<PAGE>
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, 2000
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)
9101 Jameel Road, Suite 180
Houston, Texas 77040
--------------------
(Address of Principal Executive Offices)
(713) 460-1976
--------------
(Registrant's telephone number, including area code)
Advanced Nutraceuticals, Inc. is the successor issuer to
Nutrition For Life International, Inc.
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.
Yes[X] No[_]
As of August 7, 2000 there were 8,019,865 shares of common stock,
$0.01 par value per share, outstanding.
<PAGE>
ADVANCED NUTRACEUTICALS, INC.
Index
PART 1 - Financial Information
<TABLE>
<CAPTION> Page
<S> <C>
Item 1. Financial Statements
Advanced Nutraceuticals, Inc.
Consolidated Balance Sheets 3
June 30, 2000 and September 30, 1999
Consolidated Statements of Operations and Comprehensive Income (Loss) 4
For the Three and Nine Months Ended June 30, 2000 and 1999
Condensed Consolidated Statements of Cash Flows 5
For the Nine Months Ended June 30, 2000 and 1999
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 4. Submission of Matters to a Vote of Security Holders 11
Signatures 12
</TABLE>
<PAGE>
Part 1 - Financial Information
Item 1
ADVANCED NUTRACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
2000 September 30,
(Unaudited) 1999
----------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 174,068 $ 1,395,310
Restricted cash 101,266 585,866
Marketable securities -- 996,942
Receivables, net 4,934,916 362,315
Inventories 8,800,925 8,434,220
Deferred tax asset 2,424,000 1,647,000
Prepaid expenses and other assets 1,304,452 1,062,513
----------- -----------
Total current assets 17,739,627 14,484,166
Property and equipment, net 14,944,767 6,038,186
Audio production rights 99,222 972,222
Goodwill 10,126,575 --
Other assets 645,916 746,246
----------- -----------
$43,556,107 $22,240,820
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 5,329,904 $ 2,517,020
Accrued bonuses and commissions 1,206,826 1,384,950
Deferred income 564,897 826,464
Accrued expenses and other liabilities 2,652,416 1,344,001
Note payable - other 26,817 --
Current portion of capital lease obligation 200,639 177,160
Current portion of long-term debt 10,398,989 385,304
----------- -----------
Total current liabilities 20,380,488 6,634,899
Deferred tax liability 3,838,000 778,000
Long-term portion of capital lease obligation 68,972 170,994
Long-term debt 2,103,023 308,725
----------- -----------
Total liabilities 26,390,483 7,892,618
----------- -----------
Stockholders' equity:
Series A convertible preferred stock, $.001 par value; 1,000,000
shares authorized; -- --
Common stock; $.01 par value; 20,000,000 shares authorized 80,198 58,875
Additional paid-in capital 17,563,348 11,837,156
Retained earnings (deficit) (577,112) 3,110,405
Accumulated other comprehensive income (loss) 99,190 (125,749)
------------ -----------
17,165,624 14,880,687
Less: Treasury stock 79,000 shares, at cost -- (532,485)
----------- -----------
Total stockholders' equity 17,165,624 14,348,202
----------- -----------
$43,556,107 $22,240,820
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
ADVANCED NUTRACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30, Ended June 30,
------------------------------- ---------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 17,428,107 $ 17,210,436 $ 52,424,849 $ 50,737,950
Cost of sales 13,416,575 11,204,917 37,239,784 33,186,954
------------ ------------ ------------ ------------
Gross profit 4,011,532 6,005,519 15,185,065 17,550,996
Marketing, distribution and
Administrative expenses 6,891,996 5,022,627 18,551,531 16,103,144
------------ ------------ ------------ ------------
Income (loss) from operations (2,880,464) 982,892 (3,366,466) 1,447,852
------------ ------------ ------------ ------------
Other income (expense):
Interest income (expense), net (305,090) (3,820) (691,003) (17,064)
Foreign exchange income (loss) (227,011) (17,109) (311,121) 97,523
Other, net 6,727 19,694 100,169 372,291
------------ ------------ ------------ ------------
(525,374) (1,235) (901,955) 452,750
------------ ------------ ------------ ------------
Income (loss) before income tax expense (3,405,838) 981,657 (4,268,421) 1,900,602
Income tax expense (benefit) (634,904) 489,000 (580,904) 989,000
