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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE PERIOD FROM TO
.
COMMISSION FILE NUMBER: 000-23731
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NUTRACEUTICAL INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 87-0515089
(State or other (I.R.S. Employer
jurisdiction of incorporation) Identification Number)
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1400 KEARNS BOULEVARD, 2ND FLOOR
PARK CITY, UTAH 84060
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (435) 655-6106
Securities registered pursuant to Section 12(b) of the Act: NONE.
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR
VALUE $.01 PER SHARE
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of December 21, 1999 at a closing sale price of $4.00 as reported
by the Nasdaq National Market was approximately $23.1 million. Shares of Common
Stock held by each officer and director and by each person who owns or may be
deemed to own 10% or more of the outstanding Common Stock have been excluded
since such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of December 21, 1999, the Registrant had 11,797,718 shares of Common
Stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Proxy
Statement to be used in connection with the solicitation of proxies for the
Registrant's Fiscal 1999 Annual Meeting of Stockholders (the "Proxy Statement")
are incorporated by reference in Part III of this Annual Report of Form 10-K
(the "Form 10-K").
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NUTRACEUTICAL INTERNATIONAL CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K
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PART I
Item 1 Business.................................................... 2
Item 2 Properties.................................................. 18
Item 3 Legal Proceedings........................................... 18
Item 4 Submission of Matters to a Vote of Security-Holders......... 19
Item 4A Executive Officers of the Registrant........................ 19
PART II
Item 5 Market for the Registrant's Common Equity and Related
Stockholder Matters....................................... 21
Item 6 Selected Financial Data..................................... 22
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 23
Item 7A Quantitative and Qualitative Disclosure About Market Risk... 29
Item 8 Financial Statements and Supplementary Data................. 29
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 29
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 30
Item 11 Executive Compensation...................................... 30
Item 12 Security Ownership of Certain Beneficial Owners and
Management................................................ 30
Item 13 Certain Relationships and Related Transactions.............. 30
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................. 31
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PART I
ITEM 1. BUSINESS.
As used herein, the terms "Company" and "Nutraceutical" refer to
Nutraceutical International Corporation and its subsidiaries, except where
indicated otherwise.
GENERAL
Nutraceutical is one of the nation's largest manufacturers and marketers of
quality branded nutritional supplements sold to health food stores. The Company
sells its branded products under the Solaray, KAL, NaturalMax, VegLife, Premier
One, Solar Green and Natural Sport brand names directly to health food stores in
the United States. The Action Labs product line is sold to distributors and
health food stores in the United States. Internationally, the Company sells its
branded products primarily to distributors and retailers. The Company
manufactures and/or distributes one of the broadest branded product lines in the
industry with over 1,900 stock keeping units ("SKUs"), including approximately
350 SKUs exclusively sold internationally. The Company believes that as a result
of its emphasis on quality, loyalty, education and customer service, the
Company's brands are widely recognized in health food stores and among health
food store consumers.
In addition to branded products, the Company manufactures bulk materials for
use in its own products and for sale to other manufacturers and marketers of
nutritional supplements under the tradenames Monarch Nutritional Laboratories
and Great Basin Botanicals.
On April 1, 1999, the Company purchased Woodland Publishing, Inc. and Summit
Graphics, Inc., two affiliated companies in the nutritional health publishing
and printing business. The operations and assets of the two companies were
combined into a new subsidiary of the Company, known as Woodland
Publishing, Inc. ("Woodland"). Woodland markets a line of over 150 books and
pamphlets to national retail book stores as well as health food stores.
The Company was formed in 1993 by senior management and Bain Capital, Inc.
("Bain Capital") to effect a consolidation strategy in the highly fragmented
vitamin, mineral, herbal and other nutritional supplements industry (the "VMS
Industry"). Since its formation, the Company has successfully completed seven
acquisitions, including Solaray, Inc. ("Solaray"), Premier One Products, Inc.
("Premier One"), Makers of KAL, Inc. and Makers of KAL, B.V. ("KAL"), Monarch
Nutritional Laboratories, Inc. ("Monarch"), Action Labs, Inc. ("Action Labs"),
NutraForce (Canada) International, Inc. ("NutraForce Canada") and Woodland. As a
result of these acquisitions and internal growth, the Company has grown in net
sales and operating income. Management believes that the Company is well
positioned to continue to capitalize on the consolidation occurring in the VMS
Industry.
The Company has adopted a strategy of selling its branded products directly
to health food stores in the United States (the "Healthy Foods Channel"). This
strategy has enabled the Company to benefit from the rapid growth of the Healthy
Foods Channel. The Healthy Foods Channel consists of approximately 11,500
retailers including (i) independent health and natural food stores, (ii) health
food stores affiliated with local, regional and national health food chains
(including healthy food supermarket chains, such as Whole Foods Market and Wild
Oats Markets) and (iii) GNC stores. The Healthy Foods Channel has historically
experienced strong growth based on the continued expansion of independent health
food stores and local, regional and national health food chains in response to
strong demand from consumers who desire product education, service and high
quality natural ingredients. The growth of the Healthy Foods Channel does not
appear to be currently at (and may not continue at) historical levels. The
Company believes there are significant differences between mass market retailers
(such as drugstores, warehouse clubs and supermarkets), which typically offer a
limited selection of discounted and lower-potency items, and the Healthy Foods
Channel, where natural ingredients, quality, potency, selection and customer
support are emphasized.
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The Company believes that it benefits from substantially greater customer
diversification than most of its larger competitors. The Company also benefits
from product diversification.
The Company believes that it is among the largest suppliers of nutritional
supplements to the Healthy Foods Channel that develops, manufactures, markets
and directly distributes a majority of its own products. The Company
manufactured over 85% of its products in fiscal 1999 and believes that the
quality of its products is among the highest in the industry. The Company
markets its branded products through one of the industry's largest sales forces
dedicated to the Healthy Foods Channel. The Company seeks to be a market leader
in the development of new and innovative products, introducing approximately 150
new SKUs in fiscal 1999.
The Company's principal executive offices are located at 1400 Kearns Blvd.,
Second Floor, Park City, Utah, 84060. The Company's telephone number is
435-655-6106.
INDUSTRY
The total United States retail market for nutritional supplements (the "VMS
Market") is highly fragmented and historically has grown rapidly, generating
$8.9 billion in 1998 retail sales, as compared to $6.5 billion in 1996 and
$5.0 billion in 1994. The Company believes that this growth was due to a number
of factors, including (i) increased interest in healthier lifestyles, (ii) the
publication of research findings supporting the positive health effects of
certain nutritional supplements and (iii) the aging of the "Baby Boom"
generation combined with the tendency of consumers to purchase more nutritional
supplements as they age. The Company does not have reliable data for industry
trends after calendar 1998. Recently, various publicly-traded nutritional
supplement companies have announced that there appears to be a slow-down in
sales of nutritional supplements. The Company believes that this slow-down may
be the result of, among other things, the lack of any recent industry-wide "hit"
products (such as St. John's Wort in 1997).
PRODUCTS
As of September 30, 1999, the Company sold over 1,900 SKUs, including
approximately 350 SKUs exclusively sold internationally. The Company's products
generally fall into one of three categories: (i) supplements, (ii) vitamins and
minerals and (iii) diet, energy and other. The Company's products come in
various formulations and delivery forms, including tablets, capsules, softgels,
liquids, powders and whole herbs.
The Company currently markets its products through a multiple brand strategy
that the Company believes has been successful in encouraging retailers to
allocate additional shelf space to the Company's brands. The Company has
enhanced the strength of all of its brands since their respective acquisitions
by instituting appropriate business strategies in each case that have included
(i) consolidating sales forces and increasing the brands' geographic coverage
through an expanded sales force, (ii) instituting performance and growth-based
incentives for sales representatives, (iii) introducing more sophisticated
management information systems and (iv) updating each brand's packaging.
As of September 30, 1999, the Company's portfolio of established brand names
consisted of the following:
SOLARAY. Solaray began manufacturing and selling herbal products in 1973,
originally as a pioneer in formulating and marketing blended herbal products
that contain two or more herbs with complementary effects. From its inception,
Solaray focused on encapsulated products which offer rapid disintegration and
are easy to swallow and has sold its products through independent sales
representatives to the Healthy Foods Channel. By 1984, Solaray had become a full
line manufacturer, carrying not only herbs, but also a full line of vitamins and
minerals. Solaray has become one of the most popular and well-known brands of
nutritional supplements in the Healthy Foods Channel and has
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developed a reputation for quality, consistency and innovation. This year marks
Solaray's 25th anniversary since incorporation. Solaray celebrated this
anniversary by generating excitement and interest in the brand with many new
in-store merchandising tools, retailer and consumer contests, and unique
promotions. A large number of retail stores participated in this celebration.
Solaray's brand packaging is distinguished by white bottles with a rainbow of
five colors across the top of the label as a backdrop to the distinctive Solaray
logo.
KAL. The KAL product line was established in Southern California in 1932 as
one of the first nutritional supplement lines in the United States. Although
KAL's first products were in powdered form, KAL soon shifted its focus to
tableted products that are generally more economical than capsules as a delivery
form and which allow for fewer units per dose than encapsulated products. KAL
has been a pioneer in the introduction of new and innovative products, as well
as new and unique delivery forms. Among its innovative product introductions was
Beyond Garlic, which remains a popular garlic product in the Healthy Foods
Channel and was the first "enteric coated softgel" garlic product. This unique
delivery form allowed for fresh garlic oil inside of a softgel to pass through
the stomach into the intestine before being digested, thereby virtually
eliminating any potential garlic odor. KAL was also the first nutritional
supplement marketer in the Healthy Foods Channel to introduce pycnogenol and
melatonin. More recently, KAL was one of the first companies to introduce MSM,
NADH and a complete line of Colostrum products. This past year KAL re-introduced
the popular Lifestyle line of products which targets key health concerns. Some
of the products include; Beyond Garlic, Vitality for Women, Hair Force and Deep
Thought. KAL's brand packaging consists of a white bottle and includes the
circular red and black KAL logo as a prominent feature on the principal display
panel.
NATURALMAX. The NaturalMax brand began as a product line of the KAL brand
in approximately 1993, with a focus on diet products (with diet plans) as well
as energy and rest products. The NaturalMax brand uses tablets, softgels,
capsules and liquids, depending on the most desired form for the particular
product. After the acquisition of KAL, the Company established NaturalMax, Inc.
("NaturalMax") as a separate brand in order to bring special focus to the
NaturalMax product line. NaturalMax recently launched the innovative diet
product Fat-X, a natural lipase inhibition product. The packaging of NaturalMax
products always includes the distinctive NaturalMax logo.
PREMIER ONE. The Premier One brand was founded in July 1984 in Omaha,
Nebraska as one of the first product lines devoted entirely to natural,
nutritional supplements derived from bee products. The Premier One brand uses
various delivery forms, each chosen for its particular benefits, including
capsules, chewable wafers, granules, energy bars, tinctures and products in a
honey base. Royal Jelly in Honey is one of Premier One's most popular products;
some of Premier One's other popular products include Raw Energy, an energy
product that includes royal jelly, bee pollen and a variety of herbs, and
Beefense, a product that includes bee propolis and echinacea. Premier One's
brand packaging includes a distinctive logo of a bee harvesting scene in a
mountain setting, with gold highlights on the label.
VEGLIFE. VegLife is a relatively new brand which began in 1992 as a product
line under the Solaray brand. The goal was to create a line of products that
would be suitable for strict vegetarians who avoid any animal-derived
ingredients, including gelatin capsules. VegLife was among the first to
introduce a line of nutritional supplements using a cellulose-based capsule with
substantially equivalent characteristics to traditional gelatin capsules.
Vegetarian consumers showed substantial interest in this product line, so the
Company established it as a separate brand in 1995 in order to allow a
management team to focus on the development of a full line of vegetarian
products. This management team scrutinizes every element of each product
developed, as well as the materials used in formulation, to ensure that strict
vegetarian standards are met. The VegLife brand focuses primarily on
encapsulated products, but also now includes a popular soy-based protein drink
supplement sold under the trademark Peaceful Planet as well as a kava beverage
sold under the trademark Peaceful Kava.
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VegLife's brand packaging includes a distinctive green and blue label, as well
as a logo with an attractive depiction of a budding plant.
SOLAR GREEN. Solar Green was launched in April 1997. The Solar Green brand
is focused on chlorophyll-laden "green foods," such as algaes (including
chlorella, spirulina and blue green algae) and cereal grasses (such as barley
and wheat grass). These products are currently offered in tablet forms. Solar
Green also introduced "green food" drink mixes which can be combined with juice
or water to create a nutritious beverage supplement. Solar Green's brand
packaging includes a distinctive Solar Green logo and a label with green borders
and accents.
ACTION LABS. The Action Labs brand started in 1989 with a focus on men's
and women's specialty supplements and diet and energy products. The Company
acquired this brand late in fiscal 1998 and is now manufacturing most Action
Labs products in-house. The Action Labs brand has a relatively strong presence
on the East Coast, including a New York sales office. The packaging of Action
Labs products includes the distinctive Action Labs logo and brightly colored
text.
NATURAL SPORT. Natural Sport was launched in September 1998 as the
Company's newest brand. The Natural Sport brand is focused on all-natural sport
supplements for serious athletes and also individuals who exercise for fitness,
health or to lose weight. The Natural Sport line includes two innovative sport
beverage supplements, Pre-Burn (to be taken prior to exercise to support fat
metabolism and endurance) and Post-Up (to be taken after exercise to support
muscle glycogen rejuvenation). The line also includes ProSoy, a soy protein
beverage supplement, creatine monohydrate and two separate sport multivitamin
mineral formulas, one for men and one for women, under the name Phyto Sport.
Natural Sport's packaging includes a distinctive Natural Sport logo in black and
white, as well as blue lids and a label with an attractive blue swath running up
one side of the front panel.
WOODLAND. Woodland Publishing was established in 1975 as one of the first
publishers solely dedicated to the natural health field. Originally, Woodland
published books by such authors as Bernard Jensen, John Christopher, and Louise
Tenney. In 1985, Today's Herbal Health was introduced and is now considered a
classic. In 1995, The Woodland Health Series was created; the series consists of
one-topic booklets and has sold over 4 million copies. Today's Herbal Health has
sold more than 750,000 copies. With more than 160 titles in print, Woodland
continues to be a pioneer in the natural health field.
HEALTHWAY. Healthway Corporation ("Healthway"), which was established in
1958, was acquired in 1995 as part of the KAL acquisition. The goal of Healthway
is to find the highest quality products from around the world and offer them to
the consumer.
RESEARCH AND DEVELOPMENT; QUALITY CONTROL
The Company has a strong commitment to research and development. The Company
believes that product quality and innovation are fundamental to its long-term
growth and success. Through its research and development efforts, the Company
seeks to (i) identify the active ingredients in current and potential new
products, (ii) test the safety, potency and efficacy of products, (iii) develop
more effective and efficient means of extracting ingredients for use in
products, (iv) develop testing methods for ensuring and verifying the
consistency of the dosage of ingredients included in the Company's products,
(v) develop new, more effective product delivery forms and (vi) develop new
products either by combining existing ingredients used in nutritional
supplements or identifying new ingredients that can be used in nutritional
supplements. The Company's efforts are designed to lead not only to the
development of new and improved products, but also to ensure effective
manufacturing quality control measures.
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The Company has entered into a cooperative arrangement with Weber State
University in Ogden, Utah through which, among other things, the University
provides the Company with access to certain laboratory space and equipment. The
University has assigned one faculty member as a project director to coordinate
the use of any projects undertaken at the University facility. The Company also
conducts research and development in Company-owned facilities. The Company
currently employs various professionals in its research and development and
quality control departments, including individuals with Ph.D. degrees.
Professionals employed by the Company have degrees in, among other things,
chemistry, botany, microbiology, nutrition and engineering and, in many cases,
have received training in natural health food products. In addition, the Company
retains the services of outside laboratories from time to time to validate its
product standards and manufacturing protocols.
The Company's quality control program seeks to ensure the superior quality
of the Company's products and that they are manufactured in accordance with
current Good Manufacturing Practices. The Company's processing methods are
monitored closely to ensure that only quality ingredients are used and to ensure
product purity. The Company has been a leader in establishing industry product
quality guidelines.
