UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

 

FORM 10-Q

 

 

For the transition period from            to             .

 

Commission file number:

001-14608

 

WEIDER NUTRITION INTERNATIONAL, INC.

(Exact name of Registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code:

(801) 975-5000

 

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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  ý

 

The number of shares outstanding of the Registrant’s common stock is 26,040,740 (as of March 31, 2004).

 

 

PART I.         FINANCIAL INFORMATION

 

ITEM 1.         FINANCIAL STATEMENTS

 

WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

		February 29, 2004			May 31, 2003
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	4,778		$	3,463
Receivables, net		33,371			27,592
Inventories		30,753			27,543
Prepaid expenses and other		4,418			4,312
Deferred taxes		3,564			2,908
Assets held for sale		—			5,077
Total current assets		76,884			70,895
Property and equipment, net		25,618			26,676
Other assets:
Intangible assets, net		9,916			9,738
Deposits and other assets		3,902			5,286
Notes receivable, net (Note 5)		171			2,178
Assets held for sale		—			469
Total other assets		13,989			17,671
Total assets		$	116,491		$	115,242
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	13,908		$	20,096
Accrued expenses		16,304			16,610
Current portion of long-term debt		3,394			8,057
Income taxes payable		793			173
Total current liabilities		34,399			44,936
Long-term debt		186			659
Deferred taxes		7,649			801
Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock, par value $.01 per share; shares authorized-10,000,000; no shares issued and outstanding		—			—
Class A common stock, par value $.01 per share; shares authorized-50,000,000; shares issued and outstanding-11,051,676 and 11,916,288		110			119
Class B common stock, par value $.01 per share; shares authorized-25,000,000; shares issued and outstanding-14,973,148		150			150
Additional paid-in capital		83,634			86,943
Deferred compensation costs		(698		)	(873		)
Other accumulated comprehensive loss		(3,824		)	(4,951		)
Retained deficit		(5,115		)	(12,542		)
Total stockholders’ equity		74,257			68,846
Total liabilities and stockholders’ equity		$	116,491		$	115,242

 

See notes to condensed consolidated financial statements.

 

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WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share data)

(unaudited)

 

		Three Months Ended
		February 29, 2004			February 28, 2003
Net sales		$	67,485		$	57,728
Cost of goods sold		41,895			36,844
Gross profit		25,590			20,884
Operating expenses:
Selling and marketing		12,232			11,410
General and administrative		8,073			6,645
Research and development		868			1,094
Amortization of intangible assets		146			238
Total operating expenses		21,319			19,387
Income from operations		4,271			1,497
Other income (expense):
Interest income		124			13
Interest expense		(253		)	(425		)
Other		149			163
Total other income (expense), net		20			(249		)
Income from continuing operations before income taxes		4,291			1,248
Income tax expense		1,655			491
Net income from continuing operations		2,636			757
Income (loss) from discontinued operations, net of income taxes		(71		)	51
Net income		$	2,565		$	808
Weighted average shares outstanding:
Basic		25,526,424			26,249,436
Diluted		26,542,768			26,276,692
Net income per share-basic and diluted:
Net income from continuing operations		$	0.10		$	0.03
Net income (loss) from discontinued operations		—			—
Net income		$	0.10		$	0.03
Comprehensive income		$	2,716		$	1,078

 

See notes to condensed consolidated financial statements.

 

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WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share data)

(unaudited)

 

		Nine Months Ended
		February 29, 2004			February 28, 2003
Net sales		$	191,886		$	185,073
Cost of goods sold		118,915			114,206
Gross profit		72,971			70,867
Operating expenses:
Selling and marketing		40,391			32,592
General and administrative		17,705			17,833
Research and development		3,044			2,934
Amortization of intangible assets		429			770
Total operating expenses		61,569			54,129
Income from operations		11,402			16,738
Other income (expense):
Interest income (Note 5)		852			42
Interest expense		(895		)	(2,146		)
Write-off of financing fees, including OID costs		—			(1,147		)
Other		(222		)	438
Total other expense, net		(265		)	(2,813		)
Income from continuing operations before income taxes		11,137			13,925
Income tax expense		4,288			5,562
Net income from continuing operations		6,849			8,363
Income (loss) from discontinued operations, net of income taxes		578			(786		)
Net income before cumulative effect of change in accounting principle		7,427			7,577
Cumulative effect of change in accounting principle, net of income tax benefit		—			(15,392		)
Net income (loss)		$	7,427		$	(7,815	)
Weighted average shares outstanding:
Basic		25,949,587			26,249,436
Diluted		26,821,183			26,249,436
Net income (loss) per share-basic and diluted:
Net income from continuing operations		$	0.26		$	0.32
Net income (loss) from discontinued operations		0.02			(0.03		)
Net income before cumulative effect of change in accounting principle		0.28			0.29
Cumulative effect of change in accounting principle		—			(0.59		)
Net income (loss)		$	0.28		$	(0.30	)
Comprehensive income (loss)		$	8,554		$	(7,202	)

 

See notes to condensed consolidated financial statements.

 

4

 

WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

 

		Nine Months Ended
		February 29, 2004			February 28, 2003
Cash flows from operating activities:
Net income (loss)		$	7,427		$	(7,815	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for (recovery of) bad debts		(1,243		)	439
Deferred taxes		6,192			(2,151		)
Depreciation and amortization		3,764			4,653
Interest income on settlement of notes receivable		(609		)	—
Asset impairment		—			23,321
Gain on sale of assets held for sale and property and equipment		(1,139		)	—
Amortization/write-off of financing fees, including original issue discount costs		251			1,775
Amortization of deferred compensation costs		226			160
Changes in operating assets and liabilities:
Receivables		(5,605		)	13,843
Inventories		(3,210		)	(2,379		)
Prepaid expenses and other		(106		)	(885		)
Deposits and other assets		1,047			(588		)
Accounts payable		(6,188		)	(4,111		)
Other current liabilities		786			(2,905		)
Net cash provided by operating activities		1,593			23,357
Cash flows from investing activities:
Purchase of property and equipment		(1,397		)	(1,198		)
Purchase of intangibles		—			(212		)
Proceeds from disposition of assets held for sale and property and equipment		6,875			5,400
Proceeds from sale of available-for-sale equity securities		—			1,496
Collection of notes receivable		3			140
Increase in notes receivable		—			(701		)
Net cash provided by investing activities		5,481			4,925
Cash flows from financing activities:
Issuance of common stock		325			—
Tax benefit from stock options exercised		73			—
Net change in revolving line-of-credit		—			(12,917		)
Proceeds from debt		2,704			4,317
Payments on debt		(9,282		)	(19,216		)
Net cash used in financing activities		(6,180		)	(27,816		)
Effect of exchange rate changes on cash		421			339
Increase in cash and cash equivalents		1,315			805
Cash and cash equivalents, beginning of period		3,463			2,412
Cash and cash equivalents, end of period		$	4,778		$	3,217

 

See notes to condensed consolidated financial statements.

