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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, 1996 Commission file number 0-15701
NATURAL ALTERNATIVES INTERNATIONAL, INC.
Incorporated in Delaware 84-1007839
1185 Linda Vista Drive, San Marcos, California 92069 (I.R.S. Employer
(619) 744-7340 Identification No.)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock - $.01 par value American Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes__X____ No________
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of 3,898,085 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
$32,159,000 based on the closing sale price as of September 16, 1996.
At September 16, 1996, the Registrant had outstanding 5,371,875 shares of Common
Stock, $.01 par value.
Documents Incorporated by Reference
NONE
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INDEX
PART I
Item 1. Business...................................................................... 1
Item 2. Properties.................................................................... 3
Item 3. Legal Proceedings............................................................. 3
Item 4. Submission of Matters to a Vote of Security Holders........................... 3
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.......................................................... 5
Item 6. Selected Financial Data....................................................... 6
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................... 7
Item 8. Financial Statements and Supplementary Data................................... 9
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................................... 9
PART III
Item 10. Directors and Executive Officers of the Registrant.......................... 10
Item 11. Executive Compensation...................................................... 13
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................................. 19
Item 13. Certain Relationships and Related Transactions.............................. 21
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports of Form 8-K............ 22
Signatures............................................................................ 47
Exhibit Index......................................................................... 48
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PART I
ITEM 1. BUSINESS
Natural Alternatives International, Inc. (referred to herein as the "Company")
is engaged in the formulation and production of encapsulated vitamins and
nutrients and provides for its clients sports affiliations, assistance with
foreign registration of products, graphic design, brochures, formulations and a
host of other marketing related services. The Company narrowly focuses its
marketing activity on attracting and retaining a select number of large,
financially sound companies with global, growth-oriented objectives. The Company
seeks to further its customers' objectives by assisting them in expanding their
market share through a variety of special programs and services.
In 1995, the Company expanded and enhanced its laboratory and quality control
capabilities. Management believes its technically advanced facilities are a
major factor in solidifying existing customer relationships and adding new
customers. Newly recognized standards for manufacturing nutritional products
should, in the opinion of management, assist the Company in serving its present
and future customers. The newly revised United States Pharmacopeia compendia
(USP) contains, for the first time, specifications for vitamin and mineral
supplements. This USP monograph has long been the basis for determining the
strength, quality, purity, packaging and labeling of drugs and related articles.
The Company believes it currently has the technical and quality control
expertise to conform to all aspects of USP specifications. Conformance with USP
specifications will allow the Company to use the USP designation on all products
manufactured for its customers which have the USP designation.
The Company has several proprietary lines of products, which are sold by two of
its wholly-owned subsidiaries, Pro-Lean, Inc. (formerly Sonergy, Inc.), and
CellLife International, Inc. In keeping with its overall strategy, the Company
revised operations of its two primary subsidiaries last year, significantly
reducing the number of their product lines and focusing on a limited number of
profitable products which comprise the majority of their sales. The Company
believes such specialty proprietary products typically generate higher profit
margins and assist in product diversification and less reliance on contract
manufacturing.
RESEARCH AND DEVELOPMENT
The Company continuously produces pilot or sample runs of products to ensure
stability or efficacy and to determine ingredient interaction and prospective
customer acceptance. Research of this type, and the associated costs, are part
of the operating expenses incurred by the Company. Such research and development
has not been a significant investment by the Company and is not expected to be a
material investment in the future.
COMPETITION AND BUSINESS RISKS
The vitamin and nutritional supplement industry is highly competitive, and
competition is expected to increase in the future. Competition for the sale of
vitamins and supplements comes from many sources, including companies which sell
vitamins to supermarkets, large chain discount retailers, drug store chains and
independent drug stores, health food stores, pharmaceutical companies and others
which sell to wholesalers, mail order vendors and network marketing companies.
The Company does not believe it is possible to accurately estimate the number or
size of many of its competitors since the vitamin industry is largely privately
held.
The Company believes that competition among vitamin and supplement products is
based, among other things, on price, timely delivery, product quality, safety,
availability, product innovation and assistance in marketing and customer
service. The competitive position of the Company will also depend upon continued
acceptance of its hard gel capsules, its ability to attract and retain qualified
personnel, future governmental regulations affecting vitamins and nutritional
supplements, and publication of vitamin product safety and efficacy studies by
the government and authoritative health and medical authorities.
The Company's operations are subject to the risks normally associated with
manufacturing vitamins and nutritional products, including suspension of
operations, shortage of certain raw materials and damage to property or injury
to persons.
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PART I
ITEM 1. BUSINESS (continued)
BACKLOG
The Company's backlog figures, believed to be firm as of September 16, 1996 were
$12,465,000. These compare to backlogs of $13,634,000 and $3,785,000 as of
September 5, 1995 and September 7, 1994, respectively. The Company expects that
all orders in the backlog at the end of fiscal year 1996 will be shipped during
calendar year 1996.
RAW MATERIALS
Raw materials used by the Company consist of nutrient powders, empty gelatin
capsules, and necessary components for packaging and distribution of finished
vitamin and nutritional supplement products. The nutrient powders and the empty
gelatin capsules are purchased from manufacturers in the United States,
including foreign-owned entities operating in the United States.
MAJOR CUSTOMERS
Jenny Craig International, NSA International and Nu Skin International together
represented 69% of the Company's sales for the year ended June 30, 1996. Loss of
any of these customers would have an adverse impact on the Company's revenues
and earnings until the Company could replace these sales. If the Company was
unable to replace the sales to any of these customers, it would have a material
adverse impact on the business and operations of the Company. No other customer
represented 10% or more of the Company's sales.
EMPLOYEES
The Company employs 110 individuals, with three employed in executive or other
professional positions, six in the area of research, laboratory and quality
control, seven in marketing and sales, while the remaining employees are engaged
in production and administration. The Company has never experienced a work
stoppage, and none of its employees are currently represented by a union or any
other form of collective bargaining unit. The Company believes its relations
with its employees are excellent.
GOVERNMENT REGULATION
The processing, formulation, packaging, labeling and advertising of the
Company's products are subject to regulations by one or more federal agencies,
including the Federal Drug Administration (FDA), the Federal Trade Commission
(FTC), the Consumer Product Safety Commission, the United States Department of
Agriculture and the Environmental Protection Agency. These activities are also
regulated by various agencies of the state and localities in which the Company's
products are sold, including without limitation the California Department of
Health Services, Food and Drug branch. The FDA in particular regulates the
advertising, labeling and sales of vitamin and mineral supplements and may take
regulatory action concerning medical claims, misleading or untruthful
advertising, and product safety issues. While the Company is subject to the
FDA's Good Manufacturing Practices for foods, and complies with them as a
quality control practice, it also uses many of the FDA's more stringent
standards for pharmaceutical manufacturing.
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PART I
ITEM 2. PROPERTIES
The Company's corporate and manufacturing facilities consist of approximately
54,000 square feet and are located in San Marcos, California. Of this space, the
Company owns approximately 36,000 square feet and leases the remaining space. In
June 1996, the Company acquired a portion of a building occupied by certain of
its offices and production facilities which, up to that time, were being leased
from its two principal stockholders, Marie A. LeDoux and Mark A. LeDoux. The
lease provided for rent payable in the amount of $60,000 per year. Purchase
price of the building was $545,000 which, in the opinion of management and an
independent certified appraiser who evaluated the property in April 1996,
represented fair market value.
The Company believes its facilities are adequate and suitable for its current
needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, based in part on the
advice of counsel, the ultimate disposition of these matters will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on May 10, 1996. The
following matters were voted upon at the meeting:
Description Votes for Votes Against Abstentions
----------- --------- ------------- -----------
Amend Certificate of Incorporation to-
Provide for a classified board of directors. 2,639,897 422,513 71,255
Provide that newly created directorships shall be filled by
the vote of the remaining directors. 2,716,767 373,561 43,337
Provide that no director may be removed except for cause as
defined, and to require a vote of 70% of the outstanding
shares to remove a director. 2,567,847 492,498 73,320
Provide that at any meeting of the stockholders, only such
business may be acted on as is brought by either the Board
of Directors or by the stockholders in accordance with
certain notice procedures. 3,082,312 39,333 12,020
Provide that only persons who are nominated in accordance
with certain procedures are eligible for election as 2,880,772 213,743 39,150
directors.
Prohibit the Company from making certain stock repurchases 2,909,048 211,295 13,322
except under certain conditions.
Add a fair price provision which requires that certain
minimum price and procedural requirements be observed by
certain parties who seek to accomplish mergers or other
business combinations unless they meet certain
requirements. 2,672,023 444,579 17,063
(continued)
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PART I
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS(continued)
Description Votes for Votes Against Abstentions
----------- --------- ------------- -----------
Amend Certificate of Incorporation to-
Elect not to be governed by the provisions of Section 203
of the Delaware General Corporation Law. 2,851,731 235,059 46,875
Provide that the vote of 70% of the outstanding shares is
required to amend or repeal the proposed amendments to the
Restated Certificate of Incorporation described above, and
to existing Articles Second, Seventh, and Eighth. 2,648,807 444,353 40,505
Approve, in addition to the specific amendments described above,
the Restated Certificate of Incorporation in its entirety. 2,605,197 440,223 88,245
Ratify and approve the 1994 Nonqualified Stock Option Plan and
the grant of options to purchase 500,000 shares thereunder. 2,553,331 498,907 81,427
Confirm KPMG Peat Marwick LLP as the Company's independent
auditors for the fiscal year ending June 30, 1996. 3,109,850 27,380 13,835
Elect Mark A. Le Doux, William P. Spencer, William R. Kellas, Lee
G. Weldon and Marie A. Le Doux as directors. 2,982,356 188,709 0
4
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company has been trading on the American Stock Exchange
(AMEX) since November 17, 1992, under the stock symbol NAI. The table below sets
forth the high and low sales prices which are derived from the Monthly Market
Statistics issued by the American Stock Exchange.
