<PAGE>
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 March 31, 1998
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 May 12, 1998 there were 5,882,306 shares of common stock,
$0.01 par value per share, outstanding.
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
INDEX
PART I - Financial Information
Page
Item 1. Financial Statements
Nutrition For Life International, Inc.
Consolidated Balance Sheets 3
March 31, 1998 and September 30, 1997
Consolidated Statements of Operations 4
for the Three and Six Months Ended March 31, 1998 and 1997
Condensed Consolidated Statements of Cash Flows 5
for the Six Months Ended March 31, 1998 and 1997
Notes to Financial Statements 6, 7
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
PART II - Other Information
Item 1. Legal Proceedings 11
Signatures 12
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
1998 September 30,
(Unaudited) 1997
------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,049,280 8,903,957
Cash-restricted 513,195
Receivables 1,103,619 1,547,479
Inventories 8,099,475 7,920,454
Deferred tax asset, net 1,543,000 1,888,442
Refundable federal income taxes 1,048,008 1,029,277
Prepaid expenses and other assets 818,462 496,517
------------- -------------
Total current assets 18,661,844 22,299,321
Property and equipment, net 7,592,843 6,534,042
Intangible assets, net 88,999 199,047
Other assets 346,532 315,026
------------- -------------
$ 26,690,218 29,347,436
============= =============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable $ 3,301,955 3,707,930
Accrued bonuses and commissions 1,669,706 1,973,646
Current portion of capital lease obligation 192,477 157,739
Accrued expenses and other liabilities 601,336 1,072,883
Accrued cruise -- 1,195,150
Lawsuit settlement accrual 93,070 1,332,314
Deferred income 3,531,438 3,130,524
Federal and franchise tax payable 290,216 43,216
Dividends payable 117,150 115,798
------------- -------------
Total current liabilities 9,797,348 12,729,200
Deferred tax liability 300,000 282,000
Long-term portion of capital lease obligation 501,521 478,220
Stockholders' equity:
Preferred stock, $.001 par value; 1,000,000 shares
authorized; none issued and outstanding -- --
Common stock, $.01 par value; 20,000,000 shares
authorized; 5,829,435 and 5,775,835 shares, respectively 58,294 57,758
Additional paid-in capital 10,864,409 10,688,951
Retained earnings 5,300,527 5,176,539
Cumulative foreign currency translation adjustment (58,071) 8,578
------------- -------------
16,165,159 15,931,826
Less: Treasury stock - 9,000 shares at cost (73,810) (73,810)
------------- -------------
Total stockholders' equity 16,091,349 15,858,016
------------- -------------
$ 26,690,218 29,347,436
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
---------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 17,579,203 21,200,000 35,962,705 40,469,268
Cost of sales 11,843,911 15,688,411 25,199,265 29,873,040
---------- ---------- ---------- ----------
Gross profit 5,735,292 5,511,589 10,763,440 10,596,228
Operating expenses:
Marketing, distribution and
administrative expenses 4,810,066 4,433,753 10,019,704 10,014,352
Lawsuit settlement -- -- -- 6,425,000
---------- ---------- ---------- ----------
4,810,066 4,433,753 10,019,704 16,439,352
---------- ---------- ---------- ----------
Income (loss) from operations 925,226 1,077,836 743,736 (5,843,124)
Other income (expense):
Interest, net 13,561 159,516 92,713 334,672
Other, net 98,032 (46,878) 112,486 (78,592)
---------- ---------- ---------- ----------
111,593 112,638 205,199 256,080
---------- ---------- ---------- ----------
Income (loss) before income tax expense (benefit) 1,036,819 1,190,474 948,935 (5,587,044)
Income tax expense (benefit) 431,400 464,060 592,000 (1,817,130)
---------- ---------- ---------- ----------
Net income (loss) $ 605,419 726,414 356,935 (3,769,914)
========== ========== ========== ==========
Basic income (loss) per common share $ .10 .12 .06 (.60)
=== === === ===
Diluted income (loss) per common share $ .10 .12 .06 (.60)
=== === === ===
Weighted average common shares:
Basic 5,804,528 5,570,785 5,797,120 5,569,661
========== ========== ========== ==========
Diluted 6,161,530 6,260,427 6,193,810 6,291,553
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED MARCH 31,
-----------------------------
1998 1997
------------- -----------
<S> <C> <C>
Net cash provided by (used in) operating activities $ (1,097,010) 3,175,942
Net cash used in investing activities (1,693,456) (1,101,274)
Net cash provided by (used in) financing activities 2,438 (210,716)
Cumulative foreign currency translation adjustment (66,649) 64,576
--------- ----------
Net increase (decrease) in cash and cash equivalents (2,854,677) 1,928,528
Cash and cash equivalents at beginning of period 8,903,957 15,588,504
--------- ----------
Cash and cash equivalents at end of period $ 6,049,280 17,517,032
========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
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 March 31, 1998, 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-K. The results of operations for the
period ended March 31, 1998 are not necessarily an indication of operating
results for the full year.
