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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, 1999 Commission file number 0-15701
NATURAL ALTERNATIVES INTERNATIONAL, INC.
Incorporated in Delaware 84-1007839
1185 Linda Vista Drive, San Marcos, California (I.R.S. Employer
92069 Identification No.)
(760) 744-7340
Securities registered pursuant to Section 12(b) of the Act:
Common Stock - $.01 par value Nasdaq Stock Market
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of 3,429,077 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
$16,074,000 based on the closing sale price as of September 22, 1999.
At September 22, 1999, the Registrant had outstanding 5,759,875 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. and its subsidiaries (referred to
collectively herein as the "Company") is engaged in the formulation and
production of encapsulated and tablet vitamins and related nutrients including
phytochemicals derived from botanicals and foods. The Company provides clinical
studies assessment, assistance with international product registration,
packaging and delivery system design, customer-specific nutritional product
formulation and a host of other marketing related services for its clients. 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.
Management believes its technically advanced facilities, laboratory and quality
control capabilities are a major factor in solidifying existing customer
relationships and adding new customers. The recognized standards for
manufacturing nutritional products should, in the opinion of management, assist
the Company in serving its present and future customers. The United States
Pharmacopeia compendia (USP) contain 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 currently has the technical and quality control expertise to conform
to all aspects of USP specifications. Conformance with USP specifications allows
the Company to use the USP designation on products manufactured for its
customers, which have the USP designation.
The Company's growth strategy is to introduce new products, attract and retain
preferred customers, and enter new markets. The Company believes that it can
successfully implement this growth strategy by continuing to capitalize on its
operating strengths: science-based products; a strong research and development
program; in-house manufacturing; and an experienced management team.
RECENT MANAGEMENT CHANGES
The Company experienced a significant change in its management during fiscal
1999. Mark LeDoux, founder and CEO of the Company, assumed the role of President
in January 1999. David Lough was appointed Executive Vice President with
responsibility for all corporate operations. Douglas E. Flaker was appointed
Vice President of Marketing, Business Development and Strategic Planning. David
K. Shunick was appointed Vice President of Operations.
William P. Spencer, who served as a Director, President and Chief Financial
Officer of the Company, and Jane Schlosberg, formerly Director of Marketing and
Corporate Relations are no longer employed by the Company. Mr. Spencer resigned
as a director of the Company on June 29, 1999.
PRODUCTS AND MANUFACTURING
The Company is engaged in the research, design and manufacture of nutritional
supplements for others engaged in commerce in a variety of distribution channels
- - both domestic and international. The Company purchases raw materials in bulk
from qualified vendors, and, after quality control testing, encapsulates or
compresses them into solid dosage forms of either chewable wafers or tablets.
The Company utilizes contract manufacturers, in accordance with the Company's
specifications and standards, to package the product for shipment.
RESEARCH AND DEVELOPMENT
The primary emphasis of the Company's research and development activities is the
development of new products and enhancement of existing products. In addition,
the Company continuously produces pilot or sample runs of products to ensure
stability or efficacy and to determine ingredient interaction and prospective
customer acceptance. The Company has implemented stringent quality control
procedures to verify that all products comply with established specifications
and standards. Research of this type is a part of the operating expenses
incurred by the Company, and the associated costs have not been significant.
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PART I
ITEM 1. BUSINESS (continued)
COMPETITION AND BUSINESS RISKS
The Company's products are sold in domestic and foreign markets in competition
with other companies. The vitamin and nutritional supplement industry is highly
competitive, and competition continues to increase. Competition for the sale of
vitamins and supplements comes from many sources, including companies which sell
vitamins to supermarkets, large chain discount retailers, drug store chains and
independent drug stores, health food stores, pharmaceutical companies 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.
The Company believes that competition among manufacturers of 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 products, its ability to attract
and retain qualified personnel, future governmental regulations affecting
vitamins and nutritional supplements, and publication of vitamin product safety
and efficacy studies by the government and authoritative health and medical
authorities.
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.
SOURCE AND AVAILABILITY OF RAW MATERIALS
Raw materials used in the Company's products 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 entities, some of which have operations in the United
States. To date, the Company has not experienced any difficulty in obtaining
adequate sources of supply. Although there can be no assurance that the Company
will continue to be able to obtain adequate sources in the future, the Company
believes that it will be able to do so.
MAJOR CUSTOMERS
Nu Skin International, NSA International and Pharmavite together represented 71%
of the Company's sales for the year ended June 30, 1999. 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 for the year ended June 30, 1999.
EMPLOYEES
The Company employs 121 individuals, with five employed in executive positions,
eleven in the area of research, laboratory and quality control, eleven in sales
and marketing, while the remaining employees are engaged in production and
administration. The Company has never experienced a work stoppage, and none of
its employees are currently represented by a union or any other form of
collective bargaining unit. The Company believes its relations with its
employees are excellent.
