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, 1999
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) 655-6106
(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 16, 1999 the registrant had 11,791,295 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, 1998 and June 30, 1999
Condensed Consolidated Statements of Operations - 4
Three Months and Nine Months Ended June 30, 1998 and 1999
Condensed Consolidated Statements of Cash Flows - 5
Nine Months Ended June 30, 1998 and 1999
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 9
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,
------------------ -------------------
1998 (1) 1999
ASSETS
Current assets:
Cash $ 1,967 $ 1,548
Accounts receivable, net 9,149 10,087
Inventories, net 23,935 27,204
Prepaid expenses and other assets 1,649 1,312
Deferred income taxes 1,101 1,027
------------------ -------------------
Total current assets 37,801 41,178
Property, plant and equipment, net 10,770 14,141
Goodwill, net 54,375 54,349
Other assets, net 1,362 1,165
------------------ -------------------
$ 104,308 $ 110,833
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 53 $ 56
Accounts payable 9,614 7,061
Accrued expenses 4,087 3,547
------------------ -------------------
Total current liabilities 13,754 10,664
Long-term debt 37,000 41,250
Capital lease obligations 80 38
Deferred income taxes, net 1,852 2,403
------------------ -------------------
Total liabilities 52,686 54,355
------------------ -------------------
Commitments and contingencies
Stockholders' equity:
Common stock 118 118
Additional paid-in capital 42,515 42,610
Retained earnings 9,277 13,720
Cumulative translation adjustment 13 30
Treasury stock, at cost (301) -
------------------ -------------------
Total stockholders' equity 51,622 56,478
------------------ ------------------
$ 104,308 $ 110,833
================== ==================
(1) The condensed consolidated balance sheet as of September 30, 1998 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,
------------------------------ -------------------------------
1998 1999 1998 1999
Net sales $ 25,004 $ 26,212 $ 78,660 $ 80,659
Cost of sales 13,977 13,850 42,576 43,290
------------- -------------- -------------- --------------
Gross profit 11,027 12,362 36,084 37,369
------------- -------------- -------------- --------------
Operating expenses:
Selling, general and administrative 7,304 9,772 23,071 26,887
Amortization of intangibles 327 447 988 1,321
Non-recurring payments to management advisors - - 1,135 -
------------- -------------- -------------- --------------
7,631 10,219 25,194 28,208
------------- -------------- -------------- --------------
Income from operations 3,396 2,143 10,890 9,161
Interest expense, net 593 622 3,348 1,862
------------- -------------- -------------- --------------
Income before provision for income taxes 2,803 1,521 7,542 7,299
Provision for income taxes 1,079 585 2,904 2,810
------------- -------------- -------------- --------------
Net income before extraordinary loss 1,724 936 4,638 4,489
Extraordinary loss on early extinguishment of debt,
net of tax - - (3,129) -
============= ============== ============== ==============
Net income $ 1,724 $ 936 $ 1,509 $ 4,489
============= ============== ============== ==============
Net income before extraordinary loss per common share:
Basic $ 0.15 $ 0.08 $ 0.44 $ 0.38
Diluted $ 0.14 $ 0.07 $ 0.40 $ 0.36
Extraordinary loss per common share:
Basic $ - $ - $ (0.30) $ -
Diluted $ - $ - $ (0.27) $ -
Net income per common share:
Basic $ 0.15 $ 0.08 $ 0.14 $ 0.38
Diluted $ 0.14 $ 0.07 $ 0.13 $ 0.36
Weighted average common shares outstanding:
Basic 11,759,671 11,781,593 10,484,230 11,709,666
Diluted 12,762,474 12,505,211 11,639,508 12,474,574
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,
------------------------------------
1998 1999
Cash flows from operating activities:
Net income $ 1,509 $ 4,489
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 3,464 4,411
Amortization of debt issuance costs 416 161
Loss on disposal of property and equipment 10 39
Extraordinary loss on early extinguishment of debt, net of tax 3,129 -
Changes in assets and liabilities:
Accounts receivable (505) (832)
Inventories (2,671) (2,910)
Prepaid expenses and other assets 72 337
Deferred income taxes 2,597 625
Other assets (211) (24)
Accounts payable (499) (2,672)
Accrued expenses (3,224) (562)
----------- -----------
Net cash provided by operating activities 4,087 3,062
----------- -----------
Cash flows from investing activities:
Sale of property and equipment - 38
