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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, 2000 Commission file number 0-15701
NATURAL ALTERNATIVES INTERNATIONAL, INC.
Incorporated in Delaware 84-1007839
1185 Linda Vista Drive, San Marcos, California (I.R.S. Employer
92069 Identification No.)
(760) 744-7340
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. [X]
The aggregate market value of 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 $9.0 million
based on the closing sale price as of October 9, 2000.
At October 9, 2000, the Registrant had 5,761,880 outstanding shares of Common
Stock, $.01 par value, net of 262,500 shares held in the treasury.
Documents Incorporated by Reference
Registrant's Proxy Statement, for the 2001 Annual Meeting of Stockholders, to be
filed within 120 days from June 30, 2000, is incorporated herein by reference.
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PART I
ITEM 1. BUSINESS
Natural Alternatives International, Inc. and its subsidiaries (referred to
collectively herein as "Natural Alternatives", "NAI", or the "Company") are
engaged in the formulation, manufacturing and packaging of encapsulated and
compressed tablets and powder blended vitamins and related nutritional
supplements including phytochemicals derived from botanicals and foods. The
Company provides private label contract manufacturing services to various
companies engaged in the marketing and distribution of vitamins, mineral
supplements, herbs and other health and nutrition consumer products. The Company
also provides various services to these customers including, customer-specific
nutritional product formulation; clinical studies assessment; product
development; assistance with international product registration; packaging and
delivery system design; and other marketing related services. The Company seeks
to further its customers' objectives by assisting them in expanding their market
share through a variety of special marketing and research programs and services.
The Company's near term strategy is to strengthen both the board of directors
and management team; diversify its revenue base, improve quality control and
customer service, and restore its financial position. The Company believes it
can successfully implement its strategy by continuing to capitalize on its core
product development and manufacturing strengths: its ability to develop
innovative science-based products; adherence to stringent quality control and
assurance standards; the utilization of fully integrated manufacturing and
distribution; and the leadership of an experienced management team.
The Company's long-term growth strategies are focused on geographic
diversification through its European manufacturing facility and Asian sales
presence, introduction of branded direct-to-consumer product lines and
development of strategic alliances with health companies focused on consumer
sales.
MANAGEMENT
The Company experienced significant changes in its management team and board of
directors during both fiscal 1999 and fiscal 2000.
During fiscal 2000, NAI's management team was strengthened in November 1999 with
the addition of Peter C. Wulff as Chief Financial Officer and Treasurer. Also,
Joe E. Davis was appointed to the Board of Directors in February 2000. Mr. Davis
replaces William R. Kellas, Ph.D. who resigned as a director in November 1999.
PROFIT RESTORATION PLAN
The Company lost a major customer in December 1999, which represented
approximately 20% of net sales for the first quarter of fiscal 2000 and
approximately 32% of net sales for fiscal 1999. In response to losing this major
customer the Company initiated in January 2000 a cost containment program aimed
at reducing overall company expenses. The Company reduced executive compensation
and reduced the workforce by approximately 47% to a level commensurate with its
current operating levels. These cost containment initiatives, completed in May
2000, are estimated to have reduced annual compensation costs by $3.25 million.
In addition, management reduced costs in other expenditure and professional
service categories that were deemed non-essential to its business objectives.
Additional measures taken to reduce operating expenses included the lease
termination of the abandoned corporate office and manufacturing facility in
Carlsbad, California and the integration of in-house finished goods packaging
capabilities, as discussed further below. The termination of the lease
obligation in June 2000 eliminated $1.5 million in annual cash outflows related
to this lease. The commencement of in-house packaging in April of 2000
substantially eliminates the need to use outside packaging services to produce
finished goods manufactured by the Company.
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BUSINESS DEVELOPMENT INITIATIVES
During fiscal 2000, the Company worked to diversify its sales channels while
solidifying its core customer base in private label manufacturing. The Company
initiated a direct-to-consumer marketing program for its own products, as well
as, entered into joint venture and manufacturing agreements with other
companies. Sales channels include: physicians branding; health and fitness
facilities; direct mail and other media channels; and E-commerce. The Company
expects to continue to expand these efforts as an integral component of its
long-term growth strategy.
PHYSICIANS BRANDED PRODUCTS
In March 2000, the Company entered into an amended and restated 10-year
worldwide exclusive licensing agreement with Dr. Reginald B. Cherry, M.D. to
develop and distribute natural products. The Company is responsible for
collaborating with Dr. Cherry in the design, formulation and development of
these nutritional products, and the Company retains exclusive rights for the
manufacturing, marketing and distribution of these products. The Company
promotes the sale of these nutritional products through Dr. Cherry's weekly
television program and monthly medical newsletter, direct mail solicitation,
Website, books, study guides, and audiotapes.
In March 2000, the Company launched the first product, Basic Nutrient
Support(TM), under the new Dr. Cherry brand and recorded slightly less than $1
million in net sales for the four month period ended June 30, 2000. The Company
is planning other marketing initiatives to expand into additional sales channels
and is developing new product offerings for introduction in fiscal 2001.
The Company continues to seek additional physicians interested in developing
branded products. The ability to execute these opportunities depends on many
factors, including but not limited to, the identification of reputable and
renowned medical professionals, the ability to reach a business agreement and
the ability to create and market nutritional products in an effective and
profitable manner.
CUSTOM NUTRITION JOINT VENTURE
In November 1999, the Company entered into a strategic alliance with FitnessAge
Incorporated ("FitnessAge"), a privately held development stage company based in
San Diego, California. FitnessAge is a consumer health marketing company that
has a unique and patented software assessment program that measures an
individual's physiological age ("FitnessAge calculator"). FitnessAge is seeking
to market the FitnessAge calculator to consumers through diverse channels
including health and fitness facilities, corporate wellness centers, healthcare
facilities and medical practitioners. FitnessAge is also developing an
interactive website to cross-promote its products and services, including online
tracking of its relationships with its customers.
The Company and FitnessAge entered into a joint venture agreement in November
1999, to establish Custom Nutrition LLC ("Custom Nutrition"), a Delaware limited
liability company. Custom Nutrition was formed for the purpose of developing,
merchandising, selling and distributing customized nutritional supplements and
related products through various channels to individuals who have taken the
FitnessAge assessment. Custom Nutrition is one of the first supplement retailers
to provide personalized nutritional supplements and products based on an
individual's fitness assessment results. The FitnessAge software has been
modified to automatically generate recommendations from the exclusive supplement
product line, and will provide the ability for consumers to purchase these
products using the internet.
The Company has a 40% equity interest in Custom Nutrition with FitnessAge
holding the remaining 60% equity interest. In accordance with the Operating
Agreement, the Company made a capital contribution of $100,000 to Custom
Nutrition. The Company also provided funds to FitnessAge in exchange for a
$750,000 convertible secured promissory note due in November 2000, which is
secured by certain FitnessAge assets and is convertible into 1,000,000 shares of
FitnessAge common stock. The Company also invested $150,000 for 300,000 shares
of FitnessAge common stock in fiscal 1999. In addition, under terms of a 10-year
Exclusive Manufacturing Agreement, the Company is the exclusive manufacturer for
all nutritional supplements and related products sold by Custom Nutrition.
Custom Nutrition has obtained an exclusive royalty free license of FitnessAge's
proprietary software technology, including their physical fitness assessments,
known as the FitnessAge System, as well as, software under development designed
to provide customized nutritional assessments.
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During the year ended June 30, 2000, the Company had sales of $135,000 to Custom
Nutrition. At June 30, 2000, the net accounts receivable from Custom Nutrition
was approximately $80,000.
PRODUCTS AND MANUFACTURING
The Company is engaged in the research, design and manufacture of private label
customized nutritional supplements for domestic and international personal care
and health product companies engaged in marketing and distribution in a variety
of sales channels. The Company purchases raw materials in bulk from qualified
vendors, and, after quality control testing and release, weighs and blends these
materials and then either encapsulates them, processes the powder blends into
jars, or compresses them into solid dosage forms of either chewable wafers or
tablets.
In October 1999, the Company opened a new facility in Vista, California for
materials receiving, warehousing, weighing and blending, and distribution. The
facility consolidates these operations into one location to improve materials
and inventory management, work-in-process manufacturing, product distribution,
as well as improve overall manufacturing and quality process controls.
In April 2000, the Company began operating its own finished goods packaging
facility, adjacent to the warehousing and distribution facility. This new
capability substantially eliminates the need to use outside packaging services
to produce finished goods manufactured by the Company. The Company's packaging
capabilities include bottles, powder fill, blister cards and packets. Management
believes that the ability to offer in-house packaging will help control and
reduce manufacturing costs, improve inventory management and quality control,
simplify manufacturing logistics and provide more dependable service to its
customers.
In October 1999, the Therapeutic Goods Administration ("TGA") of Australia
re-certified the Company's encapsulation and tableting operations. In March
2000, the Company was also certified TGA compliant in areas including the new
finished goods packaging operations. The TGA evaluates new therapeutic products,
prepares standards, develops testing methods and conducts testing programs to
ensure that products are of high quality, safe and effective. TGA certification
also enables the Company to manufacture products for export into countries which
have signed the Pharmaceutical Inspection Convention, and includes most European
countries as well as several Pacific Rim countries.
The United States Pharmacopeia XXIV compendia ("USP") contain specifications for
vitamin and mineral supplements. This USP monograph has long been the basis for
determining the potency, purity, content uniformity, disintegration, dissolution
and bio-burden of drugs and related articles. The Company believes its has the
technical and quality control expertise to conform to all aspects of USP
specifications. Conformance with USP specifications allows the Company to use
the USP designation on products manufactured for its customers.
The Company believes its international manufacturing facilities, research &
development, laboratory and quality control capabilities are a major factor in
customer relationships. The standards for formulating, manufacturing and
labeling nutritional products should, in the opinion of management, assist the
Company in serving its present and future customers and, ultimately, the
consumer.
INTERNATIONAL OPERATIONS
In 1999, the Company initiated its geographic expansion strategy to develop a
manufacturing facility in Europe. This strategic initiative intended to provide
the Company's customers doing business in Europe the ability to source products
locally, thereby reducing costs in distribution; reducing duties and tariffs;
minimizing exchange exposure; reducing inventory; shortening lead times and
improving customer service.
In September 1999, Natural Alternatives International Europe S.A. ("NAIE"), a
wholly-owned subsidiary of the Company, opened its facility in Manno
Switzerland, which is adjacent to the city of Lugano. The new manufacturing
facility provides manufacturing capability in encapsulation and tablets,
finished goods packaging, quality control laboratory testing, warehousing,
distribution and administration. Over the last six months of fiscal 2000, the
facility was profitable with a growing revenue base. Upon formation, NAIE
obtained from the Swiss tax authorities a five-year federal and local income tax
holiday ending in fiscal 2005.
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In fiscal 2000, the Company's percentage of net sales of products marketed by
its customers into international markets was approximately 32%, including
approximately 7% of net sales of products manufactured by NAIE for customers
marketing in the European marketplace.
RESEARCH AND DEVELOPMENT
The primary emphasis of the Company's research and development activities is the
development of new products and enhancement of existing products. In addition,
the Company continuously produces pilot or sample runs of product formulation
prototypes to ensure stability and/or efficacy and to determine ingredient
interaction and prospective customer acceptance of the final product. The
Company has implemented quality control procedures to verify that all products
comply with established specifications and standards in compliance with both USP
and Good Manufacturing Practices promulgated by the Food and Drug
Administration. The Company also directs and participates in clinical research
studies for measuring the efficacy of certain products and/or formulations.
These studies are conducted to establish consumer benefits and scientific
efficacy supporting both product claims and marketing initiatives. The Company
often collaborates with scientists and institutions, and the study results are
generally presented at various scientific meetings and symposia, and published
in numerous peer reviewed scientific journals. Research of this type is a part
of the operating expenses incurred by the Company, and the associated costs have
not been significant to date.
SOURCES AND AVAILABILITY OF RAW MATERIALS
Raw materials used in the Company's products consist of nutrient powders,
excipients, 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, and foreign countries. All materials procured by the
Company undergo quality control review to ensure conformance to product
specification prior to acceptance and release into materials inventory. To date,
the Company has not experienced any difficulty in obtaining adequate sources of
supply. Although there can be no assurance that the Company will continue to be
able to obtain adequate sources in the future, the Company believes that it will
be able to do so.
MAJOR CUSTOMERS
NSA International, Inc. ("NSA") and Mannatech Incorporated ("Mannatech")
represented 62% of the Company's net sales for the fiscal year ended June 30,
2000. No other customers represented 10% or more of the Company's net sales for
the fiscal year ended June 30, 2000. For the year ended June 30, 1999, NuSkin
Enterprises, Inc., NSA and Pharmavite Corporation together represented 71% of
the Company's net sales.
The Company is strengthening the manner in which it conducts business with its
customers by entering into multi-year manufacturing services and supply
agreements. These agreements may be either exclusive or non-exclusive covering
markets for either the United States, certain countries or worldwide. Most of
the Company's current customers conduct business under such agreements, whereby
both parties agree to specific terms and conditions for product formulation,
clinical research assessment, proprietary and confidential business information,
product specifications, manufacturing standards, product pricing, delivery and
payment terms.
The majority of the Company's existing customers are either public or privately
held direct marketing organizations who distribute a variety of nutritional and
health related products throughout the United States, Europe and the Pacific
Rim.
As of June 30, 2000, the Company' s sales backlog was approximately $13.6
million.
COMPETITION
The Company's products are sold in domestic and foreign markets in competition
with other private label manufacturing and marketing companies. The vitamin and
nutritional supplement industry is highly competitive, and competition continues
to increase. 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
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and others who sell to wholesalers, as well as mail order vendors, eCommerce 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 and highly fragmented.
The Company believes the industry continues to see significant consolidation
with merger and acquisition activity totaling over $4 billion in transactions
during the first half of calendar 2000. Most industry experts expect this
activity to continue for the foreseeable future in food and nutrition companies,
multilevel marketing organizations and eCommerce internet firms.
