SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
[Amendment No. ____]
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Advanced Nutraceuticals, Inc.
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ADVANCED NUTRACEUTICALS, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To the Shareholders:
The annual meeting of shareholders of Advanced Nutraceuticals, Inc. (the
"Company"), will be held at 2:00 P.M., local time, on September 10, 2002, at
1660 Lincoln Street, Suite 1900, Denver, Colorado, for the following purpose:
1. To elect five directors to serve one-year terms ending in the year
2003;
2. To approve the 1995 Stock Option Plan, as amended;
3. To approve the right of conversion of $1,070,000 in debt to shares of
the Company's common stock; and
4. To transact any other business that may properly be discussed at the
meeting or at any subsequent meeting if the annual meeting has to be
postponed or adjourned.
You may vote if you are a shareholder of record on July 25, 2002. 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.
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:
/s/ Jeffrey G. McGonegal
------------------------
August 9, 2002 Jeffrey G. McGonegal
Secretary
ADVANCED NUTRACEUTICALS, INC.
106 S. UNIVERSITY BLVD. #14
DENVER, CO 80209
PROXY STATEMENT
TABLE OF CONTENTS
General Information for Shareholders.......................................2
Proposal 1: Election Of Directors.........................................3
Vote Required..............................................................3
Information About the Nominees to the Board of Directors...................3
Officers...................................................................4
Relevant Business Relationships And Related Transactions...................4
Compliance With Section 16(a) Reporting Requirements.......................6
Audit Committee Report.....................................................6
Board of Directors Meetings and Committees.................................6
Compensation Committee Report..............................................8
Directors Compensation....................................................10
Executive Compensation....................................................10
Summary Compensation Table................................................12
Employment Agreements.....................................................12
Equity Compensation Plan Information......................................13
Option Grants in Fiscal Year Ended September 30, 2001.....................13
Option Exercises and Year-End Values......................................14
Corporate Performance Graph...............................................15
Proposal 2: Approval of Amended 1995 Stock Option Plan...................16
Vote Required.............................................................16
Purpose...................................................................16
Administration............................................................16
Eligible Participants.....................................................16
Shares Authorized.........................................................17
Types of Options..........................................................17
Federal Income Tax Consequences...........................................17
Adjustments...............................................................18
Transferability...........................................................18
Amendments................................................................19
Term......................................................................19
Proposal 3: Approval of Note Conversion to Common Stock .................20
Vote Required.............................................................20
Purpose of the Conversion.................................................20
Reason for Shareholder Approval...........................................20
Security Ownership........................................................21
Independent Public Accountants............................................24
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Stockholder Proposals For The Next Annual Meeting.........................24
Where You Can Find More Information.......................................24
Other Matters.............................................................25
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GENERAL INFORMATION FOR SHAREHOLDERS
We are mailing this proxy statement to you, on or about August 9, 2002.
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 September 10, 2002
at 2:00 p.m., local time. Your vote is very important.
Who Can Vote
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Record holders of the common stock on July 25, 2002 may vote at the annual
meeting. On the record date, there were 2,151,989 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."
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
The current members of the Board of Directors are F. Wayne Ballenger, M. F.
Florence, Randall D. Humphreys, Gregory Pusey, and Pailla M. Reddy. Each of the
current directors has been nominated for election to the Board of Directors 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.
Vote Required
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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.
Information About The Nominees To The Board Of Directors
Please review the following information about the nominees for election to
the Board of Directors.
F. Wayne Ballenger, age 55, has served in various financial consulting
capacities since 2000. He served as President of First Commercial Capital from
1995 to 2000. 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.
M. F. Florence, age 65, 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 Corp., 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 Accountant degree from the Institute of Chartered Accountants of
Ontario. Mr. Florence is President of Citadel Gold Mines, Inc. Mr. Florence has
served as a director of the Company since 1994.
Randall D. Humphreys, age 46, is Chairman and managing director of Glenwood
Capital, L.L.C. From 1997 to 2001 he was the Chairman and managing director of
Enterprise Merchant Banc, L.L.C. During 1997 he led the diversification effort
of St. Joseph Light and Power, a New York Stock Exchange listed utility. During
1996 he served as a financial consultant. From 1986 through 1995, Mr. Humphreys
served as the Senior Operations Officer of Brierly Investments Limited. In
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addition, Mr. Humphreys currently serves on the Board of Directors of the
following companies: Enterbank Holdings, Inc., Acousti Seal Corporation,
Permalock Corporation, GSC Industries, and Mirror Image Holdings, Inc. Mr.
