<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
X Annual Report Under Section 13 or 15(d) of The Securities
---
Exchange Act of 1934 (Fee Required) for the Fiscal Year Ended
September 30, 1995
Transition Report Under Section 13 or 15(d) of The
---
Securities Exchange Act of 1934 (No Fee Required) for the
Transition Period from ________ to ________
Commission file number 0-26362
-------
NUTRITION FOR LIFE INTERNATIONAL, INC.
--------------------------------------
(Name of Small Business Issuer in its Charter)
Texas 76-0416176
----- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
9101 Jameel, Suite 180
Houston, Texas 77040
---------------------- -----
(Address of principal executive office) (Zip Code)
Issuer's telephone number, including area code: (713) 460-1976
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of each Class on Which Registered
None None
Securities Registered Pursuant to Section 12(g) of the Act:
$.01 par value common stock
---------------------------
(Title of Class)
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NUTRITION FOR LIFE INTERNATIONAL, INC.
(Registrant)
Date: July 11, 1996 By: /s/ Ronnie D. Meaux
-------------------------------------------------
Ronnie D. Meaux, Vice-President and Treasurer
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Business Development
- --------------------
The Company is a Texas corporation organized in September 1993 to be the
surviving corporation of the merger (the "Merger") of the Company and its
predecessors, Nutrition Express Corporation of Colorado, Inc. and Nutrition
Express Corporation of Utah, Inc. The Merger was effected in June 1994.
The Company develops products that are designed for health-conscious
consumers, and sells those products to consumers through its network of
independent distributors. The Company has developed a network of over 57,000
distributors. The Company offers a product line of approximately 250 products
in eight categories, including nutritional supplements, health foods, weight
management items, skin care products, and other consumer products.
The Company develops products that it believes will have market appeal to
its distributors and their customers, and assists its distributors in building
their own businesses. The advantages the Company offer to distributors is that
they can start a business without normal start-up costs and other difficulties
usually associated with new ventures. The Company provides product development,
marketing aids, customer service, and essential record-keeping functions for its
distributors. The Company also provides other support programs to the
distributors including satellite broadcasts, international teleconferencing
calls, international and regional seminars, a proprietary "monthly" magazine,
and business training systems.
Distributors actively recruit interested people to become new distributors
for the Company. These recruits are placed beneath the recruiting distributor
in the "network" and are referred to by the Company as that distributor's
"downline". Distributors earn commissions on sales generated by the
distributors in their downline as well as on the sales they generate directly.
The Company's marketing program is designed to provide incentive for
distributors to build an organization of recruited distributors in their
downline to maximize their earning potential. The Company has experienced an
increase in the number of distributors from approximately 37,800 on September
30, 1994 to 57,300 on September 30, 1995. The Company's sales per average
number of distributors increased from $44 per month during the year ended
September 30, 1994 to $58 per month for the year ended September 30, 1995. The
Company believes that the increases in the number of distributors and the
monthly sales per average number of distributors were the result of the
Company's ability to increase sales of its health-related products by timely
introduction of new products, increased public awareness of nutrition and its
benefits, an innovative marketing program, including the opportunity to become
an executive distributor and earn commissions and bonuses, and increased public
confidence that network marketing is a viable method to distribute product and
earn supplemental income.
The Company purchases most of its products directly from manufacturers and
sells them to its independent distributors located in all 50 states, the
District of Columbia, Puerto Rico, Guam, Canada, Korea and the Philippines.
Recently, the Company has expanded the number of its distributors located in
Canada, Guam, and Puerto Rico. The Company expects to expand its efforts in
these countries and in other parts of the world.
The Company intends to pursue its business strategy of increasing sales and
profitability by (1) attracting and retaining distributors to its network
marketing system; (2) increasing product sales to existing distributors; and (3)
expanding its marketing activities into new international markets.
During the fiscal year ended September 30, 1995, the Company's executive
offices were located at 8801 Jameel, Suite 100, Houston, TX 77040. Its telephone
number is (713) 460-1976. In February 1996, the Company's executive offices were
moved to 9101 Jameel, Suite 180, Houston, TX 77040.
Distribution and Marketing
- --------------------------
The Company's products are distributed through a network marketing system
consisting of a network of over 57,300 distributors. Distributors are
independent contractors who purchase products directly from the Company for
their own use and for resale to retail consumers. Distributors may elect to
work on a full-time or part-time basis. Management believes that its network
marketing system is well suited to marketing its nutritional supplements and
other products because sales of such products are strengthened by ongoing
personal contact between retail consumers and distributors, many of whom use the
Company's products themselves. The Company encourages its distributors to use
2
<PAGE>
the Company's products. The Company has experienced an increase in monthly sales
per average number of distributors from $44 in the fiscal year ended September
30, 1994 to $58 in the fiscal year ended September 30, 1995. No one distributor
accounted for more than 5% of the Company's annual sales in either of the past
two fiscal years.
