<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1996
Commission File Number 0-26362
NUTRITION FOR LIFE INTERNATIONAL, INC.
--------------------------------------
(Exact name of registrant as specified in its charter)
Texas 76-0416176
----------------------------- -------------------------------
(State or jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
9101 Jameel Road,
Houston, Texas 77040
(Address of Principal Executive Offices)
(713) 460-1976
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 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______
-----
As of May 8, 1996 there were 5,516,038 shares of common stock,
$0.01 par value per share, outstanding.
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
Index
- --------------------------------------------------------------------------------
PART I - Financial Information
Page
ITEM 1. FINANCIAL STATEMENTS
Nutrition For Life International, Inc.
Balance Sheets 3
March 31, 1996 and September 30, 1995
Statements of Operations 4
for the Three and Six Months Ended March 31, 1996 and 1995
Condensed Statements of Cash Flows 5
for the Six Months Ended March 31, 1996 and 1995
Notes to Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 7
CONDITION AND RESULTS OF OPERATIONS
PART II - Other Information
ITEM 1. LEGAL PROCEEDINGS 11
ITEM 5. OTHER INFORMATION 11
Signatures 12
<PAGE>
Part I - Financial Information
Item 1 - Financial Statements
NUTRITION FOR LIFE INTERNATIONAL, INC.
Balance Sheets (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, September 30
1996 1995
----------- -----------
<S> <C> <C>
- Assets -
Current assets:
Cash and cash equivalents $13,703,345 8,960,100
Investments - U.S. Government Agencies 3,944,019 --
Accounts receivable, net 517,404 172,762
Inventory 4,290,871 2,267,617
Prepaid expenses and other current assets 331,324 89,251
----------- ----------
Total current assets 22,786,963 11,489,730
Fixed assets, net 1,629,658 620,818
Deferred tax asset, net 547,859 79,142
Intangible assets, net 182,360 227,498
Other assets 176,237 148,425
----------- ----------
$25,323,077 12,565,613
=========== ==========
- Liabilities and Stockholders' Equity -
Current liabilities:
Accounts payable $ 3,310,422 2,389,706
Accrued bonuses and commissions 3,010,967 1,266,616
Accrued expenses and other liabilities 847,085 559,415
Deferred income 1,497,428 347,795
Federal and state tax payable 1,710,937 843,737
----------- ---------
Total current liabilities 10,376,839 5,407,269
----------- ---------
Stockholders' equity:
Preferred stock, $.001 par value; authorized 1,000,000 shares -- --
Common stock, $.01 par value; authorized 10,000,000
shares; issued and outstanding 5,498,849 in March 1996
and 5,056,524 in September 1995 54,988 50,565
Additional paid-in capital 9,678,332 8,089,992
Retained earnings (deficit) 5,212,918 (982,213)
----------- ----------
Total stockholders' equity 14,946,238 7,158,344
----------- ----------
$25,323,077 12,565,613
=========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
------------------------ -------------------------
1996 1995 1996 1995
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 30,315,402 6,011,548 51,577,877 11,246,826
---------- ---------
Cost of sales: ---------- ----------
Cost of goods sold 8,731,562 2,027,717 14,895,271 3,726,741
Distributor commissions and bonuses 11,906,667 2,438,391 20,235,104 4,504,248
---------- --------- ---------- ---------
Cost of sales 20,638,229 4,466,108 35,130,375 8,230,989
---------- --------- ---------- ---------
Gross profit 9,677,173 1,545,440 16,447,502 3,015,837
Marketing, distribution and
administrative expenses 4,116,129 1,237,636 7,017,809 2,441,233
--------- --------- --------- ---------
Operating income 5,561,044 307,804 9,429,693 574,604
--------- ------- --------- --------
Other (expenses) income:
Interest, net 186,398 (14,373) 337,762 (29,570)
Other, net (19,090) (10,386) (38,823) (23,860)
------- ------- ------- -------
167,308 (24,759) 298,939 (53,430)
------- ------- ------- -------
Income before income taxes 5,728,352 283,045 9,728,632 521,174
Income taxes 2,086,500 -- 3,533,500 --
--------- ------- --------- --------
Net Income $ 3,641,852 283,045 6,195,132 521,174
========= ======= ========= =======
Earnings per share:
Primary $ .55 .10 .94 .18
=== === === ===
Fully diluted $ .55 .07 .94 .13
=== === === ===
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended March 31,
-----------------------------
1996 1995
-------------- ------------
<S> <C> <C>