Acquisition, net of cash acquired - (1,187)
Purchases of property and equipment (2,502) (6,252)
----------- -----------
Net cash used in investing activities (2,502) (7,401)
----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt 33,000 4,750
Payments on long-term debt (68,005) (500)
Payments on capital lease obligations (129) (39)
Payments of deferred financing fees (1,691) -
Receipt of subscriptions receivable 55 -
Proceeds from issuance of common stock 33,230 91
Purchase of treasury stock - (391)
----------- -----------
Net cash provided by (used in) financing activities (3,540) 3,911
----------- -----------
Effect of exchange rate changes on cash - 9
----------- -----------
Net decrease in cash (1,955) (419)
Cash at beginning of period 4,415 1,967
=========== ===========
Cash at end of period $ 2,460 $ 1,548
=========== ===========
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,
1999, the results of its operations for the three months and nine months ended
June 30, 1998 and 1999, and its cash flows for the nine months ended June 30,
1998 and 1999, 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, 1999 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,
1998, which was filed with the Securities and Exchange Commission on December
29, 1998.
2. INVENTORIES, NET
Inventories, net of reserves for obsolete and slow moving inventory, are
comprised of the following:
September 30, June 30,
1998 1999
---------------- ---------------
Raw materials $ 8,562 $ 7,666
Work-in-process 4,981 6,617
Finished goods 10,392 12,921
---------------- ----------------
$ 23,935 $ 27,204
================ ================
6
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share data)
3. CAPITAL STOCK
The Company has adopted Statement of Financial Accounting Standards No. 128,
Earnings per Share (SFAS 128). Under this statement, both "basic" earnings per
share and "diluted" earnings per share are presented on the face of the income
statement. As required under SFAS 128, both basic earnings per share and diluted
earnings per share for the three months and nine months ended June 30, 1998 and
1999 have been calculated giving retroactive effect to the Company's stock
reclassification and stock split, which occurred in conjunction with the
Company's initial public offering in February 1998. The following table provides
a reconciliation of both net income and the number of common shares used in the
computations of basic earnings per share, which utilizes the weighted average
number of common shares outstanding without regard to potential common shares,
and diluted earnings per share, which includes all such shares:
Three months ended June 30, Nine months ended June 30,
------------------------------ ------------------------------
1998 1999 1998 1999
Net income (Numerator):
Net income before extraordinary loss $ 1,724 $ 936 $ 4,638 $ 4,489
Extraordinary loss on early extinguishment of debt,
net of tax - - (3,129) -
------------- ------------- ------------- -------------
Net income $ 1,724 $ 936 $ 1,509 $ 4,489
============= ============= ============= =============
Weighted average common shares (Denominator):
Basic weighted average common shares 11,759,671 11,781,593 10,484,230 11,709,666
Add: Dilutive effect of stock options and warrants 1,002,803 723,618 1,155,278 764,908
------------- ------------- ------------- -------------
Diluted weighted average common shares 12,762,474 12,505,211 11,639,508 12,474,574
============= ============= ============= =============
Net income before extraordinary loss per common share:
Basic $ 0.15 $ 0.08 $ 0.44 $ 0.38
Diluted $ 0.14 $ 0.07 $ 0.40 $ 0.36
Extraordinary loss per common share:
Basic $ - $ - $ (0.30) $ -
Diluted $ - $ - $ (0.27) $ -
Net income per common share:
Basic $ 0.15 $ 0.08 $ 0.14 $ 0.38
Diluted $ 0.14 $ 0.07 $ 0.13 $ 0.36
7
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share data)
During the fiscal year ended September 30, 1998, the Company's Board of
Directors approved a stock repurchase program to repurchase up to 400,000 shares
of the Company's common stock. As of September 30, 1998, the Company had
repurchased 41,800 shares of common stock at an aggregate price of $301. In
October 1998, the Company repurchased an additional 57,500 shares of common
stock at an aggregate price of $391. As of March 31, 1999, a total of 99,300
shares of common stock had been repurchased by the Company at an aggregate price
of $692. On April 1, 1999, all 99,300 shares of treasury stock previously
repurchased by the Company were reissued in connection with the acquisition of
Woodland Publishing, Inc.
