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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, 1997 Commission file number 0-15701
NATURAL ALTERNATIVES INTERNATIONAL, INC.
Incorporated in Delaware 84-1007839
1185 Linda Vista Drive, San Marcos, California 92069 (I.R.S. Employer
(760) 744-7340 Identification No.)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock - $.01 par value Nasdaq Stock Market
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of 3,955,974 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
$30,659,000 based on the closing sale price as of September 23, 1997.
At September 23, 1997, the Registrant had outstanding 5,431,764 shares of Common
Stock, $.01 par value.
Documents Incorporated by Reference
NONE
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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. There are no
fees charged or revenues generated from these marketing related services, which
are generally provided before orders for product are obtained. Therefore, these
costs are treated as period costs.
In 1995, the Company expanded and enhanced its laboratory and quality control
capabilities. Management believes its technically advanced facilities are a
major factor in solidifying existing customer relationships and adding new
customers. Newly recognized standards for manufacturing nutritional products
should, in the opinion of management, assist the Company in serving its present
and future customers. The newly revised United States Pharmacopeia compendia
(USP) contain, for the first time, specifications for vitamin and mineral
supplements. This USP monograph has long been the basis for determining the
strength, quality, purity, packaging and labeling of drugs and related articles.
The Company believes it currently has the technical and quality control
expertise to conform to all aspects of USP specifications. Conformance with USP
specifications will allow the Company to use the USP designation on all products
manufactured for its customers, which have the USP designation.
During 1997, the Company expanded its product-delivery system mix with the
addition of a tablet manufacturing facility that nearly doubles the Company's
overall manufacturing capacity. Tablets and chewable wafers are more readily
accepted than capsules by consumers in overseas markets, such as Asia. The
Company's proprietary and sophisticated flavoring laboratory formulates chewable
wafers in a wide variety of tasty flavors.
The Company has several proprietary lines of products, which were sold by two of
its wholly owned subsidiaries, Millennium Health Products, Inc. (formerly
Pro-Lean, Inc. and before that Sonergy, Inc.), and CellLife International, Inc.
The operations of its two primary subsidiaries were transferred to the Company
during fiscal 1997. The Company believes such specialty proprietary products
typically generate higher profit margins and assist in product diversification
and less reliance on contract manufacturing.
RESEARCH AND DEVELOPMENT
The Company continuously produces pilot or sample runs of products to ensure
stability or efficacy and to determine ingredient interaction and prospective
customer acceptance. Research of this type, and the associated costs, are part
of the operating expenses incurred by the Company. Such research and development
has not been significant and is not expected to be significant in the future.
COMPETITION AND BUSINESS RISKS
The vitamin and nutritional supplement industry is highly competitive, and
competition is expected to increase in the future. Competition for the sale of
vitamins and supplements comes from many sources, including companies which sell
vitamins to supermarkets, large chain discount retailers, drug store chains and
independent drug stores, health food stores, pharmaceutical companies and others
which sell to wholesalers, mail order vendors and network marketing companies.
The Company does not believe it is possible to accurately estimate the number or
size of its many competitors since the vitamin industry is largely privately
held.
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PART I
ITEM 1. BUSINESS (continued)
The Company believes that competition among vitamin and supplement products is
based, among other things, on price, timely delivery, product quality, safety,
availability, product innovation and assistance in marketing and customer
service. The competitive position of the Company will also depend upon continued
acceptance of its hard gel capsules, its ability to attract and retain qualified
personnel, future governmental regulations affecting vitamins and nutritional
supplements, and publication of vitamin product safety and efficacy studies by
the government and authoritative health and medical authorities.
The Company's operations are subject to the risks normally associated with
manufacturing vitamins and nutritional products, including shortage of certain
raw materials and damage to property or injury to persons.
BACKLOG
The Company's backlog, believed to be firm as of September 22, 1997 was
$18,114,000. These compare to backlogs of $12,465,000 and $13,634,000 as of
September 16, 1996 and September 5, 1995, respectively. The Company expects that
all orders in the backlog at September 22, 1997 will be shipped during
calendar year 1997.
RAW MATERIALS
Raw materials used by the Company consist of nutrient powders, empty gelatin
capsules, and necessary components for packaging and distribution of finished
vitamin and nutritional supplement products. The nutrient powders and the empty
gelatin capsules are purchased from manufacturers in the United States,
including foreign-owned entities operating in the United States.
MAJOR CUSTOMERS
Nu Skin International, NSA International and Nutrilite Products (a division of
Amway Corporation) together represented 62% of the Company's sales for the year
ended June 30, 1997. Loss of any of these customers could have an adverse impact
on the Company's revenues and earnings until the Company could replace these
sales. If the Company was unable to replace the sales to any of these customers,
it would have a material adverse impact on the business and operations of the
Company. No other customer represented 10% or more of the Company's sales.
EMPLOYEES
The Company employs 110 individuals, with three employed in executive or other
professional positions, seven in the area of research, laboratory and quality
control, nine in sales and marketing, while the remaining employees are engaged
in production and administration. The Company has never experienced a work
stoppage, and none of its employees are currently represented by a union or any
other form of collective bargaining unit. The Company believes its relations
with its employees are excellent.
GOVERNMENT REGULATION
The processing, formulation, packaging, labeling and advertising of the
Company's products are subject to 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 states and localities in which the
Company's products are sold, including without limitation the California
Department of Health Services, Food and Drug branch. The FDA in particular
regulates the advertising, labeling
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PART I
ITEM 1. BUSINESS (continued)
and sales of vitamin and mineral supplements and may take regulatory action
concerning medical claims, misleading or untruthful advertising, and product
safety issues. While the Company is subject to the FDA's Good Manufacturing
Practices for foods, and complies with them as a quality control practice, it
also adheres to many of the FDA's more stringent standards for pharmaceutical
manufacturing.
ITEM 2. PROPERTIES
The Company's corporate and manufacturing facilities consist of approximately
54,000 square feet and are located in San Marcos, California. Of this space, the
Company owns approximately 36,000 square feet and leases the remaining space. In
June 1996, the Company acquired certain suites within a building occupied by
certain of its offices and production facilities which, up to that time, were
being leased from its two principal stockholders, Marie A. LeDoux and Mark A.
LeDoux. The lease provided for rent payable in the amount of $60,000 per year.
Purchase price of the building was $545,000 which, in the opinion of management
and an independent certified appraiser who evaluated the property in April 1996,
represented fair market value.
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
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On January 13, 1997, the Company's common stock began trading on the Nasdaq
National Market tier of The Nasdaq Stock Market under the Symbol: NAII. The
common stock of the Company had previously been traded on the American Stock
Exchange (AMEX) since November 17, 1992, under the stock symbol NAI. The table
below sets forth the high and low sales prices, which are derived from the
Monthly Market Statistics issued by the American Stock Exchange and the Summary
of Activity issued by The Nasdaq Stock Market for the respective periods.