------------ ------------ ------------ ------------
Net income (loss) (2,770,934) 492,657 (3,687,517) 911,602
------------ ------------ ------------ ------------
Other comprehensive income (loss):
Unrealized gain (loss) on investments -- (12,290) 45,500 (19,163)
Foreign currency translation gain (loss) 218,058 11,485 179,439 (48,887)
------------ ------------ ------------ ------------
218,058 (805) 224,939 (68,050)
------------ ------------ ------------ ------------
Total comprehensive income (loss) $ (2,552,876) $ 491,852 $ (3,462,578) $ 843,552
============ ============ ============ ============
Basic income (loss) per common share $ (0.35) $ 0.08 $ (0.48) $ 0.16
============ ============ ============ ============
Diluted income (loss) per common share $ (0.35) $ 0.08 $ (0.48) $ 0.16
============ ============ ============ ============
Weighted average common share
Basic 8,019,865 5,808,595 7,614,454 5,808,595
============ ============ ============ ============
Diluted 8,019,865 5,847,002 7,614,454 5,863,730
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
ADVANCED NUTRACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months
Ended June 30,
-----------------------------------
2000 1999
---- ----
<S> <C> <C>
Net cash provided by (used in) operating activities $ (2,163,350) $ 39,360
Net cash used in investing activities (3,964,837) (232,683)
Net cash provided by (used in) financing activities 4,727,506 (354,198)
Effect of exchange rates on cash and cash equivalents 179,439 (48,887)
------------- ------------
Net decrease in cash and cash equivalents (1,221,242) (596,408)
Cash and cash equivalents at beginning of period 1,395,310 4,404,388
------------- ------------
Cash and cash equivalents at end of period $ 174,068 $ 3,807,980
============= ============
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERIM FINANCIAL STATEMENTS
The accompanying financial statements of Advanced Nutraceuticals, Inc. ("ANI" or
the "Company") 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, 2000, 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 generally accepted
accounting principles 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, 2000 are not necessarily an indication of operating
results for the full year.
Note 1 - Reorganization Into A Holding Company
On March 15, 2000, Nutrition For Life International, Inc. a Texas corporation
("NFLI") reorganized into a holding company structure (the "Reorganization") in
which Advanced Nutraceuticals, Inc., a Texas corporation became the holding
company. As a result of the Reorganization, ANI became the publicly traded
entity.
The Reorganization was effected through the formation by NFLI of ANI as a
wholly-owned subsidiary and the formation by ANI of a wholly-owned subsidiary,
NFLI Merger Sub, Inc., a Texas corporation ("Merger Sub"). An agreement and Plan
of Merger dated March 13, 2000 was entered into by and among NFLI, ANI and
Merger Sub (the "Merger Agreement"), and pursuant to the Merger Agreement,
Merger Sub merged with and into NFLI (the "Merger"), with NFLI as the surviving
corporation. NFLI became a wholly-owned subsidiary of ANI as a result of the
Merger. The Reorganization was effected in accordance with the provisions of
Article 5.03(H) of the Texas Business Corporation Act.
Pursuant to the Merger Agreement, 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. As a result, the NFLI shareholders now hold common
stock in ANI (instead of NFLI) which is deemed to have been registered under
Section 12(g) of the Securities Exchange Act of 1934 because the Reorganization
constitutes a "succession" and the Registrant constitutes a "successor issuer"
of NFLI for securities law purposes.
In addition, pursuant to the terms of the Merger Agreement, each outstanding
share of Series A Preferred Stock of NFLI issued and outstanding immediately
prior to the Merger was converted into one share of Series A Preferred Stock of
ANI. Also, each outstanding option, and each outstanding warrant, to purchase
shares of NFLI's common stock has been converted into an option or warrant, as
the case may be, to purchase, on the same terms and conditions, an identical
number of shares of ANI's common stock.
ANI's common stock trades on the Nasdaq National Stock Market (NMS) under the
trading symbol, ANII, and the warrants trade under the symbol, ANIIW.
