Update-October 2001
Exhibit 99.1
ADVANCED NUTRACEUTICALS, INC.
(NASDAQ symbol: ANII)
CORPORATE UPDATE October 2001
Many activities have occurred at Advanced Nutraceuticals, Inc. ("ANI") since the
shareholder meeting. We have prepared this discussion to give you a current
overview of the Company and its operations.
At the Annual Meeting held on May 31, 2001, the shareholders overwhelming
approved all of the proposals. The following is a summary of the proposals
approved and the actions taken by the Company:
1. The Articles of Incorporation of the Company were amended to effect a
reverse split of the Company's common stock, in a range left to the
discretion of the Company's Board of Directors. The Board approved a one
for four split. This enabled the Company to end its conditional status on
NASDAQ. We have been able to maintain our listing since the Meeting. Our
common stock trades under the symbol ANII;
2. Five directors were re-elected;
3. The Stock Purchase Agreement providing for the sale of Nutrition For Life
International, Inc. and its subsidiaries was approved and the sale was
subsequently closed;
4. The Articles of Incorporation were amended to change the vote required
for future amendments to the Articles of Incorporation, mergers, asset
sales and other significant matters from two-thirds to a majority; and
5. The 1995 Stock Option Plan, as amended, was approved.
The most significant of our recent activities was the sale of Nutrition For Life
International, Inc. The decision to sell NFLI followed serious deliberations by
management, as we had originally intended to utilize it as a base to grow from,
by adding a number of companies through acquisitions. We concluded that the
public investing community was not favorably inclined towards a company in the
network marketing industry. Management at the subsidiary level of NFLI supported
a sale to enhance the opportunities for the distributors of NFLI's products. On
June 13, 2001 we completed the sale of NFLI. The sale of NFLI significantly
improved ANI's financial condition by generating $3.2 million of cash from the
cash portion of the purchase price, as well as enhancing the potential for near
term profitability and cashflow, thereby improving the opportunity for our
shareholders.
Recently, ANI has been pursuing the acquisition of certain assets of York
Pharmaceuticals, Incorporated. In the proposed transaction, ANI would issue
preferred stock which would become convertible into common stock upon
shareholder approval. York would also have the right to acquire additional
equity amounts tied to achieving defined earn out thresholds. The primary
purpose of the transaction is to provide additional revenue opportunities for
our OTC pharmaceutical business headquartered in Gulfport, Mississippi.
We have organized a new corporation, ANI Pharmaceuticals, Inc. ("ANIP") in
Mississippi to become the principal operating arm of our OTC pharmaceuticals
operation. We plan to move the assets of our ASHCO division into ANIP. In
addition, we recently hired George Chin, formerly Vice President of Sales and
Marketing for York, as the Vice President of Sales and Marketing for ANIP.
George's extensive and successful background in the OTC pharmaceutical industry
is an asset that will help in achieving our immediate and long-term goals. In
addition to York, George has worked in sales and marketing for Glaxo/SmithKline
(then known as Beecham Products), Perrigo Company (the largest private label
manufacturer in the industry) and Pharmaceutical Formulations, Inc.
George states, "Our plan is to position ANIP as the only vertically integrated
premier manufacturer of liquid pharmaceutical products for mass-market retailers
and contract manufacturing. Our infrastructure will provide a solid foundation
to enable future expansion of product offerings. Our business plan includes
expanding ANIP's contract manufacturing business and diversifying into direct
distribution with major food, drug and mass merchandiser chains through their
private label programs". Retailers such as Kmart, Walgreen, Kroger, Dollar
General, Winn Dixie and Rite Aid have already committed to our program.
Corporate Structure and Operations
Advanced Nutraceuticals, Inc. is a holding company, which conducts its
operations through its wholly owned subsidiaries, Bactolac Pharmaceutical, Inc
and ANI Pharmaceuticals, Inc. The following information will provide you with a
basic understanding of each of the operating business units.
Bactolac Pharmaceuticals, Inc.
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Bactolac is a contract manufacturer of vitamin and nutritional supplement
products, operating in an industry with current annual revenues estimated to
exceed $20 billion. Bactolac is led by its founder, Dr. Pailla M. Reddy.
Bactolac was founded in 1995, was acquired by ANI in late 1999 and has grown to
be a substantial entity with estimated 2002 sales exceeding $14 million.