High Low
----------- -----------
First Quarter Ended September 30, 1996 $10.375 $7.625
Second Quarter Ended December 31, 1996 $ 9.500 $7.125
Third Quarter Ended March 31, 1997 $10.500 $8.125
Fourth Quarter Ended June 30, 1997 $ 9.000 $6.875
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
As of June 30, 1997, 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
- --------------------------------------------------------------------------------
(NOT COVERED BY INDEPENDENT AUDITORS' REPORT)
YEAR ENDED JUNE 30
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
Net sales $49,444,221 $47,621,804 $37,388,254 $34,334,062 $19,431,664
Income from Operations $ 1,815,072 $ 5,263,376 $ 3,637,522 $ 3,592,951 $ 1,604,699
Net Earnings $ 1,119,920 $ 3,222,317 $ 2,028,059 $ 1,887,367 $ 965,543
Net Earnings Per
Common Share:
Primary and fully diluted $ 0.20 $ 0.58 $ 0.39 $ 0.38 $ 0.21
Current Assets $18,857,979 $15,710,135 $14,722,929 $11,883,140 $ 5,953,903
Total Assets $27,729,175 $23,561,191 $21,193,780 $17,514,511 $10,620,035
Long-Term Debt and
Capital Lease Obligations,
less current installments $ 1,123,898 $ 1,324,920 $ 1,114,828 $ 958,415 $ 819,528
Stockholders' Equity $18,699,487 $17,159,586 $13,278,255 $11,216,465 $ 6,873,068
- --------------------------------------------------------------------------------
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PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales increased 3.8% or $1.8 million to $49.4 million in fiscal 1997,
primarily due to increased sales to existing customers. The Company added
several new customers in the latter part of the year, however the sales to these
new customers were not significant in fiscal 1997.
Sales to international customers declined from $4.3 million in 1996 to $1.9
million in 1997. The decrease is the result of a major client restructuring its
European operations coupled with a declining demand for the same client's
products in Europe.
Income from operations decreased 65.5% to $1.8 million. This was due to a $2.0
million decline in gross profit and a $1.4 million increase in selling, general
and administrative expenses.
Gross profit margins were 21.1% and 26.1% in fiscal 1997 and 1996, respectively.
The decline in gross margins is due to several factors. Shifts in product sales
mix toward lower profit margin products, rising costs of certain raw materials,
and increased costs for subcontracted packaging were the major contributing
factors. To a lesser extent, the change in ownership of one of the Company's
customers resulted in a substantial write-off of packaging materials. In
addition, the Company wrote off raw materials that became obsolete because of
customer discontinuance of certain products.
Selling, general and administrative expenses increased as a percentage of sales
from 15.1% in 1996 to 17.4% in 1997. Selling, general and administrative
expenses increased to $8.6 million in fiscal 1997 from $7.2 million in 1996. The
increase in expenses was due to several factors: a specific provision for
doubtful accounts was made for the balance due from a related party customer;
the Company underwrote several clinical studies to show the efficacy of certain
customer products; marketing fixtures related to certain unprofitable products
were written off; and finally, the Company incurred startup expenses for its new
tablet manufacturing facility.
Other income (expense) amounted to net other income of approximately $25,000 in
fiscal 1997 compared to a net expense of approximately $56,000 in fiscal 1996.
The net increase was primarily the result of increased interest income on
investments.
Net earnings decreased 65.2% or $2.1 million to $1.1 million in fiscal 1997.
This decrease was due, primarily, to the reasons given above. The higher
effective income tax rate, from 38.1% in 1996 to 39.1% in 1997, is primarily the
result of a smaller investment credit applicable to California franchise taxes.
Net earnings per common share decreased 65.6% to $.20 per share in 1997 from
$.58 per share in 1996.
The Company's backlog position amounted to $18,114,000 as of September 22, 1997,
compared to $12,465,000 as of September 16, 1996. This increase is attributable
to successful customer expansion into foreign markets and increased orders from
existing customers.
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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 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 net other 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.
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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, 1997, the Company had working capital of $11,439,000 and revolving
lines of credit of $3,000,000. As of June 30, 1997, there were no borrowings
under these lines.
In 1997, net cash provided by operating activities was $3,802,000 compared to
$1,103,000 for 1996. This increase of $2,699,000 was due primarily to an
increase in accounts payable and a decrease in inventory that was offset by a
decrease in net earnings and an increase in accounts receivable. Current
maturities of long-term debt and capital leases amounted to $189,000 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, 1997. The lines of
credit expire on December 5, 1997; management expects such lines to be renewed
in the normal course of business.
Capital expenditures for 1997 amounted to $2,236,000 primarily in connection
with construction of a new tablet facility and the acquisition of related
high-speed tablet compression equipment 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 1998,
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 1998 and borrowings under the Company's lines of
credit with its bank.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). SFAS 128 supercedes Accounting Principles Board Opinion No. 15, "Earnings
Per Share" ("APB 15") and specifies the computation, presentation, and
disclosure requirements of earnings per share ("EPS"). SFAS 128 replaces
"primary" and "fully diluted" EPS under APB 15 with "basic" and "diluted" EPS.
Unlike primary EPS, basic EPS excludes the dilutive effects of options, warrants
and other convertible securities. Dilutive EPS reflects the potential dilution
of securities that could share in the earnings of an entity, similar to fully
diluted EPS. SFAS 128 is effective for years ending after December 15, 1997. The
Company does not expect that the adoption of this statement will have a material
impact on the Company's results of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130") and No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 130
establishes standards for the reporting and display of comprehensive income and
its components in the financial statements. SFAS 131 establishes standards for
the manner in which public business enterprises report information about
operating segments and also establishes standards for related disclosures about
products and services, geographic areas, and major customers. These statements
are effective for years beginning after December 15, 1997. The Company does not
expect that the adoption of these statements will have a material impact on the
Company's financial position or results of operations.
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PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data as required by this item are set
forth on pages 24 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, 1997 Election Family Relationship
- ----------------- ------------- -------- -------------------
Mark A. LeDoux 43 1986 Son to Chairperson of the
Chief Executive Officer, Director Board, Marie A. LeDoux
William P. Spencer 44 1986 None
President, Treasurer, Chief Operating
Officer, Chief Financial Officer,
Chief Accounting
Officer and Director
Marie A. LeDoux 80 1986 Mother to Chief Executive Officer,
Secretary, Chairperson of the Board Mark A. LeDoux
William R. Kellas 46 1988 None
Director
Lee G. Weldon 58 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 and
Chief Executive Officer of the Company since the August 1986 merger of the
predecessor corporation into the Company, which continued the business and
operations of Natural Alternatives, Inc. From August 1986 to December 1996, he
also served as President of the Company. From 1976 to 1980, Mr. LeDoux held the
position of Executive Vice President and Chief Operating Officer of Kovac
Laboratories, a company, which was engaged in the business of manufacturing
nutritional supplements. He attended the University of Oklahoma and graduated
Cum Laude with a Bachelor of Arts in Letters in 1975. Mr. LeDoux graduated from
Western State University, College of Law in 1979, with a Juris Doctorate.
WILLIAM P. SPENCER has been a director, Chief Operating Officer and Chief
Financial Officer of the Company since August 1986. He also served as Executive
Vice President until December 1996 when he became President of the Company.
Prior to joining the Company, he was with San Diego Trust and Savings Bank for
ten years, the last four as Vice President. Mr. Spencer received a Bachelor of
Science in Finance in 1974, and a Masters in Business Administration, also in
the area of Finance, in 1979 from San Diego State University.
