Nutrition for Life International Inc.

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Nutrition for Life International Inc.

9101 Jameel
Houston, Texas 77040
U.S.A.
(713) 460-1976
Fax: (713) 895-8927
Web site: http://www.nutritionforlife.com

Public Company
Incorporated: 1993
Employees: 200
Sales: $97.40 million (1996)
Stock Exchanges: NASDAQ
SICs: 5122 Drugs, Proprietaries & Sundries

Based in Houston, Texas, Nutrition for Life International Inc. is one of the larger U.S. distributors of nutritional supplements and health-related products. The company offers 320 products, including vitamins, minerals, and antioxidants; personal care items; food and weight management programs; herbal formulas; homeopathic and special formulas; cleaning concentrates; filtration systems; and self-development programs. Most products are packaged as private label items under the trade names of Nutique, Master Key Plus, Oraflow Plus, Lean-Life, Nutri-Cookie, Requin 3, Grand Master, Phytonol, BioWater, E-Lemonator, Phytogreen, BioGlow, BioRub, MasterPiece, and PowerPlay.

Nutrition for Life purchases its nutritional supplements and other products directly from third-party manufacturers. The company then sells these products—made to its specifications—to distributors throughout the world, specifically in the United States, including territories such as the District of Columbia, Puerto Rico, and Guam; Canada; Korea; the Philippines; and the United Kingdom. Nutrition for Life markets its products through a network of thousands of such distributors, independent contractors who own their own businesses. Distributors purchase items from Nutrition for Life for resale to their own clients. Distributors may work on a full- or part-time basis.

Nutrition for Life provides them with product development, marketing aids, customer service operations, and record keeping. The company also offers distributors support programs such as international teleconferencing, seminars, a proprietary magazine, business training, and a web site.

Distributors enlist new recruits to form their sales networks. Original distributors earn commissions on their sales as well as those of their new recruits. The larger a distributor’s network, the more earning potential he or she enjoys. Nutrition for Life International offers incentives to distributors for building their networks and advertises for new distributors on the company’s web site, through teleconferencing, and at regional sales meetings. Its products are endorsed by Brandi Carrier, Miss Fitness Galaxy 1996. Nutrition for Life sponsors two professional cycling teams—Volvo/Cannondale Mountain Bike Racing Team and Saturn Cycling Team—and supports the National Wheelchair Sports Foundation.

Born Through a Merger

In September 1993, David P. Bertrand and Jana Mitchum organized the current company through the merger of Nutrition Express Corporation of Colorado Inc. with Nutrition Express Corporation of Utah Inc. The merger took effect in June 1994.

Bertrand served as president and chairman of the board of the predecessor companies since 1984; he retained these titles in the new corporation. Likewise, Mitchum—Bertrand’s sister-inlaw—held positions as executive vice-president, secretary, and director of the predecessor companies since 1984. She, too, continued in these positions when the new company formed.

The predecessor companies had been active in the United States since 1984 and in Korea since 1991, although distributors in Korea did not participate in the company’s network marketing system. Nutrition for Life’s operations extended to Canada and the Philippines beginning in 1993. As in Korea, distributors in the Philippines were not part of the company’s network marketing system.

The Network Marketing System

The new company’s distributors purchased products for their own use and for resale to retail clients through a specialized system. Nutrition for Life encouraged its distributors to recruit new distributors to create a network—the recruiting distributor’s “downline.” The recruiting distributor would receive a commission from all the sales of all the distributors in his or her downline. The company created this marketing program so that existing distributors might maximize their earnings by building sales networks. Nutrition for Life explained in its U.S. Securities and Exchange Commission Form 10-KSB that the company’s “management believes that its network marketing system is well suited to marketing its nutritional supplements and other products because sales of such products are strengthened by ongoing personal contact between retail consumers and distributors, many of whom use the company’s products themselves.”

The company depended on adding and retaining distributors to increase its sales, so its recruiting programs offered financial incentives, training and support, nominal fees for starter kits, no inventory requirements, and limited monthly purchase requirements as enticements. Programs to increase distributor sales and recruiting potential included car bonuses, an order assurance program, and personnel recruiting and sales campaigns. For example, prior to mid-1996, Nutrition for Life sponsored an Instant Executive program through which distributors could qualify for the executive distributor level by generating at least $1,000 in product volume on the day of enrollment rather than over time.

