<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-15701
NATURAL ALTERNATIVES INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1007839
- -------- ----------
(State of other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1185 LINDA VISTA DRIVE, SAN MARCOS, CALIFORNIA 92069
(Address of principal executive offices)
(Zip Code)
(760) 744-7340
(Registrant's telephone number, including area code)
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 [ ]
5,752,423
(Number of shares of common stock of the registrant outstanding,
net of treasury shares held, as of April 30, 2000)
1
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31 June 30
2000 1999
-------- --------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,000 $ 1,063
Accounts receivable - less allowance for doubtful accounts of
$326 at March 31, 2000 and $472 at June 30, 1999 4,176 7,515
Inventories 8,277 10,611
Income tax refund receivable 3,517 2,229
Notes receivable - current portion 769 127
Prepaid expenses 445 371
Deposits 1,195 530
Other current assets 139 794
-------- --------
Total current assets 19,518 23,240
Property and equipment, net 14,649 12,274
Deferred income taxes 2,129 1,979
Investments 250 195
Notes receivable, less current portion 506 401
Other noncurrent assets, net 140 507
-------- --------
Total assets 37,192 38,596
======== ========
Current Liabilities:
Accounts payable 6,076 8,305
Current installments of long-term debt 1,576 50
Accrual for loss on lease obligation 3,030 --
Accrued compensation and employee benefits 583 786
-------- --------
Total current liabilities 11,265 9,141
Deferred income taxes 593 593
Long-term debt, less current installments 4,079 927
Accrual for loss on lease obligation -- 2,434
Long-term pension liability 417 410
-------- --------
Total liabilities 16,354 13,505
-------- --------
Commitments and contingencies
Stockholders' Equity:
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 6,014,923 at March 31, 2000 and 6,002,375 at
June 30, 1999 60 60
Additional paid-in capital 11,258 11,237
Retained earnings 10,883 14,970
Treasury stock, at cost, 262,500 shares at March
31, 2000 and 212,500 shares at June 30, 1999 (1,283) (1,116)
Accumulated other comprehensive loss (80) (60)
-------- --------
Total stockholders' equity 20,838 25,091
-------- --------
Total liabilities and stockholders' equity $ 37,192 $ 38,596
======== ========
</TABLE>
See accompanying notes to unaudited financial statements.
2
<PAGE> 3
NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
STATEMENTS OF OPERATIONS
(In thousands, except per-share information)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
March 31 March 31
------------------------------ ------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 9,538 $ 13,123 $ 36,866 $ 47,426
Cost of goods sold 8,942 11,232 31,912 37,616
Inventory write-off -- -- 2,000 --
----------- ----------- ----------- -----------
Total cost of goods sold 8,942 11,232 33,912 37,616
----------- ----------- ----------- -----------
Gross profit 596 1,891 2,954 9,810
Selling, general and
administrative expenses 2,541 4,096 8,286 8,910
Provision for loss on lease obligation 600 5,048 600 5,048
----------- ----------- ----------- -----------
Loss from operations (2,545) (7,253) (5,932) (4,148)
----------- ----------- ----------- -----------
Other income (expense):
Interest income 48 51 94 149
Interest expense (113) (21) (218) (65)
Other, net (74) 18 (131) 18
----------- ----------- ----------- -----------
(139) 48 (255) 102
----------- ----------- ----------- -----------
Loss before taxes (2,684) (7,205) (6,187) (4,046)
Tax benefit (921) (2,884) (2,100) (1,628)
----------- ----------- ----------- -----------
Net loss $ (1,763) $ (4,321) $ (4,087) $ (2,418)
=========== =========== =========== ===========
Basic and diluted net loss per common share $ (0.31) $ (0.73) $ (0.71) $ (0.41)
=========== =========== =========== ===========
Shares used in calculation of
basic and diluted net loss per share 5,739,875 5,931,764 5,758,061 5,884,973
=========== =========== =========== ===========
</TABLE>
See accompanying notes to unaudited financial statements.
3
<PAGE> 4
NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended March 31
----------------------
2000 1999
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($4,087) ($2,418)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Bad debt provision 240 454
Inventory write-off 2,000 --
Write-off of notes receivable 72 --
Accrued interest on notes receivable (42) --
Tax benefit on option exercise -- 439
Depreciation and amortization 1,401 1,215
Provision for income taxes (150) (2,667)
Accrual for lease obligation 600 5,048
Other 46 --
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 3,099 6,378
Inventories 334 4,881
Tax refund receivable (1,288) (388)
Prepaid expenses (74) (126)
Deposits (665) (247)
Other assets 1,022 --
Decrease in liabilities:
Accounts payable (2,226) (9,599)
Income taxes payable -- (378)
Accrued compensation and employee benefits (203) (69)
------- -------
Net cash provided by operating activities 79 2,523
------- -------
Cash flows from investing activities:
Capital expenditures (3,776) (4,267)
Issuance of notes receivable (808) (335)
Repayment of notes receivable 31 307
Other assets (100) (474)
------- -------
Net cash used in investing activities (4,653) (4,769)
------- -------
Cash flows from financing activities:
Borrowings on lines of credit 1,390 --
Proceeds from long-term debt financing 3,459 --
Payments on long-term debt and capital leases (171) (56)
Issuance of common stock -- 1,108
Payments to acquire treasury stock (167) (837)
------- -------
Net cash provided by financing activities 4,511 215
------- -------
Net decrease in cash and cash equivalents (63) (2,031)
Cash and cash equivalents at beginning of period 1,063 4,714
------- -------
Cash and cash equivalents at end of period $ 1,000 $ 2,683
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the nine months for:
Interest $ 203 $ 63
Income Taxes $ -- $ 1,196
======= =======
</TABLE>
See accompanying notes to unaudited financial statements.
