<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended JUNE 30, 1998 Commission file number 0-15701
NATURAL ALTERNATIVES INTERNATIONAL, INC.
Incorporated in Delaware 84-1007839
1185 Linda Vista Drive, San Marcos, California 92069 (I.R.S. Employer
(760) 744-7340 Identification No.)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock - $.01 par value Nasdaq Stock Market
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of 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. [ ]
The aggregate market value of 4,499,485 shares of voting stock held by
non-affiliates (assuming for this purpose that all officers and directors, and
affiliates of directors, are affiliates) of the Registrant was approximately
$62,151,000 based on the closing sale price as of September 25, 1998.
At September 25, 1998, the Registrant had outstanding 5,887,375 shares of Common
Stock, $.01 par value.
Documents Incorporated by Reference
NONE
1
<PAGE> 2
PART I
ITEM 1. BUSINESS
Natural Alternatives International, Inc. (referred to herein as the "Company")
is engaged in the formulation and production of encapsulated vitamins and
nutrients and provides sports affiliations, assistance with foreign registration
of products, graphic design, brochures, formulations and a host of other
marketing related services for its clients. The Company narrowly focuses its
marketing activity on attracting and retaining a select number of large,
financially sound companies with global, growth-oriented objectives. The Company
seeks to further its customers' objectives by assisting them in expanding their
market share through a variety of special programs and services. There are no
fees charged or revenues generated from these marketing related services, which
are generally provided before orders for product are obtained. Therefore, these
costs are treated as period costs.
In 1995, the Company expanded and enhanced its laboratory and quality control
capabilities. Management believes its technically advanced facilities are a
major factor in solidifying existing customer relationships and adding new
customers. Newly recognized standards for manufacturing nutritional products
should, in the opinion of management, assist the Company in serving its present
and future customers. The newly revised United States Pharmacopeia compendia
(USP) contain, for the first time, specifications for vitamin and mineral
supplements. This USP monograph has long been the basis for determining the
strength, quality, purity, packaging and labeling of drugs and related articles.
The Company believes it currently has the technical and quality control
expertise to conform to all aspects of USP specifications. Conformance with USP
specifications will allow the Company to use the USP designation on all products
manufactured for its customers, which have the USP designation.
During 1997, the Company expanded its product-delivery system mix with the
addition of a tablet manufacturing facility that nearly doubled the Company's
overall manufacturing capacity. Tablets and chewable wafers are more readily
accepted than capsules by consumers in overseas markets, such as Asia. The
Company's proprietary and sophisticated flavoring laboratory formulates chewable
wafers in a wide variety of tasty flavors.
The Company has several proprietary lines of products, which were sold by two of
its wholly owned subsidiaries, Millennium Health Products, Inc. (formerly
Pro-Lean, Inc. and before that Sonergy, Inc.), and CellLife International, Inc.
The operations of its two primary subsidiaries were transferred to the Company
during fiscal 1997. The Company believes such specialty proprietary products
typically generate higher profit margins and assist in product diversification
and less reliance on contract manufacturing.
RESEARCH AND DEVELOPMENT
The Company continuously produces pilot or sample runs of products to ensure
stability or efficacy and to determine ingredient interaction and prospective
customer acceptance. Research of this type, and the associated costs, are part
of the operating expenses incurred by the Company. Such research and development
has not been significant and is not expected to be significant in the future.
COMPETITION AND BUSINESS RISKS
The vitamin and nutritional supplement industry is highly competitive, and
competition is expected to increase in the future. Competition for the sale of
vitamins and supplements comes from many sources, including companies which sell
vitamins to supermarkets, large chain discount retailers, drug store chains and
independent drug stores, health food stores, pharmaceutical companies and others
which sell to wholesalers, mail order vendors and network marketing companies.
The Company does not believe it is possible to accurately estimate the number or
size of its many competitors since the vitamin industry is largely privately
held.
2
<PAGE> 3
PART I
ITEM 1. BUSINESS (continued)
The Company believes that competition among vitamin and supplement products is
based, among other things, on price, timely delivery, product quality, safety,
availability, product innovation and assistance in marketing and customer
service. The competitive position of the Company will also depend upon continued
acceptance of its hard gel capsules, its ability to attract and retain qualified
personnel, future governmental regulations affecting vitamins and nutritional
supplements, and publication of vitamin product safety and efficacy studies by
the government and authoritative health and medical authorities.
The Company's operations are subject to the risks normally associated with
manufacturing vitamins and nutritional products, including shortage of certain
raw materials and damage to property or injury to persons.
RAW MATERIALS
Raw materials used by the Company consist of nutrient powders, empty gelatin
capsules, and necessary components for packaging and distribution of finished
vitamin and nutritional supplement products. The nutrient powders and the empty
gelatin capsules are purchased from manufacturers in the United States,
including foreign-owned entities operating in the United States.
MAJOR CUSTOMERS
Nu Skin International and NSA International together represented 54% of the
Company's sales for the year ended June 30, 1998. Loss of either of these
customers could have an adverse impact on the Company's revenues and earnings
until the Company could replace these sales. If the Company was unable to
replace the sales to any of these customers, it would have a material adverse
impact on the business and operations of the Company. No other customer
represented 10% or more of the Company's sales for the year ended June 30, 1998.
EMPLOYEES
The Company employs 128 individuals, with three employed in executive or other
professional positions, eight in the area of research, laboratory and quality
control, eleven in sales and marketing, while the remaining employees are
engaged in production and administration. The Company has never experienced a
work stoppage, and none of its employees are currently represented by a union or
any other form of collective bargaining unit. The Company believes its relations
with its employees are excellent.
GOVERNMENT REGULATION
The processing, formulation, packaging, labeling and advertising of the
Company's products are subject to regulation by one or more federal agencies,
including the Federal Drug Administration (FDA), the Federal Trade Commission
(FTC), the Consumer Product Safety Commission, the United States Department of
Agriculture and the Environmental Protection Agency. These activities are also
regulated by various agencies of the states and localities in which the
Company's products are sold, including without limitation the California
Department of Health Services, Food and Drug branch. The FDA in particular
regulates the advertising, labeling and sales of vitamin and mineral supplements
and may take regulatory action concerning medical claims, misleading or
untruthful advertising, and product safety issues. While the Company is subject
to the FDA's Good Manufacturing Practices for foods, and complies with them as a
quality control practice, it also adheres to many of the FDA's more stringent
standards for pharmaceutical manufacturing.
3
<PAGE> 4
ITEM 2. PROPERTIES
The Company's corporate and manufacturing facilities consist of approximately
54,000 square feet and are located in San Marcos, California. Of this space, the
Company owns approximately 36,000 square feet and leases the remaining space. In
June 1996, the Company acquired certain suites within a building occupied by
certain of its offices and production facilities which, up to that time, were
being leased from its two principal stockholders, Marie A. LeDoux and Mark A.
LeDoux. The lease provided for rent payable in the amount of $60,000 per year.
Purchase price of the building was $545,000 which, in the opinion of management
and an independent certified appraiser who evaluated the property in April 1996,
represented fair market value.
In August 1997, the Company entered into a 15-year lease agreement under which
the lessor is to construct a build-to-suit 82,000 square foot office and
manufacturing facility in Carlsbad, California. The Company plans to move its
administrative offices and expand its manufacturing capacity into these premises
when the building is ready for occupancy in early 1999. Also, in August 1998,
the Company entered into a 5-year lease agreement for the rental of a 54,000
warehousing facility located in Vista, California. The Company will continue to
utilize its building in San Marcos for production.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, based in part on the
advice of counsel, the ultimate disposition of these matters will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
4
<PAGE> 5
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On January 13, 1997, the Company's common stock began trading on the Nasdaq
National Market tier of The Nasdaq Stock Market under the Symbol: NAII. The
common stock of the Company had previously been traded on the American Stock
Exchange (AMEX) since November 17, 1992, under the stock symbol NAI. The table
below sets forth the high and low sales prices, which are derived from the
Monthly Market Statistics issued by the American Stock Exchange and the Summary
of Activity issued by The Nasdaq Stock Market for the respective periods.
<TABLE>
<CAPTION>
High Low
-------- --------
<S> <C> <C>
First Quarter Ended September 30, 1997 $ 9.750 $ 7.000
Second Quarter Ended December 31, 1997 $ 10.813 $ 7.250
Third Quarter Ended March 31, 1998 $ 22.500 $ 17.625
Fourth Quarter Ended June 30, 1998 $ 24.500 $ 16.000
First Quarter Ended September 30, 1996 $ 10.375 $ 7.625
Second Quarter Ended December 31, 1996 $ 9.500 $ 7.125
Third Quarter Ended March 31, 1997 $ 10.500 $ 8.125
Fourth Quarter Ended June 30, 1997 $ 9.000 $ 6.875
</TABLE>
As of June 30, 1998, the approximate number of holders of common stock was
4,000.
The Company has never paid a dividend on its common stock. It is the Company's
present policy to retain all earnings to provide funds for the future growth of
the Company.
5
<PAGE> 6
PART II
ITEM 6. SELECTED FINANCIAL DATA
Five-Year Summary
(Not Covered by Independent Auditors' Report)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales $67,894,305 $49,444,221 $47,621,804 $37,388,254 $34,334,062
Income from Operations $ 9,622,478 $ 1,815,072 $ 5,263,376 $ 3,637,522 $ 3,592,951
Net Earnings $ 5,871,765 $ 1,119,920 $ 3,222,317 $ 2,028,059 $ 1,887,367
Net Earnings Per Common Share(1):
Basic $ 1.06 $ 0.21 $ 0.61 $ 0.39 $ 0.39
Diluted $ 1.00 $ 0.20 $ 0.58 $ 0.37 $ 0.35
Current Assets $31,496,121 $18,857,979 $15,710,135 $14,722,929 $11,883,140
Total Assets $42,987,279 $28,108,756 $23,561,191 $21,193,780 $17,514,511
Long-Term Debt and Capital
Lease Obligations, less
current installments $ 977,375 $ 1,123,898 $ 1,324,920 $ 1,114,828 $ 958,415
Stockholders' Equity $27,659,141 $18,699,487 $17,159,586 $13,278,255 $11,216,465
</TABLE>
(1) amounts have been restated in accordance with SFAS 128.