4. ACQUISITIONS
On April 1, 1999, the Company purchased Woodland Publishing, Inc. and Summit
Graphics, Inc., two affiliated companies in the nutritional health publishing
business, for approximately $1.8 million in cash and stock. Headquartered in
Lindon, Utah, Woodland Publishing, Inc. markets a line of over 150 books and
pamphlets to national retail book stores as well as health food stores. The
operations and business of Woodland Publishing, Inc., which began publishing in
1974, were combined with those of Summit Graphics, Inc., which was established
in 1996 to provide printing services, in a new subsidiary of the Company. The
impact of these acquisitions on the financial statements for the three months
ended June 30, 1999 is immaterial.
5. SUBSEQUENT EVENTS
On July 2, 1999, the Company announced that it had elected not to proceed with
the planned acquisition of certain assets of Futurebiotics, Inc. (Nasdaq:VITK),
----
a marketer and distributor of branded nutritional supplements. The Company had
previously announced the planned acquisition on March 3, 1999.
8
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. In fiscal 1998, the Company completed two additional acquisitions with
the purchases of Action Labs, Inc. in July 1998 and Nutraforce (Canada)
International, Inc. in August 1998. Most recently, the Company completed the
acquisitions of Woodland Publishing, Inc. and Summit Graphics, Inc. on April 1,
1999.
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,
---------------------------- ----------------------------
1998 1999 1998 1999
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 55.9% 52.8% 54.1% 53.7%
------------ ------------- ------------ -------------
Gross profit 44.1% 47.2% 45.9% 46.3%
Selling, general and administrative 29.2% 37.3% 29.3% 33.3%
Amortization of intangibles 1.3% 1.7% 1.3% 1.6%
Non-recurring payments to management advisors - - 1.5% -
------------ ------------- ------------ -------------
Income from operations 13.6% 8.2% 13.8% 11.4%
Interest expense, net 2.4% 2.4% 4.2% 2.3%
------------ ------------- ------------ -------------
Income before provision for income taxes 11.2% 5.8% 9.6% 9.1%
Provision for income taxes 4.3% 2.2% 3.7% 3.5%
------------ ------------- ------------ -------------
Net income before extraordinary loss 6.9% 3.6% 5.9% 5.6%
Extraordinary loss on early extinguishment of debt, net of tax - - -4.0% -
------------ ------------- ------------ -------------
Net income 6.9% 3.6% 1.9% 5.6%
============ ============= ============ =============
Adjusted EBITDA (1) 18.3% 14.3% 19.7% 16.8%
============ ============= ============ =============
(1) See "- Adjusted EBITDA."
9
Comparison of the Three Months Ended June 30, 1999 to the Three Months Ended
June 30, 1998
Net Sales. Net sales increased by $1.2 million, or 4.8%, to $26.2 million for
the three months ended June 30, 1999 (third quarter of fiscal 1999) from $25.0
million for the three months ended June 30, 1998 (third quarter of fiscal 1998).
This increase in net sales was primarily the result of growth in the Company's
core health food store business, especially in stores serviced by the Company's
direct sales force, which management believes to be among the largest focusing
on health food stores. This growth in the Company's domestic health food store
business continues to be offset by weaknesses in sales to certain international
markets and sales of premium bulk formulations.