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PART I
ITEM 1. BUSINESS (continued)
GOVERNMENT REGULATION
The formulation, manufacturing, packaging, labeling, advertising and
distribution of the Company's products are subject to regulation by one or more
federal agencies, including the Federal Drug Administration (FDA), the Federal
Trade Commission (FTC), the Consumer Product Safety Commission (CPSC), the
United States Department of Agriculture (DOA) and the Environmental Protection
Agency (EPA). These activities are also regulated by various agencies of the
states and localities in which the Company's products are sold, including
without limitation the California Department of Health Services, Food and Drug
branch. The FDA in particular regulates the advertising, labeling and sales of
vitamin and mineral supplements and may take regulatory action concerning
medical claims, misleading or untruthful advertising, and product safety issues.
These regulations include the FDA's Good Manufacturing Practices (GMPs) for
foods. Detailed dietary supplement GMPs have been proposed but no regulations
have been adopted. Additional regulations for the implementation of the Dietary
Supplement Health and Education Act of 1994 (DSHEA) requirements for dietary
supplement labeling were adopted.
The Company may be subject, from time to time, to additional laws or regulations
administered by the FDA or other Federal, State or foreign regulatory
authorities, or more stringent interpretations of current laws or regulations in
the future. The Company is unable to predict the nature of such future laws,
regulations, interpretations or applications, nor can it predict what effect
additional governmental regulations or administrative orders, when and if
promulgated, would have on its business in the future. They could, however,
require the Company to: reformulate certain products to meet new standards;
recall or discontinue certain products not able to be reformulated; expand
documentation of the properties of certain products; expand or provide different
labeling and scientific substantiation; or, impose additional recordkeeping
requirements. Any or all such requirements could have a material adverse effect
on the Company's results of operations and financial position.
ITEM 2. PROPERTIES
The Company's corporate and manufacturing facilities consist of approximately
123,000 square feet and are located in San Marcos and Vista, California. Of this
space, the Company owns approximately 29,500 square feet and leases the
remaining space. Approximately 68,000 square feet is used for production related
activities, 35,000 square feet is used for warehousing, 5,000 square feet is
used for laboratory and product development, and 15,000 square feet is used for
offices.
In August 1997, the Company entered into a 15-year lease agreement under which
the lessor was to construct a build-to-suit 82,000 square foot office and
manufacturing facility in Carlsbad, California. In March 1999, the Company made
the decision to sublease, and not occupy, the partially completed facility. In
the third quarter of fiscal 1999, the Company recorded a $2.3 million charge for
impairment of leasehold assets and an accrual of $2.7 million representing the
present value of the excess of future lease payments over estimated sub-lease
income. The Company is seeking tenants for the facility.
The Company entered into two new lease agreements during fiscal year 1999 for
two adjacent buildings located in Vista, California. The facilities are leased
from an unaffiliated third party and consist of a total of approximately 74,000
square feet. The lease for the first building commenced in August 1998 under a
5-year lease agreement and consists of approximately 54,000 square feet to be
utilized as a warehousing and blending facility. The lease for the second
building commenced in March 1999 under a 3.5-year lease agreement for the rental
of approximately 20,000 square feet to be utilized as a warehouse and packaging
facility. The consolidation of warehousing space is expected to increase
operating efficiencies to allow the Company to meet demand for its products. The
Company will continue to utilize its facilities in San Marcos for production.
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PART I
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, after consultation
with its legal counsel, the ultimate disposition of these matters will not have
a material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market under the Symbol: NAII. The common stock of the Company had
previously been traded on the American Stock Exchange (AMEX) since November 17,
1992, under the stock symbol NAI. The table below sets forth the high and low
sales prices of the Company's stock for fiscal 1999 and 1998.
High Low
First Quarter Ended September 30, 1998 $26.625 $12.125
Second Quarter Ended December 31, 1998 $15.063 $ 9.125
Third Quarter Ended March 31, 1999 $14.000 $ 4.188
Fourth Quarter Ended June 30, 1999 $ 5.125 $ 3.125
First Quarter Ended September 30, 1997 $ 9.750 $ 7.000
Second Quarter Ended December 31, 1997 $10.813 $ 7.250
Third Quarter Ended March 31, 1998 $22.500 $17.625
Fourth Quarter Ended June 30, 1998 $24.500 $16.000
As of June 30, 1999, 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
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
Net Sales $ 57,429,898 $ 67,894,305 $ 49,444,221 $ 47,621,804 $ 37,388,254
Income (Loss) from Operations $ (4,937,345) $ 9,622,478 $ 1,815,072 $ 5,263,376 $ 3,637,522
Net Earnings (Loss) $ (2,923,340) $ 5,871,765 $ 1,119,920 $ 3,222,317 $ 2,028,059
Net Earnings (Loss) Per
Common Share:
Basic $ (0.50) $ 1.06 $ 0.21 $ 0.61 $ 0.39
Diluted $ (0.50) $ 1.00 $ 0.20 $ 0.58 $ 0.37
Current Assets $ 23,240,014 $ 30,642,121 $ 18,857,979 $ 15,710,135 $ 14,722,929
Total Assets $ 38,596,023 $ 42,987,279 $ 28,108,756 $ 23,561,191 $ 21,193,780
Long-Term Debt and Capital
Lease Obligations, Less
Current Installments $ 926,864 $ 977,375 $ 1,123,898 $ 1,324,920 $ 1,114,828
Stockholders' Equity $ 25,090,460 $ 27,659,141 $ 18,699,487 $ 17,159,586 $ 13,278,255
