UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended June 30, 1996
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)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 7, 1996 there were 5,548,451 shares of common stock,
$0.01 par value per share, outstanding.
Nutrition For Life International, Inc.
Index
- --------------------------------------------------------------------------------
PART I - Financial Information
Page
ITEM 1. FINANCIAL STATEMENTS
Nutrition For Life International, Inc.
Balance Sheets 3
June 30, 1996 and September 30, 1995
Statements of Operations 4
for the Three and Nine Months Ended June 30, 1996 and 1995
Condensed Statements of Cash Flows 5
for the Nine Months Ended June 30, 1996 and 1995
Notes to Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 7
CONDITION AND RESULTS OF OPERATIONS
PART II - Other Information
ITEM 1. LEGAL PROCEEDINGS 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
Signatures 14
PART I - Financial Information
Item 1 - Financial Statements
Nutrition For Life International, Inc.
Balance Sheets (Unaudited)
- --------------------------------------------------------------------------------
-Assets- June 30, September 30,
1996 1995
---------- -------------
Current assets:
Cash and cash equivalents $12,843,845 8,960,100
Marketable securities - held to maturity 1,996,811 -
Accounts receivable, net 753,902 172,762
Inventory 6,496,916 2,267,617
Prepaid expenses and other current assets 1,085,447 89,251
----------- -----------
Total current assets 23,176,921 11,489,730
Fixed assets, net 2,051,272 620,818
Deferred tax asset, net 857,670 79,142
Intangible assets, net 159,791 227,498
Other assets 189,564 148,425
----------- -----------
$26,435,218 12,565,613
=========== ===========
-Liabilities and Stockholders' Equity-
Current liabilities:
Accounts payable $ 3,660,030 2,389,706
Accrued bonuses and commissions 1,679,231 1,266,616
Accrued expenses and other liabilities 762,337 559,415
Deferred income 2,170,603 347,795
Federal and state tax payable 1,221,493 843,737
----------- -----------
Total current liabilities 9,493,694 5,407,269
----------- -----------
Stockholders' equity:
Preferred stock, $.001 par value; authorized
1,000,000 shares - -
Common stock, $.01 par value; authorized
20,000,000 shares; issued and outstanding
5,530,452 in June 1996 and 5,056,524 in
September 1995 55,305 50,565
Additional paid-in capital 9,796,527 8,089,992
Retained earnings (deficit) 7,089,692 (982,213)
----------- -----------
Total stockholders' equity 16,941,524 7,158,344
----------- -----------
$26,435,218 12,565,613
=========== ===========
The accompanying notes are an integral part of these statements.
3
Nutrition For Life International, Inc.
Statements Of Operations (Unaudited)
- --------------------------------------------------------------------------------
Three Months Nine Months
Ended June 30, Ended June 30,
------------------------ ------------------------
1996 1995 1996 1995
----------- --------- ---------- ---------
Net sales $26,280,722 7,943,127 77,858,600 19,189,952
----------- --------- ---------- ----------
Cost of sales:
Cost of good sold 8,299,658 2,644,025 23,194,929 6,370,765
Distributor commissions and
and bonuses 9,741,135 3,357,750 29,976,240 7,861,999
----------- --------- ---------- ----------
Cost of sales 18,040,793 6,001,775 53,171,169 14,232,764
----------- --------- ---------- ----------
Gross profit 8,239,929 1,941,352 24,687,431 4,957,188
Marketing, distribution and
administrative expenses 4,956,022 1,365,020 11,973,831 3,806,252
----------- --------- ---------- ----------
Operating income 3,283,907 576,332 12,713,600 1,150,936
----------- --------- ---------- ----------
Other income (expenses):
Interest, net 197,209 (6,146) 534,971 (35,716)
Other, net (18,318) (21,348) (57,141) (45,209)
----------- --------- ---------- ----------
178,891 (27,494) 477,830 (80,925)
Income before income taxes 3,462,798 548,838 13,191,430 1,070,011
Income taxes 1,586,025 - 5,119,525 -
----------- --------- ---------- ----------
Net income $ 1,876,773 548,838 8,071,905 1,070,011
=========== ========= ========== ==========
Earnings per share:
Primary $0.30 0.19 1.25 0.37
===== ==== ==== ====
Fully diluted $0.30 0.14 1.25 0.29
===== ==== ==== ====
Weighted average common shares:
Primary 6,342,312 2,948,584 6,450,902 2,912,240
=========== ========= ========== ==========
Fully Diluted 6,342,312 3,931,598 6,450,902 3,910,362
=========== ========= ========== ==========
The accompanying notes are an integral part of these statements.
