SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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, CO 80209
(Address of Principal Executive Offices)
(303) 722-4008
(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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.). [ ] Yes [X]No
As of August 11, 2003 there were 4,992,789 shares of common stock, $0.01 par
value per share, outstanding.
ADVANCED NUTRACEUTICALS, INC.
Index
PART 1 - Financial Information
----
Item 1. Financial Statements
Advanced Nutraceuticals, Inc.
Consolidated Balance Sheets
June 30, 2003 and September 30, 2002 3
Consolidated Statements of Operations For the
Three and Nine Months Ended June 30, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended June 30, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 10
Item 4. Controls and Procedures 10
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 11
ADVANCED NUTRACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
June 30,
2003 September 30,
(Unaudited) 2002
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 239,050 $ 793,023
Receivables 3,549,408 4,099,852
Inventories 2,112,898 2,053,268
Notes receivable -- 184,282
Prepaid expenses and other assets 300,709 329,362
------------ ------------
Total Current Assets 6,202,065 7,459,787
Property and equipment, net 8,505,638 9,280,558
Goodwill 7,563,913 7,563,913
Other assets 459,715 230,982
------------ ------------
$ 22,731,331 $ 24,535,240
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,051,855 $ 2,027,039
Accrued expenses and other liabilities 251,942 675,714
Credit facility -- 2,889,811
Notes payable - related parties -- 500,000
Current portion of long-term debt 174,647 113,384
------------ ------------
Total Current Liabilities 2,478,444 6,205,948
Long-term debt 4,355,208 2,403,695
------------ ------------
Total Liabilities 6,833,652 8,609,643
------------ ------------
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; 4,992,789 outstanding 49,928 49,928
Additional paid-in capital 20,322,048
20,322,048
Accumulated deficit (4,474,297) (4,446,379)
------------ ------------
Total Stockholders' Equity 15,897,679 15,925,597
------------ ------------
$ 22,731,331 $ 24,535,240
============ ============
See accompanying notes to condensed consolidated financial statements.
3
ADVANCED NUTRACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Nine Months
Ended June 30, Ended June 30,
----------------------------------- -------------------------------------
2003 2002 2003 2002
----------- ----------- ------------ ------------
Net sales $ 5,649,519 $ 5,117,559 $ 18,469,065 $ 16,179,974
Cost of sales 3,840,427 3,917,581 12,489,638 11,296,752
----------- ----------- ------------ ------------
Gross profit 1,809,092 1,199,978 5,979,427 4,883,222
General and administrative expenses 1,705,742 1,573,138 5,313,236 5,025,829
Terminated acquisition costs -- 216,207 -- 216,207
----------- ----------- ------------ ------------
Operating income (loss) 103,350 (589,367) 666,191 (358,814)
----------- ----------- ------------ ------------
Other income (expense):
Interest expense (179,926) (185,627) (525,903) (567,358)
Loss on sale of equipment -- -- (180,127) --
Other, net 1,291 (18,376) 11,921 10,634
----------- ----------- ------------ ------------
(178,635) (204,003) (694,109) (556,724)
----------- ----------- ------------ ------------
Income (loss) from operations before cumulative
effect of accounting change (75,285) (793,370) (27,918) (915,538)
Cumulative effect of accounting change -- -- -- (1,184,553)
----------- ----------- ------------ ------------
Net income (loss) $ (75,285) $ (793,370) $ (27,918) $ (2,100,091)
=========== =========== ============ ============
Basic and Diluted income (loss) per common share:
Net income (loss) $ (0.01) $ (0.37) $ (0.01) $ (0.99)
=========== =========== ============ ============
Weighted average common shares outstanding-
Basic 4,992,789 2,151,989 4,992,789 2,112,665
=========== =========== ============ ============
Diluted 4,992,789 2,151,989 4,992,789 2,112,665
=========== =========== ============ ============
See accompanying notes to condensed consolidated financial statements.
