SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2002
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Commission file number 0-26362
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ADVANCED NUTRACEUTICALS, INC.
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(Exact name of Registrant as specified in its charter)
Texas 76-0642336
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
106 South University Blvd., Unit 14
Denver, CO 80209
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(Address of Principal Executive Offices)
(303) 722-4008
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
--- ---
As of June 30, 2002 there were 2,151,989 shares of
common stock, $0.01 par value per share, outstanding.
ADVANCED NUTRACEUTICALS, INC.
Index
PART 1 - Financial Information
Page
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Item 1. Financial Statements
Advanced Nutraceuticals, Inc.
Consolidated Balance Sheets
June 30, 2002 and September 30, 2001 3
Consolidated Statements of Operations and
Comprehensive Income (Loss) For the Three
and Nine Months Ended June 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended June 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 13
ADVANCED NUTRACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
June 30, September 30,
2002 2001
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(Unaudited)
ASSETS
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Current Assets:
Cash and cash equivalents $ 544,085 $ 781,847
Receivables 4,431,087 2,978,698
Inventories 1,892,501 1,734,395
Deferred tax asset 181,232 181,232
Notes receivable 782,504 1,150,000
Prepaid expenses and other assets 212,710 97,228
------------ ------------
Total Current Assets 8,044,119
6,923,400
Property and equipment, net 9,354,660 9,728,865
Goodwill 7,563,913 8,727,553
Note receivable, less current portion -- 10,201
Other assets 230,355 319,669
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$ 25,193,047 $ 25,709,688
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 2,728,938 $ 1,892,884
Accrued expenses and other liabilities 685,199 574,056
Credit facility 2,364,815 2,039,454
Notes payable - related parties 1,714,630 --
Current portion of long-term debt 59,505 106,708
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Total Current Liabilities 7,553,087
4,613,102
Deferred tax liability 181,232 181,232
Long-term debt 2,424,558 3,970,596
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Total Liabilities 10,158,877 8,764,930
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Commitments and contingencies -- --
Stockholders' Equity:
Preferred stock, $.001 par value; 1,000,000
authorized; none outstanding -- --
Common stock; $.01 par value; 20,000,000
shares authorized 21,520 20,270
Additional paid-in capital 18,214,699
18,026,446
Retained earnings (deficit) (3,202,049) (1,101,958)
------------ ------------
Total Stockholders' Equity 15,034,170 16,944,758
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$ 25,193,047 $ 25,709,688
============ ============
See accompanying notes to consolidated financial statements.
ADVANCED NUTRACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three Months Nine Months
Ended June 30, Ended June 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net sales $ 5,117,559 $ 4,702,220 $ 16,179,974 14,425,624
Cost of sales 3,917,581 3,336,385 11,296,752 10,042,637
------------ ------------ ------------ ------------
Gross profit 1,199,978 1,365,835 4,883,222 4,382,987
General and administrative expenses 1,573,138 1,529,431 5,025,829 4,387,297
Terminated acquisition costs 216,207 0 216,207 0
------------ ------------ ------------ ------------
Operating income (loss) (589,367) (163,596) (358,814) (4,310)
------------ ------------ ------------ ------------
Other income (expense):
Interest expense, net (185,627) (203,125) (567,358) (663,286)
Other, net (18,376) 1,155 10,634 11,920
------------ ------------ ------------ ------------
(204,003) (201,970) (556,724) (651,366)
------------ ------------ ------------ ------------
Loss from continuing operations before income tax
expense and cumulative effect of accounting change (793,370) (365,566) (915,538) (655,676)
Income tax expense (benefit) 0 (116,000) 0 (130,000)