4
Nutrition For Life International, Inc.
Condensed Statements Of Cash Flows (Unaudited)
- --------------------------------------------------------------------------------
Nine Months
Ended June 30,
-------------------------
1996 1995
----------- ----------
Net cash provided by operating activities $ 5,841,987 1,568,091
Net cash used in investing activities (3,669,517) (235,870)
Net cash provided by financing activities 1,711,275 4,375
----------- ----------
Net increase in cash and cash equivalents 3,883,745 1,336,596
Cash and cash equivalents at beginning of period 8,960,100 639,164
----------- ----------
Cash and cash equivalents at end of period $12,843,845 1,975,760
=========== ==========
The accompanying notes are an integral part of these statements.
5
Nutrition For Life International, Inc.
Notes To 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-QSB. 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, 1996, and for all periods presented have been made. Certain
information and footnote data necessary for fair presentation of financial
position and results of operations in conformity with generally accepted
accounting principles have been condensed or omitted. It is therefore suggested
that these financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report. Accounting
measurements at interim dates inherently involve greater reliance on estimates
than at year end. The results of operations for the periods ended June 30, 1996
are not necessarily indicative of operating results for the full year.
6
Item 2 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations
Nutrition For Life International, Inc.
- --------------------------------------------------------------------------------
Results of Operations
The Company develops, markets and sells an extensive product line of
nutritional supplements and other consumer products through its network of
distributors. Net sales for the nine months ended June 30, 1996 increased by
$58,668,648 or 305.7% to $77,858,600 from $19,189,952 for the nine months ended
June 30, 1995. The increase in net sales is a result of the Company increasing
its number of distributors and its sales per average number of distributors. At
June 30, 1996 the Company had 85,954 distributors compared to 48,734 at June
30, 1995. However, the rate of growth in the number of distributors slowed
during the three months ended June 30, 1996, to a net increase of 3,502
distributors. Increases in the number of distributors were 11,489 and 13,651,
respectively, during the three months ended December 31, 1995 and March 31,
1996.
The Company's net sales per average number of distributors per month
increased from $49 during the nine month period ended June 30, 1995 to $121 for
the nine months ended June 30, 1996. Approximately 56% of the increase in net
sales was due to new distributors electing to purchase the Instant Executive
Pack, an assortment of the Company's products for $1,000.
The purchase of the Instant Executive Pack has been the fastest method
in which a distributor could attain the level of "executive". Executive level
distributors may earn commissions on sales generated by other distributors in
their downline organization. Sales of the Instant Executive Pack, particularly
by Kevin Trudeau, a key distributor of the Company, have been the subject of
regulatory scrutiny.
In April 1996 the Attorney General of the State of Illinois (the
"Attorney General") filed suit against the Trudeau Marketing Group, Inc., Kevin
Trudeau, and Jules Lieb, People v. Trudeau (the "Civil Suit"). See "Other
Information" below. The Company was not named as a defendant in the Civil Suit,
but the Company's management viewed the Civil Suit as an opportunity to discuss
the Company's marketing program and to resolve confusion surrounding the
program. On July 16, 1996, the Company entered into an "Assurance of Voluntary
Compliance" (the "AVC") with the Attorney General. The AVC preserves the ability
of a new distributor to become an executive distributor the day that he or she
enrolls by generating at least $1,000 in sales volume and by joining the Order
Assurance Program ("OAP") and Master Developer Series. Under the AVC, the
Company will maintain its same executive level qualifications, but to aid
clarification, it will no longer use the "instant executive" designation.
Other key features of the AVC focus on the Company's commitment to: (a)
create an official explanation of its marketing and compensation plan and to
prohibit distributors from creating their own explanations of how the marketing
and compensation plan works; (b) make clear that there are no mandatory
purchases of product to become a distributor; (c) take further steps to stress
distributor compliance with the Company's policies and procedures; and (d)
create a World Wide Web site on the Internet to provide more information about
the Company's products and programs. The Company also agreed to provide
distributor earnings disclosures, to make clear that executive distributors
cannot earn commissions unless they are engaged in the sale of the Company's
products to consumers at retail, including procedures to verify retail sales,
and to take additional steps to encourage distributors to redeem OAP
certificates for product. The Company also agreed to make a contribution to the
Illinois Consumer Education Fund.
