<PAGE>
As filed with the Securities and Exchange Commission on March 18, 1997
Registration No. 33-92274
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________
POST-EFFECTIVE
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
NUTRITION FOR LIFE INTERNATIONAL, INC.
--------------------------------------
(Name of Small Business Issuer)
Texas 5122 76-0416176
----- ---- ----------
(State or jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification No.)
9101 JAMEEL
HOUSTON, TEXAS 77040
(713) 460-1976
(Address including zip code, and telephone number, including area
code, of registrant's principal executive offices)
DAVID P. BERTRAND
9101 JAMEEL
HOUSTON, TEXAS 77040
(713) 460-1976
(Name, address, including zip code, and telephone number, including
area code of agent for service)
Copies of communications to:
ROBERT M. BEARMAN, ESQ.
BEARMAN TALESNICK & CLOWDUS
PROFESSIONAL CORPORATION
1200 17TH STREET, SUITE 2600
DENVER, COLORADO 80202
TELEPHONE: (303) 572-6500
FACSIMILE: (303) 572-6511
Approximate date of commencement of proposed sale to the public:
As soon as practicable after effective date of Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 of the Securities Act of 1933,
please check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
________________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Item in Form S-1 Caption in Prospectus
---------------- ---------------------
<S> <C>
1. Forepart of the Registration Statement and Facing Page; Outside Front Cover Page
Outside Front Cover of Prospectus
2. Inside Front and Outside Back Cover Pages of Inside Front Cover Page
Prospectus
3. Summary Information Risk Factors and Ratio Prospectus Summary; Risk Factors
of Earnings to Fixed Charges
4. Use of Proceeds Prospectus Summary; Use of Proceeds
5. Determination of Offering Price Risk Factors
6. Dilution Risk Factors; Dilution
7. Selling Security Holders Not Applicable
8. Plan of Distribution Cover Page
9. Description of Securities to be Registered Description of Securities
10. Interests of Named Experts and Counsel Legal Matters; Experts
11. Information with Respect to the Registrant The Company; Business; Legal Proceedings;
Price Range of Securities; Selected
Financial Data; Dividend Policy; Prospectus
Summary; Management's Discussion and
Analysis of Financial Condition and Results
of Operations; Management; Principal Shareholders;
Certain Transactions
12. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act
Liabilities
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 18, 1997
AMENDED PROSPECTUS
NUTRITION FOR LIFE INTERNATIONAL, INC.
434,416 Shares of Common Stock
Nutrition for Life International, Inc. (the "Company") offered 920,000
common stock purchase warrants (the "Warrants"), in a securities offering
pursuant to a Prospectus dated July 10, 1995. As adjusted for a two-for-one
stock split effective December 8, 1995, the holder of one Warrant is entitled to
purchase one share of Common Stock at an exercise price of $3.75 per share.
Prior to the date of this Amended Prospectus, 485,584 Warrants to purchase
485,584 shares of Common Stock have been exercised. Accordingly, this Amended
Prospectus relates to the offering by the Company of 434,416 shares of Common
Stock which may be acquired by exercise of 434,416 Warrants.
The exercise period of the Warrants commenced on July 10, 1995 and extends
for three years unless the Warrants are earlier called for redemption by the
Company. The Company may call the Warrants for redemption on 30 days prior
written notice at a price of $.05 per Warrant within the term of the Warrants if
the closing bid price of the Company's Common Stock exceeds the exercise price
of the Warrants by at least 50% ($5.63) during a period of at least 20 of the 30
trading days immediately preceding the notice of redemption and the Company has
in effect a current registration statement. This Amended Prospectus is part of a
current registration statement. The Company has not elected to call the Warrants
for redemption, but may choose to do so in the future.
In addition, in connection with the Company's public offering of securities
pursuant to a Prospectus dated July 10, 1995, the Company sold to Cohig &
Associates, Inc. and Neidiger/Tucker/Bruner, Inc. and their designees, the
Representatives of the Underwriters, for $100 options to purchase an aggregate
of 160,000 shares of Common Stock and 80,000 Warrants to purchase 80,000 shares
of Common Stock (the "Representatives' Securities"). The Representatives'
Securities are exercisable for a four-year period which commenced July 10, 1996
at $3.225 per share of Common Stock and at $.15 per Warrant. The Warrants have
the same exercise price ($3.75) as the Warrants issued to the public. This
Amended Prospectus also relates to the Representatives' Securities.
The Company's Common Stock and Warrants are traded on the Nasdaq National
Market under the symbols NFLI and NFLIW, respectively. On March 17, 1997, the
closing prices of the Common Stock and Warrants were $9.88 per share and $6.63
per Warrant, respectively. See "Price Range of Securities."
_____________
FOR INFORMATION CONCERNING CERTAIN RISKS, SEE "RISK FACTORS".
_____________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
================================================================================
<TABLE>
<CAPTION>
PRICE TO PUBLIC UNDERWRITING PROCEEDS TO
DISCOUNTS(1) COMPANY(1)(2)(3)
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Per Share...... $ 3.75 $0.00 $ 3.75
- --------------------------------------------------------------------------------
Total.......... $1,629,060 $0.00 $1,629,060
================================================================================
</TABLE>
(1) This Offering is being conducted by the Company. No commissions will be
paid in connection with the exercise of any of the Warrants.
(2) Before deducting offering expenses payable by the Company of
approximately $70,000.
(3) Assumes exercise of all Warrants, of which there is no assurance.
The date of this Amended Prospectus is March __, 1997
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT
IMPLY THAT THERE HAS NOT BEEN ANY CHANGE IN THE INFORMATION SET FORTH HEREIN OR
TO THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS AMENDED PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY
SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH IT IS UNLAWFUL FOR SUCH PERSON MAKING SUCH OFFER OR
SOLICITATION.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934 and in accordance therewith files periodic reports, proxy
statements and other information with the Securities and Exchange Commission
("the Commission"). Reports, proxy statements and other information concerning
the Company may be inspected and copied at prescribed rates at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549 as well as at its offices at
Northwestern Atrium Center, 500 W. Madison St., Ste. 1400, Chicago, Illinois
60661 and Seven World Trade Center, Ste. 1300,New York, New York 10048. Copies
of such material can be obtained from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth St., N.W., Room 1024, Washington, D.C.
20549 at prescribed rates. Electronic filings are publicly available through the
Commission's Web site (www.sec.gov).
The Company intends to furnish its shareholders with annual reports, which
will include audited financial statements.
The Company has filed with the Commission a Registration Statement under
the Securities Act of 1933, as amended, with respect to the securities offered
hereby. This Amended Prospectus does not contain all of the information set
forth in the Registration Statement and exhibits thereto. For further
information with respect to the Company and the securities offered hereby,
reference is made to the Registration Statement, including the exhibits filed as
a part thereof. Statements herein concerning the provisions of any contract or
other document are not necessarily complete and, in each instance, reference is
made to the contract or other document filed as an exhibit to the Registration
Statement. Any interested party may obtain copies of all or any portion of the
Registration Statement and its exhibits at prescribed rates from the Public
Reference Section of the Commission at its principal office at Judiciary Plaza,
450 Fifth St., N.W., Room 1024, Washington, D.C. 20549.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Amended Prospectus includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All statements other than statements of historical
fact included in this Amended Prospectus, including without limitation, the
statements under "Prospectus Summary," "Risk Factors," "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" regarding the Company's financial position and
liquidity, the Company's operations and proposed operations, and other matters,
are forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from the Company's
expectations are disclosed in this Amended Prospectus, including without
limitation in conjunction with the forward-looking statements included in this
Amended Prospectus.
2
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
This summary is qualified in its entirety by the more detailed information
and financial statements and related notes appearing elsewhere in this
Prospectus or incorporated by reference herein. Throughout this Prospectus,
Nutrition For Life International, Inc. and its predecessors are referred to
collectively as the "Company". All information with respect to the Common Stock
and per share amounts herein have been adjusted, unless otherwise indicated, to
give effect to a three-for-five split of the Company's Common Stock effected in
July 1995 and a two-for-one split of the Company's Common Stock effected in
December 1995.
THE COMPANY
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 approximately
87,200 distributors. The Company offers a product line of approximately 320
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 Company assists its new distributors in starting their
business without the 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 international teleconferencing calls, international and
regional seminars, a proprietary "monthly" magazine, business training systems
and a site on the Worldwide Web of the Internet (www.nutritionforlife.com).
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 a
substantial increase in the number of distributors. The number of distributors
increased from approximately 37,800 on September 30, 1994 to 57,300 on September
30, 1995. During the year ended September 30, 1996, the number of distributors
increased to 87,400. At December 31, 1996, the Company had approximately 87,200
distributors. 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. In addition, in 1996 the Company's marketing program became the
subject of regulatory scrutiny and the Company was named as a defendant in class
action lawsuits. These matters have had a material effect on the Company's
operations and financial condition and could materially impact the Company in
the future. See "Risk Factors", "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Legal Proceedings".
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, Canada, Guam, Korea, the Philippines, Puerto Rico and the
United Kingdom. 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; and (3) expanding its marketing
activities into new international markets. The Company also intends to pursue
potential opportunities for growth through mergers and acquisitions of
complimentary businesses.
The Company's offices are located at 9101 Jameel Street, Houston, Texas
77040. Its telephone number is (713)460-1976.
- --------------------------------------------------------------------------------
3
<PAGE>
- -------------------------------------------------------------------------------
THE OFFERING
Securities offered .............................. Common Stock, $.01 par value
Exercise Price Per Warrant....................... $3.75
Common Stock outstanding prior to the
Offering ........................................ 5,589,701 shares
Common Stock outstanding after the
Offering (1) ................................. 6,024,117 shares
Use of proceeds ................................. For general corporate
purposes and working capital
NASDAQ Symbols:
Common Stock ............................... NFLI
Warrants ................................... NFLIW
_________
(1) Assuming the exercise of all outstanding Warrants. Does not include shares
of Common Stock issuable upon exercise of the Representatives' Securities
and options issued or reserved for issuance by the Company. See
"Management"; "Description of Securities" and "Financial Statements".
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA)
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
SEPTEMBER 30, DECEMBER 31,
------------- ------------
STATEMENTS OF OPERATIONS DATA: 1996 1995 1996 1995
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales........................................ $97,404 $32,290 $19,269 $21,262
Gross profit..................................... 29,577 8,774 5,085 6,770
Operating income (loss).......................... 13,347 2,921 (496) 3,869
Net income (loss)................................ 8,705 2,244 (4,496) 2,553
Earnings (loss) per share:
Primary........................................ 1.36 .65 (.71) .40
Fully diluted.................................. 1.36 .51 (.71) .39
Weighted average number of shares outstanding(1):
Primary........................................ 6,405 3,437 6,320 6,419
Fully diluted.................................. 6,405 4,444 6,320 6,555
Operating Data:
Number of distributors (2)..................... 87,400 57,300 87,200 68,800
Average monthly sales per distributor (3)...... $ 112 $ 58 $ 74 $ 112
Total products offered......................... 320 270 320 270
Balance Sheet Data:.............................. DECEMBER 31,
1996
----
(UNAUDITED)
Working capital................................ $ 9,280
Total assets................................... 29,155
Total liabilities.............................. 16,075
Stockholders Equity............................ 13,080
</TABLE>
______________________
(1) The weighted average number of shares of Common Stock outstanding for each
period presented has been calculated giving effect to a three-for-five
stock split on July 10, 1995 and a two-for-one stock split on December 8,
1995, and after giving effect to dilutive stock options and warrants.
(2) Includes "active" distributors only at the end of the period indicated. The
Company regards distributors as "active" if they have purchased product
from the Company during the preceding twelve months.
(3) Computed using a simple average for the periods indicated.
- -------------------------------------------------------------------------------
5
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be considered carefully in evaluating the Company, its
business and this Offering before purchasing any of the Common Stock offered
hereby.
RISKS RELATED TO THE COMPANY
LOSS IN MOST RECENT QUARTER. Although the Company experienced rapid growth
in sales and income during its last three fiscal years, it incurred a
substantial loss in its most recently completed quarter, which ended December
31, 1996. This loss was attributable primarily to accrual of expenses related to
the conditional settlement of class action lawsuits against the Company.
However, the Company also incurred a loss from operations in the December
quarter and experienced a decline in net sales in that quarter as compared to
the quarter ended December 31, 1995. In addition, the Company experienced
significant increases in both cost of sales and marketing, distribution and
administrative expenses as a percentage of net sales as compared to the quarter
ended in December 1995. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The Company has increased its
infrastructure during its growth phase. Particularly in view of the Company's
increased level of expenditures, the Company's future operating results will be
negatively impacted if the Company is not successful in regaining its growth in
sales.
DISTRIBUTOR NETWORK. The Company's products are distributed through an
extensive network marketing system of distributors. Distributors are independent
contractors who purchase products directly from the Company for resale and/or
for their own use. Distributors typically work on a part-time basis for the
Company, and may engage in other business activities, including the sale of
products offered by competitors of the Company. The Company has experienced
rapid growth in its number of distributors during the past three fiscal years.
At September 30, 1996, the Company had 87,400 distributors. However, at December
31, 1996, the number of distributors had decreased slightly to 87,200. The
Company's growth depends to a significant degree on its ability to retain and
motivate its existing distributors and to attract new distributors by continuing
to offer new products and new marketing programs.
REGULATORY SCRUTINY AND LEGAL PROCEEDINGS. The Company's network marketing
system is subject to governmental laws and regulations generally directed at
ensuring that product sales are made to consumers of the products and that
compensation and advancement within the marketing organization is based on sales
of products rather than investment in the organization. These laws and
regulations include the federal securities laws, matters administered by the
Federal Trade Commission and various state anti-pyramid and business opportunity
laws. Although the Company believes that it is in compliance with all such laws
and regulations, the Company remains subject to the risk that, in one or more of
its present or future markets, its marketing system or the conduct of certain
distributors could be found not to be in compliance with applicable laws or
regulations. Failure by the Company or significant distributors to comply with
these laws and regulations could have an adverse material effect on the Company
in a particular market or in general.
To become a distributor of the Company, a person must be sponsored by an
existing distributor, sign the official Distributor Agreement, and purchase a
"distributor success kit" from the Company, which is currently priced at $49.
The Company's distributors earn the right to receive commissions upon obtaining
the level of "executive." Executive level distributors may earn commissions on
sales generated by other distributors in their downline organization. There are
three ways for a distributor to meet the requirement to become an executive,
which can be met the same day he or she enrolls as a distributor or over an
extended period of time at the election of the distributor. The Company
previously used the terminology of "Instant Executive Program" to reference the
qualifications for becoming an executive distributor on an accelerated basis.
The Instant Executive Program, particularly as marketed by Kevin Trudeau, a key
independent distributor, and his marketing organization, has been the subject of
legal and regulatory scrutiny.
In April 1996 the Attorney General of the State of Illinois (the "Attorney
General") filed suit against the Trudeau Marketing Group, Inc., Kevin Trudeau
and Jules Leib, People v. Trudeau (the "Illinois Suit") alleging
-----------------
6
<PAGE>
violations of the Illinois Consumer Fraud and Deceptive Practices Act and the
Illinois Business Opportunities Sales Law of 1995 by, among other things,
operating a "pyramid sales scheme." Mr. Leib works with Mr. Trudeau. In
addition, the Secretary of State of the State of Illinois 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. See "Business-Distribution and Marketing" for further information
regarding Mr. Trudeau.
The Company was not named as a defendant in the Illinois Suit, but the
Company's management viewed the Illinois Suit as an opportunity to discuss the
Company's marketing program and to resolve confusion surrounding the program. On
July 16, 1996, the Company entered into an "Assurance of Voluntary Compliance"
(the "AVC") with the Illinois Attorney General. The AVC preserves the ability of
a new distributor to become an executive distributor the day that he or she
enrolls by purchasing at least $1,000 in qualifying products and by joining the
Order Assurance Program and Master Developer Series. Under the AVC, the Company
will maintain its same executive level qualifications, but to aid clarification,
it will no longer use the "Instant Executive" designation. The Company entered
into similar agreements with the States of Florida, Hawaii, Idaho, Kansas,
Kentucky, Michigan, Missouri, New Jersey and Pennsylvania. The Company has
agreed that in Florida, distributors who want to receive commissions must state,
when placing orders, that they have sold to consumers 70% of their prior
comissionable product purchase. The Company has agreed to establish procedures
to independently verify consumer sales on a random basis and to sanction
distributors submitting false information. The Company may negotiate agreements
with other states. See "Business-Distribution and Marketing".
The effect of the implementation of the measures in the AVC, including the
requirement that executive distributors must make at least five retail sales in
a month, and of any agreements the Company may make with other states, is
uncertain. Implementation of these agreements may be expensive and could make
the program less attractive to distributors. These factors could impact the
Company's future operating results. Moreover, because the Company has not
operated under these agreements for an extended period of time, there may be
other consequences which are not presently ascertainable and which could
adversely affect the Company.
The Company has been informed that in July 1996, Mr. Trudeau signed a
consent decree resolving the lawsuit with the Illinois Attorney General and
entered into a settlement agreement with the Illinois Secretary of State
resolving the Cease and Desist Order. Among other things, Mr. Trudeau has agreed
to abide by all applicable provisions of the AVC entered into between the
Company and the Illinois Attorney General. The Company has also been informed
that Mr. Leib signed a consent decree with the Illinois Attorney General.
In April 1996, the Company received notice from the Securities and Exchange
Commission of a formal order of private investigation into possible violations
by the Company of the federal securities laws. In December 1996 the Company
received a letter from the Securities and Exchange Commission notifying the
Company that the staff inquiry had been terminated and that no enforcement
action had been recommended at that time to the Commission.
The Company does not believe that the manner in which it markets its
products constitutes a "pyramid scheme" or a "security." The only financial
requirement to become a distributor is to purchase a "distributor success kit"
which is currently priced at $49. The Company does not pay a fee or other
compensation to distributors as direct remuneration for enrolling distributors
in their "downline"; and the Company encourages all distributors to retail their
products to consumers who are not Company executives. In addition, the Company
does not pay a fee or other compensation to distributors for sales of product to
their downline; thus, all product purchases are to be consumed by the
distributor or sold to the ultimate consumer. The Company believes that the
efforts it has undertaken with the Illinois Attorney General and regulatory
authorities in other states, which culminated in the AVC in Illinois and
elsewhere, will assist the Company in complying with government laws and
regulations in the future. Nonetheless, there can be no assurance that the
appropriate authorities in any states will not initiate court proceedings
against the Company for violation of applicable laws. In particular, there can
be no assurance that one
7
<PAGE>
or more states will not contend that the Company or its distributors unduly
emphasize recruiting new distributors, unduly reward those product sales made in
connection with the recruitment of new executives, unduly emphasize immediate
qualifications as an executive, unduly rely upon the Company's Order Assurance
Program and/or inadequately promote product sales.
CLASS ACTION LITIGATION. In August 1996, a suit was filed against the
Company in the United States District Court for the Southern District of Texas,
Houston Division (the "Federal Action"). Also named as defendants were Kevin
Trudeau, a key distributor of the Company, the Trudeau Marketing Group, Inc.,
Bernard Sherman, the largest beneficial owner of the Company's Common Stock,
certain officers of the Company, and Cohig & Associates, Inc. and
Neidiger/Tucker/Bruner, Inc., the investment banking firms which previously
served as underwriters of the July 1995 public offering of the Company's
securities. The Federal Action was brought as a class action on behalf of
persons who became "instant" executive distributors of the Company and on behalf
of persons who purchased the Company's Common Stock and Warrants between July
11, 1995 and July 16, 1996.
The principal allegations of the complaint in the Federal Action are that
certain aspects of the executive distributor compensation program constituted an
illegal pyramid scheme and the sale of an unregistered security and that the
Company failed to disclose the alleged illegality of the program and failed to
completely disclose Mr. Trudeau's past. The plaintiffs seek unspecified damages,
costs and fees of litigation and punitive damages.
In August 1996, a suit was also filed against the Company and the same
defendants named in the Federal Action in the District Court of Harris County,
Texas (the "State Action"). The State Action was brought as a class action on
behalf of persons who purchased Common Stock and Warrants of the Company during
the period from July 11, 1995 through July 16, 1996.
The principal allegations of the complaint in the State Action are
substantially similar to the Federal Action, i.e., that certain aspects of the
executive distributor compensation program constituted an illegal pyramid scheme
and that the Company failed to disclose that its outstanding financial results
were directly attributable to the questioned aspects of its marketing practices
and failed to adequately disclose Mr. Trudeau's past. The plaintiffs seek
unspecified damages, costs and fees of litigation and punitive damages.
In January 1997, the Company reached two preliminary settlement agreements
which should resolve the class action lawsuits. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Legal
Proceedings".