4
<PAGE> 5
NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 1 - Interim Financial Information
The unaudited consolidated financial statements of Natural Alternatives
International, Inc. and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles and with Article 10 of
the Securities and Exchange Commission's Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete consolidated financial statements. In the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting of normal recurring adjustments,
considered necessary for a fair presentation of the Company's financial
information as of and for the nine months ended March 31, 2000 and 1999.
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make certain estimates
and assumptions that may affect the reported amounts of assets, liabilities,
revenues and expenses during the reporting periods. Actual results may differ
from such estimates. The consolidated results of operations for the interim
periods ended March 31, 2000 and 1999 are not necessarily indicative of the
consolidated operating results for the full year. It is suggested that these
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's annual report on Form
10-K for the year ended June 30, 1999.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Reclassifications
Certain amounts in prior periods' consolidated financial statements have been
reclassified to conform to the presentation for the quarter ended March 31,
2000.
NOTE 2 - Inventories
Inventories are comprised of the following:
<TABLE>
<CAPTION>
March 31 June 30
2000 1999
------- -------
<S> <C> <C>
Raw materials $ 4,399 $ 7,457
Work in progress 458 270
Finished goods 3,420 2,884
------- -------
$ 8,277 $10,611
======= =======
</TABLE>
In December 1999, 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 sales potential.
5
<PAGE> 6
NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 3 - Comprehensive Net Loss
Comprehensive net loss is comprised of the following:
<TABLE>
<CAPTION>
For the three months For the nine months
ended March 31 ended March 31
---------------------- ----------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net loss ($1,763) ($4,321) ($4,087) ($2,418)
Foreign currency translation adjustments (6) -- (21) --
Unrealized gain (loss) on investments -- -- 1 (6)
------- ------- ------- -------
Comprehensive loss ($1,769) ($4,321) ($4,107) ($2,424)
======= ======= ======= =======
</TABLE>
NOTE 4 - Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding during the period. Diluted net loss
per share reflects the potential dilution that could occur if stock options or
other contracts to issue common stock were exercised or converted into common
stock. The computation of diluted net loss per share does not assume exercise or
conversion of securities that would have an anti-dilutive effect on net loss per
share.
For the three and nine months ended March 31, 2000, there were outstanding
options to purchase 313,000 shares of common stock, and for the three and nine
months ended March 31, 1999 there were outstanding options to purchase 45,000
and 30,000 shares of common stock, respectively, that were not included in the
computation of diluted net loss per share as their effect would have been
anti-dilutive.
NOTE 5 - Major Customers
The Company had substantial sales to five separate customers during one or more
of the periods shown in the following table. The Company lost one of these major
customers during the quarter ended December 31, 1999 which resulted in a
material adverse impact on the Company's revenues and income. Sales by customer,
representing 10% or more of the respective period's total net sales, are shown
below.
<TABLE>
<CAPTION>
For the three months For the nine months
ended March 31 ended March 31
------------------------------------------------ -----------------------------------------------------
2000 1999 2000 1999
------------------- ---------------------- ----------------------- -----------------------
Sales by Sales by Sales by Sales by
Customer Customer %(a) Customer %(a) Customer %(a) Customer %(a)
- ------------ -------- ---- ------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Customer 1 $ 6,367 67% $ 3,646 28% $14,981 41% $ 9,832 21%
Customer 2 1,321 14% (b) 5,964 16% (b)
Customer 3 (b) 4,100 31% 4,256 12% 15,416 33%
Customer 4 (b) (b) 3,747 10% (b)
Customer 5 (b) 1,649 13% (b) 9,226 19%
-------- ---- ------- ------- ------- ------- ------- -------
$ 7,688 81% $ 9,395 72% $28,948 79% $34,474 73%
======== ==== ======= ======= ======= ======= ======= =======
</TABLE>
(a) Percent of total net sales.
(b) Net sales for the period were less than 10% of total net sales.
6
<PAGE> 7
NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per-share data)
NOTE 6 - Debt
On October 4, 1999, the Company replaced an existing $3.0 million revolving
working capital line of credit with $9.0 million in new financing. The new
financing consists of a $5.0 million revolving 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 9.00% and
9.25%, respectively, at March 31, 2000. Borrowings under the revolving 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 March 31, 2000, the Company was not in
compliance with certain financial covenant provisions of the line of credit
agreement, which the financial institution has waived through June 30, 2000. The
line of credit expires on December 1, 2000; management expects this line to be
renewed in the normal course of business. Borrowings under the term note will be
used for new equipment purchases, as defined. The term note expires on June 1,
2000; the loan will be converted to a five-year term loan provided that the
Company is in compliance with all terms and conditions, as defined. As of March
31, 2000, amounts outstanding under the revolving line of credit and term note
were $100,000 and $958,000, respectively.