The Company entered into substantially similar agreements with the
states of Michigan, Missouri, New
7
Jersey, Hawaii, Idaho, Kentucky and Pennsylvania. The Company expects to enter
into agreements with other states in the future.
During the three months ended June 30, 1996, the Company expended
significant time and resources engaging in the discussions with the Attorney
General and other state attorneys general. Included in the results of
operations for the three months ended June 30, 1996 were expenses of
approximately $782,000 related to the Company's resolution of these states'
legal issues. These expenses included contributions to state funds, legal fees,
costs associated with revised marketing literature and other distributor
communications, and the establishment of a World Wide Web site on the Internet.
In addition, uncertainty about the possible outcome of these discussions may
have affected the efforts of some of the Company's distributors during the
quarter. The future effect of the resolution of these issues in Illinois and
the other seven states, and the implementation of the measures noted in the
AVC, is uncertain.
The AVC preserves the OAP, a popular option for distributors. Under the
OAP, a distributor may elect to enroll in a minimum ordering program to
maintain eligibility for performance bonuses. Minimum orders ranging from $41
to $300 per month are automatically placed by credit card or check. So long as
distributors continue to enroll in the OAP the Company is assured of sales and
the distributor is assured participation in bonus programs. As noted above, the
Company has agreed in the AVC to take additional steps to encourage
distributors to redeem OAP certificates for product. The OAP is voluntary and
no restrictions are placed upon any participant's ability to exit the Program.
As of June 30, 1996 and 1995, respectively, there were appproximately 43,800
and 10,000 participants in this Program.
Cost of sales increased by $38,938,405 or 273.6% to $53,171,169 for the
nine months ended June 30, 1996 from $14,232,764 for the nine months ended June
30, 1995. Expenses included in cost of sales are cost of goods sold (product
cost, shipping cost and supplies) and distributor commissions and bonuses. Cost
of goods sold increased $16,824,164 or 264.1% to $23,194,929 for the nine
months ended June 30, 1996 from $6,370,765 for the nine months ended June
30,1995. Commissions and bonuses paid to distributors increased 281.3% or
$22,114,241 to $29,976,240 for the nine months ended June 30,1996 from
$7,861,999 for the nine months ended June 30, 1995. Also included in the cost
of sales for the nine months ended June 30, 1996, is approximately $58,000 of
the $782,000 incurred in resolving the state legal issues discussed above.
Gross profit increased by 398.0% or $19,730,243 from $4,957,188 for the
nine months ended June 30, 1995 to $24,687,431 for the nine months ended June
30, 1996. Gross profit as a percentage of sales increased from 25.8% for the
nine months ended June 30, 1995 to 31.7% for the nine months ended June 30,
1996.
Marketing, distribution and administrative expenses increased $8,167,579
or 214.6% from $3,806,252 for the nine months ended June 30,1995 to $11,973,831
for the nine months ended June 30, 1996. As a percentage of net sales, marketing
distribution and administrative expenses decreased to 15.4% for the nine months
ended June 30, 1996 from 19.8% for the nine months ended June 30, 1995. The
dollar increase resulted primarily from increased personnel costs, credit card
fees, postage and professional fees to support the Company's growth. Also
included in the increase in marketing, distribution and administrative expenses
is approximately $724,000 of the $782,000 incurred in resolving the state legal
issues discussed above.
Operating income for the nine months ended June 30, 1996 increased
$11,562,664 or 1004.6 % to $12,713,600 from $1,150,936 for the nine months
ended June 30,1995, principally as a result of the higher level of sales and
the increase in the gross profit as a percentage of sales. Operating income as
a percentage of sales increased from 6.0% for the nine months ended June 30,
1995 to 16.3% for the nine months ended June 30, 1996.
Other income increased to $477,830 for the nine months ended June 30,
1996 from a deficit of $80,925 for the nine months ended June 30, 1995. The
increase was primarily a result of interest income earned.
8
There was no estimated income tax expense for the nine months ended June
30, 1995 under the provisions of Financial Accounting Standards Board Statement
of Financial Accounting Standards No. 109 (Accounting For Income taxes),
utilizing loss carryforwards as a component of income tax expense. As of
September 30, 1995, the Company had approximately $553,000 of net operating
loss available to carry forward and offset against future earnings. The Company
anticipates it will use a significant portion of the available net operating
loss carryforwards in fiscal 1996.
Net income was $8,071,905 for the nine months ended June 30, 1996, an
increase of 654.4% compared to $1,070,011 for the nine months ended June
30,1995, principally as a result of a higher level of sales and the increase in
gross profit as a percentage of sales.