 

5

 

WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share data)

(unaudited)

 

 

1.                                      BASIS OF PRESENTATION AND OTHER MATTERS

 

The accompanying unaudited interim condensed consolidated financial statements (“interim financial statements”) do not include all disclosures provided in our annual consolidated financial statements.  These interim financial statements should be read in conjunction with the consolidated financial statements and the footnotes thereto contained in our Annual Report on Form 10-K for the year ended May 31, 2003 as filed with the Securities and Exchange Commission.  The May 31, 2003 consolidated balance sheet was derived from audited financial statements, but all disclosures required by generally accepted accounting principles are not provided in the accompanying footnotes.  We are a majority-owned subsidiary of Weider Health and Fitness (“WHF”).

 

In our opinion, the accompanying interim financial statements contain all adjustments (which are of a normal recurring nature) necessary for a fair presentation of our financial position and results of operations.  Certain prior period amounts have been reclassified to conform with the current interim period presentation.  The results of operations and cash flows for any interim period are not necessarily indicative of the results of operations and cash flows that we may achieve for any other interim period or for the entire year.

 

Effective in our fiscal 2004 first quarter, we sold substantially all of the assets of our Haleko Venice Beach® sports apparel business to Hucke AG, a German apparel company, for cumulative net cash proceeds of approximately $6,754.  In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, the operating results for Venice Beach® are reflected as discontinued operations and the associated assets are included in assets held for sale in the accompanying condensed consolidated financial statements.  Accordingly, we recognized after-tax income from discontinued operations of approximately $578, including an after-tax gain on disposal of approximately $743.  Fiscal 2004 results from discontinued operations may subsequently be impacted by certain lease related and/or other costs, as well as by final settlement of net assets sold in the transaction.

 

Effective August 16, 2002, we issued 640,000 restricted shares of Class A common stock to certain officers and employees.  The aggregate value of the restricted shares was approximately $1,038, which we are expensing on a straight-line basis over the accompanying five-year vesting period.  In August 2003, 13,600 of these restricted shares were cancelled as a result of the voluntary termination of certain employees.

 

Effective July 26, 2002, we sold substantially all of the assets and certain associated liabilities relating to our American Body Building® and Science Foods® brands.  The impact of the sale on the fiscal 2003 first quarter operating results was not significant.

 

Effective June 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets”, which establishes new accounting and reporting standards for goodwill and other intangible assets.  (See Note 4 to Condensed Consolidated Financial Statements).

 

6

 

We disclose the effect of SFAS No. 123 “Accounting for Stock-Based Compensation”, on a proforma basis and continue to follow Accounting Principles Board (“APB”) Opinion No. 25 (as permitted by SFAS No. 123) as it relates to stock based compensation.

 

Proforma information regarding net income (loss) and net income (loss) per share is required by SFAS No. 123, as amended by SFAS No. 148, and has been determined as if we had accounted for our employee stock options and previously unvested performance units under the fair value method of SFAS No. 123.  For the purposes of proforma disclosure, the estimated fair value of the stock options is amortized to expense over the options vesting period.  Our proforma net income (loss) and net income (loss) per share were as follows:

 

		Three Months Ended						Nine Months Ended
		Feb. 29, 2004			Feb. 28, 2003			Feb. 29, 2004			Feb. 28, 2003
Net income (loss), as reported		$	2,565		$	808		$	7,427		$	(7,815	)
Net income (loss), proforma		2,482			793			7,183			(7,862		)
Basic net income (loss) per share, as reported		0.10			0.03			0.28			(0.30		)
Diluted net income (loss) per share, as reported		0.10			0.03			0.28			(0.30		)
Basic net income (loss) per share, proforma		0.10			0.03			0.28			(0.30		)
Diluted net income (loss) per share, proforma		0.09			0.03			0.27			(0.30		)

 

2.                                      RECEIVABLES, NET

 

Receivables, net, consist of the following:

 

		February 29, 2004			May 31, 2003
Trade accounts		$	39,045		$	35,242
Other		795			670
		39,840			35,912
Less allowance for doubtful accounts and sales returns		(6,469		)	(8,320		)
Total		$	33,371		$	27,592

 

3.                                      INVENTORIES

 

Inventories consist of the following:

 

		February 29, 2004			May 31, 2003
Raw materials		$	10,114		$	8,487
Work in process		3,632			1,691
Finished goods		17,007			17,365
Total		$	30,753		$	27,543

 

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4.                                      INTANGIBLE ASSETS, NET

 

Intangible assets, net, consist of the following:

 

		February 29, 2004									May 31, 2003
		Gross Carrying Amount			Accumul. Amortiz.			Net Book Value			Gross Carrying Amount			Accumul. Amortiz.			Net Book Value
Patents and trademarks		$	10,631		$	(5,061	)	$	5,570		$	9,743		$	(4,351	)	$	5,392
Goodwill		4,346			—			4,346			4,346			—			4,346
		$	14,977		$	(5,061	)	$	9,916		$	14,089		$	(4,351	)	$	9,738

 

Estimated amortization expense, assuming no changes in our intangible assets, for each of the five succeeding fiscal years, beginning with fiscal 2004, is $573 (2004), $427 (2005), $422 (2006), $388 (2007), and $383 (2008).

 

Upon the implementation of SFAS No. 142, we tested goodwill for impairment by comparing the carrying amount, including goodwill, for each of our reporting (business) units at June 1, 2002 to the estimated fair value for each of our reporting units.  We assessed the fair value of the reporting units by evaluating their current and future cash flows in comparison to our overall market capitalization.  Based on this comparison, we concluded that the net book carrying value for two of our reporting units, Active Nutrition and Haleko, exceeded their respective fair values.  For those two reporting units, we then compared the implied fair value of their respective goodwill to their respective net book carrying values to determine the asset impairment amount.  Based on this comparison, effective June 1, 2002, we recognized an impairment loss of $23,321, or an after-tax charge of $15,392, as a cumulative effect of a change in accounting principle.