To support this consistent growth and to expand its customer service
capabilities, Bactolac recently moved into a state of the art, 37,500 square
foot GMP facility located in Hauppauge, NY. This new facility has enhanced
Bactolac's ability to provide complete turnkey services from product development
to final product coating and packaging to its customers. Recent investments in
state of
Update-October 2001
the art lab equipment, high speed manufacturing equipment, tablet coating
machines and flexible packaging equipment, have now been completed.
Bactolac is known for creating high quality, unique formulas for a variety of
uses, including weight loss, antioxidants, formulas designed specifically for
men, women and children, sport nutrition, energy products, stress formulas,
relaxation formulas, life extension formulas, immune enhancement, brain
products, cleansing products, cholesterol products, liver products, heart
formulas and hundreds of herbal remedies. The company has manufactured over 700
formulations.
Bactolac has assembled an excellent staff that includes many highly qualified
and degreed chemists and biochemists, which custom formulate products in
response to, and in conjunction with, customers' needs and demands.
Since its inception, Bactolac has focused on achieving ever-increasing standards
of quality systems and controls. To this end the company has made substantial
investments in hiring qualified people and in state of the art analytical
equipment. Raw materials and finished goods undergo analytical, organoleptic
and physical standard tests. Bactolac's "In-Process Quality Control" (IPQC)
ensures compliance with product specification at all stages of the manufacturing
process. It is the company's goal to achieve NNFA certification in the coming
year.
Bactolac markets primarily to companies in the nutrition industry. Customers
include specialty food retailers, mass-market drug stores, multi-level
marketers, catalog marketers, retail distributors, direct mail sellers,
infomercial marketers and international distributors. The company has been
built primarily through word of mouth testimonials from its satisfied customers.
Efficient manufacturing, excellent service, and on time delivery are
cornerstones of Bactolac's business strategy. Its customers are able to receive
rapid order turnaround at competitive prices. The company has embarked on an
aggressive program to market its products and services to the industry.
Dr Reddy and his excellent staff have created a rapidly growing and profitable
manufacturer of vitamins, supplements and nutraceutical products during an
otherwise generally flat time for the industry. We are pleased to have the
commitment of an able leader such as Dr. Reddy.
ANI Pharmaceuticals, Inc.
ANIP is a contract and private label manufacturer of OTC pharmaceutical liquid
products, operating in a Company-owned 132,000 square foot facility in Gulfport,
Mississippi. The operating facility, previously owned by Bayer Corporation,
manufactured a number of OTC pharmaceutical products for Bayer. Most recently
it produced Phillips brand of Milk of Magnesia(R). In 2000, the last year the
plant produced Phillips MOM; its volume exceeded 11,000,000 bottles for the
Bayer Corporation, in addition to manufacturing a number of products for other
ASHCO contract customers.
Update-October 2001
ANIP continues to follow the quality-driven procedures and principles
established by Bayer. A majority of the key management staff members are former
Bayer employees and additional staff members have been added with strong
operational and technical backgrounds. Contract manufacturing has been
performed at ANIP's facility for some of the most respected pharmaceutical
companies in the world including Bayer, Schering Plough, Ivax, Watson and CB
Fleet.
The ANIP facility is comprised of four manufacturing areas: bulk magnesium
hydroxide manufacturing, antacid manufacturing; tablet manufacturing and powder
manufacturing. ANIP currently operates three high-speed fully automated liquid
packaging lines, two fully automated powder-packaging lines, and two fully
automated tablet-packaging lines and one fully automated blister packaging line.
Three extrusion blow-molding machines are used to produce the majority of the
plastic bottles the plant uses in its production process.
ANIP has the capability of developing and manufacturing virtually any OTC
pharmaceutical liquid, tablet, or powder for contract manufacturing or private
label uses. It is estimated that the current plant production capacity is
approximately $28 to $35 million annually, depending upon product mix. It is
currently estimated that ANIP's 2002 sales will exceed $15 million.
ANIP has well established and stringent quality control procedures and
standards. All products and production methods meet or exceed applicable
standards, specifications, and regulations, in accordance with cGMP's as
mandated by the Food, Drug and Cosmetic Act. The company has a clean regulatory
record with a history of no objectionable observations from the FDA's recurring
audit examinations. ANIP's laboratories and people are well qualified and
capable of performing all required compendial testing in-house.
New Board Member
----------------
In an effort to provide additional expertise to ANI, a new Board Member Randy
Humphreys has joined our board of directors. As an experienced domestic and
international merchant banker, as well as serving as a director on numerous
corporate boards, Randy brings extensive experience to our Company. He is
Chairman and Managing Director of Enterprise Merchant Bank, L.L.C. Enterprise
is the sole shareholder of York. York will become a substantial shareholder of
ANI upon completion of the York transaction.