The Company believes competition among manufacturers of vitamin and supplement
products is based, among other things, on price, timely delivery, product
quality, safety, availability, product innovation, marketing assistance and
customer service. The competitive position of the Company will likely depend
upon continued acceptance of its products, 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.
Based on industry data, the botanicals and supplements industry experienced a
30% sales growth in calendar year 1998, while 1999 experienced a decelerating
growth rate of 7.8%. Intense competition among industry members during the same
period narrowed overall operating margins from 9.7% to 4.3%. The industry is
believed to be moving into a mature stage where greater price pressure and
modest market expansion will continue to increase competition.
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.
EMPLOYEES
As of June 30, 2000, the Company employed in the United States 101 full-time
employees, with five employed in executive management positions, twenty in the
area of research, laboratory and quality control, six in sales and marketing,
while the remaining employees are engaged in production and administration. The
Company uses in its normal course of operations temporary personnel to meet
short term operating level requirements primarily in manufacturing and
manufacturing support. As of June 30, 2000 approximately 34 individuals were
employed as temporary personnel.
As of June 30, 2000, the Company employed 12 full-time employees and 11
temporary personnel in Switzerland. Most of these employees were engaged in
manufacturing and manufacturing support.
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 good.
GOVERNMENT REGULATION
The formulation, manufacturing, packaging, labeling, advertising and
distribution of the Company's products are subject to regulation by one or more
federal agencies, including the United States Food and Drug Administration
("FDA"), the Federal Trade Commission ("FTC"), the Consumer Product Safety
Commission ("CPSC"), the United States Department of Agriculture ("DOA") and the
Environmental Protection Agency ("EPA"). 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. These regulations include the FDA's Good Manufacturing
Practices ("GMP") for foods. Detailed dietary supplement GMPs have been proposed
but no regulations have been adopted. Additional dietary supplement regulations
were adopted by the FDA pursuant to the implementation of the Dietary Supplement
Health and Education Act of 1994 ("DSHEA").
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The Company may be subject, from time to time, to additional laws or regulations
administered by the FDA or other Federal, State or foreign regulatory
authorities, or to revised interpretations of current laws or regulations. The
Company is unable to predict the nature of such future laws, regulations,
interpretations or applications, nor can it predict what effect additional
governmental regulations or administrative orders, when and if promulgated,
would have on its business in the future. They could, however, require the
Company to: reformulate certain products to meet new standards; recall or
discontinue certain products not able to be reformulated; expand documentation
of the properties of certain products; expand or provide different labeling and
scientific substantiation; or, impose additional record keeping requirements.
Any or all such requirements could have a material adverse effect on the
Company's results of operations and financial position.
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ITEM 2. PROPERTIES
The Company's corporate and manufacturing facilities consist of approximately
123,000 square feet and are located in San Marcos and Vista, California. Of this
space, the Company owns approximately 29,500 square feet and leases the
remaining space. Approximately 68,000 square feet is used for production related
activities, 35,000 square feet is used for warehousing, 5,000 square feet is
used for laboratory and product development, and 15,000 square feet is used for
offices.
In August 1997, the Company entered into a 15-year lease agreement under which
the lessor was to construct a build-to-suit 82,000 square foot corporate office
and manufacturing facility in Carlsbad, California. In March 1999, the Company
made the decision to abandon the facility and sublease, and not occupy, the
partially completed facility. The decision to abandon the facility was based on
subsequent management determination that considered the inadequate size,
location, utility and the expense of the building. In fiscal 1999, the Company
recorded a $5.4 million loss on abandonment of leased facility consisting of:
(1) $2.3 million impairment of leasehold improvement costs, (2) an unfavorable
lease obligation accrual of $2.7 million representing the present value of the
excess of future lease payments over the estimated sub-lease income and (3) $0.4
million facility lease payments.
In June 2000, the Company successfully terminated the long-term lease obligation
related to the Carlsbad facility. In April and May 2000, the Company entered
into two sublease agreements for the entire premises for approximately five
years. In June 2000, the Company completed a termination agreement of the
fifteen-year lease obligation from the landlord for a $3.0 million settlement
fee. The buyout agreement provided for the sale of the Company's leasehold
interests and obligations to the landlord for essentially the same cost of
performing its obligations pursuant to the sublease agreements. The Company
recorded an additional $1.7 million charge to results of operations in the year
ended June 30, 2000, reflecting the final cost for exiting the long-term lease
commitment, lease payments and property taxes. The Company incurred total
expenses of approximately $7.1 million over the duration of this abandoned
facility commitment, including facility lease payments and property taxes. The
buyout terminated the Company's obligation for the facility saving cash outflows
of approximately $1.5 million per year related to the leased facility and
terminated a $20.0 million long-term lease commitment.
The Company entered into two new lease agreements during fiscal year 1999 for
two adjacent buildings located in Vista, California. The facilities are leased
from an unaffiliated third party and consist of a total of approximately 74,000
square feet. The lease for the first building commenced in August 1998 under a
5-year lease agreement and consists of approximately 54,000 square feet to be
utilized as a materials warehousing, weighing, blending, and distribution
facility. The lease for the second building commenced in March 1999 under a 3.5
year lease agreement for the rental of approximately 20,000 square feet to be
utilized as a finished goods packaging facility. The consolidation of receiving,
warehousing, weighing, blending and distribution space is expected to increase
operating efficiencies to allow the Company to meet demand for its products, as
well as maintain stringent inventory and quality controls. The Company will
continue to utilize its facilities in San Marcos as its corporate and
administrative offices, laboratory, pilot manufacturing and encapsulation and
tablet bulk product production.
The Company leases approximately 18,000 square feet in Manno, a town adjacent to
Lugano, Switzerland. The facilities are used primarily for the use of
manufacturing, packaging and distribution of nutritional supplement products for
the European marketplace. The Company entered into a five-year lease agreement
in March 1999, with the facility becoming fully operational for manufacturing
operations in September 1999.
The Company expects to renew its leases in the normal course of business. The
Company believes that its current facilities are adequate to meet its operating
requirements for the foreseeable future.
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ITEM 3. LEGAL PROCEEDINGS
The Company is a party to a lawsuit filed by its former President, Director and
Chief Financial Officer, William P. Spencer. The lawsuit was filed in January
2000, and was served upon the Company in March 2000. Mr. Spencer was terminated
by the Company for cause in January 1999. The lawsuit alleges damages for
wrongful termination, breach of option contract, conversion, breach of
employment contract, discriminatory and retaliatory discharge, workplace
harassment and slander. The lawsuit seeks damages in an amount to be proved at
trial, and alleges damages in excess of six million dollars. The Company has
responded to the lawsuit and has denied it has any liability. Management
believes the claims against the Company are without merit. The Company has filed
a cross-complaint in the lawsuit against Mr. Spencer and Imagenetix, Inc., a
corporation in which Mr. Spencer is currently a director, principal shareholder
and chief executive, and three other individuals, two of whom are former
employees of the Company and the other a former consultant to the Company. The
cross-complaint seeks damages and injunctive relief for breach of fiduciary
duty; fraud-concealment of material facts; intentional interference with
prospective economic advantage; negligent interference with prospective economic
advantage; civil conspiracy; intentional interference with contract; trade
libel; slander per se; breach of contract; conversion; misappropriation of trade
secrets; breach of duty of loyalty; unlawful, unfair and/or fraudulent business
acts or practices and an accounting. The additional defendants in NAI's
cross-complaint subsequently filed cross-actions against NAI, alleging similar
claims to those alleged by Mr. Spencer. The complaint against NAI was also
amended to add Imagenetix, Inc. as a claimant. Management believes the
additional claims are without merit, and the Company will prevail in its
cross-complaint against each cross-defendant. The Company subsequently amended
its complaint, adding additional claims against certain parties. In the event a
judgment is obtained against the Company in the amount of the damages alleged in
the lawsuit or any significant portion thereof, it would have a material adverse
impact upon the financial condition of the Company.
The Company is a plaintiff in an anti-trust lawsuit against several
manufacturers of vitamins and other raw materials purchased by the Company.
Other similarly situated companies have filed a number of similar lawsuits
against some or all of the same manufacturers. The Company's lawsuit has been
consolidated with some of the others and is captioned In re: Vitamin Antitrust
Litigation, and is pending in U.S. District Court in Washington D.C. One or more
consumer class actions have also been filed against some or all of the same
defendants, and at least one of these is presently in a settlement process. The
Company brought its own action to insure it understood what actually occurred.
There can be no assurance the claims will be resolved, or, if they are, that it
will result in a material benefit to the Company.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, after consultation
with its legal 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades 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 of the Company's stock for fiscal 2000 and 1999.
<TABLE>
<CAPTION>
High Low
------ -----
<S> <C> <C>
First Quarter Ended September 30, 1999 $ 4.875 $ 3.188
Second Quarter Ended December 31, 1999 $ 4.250 $ 2.531
Third Quarter Ended March 31, 2000 $ 3.500 $ 1.750
Fourth Quarter Ended June 30, 2000 $ 2.125 $ 1.313
First Quarter Ended September 30, 1998 $26.625 $12.125
Second Quarter Ended December 31, 1998 $15.063 $ 9.125
Third Quarter Ended March 31, 1999 $14.000 $ 4.188
Fourth Quarter Ended June 30, 1999 $ 5.125 $ 3.125
</TABLE>
As of June 30, 2000, there were approximately 422 stockholders of record of NAII
Common Stock.
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.
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PART II
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
--------------------------------------------------------------------------------
YEAR ENDED JUNE 30
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Sales $ 47,827 $ 57,430 $ 67,894 $ 49,444 $ 47,622
Income (Loss) from Operations $ (6,724) $ (4,937) $ 9,623 $ 1,815 $ 5,263
Net Earnings (Loss) $ (4,472) $ (2,923) $ 5,872 $ 1,120 $ 3,222
Net Earnings (Loss) Per Common Share:
Basic $ (0.78) $ (0.50) $ 1.06 $ 0.21 $ 0.61
Diluted $ (0.78) $ (0.50) $ 1.00 $ 0.20 $ 0.58
Current Assets $ 17,456 $ 23,239 $ 30,642 $ 18,858 $ 15,710
Total Assets $ 34,875 $ 38,596 $ 42,987 $ 28,109 $ 23,561
Long-Term Debt and Capital
Lease Obligations, Less
Current Installments $ 3,345 $ 927 $ 977 $ 1,124 $ 1,325
Stockholders' Equity $ 20,486 $ 25,091 $ 27,660 $ 18,700 $ 17,160
</TABLE>
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PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K contains certain "forward-looking statements" as such term is
defined in the Private Securities Litigation Reform Act of 1995 or by the
Securities and Exchange Commission in its rules, regulations and releases. These
statements represent the Company's expectations or beliefs, including, but not
limited to, statements concerning future financial and operating results,
anticipated growth in revenues and profit margins, improvements in management
personnel, the impact of European operations, and the utilization of inventories
and facilities, statements concerning industry performance, the Company's
operations, economic performance, financial condition, growth and acquisition
strategies, margins and growth in sales of the Company's products. For this
purpose, any statements contained in this Report that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the generality of the foregoing, words such as "may", "will", "expect",
"believe", "anticipate", "intend", "could", "estimate" or "continue" or the
negative or other variations thereof or comparable terminology are intended to
identify forward-looking statements. These statements by their nature involve
substantial risks and uncertainties, certain of which are beyond the Company's
control, and actual results may differ materially depending on a variety of
important factors, including uncertainty related to government regulation, the
effect of adverse publicity, litigation, the centralized location of the
Company's manufacturing operations, availability of raw materials, risks
associated with international operations, competition, product liability claims,
volatility of stock price and those factors described in this and other Company
filings with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
The following discussion refers to the twelve-month period ended June 30, 2000,
the twelve-month period ended June 30, 1999, and the twelve-month period ended
June 30, 1998, respectively.
FISCAL 2000 COMPARED TO FISCAL 1999
Fiscal 2000 net sales of $47.8 million decreased $9.6 million, or 17%, compared
to net sales of approximately $57.4 million for fiscal 1999. The decrease was
primarily due to the loss of a major customer, Nu Skin Enterprises Inc., which
accounted for sales of approximately $4.3 million, or 9%, for fiscal 2000 and
$18.4 million, or 32%, for fiscal 1999. NuSkin informed the Company in December
1999 that its production needs have been transitioned to other vendors for the
foreseeable future. The sales decrease from fiscal 1999 was also impacted due to
the loss of commodity herbal product sales to Pharmavite Corporation of
approximately $9.4 million. The Company experienced the sales decrease to
Pharmavite commencing in the third quarter fiscal 1999 as a result of a sharp
sales decrease in the mass drug and retail consumer market starting during the
time period of mid to late 1998. The loss of these major customers was partially
offset by increased sales to existing and new customers in the private label
product line and the launch in March 2000 of the Company's first
direct-to-consumer physicians branded product line. The sales increase
attributed to the Company's largest customer increased to $20.8 million, over
fiscal year 1999 sales of $13.4 million, an increase of $7.4 million. The
Company's second largest customer in fiscal 2000 also increased sales from $2.5
million in fiscal 1999 to $9.0 million in fiscal 2000, an increase of $6.5
million. In addition, sales attributed to a new private label product line
customer contributed approximately $3.1 million in sales for fiscal 2000.
Management continues to focus its growth strategy through diversifying and
expanding geographic sales channels. The geographic expansion in fiscal 2000
through the wholly-owned manufacturing subsidiary, located in Switzerland,
commenced operations in September 1999 and contributed $3.4 million, or 7%, in
net sales fiscal 2000. The Company believes that the new Swiss manufacturing
facility is tracking to its business plan and sales volumes are anticipated to
grow to meet European market demand. During the latter part of the third quarter
of fiscal 2000, the Company also launched its first physician branded product
line under the Dr. Cherry label. This new direct-to-consumer product line
contributed slightly less than $1.0 million in revenues during the fourth
quarter fiscal 2000. The Company has a 10-year Exclusive Licensing and
Manufacturing Agreement for the distribution and manufacture of these products
and has contracted
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with an outside company to utilize their specialized services to meet
direct-to-consumer call center and order fulfillment capabilities. These
fulfillment services support future direct television, radio, monthly medical
newsletter, direct mail, study guides, books and e-commerce channels,
specifically targeted to the direct-to-consumer market. In addition, the Company
developed and sold to Custom Nutrition, a joint venture with FitnessAge
Incorporated, customized sports nutritional supplements in anticipation of
FitnessAge launching its consumer health marketing programs during the second
half of calendar year 2000.
