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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
Commission file number 000-23731
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NUTRACEUTICAL INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 87-0515089
(State of incorporation) (IRS Employer Identification No.)
1400 KEARNS BOULEVARD, 2ND FLOOR, PARK 84060
CITY, UTAH (Zip code)
(Address of principal executive office)
(435) 655-6106
(Registrant's telephone number, including area code)
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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 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 / /
At February 14, 2001 the registrant had 10,936,853 shares of common stock
outstanding.
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NUTRACEUTICAL INTERNATIONAL CORPORATION
INDEX
DESCRIPTION PAGE NO.
- ----------- --------
Part I. Financial Information
Item 1. Financial Statements........................................ 3
Condensed Consolidated Balance Sheets--
September 30, 2000 and December 31, 2000.................... 3
Condensed Consolidated Statements of Operations and
Comprehensive Income--Three Months Ended December 31, 1999
and 2000.................................................... 4
Condensed Consolidated Statements of Cash Flows--
Three Months Ended December 31, 1999 and 2000............... 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and
Results of Operations....................................... 8
Part II. Other Information
Item 1. Legal Proceedings........................................... 12
2
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NUTRACEUTICAL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2000 (1) 2000
------------- ------------
ASSETS
Current assets:
Cash...................................................... $ 1,773 $ 173
Accounts receivable, net.................................. 9,551 10,583
Inventories, net.......................................... 24,083 23,991
Prepaid expenses and other current assets................. 976 621
Deferred income taxes..................................... 1,162 1,162
-------- --------
Total current assets.................................... 37,545 36,530
Property, plant and equipment, net.......................... 16,939 17,306
Goodwill, net............................................... 53,068 52,627
Other non-current assets, net............................... 777 753
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$108,329 $107,216
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations.............. $ 22 $ 7
Accounts payable.......................................... 6,418 5,947
Accrued expenses.......................................... 3,391 2,778
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Total current liabilities............................... 9,831 8,732
Long-term debt.............................................. 38,000 36,500
Deferred income taxes, net.................................. 2,554 2,679
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Total liabilities....................................... 50,385 47,911
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Stockholders' equity:
Common stock.............................................. 118 118
Additional paid-in capital................................ 41,012 41,044
Retained earnings......................................... 20,105 21,435
Cumulative translation adjustment......................... 18 17
Treasury stock............................................ (3,309) (3,309)
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Total stockholders' equity.............................. 57,944 59,305
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$108,329 $107,216
======== ========
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(1) The condensed consolidated balance sheet as of September 30, 2000 has been
prepared using information from the audited financial statements at that
date.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
NUTRACEUTICAL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
DECEMBER 31,
-----------------------
1999 2000
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Net sales................................................... $ 27,650 $ 25,327
Cost of sales............................................... 14,518 13,197
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Gross profit.............................................. 13,132 12,130
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Operating expenses
Selling, general and administrative....................... 9,400 8,703
Amortization of intangibles............................... 441 442
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9,841 9,145
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Income from operations...................................... 3,291 2,985
Interest expense, net....................................... 655 805
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Income before provision for income taxes.................... 2,636 2,180
Provision for income taxes.................................. 1,028 850
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Net income.................................................. $ 1,608 $ 1,330
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Other comprehensive income
Foreign currency translation adjustment................... 8 (1)
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Comprehensive income........................................ $ 1,616 $ 1,329
========== ==========
Net income per common share:
Basic..................................................... $ 0.14 $ 0.12
Diluted................................................... $ 0.13 $ 0.12
Weighted average common shares outstanding:
Basic..................................................... 11,792,482 10,918,827
Diluted................................................... 12,511,896 10,918,827
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