NEGATIVE MEDIA AND OTHER REPORTS. The Company's ability to continue its
growth is dependent upon the Company's success in retaining and motivating its
existing distributors and in attracting new distributors. A significant part of
the Company's recent growth is attributable to the efforts of Kevin Trudeau and
his marketing organization (collectively referred to as "Trudeau"). Mr. Trudeau
has twice been convicted of criminal charges during the past 10 years. See
"Business-Distribution and Marketing" for biographical information concerning
Mr. Trudeau. Trudeau has been particularly successful in recruiting new
distributors who quickly attain executive level status with the Company.
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
marketing of the instant executive program. Similar negative reports were
published on the same day by Bloomberg, a news wire service, and by cable
television station CNBC. Other negative media reports occurred subsequently.
The Company believes that the negative reports in the financial media has
had a negative impact on the Company's retention and recruitment of
distributors. If the negative reports in the financial media or any legal
developments continued, distributor recruitment and/or retention could suffer,
and there could be an adverse effect on the Company's future sales. Moreover,
even if the Company's operating results were unaffected, the negative media
coverage could adversely impact the price of the Common Stock.
8
<PAGE>
In addition, an individual who several years ago was associated with, and a
major shareholder of a predecessor of the Company, has embarked on a campaign to
discredit and harm the Company and Mr. Trudeau. He has published negative
statements on the Internet and elsewhere regarding the Company and Mr. Trudeau
and has contacted various regulatory agencies to complain about the Company and
Mr. Trudeau. In separate actions, the Company and Mr. Trudeau brought defamation
lawsuits against this individual. The Company was awarded a default judgment in
November 1996 and in February 1997 the court entered a partial final judgment
enjoining the individual from making any communication about the Company. In his
suit, Mr. Trudeau was awarded damages in a default judgment and this individual
was enjoined from publishing the statements alleged to be defamatory in Mr.
Trudeau's complaint against him. The individual has filed for bankruptcy and the
Company does not expect to collect any part of its monetary judgment. There is a
risk that this individual and/or others may engage in actions which would damage
the reputation of the Company and adversely affect the Company's operations.
STATEMENTS AND OTHER ACTIONS BY DISTRIBUTORS. The Company's distributors
are required to sign the Company's official Distributor Agreement which requires
them to abide by the Company's policies. Nonetheless, in certain instances
distributors have created promotional material which does not accurately
describe the Company's marketing program or may have made statements regarding
potential earnings or other matters not in accordance with the Company's
policies. Although the Company was not sued by regulatory authorities, such
actions lead to increased regulatory scrutiny as described above. In order to
assure itself that its policies and practices and those of its independent
distributors conform to law and fairly protect the interests of consumers, the
Company entered into an AVC with the State of Illinois and similar agreements
with several other states. Among other things, the Company agreed in the AVC to
more carefully monitor against misdescriptions by distributors of the Company's
executive compensation plan. The Company has approximately 87,200 distributors.
Although the Company intends to increase its efforts to monitor its
distributors' statements and activities, there can be no assurance that the
Company will be able to accomplish this objective and the Company could be
subject to additional regulatory scrutiny and potential claims. In addition,
distributors, including key distributors such as Kevin Trudeau, could make
predictive statements about the Company's operations or other unauthorized
remarks regarding the Company which the Company may be unable to control. Mr.
Trudeau and other distributors are not authorized to make such statements on
behalf of the Company. Nonetheless, statements or actions by Mr. Trudeau or
other distributors could also adversely affect the Company.
COMPETITION. The business of distributing and marketing vitamins and
minerals, personal care items, weight management items, and other products
offered by the Company is highly competitive. Numerous manufacturers,
distributors and retailers compete actively for consumers. Many of the Company's
competitors are substantially larger than the Company and have greater financial
resources. The market is highly sensitive to the introduction of new products or
weight management plans that may rapidly capture a significant share of the
market. As a result, the Company's ability to remain competitive depends in part
upon the successful introduction of new products.
The Company is subject to significant competition from other marketing
organizations for the recruitment of distributors. The Company's ability to
remain competitive depends, in significant part, on the Company's success in
recruiting and retaining distributors. In the last quarter of the fiscal year
ended September 30, 1995 and during the year ended September 30, 1996, one
executive level distributor, Kevin Trudeau and his marketing organization, made
a significant contribution to the growth of the Company. See "Business-
Distribution and Marketing". Mr. Trudeau and the other distributors of the
Company are not obligated to continue acting as distributors of the Company.
There can be no assurance that the Company's programs for recruitment and
retention of distributors will be successful. See "Business-Competition".
DEPENDENCE ON KEY PERSONNEL. The Company's future success depends on the
continued availability of certain key management personnel, including David P.
Bertrand and Jana Mitcham, founders, officers and directors of the Company. The
Company has obtained "key man" insurance on the lives of Mr. Bertrand and Ms.
Mitcham with benefit amounts to the Company of $1,060,000 and $660,000,
respectively. The Company has also entered into employment agreements with each
of Mr. Bertrand and Ms. Mitcham. The Company's continued growth and
profitability also depends on its ability to attract and retain other management
personnel.
9
<PAGE>
FAMILY RELATIONSHIPS. At December 31, 1996, the Company employed
approximately 210 persons. Of these 210 persons, 15 persons have a family
relationship, through birth or marriage, with either David P. Bertrand or Jana
Mitcham, executive officers of the Company. The Company's management believes
that all of the Company's employees have been employed by the Company on the
basis of their qualifications, and that their retention by, and advancement
within, the Company has been, and will continue to be, determined by their
individual performances as an employee of the Company, and not due to any family
relationship. Nonetheless, due to the large number of family relationships, the
potential for conflicts of interest could be significant.
GOVERNMENT REGULATIONS. 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 October 1994 the "Dietary Supplement Health
and Education Act of 1994" was enacted. The FDA has not yet reconciled its
existing regulations with this new legislation. Therefore, the Company cannot
determine to what extent any changed or amended regulations will affect its
business. 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 of certain products and
scientific substantiation. In addition, negative publicity associated with a
regulatory inquiry regarding products sold by the Company may adversely affect
the Company. See "Business-Distribution and Marketing". 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. See
"Business-Government Regulations".
EXPANSION INTO FOREIGN MARKETS. Although the Company intends to continue to
expand into foreign markets, there can be no assurance that the Company can open
markets on a timely basis or that such new markets will prove to be profitable.
Significant regulation and legal barriers must be overcome before marketing can
begin in any foreign market. Also, before marketing has commenced, it is
difficult to assess the extent to which the Company's products and sales
techniques will be successful in any given country. In addition to significant
regulatory barriers, the Company may also expect problems related to entering
new markets with different cultural bases and legal systems from those
encountered in the past. See "Business-Markets". Moreover, expansion of the
Company's operations into new markets entails substantial working capital and
capital requirements associated with regulatory compliance.
EFFECT OF EXCHANGE RATE FLUCTUATIONS. The Company has commenced efforts to
expand its marketing organization in foreign countries. As a result, exchange
rate fluctuations may have a significant effect on its sales and the Company's
gross margins. Further, if exchange rates fluctuate dramatically, it may become
uneconomical for the Company to establish or continue activities in certain
countries.
NO FIRM CONTRACTS WITH SUPPLIERS OR MANUFACTURERS. The Company does not
have any written contracts with any of its suppliers or manufacturers or
commitments from any of its suppliers or manufacturers to continue to sell
products to the Company. A substantial portion of the products purchased by the
Company have been supplied by NION Laboratories ("NION"). Richard S. Kashenberg,
a director of the Company, served as the chief executive officer of NION until
December 1996. Mr. Kashenberg is currently a consultant to 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 positions with
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. 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. Accordingly, there is a
risk that any of the Company's suppliers or manufacturers could discontinue
selling their products to the Company for any reason. Although the Company
believes that it could establish alternate sources for most of its products, any
delay in
10
<PAGE>
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. In addition, such delays could interrupt momentum in
growth of product sales and distributor recruitment.
PRODUCT LIABILITIES. Although the Company does not engage in the
manufacture of any of the products it markets and distributes, the Company could
be exposed to product liability claims. The Company has not had any such claims
to date. Although the Company maintains product liability insurance which it
believes to be adequate for its needs, there can be no assurance that the
Company will not be subject to claims in the future or that its insurance
coverage will be adequate.
DIVIDENDS. The Company declared an initial cash dividend of $.02 per share
of Common Stock in September 1996. The Company paid a dividend of $.02 per
share of Common Stock in January 1997 and has authorized the payment of a
dividend of $.02 per share of Common Stock in March of 1997. Although it is the
Company's present intent to declare dividends on a quarterly basis, the
determination of whether to pay dividends will be made by the Board of Directors
and will depend on many factors. See "Dividend Policy".
RISKS OF THE OFFERING
CONTROL BY PRINCIPAL SHAREHOLDERS. Following completion of this offering,
the Company's officers and directors and their affiliates will beneficially own
approximately 39% of the then issued and outstanding shares of Common Stock.
There are no cumulative voting rights under the Company's Articles of
Incorporation and, therefore, these shareholders could possess the ability to
elect all of the directors of the Company, to increase its authorized capital,
to dissolve or merge the Company or to sell its assets and generally to exert
substantial control over the business and operations of the Company. See
"Principal Shareholders" and "Description of Securities".
SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of this offering, the
Company will have 6,024,117 shares of Common Stock outstanding. The shares
issued in this offering and the shares previously outstanding will be freely
tradeable without restriction under the Securities Act of 1933, as amended (the
"Securities Act"), except for any shares held by an "affiliate" of the Company,
as that term is defined in Rule 144 under the Securities Act.
The Company's officers and directors and their affiliates own beneficially
2,365,952 shares of Common Stock, of which 2,022,852 shares are currently
eligible for sale in the public market pursuant to Rule 144. In addition, the
Company has agreed to register the 360,000 shares issued to Shermfin Corp. in
July 1995 at the request of Shermfin Corp. during the period commencing July 10,
1996 and ending July 10, 1999. The Company has also agreed to register an
aggregate of 120,000 shares of Common Stock for resale by KT Corp., an affiliate
of Kevin Trudeau, and Nightingale-Conant Corporation, a supplier to the Company.
See "Shares Eligible for Future Sale".
INABILITY TO EXERCISE WARRANTS. It is possible that the Warrants could be
acquired by persons residing in jurisdictions where the Company is unable to
qualify the shares underlying the Warrants for issuance upon exercise. Warrant
holders residing in such jurisdictions would have to sell their Warrants or they
would be called for redemption. Also, it is possible the Company may be unable,
for unforeseen reasons, to cause the registration statement of which this
Amended Prospectus is a part, to remain current. If a current registration
statement is not in effect, the Warrants cannot be exercised. If that occurred,
the Company would extend the period for redemption so that holders of the
Warrants would be permitted a minimum period of 30 days to exercise the
Warrants.
POTENTIAL REDEMPTION OF THE WARRANTS. The Company may call all of the
Warrants for redemption at a redemption price of $.05 per Warrant on 30 days'
prior written notice within the term of the Warrants if the closing bid price of
the Common Stock exceeds the exercise price by at least 50% ($5.63) during a
period of at least 20 of the 30 trading days immediately preceding the notice of
redemption and the Company has in effect a current registration statement. If
the Company determines to redeem the Warrants, holders of Warrants could either
exercise their warrants, sell such Warrants in the market or tender their
Warrants to the Company for redemption. See "Description of Securities -
Warrants".
11
<PAGE>
REGULATION M. Pursuant to Regulation M promulgated under the Securities
Exchange Act of 1934, as amended, certain persons must refrain from purchasing
and other market making activities during a distribution of securities. The
provisions of Regulation M may impact the liquidity of the market for the
Company's securities if, as contemplated, certain holders of the
Representatives' Securities acquire Common Stock pursuant to this Prospectus.
These brokerage firms may need to suspend any then existing market making
activities during the period when their affiliates are effecting sales of Common
Stock.
SHARES AVAILABLE FOR ISSUANCE; POSSIBLE ADVERSE IMPACT OF ISSUANCE OF
PREFERRED STOCK. The Company is authorized to issue 20,000,000 shares of Common
Stock and 1,000,000 shares of Preferred Stock. A total of 6,024,117 shares of
Common Stock will be issued and outstanding immediately after the offering.
Therefore, a substantial number of authorized shares of Common Stock will be
available for issuance. These shares may be issued at the discretion of the
Board of Directors of the Company in accordance with the Texas Business
Corporation Act (the "TBCA"). Unless otherwise required by the TBCA, as in the
case of certain extraordinary actions, shareholder approval will not be required
for the issuance of additional shares of Common Stock.
The Company has available for issuance 1,000,000 shares of Preferred Stock.
There are currently no shares of Preferred Stock outstanding. Shares of
Preferred Stock may be issued by the Company in the future without shareholder
approval and upon such terms as the Company's Board of Directors may determine.
The rights of the holders of Common Stock will be subject to and may be affected
adversely by the rights of holders of any Preferred Stock that may be issued in
the future. The availability of Preferred Stock, while providing desired
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of discouraging a third party from acquiring
control of the Common Stock. The Company has no plans to issue any shares of
Preferred Stock. See "Description of Securities - Preferred Stock".
DILUTION. Purchasers of Common Stock in the offering will suffer immediate
dilution of $1.37 per share or 36.5% in the net tangible book value of their
investment. See "Dilution".
12
<PAGE>
THE COMPANY
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. ("NEC-Colorado")
and Nutrition Express Corporation of Utah, Inc. ("NEC-Utah"). The Merger was
effected in June 1994.
Prior to the Merger each of NEC-Colorado and NEC-Utah owned a 50% interest
in Nutrition for Life International, a Texas partnership formed in 1989 (the
"Partnership"). As a result of the Merger, the assets and liabilities of the
Partnership, as well as those of NEC-Colorado and NEC-Utah, have become the
assets and liabilities of the Company. The Company has continued the business
operations of the Partnership as they were previously conducted. The Merger was
effected primarily to eliminate the cumbersome structure of the Partnership and
its two public corporate partners, which was costly to maintain and difficult
for distributors and others to understand.
The Merger was accounted for as a reorganization of entities under common
control in a manner similar to a pooling of interests. Accordingly, the
Company's financial statements have been restated for all periods prior to the
Merger to reflect the results of operations, financial positions and cash flows
of the companies in the Merger on a historical cost basis. See "Financial
Statements".
The Company's offices are located at 9101 Jameel Street, Houston, Texas
77040. Its telephone number is (713) 460-1976.
13
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the 434,416
shares of Common Stock being offered by the Company are estimated to be
$1,559,060. Net proceeds of the offering will be used for general corporate
purposes and working capital. Pending these uses, the net proceeds of this
offering will be invested in short-term, interest bearing, investment grade
securities, including government obligations or other money market instruments.
DILUTION
The net tangible book value of the Company at December 31, 1996 was
$12,789,214 or $2.30 per share. Net tangible book value per share represents
the total net tangible assets of the Company less total liabilities, divided by
the number of shares of Common Stock outstanding. Without taking into effect
any other changes in the net tangible book value after December 31, 1996, other
than to give effect to the sale by the Company of an additional 434,416 shares
of Common Stock pursuant to exercise of Warrants (at the exercise price of $3.75
per share) and the receipt of net proceeds therefrom of $1,559,060, the net
tangible book value of the Company at December 31, 1996 would have been
$14,348,274 or $2.38 per share. This represents an immediate increase in the
net tangible book value of $.08 per share to existing stockholders and an
immediate dilution of $1.37 per share to new investors. The following table
illustrates this per share dilution:
<TABLE>
<S> <C>
Public offering price per share of Common Stock...................................................... $3.75
Net tangible book value per share of Common Stock at December 31, 1996........ $2.30
Increase per share of Common Stock attributable to purchase of Common Stock
by Warrant holders in this offering.......................................... .08
---
Net tangible book value per share of Common Stock at December 31, 1996, as
adjusted to reflect this offering................................................................... $2.38
-----
Dilution per share of Common Stock to new investors in this offering................................. $1.37
=====
Dilution as a percentage of offering price........................................................... 36.5%
=====
</TABLE>
DIVIDEND POLICY
The Company declared its first cash dividend on its Common Stock in
September 1996. The dividend of $.02 per share was paid in October 1996. Another
dividend of $.02 per share of Common Stock was declared in December 1996 and
paid in January 1997. Another dividend of $.02 per share of Common Stock was
declared in February 1997 for payment in March 1997. The Company currently
intends to declare dividends in this amount on a quarterly basis. However, the
determination of the payment of dividends in the future will be within the
discretion of the Company's Board of Directors and will depend on the earnings,
capital requirements and operating and financial condition of the Company, among
other factors.
14
<PAGE>
PRICE RANGE OF SECURITIES
Since July 1995, the Common Stock has traded on the National Market System
of The Nasdaq Stock Market under the symbol "NFLI". From June 1994 to July
1995, the Common Stock was traded on the Electronic Bulletin Board system
operated by the National Association of Securities Dealers, Inc. Quotations in
the table below for the periods prior to the quarters ended September 30, 1995
reflect inter-dealer prices, without retail mark-up, mark-down or commissions
and may not necessarily reflect actual transactions. The quotations for the
quarters ended September 30, 1995 and thereafter represent the range of high and
low trade quotations. For the earlier periods, the quotations reflect the high
bid and low bid prices. The quotations have been adjusted to give effect to a
three-for-five split of the Common Stock effected on July 10, 1995 and a two-
for-one split of the Common Stock effected on December 8, 1995.
The Warrants commenced trading in July 1995 on the National Market System
of The Nasdaq Stock Market under the symbol "NFLIW".
<TABLE>
<CAPTION>
Common Stock Warrants
-------------- -------------
Quarter Ended High Low High Low
- ------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
Fiscal 1995
- -----------
December 31, 1994........... $ 1.67 $ 1.25
March 31, 1995.............. 3.54 1.67
June 30, 1995 .............. 3.65 1.67
September 30, 1995.......... 9.50 2.50 $ 5.63 $ 0.25
Fiscal 1996
- ----------- 24.00 8.63 20.13 5.00
December 31, 1995...........
March 31, 1996.............. 35.00 16.75 31.50 13.00
June 30, 1996............... 23.00 8.50 19.25 5.00
September 30, 1996.......... 17.75 9.50 14.25 6.50
Fiscal 1997
- ----------- 17.50 11.00 14.00 8.25
December 31, 1996...........
</TABLE>
On March 17, 1997, the closing prices of the Common Stock and Warrants
were $9.88 per share and $6.63 per Warrant, respectively. As of September 30,
1996, there were 1,433 record holders of Common Stock.
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
The selected financial data presented below for each year in the
four-year period ended September 30, 1996 have been derived from the audited
financial statements of the Company included elsewhere in this Prospectus.
The selected financial data for the year ended September 30, 1992 is derived
from the unaudited financial statements of the Company prepared on the same
basis as the audited financial statements and contains all adjustments
(consisting of normal recurring accruals) that management believes are necessary
for a fair presentation of such data. The data presented below should be read
in conjunction with the Company's financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
Statements of operations:
Net sales....................................... $97,404 $32,290 $17,583 $13,838 $14,028
Gross profit.................................... 29,577 8,774 4,801 3,686 3,033
Operating income (loss)......................... 13,347 2,921 442 136 (256)
Net income (loss)............................... 8,705 2,244 250 (4) 85 (352)
Earnings (loss) per share:
Primary......................................... 1.36 .65 0.09 0.03 (0.13)
Fully diluted................................... 1.36 .51 0.08 0.03 (0.13)
Weighted average number of shares outstanding (1):
Primary......................................... 6,405 3,437 2,824 2,824 2,824
Fully diluted................................... 6,405 4,444 3,792 3,792 3,792
Operating data:
Number of distributions (2)..................... 87,400 57,300 37,800 29,500 31,500
Average monthly sales per distributor (3)....... $ 112 $ 58 $ 44 $ 38 $ 38
Total products offered.......................... 320 270 258 236 242
</TABLE>
- -----
(1) The weighted average number of shares of Common Stock outstanding for each
period presented has been calculated giving effect to a three-for-five
stock split on July 10, 1995 and a two-for-one stock split on December 8,
1995, and after giving effect to dilutive stock options and warrants.
(2) Includes "active" distributors only at the end of the period indicated. The
Company regards distributors as "active" if they have purchased product
from the Company during the preceding twelve months.
(3) Computed using a simple average for the periods indicated.
(4) Net income is net of a $181,243 preferred stock conversion expense.
SELECTED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Quarter Ended
-------------
December 31 March 31 June 30 September 30 Fiscal Year
----------- -------- ------- ------------ -----------
(In thousands, except Per Share and Operating Data)
Fiscal 1996
<S> <C> <C> <C> <C> <C>
Net sales $21,263 30,315 26,281 19,545 97,404
Gross profit 6,770 9,677 8,240 4,890 29,577
Operating income 3,869 5,561 3,284 633 (1) 13,347
Net income 2,553 3,642 1,877 633 8,705
Dividends per share $0.02 0.02
Fiscal 1995
Net sales $5,235 6,012 7,943 13,100 32,290
Gross profit 1,470 1,546 1,941 3,817 8,774
Operating income 267 308 576 1,770 2,921
Net income 238 283 551 1,172 2,244
(1) Includes a $782,000 charge for resolution of the state regulatory issues.