HIGH LOW
---- ---
First Quarter Ended September 30, 1995 $ 9.750 $6.000
Second Quarter Ended December 31, 1995 $12.750 $7.000
Third Quarter Ended March 31, 1996 $10.125 $7.750
Fourth Quarter Ended June 30, 1996 $11.250 $9.250
First Quarter Ended September 30, 1994 $ 9.125 $5.500
Second Quarter Ended December 31, 1994 $ 6.125 $3.875
Third Quarter Ended March 31, 1995 $ 7.000 $4.062
Fourth Quarter Ended June 30, 1995 $ 6.500 $5.250
As of June 30, 1996, the approximate number of holders of common stock was
4,000.
The Company has never paid a dividend on its common stock. It is the Company's
present policy to retain all earnings to provide funds for the future growth of
the Company.
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PART II
ITEM 6. SELECTED FINANCIAL DATA
Five-Year Summary
- --------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Net sales $47,621,804 $37,388,254 $34,334,062 $19,431,664 $14,471,502
Income
From Operations $ 5,263,376 $ 3,637,522 $ 3,592,951 $ 1,604,699 $ 1,321,574
Net Earnings $ 3,222,317 $ 2,028,059 $ 1,887,367 $ 965,543 $ 753,837
Net Earnings Per Common
Share:
Primary and fully diluted $ .58 $ .39 $ .38 $ .21 $ .18
Current Assets $15,710,135 $14,722,929 $11,883,140 $ 5,953,903 $ 4,910,183
Total Assets $23,561,191 $21,193,780 $17,514,511 $10,620,035 $ 8,025,690
Long-Term Debt and
Capital Lease
Obligations, less current
installments $ 1,324,920 $ 1,114,828 $ 958,415 $ 819,528 $ 466,047
Stockholders' Equity $17,159,586 $13,278,255 $11,216,465 $ 6,873,068 $ 5,941,946
- --------------------------------------------------------------------------------
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PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales increased 27.4% or $10.2 million to a record $47.6 million in fiscal
1996, primarily due to the combination of increased existing and new customer
volume which took place throughout the year. The Company continues to pursue
Olympic marketing affiliations for its customers on an international basis.
Sales to international customers of $4.3 million increased 43% or $1.3 million
in 1996 and represented 9.0% of net sales. The increase was due to the
completion of registration requirements on new international products being
developed at customers' requests.
Income from operations increased 44.7% to $5.3 million, due primarily to
increased gross profit offset by a moderate rise in selling, general and
administrative expenses.
Gross margins were 26.1% and 26.3% in fiscal 1996 and 1995, respectively. The
decline in gross margins is primarily due to writedowns of inventories relating
to certain discontinued products.
Selling, general and administrative expenses decreased moderately as a
percentage of sales from 16.6% in 1995 to 15.1% in 1996. In absolute dollars,
selling, general and administrative expenses increased to approximately $7.2
million in fiscal 1996 from $6.2 million in 1995. This was due, primarily, to
increases in bad debt expense, operating supplies, outside services, repairs
and maintenance, royalties, and salaries, partially offset by decreases in
printing and stationery and professional fees.
Other income(expense) amounted to a net expense of approximately $56,000 in
fiscal 1996 compared to a net expense of approximately $52,000 in fiscal 1995.
Net earnings increased 58.9% or $1.2 million to a record $3.2 million in fiscal
1996. This increase was due, in part, to the reasons given above, and to a lower
effective income tax rate. The lower income tax rate, from 43.4% in 1995 to
38.1% in 1996, is the result of an investment credit recently enacted by the
state of California.
Earnings per share increased 48.7% to $.58 per share in 1996 from $.39 per share
in 1995. Earnings per share did not increase at the same rate as net earnings
due to the increase in the weighted average number of shares outstanding to
5,585,442 as of June 30, 1996 from 5,257,865 as of June 30, 1995. The increase
in weighted average shares was due to exercises of employee stock options and
the dilutive effect of common stock equivalents in 1996 which was not a factor
in 1995.
The Company's backlog position amounted to $12,465,000 as of September 16, 1996,
compared to $13,634,000 as of September 5, 1995. This slight decline is
attributable to client ordering patterns and new product introductions.
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PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
RESULTS OF OPERATIONS
FISCAL 1995 COMPARED TO FISCAL 1994
Net sales increased 8.9% or $3.1 million to a record $37.4 million in fiscal
1995, primarily due to the combination of increased existing and new customer
volume which took place during the fourth quarter. The Company continues to
pursue Olympic marketing affiliations for its customers on an international
basis.
Sales to international customers of $3.0 million decreased 13% or $.4 million in
1995 and represented 8.0% of net sales. Due to lengthy registration requirements
on new international products being developed at customers' requests, shipments
to customers were delayed from fiscal 1995 to fiscal 1996 resulting in the
slight decrease of international sales.
Income from operations increased 1% to $3.6 million, due primarily to increased
gross profit offset by a moderate rise in selling, general and administrative
expenses.
Gross margins were 26.3% and 28.1% in fiscal 1995 and 1994, respectively. The
decline in gross margins is primarily due to price increases incurred on
specific raw materials which could not be immediately passed along to customers.
Selling, general and administrative expenses decreased moderately as a
percentage of sales from 17.7% in 1994 to 16.6% in 1995. In absolute dollars,
selling, general and administrative expenses increased to approximately $6.2
million in fiscal 1995 from $6.1 million in 1994.
Other income(expense) amounted to a net expense of approximately $52,000 in
fiscal 1995 compared to a net expense of approximately $424,000 in fiscal 1994.
The difference was primarily due to the disposal of its plant investment in
Mexico, which amounted to a loss of approximately $349,600 in fiscal 1994.
Earnings per share increased to $.39 per share in 1995 from $.38 per share in
1994. Per share earnings were moderately affected by the increase in weighted
average shares outstanding to 5,257,865 shares in 1995 from 4,948,564 shares in
1994, the principal cause of which was the exercise of warrants for 475,000
shares in May, 1994, which were fully weighted in fiscal 1995.
The Company's backlog position compared to one year ago showed an approximate
four-fold increase. The Company's backlog position amounted to $13,634,000 as of
September 5, 1995, compared to $3,785,000 as of September 7, 1994.
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PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has satisfied its liquidity requirements
through a combination of equity financing, net cash provided by operating
activities, revolving lines of credit, equipment financing and leases.
Management believes the Company's financial condition remains strong, and
management also believes the Company should have the resources necessary to meet
currently anticipated funding requirements.
At June 30, 1996, the Company had working capital of $10,990,000 and revolving
lines of credit of $3,000,000. As of June 30, 1996, there were no borrowings
under these lines. In 1996, net cash provided by operating activities was
$1,103,000 compared to $3,501,000 for 1995. This decrease was due primarily to
an increase in inventory of $1,170,000 and a decrease in accounts payable of
$1,325,000. Current maturities of long term debt amount to $235,000 which the
Company expects to pay out of working capital.
The Company has revolving lines of credit permitting borrowings up to
$3,000,000, which are secured by the Company's receivables, inventory,
equipment, and vehicles and bear interest at the bank's prime rate. The present
loan agreement with the bank contains financial covenants concerning limitations
on maintenance of debt, certain financial ratio's and other matters, for all of
which the Company is in full compliance as of September 25, 1996. Of the lines
of credit, $1,000,000 expires on December 5, 1996 and $2,000,000 expires on
December 5, 1997; management expects such lines to be renewed in the normal
course of business.
Capital expenditures for 1996 amounted to $2,609,000 primarily in the form of
new high speed encapsulating equipment and facility modernization to expand the
Company's output capacity. The Company anticipates capital expenditures, subject
to satisfactory financial performance and conditions, of approximately
$1,500,000 during fiscal 1997, primarily for equipment and building
improvements. These expenditures are expected to be paid from a combination of
cash holdings, net cash provided by operating activities in fiscal 1997 and
borrowings under the Company's lines of credit with its bank.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. ("SFAS") 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," effective for
fiscal years beginning after December 15, 1995. SFAS 121 provides guidance for
recognition and measurement of impairment of long-lived assets, certain
identifiable intangibles and goodwill related both to assets to be held and used
and assets to be disposed of. The adoption of SFAS 121 is not expected to have a
material effect on the Company's financial position or results of operations.
In October 1995, the Financial Accounting Standards Board issued SFAS 123,
"Accounting for Stock-Based Compensation," effective for fiscal years beginning
after December 15, 1995. Under the provisions of SFAS 123, the Company may elect
to measure compensation costs related to its employee stock compensation under
the fair value method. Since the Company has elected not to recognize
compensation expense under this method, it is required to disclose the pro forma
effects based on SFAS 123 methodology.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data as required by this item are set
forth on pages 23 through 45.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company (Registrant) are as follows:
Age as of Year of First
Name and Position June 30, 1996 Election Family Relationship
- ----------------- ------------- -------- -------------------
Mark A. LeDoux 42 1986 Son to Chairperson of the
President, Chief Executive Officer, Board, Marie A. LeDoux
Director
William P. Spencer 43 1986 None
Executive Vice President, Treasurer,
Chief Operating Officer, Chief
Financial Officer, Chief Accounting
Officer and Director
Marie A. LeDoux 79 1986 Mother to President, Mark A.