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PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K contains certain "forward-looking statements" as such term is
defined in the Private Securities Litigation Reform Act of 1995 or by the
Securities and Exchange Commission in its rules, regulations and releases. These
statements represent the Company's expectations or beliefs, including, but not
limited to, statements concerning future financial and operating results,
anticipated growth in revenues and profit margins, improvements in management
personnel, the impact of European operations, and the utilization of inventories
and facilities, statements concerning industry performance, the Company's
operations, economic performance, financial condition, growth and acquisition
strategies, margins and growth in sales of the Company's products. For this
purpose, any statements contained in this Report that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the generality of the foregoing, words such as "may", "will", "expect",
"believe", "anticipate", "intend", "could", "estimate" or "continue" or the
negative or other variations thereof or comparable terminology are intended to
identify forward-looking statements. These statements by their nature involve
substantial risks and uncertainties, certain of which are beyond the Company's
control, and actual results may differ materially depending on a variety of
important factors, including uncertainty related to government regulation, the
effect of adverse publicity, litigation, the centralized location of the
Company's manufacturing operations, availability of raw materials, risks
associated with international operations, competition, product liability claims,
volatility of stock price and those factors described in this and other Company
filings with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
FISCAL 1999 COMPARED TO FISCAL 1998
Net sales decreased 15.4% or $10.5 million to $57.4 million in fiscal 1999 from
$67.9 million in 1998. Management believes the decrease in sales is attributable
to increased product and price competition in the nutritional supplement market
as well as increased competition for new distributors. In addition, sales growth
was negatively impacted by the reduction in market demand for several herbal
products, resulting in depressed market prices. The Company expects competition
to remain strong for the foreseeable future.
Sales of products by our customers into international markets increased 18.8% to
$17.7 million in 1999 from $14.9 million in 1998. The increase is primarily the
result of existing customers continued expansion into Asian and European markets
through their international distribution channels. Management believes that the
expansion into international markets should continue and net sales to these
markets should increase as a percentage of total net sales.
For the year ended June 30, 1999, the Company experienced an increase in cost of
goods sold, as a percentage of sales, to 78.4% compared to 72.4% for the prior
year. The increase was primarily due to liquidation of excess or slow moving
inventories at or below cost and inventory write-downs to net realizable values,
caused by depressed market prices due to reduced industry demand. The increase
in cost of goods sold resulted in a reduction of gross profit margins to 21.6%
in fiscal 1999 compared to 27.6% in fiscal 1998.
Selling, general and administrative expenses increased as a percentage of net
sales to 21.4% in 1999 from 13.4% in 1998, increasing in absolute dollars to
$12.3 million in fiscal 1999 from $9.1 million in 1998. The percentage increase
was due primarily to the fixed nature of selling, general and administrative
expenses and the decrease in net sales as noted above. The increase in absolute
dollars was due to: upgrades in systems and computers related to Y2K compliance;
expenses related to management restructuring; and higher rents in connection
with entering into additional leases for new blending, warehousing and packaging
facilities. Additionally, professional fees increased because of increased
activity in seeking additional manufacturing agreements.
(continued)
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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 1999 COMPARED TO FISCAL 1998 (continued)
The Company recorded charges related to a lease obligation of approximately
$5,000,000 during the fiscal year ended June 30, 1999. The expense relates to
the Company's decision to sublease, and not occupy, a partially completed office
and manufacturing facility in Carlsbad, California. In the third quarter of
fiscal 1999, the Company recorded a $2.3 million charge for impairment of
leasehold assets and an accrual of $2.7 million representing the present value
of the excess of future lease payments over estimated sub-lease income. The
Company is seeking tenants for the facility.
The Company's loss from operations was approximately $4.9 million compared to
income from operations of $9.6 million in 1998. This was due to an approximate
$6.3 million decrease in gross profit, approximately $3.2 million increase in
selling, general and administrative expenses, and the approximate $5 million
provision for loss on lease obligation and other expense.
The Company incurred a net loss for fiscal 1999 of approximately $2.9 million
compared to net income of $5.9 million in fiscal 1998. This loss was due to the
reasons described above. Diluted loss per common share was ($.50) in fiscal 1999
compared to diluted earnings per common share of $1.00 in 1998.
FISCAL 1998 COMPARED TO FISCAL 1997
Net sales increased 37.3% or $18.5 million to $67.9 million in fiscal 1998. The
Company added several new customers in the latter part of fiscal 1997 and sales
to these and other new customers was the primary reason for the increase. A
decrease in sales to certain existing customers was offset by increases in
international sales to other existing customers through their international
distribution channels.
Sales of products into international markets increased to $14.9 million in 1998
from $1.9 million in 1997. The increase was primarily the result of existing
customers expanding into Asian and European markets.