 

The changes in the carrying amount of goodwill, broken down by business unit, for fiscal 2003 is as follows:

 

		Schiff® Specialty			Active Nutrition			Haleko			Total
Balance at June 1, 2002		$	4,346		$	1,843		$	21,478		$	27,667
Adoption of SFAS No. 142		—			(1,843		)	(21,478		)	(23,321		)
Balance at May 31, 2003		$	4,346		$	—		$	—		$	4,346

 

The carrying amount of goodwill did not change during the first nine months of fiscal 2004.

 

8

 

5.                                      NOTES RECEIVABLE, NET

 

Notes receivable (including accrued interest), net, were $171 and $2,178, respectively, at February 29, 2004 and May 31, 2003.  The original notes receivable are recourse, collateralized by debtors’ shares of our Class A common stock and repayable beginning in June 2002 and ending December 2006.  Certain allowances for, or adjustments to, unrealizable amounts are recognized to adjust the outstanding balances to the underlying collateral value and/or to consider other factors that may impact the valuation of the notes receivable.  If shares of our Class A common stock are received in lieu of cash payment, a portion of, or the entire amount of outstanding notes receivable, including contractually due interest thereon, is reclassified as treasury stock and/or reflected as a direct reduction of capital within stockholders’ equity.

 

In connection with collection efforts, we have been pursuing negotiations with the five note holders who are no longer employed by the company. During our fiscal 2004 first quarter, we received $68 in cash and acquired and retired 140,434 shares of our Class A common stock valued at approximately $434 as full payment of principal and interest accrued on notes due from two note holders.  During our fiscal 2004 second quarter, we received $31 in cash and acquired and retired 826,175 shares of our Class A common stock valued at approximately $3,259 as full payment of principal and interest accrued on notes due from two additional note holders.  We are continuing to pursue collection of amounts due from the remaining note holder.

 

The fiscal 2004 settlement of outstanding notes receivable resulted in the reduction of previously recognized allowances for unrealizable amounts of $1,069, reflected as a reduction of general and administrative expense, and recognition of contractually due interest income of $675, during the first two quarters of fiscal 2004.  Notes receivable balances are reflected net of aggregate allowances for unrealizable amounts of $78 and $1,304, respectively, at February 29, 2004 and May 31, 2003.

 

6.                                      OPERATING SEGMENTS

 

Our operations are organized into three business units.  These business units are the Schiff® Specialty Unit, the Active Nutrition Unit and the Haleko Unit (our primary European subsidiary).  The business units are managed independently, each with its own sales and marketing resources, and supported by product research and development, operations and technical services, and administrative functions.

 

9

 

We manufacture and market nutritional products, including a full line of specialty supplements, vitamins and minerals through our Schiff® Specialty Unit.  Schiff® Specialty Unit products are marketed primarily in the United States through mass-market distribution channels.  We manufacture and market a variety of sports nutrition, nutritional bar and weight management products through our Active Nutrition Unit.  The Active Nutrition Unit also includes certain Schiff® branded products marketed outside the United States.  Active Nutrition Unit products are marketed domestically and internationally primarily through mass market and health club and gym distribution channels.  We also manufacture and market nutritional products, including a full line of sports nutrition supplements, together with certain other nutraceuticals within our Haleko Unit.  Haleko Unit products are marketed primarily in Europe through mass market and health club and gym distribution channels.

 

The accounting policies of these business units are the same as those described in Note 1 to the consolidated financial statements in our Annual Report on Form 10-K.  We evaluate the performance of our business units based on actual and expected operating results of the respective business units.  Certain domestic assets are not allocated to the Schiff® Specialty and Active Nutrition Units.  Accordingly, asset segment information is provided on a total domestic and non-domestic basis consistent with the manner in which management evaluates the business.

 

Effective in our fiscal 2004 first quarter, we reclassified the Weider Germany branded business from our Haleko unit to our Active Nutrition unit.  Accordingly, Weider Germany branded sales are included in Active’s operating results.  Haleko continues to provide manufacturing services for the Weider Germany business and therefore also includes the sale (transfer) of these products in its stand-alone private label operating results.  These inter-business unit sales from Haleko to Active Nutrition are eliminated in the consolidated financial statements.  We have not restated the prior year business unit information to reflect this change because it was not practicable to do so.

 

Segment information for the three months ended February 29, 2004 and February 28, 2003 is summarized as follows:

 

		Net Sales			Income (Loss) From Operations			Interest Expense
2004:
Schiff® Specialty		$	45,062		$	4,001		$	193
Active Nutrition		8,723			(653		)	17
Haleko		14,929			897			73
Eliminations		(1,229		)	26			(30		)
		$	67,485		$	4,271		$	253
2003:
Schiff® Specialty		$	36,506		$	2,416		$	253
Active Nutrition		7,474			(954		)	24
Haleko		14,307			35			148
Eliminations		(559		)	—			—
		$	57,728		$	1,497		$	425

 

10

 

Segment information for the nine months ended February 29, 2004 and February 28, 2003 is summarized as follows:

 

		Net Sales			Income (Loss) From Operations			Interest Expense
2004:
Schiff® Specialty		$	119,987		$	10,236		$	595
Active Nutrition		27,901			(876		)	58
Haleko		47,958			1,966			329
Eliminations		(3,960		)	76			(87		)
		$	191,886		$	11,402		$	895
2003:
Schiff® Specialty		$	112,284		$	15,865		$	1,520
Active Nutrition		26,932			306			171
Haleko		47,912			567			455
Eliminations		(2,055		)	—			—
		$	185,073		$	16,738		$	2,146

 

Reconciliation of total assets for domestic and international operations is as follows:

 

		February 29, 2004			May 31, 2003
Total domestic assets		$	129,284		$	128,420
Total international assets		47,548			49,101
Eliminations		(60,341		)	(62,279		)
Total		$	116,491		$	115,242

 

Capital expenditures for domestic and international operations were $475 and $922, respectively, for the nine months ended February 29, 2004, and $769 and $429, respectively, for the nine months ended February 28, 2003.

 

7.                                      SALES TO MAJOR CUSTOMERS

 

Our two largest customers combined accounted for approximately 52% and 50%, respectively, of net sales for the nine months ended February 29, 2004 and February 28, 2003.  At February 29, 2004, and May 31, 2003, amounts due from these customers represented approximately 41% and 39%, respectively, of total trade accounts receivable.

