<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
Commission file number 000-23731
NUTRACEUTICAL INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 87-0515089
(State of incorporation) (IRS Employer Identification No.)
1400 Kearns Boulevard, 2nd Floor, Park City, Utah 84060
(Address of principal executive office) (Zip code)
(435) 655-6000
(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
----- -----
At May 15, 1998 the registrant had 11,761,158 shares of common stock
outstanding.
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
INDEX
<TABLE>
<CAPTION>
Description Page No.
<S> <C>
Part I. Financial Information
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets - 3
September 30, 1997 and March 31, 1998
Condensed Consolidated Statements of Operations - 4
Three Months and Six Months Ended March 31, 1997 and
1998
Condensed Consolidated Statements of Cash Flows - 5
Six Months Ended March 31, 1997 and 1998
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NUTRACEUTICAL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, March 31,
-----------------------------
1997(1) 1998
<S> <C> <C>
ASSETS
Current assets:
Cash $ 4,415 $ 2,049
Accounts receivable, net 8,001 8,616
Inventories, net 20,753 26,071
Prepaid expenses and other assets 1,018 586
Deferred income taxes 897 2,090
---------- ----------
Total current assets 35,084 39,412
Property, plant and equipment, net 10,711 10,776
Goodwill, net 42,008 41,397
Other assets, net 2,307 1,234
---------- ----------
$ 90,110 $ 92,819
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 7,085 $ -
Current portion of capital lease obligations 181 119
Accounts payable 6,932 7,399
Accrued expenses 5,270 2,558
---------- ----------
Total current liabilities 19,468 10,076
Long-term debt 52,860 31,500
Capital lease obligations 133 107
Deferred income taxes, net 1,295 1,800
---------- ----------
Total liabilities 73,756 43,483
---------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock 93 118
Additional paid-in capital 9,609 42,726
Subscriptions receivable (55) -
Retained earnings 6,707 6,492
---------- ----------
Total stockholders' equity 16,354 49,336
---------- ----------
$ 90,110 $ 92,819
========== ==========
</TABLE>
(1) The condensed consolidated balance sheet as of September 30, 1997 has been
prepared using information from the audited financial statements at that
date.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended March 31, Six months ended March 31,
------------------------------- ----------------------------
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Net sales $ 25,120 $ 27,799 $ 47,485 $ 53,656
Cost of sales 13,320 14,742 25,123 28,600
------------ ----------- ------------ ------------
Gross profit 11,800 13,057 22,362 25,056
------------ ----------- ------------ ------------
Operating expenses:
Selling, general and administrative 7,283 8,070 14,024 15,767
Amortization of intangibles 335 329 684 660
Non-recurring payments to management advisors 75 1,060 150 1,135
------------ ----------- ------------ ------------
7,693 9,459 14,858 17,562
------------ ----------- ------------ ------------
Income from operations 4,107 3,598 7,504 7,494
Interest expense, net 1,640 1,188 3,345 2,756
------------ ----------- ------------ ------------
Income before provision for income taxes 2,467 2,410 4,159 4,738
Provision for income taxes 974 928 1,643 1,824
------------ ----------- ------------ ------------
Net income before extraordinary loss 1,493 1,482 2,516 2,914
Extraordinary loss on early extinguishment of debt, net of tax - (3,129) - (3,129)
------------ ----------- ------------ ------------
Net income (loss) $ 1,493 $ (1,647) $ 2,516 $ (215)
============ =========== ============ ============
Net income before extraordinary loss per common share:
Basic $ 0.16 $ 0.14 $ 0.27 $ 0.30
Diluted $ 0.14 $ 0.13 $ 0.24 $ 0.26
Extraordinary loss per common share:
Basic $ - $ (0.30) $ - $ (0.32)
Diluted $ - $ (0.27) $ - $ (0.28)
Net income (loss) per common share:
Basic $ 0.16 $ (0.16) $ 0.27 $ (0.02)
Diluted $ 0.14 $ (0.14) $ 0.24 $ (0.02)
Weighted average common shares outstanding:
Basic 9,308,583 10,396,389 9,308,583 9,846,509
Diluted 10,501,134 11,602,100 10,489,498 11,078,025
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31,
----------------------------------------
1997 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,516 $ (215)
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,883 2,292
Amortization of debt issuance costs 404 362
Extraordinary loss on early
extinguishment of debt, net of tax - 3,129
Changes in assets and liabilities:
Accounts receivable (2,418) (615)
Inventories (2,206) (5,318)
Prepaid expenses and other assets 258 432
Deferred income taxes 472 1,116
Other assets (3) (20)
Accounts payable 3,033 467