Note 2 - Recent Acquisitions
On November 17, 1999 the Company finalized the acquisitions of Advanced
Nutraceuticals, Inc., a Delaware corporation ("Old ANI") and Bactolac
Pharmaceutical Inc. ("Bactolac"). The acquisition of Old ANI was completed
through a merger with the Company's wholly owned subsidiary, NL Acquisition
Company. The acquisition of Bactolac was completed through a merger with the
Company's wholly owned subsidiary, BPI Acquisition Company. In connection with
the merger of Bactolac into BPI Acquisition Company, the name of the surviving
corporation was changed to Bactolac Pharmaceutical Inc.
Old ANI was formed to pursue a consolidation and integration program in the
nutrition industry. The former Old ANI stockholders received an aggregate of
75,000 shares of a newly created Series A Preferred Stock of the Company. Each
one share of Series A Preferred Stock was automatically converted into ten
shares of the Company's common stock upon approval by the Company's shareholders
of such conversion at the Company's Annual Meeting held June 6, 2000.
Bactolac headquartered in Westbury, New York, manufactures nutritional
supplements for private label customers. The purchase price of the Bactolac
acquisition consisted of $2,500,000 in cash, a subordinated promissory note in
the principal amount of $2,500,000 and 96,831 shares of the previously mentioned
Series A Preferred Stock which were converted into 968,310 shares of Common
Stock on June 6, 2000. Additionally, up to 176,060 shares of Common Stock may be
issued pursuant to an earnout agreement. Bactolac entered into an employment
agreement and covenant not to compete agreement with its former owner at the
closing on November 17,1999. The Company intends to continue the operations of
Bactolac and to use its inventory, machinery and equipment in connection with
the manufacture of nutritional supplements.
6
<PAGE>
On December 1, 1999, the Company finalized the acquisition of Ash Corp. ("Ash").
The acquisition of Ash was completed through a merger with the Company's wholly
owned subsidiary, Bactolac. The purchase price of Ash consisted of $750,000 in
cash, a note payable in the amount of $500,000 and 49,296 shares of Series A
Preferred Stock which were converted into 492,960 shares of Common Stock.
Additionally, up to 1,056,340 shares of Common Stock may be issued pursuant to
an earnout agreement. The Company intends to continue the operations of Ash and
to use its inventory, machinery and equipment in connection with the manufacture
of liquid pharmaceutical and nutraceutical products.
Financing for the above acquisitions was provided primarily through a financing
arrangement entered into on November 17,1999 with General Electric Capital
Corporation ("GECC"). The Company borrowed $2,360,000 from GECC pursuant to a
term loan payable in three years, and is subject to limitations based upon
eligible accounts. The loan facility is secured by substantially all of the
assets of the Company and its subsidiaries. The interest rate on borrowing is
0.5% above the prime rate. There is a fee of 0.25% on the unused portion of the
facility and an annual monitoring fee of $10,000. It is required, among other
provisions, that the Company maintain as of the end of the fiscal year ending
September 30, 1999, a minimum net worth (on a consolidated basis including ASH
and BPI) of $18 million and a minimum net worth of $25.5 million at September
30, 2000, and a minimum net worth of $27 million for each fiscal year after
September 30, 2000. In addition, the Company is required to maintain a fixed
charge coverage ratio of 2.0 to 1.0 through July 1, 2000, and 1.5 to 1.0 at July
2, 2000, and at all times thereafter. At June 30, 2000, the Company was not in
compliance with this requirement and a waiver has been obtained from GECC. The
Company is also subject to additional covenants, including filing of reports and
significant restrictions on dividend payments, issuance of debt and equity,
mergers, changes in business operations and sales of assets. The Company intends
to discuss with GECC an amendment to the financing arrangement to achieve
mutually acceptable compliance conditions. If the Company's efforts are not
successful, it will have an adverse effect on the Company's business, financial
condition and operations.
The acquisitions have been accounted for using the purchase method of
accounting, and, accordingly, the purchase price has been allocated to the
assets purchased and the liabilities assumed based upon their fair values at the
acquisition dates. The excess of the purchase price over the fair values of the
net assets acquired was approximately $10,400,000 and has been recorded as
goodwill, which is being amortized on a straight-line basis over 20 years.