Financial Overview
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ANI has been a publicly held company since 1995. It currently is in a
transition stage following the completion of the sale of NFLI, and the
implementation of its growth through selective acquisitions strategy. NFLI
generated over $50 million in annual revenues and accordingly, required an
appreciable level of management and service infrastructure to oversee. As a
result of the completion of the sale of NFLI, financial statements of ANI issued
in the future will treat the historical operations and assets of the NFLI
entities as a discontinued business. The NFLI sale was
Update-October 2001
completed for $3.2 million in cash at closing in June 2001, a $650,000 Note
payable to Bactolac, due in June 2002 and a $5.0 million note payable in
quarterly installments based on a ten-year amortization schedule with interest
at prime plus one-half percent. The $5.0 million Note includes a balloon payment
for the balance owed in June 2004. Due to the fact that management of ANI was
unable to determine at closing if the entire Note would be collectable, for
financial reporting purposes, an allowance representing the approximate balloon
amount has been recorded against the face amount of the Note. Collections on the
Note will be recorded on the cost recovery basis, with amounts collected above
the approximate net $2.2 million carrying value, recorded as income when
received.
ANI's debt and credit facilities consist principally of a $12 million revolving
credit facility ($0.8 million outstanding as of September 30, 2001) with General
Electric Credit Corporation, an approximate $1.2 million equipment term loan
facility, also with GE, and a $1.5 million remaining purchase note commitment
due to Dr, Reddy, the founder and selling stockholder of Bactolac. The Company
has a mortgage of $2.4 million on its operational facility and land in Gulfport.
We are currently in discussions with GE to amend the credit agreements following
the completion of the sale of NFLI, and we are optimistic that amended
agreements can be finalized during the quarter ending December 31, 2001.
Following are financial highlights for the nine months ended June 30, 2001, of
the continuing ANI group (000's):
Revenues $14,426
Net income $ 380
EBITDA $ 930
Total assets $28,750
Stockholders' equity:
Total $17,159
Per share $ 8.47
Tangible net worth:
Total $ 8,282
Per share $ 4.09
Total shares outstanding 2,027
Note: Shares outstanding are expected to increase as a result of ongoing
negotiations with a note holder and the shares issuable upon closure of the York
transaction.
Summary
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ANI's management has determined both long-term and near-term goals for the
company. The primary near term goal of the Company is to continue to support
the growth and expansion of
Update-October 2001
Bactolac's profitable business and to restructure and grow the liquid
pharmaceutical business operated under ANIP. These efforts we believe, will
result in 1) continued growth at Bactolac as it provides new products and
enhanced services to existing and potential customers and 2) improved cashflow
at ANIP by expanding its customer base.
With an increase in sales we believe that ANIP can generate positive cashflow
and become profitable in the near term. These efforts are already improving
results as we have begun shipping to some of our new customers. We will continue
to develop ANIP's business through internal growth with new product development
and enhanced services and consider potential external acquisitions of companies
within our industry, if they support our goals and objectives.
We believe that our current strategy of focusing the Company's efforts on
increasing sales, improving cashflow and restoring profitability will result in
improved shareholder value. Our key managers remain convinced that ANI will
succeed and have made several purchases of our common stock over the past year.
Our longer-term goals will be to pursue accretive acquisitions, concentrate our
efforts on areas that will most positively enhance our position in the market
place, increase revenues, improve profitability and ultimately enhance and
increase the value to our shareholders.
I believe that we are positioned to take advantage of many opportunities that
exist in the market and we look forward to an exciting and challenging year.
For additional information contact:
Greg Pusey, President, at 303-722-4008
Or Jeff McGonegal, Sr. VP Finance, at 303-660-9583
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This Corporate Update includes "forward looking statements" as defined by the
Securities and Exchange Commission (the "SEC"). All statements, other than
statements of historical fact, included in the Corporate Update that address
activities, events or developments that the Company believes or anticipates will
or may occur in the future are forward-looking statements. These statements are
based on certain assumptions made based on experience, expected future
developments and other factors ANI believes are appropriate in the
circumstances. Such statements are subject to a number of assumptions, risks
and uncertainties, many of which are beyond the control of the Company.
Investors are cautioned that any such statements are not guarantees of future
performance and that actual results or developments may differ materially from
those projected in the forward-looking statements. Furthermore, ANI does not
intend (and is not obligated) to update publicly any forward-looking statements.
The contents of this Corporate Update should be considered in conjunction with
the warnings and cautionary statements contained in the Company's recent filings
with the SEC.