SALES AND MARKETING
The Company promotes demand for its products by educating retailers, who in
turn educate consumers, as to the qualities of its natural vitamin, mineral and
herbal nutritional supplements and the wide range of its products. The Company's
branded products are currently sold in the United States to retailers in the
Healthy Foods Channel, which consists of approximately 11,500 stores, including
(i) independent health and natural food stores, (ii) health food stores
affiliated with local, regional and national health food chains (including
healthy food supermarket chains such as Whole Foods Market and Wild Oats
Markets) and (iii) GNC stores. Unlike many of its competitors, the Company does
not sell its branded products in the United States to mass market retailers, but
instead focuses on sales to the Healthy Foods Channel. The Company believes that
its products are attractive to retailers in the Healthy Foods Channel due to
factors such as the strength of its brand names, the quality and potency of its
products, service and the availability of sales support and educational
materials regarding the products. The Company has developed an internet site
that provides information about the Company's portfolio of branded lines and the
various products within each branded line.
The Company markets its products through a sales force dedicated to the
Healthy Foods Channel. The Company's sales representatives (including
independent, employee and sub-representatives) regularly visit each assigned
health food store in their respective territories to assist in the solicitation
of orders for products and provide related product sales assistance. The Company
monitors and periodically updates its payment structure for its sales force in
order to ensure that appropriate incentives are provided for sales growth. The
Company also sells products directly to certain retailers through its telephone
marketing organization. The Action Labs brand of products are sold principally
to distributors and through the Action Labs separate telephone marketing
organization. The Company has organized its sales and marketing force under a
newly-created subsidiary, Nutra Corp.
The Company's marketing efforts are focused on educating retailers to enable
them to then educate the ultimate consumer about the Company's products. The
Company sponsors a retailer seminar program which the Company believes has made
an important contribution to the growth of its brands. The Company also sponsors
seminars for consumers. Participants receive product education presentations
with background information relating to existing products and with special
emphasis given to new products. The Company's seminars are designed to foster
relationships with the Company's customers in the Healthy Foods Channel and to
increase retailer and consumer awareness of the Company's products.
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Au Naturel, Inc. ("Au Naturel") was formed in fiscal 1995 for the purpose of
marketing the Company's branded products internationally. During fiscal 1999,
Au Naturel marketed products to customers in more than 30 foreign countries.
Although Au Naturel is not a product brand, it functions as a separate business
unit. Au Naturel markets standard and unique formulations that must meet
specific requirements of certain foreign countries, including product
formulation and labeling changes for Au Naturel's international customers. In
January of 1999, the Company incorporated Nutra-Force (Barbados) International,
Inc. to act as a foreign sales corporation for international sales.
Monarch and Great Basin Botanicals market bulk materials as well as bulk
minerals and herbs in the United States through its own sales force and
internationally both directly to manufacturers and through an independent sales
representative and a distributor, both based in Europe.
MANUFACTURING
The Company's manufacturing process generally consists of the following
operations (i) extracting the ingredients contained in a particular product from
a bulk source of such ingredient and measuring the ingredient for inclusion in
such product, (ii) blending the measured ingredients into a mixture with a
homogeneous consistency and (iii) encapsulating or tableting the blended mixture
into the appropriate dosage form using either automatic or semiautomatic
equipment. The next step, bottling and packaging, involves placing the
encapsulated or tableted product in packaging with appropriate tamper-evident
features and sending the packaged product to a distribution point for delivery
to retailers. The Company places special emphasis on quality control and
conducts inspections throughout the manufacturing process, including raw
material verification, homogeneity testing, weight deviation measurements and
package quality sampling. See "Research and Development; Quality Control."
The Company manufactured over 85% of its products in fiscal 1999, based on
net sales. By manufacturing the majority of its own products, the Company
believes it maintains better control over product quality and availability while
also reducing production costs. The Company's manufacturing operations are
performed in its facilities located in the greater Ogden, Utah area. The Company
also has a working relationship with numerous outside manufacturers and
packagers and utilizes these outside sources from time to time. The Company does
not have any material backlogs.
Monarch and Great Basin Botanicals source raw material components, provide
contract grinding and milling services, manufacture bulk materials and supply
these to the Company and other marketers of nutritional supplements, including,
in certain cases, competitors of the Company.
MANAGEMENT INFORMATION AND COMMUNICATION SYSTEMS
The Company uses a custom computer software system for handling order entry
and invoicing, shipping, warehouse operations and customer service inquiries.
The system provides product delivery and order information and allows for
inventory management. The Company believes that this system has improved
operating efficiencies and customer service. In addition, the Company has
installed an advanced telephone communication system which provides the platform
for computer-telephone integration and facilitates intra-company communication.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Year 2000 Issue" for a discussion of concerns and potential
exposures related to the Company's computer systems vis-a-vis the "Year 2000"
issue.
MATERIALS AND SUPPLIERS
The Company's purchasing staff includes individuals with product knowledge
and experience related to herbs, minerals, bulk products, bottles, caps, labels,
packaging and advertising, marketing and selling material and merchandise. The
purchasing staff, in cooperation with quality control personnel,
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maintains supplier relationships and gathers market information to inform
management of issues that might adversely impact the Company's ability to
acquire sufficient quantities of raw materials to meet customer demand. The
Company engages in extensive sample testing of raw materials to be incorporated
in the Company's products.
The Company believes that its continued success will depend upon the
availability of raw materials that permit the Company to meet its labeling
claims, quality control standards and demand for unique ingredients. Due to
issues related to quality, efficacy, safety or third-party intellectual property
protection, a number of the Company's branded products contain one or more
ingredients that may only be available from a single source or supplier. In
addition, the supply of herbal products is subject to the same risks normally
associated with agricultural production, such as climatic conditions, insect
infestations and availability of manual labor for harvesting. Any significant
delay in or disruption of the supply of raw materials could substantially
increase the cost of such materials and could require product reformulations, as
well as the qualification of new suppliers and repackaging. Accordingly, there
can be no assurance that the disruption of the Company's supply sources will not
have a material adverse effect on the Company.
Although the Company acquires the majority of its raw materials from U.S.
suppliers, the ingredients of a number of the Company's products include one or
more ingredients that originate outside of the United States. The Company's
business is therefore subject to the risks generally associated with doing
business outside the United States, such as delays in shipments, embargoes,
changes in economic and political conditions, tariffs, foreign exchange rates
and trade disputes. The Company's business is also subject to the risks
associated with the enactment of United States and foreign legislation and
regulations relating to imports and exports, including quotas, duties, taxes or
other charges or restrictions that could be imposed upon the importation of
products into the United States.
The Company seeks to mitigate the risk of the shortage of certain raw
materials through its relationships with approximately 130 principal suppliers.
The Company also acquired Monarch, a manufacturer of premium bulk formulations,
which has purchased manufacturing equipment and hired personnel to allow more
extensive vertical integration and to improve the quality and consistency of
ingredients.
DISTRIBUTION
The Company ships the majority of its products directly to retailers via
Federal Express. Shipments are generally made from the Company's primary
distribution facilities in Ogden, Utah and Memphis, Tennessee. These
distribution facilities have been strategically located to reduce the Company's
expenses relating to outbound freight charges without sacrificing delivery
times.
The Company has a short-term two-year lease (with multiple two-year renewal
options) for a facility formerly used by the Department of Defense in the Ogden,
Utah area ("DDO") in which it is consolidating distribution and certain other
operations which were performed in different buildings and locations in the
Ogden, Utah area. These renovations have been designed to facilitate quick
response to customer demands for the Company's products and to assist the
Company to reduce the risk of out-of-stocks and to maintain appropriate levels
of finished goods inventory. By integrating the bulk product inventory
distribution operation with the bottling and packaging operation, the Company
believes it will be able to bottle and package finished goods on a more
selective customer demand basis. In addition, consolidation into the DDO
facility will reduce the Company's lease payment obligations. The Company
expects that its Memphis, Tennessee facility will continue to operate for
Eastern distribution.
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GOVERNMENT REGULATION
The formulation, manufacturing, processing, packaging, labeling,
advertising, distribution and sale of nutritional supplements such as those sold
by the Company are subject to regulation by one or more federal agencies,
principally the Food and Drug Administration ("FDA") and the Federal Trade
Commission ("FTC"), and to a lesser extent the Consumer Product Safety
Commission and United States Department of Agriculture. These activities are
also regulated by various governmental agencies for the states and localities in
which the Company's products are manufactured, distributed or sold, as well as
by governmental agencies in certain foreign countries in which the Company's
products are sold. Among other matters, regulation of the Company by the FDA and
FTC is concerned with claims made with respect to a product which refer to the
value of the product in treating or preventing disease or other adverse health
conditions.
Federal agencies, primarily the FDA and FTC, have a variety of remedies and
processes available to them, including initiating investigations, issuing
warning letters and cease and desist orders, requiring corrective labels or
advertising, requiring consumer redress (for example, requiring that a company
offer to repurchase products previously sold to consumers), seeking injunctive
relief or product seizure and imposing civil penalties or commencing criminal
prosecution. In addition, certain state agencies have similar authority, as well
as the authority to prohibit or restrict the manufacture or sale of products
within their jurisdiction. These federal and state agencies have in the past
used these remedies in regulating participants in the nutritional supplements
industry, including the imposition by federal agencies of civil penalties in
the millions of dollars against a few industry participants. Certain product
lines now manufactured by the Company had been the subject of investigations
prior to the acquisition of those product lines by the Company, and the
Company's bulk materials subsidiary has been the subject of an investigation by
the FDA, the United States Attorney's Office in Salt Lake City, Utah, and by the
Attorney General's Office of the State of California. In January of 1999, the
Company received grand jury subpoenas regarding documents with respect to the
investigation; the Company continues to cooperate with the FDA and the United
States Attorney's Office in the investigation of these matters. In March 1993,
the staff of the Cleveland Regional Office of the FTC began an investigation
into advertising claims made by the seller in the KAL/NaturalMax Acquisition,
and made an inquiry to the Company in August 1995 concerning certain products
and claims associated with the KAL and NaturalMax product lines. The Company has
responded to the FTC and, to the Company's knowledge, the FTC has taken no
further action. Although none of these investigations has had a material adverse
effect on the Company, there can be no assurance that future regulatory action
will not have such an effect. There can be no assurance that the regulatory
environment in which the Company operates will not change or that such
regulatory environment, or any specific action taken against the Company, will
not result in a material adverse effect on the Company's business, financial
condition or results of operations. In addition, increased sales and publicity
of nutritional supplements may result in increased regulatory scrutiny of the
nutritional supplements industry.
The Dietary Supplement Health and Education Act of 1994 (the "Act") was
enacted in October 1994, amending the Food, Drug and Cosmetic Act. The Company
believes this law is generally favorable to the dietary supplement industry. The
Act establishes a new statutory class of "dietary supplements," which provide
vitamins, minerals, herbs, amino acids and other dietary ingredients for human
use to supplement the diet. Dietary ingredients on the market as of October 15,
1994 will not require the submission by the manufacturer or distributor of
evidence of a history of use or other evidence of safety establishing that the
supplement will reasonably be expected to be safe, but a dietary supplement
which contains a dietary ingredient which was not on the market as of
October 15, 1994 does require such submission of evidence of a history of use or
other evidence of safety. Among other things, this law prevents the further
regulation of dietary ingredients as "food additives" and allows the use of
statements of nutritional support on product labels. The FDA has issued proposed
and final regulations in this area and indicates that further guidance and
regulations are forthcoming.
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<PAGE>
The FDA issued final dietary supplement labeling regulations in calendar
1997. These final regulations required the Company to revise most of its product
labels by March 1999. The Company has completed the revisions and its labels are
in compliance.
Advertising and label claims for dietary supplements and conventional foods
have been regulated by state and federal authorities under a number of disparate
regulatory schemes. There can be no assurance that a state will not interpret
claims presumptively valid under federal law as illegal under that state's
regulations, or that future FDA regulations or FTC decisions will not restrict
the permissible scope of such claims.
The FDA is currently proposing to regulate the sale of nonprescription
products containing ephedra, a natural product that contains a small percentage
of ephedrine alkaloids which are used in some prescriptions and over the counter
stimulants and antihistamines. Various state legislatures and agencies have also
expressed concern regarding ephedra-based products. For example, Arkansas,
Hawaii, Missouri, Ohio, Florida and Texas have passed legislation or adopted
regulations regulating the over-the-counter sale of certain ephedra products, or
are considering doing so. Currently, the Texas regulation requires a
comprehensive warning on all labels as well as other label information that is
without precedent in the industry. The Company believes that other states are
considering or will consider taking similar action and may take such action in
the future. Although the Company has limited SKUs that contain ephedra, the loss
of sales of these products or a further limitation in the states and other
jurisdictions where these products may be sold could have a material adverse
effect on the Company.
The DEA has issued proposed regulations governing the sale of products
containing ephedrine alkaloids because of concerns by the DEA that these
products may be used in the illegal manufacture of methamphetamines. These
proposed regulations would require that certain manufacturers, distributors and
retailers who carry covered products register with the DEA and comply with
certain requirements. The proposed regulations exempt from registration any
products containing 2% or less by weight of ephedrine alkaloids. As of
September 30, 1999, all of the Company's products which contain ephedrine
alkaloids had 2% or less by weight of ephedrine alkaloids. However, there can be
no assurance that the DEA will not modify its proposal or take a more aggressive
stance such that some of the Company's products, as well as certain of Company's
customers, might be subject to registration and other requirements, and it is
possible such a regulation could have a material adverse effect on the Company.
In July 1997, the Company received a notice that it may be a defendant along
with a number of other participants in the dietary supplement industry in a
threatened action by certain private litigants or the Attorney General of the
State of California, which alleged that certain products containing fish and
salmon oils also may be in violation of a California law known as
"Proposition 65" for failure to include required warning labels. Proposition 65
allows private litigants or the California Attorney General to recover monetary
penalties or injunctive relief under certain circumstances. The Company has
learned that the Attorney General of the State of California completed testing
of all of the products in question sometime during the early summer of 1998, and
has further been advised that the Attorney General would contact each company
individually to discuss the results. The Company has not been contacted
concerning the results of these tests, nor has the Company received any
correspondence or communication from the Attorney General of the State of
California or the private party litigant for many months. The Company believes
that this issue may have been resolved by the test results. If not, the Company
intends to dispute the allegations. However, there can be no assurance that this
matter has been completely resolved or that the resolution would not have an
adverse impact on the Company's results of operations and financial conditions.
In October 1997, the Company and a number of other suppliers, processors and
marketers of nutritional supplements received warning letters from the FDA
relating to an allegedly contaminated
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<PAGE>
batch of an herb called plantain. These letters claimed that the plantain, which
had been shipped to the United States from Europe, had been contaminated with
another botanical product with potentially harmful side effects. The letter that
the Company received alleged that some of this plantain had been included in a
shipment of products that Great Basin had processed for a third party on a
contract basis. The Company has replied to the FDA, explaining that, among other
things, it did not own the products or market them for human consumption but
simply provided grinding services for the owner of the herbs. The Company
further noted to the FDA that it did not process any plantain that could have
been incorporated into any products that were actually consumed because the only
batch it processed was returned to the supplier/owner following the FDA's
initial press releases on this matter. The Company has denied responsibility for
any adverse effects and affirmed its commitment to good manufacturing practices.
There can be no assurances that the FDA will not take further action and that,
if taken, such action will not result in a material adverse effect on the
Company. More recently, a private lawsuit has been filed by the distributor
against certain suppliers and processors of the plantain; the Company has not
been named in the lawsuit.
On January 20, 1998, Monarch received a written notice from an attorney
representing a private party that alleged that Monarch violated Proposition 65
by not providing appropriate warning statements with respect to the level of
lead contained in copper gluconate. This notice alleged that the violation arose
from the sale of bulk quantities of copper gluconate to a wholesale customer.