The Company's wholly owned subsidiary in Switzerland has a revolving line of
credit agreement permitting borrowings up to CHF 2.0 million, or approximately
$1.3 million at March 31, 2000 at an annual interest rate of 5.0%. The line of
credit expires on December 31, 2000; management expects this line to be renewed
in the normal course of business. The agreement contains no financial covenants.
As of March 31, 2000, the Company converted approximately $935,000 of the
amounts outstanding to term notes, with minimum payments of CHF 250,000, or
approximately $151,000, required beginning in the second quarter of fiscal year
2001. As of March 31, 2000, the Company is in compliance with all terms and
conditions of the revolving line of credit agreement.
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 March 31, 2000, approximately $2.4 million was outstanding
under this term note. As of March 31, 2000, the Company is in compliance with
all terms and conditions of the term note. The composite interest rate on all
outstanding debt was approximately 8.3%.
NOTE 7 - Equity
During the nine month period ended March 31, 2000, 50,000 common shares were
repurchased at a cost of $167,000 pursuant to the Board of Directors approved
repurchase program of up to 500,000 shares of the Company's common stock. As of
March 31, 2000, 249,500 shares had been repurchased at a cost of $1,161,000
under this repurchase program.
NOTE 8 - Related Party Transactions
The Company entered into an agreement with the father-in-law and mother-in-law
of the Chief Executive Officer of the Company in December 1991, which provides
for commissions on sales to a particular customer. Effective January 1, 1993,
the commission is equal to 5% of sales and payable upon collection from the
customer and capped at $25,000 per calendar quarter. Amounts paid under this
agreement were $50,000 and $75,000 for the nine-month periods ended March 31,
2000 and 1999, respectively. There were no amounts owed under the agreement at
March 31, 2000 or 1999. The agreement will expire in December 2001 or as defined
in the agreement; future commissions on sales are anticipated to decline or
cease as no orders are expected from the particular customer for the foreseeable
future.
During the nine months ended March 31, 2000 and 1999, the Company had sales of
$13,000 and $743,000, respectively, to a customer in which certain directors,
officers and employees previously had direct or indirect equity ownership. At
March 31, 2000 and June 30, 1999, the net accounts receivable from
7
<PAGE> 8
NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per-share data)
this customer were $0 and $83,000, respectively. The Company recovered accounts
receivable of $35,000 during the nine months ended March 31, 2000 and $39,000
was written off. In addition, at March 31, 2000 and June 30, 1999, the Company
had notes receivable, net, of $0 and $50,000, respectively. As of November 11,
1999 no remaining directors, officers or employees of the Company had any direct
or indirect equity ownership in the customer.
In March 1999, the Company entered into a letter of intent to form a joint
venture with FitnessAge, Inc., 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 the nine
months ended March 31, 2000, the Company had sales of $127,000 to Custom
Nutrition, LLC, a company formed under its joint venture with FitnessAge. At
March 31, 2000, the net accounts receivable from this customer was $127,000.
NOTE 9 - Custom Nutrition Joint Venture Alliance with FitnessAge, Inc.
On December 6, 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"). 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 quarter
ended March 31, 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. As of March 31, 2000, there were no sales
recorded by Custom Nutrition, which commenced operations during the first half
of calendar year 2000, and other operations have been insignificant.
In addition, in November and December 1999, the Company provided FitnessAge a
total of $734,000, net of $16,000 of professional fees, as part of a convertible
secured loan made by the Company to FitnessAge (the "Loan"). The Loan is
collateralized by all of the 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 March 31, 2000,
the balance of the Loan, including all accrued and unpaid interest, was
$765,000, and the Company's direct aggregate investment in FitnessAge was
approximately $915,000. The Company is currently accounting for this investment
under the cost method of accounting.
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
$1.00 per share. The Company may exercise the Warrant at any time up to and
including November 1, 2002. As of March 31, 2000, the Company had not exercised
any portion of this Warrant. 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 Warrant, the
Company would own less than five percent, on an as converted basis, of
FitnessAge common stock.
8
<PAGE> 9
NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per-share data)
NOTE 10 - Subsequent Event
On April 27, 2000 the Company executed an agreement to sublease 24,000 square
feet of the abandoned office and manufacturing facility in Carlsbad, California
and the Company is in final contract negotiations to sublease an additional
58,000 square feet of the facility. Management expects to finalize these
agreements by June 2000.
The Company also received a proposal for the sale of its leasehold interests
in the abandoned Carlsbad facility in exchange for the Company's payment of
a fixed buyout fee. The Company is currently evaluating this proposal. The
Company can make no assurance that it will sell its leasehold interests, or
sublease the premises on terms acceptable to the Company, or if at all.
