<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual Report Under Section 13 or 15(d) of The Securities Exchange Act of
1934 (Fee Required) for the Fiscal Year Ended September 30, 1998
Transition Report Under Section 13 or 15(d) of The Securities Exchange Act
of 1934 (No Fee Required) for the Transition Period from ________ to
________
Commission file number 0-26362
NUTRITION FOR LIFE INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
Texas 76-0416176
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9101 Jameel
HOUSTON, TEXAS 77040
(Address of principal executive office) (Zip Code)
Issuer's telephone number, including area code: (713) 460-1976
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of each Class on Which Registered
None None
Securities Registered Pursuant to Section 12(g) of the Act:
$.01 PAR VALUE COMMON STOCK
(Title of Class)
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 during the
preceding 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on December 21, 1998 was $8,336,301.
The number of shares outstanding of the Registrant's common stock on December
21, 1998 was 5,808,595.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K is incorporated by reference to the Registrant's
definitive proxy statement which is expected to be filed within 120 days of the
end of the Registrant's fiscal year ended September 30, 1998.
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
The Company is including the following cautionary statement in this
Annual Report on Form 10-K to make applicable and take advantage of the safe
harbor provision of the Private Securities Litigation Reform Act of 1995 for any
forward looking statements made by, or on behalf of the Company. Forward looking
statements include statements concerning plans, objectives, goals strategies,
future events or performance and underlying assumptions and other statements
which are other than statements of historical facts. Certain statements
contained herein are forward looking statements and, accordingly, involve risks
and uncertainties which could cause actual results or outcomes to differ
materially from those expressed in the forward looking statements. The Company's
expectations, beliefs and projections are expressed in good faith and are
believed by the Company to have a reasonable basis, including without
limitation, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's expectation, beliefs or
projections will result or be achieved or accomplished. Actual events or results
may differ materially as a result of risks facing the Company. Such risks
include, but are not limited to, changes in business conditions, changes in
distributor composition and the network marketing industry, the general economy,
competition, changes in product offerings, international operations, as well as
regulatory developments that could cause actual results to vary materially from
the future anticipated results indicated, expressed or implied, in such forward-
looking statements. The Company disclaims any obligation to update any forward-
looking statement to reflect events or circumstances after the date hereof.
PART I
ITEM 1. BUSINESS
Background
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 80,000 distributors. The Company offers a product line of
approximately 380 products in nine categories, including nutritional
supplements, health foods, weight management items, skin care products, and
other consumer products and services.
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 advantage the Company offers to
distributors is that they can start a business without normal start-up costs
and other difficulties usually associated with new ventures. The Company
provides product development, marketing aids, customer service, and essential
record-keeping functions for its distributors. The Company also provides
other support programs to the distributors including 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 by
the distributors in their downline as well as on the sales they directly
generate.
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. From September 30, 1997 to
September 30, 1998, the number of distributors decreased approximately 8,500
from 88,500 to 80,000. See Item 1. "Business - Distribution and Marketing".
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. The Company believes that these matters have had a material effect
on the Company's operations and financial condition. See Item 1. "Business -
Risk Factors", Item 3. "Legal Proceedings" and Item 7. "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, the United Kingdom, the Republic of Ireland, the
Republic of Philippines, Guam and Puerto Rico. The Company has two wholly-owned
subsidiaries, Nutrition For Life International (UK) Ltd. and Nutrition For Life
International Philippines, Inc. Unless the context otherwise requires, the term
the "Company" as used in this Annual Report on Form 10-K includes the Company's
two wholly-owned subsidiaries.
The Company intends to pursue its long-term 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; (3) expanding its marketing activi-
2
<PAGE>
ties into new international markets; and (4) adding complimentary goods and
services through new product offerings and strategic acquisitions.
The Company's executive offices are located at 9101 Jameel,
Houston, TX 77040. Its telephone number is (713) 460-1976.
Distribution and Marketing
The Company's products are distributed through a network marketing
system consisting of approximately 80,000 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 any 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, low priced starter
kits, no inventory requirements, and low monthly purchase requirements.
Management intends to reach potential new distributors through the Company's
site on the World Wide Web, teleconferencing and regional sales meetings.
Distributors' revenues are derived from several sources. First,
distributors may receive revenues by purchasing the Company's products at
wholesale prices and selling those 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, until
qualifying as a Platinum executive, 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 two ways of meeting this requirement which are as follows:
. Generate cumulative qualifying product volume of $1,000 over any
period of time.
. Qualify to be an Executive right away by purchasing the $199
Executive Business Pack, enroll in the Order Assurance Program (the
"OAP") at the monthly level of $100 or the $100 AutoShip Program and
subscribe to the $25 monthly Business Training System.
"Qualifying product volume" is product the distributor and his
downline distributors purchase at wholesale directly from the Company either for
personal use or for sale to other customers at retail prices. 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. For
distributors who became executives prior to March 1, 1998, the only
qualification to remain an executive is to purchase $100 in product every month,
except that distributors who have become executives by generating cumulative
qualifying product value of only $500 must continue their participation in the
other programs noted above for one year from enrollment in order to maintain
executive status. For distributors becoming executives subsequent to March 1,
1998, the qualifications to remain an executive are to purchase $100 in product
every month and to be enrolled in the Business Training System. 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 will assist in increasing its network of
distributors.
The Company previously designated 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 Mr. Kevin Trudeau,
formerly a key distributor of the Company, was the subject of legal and
regulatory scrutiny. The Company has discontinued the use of the terminology,
"Instant Executive Program".
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
3
<PAGE>
executive distributor the day that he or she enrolls by generating at least
$1,000 in qualifying product volume and by joining the OAP and the Company's
business training program. Under the AVC, the Company was permitted to maintain
its same executive level qualifications, but to aid clarification, it no longer
uses 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, 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.
Compliance by the Company with these agreements may make the program less
attractive to distributors and prospective distributors. In particular, the
Company believes that the special requirements in the Florida agreement have had
a negative impact on the Company's ability to retain and attract distributors in
Florida. These factors could negatively impact the Company's future operating
results. The Company maintains an ongoing compliance program which includes
periodic reporting to the states.
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 noted 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.
The following table sets forth the number of the Company's
distributors on the dates indicated:
AT SEPTEMBER 30,
1998 1997(2) 1996 1995 1994
---- ---- ---- ---- ----
Approximate number of distributors(1) 80,000 88,500 87,400 57,300 37,800
(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 $100 in
sales volume every month and be enrolled in the Company's Business
Training System.
(2) The approximate number of 1997 active distributors was revised downward in
March 1998 from 98,500 as previously reported, upon the discovery of a
computer error.
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
4
<PAGE>
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 fiscal years ended September 30,
1998, 1997 and 1996, the Company expended approximately $679,000, $590,000, and
$348,000, respectively, on promotional activities related to distributors'
rallies and the annual convention. In February 1998 the Company sponsored a
cruise for certain distributors at an additional cost of approximately $900,000.
See Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
In July 1996 the Company entered into an Administrative and Consulting
Services Agreement (the "1996 Agreement") with Distributor Services, L.L.C.
("DS"). DS is an affiliate of Nightingale-Conant ("NC"), at the time a major
supplier of self improvement materials to the Company. The 1996 Agreement
provided that, except to the extent the Company produced its own material in-
house, DS had the exclusive right to produce and sell all of the Company's
recruiting and training material. Such materials were to be produced and
marketed at the expense of DS and DS was entitled to all revenues received from
the sales of such materials. DS was also 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 therefrom. The
Company had the exclusive right of approval over the content of all materials
and meetings produced by DS. Without additional compensation, DS was to 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 also produced and
provided for 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 1996
Agreement was fifteen years and the parties agreed to negotiate in good faith
successive fifteen year terms. The 1996 Agreement could be earlier terminated
for breaches of any material obligation. Kevin Trudeau, formerly a key
distributor of the Company, was principally responsible for DS's performance in
connection with this 1996 Agreement. Mr. Trudeau produces certain self
improvement tapes which are sold by NC to the Company and others. The Company
purchased product and services in the aggregate of approximately $4,387,000,
$6,494,000 and $2,273,000 from DS and NC in the years ended September 30, 1998,
1997 and 1996, respectively.
In July 1997, DS made a promisory note payable to the Company in the
amount of $632,000, plus interest at 8% per year, which represented the
balance due the Company on account. The note was due and paid in July 1998.
Associated with the termination of Kevin Trudeau's distributorship in
October 1998, the Company, DS and NC entered into a severence agreement
terminating the 1996 Agreement in which the Company agreed to pay NC and DS
$2,047,000 and to issue NC a warrant to purchase 290,000 shares of the Company's
common stock to satisfy all accounts payable and other amounts claimed by them
for materials previously delivered to the Company, as well as for the purchase
of all of DS's inventory of audio and video tapes, including all of the master
disks for such audio and video tapes, and other materials used to promote the
Company, and for cancellation of the 1996 Agreement.
Approximately $967,000 was paid upon execution of the severence
agreement, with the balance of $1,080,000 represented by a promissory note
payable in 30 equal monthly interest free payments of $36,000 beginning November
1, 1998. The note is subordinated to working capital loans obtained by the
Company in the ordinary course of business, tax and other governmental charges,
and other obligations incurred in the ordinary course of business for obtaining
goods and services.
The Company issued NC a warrant entitling NC to purchase up to
290,000 shares of the Company's Common Stock at $5.50 per share at any time
until October 31, 2003. NC also agreed that for a five year period it would
not directly or indirectly seek to acquire a controlling interest, as defined
under the rules and regulations promulgated by the Securities and Exchange
Commission in the Company without the prior written consent of the Company's
Board of Directors. Since the warrants were actually issued in October 1998 the
Company has accrued an expense of $702,000 as of September 30, 1998 and will
record that amount in "Additional Paid In Capital" in October 1998.
The Company has accounted for the transactions as of September 30,
1998. The amount paid for the audio production rights was approximately
$1,400,000 and will be amortized beginning in November 1998 over an expected
recovery period of three-years. Expense relative to the warrants issued to NC
has been determined by utilizing the Black-Scholes method to be approximately
$702,000. Such expense is included in the accompanying financial statements as
"Other expense - Contract termination" and "Accrued expense - Nightingale
Conant". Since the warrants were actually issued in October 1998 the Company has
accrued an expense of $702,000 as of September 30, 1998 and will record that
amount in "Additional Paid In Capital" in October 1998. Additionally, the cash
paid upon the execution of the agreement of approximately $976,000 has also been
included in "Accrued expenses - Nightingale Conant".
In addition to continuing to offer certain NC products through its
distributor network, the Company also agreed to utilize NC's services on an
exclusive basis for a 30-month period to reproduce audiotapes for the Business
Training System made by the Company.
The Company is now internally providing the services previously
performed by DS. To facilitate this the Company has hired three former
employees of DS to assist in event organization and scheduling. The Company
now produces, organizes and, when appropriate, sells admission to its
recruiting and promotional events and retains all such revenue. Additionally,
existing in-house staff, facilities and certain executive distributors are
being utilized to produce the Company's recruiting and training materials,
including its monthly Business Training System. The Company believes that it
has the personnel and facilities to perform the services previously provided
by DS.
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
5
<PAGE>
program was initiated in fiscal 1990. At September 30, 1998, the Company had
approximately 300 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 commits to the optional Order
Assurance Program at the $100 per month level and subscribes to
the optional Business Training System).
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 $3,500 per month.
House Bonus Program. The Company offers a house payment bonus
program, whereby it makes house payments up to $5,000 per month. The Company
has no liability relating to the financing or purchasing of the house. The
house payment bonus program was initiated in September 1998. At September 30,
1998 the Company had 23 distributors in the program.To qualify for the house
payment bonus program a distributor must be a fully qualified Four or
Five-Star Platinum Executive who has 300 (Four-Star) or 400 (Five-Star)
"unencumbered" Executives in his or her personal lines of sponsorship who are
each purchasing $100 sales volume per month. An unencumbered executive is
someone in a distributor's personal line of sponsorship who does not fall
under another Four or Five-Star Platinum Executive who is also qualified to
receive the House Payment Bonus.
Order Assurance Program. The Company provides a program whereby
distributors may enroll in a minimum ordering program in order to enhance
their eligibility for commissions. Minimum orders ranging from $41 to $301
per month are automatically placed by credit card or check. Differing
amounts for the optional Order Assurance Program ("OAP") exist to allow
generation of sales volume at various levels that generally correspond to
commission and bonus qualification levels, i.e., $100 is the minimum sales
volume to remain an active 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; $300 is the minimum sales volume
requirement to be a platinum executive; and $300 is the minimum sales volume
qualification level for the house payment program. Therefore, the OAP
promotes sales for the Company and the distributors participating in bonus
programs. The OAP was initiated in fiscal 1993. The OAP is voluntary and no
restrictions are placed upon any participant's ability to exit the OAP. The
Company has agreed in the AVC that, effective in January 1997, a distributor
would not receive additional product certificates under the OAP and would be
given 30 days notice that their OAP status would be suspended if: (i) four
monthly unredeemed certificates were 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 OAP 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 also agreed in the AVC
to encourage distributors to redeem their certificates for product. As of
September 30, 1998, 1997 and 1996, respectively, there were approximately
35,100, 34,400 and 41,700 distributors enrolled in the OAP.
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.
Virtual Voice. The Company provides a special voice messaging
program which gives distributors voice messaging capabilities to communicate
more efficiently with their downline. This program also allows the Company to
automatically voice message all distributors on the Virtual Voice Program.
Mind And Body Institute. In January 1997, the Company began a
series of one-day product workshops designed to enhance distributor
understanding and appreciation of the Company's product line.
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
recruit new distributors by
6
<PAGE>
answering the most commonly asked questions by potential new distributors.
Management believes it is one of the more effective marketing tools in the
industry.
Business Training System. The Company provides a monthly
subscriber service of leading self development books and audio and video
programs that serve as a link between the philosophy and ideals of the
Company and its distributors. Prior to September, 1998 the Company offered a s
imilar monthly subscriber service known as the "Master Developer Series".
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.
Management also believes that a significant part of its growth is
dependent upon 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.
Commencing with the last quarter of the fiscal year ended September
30, 1995, one executive level distributor, Mr. Kevin Trudeau, was particularly
noteworthy in this regard, and he made a significant contribution to the growth
of the Company. Effective October 24, 1997, Mr. Trudeau entered into an
exclusivity agreement with the Company for a period of eight years. Under the
agreement, Mr. Trudeau was to devote substantial effort to his position as a key
distributor of the Company, which included conducting opportunity meetings and
training seminars, producing tapes for the Company's Master Developer Series,
and consulting with Management of the Company. Mr Trudeau agreed that during the
term of the exclusivity agreement and for nine months after termination, he
would not engage in any business that markets products through a network or
multilevel marketing system other than through the Company or its affiliates.
