<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
Commission file number 000-23731
NUTRACEUTICAL INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 87-0515089
(State of incorporation) (IRS Employer Identification No.)
1400 Kearns Boulevard, 2nd Floor, Park City, Utah 84060
(Address of principal executive office) (Zip code)
(435) 655-6106
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---- ----
At May 17, 1999 the registrant had 11,784,058 shares of common stock
outstanding.
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
INDEX
<TABLE>
<CAPTION>
Description Page No.
<C> <S> <C>
Part I. Financial Information
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets - 3
September 30, 1998 and March 31, 1999
Condensed Consolidated Statements of Operations - 4
Three Months and Six Months Ended March 31, 1998 and 1999
Condensed Consolidated Statements of Cash Flows - 5
Six Months Ended March 31, 1998 and 1999
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NUTRACEUTICAL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, March 31,
----------------------------------------
1998 (1) 1999
<S> <C> <C>
ASSETS
Current assets:
Cash $ 1,967 $ 1,183
Accounts receivable, net 9,149 10,366
Inventories, net 23,935 26,105
Prepaid expenses and other assets 1,649 1,220
Deferred income taxes 1,101 1,052
------------------- ------------------
Total current assets 37,801 39,926
Property, plant and equipment, net 10,770 13,226
Goodwill, net 54,375 53,538
Other assets, net 1,362 1,230
------------------- ------------------
$ 104,308 $ 107,920
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 53 $ 55
Accounts payable 9,614 7,918
Accrued expenses 4,087 2,826
------------------- ------------------
Total current liabilities 13,754 10,799
Long-term debt 37,000 40,000
Capital lease obligations 80 51
Deferred income taxes, net 1,852 2,220
------------------- ------------------
Total liabilities 52,686 53,070
------------------- ------------------
Commitments and contingencies
Stockholders' equity:
Common stock 118 118
Additional paid-in capital 42,515 42,575
Retained earnings 9,277 12,830
Cumulative translation adjustment 13 19
Treasury stock, at cost (301) (692)
------------------- ------------------
Total stockholders' equity 51,622 54,850
=================== ==================
$ 104,308 $ 107,920
=================== ==================
</TABLE>
(1) The condensed consolidated balance sheet as of September 30, 1998 has been
prepared using information from the audited financial statements at that
date.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended March 31, Six months ended March 31,
------------------------------ ------------------------------
1998 1999 1998 1999
<S> <C> <C> <C> <C>
Net sales $ 27,799 $27,234 $ 53,656 $ 54,446
Cost of sales 14,742 14,416 28,600 29,440
-------------- ------------- -------------- --------------
Gross profit 13,057 12,818 25,056 25,006
-------------- ------------- -------------- --------------
Operating expenses:
Selling, general and administrative 8,070 8,902 15,767 17,114
Amortization of intangibles 329 437 660 874
Non-recurring payments to management advisors 1,060 - 1,135 -
-------------- ------------- -------------- --------------
9,459 9,339 17,562 17,988
-------------- ------------- -------------- --------------
Income from operations 3,598 3,479 7,494 7,018
Interest expense, net 1,188 649 2,756 1,240
-------------- ------------- -------------- --------------
Income before provision for income taxes 2,410 2,830 4,738 5,778
Provision for income taxes 928 1,090 1,824 2,225
-------------- ------------- -------------- --------------
Net income before extraordinary loss 1,482 1,740 2,914 3,553
Extraordinary loss on early extinguishment of debt, net of tax (3,129) - (3,129) -
============== ============= ============== ==============
Net income (loss) $ (1,647) $ 1,740 $ (215) $ 3,553
============== ============= ============== ==============
Net income before extraordinary loss per common share:
Basic $ 0.14 $ 0.15 $ 0.30 $ 0.30
Diluted $ 0.13 $ 0.14 $ 0.26 $ 0.29
Extraordinary loss per common share:
Basic $ (0.30) $ - $ (0.32) $ -
Diluted $ (0.27) $ - $ (0.28) $ -
Net income per common share:
Basic $ (0.16) $ 0.15 $ (0.02) $ 0.30
Diluted $ (0.14) $ 0.14 $ (0.02) $ 0.29
Weighted average common shares outstanding:
Basic 10,396,389 11,674,994 9,846,509 11,673,703
Diluted 11,602,100 12,419,806 11,078,025 12,459,256
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Six months ended March 31,
-------------------------------------------
1998 1999
<S> <C> <C>
Cash flows from operating activities:
Net income $ (215) $ 3,553
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,292 2,812
Amortization of debt issuance costs 362 108
Loss on disposal of property and equipment - 34
Extraordinary loss on early extinguishment of debt, net of tax 3,129 -
Changes in assets and liabilities:
Accounts receivable (615) (1,217)
Inventories (5,318) (2,170)
Prepaid expenses and other assets 432 429