The Company accrued an additional $600,000 in costs during the quarter ended
March 31, 2000 in connection with the sublease arrangements. The total accrued
liability of approximately $3.0 million provides for the expected costs related
to the various sublease arrangements and other potential exit strategies,
including but not limited to commissions, tenant improvement allowances, legal,
architectural fees and other related exit and/or lease buyout settlement costs.
9
<PAGE> 10
NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain Forward-Looking Information
Information provided in this Quarterly Report on Form 10-Q may contain
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 that are not historical facts and information. These
statements represent the Company's expectations or beliefs, including, but not
limited to, statements concerning future financial and operating results,
statements concerning industry performance, the Company's operations, economic
performance, financial condition, margins and growth in sales of the Company's
products, capital expenditures, financing needs, as well as assumptions related
to the foregoing. For this purpose, any statements contained in this Quarterly
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 forward-looking statements are based on current expectations and involve
various risks and uncertainties that could cause actual results and outcomes for
future periods to differ materially from any forward-looking statement or views
expressed herein. The Company's financial performance and the forward-looking
statements contained herein are further qualified by other risks including but
not limited to those set forth from time to time in the documents filed by the
Company with the Securities and Exchange Commission, including the Company's
most recent Form 10-K.
RESULTS OF OPERATIONS
THIRD QUARTER OF FISCAL 2000 AND 1999
Net sales decreased 27.3%, or approximately $3.6 million, to approximately $9.5
million for the quarter ended March 31, 2000, from approximately $13.1 million
for the quarter ended March 31, 1999. The decrease was primarily due to the loss
of a major customer, Nu Skin Enterprises Inc., which accounted for approximately
$4.1 million, or 31.2%, of net sales for the quarter ended March 31, 1999.
During the second quarter of fiscal year 2000, Nu Skin informed the Company that
its production needs have been transitioned to other vendors for the foreseeable
future. Domestic sales growth was also negatively impacted by the loss of
customer sales for several herbal products. Partially offsetting the decrease in
net sales from the loss of these major customers was increased net sales to
existing customers, primarily attributed to the Company's largest customer which
had increased net sales of approximately 74.6%, or $2.7 million, to
approximately $6.4 million for the quarter ended March 31, 2000.
Company management continues its strategy to focus its efforts for increasing
sales through diversifying and expanding geographic distribution channels. The
expansion in fiscal 2000 into Switzerland through the wholly-owned manufacturing
subsidiary, which commenced operations in September 1999, contributed $1.2
million in net sales for the quarter ended March 31, 2000, an increase of
approximately $0.9 million from the prior quarter ended December 31, 1999. The
Company believes that the Swiss facility is tracking to meet its business plan
expectations, as volumes are anticipated to grow to meet European market demand.
During the latter part of the third quarter of fiscal year 2000, the Company
also commenced the initial marketing and sale of unique herbal health and
natural supplement products under the Dr. Cherry label. The Company has a
10-year Exclusive Licensing and Manufacturing Agreement for the manufacture and
distribution of these products and has contracted with an outside company to
utilize their specialized services to meet direct to consumer order fulfillment
capabilities. These services are anticipated to support future direct
television, direct mail and e-commerce channels, specifically targeted to the
branded health practitioner market. In addition, during the third quarter of
fiscal year 2000, the Company began the manufacture of products held in
inventory by Custom Nutrition, a joint venture with FitnessAge, in anticipation
of the product launch of customized sports nutritional supplements and related
products to consumers expected to commence during the second half of calendar
year 2000. These new business initiatives are intended to diversify sales and
improve gross margins and are currently not material to the results of
operations. Industry competition, which the Company expects to remain strong for
the foreseeable future, and other market or regulatory factors, could adversely
affect
10
<PAGE> 11
NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
these initiatives and results of operations in any given period; such adverse
affects often cannot be anticipated.
For the quarter ended March 31, 2000, the Company experienced an increase in
cost of goods sold as a percentage of sales, to 93.8% compared to 85.6% for the
quarter ended March 31, 1999. The increase reflects the following: reduced sales
prices which were not completely offset by reduced material costs; decreased
production volume absorption of manufacturing overhead costs; and increased
quality control costs to ensure product compliance with established GMP
specifications and standards. The increase in cost of goods sold resulted in a
reduction in gross profit of approximately $1.3 million to $0.6 million for the
quarter ended March 31, 2000 compared to a gross profit of approximately $1.9
million for the quarter ended March 31, 1999. The Company reduced total
manufacturing labor and overhead costs approximately $0.5 million from the
previous quarter ended December 31, 1999 as a result of the previously announced
cost containment program.
Selling, general and administrative expenses decreased as a percentage of net
sales to 26.6% for the quarter ended March 31, 2000 from 31.2% for the quarter
ended March 31, 1999. In absolute dollars, the expenses decreased by
approximately $1.6 million to approximately $2.5 million for the quarter ended
March 31, 2000 from approximately $4.1 million for the quarter ended March 31,
1999. The reduction was primarily the result of the previously announced cost
containment program. In addition, approximately $0.6 million of non-recurring
employment termination and loan impairment expenses related to senior management
restructuring were incurred during the quarter ended March 31, 1999. Total
selling, general and administrative expenses declined approximately $0.4 million
from the previous quarter ended December 31, 1999.