6
<PAGE> 7
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED TO FISCAL 1997
Net sales increased 37.3% or $18.5 million to $67.9 million in fiscal 1998. The
Company added several new customers in the latter part of fiscal 1997 and sales
to these and other new customers was the primary reason for the increase. A
decrease in sales to certain existing customers was offset by increases in
international sales to other existing customers through their international
distribution channels.
Sales of products into international markets increased to $14.9 million in 1998
from $1.9 million in 1997. The increase is primarily the result of existing
customers expanding into Asian and European markets.
Income from operations increased 430% to $9.6 million in 1998. This was due to a
$8.3 million increase in gross profit offset by a $.5 million increase in
selling, general and administrative expenses.
Gross profit margins were 27.6% and 21.1% in fiscal 1998 and 1997, respectively.
The 1997 gross profit margin was substantially below historical margins because
of factors that are discussed in the comparison of fiscal 1997 to 1996. The 1998
gross profit margin was slightly higher than historical margins experienced
before 1997. The increase is principally due to negotiated raw material savings
and improved manufacturing cost efficiencies.
Selling, general and administrative expenses decreased as a percentage of sales
to 13.4% in 1998 from 17.4% in 1997, while increasing in absolute dollars to
approximately $9.1 million in fiscal 1998 from $8.6 million in 1997. The
majority of this increase in selling, general and administrative expenses is due
to an increase in employee benefits expense which increased because the defined
benefit pension plan adopted as of January 1, 1997 was in effect for a full year
in 1998. Additionally, professional fees increased because of increased activity
in the registration of foreign products. These increases in selling, general and
administrative expenses were partially offset by a decline in bad debt expense,
which was attributable to a related party customer write-off in fiscal 1997, and
a decline in royalty expense because the Company's agreement with the United
States Olympic Committee expired in March 1997.
Other income (expense) contributed to net other income approximately $44,000 in
fiscal 1998 compared to a net other income contribution of approximately $25,000
in fiscal 1997.
Net earnings increased by 424% or $4.8 million to $5.9 million in fiscal 1998.
This increase was due primarily to the reasons given above and was partially
offset by a higher effective income tax rate. The higher effective income tax
rate, from 39.1% in 1997 to 39.3% in 1998, is the result of a smaller investment
credit applicable to California franchise taxes.
Diluted earnings per share increased 400% to $1.00 per share in 1998 from $.20
per share in 1997.
The Company's backlog position amounted to $24,000,000 as of September 17, 1998,
compared to $18,114,000 as of September 12, 1997. This increase is attributable
to continued customer expansion into foreign markets and increased orders from
existing customers.
7
<PAGE> 8
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales increased 3.8% or $1.8 million to $49.4 million in fiscal 1997,
primarily due to increased sales to existing customers. The Company added
several new customers in the latter part of the year, however the sales to these
new customers were not significant in fiscal 1997.
Sales to international customers declined from $4.3 million in 1996 to $1.9
million in 1997. The decrease is the result of a major client restructuring its
European operations coupled with a declining demand for the same client's
products in Europe.
Income from operations decreased 65.5% to $1.8 million. This was due to a $2.0
million decline in gross profit and a $1.4 million increase in selling, general
and administrative expenses.
Gross profit margins were 21.1% and 26.1% in fiscal 1997 and 1996, respectively.
The decline in gross margins is due to several factors. Shifts in product sales
mix toward lower profit margin products, rising costs of certain raw materials,
and increased costs for subcontracted packaging were the major contributing
factors. To a lesser extent, the change in ownership of one of the Company's
customers resulted in a substantial write-off of packaging materials. In
addition, the Company wrote off raw materials that became obsolete because of
customer discontinuance of certain products.
Selling, general and administrative expenses increased as a percentage of sales
from 15.1% in 1996 to 17.4% in 1997. Selling, general and administrative
expenses increased to $8.6 million in fiscal 1997 from $7.2 million in 1996. The
increase in expenses was due to several factors: a specific provision for
doubtful accounts was made for the balance due from a related party customer;
the Company underwrote several clinical studies to show the efficacy of certain
customer products; marketing fixtures related to certain unprofitable products
were written off; and finally, the Company incurred startup expenses for its new
tablet manufacturing facility.
Other income (expense) amounted to net other income of approximately $25,000 in
fiscal 1997 compared to a net expense of approximately $56,000 in fiscal 1996.
The net increase was primarily the result of increased interest income on
investments.
Net earnings decreased 65.2% or $2.1 million to $1.1 million in fiscal 1997.
This decrease was due, primarily, to the reasons given above. The higher
effective income tax rate, from 38.1% in 1996 to 39.1% in 1997, is primarily the
result of a smaller investment credit applicable to California franchise taxes.
Diluted earnings per common share decreased 65.5% to $.20 per share in 1997 from
$.58 per share in 1996.
The Company's backlog position amounted to $18,114,000 as of September 12, 1997,
compared to $12,465,000 as of September 16, 1996. This increase is attributable
to successful customer expansion into foreign markets and increased orders from
existing customers.
8
<PAGE> 9
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
YEAR 2000 ISSUES
Most computer databases, as well as embedded microprocessors in computer systems
and industrial equipment, have been programmed to use a two-digit number to
represent the year. Computer programs that recognize a date using "00" as the
year 1900 rather than the year 2000 could result in errors or system failures.
Accordingly, all companies must analyze their systems and make the necessary
changes to ensure that automated processes will correctly distinguish between
years before and after the year 2000.
In the second quarter of its 1998 fiscal year, the Company decided to replace
its financial and manufacturing software systems because these systems were not,
in management's judgment, able to support the Company's continued growth and
expansion. At this time, the Company also began to address its Year 2000 issues.
The Company expects to implement its new computer systems by March 31, 1999 and
the Company has begun an assessment of the potential for Year 2000 problems with
embedded microprocessors in its production equipment.
The Company has received some preliminary information concerning the Year 2000
readiness of some of its vendors of goods and services. It expects to engage in
discussions with its most significant vendors during the balance of 1998 and
1999 in an attempt to determine the extent to which the Company is vulnerable to
those vendors' possible failure to become Year 2000 ready. If the Company's most
significant vendors of goods and services, or the suppliers of the Company's
necessary energy, telecommunications and transportation needs, fail to provide
the Company with the materials and services which are necessary to produce,
distribute and sell its products, such failure could have a material adverse
effect on the results of operations, liquidity and financial condition of the
Company.
The Company estimates that it will have incurred approximately $1 million in
costs, of which approximately $100,000 will be charged to expense, by the end
of its 1999 fiscal year to replace its financial and manufacturing software
systems and to remediate or replace embedded microprocessors in its production
equipment. This amount will be funded from internally generated cash flows.
If some or all of the Company's remediated or replaced internal computer systems
fail to correctly distinguish between years before and after the year 2000, or
if any software applications or embedded microprocessors critical to the
Company's operations are overlooked in the assessment or implementation phases,
there could be a material adverse effect on the Company's results of operations,
liquidity and financial condition of a magnitude which the Company has not yet
fully analyzed.
The Company has not yet established a contingency plan to address unavoided or
unavoidable Year 2000 risks, but it expects to create such a plan during the
balance of 1998 and 1999.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has satisfied its liquidity requirements
through a combination of equity financing, net cash provided by operating
activities, revolving lines of credit, equipment financing and leases.
Management believes the Company's financial condition remains strong, and
management also believes the Company will be able to obtain additional financing
to provide the resources necessary to meet currently anticipated funding
requirements.
9
<PAGE> 10
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
At June 30, 1998, the Company had working capital of $18,308,000 and borrowings
available under revolving lines of credit of $3,000,000. As of June 30, 1998,
there were no borrowings under these lines.
In 1998, net cash provided by operating activities was $3,196,000 compared to
$3,802,000 for 1997. This decrease of $606,000 was due primarily to increases in
accounts receivable and inventories that was partially offset by increases in
net earnings, tax benefit on option exercise, accounts payable and a decrease in
tax refund receivable. Current maturities of long-term debt and capital leases
amounted to $70,000 which the Company expects to pay out of working capital.
The Company has revolving lines of credit permitting borrowings up to
$3,000,000, which are secured by the Company's receivables, inventory,
equipment, and vehicles and bear interest at the bank's prime rate. The present
loan agreement with the bank contains financial covenants concerning limitations
on maintenance of debt, certain financial ratio's and other matters, for all of
which the Company is in full compliance as of September 25, 1998. The lines of
credit expire on January 19, 1999; management expects such lines to be renewed
in the normal course of business.
Capital expenditures for 1998 amounted to $3,475,000 primarily in connection
with the building improvements in progress at the Company's new headquarters
building and the purchases of additional encapsulation and tablet compression
equipment to expand the Company's output capacity. The Company anticipates
capital expenditures of approximately $12,000,000 during fiscal 1999. These
planned expenditures relate primarily to building improvements for the Company's
new headquarters building, which is expected to be occupied in early 1999, and a
warehouse and blending facility, which was leased in August 1998. These
expenditures are expected to be paid from a combination of cash holdings, net
cash provided by operating activities in fiscal 1999, borrowings under the
Company's lines of credit with its bank, and anticipated long term debt or
equity financing.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This Statement standardizes
the disclosure requirements for pensions and other postretirement benefits,
requires additional information on changes in the benefit obligations and fair
values of plan assets and eliminates certain disclosures. Restatement of
disclosures for earlier periods is required. The Company will adopt this
Statement in its financial statements for the year ending June 30, 1999.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130") and No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 130
establishes standards for the reporting and display of comprehensive income and
its components in the financial statements. SFAS 131 establishes standards for
the manner in which public business enterprises report information about
operating segments and also establishes standards for related disclosures about
products and services, geographic areas, and major customers. These statements
are effective for years beginning after December 15, 1997. The Company does not
expect that the adoption of SFAS Nos. 130, 131 and 132 will result in
disclosures that will be materially different from those presently included in
its financial statements.
10
<PAGE> 11
PART II
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to risks relating to changes in interest rates and stock
market fluctuations.
At June 30, 1998, the Company maintains a portion of its cash and cash
equivalents in financial instruments with original maturities of three months or
less. These financial instruments, principally comprised of government backed
money market funds, are subject to interest rate risk and will decline in value
if interest rates increase. The Company also maintains a short-term investment
portfolio containing common stocks that are subject to market risk. The Company
has not used derivative financial instruments in its investment portfolio.