During fiscal 2000, the Company experienced an increase in cost of goods sold as
a percentage of sales, excluding the inventory write-off of $2.0 million, to
86.7% compared to 78.4% for fiscal 1999. The increase reflects reduced selling
prices which were not completely offset by reduced material costs; increased
manufacturing labor and overhead costs; and increased costs in quality control
to ensure product compliance with established GMP specifications and standards.
During the second quarter fiscal 2000, the Company wrote-off inventory of $2.0
million, which included $735,000 for deposits on inventory. The analysis of
inventory balances and subsequent write-off related primarily to the loss of a
major customer in December 1999, a decline in market share and continuing
competitive pressures, which caused the Company to re-evaluate all product lines
and reduce or slow production of products with limited future commercial value.
The decrease in sales, increase in cost of goods sold and the inventory
write-off resulted in a reduction of gross profit of $8.1 million to
approximately $4.3 million for fiscal 2000 compared to $12.4 million for fiscal
1999. The Company reduced manufacturing labor and overhead costs by $1.0 million
and outside packaging costs by $1.6 million during the last six months of fiscal
2000 primarily attributable to the cost containment program discussed below.
Selling, general and administrative expenses for fiscal 2000 were $9.3 million,
or 19.5% as a percentage of sales, which represented a decrease from 20.8% for
fiscal 1999. In absolute dollars, the expenses decreased by approximately $2.7
million to $9.3 million for fiscal 2000 from $12.0 million for fiscal 1999. The
expense reduction was primarily the result of the previously announced cost
containment program, including reductions in consulting, commissions and travel
expenses. In addition, during fiscal 1999, the Company incurred approximately
$0.6 million of expenses related to the restructuring of the senior management
team. Total selling, general and administrative expenses have declined over the
last preceding four quarters in fiscal 2000 primarily attributable to the cost
containment program discussed below.
The Company's loss from operations was $6.7 million for fiscal 2000 compared to
a loss of $4.9 million for fiscal 1999. The increase in loss from operations of
$1.8 million was due to a decrease in gross profit of $8.1 million, partially
offset by the decrease in selling, general and administrative expenses of $2.7
million and the loss on abandonment of leased facility of approximately $3.7
million. Cumulative loss from operations for the two fiscal years 2000 and 1999
of $11.7 million included expenses relating to the loss on abandonment of the
Carlsbad facility of $7.1 million and the inventory write-off of $2.0 million.
Loss from operations during both fiscal 2000 and 1999 also included professional
and consulting fees relating to the training in new computer systems and
management restructuring. These costs are expected to reduce significantly as a
result of both the cost containment program and cessation of such events.
The Company recorded a net loss for 2000 of $4.5 million compared to a net loss
of $2.9 million for fiscal 1999. The increase in net loss was due to the reasons
described above. The income tax benefit of 35.2% compares with a benefit of
39.4% for fiscal 2000 and 1999, respectively. The lower percentage is partially
due to the consolidation of NAIE, the wholly-owned subsidiary located in
Switzerland, which has five-year income tax holiday ending in fiscal 2005. NAIE
contributed in its first year of operations a net loss of less than $0.2 million
during fiscal 2000, which included start-up and development expenses, and
provided net earnings for the last six months of fiscal 2000 of approximately
$0.5 million. Diluted net loss per common share was $0.78 for fiscal 2000
compared to diluted net loss per common share of $0.50 for 1999.
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COST CONTAINMENT PROGRAM
Based on the Company's net operating losses in fiscal 2000 and previous quarters
during fiscal 1999, management is committed to the restoration of future
operating profits by adjusting its operating cost structure in line with its
operating levels.
In the second quarter fiscal 2000, the Company announced a cost containment
program designed to reduce future operating expenses in response to the loss of
a major customer in December 1999. The program initiated expense control
measures intended to counteract the loss of a major customer and streamline
business processes to improve future operating performance. The program included
an immediate reduction of approximately 27% in the Company workforce, consisting
of both permanent and temporary personnel.
In the fourth quarter fiscal 2000 the following additional cost containment
initiatives completed were:
(i) Substantial reduction of outside packaging services, as a result of the
capital expansion initiative to invest in the integration of in-house
finished goods packaging capabilities and to substantially eliminate
future outside packaging services.
(ii) An additional reduction in force of 25% effective May 2000, including
reductions in executive compensation and benefits.
(iii) Successfully terminating the long-term lease obligation related to the
Carlsbad facility in June 2000. Initially the Company entered into two
sublease agreements for the entire premises for approximately five
years. Shortly thereafter, the Company completed a buyout of the
fifteen-year lease obligation from the landlord. The buyout agreement
provided for the sale of the Company's leasehold interests and
obligations to the landlord for essentially the same cost of performing
its obligations pursuant to the sublease agreements, resulting in the
Company paying a $3.0 million settlement fee to the landlord.
Since January 2000, the Company eliminated approximately 95 positions, or 47% of
its United States workforce, excluding the effect of new positions created in
the fourth quarter fiscal 2000 for its new in-house packaging facility. The
Company estimates that the cumulative effect of the reductions will reduce
annual operating expenses by approximately $3.25 million. The two
reduction-in-force initiatives did not result in significant separation
agreement or other termination costs during fiscal 2000.
The Company will continue to concentrate and adhere to its efforts on improving
operational efficiencies, steamlining resource requirements, and upgrading core
business processes to improve operating performance. In addition, the Company
will continue to focus on existing customers and realize the returns from the
strategies implemented to diversify and expand geographical and distribution
channels through its Swiss manufacturing operations, physician branding direct
to consumer initiatives and Custom Nutrition joint venture.
FISCAL 1999 COMPARED TO FISCAL 1998
Net sales decreased 15.4% or $10.5 million to $57.4 million in fiscal 1999 from
$67.9 million in fiscal 1998. Management believes the decrease in sales is
attributable to increased product and price competition in the nutritional
supplement market as well as increased competition for new distributors. In
addition, sales growth was negatively impacted by the reduction in market demand
for several herbal products, resulting in depressed market prices and sales
volumes. The Company expects competition to remain strong for the foreseeable
future.
Sales of products by our customers into international markets increased 18.8% to
$17.7 million in fiscal 1999 from $14.9 million in fiscal 1998. The increase is
primarily the result of existing customers continued expansion into Asian and
European markets through their international distribution channels.
In fiscal 1999, the Company experienced an increase in cost of goods sold, as a
percentage of sales, to 78.4% compared to 72.4% for the prior year. The increase
was primarily due to liquidation of excess or slow moving inventories at or
below cost and inventory write-downs to net realizable values, caused by
depressed market prices due to reduced industry demand. The increase in cost of
goods sold resulted in a reduction of gross profit margins to 21.6% in fiscal
1999 compared to 27.6% in fiscal 1998.
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Selling, general and administrative expenses increased as a percentage of net
sales to 20.8% in fiscal 1999 from 13.4% in fiscal 1998, increasing in absolute
dollars to $12.0 million in fiscal 1999 from $9.1 million in fiscal 1998. The
percentage increase was due primarily to the fixed nature of selling, general
and administrative expenses and the decrease in net sales as noted above. The
increase in absolute dollars was due to: upgrades in systems and computers
related to Y2K compliance; expenses related to management restructuring; and
higher rents in connection with entering into additional leases for new
blending, warehousing and packaging facilities. Additionally, professional fees
increased because of increased activity in seeking additional manufacturing
agreements.
The Company recorded charges related to the loss on abandonment of leased
facility of $5.4 million during fiscal 1999. The expense relates to the
Company's decision to sublease, and not occupy, a partially completed office and
manufacturing facility in Carlsbad, California. In fiscal 1999, the Company
recorded a $2.3 million charge for impairment of leasehold assets, an
unfavorable lease obligation accrual of $2.7 million representing the present
value of the excess of future lease payments over estimated sub-lease income,
and $0.4 million in lease payments.
The Company's loss from operations was $4.9 million compared to income from
operations of $9.6 million in fiscal 1998. This was due to an $6.3 million
decrease in gross profit, $2.9 million increase in selling, general and
administrative expenses, and the $5.4 million provision for loss on abandonment
of leased facility and other expense.
The Company incurred a net loss for fiscal 1999 of $2.9 million compared to net
income of $5.9 million in fiscal 1998. This loss was due to the reasons
described above. Diluted loss per common share was ($.50) in fiscal 1999
compared to diluted earnings per common share of $1.00 in fiscal1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations through cash flow from
operations, capital and operating lease transactions, working capital credit
facility and equipment financing arrangements.
At June 30, 2000, the Company had cash of approximately $0.8 million, a decrease
from approximately $1.1 million at June 30, 1999. The Company used approximately
$6.0 million in investing activities primarily to fund manufacturing facility
improvements in both the United States and Switzerland, and a convertible
secured promissory note from FitnessAge Incorporated as discussed in footnote L
to the financial statements. The Company also utilized approximately $1.6
million to fund cash used in operating activities. The cash used in both
investing and operating activities were primarily funded by cash provided by
financing activities of approximately $7.4 million.
Capital expenditures for fiscal 2000 amounted to approximately $5.2 million.
These expenditures relate primarily to the development of the new Swiss
manufacturing facility of approximately $1.4 million and domestic manufacturing
facility improvements of approximately $3.7 million. The domestic capital
expenditures were spent on expanding and upgrading the Company's materials
warehouse, weighing, blending, and distribution facility, as well as the
addition of the new finished goods packaging facility. These expenditures were
primarily for consolidating operations into adjacent facilities to improve
overall manufacturing, quality and process controls, as well as to vertically
integrate finished goods packaging and labeling capabilities. In April 2000, the
Company began operating its own finished goods packaging facility, adjacent to
the warehousing and distribution facility. This new capability substantially
eliminates the need to use outside packaging services to produce finished goods
manufactured by the Company. The Company packages bottles, powder filling,
blister cards or packets. Management believes that the ability to offer in-house
packaging will help control and reduce manufacturing costs, improve inventory
management and quality control, simplify manufacturing logistics and provide
more dependable service to its customers. These expenditures were funded
primarily from borrowings under the Company's term note described below.
At June 30, 2000, the Company had working capital of approximately $7.6 million
compared to approximately $14.1 million at June 30, 1999. The $6.5 million
decrease in working capital was primarily the result of a decrease in current
assets of $5.8 million and an increase of current liabilities of $0.7 million.
Current assets decreased primarily due to a decrease in inventories of
approximately $2.2 million and accounts receivable of $3.4 million. Current
liabilities increased primarily due to an increase in lines of
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credit, current notes payable and current portion of long-term debt of $5.0
million partially offset by a decrease in accounts payable of $3.9 million and
other liabilities of $0.4 million.
For fiscal 2000, the Company's consolidated outstanding debt increased to
approximately $8.4 million from approximately $1.0 million at June 30, 1999. The
increase of $7.4 million in total debt to fund the following Company initiatives
in fiscal 2000: capital expenditures related primarily to domestic manufacturing
facility improvements of $3.7 million; cash used in operating activities of $1.6
million; increase of debt of $0.8 million for the development of the new
manufacturing subsidiary in Switzerland; and cash used in investing activities
of $0.9 million for FitnessAge and Custom Nutrition. The composite interest rate
on all outstanding debt as of June 30, 2000 was approximately 8.95%.
The Company has access to funds from existing working capital credit facilities
to support future ongoing operating requirements of approximately $6.2 million,
net of borrowings outstanding under these facilities as of June 30, 2000 of
approximately $2.8 million. The working capital line of credit facilities are
subject to eligibility requirements for current accounts receivable and
inventory balances. As of June 30, 2000 total excess borrowing capacity based on
eligible working capital balances was approximately $1.0 million. One or more of
the Company's loan agreements contain a number of covenants that restrict the
operations of the Company. Such restrictions include requiring the Company to
comply with specified financial ratios and tests, including minimum tangible net
worth requirements, maximum leverage ratios, debt coverage ratios, and minimum
Earnings before Interest, Depreciation and Amortization ("EBITDA") to cash
interest expense ratios. The Company was not in compliance with certain of these
ratios as of June 30, 2000, which the lender has agreed to waive through June
30, 2000. As of July 1, 2000 the Company and the lender have amended the credit
agreement to provide new debt covenant restrictions under which the Company is
compliant. The Company is negotiating with various lenders to establish new loan
arrangements.
The Company believes that its available cash and existing credit facilities
should be sufficient to fund near-term operating activities. However, the
Company's ability to fund future operations and meet capital requirements will
depend on many factors, including but not limited to: the ability to seek
additional capital; the effectiveness of the Company's diversified growth
strategy; the effectiveness of the cost containment program; vertical
integration of packaging operations; the expansion of Switzerland manufacturing
operations; and the ability to establish additional customers or changes to
existing customer's business.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
No. 101"). SAB No. 101, as amended by SAB No. 101B, summarizes certain of the
SEC's staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The Company is required to
implement SAB No. 101 by the fourth quarter fiscal 2001 and does not believe
that it will have a significant effect on its financial statements.
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133), which was amended by Statement of Financial
Accounting Standards No. 137 (SFAS 137). SFAS 133 and SFAS 137 require companies
to recognize all derivatives as either assets or liabilities, with the
instruments measured at fair value. The accounting for changes in fair value
gains and losses depends on the intended use of the derivative and its resulting
designation. SFAS 133 and SFAS 137 become effective for the Company on July 1,
2000, however, the Company does not believe their adoption will have a material
impact on its financial statements.
In March of 2000, the Financial Accounting Standards Boards ("FASB") issued FASB
Interpretation No. 44 ("FIN 44"), Accounting for Certain Transactions Involving
Stock Compensation - an Interpretation of Accounting Principles Board Opinion
No. 25. FIN 44 is effective July 1, 2000. The Company does not expect the
application of FIN 44 to have a significant effect on its financial statements.