Gross Profit. Gross profit increased by $1.4 million, or 12.1%, to $12.4
million for the third quarter of fiscal 1999 from $11.0 million for the third
quarter of fiscal 1998. This increase in gross profit was primarily
attributable to an increase in sales volume. As a percentage of net sales, gross
profit increased to 47.2% for the third quarter of fiscal 1999 from 44.1% for
the third quarter of fiscal 1998. This increase in gross profit as a percentage
of net sales is primarily attributable to growth in the Company's higher margin
domestic health food store business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $2.5 million, or 33.8%, to $9.8 million
for the third quarter of fiscal 1999 from $7.3 million for the third quarter of
fiscal 1998. As a percentage of net sales, selling, general and administrative
expenses increased to 37.3% for the third quarter of fiscal 1999 from 29.2% for
the third quarter of fiscal 1998. This increase in selling, general and
administrative expenses as a percentage of net sales was primarily attributable
to the Company's investment in facility consolidation, new business development
and information systems, including increased depreciation associated with prior
year capital expenditures.
Amortization of Intangibles. Amortization of intangibles was $0.4 million for
the third quarter of fiscal 1999 and $0.3 million for the third quarter of
fiscal 1998. As a percentage of net sales, amortization of intangibles
increased to 1.7% for the third quarter of fiscal 1999 from 1.3% for the third
quarter of fiscal 1998. This increase in amortization of intangibles as a
percentage of net sales is primarily attributable to the amortization of
goodwill associated with the Action Labs, Inc. acquisition in July 1998.
Interest Expense, Net. Net interest expense remained stable at $0.6 million
for the third quarter of fiscal 1999 compared to $0.6 million for the third
quarter of fiscal 1998. As a percentage of net sales, net interest expense also
remained stable at 2.4% for the third quarter of fiscal 1999 compared to 2.4%
for the third quarter of fiscal 1998.
Provision for Income Taxes. The Company's effective tax rate was 38.5% for
both the third quarter of fiscal 1999 and the third quarter of fiscal 1998. 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, Inc. acquisition.
10
Comparison of the Nine Months Ended June 30, 1999 to the Nine Months Ended June
30, 1998
Net Sales. Net sales increased by $2.0 million, or 2.5%, to $80.7 million for
the nine months ended June 30, 1999 from $78.7 million for the nine months ended
June 30, 1998. Management believes this increase in net sales was modest
primarily due to slowing in the overall growth rate of the domestic nutritional
supplement industry combined with weaknesses in certain international markets
and in sales of premium bulk formulations.
Gross Profit. Gross profit increased by $1.3 million, or 3.6%, to $37.4
million for the nine months ended June 30, 1999 compared to $36.1 million for
the nine months ended June 30, 1998. As a percentage of net sales, gross profit
increased to 46.3% for the nine months ended June 30, 1999 from 45.9% for the
nine months ended June 30, 1998. This increase in gross profit as a percentage
of net sales can be attributed to, among other things, growth in the Company's
higher margin domestic health food store business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $3.8 million, or 16.5%, to $26.9 million
for the nine months ended June 30, 1999 from $23.1 million for the nine months
ended June 30, 1998. As a percentage of net sales, selling, general and
administrative expenses increased to 33.3% for the nine months ended June 30,
1999 from 29.3% for the nine months ended June 30, 1998. This increase in
selling, general and administrative expenses as a percentage of net sales was
primarily attributable to the Company's investment in facility consolidation,
new business development and information systems, including increased
depreciation associated with prior year capital expenditures.
Amortization of Intangibles. Amortization of intangibles was $1.3 million for
the nine months ended June 30, 1999 and $1.0 million for the nine months ended
June 30, 1998. As a percentage of net sales, amortization of intangibles
increased to 1.6% for the nine months ended June 30, 1999 from 1.3% for the nine
months ended June 30, 1998. This increase in amortization of intangibles as a
percentage of net sales is primarily attributable to the amortization of
goodwill associated with the Action Labs, Inc. acquisition in July 1998.
Non-recurring Payments to Management Advisors. No non-recurring payments to
management advisors were made during the nine months ended June 30, 1999. Non-
recurring payments to management advisors of $1.1 million were recognized for
the nine months ended June 30, 1998 pursuant to an advisory agreement that was
terminated in connection with the Company's initial public offering. The
Company does not expect to incur such payments in the future.