Pursuant to the agreement, Mr Trudeau was expected to continue to engage in
other business activities (which included sales of products similar to those
offered by the Company so long as they were not offered through a network
marketing system) and it was acknowledged that he was not an employee, director
or officer of the Company and was not involved in management of the Company. Mr
Trudeau was entitled to receive approximately 0.75% of the Company's sales on a
monthly basis (which commenced in October 1997), in addition to his regular
distributor earnings. Mr. Trudeau 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 and is the author of Kevin Trudeau's Mega Memory book which was
published in 1995 by William Morrow.
During the past five years, Mr. Trudeau also engaged in other
activities, including KT Corp., which was a distributor of the Company, the
Trudeau Marketing Group, and Distributor Services, L.L.C., which marketed
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 January 1998 Mr.
Trudeau and Mega Systems, Inc. entered into a settlement with the U.S.
Federal Trade Commission ("FTC"), in which Mr. Trudeau agreed to pay $500,000
in consumer redress and to be barred from making false claims regarding the
"Mega Memory" System. Mr. Trudeau also agreed to establish a $500,000 escrow
account or performance bond to assure compliance. Mr. Trudeau also agreed
with the FTC that he would be required to have substantiation, which, when
appropriate, must be scientific, for claims about the benefits, performance
or efficacy or any product he advertises, promotes, sells or distributes in
the future. He was also barred from misrepresenting the existence, contents,
validity, results, conclusions or interpretations of any test, study or
research. It is unknown whether this matter will affect the Company's distribu
tion and marketing of "Mega Memory" tapes or other products produced by Mega
Systems, Inc. See Item 1. "Business - 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
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 was a key
independent distributor of the Company, but was not an officer or director of
the Company, and was not authorized to make statements about Company policy.
See Item 1. "Business - Risk Factors".
In August 1998 the Company and Mr. Trudeau entered into an
agreement to end their business relationship. Mr. Trudeau and the Company
agreed that their October 1997 agreement and his distributorship were
terminated and that Mr. Trudeau would not contest such terminations. Mr.
Trudeau agreed that he would comply with the nine-month non-competition
provisions of the October 1997 agreement. Additionally the Company and Mr.
Trudeau agreed that the Company would purchase the approximate 70,000 shares
of Common Stock and 40,000 stock purchase warrants owned by Mr. Trudeau at
the then market price of approximately $459,000.
7
<PAGE>
The Company is hopeful that the termination of the business
arrangement with Mr. Trudeau will have a positive impact on its future
operations. By refocusing attention on a large number of highly motivated
executive level distributors rather than one individual the Company believes
that it is better positioned to increase its sales of product and the level
of distributor recruitment. The Company believes that the enthusiasm and
momentum generated by executive level distributors who will now be able to
motivate their downlines utilizing non-Trudeau methods may result in a more
consistent and sustainable growth. See Item 1. "Business - 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)
Country YEAR ENTERED 1998 1997 1996 1995 1994
------- ------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
United States 1984 $60,400 $73,000 $89,400 $25,800 $14,700
Canada 1993 4,800 6,800 6,400 4,200 2,400
Puerto Rico 1994 200 500 1,200 2,200 300
United Kingdom(1) 1996 3,500 2,500 200 -- --
Korea(2) 1991 -- -- 100 100 100
Philippines(2) 1993 700 200 100 100 100
</TABLE>
(1) The Company commenced operations in the United Kingdom in September
1996. The Company commenced operations in Ireland in May 1997, which
results are included in the United Kingdom.
(2) The Company has historically sold its products in Korea and the
Philippines which do not use the Company's network marketing system. The
Company introduced its network marketing system in the Philippines in
July 1997.
The Company's long-term plan is to enter additional markets outside
the continental United States. Regulatory approvals may be required in some
instances. 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 market. 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. The Company also
maintains distribution centers in Alaska, Hawaii and Puerto Rico. The Company
has established an office and warehouse center in Warrington, England to provide
administrative, shipping and warehouse support for the Company's operations in
the United Kingdom and Ireland. The Company has also established an office in
Pasig City, Philippines in addition to warehouse centers in Quezon, Davao and
Cebu, Philippines.
The Company is currently evaluating its options relative to
continuing certain of its international operations. Such options include but are
not limited to the continued operation of its subsidiaries or the sale or
closure of certain operations. As of September 30, 1998 the Company has
established no formal plan of action.
The uncertain Asian economic situtation has had a negative impact
on the Company's operations in the Philippines. The exchange rate between the
Philippines peso and the US dollar has declined from approximately 28 to 1 at
the formation of that subsisdiary to approximately 44 to 1 as of September 30,
1998. As a result the Company has realized exchange rate losses of approximately
$212,000 and $78,500 for the years ended September 30, 1998 and 1997,
respectively in the Philippines.
8
<PAGE>
Products
The Company markets and distributes an extensive product line of
approximately 380 items in nine 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; (8) self-improvement programs; and (9)
services. The line consists of primarily consumable products that are
designed to target the growing consumer interest in natural health
alternatives for nutrition and personal care. In developing its product
line, the Company has emphasized quality, purity, potency, and safety.
Vitamins and minerals and antioxidants. The Company markets 47 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 28 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 70 food and
weight management products. These include a whey beverage in five 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, and a line called Heartful Gourmets(R), which are
soy-based meals and snacks .
Herbal formulas. The Company's 33 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, garlic, Cat's Claw, and St. John's Wort, 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 75 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 29 products,
including a liquid hand and body soap, dishwasher concentrate, laundry
concentrates, laundry softener, a heavy duty cleaner-degreaser, and a pine
disinfectant, and a line of anti-microbial and anti-viral disinfectants.
Filtration systems. The Company markets 51 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 47 motivational
and self improvement tapes and other products. Prior to September, 1998 the
self improvement tapes were purchased primarily through arrangements with
Nightingale-Conant Corporation. Effective September, 1998 the Company began
internally producing such tapes to supplement tapes available from
Nightingale-Conant Corporation.
Services. The Company began a ninth marketing category in the
fiscal year ended September 30, 1997 called "Services." Two services are
currently being offered to distributors and customers: LIFEdial 1 Plus and
Body Check. LIFEdial 1 Plus is a discounted long distance package.
Distributors may sign-up for the service and sell it to customers. Body Check
is a hair analysis which tests the level of 21 elements normally found in the
body. The resulting report also includes information regarding exposure to
toxic substances. The Body Check report can then be used to make
recommendations for the individual's specific nutritional supplements.
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, 1998, 1997 and 1996,
the approximate number of new products and services introduced by the Company
was 16, 44, and 50, respectively. Management believes that its ability to
introduce new products increases its distributors' visibility and competitiven
ess in the marketplace.
9
<PAGE>
The Company maintains significant amounts of products in its
inventory to meet rapid delivery requirements of customers and to minimize
product back orders, which historically have not been significant. However,
the Company did experienced significant backorders in the fiscal year ended
September 30, 1997. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations". 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, counsel and other representatives retained by the Company
investigate product formulation matters as they relate to regulatory
compliance and other issues. To the extent possible, the Company's products
are formulated to suit both the regulatory and marketing requirements of the
particular market.
The Company does not maintain its own product research, development
and formulation staff but relies upon independent research, vendor research
departments, research consultants and others for such services. When the
Company, one of its consultants or another party identifies a new product
concept or when an existing product must be reformulated for introduction into a
new or existing market, the new product concept or reformulation is generally
submitted to the Company's suppliers for technological development and
implementation. The Company owns the proprietary rights to a majority of its
product formulations.
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.
The Company installed a White(R) automated inventory storage and
retrieval system in 1997 in its warehouse/shipping facilities in Houston during
1997. The system has improved operator productivity, reduced error rates and
increased the speed of throughput. The Company believes that it wil be able to
handle substantially increased sales volumes without material staffing increases
as a result of the installation of the White(R) system. The total cost including
implementation and training was approximtely $1,000,000.
The Company completed the installation of SAP(R), an enterprise wide
state-of-the-market computer information system during 1998. The system is
expected to provide improved administrative cost control, enhanced customer
service and improved multinational support. The total cost, including
implementation and training, was approximately $3,000,000. The Company has
entered into a lease arrangement for a portion of this system. See Item 1.
"Business-Risk Factors" and Item 7. "Management's Discussion and Analysis of
Financial Conditions and Results of Operations".
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 $494,000, $4,190,000, $5,234,000 for the fiscal years ended September 30,
1998 and 1997 and 1996, respectively. Richard S. Kashenberg, a director of
the Company, served as the chief executive officer of NION until December
1996, and as a consultant to NION from January to October 1997. Until June,
1995 NION was owned by
10
<PAGE>
Shermfin Corp., the Company's largest shareholder, and Mr. Kashenberg. Since
June 1995 NION has continued to be a supplier of product to the Company.
In July 1998, the Company entered into an agreement with VitaRich
Laboratories, Inc. ("VitaRich") in which the Company agreed to advance
VitaRich up to $800,000 to secure the purchase of a sufficient quantity of
certain nutritional supplement raw materials to meet the Company's
anticipated need for rapid delivery of product and to obtain such product at
discounted prices. The agreement is for three years and requires that the
Company provide VitaRich with periodic estimates of anticipated needs, as well
as actual use rates of the requested product.
The Company made an initial deposit of $400,000 to VitaRich and has
agreed that it will maintain a deposit in the amount of 40% of its
outstanding purchase orders with VitaRich. VitaRich is required to use the
deposit for the purchase of raw material and the processing of finished
product in sufficient kinds and quantifies to enable the Company to (i) meet
its anticipated need for the product, (ii) maximize the costs savings to
VitaRich and provide the Company with reduced prices through the purchase of
bulk quantities of raw materials, and (iii) enable VitaRich to meet the
Company's rapid delivery requirements.
Unless the agreement is terminated before its expiration, the Company
is not required to make additional deposits beyond the third year. Additionally,
VitaRich is required to repay any outstanding deposits by crediting the Company
with an amount equal to 10% of each purchase order placed by the Company until
such time as all advances have been repaid. The Company has a first priority
security interest in all of VitaRich's interest in the inventory, warehouse
receipts, documents of title, accounts receivable and proceeds of insurance
related to the raw materials purchased by VitaRich on behalf of the Company.
As of September 30, 1998 the Company had advanced VitaRich a total of $400,000
which amount is included in prepaid expenses in the financial statements in
Item 7.
The Company does not have long term supply agreements with any vendor
other than VitaRich. Although the Company believes that it could establish
alternate sources for most of its products, any delay in locating and
establishing relationships with new 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 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.
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) and Phytogreen(R) and Nutrition For Life(R). It has applied for
trademark registration for its BioGlow(R), BioRub(R), MasterPiece(TM),
PowerPlay(TM), Snoreless(TM), ItchBuster(TM) , and PyruBalance(TM).
Competition
The Company competes with many companies marketing products similar
to those it sells and markets. It also competes intensely with other
network marketing companies in the recruitment of distributors. The Company's
ability to remain competitive depends, in significant part, on its success in
recruiting and retaining distributors. From the last quarter of the fiscal
year ended September 30, 1995 through the last quarter of the year ended
September 30, 1998, one executive level distributor, Kevin Trudeau and his
marketing organization, made a significant contribution to the growth of the
Company. The Company and Mr. Trudeau recently terminated their relationship.
See Item 1. "Business - Distribution and Marketing" and "Risk Factors". There
can be no assurance that the Company's programs for recruitment and retention
of distributors will be successful in the future.
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.
11
<PAGE>
Government Regulation
Although the Company confines its activities to marketing and
distribution, the manufacturing, processing, formulation, packaging, labeling
and advertising of the Company's products are subject to regulation by
federal agencies, including the Food and Drug Administration (the "FDA"), the
Federal Trade Commission, the Consumer Product Safety Commission, the United
States Department of Agriculture, the United States Postal Service and the
United States Environmental Protection Agency. These activities are also
subject to regulation by various agencies of the states and localities in
which the Company's products are sold.
In November 1991, the FDA issued proposed regulations designed to,
among other things, amend its food labeling regulations. The proposed
regulations met with substantial opposition. In October 1994, the "Dietary
Supplement Health and Education Act of 1994" (the "Dietary Supplement Law")
was enacted. Section 11 of the Dietary Supplement Law provided that the
advance notice of proposed rule making by the FDA concerning dietary
supplements was null and void. FDA regulations that became
effective on June 1, 1994 would require standard format nutrition labeling on
dietary supplements.
The Dietary Supplement Law broadly regulates nutritional labeling
requirements for dietary supplements. The final regulations were published
September 23, 1997. Provisions relating to notification to FDA of product
label claims considered "Statements of Nutritional Support" and provisions
relating to new dietary ingredients became effective October 23, 1997.
Regulations specifying product label content will become effective March 23,
1999.
The Dietary Supplement Law provides for regulation of Statements of
Nutritional Support ("Statements"). These Statements may be made if they are
truthful and not misleading and if "adequate" substantiation for the claims
if available. Statements can describe claims of enhanced well-being from use
of the dietary supplement or product statements that relate to affecting a
structure or function of the body. However, Statements cannot claim to
diagnose, treat, cure, or prevent any disease, regardless of the possible
existence of scientific reports substantiating such claims.
Statements appearing in dietary supplement labeling must be
accompanied by a disclaimer stating that the FDA has not
evaluated the Statements. Notification to the FDA of these Statements is not
considered approval of the Statements of products. If the FDA determines in
possible future proceedings that dietary supplement Statements fail to met
the requirements of the Dietary Supplement Law., a product may be subject to
regulation as a drug. The FDA retains all enforcement means available to it
(i.e. seizure, civil or criminal penalties, etc.), when investigating or
enforcing labeling claims.
The Dietary Supplement Law also provided for the formation of a
Presidential Commission on Dietary Supplement Labels, requiring it to
consider and comment upon informational dietary supplement issues. The
Commission issued its non-binding final report on November 24, 1997. The
report's findings are similar, yet distinct from, the regulations enacted by
the Dietary Supplement Law. The report addressed a broad range of issues,
including the need for increased consumer education of dietary supplement
products and increased responsibility on the part of manufacturers and
distributors regarding the safety of dietary supplement products. The Company
cannot determine what effect the report will have on its business in the
future, or whether the report will lead to any additional legislative or
regulatory intervention.
The FDA also regulates the formulation and manufacture of dietary
supplements distributed by the Company. The FDA has published proposed
regulations for the manufacture of dietary supplements called cGMP's. Final
cGMP regulations are not expected any earlier than the first quarter of 1999.
The Company complies with good manufacturing practices for foods, as
currently required by the FDA. The Company cannot predict whether this new
legislation regulating manufacturing activities could have a material adverse
effect on the Company.
The Federal Trade Commission ("FTC") regulates advertising of the
Company's nutritional and dietary supplement products, cosmetics and
over-the-counter drugs. The Federal Trade Commission Act prohibits unfair or
deceptive trade practices and false or misleading advertising. The FTC has
recently been very active in its enforcement of advertising against
manufacturers and distributors of nutritional dietary supplements having
instituted several enforcement actions resulting in signed agreements and
payment of large fines. Although the Company has not been the target of a FTC
investigation, there can be no assurance that the FTC will not investigate
the Company's advertising in the future.