The Company's ability to increase sales is significantly dependent on its
ability to attract, motivate and retain distributors. The Company utilizes an
innovative marketing program which it believes is superior to programs offered
by other network marketing companies. The program provides financial
incentives, distributor training and support, low priced starter kit, no
inventory requirements, and low monthly purchase requirements. Management
intends to reach potential new distributors through increased advertising,
satellite broadcasts, teleconferencing and regional sales meetings. The Company
experienced a net increase in the number of distributors during the fiscal year
ended September 30, 1994 of 8,377 and during the fiscal year ended September 30,
1995, 19,468 distributors were added.
Distributors' revenues are derived from several sources. First,
distributors may receive revenues by purchasing the Company's products at
wholesale prices and selling the Company's products to customers at retail
prices. Second, distributors earn the right to receive commissions upon
attaining the level of "executive." Executive level distributors may earn
commissions on sales generated by other distributors in their downline
organization. The qualification for a distributor to earn commissions is a one
time requirement and there are three ways of meeting this requirement which are
as follows:
. Generate a cumulative sales volume of $1,500
. or generate a cumulative sales volume of $1,200 and enroll in the
optional Order Assurance Program
. or generate a cumulative sales volume of $1,000, enroll in the
optional Order Assurance Program at the monthly level of $100 and
subscribe to the $21 monthly optional Master Developer Series
An executive level distributor may then attain higher levels of commissions
based on sales generated by distributors within his or her organization.
Management believes that the right of executive level distributors to earn
commissions contributes significantly to the Company's ability to retain its
productive distributors. Management also believes that the timely introduction
of new and topical programs and products has assisted the Company to increase
its network of distributors.
During the fiscal year ended September 30, 1995, the Company introduced its
Instant Executive Program. This program allowed a distributor to make a one
time purchase of an Instant Executive Pack, an assortment of the Company's
products sold at a distributor cost of $1,000, enroll in the Order Assurance
Program and subscribe to the Master Developer Series and instantly become an
executive distributor to be eligible to earn commissions and bonuses. The
Company has determined to discontinue the use of the Instant Executive Program
and the Instant Executive Pack designations. However, the qualification
requirements for distributors to attain the level of "executive distributor" and
the commissions and bonuses which may be earned as an executive distributor have
not changed. See Item 6, "Management's Discussion and Analysis or Plan of
Operation-Overview", below:
To become a distributor, a person must be sponsored by an existing
distributor and must 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.
The following table sets forth the number of the Company's distributors on
the dates indicated:
At September 30,
----------------
Approximate number of 1993 1994 1995
---- ---- ----
distributors(1)
29,500 37,800 57,300
_________________________
(1) Includes "active" distributors only. A distributor remains active by
generating a minimum of $40 in sales volume at least once every 12 months.
In order to maintain executive status and to be eligible for commissions
and bonuses, an executive distributor must generate a minimum of $40 in
sales volume every other month.
The Company seeks to expand its distributor base in each market by offering
distributors attractive compensation opportunities. Management believes the
Company's executive level distributor compensation plan is
3
<PAGE>
superior to that of other network marketing organizations because the program
offers an opportunity for the distributor to become successful without having to
finance a large inventory of products and requires only a modest amount of sales
to meet the commission requirements.
The Company regularly sponsors rallies in various key cities in North
America, Puerto Rico, and Pacific Rim countries and participates in motivational
and training events in key countries, all of which are designed to inform large
numbers of prospective and existing distributors about the Company's product
line and selling techniques. Distributors give presentations relating to their
experiences with the Company's products and the methods by which they develop
their distributor organizations. Specific selling techniques are explained, and
emphasis is placed on the need for consistency in using such techniques.
Participants are encouraged to ask questions regarding selling techniques and
product developments and to share information with other distributors attending
the rallies. Distributors are also given opportunities to interact with other
distributors and to develop confidence in selling and goal-setting techniques.
Motivation is offered to participants in the form of recognition, gifts,
excursions and tours, which are intended to foster an atmosphere of excitement
throughout the distributor organization. Prospective distributors are educated
about the structure, dynamics and benefits of the Company's network marketing
system. During the years ended September 30, 1995 and 1994, the Company
expended approximately $138,000 and $136,000, respectively, on promotional
activities related to distributors' rallies and the annual convention.
The Company continues to develop marketing strategies and programs to
motivate distributors. These programs are designed to increase distributors'
monthly product sales and the recruiting of new distributors. Some of the
programs that the Company has implemented are as follows:
Car Bonus Program. The Company offers a car bonus program, whereby it makes car
payments up to $750 per month for qualifying distributors. The Company has no
liability relating to the financing or purchasing of the automobile. The car
bonus program was initiated in fiscal 1990. As of September 30, 1995, the
Company had 129 distributors in the program. The requirements for a distributor
to qualify for the car bonus program are as follows:
. Generate $100 sales volume for nine consecutive months (or six months
if the distributor attends one of the Company's training programs or
subscribes to the optional Master Developer Series).
. The distributors' third level executives must generate at least $4,000
in sales volume for two consecutive months (that would be in either
the fifth and sixth month, or eighth and ninth month, depending on
qualifications).
. As the distributors' third level generates higher sales volume, the
Company will make larger monthly payments up to a maximum of $750 per
month.