Accrued expenses 275 (2,712)
-------- ---------
Net cash provided by (used in) operating activities 4,214 (1,082)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,812) (1,697)
-------- ---------
Net cash used in investing activities (1,812) (1,697)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facility - 33,000
Payments on revolving credit facility (1,950) (10,740)
Payments on long-term debt (500) (53,265)
Principal payments on capital lease obligations (92) (88)
Payments of deferred financing fees - (1,691)
Receipt of subscriptions receivable 17 55
Proceeds from issuance of common stock - 33,142
-------- ---------
Net cash provided by (used in) financing activities (2,525) 413
-------- ---------
Net decrease in cash (123) (2,366)
Cash at beginning of period 2,321 4,415
-------- ---------
Cash at end of period $ 2,198 $ 2,049
======== =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share data)
1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements include all necessary adjustments (consisting of normal
recurring accruals) to present fairly the financial position of Nutraceutical
International Corporation (the Company) and its subsidiaries as of March 31,
1998, the results of its operations for the three months and six months ended
March 31, 1997 and 1998, and its cash flows for the six months ended March 31,
1997 and 1998, in conformity with generally accepted accounting principles for
interim financial information applied on a consistent basis. The results for
the three months and six months ended March 31, 1998 are not necessarily
indicative of the results to be expected for the full fiscal year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. Accordingly, these financial statements should be read in
conjunction with the Company's Registration Statement on Form S-1, as amended,
which was filed with the Securities and Exchange Commission and became effective
on February 11, 1998 (the Registration Statement).
2. INVENTORIES, NET
Inventories, net of reserves for obsolete and slow moving inventory, are
comprised of the following:
<TABLE>
<CAPTION>
September 30, March 31,
1997 1998
------------- ------------
<S> <C> <C>
Raw materials $ 10,090 $ 11,353
Work-in-process 3,064 4,176
Finished goods 7,599 10,542
------------- ------------
$ 20,753 $ 26,071
============= ============
</TABLE>
6
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share data)
3. COMMON STOCK TRANSACTIONS
On February 19, 1998, the Company completed the initial public offering (the
Offering) of its common stock (Common Stock), par value $0.01 per share.
In connection with the Offering, the Company reclassified all of its outstanding
classes of capital stock (including accrued preference amounts) into shares of
Common Stock and authorized a single class of undesignated preferred stock.
Concurrently with the Offering, the Company effected a 7.5291-for-one stock
split of all outstanding shares of Common Stock and a corresponding adjustment
in the number of shares issuable upon the exercise of all outstanding options
and warrants. After giving effect to the reclassification and stock split, the
Company had 9,308,583 shares of Common Stock outstanding and no shares of
preferred stock outstanding. The reclassification and stock split have been
retroactively reflected in the accompanying financial statements.
The Company sold 2,144,618 shares of Common Stock in the Offering and certain
selling stockholders sold an additional 1,684,882 shares of Common Stock
(including shares sold pursuant to the underwriters overallotment option). Of
the shares sold by the selling stockholders, 302,947 shares were issued in
connection with the Offering upon the exercise of outstanding warrants.
Immediately following the Offering, the Company had a total of 11,756,148 shares
of Common Stock outstanding. The net proceeds to the Company from the sale of
shares in the Offering of approximately $33,142 were primarily used to repay
existing indebtedness. In addition, the Company recorded a one-time payment
related to the termination of a management advisory agreement and for services
rendered in connection with the Offering.
4. DEBT TRANSACTIONS
On February 25, 1998, the Company replaced its existing credit agreement, under
which the Company had outstanding borrowings of $60,178 (before unamortized
discount of $2,454), with a new credit agreement (the New Credit Agreement). The
Company realized an extraordinary loss on the early extinguishment of the
existing credit agreement of approximately $3,129, net of tax of $1,804, during
the three months ended March 31, 1998. The New Credit Agreement makes $70,000 of
revolving credit borrowings available to the Company, of which $31,500 was
outstanding at March 31, 1998.