The Company is unable to predict the nature of any future laws,
regulations, interpretations, or applications, nor can it
predict what effect additional governmental regulations or administrative
orders, when and if promulgated, would have on its
business in the future. They could, however, require the reformulation of
certain products not possible to be reformulated,
imposition of additional record keeping requirements, expanded documentation
of the properties of certain products, expanded or different labeling and
scientific substantiation regarding product ingredients, safety or
usefulness. Any or all such requirements could have a material adverse effect
on the Company's results of operations and financial condition.
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 organi-
12
<PAGE>
zation is based on sales of products rather than investment in the organization.
These laws and FTC regulations include the federal securities laws, matters
administered by the FTC 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. See Item 1. "Business-Risk Factors" and
"Distribution and Marketing" for further discussion regarding the AVC with the
Illinois Attorney General and other states, and Item 3. "Legal Proceedings"
regarding the recently resolved class action litigation against the Company.
Employees
At September 30, 1998, the Company employed 269 persons; 186 of
whom are employed in the U.S. The majority of the Company's employees are
office, clerical and warehouse employees. The Company believes that its
relationship with its employees is good.
Risk Factors
Important factors that could cause actual results to differ
materially from the Company's expectations are disclosed in this Report,
including without limitation in conjunction with the forward-looking
statements included in this Report, and the following risk factors.
Risks Related to the Company
Recent Losses. Although the Company experienced rapid growth in sales
and income during its fiscal years ended September 30, 1995 and 1996 its net
sales have declined and, it has incurred losses in each of the fiscal years
ended September 30, 1998 and 1997. The 1998 loss was principally the result of
lower sales, significant losses experienced by the Company's foreign
subsidiaries and the Company recognizing in September 1998, the cost associated
with the termination of its 1996 Agreement with Nightingale-Conant. The loss in
1997 was attributable primarily to accrual of expenses related to the settlement
of class action lawsuits against the Company. The Company also experienced
declines in net sales for the year ended September 30, 1998 as compared to the
year ended September 30, 1997 and for the year ended September 30, 1997 as
compared to the year ended September 30, 1996. In addition, the Company
experienced increased operating costs in 1998 and 1997. 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. See Item 7. "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
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 market the
Company's products on a part-time basis, and may engage in other business
activities, including the sale of products offered by competitors of the
Company. The Company has a large number of distributors, and a relatively
small corporate staff to implement its marketing programs and provide
motivational support. The Company's future 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. See "Product Competition; Competition for Distributors".
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 bas
ed 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 in
compliance with applicable laws or regulations. Failure by the Company or
significant distributors to comply with these laws and regulations could have a
material adverse 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 two 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, formerly a key independent distributor, and his
marketing organization, was the subject of legal and regulatory scrutiny.
13
<PAGE>
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 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 worked with Mr. Trudeau and
is an independent distributor of the Company's products. In addition, the
Illinois Secretary of State 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 Item
1. "Business-Distribution and Marketing" above 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
preserved 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 a business training
program. Under the AVC, the Company may 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 effect of the ongoing compliance with 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. Compliance with 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.
The Company was 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 agreed
to abide by all applicable provisions of the AVC entered into between the
Company and the Illinois Attorney General. The Company was also informed
that Mr. Leib entered an Assurance of Voluntary Compliance 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.
In 1996 class action lawsuits were commenced against the Company
alleging, among other things, that the Company's distributor compensation
program constituted an illegal "pyramid scheme." In 1997, the Company entered
into settlement agreements. The pendancy and settlement of these actions had a
material adverse effect upon the Company's operations and financial condition.
See Item 3. "Legal Proceedings" and Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
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 a nominal charge of $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. Furthermore, there can be
no assurances that the Company will not be subject to other lawsuits from other
governmental authorities or private parties in state or federal court. Any such
action could have a material adverse effect upon the Company.
Negative Media and Other Reports. The Company's ability to grow 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 growth was attributable to the efforts of Kevin Trudeau and his
marketing organization. Effective October 24, 1997, the Company entered into
an agreement with Mr. Trudeau providing for the exclusive use of Mr.
Trudeau's service in the network marketing industry. In August 1998 the
Company and Mr. Trudeau entered into an agreement to end their business
relationship. See Item 1. "Business - Distribution and Marketing".
14
<PAGE>
Mr. Trudeau was twice convicted of criminal charges during the
past 10 years. See Item 1." Business - Distribution and Marketing" above for
biographical information concerning Mr. Trudeau and the exclusive services
agreement with him. 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 Mr. Trudeau's marketing practices
and, in particular, the recruitment of executive level distributors. 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 had a negative impact on its retention and recruitment of distributors
and the price of its common stock. It is presently unknown whether there
will be negative reports or adverse legal developments in the future, but if
that occurred, 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.
In addition, an individual who several years ago was associated
with, and a major shareholder of a predecessor of the Company, embarked on a
substantial campaign in 1996 to discredit and harm the Company and Mr. Trudeau.
He published negative statements on the Internet and elsewhere regarding the
Company and Mr. Trudeau and 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 individua l. The Company was
awarded a default judgment and Mr. Trudeau was awarded damages of $10 million.
This individual subsequently filed for bankruptcy, and the Company has
determined not to pursue a claim against him for money damages. Nonetheless,
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 they 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. Although the Company continually monitors its distributors'
statements and activities, there can be no assurance that it will be able to
accomplish this objective and the Company could be subject to additional
regulatory scrutiny and potential claims. In addition, distributors could make
predictive statements about the Company's operations or other unauthorized
remarks regarding the Company which the Company may be unable to control.
Distributors are not authorized to make such statements on behalf of the
Company. Nonetheless, statements or actions by distributors could also adversely
affect the Company.
Product Competition; Competition for Distributors. 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. From the last quarter of the fiscal year
ended September 30, 1995 to the last quarter of the fiscal year ended September
30, 1998, one executive level distributor, Mr. Kevin Trudeau and his marketing
organization, made a significant contribution to the growth of the Company. In
August 1998, the Company and Mr. Trudeau entered into an agreement to end their
business relationship. Mr. Trudeau and the Company agreed that their October
1997 agreement and his distributorship were terminated and that Mr. Trudeau
would not contest such terminations. Additionally, the Company and Mr. Trudeau
agreed that he would comply with the nine month non-competition provisions of
the October 1997 agreement. In October 1998 the Company also entered into a
severance agreement with NC and DS, which had been producing and marketing
recruiting and training materials and sponsoring promotional events for the
Company since July 1996. The Company is now internally providing the services
previously performed by NC and DS. See "Business -Distribution and Marketing."
There can be no assurance that the Company's programs for recruitment, training
and retention of distributors will be successful or that existing distributors
will not join Mr. Trudeau in another business venture or otherwise lose interest
in the Company's products and programs.
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 B. 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
15
<PAGE>
of $1,060,000 and $660,000, respectively. The Company's growth and profitability
also depends on its ability to attract and retain other management personnel.
Family Relationships. At September 30, 1998, the Company employed
approximately 269 persons. Of these 269 persons, 11 persons have a family
relationship, through birth or marriage, with either David P. Bertrand or Jana
B. 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. The manufacturing, processing, formulation,
packaging, labeling and advertising of the Company's products are subject to
regulation by federal,state and foreign agencies, including the United States
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. Among other matters, such regulation is
concerned with health claims made with respect to a product that asserts the
healing or nutritional value of such product. Such agencies have a variety of
remedies and processes available to them, including initiating
investigations, issuing warning letters and cease and desist orders,
requiring corrective labels or advertising, requiring consumer redress (for
example, by requiring that a Company offer to repurchase products previously
sold to consumers), seeking injunctive relief or product seizure, imposing civil
penalties, or commencing criminal prosecution.
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. The Dietary Supplement Law broadly regulates nutritional
labeling requirements for dietary supplements. Final regulations were
published September 23, 1997. Provisions relating to FDA notification of
product label claims considered "Statements of Nutritional Support" and
provisions relating to new dietary ingredients became effective October 23,
1997. Regulations specifying product label content will become effective
March 23, 1999. The Company cannot determine what effect FDA regulations will
have on its business in the future. Such regulations may, among other things,
require expanded or different labeling, 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. There can be no assurance that the regulatory environment in which
the Company operates will not change or that such regulatory environment, or
any specific action taken against the Company, will not result in a material
adverse effect on the Company's business, financial condition or results of
operations. The Company also cannot predict whether new legislation regulating
its activities will be enacted, which new legislation could have a material
adverse effect on its operations. See Item 1. "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. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a discussion of recent
start-up expenditures and increased operating costs associated with expansion
into the United Kingdom and the Republic of Philippines. 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 Item 1. "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.
During the years ended September 30, 1998, 1997 and 1996 the
Company realized exchange rate losses of approximately $318,000, $78,500 and
$0, respectively. There can be no assurance that exchange rates will improve
in the future or that future exchange rate losses will not exceed those
experienced in recent periods. Further, if exchange rates fluctuate
dramatically, it may become uneconomical for the Company to establish or
continue activities in certain countries.
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 other than a three
year agreement with VitaRich Laboratories, Inc. ("VitaRich). See Item 1.
"Business - Manufacturing and Supplies." A portion of the products purchased
by the Company have been supplied by NION Laboratories ("NION"). Mr. Richard
16
<PAGE>
S. Kashenberg, a director of the Company, served as the chief executive
officer of NION until December 1996, and as a consultant to NION from January
to October 1997. Until June 1995 NION was owned by Mr. Kashenberg and
Shermfin Corp., the Company's largest shareholder. Since June 1995, NION has
been owned by a corporation with no affiliation to the Company other than Mr.
Kashenberg's continuation as the chief executive officer of, and then as a
consultant to, NION. Since June 1995 NION has continued to be a supplier of
product to the Company.
Pursuant to an agreement entered into in July 1998, the Company
agreed to advance VitaRich up to $800,000 to secure the purchase of a sufficient
quantity of certain nutritional supplement raw materials to meet the Company's
anticipated need for rapid delivery of product and to obtain such product at
discounted prices. The agreement is for three years and requires that the
Company provide VitaRich with periodic estimates of anticipated needs, as well
as actual use rates of the requested product. The Company does not have long
term supply agreements with any vendor other than its agreement with VitaRich.
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 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.
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, and paid dividends quarterly
until June 1998. The Company has not declared any dividends subsequent to
June 1998. The determination of whether to pay dividends in the future will
be made by the Board of Directors and will depend on the earnings, capital
requirements, and operating and financial condition of the Company, among
other factors. It is not likely that the Company will pay dividends in the
fiscal year ended September 30, 1999. See Item 5. "Market for Registrant's
Common Equity and Related Stockholder Matters".
Impact of Year 2000. The Year 2000 issue is the result of computer
programs being written using two digits rather than four to define the
applicable year. Any computer programs that have time sensitive software may
recognize a date using 00 as the year 1900 rather than the year 2000. The
failure of the Company's or a third party supplier's or vendor's computer
system to properly recognize the date could result in a system failure or
miscalculation causing a disruption of the Company's activities. Such a
disruption could have a material adverse impact on the Company's ability to
conduct its business.
The Company recently completed the installation of SAP(R), an enterprise
wide state-of-the-market computer information system. Additionally, the Company
also installed a White(R) automated inventory storage and retrieval system in
its Houston warehouse facility. The total cost of installation and training
associated with both systems was approximately $4,000,000. The Company has
received certification from SAP(R) and White(R) that their systems are Year
2000 compliant. The Company is currently developing a plan that will test for
such compliance.
The Company also relies on certain other less significant software
systems in its day to day activities. The Company has not yet performed the
detailed tasks necessary to properly test the Year 2000 compliance of these
particular systems; however an implementation plan is currently being developed
to complete such task in sufficient time to allow for any required updating and
additional testing. The Company presently believes that, with the recent
conversion to the new SAP(R) and White(R) systems software and modifications to
existing, less significant software, the Year 2000 problem should not pose
significant operational problems for the Company's internal information systems.
Additionally, the Company has performed a preliminary assessment of
its significant vendors' and suppliers' information and non-information
systems using a broad overview and management's informal understanding of
their systems. The detailed tasks necessary to directly assess their Year
2000 compliance (such as direct coordination with those significant vendors
and suppliers) have not been performed by the Company. The Company is
currently developing a plan to complete such review. It is anticipated that
such review will be completed in sufficient time to allow for adequate
testing of such compliance.
Based on the Company's initial assessment of its significant vendors'
and suppliers' vulnerability to Year 2000 related systems failures, management
believes that the Company should not have significant exposure with respect to
such third parties. The Company's preliminary assessments indicate that the
worst case scenario with regard to Year 2000 third party issues would be delays
in receiving inventory and/or shipping product to its distributors. Management
has not yet assessed the expense related to the testing of significant third
party vendors' or suppliers' compliance with Year 2000 issues.
17
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
Properties
The Company owns no real property. The Company's offices and
warehouse facilities in Houston, Texas are leased from non-affiliates. The
Company's office building consists of approximately 37,000 square feet and
the current monthly rental is $19,700 which escalates over the two year term
remaining on the lease. Additionally, the Company's warehouse consists of
approximately 52,000 square feet and the current monthly rental is $13,400
which escalates over the three year term remaining on the lease. The Company
also leases warehouse facilities in Alaska and Hawaii with a combined 3,000
square feet of space for approximately $5,800 per month. Additionally, the
Company leases an office and warehouse center in Warrington, England from a
non-affiliate consisting of approximately 16,000 square feet. The current
monthly rental is $11,000 which escalates over the eight year term remaining
on the lease. The Company also leases warehouse facilities in the Philippines
aggregating 3,900 square feet for an aggregate monthly rental of $9,100 through
2000. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operation" and Item 8. "Financial Statements and
Supplementary Data".
ITEM 3. LEGAL PROCEEDINGS
In 1996 class action lawsuits were initiated against the Company.
These actions were concluded in 1997. See Item 1. "Business", Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and Item 8. "Financial Statements and Supplementary Data". The
Company entered into an "Assurance of Voluntary Compliance" with the Illinois
Attorney General and similar agreements with other states. In the future,
inquiries may continue from various state agencies concerning the marketing
of the Company's programs.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this Report.
18
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the National Market System
of the Nasdaq Stock Market under the symbol "NFLI" and its warrants trade
under the symbol "NFLIW".
In connection with a public offering in July 1995 the Company
issued warrants to purchase Common Stock (the "Warrants"). The holder of one
Warrant is entitled to purchase one share of Common Stock at $3.75 per share
until June 15, 1999, unless earlier redeemed by the Company.
<TABLE>
<CAPTION>
Common Stock Warrants
-------------- -------------
QUARTER ENDED HIGH LOW HIGH LOW
------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
FISCAL 1997
December 31, 1996 $17.50 $11.00 $14.00 $8.25
March 31, 1997 13.25 7.00 9.38 4.00
June 30, 1997 10.50 7.50 6.63 3.75
September 30, 1997 10.75 6.00 6.88 2.00
FISCAL 1998
December 31, 1997 7.88 5.50 3.94 2.38
March 31, 1998 6.44 4.94 2.69 1.63
June 30, 1998 9.00 5.56 5.13 1.88
September 30, 1998 7.13 3.00 3.63 0.50
</TABLE>
As of December 30, 1998, there were 1,451 record holders of common
stock.
