<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1997
Commission File Number 0-26362
NUTRITION FOR LIFE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Texas 76-0416176
(State or jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
9101 Jameel Road, Suite 180
Houston, Texas 77040
(Address of Principal Executive Offices)
(713) 460-1976
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceeding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
As of August 8, 1997 there were 5,787,136 shares of common stock,
$0.01 par value per share, outstanding.
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NUTRITION FOR LIFE INTERNATIONAL, INC.
Index
PART I - FINANCIAL INFORMATION
Page
ITEM 1. FINANCIAL STATEMENTS
Nutrition For Life International, Inc.
Consolidated Balance Sheets 3
June 30, 1997 and September 30, 1996
Consolidated Statements of Operations for the
Three and Nine Months Ended June 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended June 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 10
Signatures 11
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NUTRITION FOR LIFE INTERNATIONAL, INC.
Consolidated Balance Sheets
Assets
<TABLE>
<CAPTION>
June 30,
1997 September 30,
(Unaudited) 1996
----------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $12,695,010 15,588,504
Accounts receivable, net 996,980 368,062
Inventories 6,800,552 6,365,350
Deferred tax asset, net 3,400,000 1,500,000
Refundable federal income taxes 340,957 500,000
Prepaid expenses and other assets 1,067,897 260,091
----------- ----------
Total current assets 25,301,396 24,582,007
Property and equipment, net 3,885,463 2,493,759
Intangible assets, net 542,287 340,063
Other assets 258,409 212,031
----------- ----------
$29,987,555 27,627,860
=========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 5,308,656 2,577,101
Accrued bonuses and commissions 1,322,240 2,041,678
Accrued expenses and other liabilities 754,004 552,424
Accrued class action settlement 5,756,949 --
Deferred income 2,622,809 3,893,570
Federal and franchise tax payable -- 850,000
Dividends payable -- 111,371
----------- ----------
Total current liabilities 15,764,658 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; 5,770,085 and 5,568,562 shares
issued and outstanding, respectively 57,704 55,686
Additional paid-in capital 10,560,853 9,939,059
Treasury stock, at cost (73,810) --
Retained earnings 3,682,286 7,611,580
Cumulative foreign currency translation adjustment (4,136) (4,609)
----------- ----------
Total stockholders' equity 14,222,897 17,601,716
----------- ----------
$29,987,555 27,627,860
=========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
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NUTRITION FOR LIFE INTERNATIONAL, INC.
Consolidated Statements Of Operations (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ ------------------------
1997 1996 1997 1996
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $22,600,186 26,280,722 63,069,456 77,858,600
Cost of sales 17,209,303 18,040,793 47,082,346 53,171,169
----------- ---------- ---------- ----------
Gross profit 5,390,883 8,239,929 15,987,110 24,687,431
Marketing, distribution and administrative
expenses 5,172,765 4,956,022 15,187,120 11,973,831
----------- ---------- ---------- ----------
Income from operations 218,118 3,283,907 799,990 12,713,600
Other income (expense):
Class action settlement -- -- (6,425,000) --
Interest, net 195,792 197,209 530,464 534,971
Other, net (54,242) (18,318) (132,834) 57,141
----------- ---------- ---------- ----------
141,550 178,891 (6,027,370) 477,830
----------- ---------- ---------- ----------
Income (loss) before income tax expense (benefit) 359,668 3,462,798 (5,227,380) 13,191,430
Income tax expense (benefit) 179,443 1,586,025 (1,637,687) 5,119,525
----------- ---------- ---------- ----------
Net income (loss) $ 180,225 1,876,773 (3,589,693) 8,071,905
=========== ========== ========== ==========
Primary earnings (loss) per common share $ .03 .30 (.57) 1.25
===== ===== ===== ====
Fully diluted earnings (loss) per common share $ .03 .30 (.57) 1.25
===== ===== ===== ====
Weighted average common shares:
Primary 6,270,853 6,342,312 6,286,856 6,450,902
=========== ========== ========== ==========
Fully diluted 6,270,853 6,342,312 6,286,856 6,450,902
=========== ========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
Condensed Consolidated Statements Of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended June 30,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
Net cash provided by (used in) operating activities $(1,289,886) 5,841,987
Net cash used in investing activities (1,814,483) (3,669,517)
Net cash provided by financing activities 210,402 1,711,275
Cumulative foreign currency translation adjustment 473 --
----------- ----------
Net increase (decrease) in cash and cash equivalents (2,893,494) 3,883,745
Cash and cash equivalents at beginning of period 15,588,504 8,960,100
----------- ----------
Cash and cash equivalents at end of period $12,695,010 12,843,845
=========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
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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 June 30, 1997, 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 interim periods ended June 30, 1997 and 1996
are not necessarily indicative of operating results for the full year.