7
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share data)
5. NEW ACCOUNTING STANDARDS
The Company has adopted SFAS No. 128, "Earnings per Share". SFAS No. 128 is
effective for fiscal periods ending after December 15, 1997 and requires
restatement of all prior-period earnings per share (EPS) data presented. Under
this statement, both "basic" EPS and "diluted" EPS are presented on the face of
the income statement. As required under SFAS No. 128, both basic EPS and diluted
EPS for the three months and six months ended March 31, 1997 and 1998 have been
calculated giving retroactive effect to the Company's stock reclassification and
stock split which occurred in February of 1998. The following table provides a
reconciliation of both net income and the number of common shares used in the
computations of basic EPS, which utilizes the weighted average number of common
shares outstanding without regard to potential common shares, and diluted EPS,
which includes all such shares:
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
March 31, March 31,
1997 1998 1997 1998
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net income (Numerator):
Net income before extraordinary loss $ 1,493 $ 1,482 $ 2,516 $ 2,914
Extraordinary loss on early extinguishment of debt, net of tax - (3,129) - (3,129)
------------- ------------- ------------ -------------
Net income $ 1,493 $ (1,647) $ 2,516 $ (215)
============= ============= ============ =============
Weighted average common shares (Denominator):
Basic weighted average common shares 9,308,583 10,396,389 9,308,583 9,846,509
Add: Dilutive effect of stock options and warrants 1,192,551 1,205,711 1,180,915 1,231,516
------------- ------------- ------------ -------------
Diluted weighted average common shares 10,501,134 11,602,100 10,489,498 11,078,025
============= ============= ============ =============
Net income before extraordinary loss per common share:
Basic $ 0.16 $ 0.14 $ 0.27 $ 0.30
Diluted $ 0.14 $ 0.13 $ 0.24 $ 0.26
Extraordinary loss per common share:
Basic $ - $ (0.30) $ - $ (0.32)
Diluted $ - $ (0.27) $ - $ (0.28)
Net income (loss) per common share:
Basic $ 0.16 $ (0.16) $ 0.27 $ (0.02)
Diluted $ 0.14 $ (0.14) $ 0.24 $ (0.02)
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with the
response to Part I, Item 1 of this report.
The Company was formed in 1993 by key members of the current management team and
Bain Capital, Inc. to effect a consolidation strategy in the highly fragmented
vitamin, mineral, herbal and other nutritional supplements industry (the VMS
Industry). The Company purchased Solaray, Inc. in October 1993 with a view
toward using it as a platform for future acquisitions of businesses in the VMS
Industry. In fiscal 1995, the Company completed three additional acquisitions
with the purchases of Premier One Products, Inc. in October 1994, Makers of KAL,
Inc. in January 1995 and Monarch Nutritional Laboratories, Inc. in September
1995.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of operations data
as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Three months ended March 31, Six months ended March 31,
----------------------------- --------------------------
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 53.0% 53.0% 52.9% 53.3%
-------- --------- -------- --------
Gross profit 47.0% 47.0% 47.1% 46.7%
Selling, general and administrative 29.0% 29.0% 29.5% 29.4%
Amortization of intangibles 1.4% 1.2% 1.4% 1.2%
Non-recurring payments to management advisors 0.3% 3.9% 0.4% 2.1%
-------- --------- -------- --------
Income from operations 16.3% 12.9% 15.8% 14.0%
Interest expense, net 6.5% 4.2% 7.0% 5.2%
-------- --------- -------- --------
Income before provision for income taxes 9.8% 8.7% 8.8% 8.8%
Provision for income taxes 3.9% 3.4% 3.5% 3.4%
-------- --------- -------- --------
Net income before extraordinary loss 5.9% 5.3% 5.3% 5.4%
Extraordinary loss on early extinguishment of debt, net of tax - -11.2% - -5.8%
-------- --------- -------- --------
Net income (loss) 5.9% -5.9% 5.3% -0.4%
======== ========= ======== ========
Adjusted EBITDA (1) 20.5% 21.0% 20.1% 20.4%
======== ========= ======== ========
</TABLE>
(1) See "-Adjusted EBITDA."