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data as required by this item are set
forth on pages 26 through 47.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
11
<PAGE> 12
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company (Registrant) are as follows:
<TABLE>
<CAPTION>
Age as of Year of First
Name and Position June 30, 1998 Election Family Relationship
- ----------------- ------------- ------------- --------------------------
<S> <C> <C> <C>
Mark A. LeDoux 44 1986 Son to Chairperson of the
Chief Executive Officer, Director Board, Marie A. LeDoux
William P. Spencer 45 1986 None
President, Treasurer, Chief Operating
Officer, Chief Financial Officer,
Chief Accounting
Officer and Director
Marie A. LeDoux 81 1986 Mother to Chief Executive
Secretary, Chairperson of the Board Officer, Mark A. LeDoux
William R. Kellas
Director 47 1988 None
Lee G. Weldon
Director 59 1992 None
</TABLE>
MARK A. LEDOUX was a director, the President and Chief Executive Officer of
Natural Alternatives, Inc., the predecessor corporation, from its formation in
1981 until the 1986 merger into the Company. Mr. LeDoux has been a director and
Chief Executive Officer of the Company since the August 1986 merger of the
predecessor corporation into the Company, which continued the business and
operations of Natural Alternatives, Inc. From August 1986 to December 1996, he
also served as President of the Company. From 1976 to 1980, Mr. LeDoux held the
position of Executive Vice President and Chief Operating Officer of Kovac
Laboratories, a company, which was engaged in the business of manufacturing
nutritional supplements. He attended the University of Oklahoma and graduated
Cum Laude with a Bachelor of Arts in Letters in 1975. Mr. LeDoux graduated from
Western State University, College of Law in 1979, with a Juris Doctorate.
WILLIAM P. SPENCER has been a director, Chief Operating Officer and Chief
Financial Officer of the Company since August 1986. He also served as Executive
Vice President until December 1996 when he became President of the Company.
Prior to joining the Company, he was with San Diego Trust and Savings Bank for
ten years, the last four as Vice President. Mr. Spencer received a Bachelor of
Science in Finance in 1974, and a Masters in Business Administration, also in
the area of Finance, in 1979 from San Diego State University.
(continued)
12
<PAGE> 13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
MARIE A. LEDOUX has been a director of the Company since August 1986, and has
also been Chairperson and Secretary since that time. Mrs. LeDoux was also the
Chairperson/Advisor of the Company's predecessor from its formation until 1986.
She has thirty-nine years of experience in the area of nutrition. In 1978, Mrs.
LeDoux was awarded an Honorary Fellowship in the International Academy of
Preventive Medicine. In 1981, she received an Honorary Ph.D. in Humanities from
the Heritage Institute. Marie A. LeDoux is the mother of Mark A. LeDoux. For the
last eighteen years, Mrs. LeDoux has been the President of Play N' Talk
International, a company which is in the business of preparing instructional
materials for children's reading programs.
WILLIAM R. KELLAS, Ph.D. became a director of the Company in October 1987. Mr.
Kellas graduated from the University of Southern California earning a Bachelor
of Science in Business with a Minor in Physics. He earned his Ph.D. in Health
Sciences from the Doctors University of Natural Health Sciences in 1985. Dr.
Kellas also graduated from Harvard University's Financial and Management
Program. From 1974 to 1984, Dr. Kellas was employed by IBM as the firm's Western
Regional Marketing Manager. From 1984 to 1985, Dr. Kellas was a District Manager
for Wang Laboratories. In 1985, Dr. Kellas founded Comprehensive Health Centers,
a medical clinic offering integrated medical, dental, chiropractic, and natural
therapeutic services. In addition, Dr. Kellas is the President of Professional
Preference, a biochemical firm that sells computerized regimens of protocols
that are designed to regenerate an individual's immune system and fight related
degenerative diseases.
LEE G. WELDON has been a director of the Company since June of 1992. He was the
Chairman and Chief Executive Officer of Kal Healthway, Inc., a food supplement
distributor, until it was acquired by another company during the past year. In
1963, Mr. Weldon graduated from UCLA and obtained a Bachelor of Science in
Business Administration. In 1982, Mr. Weldon became a member of Young
President's Organization (YPO), and since 1990 he has been a graduate member of
YPO.
BOARD MEMBERS
Members of the Board of Directors are elected in three classes (Class I, Class
II, and Class III) to serve initially until the 2000, 1998, and 1999 annual
meetings of stockholders, respectively, and until the election and qualification
of their successors. After the initial term of directors of each class
terminates, at each regularly scheduled annual meeting of stockholders held to
elect directors of that class, the number of directors equal to the number of
directors of the class whose term expires at the time of such meeting shall be
elected to hold office until the third succeeding annual meeting of
stockholders. Directors receive $500 for each Directors' meeting attended in
person. Mark A. LeDoux is the son of Marie A. LeDoux. Executive officers serve
at the discretion of the Board of Directors. The classes of directors are as
follows:
<TABLE>
<CAPTION>
Director Class
-------- -----
<S> <C>
Mark A. LeDoux I
Marie A. LeDoux, Lee G. Weldon II
William R. Kellas, William P. Spencer III
</TABLE>
COMMITTEES
The Company currently has a Compensation Committee, composed of William R.
Kellas and Lee G. Weldon. The Company's Audit Committee is comprised of William
R. Kellas, Lee G. Weldon and William P. Spencer.
(continued)
13
<PAGE> 14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Based solely on its review of the copies of Form 4's received by the Company,
the Company believes that during its most recent fiscal year ended June 30,
1998, that its officers and directors complied with the filing requirements
under Section 16(a).
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND OTHER COMPENSATION
The following table sets forth compensation for services rendered in all
capacities to the Company during the years ended June 30, by each of the
executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
------------------------------- All Other
Name and Principal Position Year Salary Bonus Other(1) Compensation(2)
- ---------------------------------------- ---- -------- ------ ---------- ----------------
<S> <C> <C> <C> <C> <C>
Mark A. LeDoux, Chief Executive Officer
and Director 1998 208,000 304 40,270 27,842
1997 201,579 50,345 28,422 18,703
1996 213,520 45,300 8,592 21,987
William P. Spencer, President, Chief
Financial Officer, and Director 1998 182,000 304 779,409 39,838
1997 178,830 72,304 166,178 37,438
1996 169,275 40,300 113,656 35,005
</TABLE>
(1) Amounts do not exceed the lesser of $50,000 or 10% of salary and bonus
combined for named executive, except as set forth in the following table.
(2) See following table.
(continued)
14
<PAGE> 15
PART III
ITEM 11. EXECUTIVE COMPENSATION (continued)
SUMMARY OF CASH AND OTHER COMPENSATION (continued)
<TABLE>
<CAPTION>
Mark A. William P.
LeDoux Spencer
------- ----------
<S> <C> <C>
Other Annual Compensation-1998
Gain from exercise and sale of stock options $ -- $730,084
Personal Transportation 18,000 18,000
Other Personal Expenses 22,270 31,325
------- --------
Totals $40,270 $779,409
------- --------
Other Annual Compensation-1997
Gain from exercise and sale of stock options $ -- $ 92,799
Personal Transportation 18,600 13,800
Other Personal Expenses 9,822 59,579
------- --------
Totals $28,422 $166,178
------- --------
Other Annual Compensation-1996
Gain from exercise and sale of stock options $ -- $ 53,078
Personal Transportation -- 7,284
Other Personal Expenses -- 40,600
Tax Payment Reimbursements -- 12,694
------- --------
Totals $ 8,592 $113,656
------- --------
All Other Compensation-1998
401(k) Employer Contributions $ 5,675 $ 7,647
Life Insurance and Disability Premiums 4,621 15,446
Medical, Dental and Vision 15,046 14,245
Board of Director Meetings 2,500 2,500
------- --------
Totals $27,842 $ 39,838
------- --------
All Other Compensation-1997
401(k) Employer Contributions $ 5,550 $ 6,698
Life Insurance Premiums 1,920 13,990
Medical, Dental and Vision 10,233 15,750
Board of Director Meetings 1,000 1,000
------- --------
Totals $18,703 $ 37,438
------- --------
All Other Compensation-1996
401(k) Employer Contributions $ 8,759 $ 10,974
Life Insurance Premiums 1,819 13,998
Medical, Dental and Vision 9,909 8,533
Board of Director Meetings 1,500 1,500
------- --------
Totals $21,987 $ 35,005
------- --------
</TABLE>
(continued)
15
<PAGE> 16
PART III
ITEM 11. EXECUTIVE COMPENSATION (continued)
OPTION GRANTS
The following table contains information concerning the stock option grants to
the Company's Chief Executive Officer and each of the other named executive
officers that were made for the fiscal year ended June 30, 1998:
POTENTIAL VALUE OF OPTIONS GRANTED IN FISCAL 1998
<TABLE>
<CAPTION>
Potential at
Shares % of Exercise Expire ----------------------
Granted Total options Price Date 5% 10%
------- ------------- -------- ---------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Mark A. LeDoux 30,000 10.00% $10.50 January 21, 2003 $ 67,884 $146,192
William P. Spencer 110,000 36.67% $10.50 January 21, 2003 $248,910 $536,036
All other 160,000 53.33%
------- ------
Total 300,000 100.00%
======= ======
</TABLE>
(1) There is no assurance provided to any executive officer or any other
holder of the Company's securities that the actual stock price
appreciation over the five-year option term will be at the assumed 5% and
10% levels or at any other defined level. Unless the market price of the
Company's common stock does in fact appreciate over the option term, no
value will be realized from the option grants made to the executive
officers.
(2) The options granted to the named executives were granted under the
Company's 1992 Incentive Stock Option Plan on January 21, 1998 at the fair
market value price of $10.50. The following restrictions apply to the
options granted: (a) The recipient must be employed with the Corporation
on the date of exercise, (b) fifty percent of the granted options are
exercisable on the date of grant, (c) the remaining fifty percent will
become exercisable on January 21, 1999.
OPTION EXERCISES AND HOLDINGS
The following table sets forth information for the year ended June 30, 1998,
concerning option exercises and option holdings under the 1992 Incentive Stock
Option Plan, the 1992 Nonqualified Stock Option Plan, and the 1994 Nonqualified
Stock Option Plan with respect to the Company's executive officers:
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Value Number of Unexercised Value of Unexercised In-The
Realized Market Options/SAR's at Fiscal Money Options/SAR's at
Price at Year-End(#) Fiscal Year End(1)
Shares Exercise less ---------------------------- ------------------------------
Acquired Exercise Price Exercisable Unexercisable Exercisable Unexercisable
-------- --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
1992 Plans-
Mark A. LeDoux 0 $ 0 90,000 0 $1,192,500 $0
William P. Spencer 68,000 $730,084 137,000 0 $1,453,375 $0
1994 Plan-
Mark A. LeDoux 0 $ 0 100,000 0 $1,537,500 $0
William P. Spencer 0 $ 0 125,000 0 $1,921,875 $0
</TABLE>
(1) The closing price of the Company's common stock at June 30, 1998, as
quoted on the Nasdaq Exchange, was $20.00.