Interest Expense, Net. Net interest expense decreased by $1.4 million, or
44.4%, to $1.9 million for the nine months ended June 30, 1999 from $3.3 million
for the nine months ended June 30, 1998. As a percentage of net sales, net
interest expense decreased to 2.3% for the nine months ended June 30, 1999 from
4.2% for the nine months ended June 30,
11
1998. This decrease in net interest expense was primarily attributable to
decreased indebtedness resulting from the Company's use of proceeds generated in
its initial public offering.
Provision for Income Taxes. The Company's effective tax rate was 38.5% for
both the nine months ended June 30, 1999 and the nine months ended June 30,
1998. In each nine month period, 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, Inc. acquisition.
Extraordinary Loss on Early Extinguishment of Debt. No extraordinary loss on the
early extinguishment of debt was recognized during the nine months ended June
30, 1999. An extraordinary loss on the early extinguishment of debt of $3.1
million, net of tax, was recognized during the nine months ended June 30, 1998.
This loss was incurred in connection with the repayment of indebtedness related
to an existing credit agreement pursuant to the establishment of a new credit
agreement, which was consummated simultaneously with the Company's initial
public offering.
Adjusted EBITDA
Adjusted 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 Adjusted 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 June 30, Nine months ended June 30,
----------------------------- ------------------------------
1998 1999 1998 1999
Net income before extraordinary loss $ 1,724 $ 936 $ 4,638 $ 4,489
Provision for income taxes 1,079 585 2,904 2,810
Interest expense, net (1) 593 622 3,348 1,862
Depreciation and amortization (2) 1,172 1,599 3,464 4,411
Non-recurring payments to management advisors (3) - - 1,135 -
------------- ------------- ------------- --------------
Adjusted EBITDA $ 4,568 $ 3,742 $ 15,489 $ 13,572
============= ============= ============= ==============
(1) Includes amortization of capitalized debt issuance costs.
(2) Includes non-recurring amortization of inventory write up.
(3) Represents payments to management advisors for services provided. The
Company does not expect to incur such payments in the future.
The Company's Adjusted EBITDA decreased $0.9 million to $3.7 million for the
third quarter of fiscal 1999 from $4.6 million for the third quarter of fiscal
1998. Adjusted EBITDA as a percentage of net sales decreased to 14.3% for the
third quarter of fiscal
12
1999 from 18.3% for the third quarter of fiscal 1998. Increased selling, general
and administrative expenses attributable to the Company's investment in facility
consolidation, new business development and information systems contributed to
this decrease in Adjusted EBITDA as a percentage of net sales.
The Company's Adjusted EBITDA decreased $1.9 million to $13.6 million for the
nine months ended June 30, 1999 from $15.5 million for the nine months ended
June 30, 1998. Adjusted EBITDA as a percentage of net sales decreased to 16.8%
for the nine months ended June 30, 1999 from 19.7% for the nine months ended
June 30, 1998. Increased selling, general and administrative expenses
attributable to the Company's investment in facility consolidation, new business
development and information systems contributed to this decrease in Adjusted
EBITDA as a percentage of net sales.
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 sales volume during
the second fiscal quarter 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 that 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.
Year 2000 Issue
Many existing computer programs use only two digits to identify years. These
programs were designed without consideration for the effect of the upcoming
change in century, and if not corrected, could fail or create erroneous results
by or at the Year 2000. Essentially all the Company's information technology
based systems, as well as many non-information technology based systems, are
affected by the Year 2000 issue. Specific systems include accounting, payroll,
financial reporting, product formulation and development, manufacturing,
inventory tracking and control, business planning, tax, accounts receivable,
accounts payable, purchasing, distribution and numerous word processing and
similar applications. Non-information technology based systems include
equipment and services containing imbedded microprocessors, such as
manufacturing and bottling equipment, clocks, security systems and building
management systems. The Company also has relationships with numerous third
parties, including material suppliers, utility companies, transportation
companies, and banks and brokerage firms that may be affected by the Year 2000
issue.
Remediation plans have been established for all major systems potentially
affected by the Year 2000 issue. These remediation plans constitute an ongoing
process that the Company expects to adequately complete before the Year 2000.