Deferred income taxes 1,116 417
Other assets (20) (12)
Accounts payable 467 (1,696)
Accrued expenses (2,712) (1,259)
------------------ ------------------
Net cash provided by (used in) operating activities (1,082) 999
------------------ ------------------
Cash flows from investing activities:
Sale of property and equipment - 38
Purchases of property and equipment (1,697) (4,467)
------------------ ------------------
Net cash used in investing activities (1,697) (4,429)
------------------ ------------------
Cash flows from financing activities:
Proceeds from long-term debt 33,000 3,500
Payments on long-term debt (64,005) (500)
Payments on capital lease obligations (88) (26)
Payments of deferred financing fees (1,691) -
Receipt of subscriptions receivable 55 -
Proceeds from issuance of common stock 33,142 60
Purchase of treasury shares - (391)
------------------ ------------------
Net cash provided by financing activities 413 2,643
------------------ ------------------
Effect of exchange rate changes on cash - 3
------------------ ------------------
Net decrease in cash (2,366) (784)
Cash at beginning of period 4,415 1,967
================== ==================
Cash at end of period $ 2,049 $ 1,183
================== ==================
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share data)
1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements include all necessary adjustments (consisting of normal
recurring accruals) to present fairly the financial position of Nutraceutical
International Corporation (the Company) and its subsidiaries as of March 31,
1999, the results of its operations for the three months and six months ended
March 31, 1998 and 1999, and its cash flows for the six months ended March 31,
1998 and 1999, in conformity with generally accepted accounting principles for
interim financial information applied on a consistent basis. The results for
the three months and six months ended March 31, 1999 are not necessarily
indicative of the results to be expected for the full fiscal year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. Accordingly, these financial statements should be read in
conjunction with the Company's Form 10-K for the fiscal year ended September 30,
1998 which was filed with the Securities and Exchange Commission on December 29,
1998.
2. INVENTORIES, NET
Inventories, net of reserves for obsolete and slow moving inventory, are
comprised of the following:
September 30, March 31,
1998 1999
-------------- -------------
Raw materials $ 8,562 $ 8,297
Work-in-process 4,981 5,298
Finished goods 10,392 12,510
-------------- -------------
$ 23,935 $ 26,105
============== =============
6
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share data)
3. CAPITAL STOCK
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 the three months and six months ended March 31,
1998 and 1999 have been calculated giving retroactive effect to the Company's
stock reclassification and stock split which occurred in conjunction with the
Company's initial public offering in February 1998. 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>
Three months ended March 31, Six months ended March 31,
------------------------------ ------------------------------
1998 1999 1998 1999
<S> <C> <C> <C> <C>
Net income (Numerator):
Net income before extraordinary loss $ 1,482 $ 1,740 $ 2,914 $ 3,553
Extraordinary loss on early extinguishment of debt, net
of tax (3,129) - (3,129) -
-------------- -------------- -------------- --------------
Net income $ (1,647) $ 1,740 $ (215) $ 3,553
============== ============== ============== ==============
Weighted average common shares (Denominator):
Basic weighted average common shares 10,396,389 11,674,994 9,846,509 11,673,703
Add: Dilutive effect of stock options and warrants 1,205,711 744,812 1,231,516 785,553
-------------- -------------- -------------- --------------
Diluted weighted average common shares 11,602,100 12,419,806 11,078,025 12,459,256
============== ============== ============== ==============
Net income before extraordinary loss per common share:
Basic $ 0.14 $ 0.15 $ 0.30 $ 0.30
Diluted $ 0.13 $ 0.14 $ 0.26 $ 0.29
Extraordinary loss per common share:
Basic $ (0.30) $ - $ (0.32) $ -
Diluted $ (0.27) $ - $ (0.28) $ -
Net income (loss) per common share:
Basic $ (0.16) $ 0.15 $ (0.02) $ 0.30
Diluted $ (0.14) $ 0.14 $ (0.02) $ 0.29
</TABLE>
7
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share data)
During the fiscal year ended September 30, 1998, the Company's Board of
Directors approved a stock repurchase program to repurchase up to 400,000 shares
of the Company's common stock. As of September 30, 1998, the Company had
repurchased 41,800 shares of common stock at an aggregate price of $301. In
October 1998, the Company repurchased an additional 57,500 shares of common
stock at an aggregate price of $391. As of March 31, 1999, a total of 99,300
shares of common stock had been repurchased by the Company at an aggregate price
of $692.
