Back to GetFilings.com
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Fiscal Year Ended September 30, 2003
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
For the Transition Period from ________ to ________
Commission file number 0-26362
-------
ADVANCED NUTRACEUTICALS, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Texas 76-0642336
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
106 South University Blvd., Unit 14
Denver, Colorado 80209
- --------------------------------------- ----------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (303) 722-4008
--------------
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each
Exchange
Title of each Class on Which Registered
------------------- -------------------
None None
Securities Registered Pursuant to Section 12(g) of the Act:
$.01 par value common stock
---------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.). Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on December 31, 2003 was $743,000.
The number of shares outstanding of the Registrant's common stock on December
31, 2003 was 4,992,789.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K is incorporated by reference to the Registrant's
definitive proxy statement, which is due to be filed within 120 days of the end
of the Registrant's fiscal year ended September 30, 2003.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
The Company is including the following cautionary statement in this Annual
Report on Form 10-K to make applicable and take advantage of the safe harbor
provision of the Private Securities Litigation Reform Act of 1995 for any
forward looking statements made by, or on behalf of the Company. Forward looking
statements include statements concerning plans, objectives, goals, strategies,
future events or performance and underlying assumptions and other statements
which are other than statements of historical facts. Certain statements
contained herein are forward looking statements and, accordingly, involve risks
and uncertainties which could cause actual results or outcomes to differ
materially from those expressed in the forward looking statements. The Company's
expectations, beliefs and projections are expressed in good faith and are
believed by the Company to have a reasonable basis, including without
limitation, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's expectation, beliefs or
projections will result or be achieved or accomplished. Actual events or results
may differ materially as a result of risks facing the Company. Such risks
include, but are not limited to, changes in business conditions, the general
economy, competition, changes in product offerings, as well as regulatory
developments that could cause actual results to vary materially from the future
anticipated results indicated, expressed or implied, in such forward-looking
statements. The Company disclaims any obligation to update any forward-looking
statement to reflect events or circumstances after the date hereof.
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF THE BUSINESS
Advanced Nutraceuticals, Inc. ("ANI" or the "Company"),
www.advancednutraceuticals.com or www.anii.cc, a holding company, organized in
March 2000, has two operating subsidiaries, Bactolac Pharmaceutical Inc.
("Bactolac") and ANI Pharmaceuticals, Inc. ("ANIP") (formerly ASHCO, a division
of Bactolac). The Company's subsidiaries manufacture nutraceutical and
pharmaceutical products.
-2-
Bactolac, www.bactolac.com, located in Hauppauge, New York, was founded in 1995
and is engaged in the formulation, manufacturing, coating and packaging of
encapsulated and compressed tablets and powder blended vitamins and related
nutritional supplements. To support continuing sales increases at Bactolac, in
the fall of 2000, its operations were moved to a state of the art approximately
32,700 square foot Good Manufacturing Practices ("GMP") facility. Recent
investments in high-tech lab equipment, high speed manufacturing equipment,
in-house thin film coating equipment and flexible packaging equipment have
resulted in faster turn around times and greater control of the quality and
production processes. Bactolac provides private label contract manufacturing
services, with over 1000 different vitamins and supplements to various companies
engaged in the marketing and distribution of vitamins, mineral supplements,
herbs and other health and nutrition consumer products.
Bactolac's growth and profitability has been driven by its reputation for
creating exciting, innovative formulas including weight loss, sport nutrition,
energy products, antioxidants, formulas designed specifically for men, women and
children, stress formulas, relaxation formulas, life extension, immune
enhancement, brain products, cleansing products, cholesterol products, liver
formulas, heart formulas and hundreds of herbal remedies. Additionally, Bactolac
custom formulates products in response to and in conjunction with, customer
demand. Bactolac strives to provide high quality nutritional products that
promote the health and vitality of its users.
ANIP, www.anipharmaceuticals.com, located in Gulfport, Mississippi manufactures
high quality pharmaceutical products, primarily liquid and powder pharmaceutical
products. ANIP provides contract and private label manufacturing services to
various companies, many of which are engaged in the distribution and sale of
over-the-counter liquid antacid and other OTC products. ANIP conducts its
operations in a 132,000 square foot facility.
The Company formerly owned Nutrition for Life International, Inc. ("NFLI"), a
network marketer of nutritional and consumer products. On June 13, 2001, ANI
completed the sale of NFLI. As a result of the sale, the network marketing
operations of NFLI are treated as discontinued operations in the Company's
historical consolidated financial statements. The Company's ongoing business
operations consist of the manufacture of nutraceutical and pharmaceutical
products.
The Company's near term strategy is to continue to grow its Bactolac subsidiary
and focus on reducing the losses being incurred at the ANIP subsidiary thereby
improving the Company's financial position, generating positive cash flow, and
becoming consistently profitable. The Company believes it can successfully
implement this strategy by continuing in its aggressive efforts to obtain new
customers, focusing on expanded sales opportunities with its existing customers
and through emphasizing its competitive manufacturing operations while at the
same time maintaining a stringent cost containment program.
The Company's long-term strategy is to pursue strategic acquisition
opportunities in the manufacturing and distribution segments of the nutritional
and pharmaceutical industries. However, due to ANIP's poor operating results and
limited capital resources, management of the Company determined that for the
near term, it may not be feasible for the Company to attempt to acquire
additional companies. The Company intends to continue to consider other
strategic initiatives to enhance shareholder value.
FINANCIAL INFORMATION ABOUT THE COMPANY'S BUSINESS SEGMENTS
-3-
The Company's internal competencies are divided into two distinct manufacturing
segments in separate geographic locations. Bactolac is a private label contract
manufacturer of vitamins and supplements located in Hauppauge, New York. ANIP is
a contract and private label manufacturer of over-the-counter liquid and
pharmaceutical products, primarily liquid stomach remedies, located in Gulfport,
Mississippi. The Company is committed to providing high quality products.
Bactolac utilizes GMP practices at its facility. ANIP is a Current Good
Manufacturing Practices ("cGMP") facility (under the Food and Drug
Administration ("FDA") guidelines) and manufactures United States Pharmacopoeia
("USP") products. Additional financial information by segment can be found in
ITEM 8, FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
Vitamin and Supplement Segment
Bactolac manufactures a comprehensive assortment of vitamin, mineral and
nutritional supplement products, which include a variety of vitamins, beta
carotene, magnesium, folic acid, calcium and potassium, as well as various herbs
such as Echinacea, St. John's Wort, Ginko Biloba, Saw Palmetto, Ginseng, and
various multivitamin combinations, with no single product generating a sales
concentration.
The Company has the capacity to produce millions of tablets per day using
technologically advanced high-speed manufacturing equipment. During 2002 and
2003 Bactolac increased its production capacity through additional equipment
purchases as well as vertically integrating processes that had previously been
performed by outside subcontractors.
Capital expenditures at Bactolac during 2003 approximated $430,000. Capital
expenditures at Bactolac over the past three years have resulted in
significantly higher production capacity, with shorter production turnaround
times, combined with higher levels of quality control. Bactolac custom
formulates products in response to and in conjunction with, customer demand. The
Company also has developed a fully automated packaging line and has recently
completed an in-house thin film coating line.
Raw materials used in Bactolac's products consist of nutrient powders,
excipients, empty gelatin capsules, and necessary components for packaging and
distribution of finished vitamin and nutritional supplement products. The
nutrient powders and the empty gelatin capsules are purchased from manufacturers
in the United States and foreign countries. All materials procured by Bactolac
undergo quality control review to ensure conformance to product specification
prior to acceptance and release into materials inventory. To date, the Company
has not experienced any material difficulty in obtaining adequate sources of
supply, and generally a number of suppliers are available for most raw
materials. Although there can be no assurance that adequate sources will
continue to be available, Bactolac believes it should be able to secure
sufficient raw materials in the future.
The vitamin and supplement segment generated net sales of $12,813,000,
$12,364,000 and $10,764,000, for the years ended September 30, 2003, 2002 and
2001. The top three unrelated customers accounted for approximately 39%, 50% and
47% of Bactolac's net sales for 2003, 2002 and 2001, respectively. Seasonality
is generally not a major factor in Bactolac's business, except that revenues
during late summer and fall are typically slightly higher than other periods.
Backlog of open orders at Bactolac is fairly short term in nature due to quick
production turn around, with recent backlog less than one month's sales.
-4-
Over-The-Counter Pharmaceutical Segment
ANIP manufactures liquids, powders, and over the counter drugs. Examples of the
primary products that it produces include liquid antacids and associated liquid
stomach remedies, medicated powders, anti-fungal powders and topical liquid
products with no single product generating a sales concentration. . Raw
materials used at ANIP consist of active and inactive materials for the
production of liquid antacids and raw material powder products. Packaging
materials consisting of bottles, caps, cardboard containers and labels are also
significant stocked items. Substantially all materials are purchased from
suppliers in the United States. All significant vendors and materials procured
by ANIP undergo quality control review and testing, including on-site quality
control audits to ensure conformance to quality standards and product
specification prior to acceptance and release into materials inventory. The
Gulfport facility is committed to providing high quality products; its
facilities are designed to meet USP compliance standards.
In place quality management systems are detailed and rigorous, and include
analytical processes and procedures. The quality management systems also include
well-equipped and professionally staffed analytical laboratories to assure raw
material acceptance as well as in-process and finished product evaluation for
compliance to specification. The Company's Over-the-Counter ("OTC")
pharmaceutical products are also subject to shelf life stability testing through
which the Company determines the effects of aging on its products. The Company's
product retention program allows the Company the ability to maintain samples
from each product batch shipped and, when appropriate, to analyze such samples
for product quality.
The OTC pharmaceutical segment generated net sales of $11,887,000, $9,261,000
and $6,842,000, for the years ended September 30, 2003, 2002 and 2001,
respectively. The top two unrelated customers accounted for approximately 50%
and 47% of ANIP's net sales for 2003 and 2002 and a single customer, Bayer
Corporation represented 35% of ANIP's net sales in 2001. Since 2001, Bayer
Corporation has not been a customer of ANIP. One customer included above, was
Clay-Park Labs, Inc. ("CPL") that represented 40% and 32% of ANIP's net sales in
2003 and 2002. Subsequent to year end ANIP received a communication from CPL
describing concerns about certain product quality delivery issues. ANIP is
working to address CPL's concerns and is optimistic that the issues can be
rectified. Should ANIP not be able to adequately address CPL's issues, it could
have an adverse impact on ANIP's ability to retain some or all of CPL's
business. Seasonality is generally not a significant factor in ANIP's business.
Backlog at ANIP is fairly short term in nature due to the timing of production
turn around, and recent backlog has generally been in the range of $800,000 to
$1,200,000.
Customers and Markets
The Company manufactures a broad range of products and uses a variety of methods
to market and sell its products and services; these include experienced sales
personnel, word of mouth referrals from one customer to another, contract sales
representatives, trade show participation, trade journal advertising and press
publicity, as well as web site exposure and reliance on name recognition and
long standing reputation in the industry.
-5-
Bactolac's customer base includes a wide range of distribution alternatives.
Customers include direct marketing companies, network-marketing companies,
retail chain distribution and customers who re-package bulk products for re-sale
to others. During the current fiscal year, Bactolac concentrated on increasing
its customer base through expanded marketing and sales efforts, including
developing marketing materials in addition to commencing attendance at trade
shows.
ANIP's customer base consists of distributors who re-sell the products and major
retail customers who generally have the product produced with their private
brand label on the product, to compete with national brand suppliers. ANIP's
efforts are focused on sales opportunities to new customers as well as expanding
sales to existing customers. Additionally a tight cost containment program aimed
at reducing expenses at the Gulfport facility has been maintained. As a result
of these activities the Company has achieved success in expanding its
relationship with its top customers and through adding several customers, such
as Walgreens, K-Mart, Winn Dixie, Kroger and Rite Aid, and is in talks with a
number of large recognized retailers.
The Company's operations are subject to the risks normally associated with
manufacturing vitamins, nutritional and pharmaceutical products, including
shortage of certain raw materials.
Financial Information Relating to Export Sales - Continuing Operations:
For the year ended September 30, 2003, sales to unaffiliated customers totaled
$24,700,000. Of this total $1,011,000, $273,000 and $36,000 related to customers
in Russia, Algeria and Mexico, respectively. For the year ended September 30,
2002, sales to unaffiliated customers totaled $21,625,000. Of this total
$1,056,000, $685,000 and $46,000 related to customers located in Russia, Algeria
and Mexico, respectively. For the year ended September 30, 2001 sales to
unaffiliated customers totaled $17,606,000 of which $1,354,000 related to a
customer in Russia. All identifiable assets for 2003, 2002 and 2001 were located
in the United States.
Research and Development
The primary areas of the Company's research and development activities are
focused in working with customers in the development of new products and
expansion of the product line offerings for the private label market. Such
assistance is normally in the form of product component identification and
formulation, as well as product and packaging trends. In addition, as part of
its quality control procedures, the Company produces pilot or sample runs of
product formulation prototypes to ensure stability and/or efficacy and to
determine ingredient interaction. The Company has implemented quality control
procedures to verify that all products comply with established specifications
and standards in compliance with both USP and GMP promulgated by the FDA.
Research of this type is a part of the internal overhead operating expenses
incurred by the Company and the associated incremental outside costs of research
and development activities have not been significant to date.
Competition
The Company's products are sold primarily in domestic as well as limited foreign
markets in competition with other private label manufacturing and marketing
companies. The vitamin, nutritional supplement and OTC pharmaceutical industries
are highly competitive, and competition continues to increase. Competition for
the sale of products comes from many sources, including companies that sell
pharmaceuticals and nutraceuticals to supermarkets, large chain discount
retailers, drug store chains and independent drug stores, health food stores,
pharmaceutical companies and others who sell to wholesalers, as well as mail
order vendors, eCommerce and network marketing companies. The Company does not
believe it is possible to accurately estimate the number or size of its many
competitors, as the vitamin industry is largely privately held and highly
fragmented.
-6-
The Company believes the industries it operates in continue to see significant
changes through merger and acquisition consolidations, as well as contractions
due to a general slowing of the prior growth trend. Many industry experts expect
this trend to continue for the foreseeable future in food and nutrition
companies, multilevel marketing and direct marketing organizations and eCommerce
firms.
Based on industry data, the botanicals and supplements industry is experiencing
a trend of slowed to contracting growth. The industry, while still estimated at
approximately $20 billion annually, is believed to be moving into a mature stage
where greater price pressure and modest market expansion will continue to
increase competition.