------------ ------------ ------------ ------------
Loss from continuing operations before cumulative
effect of accounting change (793,370) (249,566) (915,538) (525,676)
Income from discontinued operations, net of tax 0 469,580 0 904,723
Cumulative effect of accounting change 0 0 (1,184,553) 0
------------ ------------ ------------ ------------
Net income (loss) (793,370) 220,014 (2,100,091) 379,047
Other comprehensive income (loss) 0 0 0 0
------------ ------------ ------------ ------------
Total comprehensive income (loss) $ (793,370) $ 220,014 $ (2,100,091) $ 379,047
============ ============ ============ ============
Basic and Diluted income (loss) per common share:
Loss from continuing operations before
cumulative effect of accounting change $ (.37) $ (.12) $ (.43) $ (.26)
Cumulative effect of accounting change -- -- (.56) --
Income (loss) from discontinued operations -- .22 -- .44
------------ ------------ ------------ ------------
Net income (loss) $ (.37) $ .10 $ (.99) $ .18
============ ============ ============ ============
Weighted average common shares outstanding-
Basic and diluted 2,151,989 2,098,325 2,112,665 2,058,135
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
ADVANCED NUTRACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months
Ended June 30,
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2002 2001
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Net cash provided by (used in) operating activities - continuing operations $(1,037,349) $ 351,887
Net cash provided by (used in) investing activities 192,738 2,654,944
Net cash provided by (used in) financing activities 606,849 (2,052,239)
Effect of exchange rates on cash 0 (77,670)
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Net increase (decrease) in cash and cash equivalents (237,762) 876,922
Cash and cash equivalents at beginning of period 781,847 696,741
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Cash and cash equivalents at end of period $ 544,085 $ 1,573,663
=========== ===========
See accompanying notes to consolidated financial statements
ADVANCED NUTRACEUTICALS, INC.
NOTES FOR CONSOLIDATED STATEMENTS
INTERIM FINANCIAL STATEMENTS
The accompanying financial statements of Advanced Nutraceuticals, Inc. (the
"Company" or "ANI") have been prepared in accordance with the instructions to
quarterly reports on Form 10-Q. In the opinion of Management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and changes in financial position
at June 30, 2002, and for all periods presented have been made. Certain
information and footnote data necessary for fair presentation of financial
position and results of operations in conformity with accounting principles
generally accepted in the United States of America have been condensed or
omitted. It is therefore suggested that these financial statements be read in
conjunction with the summary of significant accounting policies and notes to
financial statements included in the Company's Annual Report on Form 10-K. The
results of operations for the period ended June 30, 2002 are not necessarily an
indication of operating results for the full year.
NOTE 1--GOODWILL AND OTHER INTANGIBLE ASSETS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and No.
142, "Goodwill and Other Intangible Assets" during July 2001. SFAS No. 141
requires that business combinations initiated subsequent to June 30, 2001 must
be accounted for by using the purchase method of accounting. SFAS No. 142
supersedes Accounting Principles Board ("APB") Opinion No. 17, "Intangible
Assets," however; the new statement will carry forward provisions in APB Opinion
No. 17 related to internally developed intangible assets. SFAS No. 142 changes
the accounting for goodwill from an amortization method to an impairment-only
approach. Under SFAS 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 has adopted and applied SFAS No.
142 as of October 1, 2001, the beginning of the Company's Fiscal Year 2002.
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 would
immediately recognize 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 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 as a result of 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.
