<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
Commission File Number 0-26362
NUTRITION FOR LIFE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Texas 76-0416176
(State or jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
9101 Jameel Road, Suite 180
Houston, Texas 77040
(Address of Principal Executive Offices)
(713) 460-1976
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceeding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
As of August 11, 1999 there were 5,808,595 shares of common stock,
$0.01 par value per share, outstanding.
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
Index
PART I - FINANCIAL INFORMATION
Page
ITEM 1. FINANCIAL STATEMENTS
Nutrition For Life International, Inc.
Consolidated Balance Sheets
June 30, 1999 and September 30, 1998 3
Consolidated Statements of Operations and Comprehensive
Income (Loss) for the Three and Nine Months Ended
June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
ITEM 5. OTHER INFORMATION 13
Signatures 14
<PAGE>
Part I - Financial Information
Item 1
NUTRITION FOR LIFE INTERNATIONAL, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30,
1999 September 30,
(Unaudited) 1998
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,807,980 $ 4,404,388
Marketable securities 998,165 968,196
Receivables 424,531 568,931
Inventories 9,041,698 9,697,495
Deferred tax asset, net 1,223,000 1,982,000
Refundable federal income taxes 195,633 200,000
Prepaid expenses and other assets 1,430,725 953,161
----------- -----------
Total current assets 17,121,732 18,774,171
Property and equipment, net 6,371,186 7,306,650
Audio production rights 1,088,889 1,400,000
Other assets 481,142 377,328
----------- -----------
$25,062,949 $27,858,149
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,392,504 $ 3,282,750
Accrued bonuses and commissions 1,645,886 1,646,638
Deferred income 1,708,411 3,252,598
Accrued expenses and other liabilities 1,382,979 1,420,338
Accrued liability - Nightingale Conant -- 1,669,122
Current portion of capital lease obligation 175,432 163,324
Current portion of long-term debt 342,813 320,263
----------- -----------
Total current liabilities 7,648,025 11,755,033
Deferred tax liability 776,000 682,000
Long-term portion of capital lease obligation 213,140 349,520
Long-term debt 376,261 628,737
Stockholders' equity:
Preferred stock, $.001 par value; 1,000,000 authorized; none issued -- --
Common stock, $.01 par value; 20,000,000 shares authorized 58,875 58,875
Additional paid-in capital 11,837,156 11,074,044
Retained earnings 4,870,359 3,958,757
Unrealized loss on investment (57,527) (38,364)
Cumulative foreign currency translation adjustment (126,855) (77,968)
----------- -----------
16,582,008 14,975,344
Less: Treasury stock 79,000 shares, at cost (532,485) (532,485)
----------- -----------
Total stockholders' equity 16,049,523 14,442,859
----------- -----------
$25,062,949 $27,858,149
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
Consolidated Statements Of Operations And Comprehensive Income (Loss)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30, Ended June 30,
------------------------ -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $17,210,436 $15,414,795 $50,737,950 $51,377,500
Cost of sales 11,204,917 10,656,483 33,186,954 35,855,748
----------- ----------- ----------- -----------
Gross profit 6,005,519 4,758,312 17,550,996 15,521,752
Marketing, distribution and
administrative expenses 5,022,627 5,143,762 16,103,144 15,163,466
----------- ----------- ----------- -----------
Income (loss) from operations 982,892 (385,450) 1,447,852 358,286
----------- ----------- ----------- -----------
Other income (expense):
Interest income (expense), net (3,820) 19,467 (17,064) 112,180
Foreign exchange gain (loss) (17,109) (109,098) 97,523 (160,133)
Other, net 19,694 153,765 372,291 317,286
----------- ----------- ----------- -----------
(1,235) 64,134 452,750 269,333
----------- ----------- ----------- -----------
Income (loss) before income tax expense 981,657 (321,316) 1,900,602 627,619
Income tax expense 489,000 -- 989,000 592,000
----------- ----------- ----------- -----------
Net income (loss) 492,657 (321,316) 911,602 35,619
----------- ----------- ----------- -----------
Other comprehensive income (loss):
Unrealized gain (loss) on investments (12,290) -- (19,163) --
Foreign currency translation gain (loss) 11,485 3,704 (48,887) (62,945)
----------- ----------- ----------- -----------
(805) 3,704 (68,050) (62,945)
----------- ----------- ----------- -----------
Total comprehensive income (loss) $ 491,852 $ (317,612) $ 843,552 $ (27,326)
=========== =========== =========== ===========
Basic income per common share $ 0.08 $ (0.05) $ 0.16 $ 0.01
=========== =========== =========== ===========
Diluted income per common share $ 0.08 $ (0.05) $ 0.16 $ 0.01
=========== =========== =========== ===========
Weighted average common share
Basic 5,808,595 5,888,525 5,808,595 5,819,922
=========== =========== =========== ===========
Diluted 5,847,002 5,888,525 5,863,730 6,210,712
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
Condensed Consolidated Statements Of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended June 30,
------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Net cash provided by (used in) operating activities $ 39,360 $(2,677,908)
Net cash used in investing activities (232,683) (1,791,523)
Net cash used in financing activities (354,198) (118,507)
Cumulative foreign currency translation adjustment (48,887) (62,945)
---------- ----------
Net decrease in cash and cash equivalents (596,408) (4,650,883)
Cash and cash equivalents at beginning of period 4,404,388 8,903,957
---------- ----------
Cash and cash equivalents at end of period $3,807,980 $4,253,074
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
Notes To Consolidated Financial Statements
INTERIM FINANCIAL STATEMENTS
The accompanying financial statements of Nutrition For Life International, Inc.