The Company believes competition among manufacturers of OTC pharmaceuticals is
based, among other things, on price, timely delivery, product quality and
consistency, safety, availability, product innovation, marketing assistance and
customer service. Competition in the OTC pharmaceuticals market is highly
competitive, and while there are several manufacturers in the industry, the
primary competitor is Perrigo Company, which is estimated to service the largest
percentage of the market. The competitive position of the Company will likely
depend upon continued acceptance of its products, its ability to attract and
retain qualified personnel, future governmental regulations affecting the
Company's products, as well as the publication of vitamin product safety and
efficacy studies by the government and authoritative health and medical
authorities.
Employees
At September 30, 2003, the Company employed 157 full time employees in its
operations, with Bactolac employing 61, ANIP employing 93 and 3 employed in
holding company executive management. The employees at Bactolac and ANIP are
engaged in management and sales, quality control, production and administration.
The Company has never experienced a work stoppage, and none of its employees are
currently represented by a union or any other form of collective bargaining
unit. The Company believes its relations with its employees are good.
Government Regulation
The formulation, manufacturing, packaging, labeling, advertising and
distribution of the Company's products are subject to regulation by one or more
federal agencies, including the FDA, the Federal Trade Commission ("FTC"), the
Consumer Product Safety Commission ("CPSC"), the United States Department of
Agriculture ("DOA"), the United States Postal Service ("USPS") and the
Environmental Protection Agency ("EPA"). These activities are also regulated by
various agencies of the states and localities in which the Company's products
are sold, including without limitation the California Department of Health
Services, Food and Drug branch. The FDA and FTC in particular regulate the
advertising, labeling and sales of vitamin and mineral supplements and may take
regulatory action concerning medical claims, misleading or untruthful
advertising, and product safety issues. These regulations include the FDA's GMPs
for foods.
-7-
Detailed dietary supplement GMPs have been proposed, but no regulations have
been adopted. Additional dietary supplement regulations were adopted by the FDA
pursuant to the implementation of the Dietary Supplement Health and Education
Act of 1994 ("DSHEA").
The Company may be subject, from time to time, to additional laws or regulations
administered by the FDA or other federal, state or foreign regulatory
authorities, or to revised interpretations of current laws or regulations. The
Company is unable to predict the nature of such future laws, regulations,
interpretations or applications, nor can it predict what effect additional
governmental regulations or administrative orders, when and if promulgated,
would have on its business in the future. They could, however, require the
Company to: reformulate certain products to meet new standards; recall or
discontinue certain products not able to be reformulated; expand documentation
of the properties of certain products; expand or provide different labeling and
scientific substantiation; or, impose additional record keeping requirements.
Any or all such requirements could have a material adverse effect on the
Company's results of operations and financial position.
Discontinued Operations - NFLI
Effective June 13, 2001, the Company completed the sale of its NFLI subsidiary
to Everest International, L.L.C. ("Everest"). The sale provided $3.2 million in
cash at closing and a $5 million note ("Note"), payable in quarterly payments
for three years and a balloon payment at the end of the third year. In addition,
Bactolac received a $650,000 note due one year and a day from closing, relating
to inter-company debt. Due to the sale of NFLI, the Company's consolidated
financial statements and related notes thereto present the operations of NFLI as
discontinued operations. For further discussion see Note 14 of the Notes to
Consolidated Financial Statements in Item 8 herein.
For financial reporting purposes, at closing, management of ANI was unable to
determine that it was probable that the future cash flows from NFLI's operations
would be sufficient to fund the entire balloon payment required under the terms
of the $5.0 million Note and accordingly, an allowance of approximately
$4,261,000 was provided against the face amount of the Note. ANI accounted for
collections on the $5 million Note under the cost recovery method, whereby
collections were recorded as a reduction of the balance recorded for the Note
(after the allowance). At the June 2002 due date of the $650,000 note, the
Company sent a demand notice for payment and NFLI responded that there may be
certain claims for offset. The Company has not received any further
communication from NFLI regarding any claims. During October 2002 the Company
received the regularly scheduled $184,000 payment for the quarter ended
September 30, 2002. During the quarter ended September 30, 2002, management of
the Company recorded an additional allowance of approximately $365,000, against
the net balances due under the $5.0 million Note and the $650,000 note due to
Bactolac, based upon current assessment of the probability of receiving any
additional payments beyond the October 2002 payment, under those notes. As a
result of the additional allowance the Company is carrying these notes on its
balance sheet at a zero basis. During May 2003, NFLI entered Chapter 11
bankruptcy, which was subsequently converted to Chapter 7 in July 2003. The
trustee in the bankruptcy case is completing the liquidation of NFLI's remaining
assets. During October 2003, the Company received approximately $32,500 from the
bankruptcy trustee related to the sale of certain NFLI assets. Any additional
collections, which management of ANI does not believe to be likely, will be
recorded as income when and if collected.
-8-
RISK FACTORS
Important factors that could cause actual results to differ materially from the
Company's expectations are disclosed in this Report, including without
limitation in conjunction with the forward-looking statements included in this
Report, and the following risk factors.
Risks Related to the Company and its Continuing Operations
Recent Losses. The Company has incurred losses from its continuing operations in
each of the fiscal years ended September 30, 2003, 2002 and 2001. The losses
were incurred from the operations of ANIP (formerly ASHCO) as well as NFLI,
which is now discontinued as the result of the sale of NFLI. The Company
completed the acquisitions of Bactolac and ANIP in late 1999. Although the
Bactolac operation has been profitable since acquisition, the losses of ANIP and
the overhead and transactional expenses of the Company have caused significant
losses to be incurred during the past three fiscal years. Although Bactolac
continues to have profitable operations and efforts are continuing to improve
ANIP's operating results, future profitable operations cannot be predicted with
certainty. If the Company is unable to improve ANIP's operating results, it may
need to alter the operating profile of ANIP, or sell the assets related to
ANIP's operation.
Sale of NFLI. On June 13, 2001, ANI completed the sale of NFLI to Everest. The
sales price included a $5,000,000 note payable ("Note") and a $650,000 note
payable to Bactolac. ANI has agreed to subordinate the $5,000,000 Note to a
secured lender of NFLI and the Note is without recourse to Everest. ANI has
fully reserved the remaining balances outstanding on the notes and additional
collections under the notes is doubtful as NFLI is being liquidated in a Chapter
7 bankruptcy. In previous attempts to demand payment on the obligations due ANI,
NFLI had responded that there may be certain claims for offset. The Company has
fully reserved the remaining balance outstanding on the notes and no additional
communications have been received from NFLI regarding any claims.
Dependence on Significant Customers. Approximately 19% of the Company's revenues
for the year ended September 30, 2003 was generated from one customer and 30% of
the Company's total revenues in the fiscal year ended September 30, 2002 were
generated from two customers. The Company is aggressively attempting to expand
its customer base to reduce its dependence on these customers. The loss of these
significant customers could have an adverse effect on the Company's business and
financial condition.
Dependence on Key Personnel. ANI's future success depends on the continued
availability of certain key management personnel, including Dr. P.M. Reddy,
founder of Bactolac and Director of ANI, Greg Pusey, Chairman, Director and
Chief Executive Officer of ANI and Jeff McGonegal, CFO of the Company. ANI has
obtained "key man" insurance on the life of Dr. Reddy with the benefit amount to
ANI of $7,000,000. ANI's growth and profitability also depends on its ability to
attract and retain other management personnel.
Bulletin Board Listing. The Company's common stock is currently traded under the
symbol ANII on the Bulletin Board System. Trading on this system can have a
negative impact on the trading activity and price of the Company's common stock,
as well as the Company's ability to raise additional equity capital and/or
consummate additional acquisitions.
-9-
Government Regulations. The manufacturing, processing, formulation and packaging
of the Company's products are subject to regulation by federal, state and
foreign agencies, including the FDA, the FTC, the CPSC, the DOA, the USPS and
the EPA. Such agencies have a variety of remedies and processes available to
them, including initiating investigations, issuing warning letters and cease and
desist orders, requiring corrective labels or advertising, requiring consumer
redress (for example, by requiring that a company offer to repurchase products
previously sold to consumers), seeking injunctive relief or product seizure,
imposing civil penalties, or commencing criminal prosecution.
There can be no assurance that the regulatory environment in which the Company
operates will not change or that such regulatory environment, or any specific
action taken against the Company, will not result in a material adverse effect
on the Company's business, financial condition or results of operations. The
Company also cannot predict whether new legislation regulating its activities
will be enacted, which new legislation could have a material adverse effect on
its operations.
Product Liability. The Company, like other manufacturers and distributors of
products that are ingested, faces an inherent risk of exposure to product
liability claims if, among other things, the use of its products results in
injury. The Company currently has product liability insurance for its operations
in amounts the Company believes are adequate for its operations. There can be no
assurance, however, that such insurance will continue to be available at a
reasonable cost, or if available, will be adequate to cover liabilities.
Ability to Implement Business Strategy; Integration of Acquisitions. The
Company's future results and financial condition are dependent on the successful
implementation of its business strategy. A key component of the Company's long
term business strategy involves strategic acquisitions. Due to ANIP's poor
operating results and the Company's limited financial resources, the Company has
not made any acquisitions since 1999 and will likely not be able to make new
acquisitions in the near term. Even if the Company is able to implement its
long-term strategy, there can be no assurance that the strategy will be
successful, that the anticipated benefits of its strategy will be realized, that
management will be able to implement the strategy on a timely basis, that the
Company will return to profitability levels previously experienced, or that
losses will not be incurred in the future.
The success of the Company will depend, in part, on the Company's ability to
integrate the operations of companies acquired in the future. There can be no
assurance that the Company's management team will effectively be able to oversee
the combined entity and implement the Company's business strategy. Moreover, no
assurance can be given that the Company will be able to successfully integrate
any future acquisitions without substantial cost, delays or other problems. The
cost of integration could have an adverse effect on short-term operating
results. Such costs could include severance payments, restructuring charges
associated with the acquisitions and expenses associated with the change of
control. There can be no assurance that the Company will be able to anticipate
all the changing demands the acquisitions will impose on its management
personnel, operational and management information systems and financial systems.
The integration of newly acquired companies may also lead to diversion of
management attention from other ongoing business concerns. Any or all of these
factors could have a material adverse effect on the Company's business,
financial condition or results of operations.
-10-
Risks Related to Acquisition Financing; Leverage. The financing for the
acquisitions in 1999, as well as ongoing working capital and capital equipment
needs is provided primarily through a leveraged lending arrangement. The loan
facility is secured by substantially all the assets of the Company and its
subsidiaries. The Company's loan facility contains various covenants that
require the maintenance of certain financial ratios, as well as additional
covenants and significant restrictions on dividend payments, issuance of debt
and equity, mergers, changes in business operations and sales of assets. Should
the Company not be successful in continuing to comply with the covenant
restrictions and repay the obligations under their terms, the financial position
and liquidity of the Company could be adversely affected.
Subject to future operating results and/or obtaining additional financing, the
availability of which is not assured, the Company intends to seek additional
acquisitions. The timing, size and success of the Company's acquisition efforts
and any associated capital commitments cannot be readily predicted. The Company
intends to finance future acquisitions by using shares of its stock, cash, and
borrowed funds (including the issuance of promissory notes to the sellers of the
companies to be acquired) or a combination thereof. If the Company's stock does
not maintain a sufficient market value, or if potential acquisition candidates
are otherwise unwilling to accept stock as part of the consideration for the
sale of their businesses, the Company may be required to use more of its cash
resources or more borrowed funds, in each case if available, in order to acquire
additional companies. If the Company does not have sufficient cash resources,
its growth could be limited unless it is able to obtain additional capital
through debt or equity financings.
There can be no assurance that the Company will be able to obtain any additional
financing that it may need for future acquisitions on the terms that the Company
deems acceptable.
Dividends. The Company has not paid any dividends since 1998. The Company's
credit facility prohibits dividend payments without the consent of the lender.
The determination of whether to pay dividends in the future will be made by the
Board of Directors and will depend on the earnings, capital requirements, and
operating and financial condition of the Company, among other factors. It is not
anticipated that the Company will pay dividends in the fiscal year ending
September 30, 2004 or in the foreseeable future.
Competition. The market for the Company's products is highly competitive. The
Company competes with other dietary supplement products and over-the-counter
pharmaceutical manufacturers. Among other factors, competition among these
manufacturers is based upon price. If one or more manufacturers significantly
reduce their prices in an effort to gain market share, the Company's business,
operations and financial condition could be adversely affected. Many of the
Company's competitors, particularly manufacturers of nationally advertised brand
name products, are larger and have resources substantially greater than those of
the Company. There has been speculation about the potential for increased
participation in these markets by major international pharmaceutical companies.
In the future, if not already, one or more of these companies could seek to
compete more directly with the Company by manufacturing and distributing their
own or others' products, or by significantly lowering the prices of existing
national brand products. The Company sells substantially all of its supplement
products to customers who re-sell and distribute the products.
-11-
ITEM 2. DESCRIPTION OF PROPERTY
Properties
ANIP manufactures pharmaceutical products at the Company owned 132,000 square
foot facility in Gulfport, Mississippi. Bactolac headquartered in Hauppauge, New
York, conducts its operations in a leased facility comprising approximately
32,700 square feet. Bactolac's current monthly rental is approximately $30,000,
(of which $6,000 pertains to improvements made by a related party), that
escalates over the remaining term on the lease, through December 2010. The
Company has an additional five-year renewal option on the facility. Bactolac
leases this facility from Shilpa Saketh Realty, Inc., an entity owned by Pailla
M. Reddy, President of Bactolac and a member of the Company's Board of
Directors. In addition, ANI currently rents administrative office space in
Houston, TX, on a temporary, short-term basis for approximately $600 per month.
The Company believes that its Bactolac facility, while significantly utilized,
is suitable and adequate and will be sufficient for anticipated growth. The ANIP
facility was constructed as an O-T-C liquid pharmaceutical plant and is suitable
for ANIP's business. The ANIP facility is currently being used at approximately
35-40% below total estimated production capacity.
See Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operation" and Item 8. "Financial Statements and Supplementary Data".
ITEM 3. LEGAL PROCEEDINGS
Bactolac is a defendant in an action brought by Health Support, Inc., during the
last quarter of 2003 in Nassau County, New York. Health Support appears to seek
damages of $650,000 for each of three causes of action, namely breach of
contract, breach of warranty and damage to good name and reputation. Health
Support alleges that in or about August 2002, a contract was entered into
between the parties providing for Bactolac to produce a dietary supplement
product for Health Support. Bactolac has answered the complaint and denies any
liability. Bactolac denies that there is any contractual agreement between the
parties. Bactolac believes that the plaintiff's claims are without merit and
intends to vigorously defend this action and has asserted numerous affirmative
defenses in this matter. It is too early to provide an evaluation of the
likelihood of an unfavorable outcome or an estimate of the amount or range of
potential loss, should Bactolac be unsuccessful in its efforts.