The Company declared its first cash dividend on its common stock in
September 1996, which dividend of $.02 per share was paid in October 1996.
The Company continued to pay quarterly dividends of $.02 per share of common
stock until June 1998. No dividends have been declared by the Company
subsequent to June 1998. It is not likely that dividends will be paid in the
fiscal year ending September 30, 1999. 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. See
Item 1. "Business" and Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
19
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for each year in the
five-year period ended September 30, 1998 have been derived from the audited
financial statements of the Company. The data presented below should be read
in conjunction with Company's financial statements and notes thereto and,
except for operating data included therein, Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
-------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statements of Operations
Net Sales $69,658 $83,045 $97,404 $32,290 $17,583
Gross Profit 21,719 22,767 29,577 8,774 4,801
Operating income (loss) 698 (3,276) 13,347 2,921 442
Net income (loss) (867) (1,981) 8,705 2,244 250(4)
Earnings (loss) per share:
Basic (.15) (.35) 1.61 .65 0.09
Diluted (.15) (.35) 1.36 .51 0.08
Weighted average number of
shares outstanding (1):
Basic 5,833 5,625 5,408 3,437 2,824
Diluted 5,833 5,625 6,405 4,444 3,792
Operating data:
Number of Distributors (2) 80,000 88,500 87,400 57,300 37,800
Average monthly
sales per Distributor (3) 69 74 112 58 44
Total products offered 380 364 320 270 258
Balance Sheet Data:
Working capital 7,019 9,570 14,617 6,082 546
Total assets 27,858 29,347 27,689 12,566 2,633
Total liabilities 13,415 13,489 10,087 5,407 1,985
Stockholders' equity 14,443 15,858 17,602 7,159 648
</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 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.
See Item 1. "Business-Distribution and Marketing".
(3) Computed using a simple average for the periods indicated.
(4) Net income is net of a $181,243 preferred stock conversion expense.
20
<PAGE>
SELECTED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
QUARTER ENDED
(IN THOUSANDS, EXCEPT PER SHARE)
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 FISCAL YEAR
----------- -------- ------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Fiscal 1998
Net Sales $18,384 $17,579 $15,415 $18,280 $69,658
Gross profit 5,028 5,735 4,758 6,198 21,719
Operating income (181) 925 (385) 339 698
(loss)
Net income (loss) (248) 605 (321) (903)(1) (867)
Earnings (loss) per
Share:
Basic (0.04) 0.10 (0.05) (0.16) (0.15)
Diluted (0.04) 0.10 (0.05) (0.16) (0.15)
Dividends per share 0.02 0.02 0.02 -- 0.06
Fiscal 1997
Net Sales 19,269 21,200 22,600 19,976 83,045
Gross profit 5,085 5,511 5,391 6,780 22,767
Operating income
(loss) (6,921)(2) 1,078 218 2,349(3) (3,276)
Net income (loss) (4,496) 726 180 1,609 (1,981)
Earnings (loss) per
Share:
Basic (0.71) 0.12 0.03 .21 (0.35)
Diluted (0.71) 0.12 0.03 .21 (0.35)
Dividends per share .02 .02 .02 .02 .08
Fiscal 1996
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(4) 13,347
Net income 2,553 3,642 1,877 633 8,705
Earnings per
Share:
Basic 0.49 0.67 0.34 .11 1.61
Diluted 0.40 0.56 0.30 .09 1.36
Dividends per share -- -- -- .02 .02
</TABLE>
(1) Includes a $702,000 charge for warrants issued in connection with
a severance agreement.
(2) Includes a $6,425,000 charge incurred and accrued for the
settlement of class action lawsuits.
(3) Includes an $890,000 credit to recognize a reduction in the
remaining estimated liability for the class action lawsuits.
(4) Includes a $782,000 charge for resolution of the state regulatory
issues.
21
<PAGE>
FINANCIAL INFORMATION RELATING TO FOREIGN AND
DOMESTIC OPERATIONS AND EXPORT SALES
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
(IN THOUSANDS)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Sales to unaffiliated customers:
North America (1) $65,387 $80,325 $97,248
United Kingdom (2) 3,533 2,549 156
Philippines (3) 738 171 --
Sales or transfers between geographic areas:
North America -- -- --
United Kingdom 622 682 82
Philippines 290 269 --
Operating profit (loss):
North America 1,937 (2,342) 13,382
United Kingdom (959) (906) (35)
Philippines (280) (28) --
Identifiable assets:
North America 29,635 29,827 27,524
United Kingdom 1,435 1,355 871
Philippines 883 708 --
</TABLE>
(1) Includes the United States, Canada, and Puerto Rico.
(2) First began operations in fiscal 1996.
(3) First began operations in fiscal 1997.
22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company develops products that are designed for health conscious
consumers, and sells those products through its network of approximately 80,000
independent distributors. The Company offers a line of approximately 380
products in nine categories, including nutritional supplements, health foods,
weight management items, skin care products, other consumer products and
services.
After two fiscal years of rapid growth in both net sales and income,
the Company experienced a decline in net sales and incurred a net loss in fiscal
1998 and 1997. The principal reasons for the fiscal 1998 loss, were lower sales
revenue, significant losses incurred by the Company's foreign subsidiaries and
the recognition by the Company of the warrant cost associated with the
termination of certain agreements with Nightingale-Conant. The fiscal 1997 net
loss included expenses incurred with the settlement of class action lawsuits
filed against the Company in 1996. Management believes that the regulatory
scrutiny and legal proceedings filed against it in fiscal 1996 and concluded
during fiscal 1997 as well as related negative media reports were significant
factors affecting distributor recruitment and retention and sales efforts by
distributors during all of fiscal 1997 and part of fiscal 1998.
Results of Operations
The following table sets forth for the periods indicated the
percentages which selected items in the Consolidated Statement of Operations
bear to net sales:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales......................................... 100.0% 100.0% 100.0%
Cost of sales..................................... 68.8 72.6 69.6
----- ----- -----
Gross profit...................................... 31.2 27.4 30.4
Operating expenses................................ 30.2 31.3 16.7
Income (loss) from operations..................... 1.0 (3.9) 13.7
Other income (expense), net....................... (1.1) 1.0 0.6
----- ----- -----
Income (loss) before income tax expense (benefit). (.1) (2.9) 14.3
Income tax expense (benefit)...................... 1.1 (0.5) 5.4
----- ----- -----
Net income (loss)................................. (1.2)% (2.4)% 8.9%
====== ===== =====
</TABLE>
Year Ended September 30, 1998 Compared to Year Ended September 30, 1997
Net sales for the twelve months ended September 30, 1998 decreased by
$13,387,000 or 16.1% to $69,658,000 as compared to net sales of $83,045,000
for the twelve months ended September 30, 1997. At September 30, 1998, the
Company had approximately 80,000 distributors as compared to approximately
88,500 at September 30, 1997. During the twelve months ended September 30,
1998 the number of active international distributors increased by
approximately 500, while active distributors in North America decreased by
approximately 9,000. 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 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:
<TABLE>
<CAPTION>
<S> <C>
Decrease in sales due to decreased average number of distributors $ (8,010,000)
Decrease in distributors average sales (5,377,000)
------------
$(13,387,000)
============
</TABLE>
The Company's net sales per average number of distributors per
month decreased from $74 during the twelve months ended September 30, 1997 to
$69 for the twelve months ended September 30, 1998.
Cost of sales decreased by $12,339,000 or 20.5% to $47,939,000 for
the twelve months ended September 30, 1998 from $60,278,000 for the twelve
months ended September 30, 1997. Cost of sales as a percentage of net sales
decreased from 72.6% in
23
<PAGE>
the twelve months ended September 30, 1997 to 68.8% in the twelve months ended
September 30, 1998. 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,
-----------------------
1998 1997
---- ----
<S> <C> <C>
Product costs 27.6% 27.1%
Commissions and bonuses paid to distributors 35.0 36.2
Shipping costs 6.2 9.3
---- ----
68.8% 72.6%
==== ====
</TABLE>
Reduced margins resulting from lower initial qualifications for
becoming an Executive resulted in a .5% increase in product cost from 1997 to
1998. The percentage of commissions and bonuses paid to distributors
decreased 1.2% because of price adjustments initiated during December 1997
and changes in the mix of higher versus lower bonus value products purchased
by distributors. The 3.1% decrease in shipping costs resulted from lower
carrier rates and lower cost of backorders than the prior year.
Gross profit decreased 4.6% or $1,048,000 from $22,767,000 for the
twelve months ended September 30, 1997 to $21,719,000 for the twelve months
ended September 30, 1998. Gross profit as percentage of net sales increased
from 27.4% for the twelve months ended September 30, 1997 to 31.2% for the
twelve months ended September 30, 1998.
Operating expenses decreased $5,022,000 or 19.3% from $26,043,000
for the year ended September 30, 1997 to $21,021,000 for the twelve months
ended September 30, 1998. The primary reason for the decrease was that no
class action lawsuit costs were incurred during the twelve months ended
September 30, 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 revise d 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
exclusive of the lawsuit charge in 1997 increased to 30.2% for the twelve months
ended September 30, 1998 from 24.7% for the year ended September 30, 1997
principally because of the decline in net sales. As a result of its lower sales
and higher operating costs, the Company's future operating results may be
negatively impacted if it is not successful in regaining its growth in sales or
decreasing its expenditures below current levels.
Income (loss) from operations for the year ended September 30, 1998
increased $3,974,000 or 121.3% to $698,000 of income from operations from
$3,276,000 of loss from operations for the year ended September 30, 1997
principally as a result of the decrease in operating expenses as explained
above. The income (loss) from operations for the twelve ended September 30,
1998 and 1997 includes approximately $1,340,000 and $934,000, respectively,
of operating loss from the Company's wholly-owned, consolidated subsidiaries
which operate in foreign countries.
Other income (expense) decreased to an expense of $775,000 for the
year ended September 30, 1998 from income of $850,000 for the year ended
September 30, 1997. The decrease was principally the result of a decline in net
interest income due to a decrease in interest bearing deposits, to the
recognition of interest expense on capital lease obligations and to the
recognition of a $702,000 expense associated with the warrants issued to
Nightingale-Conant in connection with the severance agreement described in Item
1 and an increase in foreign exchange losses.
Income tax expense for the year ended September 30, 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 loss was $867,000 for the year ended September 30, 1998,
compared to a net loss of $1,981,000 for the year ended September 30, 1997.
The decrease was the result of the items discussed above.
Year Ended September 30, 1997 Compared to Year Ended September 30, 1996
Net sales for the year ended September 30, 1997 decreased by
$14,359,000 or 14.7% to $83,045,000 from $97,404,000 for the year ended
September 30, 1996. At September 30, 1997, the Company had approximately
88,500 distributors compared to approximately 87,400 at September 30, 1996.
Although there was a net addition of approximately 1,100 distributors during
fiscal 1997, two additional factors contributed to the decline in net sales -
(1) fewer new distributors elected to qualify promptly as executive distributors
and (2) beginning in March 1997 new distributors could qualify right away
as executive distributors for $500 rather than $1,000. 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. Although
the Company has resolved the regulatory scrutiny and legal proceedings
initiated during fiscal 1996 and the negative media reports have diminished,
the ability of the Company to regain the rate of growth realized during
fiscal 1996 cannot be predicted with certainty. The decrease in net sales is
recapped below:
24
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Decrease in executive initial purchases $(21,500,000)
Growth in sales due to increased number of distributors 21,022,000
Decrease in distributor average sales (13,881,000)
------------
$(14,359,000)
============
</TABLE>
The Company's net sales per average number of distributors per
month decreased from $112 during the year ended September 30, 1996 to $79 for
the year ended September 30, 1997. No one distributor has directly accounted
for more than 5% of the Company's net sales in any of the past three fiscal
years.
Cost of sales decreased by $7,549,000 or 11.1% to $60,278,000 for
the year ended September 30, 1997 from $67,827,000 for the year ended
September 30, 1996. Cost of sales as a percentage of net sales increased
from 69.6% in the year ended September 30, 1996 to 72.6% in the year ended
September 30, 1997. 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,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Product costs 27.1% 23.6%
Commissions and bonuses paid to distributors 36.2 39.2
Shipping costs 9.3 6.8
---- ----
72.6% 69.6%
==== ====
</TABLE>
The percentage of product costs increased 3.5% primarily as a
result of vendor price increases and the purchase by distributors of products
and sales aids with a higher cost to the Company. The decrease in the
percentage of commissions and bonuses paid of 3.0% was the result of slower
growing distributor organization and the purchase by distributors of products
with a slower rate of commission and bonus payout. The increase of 2.5% in
the percentage of shipping costs resulted from increased shipping costs
associated with the shipping of back orders (without any associated revenues)
caused initially by the success of a promotional campaign and subsequently by
production delays by a major supplier.
Gross profit decreased 23.0% or $6,810,000 from $29,577,000 for the
year ended September 30, 1996 to $22,767,000 for the year ended September 30,
1997. Gross profit as a percentage of sales decreased from 30.4% for the
year ended September 30, 1996 to 27.4% for the year ended September 30, 1997.
Operating expenses increased $9,813,000 or 60.5% from $16,230,000
for the year ended September 30, 1996 to $26,043,000 for the year ended
September 30, 1997. As a percentage of net sales, marketing distribution and
administrative expenses increased to 31.3% for the year ended September 30,
1997 from 16.7% for the year ended September 30, 1996.
Four factors contributed to the increase in operating expenses.
First, $5,535,000 was recorded to account for the settlement of class action
lawsuits filed against the Company in 1996. The settlements are more fully
described in Item 8. Second, foreign operating costs increased approximately
$1,500,000 primarily as a result of a full twelve months of operation in the
United Kingdom. Third, the Company 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. 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 offered certain distributors the right to
participate in cruises at the Company's expense. The Company estimates that its
cost will be approximately $1,200,000 for this program, which has been accrued
in the year ended September 30, 1997. Fourth, in connection with the Company's
expansion, the Company experienced increases in personnel costs, postage, and
property taxes. As a result of the increase in marketing, distribution and
administrative costs incurred in connection with the Company's operations, 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 (loss) from operations for the year ended September 30, 1997
decreased $16,623,000 or 124.5% to a loss of $3.276,000 from income of
$13,347,000 for the year ended September 30, 1996, principally as a result of
the lower level of sales, the decrease in the gross profit as a percentage of
sales, and the increase in marketing, distribution and administrative
expenses. Income (loss) from operations as a percentage of sales decreased
from 13.7% for the year ended September 30, 1996 to a negative 3.9% for the
year ended September 30, 1997.
Other income increased 31.2% to $850,000 for the year ended
September 30, 1997 from $648,000 for the year ended September 30, 1996. The
increase in other income resulted primarily from $183,000 of net other income
items.
25
<PAGE>
An income tax benefit of $445,000 is accrued for the year ended
September 30, 1997. Of this amount, $370,000 is to recognize the benefit of
the carryback of the operating loss for the year ended September 30, 1997 and
$119,000 is to recognize a net deferred tax benefit.