(continued)
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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-nine years of experience in the area of nutrition. In 1978, Mrs.
LeDoux was awarded an Honorary Fellowship in the International Academy of
Preventive Medicine. In 1981, she received an Honorary Ph.D. in Humanities from
the Heritage Institute. Marie A. LeDoux is the mother of Mark A. LeDoux. For the
last eighteen years, Mrs. LeDoux has been the President of Play N' Talk
International, a company which is in the business of preparing instructional
materials for children's reading programs.
WILLIAM R. KELLAS, PH.D. became a director of the Company in October 1987. Mr.
Kellas graduated from the University of Southern California earning a Bachelor
of Science in Business with a Minor in Physics. He earned his Ph.D. in Health
Sciences from the Doctors University of Natural Health Sciences in 1985. Dr.
Kellas also graduated from Harvard University's Financial and Management
Program. From 1974 to 1984, Dr. Kellas was employed by IBM as the firm's Western
Regional Marketing Manager. From 1984 to 1985, Dr. Kellas was a District Manager
for Wang Laboratories. In 1985, Dr. Kellas founded Comprehensive Health Centers,
a medical clinic offering integrated medical, dental, chiropractic, and natural
therapeutic services. In addition, Dr. Kellas is the President of Professional
Preference, a biochemical firm that sells computerized regimens of protocols
that are designed to regenerate an individual's immune system and fight related
degenerative diseases.
LEE G. WELDON has been a director of the Company since June of 1992. He was the
Chairman and Chief Executive Officer of Kal Healthway, Inc., a food supplement
distributor, until it was acquired by another company during the past year. In
1963, Mr. Weldon graduated from UCLA and obtained a Bachelor of Science in
Business Administration. In 1982, Mr. Weldon became a member of Young
President's Organization (YPO), and since 1990 he has been a graduate member of
YPO.
BOARD MEMBERS
Members of the Board of Directors are elected in three classes (Class I, Class
II, and Class III) to serve initially until the 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.
(continued)
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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,
1997, that its officers and directors complied with the filing requirements
under Section 16(a).
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND OTHER COMPENSATION
The following table sets forth compensation for services rendered in all
capacities to the Company during the years ended June 30, by each of the
executive officers.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
----------------------------------------- -------------
Securities
Underlying All Other
Options/SARs Compensation
Name and Principal Position Year Salary Bonus Other(1) (#) (2)
- --------------------------- ---- ------ ----- -------- ------------- ------------
Mark A. LeDoux, Chief
Executive Officer and Director 1997 $201,579 $50,345 $28,422 0 $18,703
1996 $213,520 $45,300 $8,592 0 $21,987
1995 $172,942 $101,203 $11,502 100,000 $14,961
William P. Spencer,
President, Chief
Financial Officer, and
Director 1997 $178,830 $72,304 $166,178 0 $37,438
1996 $169,275 $40,300 $113,656 0 $35,005
1995 $168,058 $83,854 $543 125,000 $35,538
(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-1997
Gain from exercise and sale of stock options $ 0 $ 92,799
Personal Transportation 18,600 13,800
Other Personal Expenses 9,822 59,579
------- --------
Totals $28,422 $166,178
------- --------
Other Annual Compensation-1996
Gain from exercise and sale of stock options 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
------- --------
All Other Compensation-1997
401(k) Employer Contributions $ 5,550 $ 6,698
Life Insurance Premiums 1,920 13,990
Medical, Dental and Vision 10,233 15,750
Board of Director Meetings 1,000 1,000
------- --------
Totals $18,703 $ 37,438
------- --------
All Other Compensation-1996
401(k) Employer Contributions $ 8,759 $ 10,974
Life Insurance Premiums 1,819 13,998
Medical, Dental and Vision 9,909 8,533
Board of Director Meetings 1,500 1,500
------- --------
Totals $21,987 $ 35,005
------- --------
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
------- --------
(continued)
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PART III
ITEM 11. EXECUTIVE COMPENSATION (continued)
OPTION GRANTS
There were no options granted in the year ended June 30, 1997.
OPTION EXERCISES AND HOLDINGS
The following table sets forth information for the year ended June 30, 1997,
concerning option exercises and option holdings under the 1992 Incentive Stock
Option Plan, the 1992 Nonqualified Stock Option Plan, and the 1994 Nonqualified
Stock Option Plan with respect to the Company's executive officers:
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
Value
RealizedMarket
Price at Number of Unexercised Value of Unexercised In-The
Shares Exercise less Options/SAR's at Fiscal Money Options/SAR's at
Acquired Exercise Price Year-End(#) Fiscal Year End(1)
-------- -------------- ---------------------------- ----------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ------------ -------------
1992 Plans-
Mark A. LeDoux 0 $0 60,000 0 $165,000 $0
William P. Spencer 20,000 $92,799 95,000 0 $261,250 $0
1994 Plan-
Mark A. LeDoux 0 $0 100,000 0 $300,000 $0
William P. Spencer 0 $0 125,000 0 $375,000 $0
(1) The closing price of the Company's common stock at June 30, 1997, as quoted
on the Nasdaq Exchange, was $7.625.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Company's Compensation Committee for fiscal 1997 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)
15
16
PART III
ITEM 11. EXECUTIVE COMPENSATION (continued)
EMPLOYMENT AGREEMENTS
There were no employment agreements in effect at June 30, 1997.
BONUS PLAN
There were no bonus plans in effect at June 30, 1997.
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 $114,206,
$101,161, and $50,345 in 1997, 1996 and 1995, respectively.
STOCK OPTION PLANS
The Company maintains three stock option plans: the 1992 Incentive Stock Option
Plan (Incentive Plan) and the 1992 Nonqualified Stock Option Plan (1992
Nonqualified Plan), both of which were approved by the shareholders of the
Company at its Annual Meeting of Shareholders on June 5, 1992, and the 1994
Nonqualified Stock Option Plan (1994 Nonqualified Plan) which was approved by
the Board of Directors on December 9, 1994, and by the shareholders of the
Company at its Annual Meeting of Shareholders on May 10, 1996. The Incentive
Plan provides for the granting of "incentive stock options" as described in
Section 422 of the Internal Revenue Code (Code). The 1992 and 1994 Nonqualified
Plans provide for the granting of nonqualified stock options which are not
intended to qualify under any provision of the Code. On September 9, 1993, all
options then authorized under the Incentive Plan and 1992 Nonqualified Plan were
granted 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)
16
17
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.
(continued)
17
18
PART III
ITEM 11. EXECUTIVE COMPENSATION (continued)
STOCK OPTION PLANS (continued)
1992 and 1994 Nonqualified Plans(continued)
The administrators of the Nonqualified Plans shall be either the Board of the
Company or a committee designated by the Board. The administrators have full
power to select, from among the officers, employees and consultants of the
Company eligible for options, the individuals to whom options will be granted,
and to determine the specific terms of each grant, subject to the provisions of
the Nonqualified Plans.
The exercise price for each share covered by the Nonqualified Plans will be
determined by the administrators, but will not be less than 60% and 100% for the
1992 Nonqualified Plan and the 1994 Nonqualified Plan, respectively, of the fair
market value of a share of Common Stock of the Company on the date of grant of
such option. The term of each option will be fixed by the administrators of the
Nonqualified Plans. In addition, the administrators will determine the time or
times each option may be exercised. Options may be exercisable in installments,
and the exercisability of options may be accelerated by the administrators.
