SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
The Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by Rule 14A-
6(a)(2))
[x] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
ADVANCED NUTRACEUTICALS, INC.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-8(i)(1) and 0-11
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined) In accordance
with Rule 0-11(c)(2), the fee is based on the value of the cash,
securities and property to be received by the Registrant in connection
with the Registrant's sale of its assets.
(4) Proposed maximum aggregate value of transaction: $10,000,000
(5) Total fee paid: $2,000
[X] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: NOT APPLICABLE
(2) Form, Schedule or Registration Statement No.: NOT APPLICABLE
(3) Filing Party: NOT APPLICABLE
(4) Date Filed: NOT APPLICABLE
ADVANCED NUTRACEUTICALS, INC.
9101 Jameel
Houston, TX 77040
Dear Fellow Shareholders:
You are cordially invited to attend our annual meeting of shareholders to be
held at our offices on May 31, 2001. At this meeting, you will be asked to elect
directors and approve proposals submitted by the Board of Directors, including
the sale of our network marketing business conducted by Nutrition For Life
International, Inc. ("NFLI").
The sale of NFLI represents an important new direction for ANI. As both a
fellow shareholder and the president of ANI, I would like to share with you the
reasons for this decision, and ask for your support. The Board agrees that this
new direction is essential for our Company's progress and unanimously recommends
your approval. Please read the entire proxy statement for a complete discussion
of the Sale.
YOUR VOTE IS VERY IMPORTANT TO THE COMPANY.
The Sale must be approved by holders of at least two-thirds of the
outstanding shares of the Company's stock. Therefore, it is important that your
shares be represented at the annual meeting, whether or not you plan to attend.
Accordingly, please complete, sign and date the accompanying proxy and return it
in the enclosed envelope as soon as possible. If you attend the annual meeting,
you may vote in person if you wish, even if you previously returned your proxy.
Your prompt cooperation will be greatly appreciated.
Why do we propose to sell NFLI?
We have been engaged in the network marketing business since 1983. We have
experienced periods of great growth. Unfortunately, our results of operations in
the network marketing business have dramatically declined during the past three
years. We believe that we have undertaken measures that may reverse that
decline; however, we are concerned that we may not have the financial resources
to fund continuing losses. Therefore, we explored a potential sale and believe
that we have entered into an arrangement which will be beneficial to ANI as well
as to NFLI and NFLI's employees and the distributors in NFLI's network marketing
system. This sale is strongly supported by the management of NFLI.
We are pleased with the progress we have made with our recent expansion into
manufacturing through our acquisition of Bactolac Pharmaceutical, Inc. We are
pleased that Bactolac will continue to supply products to NFLI after the
completion of the sale. We believe that the sale will provide the necessary cash
to improve our financial position and to better enable us to improve our
operating results. The Board and I strongly believe that there is a
significantly better opportunity to increase the value of the Company by
focusing on our manufacturing operations, and selling the network marketing
business. This transaction will raise needed cash and eliminates the risk of
continued losses and further cash needs from the network marketing business.
We need your support and urge you to read the proxy materials and other
enclosed materials carefully. These documents will explain in more detail why we
are convinced that this is the best decision for the shareholders of the
Company. Thank you for your consideration and your support.
Sincerely,
Gregory Pusey
President and Chief Executive Officer
NUTRITION FOR LIFE INTERNATIONAL, INC.
9101 Jameel
Houston, TX 77040
Dear Fellow Shareholders of ANI:
I wholeheartedly agree with the reasons for the sale expressed by my good
friend and fellow Board member, Greg Pusey, in his letter to you.
I have had the honor and pleasure of serving as president of NFLI since 1984.
Many of our distributors are also shareholders of ANI. I am proud of the network
marketing system we have developed. Our business has challenges, but it also has
great potential. I firmly believe our best opportunity for realizing that
potential is through the sale of NFLI. I am also convinced that this is the best
opportunity to create shareholder value for ANI. Stated simply, I view this as
very much a "win-win" situation.
This sale will mark an important new beginning for both ANI and NFLI, a new
beginning born from great challenges. It is through great challenges that we can
achieve much growth, both in our lives and in our businesses. I want to thank
all of you who have helped us overcome great challenges in the past, and who
will be with us to embark upon our journey to success in the future.
Your vote is critical to the success of NFLI and ANI and I urge your support.
Please consider the proxy materials carefully and vote and mail your proxy card
at your earliest possible convenience.
Sincerely,
David P. Bertrand
President and Chief Executive Officer
Advanced Nutraceuticals, Inc.
9101 Jameel
Houston, Texas 77040
Notice Of Annual Meeting Of Shareholders
To the Shareholders:
The annual meeting of shareholders of Advanced Nutraceuticals, Inc. (the
"Company"), will be held at 1:00 P.M., local time, on May 31, 2001, at 9101
Jameel Road, Houston, Texas, for the following purpose:
1. To elect five directors to serve one-year terms ending in the year
2002;
2. To approve and adopt that certain Stock Purchase Agreement dated
December 29, 2000 (the "Agreement") and the transactions contemplated
thereby, substantially as described in the proxy statement
accompanying this Notice, pursuant to which the Company will sell (the
"Sale") all of the stock of Nutrition For Life International, Inc. and
its subsidiaries engaged in the network marketing business
(collectively, "NFLI");
3. To approve alternate proposals to amend the Articles of Incorporation
of the Company to effect a (i) one for three (1:3), (ii) one for four
(1:4), or (iii) a one for five (1:5) stock split of the Company's
issued and outstanding common stock at the discretion of the Company's
Board of Directors;
4. To approve an amendment to the Articles of Incorporation to change the
vote required for future amendments to the Articles of Incorporation,
mergers, asset sales and other specified matters in the Texas Business
Corporation Act from two-thirds to a majority;
5. To approve the 1995 Stock Option Plan, as amended; and
6. To transact any other business that may properly be discussed at the
meeting or at any subsequent meeting if the annual meeting is
postponed or adjourned.
You may vote if you are a shareholder of record on April 23, 2001. A list
of shareholders entitled to vote at the annual meeting will be available for
inspection by shareholders of record during business hours at the principal
offices of the Company during the ten day period prior to the annual meeting and
will also be available at the annual meeting.
Your Board of Directors unanimously recommends that you vote to adopt the
above proposals, which are described in detail in the accompanying Proxy
Statement.
Holders of the Company's common stock who vote against the Sale and comply
with the detailed provisions of Articles 5.12 and 5.13 of the Texas Business
Corporation Act ("TBCA") will be entitled to dissent from the proposed Sale and
to seek payment of the "fair value" of their shares. Because a proxy will be
voted "FOR" the proposed Sale unless otherwise specified, a
shareholder returning a signed but unmarked proxy will waive his or her right to
dissent from the proposed Sale. A copy of Articles 5.12 and 5.13 of the TBCA is
included as Annex D in the accompanying Proxy Statement. Shareholders wishing to
dissent from the proposed Sale should read those materials carefully.
It is important your shares be represented and voted at the annual meeting.
The management of the Company hopes that you will be able to attend the annual
meeting in person. If you are unable to attend, please vote by marking,
signing, dating and promptly returning the enclosed proxy in the enclosed reply
envelope. If your shares are held in "street name" by your broker or other
nominee, only that holder can vote your shares. You should follow the
directions provided by them regarding how to instruct them to vote your shares.
By Order Of the Board of Directors:
April 27, 2001 Jana B. Mitcham
Secretary
Advanced Nutraceuticals, Inc.
9101 Jameel Road
Houston, Texas 77040
Proxy Statement
Table of Contents
Questions And Answers About The Proposals................................................................ 1
General Information For Shareholders..................................................................... 3
Proposal 1: Election of Directors....................................................................... 5
Introduction............................................................................................ 5
Information Regarding the Company and Its Directors..................................................... 5
Vote Required........................................................................................... 5
Board of Directors Meetings............................................................................. 5
Committees of the Board of Directors.................................................................... 6
Audit Committee Report.................................................................................. 6
Audit Fees.............................................................................................. 6
Financial Information Systems Design and Implementation Fees............................................ 7
All Other Fees.......................................................................................... 7
Proposal 2: Approval of Sale of NFLI.................................................................... 8
General Description of the Sale......................................................................... 8
Vote Required........................................................................................... 8
Background.............................................................................................. 9
Timeline of Discussions Between the Parties............................................................. 10
Opinion of Our Financial Advisor........................................................................ 12
Interest of ANI's Officers and Directors in the Sale.................................................... 17
Accounting Treatment.................................................................................... 18
Federal Income Tax Consequences......................................................................... 18
The Stock Purchase Agreement............................................................................ 18
Rights of Dissenting Shareholders....................................................................... 23
Unaudited Pro Forma Consolidated Financial Statements................................................... 24
Proposal 3: Approval of Reverse Stock Split at the Discretion of the Board.............................. 31
Introduction............................................................................................ 31
Vote Required........................................................................................... 31
Purpose................................................................................................. 31
Effect On Authorized And Available Shares............................................................... 32
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Proposal 4: Approval of Amendment to the Articles of Incorporation to
Decrease the Required Vote for Certain Extraordinary Actions........................................ 33
Introduction....................................................................................... 33
Vote Required...................................................................................... 33
Advantages of the Amendment........................................................................ 33
Disadvantages of the Amendment..................................................................... 34
Proposal 5: Approval of 1995 Stock Option Plan, As Amended......................................... 34
Vote Required...................................................................................... 34
Purpose............................................................................................ 34
Administration..................................................................................... 34
Eligible Participants.............................................................................. 35
Shares Authorized.................................................................................. 35
Types of Options................................................................................... 35
Federal Income Tax Consequences.................................................................... 36
Adjustments........................................................................................ 37
Transferability.................................................................................... 37
Amendments......................................................................................... 37
Term............................................................................................... 37
Independent Public Accountants...................................................................... 37
Stockholder Proposals For The Next Annual Meeting................................................... 38
Where You Can Find More Information................................................................. 38
Other Matters....................................................................................... 38
Annex A-1 Form 10-K/A Report........................................................................
Annex A-2 Form 10-Q/A Report........................................................................
Annex A-3 Form 8-K/A Report.........................................................................
Annex B - Stock Purchase Agreement..................................................................
Annex C - Audit Committee Charter...................................................................
Annex D - Dissenters' Statute.......................................................................
Annex E - Neidiger Tucker Bruner, Inc. Opinion......................................................
Annex F - 1995 Stock Option Plan, As Amended........................................................
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Questions And Answers About The Proposals
Q: Why does the Company want to sell NFLI?
A: NFLI has experienced substantial losses and the Company does not have the
resources to continue to fund those losses. Management believes that the
Sale proposal is fair and that the Sale proceeds will improve the Company's
financial position and prospects for improving its operational results.
Q: Does the ANI Board of Directors recommend approval of the Sale?
A: Yes. After careful consideration, the ANI Board of Directors unanimously
recommends that the shareholders vote in favor of the stock purchase
agreement and the Sale. Additional information pertaining to the
recommendation of the Board of Directors can be found under the discussion
of Proposal 2.
Q: What will happen to ANI as a result of the Sale?
A: ANI will remain as a holding company with Bactolac Pharmaceutical Inc. and
its ASHCO division as an operating subsidiary. ANI plans to seek additional
acquisitions if the Sale is completed.
Q: What will be the relationship between ANI and NFLI if the Sale is completed?
A: If the Sale is completed, NFLI will no longer be a subsidiary of ANI. ANI
will receive a promissory note from NFLI as part of the purchase price. ANI
may also receive additional amounts as an earnout based on operations of
NFLI's Japanese subsidiary. In addition, Bactolac is currently a supplier of
nutritional products to NFLI, and Bactolac and NFLI will enter into a supply
agreement regarding these products at the closing of the Sale.
Q: What happens if the Sale is not completed?
A: If the Sale is not completed, NFLI will remain a subsidiary of ANI.
Q: Where can I get information regarding ANI, NFLI and the Sale?
A: We urge you to read and consider the information contained in this proxy
statement, including the Annexes. You should also review the documents
referenced under "Where You Can Find More Information."
Q: How do I vote?
A: After carefully reading and considering the information in this proxy
statement, please mark, sign and date your proxy card. Then mail your signed
proxy card in the enclosed return envelope as soon as possible so that your
shares may be represented at the annual meeting. Your proxy card will
instruct the persons named on the card to vote your shares at the annual
meeting as you direct on the card. The Board recommends that you vote for
the Board nominees and for the other proposals. If you do not vote or you
abstain, the effect will be a vote against the proposal. You may also vote
by attending the meeting in person.
Q: If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A: Your broker will vote your shares based on your instructions on how to vote.
You should follow the directions provided by your broker to vote your
shares. If you do not instruct your broker, your shares will not be voted
for the proposals, which will have the same effect as a vote against the
Sale and against the authority to effect the reverse stock split.
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Q: May I change my vote?
A: If you are a shareholder of record, you may change your vote at any time
before your proxy is voted at the annual meeting by:
. Sending us a proxy card dated later than your last vote;
. Notifying the secretary of the Company in writing; or
. Voting at the meeting.
If you have instructed a broker to vote your shares you must follow
directions received from your broker to change your vote.
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General Information For Shareholders
We are mailing this proxy statement to you, on or about April 30, 2001.
Together with this document, we are also sending to you a notice of the annual
meeting and a form of proxy that our Board is soliciting for use at the annual
meeting. The annual meeting of shareholders will be held on May 31, 2001 at 1:00
p.m., local time. Your vote is very important.
Who Can Vote
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Record holders of the common stock on April 23, 2001 may vote at the annual
meeting. On the record date, there were 8,107,895 shares of common stock
outstanding.
How To Vote
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You are entitled to cast one vote for each share of common stock you own on
the record date. Shares represented by a proxy marked "abstain" on any matter
will be considered present at the annual meeting for purposes of determining a
quorum and for purposes of calculating the vote, but will not be considered to
have voted in favor of the proposal. Therefore, any proxy marked "abstain" will
have the effect of a vote against the matter.
The shares represented by a proxy as to which there is a "broker non-vote"
(for example, where a broker does not have discretionary authority to vote the
shares), or a proxy in which authority to vote for any matter considered is
withheld, will be considered present at the annual meeting for purposes of
determining a quorum, but will have no effect on the vote.
All shares that have been properly voted and not revoked will be voted at
the annual meeting in accordance with your instructions. If you sign your proxy,
but do not give voting instructions, the shares represented by that proxy will
be voted as recommended by our Board.
If any other matters are properly presented at the annual meeting for
consideration, the persons named in the enclosed proxy will have the discretion
to vote on those matters for you. At the date this proxy statement went to
press, we do not know of any other matter to be raised at the annual meeting.
Vote Required
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The vote required for each proposal is set forth in the discussion of each
proposal under the caption entitled, "Vote Required."
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Costs Of Solicitation
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We will pay for preparing, printing and mailing this proxy statement. Our
regular employees or other representatives without additional compensation by us
may solicit proxies personally or by telephone. We will reimburse banks, brokers
and other custodians, nominees and fiduciaries for their costs of sending the
proxy materials to beneficial owners.
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Proposal 1: Election of Directors
Introduction
The current members of the Board of Directors are F. Wayne Ballenger, David P.
Bertrand, M. F. Florence, Jana B. Mitcham, Gregory Pusey, Pailla M. Reddy and
Neil S. Sirkin. Each of the current directors has been nominated for election
to the Board of Directors, except for David P. Bertrand and Jana B. Mitcham who
will continue as executive officers of NFLI after the Sale. Each nominee for
director has agreed to serve on the Board of Directors if elected. Each
director is nominated to serve for a term of one year until the next annual
meeting of shareholders or until his successor is elected and qualified. If any
nominee is unable to serve as a director at the time of the annual meeting, your
proxy will be voted for the election of another person the Board may nominate in
his or her place, unless you indicate otherwise.
Information Regarding the Company and Its Directors
To aid you in your review of the information in this proxy statement before
voting upon the matters to be decided at the annual meeting, we have attached as
Annex A-1 our Annual Report on Form 10-K/A for the fiscal year ended September
30, 2000 (the "Annual Report") and as Annex A-2 our Quarterly Report on Form 10-
Q/A for the fiscal quarter ended December 31, 2000 (the "Quarterly Report").
You are encouraged to review the entire Annual Report and Quarterly Report.
Information regarding the background of our officers and directors, compensation
paid to the officers and directors, security holdings of officers and directors
and principal shareholders and related party transactions is provided in Item
10. Directors and Executive Officers of Registrant; Item 11. Executive
Compensation; Item 12. Security Ownership of Certain Beneficial Owners and
Management; and Item 13. Certain Relationships and Related Transactions of the
Annual Report.
Vote Required
The five candidates having the highest number of votes cast in favor of their
election will be elected to the Board of Directors.
The Board of Directors recommends a vote for the election of these nominees
for election as directors.
Board of Directors Meetings
Our Board held seven meetings in person or by consent during the fiscal year
ended September 30, 2000. None of the incumbent directors attended fewer than
75% of the aggregate number of meetings of the Board of Directors and the
Committees on which they served that were held during the period that they
served.
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Committees of the Board of Directors
The Board has two standing committees, the audit committee and the
compensation committee. M.F. Florence and F. Wayne Ballenger serve as the two
members of the audit committee. During the fiscal year ended September 30,
2000, the audit committee held three meetings. The primary functions of the
audit committee are to review the scope and results of audits by our independent
auditors, internal accounting controls, non-audit services performed by the
independent accountants and the cost of accounting services.
F. Wayne Ballenger and M.F. Florence served as the two members of the
compensation committee. During the fiscal year ended September 30, 2000, the
compensation committee held two meetings. The compensation committee reviews
stock option and other compensation policies and programs. The Compensation
Committee Report is included in Item 11 of the Annual Report attached as Annex
A-1 to this proxy statement.
Audit Committee Report
The Audit Committee of our Board consists entirely of non-employee directors
who are independent. Members of the Committee are required to have a basic
understanding of finance and accounting and to be able to read and understand
fundamental financial statements. A copy of the Charter of the Audit Committee
is attached to this proxy statement as Annex C.
Management is responsible for the Company's internal controls and the
financial reporting process. The independent accountants are responsible for
performing an independent audit of the Company's consolidated financial
statements in accordance with generally accepted auditing standards and issuing
a report thereon. The Committee's responsibility is to monitor and oversee
these processes.
With respect to the Company's audited financial statements for the Company's
fiscal year ended September 30, 2000, management of the Company represented to
the Committee that the financial statements were prepared in accordance with
generally accepted accounting principles and the Committee has reviewed and
discussed those financial statements with management. The Audit Committee has
also discussed with Grant Thornton LLP, the Company's independent accountants,
the matters required to be discussed by Statement on Auditing Standards No. 61
(Communication with Audit Committees) as modified or supplemented.
The Audit Committee has received the written disclosures from Grant Thornton
LLP required by Independent Standards Board Standard No. 1 (Independent
Standards Board Standard No. 1, Independent Discussions With Audit Committees),
as modified or supplemented, and has discussed the independence of Grant
Thornton LLP with members of that firm.
Audit Fees
The aggregate fees billed for professional services rendered by Grant Thornton
LLP for the audit of ANI's annual financial statements for the fiscal year ended
September 30, 2000 and the
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reviews of the financial statements included in ANI's quarterly reports on Form
10-Q for that fiscal year were $214,000.
Financial Information Systems Design and Implementation Fees
The aggregate fees billed for professional services by Grant Thornton LLP
during the fiscal year ended September 30, 2000 was $27,700.
All Other Fees
The aggregate fees billed for services rendered by Grant Thornton LLP, other
than the services covered in the two preceding sections, for the fiscal year
ended September 30, 2000 were $46,200.
Based on the review and discussions referred to above, the Audit Committee
recommended to the Board that the audited financial statements for the fiscal
year ended September 30, 2000 be included in the Company's Annual Report on Form
10-K/A for that year.
M.F. Florence - Chairman
F. Wayne Ballenger
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Proposal 2: Approval of Sale of NFLI
General Description of the Sale
On December 29, 2000, ANI signed a definitive agreement to sell NFLI to
Everest International, L.L.C. ("Everest") for $10,000,000. At closing of the
Sale, ANI is to receive a cash payment of $5,000,000 and a note for $5,000,000.
The cash payment will be adjusted based upon NFLI's working capital at closing.
NFLI's working capital and the amount of the adjustment will depend upon a
number of factors, primarily future operations of NFLI. It is anticipated that
the cash payment will be adjusted to an amount between $3,700,000 and
$4,200,000.
The $5,000,000 note will provide for interest to be paid at prime plus 1/2%.
Payments of principal and interest are to be made quarterly for three years from
closing based upon a 10-year amortization schedule. The interest rate will be
adjusted quarterly based on the then prime rate. The current prime rate is 8%.
Accordingly, if interest were payable on this date, the interest rate would be
8-1/2%. The note will be an obligation of NFLI only and without recourse to
Everest. Everest expects to arrange financing of the cash portion of the
purchase price. The note to Everest's lender is expected to be secured by all of
NFLI's assets as well as by personal guaranties of principals of Everest.
Although no firm arrangements have been made, Everest has informed ANI that it
expects the note to its secured lender to provide for interest to be paid at
prime plus 3/4% in quarterly installments of principal and interest for three
years based upon a ten year amortization schedule. Based on the current prime
rate, the interest rate on Everest's note to its secured lender would be 8-3/4%.
It is likely that the loan agreement will include customary provisions providing
for acceleration of the note if various reporting and credit requirements are
not satisfied. ANI has agreed that the $5,000,000 note from Everest to ANI will
be subordinate to the note to Everest's secured lender. Accordingly,
collectability of the note will depend upon the success of operations of NFLI
after the closing of the Sale, including NFLI's ability to service its debt with
its senior lender. Although the $5,000,000 note from Everest to ANI will be
secured by NFLI's assets and, in the event of default, ANI may seek to foreclose
on those assets, or may seek a judgment in court for the amount in default, or
both, ANI's recovery efforts will be limited by the subordination to Everest's
secured lender. Moreover, Everest may incur additional indebtedness without
ANI's consent, which may also lessen ANI's ability to recover in the event of
default.
The purchase price may also be increased up to an additional $750,000,
depending upon future operating results of NFLI's recently established Japanese
subsidiary. In addition, our Bactolac subsidiary will enter into a product
supply agreement with NFLI and will also receive a $650,000 note representing a
currently outstanding intercompany liability, due one year and a day from
closing. Closing is anticipated to occur immediately following the annual
meeting of shareholders.
Everest is a privately held entity with its principal offices located at 8645
College Boulevard, Overland Park, Kansas 66210. Everest was formed in May 1999
to research, develop and market a line of nutritional supplements to complement
traditional medical practices and to help consumers lead longer, healthier
lives. Everest markets its nutritional supplements through a network marketing
organization. Prior to negotiations in connection with the Stock Purchase
Agreement, there were no material contracts, arrangements, understandings,
relationships, negotiations or transactions between ANI and any of its
affiliates and Everest and any of its affiliates.
Vote Required
The affirmative vote of the holders of two-thirds of the outstanding shares
of ANI stock will be necessary to approve the proposal.
The Board of Directors recommends a vote FOR approval of the stock purchase
agreement and the transactions contemplated thereby.
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Background
We organized ANI in March 2000 to be the holding company for NFLI and its
subsidiaries. NFLI has been engaged in the sale of nutritional supplements and
other consumer products through a network marketing system since 1983. In late
1999, we acquired Bactolac and Ash Corp., which are manufacturers of
nutraceutical and pharmaceutical products. We adopted the holding company
structure to better reflect the diversification of our operations and to improve
our organizational structure for our acquisition program.
Our acquisitions and reorganization into the holding company structure were
part of our long term strategy to build shareholder value through internal
growth and acquisition of companies in the nutritional and pharmaceutical
industries. However, our operating results have been poor and our stock price
has declined substantially. As a result, we did not achieve internal growth and
we have been unable to pursue acquisition opportunities due to a lack of capital
and poor performance in the stock market.
During 2000, the Board considered various strategies to position ANI to renew
its growth strategy. In the course of this review, we communicated with a
number of outside sources, including investment banking institutions, lending
sources and prospective purchasers of our businesses. In connection with the
Ash Corp. acquisition, we acquired the land and building used by Ash, as well as
some land nearby in Gulfport, Mississippi. The property is mortgaged and we
attempted unsuccessfully to refinance the property to obtain additional capital.
Due to our poor operating results, we were unable to obtain refinancing. We also
explored the possibility of a private sale of our equity securities through
informal discussions with investment bankers. Based on our poor operating
results, low stock price and low volume in trading in our stock, we were advised
that our prospects were not encouraging. In addition, we had extensive
communications with a private insurance company about the possibility of a
significant equity investment or a business combination, which possibilities
were subsequently rejected by the insurance company.
We also considered whether it would be prudent to contact potential
acquirers. NFLI's business is conducted through a network marketing organization
of independent distributors who are not employees of NFLI and who may at any
time leave NFLI to work for competing organizations or who may simply devote
less time to sales of NFLI's products. The Board believes that the success of
NFLI's business is based upon the confidence of the distributors in management
and the direction of NFLI's affairs. The Board believed that it was important to
the viability of NFLI to enter into an arrangement that would be viewed
favorably by the distributor organization. The Board also believed that if the
distributors heard NFLI was for sale it would have a significant negative impact
on distributor confidence and adversely affect NFLI's revenues and distributor
retention and recruitment efforts. Accordingly, the Board determined that any
contact with potential acquirors must be done in an extremely careful manner.
Discussions were held regarding the possibility of a significant equity
investment or business combination with a private insurance company which was
then involved in discussions with NFLI regarding a marketing arrangement for
NFLI's products. The insurance company terminated the merger and financing
discussions. Brief discussions were also held with a group that had contacted
NFLI in early 2000, but which later declined to pursue discussions. The Board
concluded that the only feasible alternative to provide ANI with a reasonable
prospect of reinvigorating its growth strategy would be the sale of NFLI to
Everest.
The Board made this decision reluctantly as it believes that the future
prospects for success of NFLI's operations may be good. The Board believes the
marketing program of NFLI in the
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U.S. is sound, and that the initiatives to reduce expenses in the U.S. and the
United Kingdom by closing remote offices and other cost-saving measures have
resulted in a substantial narrowing of losses from those operations. Extensive
cost-saving measures were also initiated in the U.S. in 2000, including
management salary reductions, personnel reductions, a more favorable telephone
contract, and revisions to NFLI's starter kit. The cost-saving measures
implemented in 2000 are expected to result in future annual expense reductions
of approximately $2.9 million. In addition, NFLI expanded operations into Japan
and incurred substantial start-up expenses in 2000, which the Board believes may
result in substantial revenues in the future. However, the Board also recognized
the increasingly competitive nature of the network marketing business. The Board
also noted the negative connotations in the marketplace ascribed to the network
marketing business and the low valuations of companies engaged in that business.
The Board carefully considered whether the value of ANI could be increased by
focusing on the network marketing business, and concluded that while it was a
business we understood based on our relatively long history in network
marketing, the dynamics of that industry and the financial condition of the
Company both worked against the prospect of significant stock price
appreciation.
On the other hand, the Board examined the opportunity in the manufacturing
part of the nutritional and pharmaceutical industries and concluded that there
is a significantly better opportunity to increase the value of ANI by focusing
on the manufacturing segment of the nutritional and pharmaceutical industries.
The proposed Sale raises cash needed to strengthen ANI's financial position and
to expand and diversify its revenue base. The proposed Sale will also eliminate
the risk of continued losses and further cash needs from the network marketing
business. The Board is convinced that this alternative is the best one for the
shareholders of the Company.
Timeline of Discussions Between the Parties
The terms and conditions of the stock purchase agreement and the Sale are
the result of arm's length negotiations between representatives of Everest and
representatives of ANI. Set forth below is a summary of the background of these
negotiations.
. On August 15, 2000, Barry Loder, a representative of ANI, called David
Wheeler, Vice President of Everest, to discuss the potential interest of
Everest in purchasing NFLI from ANI. Mr. Loder contacted Mr. Wheeler at
the request of Gregory Pusey, Chairman of the Board of Directors of ANI.
Mr. Pusey was aware that Mr. Loder had performed some consulting services
for Everest. Mr. Pusey made this request because he had heard from Mr.
Loder that Everest was engaged in sales of nutritional supplements through
a developing network marketing organization and was interested in rapid
growth.
. On August 21, 2000, Barry Loder received a call from David Wheeler to
confirm that Everest was interested in pursuing the possible purchase of
NFLI.
. On August 29, 2000, Gregory Pusey, President of ANI, and Barry Loder met
with David Wheeler and Rob Hamlin, Vice-President of Everest, to explore
the possibility of a transaction.
. On September 1, 2000, Jerry Kramer, Chairman of the Board of Everest,
visited NFLI's headquarters in Houston, Texas for the first time. Mr.
Kramer met with various members of the NFLI management team. The members
of NFLI's
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management presented the status of NFLI, strategic plans for the future,
potential strategic value, and provided a site tour.
. On September 8, 2000, David Wheeler met with certain members of ANI's
management concerning how a transaction could be structured. Preliminary
discussions were held regarding purchase terms. ANI proposed a purchase
price of $15,000,000. Mr. Wheeler stated that he would consider this
offer. He also informed ANI that Everest would not be willing to make an
all cash payment of the purchase price. Mr. Wheeler also informed ANI that
Everest expected to borrow funds in connection with the transaction and
that the note to ANI must be non-recourse to Everest and subordinate to
Everest's lender. He noted that the lender would be expected to have a
security interest in all of NFLI's assets.
. On September 11, 2000, the ANI board of directors met and Greg Pusey and
Jeff McGonegal informed the board of directors that preliminary
discussions had been held with Everest regarding Everest's interest in
purchasing NFLI. Jeff McGonegal discussed the tax and accounting
considerations. After discussion, the ANI Board authorized senior
management of ANI to continue discussions for a possible transaction.
. On September 27, 2000 and October 3, 2000, Barry Loder and John Brown met
with David Wheeler concerning deal structure and purchase terms. Everest
rejected ANI's $15,000,000 offer and proposed a maximum purchase price of
$10,000,000, consisting of $3,000,000 in cash, $3,000,000 payable in
installments and $4,000,000 contingent upon NFLI's future earnings. After
further discussions, ANI and Everest agreed on the following terms as a
framework for future deliberations: $5,000,000 in cash subject to working
capital adjustments, $5,000,000 payable in installments and an earnout in
an amount to be determined based solely on operations in Japan.
. On October 9, 2000, Patton Boggs LLP, counsel to ANI, circulated the first
draft of a letter of intent to ANI, Everest and Everest representatives.
Negotiations regarding the letter of intent and the related documents
continued periodically until December 12, 2000.
. On October 16, 2000, Jack Preston and Art Preston, owners of Everest
visited NFLI in Houston, Texas for the first time, and met with various
members of the NFLI management team to tour the site and discuss
management's plans for NFLI's operations.
. On October 26, 2000, Barry Loder and John Brown met with David Wheeler
concerning the terms included in the draft letter of intent.
. On October 27, 2000, ANI and Everest signed a Confidentiality Agreement.
. Beginning October 27, 2000 and continuing through December 29, 2000, the
companies exchanged various due diligence materials as part of their
ongoing due diligence process.
. On November 14, 2000, Dr. Marcus Laux, President of Everest visited NFLI's
headquarters in Houston, Texas for the first time. Dr. Laux met with
various members of NFLI's management team to tour the site and discuss
with management plans for Everest's acquisition of NFLI and personnel
issues.
. On December 12, 2000, the ANI board of directors met and Greg Pusey and
Jeff McGonegal informed the board of directors the status of the
transaction. After discussion, the ANI board of directors authorized
senior management of ANI to continue the negotiation of a definitive
agreement.
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. On December 13, 2000, Greg Pusey, Barry Loder and John Brown, met with
David Wheeler and Brent Hudson concerning the findings of due diligence
and the terms of the agreement.
. On December 14, 2000, Patton Boggs, LLP counsel to ANI, circulated the
first draft of a stock purchase agreement to ANI, Everest and Everest
representatives. On December 21, 2000, Jackson Walker LLP counsel for
Everest circulated a revised draft of a stock purchase agreement to the
parties. Negotiations regarding the agreement and the related documents
continued periodically until December 29, 2000. The negotiations included
discussions regarding the interest rate and security on the $5,000,000
note to ANI, including whether the interest rate should be fixed or
floating based on prime. Everest requested a floating rate based on prime.
ANI requested prime plus 2%, which ANI believed was more comparable to a
commercial loan. It was agreed that the rate would be prime plus 1/2% and
that the note would be secured by NFLI's assets in a subordinate position
to Everest's secured lender.
. On December 29, 2000, the ANI board of directors met via a telephonic
board meeting to discuss the proposed Sale. At the meeting,
representatives of Everest gave an overview of the financial strength of
Everest and presented their future plans for NFLI. Greg Pusey discussed
the terms of the sale. After discussion, the ANI board of directors
unanimously approved the Sale and authorized the senior management of ANI
to finalize and execute the stock purchase agreement. The consideration of
the Sale at the Board meeting was for a period of one hour and 50 minutes.
. On December 29, 2000, upon completion of all negotiations and finalization
of all agreements, the two companies executed and delivered the definitive
agreement and related agreements.
. On December 29, 2000, ANI issued a press release announcing the
transaction.
Opinion of Our Financial Advisor
Pursuant to an engagement letter dated January 24, 2001, ANI retained
Neidiger, Tucker, Bruner, Inc. ("NTB") to render to ANI's Board an opinion as to
the fairness, from a financial point of view, of the proposed Sale.
On February 7, 2001, NTB delivered its written opinion to ANI that, as of the
date of the opinion, the Sale of NFLI as described in the Stock Purchase
Agreement was fair from a financial point of view to the shareholders of ANI.
THE FULL TEXT OF THE WRITTEN OPINION OF NTB, WHICH SETS FORTH THE ASSUMPTIONS
MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN IN CONNECTION
WITH THE OPINION, IS ATTACHED AS ANNEX E TO THIS PROXY STATEMENT AND IS
INCORPORATED HEREIN BY REFERENCE. YOU ARE URGED TO, AND SHOULD, READ THE
OPINION IN ITS ENTIRETY.
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In connection with its opinion, NTB reviewed, among other things:
. the Stock Purchase Agreement dated December 29, 2000;
. publicly available information relating to ANI including quarterly 10-Qs
and the annual Form 10K/A for the year ended September 30, 2000;
. the financial condition of ANI and NFLI;
. the past operating results of NFLI;
. certain additional financial statements and other financial and operating
data concerning NFLI prepared internally by its senior management and that
of ANI;
. certain financial forecasts and other forward looking financial
information prepared by the senior management of ANI and NFLI;
NTB also held discussions with members of senior management of ANI and NFLI
and their financial and legal advisors regarding NFLI's past and current
business operations, financial condition and future prospects, and made other
studies and inquiries, and took into account such other matters as it deemed
relevant, including an assessment of general economic, market and monetary
conditions. NTB also compared the financial performance of NFLI to that of
certain other publicly traded companies comparable to NFLI. NTB did not
identify or review comparable transactions in rendering its opinion. A summary
of results of the comparison is set forth below.
NTB relied upon the accuracy and completeness of all of the financial and
other information reviewed by it and assumed such accuracy and completeness for
purposes of rendering its opinion. In addition, NTB did not make any
independent evaluation or appraisal of the assets and liabilities of NFLI, and
NTB was not furnished with any such evaluation or appraisal. The opinion of NTB
was provided for ANI's information and assistance in connection with ANI's
consideration of the transaction contemplated by the Stock Purchase Agreement.
ANI and Everest had determined the amount of consideration to be paid prior to
the engagement of NTB. NTB was given no instructions and/or limitations
concerning the engagement by ANI. NTB's opinion does not address the relative
merits of the Stock Purchase Agreement and the other business strategies that
the board of ANI has considered or may be considering, or the underlying
business decision of the board of ANI to proceed with the Stock Purchase
Agreement. The opinion does not constitute a recommendation as to how you should
vote with respect to the merger.
In rendering its opinion, NTB considered the recent liquidity problems
experienced by NFLI, its history of operating losses and its recent operations.
NTB also considered the results of its discussions with parties involved in
businesses similar to NFLI.
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In its review and analysis, and in arriving at its opinion, NTB assumed and
relied upon the accuracy and completeness of all of the financial and other
information provided to it (including information furnished to it orally or
otherwise discussed with it by the senior management of ANI and NFLI) or
publicly available and neither attempted to verify, nor assumed responsibility
for verifying, any such information. NTB relied upon the assurances of senior
management of ANI and NFLI that they were not aware of any facts that would make
the information provided inaccurate or misleading.
NTB assumed that the financial forecasts and projections (and assumptions
and basis therefore) of NFLI provided for NTB's review:
. had been prepared in good faith on the basis of reasonable assumptions;
. reflected the best available estimates and judgments as to the future
financial condition and performance of NFLI;
In addition, NTB assumed that:
. the Stock Purchase Agreement will be consummated upon the terms set forth
in the agreement without material alteration thereof; and
. the historical financial statements of ANI and NFLI reviewed by it had
been prepared and fairly presented in accordance with U.S. generally
accepted accounting principles consistently applied.
Although developments following the date of the NTB opinion may affect the
opinion, NTB assumed no obligation to update, revise or reaffirm its opinion.
The NTB opinion is necessarily based upon market, economic and other conditions
as in effect on, and information made available to NTB as of, the date of the
NTB opinion. It should be understood that subsequent developments may affect
the conclusion expressed in the NTB opinion and that NTB disclaims any
undertaking or obligation to advise any person of any change in any matter
affecting the opinion which may come or be brought to its attention after the
date of the opinion. The NTB opinion is limited to the fairness from a
financial point of view and as of the date thereof, of the sale of NFLI to the
holders of ANI.
NTB does not express any opinion as to:
. the value of any employee agreement or other arrangement entered into in
connection with the Agreement; or
. any tax or other consequences that might result from the Agreement.
The following is a summary of certain of the financial and comparative
analyses that provided the basis for NTB's opinion, which was presented to ANI's
board of directors on February 7, 2001.
-14-
Comparable Public Company Market Analysis. NTB compared the financial and
market performance of NFLI with that of a group of publicly traded companies
engaged in direct sales of nutritional supplements. The companies were Reliv
International, Inc. (Symbol: RELV); Nature's Sunshine Products, Inc. (Symbol:
NATR); Herbalife International, Inc. (Symbol: HERBA); and Nu Skin Enterprises,
Inc. (Symbol: NUS). The companies were selected based on their similarities to
the business conducted by NFLI. The purpose of the comparable public company
market analysis was to establish a range for the potential equity value of NFLI.
NTB selected this group of companies based on similarities to NFLI in product
and service offerings and target market as evidenced by total revenues and
market capitalization. NTB examined certain publicly available financial and
operational data of such comparable companies, in particular:
. annualized revenues;
. market capitalization;
. profitability;
. liquidity.
The analysis showed a range of annualized run rate revenue for the companies
considered of $61.5 million to $982.4 million as compared to approximately $55.4
million for NFLI, assuming a $10 million dollar market valuation. The average
annualized run rate revenues for the companies considered were $558.8 million.
The annualized revenue run rate for NFLI was less than 10% of the average for
the companies considered. The approximate market capitalization for the
companies considered ranged from $13.7 million to $471.9 million. The market
capitalization to revenues ratio for the companies considered ranged from .18 to
.53 with the average being .35. NFLI's market capitalization to revenues was at
the low end of the range at .18. This is suggested by several factors
significant to NFLI in relation to the comparable group. First, NFLI's
annualized revenues are significantly less than the average of the peer group.
The comparable company most similar to NFLI in terms of revenues was
significantly below the group average with a market capitalization to revenue
ratio of .22. In addition, all companies in the peer group were experiencing
revenue growth whereas NFLI's revenues have decreased during the last twenty-
four months. The Price to Earnings ratio (P/E Ratio) for the companies
considered ranged from 0 to 8.24. The average P/E ratio was 5.25. NFLI has been
unprofitable and therefore is well below the average for the companies
considered. The analysis showed a range of net profit margins for the companies
considered of (.05%) to 6.58% as compared to approximately (8.77%) for NFLI. The
average net profit margin for the companies considered was 4.32%. When reviewing
the market valuation of the companies considered, the level of profitability for
each company has a significant effect on market valuation. The analysis showed a
range of current ratios for the companies considered of 1.10 to 2.42 as compared
to approximately .98 for NFLI. The average current ratio of 1.88 is
significantly better than that of NFLI. The analysis of total debt to equity is
also unfavorable to NFLI. The total debt to equity ratios for the companies
considered ranged from .01 to 1.07 as compared to 1.42 for NFLI. The average
total debt to equity ratios for the companies considered was .34. When taking
into consideration both the current ratio and debt to equity ratio for NFLI, the
liquidity and financial stability of NFLI is substantially less than that of the
companies considered. NTB also took into consideration NFLI's lack of sustained
profitability and positive cash flow. Additionally, NFLI has been unable to
demonstrate continued
-15-
growth in total revenue over the last three years. In fact, total revenues have
decreased substantially from fiscal 1998 through fiscal 2000.
While the foregoing summary describes certain analyses and factors that NTB
deemed material to its presentation to the ANI board of directors, it is not a
comprehensive description of all analyses and factors considered by NTB. The
preparation of a fairness opinion is a complex process. Selecting portions of
the analyses or of the summary set forth above, without considering the analyses
as a whole, could create an incomplete view of the processes underlying NTB's
opinion. In arriving at its fairness determination, NTB considered the results
of all such analyses. No company used in the above analyses as a comparison is
directly comparable to NFLI. The analyses were prepared solely for the purpose
of NTB providing its opinion to ANI as to the fairness from a financial point of
view of the consideration to be received by ANI pursuant to the agreement and do
not purport to be appraisals or necessarily reflect the prices at which
businesses or securities actually may be sold. Analyses based upon forecasts of
future results are not necessarily indicative of actual future results, which
may be significantly more or less favorable than suggested by such analyses.
Because such analyses are inherently subject to uncertainty, being based upon
numerous factors or events beyond the control of the parties or their respective
advisors, none of ANI, NTB or any other person assumes responsibility if future
results are materially different from those forecast. The foregoing summary does
not purport to be a complete description of the analysis performed by NTB and is
qualified by reference to the written opinion of NTB set forth in Annex E to
this proxy statement.
NTB as part of its investment banking business, is regularly engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive bidding, secondary
distributions of listed and unlisted securities, private placements, and
valuations for estate, corporate and other purposes. ANI selected NTB as its
financial advisor because it is an investment banking firm that has expertise in
transactions similar to the Stock Purchase Agreement.
NTB has provided certain investment banking services to ANI or NFLI for
which it has been paid fees, including acting as co-managing underwriter for an
offering of NFLI securities in 1995. Other than the engagement as herein
described, NTB has not been engaged by ANI or its affiliates in any underwriting
and/or investment banking capacity during the prior two year period. In the
ordinary course of its business, NTB may trade in ANI's long or short position
in ANI's securities.
Pursuant to a letter agreement dated January 24, 2001, ANI engaged NTB to
render an opinion as to the fairness from a financial point of view of the
proposed Stock Purchase Agreement and the consideration to be paid to ANI. In
consideration for NTB's rendering of its opinion, ANI paid NTB a fee of $16,750
prior to the delivery of the opinion to ANI, $16,750 to be paid upon delivery of
the opinion letter with an additional $16,500 to be paid upon consummation of
the transaction. ANI has also agreed to indemnify and hold harmless NTB and its
affiliates and any director, employee or agent of NTB or any of its affiliates
for certain losses, claims, damages, expenses and liabilities relating to or
arising out of services provided by NTB as financial advisor to ANI, unless
caused by NTB's bad faith or negligence. The terms of the fee arrangement
between NTB and ANI were negotiated at arm's length, and the board of directors
of ANI was informed of such fee arrangement.
-16-
NTB's opinion was provided to the ANI Board at a board meeting held on
February 7, 2001. The discussion regarding the NTB opinion was held during an
approximate period of one hour. The Board considered the analyses that provided
the basis for NTB's opinion. The Board did not make any specific inquiries into
the matters supporting the analysis and opinion of NTB. The Board believes that
the purchase price to be received for the Sale is fair and recommends the sale
of NFLI. In making this determination, the Board considered the terms of the
$5,000,000 note. Although the Board did not make any specific assumptions
regarding payment of the note, terms of the note were discussed with the NTB
representative and the Board considered the risk of non-payment in making its
decision that the purchase price for the Sale is fair. NTB also considered the
risk of collectability of the note in NTB's assessment of the fairness of the
Sale. In making their overall assessment, NTB considered the terms of the note
to be made to ANI, Everest's plans to obtain a secured loan superior in rights
to the note to be made to ANI and NFLI's ability to service the debt on a going
forward basis.
Subsequent to the Board making its fairness determination, ANI filed with the
SEC its Quarterly Report for the quarter ended December 31, 2000. The Quarterly
Report is attached as Annex A-2 to this Proxy Statement. The Board has reviewed
this Quarterly Report. In addition to the review of the Quarterly Report, the
Board has considered whether there are other developments or market changes
which would cause the Board to determine the purchase price to be paid in the
Sale is unfair. The Board has concluded that the value of the consideration to
be paid is fair and has confirmed its recommendation, based on current events,
that the Sale be approved.
Interest of ANI's Officers and Directors in the Sale
In considering the recommendation of the Board in approving the stock
purchase agreement, you should be aware that certain members of ANI's management
have interests in the Sale that are in addition to the interests of shareholders
of ANI generally. The Board was aware of these interests and considered them,
among other matters, in approving the stock purchase agreement.
It is a condition of closing of the stock purchase agreement that David P.
Bertrand and Jana B. Mitcham continue as officers of NFLI and enter into
employment agreements with NFLI. Mr. Bertrand and Ms. Mitcham are co-founders of
NFLI and have served in management of NFLI since its founding in 1983. Mr.
Bertrand is also Vice Chairman of the Board and a Director of ANI and Ms.
Mitcham is Secretary and Director of ANI. Mr. Bertrand and Ms. Mitcham plan to
resign their positions with ANI if the Sale is completed.
Everest has provided to Mr. Bertrand and Ms. Mitcham general terms of an
employment agreement, with the expectation that employment agreements between
each of them and NFLI will be entered into on or before the closing. Mr.
Bertrand and Ms. Mitcham have agreed to these terms. Both persons will be
employed for three year terms, with possible renewal for an additional two year
term. Mr. Bertrand and Ms. Mitcham will receive annual salaries of $250,000 and
$200,000, respectively, and each of them will receive a car allowance of $1,000
per month. They will be entitled to participate in a management bonus program in
amounts to be determined. Mr. Bertrand will continue to serve as President of
NFLI and Ms. Mitcham will continue to serve as Executive Vice President of NFLI.
At closing of the Sale, each of Mr. Bertrand and Ms. Mitcham will receive rights
to acquire four percent of the outstanding stock of NFLI. There will be
termination provisions in their employment agreement, with severance to be paid
based on whether the termination is "no-fault." If there is a no-fault
termination by NFLI within the first twelve months of the term, the officer will
receive severance of twelve months' pay, six months'
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severance pay would be received for termination during the second twelve months
of the term and three months' severance pay would be received for termination
within the third twelve month period of the term. Both employment agreements
will include a one year non-compete provision. Mr. Bertrand and Ms. Mitcham will
be entitled to a continuation of the split dollar key man life insurance
coverage now in existence, subject to their continued employment by NFLI.
None of the officers and directors of ANI or NFLI is currently a party to any
employment agreement or severance agreement with either ANI or NFLI.
Accordingly, neither ANI or NFLI is obligated to make any change in control or
severance payments to any of its officers and directors in connection with the
Sale.
Accounting Treatment
The proposed Sale will be accounted for as a sale of the subsidiaries being
disposed of by ANI for the fair market value of the consideration received by
ANI, consisting of cash at closing and a note payable over a ten year
amortization with quarterly payments for three years, at which time the
remaining balance on the note is due.
Additional consideration may be received by ANI of up to $750,000, based upon
the future operating results of NFLI's recently established Japanese subsidiary.
The earnout amount will be based upon fifty percent of the annual EBITDA (as
defined in the Agreement) of the Japanese operation in excess of any aggregate
capital contributions (as defined in the Agreement) made to the Japanese
subsidiary by the purchaser. ANI will account for any such earnout payments as
income, only to the extent and when they are determined to be earned.
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 $2,700,000 is being 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.
Upon approval for the sale of NFLI by the ANI's shareholders, financial
statements subsequently issued by ANI which include the results of NFLI would be
restated to reflect the historical results of NFLI as a discontinued operation.
Federal Income Tax Consequences
We do not expect that there will be any significant tax consequences
resulting from the proposed Sale because our tax basis in the subsidiaries to be
sold is greater than or equal to the "fair market value" of the total
consideration being received by us.
The Stock Purchase Agreement
The following is a brief summary of material provisions of the Stock Purchase
Agreement. A copy of the Stock Purchase Agreement is attached as Annex B and is
incorporated herein by reference. We urge all of the ANI shareholders to read
the Stock Purchase Agreement in its entirety for a more complete description of
the terms and conditions of the proposed Sale.
Representations and Warranties
Under the Stock Purchase Agreement, all of the stock of NFLI will be sold to
Everest. Unless the parties agree otherwise, the closing of the Sale will take
place as soon as practicable, but no later than one business day after all
closing conditions have been satisfied or waived, unless the Stock Purchase
Agreement has been terminated. The Stock Purchase Agreement contains
representations and warranties of ANI that are customary for a transaction of
this nature relating to, among other things:
. NFLI's organization, capitalization and authority to enter into the Stock
Purchase Agreement;
. The enforceability of the Stock Purchase Agreement as a binding obligation
of ANI;
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. Any conflicts between the Stock Purchase Agreement and any of ANI's other
material contracts, any law, or any of ANI's charter or bylaw provisions;
. The accuracy of NFLI's financial statements;
. Material liabilities or obligations incurred by NFLI since September 30,
2000, other than in the ordinary course of business;
. Indebtedness and absence of undisclosed liabilities;
. The absence of material litigation;
. Compliance with laws;
. Employee benefit and labor matters;
. Insurance;
. Environmental matters;
. Intellectual property matters;
. Material contracts;
. The absence of any material adverse change in the business of NFLI since
September 30, 2000;
. Brokers and finders in connection with the Sale; and
. Regulatory matters.
The Stock Purchase Agreement also includes representations and warranties by
Everest as to:
. Everest's organization and authority to enter into the Stock Purchase
Agreement;
. Enforceability of the Stock Purchase Agreement as a binding obligation of
Everest;
. The accuracy of Everest's financial statements;
. The absence of litigation;
. Tax matters;
. Material liabilities or obligations incurred by Everest since September
30, 2000;
. Brokers and finders in connection with the Sale; and
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. Availability of funds to complete the Sale transaction.
Conduct of NFLI's Business.
ANI has agreed that prior to the Sale, NFLI will operate its business
consistent with past practices and use best efforts to maintain and preserve its
business organization intact, retain its present key employees and maintain its
relationships with suppliers, customers and others having business relations
with it. ANI has also agreed that it will not solicit, initiate, or encourage
any inquiries or proposals from any person other than Everest relating to any
transaction involving the sale of the business or assets (other than in the
ordinary course of business) of NFLI, or a merger, consolidation or business
combination or similar transaction involving NFLI.
General Conditions to Closing.
The obligations of each party to complete the Sale are subject to the
following conditions:
. The shareholders of ANI shall have approved the proposal in this proxy
statement;
. No action or proceeding shall have been instituted or threatened to
restrain or prohibit the completion of the Sale;
. All consents and approvals in connection with the Stock Purchase Agreement
shall have been obtained;
. David P. Bertrand and Jana B. Mitcham shall have entered into employment
agreements with NFLI in accordance with terms agreed upon by ANI and NFLI;
. Bactolac and NFLI shall have entered into a supply agreement in accordance
with terms agreed upon by ANI and NFLI; and
. ANI shall have received the written consent of its senior lender, General
Electric Capital Corporation, to the Sale.
Additional Conditions to Obligations of ANI
ANI's obligations to complete the Sale are subject to certain additional
conditions including:
. The accuracy of the representations and warranties of Everest as of the
date of the Stock Purchase Agreement and as of the date of closing;
. Everest's performance in all material respects of each of the obligations
it has agreed, under the Stock Purchase Agreement, to perform prior to the
closing, and delivery to ANI of a certificate to that effect;
. The absence of any event or circumstances with respect to Everest which
would constitute a material adverse effect as defined in the Stock
Purchase Agreement;
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. Receipt by ANI of the opinion of its financial advisor to the effect that
the Sale is fair from a financial point of view to ANI's shareholders;
. The transfer of the Bactolac stock from NFLI to ANI; and
. The receipt by ANI's subsidiary, Bactolac, of a promissory note for
$650,000, payable one year and one day following the closing date with
interest at the rate of prime plus one-half of one percent.
Additional Conditions to Obligations of Everest
Everest's obligations to complete the Sale are subject to certain additional
conditions, including:
. The accuracy of the representations and warranties of ANI as of the date
of the Stock Purchase Agreement and as of the date of closing;
. ANI's performance in all material respects of each of the obligations it
has agreed, under the Stock Purchase Agreement, to perform prior to the
closing, and delivery to Everest of a certificate to that effect;
. The absence of any event or circumstance with respect to NFLI which would
constitute a material adverse effect, as defined in the Stock Purchase
Agreement;
. Everest's receipt of resignation letters of all officers and directors of
NFLI other than David P. Bertrand and Jana Mitcham.
Supply Agreement
Bactolac currently supplies nutritional products to NFLI and it is planned
that this relationship will continue after closing of the Sale. It is a
condition to closing for both ANI and Everest that a supply agreement be
completed between NFLI and Bactolac which would provide for a continuation of
product sale prices in effect at December 31, 2000 (except for raw material
price increases exceeding 5%) and for Bactolac to provide quotes on new products
on substantially equivalent pricing structure terms and assumptions. The supply
agreement will be for a one year term, with subsequent annual renewals unless
cancelled by either party.
Termination; Termination Fees
The Stock Purchase Agreement may be terminated at any time prior to
completion of the Sale, whether before or after approval by the ANI
shareholders, by the mutual consent of the parties to the Stock Purchase
Agreement. In addition, the Stock Purchase Agreement may be terminated if a
party is in material breach of the Stock Purchase Agreement, and such breach has
not been cured.
In the event of termination, Everest shall pay a termination fee to ANI in
the amount of all escrowed funds together with all interest thereon held by the
escrow agent. Everest has deposited
-21-
$250,000 into an escrow account. Everest also agreed that, if the Sale was not
completed by February 27, 2001, Everest would deposit an additional $100,000
into the escrow account (and such $100,000 has been deposited) and would make
additional deposits of $100,000 every 30 days after February 27, 2001 if the
sale was not completed by those dates. If the Sale is completed, the amounts
deposited by Everest will be paid at closing to ANI and credited against the
cash portion of the purchase price. If the Sale is not completed, the escrowed
funds will be delivered to ANI, which will constitute a liquidated damage
payment to ANI and ANI will not be entitled to make other claims for damages.
The termination fee will not be paid to ANI if the Stock Purchase Agreement is
terminated for any of the following reasons:
. A material breach is made by ANI of the representations and warranties
contained in the Stock Purchase Agreement or there is a material default
in the performance of ANI's obligations. "Material" is defined as the
occurrence or existence of an event or condition with a magnitude, effect
or consequence of at least $500,000;
. Certain closing conditions are not satisfied, including Everest's receipt
of the resignations of all officers and directors of NFLI other than Mr.
Bertrand and Ms. Mitcham, employment agreements with Ms. Bertrand and Mrs.
Mitcham and a supply agreement between NFLI and Bactolac, unless any of
the conditions were not satisfied due to unreasonable acts or inaction by
Everest; or
. Closing of the Sale shall not have occurred on or before June 1, 2001
through no fault of Everest.
If any of the foregoing conditions occur, the escrowed funds will be returned
to Everest and not paid to ANI. In the event of termination by Everest due to a
material breach by ANI or a material default, which remains uncured, ANI may be
liable to Everest for damages up to $250,000.
Indemnification; Arbitration
The Stock Purchase Agreement contains cross-indemnification provisions for
breaches of the Stock Purchase Agreement for claims brought within twelve months
after the closing date. No claim may be brought unless the result of all
breaches exceeds $150,000. The parties have agreed to arbitrate any disputes.
If an arbitration award is issued in favor of Everest, Everest will have the
right to set off any amount to which it may be entitled under the
indemnification provisions against amounts otherwise payable under the
promissory note.
Amendment and Waiver
The Stock Purchase Agreement may be amended by the parties at any time
prior to the closing of the Sale. Any amendment must be in writing signed by
all the parties. Once ANI's shareholders have voted to approve the Stock
Purchase Agreement, however, no party may make an amendment to the Stock
Purchase Agreement which would require the further approval of ANI's
shareholders.
Prior to the consummation of the Sale, any party may:
-22-
. Extend the time given for the performance of any of the obligations or
other acts of the other parties;
. Waive any inaccuracies in the representations and warranties of the other
parties contained in the Stock Purchase Agreement; and
. Waive compliance by the other parties with any of the agreements or
conditions contained in the Stock Purchase Agreement.
Rights of Dissenting Shareholders
Shareholders will have the right to exercise dissenters' rights with respect
to the proposed Sale. Pursuant to Articles 5.12 and 5.13 of the TBCA (the
"Dissenters' Statute"), holders of record of Company common stock who object to
the proposed Sale and who follow the procedures prescribed by the Dissenters'
Statute will be entitled to receive a cash payment equal to the "fair value" of
the shares of stock held by them. Set forth below is a summary of the procedures
holders of common stock must follow in order to exercise dissenters' rights
under the TBCA. This summary does not purport to be complete and is qualified in
its entirety by reference to the Dissenters' Statute (a copy of which, as of the
date hereof, is attached to this proxy statement as Appendix D) and to any
amendments to, or modifications of, such provisions as may be adopted after the
date hereof. Any shareholder contemplating the possibility of objecting to the
proposed Sale should carefully review the text of Appendix D (particularly the
specified procedural steps required to perfect their dissenters' rights) and
should consult as appropriate with such holder's legal counsel. These rights
will be lost if the procedural requirements of the Dissenters' Statute are not
fully and precisely satisfied.
Under the Dissenters' Statute, any shareholder who files with the Company,
prior to the meeting, a written objection to the proposed action and stating
that the shareholder will exercise its right of dissent if the action is
effective and who complies with the other applicable procedural requirements of
the Dissenters' Statute, shall be entitled, if the proposed Sale is consummated,
to receive a cash payment of the fair value of such shares. However, a
shareholder who votes such holder's stock against approval of the proposed Sale
will not, solely by virtue of such vote, satisfy the notice requirement referred
to above. Further, because an executed proxy card will be voted "FOR" the
proposed Sale unless otherwise specified, a shareholder returning a signed but
unmarked proxy card will waive his or her right to dissent from the proposed
Sale.
Written notices of the intent to exercise dissenters' rights must be sent to
the Company at 9101 Jameel, Suite 180, Houston, Texas 77040, Attn: John R.
Brown, Jr., prior to the taking of the vote at the annual meeting. A HOLDER OF
COMMON STOCK WHO DOES NOT SATISFY EACH OF THE REQUIREMENTS OF THE DISSENTERS'
STATUTE WILL NOT BE ENTITLED TO EXERCISE ANY RIGHTS OF DISSENT UNDER THE
PROVISIONS OF THE TBCA.
No later than ten days after the proposed Sale is effected, we must deliver
or mail to each dissenting shareholder written notice that the action has been
effected and the shareholder may, within ten days from the delivery or mailing
of such notice, make written demand on the Company
-23-
for the payment of the "fair value" of such shareholder's shares. The demand
must state the number and class of shares owned by the shareholder and the "fair
value" of the shares as estimated by the shareholder. Any shareholder failing to
make demand within the ten day period shall be bound by the Company's action.
Not later than twenty days after making such written demand, each holder of
stock who exercised dissenters' rights must submit to us the certificate or
certificates representing such holder's shares of stock for notation thereon
that such demand has been made. Upon making a demand for value, a holder of
stock shall have no rights in the Company by virtue of holding such shares,
other than the right to receive fair value for such shares.
Within twenty days after receipt by us of a demand for payment made by the
dissenting shareholder, we shall either accept the amount claimed in the demand
or provide the shareholder with our estimate of the "fair value" of the shares,
in either case, along with an offer to pay either the agreed or offered amount
within ninety days after the date on which the action was effected (upon the
surrender of any certificates representing such shares, duly endorsed).
If within sixty days after the date on which the corporate action was
effected, the value of the shares is agreed upon between the shareholder and us,
payment shall be made within ninety days after the date the action was effected
(upon the surrender of any stock certificates, duly endorsed). If the Company
and shareholder do not so agree within such sixty day period, then either party
may, within sixty days after the expiration of such sixty day period, seek a
judicial determination of the fair value of the shareholder's shares. The court
shall then determine which shareholders have properly complied with the
provisions of Article 5.12 and shall appoint one or more qualified appraisers to
determine that value.
The term "fair value" as used in the Dissenters' Statute will be determined
as of the day prior to the day of the annual meeting and will exclude any
appreciation or depreciation resulting from the proposed Sale.
Unaudited Pro Forma Consolidated Financial Statements
The following unaudited pro forma consolidated financial statements give
effect to the Sale by ANI of the outstanding capital stock of NFLI, which is
anticipated to close as soon as practical following approval by ANI's
shareholders and approval by ANI's senior lender. The unaudited pro forma
consolidated financial statements give effect to the estimated terms of the
transaction, including the estimated cash portion of the purchase price as well
as the note to be issued as part of the consideration, but do not give effect to
any amounts which may be paid in the future under an earn-out based upon future
operations of NFLI Japan. Such earn-out amounts would be recorded as income at
which future time, collection of such amounts would be assured. The pro forma
statements for the year ended September 30, 2000, also give effect to the
acquisitions of Bactolac, ASH and Advanced Nutraceuticals, Inc. ("Old-ANI") as
though such acquisitions had occurred as of the beginning of the year ended
September 30, 2000. These pro forma consolidated financial statements are based
on the historical financial statements of ANI, included in the Annual Report
(Annex A-1 to this proxy statement), Form 10-Q/A for the quarterly period ended
December 31, 2000 (Annex A-2 to this proxy statement) as well as Form 8-K/A
(Annex A-3 to this proxy statement) dated January 31, 2000, covering the
acquisitions of Bactolac, ASH and Old-ANI, and the estimates and assumptions set
forth below and in the notes to the unaudited pro forma consolidated financial
statements. The unaudited pro forma consolidated balance sheet gives effect to
the Sale as if it had occurred on December 31, 2000. The unaudited pro forma
consolidated statements of operations for
-24-
the year ended September 30, 2000 and for the three months ended December 31,
2000 give effect to the transactions as if they had occurred on October 1, 1999.
For financial reporting purposes, management of ANI is unable to determine
that it is probable 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 $2,700,000 is being 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.
A definitive agreement was signed for the sale of NFLI which was approved by
the Board of Directors, but which is subject to approval by the Stockholders of
ANI. Upon approval by the Stockholders, any subsequently issued ANI historical
consolidated financial statements and related notes thereto will be restated to
present the operations of NFLI as a discontinued operation. NFLI is not expected
to incur any significant losses from December 31, 2000 through closing and the
Sale is not expected to result in a loss to ANI.
The pro forma adjustments are based on estimates, available information and
certain assumptions and may be revised as additional information becomes
available. The unaudited pro forma consolidated financial data presented herein
does not purport to represent what the Company's financial position or results
of operations would have actually been had such Sale or the acquisitions of
Bactolac, ASH and Old-ANI, occurred on the assumed dates or to project the
Company's financial position or results of operations for any future period. The
unaudited pro forma consolidated financial statements should be read in
conjunction with the historical financial statements and notes thereto included
in the Annual Report and Form 10-Q/A for the quarterly period ended December 31,
2000 as well as the Form 8-K/A dated January 31, 2000, covering the acquisitions
of Bactolac, ASH and Old-ANI.
-25-
Advanced Nutraceuticals, Inc.