Order Assurance Program. The Company provides a program whereby the distributor
may enroll in a minimum ordering program in order to maintain eligibility for
performance bonuses. Minimum orders ranging from $41 to $300 per month are
automatically placed by credit card or check. Differing amounts for the
optional Order Assurance Program exist to allow generation of sales volume at
levels that correspond to commission and bonus qualification levels, i.e., $40
is the minimum sales volume to remain an active executive; $80 is the minimum
sales volume to qualify as a bronze or silver executive; $100 is the minimum
sales volume qualification level for the car bonus program; $160 is the minimum
sales volume to be eligible for gold executive; and $300 is the minimum sales
volume requirement to be a platinum executive. Therefore, this program ensures
sales for the Company and the distributors participation in bonus programs. The
Order Assurance Program was initiated in fiscal 1993. The Order Assurance
Program is voluntary and no restrictions are placed upon any participant's
ability to exit the Order Assurance Program. As of September 30, 1995 and 1994,
respectively, there were approximately 22,800 and 5,700 participants in the
Order Assurance Program.
Personal Recruiting and Sales Campaign. These programs were developed to assist
distributors in developing their downlines and increasing product sales. These
programs provide special incentives for quicker qualification into the executive
level distributor compensation program.
As a part of the Company's commitment to maintain constant communication
with its distributor network, the Company offers the following support programs:
Satellite Network. The Company broadcasts a one hour program twice a week that
includes product information and marketing training as well as motivational
presentations and "lifestyle" stories of many of its successful distributors.
The satellite broadcasts were initiated in fiscal 1994.
4
<PAGE>
24 hour Teleconference. The Company provides 24 hour access to a weekly
recorded teleconference call to its distributors that includes interviews with
successful distributors, current product information, announcements and product
specials offered by the Company. The teleconference calls were initiated in
fiscal 1994.
Freedom Magazine. The Company publishes Freedom Magazine, a publication that
provides information on the network marketing industry and the Company. The
magazine was developed in fiscal 1994 to recruit new distributors by answering
the most commonly asked questions by potential new distributors. Management
believes it is one of the more effective marketing tools in the industry.
Master Developer Series. The Company provides a monthly subscriber service of
leading self development books and audio programs that serve as a link between
the philosophy and ideals of the Company and its distributors.
Product Literature. The Company produces for its distributors comprehensive and
attractive four color catalogues and brochures that display and describe the
Company's products.
Toll Free Access. The Company furnishes toll free numbers for: (1) placement
of orders, (2) customer service assistance, and (3) faxing of orders and
applications.
The Company experienced significant growth in sales in the fiscal year
ended September 30, 1995. Management of the Company believes this is directly
related to the increases in both the number of distributors and the monthly
sales per average number of distributors. Management also believes the
significant part of the Company's growth is attributable to the enthusiasm and
momentum generated by executive level distributors who are able to motivate
their downline organizations through various marketing methods, including the
use of newsletters, brochures and other sales aids and the holding of meetings
and rallies at the expense of the sponsoring distributor.
In the last quarter of the fiscal year ended September 30, 1995, one
executive level distributor, Kevin Trudeau, was particularly noteworthy in this
regard, and he has made a significant contribution to the growth of the Company
during this period. In addition to the marketing methods described above, Mr.
Trudeau has sponsored radio and newspaper advertisements and radio and
television infomercials to attract new distributors. Mr. Trudeau has
substantial prior experience in product sales through the use of infomercials.
In addition, he has served as a host of a series of infomercials entitled "A
Closer Look" and "Vantage Point". During the last several months, he has also
frequently served as a guest on the Home Shopping Network.
Mr. Trudeau is the producer of the "Mega Memory" home study course and is
the author of Kevin Trudeau's Mega Memory book which was published in 1995 by
----- --------- ---- ------
William Morrow. He founded the American Memory Institute, a memory training
school, in 1983. Mr. Trudeau is also frequently featured as a prominent speaker
at motivational seminars and other programs.
During the past five years, Mr. Trudeau has also been engaged in other
entrepreneurial activities, including KT Corp., which is a distributor of the
Company, the Trudeau Marketing Group, which markets sales aids, memory tapes and
other products to distributors of the Company, and Mega Systems, Inc., which
markets memory and other home study courses. Mr. Trudeau is no longer employed
by Mega Systems, Inc.
In 1990 Mr. Trudeau plead guilty in a Massachusetts state court to larceny
involving a bank overdraft. He was incarcerated for 21 days and received a
suspended sentence of three years. In 1991, Mr. Trudeau plead guilty in
federal court in Massachusetts to a charge of providing false information on a
credit card application and was sentenced to 24 months incarceration and 24
months supervised release. Mr. Trudeau has informed the Company that he is no
longer under any parole or other type of supervised provisions. In addition,
in 1990, Mr. Trudeau filed a Petition under Chapter 13 of the Bankruptcy Code in
the United States Bankruptcy Court in Dallas, Texas. Shortly after the filing,
Mr. Trudeau withdrew the Petition and no further action was taken.
Markets
The following chart sets forth the countries in which the Company currently
operates, the year operations were commenced in each country, and product and
historical sales information by country during the past five years.