The Company is not a party to any other legal proceedings, the adverse outcome
of which would, in management's opinion, have a material adverse effect on the
Company's business, financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Item not applicable.
-12-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the OTC Bulletin Board under the symbol
"ANII". ANI's warrants, previously traded under the symbol "ANIIW", were
delisted during 2001, and expired as of December 31, 2001. A one for four (1:4)
reverse stock split of the issued and outstanding common stock was effected in
June 2001. All share references have been retroactively restated to reflect the
effect of this split.
Quarter Ended High Low
------------- ---- ---
Fiscal 2001:
December 31, 2000 $1.00 $0.19
March 31, 2001 0.75 0.25
June 30, 2001 3.30 0.25
September 30, 2001 1.75 0.77
Fiscal 2002:
December 31, 2001 1.15 0.85
March 31, 2002 1.09 0.88
June 30, 2002 1.24 0.89
September 30, 2002 0.92 0.40
Fiscal 2003:
December 31, 2002 1.19 0.48
March 31, 2003 1.00 0.44
June 30, 2003 1.49 0.50
September 30, 2003 0.75 0.35
As of December 31, 2003, there were approximately 1,655 record holders of
common stock.
No dividends have been declared by the Company subsequent to June 1998. It is
not likely that dividends will be paid in the fiscal year ending September 30,
2004. Under its current loan agreement, the Company may not declare any
dividends without the consent of its senior lender. Subject to obtaining the
lender's consent, the determination of the payment of dividends in the future
will be within the discretion of the Company's Board of Directors and will
depend on the earnings, capital requirements and operating and financial
condition of the Company, among other factors.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for each year in the five-year
period ended September 30, 2003 have been derived from the audited financial
statements of the Company as restated to present the operations of NFLI as
discontinued operations and to conform the prior years' statements of operations
with the current year presentation. The data presented below should be read in
conjunction with the Company's financial statements and notes thereto and,
except for operating data included therein, Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
-13-
YEARS ENDED SEPTEMBER 30,
(In thousands, except Per Share)
--------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Statements of Operations:
Net sales $ 24,700 $ 21,625 $ 17,606 $ 16,068 $ --
Gross profit 7,374 6,340 5,022 5,259 --
Impairment loss on long-lived assets 3,900 -- -- -- --
Operating income (loss) (2,994) (818) (608) 770 (628)
Loss from continuing
operations (3,844) (2,160) (981) (34) (628)
Income (loss) from discontinued
operations, net of tax -- -- 1,146 (3,970) (220)
Cumulative effect of accounting
change -- (1,185) -- -- --
Net income (loss) $ (3,844) $ (3,344) $ 165 $ (4,004) $ (848)
Basic income (loss) per share:
Continuing operations $ (.77) $ (.90) $ (.48) $ (.02) $ (.43)
Cumulative effect of accounting change $ -- $ (.50) $ -- $ -- $ --
Discontinued operations, net of tax $ -- $ -- $ .56 $ (2.06) $ (.15)
Diluted income (loss) per share:
Continuing operations $ (.77) $ (.90) $ (.47) $ (.02) $ (.43)
Cumulative effect of accounting change $ -- $ (.50) $ -- $ -- $ --
Discontinued operations, net of tax $ -- $ -- $ .55 $ (2.06) $ (.15)
Weighted average number of shares outstanding:
Basic 4,993 2,389 2,027 1,928 1,452
Diluted (1) 4,993 2,389 2,077 1,928 1,452
Balance Sheet Data:
Working capital $ 4,890 $ 1,254 $ 2,310 $ 1,544 $ 14,348
Total assets 20,473 24,535 25,710 31,778 14,348
Total long-term obligations 5,415 2,404 4,152 3,452 --
Total liabilities 8,391 8,609 8,765 14,951 --
Stockholders' equity 12,082 15,926 16,945 16,827 14,348
(1) The weighted average number of shares of Common Stock outstanding for
each period presented has been calculated giving effect to dilutive
stock options and warrants.
SELECTED QUARTERLY FINANCIAL INFORMATION
QUARTER ENDED
(In thousands, except Per Share data)
-----------------------------------------------------------
December 31 March 31 June 30 September 30 Fiscal Year
----------- -------- ------- ------------ -----------
Fiscal 2003:
Net Sales $ 6,638 $ 6,182 $ 5,649 $ 6,231 $ 24,700
Gross profit 2,206 1,830 1,742 1,596 7,374
Impairment loss on long-lived assets -- -- -- (3,900) (3,900)
Net Income (loss) 217 (170) (75) (3,816) (3,844)
Basic income (loss) per share $ .04 $ (.03) $ (.01) $ (.77) $ (.77)
Diluted income (loss) per share $ .04 $ (.03) $ (.01) $ (.77) $ (.77)
Dividends per share $ -- $ -- $ -- $ -- $ --
Fiscal 2002:
Net Sales $ 5,147 $ 5,915 $ 5,118 $ 5,445 $ 21,625
Gross profit 1,611 1,924 1,126 1,679 6,340
(Loss) from continuing operations (73) (49) (793) (1,245) (2,160)
Cumulative effect of accounting change (1,185) -- -- -- (1,185)
Basic income (loss) per share:
Continuing $ (.04) $ (.02) $ (.37) $ (.47) $ (.90)
Cumulative effect of accounting change $ (.50) $ -- $ -- $ -- $ (.50)
Diluted income (loss) per share:
Continuing $ (.04) $ (.02) $ (.37) $ (.47) $ (.90)
Cumulative effect of accounting change $ (.50) $ -- $ -- $ -- $ (.50)
Dividends per share $ -- $ -- $ -- $ -- $ --
-14-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Following is a summary table of the key operating statistics of the Company for
the years ended September 30, 2003, 2002 and 2001:
Year ended September 30,
-------------------------------------------------------------------------
2003 2002 2001
------------------ -------------------- ----------------------
Net sales $24,700,000 100.0% $21,625,000 100.0% $ 17,606,000 100.0%
Cost of sales 17,326,000 70.1 15,285,000 70.7 12,584,000 71.5
Gross profit 7,374,000 29.9 6,340,000 29.3 5,022,000 28.5
Fiscal Year 2003 Compared to Fiscal Year 2002
Net sales for the 2003 period increased $3,075,000 or 14.2% over the 2002
period. The increase was attributable to a net $449,000 increase in the sales of
Bactolac through several customers, and a $2,626,000 increase in the sales of
ANIP. The ANIP increase consisted of $1,276,000 in expanded sales to existing
private label customers such as Walgreens, Dollar General, Rite Aid and Big Lots
Stores, combined with a net expansion in sales to continuing contract customers
of $1,779,000. These increases were offset by a $429,000 decline in export sales
over the prior fiscal year.
Gross profit for the 2003 period increased to $7,374,000, a $1,034,000 increase
over the 2002 amount. Gross profit as a percentage of net sales increased to
29.9% in 2003, as compared to 29.3% in the 2002 period. Gross profit at Bactolac
improved to 36.6% from 33.5% in 2002. The majority of the improvement resulted
from higher sales volumes better absorbing overhead expenses combined with the
addition of high-speed equipment that improved production efficiencies. Gross
profit at ANIP decreased to 22.6% in 2003, as compared to 23.7% in 2002. This
change was primarily the result of changes in the product mix during the year.
-15-
Total general and administrative expenses excluding the impairment loss on
long-lived assets, decreased to $6,467,000 in 2003, from $6,637,000, in 2002.
This represents a decrease of $170,000, or 2.6%. The majority of the decrease
relates to a $500,000 bad debt allowance that was provided for by Bactolac in
2002, partially offset by higher payroll, and selling and delivery expenses in
2003 due to the higher sales levels.
During the year ended September 30, 2003 the Company sold certain ANIP excess
equipment, which resulted in a loss of approximately $180,000. Additionally, the
Company determined that based upon the current economic and market conditions at
the ANIP operation, the property and equipment was impaired and accordingly, an
impairment loss of $3,900,000 was recorded at September 30, 2003.
Fiscal Year 2002 Compared to Fiscal Year 2001
Net sales for the 2002 period increased $4,019,000 or 22.8% over the 2001
period. The increase was attributable to a net $1,600,000 increase in the sales
of Bactolac through several customers, and a $2,419,000 increase in the sales of
ANIP. The ANIP increase consisted of $2,364,000 in sales from new private label
customers such as Walgreen's, K-Mart, Dollar General, Winn Dixie and Big Lots
Stores, combined with a net expansion in sales to continuing contract customers
of $2,414,000, offset by the $2,360,000 decline in sales to Bayer Corporation.
Bayer Corporation historically represented a significant portion of ANIP's
revenue base, and effective January 2001, ANIP completed the final production
under the Bayer contract. During 2002, ANIP aggressively expanded its customer
base to compensate for the loss of the Bayer business.
Gross profit for the 2002 period increased to $6,340,000, a $1,318,000 increase
over the 2001 amount. Gross profit as a percentage of net sales increased to
29.3% in 2002, as compared to 28.5% in the 2001 period. Gross profit at Bactolac
improved to 33.5% from 31.7% in 2001. The majority of the improvement resulted
from higher sales volumes better absorbing overhead expenses combined with the
addition of high-speed equipment that improved production efficiencies. Gross
profit at ANIP increased to 23.7% in 2002, as compared to 23.4% in 2001.
Substantially all of the change was due to changes in the product mix.
Total operating expenses, excluding terminated acquisition costs and reserve for
notes receivable, increased to $6,637,000 in 2002, from $5,629,000, in 2001.
This represents an increase of $1,008,000, or 17.9%. The majority of the
increase relates to additional personnel costs, in addition to higher
administrative costs being incurred for insurance and sales and marketing
expenses incurred in connection with the private label customers at ANIP. During
2002, ANI wrote-off $155,000 in net costs incurred in connection with the
proposed York Pharmaceuticals acquisition that was terminated.
During September 2002, under agreements finalized with Dr. Reddy, Cambridge
Holdings, Ltd,. and Glenwood Capital Partners I, LP, the total amounts including
accrued interest due, on convertible obligations (all but the remaining $500,000
due to Dr. Reddy) were converted into 2,840,800 shares of ANI's common stock.
The agreed upon conversion rate was $0.55 per share, which at the time
represented approximately a 20% premium over the trading price of the stock.
Under accounting principles generally accepted in the United States, since the
agreements were modified to adjust the conversion price from the originally
established terms, an inducement expense was required to be recorded. The
inducement expense was computed based upon the fair value of the additional
shares issued, over those that would have been issued under the original terms.
The additional expense was computed to be approximately $601,000, which was
recorded as debt conversion inducement expense on the statement of operations
for the year ended September 30, 2002, with the offsetting credit being recorded
as additional paid-in capital.
-16-
Discontinued Operations
As of June 13, 2001, the Company completed the sale of NFLI to an unrelated
privately held entity. As a result of the sale of NFLI, the Company's
consolidated historical financial statements and related notes thereto were
restated to present the operations of NFLI as discontinued operations. For
further discussion see Note 14 of the Notes to Consolidated Financial Statements
in Item 8.
Liquidity and Capital Resources
In recent years, ANI has met its working capital and capital expenditure
requirements, including funding for debt repayments, mainly through net cash
provided under the Company's revolving line of credit as well as the net
proceeds in 2001 received from the sale of NFLI. Based upon revenue increases,
primarily from new customers of ANIP, combined with cost reductions that have
been implemented, a significant portion of the working capital needs for the
year ended September 30, 2003 were met out of cash generated from operating
activities. Management plans to continue to strive to restore profitability to
meet currently anticipated funding requirements.
In March 2003, the Company completed the refinancing of its senior debt facility
with a new lender. The new debt agreement provides the Company with a $5.5
million facility, consisting of a $4.0 million revolver, a $1.0 million
equipment term loan and a $500,000 equipment acquisition line. The three-year
agreement is collateralized by substantially all of the Company's assets, and
bears interest at rates that fluctuate with the Prime Rate, with the revolver at
2% over prime (not to be less than a total rate of 6.5%) and the equipment lines
at 4.75% over prime (not to be less than a total rate of 9.25%). Due to the
"floor" interest amounts under the Company's credit facility, the current prime
rate would need to increase by 0.5% prior to the Company's interest rate being
impacted. Increases in the prime rate would increase the Company's interest
expense. The Agreement contains a number of covenants, which include among other
items; maintenance of specified minimum net worth and fixed charge ratios, as
well as limitations on capital expenditures. Effective as of September 30, 2003
the credit facility was amended to revise the net worth requirement following
the impairment loss on long-lived assets recorded by the Company.
Initial proceeds under the new agreement were used to payoff the debt
obligations to the then existing Senior Lender, which totaled approximately
$1,339,000 at closing, and to repay the remaining $500,000, plus accrued
interest, due under a note with Dr. Pailla Reddy, a director of the Company,
that arose from the Bactolac acquisition.
At September 30, 2003, the Company had working capital of $4,890,000. Borrowings
under the revolving portion of the secured credit facility totaled $2,177,000,
with additional borrowings available of $1,164,000, at that point, based upon
accounts receivable and inventory levels.
-17-
Operating Activities
Net cash flows from continuing operating activities generated (consumed)
approximately $631,000, $(1,458,000) and $300,000 in 2003, 2002 and 2001. The
net cash generated in 2003 consisted primarily of the $(3,844,000) net loss less
the non cash expenses which included the $3,900,000 impairment loss on long term
assets, $763,000 of depreciation expense and $180,000 from the loss on the
disposal of equipment. This was offset by cash used in increases of accounts
receivable and inventories totaling $385,000 less the $126,000 increase in
accounts payable.
The net cash consumed in 2002 consisted primarily of approximately $1,588,000
increase in accounts receivable and a $319,000 increase in inventories. The
majority of this increase related to higher monthly sales levels at ANIP. The
net loss from continuing operations in 2002 of $3,344,000 was offset
substantially by the non cash expenses recorded consisting primarily of the
cumulative effect of the accounting change relating to the goodwill write-off,
depreciation and amortization expenses, the bad debt provision and the expense
recognized on the debt conversion which in total amounted to $3,375,000.
Investing Activities
Investing activities from continuing operations generated approximately $20,000
in 2003. This consisted of $250,000 received from the sale of equipment at ANIP
and $184,000 collected on the NFLI notes receivable, net of $414,000 used for
additions to equipment.
Investing activities from continuing operations generated approximately $302,000
in 2002. This consisted of $611,000 collected on the NFLI Note receivable net of
$308,000 used for additions to equipment.