The operating results of these acquired businesses have been included in the
consolidated statement of operations and comprehensive income (loss) from their
dates of acquisition. On the basis of a proforma consolidation of the results of
operations as if the acquisition had taken place on October 1, 1998 consolidated
results of operations would have been as follows:
Nine Months
Ended June 30,
---------------------------------
2000 1999
---- ----
Net revenue $55,555,000 $66,248,000
Net income (loss) (2,900,900) 999,000
Net income (loss) per share (0.36) 0.12
These proforma results have been prepared for comparative purposes only and
include certain adjustments such as additional depreciation expense as a result
of a step-up in the basis of fixed assets, additional amortization expense as a
result of goodwill and increased interest expense on acquisition debt. They do
not purport to be indicative of the results of operations which actually would
have resulted had the acquisitions been in effect on October 1, 1998 and 1999 or
of future results of operations of the consolidated entities.
7
<PAGE>
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Segment Information
Information regarding the Company's business segments as required by Statements
of Financial Accounting Standards No. 131, "Disclosure About Segments of a
Business Enterprise", follows below:
Nine Months Ended
June 30,
(In Thousands)
------------------------
2000 1999
---- ----
Sales to unaffiliated customers:
Distribution:
North America (1) $ 35,502 $ 46,728
United Kingdom (2) 3,334 3,388
Philippines 521 622
Japan 1,499 --
Manufacturing (3) 11,569 --
Sales or transfers between geographic areas:
Distribution:
North America -- --
United Kingdom 576 624
Philippines 103 199
Japan -- --
Manufacturing (3) -- --
Operating profit (loss):
Distribution:
North America (2,898) 2,171
United Kingdom (1,006) (311)
Philippines (255) (209)
Japan (155) --
Manufacturing (3) 948 --
Identifiable assets:
Distribution:
North America 33,802 27,385
United Kingdom 1,822 1,607
Philippines 246 947
Japan 540 --
Manufacturing (3) 27,996 --
(1) Includes the United States, Canada, and Puerto Rico
(2) Includes the United Kingdom, Ireland, and the Netherlands
(3) Substantially all in North America
8
<PAGE>
Item 2.
ADVANCED NUTRACEUTICALS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Distribution Operations:
Net sales of the distribution segment decreased approximately $9,881,000 from
approximately $50,738,000 for the nine months ended June 30, 1999 to
approximately $40,856,000 for the similar period ended June 30, 2000.
Approximately $7,134,000 of the decrease in net sales resulted from a net
decrease in the number of active worldwide distributors. The remaining decrease
of approximately $2,748,000 resulted from a decrease in the average sales per
distributor. The Company's results of operations depend to a significant degree
on its ability to attract new distributors to its program and to motivate its
existing distributors.
Cost of sales decreased by approximately $3,926,000 or 11.8% to approximately
$29,261,000 for the nine months ended June 30, 2000 from approximately
$33,187,000 for the nine months ended June 30, 1999. Included in cost of sales
at June 30, 2000 is approximately $1,150,000 of non-recurring write-downs of
certain outdated literature and sales aids inventory and certain inventory
located outside of the continental United States. Exclusive of these write-
downs, cost of sales as a percentage of net sales increased from 65.4% in the
nine months ended June 30, 1999 to 68.8% in the nine months ended June 30, 2000.
Cost of sales, exclusive of the non-recurring write-downs includes product
costs, commissions and bonuses paid to distributors, and shipping costs, and is
recapped below:
<TABLE>
<CAPTION>
Nine months ended
June 30,
---------------------
2000 1999
---- ----
<S> <C> <C>
Product costs 25.1% 25.8%
Commissions and bonuses paid to distributors 34.3 32.9
Shipping costs 9.4 6.7
---- ----
68.8% 65.4%
==== ====
</TABLE>
Product cost decreased by 0.7% as a result of lower average cost of some of the
Company's products and a change in the mix of product sales. Commissions and
bonuses paid to distributors increased 1.4% as a result of changes in the mix of
higher versus lower bonus value products purchased by distributors. Shipping
costs increased 2.7% during the nine months ended June 30, 2000 primarily from a
combination of increased shipping to continental Europe from the United Kingdom
during the first six months of the year and the contract shipping of success
kits. In May 2000 the Company instituted revised shipping and handling charges
that are expected to closely reflect the actual cost of shipping product.
Exclusive of the non-recurring charge mentioned above gross profit as percentage
of net sales decreased from 34.6% for the nine months ended June 30, 1999 to
31.2% for the nine months ended June 30, 2000. Gross profit dollars, exclusive
of the non-recurring charge, decreased 27.4% or approximately $4,805,000 from
approximately $17,551,000 for the nine months ended June 30, 1999 to
approximately $12,746,000 for the nine months ended June 30, 2000.