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ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of risks, including changes in interest rates
affecting the return on our investments and the cost of our debt.
At June 30, 2000, the Company maintained its cash and cash equivalents in
financial instruments with original maturities of three months or less.
The Company's debt totaled $8.4 million as of June 30, 2000 and was comprised
principally of term notes and lines of credit. The Company's debt obligations
bear a composite rate of 9.0%. An immediate change of one hundred basis points
in interest rates would not have a material effect on our financial condition or
results of operations due to the fixed rate nature of the term notes.
RISK FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
In addition to the other information included in this Report, the following
factors should be considered in evaluating the Company's business and future
prospects. The Company's business and results of operations could be seriously
harmed by any of the following risks. In addition, the market price of our
common stock could decline due to any of these risks.
RECENT LOSSES; DECLINING SALES
The Company incurred a net loss of approximately $4.5 million for the fiscal
year ended June 30, 2000. Sales for the fiscal year ended June 30, 2000,
declined to approximately $47.8 million, compared to approximately $57.4 million
for the fiscal year ended June 30, 1999. The Company has implemented a cost
containment program and a return to profitability program in an effort to reduce
expenses to be consistent with current operating levels. There can be no
assurance these programs will be effective, or if they are, the Company cannot
predict the level of profitability or whether the Company will be able to
maintain profitability. The Company expects that operating results will
fluctuate from period to period as a result of differences in when it incurs
expenses and recognizes revenues from product sales. Some of these fluctuations
may be significant.
DECLINE IN STOCK PRICE
The Company's stock price has experienced significant volatility at times during
the past few years and is currently at historic lows. In view of the Company's
recent losses and the fact there can be no assurances of future profitability,
there can be no assurance that the stock price will not continue to decline.
Market conditions in the vitamin and nutritional supplement industry, such as
increased price competition, consolidation, oversupply of vitamin and supplement
products, operating results of competitors, adverse publicity and other factors
such as customer and product announcements by the Company and operating results
which are lower than the expectations of analysts and our investors, may have a
continuing adverse affect on the price of the Company's stock.
RELIANCE ON LIMITED NUMBER OF CUSTOMERS FOR MAJORITY OF REVENUE
For the fiscal year ended June 30, 2000, the Company had 2 major customers,
which together accounted for approximately 62% of the Company's net sales. The
loss of either of these major customers, or any substantial reduction of their
purchases from the Company, would have a material adverse impact on the
business, operations and financial condition of the Company.
LOSS OF MAJOR CUSTOMER
During the quarter ended December 31,1999, one of the Company's major customers,
NuSkin Enterprises, Inc. ("NuSkin"), advised the Company it would stop
purchasing products from the Company, and no longer purchases any Company
products. For the fiscal year ended June 30, 1999, NuSkin accounted for
approximately $18.4 million or approximately 32% of the Company's net sales. For
the year ended June 30, 2000, NuSkin accounted for approximately $4.3 million or
9% of the Company's net sales. The loss of
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NuSkin as a customer has had a material adverse impact on the revenues and
operating results of the Company. There can be no assurance the Company will be
able to generate revenue from any source in an amount sufficient to offset the
loss of NuSkin as a customer.
RESTRICTIVE FINANCING COVENANTS.
One or more of the Company's loan agreements contain a number of covenants that
restrict the operations of the Company. Such restrictions include requiring the
Company to comply with specified financial ratios and tests, including minimum
tangible net worth requirements, maximum leverage ratios, debt coverage ratios,
and minimum Earnings before Interest, Depreciation and Amortization ("EBITDA")
to cash interest expense ratios. The Company was not in compliance with certain
of these ratios at June 30, 2000, which the lender has agreed to waive through
June 30, 2000. The credit agreement was subsequently amended to provide new debt
covenant restrictions under which the Company was compliant at 6/30/00. The
Company is negotiating with various lenders to establish new loan arrangements.
There can be no assurance the Company will successfully enter into new loan
agreements and will be able to comply with the covenants or restrictions
contained therein during future quarters. The Company's ability to comply with
such covenants and other restrictions may be affected by events beyond its
control, including prevailing economic, financial and industry conditions. The
breach of any such covenants or restrictions could result in a default under the
various loan agreements that would permit the lenders to declare all amounts
outstanding thereunder to be immediately due and payable, together with accrued
and unpaid interest, and to terminate their commitments to make further
extensions of credit. Any such action could have a material adverse impact upon
the business operations and financial condition of the Company.
SECURED PROMISSORY NOTE RECEIVABLE
The Company has loaned approximately $750,000 to its joint venture partner in a
limited liability company. The debt is convertible into the private company's
common stock and will become due and payable in the second fiscal quarter of
2001. The borrower is a development stage company and there can be no assurance
it will have the funds to repay the debt when it becomes due. In the event it
does not, the Company may elect to renegotiate the terms or grant an extension
or convert the debt into the stock of the borrower on the same or revised terms
as exist in the current loan agreements.
LAWSUIT BY FORMER PRESIDENT, DIRECTOR AND CHIEF FINANCIAL OFFICER
The Company is a party to a lawsuit filed by its former President, Director and
Chief Financial Officer, William P. Spencer. Mr. Spencer was terminated by the
Company for cause in January 1999. The lawsuit includes various claims, and
alleges damages in excess of six million dollars. The Company has responded to
the lawsuit and has denied it has any liability associated with the claim.
Management believes the claims against the Company are without merit. The
Company filed a cross-complaint in the lawsuit against Mr. Spencer and
Imagenetix, Inc., a corporation in which he is currently a director, principal
shareholder and chief executive, and three other individuals, two of whom are
former employees of the Company and the other a former consultant to the
Company. Both the Company's and the other parties' complaints have been amended,
and additional parties have been added. Management believes the Company will not
be found liable on any claim, and will prevail in its cross-complaint against
each cross-defendant. In the event a judgment is obtained against the Company in
the amount of the damages alleged in the lawsuit or any significant portion
thereof, it would have a material adverse impact upon the financial condition of
the Company.
POTENTIAL FOR INCREASED COMPETITION
The market for the Company's products is highly competitive. The Company
competes with other dietary supplement products and over-the-counter
pharmaceutical manufacturers. Among other factors, competition among these
manufacturers is based upon price. If one or more manufacturers significantly
reduce their prices in an effort to gain market share, the Company's business,
operations and financial condition could be adversely affected. Many of the
Company's competitors, particularly manufacturers of nationally advertised brand
name products, are larger and have resources substantially greater than those of
the Company. There has been speculation about the potential for increased
participation in these markets by major international pharmaceutical companies.
In the future, if not already, one or more of these companies could seek to
compete more directly with the Company by manufacturing and distributing
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their own or others' products, or by significantly lowering the prices of
existing national brand products. The Company sells substantially all of its
supplement products to customers who re-sell and distribute the products.
Although the Company does not currently participate significantly in other
channels such as health food stores, direct mail, internet sales and direct
sales, the Company is expanding its operations and its products, and will likely
face increased competition in such distribution and sales channels as more
vendors and customers utilize them.
RELIANCE ON LIMITED NUMBER OF SUPPLIERS; AVAILABILITY AND COST OF PURCHASED
MATERIALS
The Company purchases certain products it does not manufacture from a limited
number of raw material suppliers. No supplier represented more than 10% of total
raw material purchases for the fiscal year ended June 30, 2000. Although the
Company currently has supply arrangements with several suppliers of these raw
materials, and such materials are generally available from numerous sources, the
termination of the supply relationship by any material supplier or an unexpected
interruption of supply could materially adversely affect the Company's business,
operations and financial condition.
The Company relies on a single supplier to process certain raw materials for a
product line of the Company's largest customer. An unexpected interruption of
supply of this service would materially adversely affect the Company's business,
operations and financial condition.
EFFECT OF ADVERSE PUBLICITY
The Company's products consist primarily of dietary supplements (vitamins,
minerals, herbs and other ingredients). The Company regards these products as
safe when taken as suggested by the Company. In addition, various scientific
studies have suggested the ingredients in some of the Company's products may
involve health benefits. The Company believes the growth in the dietary
supplements business of the last several years may, in part, be based on
significant media attention and various scientific research suggesting potential
health benefits from the consumption of certain vitamin products. The Company is
indirectly dependent upon its customers' perception of the overall integrity of
its business, as well as the safety and quality of its products and similar
products distributed by other companies which may not adhere to the same quality
standards as the Company. The business, operations, and financial condition of
the Company could be adversely affected if any of the Company's products or any
similar products distributed by other companies should prove or be asserted to
be harmful to consumers, or should scientific studies provide unfavorable
findings regarding the effect of products similar to those produced by the
Company.
EXPOSURE TO PRODUCT LIABILITY CLAIMS
The Company, like other retailers, distributors and manufacturers of products
that are ingested, faces a risk of exposure to product liability claims in the
event that, among other things, the use of its products results in injury. The
Company maintains product liability insurance coverage, including primary
product liability and excess liability coverage. There can be no assurance that
product liability insurance will continue to be available at an economically
reasonable cost or that the Company's insurance will be adequate to cover any
liability the Company incurs in respect to all possible product liability
claims. In addition, some of the ingredients included in one or more of the
products manufactured by the Company are subject to controversy involving
potential negative side effects or questionable health benefits. Some insurers
have recently excluded certain of these ingredients from their product liability
coverage. Although the Company's product liability insurance does not presently
have any such limitations, the Company's insurer could require such exclusions
or limitations on coverage in the future. In such event, the Company may have to
cease utilizing the ingredients or may have to rely on indemnification or
similar arrangements with its customers who wish to continue to include such
ingredients in their products. In such an event, the consequential increase in
product liability risk or the loss of customers or product lines could have a
material adverse impact on the Company's business, operations, and financial
condition.
RISKS ASSOCIATED WITH INTERNATIONAL MARKETS
The Company's growth may be dependent in part upon its ability to expand its
operations and those of its customers into new markets, including international
markets. For the fiscal year ended June 30, 2000, the percentage of the
Company's net sales to customers in international markets was approximately 32%.
The
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Company has a manufacturing facility in Switzerland, which is intended to
facilitate an increase in sales of the Company's products overseas and which
contributed approximately 7% of the Company's' s net sales for the fiscal year
ended June 30, 2000. The Company may experience difficulty entering new
international markets due to regulatory barriers, the necessity of adapting to
new regulatory systems, and problems related to entering new markets with
different cultural bases and political systems. Operating in international
markets exposes the Company to certain risks, including, among other things, (1)
changes in or interpretations of foreign import, currency transfer and other
restrictions and regulations that among other things may limit the Company's
ability to sell certain products or repatriate profits to the United States, (2)
exposure to currency fluctuations, (3) the potential imposition of trade or
foreign exchange restrictions or increased tariffs, and (4) economic and
political instability. As the Company continues to expand its international
operations, these and other risks associated with international operations are
likely to increase.
GOVERNMENT REGULATION
The manufacturing, processing, formulation, packaging, labeling and advertising
of the Company's products are subject to regulation by one or more federal
agencies, including the United States Food and Drug Administration ("FDA"), the
Federal Trade Commission ("FTC"), the Consumer Product Safety Commission, the
United States Department of Agriculture, the United States Postal Service, the
United States Environmental Protection Agency, and the Occupational Safety and
Health Administration. The Company's activities are also regulated by various
agencies of the states and localities in which the Company's products are sold.
In particular, the FDA regulates the safety, labeling and distribution of
dietary supplements, including vitamins, minerals, herbs, food, and
over-the-counter and prescription drugs and cosmetics. In addition, the FTC has
overlapping jurisdiction with the FDA to regulate the labeling, promotion and
advertising of vitamins, over-the-counter drugs, cosmetics and foods.
The Dietary Supplement Health and Education Act of 1994 ("DSHEA") was enacted on
October 25, 1994. DSHEA amends the Federal Food, Drug and Cosmetic Act by
defining dietary supplements, which include vitamins, minerals, nutritional
supplements and herbs as a new category of food separate from conventional food.
DSHEA provides a regulatory framework to ensure safe, quality dietary
supplements and the dissemination of accurate information about such products.
Under DSHEA, the FDA is generally prohibited from regulating the active
ingredients in dietary supplements as drugs unless product claims, such as
claims that a product may heal, mitigate, cure or prevent an illness, disease or
malady, trigger drug status.
DSHEA provides for specific nutritional labeling requirements for dietary
supplements. DSHEA permits substantiated, truthful and non-misleading statements
of nutritional support to be made in labeling, such as statements describing
general well being resulting from consumption of a dietary ingredient or the
role of a nutrient or dietary ingredient in affecting or maintaining a structure
or function of the body. The Company anticipates the FDA will finalize
manufacturing process regulations that are specific to dietary supplements and
require at least some of the quality control provisions applicable to drugs. The
Company currently manufactures its vitamins and nutritional supplement products
in compliance with the food good manufacturing processes.
The FDA is developing additional regulations to implement DSHEA. Labeling
regulations may require expanded or different labeling for the Company's vitamin
and nutritional products. The Company cannot determine what effect such
regulations, when fully implemented, will have on its business in the future.
Such regulations could, among other things, require the recall, reformulation or
discontinuance of certain products, additional record keeping, warnings,
notification procedures and expanded documentation of the properties of certain
products or scientific substantiation regarding ingredients, product claims,
safety or efficacy. Failure to comply with applicable FDA requirements could
result in sanctions being imposed on the Company or the manufacturers of its
products, including warning letters, fines, product recalls and seizures.
Governmental regulations in foreign countries where the Company plans to
commence or expand sales may prevent or delay entry into a market or prevent or
delay the introduction, or require the reformulation of, certain of the
Company's products. In addition, the Company cannot predict whether new domestic
or foreign legislation regulating its activities will be enacted. Such new
legislation could have a material adverse effect on the business, operations and
financial condition of the Company.