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - OVERVIEW
The following table sets forth for the periods indicated the percentages
which selected items in the Consolidated Statement of Operations bear to net
sales:
<TABLE>
<CAPTION>
Three Months Ended
-------------------
Years Ended September 30, December 31,
------------------------- ------------
1996 1995 1994 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales 69.6 72.8 72.7 73.6 68.2
---- ---- ---- ---- ----
Gross profit 30.4 27.2 27.3 26.4 31.8
Marketing, distribution and
administrative expenses 16.7 18.1 24.8 29.0 13.6
---- ---- ---- ---- ----
Income (loss) from operations 13.7 9.1 2.5 (2.6) 18.2
Other income (expense), net 0.6 0.3 (0.1) (32.6) 0.6
--- --- ---- ----- ---
Income (loss) before income
tax expense (benefit) 14.3 9.4 2.4 (35.2) 18.8
Income tax expense (benefit) 5.4 2.4 0.0 (11.8) 6.8
--- --- --- ----- ---
Net income (loss) 8.9 7.0 2.4 (23.4) 12.0
Preferred stock conversion 0.0 0.0 1.0 0.0 0.0
--- --- --- --- ---
Net income (loss) applicable to
common shares 8.9% 7.0% 1.4% (23.4)% 12.0%
=== === === ====== ====
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1995
Net sales for the three months ended December 31, 1996 decreased by
$1,993,000 or 9.4% to $19,269,000 as compared to net sales of $21,262,000 for
the three months ended December 31, 1995. At December 31, 1996, the Company had
approximately 87,200 distributors compared to approximately 68,800 at December
31, 1995 and 87,400 at September 30, 1996. The ability of the Company to
increase its number of distributors and its sales per average number of
distributors is material to the growth of the Company. Management believes that
the regulatory scrutiny and legal proceedings initiated in the year ended
September 30, 1996, as well as the negative media reports, were significant
factors affecting distributor recruitment and retention and sales efforts by
distributors during the last two quarters of fiscal 1996 and the first quarter
of fiscal 1997. Although the Company has resolved many of these issues, the
ability of the Company to regain its former rate of growth cannot be predicted
with certainty. The decrease in net sales is recapped below:
New executive initial purchases $(8,957,000)
Increase in sales due to increased number of distributors 8,169,000
Decrease in distributor average sales (1,205,000)
-----------
$(1,993,000)
============
16
<PAGE>
The decrease in net sales was primarily due to fewer new distributors
electing to qualify immediately as executives. The Company's net sales per
average number of distributors per month decreased from $112 during the three
months ended December 31, 1995 to $74 for the three months ended December 31,
1996. No one distributor has directly accounted for more than 5% of the
Company's net sales during either of the three month periods ended December 31,
1996 and 1995.
Cost of sales decreased by $307,000 or 2.1% to $14,185,000 for the three
months ended December 31, 1996 from $14,492,000 for the three months ended
December 31, 1995. Cost of sales as a percentage of net sales increased from
68.2% in the three months ended December 31, 1995 to 73.6% in the three months
ended December 31, 1996. Cost of sales, which includes product costs,
commissions and bonuses paid to distributors, and shipping costs, is recapped
below:
<TABLE>
<CAPTION>
Three months ended
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Product costs 29.5% 24.7%
Commissions and bonuses paid to distributors 38.2 39.2
Shipping costs 5.9 4.3
---- ----
73.6% 68.2%
==== ====
</TABLE>
The percentage of product costs increased 4.8% primarily as a result of the
reduction in the number of new executive initial purchases, which carried a
lower product cost margin than the products sold individually. In addition,
there has been an increase in the amount of literature sales which carry a
higher product cost margin. The percentage of commissions and bonuses paid to
distributors decreased 1.0% because the products with higher product cost
margins have a reduced base for the calculation of commissions and bonuses.
Shipping costs increased 1.6% primarily as a result of the reduction in the
number of new initial purchases mentioned above. In other words, proportionately
there are more small orders which have higher associated shipping costs.
Gross profit decreased 24.9% or $1,685,000 from $6,770,000 for the three
months ended December 31, 1995 to $5,085,000 for the three months ended December
31, 1996. Gross profit as percentage of net sales decreased from 31.8% for the
three months ended December 31, 1995 to 26.4% for the three months ended
December 31, 1996.
Marketing, distribution and administrative expenses increased $2,679,000 or
92.3% from $2,902,000 for the three months ended December 31, 1995 to $5,581,000
for the three months ended December 31, 1996. As a percentage of net sales,
marketing, distribution, and administrative expenses increased to 29.0% for the
three months ended December 31, 1996 from 13.6% for the three months ended
December 31, 1995. The dollar increase resulted primarily from greater
personnel costs, postage, professional fees, and facilities lease costs to
support the growth in the Company's infrastructure and a $1,200,000 accrual for
a special award for a group of executives as described below. Particularly in
view of the Company's increased level of expenditures, the Company's future
operating results will be negatively impacted if the Company is not successful
in regaining its growth in sales experienced during the first half of fiscal
1996.
The Company has also determined that, in connection with the recruitment of
certain distributors by Kevin Trudeau, a key distributor of the Company, certain
representations may have been made regarding entitlement to benefits or prizes,
principally cruises, as performance incentives to these distributors. Mr.
Trudeau is not an officer or director of the Company and the Company does not
believe that it is legally responsible for any such representations. However, in
the interest of promoting good distributor relations, the Company intends to
offer certain distributors the right to participate in cruises at the Company's
expense. The Company believes these cruises have significant motivational value.
The Company may utilize the cruises for marketing purposes with other
distributors, and include product seminars and other marketing programs as part
of the cruises. The Company estimates that its cost will be approximately
$1,200,000 for these programs, which has been accrued in the three months ended
December 31, 1996.
17
<PAGE>
Income (loss) from operations for the three months ended December 31, 1996
decreased $4,365,000 or 112.8% to a $496,000 operating loss from $3,869,000
operating income for the three months ended December 31, 1995, principally as a
result of lower level of net sales, the decrease in the gross profit as a
percentage of sales, and the increase in marketing, distribution and
administrative expenses. Income from operations as a percentage of net sales
decreased from 18.2% for the three months ended December 31, 1995 to a 2.6%
operating loss for the three months ended December 31, 1996. The loss from
operations for the three months ended December 31, 1996, includes approximately
$237,000 of operating loss from the Company's wholly owned subsidiary located in
the United Kingdom.
Other income (expense) decreased to $6,282,000 of net other expense for the
three months ended December 31, 1996 from $132,000 of net other income for the
three months ended December 31, 1995. The decrease was primarily the result of
the $6,425,000 incurred in the settlement of the class action lawsuits as
described below.
As a result of a loss before income tax expense (benefit) for the three
months ended December 31, 1996, an income tax benefit of $2,281,000 has been
accrued. Of this tax benefit, $2,249,000 relates to the tax effect of the
settlement of the class action lawsuits. This resulted in a deferred tax asset
of $3,670,000 as of December 31, 1996. It is Management's belief, based on prior
operating results and expected future operating results, that it is more likely
than not that the Company will utilize its entire net operating loss carry-
forward before expiration.
In January, 1997, the Company reached two preliminary settlement agreements
which should resolve the class action lawsuits that were filed against the
Company in 1996. Under the first Settlement Agreement, the Company has agreed
to set aside a reserve fund of between $1.2 to $1.5 million to be paid, under
certain provisions, to persons who became "instant executives" between April 1,
1995 and January 19, 1996. The Company will pay out of the reserve fund an
amount equal to the 10% restocking charge which has been or would otherwise be
imposed upon a refund to them, and refund the amount paid for any unused
perishable product which the distributor has tendered or tenders for refund in
an unused condition. Any amounts left in the reserve fund will be refunded to
the Company six months after the final approval of the Settlement Agreement.
Also under the first Settlement Agreement, the Company has agreed that persons
who became "instant executives" between April 1, 1995 and April 15, 1996 will
receive product of the Company's choice with a retail value equivalent to the
face amount of any expired, unredeemed Order Assurance Program certificates held
by those persons. The Company estimates that the cost of the product and
shipping will be approximately $800,000.
In the other Settlement Agreement, the Company agreed to pay up to $2
million to persons who purchased the Company's Common Stock or Warrants between
July 11, 1995 and July 15, 1996 and lost money. The Settlement Agreements are
subject to federal court approval. The Company estimates that its additional
attorneys' fees, administrative costs and costs and fees of attorneys for the
plaintiffs in the amount of approximately $2,125,000 will be incurred.
Net loss was $4,496,000 for the three months ended December 31, 1996, a
decrease of 276.1% compared to net income of $2,553,000 for the three months
ended December 31, 1995. The decrease was principally the result of lower net
sales, a lower gross profit margin, increased marketing, distribution and
administrative expenses, and accrual of $6,425,000 for settlement of the class
action lawsuits.
YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO YEAR ENDED SEPTEMBER 30, 1995
Net sales for the year ended September 30, 1996 increased by $65,114,000 or
201.7% to $97,404,000 from $32,290,000 for the year ended September 30, 1995.
The increase in net sales is primarily the result of the Company increasing its
number of distributors and its sales per average number of distributors. At
September 30, 1996, the Company had approximately 87,400 distributors compared
to approximately 57,300 at September 30, 1995. However, the rate of growth in
the number of distributors slowed during the three months ended June 30, 1996
and September 30, 1996, respectively, to a net increase of 3,502 and 1,452
distributors. The ability of the Company to increase its number of distributors
and its sales per average number of distributors is material to the growth of
the Company. Management believes that the regulatory scrutiny and legal
proceedings initiated in the year ended September 30, 1996, as well as the
negative media reports, were significant factors affecting distributor
recruitment and retention and sales efforts by distributors during the last two
quarters of the year ended September
18
<PAGE>
30, 1996. The Company has resolved certain of these issues, but the ability of
the Company to regain the rate of growth realized during the first two quarters
of the year ended September 30, 1996 cannot be predicted with certainty. The
increase in net sales is recapped below:
<TABLE>
<CAPTION>
<S> <C>
New executive initial purchases $30,163,000
Growth in sales due to increased number
of distributors 16,818,000
Increase in distributor average sales 18,133,000
----------
$65,114,000
==========
</TABLE>
The Company's net sales per average number of distributors per month
increased from $59 during the year ended September 30, 1995 to $112 for the year
ended September 30, 1996. Approximately 46% of the increase in net sales was
due to new distributors electing to purchase product to qualify as an executive
under the program formerly known as the Instant Executive Program. No one
distributor has directly accounted for more than 5% of the Company's net sales
in any of the past three fiscal years.
The Instant Executive Program had referred to an option by which a
distributor could quickly attain the level of "executive". Executive level
distributors may earn commissions on sales generated by other distributors in
their downline organization. The Instant Executive Program, particularly as
marketed by Kevin Trudeau, a key distributor of the Company, has been the
subject of legal and regulatory scrutiny.
In April 1996 the Attorney General of the State of Illinois (the "Attorney
General") filed suit against the Trudeau Marketing Group, Inc., Kevin Trudeau,
and Jules Leib, People v. Trudeau (the "Illinois Suit"). The Company was not
-----------------
named as a defendant in the Illinois Suit, but the Company's management viewed
the Illinois Suit as an opportunity to discuss the Company's marketing program
and to resolve confusion surrounding the program. On July 16, 1996, the Company
entered into an "Assurance of Voluntary Compliance" (the "AVC") with the
Attorney General. The AVC preserves the ability of a new distributor to become
an executive distributor the day that he or she enrolls by generating at least
$1,000 in qualifying product volume and by joining the Order Assurance Program
("OAP") and Master Developer Series. Under the AVC, the Company will maintain
its same executive level qualifications, but to aid clarification, it will no
longer use the "instant executive" terminology.
Other key features of the AVC focus on the Company's commitment to: (a)
create an official explanation of its marketing and compensation plan and to
prohibit distributors from creating their own explanations of how the marketing
and compensation plan works; (b) make clear that there are no mandatory
purchases of product to become a distributor; (c) take further steps to stress
distributor compliance with the Company's policies and procedures; and (d)
create a World Wide Web site on the Internet to provide more information about
the Company's products and programs. The Company also agreed to provide
distributor earnings disclosures, to make clear that executive distributors
cannot earn commissions unless they are engaged in the sale of the Company's
products to five consumers per month at retail, including procedures to verify
retail sales, to take additional steps to encourage distributors to redeem OAP
certificates for product and to limit the number of OAP certificates, and to
monitor customer purchases. The Company also agreed to make a contribution
to the Illinois Consumer Education Fund.
The Company also entered into agreements with the states of Florida,
Hawaii, Idaho, Kansas, Kentucky, Michigan, Missouri, New Jersey, and
Pennsylvania. See "Business-Distribution and Marketing". The Company may enter
into agreements with other states in the future.
The Company expended significant time and resources engaging in the
discussions with the Attorney General and other state attorneys general.
Included in the results of operations for the year ended September 30, 1996 were
expenses of approximately $782,000 related to the Company's resolution of these
states' legal issues. These expenses included contributions to state funds,
legal fees, costs associated with revised marketing literature and other
distributor communications, and the establishment of a World Wide Web site on
the Internet. In addition,
19
<PAGE>
uncertainty about the possible outcome of these discussions, the SEC
investigation, the class action lawsuits and certain unfavorable media reports
appears to have affected the efforts of some of the Company's distributors
during the year ended September 30, 1996. The future effect of the resolution of
these issues in Illinois, Florida and the other eight states, and the
implementation of, and continued compliance with, the AVC could negatively
impact the Company's future operating results. See "Risk Factors"; and
"Business-Distribution and Marketing".
The AVC preserves the OAP, a popular option for distributors. Under the
OAP, a distributor may elect to enroll in a minimum ordering program to maintain
eligibility for bonuses. Minimum orders ranging from $41 to $300 per month are
automatically placed by credit card or check. So long as distributors continue
to enroll in the OAP the Company is assured of sales and the distributor is
assured participation in bonus programs. The Company has agreed in the AVC to
take additional steps to encourage distributors to redeem OAP certificates for
product and to limit the number of OAP certificates which may be issued. The OAP
is voluntary and no restrictions are placed upon any participant's ability to
exit the Program. As of September 30, 1996 and 1995, respectively, there were
approximately 41,700 and 18,000 participants in this Program. On the average
during the year ended September 30, 1996, the Company issued OAP certificates
for approximately 40% of the participants. The percentage for the comparable
period in 1995 is not available.
The Company recognizes revenues on the OAP certificates when they are
redeemed for product or when they expire. The Company recognized revenues from
the redemption of certificates of $7,647,000 and $1,090,000 for the years ended
September 30, 1996 and 1995. The Company recognized revenues from expired
certificates of $3,025,000 and $876,000 during the years ended September 30,
1996 and 1995. At September 30, 1996 and 1995, the Company had a liability for
unredeemed certificates of $3,893,600 and $347,800 which is included in deferred
income in the "Financial Statements". The effect of the AVC on future revenues
from OAP certificates is uncertain, but could have a negative impact on the
Company's future operating results.
Cost of sales increased by $44,312,000 or 188.4% to $67,827,000 for the
year ended September 30, 1996 from $23,515,000 for the year ended September 30,
1995. Also included in the cost of sales for the year ended September 30, 1996,
is approximately $58,000 of the $782,000 incurred in resolving the state legal
issues discussed above. Cost of sales as a percentage of net sales decreased
from 72.8% in the year ended September 30, 1995 to 69.6% in the year ended
September 30, 1996. Cost of sales, which includes product costs, commissions and
bonuses paid to distributors, and shipping costs, is recapped below:
<TABLE>
<CAPTION>
Year Ended
September 30,
-------------
1996 1995
---- ----
<S> <C> <C>
Product costs 23.6% 24.3%
Commissions and bonuses
paid to distributors 39.2 40.5
Shipping costs 6.8 8.0
---- ----
69.6% 72.8%
===== =====
</TABLE>
The percentage of product costs decreased 0.7% primarily as a result of
improved pricing with higher volume. The decrease in the percentage of
commissions and bonuses paid of 1.3% was the result of the significant growth in
new executive initial purchases and the lower level of the associated
commissions and bonuses in relation to a slower growing organization. The
decrease of 1.2% in the percentage of shipping costs resulted from economies of
scale in shipping costs associated with the volume of sales from new executive
initial purchases.
Gross profit increased 237.1% or $20,802,000 from $8,775,000 for the year
ended September 30, 1995 to $29,577,000 for the year ended September 30, 1996.
Gross profit as a percentage of sales increased from 27.2% for the year ended
September 30, 1995 to 30.4% for the year ended September 30, 1996.
20
<PAGE>
Marketing, distribution and administrative expenses increased $10,377,000 or
177.3% from $5,853,000 for the year ended September 30, 1995 to $16,230,000 for
the year ended September 30, 1996. As a percentage of net sales, marketing
distribution and administrative expenses decreased to 16.7% for the year ended
September 30, 1996 from 18.1% for the year ended September 30, 1995. The dollar
increase resulted primarily from increased personnel costs, credit card fees,
postage and professional fees to support the Company's growth. Also included in
the increase in marketing, distribution and administrative expenses is
approximately $724,000 of the $782,000 incurred in resolving the state legal
issues discussed above. As a result of the increase in marketing, distribution
and administrative costs incurred in connection with the Company's growth and
the increased expenses related to legal issues, the Company's future operating
results will be negatively impacted if the Company is not successful in
regaining its growth in sales experienced during the first two quarters of the
year ended September 30, 1996.
Income from operations for the year ended September 30, 1996 increased
$10,426,000 or 356.9% to $13,347,000 from $2,921,000 for the year ended
September 30, 1995, principally as a result of the higher level of sales,
the increase in income recognized from expired OAP certificates, and the
increase in the gross profit as a percentage of sales. Income from operations
as a percentage of sales increased from 9.1% for the year ended September 30,
1995 to 13.7% for the year ended September 30, 1996.
Other income increased to $648,000 for the year ended September 30, 1996
from $88,000 for the year ended September 30, 1995. The increase was primarily
a result of interest income earned.
Income tax expense increased $4,525,000 to $5,290,000 for the year ended
September 30, 1996 from $765,000 for the year ended September 30, 1995. The
dollar increase resulted from higher taxable income, an increased base tax rate,
and a reduced effect of the utilization of approximately $150,000 of net
operating loss carryforward compared to approximately $423,000 in the prior
fiscal year.
Net income was $8,705,000 for the year ended September 30, 1996, an increase
of 287.9% compared to $2,244,000 for the year ended September 30, 1995,
principally as a result of higher level of sales and the increase in gross
profit as a percentage of sales.
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 utilizing the
Instant Executive option. 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>
<S> <C>
New executive initial purchases $7,700,000
Growth in sales due to increased 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 net 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:
21
<PAGE>
<TABLE>
<CAPTION>
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>
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 of product in
the Instant Executive Program.
Gross profit 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 expenses 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.
Income from operations 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. Income from
operations as a percentage of sales increased from 2.5% for the year ended
September 30, 1994 to 9.1% 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. As of September 30, 1995, the Company had approximately $553,000
of net operating loss available to carryforward 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $14,541,000 at December 31,
1996 compared to $15,589,000 at September 30, 1996. The cash used in operating
activities of $88,000 for the three months ended December 31, 1996 was
significantly reduced from the cash provided by operating activities of
$3,805,000 for the three months ended December 31, 1995. The Company used
approximately $934,000 and $392,000, respectively, to purchase property and
equipment during the three month periods ended December 31, 1996 and 1995. In
addition, $111,000 was paid in dividends to shareholders during the three months
ended December 31, 1996. The Company had working capital of $9,280,000 at
December 31, 1996 compared to $14,556,000 at September 30,
22
<PAGE>
1996. The $5,276,000 decrease in working capital was caused primarily by the
$6,200,000 accrual for the class action settlement.
The Company currently anticipates expanding into new foreign markets, but
the extent of the expansion has not been determined and will be dependent upon
results of operations and other factors. As a result of the cost of the class
action settlement discussed above, the Company's pace of expansion may be
reconsidered. While Management is hopeful that the business disruption
associated with the regulatory scrutiny and legal issues and the negative media
reports will subside, there can be no guarantee that profitable operations will
result in the future.
The Company has not been subjected to any material price increases by its
suppliers and inflation is not expected to have a material impact on the
Company's business during the next twelve months.
In September, 1996, the Board of Directors authorized a repurchase program
of the Company's Common Stock. Under the program the Company may purchase up to
200,000 shares in the open market or through privately negotiated transactions.
At December 31, 1996, the Company had not made any purchases. The program
terminates June 30, 1997, unless extended by the Board of Directors.
At September 30, 1996, the Company had approximately $130,000 of net
operating loss available to carry forward subject to limitations imposed by
Section 382 of the Internal Revenue Code expiring through 2008. The deferred
tax asset at December 31, 1996 increased $2,170,000 to $3,670,000 from
$1,500,000 at September 30, 1996. This increase was the result of the accrual
of the deferred tax benefit from the loss before income tax benefits for the
three months ended December 31, 1996. It is Management's opinion, based on
prior operating results and expected future operating results, that it will be
more likely than not that the Company will utilize its entire net operating loss
carryforward before expiration.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (SFAS No. 121). SFAS No.