Marketing, distribution and administrative expenses decreased approximately
$193,000 or 1.2% from approximately $16,103,000 for the nine months ended June
30, 1999 to approximately $15,910,000 for the nine months ended June 30, 2000.
Included in marketing, distribution and administrative expenses at June 30, 2000
is a non-recurring write-down of approximately $523,000 related to the carrying
value of the Company's audio production rights. Due to the recent
decentralization of the development and production of the audiotapes used in the
Company's Business Training System and recent management and operational changes
in Japan, the Company determined that the carrying value of such audio
production rights had become impaired. As a result of the expected closure of
certain foreign operations the Company recorded additional non-recurring
impairments and asset write-downs of approximately $342,000.
Exclusive of the non-recurring adjustments mentioned above marketing,
distribution, and administrative expenses increased to 36.8% of net sales for
the nine months ended June 30, 2000 from 31.8% of net sales for the nine months
ended June 30, 1999.
9
<PAGE>
Manufacturing Operations:
The Company's manufacturing operations are conducted through its subsidiary,
Bactolac Pharmaceutical Inc., which was acquired on November 17, 1999, and
ASHCO, which was acquired on December 1, 1999, and is now operated as a division
of Bactolac. ASHCO's principal customer is Bayer Corporation, which in August
2000 informed the Company that, effective January 1, 2001, it intends to produce
in-house products currently produced for it by ASHCO. Net sales to Bayer during
the period from the date of acquisition of ASHCO to June 30, 2000 were
approximately $2,562,000, which constituted approximately 50.2% of ASHCO's net
sales. ASHCO has been attempting to expand its customer base to reduce its
dependence upon Bayer and intends to accelerate these efforts. Failure to
replace this substantial customer or a substantial reduction in operating
expenses would have an adverse effect upon the Company's business and
operations.
Net sales for the manufacturing operations from the dates of acquisition to June
30, 2000 were approximately $11,568,000. Costs of sales for the nine months
ended June 30, 2000 were approximately $7,794,000 or 69.0%. Gross profit for the
nine months was approximately $3,589,000 or 31.0%.
Combined Operations:
Exclusive of the non-recurring adjustments mentioned above, income (loss) from
operations for the nine months ended June 30, 2000 decreased approximately
$2,599,000 to a loss of approximately $1,151,000 from income of approximately
$1,448,000 for the nine months ended June 30, 1999, principally as a result of
items explained above.
Other income (expense) decreased to an expense of approximately $902,000 for the
nine months ended June 30, 2000 from income of approximately $453,000 for the
nine months ended June 30, 1999. The decrease was primarily the result of
increased interest expense associated with the Company's revolving credit debt
and acquisitions related debt incurred in November and December 1999.
Additionally the Company experienced foreign exchange losses of approximately
$311,000 for the nine months ended June 30, 2000 compared to foreign exchange
gains of approximately $98,000 for the similar period of 1999.
Exclusive of the non-recurring adjustments mentioned above, net loss was
approximately $2,053,000 for the nine months ended June 30, 2000, a decrease of
approximately $2,200,000 compared to net income of approximately $912,000 for
the nine months ended June 30, 1999. The decrease was the result of the items
discussed above.
The Company has continued a program, begun in the second quarter of 2000, of
closing its small office/warehouse facilities in Norway, Finland and the
Netherlands. Orders from those countries will now be fulfilled from the
Company's U.K. warehouse. Additionally the Company has reduced the head count in
its foreign operations from 35 at September 30, 1999 to 22 as of August 18,
2000. The Company expects further reductions in head count subject to local
employment regulations over the next several months. Monthly operating
expenditures in the U.S. have been reduced through head count reductions, salary
reductions for certain corporate personnel and the reduction of other
expenditures. The Company intends to continue its efforts to reduce operating
costs and increase revenue to return to profitability as soon as possible.