The private party that initiated this notice alleged that it purchased some of
these bulk products from Monarch's customer. Monarch reached a resolution of
this matter with the private party and has had no further communication from the
Attorney General of the State of California. However, the FDA contacted the
Company regarding this matter and conducted an investigation of the Company's
bulk materials subsidiary with the assistance of the Company and its outside
counsel. In January of 1999, the Company received grand jury subpoenas regarding
documents with respect to the investigation; the Company continues to cooperate
with the FDA and the United States Attorney's Office in the investigation of
these matters. It is possible that either or both of the foregoing proceedings
may result in monetary penalties, adverse publicity, lost sales or a change in
the Company's labeling as to the products in question and could have a material
adverse effect on the Company.
In September 1998, the Company received a letter written by the FDA to all
manufacturers and distributors of the supplement L-5-hydroxytryptophan, warning
that the FDA believed this supplement might be implicated in the occurrence of a
certain disorder known as EMS in a small subgroup of the general population. The
FDA asserted in this correspondence that it believed EMS might be related to the
presence of a contaminant or substance possibly found in L-5-hydroxytryptophan
which it labeled "Peak X." The FDA's letter described a protocol for testing for
"Peak X" and urged manufacturers, distributors and marketers of these
supplements to test for "Peak X" and to report adverse events related to this
supplement to the FDA. The Company has established its own testing protocol for
"Peak X" and is actively monitoring the product and any potential adverse
reactions.
In November 1998, the FTC announced its new advertising guidelines for the
dietary supplement industry, which it labeled "Dietary Supplements: An
Advertising Guide for Industry." These guidelines reiterate many of the policies
the FTC has periodically announced over the years, including requirements for
substantiation of claims made in advertising about dietary supplements.
The FDA has announced its intent to issued Good Manufacturing Practices
(GMP) guidelines for the dietary supplement industry. FDA is currently holding
public comment meetings on this issue with the intent to publish proposed GMP
guidelines some time in the year 2000.
Governmental regulations in foreign countries where the Company plans to
commence or expand sales may prevent or delay entry into the market or prevent
or delay the introduction, or require the reformulation, of certain of the
Company's products. Compliance with such foreign governmental
11
<PAGE>
regulations is generally the responsibility of the Company's distributors for
those countries. These distributors are independent contractors over whom the
Company has limited control.
As a result of the Company's efforts to comply with applicable statutes and
regulations, the Company has from time to time reformulated, eliminated or
relabeled certain of its products and revised certain provisions of its sales
and marketing program. The Company cannot predict the nature of any future laws,
regulations, interpretations or applications, nor can it determine what effect
additional governmental regulations or administrative orders, when and if
promulgated, would have on its business in the future. They could, however,
require the reformulation of certain products to meet new standards, the recall
or discontinuance of certain products not capable of reformulation, additional
recordkeeping, expanded documentation of the properties of certain products,
expanded or different labeling, and/or scientific substantiation. Any or all of
such requirements could have a material adverse effect on the Company's results
of operations and financial condition.
There can be no assurance that the foregoing proceedings or investigations,
or any future proceedings or investigations, will not have a material adverse
effect on the Company.
COMPETITION
The nutritional supplements segment of the natural health food products
industry is highly competitive. The Company's principal competitors in the
Healthy Foods Channel include a limited number of large nationally known
manufacturers (such as Twin Laboratories, Inc., Solgar Vitamin and Herb
Company, Inc., Nature's Plus, Country Life and Nature's Way Products, Inc.) and
many smaller manufacturers and distributors of nutritional supplements. Certain
of the Company's principal competitors are larger than the Company, have greater
access to capital and may be better able to withstand volatile market conditions
within the VMS Industry. Moreover, because this industry generally has low
barriers to entry, additional competitors could enter the market at any time.
Private label products of the Company's customers also provide competition
to the Company's products. For example, a substantial portion of GNC's vitamin
and mineral supplement offerings are products offered under GNC's own private
label. Whole Foods Market, Wild Oats Markets and most large health food stores
also sell a portion of their supplement offerings under their own private
labels.
The Company believes that health food retailers are increasingly likely to
align themselves with those companies that offer a wide variety of high quality
products, have a loyal customer base, support their brands with strong marketing
and advertising programs and provide consistently high levels of customer
service. The Company believes that it competes favorably with other nutritional
supplement companies because of its comprehensive line of products, premium
brand names, commitment to quality, ability to rapidly introduce innovative
products, competitive pricing, strong and effective sales force and distribution
strategy and sophisticated advertising and promotional support. The wide variety
and diversity of the forms, potencies and categories of the Company's products
are important points of differentiation between the Company and many of its
competitors.
Although the Company does not compete in the mass market retail channel of
distribution, it is possible that as increasing numbers of companies sell
nutritional supplement products in the mass market channels, these product
offerings may affect sales in the Healthy Foods Channel. Several major
pharmaceutical companies have introduced herbal lines in the mass market,
including American Home Products (Centrum), Whitehall-Robins (Quanterra) and
Bayer (One-A-Day). Many of these companies have substantially greater financial
and other resources than the Company. In that regard, although the VMS Industry
to date has been characterized by many relatively small participants, there can
be no assurance that additional national or international companies (which may
include additional pharmaceutical companies or additional suppliers to mass
merchandisers) will not seek in the future to enter or to increase their
presence in the VMS Market. Increased competition in the VMS Market could have a
material adverse effect on the Company.
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<PAGE>
INTELLECTUAL PROPERTY
The Company owns 91 trademarks that have been registered with the United
States Patent and Trademark Office and has filed applications to register an
additional 25 trademarks. In addition, the Company claims domestic trademark and
servicemark rights in numerous additional marks used by the Company. The Company
owns a number of trademark registrations in foreign countries and is in the
process of filing additional registration applications in various countries. The
Company regards its trademarks and other proprietary rights as valuable assets
and believes they make a significant positive contribution to the marketing of
its products.
The Company protects its legal rights concerning its trademarks by
appropriate legal action. The Company relies on common law trademark rights to
protect its unregistered trademarks. Common law trademark rights do not provide
the company with the same level of protection as afforded by a United States
federal registration of a trademark. In addition, common law trademark rights
are limited to the geographic area in which the trademark is actually used,
while a United States federal registration of a trademark enables the registrant
to stop the unauthorized use of the trademark by any third party anywhere in the
United States, even if the registrant has never used the trademark in the
geographic area wherein the unauthorized use is being made (provided, however,
that an unauthorized third-party user has not, prior to the registration date,
perfected its common law rights in the trademark in that geographic area). The
Company has registered and intends to register its trademarks in certain foreign
jurisdictions where the Company's products are sold. However, the protection
available in such jurisdictions may not be as extensive as the protection
available to the Company in the United States.
The Company is currently involved in trademark infringement litigation
relating to its Solar Green mark; the Company is involved in trademark
opposition actions concerning the marks Natural Sport and NaturalMax. The
Company is vigorously defending or pursuing these actions; see "Legal
Proceedings."
EMPLOYEES
At September 30, 1999, the Company and its subsidiaries employed over 500
full-time and over 50 part-time employees. None of the Company's employees is
represented by a collective bargaining unit. The Company believes that it has a
good relationship with its employees.
RISK FACTORS
In addition to the other information contained in this Form 10-K, the
following factors should be considered in evaluating whether to buy, sell, or
hold Common Stock of the Company:
GOVERNMENT REGULATION
The formulation, manufacturing, processing, packaging, labeling,
advertising, distribution and sale of nutritional supplements such as those sold
by the Company are subject to regulation by a number of federal, state and
foreign agencies, principally, the FDA and the FTC. Among other matters, such
regulation is concerned with health claims, made with respect to a product, that
assert the healing or nutritional value of such product. Such agencies have a
variety of remedies and processes available to them, including initiating
investigations, issuing warning letters and cease and desist orders, requiring
corrective labels or advertising, requiring consumer redress (for example, by
requiring that a company offer to repurchase products previously sold to
consumers), seeking injunctive relief or product seizure, imposing civil
penalties, or commencing criminal prosecution. Federal and state agencies have
in the past used these remedies in regulating participants in the nutritional
supplements industry, including the imposition by federal agencies of civil
penalties in the millions of dollars against a few industry participants. In
addition, increased sales and publicity of nutritional supplements may result in
increased regulatory scrutiny of the nutritional supplements industry. There can
be no assurance that
13
<PAGE>
the regulatory environment in which the Company operates will not change or that
such regulatory environment, or any specific action taken against the Company,
will not result in a material adverse effect on the Company's business,
financial condition or results of operations. Additional proceedings and issues
are outlined under "Business--Government Regulation." There can be no assurance
that such proceedings or investigations or any future proceedings or
investigations will not have a material adverse effect on the Company. See
"Business--Government Regulation."
PRODUCT LIABILITY; POTENTIAL ADVERSE PRODUCT PUBLICITY
The Company, like any other retailer, distributor or manufacturer of
products that are designed to be ingested, faces an inherent risk of exposure to
product liability claims in the event that the use of its products results in
injury. In the event that the Company does not have adequate insurance or
contractual indemnification, product liability claims could have a material
adverse effect on the Company. Like other manufacturers and distributors of
nutritional supplements, the Company and its predecessors currently are or have
been named as defendants in product liability lawsuits. The successful assertion
or settlement of any uninsured claim, a significant number of insured claims, or
a claim exceeding the Company's insurance coverage could have a material adverse
effect on the Company.
The Company is highly dependent upon consumers' perception of the safety and
quality of its products as well as similar products distributed by other
companies. Thus, the mere publication of reports asserting that such products
may be harmful could have a material adverse effect on the Company, regardless
of whether such reports are scientifically supported and regardless of whether
the harmful effects would be present at the dosages recommended for such
products.
LIMITED AVAILABILITY OF CONCLUSIVE CLINICAL STUDIES
Although many of the ingredients in the Company's products are vitamins,
minerals, herbs and other substances for which there is a long history of human
consumption, some of the Company's products contain innovative ingredients or
combinations of ingredients. Although the Company believes all of its products
to be safe when taken as directed by the Company, there is little long-term
experience with human consumption of certain of these innovative product
ingredients or combinations thereof in concentrated form. Although the Company
performs research and/or tests the formulation and production of its products,
it has only sponsored limited clinical studies.
COMPETITION
See "Business--Competition."
RISK OF LIMITED SUPPLY SOURCES; DEPENDENCE ON FOREIGN SUPPLIERS
The Company believes that its continued success will depend upon the
availability of raw materials that permit the Company to meet its labeling
claims, quality control standards and desire for unique ingredients. Due to
issues relating to quality or third-party intellectual property rights, a number
of the Company's branded products contain one or more ingredients that may only
be available from a single source or supplier. In addition, the supply of herbal
products is subject to the same risks normally associated with agricultural
production, such as climatic conditions, insect infestations and availability of
manual labor or equipment for harvesting. Any significant delay in or disruption
of the supply of raw materials could substantially increase the cost of such
materials, could require product reformulations, the qualification of new
suppliers and repackaging and could result in a substantial reduction or
termination by the Company of its sales of certain products, any of which could
have a material adverse effect upon the Company. Accordingly, there can be no
assurance that the disruption of the Company's supply sources will not have a
material adverse effect on the Company.
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Although the Company acquires the majority of its raw materials from U.S.
suppliers, the ingredients of a number of the Company's products include one or
more ingredients that originate outside of the United States. The Company's
business is therefore subject to the risks generally associated with doing
business outside the United States, such as delays in shipments, embargoes,
changes in economic and political conditions, tariffs, foreign exchange rates
and trade disputes. The Company's business is also subject to the risks
associated with the enactment of United States and foreign legislation and
regulations relating to imports and exports, including quotas, duties, taxes or
other charges or restrictions that could be imposed upon the importation of
products into the United States. See "Business--Materials and Suppliers." These
factors could result in a delay in or disruption of the supply of certain raw
materials and could have the consequences described in the preceding paragraph,
any of which could have a material adverse effect on the Company.
RELIANCE ON KEY MANAGEMENT
The operation of the Company requires managerial and operational expertise.
In particular, the Company is dependent upon the management and leadership
skills of a number of its senior managers, including Frank W. Gay II, Bruce R.
Hough, Jeffrey A. Hinrichs, Gary M. Hume, William T. Logan and Leslie M. Brown,
Jr. Substantially all of the Company's employees are employed "at will." None of
the key management employees has a long-term employment contract with the
Company and there can be no assurance that such individuals will remain with the
Company. The failure of such key personnel to continue to be active in
management could have a material adverse effect on the Company. See "Executive
Officers of the Registrant."
RISKS ASSOCIATED WITH IMPLEMENTATION OF THE BUSINESS STRATEGY
Implementation of the Company's business strategy is subject to risks and
uncertainties, including certain factors that are within the Company's control
and other factors that are outside of the Company's control. In addition,
certain elements of the Company's business strategy, notably the acquisition of
complementary businesses or product lines, could result in significant
expenditures of cash and management resources. See "--Risk Associated with
Acquisitions." Finally, implementation of the Company's business strategy is
subject to risks associated with market and competitive conditions. See
"--Competition" and "--No Assurance of Future Industry Growth."
RISKS ASSOCIATED WITH ACQUISITIONS
The Company has completed seven acquisitions, including the Solaray
acquisition, since 1993 and expects to pursue additional acquisitions in the
future as a key component of the Company's business strategy. See
"Business--General." There can be no assurances that attractive acquisition
opportunities will be available to the Company, that the Company will be able to
obtain financing for or otherwise consummate any future acquisitions or that any
acquisitions which are consummated will prove to be successful. Moreover,
acquisitions involve numerous risks, including the risk that the acquired
business will not perform in accordance with expectations, difficulties in the
integration of the operations and products of the acquired businesses with the
Company's other businesses, the diversion of management's attention from other
aspects of the Company's business, the risks associated with entering geographic
and product markets in which the Company has limited or no direct prior
experience and the potential loss of key employees of the acquired business. The
acquisition of another business can also subject the Company to liabilities and
claims arising out of such business. In addition, future acquisitions would
likely require additional financing, which would likely result in an increase in
the Company's indebtedness or the issuance of additional capital stock which
could be dilutive to holders of Common Stock. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
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NO ASSURANCE OF FUTURE INDUSTRY GROWTH
There can be no assurance that the VMS Market or the Healthy Foods Channel
are as large as reported or that projected or expected growth will occur or
continue. Market data and projections, such as those presented in this Form10-K,
are inherently uncertain and subject to change. In addition, the underlying
market conditions are subject to change based on economic conditions, consumer
preferences and other factors that are beyond the Company's control. There can
be no assurance that an adverse change in size or growth rate of the VMS Market
or the Healthy Foods Channel will not have a material adverse effect on the
Company.
RISKS ASSOCIATED WITH INTERNATIONAL MARKETS
The Company's continued growth is dependent in part upon its ability to
expand its operations into new markets, including international markets. The
Company may experience difficulty entering new international markets due to
greater regulatory barriers, the necessity of adapting to new regulatory systems
and problems related to entering new markets with different cultural bases and
political systems. Operating in international markets exposes the Company to
certain risks, including, among other things: (i) changes in or interpretations
of foreign regulations that may limit the Company's ability to sell certain
products or repatriate profits to the United States, (ii) exposure to currency
fluctuations, (iii) the potential imposition of trade or foreign exchange
restrictions or increased tariffs and (iv) political instability. As the Company
continues to expand its international operations, these and other risks
associated with international operations are likely to increase. See
"Business--General."
RELIANCE ON INDEPENDENT CONTRACTORS
The Company places significant reliance on its independent contractors to
act as part of its sales force and sell its products to health food retailers.
As with any independent contractor, such contractors are not employed or
otherwise controlled by the Company and are generally free to conduct their
businesses at their own discretion. Although these contractors enter into
contracts with the Company, such contracts typically can be terminated at any
time by the Company or the independent contractor. The simultaneous loss of the
services of a number of these independent contractors could have a material
adverse effect on the Company.
CONTROL BY EXISTING STOCKHOLDERS
Investment funds (the "Bain Capital Funds") controlled by Bain Capital
beneficially own approximately 41% of the outstanding Common Stock. By virtue of
such stock ownership, Bain Capital may be able to exert significant influence
over the election of the members of the Company's Board of Directors and to
exert significant influence over the affairs of the Company. Such concentration
of ownership could also have the effect of delaying, deterring or preventing a
change in control of the Company that might otherwise be beneficial to
stockholders. In addition, two representatives of Bain Capital currently serve
on the Company's Board of Directors. There can be no assurance that conflicts of
interest will not arise with respect to such Directors or that such conflicts
will be resolved in a manner favorable to the Company.