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 TO THE THREE MONTHS ENDED
MARCH 31, 1997
Net Sales. Net sales increased by $2.7 million, or 10.7%, to $27.8 million for
the three months ended March 31, 1998 (second quarter of fiscal 1998) from $25.1
million for the three months ended March 31, 1997 (second quarter of fiscal
1997). The increase in net sales was primarily the result of increased sales
volume and, to a lesser extent, minimal increases in the prices of the Company's
products. Such price increases did not contribute significantly to revenue
growth. The Company believes that the increased
9
<PAGE>
volume was primarily attributable to industry growth as well as to the success
of the Company's new product introductions.
Gross Profit. Gross profit increased by $1.3 million, or 10.7%, to $13.1
million for the second quarter of fiscal 1998 from $11.8 million for the second
quarter of fiscal 1997. This increase in gross profit was primarily
attributable to growth in sales volume. As a percentage of net sales, gross
profit remained strong and stable at 47.0% for both the second quarter of fiscal
1998 and the second quarter of fiscal 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $0.8 million, or 10.8%, to $8.1 million
for the second quarter of fiscal 1998 from $7.3 million for the second quarter
of fiscal 1997. As a percentage of net sales, selling, general and
administrative expenses remained flat at 29.0% for the second quarter of fiscal
1998 and the second quarter of fiscal 1997.
Amortization of Intangibles. Amortization of intangibles was $0.3 million for
the second quarter of fiscal 1998 and $0.3 million for the second quarter of
fiscal 1997. As a percentage of net sales, amortization of intangibles
decreased to 1.2% for the second quarter of fiscal 1998 from 1.4% for the second
quarter of fiscal 1997. This decrease in amortization of intangibles as a
percentage of net sales was primarily attributable to the increase in net sales.
Non-recurring Payments to Management Advisors. Non-recurring payments to
management advisors of $1.1 million for the second quarter of fiscal 1998 and
$0.1 million for the second quarter of fiscal 1997 were recognized. The payments
recognized in the second quarter of fiscal 1997 were made pursuant to an
advisory agreement, which was terminated in connection with the Offering. The
payments recognized in the second quarter of fiscal 1998 were made primarily for
the termination of the advisory agreement and for services rendered in
connection with the Offering. The Company does not expect to incur such payments
in the future.
Interest Expense, Net. Interest expense decreased by $0.4 million, or 27.6%,
to $1.2 million for the second quarter of fiscal 1998 from $1.6 million for the
second quarter of fiscal 1997. As a percentage of net sales, interest expense
decreased to 4.2% for the second quarter of fiscal 1998 from 6.5% for the second
quarter of fiscal 1997. This decrease in interest expense was primarily
attributable to decreased indebtedness resulting from the Company's use of
proceeds generated in the Offering.
Provision for Income Taxes. The Company's effective tax rate decreased to
38.5% for the second quarter of fiscal 1998 from 39.5% for the second quarter of
fiscal 1997. In each fiscal quarter, the effective tax rate is higher than
statutory rates primarily due to the non-deductibility for tax purposes of
goodwill amortization arising from the Solaray acquisition. The impact of
Solaray goodwill on the effective tax rate for fiscal 1998 compared to fiscal
1997 is expected to decline as a result of the Company's higher projected income
before provision for taxes.
10
<PAGE>
Extraordinary Loss on Early Extinguishment of Debt. An extraordinary loss on
early extinguishment of debt of $3.1 million, net of tax, was recognized during
the second quarter of fiscal 1998 in connection with the repayment of
indebtedness related to the existing credit agreement and the establishment of
the New Credit Agreement, which was consummated simultaneously with the
Offering.
COMPARISON OF THE SIX MONTHS ENDED MARCH 31, 1998 TO THE SIX MONTHS ENDED MARCH
31, 1997
Net Sales. Net sales increased by $6.2 million, or 13.0%, to $53.7 million for
the six months ended March 31, 1998 from $47.5 million for the six months ended
March 31, 1997. The increase in net sales was primarily the result of increased
sales volume and, to a lesser extent, minimal increases in the prices of the
Company's products. Such price increases did not contribute significantly to
revenue growth. The Company believes that the increased volume was primarily
attributable to industry growth as well as to the success of the Company's new
product introductions.