Net cash provided by operating activities $ 8,254,591 886,878
Net cash used in investing activities (5,104,109) (108,144)
Net cash provided by financing activities 1,592,763 4,375
------------ ---------
Net increase in cash and cash equivalents 4,743,245 783,109
Cash and cash equivalents at beginning of period 8,960,100 639,164
------------ -----------
Cash and cash equivalents at end of period $ 13,703,345 1,422,273
============ ==========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
INTERIM FINANCIAL STATEMENTS
The accompanying financial statements of Nutrition For Life International,
Inc. (the Company) have been prepared in accordance with the instructions to
quarterly reports on Form 10-QSB. In the opinion of Management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and changes in financial position
at March 31, 1996 and for all periods presented have been made. Certain
information and footnote data necessary for fair presentation of financial
position and results of operations in conformity with generally accepted
accounting principles have been condensed or omitted. It is therefore suggested
that these financial statements be read in conjunction with the summary of
significant accounting policies and notes to financial statements included in
the Company's Annual Report. The results of operations for the periods ended
March 31, 1996 are not necessarily indicative of operating results for the full
year.
6
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
NUTRITION FOR LIFE INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
The Company develops, markets and sells an extensive product line of
nutritional supplements and other consumer products through its network of
distributors. Net sales for the six months ended March 31, 1996 increased by
$40,331,051 or 358.6% to $51,577,877 from $11,246,826 for the six months ended
March 31, 1995. The increase in net sales is a result of the Company increasing
its number of distributors and its sales per average number of distributors. As
of March 31, 1996 the Company had 82,452 distributors compared to 44,422 at
march 31, 1995. The Company's net sales per average number of distributors per
month increased from $46 during the six month period ended March 31, 1995 to
$123 for the six months ended March 31, 1996. Approximately 49% of the increase
in net sales was due to new distributors electing to purchase the Instant
Executive Pack, an assortment of the Company's products for $1,000. The Instant
Executive Pack is a program which allows distributors to qualify for the
executive level in the Company's marketing program on an accelerated basis. The
future viability of the Instant Executive Pack program is uncertain as a result
of the matters discussed in detail under "Other Information" below.
The Company markets and distributes an extensive product line of over 250
items. The product line consists of primarily consumable products that are
designed to target the growing consumer interest in natural health alternatives
for nutrition and personal care. The Company believes that the increase in
number of distributors and sales per average number of distributors is
attributable to several factors, including the Company's enhanced line of
nutrition and health products, the Company's attractive compensation plan and
the training, and development and support programs offered to assist the
Company's distributors. Whether the present level of distributors and sales can
be maintained depends on the effect, if any, of the matters discussed under
"Other Information" below.
Cost of sales increased by $26,899,386 or 326.8% to $35,103,375 for the six
months ended March 31, 1996 from $8,230,989 for the six months ended March 31,
1995. Expenses included in cost of sales are cost of goods sold (product cost,
shipping cost and supplies) and distributor commissions and bonuses. Cost of
goods sold increased $11,168,530 or 299.7% to $14,895,271 for the six months
ended March 31, 1996 from $3,726,741 for the period ended March 31, 1995.
Commissions and bonuses paid to distributors increased 349.2% or $15,730,856 to
$20,235,104 for the six months ended March 31, 1996 from $4,504,248 for the six
months ended March 31, 1995.
Gross profit increased by 445.4% or $13,431,665 from $3,015,837 for the six
months ended March 31, 1995 to $16,447,502 for the six months ended March 31,
1996. Gross profit as a percentage of sales increased from 26.8% for the six
months ended March 31, 1995 to 31.9% for the six months ended March 31, 1996.