4
ADVANCED NUTRACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months
Ended June 30,
-----------------------------------
2003 2002
----------- -----------
Net cash provided by (used in) operating activities $ 900,949 $(1,037,349)
Net cash provided by (used in) investing activities (10,177) 192,738
Net cash provided by (used in) financing activities (1,444,745) 606,849
----------- -----------
Net increase (decrease) in cash and cash equivalents (553,973) (237,762)
Cash and cash equivalents at beginning of period 793,023
----------- -----------
781,847
Cash and cash equivalents at end of period $ 239,050 $ 544,085
=========== ===========
See accompanying notes to condensed consolidated financial statements
5
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONDENSED 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, 2003, 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, 2003 are not necessarily an
indication of operating results for the full year.
NOTE 1--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") 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
----------- -------- -------- --------
Nine months ended June 30, 2003:
Net sales $ 9,435 $ 9,034 $ -- $ 18,469
Gross profit 3,556 2,423 -- 5,979
General and administrative
expenses 1,512 3,282 519 5,313
Operating income (loss) from
continuing operations 2,043 (858) (519) 666
Interest expense (119) (347) (60) (526)
Loss on sale of equipment -- (180) -- (180)
Net income (loss) 1,932 (1,377) (583) (28)
Capital expenditures 205 10 -- 215
Depreciation and amortization 159 400 2 561
Identifiable assets 12,132 10,179 420 22,731
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
operations 1,739 (1,449) (649) (359)
Interest expense (49) (397) (121) (567)
Income (loss) from
operations before taxes 1,719 (1,864) (771) (916)
Capital expenditures 139 46 -- 185
Depreciation and amortization 151 406 2 559
Identifiable assets 13,160 10,843 1,009 25,012
Major Customers
Other than as detailed under foreign 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 for the nine-month
periods ending June 30:
Customer. 2003 2002
-------- ---- ----
A 18.6% 12.0%
B 7.0% 17.4%
Foreign Sales
Export sales were approximately $688,000 and $1,497,000 for the nine months
ended June 30, 2003 and 2002. The Company has no foreign assets.
NOTE 2 - DEBT AGREEMENTS
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 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 fact that the agreement extends for a three-year term, the obligation
is classified as a long-term liability on the accompanying consolidated balance
sheet as of June 30, 2003. 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. As of June 30,
2003, the total balance outstanding under the facility, including $1,069,000
outstanding under the term loan portion, amounted to $1,996,000.
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.
NOTE 3 - CUMULATIVE EFFECT OF ACCOUNTING CHANGE
The Company adopted and applied Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets" as of October 1, 2001,
the beginning of the Company's fiscal year 2002. SFAS No. 142 changed the
accounting for goodwill from an amortization method to an impairment-only
approach. Under SFAS 142, goodwill and other indefinite lived intangible assets
are tested annually and whenever events or circumstances occur indicating that
goodwill might be impaired. As a result of the adoption of SFAS 142 and the
required comparison of fair value to the carrying amount of goodwill, the
Company recorded a one-time non-cash charge of approximately $1.2 million to
reduce the carrying amount of its goodwill associated with the operations
located in Gulfport, Mississippi. Such charge is non-operational and is
reflected as a cumulative effect of an accounting change in the accompanying
consolidated statement of operations.
NOTE 4 - STOCK BASED COMPENSATION AND EARNINGS PER SHARE
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations in accounting for its stock-based
employee compensation plans. The following table illustrates the effect on net
income (loss) and income (loss) per share if the Company had applied the fair
value recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation to its stock-based employee plans.
Three Months Nine Months
Ended June 30, Ended June 30,
------------------------------ --------------------------------
2003 2002 2003 2002
-------- --------- -------- -----------
Net income (loss), as reported $(75,000) $(793,000) $(28,000) $(2,100,000)
Deduct: Total stock-based employee compen-
sation expense determined under fair value
based method for awards granted, modified
or settled, net of related tax effects (14,000) (103,000) (41,000) (309,000)
-------- --------- -------- -----------
Pro forma net income (loss) $(89,000) $(896,000) $(69,000) $(2,409,000)
======== ========= ======== ===========
Earnings (loss) per share:
Basic and diluted - as reported $ (0.01) $ (0.37) $ (0.01) $ (0.99)
======== ========= ======== ===========
Basic and diluted - pro forma $ (0.02) $ (0.41) $ (0.01) $ (1.14)
======== ========= ======== ===========
NOTE 5 - 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.