Secretary, Chairperson of the Board LeDoux
William R. Kellas 45 1988 None
Director
Lee G. Weldon 57 1992 None
Director
MARK A. LEDOUX was a director, the President and Chief Executive Officer of
Natural Alternatives, Inc., the predecessor corporation, from its formation in
1981 until the 1986 merger into the Company. Mr. LeDoux has been a director of
the Company since the August 1986 merger of the predecessor corporation into the
Company, which continued the business and operations of Natural Alternatives,
Inc. Since August 1986, he has also been the President and Chief Executive
Officer of the Company. From 1976 to 1980, Mr. LeDoux held the position of
Executive Vice President and Chief Operating Officer of Kovac Laboratories, a
company which was engaged in the business of manufacturing nutritional
supplements. He attended the University of Oklahoma and graduated Cum Laude with
a Bachelor of Arts in Letters in 1975. Mr. LeDoux graduated from Western State
University, College of Law in 1979, with a Juris Doctorate.
WILLIAM P. SPENCER has been a director of the Company since August 1986, and has
also been Executive Vice President, Chief Operating Officer and Chief Financial
Officer since that time. Prior to joining the Company, he was with San Diego
Trust and Savings Bank for ten years, the last four as Vice President. Mr.
Spencer received a Bachelor of Science in Finance in 1974, and a Masters in
Business Administration, also in the area of Finance, in 1979 from San Diego
State University.
(continued)
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
MARIE A. LEDOUX has been a director of the Company since August 1986, and has
also been Chairperson and Secretary since that time. Mrs. LeDoux was also the
Chairperson/Advisor of the Company's predecessor from its formation until 1986.
She has thirty-eight years of experience in the area of nutrition. In 1978, Mrs.
LeDoux was awarded an Honorary Fellowship in the International Academy of
Preventive Medicine. In 1981, she received an Honorary Ph.D. in Humanities from
the Heritage Institute. Marie A. LeDoux is the mother of Mark A. LeDoux. For the
last eighteen years, Mrs. LeDoux has been the President of Play N' Talk
International, a company which is in the business of preparing instructional
materials for children's reading programs.
WILLIAM R. KELLAS, PH.D. became a director of the Company in October 1987. Mr.
Kellas graduated from the University of Southern California earning a Bachelor
of Science in Business with a Minor in Physics. He earned his Ph.D. in Health
Sciences from the Doctors University of Natural Health Sciences in 1985. Dr.
Kellas also graduated from Harvard University's Financial and Management
Program. From 1974 to 1984, Dr. Kellas was employed by IBM as the firm's
Western Regional Marketing Manager. From 1984 to 1985, Dr. Kellas was a
District Manager for Wang Laboratories. In 1985, Dr.Kellas founded
Comprehensive Health Centers, a medical clinic offering integrated medical,
dental, chiropractic, and natural therapeutic services. In addition, Dr.
Kellas is the President of Professional Preference, a biochemical firm which
sells computerized regimens of protocols that are designed to regenerate an
individual's immune system and fight related degenerative diseases.
LEE G. WELDON has been a director of the Company since June of 1992. He was the
Chairman and Chief Executive Officer of Kal Healthway, Inc., a food supplement
distributor, until it was acquired by another company during the past year. In
1963, Mr. Weldon graduated from UCLA and obtained a Bachelor of Science in
Business Administration. In 1982, Mr. Weldon became a member of Young
President's Organization (YPO), and since 1990 he has been a graduate member of
YPO.
BOARD MEMBERS
Members of the Board of Directors are elected in three classes (Class I, Class
II, and Class III) to serve initially until the 1997, 1998, and 1999 annual
meetings of stockholders, respectively, and until the election and qualification
of their successors. After the initial term of directors of each class
terminates, at each regularly scheduled annual meeting of stockholders held to
elect directors of that class, the number of directors equal to the number of
directors of the class whose term expires at the time of such meeting shall be
elected to hold office until the third succeeding annual meeting of
stockholders. Directors receive $500 for each Directors' meeting attended in
person. Mark A. LeDoux is the son of Marie A. LeDoux. Executive officers serve
at the discretion of the Board of Directors. The classes of directors are as
follows:
Director Class
-------- -----
Mark A. LeDoux I
Marie A. LeDoux, Lee G. Weldon II
William R. Kellas, William P. Spencer III
COMMITTEES
The Company currently has a Compensation Committee, composed of William R.
Kellas and Lee G. Weldon. The Company's Audit Committee is comprised of William
R. Kellas, Lee G. Weldon and William P. Spencer.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Based solely on its review of the copies of Form 4's received by the Company,
the Company believes that during its most recent fiscal year ended June 30,
1996, that its officers and directors complied with the filing requirements
under Section 16(a), except that Officer and Director William P. Spencer had
four late filings of Form 4 covering seven transactions, Officer and Director
Mark L. LeDoux had one late filing of Form 4 covering four transactions, and
Officer and Director Marie L. LeDoux had one late filing of Form 4 covering one
transaction.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND OTHER COMPENSATION
The following table sets forth compensation for services rendered in all
capacities to the Company during the years ended June 30, by each of the
executive officers.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
------------------- ------
Securities All Other
Other Annual Underlying Compen-
Compensation Options/ sation
Name and Principal Position Year Salary ($) Bonus ($) ($)(1) SARs(#) ($)(2)
- --------------------------- ---- ---------- --------- ------ ------- ------
Mark A. LeDoux, President 1996 213,520 45,300 8,592 -- 21,987
Chief Executive Officer and 1995 172,942 101,203 11,502 100,000 14,961
Director 1994 158,450 157,867 27,770 60,000 22,559
William P. Spencer, 1996 169,275 40,300 113,656 -- 35,005
Executive Vice President, 1995 168,058 83,854 543 125,000 35,538
Chief Operating Officer, 1994 200,250 124,357 40,668 125,000 35,394
Treasurer, Chief Financial
Officer, Chief Accounting
Officer, and Director
(1) Amounts do not exceed the lesser of $50,000 or 10% of salary and bonus
combined for named executive, except as set forth in the following table.
(2) See following table.
(continued)
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PART III
ITEM 11. EXECUTIVE COMPENSATION (continued)
SUMMARY OF CASH AND OTHER COMPENSATION (continued)
Mark A. William P.
LeDoux Spencer
------ -------
Other Annual Compensation-1996
Gain from exercise and sale of
stock options NA $ 53,078
Personal Transportation NA 7,284
Other Personal Expenses NA 40,600
Tax Payment Reimbursements NA 12,694
-------- --------
Totals $ 8,592 $113,656
-------- --------
Other Annual Compensation-1994
Personal Transportation NA $ 9,739
Other Personal Expenses NA 20,516
Tax Payment Reimbursements NA 10,413
-------- --------
Totals $ 27,770 $ 40,668
-------- --------
All Other Compensation-1996
401(k) Employer Contributions $ 8,759 $ 10,974
Life Insurance Premiums 1,819 13,998
Medical, Dental and Vision 9,909 8,533
Board of Director Meetings 1,500 1,500
-------- --------
Totals $ 21,987 $ 35,005
-------- --------
All Other Compensation-1995
401(k) Employer Contributions $ 5,060 $ 4,518
Life Insurance Premiums 1,813 13,895
Medical, Dental and Vision 5,838 14,875
Board of Director Meetings 2,250 2,250
-------- --------
Totals $ 14,961 $ 35,538
-------- --------
All Other Compensation-1994
401(k) Employer Contributions $ 10,303 $ 12,662
Life Insurance Premiums 3,567 13,909
Medical, Dental and Vision 6,289 6,085
Years of Service Award 150 488
Board of Director Meetings 2,250 2,250
-------- --------
Totals $ 22,559 $ 35,394
-------- --------
(continued)
13
16
PART III
ITEM 11. EXECUTIVE COMPENSATION (continued)
OPTION GRANTS
There were no options granted in the year ended June 30, 1996.
OPTION EXERCISES AND HOLDINGS
The following table sets forth information concerning option exercises and
option holdings under the 1992 Incentive Stock Option Plan, the 1992
Nonqualified Stock Option Plan, and the 1994 Nonqualified Stock Option Plan for
the year ended June 30, 1996, with respect to the Company's executive officers:
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
Value
Realized Number of Unexercised Value of Unexercised
Market Price Options/SAR's at Fiscal In-The-Money Options/SAR's
Shares at Exercise Year-End (#) at Fiscal Year End ($)(1)
Acquired less Exercise ------------ -------------------------
Name Exercise (#) Price ($) Exercisable Unexercisable Exercisable Unexercisable
- -------------------- ------------ ------------- ----------- ------------- ----------- -------------
1992 Plans-
Mark A. LeDoux 0 0 60,000 0 277,200 0
William P. Spencer 10,000 53,078 115,000 0 531,300 0
1994 Plan-
Mark A. LeDoux 0 0 100,000 0 487,000 0
William P. Spencer 0 0 125,000 0 608,750 0
(1) The closing price of the Company's common stock at June 30, 1996, as quoted
on the American Stock Exchange, was $9.50.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Company's Compensation Committee for fiscal 1996 were William
R. Kellas and Lee G. Weldon. No current member of the Compensation Committee is
a current or former officer or employee of the Company or its subsidiaries.
(continued)
14
17
PART III
ITEM 11. EXECUTIVE COMPENSATION (continued)
EMPLOYMENT AGREEMENTS
Messrs. LeDoux and Spencer each have Employment Agreements (Agreements) with
the Company effective October 1, 1995, through September 30, 1996, pursuant to
which they receive annual salaries of $182,000 and $150,800, respectively,
and annual auto allowances of $24,000 and $12,000, respectively. The Agreements
also provide severance payments in the event of a merger, liquidation or sale
of all or substantially all of the assets of the Company in an amount equal to
2.99 times the employees' average annualized base salary and performance bonus
for the five year period immediately preceding the severance payment. The
Agreements also contain restrictive covenants prohibiting Messrs. LeDoux and
Spencer from competing with the Company during the term of their employment and
for two years thereafter.