Options granted pursuant to the Nonqualified Plans are nontransferable by their
participants, other than by will or by the laws of descent or distribution, and
may be exercised during the lifetime of the participant only by the participant.
In the event of an optionee's termination of employment or consulting
relationship for any reason other than death or total and permanent disability,
an option may be thereafter exercised, to the extent it was exercisable at the
date of such termination, for such period of time as the administrator shall
determine at the time of grant, but only to the extent that the term of the
option has not expired.
Subject to the Nonqualified Plans' change in control provisions, in the event of
the sale of substantially all of the assets of the Company or the merger of the
Company with or into another corporation, each outstanding option shall be
assumed or substituted by such successor corporation or parent or subsidiary of
such successor corporation. The Nonqualified Plans also provide that in the
event of a change of control of the Company, certain acceleration and valuation
provisions shall apply, except as otherwise determined by the Board at its
discretion prior to the change of control.
In the event of any change in capitalization in the Company which results in an
increase or decrease in the number of outstanding shares of Common Stock without
receipt of consideration by the Company, an appropriate adjustment shall be made
in the number of shares which have been reserved for issuance under the
Nonqualified Plans and the price per share covered by each outstanding option.
DEFINED BENEFIT PENSION PLAN
Effective January 1, 1997, the Company adopted a defined benefit pension plan
(the "Plan") covering substantially all of its employees. The benefits are based
on years of service and the employee's compensation during the five years before
retirement. The Company will make annual contributions to the Plan equal to the
maximum amount that can be deducted for income tax purposes. For the six months
ended June 30, 1997, the estimated current service cost (normal cost) and the
amortized portion of the unfunded estimated accrued liability for prior service
cost, using a 30-year funding period amounted to $158,560. This amount has been
accrued in the current period.
18
19
PART III
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as far as is known to the Board of Directors or
management of the Company, as of September 24, 1997, 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 16.98%
1185 Linda Vista Drive
San Marcos CA 92069
Common Stock Mark A. LeDoux (4) 495,317 7.81%
1185 Linda Vista Drive
San Marcos CA 92069
Common Stock William R. Kellas (5) 29,500 .46%
1185 Linda Vista Drive
San Marcos CA 92069
Common Stock William P. Spencer (6) 234,792 3.70%
1185 Linda Vista Drive
San Marcos CA 92069
Common Stock Lee G. Weldon 43,880 .69%
1185 Linda Vista Drive
San Marcos CA 92069
Common Stock All Directors and Officers as a 1,880,790 29.64%
Group (5 persons)
(continued)
19
20
PART III
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT (continued)
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, to the Company's knowledge, the persons
named in the table have sole voting and investment power with respect to all
shares of Common Stock.
(2) Shares of common stock which were not outstanding but which could be
acquired upon exercise of an option within 60 days from the date of this filing
are considered outstanding for the purpose of computing the percentage of
outstanding shares beneficially owned. However, such shares are not considered
to be outstanding for any other purpose.
(3) Includes 10,000 shares, which Mrs. LeDoux has the right to acquire upon
exercise of options exercisable within 60 days of the date of this filing.
(4) Includes 800 shares of common stock held in the name of Mr. LeDoux's wife,
Julie LeDoux, and 8,000 shares of common stock held as custodian for his
children and a niece. Also includes 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 220,000 shares, which he has the right to acquire upon exercise of
options exercisable within 60 days of the date of this filing.
There is no arrangement known to the Company, the operation of which may at a
subsequent date, result in a change of control of the Company.
20
21
PART III
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In June 1996, the Company acquired a portion of a building occupied by certain
of its offices and production facilities which, up to that time, were being
leased from its two principal stockholders, Marie A. LeDoux and Mark A. LeDoux.
The lease provided for rent payable in the amount of $60,000 per year. The
purchase price of the building was $545,000 which, in the opinion of management
and an independent certified appraiser who evaluated the property in April 1996,
represented fair market value.
The Company entered into an agreement with the father-in-law and mother-in-law
of the Chief Executive Officer of the Company in December 1991, which provides
commissions on sales to a particular customer. The term of the agreement is ten
years and will expire in December 2001. The commission equals 5% of sales, with
earnings capped at $25,000 per calendar quarter. Amounts paid under this
agreement were $100,000 for each of the years ending June 30, 1997, 1996 and
1995. There were no amounts owed under the agreement at June 30, 1997 or 1996.
Included in notes receivable are notes from the Company's Chief Executive
Officer and President. The balance of the notes, including accrued interest, at
June 30, 1997 was $74,444 and $89,824, respectively, and at June 30, 1996 was
$70,119 and $84,606, respectively.
Additionally, during the year ended June 30, 1997, the Company made
noninterest-bearing loans to the Chairman of the Board and the President in the
amount of $50,000 and $13,802, respectively, bringing the aggregate amount of
such loans to $219,012. Amounts owed on these loans, which are secured by
proceeds from life insurance policies on their respective lives, were $150,000
and $100,000 for the Chairman of the Board and $69,012 and $55,210 for the
President at June 30, 1997 and 1996, respectively.
During fiscal year 1995, the Company's Chairman of the Board 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.
21
22
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22
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The financial statements listed in the accompanying index to consolidated
financial statements are filed as part of this report.
2. FINANCIAL STATEMENT SCHEDULES
The financial statement schedule listed in the accompanying index to the
consolidated financial statements is filed as part of this annual report.
Schedules not included have been omitted because they are not applicable or the
information required is included in the financial statements and notes thereto.