5
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------
(in Thousands)
Year
Country Entered 1993 1994 1995
- ---------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
United States 1984 $12,700 $14,700 $25,800
Canada 1993 1,000 2,400 4,200
Puerto Rico 1994 --- 300 2,200
Korea(1) 1991 100 100 100
Philippines(1) 1993 100 100 100
- ---------------------
</TABLE>
(1) The Company sells its products to distributors in Korea and the Philippines
which do not use the Company's network marketing system.
The Company currently plans to enter additional markets outside the
continental United States at the rate of approximately one new market per year.
Upon deciding to enter a new market, the Company will hire local legal counsel
to help ensure that the Company's network marketing system and products comply
with all applicable regulations and that the Company's profits may be
expatriated. In addition, local counsel will help to establish favorable public
relations in the new market by acting as an intermediary between the Company and
local regulatory authorities, public officials and business people. Local
counsel will also be responsible for explaining the Company's products and
product ingredients to appropriate regulators and, when necessary, will arrange
for local technicians to conduct required ingredient analysis tests of the
Company's products.
If regulatory approval is required in a foreign market, the Company's local
counsel will work with regulatory agencies to confirm that all of the
ingredients of the Company's products are permissible within the new market.
During the regulatory compliance process, the Company may alter the formulation,
packaging or labeling of its products to conform to applicable regulations as
well as local variations in customs and consumer habits, and the Company may
modify certain aspects of its network marketing system as necessary to comply
with applicable regulations.
Following completion of the regulatory compliance phase, the Company will
undertake the steps necessary to meet the operational requirements of the new
market. The Company will initiate plans to satisfy the inventory, distribution,
personnel and transportation requirements of the new market, and the Company
will modify its distributor manuals, cassette recordings, videocassette and
other training materials as necessary to be suitable for the new market. The
Company has prepared manuals in French and Spanish. Currently, the Company's
products are distributed to all markets from the Company's Houston, Texas
distribution center.
In August 1994, to assist the Company in its entry into new markets, the
Company retained the services of Dr. David Santiago. In December 1995, Dr.
Santiago and the Company agreed to a termination of their relationship.
Products
The Company markets and distributes an extensive product line of over 250
items in eight different categories: (1) vitamins and minerals and
antioxidants; (2) Nutique personal care items; (3) food and weight management
items; (4) herbal formulas, (5) homeopathic and special formulas; (6) cleaning
concentrates; (7) filtration systems; and (8) self-improvement programs. The
line consists of primarily consumable products that are designed to target the
growing consumer interest in natural health alternatives for nutrition and
personal care. In developing its product line, the Company has emphasized
quality, purity, potency, and safety.
Vitamins and minerals and antioxidants. The Company markets approximately 33
vitamin and mineral products that are offered in a variety of combinations
including the Company's proprietary Grand Master/(R)/, Master-Key-Plus/(R)/, and
OraFlow Plus/(R)/ formulations.
Nutique personal care items. The Company markets 33 Nutique hair and skin care
products including skin care formulas for men and women, shampoo and
conditioner, hand and body lotions, sunscreen, an alphahydroxy acid skin
rejuvenating complex, and a thigh creme. Each of these products contains
ingredients that are formulated to promote healthier looking skin and hair.
6
<PAGE>
Food and weight management items. The Company markets over 52 food and weight
management products. These include a whey beverage in four flavors, the Nutri-
Mac line of pastas, the Nutri-Blend flour and baking mixes, instant food shakes,
fiber products, the Nutri-Cookie/(TM)/, and Lean Life/(R)/, a herbal weight
management formulation.
Herbal formulas. The Company's 36 herb and herbal formulation products are
produced using only natural ingredients and are precisely measured and carefully
processed into a convenient tablet or capsule form. The line consists of many
traditionally popular herbs such as alfalfa, ginkgo biloba, and garlic, as well
as special blends developed by the Company.
Homeopathic and special formulas. Homeopathic remedies, when prepared in minute
amounts, mimic disease symptoms and stimulate the body's defense systems. The
Company offers 62 homeopathic remedies that have been formulated in accordance
with the Homeopathic Pharmacopoeia of the United States. In addition, the
Company markets a variety of other special formula products including shark
cartilage liquid and capsules, pain relief formulations, cough syrup, digestive
aids, sports massaging gel, a special formula dentifrice and special
phytochemical products.
Cleaning concentrates. The Company markets household cleaning products that are
non-volatile and biodegradable. There are 19 products, including a liquid hand
and body soap, dishwasher concentrate, laundry concentrates, laundry softener, a
heavy duty cleaner-degreaser, and a pine disinfectant.
Filtration systems. The Company markets 27 products designed to test or improve
the quality of air and water, including electrostatic air filters, radon testing
kits and water filtration systems.
Self improvement programs. The Company markets the Mega Memory Cassette Course
and other tape products primarily through arrangements with the American Memory
Institute and Nightingale Conant.
The Company continually seeks to identify, develop and introduce
innovative, effective and safe products. During the fiscal year ended September
30, 1995 the Company introduced over 25 new products or services. Management
believes that its ability to introduce new products increases its distributors'
visibility and competitiveness in the marketplace.
