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TABLE OF CONTENTS
Nutraceutical International Corporation Index to Consolidated Financial Statements
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
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for the Fiscal Year Ended September 30, 2009
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
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for the transition period
from to
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Commission file number: 000-23731
NUTRACEUTICAL INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of incorporation)
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87-0515089
(I.R.S. Employer Identification Number)
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1400 Kearns Boulevard, 2nd Floor
Park City, Utah 84060
(Address of principal executive offices including zip code)
Registrant's
telephone number, including area code:
(435) 655-6106
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
o
No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
o
No
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes
ý
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes
o
No
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein and
will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of "accelerated filer," "large accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act (check one):
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Large Accelerated Filer
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Accelerated Filer
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Non-accelerated Filer
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(Do not check if a smaller
reporting company)
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Smaller reporting company
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
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No
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The aggregate market value of voting stock held by non-affiliates of the Registrant as of March 31, 2009 at a closing sale price of $6.70 as reported by the Nasdaq
National Market was approximately $65.7 million. Shares of common stock held by each officer and director and by each person who owns or may be deemed to own 10% or more of the outstanding common
stock have been excluded since such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As
of December 9, 2009, the Registrant had 10,396,838 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be used in connection with the solicitation of proxies for the Registrant's 2010 Annual Meeting of Stockholders are
incorporated by reference in Part III of this Annual Report on Form 10-K.
Table of Contents
NUTRACEUTICAL INTERNATIONAL CORPORATION
ANNUAL REPORT ON FORM 10-K
For The Fiscal Year Ended September 30, 2009
TABLE OF CONTENTS
Table of Contents
Special Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 with respect to our financial condition, results of operations and business. These forward-looking statements can be identified by the use of terms
such as "believe," "expects," "plan," "intend," "may," "will," "should," "can," or "anticipates," or the negative thereof, or variations thereon, or comparable terminology, or by discussions of
strategy. Important factors that may cause our results to differ from these forward-looking statements include, but are not limited to:
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slow or negative growth in the nutritional supplement industry or the healthy foods
channel,
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adverse publicity or negative consumer perception regarding nutritional
supplements,
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unavailability of desirable acquisitions or inability to complete
them,
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changes in or new government regulations or increased enforcement of the
same,
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litigation and claims, including product liability, intellectual property and other
types,
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insurance coverage issues,
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increased competition,
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increased costs, including from increased energy
prices,
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the loss of key personnel or the inability to manage our operations
efficiently,
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disruptions from acquisitions including the loss of
customers,
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issues with obtaining raw materials of adequate quality or quantity, or increases in the
cost,
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problems with information management systems, manufacturing efficiencies and
operations,
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changes in general worldwide economic or political
conditions,
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the volatility of the stock market generally and of our stock
specifically,
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increases in the cost of borrowings or unavailability of additional debt or equity capital, or
both, or fluctuations in foreign currencies, and
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interruption of business or negative impact on sales and earnings due to acts of God, acts of war,
terrorism, bio-terrorism, civil unrest and other factors outside of our control.
These statements involve known and unknown risks, uncertainties and other factors that may cause industry trends or our actual results to be materially different
from any future results expressed or implied by these statements. For a detailed discussion of these risks and uncertainties, see "Risk Factors" in Item 1A of this Annual Report on
Form 10-K. We undertake no obligation to update or revise publicly any forward-looking statements to reflect new information, events or circumstances occurring after the date of
this Annual Report on Form 10-K.
Industry data used throughout this report was obtained from industry publications and internal company estimates. While we believe such information to be
reliable, its accuracy has not been independently verified and cannot be guaranteed.
Table of Contents
PART I
Item 1. Business
We were incorporated in Delaware in 1993 and maintain our principal executive offices at 1400 Kearns Boulevard,
2
nd
Floor, Park City, Utah, 84060. For convenience in this report, the terms "Company," "Nutraceutical," "we" and "us" may be used to refer to Nutraceutical International
Corporation and/or its subsidiaries, except where indicated otherwise. Our telephone number is (435) 655-6106.
General
We are an integrated manufacturer, marketer, distributor and retailer of branded nutritional supplements and other natural products
sold primarily to and through domestic health and natural food stores. Internationally, we market and distribute branded nutritional supplements and other natural products to and through health and
natural product distributors and retailers. Our core business strategy is to acquire, integrate and operate businesses in the natural products industry that manufacture, market and distribute branded
nutritional supplements. We believe that the consolidation and integration of these acquired businesses provides ongoing financial synergies through increased scale and market penetration, as well as
strengthened customer relationships.
We
manufacture and sell nutritional supplements and other natural products under numerous brands including
Solaray
®,
VegLife®
,
KAL
®,
Nature's
Life
®,
Sunny Green®, Action Labs®, Natural Balance
®,
NaturalMax
®,
bioAllers
®,
Herbs for
Kids
,
Natra-Bio®, NaturalCare®, Zand®, Health from the Sun®,
Life-flo®, Larénim
®,
Living Flower Essences®, Pioneer®,
Thompson®, Natural Sport®, Supplement Training Systems®, Premier One
®,
Montana Big Sky,
ActiPet®, FunFresh Foods
,
Dowd & Rogers, CompliMed
®,
AllVia
,
Oakmont
Labs
®,
Healthway®, Body
Gold®, Sayge®
,
Monarch Nutraceuticals
and
Great Basin
Botanicals
. Under the name
Woodland Publishing
, we publish, print and market a line of books and
booklets to, among others, book distributors, national retail bookstores and health and natural food stores. We also distribute branded products of certain third parties.
We
own neighborhood natural food markets, which operate under the trade names
The Real Food Company
,
Thom's Natural Foods
and
Cornucopia Community Market
. We also own health food
stores, which operate under the trade names
Fresh Vitamins
and
Granola's
.
We
manufacture and/or distribute one of the broadest branded product lines in the industry with over 4,000 individual stock keeping units (SKUs), including over 700 SKUs sold
internationally. We believe that as a result of our emphasis on innovation, quality, loyalty, education and customer service, our brands are widely recognized in health and natural food stores and
among their customers.
We
were formed in 1993 to effect a consolidation strategy in the fragmented vitamin, mineral, herbal and other nutritional supplements industry (the "VMS Industry"). Since our formation,
we have completed twenty-six acquisitions. As a result of these acquisitions, internal growth and cost management, we believe that we are well positioned to continue to capitalize on the
consolidation that we believe is occurring in the VMS Industry.
Business Strategy
We target consumers searching for high quality nutritional and other natural products. We believe many of these consumers shop in sales
channels that offer meaningful education, service and support to their customers.
The
primary channel that offers this type of support to consumers in the United States has been health and natural food stores (the "Healthy Foods Channel"). Our primary focus has been
and remains on this channel. This strategy has enabled us to benefit from the growth of the Healthy Foods
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Channel.
The Healthy Foods Channel consists of more than 17,000 retailers, including (i) independent health and natural food stores, (ii) health and natural food stores affiliated with
local, regional and national health and natural food chains (including health and natural food store chains, such as Whole Foods Markets, and vitamin store chains, such as Vitamin Shoppe and Vitamin
World), and (iii) GNC stores. The Healthy Foods Channel principally caters to our primary target consumers: those who desire product education, service and high quality nutritional supplements
and other natural products. We believe there are significant differences between mass market retailers (such as supermarkets, drugstores and warehouse clubs) that typically offer a limited selection
of discounted natural products and lower-potency nutritional supplements and the Healthy Foods Channel, where natural ingredients, quality, potency, selection and customer support are emphasized. The
growth rate of the Healthy Foods Channel is not at (and may not return to) levels achieved in the mid-1990s.
We
believe we are among the largest suppliers of nutritional supplements to the Healthy Foods Channel that develop, manufacture, market and directly distribute a majority of their own
products. We manufactured approximately 75% of our branded products in fiscal 2009 and believe that the quality of our products is among the highest in the industry. We market our branded products
through one of the industry's largest sales forces dedicated to the Healthy Foods Channel. We seek to be a market leader in the development of new and innovative products, introducing over 160 new
SKUs in fiscal 2009. We believe that we benefit from greater customer and product diversification than most of our larger competitors.
We
believe that consumers seeking high quality products are also purchasing them through other channels, such as products available through health care practitioners and direct to
consumer channels and we continue to seek opportunities through acquisitions to explore reaching our target consumers through these and additional channels.
Industry
According to
Nutrition Business Journal
, the total retail natural products market (the
"Natural Products Market") is highly fragmented and totaled approximately $101.8 billion in retail sales in calendar 2008. The Natural Products Market is comprised of the following submarkets
(with estimated calendar 2008 sales indicated): (i) personal care, $10.1 billion, (ii) natural and organic foods, $29.7 billion, (iii) functional foods,
$36.8 billion, and (iv) vitamins, minerals and supplements, $25.2 billion. Historically, our primary focus has been on vitamins, minerals and supplements (the "VMS Market"), but
recently we have increased our effort in other areas within the Natural Products Market.
The
total retail VMS Market is highly fragmented with estimated sales of $25.2 billion in calendar 2008, $23.7 billion in calendar 2007 and $22.5 billion in calendar
2006. We believe that the VMS Market reached its present size due to a number of factors, including (i) interest in healthier lifestyles, living longer and living well, (ii) the
publication of research findings supporting the positive health effects of certain nutritional supplements and (iii) the aging of the "Baby Boom" generation combined with the tendency of
consumers to purchase more nutritional supplements and natural foods as they age. In recent periods, however, various publicly-traded nutritional supplement companies, as well as industry analysts,
have announced an ongoing softness in sales of nutritional supplements. We believe this continuing softness may be the result of, among other things, the lack of any recent industry-wide
"hit" products, negative press releases regarding certain ingredients and companies in the VMS Market and increased market and pricing competition, as well as competition from food and pharmaceutical
companies.
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Products
We primarily manufacture and market nutritional supplements and also sell certain other natural products. As of September 30,
2009, we sold over 4,000 SKUs, including over 700 SKUs sold internationally, under approximately 40 different brands. Our products include: (i) vitamins and minerals, (ii) herbs,
(iii) specialty formulas, (iv) personal care products, (v) homeopathics, (vi) functional foods and (vii) other products. To accommodate consumer preferences, our
products come in various formulations and delivery forms, including capsules, tablets, softgels, chewables, liquids, creams, sprays, powders and whole herbs.
We
currently market our products through a multiple brand strategy to offer more customer choice and to encourage retailers to allocate additional shelf space to our brands. We have
worked to enhance the strength of our brands by instituting business strategies that have included (i) consolidating or expanding our sales force in certain areas, as appropriate, to maximize
each brand's geographic coverage, (ii) performance and growth-based incentives for sales representatives, (iii) introducing more sophisticated management information systems, and
(iv) periodic updating to brand packaging.
We
also act as a distributor to the Healthy Foods Channel and to certain international markets for certain third-party brands.
Research and Development; Quality Control
We have a commitment to research and development and to introducing innovative products to correspond with consumer trends and
scientific research. We believe that product quality and innovation are fundamental to our long-term growth and success. Through our research and development efforts, we seek to
(i) test the safety, purity and potency of products, (ii) develop more effective and efficient means of producing ingredients for use in products, (iii) develop testing methods
for ensuring and verifying the consistency of the dosage of ingredients included in our products, (iv) develop new, more effective product delivery forms, and (v) develop new products
either by combining existing ingredients used in nutritional supplements or identifying new ingredients that can be used in nutritional supplements. Our efforts are designed to lead not only to the
development of new and improved products, but also to ensure effective manufacturing quality control measures.
We
have entered into a cooperative arrangement with Weber State University in Ogden, Utah through which, among other things, the university provides us with access to certain laboratory
space and equipment. We also conduct research and development in our own facilities. We currently employ various professionals in research and development and quality control with degrees in, among
other things, chemistry, microbiology and engineering and, in many cases, these professionals have also received training in natural health food products. In addition, we retain the services of
outside laboratories from time to time to validate our product standards and manufacturing protocols.
Our
quality control program seeks to ensure the superior quality of our products and that they are manufactured in accordance with current Good Manufacturing Practices ("GMPs"). Our
processing methods are monitored closely to ensure that only quality ingredients are used and to ensure product purity. Periodically, we retain the services of outside GMP audit and/or consulting
firm(s) to assist in our efforts to comply with GMPs.
Marketing and Sales
We believe our marketing and sales efforts help to promote demand for our products by educating retailers, who in turn educate their
customers, as to the quality and attributes of our natural nutritional supplements and other products. Our branded products are currently sold in the United States primarily in the Healthy Foods
Channel. We believe that our products are attractive to retailers in the Healthy Foods Channel due to factors such as the strength of our brand names, the breadth of our
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product
offerings, the quality and potency of our products and the availability of service, sales support and educational materials. We have developed various Internet sites (including
http://www.nutraceutical.com
) that provide information about our branded lines and the various products within each brand.
We
have included our Internet site here and elsewhere only as an inactive textual reference. The information contained on the Internet site is not incorporated by reference into this Annual Report on
Form 10-K.
We
employ a sales force dedicated to the Healthy Foods Channel. Our sales representatives regularly visit each assigned health and natural food store in their respective areas to assist
in the solicitation of orders for products and provide related product sales assistance. We monitor and periodically update our payment structure for our sales force in order to ensure that
appropriate incentives are provided for sales growth. We also sell products directly to certain retailers through our telephone customer service organization and certain products to both retailers and
distributors. We have organized our marketing and sales force under a subsidiary company, NutraBrands, Inc.
Our
marketing efforts are focused on product development, in-store marketing support and educating retailers to enhance their knowledge and awareness of our products and to
enable them to then educate their customers about our products. Our marketing efforts are designed to foster relationships with our customers in the Healthy Foods Channel and to increase retailer and
consumer awareness of our products.
Au
Naturel, Inc., a subsidiary of Nutraceutical, was formed in fiscal 1995 for the purpose of marketing and/or selling our branded products internationally. During fiscal 2009, Au
Naturel marketed products to distributors and other customers in over 60 countries. Au Naturel markets domestic branded products as well as custom labeled versions of its domestic branded products
internationally; however, many of its products must be modified to meet the specific labeling requirements of the relevant foreign country. In most foreign markets, Au Naturel sells to local
distributors. However, in certain foreign markets (including the United Kingdom, the Netherlands, Norway, Sweden and Japan), Au Naturel markets and sells its products directly to retailers. Au Naturel
is not currently selling products in Canada.
Monarch
Nutraceuticals, Inc., a subsidiary of Nutraceutical, markets branded bulk products and custom blends. Monarch conducts marketing and sales for bulk materials domestically
through a separate sales force and internationally directly to manufacturers and through distributors.
Manufacturing
Our manufacturing process generally consists of the following operations: (i) sourcing ingredients for products,
(ii) warehousing raw ingredients, (iii) measuring ingredients for inclusion in products, (iv) blending, grinding, and chilsonating ingredients into a mixture with a homogeneous
consistency and (v) encapsulating, tableting, pouring, pouching, bagging or boxing the blended mixture into the appropriate dosage form using either automatic or semiautomatic equipment. The
next step, bottling and packaging, involves placing the product in packaging with appropriate tamper-evident features and sending the packaged product to a distribution point for delivery to
retailers. We place special emphasis on quality control, including raw material verification, homogeneity testing, weight deviation measurements and package quality sampling. See "Research and
Development; Quality Control."
We
manufactured approximately 75% of our branded products in fiscal 2009, based on net sales. By manufacturing the majority of our own products, we believe that we maintain better
control over product quality and availability while also reducing production costs. Our manufacturing operations are performed primarily in our facilities located in the greater Ogden, Utah area,
although we also have a cream manufacturing operation in Phoenix, Arizona. We have a working relationship with numerous outside manufacturers, including softgel manufacturers and packagers and utilize
these outside sources from time to time. Manufacturing backlogs, to the extent they may exist from time to time, do not have
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a
material impact on delivery time to the customer. We have organized our manufacturing operations under a subsidiary company, NutraPure, Inc.
Management Information and Communication Systems
We use customized computer software systems, as well as commercially packaged software, for handling order entry and invoicing,
manufacturing, inventory management, shipping, warehouse operations, customer service inquiries, accounting operations and management information. We believe that these systems have improved operating
efficiencies and customer service.
Materials and Suppliers
We employ a purchasing staff that works with marketing, product development, formulations and quality control personnel to source raw
materials for products as well as other items purchased by us. Raw materials are sourced principally from the United States, Europe and China. Raw materials used by us are available from a variety of
suppliers and no one supplier accounted for more than 15% of our total raw material purchases in fiscal 2009. We seek to mitigate the risk of a shortage of raw materials through our relationships with
our principal suppliers, including identification of alternative suppliers for the same, or similar, raw materials where available. We also manufacture bulk branded products to allow more extensive
vertical integration and to improve the quality and consistency of raw materials.