BONUS PLAN
The Executive Bonus Plan established on January 1, 1994, for the benefit of
certain executive officers of the Company and its subsidiaries was terminated in
the current fiscal year.
401(K) PLAN
The NATURAL ALTERNATIVES Partnership for Profits Plan (Plan) is considered a
qualified plan under Section 401(k) of the Internal Revenue Code. All employees
of the Company with twelve (12) months and at least one thousand hours of
service during the twelve month period are eligible to participate in the Plan.
The Plan provides for employee contributions of up to 15% of compensation.
Employer contributions are determined by the Board of Directors at their
discretion. The Company may match up to 100% of each employee's contribution
which does not exceed 5% of the employee's total compensation. Employee
contributions in the Plan are 100% vested. Participants become vested in
employer contributions at the rate of 34% the first year, 67% the second year
and 100% after three years. The Company contributed and expensed $101,161,
$50,345 and $84,296 in 1996, 1995 and 1994, respectively.
STOCK OPTION PLANS
The Company maintains three stock option plans: the 1992 Incentive Stock Option
Plan (Incentive Plan) and the 1992 Nonqualified Stock Option Plan (1992
Nonqualified Plan), both of which were approved by the shareholders of the
Company at its Annual Meeting of Shareholders on June 5, 1992, and the 1994
Nonqualified Stock Option Plan (1994 Nonqualified Plan) which was approved by
the Board of Directors on December 9, 1994, and by the shareholders of the
Company at its Annual Meeting of Shareholders on May 10, 1996. The 1992
Incentive Plan provides for the granting of "incentive stock options" as
described in Section 422 of the Internal Revenue Code (Code). The 1992 and 1994
Nonqualified Plans provide for the granting of nonqualified stock options which
are not intended to qualify under any provision of the Code. On September 9,
1993, all options then authorized under the Incentive Plan and 1992 Nonqualified
Plan were granted at the fair market value price of $4.875 per share. On
December 9, 1994, the Shareholders approved an amendment to the Incentive Plan,
increasing the number of common shares that may be granted from 200,000 to
500,000. There have been no additional options granted to date. On January 24,
1995, options for 500,000 shares under the 1994 Plan were granted at the fair
market value of $4.625 per share.
Incentive Plan
The purpose of the Incentive Plan is to promote the interests of the Company by
providing a method whereby key management personnel of the Company and its
subsidiaries responsible for the management, growth and financial success of the
Company may be offered incentives to encourage them to acquire a proprietary
interest or to increase their proprietary interest in the Company, and to remain
in the employ of the Company and its subsidiaries. The total number of shares
issuable under the Incentive Plan may not exceed 500,000 shares, subject to
certain adjustments.
(continued)
15
18
PART III
ITEM 11. EXECUTIVE COMPENSATION (continued)
STOCK OPTION PLANS (continued)
Incentive Plan (continued)
The Incentive Plan is to be administered by either the Board of Directors
(Board) or the Company's Compensation Committee. Subject to the express
provisions of the Incentive Plan, the Board or the Compensation Committee will
have complete authority to determine the employees to whom, and the times at
which options are to be granted, the number of shares to be subject to each
option, the option term, and all other terms and conditions of an option. The
Board or the Compensation Committee will also have the authority to interpret
the provisions in the Incentive Plan and to prescribe rules and regulations for
its orderly administration.
The exercise price of incentive stock options granted under the Incentive Plan
may not be less than 100% of the fair market value of the Common Stock on the
date of the option grant. With respect to any key employee who owns stock
representing more than 10% of the voting power of the outstanding capital stock
of the Company, the exercise price of any incentive stock option may not be less
than 110% of the fair market value of such shares at the time of grant and the
term of such option may not exceed five years. Each option granted under the
Incentive Plan will be exercisable at such time or times, during such period,
and for such number of shares as is determined by the Board or the Compensation
Committee and set forth in the instrument evidencing the option. No option
granted under the Incentive Plan shall have a term in excess of ten years from
the date of grant.
During the lifetime of the optionee, the option will be exercisable only by the
optionee and may not be assigned or transferred by the optionee other than by
will or the laws of descent or distribution. Should an optionee cease to be an
employee of the Company or its subsidiaries for any reason other than death,
then any outstanding option granted under the Incentive Plan will be exercisable
by the optionee only during the three month period following cessation of
employee status, and only to the extent of the number of shares for which the
option is exercisable at the time of such cessation of employee status.
If the Company or its shareholders enter into an agreement to dispose of all or
substantially all of the assets or outstanding capital stock of the Company by
sale, merger, reorganization or liquidation, each option outstanding will become
exercisable during the 15 days immediately prior to the scheduled consummation
of such sale, merger, reorganization or liquidation with respect to the full
number of shares of the Company's Common Stock purchasable under such option,
unless the successor corporation or parent assumes or replaces the outstanding
options.
In the event any change is made to the outstanding shares of the Company's
Common Stock without the receipt of consideration by the Company, then unless
such change results in the termination of all outstanding options, appropriate
adjustments will be made to the maximum number of shares issuable under the
Incentive Plan and to the number of shares and the option price per share of the
stock subject to each outstanding option.
1992 and 1994 Nonqualified Plans
The purpose of the 1992 and 1994 Nonqualified Plans (the Nonqualified Plans) is
to provide an incentive to eligible employees, consultants and officers whose
present and potential contributions are important to the continued success of
the Company, to afford those individuals the opportunity to acquire a
proprietary interest in the Company and to enable the Company to enlist and
retain in its employment qualified personnel for the successful conduct of its
business. Officers, consultants and other employees of the Company and its
subsidiaries whom the administrators deem to have the potential to contribute to
the success of the Company shall be eligible to receive options under the
Nonqualified Plans.
The administrators of the Nonqualified Plans shall be either the Board of the
Company or a committee designated by the Board. The administrators have full
power to select, from among the officers, employees and consultants of the
Company eligible for options, the individuals to whom options will be granted,
and to determine the specific terms of each grant, subject to the provisions of
the Nonqualified Plans.
(continued)
16
19
PART III
ITEM 11. EXECUTIVE COMPENSATION (continued)
STOCK OPTION PLANS (continued)
1992 and 1994 Nonqualified Plans (continued)
The exercise price for each share covered by the Nonqualified Plans will be
determined by the administrators, but will not be less than 60% and 100% for the
1992 Nonqualified Plan and the 1994 Nonqualified Plan, respectively, of the fair
market value of a share of Common Stock of the Company on the date of grant of
such option. The term of each option will be fixed by the administrators of the
Nonqualified Plans. In addition, the administrators will determine the time or
times each option may be exercised. Options may be exercisable in installments,
and the exercisability of options may be accelerated by the administrators.
Options granted pursuant to the Nonqualified Plans are nontransferable by their
participants, other than by will or by the laws of descent or distribution, and
may be exercised during the lifetime of the participant only by the participant.
In the event of an optionee's termination of employment or consulting
relationship for any reason other than death or total and permanent disability,
an option may be thereafter exercised, to the extent it was exercisable at the
date of such termination, for such period of time as the administrator shall
determine at the time of grant, but only to the extent that the term of the
option has not expired.
Subject to the Nonqualified Plans' change in control provisions, in the event of
the sale of substantially all of the assets of the Company or the merger of the
Company with or into another corporation, each outstanding option shall be
assumed or substituted by such successor corporation or parent or subsidiary of
such successor corporation. The Nonqualified Plans also provide that in the
event of a change of control of the Company, certain acceleration and valuation
provisions shall apply, except as otherwise determined by the Board at its
discretion prior to the change of control.
In the event of any change in capitalization in the Company which results in an
increase or decrease in the number of outstanding shares of Common Stock without
receipt of consideration by the Company, an appropriate adjustment shall be made
in the number of shares which have been reserved for issuance under the
Nonqualified Plans and the price per share covered by each outstanding option.
17
20
PART III
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as far as is known to the Board of Directors or
management of the Company, as of September 16, 1996, the stock ownership of each
person known by the Company to be the beneficial owner of 5% or more of the
Company's Common Stock, all Directors individually, all Directors and Officers
as a group and by the individuals listed under the summary compensation table.
Directors and Officers
Name and Address Amounts and Nature
of Beneficial of Beneficial Percent
Title of Class Owner Ownership (1)(2) of Class (2)
- -------------- ----- ---------------- ------------
Common Stock Marie A. LeDoux (3) 1,077,301 17.10%
1185 Linda Vista Drive
San Marcos CA 92069
Common Stock Mark A. LeDoux (4) 510,317 8.10%
1185 Linda Vista Drive
San Marcos CA 92069
Common Stock William R. Kellas (5) 29,500 .47%
1185 Linda Vista Drive
San Marcos CA 92069
Common Stock William P. Spencer (6) 254,792 4.05%
1185 Linda Vista Drive
San Marcos CA 92069
Common Stock Lee G. Weldon (7) 41,880 .66%
1185 Linda Vista Drive
San Marcos CA 92069
Common Stock All Directors and Officers 1,913,790 30.38%
as a Group (5 persons)
(continued)
18
21
PART III
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(continued)
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, to the Company's knowledge, the persons
named in the table have sole voting and investment power with respect to all
shares of Common Stock.
(2) Shares of common stock which were not outstanding but which could be
acquired upon exercise of an option within 60 days from the date of this filing
are considered outstanding for the purpose of computing the percentage of
outstanding shares beneficially owned. However, such shares are not considered
to be outstanding for any other purpose.
(3) Includes 10,000 shares which Mrs. LeDoux has the right to acquire upon
exercise of options exercisable within 60 days of the date of this filing.
(4) Includes 800 shares of common stock held in the name of Mr. LeDoux's wife,
Julie LeDoux, and 8,000 shares of common stock held as custodian for a niece and
his children. Also includes 160,000 shares which Mr. LeDoux has the right to
acquire upon exercise of options exercisable within 60 days of the date of this
filing.