Financing Activities
Financing activities from continuing operations consumed approximately $376,000
in 2003. The primary uses of cash was the repayment of the $500,000 note payable
to a related party, which was repaid out of the proceeds from the new credit
facility and $227,000 in loan costs paid on the new credit facility. The
outstanding balance on the revolving portion of the credit facility was reduced
by $49,000 and other long-term notes payable were reduced by $70,000 during the
year. The Company borrowed a net additional amount of $471,000 under the
long-term equipment debt portion of our credit facility.
Financing activities from continuing operations generated $1,167,000 in 2002.
This amount related to net increases in the Company's debt.
Financing activities from continuing operations consumed approximately
$(2,044,000) in 2001. This consisted of $3,253,000 in net repayments under the
Company's credit facility, plus $1,328,000 in principal payments made on
long-term debt and $1,435,000 repaid on notes payable to related parties, funded
in part by the ANIP mortgage refinancing of $2,415,000. Also during 2001,
$(307,000) in cash was consumed by the discontinued entity prior to the sale.
-18-
The Company's revolving credit facility provides for borrowings, based upon
outstanding amounts of eligible accounts receivable and allowable inventories.
Additionally, there is a term loan facility with the secured lender that
requires principal payments of approximately $19,000 monthly. The Agreement
matures in March 2006. Interest on amounts outstanding under the Agreement is
payable monthly based upon the lender's prime rate plus two percent (2%) for the
revolving portion of the facility and the prime rate plus four and three
quarters percent (4.75%) for the equipment term loan portion. The credit
facility is secured by substantially all of the Company's assets. The Agreement
contains a number of covenants, which include among other items; maintenance of
specified minimum net worth and fixed charge ratios, as well as limitations on
capital expenditures. After considering the effect of an amendment to the
facility, the Company is in compliance with the covenants of the loan agreement.
Capital expenditures, primarily for manufacturing and facility improvement costs
for the fiscal year ending September 30, 2004, are anticipated to be
approximately $200,000 to $300,000. It is expected that funding for the capital
additions will be provided out of the credit facility with a portion funded out
of working capital.
Critical Accounting Policies
The Company's financial position, results of operations and cash flows are
impacted by the accounting policies the Company has adopted. In order to get a
full understanding of the Company's financial statements, one must have a clear
understanding of the accounting policies employed. A summary of the Company's
critical accounting policies follows:
Accounts Receivable: Accounts receivable balances are stated net of allowances
for doubtful accounts. The Company records allowances for doubtful accounts when
it is probable that the accounts receivable balance will not be collected. When
estimating the allowances for doubtful accounts, the Company takes into
consideration such factors as its day-to-day knowledge of the financial position
of specific clients, the industry and size of its clients. A financial decline
of any one of the Company's large clients could have an adverse and material
effect on the collectibility of receivables and thus the adequacy of the
allowance for doubtful accounts. Increases in the allowance for doubtful
accounts are recorded as charges to bad debt expense and are reflected in other
operating expenses in the Company's consolidated statements of operations.
Write-offs of uncollectible accounts are charged against the allowance for
doubtful accounts.
Inventories: The Company's inventory is a significant component of current
assets and is stated at the lower of cost or market. The Company regularly
reviews inventory quantities on hand and records provisions for excess or
obsolete inventory based primarily on its estimated forecast of product demand,
market conditions, production requirements and technological developments.
Significant or unanticipated changes to the Company's forecasts of these items,
either adverse or positive, could impact the amount and timing of any additional
provisions for excess or obsolete inventory that may be required.
Long-Lived Assets: The Company records property and equipment at cost.
Depreciation of the assets is recorded on the straight-line basis over the
estimated useful lives of the assets. Dispositions of property and equipment are
recorded in the period of disposition and any resulting gains or losses are
charged to income or expense when the disposal occurs. The carrying value of the
Company's long-lived assets is periodically reviewed to determine that such
carrying amounts are not in excess of estimated market value. During the fourth
quarter of the year ended September 30, 2003, the Company recorded a $3,900,000
impairment loss relating to the carrying value of the ANIP property and
equipment. Goodwill is reviewed annually for impairment by comparing the
carrying value of each reporting unit to the present value of its expected cash
flows. For fiscal 2003, the required annual testing resulted in no impairment
charge. For fiscal 2002, the analysis resulted in the write-off of the goodwill
associated with the ANIP operations, resulting in a charge of $1.2 million.
-19-
Revenue Recognition: The Company's revenues are recognized when products are
shipped to unaffiliated customers. The Securities and Exchange Commission's
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition" provides guidance
on the application of generally accepted accounting principles to select revenue
recognition issues. The Company has concluded that its revenue recognition
policy is appropriate and in accordance with SAB No. 101.
Recent Accounting Pronouncements
Accounting for Guarantees - In November 2002, FASB Interpretation No.
45,Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others (FIN 45) was issued. FIN 45
requires a guarantor entity, at the inception of a guarantee covered by the
measurement provisions of the interpretation, to record a liability for the fair
value of the obligation undertaken in issuing the guarantee. Interpretation 45
applies prospectively to guarantees the Company issues or modifies subsequent to
December 31, 2002. The Company has historically not issued guarantees and
therefore FIN 45 did not have a material effect on its 2003 financial
statements.
Stock-Based Compensation - In December 2002, the FASB issued FASB No. 148 (SFAS
148), Accounting for Stock-Based Compensation - Transition and Disclosure. This
Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. It also amends disclosure requirements to require prominent
disclosures in both annual and interim financial statements about the method and
the effect of the method used for stock based compensation on reported results.
The statement is effective for fiscal years ending after December 15, 2002.
Adoption of SFAS 148 did not have a material effect on the Company's financial
statements.
Variable Interest Entities - In January 2003, the FASB issued FASB
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. FIN
46 clarifies the application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, for certain entities which do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties or in which equity
investors do not have the characteristics of a controlling financial interest
("variable interest entities"). Variable interest entities will be required to
be consolidated by their primary beneficiary. The primary beneficiary of a
variable interest entity is determined to be the party that absorbs a majority
of the entity's expected losses, receives a majority of its expected returns, or
both, as a result of holding variable interests, which are ownership,
contractual, or other pecuniary interests in an entity. FIN 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after
December 15, 2003, to variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003. FIN 46 applies to
public enterprises as of the beginning of the applicable interim or annual
period. The Company does not have any variable interest entities, and therefore
the adoption of the provisions of FIN 46 did not have any impact on the Company.
-20-
Derivative Instruments and Hedging Activities - In April 2003, the FASB issued
Statement of Financial Accounting Standards No. 149 (SFAS 149), Amendment of
Statement 133 on Derivative Instruments and Hedging Activities, which amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts. SFAS 149
is effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The provisions of SFAS 149
are to be applied prospectively. The adoption of SFAS No. 149 did not have an
impact on the Company's financial position or results of operations.
Revenue Arrangements - In November 2002, the Emerging Issues Task Force ("EITF")
reached a consensus on Issue 00-21, Accounting for Revenue Arrangements with
Multiple-Deliverables (EITF 00-21). EITF 00-21 addresses how to account for
arrangements that may involve the delivery or performance of multiple products,
services and/or rights to use assets. The consensus mandates how to identify
whether goods or services or both which are to be delivered separately in a
bundled sales arrangement should be accounted for separately because they are
"separate units of accounting." The guidance can affect the timing of revenue
recognition for such arrangements, even though it does not change rules
governing the timing or pattern of revenue recognition of individual items
accounted for separately. The final consensus will be applicable to agreements
entered into in fiscal years beginning after June 15, 2003 with early adoption
permitted. Additionally, companies will be permitted to apply the consensus
guidance to all existing arrangements as the cumulative effect of a change in
accounting principle in accordance with APB Opinion No. 20, Accounting Changes.
The Company does not believe the adoption of EITF 00-21 will have a material
impact on its financial position or results of operations.
Financial Instruments - In May 2003 the FASB issued Statement of Financial
Accounting Standards No. 150 ("SFAS 150"), Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures in its balance
sheet certain financial instruments with characteristics of both liabilities and
equity. In accordance with this standard, financial instruments that embody
obligations of the issuer are required to be classified as liabilities. SFAS No.
150 is effective for all financial instruments entered into or modified after
May 31, 2003. For existing financial instruments, SFAS No. 150 is effective at
the beginning of the fiscal quarter commencing July 1, 2003. The adoption of
SFAS No. 150 did not have an effect on the Company's financial position, results
of operations or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
As a result of the completion of the NFLI sale, the Company is no longer exposed
to market risks, including changes in currency exchange rates as measured
against the U.S. dollar or the value of the U.S. dollar against the foreign
currencies. While the Company does sell certain products internationally, terms
are settled in U.S. dollars, either through letters of credit, cash in advance,
or in limited circumstances with payment of the sale amount following shipment,
for credit worthy customers.
-21-
At September 30, 2003, the Company was exposed to some market risk with respect
to its variable rate long-term debt agreement; however, management did not
believe such risk to be material. Due to the "floor" interest amounts under the
Company's credit facility, the current prime rate would need to increase by 0.5%
prior to the Company's interest rate being impacted. Additional increases in the
prime rate would increase the Company's interest expense.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Advanced Nutraceuticals, Inc. Consolidated Financial Statements Page
----
Report of Independent Certified Public Accountants F-2
Report of Independent Certified Public Accountants F-3
Consolidated Balance Sheets as of September 30, 2003 and 2002 F-4
Consolidated Statements of Operations and Comprehensive Income
(Loss) for the Years Ended September 30, 2003, 2002 and 2001 F-5
Consolidated Statement of Stockholders' Equity for the Years
Ended September 30, 2003, 2002 and 2001 F-6
Consolidated Statements of Cash Flows for the Years Ended
September 30, 2003, 2002 and 2001 F-7
Notes to Consolidated Financial Statements F-8
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Advanced Nutraceuticals, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Advanced
Nutraceuticals, Inc. (a Texas corporation) and subsidiaries (the "Company") as
of September 30, 2003, and the related consolidated statements of operations and
comprehensive loss, stockholders' equity, and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Advanced
Nutraceuticals, Inc. and subsidiaries as of September 30, 2003, and the results
of their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of America.
GELFOND HOCHSTADT PANGBURN, P.C.
/s/ Gelfond Hochstadt Pangburn, P.C.
- ----------------------
Denver, Colorado
November 21, 2003,except for Note 6, as to
which the date is January 7, 2004
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Advanced Nutraceuticals, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Advanced
Nutraceuticals, Inc. (a Texas corporation) and Subsidiaries as of September 30,
2002, and the related consolidated statements of operations and comprehensive
income (loss), stockholders' equity, and cash flows for each of the two years in
the period ended September 30, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Advanced
Nutraceuticals, Inc. and Subsidiaries as of September 30, 2002, and the results
of their operations and their cash flows for each of the two years in the period
ended September 30, 2002, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 13 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangible assets for
the year ended September 30, 2002.
Grant Thornton LLP
/s/ Grant Thornton LLP
- ----------------------
Houston, Texas
December 16, 2002
F-3
ADVANCED NUTRACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
2003 2002
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,068,758 $ 793,023
Receivables, net (Note 6) 4,213,738 4,099,852
Inventories (Notes 3 and 6) 2,391,671 2,053,268
Notes receivable (Note 14) -- 184,282
Prepaid expenses and other assets 192,142 329,362
------------ ------------
Total Current Assets 7,866,309 7,459,787
Property and equipment, net (Notes 2, 4, 6 and 7) 4,601,384 9,280,558
Goodwill (Note 13) 7,563,913 7,563,913
Other assets 441,518 230,982
------------ ------------
$ 20,473,124 $ 24,535,240
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,152,867 $ 2,027,039
Accrued compensation 185,479 150,497
Accrued expenses and other liabilities 289,795 525,217
Note payable - related party (Note 7) -- 500,000
Credit facility (Note 6) 224,200 2,889,811
Current portion of long-term debt (Note 7) 124,118 113,384
------------ ------------
Total Current Liabilities 2,976,459 6,205,948
Long-term Debt:
Credit facility (Note 6) 3,087,480 --
Other long-term debt (Note 7) 2,327,392 2,403,695
------------ ------------
Total Liabilities 8,391,331 8,609,643
------------ ------------
Commitments and contingencies (Note 9) -- --
Stockholders' Equity (Note 10 and 11):
Preferred stock, $.001 par value; 1,000,000 shares authorized; none issued -- --
Common stock; $.01 par value; 20,000,000 shares authorized;
4,992,789 issued and outstanding 49,928 49,928
Additional paid-in capital 20,322,048 20,322,048
Accumulated deficit (8,290,183) (4,446,379)
------------ ------------
Total Stockholders' Equity 12,081,793 15,925,597
------------ ------------
$ 20,473,124 $ 24,535,240
============ ============
See accompanying notes to consolidated
financial statements.
F-4
ADVANCED NUTRACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED SEPTEMBER 30,
2003 2002 2001
------------ ------------ ------------
Net sales $ 24,699,501 $ 21,624,750 $ 17,606,367
Cost of sales 17,325,853 15,284,725 12,584,651
------------ ------------ ------------
Gross profit 7,373,648 6,340,025 5,021,716
General and administrative expenses 6,467,336 6,637,202 5,629,283
Impairment loss on long-lived assets (Note 2) (3,900,000) - -
Reserve for notes receivable - 365,419 -
Terminated acquisition costs - 155,126 -
------------ ------------ ------------
Operating income (loss) (2,993,688) (817,722) (607,567)
------------ ------------ ------------
Other income (expense):
Interest expense, net (680,645) (756,639) (843,329)
Loss on sale of equipment (180,128) - -
Debt conversion inducement expense - (600,800) -
Gain on debt settlement - - 121,191
Other, net 10,657 15,293 63,723
------------ ------------ ------------
(850,116) (1,342,146) (658,415)
------------ ------------ ------------
Income (loss) from continuing operations
before income tax expense (3,843,804) (2,159,868) (1,265,982)
Income tax (benefit) (Note 5) - - (285,315)
------------ ------------ ------------
Loss from continuing operations before cumulative
effect of accounting change (3,843,804) (2,159,868) (980,667)
Income from discontinued operations, net of tax (Note 14) - - 1,145,540
Cumulative effect of accounting change (Note 13) - (1,184,553) -
------------ ------------ ------------
Net income (loss) (3,843,804) (3,344,421) 164,873
------------ ------------ ------------
Other comprehensive income (loss):
Foreign currency translation adjustment - - (77,670)
------------ ------------ ------------
Total comprehensive income (loss) $ (3,843,804) $ (3,344,421) $ 87,203
============ ============ ============
Basic income (loss) per common share:
Loss from continuing operations $ (.77) $ (.90) $ (.48)
Cumulative effect of accounting change -- (.50) --
Income (loss) from discontinued operations -- -- .56
------------ ------------ ------------
Net income (loss) $ (.77) $ (1.40) $ .08
============ ============ ============
Diluted income (loss) per common share:
Loss from continuing operations $ (.77) $ (.90) $ (.47)
Cumulative effect of accounting change -- (.50) --
Income (loss) from discontinued operations -- -- .55
------------ ------------ ------------
Net income (loss) $ (.77) $ (1.40) $ .08
============ ============ ============
Weighted average common shares outstanding:
Basic 4,992,789 2,388,631 2,026,975
============ ============ ============
Diluted 4,992,789 2,388,631 2,077,162
============ ============ ============
See accompanying notes to consolidated
financial statements.