Gross Profit. Gross profit increased by $2.7 million, or 12.0%, to $25.1
million for the six months ended March 31, 1998 from $22.4 million for the six
months ended March 31, 1997. This increase in gross profit was primarily
attributable to growth in sales volume. As a percentage of net sales, gross
profit decreased to 46.7% for the six months ended March 31, 1998 from 47.1% for
the six months ended March 31, 1997. This decrease in gross profit as a
percentage of net sales was primarily attributable to increased discounts
during the current year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $1.8 million, or 12.4%, to $15.8 million
for the six months ended March 31, 1998 from $14.0 million for the six months
ended March 31, 1997. As a percentage of net sales, selling, general and
administrative expenses decreased to 29.4% for the six months ended March 31,
1998 from 29.5% for the six months ended March 31, 1997. This decrease in
selling, general and administrative expenses as a percentage of net sales was
primarily attributable to the Company's efforts to implement cost control
programs during periods of sales increase.
Amortization of Intangibles. Amortization of intangibles was $0.7 million for
the six months ended March 31, 1998 and $0.7 million for the six months ended
March 31, 1997. As a percentage of net sales, amortization of intangibles
decreased to 1.2% for the six months ended March 31, 1998 from 1.4% for the six
months ended March 31, 1997. This decrease in amortization of intangibles as a
percentage of net sales was primarily attributable to the increase in net sales.
Non-recurring Payments to Management Advisors. Non-recurring payments to
management advisors of $1.1 million for the six months ended March 31, 1998 and
$0.2 million for the six months ended March 31, 1997 were recognized. The
payments recognized for the six months ended March 31, 1997 were made pursuant
to an advisory agreement which was terminated in connection with the Offering.
The payments recognized for the six months ended March 31, 1998 were made
primarily for the termination of the advisory agreement and for services
rendered in connection with the Offering. The Company does not expect to incur
such payments in the future.
11
<PAGE>
Interest Expense, Net. Interest expense decreased by $0.5 million, or 17.6%,
to $2.8 million for the six months ended March 31, 1998 from $3.3 million for
the six months ended March 31, 1997. As a percentage of net sales, interest
expense decreased to 5.2% for the six months ended March 31, 1998 from 7.0% for
the six months ended March 31, 1997. This decrease in interest expense was
primarily attributable to decreased indebtedness resulting from the Company's
use of proceeds generated in the Offering.
Provision for Income Taxes. The Company's effective tax rate decreased to
38.5% for the six months ended March 31, 1998 from 39.5% for the six months
ended March 31, 1997. In each fiscal year, the effective tax rate is higher
than statutory rates primarily due to the non-deductibility for tax purposes of
goodwill amortization arising from the Solaray acquisition. The impact of
Solaray goodwill on the effective tax rate for the six months ended March 31,
1998 decreased compared to the six months ended March 31, 1997 as a result of
the Company's higher income before provision for taxes.
Extraordinary Loss on Early Extinguishment of Debt. An extraordinary loss on
early extinguishment of debt of $3.1 million, net of tax, was recognized during
the six months ended March 31, 1998 in connection with the repayment of
indebtedness related to the existing credit agreement and the establishment of
the New Credit Agreement, which was consummated simultaneously with the
Offering.
ADJUSTED EBITDA
Adjusted EBITDA (earnings before interest expense, taxes, depreciation and
amortization) is a widely used and commonly reported standard measure utilized
by analysts and investors in the VMS Industry. The following Adjusted EBITDA
information can provide additional information for determining the ability of
the Company to meet its debt service requirements and for other comparative
analyses of the Company's operating performance relative to other nutritional
supplement companies:
<TABLE>
<CAPTION>
Three months ended March 31, Six months ended March 31,
-------------------------------- ----------------------------
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Net income before extraordinary loss $ 1,493 $ 1,482 $ 2,516 $ 2,914
Provision for income taxes 974 928 1,643 1,824
Interest expense, net (1) 1,640 1,188 3,345 2,756
Depreciation and amortization 967 1,177 1,883 2,292
Non-recurring payments to management
advisors (2) 75 1,060 150 1,135
-------------- ---------- ---------- ----------
$ 5,149 $ 5,835 $ 9,537 $ 10,921
Adjusted EBITDA ============== ========== ========== ==========
</TABLE>
(1) Includes amortization of capitalized debt issuance costs.
