SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1998
Commission file number 000-23731
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 City, Utah 84060
(Address of principal executive office) (Zip code)
(435) 655-6000
(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 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 August 14, 1998 the registrant had 11,764,879 shares of common stock
outstanding.
NUTRACEUTICAL INTERNATIONAL CORPORATION
INDEX
Description Page No.
Part I. Financial Information
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets - 3
September 30, 1997 and June 30, 1998
Condensed Consolidated Statements of Operations - 4
Three Months and Nine Months Ended June 30, 1997 and 1998
Condensed Consolidated Statements of Cash Flows - 5
Nine Months Ended June 30, 1997 and 1998
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NUTRACEUTICAL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands)
September 30, June 30,
----------------------------------------
1997 (1) 1998
ASSETS
Current assets:
Cash $ 4,415 $ 2,460
Accounts receivable, net 8,001 8,506
Inventories, net 20,753 23,424
Prepaid expenses and other assets 1,018 946
Deferred income taxes 897 614
---------------- ----------------
Total current assets 35,084 35,950
Property, plant and equipment, net 10,711 10,727
Goodwill, net 42,008 41,092
Other assets, net 2,307 1,348
---------------- ----------------
$ 90,110 $ 89,117
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 7,085 $ -
Current portion of capital lease obligations 181 91
Accounts payable 6,932 6,433
Accrued expenses 5,270 2,046
---------------- ----------------
Total current liabilities 19,468 8,570
Long-term debt 52,860 27,500
Capital lease obligations 133 95
Deferred income taxes, net 1,295 1,804
---------------- ----------------
Total liabilities 73,756 37,969
---------------- ----------------
Commitments and contingencies
Stockholders' equity:
Common stock 93 118
Additional paid-in capital 9,609 42,814
Subscriptions receivable (55) -
Retained earnings 6,707 8,216
---------------- ----------------
Total stockholders' equity 16,354 51,148
================ ================
$ 90,110 $ 89,117
================ ================
(1) The condensed consolidated balance sheet as of September 30, 1997 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
(unaudited)
(dollars in thousands, except per share data)
Three months ended June 30, Nine months ended June 30,
------------------------------ -------------------------------
1997 1998 1997 1998
Net sales $ 24,795 $ 25,004 $ 72,281 $ 78,660
Cost of sales 13,255 13,977 38,378 42,576
------------ ---------- ---------- -----------
Gross profit 11,540 11,027 33,903 36,084
------------ ---------- ---------- -----------
Operating expenses:
Selling, general and administrative 6,837 7,304 20,862 23,071
Amortization of intangibles 332 327 1,016 988
Non-recurring payments to management advisors 75 - 225 1,135
------------ ---------- ---------- -----------
7,244 7,631 22,103 25,194
------------ ---------- ---------- -----------
Income from operations 4,296 3,396 11,800 10,890
Interest expense, net 1,598 593 4,944 3,348
------------ ---------- ---------- -----------
Income before provision for income taxes 2,698 2,803 6,856 7,542
Provision for income taxes 1,066 1,079 2,708 2,904
------------ ---------- ---------- -----------
Net income before extraordinary loss 1,632 1,724 4,148 4,638
Extraordinary loss on early extinguishment of debt, net of tax - - - (3,129)
------------ ---------- ---------- -----------
Net income $ 1,632 $ 1,724 $ 4,148 $ 1,509
============ ========== ========== ===========
Net income before extraordinary loss per common share:
Basic $ 0.18 $ 0.15 $ 0.45 $ 0.44
Diluted $ 0.16 $ 0.14 $ 0.40 $ 0.40
Extraordinary loss per common share:
Basic $ - $ - $ - $ (0.30)
Diluted $ - $ - $ - $ (0.27)
Net income per common share:
Basic $ 0.18 $ 0.15 $ 0.45 $ 0.14
Diluted $ 0.16 $ 0.14 $ 0.40 $ 0.13
Weighted average common shares outstanding:
Basic 9,308,583 11,759,671 9,308,583 10,484,230
Diluted 10,512,631 12,762,474 10,497,209 11,639,508
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)
Nine months ended June 30,
------------------------------------------------
1997 1998
Cash flows from operating activities:
Net income $ 4,148 $ 1,509
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,934 3,464
Amortization of debt issuance costs 609 416
Loss on disposal of property and equipment - 10
Extraordinary loss on early extinguishment of debt, net of tax - 3,129
Changes in assets and liabilities:
Accounts receivable (2,155) (505)