Net loss was $1,981,000 for the year ended September 30, 1997, a
decrease of 122.8% compared to net income of $8,705,000 for the year ended
September 30, 1996, principally as a result of lower level of net sales, the
decrease in gross profit as a percentage of sales, and the settlement of the
class action lawsuits.
Liquidity and Capital Resources
The Company had cash and cash equivalents of $4,404,000 at September
30, 1998 compared to $8,904,000 at September 30, 1997. The cash used in
operating activities of $571,000 for the year ended September 30, 1998 was
significantly less than the cash used in by operating activities of $2,693,000
for the twelve months ended September 30, 1997. The Company used approximately
$1,986,000 and $4,076,000, respectively, to purchase property and equipment
during the years ended September 30, 1998 and 1997. The Company had working
capital of $7,019,000 at September 30, 1998 compared to $9,570,000 at September
30, 1997.
The $2,551,000 decline in working capital was primarily the result of
the previously mentioned acquisition of property and equipment and the net
reduction of current liabilities. Dividends of $350,000 were also declared and
paid during the year ended September 30, 1998. In addition, the Company received
$272,000 from the exercise of Warrants issued in the public offering completed
in July, 1995 and the exercise of stock options.
During October, 1998 $459,000 was disbursed for the purchase of
Common Stock and stock purchase warrants owned by Kevin Trudeau and $967,000 was
disbursed as part of the settlement with Distributors Services, L.L.C.
The Company 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. The Company has no immediate plans for expansion into new foreign
markets. However, the Company anticipates considering various expansion plans,
as well as other opportunities for growth through acquisitions or other means.
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.
Impact of Year 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any computer
programs that have time sensitive software may recognize a date using 00 as
the year 1900 rather than the year 2000. The failure of the Company's or a
third party supplier's or vendor's computer system to properly recognize the
date could result in a system failure or miscalculation causing a disruption
of the Company's activities. Such a disruption could have a material adverse
impact on the Company's ability to conduct its business.
The Company recently completed the installation of SAP(R), an enterprise
wide state-of-the-market computer information system. Additionally, the Company
also installed a White(R) automated inventory storage and retrieval system in
its Houston warehouse facility. The total cost of installation and training
associated with both systems was approximately $4,000,000. The Company has
received certification from SAP(R) and White(R) that their systems are Year
2000 compliant. The Company is currently developing a plan that will test for
such compliance.
The Company also relies on certain other less significant software
systems in its day to day activities. The Company has not yet performed the
detailed tasks necessary to properly test the Year 2000 compliance of these
particular systems; however an implementation plan is currently being developed
to complete such task in sufficient time to allow for any required updating and
additional testing. The Company presently believes that, with the recent
conversion to the new SAP(R) and White(R) systems software and modifications to
existing, less significant software, the Year 2000 problem should not pose
significant operational problems for the Company's internal information systems.
Additionally, the Company has performed a preliminary assessment of
its significant vendors and suppliers information and non-information systems
using a broad overview and management's informal understanding of their
systems. None of the detailed tasks necessary to directly assess their Year
2000 compliance (such as direct coordination with those significant vendors
and suppliers) have been performed by the Company. The Company is currently
developing a plan to complete such review and it anticipates that such review
will be completed in sufficient time to allow for adequate testing of such
compliance.
Based on the Company's initial assessment of its significant vendors'
and suppliers' vulnerability to Year 2000 related systems failures,
management believes that the Company should not have significant exposure
with respect to such third parties. The Company's preliminary assessments
indicate that the worst case scenario with regard to Year 2000 third party
issues would be delays in receiving inventory and/or shipping product to its
distributors. Management has not yet assessed the expense related to the
testing of significant third party vendors' or suppliers' compliance with
Year 2000 issues.
26
<PAGE>
Recent Accounting Pronouncements
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS ("SFAS") NO. 130,
"REPORTING COMPREHENSIVE INCOME," establishes standards for the reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS No. 130 requires that all items that are required to be
recognized under current accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. SFAS No. 130 is effective for
financial statements for the periods beginning after December 15, 1997 and
requires the restatement of comparative information for earlier years. The
Company does not believe this statement will have a material impact on its
financial statement reporting.
SFAS NO. 131, "DISCLOSURE ABOUT SEGMENTS OF A BUSINESS ENTERPRISE,"
establishes standards for the way that public enterprises report
information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in
interim financial statements issued to the public. It also establishes
standards for disclosures regarding products and services, geographic areas
and major customers. SFAS No. 131 is effective for financial statements for
the periods beginning after December 15, 1997 and requires comparative
information for earlier years to be restated. The Company does not believe this
statement will have a material impact on its financial statements.
SFAS NO. 132, "EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER
POST-RETIREMENT BENEFITS," standardizes the disclosure requirements for pensions
and other post-retirement benefits and requires additional information on
changes in the benefit obligations and fair values of plan assets. The statement
is effective for financial statements for periods beginning after December 15,
1997 and requires comparative information for earlier years to be restated.
Adoption of SFAS No. 132 is not expected to have a material effect on the
Company's financial statement disclosures.
SFAS NO. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES," requires companies to recognize all
derivative contracts as either assets or liabilities in the balance sheet and
to measure them at fair value. If certain conditions are met, a derivative may
be specifically designated as a hedge, the objective of which is to match the
timing of gain or loss recognition on the hedging derivative with the
recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income in the period of
change. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Historically, the Company has not entered into
derivative contracts either to hedge existing risks or for speculative purposes.
Accordingly, the Company does not expect adoption of the new standard to have a
material effect on its financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company is exposed to market risks, which include changes in
currency exchange rates as measured against the U.S. dollar. The value of the
U.S. dollar affects the Company's financial results. Changes in exchange
rates may positively or negatively affect the Company's sales (as expressed in
U.S. dollars), gross margins, operating expenses, and retained earnings. When
the U.S. dollar sustains a strengthening position against currencies in which
the Company sells products or a weakening exchange rate against currencies in
which it incurs costs, its sales or costs are adversely affected. The Company
does not believe that its exposure to exchange rate fluctuations will have a
material impact on its results of operations.
27
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Nutrition For Life International, Inc. Consolidated Financial Statements PAGE
----
Independent Certified Public Accountants' Report........................................................... F-2
Consolidated Balance Sheets as of September 30, 1998 and 1997.............................................. F-3
Consolidated Statements of Operations for the Years Ended September 30, 1998, 1997 and 1996................ F-4
Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 1998, 1997 and 1996...... F-5
Consolidated Statements of Cash Flows for the Years Ended September 30, 1998, 1997 and 1996................ F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
To the Board of Directors
and Shareholders of
Nutrition For Life International, Inc.
We have audited the consolidated balance sheets of Nutrition For Life
International, Inc. as of September 30, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended September 30, 1998. 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 audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits 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 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, 1998 and
1997 and the results of its operations and its cash flows for each of the three
years in the period ended September 30, 1998 in conformity with generally
accepted accounting principles.
BDO Seidman, LLP
Houston, Texas
December 29, 1998
F-2
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents $ 4,404,388 $ 8,903,957
Restricted cash -- 513,195
Marketable securities 968,196 --
Receivables 568,931 1,547,479
Inventories 9,697,495 7,920,454
Deferred tax asset, net (Note 6) 1,982,000 2,258,608
Refundable federal income taxes (Note 6) 200,000 659,111
Prepaid expenses and other assets 953,161 496,517
----------- ----------
Total Current Assets 18,774,171 22,299,321
Property and equipment, net (Note 2) 7,306,650 6,534,042
Audio production rights (Note 11) 1,400,000 --
Other assets 377,328 514,073
----------- ----------
$27,858,149 $29,347,436
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,282,750 $ 3,707,930
Accrued bonuses and commissions 1,646,638 1,734,395
Deferred income (Note 7) 3,252,598 3,824,471
Accrued cruise (Note 8) -- 1,195,150
Lawsuit settlement accrual (Note 8) -- 1,332,314
Accrued expenses and other liabilities 1,420,338 618,187
Accrued liability - Nightingale Conant (Note 11) 1,669,122 --
Federal and franchise tax payable (Note 6) -- 43,216
Current portion of capital lease obligation (Note 3) 163,324 157,739
Current portion of long term debt (Note 11) 320,263 --
Dividends payable (Note 4) -- 115,798
----------- ----------
Total Current Liabilities 11,755,033 12,729,200
Deferred tax liability (Note 6) 682,000 282,000
Long-term portion of capital lease obligation (Note 3) 349,520 478,220
Long-term debt (Note 11) 628,737 --
Commitments and contingencies (Note 8)
Stockholders' Equity (Note 4):
Preferred stock, $.001 par value; 1,000,000 authorized;
none issued -- --
Common stock; $.01 par value; 20,000,000 shares authorized 58,875 57,758
Additional paid-in capital 11,074,044 10,688,951
Retained earnings 3,958,757 5,176,539
Unrealized loss on investment (38,364) --
Cumulative foreign currency translation adjustment (77,968) 8,578
----------- -----------
14,975,344 15,931,826
Less: Treasury stock 79,000 shares in 1998 and 9,000 shares
in 1997, at cost (532,485) (73,810)
----------- ----------
Total Stockholders' Equity 14,442,859 15,858,016
----------- -----------
$27,858,149 $29,347,436
=========== ===========
See accompanying summary of accounting policies and notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales (Notes 7 and 10) $69,658,095 $83,044,577 $97,403,757
Cost of sales (Note 9) 47,939,482 60,277,742 67,826,803
----------- ----------- -----------
Gross profit 21,718,613 22,766,835 29,576,954
----------- ----------- -----------
Operating expenses:
Marketing, distribution and administrative
expenses 21,021,056 20,508,294 16,230,023
Lawsuit settlement (Note 8) -- 5,535,000 --
----------- ----------- -----------
21,021,056 26,043,294 16,230,023
----------- ----------- -----------
Income (loss) from operations 697,557 (3,276,459) 13,346,931
----------- ----------- -----------
Other income (expense)
Interest income, net 70,184 667,338 711,563
Foreign exchange loss (336,842) (78,561) --
Other, net (Note 11) (508,305) 261,161 (63,533)
----------- ---------- -----------
(774,963) 849,938 648,030
----------- ---------- -----------
Income (loss) before income tax expense (benefit) (77,406) (2,426,521) 13,994,961
Income tax expense (benefit) (Note 6) 790,050 (445,420) 5,289,797
----------- ---------- -----------
Net income (loss) $ (867,456) $(1,981,101) $ 8,705,164
=========== =========== ===========
Basic earnings (loss) per common share $ (.15) $ (.35) $ 1.61
=========== =========== ===========
Diluted earnings (loss) per common share $ (.15) $ (.35) $ 1.36
=========== =========== ===========
Weighted average common shares outstanding:
Basic 5,832,887 5,625,464 5,407,957
=========== =========== ===========
Diluted -- -- 6,344,682
=========== =========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Cumulative
Unrealized Foreign
Common Stock Additional Retained Loss Currency Treasury Stock Total
---------------- Paid-In Earnings on Translation ------------------ Stockholders'
Shares Amount Capital (Deficit) Investment Adjustment Shares Amount Equity
------ ------ ----------- ----------- ---------- ---------- ------ --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, at
October 1, 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 4) -- -- -- (111,371) -- -- -- -- (111,371)
Foreign currency
translation
adjustment -- -- -- -- -- (4,609) -- -- (4,609)
Exercise of stock
options and
warrants 512,038 5,121 1,849,067 -- -- -- -- -- 1,854,188
--------- ------- ----------- ---------- -------- -------- -------- --------- -----------
Balance, at
September 30, 1996 5,568,562 55,686 9,939,059 7,611,580 -- (4,609) -- -- 17,601,716
Net loss -- -- -- (1,981,101) -- -- -- -- (1,981,101)
Cash dividends
(Note 4) -- -- -- (453,940) -- -- -- -- (453,940)
Issuance of common
stock options for
services (Note 5) -- -- 105,362 -- -- -- -- -- 105,362
Registration
expenses -- -- (43,872) -- -- -- -- -- (43,872)
Foreign currency
translation
adjustment -- -- -- -- -- 13,187 -- -- 13,187
Purchase of treasury
stock (Note 2) -- -- -- -- -- -- (9,000) (73,810) (73,810)
Exercise of stock
options and
warrants 207,273 2,072 688,402 -- -- -- -- -- 690,474
--------- ------- ----------- ---------- -------- -------- ------- --------- -----------
Balance, at
September 30, 1997 5,775,835 57,758 10,688,951 5,176,539 -- 8,578 (9,000) (73,810) 15,858,016
Net loss -- -- -- (867,456) -- -- -- -- (867,456)
Cash dividends (Note 4) -- -- -- (350,326) -- -- -- -- (350,326)
Purchase of
treasury stock (Note 8) -- -- -- -- -- -- (70,000) (458,675) (458,675)
Foreign currency
translation adjustment -- -- -- -- -- (86,546) -- -- (86,546)
Issuance of common
stock options for
services (Note 5) -- -- 144,705 -- -- -- -- -- 144,705
Registration expense -- -- (31,487) -- -- -- -- -- (31,487)
Unrealized loss on
investment -- -- -- -- (38,364) -- -- -- (38,364)
Exercise of stock
options and
warrants 111,760 1,117 271,875 -- -- -- -- -- 272,992
--------- ------- ----------- ---------- -------- -------- ------- --------- -----------
Balance at
September 30, 1998 5,887,595 $58,875 $11,074,044 $3,958,757 $(38,364) $(77,968) (79,000) $(532,485) $14,442,859
========= ======= =========== ========== ======== ======== ======= ========= ===========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (867,456) $ (1,981,101) $ 8,705,164
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,397,810 801,039 400,368
Bad debt expense 530,880 653,458 671,198
Deferred tax expense (benefit) 676,608 (488,802) (1,420,858)
Stock options/warrants issued for services 144,705 105,362 --
Unrealized losses on available for sale securities 38,364 -- --
Changes in assets and liabilities:
Cash-restricted 513,195 (513,195) --
Receivables 447,668 (1,756,875) (866,498)
Inventories (1,777,041) (1,555,104) (4,097,733)
Refundable federal income taxes 459,111 (159,111) (500,000)
Prepaids and other assets (456,643) (236,426) (170,840)
Other assets 5,186 (102,995) (63,606)
Accounts payable (425,181) 1,130,829 187,395
Deferred income (571,873) (69,099) 3,545,776
Accrued expenses and other liabilities (642,865) 2,285,944 768,070
Federal and franchise tax payable (43,216) (806,784) 6,263
----------- ----------- -----------
Net cash provided by (used in) operating activities (570,748) (2,692,860) 7,164,699
----------- ----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (1,986,114) (4,076,384) (2,174,214)
Purchase of marketable securities (1,006,560) -- --
Purchase of intangible assets -- (51,769) (211,660)
----------- ----------- -----------
Net cash used in investing activities (2,992,674) (4,128,153) (2,385,874)
----------- ----------- -----------
Cash flows from financing activities:
Payment of capital lease obligations (166,307) -- --
Exercise of stock options 223,642 523,655 36,998
Exercise of warrants 49,350 166,819 1,817,190
Dividends paid (466,124) (449,513) --
Registration fees (31,487) (43,872) --
Purchase of warrants (73,675) -- --
Purchase of treasury stock (385,000) (73,810) --
----------- ----------- -----------
Net cash provided by (used in) financing activities (849,601) 123,279 1,854,188
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (4,413,023) (6,697,734) 6,633,013
Cash and cash equivalents, beginning of year 8,903,957 15,588,504 8,960,100
Cumulative foreign currency translation adjustment (86,546) 13,187 (4,609)
----------- ----------- -----------
Cash and cash equivalents, end of year $ 4,404,388 $ 8,903,957 $15,588,504
=========== =========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-6
<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. 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 previously conducted.