The Company has adopted SFAS No. 121 for the year ended September 30, 1997
and its implementation has not had a material effect on the financial
statements. The Company has not yet adopted Statements of Financial Accounting
Standards No. 123 or No. 128. 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.
6
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NUTRITION FOR LIFE INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the nine months ended June 30, 1997 decreased by $14,789,144 or
19.0% to $63,069,456 as compared to net sales of $77,858,600 for the nine
months ended June 30, 1996. At June 30, 1997, the Company had approximately
102,000 distributors compared to approximately 86,000 at June 30, 1996 and
87,400 at September 30, 1996. The increase in distributors since September
30, 1996, occurred primarily during March and April, 1997. Commencing in the
latter part of February 1997 and continuing through April 1997, the Company
featured a marketing promotion allowing executive qualification at a reduced
price. In addition the Company in June 1997 began the recruitment of
distributors in the Republic of Philippines in preparation for the initiation of
formal operations in the Philippines during the quarter ending September 30,
1997. Net sales for the three months ended June 30, 1997, were $22,600,186, the
second consecutive quarter with an increase in net sales.
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 three quarters 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 $(20,058,000)
Increase in sales due to increased number of
distributors 25,258,000
Decrease in distributor average sales (19,989,000)
------------
$(14,789,000)
============
The decrease in net sales from the nine months ended June 30, 1996 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 $121 during the nine months ended June 30, 1996 to $74
for the nine months ended June 30, 1997.
Cost of sales decreased by $6,088,823 or 11.5% to $47,082,346 for the nine
months ended June 30, 1997 from $53,171,169 for the nine months ended June
30, 1996. Cost of sales as a percentage of net sales increased from 68.3% in
the nine months ended June 30, 1996 to 74.7% in the nine months ended June
30, 1997. Cost of sales, which includes product costs, commissions and
bonuses paid to distributors, and shipping costs, is recapped below:
7
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Nine months ended
June 30,
-----------------
1997 1996
---- ----
Product costs 30.7% 25.3%
Commissions and bonuses paid to distributors 37.1 38.5
Shipping costs 6.9 4.5
---- ----
74.7% 68.3%
==== ====
The percentage of product costs increased 5.4% 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, and the marketing
promotion from February 1997 to April 1997 described above whereby the same
amount of product costs were incurred for a reduced sales amount. 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 1.4% because the products with higher product cost
margins have a reduced base for the calculation of commissions and bonuses.
Shipping costs increased 2.4% primarily as a result of the reduction in the
dollar amount of new initial purchases and the fulfillment of backorders created
by the marketing promotion.
Gross profit decreased 35.2% or $8,700,321 from $24,687,431 for the nine
months ended June 30, 1996 to $15,987,110 for the nine months ended June 30,
1997. Gross profit as percentage of net sales decreased from 31.7% for the
nine months ended June 30, 1996 to 25.4% for the nine months ended June 30,
1997.
Marketing, distribution and administrative expenses increased $3,213,289 or
26.8% from $11,973,831 for the nine months ended June 30, 1996 to $15,187,120
for the nine months ended June 30, 1997. As a percentage of net sales,
marketing, distribution, and administrative expenses increased to 24.1% for
the nine months ended June 30, 1997 from 15.4% for the nine months ended June
30, 1996. The dollar increase resulted primarily from greater personnel
costs, postage, travel and credit card fees as the Company devoted resources to
managing the new distributors and in preparing for future growth.
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 entitlements 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. 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 was accrued in the three months ended December 31,
1996.
Income from operations for the nine months ended June 30, 1997 decreased
$11,913,610 or 93.7% to $799,990 from $12,713,600 for the nine months ended
June 30, 1996, 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 16.3% for the nine months ended
June 30, 1996 to 1.3% for the nine months ended June 30, 1997. The income
from operations for the nine months ended June 30, 1997, includes
approximately $360,000 of operating loss from the Company's wholly owned
subsidiary located in the United Kingdom which began operations in September
1996.
8
<PAGE>
Other income (expense) decreased to $6,027,370 of net other expense for the
nine months ended June 30, 1997 from $477,830 of net other income for the
nine months ended June 30, 1996. The decrease was primarily the result of
the $6,425,000 incurred in the settlement of the class action lawsuits.
As a result of a loss before income tax expense (benefit) for the nine months
ended June 30, 1997, an income tax benefit of $1,637,688 has been accrued.
Of this tax benefit, $2,248,750 relates to the tax effect of the settlement
of the class action lawsuits.