Humphreys is a graduate of Kansas State University. Mr. Humphreys became a
director of the Company in June 2001.
Gregory Pusey, age 50, has served as Chairman of the Board of Directors of
the Company since November 1999. Mr. Pusey served as an officer and director of
the company formerly known as Advanced Nutraceuticals, Inc. ("Old ANI") since
December 1997. Old ANI was acquired by the Company in November 1999. He has
served both as President of Livingston Capital, Ltd. and President of the
general partner of Graystone Capital, Ltd., venture capital firms, since 1987.
From 1986 to 1994 , he served as a consultant to the Company and from 1994 to
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 also serves as a director
of AspenBio, Inc. Mr. Pusey graduated summa cum laude from Boston College with a
B.S. degree in finance in 1974.
Pailla M. Reddy, age 42, is currently Chairman of the Board of Directors,
Chief Executive Officer and President of Bactolac Pharmaceutical Inc. Bactolac
was acquired by us 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. Dr. Reddy became a director of the
Company in 1999.
Officers
Our Board has elected the following executive officer who is not a member
of the Board. It is expected that the Board will elect officers annually
following each annual meeting of Shareholders.
Jeffrey G. McGonegal, age 51, became Senior Vice President - Finance of the
Company in February 2000. Mr. McGonegal also serves as Secretary of the Company
and is President of ANI Pharmaceuticals, Inc (ANIP). 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 recent acquisitions. 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.
Relevant Business Relationships And Related Transactions
In March 1995, we entered into an agreement with Shermfin Corp. regarding
conversion to common stock of debt owned by us to Shermfin Corp. We agreed with
Shermfin Corp. that, for so long as Shermfin Corp. owns 10% or more of our
outstanding common stock, Shermfin Corp. would be entitled to designate one
person to serve as a member of our Board of Directors. Shermfin Corp. designated
M. F. Florence to serve on the Board.
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Bactolac, headquartered in Hauppauge, New York, conducts its operations in
a facility leased from its President, Pailla M. Reddy, comprising approximately
25,000 square feet. Bactolac's current monthly rental is approximately $26,000,
of which $6,000 pertains to improvement made by an entity owned by Mr. 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.
During July 2001, we negotiated a settlement of the $500,000 purchase notes
and accrued interest payable to Allan I. Sirkin and Neil Sirkin issued in
connection with our acquisition of ASHCO. The balance then outstanding including
interest, totaled $556,191, which was settled in full with a payment of
$435,000, resulting in a gain of $121,191. Allan I. Sirkin also agreed at that
time to void the remainder of his employment contract and retire from the
Company. Neil Sirkin is currently the Vice President of Contract Sales of ANIP.
He resigned his position as a director of the Company in August 2002.
In September 2001, we entered into an agreement to acquire certain assets
of York Pharmaceuticals, Inc. ("York"), including equipment and customer list.
The agreement has expired. York has relocated certain of the equipment to ANIP's
facility in Gulfport, Mississippi. Randall D. Humphreys, a Director of the
Company, controls York.
During September 2001, our Board approved a bonus of 103,000 shares of
Common Stock, payable to Dr. Reddy, for his achievements. The shares were issued
subsequent to year-end.
During November 2001, an agreement was entered into with Dr. Reddy, to
extend the principal and interest payment otherwise due on November 17, 2001,
resulting from our November 1999, purchase of Bactolac, for one year. As part of
the agreement, we agreed to a conversion option on $1,000,000 of the deferred
principal, plus interest at the rate of 7% per annum, to allow the holder to
convert such amounts into shares of our Common Stock at the rate of $1.00 per
share, during the extension period. We are seeking shareholder approval of the
conversion option in Proposal 2 in this Proxy Statement.
During November 2001, Bactolac and Dr. Reddy entered into a new two-year
employment agreement. In addition to a base annual salary of $250,000, and
performance bonus features, the agreement contains customary confidentiality and
benefit provisions.