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 380 products in nine categories,
including nutritional supplements, health foods, weight management items, skin
care products, other consumer products, and services.
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.
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
directly generate. The Company's operations depend 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.
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 sells products.
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 marketin
g organization is based on sales of products rather than investments in the
organization.
The Company has two wholly-owned subsidiaries, Nutrition For Life
International (UK) Ltd. ("UK"), and Nutrition For Life International
Philippines, Inc. ("Philippines") that were formed primarily to operate as
wholesale distributors of the Company's products throughout the United
Kingdom and the Philippines.
Principles Of Consolidation
The consolidated financial statements include the accounts of the
Company and its two wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Cash And Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand and in short-term, interest bearing deposits with
original maturities of three months or less.
Restricted Cash
In accordance with the settlement of the Federal Action (See Note
8), the Company was required to set up a reserve fund of $1,500,000 for
reimbursements to certain distributors. As of September 30, 1997, the Company
made reimbursements totaling $986,805. The remaining $513,195 was disbursed
during the year ended September 30, 1998.
F-7
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Concentration Of Credit Risk
At September 30, 1998 and 1997, the Company's cash in financial
institutions exceeded the federally insured deposit limit by approximately
$3,998,000 and $4,675,000, respectively.
Fair Market Value Of Financial Instruments
The Company's financial instruments include accounts receivable,
accounts payable, long-term debt and capital lease obligations. The fair market
value of accounts receivable and accounts payable approximates their carrying
values because their maturities are generally less than one year.
Marketable Securities
The Company's marketable securities are categorized as
available-for-sale securities, as defined by the Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Unrealized holding gains and losses on available for sale
securities are reflected as a net amount in a separate component of
stockholders' equity until realized. For the purposes of computing realized
and unrealized gains and losses cost is identified on a specific identification
basis.
Marketable securities are categorized as available-for-sale
securities and summarized as follows:
<TABLE>
<CAPTION>
Gross
Unrealized
Cost Fair Value Loss
------ ---------- ----------
<S> <C> <C> <C>
Bond funds $ 674,035 $635,671 $(38,364)
Money-market funds 332,525 332,525 --
---------- -------- --------
$1,006,560 $968,196 $(38,364)
========== ======== ========
</TABLE>
Receivables
Receivables consist principally of amounts due from distributors
resulting from credit card sales in the normal course of business. All amounts
are considered collectible. At September 30, 1997 receivables also included
approximately $968,000 due from the Canadian government from overpayment of
goods and services taxes. The Canadian receivable was collected in 1998. Due to
fluctuations in the exchange rate between the U.S. and Canadian dollar, the
Company realized an exchange rate loss upon collection of the receivable of
approximately $100,000.
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
property and equipment is provided using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized over
the terms of the respective leases, not in excess of their estimated useful
lives. For income tax purposes, depreciation on fixed assets is calculated using
accelerated methods.
The Company reviews the carrying values of its long-lived assets
for possible impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be recoverable.
Capital Lease
The Company leases certain computer equipment under a capital lease
agreement which expires in 2002. The asset and liability under this capital
lease are recorded at the lower of the present value of the minimum lease
payments or the fair value of the asset. The asset is being amortized beginning
in fiscal 1998 over the lesser of the related lease term or its estimated useful
life. At the inception of the capital lease, the Company's incremental borrowing
rate was used to determine the
F-8
<PAGE>
present value of the minimum lease payment. Therefore, the carrying value of the
capital lease obligation approximates market value.
Stock Options And Warrants
The Company has elected to continue to account for stock options
issued to employees in accordance with APB No. 25. During the years ended
September 30, 1998 and 1997, all options issued to officers and employees
were granted at an exercise price, which equaled or exceeded the market price
per share at the date of grant and accordingly, no compensation expense was
recorded relative to those grants.
Effective for the year ended September 30, 1997, the Company
adopted the disclosure requirements of SFAS No. 123 "Accounting for
Stock-based Compensation". This statement requires that the Company provide
proforma information regarding net income (loss) and income (loss) per share
as if compensation cost for the Company's stock options granted had been
determined in accordance with the fair value based method prescribed in SFAS
No. 123. See Note 5. Additionally, SFAS No. 123 generally requires that
the Company record options issued to non-employees as an expense.
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 are 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 sells product redemption certificates to distributors who
are enrolled 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.
F-9
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 (Loss) Per Common Share
Basic earnings per share includes no dilution and is computed by
dividing net earnings (loss) 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
Company's earnings similar to fully diluted earnings per share.
F-10
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings per share amounts as required by Statement of Financial
Accounting Standards No. 128 are calculated as follows:
<TABLE>
<CAPTION>
For the Year Ended September 30,
-----------------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Basic earnings (loss) per share:
Net income (loss) available to common
stockholders $ (867,456) $(1,981,101) $8,705,164
Weighted average common shares outstanding 5,832,887 5,625,464 5,407,957
Basic earnings (loss) per share $ (0.15) $ (0.35) $ 1.61
========== =========== ==========
Diluted earnings (loss) per share:
Net income (loss) available to
common stockholders $ (867,456) $(1,981,101) $8,705,164
Weighted average common shares outstanding 5,832,887 5,625,964 5,407,957
Effect of dilutive warrants and options 366,498 645,079 936,725
---------- ----------- ----------
Weighted average shares outstanding plus
assumed conversions 6,199,385 6,270,543 6,344,382
========== =========== ==========
Diluted earnings (loss) per share $ (.15) $ (.35) $ 1.36
========== =========== ==========
</TABLE>
Diluted earnings per share for the years ended September 30, 1998
and 1997 did not consider the effect of the warrants and options because they
were anti-dilutive.
F-11
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Foreign Currency Translation
The asset and liability accounts of the Company's foreign
subsidiaries are translated into US dollar amounts for financial reporting
purposes using year-end exchange rates. Revenue and expense accounts are
translated at the average rates during the year. Foreign exchange rate
translation adjustments are accumulated in a separate component of
stockholders' equity. Exchange losses of approximately $318,000, $78,500, and
$0 for the years ended September 30, 1998, 1997 and 1996, respectively, are
included in the accompanying financial statements as "Other income
(expense)".
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.
Recent Accounting Pronouncements
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS ("SFAS") NO. 130,
"REPORTING COMPREHENSIVE INCOME," establishes standards for the reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS No. 130 requires that all items that are required to be
recognized under current accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. SFAS No. 130 is effective for
financial statements for the periods beginning after December 15, 1997 and
requires the restatement of comparative information for earlier years. The
Company does not believe this statement will have a material impact on its
financial statement reporting.
SFAS NO. 131, "DISCLOSURE ABOUT SEGMENTS OF A BUSINESS ENTERPRISE,"
establishes standards for the way that public enterprises report
information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in
interim financial statements issued to the public. It also establishes
standards for disclosures regarding products and services, geographic areas
and major customers. SFAS No. 131 is effective for financial statements for
the periods beginning after December 15, 1997 and requires comparative informa
tion for earlier years to be restated. The Company does not believe this
statement will have a material impact on its financial statements.
SFAS NO. 132, "EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER
POST-RETIREMENT BENEFITS," standardizes the disclosure requirements for pensions
and other post-retirement benefits and requires additional information on
changes in the benefit obligations and fair values of plan assets. SFAS No. 132
is effective for financial statements for periods beginning after December 15,
1997 and requires comparative information for earlier years to be restated.
Adoption of SFAS No. 132 is not expected to have a material effect on the
Company's financial statement disclosures.
SFAS NO. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES," requires companies to recognize all derivative contracts as either
assets or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Historically, the
Company has not entered into derivative contracts either to hedge existing risks
or for speculative purposes. Accordingly, the Company does not expect adoption
of the new standard to have a material effect on its financial statements.
Reclassifications
Certain reclassifications were made to the 1997 accounts to
conform to the 1998 financial statement presentation. These reclassifications
did not have an impact on previously reported results.
F-12
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment and their estimated useful lives are
summarized as follows:
<TABLE>
<CAPTION>
September 30,
LIVES 1998 1997
----- ---- ----
<S> <C> <C> <C>
Equipment 7 $4,498,928 $4,364,327
Computer software 10 3,038,391 1,577,004
Leasehold improvements 5 1,110,167 1,045,058
Furniture and fixtures 5-10 656,809 612,498
Automobiles 5 151,059 93,905
Equipment held under capital
lease (Note 3) 4 679,151 635,959
----------- ----------
10,134,505 8,328,751
Less: Accumulated depreciation and amortization 2,827,855 1,794,709
----------- ----------
$ 7,306,650 $6,534,042
=========== ==========
</TABLE>
NOTE 3 - CAPITAL LEASE OBLIGATION
Minimum future lease payments under capital leases as of
September 30, 1998 for each of the next four years and in the aggregate are:
<TABLE>
<CAPTION>
<S> <C>
Amount
Year ended September 30: ------
1999 $ 194,880
2000 194,880
2001 179,738
2002 789
---------
Total minimum lease payments 570,287
Less: Amount representing interest (57,443)
---------
Present value of net minimum lease payments 512,844
Current portion of capital lease obligation (163,324)
---------
Long-term portion of capital lease obligation $ 349,520
=========
</TABLE>
An interest rate of 7.21% on the capital lease was imputed based
on the Company's incremental borrowing rate at the inception of the lease.
NOTE 4 - COMMON STOCK
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
adjusted to give effect to the stock split on October 1, 1995 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 adjusted to reflect this split.
On September 16, 1996 the Company's Board of Directors authorized
a stock repurchase program, whereby the Company had the discretion to
purchase up to 200,000 shares of its common stock. During the year ended
September 30, 1997, the Company purchased 9,000 shares of common stock for
$73,810. The repurchase program terminated on June 30, 1997.
During the years ended September 30, 1998, 1997, and 1996 the
Company's Board of Directors declared cash dividends totaling $350,326,
$453,940 and $111,371, respectively. Of such dividends, $466,124, $449,513
and $0 was paid during the years ended September 30, 1998, 1997 and 1996,
respectively.
F-13
<PAGE>
NOTE 5 - STOCK OPTIONS AND WARRANTS
1993 Plan
In planning the Merger, NEC-Utah and NEC-Colorado determined that
a stock option plan would provide incentives for employees and consultants of
NFLI who promote the interests of the Company and its stockholders. The
Company's Board of Directors approved the 1993 Stock Option Plan (the "1993
Plan") in connection with the approval of the Merger. Pursuant to the 1993
Plan, a total of 282,000 shares of common stock were reserved for the grant
of options to purchase the Company's common stock. Generally, one-third of
the shares underlying the options become exercisable in cumulative
installments of 12 months, 24 months and 36 months after the date of grant.
The maximum term of the options is 10 years, except that if an employee
leaves the Company, the options will terminate 30 days thereafter. The
issuance of options is at the discretion of the Company's Board of Directors.
1995 Discretionary Plan
The Company's Board of Directors approved the 1995 Stock Option
Plan (the "1995 Plan") in March 1995. Pursuant to the 1995 Plan, as amended
in June 1996, the Company reserved a total of 640,000 shares of common stock for
the grant of options to purchase Common Stock of the Company. The terms of the
options are similar to those of the 1993 Plan.
1995 Non-Discretionary Plan
In November 1995, the Company adopted the 1995 Non-Discretionary
Stock Option Plan for non-employee 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 value of the common
stock at the date of grant of the options. The options expire in five years
and are exercisable in full at the date of grant.
During the years ended September 30, 1998 and 1997, the Company
issued 15,000 options to Directors under this plan. For the year ended September
30, 1997, the Company recorded directors fees of $105,362 based on the
Black-Scholes model. For the year ended December 31, 1998, the Company
determined that the value of the options was not material.
Options and warrants issued in public offering
In connection with a public offering, the Company issued 920,000
stock warrants. Each warrant entitles the holder to purchase one share of
common stock at a price of $3.75. The warrant expiration date of has been
extended by the Company's Board of Directors until June 15, 1999. The Company
has the right to call all of the warrants for redemption on 30 days written
notice at a redemption price of $.05 per warrant, subject to certain defined
criteria. In addition, the Company issued warrants to underwriters to
purchase 80,000 shares of the Company's common stock at $3.75 and options to
purchase 160,000 shares of the Company's common stock at $3.23.
Other Warrants
In April 1998 the Company retained the services of Piedmont
Consulting, Inc., ("Piedmont") a public/investor relations firm, to assist in
its efforts to gain a broader investor following. As compensation for its
services Piedmont was paid a monthly retainer and was granted a three year
warrant entitling it to purchase up to 30,000 shares of the Company's common
stock at $5.25 per share and 40,000 shares at $7.00 per share. In July 1998
the Company terminated its relationship with Piedmont. Pursuant to the
provisions of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation", the Company recognized approximately $144,705 as
compensation expense related to the warrants in the year ended September
30,1998.
In October 1998 the Company issued a warrant to Nightingale
Conant to purchase up to 290,000 shares of the Company's common stock at
$5.50 per share. The warrant is exercisable at any time until October 31,
2003 and is entitled to the benefit of adjustment of the exercise price and
number of shares deliverable upon exercise thereof in the event of certain
specified dilutive transactions. Expense of $702,000 has been accrued in the
accompanying September 30, 1998 financial statements.
F-14
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company estimates the fair value of each stock option at the
grant date by using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in 1998, 1997 and 1996, a dividend
yield of 1%, an interest free interest rate of 5.7%, and an expected life
ranging from 5-10 years, and an expected volatility of 67%.