4. ACQUISITIONS
On March 3, 1999, the Company announced that it had entered into an agreement to
acquire substantially all the assets of Futurebiotics, Inc. (Futurebiotics), a
marketer and distributor of branded nutritional supplements (Nasdaq: VITK).
----
Total consideration of approximately $6 million will be paid in cash, subject
to certain adjustments and closing conditions, including approval by the
stockholders of Futurebiotics.
As of the date of this filing, this transaction had not closed. Management
believes that if closing conditions are met, this transaction will close during
the third fiscal quarter ending June 30, 1999. However, there can be no
assurance that all closing conditions will be met or that this transaction will
close.
Headquartered in Hauppauge, New York, Futurebiotics markets and distributes a
line of over 100 specialty supplements under the well-recognized
Futurebiotics(R) brand name. Futurebiotics, which was established in 1994,
markets its products through health food stores. As a marketer of specialty
supplements, Futurebiotics emphasizes high-demand ingredients and ingredient
combinations. The Futurebiotics product line includes such popular products as
Hair, Skin & Nails(R), Vital K(TM) and Colon Green(TM), as well as other leading
nutritional supplements such as Ginkgo Biloba, St. John's Wort and Saw Palmetto.
On April 1, 1999, the Company purchased Woodland Publishing, Inc. (Woodland) and
Summit Graphics, Inc. (Summit), two affiliated companies in the nutritional
health publishing business, for approximately $1.8 million in cash and stock.
Headquartered in Lindon, Utah, Woodland markets a line of over 150 books and
pamphlets to national retail book stores as well as health food stores. The
operations and business of Woodland, which began publishing in 1974, were
combined with those of Summit, which was established in 1996 to provide printing
services, in a new subsidiary of the Company.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
The following discussion and analysis should be read in conjunction with the
response to Part I, Item 1 of this report.
The Company was formed in 1993 by key members of the current management team and
Bain Capital, Inc. to effect a consolidation strategy in the highly fragmented
vitamin, mineral, herbal and other nutritional supplements industry (the VMS
Industry). The Company purchased Solaray, Inc. in October 1993 with a view
toward using it as a platform for future acquisitions of businesses in the VMS
Industry. In fiscal 1995, the Company completed three additional acquisitions
with the purchases of Premier One Products, Inc. in October 1994, Makers of KAL,
Inc. in January 1995 and Monarch Nutritional Laboratories, Inc. in September
1995. In fiscal 1998, the Company completed two additional acquisitions with
the purchases of Action Labs, Inc. in July 1998 and Nutraforce (Canada)
International, Inc. in August 1998. Most recently, the Company completed the
acquisitions of Woodland Publishing, Inc. and Summit Graphics, Inc. on April 1,
1999 and announced, on March 3, 1999, the planned acquisition of Futurebiotics,
Inc.
Results of Operations
The following table sets forth certain consolidated statement of operations data
as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Three months ended March 31, Six months ended March 31,
----------------------------- -----------------------------
1998 1999 1998 1999
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 53.0% 52.9% 53.3% 54.1%
------------- ------------- ------------- -------------
Gross profit 47.0% 47.1% 46.7% 45.9%
Selling, general and administrative 29.0% 32.7% 29.4% 31.4%
Amortization of intangibles 1.2% 1.6% 1.2% 1.6%
Non-recurring payments to management advisors 3.9% - 2.1% -
------------- ------------- ------------- -------------
Income from operations 12.9% 12.8% 14.0% 12.9%
Interest expense, net 4.2% 2.4% 5.2% 2.3%
------------- ------------- ------------- -------------
Income before provision for income taxes 8.7% 10.4% 8.8% 10.6%
Provision for income taxes 3.4% 4.0% 3.4% 4.1%
------------- ------------- ------------- -------------
Net income before extraordinary loss 5.3% 6.4% 5.4% 6.5%
Extraordinary loss on early extinguishment of
debt, net of tax -11.2% - -5.8% -
------------- ------------- ------------- -------------
Net income (loss) -5.9% 6.4% -0.4% 6.5%
============= ============= ============= =============
Adjusted EBITDA (1) 21.0% 18.1% 20.4% 18.1%
============= ============= ============= =============
(1) See "- Adjusted EBITDA."
