10-Q 1 a10-q.txt FORM 10-Q -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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, 2000 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, 84060 PARK CITY, UTAH (Zip code) (Address of principal executive office)
(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 14, 2000 the registrant had 10,905,104 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--September 30, 1999 and June 30, 2000........................................... 3 Condensed Consolidated Statements of Operations--Three Months and Nine Months Ended June 30, 1999 and 2000......... 4 Condensed Consolidated Statements of Cash Flows--Nine Months Ended June 30, 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........................................... 14 Item 6. Exhibits and Reports on Form 8-K............................ 14
2 PART I--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NUTRACEUTICAL INTERNATIONAL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (DOLLARS IN THOUSANDS)
SEPTEMBER 30, JUNE 30, 1999 (1) 2000 -------------- --------- ASSETS Current assets: Cash...................................................... $ 869 $ 977 Accounts receivable, net.................................. 9,010 9,717 Inventories, net.......................................... 26,863 26,840 Prepaid expenses and other current assets................. 1,397 1,136 Deferred income taxes..................................... 1,231 1,425 -------- -------- Total current assets.................................... 39,370 40,095 Property, plant and equipment, net.......................... 14,752 16,486 Goodwill, net............................................... 53,422 52,821 Other non-current assets, net............................... 1,100 829 -------- -------- $108,644 $110,231 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of capital lease obligations.............. $ 57 $ 37 Accounts payable.......................................... 6,879 6,543 Accrued expenses.......................................... 3,185 3,360 -------- -------- Total current liabilities............................... 10,121 9,940 Long-term debt.............................................. 38,750 39,000 Capital lease obligations................................... 23 -- Deferred income taxes, net.................................. 2,460 2,685 -------- -------- Total liabilities....................................... 51,354 51,625 -------- -------- Stockholders' equity: Common stock.............................................. 118 118 Additional paid-in capital................................ 42,637 42,713 Retained earnings......................................... 14,504 19,059 Cumulative translation adjustment......................... 31 25 Treasury stock............................................ -- (3,309) -------- -------- Total stockholders' equity.............................. 57,290 58,606 -------- -------- $108,644 $110,231 ======== ========
------------------------ (1) The condensed consolidated balance sheet as of September 30, 1999 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, ---------------------------- --------------------------- 1999 2000 1999 2000 ----------- ----------- ------------ ------------ Net sales.................................... $ 26,212 $ 25,552 $ 80,659 $ 81,876 Cost of sales................................ 13,850 13,255 43,290 42,711 ---------- ---------- ---------- ---------- Gross profit............................... 12,362 12,297 37,369 39,165 ---------- ---------- ---------- ---------- Operating expenses Selling, general and administrative........ 9,772 9,090 26,887 28,244 Amortization of intangibles................ 447 431 1,321 1,301 ---------- ---------- ---------- ---------- 10,219 9,521 28,208 29,545 ---------- ---------- ---------- ---------- Income from operations....................... 2,143 2,776 9,161 9,620 Interest expense, net........................ 622 789 1,862 2,153 ---------- ---------- ---------- ---------- Income before provision for income taxes..... 1,521 1,987 7,299 7,467 Provision for income taxes................... 585 775 2,810 2,912 ---------- ---------- ---------- ---------- Net income................................... $ 936 $ 1,212 $ 4,489 $ 4,555 ========== ========== ========== ========== Net income per common share: Basic...................................... $ 0.08 $ 0.11 $ 0.38 $ 0.39 Diluted.................................... $ 0.07 $ 0.10 $ 0.36 $ 0.37 Weighted average common shares outstanding: Basic...................................... 11,781,593 11,541,851 11,709,666 11,712,719 Diluted.................................... 12,505,211 12,232,031 12,474,574 12,417,872