The Company's loss from operations was approximately $2.6 million for the
quarter ended March 31, 2000, compared to a loss from operations of $7.3 million
for the quarter ended March 31, 1999. The decrease of approximately $4.7 million
was due to a decrease of approximately $6.0 million in selling, general and
administrative expenses and the provision for loss on lease obligation,
partially offset by the decrease in gross profit of approximately $1.3 million.
The Company recorded a net loss for the quarter ended March 31, 2000 of
approximately $1.8 million compared to a net loss of approximately $4.3 million
for the quarter ended March 31, 1999. The decrease of approximately $2.5 million
was due to the reasons described above. The income tax benefit of 34.3% compares
with a tax benefit of 40.0% for the quarters ended March 31, 2000 and 1999,
respectively. The lower percentage is the result of the consolidation of a
wholly owned manufacturing subsidiary in Switzerland, which has a five-year
income tax holiday. Diluted net loss per common share was $0.31 for the quarter
ended March 31, 2000 compared to diluted net loss per common share of $0.73 for
the quarter ended March 31, 1999.
NINE MONTHS ENDED MARCH 31, 2000 AND 1999
Net sales decreased 22.3% or approximately $10.6 million to approximately $36.9
million for the nine months ended March 31, 2000, from approximately $47.4
million for the nine months ended March 31, 1999. The decrease was primarily due
to the loss of a major customer, Nu Skin Enterprises Inc., which accounted for
approximately $4.3 million, or 11.5% and $15.4 million, or 32.5% of net sales
for the nine months ended March 31, 2000 and 1999, respectively. Nu Skin
informed the Company that its production needs have been transitioned to other
vendors for the foreseeable future. Domestic sales growth was also negatively
impacted by the loss of customer sales for several herbal products. Partially
offsetting the decrease in net sales from the loss of these major customers was
increased net sales to existing customers, primarily attributed to the Company's
largest customer which had increased net sales of approximately $5.1 million, or
52.4%, to approximately $15.0 million for the nine months ended March 31, 2000.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Company management continues its strategy to focus its efforts for increasing
sales through diversifying and expanding geographic distribution channels. The
expansion in fiscal 2000 into Switzerland through the wholly-owned manufacturing
subsidiary, which commenced operations in September 1999, contributed $1.6
million in net sales for the nine months ended March 31, 2000. The Company
believes that the Swiss facility is tracking to meet its business plan
expectations, as volumes are anticipated to grow to meet European market demand.
During the latter part of the third quarter of fiscal year 2000, the Company
also commenced the initial marketing and sale of unique herbal health and
natural supplement products under the Dr. Cherry label. The Company has a
10-year Exclusive Licensing and Manufacturing Agreement for the distribution and
manufacture of these products and has contracted with an outside company to
utilize their specialized services to meet direct to consumer order fulfillment
capabilities. These services are anticipated to support future direct
television, direct mail and e-commerce channels, specifically targeted to the
branded health practitioner market. In addition, during the third quarter of
fiscal year 2000 the Company began the manufacture of products held in inventory
by Custom Nutrition, a joint venture with FitnessAge, in anticipation of the
product launch of customized sports nutritional supplements and related products
to consumers expected to commence during the second half of calendar year 2000.
These new business initiatives are intended to diversify sales and improve gross
margins to levels previously experienced and are currently not material to the
results of operations. Industry competition, which the Company expects to remain
strong for the foreseeable future, and other market or regulatory factors, could
adversely affect these initiatives and results of operations in any given
period; such adverse affects often cannot be anticipated.
For the nine months ended March 31, 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 86.6% compared to 79.3% for the nine months ended March 31,
1999. The increase reflects reduced sales prices which were not completely
offset by reduced material costs; increased manufacturing overhead costs; and
increased quality control costs to ensure product compliance with established
GMP specifications and standards. During the second quarter of fiscal year 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 sales potential. The decrease in sales, increase in
cost of goods sold and the inventory write-off resulted in a reduction of gross
profit of $6.9 million to approximately $3.0 million for the nine months ended
March 31, 2000 compared to $9.8 million for the nine months ended March 31,
1999. The Company reduced total manufacturing labor and overhead costs
approximately $0.5 million from the previous quarter ended December 31, 1999 as
a result of the previously announced cost containment program.
Selling, general and administrative expenses increased as a percentage of sales
to 22.5% for the nine months ended March 31, 2000 from 18.8% for the nine months
ending March 31, 1999. In absolute dollars, the expenses decreased by
approximately $0.6 million to approximately $8.3 million for the nine months
ended March 31, 2000 from approximately $8.9 million for the nine months ended
March 31, 1999. The reduction was primarily the result of the previously
announced cost containment program. In addition, approximately $0.6 million of
non-recurring employment termination and loan impairment expenses related to the
senior management restructuring were incurred during the quarter ended March 31,
1999. Total selling, general and administrative expenses declined approximately
$0.4 million from the previous quarter ended December 31, 1999.