(the Company) have been prepared in accordance with the instructions to
quarterly reports on Form 10-Q. In the opinion of Management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and changes in financial position
at June 30, 1999, and for all periods presented have been made. Certain
information and footnote data necessary for fair presentation of financial
position and results of operations in conformity with generally accepted
accounting principles have been condensed or omitted. It is therefore suggested
that these financial statements be read in conjunction with the summary of
significant accounting policies and notes to financial statements included in
the Company's Annual Report on Form 10-K. The results of operations for the
period ended June 30, 1999 are not necessarily an indication of operating
results for the full year.
Information regarding the Company's business segments as required by Statements
of Financial Accounting Standards No. 131, "Disclosure About Segments of a
Business Enterprise", follows:
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
(In thousands)
------------------
1999 1998
---- ----
<S> <C> <C>
Sales to unaffiliated customers:
North America (1) $46,728 $48,085
United Kingdom (2) 3,388 2,760
Philippines 622 532
Sales or transfers between geographic areas:
North America -- --
United Kingdom 624 282
Philippines 199 186
Operating profit (loss):
North America 2,171 1,088
United Kingdom (311) (426)
Philippines (364) (209)
Identifiable assets:
North America 27,545 27,385
United Kingdom 1,726 1,607
Philippines 704 947
</TABLE>
(1) Includes the United States, Canada, and Puerto Rico
(2) Includes the United Kingdom, Ireland, and the Netherlands
6
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
Notes To Consolidated Financial Statements
The Company has not yet adopted Statements of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments And Hedging Activities". The Company
will be required to adopt this Statement during the fiscal year ended September
30, 2000. As the Company has historically not entered into derivative contracts
either to hedge existing risks or for speculative purposes the Company does not
expect adoption of the new standard to have a material effect on the financial
statements.
7
<PAGE>
Nutrition For Life International, Inc.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Net sales for the nine months ended June 30, 1999 decreased by $639,550 or 1.3%
to $50,737,950 as compared to net sales of $51,377,500 for the nine months ended
June 30, 1998. Net sales for three months ended June 30, 1999 increased by
$1,795,641 or 11.6% to $17,210,436 as compared to net sales of $15,414,795 for
the three months ended June 30, 1998.
The Company has an Order Assurance Program ("OAP") to assist certain
distributors in meeting minimum monthly sales volumes. Effective June 1, 1999
the Company changed its OAP from the issuance of product certificates to
primarily the sale of product packs. Prior to June 1, 1999 distributors could
elect to receive a limited number of product certificates which could be
redeemed for products. The Company recognized revenue on these sales upon the
redemption of the certificates for products. Subsequent to June 1, 1999 the
Company began shipping product packs for most OAP purchases, the shipment of
which results in recognition of revenue. Approximately $760,000 of revenue
related to the shipment of the product packs was recognized in June 1999. As a
result of the change in the OAP, the Company does not expect to continue to
recognize substantial revenue from the redemption of product certificates.
Management believes that the redemption of the remaining approximate $1,600,000
of product redemption certificates will occur during the three months ended
September 30, 1999.
At June 30, 1999, the Company had approximately 69,900 distributors as compared
to approximately 81,200 at June 30, 1998 and approximately 80,000 at September
30, 1998. During the nine months ended June 30, 1999 the number of active
international distributors increased by approximately 1,200, while active
distributors in North America decreased by approximately 11,300. The Company's
results of operations depend to a significant degree on the motivation of its
existing distributors and the attraction of new distributors to the Company. The
decrease in net sales is recapped below:
Decrease in sales due to decreased number of distributors $(6,164,000)
Increase in distributor average sales 5,524,000
-----------
$ (640,000)
===========
The Company's net sales per average number of distributors per month increased
from approximately $67 during the nine months ended June 30, 1998 to $75 for the
nine months ended June 30, 1999.