Material Changes in Financial Condition
The Company has financed its recent growth primarily from funds obtained
from operations. The Company had cash and cash equivalents of $12,843,845 at
June 30, 1996 compared to $8,960,100 at September 30, 1995. For the nine months
ended June 30, 1996, the net cash provided by operations was $5,841,987 and
approximately $1,632,000 was used for the acquisition of property and equipment
and $1,997,000 for investment in securities of U.S. Government Agencies. The
Company also received $1,711,275 from the exercise of warrants issued in the
public offering completed in July, 1995. The Company received net cash from
operations for the nine months ended in June 30, 1995 of $1,568,091 and used
$235,870 for the acquisition of property and equipment The increase in net
cash provided by operations and cash and cash equivalents was a result of
record sales and more efficient operations.
The Company had working capital of $13,683,227 at June 30, 1996 compared
to $6,082,461 at September 30, 1995. Approximately 95% of all sales are paid in
advance before shipment; therefore, accounts receivable as a percentage of sales
averages a relatively low 5% of monthly sales and bad debts have been
insignificant.
Approximately 65% of the Company's net sales are processed through
credit card transactions. The Bank which services these transactions has
requested that the Company grant the Bank a security interest in the funds
deposited from credit card transactions to protect the Bank against customer
returns and "charge backs". To accomplish this the Company pledged in May, 1996,
$3,000,000 in repurchase agreements purchased by the Company from the Bank to
collateralize the Bank. During July, 1996, the Bank reduced the pledged
repurchase agreements to $1,000,000. The Company's returns and credit card
"charge backs" did not exceed 5% of net sales for either the three or nine
months period ended June 30, 1996.
The Company believes its existing cash resources and revenues to be
derived from operations should be sufficient to meet the Company's capital needs
and planned expansion requirements for the next 12 months. The Company currently
anticipates expanding its operations in established markets and into foreign
markets.
The Company has not been subjected to any material price increases by
its suppliers and inflation is not expected to have a material impact on the
Company's business during the next twelve months.
Other Information
A significant part of the Company's recent growth is attributable to the
efforts of Kevin Trudeau, a key independent distributor and his marketing
organization (collectively referred to as "Trudeau").
9
Trudeau has been particularly successful in marketing the Company's Instant
Executive Program. As noted above, the Instant Executive Program allowed
distributors to qualify for the executive level in the Company's marketing
program on an accelerated basis. As the Company noted in its Report on Form 10-
KSB for the fiscal year ended September 30, 1995, Mr. Trudeau has been convicted
twice of criminal charges during the past ten years.
Mr. Trudeau's criminal past was highlighted in an article which appeared
in The Wall Street Journal on January 19, 1996. The author of the article also
questioned the legality of Trudeau's marketing practices and, in particular, the
offering of products requiring a $1,000 purchase. Similar negative reports were
published on the same day by Bloomberg, a news wire service, and by cable
television station CNBC. On January 19, 1996, the price of the Company's common
stock fell 45%.
In April 1996, the Company learned that the Attorney General of the
State of Illinois (the "Attorney General") filed a Complaint against Kevin
Trudeau, the Trudeau Marketing Group, Inc. and Jules Leib, alleging violations
of the Illinois Consumer Fraud and Deceptive Business Practices Act and the
Illinois Business Opportunity Sales Law of 1995 by, among other things,
operating a "pyramid sales scheme." Mr. Lieb works with Mr. Trudeau. In
addition, the Secretary of State of the State of Illinois issued to Mr. Trudeau
and the Trudeau Marketing Group a Summary Order to Cease and Desist prohibiting
them from offering or selling "business opportunities" in the State of Illinois.
Generally, a "business opportunity" is an agreement involving sales of products
or services enabling the purchaser to start a business when the purchaser is
required to pay more than $500. Many other states have "business opportunity"
statutes.
The Company has been informed that in July 1996, Mr. Trudeau signed a
consent decree resolving the lawsuit with the Attorney General, and entered
into a settlement agreement with the Illinois Secretary of State resolving the
cease and desist order. Among other things, Mr. Trudeau has agreed to abide by
all applicable provisions of the AVC entered into between the Company and the
Attorney General. The Company has also been informed that Mr. Lieb entered into
an Assurance of Voluntary Compliance with the Attorney General.
In April 1996, Mr. Trudeau returned to the Company for cancellation
warrants to purchase 500,000 shares of the Company's common stock exercisable
at $12.50 per share. The warrants were issued to Mr. Trudeau in October 1995
and, prior to cancellation, were exercisable from April 1996 to October 1998.