Unaudited Pro Forma Balance Sheet
December 31, 2000
Pro Forma Adjustments - DR (CR)
------------------------------------------- Pro Forma
ANI Ref. Amount Ref. Amount Adjusted
---------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 915,259 2 $ (448,565) 3 $ 3,445,000 $ 3,911,694
Restricted cash 101,266 2 (101,266) - -
Trade accounts receivable, net 5,707,689 2 (596,431) - 5,111,258
Inventories 7,130,203 2 (5,131,911) - 1,998,292
Net assets of NFLI operation - 2 5,601,714 5 (5,601,714) -
Deferred tax asset, net 1,707,000 2 (908,000) - 799,000
Prepaid expenses and other assets 778,150 2 (665,139) 3 500,000 613,011
----------- ----------- --------------------------------
Total current assets 16,339,567 (2,249,598) (1,656,714) 12,433,255
Property and equipment, net 13,977,154 2 (4,479,924) - 9,497,230
Intangible assets, net 9,163,805 2 (62,000) - 9,101,805
Notes receivable - - 3 1,826,714 1,826,714
Other assets 557,708 2 (461,043) - 96,665
----------- ----------- --------------------------------
Total assets $40,038,234 $(7,252,565) $ 170,000 $32,955,669
=========== =========== ================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,291,729 2 $ 2,830,908 $ - $ 2,460,821
Accrued distributor bonuses 934,421 2 934,421 - -
Deferred income 283,855 2 172,744 - 111,111
Accrued expenses and other 1,978,247 2 1,468,778 3 (170,000) 679,469
Credit facility 6,084,294 2 1,089,492 - 4,994,802
Current portion of installment obligations 942,689 2 756,222 - 186,467
Current portion of long-term debt 3,850,053 - - 3,850,053
----------- ----------- --------------------------------
Total current liabilities 19,365,288 7,252,565 (170,000) 12,282,723
----------- ----------- --------------------------------
Deferred tax liability 2,807,000 - - 2,807,000
Long-term debt 500,000 - - 500,000
----------- ----------- --------------------------------
Total liabilities 22,672,288 7,252,565 (170,000) 15,589,723
----------- ----------- --------------------------------
Stockholders' Equity:
Common stock 80,198 - - 80,198
Additional paid-in capital 17,936,253 - - 17,936,253
Retained earnings (deficit) (683,909) - - (683,909)
Accumulated other comprehensive income 33,404 - - 33,404
----------- ----------- --------------------------------
Total stockholders' equity 17,365,946 - - 17,365,946
----------- ----------- --------------------------------
Total liabilities and stockholders' equity $40,038,234 $ 7,252,565 $ (170,000) $32,955,669
=========== =========== ================================
See accompanying Headnote and Notes to Pro Forma
Consolidated Financial Statements.
- 26 -
Advanced Nutraceuticals, Inc.
Unaudited Pro Forma Statement of Operations
Three Months Ended December 31, 2000
Pro Forma
Adjustments - DR (CR)
-------------------------- Pro Forma
ANI Ref. Amount Adjusted
---------------------------------------- -----------
Net sales $16,653,997 2 $ 11,732,350 $ 4,921,647
Cost of sales 11,011,657 2 (7,594,869) 3,416,788
----------- ------------ -----------
Gross profit 5,642,340 4,137,481 1,504,859
General and administrative exp. 5,075,615 2 (3,743,375) 1,332,240
----------- ------------ -----------
Operating income 566,725 394,106 172,619
Other income (expense): (248,192) 2 (10,786) (237,406)
----------- ------------ -----------
Income (loss) from operations
before income tax expense 318,533 383,320 (64,787)
Income tax expense (benefit) (264,389) 2 (289,389) 25,000
----------- ------------ -----------
Net income (loss) $ 582,922 $ 672,709 $ (89,787)
=========== ============ ===========
Net income (loss) per share:
Basic and Diluted $ 0.07 $ (0.01)
=========== ===========
Shares used in computing
net income (loss) per share :
Basic 8,109,865 6 8,109,865
=========== ===========
Diluted 8,113,136 6 8,113,136
=========== ===========
See accompanying Headnote and Notes to Pro Forma
Consolidated Financial Statements.
-27-
Advanced Nutraceuticals, Inc.
Unaudited Pro Forma Statement of Operations
Year Ended September 30, 2000
Pro Forma Adjustments - DR (CR)
------------------------------------------------------ Pro Forma
ANI Ref. Amount Ref. Amount Adjusted
--------------------------------------------------------------------------------------
Net sales $69,258,328 2 $ 53,190,439 4 $(2,694,000) $18,761,889
Cost of sales 48,320,748 2 (37,750,401) 4 2,362,000 12,932,347
----------- ------------ --------------------------------
Gross profit 20,937,580 (15,440,038) 332,000 5,829,542
General and administrative exp. 24,556,847 2 (19,829,044) 4 686,000 5,413,803
----------- ------------ --------------------------------
Operating income (loss) (3,619,267) 4,389,006 (354,000) 415,739
Other income (expense): (1,042,064) 2 498,336 4 85,000 (628,728)
----------- ------------ --------------------------------
Income (loss) from operations
before income tax expense (4,661,331) 4,887,342 (439,000) (212,989)
Income tax expense (benefit) (657,000) 2 917,000 4 (65,000) 195,000
----------- ------------ --------------------------------
Net income (loss) $(4,004,331) $ 3,970,342 $ (374,000) $ (407,989)
=========== ============ ================================
Net income (loss) per share:
Basic and Diluted $ (0.52) $ (0.05)
=========== ===========
Shares used in computing
net income (loss) per share :
Basic and Diluted 7,713,750 6 296,949 8,010,699
=========== =========== ===========
See accompanying Headnote and Notes to Pro Forma
Consolidated Financial Statements.
-28-
Advanced Nutraceuticals, Inc.
Notes To Pro Forma Consolidated Financial Statements (Unaudited)
Note 1 - General
The unaudited pro forma consolidated balance sheet as of December 31, 2000,
assumes that the Sale was consummated as of December 31, 2000 and the unaudited
pro forma consolidated statements of operations for the year ended September 30,
2000 and for the three months ended December 31, 2000 assumes that the Sale was
consummated as of October 1, 1999. The pro forma unaudited statement of
operations for the year ended September 30, 2000, also give effect to the
acquisitions of Bactolac, ASH and Old-ANI, as though such acquisitions had
occurred as of the beginning of the year ended September 30, 2000. The pro forma
adjustments only give effect to amounts that are directly attributable to the
Sale and acquisition transactions.
Note 2 - NFLI Operations
Adjustments to remove from the balance sheet the individual amounts of assets
and liabilities associated with the NFLI entities being sold. Also to delete
the amounts representing the items of revenue and expense associated with the
NFLI entities being sold from the statements of operations.
Note 3 - Sale of NFLI
Under the terms of the definitive agreement signed on December 29, 2000, ANI has
agreed to sell to Everest International, L.L.C., a privately held entity, all of
the outstanding capital stock of NFLI and its subsidiaries engaged in the
network marketing business. The agreement provides for $5 million in cash at
closing, subject to a working capital adjustment and a $5 million, prime plus
one-half percent note, payable based upon a ten-year amortization with quarterly
payments for three years and final balloon payment at the end of the third year.
The working capital adjustment as defined in the agreement, will be based upon
an adjusted working capital calculation using $1,000,000 as a base figure. If at
closing the computation yields more or less than $1,000,000, the purchase price
will be adjusted accordingly. It is currently unknown what adjustment, if any
may be made at closing, as this will depend upon a number of factors, primarily
future operations of NFLI. The note will be an obligation of NFLI and
subordinate to the purchaser's secured lender and will be without recourse to
the purchaser. Accordingly, collectability of the note will depend upon the
success of operations of NFLI after the closing of the sale, including NFLI's
ability to service its debt with its senior lender. 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 $2,700,000 is being 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. In addition, Bactolac
Pharmaceutical, Inc. (a subsidiary of ANI) will receive a $650,000 note
representing a currently outstanding inter-company liability, due one year and a
day from closing. The following summarizes the sale amounts had closing occurred
based upon the NFLI balance sheet as of December 31, 2000:
-29-
Note receivable portion to be received at closing (of which
$500,000 is to be collected within next twelve months) $ 5,000,000
Valuation allowance being established against face amount of Note,
due to estimated insufficient operating cash flow to pay balloon
payment (2,673,286)
-----------
Net carrying value of Note for financial reporting purposes $ 2,326,714
Cash portion at closing:
"Working capital" computed as defined under agreement (deficit) $ (275,000)
Base amount required under the agreement (1,000,000)
-----------
Adjustment to cash portion of price (1,275,000)
Cash portion of price 5,000,000
-----------
Adjusted pro forma cash amount as computed 3,725,000
Estimated transaction expenses payable at closing (280,000)
===========
Net cash at closing 3,445,000
----------
Total proceeds as computed 5,771,714
Less estimated transaction expenses payable after closing (170,000)
----------
Revised total 5,601,714
Financial reporting basis in net assets being disposed 5,601,714
----------
Financial reporting gain on sale $ -
==========
Note 4 - Acquisitions
Adjusts the pro forma unaudited statement of operations for the year ended
September 30, 2000 to also give effect to the acquisitions of Bactolac, ASH and
Old-ANI, as though such acquisitions had occurred as of the beginning of the
year.
Note 5 - Net Assets of NFLI Operations
Removes net assets relating to entities being sold from the balance sheet.
Note 6 - Net Income (Loss) Per Share
Adjusts average shares outstanding (basic and diluted) for the year ended
September 30, 2000 to record the additional shares issued for the acquisitions
of Bactolac, ASH and Old-ANI, as though the acquisitions had occurred as of the
beginning of the fiscal year.
On a pro forma basis, the effect of outstanding options and warrants are
presented where applicable, but they have no affect on the rounded computation
of diluted pro forma adjusted income per share.
-30-
Proposal 3: Approval of Reverse Stock Split at the Discretion of the Board
Introduction
You are asked to consider granting to the Board discretionary
authority to implement proposals to amend the Company's Articles of
Incorporation and to effect a (i) one-for-three (1:3), (ii) one-for-four (1:4),
or (iii) one-for-five (1:5) split of the Company's common stock (the "Reverse
Splits"). Approval of the alternative proposals would give the Board
discretionary authority to implement any one or none of the Reverse Splits
through December 31, 2001.
Vote Required
The affirmative vote of two-thirds of the outstanding shares of common
stock entitled to vote at the annual meeting is required for approval of the
discretionary authority to the Board to effect the Reverse Splits.
The Board of Directors recommends a vote FOR granting the Board
discretion to effect the Reverse Splits.
Purpose
Our common stock was traded on the National Market System of the
Nasdaq Stock Market until March 20, 2001. On that date the Nasdaq listing for
our common stock was transferred to the Nasdaq SmallCap Market pursuant to an
exception to the Nasdaq minimum bid price requirement of $1.00 per share. Nasdaq
has informed us that in order to maintain this listing we must file a proxy
statement with the SEC and Nasdaq evidencing our intent to seek shareholder
approval for a reverse stock split sufficient to evidence a closing bid price of
at least $1.00 per share. In addition, on or before May 18, 2001, we must
demonstrate a closing bid price of at least $1.00 per share and, immediately
thereafter, a closing bid price of at least $1.00 per share for a minimum of ten
consecutive trading days. If we fail to comply with these terms, our common
stock will be delisted from Nasdaq. We have requested from Nasdaq an extension
of this deadline to June 1, 2001 to accomodate the Annual meeting. On April 26,
2001 the closing bid price of our common stock was $.29.
The Board believes that a delisting could adversely affect our ability
to attract new investors, may result in decreased liquidity and, consequently,
could reduce the trading price and increase the transaction costs involved in
trading the shares.
The Board believes a reverse split may be helpful in satisfying
Nasdaq's minimum bid price requirement of $1 per share and that Nasdaq may be
more receptive to continue the listing of our stock if the Board has the
authority to quickly implement one of the Reverse Splits.
Even though a reverse split, by itself, does not impact a
corporation's assets or prospects, reverse stock splits can result in a decrease
in the aggregate market value of a corporation's equity capital. The reverse
split will result in fewer shares outstanding, which could have a negative
effect on the trading volume in our common stock. In addition, there is
sometimes negative investor psychology associated with a reverse stock split.
The Board believes that this risk is offset by the prospect that the reverse
stock split may, by increasing the per share price, make an investment in our
common stock more attractive for certain investors. If the common stock were no
longer trading on Nasdaq, trading would be
-31-
conducted in the over-the-counter market, either on the over-the-counter
bulletin board system operated by Nasdaq, or through the "pink sheets." In such
event, an investor could find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of our stock. In addition, if the
common stock were not trading on Nasdaq and the trading price was below $5 per
share, trading could also be subject to certain SEC rules which require
additional disclosure by broker-dealers in connection with any trades involving
a stock defined as a penny stock. The additional burdens imposed upon broker-
dealers by such requirements could discourage them from effecting transactions
in our stock, which could severely limit the liquidity of our stock and the
ability of investors to trade in the stock.
The purpose of the Reverse Splits is to increase the market value of
our stock. The Board intends to effect the reverse split only if it believes
that a decrease in the number of shares outstanding may improve the trading
market for our stock. If any of the Reverse Splits are authorized by the
shareholders, the Board will have the discretion to implement only one during
calendar year 2001 or effect no reverse stock split at all. The Board has
submitted three proposals in order to give it latitude. If the trading price of
the common stock increases without a reverse split, a reverse split may not be
necessary, or one of lesser proportions would be required if the trading price
decreased or remains constant. The Board has requested authority through the
end of this calendar year to provide it with latitude to consider a
reapplication for listing on Nasdaq if our common stock is delisted in May.
In connection with any determination to effect a reverse split, the
Board will also select the reverse split that, in its discretion, is believed to
result in the greatest marketability of the common stock based on prevailing
market conditions and the outcome of the hearing and any other proceedings or
discussions with Nasdaq. No further action on the part of the shareholders
would be required to either effect one of the Reverse Splits or to determine not
to effect any of the Reverse Splits. If one of the Reverse Splits is not
effected by December 31, 2001, the Board's authority to effect a reverse split
will terminate.
Effect On Authorized and Available Shares
The Board is not requesting a reduction in the number of the Company's
authorized shares of common stock in connection with the reverse stock split.
Accordingly, there will remain 20,000,000 common shares authorized. There are
currently 8,107,895 Common shares outstanding and 3,927,327 shares (including
the 1,000,000 share under Proposal 5 in this Proxy statement) issued or
reserved for issuance pursuant to outstanding option plans and warrants and
1,144,370 shares reserved for issuance under the Bactolac and ASH earnout
agreements. The total remaining number of unissued and unreserved shares which
would be available for future issuances by the Board without further shareholder
approval in the event of the Reverse Splits would be: 15,606,833 if the Board
decides to effect the 1:3 stock split, 16,705,124 if the Board decides to effect
the 1:4 stock split, or 17,364,099 if the Board decides to effect the 1:5 stock
split.
-32-
Proposal 4: Approval of Amendment to the Articles of Incorporation to Decrease
the Required Vote for Certain Extraordinary Actions
Introduction
The Company is incorporated in Texas and is governed by the Texas
Business Corporation Act (the "TBCA"). A vote of two-thirds of the outstanding
shares is required for certain extraordinary actions, unless the Articles of
Incorporation provide otherwise. Under the TCBA, the vote for these matters may
be reduced to a majority of the outstanding shares. These matters include
amendments to the Articles of Incorporation, a plan of merger or a plan of share
exchange, a transaction involving a sale, lease, exchange, or other disposition
of all, or substantially all, the property and assets of a corporation, with or
without its goodwill, otherwise than in the usual and regular course of
business, and a proposal to dissolve the corporation. The Board believes that
it would be desirable to amend the Articles of Incorporation to reduce the
percentage approval required from two-thirds to a majority, as permitted by the
TBCA. The proposed amendment will be submitted substantially as follows:
When, with respect to any action to be taken by holders of the capital
stock of this Corporation, the Texas Business Corporation Act or any
successor act requires the vote or concurrence of the holders of two-
thirds of the outstanding shares, such action may be taken by the vote
or concurrence of a majority of such shares.
Vote Required
The affirmative vote of the holders of two-thirds of the outstanding
shares of ANI stock will be necessary to approve the proposal.
The Board of Directors recommends a vote FOR approval of the amendment
to the Articles of Incorporation to decrease the required vote for certain
extraordinary actions.
Advantages of the Amendment
The Board of Directors believes that a lower voting requirement would
be beneficial to the Company because of the difficulties in obtaining a two-
thirds vote for any proposal. The Company's common stock is held by over 1,500
holders of record. The Company believes that the number of beneficial owners
who hold their shares through brokerage or other nominee accounts is probably in
the thousands. Moreover, no individual shareholder owns more than 15% of the
Company's common stock, and the common stock is widely distributed. Also, many
shareholders choose not to vote at shareholder meetings. For extraordinary
actions, the vote required is a percentage of the outstanding shares, and not
simply a percentage of the shares represented at a particular meeting. The
Board of Directors believes that the imposition of a very high percentage voting
requirement, such as the two-thirds requirement presently in effect, could be a
substantial hindrance to the future business operations of the Company.
-33-
Disadvantages of the Amendment
If the voting requirement is lower it could be easier to adopt
management proposals that may require shareholder approval, including a takeover
by management, mergers and acquisitions or change of control of ANI.
Proposal 5: Approval of 1995 Stock Option Plan, As Amended
You are asked to consider an amendment of our 1995 Stock Option Plan.
The following is a summary of the proposed amended 1995 Stock Option Plan.
Please refer to Annex F for the full text of the Plan.
Vote Required
The affirmative vote of a majority of the outstanding shares of common
stock entitled to vote at the annual meeting is required for approval of the
Plan.
The Board of Directors recommends a vote FOR amendment of the Plan.
Purpose
The purpose of the Plan is to promote the interests of the Company and
its shareholders by:
. Attracting and retaining key employees;
. Providing participants a significant stake in the performance of
the Company; and
. Providing an opportunity for participants to increase their
holdings of common stock.
Administration
The Plan is administered by the option committee. The option committee
consists of the Board or a committee of the Board, as the Board may from time to
time designate, composed of not less than two members of the Board, each of whom
shall be a director who is not employed by the Company. The option committee
currently consists of the full Board. The option committee has the authority to
select employees and consultants to receive awards, to determine the number of
shares of common stock covered by awards, and to set the terms and conditions of
awards. The option committee has the authority to establish rules for the
administration of the Plan, and its determinations and interpretations are
binding.
-34-
Eligible Participants
. Any employee or officer (including executive officers) of the
Company, including any of its subsidiaries will be eligible for a
stock option grant under the Plan if selected by the option
committee. There are currently approximately 260 employees of the
Company, including its subsidiaries who would be eligible for
option grants under the Plan.
. Any consultant to the Company, including directors, will also be
eligible to receive option grants under the Plan if authorized by
the option committee.
Shares Authorized
Prior to the amendment, there were 2,000,000 shares authorized,
exclusive of specific options grants made in 1995 to purchase up to 85,000
shares. The proposed amendment will increase the authorized shares, exclusive of
specific option grants, to 3,000,000 shares. At April 25, 2001 there were
outstanding options to purchase up to 1,349,339 shares. Option grants to
officers, directors and nominees for directors are described under the caption
entitled, "Security Ownership of 5% Beneficial Owners and Management" (Item 12)
in the Annual Report. In addition, the Board has authorized the grant of options
to purchase up to an additional 1,366,000 shares, including options to the
following officers and directors: John R. Brown, Jr. - 25,000; Jeffrey G.
McGonegal -125,000; F. Wayne Ballenger - 50,000; M.F. Florence - 50,000; Gregory
Pusey -300,000; Pailla M. Reddy - 300,000. Options to employees typically have
vesting periods of three years in annual one-third installments and are
exercisable for ten years. No person may be granted options to purchase more
than 300,000 shares in any fiscal year of the Company. All options granted
pursuant to the Plan were granted at the fair market value of common stock on
the respective dates of grant. If any option grant expires or terminates, all
shares which were not issued under the option grant will become available for
additional awards under the Plan.
Types of Options
The Plan was designed to permit the option committee to grant stock
options that qualify as "incentive stock options" under Section 422 of the
Internal Revenue Code or options that do not so qualify -- "non-incentive stock
options."
All options granted will be subject to the following:
. The exercise price must be paid at the time the option is
exercised in either cash or other shares of common stock.
. The exercise price cannot be less than the fair market value of
the common stock on the grant date.
. The option committee will determine the vesting schedule of
options granted under the Plan and may also impose additional
conditions on exercise, including performance goals.
-35-
. Options are not exercisable for at least six months after they
are granted, and they cannot be exercised more than ten years
after grant.
Federal Income Tax Consequences
The following is a summary of the principal U.S. federal income tax
consequences generally applicable to option grants under the Plan:
. The grant of an option is not expected to result in any taxable
income for the recipient.
. The holder of an incentive stock option generally will have no
taxable income upon exercising the incentive stock option if
certain requirements are met. However, liability may arise for
alternative minimum tax. We will not be entitled to a tax
deduction when an incentive stock option is exercised.
. Upon exercise of a Non-incentive stock option, the holder will
recognize ordinary income equal to the difference between the
fair market value of shares of common stock acquired and the
exercise price. We will be entitled to a tax deduction for the
same amount.
. The tax consequences upon a sale of shares acquired in an
exercise of an option will depend on how long the shares were
held prior to sale, and upon whether such shares were acquired in
the exercise of an incentive stock option or non-incentive stock
option.
. If shares acquired upon exercise of an incentive stock options
are held for at least one year after exercise and two years from
the date that the incentive stock options were granted, the
holder will recognize long-term capital gain or loss in an amount
equal to the difference between the option exercise price and the
sale price of shares. If the shares are not held for that period,
gain on the sale of shares may be treated as ordinary income.
. Any gain realized upon the sale of shares acquired in the
exercise of a non-incentive stock options for an amount greater
than their fair market value on the date of exercise, will be
capital gain and any loss will be capital loss. Generally, there
will be no tax consequences to us in connection with the
disposition of shares acquired in the exercise of an option,
except that we may be entitled to a tax deduction in the case of
a sale of incentive stock option shares before the holding
periods described above have been satisfied.
-36-
Adjustments
Certain corporate transactions or events such as stock splits,
recapitalizations, spin-offs, mergers, etc., may directly affect the number of
outstanding shares and/or the value of the outstanding common stock. If such
transactions occur, the option committee may adjust the number of shares that
may be granted under the Plan, as well as the limits on individual option
grants. The option committee may adjust the number of shares and the exercise
price under outstanding options, and may make other adjustments, which are
thought to be in our best interests.
Transferability
Options granted under the Plan may not be transferred except:
. By will or the laws of descent and distribution; or
. Pursuant to a qualified domestic relations order or the Employee
Retirement Income Security Act.
Amendments
The Board may amend or terminate the Plan at any time. No amendment,
however, may:
. Increase the number of shares reserved for option grants without
shareholder approval;
. Impair the right of a holder under an option previously granted;
or
. Increase the benefits accruing to employees under the Plan.
Term
The Plan will continue until February 28, 2005, unless abandoned or
terminated at an earlier time.
INDEPENDENT PUBLIC ACCOUNTANTS
On September 16, 1999, we engaged Grant Thornton LLP as the principal
accountant to audit our financial statements for the fiscal year ending
September 30, 1999. Accordingly, BDO Seidman LLP was dismissed as of that date.
The decision to change accountants was recommended by the audit committee of the
Board.
BDO Seidman LLP's Report on our financial statements for either of the
two fiscal years ended September 30, 1998 and 1997 did not contain an adverse
opinion or disclaimer of opinion nor was it modified as to uncertainty, audit
scope or accounting principles. We do not believe that there were any
disagreements with BDO Seidman LLP on any matter of accounting principles or
-37-
practices, financial statement disclosure, or auditing scope or procedure,
during those two fiscal years, which, if not resolved to BDO Seidman LLP's
satisfaction, would have caused BDO Seidman LLP to make reference to the subject
matter of the disagreement(s) in connection with its reports. However, during
fiscal 1999, BDO Seidman informed us of the need to evaluate for impairment the
unamortized carrying value of the audio production rights, the balance of which,
as of September 30, 1998 and June 30, 1999 was $1,400,000 and $1,089,000,
respectively. We evaluated such audio production rights for impairment at
September 30, 1999 and continue to evaluate these rights on a periodic basis. We
filed a Report on Form 8-K/A regarding the engagement of Grant Thornton LLP and
dismissal of BDO Seidman LLP on September 27, 1999, which Report on Form 8-K/A
is incorporated by reference.
A representative of Grant Thornton is expected to be present at the
annual meeting and available to respond to appropriate questions. Although the
firm has indicated that no statement will be made, an opportunity for a
statement will be provided. Management has not made an appointment of auditors
for the fiscal year ending September 30, 2001.
Stockholder Proposals For The Next Annual Meeting
Any proposal to be presented at the next annual meeting of
shareholders must be received by us, directed to the attention of the Secretary,
no later than November 30, 2001 in order to be included in our proxy statement
and form of proxy for that meeting.
Where You Can Find More Information
A copy of our Annual Report on Form 10-K/A for the fiscal year ended
September 30, 2000, is attached as Annex A-1 to this proxy statement. A copy of
our Quarterly Report on Form 10-Q/A for the fiscal quarter ended December 31,
2000 is attached as Annex A-2 to this Proxy Statement. A copy of our Form 8-K/A
dated January 31, 2000 is attached as Annex A-3. An additional copy is available
to each record and beneficial owner of our securities without charge upon
written request to the Secretary at 9101 Jameel, Suite 180, Houston, Texas
77040.
Other Matters
The Board of Directors knows of no business that will be presented at
the annual meeting other than that described above. If any matters other than
those referred to above should properly come before the annual meeting, the
persons designated by the Board of Directors to serve as proxies intend to vote
such proxies in accordance with their best business judgment.
By Order of the Board of Directors
Jana B. Mitcham
Secretary
April 27, 2001
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Annex A-1
Form 10-K/A Report
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
X Annual Report Under Section 13 or 15(d) of The Securities Exchange Act
--- of 1934 Fee Required) for the Fiscal Year Ended September 30, 2000
--- Transition Report Under Section 13 or 15(d) of The Securities Exchange
Act of 1934 (No Fee Required) for the Transition Period from ________
to ________
Commission file number 0-26362
ADVANCED NUTRACEUTICALS, INC.
-----------------------------
(Exact name of Registrant as specified in its charter)
Texas 76-0642336
----- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9101 Jameel
Houston, Texas 77040
-------------- -----
(Address of principal executive office) (Zip Code)
Issuer's telephone number, including area code: (713) 460-1976
Advanced Nutraceuticals, Inc. is the successor issuer to
Nutrition For Life International, Inc.
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each
Exchange
Title of each Class on Which Registered
------------------- -------------------
None None
Securities Registered Pursuant to Section 12(g) of the Act:
$.01 par value common stock
---------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on January 10, 2001 was $2,247,000.
The number of shares outstanding of the Registrant's common stock on January 10,
2001 was 8,019,865.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ADVANCED NUTRACEUTICALS, INC.
(Registrant)
Date: April 18, 2001 By: /s/ John R. Brown, Jr.
-----------------------
John R. Brown, Jr.,
Vice President-Finance
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
The Company is including the following cautionary statement in this Annual
Report on Form 10-K to make applicable and take advantage of the safe harbor
provision of the Private Securities Litigation Reform Act of 1995 for any
forward looking statements made by, or on behalf of the Company. Forward looking
statements include statements concerning plans, objectives, goals strategies,
future events or performance and underlying assumptions and other statements
which are other than statements of historical facts. Certain statements
contained herein are forward looking statements and, accordingly, involve risks
and uncertainties which could cause actual results or outcomes to differ
materially from those expressed in the forward looking statements. The Company's
expectations, beliefs and projections are expressed in good faith and are
believed by the Company to have a reasonable basis, including without
limitation, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's expectation, beliefs or
projections will result or be achieved or accomplished. Actual events or results
may differ materially as a result of risks facing the Company. Such risks
include, but are not limited to, changes in business conditions, changes in
distributor composition and the network marketing industry, the general economy,
competition, changes in product offerings, international operations, as well as
regulatory developments that could cause actual results to vary materially from
the future anticipated results indicated, expressed or implied, in such forward-
looking statements. The Company disclaims any obligation to update any forward-
looking statement to reflect events or circumstances after the date hereof.
PART I
ITEM 1. BUSINESS
Advanced Nutraceuticals, Inc. ("ANI" or the "Company") was organized in March
2000 to be the holding company for Nutrition For Life International, Inc.
("NFLI") and NFLI's subsidiaries. NFLI has been engaged in the sale of
nutritional supplements and other consumer products through a network marketing
system since 1983. In late 1999, the Company acquired Bactolac Pharmaceutical
Inc. ("Bactolac") and ASH Corp. ("ASH"), manufacturers of nutraceutical and
pharmaceutical products. The Company adopted the holding company structure to
better reflect the diversification of its operations and to improve its
organizational structure for its acquisition program.
On December 29, 2000, ANI entered into a definitive agreement to sell NFLI.
Closing of the sale is subject to approval of the Company's shareholders and
senior lender, as well as customary closing conditions. Assuming the completion
of the sale, the Company's business operations will consist of the manufacture
of nutraceutical and pharmaceutical products by Bactolac and ASH.
Bactolac is engaged in the formulation, manufacturing and packaging of
encapsulated and compressed tablets and powder blended vitamins and related
nutritional supplements. ASH, which is operated as a division of Bactolac, is
engaged primarily in the contract manufacture of liquid and powder
pharmaceutical products. Bactolac and ASH provide private label contract and
over-the-counter manufacturing services to various companies engaged in the
marketing and distribution of vitamins, mineral supplements, herbs and other
health and nutrition consumer products and over-the-counter drugs.
The Company's near term strategy is to strengthen its financial position and
to expand and diversify its revenue base. The Company believes it can
successfully implement this strategy by completion of the sale of NFLI, improved
management of its working capital assets, and aggressive efforts to obtain new
customers by emphasizing its cost effective and high quality manufacturing
operations.
The Company's long-term strategy, which commenced with its acquisitions of
Bactolac and ASH, is to pursue strategic acquisition opportunities in the
manufacturing and distribution segments of the nutritional and pharmaceutical
industries. Due to the operating losses of NFLI, management of the Company
determined that for the near term, it would not be feasible to attempt to
acquire additional companies. With the pending sale of NFLI, the Company
anticipates refocusing on select acquisition candidates.
MANUFACTURING OPERATIONS
Products and Manufacturing
The Company has significant internal manufacturing competencies in the
following distinct areas: over the counter liquids and powder manufacturing,
bottling and packaging; powder blending, filling; and capsule and tablet
manufacturing, filling and packaging. The Company currently manufactures its
products in two facilities. In September 2000, the Company
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commenced relocation to a state-of-the-art facility that more than doubled the
Company's previous capacity for manufacturing capsules and tablets. The facility
is located in Hauppauge, New York. The Company also operates an over the counter
liquids production facility located in Gulfport, Mississippi. The Company is
continuously upgrading its facilities and enhancing its manufacturing
capabilities through new equipment purchases.
The Company manufactures at its Hauppauge facility a comprehensive assortment
of vitamin, mineral and nutritional supplement products, which include vitamins
C and E, beta carotene, magnesium, folic acid, calcium and potassium, as well as
various herbs such as Echinacea, St. John's Wort, Ginko Biloba, Saw Palmetto and
Ginseng and various multivitamin combinations. The Company has the capacity to
produce millions of tablets per day using technologically advanced high-speed
manufacturing equipment. The Company is in the process of developing fully
automated packaging lines. At its Gulfport facility, the Company manufactures
liquids, tablet, powders, and over the counter drugs. Examples of the products
that it produces include liquid antacids, cough and cold syrups and elixirs,
acetaminophen elixirs, baby powders, medicated powders, antifungal powders and
other consumer products.
The Company is committed to providing high quality products. The Company's
facilities are designed to meet USP compliance standards. The Company's quality
management systems are detailed and rigorous, and include analytical processes
and procedures. The quality management systems also include well equipped and
professionally staffed analytical laboratories to assure raw material acceptance
as well as in-process and finished product evaluation for compliance to
specification. The Company's OTC pharmaceutical products are also subject to
shelf life stability testing through which the Company determines the effects of
aging on its products. The Company's product retention program allows the
Company the ability to maintain samples from each product batch shipped and,
when appropriate, to analyze such samples for product quality.
The Company focuses on maximizing buying power through volume leverage with a
smaller select supplier base. As a result of this effort, material supply
savings have been achieved. In addition, key supply relationships have been
established with raw material and packaging suppliers who bring significant
financial, technical, quality and service resources to the Company
The Company believes its current manufacturing facilities and efficiencies, as
well as, laboratory and quality control capabilities, are a major factor in
customer relationships. The standards for formulating, manufacturing and
labeling nutritional and pharmaceutical products should, in the opinion of
management, assist the Company in serving its present and future customers and,
ultimately, the consumer.
Customers and Markets
The Company manufactures a broad range of products and uses a variety of
methods to market and sell its products and services; these include word of
mouth, management and sales personnel, contract sales representatives,
referrals, trade show participation, trade journal advertising and press
publicity as well as reliance on name recognition and reputation in the
industry.
During the first quarter of the new fiscal year, the Company has concentrated
on increasing its customer base through expanded marketing and sales efforts.
The Company has engaged independent sales agents with established customer
relationships and has developed marketing materials in addition to commencing
attendance at trade shows. As a result of these activities the Company has
entered into negotiations and talks with several new potential customers.
In the fourth quarter ended September 30,2000, Bayer Corporation informed the
Company that it decided to internally produce most of the products produced at
ASH's facility by the Company for Bayer. Bayer accounted for 5% of the Company's
consolidated sales for the fiscal year ended September 30, 2000. ASH has
expanded its marketing efforts by engaging independent sales agents with
established customer relationships and expanding sales opportunities with
customers other than Bayer. In addition, ASH has initiated a cost containment
program aimed at reducing its expenses at its Gulfport facility.
Research and Development
The primary areas of the Company's research and development activities are
assisting customers in the development of new products and enhancement of
existing products. Such assistance is normally in the form of product component
identification and formulation, as well as product and packaging trends. In
addition, as part of its quality control procedures the Company produces pilot
or sample runs of product formulation prototypes to ensure stability and/or
efficacy and to determine ingredient interaction. The Company has implemented
quality control procedures to verify that all products
-3-
comply with established specifications and standards in compliance with both USP
and Good Manufacturing Practices promulgated by the Food and Drug
Administration. Research of this type is a part of the operating expenses
incurred by the Company, and the associated costs of research and development
activities have not been significant to date.
Sources and Availability of Raw Materials
Raw materials used in the Company's products consist of nutrient powders,
excipients, empty gelatin capsules, and necessary components for packaging and
distribution of finished vitamin and nutritional supplement products. The
nutrient powders and the empty gelatin capsules are purchased from manufacturers
in the United States, and foreign countries. Pharmaceutical ingredients used
products manufactured by the ASH division are purchased from reliable sources in
the United States. All materials procured by the Company undergo quality control
review to ensure conformance to product specification prior to acceptance and
release into materials inventory. To date, the Company has not experienced any
difficulty in obtaining adequate sources of supply. Although there can be no
assurance that the Company will continue to be able to obtain adequate sources
in the future, the Company believes that it will be able to do so.
Competition
The Company's products are sold primarily in domestic as well as limited
foreign markets in competition with other private label manufacturing and
marketing companies. The vitamin, nutritional supplement and over-the-counter
pharmaceutical industry is highly competitive, and competition continues to
increase. Competition for the sale of products comes from many sources,
including companies which sell pharmaceuticals and nutraceuticals to
supermarkets, large chain discount retailers, drug store chains and independent
drug stores, health food stores, pharmaceutical companies and others who sell to
wholesalers, as well as mail order vendors, eCommerce and network marketing
companies. The Company does not believe it is possible to accurately estimate
the number or size of its many competitors as the vitamin industry is largely
privately held and highly fragmented.
The Company believes the industry continues to see significant consolidation
as merger and acquisition activity was reported to total over $4 billion in
transactions during the first half of calendar 2000. Many industry experts
expect this activity to continue for the foreseeable future in food and
nutrition companies, multilevel marketing organizations and eCommerce internet
firms.
The Company believes competition among manufacturers of over-the-counter
pharmaceuticals, vitamin and supplement products is based, among other things,
on price, timely delivery, product quality and consistency, safety,
availability, product innovation, marketing assistance and customer service. The
competitive position of the Company will likely depend upon continued acceptance
of its products, its ability to attract and retain qualified personnel, future
Governmental regulations affecting the Company's products as well as the
publication of vitamin product safety and efficacy studies by the government and
authoritative health and medical authorities.
Based on industry data, the botanicals and supplements industry experienced a
30% sales growth in calendar year 1998, while 1999 experienced a decelerating
growth rate of 7.8%. Intense competition among industry members during the same
period narrowed overall operating margins from 9.7% to 4.3%. The industry is
believed to be moving into a mature stage where greater price pressure and
modest market expansion will continue to increase competition.
The Company's operations are subject to the risks normally associated with
manufacturing vitamins, nutritional and pharmaceutical products, including
shortage of certain raw materials.
Employees
At September 30, 2000, the Company employed 113 full time employees in its
manufacturing operations, with 3 employed in holding company executive
management while the remaining employees are engaged in management and sales,
quality control, production and administration. At September 30, 2000, NFLI
employed 145 persons; 115 of whom are employed in the U.S. The majority of
NFLI's employees are office, clerical and warehouse employees.
The Company has never experienced a work stoppage, and none of its employees
are currently represented by a union or any other form of collective bargaining
unit. The Company believes its relations with its employees are good.
Government Regulation
-4-
The formulation, manufacturing, packaging, labeling, advertising and
distribution of the Company's products are subject to regulation by one or more
federal agencies, including the United States Food and Drug Administration
("FDA"), the Federal Trade Commission ("FTC"), the Consumer Product Safety
Commission ("CPSC"), the United States Department of Agriculture ("DOA") and the
Environmental Protection Agency ("EPA"). These activities are also regulated by
various agencies of the states and localities in which the Company's products
are sold, including without limitation the California Department of Health
Services, Food and Drug branch. The FDA in and FTC particular regulate the
advertising, labeling and sales of vitamin and mineral supplements and may take
regulatory action concerning medical claims, misleading or untruthful
advertising, and product safety issues. These regulations include the FDA's Good
Manufacturing Practices ("GMP") for foods. Detailed dietary supplement GMPs have
been proposed but no regulations have been adopted. Additional dietary
supplement regulations were adopted by the FDA pursuant to the implementation of
the Dietary Supplement Health and Education Act of 1994 ("DSHEA").
The Company may be subject, from time to time, to additional laws or
regulations administered by the FDA or other Federal, State or foreign
regulatory authorities, or to revised interpretations of current laws or
regulations. The Company is unable to predict the nature of such future laws,
regulations, interpretations or applications, nor can it predict what effect
additional governmental regulations or administrative orders, when and if
promulgated, would have on its business in the future. They could, however,
require the Company to: reformulate certain products to meet new standards;
recall or discontinue certain products not able to be reformulated; expand
documentation of the properties of certain products; expand or provide different
labeling and scientific substantiation; or, impose additional record keeping
requirements. Any or all such requirements could have a material adverse effect
on the Company's results of operations and financial position.
NETWORK MARKETING OPERATIONS- NFLI
On December 29, 2000, the Company signed a definitive agreement to sell
Nutrition For Life International, Inc. ("NFLI") to Everest International, L.L.C.
("Everest"). The agreement provides for $5 million in cash at closing subject to
a working capital adjustment and a $5 million note, payable based on a ten-year
amortization with quarterly payments for three years and a final balloon payment
at the end of the third year. In addition, Bactolac will enter into a product
supply agreement with NFLI and will also receive a $650,000 note representing a
currently outstanding inter-company liability, due in one year and a day from
closing. The purchase price may also be increased up to an additional $750,000,
depending upon future operating results of NFLI's Japanese operation. The
transaction is subject to approval by the Company's stockholders and its senior
lender and customary closing conditions.
Distribution and Marketing
NFLI develops products that are designed for health-conscious consumers, and
sells those products to consumers through its network of independent
distributors. Distributors are independent contractors who purchase products
directly from NFLI for their own use and for resale to retail consumers.
Distributors may elect to work on a full-time or part-time basis. Distributors'
revenues are derived from several sources. First, distributors may receive
revenues by purchasing NFLI's products at wholesale prices and selling those
products to customers at retail prices. Second, distributors earn the right to
receive commissions upon attaining the level of "executive." Executive level
distributors may earn commissions on product purchases by other distributors in
their downline organization.
The number of active independent distributors of NFLI has declined during the
past three fiscal years from 80,000 at September 30, 1998, to 67,000 and 58,000
at September 30, 1999 and 2000, respectively. A distributor remains active by
generating a minimum of $40 in sales volume at least once every 12 months.
In July 1996 NFLI entered into an Administrative and Consulting Services
Agreement (the "1996 Agreement") with Distributor Services, L.L.C. ("DS"). DS is
an affiliate of Nightingale-Conant ("NC"), at the time a major supplier of self
improvement materials to NFLI. The 1996 Agreement provided that, except to the
extent NFLI produced its own material in-house, DS had the exclusive right to
produce and sell all of NFLI's recruiting and training material. Such materials
were to be produced and marketed at the expense of DS and DS was entitled to all
revenues received from the sales of such materials. DS was also granted the
exclusive right to produce, organize and sell, at its own expense, admission to
all Company sponsored recruiting or promotional events and to receive all
revenues therefrom. NFLI purchased product and services in the aggregate of
approximately $350,000, $607,000 and $4,387,000 from DS and NC in the years
ended September 30, 2000, 1999 and 1998, respectively. Kevin Trudeau, formerly a
key distributor of NFLI, was principally responsible for DS's performance in
connection with the 1996 Agreement.
In August 1998, NFLI and Kevin Trudeau entered into an agreement regarding the
termination of Mr. Trudeau's distributorship and in October 1998, NFLI, DS and
NC entered into a severance agreement terminating the 1996
-5-
Agreement. NFLI is now internally providing the services previously performed by
DS. NFLI now produces, organizes and, when appropriate, sells admission to its
recruiting and promotional events and retains all such revenue. Additionally,
existing in-house staff, facilities and certain executive distributors are being
utilized to produce NFLI's recruiting and training materials, including its
monthly Business Training System.
NFLI provides a program, Order Assurance Program, whereby distributors may
enroll in a minimum ordering program in order to enhance their eligibility for
commissions. Minimum orders ranging from $41 to $301 per month are automatically
placed by credit card or check. Differing amounts for the optional Order
Assurance Program ("OAP") exist to allow generation of sales volume at various
levels that generally correspond to commission and bonus qualification levels,
i.e., $100 is the minimum sales volume to remain an active executive; $100 is
the minimum sales volume qualification level for the car bonus program; $160 is
the minimum sales volume to be eligible for gold executive; $300 is the minimum
sales volume requirement to be a platinum executive; and $300 is the minimum
sales volume qualification level for the house payment program. Therefore, the
OAP promotes sales for NFLI and the distributors participating in bonus
programs. The OAP was initiated in fiscal 1993. The OAP is voluntary and no
restrictions are placed upon any participant's ability to exit the OAP. As of
September 30, 2000, 1999, and 1998, respectively, there were approximately
23,703, 29,000, and 35,000 distributors enrolled in the OAP.
Prior to June 1, 1999, NFLI sold product redemption certificates to
distributors who were enrolled in the Company's order assurance program ("OAP").
Revenues were recorded when these certificates were redeemed for product.
However, if the certificates were not redeemed for product, the Company recorded
revenues ratably over a 150 day period commencing with the ending of the
expiration period of 120 days. The period of recognition was based upon NFLI's
historical redemption experience. Such revenues were recorded as part of the
Company's net sales for periods prior to June 1, 1999.
Subsequent to June 1, 1999, NFLI began shipping product packs for most OAP
purchases, the shipment of which results in the recognition of revenue.
Approximately $4,800,000 and $2,600,000 of revenue related to the shipment of
the product packs was recognized in fiscal 2000 and 1999. Except in very
limited circumstances, NFLI no longer sells any type of product redemption
certificates. It now only provides its distributors with a deferred arrangement
for product purchases under a plan similar to a "layaway" program for "big
ticket" items. The distributor makes payments against the product purchase for
a period not to exceed six months, and upon payment in full, NFLI ships the
product to the distributor. Revenues collected in advance of shipment are
recorded as deferred revenues until the product is shipped. The distributor has
the right to substitute other products or receive a cash refund or product
replacement under the same terms as regular product sales.
Markets
The following chart sets forth the countries in which NFLI currently operates,
the year operations were commenced in each country, and historical sales
information by country during the periods indicated.
Year Ended September 30
-------------------------
(in Thousands)
Country Year Entered 2000 1999 1998
--------------- ------------ ------- ------- -------
United States 1984 $42,800 $57,900 $60,400
Canada 1993 3,600 3,100 4,800
Puerto Rico 1994 -- 100 200
Europe 1996 4,200 4,700 3,500
Philippines 1993 600 800 700
Japan 1999 2,000 -- --
The uncertain Asian economic situation has had a negative impact on NFLI's
operations in the Philippines. The exchange rate between the Philippine peso and
the US dollar has declined from approximately 28 to 1 at the formation of that
subsidiary to approximately 41 to 1 as of September 30, 1999. NFLI has realized
exchange rate gains (losses) of approximately $ (146,000), $72,500, and
$(212,000) for the years ended September 30, 2000, 1999 and 1998, respectively,
in the Philippines. NFLI sold the operations in the Philippines effective
September 1, 2000, resulting in an immaterial loss on the sale transaction.
-6-
Products
NFLI markets and distributes an extensive product line of approximately 500
items in nine different categories: (1) vitamins, minerals and antioxidants; (2)
Nutique personal care items; (3) food and weight management items; (4) herbal
formulas; (5) homeopathic and special formulas; (6) cleaning concentrates; (7)
filtration systems; (8) self-improvement programs; and (9) services. The line
consists of primarily consumable products that are designed to target the
growing consumer interest in natural health alternatives for nutrition and
personal care. In developing its product line, NFLI has emphasized quality,
purity, potency, and safety.
Vitamins and minerals and antioxidants. NFLI markets 44 vitamin and mineral
products that are offered in a variety of combinations including NFLI's
proprietary Grand Master, Master-Key-Plus, and OraFlow Plus formulations.
JaNique. NFLI markets a high-quality cosmetics offering providing the latest
American and European technologies. The line consists of foundations, eye
shadows, blushes, lipstick, powders, mascaras, lip and eye pencils and specialty
color items.
Nutique personal care items. NFLI markets 42 Nutique hair and skin care
products including skin care formulas for men and women, shampoo and
conditioner, hand and body lotions, sunscreen, an alphahydroxy acid skin
rejuvenating complex, and a thigh creme. Each of these products contains
ingredients that are formulated to promote healthier looking skin and hair.
Food and weight management items. NFLI markets 84 food and weight management
products. These include a whey beverage in five flavors, the Nutri- Mac line of
pastas, the Nutri-Blend flour and baking mixes, instant food shakes, fiber
products, the Nutri-Cookie, and Lean Life, a herbal weight management
formulation, and a line called Heartful Gourmets, which are soy- based meals and
snacks.
Herbal formulas. NFLI's 33 herb and herbal formulation products are produced
using only natural ingredients and are precisely measured and carefully
processed into a convenient tablet or capsule form. The line consists of many
traditionally popular herbs such as alfalfa, ginkgo biloba, garlic, Cat's Claw,
and St. John's Wort, as well as special blends developed by NFLI.
Homeopathic and special formulas. Homeopathic remedies, when prepared in
minute amounts, mimic disease symptoms and stimulate the body's defense systems.
NFLI offers 76 homeopathic remedies that have been formulated in accordance with
the Homeopathic Pharmacopoeia of the United States. In addition, NFLI markets a
variety of other special formula products including shark cartilage liquid and
capsules, pain relief formulations, cough syrup, digestive aids, sports
massaging gel, a special formula dentifrice and special phytochemical products.
Cleaning concentrates. NFLI markets household cleaning products that are non-
volatile and biodegradable. There are 29 products, including a liquid hand and
body soap, dishwasher concentrate, laundry concentrates, laundry softener, a
heavy duty cleaner-degreaser, and a pine disinfectant, and a line of anti-
microbial and anti-viral disinfectants.
Filtration systems. NFLI markets 17 products designed to test or improve the
quality of air and water, including electrostatic air filters and water
filtration systems.
Self improvement programs. NFLI markets a number of motivational and self
improvement tapes and other products. NFLI internally produces such tapes to
supplement tapes available from third party suppliers.
Services. Two services are currently being offered to distributors and
customers: LIFEdial 1 Plus and Body Check. LIFEdial 1 Plus is a discounted long
distance package. Distributors may sign-up for the service and sell it to
customers. Body Check is a hair analysis which tests the level of 21 elements
normally found in the body. The resulting report also includes information
regarding exposure to toxic substances. The Body Check report can then be used
to make recommendations for the individual's specific nutritional supplements.
During the last three fiscal years, no single product has accounted for 10
percent or more of NFLI's revenue. NFLI continually seeks to identify, develop
and introduce innovative, effective and safe products. During the fiscal years
ended September 30, 2000, 1999, and 1998, the approximate number of new products
and services introduced by NFLI was 88, 36, and 16, respectively. Management
believes that its ability to introduce new products increases its distributors'
visibility and competitiveness in the marketplace.
-7-
NFLI maintains significant amounts of products in its inventory to meet rapid
delivery requirements of customers and to minimize product back orders, which
historically have not been significant. Due to the nature of NFLI's business,
NFLI typically does not carry a substantial backlog of orders.
Consumer Product Warranties and Returns
NFLI's product warranties and policy regarding returns of products are similar
to those of other companies in the industry. If a retail purchaser of any of
NFLI's products is not satisfied with the product, he may return it to the
distributor from whom he purchased it at any time within 30 days of his
purchase. The distributor is required to refund the purchase price to the retail
purchaser. The distributor may then return the unused portion of the product to
NFLI for an exchange of equal value. The manufacturers of those products warrant
most products against defect. Most products returned to NFLI, however, are not
found to be defective in manufacture. As a result, NFLI at its cost replaces
most products returned to NFLI.
Management Information System
NFLI completed the installation of SAP(R), an enterprise wide state-of-the-
market computer information system during 1998. The total cost, including
implementation and training, was approximately $3,000,000. NFLI has entered into
a lease arrangement for a portion of this system. Currently, NFLI has elected to
maintain the current SAP software installation at NFLI and not upgrade to a
newer version. NFLI is evaluating its options regarding maintenance and support
agreements covering the system.
Manufacturing and Supplies
During the past three fiscal years NFLI purchased all of its vitamins,
nutritional supplements and all other products from third parties that
manufacture such products to NFLI's specifications and standards.
In July 1998, NFLI entered into an agreement with VitaRich Laboratories, Inc.
("VitaRich") in which NFLI agreed to advance VitaRich up to $800,000 to secure
the purchase of a sufficient quantity of certain nutritional supplement raw
materials to meet NFLI's anticipated need for rapid delivery of product and to
obtain such product at discounted prices. The agreement is for three years and
requires that NFLI provide VitaRich with periodic estimates of anticipated
needs, as well as actual use rates of the requested product.
NFLI made an initial deposit of $400,000 to VitaRich and has agreed that it
will maintain a deposit in the amount of 40% of its outstanding purchase orders
with VitaRich. VitaRich is required to use the deposit for the purchase of raw
material and the processing of finished product in sufficient kinds and
quantifies to enable NFLI to (i) meet its anticipated need for the product, (ii)
maximize the costs savings to VitaRich and provide NFLI with reduced prices
through the purchase of bulk quantities of raw materials, and (iii) enable
VitaRich to meet NFLI's rapid delivery requirements.
Unless the agreement is terminated before its expiration, NFLI is not required
to make additional deposits beyond the third year. Additionally, VitaRich is
required to repay any outstanding deposits by crediting NFLI with an amount
equal to 10% of each purchase order placed by NFLI until such time as all
advances have been repaid. NFLI has a first priority security interest in all of
VitaRich's interest in the inventory, warehouse receipts, documents of title,
accounts receivable and proceeds of insurance related to the raw materials
purchased by VitaRich on behalf of NFLI. As of September 30, 2000, the
outstanding advance to VitaRich was $262,859.
NFLI does not have long term supply agreements with any vendor other than
VitaRich. Although NFLI believes that it could establish alternate sources for
most of its products, any delay in locating and establishing relationships with
new sources could result in product shortages and back orders for the products,
with a resulting loss of revenues to NFLI. In addition, such delays could
interrupt growth of product sales and distributor recruitment.
Trademarks and Service Marks
Most products are packaged under NFLI's "private label". NFLI has registered
trademarks with the United States Patent and Trademark Office for its Master Key
Plus(R), Oraflow Plus(R), LeanLife(R), Nutri-Cookie(R), Requin 3(R), Grand
Master(R), Phytonol(R), BioWater(R), E-Lemonator(R), Phytogreen(R), BioGlow(R),
BioRub(R), Whey-To-Go(R), Heartful Gourmets(R), Lifedial Plus(R), Arthro Support
Tri-Pack(R), Enviro Defense System(R), NutriBuddies(R), ,and Nutrition For
Life(R). It has applied for trademark registration for its Snoreless(TM),
ItchBuster(TM), Healthy Chocolates(TM), Soy B-Nuts(TM), JaNails(TM),
Kholesterol-Blocker(TM), Healthy Start(TM), O2 Support(TM), Ki.Sweet(TM), Immune
Support(TM), and PyruBalance(TM).
-8-
Competition
NFLI competes with many companies marketing products similar to those it sells
and markets. It also competes intensely with other network marketing companies
in the recruitment of distributors. NFLI's ability to remain competitive
depends, in significant part, on its success in recruiting and retaining
distributors. There can be no assurance that NFLI's programs for recruitment and
retention of distributors will be successful in the future.
There are many network marketing companies with which NFLI competes for
distributors. Some of the largest of these are Amway, Nature's Sunshine, Inc.,
Herbalife International, Inc., and Rexall Sundown, Inc. Each of these companies
is substantially larger than NFLI and has significantly greater resources. NFLI
competes for distributors by means of its marketing program that includes its
commission structure, training and support services, and other benefits.
Not all competitors market all types of products marketed by NFLI, and some
competitors market products and services in addition to those marketed by NFLI.
For example, some competitors are known for and are identified with sales of
herbal formulations, some are known for and are identified with sales of
household cleaning and personal care products, and others are known for and are
identified with sales of nutritional and dietary supplements. NFLI's principal
methods of competition for the sale of products are its responsiveness to
changes in consumer preferences and its commitment to quality, purity, and
safety.
Government Regulation
The manufacturing, processing, formulation, packaging, labeling and
advertising of NFLI's products are subject to regulation by federal agencies,
including the Food and Drug Administration (the "FDA"), the Federal Trade
Commission, the Consumer Product Safety Commission, the United States Department
of Agriculture, the United States Postal Service and the United States
Environmental Protection Agency. These activities are also subject to regulation
by various agencies of the states and localities in which NFLI's products are
sold.
In November 1991, the FDA issued proposed regulations designed to, among other
things, amend its food labeling regulations. The proposed regulations met with
substantial opposition. In October 1994, the "Dietary Supplement Health and
Education Act of 1994" (the "Dietary Supplement Law") was enacted. Section 11 of
the Dietary Supplement Law provided that the advance notice of proposed rule
making by the FDA concerning dietary supplements was null and void. FDA
regulations that became effective on June 1, 1994 would require standard format
utrition labeling on dietary supplements.
The Dietary Supplement Law broadly regulates nutritional labeling requirements
for dietary supplements. The final regulations were published September 23,
1997. Provisions relating to notification to FDA of product label claims
considered "Statements of Nutritional Support" and provisions relating to new
dietary ingredients became effective October 23, 1997. Regulations specifying
product label content became effective March 23, 1999. More detailed regulations
regarding claim language became effective January 7, 2001.
The Dietary Supplement Law provides for regulation of Statements of
Nutritional Support ("Statements"). These Statements may be made if they are
truthful and not misleading and if "adequate" substantiation for the claims is
available. Statements can describe claims of enhanced well-being from use of the
dietary supplement or product statements that relate to affecting a structure or
function of the body. However, Statements cannot claim to diagnose, treat, cure,
or prevent any disease, regardless of the possible existence of scientific
reports substantiating such claims.
Statements appearing in dietary supplement labeling must be accompanied by
disclaimer stating that the FDA has not evaluated the Statements. Notification
to the FDA of these Statements is not considered approval of the Statements of
products. If the FDA determines in possible future proceedings that dietary
supplement Statements fail to met the requirements of the Dietary Supplement
Law., a product may be subject to regulation as a drug. The FDA retains all
enforcement means available to it (i.e. seizure, civil or criminal penalties,
etc.), when investigating or enforcing labeling claims.
The Dietary Supplement Law also provided for the formation of a Presidential
Commission on Dietary Supplement Labels, requiring it to consider and comment
upon informational dietary supplement issues. The Commission issued its non-
binding final report on November 24, 1997. The report's findings are similar,
yet distinct from, the regulations enacted by the Dietary Supplement Law. The
report addressed a broad range of issues, including the need for increased
consumer education of dietary supplement products and increased responsibility
on the part of manufacturers and distributors
-9-
regarding the safety of dietary supplement products. NFLI cannot determine what
effect the report will have on its business in the future, or whether the report
will lead to any additional legislative or regulatory intervention.
The FDA also regulates the formulation and manufacture of dietary supplements
distributed by NFLI. In February 1997 the FDA published proposed regulations for
the manufacture of dietary supplements. These regulations, if finalized would
require at least some of the quality control provisions related to drugs to be
applied to nutritional supplements. NFLI believes that it complies with good
manufacturing practices for foods, as currently required by the FDA.
The Federal Trade Commission ("FTC") regulates advertising of NFLI's
nutritional and dietary supplement products, cosmetics and over-the-counter
drugs. The Federal Trade Commission Act prohibits unfair or deceptive trade
practices and false or misleading advertising. The FTC has recently been very
active in its enforcement of advertising against manufacturers and distributors
of nutritional dietary supplements having instituted several enforcement actions
resulting in signed agreements and payment of large fines. Although NFLI has not
been the target of a FTC investigation, there can be no assurance that the FTC
will not investigate NFLI's advertising in the future.
On November 18, 1998, the FTC issued it's "Dietary Supplements: An Advertising
Guide for Industry". Such guide provides an application of FTC law to dietary
supplement advertising and includes examples of how principles of advertisement
interpretation and substantiation apply in the context of dietary supplement
advertising. The guide provides additional explanation but does not
substantially change the FTC's existing policy that all supplement marketers
have an obligation to ensure that claims are presented truthfully and to specify
the adequacy of the support behind such claims.
NFLI is unable to predict the nature of any future laws, regulations,
interpretations, or applications, nor can it predict what effect additional
governmental regulations or administrative orders, when and if promulgated,
would have on its business in the future. They could, however, require the
reformulation of certain products not possible to be reformulated, imposition of
additional record keeping requirements, expanded documentation of the properties
of certain products, expanded or different labeling and scientific
substantiation regarding product ingredients, safety or usefulness. Any or all
such requirements could have a material adverse effect on NFLI's results of
operations and financial condition.
NFLI's network marketing system is subject to governmental laws and
regulations generally directed at ensuring that product sales are made to
consumers of the products and that compensation and advancement within the
marketing organization is based on sales of products rather than investment in
the organization. These laws and FTC regulations include the federal securities
laws, matters administered by the FTC and various state anti-pyramid and
business opportunity laws. Although NFLI believes that it is in compliance with
all such laws and regulations, NFLI remains subject to the risk that, in one or
more of its present or future markets, its marketing system or the conduct of
certain distributors could be found not to be in compliance with applicable laws
or regulations. Failure by NFLI or significant distributors to comply with
these laws and regulations could have an adverse material effect on NFLI in a
particular market or in general.
NFLI's products are subject to regulation by foreign countries where they are
sold. Government regulations in foreign countries where NFLI plans to commence
or expand sales may prevent or delay entry into a market or prevent or delay the
introduction or require the reformulation or relabeling of certain of NFLI's
products.
RISK FACTORS
Important factors that could cause actual results to differ materially from
the Company's expectations are disclosed in this Report, including without
limitation in conjunction with the forward-looking statements included in this
Report, and the following risk factors.
Risks Related to the Company and its Manufacturing Operations
Recent Losses. The Company has incurred losses in each of the fiscal years
-------------
ended September 30, 2000, 1999 and 1998. The losses were incurred primarily from
the operations of NFLI, which are expected to be discontinued upon completion
primarily of the pending sale. The Company experienced declines in net sales for
the network marketing business operated by NFLI during each of those years when
compared to the preceding fiscal year. In addition, NFLI experienced increased
costs in each of those years. Particularly in view of the Company's increased
level of expenditures, NFLI's future financial condition and operating results
could be negatively impacted if the Company is not successful in completing the
NFLI sale. The Company completed the acquisitions of Bactolac and ASH in late
1999. Although those operations had income before income tax expense in the
fiscal year ended September 30, 2000, because of the brief operating history,
future profitable operations cannot be predicted with certainty.
-10-
Sale of NFLI. On December 29, 2000, ANI signed a definitive agreement to sell
------------
NFLI and NFLI's subsidiaries in the network marketing business. The sales price
consists of $5,000,000 in cash, subject to a working capital adjustment at
closing, and a $5,000,000 note payable based upon a ten year amortization
schedule with quarterly payments for three years and a final balloon payment at
the end of the third year. The purchase price may also be increased up to an
additional $750,000, depending upon future operating results of NFLI's recently
established Japanese subsidiary. The note will be subordinate to the purchaser's
secured lender and will be without recourse to the purchaser. Accordingly,
collectability of the note will depend upon the success of operations of NFLI
after the closing of the sale, including NFLI's ability to service its debt with
its senior lender.
The working capital adjustment will be based upon an adjusted working capital
calculation using $1,000,000 as a base figure. If at closing the computation
yields more or less than $1,000,000, the purchase price will be adjusted
accordingly. As of December 31, 2000, such computation would have resulted in a
base amount deficit and if the sale were closed as of that date, the $5,000,000
cash purchase price would have been decreased to approximately $ 3,725,000. It
is currently unknown what adjustment will be made at closing as this will depend
upon a number of factors, primarily future operations of NFLI. If the working
capital adjustment results in a significant reduction in the purchase price, or
if the future operations of NFLI are not sufficient to repay the note, the
financial position and liquidity of ANI would be adversely affected.
Secured Lender Relationships. In connection with the acquisitions of Bactolac
----------------------------
and ASH, the Company entered into a credit facility, and through Bactolac,
assumed a mortgage obligation outstanding on the ASH facility. As of September
30, 2000, the balances outstanding on those obligations amounted to $6,589,783
and $1,350,053, respectively. The Company has not been in compliance with
certain covenants under the credit facility and has been granted waivers by the
lender and, in the case of the mortgage obligation, has been granted extensions
of the original due date of the loan. The Company is attempting to amend its
credit agreements and believes based on its discussion with the lenders, that it
will be successful in such efforts. If the Company's secured lenders will not
modify the agreements or continue to work with the Company in granting waivers
and extensions, until such time as the Company may be able to modify, refinance
or repay such obligations, the financial position and liquidity of the Company
would be adversely affected.
Replacement Of Principal Customer Of ASH. Approximately 5% (31% of the
----------------------------------------
manufacturing divisions sales) of the Company's consolidated sales in for the
fiscal year ended September 30, 2000 were made to Bayer Corporation. During the
fiscal year, Bayer informed ASH that, effective January 1, 2001, it intended to
produce in-house products which had been produced for it by ASH. ASH is
aggressively attempting to expand its customer base to compensate for the loss
of the Bayer business and has initiated a cost containment program. Failure to
replace this substantial customer, or the inability to substantially reduce
ASH's operating expenses, would have an adverse effect on the Company's business
and financial condition.
Dependence on Key Personnel. ANI's future success depends on the continued
---------------------------
availability of certain key management personnel, including Dr. P.M. Reddy,
founder of Bactolac and Director of ANI, and Greg Pusey, Chairman, Director and
Chief Executive Officer of ANI. ANI has obtained "key man" insurance on the
life of Dr. Reddy with the benefit amount to ANI of $7,000,000. ANI's growth
and profitability also depends on its ability to attract and retain other
management personnel.
Nasdaq Listing. The Company's common stock is currently traded under the
--------------
symbol - ANIIC, on the Nasdaq SmallCap Market based on a temporary exception
granted by Nasdaq. The Company's common stock has failed to maintain a minimum
bid price of $1.00 as required by Nasdaq. The exception will expire on May 18,
2001. If the Company meets this requirement, the common stock will continue to
be listed on Nasdaq. Should the Company's shares be delisted from Nasdaq, and
be quoted on either the "bulletin board," or the "pink sheet" system, it could
have a negative impact on the trading activity and price of the Company's common
stock as well as the Company's ability to raise additional equity capital and/or
consummate additional acquisitions.
Government Regulations. The manufacturing, processing, formulation and
----------------------
packaging of the Company's products are subject to regulation by federal, state
and foreign agencies, including the United States Food and Drug Administration
(the "FDA"), the Federal trade Commission, the Consumer Product Safe Commission,
the United States Department of Agriculture, the United States Postal Service
and the United States Environmental Protection Agency. Such agencies have a
variety of remedies and processes available to them, including initiating
investigations, issuing warning letters and cease and desist orders, requiring
corrective labels or advertising, requiring consumer redress (for example, by
requiring that a company offer to repurchase products previously sold to
consumers), seeking injunctive relief or product seizure, imposing civil
penalties, or commencing criminal prosecution.
-11-
There can be no assurance that the regulatory environment in which the Company
operates will not change or that such regulatory environment, or any specific
action taken against the Company will not result in a material adverse effect on
the Company's business, financial condition or results of operations. The
Company also cannot predict whether new legislation regulating its activities
will be enacted, which new legislation could have a material adverse effect on
its operations.
Product Liabilities. The Company, like other manufacturers and distributors
-------------------
of products that are ingested, faces an inherent risk of exposure to product
liability claims if, among other things, the use of its products results in
injury. The Company currently has product liability insurance for its
operations in amounts the Company believes are adequate for its operations.