NUTRACEUTICAL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
DECEMBER 31,
-------------------
1999 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 1,608 $ 1,330
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 1,509 1,478
Amortization of debt issuance costs....................... 54 54
Losses on disposals of property and equipment............. 8 --
Changes in assets and liabilities:
Accounts receivable, net................................ (467) (1,032)
Inventories, net........................................ 991 92
Prepaid expenses and other current assets............... 389 355
Deferred income taxes................................... 75 125
Other non-current assets................................ (8) (30)
Accounts payable........................................ 151 (471)
Accrued expenses........................................ (98) (619)
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Net cash provided by operating activities............. 4,212 1,282
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... (856) (1,403)
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Net cash used in investing activities................. (856) (1,403)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt.................................. (2,750) (1,500)
Payments on capital lease obligations....................... (14) (15)
Proceeds from issuance of common stock...................... 22 32
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Net cash used in financing activities................. (2,742) (1,483)
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Effect of exchange rate changes on cash..................... 6 4
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Net increase (decrease) in cash............................. 620 (1,600)
Cash at beginning of period................................. 869 1,773
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Cash at end of period....................................... $ 1,489 $ 173
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all necessary adjustments (consisting
of normal recurring accruals) to present fairly the financial position of
Nutraceutical International Corporation (the "Company") and its subsidiaries as
of December 31, 2000, the results of its operations for the three months ended
December 31, 1999 and 2000 and its cash flows for the three months ended
December 31, 1999 and 2000, in conformity with generally accepted accounting
principles for interim financial information applied on a consistent basis. The
results for the three months ended December 31, 2000 are not necessarily
indicative of the results to be expected for the full fiscal year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. Accordingly, these financial statements should be read in
conjunction with the Company's Form 10-K for the fiscal year ended
September 30, 2000, which was filed with the Securities and Exchange Commission
on December 29, 2000.
2. INVENTORIES, NET
Inventories, net of reserves for obsolete and slow moving inventory, are
comprised of the following:
SEPTEMBER 30, DECEMBER 31,
2000 2000
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Raw materials....................................... $ 8,277 $ 8,490
Work-in-process..................................... 4,242 3,788
Finished goods...................................... 11,564 11,713
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$24,083 $23,991
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3. CAPITAL STOCK
The following table provides a reconciliation of basic weighted average
common shares (which represent the weighted average number of common shares
outstanding without regard to potential
6
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
3. CAPITAL STOCK (CONTINUED)
common shares) to diluted weighted average common shares (which include all
potential common shares):
THREE MONTHS ENDED
DECEMBER 31,
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1999 2000
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Net income (Numerator)............................... $ 1,608 $ 1,330
Weighted average common shares (Denominator):
Basic weighted average common shares............... 11,792,482 10,918,827
Dilutive effect of stock options and warrants...... 719,414 --
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Diluted weighted average common shares............... 12,511,896 10,918,827
========== ==========
Net income per common share:
Basic.............................................. $ 0.14 $ 0.12
Diluted............................................ $ 0.13 $ 0.12
4. OPERATING SEGMENTS
Based on the Company's method of internal reporting, the Company has two
reportable segments: branded products and bulk materials. The Company is a
manufacturer and marketer of quality branded products sold to health food stores
in the United States, and to distributors and stores worldwide. In addition to
branded products, the Company manufactures bulk materials for use in its own
products and for sale to other manufacturers and marketers in the nutritional
supplement industry.
The accounting policies for these segments are consistent with those of the
Company. The Company evaluates the financial performance of its segments based
on sales performance. Other performance measures beyond net sales, as well as
balance sheet components, are not tracked to these segments.
Segment information for the three months ended December 31, 1999 and 2000
was as follows:
THREE MONTHS ENDED
DECEMBER 31,
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1999 2000
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Net Sales:
Branded Products........................................ $24,943 $22,830
Bulk Materials.......................................... 2,707 2,497
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Total................................................. $27,650 $25,327
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with the
response to Part I, Item 1 of this report.