The Company's loss from operations was approximately $5.9 million for the nine
months ended March 31, 2000 compared to a loss of approximately $4.1 million for
the nine months ended March 31, 1999. The increase of approximately $1.8 million
was due to a decrease in gross profit of approximately $6.9 million, partially
offset by the decrease in selling, general and administrative expenses and the
provision for loss on lease obligation of approximately $5.1 million.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The Company recorded a net loss for the nine months ended March 31, 2000 of
approximately $4.1 million compared to a net loss of approximately $2.4 million
for the nine months ended March 31, 1999. This increase was due to the reasons
described above. The income tax benefit of 33.9% compares with a benefit of
40.2% for the quarters ended March 31, 2000 and 1999, respectively. The lower
percentage is the result of the consolidation of a wholly owned subsidiary in
Switzerland, which has five-year income tax holiday. Diluted net loss per common
share was $0.71 for the nine months ended March 31, 2000 compared to diluted net
loss per common share of $0.41 for the nine months ended March 31, 1999.
COST CONTAINMENT PROGRAM
In January 2000, the Company announced a cost containment program designed to
reduce future operating expenses. 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. The reduction-in-force did not result in
significant separation agreement or other termination costs. As a result of this
program, total compensation, manufacturing, selling and administrative overhead
costs declined $0.9 million, or 14.5%, to approximately $5.3 million for the
quarter ended March 31, 2000 from approximately $6.2 million for the previous
quarter ended December 31, 1999.
Based on the Company's continued net operating losses, management is committed
to the restoration of future net profits by adjusting its operating cost
structures with current operating levels. Immediate efforts in progress for the
quarter ended June 30, 2000 are (i) a reduction in force of 25% effective May
2000, (ii) termination of outside packaging services, as a result of the cost
reduction initiative to invest in the integration of in-house finished goods
packaging capabilities and (iii) exit strategies of the Carlsbad abandoned
office and manufacturing facility.
The Company will continue to concentrate its efforts on improving operational
efficiencies, resource requirements, and core business processes to improve
operating performance. In addition, the Company will continue to focus on
existing customers and realizing the returns from the strategies implemented to
diversify and expand geographical and distribution channels through its Swiss
manufacturing operations, Custom Nutrition joint venture and Dr. Cherry
physician branding direct to consumer initiatives.
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 March 31, 2000, the Company had cash of approximately $1.0 million,
consistent with the approximate $1.1 million at June 30, 1999. The Company used
approximately $4.7 million in investing activities primarily to fund
manufacturing facility improvements and a convertible secured loan with
FitnessAge as discussed in footnote 9 to the financial statements. The cash used
in investing activities was funded by cash provided by financing activities of
approximately $4.5 million and cash provided by operating activities of
approximately $79,000.
Capital expenditures for the nine months ended March 31, 2000 amounted to
approximately $3.8 million. These expenditures relate primarily to manufacturing
facility improvements for expanding and upgrading the Company's warehouse,
blending and encapsulation production operations. The Company anticipates
additional capital expenditures of approximately $1.7 million during fiscal year
2000. These expenditures will primarily be for completing manufacturing quality
improvements through the purchase of packaging equipment to vertically integrate
finished goods packaging and labeling operations, all of which were outsourced
through the quarter ended March 31, 2000. Subsequent to quarter end, the
packaging operation was brought on-line, beginning the elimination of outside
packaging services; through this cost
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
reduction initiative, the Company expects to reduce future manufacturing costs
and realize additional benefits of improved logistics, inventory, quality
control and customer service. These expenditures are expected to be paid
primarily from borrowings under the Company's term note described below. If
these financing alternatives become unavailable, the Company may be required to
defer or restrict certain commercial activities or delay or eliminate
expenditures for certain of its potential products and/or markets.
At March 31, 2000, the Company had working capital of approximately $8.3 million
compared to approximately $14.1 million at June 30, 1999. The $5.8 million
decrease in working capital was primarily the result of a decrease in
inventories of approximately $2.3 million and accounts receivable of $3.3
million, and a reclassification of the accrual for loss on lease obligation of
$3.0 million from long term to current and current installments of long-term
debt of approximately $1.5 million used to finance manufacturing facility
improvements and expansion; this was partially offset by a decrease in accounts
payable of approximately $2.2 million. Current maturities of long-term debt at
March 31, 2000 amounted to approximately $1.6 million.
For the nine months ended March 31, 2000, the Company's consolidated outstanding
debt increased to approximately $5.7 million from approximately $1.0 million at
June 30, 1999. The increase in debt of $4.7 million was utilized to fund the
following Company initiatives: capital expenditures related primarily to
manufacturing facility improvements discussed above; and the start-up expenses
for the expansion in fiscal 2000 of the wholly-owned manufacturing subsidiary in
Switzerland. The composite interest rate on all outstanding debt was
approximately 8.3%.