20
<PAGE> 21
DISTRIBUTION AND MANAGEMENT OF OPERATIONS
In fiscal 1999, the Company leased and commenced operating three additional
facilities. Two adjacent facilities, comprising 74,000 square feet in Vista,
California, and used as a receiving, warehousing, weighing, blending, finished
goods packaging, and distribution facility. The third new facility is an 18,000
square foot manufacturing facility in Lugano, Switzerland. Both of these
facilities were completed and became fully operational during fiscal 2000.
During fiscal 1999, the Company also implemented an entirely new software system
to manage its materials, manufacturing and accounting operations, and use of
this system has continued to be refined in fiscal 2000. While the Company
believes new facilities and operating systems will increase the Company's
manufacturing and distribution capabilities, there can be no assurance that they
will result in improved sales, profit margins or earnings. A significant,
unexpected disruption of these systems and facilities could have a material
adverse effect on the Company's results of operations.
FAILURE TO ATTRACT AND RETAIN MANAGEMENT COULD HARM OUR ABILITY TO ACHIEVE
PROFITABILITY AND GAIN
The Company's success is dependent in large part upon its continued ability to
identify, hire, retain, and motivate highly skilled management employees. These
types of qualified individuals are currently in great demand in the marketplace.
Competition for these employees is intense, and the Company may not be able to
hire additional qualified personnel in a timely manner and on reasonable terms.
The majority of the Company's current corporate officers began their employment
with the Company in fiscal years 1999 and 2000. The inability of the Company to
retain competent professional management could adversely effect our ability to
execute our business strategy.
CENTRALIZED LOCATION OF MANUFACTURING OPERATIONS
The Company currently manufactures the vast majority of its products at its
manufacturing facilities in San Marcos, California. Accordingly, any event
resulting in the slowdown or stoppage of the Company's manufacturing operations
or distribution facilities in San Marcos could have a material adverse affect on
the Company. The Company maintains business interruption insurance. There can be
no assurance, however, that such insurance will continue to be available at a
reasonable cost or, if available, will be adequate to cover any losses that may
be incurred from an interruption in the Company's manufacturing and distribution
operations.
CONCENTRATION OF OWNERSHIP; CERTAIN ANTI-TAKEOVER CONSIDERATIONS
The Company's directors and executive officers beneficially own in excess of
24.9% of the outstanding Common Stock as of June 30, 2000. Accordingly, these
shareholders will continue to have the ability to substantially influence the
management, policies, and business operations of the Company. The Company's
Board of Directors has the authority to approve the issuance of 500,000 shares
of preferred stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the Company's shareholders. The rights of the holders of Common
Stock will be subject to, and may be adversely affected by, the rights of
holders of any preferred stock that may be issued in the future. Certain
provisions of Delaware law, as well as the issuance of preferred stock, and
other "anti-takeover" provisions in the Company's Articles and Bylaws, could
delay or inhibit the removal of incumbent directors and could delay, defer, make
more difficult or prevent a merger, tender offer or proxy content, or any change
in control involving the Company, as well as the removal of management, even if
such events would be beneficial to the interests of the Company's shareholders,
and may limit the price certain investors may be willing to pay in the future
for shares of Common Stock.
21
<PAGE> 22
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 53.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
22
<PAGE> 23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be included under the caption
"Directors and Executive Officers of the Registrant" in the Registrant's Proxy
Statement for the 2001 Annual Meeting of Stockholders and is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be included under the caption
"Executive Compensation" in the Registrant's Proxy Statement for the 2001 Annual
Meeting of Stockholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be included under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the
Registrant's Proxy Statement for the 2001 Annual Meeting of Stockholders and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be included under the caption
"Certain Relationships and Related Transactions" in the Registrant's Proxy
Statement for the 2001 Annual Meeting of Stockholders and is incorporated herein
by reference.
23
<PAGE> 24
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 the 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
10.1 Standard Industrial/Commercial Multi-Tenant Lease - Modified Net dated
March 3, 1999, by and between Pacific Gulf Properties, Inc. and Natural
Alternatives International, Inc., as amended.
10.2 Industrial Real Estate Lease (Multi-Tenant Facility) dated July 17,
1998, by and between Pacific Gulf Properties, Inc. and Natural
Alternatives International, Inc.
10.3 Standard Business Park Lease dated January 9, 1995, by and between
Brigitte Zemmrich and Natural Alternatives International, Inc., located
at 425 Ryan Drive, Suite A, San Marcos, CA 92069, as amended.
10.4 Standard Industrial/Commercial Multi-Tenant Lease-Gross dated April 11,
1994, by and between Brigitte Zemmrich and Natural Alternatives
International, Inc., located at 425 Ryan Drive, Suite B, San Marcos, CA
92069, as amended.
10.5 Buy Out of Leasehold Interest dated June 30, 2000, between Pacific View
Corporate Center, L.L.C. and Natural Alternatives International, Inc.
10.6 Natural Alternatives International, Inc. 1999 Omnibus Equity Incentive
Plan Effective May 10, 1999 (incorporated by reference to the Company's
Proxy Statement on Schedule 14A filed with the Commission on October 27,
1999.)
10.7 Natural Alternatives International, Inc. 1999 Employee Stock Purchase
Plan (incorporated by reference to the Company's Proxy Statement on
Schedule 14A filed with the Commission on October 27, 1999.)
10.8 Executive Employment Agreement dated October 1, 1999, between Douglas E.
Flaker and Natural Alternatives International, Inc.
10.9 Executive Employment Agreement dated October 1, 1999, between Mark A.
LeDoux and Natural Alternatives International, Inc.
10.10 Executive Employment Agreement dated October 1, 1999, between David
Lough and Natural Alternatives International, Inc.
10.11 Executive Employment Agreement dated October 1, 1999, between John A.
Wise and Natural Alternatives International, Inc.
10.12 Executive Employment Agreement dated October 25, 1999, between Peter C.
Wulff and Natural Alternatives International, Inc.
24
<PAGE> 25
10.13 Operating Agreement of Custom Nutrition, LLC dated December 6, 1999, by
and among FitnessAge Incorporated, as one member, and Natural
Alternatives International, Inc. (incorporated by reference to the
Company's Report on Form 10-Q, for the quarter ended December 31, 1999.)
10.14 Loan Agreement dated November 11, 1999, by and between FitnessAge, Inc.
and Natural Alternatives International, Inc. (incorporated by reference
to the Company's Report on Form 10-Q, for the quarter ended December 31,
1999.)
10.15 First Amendment to Loan Agreement and Security Agreement dated December
6, 1999 by and between FitnessAge, Inc. and Natural Alternatives
International, Inc. (incorporated by reference to the Company's Report
on Form 10-Q, for the quarter ended December 31, 1999.)
23.1 Consent of KPMG L.L.P., Independent Auditors
27.1 Financial Data Schedule
(c) REPORTS FORM 8-K
Not Applicable
25
<PAGE> 26
NATURAL ALTERNATIVES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
JUNE 30, 2000
<TABLE>
<S> <C>
Independent Auditors' Report ............................................. 27
Consolidated Balance Sheets as of June 30, 2000 and 1999 ................. 28
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the years ended June 30, 2000, 1999 and 1998 ......................... 30
Consolidated Statements of Stockholders' Equity for
the years ended June 30, 2000, 1999 and 1998 ............................. 31
Consolidated Statements of Cash Flows for the
years ended June 30, 2000, 1999 and 1998 ................................. 32
Notes to Consolidated Financial Statements ............................... 34
Schedule II - Valuation and Qualifying Accounts for
the years ended June 30, 2000, 1999 and 1998 ............................. 53
</TABLE>
26
<PAGE> 27
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 auditing standards generally accepted
in the United States of America. 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 consolidated financial position of Natural
Alternatives International, Inc. and subsidiaries as of June 30, 2000 and 1999,
and the results of their operations and their cash flows for each of the years
in the three-year period ended June 30, 2000, in conformity with accounting
principles generally accepted in the United States of America. 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 LLP
San Diego, California
October 9, 2000
27
<PAGE> 28
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND 1999
ASSETS
<TABLE>
<CAPTION>
June 30 June 30
(Amounts in thousands except share data) 2000 1999
------- -------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 815 $ 1,063
Accounts receivable - less allowance for doubtful
accounts of $330 at June 30, 2000 and
$472 at June 30, 1999 (Notes F and M) 4,097 7,515
Inventories (Notes C and F) 7,627 9,876
Income tax refund receivable (Note G) 1,500 2,229
Deferred income taxes 1,467 --
Related parties notes receivable - current portion (Note K) 815 126
Prepaid expenses 635 371
Deposits 390 1,265
Other current assets 110 794
------- -------
Total Current Assets 17,456 23,239
------- -------
Property and equipment, net (Notes D and F) 15,037 12,274
------- -------
Other Assets:
Deferred income taxes (Note G) 1,592 1,979
Investments (Note E) 232 196
Related parties notes receivable, less current portion (Note K) 444 401
Other noncurrent assets, net 114 507
------- -------
Total Other Assets 2,382 3,083
------- -------
TOTAL ASSETS $34,875 $38,596
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
(continued)
28
<PAGE> 29
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
JUNE 30, 2000 AND 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30 June 30
(Amounts in thousands except share data) 2000 1999
-------- --------
<S> <C> <C>
Current Liabilities:
Accounts payable $ 4,422 $ 8,305
Lines of credit (Note F) 2,803 --
Notes payable (Note F) 1,741 --
Current installments of long-term debt (Note F) 490 50
Income taxes payable (Note G) -- --
Current accrual for loss on lease obligation 50 --
Accrued compensation and employee benefits 355 786
-------- --------
Total Current Liabilities 9,861 9,141
Deferred income taxes (Note G) 766 593
Long-term debt, less current installments (Note F) 3,345 927
Accrual for loss on lease obligation -- 2,434
Long-term pension liability (Note H) 417 410
-------- --------
Total Liabilities 14,389 13,505
-------- --------
Stockholders' Equity (Note I):
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 6,024,380 at
June 30, 2000 and 6,002,375 at June 30, 1999 60 60
Additional paid-in capital 11,272 11,237
Retained earnings 10,498 14,970
Treasury stock, at cost, 262,500 shares at June 30, 2000
and 212,500 shares at June 30, 1999 (1,283) (1,116)
Accumulated other comprehensive loss (Note E) (61) (60)
-------- --------
Total Stockholders' Equity 20,486 25,091
-------- --------
Commitments and contingencies (Notes H, J and N)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 34,875 $ 38,596
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 30
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
(Dollars in thousands except share data) 2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 47,827 $ 57,430 $ 67,894
Cost of goods sold 41,503 45,010 49,157
Inventory write-off 2,000 -- --
----------- ----------- -----------
GROSS PROFIT 4,324 12,420 18,737
Selling, general &
administrative expenses 9,319 11,965 9,114
Loss on abandonment of leased facility 1,729 5,392 --
----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (6,724) (4,937) 9,623
----------- ----------- -----------
Other income (expense):
Interest income 139 185 194
Interest expense (399) (85) (110)
Equity in loss of unconsolidated joint
venture (62) -- --
Foreign exchange gain 74 -- --
Other, net 71 15 (40)
----------- ----------- -----------
(177) 115 44
----------- ----------- -----------
EARNINGS (LOSS) BEFORE INCOME TAXES (6,901) (4,822) 9,667
Provision for income taxes (benefit) (Note G) (2,429) (1,899) 3,795
----------- ----------- -----------
NET EARNINGS (LOSS) $ (4,472) $ (2,923) $ 5,872
=========== =========== ===========
Unrealized gain (loss) on investments (1) (12) 3
----------- ----------- -----------
Comprehensive Income (loss) $ (4,473) $ (2,935) $ 5,875
=========== =========== ===========
NET EARNINGS (LOSS) PER COMMON SHARE:
Basic $ (0.78) $ (0.50) $ 1.06
=========== =========== ===========
Diluted $ (0.78) $ (0.50) $ 1.00
=========== =========== ===========
Weighted average common shares outstanding:
Basic shares 5,756,705 5,868,159 5,544,337
Diluted shares 5,756,705 5,868,159 5,866,640
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 31
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
----------------------- Paid-in Retained Treasury Comprehensive
(Dollars in thousands) Shares Amount Capital Earnings Stock Income (Loss) Total
--------- --------- ---------- --------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997 5,429,764 $ 54 $ 6,676 $ 12,021 -- $ (51) $ 18,700
Issuance of common
stock upon exercise of
employee stock options 338,445 4 1,646 -- -- -- 1,650
Income tax benefit from
stock options exercised -- -- 1,435 -- -- -- 1,435
Net unrealized gains on
investments -- -- -- -- -- 3 3
Net earnings -- -- -- 5,872 -- -- 5,872
--------- --------- --------- --------- --------- --------- ---------
Balance, June 30, 1998 5,768,209 $ 58 $ 9,757 $ 17,893 -- $ (48) $ 27,660
Issuance of common
stock upon exercise of
stock options 234,166 2 1,106 -- -- -- 1,108
Income tax benefit from
stock options exercised -- -- 374 -- -- -- 374
Treasury stock purchased -- -- -- -- (1,116) -- (1,116)
Net unrealized loss on
investments -- -- -- -- -- (12) (12)
Net loss -- -- -- (2,923) -- -- (2,923)
--------- --------- --------- --------- --------- --------- ---------
Balance, June 30, 1999 6,002,375 $ 60 $ 11,237 $ 14,970 $ (1,116) $ (60) $ 25,091
Issuance of common
stock for employee stock
purchase plan 22,005 -- 35 -- -- -- 35
Treasury stock purchased -- -- -- -- (167) -- (167)
Net unrealized loss on
investments -- -- -- -- -- (1) (1)
Net loss -- -- -- (4,472) -- -- (4,472)
--------- --------- --------- --------- --------- --------- ---------
Balance, June 30, 2000 6,024,380 $ 60 $ 11,272 $ 10,498 $ (1,283) $ (61) $ 20,486
========= ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE> 32
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
(Dollars in thousands) 2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS (USED IN)/PROVIDED BY OPERATING ACTIVITIES:
Net earnings (loss) $(4,472) $(2,923) $ 5,872
Adjustments to reconcile net (loss) earnings to net
cash provided by operating activities:
Bad debt provision (142) 566 360
Write-off of inventory 2,000 -- --
Write-off of notes receivable 80 353 --
Tax benefit on option exercise -- 374 1,435
Depreciation and amortization 2,182 1,638 1,515
Deferred income taxes (907) (1,032) 10
Pension expense, net of contributions 7 163 89
Loss on disposal of assets 162 5 55
Loss on investments 63 1 --
Loss on abandonment of leased facility,
net of amounts paid (2,384) 4,739 --
Other -- 10 (37)
Foreign exchange gains (86) -- --
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 3,560 4,477 (6,029)
Inventories 249 1,629 (5,814)
Tax refund receivable 729 (2,229) 842
Prepaid expenses 420 28 (189)
Deposits 875 (624) (319)
Accrued interest on related parties notes receivable (64) -- --
Other noncurrent assets 393 -- --
(Decrease) increase in:
Accounts payable (3,883) (3,997) 5,045
Income taxes payable -- (378) 378
Accrued compensation and employee benefits (431) 348 117
------- ------- -------
Net Cash (Used in) Provided by Operating Activities $(1,649) $ 3,148 $ 3,330
------- ------- -------
</TABLE>
(continued)
32
<PAGE> 33
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment $ 54 $ 10 $ 65
Capital expenditures (5,161) (5,700) (3,475)
Issuance of notes receivable (826) (641) (5)
Repayment of notes receivable 78 343 143
Investment purchases (100) (334) --
Other assets -- (399) (198)
------- ------- -------
Net Cash (Used in) Investing Activities (5,955) (6,721) (3,470)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on lines of credit 3,805 700 --
Borrowings on long-term debt 5,455 -- --
Payments on lines of credit (972) (700) --
Payments on long-term debt and capital leases (800) (70) (266)
Issuance of common stock 35 1,108 1,650
Treasury stock acquisitions (167) (1,116) --
------- ------- -------
Net Cash (Used in) Provided by Financing Activities 7,356 (78) 1,384
------- ------- -------
Net Increase (Decrease) in Cash and Cash Equivalents (248) (3,651) 1,244
Cash and Cash Equivalents at Beginning of Year 1,063 4,714 3,470
------- ------- -------
Cash and Cash Equivalents at End of Year $ 815 $ 1,063 $ 4,714
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 365 $ 84 $ 100
Income taxes (refunded) paid (2,252) 1,196 1,494
======= ======= =======
Disclosure of non-cash activities:
Net unrealized gains (losses) on investments $ (1) $ (12) $ 3
Fixed asset purchases in accounts payable -- -- 433
Issuance of note receivable for payment of
account receivable -- -- 100
Write-off of notes receivable through the
allowance for doubtful accounts -- -- --
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE> 34
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Natural Alternatives International, Inc. manufactures vitamins, micronutrients
and related nutritional supplements, and provides innovative private-label
products for specialized corporate, institutional and commercial accounts
worldwide.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Natural
Alternatives International, Inc. and its wholly owned subsidiary, NAIE Natural
Alternatives International Europe, SA ("Company"). All significant intercompany
accounts and transactions have been eliminated. The functional currency of the
Company's foreign subsidiary is the United States dollar. The financial
statements of the subsidiary have been translated at either current or
historical exchange rates, as appropriate, with gains and losses included in the
consolidated statements of operations.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
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
manufacturing overhead.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. 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. Maintenance and repairs are
expensed as incurred. Significant expenditures that increase economic useful
lives are capitalized.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles are 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. In fiscal 1999, the Company recorded a
$2.3 million charge for the impairment of certain leasehold improvements. See
Note J for discussion.