121 requires, among other things, that impairment losses on assets to be held,
and gains or losses from assets that are expected to be disposed of, be included
as a component of income from continuing operations. SFAS No. 121 is effective
for fiscal years beginning after December 15, 1995. The Company will adopt SFAS
No. 121 for the year ending September 30, 1997 and its implementation is not
expected to have a material effect on the financial statements.
In October 1995, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). SFAS No. 123 encourages entities to adopt the
fair value method in place of the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), for all
arrangements under which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to employees in
amounts based on the price of its stock. The Company does not anticipate
adopting the fair value method encouraged by SFAS No. 123 and will continue to
account for such transactions in accordance with APB No. 25. However, the
Company will be required to provide additional disclosures beginning in the year
ending September 30, 1997 providing pro forma effects as if the Company had
elected to adopt SFAS No. 123.
23
<PAGE>
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 87,200
distributors. The Company offers a product line of approximately 320 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 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
international teleconferencing calls, international and regional seminars, a
proprietary "monthly" magazine, business training systems and a site on the
World Wide Web of the Internet (www.nutritionforlife.com).
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 to 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 a
substantial increase in the number of distributors. The number of distributors
increased from approximately 37,800 on September 30, 1994 to 57,300 on September
30, 1995. During the fiscal year ended September 30, 1996, the number of
distributors increased to 87,400. At December 31, 1996, the Company had 87,200
distributors.
In 1996 the Company's marketing program became the subject of regulatory
scrutiny and the Company was named as a defendant in class action lawsuits.
These matters have had a material effect on the Company's operations and
financial condition, and further developments could continue to affect the
Company. See "Risk Factors"; "Legal Proceedings"; and "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
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, Canada, Guam, Korea, the Philippines, Puerto Rico and the
United Kingdom. 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. The Company
also intends to pursue potential opportunities for growth through mergers and
acquisitions of complimentary businesses.
The Company's executive offices are located at 9101 Jameel, Houston, TX
77040. Its telephone number is (713) 460-1976.
24
<PAGE>
DISTRIBUTION AND MARKETING
The Company's products are distributed through a network marketing system
consisting of a network of approximately 87,200 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
the Company's products. No one distributor directly accounted for more than 5%
of the Company's sales in either of the past three 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, a low priced starter kit, no
inventory requirements, and a low monthly purchase requirements. Management
intends to reach potential new distributors through advertising, the Company's
site on the World Wide Web, teleconferencing and regional sales meetings. The
Company experienced a net increase in the number of distributors during the
fiscal year ended September 30, 1995 of 19,500 and during the fiscal year ended
September 30, 1996, 30,100 distributors were added. However, the Company
experienced a net decrease of 200 distributors from September 30, 1996 to
December 31, 1996.
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 product purchases by other distributors in their downline
organization. The first level of each executive may have no more than four
executives, and commissions may be earned on the sale of product to executives
in up to the first seven levels of their downline. 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 cumulative qualifying product volume of $1,500 over any period of
time
. or generate cumulative qualifying product volume of $1,200 over any period
of time and enroll in the optional Order Assurance Program
. or generate cumulative qualifying product volume of $1,000 over any period
of time, enroll in the optional Order Assurance Program at the monthly level
of $100 and subscribe to the $35 monthly optional Master Developer Series
"Qualifying product volume" is product the distributor and his other downline
distributors purchase at wholesale directly from the Company either for personal
use or for sale to other customers at retail. There is no time limit to meet
these qualifications, and distributors may choose to become executives the same
day that they enroll as a distributor or over any period of time. An executive
level distributor may attain higher levels of commission based on sales
generated by distributors within his or her organization. The only
qualification to remain an executive is to purchase $40 in product every other
month. 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.
The Company previously denominated a program as the "Instant Executive
Program". The Instant Executive Program designation merely referred to the
option by which distributors could choose to qualify immediately rather than
through incremental product purchases over time. The Instant Executive Program,
particularly as marketed by Kevin Trudeau, a key distributor of the Company, has
been the subject of legal and regulatory scrutiny. The
25
<PAGE>
Company has determined to discontinue the use of the terminology, "Instant
Executive Program". 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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
In April 1996 the Attorney General of the State of Illinois (the "Attorney
General") filed suit against the Trudeau Marketing Group, Inc., Kevin Trudeau,
and Jules Leib, People v. Trudeau (the "Illinois Suit"). The Company was not
-----------------
named as a defendant in the Illinois Suit, but the Company's management viewed
the Illinois Suit as an opportunity to discuss the Company's marketing program
and to resolve confusion surrounding the program. On July 16, 1996, the Company
entered into an "Assurance of Voluntary Compliance" (the "AVC") with the
Attorney General. The AVC preserves the ability of a new distributor to become
an executive distributor the day that he or she enrolls by generating at least
$1,000 in qualifying product volume and by joining the Order Assurance Program
("OAP") and Master Developer Series. Under the AVC, the Company will maintain
its same executive level qualifications, but to aid clarification, it will no
longer use the "instant executive" terminology.
Other key features of the AVC focus on the Company's commitment to: (a)
create an official explanation of its marketing and compensation plan and to
prohibit distributors from creating their own explanations of how the marketing
and compensation plan works; (b) make clear that there are no mandatory
purchases of product to become a distributor; (c) take further steps to stress
distributor compliance with the Company's policies and procedures; and (d)
create a World Wide Web site on the Internet to provide more information about
the Company's products and programs. The Company also agreed to provide
distributor earnings disclosures and to make clear that executive distributors
cannot earn commissions unless they are engaged in the sale of the Company's
products to consumers at retail, including procedures to verify retail sales.
Specifically, an executive distributor will not be entitled to receive bonuses
or commissions on downline sales unless within the preceding one month period
the executive distributor has made at least five retail sales, or within the
preceding two month period has made ten retail sales. The Company also agreed to
take additional steps to encourage distributors to redeem OAP certificates for
product and to limit the number of OAP certificates (See "Order Assurance
Program"), to monitor customer purchases, and to make a contribution to the
Illinois Consumer Education Fund.
The Company entered into similar agreements with the states of Florida,
Hawaii, Idaho, Kansas, Kentucky, Michigan, Missouri, New Jersey and
Pennsylvania. The Company has agreed that in Florida, distributors who want to
receive commissions must state, when placing orders, that they have sold to
consumers 70% of their prior commissionable product purchase. The Company has
agreed to establish procedures to independently verify consumer sales on a
random basis and to sanction distributors submitting false information.
Implementation of these agreements by the Company may be expensive and could
make the program less attractive to distributors. These factors could
negatively impact the Company's future operating results. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations". The
Company may enter into agreements with other states in the future.
To become a distributor, a person must be sponsored by an existing
distributor, sign the official Distributor Agreement and purchase a "distributor
success kit" from the Company. The Company revised its official Distributor
Agreement in connection with the AVC. It is emphasized in the Distributor
Agreement that in order for a distributor to be successful in the Company's
program, the distributor must purchase and sell the Company's products at retail
and sponsor other distributors to do the same. It is also emphasized that the
distributor must retail or use in business building 70% of the product he or she
purchases before more product may be purchased from the Company. A distributor
success kit currently costs approximately $49 and provides sales aids,
brochures, order forms, audio and video cassette recordings and a subscription
to the Company's monthly publication, Lifestyles.
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The following table sets forth the number of the Company's distributors on
the dates indicated:
<TABLE>
<CAPTION>
At September 30,
---------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Approximate number of distributors(1) 87,400 57,300 37,800
</TABLE>
_________________________
(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 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 participates in rallies in various key cities in North America,
Puerto Rico, the United Kingdom 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 1996, the Company expended approximately $138,000 and $348,000,
respectively, on promotional activities related to distributors' rallies and the
annual convention.
In July 1996 the Company entered into an Administrative and Consulting
Services Agreement (the "Agreement") with Distributor Services, L.L.C. ("DS").
DS is an affiliate of Nightingale-Conant, a major supplier of self improvement
programs to the Company. It is provided in the Agreement that, except to the
extent the Company produces its own material in-house, DS will have the
exclusive right to produce and sell all of the Company's recruiting and training
material. Such materials will be produced and marketed at the expense of DS and
DS will be entitled to all revenues received from the sales of such materials.
DS has also been granted the exclusive right to produce, organize and sell, at
its own expense, admission to all Company sponsored recruiting or promotional
events and to receive all revenues received therefrom. The Company will have
the exclusive right of approval over the content of all materials and meetings
produced by DS. Without additional compensation, DS will provide consulting
services to the Company with respect to the Company's marketing strategy and
program, including the Company's weekly teleconference, magazine and other
communications with distributors. For a fee, DS will also produce and provide
to the Company each month at least four master cassettes for sale by the Company
in the Company's Master Developer Series. The term of the Agreement is fifteen
years and the parties have agreed to negotiate in good faith successive fifteen
year terms. The Agreement may be earlier terminated for breaches of any
material obligation. It is expected that Kevin Trudeau, a key distributor of
the Company, will be principally responsible for DS's performance in connection
with this Agreement. Mr. Trudeau produces self improvement tapes which are sold
by Nightingale-Conant to the Company and others.
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<PAGE>
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 $3,500 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. At September 30, 1996, the Company
had 357 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 save for big ticket items
and enhance their eligibility for commissions. 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 various levels that generally 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 promotes 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. The Company has agreed in the AVC that, effective in January
1997, a distributor will not receive additional product certificates under the
Program and will be given 30 days notice that their Program status will be
suspended if: (i) four monthly unredeemed certificates are issued consecutively
to the distributor for a maximum credit of four times the distributors
enrollment level; or (ii) the distributor has accumulated unredeemed
certificates with a total face value of six times the distributors then
designated Program amount. However, these requirements would not be applicable
if the distributor redeems one or more of the issued certificates, or notifies
the Company that he is accumulating toward a "big ticket" item. The Company has
also agreed in the AVC to encourage distributors to redeem their certificates
for product. As of September 30, 1995 and September 30, 1996, respectively,
there were approximately 22,800 and 41,700 distributors enrolled in the Order
Assurance Program.
PERSONAL RECRUITING AND SALES CAMPAIGNS. 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:
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 multilingual
publication that provides information on the network marketing industry and the
Company. The magazine was developed in fiscal 1994 to
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<PAGE>
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 years
ended September 30, 1995 and September 30, 1996. 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 and in the
fiscal year ended September 30, 1996, 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".
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 has also been featured as a prominent speaker at
motivational seminars and other programs.
During the past five years, Mr. Trudeau has also been engaged in other
activities, including KT Corp., which is a distributor of the Company, the
Trudeau Marketing Group, and Distributor Services, L.L.C., 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 December 1996 Mr. Trudeau
informed the Company that he is the subject of a potential complaint by the U.S.
Federal Trade Commission ("FTC"), which alleges that a number of infomercials in
which Mr. Trudeau participated in marketing products of Mega Systems, Inc.,
including "Mega Memory" tapes, were false and misleading. Mr. Trudeau has not
informed the Company how he intends to proceed in connection with this matter.
The pendency of this matter may affect Mr.Trudeau's ability to act effectively
as a distributor of the Company. It is presently unknown whether this matter
will affect the Company's distribution and marketing of "Mega Memory" tapes or
other products produced by Mega Systems, Inc. See "Risk Factors".
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 credit card fraud involving the use of credit
cards belonging to others for personal use 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. Mr. Trudeau has been the subject of regulatory scrutiny and
certain legal proceedings. Mr. Trudeau is a key
29
<PAGE>
independent distributor of the Company, but is not an officer or director of the
Company, and is not authorized to make statements about Company policy. See
"Risk Factors".
MARKETS
The following chart sets forth the countries in which the Company currently
operates, the year operations were commenced in each country, and historical
sales information by country during the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
(in Thousands)
Year
Country Entered 1996 1995 1994
------- ------- ---- ---- ----
<S> <C> <C> <C> <C>
United States 1984 $89,400 $25,800 $14,700
Canada 1993 6,100 4,200 2,400
Puerto Rico 1994 1,500 2,200 300
United Kingdom(1) 1996 200 --- ---
Korea(2) 1991 100 100 100
Philippines(2) 1993 100 100 100
</TABLE>
_____________________
(1) The Company commenced operations in the United Kingdom in September 1996.
(2) 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. In some instances, regulatory approvals may be
required. 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.
The Company may also need to undertake the steps necessary to meet the
operational requirements of new markets, including plans to satisfy the
inventory, distribution, personnel and transportation requirements of the new
market. The Company may also need to modify its distributor manuals, cassette
recordings, videocassette and other training materials as necessary to be
suitable for the new markets. The Company has prepared manuals in English,
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
approximately 320 items in eight different categories: (1) vitamins, 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
30
<PAGE>
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 44
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 25 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.
FOOD AND WEIGHT MANAGEMENT ITEMS. The Company markets over 51 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(R), and Lean Life(R), a herbal weight
management formulation.
HERBAL FORMULAS. The Company's 31 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 65 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 18 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 31 products designed to test or improve
the quality of air and water, including electrostatic air filters and water
filtration systems.
SELF IMPROVEMENT PROGRAMS. The Company markets approximately 55 motivational
and self improvement tapes and other products, including "Mega Memory" tapes.
The self improvement tapes are purchased primarily through arrangements with
Nightingale-Conant Corporation.
During the last three fiscal years, no single product has accounted for 10
percent or more of the Company's revenue.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 approximately 25
new products or services. From September 30, 1995 to September 30, 1996 the
Company introduced approximately 70 new products or services. Management
believes that its ability to introduce new products increases its distributors'
visibility and competitiveness in the marketplace.
The Company maintains significant amounts of products in its inventory to
meet rapid delivery requirements of customers and to minimize product back
orders, which have not been significant. Due to the nature of the Company's
business, the Company typically does not carry a substantial backlog of orders.
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.
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<PAGE>
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.
CONSUMER 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.
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 makes available to the Company's distributors a
detailed monthly accounting of sales and recruiting activity. 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 frequently 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. The Company purchased products from
NION Laboratories ("NION") in the approximate amounts of $2,258,000 and
$5,234,000 for the fiscal years ended September 30, 1995 and 1996, respectively.
Richard S. Kashenberg, a director of the Company, served as the chief executive
officer of NION until December 1996. Mr. Kashenberg is currently a consultant
to NION. Until June, 1995 NION was owned by Shermfin Corp., the Company's
largest shareholder, and Mr. Kashenberg. 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. 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. In addition, such
delays could interrupt momentum in growth of product sales and distributor
recruitment.
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.
32
<PAGE>
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), Nutri-Cookie(R), Requin
3(R), Grand Master(R), Phytonol(R), BioWater(R), E-Lemonator(R), Phytogreen(R),
ThinPen(R) and NutritionForLife(R). It has applied for trademark registration
for its BioGlow(TM), BioRub(TM), MasterPiece(TM) and PowerPlay(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 Amway, 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.
GOVERNMENT REGULATIONS
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,
1998 at the earliest. 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. However, enforcement of the health claims
regulations has been delayed pending the decision of the U.S. Court of Appeals
in Denver involving a challenge to the regulations on constitutional grounds.
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
33
<PAGE>
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 December 31, 1996, the Company employed approximately 210 persons. The
majority of the Company's employees are office, clerical and warehouse
employees. The Company believes that its relationship with its employees is
good.
34
<PAGE>
LEGAL PROCEEDINGS
As more fully discussed in "Risk Factors" and "Business" and Note 8 to the
Notes to "Financial Statements", the Company entered into an "Assurance of
Voluntary Compliance" with the Illinois Attorney General and similar agreements
with other states. The Company may enter into agreements with other states and
there can be no assurance that one or more state attorneys general will not
initiate lawsuits against the Company or its independent distributors under
anti-pyramid or business opportunity laws.
A formal investigation was commenced during the fiscal year September 30,
1996 by the Securities and Exchange Commission regarding possible violations by
the Company of the federal securities laws. In December 1996 the Company
received a letter from the Securities and Exchange Commission notifying the
Company that the staff inquiry had been terminated and that no enforcement
action had been recommended at that time to the Commission.
In August 1996, a suit was filed against the Company in the United States
District Court for the Southern District of Texas, Houston Division (the
"Federal Action"). Also named as defendants were Kevin Trudeau, a key
distributor of the Company, the Trudeau Marketing Group, Inc., Bernard Sherman,
the largest beneficial owner of the Company's Common Stock, certain officers of
the Company, and Cohig & Associates, Inc. and Neidiger/Tucker/Bruner, Inc., the
investment banking firms which previously served as underwriters of the July
1995 public offering of the Company's securities. The Federal Action was
brought as a class action on behalf of persons who became "instant" executive
distributors of the Company and on behalf of persons who purchased the Company's
Common Stock and Warrants between July 11, 1995 and July 16, 1996.
The principal allegations of the complaint in the Federal Action are that
certain aspects of the executive distributor compensation program constituted an
illegal pyramid scheme and the sale of an unregistered security and that the
Company failed to disclose the alleged illegality of the program and Mr.
Trudeau's past. The plaintiffs seek unspecified damages, costs and fees of
litigation and punitive damages. The Company has denied and continues to deny
the claims alleged in the Federal Action and the State Action.
In August 1996, a suit was also filed against the Company and the same
defendants in the Federal Action in the District Court of Harris County, Texas
(the "State Action"). The State Action was brought as a class action on behalf
of persons who purchased Common Stock and Warrants of the Company during the
period from July 11, 1995 through July 16, 1996.
The principal allegations of the complaint in the State Action are
substantially similar to the Federal Action, i.e., that certain aspects of the
executive distributor compensation program constituted an illegal pyramid scheme
and that the Company failed to disclose that its outstanding financial results
were directly attributable to the questioned aspects of its marketing practices
and failed to adequately disclose Mr. Trudeau's past. The plaintiffs seek
unspecified damages, costs and fees of litigation and punitive damages.
In January 1997, the Company reached two preliminary settlement agreements
which should resolve these class action lawsuits. The Settlement Agreements
were in the Federal Action and are subject to final federal court approval.
Under the first Settlement Agreement, the Company has agreed to set aside a
reserve fund of between $1,200,000 to $1,500,000 to be paid, under certain
provisions, to persons who became "Instant Executives" between April 1, 1995 and
January 19, 1996. The Company will pay out of the reserve fund an amount equal
to the 10% restocking charge which has been or would otherwise be imposed upon a
refund to them, and refund the amount paid for any unused perishable product
which the distributor has tendered or tenders for refund in an unused condition.
Any amounts left in the reserve fund will be refunded to the Company six months
after the final approval of the Settlement Agreement. Also under the first
Settlement Agreement, the Company has agreed that persons who became "Instant
Executives" between April 1, 1995 and April 15, 1996 will receive product of the
Company's choice with a retail value equivalent to the face amount of any
expired, unredeemed Order Assurance Program certificates held by those persons.
The Company estimates that its cost of the product and shipping will be
approximately $800,000.
35
<PAGE>
In the other Settlement Agreement, the Company has agreed to pay up to $2
million to persons who purchased the Company's Common Stock or Warrants between
July 11, 1995 and July 15, 1996 and lost money. On February 5, 1997, a
conditional order of the federal court was entered preliminarily approving the
settlement of the securities class. The conditional approval was based on the
presentation of the plan of allocation for distribution of the settlement fund
which was subsequently submitted by the plaintiffs. A notice of this action and
a summary of the proposed settlement has been submitted to the court for review.
36
<PAGE>
MANAGEMENT
OFFICERS AND DIRECTORS
The officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
David P. Bertrand 53 President, Director and Chairman of the Board
of Directors
Jana Mitcham 48 Executive Vice President, Secretary and
Director
Barry C. Loder 38 Vice-President and Chief Financial Officer
John R. Brown, Jr. 59 Vice-President-Finance
Ronnie D. Meaux 42 Vice President, Treasurer, and Assistant
Secretary
F. Wayne Ballenger 48 Director
M. F. Florence 59 Director
Richard S. Kashenberg 41 Director
Gregory Pusey 44 Director
</TABLE>
DAVID P. BERTRAND has served as President and Chairman of the Board of
Directors of the Company and its predecessors since 1984. Mr. Bertrand received
a B.S. degree in education in 1966 and a Master of Education degree in
administration and supervision in 1969, both from McNeese State University in
Lake Charles, Louisiana. Mr. Bertrand is the brother-in-law of Jana Mitcham.
JANA MITCHAM has served as Executive Vice President, Secretary and Director
of the Company and its predecessors since 1984. Ms. Mitcham received a B.A.
degree in 1974 in special education from McNeese State University and undertook
graduate work in special education at the Korean Extension of the University of
Maryland. Ms. Mitcham is the sister-in-law of David P. Bertrand.