16
<PAGE> 17
PART III
ITEM 11. EXECUTIVE COMPENSATION (continued)
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Company's Compensation Committee for fiscal 1998 were William
R. Kellas and Lee G. Weldon. No current member of the Compensation Committee is
a current or former officer or employee of the Company or its subsidiaries.
EMPLOYMENT AGREEMENTS
There were no employment agreements in effect at June 30, 1998.
BONUS PLAN
There were no bonus plans in effect at June 30, 1998.
401(k) PLAN
The NATURAL ALTERNATIVES Partnership for Profits Plan (Plan) is considered a
qualified plan under Section 401(k) of the Internal Revenue Code. All employees
of the Company with twelve (12) months and at least one thousand hours of
service during the twelve month period are eligible to participate in the Plan.
The Plan provides for employee contributions of up to 15% of compensation.
Employer contributions are determined by the Board of Directors at their
discretion. The Company may match up to 100% of each employee's contribution,
which does not exceed 5% of the employee's total compensation. Employee
contributions in the Plan are 100% vested. Participants become vested in
employer contributions at the rate of 34% the first year, 67% the second year
and 100% after three years. The Company contributed and expensed $146,277,
$114,206, and $101,161 in 1998, 1997 and 1996, respectively.
STOCK OPTION PLANS
The Company maintains three stock option plans: the 1992 Incentive Stock Option
Plan (Incentive Plan) and the 1992 Nonqualified Stock Option Plan (1992
Nonqualified Plan), both of which were approved by the shareholders of the
Company at its Annual Meeting of Shareholders on June 5, 1992, and the 1994
Nonqualified Stock Option Plan (1994 Nonqualified Plan) which was approved by
the Board of Directors on December 9, 1994, and by the shareholders of the
Company at its Annual Meeting of Shareholders on May 10, 1996.
The Incentive Plan provides for the granting of "incentive stock options" as
described in Section 422 of the Internal Revenue Code (Code). The 1992 and 1994
Nonqualified Plans provide for the granting of nonqualified stock options which
are not intended to qualify under any provision of the Code.
On September 9, 1993, all options then authorized under the Incentive Plan and
1992 Nonqualified Plan were granted with exercise prices equal to the fair
market value price of $4.875 per share. On December 9, 1994, the Shareholders
approved an amendment to the Incentive Plan, increasing the number of common
shares that may be granted from 200,000 to 500,000. On January 24, 1995, options
for 500,000 shares under the 1994 Plan were granted at the fair market value of
$4.625 per share. On January 21, 1998, options for 300,000 shares under the
Incentive Plan were granted at the fair market value of $10.50 per share.
(continued)
17
<PAGE> 18
PART III
ITEM 11. EXECUTIVE COMPENSATION (continued)
STOCK OPTION PLANS (continued)
Incentive Plan
The purpose of the Incentive Plan is to promote the interests of the Company by
providing a method whereby key management personnel of the Company and its
subsidiaries responsible for the management, growth and financial success of the
Company may be offered incentives to encourage them to acquire a proprietary
interest or to increase their proprietary interest in the Company, and to remain
in the employ of the Company and its subsidiaries. The total number of shares
issuable under the Incentive Plan may not exceed 500,000 shares, subject to
certain adjustments.
The Incentive Plan is to be administered by either the Board of Directors
(Board) or the Company's Compensation Committee. Subject to the express
provisions of the Incentive Plan, the Board or the Compensation Committee will
have complete authority to determine the employees to whom, and the times at
which options are to be granted, the number of shares to be subject to each
option, the option term, and all other terms and conditions of an option. The
Board or the Compensation Committee will also have the authority to interpret
the provisions in the Incentive Plan and to prescribe rules and regulations for
its orderly administration.
The exercise price of incentive stock options granted under the Incentive Plan
may not be less than 100% of the fair market value of the Common Stock on the
date of the option grant. With respect to any key employee who owns stock
representing more than 10% of the voting power of the outstanding capital stock
of the Company, the exercise price of any incentive stock option may not be less
than 110% of the fair market value of such shares at the time of grant and the
term of such option may not exceed five years. Each option granted under the
Incentive Plan will be exercisable at such time or times, during such period,
and for such number of shares as is determined by the Board or the Compensation
Committee and set forth in the instrument evidencing the option. No option
granted under the Incentive Plan shall have a term in excess of ten years from
the date of grant.
During the lifetime of the optionee, the option will be exercisable only by the
optionee and may not be assigned or transferred by the optionee other than by
will or the laws of descent or distribution. Should an optionee cease to be an
employee of the Company or its subsidiaries for any reason other than death,
then any outstanding option granted under the Incentive Plan will be exercisable
by the optionee only during the three month period following cessation of
employee status, and only to the extent of the number of shares for which the
option is exercisable at the time of such cessation of employee status.
If the Company or its shareholders enter into an agreement to dispose of all or
substantially all of the assets or outstanding capital stock of the Company by
sale, merger, reorganization or liquidation, each option outstanding will become
exercisable during the 15 days immediately prior to the scheduled consummation
of such sale, merger, reorganization or liquidation with respect to the full
number of shares of the Company's Common Stock purchasable under such option,
unless the successor corporation or parent assumes or replaces the outstanding
options.
In the event any change is made to the outstanding shares of the Company's
Common Stock without the receipt of consideration by the Company, then unless
such change results in the termination of all outstanding options, appropriate
adjustments will be made to the maximum number of shares issuable under the
Incentive Plan and to the number of shares and the option price per share of the
stock subject to each outstanding option.
(continued)
18
<PAGE> 19
PART III
ITEM 11. EXECUTIVE COMPENSATION (continued)
STOCK OPTION PLANS (continued)
1992 and 1994 Nonqualified Plans
The purpose of the 1992 and 1994 Nonqualified Plans (the Nonqualified Plans) is
to provide an incentive to eligible employees, consultants and officers whose
present and potential contributions are important to the continued success of
the Company, to afford those individuals the opportunity to acquire a
proprietary interest in the Company and to enable the Company to enlist and
retain in its employment qualified personnel for the successful conduct of its
business. Officers, consultants and other employees of the Company and its
subsidiaries whom the administrators deem to have the potential to contribute to
the success of the Company shall be eligible to receive options under the
Nonqualified Plans.
The administrators of the Nonqualified Plans shall be either the Board of the
Company or a committee designated by the Board. The administrators have full
power to select, from among the officers, employees and consultants of the
Company eligible for options, the individuals to whom options will be granted,
and to determine the specific terms of each grant, subject to the provisions of
the Nonqualified Plans.
The exercise price for each share covered by the Nonqualified Plans will be
determined by the administrators, but will not be less than 60% and 100% for the
1992 Nonqualified Plan and the 1994 Nonqualified Plan, respectively, of the fair
market value of a share of Common Stock of the Company on the date of grant of
such option. The term of each option will be fixed by the administrators of the
Nonqualified Plans. In addition, the administrators will determine the time or
times each option may be exercised. Options may be exercisable in installments,
and the exercisability of options may be accelerated by the administrators.
Options granted pursuant to the Nonqualified Plans are nontransferable by their
participants, other than by will or by the laws of descent or distribution, and
may be exercised during the lifetime of the participant only by the participant.
In the event of an optionee's termination of employment or consulting
relationship for any reason other than death or total and permanent disability,
an option may be thereafter exercised, to the extent it was exercisable at the
date of such termination, for such period of time as the administrator shall
determine at the time of grant, but only to the extent that the term of the
option has not expired.
Subject to the Nonqualified Plans' change in control provisions, in the event of
the sale of substantially all of the assets of the Company or the merger of the
Company with or into another corporation, each outstanding option shall be
assumed or substituted by such successor corporation or parent or subsidiary of
such successor corporation. The Nonqualified Plans also provide that in the
event of a change of control of the Company, certain acceleration and valuation
provisions shall apply, except as otherwise determined by the Board at its
discretion prior to the change of control.
In the event of any change in capitalization in the Company which results in an
increase or decrease in the number of outstanding shares of Common Stock without
receipt of consideration by the Company, an appropriate adjustment shall be made
in the number of shares which have been reserved for issuance under the
Nonqualified Plans and the price per share covered by each outstanding option.
DEFINED BENEFIT PENSION PLAN
Effective January 1, 1997, the Company adopted a defined benefit pension plan
(the "Plan") covering substantially all of its employees. The benefits are based
on years of service and the employee's compensation during the five years before
retirement. The Company expects to make annual contributions to the Plan equal
to the maximum amount that can be deducted for income tax purposes. For the year
ended June 30, 1998, the estimated current service cost (normal cost) and the
amortized portion of the unfunded estimated accrued liability for prior service
cost, using a 30-year funding period, amounted to $404,614. This amount has been
accrued in the current period.
19
<PAGE> 20
PART III
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as far as is known to the Board of Directors or
management of the Company, as of September 24, 1998, the stock ownership of each
person known by the Company to be the beneficial owner of 5% or more of the
Company's Common Stock, all Directors individually, all Directors and Officers
as a group and by the individuals listed under the summary compensation table.
Directors and Officers
<TABLE>
<CAPTION>
Amounts and Nature
Name and Address of Beneficial Percent
Title of Class of Beneficial Owner Ownership (1)(2) of Class(2)
------------- -------------------------------- ------------------- -----------
<S> <C> <C> <C>
Common Stock Marie A. LeDoux (3) 1,012,301 15.96%
1185 Linda Vista Drive
San Marcos CA 92069
Common Stock Mark A. LeDoux (4) 412,417 6.50%
1185 Linda Vista Drive
San Marcos CA 92069
Common Stock William R. Kellas (5) 29,500 .47%
1185 Linda Vista Drive
San Marcos CA 92069
Common Stock William P. Spencer (6) 139,792 2.20%
1185 Linda Vista Drive
San Marcos CA 92069
Common Stock Lee G. Weldon 43,880 .69%
1185 Linda Vista Drive
San Marcos CA 92069
Common Stock All Directors and Officers as a 1,637,890 25.82%
Group (5 persons)
</TABLE>
(continued)
20
<PAGE> 21
PART III
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(continued)
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, to the Company's knowledge, the
persons named in the table have sole voting and investment power with
respect to all shares of Common Stock.