(5) Includes 1,500 shares of common stock held in the name of Mr. Kellas' wife
and 15,000 shares which Mr. Kellas has the right to acquire upon exercise of
options exercisable within 60 days of the date of this filing.
(6) Includes 2,400 shares of common stock held as custodian for Mr. Spencer's
children and 240,000 shares which he has the right to acquire upon exercise of
options exercisable within 60 days of the date of this filing.
(7) Includes 15,000 shares which Mr. Weldon has the right to acquire upon
exercise of options exercisable within 60 days of the date of this filing.
There is no arrangement known to the Company, the operation of which may at a
subsequent date, result in a change of control of the Company.
19
22
PART III
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In June 1996, the Company acquired a portion of a building occupied by certain
of its offices and production facilities which, up to that time, were being
leased from its two principal stockholders, Marie A. LeDoux and Mark A. LeDoux.
The lease provided for rent payable in the amount of $60,000 per year. Purchase
price of the building was $545,000 which, in the opinion of management and an
independent certified appraiser who evaluated the property in April 1996,
represented fair market value.
The Company entered into an agreement with the father-in-law and mother-in-law
of the President of the Company in December 1991, which provides commissions on
sales to a particular customer. The term of the agreement is ten years and will
expire in December 2001. The commission equals 5% of sales, with earnings capped
at $25,000 per calendar quarter. Amounts paid under this agreement were
$100,000, $100,000 and $95,864 for the years ending June 30, 1996, 1995 and
1994, respectively. There were no amounts owed under the agreement at June 30,
1996 or 1995.
Included in notes receivable are notes from the Company's President and
Executive Vice President. The balance of the notes, including accrued interest,
at June 30, 1996 was $70,119 and $84,606, respectively, and at June 30, 1995 was
$91,992 and $55,428, respectively. Additionally, during the year ended June 30,
1996, the Company made a noninterest bearing loan in the amount of $50,000 to
the Chairman of the Board, bringing the aggregate amount of such loans to
$100,000. Amounts owed on these loans, which are secured by proceeds from a life
insurance policy on the Chairman of the Board's life, were $100,000 and $50,000
at June 30, 1996 and 1995, respectively.
During fiscal year 1995, the Company's President paid $26,483 for certain
expenses on behalf of the Company. Also, the Company paid commissions during the
years ended June 30, 1996 and 1995 in the amounts of $6,916 and $10,800,
respectively, to the Chairman of the Board.
20
23
This page left blank intentionally.
21
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
consolidated financial statements are filed as part of this report.
2. FINANCIAL STATEMENT SCHEDULES
The financial statement schedule listed in the accompanying index to
consolidated financial statements is filed as part of this annual
report. Schedules not included have been omitted because they are not
applicable or the information required is included in the financial
statements and notes thereto.
(b) EXHIBITS
Exhibit 11 Re: Computation of Per Share Earnings
Exhibit 23 Re: Consent of KPMG Peat Marwick LLP
(c) REPORTS FORM 8-K
Not Applicable
22
25
NATURAL ALTERNATIVES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
JUNE 30, 1996
Independent Auditors' Report ............................................. 24
Consolidated Balance Sheets as of June 30, 1996 and 1995 ................. 25
Consolidated Statements of Earnings for the years ended June 30, 1996,
1995 and 1994 ........................................................ 27
Consolidated Statements of Stockholders' Equity for the years ended
June 30, 1996, 1995 and 1994 ......................................... 28
Consolidated Statements of Cash Flows for the years ended June 30, 1996,
1995 and 1994 ........................................................ 30
Notes to Consolidated Financial Statements ............................... 32
Schedule II - Valuation and Qualifying Accounts for the years ended
June 30, 1996, 1995 and 1994 ......................................... 45
23
26
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
NATURAL ALTERNATIVES INTERNATIONAL, INC.:
We have audited the accompanying consolidated financial statements of Natural
Alternatives International, Inc. and subsidiaries (the Company) as listed in the
accompanying index. In connection with our audits of the consolidated financial
statements, we have also audited the financial statement schedule as listed in
the accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Natural Alternatives
International, Inc. and subsidiaries as of June 30, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 1996, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG Peat Marwick LLP
San Diego, California
September 16, 1996
24
27
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND 1995
ASSETS
1996 1995
----------- -----------
Current Assets:
Cash and cash equivalents $ 1,887,427 $ 2,526,839
Accounts receivable - less allowance for doubtful
accounts of $319,000 in 1996 and $215,000
in 1995 (Notes E, F, and L) 5,026,204 5,590,165
Accounts receivable - related party (Note E and K) 932,490 --
Inventory (Notes B, E, and F) 6,399,592 5,229,585
Notes receivable - current portion (Note K) 157,155 183,255
Deferred income taxes (Note H) 425,000 326,000
Deposits 100,513 126,223
Other current assets 781,754 740,862
----------- -----------
Total Current Assets 15,710,135 14,722,929
----------- -----------
Property and equipment, net (Notes C, E, F, G, and K) 7,278,078 5,774,732
----------- -----------
Other Assets:
Investments (Note D) 74,890 50,254
Notes receivable, less current portion (Note K) 285,470 365,871
Other non-current assets, net 212,618 279,994
----------- -----------
Total Other Assets 572,978 696,119
----------- -----------
TOTAL ASSETS $23,561,191 $21,193,780
=========== ===========
(continued)
25
28
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS (continued)
JUNE 30, 1996 AND 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995
------------ ------------
Current Liabilities:
Accounts payable $ 3,658,897 $ 4,983,913
Current installments of long-term debt (Note F) 234,736 213,812
Current installments of capital lease
obligations (Note G) 22,860 20,786
Accrued compensation and employee benefits 280,340 528,704
Income taxes payable (Note H) 520,246 738,075
Customer deposits 2,606 30,407
------------ ------------
Total Current Liabilities 4,719,685 6,515,697
------------ ------------
Deferred income taxes (Note H) 357,000 285,000
Long-term debt, less current installments (Note F) 1,276,118 1,043,179
Capital lease obligations, less current
installments (Note G) 48,802 71,649
------------ ------------
Total Liabilities 6,401,605 7,915,525
------------ ------------
Stockholders' Equity (Note J):
Preferred stock; $.01 par value;
500,000 shares authorized; none
issued or outstanding -- --
Common stock; $.01 par value; 8,000,000
shares authorized; issued and outstanding
5,351,875 in 1996 and 5,257,875 in 1995 53,519 52,579
Additional paid-in capital 6,220,196 5,586,759
Retained earnings 10,901,093 7,678,776
Net unrealized (losses) on investments (Note D) (15,222) (39,859)
------------ ------------
Total Stockholders' Equity 17,159,586 13,278,255
------------ ------------
Commitments and contingencies (Notes K, L and M)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 23,561,191 $ 21,193,780
============ ============
See accompanying notes to consolidated financial statements.
26
29
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
1996 1995 1994
------------ ------------ ------------
Net sales $ 47,621,804 $ 37,388,254 $ 34,334,062
Cost of goods sold 35,182,059 27,554,623 24,678,182
------------ ------------ ------------
GROSS PROFIT 12,439,745 9,833,631 9,655,880
Selling, general &
administrative expenses 7,176,369 6,196,109 6,062,929
------------ ------------ ------------
INCOME FROM OPERATIONS 5,263,376 3,637,522 3,592,951
------------ ------------ ------------
Other income (expense):
Interest income 92,926 85,236 64,029
Interest expense (190,850) (123,107) (109,665)
Other, net (Note D) 41,865 (14,592) (377,948)
------------ ------------ ------------
(56,059) (52,463) (423,584)
------------ ------------ ------------
EARNINGS BEFORE
INCOME TAXES 5,207,317 3,585,059 3,169,367
Income taxes (Note H) 1,985,000 1,557,000 1,282,000
------------ ------------ ------------
NET EARNINGS $ 3,222,317 $ 2,028,059 $ 1,887,367
============ ============ ============
NET EARNINGS PER COMMON SHARE:
Primary and fully diluted $ .58 $ .39 $ .38
============ ============ ============
See accompanying notes to consolidated financial statements.