Kevin Trudeau’s Contributions

Nutrition for Life also produced product literature for distributors to use, as well as established a toll-free number for ordering, customer service operations, and faxing ’services. In addition, the company sponsored a subscription service for distributors, monthly offering self-development materials— many created by Kevin Trudeau, a noted motivational speaker and marketer. (Trudeau also founded the American Memory Institute, produced a memory training home-study course, and wrote a memory training book published by William Morrow in 1995.) Trudeau sold his sales aids, memory tapes, and other items to Nutrition for Life distributors through his own companies. He became important to Nutrition for Life as an executive-level distributor who demonstrated great success recruiting new distributors who readily achieved executive-level status.

Growth in Distributors and Products

In 1994, Nutrition for Life launched a 24-hour teleconferencing service with announcements, product information, and other recorded messages for distributors. The company also first published its multilingual recruiting publication, Freedom Magazine, in 1994 to answer the most common questions of those considering becoming distributors. In addition, Nutrition for Life extended its operations to Puerto Rico in 1994. By September, the company’s distributors numbered 37,800.

More development followed the next year: Bertrand and Mitchum issued the company’s initial public offering in July 1995, and 25 new products were introduced by Nutrition for Life in the fiscal year ending in September 1995.

Then company sales grew remarkably between September 1995 and September 1996. Nutrition for Life launched 70 new products and increased its 57,300 distributors by more than 30,000 during the fiscal year. The increase in distributors—as well as their monthly sales averages—was attributed in large part to the efforts of Trudeau. Trudeau purchased ads on radio and television and utilized infomercials—in particular his “A Closer Look” and “Vantage Point” infomercial series—to recruit new distributors.

The Litigation Begins

But by January 1996, the company’s marketing program to recruit new distributors became a source of contention. The Wall Street Journal, the Bloomberg news wire service, and CNBC issued disparaging reports regarding Trudeau, his marketing practices, and Nutrition for Life’s Instant Executive program. A major shareholder of a predecessor company also complained to regulatory agencies and issued unfavorable statements through the Internet regarding Trudeau and Nutrition for Life. Both the company and Trudeau initiated and won legal proceedings against this individual for defamation. Trudeau, for example, was awarded $10 million in damages. Yet, in April 1996, the Attorney General of the State of Illinois brought litigation against Trudeau and his company, the Trudeau Marketing Group, Inc., among others.

Company Perspectives:

For more than a decade, Nutrition for Life International Inc. has provided thousands of individuals with the opportunity to achieve financial freedom and the means to a healthier and happier life by offering a superior range of health and nutritional products. Today Nutrition for Life International is a recognized leader in the health and nutrition industry. With increasing consumer awareness of nutrition and health, Nutrition for Life International is on the cutting-edge of the industry and well positioned for further growth and expansion.

Although Nutrition for Life was not named in the lawsuit, the company nevertheless entered into an Assurance of Voluntary Compliance with the Attorney General of Illinois, as well as similar agreements in nine other states: Florida, Hawaii, Idaho, Kansas, Kentucky, Michigan, Missouri, New Jersey, and Pennsylvania. Nutrition for Life agreed to stop calling its program “Instant Executive,” though the qualifications to achieve executive distributor status immediately upon enrollment remained unchanged. Nutrition for Life also decided to clarify its marketing and compensation plans, prohibiting distributors from creating their own versions, and to explain clearly that mandatory product purchases were not required in order to become a distributor. The company also encouraged distributor compliance with corporate policies and created an Internet web site with information about Nutrition for Life’s products and programs. Nutrition for Life agreed to disclose distributor earnings and clarified parameters under which executive-level distributors could collect commissions on sales within their downlines.

With lawsuits settled in at least eight states, Trudeau changed his commission method in July 1996. Now he based commissions on product sales instead of new member signings. But the past still haunted him.

Nutrition for Life’s Involvement in Litigation

In August 1996, Instant Executive distributors and stock and warrant buyers filed suit in U.S. District Court in the Southern District of Texas, Houston Division, against Trudeau; Nutrition for Life and some of its officers; Bernard Sherman, the largest beneficial owner of Nutrition for Life common stock; and Cohig and Associates, Inc., and Neidiger/Tucker/Bruner, Inc., the investment bankers that underwrote Nutrition for Life’s July 1995 initial public offering. The distributors and stock buyers charged that Nutrition for Life ran an illegal pyramid scheme, sold unregistered securities, and failed to disclose alleged illegalities, not to mention Trudeau’s criminal history. (A state court in Massachusetts issued a three-year suspended sentence after Trudeau pled guilty to larceny in 1990. He served 21 days. Trudeau also filed for bankruptcy in Texas in 1990, although he took no further action on the claim. The following year, Trudeau plead guilty to credit card fraud in Massachusetts. At that time, the court sentenced him to a two-year prison term and 24 months supervised release.)