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, ------------------- 1999 2000 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................. $ 4,489 $ 4,555 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization (includes amortization of inventory write-up of $46 during 1999).................. 4,411 4,545 Amortization of debt issuance costs....................... 161 161 Losses on disposals of property and equipment............. 39 30 Changes in assets and liabilities: Accounts receivable..................................... (832) (707) Inventories............................................. (2,910) 1,650 Prepaid expenses and other current assets............... 337 261 Deferred income taxes................................... 625 225 Other non-current assets................................ (24) 90 Accounts payable........................................ (2,672) (336) Accrued expenses........................................ (562) 70 ------- ------- Net cash provided by operating activities............. 3,062 10,544 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Sales of property and equipment............................. 38 -- Acquisitions of businesses.................................. (1,187) (2,401) Purchases of property and equipment......................... (6,252) (5,009) ------- ------- Net cash used in investing activities................. (7,401) (7,410) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt................................ 4,750 3,500 Payments on long-term debt.................................. (500) (3,250) Payments on capital lease obligations....................... (39) (43) Proceeds from issuance of common stock...................... 91 77 Purchases of treasury stock................................. (391) (3,309) ------- ------- Net cash provided by (used in) financing activities... 3,911 (3,025) ------- ------- Effect of exchange rate changes on cash..................... 9 (1) ------- ------- Net increase (decrease) in cash............................. (419) 108 Cash at beginning of period................................. 1,967 869 ------- ------- Cash at end of period....................................... $ 1,548 $ 977 ======= =======
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, 2000, the results of its operations for the three months and nine months ended June 30, 1999 and 2000 and its cash flows for the nine months ended June 30, 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 and nine months ended June 30, 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, 1999, which was filed with the Securities and Exchange Commission on December 29, 1999. 2. INVENTORIES, NET Inventories, net of reserves for obsolete and slow moving inventory, are comprised of the following:
SEPTEMBER 30, JUNE 30, 1999 2000 -------------- --------- Raw materials......................................... $ 7,491 $ 7,746 Work-in-process....................................... 7,151 6,953 Finished goods........................................ 12,221 12,141 ------- ------- $26,863 $26,840 ======= =======
3. CAPITAL STOCK The following table provides a reconciliation of basic common shares, which represent the weighted average number of common shares outstanding without regard to potential common shares, to diluted weighted average common shares, which include all such shares:
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30, ---------------------------- --------------------------- 1999 2000 1999 2000 ----------- ----------- ------------ ------------ Net income (Numerator)....................... $ 936 $ 1,212 $ 4,489 $ 4,555 Weighted average common shares (Denominator): Basic weighted average common shares....... 11,781,593 11,541,851 11,709,666 11,712,719 Dilutive effect of stock options and warrants................................. 723,618 690,180 764,908 705,153 ---------- ---------- ---------- ---------- Diluted weighted average common shares....... 12,505,211 12,232,031 12,474,574 12,417,872 ========== ========== ========== ========== Net income per common share: Basic...................................... $ 0.08 $ 0.11 $ 0.38 $ 0.39 Diluted.................................... $ 0.07 $ 0.10 $ 0.36 $ 0.37
6 NUTRACEUTICAL INTERNATIONAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 3. CAPITAL STOCK (CONTINUED) On June 22, 2000, the Company's Board of Directors approved a share repurchase program authorizing the Company to buy up to 1,500,000 shares of its outstanding common stock. This repurchase program superceded the previous repurchase program announced on September 10, 1998. During the quarter ended June 30, 2000, the Company repurchased a total of 918,287 shares of common stock at an aggregate price of $3,309. 4. ACQUISITONS On May 26, 2000, the Company purchased certain assets of Thompson Nutritional Products ("Thompson"), a division of Rexall Sundown, Inc. Thompson, with over 60 years history in the vitamin and nutrition industry, is a manufacturer and marketer of health-related products, including a full line of vitamins, minerals and other nutritional supplements. 5. OPERATING SEGMENTS Based on the Company's method of internal reporting, the Company has two reportable segments: branded products and bulk materials. The Company manufactures and markets quality branded products sold to health food stores in the United States and to distributors worldwide. In addition to branded products, the Company manufactures bulk materials for its own use and for sale to other manufactures 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 and nine months ended June 30, 1999 and 2000 was as follows:
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ------------------- ------------------- 1999 2000 1999 2000 -------- -------- -------- -------- Net Sales: Branded Products...................................... $23,375 $23,090 $69,650 $73,583 Bulk Materials........................................ 2,837 2,462 11,009 8,293 ------- ------- ------- ------- Total............................................... $26,212 $25,552 $80,659 $81,876 ======= ======= ======= =======
7 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 significant 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 Nutraforce (Canada) International, Inc. in August 1998. In fiscal 1999, the Company completed two additional acquisitions: Woodland Publishing, Inc. and Summit Graphics, Inc. in April 1999 (the "Fiscal 1999 Acquisitions"). On May 26, 2000, the Company acquired Thompson Nutritional Products (the "Fiscal 2000 Acquisition"). 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 NINE MONTHS ENDED JUNE 30, JUNE 30, ------------------- ------------------- 1999 2000 1999 2000 -------- -------- -------- -------- Net sales................................................ 100.0% 100.0% 100.0% 100.0% Cost of sales............................................ 52.8% 51.9% 53.7% 52.2% ------ ------ ------ ------ Gross profit............................................. 47.2% 48.1% 46.3% 47.8% Selling, general and administrative...................... 37.3% 35.5% 33.3% 34.5% Amortization of intangibles.............................. 1.7% 1.7% 1.6% 1.6% ------ ------ ------ ------ Income from operations................................... 8.2% 10.9% 11.4% 11.7% Interest expense, net.................................... 2.4% 3.1% 2.3% 2.6% ------ ------ ------ ------ Income before provision for income taxes................. 5.8% 7.8% 9.1% 9.1% Provision for income taxes............................... 2.2% 3.1% 3.5% 3.5% ------ ------ ------ ------ Net income............................................... 3.6% 4.7% 5.6% 5.6% ====== ====== ====== ====== EBITDA (1)............................................... 14.3% 16.8% 16.8% 17.3% ====== ====== ====== ======
------------------------ (1) See "--EBITDA." COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2000 TO THE THREE MONTHS ENDED JUNE 30, 1999 NET SALES. Net sales decreased by $0.6 million, or 2.5%, to $25.6 million for the three months ended June 30, 2000 ("third quarter of fiscal 2000") from $26.2 million for the three months ended June 30, 1999 ("third quarter of fiscal 1999"). Net sales of branded products decreased by $0.3 million, or 1.2%, to $23.1 million for the third quarter of fiscal 2000 from $23.4 million for the third quarter of fiscal 1999. This decrease in net sales of branded products was primarily the result of decreased sales volume. The Company believes that the decreased volume was primarily attributable to year-over-year decreases in sales to certain non-core, health-food-store customers not targeted by our direct sales force. Net sales of bulk materials decreased by $0.3 million, or 13.2%, to $2.5 million for the third quarter of fiscal 2000 from 8 $2.8 million for the third quarter of fiscal 1999. This decrease in net sales of bulk materials was primarily attributable to reduced sales of certain commodity-based materials to key customers. GROSS PROFIT. Gross profit decreased by $0.1 million, or 0.5%, to $12.3 million for the third quarter of fiscal 2000 from $12.4 million for the third quarter of fiscal 1999. This decrease in gross profit was primarily attributable to a decrease in sales volume. As a percentage of net sales, gross profit increased to 48.1% for the third quarter of fiscal 2000 from 47.2% for the third quarter of fiscal 1999. This increase in gross profit as a percentage of net sales was primarily attributable to improvements in direct material pricing and, to a lesser extent, a continued shift in sales mix to a higher proportion of branded product sales, which have higher gross profit margins, relative to bulk material sales, which have lower gross profit margins. During the third quarter of fiscal 2000, direct material pricing improved due to new material sources, increased supplier competition and, to a lesser extent, reduced packaging costs, which were higher during the third quarter of fiscal 1999 due to bottle and label conversions associated with the Company's efforts to enhance quality and to comply with labeling laws mandated by the FDA. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased by $0.7 million, or 7.0%, to $9.1 million for the third quarter of fiscal 2000 from $9.8 million for the third quarter of fiscal 1999. As a percentage of net sales, selling, general and administrative expenses decreased to 35.5% for the third quarter of fiscal 2000 from 37.3% for the third quarter of fiscal 1999. This decrease in selling, general and administrative expenses as a percentage of net sales was primarily attributable to the Company's efforts to reduce costs through elimination of certain non-core business development activities, as well as through headcount attrition. AMORTIZATION OF INTANGIBLES. Amortization of intangibles was $0.4 million for the third quarter of fiscal 2000 and $0.4 million for the third quarter of fiscal 1999. As a percentage of net sales, amortization of intangibles remained constant at 1.7% for both the third quarter of fiscal 2000 and the third quarter of fiscal 1999. INTEREST EXPENSE, NET. Net interest expense was $0.8 million for the third quarter of fiscal 2000 compared to $0.6 million for the third quarter of fiscal 1999. As a percentage of net sales, net interest expense was 3.1% for the third quarter of fiscal 2000 compared to 2.4% for the third quarter of fiscal 1999. This increase in net interest expense was primarily attributable to increased interest rates. PROVISION FOR INCOME TAXES. The Company's effective tax rate increased to 39.0% for the third quarter of fiscal 2000 from 38.5% for the third quarter of fiscal 1999. 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 and, to a lesser extent, the Woodland Publishing, Inc. acquisition. The impact of goodwill arising from the Solaray, Inc. and Woodland Publishing, Inc. acquisitions on the effective tax rate for the third quarter of fiscal 2000 increased compared to the third quarter of fiscal 1999 as a result of the Company's mid-year acquisition of Woodland Publishing, Inc. COMPARISON OF THE NINE MONTHS ENDED JUNE 30, 2000 TO THE NINE MONTHS ENDED JUNE 30, 1999 NET SALES. Net sales increased by $1.2 million, or 1.5%, to $81.9 million for the nine months ended June 30, 2000 from $80.7 million for the nine months ended June 30, 1999. Net sales of branded products increased by $3.9 million, or 5.6%, to $73.6 million for the nine months ended June 30, 2000 from $69.7 million for the nine months ended June 30, 1999. This increase in net sales of branded products was primarily the result of increased sales volume. The Company believes that the increased volume was primarily attributable to industry growth, the success of new product introductions and, to a lesser extent, the Fiscal 1999 Acquisitions. Net sales of bulk materials decreased by $2.7 million, or 24.7%, to $8.3 million for the nine months ended June 30, 2000 from $11.0 million for the nine months ended June 30, 1999. This decrease in net sales of bulk materials was primarily attributable to reduced sales of certain commodity-based materials to key customers. 9 GROSS PROFIT. Gross profit increased by $1.8 million, or 4.8%, to $39.2 million for the nine months ended June 30, 2000 from $37.4 million for the nine months ended June 30, 1999. This increase in gross profit was primarily attributable to an increase in sales volume. As a percentage of net sales, gross profit increased to 47.8% for the nine months ended June 30, 2000 from 46.3% for the nine months ended June 30, 1999. This increase in gross profit as a percentage of net sales was primarily attributable to improvements in direct material pricing and, to a lesser extent, a shift in sales mix to a higher proportion of branded product sales, which have higher gross profit margins, relative to bulk material sales, which have lower gross profit margins. During the nine months ended June 30, 2000, direct material pricing improved due to new material sources, increased supplier competition and reduced packaging costs, which were higher during the nine months ended June 30, 1999 due to bottle and label conversions associated with the Company's efforts to enhance quality and to comply with labeling laws mandated by the FDA. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased by $1.3 million, or 5.0%, to $28.2 million for the nine months ended June 30, 2000 from $26.9 million for the nine months ended June 30, 1999. As a percentage of net sales, selling, general and administrative expenses increased to 34.5% for the nine months ended June 30, 2000 from 33.3% for the nine months ended June 30, 1999. This increase in selling, general and administrative expenses as a percentage of net sales was primarily attributable to the Company's investment in sales force expansion, facility consolidation and the addition of key management personnel. AMORTIZATION OF INTANGIBLES. Amortization of intangibles was $1.3 million for both the nine months ended June 30, 2000 and the nine months ended June 30, 1999. As a percentage of net sales, amortization of intangibles remained constant at 1.6% for both the nine months ended June 30, 2000 and the nine months ended June 30, 1999. INTEREST EXPENSE, NET. Net interest expense was $2.2 million for the nine months ended June 30, 2000 compared to $1.9 million for the nine months ended June 30, 1999. As a percentage of net sales, net interest expense was 2.6% for the nine months ended June 30, 2000 compared to 2.3% for the nine months ended June 30, 1999. This increase in net interest expense was primarily attributable to increased interest rates. PROVISION FOR INCOME TAXES. The Company's effective tax rate increased to 39.0% for the nine months ended June 30, 2000 from 38.5% for the nine months ended June 30, 1999. 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 and, to a lesser extent, the Woodland Publishing, Inc. acquisition. The impact of goodwill arising from the Solaray, Inc. and Woodland Publishing, Inc. acquisitions on the effective tax rate for the nine months ended June 30, 2000 increased compared to the nine months ended June 30, 1999 as a result of the Company's mid-year acquisition of Woodland Publishing, Inc. 