</TABLE>
9
<PAGE>
Comparison of the Three Months Ended March 31, 1999 to the Three Months Ended
March 31, 1998
Net Sales. Net sales decreased by $0.6 million, or 2.0%, to $27.2 million for
the three months ended March 31, 1999 (second quarter of fiscal 1999) from $27.8
million for the three months ended March 31, 1998 (second quarter of fiscal
1998). This decrease in net sales was primarily the result of slowing in the
overall growth rate of the domestic nutritional supplement industry combined
with weaknesses in certain international markets and variations in quarterly
sales of premium bulk formulations.
Gross Profit. Gross profit decreased by $0.3 million, or 1.8%, to $12.8
million for the second quarter of fiscal 1999 from $13.1 million for the second
quarter of fiscal 1998. This decrease in gross profit was primarily
attributable to a decrease in sales volume. As a percentage of net sales, gross
profit remained relatively stable at 47.1% for the second quarter of fiscal 1999
compared to 47.0% for the second quarter of fiscal 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $0.8 million, or 10.3%, to $8.9 million
for the second quarter of fiscal 1999 from $8.1 million for the second quarter
of fiscal 1998. As a percentage of net sales, selling, general and
administrative expenses increased to 32.7% for the second quarter of fiscal 1999
from 29.0% for the second quarter of 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 facility consolidation, new business
development and information systems, including increased depreciation associated
with prior year capital expenditures.
Amortization of Intangibles. Amortization of intangibles was $0.4 million for
the second quarter of fiscal 1999 and $0.3 million for the second quarter of
fiscal 1998. As a percentage of net sales, amortization of intangibles
increased to 1.6% for the second quarter of fiscal 1999 from 1.2% for the second
quarter of fiscal 1998. This increase in amortization of intangibles as a
percentage of net sales is primarily attributable to the amortization of
goodwill associated with the Action Labs, Inc. acquisition in July 1998.
Non-recurring Payments to Management Advisors. No non-recurring payments to
management advisors were made during the second quarter of fiscal 1999. Non-
recurring payments to management advisors of $1.1 million were recognized for
the second quarter of fiscal 1998 pursuant to an advisory agreement which was
terminated in connection with the Company's initial public offering. The
Company does not expect to incur such payments in the future.
Interest Expense, Net. Interest expense decreased by $0.6 million, or 45.4%,
to $0.6 million for the second quarter of fiscal 1999 from $1.2 million for the
second quarter of fiscal 1998. As a percentage of net sales, interest expense
decreased to 2.4% for the second quarter of fiscal 1999 from 4.2% for the second
quarter of fiscal 1998. This decrease in interest expense was primarily
attributable to decreased indebtedness resulting from the Company's use of
proceeds generated in its initial public offering.
10
<PAGE>
Provision for Income Taxes. The Company's effective tax rate was 38.5% for
both the second quarter of fiscal 1999 and the second quarter of fiscal 1998.
In each fiscal quarter, the effective tax rate is higher than statutory rates
primarily due to the non-deductibility for tax purposes of goodwill amortization
arising from the Solaray, Inc. acquisition.
Extraordinary Loss on Early Extinguishment of Debt. No extraordinary loss on
the early extinguishment of debt was recognized during the second quarter of
fiscal 1999. An extraordinary loss on the early extinguishment of debt of $3.1
million, net of tax, was recognized during the second quarter of fiscal 1998.
This loss was incurred in connection with the repayment of indebtedness related
to an existing credit agreement pursuant to the establishment of a new credit
agreement, which was consummated simultaneously with the Company's initial
public offering.
Comparison of the Six Months Ended March 31, 1999 to the Six Months Ended March
31, 1998
Net Sales. Net sales increased by $0.7 million, or 1.5%, to $54.4 million for
the six months ended March 31, 1999 from $53.7 million for the six months ended
March 31, 1998. This increase in net sales was modest primarily because
of slowing in the overall growth rate of the domestic nutritional supplement
industry combined with weaknesses in certain international markets.