27
30
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
Net
Additional Unrealized
Common Stock Paid-In Retained Gains
Shares Amount Capital Earnings (Losses) Total
------ ------ ------- -------- -------- -----
Balance at
June 30, 1993 4,700,875 $ 47,009 $ 3,062,709 $ 3,763,350 $ -- $ 6,873,068
Issuance of common
stock pursuant
to Sonergy
purchase agreement 40,000 400 19,600 -- -- 20,000
Issuance of common
stock for warrants
exercised 507,500 5,075 2,465,924 -- -- 2,470,999
Issuance costs
for warrants -- -- (55,222) -- -- (55,222)
Issuance of common
stock upon exercise of
employee stock options 9,000 90 43,830 -- -- 43,920
Income tax benefit from
stock options exercised -- -- 20,000 -- -- 20,000
Net unrealized
(losses) on
investments -- -- -- -- (43,667) (43,667)
Net earnings -- -- -- 1,887,367 -- 1,887,367
--------- ------------ ------------ ------------ ----------- ------------
Balance at
June 30, 1994 5,257,375 $ 52,574 $ 5,556,841 $ 5,650,717 $ (43,667) $ 11,216,465
Issuance of common
stock upon exercise of
employee stock options 500 5 2,435 -- -- 2,440
Income tax benefit from
stock options exercised -- -- 1,000 -- -- 1,000
Net unrealized
gains on
investments -- -- -- -- 3,808 3,808
Other (Note K) -- -- 26,483 -- -- 26,483
Net earnings -- -- -- 2,028,059 -- 2,028,059
--------- ------------ ------------ ------------ ------------ ------------
Balance at
June 30, 1995 5,257,875 $ 52,579 $ 5,586,759 $ 7,678,776 $ (39,859) $ 13,278,255
--------- ------------ ------------ ------------ ------------ ------------
(continued)
28
31
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(continued)
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
Net
Additional Unrealized
Common Stock Paid-In Retained Gains
Shares Amount Capital Earnings (Losses) Total
------ ------ ------- -------- -------- -----
Balance at
June 30, 1995 5,257,875 $ 52,579 $ 5,586,759 $ 7,678,776 $ (39,859) $13,278,255
Issuance of common
stock upon exercise of
employee stock options 94,000 940 454,662 -- -- 455,602
Income tax benefit from
stock options exercised -- -- 178,775 -- -- 178,775
Net unrealized
gains on
investments -- -- -- -- 24,637 24,637
Net earnings -- -- -- 3,222,317 -- 3,222,317
--------- ----------- ----------- ----------- ----------- -----------
Balance at
June 30, 1996 5,351,875 $ 53,519 $ 6,220,196 $10,901,093 $ (15,222) $17,159,586
========= =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
29
32
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
1996 1995 1994
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 3,222,317 $ 2,028,059 $ 1,887,367
Adjustments to reconcile net earnings
to net cash provided by (used in)
operating activities:
Bad debt expense 391,162 112,000 92,000
Tax benefit on option exercise 178,775 1,000 20,000
Depreciation and amortization 1,069,460 1,051,489 817,477
Deferred income taxes (27,000) 99,000 (139,000)
Loss on disposal of assets 11,038 21,276 1,154
(Gain)Loss on investments (48,020) -- 402,285
Other (32,005) 26,483 --
Changes in operating assets and liabilities,
net of effect from a business acquisition:
(Increase) decrease in:
Accounts receivable (686,338) 166,545 (3,955,417)
Inventory (1,170,007) (1,764,671) (1,857,867)
Deposits 25,710 87,393 5,895
Prepaid taxes -- 257,917 --
Other assets (12,673) (81,900) (578,019)
Tax refund receivable -- -- (257,917)
(Decrease) increase in:
Accounts payable (1,325,016) 498,361 2,146,181
Accrued compensation and
employee benefits (248,364) 243,083 141,898
Income taxes payable (217,829) 738,075 (99,583)
Customer deposits (27,801) 17,249 (99,989)
----------- ----------- -----------
Net Cash Provided by (Used in)
Operating Activities 1,103,409 3,501,359 (1,473,535)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment 55,337 77,800 100,000
Proceeds from sale of investments 64,108 -- 251,672
Capital expenditures (2,064,524) (1,773,362) (2,040,682)
Capital expenditure-related party (545,000) -- --
Investments (16,088) (22,501) (96,239)
Issuance of notes receivable (60,605) (26,475) (76,227)
Repayment of notes receivable 135,259 112,256 93,009
----------- ----------- -----------
Net Cash (Used in) Investing Activities (2,431,513) (1,632,282) (1,768,467)
----------- ----------- -----------
(continued)
30
33
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
1996 1995 1994
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on lines of credit $ -- $ 650,000 $ 2,117,000
Payments on line of credit -- (500,000) (1,502,000)
Payments on long-term debt and capital
leases (311,910) (308,432) (135,235)
Offering costs -- -- (55,222)
Proceeds from long-term debt financing 545,000 -- --
Issuance of common stock 455,602 2,440 2,514,919
----------- ----------- -----------
Net Cash Provided by (Used in) Financing
Activities 688,692 (155,992) 2,939,462
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents (639,412) 1,713,085 (302,540)
Cash and Cash Equivalents at
Beginning of Year 2,526,839 813,754 1,116,294
----------- ----------- -----------
Cash and Cash Equivalents at
End of Year $ 1,887,427 $ 2,526,839 $ 813,754
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 190,850 $ 123,107 $ 109,665
Income Taxes 2,052,000 800,000 1,372,000
=========== =========== ===========
Disclosure of non-cash financing and investing activities:
Issuance of note receivable on disposal
of asset $ 8,000 $ -- $ --
Assets acquired through debt financing 43,143 97,807
Notes payable refinanced with new debt 565,000 -- --
Partial fulfillment of obligation
to issue shares of restricted stock
relating to Sonergy purchase agreement -- -- 20,000
Conversion of accounts receivable
to notes receivable -- 79,181 70,000
Conversion of other assets
to notes receivable 1,500 38,175 45,000
Conversion of line of credit
to notes payable -- 500,000 265,000
Conversion of inventory to notes receivable -- 80,108 --
Net unrealized gains (losses) on
investments 24,637 3,808 (43,667)
Write-off of notes receivable through
the allowance for doubtful accounts 62,790 13,000 79,717
=========== =========== ===========
See accompanying notes to consolidated financial statements.
31
34
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Natural Alternatives International, Inc., (the Company) manufactures vitamins,
micronutrients and related nutritional supplements, providing innovative
private-label products for specialized corporate, institutional and commercial
accounts worldwide. The Company operates as a single business segment.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries: Pro-Lean, Inc., (formerly Sonergy, Inc.),
CellLife International, Inc. and CellLife Pharmaceuticals International, Inc.
All significant intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
For purposes of the statements of cash flows, cash and cash equivalents include
highly liquid investments purchased with an original maturity of three months or
less.
Inventory
Inventory is recorded at the lower of cost (first-in, first-out) or market (net
realizable value). Such cost includes raw materials, labor and production
overhead.
Property and Equipment
Property and equipment is stated at cost. Property and equipment under capital
leases is recorded at the lower of fair market value or the present value of
future minimum lease payments. These leases are amortized using the
straight-line method over the shorter of the estimated useful life of the asset
or the lease term. Depreciation and amortization of property and equipment are
provided using the straight-line method over their estimated useful lives,
generally ranging from 5 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.
Investments
Effective June 30, 1994, the Company adopted, on a prospective basis, Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." Prior to this implementation, the Company
carried its investments at the lower of cost or market. The Company's
investments, which consist of equity securities, are classified as available for
sale and are carried at fair value, with unrealized gains and losses excluded
from earnings and reported in a separate component of stockholders' equity.
Adoption of this statement had no material effect on the Company's financial
statements.
(continued)
32
35
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Intangible Assets
Other non-current assets are composed of identifiable intangible assets
including a customer list. The assets are amortized on a straight-line basis
over five years. Accumulated amortization at June 30, 1996 and 1995 was $418,897
and $381,240, respectively.
Fair Value of Financial Instruments
Because of their short maturities, the carrying amounts for cash and cash
equivalents, accounts receivable, notes receivable, accounts payable, and
accrued compensation and employee benefits approximate fair value. The carrying
amounts for long-term debt approximate fair value as the interest rates and
terms are substantially similar to rates and terms which could be obtained
currently for similar instruments.
Revenue Recognition
Revenue is recognized when products are shipped and title has transferred.
Income Taxes
The Company accounts for income taxes using the asset and liability method in
accordance with Statement of Financial Accounting Standards No. 109 "Accounting
for Income Taxes." Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that the includes the enactment date.
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 financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
Net Earnings per Share
Primary earnings per share is computed based upon the weighted average number of
shares outstanding during the period plus the dilutive effects of common shares
contingently issuable from stock options and warrants. Fully diluted earnings
per share reflect additional dilution related to common stock equivalents due to
the use of the market price at the end of the period, when higher than the
average price for the period. Common stock options and common stock purchase
warrants are excluded from the computation of net earnings per share if their
effect is anti-dilutive.
The weighted average number of shares outstanding and common stock equivalents
are as follows:
1996 1995 1994
---- ---- ----
Primary and fully diluted 5,585,442 5,257,865 4,948,564
(continued)
33
36
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Concentrations of Credit Risk
Financial instruments which subject the Company to concentrations of credit risk
consist primarily of cash and accounts receivable. The Company places its cash
investments with high credit qualified financial institutions. Credit risk with
respect to receivables is concentrated with the Company's three largest
customers (see Note L). These three customers' receivable balances collectively
represent 54% and 55% of total accounts receivable at June 30, 1996 and 1995,
respectively. Concentrations of credit risk related to the remaining accounts
receivable balance are limited due to the large number of customers comprising
the Company's remaining customer base and their dispersion across many different
industries and geographies.
Reclassifications
Certain amounts in prior years' financial statements have been reclassified to
conform to the 1996 presentation.
B. INVENTORY
Inventory is comprised of the following at June 30:
1996 1995
---- ----
Raw materials $2,865,438 $2,419,083
Work in progress 2,911,778 2,240,173
Finished goods 622,376 570,329
---------- ----------
$6,399,592 $5,229,585
========== ==========
Labor and production overhead included in inventory as of June 30, 1996 and 1995
was $1,107,618 and $769,713, respectively.
C. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at June 30:
1996 1995
---- ----
Building and building improvements $ 3,296,008 $ 1,120,846
Machinery and equipment 6,139,145 4,928,968
Office equipment and furniture 1,845,083 1,488,710
Equipment under capital leases 516,362 516,362
Vehicles 30,922 187,596
Leasehold improvements 92,198 1,230,543
------------ ------------
Total property and equipment 11,919,718 9,473,025
Less accumulated depreciation
and amortization (4,641,640) (3,698,293)
------------ ------------
Property and equipment, net $ 7,278,078 $ 5,774,732
============ ============
(continued)
34
37
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
C. PROPERTY AND EQUIPMENT (continued)
At June 30, 1996 and 1995, accumulated depreciation and amortization includes
$452,343 and $427,896, respectively, of amortization of capitalized leases. In
connection with the acquisition of certain building suites (see Note K), the
cost of related leasehold improvements was reclassified from leasehold
improvements to building and building improvements.