13
Identification of areas of potential third-party risk is currently in process.
Plans will be developed and implemented based on the results of such
identification and assessment. No areas of material risk have been identified
to date.
The Company is in the process of determining the risks it would face in the
event certain aspects of its Year 2000 remediation plan fail. It is also
developing contingency plans for all mission-critical processes. Under a "worst
case" scenario, the Company's manufacturing operations would be unable to build
and deliver products in a timely fashion due to internal systems failures and/or
the inability of vendors to deliver raw materials and components. Alternative
suppliers are being identified (where possible) and inventory levels of certain
key components may be temporarily increased. While virtually all internal
systems can be replaced with manual systems on a temporary basis, the failure of
mission-critical systems would have at least a short-term negative effect on
operations. The failure of national and worldwide banking systems could result
in the inability of many businesses, including the Company, to conduct business.
Remediation, risk assessment and contingency plans are expected to be completed
in a timely enough manner before the Company experiences any material adverse
impact to its ongoing operations. The total cost to the Company of achieving
Year 2000 compliance is not expected to exceed $200,000, not including internal
resources. Spending to date totals approximately $60,000.
Liquidity and Capital Resources
The Company had working capital of $30.5 million as of June 30, 1999, compared
to $24.0 million as of September 30, 1998. This increase in working capital was
primarily the result of an increase in inventory due to the Company's efforts to
expand inventory levels in connection with the consolidation of certain
distribution and other operations, as well as an increase in accounts receivable
and decreases in accounts payable and accrued expenses.
Net cash provided by operating activities for the nine months ended June 30,
1999 was $3.1 million compared to $4.1 million for the comparable period in
fiscal 1998. Net cash provided by operating activities decreased primarily due
to increased cash usage for changes in operating assets and liabilities.
Net cash used in investing activities was $7.4 million for the nine months ended
June 30, 1999 compared to $2.5 million for the comparable period in fiscal 1998.
Net cash used in investing activities increased primarily due to leasehold
improvements associated with the Company's investment in facility consolidation
and the acquisitions of Woodland Publishing, Inc. and Summit Graphics, Inc. on
April 1, 1999.
Net cash provided by (used in) financing activities was $3.9 million for the
nine months ended June 30, 1999 compared to ($3.5) million for the comparable
period in fiscal 1998. Net cash provided by financing activities increased
primarily due to increased borrowings under the Company's current credit
agreement to finance working capital increases and capital expenditures,
including the aforementioned acquisitions.
14
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 Company's current credit agreement,
together with cash flows from operating activities, will be sufficient to make
anticipated capital expenditures and fund working capital needs for the
remaining months of fiscal 1999.
New Accounting Standards
The Financial Accounting Standards Board issued SFAS No. 130, Reporting
Comprehensive Income, which became effective for fiscal years beginning after
December 15, 1997 and established standards for the way companies report and
display comprehensive income and its components in a full set of general purpose
financial statements. The Company has adopted SFAS No. 130 and the impact of
SFAS No. 130 on the Company's financial statements is immaterial for disclosure
in the periods presented.
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 financial statements. SFAS No. 131 also established standards for related
disclosures about products and services, geographic areas and major customers.
This statement need not be applied to interim financial statements in the
initial year of its application. The Company is currently assessing the impact
of SFAS No. 131 disclosure requirements on its financial statements.
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, 1998
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 for nutritional supplement sales 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.
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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 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. Recent
material developments in regulatory and legal matters referred to in the
Registration Statement and in previous filings include the fact that the lawsuit
filed by American Cyanamid Co. in United States District Court for the District
of New Jersey was dismissed with prejudice after the court found in favor of the
Company on all counts, based on a summary judgment motion filed by the Company.
The Court's opinion was dated May 28, 1999.
In the opinion of management, the Company's liability, if any, arising from
regulatory and legal proceedings in which it is involved is not expected to have
a material adverse impact on the Company's financial position, results of the
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 16, 1999 By: /s/ Leslie M. Brown, Jr.
---------------- -------------------------
Leslie M. Brown, Jr.
Senior Vice President,
Finance and Chief Financial Officer
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