Government Regulation
The formulation, manufacturing, packaging, labeling, advertising, distribution and sale (hereafter, "sale" or "sold" may be used to
signify all of these activities) of our products are subject to regulation by one or more federal agencies, principally the Food and Drug Administration ("FDA") and the Federal Trade Commission
("FTC"), and to a lesser extent the Consumer Product Safety Commission ("CPSC"), the United States Department of Agriculture and the Environmental Protection Agency. Our activities are also regulated
by various governmental agencies for the states and localities in which our products are sold, as well as by governmental agencies in certain countries outside the United States in which our products
are sold. Among other matters, regulation by the FDA and FTC is concerned with product safety and claims made with respect to a product's ability to provide health-related benefits. Specifically, the
FDA, under the Federal Food, Drug, and Cosmetic Act ("FDCA"), regulates the formulation, manufacturing, packaging, labeling, distribution and sale of food, including dietary supplements, and
over-the-counter drugs. The FTC regulates the advertising of these products. The National Advertising Division ("NAD") of the Council of Better Business Bureaus oversees an
industry-sponsored self-regulatory system that permits competitors to resolve disputes over advertising claims. The NAD has no enforcement authority of its own, but may refer matters that
the NAD views as violating the Federal Trade Commission Act, FDA regulations or FTC guides or rules to the FDA or FTC for further action, as appropriate.
Federal
agencies, primarily the FDA and FTC, have a variety of procedures and enforcement remedies available to them, including initiating investigations, issuing warning letters and
cease and desist orders, requiring corrective labeling or advertising, requiring consumer redress (for example, requiring that a company offer to repurchase products previously sold to consumers),
seeking injunctive relief or product seizures, imposing civil penalties or commencing criminal prosecution. In addition, certain state agencies have similar authority. These federal and state agencies
have in the past used these remedies in regulating participants in the food, dietary supplement and
over-the-counter drug industries, including the imposition of civil penalties in the millions of dollars against a few industry participants.
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The
Dietary Supplement Health and Education Act ("DSHEA") was enacted in 1994, amending the FDCA. We believe DSHEA is generally favorable to consumers and to the dietary supplement
industry. DSHEA establishes a statutory class of "dietary supplements," which includes vitamins, minerals, herbs, amino acids and other dietary ingredients for human use to supplement the diet.
Dietary ingredients marketed in the United States before October 15, 1994 may be marketed without the submission of a "new dietary ingredient" ("NDI") to the FDA. Dietary ingredients not
marketed in the United States before October 15, 1994 may require the submission of an NDI notification containing information establishing that the ingredient is reasonably expected to be safe
for its intended use at least 75 days before marketing. Among other things, DSHEA prevents the FDA from regulating dietary ingredients in dietary supplements as "food additives" and allows the
use of statements of nutritional support on product labels and in labeling. The FDA has issued final regulations under DSHEA and has indicated that further guidance and regulations are forthcoming.
Several bills to amend DSHEA in ways that would make this law less favorable to consumers and industry have been proposed in Congress.
Some
of our products are regulated as foods under the Nutritional Labeling and Education Act of 1990 ("NLEA"). The NLEA established requirements for ingredient and nutrition labeling and
labeling claims for foods. If the NLEA labeling requirements change at a future time, we may need to revise our product labeling. Most of our products are classified as dietary supplements.
On
February 11, 2004, the FDA issued a final rule, effective on April 12, 2004, banning the sale of dietary supplement products containing ephedrine alkaloids and
announcing a risk/benefit test that could potentially apply to other types of dietary supplements. We filed a lawsuit on May 3, 2004 in the Federal District Court in the State of Utah
challenging the FDA over the final rule. This litigation ended in 2007 in two related decisions. Under one of these decisions, our petition for a writ of certiorari to the U.S. Supreme Court was
denied on May 14, 2007. However, in a related decision on March 16, 2007 (which was not part of our petition for a writ of certiorari), the Federal District Court in Utah ruled in favor
of the FDA but held that the risk-benefit test announced in the FDA's final rule only applied to dietary supplements containing ephedrine alkaloids. Neither we nor the FDA appealed this
decision. We stopped shipping any products containing ephedrine alkaloids to our retail customers in April 2004. We do not currently manufacture any products containing ephedrine alkaloids.
On
October 20, 2004, the FDA announced a new strategy initiative to enforce and implement DSHEA, including a public meeting held on November 15, 2004. The FDA requested
comments on its premarket notification program for new dietary ingredients from industry, consumers, and other interested members of the public concerning the content and format requirements for new
dietary ingredients
notifications made under the FDCA and the type, quantity, and quality of information that a notifier should provide in notifications under section 413 (a)(2) of the Act. The FDA has stated that
the agency intends to issue guidance on new dietary ingredients, and it is possible that the FDA may make it more difficult for companies to market dietary supplement products that contain new dietary
ingredients. The FDA's October 20, 2004 announcement also outlined other potential strategy and enforcement initiatives relating to dietary supplements.
The
FDA issued a Final Rule on Good Manufacturing Practices ("GMPs") on June 22, 2007. Since our manufacturing subsidiary has less than 500 employees, our effective compliance
date was June 22, 2009. The GMPs cover manufacturers and holders of finished dietary supplement products, including dietary supplement products manufactured outside the United States that are
imported for sale into the United States. Among other things, the new GMPs: (a) require identity testing on all incoming dietary ingredients, (b) call for a "scientifically valid system"
for ensuring finished products meet all specifications, (c) include requirements related to process controls, including statistical sampling of finished batches for testing and requirements for
written procedures, and (d) require extensive recordkeeping. We have reviewed the GMPs and have taken steps to ensure compliance. While we believe we were in compliance on or before the
compliance date, there can be no assurance that our operations or those of our suppliers will be in compliance in all respects at all times. Additionally, there is a potential risk of increased audits
as the FDA and other regulators seek to ensure compliance with the GMPs.
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The FTC and FDA have pursued a coordinated effort to challenge what they consider to be unsubstantiated and unsafe weight-loss products, and have also
coordinated enforcement against dietary supplement claims in other areas, including children's products. Their efforts to date have focused on manufacturers and marketers as well as media outlets, and
have resulted in a significant number of investigations and enforcement actions, some resulting in civil penalties under the Federal Trade Commission Act of several million dollars.
On
December 22, 2006 Congress passed the Dietary Supplement and Nonprescription Drug Consumer Protection Act that treats dietary supplements like
over-the-counter drugs for the purposes of adverse event reporting. The regulations went into effect on December 22, 2007. These regulations, among other things, require
companies that manufacture or distribute nonprescription drugs or dietary supplements to report serious adverse events allegedly associated with their products to the FDA and institute recordkeeping
requirements for all adverse events (serious and non-serious). There is a risk that consumers, the press and government regulators could misinterpret reported serious adverse events as
evidence of causation by the ingredient or product complained of, which could lead to additional regulations, banned ingredients or products, increased insurance costs and a potential increase in
product liability litigation, among other things.
The
Food and Drug Administration Amendments Act of 2007 amended the FDCA to prohibit, with certain exceptions, the marketing of foods to which a drug or biological product has been
added. The meaning of this new provision is unclear, and FDA has requested comments on it. This new provision could have an impact on the marketing of some of our products.
The
Consumer Product Safety Improvement Act of 2008 ("CPSIA") appears to apply to all products subject to laws enforced by the CPSC. Among other things, the CPSIA requires testing and
certification of certain products and enhances the CPSC's authority to order recalls.
The
sale of our products in countries outside the United States is regulated by the governments of those countries. Our plans to commence or expand sales in those countries may be
prevented or delayed or even suspended by such regulations or by regulators in those countries. In countries in which we have distributors, compliance with such regulations is generally undertaken by
our distributors, but even in these cases we assist with such compliance and in many cases may be liable if a distributor fails to comply. These distributors are independent contractors over whom we
have limited control. In certain countries, we distribute our products through our own subsidiary or branch; in these countries we retain responsibility for compliance with all applicable regulations.
These countries currently include the United Kingdom, the Netherlands, Norway, Sweden and Japan.
Norway
is our largest international market. Norway's regulatory environment is similar to other countries in the European Union. In some countries or areas, such as the European Union
and Norway, there are new regulations or proposed regulations that may or will prohibit the sale of certain products or certain combination products (such as products containing both vitamins and
botanicals) or the use of certain common ingredients, or levels above certain established limits.
As
a result of our efforts to comply with applicable statutes and regulations, we have from time to time reformulated, eliminated or relabeled certain of our products and revised certain
provisions of our marketing and sales program. We have also suspended or halted sales in certain cases.
Competition
The Natural Products Market and the VMS Market are highly competitive. Our principal competitors in the VMS Market that sell to the
Healthy Foods Channel include a number of large, nationally known brands (such as Country Life, Enzymatic Therapy, Garden of Life, NBTY (including its Solgar brand), Natrol, Nature's Plus, Nature's
Way, Now Foods, and New Chapter) and many smaller brands, manufacturers and distributors of nutritional supplements. We have recently begun to
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focus
on the broader Natural Products Market within the Healthy Foods Channel and within that market there are a number of large, nationally known competitors, such as Hain Celestial. Because
both the Natural Products Market and the VMS Market generally have low barriers to entry, additional competitors enter the market regularly.
Private
label products of our customers also provide competition to our products. For example, a substantial portion of GNC's vitamin and mineral supplement offerings are offered under
GNC's own private label. Whole Foods, Vitamin Shoppe and many health and natural food stores also sell a portion of their offerings under their own private labels. Private label products are often
sold at a discount to branded products. The Thompson line has been positioned to meet the needs of our customers in this area of the VMS Market.
We
believe that health and natural food stores are increasingly likely to align themselves with those companies that offer a wide variety of high quality products, have a loyal consumer
base, support their brands with strong marketing and education programs and provide consistently high levels of customer service. We believe that we compete favorably with other nutritional supplement
companies because of our comprehensive line of products and brands, premium brand names, commitment to quality, ability to rapidly introduce innovative products, competitive pricing, strong and
effective sales force and distribution strategy and sophisticated marketing and promotional support. The wide variety and diversity of the forms, potencies and categories of our products are important
points of differentiation between us and many of our competitors.
With
regard to the mass market retail channel of distribution, our sales are focused primarily in limited SKUs in the Body Gold, Sayge and NaturalCare lines. All of these lines were
focused on the mass market channel when acquired. We do not consider this channel to be an area of primary focus. It is possible that as increasing numbers of companies sell nutritional supplement
products and other natural products in the mass market channels (such as Nature Made, NBTY, Schiff and Hain Celestial), these product offerings may affect sales in the Healthy Foods Channel. We also
compete with distributors that sell products to the Healthy Foods Channel as well as the mass market retail channel (such as Nature's Best, Select Nutrition and Tree of Life). In addition, several
major pharmaceutical companies continue to offer nutritional supplement lines in the mass market, including Wyeth (Centrum) and Bayer (One-A-Day). Some of these nutritional
supplements purport to use proprietary manufacturing techniques or delivery forms. Moreover, pharmaceutical companies offer prescription and over-the-counter products that are
or may be competitive with nutritional supplements, particularly with regard to certain categories of products.
Intellectual Property
We own more than 200 trademarks that have been registered with the United States Patent and Trademark Office and have filed
applications to register additional trademarks. In addition, we claim domestic trademark and service mark rights in numerous additional marks that we use. We own a number of trademark registrations in
countries outside the United States. We regard our trademarks and other proprietary rights as valuable assets and believe they make a significant positive contribution to the marketing of our
products.
We
protect our legal rights concerning our trademarks by appropriate legal action. We rely on common law trademark rights to protect our unregistered trademarks. Common law trademark
rights do not provide us with the same level of protection as afforded by a United States federal registration of a trademark. In addition, common law trademark rights are limited to the geographic
area in which the trademark is actually used. We have registered and intend to register certain trademarks in certain limited jurisdictions outside the United States where our products are sold, but
we may not register all or even some of our trademarks in every country in which we conduct business or intend to conduct business.
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We
own six U.S. patents and have filed five additional patent applications but generally do not seek patent protection for our products. We sell a number of products that include
patented ingredients. We purchase these ingredients from parties that we believe have the right to manufacture and sell those ingredients to us. However, there are a large number of patents that have
been granted or applied for in the dietary supplement industry, and there may be an increased possibility that third parties will seek to compel us and our competitors to purchase their patented
ingredients or file infringement actions. The cost of these patented ingredients is typically higher than the cost of non-patented ingredients.
We
are currently involved in various patent and trademark cases that have arisen in the ordinary course of business. See "Legal Proceedings."
Employees
At September 30, 2009, we employed approximately 655 full-time and approximately 80 part-time employees.
None of our employees is represented by a collective bargaining unit. We believe that we have a good relationship with our employees.
Available Information
The SEC maintains an Internet site (
http://www.sec.gov
) that contains reports, proxy
and information statements, and other information regarding us. Our Annual Report on Form 10-K filed with the SEC includes all exhibits required to be filed with the SEC. We make
available, free of charge, on our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all
amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such reports are available as soon as
is reasonably practicable after we electronically file such materials with the SEC. Additionally, copies of this Annual Report on Form 10-K are available without charge upon
request. Please contact us to request copies of this Annual Report on Form 10-K (435-655-6106).
Executive Officers
The following table sets forth certain information concerning our executive officers:
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
Frank W. Gay II
|
|
64
|
|
Director, Chairman of the Board and Chief Executive Officer
|
Bruce R. Hough
|
|
55
|
|
President
|
Jeffrey A. Hinrichs
|
|
52
|
|
Director, Executive Vice President, Chief Operating Officer and Secretary
|
Gary M. Hume
|
|
60
|
|
Executive Vice President
|
Stanley E. Soper
|
|
46
|
|
Vice President, Legal Affairs and Assistant Secretary
|
Cory J. McQueen
|
|
40
|
|
Vice President and Chief Financial Officer
|
Christopher B. Neuberger
|
|
43
|
|
Vice President, Marketing and Sales
|
Daren P. Peterson
|
|
47
|
|
Vice President, Operations
|
Andrew W. Seelos
|
|
42
|
|
Assistant Vice President and Controller
|
Frank W. Gay II
has served as the Chairman of our Board of Directors since our inception and as Chief Executive Officer since 1994.
Mr. Gay received a master's degree in business administration from Harvard Business School.
Bruce R. Hough
was made our President in 1994. Prior to joining Nutraceutical, Mr. Hough acted as a consultant from 1991 to 1993
and as President of Keystone Communications, a telecommunications firm, from 1987 to 1991. Mr. Hough received an associate's degree from Ricks College.
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Jeffrey A. Hinrichs
has served as our Executive Vice President and Chief Operating Officer since 1994 and as a member of our Board of
Directors since 1998. Prior to joining Nutraceutical, Mr. Hinrichs served as President of Solaray from 1993 to 1994 and as Chief Financial Officer, and in other management positions, with
Solaray from 1984 to 1993. Mr. Hinrichs received a bachelor of science degree from Weber State University.
Gary M. Hume
has served as our Executive Vice President since September 1999. Prior to joining Nutraceutical, Mr. Hume was
President and CEO of Murdock Madaus Schwabe (Nature's Way) from 1995 to 1999. Prior to joining Nature's Way, Mr. Hume was President of Tree of Life's Southwest Division for over twenty years.
Mr. Hume received a bachelor of arts from Southwestern Union College.
Stanley E. Soper
joined Nutraceutical in 1997 as Vice President, Legal Affairs. From September 1999 until March 2001, Mr. Soper
founded and was employed at a technology startup. He rejoined Nutraceutical in his previous position in March 2001. Mr. Soper was in private law practice from 1991 to 1997, most recently with
Holland & Hart LLP. Mr. Soper received a J.D. from Yale Law School.
Cory J. McQueen
joined Nutraceutical in March 1995 as Assistant Controller. Mr. McQueen became Controller in October 1997 and was
appointed Vice President in February 2001. In April 2007, Mr. McQueen became Chief Financial Officer. Prior to joining Nutraceutical, he was employed by Price Waterhouse LLP.
Mr. McQueen received a master's degree in accounting from the University of Utah and is a Certified Public Accountant.
Christopher B. Neuberger
joined Nutraceutical in August 1995 as Director of Marketing for the Premier One brand. Mr. Neuberger left
Nutraceutical from March 1997 to December 1997 while he was employed by Weider Nutrition International, Inc. Mr. Neuberger became President of NutraBrands, our marketing and sales
subsidiary in March 1999 and was appointed as our Vice President, Marketing and Sales in April 2005. Mr. Neuberger was previously employed by Melaleuca, Inc. Mr. Neuberger
received
his master's degree in business administration from Thunderbird, The Garvin School of International Management.