COMPUTER SYSTEMS AND YEAR 2000 ISSUES
The "Year 2000" issue concerns the potential exposures related to the
automated generation of business and financial misinformation resulting from the
application of computer programs which have been written using two digits,
rather than four, to define the applicable year of business transactions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Issue." Failure of the Company or its software providers
to adequately address the Year 2000
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issue could result in misstatement of reported financial information or
otherwise adversely affect the Company's business operations.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock may fluctuate significantly. These
fluctuations could result from, among other things, variations in the Company's
results of operations, which could be adversely affected by a number of factors
(some which are beyond the Company's control), including economic downturns,
variations in demand for nutritional supplements, changes in the mix of products
sold, price changes in response to competition, increases in the cost of raw
materials and possible supply shortages. In particular, the market price of the
Common Stock could be materially adversely affected by reports by official or
unofficial health and medical authorities and the general media regarding the
potential health benefits or detriments of products sold by the Company or of
similar products distributed by other companies regardless of whether such
reports are scientifically supported and regardless of whether the Company's
operating results are likely to be affected by such reports, as well as by
consumer perceptions regarding the safety and efficacy of nutritional
supplements and consumer preferences generally. In addition, the stock market in
general has experienced wide price and volume fluctuations in recent periods,
and these fluctuations may be unrelated to the operating performance of the
specific issuers whose stock is affected.
SHARES ELIGIBLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, that sales of shares of
Common Stock or the availability of shares of Common Stock for sale will have on
the market price of the Common Stock from time to time. The sale of a
substantial number of shares held by existing stockholders, whether pursuant to
subsequent public offerings or otherwise, or the perception that such sales
could occur, could adversely affect the market price of the Common Stock and
could materially impair the Company's future ability to raise capital through an
offering of equity securities.
CERTAIN ANTI-TAKEOVER EFFECTS
Certain provisions of the Company's Restated Certificate of Incorporation
(the "Restated Certificate") and Amended and Restated By-laws (the "By-laws")
may inhibit changes in control of the Company not approved by the Company's
Board of Directors. These provisions include (i) a classified Board of
Directors, (ii) a prohibition on stockholder action through written consents,
(iii) a requirement that special meetings of stockholders be called only by the
Board of Directors, (iv) advance notice requirements for stockholder proposals
and nominations, (v) limitations on the ability of stockholders to amend, alter
or repeal the By-laws and (vi) the authority of the Board to issue without
stockholder approval preferred stock, with such terms as the Board may
determine. The Company is also afforded the protections of Section 203 of the
Delaware General Corporation Law, which could have similar effects.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein under "Business," and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
including statements concerning (i) the Company strategy, (ii) the Company's
expansion plans, (iii) the market for the Company's products, (iv) the effects
of government regulation of the Company's products and (v) the effects on the
Company of certain legal proceedings, contain certain forward-looking statements
concerning the Company's operations, economic performance and financial
condition. Because such statements involve risks and uncertainties, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause such differences include,
but are not limited to, those discussed under "Risk Factors."
ITEM 2. PROPERTIES.
The following table describes the principal properties of the Company as of
September 30, 1999:
<TABLE>
<CAPTION>
PURPOSE LOCATION SQUARE FOOTAGE
- ------- ------------------------- --------------
<S> <C> <C>
DDO (distribution; proposed bottling and Ogden, Utah
manufacturing)..................................... 338,236
Brand manufacturing+................................. Ogden, Utah 31,230
Raw material and bulk distribution*.................. Ogden, Utah 25,000
Eastern distribution................................. Memphis, Tennessee 24,700
Monarch manufacturing*............................... Ogden, Utah 24,370
Woodland Publishing.................................. Lindon, Utah 12,820
Brand marketing and product development.............. Park City, Utah 10,446
Administrative offices and customer services*........ Ogden, Utah 8,855
Printing facility.................................... Las Vegas, Nevada 7,974
Great Basin manufacturing*........................... Clearfield, Utah 6,400
Executive offices and corporate sales and Park City, Utah
marketing.......................................... 6,103
Information systems and data management.............. Park City, Utah 3,228
Canadian distribution................................ Langley, British Columbia 2,817
Action Labs sales and marketing...................... Long Island, New York 2,499
Research, development and quality control............ Ogden, Utah 1,813
</TABLE>
- ------------------------
+ With the exception of this property, which is owned by the Company, the
Company leases all of the principal properties identified above. Lease terms
with respect to such properties end between 1999 and 2003, although the
Company has negotiated extension options in many cases.
* The operations currently housed in these facilities are expected to be moved
to the Company's facility at DDO in Ogden, Utah.
ITEM 3. LEGAL PROCEEDINGS.
As discussed in other filings and elsewhere in this Form 10-K, the Company
is subject to regulation by a number of federal, state and foreign agencies and
is involved in various legal matters arising in the normal course of business.
Recent material developments in regulatory and legal matters referred to in
previous filings, as well as new matters, include the following: (i) the FDA and
the United States Attorney's Office have continued the investigation of certain
matters originating with the January 20, 1998 Proposition 65 notice received by
Monarch. The Company has received grand jury subpoenas for documents with
respect to the investigation; the Company continues to cooperate with the FDA
and the United States Attorney's Office in the investigation of these matters,
(ii) the Company has been sued by American Home Products, the owner of the
Solgar line of dietary supplements; the lawsuit alleges that the Company's
registered mark Solar Green infringes on the registered mark Solgar that is now
owned by American Home Products, (iii) The Brown Group filed an
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opposition action with the U.S. Patent and Trademark Office against the Company,
opposing the registration of the Natural Sport trademark for dietary
supplements, (iv) Nutramax Laboratories filed an opposition action with the U.S.
Patent and Trademark Office against the Company, opposing the registration of
NaturalMax as a trademark, (v) in October 1999, Futurebiotics filed a complaint
against the Company in New York State Court alleging a violation of the
confidentiality agreement between the parties as it pertains to trade secrets
and the Futurebiotics' product "Hair, Skin & Nails" and (vi) in December 1999
the Company was sued by Enzymatic Therapy, Inc. and Abulkalam M. Shamsuddin,
M.D., claiming, among other things, that the Solaray brand IP-6 product
infringes on the plaintiffs' patent rights.
The Company carries insurance coverage in the types and amounts that
management considers reasonably adequate to cover the risks it faces in the
industry in which it competes. There can be no assurance, however, that such
insurance coverage will be adequate to cover all losses which the Company may
incur in future periods or that coverage will be available for all of the types
of claims the Company faces or may face.
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's financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information concerning the executive
officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------
<S> <C> <C>
Frank W. Gay II........................... 54 Director, Chairman of the Board and Chief
Executive Officer
Bruce R. Hough............................ 45 President
Jeffrey A. Hinrichs....................... 42 Director, Chief Operating Officer and
Executive Vice President
Gary M. Hume.............................. 50 Executive Vice President
William T. Logan.......................... 57 Senior Vice President, Marketing and Sales
Leslie M. Brown, Jr....................... 35 Senior Vice President, Finance and Chief
Financial Officer
</TABLE>
Frank W. Gay II has served as the Chairman of the Board of Directors of the
Company since its inception and as Chief Executive Officer since 1994. Mr. Gay
has been a partner of F.W. Gay & Sons, a private equity investment group, from
1967 to present.
Bruce R. Hough was made President of the Company in 1994. Prior to joining
the Company, Mr. Hough acted as a consultant from 1991 to 1993 and as President
of Keystone Communications, a telecommunications firm, from 1987 to 1991.
Jeffrey A. Hinrichs has served as Chief Operating Officer and Executive Vice
President of the Company since 1994. Prior to joining the Company, Mr. Hinrichs
served as President of Solaray, from 1993 to 1994 and as Chief Financial Officer
and in other management positions with Solaray from 1984 to 1993.
Gary M. Hume has served as Executive Vice President of the Company since
September 1999. Prior to joining the Company, Mr. Hume was President and CEO of
Murdock Madaus Schwabe
19
<PAGE>
(Nature's Way) from 1995 to 1999. Prior to joining Nature's Way, Mr. Hume was
President of Tree of Life's Southwest Division for over twenty years.
William T. Logan has served as Senior Vice President, Marketing and Sales
since February 1995. Mr. Logan served as Senior Vice President of Makers of
KAL, Inc. ("Old KAL") from 1978 to January 1995. Prior to joining Old KAL, he
held several sales and marketing positions with Gillette.
Leslie M. Brown, Jr. joined the Company in January 1995 as Vice President
and Controller. Mr. Brown became Senior Vice President, Finance and Chief
Financial Officer in October 1997. Prior to joining the Company, he was employed
by Price Waterhouse LLP. Mr. Brown is a Certified Public Accountant.
20
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET INFORMATION
The Company's Common Stock is traded on the Nasdaq National Market (the
"NNM") under the symbol "NUTR." The Common Stock commenced trading on
February 20, 1998. The following table sets forth the high and low prices per
share for the Common Stock as reported by The Nasdaq Stock Market ("Nasdaq") for
the period indicated:
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
1998:
Second Quarter (from February 20, 1998)..................... $23.63 $19.88
Third Quarter............................................... 22.25 8.50
Fourth Quarter.............................................. 12.75 5.88
1999:
First Quarter............................................... 7.69 4.69
Second Quarter.............................................. 6.00 4.06
Third Quarter............................................... 5.38 3.69
Fourth Quarter.............................................. 6.38 3.88
2000:
First Quarter (through December 21, 1999)................... 4.81 3.75
</TABLE>
The Company has received notification from Nasdaq regarding its continued
eligibility for listing on the NNM, based on recent market prices of the Common
Stock. The Company is responding to such notice.
HOLDERS
As of the close of business on December 21, 1999, there were 258 holders of
record of Common Stock. The Company believes that it has a significantly larger
number of beneficial holders of Common Stock. A recent reported last sale price
of the Common Stock on the NNM is set forth on the cover page of this report.
DIVIDENDS
Since its incorporation in 1993, the Company has neither declared nor paid
any cash or other dividends on its Common Stock and does not expect to pay
dividends for the foreseeable future. Instead, the Company currently intends to
retain earnings to support its growth strategy and reduce indebtedness. As a
holding company, the ability of the Company to pay dividends in the future is
dependent upon the receipt of dividends or other payments from its principal
operating subsidiary. Any future determination to pay dividends will be at the
discretion of the Company's Board of Directors and will depend upon, among other
factors, the Company's results of operations, financial condition, capital
requirements and contractual restrictions.
21
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data presented below were derived from the
consolidated financial statements of the Company. This selected financial data
should be read in conjunction with "Management's Discussion and Analysis of
Results of Operations and Financial Condition" and the Company's consolidated
financial statements and the notes thereto.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales..................................... $ 62,932 $ 83,923 $ 98,096 $ 104,688 $ 106,809
Cost of sales................................. 35,885 45,099 52,277 57,750 57,261
---------- ----------- ----------- ----------- -----------
Gross profit................................ 27,047 38,824 45,819 46,938 49,548
Operating expenses:
Selling, general and administrative......... 21,140 27,308 28,879 31,233 36,644
Amortization of intangibles................. 1,059 1,483 1,346 1,391 1,768
Non-recurring payments to management
advisors.................................. 269 300 300 1,135 --
One-time payment to executive officer....... -- -- 1,700 -- --
---------- ----------- ----------- ----------- -----------
Income from operations........................ 4,579 9,733 13,594 13,179 11,136
Interest expense, net......................... 4,478 7,126 6,572 3,971 2,493
---------- ----------- ----------- ----------- -----------
Income before provision for income taxes...... 101 2,607 7,022 9,208 8,643
Provision for income taxes.................... 23 1,056 2,774 3,509 3,370
---------- ----------- ----------- ----------- -----------
Net income before extraordinary loss.......... 78 1,551 4,248 5,699 5,273
Extraordinary loss on early extinguishment of
debt, net of tax............................ (478) -- -- (3,129) --
---------- ----------- ----------- ----------- -----------
Net income (loss)............................. $ (400) $ 1,551 $ 4,248 $ 2,570 $ 5,273
========== =========== =========== =========== ===========
Net income before extraordinary loss per
common share, basic......................... $ 0.01 $ 0.17 $ 0.46 $ 0.53 $ 0.45
Net income before extraordinary loss per
common share, diluted....................... $ 0.01 $ 0.15 $ 0.40 $ 0.48 $ 0.42
Net income per common share, basic............ $ (0.05) $ 0.17 $ 0.46 $ 0.24 $ 0.45
Net income per common share, diluted.......... $ (0.04) $ 0.15 $ 0.40 $ 0.22 $ 0.42
Weighted average shares outstanding, basic.... 8,824,623 9,308,583 9,308,583 10,806,178 11,729,587
Weighted average shares outstanding,
diluted..................................... 9,878,693 10,421,667 10,502,749 11,902,348 12,494,179
OTHER FINANCIAL DATA:
Adjusted EBITDA(a)............................ $ 11,831 $ 13,118 $ 19,563 $ 19,410 $ 17,082
Capital expenditures (excluding
acquisitions)............................... 2,837 5,498 3,652 3,380 7,904
Cash flows provided by (used in):
Operating activities........................ (64) 4,559 9,363 10,063 6,528
Investing activities........................ (49,155) (5,498) (3,652) (17,815) (9,058)
Financing activities........................ 49,645 2,600 (3,617) 5,309 1,423
BALANCE SHEET DATA (AT PERIOD END):
Cash.......................................... $ 660 $ 2,321 $ 4,415 $ 1,967 $ 869
Working capital............................... 17,165 19,727 15,616 24,047 29,249
Total assets.................................. 83,498 84,755 90,110 104,308 108,644
Total debt.................................... 60,881 63,657 60,259 37,133 38,830
Stockholders' equity.......................... 10,512 12,091 16,354 51,622 57,290
</TABLE>
- --------------------------
(a) "Adjusted EBITDA" is defined herein as net income before extraordinary loss
plus provision for income taxes, net interest expense, depreciation and
amortization and other non-recurring items. Management believes that
Adjusted EBITDA, as presented, represents a useful measure for assessing the
performance of the Company's ongoing operating activities as it reflects the
earnings trends of the Company without the impact of the purchase accounting
applied in connection with the Company's history of acquisitions, the
financing required to consummate such transactions and other non-recurring
items. Targets and trends in Adjusted EBITDA are used as a performance
measure for determining management's bonus compensation and are also used by
the Company's creditors in assessing debt covenant compliance. The Company
understands that while Adjusted
22
<PAGE>
EBITDA is frequently used by securities analysts in the evaluation of
nutritional supplement companies, it is not necessarily comparable to other
similarly titled captions of other companies due to potential
inconsistencies in the method of calculation. Adjusted EBITDA is not
intended as an alternative to cash flows from operating activities, as a
measure of liquidity or as an alternative to net income as an indicator of
the Company's operating performance or any other measure of performance in
accordance with generally accepted accounting principles. The following
table sets forth a reconciliation of net income before extraordinary loss to
Adjusted EBITDA for each period included herein:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net income before extraordinary loss.................... $ 78 $ 1,551 $ 4,248 $ 5,699 $ 5,273
Provision for income taxes.............................. 23 1,056 2,774 3,509 3,370
Interest expense, net(1)................................ 4,478 7,126 6,572 3,971 2,493
Depreciation and amortization(2)........................ 6,983 3,085 3,969 5,096 5,946
Non-recurring payments to management advisors(3)........ 269 300 300 1,135 --
One-time payment to executive officer(4)................ -- -- 1,700 -- --
------- ------- ------- ------- -------
Adjusted EBITDA....................................... $11,831 $13,118 $19,563 $19,410 $17,082
======= ======= ======= ======= =======
</TABLE>
- --------------------------
(1) Includes amortization of capitalized debt issuance costs.
(2) Includes non-recurring amortization of inventory write-up.
(3) Represents management fees paid to Bain Capital and F.W. Gay & Sons pursuant
to a management advisory agreement, which was terminated in connection with
the Company's initial public offering (the "Offering"). As is often the case
in stand-alone acquisition scenarios such as the Company's original
acquisition of Solaray, during the early stages of the Company's development
it relied heavily on an affiliate of its equity sponsors, Bain Capital, to
provide certain management services, paying a recurring annual fee pursuant
to the management advisory agreement in respect of such services. Over time,
the Company has developed the infrastructure to provide these services
internally and, as a result, terminated the management advisory agreement
(and the recurring management fees payable thereunder) upon consummation of
the Offering.