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 10 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 NINE MONTHS ENDED ENDED JUNE 30, JUNE 30, ------------------- ------------------- 1999 2000 1999 2000 -------- -------- -------- -------- Net income................................................ $ 936 $1,212 $ 4,489 $ 4,555 Provision for income taxes................................ 585 775 2,810 2,912 Interest expense, net (1)................................. 622 789 1,862 2,153 Depreciation and amortization (2)......................... 1,599 1,526 4,411 4,545 ------ ------ ------- ------- EBITDA.................................................... $3,742 $4,302 $13,572 $14,165 ====== ====== ======= =======
------------------------ (1) Includes amortization of debt issuance costs. (2) Includes non-recurring amortization of inventory write-up. The Company's EBITDA increased $0.6 million to $4.3 million for the third quarter of fiscal 2000 from $3.7 million for the third quarter of fiscal 1999. EBITDA as a percentage of net sales increased to 16.8% for the third quarter of fiscal 2000 from 14.3% for the third quarter of fiscal 1999. Increased gross profit margin and decreased selling, general and administrative expenses attributable to the Company's efforts to reduce costs through elimination of certain non-core business development activities, as well as through headcount attrition, contributed to this increase in EBITDA as a percentage of net sales. The Company's EBITDA increased $0.6 million to $14.2 million for the nine months ended June 30, 2000 from $13.6 million for the nine months ended June 30, 1999. EBITDA as a percentage of net sales increased to 17.3% for the nine months ended June 30, 2000 from 16.8% for the nine months ended June 30, 1999. Increased gross profit margin is the primary contributor to this increase in EBITDA as a percentage of net sales. SEASONALITY The Company believes that its business is characterized by minor seasonality. Furthermore, sales to some customers 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. 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 $30.2 million as of June 30, 2000 compared to $29.2 million as of September 30, 1999. This increase in working capital was primarily the result of increases in accounts receivable, deferred income taxes and cash, combined with a decrease in accounts payable, which were somewhat offset by an increase in accrued expenses and a decrease in prepaid expenses and other current assets. Net cash provided by operating activities for the nine months ended June 30, 2000 was $10.5 million compared to $3.1 million for the comparable period in fiscal 1999. The increase in net cash provided by operating activities for the nine months ended June 30, 2000 was primarily attributable to reduced 11 inventory purchases, compared to the prior year, and changes in accounts payable related to the timing of payments. Net cash used in investing activities was $7.4 million for the nine months ended June 30, 2000 and $7.4 million for the comparable period in fiscal 1999. During these periods, the Company's investing activities consisted primarily of capital expenditures related to leasehold improvements for the Company's DDO facility, as well as capital expenditures for information systems, distribution equipment and manufacturing equipment to improve overall operating efficiency. In addition, the Company completed the Fiscal 1999 Acquisitions for $1.2 million and the Fiscal 2000 Acquisition for $2.4 million during the periods presented. Net cash provided by (used in) financing activities was ($3.0) million for the nine months ended June 30, 2000 compared to $3.9 million for the comparable period in fiscal 1999. Net cash used in financing activities increased primarily due to the repayment of borrowings under the Company's revolving credit facility and the repurchase of the Company's common stock. 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, 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 2000. 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, but the impact of SFAS No. 130 on the Company's financial statements is immaterial for disclosure in the periods presented. 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 has adopted SOP 98-1 in its financial statements for the nine months ended June 30, 2000. 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. 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 12 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. 13 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. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 27.1 Financial Data Schedule (b) Reports on Form 8-K: None 14 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: August 14, 2000 By: /s/ LESLIE M. BROWN, JR. ----------------------------------------- Leslie M. Brown, Jr. SENIOR VICE PRESIDENT, FINANCE AND CHIEF FINANCIAL OFFICER
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