During January 2002, we borrowed $250,000 from Cambridge Holdings, Ltd. The
7% note matures in one year, and is convertible at the option of the holder into
shares of our Common Stock at $1.00 per share. We also issued a warrant to allow
Cambridge to acquire 50,000 shares of our Common Stock at $1.00 per share,
through June 2004. Greg Pusey and Jeff McGonegal, officers of the Company, are
also officers and directors of Cambridge. These transactions were approved by a
disinterested majority of our Board and our Board believes that the terms are at
least as favorable as could have been obtained from an unaffiliated party.
During July 2002, we borrowed $175,000 from Glenwood Capital Partners I,
LP, a partnership managed by Randall D. Humphreys, a director of the Company.
The 7% note matures in one year, and is convertible at the option of the holder
into shares of our Common Stock at $1.00 per share. We also issued a warrant to
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allow Glenwood to acquire 35,000 shares of our Common Stock at $1.00 per share
through January 2005, and agreed to issue up to a maximum of 178,114 shares of
our Common Stock if certain pre-tax earnings of our ANIP subsidiary are
achieved. If ANIP has pre-tax income greater than $850,000 in fiscal 2003 or
$1,520,000 in fiscal 2004, we will issue 0.75 shares of our Common Stock to
Glenwood for each $1.00 greater than the threshold amounts, subject to the
178,114 shares maximum. These transactions were approved by a disinterested
Board and the Board believes that the terms are at least as favorable as could
have been obtained from an unaffiliated party.
Compliance With Section 16(a) Reporting Requirements
Based solely on our 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 us and written representations
from these persons that no other reports were required for those persons, we
believe that all filing requirements applicable to those persons were complied
with for the fiscal year ended September 30, 2001.
Board of Directors Meetings and Committees
Our Board held eleven meetings in person or by consent during the fiscal
year ended September 30, 2001. 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.
Our Board has two standing committees, the audit committee and the
compensation committee. M.F. Florence, F. Wayne Ballenger and Randall D.
Humphreys serve as the three members of the audit committee. During the fiscal
year ended September 30, 2001, the audit committee held two meetings. The
primary functions of the audit committee are to review the scope and results of
audits by our independent certified public accountants, 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, 2001, the compensation committee held one meeting. The
compensation committee reviews stock option and other compensation policies and
programs.
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 was attached to the proxy statement for our annual meeting of
shareholders held on May 31, 2001.
Management is responsible for the Company's internal controls and the
financial reporting process. The independent certified public accountants are
responsible for performing an independent audit of the Company's consolidated
financial statements in accordance with auditing standards generally accepted in
the United States of America and issuing a report thereon. The Committee's
responsibility is to monitor and oversee these processes.
-6-
With respect to the Company's audited financial statements for the
Company's fiscal year ended September 30, 2001, management of the Company
represented to the Committee that the financial statements were prepared in
accordance with accounting principles generally accepted in the United States of
America and the Committee has reviewed and discussed those financial statement
with management. The Audit Committee has also discussed with Grant Thornton LLP,
the Company's independent certified public 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
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The aggregate fees billed for professional services for financial
information systems design or implementation by Grant Thornton LLP for the audit
of ANI's annual financial statements for the fiscal year ended September 30,
2001 and the reviews of the financial statements included in ANI's quarterly
reports on Form 10-Q for that fiscal year were $112,335.
Financial Information Systems Design and Implementation Fees
- ------------------------------------------------------------
The aggregate fees billed for professional services for financial
information systems design or implementation by Grant Thornton LLP during the
fiscal year ended September 30, 2001 was $0.
All Other Fees
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The aggregate fees billed for services rendered by Grant Thornton LLP,
including out-of-pocket expenses, other than the services covered in the two
preceding sections, for the fiscal year ended September 30, 2001 were $91,367,
primarily for tax related professional services ($64,790), 401(K) Plan audit
($8,200) and other professional services ($18,377).
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, 2001 be included in the Company's Annual Report on Form
10-K/A for that year.