Marketing, distribution and administrative expenses increased $4,576,576 or
187.5% from $2,441,233 for the six months ended March 31,1995 to $7,017,809 for
the six months ended March 31, 1996. As a percentage of net sales, marketing
distribution and administrative expenses decreased to 13.6% for the six months
ended March 31, 1996 from 21.7% for the six months ended March 31, 1995. The
dollar increase resulted primarily from increased personnel costs, credit card
fees, postage and professional fees to support the Company's growth.
Operating income for the six months ended March 31, 1996 increased
$8,855,089 or 1541.1 % to $9,429,693 from $574,604 for the six months ended
March 31,1995, principally as a result of the higher level of sales and the
increase in the gross profit as a percentage of sales. Operating income as a
percentage of sales increased from 5.1% for the six months ended March 31, 1995
to 18.3% for the six months ended March 31, 1996.
Other income increased to $298,939 for the six months ended March 31, 1996
from a deficit of $53,430 for the six months ended March 31, 1995. The increase
was primarily a result of interest income earned.
7
<PAGE>
There was no estimated income tax expense for the six months ended March
31, 1995 under the provisions of Financial Accounting Standards Board Statement
of Financial Accounting Standards No. 109 (Accounting For Income taxes),
utilizing loss carryforwards as a component of income tax expense. As of
September 30, 1995, the Company had approximately $553,000 of net operating loss
available to carry forward and offset against future earnings. The Company
anticipates it will use a significant portion of the available net operating
loss carryforwards in fiscal 1996.
Net income was $6,195,132 for the six months ended March 31, 1996, an
increase of 1088.7% compared to $521,174 for the six months ended March 31,1995,
principally as a result of a higher level of sales and the increase in gross
profit as a percentage of sales.
MATERIAL CHANGES IN FINANCIAL CONDITION
The Company has financed its recent growth primarily from funds obtained
from operations. The Company had cash and cash equivalents of $13,703,345 at
March 31, 1996 compared to $8,960,100 at September 30, 1995. For the six months
ended March 31, 1996, the net cash provided by operations was $8,254,591 and
approximately $1,160,090 was used for the acquisition of property and equipment
and $3,935,914 for investment in securities of U.S. Government Agencies. The
Company also received $1,592,763 from the exercise of warrants issued in the
public offering completed July, 1995. The Company received net cash from
operations for the six months ended March 31, 1995 of $886,878 and used $108,144
for the acquisition of property and equipment The increase in net cash provided
by operations and cash and cash equivalents was a result of record sales and
more efficient operations.
The Company had working capital of $12,410,124 at March 31, 1996 compared
to $6,082,461 at September 30, 1995. Approximately 95% of all sales are paid in
advance before shipment; therefore, accounts receivable as a percentage of sales
averages a relatively low 5% of monthly sales and bad debts have been
insignificant.
Approximately 65% of the Company's net sales are processed through credit
card transactions. The Bank which services these transactions has requested that
the Company grant the Bank a security interest in the funds deposited from
credit card transactions to protect the Bank against customer returns and
"charge backs". To accomplish this the Company has agreed to pledge $3,000,000
in repurchase agreements purchased by the Company from the Bank to collateralize
the Bank. The Company's returns and credit card "charge backs" did not exceed 5%
of net sales for either the three or six months period ended March 31, 1996.
Subject to the potential adverse effects which could result from the
uncertainties discussed below in "Other Information," the Company believes its
existing cash resources and revenues to be derived from operations should be
sufficient to meet the Company's capital needs and planned expansion
requirements for the next 12 months. The Company currently anticipates expanding
its operations in established markets and into foreign markets.
The Company has not been subjected to any material price increases by its
suppliers and inflation is not expected to have any material impact on its
business during the twelve months.
OTHER INFORMATION
A significant part of the Company's recent growth is attributable to the
efforts of Kevin Trudeau, a
8
<PAGE>
key independent distributor and his marketing organization (collectively
referred to as "Trudeau"). Trudeau has been particularly successful in marketing
the Company's Instant Executive Program. As noted above, the Instant Executive
Program allows distributors to qualify for the executive level in the Company's
marketing program on an accelerated basis. As the Company noted in its Report on
Form 10-KSB for the fiscal year ended September 30, 1995, Mr. Trudeau has been
convicted twice of criminal charges during the past ten years.