BARRY C. LODER became Vice President and Chief Financial Officer of the
Company in March 1995. From October 1993 until he joined the Company, Mr. Loder
was a financial consultant, performing corporate finance, merger and acquisition
and other financing activities. From January 1992 to October 1993, he was in
Corporate Development with Allwaste, Inc., a publicly held environmental
services company. From December 1989 to December 1991, he was the Senior Vice
President-Finance of Republic Waste Industries, Inc., a publicly held integrated
solid waste management company. Mr. Loder received a B.B.A. degree in
Accounting and Finance from Walsh College and an M.B.A. degree from Houston
Baptist University. He is a Certified Public Accountant and is currently
working towards a Chartered Financial Analyst designation.
JOHN R. BROWN, JR. became Vice President-Finance of the Company in
September, 1996. From April, 1989 until he joined the Company, Mr. Brown was a
management consultant performing merger and acquisition services, systems
analyses, financial reporting assistance, and other services for both publicly
and privately held companies. From June, 1987 to March, 1989 he was Vice
President-Finance & Administration for Environmental Protective Industries,
Inc., an environmental services organization. Mr. Brown is a Certified Public
Accountant and has over
37
<PAGE>
20 years experience in public accounting with both national and local firms. Mr.
Brown received a B.S. in Mechanical Engineering from Stanford University and an
M.B.A. from the University of Texas at Austin.
RONNIE D. MEAUX has served in various accounting and finance capacities for
the Company and its predecessors since 1985. He is currently Vice President and
Treasurer of the Company. Mr. Meaux received a B.S. degree in accounting in
1977 from McNeese State University.
F. WAYNE BALLENGER has served as President of First Commercial Capital
since 1995. He has also served as President of Puncture Guard L.L.C. since
December 1994. From March 1992 to December 1994, he served as director of sales
and marketing for Petrolon, Inc., a multi-level marketing organization.
Immediately prior thereto, he served as a vice president of Southwest Bank of
Texas with commercial lending responsibilities. Mr. Ballenger received a B.B.A.
degree from the University of the South in 1968.
M. F. FLORENCE has served as President of Sherfam Inc. since 1989. Sherfam
Inc. is a holding company, principally of pharmaceutical companies and is the
parent of Shermfin Corp., which is a principal shareholder of the Company. From
1958 to 1989, Mr. Florence was associated with the firm of Wm. Eisenberg & Co.,
a firm of chartered accountants in Canada. He served as a partner of the firm
from 1964 to 1989. Mr. Florence received a Bachelor of Commerce degree from the
University of Toronto. He is the recipient of a Chartered Accountant degree
from the Institute of Chartered Accountants of Ontario. Mr. Florence is also a
Director of Barr Laboratories, Inc., a publicly held corporation whose common
shares are listed on the American Stock Exchange. Mr. Florence has served as a
director of the Company since 1994.
RICHARD S. KASHENBERG served as President of NION Laboratories from 1982 to
1996. He presently serves as a consultant to NION is a principal supplier of
products sold by the Company. Mr. Kashenberg served as President and Director
of NEC-Utah from 1991 until its merger with the Company in 1994. Mr. Kashenberg
has served as a director of the Company since 1994. Mr. Kashenberg received a
Bachelor's degree from Vanier College.
GREGORY PUSEY is primarily engaged in private investment activities. He
has served both as President of Livingston Capital, Ltd. and President of the
General Partner of Graystone Capital, Ltd., venture capital firms, since 1987.
He is also President and a director of Cambridge Holdings, Ltd., a publicly held
real estate firm, and a co-founder and director of USMX, Inc., a publicly held
mining company. From May 1989 until January 1990, Mr. Pusey also served as
Chief Financial Officer of USMX, Inc. Mr. Pusey received a B.S. degree in
Finance from Boston College in 1974. Mr. Pusey became a director of the Company
in 1994.
The Company has entered into an agreement with Shermfin Corp. wherein it
has agreed that, for so long as Shermfin Corp. owns 10% or more of the
outstanding Common Stock of the Company, Shermfin Corp. will be entitled to
designate one person to serve as a member of the Company's Board of Directors.
The current designee is M. F. Florence who shall continue to serve in such
capacity until written notice otherwise is provided by Shermfin Corp. to the
Company. See "Certain Transactions".
The Company's Board of Directors has two standing committees, the Audit
Committee and the Compensation Committee. M.F. Florence and Gregory Pusey serve
as the two members of the Audit Committee. The primary functions of the Audit
Committee are to review the scope and results of audits by the Company's
independent auditors, internal accounting controls, non-audit services performed
by the independent accountants and the cost of accounting services. F. Wayne
Ballenger, M.F. Florence and Richard S. Kashenberg serve as the three members of
the Option Committee. The Compensation Committee reviews stock option and other
compensation policies and programs.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid by the Company to the officers whose total annual compensation exceeded
$100,000 during the fiscal years ended September 30, 1995 and 1996.
38
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------------- ------ -------
Other
Annual Restricted All Other
Name and Principal Salary compensa- Stock Options/ LTIP Compensa-
Position Year ($) Bonus tion Awards SARs Payouts tion(1)
============== ==== ====== ===== ======= ========== ======== ======= =========
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David P. Bertrand 1994 143,256 24,000 -0- -0- -0- -0- 12,885
Chief Executive Officer of 1995 162,006 143,829 5,250 -0- 80,400 -0- 12,885
the Company 1996 162,000 530,812 15,750 -0- -0- -0- 12,885
Jana Mitcham 1994 144,826 24,000 -0- -0- -0- -0- 9,013
Executive Vice President 1995 157,316 143,829 5,250 -0- 75,600 -0- 9,013
of the Company 1996 156,000 526,649 15,500 -0- -0- -0- 9,013
Barry C. Loder 1994(2) -0- -0- -0- -0- -0- -0- -0-
Vice President and Chief 1995 51,404 7,790 1,500 50,000 -0- -0- -0-
Financial Officer of the 1996 121,184 57,500 11,208 -0- -0- -0- -0-
Company
Ronnie D. Meaux 1994 74,626 -0- -0- -0- -0- -0- 6,392
Vice President and 1995 81,350 10,000 6,900 -0- 36,000 -0- 6,392
Assistant Secretary of the 1996 87,430 53,160 9,400 -0- -0- -0- 6,392
Company
</TABLE>
_________________
(1) The Company has obtained insurance policies on the lives of Mr. Bertrand,
Ms. Mitcham and Mr. Meaux, of which benefit amounts of $1,060,000, $660,000
and $467,000 on the lives of Mr. Bertrand, Ms. Mitcham and Mr. Meaux,
respectively, constitute "keyman" insurance and are payable to the Company.
Approximately 51% of the aggregate insurance benefits on the lives of Mr.
Bertrand, Ms. Mitcham and Mr. Meaux are payable to beneficiaries designated
by Mr. Bertrand, Ms. Mitcham and Mr. Meaux. In addition, part of the cash
value may be used as retirement benefits for the executive officers. The
premiums paid by the Company allocable to these items are included in the
table.
(2) Mr. Loder joined the Company in March 1995.
In 1995 the Company entered into employment agreements with Mr. Bertrand
and Ms. Mitcham which expired on September 30, 1996. The terms of the
agreements were essentially identical. Mr. Bertrand received an annual salary
of $162,000 and Ms. Mitcham received an annual salary of $156,000. Each was
also entitled to 5% of the first $2,000,000 of annual pre-tax income of the
Company, 4% of the amount in excess of $2,000,000 but less than $2,500,000, and
3% of the amount over $2,500,000. Mr. Bertrand was also granted the right to
create a special bonus pool for key employees to receive up to 2% of the pre-tax
income between $2,000,001 and $2,500,000 and up to 4% of the pre-tax income
greater than $2,500,000.
Effective October 1, 1996, the Company entered into new employment
agreements with Mr. Bertrand and Ms. Mitcham. The terms of these agreements are
essentially identical, except that Mr. Bertrand's annual salary is $400,000 and
Ms. Mitcham's annual salary is $376,000. Mr. Bertrand and Ms. Mitcham are each
also entitled to a bonus if the Company has pre-tax annual income between $3
million and $20 million. Each is entitled to receive 5% of any annual pre-tax
income between $3 million and $5 million; four percent of the annual pre-tax
income between $5 million and $10 million; and three percent of the annual pre-
tax income between $10 million and $20 million. The term of each agreement is
three years. Each of the agreements may be earlier terminated upon mutual
agreement, death, disability or conviction of the officer, or a material breach
of the agreement by the officer.
39
<PAGE>
OPTION PLANS
In 1993 and 1995 the Company adopted stock option plans for the grant of
options to employees and consultants (the "Plans"). The provisions for each of
the Plans are similar. There are presently outstanding or reserved for issuance
options to acquire up to 518,850 shares of Common Stock. Under the Plans, the
Company may issue options to purchase up to an additional 440,906 shares of
Common Stock. Under the Plans, options may be granted in the form of "incentive
stock options" as defined in Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code") and non-statutory stock options. The Board of Directors
has the authority to fix the terms and number of options to be granted and the
employees to receive the options. The exercise price of each stock option
granted under the Plans may not be less than 100% of the fair market value of
the Common Stock on the date of grant (110% in the case of incentive stock
options granted to employees owning more than 10% of the Common Stock). All of
the outstanding options were granted at exercise prices which were not less than
the fair market value on the respective grant dates. See "Principal
Shareholders" regarding outstanding options to officers and directors of the
Company.
The maximum term of options granted under the plans is 10 years. The
aggregate fair market value of the Common Stock with respect to which incentive
stock options are first exercisable in any calendar year may not exceed $100,000
per optionee. Options granted under the Plans are non-transferable and
generally expire 30 days after the termination of any optionee's service to the
Company. In general, if an optionee is permanently disabled or dies during his
or her service to the Company, such person's option may be exercised up to 90
days following such disability or death.
OPTION GRANTS IN FISCAL YEAR ENDED SEPTEMBER 30, 1996
No stock options were granted by the Company during the fiscal year ended
September 30, 1996 to any executive officer named in the Summary Compensation
Table.
OPTION EXERCISES AND YEAR-END VALUES
The following table shows option exercises by the named executive officers
during the fiscal year ended September 30, 1996. Also reported are the year-end
values for their unexercised "in-the-money" options, which represent the
positive spread between the exercise price of any such option and the market
price of the Common Stock on September 30, 1996.
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Number of Options Options at
Shares Under- Value At Year End (#) Year End ($)
lying Options Realized Exercisable/ Exercisable/
Name Exercised (#) ($) Unexercisable Unexercisable
- -------- -------------- -------- --------------- -------------
<S> <C> <C> <C> <C>
David P. Bertrand -- -- 66,400/14,000 853,580/183,190
Jana Mitcham -- -- 61,600/14,000 792,680/183,190
Barry C. Loder -- -- 33,333/16,667 402,079/201,040
Ronnie D. Meaux -- -- 18,500/6,000 238,495/78,510
</TABLE>
40
<PAGE>
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company receive $18,000 per year,
$400 for each Board meeting attended, and $200 for each committee meeting of the
Board attended. Directors who are also employees of the Company receive no
additional compensation for serving as Directors. The Company reimburses its
Directors for travel and out-of-pocket expenses in connection with their
attendance at meetings of the Board of Directors. The Company may also utilize
the services of its outside directors as consultants to the Company. During the
fiscal year ended September 30, 1995 the Company paid Mr. Pusey $40,000, Mr.
Kashenberg $ 12,000 and Mr. Florence $2,000 for consulting services. During the
fiscal year ended September 30, 1996, the Company paid Mr. Pusey $58,000, and
$12,000 to each of Mr. Kashenberg and Mr. Florence.
In November 1995, the Board of Directors of the Company adopted the 1995
Non-Discretionary Stock Option Plan for directors of the Company who are not
eligible to participate in the other Plans (the "Non-Discretionary Plan.") The
Non-Discretionary Plan provides that the Company grant options to purchase 5,000
shares of the Company's Common Stock to each eligible director on the date of
adoption of the Non-Discretionary Plan (November 28, 1995), to each person who
thereafter becomes a director of the Company and, as of December 1 of each year
(commencing in 1996), options to purchase an additional 5,000 shares of Common
Stock will be granted to each eligible director. The exercise price of the
options is the fair market value of the Common Stock on the date the options are
granted. The options are exercisable in full as of the date of grant. The shares
acquired upon exercise of these options cannot be sold for six months following
the date of grant. In November 1995, the Company granted options to purchase
5,000 shares of Common Stock at a price of $19.75 per share to each of F. Wayne
Ballenger, M.F. Florence and Richard S. Kashenberg. In December 1996 the Company
granted options to purchase 5,000 shares of Common Stock at a price of $12.38
per share to each of F. Wayne Ballenger, M.F. Florence and Richard S.
Kashenberg. Each option granted pursuant to the Non-Discretionary Plan will
expire five years from the date of grant, except that an option will expire, if
not exercised, 30 days after the optionee ceases to be a director of the
Company.
Options granted pursuant to the Non-Discretionary Plan will not qualify for
the special tax benefits given to incentive stock options under Section 422 of
the Code. Accordingly, all of the stock options granted pursuant to the Non-
Discretionary Plan may be deemed to be non-statutory stock options. The options
are generally non-transferable.
INDEMNIFICATION AND LIMITATION ON DIRECTORS' AND OFFICERS' LIABILITY
The Company's Articles of Incorporation provide for the indemnification of
directors and officers of the Company. In general, the Company will indemnify
its officers and directors against expenses incurred by them in connection with
the defense of any action, suit or proceeding in which they are made parties,
except in relation to matters to which any such director or officer is adjudged
in such action, suit or proceeding to be liable for gross negligence or willful
misconduct in the performance of duty. The Company has no director and officer
liability insurance. There are no pending claims for indemnification, nor is
the Company aware of any pending or threatened claims which would result in a
claim for indemnification.
In addition, the Company's Articles of Incorporation eliminate liability of
directors to the Company and its shareholders for monetary damages for an act or
omission in the director's capacity as a director except in the case of
liability: (i) for a breach of the director's duty of loyalty to the Company or
its shareholders; (ii) for acts or omissions not in good faith or that
constitute a breach of duty of the director to the Company or an act or omission
that involves intentional misconduct or a knowing violation of law, (iii) a
transaction from which the director received an improper benefit, whether or not
the benefit resulted from an action taken within the scope of the director's
office or (iv) an act or omission for which the liability of a director is
expressly provided by an applicable statute. It does not limit the rights of
third parties, nor does it limit or eliminate the rights of the Company or any
shareholder, to seek non-monetary relief such as an injunction or rescission if
a director breaches his duty of care. The provision applies only to the duty of
care and not to any other fiduciary duties to the Company and its shareholders.
41
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foreign provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
42
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 13, 1997 and as adjusted
to reflect the sale of 434,416 shares of Common Stock offered hereby, by (i)
each shareholder who is known by the Company to own beneficially more than 5% of
its Common Stock, (ii) each director of the Company and (iii) all directors and
officers of the Company as a group.
<TABLE>
<CAPTION>
Number of Percentage of Ownership
Beneficial Owner Shares Owned Before Offering After Offering
- -------------------- ---------------- ------------------------------------
<S> <C> <C> <C>
Shermfin Corp. 1,215,390(1) 21.8 20.2
150 Signet Dr.
Weston, Ontario, Canada
9ML 1T9
M. F. Florence 1,231,390(1)(2) 22.1 20.5
150 Signet Dr.
Weston, Ontario, Canada
M9L 1T9
Bernard Sherman 1,215,390(1) 21.8 20.2
150 Signet Dr.
Weston, Ontario, Canada
M9L 1T9
Jana Mitcham 377,304(3) 6.8 6.3
10618 Great Plains
Houston, Texas 77064
David P. Bertrand 328,692(4) 5.9 5.5
10622 Great Plains
Houston, TX 77064
Gregory Pusey 236,978(5) 4.2 3.9
1722 Buffehr Creek Road
Vail, Colorado 81657
Richard S. Kashenberg 60,372(6) 1.1 1.0
15501 First Street
Irwindale, CA 91706
F. Wayne Ballenger 10,000(7) .2 .2
3134 Meadway Drive
Houston, Texas 77082
All Officers and Directors 2,366,352(8) 42.5 39.4
as a Group (9 Persons)
</TABLE>
___________________
(1) Messrs. Sherman and Florence may be deemed beneficial owners of the shares
held by Shermfin Corp. due to their affiliations with Shermfin Corp. In
July, 1994, Mr. Sherman and Shermfin Corp. consented to the issuance of an
Order of the Securities and Exchange Commission (the "Commission") that
they cease and desist from violations of certain reporting and anti-fraud
provisions of the Securities Exchange Act of 1934. Mr. Sherman and
Shermfin Corp. consented to this Order without admitting or denying the
findings of the Commission that they had failed to file reports of
beneficial ownership of the common stock of Kinesis, Inc. with the
Commission on Form 3 and Schedule 13G. The Company has no relationship
with Kinesis, Inc.
43
<PAGE>
(2) Includes options to acquire (i) 6,000 shares of Common Stock at $1.665 per
share, of which options to acquire 2,000 shares become exercisable in
October 1997, (ii) options to acquire 5,000 shares of Common Stock at
$19.75 per share, and (iii) options to acquire 5,000 shares of Common Stock
at $12.38 per share.
(3) Includes 5,000 Warrants and options to acquire (i) 42,000 shares of Common
Stock at $1.665 per share, of which options to acquire 14,000 shares become
exercisable in October 1997, (ii) 16,800 shares of Common Stock at $1.875
per share, and (iii) 16,800 shares of Common Stock at $2.25 per share. Also
includes 11,554 shares of Common Stock owned by her daughter, 4,000 shares
of Common Stock owned by her husband, and options held by her husband to
acquire 4,800 shares of Common Stock at $1.665 per share. Does not include
options to purchase an aggregate of 45,000 shares of Common Stock at $13.00
per share, which become exercisable in equal amounts over a three-year
period commencing November 20, 1997.
(4) Includes options to acquire (i) 42,000 shares of Common Stock at $1.665 per
share, of which options to acquire 14,000 shares become exercisable in
October 1997, (ii) 19,200 shares of Common Stock at $1.875 per share, and
(iii) 19,200 shares of Common Stock at $2.25 per share. Also includes
40,000 shares owned by his two sons and options held by his wife to acquire
4,800 shares of Common Stock at $1.665 per share. Does not include options
to purchase an aggregate of 47,400 shares of Common Stock at $13.00 per
share, which become exercisable in equal amounts over a three-year period
commencing November 20, 1997.
(5) Includes 3,000 Warrants and options to acquire (i) 6,000 shares of Common
Stock at $1.665 per share of which options to acquire 2,000 shares become
exercisable in October 1997, (ii) 6,000 shares of Common Stock at $1.875
per share, and (iii) 6,000 shares of Common Stock at $2.25 per share. Also
includes 45,468 shares of Common Stock and 14,000 Warrants held by entities
which are affiliates of Mr. Pusey, and 20,104 shares of Common Stock and
1,000 Warrants held by his wife, individually, or as custodian for their
minor children. Does not include options to purchase an aggregate of 9,000
shares of Common Stock at $13.00 per share, which become exercisable in
equal amounts over a three-year period commencing November 20, 1997.
(6) Includes options to acquire (i) 6,000 shares of Common Stock at $1.665 per
share, of which options to acquire 2,000 shares become exercisable in
October 1997, (ii) options to acquire 5,000 shares of Common Stock at
$19.75 per share, and (iii) options to acquire 5,000 shares of Common Stock
at $12.38 per share.
(7) Includes options to acquire (i) 5,000 shares of Common Stock at $19.75 per
share; and (ii) options to acquire 5,000 shares of Common Stock at $12.38
per share.
(8) Includes the following options and Warrants held by persons who are
officers, but not directors, of the Company: 9,000 Warrants and options to
acquire (i) 15,500 shares of Common Stock at $1.665 per share, of which
options to acquire 6,000 shares become exercisable in October 1997, (ii)
4,500 shares of Common Stock at $1.875 per share, (iii) 4,500 shares of
Common Stock at $2.25 per share, (iv) 50,000 shares of Common Stock at
$2.6875 per share, and (v) 10,000 shares of Common Stock at $11.50 per
share. Does not include options to purchase an aggregate of 37,250 shares
of Common Stock at $13.00 per share, which become exercisable in equal
amounts over a three-year period commencing November 20, 1997.
44
<PAGE>
CERTAIN TRANSACTIONS
The Company and its predecessors borrowed an aggregate of $650,000 from
Shermfin Corp. during the period from 1988 to 1991. The loans were evidenced by
promissory notes with interest at rates ranging from 9% to 11% per annum with
maturity dates from October 1995 to October 1996. The promissory notes were
convertible at the option of Shermfin Corp. into an aggregate of 966,834 shares
of Common Stock. In March 1995 the Company entered into an agreement with
Shermfin Corp. pursuant to which it was agreed that Shermfin Corp. would convert
$130,500 of debt from the note in the principal amount of $250,000 into 360,000
shares of the Company's Common Stock at the closing of the Company's public
offering of securities that year. It was further agreed that the remaining
principal balance of the promissory note in the principal amount of $250,000
($119,500), plus the entire principal balances of the other three notes (an
aggregate of $400,000) would be repaid to Shermfin Corp. at the closing of the
offering. The Company believes that the borrowing arrangements with Shermfin
Corp. were made on terms at least as favorable as could be obtained from third
parties.