There can be no assurance, however, that such insurance will continue to be
available at a reasonable cost, or if available, will be adequate to cover
liabilities.
Ability to Implement Business Strategy; Integration of Acquisitions. The
-------------------------------------------------------------------
Company's future results and financial condition are dependent on the successful
implementation of its business strategy. A key component of the Company's long-
term business strategy involves strategic acquisitions. With the 1999
acquisitions of ASH and Bactolac, the Company has expanded its operations to
include the manufacture of pharmaceutical products and nutritional supplements.
Although the Company believes that its business strategy will enable it to
improve its financial results, there can be no assurance that its strategy will
be successful, that the anticipated benefits of its strategy will be realized,
that management will be able to implement the strategy on a timely basis, that
the Company will return to profitability levels previously experienced, or that
losses will not be incurred in the future.
The success of the Company will depend, in part, on the Company's ability to
integrate the operations of the acquired companies. There can be no assurance
that the Company's management team will effectively be able to oversee the
combined entity and implement the Company's business strategy. Moreover, no
assurance can be given that the Company will be able to successfully integrate
the acquisitions of ASH and Bactolac or any future acquisitions without
substantial cost, delays or other problems. The cost of integration could have
an adverse effect on short-term operating results. Such costs could include
severance payments, restructuring charges associated with the acquisitions and
expenses associated with the change of control. There can be no assurance that
the Company will be able to anticipate all the changing demands the acquisitions
will impose on its management personnel, operational and management information
systems and financial systems. The integration of newly acquired companies may
also lead to diversion of management attention from other ongoing business
concerns. Any or all of these factors could have a material adverse effect on
the Company's business, financial condition or results of operations.
Risks Related to Acquisition Financing; Leverage. The financing for the
------------------------------------------------
acquisitions of Bactolac and ASH was provided primarily through a new lending
arrangement that commenced in November 1999. The loan facility is secured by
substantially all the assets of the Company and its subsidiaries. The loan
agreement contains various covenants that require the maintenance of certain
financial ratios, as well as additional covenants and significant restrictions
on dividend payments, issuance of debt and equity, mergers, changes in business
operations and sales of assets. These restrictions could limit the Company's
ability to respond to market conditions, to provide for unanticipated capital
expenditures or to take advantage of business or acquisition opportunities. If
any covenant were breached without a waiver or renegotiation of the terms of
that covenant, the lender could have the right to accelerate the payment of the
indebtedness even if the Company has made all principal and interest payments
when due. The Company has not complied with all of the covenants and has
obtained waivers from the lender. The Company is attempting to amend its credit
agreements and believes based on its discussions with such lenders that it will
be successful in such efforts. If the Company continues to breach these
covenants, or if the Company's operating revenues after the sale of NFLI were to
be insufficient to pay debt service, there would be a risk of default and
foreclosure on the Company's assets.
Subject to future operating results and/or obtaining additional financing, the
availability of which is not assured, the Company plans to seek additional
acquisitions. The timing, size and success of the Company's acquisition efforts
and any associated capital commitments cannot be readily predicted. The Company
currently intends to finance future acquisitions by using shares of its stock,
cash, borrowed funds (including the issuance of promissory notes to the sellers
of the companies to be acquired) or a combination thereof. If the Company's
stock does not maintain a sufficient market value, or if potential acquisition
candidates are otherwise unwilling to accept stock as part of the consideration
for the sale of their businesses, the Company may be required to use more of its
cash resources or more borrowed funds, in each case if available, in order to
acquire additional companies. If the Company does not have sufficient cash
resources, its growth could be limited unless it is able to obtain additional
capital through debt or equity financings. There can be no assurance that the
Company will be able to obtain any additional financing that it may need for
future acquisitions on the terms that the Company deems acceptable.
-12-
Dividends The Company declared an initial cash dividend of $.02 per share of
---------
common stock in September 1996, and paid dividends quarterly until June 1998.
The Company has not declared any dividends subsequent to June 1998. The
Company's credit facility prohibits dividend payments without the consent of the
lender. The determination of whether to pay dividends in the future will be
made by the Board of Directors and will depend on the earnings, capital
requirements, and operating and financial condition of the Company, among other
factors. It is not anticipated that the Company will pay dividends in the fiscal
year ending September 30, 2001 or in the foreseeable future.
Competition. The market for the Company's products is highly competitive. The
-----------
Company competes with other dietary supplement products and over-the-counter
pharmaceutical manufacturers. Among other factors, competition among these
manufacturers is based upon price. If one or more manufacturers significantly
reduce their prices in an effort to gain market share, the Company's business,
operations and financial condition could be adversely affected. Many of the
Company's competitors, particularly manufactures of nationally advertised brand
name products, are larger and have resources substantially greater than those of
the Company. There has been speculation about the potential for increased
participation in these markets by major international pharmaceutical companies.
In the future, if not already, one or more of these companies could seek to
compete more directly with the Company by manufacturing and distributing their
own or others' products, or by significantly lowering the prices of existing
national brand products. The Company sells substantially all of its supplement
products to customers who re-sell and distribute the products.
Risks Related to NFLI and the Company's Network Marketing Operations
Distributor Network. NFLI's products are distributed through an extensive
-------------------
network marketing system of distributors. Distributors are independent
contractors who purchase products directly from NFLI for resale and/or for their
own use. Distributors typically market NFLI's products on a part-time basis, and
may engage in other business activities, including the sale of products offered
by competitors of NFLI. NFLI has a large number of distributors, and a
relatively small corporate staff to implement its marketing programs and provide
motivational support. NFLI's future growth depends to a significant degree on
its ability to retain and motivate its existing distributors and to attract new
distributors by continuing to offer new products and new marketing programs. See
"Product Competition and Competition for Distributors".
Regulatory Scrutiny and Legal Proceedings. NFLI's network marketing system
-----------------------------------------
is subject to governmental laws and regulations generally directed at ensuring
that product sales are made to consumers of the products and that compensation
and advancement within the marketing organization is based on sales of products
rather than investment in the organization. These laws and regulations include
the federal securities laws, matters administered by the Federal Trade
Commission and various state anti-pyramid and business opportunity laws.
Although NFLI believes that it is in compliance with all such laws and
regulations, NFLI remains subject to the risk that, in one or more of its
present or future markets, its marketing system or the conduct of certain
distributors could be found not in compliance with applicable laws or
regulations. Failure by NFLI or significant distributors to comply with these
laws and regulations could have a material adverse effect on NFLI in a
particular market or in general.
To become a distributor of NFLI, a person must be sponsored by an existing
distributor, sign the official Distributor Agreement, and purchase a
"distributor success kit" from NFLI, which is currently priced at $49. NFLI's
distributors earn the right to receive commissions upon obtaining the level of
"executive." Executive level distributors may earn commissions on sales
generated by other distributors in their downline organization. There are two
ways for a distributor to meet the requirement to become an executive, which can
be met the same day he or she enrolls as a distributor or over an extended
period of time at the election of the distributor. NFLI previously used the
terminology of "Instant Executive Program" to reference the qualifications for
becoming an executive distributor on an accelerated basis. The Instant Executive
Program, particularly as marketed by Kevin Trudeau, formerly a key independent
distributor, and his marketing organization, was the subject of legal and
regulatory scrutiny.
In April 1996, the Attorney General of the State of Illinois (the "Attorney
General") filed suit against the Trudeau Marketing Group, Inc., Kevin Trudeau
and Jules Leib (the "Illinois Suit") alleging violations of the Illinois
Consumer Fraud and Deceptive Practices Act and the Illinois Business
Opportunities Sales Law of 1995 by, among other things, operating a "pyramid
sales scheme." Mr. Leib worked with Mr. Trudeau and is an independent
distributor of NFLI's products. In addition, the Illinois Secretary of State
issued to Mr. Trudeau and the Trudeau Marketing Group a Summary Order to Cease
and Desist prohibiting them from offering or selling "business opportunities" in
the State of Illinois. Generally, a "business opportunity" is an agreement
involving sales of products or services enabling the purchaser to start a
business when the purchaser is required to pay more than $500. Many other states
have "business opportunity" statutes.
NFLI was not named as a defendant in the Illinois Suit, but NFLI's management
viewed the Illinois Suit as an opportunity to discuss NFLI's marketing program
and to resolve confusion surrounding the program. On July 16, 1996,
-13-
NFLI entered into an "Assurance of Voluntary Compliance" (the "AVC") with the
Illinois Attorney General. The AVC preserved the ability of a new distributor to
become an executive distributor the day that he or she enrolls by purchasing at
least $1,000 in qualifying products and by joining the Order Assurance Program
and a business training program. Under the AVC, NFLI may maintain its same
executive level qualifications, but to aid clarification, it will no longer use
the "Instant Executive" designation. Other key features of the AVC focus on
NFLI's commitment to: (a) create an official explanation of its marketing and
compensation plan and to prohibit distributors from creating their own
explanations of how the marketing and compensation plan works; (b) make clear
that there are no mandatory purchases of product to become a distributor; (c)
take further steps to stress distributor compliance with NFLI's policies and
procedures; and (d) create a World Wide Web site on the Internet to provide more
information about NFLI's products and programs. NFLI also agreed to provide
distributor earnings disclosures and to make clear that executive distributors
cannot earn commissions unless they are engaged in the sale of NFLI's products
to consumers at retail, including procedures to verify retail sales.
Specifically, an executive distributor will not be entitled to receive bonuses
or commissions on downline sales unless within the preceding one month period
the executive distributor has made at least five retail sales, or within the
preceding two month period has made ten retail sales. NFLI also agreed to take
additional steps to encourage distributors to redeem OAP certificates for
product, to monitor customer purchases, and to make a contribution to the
Illinois Consumer Education Fund.
NFLI entered into similar agreements with the states of Florida, Hawaii,
Idaho, Kansas, Kentucky, Michigan, Missouri, New Jersey and Pennsylvania. NFLI
has agreed that in Florida, distributors who want to receive commissions must
state, when placing orders, that they have sold to consumers 70% of their prior
commissionable product purchase. NFLI has agreed to establish procedures to
independently verify consumer sales on a random basis and to sanction
distributors submitting false information. Compliance by NFLI with these
agreements may make the program less attractive to distributors and prospective
distributors. In particular, NFLI believes that the special requirements in the
Florida agreement have had a negative impact on NFLI's ability to retain and
attract distributors in Florida. These factors could negatively impact NFLI's
future operating results. NFLI maintains an ongoing compliance program, which
includes periodic reporting to the states.
NFLI was informed that in July 1996, Mr. Trudeau signed a consent decree
resolving the lawsuit with the Illinois Attorney General and entered into a
settlement agreement with the Illinois Secretary of State resolving the Cease
and Desist Order. Among other things, Mr. Trudeau agreed to abide by all
applicable provisions of the AVC entered into between NFLI and the Illinois
Attorney General. NFLI was also informed that Mr. Leib entered an Assurance of
Voluntary Compliance with the Illinois Attorney General.
In April 1996, NFLI received notice from the Securities and Exchange
Commission of a formal order of private investigation into possible violations
by NFLI of the federal securities laws. In December 1996 NFLI received a letter
from the Securities and Exchange Commission notifying NFLI that the staff
inquiry had been terminated and that no enforcement action had been recommended
at that time to the Commission.
In 1996 class action lawsuits were commenced against NFLI alleging, among
other things, that NFLI's distributor compensation program constituted an
illegal "pyramid scheme." In 1997, NFLI entered into settlement agreements. The
pendancy and settlement of these actions had a material adverse effect upon
NFLI's operations and financial condition.
NFLI does not believe that the manner in which it markets its products
constitutes a "pyramid scheme" or a "security." The only financial requirement
to become a distributor is to purchase a "distributor success kit" which is
currently priced at a nominal charge of $49. NFLI does not pay a fee or other
compensation to distributors as direct remuneration for enrolling distributors
in their "downline" and NFLI encourages all distributors to retail their
products to consumers who are not NFLI executives. In addition, NFLI does not
pay a fee or other compensation to distributors for sales of product to their
downline; thus, all product purchases are to be consumed by the distributor or
sold to the ultimate consumer. NFLI believes that the efforts it has undertaken
with the Illinois Attorney General and regulatory authorities in other states,
which culminated in the AVC in Illinois and elsewhere, will assist NFLI in
complying with government laws and regulations in the future. Nonetheless,
there can be no assurance that the appropriate authorities in any states will
not initiate court proceedings against NFLI for violation of applicable laws.
Furthermore, there can be no assurances that NFLI will not be subject to other
lawsuits from other governmental authorities or private parties in state or
federal court. Any such action could have a material adverse effect upon NFLI.
Adverse Publicity. The size of the distribution force and results of NFLI's
-----------------
operations can be particularly impacted by adverse publicity regarding NFLI, or
its competitors, including the legality of network marketing, the quality of
NFLI's products and product ingredients or those of NFLI's competitors,
regulatory investigations of NFLI or its competitors and their products, actions
by NFLI's distributors and the public's perception of NFLI's distributors and
network marketing
-14-
businesses generally. Such adverse publicity could have a material adverse
effect on NFLI's ability to attract and retain customers or distributors, or in
NFLI's results from operations or financial condition generally.
Statements and Other Actions by Distributors. NFLI's distributors are
--------------------------------------------
required to sign NFLI's official Distributor Agreement that requires them to
abide by NFLI's policies. Nonetheless, in certain instances distributors have
created promotional material which does not accurately describe NFLI's marketing
program or they may have made statements regarding potential earnings or other
matters not in accordance with NFLI's policies. Although regulatory authorities
did not sue NFLI, such actions lead to increased regulatory scrutiny as
described above. Although NFLI attempts to monitor its distributors' statements
and activities, there can be no assurance that it will be able to accomplish
this objective and NFLI could be subject to regulatory scrutiny and potential
claims. In addition, distributors could make predictive statements about NFLI's
operations or other unauthorized remarks regarding NFLI that NFLI may be unable
to control. Distributors are not authorized to make such statements on behalf of
NFLI. Nonetheless, statements or actions by distributors could also adversely
affect NFLI.
Product Competition and Competition for Distributors. The business of
----------------------------------------------------
distributing and marketing vitamins and minerals, personal care items, weight
management items, and other products offered by NFLI is highly competitive.
Numerous manufacturers, distributors and retailers compete actively for
consumers. Many of NFLI's competitors are substantially larger than NFLI and
have greater financial resources. The market is highly sensitive to the
introduction of new products or weight management plans that may rapidly capture
a significant share of the market. As a result, NFLI's ability to remain
competitive depends in part upon the successful introduction of new products.
NFLI is subject to significant competition from other marketing organizations
for the recruitment of distributors. NFLI's ability to remain competitive
depends, in significant part, on NFLI's success in recruiting and retaining
distributors. From the last quarter of the fiscal year ended September 30, 1995
to the last quarter of the fiscal year ended September 30, 1998, one executive
level distributor, Mr. Kevin Trudeau and his marketing organization, were
involved in recruiting distributors for NFLI. In August 1998, NFLI and Mr.
Trudeau entered into an agreement to end their business relationship. Mr.
Trudeau's agreement not to compete with NFLI expired in May 1999. In October
1998 NFLI also entered into a severance Agreement with NC and DS, which had been
producing and marketing recruiting and training materials and sponsoring
promotional events for NFLI since July 1996. NFLI is now internally providing
the services previously performed by NC and DC. There can be no assurance that
NFLI's programs for recruitment, training and retention of distributors will be
successful or that existing distributors will not join Mr. Trudeau in another
business venture or otherwise lose interest in NFLI's products and programs.
Dependence on Key Personnel. NFLI's success depends on the continued
---------------------------
availability of certain key management personnel, including David P. Bertrand
and Jana B. Mitcham, founders and officers of NFLI. NFLI has obtained "key man"
insurance on the lives of Mr. Bertrand and Ms. Mitcham with benefit amounts to
NFLI of $1,060,000 and $660,000, respectively. NFLI's growth and profitability
also depends on its ability to attract and retain other management personnel.
Family Relationships. At September 30, 2000, NFLI's operations in the United
--------------------
States employed approximately 115 persons. Of these 115 persons, 11 persons have
a family relationship, through birth or marriage, with either David P. Bertrand
or Jana B. Mitcham, executive officers of NFLI. NFLI's management believes that
all of NFLI's employees have been employed by NFLI on the basis of their
qualifications, and that their retention by, and advancement within, NFLI has
been, and will continue to be, determined by their individual performances as an
employee of NFLI, and not due to any family relationship. Nonetheless, due to
the large number of family relationships, the potential for conflicts of
interest could be significant.
Government Regulations. The manufacturing, processing, formulation, packaging,
----------------------
labeling and advertising of NFLI's products are subject to regulation by
federal, state and foreign agencies, including the United States Food and Drug
Administration (the "FDA"), the Federal Trade Commission, the Consumer Product
Safety Commission, the United States Department of Agriculture, the United
States Postal Service and the United States Environmental Protection Agency.
Among other matters, such regulation is concerned with health claims made with
respect to a product that asserts the healing or nutritional value of such
product. Such agencies have a variety of remedies and processes available to
them, including initiating investigations, issuing warning letters and cease and
desist orders, requiring corrective labels or advertising, requiring consumer
redress (for example, by requiring that a company offer to repurchase products
previously sold to consumers), seeking injunctive relief or product seizure,
imposing civil penalties, or commencing criminal prosecution.
There can be no assurance that the regulatory environment in which NFLI
operates will not change or that such regulatory environment, or any specific
action taken against NFLI, will not result in a material adverse effect on
NFLI's
-15-
business, financial condition or results of operations. NFLI also cannot predict
whether new legislation regulating its activities will be enacted, which new
legislation could have a material adverse effect on its operations.
Expansion Into Foreign Markets. Although NFLI intends to continue to operate
------------------------------
in and expand into foreign markets, there can be no assurance that NFLI can open
markets on a timely basis or that such markets will prove to be profitable.
Significant regulation and legal barriers must be overcome before marketing can
begin in any foreign market. Also, before marketing has commenced, it is
difficult to assess the extent to which NFLI's products and sales techniques
will be successful in any given country. In addition to significant regulatory
barriers, NFLI may also expect problems related to entering new markets with
different cultural bases and legal systems from those encountered in the past.
Moreover, expansion of NFLI's operations into new markets entails substantial
working capital and capital requirements associated with regulatory compliance.
Effect of Exchange Rate Fluctuations. During the fiscal years ended
------------------------------------
September 30, 2000 and 1998 NFLI realized exchange rate losses of approximately
$453,000, and $337,000, respectively. During the year ended September 30, 1999
the Company realized an exchange rate gain of approximately $65,600. There can
be no assurance that exchange rates will continue to improve in the future or
that future exchange rate losses will not exceed those experienced in recent
periods. Further, if exchange rates fluctuate dramatically, it may become
uneconomical for NFLI to establish or continue activities in certain countries.
Contracts with Suppliers or Manufacturers. NFLI does not have any written
-----------------------------------------
contracts with any of its suppliers or manufacturers or commitments from any of
its suppliers or manufacturers to continue to sell products to NFLI other than a
three year agreement with VitaRich Laboratories, Inc. ("VitaRich").
Pursuant to an agreement entered into in July 1998, NFLI agreed to advance
VitaRich up to $800,000 to secure the purchase of a sufficient quantity of
certain nutritional supplement raw materials to meet NFLI's anticipated need for
rapid delivery of product and to obtain such product at discounted prices. The
agreement is for three years and requires that NFLI provide VitaRich with
periodic estimates of anticipated needs, as well as actual use rates of the
requested product. Other than its agreement with VitaRich, NFLI does not have
long term supply agreements with any vendor. Accordingly, there is a risk that
any of NFLI's suppliers or manufacturers could discontinue selling their
products to NFLI for any reason. Although NFLI believes that it could establish
alternate sources for most of its products, any delay in locating and
establishing relationships with other sources could result in product shortages
and back orders for the products, with a resulting loss of revenues to NFLI.
Product Liabilities. NFLI, like other manufacturers and distributors of
-------------------
products that are ingested, faces an inherent risk of exposure to product
liability claims if, among other things, the use of its products results in
injury. NFLI currently has product liability insurance for its operations in
amounts NFLI believes are adequate for its operations. There can be no
assurance, however, that such insurance will continue to be available at a
reasonable cost, or if available, will be adequate to cover liabilities.
ITEM 2. DESCRIPTION OF PROPERTY
Manufacturing Operations
ASH manufactures pharmaceutical products at its company owned 132,000 square
foot facility in Gulfport, Mississippi. Bactolac headquartered in Hauppauge, New
York, conducts its operations in a leased facility comprising approximately
25,000 square feet. Bactolac current monthly rental is approximately $25,000, of
which $6,000 pertains to improvement made by a related party, that escalates
over the 5 year term remaining on the lease. The Company has two five year
renewal options and a purchase option on the facility. The Bactolac lease is
with Shilpa Saketh Realty, Inc., an entity owned by a member of the Company's
Board of Directors. In addition, ANI currently rents administrative office space
on a temporary, short-term basis for $1,000 per month.
Network Marketing Operations
NFLI's offices and warehouse facilities in Houston, Texas are leased from non-
affiliates. NFLI's office building consists of approximately 37,000 square feet
and the current monthly rental is approximately $20,000. Additionally, NFLI's
warehouse consists of approximately 52,000 square feet and the current monthly
rental is approximately $19,000. NFLI also leases warehouse facilities in
Alaska and Hawaii with a combined 3,000 square feet of space for approximately
$6,000 per month. Additionally, the Company leases an office and warehouse
center in Warrington, England from a non-affiliate
-16-
consisting of approximately 16,000 square feet. The current monthly rental is
approximately $10,000 that escalates over the eight year term remaining on the
lease.
See Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operation" and Item 8. "Financial Statements and Supplementary Data".
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings, the adverse outcome of
which would, in management's opinion, have a material adverse effect on the
Company's business, financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year covered by this Report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock was traded on the National Market System of the
Nasdaq Stock Market under the symbol "ANII" and its Warrants were traded under
the symbol "ANIIW" during the past three fiscal years. The Company has been
notified by Nasdaq that its common stock is subject to delisting for the failure
to meet the minimum bid price requirement of $1.00 per share. The Company's
Common Stock and Warrants are currently traded on the Nasdaq SmallCap Market
under a temporary exception which expires on May 18, 2001. For the duration of
the exception, the Company's Nasdaq symbols will be ANIIC for the Common Stock
and ANIWC for the Warrants. There can be no assurance that the Company will be
able to maintain its Nasdaq listing.
In connection with a public offering in July 1995 the Company issued warrants to
purchase Common Stock (the "Warrants"). The holder of one Warrant is entitled to
purchase one share of Common Stock at $3.75 per share until December 31, 2001,
unless earlier redeemed by the Company.
Common Stock Warrants
------------ ---------------
Quarter Ended High Low High Low
------------- ----- ----- -------- -----
Fiscal 1998:
December 31, 1997 $7.88 $5.50 $3.94 $2.38
March 31, 1998 6.44 4.94 2.69 1.63
June 30, 1998 9.00 5.56 5.13 1.88
September 30, 1998 7.13 3.00 3.63 0.50
Fiscal 1999:
December 31, 1998 3.94 2.00 1.06 0.38
March 31, 1999 3.34 2.06 1.13 0.38
June 30, 1999 2.63 2.06 0.88 0.25
September 30, 1999 3.63 1.63 0.94 0.31
Fiscal 2000
December 31, 1999 3.00 2.13 0.38 0.19
March 31, 2000 2.44 1.63 0.75 0.19
June 30, 2000 2.19 1.38 0.31 0.25
September 30, 2000 2.00 0.75 0.31 0.03
As of January 10, 2001, there were 1,542 record holders of common stock.
The Company declared its first cash dividend on its common stock in September
1996, which dividend of $.02 per share was paid in October 1996. The Company
continued to pay quarterly dividends of $.02 per share of common stock until
June 1998. No dividends have been declared by the Company subsequent to June
1998. It is not likely that dividends will be paid in the fiscal year ending
September 30, 2000. The Company may not declare any dividends without the
consent of GECC.
-17-
Subject to obtaining the lender's consent the determination of the payment of
dividends in the future will be within the discretion of the Company's Board of
Directors and will depend on the earnings, capital requirements and operating
and financial condition of the Company, among other factors.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for each year in the five-year
period ended September 30, 2000 have been derived from the audited financial
statements of the Company. The data presented below should be read in
conjunction with Company's financial statements and notes thereto and, except
for operating data included therein, Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
YEARS ENDED SEPTEMBER 30,
(In thousands, except Per Share and Operating Data)
-----------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
Statements of Operations
Net Sales $69,258 $66,570 $69,658 $83,045 $97,404
Gross Profit 20,938 21,828 21,719 22,767 29,577
Operating income (loss) (3,619) (502) 698 (3,276) 13,347
Net income (loss) (4,004) (848) (867) (1,981) 8,705
Earnings (loss) per share:
Basic $(.52) $(.15) $(.15) $(.35) $1.61
Diluted $(.52) $(.15) $(.15) $(.35) $1.36
Weighted average number of
shares outstanding (1):
Basic 7,714 5,809 5,833 5,625 5,408
Diluted 7,714 5,809 5,833 5,625 6,405
Operating data:
Number of Distributors (2) 58,000 67,000 80,000 88,500 87,400
Average monthly
sales per Distributor (3) $ 71 $ 76 $ 69 $ 74 $ 112
Total products offered 500 400 380 364 320
Balance Sheet Data:
Working capital (deficit) $(3,597) $ 7,849 $ 7,019 $ 9,570 $14,617
Total assets 39,663 22,241 27,858 29,347 27,689
Total liabilities 22,835 7,893 13,415 13,489 10,087
Stockholders' equity 16,827 14,348 14,443 15,858 17,602
(1) The weighted average number of shares of Common Stock outstanding for
each period presented has been calculated giving effect to a three-for-
five stock split on July 10, 1995 and two-for-one stock split on
December 8, 1995, and after giving effect to dilutive stock options and
warrants.
(2) Includes "active" distributors only at the end of the period indicated.
See Item 1. "Business-Distribution and Marketing".
(3) Computed using net sales for NFLI network marketing operations only
using a simple average for the periods indicated.
-18-
SELECTED QUARTERLY FINANCIAL INFORMATION
QUARTER ENDED
(In thousands, except Per Share)
--------------------------------------------------------------
December 31 March 31 June 30 September 30 Fiscal Year
------------ --------- -------- ------------- ------------
Fiscal 2000:
Net Sales $16,587 $18,410 $17,428 $ 16,833 $69,258
Gross profit 5,110 6,063 4,012 5,753 20,938
Operating income (loss) (508) 22 (2,880) (253) (3,619)
Net income (loss) (498) (418) (2,771) (317) (4,004)
Earnings (loss) per Share:
Basic $ (.09) $ (.05) $ (.35) $ (.03) $ (.52)
Diluted $ (.09) $ (.05) $ (.35) $ (.03) $ (.52)
Dividends per share $ -- $ -- $ -- $ -- $ --
Fiscal 1999:
Net Sales $16,992 $16,536 $17,210 $ 15,832 $66,570
Gross profit 5,971 5,574 6,006 4,277 21,828
Operating income (loss) 358 107 983 (1,950) (502)
Net income (loss) 404 15 493 (1,760) (848)
Earnings (loss) per Share:
Basic $ .07 $ .00 $ .08 $ (.30) $ (.15)
Diluted $ .07 $ .00 $ .08 $ (.30) $ (.15)
Dividends per share -- -- -- -- --
Fiscal 1998:
Net Sales $18,384 $17,579 $15,415 $ 18,280 $69,658
Gross profit 5,028 5,735 4,758 6,198 21,719
Operating income (loss) (181) 925 (385) 339 698
Net income (loss) (248) 605 (321) (903) (1) (867)
Earnings (loss) per
Share:
Basic $ (0.04) $ 0.10 $ (0.05) $ (0.16) $ (0.15)
Diluted $ (0.04) $ 0.10 $ (0.05) $ (0.16) $ (0.15)
Dividends per share $ 0.02 $ 0.02 $ 0.02 -- $ 0.06
(1) Includes a $702,000 charge for warrants issued in connection with a
severance agreement.
-19-
FINANCIAL INFORMATION RELATING TO FOREIGN AND
DOMESTIC OPERATIONS AND EXPORT SALES
YEARS ENDED SEPTEMBER 30,
(In thousands)
--------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
Sales to unaffiliated customers:
North America (1) $62,500 $61,100 $65,400 $80,300 $97,200
Europe (2) 4,200 4,700 3,500 2,500 200
Philippines (3) 600 800 700 200 --
Japan (4) 2,000 -- -- -- --
Sales or transfers between geographic areas:
North America -- -- -- -- --
Europe 700 1,000 600 700 100
Philippines 100 100 300 300 --
Japan -- -- -- -- --
Operating profit (loss):
North America (1,300) 1,500 1,900 (2,300) 13,400
Europe (1,300) (900) (900) (900) --
Philippines (300) (500) (300) -- --
Japan (700) -- -- -- --
Identifiable assets:
North America 37,900 19,600 29,600 29,800 27,500
Europe 1,300 1,700 1,400 1,400 900
Philippines -- 300 900 700 --
Japan 500 -- -- -- --
(1) Includes the United States, Canada, and Puerto Rico.
(2) First began operations in fiscal 1996.
(3) First began operations in fiscal 1997 and ceased operations in fiscal
2000.
(4) First began operations in fiscal 2000.
-20-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Manufacturing Operations
The Company's manufacturing operations are a new line of business resulting
from the acquisitions that were consummated during the first quarter of the
fiscal year ended September 30, 2000. The acquisition of Bactolac Pharmaceutical
Inc., a contract manufacturer of nutritional supplements, was closed on November
17, 1999, and ASH, a contract manufacturer of pharmaceutical products, was
acquired as a division of Bactolac, as of December 1, 1999. The acquisitions
have been accounted for under the purchase method of accounting, whereby the
results of the acquired operations are included in the consolidated financial
statements from their dates of acquisition. In order to provide a meaningful
comparison, the following table for comparative purposes only, sets forth on a
pro forma basis for the periods indicated the amounts and percentages of
selected items of revenue and expense, as though the acquisitions of Bactolac
and ASH had been consummated as of the beginning of the year ended September 30,
1999.
Pro Forma Year ended September 30,
---------------------------------------
2000 1999
------------------ ------------------
Amount % Amount %
----------- ----- ----------- -----
Net sales $18,762,000 100.0% $19,296,000 100.0%
Cost of sales 12,932,000 68.9 16,110,000 83.5
Gross profit 5,830,000 31.1 3,186,000 16.5
Operating expenses 3,486,000 18.6 2,449,000 12.7
Goodwill amortization 484,000 2.6 484,000 2.5
Operating income (loss) 1,860,000 9.9 253,000 1.3
Net sales for the 2000 pro forma period decreased $534,000 or 2.8% over the
1999 pro forma period. The decrease was primarily attributable to a net
$2,612,000, increase in the sales of Bactolac, through a number of customers,
offset by a $3,146,000 reduction in the sales of ASH. The majority of the ASH
decrease was attributable to a decline in sales to Bayer Corporation. Bayer
Corporation has historically represented a significant portion of ASH's revenue
base, and Bayer has informed ASH, that effective January 1, 2001, it intends to
produce in-house substantially all of the products currently produced for it by
ASH. Sales to Bayer during the pro forma periods above represented 31% of the
manufacturing division pro forma sales for 2000, and 42% of the manufacturing
division pro forma sales for 1999. On the same basis, Bayer represented 17% of
the manufacturing division pro forma gross profit in 2000 and 31% of the
manufacturing division gross profit for 1999. ASH is aggressively attempting
to expand its customer base to compensate for the loss of the Bayer business.
Failure to replace this substantial customer, or the inability to substantially
reduce ASH's operating expenses, would have an adverse effect on the Company's
business and operations.
Gross profit for the 2000 pro forma period increased to $5,830,000, a
$2,644,000 increase over the 1999 pro forma amount. On a pro forma basis, gross
profit as a percentage of net sales increased to 31.1% in 2000, as compared to
16.5% in the 1999 pro forma period. The majority of the increase was due to
higher levels of sales at the Bactolac operation, without a corresponding level
of increase in the labor and overhead components of the cost of sales amounts.
Additionally, as Bactolac purchases materials in higher volumes and better
manages its purchasing activities, it is able to reduce, as a percentage of
sales, its material costs. Shortly after the end of the current fiscal year,
Bactolac moved into a larger facility, which will cause an increase in costs,
but is also anticipated to provide for improved operating efficiencies and
expanded in-house capabilities of certain processes for coating and packaging
that had been previously outsourced and allow for higher revenue levels to be
obtained.
Operating expenses on a pro forma basis increased to $3,486,000 in 2000, from
$2,449,000 in 1999. This represents an increase of $1,037,000 or 42.3%. The
majority of the increase relates to additional personnel costs, in addition to
higher administrative costs being incurred for insurance, professional fees and
sales and marketing expenses following the acquisitions.
-21-
Network Marketing Operations
The following table sets forth for the network marketing line of business for
the periods indicated the percentages that selected items bear to net sales as
included in the Consolidated Statements of Operations:
Year Ended September 30,
----------------------
2000 1999 1998
----- ------ -----
Net sales 100.0% 100.0% 100.0%
Cost of sales 71.0 67.2 68.8
----- ------ -----
Gross profit 29.0 32.8 31.2
Operating expenses 37.3 33.6 30.2
----- ------ -----
Income (loss) from operations (8.3)% (0.8)% 1.0%
===== ====== =====
Year Ended September 30, 2000 Compared to Year Ended September 30, 1999
Net sales for the twelve months ended September 30, 2000 decreased by
$13,380,000 or 20.1% to $53,190,000 as compared to net sales of $66,570,000 for
the twelve months ended September 30, 1999.
At September 30, 2000, the Company had approximately 58,000 distributors as
compared to approximately 67,000 at September 30, 1999. During the twelve months
ended September 30, 2000 the number of active international distributors
increased by approximately 2,400, while active distributors in North America
decreased by approximately 11,400. The ability of the Company to increase its
number of active distributors and its sales per average number of distributors
is material to the future operations and financial condition of the Company. The
decrease in net sales is recapped below:
Decrease in sales due to decreased average
number of distributors $ (9,775,000)
Decrease in distributor average sales (3,605,000)
------------
$(13,380,000)
============
The Company's net sales per average number of distributors per month decreased
from $76 during the twelve months ended September 30, 1999 to $71 for the twelve
months ended September 30, 2000.
Cost of sales decreased by $6,992,000 or 15.6% to $37,750,000 for the twelve
months ended September 30, 2000 from $44,742,000 for the twelve months ended
September 30, 1999. Cost of sales as a percentage of net sales increased from
67.2% in the twelve months ended September 30, 1999 to 71.0% in the twelve
months ended September 30, 2000. Cost of sales, which includes product costs,
commissions and bonuses paid to distributors, and shipping costs, is recapped
below:
Year Ended
September 30,
-----------
2000 1999
---- ----
Product costs 27.7% 27.1%
Commissions and bonuses paid to distributors 34.4 33.0
Shipping costs 8.9 7.1
---- ----
71.0% 67.2%
==== ====
Product costs as a percentage of cost of sales increased 0.6%. Commissions
and bonuses paid to distributors increased 1.4% as a percentage of cost of sales
as a result of changes in the mix of higher versus lower bonus value products
purchased by distributors. Shipping costs increased 1.8% primarily from a
combination of higher shipping rates and increased shipping to the Japan markets
from the Company's warehouse in the United States and the use of an outside
contractor for certain shipping.
Gross profit decreased 29.3% or $6,388,000 from $21,828,000 for the twelve
months ended September 30, 1999 to $15,440,000 for the twelve months ended
September 30, 2000. Gross profit as percentage of net sales decreased from 32.8%
for the twelve months ended September 30, 1999 to 29.0% for the twelve months
ended September 30, 2000.
Marketing, distribution and administrative expenses in decreased $2,501,000 or
11.2% from $22,330,000 for the twelve months ended September 30, 1999 to
$19,829,000 for the twelve months ended September 30, 2000. The decrease
results primarily from a combination of reduced personnel expense and overall
expense containment in response to the Company's continued losses. As a
percentage of net sales, marketing, distribution and administrative expenses
increased to 37.3% for
-22-
the year ended September 30, 2000 from 33.6% for the year ended September 30,
1999, as the rate of expense reductions did not keep pace with the decrease in
net sales.
Loss from operations for the year ended September 30, 2000 increased
$3,887,000 to $4,389,000 from $502,000 of loss from operations for the year
ended September 30, 1999 principally as a result of reduced net sales and gross
profits partially off set by reduced operating expenses as explained above. The
loss from operations for the twelve months ended September 30, 2000 and 1999
includes approximately $1,591,000 and $1,363,000, respectively, of operating
loss from the Company's wholly-owned, consolidated subsidiaries that operate in
foreign countries.
During the fourth quarter of the year ended September 30, 2000, the Company
consummated the previously executed letter of intent with the current managers
of RP to purchase the subsidiary. The Company's loss on the disposition as well
as the realizable value of consideration received was minimal. During the year
ended September 30, 1999, the Company recorded asset impairments and other
writedowns (principally inventory) in RP in the aggregate amount of $300,000.
Additionally the Company began operations in Japan in October 1999. To date
start-up costs have been minimal since the Company's operations in Japan
consisted of providing services to Japanese members who will purchase products
for personal use only directly from the Company's US operations.
Year Ended September 30, 1999 Compared to Year Ended September 30, 1998
Net sales for the twelve months ended September 30, 1999 decreased by
$3,088,000 or 4.4% to $66,570,000 as compared to net sales of $69,658,000 for
the twelve months ended September 30, 1998.
The Company has an Order Assurance Program("OAP"), which allows a distributor
to generate sales volume and maintain qualification to receive monthly
commissions. Prior to June 1, 1999 NFLI sold product redemption certificates to
distributors who were enrolled in the OAP. Revenues were recorded when these
certificates were redeemed for product. However, if the certificates were not
redeemed for product, the Company recorded revenues ratably over a 150-day
period commencing with the ending of the expiration period of 120 days. Such
revenues are recorded as part of the Company's net sales for periods prior to
June 1, 1999.
Subsequent to June 1, 1999 the Company began shipping product packs for most
OAP purchases, the shipment of which results in the recognition of revenue.
Approximately $2,600,000 of revenue related to the shipment of the product packs
was recognized in fiscal 1999. Except in very limited circumstances, NFLI no
longer sells any type of product redemption certificates. It now only provides
its distributors with a deferred arrangement for product purchases under a plan
similar to a "layaway" program for "big ticket" items. The distributor makes
payments against the product purchase for a period not to exceed six months, and
upon payment in full, NFLI ships the product to the distributor. Revenues
collected in advance of shipment are recorded as deferred revenues until the
product is shipped. The distributor has the right to substitute other products
or receive a cash refund or product replacement under the same terms as regular
product sales.
At September 30, 1999, the Company had approximately 67,000 distributors as
compared to approximately 80,000 at September 30, 1998. During the twelve months
ended September 30, 1999 the number of active international distributors
increased by approximately 1,500, while active distributors in North America
decreased by approximately 14,000. The ability of the Company to increase its
number of active distributors and its sales per average number of distributors
is material to the future operations and financial condition of the Company. The
decrease in net sales is recapped below:
Decrease in sales due to decreased
average number of distributors $(8,912,000)
Increase in distributor average sales 5,824,000
-----------
$(3,088,000)
===========
The Company's net sales per average number of distributors per month increased
from $69 during the twelve months ended September 30, 1998 to $76 for the
twelvemonths ended September 30, 1999.
Cost of sales decreased by $3,197,000 or 6.6% to $44,742,000 for the twelve
months ended September 30, 1999 from $47,939,000 for the twelve months ended
September 30, 1998. Cost of sales as a percentage of net sales decreased from
68.8% in the twelve months ended September 30, 1998 to 67.2% in the twelve
months ended September 30, 1999. Cost of sales, which includes product costs,
commissions and bonuses paid to distributors, and shipping costs, is recapped
below:
-23-
Year Ended
September 30,
-----------
1999 1998
---- ----
Product costs 27.1% 27.6%
Commissions and bonuses paid to distributors 33.0 35.0
Shipping costs 7.1 6.2
---- ----
67.2% 68.8%
==== ====
Product costs as a percentage of cost of sales decreased 0.5% primarily as a
result of the Company now producing and selling certain recruiting and training
materials which were primarily sold to the Company's distributors by Distributor
Services, L.L.C. during the twelve months ended September 30, 1998. The gross
profit margin on these materials is generally greater than the gross profit
margin on many of the Company's other products. Commissions and bonuses paid to
distributors decreased 2.0% as a percentage of cost of sales as a result of
changes in the mix of higher versus lower bonus value products purchased by
distributors. Shipping costs increased 0.9% primarily from a combination of
increased shipping to continental Europe from the Company's warehouse in the
United Kingdom and the use of an outside contractor for certain shipping.
Gross profit decreased 0.5% or $109,000 from $21,719,000 for the twelve months
ended September 30, 1998 to $21,828,000 for the twelve months ended September
30, 1999. Gross profit as percentage of net sales increased from 31.2% for the
twelve months ended September 30, 1998 to 32.8% for the twelve months ended
September 30, 1999.
Marketing, distribution and administrative expenses increased $1,309,000 or
6.2% from $21,021,000 for the twelve months ended September 30, 1998 to
$22,330,000 for the twelve months ended September 30, 1999. The increase
results primarily from a combination of reduced personnel expenses, increased
depreciation charges on computer hardware and software, and increased promotion
costs for meetings and rallies previously performed by Distributor Services,
L.L.C. As a percentage of net sales, marketing, distribution and administrative
expenses increased to 33.6% for the year ended September 30, 1999 from 30.2% for
the year ended September 30, 1998.
Income (loss) from operations for the year ended September 30, 1999 decreased
$1,200,000 or 172.0% to $502,000 of loss from $698,000 of income from operations
for the year ended September 30, 1998 principally as a result of the increase in
operating expenses as explained above. The income (loss) from operations for the
twelve months ended September 30, 1999 and 1998 includes approximately
$1,363,000 and $1,340,000, respectively, of operating loss from the Company's
wholly-owned, consolidated subsidiaries that operate in foreign countries.
Subsequent to September 30, 1999, the Company executed a letter of intent with
the current managers of RP to purchase the subsidiary. The completion of the
sale is subject to various closing conditions. The Company anticipates that the
realizable value of consideration to be received will be minimal. During the
year ended September 30, 1999, the Company recorded asset impairments and other
writedowns (principally inventory) in RP in the aggregate amount of $300,000.
Additionally the Company began operations in Japan in October 1999. Start-up
costs are expected to be minimal since the Company's operations in Japan will
consist of providing services to Japanese members who will purchase products for
personal use only directly from the Company's US operations.
At September 30, 1999, approximately $425,000 related to the Company's recent
acquisition of ANI, ASH and Bactolac was included in Other Assets. The Company
will amortize that amount plus other acquisition cost incurred prior to the
closing of the acquisition over a twenty year period.
As a result of the Company's foreign operations, it is subject to foreign
currency changes. The gains and (losses) from such changes are included with
other income (loss). For the years ended September 30, 2000, 1999 and 1998, the
Company reported gains and losses of $(453,000), $66,000 and $(337,000),
respectively. During 2000 interest expense increased to $996,000 from $21,000
in the previous year, primarily as a result of borrowings incurred in connection
with the acquisitions made during the current fiscal year. During the year
ended September 30, 1998, the Company reported an expense of $702,000, recorded
to recognize the cost of a Warrant issued in settlement of a contract
termination.
Income Taxes
Historically the Company's effective tax rate has been significantly higher
that the computed statutory rate. The higher rate has been primarily as a
result of losses of the Company's foreign subsidiaries which are not deductible
for U.S. income tax purposes. Additionally, during the year ended September 30,
2000, the effective rate of expected tax benefit was lower
-24-
than the expected amount due to the non-deductible goodwill arising from the
acquisitions which were consummated in the year.
Liquidity and Capital Resources
Since ANI consummated the acquisitions of Bactolac and ASH, it has met its
working capital and capital expenditure requirements, including funding for debt
repayments, mainly through net cash provided under the Company's revolving line
of credit provided through a secured lender. As a result of cost reductions
which have been implemented across the board and upon the closing of the pending
sale of NFLI, management believes that a significant portion of the upcoming
working capital needs can be met out of cash provided by the sale of NFLI and
cash generated from operating activities. Additionally, subsequent to September
30, 2000, the Company received a net state of Texas franchise tax refund of
approximately, $619,000, arising from amending previous years tax returns, which
amount will be used for working capital needs. Management plans to continue to
strive to restore profitability and pursue additional financing during the
current fiscal year to meet currently anticipated funding requirements.
At September 30, 2000, the Company had a working capital deficit of
$3,597,000. Borrowings under the revolving portion of the secured credit
facility totaled $4,653,000, with additional borrowings available of $577,000,
at that point, based upon accounts receivable and inventory levels. Under the
terms of the Agreement for the sale of NFLI, the purchaser is required to repay
or assume the NFLI portion of such borrowings, which as of September 30, 2000,
totaled approximately $1,363,000, including $220,000, outstanding under the term
loan portion of the credit facility.
Operating Activities
Net cash outflows from continuing operating activities were approximately
$1,033,000, $2,199,000 and $571,000 in 2000, 1999 and 1998, respectively. The
net cash outflow from operating activities in 2000, consisted of approximately
$2,520,000 in cash used to reduce accounts payable and accrued expenses
primarily during the period following the acquisitions of Bactolac and ASH and
approximately $1,209,000 increase in accounts receivable, relating primarily to
higher level of sales at the Bactolac operation. These amounts were offset in
2000 by reduced inventory levels primarily at the NFLI operations. Net losses
consumed approximately $500,000 from operations after adding back depreciation
and amortization expense.
Investing Activities
Investing activities consumed approximately $125,000 in 2000. The sale of the
remaining balance in marketable securities generated approximately $997,000 in
cash. During 2000 approximately $650,000 was used for property and equipment
additions, with the largest portion primarily at the new Bactolac facility,
which was leased shortly before the end of the fiscal year. Investing
activities consumed $388,000 during 1999, primarily for equipment additions and
1998 consumed $2,993,000, with approximately $1,986,000 spent on property and
equipment, primarily computer and software additions and the remainder on the
purchase of marketable securities.
Financing Activities
Financing activities generated approximately $517,000 in 2000. This consisted
of approximately $4,005,000 in net borrowing under the Company's credit facility
and long term debt net repayments of approximately $3,487,000.
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 $2,360,000 term loan facility
with the secured lender that requires principal payments of $49,167, monthly
over the remaining term of the Agreement. Interest on amounts outstanding under
the Agreement is payable monthly based upon the lender's index rate plus 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, 2000,
the Company was not in compliance with several covenants under the Agreement and
a waiver has been obtained from GECC. Due to the fact that ANI was not in
compliance with the terms of the Agreement, and the waiver did not extent 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
September 30, 2000. Management of ANI plans to continue discussions with the
secured lender concerning an amendment to the credit facility which management
believes based on its discussions with such lender can be accomplished between
now and closing of the NFLI sale, to approve the agreed upon sale of NFLI and to
achieve mutually acceptable compliance conditions. If the Company is
-25-
not successful in its efforts to amend the Agreement, it will have adverse
effects on the Company's business, financial condition and operations.
As a result of the acquisitions of Bactolac and ASH, during the first quarter
of the Company's fiscal year ended September 30, 2000, the Company entered into
purchase notes totaling $3,000,000, with certain of the selling stockholders and
assumed, through Bactolac, a $1,350,053, mortgage obligation of the ASH
facility. The Bactolac stock purchase note is subordinate to the GECC facility,
bears interest at 7%, and with the approval of GECC, required a
$1,000,000,payment on the first anniversary of the acquisition. The holder of
the note has agreed to extend the payment of the first installment for six
months or until the closing of the NFLI sale transaction. The $500,000, ASH
stock purchase notes are subordinate to the GECC facility, bear interest at 7%,
and subject to the approval of GECC, were payable December 29, 2000. The loan
assumption agreement for the ASH mortgage obligation bears interest at prime
plus 2%, and is secured by the ASH land and building. The assumption agreement
was originally due May 15, 2000, and the holder has agreed to four amendment
agreements that extended the due date to March 31, 2001. Management of ANI
intends to continue to try to work with the holders of these obligations in
trying to resolve the current inability to liquidate the debts under their
scheduled terms. Additionally, the ability to potentially refinance the ASH
mortgage with a new lender and provide additional cash is currently being
explored. Should the holders not agree to extensions, or an alternative loan
facility not be obtained, it would have adverse effects on the Company's
business, financial condition and operation.
Capital expenditures, primarily for manufacturing and laboratory equipment for
fiscal 2001 are anticipated to be approximately $450,000-600,000. It is expected
that the funding for these capital needs will be provided by leases. A lease of
$70,000 has recently been approved and was funded in January 2001, and a lease
line of $407,000, has been tentatively approved for equipment needs.
Bayer has notified the Company that it will be moving substantially all
production previously produced at the ASH facility, to its own in-house facility
on or about January 1, 2001. During the first quarter of the current fiscal year
ending September 30, 2001, a significant increase in Bayer orders, which totaled
approximately $1.1 million, was received and processed at the ASH facility, as
Bayer stocked up for the transition. During the second quarter of the year, it
is expected that such revenues will be collected and associated accounts
receivable and inventory levels will be reduced. Since no new revenues are
expected from Bayer, ASH has been attempting to expand its customer base to
reduce its dependence upon Bayer and intends to continue to focus on those
efforts. Failure to replace this substantial customer or failing to implement a
substantial reduction in operating expenses would have an adverse effect on the
Company's business, financial condition and results of operations.
Year 2000 Issue Update
The Company did not experience any significant malfunctions or errors in its
operating or business systems when the date changed from 1999 to 2000. Based on
operations since January 1, 2000, the Company does not expect any significant
impact to its on-going business as a result of the "Year 2000 issue." However,
it is possible that the full impact of the date change, which was of concern due
to computer programs that use two digits instead of four digits to define years,
has not been fully recognized. For example, it is possible that Year 2000 or
similar issues, such as leap year-related problems, may occur with billing,
payroll, or financial closings at month, quarterly or year end. The Company
believes that any such problems are likely to be minor and correctable. In
addition, the Company could still be negatively impacted if its customers or
suppliers are adversely affected by the Year 2000 or similar problems that have
arisen for its customers and suppliers.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No 133, and SFAS 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, will be effective for the
Company's fiscal year ending September 30, 2001. SFAS 133 requires that an
entity record all derivatives on the balance sheet as either assets or
liabilities, measured at fair value. The accounting for changes in the fair
value of a derivative depends on the use of the derivative. Management believes
that the adoption of these statements will not have a significant impact on the
company's financial position or results of operations.
The Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
(SAB) 101, Revenue Recognition in Financial Statements, in December 1999. The
SAB summarizes certain of the SEC staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. In June
2000, the SEC issued SAB 101B, which delays the implementation date of SAB 101
until no later than the fourth fiscal quarter of fiscal years beginning after
-26-
December 15, 1999. The Company does not believe that adoption of this SAB will
have a material impact on its financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company is exposed to market risks, which include changes in currency
exchange rates as measured against the U.S. dollar. The value of the U.S. dollar
against the foreign currencies in which the Company has operations affects the
Company's financial results. Changes in exchange rates positively or negatively
affect the Company's sales (as expressed in U.S. dollars), gross margins,
operating expenses, and retained earnings. When the U.S. dollar sustains a
strengthening position against currencies in which the Company sells products or
a weakening exchange rate against currencies in which it incurs costs, its sales
or costs are adversely affected. The Company does not believe that upon
completion of the sale of NFLI, that it will have any significant exposure to
exchange rate fluctuations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On September 16, 1999, the Company determined to engage Grant Thornton LLP as
the principal accountant to audit the Company's financial statements for the
fiscal year ending September 30, 1999. The decision to change accountants was
recommended by the Audit Committee of the Board of Directors of the Company.
The Report of BDO Seidman, LLP, on the consolidated financial statements of the
Company for the fiscal year ended September 30, 1998 did not contain an adverse
opinion or disclaimer of opinion nor was it modified as to uncertainty, audit
scope or accounting principles. The Company does not believe that there were any
disagreements with BDO Seidman, LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
during the past two fiscal years then ended or the subsequent period up to the
time of dismissal which, if not resolved to BDO Seidman, LLP's satisfaction,
would have caused BDO Seidman, LLP to make reference to the subject matter of
the disagreement(s) in connection with its Report. However, during fiscal 1999
BDO Seidman, LLP informed the Company of the need to evaluate for impairment the
unamortized carrying value of the Audio Production Rights which balance as of
September 30, 1998 and June 30, 1999 was $1,400,000 and $1,089,000,
respectively. The Company evaluated such Audio Production Rights for impairment
at September 30, 1999, as well as subsequently.
-27-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Advanced Nutraceuticals, Inc. Consolidated Financial Statements Page
----
Report of Independent Certified Public Accountants F-2
Independent Certified Public Accountants' Report F-3
Consolidated Balance Sheets as of September 30, 2000 and 1999 F-4
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the Years Ended September 30, 2000, 1999 and 1998. F-5
Consolidated Statements of Stockholders' Equity for the Years
Ended September 30, 2000, 1999 and 1998. F-6
Consolidated Statements of Cash Flows for the Years Ended
September 30, 2000, 1999 and 1998. F-7
Notes to Consolidated Financial Statements. F-8
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Advanced Nutraceuticals, Inc.
We have audited the consolidated balance sheets of Advanced Nutraceuticals,
Inc. (formerly - Nutrition For Life International, Inc.) and Subsidiaries as of
September 30, 2000 and 1999 and the related consolidated statements of
operations and comprehensive income (loss), stockholders' equity, and cash flows
for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Advanced Nutraceuticals, Inc. (formerly - Nutrition For Life International,
Inc.) and Subsidiaries as of September 30, 2000 and 1999 and the consolidated
results of their operations and their consolidated cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.
As described in Note 17 the accompanying consolidated balance sheets as of
September 30, 2000 and 1999, and the related consolidated statements of
operations and comprehensive income (loss) and cash flows for the years then
ended have been restated.
Grant Thornton LLP
Houston, Texas
January 3, 2001
F-2
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
To the Board of Directors
and Shareholders of
Advanced Nutraceuticals, Inc.
We have audited the consolidated statements of operations and comprehensive
loss, stockholders' equity, and cash flows of Advanced Nutraceuticals, Inc.
(formerly - Nutrition for Life International, Inc.) for the year ended September
30, 1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows of Advanced Nutraceuticals, Inc. (formerly -Nutrition For Life
International, Inc.) for the year ended September 30, 1998 in conformity with
generally accepted accounting principles.
As described in Note 17 to the consolidated financial statements, certain of
the financial statements have been restated from amounts as previously prepared.
BDO Seidman, LLP
Houston, Texas
December 29, 1998
F-3
ADVANCED NUTRACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND 1999
2000 1999
----------- -----------
(Restated-*) (Restated-*)
ASSETS
------
Current Assets:
Cash and cash equivalents $ 958,365 $ 1,395,310
Restricted cash 101,266 585,866
Marketable securities -- 996,942
Receivables, net 4,578,570 362,315
Inventories (Note 4) 7,253,939 8,434,220
Deferred tax asset (Note 5) 1,707,000 1,647,000
Prepaid expenses and other assets 884,831 1,062,513
----------- -----------
Total Current Assets 15,483,971 14,484,166
Property and equipment, net (Notes 6 and 9) 14,326,317 6,038,186
Audio production rights 80,600 972,222
Goodwill (Note 7) 9,228,829 --
Other assets 542,938 746,246
----------- -----------
$ 39,662,655 $22,240,820
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 5,614,400 $ 2,517,020
Accrued distributor bonuses 1,133,081 1,384,950
Deferred income 348,455 826,464
Accrued expenses and other liabilities 1,372,075 1,344,001
Credit facility (Note 8) 6,589,783 --
Current portion of other installment obligations 1,173,518 562,464
Current portion of long-term debt (Note 9) 2,850,053 --
----------- -----------
Total Current Liabilities 19,081,365 6,634,899
Deferred tax liability (Note 5) 2,254,000 778,000
Long-term debt (Note 9) 1,500,000 --
Long-term portion of other installment obligations -- 479,719
----------- -----------
Total Liabilities 22,835,365 7,892,618
----------- -----------
Commitments and contingencies (Note 10) -- --
Stockholders' Equity (Notes 11 and 12):
Preferred stock, $.001 par value; 1,000,000 authorized; none issued -- --
Common stock; $.01 par value; 20,000,000 shares authorized 80,198 58,875
Additional paid-in capital 17,936,253 11,837,156
Retained earnings (deficit) (1,266,831) 3,110,405
Accumulated other comprehensive income (loss) 77,670 (125,749)
----------- -----------
16,827,290 14,880,687
Less: Treasury stock, 79,000 shares, at cost in 1999 -- (532,485)
----------- -----------
Total Stockholders' Equity 16,827,290 14,348,202
----------- -----------
$39,662,655 $22,240,820
=========== ===========
See accompanying notes to consolidated financial statements.
(* Amounts Restated--See Note 17)
F-4
ADVANCED NUTRACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
2000 1999 1998
----------- ----------- -----------
(Restated-*) (Restated-*) (Restated-*)
Net sales $69,258,328 $66,569,875 $69,658,095
Cost of sales 48,320,748 44,742,050 47,939,482
----------- ----------- -----------
Gross profit 20,937,580 21,827,825 21,718,613
General and administrative expenses 24,556,847 22,329,914 21,021,056
----------- ----------- -----------
Operating income (loss) (3,619,267) (502,089) 697,557
----------- ----------- -----------
Other income (expense):
Interest expense, net (995,757) (21,478) 70,184
Foreign exchange gain (loss) (452,947) 65,596 (336,842)
Other, net 406,640 166,619 (508,305)
----------- ----------- -----------
(1,042,064) 210,737 (774,963)
----------- ----------- -----------
Loss before income tax expense (benefit) (4,661,331) (291,352) (77,406)
Income tax expense (benefit) (Note 5) (657,000) 557,000 790,050
----------- ----------- -----------
Net Income (loss) (4,004,331) (848,352) (867,456)
Other comprehensive income (loss):
Unrealized loss on investments, net of tax 45,500 (7,136) (38,364)
Foreign currency translation adjustment 157,919 (2,281) (86,546)
----------- ----------- -----------
203,419 (9,417) (124,910)
----------- ----------- -----------
Total comprehensive loss $(3,800,912) $ (857,769) $ (992,366)
=========== =========== ===========
Basic and diluted loss per common share $ (0.52) $ (0.15) $ (0.15)
=========== =========== ===========
Weighted average common shares outstanding -
basic and diluted 7,713,750 5,808,595 5,832,887
=========== =========== ===========
See accompanying notes to consolidated financial statements.
(* Amounts Restated--See Note 17)
F-5
ADVANCED NUTRACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
Additional Retained
Preferred Stock Common Stock Paid-In Earnings
Shares Amount Shares Amount Capital Deficit
-------- ----------- --------- ------- ----------- ------------
Balance at
September 30, 1997 -- $ -- 5,775,835 $57,758 $10,688,951 $ 5,176,539
Net loss -- -- -- -- -- (867,456)
Cash dividends (Note 11) -- -- -- -- -- (350,326)
Purchase of treasury stock -- -- -- -- -- --
Foreign currency
translation adjustment -- -- -- -- -- --
Issuance of common
stock options (Note 12) -- -- -- -- 144,705 --
Registration expenses -- -- -- -- (31,487) --
Unrealized loss on investment,
net of tax -- -- -- -- -- --
Exercise of stock options
and warrants -- -- 111,760 1,117 271,875 --
-------- ----------- --------- ------- ----------- ------------
Balance at
September 30 ,1998 -- -- 5,887,595 58,875 11,074,044 3,958,757
Net loss -- -- -- -- -- (848,352)
Foreign currency
translation adjustment -- -- -- -- -- --
Issuance of common
stock options and
warrants (Note 12) -- -- -- -- 763,112 --
Unrealized loss on investments,
net of tax -- -- -- -- -- --
-------- ----------- --------- ------- ----------- ------------
Balance at
September 30 ,1999 -- -- 5,887,595 58,875 11,837,156 3,110,405
Net loss -- -- -- -- -- (4,004,331)
Foreign currency
translation adjustment -- -- -- -- -- --
Unrealized gain on
investment, net of tax -- -- -- -- -- --
Issue preferred
stock (Note 11) 221,127 6,280,000 -- -- -- --
Convert preferred
stock (Note 11) (221,127) (6,280,000) 2,211,270 22,113 6,257,887 --
Cancel treasury stock (Note 11) -- -- (79,000) (790) (158,790) (372,905)
-------- ----------- --------- ------- ----------- ------------
Balance at
September 30, 2000 -- $ -- 8,019,865 $80,198 $17,936,253 $ (1,266,831)
======== =========== ========= ======= =========== ============
See accompanying notes to consolidated financial statements
F-6
ADVANCED NUTRACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
Accumulated Other
Comprehensive Income (Loss)
-----------------------
Cumulative
Unrealized Foreign
Loss Currency Total
On Translation Treasury Stock Stockholders'
Investment Adjustment Shares Amount Equity
---------- ----------- ----------- ---------- -----------
Balance at
September 30, 1997 $ -- $ 8,578 (9,000) $ (73,810) $15,858,016
Net loss -- -- -- -- (867,456)
Cash dividends (Note 11) -- -- -- -- (350,326)
Purchase of treasury stock -- -- (70,000) (458,675) (458,675)
Foreign currency
translation adjustment -- (86,546) -- -- (86,546)
Issuance of common
stock options (Note 12) -- -- -- -- 144,705
Registration expenses -- -- -- -- (31,487)
Unrealized loss on investment, net of tax (38,364) -- -- -- (38,364)
Exercise of stock options
and warrants -- -- -- -- 272,992
---------- ----------- ----------- ---------- -----------
Balance at
September 30, 1998 (38,364) (77,968) (79,000) (532,485) 14,442,859
Net loss -- -- -- -- (848,352)
Foreign currency
translation adjustment -- (2,281) -- -- (2,281)
Issuance of common stock
options and
warrants (Note 12) -- -- -- -- 763,112
Unrealized loss on
Investments, net of tax (7,136) -- -- -- (7,136)
---------- ----------- ----------- ---------- -----------
Balance at
September 30, 1999 (45,500) (80,249) (79,000) (532,485) 14,348,202
Net loss -- -- -- -- (4,004,331)
Foreign currency
translation adjustment -- 157,919 -- -- 157,919
Unrealized gain on
investment, net of tax 45,500 -- -- -- 45,500
Issued preferred
stock (Note 11) -- -- -- -- 6,280,000
Convert preferred
stock (Note 11) -- -- -- -- --
Cancel treasury stock (Note 11) -- -- 79,000 532,485 --
---------- ----------- ----------- ---------- -----------
Balance at
September 30, 2000 $ -- $ 77,670 -- $ -- $16,827,290
========== =========== ========== ========== ===========
See accompanying notes to consolidated financial statements
F-7
ADVANCED NUTRACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999, AND 1998
2000 1999 1998
----------- ----------- -----------
(Restated-*) (Restated-*) (Restated-*)
Cash flows from operating activities:
Net loss $(4,004,331) $ (848,352) $ (867,456)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,448,532 1,944,644 1,397,810
Bad debt provision 200,000 1,093,119 530,880
Deferred tax expense (benefit) (654,259) 460,000 676,608
Stock options/warrants issued for services -- 60,990 144,705
Loss on disposition of property and equipment 54,627 74,809 --
Unrealized losses on available for sale securities -- -- 38,364
Changes in assets and liabilities, net of acquisitions:
Restricted cash 484,600 (585,866) 513,195
Receivables (1,208,850) (886,503) 447,668
Inventories 3,320,771 1,263,275 (1,777,041)
Refundable federal income taxes -- 200,000 459,111
Prepaid and other assets 261,330 (109,352) (456,643)
Other assets 228,825 (368,918) 5,186
Accounts payable (456,844) (765,730) (425,181)
Deferred income (644,676) (2,426,134) (571,873)
Accrued expenses and other liabilities (2,062,582) (1,305,025) (642,865)
Federal and franchise tax payable -- -- (43,216)
----------- ----------- -----------
Net cash flows from operating activities (1,032,857) (2,199,043) (570,748)
----------- ----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (650,158) (323,211) (1,986,114)
Sale (purchase) of marketable securities 996,942 (64,882) (1,006,560)
Acquisitions, net of cash acquired (471,528) -- --
----------- ----------- -----------
Net cash flows from investing activities (124,744) (388,093) (2,992,674)
----------- ----------- -----------
Cash flows from financing activities:
Net borrowings from credit facility 3,039,783 -- --
Payment of capital lease obligation (176,334) (164,690) (166,307)
Proceeds from long-term debt 965,109 -- --
Payment of long-term debt (3,311,321) (254,971) --
Exercise of stock options -- -- 223,642
Exercise of warrants -- -- 49,350
Dividends paid -- -- (466,124)
Registration fees -- -- (31,487)
Purchase of warrants -- -- (73,675)
Purchase of treasury stock -- -- (385,000)
----------- ----------- -----------
Net cash flows from financing activities 517,237 (419,661) (849,601)
----------- ----------- -----------
Effect of exchange rates on cash and cash equivalents 203,419 (2,281) (86,546)
----------- ----------- -----------
Net decrease in cash and cash equivalents (436,945) (3,009,078) (4,499,569)
Cash and cash equivalents, beginning of year 1,395,310 4,404,388 8,903,957
----------- ----------- -----------
Cash and cash equivalents, end of year $ 958,365 $ 1,395,310 $ 4,404,388
=========== =========== ===========
See accompanying notes to consolidated financial statements.