During the three months ended December 31, 2001, goodwill was increased by
$20,913, representing the fair value of 22,014 shares that were issued under the
terms of the Bactolac earnout agreement. 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:
Periods Ended June 30, 2001
--------------------------
Three Months Nine Months
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Net income (loss):
Reported income (loss) from continuing operations $ (249,566) $ (525,676)
Add: Goodwill amortization 77,300 231,900
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Adjusted income (loss) from continuing operations (172,266) (293,776)
Income from discontinued operations, net of tax 469,580 904,723
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Adjusted net income (loss) $ 297,314 $ 610,947
Basic and Diluted income (loss) per share:
Reported income (loss) from continuing operations $ (0.12) $ (0.26)
Add: Goodwill amortization 0.04 0.11
----------- -----------
Adjusted net income (loss) from continuing operations $ (0.08) $ (0.15)
Income from discontinued operations, net of tax 0.22 0.44
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Adjusted net income (loss) $ 0.14 $ 0.29
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Weighted average shares outstanding:
Basic and Diluted 2,098,325 2,058,135
6
NOTE 2--INDUSTRY SEGMENTS AND MAJOR CUSTOMERS
Segments
The Company's business segments are divided into distinct manufacturing
areas in two geographic locations. Bactolac Pharmaceutical Inc. ("Bactolac"), is
a private label contract manufacturer of vitamins and supplements located in
Hauppauge, New York. ANI Pharmaceuticals, Inc. ("ANIP") (previously operated as
ASHCO, a division of Bactolac), is a contract and private label manufacturer of
over-the-counter liquid and powder pharmaceutical products, primarily liquid
stomach remedies, located in Gulfport, Mississippi. For ease of reference, ANIP
will include both ANI Pharmaceuticals, Inc. and the ASHCO division unless
indicated otherwise. 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
----------- ------------- ---------- --------
Nine months ended June 30, 2002:
Net sales $ 9,413 $ 6,767 $ -- $ 16,180
Gross profit 3,109 1,774 -- 4,883
General and administrative
expenses 1,370 3,223 649 5,242
Operating income (loss) from
continuing operations 1,739 (1,449) (649) (359)
Interest expense 49 397 121 567
Income (loss) from
continuing operations before
taxes 1,719 (1,864) (771) (916)
Capital expenditures 139 46 -- 185
Depreciation and amortization 151 406 2 559
Identifiable assets 12,372 11,817 1,004 25,193
Nine months ended June 30, 2001:
Net sales $ 8,560 $ 5,866 $ -- $ 14,426
Gross profit 2,626 1,757 -- 4,383
General and administrative
expenses (*) 1,376 2,211 800 4,387
Operating income (loss) from
continuing operations 1,250 (454) (800) (4)
Interest expense 50 413 200 663
Income (loss) from
continuing operations before 1,212 (868) (1,000) (656)
taxes
Capital expenditures 642 65 3 710
Depreciation and amortization 247 436 54 737
Identifiable assets 11,872 12,918 3,960 28,750
(*) Including goodwill amortization - See Note 2
7
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
for the nine-month period ending June 30:
Customer. 2002 2001
-------- ---- ----
A 17.7% 13.0%
B 12.1% 4.7%
C 0.0% 16.4%
Foreign Sales
Export sales were approximately $1,497,000 and $1,524,000 for the nine months
ended June 30, 2002 and 2001. The Company has no foreign assets.
NOTE 3 - DEBT AGREEMENTS
During November 2001, an agreement was entered into with Dr. Pailla Reddy,
a director of the Company who is the holder of the $1,500,000, note that arose
from the Bactolac acquisition, 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, Dr, Reddy was granted a conversion option on the deferred
principal and interest to allow him 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 January 2002, ANI received a $250,000, subordinated 7% loan from a
company, Cambridge Holdings, Ltd., that is affiliated with ANI's chairman, Greg
Pusey. The note matures in one year during January 2003, is 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 has been recorded separately from
the note liability, as a credit to additional paid-in capital. This allocation
will give rise to additional interest cost, above the stated face amount of
interest, as the amount is accreted back to the total loan amount over its
maturity.
During July 2002, ANI borrowed $175,000 from Glenwood Capital Partners I,
LP, a partnership managed by Randall D. Humphreys, a director of the Company.
The 7% note matures in one year, and is 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, and it was agreed ANI would issue up to a
maximum of 178,114 shares of Common Stock if certain pre-tax earnings of ANIP
are achieved. If ANIP has pre-tax income greater than $850,000 in fiscal 2003 or
$1,520,000 in fiscal 2004, ANI will issue 0.75 shares of ANI common stock to
Glenwood for each $1.00 greater than the threshold amounts, subject to the
178,114 shares maximum. The approximate $49,500 value associated with the
detachable warrant and the conversion feature will be recorded separately from
the note liability, as a credit to additional paid-in capital. This allocation
will give rise to additional interest cost, above the stated face amount of
interest, as the amount is accreted back to the total loan amount over its
maturity.
NOTE 4 - TERMINATED ACQUISITION COSTS
During September 2001 the Company had 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 the parties
agreed to terminate further discussions. As a result of the termination,
approximately $216,000 in accumulated acquisition related expenses were written
off in the quarter ended June 30, 2002.