In its March 1995 agreement with Shermfin Corp., the Company agreed to
register the 360,000 shares to be issued to Shermfin Corp. during the period
commencing one year after the date of commencement of the offering (July 10,
1995) and ending four years after the date of the offering (July 10, 1999). See
"Shares Eligible For Future Sale". The Company also agreed that, for so long as
Shermfin Corp. owns 10% or more of the outstanding Common Stock of the Company,
Shermfin Corp. will be entitled to designate one person to serve as a member of
the Company's Board of Directors. The current designee is M.F. Florence who
shall continue to serve in such capacity until written notice otherwise is
provided by Shermfin Corp. to the Company. See "Management".
Prior to the Merger of the Company's predecessors, Nutrition Express
Corporation of Colorado, Inc., and Nutrition Express Corporation of Utah, Inc.
("NEC-Utah"), into the Company in 1994, Shermfin Corp. held, among other
securities, all of the outstanding shares of the Series A Preferred Stock of
NEC-Utah. In exchange for the agreement of Shermfin Corp. to convert the Series
A Preferred Stock into common stock of NEC-Utah, NEC-Utah agreed to reduce the
conversion rate. As a result, the Company recognized a conversion expense
against net income applicable to common stock of $181,243 in the fiscal year
ended September 30, 1994.
The largest supplier of products to the Company is NION Laboratories, a
wholly owned subsidiary of Shermfin Corp. NION Laboratories is a manufacturer
of pharmaceutical and consumer-related products. During the fiscal years ended
September 30, 1994 and 1995, the Company purchased approximately $1,706,000 and
$2,258,000 of goods, respectively, from NION Laboratories. During the year
ended September 30, 1996, the Company purchased $5,234,000 of goods from NION.
In addition, Richard S. Kashenberg, a director of the Company, served as the
chief executive officer of NION until December 1996. Mr. Kashenberg is
currently a consultant to NION. It is anticipated that this relationship will
continue in the future and the Company believes that the terms it has obtained
from NION are at least as favorable as could have been obtained from third
parties.
In October 1995 the Company granted warrants to purchase 500,000 shares of
Common Stock at $12.50 to Kevin Trudeau. The warrants become exercisable on
April 15, 1996 and expire on October 14, 1998. The exercise price of the
warrants on the date of grant was not less than the market price of the
Company's Common Stock on that date. In April 1996 Mr. Trudeau agreed to the
cancellation of these warrants and they are no longer outstanding.
45
<PAGE>
DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 20,000,000 shares of
Common Stock, par value $.01 (the "Common Stock"), and 1,000,000 shares of
preferred stock, $.001 par value (the "Preferred Stock").
COMMON STOCK
As of the date of this Amended Prospectus, the Company had outstanding
6,024,117 shares of Common Stock. Holders of Common Stock are, subject to the
rights of the holders of Preferred Stock, entitled to receive dividends, when
and if declared by the Board of Directors, out of funds of the Company legally
available therefor. Each holder of Common Stock is entitled to cast one vote
per share in all matters to be voted upon by shareholders. Cumulative voting is
not allowed in the election of Directors or for any other purpose. Therefore,
the holders of more than 50% of the outstanding Common Stock can elect all
Directors. The holders of one-third of the outstanding Common Stock constitute
a quorum at any meeting of shareholders and the vote by the holders of the
majority of the outstanding shares is required to effect certain fundamental
corporate changes, such as liquidation, merger or amendment of the Articles of
Incorporation. The shares of the Company's Common Stock have no preemptive or
conversion rights, or redemption or sinking fund provisions, and are not liable
for further call or assessment. In the event of any liquidation, dissolution or
winding up of the affairs of the Company, whether voluntary or otherwise, after
payment or provision for payment of the debts and other liabilities of the
Company, including any liquidation preference on the Preferred Stock of the
Company, each holder of Common Stock will be entitled to receive a pro rata
portion of the remaining net assets of the Company, if any.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
shareholders, to issue up to 1,000,000 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of such series, without any further
vote or action by shareholders. The Board has not designated any shares of
Preferred Stock. Therefore, the full 1,000,000 shares of Preferred Stock are
available for issuance in series. The issuance of Preferred Stock could affect
adversely the voting power of holders of Common Stock and the likelihood that
such holders would receive dividends and dividend payments and payments upon
liquidation could have the effect of delaying, deferring or preventing a change
in control of the Company. The Company has no present plan to issue any shares
of Preferred Stock.
WARRANTS AND OPTIONS
The holder of one Warrant is entitled to purchase one share of the
Company's Common Stock at a price of $3.75 per share until July 10, 1998,
unless earlier redeemed by the Company. The Company may at any time and from
time to time extend the term of the Warrants or reduce the exercise price of the
Warrants. Unless exercised during the exercise period, the Warrants will expire
automatically.
Subject to compliance with applicable securities laws, Warrant certificates
may be transferred or exchanged for new certificates of different denominations
at the offices of the Warrant Agent described below. The holders of Warrants as
such, are not entitled to vote, to receive dividends or to exercise any of the
rights of shareholders for any purpose.
For a holder to exercise Warrants, there must be a current registration
statement in effect with the SEC and various state securities authorities
registering the shares of Common Stock underlying the Warrants or, at the sole
determination of the Company and its counsel, there must be a valid exemption
therefrom. The Company intends to maintain a current registration statement
which will permit the exercise of the Warrants. Maintaining a current effective
registration statement could result in substantial expense to the Company and
there is no assurance that the Company will be able to maintain a current
registration statement covering the shares of Common Stock issuable upon
46
<PAGE>
exercise of the Warrants. The Warrants may not be exercised in any state in
which the issuance of Common Stock and exercise of the Warrants is not permitted
under such state's "blue sky" or securities laws. Holders of the Warrants may
telephone the Company in order to ascertain in which states the Warrants may be
exercised. There is no minimum number of shares that must be purchased upon
exercise of the Warrants, except that no fractional shares will be issued.
The Company has the right, at its discretion, to call all of the Warrants
for redemption on 30 days' prior written notice at a redemption price of $.05
per Warrant if: (i) the closing bid price of the Company's Common Stock exceeds
the exercise price of the Warrants by at least 50% during a period of at least
20 of the 30 trading days immediately preceding the Notice of Redemption; (ii)
the Company has in effect a current registration statement covering the Common
Stock issuable upon exercise of the Warrants; and (iii) the expiration of the 30
day notice period is within the term of the Warrants. If the Company elects to
exercise its redemption right, holders of Warrants may either exercise their
Warrants, sell such Warrants in the market or tender their Warrants to the
Company for redemption. Within five business days after the end of the 30-day
period, the Company will mail a redemption check to each registered holder of a
Warrant who holds unexercised Warrants as of the end of the 30-day period,
irrespective of whether such holder has surrendered the Warrant certificates for
redemption. The Warrants may not be exercised after the end of the 30-day
period.
In addition, in connection with the Company's public offering of securities
pursuant to a Prospectus dated July 10, 1995, the Company sold to Cohig &
Associates, Inc. and Neidiger/Tucker/Bruner, Inc., the Representatives of the
Underwriters and their designees, for $100 options to purchase an aggregate of
160,000 shares of Common Stock and 80,000 Warrants to purchase 80,000 shares of
Common Stock (the "Representatives' Securities"). The Representatives'
Securities are exercisable for a four-year period which commenced July 10, 1996
at $3.225 per share of Common Stock and at $.15 per Warrant. The Warrants have
the same exercise price ($3.75) as the Warrants issued to the public.
TRANSFER AND WARRANT AGENT
Corporate Stock Transfer, Inc., 370 Seventeenth Street, Suite 2350, Denver,
Colorado 80202-4614, is the Transfer Agent for the Common Stock and the Warrants
and the Warrant Agent under the Warrant Agreement.
SHARES ELIGIBLE FOR FUTURE SALE
Assuming the sale of all shares offered pursuant to this Amended
Prospectus, the Company will have outstanding 6,024,117 shares of Common Stock.
The shares issued in this offering and the shares previously outstanding will be
freely tradeable without restriction under the Securities Act of 1933, as
amended (the "Securities Act"), except for any shares held by an "affiliate" of
the Company, as that term is defined in Rule 144 under the Securities Act.
The Company's officers and directors and their affiliates own beneficially
2,365,952 shares of Common Stock of which 2,022,852 shares are currently
eligible for sale in the public market pursuant to Rule 144. In addition, the
Company has agreed to register the 360,000 shares issued to Shermfin Corp. in
July 1995 at the request of Shermfin Corp. during the period commencing July 10,
1996 and ending July 10, 1999.
In general, under Rule 144, as currently in effect, a person who has
beneficially owned restricted shares for at least two years, including an
"affiliate", as that term is defined in Rule 144, is entitled to sell within any
three month period a number of shares that does not exceed the greater of 1% of
the then outstanding shares of Common Stock (approximately 60,241 shares
immediately following this offering) or the average weekly trading volume of the
Common Stock during the four calendar weeks preceding such sale. The two year
holding period will be reduced to one year upon effectiveness (in or about April
1997) of an amendment by the SEC to Rule 144. Sales under Rule 144 are subject
to certain manner of sale limitations, notice requirements and the availability
of current public information about the Company. It is provided in Rule 144(k)
that a person who is not an "affiliate" of the issuer at any time during the
three months preceding a sale and who has beneficially owned shares for at least
three years (two years upon
47
<PAGE>
effectiveness of the amendment to Rule 144) is entitled to sell those shares at
any time under Rule 144 without having to comply with the public information,
volume limitation, manner of sale and notice provisions of Rule 144.
The Company has agreed with Nightingale-Conant that the Company will file a
registration statement under the Securities Act to register for resale an
aggregate of 120,000 shares of Common Stock owned by KT Corp., a major
distributor of the Company and an affiliate of Kevin Trudeau, and Nightingale-
Conant Corporation, a supplier of cassette tapes to the Company. These persons
acquired their shares from Shermfin Corp. in a private transaction in October
1995. The Company has agreed with Nightingale-Conant Corporation that it will
file this registration statement upon the request of Nightingale-Conant
Corporation.
48
<PAGE>
LEGAL MATTERS
The law firm of Bearman Talesnick & Clowdus Professional Corporation,
Denver, Colorado, has acted as counsel for the Company in connection with this
offering and has rendered an opinion concerning the legality of the Common Stock
offered hereby. Attorneys in that law firm own 8,000 shares of the Common
Stock.
EXPERTS
Financial statements of the Company as of September 30, 1996 and for the
year then ended included in this Amended Prospectus and in the Registration
Statement have been audited by BDO Seidman, LLP, independent certified public
accountants, to the extent set forth in their report appearing elsewhere herein
and in the Registration Statement, and are included in reliance upon such report
given upon the authority of said firm as experts in accounting and auditing.
Financial statements of the Company as of September 30, 1995 and for each of the
years in the two-year period ended September 30, 1995 have been included herein
in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
49
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Interim Financial Statements:
Consolidated Balance Sheets ...............................................F-2
Consolidated Statements of Operations .....................................F-3
Consolidated Statements of Stockholders' Equity............................F-4
Condensed Consolidated Statements of Cash Flows ...........................F-5
Notes to Consolidated Financial Statements.................................F-6
Fiscal Financial Statements:
Independent Auditors' Reports..............................................F-7
Consolidated Balance Sheets ...............................................F-9
Consolidated Statements of Operations ....................................F-10
Consolidated Statements of Stockholders' Equity ..........................F-11
Consolidated Statements of Cash Flows ....................................F-12
Notes to Consolidated Financial Statements................................F-13
F-1
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
Consolidated Balance Sheets
Assets
<TABLE>
<CAPTION>
December 31, September 30,
1996 1996
(Unaudited)
----------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $14,541,312 15,588,504
Accounts receivable, net 335,379 368,062
Inventories 5,822,121 6,365,350
Deferred tax asset, net 3,670,000 1,500,000
Refundable federal income taxes 611,191 500,000
Prepaid expenses and other assets 375,055 260,091
----------- ----------
Total current assets 25,355,058 24,582,007
Property and equipment, net 3,289,107 2,493,759
Intangible assets, net 291,037 340,063
Other assets 219,976 212,031
----------- ----------
$29,155,178 27,627,860
=========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 3,192,714 2,577,101
Accrued bonuses and commissions 1,221,988 2,041,678
Accrued expenses and other liabilities 615,858 552,424
Accrued class action settlement 6,200,000 --
Deferred income 3,882,996 3,893,570
Federal and franchise tax payable 850,000 850,000
Dividends payable 111,371 111,371
----------- ----------
Total current liabilities 16,074,927 10,026,144
----------- ----------
Stockholders' equity:
Preferred stock, $.001 par value; 1,000,000
authorized; none issued and outstanding -- --
Common stock, $.01 par value; 20,000,000 shares
authorized; 5,570,962 and 5,568,562 shares, respectively 55,710 55,686
Additional paid-in capital 9,943,043 9,939,059
Retained earnings 3,003,883 7,611,580
Cumulative foreign currency translation adjustment 77,615 (4,609)
----------- ----------
Total stockholders' equity 13,080,251 17,601,716
----------- ----------
$29,155,178 27,627,860
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
Consolidated Statements Of Operations (Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended December 31,
----------------------------
1996 1995
---------- ----------
<S> <C> <C>
Net sales $19,269,268 21,262,476
Cost of sales 14,184,630 14,492,147
----------- ----------
Gross profit 5,084,638 6,770,329
Marketing, distribution and
administrative expenses 5,580,599 2,901,680
----------- ----------
Income (loss) from operations (495,961) 3,868,649
----------- ----------
Other income (expense):
Class action settlement (6,425,000) --
Interest, net 175,156 151,364
Other, net (31,714) (19,733)
----------- ----------
(6,281,558) 131,631
----------- ----------
Income (loss) before income
tax expense (benefit) (6,777,519) 4,000,280
Income tax expense (benefit) (2,281,191) 1,447,000
----------- ----------
Net income (loss) $(4,496,328) 2,553,280
=========== ==========
Primary earnings (loss) per
common share $ (.71) .40
==== =====
Fully diluted earnings
(loss) per common share $ (.71) .39
==== =====
Weighted average common shares:
Primary 6,319,813 6,419,365
=========== ==========
Fully diluted 6,319,813 6,555,085
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
Consolidated Statements of Stockholders' Equity
Three Months Ended December 31, 1996 and 1995 (Unaudited)
<TABLE>
<CAPTION>
Cumulative
Additional Retained Foreign Total
Common Paid-In Earnings Currency Stockholders'
Stock Capital (Deficit) Adjustment Equity
------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance, at September 30, 1995 $50,565 8,089,992 (982,213) - $ 7,158,344
Net income (loss) - - 2,553,280 - 2,553,280
Exercise of stock options 262 36,736 - - 36,998
Exercise of warrants 1,851 687,526 - - 689,377
------- --------- ----------- ---------- -----------
Balance, at December 31, 1995 $52,678 8,814,254 1,571,067 0 $10,437,999
======= ========= ========== ========== ===========
Balance, at September 30, 1996 $55,686 9,939,059 7,611,580 (4,609) $17,601,716
Net income (loss) - - (4,496,328) - (4,496,328)
Cash dividends - - (111,369) - (111,369)
Foreign currency adjustment - - - 82,224 82,224
Exercise of stock options 24 3,984 - - 4,008
------- --------- ----------- --------- -----------
Balance, at December 31, 1996 $55,710 9,943,043 3,003,883 77,615 $13,080,251
======= ========= ========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
Condensed Consolidated Statements Of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended December 31,
---------------------------
1996 1995
---------- ----------
<S> <C> <C>
Net cash provided by (used in) operating activities $ (87,725) 3,804,987
Net cash used in investing activities (934,328) (405,777)
Net cash provided by (used in) financing activities (107,363) 726,375
Cumulative foreign currency translation adjustment 82,224 --
----------- ----------
Net increase (decrease) in cash and cash equivalents (1,047,192) 4,125,585
Cash and cash equivalents at beginning of period 15,588,504 8,960,100
----------- ----------
Cash and cash equivalents at end of period $14,541,312 13,085,685
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
Notes To Consolidated 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-Q. 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 December 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 on Form 10-KSB. The results of
operations for the period ended December 31, 1996 are not necessarily indicative
of operating results for the full year
Included in marketing, distribution and administrative expenses during
the three months ended December 31, 1996 is an accrual of $1,200,000 to cover
the estimated cost for a special award to a group of executive distributors.
This special award relates to the recruitment of certain distributors by Kevin
Trudeau, a key distributor of the Company, and representations which may have
been made regarding entitlement to benefits or prizes, principally cruises, as
performance incentives to these distributors. Although the Company does not
believe that it is legally responsible for any such representations, in the
interest of promoting good distributor relations, the Company intends to offer
certain distributors the right to participate in cruises at the Company's
expense.
During the three months ended December 31, 1996, the Company accrued
$6,425,000 for the preliminary settlement of class action lawsuits that had been
filed during the fiscal year ended September 30, 1996. The settlement amount
includes estimated amounts due to class action members, to attorneys, and for
costs of administration.
The Company has not yet adopted Statements of Financial Accounting
Standards No. 121 or No. 123. The Company will be required to adopt these
Statements during the fiscal year ended September 30, 1997. The Company does
not believe either Statement will have a material impact on the financial
statements.
F-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors
and Shareholders of
Nutrition for Life International, Inc.
We have audited the consolidated balance sheet of Nutrition for Life
International, Inc. as of September 30, 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Nutrition for Life International, Inc. at September 30, 1996 and the results of
its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
BDO Seidman, LLP
Houston, Texas
November 1, 1996, except Notes 7 and 8
which are dated December 4, 1996.