Daren P. Peterson
joined Nutraceutical in 1994 as Controller. Mr. Peterson served in other management positions prior to his
appointment as Vice President, Operations in March 2009. Prior to joining Nutraceutical, Mr. Peterson served in various positions with Solaray from 1985 to1994. Mr. Peterson received a
master's degree in accounting from Weber State University.
Andrew W. Seelos
joined Nutraceutical in March 1997 as Assistant Controller. Mr. Seelos was appointed Assistant Vice President and
Controller in April 2007. Prior to joining Nutraceutical, he was employed by Price Waterhouse LLP. Mr. Seelos received a master's degree in accounting from Brigham Young University and
is a Certified Public Accountant.
Item 1A. Risk Factors.
Our business routinely encounters and addresses risks, some of which may cause our future results to be
different than we currently anticipate. The risk factors described below represent our current view of some of the most important risks facing our businesses and are important to understanding our
business. The following information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and our Consolidated Financial Statements
and related notes included in this Annual Report on Form 10-K. This discussion includes a number of forward-looking statements. You should refer to the description of the
qualifications and limitations on forward-looking statements under "Special Note Regarding Forward-Looking Statements" above.
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Regulatory, Product Liability and Insurance Risks
Our products are subject to government regulation, both in the United States and abroad, which could increase our costs significantly and limit or prevent the sale of our
products.
The manufacture, packaging, labeling, advertising, promotion, distribution, and sale of our products are subject to regulation by numerous national and
local governmental agencies in the United States and other countries. The primary regulatory bodies in the United States are the FDA and FTC, and we are also subject to the Food Standards Agency and
the Department of Health in the United Kingdom and similar regulators in Norway. Failure to comply with these regulatory requirements may result in various types of penalties or fines. These include
injunctions, product withdrawals, recalls, product seizures, fines, and criminal prosecutions. Individual states also regulate nutritional supplements. A state may interpret claims or products
presumptively valid under federal law as illegal under that state's regulations. In markets outside the United States, we are usually required to obtain approvals, licenses, or certifications from a
country's ministry of health or comparable agency, as well as labeling and packaging regulations, all of which vary from country to country. Approvals or licensing may be conditioned on reformulation
of products or may be unavailable with respect to certain products or product ingredients. Any of these government agencies, as well as legislative bodies, can change existing regulations, or impose
new ones, or could take aggressive measures, causing or contributing to a variety of negative consequences, including:
-
-
requirements for the reformulation of certain or all products to meet new standards,
-
-
the recall or discontinuance of certain or all products,
-
-
additional record keeping,
-
-
expanded documentation of the properties of certain or all products,
-
-
expanded or different labeling,
-
-
adverse event tracking and reporting, and
-
-
additional scientific substantiation.
Any
or all of these requirements could have a material adverse effect on us. There can be no assurance that the regulatory environment in which we operate will not change or that such
regulatory environment, or any specific action taken against us, will not result in a material adverse effect on us.
If we experience product recalls, we may incur significant and unexpected costs, and our business reputation could be adversely affected.
We may be
exposed to product recalls and adverse public relations if our products are alleged to cause injury or illness, or if we are alleged to have violated governmental regulations. A product recall could
result in substantial and unexpected expenditures, which would reduce operating profit and cash flow. In addition, a product recall may require significant management attention. Product recalls may
hurt the value of our brands and lead to decreased demand for our products. Product recalls also may lead to increased scrutiny by federal, state or international regulatory agencies of our operations
and increased litigation and could have a material adverse effect on our business, results of operations, financial condition and cash flows.
We may experience product liability claims and litigation to prosecute such claims, and although we maintain product liability insurance, which we believe to be adequate for our
needs,
there can be no assurance that our insurance coverage will be adequate or that we will be able to maintain adequate insurance coverage.
As a manufacturer and a
distributor of products for human consumption, we experience product liability claims and litigation to prosecute such claims. Additionally, the manufacture and sale of these products involves the
risk of injury to consumers as a result of tampering by unauthorized third parties or product contamination. We carry insurance coverage in the types and amounts that we consider reasonably adequate
to cover the risks we face. Our current third-party liability policies exclude claims
11
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related
to products containing certain ingredients. We have established a captive insurance subsidiary to provide coverage for certain of our product liability risks, including excluded claims under
our other policies. We have accrued an amount using the assistance of a third-party actuary that we believe is sufficient to cover probable and reasonably estimable liabilities related to product
liability claims based on its history of such claims. However, the capitalization and income from premiums paid, both of which are contributed by us, could be inadequate to cover a claim, particularly
a material claim that arises in the first few years of the captive's operations. If insurance coverage is inadequate or unavailable or premium costs continue to rise, we may face additional claims not
covered by insurance, and claims that exceed coverage limits or that are not covered could have a material adverse effect on us.
Market and Channel Risks
Our success is linked to the size and growth rate of the vitamin, mineral and supplement market and an adverse change in the size or growth rate of that market could have a
material
adverse effect on us.
Some manufacturers in our industry have experienced a slow-down in sales of nutritional supplements. An adverse change in size or
growth rate of the vitamin, mineral and supplement market could have a material adverse effect on us. Underlying market conditions are subject to change based on economic conditions, consumer
preferences and other factors that are beyond our control, including media attention and scientific research, which may be positive or negative.
Because a substantial majority of our sales are to or through health food stores, we are dependent to a large degree upon the success of this channel as well as the success of
specific
retailers in the channel.
Over 85% of our sales are in the United States. In this market, we sell our products primarily to or through health food stores. Because
of this, we are dependent to a large degree upon the success of that channel as well as the success of specific retailers in the channel. There are some large chains of health food stores, such as
Whole Foods and Vitamin Shoppe, but most health food stores are individual stores or very small chains. We rely on these health food stores to purchase, market, and sell our products. Our success is
dependent, to a large degree, on the growth and success of the Healthy Foods Channel, which is outside our control. There can be no assurance that the Healthy Foods Channel will be able to grow or
prosper as it faces price and service pressure from other channels, including the mass market. There can be no assurance that retailers in the Healthy Foods Channel, in the aggregate, will respond or
continue to respond to our stated loyalty to this channel.
We are highly dependent upon consumers' perception of the safety and quality of our products as well as similar products distributed by other companies in our industry, and adverse
publicity and negative public perception regarding particular ingredients or products or our industry in general could limit our ability to increase revenue and grow our
business.
Decisions about purchasing made by consumers of our products may be affected by adverse publicity or negative public perception regarding particular
ingredients or products or our industry in general. This negative public perception may include publicity regarding the legality or quality of particular ingredients or products in general or of other
companies or our products or ingredients specifically. Negative public perception may also arise from regulatory investigations, regardless of whether those investigations involve us. We are highly
dependent upon consumers' perception of the safety and quality of our products as well as similar products distributed by other companies. Thus, the mere publication of reports asserting that such
products may be harmful could have a material adverse effect on us, regardless of whether these reports are scientifically
supported. Publicity related to nutritional supplements may also result in increased regulatory scrutiny of our industry and/or the healthy foods channel. Adverse publicity may have a material adverse
effect on our business, financial condition, and results of operations. There can be no assurance of future favorable scientific results and media attention or of the absence of unfavorable or
inconsistent findings.
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We face intense competition from competitors that are larger, more established and that possess greater resources than we do, and if we are unable to compete effectively, we may
be
unable to maintain sufficient market share to sustain profitability.
Numerous manufacturers and retailers compete actively for consumers. There can be no assurance
that we will be able to compete in this intensely competitive environment. In addition, nutritional supplements can be purchased in a wide variety of channels of distribution. These channels include
mass market retail stores and the Internet. Because these markets generally have low barriers to entry, additional competitors could enter the market at any time. Private label products of our
customers also provide competition to our products. Additional national or international companies may seek in the future to enter or to increase their presence in the healthy foods channel or the
vitamin, mineral supplement market. Increased competition in either or both could have a material adverse effect on us.
The nutritional supplement industry increasingly relies on intellectual property rights and although we seek to ensure that we do not infringe the intellectual property rights of
others,
there can be no assurance that third parties will not assert intellectual property infringement claims against us, which claims may result in substantial costs and diversion of management and other
resources and could have a material adverse effect on our business, financial condition, and operating results.
Recently it has become more and more common for
suppliers and competitors to apply for patents or develop proprietary technologies and processes. We seek to ensure that we do not infringe the intellectual property rights of others, but there can be
no assurance that third parties will not assert intellectual property infringement claims against us. These
developments could prevent us from offering or supplying competitive products or ingredients in the marketplace. They could also result in litigation or threatened litigation against us related to
alleged or actual infringement of third-party rights. If an infringement claim is asserted or litigation is pursued, we may be required to obtain a license of rights, pay royalties on a retrospective
or prospective basis, or terminate our manufacturing and marketing of our products that are alleged to have infringed. Litigation with respect to such matters could result in substantial costs and
diversion of management and other resources and could have a material adverse effect on our business, financial condition, and operating results.
We may be affected adversely by increased utility and fuel costs.
Increasing fuel costs may affect our results of operations
adversely in that
consumer traffic to health and natural food stores may be reduced and the costs of our sales may increase as we incur fuel costs in connection with our manufacturing operations and the transportation
of goods from our warehouse and distribution facilities to health and natural food stores. Also, high oil costs can affect the cost of our raw materials and components and the competitive environment
in which we operate may limit our ability to recover higher costs resulting from rising fuel prices.
Adverse economic conditions may harm our business.
Inflation or other changes in economic conditions that affect demand for
nutritional supplements
could adversely affect our revenue. Uncertainty about current global economic conditions poses a risk as consumers and businesses may postpone spending in response to tighter credit markets, negative
financial news and/or declines in income or asset values, each of which could have a material negative effect on the demand for our products. Other factors that could influence demand include
conditions in the residential real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence, and other macroeconomic factors affecting consumer spending behavior.
These and other economic factors could have a material adverse effect on demand for our products and on our financial condition and operating results.
The
current financial turmoil affecting the banking system and financial markets and the possibility that financial institutions may consolidate or go out of business have resulted in a
tightening in the credit markets, a low level of liquidity in many financial markets, and extreme volatility in fixed income, credit, currency and equity markets. There could be a number of
follow-on effects from the credit crisis
13
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on
our business, including interest rate changes with respect to our debt obligations, foreign currency exchange rate fluctuations and insolvency of key suppliers resulting in raw material delays and
customer insolvencies. Uncertainty about current global economic conditions could also continue to increase the volatility of our stock price.
Business Strategy and Operational Risks
If we are unable to retain key personnel, our ability to manage our business effectively and continue our growth could be negatively impacted.
Key
management employees include Frank W. Gay II, Bruce R. Hough, Jeffrey A. Hinrichs, Gary M. Hume, Stanley E. Soper, Cory J. McQueen, Christopher B. Neuberger, Daren P. Peterson, Andrew W. Seelos and
certain other employees. These key management employees are primarily responsible for our day-to-day operations, and we believe our success depends in part on our ability to
retain them and to continue to attract additional qualified individuals to our management team. We do not have an employment agreement with any of our key management employees. The loss or limitation
of the services of any of our key management employees or the inability to attract additional qualified management personnel could have a material adverse effect on our business, financial condition,
and results of operations.
As a part of our business strategy, we have made and expect to continue to make acquisitions that could disrupt our operations and harm our operating
results.
An element of our strategy includes expanding our product offerings, gaining shelf-space and gaining access to new skills and other resources through
strategic acquisitions when attractive opportunities arise. Acquiring additional businesses and the implementation of other elements of our business strategy are subject to various risks and
uncertainties. Some of these factors are within our control and some are outside our control. These risks and uncertainties include, but are not limited to, the following:
-
-
any acquisition may result in significant expenditures of cash, stock and/or management resources,
-
-
acquired businesses may not perform in accordance with expectations,
-
-
we may encounter difficulties and costs with the integration of the acquired businesses,
-
-
management's attention may be diverted from other aspects of our business,
-
-
we may face unexpected problems entering geographic and product markets in which we have limited or no direct prior
experience,
-
-
we may lose key employees of acquired or existing businesses,
-
-
we may incur liabilities and claims arising out of acquired businesses,
-
-
we may be unable to obtain financing, and
-
-
we may incur indebtedness or issue additional capital stock which could be dilutive to holders of our common stock.
There
can be no assurance that attractive acquisition opportunities will be available to us, that we will be able to obtain financing for or otherwise consummate any acquisitions or that
any acquisitions which are consummated will prove to be successful. There can be no assurance that we can successfully execute all aspects of our business strategy.
Because we depend on outside suppliers with whom we do not have long-term agreements for raw materials, we may be unable to obtain adequate supplies of raw materials for our
products at favorable prices or at all, which could result in product shortages and back orders for our products, with a resulting loss of net sales and
profitability.
We acquire all of our raw materials for the manufacture of our products from third-party suppliers. We also rely on third-party
co-packers for some of our products. We have
14
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few
agreements for the continued supply of these materials and products. A number of our products contain one or more ingredients that may only be available from a single source or supplier. Any of
our suppliers could discontinue selling to us at any time. Our suppliers or government regulators may interpret new regulations (including GMP regulations) in such a way as to cause a disruption in
our supply chain as these parties undertake increased scrutiny of raw materials and components of raw materials and products, causing certain suppliers or us to discontinue, change or suspend the sale
of certain ingredients or components. Although we believe that we could establish alternate sources for most of these materials, any delay in locating and establishing relationships with other sources
could result in product shortages and back orders for the products, with a resulting loss of net sales and profitability. We are also subject to delays associated with raw materials. These can be
caused by conditions not within our control, including:
-
-
weather,
-
-
crop conditions,
-
-
transportation interruptions,
-
-
strikes by supplier employees, and
-
-
natural disasters or other catastrophic events.
We
acquire many ingredients from suppliers outside of the United States. Purchasing these ingredients is subject to the risks generally associated with importing raw materials from other
countries, including, among other factors, delays in shipments, changes in economic and political conditions, quality assurance, tariffs, trade disputes and foreign currency fluctuations. These
factors could result in a delay in or disruption of the supply of certain raw materials. Any significant delay in or disruption of the supply of raw materials could have a material adverse effect upon
us.
Our success is dependent on the accuracy, reliability, and proper use of sophisticated and dependable information processing systems and management information technology and any
interruption in these systems could have a material adverse effect on our business, financial condition, and results of operations.
Our success is dependent on the
accuracy, reliability, and proper use of sophisticated and dependable information processing systems and management information technology. Our information technology systems are designed and selected
in order to facilitate order entry and customer billing, maintain customer records, accurately track purchases and incentive payments, manage accounting, finance and manufacturing operations, generate
reports, and provide customer service and technical support. Any interruption in these systems could have a material adverse effect on our business, financial condition, and results of operations.
Because we manufacture approximately 75% of our products, we are dependent upon the uninterrupted and efficient operation of our manufacturing facilities, which are subject to
power
failures, the breakdown, failure, or substandard performance of equipment, the improper installation or operation of equipment, natural or other disasters, and the need to comply with the requirements
or directives of government agencies, including the FDA.
We are dependent upon the uninterrupted and efficient operation of our manufacturing facilities in Ogden,
Utah as well as Phoenix, Arizona. Those operations are subject to power failures, the breakdown, failure, or substandard performance of equipment, the improper installation or operation of equipment,
natural or other disasters, and the need to comply with the requirements or directives of government agencies, including the FDA. There can be no assurance that the occurrence of these or any other
operational problems at our facility would not have a material adverse effect on our business, financial condition, and results of operations.
We are party to a number of lawsuits that arise in the ordinary course of business and may become party to others in the future.
We are party to a
number of lawsuits that arise in the ordinary course of business and may become party to others in the future. The possibility of such litigation, and its timing,
15
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is
in large part outside our control. While none of the current lawsuits in which we are involved are reasonably estimable to be material as of the date of this filing, it is possible that future
litigation could arise, or developments could occur in existing litigation, that could have material adverse effects on us.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud, which could harm our business
reputation
and cause our stock price to decline.
Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. Any failure to
implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. Inadequate
internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.
If our goodwill or amortizable intangible assets become impaired we may be required to record a significant charge to earnings.
Under generally
accepted accounting principles, we review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill and
non-amortizable intangible assets are tested for impairment at least annually. Factors that may indicate that the carrying value of our goodwill or intangible assets may not be
recoverable, include a decline in stock price and market capitalization, reduced future cash flow estimates, and slower growth rates in our industry. Our results of operations may be materially
impacted if we are required to record a significant charge due to an impairment of our goodwill or intangible assets.
We are dependent upon our lenders for financing to execute our business strategy and meet our liquidity needs and the lack of adequate financing could negatively impact our
business.