NOTE 5 - INCOME TAXES
No income tax benefit was recorded on the loss for the nine months ended
June 30, 2002, as management of the Company was unable to determine that it was
more likely than not that such benefit would be realized.
8
NOTE 6 - SALE OF NUTRITION FOR LIFE INTERNATIONAL, INC. -DISCONTINUED OPERATIONS
On June 13, 2001, ANI completed the sale of its network-marketing
subsidiary, Nutrition For Life International, Inc. ("NFLI"), to Everest
International, LLC, a privately-held entity. At closing the Company received
$3.2 million in cash and a $5 million note ("Note") payable by NFLI based on a
ten-year amortization with quarterly payments for three years and a final
balloon payment in June 2004. NFLI entered into a product supply agreement with
the Company's subsidiary, Bactolac Pharmaceutical, Inc. and Bactolac received a
$650,000 note from NFLI 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 is unable to
determine that it is probable that the future cash flows from NFLI's operations
will 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. ANI will account for collections on the
Note under the cost recovery method, whereby any future 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.
NFLI develops products that are designed for health-conscious consumers, and
sells those products to consumers through its network of independent
distributors. As a result of the sale of NFLI, the Company's consolidated
financial statements and related notes thereto have been restated to present the
operations of NFLI as discontinued operations.
During the three months ended June 30, 2002, NFLI notified ANI that it
believed it was due approximately $573,000 for reimbursement of prior expenses.
ANI believes that NFLI's claims are without merit and have so notified NFLI.
NFLI is past due in payment of its $650,000 Note to Bactolac and Bactolac has
notified NFLI that it is in default of that note. NFLI made the approximate
$186,000, quarterly payment due June 30, 2002, on the $5.0 million Note to ANI.
Certain information with respect to the discontinued operations of NFLI through
the date of sale follows (ooo's):
Net sales $ 32,039
Cost of sales 20,439
----------
Gross profit 11,600
Operating expenses 11,386
Other income (expense) (45)
----------
Income (loss) before income tax benefit 169
Income tax expense (benefit) (736)
----------
Income (loss) from discontinued operations, net $ 905
==========
ITEM 2.
ADVANCED NUTRACEUTICALS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company's operations are conducted through two operating subsidiaries;
Bactolac Pharmaceutical Inc. ("Bactolac"), a contract manufacturer of
nutritional supplements, and ANI Pharmaceuticals, Inc. ("ANIP"), a contract
manufacturer of pharmaceutical products.
Net sales for the 2002 period increased $1,754,000 or 12.2% over the 2001
period. The increase was attributable to an $853,000, increase in the sales of
Bactolac, through a number of customers, combined with a $902,000 increase in
the sales at ANIP. The ANIP increase was attributable to a $3,236,000 increase
in sales to several new and expanded customers offset by a $2,334,000 decline in
9
sales to Bayer Corporation. Bayer Corporation historically represented a
significant portion of ANIP's revenue base, and during January 2001, ANIP
completed the final production of Bayer contract production. ANIP continues to
aggressively attempt to expand its customer base to compensate for the loss of
the Bayer business. Failure to generate sufficient revenues to replace this
substantial customer, or the inability to substantially reduce ANIP's operating
expenses, would have an adverse effect on the Company's business and operations.
ANIP has added several customers, such as Walgreens, K-Mart and Dollar General
and is in talks with a number of large recognized retailers. ANIP has
approximately $38,000 in outstanding accounts receivable due from K-Mart, at the
time of K-Mart's bankruptcy filing, which is covered in ANIP's allowance. The
impact on net sales by adding these "private-label" customers added
approximately $1,692,000 to revenues for the nine months ended June 30, 2002, of
which approximately $565,000 occurred during the third quarter of the year
ending September 30, 2002.
Gross profit for the 2002 period increased to $4,883,000, a $500,000
increase over the 2001 amount. Gross profit as a percentage of net sales
decreased to 30.2% in 2002, as compared to 30.4% in the 2001 period. Higher
sales volumes at the Bactolac operation with minimal increases in fixed
production costs resulted in gross profit percentage increasing to 33.0% from
30.7% in the 2001 period. Gross profits at the ANIP operation decreased to 26.2%
from 29.9% in the 2001 period primarily due to a change in the customer mix,
which resulted in lower average selling prices, combined with approximately
$200,000 in in-house product rejections due to quality failures. The ANIP
margins during the three month period ended June 30, 2002 were negatively
impacted by the approximate $200,000 product rejections, as well as labor and
development start-up costs associated with beginning to run two new products
which are now being produced under contract, for an existing customer.