(b) EXHIBITS
Exhibit 11 Re: Computation of Per Share Earnings
Exhibit 23 Re: Consent of KPMG Peat Marwick LLP
(c) REPORTS FORM 8-K
Not Applicable
23
24
NATURAL ALTERNATIVES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
JUNE 30, 1997
Independent Auditors' Report................................................ 25
Consolidated Balance Sheets as of June 30, 1997
and 1996.................................................................... 26
Consolidated Statements of Earnings for the years ended
June 30, 1997, 1996 and 1995................................................ 28
Consolidated Statements of Stockholders' Equity for the
years ended June 30, 1997, 1996 and 1995.................................... 29
Consolidated Statements of Cash Flows for the years
ended June 30, 1997, 1996 and 1995.......................................... 30
Notes to Consolidated Financial Statements.................................. 32
Schedule II - Valuation and Qualifying Accounts for the
years ended June 30, 1997, 1996 and 1995.................................... 46
24
25
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
NATURAL ALTERNATIVES INTERNATIONAL, INC.:
We have audited the consolidated financial statements of Natural Alternatives
International, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Natural Alternatives
International, Inc. and subsidiaries as of June 30, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 1997, 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 18, 1997
25
26
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1996
ASSETS
1997 1996
----------- -----------
Current Assets:
Cash and cash equivalents $ 3,469,739 $ 1,887,427
Accounts receivable - less allowance for doubtful
accounts of $231,000 in 1997 and $319,000 in 1996
(Notes E, F, and L) 6,990,121 5,026,204
Accounts receivable, related party - less allowance
for doubtful accounts of $775,000 in 1997 and $0 in
1996 (Note E and K) -- 932,490
Inventory (Notes B, E, and F) 5,690,850 6,399,592
Tax refund receivable 842,209 --
Notes receivable - current portion (Note K) 235,613 157,155
Deferred income taxes (Note H) 851,000 425,000
Deposits 322,269 100,513
Other current assets 456,178 781,754
----------- -----------
Total Current Assets 18,857,979 15,710,135
----------- -----------
Property and equipment, net (Notes C, E, F, G, and K) 8,259,705 7,278,078
----------- -----------
Other Assets:
Investments (Note D) 58,862 74,890
Notes receivable, less current portion (Note K) 261,697 285,470
Other noncurrent assets, net 290,932 212,618
----------- -----------
Total Other Assets 611,491 572,978
----------- -----------
TOTAL ASSETS $27,729,175 $23,561,191
=========== ===========
(continued)
26
27
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS (continued)
JUNE 30, 1997 AND 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
------------ ------------
Current Liabilities:
Accounts payable $ 6,907,998 $ 3,658,897
Current installments of long-term debt (Note F) 164,266 234,736
Current installments of capital lease obligations
(Note G) 25,189 22,860
Accrued compensation and employee benefits 321,337 280,340
Income taxes payable (Note H) -- 520,246
Customer deposits -- 2,606
------------ ------------
Total Current Liabilities 7,418,790 4,719,685
Deferred income taxes (Note H) 487,000 357,000
Long-term debt, less current installments (Note F) 1,100,285 1,276,118
Capital lease obligations, less current installments
Note (G) 23,613 48,802
------------ ------------
Total Liabilities 9,029,688 6,401,605
------------ ------------
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 5,429,764 in
1997 and 5,351,875 in 1996 54,298 53,519
Additional paid-in capital 6,675,426 6,220,196
Retained earnings 12,021,013 10,901,093
Net unrealized losses on investments (Note D) (51,250) (15,222)
------------ ------------
Total Stockholders' Equity 18,699,487 17,159,586
------------ ------------
Commitments and contingencies (Notes K, L and M)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 27,729,175 $ 23,561,191
============ ============
See accompanying notes to consolidated financial statements.
27
28
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
1997 1996 1995
------------ ------------ ------------
Net sales $ 49,444,221 $ 47,621,804 $ 37,388,254
Cost of goods sold 39,019,224 35,182,059 27,554,623
------------ ------------ ------------
GROSS PROFIT 10,424,997 12,439,745 9,833,631
Selling, general &
administrative expenses 8,609,925 7,176,369 6,196,109
------------ ------------ ------------
INCOME FROM OPERATIONS 1,815,072 5,263,376 3,637,522
------------ ------------ ------------
Other income (expense):
Interest income 163,368 92,926 85,236
Interest expense (147,373) (190,850) (123,107)
Other, net 8,853 41,865 (14,592)
------------ ------------ ------------
24,848 (56,059) (52,463)
------------ ------------ ------------
EARNINGS BEFORE
INCOME TAXES 1,839,920 5,207,317 3,585,059
Income taxes (Note H) 720,000 1,985,000 1,557,000
------------ ------------ ------------
NET EARNINGS $ 1,119,920 $ 3,222,317 $ 2,028,059
============ ============ ============
NET EARNINGS PER COMMON SHARE:
Primary and fully diluted $ 0.20 $ 0.58 $ 0.39
============ ============ ============
See accompanying notes to consolidated financial statements.
28
29
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
Net
Unrealized
Common Stock Additional Gains
------------------------- Paid-in Retained (Losses) on
Shares Amount Capital Earnings Investments Total
---------- ------------ ------------ ------------ ------------ ------------
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
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
Issuance of common stock upon
exercise of employee stock options 77,889 779 369,630 -- -- 370,409
Income tax benefit from stock options
exercised -- -- 85,600 -- -- 85,600
Net unrealized gains on investments -- -- -- -- (36,028) (36,028)
Net earnings -- -- -- 1,119,920 -- 1,119,920
---------- ------------ ------------ ------------ ------------ ------------
Balance at June 30, 1997 5,429,764 $ 54,298 $ 6,675,426 $ 12,021,013 ($51,250) $ 18,699,487
========== ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
29
30
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
1997 1996 1995
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,119,920 $ 3,222,317 $ 2,028,059
Adjustments to reconcile net
earnings to net cash provided by
operating activities:
Bad debt expense 725,000 391,162 112,000
Tax benefit on option exercise 85,600 178,775 1,000
Depreciation and amortization 1,276,355 1,069,460 1,051,489
Deferred income taxes (296,000) (27,000) 99,000
Loss on disposal of assets 3,601 11,038 21,276
Gain on investments -- (48,020) --
Other (18,105) (32,005) 26,483
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (1,747,544) (686,338) 166,545
Inventory 708,742 (1,170,007) (1,764,671)
Deposits (221,756) 25,710 87,393
Tax refund receivable (842,209) -- 257,917
Other assets 241,028 (12,673) (81,900)
(Decrease) increase in:
Accounts payable 3,249,101 (1,325,016) 498,361
Accrued compensation and employee benefits 40,997 (248,364) 243,083
Income taxes payable (520,246) (217,829) 738,075
Customer deposits (2,606) (27,801) 17,249
----------- ----------- -----------
Net Cash Provided by Operating Activities 3,801,878 1,103,409 3,501,359
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 10,000 55,337 77,800
Proceeds from sale of investments -- 64,108 --
Capital expenditures (2,236,165) (2,064,524) (1,773,362)
Capital expenditure-related party -- (545,000)
Investment purchases (20,000) (16,088) (22,501)
Issuance of notes receivable (183,909) (60,605) (26,475)
Repayment of notes receivable 109,262 135,259 112,256
----------- ----------- -----------
Net Cash Used in Investing Activities (2,320,812) (2,431,513) (1,632,282)
----------- ----------- -----------
(continued)
30
31
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
1997 1996 1995
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on lines of credit $ 443,959 $ -- $ 650,000
Payments on line of credit (443,959) -- (500,000)
Payments on long-term debt and
capital leases (269,163) (311,910) (308,432)
Proceeds from long-term debt financing -- 545,000 --
Issuance of common stock 370,409 455,602 2,440
----------- ----------- -----------
Net Cash Provided by (Used in) Financing Activities 101,246 688,692 (155,992)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 1,582,312 (639,412) 1,713,085
Cash and Cash Equivalents at Beginning of Year 1,887,427 2,526,839 813,754
----------- ----------- -----------
Cash and Cash Equivalents at End of Year $ 3,469,739 $ 1,887,427 $ 2,526,839
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 147,373 $ 190,850 $ 123,107
Income Taxes 2,289,959 2,052,000 800,000
=========== =========== ===========
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
Notes payable refinanced with new debt -- 565,000 --
Conversion of accounts receivable to notes receivable -- -- 79,181
Conversion of other assets to notes receivable -- 1,500 38,175
Conversion of line of credit to notes payable -- -- 500,000
Conversion of inventory to notes receivable -- -- 80,108
Net unrealized gains (losses) on investments (36,028) 24,637 3,808
Write-off of notes receivable through the allowance
for doubtful accounts 15,504 62,790 13,000
=========== =========== ===========
See accompanying notes to consolidated financial statements.