ITEM 2.
ADVANCED NUTRACEUTICALS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Comparison of the Presented Results of Operations for the Nine Months Ended
June 30, 2003 to the Nine Months Ended June 30, 2002.
The Company's operations are conducted through two operating subsidiaries;
Bactolac Pharmaceutical Inc. ("Bactolac"), a private label contract manufacturer
of vitamins and supplements, and ANI Pharmaceuticals, Inc. ("ANIP"), a contract
and private label manufacturer of over-the-counter liquid and powder
pharmaceutical products.
Net sales for the 2003 period increased $2,289,000 or 14.1% over the 2002
period. The increase was attributable to a $2,266,000 increase in the sales at
ANIP. The ANIP increase consisted of an increase in sales to expanding private
label customers such as Walgreens, Rite Aid, K-Mart, Dollar General, Winn Dixie
and Big Lots Stores, combined with an expansion in sales to continuing contract
customers.
Gross profit for the 2003 period increased to $5,979,000, a $1,096,000
increase over the 2002 amount. Gross profit as a percentage of net sales
increased to 32.4% in 2003, as compared to 30.2% in the 2002 period. Gross
profit at Bactolac improved to 37.7% from 33.0% in the 2002 period. The majority
of the improvement resulted from recent additions of customers who are buying
larger quantities of higher priced products assisted with the recent addition of
high-speed production machines, which have created cost efficiencies. Gross
profits at the ANIP operation increased to 26.8% in 2003 from 26.2% in the 2002
period primarily due to changes in the product mix.
Total operating expenses increased to $5,313,000 in 2003 from $5,242,000,
in 2002. This represents an increase of $71,000, or 1.3%. The majority of the
increase relates to additional personnel costs, combined with higher sales and
marketing expenses incurred, primarily commissions and freight expenses incurred
in connection with the private label customers at ANIP.
No income tax expense was recorded on the income for the nine months ended
June 30, 2003, due to the net operating loss carry forwards available.
Liquidity and Capital Resources
ANI meets its working capital and capital expenditure requirements mainly
through operations and net cash provided under the Company's revolving line of
credit provided through its secured lender. Based upon recent revenue increases,
primarily from new customers of ANIP, combined with cost reductions that have
been implemented, management believes that a more significant portion of its
working capital needs could be met out of cash generated from operating
activities. ANIP continues to incur losses as current monthly sales levels are
still below amounts required to break-even at current margins and product mix.
Management continues to closely monitor the performance of this subsidiary,
while exploring possible alternative strategic opportunities to best enhance the
performance and value of the Company. Management plans to continue to strive to
restore profitability while continuing to rely on its recently completed debt
agreement to meet currently anticipated funding requirements.
At June 30, 2003, the Company had working capital of $3,724,000. Borrowings
under the revolving portion of the secured credit facility totaled $927,000,
with additional borrowings available of approximately $2,275,000, at that point,
based upon accounts receivable and inventory levels. The Company's line of
credit includes a $500,000 available capital expenditure line that can be used
for equipment additions in loan amounts exceeding $100,000 per advance, of which
$121,000 was advanced during April 2003.
As of March 21, 2003, the Company completed the refinancing of its Senior
Debt Facility with a new lender, CapitalSource Finance LLC. 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 fact that the agreement
extends for a three-year term, the obligation is classified as a long-term
liability on the accompanying consolidated balance sheet as of June 30, 2003.
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. As of June 30, 2003, the total balance
outstanding under the facility, including $1,069,000 outstanding under the term
loan portion, amounted to $1,996,000.
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.
Operating Activities
Net cash flows from operating activities generated approximately $901,000
in 2003 and consumed approximately $1,037,000 in 2002. The net cash flow
generated in 2003 consisted primarily of approximately a $492,000 decrease in
accounts receivable combined with $561,000 in non-cash depreciation expense plus
the non-cash $180,000 loss on the sale of equipment. This was offset by
approximately $153,000 in increases to prepaid expenses and a $175,000 decrease
in accrued expenses.