D. INVESTMENTS
Investments consist of marketable securities. Securities held as of June 30,
1996, are considered "available for sale securities." Securities are valued at
$74,890 and $50,254 as of June 30, 1996 and 1995, respectively. The security
portfolio includes gross unrealized losses, net of tax, of $15,222 and $39,859
at June 30, 1996 and 1995, respectively.
During fiscal year 1995, the Company disposed of its investment in a start-up
operation in Mexico resulting in no gain or loss in fiscal 1995. The investment
was accounted for under the equity method through the third quarter of fiscal
year 1994. Due to the Company's decision to sell the investment, the investment
was written down to its estimated realizable value in fiscal 1994. The
write-down of $349,600 is included as an offset to other income.
E. LINE OF CREDIT AGREEMENTS
The Company has revolving lines of credit agreements permitting borrowings up to
$3,000,000, which are secured by the Company's receivables, inventory,
equipment, and vehicles and bear interest at the bank's prime rate, which was
8.25% at June 30, 1996. Advances against the revolving lines of credit cannot
exceed 70% of eligible receivables. These agreements contain financial covenants
concerning limitations on maintenance of debt, certain financial ratios and
other matters. Of the lines of credit, $1,000,000 expires on December 5, 1996
and $2,000,000 expires on December 5, 1997; management expects such lines to be
renewed in the normal course of business. There were no amounts outstanding
under these credit agreements as of June 30, 1996 and 1995, respectively.
F. LONG-TERM DEBT
Long-term debt consisted of the following as of June 30:
1996 1995
---- ----
Note payable to bank, secured by
building, interest at 8.25%, principal
and interest payments of $10,769
monthly, due 2011 $ 1,110,000 $ -0-
Note payable to bank, secured by UCC
filing on receivables, inventory,
equipment, and vehicles, interest at
bank's prime plus .75% (an effective
rate of 9.0% and 9.75% at June 30, 1996
and 1995, respectively), principal and
interest payments of $5,520 monthly; due
December 1997 88,360 154,600
(continued)
35
38
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F. LONG-TERM DEBT (continued)
1996 1995
---- ----
Note payable to bank, secured by UCC
filing on receivables, inventory,
equipment, and vehicles, interest at
bank's prime plus .75% (an effective
rate of 9.0% and 9.75% at June 30, 1996
and 1995, respectively), principal
payments of $10,417 monthly; due January
1999 $ 312,494 $ 437,498
Note payable to bank, secured by
building, interest at 7.0%, principal
and interest payments of $2,173 monthly;
paid in full May 1996 -0- 23,076
Notes payable to bank, secured by
vehicles, principal and interest payments
of $796 monthly; paid in full February
1996 -0- 11,474
Note payable to bank, secured by
building, interest at 7.0%, principal
and interest payments of $2,607 monthly;
paid in full June 1996 -0- 375,879
Note payable to bank, secured by
vehicle, interest at 4.75%, principal
and interest payments of $420 monthly;
paid in full February 1996 -0- 11,346
Note payable to bank, secured by
building, interest at 7.0%, principal
and interest payments of $1,848 monthly;
paid in full June 1996 -0- 243,118
----------- -------------
1,510,854 1,256,991
Less current installments (234,736) (213,812)
----------- -------------
Long-term debt - less current installments $ 1,276,118 $ 1,043,179
=========== =============
Aggregate amounts of long-term debt maturities as of June 30, 1996 are as follows:
1997 $ 234,736
1998 189,955
1999 108,987
2000 50,486
2001 54,812
Thereafter 871,878
----------
$1,510,854
==========
36
39
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
G. CAPITAL LEASE OBLIGATION
The Company leases certain equipment under capital leases which expire during
the next three years. The present value of the future minimum capital lease
payments as of June 30 are as follows:
1996 1995
---- ----
Capital lease payable to AT&T Credit
Corporation, secured by phone system,
interest at 13%, principal and interest in
monthly installments of $2,504 through
May 1999 $ 85,121 $ 115,164
Other capital lease 780 2,341
--------- ---------
85,901 117,505
Less amount representing interest (14,239) (25,070)
--------- ---------
Present value of net minimum lease payments 71,662 92,435
Less current installments (22,860) (20,786)
--------- ---------
Capital lease obligations - less current
installments $ 48,802 $ 71,649
========= =========
Future minimum annual lease payments under capital lease obligations at June 30,
1996 are as follows:
1997 $ 30,822
1998 30,043
1999 25,036
---------
Minimum lease payments $ 85,901
=========
37
40
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
H. INCOME TAXES
Income taxes consist of the following:
Year Ended June 30,
-------------------
1996 1995 1994
---- ---- ----
Current:
Federal $ 1,712,000 $ 1,129,000 $ 1,112,000
State 300,000 329,000 309,000
----------- ----------- -----------
2,012,000 1,458,000 1,421,000
----------- ----------- -----------
Deferred:
Federal (15,000) 66,000 (127,000)
State (12,000) 33,000 (12,000)
----------- ----------- -----------
(27,000) 99,000 (139,000)
----------- ----------- -----------
$ 1,985,000 $ 1,557,000 $ 1,282,000
=========== =========== ===========
The provision for deferred income taxes consists of the following:
Year Ended June 30,
-------------------
1996 1995 1994
---- ---- ----
Accelerated depreciation and
amortization for tax purposes $ 78,000 $ 54,000 $ 73,000
Increase in valuation allowance -- 34,000 --
Accrued compensation 108,000 (68,000) (40,000)
Inventory valuation reserve (202,000) -- --
Bad debt expense (41,000) (36,000) (2,000)
Accrued vacation expense (6,000) (26,000) --
Customer deposits 11,000 (6,000) 43,000
Writedown of investments -- 158,000 (168,000)
State income taxes 48,000 (34,000) (32,000)
Other, net (23,000) 23,000 (13,000)
--------- --------- ---------
$ (27,000) $ 99,000 $(139,000)
========= ========= =========
(continued)
38
41
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
H. INCOME TAXES (continued)
Net deferred tax assets and deferred liabilities as of June 30 are as follows:
1996 1995
---- ----
Deferred tax assets:
Accrued compensation $ -- $108,000
Allowance for doubtful accounts 127,000 86,000
Accrued vacation expense 39,000 33,000
Customer deposits 1,000 12,000
Investment loss carryforward 34,000 34,000
State income taxes 88,000 136,000
Allowance for inventory valuation 202,000 --
Other, net 3,000 --
-------- --------
Total gross deferred tax assets 494,000 409,000
Less valuation allowance 34,000 34,000
-------- --------
Net deferred tax assets 460,000 375,000
-------- --------
Deferred tax liabilities:
Accumulated depreciation and amortization 392,000 314,000
Other, net -- 20,000
-------- --------
Total gross deferred tax liabilities 392,000 334,000
-------- --------
Net deferred tax asset $ 68,000 $ 41,000
======== ========
The valuation allowance for deferred tax assets was $34,000 at June 30, 1996 and
1995. The net change in the valuation allowance for the year ended June 30, 1995
was an increase of $34,000 related to capital losses. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Management considers, among other things, the scheduled reversal of
deferred tax liabilities, projected future taxable income, and other planning
strategies. In making this assessment, management believes it more likely than
not that the Company will realize the benefit of the deferred tax asset at June
30, 1996.
During the year ended June 30, 1996, the Company reached a settlement with the
Internal Revenue Service relating to an examination of the Company's tax return
for the year ended June 30, 1991. The agreed amount of additional tax assessed,
and paid in July, 1996, was $22,959. The amount of related state income tax will
be approximately $7,500.
(continued)
39
42
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
H. INCOME TAXES (continued)
A reconciliation of income taxes computed by applying the statutory federal
income tax rate to earnings before income taxes is as follows:
Year Ended June 30,
---------------------
1996 1995 1994
---- ---- ----
Income taxes computed at
statutory federal income tax rate $1,770,000 $ 1,219,000 $ 1,078,000
State income taxes, net of
federal income tax benefit 190,000 224,000 195,000
Increase in valuation allowance -- 34,000 --
Adjustments for prior year tax
estimates -- 60,000 --
Expenses not deductible for
tax purposes:
Meals and entertainment 21,000 17,000 9,000
Officers' life insurance 1,000 5,000 1,000
Other 3,000 (2,000) (1,000)
---------- ----------- -----------
Income taxes as reported $1,985,000 $ 1,557,000 $ 1,282,000
========== =========== ===========
Effective tax rate 38.1% 43.3% 40.4%
========== =========== ===========
I. EMPLOYEE BENEFIT PLANS
The Company has a profit sharing plan pursuant to Section 401(k) of the Internal
Revenue Code, whereby participants may contribute a percentage of compensation,
but not in excess of the maximum allowed under the Code. All employees with
twelve months and at least one thousand hours of service during the twelve-month
period are eligible to participate in the plan. The Company may make
contributions at the discretion of its Board of Directors. The Company
contributed and expensed $100,161, $50,345 and $84,296 in 1996, 1995 and 1994,
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 paid for these benefits totaled $217,375, $194,087
and $163,003 for 1995, 1994 and 1993, respectively.
The Company does not currently provide any post-retirement or post-employment
benefits.
J. STOCKHOLDERS' EQUITY
In connection with the 1990 acquisition by Pro-Lean of DBA Laboratories, Inc.
(DBA), the sole stockholder of DBA received 80,000 shares of restricted stock of
the Company. During fiscal year 1992, 40,000 shares were issued and the
remaining 40,000 shares were issued in fiscal year 1994.
(continued)
40
43
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
J. STOCKHOLDERS' EQUITY (continued)
Effective February 6, 1992, the Company had a secondary offering of 350,000
units. On March 12, 1992, the Underwriter exercised the over-allotment option
consisting of 52,500 units, purchasing 75,000 shares of common stock from the
Company and 30,000 shares of common stock from two of the Company's directors.