New Product Development
The Company expands its product line through the development of new
products. New product ideas are derived from a number of sources, including
trade publications, scientific and health journals, the Company's management and
consultants, and outside parties. Prior to introducing products into the
Company's markets, local counsel and other representatives retained by the
Company investigate product formulation matters as they relate to regulatory
compliance and other issues. To the extent possible, the Company's products are
formulated to suit both the regulatory and marketing requirements of the
particular market.
The Company does not maintain its own product research, development and
formulation staff but relies upon independent research, vendor research
departments, research consultants and others for such services. When the
Company, one of its consultants or another party identifies a new product
concept or when an existing product must be reformulated for introduction into a
new or existing market, the new product concept or reformulation is generally
submitted to the Company's suppliers for technological development and
implementation. The Company owns the proprietary rights to a majority of its
product formulations.
Product Warranties and Returns
The Company's product warranties and policy regarding returns of products
are similar to those of other companies in the industry. If a retail purchaser
of any of the Company's products is not satisfied with the product, he may
return it to the distributor from whom he purchased it at any time within 30
days of his purchase. The distributor is required to refund the purchase price
to the retail purchaser. The distributor may then return the unused portion of
the product to the Company for an exchange of equal value. Most products are
warranted against defect by the manufacturers of those products. Most products
returned to the Company, however, are not found to be defective in manufacture.
As a result, most products returned to the Company are replaced by the Company
at its cost. Additionally, if a distributor resigns and returns resalable
products, the distributor is entitled to a refund equal to 100% of the price
paid for the products less a 10% restocking fee and less commissions and bonuses
paid to that distributor. For the fiscal year ended September 30, 1995, the
cost of products returned to the Company was insignificant.
7
<PAGE>
Management Information System
The Company maintains a proprietary computerized system for processing
distributor orders and calculating distributor commission and bonus payments
which enables it to remit such payments promptly to distributors. The Company
believes that prompt remittance of commissions and bonuses is vital to
maintaining a motivated network of distributors and that this has enhanced the
loyalty of the distributors to the Company.
The Company's computer system provides each distributor a detailed monthly
accounting of all sales and recruiting activity in his or her downline. These
convenient statements eliminate the need for substantial record keeping on
behalf of the distributor. The computer system also is fully integrated with the
Company's financial reporting system that generates monthly reports, invoices
and payroll. As a precaution, duplicate copies of the Company's computer
records are transferred daily to an off-site location for safekeeping.
Manufacturing and Supplies
The Company currently purchases all of its vitamins, nutritional
supplements and all other products from third parties that manufacture such
products to the Company's specifications and standards. During the fiscal years
ended September 30, 1995 and 1994, the Company purchased approximately 29% and
40% of its inventory, respectively, from NION Laboratories ("NION"). Richard S.
Kashenberg, a director of the Company, is the chief executive officer of NION.
Until June, 1995 NION was owned by Shermfin Corp., the Company's largest
shareholder, and Mr. Kashenberg. Since June 1995 NION has been owned by a
privately held corporation with no affiliation with the Company other than Mr.
Kashenberg's continuation as the chief executive officer of NION. Since June
1995 NION has continued to be a principal supplier of product to the Company and
the Company believes that its relationship with NION is satisfactory. The
Company purchased products from NION in the approximate amounts of $2,258,000
and $1,706,000 for the twelve months ended September 30, 1995 and 1994,
respectively. However, there can be no assurance that NION will continue to be a
significant and reliable supplier to the Company.
The Company does not have long term supply agreements with NION or any
other vendor. Although the Company believes that it could establish alternate
sources for most of its products, any delay in locating and establishing
relationships with other sources could result in product shortages and back
orders for the products, with a resulting loss of revenues to the Company.
The Company places significant emphasis on quality control. All
nutritional supplements, raw materials and finished products are subject to
sample testing, weight testing and purity testing by independent laboratories.
Trademarks and Service Marks
Most products are packaged under the Company's "private label". The
Company has registered trademarks with the United States Patent and Trademark
Office for its Master Key Plus/(R)/, Oraflow Plus/(R)/, LeanLife/(R)/, Requin
3/(R)/, Grand Master/(R)/, Phytonol/(R)/, and Phytogreen/(R)/. It has applied
for trademark registration for its Nutri-Cookie/TM/ and the ThinPen/TM/.
Competition
The Company competes with many companies marketing products similar to
those sold and marketed by the Company. It also competes intensely with other
network marketing companies in the recruitment of distributors.
There are many network marketing companies with which the Company competes
for distributors. Some of the largest of these are Nature's Sunshine, Inc.,
Herbalife International, Inc., and Rexall Sundown, Inc. Each of these companies
is substantially larger than the Company and has significantly greater
resources. The Company competes for distributors by means of its marketing
program that includes its commission structure, training and support services,
and other benefits.
Not all competitors market all types of products marketed by the Company,
and some competitors market products and services in addition to those marketed
by the Company. For example, some competitors are known for and are identified
with sales of herbal formulations, some are known for and are identified with
sales of household cleaning and personal care products, and others are known for
and are identified with sales of nutritional and dietary supplements. The
Company's principal methods of competition for the sale of products are its
responsiveness to changes in consumer preferences and its commitment to quality,
purity, and safety.