M.F. Florence - Chairman
F. Wayne Ballenger
Randall D. Humphreys
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Compensation Committee Report
The compensation committee (the "Committee") of the Board has been
established by the Board to periodically review the compensation philosophy for
our executives, and to recommend to the Board compensation packages for our
executives. The Committee also reviews and recommends to the Board any additions
to or revisions of our 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 our 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.
In late 1999, we finalized acquisitions of three companies. In connection
with those acquisitions, we 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 our worsening financial condition, David Bertrand and Jana
Mitcham (who were officers of Nutrition For Life International, Inc. ("NFLI"), a
subsidiary which was sold by us in June 2001), Mr. Pusey and Mr. Loder, as well
as Jeff McGonegal, our Senior Vice President of Finance, agreed to terminate
their respective employment agreements or arrangements and to substantial
reductions in their salaries.
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. During June 2001,
-8-
following the closing of the sale of NFLI, bonuses of $75,000, $50,000 and
$30,000 were paid to Messrs. Bertrand, Pusey and McGonegal respectively. In
September 2001, a bonus of 103,000 shares of our common stock (valued at
$97,850) was approved for Dr. Reddy, and the shares were issued subsequent to
the fiscal year-end.
Our stock option plans are designed to focus executive efforts on our
long-term goals and to maximize total return to our 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 us 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
our financial success, and our 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, 2001, the
Committee also considered the number of outstanding options previously granted
to each officer. Due to the decline in our stock price during the year, all of
the options granted to our executive officers in fiscal 2001 were
"out-of-the-money" at the fiscal year end of September 30, 2001. The Committee
believes that its awards were consistent with our compensation philosophy to
increase the emphasis placed on long-term incentives and to be competitive in
its total compensation program.
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, our 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
Directors Compensation
Effective in November 2001, our policy is to pay directors who are not
employees of the Company $12,000 per year. Prior to November 2001, directors
received $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. We
reimburse our directors for expenses incurred for attendance at meetings of the
Board.
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During the fiscal year ended September 30, 2001, we granted options to
purchase 12,500 shares of Common Stock at a price of $1.16 per share to F. Wayne
Ballenger, 12,500 shares of Common Stock at a price of $1.16 per share to M.F.
Florence, and 12,500 shares of Common Stock at a price of $1.26 per share to
Randall D. Humphreys. The option grants were made pursuant to the Company's 1995
Stock Option Plan, as amended. Each option will expire ten years from the date
of grant, except that an option will expire, if not exercised, 30 days after the
optionee ceases to be a consultant to the Company.
Executive Compensation
The following table sets forth certain information regarding compensation
paid by us to the chief executive officer and each of the other executive
officers of the Company (the "named executive officers") during the fiscal years
ended September 30, 1999, 2000 and 2001.
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Summary Compensation Table
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------- ------------ ----------------------
Other Annual
Name and Principal Position Salary Compen- Restricted Options/ LTIP All other
Year ($) Bonus sation Stock Awards SARs Payouts Compensation
- ---------------------------- ---- -------- -------- ------------ ------------ -------- ------- ------------
Greg Pusey (1)
President, Chief
Executive Officer and 1999 $ -- $ -- $ -- -- -- -- $ --
Chairman of the Board 2000 94,769 -- -- -- 12,500 -- --
of Directors of ANI 2001 88,696 50,000 -- -- 62,500 -- --
David P. Bertrand (2)
Former Vice Chairman 1999 318,269 -- -- -- 6,250 -- 6,744
of the Board of 2000 241,703 -- -- -- 25,901 -- 6,744
Directors of ANI; 2001 96,769 75,000 -- -- -- -- 2,810
President Chief
Executive Officer of
NFLI
Jana Mitcham (2)
Former Executive Vice 1999 298,378 -- -- -- 6,250 -- 5,184
President and Secretary; 2000 242,143 -- -- -- 25,901 -- 5,184
Secretary of NFLI 2001 96,846 -- -- -- -- -- 2,160
Jeffrey G. McGonegal(3)
Senior Vice President 1999 -- -- -- -- -- -- --
of Finance of ANI 2000 56,558 -- -- -- 25,000 -- --
2001 99,712 30,000 -- -- 75,000 -- --
John R. Brown, Jr. (3)
Vice President Finance, 1999 96,067 -- -- -- 2,500 -- --
Assistant Secretary and 2000 109,899 -- -- -- 5,500 -- --
Treasurer of ANI 2001 107,048 -- -- -- 6,250 -- --
David O. Rodrigue(4)
Former Vice President and 1999 117,760 -- -- -- 3,750 -- --
Chief Financial Officer of 2000 120,295 -- -- -- 8,750 -- --
ANI and NFLI 2001 -- -- -- -- -- -- --
Pailla Reddy (1) (5)
President, Chief Executive 1999 -- -- -- -- -- -- --
Officer and Chairman of the 2000 218,750 -- -- -- -- -- --
Board of Directors of 2001 221,795 -- -- 103,000 75,000 -- --
Bactolac
Neil Sirkin (1)
Vice President of ANIP 1999 -- -- -- -- -- -- --
2000 125,000 -- -- -- -- -- --
2001 138,470 -- -- 30,000 -- -- --
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(1) Messrs. Pusey, McGonegal, Reddy and Sirkin became officers during the first
quarter of the fiscal year ended September 30, 2000.