(2) Represents payments to management advisors for services provided,
including services rendered in connection with the Offering. The Company
does not expect to incur such payments in the future.
12
<PAGE>
The Company's Adjusted EBITDA increased $0.7 million to $5.8 million for the
second quarter of fiscal 1998 from $5.1 million for the second quarter of fiscal
1997. Adjusted EBITDA increased $1.4 million to $10.9 million for the six
months ended March 31, 1998 from $9.5 million for the six months ended March 31,
1997. Adjusted EBITDA as a percentage of net sales increased to 21.0% for the
second quarter of fiscal 1998 from 20.5% for the second quarter of fiscal 1997.
Adjusted EBITDA as a percentage of net sales increased to 20.4% for the six
months ended March 31, 1998 from 20.1% for the six months ended March 31, 1997.
Increased sales volume and the successful implementation of the Company's
operating improvements contributed to this increase in Adjusted EBITDA.
SEASONALITY
The Company believes that its business is characterized by minor seasonality.
Historically, the Company has recorded higher sales volume during the second and
third quarters due to increased interest in health-related products among
consumers following the holiday season and in anticipation of the summer months.
The Company does not believe the impact of seasonality on its results of
operations is material. In addition, the Company's sales of premium bulk
formulations are characterized by periodic shipments to certain customers and
can vary from quarter to quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $29.3 million as of March 31, 1998, compared
to $15.6 million as of September 30, 1997. This increase in working capital was
primarily the result of (i) increases in inventory and accounts receivable due
to higher sales levels and the Company's efforts to expand inventory levels in
connection with the expected consolidation of certain distribution and other
operations, (ii) a decrease in the current portion of long-term debt related to
debt repayments, (iii) a decrease in accrued expenses offset by a decrease in
cash and (iv) an increase in deferred income taxes related to the early
extinguishment of debt in connection with the New Credit Facility, which was
consummated simultaneously with the Offering.
Net cash provided by (used in) operating activities for the six months ended
March 31, 1998 was ($1.1) million compared to $4.2 million for the comparable
period in fiscal 1997. Net cash flows from operating activities decreased
primarily due to (i) increases in inventory and accounts receivable related to
higher sales levels and the Company's efforts to expand inventory levels in
connection with the expected consolidation of certain distribution and other
operations and (ii) a decrease in accrued expenses related to the payment of
previously accrued performance incentives.
Net cash used in investing activities was $1.7 million for the six months ended
March 31, 1998 compared to $1.8 million for the comparable period in fiscal
1997. Investing activities during these periods relate entirely to capital
expenditures.
Net cash provided by (used in) financing activities was $0.4 million for the six
months ended March 31, 1998 compared to ($2.5) million for the comparable period
in fiscal 1997. Net cash flows from financing activities increased primarily
due to the Offering and the New Credit Facility.
13
<PAGE>
On February 25, 1998, the Company replaced its existing credit agreement, under
which the Company had outstanding borrowings of $60,178 (before unamortized
discount of $2,454), with the New Credit Agreement. The Company realized an
extraordinary loss on the early extinguishment of the existing credit agreement
of approximately $3,129, net of tax, during the six months ended March 31, 1998.
The New Credit Agreement makes $70,000 of revolving credit borrowings available
to the Company, of which $31,500 was outstanding at March 31, 1998.
A key component of the Company's business strategy is to seek to make additional
acquisitions, which could require the Company to incur substantial additional
indebtedness. The Company believes that based on current levels of operations
and anticipated growth, borrowings under the New Credit Agreement, together with
cash flows from operations, will be sufficient to make anticipated capital
expenditures and fund working capital needs for fiscal 1998.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which became effective for
fiscal years beginning after December 15, 1997 and established standards for the
way that public business enterprises report information about operating segments
in annual and quarterly financial statements. SFAS No. 131 also established
standards for related disclosures about products and services, geographic areas,
and major customers. The Company is currently assessing the impact of SFAS No.
131 on its financial statements.
The American Institute of Certified Public Accountants issued SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use", which became effective for fiscal years beginning after December
15, 1997 and established standards for the way that public business enterprises
account for the costs of internal use computer software. The Company is
currently assessing the impact of SOP 98-1 on its financial statements.