8
<PAGE>
Government Regulation
Although the Company confines its activities to marketing and distribution,
the manufacturing, processing, formulation, packaging, labeling and advertising
of the Company's products are subject to regulation by federal agencies,
including the Food and Drug Administration (the "FDA"), the Federal Trade
Commission, the Consumer Product Safety Commission, the United States Department
of Agriculture, the United States Postal Service and the United States
Environmental Protection Agency. These activities are also subject to
regulation by various agencies of the states and localities in which the
Company's products are sold.
In November 1991, the FDA issued proposed regulations designed to, among
other things, amend its food labeling regulations. The proposed regulations met
with substantial opposition. In October 1994, the "Dietary Supplement Health
and Education Act of 1994" (the "Dietary Supplement Law") was enacted. Section
11 of the Dietary Supplement Law provided that the advance notice of proposed
rule making by the FDA concerning dietary supplements was null and void. FDA
regulations that became effective on June 1, 1994 would require standard format
nutrition labeling on dietary supplements. However, because the new Dietary
Supplement Law also addresses labeling of dietary supplements, the FDA has
indicated that it will not enforce its labeling regulations until January 1,
1997. In the interim, new regulations are expected to be proposed by the FDA.
Because the FDA has not yet reconciled its existing regulations with the new
Dietary Supplement Law, the Company cannot determine to what extent any changed
or amended regulations will affect its business.
The Dietary Supplement Law did not affect the July 1, 1994 effectiveness of
the FDA's health claims regulations. Those regulations prohibit any express or
implied health claims for dietary supplements unless such claims are approved in
advance by the FDA through the promulgation of specific authorizing regulations.
Such approvals are rarely provided by the FDA. Therefore, no claim may be made
on a dietary supplement label or in printed sales literature, "that expressly or
by implication characterizes the relationship of any substance to a disease or
health-related condition". The Company cannot determine what effect currently
proposed FDA regulations, when and if promulgated, will have on its business in
the future. Such regulations could, among other things, require expanded or
different labeling, the recall or discontinuance of certain products, additional
record keeping and expanded documentation of the properties and certain products
and scientific substantiation. In addition, the Company cannot predict whether
new legislation regulating its activities will be enacted, which new legislation
could have a material adverse effect on the Company.
The Company has an ongoing compliance program with assistance from
experienced FDA counsel regarding the nature and scope of food and drug legal
matters affecting the Company's business and products. The Company is unaware
of any legal actions pending or threatened by the FDA against the Company.
Employees
At September 30, 1995, the Company employed approximately 78 persons, of
whom 76 persons were full-time employees. The majority of the Company's
employees are office, clerical and warehouse employees. The Company believes
that its relationship with its employees is good.
Litigation
To the knowledge of the management of the Company, there is no material
litigation pending or threatened against the Company nor are there any such
proceedings to which the Company is a party, except that inquiries have been
made by various state agencies concerning the marketing of the Company's
programs. In addition, a formal investigation has been commenced by the
Securities and Exchange Commission regarding possible violations by the Company
of the federal securities laws. See Item 6 herein and the Company's Report on
Form 10-QSB for the quarter ended March 31, 1996.
9
<PAGE>
PART II
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
Overview
- --------
The Company develops products that are designed for health conscious
consumers, and sells those products through its network of over 57,300
independent distributors. The Company offers a line of approximately 250
products in eight categories, including nutritional supplements, health foods,
weight management items, skin care products and other consumer products.
The Company has experienced rapid growth in both revenues and income during
the past three fiscal years. Management believes that the Company's success is
attributable primarily to the Company's emphasis on continually improving both
its marketing programs and product offerings and the efforts of its independent
distributors in attracting new distributors to the Company's network. The
Company's revenue expansion has been the result of growth in both domestic and
foreign markets. The Company intends to expand its efforts in these areas and
also expects to enter into markets in other countries outside the United States.
The rate and extent of this expansion will depend upon many factors, including
sales momentum, the effect of government regulations, and general economic
conditions.
Subsequent to the end of the Company's fiscal year ended September 30,
1995, there was substantial negative publicity regarding Kevin Trudeau (a key
distributor of the Company), his prior criminal convictions and his marketing
methods, including the promotion of the Instant Executive Program. In addition,
a court proceeding was initiated in April 1996 by the Illinois Attorney General
against Mr. Trudeau and the Trudeau Marketing Group, Inc. Mr. Trudeau consented
to a temporary restraining order, among other things, restricting his personal
recruitment of Instant Executive distributors in Illinois.
Although the Company was not named a defendant in the Illinois action, the
Company determined to initiate discussions with the Illinois Attorney General's
office to resolve concerns regarding the Company's programs. The Illinois
Attorney General's office informed the Company that its representatives have
also communicated with regulatory officials in other states regarding the
discussions with the Company. Although not finalized, the Company presently
anticipates that it will enter into an administrative order of assurance of
voluntary compliance with the State of Illinois and other states. The Company
has taken measures in anticipation of this agreement and in order to reduce
confusion and misunderstanding regarding the operation of the Company's network
marketing program, including the elimination of the Instant Executive
designation and emphasis on the proper presentation of the Company's marketing
plan. However, the qualification requirements for distributors to attain the
level of "executive distributor" and the commissions and bonuses which may be
earned as an executive distributor have not changed. The ultimate effect of
these actions and any regulatory agreements or actions on the Company's future
operations cannot be predicted, but could have a material adverse effect.