Subsequent to September 30, 1997 the Company adopted Statements of
Financial Accounting Standards No. 128 ("SFAS 128"), Earnings Per Share. SFAS
128 provides for the calculation of basic and diluted earnings per share. Basic
earnings per share includes no dilution and is computed by dividing net income
available to stockholders by the weighted number of common shares outstanding
for the period. Dilutive earnings per share reflects the potential dilution of
securities that could share in the earnings of an entity, similar to fully
diluted earnings per share.
Earnings per share amounts as required by Statements of Financial
Accounting Standards No. 128 are calculated as follows:
<TABLE>
<CAPTION>
For the Six Months Ended March 31, 1998
------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
--------- ----------- ------
<S> <C> <C> <C>
Net income $ 356,935
=======
Basic EPS:
Net income available
to common stockholders $ 356,935 5,797,120 $ 0.06
Effect of dilutive warrants
and options -- 396,690 --
------- --------- ------
Diluted EPS:
Net income available to common
stockholders + assumed
conversions $ 356,935 6,193,810 $ 0.06
======= ========= ======
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended March 31, 1997
-------------------------------------------------------------
Income (loss) Shares Per Share
(Numerator) (Denominator) Amount
--------- ----------- ------
<S> <C> <C> <C>
Net income (loss) $(3,769,914)
=========
Basic EPS:
Net income (loss) available
to common stockholders $(3,769,914) 5,569,661 $ (0.60)
Effect of dilutive warrants
and options -- 721,892 --
---------- --------- ------
Diluted EPS:
Net income (loss) available to common
stockholders + assumed
conversions $(3,769,914) 6,291,553 $ (0.60)
========= ========= ====
<CAPTION>
For the Three Months Ended March 31, 1998
-------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
--------- ----------- ------
<S> <C> <C> <C>
Net income $ 605,419
=======
Basic EPS:
Net income available
to common stockholders $ 605,419 5,804,528 $ 0.10
Effect of dilutive warrants
and options -- 357,002 --
------- --------- -----
Diluted EPS:
Net income available to common
stockholders + assumed
conversions $ 605,419 6,161,530 $ 0.10
======= ========= =====
<CAPTION>
For the Three Months Ended March 31, 1997
-------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
--------- ----------- ------
<S> <C> <C> <C>
Net income $ 726,414
========
Basic EPS:
Net income available
to common stockholders $ 726,414 5,570,785 $ 0.12
Effect of dilutive warrants
and options -- 689,642 --
-------- --------- ------
Diluted EPS:
Net income available to common
stockholders + assumed
conversions $ 726,414 6,260,427 $ 0.12
======== ========= ====
</TABLE>
The Company has not yet adopted Statements of Financial Accounting Standards No.
130, "Reporting Comprehensive Income", nor No. 131, "Disclosure about Segments
of a Business Enterprise". The Company will be required to adopt these
Statements during the fiscal year ended September 30, 1998. The Company does not
believe either Statement will have a material impact on the financial
statements.