Inventories (4,065) (2,671)
Prepaid expenses and other assets 270 72
Deferred income taxes 708 2,597
Other assets (3) (211)
Accounts payable 1,313 (499)
Accrued expenses 172 (3,224)
-------------- --------------
Net cash provided by operating activities 3,931 4,087
-------------- ---------------
Cash flows from investing activities:
Purchases of property and equipment (2,695) (2,502)
-------------- ---------------
Net cash used in investing activities (2,695) (2,502)
-------------- ---------------
Cash flows from financing activities:
Proceeds from revolving credit facility - 33,000
Payments on revolving credit facility (1,950) (14,740)
Payments on long-term debt (500) (53,265)
Payments on capital lease obligations (137) (129)
Payments of deferred financing fees - (1,691)
Receipt of subscriptions receivable 17 55
Proceeds from issuance of common stock - 33,230
-------------- ---------------
Net cash used in financing activities (2,570) (3,540)
-------------- ---------------
Net decrease in cash (1,334) (1,955)
Cash at beginning of period 2,321 4,415
============== ===============
Cash at end of period $ 987 $ 2,460
============== ===============
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 June 30,
1998, the results of its operations for the three months and nine months ended
June 30, 1997 and 1998, and its cash flows for the nine months ended June 30,
1997 and 1998, in conformity with generally accepted accounting principles for
interim financial information applied on a consistent basis. The results for
the three months and nine months ended June 30, 1998 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 Registration Statement on Form S-1, as amended,
which was filed with the Securities and Exchange Commission and became effective
on February 11, 1998 (the Registration Statement).
2. INVENTORIES, NET
Inventories, net of reserves for obsolete and slow moving inventory, are
comprised of the following:
September 30, June 30,
1997 1998
------------- --------
Raw materials $ 10,090 $ 9,970
Work-in-process 3,064 4,206
Finished goods 7,599 9,248
-------- --------
$ 20,753 $ 23,424
======== ========
6
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share data)
3. COMMON STOCK TRANSACTIONS
On February 19, 1998, the Company completed the initial public offering (the
Offering) of its common stock (Common Stock), par value $0.01 per share.
In connection with the Offering, the Company reclassified all of its outstanding
classes of capital stock (including accrued preference amounts) into shares of
Common Stock and authorized a single class of undesignated preferred stock.
Concurrently with the Offering, the Company effected a 7.5291-for-one stock
split of all outstanding shares of Common Stock and a corresponding adjustment
in the number of shares issuable upon the exercise of all outstanding options
and warrants. After giving effect to the reclassification and stock split, the
Company had 9,308,583 shares of Common Stock outstanding and no shares of
preferred stock outstanding. The reclassification and stock split have been
retroactively reflected in the accompanying financial statements.
The Company sold 2,144,618 shares of Common Stock in the Offering and certain
selling stockholders sold an additional 1,684,882 shares of Common Stock
(including shares sold pursuant to the underwriters overallotment option). Of
the shares being sold by the selling stockholders, 302,947 shares were issued in
connection with the Offering upon the exercise of outstanding warrants.
Immediately following the Offering, the Company had a total of 11,756,148 shares
of Common Stock outstanding. The net proceeds to the Company from the sale of
shares in the Offering of approximately $33,142 were primarily used to repay
existing indebtedness. In addition, the Company recorded a one-time payment
related to the termination of a management advisory agreement and for services
rendered in connection with the Offering.
4. DEBT TRANSACTIONS
On February 25, 1998, the Company replaced its existing credit agreement, under
which the Company had outstanding borrowings of $60,178 (before unamortized
discount of $2,454), with a new credit agreement (the New Credit Agreement).
The Company realized an extraordinary loss on the early extinguishment of the
existing credit agreement of approximately $3,129, net of tax of $1,804.
7
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share data)
The New Credit Agreement makes $70,000 of revolving credit borrowings available
to the Company, of which $27,500 was outstanding at June 30, 1998.