(continued)
34
<PAGE> 35
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS
The Company's investments include equity securities classified as available for
sale and carried at fair value, with unrealized gains and losses excluded from
net earnings and area included in Accumulated Other Comprehensive Loss.
The Company has a 4.2% investment, on a converted basis, in FitnessAge
Incorporated, which is accounted for under the cost method. The Company also
holds a 40% investment in Custom Nutrition L.L.C., which is accounted for under
the equity method, as the Company has the ability to exercise significant
influence over Custom Nutrition L.L.C. (Note L).
REVENUE RECOGNITION
Revenue from sales of product, and related cost of products sold, is recognized
upon shipment of product at which time title passes to the customer. Customers
generally do not have the right to return product unless damaged or defective.
COST OF GOODS SOLD
Cost of goods sold includes raw material, labor and manufacturing overhead.
INCOME TAXES
The Company accounts for income taxes using the asset and liability method.
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 operations in the period
that includes the enactment date.
STOCK OPTION PLANS
The Company accounts for its stock-based employee compensation for stock options
using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations, as allowed under SFAS 123. Accordingly, compensation cost is
measured as the excess, if any, of the fair value of the Company's stock at the
date of the grant over the price the employee must pay to acquire the stock.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, notes receivable,
investments, accounts payable, line of credit and note payable approximates fair
value due to the relatively short maturity of such instruments. The carrying
amounts for long-term debt approximate fair value as the interest rates and
terms are comparable to rates and terms that could be obtained currently for
similar instruments.
(continued)
35
<PAGE> 36
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 (LOSS) PER SHARE
The Company computes net earnings (loss) per share in accordance with Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128").
This statement requires the presentation of basic earnings (loss) per share,
computed using the weighted average number of shares outstanding during the
period, and diluted earnings (loss) per share, computed using the additional
dilutive effect of all dilutive securities. The dilutive impact of stock options
account for the additional weighted average shares of common stock outstanding
for the Company's diluted earnings (loss) per share computation. Basic and
diluted earnings (loss) per share have been calculated as follows:
For the Years Ended June 30, 2000, 1999, and 1998
(Amounts in thousands except share data)
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ ----------
<S> <C> <C> <C>
NUMERATOR:
Net earnings (loss) - Numerator for
basic and diluted earnings (loss) per
share - earnings (loss) available to
common shareholders (In thousands) $ (4,472) $ (2,923) $ 5,872
============ ============ ==========
DENOMINATOR:
Denominator for basic earnings
(loss) per share - weighted
average shares 5,756,705 5,868,159 5,544,337
Effect of dilutive securities -
employee stock options -- -- 322,303
------------ ------------ ----------
Denominator for diluted earnings (loss)
per share - adjusted weighted average
shares with assumed
conversions 5,756,705 5,868,159 5,866,640
============ ============ ==========
Basic earnings (loss) per share $ (0.78) $ (0.50) $ 1.06
Diluted earnings (loss) per share $ (0.78) $ (0.50) $ 1.00
</TABLE>
For the years ended June 30, 2000 and 1999, respectively, shares related to
stock options of 313,000 and 352,750, respectively, were excluded from the
calculation of diluted loss per share, as the effect of their inclusion would be
anti-dilutive.
(continued)
36
<PAGE> 37
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEGMENT REPORTING
In fiscal 1999, the Company adopted SFAS 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes reporting standards for a
company's operating segments and related disclosures about its products,
services, geographic areas and major customers. An operating segment is defined
as a component of an enterprise that engages in business activities from which
it may earn revenues and incur expenses, and about which separate financial
information is regularly evaluated by the chief operating decision maker in
deciding how to allocate resources. This Statement allows aggregation of similar
operating segments into a single operating segment if businesses are considered
similar under the criteria of this Statement. The Company believes it operates
in a single segment, nutritional supplements.
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 equivalents with highly rated financial
institutions. Credit risk with respect to receivables is concentrated with the
Company's two largest customers (see Note M). These two customers' receivable
balances collectively represent 65% of gross accounts receivable at June 30,
2000 and 28% at June 30, 1999. Concentrations of credit risk related to the
remaining accounts receivable balances are limited due to the number of
customers comprising the Company's remaining customer base.
RECLASSIFICATIONS
Certain amounts in prior years' consolidated financial statements have been
reclassified to conform to the fiscal 2000 presentation.
B. INTERNATIONAL SUBSIDIARY
On January 22, 1999, NAIE Natural Alternatives International Europe, SA
("NAIE"), was incorporated as a wholly-owned subsidiary of the Company, based in
Manno Switzerland, which is adjacent to the city of Lugano. In September 1999,
NAIE opened its new manufacturing facility to provide manufacturing capability
in encapsulation and tablets, finished goods packaging, quality control
laboratory testing, warehousing, distribution and administration. Upon
formation, NAIE obtained from the Swiss tax authorities a five-year federal and
local income tax holiday ending in fiscal 2005.
C. INVENTORIES
Inventories are comprised of the following at June 30:
<TABLE>
<CAPTION>
(Dollars in thousands) 2000 1999
------ ------
<S> <C> <C>
Raw materials $4,187 $6,722
Work in progress 2,409 270
Finished goods 1,031 2,884
------ ------
$7,627 $9,876
====== ======
</TABLE>
37
<PAGE> 38
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
D. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at June 30:
<TABLE>
<CAPTION>
Life Used For
(Dollars in thousands) Depreciation 2000 1999
------------- -------- --------
<S> <C> <C> <C>
Land NA $ 393 $ 393
Building and building improvements 5 - 39 years 3,285 3,233
Machinery and equipment 3 - 15 years 14,301 12,784
Office equipment and furniture 5 to 7 years 3,679 2,549
Vehicles 3 years 179 179
Leasehold improvements 5 to 39 years 3,920 1,842
-------- --------
Total property and equipment 25,757 20,980
Less accumulated depreciation and amortization (10,720) (8,706)
-------- --------
Property and equipment, net $ 15,037 $ 12,274
======== ========
</TABLE>
E. INVESTMENTS
Investments includes marketable securities. Securities held at June 30, 2000 and
1999 are considered "available for sale securities." Securities are valued at
$44,000 and $46,000 as of June 30, 2000 and 1999. The security portfolio
includes gross unrealized losses, net of tax, of $61,000 and $60,000 at June 30,
2000 and 1999, respectively.
In addition to marketable securities, the Company has investments in FitnessAge
Incorporated, which is accounted for under the cost method, and Custom Nutrition
L.L.C., which is accounted for under the equity method. The investment in
FitnessAge Incorporated as of June 30, 2000 and June 30, 1999 was $150,000,
respectively. The investment in Custom Nutrition L.L.C. as of June 30, 2000 was
$38,000 consisting of a $100,000 initial investment less $62,000 of equity in
loss of unconsolidated joint venture. (See Note L)
F. DEBT
On October 4, 1999, the Company replaced an existing $3.0 million working
capital line of credit with $9.0 million in new financing. The new financing
consists of a $5.0 million working capital line of credit at an annual interest
rate of prime and a $4.0 million term note at an annual interest rate of prime
plus 0.25%, for an effective interest rate of 9.50% and 9.75%, respectively, at
June 30, 2000. Borrowings under the working capital line of credit are
collateralized by eligible accounts receivable and inventory, as defined in the
agreement; proceeds are to be used to support ongoing operating requirements. As
of June 30, 2000, the Company was not in compliance with certain financial
covenant provisions of the credit agreement, which the financial institution has
waived through June 30, 2000. The credit agreement was subsequently amended to
provide new debt covenant restrictions under which the Company was compliant at
June 30, 2000.
The line of credit expires on December 1, 2000. The term note expires on
November 1, 2000. As of June 30, 2000, amounts outstanding under the line of
credit and term note were $2.65 million and $1.74 million, respectively. The
Company expects this line to be renewed in the normal course of business and the
Company is negotiating with various lenders to establish new working capital
credit facility arrangements.
38
<PAGE> 39
The Company also has a term note secured by a building due June 2011 with the
same lender that also provides the working capital credit facility. As of June
30, 2000 the outstanding amount is $927,000.
The Company's wholly owned subsidiary in Switzerland has a line of credit
agreement permitting borrowings up to CHF 2.0 million, or approximately $1.2
million at June 30, 2000 at an annual interest rate of 5.5%. The line of credit
requires minimum annual principal payments of CHF250,000, or $150,000, due
annually on December 31; management expects this line to be renewed in the
normal course of business. The agreement contains no financial covenants. As of
June 30, 2000, the Company converted approximately $645,000 into various
unsecured term notes with maturities from six to twelve months at interest rates
ranging from 5.5% to 6.0%. The amount outstanding under the line of credit is
approximately $153,000.
On November 9, 1999, the Company entered into a term note agreement for $2.5
million, secured by equipment, at an annual interest rate of 9.2%. The note has
a five-year term that provides for principal and interest payable in monthly
installments of $52,000; proceeds have been used to support working capital
requirements. As of June 30, 2000 the outstanding amount is $2.26 million. The
composite interest rate on all outstanding debt was 8.95%.
Aggregate amounts of long-term debt maturities as of June 30, 2000 are as
follows:
(Dollars in thousands)
<TABLE>
<S> <C>
2001 $ 490
2002 687
2003 738
2004 793
2005 481
Thereafter 646
------
$3,835
======
</TABLE>
39
<PAGE> 40
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
G. INCOME TAXES
Income taxes (benefit) for the year ended June 30 consist of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $(1,525) $ (857) $ 3,104
State 3 (10) 681
------- ------- -------
(1,522) (867) 3,785
------- ------- -------
Deferred:
Federal (755) (689) 9
State (152) (343) 1
------- ------- -------
(907) (1,032) 10
------- ------- -------
Income taxes (benefit) $(2,429) $(1,899) $ 3,795
======= ======= =======
</TABLE>
The provision (benefit) for deferred income taxes for the year ended June 30
consists of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Accrual for loss on lease obligation $ 951 $ (971) $ --
Accelerated depreciation and
amortization for tax purposes 21 93 13
Increase in valuation allowance 83 -- --
Inventories (697) (106) (24)
Bad debt expense 308 (245) 238
Accrued vacation expense (15) 7 1
Customer deposits (80) -- --
State income taxes -- 232 (207)
Credit carryforward (126) -- --
Investment loss carryforward 36 -- --
Other, net (102) 14 (11)
Net operating loss carryforward (1,286) (56) --
------- ------- -------
$ (907) $(1,032) $ 10
======= ======= =======
</TABLE>
(continued)
40
<PAGE> 41
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
G. INCOME TAXES (CONTINUED)
Net deferred tax assets and deferred tax liabilities as of June 30 are as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 2000 1999
------ ------
<S> <C> <C>
Deferred tax assets:
Accrual for loss on lease obligation $ 20 $ 971
Allowance for doubtful accounts 135 443
Accrued vacation expense 61 46
Investment loss carryforward -- 36
Credit carryforward 126 --
Allowance for inventories 1,160 463
Other, net 102 --
Deposits 80 --
Net operating loss carryforward 1,494 56
------ ------
Total gross deferred tax assets 3,178 2,015
Less valuation allowance 119 36
------ ------
Net deferred tax assets 3,059 1,979
Deferred tax liabilities:
Accumulated depreciation and amortization 614 593
Federal impact of state NOL carryforward 152 --
------ ------
Net deferred tax liabilities 766 593
------ ------
Net deferred tax asset $2,293 $1,386
====== ======
</TABLE>
The valuation allowance for deferred tax assets was $119,000 and $36,000 at June
30, 2000 and 1999, respectively. 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. As
of June 30, 2000 and 1999 management believes it is more likely than not that
the Company will realize the benefit of the net deferred tax asset, net of the
existing valuation allowance.