7
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Net sales for the six months ended March 31, 1998 decreased by $4,506,563 or
11.4% to $35,962,705 as compared to net sales of $40,469,268 for the six months
ended March 31, 1997. At March 31, 1998, the Company had approximately 88,000
distributors as compared to approximately 87,400 at December 31, 1997 and
approximately 88,500 at September 30, 1997. The approximate number of
distributors in 1997 have been revised based on discovery of a computer error.
During the six months ended March 31, 1998 the number of active international
distributors increased by approximately 3,000, while active distributors in
North America decreased by approximately 3,500. Management believes that the
regulatory scrutiny and legal proceedings filed against the Company in fiscal
1996 and concluded during fiscal 1997 as well as negative media reports
continued to have a negative impact on distributor recruitment and retention and
sales efforts by distributors during the first six months of fiscal 1998. The
ability of the Company to increase its number of active distributors and its
sales per average number of distributors is material to the future operations
and financial condition of the Company. The decrease in net sales is recapped
below:
Decrease in sales due to decreased average number of distributors $(1,077,000)
Decrease in distributor average sales (3,429,000)
---------
$(4,506,000)
=========
The Company's net sales per average number of distributors per month decreased
from $74 during the six months ended March 31, 1997 to $68 for the six months
ended March 31, 1998.
Cost of sales decreased by $4,673,775 or 15.7% to $25,199,265 for the six months
ended March 31, 1998 from $29,873,040 for the six months ended March 31, 1997.
Cost of sales as a percentage of net sales decreased from 73.8% in the six
months ended March 31, 1997 to 70.1% in the six months ended March 31, 1998.
Cost of sales, which includes product costs, commissions and bonuses paid to
distributors, and shipping costs, is recapped below:
<TABLE>
<CAPTION>
Six months ended
March 31,
------------------------
1998 1997
---- ----
<S> <C> <C>
Product costs 28.2% 29.9%
Commissions and bonuses paid to distributors 35.5 37.6
Shipping costs 6.4 6.3
--- ---
70.1% 73.8%
==== ====
</TABLE>
8
<PAGE>
The percentage of product costs decreased 1.7% primarily as a result of selling
price adjustments initiated during December 1997. The percentage of commissions
and bonuses paid to distributors decreased 2.1% primarily because the basis for
commissions was adjusted less than the selling prices. The 0.1% increase in
shipping costs is not significant.
Gross profit increased 1.6% or $167,212 from $10,596,228 for the six months
ended March 31, 1997 to $10,763,440 for the six months ended March 31, 1998.
Gross profit as percentage of net sales increased from 26.2% for the six months
ended March 31, 1997 to 29.9% for the six months ended March 31, 1998.
Operating expenses decreased $6,419,648 or 39.1% from $16,439,352 for the six
months ended March 31, 1997 to $10,019,704 for the six months ended March 31,
1998. The primary reason for the decrease was that no class action lawsuit costs
were incurred during the six months ended March 31, 1998. The $6,425,000 lawsuit
settlement charge in the three months ended December 31, 1996 represented the
Company's estimate of all costs of the lawsuit. Based upon subsequent
experience, the Company revised the estimate to $5,535,000 during the three
months ended September 30, 1997. As a percentage of net sales, marketing,
distribution, and administrative expenses increased to 27.9% for the six months
ended March 31, 1998 from 24.8% for the six months ended March 31, 1997 because
of the decline in net sales. The Company's future operating results may be
negatively impacted if the Company is not successful in regaining its growth in
sales or decreasing its expenditures below current levels.
Income (loss) from operations for the six months ended March 31, 1998 increased
$6,586,860 or 112.7% to $743,736 of income from operations from $5,843,124 of
loss from operations for the six months ended March 31, 1997 principally as a
result of the decrease in operating expenses as explained above. The income
(loss) from operations for the six months ended March 31, 1998 and 1997 includes
approximately $524,000 and $210,000, respectively, of operating loss from the
Company's wholly-owned, consolidated subsidiaries which operate in foreign
countries.
Other income decreased to $205,199 for the six months ended March 31, 1998 from
$256,080 for the six months ended March 31, 1997. The decrease was the result of
a decline in net interest income due to a decrease in interest bearing deposits
and to the recognition of interest expenses on capital lease obligations and
non-recurring credits.