(2) Shares of common stock which were not outstanding but which could be
acquired upon exercise of an option within 60 days from the date of this
filing are considered outstanding for the purpose of computing the
percentage of outstanding shares beneficially owned. However, such shares
are not considered to be outstanding for any other purpose.
(3) Includes 10,000 shares, which Mrs. LeDoux has the right to acquire upon
exercise of options exercisable within 60 days of the date of this filing.
(4) Includes 800 shares of common stock held in the name of Mr. LeDoux's wife,
Julie LeDoux, and 8,000 shares of common stock held as custodian for his
children and a niece. Also includes 100,000 shares, which Mr. LeDoux has
the right to acquire upon exercise of options exercisable within 60 days
of the date of this filing.
(5) Includes 1,500 shares of common stock held in the name of Mr. Kellas'
wife.
(6) Includes 2,400 shares of common stock held as custodian for Mr. Spencer's
children and 125,000 shares, which he has the right to acquire upon
exercise of options exercisable within 60 days of the date of this filing.
There is no arrangement known to the Company, the operation of which may at a
subsequent date, result in a change of control of the Company.
21
<PAGE> 22
PART III
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In June 1996, the Company acquired a portion of a building occupied by certain
of its offices and production facilities which, up to that time, were being
leased from its two principal stockholders, Marie A. LeDoux and Mark A. LeDoux.
The lease provided for rent payable in the amount of $60,000 per year. The
purchase price of the building was $545,000 which, in the opinion of management
and an independent certified appraiser who evaluated the property in April 1996,
represented fair market value.
The Company entered into an agreement with the father-in-law and mother-in-law
of the Chief Executive Officer of the Company in December 1991, which provides
commissions on sales to a particular customer. The term of the agreement is ten
years and will expire in December 2001. The commission equals 5% of sales, with
earnings capped at $25,000 per calendar quarter. Amounts paid under this
agreement were $100,000 for each of the years ending June 30, 1998, 1997 and
1996. There were no amounts owed under the agreement at June 30, 1998 or 1997.
Included in notes receivable are notes from the Company's Chief Executive
Officer and President. The balance of the notes, including accrued interest, was
$79,036 and $95,365, respectively, as of June 30, 1998 and $74,444 and $89,824,
respectively, at June 30, 1997.
Additionally, during the year ended June 30, 1998, the Company made
noninterest-bearing loans to the Chairman of the Board and the President in the
amount of $50,000 and $13,803, respectively, bringing the aggregate amount of
such loans to $282,815. Amounts owed on these loans, which are secured by
proceeds from life insurance policies on their respective lives, were $200,000
and $150,000 for the Chairman of the Board and $82,815 and $69,012 for the
President at June 30, 1998 and 1997, respectively.
The Company paid commissions during the year ended June 30, 1996 in the amount
of $6,916 to the Chairman of the Board.
22
<PAGE> 23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The financial statements listed in the accompanying index to consolidated
financial statements are filed as part of this report.
2. FINANCIAL STATEMENT SCHEDULES
The financial statement schedule listed in the accompanying index to the
consolidated financial statements is filed as part of this annual report.
Schedules not included have been omitted because they are not applicable or the
information required is included in the financial statements and notes thereto.
(b) EXHIBITS
Exhibit 23 Re: Consent of KPMG Peat Marwick LLP
Exhibit 27 Financial Data Schedule
(c) REPORTS FORM 8-K
Not Applicable
23
<PAGE> 24
NATURAL ALTERNATIVES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
JUNE 30, 1998
<TABLE>
<S> <C>
Independent Auditors' Report......................................................................... 25
Consolidated Balance Sheets as of June 30, 1998 and 1997............................................. 26
Consolidated Statements of Earnings for the years ended June 30, 1998, 1997 and 1996................. 28
Consolidated Statements of Stockholders' Equity for the years ended June 30, 1998, 1997 and 1996..... 29
Consolidated Statements of Cash Flows for the years ended June 30, 1998, 1997 and 1996............... 30
Notes to Consolidated Financial Statements........................................................... 32
Schedule II - Valuation and Qualifying Accounts for the years ended June 30, 1998, 1997 and 1996..... 48
</TABLE>
24
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
NATURAL ALTERNATIVES INTERNATIONAL, INC.:
We have audited the consolidated financial statements of Natural Alternatives
International, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Natural Alternatives
International, Inc. and subsidiaries as of June 30, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 1998, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG Peat Marwick LLP
San Diego, California
September 8, 1998
25
<PAGE> 26
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 4,714,212 $ 3,469,739
Accounts receivable - less allowance for doubtful
accounts of $1,073,000 at June 30, 1998 and $1,006,000
at June 30, 1997 (Notes E, F, and L) 12,558,731 6,990,121
Inventories (Notes B, E, and F) 11,504,936 5,690,850
Tax refund receivable -- 842,209
Notes receivable - current portion (Note K) 399,307 235,613
Prepaid expenses 594,054 404,899
Deferred income taxes (Note H) 854,000 851,000
Deposits 641,573 322,269
Other current assets 229,308 51,279
------------ ------------
Total Current Assets 31,496,121 18,857,979
------------ ------------
Property and equipment, net (Notes C, E, F, G, and K) 10,531,865 8,259,705
------------ ------------
Other Assets:
Investments (Note D) 61,971 58,862
Notes receivable, less current portion (Note K) 160,273 261,697
Other noncurrent assets, net 737,049 670,513
------------ ------------
Total Other Assets 959,293 991,072
------------ ------------
TOTAL ASSETS $42,987,279 $28,108,756
============ ============
</TABLE>
26
<PAGE> 27
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS (continued)
JUNE 30, 1998 AND 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Current Liabilities:
Accounts payable $ 12,301,859 $ 6,824,198
Current installments of long-term debt (Note F) 46,501 164,266
Current installments of capital lease obligation (Note G) 23,542 25,189
Income taxes payable (Note H) 378,055 --
Accrued compensation and employee benefits 438,242 321,337
------------ ------------
Total Current Liabilities 13,188,199 7,334,990
Deferred income taxes (Note H) 500,000 487,000
Long-term debt, less current installments (Note F) 977,375 1,100,285
Long-term pension liability (Note I) 662,564 463,381
Capital lease obligations, less current installments (Note G)
-- 23,613
------------ ------------
Total Liabilities $ 15,328,138 $ 9,409,269
------------ ------------
Stockholders' Equity (Note J):
Preferred stock; $.01 par value; 500,000 shares
authorized; none issued or outstanding
Common stock; $.01 par value; 8,000,000 shares
authorized; issued and outstanding 5,768,209 at June 30,
1998 and 5,429,764 at June 30, 1997 57,682 54,298
Additional paid-in capital 9,756,822 6,675,426
Retained earnings 17,892,778 12,021,013
Net unrealized losses on investments (Note D) (48,141) (51,250)
------------ ------------
Total Stockholders' Equity $ 27,659,141 $ 18,699,487
------------ ------------
Commitments and contingencies (Notes K, L and M)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 42,987,279 $ 28,108,756
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 28
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED JUNE 30, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 67,894,305 $ 49,444,221 $ 47,621,804
Cost of goods sold 49,157,717 39,019,224 35,182,059
------------ ------------ ------------
GROSS PROFIT 18,736,588 10,424,997 12,439,745
Selling, general &
administrative expenses 9,114,110 8,609,925 7,176,369
------------ ------------ ------------
INCOME FROM OPERATIONS 9,622,478 1,815,072 5,263,376
------------ ------------ ------------
Other income (expense):
Interest income 194,781 163,368 92,926
Interest expense (110,337) (147,373) (190,850)
Other, net (40,157) 8,853 41,865
------------ ------------ ------------
44,287 24,848 (56,059)
------------ ------------ ------------
EARNINGS BEFORE
INCOME TAXES 9,666,765 1,839,920 5,207,317
Income taxes (Note H) 3,795,000 720,000 1,985,000
------------ ------------ ------------
NET EARNINGS $ 5,871,765 $ 1,119,920 $ 3,222,317
============ ============ ============
NET EARNINGS PER COMMON SHARE:
Basic $ 1.06 $ 0.21 $ 0.61
============ ============ ============
Diluted $ 1.00 $ 0.20 $ 0.58
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 29
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
NET UNREALIZED
COMMON STOCK ADDITIONAL GAINS
----------------------- PAID-IN RETAINED (LOSSES) ON
SHARES AMOUNT CAPITAL EARNINGS INVESTMENTS TOTAL
--------- ------- ---------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30,1995 5,257,875 $52,579 $5,586,759 $ 7,678,776 $(39,859) $ 13,278,255
Issuance of common stock
upon exercise of employee
stock options 94,000 940 454,662 -- -- 455,602
Income tax benefit from stock
options exercised -- -- 178,775 -- -- 178,775
Net unrealized gains on
investments -- -- -- -- 24,637 24,637
Net earnings -- -- -- 3,222,317 -- 3,222,317
--------- ------- ---------- ----------- -------- ------------
Balance, June 30, 1996 5,351,875 53,519 6,220,196 10,901,093 (15,222) 17,159,586
Issuance of common stock
upon exercise of employee
stock options 77,889 779 369,630 -- -- 370,409
Income tax benefit from
stock options exercised -- -- 85,600 -- -- 85,600
Net unrealized loss on
investments -- -- -- -- (36,028) (36,028)
Net earnings -- -- -- 1,119,920 -- 1,119,920
--------- ------- ---------- ----------- -------- ------------
Balance, June 30, 1997 5,429,764 54,298 6,675,426 12,021,013 (51,250) 18,699,487
Issuance of common stock
upon exercise of employee
stock options 338,445 3,384 1,646,202 -- -- 1,649,586
Income tax benefit from
stock options exercised -- -- 1,435,194 -- -- 1,435,194
Net unrealized gains on
investments -- -- -- -- 3,109 3,109
Net earnings -- -- -- 5,871,765 -- 5,871,765
--------- ------- ---------- ----------- -------- ------------
Balance, June 30, 1998 5,768,209 $57,682 $9,756,822 $17,892,778 $(48,141) $ 27,659,141
========= ======= ========== =========== ======== ============
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 30
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 5,871,765 $ 1,119,920 $ 3,222,317
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Bad debt provision 360,000 725,000 391,162
Tax benefit on option exercise 1,435,194 85,600 178,775
Depreciation and amortization 1,515,402 1,276,355 1,069,460
Provision for deferred income taxes 10,000 (296,000) (27,000)
Pension expense, net of contributions 88,839 158,560 --
Loss on disposal of assets 54,727 3,601 11,038
Gain on investments -- -- (48,020)
Other (36,808) (18,105) (32,005)
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (6,028,610) (1,747,544) (686,338)
Inventories (5,814,086) 708,742 (1,170,007)