Total operating expenses increased to $5,242,000 in 2002, from $4,387,000,
in 2001. This represents an increase of $855,000, or 19.5%. The majority of the
increase relates to additional personnel costs for quality control and
production management personnel at Bactolac and sales and marketing personnel
and related costs at ANIP.
No income tax benefit was recorded on the loss for the nine months ended
June 30, 2002, as management of the Company was unable to determine that it was
more likely than not that such benefit would be realized.
Liquidity and Capital Resources
The Company meets its working capital and capital expenditure requirements,
including funding for recurring debt repayments, mainly through net cash
provided under the Company's revolving line of credit provided through its
secured lender as well as since June 2001, the net proceeds received from the
sale of its former subsidiary, NFLI. Management believes that the Company's
revenue should increase on a quarter-to-quarter basis, primarily from continued
expansion of the Bactolac business and new customers of ANIP. The revenue
increases combined with cost efficiencies that have been implemented should
position the Company to meets its upcoming working capital needs. Management
plans to continue to strive to restore profitability and pursue additional
financing opportunities during the current fiscal year.
ANI has debt obligations with related parties maturing $1,500,000 in
November 2002 (of which the holder has the right to convert up to $1,000,000
into common stock of the Company) and an additional $250,000 coming due in
January 2003, which was obtained during January 2002, and at the option of the
holder, may be converted into common shares of the Company. An additional
$175,000 was obtained during July 2002, which is due July 2003, containing
similar conversion rights. Depending upon the holders' elections to convert none
to the entire amounts convertible, ANI would be required to repay between
$500,000 and $1,925,000, plus accrued interest, during the period from November
2002 to July 2003. The $1,500,000, $250,000 and $175,000 loans are subordinated
to the senior credit facility. ANI has not reached any agreements with the note
holders concerning extending the maturity dates and does not have alternative
financing plans under discussion. ANI does not have sufficient working capital
to repay the total balloon debt obligations coming due in the next twelve
months. Accordingly, the failure to obtain a conversion of the obligations or
the inability to negotiate extensions of the loans or secure other financing
could have a material adverse impact on the Company's financial condition. The
Company intends to have discussions with the holders regarding conversion and
extension and explore alternative financing plans.
At June 30, 2002, the Company had working capital of $491,000. Included in
current liabilities as of June 30, 2002, is the entire $2,365,000 balance in the
credit facility obligation, as the waiver granted by the lender as of December
26, 2001, did not extend beyond one year and therefore the entire amount has
been reclassed to a current liability. Borrowings outstanding under the
revolving portion of the secured credit facility totaled $1,569,000, with
additional borrowings available of approximately $551,000, at that point, based
upon accounts receivable and inventory levels.
Operating Activities
Net cash flows from continuing operating activities consumed approximately
$1,037,000 in 2002 and generated approximately $352,000 in 2001. The net cash
flow consumed in 2002, consisted primarily of approximately $1,524,000 increase
in accounts receivable, relating primarily to higher sales in the period ended
June 30, 2002 as compared to the comparable period ended June 30, 2001. This was
offset by approximately $956,000 in increases to accounts payable and accrued
expenses.
10
The net cash inflow from continuing operations in 2001, consisted primarily
of a net loss of approximately $526,000, offset by depreciation and amortization
expenses of approximately $865,000, plus approximately $202,000 decrease in
inventories and net of approximately $108,000 increase in accounts payable and
accrued expenses. Other current assets increased by approximately $297,000.
Investing Activities
Investing activities from continuing activities generated approximately
$193,000 in 2002. This consisted of $378,000 collected on the NFLI Note
Receivable, net of $185,000 used for additions to equipment.
Investing activities from continuing activities contributed approximately
$2,655,000 in 2001. The majority of this amount was generated from the sale of
NFLI net of $733,000, which was used for additions to equipment.