Income tax expense for the six months ended March 31, 1998 is higher than the
amount computed at the statutory rate. As the Company is not currently able to
recognize any tax benefits from foreign operating losses, tax expense is accrued
on the taxable income of domestic operations.
Net income was $356,935 for the six months ended March 31, 1998, compared to a
net loss of $3,769,914 for the six months ended March 31, 1997. The increase was
principally the result of having no accrual for the settlement of the class
action lawsuits in the six months ended March 31, 1998.
9
<PAGE>
Changes in Financial Condition
The Company had cash and cash equivalents of $6,049,280 at March 31, 1998
compared to $8,903,957 at September 30, 1997. During the six months ended March
31, 1998, $1,097,100 of cash was used in operating activities as compared to the
six months ended March 31, 1997 when $3,175, 942 of cash was provided by
operating activities. This swing was primarily due to the payments of lawsuit
settlement accrual, accrued cruise, and accrued expenses and other liabilities.
The Company used approximately $1,661,000 and $1,101,000 respectively, to
purchase property and equipment during the six month periods ended March 31,
1998 and 1997. In addition, $232,947 was paid in dividends to shareholders
during the six months ended March 31, 1998. The Company had working capital of
$8,864,496 at March 31, 1998 compared to $9,570,121 at September 30, 1997.
10
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
Part II Other Information
Item 1. Legal Proceedings
In February 1998, the Company was named as a defendant in an
action commenced in the United States District Court for the
District of Wyoming by a distributor of the Company. Also
named as defendants are Kevin Trudeau, the Trudeau Marketing
Group and Veridien Corp. Veridien Corp. is a manufacturer of
Virahol, a disinfectant which is distributed by the Company.
Kevin Trudeau is a key distributor of, and consultant to, the
Company. The plaintiff claims that the defendants
misrepresented facts pertaining to Virahol in an attempt to
entice her and others like her to join an illegal pyramid
scheme. The plaintiff's claim is for out of pocket expenses of
$1,913, the "benefit of the bargain" she made with defendants
in an amount ranging from $240,000 to $4 million, medical
expenses of $161 and damages to be determined for
embarrassment, humiliation and emotional distress. The Company
denies the allegations of the plaintiff and intends to
vigorously defend this action.
11
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934 the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NUTRITION FOR LIFE INTERNATIONAL, INC.
(Registrant)
Dated: May 15, 1998 By: /s/ John R. Brown, Jr.
--------------------------------------
John R. Brown, Jr.
Vice President - Finance
By: /s/ Julia J. Schreiber
--------------------------------------
Julia J. Schreiber
Controller and Chief Accounting Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> SEP-30-1998 SEP-30-1997
<PERIOD-START> OCT-01-1997 OCT-01-1996
<PERIOD-END> MAR-30-1998 MAR-31-1997
<CASH> 6,049,280 8,903,957
<SECURITIES> 0 0
<RECEIVABLES> 1,103,619 1,547,479
<ALLOWANCES> 0 0
<INVENTORY> 8,099,475 7,920,454
<CURRENT-ASSETS> 18,661,844 22,299,321
<PP&E> 9,990,002 8,328,751
<DEPRECIATION> 2,397,859 1,794,709
<TOTAL-ASSETS> 26,690,218 29,347,436
<CURRENT-LIABILITIES> 9,797,348 12,729,200
<BONDS> 0 0
0 0
0 0
<COMMON> 58,294 57,758
<OTHER-SE> 16,033,055 15,800,258
<TOTAL-LIABILITY-AND-EQUITY> 26,690,218 29,340,258
<SALES> 0 0
<TOTAL-REVENUES> 35,962,705 40,469,268
<CGS> 25,199,265 29,873,040
<TOTAL-COSTS> 10,019,704 16,439,352
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 948,935 (5,843,124)
<INCOME-TAX> 592,000 (1,817,130)
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 356,935 (3,769,914)
<EPS-PRIMARY> .06 (.60)
<EPS-DILUTED> .06 (.60)
</TABLE>