Income from operations increased 430% to $9.6 million in 1998. This was due to a
$8.3 million increase in gross profit offset by a $.5 million increase in
selling, general and administrative expenses.
Gross profit margins were 27.6% and 21.1% in fiscal 1998 and 1997, respectively.
The 1997 gross profit margin was substantially below historical margins because
of the following factors: shifts in product sales mix toward lower profit margin
products, rising costs of certain raw materials, increased costs for
subcontracted packaging, change in ownership of a customer that resulted in a
substantial write-off of packaging materials, and the write-off of raw materials
that became obsolete because of customer discontinuance of certain products. The
1998 gross profit margin was slightly higher than historical margins experienced
before 1997. The increase is principally due to negotiated raw material savings
and improved manufacturing cost efficiencies.
Selling, general and administrative expenses decreased as a percentage of sales
to 13.4% in 1998 from 17.4% in 1997, while increasing in absolute dollars to
approximately $9.1 million in fiscal 1998 from $8.6 million in 1997. The
majority of this increase in selling, general and administrative expenses is due
to an increase in employee benefits expense which increased because the defined
benefit pension plan adopted as of January 1, 1997 was in effect for a full year
in 1998. Additionally, professional fees increased in part because of increased
activity in the registration of foreign products. These increases in selling,
general and administrative expenses were partially offset by a decline in bad
debt expense, which was attributable to a related party customer write-off in
fiscal 1997, and a decline in royalty expense because the Company's agreement
with the United States Olympic Committee expired in March 1997.
Net other income (expense) was approximately $44,000 in fiscal 1998 compared
approximately $25,000 in fiscal 1997.
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PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
FISCAL 1998 COMPARED TO FISCAL 1997 (continued)
Net earnings increased by 424% or $4.8 million to $5.9 million in fiscal 1998.
This increase was due primarily to the reasons given above and was partially
offset by a higher effective income tax rate. The higher effective income tax
rate, from 39.1% in 1997 to 39.3% in 1998, was the result of a smaller
investment credit applicable to California franchise taxes.
Diluted earnings per share increased 400% to $1.00 per share in 1998 from $.20
per share in 1997.
YEAR 2000 ISSUES
The year 2000 issue ("Year 2000 Issue") is the result of computer programs being
written using two digits rather than four digits to represent the year and
affects both information technology (IT) and non-IT systems. Thus, computer
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in system failures or miscalculations causing
disruptions of operations, including among others, a temporary inability to
process certain data or engage in similar normal business activities.
STATUS: The Company's plan to resolve the Year 2000 Issue involved four phases:
assessment, remediation, testing and implementation. The Company completed its
assessment of its IT systems and implemented its new computer software system
during the fourth quarter of its 1999 fiscal year. The manufacturer represents
this system as Year 2000 compliant. The Company also completed its assessment of
non-IT systems, most of which are equipment used in production. Systems
identified as not being Year 2000 compliant were brought into compliance by
upgrading either the software or hardware. The Company fully implemented these
upgrades by the end of its 1999 fiscal year. The Company has determined that its
production equipment and alarm, heating, and air-conditioning systems will not
be affected by the Year 2000.
The Company's computer staff has queried its significant suppliers, vendors and
other outside parties and none of the responses received thus far have indicated
any significant deficiencies. The Company will continue to monitor their Year
2000 compliance status, but has no means of ensuring that suppliers, vendors and
other outside parties will be Year 2000 ready. The Company's most likely worst
case scenario is the inability of suppliers, vendors and other outside parties
(including the government) to complete their Year 2000 resolution process in a
timely fashion, which could materially impact the Company. The effect of
non-compliance by suppliers, vendors and outside parties is not determinable.
COSTS: The Company incurred approximately $1 million in costs, of which
approximately $150,000 was charged directly to expense in the 1999 fiscal year
to replace its financial and manufacturing software systems and to remediate or
replace embedded microprocessors in its production equipment. The Company funded
its costs from current funds available from operations. If, however, additional
unanticipated costs are incurred, this could have a material adverse effect on
the Company's business, results of operations and financial condition.
RISKS: While management of the Company believes it effectively implemented its
program to resolve the Year 2000 Issue in a timely manner, as noted above,
disruptions in the economy generally resulting from Year 2000 Issues could also
materially adversely effect the Company. The Company is unable to estimate if it
has any potential liability or potential lost revenue at this time. There can be
no assurance that the Company will not discover Year 2000 compliance issues that
will have a material adverse effect on the Company's business, results of
operations and financial condition.
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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
The Company has historically met its working capital and capital expenditure
requirements, including funding for expansion of operations, mainly through net
cash provided by operating activities. In addition, the Company has utilized
revolving lines of credit and equipment financing and leases. Management plans
to pursue additional financing during its fiscal year 2000 to provide the
resources necessary to meet currently anticipated funding requirements. There
can be no assurance such financing will be available or if it is, on what terms,
and if obtained, that it will be adequate to provide resources necessary to meet
current requirements.