Changes in Financial Condition
The Company had cash and cash equivalents of $174,068 at June 30, 2000 compared
to $1,395,310 at September 30, 1999. The cash used in operating activities of
$2,163,350 for the nine months ended June 30, 2000 was $2,202,710 less than the
cash provided by operating activities of $39,360 for the nine months ended June
30, 1999. The Company used approximately $673,000 and $184,000, respectively, to
purchase property and equipment during the nine month periods ended June 30,
2000 and 1999. The Company had a working capital deficit of $2,640,861 at
June 30, 2000 compared to working capital of $7,849,267 at September 30, 1999.
The decrease in working capital resulted principally from the reclassification
of approximately $6,340,000 of long-term debt to current as explained below and
increases in trade accounts payable, accrued liabilities, current maturities of
long-term debt and revolving credit debt which more than offset increases in
accounts receivable and inventories. These increases resulted from the Company's
recent acquisition of two manufacturing companies.
The Company's revolving line of credit is formula-based and provides a borrowing
arrangement based on a percentage of accounts receivable and inventory up to a
maximum borrowing limit. As of June 30, 2000, Company advances under the line of
credit totaled approximately $4.9 million and the Company had available to it
approximately $1.2 million of additional borrowing capacity. Pursuant to the
agreement with GECC substantially all cash received by the Company is deposited
into a controlled lockbox and is swept on a daily basis to reduce the
outstanding revolving line of credit balance thereby reducing the Company's
interest expense.
Management believes that the Company's internally generated funds together with
the existing revolving line of credit should be sufficient to meet working
capital requirements in fiscal 2000. Management believes that improvement of the
Company's working capital is critical to the Company's future operation. A $1.25
million equipment lease line has recently been obtained to fund needed capital
expenditures. No amounts have yet been advanced under this facility. To improve
its working capital position the Company is currently considering various
alternatives, which include mortgaging real property used by the Company in its
manufacturing operations in Mississippi, selling certain real property not used
in such manufacturing operations and equity or debt offerings. The Company has
no firm commitments for additional financing of any type and there can be no
assurance that any financing, if obtained, would be on terms favorable to the
Company.
The revolving credit agreement with GECC requires among other things that the
Company have a consolidated net worth of $18 million followed by $25.5 million
at September 30, 2000 and $27 million for each fiscal year after September 30,
2000. As noted in the Notes to the Financial Statements, the Company is not in
compliance with the fixed charge ratio covenant in its credit agreement with
GECC, which default has been waived by GECC. In addition, the Company expects
that it will fail to comply with the requirement in the credit agreement with
GECC that it maintain a minimum net worth of $25.5 million at September 30,
2000. The Company has reclassified approximately $6,340,000 of long-term debt to
current because it was not in compliance with certain of the GECC loan covenants
at June 30, 2000 as explained above. The Company has obtained from GECC a
waiver of such covenant violations. The Company is in the process of seeking
future relief from GECC covering the remaining term of the revolving credit
agreement. There can be no assurances that the GECC will grant the requested
covenant relief nor that the Company will not require further waivers and/or
amendments to the credit agreement or that GECC will grant such further waivers
and/or amendments.
10
<PAGE>
Part II Other Information
Item 4. Submission of Matters to a Vote of Security Holders
On June 6, 2000, the Company held its Annual Meeting of Shareholders.
At the meeting, the shareholders elected F. Wayne Ballenger, David P.
Bertrand, M. F. Florence, Jana Mitcham, Gregory Pusey, Pailla M. Reddy and Neil
S. Sirkin as directors. Each of the nominees received votes from shareholders
representing 5,378,177 shares in favor, with 1,141 shares voting to withhold
authority for election.
The shareholders also considered an amendment to the Company's 1995
Stock Option Plan to increase by 1,100,000 the number of shares of common stock
available for Plan purposes. This measure was approved with 2,781,679 shares
voting for, 59,297 shares voting against, and 5,535 shares voting to abstain.
A total of 2,538,342 shares would be regarded as broker non-votes.
The shareholders also approved the conversion of 221,127 shares of the
Company's Series A Preferred Stock to 2,211,270 shares of the Company's common
stock with 2,799,765 shares voting for, 41,881 shares voting against, and 4,865
shares voting to abstain. A total of 2,537,672 shares would be regarded as
broker non-votes.
11
<PAGE>
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)
Dated: August 21, 2000 By: /s/ John R. Brown, Jr.
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John R. Brown, Jr.
Vice President - Finance
and Chief Accounting Officer
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