Issuance of common stock pursuant to the secondary offering and exercise of the
over-allotment option generated net proceeds of $1,989,216 after deducting
underwriting discounts, commissions and offering costs of $301,419. Each unit
consisted of two shares of common stock and one common stock purchase warrant,
which were exercisable for a period of two years and entitled the holder to
purchase one share of common stock at $5.00 per share. No value was assigned to
the common stock purchase warrants at the date of issuance. Effective April 8,
1994, the Company registered the common stock purchase warrants. All warrants
were exercised by May 15, 1994, and 507,500 common shares were issued,
generating net proceeds of $2,415,777 after deducting costs of $55,222.
Effective June 5, 1992, the Company adopted the 1992 Incentive Stock Option Plan
and reserved a total of 200,000 common shares for issuance to 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 at the fair
market value price of $4.875 per share. Effective December 9, 1994, the
Shareholders approved an amendment to the Plan, increasing the number of common
shares that may be granted thereunder from 200,000 to 500,000, to enable
additional officers, directors, and employees to participate in the plan.
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 at the fair market value price of $4.875 per share.
Effective December 9, 1994, the Board of Directors approved the 1994
Nonqualified Stock Option Plan and reserved a total of 500,000 common shares for
issuance to officers, employees, and consultants of the Company. On January 24,
1995, 500,000 options were granted at the fair market value price of $4.625 per
share.
Information regarding the Company's stock option plans is summarized below:
1992 1992 1994
Incentive Nonqualified Nonqualified
Plan Plan Plan
---- ---- ----
Outstanding at June 30, 1993 -0- -0- -0-
Granted at $4.875 per share 200,000 250,000 -0-
Exercised 1,416 7,584 -0-
------- ------- -------
Outstanding at June 30, 1994 198,584 242,416 -0-
Granted at $4.625 per share -0- -0- 500,000
Exercised 222 278 -0-
------- ------- -------
Outstanding at June 30, 1995 198,362 242,138 500,000
Exercised 74,360 8,640 11,000
------- ------- -------
Outstanding at June 30, 1996 124,002 233,498 489,000
======= ======= =======
Exercisable at June 30, 1996 124,002 233,498 489,000
======= ======= =======
Available for grant at June 30, 1996 300,000 -0- -0-
======= ======= =======
On January 24, 1995, the Board of Directors granted 100,000 options with an
exercise price of $4.625 in exchange for consulting services and reserved
100,000 common shares. As of June 30, 1996, none of these options had been
exercised or canceled.
41
44
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
K. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Company leases part of its main facilities under leases which are classified
as noncancelable operating leases.
Minimum rental commitments (exclusive of property tax, insurance and
maintenance) under all noncancelable operating leases (with initial or remaining
lease terms in excess of one year) are due as follows:
1997 $ 77,071
1998 35,400
1999 25,750
2000 16,200
2001 9,450
---------
$ 163,871
=========
Rental expense totaled $193,340, $209,735, and $188,326 for the years ended June
30, 1996, 1995 and 1994, respectively. These amounts include rental charges,
pursuant to a lease agreement (the related party lease) with its two principal
stockholders, Marie A. LeDoux and Mark A. LeDoux, of $55,000 for the year ended
June 30, 1996 and $60,000 for each of the years ended June 30, 1995 and 1994.
Amounts paid under this agreement were $100,000, $75,000, and $20,000 for the
years ended June 30, 1996, 1995, and 1994 respectively. Amounts owed under the
agreement were $0 and $45,000 for the years ended June 30, 1996 and 1995,
respectively.
In June 1996, the Company acquired a portion of a building occupied by certain
of its offices and production facilities which, up to that time, were subject to
the related party lease. The lease provided for rent payable in the amount of
$60,000 per year. Purchase price of the building was $545,000 which, in the
opinion of management and an independent certified appraiser who evaluated the
property in April 1996, represented fair market value.
During 1996, the Company had sales of $1,084,290 to a company in which a key
employee and beneficial owner of 1% of the stock of the Company is the president
and part owner. The amount receivable from this company at June 30, 1996 was
$932,490.
The Company entered into an agreement with the father-in-law and mother-in-law
of the President of the Company in December, 1991, which provides commissions on
sales to a particular customer. The agreement will expire in December, 2001. The
commission equals 5% of sales, and is capped at $25,000 per calendar quarter,
effective January 1, 1993. Amounts paid under this agreement were $100,000,
$100,000, and $95,864 for the years ended June 30, 1996, 1995 and 1994,
respectively. There were no amounts owed under the agreement at June 30, 1996 or
1995.
During fiscal year 1993, the Company entered into an agreement which requires
future minimum royalty payments over the term of the contract which expires
December 31, 1996. The Company provided a bond in the amount of $500,000 as a
guarantee for these payments. Amounts paid under this agreement were $247,898
and $51,331 for the years ended June 30, 1996 and 1995, respectively. Amounts
owed under the agreement were $21,297 and $11,232 at June 30, 1996 and 1995,
respectively.
Included in notes receivable are notes from the Company's President and
Executive Vice President. The balance of the notes, including accrued interest,
was $70,119 and $84,606, respectively, as of June 30, 1996 and $91,992 and
$55,428, respectively, at June 30, 1995. Additionally, during the year ended
June 30, 1996, the Company made a noninterest bearing loan in the amount of
$50,000 to the Chairman of the Board, bringing the aggregate amount of such
loans to $100,000. Amounts owed on these loans, which are secured by proceeds
from a life insurance policy on the Chairman of the Board's life, were $100,000
and $50,000 at June 30, 1996 and 1995, respectively.
During fiscal year 1995, the Company's President paid $26,483 for certain
expenses on behalf of the Company. Also, the Company paid commissions during the
years ended June 30, 1996 and 1995 in the amounts of $6,916 and $10,800,
respectively, to the Chairman of the Board.
42
45
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
L. ECONOMIC DEPENDENCY
The Company had substantial sales to three customers for the year ended June 30,
1996, five customers for the year ended June 30, 1995 and four customers for the
year ended June 30, 1994. The loss of any of these customers would have an
adverse impact on the Company's revenues and earnings in the short-term. Sales
to these customers were as follows:
1996 1995 1994
---- ---- ----
Net % of Net Net % of Net Net % of Net
Industry Segment Revenue Revenue Revenue Revenue Revenue Revenue
- ---------------- ------- ------- ------- ------- ------- -------
Weight loss and nutrition $ 5,364,185 11% $ 3,889,860 10% $ 3,600,509 10%
Multi-level distribution 27,402,046 58% 29,354,837 78% 22,183,725 65%
----------- -- ----------- -- ----------- --
Total $32,766,231 69% $33,244,697 88% $25,784,234 75%
=========== == =========== == =========== ==
Accounts receivable from these customers totaled $3,247,063 and $4,452,422 at
June 30, 1996 and 1995, respectively.
M. CONTINGENCIES
General
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, based in part on the
advice of counsel, the ultimate disposition of these matters will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
43
46
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
N. QUARTERLY DATA (unaudited)
The following is a summary of unaudited quarterly data:
Year Ended June 30, 1996
------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
--------------- --------------- ---------------- -------------- ---------------
Net sales $ 10,353,801 $ 11,753,954 $ 12,782,137 $ 12,731,912 $ 47,621,804
Gross profit 2,694,215 2,900,538 3,452,817 3,392,175 12,439,745
Net earnings 588,890 735,396 1,005,402 892,629 3,222,317
Net earnings per
common share:
Primary and
fully diluted .11 .13 .18 .16 .58
Year Ended June 30, 1995
-------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
-------------- --------------- -------------- ------------- -------------
Net sales $ 5,873,747 $ 7,011,148 $ 10,287,529 $ 14,215,830 $ 37,388,254
Gross profit 1,704,210 1,910,601 2,722,446 3,496,374 9,833,631
Net earnings 110,173 241,757 649,082 1,027,047 2,028,059
Net earnings per common
share:
Primary and
fully diluted .02 .05 .12 .20 .39
44
47
SCHEDULE II
NATURAL ALTERNATIVES INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
Balance at Balance
beginning at end
of period Expense Deductions* of period
--------- ------- ----------- ---------
Allowance for doubtful
accounts:
Year ended June 30, 1996 $215,000 $245,000 $141,000 $319,000
-------- -------- -------- --------
Year ended June 30, 1995 $116,000 $112,000 $ 13,000 $215,000
-------- -------- -------- --------
Year ended June 30, 1994 $107,000 $ 92,000 $ 83,000 $116,000
-------- -------- -------- --------
*Accounts written off
See accompanying independent auditors' report.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NATURAL ALTERNATIVES INTERNATIONAL, INC.
(Registrant)
Date: September 25, 1996 By: Mark A. LeDoux
-----------------------------------------------
(Mark A. LeDoux, President and Chief Executive
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Marie A. LeDoux Chairperson of the Board, September 25, 1996
--------------- Secretary, and Director
(Marie A. LeDoux)
Mark A. LeDoux President, and Chief September 25, 1996
-------------- Executive Officer, and
(Mark A. LeDoux) Director
William P. Spencer Executive Vice President, September 25, 1996
------------------ and Chief Operating Officer,
(William P. Spencer) and Treasurer, and Chief
Financial Officer, and Chief
Accounting Officer, and
Director
William R. Kellas Director September 25, 1996
------------------
(William R. Kellas)
Lee G. Weldon Director September 25, 1996
------------------
(Lee G. Weldon)
47
50
EXHIBIT INDEX
Exhibit 11 Re: Computation of Per Share Earnings
Exhibit 23 Re: Consent of KPMG Peat Marwick LLP
48