Prepaid expenses (189,155) 107,812 (50,002)
Deposits (319,304) (221,756) 25,710
Tax refund receivable 842,209 (842,209) --
Other assets (134,221) 438,037 37,329
(Decrease) increase in:
Accounts payable 5,044,941 2,785,720 (1,325,016)
Accrued compensation and employee benefits 116,905 40,997 (248,364)
Income taxes payable 378,055 (520,246) (217,829)
Customer deposits -- (2,606) (27,801)
------------ ------------ ------------
Net Cash Provided by Operating Activities 3,195,853 3,801,878 1,103,409
------------ ------------ ------------
</TABLE>
(continued)
30
<PAGE> 31
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FOR THE YEARS ENDED JUNE 30, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment $ 65,000 $ 10,000 $ 55,337
Proceeds from sale of investments -- -- 64,108
Capital expenditures (3,474,569) (2,236,165) (2,064,524)
Capital expenditure-related party -- -- (545,000)
Investment purchases -- (20,000) (16,088)
Issuance of notes receivable (4,625) (183,909) (60,605)
Repayment of notes receivable 79,163 109,262 135,259
------------ ------------ ------------
Net Cash Used in Investing Activities (3,335,031) (2,320,812) (2,431,513)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on lines of credit -- 443,959 --
Payments on lines of credit -- (443,959) --
Payments on long-term debt and capital leases (265,935) (269,163) (311,910)
Proceeds from long-term debt financing -- -- 545,000
Issuance of common stock 1,649,586 370,409 455,602
------------ ------------ ------------
Net Cash Provided by Financing Activities 1,383,651 101,246 688,692
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents 1,244,473 1,582,312 (639,412)
Cash and Cash Equivalents at Beginning of Period 3,469,739 1,887,427 2,526,839
------------ ------------ ------------
Cash and Cash Equivalents at End of Period $ 4,714,212 $ 3,469,739 $ 1,887,427
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 99,602 $ 147,373 $ 190,850
Income Taxes 1,494,000 2,289,959 2,052,000
============ ============ ============
Disclosure of non-cash activities:
Notes payable refinanced with new debt $ 0 $ 0 $ 565,000
Net unrealized gains (losses) on investments 3,109 (36,028) 24,637
Fixed asset purchases in accounts payable 432,720 -- --
Issuance of note receivable for payment of
account receivable 100,000 -- --
Write-off of notes receivable through the
allowance for doubtful accounts -- 15,504 62,790
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE> 32
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Natural Alternatives International, Inc., (the Company) manufactures vitamins,
micronutrients and related nutritional supplements, and provides innovative
private-label products for specialized corporate, institutional and commercial
accounts worldwide. The Company operates as a single business segment.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries: Millennium Health International, Inc. (formerly
Pro-Lean, Inc. and prior to that Sonergy, Inc.), CellLife International, Inc.
and CellLife Pharmaceuticals International, Inc., all of which had been
administered and operated out of the Company's facilities. During fiscal 1997,
the assets and liabilities of each of the subsidiaries were transferred to the
Company and their operations were assumed by the Company. All significant
intercompany accounts and transactions through the date of transfer have been
eliminated.
Cash and Cash Equivalents
For purposes of the statements of cash flows, cash and cash equivalents include
highly liquid investments purchased with an original maturity of three months or
less.
Inventories
Inventories are recorded at the lower of cost (first-in, first-out) or market
(net realizable value). Such costs include raw materials, labor and production
overhead.
Property and Equipment
Property and equipment are stated at cost. Property and equipment under capital
leases are recorded at the lower of fair market value or the present value of
future minimum lease payments and are amortized using the straight-line method
over the shorter of the estimated useful life of the asset or the lease term.
Depreciation of property and equipment is provided using the straight-line
method over their estimated useful lives, generally ranging from 3 to 39 years.
Leasehold improvements are amortized using the straight-line method over the
shorter of the life of the improvement or the remaining term of the lease.
Impairment of Long-Lived Assets
The Company accounts for its long-lived assets in accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
(continued)
32
<PAGE> 33
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Investments
The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The Company's investments, which consist of equity
securities, are classified as available for sale and are carried at fair value,
with unrealized gains and losses excluded from earnings and reported as a
separate component of stockholders' equity.
Revenue Recognition
Revenue is recognized when products are shipped and title has transferred.
Marketing Costs
In order to attract and retain its customer base, the Company provides a wide
range of marketing services to its customers. The Company does not generate fees
or revenues from these services and the related costs are expensed as incurred.
Income Taxes
The Company accounts for income taxes using the asset and liability method in
accordance with Statement of Financial Accounting Standards No. 109 "Accounting
for Income Taxes." Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Stock Option Plans
Prior to July 1, 1996, the Company accounted for its stock option plans in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
July 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net earnings and pro
forma net earnings per share disclosures for employee stock option grants made
in fiscal 1996 and future years as if the fair-value-based method defined in
SFAS No. 123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosures required
by SFAS No. 123.
Fair Value of Financial Instruments
Because of their short maturities, the carrying amounts for cash and cash
equivalents, accounts receivable, notes receivable, investments, accounts
payable, and accrued compensation and employee benefits approximate fair value.
The carrying amounts for long-term debt approximate fair value as the interest
rates and terms are substantially similar to rates and terms that could be
obtained currently for similar instruments.
(continued)
33
<PAGE> 34
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, revenue and expenses, and
the disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
Net Earnings per Share
In 1998, the Company adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128"). SFAS 128 requires the presentation of
basic earnings per share, computed using the weighted average number of shares
outstanding during the period, and diluted earning per share, computed using the
additional dilutive effect of all dilutive securities. The dilutive impact of
stock options and warrants account for the additional weighted average shares of
common stock outstanding for the Company's diluted earnings per share
computation. All prior periods have been restated to conform with the provisions
of SFAS 128. Basic and diluted earnings per share have been calculated as
follows:
For the Years Ended June 30, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
NUMERATOR:
Net earnings - Numerator for basic
and diluted earnings per share income
available to common
shareholders $5,871,765 $1,119,920 $3,222,317
========== ========== ==========
DENOMINATOR:
Denominator for basic
earnings per share - weighted
average shares 5,544,337 5,395,438 5,290,187
Effect of dilutive securities -
employee stock options 322,303 197,638 310,595
---------- ---------- ----------
Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed
conversions 5,866,640 5,593,076 5,600,782
========== ========== ==========
Basic earnings per share $ 1.06 $ 0.21 $ 0.61
Diluted earnings per share $ 1.00 $ 0.20 $ 0.58
</TABLE>
(continued)
34
<PAGE> 35
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Concentrations of Credit Risk
Financial instruments that subject the Company to concentrations of credit risk
consist primarily of cash and cash equivalents and accounts receivable. The
Company places its cash and cash equivalent investments with high credit
qualified financial institutions. Credit risk with respect to receivables is
concentrated with the Company's two largest customers (see Note L). These two
customers' receivable balances collectively represent 34% and 31% of total
accounts receivable at June 30, 1998 and 1997, respectively. Concentrations of
credit risk related to the remaining accounts receivable balance are limited due
to the large number of customers comprising the Company's remaining customer
base and their dispersion across many different industries and geographies.
Reclassifications
Certain amounts in prior years' consolidated financial statements have been
reclassified to conform to the 1998 presentation.
B. INVENTORIES
Inventories are comprised of the following at June 30:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Raw materials $ 7,049,954 $2,747,451
Work in progress 3,971,315 2,598,430
Finished goods 483,667 344,969
----------- ----------
$11,504,936 $5,690,850
=========== ==========
</TABLE>
35
<PAGE> 36
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
C. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at June 30:
<TABLE>
<CAPTION>
Life Used For
Depreciation 1998 1997
-------------- ----------- -----------
<S> <C> <C> <C>
Land NA $392,600 $392,600
Building and building improvements 5 - 39 years 3,140,655 3,124,691
Machinery and equipment 3 - 15 years 10,077,375 7,649,609
Office equipment and furniture 5 to 7 years 2,304,243 2,103,479
Equipment under capital leases 5 Years 516,362 516,362
Vehicles 3 years 42,684 49,534
Leasehold improvements 5 to 39 years 1,274,076 268,968
----------- -----------
Total property and equipment 17,747,995 14,105,243
Less accumulated depreciation and amortization (7,216,130) (5,845,538)
----------- -----------
Property and equipment, net $10,531,865 $ 8,259,705
=========== ===========
</TABLE>
At June 30, 1998 and 1997, accumulated depreciation and amortization includes
$477,532 and $452,343, respectively, of amortization of equipment under capital
leases.
D. INVESTMENTS
Investments consist of marketable securities. Securities held at June 30, 1998
and 1997 are considered "available for sale securities." Securities are valued
at $61,971 and $58,862 as of June 30, 1998 and 1997. The security portfolio
includes gross unrealized losses, net of tax, of $48,141 and $51,250 at June 30,
1998 and 1997.
E. LINE OF CREDIT AGREEMENTS
The Company has revolving lines of credit agreements permitting borrowings up to
$3,000,000, which are secured by the Company's receivables, inventories,
equipment, and vehicles and bear interest at the bank's prime rate, which was
8.50% at June 30, 1998. Advances against the revolving lines of credit cannot
exceed 70% of eligible receivables. These agreements contain financial covenants
concerning limitations on maintenance of debt, certain financial ratios and
other matters. The lines of credit expire on January 19, 1999; management
expects such lines to be renewed in the normal course of business. There were no
amounts outstanding under these credit agreements at June 30, 1998 and 1997,
respectively.