In the current volatile credit market, there is risk that any lenders, even those with strong balance sheets and sound lending practices, could fail or
refuse to honor their legal commitments and obligations under existing credit commitments, including but not limited to: extending credit up to the maximum permitted by a credit facility, allowing
access to additional credit features and otherwise accessing capital and/or honoring loan commitments. The lenders on our credit facility are Rabobank International and Wells Fargo. If our lenders
failed to honor their legal commitments under our credit facility, it could be difficult in this environment to replace our credit facility on similar terms.
Stock Market Risks
The market price for our common stock may be particularly volatile, and our stockholders may be unable to
resell their shares at a profit.
The trading price of our common stock has been subject to wide fluctuations and may continue to fluctuate in the future in
response to a variety of factors, including:
-
-
quarter-to-quarter variations in operating results,
-
-
material announcements by us or our competitors,
-
-
governmental regulatory action,
-
-
negative or positive publicity involving us or the nutritional supplement industry generally,
-
-
general economic downturns,
-
-
announcements by official or unofficial health and medical authorities,
-
-
consumer preferences generally, or
-
-
other events or factors, many of which are beyond our control.
In
addition, the stock market has historically experienced significant price and volume fluctuations, which have particularly affected the market prices of many nutritional supplement
companies and which have, in certain cases, not had a strong correlation to the operating performance of these companies.
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Stock
markets experienced unprecedented volatility in connection with the recent credit crisis. General economic conditions, such as recession or interest rate or currency rate fluctuations in the
United States or abroad, could negatively affect the market price of our common stock in the future. In addition, our operating results in future quarters may be below the expectations of securities
analysts and investors. If that were to occur, the price of our common stock would likely decline, perhaps substantially. In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been instituted against that company. Such litigation could result in substantial cost and a diversion of management's attention and
resources.
Item 1B. Unresolved Staff Comments.
We do not have any unresolved comments from the SEC staff.
Item 2. Properties.
The following table describes our principal properties as of November 30, 2009:
|
|
|
|
|
|
|
Purpose
|
|
Location
|
|
Square Footage
|
|
Rapid Response Center(1)(2)
|
|
Ogden, UT
|
|
|
410,000
|
|
Transitional warehouse(3)
|
|
Ogden, UT
|
|
|
107,550
|
|
East Coast distribution center
|
|
Wilmington, MA
|
|
|
33,500
|
|
Brand manufacturing(2)
|
|
Ogden, UT
|
|
|
31,230
|
|
Bulk manufacturing
|
|
Ogden, UT
|
|
|
17,900
|
|
Marketing and sales offices
|
|
Park City, UT
|
|
|
15,905
|
|
Personal care product manufacturing
|
|
Phoenix, AZ
|
|
|
7,248
|
|
Executive offices
|
|
Park City, UT
|
|
|
6,103
|
|
Powder and liquid manufacturing
|
|
Ogden, UT
|
|
|
5,000
|
|
Research, development and quality control
|
|
Ogden, UT
|
|
|
1,813
|
|
-
(1)
-
The
Rapid Response Center is the central facility where we are, and have been, consolidating operations. The Rapid Response Center currently includes raw
materials, manufacturing, packaging, distribution and offices.
-
(2)
-
We
own these properties. We lease all other properties identified above.
-
(3)
-
The
lease for this transitional warehouse expires in May 2010.
In
addition to these principal properties, we own or lease various other properties used in our operations.
Item 3. Legal Proceedings
As discussed in other filings and elsewhere in this Annual Report on Form 10-K, we are subject to regulation by a
number of federal, state and foreign agencies and are involved in various legal matters arising in the ordinary course of business.
We
carry insurance coverage in the types and amounts that we consider reasonably adequate to cover the risks we face in the industry in which we compete. However, our current third-party
liability policies exclude claims related to products containing kava, as well as certain other ingredients, and contain other exclusions or limitations. See "BusinessRisk Factors" and
"Management's Discussion and Analysis of Financial Conditions and Results of OperationsCaptive Insurance Company."
17
Table of Contents
We are involved in various legal matters arising in the normal course of business. In the opinion of management, the outcomes of individual regulatory and legal
matters in which we are presently involved are not probable and no estimate can be made of the range of potential gains or losses. While incapable of estimation, in the opinion of management, none of
the regulatory and legal matters in which we are involved are individually expected to have a material adverse effect on our financial position, results of operations or cash flows. However, our
aggregate liability arising from regulatory and legal proceedings related to these matters could have a material effect on our financial position, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders.
During the fourth quarter of 2009, no matters were submitted to a vote of our security holders.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock is traded on the Nasdaq National Market under the symbol "NUTR." The common stock commenced trading on the Nasdaq
National Market on February 20, 1998 upon completion of our initial public offering. The following table sets forth the high and low closing prices per share for the common stock:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
Low
|
|
2008:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
16.60
|
|
$
|
10.92
|
|
|
Second Quarter
|
|
|
13.77
|
|
|
12.06
|
|
|
Third Quarter
|
|
|
13.99
|
|
|
11.25
|
|
|
Fourth Quarter
|
|
|
12.50
|
|
|
10.60
|
|
2009:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
10.89
|
|
|
6.41
|
|
|
Second Quarter
|
|
|
8.83
|
|
|
5.67
|
|
|
Third Quarter
|
|
|
11.44
|
|
|
6.92
|
|
|
Fourth Quarter
|
|
|
12.72
|
|
|
10.05
|
|
2010:
|
|
|
|
|
|
|
|
|
First Quarter (through November 30, 2009)
|
|
|
12.66
|
|
|
10.57
|
|
Holders
As of the close of business on November 30, 2009, there were 186 holders of record of common stock and approximately 1,600
beneficial holders. The closing price of our common stock on November 30, 2009 as reported by the Nasdaq National Market was $11.95.
Dividends
Since our initial public offering, we have neither declared nor paid any cash or other dividends on our common stock and do not expect
to pay dividends for the foreseeable future. Instead, we currently intend to retain earnings to support our growth strategy and reduce indebtedness. Any future determination by us to pay dividends
will be at the discretion of our Board of Directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements and contractual restrictions,
including restrictions specified in our amended credit agreement dated September 7, 2006.
18
Table of Contents
Purchase of Equity Securities
Prior to fiscal 2009, our Board of Directors approved a share purchase program authorizing us to buy up to 2,500,000 shares of our
common stock. During the year ended September 30, 2009, our Board of Directors approved the addition of 1,000,000 shares to our previously approved share purchase program. As of
September 30, 2009, 1,207,140 shares may yet be purchased
under this program. Purchases under this program during the fiscal 2009 fourth quarter occurred in August and September as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total Number of
Shares
Purchased
|
|
Average
Price Paid
Per Share
|
|
Total Number of
Shares Purchased as
Part of Publicly
Announced Plan
|
|
Maximum Number
of Shares that
May Yet Be
Purchased
Under the Plan
|
|
8/1/09 to 8/31/09
|
|
|
310,662
|
|
$
|
12.41
|
|
|
310,662
|
|
|
|
|
9/1/09 to 9/30/09
|
|
|
46,113
|
|
$
|
11.95
|
|
|
46,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
356,775
|
|
$
|
12.35
|
|
|
356,775
|
|
|
1,207,140
|
|
|
|
|
|
|
|
|
|
|
|
|
All
shares purchased during the fiscal 2009 fourth quarter were retired on September 29, 2009.
Under
this approved share repurchase program, we may purchase common stock from time to time on the open market and in individually negotiated transactions. The amount and timing of any
purchases
will be dependent upon a number of factors, including the price and availability of our shares and general market conditions.
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes outstanding options as of September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
Plan Category
|
|
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
|
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
|
|
Number of securities
remaining available for future
issuance under equity
compensation plans
(excluding securities
reflected in column (a))
(c)
|
|
Equity compensation plans approved by security holders
|
|
|
457,917
|
|
$
|
8.85
|
|
|
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
457,917
|
|
$
|
8.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Although
options are still outstanding, the previous equity compensation plans were all terminated on September 30, 2005 so no additional options can be granted under those plans.
19
Table of Contents
Item 6. Selected Financial Data
The selected financial data presented below were derived from our Consolidated Financial Statements. This selected financial data
should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the notes thereto.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
|
|
(dollars in thousands, except per share data)
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
148,187
|
|
$
|
150,405
|
|
$
|
156,548
|
|
$
|
166,885
|
|
$
|
162,346
|
|
Cost of sales
|
|
|
71,682
|
|
|
71,191
|
|
|
71,622
|
|
|
76,106
|
|
|
77,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
76,505
|
|
|
79,214
|
|
|
84,926
|
|
|
90,779
|
|
|
85,209
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
55,123
|
|
|
55,389
|
|
|
61,905
|
|
|
66,973
|
|
|
62,195
|
|
|
Amortization of intangible assets
|
|
|
377
|
|
|
289
|
|
|
391
|
|
|
701
|
|
|
697
|
|
|
Impairment of goodwill and intangible asset(1)
|
|
|
|
|
|
|
|
|
450
|
(1)
|
|
2,875
|
(1)
|
|
37,519
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
21,005
|
|
|
23,536
|
|
|
22,180
|
|
|
20,230
|
|
|
(15,202
|
)
|
Interest and other (income)/expense, net(2)
|
|
|
647
|
|
|
(757
|
)(2)
|
|
1,257
|
|
|
1,270
|
|
|
1,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision (benefit) for income taxes
|
|
|
20,358
|
|
|
24,293
|
|
|
20,923
|
|
|
18,960
|
|
|
(16,306
|
)
|
Provision (benefit) for income taxes
|
|
|
7,838
|
|
|
9,353
|
|
|
7,951
|
|
|
7,017
|
|
|
(2,269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
12,520
|
|
$
|
14,940
|
|
$
|
12,972
|
|
$
|
11,943
|
|
$
|
(14,037
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.09
|
|
$
|
1.32
|
|
$
|
1.17
|
|
$
|
1.09
|
|
$
|
(1.29
|
)
|
|
|
Diluted
|
|
$
|
1.06
|
|
$
|
1.30
|
|
$
|
1.15
|
|
$
|
1.07
|
|
$
|
(1.29
|
)
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,520,936
|
|
|
11,332,466
|
|
|
11,054,828
|
|
|
10,993,505
|
|
|
10,841,383
|
|
|
|
Diluted
|
|
|
11,765,270
|
|
|
11,517,492
|
|
|
11,253,283
|
|
|
11,127,634
|
|
|
10,841,383
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(3)
|
|
$
|
25,353
|
|
$
|
28,063
|
|
$
|
27,423
|
|
$
|
28,964
|
|
$
|
28,948
|
|
Capital expenditures (excluding acquisitions)
|
|
|
6,844
|
|
|
14,495
|
|
|
10,467
|
|
|
17,869
|
|
|
9,176
|
|
Cash flows provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
20,639
|
|
|
16,126
|
|
|
23,768
|
|
|
20,337
|
|
|
27,781
|
|
|
Investing activities
|
|
|
(12,665
|
)
|
|
(10,090
|
)
|
|
(41,182
|
)
|
|
(23,734
|
)
|
|
(13,800
|
)
|
|
Financing activities
|
|
|
(6,735
|
)
|
|
(6,587
|
)
|
|
18,971
|
|
|
4,075
|
|
|
(13,257
|
)
|
Balance Sheet Data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3,371
|
|
$
|
2,834
|
|
$
|
4,605
|
|
$
|
5,189
|
|
$
|
5,858
|
|
Working capital
|
|
|
26,793
|
|
|
29,943
|
|
|
31,259
|
|
|
36,338
|
|
|
32,444
|
|
Total assets
|
|
|
100,905
|
|
|
107,960
|
|
|
146,402
|
|
|
161,664
|
|
|
133,960
|
|
Total debt
|
|
|
2,000
|
|
|
2,500
|
|
|
20,000
|
|
|
28,000
|
|
|
18,500
|
|
Stockholders' equity
|
|
|
82,467
|
|
|
90,782
|
|
|
105,919
|
|
|
113,460
|
|
|
95,638
|
|
-
(1)
-
During
the year ended September 30, 2007, we recorded a non-cash intangible asset impairment charge of $450 ($279 after tax, or $0.02 per
diluted share) related to the re-branding of certain health food stores. During the year ended September 30, 2008, we recorded a non-cash goodwill impairment charge of
$2,875 ($1,811 after tax, or $0.16 per diluted share) related to our health food stores reporting unit. During the year ended September 30, 2009, we recorded a non-cash goodwill
impairment charge of $37,519 ($27,288 after tax, or $2.52 per diluted share) of which $35,412 ($25,755 after tax) related to our branded reporting unit and $2,107 ($1,533 after tax) related to our
natural food markets reporting unit.
20
Table of Contents
-
(2)
-
During
the year ended September 30, 2006, we sold our 31,340 square foot building located in Park City, Utah for $4,500 in cash. At the time of sale,
the building had a book value of $3,395. A gain of $1,105 ($680 after tax, or $0.06 per diluted share) was included in other income.
-
(3)
-
"Adjusted
EBITDA" (a non-GAAP measure) is defined as earnings before net interest and other (income)/expense, taxes, depreciation, amortization
and goodwill and intangible asset impairment. Adjusted EBITDA has some inherent limitations in measuring operating performance due to the exclusion of certain financial elements such as depreciation
and amortization and is not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the method of calculation. Furthermore, Adjusted EBITDA is
not intended to be a substitute for cash flows from operating activities, as a measure of liquidity, or an alternative to net income in determining our operating performance in accordance with United
States generally accepted accounting principles. Our use of an EBITDA-based metric should be considered within the following context:
-
-
We acknowledge that plant and equipment (while less important in our line of business due to outsourcing alternatives) are
necessary to earn revenue based on our current business model.
-
-
Our use of an EBITDA-based measure of operating performance is not based on any belief about the reasonableness of
excluding depreciation when measuring financial performance.
-
-
Our use of an EBITDA-based measure is supported by its importance to the following key
stakeholders:
-
-
Analysts
who estimate our projected Adjusted EBITDA and other
EBITDA-based metrics in their independently developed financial models for investors;
-
-
Creditors
who evaluate our operating performance based on
compliance with certain EBITDA-based debt covenants;
-
-
Investment Bankers
who use EBITDA-based metrics in their
written evaluations and comparisons of companies within our industry; and
-
-
Board of Directors and Executive Management
who use
EBITDA-based metrics for evaluating management performance relative to our operating budget and bank covenant compliance, as well as our ability to service debt and raise capital for growth
opportunities, including acquisitions, which are a critical component of our stated strategy. Historically, we have recorded a monthly accrual for incentive compensation as a percentage of Adjusted
EBIDTA, which has been paid out to executive management, as well as other employees, upon completion of our annual audit.
The
following table sets forth a reconciliation of net income (loss) to Adjusted EBITDA for each period included herein:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
|
|
(dollars in thousands)
|
|
Net income (loss)
|
|
$
|
12,520
|
|
$
|
14,940
|
|
$
|
12,972
|
|
$
|
11,943
|
|
$
|
(14,037
|
)
|
Provision (benefit) for income taxes
|
|
|
7,838
|
|
|
9,353
|
|
|
7,951
|
|
|
7,017
|
|
|
(2,269
|
)
|
Interest and other (income)/expense, net(1)(2)
|
|
|
647
|
|
|
(757
|
)
|
|
1,257
|
|
|
1,270
|
|
|
1,104
|
|
Depreciation and amortization
|
|
|
4,348
|
|
|
4,527
|
|
|
4,793
|
|
|
5,859
|
|
|
6,631
|
|
Impairment of goodwill and intangible asset(3)
|
|
|
|
|
|
|
|
|
450
|
|
|
2,875
|
|
|
37,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
25,353
|
|
$
|
28,063
|
|
$
|
27,423
|
|
$
|
28,964
|
|
$
|
28,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of net sales
|
|
|
17.1
|
%
|
|
18.7
|
%
|
|
17.5
|
%
|
|
17.4
|
%
|
|
17.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Includes
amortization of deferred financing fees.
21
Table of Contents
-
(2)
-
Includes
other income of $1,105 for the year ended September 30, 2006 related to a gain on the sale of a building.
-
(3)
-
For
the year ended September 30, 2007, a non-cash intangible asset impairment charge of $450 was recorded related to the
re-branding of certain health food stores. For the year ended September 30, 2008, a non-cash goodwill impairment charge of $2,875 was recorded related to our health food
stores reporting unit. For the year ended September 30, 2009, a non-cash goodwill impairment charge of $37,519 was recorded of which $35,412 related to our branded reporting unit
and $2,107 related to our natural food markets reporting unit.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our
audited Consolidated Financial Statements and accompanying notes thereto included elsewhere in this Annual Report on Form 10-K.