(2) As a result of the completion of the sale of NFLI to Everest Group
Holdings, Inc. Mr. Bertrand and Ms. Mitcham declined to stand for
re-election at the Company's 2001 annual meeting.
(3) Mr. Brown resigned from the Company in June 2002.
(4) Mr. Rodrigue resigned from the Company in September 2000.
(5) The Company has obtained a life insurance policy on Dr. Reddy. The benefit
amount of $7,000,000 constitutes "key-man" insurance and is payable to the
Company.
Employment Agreements
In connection with the acquisition of Bactolac in 1999, we entered into a
two year employment agreement with Dr. Pailla Reddy, the President of Bactolac.
In November 2001 a new two year agreement was signed. Dr. Reddy currently
receives an annual salary of $250,000 and may receive a performance bonus at our
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 in 1999,
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. During
July 2001, Allan I. Sirkin agreed to the termination of his employment
agreement.
EQUITY COMPENSATION PLAN INFORMATION
The following table gives information about our common stock that may be issued
upon the exercise of options under all of our existing equity compensation plans
as of July 25, 2002. We have options outstanding under two plans, our 1995 Stock
Option Plan and 1995 Non-Discretionary Stock Option Plan for non-employee
directors of the Company. The Non-Discretionary Stock Option Plan was terminated
in October 1999, and no additional options will be granted under that Plan. This
Proxy Statement includes a proposal for an amendment of our 1995 Stock Option
Plan to increase the authorized shares available for option grants.
-12-
(c) Number of
Securities
Remaining
Available for
(a) Number of (b) Weighted Future Issuance
Securities to be Average Exercise Under Equity
Issued Upon Exercise Price of Compensation Plans
of Outstanding Outstanding (Excluding
Options, Warrants and Options, Warrants Securities (d) Total of Securities
Rights and Rights Reflected in Reflected in Columns
Plan Category Column (a)) (a) and (c)
- ------------------------- --------------------- ----------------- ------------------ -----------------------
Equity Compensation Plans
Approved by Shareowners 503,365 $ 2.77 343,385(1) 846,750(1)
Equity Compensation Plans
Not Approved by
Shareowners None -- -- --
TOTAL 503,365 $ 2.77 343,385 (1) 846,750 (1)
===================== ================= ================== =======================
(1) These amounts will be increased by 250,000 shares if Proposal 2 to amend
our 1995 Stock Option Plan is approved.
Option Grants in Fiscal Year Ended September 30, 2001
The following table sets forth information with respect to stock option
grants to the named executive officers during the fiscal year ended September
30, 2001:
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation
Individual Grants For Option Term
- ------------------------------------------------------------------------------------- ------------------------------
Percent of
Number of Total
Securities options/SARs
underlying granted to Exercise or
Options/SARs employees in base price Expiration
Name granted (#) fiscal year ($/Sh) date 5% ($) 10% ($)
- -------------------- ------------ ------------- ----------- ----------- ----------- ---------
Greg Pusey 62,500 13.3% $1.16 4/26/11 $118,095 $188,046
Jeffrey McGonegal 50,000 10.6% $1.16 4/26/11 94,476 150,437
25,000 5.3% $2.25 11/16/05 47,3238 75,219
John R. Brown, Jr. 6,250 1.3% $1.16 4/26/11 11,809 18,805
Pailla Reddy 75,000 15.9% $1.16 4/26/11 141,714 225,656
Neil Sirkin 30,000 6.4% $1.26 8/20/11 56,686 90,262
-13-
Option Exercises and Year-End Values
The following table shows option exercises by the named executive officers
during the fiscal year ended September 30, 2001 and the number and value of
unexercised options at September 30, 2001.