The Company was formed in 1993 by certain members of the current management
team and Bain Capital, Inc. to effect a consolidation strategy in the fragmented
vitamin, mineral, herbal and other nutritional supplements industry (the "VMS
Industry"). The Company purchased Solaray, Inc. in October 1993 with a view
toward using it as a platform for future acquisitions of businesses in the VMS
Industry. In fiscal 1995, the Company completed three acquisitions: Premier One
Products, Inc. in October 1994, Makers of KAL, Inc. in January 1995 and Monarch
Nutritional Laboratories, Inc. in September 1995. In fiscal 1998, the Company
completed two acquisitions: Action Labs, Inc. in July 1998 and Ahmed's Sun Force
International Products Inc., now known as Nutraforce (Canada)
International, Inc., in August 1998. In fiscal 1999, the Company completed two
acquisitions: Woodland Publishing, Inc. and Summit Graphics, Inc. in
April 1999. In fiscal 2000, the Company completed one acquisition: Thompson
Nutritional Products in May 2000.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of operations
data as a percentage of net sales for the periods indicated:
THREE MONTHS ENDED
DECEMBER 31,
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1999 2000
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Net sales................................................. 100.0% 100.0%
Cost of sales............................................. 52.5% 52.1%
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Gross profit.............................................. 47.5% 47.9%
Selling, general and administrative....................... 34.0% 34.4%
Amortization of intangibles............................... 1.6% 1.7%
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Income from operations.................................... 11.9% 11.8%
Interest expense, net..................................... 2.4% 3.2%
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Income before provision for income taxes.................. 9.5% 8.6%
Provision for income taxes................................ 3.7% 3.3%
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Net income................................................ 5.8% 5.3%
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EBITDA (1)................................................ 17.4% 17.6%
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(1) See "--EBITDA."
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 2000 TO THE THREE MONTHS ENDED
DECEMBER 31, 1999
NET SALES. Net sales decreased by $2.3 million, or 8.4%, to $25.3 million
for the three months ended December 31, 2000 ("first quarter of fiscal 2001")
from $27.6 million for the three months ended December 31, 1999 ("first quarter
of fiscal 2000"). Net sales of branded products decreased by $2.1 million, or
8.5%, to $22.8 million for the first quarter of fiscal 2001 from $24.9 million
for the first quarter of fiscal 2000. Net sales of bulk materials decreased by
$0.2 million, or 7.8%, to $2.5 million for the first quarter of fiscal 2001 from
$2.7 million for the first quarter of fiscal 2000. The decreases in net sales of
branded products and bulk materials were primarily the result of decreased sales
volume. The
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Company believes that the decreased volume was primarily attributable to an
overall industry slow down in sales of nutritional supplements.
GROSS PROFIT. Gross profit decreased by $1.0 million, or 7.6%, to
$12.1 million for the first quarter of fiscal 2001 from $13.1 million for the
first quarter of fiscal 2000. This decrease in gross profit was primarily
attributable to the decrease in sales volume. As a percentage of net sales,
gross profit increased to 47.9% for the first quarter of fiscal 2001 from 47.5%
for the first quarter of fiscal 2000. This increase in gross profit as a
percentage of net sales was primarily attributable to manufacturing
improvements.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased by $0.7 million, or 7.4%, to $8.7 million for
the first quarter of fiscal 2001 from $9.4 million for the first quarter of
fiscal 2000. As a percentage of net sales, selling, general and administrative
expenses increased to 34.4% for the first quarter of fiscal 2001 from 34.0% for
the first quarter of fiscal 2000. This increase in selling, general and
administrative expenses as a percentage of net sales was primarily attributable
to the decrease in sales volume.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles was $0.4 million
for the first quarter of fiscal 2001 and $0.4 million for the first quarter of
fiscal 2000. As a percentage of net sales, amortization of intangibles remained
relatively constant at 1.7% for the first quarter of fiscal 2001 and 1.6% for
the first quarter of fiscal 2000.
INTEREST EXPENSE, NET. Net interest expense was $0.8 million for the first
quarter of fiscal 2001 compared to $0.7 million for the first quarter of 2000.
As a percentage of net sales, net interest expense was 3.2% for the first
quarter of fiscal 2001 compared to 2.4% for the first quarter of fiscal 2000.