The Company has access to funds from existing credit facilities to support
future ongoing operating requirements and capital expenditures of approximately
$8.0 million, net of borrowings outstanding under these facilities as of March
31, 2000 of approximately $2.3 million. The Company believes that its available
cash and cash equivalents and existing credit facilities should be sufficient to
fund near term operating activities. The Company's ability to fund future
operations and meet capital requirements will depend on many factors, including:
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; the ability
to establish additional alliances or changes to existing alliances; and the
ability to establish sub-lease arrangements for the abandoned office and
manufacturing facility. The Company may seek additional financing sources, but
there can be no assurance that such additional financing sources will be
available at acceptable terms, if any at all.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." The Company will be required to adopt SAB 101 in the first quarter
of fiscal 2001. SAB101 requires, among other things, that license and other
up-front fees be recognized over the term of the agreement, unless the fees are
in exchange for products delivered or services performed that represent the
culmination of a separate earnings process. The Company does not expect this
change in accounting principle to have a material effect on the Company's
financial position and results of operation.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
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.
CURRENT LOSSES AND EXPECTED FUTURE LOSSES; DECLINING SALES
The Company incurred a net loss of approximately $2.9 million for the fiscal
year ended June 30, 1999. Sales for the fiscal year ended June 30, 1999 declined
to approximately $57.0 million compared to approximately $68.0 million for the
fiscal year ended June 30, 1998. Sales for the nine months ended March 31, 2000
were approximately $36.9 million versus sales of approximately $47.4 million for
the comparable period of 1999. The Company incurred a net loss of approximately
$4.1 million for the nine months ended March 31, 2000, and expects to incur a
net loss for the fiscal year ending June 30, 2000. The Company has implemented a
cost containment program and a return to profitability program in an effort to
reduce expenses to meet current operating levels. There can be no assurance that
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
receives 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 two years and is currently at historic lows. In view of the Company's
current losses and expected losses through June 30, 2000, 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 significant adverse
effect on the price of the Company's stock.
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 sales, and for
the nine months ended March 31, 2000, NuSkin accounted for approximately $4.3
million or 12% of the Company's sales. The loss of NuSkin as a customer has had
a material adverse impact on the near term revenues and operating results of the
Company.
LONG-TERM LEASE COMMITMENT FOR ABANDONED FACILITY
The Company has a 15-year lease commitment for an approximately 82,500 square
foot build-to-suit office and manufacturing facility in Carlsbad, California
that the Company previously determined not to occupy. The monthly lease
payments, which commenced in November, 1999, are currently approximately
$106,000 plus costs for taxes, insurance and maintenance. The rental expenses
are subject to annual inflation adjustments through the remainder of the lease
term. As discussed in footnote 10 to the financial statements, the Company
executed an agreement to sublease 24,000 square feet and is in final contract
negotiations to sublease an additional 58,000 square feet of the facility.
Management expects to finalize these agreements by June 2000.
The Company also received a proposal for the sale of its leasehold interests in
the abandoned Carlsbad facility in exchange for the Company's payment of a fixed
buyout fee. The Company is currently evaluating this proposal. The
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
Company can make no assurance that it will sell its leasehold interests, or
sublease the premises on terms acceptable to the Company, or if at all.
RELIANCE ON LIMITED NUMBER OF CUSTOMERS FOR MAJORITY OF REVENUE
For the fiscal year ended June 30, 1999, the Company had three major customers,
which together accounted for approximately 71% of the Company's net sales. For
the nine months ended March 31, 2000, there were four major customers who each
accounted for 10% or more of the Company's net sales, which together accounted
for 79% of the Company's net sales. The Company lost one of these major
customers, NuSkin, during the quarter ended December 31, 1999. For the quarter
ended March 31, 2000, there were two major customers who each accounted for 10%
or more of the Company's net sales, which together accounted for 81% of the
Company's net sales. The loss of any additional major customers, or any of these
customers substantially reducing their purchases from the Company, would have a
material adverse impact on the business, operations and financial condition of
the Company.
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. 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 a lawsuit against Mr. Spencer and a corporation in which he
is currently a director, principal shareholder and chief executive. The Company
has also filed a cross complaint against 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. Management believes the Company
will prevail in its cross complaint against each cross defendant. In the event a
judgment was 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 also recently been speculation about the potential for
increased participation in these markets by major international pharmaceutical
companies. In the future, one or more of these companies could seek to compete
more directly with the Company by manufacturing and distributing 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 may expand its
operations and its products may face competition from such alternative channels
as more customers utilize these channels of distribution to obtain similar
products.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
RELIANCE ON LIMITED NUMBER OF SUPPLIERS; AVAILABILITY AND COST OF PURCHASED
MATERIALS
The Company purchases from a limited number of raw material suppliers certain
products the Company does not manufacture. No supplier represented more than 10%
of total raw material purchases for the fiscal year ended June 30, 1999 or for
the nine month period ended March 31, 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 has reliance on a single supplier to process certain raw materials
for a product of a major 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 material
media attention and various scientific research suggesting potential health
benefits for 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 result in injury. The
Company maintains product liability insurance coverage, including primary
product liability and excess liability coverage. There can be no assurance
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.
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, 1999 and nine months ended March 31,
2000, the percentage of the Company's net sales by customers into international
markets were 30.8% and 28.0%, respectively. The Company also has a manufacturing
facility in Switzerland, which is designed to increase sales of the Company's
products overseas. 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
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
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, OTC 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 for 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 recordkeeping, 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.