(* Amounts Restated--See Note 17)
F-8
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Advanced Nutraceuticals, Inc. ("ANI" or the "Company"), a Texas corporation,
was formed during 2000 to become the parent company of Nutrition For Life
International, Inc. ("NFLI"), in a reorganization that was completed as of March
15, 2000. Under the terms of the reorganization, each outstanding share of
common stock of NFLI issued and outstanding immediately prior to the merger was
converted into one share of ANI's common stock. Also, each outstanding option,
and each outstanding warrant, to purchase shares of NFLI's common stock was
converted into as option or a warrant, as the case may be, to purchase, on the
same terms and conditions, an identical number of shares of ANI's common stock.
Through its Bactolac Pharmaceutical Inc.("Bactolac") subsidiary, ANI operates
as a contract manufacturer of nutritional and pharmaceutical products. ANI's
NFLI subsidiary and its related entities, operate as a wholesale distributor
through its network marketing organization, by selling a variety of consumer
products and services through independent distributors in the United States and
abroad. NFLI develops products that are designed for health-conscious consumers,
and sells those products to consumers through its network of independent
distributors. The Company offers a product line of approximately 500 products in
nine categories, including nutritional supplements, health foods, weight
management items, skin care products, other consumer products, and services.
Principles Of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Cash And Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand and in short-term, interest bearing deposits with original maturities of
three months or less at the time of purchase.
Concentration of Credit Risk
At September 30, 2000 and 1999, the Company's cash in financial institutions
exceeded the federally insured deposit limit by approximately $1,200,000 and
$893,000.
Fair Market Value Of Financial Instruments
The Company's financial instruments include accounts receivable, accounts
payable, and long-term debt. The fair market value of accounts receivable and
accounts payable approximate their carrying values because their maturities are
generally less than one year. Long-term debt obligations are estimated to
approximate their carrying values based upon their stated interest rates.
Marketable Securities
Unrealized holding gains and losses on available for sale securities are
reflected as a separate component of accumulated other comprehensive income
(loss) until realized. For the purposes of computing realized and unrealized
gains and losses, cost is identified on a specific identification basis.
Marketable securities are categorized as available-for-sale securities, as
defined by Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" and are summarized as
follows:
1999
--------------------------------
Bond Money-market
Funds funds Total
-------- -------- ----------
Cost $732,519 $338,923 $1,071,442
Fair Value 658,019 338,923 996,942
-------- -------- ----------
Gross unrealized loss $ 74,500 $ -- $ 74,500
======== ======== ==========
The unrealized loss on investments in the amount of $45,500 at September 30,
1999, is net of tax in the amount of $29,000.
F-9
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Revenue Recognition
Revenues from the sale of Bactolac products are recognized upon shipment to
the customer. Management provides an estimated allowance for uncollectable
accounts receivable based upon an assessment of amounts outstanding and
evaluation of specific customer account balances.
The allowance for doubtful accounts at September 30, 2000 of $400,000 resulted
from a $200,000 bad debt provision for the year and a $200,000 allowance
recorded in connection with the Bactolac acquisition. No allowance was recorded
at September 30, 1999.
NFLI sells its products directly to independent distributors. Sales are
recorded when products are shipped. Net sales represent orders shipped, less
estimated returns and allowances. Provisions are made for estimated returns and
allowances at the time of sale. Included in cost of sales are rebates and other
commissions that are paid monthly and are calculated using specific rates based
on actual sales volume.
Prior to June 1, 1999, NFLI sold product redemption certificates to
distributors who were enrolled in the Company's order assurance program ("OAP").
Revenues were recorded when these certificates were redeemed for product.
However, if the certificates were not redeemed for product, the Company recorded
revenues ratably over a 150 day period commencing with the ending of the
expiration period of 120 days. The period of recognition was based upon NFLI's
historical redemption experience. Such revenues were recorded as part of the
Company's net sales for periods prior to June 1, 1999.
Subsequent to June 1, 1999, NFLI began shipping product packs for most OAP
purchases, the shipment of which results in the recognition of revenue.
Approximately $4,800,000 and $2,600,000 of revenue related to the shipment of
the product packs was recognized in fiscal 2000 and 1999. Except in very limited
circumstances, NFLI no longer sells any type of product redemption certificates.
It now only provides its distributors with a deferred arrangement for product
purchases under a plan similar to a "layaway" program for "big ticket" items.
The distributor makes payments against the product purchase for a period not to
exceed six months, and upon payment in full, NFLI ships the product to the
distributor. Revenues collected in advance of shipment are recorded as deferred
revenues until the product is shipped. The distributor has the right to
substitute other products or receive a cash refund or product replacement under
the same terms as regular product sales.
Inventories
Inventories are valued primarily at the lower of cost (first-in, first-out
basis) or market.
Long-lived assets
The Company reviews the carrying value of its long-lived assets, including
property and equipment, goodwill and other intangible assets, whenever events or
changes in circumstances indicate that the carrying value of the assets may not
be recovered. An impairment loss may be recognized when estimated undiscounted
future cash flows expected to result from the use of the asset, including
disposition, is less than the carrying value of the asset. The measurement of
the impairment losses to be recognized is based on the difference between the
fair value and the carrying amounts of the assets. In order to determine if an
asset has been impaired, assets are tested by operating segment and geographic
location. During the year ended September 30, 2000, the Company recorded an
impairment of certain of its long-lived assets as disclosed in Note 2. No such
losses were recognized for the years ended September 30, 1999 or 1998. See
"Significant Adjustments" note.
Property And Equipment
Property and equipment are stated at cost. Depreciation on property and
equipment is provided using the straight-line method over the estimated useful
lives of the assets. Leasehold improvements are amortized over the terms of the
respective leases, not in excess of their estimated useful lives. For income tax
purposes, depreciation on fixed assets is calculated using accelerated methods.
Capital Leases
NFLI leases certain computer equipment under a capital lease agreement that
expires in 2002. The asset and liability under this capital lease are recorded
at the lower of the present value of the minimum lease payments or the fair
value of the asset. The asset is being amortized beginning in fiscal 1998 over
the lesser of the related lease term or its estimated useful life. At the
F-10
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
inception of the capital lease, the Company's incremental borrowing rate was
used to determine the present value of the minimum lease payment. Therefore, the
carrying value of the capital lease obligation approximates market value.
Goodwill
Goodwill represents the excess of cost over net assets acquired and is being
amortized over its estimated useful life of 20 years.
Audio Production Rights
Audio production rights are stated at cost less accumulated amortization.
Amortization is provided using a straight-line method over the estimated three-
year life of the rights.
Stock Options and Warrants
The Company accounts for stock options issued to employees in accordance with
APB No.25. During the years ended September 30, 2000, 1999, and 1998, all
options issued to officers and employees were granted at an exercise price which
equaled or exceeded the market price per share at the date of grant and
accordingly, based upon an intrinsic valuation, no compensation expense was
recorded relative to those grants.
The Company has elected to adopt the disclosure requirements of SFAS No.123
"Accounting for Stock-based Compensation". This statement requires that the
Company provide proforma information regarding net income (loss) and income
(loss) per share as if compensation cost for the Company's stock options granted
had been determined in accordance with the fair value based method prescribed in
SFAS No. 123 (See Note 12). Additionally, SFAS No. 123 generally requires that
the Company record options issued to non-employees, based on the fair value of
the options.
Income Taxes
The Company recognizes income tax expense using the liability method of
accounting for deferred income taxes. A deferred tax asset or liability is
recorded based upon the tax effect of temporary differences between the tax
bases of assets and liabilities and their carrying value for financial reporting
purposes. Deferred tax expense or benefit is the result of changes in the
deferred tax assets and liabilities during the year. The Company adjusts the
deferred tax asset valuation allowance based upon the anticipated future
realization of the deferred tax benefits supported by demonstrated trends in the
Company's operating results.
Earnings (Loss) Per Common Share
Basic earnings (loss) per share includes no dilution and is computed by
dividing net earnings (loss) available to stockholders by the weighted number of
common shares outstanding for the period. Diluted earnings per share reflect the
potential dilution of securities that could share in the Company's earnings.
Weighted average Common Shares outstanding for the year ended September 30,
2000, 1999 and 1998 are 7,713,750, 5,808,595 and 5,832,887, respectively.
Diluted earnings per share for the years ended September 30, 2000, 1999, and
1998 did not consider the effect of the warrants and options because they were
anti-dilutive.
Foreign Currency Translation
The asset and liability accounts of the Company's foreign subsidiaries are
translated into US dollar amounts for financial reporting purposes using year
end exchange rates. Revenue and expense accounts are translated at the average
rates during the year. Foreign exchange rate translation adjustments are
accumulated in a separate component of stockholders' equity. Exchange gains or
(losses) are included in the accompanying consolidated statements of operations
as "Other income (expense)".
Management's Estimates And Assumptions
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affects the reported amounts of assets and liabilities and disclosure of
contingent assets and
F-11
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. The
actual results could differ from those estimates.
Reclassification
Certain reclassifications to the prior year numbers have been made to conform
to the fiscal year ended September 30, 2000 presentation.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133, and SFAS 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, will be effective for the
Company's fiscal year ending September 30, 2001. SFAS 133 requires that an
entity record all derivatives on the balance sheet as either assets or
liabilities, measured at fair value. The accounting for changes in the fair
value of a derivative depends on the use of the derivative. Management believes
that the adoption of these statements will not have a significant impact on the
Company's financial position or results of operations.
The Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
(SAB) 101, Revenue Recognition in Financial Statements, in December 1999. The
SAB summarizes certain of the SEC staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. In June
2000, the SEC issued SAB 101B, which delays the implementation date of SAB 101
until no later than the fourth fiscal quarter of fiscal years beginning after
December 15, 1999. The Company does not believe that adoption of this SAB will
have a material impact on its financial statements.
NOTE 2 - SIGNIFICANT ADJUSTMENTS
During the third quarter of the year ended September 30, 2000, expense
adjustments totaling approximately $1,673,000 were recorded, of which
approximately $1,150,000 was recorded to cost of sales for non-recurring write-
downs of certain outdated literature and sales aids inventory and certain
inventory located outside the continental United States. The remainder was a
write-down in the carrying value of NFLI's audio production rights. Such write-
downs, recorded as of June 30, 2000 arose as a result of operational changes and
product discontinuance's made during that quarter. Aggregate year end
adjustments recorded in the fourth quarter of fiscal year ended September 30,
1999, included an inventory write down of $350,000, a write down of assets of
Nutrition For Life International Philippines, Inc. ("RP") of $350,000, and a bad
debts write-off of $250,000.
NOTE 3 - SUBSEQUENT EVENT - SALE OF NFLI
On December 29, 2000, ANI signed a definitive agreement to sell NFLI and all
of its subsidiaries engaged in the network marketing business to Everest
International, L.L.C., a privately-held entity. The agreement provides for $5
million in cash at closing subject to a working capital adjustment and a $5
million prime plus one-half percent note, payable based upon a ten-year
amortization with quarterly payments for three years and final balloon payment
at the end of the third year. In addition, Bactolac is entering into a product
supply agreement with NFLI and also will receive a $650,000 note representing a
currently outstanding inter-company liability, due one year and a day from
closing. The purchase price may also be increased up to an additional $750,000,
depending upon future operating results of Nutrition For Life's recently
established Japanese subsidiary. The transaction is subject to approval by ANI
stockholders and ANI's senior lender and customary closing conditions. Closing
is anticipated to occur during the quarter ended June 30, 2001.
NOTE 4 -- INVENTORIES
Inventories, at September 30, consisted of the following:
2000 1999
---------- ----------
Finished goods $5,389,663 $6,914,417
Work in process 528,447 633,585
Raw materials 1,335,829 886,218
---------- ----------
Total inventories $7,253,939 $8,434,220
========== ==========
F-12
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 5 -- INCOME TAXES
Deferred income taxes are determined based on the temporary differences
between the financial statement and income tax basis of assets and liabilities
as measured by the enacted tax rates, which are estimated to be in effect when
these differences reverse.
The (benefit) provision for income taxes for the years ended September 30,
2000, 1999 and 1998 consisted of the following:
2000 1999 1998
--------- -------- --------
Federal tax - current $ -- $ 51,000 $ 68,009
Federal tax - deferred (683,000) 460,000 676,298
State tax 26,000 46,000 45,743
--------- -------- --------
$(657,000) $557,000 $790,050
========= ======== ========
The following reconciles federal income taxes (benefit) computed at the
statutory rate with income taxes as reported for the years ended September 30:
2000 1999 1998
----------- -------- --------
Expected income tax expense (benefit) (34%) $(1,585,000) $(99,060) $(26,318)
State taxes, net of federal benefit 8,800 30,400 30,190
Loss from foreign subsidiaries 717,000 592,800 498,000
Non deductible amortization of intangible assets 125,000 -- --
Over accrual of 1997 lawsuit settlement
and distributor cruise -- -- 153,000
Accrual difference from 1997 taxes -- -- 113,608
Other items, net 77,200 32,860 21,570
----------- -------- --------
Income tax expense (benefit) $ (657,000) $557,000 $790,050
=========== ======== ========
Deferred tax assets and liabilities consisted of the following net tax effects
of operating losses and temporary differences between the carrying amounts of
assets and liabilities for financial reporting and tax purposes at September 30,
2000 and 1999:
2000 1999
----------- ----------
Deferred income - certificates $ 20,000 $ 132,000
Additional capitalized inventory costs 404,000 561,000
Inventory obsolescence reserve 770,000 --
Cruise accrual -- 85,000
Loss carryforwards 204,000 599,000
Deferred income - product and literature 130,000 42,000
Allowance for doubtful accounts reserve 25,000 --
Other 154,000 228,000
----------- ----------
Current deferred tax asset $ 1,707,000 $1,647,000
=========== ==========
Non-current deferred tax liability at September 30, 2000 and 1999 were as
follows:
2000 1999
----------- ----------
Differences between financial reporting and
tax depreciation and amortization $(3,264,000) $ (778,000)
Loss carry-forwards 1,010,000 --
----------- ----------
Non-current deferred tax liability $(2,254,000) $ (778,000)
=========== ==========
At September 30, 2000, the Company had a net operating loss carry forward of
approximately $1,650,000 which expires primarily in 2019. Additionally, the
Company has obtained net operating losses of approximately $1,900,000 which
expire primarily in 2011 and are subject to annual usage limitations.
For the year ended September 30, 1997, the Company recorded a federal income
tax receivable of $659,111 from an overpayment of taxes. Of this receivable,
approximately $459,000 was refunded during the year ended September 30, 1998 and
$200,000 remained a receivable as of September 30, 1998 and was received during
the year ended September 30, 1999.
F-13
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6 -- PROPERTY AND EQUIPMENT
Property and equipment and their estimated useful lives are summarized as
follows:
September 30,
-------------------------------
Lives 2000 1999
----- ----------- -----------
Land $ 1,763,567 $ --
Building and improvements 15 2,606,509 --
Leasehold improvements 5 1,142,930 1,075,345
Equipment 7 9,592,504 3,896,260
Equipment held under capital lease 4 732,766 679,151
Computer software 10 3,038,391 3,038,391
Furniture and fixtures 5-10 883,233 813,555
Automobiles 5 162,015 170,970
----------- -----------
19,921,915 9,673,672
Less: Accumulated depreciation and amortization (5,595,598) (3,635,486)
----------- -----------
$14,326,317 $ 6,038,186
=========== ===========
NOTE 7 -- ACQUISITIONS
On November 17, 1999 the Company finalized the acquisitions of Bactolac and
Advanced Nutraceuticals, Inc., a Delaware corporation ("Old - ANI"). Old - ANI
was a holding company formed to pursue a consolidation and integration program
in the nutrition industry. Former Old - ANI stockholders received an aggregate
of 75,000 shares of a newly created Series A Preferred Stock of the Company,
which was converted into 750,000 shares of the Company's common stock upon
approval by the Company's stockholders at the Company's Annual Meeting held
June 6, 2000.
Bactolac, headquartered in Hauppauge, New York, manufactures nutritional
supplements for private labeled customers. The purchase price of Bactolac
consisted of $2,500,000 in cash, a subordinated promissory note in the principal
amount of $2,500,000 and 96,831 shares of Series A Preferred Stock, which were
converted into 968,310 shares of the Company's common stock upon approval by the
Company's stockholders at the Company's Annual Meeting held June 6, 2000.
Additionally, up to 176,060 shares of common stock may be issued pursuant to an
earn-out 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 to operate Bactolac and to use its
inventory, machinery and equipment in connection with the manufacture of
nutritional supplements.
On December 1, 1999, the Company finalized the acquisition of Ash Corp.
("ASH") as a division of 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 the
Company's common stock upon approval by the Company's stockholders at the
Company's Annual Meeting held June 6, 2000. Additionally, up to 1,056,340 shares
of common stock may be issued pursuant to an earn-out 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. In the fourth quarter ended September 30, 2000, Bayer
Corporation informed the Company that it decided to internally produce most of
the products produced by the Company for Bayer. Bayer accounted for 5% of the
Company's Consolidated sales for the fiscal year ended September 30, 2000.
Financing for the acquisitions was provided primarily through a financing
arrangement entered into on November 17, 1999 with General Electric Capital
Corporation (the "GECC"). The acquisitions have been accounted for using the
purchase method of accounting, and accordingly, the operating results of the
acquired companies have been included in the accompanying consolidated financial
statements from their dates of acquisition. The purchase price for the
acquisitions, including the equivalent common stock issued which was valued at
its market price of $2.84 per share, 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 net assets acquired was
approximately $9,690,000 and has been recorded as goodwill, which is being
amortized on a straight-line basis over twenty years.
F-14
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Following is a summary of the consideration paid and the allocations of the
purchase prices for each of the acquired entities:
Old-ANI Bactolac ASH Total
----------- ----------- ----------- -----------
Fair value of current assets acquired $ 5,248 $ 3,413,847 $ 2,140,920 $ 5,560,015
Fair value of long-term tangible assets acquired 3,080 449,405 10,250,888 10,703,373
Goodwill 2,145,234 6,764,882 780,108 9,690,224
Current liabilities assumed (23,562) (2,353,134) (7,186,916) (9,563,612)
Long-term liabilities assumed -- (60,000) (2,900,000) (2,960,000)
----------- ----------- ----------- -----------
Net assets acquired and total consideration paid 2,130,000 8,215,000 3,085,000 13,430,000
Cash and expenses paid at closing
including credit facility proceeds -- (2,365,000) (1,185,000) (3,550,000)
Stock purchase notes issued -- (2,500,000) (500,000) (3,000,000)
Issuance of preferred stock,
subsequently converted to common (2,130,000) (2,750,000) (1,400,000) (6,280,000)
----------- ----------- ----------- -----------
Total cash paid -- 600,000 -- 600,000
Less cash acquired (5,248) (123,224) -- (128,472)
----------- ----------- ----------- -----------
Net cash (received) paid for acquisitions $ (5,248) $ 476,776 $ -- $ 471,528
=========== =========== =========== ===========
The following proforma information presents a summary of consolidated results
of operations of the Company as if the acquisitions discussed above had occurred
at the beginning of the years ended September 30, 2000 and 1999, and include
certain proforma adjustments for amortization of the goodwill, additional
depreciation expense as a result of the step-up in the basis of fixed assets and
increased interest expense on the acquisition debt. The proforma financial
information is not necessarily indicative of the results of operations which
actually would have resulted had the acquisitions been effected on the assumed
dates or of future results of the combined entities.
Year Ended September 30,
-------------------------
2000 1999
----------- -----------
Net sales $71,952,000 $85,866,000
=========== ===========
Net loss $(4,378,000) $(1,119,000)
=========== ===========
Net loss per share $ (.55) $ (.14)
=========== ===========
NOTE 8 - CREDIT FACILITY
To provide financing for the acquisitions during the current year, and to
provide working capital for the entire Company, ANI entered into a three-year
Loan and Security Agreement (the "Agreement") with General Electric Capital
Corporation ("GECC") as of November 17 1999. The Agreement provides for a
$12,000,000 revolving credit line based upon eligible trade accounts receivable
and allowable inventories as defined under the terms of the Agreement.
Additionally, there is a $2,360,000 term loan facility, with principal payable
$49,167, monthly over the remaining term of the Agreement. Interest on amounts
outstanding under the Agreement is payable monthly based upon GECC's index rate
plus one-half percent. The loan facility is secured by substantially all of the
assets of ANI and its subsidiaries. As of September 30, 2000, there was
approximately $4,652,000 outstanding under the revolving credit line and
$1,937,000 outstanding under the term loan facility. 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, 2000, the Company was not in compliance with the
covenants regarding minimum net worth and fixed charge ratio under the Agreement
and a waiver has been obtained from GECC. Due to the fact that ANI was not in
compliance with the terms of the Agreement, and GECC's 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 September 30, 2000. The Company is attempting to amend its credit
agreement and believes based on its discussion with such lenders that it will be
successful in such efforts.
F-15
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Agreement was amended as of November 30, 1999, to provide for the
acquisition of ASH, and again as of March 9, 2000, to provide for the
reorganization of NFLI into the new holding company, ANI. The Company has begun
discussions with GECC concerning an additional amendment to the Agreement to be
accomplished between now and closing of the NFLI sale, to address the agreed
upon sale of NFLI and to achieve mutually acceptable compliance conditions. If
the Company is not successful in its efforts to amend the Agreement, it will
have adverse effects on the Company's business, financial condition and
operations.
NOTE 9 - STOCK PURCHASE NOTES AND MORTGAGE
As a result of the acquisitions of Bactolac and ASH, during the first quarter
of the Company's fiscal year, the Company entered into purchase notes with
certain of the selling stockholders and assumed, through Bactolac, a $1,456,360,
mortgage obligation of the ASH facility. Following is a summary of such
obligations as of September 30, 2000:
Stock purchase note arising from purchase of Bactolac (a) $ 2,500,000
Stock purchase notes arising from purchase of ASH (b) 500,000
Mortgage obligation on ASH facility (c) 1,350,053
------------
Total 4,350,053
Less current portion 2,850,053
------------
Long-term portion $ 1,500,000
============
(a) The Bactolac stock purchase note is subordinate to the GECC facility
and bears interest at 7%, and with the approval of GECC, is payable
$1,000,000, on the first anniversary of the acquisition, $1,000,000, on the
second anniversary, and $500,000 on the third anniversary. The holder of the
note has agreed to extend the payment of the first installment for six months
or until the closing of the NFLI sale transaction.
(b) The ASH stock purchase notes are subordinate to the GECC facility and
bear interest at 7%, and subject to the approval of GECC, were payable
December 29, 2000.
(c) In connection with the ASH acquisition as a division of Bactolac,
Bactolac entered into a loan assumption agreement for an ASH mortgage
obligation. The obligation bears interest at prime plus 2%, and is secured by
the ASH land and building. The assumption agreement was originally due May
15, 2000, and the holder has agreed to three amendment agreements which
extended the due date to December 31, 2000. Management of the Company is
currently having discussions with the holder concerning an additional
extension. Should the holder not agree to an extension, or an alternative
loan facility not be obtained, it would have adverse effects on the Company's
business, financial condition and operations.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
401(k) Plan
In July 1998 the Company established the Nutrition for Life 401(k) Plan and
Trust (the "Plan") which covers all of the Company's full-time employees who are
United States citizens, at least 21 years of age and have completed one quarter
of service with the Company. Pursuant to the plan, employees may elect to reduce
their current compensation by up to the statutorily prescribed annual limit and
have the amount of such reduction contributed to the Plan. The Plan provides for
discretionary contributions by the Company. As of September 30, 2000, 1999 and
1998, the Company has made no such discretionary contributions.
Operating Leases
The Company has non-cancelable operating leases, primarily for office,
warehouse space and equipment. Rental expense under operating leases for the
years ended September 30, 2000, 1999 and 1998 amounted to approximately
$716,000, $990,000, and $621,000, respectively. The Bactolac lease, requiring
total monthly payments of approximately $26,500, is with Shilpa-Saketh Realty,
Inc., an entity owned by a member of the Company's Board of Directors.
F-16
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Future minimum rental payments required under operating leases that have an
initial or remaining non-cancelable lease term in excess of one year are as
follows:
Year Ending September 30,
-------------------------
2001 $ 999,000
2002 524,000
2003 522,000
2004 449,000
2005 345,000
Thereafter 711,000
----------
$3,550,000
==========
Employment Agreements
Effective October 1, 1996, NFLI entered into employment agreements with its
chief executive officer and its executive vice-president through September 30,
1999. On November 1, 1999, each of the employment agreements was extended until
October 30, 2000. Under the agreements, both individuals will receive their
annual salary, plus 5% of pre-tax income from $3,000,000 to $5,000,000, 4% of
the next $5,000,000 of pretax income, and 3% of the next $10,000,000 of pretax
income. No bonuses were paid to these individuals for any of the years ended
September 30, 2000, 1999 or 1998 as NFLI did not achieve sufficient pretax
income in these years. In March 1998, each of these individuals agreed to a 25%
reduction in their annual salaries. Concurrent with the salary reduction each
individual was granted a three year option, pursuant to the Company's 1995 Stock
Option Plan, to purchase up to 20,000 shares of the Company's Common Stock at
$5.13 per share, the closing price of the Company's Common Stock on the date of
the grant. During the fourth quarter of fiscal 2000, by mutual agreement between
the individuals and the Company, the employment agreements were terminated.
Cruise Expense Adjustment
During the year ended September 30, 1998, NFLI paid $833,026 representing
payment of all obligations related to a cruise, which had been approved and
accrued for in the amount of $1.2 million during the year ended September 30,
1997. The $362,124 of over-accrued cost of the cruise is reflected as a
reduction in general and administrative expenses in the accompanying
consolidated financial statements for the year ended September 30, 1998.
Purchase Commitment
In July 1998, the NFLI entered into a three-year supply agreement with
VitaRich Laboratories, Inc. ("VitaRich") in which the NFLI agreed to advance
VitaRich up to $800,000 to secure the purchase of a sufficient quantity of
certain nutritional supplement raw materials to meet NFLI's anticipated need for
rapid delivery of product and to obtain such product at discounted prices.
NFLI made an initial deposit of $400,000 to VitaRich and VitaRich is required
to use such deposited amounts for the purchase of raw material and the
processing of finished product in sufficient kinds and quantifies to enable the
NFLI to (i) meet its anticipated need for the product, (ii) maximize the costs
savings to VitaRich and provide the NFLI with reduced prices through the
purchase of bulk quantities of raw materials, and (iii) enable VitaRich to meet
NFLI's rapid delivery requirements.
Under the terms of the supply agreement, after the third year VitaRich is
required to repay any outstanding deposits by crediting NFLI with an amount
equal to 10% of each purchase order placed by NFLI until such time as all
advances have been repaid. NFLI has a first priority security interest in all of
VitaRich's interest in the inventory, warehouse receipts, documents of title,
accounts receivable and proceeds of insurance related to the raw materials
purchased by VitaRich on behalf of NFLI. As of September 30, 2000, the NFLI had
advanced VitaRich a total of $ 400,000, of which $ 136,541 has been repaid.
F-17
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Government Regulations
The Company's activities are subject to regulations by various federal and
state agencies, including the Food and Drug Administration (the "FDA"). The
Company believes that it is in compliance with all federal and state
regulations. However, the Company cannot predict whether new legislation
regulating its activities will be enacted, which could have a material adverse
effect on the Company.
NOTE 11 -- PREFERRED AND COMMON STOCK
In connection with the acquisitions which were consummated during the first
quarter of the fiscal year ended September 30, 2000, the Board of Directors
established a Series A Preferred Stock. The Series A Preferred Stock is $.001
par value with 1,000,000 shares authorized. Following the stockholders approval
for the conversion (on a ten-for-one basis) of the 221,127 shares of Series A
Preferred Stock, into 2,211,270 shares of common stock, no Series A preferred
shares remain outstanding. The Series A preferred shares had a $28.40 per share
liquidation preference on any distribution over the holders of the common stock.
During the year ended September 30, 1998 the Company's Board of Directors
declared cash dividends totaling $350,326,of which $466,124 was paid during the
year ended September 30, 1998. No dividends have been declared or paid on the
Company's common stock subsequent to June 1998.
The Company's Board of Directors during the fiscal year 2000 approved the
retirement of 79,000 shares of common stock previously held in treasury.
NOTE 12 -- STOCK OPTIONS AND WARRANTS
1993 Plan
The Company's Board of Directors approved the 1993 Stock Option Plan (the
"1993 Plan") providing for a total of 282,000 shares of common stock to be
reserved for the grant of options to purchase the Company's common stock. At
September 30, 2000, there were 220,946 shares reserved for the grant of options
under the 1993 plan. Generally, one-third of the shares underlying the options
become exercisable in cumulative installments of 12 months, 24 months and 36
months after the date of grant. The maximum term of the options is 10 years,
except that if an employee leaves the Company, the options will terminate 30
days thereafter. The issuance of options is at the discretion of the Company's
Board of Directors.
1995 Discretionary Plan
The Company's Board of Directors approved the 1995 Stock Option Plan (the
"1995 Plan") in March 1995, as amended in June 1996, April 1999 and June 2000
providing for a total of 2,085,000 shares of common stock to be reserved for the
grant of options to purchase Common Stock of the Company. The terms of the
options are similar to those of the 1993 Plan. At September 30, 2000, there were
764,661 shares reserved for the grant of options under the 1995 plan.
1995 Non-Discretionary Plan
In November 1995, the Company adopted the 1995 Non-Discretionary Stock Option
Plan for non-employee directors of the Company who are not eligible to
participate in the other Plans (the "Non-Discretionary Plan"). The Non-
Discretionary Plan provides that the Company grant options to purchase 5,000
shares of the Company's common stock to each person who thereafter becomes a
director of the Company and, as of December 1, of each year (commencing in
1996), options to purchase an additional 5,000 shares of common stock will be
granted to each eligible director. The exercise price of the options is the fair
value of the common stock at the date of grant of the options. The options
expire in five years and are exercisable in full at the date of grant. During
the years ended September 30, 1998 and 1997, the Company issued 15,000 options
to Directors under this plan. The Non-Discretionary Plan was cancelled on
October 6, 1999.
F-18
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Options and Warrants Issued in Public Offering
In connection with a public offering, the Company issued 920,000 stock
warrants. Each warrant entitles the holder to purchase one share of common stock
at a price of $3.75. The Company's Board of Directors has extended the warrant
expiration date to April 30, 2001. The Company has the right to call all of the
warrants for redemption on 30 days written notice at a redemption price of $.05
per warrant, subject to certain defined criteria. In addition, the Company
issued warrants to underwriters to purchase 80,000 shares of the Company's
common stock at $3.75 and options to purchase 160,000 shares of the Company's
common stock at $3.23.
Other Warrants
In April 1998, the Company retained the services of Piedmont Consulting,
Inc., ("Piedmont") a public/investor relations firm, to assist in its efforts to
gain a broader investor following. As compensation for its services Piedmont was
paid a monthly retainer and was granted a three year warrant entitling it to
purchase up to 30,000 shares of the Company's common stock at $5.25 per share
and 40,000 shares at $7.00 per share. In July 1998 the Company terminated its
relationship with Piedmont. Pursuant to the provisions of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation", the Company
recognized approximately $144,700 as compensation expense related to the
warrants in the year ended September 30,1998.
In October 1998, the Company issued a warrant to Nightingale Conant to
purchase up to 290,000 shares of the Company's common stock at $5.50 per share.
The warrant is exercisable at any time until October 31, 2003, and is entitled
to the benefit of adjustment of the exercise price and number of shares
deliverable upon exercise thereof in the event of certain specified dilutive
transactions. Expense of $702,000 has been recorded in the accompanying
September 30, 1998 consolidated financial statements.
SFAS NO. 123 Pro Forma Computation
The Company estimates the fair value of each stock option at the grant date
by using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 2000, 1999 and 1998, a dividend yield of
0%, 0% and 1%; a risk-free interest rate of 5.5%, 5.0%, 5.7%; an expected life
ranging from 5-10 years; and an expected volatility of 107%, 92% and 67%,
respectively.
Had compensation cost been determined on the basis of fair value pursuant to
SFAS No. 123 for stock options issued to employees, net loss and loss per share
for years ended September 30, 2000, 1999 and 1998 would have been reduced as
follows:
2000 1999 1998
----------- ----------- -----------
Net loss:
As reported $(4,004,331) $ (848,352) $ (867,456)
=========== =========== ===========
Pro forma $(4,695,866) $(1,172,062) $(1,063,456)
=========== =========== ===========
Basic and diluted (loss) per share:
As reported $ (.52) $ (.15) $ (.15)
=========== =========== ===========
Pro forma $ (.61) $ (.20) $ (.18)
=========== =========== ===========
F-19
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following is a summary of the status of option and warrant plans during the
years ended September 30:
Options Warrants
-------------------- ---------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
--------- -------- ------- -------
Outstanding as of
September 30, 1997 608,130 $ 7.38 464,263 $3.75
Granted 80,000 $ 5.67 70,000 $5.25
Exercised (97,400) $ 2.27 (13,160) $3.75
Forfeited (73,233) $11.31 -- --
Cancelled (12,417) $11.56 -- --
--------- -------
Outstanding as of
September 30, 1998 505,080 $ 7.39 521,103 $3.84
--------- -------
Granted 205,000 $ 2.95 290,000 $5.50
Exercised -- -- -- --
Forfeited (7,200) $13.00 -- --
Cancelled (3,000) $13.00 -- --
--------- -------
Outstanding as of
September 30, 1999 699,880 $ 6.01 811,103 $4.59
--------- -------
Granted 839,871 $ 2.65 -- --
Exercised -- -- -- --
Forfeited (106,332) $ 3.09 -- --
Cancelled (114,000) $ 2.35 -- --
--------- -------
Outstanding as of
September 30, 2000 1,319,419 $ 4.48 811,103 $4.59
========= =======
Exercisable as of
September 30,
1998 362,548 $ 5.83 521,103 $3.84
1999 441,615 $ 6.58 811,103 $4.59
2000 458,543 $ 7.87 811,103 $4.59
Weighted average fair
value of grants during
the year ended
September 30,
1998 $ 2.45 $3.35
1999 $ 2.59 $2.42
2000 $ 2.32 $ --
======== =======
F-20
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Following is a summary of the status of the options and warrants outstanding at
September 30, 2000:
Options and Warrants Outstanding Options and Warrants Exercisable
--------------------------------------------- -------------------------------------------
Weighted-Average
Remaining
Range of Contractual Life Weighted-Average Weighted-Average
Exercise Prices Number (years) Exercise Price Number Exercise Price
--------------- --------- ----------------- ---------------- ------- ----------------
$0.00 - $ 1.98 40,500 4.4 $ 1.88 40,500 $ 1.88
1.98 - 3.95 997,452 8.6 2.68 136,576 2.70
3.95 - 5.93 56,667 5.3 5.31 56,667 5.31
5.93 - 7.90 15,000 2.2 7.00 15,000 7.00
7.90 - 9.88 20,000 3.4 9.00 20,000 9.00
9.88 - 11.85 10,000 6.1 11.50 10,000 11.50
11.85 - 13.83 139,800 5.3 12.93 139,800 12.93
13.83 - 15.80 25,000 5.6 14.25 25,000 14.25
15.80 - 17.78 -- -- -- -- --
17.78 - 19.75 15,000 .2 19.75 15,000 19.75
--------- === ====== ------- ======
1,319,419 7.7 $ 4.48 458,543 $ 7.87
========= === ====== ======= ======
NOTE 13 - RELATED PARTY TRANSACTIONS
During 1998, 1999 and 2000, respectively, the NFLI purchased approximately
41,000, 32,000 and 30,000 copies of a book, "Making A Difference While You're
Making A Living", written by its CEO, David P. Bertrand and his son J. Mark
Bertrand, also an employee of the Company, at a cost to NFLI of $5.00 per book.
New Paradigm Publishing, a company established by J. Mark Bertrand, published
the book and subsequently sold it to NFLI. NFLI sold approximately 19,000,
10,000 and 3,000 copies of the book during 2000, 1999 and 1998, at an average
selling price of approximately $10.95 per copy. The book has been placed in
NFLI's product catalog at per copy prices ranging from $8.95 to $12.95, based
upon quantity ordered, and in 1999 approximately 35,000 of the books were part
of the materials provided to new distributors in NFLI's starter kits.
Additionally, in 1998, approximately 19,000 copies of the book were shipped to
distributors as part of the NFLI's Business Training Systems for that month. New
Paradigm Publishing has agreed to accept return of any books ordered, but not
sold by NFLI and to refund to the Company $5.00 per returned copy. To date no
books have been returned for refund. The Company's Board of Directors
unanimously approved the purchase of the aforementioned books. As of September
30, 2000 and 1999, $105,000 and $0, respectively were owed by the Company to New
Paradigm Publishing.
The Company has purchased products from a vendor that until October 1997, a
director of the Company was the president (or a consultant) of the vendor, and
until June 1995, a major stockholder of the Company owned the vendor. The items
purchased are readily available from other vendors. During the years ended
September 30, 2000, 1999 and 1998, respectively, the Company purchased $ -0-, $-
0- and $494,000 of goods from this vendor.
F-21
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 14 - FOREIGN SALES
For the years ended September 30, 2000, and 1999, 1998, the Company's net
sales from foreign operations were approximately $10,400,000, $8,600,000, and
$9,000,000, respectively, including sales to customers in Canada totaling
approximately $3,600,000, $3,100,000, and $4,800,000, respectively. The gross
profit percentages on all foreign sales are consistent with the Company's
overall gross profit percentages, however exchange rate fluctuations could have
an impact on the Company's future gross profit margins.
Information related to the Company's domestic and international operations is
as follows:
YEARS ENDED SEPTEMBER 30
(In thousands)
----------------------------
2000 1999 1998
------- ------- -------
Sales to unaffiliated customers:
North America (1) $62,500 $61,100 $65,400
United Kingdom 4,200 4,700 3,500
Philippines 600 800 700
Japan 2,000 -- --
Sales or transfers between geographic areas:
North America -- -- --
United Kingdom 700 1,000 600
Philippines 100 100 300
Japan -- -- --
Operating profit (loss):
North America (1,300) 900 1,900
United Kingdom (1,300) (900) (900)
Philippines (300) (500) (300)
Japan (700) -- --
Identifiable assets:
North America 37,900 25,800 29,600
United Kingdom 1,300 1,700 1,400
Philippines -- 300 900
Japan 500 -- --
(1) Includes the United States, Canada, and Puerto Rico.
F-22
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 15 - CONTRACT TERMINATION
Effective October 24, 1997, NFLI entered into an eight year exclusivity in
network marketing agreement with a significant distributor, Mr. Kevin Trudeau,
in which the Company agreed to pay Mr. Trudeau a percentage, as defined in the
agreement, of gross revenues of NFLI.
In August 1998, NFLI and Mr. Trudeau entered into an agreement to terminate
the October 1997 agreement and to end the Company's business relationship and
distributorship with Mr. Trudeau. Additionally, as part of the agreement, the
Company agreed to purchase the approximate 70,000 shares of common stock and
40,000 stock purchase warrants then owned by Mr. Trudeau, which was completed in
September 1998 for approximately $459,000.
In July 1996, NFLI entered into a fifteen-year Administrative and Consulting
Services Agreement (the "1996 Agreement") with Distributor Services, L.L.C.
("DS"). DS is an affiliate of Nightingale-Conant ("NC"), at the time a major
supplier to NFLI of self-improvement programs. The 1996 Agreement provided that,
with limited exceptions , DS had the exclusive right to produce and sell all of
NFLI's recruiting and training material and recruiting and promotional events.
Such materials and events were to be produced and marketed at the expense of DS
and DS was entitled to all revenues received from sales of such materials and
events.
For a fee, DS also produced and provided to NFLI specified master cassettes
for sale by NFLI. Kevin Trudeau, formerly a key distributor of NFLI's products,
was principally responsible for DS's performance in connection with the 1996
Agreement.
Associated with the termination of Kevin Trudeau's distributorship in August
1998, NFLI, DS and NC agreed to terminate the 1996 Agreement in October 1998.
The Company agreed to pay NC and DS $2,047,000 and to issue to NC a warrant to
purchase up to 290,000 shares of the Company's common stock at $5.50 per share
at any time until October 31, 2003, in satisfaction of all accounts payable and
other amounts claimed by them for materials previously delivered to NFLI , as
well as for the purchase of all of DS's inventory of audio and video tapes,
including all of the audio production rights for such audio and video tapes, and
other materials used to promote NFLI , and for cancellation of the remaining
term of the 1996 Agreement.
Approximately $967,000 of the amount was paid upon execution of the agreement
in October 1998 with the balance of $1,080,000 represented by a promissory note
payable in 30 equal monthly payments, which has a remaining balance of $ 316,489
as of September 30, 2000.
The Company accounted for the transactions as of September 30, 1998. The
amount paid for the audio production rights was approximately $1,400,000, which
was amortized over a period of three-years. Expense relative to the warrants
issued to NC was determined by utilizing the Black-Scholes method to be
approximately $702,000.
NC also agreed that for a five year period it would not directly or
indirectly seek to acquire a controlling interest, as defined under the rules
and regulations promulgated by the Securities and Exchange Commission, in the
Company without the prior written consent of the Company's Board of Directors
F-23
ADVANCED NUTRACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 16- SUPPLEMENTAL CASH FLOW INFORMATION
2000 1999 1998
-------- -------- ----------
Supplemental disclosure of non-cash transactions during the year:
Purchase of property and equipment under
capital lease $ -- $ -- $ 43,192
Settlement of Nightingale-Conant contract:
Purchase of audio production rights $ -- $ -- $1,400,000
Issuance of long-term debt $ -- $ -- $ 949,000
Net increase in liabilities $ -- $ -- $ 451,000
Cash paid during the year:
Federal and state income taxes paid $ -- $ -- $ --
Interest paid $950,500 $128,900 $ --
Note 17 - Restatement
Certain of the accompanying consolidated financial statements have been
restated from amounts as previously prepared. The current restatement reverses
the presentation of NFLI as a discontinued operation as contained in the
previous financial statements. The restated presentation is necessary due to the
fact that under state law, approval for the completion of the sale of NFLI
requires stockholder approval, and such approval has not yet been obtained. The
restatement had no affect on reported net income (loss) or related per share
amounts.
F-24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Directors
- ---------
The following persons serve as members of the Board of Directors of
Advanced Nutraceuticals, Inc. (the "Company"):
F. Wayne Ballenger, age 54, has served as President of First Commercial
Capital since 1995. He has also served as President of Puncture Guard LLC since
December 1994. From March 1992 to December 1994, he served as director of sales
and marketing for Petrolon, Inc., a multi-level marketing organization.
Immediately prior thereto, he served as a vice president of Southwest Bank of
Texas with commercial lending responsibilities. Mr. Ballenger received a B.B.A.
degree from the University of the South in 1968. Mr. Ballenger became a director
of the Company in November 1995.
David P. Bertrand, age 57, has served as President of the Company and its
predecessors since 1984. Mr. Bertrand received a B.S. degree in education in
1966 and a Master of Education degree in administration and supervision in 1969,
both from McNeese State University in Lake Charles, Louisiana. Mr. Bertrand is
the brother-in-law of Jana B. Mitcham.
M. F. Florence, age 63, has served as President of Sherfam Inc. since 1989.
Sherfam Inc. is a holding company, principally of pharmaceutical companies, and
is the parent of Shermfin Inc., which is a principal shareholder of the
Company. From 1958 to 1989, Mr. Florence was associated with the firm of Wm.
Eisenberg & Co., a firm of Chartered Accountants in Canada. He served as a
partner of the firm from 1964 to 1989. Mr. Florence received a Bachelor of
Commerce degree from the University of Toronto. He is the recipient of a
Chartered Accountants degree from the Institute of Chartered Accountants of
Ontario. Mr. Florence is President of Citadel Gold Mines, Inc. Mr. Florence is
also a Director of Barr Laboratories, Inc., a publicly held corporation whose
common shares are listed on the New York Stock Exchange. Mr. Florence has
served as a director of the Company since 1994.
Jana B. Mitcham, age 52, has served as Executive Vice President, Secretary
and Director of the Company and its predecessors since 1984. Ms. Mitcham
received a B.A. degree in 1974 in special education from McNeese State
University and undertook graduate work in special education at the Korean
Extension of the University of Maryland. Ms. Mitcham is a Fellow with Boston
Bio-Science Research Foundation and a member of the Board of Directors of the
Multi-Level Marketing International Association. Ms. Mitcham is the sister-in-
law of David P. Bertrand.
Gregory Pusey, age 48, has served as Chairman of the Board of Directors of
the Company since November 1999. Mr. Pusey served as an officer and director of
Advanced Nutraceuticals, Inc. since December 1997. He served both as President
of Livingston Capital, Ltd. and President and the general partner of Graystone
Capital, Ltd., venture capital firms, from 1987 to 1999. From June 1994 to
August 1998, he served as a director and consultant to the Company. Since 1988,
Mr. Pusey has been the President and a director of Cambridge Holdings, Ltd., a
publicly held real estate development firm. Mr. Pusey graduated summa cum laude
from Boston College with a B.S. degree in finance in 1974.
Pailla M. Reddy, age 41, is currently Chairman of the Board of Directors,
Chief Executive Officer and President of Bactolac Pharmaceutical Inc. Bactolac
was acquired by the Company in November 1999. Dr. Reddy founded Bactolac and has
served as an officer and director of Bactolac, since 1995. From 1991 to 1995, he
was production manager for Max Pharmaceutical, Inc. From 1983 to 1991, Dr. Reddy
held various positions with Wellcome Pharmaceuticals Ltd., including research
chemist and production manager. Dr. Reddy received a B.Sc. degree in chemistry
from Osmania University in India, and M.Sc. and Ph.D. degrees in organic
chemistry from Kanpur University in India.
Neil S. Sirkin, age 37, is currently the President of the ASHCO division of
Bactolac. ASHCO was acquired by the Company in December 1999. Mr. Sirkin was
co-founder of ASHCO and served as an officer and director of ASHCO since 1996.
He previously performed a variety of consulting and special project activities
while affiliated with Sirkin Enterprises, Inc. Mr. Sirkin attended the
University of Miami.
23
The Company entered into an agreement in 1995 with Shermfin Corp. wherein
it agreed that, for so long as Shermfin Corp. owns 10% or more of the
outstanding Common Stock of the Company, Shermfin Corp. will be entitled to
designate one person to serve as a member of the Company's Board of Directors.
Shermfin Corp.'s designee is M. F. Florence. See Item 13.
Compliance with Section 16(a) of the Exchange Act
- -------------------------------------------------
Based solely on the Company's review of copies of Section 16(a) reports
filed by officers, directors and greater than 10% shareholders with the
Securities and Exchange Commission, which have been received by the Company and
written representations from these persons that no other reports were required
for those persons, the Company believes that all filing requirements applicable
to those persons were complied with for the fiscal year ended September 30,
2000, except that Neil Sirkin failed to file on a timely basis a Form 3
reporting his initial statement of beneficial ownership of the Company's
securities.
Officers
- --------
The following executive officers have been elected by the Board of
Directors of the Company. It is expected that the Board will elect officers
annually following each Annual Meeting of Shareholders. Information is provided
below regarding the names and ages of all executive officers of the Company who
are not directors of the Company, their position with the Company and the period
they have served as executive officers of the Company.
John R. Brown, Jr., age 63, became Vice President-Finance of the Company in
September, 1996, and had previously served the Company on a part-time basis
commencing in December 1995. >From April, 1989 until he joined the Company, Mr.
Brown was a management consultant performing merger and acquisition services,
systems analyses, financial reporting assistance, and other services for both
publicly and privately held companies. From June, 1987 to March, 1989 he was
Vice President-Finance & Administration for Environmental Protective Industries,
Inc., an environmental services organization. Mr. Brown is a Certified Public
Accountant and has over 20 years experience in public accounting with both
national and local firms. Mr. Brown received a B.S. degree in mechanical
engineering from Stanford University and an M.B.A. degree from the University of
Texas at Austin.
Jeffrey G. McGonegal, age 49, became Senior Vice President - Finance of the
Company in February 2000. Since 1997, Mr. McGonegal has served as Managing
Director of McGonegal and Co., a company engaged in providing accounting and
business consulting services. Mr. McGonegal served as a consultant to the
Company in connection with the acquisitions made in 1999. From 1974 to 1997, Mr.
McGonegal was an accountant with BDO Seidman LLP. While at BDO Seidman LLP, Mr.
McGonegal served as managing partner of the Denver, Colorado office. Mr.
McGonegal is a member of the board of directors of The Rockies Venture Club,
Inc. and Colorado Venture Centers, Inc. He received a B.A. degree in accounting
from Florida State University.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid by the Company and its subsidiaries to the chief executive officer and each
of the other executive officers of the Company (the "named executive officers")
during the fiscal years ended September 30, 1998, 1999 and 2000.
Summary Compensation Table
- --------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------------------------------------------------------------
Other Restricted
Name and Principal Annual Stock Options/ LTIP All Other
Position Year Salary Bonus Compensation Awards SAR's Payouts Compensation
- --------------------------------------------------------------------------------------------------------------------------
Greg Pusey (3) 1998 $ - $ - $ - - - - -
President, Chief Executive 1999 - - - - - - -
Officer and Chairman of the 2000 94,769 - - - 50,000 - -
Board of Directors of ANI
24
David P. Bertrand (1) 1998 363,969 - - - 20,000 - 6,744
Vice Chairman of the Board 1999 318,269 - - - 25,000 - 6,744
of Directors of ANI; 2000 241,703 - - - 103,604 - 6,744
President and Chief
Executive Officer of NFLI
Jana Mitcham (1) 1998 342,172 - - - 20,000 - 5,184
Executive Vice President 1999 298,378 - - - 25,000 - 5,184
and Secretary of NFLI 2000 242,143 - - - 103,604 - 5,184
Jeffery McGonegal (3) 1998 - - - - - - -
Senior Vice President 1999 - - - - - - -
of Finance of ANI and NFLI 2000 56,558 - - - 100,000 - -
John R. Brown, Jr. 1998 88,628 7,500 - - - - -
Vice President Finance, 1999 96,067 - - - 10,000 - -
Assistant Secretary and 2000 109,899 - - - 22,000 - -
Treasurer of ANI and NFLI
David O. Rodrigue (2) 1998 74,431 - - - 25,000 - -
Vice President and 1999 117,760 - - - 15,000 - -
Chief Financial Officer of 2000 120,295 - - - 35,000 - -
ANI and NFLI
Pailla Reddy (3) 1998 - - - - - - -
President, Chief Executive 1999 - - - - - - -
Officer and Chairman of the 2000 218,750 - - - - - -
Board of Directors of
Bactolac
Neil Sirkin (3) 1998 - - - - - - -
President of ASHCO 1999 - - - - - - -
Division 2000 125,000 - - - - - -
_________________
(1) The Company has obtained insurance policies on the lives of Mr. Bertrand
and Ms. Mitcham, of which benefit amounts of $1,060,000 and $660,000 on the
lives of Mr. Bertrand and Ms. Mitcham, respectively, constitute "keyman"
insurance and are payable to the Company. Approximately 51% of the aggregate
insurance benefits on the lives of Mr. Bertrand and Ms. Mitcham are payable to
beneficiaries designated by Mr. Bertrand and Ms.Mitcham. In addition, part of
the cash value may be used as retirement benefits for the executive officers.
The premiums paid by the Company allocable to these items are included in the
table.
(2) Mr. Rodrigue resigned from the Company in September 2000.
(3) Messrs. Pusey, McGonegal, Reddy and Sirkin became officers during the first
quarter of the fiscal year ended September 30, 2000.
Employment Agreements
- ---------------------
Effective October 1, 1996, the Company entered into employment agreements
with Mr. Bertrand and Ms. Mitcham. The terms of these agreements are essentially
identical, except that Mr. Bertrand's annual salary is $400,000 and Ms.
Mitcham's annual salary is $376,000. Mr. Bertrand and Ms. Mitcham are each also
entitled to a
25
bonus if the Company has pre-tax annual income between $3 million and $20
million. Each is entitled to receive 5% of any annual pre-tax income between $3
million and $5 million; four percent of the annual pre-tax income between $5
million and $10 million; and three percent of the annual pre-tax income between
$10 million and $20 million. The term of each agreement is three years. Each of
the agreements may be earlier terminated upon mutual agreement, death,
disability or conviction of the officer, or a material breach of the agreement
by the officer. In March 1998 each of Mr. Bertrand and Ms. Mitcham agreed to a
25% reduction in their annual salaries.
Effective November 1, 1999, the Company entered into new employment
agreements with Mr. Bertrand and Ms. Mitcham. The terms of these agreements are
essentially identical, except that Mr. Bertrand's annual salary is $300,000 and
Ms. Mitcham's annual salary is $282,000. Mr. Bertrand and Ms. Mitcham are each
also entitled to a bonus based on the same formula as in their prior employment
agreements. The term of each agreement is one year and will automatically renew
for two successive periods of one year each unless notice is given by either
party more than 30 days prior to the expiration of the applicable yearly period.
Each of the agreements may be earlier terminated upon mutual agreement, death,
disability or conviction of the officer, or a material breach of the agreement
by the officer.
On November 17, 1999, the Company entered into a two year employment
agreement with Gregory Pusey with an annual salary of $120,000 and a one year
employment agreement with Barry C. Loder with an annual salary of $100,000. Both
individuals may receive a performance bonus at the Company's discretion.
On September 20, 2000, Messrs. Bertrand, Loder, McGonegal and Pusey and Ms.
Mitcham entered into an Agreement with the Company providing for the termination
of any employment agreements or arrangements they had with the Company, and a
readjustment of their annual salaries to the following amounts: Mr. Bertrand -
$120,000; Mr. Loder - $12,000; Mr. McGonegal - $100,000; Ms. Mitcham - $120,000
and Mr. Pusey - $84,000.
Mr. Loder subsequently resigned as the Company's Vice President of
Corporate Development. Mr. Loder has been retained by the Company to assist in
the proposed sale of NFLI. If the proposed sale is completed, Mr. Loder will
receive approximately 3% of the amounts received by the Company for the NFLI
sale.
In connection with the acquisition of Bactolac Pharmaceuticals, Inc., the
Company entered into a two year employment agreement with Dr. Pailly Reddy, the
President of Bactolac. Dr. Reddy receives an annual salary of $200,000 and may
receive a performance bonus at the Company's discretion. He is also entitled to
continued use of the vehicle that is leased by Bactolac.
In connection with the acquisition of Ash Corp. through Bactolac, Bactolac
entered into three year employment agreements with Neil S. Sirkin and his
father, Allan I. Sirkin. Both individuals receive an annual salary of $150,000
and may receive a performance bonus at the Company's discretion.
26
Option Grants in Fiscal Year Ended September 30, 2000
- -----------------------------------------------------
The following table sets forth information with respect to stock option grants
to the named executive officers during the fiscal year ended September 30, 2000.
Percent Potential Realizable
Number of Total Value at
Securities options/SARs Assumed Annual Rates
Underlying granted to Exercise or Stock Appreciation
Options/SARs Employees base price Expiration For Option Term
----------------------
Name granted (#) in fiscal year ($/Sh) date 5% 10%
- ----------------------- ----------------------------------------------------------------------------------------------------
Greg Pusey 50,000 6.0% $2.84 12/14/09 $ 89,303 $226,311
David P. Bertrand 53,604 6.4% $2.13 10/6/09 71,636 181,541
50,000 6.0% $2.84 12/14/09 89,303 226,311
Jana Mitcham 53,604 6.4% $2.13 10/6/09 71,636 181,541
50,000 6.0% $2.84 12/14/09 89,303 226,311
Jeffery McGonegal 100,000 11.9% $2.25 2/14/10 141,501 358,592
John R. Brown, Jr. 22,000 2.6% $2.84 12/14/09 39,293 99,577
David O. Rodrigue 35,000 4.2% $2.84 12/14/09 62,512 158,418
Options Exercises and Year-End Values
- -------------------------------------
The following table shows options exercises by the named executive officers
during the fiscal year ended September 30, 2000 and the number and value of the
unexercised options at September 30,2000.
Value of
Unexercisable
Number of Number of In-the-Money
Shares Unexercised Options Options at
Underlying Value At Year End (#) Year End ($)
Options Realized Exercisable/ Exercisable/
Name Exercised ($) Unexercisable Unexercisable (1)
- ---------------------------- ---------------------------------------------------------------------------------------
Greg Pusey 0 0 0/50,000 0/0
David P. Bertrand 0 0 106,933/120,271 0/0
Jana Mitcham 0 99,733/120,271 0/0
Jeffery McGonegal 0 0 0/100,000 0/0
John R. Brown, Jr. 0 0 13,334/28,666 0/0
__________________
(1) Based on the price of the Common Stock of $.813 on September 29, 2000 as
reported by The Nasdaq Stock Market.
27
Compensation Committee Report
- -----------------------------
The Compensation Committee (the "Committee") of the Board of Directors has
been established by the Board to periodically review the compensation philosophy
for the Company's executives, and to recommend to the Board compensation
packages for the Company's executives. The Committee also reviews and
recommends to the Board any additions to or revisions of the Company's stock
option plans. The Committee consists exclusively of non-employee directors,
appointed by resolution of the entire Board.
The Committee's objective is to set executive compensation at levels which
(i) are fair and reasonable to the shareholders, (ii) link executive
compensation to long-term and short-term interest of the shareholders, and (iii)
are sufficient to attract, motivate and retain outstanding individuals for
executive positions.
Fairness to the shareholders is balanced with the need to attract, retain
and motivate outstanding individuals by comparing the Company's executive
compensation with the compensation of executives at other companies. The
Committee's overall goal is to achieve strong performance by the Company and its
executives by affording the executives the opportunity to be rewarded for strong
performance. The Committee attempts to provide both short-term and long-term
incentive pay. To accomplish its objectives, the Committee has structured the
executive compensation program with three primary components. These primary
components are base salary, annual incentives, and long-term incentives.
During the fiscal year ended September 30, 1997, the Committee determined
to undertake a review of the Company's executive compensation program, with
particular emphasis on the Company's Chief Executive Officer and Executive Vice
President. The Company had experienced dramatic growth in the fiscal year ended
September 30, 1996, but also was experiencing problems due to regulatory
scrutiny and negative media reports. The Committee determined that it would be
in the best interest of the Company and its shareholders for the Committee to
review the existing compensation arrangements and to provide a compensation
program which recognized, among other factors, the Company's growth, problem
areas which could result in short-term performance difficulties, and appropriate
incentives to provide impetus for the long-term growth of the Company. The
Company retained an independent compensation consultant to assist it in its
review of the executive compensation program. The review included compensation
programs of publicly traded peer companies similar in characteristics to the
Company, as well as compensation paid by other network marketing companies with
different product lines.
Effective in October 1996, the Company entered into employment agreements
with David P. Bertrand, the Company's President and Chief Executive Officer, and
Jana B. Mitcham, the Company's Executive Vice President and Secretary. The
employment agreements are described in "Employment Agreements." The Committee
determined that the base salaries for Mr. Bertrand and Ms. Mitcham should be
increased, based on the progress made by the Company, the tremendous effort and
energy devoted by them to the Company's business, and the recommendations of the
independent compensation consultant based on review of base salaries of other
companies.
In March 1998, after consultation with the Committee, Mr. Bertrand and Ms.
Mitcham agreed to a 25% reduction in their annual salaries, and in November 1999
entered into new employment agreements at these reduced salary levels with
potential for bonus payments based on the Company's performance. Concurrent with
the salary reductions, the Company granted to each of Mr. Bertrand and Ms.
Mitcham stock options to purchase up to 20,000 shares of the Company's Common
Stock at $5.13 per share, the closing trading price of the Common Stock on the
date of the grant. In December 1998, the Company granted to each of Mr. Bertrand
and Ms. Mitcham options to purchase up to 25,000 shares of the Company's common
stock at $3.00 per share, the closing trading price of the common stock on the
date of the grant. The options become exercisable in one-third annual
installments commencing in December 1999. The Committee recommended these
actions in furtherance of its objectives of linking compensation with Company
performance and providing incentive for key executives.
In late 1999, the Company finalized acquisitions of three companies. In
connection with those acquisitions, the Company entered into employment
agreements with the officers of those companies, Gregory Pusey, Barry Loder,
Pailla Reddy, Neil Sirkin and Allan Sirkin, to continue serving as officers.
As a result of the Company's worsening financial condition, in September
2000 Mr. Bertrand, Ms. Mitcham, Mr. Pusey and Mr. Loder, as well as Jeff
McGonegal, the Company's Senior Vice President of Finance, agreed to terminate
their respective employment agreements or arrangements and to substantial
reductions in their salaries.
28
The Committee periodically reviews executive salaries. In addition to the
external competitive compensation market, base salary levels reflect each
officer's performance over time and each individual's role in the Company.
Consequently, employees with higher levels of sustained performance over time
and/or employees assuming greater responsibilities will typically be paid
correspondingly higher salaries. Individual performance criteria used to assess
performance include leadership, professionalism, initiative and dependability.
However, individual performance assessments are made qualitatively and in total,
and no specific weightings are attached to these performance indicators, nor is
a formula utilized in determining appropriate salary increases or salary levels.
The Committee periodically reviews the performance of executive officers to
determine whether bonuses should be paid to those persons. The Committee has not
established specific performance measures for determining the award of bonuses.
The Committee believes that bonuses should be provided to reward key employees
based on Company and individual performance and to provide competitive cash
compensation opportunities to the Company's executives. However, based primarily
on the Company's financial results in the fiscal year ended September 30, 2000
and 1999, no bonuses were paid to any executive officers.
The Company's stock option plans are designed to focus executive efforts on
long-term goals of the Company and to maximize total return to the Company's
shareholders. The Committee believes that stock options advance the interests of
employees and shareholders by providing value to the executives through stock
price appreciation only. Options terminate if the employee's employment with the
Company is terminated. All options awarded must have an exercise price of at
least 100% of fair market value on the date of grant.
The exact number of shares actually granted to a particular participant
reflects both the participant's performance and role in the Company, as well as
the Company's financial success, and its future business plans. All of these
factors are assessed subjectively and are not weighted. In determining each
grant, the Committee also considers the number of stock options which are
outstanding, and the total number of options to be awarded.
In making grants during the fiscal year ended September 30, 2000, the
Committee also considered the number of outstanding options previously granted
to each officer. Due to the decline in the Company's stock price during the
year, all of the options granted to executive officers of the Company in fiscal
2000 were "out-of-the-money" at the fiscal year end of September 30, 2000. The
Committee believes that its awards were consistent with the Company's
compensation philosophy to increase the emphasis placed on long-term incentives
and to be competitive in its total compensation program.
29
Under Section 162(m) of the Internal Revenue Code of 1986, as amended, public
companies are precluded from receiving a tax deduction on compensation paid to
executive officers in excess of $1,000,000, unless the compensation is excluded
from the $1,000,000 limit as a result of being classified performance- based. At
this time, the Company's executive officers cash compensation levels do not
exceed the payment limit and will most likely not be affected by the regulations
in the near future. Nonetheless, the Committee intends to review its executive
pay plans over time in light of these regulations.
COMPENSATION COMMITTEE
F. Wayne Ballenger
M. F. Florence
Compensation of Directors
- -------------------------
Directors who are not employees of the Company receive $18,000 per year, $400
for each Board meeting attended, and $200 for each committee meeting of the
Board attended. Directors who are also employees of the Company receive no
additional compensation for serving as Directors. The Company reimburses its
Directors for travel and out-of-pocket expenses in connection with their
attendance at meetings of the Board of Directors.
In November 1995, the Board of Directors of the Company adopted the 1995 Non-
Discretionary Stock Option Plan for directors of the Company who are not
eligible to participate in the other Plans (the "Non-Discretionary Plan.") The
Non-Discretionary Plan provides that the Company grant options to purchase 5,000
shares of the Company's Common Stock to each eligible director on the date of
adoption of the Non-Discretionary Plan (November 28, 1995), to each person who
thereafter becomes a director of the Company and, as of December 1 of each year
(commencing in 1996), options to purchase an additional 5,000 shares of Common
Stock will be granted to each eligible director. The exercise price of the
options is the fair market value of the Common Stock on the date the options are
granted. The options are exercisable in full as of the date of grant. The shares
acquired upon exercise of these options cannot be sold for six months following
the date of grant.
Options granted pursuant to the Non-Discretionary Plan will not qualify for
the special tax benefits given to incentive stock options under Section 422 of
the Code. Accordingly, all of the stock options granted pursuant to the Non-
Discretionary Plan may be deemed to be non-statutory stock options. The options
are generally non-transferable. In October 1999 the Board of Directors of the
Company terminated the Non-Discretionary Plan.