This increase in net interest expense was primarily attributable to increased
interest rates.
PROVISION FOR INCOME TAXES. The Company's effective tax rate was 39.0% for
both the first quarter of fiscal 2001 and for the first quarter of fiscal 2000.
In each fiscal quarter, the effective tax rate is higher than statutory rates
primarily due to state tax considerations.
EBITDA
EBITDA (earnings before net interest expense, taxes, depreciation and
amortization) is a commonly reported standard measure that is widely used by
analysts and investors in the VMS Industry. The following EBITDA information
provides additional information for determining the ability of the Company to
meet its debt service requirements and for other comparative analyses of the
Company's operating performance relative to other nutritional supplement
companies:
THREE MONTHS ENDED
DECEMBER 31,
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1999 2000
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Net income............................................... $1,608 $1,330
Provision for income taxes............................... 1,028 850
Interest expense, net (1)................................ 655 805
Depreciation and amortization............................ 1,509 1,478
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EBITDA................................................... $4,800 $4,463
====== ======
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(1) Includes amortization of debt issuance costs.
The Company's EBITDA decreased $0.3 million to $4.5 million for the first
quarter of fiscal 2001 from $4.8 million for the first quarter of fiscal 2000.
EBITDA as a percentage of net sales increased to 17.6% for the first quarter of
fiscal 2001 from 17.4% for the first quarter of fiscal 2000. Increased gross
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profit margin and decreased selling, general and administrative expenses
attributable to the Company's efforts to reduce costs through facility
consolidations, as well as through headcount attrition, contributed to this
increase in EBITDA as a percentage of net sales.
The Company understands that while EBITDA is frequently used by analysts and
investors in the evaluation of nutritional supplement companies, it is not
necessarily comparable to other similarly titled captions of other companies due
to potential inconsistencies in the method of calculation. EBITDA is not
intended as an alternative to cash flow from operating activities as a measure
of liquidity or as an alternative to net income as an indicator of the Company's
operating performance or any other measure of performance in accordance with
generally accepted accounting principles.
SEASONALITY
The Company believes that its business is characterized by minor
seasonality. Furthermore, sales to any particular customer can vary
substantially from one quarter to the next based on such factors as industry
trends, timing of promotional discounts, international economic conditions and
acquisition-related activities. Historically, the Company has recorded higher
branded products sales volume during the second fiscal quarter due to increased
interest in health-related products among consumers following the holiday
season. The Company does not believe that the impact of seasonality on its
results of operations is material. In addition, the Company's sales of bulk
materials are characterized by periodic shipments to certain customers and can
vary significantly from quarter to quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $27.8 million as of December 31, 2000
compared to $27.7 million as of September 30, 2000. This increase in working
capital was primarily the result of an increase in accounts receivable, combined
with decreases in accounts payable and accrued expenses, which were primarily
offset by decreases in cash and prepaid expenses and other current assets.
Net cash provided by operating activities for the three months ended
December 31, 2000 was $1.3 million compared to $4.2 million for the comparable
period in fiscal 2000. The decrease in net cash provided by operating activities
for the three months ended December 31, 2000 was primarily attributable to
increased accounts receivable levels, compared to the prior year, as well as
changes in inventories and accounts payable/accrued expenses related to sales
volume and the timing of payments, respectively.
Net cash used in investing activities was $1.4 million for the three months
ended December 31, 2000 and $0.9 million for the comparable period in fiscal
2000. During these periods, the Company's investing activities consisted
primarily of capital expenditures related to leasehold improvements for the
Company's Rapid Response Center, which is the central facility where the Company
is, and has been, consolidating operations, as well as capital expenditures for
information systems, distribution equipment and manufacturing equipment to
improve overall operating efficiency.
Net cash used in financing activities was $1.5 million for the three months
ended December 31, 2000 compared to $2.7 million for the comparable period in
fiscal 2000. Net cash used in financing activities decreased primarily due to
reduced repayments of borrowings under the Company's revolving credit facility.