F-5
ADVANCED NUTRACEUTICALS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
Foreign
Additional Currency Total
Common Stock Paid-In Accumulated Translation Stockholders'
Shares Amount Capital Deficit Adjustment Equity
------------ ------------ ------------ ------------ ------------ ------------
Balance at
September 30, 2000 2,004,967 $ 20,050 $ 17,996,401 $(1,266,831) $ 77,670 $ 16,827,290
Net income -- -- -- 164,873 -- 164,873
Foreign currency
translation adjustment -- -- -- -- (77,670) (77,670)
Issuance of common stock
for earn out award 22,008 220 30,045 -- -- 30,265
------------ ------------ ------------ ------------ ------------ ------------
Balance at
September 30, 2001 2,026,975 20,270 18,026,446 (1,101,958) -- 16,944,758
Net loss -- -- -- (3,344,421) -- (3,344,421)
Value of warrants issued with
convertible debt -- -- 120,258 -- -- 120,258
Issuance of common stock
on debt conversion 2,840,800 28,408 2,057,831 -- -- 2,086,239
Common stock issued for
bonus \ earn out awards 125,014 1,250 117,513 -- -- 118,763
------------ ------------ ------------ ------------ ------------ ------------
Balance at
September 30, 2002 4,992,789 49,928 20,322,048 (4,446,379) -- 15,925,597
Net loss -- -- -- (3,843,804) -- (3,843,804)
------------ ------------ ------------ ------------ ------------ ------------
Balance at
September 30, 2003 4,992,789 $ 49,928 $ 20,322,048 $ (8,290,183) $ -- $ 12,081,793
============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements
F-6
ADVANCED NUTRACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30,
2003 2002 2001
----------- ----------- -----------
Cash flows from operating activities:
Net loss from continuing operations before
cumulative effect of accounting change $(3,843,804) $(2,159,868) $ (980,667)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 763,257 756,591 1,206,805
Impairment loss on long-lived assets 3,900,000 -- --
Loss on sale of equipment 180,128 -- --
Bad debt provision (67,000) 831,946 (235,000)
Expense recognized on debt conversion inducement -- 600,800 --
Write-off of aborted acquisition costs -- 155,126 --
Deferred tax benefit -- -- (374,184)
Changes in assets and liabilities:
Receivables (46,886) (1,587,680) 1,781,678
Inventories (338,403) (318,873) 72,908
Prepaid and other assets (27,262) (117,340) (216,889)
Accounts payable 125,828 134,155 (919,286)
Deferred income -- -- (111,111)
Accrued expenses and other liabilities (14,608) 247,069 75,423
----------- ----------- -----------
Net cash flows from continuing operations 631,250 (1,458,077) 299,677
Net cash flows from discontinued operations -- -- 2,879,222
----------- ----------- -----------
Net cash flows from operating activities 631,250 (1,458,077) 3,178,899
----------- ----------- -----------
Cash flows from investing activities:
Sale of subsidiary, net of expense -- -- 2,486,529
Collection of notes receivable 184,282 610,500 228,111
Acquisition of property and equipment (414,210) (308,284) (807,083)
Proceeds from sale of equipment 250,000 -- --
----------- ----------- -----------
Net cash flows from continuing operations 20,072 302,216 1,907,557
Net cash flows from discontinued operations -- -- (2,650,235)
----------- ----------- -----------
Net cash flows from investing activities 20,072 302,216 (742,678)
----------- ----------- -----------
Cash flows from financing activities:
Net borrowings (payments) on credit facility (49,030) 850,357 (3,252,625)
Borrowings on long-term debt 470,900 425,000 2,415,000
Payments of long-term debt - related parties (500,000) -- (1,435,000)
Payment of long-term debt (70,170) (108,320) (1,328,082)
Loan costs paid and other (227,287) -- --
Cash contribution from discontinued operations -- -- 1,556,249
----------- ----------- -----------
Net cash flows from continuing operations (375,587) 1,167,037 (2,044,458)
Net cash flows from discontinued operations -- -- (306,657)
----------- ----------- -----------
Net cash flows from financing activities (375,587) 1,167,037 (2,351,115)
----------- ----------- -----------
Net increase in cash and cash equivalents 275,735 11,176 85,106
Cash and cash equivalents, beginning of year 793,023 781,847 696,741
----------- ----------- -----------
Cash and cash equivalents, end of year $ 1,068,758 $ 793,023 $ 781,847
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-7
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Advanced Nutraceuticals, Inc. ("ANI" or the "Company"), a Texas corporation, was
formed during 2000 to become the parent company of Nutrition For Life
International, Inc. ("NFLI"), in a reorganization that was completed as of March
15, 2000. Under the terms of the reorganization, each outstanding share of
common stock of NFLI issued and outstanding immediately prior to the merger was
converted into one share of ANI's common stock. Also, each outstanding option
and each outstanding warrant to purchase shares of NFLI's common stock was
converted into an option or a warrant, as the case may be, to purchase, on the
same terms and conditions, an identical number of shares of ANI's common stock.
On June 13, 2001, ANI completed the sale of its network marketing subsidiary,
NFLI, to Everest International, LLC ("Everest"), a privately-held entity. ANI
now operates as a contract and private label manufacturer of nutritional and
pharmaceutical products through its two operating subsidiaries, Bactolac
Pharmaceutical Inc., and ANI Pharmaceuticals, Inc.
Principles Of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Cash And Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand and in short-term, interest bearing deposits with maturities of three
months or less at the time of purchase.
Fair Value Of Financial Instruments
The Company's financial instruments include accounts and notes receivable,
accounts payable, and long-term debt. The fair value of accounts receivable and
accounts payable approximate their carrying values because their maturities are
generally less than one year. The fair value of debt obligations are estimated
to approximate their carrying values based upon their stated interest rates.
Revenue Recognition
Revenues from the sale of products are recognized upon shipment to the customer.
The Company records freight-out expenses as a general and administrative
expense. For the years ended September 30, 2003, 2002 and 2001, freight out
expenses totaled $591,000, $405,000 and $146,000.
Management provides an estimated allowance for uncollectable accounts and notes
receivable based upon an assessment of amounts outstanding and evaluation of
specific customer account balances. The allowance for doubtful accounts at
September 30, 2003 and 2002 was $615,000 and $682,000, respectively.
F-8
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories
Inventories are valued primarily at the lower of cost (first-in, first-out
basis) or market.
Long-lived Assets
The Company reviews the carrying value of its long-lived assets, including
property and equipment, whenever events or changes in circumstances indicate
that the carrying value of the assets may not be recovered. An impairment loss
may be recognized when estimated undiscounted future cash flows expected to
result from the use of the asset, including disposition, is less than the
carrying value of the asset. The measurement of the impairment losses to be
recognized is based on the difference between the fair value and the carrying
amounts of the assets. In order to determine if an asset has been impaired,
assets are tested by operating segment and geographic location. During the year
ended September 30, 2003, the Company recorded an impairment of certain of its
long-lived assets held by ANIP (See Note 2).
Property And Equipment
Property and equipment are stated at cost. Depreciation on property and
equipment is provided using the straight-line method over the estimated useful
lives of the assets. Leasehold improvements are amortized over the terms of the
respective leases, not in excess of their estimated useful lives. For income tax
purposes, depreciation on fixed assets is calculated using accelerated methods.
Intangible Assets
Intangible assets consist of the excess of cost over net assets acquired,
"goodwill". Effective with the adoption of Statement of Financial Accounting
Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets" ("SFAS No.
142"), management of the Company evaluates the carrying value of goodwill
annually or whenever a possible impairment is indicated. See Note 13.
Stock Options and Warrants
The Company accounts for stock options issued to employees in accordance with
Accounting Principles Board opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25") . During the years ended September 30, 2003, 2002, and
2001, all options issued to officers and employees were granted at an exercise
price which equaled or exceeded the market price per share at the date of grant
and accordingly, based upon an intrinsic valuation, no compensation expense was
recorded relative to those grants.
The Company has elected to adopt the disclosure requirements of SFAS No.123
"Accounting for Stock-based Compensation" ("SFAS No. 123"). This statement
requires that the Company provide proforma information regarding net income
(loss) and basic and diluted earnings (loss) per share as if compensation cost
for the Company's stock options granted had been determined in accordance with
the fair value based method prescribed in SFAS No. 123. Additionally, SFAS No.
123 generally requires that the Company record options issued to non-employees,
based on the fair value of the options.
F-9
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS NO. 123 Pro Forma Computation
The Company estimates the fair value of each stock option at the grant date by
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 2003, 2002 and 2001, a dividend yield of 0%; a
risk-free interest rate of 4.4%, 3.8% and 5.0%; an expected life ranging from
5-10 years; and an expected volatility of 111%, 81.5% and 134%,respectively. Had
compensation cost been determined on the basis of fair value pursuant to SFAS
No. 123 for stock options issued to employees, net income (loss) and earnings
(loss) per share for the years ended September 30, 2003, 2002 and 2001 would
have been reduced as follows:
2003 2002 2001
-------------- ----------- -----------
Net income (loss) as reported $ (3,843,804) $(3,344,421) $ 164,873
Add: Stock-based employee compensation
expense included in reported net income
(loss), net of related tax effects -- -- --
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all awards,
net of related tax effects (206,300) (76,257) (523,013)
-------------- ------------ -----------
Pro forma $ (4,050,104) $(3,420,678) $ (358,140)
============== =========== ===========
Basic and diluted income (loss) per share:
As reported $ (.77) $ (1.40) $ .08
============== =========== ===========
Pro forma $ (.81) $ (1.43) $ (.18)
============== =========== ===========
Income Taxes
The Company recognizes income tax expense using the liability method of
accounting for deferred income taxes. A deferred tax asset or liability is
recorded based upon the tax effect of temporary differences between the tax
bases of assets and liabilities and their carrying value for financial reporting
purposes. Deferred tax expense or benefit is the result of changes in the
deferred tax assets and liabilities during the year. The Company adjusts the
deferred tax asset valuation allowance based upon the anticipated future
realization of the deferred tax benefits supported by demonstrated trends in the
Company's operating results.
Earnings (Loss) Per Common Share
Basic earnings (loss) per share includes no dilution and is computed by dividing
net earnings (loss) available to stockholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share reflects
the potential dilution of securities that could share in the Company's earnings.
Diluted earnings per share for the years ended September 30, 2003 and 2002, did
not consider the effect of the warrants and options because they were
anti-dilutive.
F-10
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management's Estimates and Assumptions
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America ("US
GAAP") 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 consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. The
actual results could differ from those estimates.
Reclassifications
Certain amounts reported in the Company's prior years' financial statements have
been reclassified to conform to the presentation used in the current year.
Recent Accounting Pronouncements
Accounting for Guarantees - In November 2002, Financial Accounting Standards
Board ("FASB") Interpretation 45,Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others ("FIN 45") was issued. FIN 45 requires a guarantor entity, at the
inception of a guarantee covered by the measurement provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. Interpretation 45 applies prospectively to
guarantees the Company issues or modifies subsequent to December 31, 2002. The
Company has historically not issued guarantees and therefore adoption of FIN 45
did not have an effect on its 2003 financial condition or results of operations.
Stock-Based Compensation - In December 2002, the FASB issued FASB No. 148 (SFAS
148), Accounting for Stock-Based Compensation - Transition and Disclosure. This
Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. It also amends disclosure requirements to require prominent
disclosures in both annual and interim financial statements about the method and
the effect of the method used for stock based compensation on reported results.
The statement is effective for fiscal years ending after December 15, 2002.
Adoption of SFAS 148 did not have a material effect on the Company's financial
statements.
Variable Interest Entities - In January 2003, the FASB issued FASB
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. FIN
46 clarifies the application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, for certain entities which do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties or in which equity
investors do not have the characteristics of a controlling financial interest
("variable interest entities"). Variable interest entities will be required to
be consolidated by their primary beneficiary. The primary beneficiary of a
variable interest entity is determined to be the party that absorbs a majority
of the entity's expected losses, receives a majority of its expected returns, or
both, as a result of holding variable interests, which are ownership,
F-11
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
contractual, or other pecuniary interests in an entity. FIN 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after
December 15, 2003, to variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003. FIN 46 applies to
public enterprises as of the beginning of the applicable interim or annual
period. The Company does not have any variable interest entities, and therefore
the adoption of the provisions of FIN 46 did not have any impact on the Company.
Derivative Instruments and Hedging Activities - In April 2003, the FASB issued
Statement of Financial Accounting Standards No. 149 ("SFAS 149"), "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities," which amends
and clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts. SFAS 149
is effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The provisions of SFAS 149
are to be applied prospectively. The adoption of SFAS No. 149 did not an impact
on the Company's financial position or results of operations.
Revenue Arrangements - In November 2002, the Emerging Issues Task Force ("EITF")
reached a consensus on Issue 00-21, Accounting for Revenue Arrangements with
Multiple-Deliverables ("EITF 00-21"). EITF 00-21 addresses how to account for
arrangements that may involve the delivery or performance of multiple products,
services and/or rights to use assets. The consensus mandates how to identify
whether goods or services or both which are to be delivered separately in a
bundled sales arrangement should be accounted for separately because they are
"separate units of accounting." The guidance can affect the timing of revenue
recognition for such arrangements, even though it does not change rules
governing the timing or pattern of revenue recognition of individual items
accounted for separately. The final consensus will be applicable to agreements
entered into in fiscal years beginning after June 15, 2003 with early adoption
permitted. Additionally, companies will be permitted to apply the consensus
guidance to all existing arrangements as the cumulative effect of a change in
accounting principle in accordance with APB Opinion No. 20, Accounting Changes.
The Company does not believe the adoption of EITF 00-21 will have a material
impact on its financial position or results of operations.