Financing Activities
Financing activities from continuing activities generated approximately
$607,000 in 2002. This consisted of $325,000 in net borrowings under the
Company's credit facility and $325,000 in new borrowings, net of $43,000 in
principal payments made on the long-term mortgage.
Financing activities from continuing activities consumed approximately
$2,052,000 in 2001. This consisted mainly of net repayments under the Company's
credit facility, less approximately $200,000 in additional borrowings on long
term debt.
The Company's revolving credit facility provides for borrowings up to
$12,000,000, 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 $44,000, monthly over the
remaining term of the Agreement, followed by a balloon payment of approximately
$575,000 at the November 2002 maturity of the agreement. Interest on amounts
outstanding under the Agreement is payable monthly based upon the lender's index
rate plus two and one-half percent. 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 ratio, as well as limitations on capital expenditures. At
September 30, 2001, the Company was not in compliance with several covenants
under the Agreement and on December 26, 2001, a waiver was obtained from GECC.
An update of the waiver was not obtained beyond the December 26, 2001 waiver.
Due to the fact that ANI was not in compliance with the terms of the Agreement,
and the waiver did not extend beyond one year, the entire amount outstanding
under the Agreement has been classified as a current liability on the
accompanying consolidated balance sheet as of June 30, 2002. Management of ANI
has engaged in periodic discussions with the secured lender concerning an
amendment to the credit facility. Management believes based on its discussions
with such lender that an amendment may be accomplished between now and the
maturity of the facility in November 2002, to achieve mutually acceptable
compliance conditions. It is currently anticipated that such an amendment would
include a mutually agreeable extension of the Agreement, as well as provision
for "re-loading" of the term loan facility. If the Company is not successful in
its efforts to amend and extend the Agreement, or secure an alternative lender,
it could have a material adverse effect on the Company's business, financial
condition and operations.
During November 2001, an agreement was entered into with Dr. Pailla Reddy,
a director of the Company who is the holder of the $1,500,000, note that arose
from the Bactolac acquisition, 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, Dr, Reddy was granted a conversion option on the deferred
principal and interest to allow him 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 January 2002, ANI received a $250,000, subordinated 7% loan from a
company, Cambridge Holdings, Ltd., that is affiliated with ANI's chairman, Greg
Pusey. The note matures in one year during January 2003, is 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 has been recorded separately from
the note liability, as a credit to additional paid-in capital. This allocation
will give rise to additional interest cost, above the stated face amount of
interest, as the amount is accreted back to the total loan amount over its
maturity.
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As of June 30, 2002, the Company's balance sheet included a material amount
of goodwill. Approximately $7.6 million (after the $1.2 million write-down), or
30% of the Company's total assets as of June 30, 2002, represents intangible
assets consisting of goodwill. Goodwill represents the excess of cost over the
fair market value of net assets acquired in business combinations accounted for
under the purchase method. Due to the newly issued Financial Accounting
Standards Board Statement ("FASB") No. 142, which the Company adopted as of
October 1, 2001, the Company no longer deducts goodwill amortization against
earnings. For all fiscal years prior to Fiscal 2002, the Company amortized
goodwill using a straight-line method over a period of 20 years with the amount
amortized in a particular period constituting a non-cash expense that reduced
the Company's net income. Under the new FASB Statement No. 142 and as previously
required, the Company must periodically evaluate the recoverability of goodwill
by reviewing the implied fair value of the acquired companies and comparing such
cash flows to the carrying value of the associated goodwill. In accordance with
SFAS 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 discussed in Note 1 the Company recorded a one-time noncash charge of
approximately $1.2 million to reduce the carrying value of the goodwill
associated with the Gulfport, MS operations, as of October 1, 2001. 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. During the three months ended December 31, 2001,
goodwill was increased by $20,913, representing the fair value of 22,014 shares
that were issued under the terms of the Bactolac earnout agreement.
During July 2002, ANI borrowed $175,000 from Glenwood Capital Partners I,
LP, a partnership managed by Randall D. Humphreys, a director of the Company.