Cost of sales decreased by $2,668,794 or 7.4% to $33,186,954 for the nine months
ended June 30, 1999 from $35,855,748 for the nine months ended June 30, 1998.
Cost of sales as a percentage of net sales decreased from 69.8% in the nine
months ended June 30, 1998 to 65.4% in the nine months ended June 30, 1999. Cost
of sales, which includes product costs, commissions and bonuses paid
to distributors, and shipping costs, is recapped below:
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
-----------------
1999 1998
---- ----
<S> <C> <C>
Product costs 25.8% 27.8%
Commissions and bonuses paid to distributors 32.9 35.6
Shipping costs 6.7 6.4
---- ----
65.4% 69.8%
==== ====
</TABLE>
8
<PAGE>
Product costs as a percentage of cost of sales decreased 2.0% primarily as a
result of the Company now producing and selling certain recruiting and training
materials which were primarily sold to the Company's distributors by Distributor
Services, L.L.C. during the nine months ended June 30, 1998. The gross profit
margin on these materials is generally greater than the gross profit margin on
most of the Company's other products. Since sales of recruiting and training
materials are not eligible for commission, commissions and bonuses paid to
distributors decreased 2.7% as a percentage of cost of sales. Shipping costs
increased .3% during the nine months ended June 30, 1999 primarily from a
combination of increased shipping to continental Europe from the United Kingdom
and the use of an outside contractor for certain shipping.
Gross profit increased 13.1% or $2,029,244 from $15,521,752 for the nine months
ended June 30, 1998 to $17,550,996 for the nine months ended June 30, 1999.
Gross profit as percentage of net sales increased from 30.2% for the nine months
ended June 30, 1998 to 34.6% for the nine months ended June 30, 1999.
Marketing, distribution and administrative expenses increased $939,678 or 6.2%
from $15,163,466 for the nine months ended June 30, 1998 to $16,103,144 for the
nine months ended June 30, 1999. The increase results primarily from a
combination of reduced personnel expenses, increased depreciation charges on
computer hardware and software, and increased promotion costs for meetings and
rallies previously performed by Distributor Services, L.L.C. As a percentage of
net sales, marketing, distribution, and administrative expenses increased to
31.7% for the nine months ended June 30, 1999 from 29.5% for the nine months
ended June 30, 1999.
Income from operations for the nine months ended June 30, 1999 increased
$1,089,566 or 304.1% to $1,447,852 from $358,286 for the nine months ended June
30, 1998, principally as a result of the increase in gross profit being more
than the increase in operating expenses as explained above.
Other income increased to $452,750 for the nine months ended June 30, 1999 from
$269,333 for the nine months ended June 30, 1998. The increase was primarily the
result of a decline in net interest income due to a decrease in interest bearing
deposits and a foreign exchange gain experienced by the Company's subsidiary in
the Philippines.
As the Company is not currently able to recognize any tax benefit from foreign
operating losses, income tax expense was accrued based on the taxable income
from domestic operations for the nine months ended June 30, 1999 and 1998.
Net income was $911,602 for the nine months ended June 30, 1999, an increase of
$875,983 compared to $35,619 for the nine months ended June 30, 1998. The
increase was the result of the items discussed above.
9
<PAGE>
Changes in Financial Condition
The Company had cash and cash equivalents of $3,807,980 at June 30, 1999
compared to $4,404,388 at September 30, 1998. The cash provided by operating
activities of $39,360 for the nine months ended June 30, 1999 was $2,717,268
more than the cash used in operating activities of $2,677,908 for the nine
months ended June 30, 1998. Included in the funds used in operating activities
for the nine months ended June 30, 1999 were significant reductions in accounts
payable, accrued expenses and other liabilities, and the payment of $967,000 in
partial settlement of the accrued liability - Nightingale Conant. While not
requiring funds the remaining balance of the accrued liability - Nightingale
Conant of $702,000 was credited to additional paid in capital to recognize the
issuance of a warrant to purchase 290,000 shares of the Company's common stock.
The Company used approximately $184,000 and $1,775,000, respectively, to
purchase property and equipment during the nine month periods ended June 30,
1999 and 1998. The Company had working capital of $9,473,707 at June 30, 1999
compared to $7,019,138 at September 30, 1998.
10
<PAGE>
Year 2000 Compliance
Year 2000 ("Y2K") issues result from the inability of certain electronic
software and/or hardware to accurately calculate, store or use a date subsequent
to December 31, 1999. These issues could not only affect computer systems used
for accounting and operations but also systems containing embedded chips. The
failure of the Company's or a third party supplier's or vendor's systems to
properly recognize the date could result in a system failure or miscalculation
causing a disruption of the Company's activities.