(continued)
41
<PAGE> 42
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
G. 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>
(Dollars in thousands) 2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Income taxes (benefit) computed at
statutory federal income tax rate $(2,346) $(1,640) $ 3,287
State income taxes (benefit), net of federal
income tax benefit (expense) (214) (220) 451
Increase (decrease) in valuation allowance 83 -- --
Expenses not deductible for tax purposes 68 32 35
Foreign tax holiday 57 -- --
Other (77) (71) 22
------- ------- -------
Income taxes (benefit) as reported $(2,429) $(1,899) $ 3,795
======= ======= =======
Effective tax rate 35.2% 39.4% 39.3%
======= ======= =======
</TABLE>
H. 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 $117,000, $167,000, and $146,000 in 2000, 1999, and
1998, 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 $348,000,
$366,000, and $242,000 for 2000, 1999, and 1998, respectively.
In December 1999, the Company adopted an employee stock purchase plan that
provides for the issuance of up to 150,000 shares of Common Stock. The plan is
intended to qualify under Section 423 of the Internal Revenue Code and is for
the benefit of qualifying employees, as designated by the Compensation and Stock
Option Committee of the Board of Directors. Under the terms of the plan,
participating employees are eligible to have a maximum of 10% of their
compensation withheld through payroll deductions to purchase shares of Common
Stock at the lower of 85% of (i) the fair market value at the beginning of each
offering period or (ii) the fair market value on predetermined dates. As of June
30, 2000, 22,005 shares of Common Stock have been issued pursuant to this plan.
The Company sponsors a defined benefit pension plan (the "Plan"), which provides
retirement benefits to employees based generally on years of service and
compensation during the last five years before retirement. Effective June 21,
1999, the Company adopted an amendment to freeze benefit accruals of the
participants of the Plan, resulting in the recognition of $97,606 of net
curtailment gains in 1999. The gain resulted from the net decrease of the
Company's benefit obligation. At June 30, 2000, the estimated amortized portion
of the unfunded estimated accrued liability for prior service cost, using a
30-year funding period, amounted to approximately $417,000. This amount has been
accrued. The Company's policy is to fund the net pension cost accrued. However,
the Company would not contribute an amount less than the minimum funding
requirements of the Employee Retirement Income Security Act of 1974 or more than
the maximum tax-deductible amount.
(continued)
42
<PAGE> 43
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
H. EMPLOYEE BENEFIT PLANS (CONTINUED)
DISCLOSURE OF FUNDED STATUS
The following table sets forth the Plan's funded status and amount recognized in
the Company's consolidated balance sheets at June 30, after the effect of
curtailment:
<TABLE>
<CAPTION>
(Dollars in thousands) 2000 1999
------- -------
<S> <C> <C>
Change in Benefit Obligation
Benefit obligation at beginning of year $ 1,179 $ 2,084
Service cost -- 527
Interest cost 69 124
Actuarial (gain)/loss (227) 166
Benefits paid (33) --
Effect of curtailment -- (1,722)
------- -------
Benefit obligation at end of year $ 988 $ 1,179
======= =======
Change in Plan Assets
Fair value of plan assets at beginning of year $ 769 $ 314
Actual return on plan assets 32 19
Employer contributions -- 436
Benefits paid (33) --
------- -------
Fair value of plan assets at end of year $ 768 $ 769
======= =======
Reconciliation of Funded Status
Funded status (under)/over funded $ (220) $ (410)
Unrecognized net actuarial (gain)/loss (197) --
------- -------
(Accrued)/Prepaid benefit cost $ (417) $ (410)
======= =======
Additional Minimum Liability Disclosures
Accrued benefit liability $ (220) $ --
Intangible asset $ -- $ --
Other comprehensive income, not adjusted
for applicable income tax $ -- $ --
</TABLE>
(continued)
43
<PAGE> 44
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
H. EMPLOYEE BENEFIT PLANS (CONTINUED)
NET PERIODIC BENEFIT COST
The Net Periodic Benefit Cost for the fiscal years ending June 30 includes the
following components:
<TABLE>
<CAPTION>
(Dollars in thousands) 2000 1999
----- -----
<S> <C> <C>
Components of Net Periodic Benefit Cost
Service cost -- $ 528
Interest cost 68 124
Expected return on Plan Assets (61) (32)
Recognized net actuarial (gain)/loss -- 18
Amortization of prior service cost -- 59
Effect of special events (curtailment) -- (98)
===== =====
Net periodic benefit cost $ 7 $ 599
===== =====
</TABLE>
ASSUMPTION AND METHOD DISCLOSURES
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Discount rate 7.00% 6.00%
Expected long term rate of return 7.50% 7.50%
Weighted average rate of compensation increase -- --
Amortization method Straight-line Straight-line
</TABLE>
I. STOCKHOLDERS' EQUITY
TREASURY STOCK
In February 1999, the Board of Directors approved a repurchase program of up to
500,000 shares of the Company's common stock. As of June 30, 2000, 262,500
shares had been repurchased under this repurchase approval. During 1999, the
Company also repurchased 13,000 shares from an officer of the Company.
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 January 21, 1998, 300,000 options were granted with an
exercise price equal to the fair market value price of $10.50 per share. During
1999, 188,250 options were forfeited, and on May 10, 1999 an additional 70,000
options were granted with an exercise price equal to the fair market value price
of $3.78 per share. During fiscal 2000 an additional 30,000 options were granted
on December 6, 1999 to equal the fair market value price of $3.19 per share and
38,750 options were forfeited.
(continued)
44
<PAGE> 45
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
I. STOCKHOLDERS' EQUITY (CONTINUED)
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. All remaining options under this plan were
exercised or forfeited as of June 30, 1999. As of June 30, 2000, no additional
shares are reserved.
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. During the fiscal years 2000 and 1999, a
total of 34,166 options were exercised, while 296,000 options were forfeited. As
of June 30, 2000, no additional shares are reserved.
On October 28, 1998, and as amended March 11, 1999, the Board of Directors
adopted the 1998 Outside Director Compensation Plan that provided non-employee
directors and annual grant of nonqualified stock options. During fiscal 2000,
three options for 10,000 shares each, were granted as of March 11, 1999, at a
fair market value price of $5.75 per share, and one grant of 10,000 shares was
subsequently forfeited.
At the Company's Annual Meeting held on December 6, 1999, the Stockholders
approved the adoption of the 1999 Omnibus Equity Incentive Plan (the "1999
Plan") and reserved a total of 500,000 common shares for issuance to officers,
employees, and consultants of the Company. Grants under this Plan can be either
Incentive Stock Options, or Nonqualified Stock Options. There have been three
grants under this Plan - 108,500 options were granted at $2.031 per share,
30,000 options were granted at $2.156 per share, and 12,000 options were granted
at $1.813 per share on February 10, 2000, March 1, 2000, and June 29, 2000,
respectively. Of the 150,500 options granted in fiscal 2000, 30,500 have been
forfeited as of June 30, 2000.
With the exception of the 1999 Plan; all stock options under each of the plans
have five-year terms and all options become fully vested within three years of
their grant date. The stock options granted under the 1999 Plan have either a
five or a ten-year term and become fully vested within three years of their
grant date.
(continued)
45
<PAGE> 46
Stock option activity during the periods indicated is summarized below:
<TABLE>
<CAPTION>
1992 1992 1994
Incentive Nonqualified Nonqualified 1998 Outside 1999
Plan Plan Plan Director Plan Plan
--------- ------------ ------------ ------------- --------
<S> <C> <C> <C> <C> <C>
Outstanding 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 -- --
Exercised (38,391) (61,609) (34,166) -- --
Forfeited (188,250) -- (125,000) -- --
Granted 70,000 -- -- -- --
-------- -------- -------- -------- --------
Outstanding at June 30, 1999 181,750 -- 171,000 -- --
Exercised -- --
Forfeited (38,750) (171,000) (10,000) (30,500)
Granted 30,000 -- 30,000 150,500
======== ======== ======== ======== ========
Outstanding at June 30, 2000 173,000 -- -- 20,000 120,000
======== ======== ======== ======== ========
Exercisable at June 30, 2000 113,000 -- -- -- --
======== ======== ======== ======== ========
Weighted-average exercise price:
June 30, 2000 $ 7.29 $ -- $ -- $ 5.75 $ 2.04
June 30, 1999 $ 7.91 $ -- $ 4.63 $ -- $ --
Weighted-average remaining contractual life in years 3.4 -- -- 3.4 6.5
Available for grant at June 30, 2000 135,000 -- -- -- 380,000
======== ======== ======== ======== ========
</TABLE>
The fair value of the option grants was estimated on the date of the grant using
the Black-Scholes option-pricing model with the following assumptions for fiscal
2000: risk-free interest rate of 6.0% at the grant date; dividend yield of zero;
expected life of three to six years depending on the option termination date;
and volatility of 88%. The weighted average fair value of the options granted
during fiscal 2000 was $1.61 per share.
The fair value of the option grants was estimated on the date of the grant using
the Black-Scholes option-pricing model with the following assumptions for fiscal
1999: risk-free interest rate of 5.9% at the grant date; dividend yield of zero;
expected life of three to six years depending on the option termination date;
and volatility of 62.1%. The weighted average fair value of the options granted
during fiscal 2000 was $1.74 per share.
The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock option
grants to employees 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 (loss) would have been
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
(Dollars in thousands except per share data) 2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Net earnings (loss), as reported $(4,472) $(2,923) $ 5,872
Pro forma net earnings (loss) $(4,750) $(3,311) $ 5,701
Basic earnings (loss) per share, as reported $ (0.78) $ (0.50) $ 1.06
Pro forma basic earnings (loss) per share $ (0.83) $ (0.56) $ 1.03
Diluted earnings (loss) per share, as reported $ (0.78) $ (0.50) $ 1.00
Pro forma diluted earnings (loss) per share $ (0.83) $ (0.56) $ 0.97
</TABLE>
46
<PAGE> 47
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. The options were exercised in January 1999. As of June
30, 2000, no additional shares are reserved.
J. COMMITMENTS
The Company leases part of its main facilities under leases that are classified
as non-cancelable operating leases.
In August 1997, the Company entered into a 15-year lease agreement under which
the lessor was to construct a build-to-suit 82,000 square foot corporate office
and manufacturing facility in Carlsbad, California. In March 1999, the Company
made the decision to abandon the facility and sublease, and not occupy, the
partially completed facility. In fiscal 1999, the Company recorded a $5.4
million loss on abandonment of leased facility consisting of: (1) $2.3 million
impairment of leasehold improvement costs, (2) an unfavorable lease obligation
accrual of $2.7 million representing the present value of the excess of future
lease payments over the estimated sub-lease income and (3) $0.4 million facility
lease payments.
In June 2000, the Company successfully terminated the long-term lease obligation
related to the Carlsbad facility.
In April and May 2000, the Company entered into two sublease agreements for the
entire premises for approximately five years. In June 2000, the Company
completed a buyout of the fifteen-year lease obligation from the landlord. The
buyout agreement provided for the sale of the Company's leasehold interests and
obligations to the landlord for essentially the same cost of performing its
obligations pursuant to the sublease agreements, resulting in the Company paying
a $3.0 million settlement fee to the landlord. The Company recorded an
additional $1.7 million charge to results of operations in the fiscal 2000,
reflecting the final cost for exiting the long-term lease commitment including
lease payments and property taxes paid in fiscal 2000. The Company incurred
total expenses of approximately $7.1 million over the duration of this abandoned
facility commitment, including facility occupancy costs. The buyout terminated
the Company's obligation for the facility for the entire term of the original 15
year lease.
The Company entered into two lease agreements during fiscal year 1999 for
adjacent buildings located in Vista, California. The facilities are leased from
an unaffiliated third party and consist of a total of approximately 74,000
square feet. The lease for the first building commenced in August 1998 under a
5-year lease agreement and consists of approximately 54,000 square feet to be
utilized as a warehousing and blending facility. The lease for the second
building commenced in March 1999 under a 3.5-year lease agreement for the rental
of approximately 20,000 square feet to be utilized as a packaging facility.
Minimum rental commitments (exclusive of property tax, insurance and
maintenance) under all noncancelable operating leases, including the lease
agreements referred to above, (with initial or remaining lease terms in excess
of one year) are set forth below:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
2001 $ 824
2002 749
2003 757
2004 232
2005 23
------
$2,585
======
</TABLE>
Rental expense totaled $647,000, $419,000, and $193,000 for the years ended June
30, 2000, 1999, and 1998, respectively. Rental expense excludes payments related
to the abandoned Carlsbad facility.
47
<PAGE> 48
K. RELATED PARTY TRANSACTIONS
During the fiscal years ended June 30, 2000, 1999, and 1998, the Company had
sales of $-0-, $-0-, and $15,000, respectively, to a customer in which certain
directors, officers and employees previously had direct or indirect equity
ownership. At June 30, 1997, the amount receivable from this company was
$775,000, which was fully reserved because the Company had determined the
account was uncollectible. The Company recovered $263,000 in the year ended June
30, 1998 and $512,000 was written off in the year ended June 30, 1999.