Results of Operations
- ---------------------
The following table sets forth for the periods indicated the percentages
which selected items in the consolidated Statement of Operations bear to net
sales:
10
<PAGE>
Year Ended September 30,
------------------------
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ -----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0
Cost of sales 73.4 72.7 72.8
----- ----- -----
Gross profit 26.6 27.3 27.2
Marketing, distribution and
administrative expense 25.6 24.8 18.1
----- ----- -----
Operating income 1.0 2.5 9.1
Interest and other income (expense),
net (0.4) (0.1) 0.3
----- ----- -----
Income before tax expense and
extraordinary item 0.6 2.4 9.4
Income tax expense 0.5 0.0 2.4
----- ----- -----
Income before extraordinary
item 0.1 2.4 7.0
Extraordinary item-utilization of
loss carryforward 0.5 0.0 0.0
----- ----- -----
Net income 0.6 2.4 7.0
Preferred stock conversion
expense 0.0 1.0 0.0
----- ----- -----
Net income applicable to
common shares 0.6 1.4 7.0
</TABLE>
Year Ended September 30, 1995 Compared to Year Ended September 30, 1994
- -----------------------------------------------------------------------
Net sales for the year ended September 30, 1995 increased by $14,707,000 or
84% to $32,290,000 from $17,583,000 for the year ended September 30, 1994. The
increase in net sales is primarily the result of a 51.6% growth in the number of
distributors. As of September 30, 1995, the Company had approximately 57,300
distributors compared to approximately 37,800 at September 30, 1994. Of the
19,500 increase in distributors, 7,700 were new distributors purchasing the
Instant Executive Pack, an assortment of the Company's products for $1,000. The
Instant Executive Program was an optional program which allowed distributors to
qualify for the executive level in the Company's marketing program on an
accelerated basis. In addition, a price increase was enacted on June 1, 1995 on
certain products to offset related increases in product costs. The increase in
net sales is recapped below.
<TABLE>
<CAPTION>
<S> <C>
Instant Executive Pack purchases $ 7,700,000
Growth in number of distributors 6,067,000
Sales price increase 940,000
-----------
$14,707,000
===========
</TABLE>
Also included in the increase in net sales was an increase in sales outside
the United States. Net sales in Canada increased from $2,435,000 for the year
ended September 30, 1994 to $4,157,000 for the year ended September 30, 1995.
Net sales in Puerto Rico for the year ended September 30, 1995 were $2,214,000,
up from $264,000 for the year ended September 30, 1994.
Cost of sales increased by $10,732,000 or 84% to $23,515,000 for the year
ended September 30, 1995 from $12,783,000 for the year ended September 30, 1994.
Cost of sales as a percentage of sales increased only slightly in the year ended
September 30, 1995 compared to the year ended September 30, 1994. Cost of
sales, which includes product costs, commissions and bonuses paid to
distributors, and shipping costs, is recapped as a percentage of net sales in
the following table:
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------
1995 1994
---- ----
<S> <C> <C>
Product costs 24.3% 24.1%
Commissions and bonuses paid to
distributors 40.5% 39.7%
Shipping costs 8.0% 8.9%
---- ----
72.8% 72.7%
==== ====
</TABLE>
11
<PAGE>
The percentage of product costs increased slightly as the Company balanced
increases in product costs with increases in sales prices as noted above. The
increase in the percentage of commissions and bonuses paid to distributors of
0.8% was the result of maturing distributor incentives and the balancing of
selected product incentive levels. The decrease of 0.9% in the percentage of
shipping costs resulted from economies of scale in shipping costs and a
reduction in shipping costs associated with the volume of sales from the Instant
Executive Program.
Gross profits increased by 83% or $3,973,000 from $4,801,000 for the year
ended september 30, 1994 to $8,774,000 for the year ended September 30, 1995.
Gross profit as a percentage of sales decreased from 27.3% for the year ended
September 30, 1994 to 27.2% for the year ended September 30, 1995.
Marketing, distribution and administrative expense increased $1,494,000 or
34.3% to $5,853,000 for the year ended September 30, 1995 from $4,359,000 for
the year ended September 30, 1994. As a percentage of sales, marketing,
distribution and administrative expenses decreased from 24.8% for the year ended
September 30, 1994 to 18.1% for the year ended September 30, 1995. The dollar
increase resulted primarily from increased salaries, credit card discount rate
charges, postage, travel and marketing expense to provide for the growth in
sales.
Operating income increased $2,479,000 or 561% to $2,921,000 for the year
ended September 30, 1995 compared to $442,000 for the year ended September 30,
1994, principally as a result of the higher level of sales. Operating income as
a percentage of sales increased from 2.5% for the year ended September 30, 1994
to 9.0% for the year ended September 30, 1995.