Financial Instruments - In May 2003 the FASB issued Statement of Financial
Accounting Standards No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and
Equity ("SFAS No. 150"). This statement establishes standards for how an issuer
classifies and measures in its financial position certain financial instruments
with characteristics of both liabilities and equity. In accordance with this
standard, financial instruments that embody obligations of the issuer are
required to be classified as liabilities. SFAS No. 150 is effective for all
financial instruments entered into or modified after May 31, 2003. For existing
financial instruments, SFAS No. 150 is effective at the beginning of the fiscal
quarter commencing July 1, 2003. The adoption of SFAS No. 150 did not have an
effect on the Company's financial position, results of operations or cash flows.
F-12
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - IMPAIRMENT OF LONG-LIVED ASSETS WITH SIGNIFICANT FOURTH QUARTER
ADJUSTMENT
During the fourth quarter of the fiscal year ended September 30, 2003, an
impairment of $3,900,000 was recorded against the carrying amounts of the
Company's long-lived assets associated with the Company's ANIP subsidiary.
ANIP's land and building was determined to be impaired by $1,730,000 and the
ANIP equipment was impaired by $2,170,000. The impairment was recorded based
upon a review by management of ANIP's results of operations and carrying values
of the ANIP assets. The impairment charge was determined based upon estimated
current market values of the assets as compared to their carrying values.
NOTE 3 -- INVENTORIES
Inventories, at September 30, consisted of the following:
2003 2002
---- ----
Finished goods $ 571,223 $ 319,300
Work in process 70,352 144,681
Raw materials 1,750,096 1,589,287
--------- ---------
Total inventories $2,391,671 $2,053,268
========= =========
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment and their estimated useful lives are summarized as
follows:
September 30,
------------
Lives 2003 2002
------- ------------ ------------
Land $ 1,029,873 $ 1,763,567
Building and improvements 15-30 1,684,243 2,707,215
Equipment 7-12 4,153,850 6,476,312
Leasehold improvements 7 291,732 278,357
Furniture and fixtures 5-10 17,702 17,702
------------ ------------
7,177,400 11,243,153
Less: Accumulated depreciation and amortization (2,576,016) (1,962,595)
------------ ------------
$ 4,601,384 $ 9,280,558
============ ============
NOTE 5 -- INCOME TAXES
Deferred income taxes are determined based on the temporary differences between
the financial statement and income tax basis of assets and liabilities as
measured by the enacted tax rates, which are estimated to be in effect when
these differences reverse.
F-13
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The (benefit) provision for income taxes on continuing operations for the years
ended September 30, 2003, 2002 and 2001 consisted of the following:
2003 2002 2001
--------- --------- ---------
Federal tax (benefit) - current $ -- $ -- $ --
Federal tax (benefit) - deferred -- -- (251,000)
State tax (benefit) expense -- -- (83,000)
--------- --------- ---------
$ -- $ -- $(334,000)
========= ========= =========
The following reconciles federal income tax expense (benefit) computed at the
statutory rate with income taxes as reported for the years ended September 30:
2003 2002 2001
--------- --------- ---------
Expected income tax (benefit) at 34% $(1,307,000) $(734,000) $(472,000)
State taxes, net of federal benefit -- -- (83,000)
Non deductible goodwill -- -- 213,000
Non deductible debt conversion expense -- 204,000 --
Increase in valuation allowance
for deferred tax asset 1,326,000 525,000 --
Other items, net (19,000) 5,000 8,000
--------- --------- ---------
Income tax (benefit) expense $ -- $ -- $(334,000)
========= ========= =========
Deferred tax assets and liabilities consisted of the following net tax effects
of operating losses and temporary differences between the carrying amounts of
assets and liabilities for financial reporting and tax purposes at September 30,
2003 and 2002:
Assets 2003 2002
------ ----------- -----------
Loss carryforwards $ 3,380,000 $ 3,045,000
Receivable allowance for doubtful accounts 246,000 273,000
Inventory valuation write-offs 48,000 77,000
Note receivable allowance 1,602,000 1,602,000
Other 44,000 41,856
----------- -----------
Deferred tax assets 5,320,000 5,038,856
Less valuation allowance (4,447,000) (2,401,048)
----------- -----------
$ 873,000 $ 2,637,808
=========== ===========
F-14
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liability
Fixed assets $ 873,000 $ 2,637,808
=========== ===========
At September 30, 2003, the Company has a net operating loss carryforward of
approximately $4.9 million, which expires through 2021. Additionally, the
Company has obtained net operating losses of approximately $2.3 million, which
expire primarily in 2011 and are subject to annual usage limitations. The
Company also has capital loss carryforwards of approximately $1.2 million,
expiring through 2005, which may only be used to offset capital gains during the
carryforward period. As the Company is unable to determine that it is more
likely than not that the future taxable income of the Company will be sufficient
to utilize the loss carryforwards, a valuation allowance has been established
against the net asset.
NOTE 6 - CREDIT FACILITY
As of March 21, 2003, the Company completed the refinancing of its Senior Debt
Facility with a new lender. The new debt agreement provides the Company with a
$5.5 million facility, consisting of a $4.0 million revolving loan, a $1.0
million equipment term loan and a $500,000 equipment acquisition line. The
three-year agreement which matures in March 2006, is collateralized by
substantially all of the Company's assets, and bears interest at rates that
fluctuate with the Prime Rate, with the revolver at 2% over prime (not to be
less than a total rate of 6.5%) and the equipment lines at 4.75% over prime (not
to be less than a total rate of 9.25%). As a result of the "floor" amount of the
interest rates under the facility, those rates represented the year-end interest
rates as well as the effective interest rates for the period. The term loan
portion of the agreement requires monthly payments of principal totaling
approximately $19,000. The Agreement contains a number of covenants, which
include among other items; maintenance of specified minimum net worth and fixed
charge ratios, as well as limitations on capital expenditures and the Company's
ability to pay dividends. After considering the effect of an amendment to the
facility, effective as of September 30, 2003, the Company was in compliance with
the covenants of the loan agreement. As of September 30, 2003, the total balance
outstanding under the facility, including $1,135,000 outstanding under the term
loan portion, amounted to $3,312,000, with additional borrowings available under
the revolving loan of $1,164,000, at that point, based upon accounts receivable
and inventory levels.
Initial proceeds under the new agreement were used to payoff the debt
obligations to the then existing Senior Lender, which totaled approximately
$1,339,000, and to repay the remaining $500,000, plus accrued interest, due
under a note with Dr. Pailla Reddy, a director of the Company, that arose from
the Bactolac acquisition.
The Company's previous credit facility provided for a $12,000,000 revolving
credit line based upon eligible trade accounts receivable and allowable
inventories as defined under the terms of the Agreement. The agreement also
contained a term loan facility, with principal payable in monthly installments
of $43,885, over the term of the agreement. Interest on amounts outstanding
under the agreement was payable monthly based upon the lender's index rate plus
F-15
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
two and one-half percent. The loan facility was secured by substantially all of
the assets of ANI and its subsidiaries. As of September 30, 2002, there was
$2,225,777 outstanding under the revolving credit line and $664,034 outstanding
under the term loan facility. The Agreement contained a number of covenants,
including among other items, maintenance of specified minimum net worth and
fixed charge ratios, as well as limitations on capital expenditures. At
September 30, 2002, the Company was not in compliance with minimum net worth and
fixed charge ratios under the agreement. Due to the maturity date of the loan
and the existing covenant violations , the entire loan amount was classified as
a current liability as of September 30, 2002.
NOTE 7 - LONG-TERM DEBT AND RELATED PARTY NOTES
As a result of the acquisitions of Bactolac and ANIP, during the first quarter
of the fiscal year ended September 30, 2000, the Company entered into purchase
notes with certain of the selling stockholders and assumed, through Bactolac, a
mortgage obligation on the ANIP facility. During the year ended September 30,
2001, the mortgage obligation was refinanced into a long-term mortgage.
Following is a summary of such obligations at September 30:
2003 2002
-------- ----------
Related party Note -
Stock purchase note arising from
purchase of Bactolac (a) $ -- $500,000
======== ==========
Long-term debt:
Mortgage obligation on ANIP facility (b) $2,342,903 $2,375,456
Other installment obligations 108,607 141,623
---------- ----------
Total 2,451,510 2,517,079
Less current portion 124,118 113,384
---------- ----------
Long-term portion $2,327,392 $2,403,695
========== ==========
(a) The Bactolac stock purchase note was subordinate to the prior credit
facility and bore interest at 7%. The original note was payable
$1,000,000 on the first anniversary of the 1999 acquisition, $1,000,000
on the second anniversary, and $500,000 on the third anniversary. During
November 2001, an agreement was entered into with the holder of the note
to extend the second $1,000,000 principal and interest payment otherwise
due on November 17, 2001, for one year. As part of the agreement, the
Company agreed to a conversion option on the deferred principal and
interest to allow the holder to convert such amounts into shares of the
Company's common stock at the rate of $1.00 per share during the
extension period. During September 2002, the Company reached agreement
with the holder to convert all but $500,000 of the remaining loan
balance into shares of the company's common stock at $0.55 per share.
The Company repaid the remaining $500,000 outstanding under the
agreement in March 2003.
F-16
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(b) As of April 30, 2001, the mortgage originally assumed in the ANIP
acquisition was refinanced with a $2,415,000 mortgage with a different
lender under an agreement that bears interest at 13% and is payable
monthly over a twenty year term. The mortgage is secured by the ANIP
land and building.
During January 2002, ANI received a $250,000, subordinated 7% loan from a
company, Cambridge Holdings, Ltd., ("Cambridge") that is affiliated with ANI's
board chairman. The note was due in one year, and was convertible at the option
of the holder into shares of ANI common stock at $1.00 per share, and also
includes a warrant to allow the holder to acquire 50,000 shares of ANI common
stock at $1.00 per share, through June 2004. The proceeds of the loan were used
as working capital. The approximate $70,700 value associated with the detachable
warrant and the conversion feature was recorded separately from the note
liability, as a credit to additional paid-in capital. This allocation gave rise
to additional interest cost, above the stated face amount of interest, as the
amount is accreted back to the total loan amount.
During July 2002, ANI borrowed $175,000 from Glenwood Capital Partners I, LP,
("Glenwood") a partnership managed by a director of the Company. The 7% note was
due in one year, and was convertible at the option of the holder into shares of
ANI common stock at $1.00 per share. Additionally, a warrant was issued to allow
Glenwood to acquire 35,000 shares of ANI Common Stock at $1.00 per share through
January 2005. The approximate $49,500 value associated with the detachable
warrant and the conversion feature was recorded separately from the note
liability, as a credit to additional paid-in capital. This allocation gave rise
to additional interest cost, above the stated face amount of interest, as the
amount is accreted back to the total loan amount.
During September 2002, under agreements finalized with Dr. Reddy, Cambridge and
Glenwood, the total amounts and accrued interest due on the above convertible
obligations (all but the remaining $500,000 due to Dr. Reddy) were converted
into 2,840,800 shares of ANI's common stock. The agreement provided for a
conversion rate of $0.55 per share, which at the time represented approximately
a 20% premium over the trading price of the stock. Since the agreements were
modified to adjust the conversion price from the originally established terms,
an inducement cost of the modification was required to be recorded. The cost was
computed based upon the fair market value on the date of the conversion of the
additional shares issued over those that would have been issued under the
original terms. The additional cost was computed to be approximately $601,000,
which was recorded as additional expense for the year ended September 30, 2002,
with the offsetting credit being recorded as additional paid-in capital.
Scheduled future maturities of long-term debt as of September 30, 2003,
exclusive of the credit facility, are approximately as follows:
F-17
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ending September 30,
------------------------
2004 $ 124,000
2005 61,000
2006 51,000
2007 55,000
2008 62,000
Thereafter 2,099,000
-----------
$ 2,452,000
===========
NOTE 8 - INDUSTRY SEGMENTS AND MAJOR CUSTOMERS
Segments
The Company's business segments are divided into distinct manufacturing areas in
two geographic locations. Bactolac Pharmaceutical Inc. is a private label
contract manufacturer of vitamins and supplements located in Hauppauge, New
York. ANI Pharmaceuticals, Inc. is a contract and private label manufacturer of
over-the-counter liquid and powder pharmaceutical products, primarily liquid
stomach remedies, located in Gulfport, Mississippi. The Company determines its
segment results consistent with its management reporting and consolidated
accounting policies. Selected financial information from the Company's business
segments is as follows (ooo's):
Vitamins and Pharmaceutical Corporate
Supplements Products Overhead Totals
----------- -------- -------- ------
Year ended September 30, 2003
- -----------------------------
Net sales $ 12,813 $ 11,887 $ -- $ 24,700
Gross profit 4,690 2,684 -- 7,374
General and administrative expenses 1,859 3,916 692 6,467
Impairment loss on long-lived assets -- (3,900) -- (3,900)
Operating income (loss) from
continuing operations 2,831 (5,133) (692) (2,994)
Interest expense 141 479 61 681
Net income (loss) from
continuing operations 2,692 (5,779) (757) (3,844)
Capital expenditures 430 20 -- 450
Depreciation and amortization 231 530 2 763
Identifiable assets 12,285 6,389 1,799 20,473
Year ended September 30, 2002
- -----------------------------
Net sales $ 12,364 $ 9,261 $ -- $ 21,625
Gross profit 4,141 2,199 -- 6,340
General and administrative expenses 2,225 3,242 1,170 6,637
Operating income (loss) from
continuing operations 1,916 (1,564) (1,170) (818)
Interest expense 80 519 758 1,357
Net income (loss) from
continuing operations 1,866 (2,083) (1,943) (2,160)
F-18
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cumulative accounting change -- (1,185) -- (1,185)
Capital expenditures 160 148 -- 308
Depreciation and amortization 212 543 2 757
Identifiable assets 11,214 12,258 1,063 24,535
Year ended September 30, 2001
- -----------------------------
Net sales $ 10,764 $ 6,842 $ -- $ 17,606
Gross profit 3,420 1,602 -- 5,022
General and administrative expenses 1,778 2,681 1,170 5,629
Operating income (loss) from
continuing operations 1,642 (1,080) (1,170) (608)
Interest expense 70 598 175 843
Net income (loss) from
continuing operations 1,590 (1,464) (1,392) (1,266)
Capital expenditures 853 72 6 931
Depreciation and amortization 492 605 110 1,207
Identifiable assets 11,133 11,945 2,632 25,710
Major Customers
Other than as detailed under export sales, the Company's revenues are generated
from customers located in the United States. The following represents customers
comprising more than 10% of the Company's net sales from continuing operations:
Customer\Segment 2003 2002 2001
----------------- ---- ---- ----
A - Bactolac 7.6% 16.6% 14.6%
B - ANIP 19.2% 13.6% 6.3%
C - ANIP --% --% 13.4%
Subsequent to year end ANIP received a communication from its customer "B"
above, describing concerns about certain product quality delivery issues. ANIP
is working to address the customer's concerns and is optimistic that the issues
can be rectified. Should ANIP not be able to adequately address the customer's
issues, it could have an adverse impact on ANIP's ability to retain some or all
of the customer's business.