The Company's current credit facility makes $70.0 million of revolving
credit borrowings available to the Company. The available revolving credit
borrowings are reduced during fiscal 2001, 2002 and 2003, respectively. The
reduction during fiscal 2001 occurs quarterly beginning April 30, 2001 with
reductions of $2.5 million per quarter for two quarters.
A key component of the Company's business strategy is to seek to make
additional acquisitions, which will likely require the Company to utilize its
current credit facility or obtain additional financing,
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which could include the incurrence of substantial additional indebtedness. The
Company believes that borrowings under the Company's current credit facility,
together with cash flows from operating activities, will be sufficient to make
required payments under the current credit facility or any such replacement
facility, and to make anticipated capital expenditures and fund working capital
needs for the remaining months of fiscal 2001.
NEW ACCOUNTING STANDARDS
The Securities and Exchange Commission issued Staff Accounting Bulletin 101,
REVENUE RECOGNITION IN FINANCIAL STATEMENTS ("SAB 101") effective for fiscal
years beginning after December 15, 1999. SAB 101 reaffirms and provides guidance
for standards of revenue recognition in financial statements. The Company has
adopted SAB 101 in preparing its financial statements.
The Financial Accounting Standards Board issued FASB Interpretation No. 44,
ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION("FIN 44")
effective July 1, 2000. FIN 44 provides guidance for certain transactions
involving stock compensation. The Company has adopted FIN 44 in preparing its
financial statements.
INFLATION
Inflation affects the cost of raw materials, goods and services used by the
Company. In recent years, inflation has been modest. The competitive environment
somewhat limits the ability of the Company to recover higher costs resulting
from inflation by raising prices. Overall, product prices have generally been
stable, and the Company seeks to mitigate the adverse effects of inflation
primarily through improved productivity and cost containment programs. The
Company does not believe that inflation has had a material impact on its results
of operations for the periods presented, except with respect to payroll-related
costs.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A") contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended. Such forward-looking
statements are based on the beliefs of the Company's management as well as on
assumptions made by and information currently available to the Company at the
time such statements were made. When used in this MD&A, the words "anticipate,"
"believe," "estimate," "expect," "intends" and similar expressions, as they
relate to the Company, are intended to identify forward-looking statements,
which include statements relating to, among other things: (i) the ability of the
Company to continue to successfully compete in the nutritional supplements
market; (ii) the anticipated benefits from new product introductions; (iii) the
continued effectiveness of the Company's sales and marketing strategy and
(iv) the ability of the Company to continue to successfully develop and launch
new products. Actual results could differ materially from those projected in the
forward-looking statements as a result of the matters discussed herein and
certain economic and business factors, some of which may be beyond the control
of the Company.
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PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As discussed in the Company's previous filings, the Company is subject to
regulation by a number of federal, state and foreign agencies and is involved in
various legal matters that arise in the normal course of business. The Company
does not believe there are any recent material developments in regulatory and
legal matters referred to in previous filings, or any new material legal
proceedings.
The Company carries insurance coverage in the types and amounts that
management considers reasonably adequate to cover the risks it faces in the
industry in which it competes. There can be no assurance, however, that such
insurance coverage will be adequate to cover all losses that the Company may
incur in future periods or that coverage will be available for all of the types
of claims the Company faces or may face.
In the opinion of management, the Company's liability, if any, arising from
regulatory and legal proceedings related to these matters, and others in which
it is involved, is not expected to have a material adverse impact on the
Company's financial position, results of operations or cash flows.
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SIGNATURE
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.
NUTRACEUTICAL INTERNATIONAL CORPORATION
(Registrant)
Dated: February 14, 2001 By: /s/ LESLIE M. BROWN, JR.
-----------------------------------------
Leslie M. Brown, Jr.
SENIOR VICE PRESIDENT, FINANCE
AND CHIEF FINANCIAL OFFICER
13