31
32
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Natural Alternatives International, Inc., (the Company) manufactures vitamins,
micronutrients and related nutritional supplements and provides innovative
private-label products for specialized corporate, institutional and commercial
accounts worldwide. The Company operates as a single business segment.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries: Millennium Health International, Inc. (formerly
Pro-Lean, Inc. and prior to that Sonergy, Inc.), CellLife International, Inc.
and CellLife Pharmaceuticals International, Inc., all of which had been
administered and operated out of the Company's facilities. During fiscal 1997,
the assets and liabilities of each of the subsidiaries were transferred to the
Company and their operations were assumed by the Company. All significant
intercompany accounts and transactions through the date of transfer have been
eliminated.
Cash and Cash Equivalents
For purposes of the statements of cash flows, cash and cash equivalents include
highly liquid investments purchased with an original maturity of three months or
less.
Inventory
Inventory is recorded at the lower of cost (first-in, first-out) or market (net
realizable value). Such costs include raw materials, labor and production
overhead.
Property and Equipment
Property and equipment are stated at cost. Property and equipment under capital
leases are recorded at the lower of fair market value or the present value of
future minimum lease payments. 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 3 to 39 years. Leasehold improvements are amortized using
the straight-line method over the shorter of the life of the improvement or the
remaining term of the lease.
Impairment of Long-Lived Assets
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
July 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of the Statement did not have a material impact on the Company's
financial position or results of operations.
(continued)
32
33
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Investments
Effective July 1, 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, 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 as a separate component of stockholders' equity. Adoption of this
statement had no material effect on the Company's consolidated financial
statements.
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, 1997 and 1996 was $447,116
and $418,897, respectively.
Revenue Recognition
Revenue is recognized when products are shipped and title has transferred.
Marketing Costs
In order to attract and retain its customer base, the Company provides a wide
range of marketing services to its customers. The Company does not generate fees
or revenues from these services and the related costs are expensed as incurred.
Income Taxes
The Company accounts for income taxes using the asset and liability method in
accordance with Statement of Financial Accounting Standards No. 109 "Accounting
for Income Taxes." Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Stock Option Plans
Prior to July 1, 1996, the Company accounted for its stock option plans in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
July 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net earnings and pro
forma net earnings per share disclosures for employee stock option grants made
in fiscal 1996 and future years as if the fair-value-based method defined in
SFAS No. 123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosures required
by SFAS No. 123.
(continued)
33
34
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 that could be obtained
currently for similar instruments.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, revenue and expenses, and
the disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
Net Earnings per Share
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:
1997 1996 1995
---- ---- ----
Primary and fully diluted 5,640,311 5,585,442 5,257,865
========= ========= =========
Concentrations of Credit Risk
Financial instruments that 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 44% and 54% of total accounts receivable at June 30, 1997 and 1996,
respectively. Concentrations of credit risk related to the remaining accounts
receivable balance are limited due to the large number of customers comprising
the Company's remaining customer base and their dispersion across many different
industries and geographies.
Reclassifications
Certain amounts in prior years' consolidated financial statements have been
reclassified to conform to the 1997 presentation.
34
35
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
B. INVENTORY
Inventory, which includes labor and production overhead of $1,073,523 and
$1,107,618 at June 30, 1997 and 1996, respectively, is comprised of the
following at June 30:
1997 1996
---------- ----------
Raw materials $2,747,451 $2,865,438
Work in progress 2,598,430 2,911,778
Finished goods 344,969 622,376
---------- ----------
$5,690,850 $6,399,592
========== ==========
C. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at June 30:
Life Used For
Depreciation 1997 1996
--------------- ------------- -------------
Land NA $392,600 $392,600
Building and building improvements 5 - 39 years 3,124,691 2,903,408
Machinery and equipment 3 - 15 years 7,649,609 6,139,145
Office equipment and furniture 5 to 7 years 2,103,479 1,845,083
Equipment under capital leases 5 Years 516,362 516,362
Vehicles 3 years 49,534 30,922
Leasehold improvements 5 to 39 years 268,968 92,198
---------- ----------
Total property and equipment 14,105,243 11,919,718
Less accumulated depreciation and amortization (5,845,538) (4,641,640)
---------- ----------
Property and equipment, net $8,259,705 $7,278,078
========== ==========
At June 30, 1997 and 1996, accumulated depreciation and amortization includes
$452,343 and $427,896, respectively, of amortization of capitalized leases. In
June 1996, 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 at June 30,
1997 and 1996 are considered "available for sale securities." Securities are
valued at $58,862 and $74,890 as of June 30, 1997 and 1996, respectively. The
security portfolio includes gross unrealized losses, net of tax, of $51,250 and
$15,222 at June 30, 1997 and 1996, respectively.
35
36
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997. Advances against the revolving lines of credit cannot
exceed 70% of eligible receivables. These agreements contain financial covenants
concerning limitations on maintenance of debt, certain financial ratios and
other matters. The lines of expire 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 at June 30, 1997 and 1996,
respectively.
F. LONG-TERM DEBT
Long-term debt consisted of the following as of June 30:
1997 1996
------ -----
Note payable to bank, secured by building, interest at
8.25%, principal and interest payments of $10,769
monthly, due 2011 $1,066,644 $1,110,000
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% at June 30, 1997 and 1996),
principal and payments of $10,417 monthly; due January 1999 197,907 312,494
in June 1997
Note payable to bank, paid in full in June 1997 --- 88,360
---------- ------------
1,264,551 1,510,854
Less current installments (164,266) (234,736)
---------- ------------
Long-term debt, less current installments $1,100,285 $1,276,118
========== ==========
Aggregate amounts of long-term debt maturities as of June 30, 1997 are as
follows:
1998 $164,266
1999 119,086
2000 50,141
2001 54,438
2002 59,103
Thereafter 817,517
----------
$1,264,551
==========
36
37
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 two years. The present values of the future minimum capital lease
payments as of June 30 are as follows:
1997 1996
------- --------
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 $ 55,078 $ 85,121
Other capital lease -- 780
-------- --------
55,078 85,901
Less amount representing interest (6,276) (14,239)
-------- --------
Present value of net minimum lease payments 48,802 71,662
Less current installments (25,189) (22,860)
-------- --------
Capital lease obligations - less current installments $ 23,613 $ 48,802
======== ========
Future minimum annual lease payments under capital lease obligations at June 30,
1997 follow:
1998 $30,043
1999 25,035
-------
Minimum lease payments $55,078
=======
37
38
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
H. INCOME TAXES
Income taxes consist of the following:
Year Ended June 30
1997 1996 1995
----------- ----------- -----------
Current:
Federal $ 850,000 $ 1,712,000 $ 1,129,000
State 166,000 300,000 329,000
----------- ----------- -----------
1,016,000 2,012,000 1,458,000
----------- ----------- -----------
Deferred:
Federal (215,000) (15,000) 66,000
State (81,000) (12,000) 33,000
----------- ----------- -----------
(296,000) (27,000) 99,000
----------- ----------- -----------
$ 720,000 $ 1,985,000 $ 1,557,000
=========== =========== ===========
The provision (benefits) for deferred income taxes consists of the following:
Year Ended June 30
1997 1996 1995
--------- --------- ---------
Accelerated depreciation and amortization for tax purposes $ 95,000 $ 78,000 $ 54,000
Increase in valuation allowance 2,000 -- 34,000
Accrued compensation -- 108,000 (68,000)
Inventory valuation reserve (131,000) (202,000) --
Bad debt expense (309,000) (41,000) (36,000)
Accrued vacation expense (15,000) (6,000) (26,000)
Customer deposits (1,000) 11,000 (6,000)
Write-down of investments -- -- 158,000
State income taxes 63,000 48,000 (34,000)
Other, net -- (23,000) 23,000
--------- --------- ---------
($296,000) ($ 27,000) $ 99,000
========= ========= =========
(continued)
38
39
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:
1997 1996
-------- --------
Deferred tax assets:
Allowance for doubtful accounts $436,000 $127,000
Accrued vacation expense 54,000 39,000
Customer deposits -- 1,000
Investment loss carryforward 36,000 34,000
State income taxes 25,000 88,000
Allowance for inventory valuation 333,000 202,000
Other, net 3,000 3,000
-------- --------
Total gross deferred tax assets 887,000 494,000
Less valuation allowance 36,000 34,000
-------- --------
Net deferred tax assets 851,000 460,000
Deferred tax liabilities:
Accumulated depreciation and amortization 487,000 392,000
-------- --------
Net deferred tax asset $364,000 $ 68,000
======== ========
The valuation allowance for deferred tax assets was $36,000 and $34,000 at June
30, 1997 and 1996, respectively. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Management
considers, among other things, the scheduled reversal of deferred tax
liabilities, projected future taxable income, and other planning strategies. In
making this assessment, management believes it more likely than not that the
Company will realize the benefit of the deferred tax asset, net of the existing
valuation allowance, at June 30, 1997.