5. NEW ACCOUNTING STANDARDS
The Company has adopted SFAS No. 128, Earnings per Share. SFAS No. 128 is
effective for fiscal periods ending after December 15, 1997 and requires
restatement of all prior-period earnings per share (EPS) data presented. Under
this statement, both "basic" EPS and "diluted" EPS are presented on the face of
the income statement. As required under SFAS No. 128, both basic EPS and
diluted EPS for the three months and nine months ended June 30, 1997 and 1998
have been calculated giving retroactive effect to the Company's stock
reclassification and stock split which occurred in February of 1998. The
following table provides a reconciliation of both net income and the number of
common shares used in the computations of basic EPS, which utilizes the weighted
average number of common shares outstanding without regard to potential common
shares, and diluted EPS, which includes all such shares:
Three months ended June 30, Nine months ended June 30,
------------------------------- ---------------------------
1997 1998 1997 1998
Net income (Numerator):
Net income before extraordinary loss $ 1,632 $ 1,724 $ 4,148 $ 4,638
Extraordinary loss on early extinguishment of
debt, net of tax - - - (3,129)
----------- -------------- ------------- -----------
Net income $ 1,632 $ 1,724 $ 4,148 $ 1,509
=========== ============== ============= ===========
Weighted average common shares (Denominator):
Basic weighted average common shares 9,308,583 11,759,671 9,308,583 10,484,230
Add: Dilutive effect of stock options and warrants 1,204,048 1,002,803 1,188,626 1,155,278
----------- -------------- ------------- -----------
Diluted weighted average common shares 10,512,631 12,762,474 10,497,209 11,639,508
=========== ============== ============= ===========
Net income before extraordinary loss per common share:
Basic $ 0.18 $ 0.15 $ 0.45 $ 0.44
Diluted $ 0.16 $ 0.14 $ 0.40 $ 0.40
Extraordinary loss per common share:
Basic $ - $ - $ - $ (0.30)
Diluted $ - $ - $ - $ (0.27)
Net income per common share:
Basic $ 0.18 $ 0.15 $ 0.45 $ 0.14
Diluted $ 0.16 $ 0.14 $ 0.40 $ 0.13
8
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share data)
6. SUBSEQUENT EVENTS
On July 20, 1998, the Company acquired substantially all the assets of Action
Labs, Inc. (Action), a marketer and distributor of branded nutritional
supplements, for approximately $13,650 in cash. Headquartered in Long Island,
N.Y., Action markets and distributes a line of over 65 specialty supplements
under the well-recognized Action Labs(R) brand name. Action, which was
established in 1988, markets its products through health food stores. As a
specialty marketer of men's and women's products, Action emphasizes high-demand
ingredients and ingredient combinations. The Action Labs(R) product line
includes such popular products as Yohimbe PowerMax(R) 2000, Action for Men(R)
and Super Fat Burning Formula(R), as well as other leading nutritional
supplements, such as Ginkgo Biloba, St. John's Wort and Saw Palmetto.
In connection with the Action acquisition, the Company obtained $11,000 of
additional revolving credit borrowings under the New Credit Agreement. The
remaining purchase price was funded with available cash generated from operating
activities. The Action acquisition was accounted for using the purchase method
of accounting.
9
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 key members of the current management team and
Bain Capital, Inc. to effect a consolidation strategy in the highly 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 additional acquisitions
with the purchases of Premier One Products, Inc. in October 1994, Makers of KAL,
Inc. in January 1995 and Monarch Nutritional Laboratories, Inc. in September
1995.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of operations data
as a percentage of net sales for the periods indicated:
Three months ended June 30, Nine months ended June 30,
--------------------------- --------------------------
1997 1998 1997 1998
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 53.5% 55.9% 53.1% 54.1%
-------- -------- -------- --------
Gross profit 46.5% 44.1% 46.9% 45.9%
Selling, general and administrative 27.6% 29.2% 28.9% 29.3%
Amortization of intangibles 1.3% 1.3% 1.4% 1.3%
Non-recurring payments to management advisors 0.3% - 0.3% 1.5%
-------- -------- -------- --------
Income from operations 17.3% 13.6% 16.3% 13.8%
Interest expense, net 6.4% 2.4% 6.8% 4.2%
-------- -------- -------- --------
Income before provision for income taxes 10.9% 11.2% 9.5% 9.6%
Provision for income taxes 4.3% 4.3% 3.8% 3.7%
-------- -------- -------- --------
Net income before extraordinary loss 6.6% 6.9% 5.7% 5.9%
Extraordinary loss on early extinguishment
of debt, net of tax - - - (4.0)%
-------- -------- -------- --------
Net income 6.6% 6.9% 5.7% 1.9%
======== ======== ======== ========
Adjusted EBITDA (1) 21.9% 18.3% 20.7% 19.7%
======== ======== ======== ========
(1) See "-Adjusted EBITDA."
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1998 TO THE THREE MONTHS ENDED
JUNE 30, 1997
Net Sales. Net sales increased by $0.2 million, or 0.8%, to $25.0 million for
the three months ended June 30, 1998 (third quarter of fiscal 1998) from $24.8
million for the three months ended June 30, 1997 (third quarter of fiscal 1997).