Value of
Unexercised
Number of In-the-Money
Number of Unexercised Options Options at
Shares Under- Value At Year End (#) Year End ($)
Lying Options Realized Exercisable/ Exercisable/
Name Exercised (#) ($) Unexercisable(1) Unexercisable
- -------------------- --------------- --------- -------------------- ----------------
Greg Pusey 0 0 4,167/70,833 0/0
Jeffrey McGonegal 0 0 8,334/91,666 0/0
John R. Brown, Jr. 0 0 6,001/10,749 0/0
Pailla Reddy 0 0 0/75,000 0/0
Neil Sirkin 0 0 0/30,000 0/0
- --------------------
(1) Based on the price of the common stock of $ .95 on September 30, 2001 as
reported by The Nasdaq Stock Market.
-14-
Corporate Performance Graph
The following graph compares the yearly cumulative return on the Company's
common stock since September 30, 1996, with that of the Index for The Nasdaq
Stock Market (U.S. Companies), Peer Group #1 (pre-NFLI sale) which includes the
following companies: BeautiControl Cosmetics, Inc., Herbalife International,
Inc., Nature's Sunshine Products, Inc and Reliv' International, Inc., and Peer
Group #2 (post-NFLI sale) which includes the following companies: Del
Laboratories, HiTech, Vatrol, Natural Alternatives, Inc., and Nutraceuticals,
Inc.
Total Return to Stockholders
(Assumes $100 Investment on 9/30/96)
Total Return Analysis 9/30/1996 9/30/1997 9/30/1998 9/30/1999 09/30/2000 09/30/2001
--------------------- --------- --------- --------- --------- ---------- ----------
Advanced Nutraceuticals, Inc. $100.00 $54.72 $20.72 $16.84 $5.61 $1.64
Peer Group #1 $100.00 $97.52 $52.79 $72.05 $62.27 $81.18
Peer Group #2 $100.00 $164.12 $103.98 $78.28 57.18 $78.37
Nasdaq Composite (US) $100.00 $137.38 $138.04 $224.52 $300.83 $122.76
Source: Carl Thompson Associates www.ctasaline.com (800) 959-9677. Data from
BRIDGE Information Systems, Inc.
-15-
PROPOSAL 2: APPROVAL OF AMENDMENT TO 1995 STOCK OPTION PLAN
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.
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.
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 125 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.
-16-
Shares Authorized
Prior to the amendment, there were 750,000 shares authorized, exclusive of
specific options grants made in 1995 to purchase up to 21,250 shares. The
proposed amendment will increase the authorized shares, exclusive of specific
option grants, to 1,000,000 shares. There are currently outstanding options to
purchase up to 498,365 shares. Option grants to officers, directors and nominees
for directors are described under the caption entitled, "Security Ownership."
Options to employees typically have vesting periods of three years in annual
one-third installments and are exercisable for ten years. 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.
* 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.
-17-
* 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.
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.
-18-
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.
-19-
Proposal 3: Approval of Conversion of
Debt to
Common Stock
You are asked to consider and approve the conversion feature of the note
made by us to outstanding common stock.
Vote Required
The affirmative vote of a majority of the outstanding shares of common
stock entitled to vote at the annual meeting is required to approve the
conversion feature of the note made by us to Dr. Reddy.
The Board of Directors recommends a vote FOR permitting the conversion
feature.
Purpose of the Conversion
On November 19, 1999, we acquired Bactolac Pharmaceutical Inc. and, as part
of the purchase price, we made a promissory note to Dr. Reddy. During November
2001, an agreement was entered into with Dr. Reddy to extend the principal and
interest payment otherwise due on November 17, 2001 resulting from the Bactolac
purchase. As part of the agreement, we agreed to a conversion option on $1
million of the deferred principal, plus interest at the rate of 7% per annum, to
allow Dr. Reddy to convert such amount into shares of our common stock at the
rate of $1.00 per share during the extension. Dr. Reddy has the option to
convert both the principal and the interest of $70,000, which will be due at the
new maturity date of November 17, 2002.