(continued)
39
40
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
-------------------------------------------------
1997 1996 1995
----------- ----------- -----------
Income taxes computed at statutory federal income tax rate $ 626,000 $ 1,770,000 $ 1,219,000
State income taxes, net of federal income tax benefit 56,000 190,000 224,000
Increase in valuation allowance 2,000 -- 34,000
Adjustments for prior year tax estimates -- -- 60,000
Expenses not deductible for tax purposes 31,000 22,000 22,000
Other 5,000 3,000 (2,000)
----------- ----------- -----------
Income taxes as reported $ 720,000 $ 1,985,000 $ 1,557,000
=========== =========== ===========
Effective tax rate 39.1% 38.1% 43.4%
=========== =========== ===========
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 $114,206, $100,161 and $50,345 in 1997, 1996 and 1995,
respectively.
The Company has a "Cafeteria Plan" pursuant to Section 125 of the Internal
Revenue Code, whereby health care benefits are provided for active employees
through insurance companies. Substantially all active full-time employees are
eligible for these benefits. The Company recognizes the cost of providing these
benefits by expensing the annual premiums, which are based on benefits paid
during the year. The premiums expensed for these benefits totaled $228,805,
$217,375 and $194,087 for 1997, 1996 and 1995, respectively.
Effective January 1, 1997, the Company adopted a defined benefit pension plan
(the "Plan") covering substantially all of its employees. The benefits are based
on years of service and the employee's compensation during the five years before
retirement. The Company will make annual contributions to the Plan equal to the
maximum amount that can be deducted for income tax purposes.
(continued)
40
41
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
I. EMPLOYEE BENEFIT PLANS (continued)
The following table sets forth the plan's funded status and amount recognized in
the Company's consolidated balance sheet at June 30, 1997.
Actuarial present value of benefit obligations:
Accumulated benefit obligation:
Vested $ 417,236
Non-vested 120,905
-----------
$ 538,141
===========
Projected benefit obligation $ 1,207,944
Plan assets at fair value 0
-----------
Projected benefit obligation (in excess of) plan assets 1,207,944
Unrecognized net gain 3,753
Prior service cost not yet recognized in net
periodic pension cost (1,053,137)
-----------
Accrued pension cost $ 158,560
-----------
Net pension cost for 1997 included the following components:
Service cost - benefits earned during the period $ 91,934
Interest cost on projected benefit obligation 37,172
Actual return on plan assets --
Net amortization and deferral 29,454
-----------
Net pension cost $ 158,560
===========
Assumptions used in accounting for the pension plan as of June 30, 1997 were as
follows:
Discount rate 7.00%
Rates of increase in compensation levels 5.76%
Expected long-term rate of return on plan assets 7.50%
===========
J. STOCKHOLDERS' EQUITY
Pursuant to a secondary offering in 1992, which generated net proceeds of
$1,989,216, the Company issued common stock purchase warrants, which were
exercised in 1994 generating net proceeds of $2,415,777.
Employee Stock Option Plans
Effective June 5, 1992, the Company adopted the 1992 Incentive Stock Option Plan
for which 500,000 common shares have been reserved for issuance to officers,
directors, and key employees of the Company. The plan provides that no option
may be granted at an exercise price less than the fair market value of the
common stock of the Company on the date of grant. On September 9, 1993, 200,000
options were granted at the fair market value price of $4.875 per share.
(continued)
41
42
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
J. STOCKHOLDERS' EQUITY (continued)
Also effective June 5, 1992, the Company adopted the 1992 Nonqualified Stock
Option Plan and reserved a total of 250,000 common shares for issuance to
officers, employees, and consultants of the Company. On September 9, 1993,
250,000 options were granted 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 for which 500,000 common shares were reserved for
issuance to officers, employees, and consultants of the Company. On January 24,
1995, 500,000 options were granted at the fair market value price of $4.625 per
share.
All stock options under each of the plans have five-year terms and all options
became fully vested one year after their grant date.
Stock option activity during the periods indicated is summarized below:
1992 1992 1994
Incentive Nonqualified Nonqualified
Plan Plan Plan
------- ------------ ------------
Outstanding at June 30, 1994 198,584 242,416 --
Granted at $4.625 per share -- -- 500,000
Exercised 222 278 --
------- ------- -------
Outstanding at June 30, 1995 198,362 242,138 500,000
Exercised 74,360 8,640 11,000
------- ------- -------
Outstanding and exercisable at June 30, 1996 124,002 233,498 489,000
Exercised 27,833 12,556 37,500
------- ------- -------
Outstanding and exercisable at June 30, 1997 96,169 220,942 451,500
======= ======= =======
Weighted-average exercise price, June 30, 1997 and June 30, 1996 $ 4.875 $ 4.875 $ 4.625
Weighted-average remaining contractual life One Year One Year Three Years
Available for grant at June 30, 1997 300,000 -- --
======= ======= =======
The Company applies APB Opinion No. 25 in accounting for its stock option plans
as it relates to employee plans and, accordingly, no compensation cost has been
recognized for its stock options in the financial statements. Under SFAS No.
123, options granted prior to the Company's 1996 fiscal year are not to be
reflected in pro forma net earnings calculations. Since the Company has not
granted any options since the beginning of the 1996 fiscal year, pro forma net
earnings is not presented.
Other Stock Options
On January 24, 1995, the Board of Directors granted 100,000 options with an
exercise price of $4.625 in exchange for consulting services and reserved
100,000 common shares. As of June 30, 1997, none of these options had been
exercised or canceled. At June 30, 1997, the weighted-average remaining
contractual life was three years.