At June 30, 1999, the Company had working capital of $14,098,000 and borrowings
available under revolving lines of credit of $3,000,000. As of June 30, 1999,
there were no borrowings under these lines.
In 1999, net cash provided by operating activities was approximately $3,148,000
compared to approximately $3,330,000 for 1998. The net loss was offset by the
cumulative effect of a provision for loss on a lease obligation, a decrease in
accounts receivable, and a decrease in inventories less the cumulative effect of
an increase in deferred income taxes, an increase in tax refund receivable, and
a decrease in accounts payable. Current maturities of long-term debt amounted to
$50,000, 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. These
agreements contain financial covenants concerning limitations on maintenance of
debt, certain financial ratios and other matters. The lines of credit expire on
January 19, 2000; management expects such lines to be renewed in the normal
course of business. The Company received a waiver for certain debt covenants for
which it was not compliant as of June 30, 1999.
Capital expenditures for 1999 amounted to approximately $5.7 million. These
expenditures relate to building improvements for the Company's new warehouse and
blending facility, the purchase of production and packaging equipment to expand
the Company's output capacity, and leasehold improvements in the Carlsbad
facility, which were written off in the third quarter. The Company anticipates
capital expenditures of approximately $5.4 million during fiscal 2000. These
expenditures are expected to be paid from a combination of cash holdings, net
cash provided by operating activities in fiscal 2000, borrowings under the
Company's lines of credit with its bank, and anticipated additional financings.
If these financing alternatives become unavailable, the Company may be required
to defer or restrict certain commercial activities or delay or eliminate
expenditures for certain of its potential products and/or markets.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the Company adopted Statement of Financial Accounting Standards
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." This Statement standardizes the disclosure requirements for pensions
and other postretirement benefits, requires additional information on changes in
the benefit obligations and fair values of plan assets and eliminates certain
disclosures. Prior years have been restated to conform to the new standard.
In fiscal 1999, the Company adopted Statements 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.
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PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NEW ACCOUNTING PRONOUNCEMENTS (continued)
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Statement
establishes accounting and reporting standards requiring that derivative
instruments be recorded in the balance sheet as either an asset or liability
measured at its fair value and that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. SFAS No. 133, as amended, is effective for fiscal years beginning after
June 15, 2000. The adoption of this Statement will not have a material effect on
the Company's consolidated financial statements as the Company does not
currently hold any derivative or hedging instruments.
In April, 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Cost of Start-up
Activities." This Statement requires that all start-up activities, including
organizational costs, be expensed as incurred. The Company adopted SOP 98-5 for
the year ended June 30, 1999. The effects of adopting this SOP did not have a
material impact on consolidated financial position, results of operations or
liquidity.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to risks relating to changes in interest rates and stock
market fluctuations. At June 30, 1999, the Company maintains a portion of its
cash and cash equivalents in financial instruments with original maturities of
three months or less. These financial instruments, principally comprised of
government backed money market funds, are subject to interest rate risk and will
decline in value if interest rates increase. The Company also maintains a
short-term investment portfolio containing common stocks that are subject to
market risk. The Company has not used derivative financial instruments in its
investment portfolio. The Company believes that its investment in
market-risk-sensitive instruments is not material.
Market rate risk related to Long Term Debt is diminimus due to the fixed
interest rate and fixed payment structure of the debt.
RISK FACTORS
GOVERNMENT REGULATION
The manufacturing, processing, formulation, packaging, labeling and advertising
of the Company's products are subject to regulation by one or more federal
agencies, including the United States Food and Drug Administration ("FDA"), the
Federal Trade Commission ("FTC"), the Consumer Product Safety Commission, the
United States Department of Agriculture, the United States Postal Service, the
United States Environmental Protection Agency and the Occupational Safety and
Health Administration. These activities are also regulated by various agencies
of the states and localities in which the Company's products are sold. In
particular, the FDA regulates the safety, labeling and distribution of dietary
supplements, including vitamins, minerals, herbs food, OTC and prescription
drugs and cosmetics. The regulations that are promulgated by the FDA relating to
the manufacturing process are known as food products. In addition, the FTC has
overlapping jurisdiction with the FDA to regulate the labeling, promotion and
advertising of vitamins, OTC drugs, cosmetics and foods.
The Dietary Supplement Health and Education Act of 1994 ("DSHEA") was enacted on
October 25, 1994. DSHEA amends the Federal Food, Drug and Cosmetic Act by
defining dietary supplements which include vitamins, minerals, nutritional
supplements and herbs, as a new category of food separate from conventional
food. DSHEA provides a regulatory framework to ensure safe, quality dietary
supplements and the dissemination of accurate information about such products.
Under DSHEA, the FDA is generally prohibited from regulating the active
ingredients in dietary supplements as drugs unless product claims, such as
claims that a product may heal, mitigate, cure or prevent an illness, disease or
malady, trigger drug status.