Mr. Trudeau's criminal past was highlighted in an article which appeared in
The Wall Street Journal on January 19, 1996. The author of the article also
questioned the legality of Trudeau's marketing practices and, in particular, the
offering of products requiring a $1,000 purchase. Similar negative reports were
published on the same day by Bloomberg, a news wire service, and by cable
television station CNBC. On January 19, 1996, the price of the Company's common
stock fell 45%.
In April 1996, the Company learned that the Attorney General of the State
of Illinois filed a Complaint against Kevin Trudeau, the Trudeau Marketing
Group, Inc. and Jules Leib, alleging violations of the Illinois Consumer Fraud
and Deceptive Business Practices Act and the Illinois Business Opportunity Sales
Law of 1995 by, among other things, operating a "pyramid sales scheme." Kevin
Trudeau, through KT Corp., is a key distributor of the Company. Mr. Leib works
with Mr. Trudeau. The relief sought includes a temporary restraining order and
permanent injunction against offering to sell the opportunity to become an
instant executive or distributor for Trudeau Marketing Group, Inc., as well as
civil penalties and a requirement for the Trudeau Marketing Group, Inc. to make
restitution to Illinois residents who participated in the "pyramid sales
scheme."
A hearing on the temporary restraining order was commenced on April 23,
1996. The Company has been informed that the parties consented to an "Agreed
Temporary Restraining Order" which became the Order of the Court on April 23,
1996. It is stated therein that the Defendants dispute the allegations contained
in the Complaint and Motion for Temporary Restraining Order and have agreed to
the entry of the Temporary Restraining Order with a view toward resolving their
differences.
Pursuant to the Order, the Defendants agreed to commence proceedings within
one week to dissolve the Trudeau Marketing Group, Inc., to cease recruiting and
sponsoring people to be instant executives with the Company, and to cease
advertising the Company's instant executive program and enrolling new
distributors in the Company's order assurance program. It is stated that the
Order does not prevent them from selling the Company's products if these
products do not describe or encourage participation in the Company's instant
executive program and that they may sponsor people into the Company by selling
them a Company kit for $35. The Order does not prejudice the Defendants' right
to a hearing on a preliminary injunction set for June 19, 1996. The parties have
agreed to meet in May, 1996 to discuss resolution of the proceedings. The
Defendants have also agreed to communicate this Order to distributors in
Illinois.
In addition, the Secretary of State of the State of Illinois has issued to
Mr. Trudeau and the Trudeau Marketing Group a Summary Order to Cease and Desist
prohibiting them from offering or selling "business opportunities" in the State
of Illinois. Generally, a "business opportunity" is an agreement involving sales
of products or services enabling the purchaser to start a business when the
purchaser is required to pay more than $500. Many other states have "business
opportunity" statutes and several states have indicated to Mr. Trudeau that they
are reviewing his activities and monitoring the Illinois proceedings.
Mr. Trudeau has confirmed to the Company that he will comply with the
aforementioned orders. In addition, he has returned to the Company for
cancellation warrants to purchase 500,000 shares of the Company's common stock
exercisable at $12.50 per share. The warrants were issued to Mr. Trudeau in
October 1995 and, prior to cancellation, were exercisable from April 1996 to
October 1998.
In April 1996, the Company received notice from the Securities and Exchange
Commission ("Commission") of a formal order of private investigation into
possible violations by the Company of the
9
<PAGE>
federal securities laws. Although the Commission may explore various acts of,
and filings by, the Company, the inquiry appears to be concentrated on the
Company's "executive" level distributor program. With the assistance of special
counsel, the Company is cooperating in providing information requested by the
Commission. As the investigation is still in its initial stages, the Company
cannot predict the ultimate outcome of the investigation.
The Company does not believe the manner in which it markets its products
constitutes a pyramid scheme. The only requirements for a person to become a
distributor are to be sponsored by an existing distributor and to purchase a
"distributor success kit" from the Company. A distributor success kit currently
costs approximately $35 and provides sales aids, brochures, order forms, audio
and video cassette recordings and a subscription to the Company's monthly
publication, Lifestyles.