Our financial resources are limited, and we would not have been able to
make the payment to Dr. Reddy without borrowing additional funds, the
availability of which was uncertain. We believe that the conversion feature is
helpful to us in that, if Dr. Reddy elects to convert the debt owed to him by us
into common stock, it will not be necessary for us to attempt to obtain funds to
repay this obligation.
Reason for Shareholder Approval
Our common stock is traded on the Nasdaq National Market. Under Nasdaq
rules, we must obtain shareholder approval of issuances of common stock equal to
20% or more of our outstanding common stock prior to the issuance. We currently
have 2,151,989 shares outstanding. If Dr. Reddy elected to convert the full
amount of the principal and interest owed of $1,070,000 into 1,070,000 shares of
our common stock, we would then have outstanding 3,221,989 shares. The 1,070,000
shares which would be acquired by Dr. Reddy upon conversion would represent
33.2% of the then outstanding shares of common stock.
-20-
SECURITY OWNERSHIP
The following table sets forth, as of July 25, 2002, the ownership of our
common stock held by:
(1) Each person who owns of record or who is known by us to own
beneficially more than 5% of such stock;
(2) Each of the directors and nominees for election as directors;
(3) Each of the current executive officers; and
(4) All of our 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 certain options or
warrants described in the notes of the table.
Number of Shares Percentage of
Beneficial Owner Owned Ownership
- ----------------------------- ---------------- --------------
Apotex Foundation 162,500(1) 6.8%
150 Signet Dr.
Weston, Ontario, Canada
9M9 1T9
Bernard Sherman 303,848(1) 12.7%
150 Signet Dr.
Weston, Ontario, Canada
9M9 1T9
Shermfin Inc. 141,349(1) 5.9%
150 Signet Dr.
Weston, Ontario, Canada
9M9 1T9
M.F. Florence 163,262(1)(2) 6.9%
150 Signet Dr.
Weston, Ontario, Canada
9M9 1T9
Cambridge Holdings, Ltd. 444,413(3) 18.0%
106 S. University, #14
Denver, CO 80209
F. Wayne Ballenger 22,500(4) 0.9%
3134 Meadway Drive
Houston, TX 77082
-21-
Number of Shares Percentage of
Beneficial Owner Owned Ownership
- ----------------------------- ---------------- --------------
Gregory Pusey 639,583(5) 25.1%
106 S. University, #14
Denver, CO 80209
Pailla M. Reddy 1,534,100(6) 46.5%
255007 Williston Avenue
Floral Park, NY 11001
Jeffrey G. McGonegal 127,363(7) 5.3%
1905 West Valley Vista Drive
Castle Rock, CO 80104
Randall D. Humphreys 222,250(8) 9.4%
9150 Glenwood
Overland Park, KS 66212
All Officers and Directors as a 2,709,058 73.1%
Group (6 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 Corp. due to their affiliations with Shermfin Inc.
(2) Includes options to acquire (i) 1,250 shares of common stock at $49.50 per
share; (ii) 1,250 shares of Common Stock at $28.00 per share,; (iii) 1,250
shares of Common Stock at $9.52 per share (iv) 1,915 shares of Common Stock
at $8.50 per share of which options to acquire 638 shares become
exercisable in October 2002, (v) 3,750 shares at $11,36 per share of which
options to acquire 1,250 shares become exercisable in December 2002, and
(vi) 12,500 shares at $1.16 per share which become exercisable in one-third
annual installments commencing in April 2002.
(3) Includes 267,500 shares which may be acquired by conversion of a note and
35,000 shares which may be acquired by exercise of a warrant.
(4) Includes options to acquire (i) 1,250 shares of common stock at $49.50 per
share; (ii) 1,250 shares of Common Stock at $28.00 per share, (iii) 1,250
shares of Common Stock at $11.00 per share, (iv) 6,250 shares of Common
Stock at $11.36 per share of which options to acquire 2,083 shares become
exercisable in December 2002, and (v) 12,500 shares at $1.16 per share
which become exercisable in one-third annual installments commencing in
April 2002.