12
13
PART II
RISK FACTORS (continued)
DSHEA provides for specific nutritional labeling requirements for dietary
supplements and the FDA's final regulations require that all dietary supplements
must be labeled in compliance with the regulations by no later than March 23,
1999. DSHEA permits substantiated, truthful and non-misleading statements of
nutritional support to be made in labeling, such as statements describing
general well-being resulting from consumption of a dietary ingredient or the
role of a nutrient or dietary ingredient in affecting or maintaining a structure
or function of the body. The Company anticipates the FDA will finalize CGMPs
that are specific to dietary supplements and require at least some of the
quality control provisions contained in the CGMPs for drugs. The Company
currently manufactures its vitamins and nutritional supplement products in
compliance with the applicable food CGMPs.
The FDA has finalized some of its regulations, including those relating to
nutritional labeling requirements. The FDA also has under development additional
regulations to implement DSHEA. Final labeling regulations may require expanded
or different labeling for the Company's vitamin and nutritional products. The
Company cannot determine what effect such regulations, when fully implemented,
will have on its business in the future. Such regulations could, among other
things, require the recall, reformulation or discontinuance of certain products,
additional recordkeeping, warnings, notification procedures and expanded
documentation of the properties of certain products or scientific substantiation
regarding ingredients, product claims, safety or efficacy. Failure to comply
with applicable FDA requirements can result in sanctions being imposed on the
Company or the manufacturers of its products, including warning letters, fines,
product recalls and seizures.
Governmental regulations in foreign countries where the Company plans to
commence or expand sales may prevent or delay entry into a market or prevent or
delay the introduction, or require the reformulation of, certain of the
Company's products. In addition, the Company cannot predict whether new domestic
or foreign legislation regulating its activities will be enacted. Such new
legislation could have a material adverse effect on the Company.
EFFECT OF ADVERSE PUBLICITY
The Company's products consist of vitamins, minerals, herbs and other
ingredients that the Company regards as safe when taken as suggested by the
Company. In addition, various scientific studies have suggested the ingredients
in some of the Company's products may involve health benefits. The Company
believes the growth in the vitamin product business of the last several years
may be based on material media attention and various scientific research
suggesting potential health benefits for the consumption of certain vitamin
products. The Company is highly dependent upon its customers' and consumers'
perception of the overall integrity of its business, as well as the safety and
quality of its products and similar products distributed by other companies
which may not adhere to the same quality standards as the Company. The Company
could be adversely affected if any of the Company's products or any similar
products distributed by other companies should prove or be asserted to be
harmful to consumers or should scientific studies provide unfavorable findings
regarding the effectiveness of products similar to those produced by the
Company.
CENTRALIZED LOCATION OF MANUFACTURING OPERATIONS
The Company currently manufactures the vast majority of its products at its
manufacturing facilities in San Marcos, California. Accordingly, any event
resulting in the slowdown or stoppage of the Company's manufacturing operations
or distribution facilities in San Marcos could have a material adverse effect on
the Company. The Company maintains business interruption insurance. There can be
no assurance, however, that such insurance will continue to be available at a
reasonable cost or, if available, will be adequate to cover any losses that may
be incurred from an interruption in the Company's manufacturing and distribution
operations.
13
14
PART II
RISK FACTORS (continued)
RELIANCE ON CERTAIN CUSTOMERS AND CERTAIN PRODUCTS
In fiscal 1999, NuSkin International, NSA International and Pharmavite accounted
for approximately 71% of the Company's sales. Each of the Company's other major
customers accounted for less than 10% of the Company's sales for fiscal 1999. If
one or more of the Company's major customers substantially reduced their volume
of purchases from the Company, or if consumer's purchases of vitamins were
substantially reduced, the Company's results of operations could be materially
adversely affected.
DISTRIBUTION AND MANAGEMENT OF OPERATIONS
In fiscal 1999, the Company leased and initiated development of two additional
facilities comprising 74,000 square feet in Vista, California, to be used as
warehousing, mixing, blending and packaging facilities. The Company also elected
to sublease and not occupy an 82,000 square foot building in Carlsbad,
California, developed specifically for the Company. In addition, the Company
organized a European subsidiary that leased and developed a 15,000 square foot
manufacturing facility in Lugano, Switzerland. During fiscal 1999, the Company
also implemented an entirely new software system to manage its materials and
manufacturing operations. While the Company believes that these activities will
increase the Company's manufacturing and distribution capabilities, there can be
no assurance the expected operating improvements will be realized or that these
efforts will result in improved sales profit margins or earnings. A significant,
unexpected disruption during the implementation of these systems and facilities
could have a material adverse effect on the Company's results of operations.
POTENTIAL FOR INCREASED COMPETITION
The market for the Company's products is highly competitive. The Company
competes with other vitamin product and OTC pharmaceuticals manufacturers. Among
other factors, competition among these manufacturers is based upon price. If one
or more manufacturers significantly reduce their prices in an effort to gain
market share, the Company's results of operations or market position could be
adversely affected. Certain of the Company's competitors, particularly
manufacturers of nationally advertised brand name products, are larger and have
resources substantially greater than those of the Company. Much speculation has
also been made about the potential for increased participation in these markets
by major international pharmaceutical companies. In the future, one or more of
these companies could seek to compete more directly with the Company by
manufacturing and distributing their own or others products or by significantly
lowering the prices of their national brand products.