During the fiscal year ended September 30, 2000, the Company granted options
to purchase 25,000 shares of Common Stock at a price of $2.84 per share to F.
Wayne Ballenger, and 15,000 shares of Common Stock at a price of $2.84 per share
and 7,658 shares of Common Stock at a price of $2.13 per share to M.F.
Florence. The option grants were made pursuant to the Company's 1995 Stock
Option Plan, as amended. Each option will expire ten years from the date of
grant, except that an option will expire, if not exercised, 30 days after the
optionee ceases to be a consultant to the Company.
Corporate Performance Graph
- ---------------------------
The following graph compares the yearly cumulative return on the Company's
Common Stock since July 10, 1995 (the date the Company's Common Stock began
trading on The Nasdaq Stock Market) with that of the Index for The Nasdaq Stock
Market (U.S. Companies) and a peer group including the following companies:
BeautiControl Cosmetics, Inc., Herbalife International, Inc., Nature's Sunshine
Products, Inc and Reliv' International, Inc.
30
[GRAPH APPEARS HERE]
- --------------------------------------------------------------------------------------------------
Total Return Analysis
9/29/95 9/30/96 9/30/97 9/30/98 9/30/99 9/29/00
- --------------------------------------------------------------------------------------------------
Advanced Nutraceuticals $ 100 $ 166.42 $ 91.06 $ 34.48 $ 28.02 $ 9.34
- --------------------------------------------------------------------------------------------------
Peer Group $ 100 $ 124.42 $ 121.34 $ 65.68 $ 89.64 $ 77.48
- --------------------------------------------------------------------------------------------------
Nasdaq Composite (US) $ 100 $ 117.58 $ 161.53 $ 162.31 $ 263.99 $ 353.71
- --------------------------------------------------------------------------------------------------
Source: Carl Thompson Associates www.ctasaline.com (800) 959-9677. Data from
Bloomberg Financial Markets.
31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of January 10, 2000, the ownership of the
Company's Common Stock held by: (i) each person who owns of record or who is
known by the Company to own beneficially more than 5% of such stock, (ii) each
of the directors of the Company, (iii) each of the current executive officers of
the Company and (iv) all of the Company's directors and executive officers as a
group. The number of shares and the percentage of the class beneficially owned
by the persons named in the table and by all directors and executive officers as
a group, includes, in addition to shares actually issued and outstanding,
unissued shares which are subject to issuance upon exercise of options or
warrants.
Number of Shares Percentage of
Beneficial Owner Owned Ownership
- ------------------------------------- -------------------- ----------------
Apotex Foundation 650,000 (1) 8.1%
150 Signet Dr.
Weston, Ontario, Canada
9M9 1T9
Bernard Sherman 1,215,390 (1) 15.2%
150 Signet Dr.
Weston, Ontario, Canada
9M9 1T9
Shermfin Inc. 565,390 (1) 7.0%
150 Signet Dr.
Weston, Ontario, Canada
9M9 1T9
M.F. Florence 608,048 (1)(2) 7.6%
150 Signet Dr.
Weston, Ontario, Canada
9M9 1T9
Jana B. Mitcham 561,634 (3) 7.0%
10618 Great Plains
Houston, TX 77064
David P. Bertrand 473,422 (4) 5.9%
10622 Great Plains
Houston, TX 77064
F. Wayne Ballenger 45,000 (5) 0.6%
3134 Meadway Drive
Houston, TX 77082
32
Gregory Pusey 429,950 (6) 5.4%
1722 Buffehr Creek Road
Vail, CO 81657
Pailla M. Reddy 968,310 (7) 12.1%
25507 Williston Avenue
Floral Park, NY 11001
Neil Sirkin 123,240 (8) 1.5%
3600 25th Avenue
Gulfport, MS 39501
John R. Brown, Jr. 47,000 (9) 0.6%
2534 Pomeran
Houston, TX 77080
Jeffrey G. McGonegal 140,651 (10) 1.8%
1905 West Valley Vista Drive
Castle Rock, CO 80104
All Officers and Directors as 3,322,255 41.4%
a Group (9 persons)
_______________________________
(1) Mr. Sherman may be deemed a beneficial owner of the shares held by the
Apotex Foundation due to his affiliations with the Apotex Foundation. Messrs.
Sherman and Florence may be deemed beneficial owners of the shares held by
Shermfin Inc. due to their affiliations with Shermfin Corp.
(2) Includes options to acquire (i) 5,000 shares of Common Stock at $19.75 per
share, (ii) 5,000 shares of Common Stock at $12.38 per share, (iii) 5,000 shares
of Common Stock at $7.00 per share and (iv) 5,000 shares of Common Stock at
$2.38 per share, (v) 7,658 shares at $2.125 per share, and (vi) 15,000 shares at
$2.84 per share.
(3) Includes Warrants to purchase 5,000 shares of Common Stock at $3.75 per
share and options to acquire (i) 16,800 shares of Common Stock at $1.875 per
share, (ii) 16,800 shares of Common Stock at $2.25 per share, (iii) 37,800
shares of Common Stock at $13.00 per share, (iv) 25,000 shares of Common Stock
at $3.00 per share, of which options to acquire 8,333 shares become exercisable
in December 2001 and (v) 20,000 shares of Common Stock at $5.13 per share, (vi)
53,604 shares of Common Stock at $2.125 per share, (vii) 50,000 shares of Common
Stock at $284 per share. Also includes 11,554 shares of Common Stock owned by
her daughter, 9,000 shares of Common Stock owned by her husband, and options
held by her husband to acquire (i) 3,600 shares of Common Stock at $13.00 per
share, (ii) 6,126 shares of Common Stock at $2.125 per share, (iii)
33
20,000 shares of Common Stock at $2.84 per share which become exercisable in
one-third annual installments commencing in December 2000.
(4) Includes options to acquire (i) 19,200 shares of Common Stock at $1.875 per
share, (ii) 19,200 shares of Common Stock at $2.25 per share, (iii) 40,200
shares of Common Stock at $13.00 per share, (iv) 25,000 shares of Common Stock
at $3.00 per share, of which options to acquire 8,333 shares become exercisable
in each of December 2000 and December 2001and (v) 20,000 shares of Common Stock
at $5.13 per share, (vi) 53,604 shares of Common Stock at $2.125 per share which
become exercisable in one-third annual installments commencing in October 2000
and (vii) 50,000 shares of Common Stock at $2.84 per share which become
exercisable in one-third annual installments commencing in December 2000 . Also
includes options held by his wife to acquire (i) 3,600 shares of Common Stock at
$13.00 per share, (ii) 10,000 shares of Common Stock at $3.00 per share, (iii)
6,126 shares of Common Stock at $2.125 per share which become exercisable in
one-third annual installments commencing in October 2000 and (iv) 20,000 shares
of Common Stock at $2.84 per share which become exercisable in one-third annual
installments commencing in December 2000.
(5) Includes options to acquire (i) 5,000 shares of Common Stock at $19.75 per
share; (ii) 5,000 shares of Common Stock at $12.38 per share, (iii) 5,000 shares
of Common Stock at $7.00 per share and (iv) 5,000 shares of Common Stock at
$2.75 per share (v) 25,000 shares of Common Stock at $2.85 per share which
become exercisable in one-third annual installments commencing in December 2000.
(6) Includes 14,430 shares held by his wife, individually and as custodian for
their minor children, 5,880 shares held by a corporation in which he is a
principal shareholder and warrants to purchase 15,000 shares of Common Stock at
$3.75 per share. Includes options to acquire 75,000 shares of Common Stock at
$2.84 per share which become exercisable in one-third annual installments
commencing in December 2000.
(7) Does not include any shares which may be earned pursuant to earnout
agreements. See Item 13.
(8) Does not include any shares which may be earned pursuant to earnout
agreements. See Item 13.
(9) Includes options to acquire (i) 10,000 shares of Common Stock at $11.50 per
share and (ii) 10,000 shares of Common Stock at $3.00 per share, of which
options to acquire 3,333 shares become exercisable in each of December 2000 and
December 2001, (iii) 22,000 shares at $2.84 per share, which become
exercisable in one-third annual installments commencing in December 2000.
(10) Includes options to acquire 100,000 shares of Common Stock at $2.375 per
share which become exercisable in one-third annual installments commencing in
February 2001 and does not include options to acquire 100,000 shares of Common
Stock at $.5625 per share which become exercisable in one-third installments
commencing in November 2001.
ITEM 13. CERTAIN RELATIONSHPS AND RELATED TRANSACTIONS
In March 1995, the Company entered into an agreement with Shermfin Inc.
regarding conversion to Common Stock of debt owed by the Company to Shermfin
Corp. The Company and Shermfin Inc. also agreed that, for so long as Shermfin
Corp. owns 10% or more of the outstanding Common Stock of the Company, Shermfin
Corp. will be entitled to designate one person to serve as a member of the
Company's Board of Directors. Shermfin Corp. designated M.F. Florence to serve
on the Board.
NION Laboratories, which was a subsidiary of Shermfin Inc. until June 1995,
has been a key supplier to the Company of nutritional supplements and other
consumer-related products. The Company purchased from NION approximately
$494,000 of goods during the fiscal year ended September 30, 1998. No goods were
purchased during the fiscal years ended September 30, 1999 and 2000. Richard S.
Kashenberg, a director of the Company until October 1999, served as the chief
executive officer of NION until December 31, 1996 and as a consultant to NION
through October 31, 1997. The Company believes that the terms it has obtained
from NION are at least as favorable as could have been obtained from third
parties.
During 1998, 1999 and 2000, respectively, the NFLI purchased approximately
41,000, 32,000 and 30,000 copies of a book, "Making A Difference While Making A
----------------------------------
Living", written by its CEO, David P. Bertrand and his son J. Mark Bertrand,
- ------
also an employee of the Company, at a cost to NFLI of $5.00 per book. New
Paradigm Publishing, a company established by J. Mark Bertrand, published the
book and subsequently sold it to NFLI. NFLI sold approximately 19,000, 10,000
and 3,000 copies of the book during 2000, 1999 and 1998, at an average selling
price of approximately $10.95 per copy. The book has been placed in NFLI's
product catalog at per copy prices ranging
34
from $8.95 to $12.95, based upon quantity ordered, and in 1999 approximately
35,000 of the books were part of the materials provided to new distributors in
NFLI's starter kits. Additionally, in 1998, approximately 19,000 copies of the
book were shipped to distributors as part of the NFLI's Business Training
Systems for that month. New Paradigm Publishing has agreed to accept return of
any books ordered, but not sold by NFLI and to refund to NFLI $5.00 per returned
copy. To date no books have been returned for refund. As of September 30, 2000
and 1999, $105,000 and $0, respectively, were owed by NFLI to New Paradigm
Publishing.
On November 17, 1999 the Company finalized the acquisitions of Bactolac
Pharmaceutical Inc. ("Bactolac") and Advanced Nutraceuticals, Inc., a Delaware
corporation ("Old - ANI"). Old - ANI was a holding company formed to pursue a
consolidation and integration program in the nutrition industry. Former Old -
ANI stockholders received an aggregate of 75,000 shares of a newly created
Series A Preferred Stock of the Company, which was converted into 750,000 shares
of the Company's common stock upon approval by the Company's stockholders at the
Company's Annual Meeting held June 6, 2000. Gregory Pusey, an officer, director
and principal stockholder of Old ANI subsequently became President and Chairman
of the Board of Directors of the Company.
The stock of Bactolac was acquired from Dr. Reddy, who subsequently became a
director of the Company. The purchase price of Bactolac consisted of $2,500,000
in cash, a subordinated promissory note in the principal amount of $2,500,000
and 96,831 shares of Series A Preferred Stock, which were converted into 968,310
shares of the Company's common stock upon approval by the Company's stockholders
at the Company's Annual Meeting held June 6, 2000. Additionally, up to 176,060
shares of common stock may be issued pursuant to an earn out agreement.
On December 1, 1999, the Company finalized the acquisition of Ash Corp. which
currently operates as a division of Bactolac under the name of ASHCO. The
purchase price of ASH consisted of $750,000 in cash, a subordinated promissory
note payable in the principal amount of $500,000 and 49,296 shares of Series A
Preferred Stock, which were converted into 492,960 shares of the Company's
common stock upon approval by the Company's stockholders at the Company's Annual
Meeting held June 6, 2000. Additionally, up to 1,056,340 shares of common stock
may be issued pursuant to an earn out agreement. Neil Sirkin and his father,
Allan Sirkin, were offcers, directors and principal stockholders of Ash. Neil
Sirkin subsequently became a director of the Company.
In connection with the acquisitions of Old ANI, Bactolac and Ash employment
agreements were made with Messrs. Loder, Pusey, Reddy and Sirkin which are
described in Item 11.
Bactolac, headquartered in Hauppauge, New York, conducts its operations in a
leased facility comprising approximately 25,000 square feet. Bactolac's current
monthly rental is approximately $27,000, of which $6,000 pertains to improvement
made by an entity owned by Dr. Reddy, that escalates over the 5 year term
remaining on the lease. Bactolac has two five year renewal options and a
purchase option on the facility.
35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2) See Item 8.
(3) Exhibits
Exhibit 2.1 Agreement and Plan of Reorganization, filed as a Exhibit to
the Registration Statement on Form S-4 (file no. 33-70312),
which Exhibit is incorporated herein by this reference.
Exhibit 2.2 Agreement and Plan of Merger, dated as of November 5, 1999,
among Nutrition For Life International, Inc., Advanced
Nutraceuticals, Inc., BPI Acquisition Company, Bactolac
Pharmaceutical Inc. and Pailla M. Reddy, filed as an Exhibit to
the Report on Form 8-K, filed on December 2, 1999, which Exhibit
is incorporated herein by this reference.
Exhibit 2.3 Agreement and Plan of Merger, dated as of October 20, 1999,
among Nutrition For Life International, Inc., Advanced
Nutraceuticals, Inc., NL Acquisition Company, Gregory Pusey and
Barry C. Loder, filed as an Exhibit to the Report on Form 8-K,
filed on December 2, 1999, which Exhibit is incorporated herein
by this reference.
Exhibit 2.4 Agreement and Plan of Merger, dated as of October 25, 1999,
among Nutrition For Life International, Inc., Advanced
Nutraceuticals, Inc., AC Acquisition Company, Allan I. Sirkin
and Neil Sirkin (the "Ash Merger Agreement"), filed as an
Exhibit to the Report on Form 8-K, filed on December 15, 1999,
which Exhibit is incorporated herein by this reference.
Exhibit 2.5 Amendment to Agreement and Plan of Merger, dated November
24, 1999, to the Ash Merger Agreement, filed as an Exhibit to
the Report on Form 8-K, filed on December 15, 1999, which
Exhibit is incorporated herein by this reference.
Exhibit 2.6 Agreement and Plan of Merger dated March 13, 2000 among
Nutrition For Life International, Inc., Advanced Nutraceuticals,
Inc. and NFLI Merger Sub, Inc., filed as an Exhibit to the
Report on Form 8-K, filed on March 21, 2000, which Exhibit is
incorporated herein by reference.
Exhibit 3.1 Articles of Incorporation of Nutrition For Life International,
Inc., as amended*
Exhibit 3.2 Bylaws of Nutrition For Life International, Inc., filed as
an Exhibit to the Registration Statement on Form S-4 (file no.
33-70312), which Exhibit is incorporated herein by this
reference.
Exhibit 3.3 Articles of Incorporation of Advanced Nutraceuticals, Inc.,
filed as an Exhibit to the Report on Form 8-K, filed on March
21, 2000, which Exhibit is incorporated herein by this reference
Exhibit 3.4 Bylaws of Advanced Nutraceuticals, Inc., filed as an Exhibit
to the Report on Form 8-K, filed on March 21, 2000, which
Exhibit is incorporated herein by this reference
Exhibit 4.1 Specimen Certificate of Nutrition for Life International,
Inc.'s Common Stock*
Exhibit 4.2 Specimen Warrant*
Exhibit 4.3 Warrant Agreement with Corporate Stock Transfer, Inc.*
Exhibit 4.4 Statement Establishing a Series of Shares (Series A Preferred
Stock), filed as an Exhibit to the Report on Form 8-K, filed on
December 2, 1999, which Exhibit is incorporated herein by this
reference.
Exhibit 10.1 1993 Stock Option Plan, filed as an Exhibit to the
Registration Statement on Form S-4 (file no. 33-70312), which
Exhibit is incorporated herein by this reference*
Exhibit 10.2 1995 Stock Option Plan, as amended***
Exhibit 10.11 Agreement, dated March 3, 1995, between Nutrition for Life
International, Inc. and Shermfin Corp.*
Exhibit 10.15 Lease Agreements for office and warehouse facilities with non-
affiliates, filed as an Exhibit to the Report on Form 10-KSB
for the fiscal year ended September 30, 1995 of the
Registrant, which Exhibit is incorporated herein by this
reference.
Exhibit 10.16 1995 Non-Discretionary Stock Option Plan, filed as an Exhibit
to the Report on Form 10-KSB for the fiscal year ended
September 30, 1995 of the Registrant, which Exhibit is
incorporated herein by this reference.
Exhibit 10.17 Assurance of Voluntary Compliance for the State of Illinois,
dated July 16, 1996, filed on July 31, 1996 as an Exhibit to
the Report on Form 8-K, which Exhibit is incorporated herein
by this reference.
Exhibit 10.18 Administrative and Consulting Services Agreement, dated July
29, 1996, between Distributor Services, L.L.C. and Nutrition
For Life International, Inc.*
Exhibit 10.19 Form of Distributor Agreement of Nutrition For Life
International, Inc.*
Exhibit 10.22 Agreement, effective October 24, 1997, among K. T. Corp.,
Kevin Trudeau and Registrant, filed as an Exhibit to the
Report on Form 10-K for the fiscal year ended September 30,
1997 of the Registrant which Exhibit is incorporated herein by
this reference.
Exhibit 10.23 Agreement, dated August 19, 1998, among the Registrant, Kevin
Trudeau and K. T. Corp., filed as an Exhibit to the Report on
Form 8-K filed on August 21, 1998, which Exhibit is
incorporated herein by this reference.
Exhibit 10.23.1 Settlement Agreement and Release, dated October 27, 1998,
among the Registrant, Kevin Trudeau and K. T. Corp. filed as
an Exhibit to the Report on Form 10-K for the fiscal year
ended September 30, 1998, which Exhibit is incorporated herein
by this reference.
Exhibit 10.24 Settlement and Release Agreement, dated October 30, 1998,
among the Registrant, Distributor Services, L.L.C., Tru-
Vantage International, L.L.C., Maximum Impact, L.L.C. and
Nightingale-Conant Corporation, filed as an Exhibit to the
Report on Form 8-K filed on November 13, 1998, which Exhibit
is incorporated herein by this reference.
Exhibit 10.25 Agreement, dated October 30, 1998, between Distributor
Services, L.L.C. and the Registrant, filed as an Exhibit to
the Report on Form 8-K filed on November 13, 1998, which
Exhibit is incorporated herein by this reference.
Exhibit 10.26 Earnout Agreement, dated November 17, 1999, between Pailla M.
Reddy and Nutrition For Life International, Inc., filed as an
Exhibit to the Report on Form 8-K, filed on December 2, 1999,
which Exhibit is incorporated herein by this reference.
Exhibit 10.26(a) Letter of agreement dated January 10, 2000, to Earnout
Agreement between Pailla M. Reddy and Nutrition For Life
International, Inc.**
Exhibit 10.27 Earnout Agreement, dated November 30, 1999, among Nutrition
For Life International, Inc. and the former shareholders of
Ash Corp. filed as an Exhibit to the Report on Form 8-K, filed
on December 15, 1999, which Exhibit is incorporated herein by
this reference.
Exhibit 10.32 Employment Agreement, dated November 17, 1999, between
Bactolac Pharmaceutical Inc. and Pailla Reddy.**
Exhibit 10.33 Employment Agreement, dated November 30, 1999, between
Bactolac Pharmaceutical Inc. and Allan I. Sirkin.**
Exhibit 10.34 Employment Agreement, dated November 30, 1999, between
Bactolac Pharmaceutical Inc. and Neil Sirkin. **
Exhibit 10.35 Non-Competition Agreement, dated November 17, 1999, among For
Life International, Inc. and NL Acquisition Company. **
Exhibit 10.36 Non-Competition Agreement, dated November 17, 1999, among
Barry C. Loder, Nutrition For Life International, Inc. and NL
Acquisition Company. **
Exhibit 10.37 Non-Competition Agreement, dated November 17, 1999, among
Pailla M. Reddy, Nutrition For Life International, Inc. and
Bactolac Pharmaceutical Inc. **
Exhibit 10.38 Non-Competition Agreement, dated November 30, 1999, between
Bactolac Pharmaceutical Inc. and Allan I. Sirkin. **
Exhibit 10.39 Non-Competition Agreement, dated November 30, 1999, between
Bactolac Pharmaceutical Inc. and Neil Sirkin. **
Exhibit 10.40 Subordinated Promissory Note, dated November 17, 1999, in the
principal amount of $2,500,000 made by Nutrition For Life
International, Inc., payable to Pailla Reddy. **
Exhibit 10.40(a) Allonge to Subordinated Promissory Note, dated November 17,
2000, to the $2,500,000 note payable to Pailla Reddy.***
Exhibit 10.41 Subordinated Promissory Note, dated November 17, 1999, in the
principal amount of $650,000 made by Bactolac Pharmaceutical
Inc., payable to Pailla Reddy. **
Exhibit 10.42 Subordinated Promissory Note, dated December 1, 1999, in the
principal amount of $155,000 payable by Nutrition For Life
International, Inc., to Neil Sirkin. **
Exhibit 10.43 Subordinated Promissory Note, dated December 1, 1999, in the
principal amount of $345,000 payable by Nutrition For Life
International, Inc., to Allan I. Sirkin. **
Exhibit 10.44 Lock-Up Agreement, dated November 30, 1999, between Allan I.
Sirkin and Nutrition For Life International, Inc. **
Exhibit 10.45 Lock-Up Agreement, dated November 30, 1999, between Neil
Sirkin and Nutrition For Life International, Inc. **
Exhibit 10.46 Lock-Up Agreement, dated November 17, 1999, between Gregory
Pusey and Nutrition For Life International, Inc. **
Exhibit 10.47 Lock-Up Agreement, dated November 17, 1999, between Barry C.
Loder and Nutrition For Life International, Inc. **
Exhibit 10.48 Lock-Up Agreement, dated November 17, 1999, between Pailla
Reddy and Nutrition For Life International, Inc. **
Exhibit 10.49 Loan and Security Agreement among General Electric Capital
Corporation, Nutrition For Life International, Inc., Ash
Corp., Bactolac Pharmaceutical Inc. and NL Acquisition
Company. **
Exhibit 10.50 First Amendment to Loan and Agreement among General Electric
Capital Corporation, Nutrition For Life International, Inc.,
Ash Corp., Bactolac Pharmaceutical Inc. and NL Acquisition
Company. **
Exhibit 10.51 Second Amendment to Loan and Security Agreement
involving General Electric Capital Corporation, dated
March 15, 2000.***
Exhibit 10.52 Agreement, dated September 20, 2000, among Nutrition
For Life International, Inc., Advanced Nutraceuticals,
Inc., David P. Bertrand, Barry C. Loder, Jeffrey G.
McGonegal, Jana Mitcham and Gregory Pusey.***
Exhibit 10.53 Agreement, dated July 7, 2000, between Shilpa-Saketh
Realty, Inc. and Bactolac Pharmaceutical Inc.***
Exhibit 10.54 Stock Purchase Agreement, dated December 29, 2000,
among Advanced Nutraceuticals, Inc., Everest
International, LLC and Nutrition For Life
International, Inc.***
Exhibit 10.55 Waiver under Loan and Security Agreement involving
General Electric Capital Corporation, dated
January 10, 2001.***
Exhibit 21 Subsidiaries of the Company.***
Exhibit 23.1 Consent of BDO Seidman, LLP.
Exhibit 23.2 Consent of Grant Thornton LLP.
* These exhibits were previously filed as exhibits to the Company's
Registration Statement on Form SB-2 (File No. 33-92274), and are
incorporated herein by reference.
** These exhibits were previously filed as exhibits to the Company's
Report on Form 10-K for the fiscal year ended September 30, 1999, and
are incorporated herein by reference.
*** These exhibits were previously filed as exhibits to the initial filing
of this Report on Form 10-K and are incorporated herein by reference.
(b) Reports on Form 8-K
None.
(c) Exhibits
(a)(3)above
(d) Financial Statement Schedules
See Item 8 above.
Annex A-2
Form 10-Q/A Report
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 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)
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 February 16, 2001 there were 8,107,895 shares of common stock,
$0.01 par value per share, outstanding.
ADVANCED NUTRACEUTICALS, INC.
Index
PART 1 - Financial Information
Page
Item 1. Financial Statements
Advanced Nutraceuticals, Inc.
Consolidated Balance Sheets
December 31, 2000 and September 30, 2000 3
Consolidated Statements of Operations and Comprehensive Income (Loss)
For the Three Months Ended December 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended December 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
2
ADVANCED NUTRACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
2000 September 30,
(Unaudited) 2000
----------- -------------
(Restated-*) (Restated-*)
ASSETS
------
Current Assets:
Cash and cash equivalents $ 915,259 $ 958,365
Restricted cash 101,266 101,266
Receivables 5,707,689 4,578,570
Inventories 7,130,203 7,253,939
Deferred tax asset 1,707,000 1,707,000
Prepaid expenses and other assets 778,150 884,831
----------- -------------
Total Current Assets 16,339,567 15,483,971
Property and equipment, net 13,977,154 14,326,317
Audio production rights 62,000 80,600
Goodwill 9,101,805 9,228,829
Other assets 557,708 542,938
----------- -------------
$ 40,038,234 $ 39,662,655
=========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 5,291,729 $ 5,614,400
Accrued distributor bonuses 934,421 1,133,081
Deferred income 283,855 348,455
Accrued expenses and other liabilities 1,978,247 1,372,075
Credit facility 6,084,294 6,589,783
Current portion of other installment obligations 942,689 1,173,518
Current portion of long-term debt 3,850,053 2,850,053
----------- -------------
Total Current Liabilities 19,365,288 19,081,365
Deferred tax liability 2,807,000 2,254,000
Long-term debt 500,000 1,500,000
----------- -------------
Total Liabilities 22,672,288 22,835,365
----------- -------------
Commitments and contingencies -- --
Stockholders' Equity:
Preferred stock, $.001 par value; 1,000,000 authorized; none issued -- --
Common stock; $.01 par value; 20,000,000 shares authorized 80,198 80,198
Additional paid-in capital 17,936,253 17,936,253
Retained earnings (deficit) (683,909) (1,266,831)
Accumulated other comprehensive income (loss) 33,404 77,670
----------- -------------
Total Stockholders' Equity 17,365,946 16,827,290
----------- -------------
$ 40,038,234 $ 39,662,655
=========== =============
See accompanying notes to consolidated financial statements.
(* Amounts Restated--See Note 4)
3
ADVANCED NUTRACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
Three Months
Ended December 31,
------------------------------
2000 1999
------------- -------------
(Restated-*) (Restated-*)
Net sales $ 16,653,997 $ 16,586,996
Cost of sales 11,011,657 11,476,565
------------- -------------
Gross profit 5,642,340 5,110,431
Marketing, distribution and administrative expense 5,075,615 5,618,771
------------- -------------
Income (loss) from operations 566,725 (508,340)
------------- -------------
Other income (expense):
Interest expense, net (287,203) (104,201)
Foreign exchange income (loss) 34,606 (33,356)
Other, net 4,405 101,737
------------- -------------
(248,192) (35,820)
------------- -------------
Income (loss) before income tax expense 318,533 (544,160)
Income tax expense (benefit) (264,389) (46,000)
------------- -------------
Net income (loss) $ 582,922 $ (498,160)
------------- -------------
Other comprehensive income (loss):
Unrealized income on investments, net of tax -- 45,500
Foreign currency translation adjustment (44,266) 83,647
------------- -------------
(44,266) 129,147
------------- -------------
Total comprehensive income (loss) $ 538,656 $ (369,013)
============= =============
Basic income (loss) per common $ .07 $ (.09)
============= =============
Diluted income (loss) per common share $ .07 $ (.09)
============= =============
Weighted average common shares outstanding:
Basic 8,109,865 5,808,595
============= =============
Diluted 8,113,136 5,808,595
============= =============
See accompanying notes to consolidated financial statements
(* Amounts Restated--See Note 4)
4
ADVANCED NUTRACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months
Ended December 31,
---------------------------
2000 1999
------------ ------------
(Restated-*) (Restated-*)
Net cash provided by (used in) operating activities $ 925,406 $ (2,352,561)
Net cash used in investing activities (199,404) (3,374,316)
Net cash provided by (used in) financing activities (724,842) 4,859,474
Effects of exchange rates on cash (44,266) 83,647
------------ ------------
Net decrease in cash and cash equivalents (43,106) (783,756)
Cash and cash equivalents at beginning of period 958,365 1,395,310
------------ ------------
Cash and cash equivalents at end of period $ 915,259 $ 611,554
============ ============
See accompanying notes to consolidated financial statements
(* Amounts Restated--See Note 4)
5
ADVANCED NUTRACEUTICALS, INC.
NOTES FOR CONSOLIDATED STATEMENTS
INTERIM FINANCIAL STATEMENTS
The accompanying financial statements of Advanced Nutraceuticals, Inc. (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
December 31, 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/A. The results of operations for the
period ended December 31, 2000 are not necessarily an indication of operating
results for the full year.
NOTE 1 -- ACQUISITIONS
On November 17, 1999 the Company finalized the acquisitions of Bactolac
Pharmaceutical Inc. ("Bactolac") and Advanced Nutraceuticals, Inc., a Delaware
corporation ("Old - ANI"). Old - ANI was a holding company formed to pursue a
consolidation and integration program in the nutrition industry. Former Old -
ANI stockholders received an aggregate of 750,000 shares of the Company's common
stock. The common shares issued in the acquisitions of Old - ANI, Bactolac and
ASH were originally Series A Preferred Stock, which was converted into common
stock on a ten for one basis upon approval by the Company's stockholders at the
Company's Annual Meeting held June 6, 2000.
Bactolac, headquartered in Hauppauge, New York, manufactures nutritional
supplements for private labeled customers. The purchase price of Bactolac
consisted of $2,500,000 in cash, a subordinated promissory note in the principal
amount of $2,500,000 and 968,310 shares of the Company's common stock.
Additionally, 88,030 shares of common stock were issued in February, 2001 and up
to 88,030 additional shares of common stock may be issued pursuant to an earn
out agreement. Bactolac entered into an employment agreement and covenant not to
compete agreement with its former owner.
On December 1, 1999, the Company finalized the acquisition of Ash Corp.
("ASH") as a division of Bactolac. The purchase price of ASH consisted of
$750,000 in cash, a note payable in the amount of $500,000 and 492,960 shares of
the Company's common stock. Additionally, up to 1,056,340 shares of common stock
may be issued pursuant to an earn out agreement. In the fourth quarter ended
September 30, 2000, Bayer Corporation informed the Company that it decided to
internally produce most of the products produced by the Company for Bayer. Bayer
accounted for 5% of the Company's consolidated sales for the fiscal year ended
September 30, 2000.
Financing for the acquisitions was provided primarily through a financing
arrangement entered into on November 17, 1999 with General Electric Capital
Corporation (the "GECC"). The acquisitions have been accounted for using the
purchase method of accounting wherein the operating results of the acquired
companies are included in the Company's consolidated financial statements from
their dates of acquisition. The purchase price for the acquisitions, including
the equivalent common stock issued which was valued at its market price of $2.84
per share, 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 net assets acquired was approximately $9,690,000 and has
been recorded as goodwill, which is being amortized on a straight-line basis
over twenty years
NOTE 2 - SALE OF NUTRITION FOR LIFE INTERNATIONAL, INC.
On December 29, 2000, ANI signed a definitive agreement to sell Nutrition For
Life International, Inc. ("NFLI"), and all of its subsidiaries engaged in the
network marketing business to Everest International, L.L.C., a privately-held
entity. The agreement provides for $5 million in cash at closing subject to a
working capital adjustment and a $5 million prime plus one-half percent note,
payable based upon a ten-year amortization with quarterly payments for three
years and final balloon payment at the end of the third year. In addition,
Bactolac Pharmaceutical, Inc. (a subsidiary of ANI) is entering into a product
supply agreement with NFLI and also will receive a $650,000 note representing a
currently outstanding inter-company liability, due one year and a day from
closing. The purchase price may also be increased up to an additional $750,000,
depending upon future operating results of NFLI's recently established Japanese
subsidiary. The transaction is subject to approval by ANI's stockholders and
GECC and customary closing conditions. Closing is anticipated to occur during
the quarter ending June 30, 2001.
6
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:
Three Months ended
December 31,
(In Thousands)
--------------
2000 1999
---- ----
Sales to unaffiliated customers:
Distribution:
North America (1) $10,068 $13,239
United Kingdom (2) 879 1,358
Philippines -- 205
Japan 785 --
Manufacturing 4,922 1,785
Sales or transfers between geographic areas:
Distribution:
North America -- --
United Kingdom 157 394
Philippines -- 43
Japan -- --
Manufacturing -- --
Operating profit (loss):
Distribution:
North America 508 (360)
United Kingdom (143) (234)
Philippines -- (100)
Japan 29 --
Manufacturing 173 186
Identifiable assets:
Distribution:
North America 11,188 37,870
United Kingdom 1,334 2,197
Philippines -- 302
Japan 421 --
Manufacturing 27,095 16,283
(1) Includes the United States, Canada, and Puerto Rico
(2) Includes the United Kingdom, Ireland, and the Netherlands
(3) Excludes goodwill
Note 4 - Restatement
Certain of the accompanying consolidated financial statements have been restated
from amounts as previously prepared. The current restatement reverses the
presentation of NFLI as a discontinued operation as contained in the previous
financial statements. The restated presentation is necessary due to the fact
that under state law completion of the sale of NFLI requires stockholder
approval, and such approval has not yet been obtained. The restatement had no
effect on reported net income (loss) or related per share amounts.
7
ITEM 2.
ADVANCED NUTRACEUTICALS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
Distribution Operations
Net sales for the three months ended December 31, 2000 decreased by $3,069,180
or 20.7% to $11,732,350 as compared to net sales of $14,801,530 for the three
months ended December 31, 1999. At December 31, 2000, the Company had
approximately 57,000 distributors compared to approximately 65,300 at December
31, 1999 and 58,000 at September 30, 2000. During the three months ended
December 31, 2000 the number of active International distributors increased by
approximately 400, while active distributors in North America decreased by
approximately 1,400. The ability of the Company to increase it's number of
active distributors and its sales per average number of distributors is material
to the future operations and financial condition of the Company. The decrease
in net sales is recapped below:
Decrease in sales due to decreased number of distributors $(1,957,557)
Decrease in distributor average sales (1,111,623)
-----------
$(3,069,180)
===========
The Company's net sales per average number of distributors per month decreased
from $75 during the three months ended December 31, 1999 to $68 for the three
months ended December 31, 2000.
Cost of sales decreased by $2,604,688 or 25.5% to $7,594,871 for the three
months ended December 31, 2000 from $10,199,559 for the three months ended
December 31, 1999. Cost of sales as a percentage of net sales decreased from
68.9% in the three months ended December 31, 1999 to 64.7% in the three months
ended December 31, 2000. Cost of sales, which includes product costs,
commissions and bonuses paid to distributors, and shipping costs, is recapped
below:
Three months ended
December 31,
------------------
2000 1999
---- ----
Product costs 23.8% 25.5%
Commissions and bonuses paid to distributors 33.5 34.1
Shipping costs 7.4 9.3
---- ----
64.7% 68.9%
==== ====
Product costs as a percentage of cost of sales decreased 1.7% primarily as a
result of mix of product sales. Commissions and bonuses paid to distributors
decreased 0.6% as a result of changes in the mix of higher versus lower bonus
value products purchased by distributors. Shipping costs were higher by 1.9%
during the three months ended December 31, 1999, than those in the 2000 period
primarily because 1999 included a higher than normal level of product shipments
between the Company's warehouse in the United States and the United Kingdom.
Gross profit as percentage of net sales increased from 31.1% for the three
months ended December 31, 1999 to 35.3% for the three months ended December 31,
2000. Gross profit decreased 10.1% or $464,492 from $4,601,971 for the three
months ended December 31, 1999 to $4,137,479 for the three months ended December
31, 2000.
Manufacturing Operations
The Company's manufacturing operations are a new line of business resulting from
the acquisitions that were consummated during the first quarter of the fiscal
year ended September 30, 2000. The acquisition of Bactolac Pharmaceutical Inc.,
a contract manufacturer of nutritional supplements, was closed on November 17,
1999, and ASH, a contract manufacturer of pharmaceutical products, was acquired
as a division of Bactolac, as of December 1, 1999. The acquisitions have been
accounted for under the purchase method of accounting, whereby the results of
the acquired operations are included in the consolidated financial statements
from their dates of acquisition. In order to provide a meaningful comparison,
the following table for comparative purposes only, sets forth on a pro forma
basis for the 1999 period the amounts and percentages of selected items of
revenue and expense, as though the acquisitions of Bactolac and ASH had been
consummated as of the beginning of the year ended September 30, 1999.
8
Three Months Ended December 31,
-------------------------------
2000 1999 (Pro Forma)
------------------- ------------------
Amount % Amount %
---------- ------ ---------- ------
Net sales $4,921,647 100.0% $4,479,577 100.0%
Cost of sales 3,416,788 69.4% 3,638,660 81.2%
Gross profit 1,504,859 30.6% 840,917 18.8%
Operating expenses 1,205,216 24.5% 974,165 21.7%
Goodwill amortization 127,024 2.6% 126,000 2.8%
Operating income (loss) 172,619 3.5% (259,248) (5.8%)
Net sales for the three months ended December 31, 2000 increased $442,070 or
9.9% over the 1999 pro forma period. The increase was primarily attributable to
a net $163,522 increase in the sales of Bactolac, through a number of customers,
and a $278,548 increase in the sales of ASH. The majority of the ASH increase
was attributable to an increase in sales to Bayer Corporation for an inventory
build up related to the conclusion of the Bayer relationship. Bayer Corporation
has historically represented a significant portion of ASH's revenue base, and
Bayer has informed ASH, that effective January 1, 2001, it intends to produce
in-house substantially all of the products currently produced for it by ASH. ASH
is aggressively attempting to expand its customer base to compensate for the
loss of the Bayer business. Failure to replace this substantial customer, or the
inability to substantially reduce ASH's operating expenses, would have an
adverse effect on the Company's business and operations.
Gross profit for the three months ended December 31, 2000 increased to
$1,504,859, a $663,942 increase over the 1999 pro forma amount. Gross profit as
a percentage of net sales increased to 30.6% in 2000, as compared to 18.8% in
the 1999 pro forma period. The majority of the increase was due to higher levels
of sales at the Bactolac operation, without a corresponding level of increase in
the labor and overhead components of the cost of sales amounts. Additionally, as
Bactolac purchases materials in higher volumes and better manages its purchasing
activities, it is able to reduce, as a percentage of sales, its material costs.
In October 2000, Bactolac moved into a larger facility, which will cause an
increase in costs, but is also anticipated to provide for improved operating
efficiencies and expanded in-house capabilities of certain processes for coating
and packaging that had been previously outsourced and allow for higher revenue
levels to be obtained.
Combined Operations
Marketing, distribution and administrative expenses decreased $543,156 or 9.7%
from $5,618,771 for the three months ended December 31, 1999 to $5,075,615 for
the three months ended December 31, 2000. This change in amount resulted
primarily from reductions in professional fees and promotion expenses in
distribution being offset by increases in personnel expenses in manufacturing.
As a percentage of net sales, marketing, distribution, and administrative
expenses decreased to 30.5% for the three months ended December 31, 2000 from
33.9% for the three months ended December 31, 1999.
Income (loss) from operations for the three months ended December 31, 2000
increased $1,075,065 to operating income of $566,725 from operating loss of
$508,340 for the three months ended December 31, 1999, principally as a result
of the increase in gross profit and a decrease in operating expenses.
Other income (loss) decreased to a loss of $248,192 for the three months ended
December 31, 2000 from a loss of $35,820 for the three months ended December 31,
1999. The decrease was primarily the result of an increase in interest incurred
from the acquisition financing.
As the Company is not currently able to recognize any tax benefit from foreign
operating losses, income tax expense was accrued based on the taxable income
from domestic operations for the three months ended December 31, 2000 and 1999 .
Net income was $582,922 for the three months ended December 31, 2000, compared
to a net loss of $498,160 for the three months ended December 31, 1999. The
increase was the result of the items discussed above.
9
LIQUIDITY AND CAPITAL RESOURCES
Since ANI consummated the acquisitions of Bactolac and ASH, it has met its
working capital and capital expenditure requirements, including funding for debt
repayments, mainly through net cash provided under the Company's revolving line
of credit provided through a secured lender. As a result of cost reductions
which have been implemented across the board and upon the closing of the pending
sale of NFLI, management believes that a significant portion of the upcoming
working capital needs can be met out of cash provided by the sale of NFLI and
cash generated from operating activities. In November 2000, NFLI received a net
State of Texas franchise tax refund of approximately $619,000, arising from
amending previous years tax returns, which amount will be used for working
capital needs. Management plans to continue to strive to restore profitability
and pursue additional financing during the current fiscal year to meet currently
anticipated funding requirements.
At December 31, 2000, the Company had a working capital (deficit) of
$3,025,721. Borrowings under the revolving portion of the secured credit
facility totaled $4,286,000, with additional borrowings available of $1,344,000,
at that point, based upon accounts receivable and inventory levels. Under the
terms of the Agreement for the sale of NFLI, the purchaser is required to repay
or assume the NFLI portion of such borrowings, which as of December 31, 2000,
totaled approximately $1,089,000, including $202,000, outstanding under the term
loan portion of the credit facility.
Operating Activities
Net cash flows from operating activities generated approximately $925,400 for
the three months ended December 31, 2000, as compared to consuming approximately
$2,352,600 for the three months ended December 31, 1999. The net cash outflow
from operating activities in 2000 consisted primarily of an increase of
approximately $1,129,000 in accounts receivable, relating primarily to higher
level of sales at the Bactolac and ASH operations. These amounts were offset in
2000 by income generated by continuing operations, depreciation and amortization
expense of approximately $694,000 and a net decrease in deferred taxes, prepaid
expenses and inventory of approximately $760,000.
Investing Activities
Investing activities consumed approximately $199,400 in 2000, compared to
$3,374,300 in the 1999 period. The $199,400 was used for equipment additions
primarily at the new Bactolac facility, which was leased shortly before the end
of the last fiscal year.
Financing Activities
Financing activities consumed approximately $724,800 in 2000, compared to the
1999 period which generated approximately $4,859,500. This consisted of
approximately $505,000 in net reduction of the Company's credit facility and
approximately $219,000 of other debt reduction.
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 an approximate $1,596,000 term
loan facility with the secured lender that requires principal payments of
$49,167, monthly over the remaining term of the Agreement. Interest on amounts
outstanding under the Agreement is payable monthly based upon the lender's index
rate plus 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,
2000, the Company was not in compliance with several covenants under the
Agreement and a waiver was obtained from GECC. Due to the fact that ANI
continues to not be in compliance with the terms of the Agreement, and the
waiver obtained as of September 30, 2000 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 December 31,
2000. Management of ANI plans to continue discussions with the secured lender
concerning an amendment to the credit facility which management believes based
on its discussions with such lender can be accomplished between now and closing
of the NFLI sale, to approve the agreed upon sale of NFLI and to achieve
mutually acceptable compliance conditions. If the Company is not successful in
its efforts to amend the Agreement, it will have adverse effects on the
Company's business, financial condition and operations.
As a result of the acquisitions of Bactolac and ASH, during the first quarter
of the Company's fiscal year ended September 30, 2000, the Company entered into
purchase notes totaling $3,000,000, with certain of the selling stockholders and
assumed, through Bactolac, a $1,350,053, mortgage obligation of the ASH
facility. The Bactolac stock purchase note is subordinate to the GECC facility,
bears interest at 7%, and with the approval of GECC, required a $1,000,000
payment on
10
the first anniversary of the acquisition. The holder of the note has agreed to
extend the payment of the first installment for six months or until the closing
of the NFLI sale transaction. The $500,000, ASH stock purchase notes are
subordinate to the GECC facility, bear interest at 7%, and subject to the
approval of GECC, were payable December 29, 2000 and have not been paid. The
loan assumption agreement for the ASH mortgage obligation bears interest at
prime plus 2%, and is secured by the ASH land and building. The assumption
agreement was originally due May 15, 2000, and the holder has agreed to
amendment agreements that extended the due date to March 31, 2001. Management of
ANI intends to continue to try to work with the holders of these obligations in
trying to resolve the current inability to liquidate the debts under their
scheduled terms. Additionally, the ability to potentially refinance the ASH
mortgage with a new lender and provide additional cash is currently being
explored. Should the holders not agree to extensions, or an alternative loan
facility not be obtained, it would have adverse effects on the Company's
business, financial condition and operation.
Capital expenditures, primarily for manufacturing and laboratory equipment for
fiscal 2001 are anticipated to be approximately $450,000-600,000. It is expected
that the funding for these capital needs will be provided by leases. A lease of
$70,000 has recently been completed and was funded in January 2001, and a
lease line of $407,000, has been tentatively approved for equipment needs.
Bayer has notified the Company that it will be moving substantially all
production previously produced at the ASH facility, to its own in-house facility
on or about January 1, 2001. During the quarter ended December 31, 2000, a
significant increase in Bayer orders, which totaled approximately $1.1 million,
was received and processed at the ASH facility, as Bayer stocked up for the
transition. During the second quarter of the year, it is expected that such
revenues will be collected and associated accounts receivable and inventory
levels will be reduced. Since no new revenues are expected from Bayer, ASH has
been attempting to expand its customer base to reduce its historical dependence
upon Bayer and intends to continue to focus on those efforts. Failure to replace
this substantial customer or failing to implement a substantial reduction in
operating expenses would have an adverse effect on the Company's business,
financial condition and results of operations.
11
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
A Report on Form 8-K was filed reporting under Item 5 that the Company
entered into a stock purchase agreement on December 29, 2000 to sell NFLI.
12
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: April 18, 2001 By: /s/ John R. Brown, Jr.
-------------------------------
John R. Brown, Jr.
Vice President - Finance and
Principal Accounting Officer
13
Annex A-3
Form 8-K/A Report
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported)
November 17, 1999
NUTRITION FOR LIFE INTERNATIONAL, INC.
-------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas
---------------------------------------------
(State or other jurisdiction of incorporation)
0-26362 76-0416176
------------------------ ------------------------------------
(Commission File Number) (IRS Employer Identification Number)
9101 Jameel, Suite 180, Houston, TX 77040
------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (713) 460-1976
--------------
_____________________________(Former address, if changed since last report)
NUTRITION FOR LIFE INTERNATIONAL, INC.
INFORMATION TO BE INCLUDED IN THE REPORT
Introduction
- ------------
On December 2, 1999, Nutrition For Life International, Inc. (the "Company")
filed a Report on Form 8-K regarding the acquisitions by the Company on November
17, 1999 of Advanced Nutraceuticals, Inc. ("ANI") and Bactolac Pharmaceutical
Inc. ("BPI"). On December 15, 1999, the Company filed a Report on Form 8-K
reporting the acquisition on December 1, 1999 of Ash Corp. ("ASH") through a
merger with BPI.
The purpose of this Amendment is to provide the financial statements of the
businesses acquired and the pro forma financial information which were not
included in the initial filings.
ITEM 7. Financial Statements and Exhibits.
---------------------------------
(a) Financial Statements of Business Acquired.
Advanced Nutraceuticals, Inc.
Report of Grant Thornton LLP
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Ash Corp.
Report of Hein + Associates LLP
Balance Sheets
Statements of Operations
Statements of Stockholders' Deficit
Statements of Cash Flows
Notes to Financial Statements
Bactolac Pharmaceutical Inc.
Report of Grant Thornton LLP
Balance Sheets
Statements of Earnings
Statements of Stockholder's Equity
Statements of Cash Flows
Notes to Financial Statements
-2-
(b) Pro forma Financial Information.
Attached is the following unaudited pro forma consolidated financial
statements which give effect to the acquisitions by the Company of 100% of the
outstanding common stock of ANI, BPI and ASH:
Unaudited pro forma combining balance sheet as of September 30, 1999.
Unaudited pro forma combining statements of operations for the year
ended September 30, 1999.
Explanatory Head Note
Notes to pro forma consolidated financial statements.
(c) Exhibits
23.1 Consent of Grant Thornton LLP
23.2 Consent of Hein + Associates LLP
23.3 Consent of Grant Thornton LLP
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.
NUTRITION FOR LIFE INTERNATIONAL, INC.
Dated: January 28, 2000 By: /s/ David P. Bertrand
----------------------------
David P. Bertrand, President
-3-
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors
Advanced Nutraceuticals, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Advanced
Nutraceuticals, Inc. and Subsidiaries as of December 31, 1997 and 1998, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the period from inception (September 9, 1997) through
December 31, 1997, and the year ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly,
in all material respects, the consolidated financial position of Advanced
Nutraceuticals, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
consolidated results of their operations and their consolidated cash flows for
the period from inception (September 9, 1997) through December 31, 1997, and for
the year ended December 31, 1998, in conformity with generally accepted
accounting principles.
GRANT THORNTON LLP
Houston, Texas
November 10, 1999
F-1
Advanced Nutraceuticals, Inc.
CONSOLIDATED BALANCE SHEETS
December 31, December 31, September 30,
1997 1998 1999
------------- ------------- --------------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 24,862 $ 156,480 $ 15,097
Prepaid expenses and other current assets 500 551 550
----------- ----------- -----------
Total current assets 25,362 157,031 15,647
PROPERTY AND EQUIPMENT, NET 2,292 2,530 2,530
DEFERRED OFFERING COSTS 1,847 - -
----------- ----------- -----------
$ 29,501 $ 159,561 $ 18,177
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Due to affiliates $ 25,000 $ 616 $ 616
Accounts payable 500 111,656 20,947
----------- ----------- -----------
Total current liabilities 25,500 112,272 21,563
COMMITMENTS AND CONTINGENCIES - - -
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.001 par value, 5,000,000 shares
authorized, 0 issued and outstanding - - -
Common stock, $.001 par value, 30,000,000 shares
authorized, 1,800,000 issued and outstanding
at December 31, 1997 and 2,388,000 issued and
outstanding at December 31, 1998 and
September 30, 1999 1,800 2,388 2,388
Additional paid-in capital 2,998,200 3,944,718 3,944,718
Accumulated deficit (2,995,999) (3,899,817) (3,950,492)
----------- ----------- -----------
Total stockholders' equity (deficit) 4,001 47,289 (3,386)
----------- ----------- -----------
$ 29,501 $ 159,561 $ 18,177
=========== =========== ===========
The accompanying notes are an integral part of these statements.
F-2
Advanced Nutraceuticals, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
From inception Nine months
(September 9, 1997) Year ended
through ended September 30,
December 31, December 31, ---------------
1997 1998 1998 1999
------------------- ------------- ------ -------
(Unaudited)
Compensation expense relating to issuance of
common stock to management and
consultants $ 2,985,000 $ - $ - $ -
Selling, general and administrative expenses 11,892 915,014 40,950 53,515
----------- --------- ---------- --------
Loss from operations (2,996,892) (915,014) (40,950) (53,515)
Other income (expense)
Interest 589 11,251 7,530 2,340
Other 304 (55) (55) 500
----------- --------- ---------- --------
893 11,196 7,475 2,840
----------- --------- ---------- --------
Loss before income taxes (2,995,999) (903,818) (33,475) (50,675)
Income tax (expense) benefit - - - -
----------- --------- ---------- --------
NET LOSS $(2,995,999) $(903,818) $ (33,475) $(50,675)
=========== ========= ========== ========
The accompanying notes are an integral part of these statements.
F-3
Advanced Nutraceuticals, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
December 31, 1997 and 1998
Total
Additional stockholders'
Number of paid-in Accumulated equity
shares Amount capital deficit (deficit)
--------- ------ ---------- ------------ --------------
Issuance of management,
consultant and director
shares 1,800,000 $1,800 $2,998,200 $ - $ 3,000,000
Net loss - - - (2,995,999) (2,995,999)
--------- ------ ---------- ----------- -----------
Balance at December 31,
1997 1,800,000 1,800 2,998,200 (2,995,999) 4,001
Issuance of stock 588,000 588 946,518 - 947,106
Net loss - - - (903,818) (903,818)
--------- ------ ---------- ----------- -----------
Balance at December 31,
1998 2,388,000 2,388 3,944,718 (3,899,817) 47,289
Net loss (unaudited) - - - (50,675) (50,675)
--------- ------ ---------- ----------- -----------
Balance at September 30,
1999 (unaudited) 2,388,000 $2,388 $3,944,718 $(3,950,492) $ (3,386)
========= ====== ========== =========== ===========
The accompanying notes are an integral part of this statement.
F-4
Advanced Nutraceuticals, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
From inception
(September 9, 1997) Year Nine months ended
through ended September 30,
December 31, December 31, -----------------------------------
1997 1998 1998 1999
------------------------- ------------------ ----------------- ----------------
(Unaudited)
Cash flows from operating activities
Net loss $(2,995,999) $(903,818) $ (33,475) $ (50,675)
Adjustments to reconcile net loss to
net cash provided (used) by
operating activities
Depreciation 208 1,667 417 -
Compensation expense related to
issuance of common stock to
management and consultants 2,985,000 - - -
Change in assets and liabilities
(Increase) decrease in prepaid
expenses and other current
assets (500) (51) (600) 1
(Increase) decrease in deferred
offering costs (1,847) 1,847 (607,362) -
Increase (decrease) in due to
affiliates 22,500 (24,384) (24,384) -
(Decrease) increase in
accounts payable 500 111,156 5,305 (90,709)
----------- --------- ---------- ----------------
Net cash provided (used) by
operating activities 9,862 (813,583) (660,099) (141,383)
Cash flows from investing activities
Acquisition of property and
equipment - (1,905) (1,905) -
Cash flows from financing activities
Issuance of stock 15,000 947,106 947,106 -
----------- --------- ---------- ----------------
Net increase (decrease) in cash and
cash equivalents 24,862 131,618 285,102 (141,383)
Cash and cash equivalents at
beginning of period - 24,862 24,862 156,480
----------- --------- ---------- ----------------
Cash and cash equivalents at end of
period $ 24,862 $ 156,480 $ 309,964 $ 15,097
=========== ========= ========== ================
Supplemental disclosure of noncash
investing activities:
Furniture and fixtures acquired
through donation from a related
party $ 2,292 $ - $ - $ -
The accompanying notes are an integral part of these statements.
F-5
Advanced Nutraceuticals, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
1. Description of Business
-----------------------
The consolidated financial statements included herein are of Advanced
Nutraceuticals, Inc. (ANI), a Delaware corporation, and of Naturally Direct,
Inc. (NDI), a Texas corporation and predecessor to ANI.
The consolidated financial statements include the accounts of the Company and
its wholly-owned, dormant subsidiaries. All significant intercompany accounts
have been eliminated in consolidation.
In September 1998, the incorporation of NDI was changed from Texas to Delaware
by the merger of NDI with and into ANI. At the time of the merger, each share
of NDI common stock outstanding was converted into one and two-tenths of ANI's
common stock. The effect of the merger on common stock has been retroactively
reflected in the accompanying financial statements. In addition to its
authorized common stock, ANI has authorized 5,000,000 shares of preferred stock
having a par value of $.001. References to the Company herein refer to ANI and
its predecessor, NDI.
The Company was incorporated on September 9, 1997 for the purpose of creating a
full service vertically integrated manufacturer and supplier of quality
nutritional supplements and botanical ingredients. The Company intended to
acquire four businesses, complete an initial public offering (IPO) of its
common stock and, subsequent to the offering, continue to acquire, through
merger or purchase, similar companies to expand its national operations.
During 1998, the Company filed a registration statement on Form S-1 for the
sale of 5,000,000 shares of its common stock, which was subsequently withdrawn.
The Company incurred $845,965 in IPO costs which were expensed in 1998. The
Company has not conducted any operations, and all activities to date have
related to the contemplated offering and mergers. Substantially all
expenditures to date have been funded by the proceeds received in connection
with a private placement during 1998 (see Note B).
2. Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid debt investments purchased with an
original maturity of three months or less to be cash equivalents.
F-6
Advanced Nutraceuticals, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
3. Concentration of Credit Risk
----------------------------
Financial instruments which potentially subject the Company to a concentration
of credit risk consist principally of cash deposits. The Company maintains
cash balances at financial institutions which may at times be in excess of
federally insured levels. The Company has not experienced any losses in such
accounts and does not believe it is exposed to any significant credit risks on
cash maintained in bank deposit accounts.
4. Property and Equipment
----------------------
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is provided over the estimated useful lives of the assets on a
straight-line basis. The useful lives of property and equipment for purposes
of computing depreciation is three years. Property and equipment at December
31, 1998 and 1997, with a cost and accumulated depreciation of $4,405 and
$1,875 and $2,500 and $208, respectively, consists of furniture and fixtures
and a computer system.
Expenditures for major additions or improvements which extend the useful lives
of assets are capitalized. Minor replacements, maintenance and repairs which
do not improve or extend the life of such assets are charged to operations as
incurred.
5. Commitments
-----------
The Company is currently utilizing office space under a month-to-month lease
agreement which requires monthly rentals of $575.
6. Deferred Offering Costs
-----------------------
The costs related to filing a registration statement on Form S-1 for the sale
of common stock were capitalized when incurred at December 31, 1997; the Form
S-1 was subsequently withdrawn and deferred offering costs were expensed
during 1998.
7. Income Taxes
------------
Deferred tax assets and liabilities are determined based on the differences
between the financial statement and tax bases of assets and liabilities as
measured by the enacted tax rates which will be in effect when these
differences are expected to reverse. Deferred tax expense (benefit) is the
result of changes in deferred tax assets and liabilities.
The Company has incurred losses from operations since its inception and,
accordingly, no deferred tax asset has been realized. All carryforwards are
subject to review and possible adjustment by the Internal Revenue Service.
Additionally, Section 382 of the Internal Revenue Code limits the amounts of
net operating loss carryforwards usable by a corporation following a more than
50 percentage point change in ownership of the corporation during a three year
period. It is possible that subsequent transactions involving the Company's
capital stock could result in such a limitation. As of September 30, 1999,
management does not believe that a 50 percentage point change in ownership has
occurred during a three year period.
F-7
Advanced Nutraceuticals, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
8. Financial Instruments
---------------------
The Company's financial instruments consist of cash and cash equivalents and
accounts payable. The Company believes that the carrying value of these
instruments on the accompanying balance sheets approximates their fair value.
9. Use of Estimates
----------------
In preparing the financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
10. New Accounting Pronouncements
-----------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). The
Company is required to adopt SFAS 133 in the year ended December 31, 2000.
SFAS 133 established methods of accounting for derivative financial instruments
and hedging activities related to those instruments as well as other hedging
activities. To date, the Company has not entered into any derivative financial
instruments or hedging activities.
11. Unaudited Interim Information
-----------------------------
The financial information for the nine months ended September 30, 1999 and 1998
has not been audited by independent certified public accountants. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from the unaudited interim financial
information. In the opinion of management of the Company, the unaudited
interim financial information includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation. Results of
operations for the interim period are not necessarily indicative of the results
of operations for the full year.
F-8
Advanced Nutraceuticals, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - STOCKHOLDERS' EQUITY
In December 1997, the Company issued a total of 1,800,000 shares of common
stock to management and directors of and consultants to the Company at a price
of $.01 per share. As a result of these transactions, the Company recorded a
nonrecurring, noncash compensation charge of $2,985,000 representing the
difference between the amount paid for the shares and an estimated fair market
value of the shares on the date of sale.
During 1998, the Company issued under a subscription agreement in a private
placement a total of 588,000 shares of common stock to investors at a price of
$1.67 per share. As a result, the Company recorded additional paid-in capital
of $946,518, net of offering costs of $34,854, representing the difference
between the amount paid for the shares and the par value of the shares on the
date of sale.
NOTE C - EVENTS SUBSEQUENT TO THE DATE OF REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS (UNAUDITED)
On November 17, 1999, the Company merged into a wholly-owned subsidiary of
Nutrition For Life International, Inc., a Houston-based publicly-held company.
F-9
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Ash Corp.
Gulfport, Mississippi
We have audited the accompanying balance sheets of Ash Corp. as of December 31,
1998 and 1997, and the related statements of operations, stockholders' deficit
and cash flows for the years ended December 31, 1998 and 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ash Corp. as of December 31,
1998 and 1997, and the results of its operations and its cash flows for the
years ended December 31, 1998 and 1997, in conformity with generally accepted
accounting principles.
HEIN + ASSOCIATES LLP
Houston, Texas
July 16, 1999
F-10
ASH CORP.
Balance Sheets
September December 31,
30, -------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
(unaudited)
ASSETS
------
Current Assets:
Cash $ 151,038 $ - $ 135,448
Accounts receivable - trade 976,826 684,957 697,427
Stockholder receivable 170,098 35,887 -
Inventories, net 1,673,005 1,243,368 854,722
Prepaid expenses 15,814 18,918 8,910
---------------- ---------------- ----------------
Total current assets 2,986,781 1,983,130 1,696,507
Property And Equipment, net 2,130,453 2,260,547 2,181,187
Other Assets 7,813 8,346 9,056
---------------- ---------------- ----------------
Total assets $ 5,125,047 $ 4,252,023 $ 3,886,750
================ ================ ================
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current Liabilities:
Current portion of notes payable $ 2,200,017 $ 1,075,777 $ 2,396,650
Accounts payable, trade 2,602,435 2,253,097 2,017,171
Accrued expenses 1,047,293 483,775 173,683
---------------- ---------------- ----------------
Total current liabilities 5,849,745 3,812,649 4,587,504
Notes Payable, less current portion 1,385,796 2,919,906 1,566,220
Commitments And Contingencies (Notes 6, 9 and 11)
Stockholders' Deficit:
Common stock, $.001 par value, 30,000,000 shares authorized, 10,000 10,000 10,000
10,000,000 issued and outstanding
Accumulated deficit (2,120,494) (2,490,532) (2,276,974)
---------------- ---------------- ----------------
Total stockholders' deficit (2,110,494) (2,480,532) (2,266,974)
---------------- ---------------- ----------------
Total liabilities and stockholders' deficit $ 5,125,047 $ 4,252,023 $ 3,886,750
================ ================ ================
See accompanying notes to these financial statements
F-11
ASH CORP.
Statements of Operations
Nine Months Ended Years Ended December 31,
September 30,
------------------------------------- -------------------------------------
1999 1998 1998 1997
---------------- ---------------- ---------------- ----------------
(unaudited)
Revenue $9,213,285 $8,224,299 $10,533,761 $10,500,780
Cost Of Revenue 6,968,492 6,576,529 8,734,289 9,128,075
---------- ---------- ----------- -----------
Gross Profit 2,244,793 1,647,770 1,799,472 1,372,705
General and Administrative 1,583,979 1,292,654 1,713,855 1,986,277
---------- ---------- ----------- -----------
Operating Income (Loss) 660,814 355,116 85,617 (613,572)
Other Income (Expense):
Other income 7,874 39,710 11,601 10,996
Interest expense (298,650) (229,371) (310,776) (285,489)
---------- ---------- ----------- -----------
Total other income (expense) (290,776) (189,661) (299,175) (274,493)
---------- ---------- ----------- -----------
Net Income (Loss) $ 370,038 $ 165,455 $ (213,558) $ (888,065)
========== ========== =========== ===========
See accompanying notes to these financial statements
F-12
ASH CORP.
Statements of Stockholders' Deficit
Years Ended December 31, 1998 and 1997 and
Nine Months Ended September 30, 1999
Common Stock Total
------------------------------------ Accumulated Stockholders'
Shares Amount Deficit Deficit
---------------- ---------------- ---------------- ----------------
Balances, January 1, 1997 10,000,000 $10,000 $(1,388,909) $(1,378,909)
Net loss - - (888,065) (888,065)
---------- ------- ----------- -----------
Balances, December 31, 1997 10,000,000 10,000 (2,276,974) (2,266,974)
Net loss - - (213,558) (213,558)
---------- ------- ----------- -----------
Balances, December 31, 1998 10,000,000 10,000 (2,490,532) (2,480,532)
Net income (unaudited) - - 370,038 370,038
---------- ------- ----------- -----------
Balances, September 30, 1999 10,000,000 $10,000 $(2,120,494) $(2,110,494)
========== ======= =========== ===========
See accompanying notes to these financial statements
F-13
ASH CORP.