The 7% note matures in one year, and is 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, and it was agreed ANI would issue up to a
maximum of 178,114 shares of Common Stock if certain pre-tax earnings of ANIP
are achieved. If ANIP has pre-tax income greater than $850,000 in fiscal 2003 or
$1,520,000 in fiscal 2004, ANI will issue 0.75 shares of ANI common stock to
Glenwood for each $1.00 greater than the threshold amounts, subject to the
178,114 shares maximum. The approximate $49,500 value associated with the
detachable warrant and the conversion feature will be recorded separately from
the note liability, as a credit to additional paid-in capital. This allocation
will give rise to additional interest cost, above the stated face amount of
interest, as the amount is accreted back to the total loan amount over its
maturity.
During September 2001 the Company had 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 the parties
agreed to terminate further discussions. As a result of the termination,
approximately $216,000 in accumulated acquisition related expenses were written
off in the quarter ended June 30, 2002.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has recently issued
Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset
Retirement Obligations and SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets.
SFAS No. 143, Accounting for Asset Retirement Obligations, addresses
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. SFAS No.
143 will be effective for the Company for the fiscal year beginning October 1,
2003 and early adoption is encouraged. SFAS No. 143 requires that the fair value
of a liability for an asset's retirement obligation be recorded in the period in
which it is incurred and the corresponding cost capitalized by increasing the
carrying amount of the related long-lived asset. The Company estimates that the
new standard will not have a material impact on its financial statements but is
still in the process of evaluating the impact on its financial statements.
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, is effective for the Company on October 1, 2003, and addresses
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of and APB Opinion
No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of
a Segment of a Business. SFAS No. 144 retains the fundamental provisions of SFAS
No. 121 and expands the reporting of discontinued operations to include all
components of an entity with operations that can be distinguished from the rest
of the entity and that will be eliminated from the ongoing operations of the
entity in a disposal transaction. The Company estimates that the new standard
will not have a material impact on its financial statements but is still in the
process of evaluating the impact on its financial statements.
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In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FAS Statement No. 13, and Technical Corrections
("SFAS 145"). This statement rescinds the requirement in SFAS No. 4, Reporting
Gains and Losses from Extinguishment of Debt, that material gains and losses on
the extinguishment of debt be treated as extraordinary items. The statement also
amends SFAS No. 13, Accounting for Leases, to eliminate an inconsistency between
the accounting for sale-leaseback transactions and the accounting for certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions. Finally the standard makes a number of
consequential and other technical corrections to other standards. The provisions
of the statement relating to the rescission of SFAS 4 are effective for fiscal
years beginning after May 15, 2002. Provisions of the statement relating to the
amendment of SFAS 13 are effective for transactions occurring after May 15, 2002
and the other provisions of the statement are effective for financial statements
issued on or after May 15, 2002. The Company has reviewed SFAS 145 and its
adoption is not expected to have a material effect on its consolidated financial
statements.
In July 2002, the FASB issued SFAS No. 146, Accounting for Exit or Disposal
Activities ("SFAS 146"). SFAS 146 applies to costs associated with an exit
activity (including restructuring) or with a disposal of long-lived assets.
Those activities can include eliminating or reducing product lines, terminating
employees and contracts, and relocating plant facilities or personnel. SFAS 146
will require a Company to disclose information about its exit and disposal
activities, the related costs, and changes in those costs in the notes to the
interim and annual financial statements that include the period in which an exit
activity is initiated and in any subsequent period until the activity is
completed. SFAS 146 is effective prospectively for exit or disposal activities
initiated after December 31, 2002, with earlier adoption encouraged. SFAS 146
supersedes Emerging Issues Task Force Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring), and requires liabilities
associated with exit and disposal activities to be expensed as incurred and can
be measured at fair value. SFAS 146 is effective for exit or disposal activities
of the Company that are initiated after December 31, 2002.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
None
ADVANCED NUTRACEUTICALS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVANCED NUTRACEUTICALS, INC.
(Registrant)
By: /s/ JEFFREY G. MCGONEGAL
--------------------------------
Jeffrey G. McGonegal
Senior Vice President--Finance and
Chief Financial Officer
Dated: August 13, 2002
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