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. This was offset by approximately $956,000 in
increases to accounts payable and accrued expenses.
Investing Activities
Investing activities consumed approximately $10,000 in 2003. This consisted
of $184,000 collected on a note received in connection with the June 2001, sale
of a former subsidiary, Nutrition for Life International, Inc., (the "NFLI
Note") and proceeds of $250,000 on the sale of equipment. In addition, $215,000
of cash was used for additions to equipment and $229,000 was used for loan
closing costs. The balance of the NFLI Note was 100% reserved for as of
September 30, 2002. An involuntary Chapter 11 Petition in bankruptcy was filed
against NFLI on March 3, 2003. Under an Order entered July 18, 2003, the case
was converted to Chapter 7, and NFLI is currently being liquidated.
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.
Financing Activities
Financing activities consumed approximately $1,445,000 in 2003. This
consisted mainly of net repayments under the Company's credit facility and the
$500,000 note repaid to Dr. Pailla Reddy.
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.
Capital expenditures, primarily for manufacturing and facility improvement
costs for the fiscal year ending September 30, 2003, are anticipated to total
approximately $400,000 to $600,000. It is expected that funding for the capital
additions will be provided out of the new credit facility with a portion funded
out of working capital.
Recent Accounting Pronouncements
Accounting for Guarantees - In December 2002, 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. The Company previously did
not record a liability when guaranteeing obligations. 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.
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 June
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 is in the process of determining what impact, if any, the adoption of
the provisions of FIN 46 will have upon its financial condition or results of
operations.
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
will be 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 Company does not anticipate the
adoption of SFAS No. 149 will have an appreciable impact of the Company's
financial statements.
Revenue Arrangements - In November 2002, the 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 our financial position or results of
operations.
Financial Instruments - In May 2003 the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 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 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 Company
fiscal quarter commencing July 1, 2003. The Company believes the adoption of
SFAS No. 150 will have no effect on the Company's financial position, results of
operations or cash flows.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND STATEMENTS
Certain statements in Management's Discussion and Analysis of Results of
Operations and Financial Condition and other portions of this report are
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, and are subject to the safe harbor created
thereby. These statements relate to future events or the Company's future
financial performance and involve known and unknown risks, uncertainties and
other factors that may cause the actual results, levels of activity, performance
or achievements of the Company or its industry to be materially different from
those expressed or implied by any forward-looking statements. In some cases,
forward-looking statements can be identified by terminology such as "may,"
"will," "could," "would," "should," "expect," "plan," "anticipate," "intend,"
"believe," "estimate," "predict," "potential" or other comparable terminology.
Please see the "Cautionary Note Regarding Forward-Looking Statements" on page 2
of the Company's Form 10-K for the year ended September 30, 2002 for a
discussion of certain important factors that relate to forward-looking
statements contained in this report. Although the Company believes that the
expectations reflected in these forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to be correct. Unless
otherwise required by applicable securities laws, the Company disclaims any
intention or obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
The Company is exposed to market risks, primarily from changes in interest
rates. The Company is exposed to interest rate changes primarily as a result of
interest expense related to its variable rate line of credit used to finance
working capital. Management believes that a fluctuation in interest rates in the
near future will not have a material impact on the Company's consolidated
financial statements.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we evaluated under the
supervision and with the participation of our chief executive officer and the
chief financial officer, the effectiveness of the design and operation of our
disclosure controls and procedures. Based upon this evaluation, our chief
executive officer and chief financial officer have concluded that our disclosure
controls and procedures were effective as of the end of the period covered by
this report.
(b) Changes in Internal Controls
There have been no changes in internal control over financial reporting
that occurred during the most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 99.1, 99.2 and 99.3 Certifications are furnished.
(b) On June 18, 2003, the Company filed an 8-K Report including as an
exhibit a news release covering the Nasdaq Small Cap de-listing of the Company's
common stock and other corporate matters.
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, 2003