36
<PAGE> 37
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F. LONG-TERM DEBT
Long-term debt consisted of the following as of June 30:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Note payable to bank, secured by building, interest at
8.25%, principal and interest payments of $10,769
monthly, due 2011 $ 1,023,876 $ 1,066,644
Note payable to bank, repaid in November 1997 -- 197,907
------------ ------------
1,023,876 1,264,551
Less current installments (46,501) (164,266)
------------ ------------
Long-term debt, less current installments $ 977,375 $ 1,100,285
============ ============
</TABLE>
Aggregate amounts of long-term debt maturities as of June 30, 1998 are as
follows:
<TABLE>
<S> <C>
1999 $ 46,501
2000 50,531
2001 54,812
2002 59,509
2003 64,608
Thereafter 747,915
----------
$1,023,876
==========
</TABLE>
37
<PAGE> 38
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
G. CAPITAL LEASE OBLIGATION
The Company leases certain equipment under a capital lease, which expires in
fiscal year 1999. The present value of the future minimum capital lease payments
as of June 30 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Capital lease payable to AT&T Credit Corporation,
secured by phone system, interest at 13%,
principal and interest in monthly installments of
$2,504 through May 1999 $ 24,964 $ 55,078
Less amount representing interest (1,422) (6,276)
-------- --------
Present value of net minimum lease payments 23,542 48,802
Less current installments (23,542) (25,189)
-------- --------
Capital lease obligations - less current installments $ -- $ 23,613
======== ========
</TABLE>
38
<PAGE> 39
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
H. INCOME TAXES
Income taxes for the year ended June 30 consist of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal $ 3,104,000 $ 850,000 $ 1,712,000
State 681,000 166,000 300,000
------------ ------------ ------------
3,785,000 1,016,000 2,012,000
------------ ------------ ------------
Deferred:
Federal 8,500 (215,000) (15,000)
State 1,500 (81,000) (12,000)
------------ ------------ ------------
10,000 (296,000) (27,000)
------------ ------------ ------------
Income taxes $ 3,795,000 $ 720,000 $ 1,985,000
============ ============ ============
</TABLE>
The provision (benefits) for deferred income taxes for the year ended June 30
consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Accelerated depreciation and
amortization for tax purposes 13,000 95,000 78,000
Increase in valuation allowance -- 2,000 --
Accrued compensation -- -- 108,000
Inventory valuation reserve (24,000) (131,000) (202,000)
Bad debt expense 238,000 (309,000) (41,000)
Accrued vacation expense 1,000 (15,000) (6,000)
Customer deposits -- (1,000) 11,000
State income taxes (207,000) 63,000 48,000
Other, net (11,000) -- (23,000)
-------- -------- --------
10,000 (296,000) (27,000)
======== ======== ========
</TABLE>
39
<PAGE> 40
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
H. INCOME TAXES (continued)
Net deferred tax assets and deferred tax liabilities as of June 30 are as
follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts 198,000 436,000
Accrued vacation expense 53,000 54,000
Investment loss carryforward 36,000 36,000
State income taxes 232,000 25,000
Allowance for inventory valuation 357,000 333,000
Other, net 14,000 3,000
-------- --------
Total gross deferred tax assets 890,000 887,000
Less valuation allowance 36,000 36,000
-------- --------
Net deferred tax assets 854,000 851,000
Deferred tax liabilities:
Accumulated depreciation and amortization 500,000 487,000
-------- --------
Net deferred tax asset 354,000 364,000
======== ========
</TABLE>
The valuation allowance for deferred tax assets was $36,000 at June 30, 1998 and
1997. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Management considers, among other
things, the scheduled reversal of deferred tax liabilities, projected future
taxable income, and other planning strategies. In making this assessment,
management believes it is more likely than not that the Company will realize the
benefit of the deferred tax asset, net of the existing valuation allowance, at
June 30, 1998.
(continued)
40
<PAGE> 41
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
H. INCOME TAXES (continued)
A reconciliation of income taxes computed by applying the statutory federal
income tax rate of 34% to earnings before income taxes for the year ended June
30 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- -------- ----------
<S> <C> <C> <C>
Income taxes computed at statutory federal
income tax rate $3,286,700 $626,000 $1,770,000
State income taxes, net of federal income
tax benefit 451,000 56,000 190,000
Increase in valuation allowance -- 2,000 --
Expenses not deductible for tax purposes 35,000 31,000 22,000
Other 22,300 5,000 3,000
---------- -------- ----------
Income taxes as reported $3,795,000 $720,000 $1,985,000
========== ======== ==========
Effective tax rate 39.3% 39.1% 38.1%
========== ======== ==========
</TABLE>
I. EMPLOYEE BENEFIT PLANS
The Company has a profit sharing plan pursuant to Section 401(k) of the Internal
Revenue Code, whereby participants may contribute a percentage of compensation,
but not in excess of the maximum allowed under the Code. All employees with
twelve months and at least one thousand hours of service during the twelve-month
period are eligible to participate in the plan. The Company may make
contributions at the discretion of its Board of Directors. The Company
contributed and expensed $146,277, $114,206 and $100,161 in 1998, 1997 and 1996,
respectively.
The Company has a "Cafeteria Plan" pursuant to Section 125 of the Internal
Revenue Code, whereby health care benefits are provided for active employees
through insurance companies. Substantially all active full-time employees are
eligible for these benefits. The Company recognizes the cost of providing these
benefits by expensing the annual premiums, which are based on benefits paid
during the year. The premiums expensed for these benefits totaled $241,815,
$228,805 and $217,375 for 1998, 1997 and 1996, respectively.
Effective January 1, 1997, the Company adopted a defined benefit pension plan
(the "Plan") covering substantially all of its employees. The benefits are based
on years of service and the employee's compensation during the five years before
retirement. The Company expects to make annual contributions to the Plan equal
to the maximum amount that can be deducted for income tax purposes.
(continued)
41
<PAGE> 42
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
I. EMPLOYEE BENEFIT PLANS (continued)
The following table sets forth the plan's funded status and amount recognized in
the Company's consolidated balance sheets at June 30:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested $ 887,697 $ 417,236
Non-vested 88,617 120,905
------------ ------------
$ 976,314 $ 538,141
============ ============
Projected benefit obligation $ 2,084,109 $ 1,207,944
Plan assets at fair value (313,750) --
------------ ------------
Projected benefit obligation (in excess of) plan assets 1,770,359 1,207,944
Unrecognized net (loss) gain (529,132) 3,753
Prior service cost not yet recognized in net periodic
pension cost (993,828) (1,053,137)
------------ ------------
Increase in accrued pension cost 247,399 158,560
Adjustment to recognize minimum liability 415,165 304,821
------------ ------------
Accrued pension cost at end of year $ 662,564 $ 463,381
============ ============
Net pension cost includes the following components:
Service cost - benefits earned during the period $ 268,815 $ 91,934
Interest cost on projected benefit obligation 84,171 37,172
Actual return on plan assets (5,368) --
Net amortization and deferral 56,996 29,454
------------ ------------
Net pension cost $ 404,614 $ 158,560
============ ============
Assumptions used in accounting for the pension plan
as of June 30 are as follows:
Discount rate 6.00% 7.00%
Rates of increase in compensation levels 5.90% 5.76%
Expected long-term rate of return on plan assets 7.50% 7.50%
============ ============
</TABLE>
42
<PAGE> 43
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
J. STOCKHOLDERS' EQUITY
Employee Stock Option Plans
Effective June 5, 1992, the Company adopted the 1992 Incentive Stock Option Plan
for which 500,000 common shares have been reserved for issuance to officers,
directors, and key employees of the Company. The plan provides that no option
may be granted at an exercise price less than the fair market value of the
common stock of the Company on the date of grant. On September 9, 1993, 200,000
options were granted with an exercise price equal to the fair market value price
of $4.875 per share. On March 10, 1998, 300,000 options were granted with an
exercise price equal to the fair market value price of $10.50 per share.
Also effective June 5, 1992, the Company adopted the 1992 Nonqualified Stock
Option Plan and reserved a total of 250,000 common shares for issuance to
officers, employees, and consultants of the Company. On September 9, 1993,
250,000 options were granted with an exercise price equal to the fair market
value price of $4.875 per share.
Effective December 9, 1994, the Board of Directors approved the 1994
Nonqualified Stock Option Plan for which 500,000 common shares were reserved for
issuance to officers, employees, and consultants of the Company. On January 24,
1995, 500,000 options were granted with an exercise price equal to the fair
market value price of $4.625 per share.
All stock options under each of the plans have five-year terms and all options
became fully vested within two years of their grant date.
Stock option activity during the periods indicated is summarized below:
<TABLE>
<CAPTION>
1992 1992 1994
Incentive Nonqualified Nonqualified
Plan Plan Plan
--------- ------------ ------------
<S> <C> <C> <C>
Outstanding at June 30, 1995 198,362 242,138 500,000
Exercised 74,360 8,640 11,000
------- ------- -------
Outstanding at June 30, 1996 124,002 233,498 489,000
Exercised 27,833 12,556 37,500
------- ------- -------
Outstanding and exercisable at June 30, 1997 96,169 220,942 451,500
Exercised 57,778 159,333 121,334
Granted 300,000 -- --
------- ------- -------
Outstanding and exercisable at June 30, 1998 338,391 61,609 330,166
======= ======= =======
Weighted-average exercise price:
June 30, 1998 $ 9.86 $ 4.88 $ 4.63
June 30, 1997 $ 4.88 $ 4.88 $ 4.63
Weighted-average remaining contractual life in years 5.00 0.17 1.50
Available for grant at June 30, 1998 -- -- --
======= ======= =======
</TABLE>
(continued)
43
<PAGE> 44
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
J. STOCKHOLDERS' EQUITY (continued)
The fair value of the option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: risk-free
interest rate equal to 5.33% at the grant date; dividend yield of zero; expected
life of three years; and volatility of 53.4%. The weighted average fair value of
options granted during fiscal year 1998 was $4.27.
The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net earnings would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1998
----------
<S> <C>
Net earnings, as reported $5,871,765
Pro forma net earnings $5,700,965
Basic earnings per share, as reported $ 1.06
Pro forma basic earnings per share $ 1.03
Diluted earnings per share, as reported $ 1.00
Pro forma diluted earnings per share $ 0.97
</TABLE>
Pro forma net earnings reflects only options granted in fiscal year 1998 as
there were no options granted by the Company during fiscal year 1997 or 1996.