The Company sells substantially all of its vitamin products to customers who
sell and distribute the products. Although the Company does not currently
participate significantly in other channels such as health food stores, direct
mail, internet sales and direct sales, the Company may expand its operations and
its products may face competition from such alternative channels as more
customers utilize these channels of distribution to obtain vitamin products.
RELIANCE ON CERTAIN SUPPLIERS; AVAILABILITY AND COST OF PURCHASED MATERIALS
The Company purchases from third party suppliers raw materials and certain
products that the Company does not manufacture. Although the Company currently
has supply arrangements with several suppliers of these ingredients and
products, and the Company's purchased materials are generally available from
numerous sources, an unexpected interruption of supply could materially
adversely affect the Company's results of operations.
14
15
PART II
RISK FACTORS (continued)
EXPOSURE TO PRODUCT LIABILITY CLAIMS
The Company, like other retailers, distributors and manufacturers of products
that are ingested, faces a risk of exposure to product liability claims in the
event that, among other things, the use of its products results in injury. The
Company maintains product liability coverage in the amount of $25 million,
including primary product liability and excess liability coverage with
deductibles of $25,000 per claim. There can be no assurance product liability
insurance will continue to be available at an economically reasonable cost or
that the Company's insurance will be adequate to cover liability the Company
incurs in respect to product liability claims. See also "Item 3. Legal
Proceedings and Product Liability."
RELIANCE ON KEY MANAGEMENT
The operation of the Company requires managerial and operational expertise. The
Company does not have long term employment contracts with any of its executives.
If, for any reason, key personnel do not continue to be active in the Company
management, operations could be adversely affected.
RISKS ASSOCIATED WITH INTERNATIONAL MARKETS
The Company's growth may be dependent in part upon its ability to expand its
operations and those of its customers into new markets, including international
markets. The Company may experience difficulty entering new international
markets due to greater regulatory barriers, the necessity of adapting to new
regulatory systems and problems related to entering new markets with different
cultural bases and political systems. Operating in international markets exposes
the Company to certain risks, including, among other things, (1) changes in or
interpretations of foreign import, currency transfer and other restrictions and
regulations that among other things may limit the Company's ability to sell
certain products or repatriate profits to the United States, (2) exposure to
currency fluctuations, (3) the potential imposition of trade or foreign exchange
restrictions or increased tariffs, and (4) economic and political instability.
As the Company continues to expand its international operations, these and other
risks associated with international operations are likely to increase.
LITIGATION INVOLVING PRODUCTS CONTAINING CERTAIN RAW MATERIALS
There can be no assurance that the Company will not be named in actions in the
future seeking damages for alleged personal injuries resulting from the
ingestion of certain products, and result in the Company becoming a defendant in
multiple actions and such an event could have a material adverse impact on the
Company.
CONCENTRATION OF OWNERSHIP; CERTAIN ANTI-TAKEOVER CONSIDERATIONS
The Company's directors and executive officers beneficially own approximately
27% of the outstanding Common Stock. Accordingly, these shareholders will
continue to have the ability to substantially influence the management, policies
and business operations of the Company. The Company's Board of Directors has the
authority to approve the issuance of 5,000,000 shares of preferred stock and to
fix the rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by the Company's
shareholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of holders of any preferred stock that
may be issued in the future. Certain provisions of Delaware law, as well as the
issuance of preferred stock, and other "anti-takeover" provisions in the
Company's Articles and Bylaws, could delay or inhibit the removal of incumbent
directors and could delay, defer, make more difficult or prevent a merger,
tender offer or proxy contest, or any change in control involving the Company,
as well as the removal of management, even if such events would be beneficial to
the interests of the Company's shareholders, and may limit the price certain
investors may be willing to pay in the future for shares of Common Stock.
15
16
PART II
RISK FACTORS (continued)
VOLATILITY OF STOCK PRICE
The Company's stock price has experienced significant volatility over the past
two fiscal years. Moreover, the stock market has from time to time experienced
extreme price and volume fluctuations that may be unrelated to the operating
performance of particular companies. Market conditions in the vitamin and
nutritional supplement industry and factors such as announcements of new
products by the Company, its competitors or third parties, and changes in
earnings estimates by analysts, may have a significant effect on the price of
the Common Stock.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data as required by this item are set
forth on pages 19 through 43.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
16
17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is included under the caption "Directors
and Executive Officers of the Registrant" in the Registrant's Proxy Statement
for the 1999 Annual Meeting of Stockholders and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption "Executive
Compensation" in the Registrant's Proxy Statement for the 1999 Annual Meeting of
Stockholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the Registrant's Proxy
Statement for the 1999 Annual Meeting of Stockholders and is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption "Certain
Relationships and Related Transactions" in the Registrant's Proxy Statement for
the 1999 Annual Meeting of Stockholders and is incorporated herein by reference.
17
18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The financial statements listed in the accompanying index to consolidated
financial statements are filed as part of this report.