Then on August 23, 1996, common stock purchasers filed another class action suit in the District Court of Harris County, Texas, against Nutrition for Life, claiming the company and its agents—in particular Kevin Trudeau and the Trudeau Marketing Group—misrepresented or omitted data regarding the company, its marketing, sales, and earnings from July 1995 through July 1996. “Among other things,” Business Wire reported in August 1996, “this investor lawsuit alleges that NFLI’s [Nutrition for Life International] reported revenues and growth were materially overstated during the Class Period and that NFLI was engaging in improper and illegal marketing practices which had the effect of fraudulently inflating NFLI’s financial results. In addition, the complaint alleges that NFLI’s ’Instant Executive Program’ was an illegal pyramid scheme. The complaint also alleges that defendants failed to fully or accurately disclose Trudeau’s history of unlawful and criminal conduct, including credit card fraud and larceny.”

By September 1996, the Securities and Exchange Commission (SEC) of the United States began investigating Nutrition for Life for violations of the federal securities laws. Throughout these legal battles, Nutrition for Life strongly denied any allegations and accusations, vigorously defending itself against all charges and working to reduce negative media coverage.

Moving Forward Undeterred

Despite its legal battles, Nutrition for Life continued to grow. In September 1996, the company authorized the buyback of 200,000 common shares of stock. Nutrition for Life launched programs in the United Kingdom, expanding its ranks to 87,400 distributors. Its net sales in fiscal 1996 were more than $97 million.

The SEC ended its inquiry in December 1996, taking no action against the company. Though expenses related to settlement of lawsuits totaled $6.4 million, the company’s focus shifted from litigation to building its business again. Meanwhile, Trudeau alerted Nutrition for Life to objections of the Federal Trade Commission (FTC) of the United States to his infomercials, including those used to market the Mega Memory tapes sold as self-development aids to Nutrition for Life distributors. With the threat of action by the FTC, the possibilities of Trudeau remaining a distributor of the company or of the continued use by the company of the Mega Memory tapes remained uncertain.

Nevertheless, by March 1997, Nutrition for Life successfully negotiated a recruiting campaign for new distributors. In one month, 8,400 distributors qualified for new executive distributorships. The company even achieved a new daily sales record: $1.5 million.

Nutrition for Life’s sales rose in the third quarter of 1997, indicating renewed confidence among consumers and distributors. The company started its network marketing program in the Philippines, its first such activity in the Pacific Rim. Independent distributors totaled 102,000 at the end of the month, far surpassing 100,000—the number of independent distributors commonly held as necessary for a company to sustain long-term growth.

In September 1997, Nutrition for Life installed computer information systems for administrative efficiency, high-quality customer service, and warehouse and shipping management. The company also offered a long-distance calling program through its worldwide network of distributors. Lifedial 1 Plus, co-sponsored by UniDial Communications, provided a low interstate rate, a calling card with no per-call surcharge, a free toll-free number, special features such as four-way conference calling and voice mail, and opportunities for Nutrition for Life distributors to earn bonus volume. As Steven M. Riddell, director of product sales, explained in a company press release: “The Lifedial 1 Plus program represents a whole new breadth of service for our distributors and their customers. We are pleased to present this exciting growth opportunity in cooperation with UniDial Communications. The calls are carried on one of the nation’s premier fiber-optic networks, and UniDial’s state-of-the-art control center constantly monitors the quality of the entire network.”

Final judgments on 1996 lawsuits were issued on September 18, 1997. The courts approved settlement agreements for Instant Executives and stock buyers from July 1995 through July 1996 who lost money. In a press release at the time, Nutrition for Life was quick to point out that “the settlements are not an admission of wrongdoing by the company, nor are the judgments a finding of the validity of any claims in the lawsuits or of any wrongdoing by the company. The company has strongly denied and continues to deny all charges of wrongdoing or liability.”

In the Future

Nutrition for Life’s business strategy for the future involved increasing the company’s sales and profitability. As always, the company intended to work to attract new distributors and to increase product sales to them. It also planned to expand in its existing markets worldwide, as well as into new international markets. In addition, if the opportunity presented itself, Nutrition for Life expected to acquire a complementary business.