Foreign Sales
Export sales were approximately $1,320,000, $1,800,000 and $1,610,000 for the
years ended September 30, 2003, 2002 and 2001. The Company has no foreign
assets.
NOTE 9 -- COMMITMENTS AND CONTINGENCIES
Contingencies
The Company's subsidiaries have pending legal actions and claims incurred in the
normal course of business. One action from a former customer of Bactolac seeks
claims exceeding $650,000 on three causes of action. During the period
subsequent to when the former customer alleges that Bactolac violated a
production agreement, Bactolac produced less than $450 for this customer and
during the entire history with the customer less than $3,000 in product was sold
to them. The Company believes that these actions to the extent that they are
material, are without merit and is actively pursuing the defense thereof. The
Company believes that the ultimate
F-19
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
resolution of these matters will not have a material effect on the Company's
financial condition, results of operations or cash flows. Depending however, on
the amount and timing of an unfavorable resolution of these items, it is
possible that the Company's future results of operations or cash flows could be
materially impacted in a particular period.
401(k) Plan
In July 1998 the Company established the Advanced Nutraceuticals, Inc. 401(k)
Plan and Trust (formerly - Nutrition for Life 401(k) Plan and Trust) (the
"Plan") which covers all of the Company's full-time employees who are United
States citizens, at least 21 years of age and have completed one quarter of
service with the Company. Pursuant to the Plan, employees may elect to reduce
their current compensation by up to the statutorily prescribed annual limit and
have the amount of such reduction contributed to the Plan. The Plan provides for
discretionary contributions by the Company. As of September 30, 2003, the
Company has made no such discretionary contributions. Subsequent to year-end,
the Company initiated procedures to terminate the Plan.
Operating Leases
The Company has noncancelable operating leases, primarily for manufacturing and
office space and equipment. Rental expense under operating leases for the years
ended September 30, 2003, 2002 and 2001 amounted to approximately $412,000,
$425,000, and $400,000. The lease for the Bactolac facility is with an entity
owned by a member of the Company's Board of Directors. The lease requires
monthly payments through December 2010 and contains a renewal option for an
additional five-year term.
Future minimum rental payments required under operating leases that have initial
or remaining non-cancelable lease terms in excess of one year are as follows for
the years ending September 30:
2004 $370,000
2005 $369,000
2006 $303,000
2007 $307,000
2008 $310,000
2009 $313,000
2010 $315,000
2011 $ 79,000
----------
$2,366,000
==========
Employment Agreements
The Company has employment agreements with certain of its management personnel.
The agreements contain customary provisions regarding employment terms,
confidentiality and non-solicitation provisions. Two of the agreements provide
for a commitment extending beyond one year, requiring monthly payments of
approximately $33,300 to January 2005 and thereafter decreasing to $21,000 per
month through November 2005.
F-20
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Government Regulations
The Company's activities are subject to regulations by various federal and state
agencies, including the Food and Drug Administration (the "FDA"). The Company
believes that it is in compliance with all federal and state regulations.
However, the Company cannot predict whether new legislation regulating its
activities will be enacted, which could have a material adverse effect on the
Company.
NOTE 10 -- PREFERRED AND COMMON STOCK
In connection with the acquisitions of Bactolac and ANIP that were consummated
during the first quarter of the fiscal year ended September 30, 2000, the Board
of Directors established a Series A Preferred Stock. The Series A Preferred
Stock is $.001 par value with 1,000,000 shares authorized. Following
stockholders approval for the conversion of the Series A Preferred Stock shares
into shares of common stock in 2000, 552,818 shares of common stock was issued
and no Series A preferred shares remain outstanding. The Series A preferred
shares had a $28.40 per share liquidation preference on any distribution over
the holders of the common stock.
Effective June 1, 2001, a one for four (1:4) reverse stock split of all of the
Company's issued and outstanding common stock was effected. The effect of the
split has been retroactively reflected for all periods presented in the
accompanying consolidated financial statements.
NOTE 11 -- STOCK OPTIONS AND WARRANTS
1993 Plan
The Company's Board of Directors approved the 1993 Stock Option Plan (the "1993
Plan") providing for a total of 70,500 shares of common stock to be reserved for
the grant of options to purchase the Company's common stock. Generally,
one-third of the shares underlying the options become exercisable in cumulative
installments of 12 months, 24 months and 36 months after the date of grant. The
maximum term of the options is 10 years, except that if an employee leaves the
Company, the options will terminate 30 days thereafter. The issuance of options
was at the discretion of the Company's Board of Directors. The 1993 Plan is now
expired.
1995 Discretionary Plan
The Company's Board of Directors approved the 1995 Stock Option Plan (the "1995
Plan") in March 1995, as amended in June 1996, April 1999, June 2000, May 2001
and February 2003, providing for a total of 1,250,000 shares of common stock to
be reserved for the grant of options to purchase Common Stock of the Company.
The terms of the options are similar to those of the 1993 Plan. At September 30,
2003, there were 920,602 shares reserved for the grant of options under the 1995
plan.
F-21
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1995 Non-Discretionary Plan
In November 1995, the Company adopted the 1995 Non-Discretionary Stock Option
Plan for non-employee directors of the Company who are not eligible to
participate in the other Plans (the "Non-Discretionary Plan"). The Non-
Discretionary Plan provided that the Company grant options to purchase 5,000
shares of the Company's common stock to each person who thereafter becomes a
director of the Company and, as of December 1, of each year (commencing in
1996), options to purchase an additional 5,000 shares of common stock will be
granted to each eligible director. The exercise price of the options is the fair
value of the common stock at the date of grant of the options. The options
expire in five years and are exercisable in full at the date of grant. During
the years ended September 30, 1998 and 1997, the Company issued 15,000 options
to Directors under this plan. The Non-Discretionary Plan was cancelled on
October 6, 1999. At September 30, 2003, there were 1,250 shares reserved for the
grant of options under this plan.
Other Options and Warrants
In connection with the Cambridge and Glenwood loans that the Company received
during the year ended September 30, 2002, a total of 85,000 warrants were issued
to these entities to allow them to acquire shares of ANI Common Stock at $1.00
per share, as further disclosed in Note 7.
In October 1998, the Company issued a warrant to Nightingale Conant to purchase
up to 72,500 shares of the Company's common stock at $22.00 per share. The
warrant was exercisable at any time until October 31, 2003 when it expired
The following is a summary of the status of option and warrant plans during the
years ended September 30:
Options Warrants
----------------------- -----------------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
--------- ------- -------- --------
Outstanding as of September 30, 2000 329,855 $17.92 202,776 $18.36
Granted 470,375 $1.21 -- --
Exercised -- -- -- --
Forfeited (80,551) $10.68 -- --
Cancelled (138,204) $19.99 (17,500) 25.00
--------- --------
Outstanding as of September 30, 2001 581,475 $3.54 185,276 $17.74
Granted 410,000 $.48 85,000 $1.00
Exercised -- -- -- --
Forfeited (16,806) $13.04 -- --
Cancelled -- -- (112,776) $15,00
--------- --------
F-22
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Outstanding as of September 30, 2002 974,669 $ 2.09 157,500 $10.67
Granted 125,000 $ .87 -- --
Exercised -- -- -- --
Forfeited (177,817) $ .75 -- --
Cancelled -- -- -- --
--------- --------
Outstanding as of September 30, 2003 921,852 $ 1.59 157,500 $10.67
========= ========
Exercisable as of September 30,
2001 50,005 $16.73 185,276 $17.74
2002 230,270 $ 5.07 157,500 $10.67
2003 534,326 $ 2.35 157,500 $10.67
Weighted average fair value of grants
during the year ended September 30,
2001 $ 9.36 --
2002 $ .48 $1.00
2003 $ .87 --
====== ======
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-Average
Remaining
Range of Contractual Life Weighted-Average Weighted-Average
Exercise Prices Number (years) Exercise Price Number Exercise Price
------------------- ------ ------- -------------- ------ --------------
$ .46 - $ 7.90 846,257 7.6 $ .87 458,731 $ .99
7.91 - 15.80 75,595 5.8 10.61 75,595 10.61
15.81 - 23.70 -- -- -- -- --
------- --- ------- ------ --------
921,852 7.5 $ 1.59 534,326 $ 2.35
======= === ======= ======= ========
NOTE 12 - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of non-cash investing and financing activities:
2003 2002 2001
----------- ------------- ----------
Purchase of property and equipment under
Capital lease $ -- $ -- $ 140,000
Issuance of common stock for debt conversion $ -- $ 1,425,000 $ --
Issuance of common stock under earnout \
bonus agreements $ -- $ 119,000 $ 30,000
Sale of NFLI transaction
Promissory Note taken in sale $ -- $ -- $ 5,000,000
Establish reserve for Promissory Note $ -- $ -- $(4,262,000)
Intercompany account of NFLI formalized into a
note receivable due to Bactolac $ -- $ -- $ 650,000
Supplemental disclosure of cash flow information:
Federal and state income taxes paid (refunded) $ 21,000 $ (5,000) $ (825,000)
Interest paid $ 632,000 $ 748,000 $ 798,000
The 2001 Tax refunds relate to the discontinued NFLI operations.
F-23
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 -- GOODWILL AND OTHER INTANGIBLE ASSETS
In connection with the 1999 acquisitions, goodwill of $8.3 million was
originally recorded in connection with the Bactolac segment and $1.4 million in
connection with the ANIP segment. During 2001 and 2002, Bactolac goodwill was
increased by $30,265 and $20,913, representing the fair value of shares that
were issued under the terms of the earn out agreement. As described below,
effective October 1, 2002 a charge was recorded of approximately $1.2 million to
write-off the total amount of goodwill associated with the ANIP segment. As of
September 30, 2003 and 2002 the $7.6 net remaining balance of goodwill was
associated with the Bactolac segment.
The FASB issued SFAS No. 141, "Business Combinations" ("SFAS No. 141") and No.
142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") during July 2001.
SFAS No. 141 requires business combinations initiated subsequent to June 30,
2001 be accounted for by using the purchase method of accounting. SFAS No. 142
changes the accounting for goodwill from an amortization method to an
impairment-only approach. Under SFAS No. 142, goodwill and other indefinite
lived intangible assets must be tested annually and whenever events or
circumstances occur indicating that goodwill might be impaired. The Company
performs its impairment test annually during the fourth quarter of the fiscal
year. The Company adopted and applied SFAS No. 142 as of October 1, 2001.
Pursuant to the transition provisions of SFAS No. 142, the Company had until
March 31, 2002, six months from the date of adoption, to perform a comparison of
the fair value of each of its reporting units with its carrying amount,
including goodwill, as of the beginning of the year. If the fair value of a
reporting unit exceeds its carrying amount, goodwill is not considered impaired.
If the carrying value exceeds the reporting unit's fair value, a calculation of
the implied fair value of the reporting unit's goodwill is made and compared to
the carrying amount of the goodwill before the end of the year. Upon
determination that goodwill was impaired at October 1, 2001, the Company
recognized the loss as a cumulative effect of a change in accounting principle
in accordance with APB Opinion No. 20 (retroactive to the first quarter of
Fiscal 2002). In accordance with SFAS No. 142, the Company determined it had two
reporting units: Bactolac and ANIP. The fair value of the reporting units was
determined using a market approach based on peer group analysis, completed
transactions and discounted cash flows. As a result of the adoption of SFAS 142
and the required comparison of implied fair value to the carrying amount of
goodwill due to continued losses at the Gulfport operation, as of October 1,
2001, the Company recorded a one-time noncash charge of approximately $1.2
million to write-off the total amount of its goodwill associated with ANIP's
operations located in Gulfport, Mississippi. The Company has completed its
impairment assessment and the write-down recorded as a cumulative change in
accounting principle is deemed final. Such charge is non-operational and is
reflected as a cumulative effect of an accounting change in the accompanying
consolidated statement of operations. It was determined that no adjustment of
the goodwill associated with the Bactolac segment was required, and accordingly
the entire remaining goodwill is associated with Bactolac. The following
reconciliation illustrates the pro forma impact that the adoption of SFAS No.
142 would have had on the Company's net income (loss) and earnings per share had
the adoption occurred as of October 1, 2000:
F-24
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended
September 30,
2001
-------------
Net income (loss):
Reported income (loss) from continuing operations $ (981,000)
Add: Goodwill amortization 531,000
-----------
Adjusted income (loss) from continuing operations (450,000)
Income (loss) from discontinued operations, net of tax 1,146,000
-----------
Adjusted net income (loss) $ 695,000
===========
Basic income (loss) per share:
Reported income (loss) from continuing operations $ (0.48)
Add: Goodwill amortization 0.26
-----------
Adjusted net income (loss) from continuing operations (0.22)
Income from discontinued operations, net of tax 0.56
-----------
Adjusted net income (loss) $ 0.34
===========
Weighted average shares outstanding 2,027,000
===========
NOTE 14 -- SALE OF NUTRITION FOR LIFE INTERNATIONAL, INC. - NOTES RECEIVABLE AND
DISCONTINUED OPERATIONS
On June 13, 2001, ANI completed the sale of its network-marketing subsidiary,
NFLI, to Everest. At closing the Company received $3.2 million in cash and a $5
million note payable ("Note") by NFLI and a $650,000 note payable to Bactolac
Pharmaceutical, Inc. ("Bactolac") due in June 2002. As part of the terms of the
transaction, Everest paid off the balance outstanding of the Company's revolving
and term debt obligations related to NFLI. The majority of the cash received at
closing was used by the Company to reduce debt, with a portion providing working
capital. For financial reporting purposes, management of ANI was unable to
determine that it was probable that the future cash flows from NFLI's operations
would be sufficient to fund the entire balloon payment required under the terms
of the Note. Accordingly, an allowance of approximately $4,262,000 was provided
against the face amount of the Note at the date of the sale. ANI accounts for
collections on the Note under the cost recovery method, whereby collections are
recorded as a reduction of the balance recorded for the Note (after the
allowance). Additional collections above that amount are recorded as income as
collected. At the June 2002 due date of the $650,000 note, the Company sent a
demand notice for payment and NFLI responded that they believed that they were
entitled to certain claims for offset against certain of the amounts owed. No
additional communications have been received from NFLI regarding any claims.