Had compensation cost been determined on the basis of fair value
pursuant to SFAS No. 123 for stock options issued to employees, net income
(loss) and earnings (loss) per share for years ended September 30, 1998, 1997
and 1996 would have been reduced as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income (loss):
As reported $ (867,456) $(1,981,101) $8,705,164
=========== =========== ==========
Pro forma $(1,063,456) $(2,457,533) $8,657,534
=========== =========== ==========
Basic and diluted earnings (loss) per share:
Basic:
As reported $ (.15) $ (.35) $ 1.61
=========== =========== ==========
Pro forma $ (.18) $ (.43) $ 1.60
=========== =========== ==========
Diluted:
As reported $ (.15) $ (.35) $ 1.37
=========== =========== ==========
Pro forma $ (.17) $ (.43) $ 1.35
=========== =========== ==========
</TABLE>
The following is a summary of the status of option plans during the years
ended September 30:
<TABLE>
<CAPTION>
Weighted
Number Average
of Exercise
Shares Price
------- --------
<S> <C> <C>
Options outstanding as of October 1, 1995 491,854 $ 2.35
Options granted 40,000 $16.31
Options exercised (27,454) $ 1.41
Options forfeited --
Options cancelled (2,400) $ 1.67
-------
Options outstanding as of September 30, 1996 502,000 $ 3.51
Options granted 266,850 $12.15
Options exercised (157,220) $ 3.15
Options forfeited (2,300) $13.00
Options cancelled (1,200) $ 7.33
-------
Options outstanding as of September 30, 1997 608,130 $ 7.38
Options granted 80,000 $ 5.67
Options exercised (97,400) $ 2.27
Options forfeited (73,233) $11.31
Options cancelled (12,417) $11.56
-------
Options outstanding as of September 30, 1998 505,080 $ 7.39
=======
Options exercisable as of:
September 30, 1996 485,333 $ 3.14
September 30, 1997 349,146 $ 3.81
September 30, 1998 362,548 $ 5.83
Weighted average fair value of options granted
during the year ended:
September 30, 1996 $ 9.62
September 30, 1997 $ 8.85
September 30, 1998 $ 2.45
</TABLE>
F-15
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of the status of stock warrants for the
years ended September 30, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Number Weighted
of Average
Shares Exercise Price
--------- --------------
<S> <C> <C>
Warrants outstanding as of October 1, 1995 999,000 $3.75
Exercised (484,684) $3.75
--------
Outstanding as of September 30, 1996 514,316 $3.75
Exercised (50,053) $3.75
--------
Outstanding as of September 30, 1997 464,263 $3.75
Issued 70,000 $5.25
Exercised (13,160) $3.75
--------
Warrants outstanding as of
September 30, 1998 521,103 $3.84
========
</TABLE>
All warrants were exercisable upon issuance. The weighted average fair
value of warrants issued in 1998 was $3.35.
F-16
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Following is a summary of the status of the option and warrants
outstanding at September 30, 1998:
<TABLE>
<CAPTION>
Options and Warrants Outstanding Options and Warrants Exercisable
---------------------------------------------------------- --------------------------------
Weighted-Average
Remaining
Range of Contractual Life Weighted-Average Weighted-Average
Exercise Prices Number (years) Exercise Price Number Exercise Price
------------------- ------ ----------------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$ 0.00 - $ 1.98 154,500 6.1 $ 1.72 154,500 $ 1.72
1.98 - 3.95 501,683 0.9 3.62 501,683 3.62
3.95 - 5.93 95,000 7.2 5.33 70,000 5.18
5.93 - 7.90 15,000 4.2 7.00 15,000 7.00
7.90 - 9.88 20,000 8.6 9.00 6,668 9.00
9.88 - 11.85 10,000 8.1 11.50 3,334 11.50
11.85 - 13.83 150,000 7.6 12.94 60,800 12.85
13.85 - 15.80 25,000 7.6 14.25 16,666 14.25
17.78 - 19.75 15,000 2.2 19.75 15,000 19.75
------- --- ------ ------- ------
986,183 3.8 $ 5.66 843,651 $ 4.70
======= === ====== ======= ======
</TABLE>
NOTE 6 - 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.
F-17
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The (benefit) provision for income taxes for the years ended
September 30, 1998, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal tax (benefit) - current $ 68,009 $ (12,028) $ 5,860,655
Federal tax (benefit) - deferred 676,298 (476,608) (1,420,858)
State tax 45,743 43,216 850,000
-------- --------- -----------
$790,050 $(445,420) $ 5,289,797
======== ========= ===========
</TABLE>
The following reconciles federal income taxes (benefit) computed
at the statutory rate with income taxes as reported for the years ended
September 30:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected income tax (benefit) expense at 34% $(26,318) $(825,017) $4,758,287
Graduated tax rate effect -- -- 140,000
State taxes, net of federal benefit 30,190 28,523 560,155
Loss from foreign subsidiaries 498,000 380,000 --
Nondeductible amortization of intangible assets -- -- 30,694
Overaccrual of 1997 lawsuit settlement and distributor
cruise 153,000 -- --
Utilization of loss carryforwards -- -- (150,335)
Accrual differences from 1997 taxes 113,608 -- --
Other items, net 21,570 (28,926) (49,004)
-------- --------- ----------
Income tax expense (benefit) $790,050 $(445,420) $5,289,797
======== ========= ==========
Current deferred tax assets at September 30, 1998 and 1997 were as follows:
1998 1997
---- ----
Deferred income - certificates $ 891,000 $1,023,325
Class action lawsuit accrual -- 463,512
Additional capitalized inventory costs 584,000 348,332
Cruise accrual -- 406,351
Loss carryforwards 111,000 --
Deferred settlement costs - Nightingale Conant 275,000 --
Deferred income - product and literature 101,000 --
Other 20,000 17,088
---------- ----------
1,982,000 2,258,608
Less valuation allowance -- --
---------- ----------
Current deferred tax assets $1,982,000 $2,258,608
========== ==========
Non-current deferred tax liability at September 30, 1998 and 1997 were as follows:
1998 1997
---- ----
Differences between financial reporting and tax
depreciation $ (682,000) $ (282,000)
========== ==========
</TABLE>
For the year ended September 30, 1998, the Company had a taxable
net operating loss of $326,000 which is available to offset future taxable
income through the year 2018. It is management's opinion, based on past
operating results and expected future operating results, that it is more likely
than not that the Company will utilize its entire net operating loss
carryforward prior to expiration.
For the year ended September 30, 1997, the Company recorded a
federal income tax receivable of $659,111 from an overpayment of taxes. Of this
receivable, approximately $459,000 was refunded during the year ended September
30, 1998 and $200,000 remained a receivable as of September 30, 1998.
F-18
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - DEFERRED INCOME
The Company's 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 approximately $12,500,000, $14,400,000, and $7,647,000 for the
years ended September 30, 1998, 1997 and 1996. The Company recognized revenue
from unredeemed expired certificates of approximately $3,100,000,
$7,028,000, and $3,025,000 for the years ended September 30, 1998, 1997 and
1996. At September 30, 1998 and 1997 the Company had a liability for unredeemed
certificates, net of applicable commissions, of approximately $2,809,000
and $2,941,000, which is included as deferred income in the accompanying
consolidated balance sheets.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
401(k) Plan
In July 1998 the Company established the Nutrition for Life 401(k)
Plan and Trust (the "Plan") which covers all of the Company's full-time
employees who are United States citizens, at least 21 years of age and have
completed one quarter of service with the Company. Pursuant to the plan,
employees may elect to reduce their current compensation by up to the
statutority prescribed annual limit and have the amount of such reduction
contributed to the Plan. The Plan provides for discretionary contributions by
the Company. As of September 30, 1998 no such discretionary contributions have
been made by the Company.
Operating Leases
The Company has noncancelable operating leases, primarily for office,
warehouse space and equipment. Rental expense under
operating leases for the years ended September 30, 1998, 1997 and 1996
amounted to approximately $621,000, $670,000, and $365,000, respectively.
F-19
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, AMOUNT
------------------------ -------
<S> <C>
1999 $ 870,166
2000 801,446
2001 576,512
2002 175,426
2003 137,690
2004 and thereafter 1,024,752
----------
$3,585,992
==========
</TABLE>
Government Regulations
The Company's activities are subject to regulations by various
federal and state agencies, including the Food and Drug Administration (the
"FDA"). The Company believes that it is in compliance with all federal and
state regulations. However, the Company cannot predict whether new
legislation regulating its activities will be enacted, which could have a
material adverse effect on the Company.
Employment Agreements
Effective October 1, 1996, the Company entered into employment
agreements with its chief executive officer and its executive vice-president
through September 30, 1999. Under the agreements, both individuals will
receive their annual salary, plus 5% of pre-tax income from $3,000,000 to
$5,000,000, 4% of the next $5,000,000 of pretax income, and 3% of the next
$10,000,000 of pretax income. No bonuses were paid to these individuals for
either of the years ended September 30, 1998 or 1997, as the Company did not
achieve sufficient pretax income in either year.
In March 1998 each of these individuals agreed to a 25% reduction
in their annual salaries. Concurrent with the salary reduction each was
granted a three year option, pursuant to the Company's 1995 Stock Option
Plan, to purchase up to 20,000 shares of the Company's Common Stock st $5.13
per share, the closing price of the Company's Common Stock on the date of the
grant.
Distributor Agreement
Effective October 24, 1997, the Company entered into an eight
year exclusivity in network marketing agreement with a significant
distributor, Mr. Kevin Trudeau, in which the Company agreed to pay Mr.
Trudeau a percentage, as defined in the agreement, of gross revenues of the
Company.
In August 1998 the Company and Mr. Trudeau entered into an
agreement to end the Company's business relationship with Mr. Trudeau. Mr.
Trudeau and the Company agreed that their October 1997 agreement and his
distributorship were terminated and that Mr. Trudeau would not contest such
terminations. Additionally, the Company and Mr. Trudeau agreed that Mr.
Trudeau would comply with the nine-month non-competition provisions of the
October 1997 agreement and that the Company would purchase the approximate
70,000 shares of common stock and 40,000 stock purchase warrants then owned by
Mr. Trudeau. In September 1998 the Company purchased Mr. Trudeau's common
stock and stock purchase warrants for approximately $459,000.
F-20
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Legal Proceedings
During April 1996, the Attorney General of the State of Illinois
filed suit against against Kevin Turdeau, a significant distributor of the
Company, concerning the distributor's 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 the Company and its distributors' policies and practices conform to
Illinois law and fairly protect the interests of consumers. In accordance with
the AVC as it relates to the OAP program, among other things, the Company has
agreed to enforce the following policies and practices: (1) distributors may not
make purchases or receive certificates merely to earn bonuses; (2) the Company
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 has implemented procedures to ensure compliance with the policies and
practices described above. The Company has entered into 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) certain of its distributors who
enrolled in the "Instant Executive Program" or the "Instant Executive Pack" and
who allegedly incurred net economic loss; and (2) all individuals who purchased
common stock and warrants during the period from 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
were 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. The state action was dismissed in November 1997.
During August 1997 and September 1997, the Federal Action was
settled out of court in two separate settlement agreements for (1) the
"distributor" class for all distributors who claimed economic loss, and (2) the
"stockholder" class for all individuals who purchased common stock and warrants
of the Company from July 11, 1995 through July 16, 1996. The settlements
provided the following terms and conditions:
(A) As part of the distributor settlement, the Company was
required to set aside $1,500,000 in a reserve fund to pay any
individuals who became instant executives from April 1995 to
January 1996. The Company reimbursed these individuals for
any unused perishable product which the distributor returned
prior to January 2, 1998 in unused condition.
(B) In addition, as part of the distributor settlement, the
Company was required to ship product of the Company's choice,
with a retail value of $3,900,000 to distributors who became
instant executives during the period from April 1995 through
April 1996 and had expired, unredeemed order assurance
certificates. The Company's cost associated with these
products was approximately $534,000.
F-21
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(C) As part of the stockholders agreement, the Company
agreed to pay $2,000,000 in cash to individuals who purchased
common stock and warrants from July 11, 1995 through July 16,
1996.
(D) In addition, the Company agreed to pay the plaintiffs
attorney fees up to $600,000 and $300,000 of the
stockholder class and distributor class, respectively.
The total settlement, including Company legal and administrative
fees for the Federal Action was $5,535,000 which is reflected in operating
expenses in the accompanying statement of operations for the year ended
September 30, 1997. The unpaid portion of the settlement at September 30,
1997 totaled $1,332,314, of which $1,244,651 was paid during the year ended
September 30, 1998. The overaccrual of the settlement cost of $87,663 is
reflected in other income in the accompanying financial statements for the
year ended September 30, 1998.
The Securities and Exchange Commission (SEC) had initiated an
investigation into possible violations by the Company 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.
Cruise
On February 11, 1997, the Company's Board of Directors approved
the rights of certain distributors to participate in a cruise during February
1998. In connection with this cruise, the Company conducted seminars for the
education and development of its distributors. The $1.2 million estimated and
accrued cost of the cruise is included in operating expenses for the year
ended September 30, 1997. During the year ended September 30, 1998 the
Company paid $833,026 representing payment of all obligations related to the
cruise. The $362,124 of overaccrued cost of the cruise is reflected in operating
expenses in the accompanying financial statements for the year ended September
30, 1998.
In connection with the cruise, the Company obtained letters of
credit from a financial institution to cover the cost
of the cruise. At September 30, 1997, the Company had $737,830 in such
letters of credit outstanding which expired in February 1998.
Product Liability
The Company does not engage in the manufacturing of any of the
products it markets and distributes; however, it 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.
Purchase Commitment
In July 1998, the Company entered into a supply agreement with
VitaRich Laboratories, Inc. ("VitaRich") in which the Company agreed to
advance VitaRich up to $800,000 to secure the purchase of a sufficient
quantity of certain nutritional supplement raw materials to meet the
Company's anticipated need for rapid delivery of product and to obtain such
product at discounted prices. The agreement is for three years and requires
that the Company provide VitaRich with periodic estimates of anticipated
needs, as well as actual use rates of the requested product.
The Company made an initial deposit of $400,000 to VitaRich and has
agreed that it will maintain a deposit in the amount of 40% of its
outstanding purchase orders with VitaRich. VitaRich is required to use the
deposit for the purchase of raw material and the processing of finished
product in sufficient kinds and quantifies to enable the Company to (i) meet
its anticipated need for the product, (ii) maximize the costs savings to
VitaRich and provide the Company with reduced prices through the purchase of
bulk quantities of raw materials, and (iii) enable VitaRich to meet the
Company's rapid delivery requirements.
Unless the agreement is terminated before its expiration, the Company
is not required to make additional deposits beyond the third year.
Additionally, VitaRich is required to repay any outstanding deposits by
crediting the Company with an amount equal to 10% of each purchase order
placed by the Company until such time as all advances have been repaid. The
Company has a first priority security interest in all of VitaRich's interest
in the inventory, warehouse receipts, documents of title, accounts receivable
and proceeds of insurance related to the raw materials purchased by VitaRich
of behalf of the Company. As of September 30, 1998 the Company had advanced
VitaRich a total of $ 400,000 which is included in prepaid expense in the
accompanying financial statements.
F-22
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - RELATED PARTY TRANSACTIONS
In August and September 1998 the Company purchased approximately
41,000 copies of a book, "MAKING A DIFFERENCE WHILE YOU'RE MAKING A LIVING",
written by its CEO, David P. Bertrand and his son J. Mark Bertrand, also an
employee of the Company, at a cost to the Company of $5.00 per book. New
Paradigm Publishing, a company established by J. Mark Bertrand, published
the book and subsequently sold it the Company. The Company sold approximately
3,000 copies of the book at its Annual Convention in August at an average
selling price of approximately $10.95 per copy. The book has been placed in
the Company's product catalog at per copy prices ranging from $8.95 to
$12.95, based upon quantity ordered, and it is using the book as part of the
materials provided to new distributors in the Company's starter kits.