The Company has completed an assessment of its internal computer systems to
determine whether these systems are Y2K compliant. The Company has determined
that these systems are either compliant or with relatively minor modifications
or upgrades will be compliant. All necessary modifications or upgrades are
anticipated to be completed prior to the end of 1999.
As part of a fiscal 1998 major information system upgrade the Company expended
approximately $4 million for the purchase, installation and associated training
of staff related to the installation of SAP (Registration Mark), an enterprise
wide state-of-the-market computer information system and a White (Registration
Mark) automated inventory storage and retrieval system in its Houston warehouse
facility. Both of these systems are believed to be Y2K compliant.
Additionally the Company has completed the assessement of its non-information
systems to determine whether these systems contain embedded chips that will not
properly function subsequent to December 31, 1999. These systems include various
office equipment items and building systems such as heating and air conditioning
and security. Generally the Company has determined or been assured by the
equipment vendors that any embedded chips are Y2K compliant.
The Company has relied upon its internal staff to assess its Y2K compliance. The
Company does not believe that it will require the services of outside
consultants in completing its Year 2000 review. The costs associated with
evaluating the Company's Y2K compliance and related system upgrades and/or
modifications have been minimal.
The Company is in the process of communicating with certain of its significant
suppliers, vendors and financial institutions to determine its vulnerability to
these third parties failure to address Y2K issues. While the Company has not yet
received definitive responses from all third parties indicating that they are
Y2K compliant, the Company has not received any information that it is
vulnerable to potential Y2K failures by these companies. At this time, the
Company has not developed any contingency plans to address third party non-
compliance with Y2K matters. However, should any communication with any third
party indicate significant vulnerability, development of contingency plans will
be considered.
The Company does not anticipate any significant disruptions of its operations
due to Y2K issues. The Company's assessment of its "worst case" vulnerability to
Y2K problems could be loss of electricity and possible delays in receiving
inventory and/or shipping products to its distributors. Such delays could result
in the loss of income for the Company.
Forward-Looking Statements
The Company is including the following cautionary statement in this report 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
11
<PAGE>
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 in 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.
12
<PAGE>
Part II. Other Information
Item 4. Submission Of Matters To A Vote Of Security Holders
The Company held its Annual Meeting of Shareholders on April 8, 1999. The
Board of Directors of the Company was re-elected in its entirety.
The 1995 Stock Option Plan, as amended, was approved, with 3,679,534
shares voting in favor, 96,491 voting against, and 19,554 shares voting
to abstain.
Item 5. Other Information
On August 5, 1999, the Company signed a letter of intent to acquire
Advanced Nutraceuticals, Inc. ("ANI"). ANI was formed to address trends
in the nutrition industry by utilizing a consolidation and integration
strategy. ANI has entered into letters of intent to acquire three
privately-held companies for a combination of cash, seller notes, and
stock which will be funded by the Company. Final terms of each
acquisition are subject to completion of due diligence and definitive
merger agreements. It is anticipated that approximately $12,000,000 in
debt and $2,500,000 in equity will be needed to complete the proposed
acquisitions. The Company has obtained preliminary financing proposals.
These proposals are subject to satisfactory conclusion of due diligence
and other conditions and approvals.
13
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NUTRITION FOR LIFE INTERNATIONAL, INC.
(Registrant)
Dated: August 11, 1999 By: /s/ John R. Brown, Jr.
________________________________________
John R. Brown, Jr.
Vice President - Finance
By: /s/ Julia J. Schreiber
________________________________________
Julia J. Schreiber
Controller and Chief Accounting Officer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> SEP-30-1999 SEP-30-1998
<PERIOD-START> OCT-01-1998 OCT-01-1997
<PERIOD-END> JUN-30-1999 JUN-30-1998
<CASH> 3,807,980 4,404,388
<SECURITIES> 998,165 968,196
<RECEIVABLES> 424,531 568,931
<ALLOWANCES> 0 0
<INVENTORY> 9,041,698 9,697,495
<CURRENT-ASSETS> 17,121,732 18,774,171
<PP&E> 6,371,186 7,306,650
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 25,062,949 27,858,149
<CURRENT-LIABILITIES> 7,648,025 11,755,033
<BONDS> 589,401 978,257
0 0
0 0
<COMMON> 58,875 58,875
<OTHER-SE> 15,990,648 14,383,984
<TOTAL-LIABILITY-AND-EQUITY> 25,062,949 27,858,149
<SALES> 50,737,952 51,377,502
<TOTAL-REVENUES> 0 0
<CGS> 33,186,954 35,855,748
<TOTAL-COSTS> 16,103,144 15,163,466
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 17,064 0
<INCOME-PRETAX> 1,900,603 627,619
<INCOME-TAX> 989,000 592,000
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 911,602 35,619
<EPS-BASIC> 0.157 0.006
<EPS-DILUTED> 0.156 0.006
</TABLE>