The Company had a note receivable from a company in which a certain officers had
direct or indirect equity ownership. At June 30, 1999, the amount receivable
from this company was $26,000. This amount was written off during fiscal 2000.
The Company had sales of $24,000, $553,000, and $875,000 for fiscal year 2000,
1999, and 1998, respectively, to a customer in which directors, officers and
employees previously had direct and indirect equity ownership. At June 30, 1999
the amount receivable from this company was $91,000, net of a $74,000 bad debt
allowance reserve. During fiscal 2000, the Company received payments of $155,000
and wrote off the remaining balance of $34,000. In addition, at June 30, 1999
the Company had a net note receivable from this customer of $50,000. This entire
amount was written off during the year ended June 30, 2000.
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 provided
for payment of commissions of 5% on sales to a particular customer. Amounts paid
under this agreement were $50,000, $100,000 and $100,000 for the fiscal years
ended June 30, 2000, 1999, and 1998, respectively. There were no amounts owed
under the agreement at June 30, 2000 or 1999. The agreement expires in December
2001.
During fiscal 1999, the Company made 6% interest-bearing loans of $20,000,
secured by Company common stock, to the Vice President of Science and
Technology, the Vice President, Marketing, and the Vice President, Operations.
During fiscal 2000 an additional loan of $19,000, with interest at 6% and
secured by a second deed of trust on a principal residence, was made to the Vice
President, Marketing. During fiscal 2000 the loan amount, including accrued
interest, to the Vice President, Operations, was repaid upon termination of his
employment.
During fiscal 1999 and 2000, the Company paid the brother and sister-in-law of
the Chief Executive Officer approximately $33,000 and $58,000, respectively, in
settlement of an existing consulting arrangement. As of June 30, 2000, the
agreement and any underlying obligations on the part of the Company have
expired.
In addition, during fiscal 1999, the Company made a 5-1/2% interest-bearing loan
to the Executive Vice President in the amount of $250,000. The loan, including
accrued interest, was repaid in February 1999.
During each of the fiscal years 2000, 1999 and 1998, the Company made
non-interest loans to the Chairperson of the Board of $50,000. Amounts owed on
these loans, which are secured by proceeds from life insurance policies, were
$300,000, $250,000, and $200,000 at June 30, 2000, 1999 and 1998, respectively.
During fiscal 1999, the Company made non-interest loans to its former President
of approximately $7,000. The total loan amounts outstanding of $101,000 was
written off during fiscal 1999, including $83,000 loaned in fiscal 1998 and
accrued interest.
48
<PAGE> 49
The balances of these notes receivables from related parties and employees as of
June 30, including accrued interest are shown below.
<TABLE>
<CAPTION>
(Dollars in thousands) 2000 1999
----- -----
<S> <C> <C>
Chief Executive Officer 67 63
Vice President of Science and Technology 21 20
Vice President, Marketing 41 20
Chairperson - Board of Directors 300 250
Other Current Employees 24 32
Former Officers -- 23
Former Employees 1 20
Other 0 23
Former Customers 0 76
FitnessAge (See Note L) 805 --
----- -----
1,259 527
===== =====
</TABLE>
The Company accrued interest from related parties notes receivable of $67,000
and $33,000 for fiscal 2000 and fiscal 1999, respectively.
L. CUSTOM NUTRITION JOINT VENTURE
In March 1999, the Company entered into a letter of intent to form a joint
venture with FitnessAge Incorporated , a privately held development stage
company based in San Diego, CA ("FitnessAge"). In connection therewith, on March
30, 1999 the Company purchased 300,000 shares of FitnessAge common stock for
$150,000. On or about the same date, the family limited partnership of the Chief
Executive Officer and the Secretary and Chairperson of the Board of Directors
purchased 200,000 shares of the Common Stock of FitnessAge for $100,000.
During December 1999, the Company and FitnessAge formalized the joint venture by
forming a new company named Custom Nutrition, LLC, a Delaware limited liability
company ("Custom Nutrition") in which the Company has a 40% ownership. Custom
Nutrition was formed for the purpose of developing, merchandising, selling and
distributing customized nutritional and related products to health and fitness
clubs, as well as over the internet. Under terms of a 10-year Exclusive
Manufacturing Agreement, the Company is the exclusive manufacturer of all
nutritional supplements for Custom Nutrition. In addition, Custom Nutrition
obtained an exclusive royalty free license to FitnessAge's proprietary software
technology, including their physical fitness assessments known as the FitnessAge
System, as well as, software under development designed to provide customized
nutritional assessments. In accordance with its Operating Agreement, the Company
was required to make an initial capital contribution of $100,000, which was
funded during the fourth quarter fiscal 2000; income and losses are to be
allocated and any additional capital contribution requirements of Custom
Nutrition are to be made 60% to FitnessAge and 40% to the Company.
In addition, in November and December 1999, the Company loaned FitnessAge a
total of $734,000, net of $16,000 of legal fees, as part of a convertible
secured loan (the "Loan"). The Loan is collateralized by certain assets of
FitnessAge and includes interest accruing at an annual rate of 12%. The
principal together with all accrued and unpaid interest is due November 10,
2000. The Company has the right at any time to convert all or any portion of the
amount due on the Loan into the common stock of FitnessAge at a conversion price
of $0.75 per share. As of June 30, 2000, the balance of the Loan, including all
accrued and unpaid interest, was $805,000, and the Company's direct aggregate
investment in FitnessAge was approximately $955,000. The Company is currently
accounting for this investment under the cost method of accounting.
49
<PAGE> 50
In conjunction with the Loan, the Company received a three-year Warrant (the
"Warrant") to purchase up to 150,000 shares of Common Stock of FitnessAge for
$0.75 per share. The Company may exercise the Warrant at any time up to and
including November 1, 2002. The Company was issued two additional warrants to
purchase common stock as additional consideration for providing a short-term
loan to FitnessAge which was repaid prior to June 30, 2000. One warrant provides
for the purchase of 80,000 shares of FitnessAge common stock for $1.25 per share
and the other warrant provides for the purchase of 80,000 shares of FitnessAge
common stock for $2.00 per share. The Company may exercise these two Warrants at
any time up to and including June 12, 2003. As of June 30, 2000, the Company had
not exercised any portion of these Warrants. The Company also obtained: the
right to designate one representative of the Company to be a member of
FitnessAge's Board of Directors, which consists of five board members; and
registration rights and certain other rights as defined by the loan documents
and by an Investor Rights Agreement. If the Company converted the Loan and
exercised the Warrants, the Company would own less than five percent, on an as
converted basis, of FitnessAge common stock.
During the year ended June 30, 2000, the Company had sales of $135,000 to Custom
Nutrition, a company formed under its joint venture with FitnessAge. At June 30,
2000, the net accounts receivable from this customer was approximately $80,000.
M. 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 a material adverse impact on the Company's revenues and earnings.
Sales by customer, representing 10% or more of the respective year's total
sales, are shown below:
<TABLE>
<CAPTION>
2000 1999 1998
---------------------------- -------------------- ------------------
Sales by Sales by Sales by
Customer Customer %(a) Customer %(a) Customer %(a)
---------- ----------- ---------- ----------- -- ----------- --
<S> <C> <C> <C> <C> <C> <C>
Customer 1 $20,818,000 44% $13,393,000 23% $11,660,000 17%
Customer 2 8,958,000 18% (b) (b)
Customer 3 (b) 18,390,000 32% 24,914,000 37%
Customer 4 (b) 9,383,000 16% (b)
----------- -- ----------- -- ----------- --
29,776,000 62% 41,166,000 71% 36,574,000 54%
=========== == =========== == =========== ==
</TABLE>
(a) Percent of total sales
(b) Sales for the year were less than 10% of total sales.
Accounts receivable from these customers totaled $2,889,000 and $4,397,000 at
June 30, 2000 and 1999, respectively.
N. CONTINGENCIES
The Company is a party to a lawsuit filed by its former President, Director and
Chief Financial Officer, William P. Spencer. The lawsuit was filed in January
2000, and was served upon the Company in March 2000. Mr. Spencer was terminated
by the Company for cause in January 1999. The lawsuit alleges damages for
wrongful termination, breach of option contract, conversion, breach of
employment contract, discriminatory and retaliatory discharge, workplace
harassment and slander. The lawsuit seeks damages in an amount to be proved at
trial, and alleges damages in excess of six million dollars. The Company has
responded to the lawsuit and has denied it has any liability. Management
believes the claims against the Company are without merit. The Company has filed
a cross-complaint in the lawsuit against Mr. Spencer and Imagenetix, Inc., a
corporation in which Mr. Spencer is currently a director, principal shareholder
and chief executive, and three other individuals, two of whom are former
employees of the Company and the other a former consultant to the Company. The
cross-complaint seeks damages and injunctive relief for breach of fiduciary
duty; fraud-concealment of material facts; intentional interference with
prospective economic advantage; negligent interference with prospective economic
advantage; civil conspiracy; intentional interference with contract; trade
libel; slander per se; breach of contract; conversion;
50
<PAGE> 51
misappropriation of trade secrets; breach of duty of loyalty; unlawful, unfair
and/or fraudulent business acts or practices and an accounting. The additional
defendants in NAI's cross-complaint subsequently filed cross-actions, alleging
similar claims against Mr. Spencer. The complaint against the Company was
further amended to add Imagenetix, Inc. as a claimant and several current or
former employees of the Company as defendants. Management believes the
additional claims are without merit, and the Company will prevail in its
cross-complaint against each cross-defendant. The Company subsequently amended
its complaint, adding additional claims against certain parties. In the event a
judgment is obtained against the Company in the amount of the damages alleged in
the lawsuit or any significant portion thereof, it would have a material adverse
impact upon the financial condition of the Company.
While the Company believes the allegations contained in these lawsuits are
without merit, the claims have not progressed sufficiently for the Company to
estimate the possible exposure, if any.
The Company is a plaintiff in an anti-trust lawsuit against several
manufacturers of vitamins and other raw materials purchased by the Company.
Other similarly situated companies have filed a number of similar lawsuits
against some or all of the same manufacturers. The Company's lawsuit has been
consolidated with some of the others and is captioned In re: Vitamin Antitrust
Litigation, and is pending in U.S. District Court in Washington D.C. One or more
consumer class actions have also been filed against some or all of the same
defendants, and at least one of these is presently in a settlement process. The
Company brought its own action to insure it understood what actually occurred.
The Company is eager to resolve its claims. There can be no assurance the claims
will be resolved, or, if they are, that it will result in a material benefit to
the Company.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, after consultation
with its legal 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.
O. SEGMENT INFORMATION
Prior to July 1, 1999 the Company operated solely within the United States.
During the year ended June 30, 2000 the Company opened its new wholly owned
manufacturing subsidiary in Switzerland. The Company's segment information by
geographic area as of and for the year ended June 30, 2000 is as follows:
<TABLE>
<CAPTION>
Long
Lived Total Capital
Sales Assets Assets Expenditures
------- ------- ------- ------------
<S> <C> <C> <C> <C>
United States $44,429 $14,560 $32,006 $ 3,742
Europe 3,398 1,267 2,869 1,419
------- ------- ------- -------
$47,827 $15,827 $34,875 $ 5,161
======= ======= ======= =======
</TABLE>
51
<PAGE> 52
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
P. QUARTERLY DATA (UNAUDITED)
The following is a summary of unaudited quarterly data:
<TABLE>
<CAPTION>
Year Ended June 30, 2000
--------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
----------- ----------- ----------- ----------- --------
(Amounts in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Net sales $ 15,264 $ 12,064 $ 9,538 $ 10,961 $ 47,827
Gross profit 3,189 (522) 287 1,370 4,324
Net earnings (loss) $ 87 $ (2,411) $ (1,763) $ (385) $ (4,472)
Net earnings (loss)
per common share:
Basic $ 0.02 $ (0.42) $ (0.31) $ (0.07) $ (0.78)
Diluted $ 0.02 $ (0.42) $ (0.31) $ (0.07) $ (0.78)
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30, 1999
--------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
----------- ----------- ----------- ----------- --------
(Amounts in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Net sales $ 16,986 $ 17,317 $ 13,123 $ 10,004 $ 57,430
Gross profit 4,654 3,265 1,891 2,609 12,419
Net earnings $ 1,520 $ 383 $ (4,321) $ (505) $ (2,923)
Net earnings
per common share:
Basic $ 0.26 $ 0.06 $ (0.73) $ (0.09) $ (0.50)
Diluted $ 0.25 $ 0.06 $ (0.73) $ (0.09) $ (0.50)
</TABLE>
52
<PAGE> 53
SCHEDULE II
NATURAL ALTERNATIVES INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
Balance at
Allowance for doubtful beginning of Balance at
accounts period Provision (Deductions) end of period
------------------------ ------------ --------- ------------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Year ended June 30, 2000 $ 472 $ 389 $ (531) $ 330
Year ended June 30, 1999 $ 1,073 $ 567 $(1,168) $ 472
Year ended June 30, 1998 $ 1,006 $ 360 $ (293) $ 1,073
</TABLE>
See accompanying independent auditors report.
53
<PAGE> 54
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: October 9, 2000 By: /s/ MARK A. LEDOUX
-----------------------------------------
(Mark A. LeDoux, Chief Executive Officer,
President and Assistant Treasurer)
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>
/s/ MARIE A. LEDOUX Chairperson of the Board,
------------------------------ Secretary, and Director
(Marie A. LeDoux) October 9, 2000
/s/ MARK A. LEDOUX
------------------------------ Chief Executive Officer, October 9, 2000
(Mark A. LeDoux) President, Assistant Treasurer, and
Director
/s/ PETER C. WULFF
------------------------------
(Peter C. Wulff) Chief Financial Officer and Treasurer October 9, 2000
/s/ JOE E. DAVIS
------------------------------
(Joe E. Davis) Director October 9, 2000
/s/ LEE G. WELDON
------------------------------
(Lee G. Weldon) Director October 9, 2000
/s/ J. SCOTT SCHMIDT
------------------------------
(J. Scott Schmidt) Director October 9, 2000
</TABLE>
54