Therefore, the full impact of calculating compensation cost for stock options
under Statement No. 123 is not reflected in the pro forma net earnings amounts
presented above because compensation cost is reflected over the options' vesting
period and compensation cost for options granted prior to July 1, 1995 is not
considered.
Other Stock Options
On January 24, 1995, the Board of Directors granted 100,000 options with an
exercise price of $4.625 in exchange for consulting services and reserved
100,000 common shares. As of June 30, 1998, none of these options had been
exercised or canceled. At June 30, 1998, the weighted-average remaining
contractual life was two years.
On March 14, 1997, 45,000 options were granted pursuant to a consulting
agreement at prices ranging from $9.00 to $15.00 per share. Consulting expense
incurred as a result of these options was $84,000 for the year ended June 30,
1997. None of these options had been exercised as of June 30, 1998. At June 30,
1998, the weighted-average remaining contractual life was one year and the
weighted-average exercise price was $12.00.
44
<PAGE> 45
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
K. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Company leases part of its main facilities under leases that are classified
as noncancelable operating leases. In August 1997, the Company entered into a
15-year lease agreement under which the lessor is to construct a build-to-suit
office and manufacturing facility in Carlsbad, California. The Company plans to
move its administrative offices and expand its manufacturing capacity into these
premises when the building is ready for occupancy in early 1999. Annual lease
payments, which will commence in November, 1998, are $1,222,000 and are subject
to annual inflation adjustments. The Company has an option to acquire the
facility during the sixth year of the lease.
Minimum rental commitments (exclusive of property tax, insurance and
maintenance) under all noncancelable operating leases, including the 15-year
lease agreement referred to above, (with initial or remaining lease terms in
excess of one year) are set forth below.
<TABLE>
<S> <C>
1999 $ 887,504
2000 1,307,736
2001 1,335,640
2002 1,329,580
2003 1,359,960
Thereafter 16,673,220
-----------
$22,893,640
===========
</TABLE>
Rental expense totaled $193,018, $169,079, and $193,340 for the years ended
June 30, 1998, 1997 and 1996, respectively. These amounts include rental
charges, pursuant to a lease agreement (the related party lease) with its two
principal stockholders, Marie A. LeDoux and Mark A. LeDoux, of $55,000 for the
year ended June 30, 1996. Amounts paid under this agreement were $100,000 for
the year ended June 30, 1996.
In June 1996, the Company acquired certain suites within a building occupied by
certain of its offices and production facilities which, up to that time, were
subject to the related party lease. The lease provided for rent payable in the
amount of $60,000 per year. The purchase price of the building was $545,000
which, in the opinion of management and an independent certified appraiser who
evaluated the property in April 1996, represented fair market value.
During 1997 and 1996, the Company had sales of $14,812 and $1,084,290,
respectively, to a company in which a key employee and beneficial owner of 1% of
the stock of the Company was formerly the president and part owner. At June 30,
1997, the amount receivable from this company was $775,302, which was fully
reserved because the Company had determined the account to be doubtful of
collection. The Company recovered $263,400 in the year ended June 30, 1998.
The Company entered into an agreement with the father-in-law and mother-in-law
of the Chief Executive Officer of the Company in December, 1991, which provides
commissions on sales to a particular customer. The agreement will expire in
December, 2001. The commission equals 5% of sales, and is capped at $25,000 per
calendar quarter, effective January 1, 1993. Amounts paid under this agreement
were $100,000 for each of the years ended June 30, 1998, 1997 and 1996. There
were no amounts owed under the agreement at June 30, 1998 or 1997.
(continued)
45
<PAGE> 46
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
K. COMMITMENTS AND RELATED PARTY TRANSACTIONS (continued)
During fiscal year 1993, the Company entered into an agreement that required
future minimum royalty payments over the term of the contract, which expired
December 31, 1996. Amounts paid under this agreement were $154,728 and $247,898
for the years ended June 30, 1997 and 1996, respectively. No amounts were owed
under the agreement at June 30, 1997.
Included in notes receivable are notes from the Company's Chief Executive
Officer and President. The balance of the notes, including accrued interest, was
$79,036 and $95,365, respectively, as of June 30, 1998 and $74,444 and $89,824,
respectively, at June 30, 1997.
Additionally, during the year ended June 30, 1998, the Company made
noninterest-bearing loans to the Chairman of the Board and the President in the
amount of $50,000 and $13,803, respectively, bringing the aggregate amount of
such loans to $282,815. Amounts owed on these loans, which are secured by
proceeds from life insurance policies on their respective lives, were $200,000
and $150,000 for the Chairman of the Board and $82,815 and $69,012 for the
President at June 30, 1998 and 1997, respectively.
The Company paid commissions during the year ended June 30, 1996 in the amount
of $6,916 to the Chairman of the Board.
L. ECONOMIC DEPENDENCY
The Company had substantial sales to four separate customers during one or more
of the periods shown in the following table. The loss of any of these customers
could have an adverse impact on the Company's revenues and earnings in the
short-term. Sales by customer, representing 10% or more of the respective year's
total sales, are shown below by industry segment.
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ----------------- -----------------
Sales by Sales by Sales by
Industry Segment Customer %(a) Customer %(a) Customer %(a)
- -------------------------- ----------- ---- ----------- --- ----------- ---
<S> <C> <C> <C> <C> <C> <C>
Multi-level Distribution:
Customer 1 $24,914,144 37% $17,934,985 36% $13,616,835 29%
Customer 2 11,659,906 17% 6,851,560 14% 13,785,211 29%
Customer 3 (b) 5,936,477 12% (b)
----------- ---- ----------- --- ----------- ---
36,574,050 54% 30,723,022 62% 27,402,046 58%
Weight Loss:
Customer 4 (b) (b) 5,364,185 11%
----------- ---- ----------- --- ----------- ---
Total $36,574,050 54% $30,723,022 62% $32,766,231 69%
=========== ==== =========== === =========== ===
</TABLE>
(a) Percent of total sales
(b) Sales for the year were less than 10% of total sales.
Accounts receivable from these customers totaled $4,271,969 and $3,108,597 at
June 30, 1998 and 1997, respectively.
46
<PAGE> 47
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
M. CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, based in part on the
advice of counsel, the ultimate disposition of these matters will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
N. QUARTERLY DATA (unaudited)
The following is a summary of unaudited quarterly data:
<TABLE>
<CAPTION>
Year Ended June 30, 1998
---------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Net sales $12,032,576 $16,297,341 $18,960,255 $ 20,604,133 $67,894,305
Gross profit 3,161,354 4,442,561 5,223,250 5,909,423 18,736,588
Net earnings 598,420 1,363,023 1,823,729 2,086,593 5,871,765
Net earnings per common share:
Basic 0.11 0.25 0.33 0.36 1.06
Diluted 0.11 0.24 0.31 0.34 1.00
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30, 1997
---------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Net sales $11,437,022 $12,630,234 $11,406,325 $ 13,970,640 $49,444,221
Gross profit 3,260,640 3,215,954 2,866,067 1,082,336 10,424,997
Net earnings (loss) 900,373 849,292 560,637 (1,190,382) 1,119,920
Net earnings (loss) per common share:
Basic 0.17 0.16 0.10 (0.22) 0.21
Diluted 0.16 0.15 0.10 (0.22) 0.20
</TABLE>
47
<PAGE> 48
SCHEDULE II
NATURAL ALTERNATIVES INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
Balance at Balance at
Allowance for doubtful beginning end of
accounts of period Provision Deductions* period
- ------------------------ ------------ ------------ ------------- ---------------
<S> <C> <C> <C> <C>
Year ended June 30, 1998 $1,006,000 $360,000 $293,000 $1,073,000
Year ended June 30, 1997 $319,000 $725,000 $38,000 $1,006,000
Year ended June 30, 1996 $215,000 $391,000 $287,000 $319,000
</TABLE>
* Accounts written off
See accompanying independent auditors report.
48
<PAGE> 49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
NATURAL ALTERNATIVES INTERNATIONAL, INC.
(Registrant)
Date: September 25, 1998 By: Mark A. LeDoux
-----------------------------------------
(Mark A. LeDoux, 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 and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Marie A. LeDoux Chairperson of the Board, September 25, 1998
---------------------- Secretary, and Director
(Marie A. LeDoux)
Mark A. LeDoux Chief September 25, 1998
---------------------- Executive Officer and
(Mark A. LeDoux) Director
William P. Spencer President, and Chief September 25, 1998
---------------------- Operating Officer,
(William P. Spencer) and Treasurer, and Chief
Financial Officer, and Chief
Accounting Officer, and
Director
William R. Kellas Director September 25, 1998
----------------------
(William R. Kellas)
Lee G. Weldon Director September 25, 1998
----------------------
(Lee G. Weldon)
</TABLE>
49
<PAGE> 1
EXHIBIT 23
The Board of Directors
Natural Alternatives International, Inc.:
We consent to incorporation by reference in the registration statement (No.
33-00947) on Form S-8 of Natural Alternatives International, Inc. of our report
dated September 8, 1998, relating to the consolidated balance sheets of Natural
Alternatives International, Inc. and subsidiaries as of June 30, 1998 and 1997,
and the related consolidated statements of earnings, stockholders' equity, and
cash flows for each of the years in the three-year period ended June 30, 1998,
and the related schedule, which report appears in the June 30, 1998, annual
report on Form 10-K of Natural Alternatives International, Inc.
KPMG Peat Marwick LLP
San Diego, California
September 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 4,714,212
<SECURITIES> 0
<RECEIVABLES> 12,558,731
<ALLOWANCES> 1,073,000
<INVENTORY> 11,504,936
<CURRENT-ASSETS> 31,496,121
<PP&E> 17,747,995
<DEPRECIATION> 7,216,130
<TOTAL-ASSETS> 42,987,279
<CURRENT-LIABILITIES> 13,188,199
<BONDS> 977,375
0
0
<COMMON> 57,682
<OTHER-SE> 27,601,459
<TOTAL-LIABILITY-AND-EQUITY> 42,987,279
<SALES> 67,894,305
<TOTAL-REVENUES> 67,894,305
<CGS> 49,157,717
<TOTAL-COSTS> 58,271,827
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 360,000
<INTEREST-EXPENSE> 110,337
<INCOME-PRETAX> 9,666,785
<INCOME-TAX> 3,795,000
<INCOME-CONTINUING> 5,871,765
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,871,765
<EPS-PRIMARY> 1.06
<EPS-DILUTED> 1.00
</TABLE>