Gross Profit. Gross profit remained relatively stable at $25.0 million for the
six months ended March 31, 1999 compared to $25.1 million for the six months
ended March 31, 1998. As a percentage of net sales, gross profit decreased to
45.9% for the six months ended March 31, 1999 from 46.7% for the six months
ended March 31, 1998. This decrease in gross profit as a percentage of net
sales can be attributed to, among other things, higher packaging costs
associated with label conversions necessitated by FDA regulations that became
effective in March 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $1.3 million, or 8.5%, to $17.1 million
for the six months ended March 31, 1999 from $15.8 million for the six months
ended March 31, 1998. As a percentage of net sales, selling, general and
administrative expenses increased to 31.4% for the six months ended March 31,
1999 from 29.4% for the six months ended March 31, 1998. This increase in
selling, general and administrative expenses as a percentage of net sales was
primarily attributable to the Company's investment in facility consolidation,
new business development and information systems, including increased
depreciation associated with prior year capital expenditures.
Amortization of Intangibles. Amortization of intangibles was $0.9 million for
the six months ended March 31, 1999 and $0.7 million for the six months ended
March 31, 1998. As a percentage of net sales, amortization of intangibles
increased to 1.6% for the six months ended March 31, 1999 from 1.2% for the six
months ended March 31, 1998. This increase is primarily attributable to the
amortization of goodwill associated with the Action Labs, Inc. acquisition in
July 1998.
11
<PAGE>
Non-recurring Payments to Management Advisors. No non-recurring payments to
management advisors were made during the six months ended March 31, 1999. Non-
recurring payments to management advisors of $1.1 million were recognized for
the six months ended March 31, 1998 pursuant to an advisory agreement which was
terminated in connection with the Company's initial public offering. The
Company does not expect to incur such payments in the future.
Interest Expense, Net. Interest expense decreased by $1.6 million, or 55.0%,
to $1.2 million for the six months ended March 31, 1999 from $2.8 million for
the six months ended March 31, 1998. As a percentage of net sales, interest
expense decreased to 2.3% for the six months ended March 31, 1999 from 5.2% for
the six months ended March 31, 1998. This decrease in interest expense was
primarily attributable to decreased indebtedness resulting from the Company's
use of proceeds generated in its initial public offering.
Provision for Income Taxes. The Company's effective tax rate was 38.5% for
both the six months ended March 31, 1999 and the six months ended March 31,
1998. In each six month period, the effective tax rate is higher than statutory
rates primarily due to the non-deductibility for tax purposes of goodwill
amortization arising from the Solaray, Inc. acquisition.
Extraordinary Loss on Early Extinguishment of Debt. No extraordinary loss on the
early extinguishment of debt was recognized during the six months ended March
31, 1999. An extraordinary loss on the early extinguishment of debt of $3.1
million, net of tax, was recognized during the six months ended March 31, 1998.
This loss was incurred in connection with the repayment of indebtedness related
to an existing credit agreement pursuant to the establishment of a new credit
agreement, which was consummated simultaneously with the Company's initial
public offering.
Adjusted EBITDA
Adjusted EBITDA (earnings before net interest expense, taxes, depreciation and
amortization) is a commonly reported standard measure that is widely used by
analysts and investors in the VMS Industry. The following Adjusted EBITDA
information provides additional information for determining the ability of the
Company to meet its debt service requirements and for other comparative analyses
of the Company's operating performance relative to other nutritional supplement
companies:
12
<PAGE>
<TABLE>
<CAPTION>
Three months ended March 31, Six months ended March 31,
--------------------------- --------------------------
1998 1999 1998 1999
<S> <C> <C> <C> <C>
Net income before extraordinary loss $ 1,482 $ 1,740 $ 2,914 $ 3,553
Provision for income taxes 928 1,090 1,824 2,225
Interest expense, net (1) 1,188 649 2,756 1,240
Depreciation and amortization 1,177 1,444 2,292 2,812
Non-recurring payments to management advisors (2) 1,060 - 1,135 -
------------ ------------ ------------ -----------
Adjusted EBITDA $ 5,835 $ 4,923 $ 10,921 $ 9,830
============ ============ ============ ===========
</TABLE>
(1) Includes amortization of capitalized debt issuance costs.
(2) Represents payments to management advisors for services provided. The
Company does not expect to incur such payments in the future.
The Company's Adjusted EBITDA decreased $0.9 million to $4.9 million for the
second quarter of fiscal 1999 from $5.8 million for the second quarter of fiscal
1998. Adjusted EBITDA as a percentage of net sales decreased to 18.1% for the
second quarter of fiscal 1999 from 21.0% for the second quarter of fiscal 1998.