Overview
We are an integrated manufacturer, marketer, distributor and retailer of branded nutritional supplements and other natural products
sold primarily to and through domestic health and natural food stores. Internationally, we market and distribute branded nutritional supplements and other natural products to and through health and
natural product distributors and retailers. Our core business strategy is to acquire, integrate and operate businesses in the natural products industry that manufacture, market and distribute branded
nutritional supplements. We believe that the consolidation and integration of these acquired businesses provides ongoing financial synergies through increased scale and market penetration, as well as
strengthened customer relationships.
We
manufacture and sell nutritional supplements and other natural products under numerous brands including
Solaray
®,
VegLife®
,
KAL
®,
Nature's
Life
®,
Sunny Green®, Action Labs®, Natural Balance
®,
NaturalMax
®,
bioAllers
®,
Herbs for
Kids
,
Natra-Bio®, NaturalCare®, Zand®, Health from the Sun®,
Life-flo®, Larénim
®,
Living Flower Essences®, Pioneer®,
Thompson®, Natural Sport®, Supplement Training Systems®, Premier One
®,
Montana Big Sky,
ActiPet®, FunFresh Foods
,
Dowd & Rogers
,
CompliMed
®,
AllVia
,
Oakmont Labs®,
Healthway®, Body Gold®, Sayge®
,
Monarch Nutraceuticals
and
Great Basin Botanicals
. Under the name
Woodland Publishing
, we publish, print
and market a line of books and booklets to, among others, book distributors, national retail bookstores and health and natural food stores. We also distribute branded products of certain third
parties.
We
own neighborhood natural food markets, which operate under the trade names
The Real Food Company
,
Thom's Natural Foods
and
Cornucopia Community Market
. We also own health food
stores, which operate under the trade names
Fresh Vitamins
and
Granola's
.
We
manufacture and/or distribute one of the broadest branded product lines in the industry with over 4,000 SKUs, including over 700 SKUs sold internationally. We believe that as a result
of our emphasis on innovation, quality, loyalty, education and customer service, our brands are widely recognized in health and natural food stores and among their customers.
We
were formed in 1993 to effect a consolidation strategy in the fragmented VMS Industry. Since our formation, we have completed twenty-six acquisitions. We believe that
Nutraceutical is well positioned to continue to capitalize on the consolidation we believe is occurring in the VMS Industry.
22
Table of Contents
Critical Accounting Policies and Estimates
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America
required us to make estimates and assumptions that affected the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements
and the reported amounts of net sales and expenses during the reported periods. Significant estimates included values and lives assigned to acquired intangible assets, reserves for customer returns
and allowances, uncollectible accounts receivable, slow moving, obsolete and/or damaged inventory and valuation and recoverability of long-lived assets. Actual results may differ from
these estimates.
Our
critical accounting policies and estimates include the following:
Accounts Receivable
Provision is made for estimated bad debts based on a periodic analysis of individual customer balances, including an evaluation of
days sales outstanding, payment history, recent payment trends and perceived credit worthiness. If general economic conditions and/or
customer financial condition were to change, additional provisions for bad debts may be required, which could have a material impact on the consolidated financial statements.
Inventories
Provision is made for slow moving, obsolete and/or damaged inventory based on a periodic analysis of individual inventory items, including
an evaluation of historical usage and/or movement, age, expiration date and general condition. If market demand and/or consumer preferences are less favorable than historical trends or future
expectations, additional provisions for slow moving, obsolete and/or damaged inventory may be required, which could have a material impact on the consolidated financial statements.
Property, Plant and Equipment
Depreciation and amortization expense is impacted by our judgments regarding the estimated useful lives of assets placed
in service. If the estimated lives of assets are significantly less than expected, depreciation and amortization expense would be accelerated, which could have a material impact on the consolidated
financial statements.
We
evaluate the recoverability of property, plant and equipment which are reviewed for possible impairment whenever events or circumstances indicate that the carrying amount of an asset
may not be recoverable. We measure recoverability of the asset by comparison of its carrying amount to the future undiscounted cash flows the asset is expected to generate. If the asset is considered
to be impaired, the difference between the carrying amount and the fair value of the impaired asset is recorded.
Goodwill and Intangible Assets
Goodwill and intangible assets require estimates and judgments in determining the initial recognition and measurement,
including factors and assumptions used in determining fair value and useful lives. Intangible assets with finite useful lives are amortized, while intangible assets with indefinite useful lives are
not amortized. Amortizable intangible assets are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill and non-amortizable
intangible assets are tested annually for impairment and are tested for impairment between annual tests if an event occurs that would cause us to believe that value is impaired. We perform our annual
impairment testing as of September 30 each year, which is the last day of our fiscal year.
A
two step process is used to test for goodwill impairment. The first step is to determine if there is an indication of impairment by comparing the estimated fair value of each reporting
unit to its carrying value, including existing goodwill. Goodwill is considered impaired if the carrying value of a reporting unit exceeds the estimated fair value. Upon an indication of impairment, a
second step is performed to measure the amount of the impairment by comparing the implied fair value of the reporting unit's goodwill with its carrying value.
23
Table of Contents
Primarily
as a result of the ongoing U.S. and global economic recession and the related turmoil in the equity markets, there was a significant and prolonged decrease in our stock price
and related market capitalization during the six months ended March 31, 2009. The ongoing economic recession also negatively impacted us during the six months ended March 31, 2009, both
domestically and internationally. Based on these factors, we determined that an interim goodwill impairment analysis was necessary and performed this goodwill impairment analysis on each of our
reporting units during the second quarter of fiscal 2009. Reporting unit fair values were determined using an equal weighting of the income approach, which estimates fair value based on expected
future discounted cash flows, and the market approach, which estimates fair value based on comparable market prices. The income approach included assumptions for, among others, forecasted revenues,
gross profit margins, operating profit margins, working capital cash flow and long-term discount rates, all of which required significant judgments by management. Long-term
discount rates used in the estimation of reporting unit fair values were determined based on the expected weighted average cost of capital for each reporting unit. Long-term discount rates
had increased since our September 30, 2008 annual impairment test due to increased risk premiums and significant tightening of the credit markets. Based on the valuation findings, we determined
that we had an indication of goodwill impairment related to our branded reporting unit and our natural food markets reporting unit in accordance with the first step of the goodwill impairment test.
We
then performed the second step of the impairment test to measure the amount of the non-cash impairment charge which was determined to be $37.5 million
($27.3 million after tax, or $2.52 per diluted share for the year ended September 30, 2009). Of this total non-cash impairment charge, $35.4 million related to our
branded reporting unit and $2.1 million related to our natural food markets reporting unit. The charge related to our branded reporting unit represented the entire carrying value of its
goodwill as of March 31, 2009. Our natural food markets reporting unit had a remaining goodwill carrying value of $0.3 million as of September 30, 2009.
Prior
to the interim assessment of goodwill impairment performed during the second quarter of fiscal 2009, we also assessed our non-amortizable intangible assets and
performed recoverability testing of our long-lived assets and determined there was no additional impairment.
For
fiscal 2008, we performed our annual goodwill impairment testing as of September 30, 2008. Reporting unit fair values were determined using the income and market approaches.
Based on the valuation findings, we determined that we had a goodwill impairment related to our health food stores reporting unit in accordance with the first step of the goodwill impairment test.
This goodwill impairment was the result of a number of factors, including (i) the adverse business climate of the specialty retail market which further declined during the quarter ended
September 30, 2008, (ii) flatness
in our health food stores sales and (iii) increased costs associated with new store openings and lease renewals.
We
then performed the second step of the impairment test to measure the amount of the non-cash impairment charge, which was determined to be $2.9 million
($1.8 million after tax, or $0.16 per diluted share). The charge represented the entire carrying value of goodwill related to our health food stores.
For
fiscal 2007, we recorded a non-cash intangible asset impairment charge of $0.5 million ($0.3 after tax, or $0.02 per diluted share) related to the
re-branding of certain of our health food stores. The charge represented the entire carrying amount of trademark and tradename intangible assets related to our health food stores.
The
fiscal 2007, 2008 and 2009 non-cash impairment charges had no impact on our compliance with debt covenants, cash flows or available liquidity.
The
ongoing uncertainty in general and economic conditions may continue to impact retail and consumer demand, as well as the market price of our common stock, and could negatively impact
our
24
Table of Contents
future
operating performance, cash flow and/or stock price and could result in additional goodwill and/or intangible asset impairment charges being recorded in future periods which could materially
impact the our consolidated financial statements. The valuation of goodwill and intangible assets is subject to a high degree of judgment and complexity.
Revenue Recognition
Revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the
product has been shipped and the customer takes ownership and assumes the risk of loss; (3) the selling price is fixed or determinable; and (4) collection of the resulting receivable is
reasonably assured. We believe that these criteria are satisfied upon shipment from our facilities or, in the case of our neighborhood natural food markets and health food stores, at the point of sale
within these stores. Revenue is reduced by provisions for estimated returns and allowances, which are based on historical averages that have not varied significantly for the periods presented, as well
as specific known claims, if any. No other significant deductions from revenue must be estimated at the point in time that revenue is recognized.
Other
than our previous discussion of goodwill and intangible asset impairment, our estimates and judgments related to our critical accounting policies, including factors and assumptions
considered in making these estimates and judgments, did not vary significantly for the periods presented and had no material impact on the consolidated financial statements as reported.
For
additional information on our accounting policies, see Note 2 of the accompanying Consolidated Financial Statements.
Results of Operations
The following table sets forth certain Consolidated Statements of Operations data as a percentage of net sales for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
September 30,
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
Net sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of sales
|
|
|
45.8
|
|
|
45.6
|
|
|
47.5
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
54.2
|
|
|
54.4
|
|
|
52.5
|
|
Selling, general and administrative
|
|
|
39.5
|
|
|
40.1
|
|
|
38.3
|
|
Amortization of intangible assets
|
|
|
0.2
|
|
|
0.4
|
|
|
0.4
|
|
Impairment of goodwill and intangible asset
|
|
|
0.3
|
|
|
1.8
|
|
|
23.1
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
14.2
|
|
|
12.1
|
|
|
(9.3
|
)
|
Interest and other (income)/expense, net
|
|
|
0.8
|
|
|
0.7
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision (benefit) for income taxes
|
|
|
13.4
|
|
|
11.4
|
|
|
(10.0
|
)
|
Provision (benefit) for income taxes
|
|
|
5.1
|
|
|
4.2
|
|
|
(1.4
|
)
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
8.3
|
%
|
|
7.2
|
%
|
|
(8.6
|
)%
|
|
|
|
|
|
|
|
|
Comparison of Fiscal 2009 to Fiscal 2008
Net Sales.
Net sales decreased by $4.6 million, or 2.7%, to $162.3 million for fiscal 2009 from $166.9 million for
fiscal 2008.
Net sales of branded nutritional supplements and other natural products decreased by $3.4 million, or 2.2%, to $146.3 million for fiscal 2009 from $149.7 million for fiscal 2008.
The decrease in net sales of branded nutritional supplements and other natural products was primarily related to a decrease in sales volume of branded products to many customers due in large part to
the U.S. and global economic recession, partially offset by the net sales contributions of the businesses acquired during fiscal 2008 and 2009. Net sales of branded products attributable to price
increases were
25
Table of Contents
$5.9 million
for fiscal 2009. Other net sales decreased $1.2 million, or 6.9%, to $16.0 million for fiscal 2009 compared to $17.2 million for fiscal 2008. The decrease in
other net sales was primarily related to
a decrease in sales volume due in large part to the U.S. economic recession as well as the closure of three health and natural food stores. We believe that the VMS Industry continues to have low
growth rates and remains very competitive.
Gross Profit.
Gross profit decreased by $5.6 million, or 6.1%, to $85.2 million for fiscal 2009 from $90.8 million for
fiscal
2008. The dollar decrease in gross profit was primarily attributable to the decrease in net sales. As a percentage of net sales, gross profit decreased to 52.5% for fiscal 2009 from 54.4% for fiscal
2008. This decrease in gross profit percentage was primarily attributable to increased material costs, primarily related to vendor price increases, as well as an increase in overhead costs as a
percentage of net sales.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses decreased by $4.8 million, or 7.1%, to
$62.2 million for fiscal 2009 from $67.0 million for fiscal 2008. As a percentage of net sales, selling, general and administrative expenses decreased to 38.3% for fiscal 2009 from 40.1%
for fiscal 2008. This decrease in selling, general and administrative expenses was primarily attributable to a reduction in operational and transitional costs related to businesses acquired in fiscal
2007 and fiscal 2008 as well as year-over-year cost improvements in many selling, general and administrative expense areas.
Amortization of Intangible Assets.
Amortization of intangibles was $0.7 million for fiscal 2009 and fiscal 2008. For each period,
amortization
expense was primarily related to intangible assets recorded in connection with acquisitions.
Impairment of Goodwill and Intangible Asset.
Primarily as a result of the ongoing U.S. and global economic recession and the related
turmoil in the
equity markets, there was a significant and prolonged decrease in our stock price and related market capitalization during the six months ended March 31, 2009. The ongoing economic recession
also negatively impacted us during this period, both domestically and internationally. Based on these factors, we determined that an interim goodwill impairment analysis was necessary and performed
this goodwill impairment analysis on each of our reporting units during the second quarter of fiscal 2009. Based on the valuation findings, we determined that we had an indication of goodwill
impairment related to our branded reporting unit and our natural food markets reporting unit in accordance with the first step of the goodwill impairment test.
We
then performed the second step of the impairment test to measure the amount of the non-cash impairment charge which was determined to be $37.5 million
($27.3 million after tax, or $2.52 per diluted share for the year ended September 30, 2009). Of this total
non-cash impairment charge, $35.4 million related to our branded reporting unit and $2.1 million related to our natural food markets reporting unit. The charge related to our
branded reporting unit represented the entire carrying value of its goodwill as of March 31, 2009. Our natural food markets reporting unit had a remaining goodwill carrying value of
$0.3 million as of September 30, 2009.
During
fiscal 2008, we recorded a non-cash goodwill impairment charge of $2.9 million ($1.8 million after tax, or $0.16 per diluted share) related to our health
food stores. The charge represented the entire goodwill carrying value of our health food stores reporting unit.
Interest and Other (Income)/Expense, Net.
Net interest and other (income)/expense was $1.1 million for fiscal 2009 and
$1.3 million for
fiscal 2008 and primarily consisted of interest expense on indebtedness under our revolving credit facility.
Provision (benefit) for Income Taxes.
During the second quarter of fiscal 2009, we recorded a non-cash goodwill impairment charge of
$37.5 million of which $11.0 million related to non-tax-deductible goodwill and reduced our effective tax rate from 37.5% to (13.9%) for the year
26
Table of Contents
ended
September 30, 2009. As a result of this goodwill impairment charge, we recognized a deferred tax benefit of $10.2 million due to the impairment of $26.5 million of
tax-deductible goodwill. Our effective tax rate was 37.0% for fiscal 2008.
Comparison of Fiscal 2008 to Fiscal 2007
Net Sales.
Net sales increased by $10.4 million, or 6.6%, to $166.9 million for fiscal 2008 from $156.5 million for
fiscal 2007.
Net sales of branded nutritional supplements and other natural products increased by $10.3 million, or 7.4%, to $149.7 million for fiscal 2008 compared to $139.4 million for
fiscal 2007. The increase in net sales of branded nutritional supplements and other natural products was
primarily related to the net sales contributions of the two businesses acquired during fiscal 2008 and the six businesses acquired during fiscal 2007, partially offset by a slight decrease in sales
volume of branded products to certain customers. The impact on net sales related to price changes was not material. Other net sales remained relatively flat at $17.2 million for fiscal 2008
compared to $17.1 million for fiscal 2007. We believe that the VMS Industry continues to have low growth rates and remains very competitive.
Gross Profit.
Gross profit increased by $5.9 million, or 6.9%, to $90.8 million for fiscal 2008 from $84.9 million for
fiscal
2007. This increase in gross profit was primarily attributable to the increase in net sales. As a percentage of net sales, gross profit remained relatively flat at 54.4% for fiscal 2008 compared to
54.2% for fiscal 2007.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses increased by $5.1 million, or 8.2%, to
$67.0 million for fiscal 2008 from $61.9 million for fiscal 2007. As a percentage of net sales, selling, general and administrative expenses increased to 40.1% for fiscal 2008 compared
to 39.5% for fiscal 2007. This increase in selling, general and administrative expenses was primarily attributable to operational and transition costs related to the two businesses acquired in fiscal
2008 and the six businesses acquired in fiscal 2007.
Amortization of Intangible Assets.