 

8.                                      COMMITMENTS AND CONTINGENCIES

 

In October 2003, we were named as a defendant in Rexall v. Weider Nutrition International, Inc. and Leiner Health Products, Inc. filed in the United States District Court in the Western District of Wisconsin.  The lawsuit alleges that certain of the defendant’s joint care products infringe upon a Rexall patent relating to the percentage of excipients contained in a tablet.  We disputed the allegations and opposed the lawsuit.  In March 2004, the plaintiff dismissed their claims against us.  We have not yet resolved our counterclaims in the matter.

 

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We are currently named as a defendant in four lawsuits alleging that consumption of certain products containing ephedra that we formerly manufactured and sold caused injuries and damages to certain individuals.  We dispute the allegations and are opposing the lawsuits.  Our insurance carriers have assumed the defense of three of the matters.

 

We are currently named as a defendant, along with numerous other dietary supplement companies, in purported class actions in certain state courts alleging that the defendants sold androstenedione and other purportedly similar products in violation of certain statutes and utilized false and misleading claims and advertising.  We dispute the allegations and are opposing the lawsuits.

 

From time to time, we are involved in other claims, legal actions and governmental proceedings that arise from our business operations. Although ultimate liability cannot be determined at the present time, we believe that liability resulting from these matters, if any, after taking into consideration our insurance coverage, will not have a material adverse effect on our financial statements.

 

9.                                      RECENTLY ISSUED ACCOUNTING STANDARDS

 

In June 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 146, “Accounting for Costs Associated With Exit or Disposal Activities”, which requires that costs associated with an exit or disposal activity be recognized when the liability is incurred and nullifies EITF No. 94-3.  SFAS No. 146 is effective for any exit or disposal activities occurring after December 31, 2002. The requirements of SFAS No. 146 were applied in the accounting treatment for the disposition of Venice Beach® assets.

 

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others” (“FIN No. 45”), which addresses the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees.  FIN No. 45 also requires the guarantor to recognize a liability for the non-contingent component of the guarantee, which is the obligation to stand ready to perform in the event that specified triggering events or conditions occur.  The recognition and measurement provisions of FIN No. 45 are effective for all guarantees entered into or modified after December 31, 2002.  We have not entered into any such guarantees and therefore the adoption of this standard did not impact our consolidated financial statements.

 

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In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of SFAS No. 123”. SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation”, to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements.  We have adopted the disclosure provisions of SFAS No. 148.

 

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities”, (“FIN No. 46”) an interpretation of ARB No. 51.  FIN No. 46 addresses consolidation by business enterprises of variable interest entities.  FIN No. 46 applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date.  FIN No. 46 applies in the first year or interim period ending after December 15, 2003 to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003.  We do not have an interest in any variable interest entity and therefore the adoption of FIN No. 46 did not impact our consolidated financial statements.

 

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”, which amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133.  SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003.  The adoption of SFAS No. 149 did not have an impact on our consolidated financial statements.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liability and Equity”, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liability and equity in its statement of financial position.  SFAS No. 150 is effective for new or modified financial instruments beginning June 1, 2003, and for existing instruments beginning August 1, 2003.  The adoption of SFAS No. 150 did not have an impact on our consolidated financial statements.

 

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ITEM 2.          MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with the consolidated financial statements, including the notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q. We disclaim any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

 

General

 

Weider Nutrition International, Inc. develops, manufactures, markets, distributes and sells branded and private label vitamins, nutritional supplements and sports nutrition products in the United States and throughout the world. We offer a broad range of capsules and tablets, powdered drink mixes, ready-to-drink beverages and nutrition bars consisting of approximately 800 stock keeping units (“SKUs”).  Our portfolio of brands, including Schiff®, Weider®, Tiger’s Milk®, Multipower® and Multaben, are primarily marketed through mass market, health food store and health club and gym distribution channels.  We market our branded nutritional supplement products, both domestically and internationally, in five principal categories: specialty supplements; vitamins and minerals; sports nutrition; weight management; and nutrition bars.

 

Effective in our fiscal 2004 first quarter, we sold substantially all of the assets relating to Haleko’s Germany-based Venice Beach® sports apparel brand.  The transaction included the sale of Venice Beach® receivables, inventories, intellectual property and certain fixed assets and the assumption by the purchaser of approximately 47 Venice Beach® employees.  The cumulative net cash proceeds from the sale were approximately $6.8 million.  In accordance with SFAS No. 144, operating results for Venice Beach® are reflected as discontinued operations for all periods presented.  Fiscal 2004 results from discontinued operations may subsequently be impacted by certain lease related and/or other costs, as well as by final settlement of net assets sold in the transaction.

 

Effective in our fiscal 2004 first quarter, we reclassified the Weider Germany branded business from our Haleko unit to our Active Nutrition unit.  Accordingly, Weider Germany branded sales are included in Active’s operating results.  Haleko continues to provide manufacturing services for the Weider Germany business and therefore also includes the sale (transfer) of these products in its stand-alone private label operating results.  These inter-business unit sales from Haleko to Active Nutrition are eliminated in the consolidated financial statements.  We have not restated the prior year business unit information to reflect this change because it was not practicable to do so.

 

During the first nine months of fiscal 2004, we entered into settlement agreements with four former employees relating to certain outstanding notes due to us, including interest accrued thereon.  As a result of the respective settlement agreements, we received an aggregate of $99,000 in cash, acquired and retired a total of 966,609 shares of our Class A common stock, reversed (recovered) approximately $1.1 million of previously recognized allowances for unrealizable amounts and recognized approximately $0.7 million of contractually due interest income.

 

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For fiscal 2004, our priorities include initiatives to defend our Schiff® Move Free® business against competition, including private label, and ultimately to increase our market share in the joint care product category.  Accordingly, we expect to continue implementation of these initiatives for our Schiff® Move Free® business during the fiscal 2004 fourth quarter and into fiscal 2005.  While the focus of these considerations is to improve future profitability, no assurance can be given that our decisions relating to these initiatives will not adversely affect our results of operations or financial condition.

 

Our principal executive offices are located at 2002 South 5070 West, Salt Lake City, Utah 84104 and our telephone number is (801) 975-5000.

 

Results of Operations (unaudited)

Three Months Ended February 29, 2004 Compared to Three Months

Ended February 28, 2003

 

The following tables show comparative results for continuing operations, by business unit, for the three months ended February 29, 2004 and February 28, 2003.  Certain indirect costs, including primarily general and administrative and research and development expenses, are charged to the business units based on various allocation methodologies (in thousands).