Statements of Cash Flows
Nine Months Ended Years Ended December 31,
September 30,
----------------------------------- -----------------------------------
1999 1998 1998 1997
--------------- --------------- --------------- ---------------
(unaudited)
Cash Flows from Operating Activities:
Net income (loss) $ 370,038 $ 165,455 $(213,558) $(888,065)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization 215,155 206,472 276,821 251,140
Changes in:
Accounts receivable (291,869) (123,833) 12,470 (118,083)
Inventory (429,637) (767,141) (388,646) 713,345
Prepaid expenses 3,104 (75,087) (10,008) 16,949
Accounts payable 349,338 817,039 235,926 (314,749)
Accrued expenses 563,518 16,385 310,092 2,047
--------- --------- --------- ---------
Net cash provided by (used in) 779,647 239,290 223,097 (337,416)
operating activities
Cash Flows from Investing Activities:
Advances from (to) stockholder (134,211) (162,148) (35,887) 79,617
Additions of property and equipment (84,528) (45,441) (355,471) (53,369)
--------- --------- --------- ---------
Net cash provided by (used in) (218,739) (207,589) (391,358) 26,248
investing activities
Cash Flows from Financing Activities:
Repayments of debt (409,870) (167,149) (171,870) (174,778)
Proceeds from debt - - 204,683 621,394
--------- --------- --------- ---------
Net cash provided by (used in) (409,870) (167,149) 32,813 446,616
financing activities --------- --------- --------- ---------
Net Change In Cash 151,038 (135,448) (135,448) 135,448
Cash, beginning of period - 135,448 135,448 -
--------- --------- --------- ---------
Cash, end of period $ 151,038 $ - $ - $ 135,448
========= ========= ========= =========
Supplemental Cash Flow Information:
Cash paid for interest $ 60,615 $ 160,107 $ 294,649 $ 268,075
========= ========= ========= =========
Supplemental Non-Cash Investing
and Financing Activities:
Building improvements financed with note $ - $ 162,081 $ 210,000 $ -
payable ========= ========= ========= =========
See accompanying notes to these financial statements
F-14
ASH CORP.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
------------------------------------------------
Organization and Nature of Operations - Ash Corp. (the "Company") was
-------------------------------------
incorporated in the state of Mississippi on September 12, 1995. The Company
manufactures over-the-counter pharmaceuticals, including aspirin, antacid,
laxatives, diaper powder, and ointments.
Inventories - Inventories consist of raw materials, work in process, and
-----------
finished goods. Inventories are stated at the lower of cost or market, with
cost determined on the first-in, first-out method, net of an estimated
amount for slow-moving and/or obsolete items.
Property and Equipment - Property and equipment is stated at cost, less
----------------------
accumulated depreciation. Depreciation is calculated using the straight-line
method over the estimated useful lives of the assets ranging from 3 to 39
years. Major improvements are capitalized; minor replacements, maintenance
and repairs are charged to current operations.
Long-Lived Assets - The Company reviews for the impairment of long-lived
-----------------
assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An impairment loss would
be recognized when estimated future cash flows expected to result from the
use of the asset and its eventual disposition is less than its carrying
amount. The Company has not identified any such impairment losses.
Income Taxes - The Company accounts for income taxes on the liability method
------------
under which the amount of deferred income taxes is based upon the tax
effects of the differences between the financial and income tax bases of the
Company's assets and liabilities at the balance sheet date based upon
existing laws.
Comprehensive Income (Loss) - Comprehensive income (loss) is defined as all
--------------------------
changes in stockholders' equity (deficit), exclusive of transactions with
owners, such as capital investments. Comprehensive income includes net
income or loss, changes in certain assets and liabilities that are reported
directly in equity such as translation adjustments on investments in foreign
subsidiaries, and certain changes in minimum pension liabilities. The
Company's comprehensive income (loss) was equal to its net income (loss) for
the years ended December 31, 1998 and 1997 and the nine months ended
September 30, 1999.
1. Organization and Significant Accounting Policies (continued)
------------------------------------------------
Unaudited Interim Information - The accompanying financial information as of
-----------------------------
F-15
ASH CORP.
NOTES TO FINANCIAL STATEMENTS
September 30, 1999 and for the nine-month periods ended September 30, 1999
and 1998 has been prepared by the Company without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. The
financial statements reflect all adjustments, consisting of normal recurring
accruals which are, in the opinion of management, necessary to fairly
present such information in accordance with generally accepted accounting
principals.
Use of Estimates - The preparation of these financial statements in
----------------
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those estimates.
2. Inventories
-----------
Inventories consisted of the following:
September 30, December 31,
------------------------------------
1999 1998 1997
--------------- --------------- ---------------
Packaging materials $ 666,068 $ 595,640 $463,542
Raw materials 450,033 403,516 256,754
Work in process 119,535 110,353 88,907
Finished goods 515,746 212,236 95,519
---------- ---------- --------
Total 1,751,382 1,321,745 904,722
Less: reserve for slow-moving and obsolete (78,377) (78,377) (50,000)
---------- ---------- --------
$1,673,005 $1,243,368 $854,722
========== ========== ========
3. Property and Equipment
----------------------
A summary of property and equipment is as follows:
September 30, December 31,
------------------------------------
1999 1998 1997
--------------- --------------- ---------------
Land $ 150,124 $ 150,124 $ 150,124
Furniture, fixtures, equipment 1,908,515 1,873,573 1,831,954
Building and improvements 1,101,779 1,052,190 730,978
----------- ---------- ----------
3,160,418 3,075,887 2,713,056
Accumulated depreciation (1,029,965) (815,340) (531,869)
----------- ---------- ----------
F-16
ASH CORP.
NOTES TO FINANCIAL STATEMENTS
$ 2,130,453 $2,260,547 $2,181,187
=========== ========== ==========
Depreciation expense of $276,111 and $250,430 was recorded for the years
ended December 31, 1998 and 1997, respectively, and $214,622 for the six
months ended June 30, 1999.
4. Notes Payable
-------------
Notes payable consists of the following:
September 30, December 31,
------------------------------------
1999 1998 1997
--------------- --------------- ---------------
Notes payable to bank (a) $ 1,747,828 $ 1,747,828 $ 1,746,394
Note payable to bank (b) 1,468,721 1,531,465 1,603,024
Notes payable to bank (c) 71,224 181,677 -
Note payable to a customer (d) 246,702 500,000 500,000
Other 51,338 34,713 113,452
----------- ----------- -----------
Total notes payable 3,585,813 3,995,683 3,962,870
Less: current portion (2,200,017) (1,075,777) (2,396,650)
----------- ----------- -----------
$ 1,385,796 $ 2,919,906 $ 1,566,220
=========== =========== ===========
4. Notes Payable (continued)
-------------
On June 14, 1999 the Company entered into a Workout, Renewal and Extension
Agreement (the "Agreement") with its bank (the "Bank"). The Agreement
requires the Company to repay the notes listed above under the following
terms:
(a) Two notes originally due in 1998, now due in six monthly installments of
$22,028, including interest at 8.75%, beginning December 14, 1999 with
the remaining balance due July 14, 2000.
(b) Note in the original amount of $1,750,000, bearing interest at 8.75%,
due October 10, 2010 in monthly installments of $17,620, including
interest.
(c) Two notes originally due March 23, 1999 and October 26, 1999, bearing
interest at 9.5% and 9.75%. These two notes and all past due amounts
under (b)($105,719), now due in 20 weekly installments of $20,000,
beginning June 30, 1999. These
F-17
ASH CORP.
NOTES TO FINANCIAL STATEMENTS
payments are required to be automatically deducted from the Company's
cash account. Any excess payments above the principal balances will then
be applied to the principal balance of the notes described in (a) above.
(d) Note payable to the Company's largest customer was renewed in October
1998, accruing interest at 8%, payments due monthly beginning June 1999;
one payment of $42,277 and six payments of $83,333 including interest,
final payment due December 1999. The payments will be made as a
reduction of the monthly reimbursement of "fixed manufacturing expenses"
(see note 6). The note is collateralized by land and building and is
subordinate to the bank debt.
The above notes are collateralized by substantially all of the Company's
assets and the Bank notes are personally guaranteed by two of the Company's
stockholders.
The Bank notes have two financial covenants which limit the amount of
officers' compensation and requires the Company to maintain a minimum
balance of $25,000 in its cash account.
4. Notes Payable (continued)
-------------
The following summarizes the future payments on the above related notes as
provided in the Agreement and with the customer:
Years Ending
December 31,
-------------
1999 $1,075,777
2000 1,550,307
2001 92,322
2002 100,857
2003 110,181
Thereafter 1,066,239
----------
Total $3,995,683
==========
5. Income Taxes
------------
The Company has net operating loss ("NOL") carryforwards of approximately
$2,300,000, expiring in various amounts through 2019. The ability of the
Company to utilize the
F-18
ASH CORP.
NOTES TO FINANCIAL STATEMENTS
carryforwards is dependent upon the Company generating sufficient taxable
income in the future.
The tax effect of significant temporary differences representing deferred
tax assets and liabilities are as follows:
December 31,
September 30, ------------------------------------
1999 1998 1997
--------------- --------------- ---------------
NOL carryforwards $ 781,000 $ 915,000 $ 732,000
Financial basis of assets in excess of tax (180,000) (145,000) (80,000)
basis
Valuation allowance (601,000) (770,000) (652,000)
--------------- --------------- ---------------
Net deferred tax balance $ - $ - $ -
=============== =============== ===============
6. Commitments and Contingencies
-----------------------------
Supplier Agreement
------------------
The Company has an agreement with a significant pharmaceutical company (the
"Customer") to exclusively manufacture certain products. The Customer pays
standard cost, which must be approved by the Customer. Standard costs are
adjusted annually to reflect anticipated costs for the next year. The
Customer also pays $83,333 monthly for "fixed manufacturing expenses." The
Company's sales to the Customer totaled approximately $6,582,000 and
$7,393,000 for the years ended December 31, 1998 and 1997, respectively, and
$4,365,000 and $3,206,000 for the six months ended June 30, 1999 and 1998,
respectively. This customer has the right to offset amounts owed by the
Company with amounts owed to the Company.
In 1997 the Company was to receive $1,000,000 ($83,333 per month) from the
Customer for fixed manufacturing expenses. However, in January of 1997, the
Company discounted the 12 payments by $150,000 and received a lump sum of
$850,000.
The agreement with the Customer expires October 10, 2000.
Litigation
----------
In 1998, two stockholders filed a lawsuit against the Company and the two
majority stockholders. This lawsuit was settled in January 1998, and the
Company was released
F-19
ASH CORP.
NOTES TO FINANCIAL STATEMENTS
from any and all liability. The majority stockholders agreed to pay $460,000
to resolve these claims which amount is secured by a promissory note given
by the majority stockholders. The settlement agreement also required the
Company to guarantee this promissory note. The stockholders that filed the
lawsuit returned their stock certificates for cancellation and were reissued
20% of the outstanding common stock of the Company. The majority
stockholders' ownership percentage was increased to 80% as a result of this
settlement. The majority stockholders also were required to pledge their
stock in the Company as additional security. As of December 31, 1998 and
September 30, 1999, the Company had paid $70,000 and $120,000 related to
this guarantee which is included in shareholder receivables.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
6. Commitments and Contingencies (continued)
-----------------------------
Product Liability
-----------------
As of December 31, 1998, the Company was corresponding with a significant
customer regarding a potential customer claim brought about by shipment of
defective product. The Company intends to defend its position that its
product was not defective; however, at December 31, 1998 and September 30,
1999, the Company has accrued $150,000 as a contingency reserve related to
this matter.
Operating Leases
----------------
The Company leases equipment under non-cancelable operating leases. The
leases expire in 1999. Total minimum lease payments due in 1999 are
approximately $2,700. Rent expense for the year ended December 31, 1998 and
1997 was approximately $5,400 and $8,400, respectively. Rent expense for the
nine months ended September 30, 1999 and 1998 was approximately $10,000 and
$40,000, respectively.
7. Concentrations of Credit Risk
-----------------------------
F-20
ASH CORP.
NOTES TO FINANCIAL STATEMENTS
Financial instruments that potentially subject the Company to concentration
of credit risk are accounts receivable. The Company performs ongoing credit
evaluations as to the financial condition of its customers. Generally, no
collateral is required. Two customers made up approximately 99% and 82% of
accounts receivable balances at December 31, 1998 and 1997, respectively.
One customer accounted for approximately 77% of accounts receivable at
September 30, 1999.
8. Revenues from Major Customers
------------------------------
A summary of the Companies' revenues from major customers is as follows
(rounded to thousands):
Nine Months Ended September 30, Year Ended December 31,
----------------------------------- -----------------------------------
1999 1998 1998 1997
--------------- --------------- --------------- ---------------
Customer A $6,580,032 $4,513,087 $ 6,582,000 $ 7,393,000
Customer B 1,236,873 1,875,745 2,204,000 630,000
Customer C 815,960 949,095 1,055,000 932,000
Others 580,420 886,372 693,000 1,439,000
---------- ---------- ----------- -----------
Totals $9,213,285 $8,224,299 $10,534,000 $10,394,000
========== ========== =========== ===========
9. Management Plans
-----------------
The Company's losses for the years ended December 30, 1998 and 1997 amounted
to approximately $214,000 and $888,000, respectively. As a result of these
losses, the Company's working capital position has deteriorated, and its
ability to generate sufficient cash flows from operations to meet its
operating and capital requirements is uncertain. In addition, the Company
was unable to make principal payments on its debt subsequent to December 31,
1998; however, it was able to renegotiate and extend the debt with its bank
in June 1999 (see note 4). These matters raise substantial doubt about the
Company's ability to continue as a going concern. In addition to the
revision of the debt terms, the Company believes it will be successful in
its ability to continue as a going concern by pursuing various financing
alternatives, including a sale of the Company's stock or assets; however,
there are no assurances any of the various alternatives will occur and be
successful.
F-21
ASH CORP.
NOTES TO FINANCIAL STATEMENTS
Subsequent to September 30, 1999, the stockholders of the Company sold all
of their shares in Ash Corp. to a holding company in exchange for an
ownership interest in a publicly traded company. This transaction is an
integral part of the consolidation of three established companies, one of
which is Ash Corp.
10. Profit Sharing Plan
-------------------
The Company has a 401(k) profit sharing plan (the "Plan"). Eligible
employees may make voluntary contributions to the Plan that are limited as
specified in the Plan. The Company makes no matching contributions under the
Plan.
11. Year 2000
---------
The Company has begun to address possible remedial efforts in connection
with computer software that could be affected by the Year 2000 problem. The
Year 2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year. Any programs that
have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a major system failure
or miscalculations. The Year 2000 problem may impact or be impacted by other
entities with which the Company transacts business.
F-22
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors
Bactolac Pharmaceutical Inc.
We have audited the accompanying balance sheets of Bactolac Pharmaceutical
Inc. as of December 31, 1998 and 1997, and the related statements of earnings,
stockholder's equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the financial position of Bactolac Pharmaceutical Inc.
as of December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Houston, Texas
October 20, 1999
F-23
Bactolac Pharmaceutical Inc.
BALANCE SHEETS
ASSETS
December 31,
---------------------- September 30,
1997 1998 1999
---------- ---------- --------------
(Unaudited)
CURRENT ASSETS
Cash $ 90,902 $ 379,590 $ 141,004
Accounts receivable - trade, less allowance for
doubtful accounts of $75,000, $75,000 and $100,000 1,204,040 1,598,381 2,841,982
Inventory 657,450 996,476 832,828
---------- ---------- ----------
Total current assets 1,952,392 2,974,447 3,815,814
PROPERTY AND EQUIPMENT - net 73,094 147,498 202,053
OTHER ASSETS 8,341 23,662 30,772
---------- ---------- ----------
$2,033,827 $3,145,607 $4,048,639
========== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 858,859 $1,102,840 $1,586,459
Secured customer advance - 140,000 -
Accrued expenses 22,708 52,496 64,064
---------- ---------- ----------
Total current liabilities 881,567 1,295,336 1,650,523
LOAN PAYABLE TO STOCKHOLDER 2,800 - -
---------- ---------- ----------
Total liabilities 884,367 1,295,336 1,650,523
COMMITMENTS - - -
STOCKHOLDER'S EQUITY
Common stock, par value $1 per share; authorized, issued
and outstanding 100 shares 100 100 100
Additional paid-in capital 4,852 4,852 4,852
Retained earnings 1,144,508 1,845,319 2,393,164
---------- ---------- ----------
Total stockholder's equity 1,149,460 1,850,271 2,398,116
---------- ---------- ----------
$2,033,827 $3,145,607 $4,048,639
========== ========== ==========
The accompanying notes are an integral part of these statements.
F-24
Bactolac Pharmaceutical Inc.
STATEMENTS OF EARNINGS
Nine months ended
Year ended December 31, September 30,
----------------------------------- ----------------------
1996 1997 1998 1998 1999
---------- ----------- ---------- ---------- ----------
(Unaudited)
Net sales $1,406,339 $5,002,113 $7,364,203 $5,886,424 $6,296,615
Cost of sales 1,135,492 3,802,153 6,003,291 4,863,892 5,409,447
---------- ---------- ---------- ---------- ----------
Gross profit 270,847 1,199,960 1,360,912 1,022,532 887,168
Selling, general and
administrative expenses 74,621 246,224 293,172 166,605 220,117
---------- ---------- ---------- ---------- ----------
Operating income 196,226 953,736 1,067,740 855,927 667,051
Other income, net 4,902 4,913 11,587 10,258 4,839
---------- ---------- ---------- ---------- ----------
Net earnings $ 201,128 $ 958,649 $1,079,327 $ 866,185 $ 671,890
========== ========== ========== ========== ==========
The accompanying notes are an integral part of these statements.
F-25
Bactolac Pharmaceutical Inc.
STATEMENTS OF STOCKHOLDER'S EQUITY
Additional Retained Total
Number of paid-in earnings stockholder's
shares Amount capital (deficit) equity
--------- ------ ---------- ----------- --------------
Balance at January 1, 1996 100 $100 $4,852 $ (2,427) $ 2,525
Net earnings - - - 201,128 201,128
--- ---- ------ ---------- ----------
Balance at December 31,
1996 100 100 4,852 198,701 203,653
Net earnings - - - 958,649 958,649
Distributions - - - (12,842) (12,842)
--- ---- ------ ---------- ----------
Balance at December 31,
1997 100 100 4,852 1,144,508 1,149,460
Net earnings - - - 1,079,327 1,079,327
Distributions - - - (378,516) (378,516)
--- ---- ------ ---------- ----------
Balance at December 31,
1998 100 100 4,852 1,845,319 1,850,271
Net earnings (unaudited) - - - 671,890 671,890
Distributions (unaudited) - - - (124,045) (124,045)
--- ---- ------ ---------- ----------
Balance at September 30,
1999 (unaudited) 100 $100 $4,852 $2,393,164 $2,398,116
=== ==== ====== ========== ==========
The accompanying notes are an integral part of this statement.
F-26
Bactolac Pharmaceutical Inc.
STATEMENTS OF CASH FLOWS
Nine months ended
Year ended December 31, September 30,
------------------------------------- --------------------------
1996 1997 1998 1998 1999
---------- ------------ ----------- ------------ ------------
(Unaudited)
Cash flows from operating activities
Net earnings $ 201,128 $ 958,649 $1,079,327 $ 866,185 $ 671,890
Adjustments to reconcile net earnings to net
cash provided by operating activities
Depreciation 45,564 44,344 39,057 25,932 71,651
Loss on disposal of property and equipment - - 5,376 - -
Provision for doubtful accounts - 75,000 - 10,000 25,000
Changes in assets and liabilities
Increase in accounts receivable (219,024) (1,052,749) (394,341) (1,437,316) (1,268,601)
(Increase) decrease in inventory (188,024) (469,426) (339,026) (271,197) 163,648
(Increase) decrease in other assets 160 (7,754) (15,321) (20,233) (7,110)
Increase in accounts payable 280,382 573,180 383,981 1,184,113 343,619
Increase in accrued expenses 3,747 14,504 29,788 35,423 11,568
--------- ----------- ---------- ----------- -----------
Net cash provided by operating activities 123,933 135,748 788,841 392,907 11,665
Cash flows from investing activities
Acquisition of property and equipment (130,534) (32,468) (118,837) (35,219) (126,206)
Cash flows from financing activities
Repayment of loan to shareholder - - (2,800) - -
Distributions paid to stockholder - (12,842) (378,516) (301,442) (124,045)
--------- ----------- ---------- ----------- -----------
Net (decrease) increase in cash (6,601) 90,438 288,688 56,246 (238,586)
Cash at beginning of period 7,065 464 90,902 90,902 379,590
--------- ----------- ---------- ----------- -----------
Cash at end of period $ 464 $ 90,902 $ 379,590 $ 147,148 $ 141,004
========= =========== ========== =========== ===========
The accompanying notes are an integral part of these statements.
F-27
Bactolac Pharmaceutical Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE A - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
1. Description of Business
-----------------------
Bactolac Pharmaceutical Inc. (the "Company") was incorporated in the state of
New York on March 29, 1995. The Company manufactures and markets a variety of
vitamin and nutritional supplement products, primarily from natural products.
The products are primarily produced for specific customer orders, with the
Company's customers consisting of a broad range of distributors and direct
marketing organizations.
2. Revenue Recognition
-------------------
Revenues are recognized as products are shipped.
3. Concentration of Credit Risk
----------------------------
Financial instruments which potentially subject the Company to concentration of
credit risk consist of trade receivables. The Company's business activities
are conducted with customers in the United States.
4. Cash Concentration
------------------
The Company maintains its cash balances primarily in one financial institution,
which at times, may exceed federally insured limits. The Company has not
experienced any losses in such account and believes it is not exposed to any
significant credit risk on cash and cash equivalents.
5. Allowance for Doubtful Accounts
-------------------------------
The Company maintains an allowance for doubtful accounts based upon the
estimated collectibility of all accounts receivable.
6. Inventory
---------
Inventory consists of herbs and vitamin supplements in the raw material,
blended and processed stages and is stated at the lower of cost or market with
cost being determined on a first-in, first-out basis.
F-28
Bactolac Pharmaceutical Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
7. Property and Equipment
----------------------
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is provided over the estimated useful lives of the assets,
generally seven years, using primarily accelerated methods. Expenditures for
major additions or improvements which extend the useful lives of assets are
capitalized. Minor replacements, maintenance and repairs which do not improve
or extend the life of such assets are charged to operations as incurred.
Management evaluates these costs for impairment whenever events or changes in
circumstances indicate that the carrying amounts may not be recoverable.
Impairment would be recognized if the carrying amounts of such costs cannot be
recovered by the net cash flows they will generate.
8. Income Taxes
------------
The Company, with the stockholder's consent, has elected to be taxed as an S
corporation since it began operations. Accordingly, taxable results of the
Company are passed through and taxed to the stockholder. The accompanying
financial statements do not contain any provision for, nor any current or
deferred liability relating to income taxes. The difference between the
financial statement and income tax bases of assets and liabilities consist
primarily of the allowance for doubtful accounts receivable.
9. Financial Instruments
---------------------
The Company's financial instruments consist of cash, accounts receivable and
accounts and notes payable. The Company believes that the carrying value of
these instruments on the accompanying balance sheets approximates their fair
value.
10. Use of Estimates
----------------
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
liabilities at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from these estimates.
F-29
Bactolac Pharmaceutical Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
11. Recent Accounting Pronouncements
--------------------------------
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133). The Company is required to
adopt SFAS 133 in the year ended December 31, 2000. SFAS 133 established
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities.
To date, the Company has not entered into any derivative financial instruments
or hedging activities.
12. Unaudited Interim Information
-----------------------------
The financial information for the nine months ended September 30, 1998 and 1999
has not been audited by independent certified public accountants. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from the unaudited interim financial
information. In the opinion of management of the Company, the unaudited
financial information includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation. Results of
operations for the interim periods are not necessarily indicative of the
results of operations for the respective full years.
13. Reclassifications
-----------------
Certain amounts in prior financial statements have been reclassified to conform
to the 1998 financial statement presentation.
NOTE B - INVENTORY
Inventory consists of the following as at December 31,:
1997 1998
-------- --------
Finished products $125,643 $ 96,957
Work in process 132,991 294,060
Raw materials 398,816 605,459
-------- --------
$657,450 $996,476
======== ========
F-30
Bactolac Pharmaceutical Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows as at December 31,:
Estimated
useful lives
in years 1997 1998
------------ --------- ----------
Machinery and equipment 7 $150,161 $ 226,322
Furniture and fixtures 5-7 12,841 21,069
Leasehold improvements 15 - 3,579
Vehicles 3 - 20,869
-------- ---------
163,002 271,839
Accumulated depreciation (89,908) (124,341)
-------- ---------
$ 73,094 $ 147,498
======== =========
NOTE D - SECURED CUSTOMER ADVANCE
During July 1998, a customer advanced $200,000 to the Company to fund raw
material purchases, under a written Advance Agreement. The Agreement is non-
interest bearing, is repayable at the rate of $15,000 per month, and is
collateralized by accounts receivable and inventory.
NOTE E - LEASE COMMITMENTS
The Company leases its manufacturing facilities as well as various equipment.
The equipment leases are generally short-term (six month) agreements with
month-to-month provisions at maturity. The facility leases have original terms
of two to three years expiring through June 2001. The agreements contain
options to renew each lease for an additional two year term and the agreements
require the following minimum rental commitments as of December 31, 1998:
Year ending
December 31, Amount
------------------ --------
1999 $ 80,800
2000 77,400
2001 16,500
--------
$174,700
========
The Company incurred rent expense in the amount of $47,562, $45,373 and $70,024
during each of the years ended December 31, 1996, 1997 and 1998.
F-31
Bactolac Pharmaceutical Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE F - MAJOR CUSTOMERS
Sales to principal customers which were in excess of 10% of total net revenues
in either 1996, 1997 or 1998, are shown below:
Year ending December 31,
---------------------------
Customer 1996 1997 1998
---------- -------- -------- -------
A* (a) 16% 36%
B (a) 24% 10%
C 20% (a) (a)
D 17% (a) (a)
E 11% (a) (a)
F 10% (a) (a)
G (a) (a) 12%
(a) less than 10%.
* The Company has a receivable of approximately $880,000 at December 31,
1998.
As of December 31, 1997 and 1998, respectively, the two major customers totaled
59% of accounts receivable, and the three major customers totaled 60% of
accounts receivable.
NOTE G - RELATED PARTY TRANSACTIONS
The Company sells products to, and purchases products from, an entity in which
the stockholder of the Company holds a 20% ownership interest. Transactions
between the Company and this entity are summarized as follows as of December
31,:
Customer 1996 1997 1998
- ------------------------------------ ------- ---------- --------
Products sales to related party $84,246 $1,213,121 $731,438
Product purchases from related
party - 459,790 660,481
Period ending balance in:
Accounts receivable from
related party 54,749 452,231 128,025
Account payable to related
party - 44,509 341,058
As of December 31, 1997, the Company had a loan payable to its stockholder in
the amount of $2,800 which was repaid during 1998.
F-32
Bactolac Pharmaceutical Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE H - SUBSEQUENT EVENT (UNAUDITED)
In August, 1999, the Company and its stockholder entered into a Letter of
Intent providing for the merger of the Company with Advanced Nutraceuticals,
Inc., which in turn was being merged into Nutrition for Life International,
Inc., a publicly traded entity.
F-33
Nutrition For Life International, Inc.
Unaudited Pro Forma Combining Balance Sheet
September 30, 1999
(Amounts in thousands)
NFLI BPI ASH
-------- ------- -------
ASSETS
Current assets:
Cash and cash equivalents $ 1,395 $ 141 $ 151
Restricted cash 586 - -
Marketable securities 997 - -
Receivables 362 2,842 977
Inventories 8,434 833 1,673
Deferred tax asset, net 1,647 - -
Prepaid expenses and other assets 1,063 - 186
------- ------ ------
Total current assets 14,484 3,816 2,987
Property and equipment, net 6,038 202 2,130
Goodwill, net - - -
Other assets 1,719 31 8
------- ------ ------
Total assets $22,241 $4,049 $5,125
======= ====== ======
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ - $ - $ -
Accounts payable 2,517 1,587 2,603
Accrued expenses and other 2,730 64 1,047
Deferred income 826 - -
Current maturities:
Long-term debt 385 - -
Capital lease obligations 177 - -
Notes payable - - 2,200
Note payable to stockholder - - -
------- ------ ------
Total current liabilities 6,635 1,651 5,850
Defered tax liability 778 - -
Long-term debt 309 - 1,386
Long-term portion of capital lease obligation 171 - -
Purchase notes payable - - -
------- ------ ------
Total liabilities 7,893 1,651 7,236
------- ------ ------
Stockholders' Equity:
Preferred stock - - -
Common stock 59 1 10
Additional paid-in capital 11,837 4 -
Retained earnings (deficit) 3,110 2,393 (2,121)
Treasury stock and other (658) - -
------- ------ ------
Total stockholders' equity (deficit) 14,348 2,398 (2,111)
------- ------ ------
Total liabilities and stockholders' equity $22,241 $4,049 $5,125
======= ====== ======
F-34
Adj. Pro Forma Pro Forma
ANI Combined Ref. Adjustments Combined
-------- ------------ ------- ------------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 15 $ 1,702 $ (890) $ 812
Restricted cash - 586 - 586
Marketable securities - 997 - 997
Receivables - 4,181 - 4,181
Inventories - 10,940 - 10,940
Deferred tax asset, net - 1,647 - 1,647
Prepaid expenses and other assets - 1,249 1 (425) 824
---- ------- -------- --------
Total current assets 15 21,302 (1,315) 19,987
Property and equipment, net 3 8,373 1 7,926 16,299
Goodwill, net - - 1 8,351 8,351
Other assets - 1,758 1 180 1,938
---- ------- -------- --------
Total assets $ 18 $31,433 $ 15,142 $ 46,575
==== ======= ======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ - $ - $ - $ -
Accounts payable 21 6,728 - 6,728
Accrued expenses and other 1 3,842 1 355 4,197
Deferred income - 826 - 826
Current maturities: -
Long-term debt - 385 1 944 1,329
Capital lease obligations - 177 - 177
Notes payable - 2,200 - 2,200
Note payable to stockholder - - 1 600 600
---- ------- -------- --------
Total current liabilities 22 14,158 1,899 16,057
Defered tax liability - 778 1 2,830 3,608
Long-term debt - 1,695 1 1,416 3,111
Long-term portion of capital lease obligation - 171 - 171
Purchase notes payable - - 1 3,000 3,000
---- ------- -------- --------
Total liabilities 22 16,802 9,145 25,947
---- ------- -------- --------
Stockholders' Equity:
Preferred stock - - 1 2 2
Common stock 2 72 1 (13) 59
Additional paid-in capital 3,945 15,786 1 2,329 18,115
Retained earnings (deficit) (3,951) (569) 1 3,679 3,110
Treasury stock and other - (658) - (658)
---- ------- -------- --------
Total stockholders' equity (deficit) (4) 14,631 5,997 20,628
---- ------- -------- --------
Total liabilities and stockholders' equity $ 18 $31,433 $ 15,142 $ 46,575
==== ======= ======== ========
F-35
Nutrition For Life International, Inc.
Unaudited Pro Forma Combining Statements of Operations
Year Ended September 30, 1999
(In thousands, except per share amounts)
Adj. Pro Forma Pro Forma
NFLI BPI ASH ANI Combined Ref. Adjustments Combined
-------------------------------------------- ---- -----------------------
Net sales $ 66,570 $ 7,774 $ 11,522 $ - $ 85,866 $ - $ 85,866
Cost of sales 44,742 6,549 9,126 - 60,417 2 435 60,852
-------------------------------------------- -----------------------
Gross profit 21,828 1,225 2,396 - 25,449 (435) 25,014
Operating expenses 22,330 346 2,004 20 24,700 3 99 24,799
Write-off off aborted offering expenses - - - 942 942 - 942
Goodwill amortization - - - - - 4 418 418
-------------------------------------------- -----------------------
Income (loss) from operations (502) 879 392 (962) (193) (952) (1,145)
Other income (expense):
Interest expense, net (21) - (381) - (402) - (402)
Interest expense, purchase debt - - - - - 5 (468) (468)
Other 232 6 (20) 7 225 - 225
-------------------------------------------- -----------------------
211 6 (401) 7 (177) (468) (645)
-------------------------------------------- -----------------------
Income (loss) before income tax expense (benefit) (291) 885 (9) (955) (370) (1,420) (1,790)
Income tax expense (benefit) 557 - - - 557 6 (432) 125
-------------------------------------------- -----------------------
Net income (loss) $ (848) $ 885 $ (9)$(955) $(927) $ (988) $ (1,915)
============================================ =======================
Net (loss) per share:
Basic and Diluted $ (0.15) $ (0.24)
======== ========
Shares used in computing
net (loss) per share -
Basic and Diluted 5,809 8,020
======== ========
F-36
Nutrition For Life International, Inc.
Pro Forma Consolidated Financial Information (Unaudited)
Explanatory Head Note
The accompanying unaudited pro forma consolidated financial statements give
effect to the acquisitions by Nutrition For Life International, Inc. ("the
Company" or "NFLI") of 100% of the outstanding common stock of Advanced
Nutraceuticals, Inc. ("ANI"), Bactolac Pharmaceutical Inc. ("BPI") and ASH Corp.
("ASH"), pursuant to Agreements between the parties. The unaudited pro forma
statements are based upon the estimates and assumptions set forth herein. The
unaudited pro forma information has been prepared utilizing the historical
financial statements and notes thereto, which for NFLI are incorporated by
reference herein and for the aforementioned acquired companies are included
herein. The unaudited pro forma financial data does not purport to be indicative
of the results which actually would have been obtained had the purchase been
effected on the dates indicated or of the results which may be obtained in the
future. The unaudited pro forma financial statements should be read in
conjunction with the historical financial statements set forth herein.
Acquisition of Advanced Nutraceuticals, Inc.
Effective November 17, 1999, ANI was acquired in exchange for 75,000 shares
of convertible preferred stock.
Acquisition of Bactolac Pharmaceutical Inc.
Effective November 17, 1999, BPI was acquired in exchange for $2,500,000 in
cash, a 7% note payable in the amount of $ 2,500,000, and 96,831 shares of
convertible preferred stock. Additionally, up to 17,606 shares of convertible
preferred stock may be issued pursuant to an earnout agreement.
Acquisition of ASH Corp.
Effective December 1, 1999, ASH was acquired in exchange for $750,000 in
cash, a 7% note payable in the amount of $ 500,000, and 49,296 shares of
convertible preferred stock. Additionally, up to 105,634 shares of convertible
preferred stock may be issued pursuant to an earnout agreement.
Financing Agreement
Financing for the acquisitions was provided through a new financing
arrangement with General Electric Capital Corporation. The borrowing agreement
consists of a term loan and revolving credit facility, with interest on
outstanding balances at .5% over prime. The agreement is collaterialized by
substantially all of the assets of the Company.
The unaudited pro forma consolidated balance sheet assumes the acquisitions were
consummated at September 30, 1999. The accompanying unaudited pro forma
consolidated statement of operations assume the acquisitions were consummated at
October 1, 1998, and have been derived from the statements of operations for the
Company for the year ended September 30, 1999. The pro forma statements of
operations for the acquired companies for the twelve months ended September 30,
1999, have been derived from their respective financial statements, included
herein, by adding the results of each of their nine months ended September 30,
1999, to those of each of their three months ended December 31, 1998.
Nutrition For Life International, Inc.
Notes to Pro Forma Consolidated Financial Statements
(In thousands, except per share amounts)
(1) Effective November 17, 1999 NFLI acquired BPI in exchange for consideration
of $ 7,750 (comprised of $ 2,500 in cash, $ 2,500 in Purchase Notes and $ 2,750
in Convertible Preferred Stock) and ANI in exchange for consideration of $2,130
in Convertible Preferred Stock. Effective December 1, 1999 NFLI acquired ASH in
exchange for consideration of $ 2,650 (comprised of $ 750 in cash, $ 500 in
Purchase Notes and $ 1,400 in Convertible Preferred Stock) Additional shares may
be issued in the future to the selling stockholders of BPI and ASH pursuant to
earn-out agreements. The Convertible Preferred Stock, issuable for that portion
of the purchase price was computed under the terms of the Agreements as of the
date of closing at the equivalent value per Common Share ($2.84). In connection
with the transaction NFLI also incurred approximately $ 600 in transaction
expenses directly related to the acquisitions as well as $180 in fees associated
with the credit facility. Collectively the above acquisitions are referred to as
the "Acquired Companies" or the "Acquisitions". For accounting purposes the
Acquisitions are accounted for under the purchase method of accounting.
F-37
Following is a summary of the allocation of the Acquired Companies purchase
price:
BPI ASH ANI Totals
------- ------- ------- --------
Consideration:
Cash (a) $ 2,500 $ 750 $ - $ 3,250
Purchase Notes (b) 2,500 500 - 3,000
Transaction expenses (c) 310 290 - 600
Convertible Preferred
Shares (Computed
Equivalent Common
share value of $2.84
per share) (d) 2,750 1,400 2,130 6,280
------- ------- ------- --------
Totals $ 8,060 $ 2,940 $ 2,130 $ 13,130
======= ======= ======= ========
(a) - The cash portion was financed under a credit facility, of which $2,360 was
drawn under the long-term portion of the agreement, repayable over a
thirty-six month period. The balance of the cash purchase price ($890) was
paid out of NFLI funds.
(b) - The Purchase Notes bear interest at 7% and are payable $1,200 in 2000,
$1,200 in 2001 and $600 in 2002.
(c) - $425 of the transaction expenses had been paid at September 30, 1999,
leaving $175 to be accrued for in addition to the $180 credit facility
fee.
(d) - Pro forma equity adjustment is net of $283 in historical net assets.
Purchase Price Allocation:
Historical net assets (e) $ 1,798 $ (2,111) $ (4) $ (317)
Consideration 8,060 2,940 2,130 13,130
--------- --------- -------- ---------
Excess 6,262 5,051 2,134 13,447
Adjust property and equipment to
fair market value 75 7,851 - 7,926
Adjustment to deferred tax liability (30) (2,800) - (2,830)
--------- --------- -------- ---------
Balance to excess of cost over
net assets acquired $ 6,217 $ - $ 2,134 $ 8,351
- ----------------------------------------------====== ========== ======== =========
(e) - BPI historical net assets are adjusted for a $600 dividend paid to its
stockholder prior to closing and loaned back to the company, with a
maturity date of April 15, 2001.
(2) Records depreciation of additional value assigned to property and
equipment, computed as follows:
Average Value Annual
Description Life Assigned Depreciation
(years)
Land - $ 1,445 $ -
Buildings 30 2,100 70
Machinery and equipment 12 4,381 365
------- -----
Totals $ 7,926 $ 435
------- -----
- -----------------------------------------------------------------
(3) Adjusts management compensation amounts of the Acquired Companies, from
the actual historical amounts paid, to the levels as provided for in
the terms of the of the acquisition Employment Agreements.
(4) Records amortization of excess of cost over net assets acquired, over a
twenty year amortization period on a straight line basis. Additional
shares potentially issuable under earnout Agreements would result, if
issued, in additional intangible assets to be amortized.
(5) Reflects interest expense on Purchase Notes at 7% and on advances under
General Electric Capital Corporation at an average rate of 8.4%, on
the debt used to fund the closing of the transaction. Additionally,
reflects the amortization of the credit facility fee over its three
year life.
(6) Records income taxes (benefits) on the operations of the Acquired
Companies, which previously were not subject to income taxes, as well
as the pro forma expense adjustments, exclusive of goodwill which is
not deductible for income tax purposes. An effective tax rate of 40%
is used.
F-38
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------
We have issued our report dated November 10, 1999, accompanying the
financial statements of Advanced Nutraceuticals, Inc. contained in the Nutrition
for Life International, Inc. Form 8-K/A. We hereby consent to the incorporation
by reference of said report in the Registration Statement of Nutrition for Life
International, Inc. on Form S-8 (File No. 333-99366, effective December 5,
1995).
GRANT THORNTON LLP
Houston, Texas
January 28, 2000
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the inclusion of our report dated July 16, 1999,
accompanying the financial statements of Ash Corp. contained in the Nutrition
For Life International, Inc. Form 8-K/A.
HEIN + ASSOCIATES LLP
Houston, Texas
January 31, 2000
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------
We have issued our report dated October 20, 1999, accompanying the
financial statements of Bactolac Pharmaceutical, Inc. contained in the
Nutrition For Life International, Inc. Form 8-K/A. We hereby consent to the
incorporation by reference of said report in the Registration Statement of
Nutrition For Life International, Inc. on Form S-8 (File No. 333-99366,
effective December 5, 1995).
GRANT THORNTON LLP
Houston, Texas
January 28, 2000
Annex B
Stock Purchase Agreement
EXHIBIT 10.54
Stock Purchase Agreement
THIS STOCK PURCHASE AGREEMENT (the "Agreement") dated December 29, 2000, is
entered into by and among Advanced Nutraceuticals, Inc., a Texas corporation
("ANI"), Everest International, L.L.C., a limited liability company organized
under the laws of Kansas ("Everest") and Nutrition For Life International, Inc.,
a Texas corporation ("NFLI"). Each of ANI, Everest and NFLI is sometimes
referred to as a "Party" and may be collectively referred to as the "Parties."
R E C I T A L S
= = = = = = = =
A. ANI is the owner of all of the issued and outstanding shares of common
stock of NFLI (the "Shares").
B. Everest desires to acquire the Shares of NFLI from ANI, and ANI
desires to sell the Shares to Everest, upon the terms and subject to the
conditions hereinafter set forth.
Statement of Agreement
----------------------
NOW, THEREFORE, in consideration of the premises and of the respective
covenants and provisions herein contained, and intending to be legally bound
hereby, the Parties agree as follows:
Unless otherwise defined, all capitalized terms used herein shall have the
same meanings as are ascribed to such terms in Section 12.13, hereinbelow.
1. THE SALE
1.1 The Sale. Upon the terms and subject to the conditions of this
Agreement, and in reliance on the mutual representations, warranties and
covenants contained herein, at the Closing, ANI will sell, assign, transfer and
deliver to Everest, and Everest will purchase and acquire from ANI, all of the
Shares, free and clear of all Encumbrances, and in the proper form for transfer.
1.2 Purchase Price.
(a) The aggregate purchase price to be paid by Everest shall be
$10,000,000, plus an Earnout Payment based upon NFLI's operations in Japan (the
"Purchase Price"). The Purchase Price is subject to adjustment as set forth in
Section 1.4. The Purchase Price shall be payable as follows:
(i) $5,000,000 minus the amount of Escrowed Funds received by
ANI from the escrow account (as described in Section 1.3) shall be paid at the
Closing by wire transfer or other immediately available funds to ANI;
(ii) A promissory note (the "Promissory Note") shall be delivered
at the Closing executed by NFLI in the principal amount of $5,000,000, bearing
interest at the rate of prime plus one half of one percent (.5%) per annum with
interest only payable at the end of the calendar quarter in which the Closing
occurs and thereafter with principle and interest being payable at the end of
each succeeding quarter based upon a ten-year amortization, with a maturity date
of three (3) years after the Closing Date, substantially in the form provided as
Exhibit 1.2(a)(ii), said Promissory Note to be subordinated in payment to the
senior secured lender of NFLI, secured by all or substantially all of the assets
of NFLI and to otherwise be without recourse to any other Person other than NFLI
or its successors as assigns; and
(iii) Any amounts due pursuant to the Earnout Agreement shall be
paid within sixty (60) days after each of the four (4) twelve-month periods
following the Closing Date as provided in the Earnout Agreement.
(b) In connection with the purchase and sale of the Shares, a
portion of the debt of NFLI to GECC (which is a joint obligation with ANI and
other Persons) will be assumed (with GECC's consent) or paid by Everest on the
Closing Date; provided, that such debt shall be limited to the sum of (i) term
debt of $238,000 and (ii) the revolving line of credit portion of the debt to
GECC which is attributable to advances made by GECC in respect of eligible
inventory of NFLI, which portion as of the date of this Agreement is
$813,986.13. The Parties acknowledge that NFLI is entitled in the Ordinary
Course of Business and in accordance with the terms and conditions of the loan
documents to increase the principal balance of the revolving line of credit
prior to Closing in order to pay accounts payable or other liabilities.
(c) In the event NFLI's Adjusted Working Capital at the
Closing Date is $1,000,000 or greater, ANI and Everest will enter into an
Indemnity Escrow Agreement in form mutually satisfactory to the Parties (the
"Indemnity Escrow Agreement") at Closing and ANI will deposit the sum of
$250,000 into an escrow account in accordance with the provisions of the
Indemnity Escrow Agreement.
1.3 Purchase Price Escrow Agreement. Attached to this Agreement as
Exhibit 1.3 is the form of Purchase Price Escrow Agreement among Everest, ANI
and an escrow agent (the "Purchase Price Escrow Agreement"), which provides for
the deposit by Everest on the date of the signing of this Agreement of $250,000,
and an additional deposit of $100,000 by Everest if the sale of the Shares has
not been consummated within sixty (60) days of the date of this Agreement, and
additional $100,000 deposits by Everest each thirty (30) days thereafter that
the sale of the Shares has not been consummated. The amounts deposited by
Everest pursuant to this Section 1.3 shall be referred to as the "Escrowed
Funds". Except as otherwise provided in the Purchase Price Escrow Agreement, at
the Closing, the Escrowed Funds, together with all accrued interest thereon,
shall be delivered to ANI and applied to the cash portion of the Purchase Price
payable as provided in Section 1.2 of this Agreement.
1.4 Adjustment of Purchase Price.
(a) The Purchase Price shall be increased or decreased, as the
case may be, by an amount equal to the amount by which NFLI's Adjusted Working
Capital
-2-
at the Closing Date is greater than or less than $1,000,000. The adjustment to
the Purchase Price shall be made as follows:
(i) At the Closing, ANI shall deliver a calculation of Adjusted
Working Capital as of the date of the last calendar day of the month immediately
preceding the Closing Date including therein items mutally estimated in good
faith by the Parties which are known to have occurred in such period (the
"Preliminary Closing Adjusted Working Capital"). The $5,000,000 cash portion of
the Purchase Price to be delivered to ANI at the Closing shall be adjusted
upward or downward, as the case may be, by an amount equal to the increase or
decrease, as the case may be, in the Adjusted Working Capital reflected in the
calculation of the Preliminary Closing Adjusted Working Capital as compared with
$1,000,000 (the "Closing Adjustment").
(ii) ANI will prepare and deliver within thirty (30) days after
the Closing Date, consolidated financial statements of the Acquired Companies as
of the Closing Date, together with a schedule reflecting the Adjusted Working
Capital of the Acquired Companies as of the Closing Date (the "Closing Adjusted
Working Capital"). Everest and NFLI will provide ANI with access to NFLI's books
and records to prepare these statements and the schedule. The Closing Adjusted
Working Capital shall be reviewed by Everest, and Everest shall submit a report
to ANI within sixty (60) days of Everest's receipt of the Closing Working
Capital stating Everest's concurrence with the calculation of the Closing
Adjusted Working Capital or showing Everest's calculation of the Closing Working
Capital as at the Closing Date, if different. If Everest's report reflects its
concurrence with ANI's calculation of the Closing Adjusted Working Capital, such
calculation of ANI shall be final and conclusive for all purposes (the "Final
Adjusted Working Capital"). If Everest's report reflects that it does not concur
with ANI's calculation of the Preliminary Closing Adjusted Working Capital, ANI
shall have fifteen (15) days after its receipt of Everest's report to advise
Everest that ANI disputes such calculation. Everest will afford to ANI access to
all books and records of the Acquired Companies and will furnish ANI such
additional financial and operating data and other information of or regarding
the Acquired Companies as ANI may reasonably request in its review of Everest's
report. If ANI fails to provide such notice, then the Closing Adjusted Working
Capital, as modified by Everest's report, shall become the Final Adjusted
Working Capital. If ANI provides notice that it disputes Everest's calculation
within such fifteen (15) day period, Everest and ANI shall each use its best
efforts to resolve such dispute through negotiation. If such dispute cannot be
resolved through negotiation within fifteen (15) days after the receipt by
Everest of ANI's notice of dispute, then the dispute shall be resolved by the
independent accounting firms selected by each of Everest and ANI. If these
accounting firms cannot agree on a resolution, they shall jointly select a third
firm of independent certified public accountants who shall have sole and
absolute discretion with respect to the resolution of this dispute. The
calculation of the Closing Adjusted Working Capital, as modified by the
accounting firm or firms shall be final and binding upon the Parties, and shall
constitute the Final Adjusted Working Capital. The difference between the
Preliminary Closing Working Capital and the Final Adjusted Working Capital shall
be referred to as the "Adjustment." The fees of the accountants selected by
Everest pursuant to this Section 1.4 shall be borne by Everest, the fees of the
accountants selected by ANI pursuant to this Section 1.4 shall be borne by ANI
and the fees of any third accounting firm which may be
-3-
retained in accordance with this Section 1.4 shall be divided equally between
ANI and Everest.
(b) The Adjustment shall be satisfied within thirty (30) days
after the final determination with respect to the Final Adjusted Working Capital
is made as follows:
(i) After taking into account the adjustments to the Purchase
Price made pursuant to the Closing Adjustment, to the extent that the Adjustment
results in a decrease in the Purchase Price, such decrease shall be satisfied by
delivery by ANI to Everest of a check or wire transfer in an amount equal to the
Adjustment, and
(ii) After taking into account the adjustments to the Purchase
Price made pursuant to the Closing Adjustment, to the extent that the Adjustment
results in an increase in the Purchase Price, such increase shall be satisfied
by delivery by Everest to ANI of a check or wire transfer in an amount equal to
the Adjustment.
2. CLOSING
It is understood that ANI is required to hold a meeting of its stockholders
to approve the sale of the Shares. Subject to the terms and conditions of this
Agreement, the closing of the transactions contemplated by this Agreement (the
"Closing") will take place on the first business day after the meeting of the
stockholders of ANI in which approval of the sale of the Shares shall have
occurred, unless another time or date is agreed to in writing by the Parties
(the actual time and date of the Closing being referred to herein as the
"Closing Date"). The Closing shall be held at the offices of Jackson Walker
L.L.P., 1100 Louisiana, Suite 4200, Houston, Texas 77002, unless another place
is agreed to in writing by the Parties hereto.
3. REPRESENTATIONS AND WARRANTIES OF ANI
Except as provided in the ANI Disclosure Letter, ANI represents and
warrants to Everest that all of the following representations and warranties in
this Section 3 are true at the date of this Agreement and shall be true at the
time of Closing. As used in this Agreement, the "ANI Disclosure Letter" shall
mean the disclosure letter delivered by ANI pursuant to this Section 3 upon
execution of this Agreement.
3.1 Due Organization. Each Acquired Company is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, with full corporate power and authority to
conduct its business as it is now being conducted, to own or use the properties
and assets that it purports to own and use, and to perform all its obligations
under Applicable Contracts. Each Acquired Company is duly qualified to do
business and is in good standing in each jurisdiction in which the nature of its
business or the ownership or leasing of its properties makes such qualification
necessary, except (i) as set forth on Schedule 3.1 to the ANI Disclosure Letter
or (ii) where the failure to be so authorized or qualified would not have a
Material Adverse Effect. Schedule 3.1 to the ANI Disclosure Letter sets forth
the jurisdiction in which Each Acquired Company is incorporated and contains a
list of all jurisdictions in which Each Acquired
-4-
Company is authorized or qualified to do business. True, complete and correct
copies of the Organizational Documents have been made available to Everest.
3.2 Authorization.
(a) Except as set forth in Schedule 3.2 to the ANI Disclosure
Letter, each of ANI and NFLI has all requisite corporate power and authority to
execute and deliver this Agreement, to consummate the transactions contemplated
hereby and to perform all the terms and conditions hereof to be performed by it.
Execution and delivery of this Agreement by each of ANI and NFLI, the
performance by ANI and NFLI of all the terms and conditions hereof to be
performed by each of it and the consummation of the transactions contemplated
hereby have been duly authorized and approved by all requisite corporate action
subject only to the approval of this Agreement and sale of the Shares by the
holders of a majority of the outstanding shares of the common stock of ANI. This
Agreement constitutes the valid and legally binding obligation of each of ANI
and NFLI, enforceable in accordance with its terms, subject to applicable
bankruptcy, insolvency, moratorium or other similar laws relating to creditors'
rights and general principles of equity.
(b) Except as set forth in Schedule 3.2 of the ANI Disclosure
Letter, neither the execution and delivery of this Agreement nor the
consummation or performance of any of the Contemplated Transactions will,
directly or indirectly (with or without notice or lapse of time):
(i) contravene, conflict with, or result in a violation of (A)
any provision of the Organizational Documents of the Acquired Companies, or (B)
any resolution adopted by the board of directors or the stockholders of any
Acquired Company;
(ii) contravene, conflict with, or result in a violation of, or
give any Governmental Body or other Person the right to challenge any of the
Contemplated Transactions or to exercise any remedy or obtain any relief under,
any Legal Requirement or any Order to which any Acquired Company or ANI, or any
of the assets owned or used by any Acquired Company, may be subject;
(iii) contravene, conflict with, or result in a violation of any
of the terms or requirements of, or give any Governmental Body the right to
revoke, withdraw, suspend, cancel, terminate, or modify, any Governmental
Authorization that is held by any Acquired Company or that otherwise relates to
the business of, or any of the assets owned or used by, any Acquired Company;
(iv) contravene, conflict with, or result in a violation or
breach of any provision of, or give any Person the right to declare a default or
exercise any remedy under, or to accelerate the maturity or performance of, or
to cancel, terminate, or modify, any Applicable Contract; or
(v) result in the imposition or creation of any Encumbrance
upon or with respect to any of the assets owned or used by any Acquired Company;
-5-
except for any of the foregoing matters in (i)-(v) which would not result in a
Material Adverse Effect, impair in any material respects the ability of ANI to
perform its obligations under this Agreement, or prevent or materially delay the
consummation of the Contemplated Transactions.
Except as set forth in Schedule 3.2 of the Disclosure Letter, neither
ANI nor any Acquired Company is or will be required to give any notice to or
obtain any Consent from any Person in connection with the execution and delivery
of this Agreement or the consummation or performance of any of the Contemplated
Transactions, except for instances in which failure to provide notice or obtain
any Consent would not have a Material Adverse Effect.
(c) ANI is acquiring the Promissory Note for its own account and
not with a view to distribution within the meaning of Section 2(11) of the
Securities Act.
3.3 Capitalization. Except as set forth in Schedule 3.3 to the ANI
Disclosure Letter: (i) the authorized equity securities of NFLI consist of
20,000,000 shares of common stock, par value $.001 per share, of which 100
shares are issued and outstanding and constitute the Shares; (ii) Seller is and
will be on the Closing Date the record and beneficial owner and holder of the
Shares, free and clear of all Encumbrances; (iii) with the exception of the
Shares (which are owned by ANI), all of the outstanding equity securities and
other securities of each Acquired Company are owned of record and beneficially
by one or more of the Acquired Companies, free and clear of all Encumbrances;
and (iv) no legend or other reference to any purported Encumbrance appears upon
any certificate representing equity securities of any Acquired Company. All of
the outstanding equity securities of each Acquired Company have been duly
authorized and validly issued and are fully paid and non-assessable. There are
no Contracts relating to the issuance, sale, or transfer of any equity
securities or other securities of any Acquired Company. None of the outstanding
equity securities or other securities of any Acquired Company was issued in
violation of the Securities Act or any other Legal Requirement. No Acquired
Company owns, or has any Contract to acquire, any equity securities or other
securities of any Person (other than Acquired Companies) or any direct or
indirect equity or ownership interest in any other business.
3.4 Financial Statements. Schedule 3.4 to the ANI Disclosure Letter
includes copies of the following financial statements (the "Acquired Companies
Financial Statements") of the Acquired Companies: the unaudited Acquired
Companies' Consolidated Balance Sheet as of September 30, 2000, and unaudited
Consolidated Statement of Operations and Comprehensive Income (Loss), for the
fiscal year ended September 30, 2000 (September 30, 2000, being hereinafter
referred to as the "Balance Sheet Date"). The Acquired Companies Financial
Statements have been prepared in accordance with GAAP (except as they relate to
deferred income tax provisions) applied on a consistent basis (except as noted
thereon or on Schedule 3.4 to the ANI Disclosure Letter). Except as set forth on
Schedule 3.4 to the ANI Disclosure Letter, the unaudited the Acquired Companies
Financial Statements present fairly in all material respects the financial
position and the results of operations equity of the Acquired Companies as at
respective
-6-
dates of and for the periods referred to in the Acquired Companies Financial
Statements except as they relate to deferred income tax provisions.
3.5 Books and Records. To the Knowledge of ANI, the books of account,
minute books, stock record books, and other records of the Acquired Companies,
all of which have been made available to Everest, are materially complete and
correct and have been maintained in accordance with sound business practices and
in material compliance with the requirements of Section 13(b)(2) of the
Securities Exchange Act of 1934, as amended (regardless of whether or not the
Acquired Companies are subject to that Section), including the maintenance of an
adequate system of internal controls. The minute books of the Acquired Companies
contain accurate and complete records of all meetings held of, and corporate
action taken by, the stockholders, the Boards of Directors, and committees of
the Boards of Directors of the Acquired Companies, and no meeting of any such
stockholders, Board of Directors, or committee has been held for which minutes
have not been prepared and are not contained in such minute books. At the
Closing, all of those books and records will be in the possession of the
Acquired Companies.
3.6 Taxes.
(a) The Acquired Companies have filed or caused to be filed or
extended as in the case of the Tax Returns for the year ended September 30, 2000
(on a timely basis since September 30, 1997) all Tax Returns that are or were
required to be filed by or with respect to any of them, either separately or as
a member of a group of corporations, pursuant to applicable Legal Requirements.
ANI has made available to Everest copies of, and Schedule 3.6 of the ANI
Disclosure Letter contains a complete and accurate list of, all such Tax Returns
relating to income or franchise taxes filed since September 30, 1997. The
Acquired Companies have paid, or made provision for the payment of, all material
Taxes that have or may have become due pursuant to those Tax Returns or
otherwise, or pursuant to any assessment received by ANI or any Acquired
Company, except such Taxes, if any, as are listed in Schedule 3.6 of the ANI
Disclosure Letter and are being contested in good faith and as to which adequate
reserves (determined in accordance with GAAP) have been provided in the Balance
Sheet. The Parties acknowledge that no provision need be made for any taxes owed
pursuant to the IRC (S) 338 election and ANI shall have no responsibility for
payment of such taxes.
(b) Schedule 3.6 of the ANI Disclosure Letter contains a
complete and accurate list of all audits of all such Tax Returns to ANI's
knowledge, including a reasonably detailed description of the nature and outcome
of each audit. All deficiencies proposed as a result of such audits have been
paid, reserved against, settled, or, as described in Schedule 3.6 of the ANI
Disclosure Letter, are being contested in good faith by appropriate proceedings.
Schedule 3.6 of the ANI Disclosure Letter describes all adjustments to the
United States federal income Tax Returns filed by any Acquired Company or any
group of corporations including any Acquired Company for all taxable years since
September 30, 1997, and the resulting deficiencies proposed by the IRS. Except
as described in Schedule 3.6 of the ANI Disclosure Letter, neither ANI nor any
Acquired Company has given or been requested to give waivers or extensions (or
is or would be subject to a waiver or extension given by any other Person) of
any statute of limitations
-7-
relating to the payment of Taxes of any Acquired Company or for which any
Acquired Company may be liable.
(c) The charges, accruals, and reserves with respect to Taxes on
the respective books of each Acquired Company are adequate (determined in
accordance with GAAP with the exception of any deferred income tax amounts or
obligations) and sufficient for the payment of each Acquired Company's liability
for Taxes. There exists no proposed tax assessment against any Acquired Company
except as disclosed in the Balance Sheet or in Schedule 3.6 of the Disclosure
Letter. No consent to the application of Section 341(f)(2) of the IRC has been
filed with respect to any property or assets held, acquired, or to be acquired
by any Acquired Company. All material Taxes that any Acquired Company is or was
required by Legal Requirements to withhold or collect have been duly withheld or
collected and, to the extent required, have been paid to the proper Governmental
Body or other Person.
(d) All Tax Returns filed by (or that include on a consolidated
basis) any Acquired Company are true, correct, and complete in all material
respects. There is no tax sharing agreement that will require any payment by any
Acquired Company after the date of this Agreement. No Acquired Company is, or
within the five-year period preceding the Closing Date has been, an "S"
corporation.
3.7 No Undisclosed Liabilities. Except as set forth in Schedule 3.7
of the ANI Disclosure Letter and for liabilities or obligations reflected or
reserved against in the NFLI Balance Sheet, and current liabilities incurred in
the Ordinary Course of Business since the Balance Sheet Date, the Acquired
Companies have no liabilities or obligations of any nature (whether known or
unknown and whether absolute, accrued, contingent, or otherwise) which would
have a Material Adverse Effect.
3.8 Compliance with Legal Requirements; Governmental Authorizations.
(a) Except as set forth in Schedule 3.8 of the ANI Disclosure
Letter, to ANI's Knowledge:
(i) Each Acquired Company is in compliance with each Legal
Requirement that is applicable to it or to the conduct or operation of its
business or the ownership or use of any of its assets, except for instances of
non-compliance that would not have a Material Adverse Effect;
(ii) No event has occurred or circumstance exists that (with or
without notice or lapse of time):
(A) may constitute or result in a violation by any Acquired
Company of, or a failure on the part of any Acquired Company to comply with, any
Legal Requirement, except for events or circumstances that would not have a
Material Adverse Effect; or
-8-
(B) may give rise to any obligation on the part of any
Acquired Company to undertake, or to bear all or any portion of the cost of, any
remedial action of any nature, except for events or circumstances that would not
have a Material Adverse Effect; and
(iii) No Acquired Company has received, at any time since
September 30, 1998, any notice or other communication (whether oral or written)
from any Governmental Body or any other Person regarding:
(A) any actual, alleged, possible, or potential violation
of, or failure to comply with, any Legal Requirement, except for violations or
instances of non-compliance that would not have a Material Adverse Effect; or
(B) any actual, alleged, possible, or potential
obligation on the part of any Acquired Company to undertake, or to bear all or
any portion of the cost of, any remedial action of any nature, except for
instances of obligations that would not have a Material Adverse Effect.
(b) Each Acquired Company has in effect all Governmental
Authorizations necessary for it to lawfully conduct and operate its business in
the manner currently conducted and to permit each Acquired Company to use and
own its assets in the manner in which they currently own and use such assets,
except for the failure to have such Governmental Authorizations that would not
have a Material Adverse Effect. There has occurred no default under, or
violation of, any such Governmental Authorization, except for defaults under, or
violations of, Governmental Authorizations that would not have a Material
Adverse Effect.
(c) No Acquired Company has received, at any time since
September 30, 1998, any notice or other communication (whether oral or written)
from any Governmental Body or any other Person regarding:
(i) Any actual, alleged, possible or potential violation of or
failure to comply with any term or requirement of any Governmental
Authorization, except for where such potential violation or failure to comply
would not have a Material Adverse Effect; or
(ii) Any actual, proposed, possible or potential revocation,
withdrawal, suspension, cancellation, termination of, or modification to any
Governmental Authorization, except where such matters would not have a Material
Adverse Effect.
3.9 Legal Proceedings; Orders.
(a) Except as set forth in Schedule 3.9 of the ANI Disclosure
Letter, there is no pending Proceeding:
(i) that has been commenced by or against any Acquired Company
or that otherwise relates to or may affect the business of, or any of the assets
owned or used by, any Acquired Company that would have a Material Adverse
Effect; or
-9-
(ii) that challenges, or that may have the effect of
preventing, delaying, making illegal, or otherwise interfering with, any of the
Contemplated Transactions.
(b) To ANI's knowledge, (1) no such Proceeding has been
Threatened, and (2) no event has occurred or circumstance exists that may give
rise to or serve as a basis for the commencement of any such Proceeding. ANI has
delivered to Everest copies of all pleadings, correspondence, and other
documents relating to each Proceeding listed in Schedule 3.9 of the ANI
Disclosure Letter.
(c) Except as set forth in Schedule 3.9 of the ANI Disclosure
Letter:
(i) there is no Order to which any of the Acquired Companies,
or any of the assets owned or used by any Acquired Company, is subject that
would have a Material Adverse Effect;
(ii) neither Seller is subject to any Order that relates to the
business of, or any of the assets owned or used by, any Acquired Company that
would have a Material Adverse Effect; and
(iii) to ANI's Knowledge, no officer, director, agent, or
employee of any Acquired Company is subject to any Order that prohibits such
officer, director, agent, or employee from engaging in or continuing any
conduct, activity, or practice relating to the business of any Acquired Company.
(d) Except as set forth in Schedule 3.9 of the ANI Disclosure
Letter:
(i) each Acquired Company is, and at all times since September
30, 1998 has been, in compliance with the terms and requirements of each Order
to which it, or any of the assets owned or used by it, is or has been subject
except for instances of non-compliance that would not have a Material Adverse
Effect;
(ii) no event has occurred or circumstance exists that may
constitute or result in (with or without notice or lapse of time) a violation of
or failure to comply with any term or requirement of any Order to which any
Acquired Company, or any of the assets owned or used by any Acquired Company, is
subject except for events or circumstances that would not have a Material
Adverse Effect; and
(iii) no Acquired Company has received, at any time since
September 30, 1998, any notice or other communication (whether oral or written)
from any Governmental Body or any other Person regarding any actual, alleged,
possible, or potential violation of, or failure to comply with, any term or
requirement of any Order to which any Acquired Company, or any of the assets
owned or used by any Acquired Company, is or has been subject except for notices
or other communications that would have a Material Adverse Effect.