During the year ended September 30, 2001, the Company collected approximately
$228,000 in total payments under the Note. During the year ended September 30,
2002, the Company collected approximately $567,000 in total payments under the
Note, resulting in a net carrying balance of the $5.0 million Note and the
$650,000 note, after reserves and other net
F-25
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
adjustments of approximately $184,000. During October 2002 the Company received
the regularly scheduled $184,000 payment for the quarter ended September 30,
2002. During the quarter ended September 30, 2002, management of the Company
recorded an additional allowance of approximately $365,000, against the net
balances due under the $5.0 million Note and the $650,000 note due to Bactolac,
based upon current assessment of the probability of receiving any additional
payments beyond the October 2002 payment, under those notes. With the additional
reserve recorded as of September 30, 2002, ANI has fully reserved the remaining
balances outstanding on the notes. During October 2003 the Company received
approximately $32,500 from the bankruptcy trustee related to the sale of certain
NFLI assets. Additional collections under the notes is doubtful as NFLI is being
liquidated in Chapter 7 bankruptcy filing that was initiated in 2003.
As a result of the sale of NFLI, the Company's 2001 consolidated financial
statements and related notes thereto were restated to present the operations of
NFLI as discontinued operations. The discontinued operations of NFLI for the
period through the sale in 2001 reported net sales of $30,341,242, gross profit
of $10,449,753, operating expenses of $10,236,064, income before income tax
benefit of $169,253 and net income of $1,145,540.
NOTE 15 - TERMINATED ACQUISITION COSTS
During September 2001 the Company entered into an agreement to acquire certain
assets of York Pharmaceuticals, Inc. ("York"), including equipment and customer
list. Following the expiration of the agreement, the Company continued to
negotiate with the York stockholders to attempt to conclude a transaction. The
Company was unable to finalize an acceptable agreement and during 2002, the
parties agreed to terminate further discussions. As a result of the termination,
approximately $155,000 in net accumulated acquisition related expenses were
written off during the quarter ended June 30, 2002.
F-26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On September 10, 2003, the Company dismissed Grant Thornton LLP ("GT") as the
Company's principal accountant. The decision to change accountants was approved
by the Audit Committee of the Board of Directors of the Company.
The reports of GT on the financial statements of the Company for the fiscal year
ended September 30, 2002 contained an explanatory paragraph stating that the
Company changed its method of accounting for goodwill and other intangible
assets for the year ended September 30, 2002. With the exception of the
foregoing, the reports of GT on the financial statements of the Company for
either of the past two fiscal years ended September 30, 2002 and 2001 did not
contain an adverse opinion or disclaimer of opinion, and were not qualified or
modified as to uncertainty, audit scope or accounting principles.
-47-
On September 12, 2003, the Company engaged Gelfond Hochstadt Pangburn, P.C.
("GHP") as the Company's certifying accountants to audit the financial
statements of the Company for its fiscal year ending September 30, 2003. During
the Company's two most recent fiscal years and the interim period prior to its
agreement to engage GHP as the Company's principal accountants, neither the
Company nor anyone on its behalf has consulted GHP on either (i) the application
of accounting principles to any transaction (completed or proposed) or (ii) the
type of audit report that might be rendered on the Company's financial
statements, or (iii) any matter that was either the subject of a disagreement or
reportable event as such terms are defined in Item 304 of Regulation S-K.
There have been no disagreements between the Company and its independent
accountants on any matter of accounting principles or practices or financial
statement disclosure.
Item 9 A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The management of the Company, including the Chief Executive Officer and the
Chief Financial Officer, has conducted an evaluation of the effectiveness of the
Company's disclosure controls and procedures pursuant to Rule 13a-14 under the
Securities Exchange Act of 1934 as of a date (the "Evaluation Date") within 90
days prior to the filing date of this report. Based on that evaluation, the
Chief Executive Officer and the Chief Financial Officer concluded that, as of
the Evaluation Date, the Company's disclosure controls and procedures were
effective in ensuring that all material information relating to the Company
required to be filed in the annual report has been made known to them in a
timely manner.
(b) Changes in Internal Controls
There have been no significant changes made in the Company's internal controls
or in other factors that have significantly affected internal controls
subsequent to the Evaluation Date.
PART III
Information required in Part III is omitted from this Report and will be filed
in a definitive proxy statement within 120 days after the end of the Company's
fiscal year in connection with the Company's Annual Meeting of Shareholders or
this Report will be amended within such time period.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2) See Item 8.
(3) Exhibits
Exhibit 2.1 Agreement and Plan of Reorganization, filed as a Exhibit to
the Registration Statement on Form S-4 (file no. 33-70312),
which Exhibit is incorporated herein by this reference.
Exhibit 2.2 Agreement and Plan of Merger, dated as of November 5, 1999,
among Nutrition For Life International, Inc., Advanced
Nutraceuticals, Inc., BPI Acquisition Company, Bactolac
Pharmaceutical Inc. and Pailla M. Reddy, filed as an Exhibit to
the Report on Form 8-K, filed on December 2, 1999, which Exhibit
is incorporated herein by this reference.
-48-
Exhibit 2.3 Agreement and Plan of Merger, dated as of October 20, 1999,
among Nutrition For Life International, Inc., Advanced
Nutraceuticals, Inc., NL Acquisition Company, Gregory Pusey and
Barry C. Loder, filed as an Exhibit to the Report on Form 8-K,
filed on December 2, 1999, which Exhibit is incorporated herein
by this reference.
Exhibit 2.4 Agreement and Plan of Merger, dated as of October 25, 1999,
among Nutrition For Life International, Inc., Advanced
Nutraceuticals, Inc., AC Acquisition Company, Allan I. Sirkin
and Neil Sirkin (the "Ash Merger Agreement"), filed as an
Exhibit to the Report on Form 8-K, filed on December 15, 1999,
which Exhibit is incorporated herein by this reference.
Exhibit 2.5 Amendment to Agreement and Plan of Merger, dated November
24, 1999, to the Ash Merger Agreement, filed as an Exhibit to
the Report on Form 8-K, filed on December 15, 1999, which
Exhibit is incorporated herein by this reference.
Exhibit 2.6 Agreement and Plan of Merger dated March 13, 2000 among
Nutrition For Life International, Inc., Advanced Nutraceuticals,
Inc. and NFLI Merger Sub, Inc., filed as an Exhibit to the
Report on Form 8-K, filed on March 21, 2000, which Exhibit is
incorporated herein by reference.
Exhibit 3.1 Articles of Incorporation of Nutrition For Life International,
Inc., as amended*
Exhibit 3.2 Bylaws of Nutrition For Life International, Inc., filed as an
Exhibit to the Registration Statement on Form S-4 (file no. 33-
70312), which Exhibit is incorporated herein by this reference.
Exhibit 3.3 Articles of Incorporation of Advanced Nutraceuticals, Inc.,
filed as an Exhibit to the Report on Form 8-K, filed on March
21, 2000, which Exhibit is incorporated herein by this reference
Exhibit 3.3 (a) Amendment to Articles of Incorporation of Advanced
Nutraceuticals, Inc. ****
Exhibit 3.4 Bylaws of Advanced Nutraceuticals, Inc., filed as an Exhibit to
the Report on Form 8-K, filed on March 21, 2000, which Exhibit
is incorporated herein by this reference
Exhibit 4.1 Specimen Certificate of Nutrition for Life International,
Inc.'s Common Stock*
Exhibit 4.4 Statement Establishing a Series of Shares (Series A
Preferred Stock), filed as an Exhibit to the Report on Form 8-K,
filed on December 2, 1999, which Exhibit is incorporated herein
by this reference.
Exhibit 10.2 1995 Stock Option Plan, as amended.****
-49-
Exhibit 10.26 Earnout Agreement, dated November 17, 1999, between Pailla
M. Reddy and Nutrition For Life International, Inc., filed as an
Exhibit to the Report on Form 8-K, filed on December 2, 1999,
which Exhibit is incorporated herein by this reference.
Exhibit 10.26(a)Letter of agreement dated January 10, 2000, to Earnout
Agreement between Pailla M. Reddy and Nutrition For Life
International, Inc.**
Exhibit 10.32 Employment Agreement, dated November 17, 1999, between Bactolac
Pharmaceutical Inc. and Pailla Reddy.**
Exhibit 10.40 Subordinated Promissory Note, dated November 17, 1999, in
the principal amount of $2,500,000 made by Nutrition For Life
International, Inc., payable to Pailla Reddy. **
Exhibit 10.40(a)Allonge to Subordinated Promissory Note, dated November
17, 2000, to the $2,500,000 note payable to Pailla Reddy.
Exhibit 10.41 Subordinated Promissory Note, dated November 17, 1999, in
the principal amount of $650,000 made by Bactolac Pharmaceutical
Inc., payable to Pailla Reddy. **
Exhibit 10.49 Loan and Security Agreement among General Electric Capital
Corporation, Nutrition For Life International, Inc., Ash Corp.,
Bactolac Pharmaceutical Inc. and NL Acquisition Company. **
Exhibit 10.50 First Amendment to Loan and Agreement among General Electric
Capital Corporation, Nutrition For Life International, Inc.,
Ash Corp., Bactolac Pharmaceutical Inc. and NL Acquisition
Company. **
Exhibit 10.51 Second Amendment to Loan and Security Agreement involving
General Electric Capital Corporation, dated March 15, 2000. ***
Exhibit 10.53 Agreement, dated July 7, 2000, between Shilpa-Saketh
Realty, Inc. and Bactolac Pharmaceutical Inc. ***
Exhibit 10.54 Waiver under Loan and Security Agreement involving General
Electric Capital Corporation, dated January 10, 2001. ***
Exhibit 10.55 Stock Purchase Agreement, dated December 29, 2000, among
Advanced Nutraceuticals, Inc., Everest International, LLC and
Nutrition For Life International, Inc. ***
Exhibit 10.56 First Amendment to Stock Purchase Agreement, dated June 5,
2001, among Advanced Nutraceuticals, Inc., Everest
International, LLC and Nutrition For Life International, Inc.
filed on Form 8-K dated June 27, 2001, and incorporated by
reference herein.
-50-
Exhibit 10.57 Subordinated Promissory Note, dated June 12, 2001,
$5,000,000 principal amount, from Nutrition For Life
International, Inc. to Advanced Nutraceuticals, Inc.****
Exhibit 10.58 Subordinated Promissory Note, dated June 12, 2001,
$650,000 principal amount, from Nutrition For Life
International, Inc. to Bactolac Pharmaceutical Inc.****
Exhibit 10.59 Release and Settlement Agreement, dated June 29, 2001, among
Advanced Nutraceuticals, Inc., Bactolac Pharmaceutical Inc.,
Allan I. Sirkin and Neil Sirkin****
Exhibit 10.60 Amended and Restated Loan Agreement among General Electric
Capital Corporation, Bactolac Pharmaceutical Inc., ANI
Pharmaceuticals, Inc. and Advanced Nutraceuticals, Inc., dated
December 12, 2001.****
*Exhibit 10.61 Subordinated Promissory Note dated, November 17, 2001 in the
principal amount of $1,543,438 made by Advanced Nutraceuticals,
Inc., payable to Pailla M. Reddy.****
Exhibit 10.62 Employment Agreement dated, November 18, 2001, between Bactolac
Pharmaceutical Inc., and Pailla M. Reddy.****
Exhibit 10.63 Waiver under Loan and Security Agreement involving General
Electric Capital Corporation, dated December 26, 2001.****
Exhibit 10.64 Conversion notice of Pailla M. Reddy dated August 26, 2002.*****
Exhibit 10.65 Conversion notice of Cambridge Holdings, Ltd., dated August
26, 2002.*****
Exhibit 10.66 Conversion notice of Glenwood Capital Partners I, L.P. dated
August 26, 2002.*****
Exhibit 10.67 Agreement dated July 19, 2002, between Advanced Nutraceuticals,
Inc. and Glenwood Capital Partners I, L.P.*****
Exhibit 10.68 Loan and Security Agreement among CapitalSource Finance LLC,
Advanced Nutraceuticals, Inc., Bactolac Pharmaceutical Inc.
and ANI Pharmaceuticals, Inc. filed on Form 8-K dated
March 27, 2003, and incorporated by reference herein.
Exhibit 10.68(a)First Amendment to Loan and Security Agreement
with CapitalSource Finance, LLC, dated December 31, 2003.
Exhibit 14 Code of Ethics of Advanced Nutraceuticals, Inc.
Exhibit 21 Subsidiaries of the Company.
Exhibit 23.1 Consent of Grant Thornton LLP.
Exhibit 23.2 Consent of Gelfond Hochstadt Pangburn, P. C.
Exhibit 31.1 Chief Executive Officer certification pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
-51-
Exhibit 31.2 Chief Financial Officer certification pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
Exhibit 32 Chief Executive Officer and Chief Financial Officer
certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
* These exhibits were previously filed as exhibits to the Company's
Registration Statement on Form SB-2 (File No. 33-92274), and are
incorporated herein by reference.
** These exhibits were previously filed as exhibits to the Company's
Report on Form 10-K for the fiscal year ended September 30, 1999, and
are incorporated herein by reference.
*** These exhibits were previously filed as exhibits to the Company's
Report on Form 10-K/A for the fiscal year ended September 30, 2000,
and are incorporated herein by reference.
**** These exhibits were previously filed as exhibits to the Company's
Report on Form 10-K for the fiscal year ended September 30, 2001, and
are incorporated herein by reference.
***** These exhibits were previously filed as exhibits to the Company's
Report on Form 10-K for the fiscal year ended September 30, 2002, and
are incorporated herein by reference.
(b) Reports on Form 8-K
a. On September 2, 2003, the Company filed an 8-K Report reporting under
Item 5 the issuance of a press release regarding an approval by the
Board to seek a reverse split of the Company's Common Stock.
b. On September 16, 2003, the Company filed an 8K Report reporting under
Item 9 a change in the Company's accountants.
(c) Exhibits
(a)(3)above
(d) Financial Statement Schedules See Item 8 above.
-52-
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ADVANCED NUTRACEUTICALS, INC.
(Registrant)
Date: January 12, 2004 By: /s/ Gregory Pusey
-----------------------------
Gregory Pusey, President and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Date: January 12, 2004 /s/ Gregory Pusey
--------------------------------------
Gregory Pusey, Chairman, President,
Chief Executive Officer and Director
Date: January 12, 2004 /s/ Jeffrey G. McGonegal
--------------------------------------
Jeffrey G. McGonegal, Senior Vice
President of Finance, Chief Financial
Officer and Secretary
Date: January 12, 2004 /s/ F. Wayne Ballenger
--------------------------------------
F. Wayne Ballenger, Director
Date: January 12, 2004 /s/ Randall D. Humphries
--------------------------------------
Randall D. Humphries, Director
Date: January 12, 2004 /s/ David E. Welch
--------------------------------------
David E. Welch, Director
Date: January 12, 2004 /s/ Pailla Reddy
--------------------------------------
Pailla Reddy, Director
-53-