Decreased gross margins related to reduced net sales levels and increased
selling, general and administrative expenses attributable to the Company's
investment in facility consolidation, new business development and information
systems contributed to this decrease in Adjusted EBITDA.
The Company's Adjusted EBITDA decreased $1.1 million to $9.8 million for the six
months ended March 31, 1999 from $10.9 million for the six months ended March
31, 1998. Adjusted EBITDA as a percentage of net sales decreased to 18.1% for
the six months ended March 31, 1999 from 20.4% for the six months ended March
31, 1998. Decreased gross margins related to higher packaging costs associated
with label conversions and increased selling, general and administrative
expenses attributable to the Company's investment in facility consolidation, new
business development and information systems contributed to this decrease in
Adjusted EBITDA.
Seasonality
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 and in anticipation of the summer
months. The Company does not believe that the impact of seasonality on its
results of operations is material. In addition, the Company's sales of premium
bulk formulations are characterized by periodic shipments to certain customers
and can vary from quarter to quarter.
13
<PAGE>
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 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 imbedded 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, and banks and brokerage firms that may be affected by the Year 2000
issue.
Remediation plans have been established for all major systems potentially
affected by the Year 2000 issue. These remediation plans constitute an ongoing
process that the Company expects to adequately complete before the Year 2000.
Identification of areas of potential third-party risk is currently in process.
Plans will be developed and implemented based on the results of such
identification and assessment. No areas of material risk have been identified
to date.
The Company is in the process of determining the risks it would face in the
event certain aspects of its Year 2000 remediation plan fail. It is also
developing 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 systems failures and/or
the inability of vendors to deliver raw materials and components. Alternative
suppliers are being identified (where possible) and inventory levels of certain
key components may be temporarily increased. 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 short-term negative effect on
operations. The failure of national and worldwide banking systems could result
in the inability of many businesses, including the Company, to conduct business.
Remediation, risk assessment and contingency plans are expected to be completed
in a timely enough manner before the Company experiences any material adverse
impact to its ongoing operations. The total cost to the Company of achieving
Year 2000 compliance is not expected to exceed $200,000, not including internal
resources. Spending to date totals approximately $50,000.
Liquidity and Capital Resources
The Company had working capital of $29.1 million as of March 31, 1999, compared
to $24.0 million as of September 30, 1998. This increase in working capital was
primarily the result of an increase in inventory due to the Company's efforts to
expand inventory
14
<PAGE>
levels in connection with the consolidation of certain distribution and other
operations, as well as an increase in accounts receivable and a decrease in
accounts payable.
Net cash provided by (used in) operating activities for the six months ended
March 31, 1999 was $1.0 million compared to ($1.1) million for the comparable
period in fiscal 1998. Net cash provided by operating activities increased
primarily due to increased net income resulting from decreased interest expense
associated with lower debt levels and decreased cash usage for changes in
operating assets and liabilities.
Net cash used in investing activities was $4.4 million for the six months ended
March 31, 1999 compared to $1.7 million for the comparable period in fiscal
1998. Investing activities during these periods relate primarily to capital
expenditures. The increase in capital expenditures for the six months ended
March 31, 1999 is primarily attributable to leasehold improvements associated
with the Company's investment in facility consolidation.
Net cash provided by financing activities was $2.6 million for the six months
ended March 31, 1999 compared to $0.4 million for the comparable period in
fiscal 1998. Net cash provided by financing activities increased primarily due
to increased borrowings under the Company's current credit agreement to finance
capital expenditures.
A key component of the Company's business strategy is to seek to make additional
acquisitions, which could require the Company to incur substantial additional
indebtedness. The Company believes that based on current levels of operations
and anticipated growth, borrowings under the Company's current credit agreement,
together with cash flows from operating activities, will be sufficient to make
anticipated capital expenditures and fund working capital needs for fiscal 1999.
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 companies report and
display comprehensive income and its components in a full set of general purpose
financial statements. The impact of SFAS No. 130 on the Company's financial
statements is immaterial for disclosure in the periods presented.
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 financial statements. SFAS No. 131 also established standards for related
disclosures about products and services, geographic areas and major customers.
This statement need not be applied to interim financial statements in the
initial year of its application. The Company is currently assessing the impact
of SFAS No. 131 disclosure requirements on its financial statements.