On September 20, 1996, 45,000 options were granted pursuant to a consulting
agreement at prices ranging from $9.00 to $15.00 per share. Consulting expense
incurred as a result of these options was $84,000 for the year ended June 30,
1997. None of these options had been exercised as of June 30, 1997. At June 30,
1997, the weighted-average remaining contractual life was four years and the
weighted-average exercise price was $12.00.
42
43
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
K. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Company leases part of its main facilities under leases that are classified
as noncancelable operating leases.
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 as follows:
1998 $137,306
1999 70,042
2000 60,492
2001 53,742
2002 9,228
--------
$330,810
========
Rental expense totaled $169,079, $193,340, and $209,735 for the years ended June
30, 1997, 1996 and 1995, 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 the year ended June 30, 1995. Amounts paid under
this agreement were $100,000 and $75,000 for the years ended June 30, 1996, and
1995, 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 certain suites within a building occupied by
certain of its offices and production facilities which, up to that time, were
subject to the related party lease. The lease provided for rent payable in the
amount of $60,000 per year. The purchase price of the building was $545,000
which, in the opinion of management and an independent certified appraiser who
evaluated the property in April 1996, represented fair market value.
During 1997 and 1996, the Company had sales of $14,812 and $1,084,290,
respectively, to a company in which a key employee and beneficial owner of 1% of
the stock of the Company was formerly the president and part owner. The amount
receivable from this company at June 30, 1997 was $775,302, and this amount has
been fully reserved because the Company has determined the account to be
doubtful of collection.
The Company entered into an agreement with the father-in-law and mother-in-law
of the Chief Executive Officer of the Company in December, 1991, which provides
commissions on sales to a particular customer. The agreement will expire in
December, 2001. The commission equals 5% of sales, and is capped at $25,000 per
calendar quarter, effective January 1, 1993. Amounts paid under this agreement
were $100,000 for each of the years ended June 30, 1997, 1996 and 1995,
respectively. There were no amounts owed under the agreement at June 30, 1997 or
1996.
During fiscal year 1993, the Company entered into an agreement that required
future minimum royalty payments over the term of the contract, which expired
December 31, 1996. Amounts paid under this agreement were $154,728 and $247,898
for the years ended June 30, 1997 and 1996, respectively. Amounts owed under the
agreement were $0 and $21,297 at June 30, 1997 and 1996, respectively.
Included in notes receivable are notes from the Company's Chief Executive
Officer and President. The balance of the notes, including accrued interest, was
$74,444 and $89,824, respectively, as of June 30, 1997 and $70,119 and $84,606,
respectively, at June 30, 1996.
(continued)
43
44
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
K. COMMITMENTS AND RELATED PARTY TRANSACTIONS (continued)
Additionally, during the year ended June 30, 1997, the Company made
noninterest-bearing loans to the Chairman of the Board and the President in the
amount of $50,000 and $13,802, respectively, bringing the aggregate amount of
such loans to $219,012. Amounts owed on these loans, which are secured by
proceeds from life insurance policies on their respective lives, were $150,000
and $100,000 for the Chairman of the Board and $69,012 and $55,210 for the
President at June 30, 1997 and 1996, respectively.
In August 1997, the Company entered into a 15-year lease agreement under which
the lessor is to construct a build-to-suit office and manufacturing facility in
Carlsbad, California. The Company plans to move its administrative offices and
expand its manufacturing capacity into these premises when the building is ready
for occupancy, estimated to be in the latter half of calendar 1998. Annual lease
payments, which will commence upon occupancy, are $1,222,000 and are subject to
annual inflation adjustments. The Company has an option to acquire the facility
during the sixth year of the lease.
During fiscal year 1995, the Company's Chief Executive Officer 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.
L. ECONOMIC DEPENDENCY
The Company had substantial sales to five separate customers during one or more
of the periods shown in the following table. The loss of any of these customers
could have an adverse impact on the Company's revenues and earnings in the
short-term. Sales by customer, representing 10% or more of the respective year's
total sales, are shown below by industry segment.
1997 1996 1995
------------------------- ----------------------- -----------------------
Sales by Sales by Sales by
Industry Segment Customer %(a) Customer %(a) Customer %(a)
------------------ ----------- ----------- ----------- ---------- ----------- -------
Multi-level Distribution:
Customer 1 $17,934,985 36% $13,616,835 29% $ 7,125,736 19%
Customer 2 6,851,560 14% 13,785,211 29% 12,167,095 33%
Customer 3 5,936,477 12% (b) (b)
Customer 4 (b) (b) 6,441,350 17%
----------- -------- ----------- --------- ----------- -------
30,723,022 62% 27,402,046 58% 25,734,181 69%
Weight Loss:
Customer 5 (b) 5,364,185 11% 3,889,860 10%
----------- -------- ----------- --------- ----------- -------
Total $30,723,022 62% $32,766,231 69% $29,624,041 79%
=========== ======== =========== ========= =========== =======
(a) Percent of total sales (b) Sales for the year were less than 10% of
total sales.
Accounts receivable from these customers totaled $3,108,597 and $3,247,063 at
June 30, 1997 and 1996, respectively.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
M. CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, based in part on the
advice of counsel, the ultimate disposition of these matters will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
N. QUARTERLY DATA (unaudited)
The following is a summary of unaudited quarterly data:
Year Ended June 30, 1997
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
------------ ------------ ------------ ------------ -------------
Net sales $ 11,437,022 $ 12,630,234 $ 11,406,325 $ 13,970,640 $ 49,444,221
Gross profit 3,260,640 3,215,954 2,866,067 1,082,336 10,424,997
Net earnings (loss) 900,373 849,292 560,637 (1,190,382) 1,119,920
Net earnings (loss) per
common share:
Primary and fully
diluted 0.16 0.15 0.10 (0.22) 0.20
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 0.11 0.13 0.18 0.16 0.58
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SCHEDULE II
NATURAL ALTERNATIVES INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
Balance at
Allowance for beginning Balance at end
doubtful accounts of period Expense Deductions* of period
----------------- --------- ------- ----------- -------------
Year ended June 30, 1997 $ 319,000 $ 725,000 $ 38,000 $1,006,000
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
* 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 26, 1997 By: Mark A. LeDoux
----------------------------------------------
(Mark A. LeDoux, Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Marie A. LeDoux Chairperson of the Board, September 26, 1997
--------------- Secretary, and Director
(Marie A. LeDoux)
Mark A. LeDoux Chief September 26, 1997
-------------- Executive Officer and
(Mark A. LeDoux) Director
William P. Spencer President, and Chief September 26, 1997
------------------ Operating Officer,
(William P. Spencer) and Treasurer, and Chief
Financial Officer, and Chief
Accounting Officer, and
Director
William R. Kellas Director September 26, 1997
-------------------
(William R. Kellas)
Lee G. Weldon Director September 26, 1997
------------------
(Lee G. Weldon)
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EXHIBIT INDEX
Exhibit 11 Re: Computation of Per Share Earnings
Exhibit 23 Re: Consent of KPMG Peat Marwick LLP
Exhibit 27 Re: Financial Data Schedule
49