(4) Reflects a one-time payment to the Company's Chief Executive Officer for
successfully positioning the Company for the Offering. Such payment is in
excess of the Chief Executive Officer's annual compensation (salary and
bonus), and the Company does not expect to make any further payments of this
nature or magnitude in the future.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Company's
audited consolidated financial statements and accompanying notes thereto
included elsewhere in this Form 10-K.
OVERVIEW
The Company was formed in 1993 by senior management and Bain Capital to
effect a consolidation strategy in the fragmented VMS Industry. The Company
purchased Solaray 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 significant acquisitions: Premier One in
October 1994, KAL/NaturalMax in January 1995 and Monarch in September 1995
(collectively, the "Fiscal 1995 Acquisitions"). In fiscal 1998, the Company
completed two additional acquisitions: Action Labs in July 1998 and NutraForce
Canada in August 1998 (collectively, the "Fiscal 1998 Acquisitions"). In fiscal
1999, the Company completed two additional acquisitions: Woodland and Summit
Graphics, Inc. in April 1999 (collectively, the "Fiscal 1999 Acquisitions").
23
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of operations
data as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 53.3 55.2 53.6
----- ----- -----
Gross profit................................................ 46.7 44.8 46.4
Selling, general and administrative......................... 29.4 29.8 34.3
Amortization of intangibles................................. 1.4 1.3 1.7
Non-recurring payments to management advisors............... 0.3 1.1 --
One-time payment to executive officer....................... 1.7 -- --
----- ----- -----
Income from operations...................................... 13.9 12.6 10.4
Interest expense, net....................................... 6.7 3.8 2.3
----- ----- -----
Income before provision for income taxes.................... 7.2 8.8 8.1
Provision for income taxes.................................. 2.8 3.4 3.2
----- ----- -----
Net income before extraordinary loss........................ 4.4 5.4 4.9
Extraordinary loss on early extinguishment of debt, net of
tax....................................................... -- (2.9) --
----- ----- -----
Net income.................................................. 4.4% 2.5% 4.9%
===== ===== =====
</TABLE>
COMPARISON OF FISCAL 1999 TO FISCAL 1998
NET SALES. Net sales increased by $2.1 million, or 2.0%, to $106.8 million
for fiscal 1999 from $104.7 million for fiscal 1998. Net sales of branded
products increased by $4.6 million, or 5.3%, to $93.0 million for fiscal 1999
from $88.4 million for fiscal 1998. This increase in net sales of branded
products was primarily the result of increased sales volume. The Company
believes that the increased volume was primarily attributable to industry
growth, the success of new product introductions, the Fiscal 1998 Acquisitions
and the Fiscal 1999 Acquisitions. Net sales of bulk materials decreased by
$2.5 million, or 15.5%, to $13.8 million for fiscal 1999 from $16.3 million for
fiscal 1998. This decrease in net sales of bulk materials was primarily
attributable to reduced sales of certain commodity-based materials to key
customers.
GROSS PROFIT. Gross profit increased by $2.6 million, or 5.6%, to
$49.5 million for fiscal 1999 from $46.9 million for fiscal 1998. This increase
in gross profit was primarily attributable to growth in sales volume. As a
percentage of net sales, gross profit increased to 46.4% for fiscal 1999 from
44.8% for fiscal 1998. This increase in gross profit as a percentage of net
sales was primarily attributable to improvements in direct material pricing and,
to a lesser extent, a shift in sales mix to a higher proportion of branded
product sales, which have higher gross profit margins, relative to bulk material
sales, which have lower gross profit margins. During fiscal 1999, direct
material pricing improved due to new material sources, increased supplier
competition and reduced packaging costs, which were higher during fiscal 1998
due to bottle and label conversions associated with the Company's efforts to
enhance quality and to comply with new labeling laws mandated by the FDA.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $5.4 million, or 17.3%, to $36.6 million
for fiscal 1999 from $31.2 million for fiscal 1998. As a percentage of net
sales, selling, general and administrative expenses increased to 34.3% for
fiscal 1999 from 29.8% for fiscal 1998. This increase in selling, general and
administrative expenses as a percentage of net sales was primarily attributable
to the Company's investment in the addition of
24
<PAGE>
certain executive and key management personnel, facility consolidation, sales
force expansion, new business development and information systems, including
increased amortization associated with prior year capital expenditures.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles increased by
$0.4 million, or 27.1%, to $1.8 million for fiscal 1999 from $1.4 million for
fiscal 1998. As a percentage of net sales, amortization of intangibles increased
to 1.7% for fiscal 1999 from 1.3% for fiscal 1998. This increase in amortization
of intangibles was primarily attributable to the Fiscal 1998 Acquisitions.
During fiscal 1999, twelve months of amortization expense related to these
acquisitions was incurred compared to approximately two months of amortization
expense for fiscal 1998.
NON-RECURRING PAYMENTS TO MANAGEMENT ADVISORS. Non-recurring payments to
management advisors represent payments pursuant to a management advisory
agreement which was terminated in connection with the Offering in fiscal 1998.
INTEREST EXPENSE, NET. Interest expense decreased by $1.5 million, or
37.2%, to $2.5 million for fiscal 1999 from $4.0 million for fiscal 1998. As a
percentage of net sales, interest expense decreased to 2.3% for fiscal 1999 from
3.8% for fiscal 1998. This decrease in interest expense was primarily
attributable to decreased indebtedness resulting from debt repayments made with
proceeds of the Offering, which occurred during the second quarter of fiscal
1998.
PROVISION FOR INCOME TAXES. The Company's effective tax rate increased to
39.0% for fiscal 1999 from 38.1% for fiscal 1998. 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
purchases of Solaray and Woodland. The impact of Solaray and Woodland goodwill
on the effective tax rate for fiscal 1999 increased compared to fiscal 1998 as a
result of the Company's mid-year acquisition of Woodland and the Company's lower
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 in
fiscal 1998. This loss was incurred in connection with the Offering when new
financing (the "New Credit Agreement") was used to extinguish previous debt
arising from the Company's previous credit agreement (the "Senior Credit
Agreement").
COMPARISON OF FISCAL 1998 TO FISCAL 1997
NET SALES. Net sales increased by $6.6 million, or 6.7%, to $104.7 million
for fiscal 1998 from $98.1 million for fiscal 1997. Net sales of branded
products increased by $10.9 million, or 14.1%, to $88.4 million for fiscal 1998
from $77.5 million for fiscal 1997. This increase in net sales of branded
products was primarily the result of increased sales volume. The Company
believes that the increased volume was primarily attributable to industry
growth, the success of new product introductions and, to a lesser extent, the
Fiscal 1998 Acquisitions. Net sales of bulk materials decreased by
$4.3 million, or 21.1%, to $16.3 million for fiscal 1998 from $20.6 million for
fiscal 1997. This decrease in net sales of bulk materials was primarily
attributable to reduced sales of certain commodity-based materials to key
customers.
GROSS PROFIT. Gross profit increased by $1.1 million, or 2.4%, to
$46.9 million for fiscal 1998 from $45.8 million for fiscal 1997. This increase
in gross profit was primarily attributable to growth in sales volume. As a
percentage of net sales, gross profit decreased to 44.8% for fiscal 1998 from
46.7% for fiscal 1997. This decrease in gross profit as a percentage of net
sales was primarily attributable to higher packaging costs associated with label
and bottle conversions and additional discounting associated with certain
promotional programs during fiscal 1998. Label conversions were necessitated by
FDA regulations, which became effective in March 1999. Bottle costs increased as
the Company moved from polystyrene to PET bottles.
25
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $2.3 million, or 8.2%, to $31.2 million for
fiscal 1998 from $28.9 million for fiscal 1997. As a percentage of net sales,
selling, general and administrative expenses increased to 29.8% for fiscal 1998
from 29.4% for fiscal 1997. This increase in selling, general and administrative
expenses as a percentage of net sales was primarily attributable to the
Company's investment in information systems, including increased amortization
associated with prior year capital expenditures.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles increased by
$0.1 million, or 3.3%, to $1.4 million for fiscal 1998 from $1.3 million for
fiscal 1997. As a percentage of net sales, amortization of intangibles decreased
to 1.3% for fiscal 1998 from 1.4% for fiscal 1997. This increase in amortization
of $0.1 million was primarily attributable to the Fiscal 1998 Acquisitions.
During fiscal 1998, approximately two months of amortization expense related to
these acquisitions was incurred compared to no amortization expense for fiscal
1997.
NON-RECURRING PAYMENTS TO MANAGEMENT ADVISORS. Non-recurring payments to
management advisors represent payments pursuant to a management advisory
agreement which was terminated in connection with the Offering.
ONE-TIME PAYMENT TO EXECUTIVE OFFICER. One-time payment to executive
officer of $1.7 million for fiscal 1997 represents a payment to the Company's
Chief Executive Officer for successfully positioning the Company for the
Offering.
INTEREST EXPENSE, NET. Interest expense decreased by $2.6 million, or
39.6%, to $4.0 million for fiscal 1998 from $6.6 million for fiscal 1997. As a
percentage of net sales, interest expense decreased to 3.8% for fiscal 1998 from
6.7% for fiscal 1997. This decrease in interest expense was primarily
attributable to decreased indebtedness resulting from debt repayments made with
proceeds of the Offering.
PROVISION FOR INCOME TAXES. The Company's effective tax rate decreased to
38.1% for fiscal 1998 from 39.5% for fiscal 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
purchase of Solaray. The impact of Solaray goodwill on the effective tax rate
for fiscal 1998 decreased compared to fiscal 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 the early extinguishment of debt of $3.1 million, net of tax, was recognized
in fiscal 1998. This loss was incurred in connection with the Offering when new
financing (the "New Credit Agreement") was used to extinguish previous debt
arising from the Company's previous credit agreement (the "Senior Credit
Agreement").
SELECTED QUARTERLY FINANCIAL DATA; SEASONALITY
The following table sets forth certain quarterly financial data for fiscal
1998 and 1999. This quarterly information is unaudited, has been prepared on the
same basis as the annual financial statements and, in the opinion of the
Company's management, reflects all normally recurring
26
<PAGE>
adjustments necessary for fair presentation of the information for the periods
presented. Operating results for any quarter are not necessarily indicative of
results of any future period.
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1999
----------------------------------------- -----------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA: UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................................. $25,857 $27,799 $25,004 $26,027 $27,213 $27,234 $26,212 $26,150
Gross profit.............................. 12,000 13,057 11,027 10,854 12,189 12,818 12,362 12,179
Net income before extraordinary loss(a)... 1,432 1,482 1,724 1,061 1,813 1,740 936 784
Net income (loss)......................... 1,432 (1,647) 1,724 1,061 1,813 1,740 936 784
Earnings per common share before
extraordinary loss:
Basic................................. $ 0.15 $ 0.14 $ 0.15 $ 0.09 $ 0.16 $ 0.15 $ 0.08 $ 0.07
Diluted............................... $ 0.14 $ 0.13 $ 0.14 $ 0.08 $ 0.15 $ 0.14 $ 0.07 $ 0.06
</TABLE>
- ------------------------------
(a) During the second quarter of fiscal 1998, the Company incurred an
extraordinary loss of $3,129, net of tax, related to the early
extinguishment of debt in connection with the Offering.
The Company believes that its business is characterized by minor
seasonality. Furthermore, sales to any particular customer can vary
substantially from one quarter to the next based on such factors as industry
trends, timing of promotional discounts, international economic conditions and
acquisition-related activities. Historically, the Company has recorded higher
sales volume during the second fiscal quarter due to increased interest in
health-related products among consumers following the holiday season. The
Company does not believe that the impact of seasonality on its results of
operations is material. In addition, the Company's sales of bulk materials are
characterized by periodic shipments to certain customers and can vary
significantly from quarter to quarter.
YEAR 2000 ISSUE
Many existing computer programs use only two digits to identify years. These
programs were designed without consideration for the effect of the upcoming
change in century, and if not corrected, could fail or create erroneous results
by, or at, the year 2000. Essentially all of the Company's information
technology-based systems, as well as many non-information technology-based
systems, are affected by the year 2000 issue. Specific systems include
accounting, payroll, financial reporting, product formulation and development,
manufacturing, inventory tracking and control, business planning, tax, accounts
receivable, accounts payable, purchasing, distribution and numerous word
processing and similar applications. Non-information technology-based systems
include equipment and services containing embedded microprocessors, such as
manufacturing and bottling equipment, clocks, security systems and building
management systems. The Company also has relationships with numerous third
parties, including material suppliers, utility companies, transportation
companies, banks and brokerage firms that may be affected by the year 2000
issue.
Remediation plans have been established and completed, to the best of the
Company's belief, for all critical and non-critical systems potentially affected
by the year 2000 issue. Nevertheless, these remediation plans constitute an
ongoing process that the Company believes will continue beyond the date of this
filing.
Identification of areas of potential third-party risk has been addressed. No
areas of material risk have been identified by the Company.
The Company believes that it has determined the risks that it would face in
the event certain aspects of its year 2000 remediation plan fail. The Company
has also established contingency plans for all mission-critical processes. Under
a "worst case" scenario, the Company's manufacturing operations would be unable
to build and deliver products in a timely fashion due to internal system
failures and/or the inability of vendors to deliver raw materials and
components. Alternative suppliers have been, and continue to be, identified
where possible. While virtually all internal systems can be replaced with manual
systems on a temporary basis, the failure of mission-critical systems would have
at least a
27
<PAGE>
short-term negative effect on operations. Furthermore, the failure of national
and worldwide banking systems could result in the inability of many businesses,
including the Company, to conduct business.
The Company believes that remediation, risk assessment and contingency plans
have been completed satisfactorily. Based on this belief, the Company does not
expect to experience any material adverse impact to its ongoing operations. The
total cost to the Company of achieving year 2000 compliance is not expected to
exceed $100,000, not including internal resources. Spending to date totals
approximately $80,000.
LIQUIDITY AND CAPITAL RESOURCES
For the fiscal year ended September 30, 1999, net cash provided by
operations was $6.5 million compared to $10.1 million for the year ended
September 30, 1998 and $9.4 million for the year ended September 30, 1997. The
decrease in net cash provided by operations in fiscal 1999 was primarily
attributable to lower levels of accounts payable and accrued expenses.
Net cash used in investing activities was $9.1 million, $17.8 million and
$3.7 million for the years ended September 30, 1999, 1998 and 1997,
respectively. The Company's investing activities consist primarily of
acquisitions and, to a lesser extent, costs associated with capital
expenditures. The higher levels of cash used in investing activities for fiscal
1999 and 1998 reflect the Company's purchases of net assets related to the
Fiscal 1999 Acquisitions and the Fiscal 1998 Acquisitions, respectively. Capital
expenditures during fiscal 1998 and 1997 related primarily to manufacturing
equipment and information systems required to expand capacity and improve
overall operating efficiency. In fiscal 1999, similar capital expenditures were
incurred as well as additional expenditures related to leasehold improvements at
the DDO facility. The Company intends to finance anticipated capital
expenditures through internally generated cash flow and, if necessary, through
funds provided under the New Credit Agreement.
Net cash provided by (used in) financing activities was $1.4 million,
$5.3 million and $(3.6) million for the years ended September 30, 1999, 1998 and
1997, respectively. The Company's current financing activities consist primarily
of borrowings and repayments under the Senior Credit Agreement and the New
Credit Agreement related to operating needs. In fiscal 1998, the Company's
financing activities were significantly impacted by proceeds generated in
connection with the Offering.
The New Credit Agreement currently makes $70.0 million of revolving credit
borrowings available to the Company. The available revolving credit borrowings
are reduced to $65.0 million, $45.0 million and $37.5 million during fiscal
2001, 2002 and 2003, respectively. Borrowings under the New Credit Agreement are
secured by certain assets of the Company and bear interest at the applicable
Eurodollar Rate plus a variable margin or at the Federal Funds Rate plus 0.5%
plus a variable margin. At September 30, 1999, the applicable interest rate was
6.38%. The Company is also required to pay a variable quarterly fee on the
unused balance under the New Credit Agreement. At September 30, 1998, the
applicable rate was 0.3%.