15
<PAGE>
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 is currently
assessing the impact of SOP 98-1 on its financial statements.
Inflation
Inflation affects the cost of raw materials, goods and services used by the
Company. In recent years, inflation has been modest. The competitive
environment for nutritional supplement sales somewhat limits the ability of the
Company to recover higher costs resulting from inflation by raising prices.
Overall, product prices have generally been stable, and the Company seeks to
mitigate the adverse effects of inflation primarily through improved
productivity and cost containment programs. The Company does not believe that
inflation has had a material impact on its results of operations for the periods
presented.
Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the Securities Act).
Such forward-looking statements are based on the beliefs of the Company's
management as well as on assumptions made by and information currently available
to the Company at the time such statements were made. When used in this MD&A,
the words "anticipate," "believe," "estimate," "expect," "intends" and similar
expressions, as they relate to the Company, are intended to identify forward-
looking statements, which include statements relating to, among other things:
(i) the ability of the Company to continue to successfully compete in the
nutritional supplements market; (ii) the anticipated benefits from new product
introductions; (iii) the continued effectiveness of the Company's sales and
marketing strategy; and (iv) the ability of the Company to continue to
successfully develop and launch new products. Actual results could differ
materially from those projected in the forward-looking statements as a result of
the matters discussed herein and certain economic and business factors, some of
which may be beyond the control of the Company.
16
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As discussed in the Company's previous filings, the Company is subject to
regulation by a number of federal, state and foreign agencies and is involved in
various legal matters which arise in the normal course of business. The Company
does not believe there are any recent material developments in regulatory and
legal matters referred to in previous filings, or any new material legal
proceedings.
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
(a) The Annual Meeting of Stockholders of the Company was held on February 25,
1999, at which meeting the stockholders voted to elect individuals to serve
as part of Class I Directors of the Company and ratify the appointment of
PricewaterhouseCoopers LLP as the Company's independent certified public
accountants for the fiscal year ending September 30, 1999.
The results of the matters voted on at the Annual Meeting are shown below.
(b) The nominees for election as Class I Directors of the Company are listed
below, together with the number of votes cast for, against, and withheld
with respect to each such nominee, as well as the number of non-votes with
respect to each such nominee:
<TABLE>
<CAPTION>
Nominee For Against Withheld Non-Voting
<S> <C> <C> <C> <C>
Jeffrey A. Hinrichs 11,085,487 - 23,110 561,878
Matthew S. Levin 11,085,487 - 23,110 561,878
</TABLE>
(c) The names of other Directors of the Company whose term of office continued
after the Annual Meeting are as follows:
Frank W. Gay II
Robert C. Gay
Geoffrey S. Rehnert
Alexander Gordon Bearn, M.D.
Jon Steven Young
(d) Other matters voted upon at the meeting and the results of those votes are
as follows:
17
<PAGE>
For Against Abstain Non-Voting
Ratification of 11,093,307 12,930 2,360 561,878
PricewaterhouseCoopers
LLP as the Company's
independent certified
public accountants
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NUTRACEUTICAL INTERNATIONAL CORPORATION
(Registrant)
Dated: May 17, 1999 By: /s/ Leslie M. Brown, Jr.
-------------- -------------------------
Leslie M. Brown, Jr.
Senior Vice President, Finance and
Chief Financial Officer
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
NUTRACEUTICAL INTERNATIONAL CORPORATION'S FINANCIAL POSITION AS OF MARCH 31,
1999 AND THE RESULTS OF ITS OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,183
<SECURITIES> 0
<RECEIVABLES> 11,482
<ALLOWANCES> 1,116
<INVENTORY> 26,105
<CURRENT-ASSETS> 39,926
<PP&E> 23,303
<DEPRECIATION> (10,077)
<TOTAL-ASSETS> 107,920
<CURRENT-LIABILITIES> 10,799
<BONDS> 0
0
0
<COMMON> 118
<OTHER-SE> 54,732
<TOTAL-LIABILITY-AND-EQUITY> 107,920
<SALES> 54,446
<TOTAL-REVENUES> 54,446
<CGS> 29,440
<TOTAL-COSTS> 29,440
<OTHER-EXPENSES> 17,988
<LOSS-PROVISION> 92
<INTEREST-EXPENSE> 1,240
<INCOME-PRETAX> 5,778
<INCOME-TAX> 2,225
<INCOME-CONTINUING> 3,553
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,553
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.29
</TABLE>