 

		Schiff® Specialty			Active Nutrition			Haleko			Other (1)			Total
2004:
Net sales		$	45,062		$	8,723		$	14,929		$	(1,229	)	$	67,485
Cost of goods sold		28,409			5,673			9,042			(1,229		)	41,895
Gross profit		16,653			3,050			5,887			—			25,590
Operating expenses:
Selling and marketing		5,811			2,885			3,536			—			12,232
General and administrative		6,273			609			1,191			—			8,073
Research and development		546			140			182			—			868
Amortization of intangible assets		22			69			81			(26		)	146
Total operating expenses		12,652			3,703			4,990			(26		)	21,319
Income (loss) from operations		$	4,001		$	(653	)	$	897		$	26		$	4,271
2003:
Net sales		$	36,506		$	7,474		$	14,307		$	(559	)	$	57,728
Cost of goods sold		24,123			4,745			8,535			(559		)	36,844
Gross profit		12,383			2,729			5,772			—			20,884
Operating expenses:
Selling and marketing		5,162			2,691			3,557			—			11,410
General and administrative		3,906			765			1,974			—			6,645
Research and development		811			148			135			—			1,094
Amortization of intangible assets		88			79			71			—			238
Total operating expenses		9,697			3,683			5,737			—			19,387
Income (loss) from operations		$	2,416		$	(954	)	$	35		$	—		$	1,497

 

(1) Amounts include inter-business unit sales and expense eliminations.

 

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Net Sales.  Net sales increased approximately 16.9% to $67.5 million for the fiscal 2004 third quarter, from $57.7 million for the fiscal 2003 third quarter.  Overall, the increase in net sales was primarily attributable to an increase in Schiff® Specialty sales and the positive impact of foreign currency exchange rates.

 

Schiff® Specialty net sales increased approximately 23.4% to $45.1 million for the fiscal 2004 third quarter, from $36.5 million for the fiscal 2003 third quarter. The increase was primarily attributable to Schiff® Move Free® results, which were $19.2 million and $14.7 million, respectively, for the fiscal 2004 and 2003 third quarters, an approximate $2.8 million increase in quarter over quarter private label sales volume, and an increase in other branded joint category sales.

 

We began implementing our Schiff® Grow Move Free® initiative during the fiscal 2003 fourth quarter.  The initiative includes incremental selling and marketing support intended to both defend our Move Free® business against competition, including private label, and ultimately to increase our market share in the joint care product category.  We believe our overall fiscal 2004 third quarter Move Free® and other branded joint category sales results benefited from the incremental investment, and are growing in certain domestic distribution channels.  We believe our fiscal 2004 fourth quarter Move Free® net sales will also reflect an increase as compared to the prior year quarter, although at a lower growth rate than the fiscal 2004 third quarter.

 

Active Nutrition net sales increased approximately 16.7% to $8.7 million for the fiscal 2004 third quarter, from $7.5 million for the fiscal 2003 third quarter.  The increase was primarily attributable to an increase in international sales due to the reclassification/inclusion of $2.0 million in Weider Germany branded sales (a portion of which is also included in Haleko private label sales before inter-business unit eliminations) and the positive impact of foreign currency exchange rates.  This increase was partially offset by a reduction in domestic Weider branded sales due to challenges in obtaining distribution for new products and maintaining distribution for current products.  Prior to fiscal 2004, Weider Germany branded sales were included only in Haleko’s operating results.

 

Haleko net sales, including the significant positive impact of foreign currency exchange rates, increased approximately 4.3% to $14.9 million for the fiscal 2004 third quarter, from $14.3 million for the fiscal 2003 third quarter.  Excluding foreign currency exchange rates, net sales decreased by approximately 13.1%, primarily due to competitive pressures and economic conditions.  Economic conditions in Germany continue to decline and may negatively impact operating results in our Haleko business unit for the foreseeable future.

 

Gross Profit.  Gross profit increased approximately 22.5% to $25.6 million for the fiscal 2004 third quarter, from $20.9 million for the fiscal 2003 third quarter.  The increase primarily resulted from higher margins in our Schiff® Specialty unit.  Gross profit, as a percentage of net sales, was 37.9% for the fiscal 2004 third quarter, compared to 36.2% for the fiscal 2003 third quarter.  Gross profit percentage increased in our Schiff® Specialty unit and decreased moderately in our Active Nutrition and Haleko business units.

 

Schiff® Specialty gross profit increased approximately 34.5% to $16.7 million for the fiscal 2004 third quarter, from $12.4 million for the fiscal 2003 third quarter.  Gross profit, as a percentage of net sales, was 37.0% for the fiscal 2004 third quarter, compared to 33.9% for the fiscal 2003 third quarter.  The percentage increase resulted primarily from an increase in higher margin Schiff® Move Free® and other joint product sales, which more than offset the impact of reduced margins on the increase in private label sales volumes.  Reductions in sales returns and

 

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inventory related charges, partially offset by increased sales incentives due to incremental promotional spending, also contributed to the increase in gross profit percentage.

 

Active Nutrition gross profit increased approximately 11.8% to $3.1 million for the fiscal 2004 third quarter, from $2.7 million for the fiscal 2003 third quarter, primarily resulting from the impact of foreign currency exchange rates.  Gross profit, as a percentage of net sales, was 35.0% for the fiscal 2004 third quarter, compared to 36.5% for the fiscal 2003 third quarter.  The decrease was primarily attributable to the inclusion of lower margin Weider Germany sales.

 

Haleko gross profit was relatively constant for the fiscal 2004 third quarter, compared to the fiscal 2003 third quarter.  Gross profit, as a percentage of net sales, was 39.4% for the fiscal 2004 third quarter, compared to 40.3% for the fiscal 2003 third quarter.  The modest percentage decrease was primarily attributable to an increase in lower margin private label sales.

 

Operating Expenses.  Operating expenses increased approximately 10.0% to $21.3 million for the fiscal 2004 third quarter, from $19.4 million for the fiscal 2003 third quarter.  The overall increase resulted primarily from an increase in general and administrative expenses and increases in selling and marketing expenses due to higher sales volumes and continuing support for our brand building initiatives.

 

Selling and marketing expenses, including sales, marketing, advertising, freight and other costs, increased to approximately $12.2 million for the fiscal 2004 third quarter, from $11.4 million for the fiscal 2003 third quarter.  The increase in selling and marketing expenses resulted primarily from incremental marketing costs associated with our long-term Move Free® strategy and related brand building initiatives.