Accrued interest on Federal Funds Rate borrowings is payable quarterly.
Accrued interest on Eurodollar Rate borrowings is payable based on an elected
interval of one, two or three months. The Company is required to pay all
principal outstanding under the New Credit Agreement in January 2003.
The New Credit Agreement contains restrictive covenants, including
restrictions on incurring other indebtedness, limitations on capital
expenditures, requirements that the Company maintain a minimum level of
consolidated net worth, a minimum ratio of cash flow to fixed charges, a minimum
level of Adjusted EBITDA, and a maximum ratio of debt to Adjusted EBITDA. Upon
the occurrence of an event of default under the New Credit Agreement, the lender
may require the Company to repay all amounts borrowed thereunder and may proceed
against the collateral. The New Credit Agreement also restricts the Company's
ability to make certain payments, including the payment of dividends on its
28
<PAGE>
Common Stock and payments with respect to certain capital expenditures, without
the approval of its lenders.
A key component of the Company's business strategy is to seek to make
additional acquisitions, which will likely require that the Company obtain
additional financing, which could include the incurrence of substantial
additional indebtedness. The Company believes that borrowings under the New
Credit Agreement or a replacement credit facility, together with cash flows from
operations, will be sufficient to make required payments under the New Credit
Agreement or any such replacement facility, and to make anticipated capital
expenditures and fund working capital needs for fiscal 2000.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued SFAS No. 130, REPORTING
COMPREHENSIVE INCOME, which became effective for fiscal years beginning after
December 15, 1997 and established standards for the way that companies report
and display comprehensive income and its components in a full set of general
purpose financial statements. The Company has adopted SFAS No. 130 in its
financial statements.
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 has adopted SFAS No. 131 in
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, 1998
and established standards for the way that public business enterprises account
for the costs of internal use computer software. The Company has adopted
SOP 98-1 for its fiscal 2000 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
form 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Borrowings under the New Credit Agreement bear interest at the applicable
Eurodollar Rate plus a variable margin or at the Federal Funds Rate plus 0.5%
plus a variable margin. At September 30, 1999, the applicable interest rate was
6.38% and the Company had total borrowings outstanding of $38.8 million. To
date, the Company has not obtained interest rate protection with respect to
these borrowings due to the recent stability of interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by Item 8 is set forth on pages F-1 through F-20 of
this Form 10-K. The supplementary financial information required by Item 302 of
Regulation S-K is set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Selected Quarterly Financial
Data; Seasonality."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
29
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to Directors of the Company is set forth in the
Proxy Statement under the heading "The Board of Directors," which information is
incorporated herein by reference. Information regarding the executive officers
of the Company is included as Item 4A of Part I of the Form 10-K as permitted by
Instruction 3 to Item 401(b) of Regulation S-K. Information required by
Item 405 of Regulation S-K is set forth in the Proxy Statement under the heading
"Section 16(a) Beneficial Ownership Reporting Compliance," which information is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to executive compensation is set forth in the Proxy
Statement under the heading "Executive Compensation," which information is
incorporated herein by reference (except for the Compensation Committee Report
and the Performance Graph).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to security ownership of certain beneficial owners
and management is set forth in the Proxy Statement under the heading "Principal
Stockholders," which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to certain relationships and related transactions
is set forth in the Proxy Statements under the headings "The Board of
Directors--Compensation Committee Interlocks and Insider Participation" and "The
Board of Directors--Certain Relationships and Related Transactions," which
information is incorporated herein by reference.
30
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements, as set forth on the attached Index to Financial
Statements.
2. Exhibits, as set forth on the attached Exhibit Index.
3. Financial Statement Schedules.
Schedule II--Valuation and Qualifying Accounts
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this 29th day of
December, 1999.
<TABLE>
<S> <C> <C>
NUTRACEUTICAL INTERNATIONAL CORPORATION
By: /s/ FRANK W. GAY II
-----------------------------------------
Name: Frank W. Gay II
Title: Chairman of the Board and Chief
Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on this 29th day of December, 1999.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<C> <S>
/s/ FRANK W. GAY II
------------------------------------------- Director, Chairman of the Board and Chief
Frank W. Gay II Executive Officer
/s/ JEFFREY A. HINRICHS
------------------------------------------- Director, Chief Operating Officer and
Jeffrey A. Hinrichs Executive Vice President
/s/ LESLIE M. BROWN, JR.
------------------------------------------- Senior Vice President, Finance and Chief
Leslie M. Brown, Jr. Financial Officer
/s/ ROBERT C. GAY
------------------------------------------- Director
Robert C. Gay
/s/ MATTHEW S. LEVIN
------------------------------------------- Director
Matthew S. Levin
/s/ ALEXANDER GORDON BEARN, M.D.
------------------------------------------- Director
Alexander Gordon Bearn, M.D.
/s/ JON STEVEN YOUNG
------------------------------------------- Director
Jon Steven Young
</TABLE>
32
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
3.1 Form of Amended and Restated Certificate of Incorporation of
the Registrant(1)
3.2 Form of By-laws of the Registrant(1)
4.1 Form of certificate representing Common Stock(1)
4.2 Amended and Restated Registration Agreement dated as of
January 31, 1995 among the Company and certain of its
stockholders(1)
4.3 Credit Agreement dated as of February 25, 1998 among the
Company and its lenders(2)
10.1 Nutraceutical International Corporation 1998 Stock Incentive
Plan(1)
10.2 Nutraceutical International Corporation 1998 Non-Employee
Director Stock Option Plan(1)
10.3 Nutraceutical International Corporation Employee Stock
Discount Purchase Plan(1)
10.4 Transaction Services Agreement between the Company and Bain
Capital(1)
10.5 Consultant Stock Agreement dated as of October 28, 1993
between the Company and Bruce R. Hough(1)
10.6 Executive Stock Agreement dated as of October 28, 1993
between the Company and Jeffrey A. Hinrichs(1)
10.7 Stock Option Agreement dated as of November 15, 1994 between
the Company and Jeffrey A. Hinrichs(1)
10.8 Stock Option Agreement dated as of November 15, 1994 between
the Company and Bruce R. Hough(1)
10.9 Stock Option Agreement dated as of November 15, 1994 between
the Company and Frank W. Gay II(1)
10.10 Form of Area Sales Consultant Agreement(1)
11.1 Computation of earnings per share
The information required by Exhibit 11.1 is set forth on
page F-15 of this Form 10-K.
21.1 Subsidiaries of the Company
27.1 Financial Data Schedule
</TABLE>
- ------------------------
(1) Incorporated by reference to the applicable exhibit to the Registrant's
Registration Statement on Form S-1, Registration No. 333-41909.
(2) The Company agrees to furnish supplementally to the Commission a copy of any
omitted schedule or exhibit to such agreement upon request by the
Commission.
33
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Financial Statements:
Report of Independent Accountants......................... F-2
Consolidated Balance Sheets at September 30, 1998 and
1999.................................................... F-3
Consolidated Statements of Operations for the years ended
September 30, 1997, 1998 and 1999....................... F-4
Consolidated Statements of Cash Flows for the years ended
September 30, 1997, 1998 and 1999....................... F-5
Consolidated Statements of Stockholders' Equity for the
years ended
September 30, 1997, 1998 and 1999....................... F-6
Notes to Consolidated Financial Statements................ F-7
Financial Statement Schedules:
For each of the three years in the period ended
September 30, 1999
Schedule II--Valuation and Qualifying Accounts
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Nutraceutical International Corporation:
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Nutraceutical International Corporation and its subsidiaries at
September 30, 1998 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended September 30, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Salt Lake City, Utah
November 12, 1999
F-2
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 1,967 $ 869
Accounts receivable, net.................................. 9,149 9,010
Inventories, net.......................................... 23,935 26,863
Prepaid expenses and other current assets................. 1,649 1,397
Deferred income taxes..................................... 1,101 1,231
-------- --------
Total current assets.................................... 37,801 39,370
Property, plant and equipment, net.......................... 10,770 14,752
Goodwill, net............................................... 54,375 53,422
Other non-current assets, net............................... 1,362 1,100
-------- --------
$104,308 $108,644
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations.............. $ 53 $ 57
Accounts payable.......................................... 9,614 6,879
Accrued expenses.......................................... 4,087 3,185
-------- --------
Total current liabilities............................... 13,754 10,121
Long-term debt.............................................. 37,000 38,750
Capital lease obligations................................... 80 23
Deferred income taxes, net.................................. 1,852 2,460
-------- --------
Total liabilities....................................... 52,686 51,354
-------- --------
Commitments and contingencies (Notes 10, 14 and 17)
Stockholders' equity:
Common Stock, $0.01 par value, 50,000,000 shares
authorized, 11,764,879 and 11,791,295 shares issued and
outstanding at September 30, 1998 and 1999,
respectively............................................ 118 118
Preferred Stock, $0.01 par value, 5,000,000 shares
authorized, no shares issued and outstanding at
September 30, 1998 and 1999, respectively............... -- --
Additional paid-in capital................................ 42,515 42,637
Retained earnings......................................... 9,277 14,504
Cumulative translation adjustment......................... 13 31
Treasury stock at cost, 41,800 shares at September 30,
1998.................................................... (301) --
-------- --------
Total stockholders' equity.............................. 51,622 57,290
-------- --------
$104,308 $108,644
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Net sales................................................ $ 98,096 $ 104,688 $ 106,809
Cost of sales............................................ 52,277 57,750 57,261
---------- ---------- ----------
Gross profit......................................... 45,819 46,938 49,548
---------- ---------- ----------
Operating expenses:
Selling, general and administrative.................... 28,879 31,233 36,644
Amortization of intangibles............................ 1,346 1,391 1,768
Non-recurring payments to management advisors.......... 300 1,135 --
One-time payment to executive officer.................. 1,700 -- --
---------- ---------- ----------
32,225 33,759 38,412
---------- ---------- ----------
Income from operations................................... 13,594 13,179 11,136
Interest expense, net.................................... 6,572 3,971 2,493
---------- ---------- ----------
Income before provision for income taxes................. 7,022 9,208 8,643
Provision for income taxes............................... 2,774 3,509 3,370
---------- ---------- ----------
Net income before extraordinary loss..................... 4,248 5,699 5,273
Extraordinary loss on early extinguishment of debt, net
of tax................................................. -- (3,129) --
---------- ---------- ----------
Net income............................................... $ 4,248 $ 2,570 $ 5,273
========== ========== ==========
Net income before extraordinary loss per common share:
Basic.................................................. $ 0.46 $ 0.53 $ 0.45
Diluted................................................ $ 0.40 $ 0.48 $ 0.42
Extraordinary loss per common share:
Basic.................................................. $ -- $ (0.29) $ --
Diluted................................................ $ -- $ (0.26) $ --
Net income per common share:
Basic.................................................. $ 0.46 $ 0.24 $ 0.45
Diluted................................................ $ 0.40 $ 0.22 $ 0.42
Weighted average common shares outstanding:
Basic.................................................. 9,308,583 10,806,178 11,729,587
Diluted................................................ 10,502,749 11,902,348 12,494,179
</TABLE>
The accompanying notes are in integral part of these consolidated financial
statements.
F-4
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 4,248 $ 2,570 $ 5,273
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization (includes amortization of
inventory write-up of $381 and $92 during 1998 and
1999, respectively)................................... 3,969 5,096 5,946
Amortization of debt issuance costs..................... 817 468 215
Extraordinary loss on early extinguishment of debt, net
of tax................................................ -- 3,129 --
Loss on disposal of property, plant and equipment....... -- 7 44
Changes in assets and liabilities, net of effects from
acquisitions:
Accounts receivable................................... (794) (456) 245
Inventories........................................... (3,390) (2,460) (2,616)
Prepaid expenses and other current assets............. 190 (453) 251
Deferred income taxes................................. 608 520 479
Other non-current assets.............................. (3) (305) 468
Accounts payable...................................... 1,939 1,960 (2,852)
Accrued expenses...................................... 1,779 (13) (925)
------- -------- -------
Net cash provided by operating activities........... 9,363 10,063 6,528
------- -------- -------
Cash flows from investing activities:
Proceeds from the sale of property and equipment.......... -- -- 33
Purchases of property and equipment....................... (3,652) (3,380) (7,904)
Acquisitions, net of cash acquired........................ -- (14,435) (1,187)
------- -------- -------
Net cash used in investing activities............... (3,652) (17,815) (9,058)
------- -------- -------
Cash flows from financing activities:
Proceeds from long-term debt.............................. -- 46,450 4,750
Payments on long-term debt................................ (3,450) (71,955) (3,000)
Principal payments on capital lease obligations........... (182) (181) (53)
Payment of deferred financing fees........................ -- (1,058) --
Prepayment penalty and fees on early extinguishment of
debt.................................................... -- (632) --
Receipts of subscriptions receivable...................... 15 55 --
Proceeds from issuance of common stock.................... -- 32,931 117
Purchase of treasury shares............................... -- (301) (391)
------- -------- -------
Net cash provided by (used in) financing
activities........................................ (3,617) 5,309 1,423
------- -------- -------
Effect of exchange rate changes on cash..................... -- (5) 9
------- -------- -------
Net increase (decrease) in cash............................. 2,094 (2,448) (1,098)
Cash at beginning of period................................. 2,321 4,415 1,967
------- -------- -------
Cash at end of period....................................... $ 4,415 $ 1,967 $ 869
======= ======== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest................................................ $ 5,924 $ 3,882 $ 2,124
Income taxes............................................ $ 2,432 $ 874 $ 3,523
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
--------------------- PAID-IN SUBSCRIPTIONS RETAINED COMPREHENSIVE TREASURY
SHARES AMOUNT CAPITAL RECEIVABLE EARNINGS INCOME STOCK
---------- -------- ---------- ------------- -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1996........... 9,308,583 $ 93 $ 9,609 $(70) $ 2,459 $-- $ --
Receipt of subscriptions
receivable......................... -- -- -- 15 -- -- --
Net income........................... -- -- -- -- 4,248 -- --
---------- ---- ------- ---- ------- --- -----
Balance at September 30, 1997........ 9,308,583 93 9,609 (55) 6,707 -- --
Net income........................... -- -- -- -- 2,570 -- --
Cumulative translation adjustment.... -- -- -- -- -- 13 --
Total comprehensive income...........
Issuance of common stock............. 2,456,296 25 32,906 -- -- -- --
Receipt of subscriptions
receivable......................... -- -- -- 55 -- -- --
Purchase of treasury stock........... -- -- -- -- -- -- (301)
---------- ---- ------- ---- ------- --- -----
Balance at September 30, 1998........ 11,764,879 118 42,515 -- 9,277 13 (301)
Net income........................... -- -- -- -- 5,273 -- --
Cumulative translation adjustment.... -- -- -- -- -- 18 --
Total comprehensive income...........
Issuance of common stock............. 26,416 -- 122 -- -- -- --
Purchase of treasury stock........... -- -- -- -- -- -- (391)
Issuance of treasury stock........... -- -- -- -- (46) -- 692
---------- ---- ------- ---- ------- --- -----
Balance at September 30, 1999........ 11,791,295 $118 $42,637 $ -- $14,504 $31 $ --
========== ==== ======= ==== ======= === =====
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance at October 1, 1996........... $12,091
Receipt of subscriptions
receivable......................... 15
Net income........................... 4,248
-------
Balance at September 30, 1997........ 16,354
-------
Net income........................... 2,570
Cumulative translation adjustment.... 13
-------
Total comprehensive income........... 2,583
Issuance of common stock............. 32,931
Receipt of subscriptions
receivable......................... 55
Purchase of treasury stock........... (301)
-------
Balance at September 30, 1998........ 51,622
-------
Net income........................... 5,273
Cumulative translation adjustment.... 18
-------
Total comprehensive income........... 5,291
Issuance of common stock............. 122
Purchase of treasury stock........... (391)
Issuance of treasury stock........... 646
-------
Balance at September 30, 1999........ $57,290
=======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. DESCRIPTION OF BUSINESS
Nutraceutical International Corporation (the "Company") develops,
manufactures and markets high quality branded vitamin, mineral, herbal and
specialty dietary supplements to domestic health food stores and international
distributors under the Solaray, Kal, NaturalMax, VegLife, Premier One, Solar
Green, Natural Sport and Action Labs brand names. Under the name Woodland, the
Company markets a line of over 150 books and pamphlets to national retail
bookstores and to health food stores.