F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
Nutrition For Life International, Inc.:
We have audited the accompanying balance sheet of Nutrition For Life
International, Inc. as of September 30, 1995 and the related statements of
operations, stockholders' equity and cash flows for each of the years in the
two-year period ended September 30, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nutrition For Life
International, Inc. as of September 30, 1995 and the results of its operations
and its cash flows for each of the years in the two-year period ended September
30, 1995 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Houston, Texas
November 2, 1995, except as to note 2,
which is as of December 8, 1995
F-8
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
ASSETS
------
Current Assets:
<S> <C> <C>
Cash and cash equivalents......................... $15,588,504 $ 8,960,100
Accounts receivable, less allowance for doubtful
accounts of $38,000 and $0....................... 368,062 172,762
Inventories....................................... 6,365,350 2,267,617
Deferred tax asset, net (Note 5).................. 1,500,000 -
Refundable federal income taxes................... 500,000 -
Prepaid expenses and other assets................. 260,091 89,251
----------- -----------
Total Current Assets............................ 24,582,007 11,489,730
Property and Equipment, Net (Note 4).......................... 2,493,759 620,818
Deferred Tax Asset, Net (Note 5).............................. - 79,142
Intangible Assets, Net........................................ 340,063 227,498
Other Assets.................................................. 212,031 148,425
----------- -----------
$27,627,860 $12,565,613
=========== ===========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
Current Liabilities:
<S> <C> <C>
Accounts payable.................................... $ 2,577,101 $ 2,389,706
Accrued bonuses and commissions..................... 2,041,678 1,266,616
Deferred income (Note 7)............................ 3,893,570 347,795
Accrued expenses and other liabilities.............. 552,424 559,415
Federal and franchise tax payable................... 850,000 843,737
Dividends payable (Note 2).......................... 111,371 -
----------- -----------
Total Current Liabilities......................... 10,026,144 5,407,269
----------- -----------
Commitments and Contingencies (Note 8)
Stockholders' Equity (Note 2):
Preferred stock, $.001 par value; 1,000,000
authorized; none issued and outstanding........... - -
Common stock; $.01 par value; 20,000,000
and 10,000,000 shares authorized.................. 55,686 50,565
Additional paid-in capital.......................... 9,939,059 8,089,992
Retained earnings (deficit)......................... 7,611,580 (982,213)
Cumulative foreign currency translation adjustment.. (4,609) -
----------- -----------
Total Stockholders' Equity........................ 17,601,716 7,158,344
----------- -----------
$27,627,860 $12,565,613
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales (Notes 7 and 10)................... $97,403,757 $32,289,752 $17,583,195
Cost of sales (Note 9)....................... 67,826,803 23,515,259 12,782,597
----------- ----------- -----------
Gross profit 29,576,954 8,774,493 4,800,598
Marketing, distribution and
administrative expenses (Note 8)........... 16,230,023 5,853,330 4,358,503
----------- ----------- -----------
Income from operations....................... 13,346,931 2,921,163 442,095
----------- ----------- -----------
Other income (expense)
Interest, net.................... 711,563 (51,499) (59,539)
Other, net (Note 8).............. (63,533) 139,189 48,747
----------- ----------- -----------
648,030 87,690 (10,792)
----------- ----------- -----------
Income before income tax expense............. 13,994,961 3,008,853 431,303
Income tax expense (Note 5).................. 5,289,797 764,595 -
----------- ----------- -----------
Net income 8,705,164 2,244,258 431,303
Preferred stock conversion (Note 3).......... - - 181,243
----------- ----------- -----------
Net income applicable to common shares....... $ 8,705,164 $ 2,244,258 $ 250,060
=========== =========== ===========
Primary earnings per common share............ $1.36 $.65 $.09
=========== =========== ===========
Fully-diluted earnings per common share...... $1.36 $.51 $.08
=========== =========== ===========
Weighted average common shares outstanding:
Primary.......................... 6,405,152 3,437,258 2,824,734
Fully-diluted.................... 6,405,152 4,443,532 3,791,566
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Cumulative
Foreign
Common Stock Additional Retained Currency Total
------------------ Paid-in Earnings Translation Stockholders'
Shares Amount Capital (Deficit) Adjustment Equity
--------- ------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, at October 1, 1993.............. 2,824,734 $28,247 $3,664,711 $(3,476,531) $ - $ 216,427
Net income............................... - - - 431,303 - 431,303
Preferred stock conversion............... - - 181,243 (181,243) - -
--------- ------- ---------- ----------- ----------- -----------
Balance, at September 30, 1994........... 2,824,734 28,247 3,845,954 (3,226,471) - 647,730
Net income............................... - - - 2,244,258 - 2,244,258
Conversion of debt....................... 360,000 3,600 126,900 - - 130,500
Public offering.......................... 1,840,000 18,400 4,089,331 - - 4,107,731
Exercise of stock options................ 30,790 308 24,067 - - 24,375
Exercise of warrants..................... 1,000 10 3,740 - - 3,750
--------- ------- ---------- ----------- ----------- -----------
Balance, at September 30, 1995........... 5,056,524 50,565 8,089,992 (982,213) - 7,158,344
Net income............................... - - - 8,705,164 - 8,705,164
Cash dividends (Note 2).................. - - - (111,371) - (111,371)
Foreign currency translation adjustment.. - - - - (4,609) (4,609)
Exercise of stock options................ 27,454 275 36,723 - - 36,998
Exercise of warrants..................... 484,584 4,846 1,812,344 - - 1,817,190
--------- ------- ---------- ----------- ----------- -----------
Balance, at September 30, 1996........... 5,568,562 $55,686 $9,939,059 $ 7,611,580 $ (4,609) $17,601,716
========= ======= ========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------ ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 8,705,164 $ 2,244,258 $ 431,303
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 400,368 211,469 161,112
Bad debt expense............................... 671,198 93,744 88,581
Deferred tax benefit........................... (1,420,858) (79,142) -
Changes in assets and liabilities:
Accounts receivable......................... (866,498) (171,025) (100,654)
Inventories................................. (4,097,733) (1,241,050) (70,887)
Refundable federal income taxes............. (500,000) - -
Prepaids and other assets................... (170,840) 30,795 (89,487)
Other assets................................ (63,606) (48,976) (60,094)
Accounts payable............................ 187,395 1,847,497 87,801
Consigned inventory deposits................ - (48,881) 24,491
Deferred income............................. 3,545,776 245,023 10,088
Accrued expenses and other liabilities...... 768,070 1,205,013 73,322
Federal and franchise tax payable........... 6,263 843,737 -
----------- --------- -------
Net cash provided by operating activities................. 7,164,699 5,132,462 555,576
----------- --------- -------
Cash flows from investing activities:
Purchase of property and equipment................ (2,174,214) (407,882) (167,039)
Purchase of intangible assets..................... (211,660) - -
----------- --------- -------
Net cash used in investing activities..................... (2,385,874) (407,882) (167,039)
----------- --------- -------
Cash flows from financing activities:
Exercise of stock options......................... 36,998 24,375 -
Exercise of warrants.............................. 1,817,190 3,750 -
Principal repayments on long-term debt............ - (519,500) -
Proceeds from notes payable - bank................ - - 45,000
Principal repayments on notes payable - bank...... - (20,000) (25,000)
Net proceeds from public offering................. - 4,107,731 -
----------- --------- -------
Net cash provided by financing activities................. 1,854,188 3,596,356 20,000
----------- --------- -------
Net increase in cash and cash equivalents................. 6,633,013 8,320,936 408,537
Cash and cash equivalents, beginning of year.............. 8,960,100 639,164 230,627
Cumulative foreign currency translation adjustment........ (4,609) - -
----------- --------- -------
Cash and cash equivalents, end of year.................... $15,588,504 $ 8,960,100 $ 639,164
=========== ============ =========
Supplemental disclosure of noncash financing activities:
Conversion of convertible long-term debt to
common stock.................................... $ - $ 130,500 $ -
============ ============ =========
Declaration of dividends.......................... $ 111,371 $ - $ -
============ ============ =========
Supplemental disclosure of cash flow information:
Federal and state income taxes paid............... $ 7,210,000 $ - $ -
============ ============ =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS
Nutrition for Life International, Inc., ("NFLI" or the "Company"), a Texas
corporation, was formed on September 15, 1993 for the purpose of being the sole
survivor of a merger between Nutrition Express Corporation of Colorado, Inc.
(NEC-Colorado) and Nutrition Express Corporation of Utah, Inc. (NEC-Utah) and
the Company, as discussed in Note 3. The effect of the merger was that, instead
of NEC-Colorado and NEC-Utah conducting operations through their ownership of a
general partnership, Nutrition for Life International (the Partnership), these
corporations were merged and the business operations have been conducted through
one corporation, NFLI. The assets and liabilities of the Partnership became the
assets and liabilities of the Company, and the business operations have
continued as they were conducted previously.
The Company operates as a wholesale distributor through its network
marketing organization, by selling a variety of consumer products and services
through independent distributors in the United States and abroad. 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 offers a product line of approximately 320 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 assist its distributors in building
their own businesses. The Company provides product development, marketing aids,
customer service and essential record keeping functions for its distributors.
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 operations depend to a significant degree on the Company's ability
to retain and motivate its existing distributors and to attract new distributors
by continuing to offer new products and new marketing programs.
Although the Company confines its activities to marketing and distribution,
the manufacturing, packaging, labeling and advertising of the Company's products
are subject to regulation by several federal agencies, as well as various
agencies of the states in which the Company's products are sold. In addition,
the Company's network marketing system is subject to governmental regulations
generally directed at ensuring that product sales are made to consumers of the
products and that advancement within the marketing organization is based on
sales of products rather than investments in the organization.
The Company's wholly-owned subsidiary, Nutrition For Life International
(UK) Ltd. ("UK"), was incorporated on April 8, 1996 in the United Kingdom and
was formed primarily to operate as a wholesale distributor of the Company's
products throughout the United Kingdom.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany balances and
transactions have been eliminated.
F-13
<PAGE>
NUTRITION FOR LIFE INTERNTAIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVENTORIES
Inventories consist mainly of health and skin care products, dietary
supplements, food products and household cleaning products. Inventories are
valued at the lower of cost or market. Cost is determined on a first-in, first-
out basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation on equipment is
provided using the straight-line method over the estimated useful lives of the
assets. For income tax purposes, depreciation on certain assets is calculated
using accelerated methods. Leasehold improvements are amortized over the terms
of the lease, not in excess of their estimated useful lives.
INTANGIBLE ASSETS
Intangible assets represent organizational costs and the value assigned to
nutrition and homeopathic product formulations. These assets are being
amortized over 10 years.
REVENUE RECOGNITION
The Company sells its products directly to independent distributors. Sales
are recorded when products are shipped. Net sales represent orders shipped,
less estimated returns and allowances. Provisions have been made for estimated
returns and allowances at the time of sale. Included in cost of sales are
rebates and other commissions which are paid monthly and are calculated using
specific rates based on actual sales volume.
NFLI issues product redemption certificates to distributors who enroll in
the Company's order assurance program. Revenues are recorded when these
certificates are redeemed for product. However, if the certificates are not
redeemed for product, the Company records revenues ratably over a 150 day period
commencing with the ending of the expiration period of 120 days (see Note 7).
Such revenues are recorded as part of the Company's net sales.
INCOME TAXES
The Company recognizes income tax expense using the liability method of
accounting for deferred income taxes. A deferred tax asset or liability is
recorded based upon the tax effect of temporary differences between the tax
basis of assets and liabilities and their carrying value for financial reporting
purposes. Deferred tax expense or benefit is the result of changes in the
deferred tax assets and liabilities during the year. The Company adjusts the
deferred tax asset valuation allowance based upon the anticipated future
realization of the deferred tax benefits supported by demonstrated trends in the
Company's operating results.
EARNINGS PER COMMON SHARE
Earnings per common share were computed by dividing net income applicable
to common shares, which has been reduced by the charge for conversion of
preferred stock for the year ended September 30, 1994 (see Note 3), and by the
weighted average number of shares of common stock outstanding after giving
effect to dilutive stock options and warrants. The stock options and warrants
are included as share equivalents using the treasury stock method, based on the
average market price of the common shares during the year.
F-14
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fully-diluted earnings per common share for the years ended September 30,
1995 and 1994 are determined on the assumption that the convertible long-term
debt outstanding as of those dates was converted as of the beginning of the
year. Net income applicable to common shares was adjusted for the interest on
the convertible long-term debt, net of its tax effect. In addition, stock
options and warrants are included as share equivalents in 1995 and 1994 using
the treasury stock method, based on the market price of the common shares as of
September 30, 1995 and 1994.
As certain debt was retired with the proceeds of the Company's public
offering (see Note 2) and certain debt was converted in connection with the
offering, supplementary earnings per share information is presented herein.
Supplementary earnings per share for 1995 is $0.59. Such amount is calculated
by increasing net income by the amount of interest expense related to the debt,
net of tax, and increasing the weighted average shares outstanding by the number
of shares issued on the conversion (278,137 weighted average shares) and the
number of shares whose proceeds from the offering would be required to retire
the debt (143,346 weighted average shares).
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash held on hand and in short-term, interest bearing deposits with original
maturities of three months or less.
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affects the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. The actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
At September 30, 1996, the Company's cash in financial institutions
exceeded the federally insured deposit limit by approximately $5,665,000.
SHORT-TERM INVESTMENTS
The carrying amount approximates fair value because of the short-term
maturity of those investments.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (SFAS No. 121). SFAS No.
121 requires, among other things, that impairment losses on assets to be held,
and gains or losses from assets that are expected to be disposed of, be included
as a component of income from continuing operations. SFAS No. 121 is effective
for fiscal years beginning after December 15, 1995. The Company will adopt SFAS
No. 121 for the year ended September 30, 1997 and its implementation is not
expected to have a material effect on the financial statements.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). SFAS No. 123 encourages entities to adopt the
fair value method in place of the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), for all
arrangements under which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to
F-15
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMEMENTS
employees in amounts based on the price of its stock. The Company does not
anticipate adopting the fair value method encouraged by SFAS No. 123 and will
continue to account for such transactions in accordance with APB No. 25.
However, the Company will be required to provide additional disclosures
beginning in the year ending September 30, 1997 providing pro forma effects as
if the Company had elected to adopt SFAS No. 123.
RECLASSIFICATIONS
Certain reclassifications were made to the 1995 and 1994 accounts to
conform to the 1996 financial statement presentation. These reclassifications
had no impact on net income as previously reported.
NOTE 2 - COMMON STOCK
On May 10, 1995, the Company's Board of Directors authorized a three-for-
five stock split, which the Company's shareholders approved on June 30, 1995.
In addition, par value was adjusted from $.001 per share to $.01 per share. On
November 6, 1995, the Company's Board of Directors authorized a two-for-one
stock split, effected in the form of a stock dividend for shareholders of record
on December 8, 1995. Stockholders' equity has been restated to give retroactive
recognition to the stock split in prior periods by reclassifying from additional
paid-in capital to common stock the par value of the additional shares arising
from the split. In addition, all share, per share and stock option data have
been restated to reflect these splits, including the public offering of
securities discussed below.
On July 10, 1995, the Company completed the issuance of an additional
1,840,000 shares of common stock, after giving effect to the stock splits noted
above, and 920,000 warrants through a public offering at prices of $2.6875 and
$0.125, respectively, resulting in net proceeds (after deducting issuance costs)
of $4,108,000. In connection with the offering, the holder of the convertible
long-term debt converted $130,500 of debt from one of the convertible notes into
360,000 shares of the Company's common stock. The remaining principal balance
of the notes were repaid from the proceeds of the offering.
The terms of the warrants currently provide that one warrant entitles the
holder to purchase one share of common stock at a price of $3.75 during a three-
year period ending on July 10, 1998. The Company has the right to call all of
the warrants for redemption on 30 days' prior written notice at a redemption
price of $0.05 per warrant, subject to certain defined criteria. For the years
ended September 30, 1996 and 1995, 484,584 and 1,000 warrants were exercised for
the issuance of 484,584 and 1,000 shares of the Company's common stock,
resulting in proceeds of $1,817,190 and $3,750. As of September 30, 1996, there
are 434,416 warrants outstanding.
On September 16, 1996 the Company's Board of Directors authorized a stock
repurchase program, whereby the Company shall have the discretion to purchase up
to 200,000 shares of common stock. The repurchase program terminates on June
30, 1997, unless extended by the Board of Directors.
On September 30, 1996 the Board of Directors of NFLI declared a cash
dividend of $.02 per share of common stock outstanding. The cash dividends of
$111,371 were paid on October 15, 1996.
NOTE 3 - THE MERGER
Effective June 27, 1994, the shareholders of NEC-Colorado, NEC-Utah and
NFLI approved the merger of the companies (the Merger). The former holders of
NEC-Utah common stock and NEC-Colorado Common Stock received a total of
1,383,544 and 1,441,190 shares of NFLI Common Stock, respectively, in connection
with the Merger.
F-16
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
This reorganization was accounted for as a combination of entities under
common control, accounted for similar to a "pooling-of-interests". Accordingly,
the Company's financial statements were restated for all periods prior to the
merger to reflect the financial position, results of operations, and cash flows
of the companies combined in the Merger on a historical cost basis.
Shermfin Corporation (Shermfin) the largest shareholder of NEC-Utah Common
Stock, was the sole holder of the 500,000 shares of the NEC-Utah Series A
Preferred Stock. Shermfin agreed to convert its Series A Preferred Stock, in
connection with the Merger, if the conversion price was reduced from the set
rate of $.0724 per share to a reduced rate of $.04 per share. As a result,
Shermfin received 12,500,000 shares of NEC-Utah Common Stock, whereas under the
existing conversion rate, Shermfin would have been entitled to receive 6,906,077
shares. For accounting purposes, the reduced conversion rate meets the criteria
of a "sweetened" conversion; therefore, net income applicable to common shares
has been reduced by $181,243 (the estimated fair value of the shares in excess
of the fair value of shares which would have been issued pursuant to the
original conversion terms) in the calculation of earnings per common share for
the year ended September 30, 1994.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment and their useful lives are summarized as follows:
SEPTEMBER 30,
----------------------
LIVES 1996 1995
----- ---------- ----------
Equipment........................ 7 $2,398,666 $1,219,966
Furniture and fixtures........... 5-10 585,056 183,241
Leasehold improvements........... 5 700,417 108,194
---------- ----------
3,684,139 1,511,401
Less: Accumulated depreciation
and amortization.......... 1,190,380 890,583
---------- ----------
$2,493,759 $ 620,818
========== ==========
NOTE 5 - INCOME TAXES
Deferred income taxes are determined based on the temporary
differences between the financial statement and income tax basis of assets and
liabilities as measured by the enacted tax rates which will be in effect when
these differences reverse.
The provision for income taxes for the years ended September 30,
1996, 1995 and 1994 consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
------------ --------- ----------
<S> <C> <C> <C>
Federal tax - current................ $ 5,860,655 $659,015 $ -
Federal tax - deferred benefit, net.. (1,420,858) (79,142) -
State tax............................ 850,000 184,722 -
----------- -------- ---------
$ 5,289,797 $764,595 $ -
=========== ======== ==========
</TABLE>
F-17
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following reconciles federal income taxes computed at the
statutory rate with income taxes as reported for the years ended September 30:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ---------
<S> <C> <C> <C>
Expected income tax expense at 34%................................... $4,758,287 $1,023,010 $ 146,643
Graduated tax rate effect............................................ 140,000 - -
State taxes.......................................................... 560,155 121,916 -
Nondeductible amortization of intangible assets...................... 30,694 30,694 30,694
Nondeductible expenses associated with the Merger.................... - - 17,250
Utilization of loss carryforwards.................................... (150,335) (422,701) (197,409)
Other items, net..................................................... (49,004) 11,676 2,822
---------- ---------- ---------
Income tax expense............................................... $5,289,797 $ 764,595 $ -
========== ========== =========
Deferred tax assets at September 30, 1996 and 1995 were as follows:
1996 1995
---------- ---------
Deferred income recognized for tax purposes.......................... $1,341,000 $ 76,168
Additional capitalized inventory costs............................... 162,000 -
Loss carryforwards................................................... 45,000 187,956
Allowance for doubtful accounts...................................... 13,000 -
Differences between financial reporting and tax depreciation......... (61,000) 2,974
---------- ---------
1,500,000 267,098
Less valuation allowance............................................. - (187,956)
---------- ---------
Net deferred tax assets.......................................... $1,500,000 $ 79,142
========== =========
</TABLE>
The Company has approximately $130,000 of net operating loss available
to carryforward subject to limitations imposed by Section 382 of the Internal
Revenue Code expiring through 2008.
It is managements opinion, based on past operating results and
expected future operating results, that it will be more likely than not that the
Company will utilize its entire net operating loss carryforward before
expiration.
NOTE 6 - STOCK OPTION PLANS
In planning the Merger, NEC-Utah and NEC-Colorado determined that a
stock option plan to provide incentives for employees and consultants of NFLI
would promote the interests of NFLI and its stockholders. The Board of Directors
of NFLI approved the 1993 Stock Option Plan (the 1993 Plan) in connection with
the approval of the Merger. Pursuant to the 1993 Plan, the Board of Directors of
NFLI reserved a total of 282,000 shares of its common stock for the grant of
options to purchase the Company's common stock. Options to purchase 55,844
shares have been issued in exchange for previously existing options to acquire
NEC-Utah and NEC-Colorado common stock. During 1995 the Company issued 30,790
shares to a director of NFLI from the exercise of options, resulting in proceeds
of $24,375. The remaining options to purchase 25,054 shares were exercised
during 1996, resulting in proceeds of $35,000. No other options are reserved for
issuance. The issuance of options is at the discretion of the Company's Board of
Directors.
In October 1994, the Company granted options to key employees and
directors to purchase an aggregate of 154,800 shares of the Company's common
stock at $1.67 per share. One-third of the shares underlying the options became
exercisable in cumulative installments of 12 months, 24 months and 36 months
after the date
F-18
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of grant. Options terminate 5 years from the date of grant, except that if an
employee leaves the Company, the options will terminate 30 days thereafter.
During 1996, the Company issued 2,400 shares to an employee from the exercise of
options, resulting in proceeds of $1,998. In addition, 3,600 options were
terminated upon an employee leaving the Company.
The Board of Directors of NFLI approved the 1995 Stock Option Plan
(the 1995 Plan) in March 1995. Pursuant to the 1995 Plan, as amended in June
1996, the Board of Directors of NFLI reserved a total of 640,000 shares of
common stock for the grant of options to purchase the Company's stock. In March
1995, the Company granted options to key employees and directors to purchase an
aggregate of 102,000 shares of the Company's common stock at prices ranging from
$1.88 to $2.25 per share. The terms of the options are similar to those granted
in the 1993 Plan. In July 1995, the Company granted options to an officer of
the Company to purchase 50,000 shares of the Company's common stock at $2.69 per
share. During the year ended September 1996, the Company granted options to two
officers of the Company to purchase an aggregate of 35,000 shares of Company's
common stock at prices ranging from $11.50 to $14.25. As of September 30, 1996,
no options were exercised.
In November 1995, the Board of Directors of NFLI adopted the 1995 Non-
Discretionary Stock Option Plan for directors of the Company who are not
eligible to participate in the other Plans (the "Non-Discretionary Plan.") The
Non-Discretionary Plan provides that the Company grant options to purchase 5,000
shares of the Company's Common Stock to each eligible director on the date of
adoption of the Non-Discretionary Plan (November 28, 1995), to each person who
thereafter becomes a director of the Company and, as of December 1 of each year
(commencing in 1996), options to purchase an additional 5,000 shares of common
stock will be granted to each eligible director. The exercise price of the
options is the fair market value of the common stock on the date the options are
granted. The options were exercisable in full as of the date of grant, except
that the options which have been granted were not exercisable until the
shareholders of the Company approved the Non-Discretionary Plan. The
shareholders approved the non-discretionary plan in May 1996. The shares
acquired upon exercise of these options cannot be sold for six months following
the later of the date of grant or shareholder approval of the Non-Discretionary
Plan. The Company granted options to purchase 5,000 shares of common stock at a
price of $19.75 per share to three directors. Each option granted pursuant to
the Non-Discretionary Plan will expire five years from the date of grant, except
that an option will expire, if not exercised, 30 days after the optionee ceases
to be a director of the Company.