 

General and administrative expenses increased to approximately $8.1 million for the fiscal 2004 third quarter, from $6.6 million for the fiscal 2003 third quarter, primarily resulting from the settlement of, and fees associated with, certain domestic legal matters.  Aggregate legal related costs increased approximately $2.5 million for the fiscal 2004 third quarter, as compared to the fiscal 2003 third quarter.  The increase was partially offset by a decrease in software license fees and personnel costs in our Haleko business unit.

 

Research and development costs decreased to approximately $0.9 million for the fiscal 2004 third quarter, from $1.1 million for the fiscal 2003 third quarter, primarily resulting from reductions in certain new product development costs and consulting fees.

 

Other Income/Expense.  Other income/expense, net, was negligible for the fiscal 2004 third quarter, compared to $0.2 million expense for the fiscal 2003 third quarter.  Interest income increased as a result of collection of amounts related to WHF’s guarantee of a certain ex-officer’s obligations to us.  Interest expense decreased as a result of lower aggregate indebtedness.

 

Provision for Income Taxes. Provision for income taxes was $1.7 million for the fiscal 2004 third quarter, compared to $0.5 million for the fiscal 2003 third quarter.  The change resulted primarily from an increase in pre-tax income, partially offset by a modest reduction in our effective tax rate.

 

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Results of Operations (unaudited)

Nine Months Ended February 29, 2004 Compared to Nine Months

Ended February 28, 2003

 

The following tables show comparative results for continuing operations, by business unit, for the nine months ended February 29, 2004 and February 28, 2003.  Certain indirect costs, including primarily general and administrative and research and development expenses, are charged to the business units based on various allocation methodologies (in thousands).

 

		Schiff® Specialty			Active Nutrition			Haleko			Other (1)			Total
2004:
Net sales		$	119,987		$	27,901		$	47,958		$	(3,960	)	$	191,886
Cost of goods sold		76,875			16,727			29,273			(3,960		)	118,915
Gross profit		43,112			11,174			18,685			—			72,971
Operating expenses:
Selling and marketing		19,178			9,015			12,198			—			40,391
General and administrative		11,605			2,370			3,730			—			17,705
Research and development		2,029			458			557			—			3,044
Amortization of intangible assets		64			207			234			(76		)	429
Total operating expenses		32,876			12,050			16,719			(76		)	61,569
Income (loss) from operations		$	10,236		$	(876	)	$	1,966		$	76		$	11,402
2003:
Net sales		$	112,284		$	26,932		$	47,912		$	(2,055	)	$	185,073
Cost of goods sold		70,448			15,905			29,908			(2,055		)	114,206
Gross profit		41,836			11,027			18,004			—			70,867
Operating expenses:
Selling and marketing		13,834			7,577			11,181			—			32,592
General and administrative		9,784			2,432			5,617			—			17,833
Research and development		2,098			400			436			—			2,934
Amortization of intangible assets		255			312			203			—			770
Total operating expenses		25,971			10,721			17,437			—			54,129
Income from operations		$	15,865		$	306		$	567		$	—		$	16,738

 

(1) Amounts include inter-business unit sales and expense eliminations.

 

Net Sales.  Net sales increased approximately 3.7% to $191.9 million for the nine months ended February 29, 2004, from $185.1 million for the nine months ended February 28, 2003.  Overall, the increase in net sales was primarily attributable to an increase in branded sales in our Schiff® Specialty business unit and the positive impact of foreign currency exchange rates, partially offset by a reduction in sales volume in our Haleko unit and the fiscal 2003 first quarter sale of our American Body Building® and Science Foods® brands.  Fiscal 2003 net sales of American Body Building® and Science Foods® branded products, prior to divestiture, were $3.1 million.

 

Schiff® Specialty net sales increased approximately 6.9% to $120.0 million for the nine months ended February 29, 2004, from $112.3 million for the nine months ended February 28, 2003. The increase primarily resulted from increases in Schiff® Move Free® and other joint product sales.  Net sales of Schiff® Move Free® were $50.1 million for the nine months ended February 29, 2004, compared to $44.9 million for the nine months ended February 28, 2003.  We

 

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believe our fiscal 2004 Move Free® and other branded joint category sales results benefited from our Schiff® Grow Move Free® initiative.

 

Active Nutrition net sales increased approximately 3.6% to $27.9 million for the nine months ended February 29, 2004, from $26.9 million for nine months ended February 28, 2003.  The increase was primarily attributable to the reclassification/inclusion of $5.6 million in Weider Germany branded sales (a portion of which is also included in Haleko private label sales before inter-business unit eliminations), partially offset by the sale of our American Body Building® and Science Foods® brands and a decrease in domestic Weider branded sales.  Prior to fiscal 2004, Weider Germany branded sales were included only in Haleko’s operating results.

 

Haleko net sales remained relatively constant at approximately $47.9 million for the nine months ended February 29, 2004 and February 28, 2003.  A decline in primarily branded Multaben sales and private label sales volume was offset by the positive impact of foreign currency exchange rates.

 

Gross Profit.  Gross profit increased approximately 3.0% to $73.0 million for the nine months ended February 29, 2004, from $70.9 million for the nine months ended February 28, 2003.  The increase in gross profit primarily resulted from an increase in branded Schiff® Specialty sales, partially offset by reduced margins on private label revenues.  Gross profit, as a percentage of net sales, was 38.0% for the nine months ended February 29, 2004, compared to 38.3% for the nine months ended February 28, 2003.

 

Schiff® Specialty gross profit increased approximately 3.1% to $43.1 million for the nine months ended February 29, 2004, from $41.8 million for the nine months ended February 28, 2003.  Gross profit, as a percentage of net sales, was 35.9% for the nine months ended February 29, 2004, compared to 37.3% for the nine months ended February 28, 2003.  The percentage decrease resulted primarily from reduced margins on private label sales volumes due to competitive pricing pressures and increased sales incentives due to incremental promotional spending, partially offset by an increase in higher margin Move Free® and other joint product sales.

 

Active Nutrition gross profit remained relatively constant at $11.2 million for the nine months ended February 29, 2004, compared to $11.0 million for the nine months ended February 28, 2003.  Gross profit, as a percentage of net sales, remained relatively constant at 40.0% and 40.9%, respectively, for the nine months ended February 29, 2004 and February 28, 2003.  The inclusion of lower margin Weider Germany sales primarily resulted in the modest percentage decrease.