Additionally, in September 1998 approximately 19,000 copies of the book were
shipped to distributors as part of the Company's Business Training Systems
for that month. New Paradigm Publishing has agreed to accept return of any
books ordered, but not sold by the Company and to refund to the Company $5.00
per returned copy. The Company's Board of Directors unanimously approved the
purchase of the aforementioned books. As of September 30, 1998 nothing was
owed to New Paradigm Publishing by the Company.
The Company purchases a portion of its inventory from one vendor.
Until October 1997, a director of the Company was the president or a
consultant of the vendor, 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, 1998, and 1997, the
Company purchased $494,000 and $4,190,000, respectively, of goods, from this
vendor.
NOTE 10 - FOREIGN SALES
For the years ended September 30, 1998, 1997, and 1996 the
Company's net sales from foreign operations were approximately $9,000,000,
$10,000,000 and $7,982,000, respectively, including sales to customers in
Canada totaling approximately $4,800,000, $6,795,000, $6,422,000,
respectively. The gross profit percentages on all foreign sales are
consistent with the Company's overall gross profit percentages, however
exchange rate fluctuations could have an impact on the Company's future gross
profit margins. Information related to the Company's domestic and
international operations is as follows:
The Company is evaluating its options relative to continuing its
international operations. Such options include but are not limited to the
continued operation of those subsidiaries or the sale or closure of those
operations. As of September 30, 1998 the Company has established no formal plan
of action.
The uncertain Asian economic situtation has had a negative impact
on the Company's operations in the Philippines. The exchange rate between the
Philippines peso and the US dollar has declined from approximately 28 to 1 at
the formation of that subsidiary to approximately 44 to 1 as of September 30,
1998. As a result the Company has realized exchange rate losses of approximately
$212,000 and $78,500 for the years ended September 30, 1998 and 1997,
respectively in the Philippines.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------------
(IN THOUSANDS)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Sales to unaffiliated customers:
North America (1) $65,387 $80,325 $97,248
United Kingdom (2) 3,533 2,549 156
Philippines (3) 738 171 --
Sales or transfers between geographic areas:
North America -- -- --
United Kingdom 622 682 82
Philippines 290 269 --
Operating profit (loss):
North America 1,937 (2,342) 13,382
United Kingdom (959) (906) (35)
Philippines (280) (28) --
Identifiable assets:
North America 29,635 29,827 27,524
United Kingdom 1,435 1,355 871
Philippines 883 708 --
</TABLE>
(1) Includes the United States, Canada, and Puerto Rico.
(2) First began operations in fiscal 1996.
(3) First began operations in fiscal 1997.
F-23
<PAGE>
NOTE 11 - CONTRACT TERMINATION
In July 1996, the Company entered into an Administrative and
Consulting Services Agreement (the 1996 "Agreement") with Distributor
Services, L.L.C. ("DS"). DS is an affiliate of Nightingale-Conant ("NC"), at
the time a major supplier to the Company of self-improvement programs. The
1996 Agreement provided that, except to the extent the Company produced its
own material in-house, DS had the exclusive right to produce and sell all of
the Company's recruiting and training material. Such materials were to be
produced and marketed at the expense of DS and DS was entitled to all
revenues received from sales of such materials. DS also was 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 derived therefrom. The Company had the exclusive right of approval
over content of all materials and meetings produced by DS. Without additional
compensation, DS was to 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 communication with
distributors. For a fee, DS also produced and provided 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 1996 Agreement was fifteen years and
the parties agreed to negotiate in good faith successive fifteen-year terms.
The 1996 Agreement could be terminated earlier for breaches of any material
obligation. Kevin Trudeau, formerly a key distributor of the Company's
products, was principally responsible for DS's performance in connection with
the 1996 Agreement.
In October 1998, the Company, DS and NC agreed to terminate the 1996
Agreement. The Company agreed to pay NC and DS $2,047,000 and to issue to NC a
warrant to purchase up to 290,000 shares of the Company's common stock to
satisfy all accounts payable and other amounts claimed by them for materials
previously delivered to the Company, as well as for the purchase of all of DS's
inventory of audio and video tapes, including all of the audio production rights
for such audio and video tapes, and other materials used to promote the Company,
and for cancellation of the remaining term of the 1996 Agreement.
Approximately $967,000 of the amount was paid upon execution of
the agreement in October 1998 with the balance of $1,080,000 represented by a
promissory note payable in 30 equal monthly interest free payments of $36,000
beginning November 1, 1998. The note is subordinated to working capital loans
obtained by the Company in the ordinary course of business, tax and other
governmental charges, and other obligations incurred in the ordinary course
of business for obtaining goods and services. For financial accounting
purposes, the Company has discounted the non-interest bearing note at 10.25%
resulting in a note payable of $949,000.
The warrant issued to NC entitles NC to purchase up to 290,000
shares of the Company's common stock at
$5.50 per share at any time until October 31, 2003. The warrant is entitled
to the benefit of adjustment of the exercise price and number of shares of
common stock deliverable upon exercise thereof in the event of certain
specified dilutive transactions.
The Company has accounted for the transactions as of September 30,
1998. The amount paid for the audio production rights was approximately
$1,400,000 and will be amortized beginning in November 1998 over an expected
recovery period of three-years. Expense relative to the warrants issued to NC
has been determined by utilizing the Black-Scholes method to be approximately
$702,000. Such expense is included in the accompanying financial statements as
"Other expense - Contract termination" and "Accrued expense - Nightingale
Conant". Since the warrants were actually issued in October 1998 the Company has
accrued an expense of $702,000 as of September 30, 1998 and will record that
amount in "Additional Paid In Capital" in October 1998. Additionally, the cash
paid upon the execution of the agreement of approximately $967,000 has also been
included in "Accrued expenses - Nightingale Conant".
NC also agreed that for a five year period it would not directly
or indirectly seek to acquire a controlling interest, as defined under the
rules and regulations promulagated by the Securities and Exchange Commission, in
the Company without the prior written consent of the Company's Board of
Directors.
F-24
<PAGE>
NOTE 12 - SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C>
Supplemental disclosure of noncash investing and
financing activities:
Purchase of property and equipment under
capital lease $ 43,192 $ 635,959 $ --
Declaration of dividends -- $ 115,798 $ 111,371
Settlement of Nightingale Conant contract:
Purchase of audio production rights $1,400,000 -- --
Issuance of long-term debt $ 949,000 -- --
Net increase in liabilities $ 451,000 -- --
Supplemental disclosure of cash flow information:
Federal and state income taxes paid -- $1,400,000 $7,210,000
Interest paid $ 129,161 -- --
</TABLE>
F-25
<PAGE>
PART III
ITEMS 10, 11, 12 AND 13 constituting Part III of this Form 10-K have been
omitted from this Annual Report pursuant to the provisions of Instruction
G(3) to Form 10-K as the Company intends to file a definitive proxy statement
pursuant to Regulation 14A under the Securities Exchange Act of 1934 within
120 days after the close of its last fiscal year.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
<S> <C>
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 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.
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.*
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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 Agreement 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 10.22 Agreement, effective October 24, 1997, among K.T. Corp., Kevin Trudeau and Registrant, filed as an
Exhibit to the Report on Form 10-K for the fiscal year ended September 30, 1997 of the Registrant which
Exhibit is incorporated herein by this reference.
Exhibit 10.23 Agreement, dated August 19, 1998, among the Registrant, Kevin Trudeau and K.T. Corp., filed as an
Exhibit to the Report on Form 8-K, which Exhibit is incorporated herein by this reference.
Exhibit 10.23.1 Settlement Agreement and Release, dated October 27, 1998, among the Registrant, Kevin Trudeau and K.T.
Corp.
Exhibit 10.24 Settlement and Release Agreement, dated October 30, 1998, among the Registrant, Distributor Services,
L.L.C., Tru-Vantage International, L.L.C., Maximum Impact, L.L.C. and Nightingale-Conant Corporation,
filed as an Exhibit to the Report on Form 8-K, which Exhibit is incorporated herein by this reference.
Exhibit 10.25 Agreement, dated October 30, 1998, between Distributor Services, L.L.C. and the Registrant, filed as
an Exhibit to the Report on Form 8-K, which Exhibit is incorporated herein by this reference.
Exhibit 21 Subsidiaries of the Company.
Exhibit 23 Consent of BDO Seidman, LLP.
* These exhibits were previously filed as exhibits to the Company's Registration Statement on Form SB-2 (File No.
33-92274), and are incorporated herein by reference.
</TABLE>
29
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NUTRITION FOR LIFE INTERNATIONAL, INC.
(Registrant)
Date: January 13, 1999 By: /s/ David P. Bertrand
--------------------------------------
David P. Bertrand, President
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Date: January 13, 1999 /s/ David P. Bertrand
--------------------------------------
David P. Bertrand, President, Director
and Chairman of the Board of Directors
Date: January 13, 1999 /s/ Jana B. Mitcham
--------------------------------------
Jana Mitcham, Executive Vice President,
Secretary, and Director
Date: January 13, 1999 /s/ David O. Rodrigue
--------------------------------------
David O. Rodrigue, Vice President and
Chief Financial Officer
Date: January 13, 1999 /s/ John R. Brown, Jr.
--------------------------------------
John R. Brown, Jr., Vice President-
Finance, Treasurer and Assistant
Secretary
Date: January 13, 1999 /s/ F. Wayne Ballenger
--------------------------------------
F. Wayne Ballenger, Director
Date: January 13, 1999 /s/ M.F. Florence
--------------------------------------
M.F. Florence, Director
Date: January 13, 1999 /s/ Richard S. Kashenberg
--------------------------------------
Richard S. Kashenberg, Director
30
<PAGE>
EXHIBIT 10.23.1
SETTLEMENT AGREEMENT AND RELEASE
This agreement is entered this 27th day of October, 1998 between and among
Nutrition for Life International, Inc. ("NFLI") and Kevin Trudeau and K.T. Corp.
(collectively "KT"). In exchange for the mutual covenants and agreements set
forth herein and other good and valuable consideration, the parties agree as
follows:
1. Promptly upon NFLI's receipt of the executed originals of the
documents listed on the attached Exhibit A, with all required medallion
guarantees, and in a form and substance acceptable to NFLI and the pertinent
stock transfer agent, which acceptance shall not be unreasonably withheld, NFLI
will pay the sum of $458,675.00 pursuant to paragraph 6 of the August 19, 1998
agreement between NFLI and KT. Said funds will be distributed in accordance
with the terms of the documents listed on the attached Exhibit A.
2. NFLI will pay KT by wire transfer no later than October 29, 1998 the
sum of $33,009.79, representing all amounts payable for the month of July 1998
by virtue of KT's October 24, 1997 agreement with NFLI, as if that agreement had
remained in full force and effect for that month.
3. NFLI will pay KT by wire transfer no later than October 29, 1998 the
sum of $35,313.38, representing all amounts due and owing to KT for the month of
July 1998 by virtue of KT's distributorship with NFLI, as if that
distributorship had not been canceled.
4. Upon payment of the sums described in paragraphs 1, 2, and 3 above, it
is the express intention of the parties to this agreement to fully, finally, and
completely resolve and discharge all claims of any kind whatsoever that have
been or might be asserted against NFLI by KT and all other entities in which KT
has or might acquire any interest, including, but not limited to, Premier
Publishing, as well as to resolve and discharge any such claims that NFLI might
have against KT. Such full, final, and complete resolution and discharge is
agreed to be the essence of this agreement. Accordingly, upon receipt of the
sums described in paragraphs 1, 2, and 3 above, KT agree that they shall be
deemed to have fully, finally, and completely released and discharged NFLI and
its directors, officers, and agents from any and all claims of any kind
whatsoever which now exist or which might exist in the future based upon any
conduct occurring prior to execution of this agreement, whether such claims are
known or currently unknown. NFLI shall simultaneously be deemed to have
released and discharged any such claims against KT, except claims that might
arise from KT's breach of any warranties, certifications, representations, or
agreements made by KT in the documents listed in Exhibit A hereto. KT agree
that following receipt of the sums described in paragraphs 1, 2, and 3 above
they shall not make or assist others in making any claims of any kind against
NFLI or its directors, officers, and agents. The terms of this paragraph and
the release described herein shall apply to every entity in which KT now hold or
may in the future acquire any interest, including, but not limited to, Premier
Publishing, as well as to their respective heirs, representatives, associates,
successors, and assigns, as well as to NFLI and its successors and
<PAGE>
assigns. Kevin Trudeau and K.T. Corp. warrant that they have authority to agree
to the foregoing terms and to make the foregoing release. NFLI also so warrants.
5. The foregoing release is governed by and shall be interpreted under
the law of the State of Illinois.
6. The parties agree that any future dispute that may arise between them
shall be submitted to binding arbitration.
7. This agreement may be executed in counterparts. Signature pages
transmitted by facsimile are acceptable, although signed originals of signature
pages shall be furnished as promptly thereafter as possible.
AGREED: ____________________________
Kevin Trudeau and K.T. Corp.
by Kevin Trudeau
AGREED: ______________________________
Nutritional for Life
International, Inc. by
Its Chief Executive Officer
2
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Name Jurisdiction
- ---- ------------
Nutrition for Life International (UK) Ltd. England
Nutrition for Life International Philippines, Inc. Philippines
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Nutrition for Life International, Inc.
Houston, Texas
We hereby consent to the incorporation by reference in the Registration
Statement Form S-8 of our report dated December 29, 1998 relating to the
consolidated financial statements and schedules of Nutrition for Life
International, Inc. appearing in the Company's Annual Report on Form 10-K for
the year ended September 30, 1998.
Houston, Texas BDO SEIDMAN, LLP
January 12, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> SEP-30-1998 SEP-30-1997
<PERIOD-START> OCT-01-1997 OCT-01-1996
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 4,404,388 8,903,957
<SECURITIES> 968,196 0
<RECEIVABLES> 568,931 1,547,479
<ALLOWANCES> 0 0
<INVENTORY> 9,697,495 7,920,454
<CURRENT-ASSETS> 18,774,171 22,299,321
<PP&E> 10,134,505 8,328,751
<DEPRECIATION> 2,827,855 1,794,709
<TOTAL-ASSETS> 27,858,149 29,347,436
<CURRENT-LIABILITIES> 11,755,033 12,729,200
<BONDS> 0 0
0 0
0 0
<COMMON> 58,875 57,758
<OTHER-SE> 14,383,984 15,800,258
<TOTAL-LIABILITY-AND-EQUITY> 27,858,149 29,347,436
<SALES> 69,658,095 83,044,577
<TOTAL-REVENUES> 69,658,095 83,044,577
<CGS> 47,939,482 60,277,742
<TOTAL-COSTS> 47,939,482 60,277,742
<OTHER-EXPENSES> 21,021,056 26,043,294
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 129,161 0
<INCOME-PRETAX> (77,406) (2,426,521)
<INCOME-TAX> 790,050 (445,420)
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (867,456) (1,981,101)
<EPS-PRIMARY> (.148) (.352)
<EPS-DILUTED> (.148) (.352)
</TABLE>