Amortization of intangibles was $0.7 million for fiscal 2008 compared to $0.4 million for
fiscal
2007. For each period, amortization expense was primarily related to intangible assets recorded in connection with acquisitions.
Impairment of Goodwill and Intangible Asset.
During fiscal 2008, we recorded a non-cash goodwill impairment charge of $2.9 million
($1.8 million after tax, or $0.16 per diluted share) related to our health food stores. The charge represented the entire goodwill carrying value of our health food stores reporting unit.
During fiscal 2007, we recorded a non-cash intangible asset impairment charge of $0.5 million ($0.3 million after tax, or $0.02 per diluted share) related to the
re-branding of certain health food stores. The charge represented the entire carrying amount of trademark and trade name intangible assets related to our health food stores.
Interest and Other (Income)/Expense, Net.
Net interest and other (income)/expense was $1.3 million for both fiscal 2008 and fiscal
2007 and
primarily consisted of interest expense on indebtedness under our revolving credit facility.
Provision for Income Taxes.
Our effective tax rate was 37.0% for fiscal 2008 and 38.0% for fiscal 2007. In each period, our effective
tax rate was
higher than the federal statutory rate primarily due to state taxes.
27
Table of Contents
Selected Quarterly Financial Data; Seasonality
The following table sets forth certain quarterly financial data for fiscal 2008 and 2009. This quarterly information is unaudited, has
been prepared on the same basis as the annual financial statements and, in our opinion, reflects all normally recurring adjustments necessary for fair presentation of the information for the periods
presented. Operating results for any quarter are not necessarily indicative of results for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
|
|
Fiscal 2009
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
|
|
(dollars in thousands, except per share data: unaudited)
|
|
Net sales
|
|
$
|
41,086
|
|
$
|
44,446
|
|
$
|
40,454
|
|
$
|
40,899
|
|
$
|
39,629
|
|
$
|
41,957
|
|
$
|
39,406
|
|
$
|
41,354
|
|
Gross profit
|
|
|
22,313
|
|
|
24,516
|
|
|
21,965
|
|
|
21,985
|
|
|
21,432
|
|
|
22,440
|
|
|
20,156
|
|
|
21,181
|
|
Net income (loss)
|
|
|
3,211
|
|
|
4,352
|
|
|
2,853
|
|
|
1,527
|
|
|
3,112
|
|
|
(23,359
|
)
|
|
3,019
|
|
|
3,191
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.29
|
|
$
|
0.39
|
|
$
|
0.26
|
|
$
|
0.14
|
|
$
|
0.29
|
|
$
|
(2.15
|
)
|
$
|
0.28
|
|
$
|
0.30
|
|
|
Diluted
|
|
$
|
0.28
|
|
$
|
0.39
|
|
$
|
0.26
|
|
$
|
0.14
|
|
$
|
0.28
|
|
$
|
(2.15
|
)
|
$
|
0.27
|
|
$
|
0.29
|
|
We
believe that our business is characterized by minor seasonality. However, 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. Excluding the effect of acquisitions, we have historically recorded higher
branded products sales volume during the second fiscal quarter due to increased interest in health-related products among consumers following the holiday season. The fiscal 2008 acquisitions were
completed during the first and second quarters and the fiscal 2009 acquisition was completed during the fourth quarter.
Liquidity and Capital Resources
As of September 30, 2009, we had cash of $5.9 million. Net cash provided by operating activities was
$27.8 million, $20.3 million and $23.8 million for the years ended September 30, 2009, 2008, and 2007, respectively. The increase in net cash provided by operating
activities in fiscal 2009 was primarily attributable to an increase in cash provided by changes in assets and liabilities, net of effects of acquisitions, partially offset by a decrease in deferred
income taxes.
Net
cash used in investing activities was $13.8 million, 23.7 million and $41.2 million for the years ended September 30, 2009, 2008, and 2007, respectively.
Our investing activities during these periods primarily consisted of acquisitions of businesses and capital expenditures.
During
the year ended September 30, 2009, we made one acquisition. On July 1, 2009, we acquired substantially all the operating assets of AJG Brands, Inc. ("Alan
James Group"), a subsidiary of Interleukin Genetics, Inc., for $4.6 million in cash. Alan James Group products include
Ginsana
®,
Ginkoba
®
and
Venastat
®.
During
the year ended September 30, 2008, we made two acquisitions. On December 12, 2007, we acquired certain assets of Dowd and Rogers, Inc. Dowd and
Rogers, Inc. manufactures and markets a line of gluten-free cake mixes. On March 20, 2008, we acquired the Health from the Sun brand of dietary supplement products by
purchasing selected assets of Arkopharma, LLC. The aggregate purchase price for these acquisitions was $5.9 million in cash.
The
fiscal 2009 and fiscal 2008 acquisitions were financed primarily using borrowings under our revolving credit facility, as well as cash provided by operating activities. These
acquisitions are in keeping with our business strategy of consolidating the fragmented industry where we compete and give
28
Table of Contents
us
nutritional brands with products we currently do not sell. The expected long-term sales and expense synergies of acquired businesses are generally not realized immediately following
acquisition as certain transition and integration matters must be completed.
Capital
expenditures during the years ended September 30, 2009, 2008, and 2007 related primarily to building improvements related to facility consolidation efforts, distribution
and manufacturing equipment and information systems.
Net
cash provided by (used in) financing activities was $(13.3) million, $4.1 million and $19.0 million for the years ended September 30, 2009, 2008 and 2007,
respectively. Our financing activities during these periods consisted primarily of borrowings and repayments under our revolving credit facility related to operating needs, purchases of common stock
for treasury and proceeds from the issuance of common stock.
In
October 2007, we registered a direct stock purchase plan with the Securities and Exchange Commission. The purpose of this direct stock purchase plan is to provide a convenient way for
existing stockholders, as well as new investors, to purchase shares of our common stock. A total of 1,500,000 shares of our common stock were registered under the plan with 22,981 and 13,043 shares
purchased during the years ended September 30, 2009 and 2008, respectively.
On
January 28, 2002, we entered into a five-year, $60 million reducing revolving credit facility. On September 7, 2006, we amended this revolving credit
facility (the "Amended Credit Agreement"). The Amended Credit Agreement extends the term of the credit facility to September 2011, resets the available credit borrowings to $60 million with no
automatic reductions and provides an accordion feature which can increase the available credit borrowings to $90 million, subject to approval by the lenders and compliance with certain
covenants and conditions. The lenders on this Amended Credit Agreement are Rabobank International and Wells Fargo. To date, we have not experienced any difficulties in accessing the available funds
under the Amended Credit Agreement. Deferred financing fees of $205 thousand related to the Amended Credit Agreement were deferred and are being amortized over the term of the Amended Credit
Agreement.
At
September 30, 2009, we had outstanding revolving credit borrowings of $18.5 million under the Amended Credit Agreement. Borrowings under the Amended Credit Agreement are
collateralized by substantially all our assets and bear interest at the applicable Eurodollar Rate plus a variable margin or at a base rate, which is the higher of the Federal Funds Rate plus 0.5% or
the Prime Lending Rate, plus a variable margin. At September 30, 2009, the applicable weighted-average interest rate for outstanding borrowings was 1.16%. We are also required to pay a variable
quarterly fee on the unused balance under the Amended Credit Agreement. At September 30, 2009, the applicable rate was 0.18%. Accrued interest on Eurodollar Rate borrowings is payable based on
elected intervals of one, two or three months. Accrued interest on base rate borrowings is payable quarterly. The Amended Credit Agreement matures on September 7, 2011, and we are required to
repay all principal and interest outstanding under the Amended Credit Agreement on such date.
The
Amended Credit Agreement contains restrictive covenants, including restrictions on incurring other indebtedness and requirements that we maintain certain financial ratios. As of
September 30, 2009, we were in compliance with these restrictive covenants. Upon the occurrence of a default or an event of default, the lender has various remedies or rights, which may include
proceeding against the collateral or requiring us to repay all amounts outstanding under the Amended Credit Agreement.
On
August 10, 2008, we entered into a one-year interest rate swap agreement covering $15.0 million of our outstanding revolving credit borrowings. The interest
rate swap had an all-in average interest rate of 4.06% and was not designated as a hedge. For the year ended September 30, 2009, the interest rate swap had an unfavorable change in fair value
of $192 thousand, which was
29
Table of Contents
included
as a component of interest and other (income)/expense in the Consolidated Statements of Operations. This swap expired on August 11, 2009 and was not renewed.
A
key component of our business strategy is to seek to make additional acquisitions, which may require that we obtain additional financing, which could include the incurrence of
substantial additional indebtedness. We believe that borrowings under the Amended Credit Agreement or a replacement credit facility, together with cash flows from operations, will be sufficient to
make required payments under the Amended Credit Agreement or any such replacement facility, and to make anticipated capital expenditures and fund working capital needs for fiscal 2010.
Our
significant non-cancelable contractual obligations as of September 30, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period
|
|
Contractual Obligations
|
|
Total
|
|
Less Than
1 Year
|
|
1-3
Years
|
|
4-5
Years
|
|
After
5 Years
|
|
|
|
(dollars in thousands)
|
|
Long-term debt
|
|
$
|
18,500
|
|
$
|
|
|
$
|
18,500
|
|
$
|
|
|
$
|
|
|
Interest on long-term debt(a)
|
|
|
621
|
|
|
318
|
|
|
303
|
|
|
|
|
|
|
|
Operating leases
|
|
|
6,395
|
|
|
3,448
|
|
|
2,605
|
|
|
299
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,516
|
|
$
|
3,766
|
|
$
|
21,408
|
|
$
|
299
|
|
$
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(a)
-
Represents
estimated interest obligations associated with our outstanding revolving credit facility balance of $18.5 million at September 30,
2009, assuming no principal payments are made before maturity, a weighted-average interest rate of 1.16% and an underutilization fee rate of 0.18%.
Captive Insurance Company
Due to increases in the number of product ingredients excluded from existing insurance policies, as well as potential increases in
coverage costs, in fiscal 2004 we established and provided funding for a wholly-owned captive insurance subsidiary, American Nutritional Casualty Insurance, Inc., which was incorporated in
Hawaii. This entity provides coverage for certain of our product liability risks, depending on the availability, pricing and terms of coverage from the traditional insurance market. We have funded
this captive insurance subsidiary with capital contributions, and we pay premiums based on actuarial estimates and input.
New Accounting Standards
In September 2006, the Financial Accounting Standards Board ("FASB") issued authoritative guidance which is included in Accounting
Standards Codification ("ASC") 820, "Fair Value Measurements and Disclosures". This guidance defines fair value, establishes a framework for measuring fair value in generally accepted accounting
principles and expands disclosures about fair value measurements. The guidance does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in prior
accounting pronouncements. In November 2007, the FASB decided to postpone for one year the effective date of this guidance for assets and liabilities
measured at fair value on a non-recurring basis. We adopted the provisions of this guidance as of October 1, 2008 for assets and liabilities measured at fair value on a recurring
basis. The adoption of this guidance did not have a material impact on our consolidated financial statements. We will adopt the guidance for assets and liabilities measured at fair value on a
non-recurring basis on October 1, 2009 and we do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In
December 2007, the FASB issued authoritative guidance included in ASC 805, "Business Combinations", which addresses fair value accounting and the related disclosure for assets and
30
Table of Contents
liabilities
acquired in a business combination and generally requires acquisition-related costs to be expensed as incurred. This guidance is effective for business acquisitions we complete after
September 30, 2009.
In
December 2007, the FASB issued authoritative guidance included in ASC 810, "Consolidation", which changes the accounting and reporting for the noncontrolling interests in a subsidiary
in consolidated financial statements. The guidance recharacterizes minority interests as noncontrolling interests and requires noncontrolling interests to be classified as a component of stockholders'
equity. This guidance is effective for us as of October 1, 2009 and requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. We do not
expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In
April 2008, the FASB issued authoritative guidance included in ASC 350, "IntangiblesGoodwill and Other", which amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a recognized intangible asset. This guidance is effective for us as of October 1, 2009 and we do not expect the adoption of
this guidance to have a material impact on our consolidated financial statements.
In
June 2009, the FASB approved the Accounting Standards Codification as the single source of authoritative non-governmental generally accepted accounting principles
("GAAP"). Rules and interpretive releases of the Securities and Exchange Commission ("SEC") are also sources of authoritative GAAP for SEC registrants. The codification did not create new accounting
and reporting guidance but rather organized and simplified existing authoritative literature. This guidance is effective for financial statements issued for interim and annual periods ending after
September 15, 2009. We adopted the codification for our annual financial statements for the period ended September 30, 2009, and as a result, all references to previous numbering of FASB
Statements have been removed from the financial statements and accompanying footnotes.
We
periodically review new accounting standards that are issued. Although some of these accounting standards may be applicable to us, we have not identified any other new standards that
we believe
merit further discussion, and we expect that none would have a significant impact on our consolidated financial statements.
Inflation
Inflation affects the cost of raw materials, goods and services used by us. In recent years, inflation has been modest. The competitive
environment somewhat limits our ability to recover higher costs resulting from inflation by raising prices. We seek to mitigate the adverse effects of inflation primarily through improved productivity
and cost containment programs. We do not believe that inflation has had a material impact on our results of operations for the periods presented, except with respect to increased costs in
manufacturing, packaging and distribution resulting from increased fuel and other petrochemical costs, as well as payroll-related costs, insurance premiums, and other costs arising from or related to
government imposed regulations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Borrowings under the Amended Credit Agreement bear interest at the applicable Eurodollar Rate plus a variable margin or at a base rate,
which is the higher of the Federal Funds Rate plus 0.5% or the Prime Lending Rate, plus a variable margin. At September 30, 2009, the applicable weighted average interest rate for borrowings
was 1.16% and we had total borrowings outstanding of $18.5 million. On August 10, 2008, we entered into a one-year interest rate swap agreement covering $15.0 million
of our outstanding revolving credit borrowings. The interest rate swap had an all-in average interest rate of 4.06%. It expired on August 11, 2009 and was not renewed.
31
Table of Contents
With
respect to our international operations, we are subject to currency fluctuations; however, we do not believe that these fluctuations would have a material adverse impact on our
financial position or results of operations because the majority of our net sales to foreign countries are transacted in U.S. dollars. Net sales to foreign countries not transacted in U.S. dollars
included sales to customers in Norway, Sweden, the U.K., the Netherlands and Japan. To date, we have not hedged any of our potential foreign currency exposures.
Item 8. Financial Statements and Supplementary Data.
The information required by Item 8 is set forth on pages F-1 through F-25 of this Annual Report
on Form 10-K. The supplemental financial information required by Item 302 of Regulation S-K is set forth in "Management's Discussion and Analysis of
Financial Condition and Results of OperationsSelected Quarterly Financial Data; Seasonality."
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
There have been no changes in our independent registered public accounting firm, PricewaterhouseCoopers LLP, or disagreements
with our accountants on matters of accounting and financial disclosure.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that
information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is
accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow for timely decisions regarding required disclosure.
In
designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of
achieving the desired control objectives, and we are required to apply our judgment in evaluating the cost-benefit relationship with respect to possible controls and procedures.
As
required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive
and principal financial officers, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the fiscal year covered by this report. Based on the
foregoing, our principal executive and principal financial officers have concluded that the Company's disclosure controls and procedures were effective.
Management's Report on Internal Control Over Financial Reporting.
We are responsible for establishing and maintaining adequate internal
control over
financial reporting as such term is defined in Exchange Act Rule 13a-15(f). In order to evaluate the effectiveness of internal control over financial reporting, we conducted an
assessment, based on the criteria in
Internal ControlIntegrated Framework
, issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
32
Table of Contents
Based on our evaluation, management concluded that we maintained effective internal control over financial reporting as of September 30, 2009, based on the
criteria in
Internal ControlIntegrated Framework
issued by the COSO. Our internal control over financial reporting as of
September 30, 2009 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Changes in Internal Control Over Financial Reporting.
There were no changes in our internal control over financial reporting that
occurred during the
last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Information required by this item with respect to our directors, our audit committee, our audit committee financial expert and
procedures by which stockholders may recommend nominees to the board of directors is set forth under the heading "The Board of Directors" in our definitive Proxy Statement for the 2010 Annual Meeting
of Stockholders (the "Proxy Statement"), to be filed with the SEC within 120 days of the end of our fiscal year, which information is incorporated herein by reference. Information required by
this item regarding our executive officers is included in Part I of this Annual Report on Form 10-K under the heading "BusinessExecutive Officers." Information
required by this item with respect to Section 16(a) beneficial ownership reporting compliance is set forth in the Proxy Statement under the heading "Section 16(a) Beneficial Ownership
Reporting Compliance," which information is incorporated herein by reference.