 

Haleko gross profit increased approximately 3.8% to $18.7 million for the nine months ended February 29, 2004, from $18.0 million for the nine months ended February 28, 2003.  Gross profit, as a percentage of net sales, was 39.0% for the nine months ended February 29, 2004, compared to 37.6% for the nine months ended February 28, 2003.  The increase was primarily attributable to higher margins on our private label business, and a decrease in inventory related charges.

 

Operating Expenses.  Operating expenses increased approximately 13.7% to $61.6 million for the nine months ending February 29, 2004, from $54.1 million for the nine months ending February 28, 2003.  The overall increase was primarily attributable to increases in selling and marketing costs in support of our brand building initiatives for all business units, particularly relating to our Schiff® Move Free® joint product category.

 

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Selling and marketing expenses, including sales, marketing, advertising, freight and other costs, were $40.4 million for the nine months ended February 29, 2004, compared to $32.6 million for the nine months ended February 28, 2003.  The increase in selling and marketing expenses resulted primarily from incremental transition and marketing costs associated with our long-term Move Free® strategy, and increased selling and marketing in support of new products in our Schiff® Specialty and Active Nutrition business units.  Incremental marketing costs for our Move Free® business includes an increase in national advertising costs of approximately $3.3 million.

 

General and administrative expenses remained relatively constant at $17.7 million and $17.8 million, respectively, for the nine months ended February 29, 2004 and February 28, 2003. Increases in aggregate legal related costs of approximately $2.8 million were offset by the fiscal 2004 recovery of approximately $1.1 million of previously recognized notes receivable valuation allowances and reduced Haleko systems and personnel related costs.

 

Research and development costs remained relatively constant at $3.0 million and $2.9 million, respectively, for the nine months ended February 29, 2004 and February 28, 2003.

 

Other Expense.  Other expense, net, was $0.3 million for the nine months ended February 29, 2004, compared to $2.8 million for the nine months ended February 28, 2003.  During the first nine months of fiscal 2004, we settled certain outstanding notes receivable primarily through reacquiring 966,609 shares of our outstanding Class A common stock.  As a result of these settlement transactions, we recognized approximately $.7 million in previously unrecognized interest income on the notes receivable.  Interest income also increased as a result of collection of amounts related to WHF’s guarantee of a certain ex-officer’s obligations to us.  We recognized less interest expense due to a reduction in total indebtedness for the nine months ended February 29, 2004.  In November 2002, we paid off $5.0 million in remaining subordinated debt with borrowings available from our senior bank credit facility, which resulted in an approximate $1.1 million write-off of previously capitalized financing fees.  We recognized approximately $0.5 million in income on the sale of certain held-for-sale equity securities during the nine months ended February 28, 2003.

 

Provision for Income Taxes. Provision for income taxes was $4.3 million for the nine months ended February 29, 2004, compared to $5.6 million for the nine months ended February 28, 2003.  The change resulted primarily from the decrease in pre-tax earnings, and a modest reduction in our effective tax rate due to a decrease in recognized valuation allowances.

 

Liquidity and Capital Resources

 

Working capital increased $16.5 million to approximately $42.5 million at February 29, 2004, from $26.0 million at May 31, 2003.  The increase in working capital resulted primarily from an increase in receivables and inventories, partially offset by the sale of our Venice Beach® sports apparel business, coupled with decreases in accounts payable and current portion of long-term debt.  The increase in receivables resulted primarily from higher sales in the fiscal 2004 third quarter, as compared to the fiscal 2003 fourth quarter.  The increase in inventories was primarily due to increased promotional activity and an overall increase in joint category inventory items primarily in support of our Schiff® Grow Move Free® initiative and recent increases in branded and private label joint product sales volumes.  The decrease in accounts payable resulted primarily from certain adjustments in payment terms with certain suppliers, including consideration of available terms discounts.

 

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We are party to a senior credit facility (the “Credit Facility”) with Bankers Trust Company, effective June 30, 2000, on behalf of our domestic subsidiaries.  The Credit Facility, as subsequently amended, is comprised of a $45.0 million revolving loan.  Under the revolving loan, we may borrow up to the lesser of $45.0 million or the sum of (i) 85% of eligible accounts receivable and (ii) the lesser of $22.5 million or 65% of the eligible inventory.  The Credit Facility contains customary terms and conditions, including, among others, financial covenants regarding minimum cash flows and limitations on indebtedness and our ability to pay dividends under certain circumstances.  Our obligations under the Credit Facility are secured by a first priority lien on all owned or acquired tangible and intangible assets of our domestic subsidiaries.  The Credit Facility, which expires in March 2005, is being used to fund our normal working capital and capital expenditure requirements.  At February 29, 2004, available revolving loan funds were approximately $25.2 million.

 

Our domestic operations were also supported by a subordinated loan (the “Subordinated Loan”) obtained in conjunction with the Credit Facility.  Effective May 31, 2002, we used funds available under our revolving loan to pay down $5.0 million of the Subordinated Loan.  Effective November 27, 2002, we used funds available under our revolving loan to pay-off the remaining $5.0 million of the Subordinated Loan.

 

Our European working capital needs (primarily our Haleko business unit) are supported by a Germany-based secured credit facility (the “Haleko Facility”) that is subject to annual renewal in June.  Our obligations under the Haleko Facility are secured by a first priority lien on substantially all Haleko tangible and intangible assets.  During June 2003, we renewed the Haleko Facility with Deutsche Bank AG in the approximate amount of $12.4 million (at recent exchange rate).  Net proceeds from the sale of our Venice Beach® sports apparel business were used to repay a portion of our outstanding indebtedness under the Haleko Facility.  At

February 29, 2004, amounts outstanding under the Haleko facility were approximately $1.0 million and available revolving loan funds were approximately $11.2 million.  We expect to renew the Haleko Facility again in June 2004.

 

We believe that our cash, cash flows from operations and the financing sources discussed above will be sufficient to meet our normal cash operating requirements during the next twelve months.  However, we continue to review opportunities to acquire or invest in companies, product rights and other investments that are compatible with our existing business.  We could use cash and financing sources discussed herein, or financing sources that subsequently become available, to fund additional acquisitions or investments.  In addition, we may consider issuing additional debt or equity securities in the future to fund potential acquisitions or growth, or to refinance existing debt.  If a material acquisition or investment is completed, our operating results and financial condition could change materially in future periods.  However, no assurance can be given that additional funds will be available on satisfactory terms, or at all, to fund such activities.