DISTRIBUTION AND MANAGEMENT OF OPERATIONS
In fiscal 1999, the Company leased and began development of two additional
facilities. One new facility, comprising 74,000 square feet in Vista,
California, is used as warehousing, blending, packaging and distribution
facility. The Company also operates an 18,000 square foot manufacturing facility
in Lugano, Switzerland. Both of these facilities were completed and 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. While the Company believes these activities will increase
the Company's manufacturing and distribution capabilities, there can be no
assurance the expected operating improvements will be realized, or these new
facilities 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.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
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 it's 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 Officers began their employment with the Company in late fiscal
year 1999 and 2000. The inability of the Company to retain competent
professional management could adversely affect 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 effect 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 CONSIDERATION
The Company's directors and executive officers beneficially own in excess of 27%
of the outstanding Common Stock as of March 31, 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 5,000,000 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.
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 restriction includes 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 EBITDA to cash interest expense ratios. The Company was not in
compliance with certain of these ratios at March 31, 2000 which the financial
institution has agreed to waive through June 30, 2000. The Company is currently
in negotiations with the financial institution and others to establish revised
loan agreements. There can be no assurance the Company will successfully enter
into new loan agreements and will be able to comply with such covenants or
restrictions contained therein in the 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
thereunder to declare all amounts outstanding thereunder to be immediately due
and payable, together with accrued and unpaid interest, and terminate their
commitments to make further extensions of credit thereunder.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks which arise in the normal course of
business from changes in interest rates, foreign currency exchange rates and
stock market fluctuations. At March 31, 2000, the Company maintains an
investment portfolio containing common stocks that are subject to market risk.
The Company has not used derivative financial instruments in its investment
portfolio and believes that
20
<PAGE> 21
NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
its investment in market-risk-sensitive instruments is not material. Based upon
our overall currency rate exposure at March 31, 2000, we do not believe that our
exposure to currency rate fluctuations will have a material impact on our
consolidated financial position or consolidated results of operations.
Market rate risk related to Long Term Debt is diminimus due to the fixed
interest rate and fixed payment structure of the significant portion of debt.
21
<PAGE> 22
NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART II - OTHER INFORMATION
ITEM 1. 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 a lawsuit against Mr. Spencer and a corporation in which he
is currently a director, principal shareholder and chief executive. The Company
has also filed a cross complaint against 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. Management believes the Company
will prevail in its cross complaint against each cross defendant. In the event a
judgment was 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.
The Company is eager to resolve its claims. There can be no assurance the claims
will be resolved, or it they are that it will result in a material benefit to
the Company.
ITEM 2. CHANGES IN SECURITIES
During the nine month period ending March 31, 2000, 50,000 common shares were
repurchased at a cost of $167,000 pursuant to the Board of Directors approved
repurchase program of up to 500,000 shares of the Company's common stock. As of
March 31, 2000, 249,500 shares had been repurchased at a cost of $1,161,000
under this repurchase program. In addition, 12,548 shares of Common Stock were
purchased through the Company's Employee Stock Purchase Plan (the "Stock
Purchase Plan") and issued to eligible employees of the Company. The Stock
Purchase Plan provides eligible employees of the Company to purchase, through
payroll deductions, shares of Common Stock at a discount consistent with the
provisions of the Internal Revenue Code of 1986, as amended. The Board of
Directors reserved 150,000 shares of common stock for the Stock Purchase Plan,
plus an annual increase as defined, to be added on the first day of the
Company's fiscal year beginning July 1, 2000.
ITEM 3. DEFAULTS BY THE COMPANY ON ITS SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
22
<PAGE> 23
NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The following exhibits are filed herewith:
27.0 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for which this report
is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NATURAL ALTERNATIVES INTERNATIONAL, INC.
Date: May 15, 2000
/s/ Peter C. Wulff
- -------------------
Peter C. Wulff
Chief Financial Officer
and Treasurer
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM
10-Q OF THE CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS
OF NATURAL ALTERNATIVES INTERNATIONAL, INC. FOR THE QUARTER ENDED MARCH 31, 2000
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. (IN
THOUSANDS EXCEPT EARNINGS PER SHARE)
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 1,000
<SECURITIES> 250
<RECEIVABLES> 4,502
<ALLOWANCES> (326)
<INVENTORY> 8,277
<CURRENT-ASSETS> 6,065<F1>
<PP&E> 24,654
<DEPRECIATION> (10,005)
<TOTAL-ASSETS> 37,192
<CURRENT-LIABILITIES> 11,265
<BONDS> 4,079
0
0
<COMMON> 60
<OTHER-SE> 20,778
<TOTAL-LIABILITY-AND-EQUITY> 37,192
<SALES> 9,538
<TOTAL-REVENUES> 9,538
<CGS> 8,942
<TOTAL-COSTS> 8,942
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 90
<INTEREST-EXPENSE> 113
<INCOME-PRETAX> (2,684)
<INCOME-TAX> (921)
<INCOME-CONTINUING> (1,763)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,763)
<EPS-BASIC> (0.31)
<EPS-DILUTED> (0.31)
<FN>
<F1>Includes income tax refund receivable, notes receivable -- current portion,
prepaid expenses, deposits and other current assets.
</FN>
</TABLE>