All options have been issued with exercise prices in excess of
the market value of the common shares at the date of grant.
<TABLE>
<CAPTION>
Details of stock options are as follows:
Number Option
of Shares Price
--------- -------------
<S> <C> <C>
Outstanding at September 30, 1993 - -
Granted.......................... 55,844 $ 0.79 - 1.40
---------
Outstanding at September 30, 1994.. 55,844 0.79 - 1.40
Granted.......................... 306,800 1.67 - 2.69
Exercised........................ (30,790) .79
---------
Outstanding at September 30, 1995.. 331,854
Granted.......................... 50,000 11.50 - 19.75
Exercised........................ (27,454) 1.40 - 1.67
Expired.......................... (3,600) 1.67
---------
Outstanding at September 30, 1996.. 350,800
=========
</TABLE>
Under the 1993 Plan and the 1995 Plan, the Company may issue options to
purchase up to an additional 516,556 shares of common stock.
F-19
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - DEFERRED INCOME
NFLI distributors earn monthly commissions based on their achieving a
pre-determined monthly minimum sales volume. To assist distributors in meeting
their monthly minimum sales volume, the Company has developed an Order Assurance
Program (OAP), which allows a distributor to purchase a product redemption
certificate, subject to certain restrictions, for the difference between the
distributor's actual monthly order and the predetermined monthly minimum sales
goal. The purchase of such a certificate by a distributor qualifies the
distributor to receive a commission in a given month even though actual product
purchases were below the required level. The Company recognizes revenues on
these certificates when they are redeemed for product or on a ratable basis over
a 150 day period after the expiration of the certificate. The Company recognized
revenues from the redemption of certificates of $7,647,000, $1,090,000 and
$733,000 for the years ended September 30, 1996, 1995 and 1994. The Company
recognized revenue from unredeemed, expired certificates of $3,025,000, $876,000
and $430,000 for the years ended September 30, 1996, 1995 and 1994. At September
30, 1996 and 1995 the Company had a liability for unredeemed certificates, net
of applicable commissions, of $3,893,570 and $347,795 which is included in
deferred income in the accompanying consolidated balance sheets.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has noncancelable operating leases, primarily for office
and warehouse space. Rental expense under operating leases for the years ended
September 30, 1996, 1995 and 1994 amounted to approximately $365,000, $161,000
and $161,000, respectively.
Future minimum rental payments required under operating leases that
have an initial or remaining noncancellable lease term in excess of one year are
as follows:
YEAR ENDED SEPTEMBER 30, AMOUNT
----------
1997....................... $ 682,000
1998....................... 684,000
1999....................... 677,000
2000....................... 669,000
2001....................... 496,000
2002 and thereafter................ 1,185,000
----------
$4,393,000
==========
Government Regulations
The Company's activities are subject to regulations by various federal
and state agencies, including the Food and Drug Administration. However, the
Company cannot predict whether new legislation regulating its activities will be
enacted, which could have a material adverse effect on the Company.
F-20
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employment Agreements
During 1995, the Company entered into employment agreements with the
chief executive officer and executive vice president of the Company which
expired September 30, 1996. In addition to their annual salary, both individuals
were entitled to 5% of the first $2,000,000 of pre-tax income, 4% of the next
$500,000 of pre-tax income and 3% of pre-tax income over $2,500,000. In
addition, certain key individuals are to receive bonuses in total ranging
between 2% and 4% of pre-tax income over $2,000,000. The Company intends to
enter into new employment agreements with these two individuals for the year
ending September 30, 1997. The Company incurred expenses of $1,554,996 and
$334,317 relating to these employment agreements for the years ended September
31, 1996 and 1995.
Legal Proceedings
During April 1996, the Attorney General of the State of Illinois filed
suit against a significant distributor of NFLI concerning the distributors'
practices in the sale of products and in the recruiting of other distributors.
On July 16, 1996, NFLI entered into an "Assurance of Voluntary Compliance" (AVC)
with the state of Illinois in order to assure that NFLI and its distributors'
policies and practices conform to Illinois law and fairly protect the interests
of consumers. In accordance with the agreement as it relates to the OAP
program, among other things, NFLI has agreed to enforce the following guidelines
and policies; (1) distributors may not make purchases or receive certificates
merely to earn bonuses; (2) NFLI will continue to encourage distributors to
redeem their certificates for products; (3) the Company's OAP shall remain a
wholly optional program; (4) a distributor shall not receive additional
certificates if the distributor has four unredeemed certificates or the
distributor has unredeemed certificates totalling six times the distributor's
designated OAP amount, unless the distributor is accumulating certificates for a
big ticket item; and (5) upon cancellation of a distributorship, unexpired
certificates and products purchased with certificates will be treated as any
other product for refund purposes. The Company is required to implement the
above procedures prior to January 1997. The Company has entered into a similar
agreements with several other states.
During August 1996, an action was brought against the Company in the
United States District Court (the "Federal Action") for damages relating to an
alleged illegal pyramid scheme by; (1) NFLI distributors who enrolled in the
"Instant Executive Program" or the "Instant Executive Pack" and allegedly
incurred net economic loss; and (2) all individuals who purchased common stock
and warrants during the period ended July 11, 1995 through July 16, 1996.
In addition during August 1996, a suit was also filed against the
Company and the same defendants named in the Federal Action in the District
Court of Harris County, Texas (the "State Action"). The State Action was
brought as a class action on behalf of persons who purchased Common Stock and
Warrants of the Company during the period from July 11, 1995 through July 16,
1996.
The principal allegations of the complaint in the State Action are
that certain aspects of the executive distributor compensation program
constituted an illegal pyramid scheme and that the Company failed to disclose
that its outstanding financial results were directly attributable to the
questioned aspects of its marketing practices and failed to adequately disclose
a certain distributor's past.
Although no assurances can be given, the Company and its independent
legal counsel believe the Company has meritorious defenses to both the Federal
Action and State Action and the Company intends to defend itself vigorously.
While the ultimate results cannot be reasonably estimated, a judgment against
the Company could have a significant negative impact on the operations and
financial position of the Company.
F-21
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Securities and Exchange Commission (SEC) had initiated an
investigation into possible violations by NFLI of the federal securities laws
pursuant to a formal order of investigation. On December 4, 1996, the SEC
terminated its investigation, resulting in no enforcement action against the
Company.
On or about March 1, 1991, a lawsuit was filed in the Superior Court
of California, Los Angeles County, by James M. Jordan, former President of NEC-
Utah, against the Partnership and its general partners. A counterclaim
against Mr. Jordan was made by the Partnership. The court found in favor of the
Partnership on all counts and awarded damages and costs of $541,291 (the
Judgment). The Judgment was affirmed October 21, 1994 by the Court of Appeal of
the State of California, Second Appellate District, Division Three.
In 1993, the Partnership collected NEC-Utah common stock valued at
$114,458 ($.03 per share) from Mr. Jordan, which was presented as a reduction to
administrative expenses for recovery of costs incurred to litigate this case.
Upon combination of the entities in the Merger, this stock was retired and the
recognition of the $114,458 was reversed as these shares were effectively
treasury shares of NFLI. In September 1995, the Company collected $160,680 from
the sale of Mr. Jordan's house which is recorded as other income in the
accompanying financial statements. On October 4, 1995, the Bankruptcy Court for
the Central District of California declared Mr. Jordan's debt to the Company
nondischargeable. Mr. Jordan did not file a notice of appeal. The Company has
only received partial collection on the Judgment and due to Mr. Jordan's
financial circumstances, it is presently unknown whether additional amounts will
be collected and, therefore, no additional amounts have been recorded in the
accompanying financial statements.
Product Liability
The Company does not engage in the manufacturing of any of the
products it markets and distributes; however, the Company could be exposed to
product liability claims. The Company has not had any such claims to date.
Although the Company maintains product liability insurance which it believes to
be adequate for its needs, there can be no assurance that the Company will not
be subject to claims in the future or that its insurance coverage will be
adequate.
NOTE 9 - RELATED PARTY TRANSACTIONS
The Company purchases a significant portion of their inventory from
one vendor. The president of this vendor is a director of the Company, and
until June 1995, the vendor was owned by a major stockholder of the Company.
The items purchased are readily available from other vendors. During the years
ended September 30, 1996, 1995 and 1994, the Company purchased $5,234,000,
$2,258,000 and $1,440,000 of goods, respectively, from this vendor.
NOTE 10 - FOREIGN SALES
For the years ended September 30, 1996, 1995, and 1994 the Company's net
sales from foreign operations were $7,982,000, $6,482,000 and $2,860,000,
respectively. During the years ended September 30, 1996 and 1995 total foreign
sales to customers in Canada totalled $6,422,000 and $4,157,000, respectively.
The gross profit percentages on all foreign sales are consistent with the
overall gross profit percentages.
F-22
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED ON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, BY ANY PERSON
IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER,
SOLICITATION OR SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN
IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE OF THIS PROSPECTUS.
___________________________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary...................................................... 3
Risk Factors............................................................ 6
The Company............................................................. 12
Use of Proceeds......................................................... 13
Dilution................................................................ 13
Dividend Policy......................................................... 13
Price Range of Securities............................................... 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................................................ 15
Business................................................................ 21
Legal Proceedings....................................................... 32
Management.............................................................. 33
Principal Shareholders.................................................. 39
Certain Transactions.................................................... 41
Description of Securities............................................... 42
Shares Eligible for Future Sale......................................... 43
Legal Matters........................................................... 45
Experts................................................................. 45
Index to Financial Statements........................................... F-1
</TABLE>
434,416 Shares of Common Stock
NUTRITION FOR LIFE
INTERNATIONAL, INC.
______________
PROSPECTUS
______________
March __, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
-------------------------------------------
The estimated expenses of the offering described in this Registration
Statement are as follows:
<TABLE>
<S> <C>
Registration Fee................................... $ *
NASD Filing Fee.................................... *
Printing Expenses.................................. 6,000
Accounting Fees and Expenses....................... 20,000
Legal Fees and Expenses............................ 35,000
Blue Sky Fees and Expenses......................... 3,000
Registrar and Transfer Agent....................... 3,000
Miscellaneous...................................... 3,000
-------
Total: $70,000
=======
</TABLE>
________________
* These fees were paid in connection with the initial filing of the
Registration Statement.
Item 14. Indemnification of Directors and Officers
-----------------------------------------
Section 2.02-1 of the Texas Business Corporation Act authorizes the
indemnification of directors and officers under certain conditions that may
include the possibility of indemnification against liabilities that may be
incurred under the Securities Act of 1933, as amended.
It is provided in Article SIXTEENTH of the Articles of Incorporation of
Nutrition for Life International, Inc. that:
SIXTEENTH: The corporation shall indemnify any and all of its directors or
officers or former directors or officers or any person who may have served
at its request as a director or officer of any other corporation in which
it owns shares of capital stock or of which it is a creditor, against
expenses actually and necessarily incurred by them, in connection with the
defense of any action, suit or proceeding in which they, or any of them,
are made parties, or a party, by reason of being or having been directors
or officers of the corporation, or for such other corporation, except in
relation to matters to which any such director or officer or former
director or person shall be adjudged in such action, suit or proceeding to
be liable for gross negligence or willful misconduct in the performance of
duty. Such indemnification shall not be deemed exclusive of any other
rights to which those indemnified may be entitled, under any bylaw,
agreement, vote of shareholders, or otherwise.
The general effect of the foregoing provisions of Nutrition for Life
International, Inc.'s Articles of Incorporation is to provide for mandatory
indemnification of Nutrition for Life International, Inc.'s directors, officers
and employees against liabilities arising from the situations described above to
the full extent permitted by the common law, the Texas Business Corporation Act,
and any other statutory provisions.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
<PAGE>
Item 15. Recent Sales of Unregistered Securities
---------------------------------------
During the past three years, the Registrant has not sold any securities
which were not registered under the Securities Act of 1933 as amended (the
"Act") except that: (i) options to purchase 30,790 shares were exercised in
March 1995 by a Director of the Registrant; and (ii) Shermfin Corp., received
360,000 shares of the Registrant's Common Stock in connection with the
conversion of $130,500 principal amount of convertible notes in July 1995.
With respect to the issuances of shares described above, Registrant has
relied and intends to rely on, Section 4(2) of the Act as an exemption from the
registration requirements of Section 5 of the Act. Both the optionee and
noteholder were shareholders and directors of the Registrant at the time of
acquisition of the above described shares and are sophisticated investors with
prior business relationships with the Registrant. Appropriate representations
of investment intent were received in connection with the share issuances, the
certificates evidencing the shares have been imprinted with the standard
restricted legend, and stop transfer instructions have been provided to the
transfer agent of the Registrant.
Item 16. Exhibits and Financial Statement Schedules
------------------------------------------
(a) Exhibits.
Exhibit 2.1 Agreement and Plan of Reorganization, filed as a Exhibit to
the Registration Statement on Form S-4 (file no. 33-70312),
which Exhibit is incorporated herein by this reference.
Exhibit 3.1 Articles of Incorporation, as amended*
Exhibit 3.2 Bylaws, filed as an Exhibit to the Registration Statement on
Form S-4 (file no. 33-70312), which Exhibit is incorporated
herein by this reference.
Exhibit 4.1 Specimen Certificate of Nutrition for Life International,
Inc.'s Common Stock*
Exhibit 4.2 Specimen Warrant*
Exhibit 4.3 Warrant Agreement with Corporate Stock Transfer, Inc.*
Exhibit 5 Opinion of Bearman Talesnick & Clowdus Professional
Corporation relating to the Nutrition for Life
International, Inc. Common Stock and Warrants that are the
subject of this Registration Statement*
Exhibit 10.1 1993 Stock Option Plan, filed as an Exhibit to the
Registration Statement on Form S-4 (file no. 33-70312),
which Exhibit is incorporated herein by this reference*
Exhibit 10.2 1995 Stock Option Plan*
Exhibit 10.3 Second Amended and Restated Convertible Debenture in the
principal amount of $275,000, dated June 29, 1992 made by
Nutrition Express Corporation of Utah, Inc. in favor of
Shermfin Corp., filed as an Exhibit to the Registration
Statement on Form S-4 (file no. 33-70312), which Exhibit is
incorporated herein by this reference.
Exhibit 10.4 Agreement, dated August 12, 1991 between Nutrition Express
Corporation of Colorado, Inc. and Shermfin Corp., filed as
an Exhibit to the Registration Statement on Form S-4 (file
no. 33-70312), which Exhibit is incorporated herein by this
reference.
Exhibit 10.5 Agreement, dated August 12, 1991 between Nutrition Express
Corporation of Utah, Inc. and Shermfin Corp., filed as an
Exhibit to the Registration Statement on Form S-4 (file no.
33-70312), which Exhibit is incorporated herein by this
reference.
II-2
<PAGE>
Exhibit 10.6 Convertible Promissory Note, dated October 12, 1989, the
principal amount of $250,000 made by Nutrition Express
Corporation of Colorado, Inc. in favor of Shermfin Corp.,
filed as an Exhibit to the Registration Statement on Form S-
4 (file no. 33-70312), which Exhibit is incorporated herein
by this reference.
Exhibit 10.7 Employment Agreement dated May 10, 1995, between Nutrition
for Life International, Inc. and David P. Bertrand*
Exhibit 10.8 Employment Agreement dated May 10, 1995, between Nutrition
for Life International, Inc. and Jana Mitcham*
Exhibit 10.9 Consulting Agreement, dated February 22, 1995, between
Nutrition for Life International, Inc. and Cohig &
Associates, Inc.*
Exhibit 10.10 Form of Consulting Agreement with Cohig & Associates, Inc.*
Exhibit 10.11 Agreement, dated March 3, 1995, between Nutrition for Life
International, Inc. and Shermfin Corp.*
Exhibit 10.13 Agreement, dated July 15, 1994 between Nutrition for Life
International, Inc. and Dr. David Santiago (N.F.P. Group,
Inc.), as amended by letter dated June 2, 1995*
Exhibit 10.14 Warrant Agreement, dated October 15, 1995 with Kevin
Trudeau, filed as an Exhibit to the Report on Form 10-KSB
for the fiscal year ended September 30, 1995 of the
Registrant, which Exhibit is incorporated herein by this
reference.
Exhibit 10.15 Lease Agreements for office and warehouse facilities with
non-affiliates, filed as an Exhibit to the Report on Form
10-KSB for the fiscal year ended September 30, 1995 of the
Registrant, which Exhibit is incorporated herein by this
reference.
Exhibit 10.16 1995 Non-Discretionary Stock Option Plan, filed as an
Exhibit to the Report on Form 10-KSB for the fiscal year
ended September 30, 1995 of the Registrant, which Exhibit is
incorporated herein by this reference.
Exhibit 10.17 Assurance of Voluntary Compliance for the State of Illinois,
dated July 16, 1996, filed on July 31, 1996 as an Exhibit to
the Report on Form 8-K, which Exhibit is incorporated herein
by this reference.
Exhibit 10.18 Administrative and Consulting Services Agreement, dated July
29, 1996, between Distributor Services, L.L.C. and Nutrition
For Life International, Inc.*
Exhibit 10.19 Form of Distributor Agreements of Nutrition For Life
International, Inc.*
Exhibit 10.20 Employment Agreement, effective October 1, 1996, between
Nutrition For Life International, Inc. and David P.
Bertrand, filed as an Exhibit to the Report on Form 10-KSB
for the fiscal year ended September 30, 1996 of the
Registrant which Exhibit is incorporated herein by this
reference.
Exhibit 10.21 Employment Agreement, effective October 1, 1996, between
Nutrition For Life International, Inc. and Jana Mitcham,
filed as an Exhibit to the Report on Form 10-KSB for the
fiscal year ended September 30, 1996 of the Registrant which
Exhibit is incorporated herein by this reference.
Exhibit 21 Subsidiaries, filed as an Exhibit to the Report on Form 10-
KSB for the fiscal year ended September 30, 1996 of the
Registrant, which Exhibit is incorporated herein by this
reference.
Exhibit 23.1 Consent of KPMG Peat Marwick LLP, Certified Public
Accountants
Exhibit 23.2 Consent of Bearman Talesnick & Clowdus Professional
Corporation
II-3
<PAGE>
Exhibit 23.3 Consent of BDO Seidman, LLP, Certified Public Accountants
___________________________________________________
* These exhibits were previously filed as exhibits to this
Registration Statement (File No. 33-92274).
(b) Financial Statement Schedules.
Not applicable.
Item 17. Undertakings.
------------
1. The undersigned Registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933 (the "Act");
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the
most recent post-effective amendment thereto) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
Registration Statement or any material change to such
information in the Registration Statement;
(b) That, for the purpose of determining any liability under
the Act, each such post-effective amendment shall be deemed to be a
new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
2. Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the SEC, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
3. The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the small business issuer pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf in the City of Houston, State of Texas, on March 18, 1997.
NUTRITION FOR LIFE INTERNATIONAL, INC., a Texas
Corporation
By: /s/ David P. Bertrand
---------------------------------------------
David P. Bertrand, President
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Power of Attorney filed on May 19, 1995 with the Registration Statement of this
Registrant on Form SB-2 and the Power of Attorney filed on November 12, 1996
with the Post-Effective Amendment No. 1, which are hereby incorporated by
reference, this Registration Statement has been signed on the above date by
David P. Bertrand as attorney-in-fact for the following officers and directors
of the Registrant.
David P. Bertrand President, Chief Executive Officer, Director and
Chairman of the Board of Directors
Jana Mitcham Executive Vice President, Secretary and Director
Barry C. Loder Vice President and Chief Financial Officer.
Ronnie D. Meaux Vice President, Treasurer, Assistant Secretary and
Principal Accounting Officer
John R. Brown, Jr. Vice President - Finance
F. Wayne Ballenger Director
M.F. Florence Director
Richard S. Kashenberg Director
Gregory Pusey Director
/s/ David P. Bertrand
--------------------------------------------------
David P. Bertrand, Attorney-In-Fact
<PAGE>
EXHIBIT 23.1
The Board of Directors
Nutrition For Life International, Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Houston, Texas
March 17, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF COUNSEL
The undersigned does hereby consent to the use of its name wherever
appearing in the Registration Statement and related Prospectus, including "Legal
Matters."
However, the undersigned disclaims any responsibility as an expert as
regards this Registration Statement except insofar as the Registration Statement
may relate to any written legal opinion from the undersigned.
BEARMAN TALESNICK & CLOWDUS
Professional Corporation
Denver, Colorado
March 18, 1997
<PAGE>
EXHIBIT 23.3
The Board of Directors
Nutrition For Life International, Inc.
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated November 1, 1996, except Notes 7 and
8 which are dated December 4, 1996, relating to the consolidated financial
statements of Nutrition For Life International, Inc., which is contained in that
Prospectus. We also consent to the reference to us under the caption "Experts"
in the Prospectus.
BDO Seidman, LLP
Houston, Texas
March 17, 1997
