Friday, July 28, 2006

Advanced Nutraceuticals Ups the Ante

Ticker: ANII
Price: $3.40
Mkt Cap: $16.1 million
Ent Val: $19.7 million
P/E: 9.66

When we reported on Advanced Nutraceuticals last month, the story revolved around the company opting to effectively go private, but retain its ability to trade on the pink sheets. We've written about this concept ad nauseum here at Cheap Stocks, but we see these situations as potential unique sources of excess return. In ANII's case, as you may recall, the company intends to reduce shareholder roles below the magic 300 level via a 1 for 500 reverse split. Those with fractional shares after the split will be paid in cash. Nothing new here.

New Price For Fractional Shareholders
What is new, however, is the price the company will pay fractional shareholders. When we wrote the last report, the company had stated in its June 8, 2006 proxy that it would pay fractional shareholders $3.20 per pre split share. The company recently revised its proxy, dated July 25th, and has raised that to $4.00 per share. This change went unreported in the media, but that's no surprise due to this company's small size.

The revised proxy states the following:

Based upon the board’s considerations taking into account the above factors, for purposes of the re-purchase of fractional shares, it was determined that the reverse split re-purchase would be based upon $4.00 per fractional share. This value was established based upon the past 30 days’ average closing prices of the common shares which equaled $3.06 increased by a premium of 30% to reflect the board’s estimate of the current fair value of the company. This value was unanimously agreed to by all board members.

The board of directors considered the fact that in mid 2005 a self-tender offer was conducted to re-purchase approximately 19% of the then outstanding common shares at a price of $4.25 per share. A significant motivating factor in the 2005 offer was to attempt to persuade large numbers of smaller shareholders to tender their shares. In addition, under the circumstances, such smaller sellers had no costs to sell their shares. The board of directors determined to re-purchase shares at a 6% premium to the market price of the stock in a further attempt to entice shareholders to sell. Nevertheless, as discussed above, only approximately 2% of the company’s shareholders participated, leaving approximately 4,200 smaller beneficial shareholders holding shares.

The board of directors believes that the reduction in the public market value of its shares in 2006 to the current level as compared to the approximate $4.10 level in 2005 when the self-tender offer was conducted, is due to the following factors, among other market conditions:

1. Erosion in product margins due to significantly higher quality costs to comply with the recently secured National Nutritional Foods Association quality manufacturer certifications and higher raw material costs.
2. Continued price competition as competitive manufacturers attempt to gain and retain market share.
3. Continued increases in interest rates causing higher borrowing costs and lower profits, as well as more investment dollars moving out of the stock market and into interest sensitive funds.
4. The Company’s borrowing of over $4.5 million debt to fund the 2005 self-tender offer.

The company popped slightly last week, trading in the $3.50 range. While the new offer may not mean a whole to those investors who plan on remaining shareholders after the split, it does show that the company is serious about enticing smaller shareholders to get off the books, paving the way for the company to reach the sub 300 shareholder level. This could be an interesting ride.

*The author has a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

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