This modest increase in net sales was primarily the result of increased sales
volume which the Company believes was primarily attributable to industry growth
as well as to the success of the Company's new product introductions.
10
Gross Profit. Gross profit decreased by $0.5 million, or 4.4%, to $11.0 million
for the third quarter of fiscal 1998 from $11.5 million for the third quarter of
fiscal 1997. This decrease in gross profit was primarily attributable to higher
packaging costs associated with label and bottle conversions. Label conversions
were necessitated by mandated FDA regulations for the VMS Industry which become
effective in March 1999. Bottle costs increased as the Company moved from
polystyrene to PET bottles, which offer greater long-term benefits such as
superior oxygen barriers and appearance. As a result of increased label and
bottle costs, gross profit margin decreased to 44.1% for the third quarter of
fiscal 1998 from 46.5% for the third quarter of fiscal 1997 as a percentage of
net sales. However, because the initial conversion process is almost complete
and because the Company has negotiated certain new supplier contracts,
management expects gross profit margins to gradually return to historical levels
in future periods.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $0.5 million, or 6.8%, to $7.3 million for
the third quarter of fiscal 1998 from $6.8 million for the third quarter of
fiscal 1997. As a percentage of net sales, selling, general and administrative
expenses increased to 29.2% for the third quarter of fiscal 1998 from 27.6% for
the third quarter of fiscal 1997.
Amortization of Intangibles. Amortization of intangibles was $0.3 million for
the third quarter of fiscal 1998 and $0.3 million for the third quarter of
fiscal 1997. As a percentage of net sales, amortization of intangibles remained
flat at 1.3% for both the third quarter of fiscal 1998 and the third quarter of
fiscal 1997.
Non-recurring Payments to Management Advisors. No non-recurring payments to
management advisors were made during the third quarter of fiscal 1998. Non-
recurring payments to management advisors of $0.1 million were recognized for
the third quarter of fiscal 1997. The payments recognized in the third quarter
of fiscal 1997 were made pursuant to an advisory agreement which was terminated
in connection with the Offering. The Company does not expect to incur such
payments in the future.
Interest Expense, Net. Interest expense decreased by $1.0 million, or 62.9%,
to $0.6 million for the third quarter of fiscal 1998 from $1.6 million for the
third quarter of fiscal 1997. As a percentage of net sales, interest expense
decreased to 2.4% for the third quarter of fiscal 1998 from 6.4% for the third
quarter of fiscal 1997. This decrease in interest expense was primarily
attributable to decreased indebtedness resulting from the Company's use of
proceeds generated in the Offering and the Company's positive cash flows from
operating activities.
Provision for Income Taxes. The Company's effective tax rate decreased to
38.5% for the third quarter of fiscal 1998 from 39.5% for the third quarter of
fiscal 1997. In each fiscal quarter, the effective tax rate is higher than
statutory rates primarily due to the non-deductibility for tax purposes of
goodwill amortization arising from the Solaray acquisition. The impact of
Solaray goodwill on the effective tax rate for fiscal 1998
11
compared to fiscal 1997 is expected to decline as a result of the Company's
higher projected income before provision for taxes.
COMPARISON OF THE NINE MONTHS ENDED JUNE 30, 1998 TO THE NINE MONTHS ENDED
JUNE 30, 1997
Net Sales. Net sales increased by $6.4 million, or 8.8%, to $78.7 million for
the nine months ended June 30, 1998 from $72.3 million for the nine months ended
June 30, 1997. The increase in net sales was primarily the result of increased
sales volume and, to a lesser extent, minimal increases in the prices of the
Company's products. Such price increases did not contribute significantly to
revenue growth. The Company believes that the increased volume was primarily
attributable to industry growth as well as to the success of the Company's new
product introductions.