The Company also manufactures bulk materials, including chelated minerals
and processed herbs, for use in its own products and for sale to other
manufacturers and marketers of dietary supplements under the tradenames Monarch
Nutritional Laboratories and Great Basin Botanicals.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of the Company and its subsidiaries (Note 1). The acquired
operations of Action Labs, Inc. ("Action Labs"), NutraForce (Canada)
International, Inc. ("NutraForce Canada"), Woodland Publishing, Inc.
("Woodland") and Summit Graphics, Inc. ("Summit") have been consolidated from
their respective dates of acquisition (Note 3). All significant intercompany
transactions and balances have been eliminated.
USE OF ESTIMATES--The preparation of these financial statements in
conformity with generally accepted accounting principles required management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of net sales and expenses
during the reporting periods. Estimates include reserves for obsolete and slow
moving inventory, customer returns and allowances and uncollectible accounts
receivable. Actual results could differ from these estimates.
RECLASSIFICATION--Certain prior period amounts have been reclassified to
conform with the current period's presentation. These reclassifications had no
effect on net income or total assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The fair value of financial
instruments, including cash, accounts receivable, other current assets, accounts
payable, accrued expenses and debt, approximates their respective book values.
CASH--Substantially all of the Company's cash is held by one bank at
September 30, 1999. The Company does not believe that, as a result of this
concentration, it is subject to any unusual financial risk beyond the normal
risk associated with commercial banking relationships.
INVENTORIES--Inventories include freight-in, materials, labor and overhead
costs and are stated at the lower of cost or market, cost being determined by a
moving weighted average under the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are stated at
cost, less accumulated depreciation and amortization. Depreciation and
amortization are provided using the straight-line method over the estimated
useful lives of the respective assets. Expenditures for renewals and betterments
are capitalized while maintenance and repairs are charged to operations in the
period incurred.
F-7
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL--The excess of purchase price over fair market value of assets
acquired and liabilities assumed in acquisition transactions is classified as
goodwill and is being amortized using the straight-line method over periods
ranging from 25 to 40 years. The Company evaluates the recoverability of
goodwill using undiscounted future cash flows whenever events or changes in
circumstances indicate that the carrying amount of goodwill may not be
recoverable. The amount of goodwill impairment, if any, is measured based on
projected discounted future net cash flows using a discount rate reflecting the
Company's average cost of funds. To date, no impairments of goodwill have been
recorded as a result of these evaluations.
NON-COMPETE AGREEMENTS--Included in non-current other assets are capitalized
costs associated with non-compete agreements the Company entered into with key
executives associated with certain acquisitions. These capitalized costs are
being amortized using the declining balance method over the lives of the
agreements which expire during fiscal 2000.
DEFERRED FINANCING FEES--The Company deferred certain debt issuance costs
related to the establishment of new financing loans (Note 9). These costs are
capitalized in non-current other assets and are being amortized using the
effective interest rate method over the life of the loans.
COMMON STOCK--On February 19, 1998, the Company completed an 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 ("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. All applicable
periods presented have been retroactively adjusted for the effect of the
reclassification and stock split.
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 $32,807 were primarily used to repay
existing indebtedness (Note 9). 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 (Note 15).
FOREIGN CURRENCY TRANSLATION--All assets and liabilities of foreign
subsidiaries are translated into U.S. dollars at fiscal year-end exchange rates.
Income and expense items are translated at average exchange rates prevailing
during the fiscal year. The resulting translation adjustments are recorded as a
component of stockholders' equity.
F-8
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION--Sales are recognized upon shipment of merchandise to a
customer. Provision is made for estimated customer returns, discounts and
allowances at the time of sale.
RESEARCH AND DEVELOPMENT--The Company expenses research and development
costs as incurred. For the years ended September 30, 1997, 1998 and 1999, the
Company incurred $850, $842 and $900, respectively, in research and development
expenditures. These costs are included in general and administrative expenses
for the respective periods.
ADVERTISING--The Company expenses advertising costs as incurred. These costs
are included in selling, general and administrative expenses for the respective
periods in the Consolidated Statements of Operations.
INCOME TAXES--The Company accounts for income taxes using the asset and
liability method as prescribed by Statement of Financial Accounting Standards
No. 109, ACCOUNTING FOR INCOME TAXES (SFAS 109). SFAS 109 requires the Company
to record deferred tax assets and liabilities for expected future tax
consequences of events that have been recognized in different periods for
financial statements versus tax returns.
ACCOUNTING FOR STOCK-BASED COMPENSATION--The Company has adopted Statement
of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION (SFAS 123). The Company measures compensation expense for its
stock-based employee compensation plans using the intrinsic value method
prescribed by the Accounting Principles Board Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, and will, when material, provide pro forma
disclosures of net income and net income per share as if the fair value-based
method prescribed by SFAS 123 had been applied in measuring compensation
expense.
CONCENTRATIONS OF CREDIT RISK--In the normal course of business, the Company
provides credit terms to its customers; however, collateral is not required.
Accordingly, the Company performs ongoing credit evaluations of its customers
and maintains allowances for possible losses which, when realized, have been
within the range of management's expectations. From time to time, a higher
concentration of credit risk may exist on outstanding accounts receivable for a
select number of customers depending on individual buying patterns. At
September 30, 1998 and 1999, no customer accounted for more than 10 percent of
trade accounts receivable. Furthermore, no customer accounted for more than
10 percent of net sales in any of the three years ended September 30, 1999.
3. ACQUISITIONS
ACQUISITIONS--On July 20, 1998 and August 31, 1998, the Company acquired
substantially all of the assets and assumed certain liabilities of Action Labs
and NutraForce Canada, respectively (collectively referred to as the "Fiscal
1998 Acquisitions"). On April 1, 1999, the Company acquired all of the
outstanding stock of Woodland and acquired substantially all of the assets and
assumed certain liabilities of Summit (collectively referred to as the "Fiscal
1999 Acquisitions"). These acquisitions were accounted for using the purchase
method of accounting. Accordingly, the purchase price assigned to the assets
acquired and liabilities assumed was their fair market values at their
respective dates of acquisition. The excess of the purchase price over the fair
market values of the assets acquired and liabilities assumed has been classified
as goodwill and is being amortized using the straight-line method
F-9
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
3. ACQUISITIONS (CONTINUED)
(Note 2). The Consolidated Statements of Operations and Consolidated Statements
of Cash Flows presented herein include the activities of these acquired
businesses from their respective dates of acquisition.
The aggregate purchase price for the Fiscal 1998 Acquisitions totaled
$14,683, consisting of cash of $14,435, forgiveness of certain seller
liabilities of $224 owed to the Company and a net payable to a seller of $24.
The aggregate purchase price for the Fiscal 1999 Acquisitions totaled $1,837,
consisting of cash of $1,187 and 100,000 shares of Common Stock. The Common
Stock, which is subject to applicable trading restrictions and certain other
indemnity obligations, has a guaranteed minimum price of $6.50 per share during
a specified trading period, which commences on the twelve-month anniversary and
ends on the fifteen-month anniversary of the acquisition. The following reflects
the allocation of the aggregate purchase price for the Fiscal 1998 Acquisitions
and the Fiscal 1999 Acquisitions to the aggregate assets acquired and the
liabilities assumed:
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1999
ACQUISITIONS ACQUISITIONS
------------ ------------
<S> <C> <C>
Aggregate purchase price for acquisitions............. $14,683 $1,837
------- ------
Aggregate assets acquired and liabilities assumed:
Current assets...................................... 2,022 509
Property, plant and equipment....................... 12 241
Goodwill............................................ 13,665 1,237
Other non-current assets............................ 166 --
Current liabilities................................. (1,182) (150)
------- ------
Total................................................. $14,683 $1,837
======= ======
</TABLE>
4. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Accounts receivable....................................... $10,173 $10,163
Less allowances........................................... (1,024) (1,153)
------- -------
$ 9,149 $ 9,010
======= =======
</TABLE>
F-10
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
5. INVENTORIES, NET
Inventories, net of reserves for obsolete and slow moving inventory, are
comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Raw materials............................................. $ 8,562 $ 7,491
Work-in-process........................................... 4,981 7,151
Finished goods............................................ 10,392 12,221
------- -------
$23,935 $26,863
======= =======
</TABLE>
In connection with the Fiscal 1998 Acquisitions and the Fiscal 1999
Acquisitions (Note 3), acquired inventories were valued at fair market value to
reflect the net realizable value of these inventories as of their respective
acquisition dates. The amount ascribed in excess of historical cost (write-up)
was $381 and $92 for the years ended September 30, 1998 and 1999, respectively
and was charged to cost of sales in the accompanying Consolidated Statements of
Operations as the inventories were sold.
6. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net, are comprised of the following:
<TABLE>
<CAPTION>
ESTIMATED SEPTEMBER 30,
USEFUL LIFE -------------------
(YEARS) 1998 1999
----------- -------- --------
<S> <C> <C> <C>
Land........................................... -- $ 422 $ 422
Building....................................... 30 1,826 1,826
Leasehold improvements......................... 1-10 797 5,097
Furniture, fixtures and equipment.............. 3-10 16,033 19,588
------- --------
19,078 26,933
Less accumulated depreciation and
amortization................................. (8,308) (12,181)
------- --------
$10,770 $ 14,752
======= ========
</TABLE>
At September 30, 1998 and 1999, furniture, fixtures and equipment includes
$474 and $327, respectively of leased equipment with an accumulated amortization
balance of $352 and $252, respectively. Certain property and equipment
collateralize debt obligations (Note 9).
Depreciation and amortization of property, plant and equipment totaled
$2,561, $3,324 and $4,086 for the years ended September 30, 1997, 1998 and 1999,
respectively.
F-11
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
7. GOODWILL, NET
Goodwill, net, is comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Goodwill.................................................. $58,902 $59,641
Less accumulated amortization............................. (4,527) (6,219)
------- -------
$54,375 $53,422
======= =======
</TABLE>
8. ACCRUED EXPENSES
Accrued expenses are comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Employee payroll, benefits, taxes and performance
incentives................................................ $2,036 $2,050
Other accrued expenses...................................... 2,051 1,135
------ ------
$4,087 $3,185
====== ======
</TABLE>
9. LONG-TERM DEBT
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Revolving Credit Facility................................. $37,000 $38,750
======= =======
</TABLE>
DEBT TRANSACTIONS
On February 25, 1998, the Company replaced its Senior 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
Senior Credit Agreement of $3,129, net of tax of $1,804.
The New Credit Agreement currently makes $70,000 of revolving credit
borrowings available to the Company. The available revolving credit borrowings
are reduced to $65,000, $45,000 and $37,500 during fiscal 2001, 2002 and 2003,
respectively. Borrowings under the New Credit Agreement are secured by certain
assets of the Company and bear interest at the applicable Eurodollar Rate plus a
variable margin or at the Federal Funds Rate plus 0.5% plus a variable margin.
At September 30, 1999, the applicable interest rate was 6.38%. The Company is
also required to pay a variable quarterly fee on the unused balance under the
New Credit Agreement. At September 30, 1999, the applicable rate was 0.3%.
Accrued interest on Federal Funds Rate borrowings is payable quarterly. Accrued
interest on Eurodollar Rate borrowings is payable based on an elected interval
of one, two or three months. The
F-12
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
9. LONG-TERM DEBT (CONTINUED)
Company is required to repay all principal outstanding under the New Credit
Agreement in 2003. Accordingly, the outstanding principal balance at
September 30, 1999 was classified as long-term debt.
The New Credit Agreement contains restrictive covenants, including
restrictions on incurring other indebtedness, limitations on capital
expenditures and requirements that the Company maintain certain financial ratios
and profitability measures. Upon the occurrence of an event of default, the
lender may require the Company to repay all amounts borrowed thereunder and may
proceed against the collateral.
10. LEASE COMMITMENTS AND OBLIGATIONS
The Company leases office and warehouse facilities under non-cancelable
operating leases expiring June of 2003. These operating leases require the
Company to pay all taxes, insurance and maintenance. The Company also leases
certain manufacturing and laboratory equipment under capital leases.
The following summarizes future minimum lease payments required under
capital and operating leases:
<TABLE>
<CAPTION>
CAPITALIZED OPERATING
YEAR ENDING SEPTEMBER 30, LEASES LEASES
- ------------------------- ----------- ---------
<S> <C> <C>
2000.................................................... $ 63 $ 911
2001.................................................... 23 278
2002.................................................... -- 191
2003.................................................... -- 111
2004.................................................... -- 27
Thereafter.............................................. -- --
---- ------
Future minimum lease payments........................... 86 $1,518
======
Less amounts representing interest...................... (6)
====
Present value of future minimum lease payments.......... 80
Less amounts due within one year........................ (57)
====
Amounts due after one year.............................. $ 23
====
</TABLE>
Total rent expense incurred by the Company under non-cancelable operating
leases for the years ended September 30, 1997, 1998 and 1999 was $950, $1,142
and $1,242, respectively.
F-13
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
11. INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal........................................... $2,058 $ 862 $2,682
State............................................. 197 133 385
Deferred:
Federal........................................... 508 647 276
State............................................. 11 63 27
------ ------ ------
$2,774 $1,705 $3,370
====== ====== ======
</TABLE>
The provision for income taxes for 1998 consists of a provision of $3,509
resulting from income before provision for income taxes offset by a benefit of
$1,804 resulting from the extraordinary loss on early extinguishment of debt.
A summary of the composition of net deferred income tax assets and
liabilities is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Inventory differences....................................... $ 470 $ 669
Accounts receivable reserves................................ 347 380
Accrued liabilities......................................... 273 180
Other....................................................... 11 2
------ ------
Current deferred income tax assets.......................... $1,101 $1,231
====== ======
LIABILITIES
Amortization of intangibles................................. $1,845 $2,560
Depreciation................................................ 7 (100)
------ ------
Long-term deferred income tax liabilities, net.............. $1,852 $2,460
====== ======
</TABLE>
The differences between income taxes at the statutory federal income tax
rate and income taxes reported in the Consolidated Statements of Operations are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Federal tax at statutory rate....................... $2,387 $1,454 $2,939
State tax, net of federal benefit................... 249 152 280
Non-deductible expenses............................. 102 113 150
Other............................................... 36 (14) 1
------ ------ ------
$2,774 $1,705 $3,370
====== ====== ======
</TABLE>
F-14
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
12. CAPITAL STOCK
DESCRIPTION OF CAPITAL STOCK--At September 30, 1999, the Company had two
authorized classes of stock: Common Stock with a par value of $0.01 per share
and Preferred Stock with a par value of $0.01 per share.
The Company has adopted Statement of Financial Accounting Standards
No. 128, EARNINGS PER SHARE (SFAS 128). Under this statement, both "basic"
earnings per share and "diluted" earnings per share are presented on the face of
the income statement. As required under SFAS 128, both basic earnings per share
and diluted earnings per share for all applicable periods presented have been
calculated giving retroactive effect to the Company's stock reclassification and
stock split, which occurred in conjunction with the Offering (Note 2). The
following table provides a reconciliation of both net income and the number of
common shares used in the computations of basic earnings per share, which
utilizes the weighted average number of common shares outstanding without regard
to potential common shares, and diluted earnings per share, which includes all
such shares:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Net income (Numerator):
Net income before extraordinary loss....... $ 4,248 $ 5,699 $ 5,273
Extraordinary loss on early extinguishment
of debt, net of tax...................... -- (3,129) --
---------- ---------- ----------
Net income................................. $ 4,248 $ 2,570 $ 5,273
========== ========== ==========
Weighted average common shares (Denominator):
Basic weighted average common shares....... 9,308,583 10,806,178 11,729,587
Add: Dilutive effect of stock options and
warrants................................. 1,194,166 1,096,170 764,592
---------- ---------- ----------
Diluted weighted average common shares..... 10,502,749 11,902,348 12,494,179
========== ========== ==========
Net income before extraordinary loss per
common share:
Basic...................................... $ 0.46 $ 0.53 $ 0.45
Diluted.................................... $ 0.40 $ 0.48 $ 0.42
Extraordinary loss per common share:
Basic...................................... -- $ (0.29) $ --
Diluted.................................... -- $ (0.26) $ --
Net income per common share:
Basic...................................... $ 0.46 $ 0.24 $ 0.45
Diluted.................................... $ 0.40 $ 0.22 $ 0.42
</TABLE>
STOCK WARRANTS--As part of the Solaray, Inc. acquisition, the Company issued
detachable stock warrants that entitle the holder to purchase 993,393 shares of
Common Stock at an exercise price of $0.01 per share, of which 302,947 warrants
were exercised in connection with the Offering. The aggregate estimated fair
market value of these warrants on the date of issuance was $292. These warrants
expire October 28, 2003. As part of the Premier One Products, Inc. and Makers of
KAL, Inc. and Makers of KAL, B.V. acquisitions, the Company issued warrants to
purchase 163,976 shares of
F-15
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
12. CAPITAL STOCK (CONTINUED)
Common Stock at exercise prices ranging from $4.86 to $4.91 per share, which
were considered to be the estimated fair market values per share of the Common
Stock at the respective dates of issuance. These warrants expire in January
2005.