INFLATION
Inflation affects the cost of raw materials, goods and services used by the
Company. In recent years, inflation has been modest. The competitive
environment somewhat limits the ability of the Company to recover higher costs
resulting from inflation by raising prices. Overall product prices have
generally been stable and the Company seeks to mitigate the adverse effects of
inflation primarily through improved productivity and cost containment programs.
The Company does not believe that inflation has had a material impact on its
results of operations for the periods presented.
FORWARD LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the Securities Act).
Such forward-looking statements are based on the beliefs of the Company's
management as well as on assumptions made by and information currently available
to the Company at the time such statements were made. When used in this MD&A,
the words "anticipate," "believe," "estimate," "expect," "intends" and similar
expressions, as they relate to the Company are intended to identify forward-
looking statements, which include statements relating to, among other things,
(i) the ability of the Company to continue to successfully compete in the
nutritional supplements market; (ii) the anticipated benefits from new product
introductions; (iii) the continued effectiveness of the Company's sales and
marketing strategy; and (iv) the ability of the Company to continue to
successfully develop and launch new products. Actual results could differ
materially from those projected in the forward-looking statements as a result of
the matters discussed herein and certain economic and business factors, some of
which may be beyond the control of the Company.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As discussed in the Registration Statement, the Company is subject to regulation
by a number of federal, state and foreign agencies and is involved in various
legal matters which arise in the normal course of business. Recent material
developments in regulatory and legal matters referred to in the Registration
Statement include the following: (i) the Company has reached an agreement to
resolve the matter involving the former international distributor of Old
Premier; (ii) the Company has resolved the private plaintiff aspect of the
Proposition 65 matter arising from the notice dated January 20, 1998; (iii) the
FDA is investigating the aforementioned matter with the Company's cooperation;
and (iv) the FDA has issued proposed final labeling regulations regarding
structure/function claims, which may require additional changes to certain
labels.
In the opinion of management, the Company's liability, if any, arising from
regulatory and legal proceedings related to these matters and others in which it
is involved is not expected to have a material adverse impact on the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None
15
<PAGE>
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.
NUTRACEUTICAL INTERNATIONAL CORPORATION
(Registrant)
Dated: May 15, 1998 By: /s/ Leslie M. Brown, Jr.
-------------- -------------------------
Leslie M. Brown, Jr.
Senior Vice President, Finance and Chief Financial
Officer
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
NUTRACEUTICAL INTERNATIONAL CORPORATION'S FINANCIAL POSITION AS OF MARCH 31,
1997 AND MARCH 31, 1998 AND THE RESULTS OF ITS OPERATIONS FOR THE SIX MONTHS
ENDED MARCH 31, 1997 AND 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> SEP-30-1997 SEP-30-1998
<PERIOD-END> MAR-31-1997 MAR-31-1998
<CASH> 2,198 2,049
<SECURITIES> 0 0
<RECEIVABLES> 10,486 9,549
<ALLOWANCES> 860 933
<INVENTORY> 19,610 26,071
<CURRENT-ASSETS> 33,116 39,412
<PP&E> 13,873 17,398
<DEPRECIATION> (3,619) (6,622)
<TOTAL-ASSETS> 89,048 92,819
<CURRENT-LIABILITIES> 12,899 10,076
<BONDS> 0 0
0 0
0 0
<COMMON> 93 118
<OTHER-SE> 14,532 49,218
<TOTAL-LIABILITY-AND-EQUITY> 89,048 92,819
<SALES> 47,485 53,656
<TOTAL-REVENUES> 47,485 53,656
<CGS> 25,123 28,600
<TOTAL-COSTS> 25,123 28,600
<OTHER-EXPENSES> 14,858 17,562
<LOSS-PROVISION> 79 211
<INTEREST-EXPENSE> 3,345 2,756
<INCOME-PRETAX> 4,159 4,738
<INCOME-TAX> 1,643 1,824
<INCOME-CONTINUING> 2,516 2,914
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (3,129)
<CHANGES> 0 0
<NET-INCOME> 2,516 (215)
<EPS-PRIMARY> 0.27 (0.02)
<EPS-DILUTED> 0.24 (0.02)
</TABLE>