In April 1996, the Company received notice from the Securities and
Exchange Commission ("Commission") of a formal order of private investigation
into possible violations by the Company of the federal securities laws. Although
the Commission may explore various acts of, and filings by, the Company, the
inquiry appears to be concentrated on the Company's "executive" level
distributor program. With the assistance of special counsel, the Company is
cooperating in providing information requested by the Commission. The Company
cannot predict the ultimate outcome of the investigation.
The Company does not believe that the manner in which it markets its
products constitutes a pyramid scheme. The only requirements for a person to
become a distributor are to be sponsored by an existing distributor and to
purchase a "distributor success kit" from the Company. A distributor success
kit currently costs approximately $35 and provides sales aids, brochures, order
forms, audio and video cassette recordings and a subscription to the Company's
monthly publication, Lifestyles.
Distributors may also become an "executive" by generating a cumulative
sales volume ranging from $1,000 to $1,500 by the distributor and his downline
sales organization in the aggregate. "Executive" status entitles distributors
to earn commissions on product sales generated by other distributors in their
downline organizations.
10
The Company's continued growth depends to a significant degree on its
ability to retain and motivate its existing distributors and to attract new
distributors. The Company experiences significant competition in the marketing
of its products. The Company has been successful in competing by offering
products which are attractive to health-conscious consumers. However, if the
negative reports in the financial media or any legal developments caused
distributor recruitment and/or retention to suffer, there could be a material
adverse effect on the Company's future results of operations and its financial
condition.
11
PART II - Other Information
Nutrition For Life International, Inc.
- --------------------------------------------------------------------------------
Item 1. - Legal Proceedings
The Company is not a party to any pending material legal proceedings.
However, as noted in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of this Report, a key distributor of the
Company was a defendant in an action commenced by the Attorney General of the
State of Illinois. That action has been concluded. However, the disposition of
similar proceedings that could be commenced against either that distributor, or
the Company could have a material adverse impact on the Company's financial
condition and results of future operations.
In addition, as also discussed in the "Management's Discussion and Analysis
of Financial Condition and Results of Operations," the Company received notice
from the Securities and Exchange Commission of a formal investigation into
possible violations by the Company of the federal securities laws. The pendency
and/or adverse disposition of these proceedings could also have a material
adverse impact on the Company's financial condition and results of future
operations.
Item. 4. - Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on May 14, 1996. At the
Annual Meeting, the six members of the Company's Board of Directors were
re-elected. The number of votes cast for, and the number of votes withheld, were
as follows:
VOTES VOTES
NAME OF NOMINEE FOR WITHHELD
--------------- --- --------
F. Wayne Ballenger 5,293,759 29,695
David P. Bertrand 5,293,859 29,595
M.F. Florence 5,293,759 29,695
Richard S. Kashenberg 5,293,659 29,795
Jana Mitcham 5,293,659 29,795
Gregory Pusey 5,293,859 29,595
The shareholders also approved an amendment to the Company's Articles of
Incorporation to increase the number of authorized shares of the Company's
common stock from 10 million to 20 million, a proposal to add an additional
400,000 shares of common stock to the Company's 1995 Stock Option Plan, and a
proposal to approve the Company's 1995 Non-Discretionary Stock Option Plan for
non-employee directors. The number of votes cast for, against and the number of
abstentians, as to each such matter, is as follows:
12
VOTES VOTES
PROPOSAL CAST FOR CAST AGAINST ABSTENTIONS
- -------- -------- ------------ -----------
Amendment to the
Articles of
Incorporation 5,210,812 100,880 11,732
Amendment to 1995
Stock Option Plan 2,840,234 147,619 23,913
Non-Discretionary
Stock Option Plan 2,727,856 134,357 36,136
Item 6. - Exhibits and Reports on Form 8-K.
(b) Reports on Form 8-K.
--------------------------
1. On or about April 9, 1996, the Company filed a Report under Item 5.
2. On April 15, 1996, the Company filed a Report under Items 4 and 7.
3. On April 19, 1996, the Company filed a Report under Item 4.
4. On May 3, 1996, the Company filed a Report under Item 5.
13
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 13, 1996 By: /s/ Barry C. Loder
__________________________________________
Barry C. Loder
Vice President and Chief Financial Officer
By: /s/ Ronnie D. Meaux
___________________________________________
Ronnie D. Meaux
Vice President, Treasurer and Principal
Accounting Officer
14