STOCK OPTIONS--During November 1994, the Company issued 301,164 options to
certain key executives at an exercise price of $3.45, which was considered to be
the estimated fair market value of the Company's stock at the date of grant.
These grants vest over a period of up to five years and expire no later than the
10(th) anniversary of the date of grant. As of September 30, 1999, 301,164
options were exercisable.
STOCK OPTION PLANS--During the year ended September 30, 1995, the Company's
Board of Directors adopted the 1995 Stock Option Plan (the "1995 Option Plan").
The 1995 Option Plan provides for granting options to executives and key
employees of the Company and its subsidiaries to purchase Common Stock. In
aggregate, 225,873 shares have been reserved for issuance under the 1995 Option
Plan.
During the year ended September 30, 1998, the Company's Board of Directors
adopted the 1998 Stock Incentive Plan (the "1998 Stock Plan"). The 1998 Stock
Plan provides for granting options to executives and key employees of the
Company and its subsidiaries to purchase Common Stock. In aggregate, 1,050,000
shares of Common Stock have been reserved for issuance under the 1998 Stock
Plan.
During the year ended September 30, 1998, the Company's Board of Directors
adopted the 1998 Non-Employee Director Stock Option Plan (the "Director Option
Plan"). The Director Option Plan provides for granting options to non-employee
Directors of the Company to purchase Common Stock. In aggregrate, 150,000 shares
of Common Stock have been reserved for issuance under the Director Option Plan.
F-16
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
12. CAPITAL STOCK (CONTINUED)
The following grants have been made under the 1995 Option Plan, the 1998
Stock Plan and the Director Option Plan:
<TABLE>
<CAPTION>
NUMBER OF AVERAGE PRICE AGGREGATE
OPTIONS PER SHARE OPTION PRICE
--------- ------------- ------------
<S> <C> <C> <C>
Outstanding at October 1, 1996............ 175,240 $ 5 $ 861
Granted................................... 26,352 9 228
Exercised................................. -- -- --
Canceled.................................. (33,316) 5 (164)
------- --- ------
Outstanding at September 30, 1997......... 168,276 5 925
------- --- ------
Granted................................... 314,074 16 5,105
Exercised................................. -- -- --
Canceled.................................. (20,580) 16 (336)
------- --- ------
Outstanding at September 30, 1998......... 461,770 12 5,694
------- --- ------
Granted................................... 161,550 5 770
Exercised................................. -- -- --
Canceled.................................. (49,660) 12 (611)
------- --- ------
Outstanding at September 30, 1999......... 573,660 $10 $5,853
======= === ======
</TABLE>
Options granted prior to the Offering were issued at exercise prices that
represented management's estimates of the fair market value per share of Common
Stock at the respective grant dates. Options granted since the Offering were
issued at exercise prices that represented the fair market value per share of
Common Stock at the respective grant dates. The 1995 Option Plan grants vest
over a period of four years and expire on the tenth anniversary of the date of
grant. The 1998 Stock Inventive Plan grants vest over a period of two to four
years and expire no later than the tenth anniversary of the date of grant. The
Director Option Plan grants vest over a period of approximately three years and
expire on no later than the tenth anniversary of the date of grant.
The following table sets forth data related to exercise prices and lives for
option grants made under the 1995 Option Plan, the 1998 Stock Plan and the
Director Option Plan:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------- -----------------------------
WEIGHTED - AVERAGE WEIGHTED - AVERAGE
RANGE OF EXERCISE PRICES SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- ------------------------ -------- ------------------ -------- ------------------
<S> <C> <C> <C> <C>
$4.00 - $7.00............................. 293,144 $ 4.83 149,362 $ 4.92
(Avg. life: 7.5 years)
$8.63 - $13.38............................ 73,330 $11.03 36,306 $10.80
(Avg. life: 6.6 years)
$17.50 - $17.50........................... 207,186 $17.50 90,154 $17.50
(Avg. life: 8.0 years)
</TABLE>
The weighted average fair value per share of options granted was $10.13 and
$3.45 for the years ended September 30, 1998 and 1999, respectively. The
Company's pro forma net income for the years
F-17
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
12. CAPITAL STOCK (CONTINUED)
ended September 30, 1997, 1998 and 1999 would have been $4,239, $2,321 and
$4,874, respectively, if compensation cost had been measured under the fair
value method of SFAS 123. The Company's pro forma basic net income per common
share for fiscal years ended September 30, 1997, 1998 and 1999 would have been
$0.46, $0.21, and $0.42, respectively. The Company's pro forma diluted net
income per common share for the fiscal years ended September 30, 1997, 1998 and
1999 would have been $0.40, $0.20 and $0.39, respectively.
The fair value of these options was estimated as of the date of grant using
a Black-Scholes option pricing model with the following assumptions for the
years ended September 30, 1997, 1998 and 1999, respectively: risk free interest
rate of 6.15%, 5.52% and 4.98%; expected life of 5 years, 5 years and 5 years;
expected volatility of 1%, 70% and 90%; and expected dividend yield of 0%, 0%
and 0%. Because changes in the subjective input assumptions can materially
affect the fair value estimate, management believes that the existing valuation
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options. The initial impact on pro forma net income may not
be representative of pro forma compensation expense in future years, depending
upon the amount of stock options awarded in the future and their related vesting
periods.
STOCK PURCHASE PLAN--During the year ended September 30, 1998, the Company's
Board of Directors adopted the Employee Stock Discount Purchase Plan (the "Stock
Purchase Plan"). The Stock Purchase Plan is intended to give employees desiring
to do so a convenient means of purchasing shares of Common Stock through payroll
and lump-sum deductions. In aggregrate, 750,000 shares of Common Stock have been
reserved for issuance under the Stock Purchase Plan.
TREASURY STOCK REPURCHASE PROGRAM--During the year ended September 30, 1998,
the Company's Board of Directors approved a treasury stock repurchase program to
repurchase up to 400,000 shares of Common Stock of the Company. As of
September 30, 1998, the Company had repurchased 41,800 shares under this plan at
an aggregate price of $301. During fiscal 1999, the Company repurchased an
additional 57,500 shares at an aggregate price of $391. On April 1, 1999, all
99,300 shares of treasury stock previously repurchased by the Company were
reissued in connection with the Fiscal 1999 Acquisitions.
13. OPERATING SEGMENTS
In 1999, the Company adopted Statement of Financial Accounting Standards
No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION,
which requires the Company to report information about its operating segments.
The Company has determined that its reportable segments are those that are
based on the Company's method of internal reporting. Accordingly, the Company
has two reportable segments: branded products and bulk materials. The Company
manufactures and markets quality branded products sold to health food stores in
the United States and to distributors worldwide. In addition to branded
products, the Company manufactures bulk materials for its own use and for sale
to other manufacturers and marketers in the nutritional supplement industry.
The accounting policies for these segments are the same as those described
in the summary of significant accounting policies (Note 2). The Company
evaluates the financial performance of its
F-18
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
13. OPERATING SEGMENTS (CONTINUED)
segments based on sales growth and gross profit. Other performance measures
beyond gross profit, as well as balance sheet components, are not tracked to
individual segments.
Segment information for the years ended September 30, 1999, 1998 and 1997
was as follows:
<TABLE>
<CAPTION>
BRANDED BULK
1999 PRODUCTS MATERIALS TOTAL
- ---- -------- --------- --------
<S> <C> <C> <C>
Net sales....................................... $93,052 $13,757 $106,809
Gross profit.................................... 44,870 4,678 49,548
<CAPTION>
1998
- ----
<S> <C> <C> <C>
Net sales....................................... $88,399 $16,289 $104,688
Gross profit.................................... 41,388 5,550 46,938
<CAPTION>
1997
- ----
<S> <C> <C> <C>
Net sales....................................... $77,450 $20,646 $ 98,096
Gross profit.................................... 38,989 6,830 45,819
</TABLE>
For the years ended September 30, 1999 and 1998, gross profit has been
reduced by $92 and $381, respectively, for amortization of inventory write-up
(Note 5).
14. EMPLOYEE BENEFIT PLANS
401(k) PLAN--The Company has a 401(k) defined contribution profit sharing
plan that covers substantially all employees. Under the plan, employees can
contribute up to 15% of their compensation. The Company makes matching and
discretionary contributions to the plan which approximate 4% of all plan
participants' salaries and wages. The amounts contributed to the plan by the
Company during the years ended September 30, 1997, 1998 and 1999 were $317, $384
and $465, respectively.
SELF-FUNDED HEALTH INSURANCE PLAN--The Company has a self-insured health
care program for its employees and their dependents. Under the program, the
Company pays claims up to $35 per year for each individual, while claims
exceeding $35 per individual, or $1,212 in the aggregate as of September 30,
1999, are covered by a third party stop-loss insurance policy. Total health
insurance expense incurred by the Company, which includes claims, third party
insurance premiums and other related costs, for the years ended September 30,
1997, 1998 and 1999 was $770, $898 and $1,232, respectively. At September 30,
1999, the Company had accrued $148 for claims incurred but not reported and
claims reported but not paid.
15. RELATED PARTY TRANSACTIONS
On January 31, 1995, the Company entered into a five year management
agreement (the "Agreement") with certain stockholders of the Company. The
Agreement required the Company to pay a monthly management fee of $25 plus
out-of-pocket expenses payable on a quarterly basis in arrears commencing
March 31, 1995. The Agreement was terminated in conjunction with the Offering. A
fee of $1,012 was incurred related to the termination of the Agreement and other
services performed in
F-19
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
15. RELATED PARTY TRANSACTIONS (CONTINUED)
connection with the Offering. For the years ended September 30, 1997 and 1998,
the Company incurred $360 and $1,185, respectively, in fees and out-of-pocket
expenses for these certain stockholders.
During fiscal 1994, the Company loaned $112 to certain stockholders for the
purchase of the Company's stock. The loans accrued interest at 6% per annum and
were payable in four annual installments commencing October 28, 1994 and ending
October 28, 1997. The amount outstanding under these loans at September 30, 1997
was $55 and was repaid in full during fiscal 1998.
16. SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
As part of the Fiscal 1998 Acquisitions, the Company forgave $224 in certain
liabilities of a seller and incurred a net payable of $24 to a seller.
17. COMMITMENTS AND CONTINGENCIES
The formulation, manufacturing, processing, packaging, labeling,
advertising, distribution and sale of dietary supplements (consisting of
vitamins, amino acids, minerals, herbs, other botanicals and other dietary
ingredients) such as those sold by the Company are subject to regulation by one
or more federal agencies, principally the Food and Drug Administration (the
"FDA") and the Federal Trade Commission and, to a lesser extent, the Consumer
Product Safety Commission and the United States Department of Agriculture. These
activities are also regulated by various governmental agencies for the states
and localities in which the Company's products are sold, as well as by
governmental agencies in certain foreign countries in which the Company's
products are sold.
Although management believes that the Company is in compliance, in all
material respects, with the statutes, laws, rules and regulations of every
jurisdiction in which it operates, no assurance can be given that the Company's
compliance with applicable statutes, laws, rules and regulations will not be
challenged by governing authorities or that such challenges will not have a
material adverse effect on the Company's financial position or results of
operations or cash flows.
The Company, like any other retailer, distributor and manufacturer of
products that are designed to be ingested, also faces inherent risk of exposure
to product liability claims in the event that the use of its products results in
injury. With respect to product liability claims, the Company has liability
insurance; however, there can be no assurance that such insurance will be
adequate to cover potential liabilities. In the event that the Company does not
have adequate insurance or contractual indemnification from parties supplying
raw materials or marketing its products, product liabilities relating to
defective products could have a material adverse effect on the Company.
The Company is not currently a named defendant in any product liability
lawsuit. However, the Company is involved in various legal matters arising in
the normal course of business, including, but not limited to, an investigation
by the FDA regarding a January 20, 1998 Proposition 65 notice received by
Monarch Nutritional Laboratories, Inc. The Company has received grand jury
subpoenas for documents with respect to the investigation; the Company continues
to cooperate with the FDA and the United States Attorney's Office in the
investigation of these matters. In the opinion of management, the Company's
liability, if any, arising from legal proceedings related to these matters is
not expected to have a material adverse impact on the Company's financial
position.
F-20
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ----------- ------------ ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SEPTEMBER 30, 1999
Deducted from related asset account:
Allowance for sales returns........... $ 603 $ 371 $ 40 $394 $ 620
Allowance for doubtful accounts....... $ 421 $ 181 $ 35 $104 $ 533
Provision for inventory............... $1,121 $1,293 $ 40 $599 $1,855
SEPTEMBER 30, 1998
Deducted from related asset account:
Allowance for sales returns........... $ 420 $ 313 $165 $295 $ 603
Allowance for doubtful accounts....... $ 390 $ 223 $ 15 $207 $ 421
Provision for inventory............... $1,167 $ 410 $164 $620 $1,121
SEPTEMBER 30, 1997
Deducted from related asset account:
Allowance for sales returns........... $ 456 $ 207 $ -- $243 $ 420
Allowance for doubtful accounts....... $ 355 $ 35 $ -- $ -- $ 390
Provision for inventory............... $ 675 $ 492 $ -- $ -- $1,167
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
Action Labs, Inc., a Delaware corporation
Au Naturel, Inc., a Delaware corporation
Healthway Corporation, a Delaware corporation
Makers of KAL, B.V.
Makers of KAL, Inc., a Delaware corporation
Monarch Nutritional Laboratories, Inc., a Delaware corporation
NaturalMax, Inc., a Delaware corporation
Nutra Corp., a Delaware corporation
Nutraceutical Corporation, a Delaware corporation
Nutra-Force (Barbados) International, Inc., a Barbados corporation
NutraForce (Canada) International, Inc., a Canadian corporation
NutraForce, Inc., a Delaware corporation
NutraPure, Inc., a Delaware corporation
Premier One Products, Inc., a Delaware corporation
Solaray, Inc., a Utah corporation
VegLife, Inc., a Delaware corporation
Woodland Publishing, Inc., a Delaware corporation
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF NUTRACEUTICAL INTERNATIONAL CORPORATION AS
OF AND FOR THE YEAR ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 869
<SECURITIES> 0
<RECEIVABLES> 10,163
<ALLOWANCES> 1,153
<INVENTORY> 26,863
<CURRENT-ASSETS> 39,370
<PP&E> 26,933
<DEPRECIATION> 12,181
<TOTAL-ASSETS> 108,644
<CURRENT-LIABILITIES> 10,121
<BONDS> 0
0
0
<COMMON> 118
<OTHER-SE> 57,172
<TOTAL-LIABILITY-AND-EQUITY> 108,644
<SALES> 106,809
<TOTAL-REVENUES> 106,809
<CGS> 57,261
<TOTAL-COSTS> 57,261
<OTHER-EXPENSES> 38,412
<LOSS-PROVISION> 181
<INTEREST-EXPENSE> 2,493
<INCOME-PRETAX> 8,643
<INCOME-TAX> 3,370
<INCOME-CONTINUING> 5,273
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,273
<EPS-BASIC> 0.45
<EPS-DILUTED> 0.42
</TABLE>