 

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A summary of our outstanding long-term debt and operating lease contractual obligations at February 29, 2004 is as follows (in thousands):

 

Contractual Cash Obligations		Total Amounts Committed			Less than 1 Year			1-3 Years			4-5 Years			After 5 Years
Long-term debt		$	3,580		$	3,394		$	186		$	—		$	—
Operating leases		24,981			3,708			5,842			5,806			9,625
Total obligations		$	28,561		$	7,102		$	6,028		$	5,806		$	9,625

 

Critical Accounting Policies and Estimates

 

In preparing our consolidated financial statements, we make assumptions, estimates and judgments that affect the amounts reported.  We periodically evaluate our estimates and judgments related to valuation of inventories, allowances for doubtful accounts, notes receivable and sales returns, valuation of deferred tax assets and recoverability of long-lived assets.  Note 1 to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended May 31, 2003, filed with the Securities Exchange Commission, describes the accounting policies governing each of these matters.  Our estimates are based on historical experience and on our future expectations that are believed to be reasonable.  The combination of these factors forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results are likely to differ from our current estimates and those differences may be material.

 

We believe the following critical accounting policies affect our more significant estimates and judgments used in preparation of our consolidated financial statements:

 

•                  We provide an inventory reserve for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions.  If actual market conditions are less favorable than those projected by management, additional inventory write-downs would be required.

 

•                  We maintain allowances for doubtful accounts, notes receivable and sales returns for estimated losses resulting from known customer exposures, including product returns and inability to make payments. We also consider collateral values and other factors in evaluating collectibility of notes receivable.  Actual results may differ, resulting in adjustment of the respective allowance(s).

 

•                  We currently have deferred tax assets resulting from certain loss carryforwards and other temporary differences between financial and income tax reporting.  These deferred tax assets are subject to periodic recoverability assessments.  The realization of these deferred tax assets is primarily dependent on future operating results.  To the extent we are uncertain whether future operations will generate sufficient profit to utilize the loss carry forwards, valuation allowances are established.

 

•                  We have significant intangible assets, including trademarks, patents and goodwill.  The determination of related estimated useful lives and whether or not these assets are impaired involves significant judgments.  Changes in strategy or market conditions could significantly impact these judgments and require adjustments to recorded asset balances.

 

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Impact of Inflation

 

Historically, we have been able to pass inflationary increases for raw materials and other costs onto our customers through price increases and we anticipate that we will be able to continue to do so in the future.

 

Seasonality

 

Our business can be seasonal, with fluctuations in sales resulting from timing of marketing and promotional activities, customer buying patterns and consumer spending patterns.  In addition, as a result of changes in product sales mix and other factors, as discussed above, we experience fluctuations in gross profit and operating margins on a quarter-to-quarter basis.

 

Forward Looking Statements

 

Investors are cautioned that, except for the historical information contained herein, the matters discussed in this Quarterly Report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on management’s beliefs and assumptions, current expectations, estimates, and projections.  Statements that are not historical facts, including without limitation statements which are preceded by, followed by or include the words “believes,” “anticipates,” “plans,” “expects,” “estimates,” “may,” “should” or similar expressions are forward-looking statements. These statements are subject to risks and uncertainties, certain of which are beyond our control, and, therefore, actual results may differ materially.

 

Important factors that may cause these forward looking statements to be false include, but are not limited to:

 

•                  the inability to successfully and cost effectively implement initiatives to defend our Schiff® Move Free® business against the competition;

•                  the inability to achieve cost savings and operational efficiencies;

•                  the inability to increase operating margins and increase revenues;

•                  dependence on individual products and customers;

•                  the inability to successfully restructure our Active Nutrition and Haleko business units and make them profitable;

•                  the impact of competitive products and pricing (including private label);

•                  market and industry conditions, including pricing, demand for products, level of trade inventories and raw materials availability and pricing;

•                  the success of product development and new product introductions into the marketplace;

•                  changes in laws and regulations, including recently proposed FDA regulations regarding good manufacturing practices;

•                  litigation and government regulatory action;

•                  lack of available product liability insurance for products containing ephedra;

•                  adverse publicity regarding the consumption of nutritional supplements;

•                  changes in accounting standards; and

•                  other factors indicated from time to time in our SEC reports, copies of which are available upon request from our investor relations department or may be obtained at the SEC’s website (www.sec.gov).

 

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ITEM 3.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The following discussion involves forward-looking statements of market risk which assume for analytical purposes that certain adverse market conditions may occur.  Actual future market conditions may differ materially from such assumptions.  Accordingly, the forward-looking statements should not be considered our projections of future events or losses.

 

Our cash flows and net earnings (losses) are subject to fluctuations resulting from changes in interest rates and foreign exchange rates.  We currently are party to one modest derivative instrument relating to our Haleko business unit.  Our current policy does not allow speculation in derivative instruments for profit or execution of derivative instrument contracts for which there are no underlying exposure.  We do not use financial instruments for trading purposes.

 

We measure market risk, related to our holdings of financial instruments, based on changes in interest rates utilizing a sensitivity analysis.  We do not believe that a hypothetical 10% change in interest rates would have a material effect on our pretax earnings or cash flows.

 

ITEM 4.          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 Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, 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 of 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 management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the quarter covered by this report.  Based on the foregoing, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

 

There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

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PART II.          OTHER INFORMATION

 

Item 1.  Legal Proceedings.

 

The information set forth in Note 8 to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference.

 

Item 2.           Changes in Securities.

 

Not applicable.

 

Item 3.           Defaults Upon Senior Securities.

 

Not applicable.

 

Item 4.           Submission of Matters to a Vote of Security Holders.

 

Not applicable.

 

Item 5.           Other Information.

 

Not applicable.

 

Item 6.           Exhibits and Reports on Form 8-K

 

(a)                                  Exhibits

 

10.1                           Consulting Agreement between the Company and Gustin Foods, LLC.

31.1                           Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act

31.2                           Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act

32.1                           Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act

 

(b)                                 Reports on Form 8-K

 

On December 18, 2003, we filed a report on Form 8-K with the commission regarding our fiscal 2004 second quarter press release.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

		WEIDER NUTRITION INTERNATIONAL, INC.
Date:	April 14, 2004	By: /s/	Bruce J. Wood
			Bruce J. Wood
				President, Chief Executive
				Officer and Director
Date:	April 14, 2004	By: /s/	Joseph W. Baty
				Joseph W. Baty
				Executive Vice President and
				Chief Financial Officer

 

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