-22-
(5) Includes 20,328 shares held by his wife, individually and as custodian for
their minor children, 126,913 shares held by Cambridge Holdings, Ltd., a
corporation in which he is a principal shareholder, 267,500 shares of
common stock which may be acquired by Cambridge by conversion of a note,
35,000 shares of common stock which may be acquired by Cambridge by
exercise of a warrant and warrants to purchase 3,750 shares of Common Stock
at $15.00 per share. Includes options to acquire (i) 12,500 shares of
Common Stock at $11.36 per share of which options to acquire 4,166 shares
become exercisable in December 2002 and (ii) 62,500 shares of Common Stock
at $1.16 per share which become exercisable in one-third annual
installments commencing in April 2002.
(6) Includes options to acquire 75,000 shares of common stock at $1.16 per
share, which become exercisable in one-third annual installments commencing
in April 2002 and 1,070,000 shares which may be acquired upon conversion of
the note made to Dr. Reddy. Does not include any shares, that may be earned
pursuant to earnout agreements.
(7) Includes 2,663 shares held in the name of McGonegal Family Partnership and
options to acquire (i) 25,000 shares of Common Stock at $9.00 per share of
which options to acquire 8,333 shares becomes exercisable in each of
February 2002 and 2003 (ii) 25,000 shares at $2.25 per share which become
exercisable in one-third annual installments commencing in November 2001
and (iii) 50,000 shares of Common Stock at $1.16 per share which become
exercisable in one-third annual installments commencing in April 2002.
(8) Includes 187,250 shares of common stock which may be acquired by conversion
of a note made to Glenwood Capital Partners I, LP, a partnership in which
he is the general partner, 35,000 shares of common stock which may be
acquired by Glenwood by exercise of a warrant not including 178,114 shares
of common stock which may be acquired by Glenwood through an earnout and
options to acquire 12,500 shares of common stock at $1.26 per share, which
become exercisable in one-third annual installments commencing in August
2002. Does not include 178,114 shares of common stock that may be acquired
by Glenwood through an earnout arrangement.
-23-
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
A representative of our auditor for the fiscal year ended September 30,
2001, Grant Thornton LLP is not expected to be present at the annual meeting.
Management has not made an appointment of auditors for the fiscal year ending
September 30, 2002.
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, 2002 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 for the fiscal year ended
September 30, 2001, has been enclosed with this proxy statement. An additional
copy is available to each record and beneficial owner of our securities without
charge upon written request to the Secretary at 106 S. University, #14, Denver,
Colorado 80209. The SEC allows us to "incorporate by reference" information from
the 10-K into this proxy statement if the 10-K is delivered with the proxy
statement. The information incorporated by reference is located in Items 7, 7A,
8 and 9 of the 10-K. Also enclosed is a copy of our Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 2002, which Report is also
incorporated by reference into this proxy statement.
-24-
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
/s/ Jeffrey G. McGonegal
------------------------
Jeffrey G. McGonegal
Secretary
August 9, 2002
-25-
Advanced Nutraceuticals, Inc.
106 S. University Blvd., #14
Denver, Colorado 80209
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 2:00 p.m. (local time) on
September 10, 2002 at 1660 Lincoln Street, Suite 1900, Denver, Colorado, or any
adjournment or postponement thereof, on the following matters:
1. ELECTION OF DIRECTORS
NOMINEES: F. Wayne Ballenger, M.F. Florence, Randall D. Humphreys, Gregory
Pusey, and Pailla M. Reddy.
FOR all Nominees ______ WITHHELD for all Nominees ______
FOR, except for the following Nominee(s):
___________________________________________________________________________
2. APPROVAL OF THE 1995 STOCK OPTION PLAN, AS AMENDED
_________ FOR ________ AGAINST _________ ABSTAIN
3. APPROVAL OF THE RIGHT OF CONVERSION OF $1,070,000 IN DEBT TO SHARES OF
THE COMPANY'S COMMON STOCK
_________ FOR ________ AGAINST _________ ABSTAIN
_________ 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:______________________________________________