Code of Ethics
We have adopted a Code of Ethics within the meaning of Item 406(b) of Regulation S-K under the Exchange Act.
This Code of Ethics applies to all our directors, officers and employees. The Code of Ethics is available on our website:
www.nutraceutical.com.
Additionally, we will provide to any person, without charge, upon request, a copy of the Code of Ethics. A person may request a copy by writing to Nutraceutical International Corporation, Attn.:
Investor Relations, 1500 Kearns Boulevard, Suite B-200, Park City, Utah 84060 or by telephoning us at (435) 655-6106.
Item 11. Executive Compensation.
Information required by this item is set forth in the Proxy Statement under the heading "Executive Compensation," which information is
incorporated herein by reference (except for the Compensation Committee Report).
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information required by this item is set forth in the Proxy Statement under the heading "Principal Stockholders," which information is
incorporated herein by reference.
Item 13. Certain Relationships, Related Transactions and Director Independence.
Information required by this item is set forth in the Proxy Statement under the headings "The Board of
DirectorsCompensation Committee Interlocks and Insider Participation" and "The Board
33
Table of Contents
of
DirectorsCertain Relationships, Related Transactions and Director Independence," which information is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
Information required by this item appears in the Proxy Statement under the heading "Fees Paid to PricewaterhouseCoopers LLP" and
is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) The
following documents are filed as part of this report:
-
1.
-
All
Financial Statements:
34
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 10
th
day of December 2009.
|
|
|
|
|
|
|
NUTRACEUTICAL INTERNATIONAL CORPORATION
|
|
|
By:
|
|
/s/ FRANK W. GAY II
Frank W. Gay II
Chairman of the Board
and Chief Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on
this 10
th
day of December 2009.
|
|
|
Signature
|
|
Capacity
|
|
|
|
/s/ FRANK W. GAY II
Frank W. Gay II
|
|
Director, Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
|
/s/ JEFFREY A. HINRICHS
Jeffrey A. Hinrichs
|
|
Director, Executive Vice President, Chief Operating Officer and Secretary
|
/s/ CORY J. MCQUEEN
Cory J. McQueen
|
|
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
|
/s/ GREGORY M. BENSON
Gregory M. Benson
|
|
Director
|
/s/ MICHAEL D. BURKE
Michael D. Burke
|
|
Director
|
/s/ J. KIMO ESPLIN
J. Kimo Esplin
|
|
Director
|
/s/ JAMES D. STICE
James D. Stice
|
|
Director
|
35
Table of Contents
Nutraceutical International Corporation
Index to Consolidated Financial Statements
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
To
the Board of Directors and Shareholders
Of Nutraceutical International Corporation:
In
our opinion, the consolidated balance sheets and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss) and cash flows present fairly,
in all material respects, the financial position of Nutraceutical International Corporation and its subsidiaries at September 30, 2009 and 2008, and the results of their operations and their
cash flows for each of the three years in the period ended September 30, 2009 in conformity with accounting principles generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
September 30, 2009, based on criteria established in
Internal
ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for
these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial
statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/
PricewaterhouseCoopers LLP
Salt Lake City, UT
December 10, 2009
F-2
Table of Contents
NUTRACEUTICAL INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2008
|
|
2009
|
|
Assets
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,189
|
|
$
|
5,858
|
|
|
Accounts receivable, net
|
|
|
11,963
|
|
|
11,539
|
|
|
Inventories, net
|
|
|
33,812
|
|
|
29,238
|
|
|
Prepaid expenses and other current assets
|
|
|
2,982
|
|
|
2,344
|
|
|
Deferred income taxes
|
|
|
1,631
|
|
|
1,603
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
55,577
|
|
|
50,582
|
|
Property, plant and equipment, net
|
|
|
52,356
|
|
|
55,584
|
|
Goodwill
|
|
|
37,632
|
|
|
1,177
|
|
Intangible assets, net
|
|
|
13,153
|
|
|
14,452
|
|
Deferred income taxes, net
|
|
|
2,432
|
|
|
11,071
|
|
Other non-current assets, net
|
|
|
514
|
|
|
1,094
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
161,664
|
|
$
|
133,960
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
12,333
|
|
$
|
11,248
|
|
|
Accrued expenses
|
|
|
6,906
|
|
|
6,890
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
19,239
|
|
|
18,138
|
|
Long-term debt
|
|
|
28,000
|
|
|
18,500
|
|
Other non-current liabilities
|
|
|
965
|
|
|
1,684
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
48,204
|
|
|
38,322
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 11, 15 and 17)
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 50,000,000 shares authorized; 10,838,976 shares issued and outstanding at September 30, 2008; 10,580,782 shares issued
and outstanding at September 30, 2009
|
|
|
108
|
|
|
106
|
|
|
Additional paid-in capital
|
|
|
30,213
|
|
|
26,458
|
|
|
Retained earnings
|
|
|
82,788
|
|
|
68,751
|
|
|
Accumulated other comprehensive income
|
|
|
351
|
|
|
323
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity
|
|
|
113,460
|
|
|
95,638
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
161,664
|
|
$
|
133,960
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
F-3
Table of Contents
NUTRACEUTICAL INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended September 30,
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
Net sales
|
|
$
|
156,548
|
|
$
|
166,885
|
|
$
|
162,346
|
|
Cost of sales
|
|
|
71,622
|
|
|
76,106
|
|
|
77,137
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
84,926
|
|
|
90,779
|
|
|
85,209
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
61,905
|
|
|
66,973
|
|
|
62,195
|
|
|
Amortization of intangible assets
|
|
|
391
|
|
|
701
|
|
|
697
|
|
|
Impairment of goodwill and intangible asset (Note 7)
|
|
|
450
|
|
|
2,875
|
|
|
37,519
|
|
|
|
|
|
|
|
|
|
|
|
|
62,746
|
|
|
70,549
|
|
|
100,411
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
22,180
|
|
|
20,230
|
|
|
(15,202
|
)
|
Interest and other (income)/expense, net
|
|
|
1,257
|
|
|
1,270
|
|
|
1,104
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision (benefit) for income taxes
|
|
|
20,923
|
|
|
18,960
|
|
|
(16,306
|
)
|
Provision (benefit) for income taxes
|
|
|
7,951
|
|
|
7,017
|
|
|
(2,269
|
)
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
12,972
|
|
$
|
11,943
|
|
$
|
(14,037
|
)
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.17
|
|
$
|
1.09
|
|
$
|
(1.29
|
)
|
|
Diluted
|
|
|
1.15
|
|
|
1.07
|
|
|
(1.29
|
)
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,054,828
|
|
|
10,993,505
|
|
|
10,841,383
|
|
|
Dilutive effect of stock options
|
|
|
198,455
|
|
|
134,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
11,253,283
|
|
|
11,127,634
|
|
|
10,841,383
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
F-4
Table of Contents
NUTRACEUTICAL INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended September 30,
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
12,972
|
|
$
|
11,943
|
|
$
|
(14,037
|
)
|
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,793
|
|
|
5,859
|
|
|
6,631
|
|
|
|
Amortization of deferred financing fees
|
|
|
56
|
|
|
56
|
|
|
56
|
|
|
|
Impairment of goodwill and intangible asset
|
|
|
450
|
|
|
2,875
|
|
|
37,519
|
|
|
|
Losses on disposals of property and equipment
|
|
|
9
|
|
|
5
|
|
|
14
|
|
|
|
Deferred income taxes
|
|
|
1,927
|
|
|
509
|
|
|
(8,611
|
)
|
|
|
Changes in assets and liabilities, net of effects of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
848
|
|
|
99
|
|
|
1,495
|
|
|
|
|
Inventories, net
|
|
|
463
|
|
|
(1,375
|
)
|
|
5,089
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
(1,537
|
)
|
|
588
|
|
|
692
|
|
|
|
|
Other non-current assets, net
|
|
|
(748
|
)
|
|
544
|
|
|
(611
|
)
|
|
|
|
Accounts payable
|
|
|
1,712
|
|
|
11
|
|
|
(1,085
|
)
|
|
|
|
Accrued expenses
|
|
|
2,855
|
|
|
(779
|
)
|
|
(90
|
)
|
|
|
|
Other non-current liabilities
|
|
|
(32
|
)
|
|
2
|
|
|
719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
23,768
|
|
|
20,337
|
|
|
27,781
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of property, plant and equipment
|
|
|
|
|
|
4
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(10,467
|
)
|
|
(17,869
|
)
|
|
(9,176
|
)
|
|
Acquisitions of businesses, net of cash acquired
|
|
|
(30,715
|
)
|
|
(5,869
|
)
|
|
(4,624
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(41,182
|
)
|
|
(23,734
|
)
|
|
(13,800
|
)
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt
|
|
|
31,500
|
|
|
14,500
|
|
|
9,500
|
|
|
Payments on long-term debt
|
|
|
(14,000
|
)
|
|
(6,500
|
)
|
|
(19,000
|
)
|
|
Proceeds from issuances of common stock
|
|
|
1,151
|
|
|
476
|
|
|
516
|
|
|
Purchases of common stock for treasury
|
|
|
|
|
|
(4,469
|
)
|
|
(4,407
|
)
|
|
Tax benefit from stock option exercises
|
|
|
320
|
|
|
68
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
18,971
|
|
|
4,075
|
|
|
(13,257
|
)
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
214
|
|
|
(94
|
)
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
1,771
|
|
|
584
|
|
|
669
|
|
Cash and cash equivalents at beginning of year
|
|
|
2,834
|
|
|
4,605
|
|
|
5,189
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
4,605
|
|
$
|
5,189
|
|
$
|
5,858
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
NUTRACEUTICAL INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (LOSS)
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
|
|
|
|
|
Additional
Paid-In
Capital
|
|
Retained
Earnings
|
|
Treasury
Stock
|
|
Total
Stockholders'
Equity
|
|
|
|
Shares
|
|
Amount
|
|
Balance at October 1, 2006
|
|
|
11,013,304
|
|
$
|
110
|
|
$
|
32,665
|
|
$
|
57,840
|
|
$
|
167
|
|
$
|
|
|
$
|
90,782
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
12,972
|
|
|
|
|
|
|
|
|
12,972
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
694
|
|
|
|
|
|
694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,666
|
|
Issuances of common stock
|
|
|
123,398
|
|
|
1
|
|
|
1,150
|
|
|
|
|
|
|
|
|
|
|
|
1,151
|
|
Tax benefit from stock option exercises
|
|
|
|
|
|
|
|
|
320
|
|
|
|
|
|
|
|
|
|
|
|
320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
|
11,136,702
|
|
|
111
|
|
|
34,135
|
|
|
70,812
|
|
|
861
|
|
|
|
|
|
105,919
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
11,943
|
|
|
|
|
|
|
|
|
11,943
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(510
|
)
|
|
|
|
|
(510
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,433
|
|
Adoption of FASB guidance on uncertain tax positions
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
|
33
|
|
Issuances of common stock
|
|
|
51,424
|
|
|
|
|
|
476
|
|
|
|
|
|
|
|
|
|
|
|
476
|
|
Tax benefit from stock option exercises
|
|
|
|
|
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
68
|
|
Purchases of common stock for treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,469
|
)
|
|
(4,469
|
)
|
Retirement of common stock in treasury
|
|
|
(349,150
|
)
|
|
(3
|
)
|
|
(4,466
|
)
|
|
|
|
|
|
|
|
4,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008
|
|
|
10,838,976
|
|
|
108
|
|
|
30,213
|
|
|
82,788
|
|
|
351
|
|
|
|
|
|
113,460
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
(14,037
|
)
|
|
|
|
|
|
|
|
(14,037
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28
|
)
|
|
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,065
|
)
|
Issuances of common stock
|
|
|
98,581
|
|
|
1
|
|
|
515
|
|
|
|
|
|
|
|
|
|
|
|
516
|
|
Tax benefit from stock option exercises
|
|
|
|
|
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
134
|
|
Purchases of common stock for treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,407
|
)
|
|
(4,407
|
)
|
Retirement of common stock in treasury
|
|
|
(356,775
|
)
|
|
(3
|
)
|
|
(4,404
|
)
|
|
|
|
|
|
|
|
4,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009
|
|
|
10,580,782
|
|
$
|
106
|
|
$
|
26,458
|
|
$
|
68,751
|
|
$
|
323
|
|
$
|
|
|
$
|
95,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
1. Description of Business
Nutraceutical International Corporation (the "Company") is an integrated manufacturer, marketer, distributor and retailer of branded nutritional supplements and other natural products
sold primarily to and through domestic health and natural food stores. Internationally, the Company markets and distributes branded nutritional supplements and other natural products to and through
health and natural product distributors and retailers. The Company's core business strategy is to acquire, integrate and operate businesses in the natural products industry that manufacture, market
and distribute branded nutritional supplements. The Company believes that the consolidation and integration of these acquired businesses provides ongoing financial synergies through increased scale
and market penetration, as well as strengthened customer relationships.
The
Company manufactures and sells nutritional supplements and other natural products under numerous brands including
Solaray
®,
VegLife
®,
KAL
®,
Nature's Life
®,
Sunny
Green
®,
Action Labs
®,
Natural
Balance
®
, NaturalMax
®,
bioAllers
®,
Herbs for Kids
,
Natra-Bio
®,
NaturalCare
®,
Zand
®,
Health from the
Sun
®,
Life-flo
®,
Larénim
®,
Living Flower Essences
®,
Pioneer
®,
Thompson
®,
Natural
Sport
®,
Supplement Training Systems
®,
Premier
One
®,
Montana Big Sky
,
ActiPet
®,
FunFresh Foods
,
Dowd & Rogers
,
CompliMed
®,
AllVia
,
Oakmont
Labs
®,
Healthway
®,
Body Gold
®,
Sayge
®,
Monarch Nutraceuticals
and
Great Basin
Botanicals
. Under the name
Woodland Publishing
, the Company publishes, prints and markets a line of
books and booklets to, among others, book distributors, national retail bookstores and health and natural food stores. The Company also distributes branded products of certain third parties.
The
Company owns neighborhood natural food markets, which operate under the trade names
The Real Food Company
,
Thom's Natural Foods
and
Cornucopia Community Market
. The Company also owns
health food stores, which operate under the trade names
Fresh Vitamins
and
Granola's
.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant
intercompany transactions and balances were eliminated.
Use of Estimates
The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of
America required management to make estimates and assumptions that affected the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported
amounts of net sales and expenses during the reported periods. Significant estimates included values and lives assigned to acquired intangible assets, reserves for customer returns and allowances,
uncollectible accounts receivable, slow moving, obsolete and/or damaged inventory and valuation and recoverability of long-lived assets. Actual results may differ from these estimates.
Fair Value of Financial Instruments
The Company believes that the fair values of financial instruments, including cash and cash equivalents, accounts
receivable, accounts payable and debt, approximated their respective book values at September 30, 2008 and 2009.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and marketable securities with original maturities of three months or
less. The majority of the Company's cash and cash equivalents were held by one bank at September 30, 2009. As a result of this concentration, the
F-7
Table of Contents
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
2. Summary of Significant Accounting Policies (Continued)
Company's
cash and cash equivalents balances frequently exceed federally insured limits. The Company does not believe it is subject to any other unusual risks as a result of this concentration other
than those normally associated with commercial banking relationships.
Accounts Receivable
Provision is made for estimated bad debts based on a periodic analysis of individual customer balances, including an evaluation of
days sales outstanding, payment history, recent payment trends and perceived credit worthiness.
Inventories
Branded inventories included freight-in, materials, labor and overhead costs and were stated at the lower of cost or market,
cost being determined by a moving weighted average. Retail inventories were accounted for using the retail method. Provision is made for slow moving, obsolete and/or damaged inventory based on a
periodic analysis of individual inventory items, including an evaluation of historical usage and/or movement, age, expiration date and general condition.
Property, Plant and Equipment
Property, plant and equipment were stated at cost, less
accumulated depreciation and amortization. Depreciation and amortization were provided using the straight-line method over the estimated useful lives of the respective assets. Expenditures
for renewals and betterments were capitalized, while maintenance and repairs were charged to operations in the periods incurred. Upon sale or disposal of an asset, the historical cost and related
accumulated depreciation or amortization of such asset were removed from their respective accounts and any gain or loss was recorded in the Consolidated Statements of Operations.
The
Company evaluates the recoverability of property, plant and equipment which are reviewed for possible impairment whenever events or circumstances indicate that the carrying amount of
an asset may not be recoverable. The Company measures recoverability of the asset by comparison of its carrying amount to the future undiscounted cash flows the asset is expected to generate. If the
asset is considered to be impaired, the difference between the carrying amount and the fair value of the impaired asset is recorded.