Gross Profit. Gross profit increased by $2.2 million, or 6.4%, to $36.1
million for the nine months ended June 30, 1998 from $33.9 million for the nine
months ended June 30, 1997. This increase in gross profit was primarily
attributable to growth in sales volume. As a percentage of net sales, gross
profit decreased to 45.9% for the nine months ended June 30, 1998 from 46.9% for
the nine months ended June 30, 1997. This decrease in gross profit as a
percentage of net sales was primarily attributable to increased discounts during
the current year and higher packaging costs associated with label and bottle
conversions. Label conversions were necessitated by mandated FDA regulations for
the VMS Industry which become effective in March 1999. Bottle costs increased as
the Company moved from polystyrene to PET bottles, which offer greater long-term
benefits such as superior oxygen barriers and appearance. However, because the
initial conversion process is almost complete and because the Company has
negotiated certain new supplier contracts, management expects gross profit
margins to gradually return to historical levels in future periods.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $2.2 million, or 10.6%, to $23.1 million
for the nine months ended June 30, 1998 from $20.9 million for the nine months
ended June 30, 1997. This increase in selling, general and administrative
expenses was primarily attributable to increased sales volume. As a percentage
of net sales, selling, general and administrative expenses increased slightly to
29.3% for the nine months ended June 30, 1998 from 28.9% for the nine months
ended June 30, 1997.
Amortization of Intangibles. Amortization of intangibles was $1.0 million for
the nine months ended June 30, 1998 and $1.0 million for the nine months ended
June 30, 1997. As a percentage of net sales, amortization of intangibles
decreased to 1.3% for the nine months ended June 30, 1998 from 1.4% for the nine
months ended June 30, 1997. This decrease in amortization of intangibles as a
percentage of net sales was primarily attributable to the increase in net sales.
Non-recurring Payments to Management Advisors. Non-recurring payments to
management advisors of $1.1 million for the nine months ended June 30, 1998 and
$0.2
12
million for the nine months ended June 30, 1997 were recognized. The payments
recognized for the nine months ended June 30, 1997 were made pursuant to an
advisory agreement which was terminated in connection with the Offering. The
payments recognized for the nine months ended June 30, 1998 were made primarily
for the termination of the advisory agreement and for services rendered in
connection with the Offering. The Company does not expect to incur such payments
in the future.
Interest Expense, Net. Interest expense decreased by $1.6 million, or 32.3%,
to $3.3 million for the nine months ended June 30, 1998 from $4.9 million for
the nine months ended June 30, 1997. As a percentage of net sales, interest
expense decreased to 4.2% for the nine months ended June 30, 1998 from 6.8% for
the nine months ended June 30, 1997. This decrease in interest expense was
primarily attributable to decreased indebtedness resulting from the Company's
use of proceeds generated in the Offering and the Company's positive cash flows
from operating activities.
Provision for Income Taxes. The Company's effective tax rate decreased to 38.5%
for the nine months ended June 30, 1998 from 39.5% for the nine months ended
June 30, 1997. In each fiscal year, the effective tax rate is higher than
statutory rates primarily due to the non-deductibility for tax purposes of
goodwill amortization arising from the Solaray acquisition. The impact of
Solaray goodwill on the effective tax rate for fiscal 1998 compared to fiscal
1997 is expected to decline as a result of the Company's higher projected income
before provision for taxes.
Extraordinary Loss on Early Extinguishment of Debt. An extraordinary loss on
early extinguishment of debt of $3.1 million, net of tax, was recognized during
the nine months ended June 30, 1998 in connection with the repayment of
indebtedness related to the existing credit agreement and the establishment of
the New Credit Agreement, which was consummated simultaneously with the
Offering.
ADJUSTED EBITDA
Adjusted EBITDA (earnings before interest expense, taxes, depreciation and
amortization) is a widely used and commonly reported standard measure utilized
by analysts and investors in the VMS Industry.
13
The following Adjusted EBITDA information can provide 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 June 30, Nine months ended June 30,
--------------------------- --------------------------
1997 1998 1997 1998
Net income before extraordinary loss $ 1,632 $ 1,724 $ 4,148 $ 4,638
Provision for income taxes 1,066 1,079 2,708 2,904
Interest expense, net (1) 1,598 593 4,944 3,348
Depreciation and amortization 1,052 1,172 2,934 3,464
Non-recurring payments to management advisors (2) 75 - 225 1,135
-------- -------- -------- --------
Adjusted EBITDA $ 5,423 $ 4,568 $ 14,959 $ 15,489
======== ======== ======== ========
(1) Includes amortization of capitalized debt issuance costs.
(2) Represents payments to management advisors for services provided, including
services rendered in connection with the Offering. The Company does not
expect to incur such payments in the future.
The Company's Adjusted EBITDA decreased $0.8 million to $4.6 million for the
third quarter of fiscal 1998 from $5.4 million for the third quarter of fiscal
1997. Adjusted EBITDA increased $0.5 million to $15.5 million for the nine
months ended June 30, 1998 from $15.0 million for the nine months ended June 30,
1997. Adjusted EBITDA as a percentage of net sales decreased to 18.3% for the
third quarter of fiscal 1998 from 21.9% for the third quarter of fiscal 1997.