Distributors may also become an "executive" by generating a cumulative
sales volume ranging from $1,000 to $1,500 by the distributor and his downline
sales organization in the aggregate. "Executive" status entitles distributors to
earn commissions on product sales generated by other distributors in their
downline organizations. The Company intends to continue to review its
"executive" program and other aspects of its network marketing system and may
make changes it deems appropriate.
The Company's growth in distributor enrollment was strong in the six months
ended March 31, 1996. The Company's continued growth depends to a significant
degree on its ability to retain and motivate its existing distributors and to
attract new distributors. The Company experiences significant competition in the
marketing of its products. The Company has been successful in competing by
offering products which are attractive to health-conscious consumers. However,
if the negative reports in the financial media or any legal developments caused
distributor recruitment and/or retention to suffer, there could be an adverse
material effect on the Company's future results of operations and its financial
condition.
10
<PAGE>
Part II - Other Information
NUTRITION FOR LIFE INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
ITEM 1. - LEGAL PROCEEDINGS
The Company is not a party to any pending material legal proceedings.
However, as noted in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of this Report, a key distributor of the
Company is a defendant in an action commenced by the Attorney General of the
State of Illinois. The disposition of that proceeding, and other proceedings
that could be commenced against either that distributor, or the Company, could
have a material adverse impact on the Company's financial condition and results
of future operations.
In addition, as also discussed in the "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the Company received
notice from the Securities and Exchange Commission of a formal investigation
into possible violations by the Company of the federal securities laws. The
pendency and/or adverse disposition of these proceedings could also have a
material adverse impact on the Company's financial condition and results of
future operations.
ITEM 2. - OTHER INFORMATION
For other information see "Other Information" under "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company has leased a 41,000 square foot warehouse facility in
Houston, Texas, which it occupied in December 1995. The Company also leases a
37,000 square foot facility used for its executive offices in Houston, Texas.
The Company moved to these offices in February 1996. Both leases are with non-
affiliates. The future minimum lease payments under these leases as of March 31,
1996 are as follows:
Years Ending September 30 Approximate Amount
------------------------- ------------------
1996 187,956
1997 372,368
1998 387,810
1999 397,745
2000 and thereafter 759,479
----------
$2,105,358
==========
11
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
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.
NUTRITION FOR LIFE INTERNATIONAL, INC.
(Registrant)
Dated: May 14, 1996 By: /s/ Barry C. Loder
__________________________________________
Barry C. Loder
Vice President and Chief Financial Officer
By: /s/ Ronnie D. Meaux
__________________________________________
Ronnie D. Meaux
Vice President, Treasurer and
Principal Accounting Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NUTRITION
FOR LIFE INTERNATIONAL, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> SEP-30-1996 SEP-30-1995
<PERIOD-START> OCT-01-1995 OCT-01-1994
<PERIOD-END> MAR-31-1996 MAR-31-1995
<CASH> 13,703,345 8,960,100
<SECURITIES> 3,944,019 0
<RECEIVABLES> 517,404 172,762
<ALLOWANCES> 0 0
<INVENTORY> 4,290,871 2,267,617
<CURRENT-ASSETS> 22,786,963 11,489,730
<PP&E> 2,642,204 1,511,401
<DEPRECIATION> 1,012,546 890,583
<TOTAL-ASSETS> 25,323,077 12,565,613
<CURRENT-LIABILITIES> 10,376,839 5,407,269
<BONDS> 0 0
0 0
0 0
<COMMON> 54,988 50,565
<OTHER-SE> 14,891,250 7,107,779
<TOTAL-LIABILITY-AND-EQUITY> 25,323,077 12,565,613
<SALES> 51,577,877 11,246,826
<TOTAL-REVENUES> 51,577,877 11,246,826
<CGS> 35,130,375 8,230,989
<TOTAL-COSTS> 35,130,375 8,230,989
<OTHER-EXPENSES> 7,017,809 2,441,233
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 29,570
<INCOME-PRETAX> 9,728,632 521,174
<INCOME-TAX> 3,533,500 0
<INCOME-CONTINUING> 6,195,132 521,174
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 6,195,132 521,174
<EPS-PRIMARY> .94 .18
<EPS-DILUTED> .94 .13
</TABLE>