Other income increased to $88,000 for the year ended September 30, 1995
from a deficit of $11,000 for the year ended September 30, 1994. The increase
was primarily a result of a partial collection of a legal judgment in favor of
the Company and interest income earned.
The Company incurred income tax expense of $765,000 for the year ended
September 30, 1995. There was no income tax expense for the year ended
September 30, 1994 as the Company was able to utilize its loss carryforwards to
offset income. The Company has approximately $553,000 of net operating loss
available to carry forward subject to limitations imposed by the Tax Reform Act
of 1986.
Net income was $2,244,000 for the year ended September 30, 1995, an
increase of 420% compared to net income of $431,000 for the year ended September
30, 1994.
Year Ended September 30, 1994 Compared to Year Ended September 30, 1993
- -----------------------------------------------------------------------
Net sales for the year ended September 30, 1994 increased by $3,745,000 or
27.1% to $17,583,000 from $13,838,000 for the year ended September 30, 1993.
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 September
30, 1994 the Company had 37,800 distributors compared to 29,500 at September 30,
1993. The Company's net sales per average number of distributors per month
increased from $38 during the year ended September 30, 1993 to $44 for the year
ended September 30, 1994. A substantial portion of the increase in net sales
came from the Company's operations in Canada. Sales in Canada increased from
$962,000 in the year ended September 30, 1993 to $2,435,000 in the year ended
September 30, 1994.
Cost of sales increased $2,630,000 or 25.9% for the year ended September
30, 1994 to $12,782,000 from $10,152,000 for the year ended September 30, 1993.
Expenses included in cost of sales are product costs, commissions and bonuses
paid to distributors and shipping costs. For the period to period comparison,
product costs increased 26.5%, commissions and bonuses paid to distributors
increased 28.1% and shipping costs increased 15.5%.
Gross profit increased by 30.2% or $1,115,000 from $3,686,000 for the year
ended September 30, 1993 to $4,801,000 for the year ended September 30, 1994.
Gross profit as a percentage of sales increased from 26.6% for the year ended
September 30, 1993 to 27.3% for the year ended September 30, 1994.
Marketing, distribution and administrative expense increased $809,000 or
22.8% to $4,359,000 for the year ended September 30, 1994 from $3,550,000 for
the year ended September 30, 1993. As a percentage of sales, marketing,
distribution and administrative expense decreased from 25.6% for the year ended
September 30, 1993 to 24.8% for the year ended September 30, 1994. The dollar
increase resulted primarily from increased salaries, credit card fees, marketing
expenses, professional fees and telephone expense to provide for the growth in
sales. In addition,
12
<PAGE>
the Company incurred $31,000 in professional fees associated with the
consummation of the merger in June 1994 of Nutrition Express Corporation of
Colorado, Inc. and Nutrition Express Corporation of Utah, Inc. into the Company
(the "Merger").
Operating income increased $306,000 or 225% to $442,000 for the year ended
September 30, 1994 compared to $136,000 for the year ended September 30, 1993,
principally as a result of the higher level of sales. Operating income as a
percentage of sales increased from 1.0% for the year ended September 30, 1993 to
2.5% for the year ended September 30, 1994.
Interest and other expenses, net, decreased to $11,000 at September 30,
1994 from $51,000 at September 30, 1993.
The Company incurred no income tax expense for the period ended September
30, 1994 under the provisions of Financial Accounting Standards Board Statement
of Financial Accounting Standards No. 109 (Accounting For Income Taxes),
utilizing its loss carryforwards as a component of income tax expense. As of
September 30, 1994, the Company had approximately $1,797,000 of net operating
loss (of which $557,000 is limited) available to carry forward and offset
against future earnings. However, certain limitations will be placed on the
unrestricted loss carryforwards.
Net income was $431,000 for the year ended September 30, 1994, an increase
of 407% compared to net income of $85,000 for the year ended September 30, 1993.
In connection with the Merger, the Company recognized a preferred stock
conversion expense against net income of $181,243 to determine net income
applicable to common shareholders for the year ended September 30, 1994.
Liquidity and Capital Resources
- -------------------------------
The Company's liquidity improved substantially during the year ended
September 30, 1995. The Company had cash and cash equivalents of $8,960,000 at
September 30, 1995 compared to $639,000 at September 30, 1994. Net cash
received from operations for the year ended September 30, 1995 was $5,132,000
compared to $556,000 for the year ended September 30, 1994. The Company also
received net proceeds of $4,108,000 from a public offering of its securities
completed in July 1995. The Company used approximately $408,000 for the
purchase of property and equipment for the year ended September 30, 1995
compared to $167,000 for the year ended September 30, 1994. The increase in net
cash provided by operations was a result of record sales and improved
operations.
The Company had working capital of $6,082,000 at September 30, 1995
compared to $546,000 at September 30, 1994. A substantial portion of the
increase in working capital is a result of the increase in cash and cash
equivalents due to the improved operations and the net proceeds received from
the public offering.
The Company currently anticipates expanding its operations in established
markets and into new foreign markets. The Company believes it has adequate
funding from its internal cash resources to create and staff initial
sales/fulfillment centers and to provide the initial inventory required for its
planned expansion and other capital needs for the next twelve months.
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 next twelve months.
13