Adjusted EBITDA as a percentage of net sales decreased to 19.7% for the nine
months ended June 30, 1998 from 20.7% for the nine months ended June 30, 1997.
Decreased gross margins related to higher packaging costs associated with label
and bottle conversions contributed to this decrease in Adjusted EBITDA.
SEASONALITY
The Company believes that its business is characterized by minor seasonality.
Historically, the Company has recorded higher sales volume during the second and
third quarters due to increased interest in health-related products among
consumers following the holiday season and in anticipation of the summer months.
The Company does not believe the impact of seasonality on its results of
operations is material. In addition, the Company's sales of premium bulk
formulations are characterized by periodic shipments to certain customers and
can vary from quarter to quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $27.4 million as of June 30, 1998, compared
to $15.6 million as of September 30, 1997. This increase in working capital was
primarily the result of (i) increases in inventory and accounts receivable due
to higher sales levels and the Company's efforts to expand inventory levels in
connection with the expected consolidation of certain distribution and other
operations, (ii) a decrease in the current portion of long-term debt related to
debt repayments and (iii) a decrease in accounts payable and accrued expenses
offset by a decrease in cash.
14
Net cash provided by operating activities for the nine months ended June 30,
1998 was $4.1 million compared to $3.9 million for the comparable period in
fiscal 1997. Net cash flows from operating activities increased primarily due
to increased net income before extraordinary loss.
Net cash used in investing activities was $2.5 million for the nine months ended
June 30, 1998 compared to $2.7 million for the comparable period in fiscal 1997.
Investing activities during these periods relate entirely to capital
expenditures.
Net cash used in financing activities was $3.5 million for the nine months ended
June 30, 1998 compared to $2.6 million for the comparable period in fiscal 1997.
Net cash used in financing activities increased primarily due to the repayment
of debt subsequent to the Offering.
On February 25, 1998, the Company replaced its existing credit agreement, under
which the Company had outstanding borrowings of $60,178 (before unamortized
discount of $2,454), with the New Credit Agreement. The Company realized an
extraordinary loss on the early extinguishment of the existing credit agreement
of approximately $3,129, net of tax of $1,804, during the nine months ended June
30, 1998. The New Credit Agreement makes $70,000 of revolving credit borrowings
available to the Company, of which $27,500 was outstanding at June 30, 1998.
A key component of the Company's business strategy is to seek to make additional
acquisitions, which could require the Company to incur substantial additional
indebtedness. The Company believes that based on current levels of operations
and anticipated growth, borrowings under the New Credit Agreement, together with
cash flows from operating activities, will be sufficient to make anticipated
capital expenditures and fund working capital needs for fiscal 1998.
In connection with the $13,650 Action acquisition on July 20, 1998, the Company
obtained $11,000 of additional revolving credit borrowings under the New Credit
Agreement. The remaining purchase price was funded with available cash generated
from operating activities.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, which became effective for
fiscal years beginning after December 15, 1997 and established standards for the
way that public business enterprises report information about operating segments
in annual and quarterly financial statements. SFAS No. 131 also established
standards for related disclosures about products and services, geographic areas
and major customers. The Company is currently assessing the impact of SFAS No.
131 on its financial statements.
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The American Institute of Certified Public Accountants issued SOP 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use, which became effective for fiscal years beginning after December 15, 1997
and established standards for the way that public business enterprises account
for the costs of internal use computer software. The Company is currently
assessing the impact of SOP 98-1 on 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.
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 (the Securities Act).
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 Registration Statement and 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 which arise in the
normal course of business. As disclosed in the Registration Statement and in
previous filings, the Company was party to a lawsuit relating to a former
international distributor of Old Premier claiming damages as a result of the
alleged breach of a distribution agreement. On May 19, 1998, following the
completion of depositions of plaintiff's executives, the parties agreed to
settle this lawsuit for the payment of a very nominal sum by the Company and a
nominal sum by Old Premier. This case was dismissed with prejudice by the
Superior Court of the County of Los Angeles on June 17, 1998.
In the opinion of the 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None
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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.
NUTRACEUTICAL INTERNATIONAL CORPORATION
(Registrant)
Dated: August 14, 1998 By: /s/ Leslie M. Brown, Jr.
--------------- ------------------------
Leslie M. Brown, Jr.
Senior Vice President, Finance
and Chief Financial Officer
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