Goodwill and Intangible Assets
The excess of purchase price over fair value of assets acquired and liabilities assumed in purchase transactions was
classified as goodwill. Intangible assets with finite useful lives are amortized while intangible assets with indefinite useful lives are not amortized. Amortizable intangible assets are reviewed for
impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill and non-amortizable intangible assets are tested annually for impairment and
are tested for impairment between annual tests if an event occurs that would cause the Company to believe that value is impaired. The Company performs its annual impairment testing as of
September 30 each year, which is the last day of the Company's fiscal year.
Derivative Instruments
Accounting Standards Codification ("ASC") 815, "Derivatives and Hedging", requires derivative instruments to be recognized as
either assets or liabilities in the balance sheet at fair value. The accounting for changes in the fair value of derivative instruments depends on their intended use and resulting hedge designation.
For derivative instruments designated as hedges, the changes in fair value are recorded in the balance sheet as a component of accumulated other comprehensive income. Changes in the fair value of
derivative instruments not designated as hedges are recorded in the Consolidated Statements of Operations, generally as a component of interest and other
F-8
Table of Contents
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
2. Summary of Significant Accounting Policies (Continued)
(income)/expense.
At September 30, 2008 and 2009, the Company had no derivative instruments designated as hedges.
Deferred Financing Fees
The Company deferred certain debt issuance costs, including bank, legal, accounting and other fees, related to the
establishment of a credit agreement (Note 10). These costs were capitalized as deferred financing fees in other non-current assets and were amortized using the
straight-line method, which approximated the effective interest rate method, based on the terms of the credit agreement.
Foreign Currency Translation
The functional currency of each of the Company's foreign subsidiaries is the local currency. All assets and liabilities
of foreign subsidiaries were translated into U.S. Dollars at fiscal year-end exchange rates. Income and expense items were translated at average exchange rates prevailing during the year.
The resulting translation adjustments, net of income taxes, were recorded in accumulated other comprehensive income, which is a component of stockholders' equity.
Revenue Recognition
Revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the
product has been shipped and the customer takes ownership and assumes the risk of loss; (3) the selling price is fixed or determinable; and (4) collection of the resulting receivable is
reasonably assured. The Company believes that these criteria are satisfied upon shipment from its facilities or, in the case of the Company's neighborhood natural food markets and health food stores,
at the point of sale within these stores. Revenue is reduced by provisions for estimated returns and allowances, which are based on historical averages that have not varied significantly for the
periods presented, as well as specific known claims, if any.
Shipping and Handling Costs
The Company incurred shipping and handling costs related to third-party freight charges, as well as internal warehousing
and order fulfillment costs. These costs were classified as selling, general and administrative expenses and totaled $9,494, $9,177 and $8,446 for the years ended September 30, 2007, 2008 and
2009, respectively.
Research and Development
The Company expensed research and development costs as incurred. For the years ended September 30, 2007, 2008 and
2009, the Company incurred $964, $1,088 and $3,022, respectively, in research and development expenditures.
Advertising
The Company expensed advertising costs the first time the respective advertising took place. These costs were included in selling, general
and administrative expenses.
Income Taxes
The Company accounted for income taxes using the asset and liability method which required the Company to record deferred tax assets and
liabilities for the differences between the financial statement and tax bases of assets and liabilities using the expected applicable future tax rates.
The
Company accounted for uncertain tax positions taken or expected to be taken in a tax return including the related financial statement recognition, measurement, reporting and
disclosure (Note 12).
Concentrations of Credit Risk
In the normal course of business, the Company provided credit terms to its customers; however, collateral was not
required. Accordingly, the Company performed
F-9
Table of Contents
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
2. Summary of Significant Accounting Policies (Continued)
credit
evaluations of its customers and maintained allowances for possible losses which, when realized, were within the range of management's expectations. From time to time, a higher concentration of
credit risk existed on outstanding accounts receivable for a select number of customers due to individual buying patterns.
New Accounting Standards
In September 2006, the Financial Accounting Standards Board ("FASB") issued authoritative guidance which is included in ASC
820, "Fair Value Measurements and Disclosures". This guidance defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures
about fair value measurements. The guidance does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in prior accounting pronouncements. In November
2007, the FASB decided to postpone for one year the effective date of this guidance for assets and liabilities measured at fair value on a non-recurring basis. The Company adopted the
provisions of this guidance as of October 1, 2008 for assets and liabilities measured at fair value on a recurring basis. The adoption of this guidance did not have a material impact on the
Company's consolidated financial statements. The Company will adopt the guidance for assets and liabilities measured at fair value on a non-recurring basis as of October 1, 2009 and
the Company does not expect this adoption to have a material impact on its consolidated financial statements.
In
December 2007, the FASB issued authoritative guidance included in ASC 805, "Business Combinations", which addresses fair value accounting and the related disclosure for assets and
liabilities acquired in a business combination and generally requires acquisition-related costs to be
expensed as incurred. This guidance is effective for business acquisitions the Company completes after September 30, 2009.
In
December 2007, the FASB issued authoritative guidance included in ASC 810, "Consolidation", which changes the accounting and reporting for the noncontrolling interests in a subsidiary
in consolidated financial statements. The guidance recharacterizes minority interests as noncontrolling interests and requires noncontrolling interests to be classified as a component of stockholders'
equity. This guidance is effective for the Company as of October 1, 2009 and requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. The
Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
In
April 2008, the FASB issued authoritative guidance included in ASC 350, "IntangiblesGoodwill and Other", which amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a recognized intangible asset. This guidance is effective for the Company as of October 1, 2009 and the Company does not
expect the adoption of this guidance to have a material impact on its consolidated financial statements.
In
June 2009, the FASB approved the Accounting Standards Codification as the single source of authoritative non-governmental generally accepted accounting principles
("GAAP"). Rules and interpretive releases of the Securities and Exchange Commission ("SEC") are also sources of authoritative GAAP for SEC registrants. The codification did not create new accounting
and reporting guidance but rather organized and simplified existing authoritative literature. This guidance is effective for financial statements issued for interim and annual periods ending after
September 15, 2009. The Company adopted the codification for its annual financial statements for the period ended
F-10
Table of Contents
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
2. Summary of Significant Accounting Policies (Continued)
September 30,
2009, and as a result, all references to previous numbering of FASB Statements have been removed from the financial statements and accompanying footnotes.
The
Company periodically reviews new accounting standards that are issued. Although some of these accounting standards may be applicable to the Company, the Company has not identified
any other new standards that it believes merit further discussion, and the Company expects that none would have a significant impact on its consolidated financial statements.
3. Acquisitions
During the year ended September 30, 2008, the Company made two acquisitions. On December 12, 2007, the Company acquired certain assets of Dowd and Rogers, Inc. for
$97 in cash. Dowd and Rogers, Inc. manufactures and markets a line of gluten-free cake mixes. On March 20, 2008, the Company acquired the
Health from
the Sun
® brand of dietary supplement products by purchasing selected assets of Arkopharma, LLC for $5,772 in cash.
During
the year ended September 30, 2009, the Company made one acquisition. On July 1, 2009, the Company acquired substantially all the operating assets of AJG
Brands, Inc. ("Alan James Group"), a subsidiary of Interleukin Genetics, Inc., for $4,624 in cash. Alan James Group products include
Ginsana
®,
Ginkoba
® and
Venastat
®.
These
acquisitions are in keeping with the Company's business strategy of consolidating the fragmented industry where it competes. These acquisitions were accounted for using the
purchase method of accounting. Accordingly, the aggregate purchase price was assigned to the assets acquired and liabilities assumed based on their fair market values at the respective dates of
acquisition. The excess of aggregate purchase price over the fair market values of the assets acquired and liabilities assumed was classified as goodwill (Note 7). The Consolidated Statements
of Operations and Consolidated Statements of Cash Flows presented herein include the activities of these acquired businesses from their respective dates of acquisition. The following reflects the
allocation of the aggregate purchase prices for the fiscal 2008 and 2009 acquisitions to the aggregate assets acquired and liabilities assumed:
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
Acquisitions
|
|
Fiscal 2009
Acquisition
|
|
Aggregate assets acquired and liabilities assumed:
|
|
|
|
|
|
|
|
|
Current assets, net
|
|
$
|
2,697
|
|
$
|
1,902
|
|
|
Property, plant and equipment
|
|
|
108
|
|
|
|
|
|
Goodwill
|
|
|
1,862
|
|
|
845
|
|
|
Intangible assets
|
|
|
1,257
|
|
|
1,960
|
|
|
Non-current assets
|
|
|
|
|
|
17
|
|
|
Current liabilities
|
|
|
(55
|
)
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
$
|
5,869
|
|
$
|
4,624
|
|
|
|
|
|
|
|
The
fiscal 2008 and fiscal 2009 acquired intangible assets included trademarks and tradenames totaling $920 and $850, respectively, which have indefinite lives and are
not subject to amortization for financial statement purposes, as well as intangible assets totaling $337 and $1,110, respectively, related to customer relationships and distribution rights, which are
being amortized over a period of 3 to
F-11
Table of Contents
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
3. Acquisitions (Continued)
9 years
for financial statement purposes. Acquired intangible assets of $1,257 related to the fiscal 2008 acquisitions and $1,960 related to the fiscal 2009 acquisition are expected to be
deductible for tax purposes over fifteen years. Goodwill, which is not subject to amortization for financial statement
purposes, of $1,862 related to the fiscal 2008 acquisitions and $845 related to the fiscal 2009 acquisition is expected to be deductible for tax purposes over fifteen years.
4. Accounts Receivable, net
Accounts receivable, net of allowances for sales returns and doubtful accounts, consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2008
|
|
2009
|
|
Accounts receivable
|
|
$
|
14,120
|
|
$
|
13,718
|
|
Less allowances
|
|
|
(2,157
|
)
|
|
(2,179
|
)
|
|
|
|
|
|
|
|
|
$
|
11,963
|
|
$
|
11,539
|
|
|
|
|
|
|
|
5. Inventories, net
Inventories, net of reserves for slow moving, obsolete and/or damaged inventory, were comprised of the following:
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2008
|
|
2009
|
|
Raw materials
|
|
$
|
12,941
|
|
$
|
12,608
|
|
Work-in-process
|
|
|
6,760
|
|
|
4,847
|
|
Finished goods
|
|
|
15,947
|
|
|
13,705
|
|
|
|
|
|
|
|
|
|
|
35,648
|
|
|
31,160
|
|
Less reserves
|
|
|
(1,836
|
)
|
|
(1,922
|
)
|
|
|
|
|
|
|
|
|
$
|
33,812
|
|
$
|
29,238
|
|
|
|
|
|
|
|
6. Property, Plant and Equipment, net
Property, plant and equipment, net, were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Estimated
Useful Life
in Years
|
|
|
|
2008
|
|
2009
|
|
Land
|
|
|
|
$
|
3,512
|
|
$
|
3,553
|
|
Buildings
|
|
30
|
|
|
42,925
|
|
|
48,591
|
|
Leasehold improvements
|
|
1 - 7
|
|
|
3,733
|
|
|
3,586
|
|
Furniture, fixtures and equipment
|
|
3 - 10
|
|
|
39,049
|
|
|
41,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89,219
|
|
|
97,606
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
(36,863
|
)
|
|
(42,022
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
52,356
|
|
$
|
55,584
|
|
|
|
|
|
|
|
|
|
F-12
Table of Contents
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
6. Property, Plant and Equipment, net (Continued)
At September 30, 2008 and 2009, the Company had no equipment under capital leases. Substantially all property, plant and equipment of the Company collateralized its debt
obligations (Note 10).
Depreciation
and amortization of property, plant and equipment totaled $4,402, $5,158 and $5,934 for the years ended September 30, 2007, 2008 and 2009, respectively.
7. Goodwill and Intangible Assets
Goodwill and non-amortizable intangible assets are tested annually for impairment and are tested for impairment between annual tests if an event occurs that would cause the
Company to believe that value is impaired. The Company performs its annual impairment testing as of September 30 each year, which is the last day of the Company's fiscal year. Amortizable
intangible assets are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable.
The
first step of the impairment test is to determine if there is an indication of impairment by comparing the estimated fair value of each reporting unit to its carrying value,
including existing goodwill. Goodwill is considered impaired if the carrying value of a reporting unit exceeds the estimated fair value. Upon an indication of impairment, a second step is performed to
measure the amount of the impairment by comparing the implied fair value of the reporting unit's goodwill with its carrying value.
During
the six months ended March 31, 2009, primarily as a result of the ongoing U.S. and global economic recession and the related turmoil in the equity markets, there was a
significant and prolonged decrease in the Company's stock price and related market capitalization. The ongoing economic recession also negatively impacted the Company during the six months ended
March 31, 2009, both domestically and internationally. Based on these factors, the Company determined that an interim
goodwill impairment analysis was necessary and performed this goodwill impairment analysis on each of its reporting units during the second quarter of fiscal 2009. Reporting unit fair values were
determined using an equal weighting of the income approach, which estimates fair value based on expected future discounted cash flows, and the market approach, which estimates fair value based on
comparable market prices. The income approach included assumptions for, among others, forecasted revenues, gross profit margins, operating profit margins, working capital cash flow and
long-term discount rates, all of which required significant judgments by management. Long-term discount rates used in the estimation of reporting unit fair values were
determined based on the expected weighted average cost of capital for each reporting unit. Long-term discount rates had increased since the Company's September 30, 2008 annual
impairment test due to increased risk premiums and significant tightening of the credit markets. Based on the valuation findings, the Company determined that it had an indication of goodwill
impairment related to its branded reporting unit and its natural food markets reporting unit in accordance with the first step of the goodwill impairment test.
The
Company then performed the second step of the impairment test to measure the amount of the non-cash impairment charge which was determined to be $37,519 ($27,288 after
tax, or $2.52 per diluted share for the year ended September 30, 2009). Of this total non-cash impairment charge, $35,412 related to the Company's branded reporting unit and $2,107
related to the Company's natural
F-13
Table of Contents
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
7. Goodwill and Intangible Assets (Continued)
food
markets reporting unit. The charge related to the Company's branded reporting unit represented the entire carrying value of its goodwill as of March 31, 2009. The Company's natural food
markets reporting unit had a remaining goodwill carrying value of $332 as of September 30, 2009.
Prior
to the interim assessment of goodwill impairment performed during the second quarter of fiscal 2009, the Company also assessed its non-amortizable intangible assets and
performed recoverability testing of its long-lived assets and determined there was no additional impairment.
For
fiscal 2008, the Company performed its annual goodwill impairment testing as of September 30, 2008. Reporting unit fair values were determined using the income and market
approaches. Based on the valuation findings, the Company determined that it had a goodwill impairment related to its health food stores reporting unit in accordance with the first step of the goodwill
impairment test. This goodwill impairment was the result of a number of factors, including (i) the adverse business climate of the specialty retail market which further declined during the
quarter ended September 30, 2008, (ii) flatness in the Company's health food stores sales and (iii) increased costs associated with new store openings and lease renewals.
The
Company then performed the second step of the impairment test to measure the amount of the non-cash impairment charge, which was determined to be $2,875 ($1,811 after
tax, or
$0.16 per diluted share). The charge represented the entire carrying value of goodwill related to the Company's health food stores reporting unit.
During
the year ended September 30, 2007, the Company recorded a non-cash intangible asset impairment charge of $450 ($279 after tax, or $0.02 per diluted share)
related to the re-branding of certain health food stores. The charge represented the entire carrying amount of trademark and tradename intangible assets related to the Company's health
food stores.
The
fiscal 2007, 2008 and 2009 non-cash impairment charges had no impact on the Company's compliance with debt covenants, cash flows or available liquidity.
The
changes in the carrying amount of goodwill for the years ended September 30, 2008 and 2009 were as follows:
|
|
|
|
|
|
|
|
Goodwill
|
|
Balance as of October 1, 2007
|
|
$
|
38,978
|
|
|
Goodwill acquired during the year
|
|
|
1,862
|
|
|
Goodwill impairment
|
|
|
(2,875
|
)
|
|
Purchase accounting adjustments related to prior acquisitions
|
|
|
(70
|
)
|
|
Foreign currency translation adjustment
|
|
|
(263
|
)
|
|
|
|
|
Balance as of September 30, 2008
|
|
|
37,632
|
|
|
Goodwill acquired during the year
|
|
|
845
|
|
|
Goodwill impairment
|
|
|
(37,519
|
)
|
|
Purchase accounting adjustments related to prior acquisitions
|
|
|
262
|
|
|
Foreign currency translation adjustment
|
|
|
(43
|
)
|
|
|
|
|
Balance as of September 30, 2009
|
|
$
|
1,177
|
|
|
|
|
|
F-14
Table of Contents
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
7. Goodwill and Intangible Assets (Continued)