-10-
3.10 Absence of Certain Changes and Events. Except as set forth in
Schedule 3.10 of the ANI Disclosure Letter, since the date of the Balance Sheet,
the Acquired Companies have conducted their businesses only in the Ordinary
Course of Business and there has not been any:
(a) Change in any Acquired Company's authorized or issued
capital stock; grant of any stock option or right to purchase shares of capital
stock of any Acquired Company; issuance of any security convertible into such
capital stock; grant of any registration rights; purchase, redemption,
retirement, or other acquisition by any Acquired Company of any shares of any
such capital stock; or declaration or payment of any dividend or other
distribution or payment in respect of shares of capital stock;
(b) Amendment to the Organizational Documents of any
Acquired Company;
(c) Increase by any Acquired Company of any bonuses,
salaries, or other compensation to any stockholder, director, officer, or entry
into any employment, severance, or similar Contract with any director or
officer;
(d) Adoption of, or increase in the payments to or benefits
under, any profit sharing, bonus, deferred compensation, savings, insurance,
pension, retirement, or other employee benefit plan for or with any employees of
any Acquired Company;
(e) Damage to or destruction or loss of any asset or
property of any Acquired Company, whether or not covered by insurance which
would have a Material Adverse Effect;
(f) Entry into, termination of, or receipt of notice of
termination of:
(i) Any license, distributorship, dealer, sales
representative, joint venture, credit, or similar agreement; or
(ii) Any Contract or transaction involving a total remaining
commitment by or to any Acquired Company of at least $150,000;
(g) Any material license, distributorship, dealer, sales
representative, joint venture, credit, or similar agreement; or
(h) Any Contract or transaction involving a total remaining
commitment by or to any Acquired Company of at least $150,000;
(i) Sale (other than sales of inventory in the Ordinary
Course of Business), lease, or other disposition of any material asset or
property of any Acquired Company (except for the distribution of the stock of
Bactolac Pharmaceutical Inc.) or mortgage, pledge, or imposition of any lien or
other encumbrance on any material asset or
-11-
property of any Acquired Company, including the sale, lease, or other
disposition of any of the material Intellectual Property Assets;
(j) Cancellation or waiver of any claims or rights with a
value to any Acquired Company in excess of $150,000;
(k) Material change in the accounting methods used by any
Acquired Company; or
(l) Agreement, whether oral or written, by any Acquired
Company to do any of the foregoing.
3.11 Contracts; No Defaults.
(a) Schedule 3.11(a) of the ANI Disclosure Letter contains
a complete and accurate list, and ANI has delivered to Everest true and complete
copies, of:
(i) each Applicable Contract that involves performance of
services or delivery of goods or materials by one or more Acquired Companies of
an amount or value in excess of $150,000;
(ii) each Applicable Contract that was not entered into in
the Ordinary Course of Business and that involves expenditures or receipts of
one or more Acquired Companies in excess of $150,000;
(iii) each lease, rental or occupancy agreement, license,
installment and conditional sales agreement, and other Applicable Contract
affecting the ownership of, leasing of, title to, use of, or any leasehold or
other interest in, any real or personal property (except personal property
leases and installment and conditional sales agreements having a value per item
or aggregate payments of less than $150,000 and with terms of less than one
year);
(iv) each licensing agreement or other Applicable Contract
with respect to patents, trademarks, copyrights, or other intellectual property,
including agreements with current or former employees, consultants, or
contractors regarding the appropriation or the non-disclosure of any of the
Intellectual Property Assets;
(v) each collective bargaining agreement and other
Applicable Contract to or with any labor union or other employee representative
of a group of employees;
(vi) each joint venture, partnership, and other Applicable
Contract (however named) involving a sharing of profits, losses, costs, or
liabilities by any Acquired Company with any other Person;
(vii) each Applicable Contract containing covenants that in
any way purport to restrict the business activity of any Acquired Company or any
Affiliate of an
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Acquired Company or limit the freedom of any Acquired Company or any Affiliate
of an Acquired Company to engage in any line of business or to compete with any
Person;
(viii) each Applicable Contract providing for payments to or
by any Person based on sales, purchases, or profits in excess of $150,000, other
than payments made to or from NFLI's distributors in the Ordinary Course of
Business and for payments for goods from customers in the Ordinary Course of
Business;
(ix) each power of attorney that is currently effective and
outstanding;
(x) each Applicable Contract entered into other than in the
Ordinary Course of Business that contains or provides for an express undertaking
by any Acquired Company to be responsible for consequential damages;
(xi) each Applicable Contract for capital expenditures in
excess of $150,000;
(xii) each written warranty, guaranty, and or other similar
undertaking with respect to contractual performance extended by any Acquired
Company other than in the Ordinary Course of Business of an amount or value in
excess of $150,000; and
(xiii) each material amendment, supplement, and modification
(whether oral or written) in respect of any of the foregoing.
(b) Except as set forth in Schedule 3.11(b) of the ANI
Disclosure Letter:
(i) neither ANI (and no Related Person of ANI) has or may
acquire any rights under, and ANI has not or may not become subject to any
obligation or liability under, any Contract that relates to the business of, or
any of the assets owned or used by, any Acquired Company; and
(ii) to ANI's Knowledge, no officer, director, agent,
employee, consultant, or contractor of any Acquired Company is bound by any
Contract that purports to limit the ability of such officer, director, agent,
employee, consultant, or contractor to:
(A) engage in or continue any conduct, activity, or
practice relating to the business of any Acquired Company; or
(B) assign to any Acquired Company or to any other
Person any rights to any invention, improvement, or discovery.
(c) Except as set forth in Schedule 3.11(c) of the ANI
Disclosure Letter:
-13-
(i) no Acquired Company has received any notice from any
other party to any Contract identified in Schedule 3.11(a) of the ANI Disclosure
Letter that such third party intends to terminate, or not renew, any such
Contract;
(ii) no Acquired Company is in violation of or in default
under (nor does there exist any condition which upon passage of time or the
giving of notice or both would cause such a violation of or default under) any
Contract identified in Schedule 3.11(a) of the ANI Disclosure Letter, except for
violations or defaults that would not have a Material Adverse Effect.
3.12 No Material Adverse Change. Since the date of the Balance
Sheet, there has not been any material adverse change in the business,
operations, properties, assets or condition of any Acquired Company which would
have a Material Adverse Effect and, to ANI's Knowledge, no event has occurred or
circumstance exists that may result in such a Material Adverse Effect.
3.13 Employee Benefits.
(a) As used in this Section 3.13, the following terms have
the meanings set forth below.
"Company Plan" means all plans, practices, programs and arrangements,
whether subject to ERISA or not, of which an Acquired Company or an ERISA
Affiliate of an Acquired Company is or was a plan sponsor, or to which an
Acquired Company or an ERISA Affiliate of an Acquired Company otherwise
contributes or has contributed, or in which an Acquired Company or an ERISA
Affiliate of an Acquired Company otherwise participates or has participated.
All references to plans are to Company Plans unless the context requires
otherwise.
"ERISA Affiliate" means, with respect to an Acquired Company, any
other person that, together with the Company, would be treated as a single
employer under IRC (S) 414.
(b) Part 3.13(i) of the Disclosure Letter contains a
complete and accurate list of all Company Plans. No Company Plan is a defined
benefit pension plan, is subject to Title IV of ERISA or is a multiemployer
pension plan within the meaning of Section 3(37) of ERISA. No Company Plan is or
may be subject to contract termination fees imposed by a third party investment
provider to the Company Plan.
(c) ANI has delivered to Everest, or will deliver to
Everest within ten days of the date of this Agreement copies of all documents
related to each of the Company Plans, including plan documents, amendments
thereto, summary plan descriptions, IRS Form 5500s for the most recent three (3)
year period, personnel policies, insurance policies, administrative reports,
communications to and from governmental agencies and favorable determination
letters.
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(d) Except as set forth in Part 3.13(ii) of the Disclosure
Letter, to ANI's Knowledge and except where any failure to comply or perform or
otherwise act or fail to act would not have a Material Adverse Effect:
(i) The Acquired Companies have performed all of their
respective material obligations under all Company Plans. The Acquired Companies
have made appropriate entries in their financial records and statements for all
material obligations and liabilities under such Plans that have accrued but are
not due.
(ii) As of the Closing Date, NFLI shall have no obligation
with respect to any Company Plan.
(iii) The Acquired Companies, with respect to all Company
Plans, are, and each Company Plan is, in full compliance with ERISA, the IRC,
and other applicable Laws including the provisions of such Laws expressly
mentioned in this Section 3.13, except where the failure to comply would not
have a Material Adverse Effect.
(iv) No Seller or Acquired Company has any liability to the
IRS with respect to any Company Plan, including any liability imposed by Chapter
43 of the IRC.
(v) All filings required by ERISA and the IRC as to each
Company Plan have been timely filed, and all notices and disclosures to
participants required by either ERISA or the IRC have been timely provided.
(vi) Each Company Plan can be terminated within thirty days,
without payment of any additional contribution or amount and without the vesting
or acceleration of any benefits promised by such Plan.
(vii) No event has occurred or circumstance exists that could
result in a material increase in premium costs of Company Plans that are
insured, or a material increase in benefit costs of such Plans that are self-
insured.
(viii) Other than claims for benefits submitted by
participants or beneficiaries, no claim against, or legal proceeding involving,
any Company Plan, is pending or, to ANI's Knowledge, is Threatened.
(ix) Each Company Plan that is intended to be qualified
within the meaning of IRC (S) 401(a) of each Acquired Company is qualified in
form and operation under IRC (S) 401(a); each trust for each such Plan is exempt
from federal income tax under IRC (S) 501(a). No event has occurred or
circumstance exists that will or could give rise to disqualification or loss of
tax-exempt status of any such Plan or trust.
(x) Except to the extent required under ERISA (S) 601 et
seq. and IRC (S) 4980B, no Acquired Company provides health or welfare benefits
for any retired or former employee or is obligated to provide health or welfare
benefits to any active employee following such employee's retirement or other
termination of service.
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(xi) No payment that is owed or may become due to any
director, officer, employee, or agent of any Acquired Company will be non-
deductible to the Acquired Companies or subject to tax under IRC (S) 280G or (S)
4999; nor will any Acquired Company be required to "gross up" or otherwise
compensate any such person because of the imposition of any excise tax on a
payment to such person.
(xii) The consummation of the Contemplated Transactions will
not result in the payment, vesting, or acceleration of any benefit.
3.14 Insurance.
(a) ANI has delivered to Everest:
(i) true and complete copies of all policies of insurance
to which any Acquired Company is a party;
(ii) true and complete copies of all pending applications
for policies of insurance; and
(iii) any statement by the auditor of any Acquired Company's
financial statements with regard to the adequacy of such entity's coverage or of
the reserves for claims.
(b) The insurance policies to which any Acquired Company is
a party are, to ANI's Knowledge:
(i) in full force and effect;
(ii) in amounts which are adequate in relation to the
business and properties of the Acquired Companies; and
(iii) have all premiums to date paid in full.
(c) Schedule 3.14(c) of the Disclosure Letter sets forth,
by year, for the current policy year and each of the two (2) preceding policy
years:
(i) a summary of the loss experience under each policy;
(ii) a statement describing each claim under an insurance
policy for an amount in excess of $25,000, which sets forth:
A. the name of the claimant;
B. a description of the policy by insurer, type of
insurance, and period of coverage; and
C. the amount and a brief description of the claim;
and
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(iii) a statement describing the loss experience for all
claims that were self-insured, including the number and aggregate cost of such
claims.
(d) Except as set forth on Schedule 3.14(d) of the
Disclosure Letter neither ANI nor any Acquired Company has received:
(i) any refusal of coverage or any notice that a defense
will be afforded with reservation of rights; or
(ii) any notice of cancellation or any other indication that
any insurance policy is no longer in full force or effect or will not be renewed
or that the issuer of any policy is not willing or able to perform its
obligations thereunder.
3.15 Environmental Matters. Except as set forth in Schedule 3.15 of
the ANI Disclosure Letter and except for those matters that would not have a
Material Adverse Effect:
(a) Each Acquired Company is, and at all times has been, in
compliance with, and has not been and is not in violation of or liable under,
any Environmental Law. ANI has no Knowledge of any basis to expect, nor has ANI
or NFLI received any actual or Threatened order, notice, or other communication
from:
(i) any Governmental Body or private citizen acting in the
public interest; or
(ii) the current or prior owner or operator of any
Facilities, of any actual or potential violation or failure to comply with any
Environmental Law, or of any actual or Threatened obligation to undertake or
bear the cost of any Environmental, Health, and Safety Liabilities with respect
to any of the Facilities or any other properties or assets (whether real,
personal, or mixed) in which the Sellers or any Acquired Company has had an
interest, or with respect to any property or Facility at or to which Hazardous
Materials were generated, manufactured, refined, transferred, imported, used, or
processed by the Sellers, any Acquired Company, or any other Person for whose
conduct they are or may be held responsible, or from which Hazardous Materials
have been transported, treated, stored, handled, transferred, disposed,
recycled, or received.
(b) There are no pending or, to ANI's Knowledge, Threatened
claims, Encumbrances, or other restrictions of any nature, resulting from any
Environmental, Health, and Safety Liabilities or arising under or pursuant to
any Environmental Law, with respect to or affecting any of the Facilities or any
other properties and assets (whether real, personal, or mixed) in which any
Acquired Company has or had an interest.
(c) To ANI's Knowledge, there is no basis to expect, nor
has ANI or NFLI received, any citation, directive, inquiry, notice, Order,
summons, warning, or other communication that relates to Hazardous Activity,
Hazardous Materials, or any alleged, actual, or potential violation or failure
to comply with any Environmental Law, or of any alleged, actual, or potential
obligation to undertake or bear the cost of any
-17-
Environmental, Health, and Safety Liabilities with respect to any of the
Facilities or any other properties or assets (whether real, personal, or mixed)
in which any Acquired Company had an interest, or with respect to any property
or facility to which Hazardous Materials generated, manufactured, refined,
transferred, imported, used, or processed by any Acquired Company, or any other
Person for whose conduct they are or may be held responsible, have been
transported, treated, stored, handled, transferred, disposed, recycled, or
received.
(d) To ANI's Knowledge, no Acquired Company, or any other
Person for whose conduct they are or may be held responsible, has any
Environmental, Health, and Safety Liabilities with respect to the Facilities or
to ANI's Knowledge, with respect to any other properties and assets (whether
real, personal, or mixed) in which any Acquired Company (or any predecessor),
has or had an interest, or at any property geologically or hydrologically
adjoining the Facilities or any such other property or assets.
(e) To ANI's knowledge, no Acquired Company has permitted
or conducted, or is aware of, any Hazardous Activity conducted with respect to
the Facilities or any other properties or assets (whether real, personal, or
mixed) of any Acquired Company, except in compliance with applicable
Environmental Laws.
(f) During the period of operation of the Facilities by the
Acquired Companies, there has been no Release or, to ANI's Knowledge, Threat of
Release of any Hazardous Materials at or from the Facilities or at any other
locations where any Hazardous Materials were generated, manufactured, refined,
transferred, produced, imported, used, or processed from or by the Facilities.
(g) ANI has delivered to Everest true and complete copies
and results of any reports, studies, analyses, tests, or monitoring possessed or
initiated by ANI or any Acquired Company pertaining to Hazardous Materials or
Hazardous Activities in, on, or under the Facilities, or concerning compliance
by ANI, any Acquired Company, or any other Person for whose conduct they are or
may be held responsible, with Environmental Laws.
3.16 Employees.
(a) Schedule 3.16 of the Disclosure Letter contains a list
which is complete in all material respects of the following information for each
employee or director of NFLI, including each employee on leave of absence or
layoff status: employer; name; job title; current compensation paid or payable;
vacation accrued; and service credited for purposes of vesting and eligibility
to participate under any Acquired Company's pension, retirement, profit-sharing,
thrift-savings, deferred compensation, stock bonus, stock option, cash bonus,
employee stock ownership (including investment credit or payroll stock
ownership), severance pay, insurance, medical, welfare, or vacation plan, other
Employee Pension Benefit Plan or Employee Welfare Benefit Plan, or any other
employee benefit plan or any Director Plan.
(b) To ANI's knowledge, no employee or director of any
Acquired Company is a party to, or is otherwise bound by, any agreement or
arrangement,
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including any confidentiality, non-competition, or proprietary rights agreement,
between such employee or director and any other Person ("Proprietary Rights
Agreement") that in any way materially adversely affects or will affect (i) the
performance of his duties as an employee or director of the Acquired Companies,
or (ii) the ability of any Acquired Company to conduct its business, including
any Proprietary Rights Agreement with ANI or the Acquired Companies by any such
employee or director. To ANI's Knowledge, no director, officer, or other key
employee of any Acquired Company intends to terminate his employment with such
Acquired Company.
(c) To ANI's Knowledge, Schedule 3.16 of the Disclosure
Letter also contains a list which is complete in all material respects of the
following information for each retired employee or director of the Acquired
Companies, or their dependents, receiving benefits or scheduled to receive
benefits in the future: name, pension benefit, pension option election, retiree
medical insurance coverage, retiree life insurance coverage, and other benefits.
3.17 Labor Relations; Compliance. No Acquired Company is a party to
any collective bargaining or other labor Contract. There is not presently
pending or existing, and to ANI's Knowledge, there is not Threatened:
(a) any strike, slowdown, picketing, work stoppage, or
employee grievance process;
(b) any Proceeding against or affecting any Acquired
Company relating to the alleged violation of any Legal Requirement pertaining to
labor relations or employment matters, including any charge or complaint filed
by an employee or union with the National Labor Relations Board, the Equal
Employment Opportunity Commission, or any comparable Governmental Body,
organizational activity, or other labor or employment dispute against or
affecting any of the Acquired Companies or their premises; or
(c) any application for certification of a collective
bargaining agent.
To ANI's Knowledge, no event has occurred or circumstance exists that could
provide the basis for any work stoppage or other labor dispute. There is no
lockout of any employees by any Acquired Company, and no such action is
contemplated by any Acquired Company. Each Acquired Company has complied with
all Legal Requirements relating to employment, equal employment opportunity,
nondiscrimination, immigration, wages, hours, benefits, collective bargaining,
the payment of social security and similar taxes, occupational safety and
health, and plant closing, except for instances of non-compliance that would not
have a Material Adverse Effect. No Acquired Company is liable for the payment of
any compensation, damages, taxes, fines, penalties, or other amounts, however
designated, for failure to comply with any of the foregoing Legal Requirements.
3.18 Intellectual Property.
(a) Intellectual Property Assets. The term "Intellectual
----------------------------
Property Assets" includes:
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(i) the name Nutrition For Life International, Inc., all
fictional business names, trading names, registered and unregistered trademarks,
service marks, and applications (collectively, "Marks");
(ii) all patents, patent applications, and inventions and
discoveries that may be patentable (collectively, "Patents");
(iii) all copyrights in both published works and unpublished
works (collectively, "Copyrights");
(iv) all rights in mask works (collectively, "Rights in Mask
Works"); and
(v) all know-how, trade secrets, confidential information,
customer lists, software, technical information, data, process technology,
plans, drawings, and blue prints (collectively, "Trade Secrets"); owned, used,
or licensed by any Acquired Company as licensee or licensor.
(b) Agreements. Schedule 3.13(b) of the ANI Disclosure
----------
Letter contains a complete and accurate list, including any royalties paid or
received by the Acquired Companies, of all material Contracts relating to the
Intellectual Property Assets to which any Acquired Company is a party or by
which any Acquired Company is bound, except for any license implied by the sale
of a product and perpetual, paid-up licenses for commonly available software
programs with a value of less than $25,000 under which an Acquired Company is
the licensee. There are no outstanding and, to the Sellers' Knowledge, no
Threatened disputes or disagreements with respect to any such agreement.
(c) Know-How Necessary for the Business. Each of the
-----------------------------------
Acquired Companies owns, or is validly licensed or otherwise has the right to
use all Intellectual Property Assets which if the Acquired Companies did not own
or validly license or otherwise have the right to use would have a Material
Adverse Effect.
(d) Trademarks.
(i) Except as set forth in Schedule 3.13(e) of the ANI
Disclosure Letter, Schedule 3.13(e) of the ANI Disclosure Letter contains a
complete and accurate list and summary description of all material Marks. To
ANI's Knowledge, one or more of the Acquired Companies is the owner of all
right, title and interest in and to each of the Marks, free and clear of all
liens, security interests, charges, encumbrances, equities, and other adverse
claims, except where any such claims would not have a Material Adverse Effect.
(ii) To ANI's Knowledge, all Marks that have been registered
with the United States Patent and Trademark Office are currently in compliance
with all formal legal requirements (including the timely post-registration
filing of affidavits of use and incontestability and renewal applications), are
valid and enforceable, and are not subject to any maintenance fees or taxes or
actions falling due within ninety (90) days after the Closing Date, except where
such lack of compliance would not have a Material Adverse Effect.
-20-
(iii) No material Mark has been or is now involved in any
opposition, invalidation, or cancellation and, to ANI's Knowledge, no such
action is Threatened with the respect to any of the material Marks which would
have a Material Adverse Effect.
(iv) To ANI's Knowledge, there is no potentially interfering
trademark or trademark application of any third party which would have a
Material Adverse Effect.
(v) To ANI's Knowledge, no Mark is infringed or, to ANI's
Knowledge, has been challenged or threatened in a way which would have a
Material Adverse Effect. To ANI's Knowledge, none of the Marks used by any
Acquired Company infringes or is alleged to infringe any trade name, trademark,
or service mark of any third party.
(vi) To ANI's Knowledge, all products and materials
containing a Mark bear the proper federal registration notice where permitted by
law, except where such failure would not have a Material Adverse Effect.
(e) Copyrights.
(i) Schedule 3.18(e) of the Disclosure Letter contains a
complete and accurate list and summary description of all Copyrights. To ANI's
Knowledge, one or more of the Acquired Companies is the owner of all right,
title, and interest in and to each of the Copyrights, free and clear of all
liens, security interests, charges, encumbrances, equities, and other adverse
claims, except where the lack of ownership would not have a Material Adverse
Effect.
(ii) To ANI's Knowledge, all the Copyrights have been
registered and are currently in compliance with formal legal requirements, are
valid and enforceable, and are not subject to any maintenance fees or taxes or
actions falling due within ninety (90) days after the date of Closing, except
where failure to register or be in compliance would not have a Material Adverse
Effect.
(iii) To ANI's Knowledge, no Copyright is infringed or, to
the Sellers' Knowledge, has been challenged or threatened in any way. None of
the subject matter of any of the Copyrights infringes or is alleged to infringe
any copyright of any third party or is a derivative work based on the work of a
third party, except where such infringement would not have a Material Adverse
Effect.
(iv) To ANI's Knowledge, all works encompassed by the
Copyrights have been marked with the proper copyright notice, except where such
failure to be marked would not have a Material Adverse Effect.
3.19 Certain Payments. Since October 1, 1998, to ANI's Knowledge, no
Acquired Company or director, officer, agent, or employee of any Acquired
Company, or any other Person associated with or acting for or on behalf of any
Acquired Company, has directly or indirectly:
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(a) made any contribution, gift, bribe, rebate, payoff,
influence payment, kickback, or other payment to any Person, private or public,
regardless of form, whether in money, property, or services:
(i) to obtain favorable treatment in securing business;
(ii) to pay for favorable treatment for business secured;
(iii) to obtain special concessions or for special
concessions already obtained, for or in respect of any Acquired Company or any
Affiliate of an Acquired Company; or
(iv) in violation of any Legal Requirement;
(b) established or maintained any fund or asset that has
not been recorded in the books and records of the Acquired Companies.
3.20 Disclosure.
(a) No representation or warranty of ANI in this Agreement
and no statement in the ANI Disclosure Letter omits to state a material fact
necessary to make the statements herein or therein, in light of the
circumstances in which they were made, not misleading except for omissions that
would not have a Material Adverse Effect.
(b) No notice given pursuant to Section 5.4 will contain
any untrue statement or omit to state a material fact necessary to make the
statements therein or in this Agreement, in light of the circumstances in which
they were made, not misleading except for notices that would not have a Material
Adverse Effect.
3.21 Relationships With Related Persons. Except as set forth in
Schedule 3.21 of the ANI Disclosure Letter, neither ANI nor any Related Person
of ANI or of any Acquired Company has, or since October 1, 1999, has had, any
interest in any property (whether real, personal, or mixed and whether tangible
or intangible), used in or pertaining to the Acquired Companies' businesses.
Except as set forth in Schedule 3.21 of the ANI Disclosure Letter, neither ANI
nor any Related Person of ANI or of any Acquired Company is, or since October 1,
1999, has owned (of record or as a beneficial owner) an equity interest or any
other financial or profit interest in, a Person that has:
(a) had business dealings or a material financial interest
in any transaction with any Acquired Company other than business dealings or
transactions conducted in the Ordinary Course of Business with the Acquired
Companies at substantially prevailing market prices and on substantially
prevailing market terms; or
(b) engaged in competition with any Acquired Company with
respect to any line of the products or services of such Acquired Company (a
"Competing Business") in any market presently served by such Acquired Company
except for less than one percent (1%) of the outstanding capital stock of any
Competing Business that is publicly traded on any recognized exchange or in the
over-the-counter market.
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Except as set forth in Schedule 3.21 of the Disclosure Letter, to ANI's
Knowledge, neither ANI nor any Related Person of ANI or of any Acquired Company
is a party to any Contract with, or has any claim or right against, any Acquired
Company.
3.22 Brokers Or Finders. Except as set forth in Schedule 3.22 of the
ANI Disclosure Letter, ANI and its agents have incurred no obligation or
liability, contingent or otherwise, for brokerage or finders' fees or agents'
commissions or other similar payment in connection with this Agreement.
4. REPRESENTATIONS AND WARRANTIES OF EVEREST
Except as provided in the Everest Disclosure Letter, Everest represents and
warrants to ANI and NFLI that all of the following representations and
warranties in this Section 4 are true at the date of this Agreement and shall be
true at the time of Closing. As used in this Agreement, the "Everest Disclosure
Letter" shall mean the disclosure letter delivered by Everest to ANI and NFLI
regarding Everest pursuant to this Section 4 upon execution of this Agreement.
4.1 Due Organization. Everest is a limited liability company duly
organized, validly existing and in good standing under the laws of the state of
its formation, and has the requisite power and authority to carry on its
business as it is now being conducted. Everest is duly qualified to do business
and is in good standing in each jurisdiction in which the nature of its business
or the ownership or leasing of its properties makes such qualification
necessary, except (i) as set forth on Schedule 4.1 to Everest Disclosure Letter
or (ii) where the failure to be so authorized or qualified would not have an
Everest Material Adverse Effect. Schedule 4.1 to the Everest Disclosure Letter
sets forth the jurisdiction in which Everest is organized and contains a list of
all jurisdictions in which Everest is authorized or qualified to do business.
True, complete and correct copies of the Articles of Organization and Operating
Agreement of Everest (the "Everest Charter Documents") have been made available
to ANI.
4.2 Authorization. Everest has all requisite power and authority to
execute and deliver this Agreement, to consummate the transactions contemplated
hereby and to perform all the terms and conditions hereof to be performed by it.
Execution and delivery of this Agreement by Everest, the performance by Everest
of all the terms and conditions hereof to be performed by it and the
consummation of the transactions contemplated hereby have been duly authorized
and approved by all requisite action on the part of Everest. This Agreement
constitutes the valid and legally binding obligation of Everest, enforceable in
accordance with its terms, subject to applicable bankruptcy, insolvency,
moratorium or other similar laws relating to creditors' rights and general
principles of equity.
4.3 Funds Available. Everest has, or will have prior to the Closing
Date, sufficient cash, available lines of credit or other sources of immediately
available funds to enable it to make payment of the Purchase Price payable at
the Closing and to repay GECC the portion of the debt set forth in Section
1.2(b), or, with GECC's consent, to assume or refinance such debt.
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4.4 Investment Intent. Everest acknowledges that the Shares have
not been registered under the Securities Act of 1933, as amended, or the
securities laws of any state, and that the Shares may not be resold except
pursuant to registration under such Act or laws, or an applicable exemption
therefrom, and Everest is not acquiring the Shares with a view to the
distribution thereof.
4.5 Disclosure of Information. Everest has received and had the
opportunity to review the reports filed by ANI with the Securities and Exchange
Commission and has had the opportunity to ask questions of, and receive answers
from, representatives of ANI and NFLI to obtain additional information regarding
NFLI.
4.6 Financial Statements. Schedule 4.6 to the Everest Disclosure
Letter includes copies of the following financial statements (the "Everest
Financial Statements") of Everest: the unaudited Everest Balance Sheet as of
December 31, 1999 and unaudited Statement of Operations and Comprehensive Income
(Loss) for the fiscal year ended December 31, 1999, and an unaudited Balance
Sheet as of September 30, 2000, and unaudited Statement of Operations and
Comprehensive Income (Loss) for the nine-month period ended September 30, 2000
(September 30, 2000, being hereinafter referred to as the "Balance Sheet Date").
The Everest Financial Statements have been prepared in accordance with GAAP
applied on a consistent basis throughout the periods indicated (except as noted
thereon or on Schedule 4.6 to Everest Disclosure Letter). Except as set forth
on Schedule 4.6 to Everest Disclosure Letter, the unaudited Everest Financial
Statements present fairly in all material respects the financial position and
the results of operations of Everest for the periods indicated thereon, except
normal and recurring year-end adjustments.
4.7 Litigation. Except as set forth on Schedule 4.7 to the Everest
Disclosure Letter, there is no suit, action, proceeding, investigation, claim or
order pending or threatened against Everest, or which may have or is likely to
have an Everest Material Adverse Effect, before any court, or before any
governmental authority, department, commission, bureau, agency or other
governmental department or arbitrator (collectively, "Claims"), nor is there any
basis for any such Claims. Everest is not subject to any unsatisfied or
continuing judgment, order or decree of any court or governmental authority.
4.8 Taxes. Everest has timely filed all requisite federal, state
and other tax returns or extension requests for all fiscal periods ended on or
before the Balance Sheet Date; and except as set forth on Schedule 4.8 to the
Everest Disclosure Letter, there are no examinations in progress or claims
against Everest for federal, state and other Taxes (including penalties and
interest) for any period or periods prior to and including the Balance Sheet
Date and no notice of any claim for Taxes, whether pending or threatened, has
been received. All Taxes, including interest and penalties (whether or not shown
on any tax return) owed by Everest, any member of an affiliated or consolidated
group which includes or included Everest, or with respect to any payment made or
deemed made by Everest herein have been paid. The amounts shown as accruals for
Taxes on the Everest Financial Statements are sufficient for the payment of all
Taxes of the kinds indicated (including penalties and interest) for all fiscal
periods ended on or before that date.
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4.9 No Violation. The execution of this Agreement and the
performance of the obligations hereunder and the consummation of the
transactions contemplated hereby by Everest will not result in any violation of,
or breach of, or constitute a default under the Everest Charter Documents or any
agreement to which Everest is a party except as to such violations, breaches or
defaults as (i) do not and will not affect the validity or enforceability of
this Agreement, or (ii) do not and will not have, in the aggregate, any Everest
Material Adverse Effect. Except as set forth on Schedule 4.9, the execution and
delivery of this Agreement and the performance of the obligations hereunder and
the consummation of the transactions contemplated hereby by Everest will not
result in any violation of, or breach, or constitute a default under any
judicial, administrative or arbitral order, award, judgment, writ, injunction or
decree applicable to or binding upon Everest or any person that directly or
indirectly controls, is controlled by or is under, control by Everest or any
provision of any material indenture, mortgage, loan or credit agreement, lien,
lease, license, contract, agreement, instrument, order, arbitral award, judgment
or decree to which Everest or any person that directly or indirectly controls,
is controlled by or is under, control with Everest, is a party or by which
Everest or any person that directly or indirectly controls, is controlled by or
is under, control with Everest is a party, or by which Everest or any person
that directly or indirectly controls, is controlled by or is under, control with
Everest or any of their respective assets or properties is bound.
4.10 Absence of Certain Changes. Since September 30, 2000, except as
set forth on Schedule 4.10 to the Everest Disclosure Letter (i) Everest has
conducted its business in the ordinary course of such business; (ii) there has
not been an Everest Material Adverse Effect; and (iii) there has not been any
material change in Everest's accounting practices, except as required by GAAP or
applicable law.
4.11 Assets and Liabilities of NFLI. Everest acknowledges that,
other than the representations and warranties contained in Section 3, ANI is
making no representation or warranty with respect to the Acquired Companies or
any of their assets and liabilities.
4.12 Brokers or Finders. Everest and its officers and agents have
incurred no obligation or liability, contingent or otherwise, for brokerage or
finders' fees or agents' commissions or other similar payment in connection with
this Agreement.
4.13 Disclosure.
(a) No representation or warranty of Everest in this
Agreement and no statement in the Everest Disclosure Letter omits to state a
material fact necessary to make the statements herein or therein, in light of
the circumstances in which they were made, not misleading except for omissions
that would not have an Everest Material Adverse Effect.
(b) No notice given pursuant to Section 6.3 will contain
any untrue statement or omit to state a material fact necessary to make the
statements therein or in this Agreement, in light of the circumstances in which
they were made, not misleading except for notices that would not have a Material
Adverse Effect.
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5. COVENANTS OF ANI AND NFLI PRIOR TO CLOSING
5.1 Access and Cooperation; Due Diligence. Between the date of this
Agreement and the Closing Date, ANI and NFLI will afford to the officers,
prospective lenders, and authorized representatives of Everest access to all of
the sites, properties, contracts, books and records of NFLI and will furnish
Everest such additional financial and operating data and other information as to
the business and properties of NFLI, as Everest may from time to time reasonably
request. ANI and NFLI will cooperate with Everest, its representatives,
prospective lenders, auditors, and counsel in the preparation of any documents
or other material which may be required in connection with any documents or
materials required by this Agreement or necessary to complete the Contemplated
Transactions.
5.2 Conduct of Business Pending Closing. Between the date of this
Agreement and the Closing Date, NFLI will, except as set forth on Schedule 5.2
to the ANI Disclosure Letter or with the consent of Everest:
(a) Carry on its business in the Ordinary Course of
Business and not introduce any material new method of management, operation or
accounting without the knowledge and consent of Everest;
(b) Maintain its properties and facilities in as good
working order and condition as at present, ordinary wear and tear excepted;
(c) Perform in all material respects all of its obligations
under agreements relating to or affecting its respective assets, properties or
rights;
(d) Use Best Efforts to keep in full force and effect
present insurance policies or other comparable insurance coverage;
(e) Use Best Efforts to maintain and preserve its business
organization intact, retain its present key employees and maintain its
relationships with suppliers, customers and others having business relations
with it;
(f) Maintain compliance with all material permits, laws,
rules and regulations, consent orders, and all other orders of applicable
courts, regulatory agencies and similar governmental authorities; and
(g) Maintain present debt and lease instruments and not
enter into new or amended debt or lease instruments, without the knowledge and
consent of Everest (which consent shall not be unreasonably withheld), provided
that debt and/or lease instruments may be replaced without the consent of
Everest if such replacement instruments are on terms at least as favorable to
NFLI as the instruments being replaced. The Parties acknowledge that NFLI is
entitled in the Ordinary Course of Business (without obtaining Everest's
consent) to increase the amount of the revolving line of credit obligation owed
to GECC to the maximum computational amount available prior to Closing in order
to pay accounts payable or other liabilities.
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5.3 Negative Covenant. Except as otherwise expressly permitted by
this Agreement, between the date of this Agreement and the Closing Date, ANI
will not, and will cause each Acquired Company not to, without the prior consent
of Everest, take any affirmative action, or fail to take any reasonable action
within its control, as a result of which any of the changes or events listed in
Section 3.8 is likely to occur.
5.4 Notification of Certain Matters. Between the date of this
Agreement and the Closing Date, ANI and NFLI shall give prompt notice to Everest
of (i) the occurrence or non-occurrence of any event the occurrence or non-
occurrence of which would be likely to cause any representation or warranty of
ANI or NFLI contained herein or in the ANI Disclosure Letter to be untrue or
inaccurate in any material respect at or prior to the Closing and (ii) any
material failure of ANI or NFLI to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by such Person
hereunder. Should any event require any change in the ANI Disclosure Letter if
the ANI Disclosure Letter were dated the date of the occurrence or discovery of
any such event, ANI will promptly deliver to Everest a supplement to the ANI
Disclosure Letter specifying such change. During the same period, ANI will
promptly notify Everest of the occurrence of any Breach of any covenant of ANI
in this Section 5 or of the occurrence of any event that may make the
satisfaction of the conditions in Section 7 impossible or unlikely.
5.5 No Solicitation. Until such time, if any, as this Agreement is
terminated pursuant to Section 10, ANI will not, and will cause each Acquired
Company and each of their representatives not to, directly or indirectly
solicit, initiate, or encourage any inquiries or proposals from any Person
(other than Everest) relating to any transaction involving the sale of the
business or assets (other than in the Ordinary Course of Business) of any
Acquired Company, or any of the capital stock of any Acquired Company, or any
merger, consolidation, business combination, or similar transaction involving
any Acquired Company.
5.6 Final Financial Statements. ANI shall provide on or before the
twentieth (20/th/) business day of each succeeding calendar month to Everest for
each calendar month prior to the Closing Date, the unaudited balance sheets of
the Acquired Companies as of the end of all months following the Balance Sheet
Date, and the unaudited statement of Operations for all months ended after the
Balance Sheet Date. Such financial statements shall have been prepared in
accordance with GAAP (except as they relate to income tax accruals) applied on a
consistent basis throughout the periods indicated (except as noted therein).
Except as noted in such financial statements, all of such financial statements
will present fairly the results of operations for the periods indicated therein.
5.7 Consent of GECC. Promptly after the date this Agreement is
executed by the Parties, ANI and Everest shall use Best Efforts to obtain the
consent of General Electric Capital Corporation ("GECC") to the sale of the
Shares and release of cross-default provisons in accordance with the terms of
this Agreement.
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6. COVENANTS OF EVEREST PRIOR TO CLOSING
6.1 Access and Cooperation; Due Diligence. Everest will cooperate
with ANI and NFLI, their representatives, auditors and counsel in the
preparation of any documents or other material which may be required in
connection with any documents or materials required by this Agreement or
necessary to complete the Contemplated Transactions.
6.2 Conduct Of Business Pending Closing. Between the date of this
Agreement and the Closing Date, Everest will, except as set forth on Schedule
6.2 to the Everest Disclosure Letter or with the consent of ANI:
(a) Carry on its business in the Ordinary Course of
Business and not introduce any material new method of management, operation or
accounting;
(b) Perform in all material respects all of its obligations
under agreements relating to or affecting its respective assets, properties or
rights; and
(c) Maintain compliance with all material permits, laws,
rules and regulations, consent orders, and all other orders of applicable
courts, regulatory agencies and similar governmental authorities.
6.3 Notification of Certain Matters. Between the date of this
Agreement and the Closing Date, Everest shall give prompt notice to ANI and NFLI
of (i) the occurrence or non-occurrence of any event the occurrence or non-
occurrence of which would be likely to cause any representation or warranty of
Everest contained herein or in the Everest Disclosure Letter to be untrue or
inaccurate in any material respect at or prior to the Closing and (ii) any
material failure of Everest to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by such Person hereunder. Should any
event require any change in the Everest Disclosure Letter if the Everest
Disclosure Letter were dated the date of the occurrence or discovery of any such
event, Everest will promptly deliver to ANI a supplement to the Everest
Disclosure Letter specifying such change. During the same period, Everest will
promptly notify ANI of the occurrence of any Breach of any covenant of Everest
in this Section 6 or of the occurrence of any event that may make the
satisfaction of the conditions in Section 8 impossible or unlikely.
6.4 Final Financial Statements. Everest shall provide on or before
the last day of each succeeding calendar month to ANI and NFLI for each calendar
month prior to the Closing Date, the unaudited consolidated balance sheets of
Everest as of the end of all months following the Balance Sheet Date, and the
unaudited consolidated statements operations for all months ended after the
Balance Sheet Date. Such financial statements shall have been prepared in
accordance with GAAP applied on a consistent basis throughout the periods
indicated (except as noted therein). Except as noted in such financial
statements, all of such financial statements will present fairly the results of
operations for the periods indicated therein.
6.5 Consent of GECC. Promptly after the date this Agreement is
executed by the Parties, ANI and Everest shall use Best Efforts to obtain the
consent GECC
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to the sale of the Shares and release of cross-default provisons in accordance
with the terms of this Agreement.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF EVEREST
The obligations of Everest to purchase the Shares and with respect to other
actions to be taken on the Closing Date are subject to the satisfaction, or
waiver by Everest, on or prior to the Closing Date of all of the following
conditions:
7.1 Representations and Warranties; Performance of Obligations. All
representations and warranties of ANI contained in this Agreement shall be true
and correct in all material respects as of the date of this Agreement and shall
be true and correct in all material respects as of the Closing Date as if made
on the Closing Date, in each case, without giving effect to any supplement to
the ANI Disclosure Letter; all the terms, covenants and conditions of this
Agreement to be complied with and performed by ANI on or before the Closing Date
shall have been duly complied with and performed in all material respects; and
certificates to the foregoing effect dated the Closing Date, and signed by ANI
shall have been delivered to Everest.
7.2 Satisfaction. All actions, proceedings, instruments and
documents required to carry out this Agreement or incidental hereto and all
other related legal matters shall be reasonably satisfactory to Everest and its
counsel.
7.3 No Proceedings. Since the date of this Agreement, there must not
have been commenced or Threatened against Everest, or against any Person
affiliated with Everest, any Proceeding (a) involving any challenge to, or
seeking damages or other relief in connection with, any of the Contemplated
Transactions, or (b) that may have the effect of preventing, delaying, making
illegal, or otherwise interfering with any of the Contemplated Transactions.
7.4 Additional Documents. There must not have been made or
Threatened by any Person any claim asserting that such person:
(a) Is the holder or the beneficial owner of, or has the right
to acquire or to obtain beneficial ownership of, any stock of, or any other
voting, equity, or ownership interest in, any of the Acquired Companies; or
(b) Is entitled to all or any portion of the Purchase Price
payable for the Shares.
7.5 No Claim Regarding Stock Ownership or Sale Proceeds. There must
not have been made or Threatened by any Person any claim asserting that such
Person:
(a) is the holder or the beneficial owner of, or has the right
to acquire or to obtain beneficial ownership of, any stock of, or any other
voting, equity, or ownership interest in, any of the Acquired Companies; or
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(b) is entitled to all or any portion of the Purchase Price
payable for the Shares.
7.6 No Prohibition. Neither the consummation nor the performance of
any of the Contemplated Transactions will, directly or indirectly (with or
without notice or lapse of time), materially contravene, or conflict with, or
result in a material violation of, or cause Everest or any Person affiliated
with Everest to suffer any material adverse consequence under:
(a) any applicable Legal Requirement or Order; or
(b) any Legal Requiremetn or Order that has been published,
introduced, or otherwise proposed by or before any Governmental Body.
7.7 Consents and Approvals. This Agreement shall have been duly
adopted by the shareholders of ANI in accordance with the Texas Business
Corporation Act and the Articles of Incorporation of ANI and NFLI and all
necessary consents and approvals shall have been obtained.
7.8 Good Standing Certificates. ANI shall have delivered to Everest
a certificate, dated as of a date no later than ten (10) days prior to the
Closing Date, duly issued by the Secretary of State of NFLI's state of
incorporation to the effect that NFLI is in good standing.
7.9 No Material Adverse Change. No event or circumstance shall have
occurred with respect to NFLI which would constitute a Material Adverse Effect.
7.10 Officer's Certificate. Everest shall have received a certificate
or certificates, dated the Closing Date and signed by the President of NFLI,
certifying the truth and correctness of attached copies of NFLI's Articles of
Incorporation (including amendments thereto) and Bylaws (including amendments
thereto).
7.11 Incumbency Certificate and Other Documents. Everest shall have
received an incumbency certificate or certificates, dated the Closing Date and
signed by the Secretary of each of ANI and NFLI certifying the names, titles and
signatures of the officers authorized to execute the documents referred to in
this Section 7 and such additional supporting documentation and other
information with respect to the transactions contemplated hereunder as Everest
or its counsel may reasonably request.
7.12 Opinion of ANI's Counsel. An opinion of ANI's counsel dated as
of the Closing Date in the form reasonably acceptable to Everest and its Counsel
shall have been delivered to Everest.
7.13 Employment Agreements. David P. Bertrand and Jana Mitcham shall
have entered into employment agreements with NFLI substantially in accordance
with the term sheet in Schedule 7.13.
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7.14 Supply Agreement. Bactolac Pharmaceutical Inc. and NFLI shall
have entered into a Supply Agreement substantially in accordance with the term
sheet in Schedule 7.14 (the "Supply Agreement") and such Supply Agreement shall
not have been terminated due to any action taken or caused by Everest.
7.15 Resignations. Everest shall have received the resignations of
all officers and directors of NFLI other than David P. Bertrand and Jana
Mitcham.
7.16 Consent of GECC. ANI shall have received the written consent of
its senior lender, General Electric Capital Corporation ("GECC") to the sale of
the Shares in accordance with the terms of this Agreement and GECC shall have
executed and delivered to Everest releases of all Encumbrances against the
property of the Acquired Companies.
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF NFLI AND ANI
The obligations of ANI and NFLI to sell the Shares and with respect to
actions to be taken on the Closing Date are subject to the satisfaction, or
waiver by Everest, on or prior to the Closing Date of all of the following
conditions.
8.1 Representations and Warranties; Performance of Obligations. All
the representations and warranties of Everest contained in this Agreement shall
be true and correct in all material respects as of the date of this Agreement
and shall be true and correct in all material respects as of the Closing Date as
if made on the Closing Date, in each case, without giving effect to any
supplement to the Everest Disclosure Letter as of the Closing Date with the same
effect as though such representations and warranties had been made on and as of
that time; all the terms, covenants and conditions of this Agreement to be
complied with and performed by Everest on or before the Closing Date shall have
been duly complied with and performed in all material respects; and certificates
to the foregoing effect dated the Closing Date, and signed by Everest shall have
been delivered to ANI.
8.2 Satisfaction. All actions, proceedings, instruments and
documents required to carry out this Agreement or incidental hereto and all
other related legal matters shall be reasonably satisfactory to ANI and its
counsel.
8.3 No Proceedings. Since the date of this Agreement, there must not
have been commenced or Threatened against Everest, or against any Person
affiliated with Everest, any Proceeding (a) involving any challenge to, or
seeking damages or other relief in connection with, any of the Contemplated
Transactions, or (b) that may have the effect of preventing, delaying, making
illegal, or otherwise interfering with any of the Contemplated Transactions.
8.4 No Claim Regarding Stock Ownership or Sale Proceeds. There must
not have been made or Threatened by any Person any claim asserting that such
Person:
(a) is the holder or the beneficial owner of, or has the right
to acquire or to obtain beneficial ownership of, any stock of, or any other
voting, equity, or ownership interest in, any of the Acquired Companies; or
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(b) is entitled to all or any portion of the Purchase Price
payable for the Shares.
8.5 No Prohibition. Neither the consummation nor the performance of
any of the Contemplated Transactions will, directly or indirectly (with or
without notice or lapse of time), materially contravene, or conflict with, or
result in a material violation of, or cause Everest or any Person affiliated
with Everest to suffer any material adverse consequence under:
(a) any applicable Legal Requirement or Order; or
(b) any Legal Requirement or Order that has been published,
introduced, or otherwise proposed by or before any Governmental Body.
8.6 Consents and Approvals. This Agreement shall have been duly
adopted by the shareholders of ANI in accordance with the Texas Business
Corporation Act and the Articles of Incorporation of ANI and NFLI and all
necessary consents and approvals shall have been obtained.
8.7 Good Standing Certificates. Everest shall have delivered to ANI a
certificate, dated as of the date no later than ten (10) days prior to the
Closing Date, duly issued by the Secretary of State of Kansas that Everest is in
good standing.
8.8 No Material Adverse Change. No event or circumstance shall have
occurred with respect to Everest which would constitute a Material Adverse
Effect.
8.9 Officer's Certificates. ANI shall have received a certificate,
dated the Closing Date and signed by the President or Managing Member of
Everest, certifying the truth and correctness of attached copies of Everest's
Articles of Organization (including amendments thereto) and Operating Agreement
(including amendments thereto).
8.10 Incumbency Certificate and Other Documents. ANI shall have
received an incumbency certificate, dated the Closing Date, and signed by the
Secretary of Everest, certifying the names, titles and signatures of the
officers authorized to execute the documents referred to in this Section 8 and
such additional supporting documentation and other information with respect to
the transactions contemplated hereunder as ANI or its counsel may reasonably
request.
8.11 Opinion of Everest's Counsel. An opinion of Everest's counsel
dated as of the Closing Date in the form reasonably acceptable to ANI and its
counsel shall have been delivered to ANI.
8.12 Supply Agreement. The Supply Agreement shall have been entered
into and shall not have been terminated due to any action taken or caused by
Everest.
8.13 Transfer of Bactolac Stock. The transfer of all of the stock of
Bactolac Pharmaceutical Inc. from NFLI to ANI shall have occurred prior to or at
the Closing Date.
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8.14 Opinion of Financial Advisor. The Board of Directors of ANI
shall have received the opinion of its financial advisor to the effect that, as
of the date hereof, the sale of the Shares is fair from a financial point of
view to ANI.
8.15 Consent of GECC. ANI shall have received the consent GECC to the
sale of the Shares in accordance with the terms of this Agreement and Everest
shall have assumed the portion of such indebtedness related to the Acquired
Companies as described in Section 1.2(b) of this Agreement or repaid such
portion of the indebtedness as described in Section 1.2(b) of this Agreement
prior to or at the Closing and GECC shall have released ANI and its affiliated
companies from any liability for the indebtedness related to the Acquired
Companies.
8.16 Note to Bactolac. Bactolac Pharmaceutical Inc. shall have
received a promissory note in the form of Exhibit 8.16 made by NFLI in the
principal amount of $650,000, payable one year and one day following the Closing
Date with interest at the rate of prime plus one-half of one percent.
9. ADDITIONAL AGREEMENTS
9.1 Best Efforts. Subject to the terms and conditions of this
Agreement, each Party will use its Best Efforts to take, or cause to be taken,
all actions and to do, or cause to be done, all things necessary, proper or
advisable under applicable laws and regulations to consummate the transactions
contemplated by this Agreement as soon as practicable after the date hereof. ANI
shall promptly prepare and file with the Securities and Exchange Commission a
proxy statement (the "Proxy Statement")and ANI will take, in accordance with
applicable law and its Articles of Incorporation and Bylaws, all action
necessary to convene a meeting of its shareholders to consider and vote upon the
adoption of this Agreement. Everest shall cooperate with ANI in the preparation
of the Proxy Statement, including providing such information about Everest and
its plans with respect to NFLI after the sale of the Shares as may be reasonably
requested by ANI.
9.2 Public Announcements. The initial press release of ANI with
respect to this Agreement shall be reviewed by Everest. Thereafter, ANI shall
consult with Everest prior to issuing any press releases or otherwise making
public announcements with respect to this Agreement and the transactions
contemplated by this Agreement, except pursuant to Legal Requirement. Everest
will make no public announcements without review by ANI, except pursuant to
Legal Requirement.
9.3 Confidentiality.
(a) Between the date of this Agreement and the Closing Date,
Everest, ANI, and NFLI will maintain in confidence, and will cause their
respective directors, officers, employees, agents, and advisors and those of the
Acquired Companies to maintain in confidence, and not use to the detriment of
another party or an acquired Company any written, oral, or other information
obtained in confidence from another party or an Acquired Company in connection
with this Agreement or the Contemplated Transaction, unless:
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(i) such information is already known to such party or to
others not bound by a duty of confidentiality or such information becomes
publicly available through no fault of such party;
(ii) the use of such information is necessary or appropriate in
making any filing or obtaining any consent or approval required for the
consummation of the Contemplated Transactions; or
(iii) the furnishing or use of such information is required by
or necessary or appropriate in connection with legal Proceedings.
(b) If the Contemplated Transactions are not consummated, each
Party will return or destroy as much of such written information as the other
Party may reasonably request. Whether or not the Closing takes place, ANI
waives, and will upon Everest's request cause the Acquired Companies to waive,
any cause of action, right, or claim arising out of the access of Everest or its
representatives to any trade secrets or other confidential information of the
Acquired Companies except for the intentional competitive misuse by Everest of
such trade secrets or confidential information.
9.4 Section 338 Election.
[RESERVED]
9.5 Further Assurances. (a) Subject to the terms and conditions of
this Agreement, each of the Parties agrees to use all reasonable efforts to
take, or cause to be taken, all action, and to do, or cause to be done, all
things necessary, common, proper or advisable under applicable Legal
Requirements, to consummate and make effective the transactions contemplated by
this Agreement. If at any time after the Closing any further action is necessary
or desirable to carry out the purposes of this Agreement, ANI, NFLI and Everest,
as the case may be, shall take or cause to be taken all such necessary or
convenient action and execute, and deliver and file, or cause to be executed,
delivered and filed, all necessary or convenient documentation.
(b) If, pursuant to any Proceeding, Legal Requirement or any claim
asserted by Everest, ANI requires access to the books and records of the
Acquired Companies, Everest shall permit ANI, during regular business hours upon
three (3) business days' notice (or at such other times as the Parties may
agree) to inspect such books and records solely to satisfy the requirements
giving rise to the need for such review.
9.6 Meetings.
(a) Between the date of this Agreement and the Closing Date, NFLI will use
its reasonable Best Efforts to include Everest in meetings related to
significant operating and policy decisions, including the management meetings
typically held each Tuesday at NFLI's executive offices beginning at 9:00 a.m.
(Houston time). In addition, Everest will be entitled to attend (but will not
have voting rights) all meetings of the NFLI Board of Directors between the date
of this Agreement and the Closing Date, it being understood that such
representatives will not be permitted to attend those portions of the meeting
relating to this
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Agreement and the Contemplated Transactions, the business of Bactolac
Pharmaceutical Inc. or other matters in which Everest may have a conflict of
interest as determined by NFLI's Board.
(b) Prior to the Closing, Everest shall bear all costs of "road show"
meetings held with NFLI distributors to introduce to them the Everest
products and executive management team, including out-of-pocket
expenses of NFLI personnel.
9.7 Employee Matters. Effective as of the Closing Date, NFLI shall
cease to be a participating employer in all Company Plans. NFLI employees and
former employees, including COBRA beneficiaries, shall be eligible as of the
Closing Date to begin participation in the employee benefit plans sponsored by
Everest in accordance with the terms and conditions of those plans; provided,
however,. ANI and Everest agree to cooperate in resolving all employee benefit
plan coverage questions; provided that neither Everest nor NFLI shall have any
liability in connection with the Company Plans, whether arising before or after
the Closing Date.
10. TERMINATION OF AGREEMENT
10.1 Termination. This Agreement may be terminated at any time prior
to the Closing Date solely:
(a) by mutual consent of all of the Parties hereto;
(b) by Everest on the one hand, or by ANI on the other hand, if
(i) a material Breach of the representations or a material Breach or default
shall be made by the other Party in the observance or in the due and timely
performance of any of the covenants or agreements contained herein, and the
curing of such default shall not have been made on or before the Closing Date,
(ii) by Everest, if the conditions set forth in Section 7 hereof have not been
satisfied, or waived by Everest, as of the Closing Date, or (iii) by ANI, if the
conditions set forth in Section 8 hereof have not been satisfied, or waived by
ANI, as of the Closing Date.
10.2 Liabilities in Event of Termination.
(a) Except as hereinafter provided, if this Agreement is
terminated for any reason, Everest shall pay a termination fee to ANI in the
amount of all Escrowed Funds together with all interest thereon held by the
Escrow Agent (the "Termination Fee"). Upon the occurrence of any such
termination, ANI and Everest shall, within three (3) business days instruct the
Escrow Agent in writing to pay to ANI the Termination Fee; provided that, if
this Agreement is terminated for any of the following reasons:
(i) A material Breach is made by ANI of the representations and
warranties contained in this Agreement or a material Breach or material default
shall be made by ANI in the observance or in the due and timely performance of
any of its material covenants or material agreements contained in this Agreement
or ANI shall fail to satisfy
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any material condition of Closing. For purposes of this subsection 10.2(a)(i)
only, "material" shall mean the occurrence or existence of an event or condition
with a magnitude, effect or consequence of at least $500,000;
(ii) The conditions of Closing set forth in Sections 7.13, 7.14
and 7.16 shall not have been satisfied on or prior to the Closing Date, unless
such condition was not satisfied due to unreasonable acts or inaction by
Everest; or
(iii) The Closing shall not have occurred on or before June 1,
2001 through no fault of Everest.
then, in any such event Everest shall not be required to pay a Termination Fee
to ANI. Upon the termination of this Agreement for any of the foregoing reasons
Everest shall be entitled to a refund in full of the Escrowed Funds together
with all accrued interest thereon and upon the occurrence of any such
termination of this Agreement, Everest and ANI shall, within three (3) business
days, instruct the Escrow Agent in writing to release to Everest all of the
Escrowed Funds together with all accrued interest thereon. Upon the termination
of this Agreement, if the Parties are unable to agree as to the instructions to
be given to the Escrow Agent concerning the payment of the Escrowed Funds, such
issue shall be resolved in the manner provided in Section 11.6 of this
Agreement. The Parties agree that the Escrow Agent is authorized to rely and act
upon the arbitration award issued in accordance with the provisions of Section
11.6 of this Agreement.
(b) In the event that (i) this} Agreement is terminated byANI}
for any reason other than those for which it is permitted to do so as provided
in Section 10.1(b) or (ii) this Agreement is terminated by Everest pursuant} to
a material Breach by ANI of its representations orANI makes a material Breach or
default in the observance or in the due and timely performance of any material
covenants or material agreements contained herein, which default was not cured
on or before the Closing Date by ANI, or (iii) all of the conditions set forth
in Section 7 were not satisfied by ANI (and such failure was not due to
unreasonable acts or inaction by Everest) or waived by Everest as of the Closing
Date, then, in any such event, ANI shall be liable to Everest for all losses,
claims damages liabilities costs, expenses (including but not limited to
attorneys fees and other expenses of investigation and deferral of any claims or
actions (collectively "Damages") caused by ANI as a result of the acts or
omissions giving rise to such termination; provided, however, such Damages shall
be limited to the aggregate amount of $250,000.
(c) In the event of termination of this Agreement and the
abandonment of the Sale pursuant to this Section 10, all obligations of the
Parties shall terminate, except the obligations of the Parties set forth in this
Section 10.2 and except for the Confidentiality Agreements previously entered
into among the Parties.
11. INDEMNIFICATION
11.1 Indemnification by ANI. If the Closing occurs, ANI agrees to
indemnify and hold harmless Everest and its officers, agents and representatives
against any and all losses, claims, damages, liabilities, costs and expenses
(including but not limited to,
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attorneys' fees and other expenses of investigation and defense of any claims or
actions), caused by the Breach of any covenant, agreement, warranty or
representation of ANI contained in this Agreement. If the Closing occurs, ANI
will have no liability (for indemnification or otherwise) with respect to any
covenant, agreement, warranty or representation to be performed and complied
with prior to the Closing Date, unless on or before the date twelve (12) months
after the Closing Date, Everest notifies ANI of a claim specifying the factual
basis of that claim in reasonable detail to the extent then known by Everest;
ANI will have no liability (for indemnification or otherwise) under this Section
11.1 until Everest has suffered Damages by reason of all such Breaches in excess
of a $150,000 aggregate deductible, and then only for the amount by which such
Damages exceed $150,000.
11.2 Indemnification by Everest. If the Closing occurs, Everest
agrees to indemnify and hold harmless ANI, and its officers, directors, agents
and representatives against any and all losses, claims, damages, liabilities,
costs and expenses (including but not limited to, attorneys' fees and other
expenses of investigation and defense of any claims or actions) caused by the
Breach of any covenant, agreement, warranty or representation of Everest
contained in this Agreement. If the Closing occurs, Everest will have no
liability (for indemnification or otherwise) with respect to any covenant,
agreement, warranty or representation to be performed and complied with prior to
the Closing Date, unless on or before the date twelve (12) months after the
Closing Date, ANI notifies Everest of a claim specifying the factual basis of
that claim in reasonable detail to the extent then known by ANI, Everest will
have no liability (for indemnification or otherwise) under this Section 11.2
until ANI has suffered Damages by reason of all such Breaches in excess of
$150,000 aggregate deductible, and then only for the amount by which such
Damages exceed $150,000.
11.3 Indemnification Notice. Should any Party (the "Indemnified
Party") suffer any loss, damage or expense for which another Party (the
"Indemnifying Party") is obligated to indemnify and hold such Indemnified Party
harmless pursuant to this Section 11 of this Agreement, the following shall
apply: If an Indemnified Party intends to exercise its right to indemnification
provided in this Section 11, such Indemnified Party shall notify each
Indemnifying Party in writing of such Indemnified Party's intention to do so and
the facts or circumstances giving rise to the claim (the "Indemnification
Claim"). An Indemnification Claim, at the option of the Indemnified Party, may
be asserted as soon as any situation, event or occurrence has been noticed by
the Indemnified Party regardless of whether actual harm has been suffered or
out-of-pocket expenses incurred. During the period of fifteen (15) days after
notice by the Indemnified Party, each Indemnifying Party shall be entitled to
cure the defect or situation giving rise to the Indemnification Claim to the
satisfaction of the Indemnified Party. If the Indemnifying Parties are unwilling
or unable to cure the defect giving rise to the Indemnification Claim during the
fifteen (15) day period, the Indemnified Party shall thereafter be entitled to
indemnification as provided in this Section 11.
11.4 Matters Involving Third Parties. If any third Party shall notify
any Indemnified Party with respect to any matter (a "Third-Party Claim") which
may give rise to a claim for indemnification against any Indemnifying Party
under this Section 11, then the
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Indemnified Party shall promptly notify each Indemnifying Party thereof in
writing. Provided, however, that no delay on the part of the Indemnified Party
in notifying any Indemnifying Party shall relieve the Indemnifying Party from
any obligation hereunder unless (and then solely to the extent) the Indemnifying
Party thereby is prejudiced. Any Indemnifying Party shall have the right to
defend the Indemnified Party against the Third-Party Claim with counsel of its
choice reasonably satisfactory to the Indemnified Party so long as (i) the
Indemnifying Party notifies the Indemnified Party in writing within fifteen (15)
days after the Indemnified Party has given notice of the Third-Party Claim that
the Indemnifying Party will indemnify the Indemnified Party from any adverse
consequences the Indemnified Party may suffer resulting from or caused by the
Third Party Claim, (ii) the Indemnifying Party provides the Indemnified Party
with evidence reasonably acceptable to the Indemnified Party that the
Indemnifying Party will have the financial resources to defend against the
Third-Party Claim and fulfill its indemnification obligations hereunder, and
(iii) the Indemnifying Party conducts the defense of the Third-Party Claim
actively and diligently. The Indemnifying Party shall not consent to the entry
of any judgment or enter into any settlement with respect to the Third-Party
Claim without the prior written consent of the Indemnified Party, which consent
shall not be withheld unreasonably.
11.5 Escrow; Right of Set-Off.
Upon the issuance of an arbitration award in favor of Everest as provided
in Section 11.6, Everest may set off any amount to which it may be entitled
under this Section 11 against amounts otherwise payable under the Promissory
Note or may give notice of a Claim in such amount under the Indemnity Escrow
Agreement (if applicable). The exercise of such right of set-off by Everest in
good faith, whether or not ultimately determined to be justified, will not
constitute an event of default under the Promissory Note or any instrument
securing the Promissory Note. Neither the exercise of nor the failure to
exercise such right of set-off or to give a notice of a claim under the
Indemnity Escrow Agreement (if applicable) will constitute an election of
remedies or limit Everest in any manner in the enforcement of any other remedies
that may be available to it.
11.6 Arbitration.
Any controversy or claim arising out of or relating to this Agreement, the
breach, termination or validity hereof, or the Contemplated Transactions herein,
shall be settled by arbitration in accordance with the commercial arbitration
rules ("CAR") of the AAA then in effect, by one neutral arbitrator selected by
mutual agreement of the Parties from the AAA panel of arbitrators in Houston,
Texas. In the event the Parties cannot agree to an arbitrator, the arbitration
shall proceed before a neutral arbitrator selected by the AAA from among neutral
panel members in Houston, Texas with experience in arbitrating disputes arising
out of transactions like the one identified in this Agreement. Any Party may
initiate arbitration twenty (20) days following the delivery of a written notice
of dispute if the dispute has not then been settled by negotiation, or sooner if
the other Party fails to participate in negotiation in accordance with this
Paragraph 11.6. The arbitrator shall be appointed as provided by the CAR,
Selection of Arbitrators. The arbitration procedure shall be governed by the
Texas Arbitration Act (the "Act"), and the award rendered by the arbitrator
shall be final and binding on the Parties and may be entered in any court having
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jurisdiction thereof, subject to the court's authority to modify or review the
award as provided in the Act.