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 which became final
August 4, 1997, the Company has set aside a reserve fund of $1.2 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 are to 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 a separate agreement, the Company has set aside a reserve fund of $2 million
for persons who purchased the Company's common stock or warrants between
July 11, 1995 and July 15, 1996 and lost money. The fairness hearing for this
settlement agreement is scheduled to be held on September 12, 1997.
The Company estimates that its additional attorneys' fees, administrative costs
and costs and fees of attorneys for the plaintiffs in the amount of
approximately $2,000,000 will be incurred in connection with the resolution of
the class action lawsuits.
Net loss was $3,589,693 for the nine months ended June 30, 1997, a decrease
of 144.5% compared to net income of $8,071,905 for the nine months ended June
30, 1996. The decrease was principally the result of lower net sales, a
lower gross profit margin, increased marketing, distribution and
administrative expenses, and accrual for the settlement of the class action
lawsuits.
CHANGES IN FINANCIAL CONDITION
The Company had cash and cash equivalents of $12,695,010 at June 30, 1997
compared to $15,588,504 at September 30, 1996. The cash used in operating
activities of $1,289,886 for the nine months ended June 30, 1997 was a
significant reduction from the cash provided by operating activities of
$5,841,987 for the nine months ended June 30, 1996. This decrease was
primarily due to the factors discussed under "Results of Operations". The
Company used approximately $1,814,483 and $1,430,454, respectively, to purchase
property and equipment during the nine month periods ended June 30, 1997
and 1996. In addition, $339,600 was paid in dividends to shareholders during
the nine months ended June 30, 1997.
The Company had working capital of $9,536,738 at June 30, 1997 compared to
$14,555,863 at September 30, 1996. The $5,019,125 decrease in working capital
was primarily due to the accrued liabilities for the settlement of the class
action lawsuits and the cruise, net of the related deferred tax benefits.
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.
In May 1997, the Company determined to acquire a state-of-the-market computer
information system. The total cost, including implementation and training, is
expected to be approximately $2,100,000. The primary benefits expected to be
achieved are improved administrative cost control, enhanced customer service and
improved multinational support. The Company is currently exploring opportunities
to enter into a lease arrangement for this system, but has no firm agreements or
understandings at this time.
9
<PAGE>
PART II - Other Information
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in class action lawsuits commenced in
federal court and state court in Texas in 1996. In January 1997, the Company
reached two preliminary settlement agreements which should resolve these
class action lawsuits. The settlement agreements in these class action lawsuits
are discussed in "Management's Discussion and Analysis of Financial Condition
and Results of Operations." On August 4, 1997 the federal court approved as
fair, reasonable and adequate the settlement agreement involving the Company's
distributors, and scheduled a hearing for September 12, 1997 regarding the
agreement involving purchasers of the Company's securities.
10
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NUTRITION FOR LIFE INTERNATIONAL, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NUTRITION FOR LIFE INTERNATIONAL, INC.
(Registrant)
Dated: August 14, 1997 By: /s/ John R. Brown, Jr.
--------------------------
John R. Brown, Jr.
Vice President - Finance
By: /s/ Ronnie D. Meaux
--------------------------
Ronnie D. Meaux
Vice President, Treasurer and
Principal Accounting Officer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NUTRITION
FOR LIFE INTERNATIONAL, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> SEP-30-1996 SEP-30-1996
<PERIOD-START> OCT-01-1996 OCT-01-1995
<PERIOD-END> JUN-30-1997 SEP-30-1996
<CASH> 12,695,010 15,588,504
<SECURITIES> 0 0
<RECEIVABLES> 996,980 368,062
<ALLOWANCES> 0 0
<INVENTORY> 6,800,552 6,365,350
<CURRENT-ASSETS> 25,301,396 24,582,007
<PP&E> 5,498,883 3,684,139
<DEPRECIATION> 1,613,420 1,190,380
<TOTAL-ASSETS> 29,987,555 27,627,860
<CURRENT-LIABILITIES> 15,764,658 10,026,144
<BONDS> 0 0
0 0
0 0
<COMMON> 57,704 55,686
<OTHER-SE> 14,165,193 17,546,030
<TOTAL-LIABILITY-AND-EQUITY> 29,987,555 27,627,860
<SALES> 63,069,456 77,858,600
<TOTAL-REVENUES> 0 0
<CGS> 47,082,346 53,171,169
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 15,187,120 11,973,831
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (5,227,380) 13,191,430
<INCOME-TAX> (1,637,687) 5,119,525
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,589,693) 8,071,905
<EPS-PRIMARY> (.57) 1.25
<EPS-DILUTED> (.57) 1.25
</TABLE>