12. GENERAL PROVISIONS
12.1 Entire Agreement. This Agreement and any attachments hereto, the
Everest Disclosure Letter and the Schedules thereto (including the schedules,
exhibits and annexes attached hereto and thereto), the ANI Disclosure Letter and
the Schedules thereto (including the schedules, exhibits and annexes attached
hereto and thereto) and the documents delivered pursuant hereto constitute the
entire agreement and understanding among the Parties and supersede any prior
agreement and understanding relating to the subject matter of this Agreement.
12.2 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the Parties
hereto, in whole or in part (whether by operation of law or otherwise), without
the prior written consent of the other Parties, and any attempt to make any such
assignment without such consent shall be null and void. Subject to the preceding
sentence, this Agreement will be binding upon, inure to the benefit of and be
enforceable by the Parties and their respective successors and assigns.
12.3 Amendment. This Agreement may be amended by the Parties at any
time before or after approval of matters presented in connection with the
Contemplated Transactions by the shareholders of ANI; provided, however, after
such shareholder approval, no amendment shall be made which by law requires the
further approval of shareholders of ANI without obtaining such further approval.
This Agreement may not be amended except by an instrument in writing signed on
behalf by each of the Parties.
12.4 Counterparts. This Agreement may be executed simultaneously in
counterparts, each of which shall be deemed an original and all of which
together shall constitute but one and the same instrument.
12.5 Expenses. Except as otherwise specifically provided herein, each
Party to this Agreement shall bear its own direct and indirect expenses incurred
in connection with the negotiation and preparation of this Agreement and the
consummation and performance of the Contemplated Transactions , including,
without limitation, all legal and accounting fees and fees of any brokers,
finders or similar agents, except that any expense of ANI will be borne by NFLI
and paid at or before the Closing.
12.6 Notices. All notices and other communications hereunder shall be
in writing and shall be deemed duly given (i) on the date of delivery if
delivered personally, or by telecopy or facsimile upon confirmation of receipt,
(ii) on the first business day following the date of dispatch if delivered by a
recognized next-day courier service, or (iii) on the fifth (5/th/) business day
following the date of mailing if delivered by registered or certified mail,
return receipt requested, postage prepaid. All notices hereunder shall be
delivered as set forth below, or pursuant to such other instructions as may be
designated in writing by the Party to receive such notice:
(a) If to Everest:
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Everest International, L.L.C.
8645 College Boulevard
Overland, KS 66210
Attention: Jerry Kramer
Facsimile No.: 913/906-5050
with a copy to:
Jackson Walker LLP
1100 Louisiana, Suite 4200
Houston, TX 77002
Attention: Richard L. Burleson
Facsimile No.: 713/752-4221
(b) If to ANI:
Advanced Nutraceuticals, Inc.
7315 East Peakview Avenue
Englewood, CO 80111
Facsimile No.: 303/796-9762
Attention: Gregory Pusey, President
and
Advanced Nutraceuticals, Inc.
1905 West Valley Vista Drive
Castle Rock CO 80104
Facsimile No. 303/660-9583
Attention: Jeffrey G. McGonegal, Senior Vice President-Finance
with a copy to:
Patton Boggs L.L.P.
1660 Lincoln Street, Suite 1900
Denver, CO 80264
Facsimile: 303/894-9239
Attention: Robert M. Bearman, Esq.
(c) If to NFLI:
Nutrition For Life International, Inc.
9101 Jameel
Houston, TX 77040
Attention: David P. Bertrand
Facsimile No.: 713/895-8927
with a copy to (if before Closing):
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Patton Boggs L.L.P.
1660 Lincoln Street, Suite 1900
Denver, CO 80264
Facsimile: 303/894-9239
Attention: Robert M. Bearman, Esq.
or
With a copy to (if after the Closing):
Jackson Walker LLP
1100 Louisiana, Suite 4200
Houston, TX 77002
Attention: Richard L. Burleson
Facsimile No.: 713/752-4221
12.7 Governing Law. This Agreement shall be construed in accordance
with the laws of the State of Texas.
12.8 Exercise of Rights and Remedies. Except as otherwise provided
herein, no delay of or omission in the exercise of any right, power or remedy
accruing to any Party as a result of any breach or default by any other Party
under this Agreement shall impair any such right, power or remedy, nor shall it
be construed as a waiver of or acquiescence in any such breach or default, or of
any similar breach or default occurring later; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
occurring before or after that waiver.
12.9 Time. Time is of the essence with respect to this Agreement.
12.10 Reformation and Severability. In case any provision of this
Agreement shall be invalid, illegal or unenforceable, it shall, to the extent
possible, be modified in such manner as to be valid, legal and enforceable but
so as to most nearly retain the intent of the Parties, and if such modification
is not possible, such provision shall be severed from this Agreement, and in
either case the validity, legality and enforceability of the remaining
provisions of this Agreement shall not in any way be affected or impaired
thereby.
12.11 Remedies Cumulative. No right, remedy or election given by any
term of this Agreement shall be deemed exclusive, but each shall be cumulative
with all other rights, remedies and elections available at law or in equity.
12.12 Captions; Construction. The headings of this Agreement are
inserted for convenience only, and shall not constitute a part of this Agreement
or be used to construe or interpret any provision hereof. This Agreement has
been fully reviewed and negotiated by the Parties and no uncertainty or
ambiguity in any term or provision of this Agreement shall be construed strictly
against any Party under any rule of construction or otherwise.
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12.13 Definitions. For purposes of this Agreement, the following terms
have the meanings specified or referred to in this Section 12.13:
"Acquired Companies --Nutrition For Life International, Inc. and its
Subsidiaries, collectively, with the exception of Bactolac Pharmaceutical Inc.
and its division, ASHCO.
"Acquired Companies Financial Statements"--as defined in Section 3.4.
Adjusted Working Capital" -- as defined in Exhibit 12.13.
"ANI Disclosure Letter"--the disclosure letter delivered by ANI to Everest
concurrently with the execution and delivery of this Agreement.
"ANI's Knowledge" --the actual knowledge, without independent
investigation, of any Person serving as an officer or director of ANI as of the
date of this Agreement.
"Applicable Contract"-- any Contract (a) under which any Acquired Company
has or may acquire any rights, (b) under which any Acquired Company has or may
become subject to any obligation or liability, or (c) by which any Acquired
Company or any of the assets owned or used by it is or may become bound.
"Balance Sheet Date" --September 30, 2000.
"Best Efforts"--the efforts that a reasonably prudent Person desirous of
achieving a result would use in similar circumstances to ensure that such result
is achieved as expeditiously as possible.
"Breach"--a breach of a representation, warranty, covenant, obligation, or
other provision of this Agreement or any instrument delivered pursuant to this
Agreement will be deemed to have occurred if there is or has been (a) any
inaccuracy in or breach of, or any failure to perform or comply with, such
representation, warranty, covenant, obligation, or other provision, or (b) any
claim (by any Person) or other occurrence or circumstance that is or was
inconsistent with such representation, warranty, covenant, obligation, or other
provision, and the term "Breach" means any such inaccuracy, breach, failure,
claim, occurrence, or circumstance.
"Closing"--as defined in Section 2.
"Closing Date"--the date and time as of which the Closing actually takes
place.
"Consent"--any approval, consent, ratification, waiver, or other
authorization (including any Governmental Authorization).
"Contemplated Transactions"--all of the transactions contemplated by this
Agreement, including:
(a) the sale of the Shares by ANI to Everest;
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(b) the execution, delivery, and performance of the Promissory
Note, the Purchase Price Escrow Agreement and the Indemnity Escrow Agreement (if
applicable) and the Escrow Agreement;
(c) the performance by Everest and ANI of their respective
covenants and obligations under this Agreement; and
(d) Everest's acquisition and ownership of the Shares and
exercise of control over the Acquired Companies.
"Contract"--any agreement, contract, obligation, promise, or undertaking
(whether written or oral and whether express or implied) that is legally
binding.
"Damages"--as defined in Section 10.2(b).
"Earnout Payment"--means an amount to be determined at the end of each
fiscal year of NFLIJ following the Closing Date, which amount in each such
fiscal year shall be equal to fifty percent (50%) of EBITDA of NFLIJ after
subtracting the aggregate amount of capital contributions made to NFLIJ from the
Closing Date to the date of determination thereof; provided, however, the
aggregate amount of the Earnout Payment shall not exceed the sum of $750,000;
provided further, for purposes of determining the Earnout Payment, EBITDA shall
not include any overhead allocations of NFLIJ's parent company, provided that
EBITDA may include a five percent (5%) transfer pricing markup of product
delivered to Japan for distribution and consumption. It is understood and agreed
to by the Parties that the computation of EBITDA of NFLIJ shall be based upon
all items of revenue and expense arising from activity in the country of Japan.
"EBITDA"--means, for NFLIJ's operations (whether operated independently as
a wholly owned subsidiary or as a division of NFLI), for any period for which
the amount thereof is to be determined, net income for such period, plus, to the
extent deducted in the determination of net income and without duplication with
items included in the adjustments under generally accepted accounting principles
to net income, in the determination of net income, (i) provisions for income
taxes; (ii) interest expense; and (iii) depreciation and amortization expense.
"Employment Agreements"--as defined in Section 7.13.
"Encumbrance"--any charge, claim, community property interest, condition,
equitable interest, lien, option, pledge, security interest, right of first
refusal, or restriction of any kind, including any restriction on use, voting,
transfer, receipt of income, or exercise of any other attribute of ownership.
The definition of Encumbrance in this Agreement excludes the interests of GECC.
"Environment"--soil, land surface or subsurface strata, surface waters
(including navigable waters, ocean waters, streams, ponds, drainage basins, and
wetlands), groundwaters, drinking water supply, stream sediments, ambient air
(including indoor air), plant and animal life, and any other environmental
medium or natural resource.
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"Environmental, Health, and Safety Liabilities"--any cost, damages,
expense, liability, obligation, or other responsibility arising from or under
Environmental Law or Occupational Safety and Health Law and consisting of or
relating to:
(e) any environmental, health, or safety matters or conditions
(including on-site or off-site contamination, occupational safety and health,
and regulation of chemical substances or products);
(f) fines, penalties, judgments, awards, settlements, legal or
administrative proceedings, damages, losses, claims, demands and response,
investigative, remedial, or inspection costs and expenses arising under
Environmental Law or Occupational Safety and Health Law;
(g) financial responsibility under Environmental Law or
Occupational Safety and Health Law for cleanup costs or corrective action,
including any investigation, cleanup, removal, containment, or other remediation
or response actions ("Cleanup") required by applicable Environmental Law or
Occupational Safety and Health Law (whether or not such Cleanup has been
required or requested by any Governmental Body or any other Person) and for any
natural resource damages; or
(h) any other compliance, corrective, investigative, or
remedial measures required under Environmental Law or Occupational Safety and
Health Law.
The terms "removal," "remedial," and "response action," include the types of
activities covered by the United States Comprehensive Environmental Response,
Compensation, and Liability Act, 42 U.S.C. (S) 9601 et seq., as amended
("CERCLA").
"Environmental Law"--any Legal Requirement that requires or relates to:
(i) advising appropriate authorities, employees, and the
public of intended or actual releases of pollutants or hazardous substances or
materials, violations of discharge limits, or other prohibitions and of the
commencements of activities, such as resource extraction or construction, that
could have significant impact on the Environment;
(j) preventing or reducing to acceptable levels the release of
pollutants or hazardous substances or materials into the Environment;
(k) reducing the quantities, preventing the release, or
minimizing the hazardous characteristics of wastes that are generated;
(l) assuring that products are designed, formulated, packaged,
and used so that they do not present unreasonable risks to human health or the
Environment when used or disposed of;
(m) protecting resources, species, or ecological amenities;
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(n) reducing to acceptable levels the risks inherent in the
transportation of hazardous substances, pollutants, oil, or other potentially
harmful substances;
(o) cleaning up pollutants that have been released, preventing
the threat of release, or paying the costs of such clean up or prevention; or
(p) making responsible parties pay private parties, or groups
of them, for damages done to their health or the Environment, or permitting
self-appointed representatives of the public interest to recover for injuries
done to public assets.
"ERISA"--the Employee Retirement Income Security Act of 1974 or any
successor law, and regulations and rules issued pursuant to that Act or any
successor law.
"Escrowed Funds" --as defined in Section 1.2(c).
"Everest Disclosure Letter" --the disclosure letter delivered by Everest to
ANI concurrently with the execution and delivery of this Agreement.
"Everest Financial Statements" --as defined in Section 4.6.
"Everest Material Adverse Effect" means a change or effect that is
materially adverse to the business or financial condition of Everest.
"Facilities"--any real property, leaseholds, or other interests currently
or formerly owned or operated by any Acquired Company and any buildings, plants,
structures, or equipment (including motor vehicles, tank cars, and rolling
stock) currently or formerly owned or operated by any Acquired Company.
"GAAP"--generally accepted United States accounting principles, applied on
a basis consistent with the basis on which the balance sheet and the other
financial statements referred to in Sections 3.4 and 4.6 were prepared.
"GECC" --General Electric Capital Corporation.
"Governmental Authorization"--any approval, consent, license, permit,
waiver, or other authorization issued, granted, given, or otherwise made
available by or under the authority of any Governmental Body or pursuant to any
Legal Requirement.
"Governmental Body"--any:
(a) nation, state, county, city, town, village, district, or other
jurisdiction of any nature;
(b) federal, state, local, municipal, foreign, or other government;
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(c) governmental or quasi-governmental authority of any nature
(including any governmental agency, branch, department, official, or entity
and any court or other tribunal);
(d) multi-national organization or body; or
(e) body exercising, or entitled to exercise, any administrative,
executive, judicial, legislative, police, regulatory, or taxing authority
or power of any nature.
"Hazardous Activity"--the distribution, generation, handling, importing,
management, manufacturing, processing, production, refinement, Release, storage,
transfer, transportation, treatment, or use (including any withdrawal or other
use of groundwater) of Hazardous Materials in, on, under, about, or from the
Facilities or any part thereof into the Environment, and any other act,
business, operation, or thing that increases the danger, or risk of danger, or
poses an unreasonable risk of harm to persons or property on or off the
Facilities, or that may affect the value of the Facilities or the Acquired
Companies.
"Hazardous Materials"--any waste or other substance that is listed,
defined, designated, or classified as, or otherwise determined to be, hazardous,
radioactive, or toxic or a pollutant or a contaminant under or pursuant to any
Environmental Law, including any admixture or solution thereof, and specifically
including petroleum and all derivatives thereof or synthetic substitutes
therefor and asbestos or asbestos-containing materials.
"Indemnity Escrow Agreement" --as defined in Section 1.2(c).
"Intellectual Property Assets" --as defined in Section 3.18.
"IRC"--the Internal Revenue Code of 1986 or any successor law, and
regulations issued by the IRS pursuant to the Internal Revenue Code or any
successor law.
"IRS"--the United States Internal Revenue Service or any successor agency,
and, to the extent relevant, the United States Department of the Treasury.
"Legal Requirement"--any federal, state, local, municipal, foreign,
international, multinational, or other administrative order, constitution, law,
ordinance, principle of common law, regulation, statute, or treaty.
"Material Adverse Effect" --a change or effect that is materially adverse
to the business or financial condition of the Acquired Companies, taken as a
whole.
"NFLIJ" -- Nutrition for Life International Japan, Inc., a corporation
organized under the laws of Japan.
"Occupational Safety and Health Law"--any Legal Requirement designed to
provide safe and healthful working conditions and to reduce occupational safety
and health hazards, and any program, whether governmental or private (including
those promulgated or sponsored by industry associations and insurance
companies), designed to provide safe and healthful working conditions.
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"Order"--any award, decision, injunction, judgment, order, ruling,
subpoena, or verdict entered, issued, made, or rendered by any court,
administrative agency, or other Governmental Body or by any arbitrator.
"Ordinary Course of Business"--an action taken by a Person will be deemed
to have been taken in the "Ordinary Course of Business" only if:
(q) such action is consistent with the past practices of such
Person and is taken in the ordinary course of the normal day-to-day operations
of such Person;
(r) such action is not required to be authorized by the board
of directors of such Person (or by any Person or group of Persons exercising
similar authority) and is not required to be specifically authorized by the
parent company (if any) of such Person; and
(s) such action is similar in nature and magnitude to actions
customarily taken, without any authorization by the board of directors (or by
any Person or group of Persons exercising similar authority), in the ordinary
course of the normal day-to-day operations of other Persons that are in the same
line of business as such Person.
"Organizational Documents"--(a) the articles or certificate of
incorporation and the bylaws of a corporation; (b) the partnership agreement and
any statement of partnership of a general partnership; (c) the limited
partnership agreement and the certificate of limited partnership of a limited
partnership; (d) articles or certificate of organization and the regulations or
operating agreement of a limited liability company; (e) any charter or similar
document adopted or filed in connection with the creation, formation, or
organization of a Person; and (f) any amendment to any of the foregoing.
"Person"--any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, labor union, or other entity
or Governmental Body.
"Proceeding"--any action, arbitration, audit, hearing, investigation,
litigation, or suit (whether civil, criminal, administrative, investigative, or
informal) commenced, brought, conducted, or heard by or before, or otherwise
involving, any Governmental Body or arbitrator.
"Purchase Price Escrow Agreement" -- as defined in Section 1.3.
"Promissory Note" -- as defined in Section 1.2.
"Related Person"--with respect to a particular individual:
(a) each other member of such individual's Family (as defined
below);
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(b) any Person that is directly or indirectly controlled by
such individual or one or more members of such individual's Family;
(c) any Person in which such individual or members of such
individual's Family hold (individually or in the aggregate) a Material
Interest(as defined below); and
(d) any Person with respect to which such individual or one or
more members of such individual's Family serves as a director,
officer, partner, executor, or trustee (or in a similar capacity).
With respect to a specified Person other than an individual:
(a) any Person that directly or indirectly controls, is
directly or indirectly controlled by, or is directly or indirectly
under common control with such specified Person;
(b) any Person that holds a Material Interest in such
specified Person;
(c) each Person that serves as a director, officer, partner,
executor, or trustee of such specified Person (or in a similar
capacity);
(d) any Person in which such specified Person holds a Material
Interest;
(e) any Person with respect to which such specified Person
serves as a general partner or a trustee (or in a similar capacity);
and
(f) any Related Person of any individual described in clause
(b) or (c).
For purposes of this definition, (a) the "Family" of an individual includes
(i) the individual, (ii) the individual's spouse and former spouses, (iii) any
other natural person who is related to the individual or the individual's spouse
within the second degree, and (iv) any other natural person who resides with
such individual, and (b) "Material Interest" means direct or indirect beneficial
ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934)
of voting securities or other voting interests representing at least ten percent
(10%) of the outstanding voting power of a Person or equity securities or other
equity interests representing at least ten percent (10%) of the outstanding
equity securities or equity interests in a Person.
"Release"--any spilling, leaking, emitting, discharging, depositing,
escaping, leaching, dumping, or other releasing into the Environment, whether
intentional or unintentional.
"Representative"--with respect to a particular Person, any director,
officer, employee, agent, consultant, advisor, or other representative of such
Person, including legal counsel, accountants, and financial advisors.
-48-
"Securities Act"--the Securities Act of 1933 or any successor law, and
regulations and rules issued pursuant to that Act or any successor law.
"Shares"--as defined in the recitals of this Agreement.
"Subsidiary"--with respect to any Person (the "Owner"), any corporation or
other Person of which securities or other interests having the power to elect a
majority of that corporation's or other Person's board of directors or similar
governing body, or otherwise having the power to direct the business and
policies of that corporation or other Person (other than securities or other
interests having such power only upon the happening of a contingency that has
not occurred) are held by the Owner or one or more of its Subsidiaries; when
used without reference to a particular Person, "Subsidiary" means a Subsidiary
of the Company.
"Tax Return"--any return (including any information return), report,
statement, schedule, notice, form, or other document or information filed with
or submitted to, or required to be filed with or submitted to, any Governmental
Body in connection with the determination, assessment, collection, or payment of
any Tax or in connection with the administration, implementation, or enforcement
of or compliance with any Legal Requirement relating to any Tax.
"Threat of Release"--a substantial likelihood of a Release that may require
action in order to prevent or mitigate damage to the Environment that may result
from such Release.
"Threatened"--a claim, Proceeding, dispute, action, or other matter will be
deemed to have been "Threatened" if any demand or statement has been made
(orally or in writing) or any notice has been given (orally or in writing), or
if any other event has occurred or any other circumstances exist, that would
lead a prudent Person to conclude that such a claim, Proceeding, dispute,
action, or other matter is likely to be asserted, commenced, taken, or otherwise
pursued in the future.
-49-
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the day and year first above written.
ADVANCED NUTRACEUTICALS, INC.
By: ______________________________
Name: John R. Brown, Jr.
Title: Vice President - Finance
NUTRITION FOR LIFE INTERNATIONAL, INC. EVEREST INTERNATIONAL, L.L.C.
By: ______________________________ By: ______________________________
Name: David P. Bertrand Name: Jerry Kramer
Title: President Title: Chairman and Chief Executive
Officer
Annex C
Audit Committee Charter
Annex C
Charter of the Audit Committee of the Board of Directors
Of
Advanced Nutraceuticals, Inc.
I. Audit Committee Purpose
The Audit Committee is appointed by the Board of Directors of Advanced
Nutraceuticals, Inc. (the "Company") to assist the Board in fulfilling its
oversight responsibilities. The Audit Committee's primary duties and
responsibilities are to:
A. Monitor the integrity of the Company's financial reporting process and
systems of internal controls regarding finance, accounting, and legal
compliance.
B. Monitor the independence and performance of the Company's independent
auditors and the Company's accounting department.
C. Provide an avenue of communication among the independent auditors,
management, the Company's accounting department, and the Board of
Directors.
D. Review the financial statements and the independent auditors' report.
E. Review areas of potential significant financial risk to the Company.
F. Monitor compliance with legal and regulatory requirements.
G. Solicit recommendations from the independent auditors regarding
internal controls and other matters.
H. Establish guidelines for the Board of Directors to review related
party transactions for potential conflicts of interest.
I. Make recommendations to the Board of Directors.
J. Perform other related tasks as requested by the Board of Directors.
The Audit Committee has the authority to conduct any investigation
appropriate to fulfilling its responsibilities, and it has direct access to
the independent auditors as well as anyone in the organization. The Audit
Committee has the ability to retain, at the Company's expense,
special legal, accounting, or other consultants or experts it deems
necessary in the performance of its duties.
II. Audit Committee Composition and Meetings
A. Audit Committee members shall meet the requirements of the Securities
and Exchange Commission (the "SEC") and any exchange on which the
Company's stock is traded. The Audit Committee shall be comprised of
independent non-executive directors, free from any relationship that
would interfere with the exercise of their independent judgment. All
members of the Committee shall have a basic understanding of finance
and accounting and be able to read and understand fundamental
financial statements.
B. Audit Committee members shall be appointed by the Board. If an Audit
Committee Chair is not designated or present, the members of the
Committee may designate a Chair by majority vote of the Committee
membership.
C. The Committee shall meet (either in person or telephonically) at least
four times annually, or more frequently as circumstances dictate. The
Committee should meet privately in executive session at least annually
with management, the Chief Financial Officer, the independent
auditors, and as a committee to discuss any matters that the Committee
or each of these groups believe should be discussed. In addition, the
Committee, or at least its Chair, should communicate with management
and the independent auditors quarterly to review the Company's
financial statements and significant findings based upon the auditors
limited review procedures.
III. Audit Committee Responsibilities and Duties
Review Procedures
-----------------
A. Review and reassess the adequacy of this Charter at least annually.
Submit the charter to the Board of Directors for approval and have the
document published at least every three years in accordance with SEC
regulations.
B. Review the Company's annual audited financial statements prior to
filing or distribution. The review should include discussion with
management and independent auditors of significant issues regarding
accounting principles, practices, and judgments.
C. In consultation with the management, the independent auditors, and the
Chief Financial Officer, consider the integrity of the Company's
financial reporting processes and controls. Discuss significant
financial risk exposures and the steps
-2-
management has taken to monitor, control, and report such exposures.
Review significant findings prepared by the independent auditors and
the Company's accounting department together with management's
responses.
D. Review with management the Company's quarterly financial results prior
to the release of earnings and/or the Company's quarterly financial
statements prior to filing or distribution. Discuss any significant
changes to the Company's accounting principles and any items required
to be communicated by the independent auditors in accordance with SAS
61. The Chair of the Committee may represent the entire Audit
Committee for purposes of this review.
Independent Auditors
--------------------
A. The independent auditors are ultimately accountable to the Audit
Committee and the Board of Directors. The Audit Committee shall review
the independence and performance of the auditors and annually
recommend to the Board of Directors the appointment of the independent
auditors or approve any discharge of auditors when circumstances
warrant.
B. On an annual basis, the Committee should review and discuss with the
independent auditors all significant relationships they have with the
Company that could impair the auditors' independence.
C. Prior to releasing the year-end earnings, discuss the results of the
audit with the independent auditors. Discuss certain matters required
to be communicated to audit committees in accordance with SAS 61.
D. Consider the independent auditors' judgments about the quality and
appropriateness of the Company's accounting principles as applied in
its financial reporting.
Accounting Department and Legal Compliance
------------------------------------------
A. Review the budget, plan, changes in plan, activities, organizational
structure, and qualifications of the Company's accounting department,
as needed.
B. On at least an annual basis, review with the Company's counsel any
legal matters that could have a significant impact on the
organization's financial statements, the Company's compliance with
applicable laws and regulations, and inquiries received from
regulators or governmental agencies.
-3-
Other Audit Committee Responsibilities
--------------------------------------
A. Annually prepare a report to shareholders as required by the SEC. The
report should be included in the Company's annual proxy statement.
B. Perform any other activities consistent with this Charter, the
Company's bylaws, and governing law, as the Committee or the Board
deems necessary or appropriate.
C. Maintain minutes of meetings and periodically report to the Board of
Directors on significant results of the foregoing activities.
* * * * *
-4-
Annex D
Dissenters' Statute
Annex D
PART FIVE
ART. 5.12. PROCEDURE FOR DISSENT BY SHAREHOLDERS AS TO SAID CORPORATE ACTIONS
A. Any shareholder of any domestic corporation who has the right to dissent
from any of the corporate actions referred to in Article 5.11 of this Act may
exercise that right to dissent only by complying with the following procedures:
(1) (a) With respect to proposed corporate action that is submitted to a
vote of shareholders at a meeting, the shareholder shall file with the
corporation, prior to the meeting, a written objection to the action, setting
out that the shareholder's right to dissent will be exercised if the action is
effective and giving the shareholder's address, to which notice thereof shall be
delivered or mailed in that event. If the action is effected and the shareholder
shall not have voted in favor of the action, the corporation, in the case of
action other than a merger, or the surviving or new corporation (foreign or
domestic) or other entity that is liable to discharge the shareholder's right of
dissent, in the case of a merger, shall, within ten (10) days after the action
is effected, deliver or mail to the shareholder written notice that the action
has been effected, and the shareholder may, within ten (10) days from the
delivery or mailing of the notice, make written demand on the existing,
surviving, or new corporation (foreign or domestic) or other entity, as the case
may be, for payment of the fair value of the shareholder's shares. The fair
value of the shares shall be the value thereof as of the day immediately
preceding the meeting, excluding any appreciation or depreciation in
anticipation of the proposed action. The demand shall state the number and class
of the shares owned by the shareholder and the fair value of the shares as
estimated by the shareholder. Any shareholder failing to make demand within the
ten (10) day period shall be bound by the action.
(b) With respect to proposed corporate action that is approved
pursuant to Section A of Article 9.10 of this Act, the corporation, in the case
of action other than a merger, and the surviving or new corporation (foreign or
domestic) or other entity that is liable to discharge the shareholder's right of
dissent, in the case of a merger, shall, within ten (10) days after the date the
action is effected, mail to each shareholder of record as of the effective date
of the action notice of the fact and date of the action and that the shareholder
may exercise the shareholder's right to dissent from the action. The notice
shall be accompanied by a copy of this Article and any articles or documents
filed by the corporation with the Secretary of State to effect the action. If
the shareholder shall not have consented to the taking of the action, the
shareholder may, within twenty (20) days after the mailing of the notice, make
written demand on the existing, surviving, or new corporation (foreign or
domestic) or other entity, as the case may be, for payment of the fair value of
the shareholder's shares. The fair value of the shares shall be the value
thereof as of the date the written consent authorizing the action was delivered
to the corporation pursuant to Section A of Article 9.10 of this Act, excluding
any appreciation or depreciation in anticipation of the action. The demand shall
state the number and class of shares owned by the dissenting shareholder and the
fair value of the shares as estimated by the shareholder. Any shareholder
failing to make demand within the twenty (20) day period shall be bound by the
action.
(2) Within twenty (20) days after receipt by the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be, of a
demand for payment made by a dissenting shareholder in accordance with
Subsection (1) of this Section, the corporation (foreign or domestic) or other
entity shall deliver or mail to the shareholder a written notice that shall
either set out that the corporation (foreign or domestic) or other entity
accepts the amount claimed in the demand and agrees to pay that amount within
ninety (90) days after the date on which the action was effected, and, in the
case of shares represented by certificates, upon the surrender of the
certificates duly endorsed, or shall contain an estimate by the corporation
(foreign or domestic) or other entity of the fair value of the shares, together
with an offer to pay the amount of that estimate within ninety (90) days after
the date on which the action was effected, upon receipt of notice within sixty
(60) days after that date from the shareholder that the shareholder agrees to
accept that amount and, in the case of shares represented by certificates, upon
the surrender of the certificates duly endorsed.
(3) If, within sixty (60) days after the date on which the corporate
action was effected, the value of the shares is agreed upon between the
shareholder and the existing, surviving, or new corporation (foreign or
domestic) or other entity, as the case may be, payment for the shares shall be
made within ninety (90) days after the date on which the action was effected
and, in the case of shares represented by certificates, upon surrender of the
certificates duly endorsed. Upon payment of the agreed value, the shareholder
shall cease to have any interest in the shares or in the corporation.
B. If, within the period of sixty (60) days after the date on which the
corporate action was effected, the shareholder and the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be, do
not so agree, then the shareholder or the corporation (foreign or domestic) or
other entity may, within sixty (60) days after the expiration of the sixty (60)
day period, file a petition in any court of competent jurisdiction in the county
in which the principal office of the domestic corporation is located, asking for
a finding and determination of the fair value of the shareholder's shares. Upon
the filing of any such petition by the shareholder, service of a copy thereof
shall be made upon the corporation (foreign or domestic) or other entity, which
shall, within ten (10) days after service, file in the office of the clerk of
the court in which the petition was filed a list containing the names and
addresses of all shareholders of the domestic corporation who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the corporation (foreign or domestic) or other
entity. If the petition shall be filed by the corporation (foreign or domestic)
or other entity, the petition shall be accompanied by such a list. The clerk of
the court shall give notice of the time and place fixed for the hearing of the
petition by registered mail to the corporation (foreign or domestic) or other
entity and to the shareholders named on the list at the addresses therein
stated. The forms of the notices by mail shall be approved by the court. All
shareholders thus notified and the corporation (foreign or domestic) or other
entity shall thereafter be bound by the final judgment of the court.
C. After the hearing of the petition, the court shall determine the
shareholders who have complied with the provisions of this Article and have
become entitled to the valuation of and payment for their shares, and shall
appoint one or more qualified appraisers to determine that value. The appraisers
shall have power to examine any of the books and records of the corporation the
shares of which they are charged with the duty of valuing, and they shall make a
determination of
-2-
the fair value of the shares upon such investigation as to them may seem proper.
The appraisers shall also afford a reasonable opportunity to the parties
interested to submit to them pertinent evidence as to the value of the shares.
The appraisers shall also have such power and authority as may be conferred on
Masters in Chancery by the Rules of Civil Procedure or by the order of their
appointment.
D. The appraisers shall determine the fair value of the shares of the
shareholders adjudged by the court to be entitled to payment for their shares
and shall file their report of that value in the office of the clerk of the
court. Notice of the filing of the report shall be given by the clerk to the
parties in interest. The report shall be subject to exceptions to be heard
before the court both upon the law and the facts. The court shall by its
judgment determine the fair value of the shares of the shareholders entitled to
payment for their shares and shall direct the payment of that value by the
existing, surviving, or new corporation (foreign or domestic) or other entity,
together with interest thereon, beginning 91 days after the date on which the
applicable corporate action from which the shareholder elected to dissent was
effected to the date of such judgment, to the shareholders entitled to payment.
The judgment shall be payable to the holders of uncertificated shares
immediately but to the holders of shares represented by certificates only upon,
and simultaneously with, the surrender to the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, of duly
endorsed certificates for those shares. Upon payment of the judgment, the
dissenting shareholders shall cease to have any interest in those shares or in
the corporation. The court shall allow the appraisers a reasonable fee as court
costs, and all court costs shall be allotted between the parties in the manner
that the court determines to be fair and equitable.
E. Shares acquired by the existing, surviving, or new corporation (foreign or
domestic) or other entity, as the case may be, pursuant to the payment of the
agreed value of the shares or pursuant to payment of the judgment entered for
the value of the shares, as in this Article provided, shall, in the case of a
merger, be treated as provided in the plan of merger and, in all other cases,
may be held and disposed of by the corporation as in the case of other treasury
shares.
F. The provisions of this Article shall not apply to a merger if, on the date
of the filing of the articles of merger, the surviving corporation is the owner
of all the outstanding shares of the other corporations, domestic or foreign,
that are parties to the merger.
G. In the absence of fraud in the transaction, the remedy provided by this
Article to a shareholder objecting to any corporate action referred to in
Article 5.11 of this Act is the exclusive remedy for the recovery of the value
of his shares or money damages to the shareholder with respect to the action. If
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, complies with the requirements of this Article, any
shareholder who fails to comply with the requirements of this Article shall not
be entitled to bring suit for the recovery of the value of his shares or money
damages to the shareholder with respect to the action.
-3-
ART. 5.13. PROVISIONS AFFECTING REMEDIES OF DISSENTING SHAREHOLDERS
A. Any shareholder who has demanded payment for his shares in accordance with
either Article 5.12 or 5.16 of this Act shall not thereafter be entitled to vote
or exercise any other rights of a shareholder except the right to receive
payment for his shares pursuant to the provisions of those articles and the
right to maintain an appropriate action to obtain relief on the ground that the
corporate action would be or was fraudulent, and the respective shares for which
payment has been demanded shall not thereafter be considered outstanding for the
purposes of any subsequent vote of shareholders.
B. Upon receiving a demand for payment from any dissenting shareholder, the
corporation shall make an appropriate notation thereof in its shareholder
records. Within twenty (20) days after demanding payment for his shares in
accordance with either Article 5.12 or 5.16 of this Act, each holder of
certificates representing shares so demanding payment shall submit such
certificates to the corporation for notation thereon that such demand has been
made. The failure of holders of certificated shares to do so shall, at the
option of the corporation, terminate such shareholder's rights under Articles
5.12 and 5.16 of this Act unless a court of competent jurisdiction for good and
sufficient cause shown shall otherwise direct. If uncertificated shares for
which payment has been demanded or shares represented by a certificate on which
notation has been so made shall be transferred, any new certificate issued
therefor shall bear similar notation together with the name of the original
dissenting holder of such shares and a transferee of such shares shall acquire
by such transfer no rights in the corporation other than those which the
original dissenting shareholder had after making demand for payment of the fair
value thereof.
C. Any shareholder who has demanded payment for his shares in accordance with
either Article 5.12 or 5.16 of this Act may withdraw such demand at any time
before payment for his shares or before any petition has been filed pursuant to
Article 5.12 or 5.16 of this Act asking for a finding and determination of the
fair value of such shares, but no such demand may be withdrawn after such
payment has been made or, unless the corporation shall consent thereto, after
any such petition has been filed. If, however, such demand shall be withdrawn as
hereinbefore provided, or if pursuant to Section B of this Article the
corporation shall terminate the shareholder's rights under Article 5.12 or 5.16
of this Act, as the case may be, or if no petition asking for a finding and
determination of fair value of such shares by a court shall have been filed
within the time provided in Article 5.12 or 5.16 of this Act, as the case may
be, or if after the hearing of a petition filed pursuant to Article 5.12 or
5.16, the court shall determine that such shareholder is not entitled to the
relief provided by those articles, then, in any such case, such shareholder and
all persons claiming under him shall be conclusively presumed to have approved
and ratified the corporate action from which he dissented and shall be bound
thereby, the right of such shareholder to be paid the fair value of his shares
shall cease, and his status as a shareholder shall be restored without prejudice
to any corporate proceedings which may have been taken during the interim, and
such shareholder shall be entitled to receive any dividends or other
distributions made to shareholders in the interim.
-4-
Annex E
Neidiger Tucker Bruner, Inc. Opinion
Annex E
February 7, 2001
The Board of Directors
Advanced Nutraceuticals, Inc.
9101 Jameel
Houston, TX 77040
To the Board of Directors,
Advanced Nutraceuticals, Inc. ("ANI" or the "Company") has negotiated a Stock
Purchase Agreement (the "Agreement") dated December 29, 2000, entered into by
and among ANI, Everest International, L.L.C., ("Everest") and Nutrition For Life
International, Inc. ("NFLI"). Upon the terms and subject to the conditions of
the Agreement, Everest will purchase and acquire from ANI, all of the shares of
NFLI. The Board of Directors of ANI requests that Neidiger,Tucker,Bruner, Inc.
("NTB") render its opinion (the "Opinion") as to the fairness of the Stock
Purchase Agreement ("Agreement" or "Transaction") from a financial point of
view, to the shareholders of ANI.
The Agreement provides for ANI to sell, assign, transfer and deliver to Everest,
and Everest will purchase and acquire form ANI, all of the Shares, free and
clear of all encumbrances, and in the proper form for transfer. The aggregate
purchase price to be paid by Everest shall be $10,000,000 plus an Earnout
Payment based upon NFLI's operations in Japan (the "Purchase Price"). The
Purchase Price is subject to adjustment as is described in Section 1.4 of the
Stock Purchase Agreement. At closing, $5,000,000 minus the amount of Escrowed
Funds received by ANI from the escrow account shall be paid by wire transfer or
other immediately available funds to ANI; a promissory note (the "Promissory
Note") shall be delivered at the Closing executed by NFLI in the principal
amount of $5,000,000, bearing an interest rate of prime plus one half of one
percent (.5%). The promissory note has a three-year maturity date with
quarterly payments based on a ten-year amortization schedule.
The Board of Directors
Advanced Nutraceuticals, Inc.
Febuary 7, 2001
Page 2
In connection with our examination, we have reviewed, among other things, (i)
the Stock Purchase Agreement dated December 29, 2000, (ii) publicly available
information for both ANI and its subsidiaries, including but not limited to the
Company's most recent quarterly Form 10-Q and annual 10-K/A as filed with the
Securities and Exchange Commission, (v) the financial condition of ANI and NFLI
including but not limited to its debt structure and bank line of credit, (VI)
the past operating results of NFLI, and (vii) various other documents and
information provided by ANI and NFLI and discussions held with the management of
ANI and NFLI.
In rendering our Opinion, we have relied on the accuracy and completion of the
audited information provided to us by the Company, and the information provided
by the Company's management and have made no independent verification of such
information.
Neidiger,Tucker,Bruner, Inc., as part of its investment banking service, is
regularly engaged in the valuation of businesses, securities and assets in
connection with mergers, acquisitions, underwritings, sales and distribution of
securities, private placements and valuations for estate, corporate and other
purposes.
Based on the foregoing and such other factors, as we deem relevant, we are of
the opinion that the terms and conditions of the sale of NFLI as described in
the Stock Purchase Agreement is fair and reasonable from a financial point of
view to the shareholders of Advanced Nutraceuticals, Inc.
Sincerely,
NEIDIGER,TUCKER,BRUNER, INC.
Anthony B. Petrelli
Senior Vice President
ABP:gr
Annex F
1995 Stock Option Plan, As Amended
Annex F
Advanced Nutraceuticals, Inc.
1995 Stock Option Plan, As Amended
This Stock Option Plan (the "Plan") is adopted in consideration for
services rendered and to be rendered to Advanced Nutraceuticals, Inc. and
related companies.
1. Definitions.
-----------
The terms used in this Plan shall, unless otherwise indicated or
required by the particular context, have the following meanings:
Board: The Board of Directors of Advanced Nutraceuticals, Inc.
-----
Code: The Internal Revenue Code of 1986, as amended.
----
Common Stock: The $.01 par value Common Stock of Advanced
------------
Nutraceuticals, Inc.
Company: Advanced Nutraceuticals, Inc., a corporation incorporated
-------
under the laws of Texas, and any successors in interest by merger, operation of
law, assignment or purchase of all or substantially all of the property, assets
or business of the Company.
Consultant: A Consultant is any person, including any advisor, engaged
----------
by the Company or any Related Company to render consulting services and who is
compensated for such services.
Continuous Status as an Employee or Consultant: The employment by, or
----------------------------------------------
relationship as a Consultant with, the Company is not interrupted or terminated.
The Board, at its sole discretion, may determine whether Continuous Status as an
Employee or Consultant shall be considered interrupted due to personal or other
mitigating circumstances.
Date of Grant: The date on which an Option is granted under the Plan.
-------------
Employee: An Employee is an employee of the Company or any Related
--------
Company.
Fair Market Value: The Fair Market Value of the Option Shares. Such
-----------------
Fair Market Value as of any date shall be reasonably determined by the Option
Committee (see below); provided, however, that if there is a public market for
the Common Stock, the Fair Market Value of the Option Shares as of any date
shall be the officially quoted closing price, if available, through the National
Association of Securities Dealers, Inc. or a stock exchange, or if
no officially quoted closing price is available, the representative closing bid
price, on the date in question. In the event there is no officially quoted
closing price or bid price or the Common Stock is not traded publicly, the Fair
Market Value of a share of Common Stock on any date shall be determined, in good
faith, by the Board or the Option Committee after such consultation with outside
legal, accounting and other experts as the Board or the Option Committee may
deem advisable, and the Board or the Option Committee shall maintain a written
record of its method of determining such value.
Incentive Stock Options ("ISOs"): "Incentive Stock Options" as that
--------------------------------
term is defined in Section 422A of the Code.
Key Employee: A person designated by the Option Committee who either
------------
is employed by the Company or a Related Company (see below) and upon whose
judgment, initiative and efforts the Company or a Related Company is largely
dependent for the successful conduct of its business; provided, however, that
Key Employees shall not include those members of the Board who are not employees
of the Company or a Related Company.
Non-Incentive Stock Options ("Non-ISOs"): Options which are not
----------------------------------------
intended to qualify as "Incentive Stock Options" under Section 422A of the Code.
Option: The rights granted to an Employee or Consultant to purchase
------
Common Stock pursuant to the terms and conditions of an Option Agreement (see
below).
Option Agreement: The written agreement (and any amendment or
----------------
supplement thereto) between the Company and an Employee or Consultant
designating the terms and conditions of an Option.
Option Committee: The Plan shall be administered by an Option
----------------
Committee composed of the Board or a committee, selected by the Board,
consisting of two or more persons, each of whom is not an employee of the
Corporation. The foregoing does not apply to Specific Option Grants.
Option Shares: The shares of Common Stock underlying an Option granted
-------------
to an Employee or Consultant.
Optionee: An Employee or Consultant who has been granted an Option.
--------
Related Company: Any corporation that is a "parent corporation" or a
---------------
"subsidiary corporation" with respect to the Company, as those terms are defined
in Section 425 of the Code. The determination of whether a corporation is a
Related Company shall be made without regard to whether the corporation or the
relationship between the corporation and the Company now exists or comes into
existence hereinafter.
Specific Option Grants: The specific grants of Options as provided in
----------------------
Section 9.
-2-
2. Purpose and Scope.
-----------------
(a) The purpose of this Plan is to advance the interests of the
Company and its stockholders by affording Employees and Consultants an
opportunity for investment in the Company and the incentive advantages inherent
in stock ownership in this Company.
(b) This Plan authorizes the Option Committee to grant Options to
purchase shares of Common Stock to Employees and Consultants selected by the
Option Committee while considering criteria such as employment position or other
relationship with the Company, duties and responsibilities, ability,
productivity, length of service or association, morale, interest in the Company,
recommendations by supervisors, and other matters.
3. Administration of the Plan. The Plan shall be administered by the
--------------------------
Option Committee. The Option Committee shall have the authority granted to it
under this section and under each other section of the Plan.
In accordance with and subject to the provisions of the Plan, the
Option Committee shall select the Optionees, shall determine (i) the number of
shares of Common Stock to be subject to each Option, (ii) the time at which each
Option is to be granted, (iii) whether an Option shall be granted in exchange
for the cancellation and termination of a previously granted option or options
under the Plan or otherwise, (iv) the purchase price for the Option Shares, (v)
the option period, and (vi) the manner in which the Option becomes exercisable.
Provided, that, the number of shares of Common Stock to be subject to Options
granted to an Optionee shall not exceed 300,000 in any fiscal year of the
Company. In addition, the Option Committee shall fix such other terms of each
Option as the Option Committee may deem necessary or desirable. The Option
Committee shall determine the form of Option Agreement to evidence each Option.
The Option Committee from time to time may adopt such rules and
regulations for carrying out the purposes of the Plan as it may deem proper and
in the best interests of the Company. The Option Committee shall keep minutes of
its meetings and those minutes shall be distributed to every member of the
Board.
The Board may from time to time make such changes in and additions to
the Plan as it may deem proper and in the best interest of the Company;
provided, however, that no such change or addition shall impair any Option
previously granted under the Plan, and that the approval by the affirmative
votes of the holders of a majority of the Company's securities entitled to vote
and represented at a meeting duly held in accordance with the applicable laws of
the State of Texas, shall be required for any amendment which would:
(a) modify the eligibility requirements for receiving Options under
the Plan;
(b) increase the benefits accruing to Employees under the Plan; or
-3-
(c) increase the number of shares of Common Stock that may be issued
under the Plan.
All actions taken and all interpretations and determinations made by
the Option Committee in good faith (including determinations of Fair Market
Value) shall be final and binding upon all Employees, Consultants, the Company
and all other interested persons. No member of the Option Committee shall be
personally liable for any action, determination or interpretation made in good
faith with respect to the Plan, and all members of the Option Committee shall,
in addition to rights they may have if Directors of the Company, be fully
protected by the Company with respect to any such action, determination or
interpretation.
4. The Common Stock. In addition to the Specific Option Grants, the Board
----------------
is authorized to appropriate, issue and sell for the purposes of the Plan, and
the Option Committee is authorized to grant Options with respect to, a total
number, not in excess of 3,000,000 shares of Common Stock, either treasury or
authorized but unissued, or the number and kind of shares of stock or other
securities which in accordance with Section 10 shall be substituted for the
3,000,000 shares or into which such 3,000,000 shares shall be adjusted. All or
any unsold shares subject to an Option that for any reason expires or otherwise
terminates may again be made subject to Options under the Plan.
5. Eligibility. Options which are intended to qualify as ISOs will be
-----------
granted only to Key Employees. Key Employees and other Employees and
Consultants may hold more than one Option under the Plan and may hold Options
under the Plan and options granted pursuant to other plans or otherwise.
6. Option Price. The Option Committee shall determine the purchase price
------------
for the Option Shares, provided that the purchase price to be paid by Optionees
for the Option Shares whether ISOs or non-ISOs, shall not be less than 100
percent of the Fair Market Value of the Option Shares on the Date of Grant. The
purchase price for the Option Shares shall be a fixed, and cannot be a
fluctuating, price.
7. Duration and Exercise of Options.
--------------------------------
(a) The option period shall commence on the Date of Grant and shall
be as set by the Option Committee, but not to exceed 10 years in length. No
Option shall be exercised for the period of six months following the Date of
Grant; provided, however, that this limitation shall not apply to the exercise
of an Option pursuant to the terms of the relevant Option Agreement upon the
Optionee's death.
(b) During the lifetime of the Optionee, the Option shall be
exercisable only by the Optionee; provided, that in the event of the legal
disability of an Optionee, the guardian or personal representative of the
Optionee may exercise the Option. However, if the Option is an ISO it may be
exercised by the guardian or personal representative of the Optionee only if
such guardian or personal representative obtains a ruling from the Internal
Revenue Service or an opinion of counsel to the effect that neither the grant
nor the exercise of such power is
-4-
violative of the Code. Any opinion of counsel must be both from counsel and in a
form acceptable to the Option Committee.
(c) The Option Committee may determine whether any Option shall be
exercisable as provided in Paragraph (a) of this Section 7 or whether the
Options shall be exercisable in installments only; if the Option Committee
determines the latter, it shall determine the number of installments and the
percentage of the Option exercisable at each installment date. All such
installments shall be cumulative.
(d) In the event an Optionee's Continuous Status as an Employee or
Consultant terminates because of the death or permanent and total disability of
the Optionee, any Option held by the Optionee on the date of termination may be
exercised within 90 days after the date of termination, but only to the extent
that the Option was exercisable according to its terms on the date of
termination. After such 90-day period, any unexercised portion of an Option
shall expire.
(e) Notwithstanding the provisions of Paragraph (d) of this Section
7, in the event an Optionee's Continuous Status as an Employee or Consultant
terminates for any reason other than the Optionee's death or permanent and total
disability, any unexercised portion of any Option held by the Optionee on the
date of termination may be exercised within 30 days after the date of
termination, but only to the extent that the Option was exercisable according to
its terms on the date of termination. After such 30-day period, any unexercised
portion of an Option shall expire.
(f) Each Option shall be exercised in whole or in part by delivering
to the office of the Treasurer of the Company written notice of the number of
shares with respect to which the Option is to be exercised and by paying in full
the purchase price for the Option Shares purchased as set forth in Section 8;
provided, that an Option may not be exercised in part unless the purchase price
for the Option Shares purchased is at least $2,000.
(g) No Option may be exercised until the Plan is approved by the
shareholders of the Company as provided in Section 16 below.
(h) No Option Shares may be sold, transferred or otherwise disposed
of within six months of the Date of Grant by any person who is subject to the
reporting requirements of Section 16(a) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act") on the Date of Grant.
(i) No Option Shares may be sold, transferred or otherwise disposed
of within six months of the date of shareholder approval of the Plan by any
person who is subject to the reporting requirements of Section 16(a) of the
Exchange Act on the date of shareholder approval of the Plan.
8. Payment for Option Shares. If the purchase price of the Option Shares
-------------------------
purchased by any Optionee at one time exceeds $2,000, the Option Committee may
permit all or part of
-5-
the purchase price for the Option Shares to be paid by delivery to the Company
for cancellation shares of the Company's Common Stock previously owned by the
Optionee with a Fair Market Value as of the date of payment equal to the portion
of the purchase price for the Option Shares that the Optionee does not pay in
cash. In the case of all other Option exercises, the purchase price shall be
paid in cash or certified funds upon exercise of the Option.
9. Specific Option Grants. The Company hereby grants to the following Key
----------------------
Employees, Options to purchase the Option Shares set forth opposite their
respective names below in this Section 9, and at Exercise Prices set forth
opposite their respective names, such Options to be exercisable commencing six
months from the date of Shareholder approval of this Plan, and to expire seven
years from the date of Grant, unless earlier terminated in accordance with the
provisions of this Plan:
Name of Optionee Number of Shares Exercise Price
-------------------- ---------------- --------------
David P. Bertrand 16,000 $2.25
David P. Bertrand 16,000 $2.70
Jana Mitcham 14,000 $2.25
Jana Mitcham 14,000 $2.70
Ronnie Meaux 7,500 $2.25
Ronnie Meaux 7,500 $2.70
Gregory Pusey 5,000 $2.25
Gregory Pusey 5,000 $2.70
10. Change in Stock, Adjustments, Etc. In the event that each of the
---------------------------------
outstanding shares of Common Stock (other than shares held by dissenting
shareholders which are not changed or exchanged) should be changed into, or
exchanged for, a different number or kind of shares of stock or other securities
of the Company, or, if further changes or exchanges of any stock or other
securities into which the Common Stock shall have been changed, or for which it
shall have been exchanged, shall be made (whether by reason of merger,
consolidation, reorganization, recapitalization, stock dividends,
reclassification, split-up, combination of shares or otherwise), then there
shall be substituted for each share of Common Stock that is subject to the Plan
but not subject to an outstanding Option thereunder, the number and kind of
shares of stock or other securities into which each outstanding share of Common
Stock (other than shares held by dissenting shareholders which are not changed
or exchanged) shall be so changed or for which each outstanding share of Common
Stock (other than shares held by dissenting shareholders) shall be exchanged.
Any securities so substituted shall be subject to similar successive
adjustments.
In the event of any such changes or exchanges, the Option Committee
shall determine whether, in order to prevent dilution or enlargement of rights,
an adjustment should be made in the number, or kind, or option price of the
shares or other securities then subject to an Option or Options granted pursuant
to the Plan and the Option Committee shall make any
-6-
such adjustment, and such adjustments shall be made and shall be effective and
binding for all purposes of the Plan.
11. Relationship to Employment or Position. Nothing contained in the Plan,
--------------------------------------
or in any Option granted pursuant to the Plan, shall confer upon any Optionee
any right with respect to continuance of employment by the Company, as an
Employee or as a Consultant or interfere in any way with the right of the
Company to terminate the Optionee's employment as an Employee or position as a
Consultant, at any time.
12. Nontransferability of Option. No Option granted under the Plan shall
----------------------------
be transferable by the Optionee, either voluntarily or involuntarily, except by
will or the laws of descent and distribution, or except pursuant to a qualified
domestic relations order as defined in the Code, the Employee Retirement Income
Security Act, or rules promulgated thereunder. Except as provided in the
preceding sentence, any attempt to transfer the Option shall void the Option.
13. Rights as a Stockholder. No person shall have any rights as a
-----------------------
shareholder with respect to any share covered by an Option until that person
shall become the holder of record of such share and, except as provided in
Section 10, no adjustments shall be made for dividends or other distributions or
other rights as to which there is an earlier record date.
14. Securities Laws Requirements. No Option Shares shall be issued unless
----------------------------
and until, in the opinion of the Company, any applicable registration
requirements of the Securities Act of 1933, as amended, any applicable listing
requirements of any securities exchange on which stock of the same class is then
listed, and any other requirements of law or of any regulatory bodies having
jurisdiction over such issuance and delivery, have been fully complied with.
Each Option and each Option Share certificate may be imprinted with legends
reflecting federal and state securities laws, restrictions and conditions, and
the Company may comply therewith and issue "stop transfer" instructions to its
transfer agent and registrar in good faith without liability.
15. Disposition of Shares. Each Optionee, as a condition of exercise,
---------------------
shall represent, warrant and agree, in a form of written certificate approved by
the Company, as follows: (a) that all Option Shares are being acquired solely
for his own account and not on behalf of any other person or entity; (b) that no
Option Shares will be sold or otherwise distributed in violation of the
Securities Act of 1933, as amended, or any other applicable federal or state
securities laws; (c) that if he is subject to reporting requirements under
Section 16(a) of the Exchange Act, he will (i) not violate Section 16(b) of the
Exchange Act, (ii) furnish the Company with a copy of each Form 4 and Form 5
filed by him, and (iii) timely file all reports required under the federal
securities laws; and (d) that he will report all sales of Option Shares to the
Company in writing on a form prescribed by the Company.
16. Effective Date of Plan; Termination Date of Plan. Subject to the
------------------------------------------------
approval of the Plan by the affirmative vote of the holders of a majority of the
Company's securities entitled to vote and represented at a meeting duly held in
accordance with applicable law, the Plan shall be deemed effective as of March
3, 1995. The Plan shall terminate at midnight on February 28, 2005, except as
to Options previously granted and outstanding under the Plan at that time. No
-7-
Options shall be granted after the date on which the Plan terminates. The Plan
may be abandoned or terminated at any earlier time by the Board, except with
respect to any Options then outstanding under the Plan.
17. Limitation on Amount of Option. To the extent that the aggregate Fair
------------------------------
Market Value (determined at the Date of Grant) of Common Stock with respect to
which ISOs are exercisable for the first time by any Optionee during any
calendar year under all plans of the Company and Related Company exceeds
$100,000, the Options or portions thereof which exceed such limit (according to
the order in which they were granted) shall be treated as Non-ISOs.
18. Ten Percent Shareholder Rule. With respect to ISO's, no Option may be
----------------------------
granted to a Key Employee who, at the time the Option is granted, owns stock
possessing more than 10 percent of the total combined voting power of all
classes of stock of the Company or of any "parent corporation" or "subsidiary
corporation", as those terms are defined in Section 425 of the Code, unless at
the time the Option is granted the purchase price for the Option Shares is at
least 110 percent of the Fair Market Value of the Option Shares on the Date of
Grant and such Option by its terms is not exercisable after the expiration of
five years from the Date of Grant. For purposes of the preceding sentence,
stock ownership shall be determined as provided in Section 425 of the Code.
19. Withholding Taxes. The Company, or any Related Company, may take such
-----------------
steps as it may deem necessary or appropriate for the withholding of any taxes
which the Company, or any Related Company, is required by any law or regulation
or any governmental authority, whether federal, state or local, domestic or
foreign, to withhold in connection with any Option including, but not limited
to, the withholding of all or any portion of any payment or the withholding of
issuance of Option Shares to be issued upon the exercise of any Option.
20. Effect of Changes in Control and Certain Reorganizations.
--------------------------------------------------------
(a) In the event of a Change in Control of the Company (as defined
below), the Option Committee may, in its discretion, make any or all of the
following adjustments: (i) provide that all Options granted pursuant to the Plan
shall become exercisable immediately upon such Change in Control (or such other
time as the Committee shall determine), subject to Section 17 with respect to
ISOs; (ii) provide for the payment to an Optionee upon surrender of an Option
(or portion thereof) of an amount in cash equal to the excess of (a) the higher
of (I) the aggregate Fair Market Value of the Option Shares covered by such
Option (or portion thereof) on the date of surrender or (II) the average price
per share paid for the most highly priced one percent of the Common Stock
acquired in connection with the Change in Control times the number of Option
Shares covered by such Option (or portion thereof) over (b) the aggregate
exercise price, except that in no event shall an Optionee have a right to
receive with respect to any ISO an amount in excess of the Fair Market Value on
the date of surrender of the total number of Option Shares with respect to which
such Option is surrendered, less the exercise price which the Optionee would
otherwise have been required to pay upon purchase of such Option Shares had he
exercised the Option; (iii) make any other adjustments, or take such
-8-
other action, as the Option Committee, in its discretion, shall deem
appropriate. In the event that the Option Committee provides for the surrender
of Options pursuant to clause (ii) above, to the extent any Option is
surrendered, it shall be deemed to have been exercised for purposes of Section
4. For purposes of this Section 20, a "Change in Control" of the Company shall
mean a change in control of a nature that would be required to be reported in
response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the
Exchange Act, whether or not the Company is then subject to such reporting
requirement; provided that, without limitation, a Change in Control shall be
deemed to have occurred if (i) any individual, partnership, firm, corporation,
association, trust, unincorporated organization or other entity, or any
syndicate or group deemed to be a person under Section 14(d)(2) of the Exchange
Act, is or becomes the "beneficial owner" (within the meaning of Section 13(d)
of the Exchange Act and the rules and regulations promulgated thereunder),
directly or indirectly, of securities of the Company representing 35% or more of
the combined voting power of the Company's then outstanding securities entitled
to vote in the election of directors of the Company; or (ii) during any period
of two consecutive years (not including any period prior to the adoption of this
Plan), individuals who at the beginning of such period constituted the Board and
any new directors, whose appointment by the Board or nomination for election by
the Company's shareholders was approved by a vote of at least a majority of the
directors then still in office who either were directors at the beginning of the
period or whose appointment or nomination for election was previously so
approved, cease for any reason to constitute a majority thereof.
(b) In the event that (i) the Company is merged or consolidated with
another corporation, (ii) one person becomes the beneficial owner of all of the
issued and outstanding equity securities of the Company (for purposes of this
Section 20(b), the terms "person" and "beneficial owner" shall have the meanings
assigned to them in Section 13(d) of the Exchange Act and the rules and
regulations promulgated thereunder), (iii) a division or subsidiary of the
Company is acquired by another corporation, person or entity, (iv) all or
substantially all of the assets of the Company are acquired by another
corporation, (v) the Company is reorganized, dissolved or liquidated (each such
event in (i), (ii), (iii), (iv) or (v) being hereinafter referred to as a
"Reorganization Event"), or (vi) the Board shall propose that the Company enter
into a Reorganization Event, then the Option Committee may, in its sole
discretion, make any or all of the following adjustments: (A) by written notice
to each Optionee provide that such Optionee's Options shall be terminated or
cancelled, unless exercised within thirty (30) days (or such other period as the
Option Committee shall determine) after the date of such notice; (B) subject to
Section 17 with respect to ISOs, advance the dates upon which any or all
outstanding Options shall be exercised; (C) provide for the payment upon
termination or cancellation of an Option of an amount in cash or securities
equal to the excess, if any, of the Fair Market Value of the Option Shares
subject to the Option at the time of such termination or cancellation over the
exercise price of such Option; and (D) make any other adjustments, or take such
other action, as the Option Committee, in its discretion, shall deem
appropriate. Any action taken by the Option Committee may be made conditional
upon the consummation of the applicable Reorganization Event.
-9-
21. Other Provisions.
----------------
(a) The use of a masculine gender in the Plan shall also include
within its meaning the feminine, and the singular may include the plural, and
the plural may include the singular, unless the context clearly indicates to the
contrary.
(b) Any expenses of administering the Plan shall be borne by the
Company.
(c) This Plan shall be construed to be in addition to any and all
other compensation plans or programs. Neither the adoption of the Plan by the
Board nor the submission of the Plan to the shareholders of the Company for
approval shall be construed as creating any limitations on the power of
authority of the Board to adopt such other additional incentive or other
compensation arrangements as the Board may deem necessary or desirable.
(d) The validity, construction, interpretation, administration and
effect of the Plan and of its rules and regulations, and the rights of any and
all personnel having or claiming to have an interest therein or thereunder shall
be governed by and determined exclusively and solely in accordance with the laws
of the State of Texas.
* * * * * * * *
-10-
Advanced Nutraceuticals, Inc.
9101 Jameel
Houston, Texas 77040
Proxy For Annual Meeting Of Shareholders
The undersigned hereby appoint Gregory Pusey and Jeffrey G. McGonegal, or
either of them, as Proxies or __________________________ (shareholder may strike
the Proxy Committee designated by management and insert the name and address of
another person(s))with power of substitution to vote all the shares of the
undersigned with all of the powers which the undersigned would possess if
personally present at the Annual Meeting of the Shareholders of Advanced
Nutraceuticals, Inc. (the "Company") to be held at 1:00 p.m. (local time) on May
31, 2001 at Houston, Texas, or any adjournment or postponement thereof, on the
following matters:
1. ELECTION OF DIRECTORS
NOMINEES: F. Wayne Ballenger, M.F. Florence, Gregory Pusey, Pailla M.
Reddy and Neil S. Sirkin
FOR all Nominees ______ WITHHELD for all Nominees ______
FOR, except for the following Nominee(s):
________________________________________________________________________________
2. APPROVAL OF THE STOCK PURCHASE AGREEMENT
____ FOR _______ AGAINST _____ ABSTAIN
3. APPROVAL OF AMENDMENT TO THE ARTICLES OF INCORPORATION REGARDING A REVERSE
STOCK SPLIT IN THE RANGE OF ONE-FOR-THREE, ONE-FOR-FOUR TO ONE-FOR-FIVE,
WITH THE EXACT RATIO TO BE DETERMINED BY THE COMPANY'S BOARD OF
DIRECTORS
____ FOR _______ AGAINST _____ ABSTAIN
4. APPROVAL OF AN AMENDMENT TO THE ARTICLES OF INCORPORATION TO DECREASE FROM
TWO-THIRDS TO A MAJORITY THE VOTE REQUIRED TO APPROVE CERTAIN EXTRAORDINARY
ACTIONS.
____ FOR _______ AGAINST _____ ABSTAIN
5. APPROVAL OF THE 1995 STOCK OPTION PLAN, AS AMENDED
____ FOR _______ AGAINST _____ ABSTAIN
In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
Unless contrary instructions are given, the shares represented by this
Proxy will be voted for the election of all nominees for directors and for the
proposals. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
ADVANCED NUTRACEUTICALS, INC. EVEN IF YOU PLAN TO ATTEND THE MEETING, PLEASE
VOTE, DATE, SIGN AND RETURN THIS PROXY IN THE ACCOMPANYING ENVELOPE.
Please sign exactly as shown on your stock certificate and on the envelope
in which this Proxy was mailed. When signing as Partner, Officer, Trustee, etc.,
give full title as such and sign your own name as well. If stock is held
jointly, each joint owner should sign.
Signature(s):____________________________
Signature(s):____________________________
Date:____________________________________