2. FINANCIAL STATEMENT SCHEDULES
The financial statement schedule listed in the accompanying index to the
consolidated financial statements is filed as part of this annual report.
Schedules not included have been omitted because they are not applicable or the
information required is included in the financial statements and notes thereto.
(b) EXHIBITS
Exhibit 23 Re: Consent of KPMG LLP
Exhibit 27 Financial Data Schedule
(c) REPORTS FORM 8-K
Not Applicable
18
19
NATURAL ALTERNATIVES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
JUNE 30, 1999
Independent Auditors' Report ........................................................................ 20
Consolidated Balance Sheets as of June 30, 1999 and 1998 ............................................ 21
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the years ended June 30, 1999, 1998 and 1997 ................................................... 23
Consolidated Statements of Stockholders' Equity for the years ended June 30, 1999, 1998 and 1997 .... 24
Consolidated Statements of Cash Flows for the years ended June 30, 1999, 1998 and 1997s ............. 25
Notes to Consolidated Financial Statements .......................................................... 27
Schedule II - Valuation and Qualifying Accounts for the years ended June 30, 1999, 1998 and 1997 .... 43
19
20
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 consolidated financial position of Natural
Alternatives International, Inc. and subsidiaries as of June 30, 1999 and 1998,
and the consolidated results of their operations and their cash flows for each
of the years in the three-year period ended June 30, 1999, 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 LLP
San Diego, California
September 10, 1999
20
21
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
ASSETS
1999 1998
----------- -----------
Current Assets:
Cash and cash equivalents $ 1,062,894 $ 4,714,212
Accounts receivable - less allowance for doubtful
accounts of $472,000 at June 30, 1999 and
$1,073,000 at June 30, 1998 (Notes F and M) 7,515,320 12,558,731
Inventories (Notes C and F) 9,875,961 11,504,936
Income tax refund receivable (Note I) 2,229,260 --
Notes receivable - current portion (Note L) 127,037 399,307
Prepaid expenses 370,918 399,341
Deposits 1,265,061 641,573
Other current assets 793,563 424,021
----------- -----------
Total Current Assets 23,240,014 30,642,121
----------- -----------
Property and equipment, net (Notes D, F, G, H, and L) 12,274,065 10,531,865
----------- -----------
Other Assets:
Deferred income taxes (Note I) 1,979,000 854,000
Investments (Note E) 383,515 61,971
Notes receivable, less current portion (Note L) 650,617 443,088
Other noncurrent assets, net 68,812 454,234
----------- -----------
Total Other Assets 3,081,944 1,813,293
----------- -----------
TOTAL ASSETS $38,596,023 $42,987,279
=========== ===========
(continued)
21
22
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS (continued)
JUNE 30, 1999 AND 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30 June 30
1999 1998
------------ ------------
Current Liabilities:
Accounts payable $ 8,305,333 $ 12,301,859
Current installments of long-term debt (Note G) 50,486 46,501
Current installments of capital lease obligation (Note H) -- 23,542
Income taxes payable (Note I) -- 378,055
Accrued compensation and employee benefits 786,306 438,242
------------ ------------
Total Current Liabilities 9,142,125 13,188,199
Deferred income taxes (Note I) 593,000 500,000
Long-term debt, less current installments (Note G) 926,864 977,375
Accrual for loss on lease obligation and other (Note L) 2,433,526 --
Long-term pension liability (Note J) 410,048 662,564
------------ ------------
Total Liabilities 13,505,563 15,328,138
------------ ------------
Stockholders' Equity (Note K):
Preferred stock; $.01 par value; 500,000 shares
authorized; none issued or outstanding -- --
Common stock; $.01 par value; 8,000,000 shares
authorized; issued and outstanding 6,002,375 at
June 30, 1999 and 5,768,209 at June 30, 1998 60,024 57,682
Additional paid-in capital 11,236,812 9,756,822
Retained earnings 14,969,438 17,892,778
Treasury stock, at cost, 212,500 shares at
June 30, 1999 (1,116,250) --
Accumulated other comprehensive loss (Note E) (59,564) (48,141)
------------ ------------
Total Stockholders' Equity 25,090,460 27,659,141
------------ ------------
Commitments and contingencies (Notes L and N)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 38,596,023 $ 42,987,279
============ ============
See accompanying notes to consolidated financial statements.
22
23
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
1999 1998 1997
------------ ------------ ------------
Net sales $ 57,429,898 $ 67,894,305 $ 49,444,221
Cost of goods sold 45,010,301 49,157,717 39,019,224
------------ ------------ ------------
GROSS PROFIT 12,419,597 18,736,588 10,424,997
Selling, general &
administrative expenses 12,309,275 9,114,110 8,609,925
Provision for loss on lease obligation 5,047,667 -- --
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (4,937,345) 9,622,478 1,815,072
------------ ------------ ------------
Other income (expense):
Interest income 185,128 194,781 163,368
Interest expense (85,158) (110,337) (147,373)
Other, net 15,035 (40,157) 8,853
------------ ------------ ------------
115,005 44,287 24,848
------------ ------------ ------------
EARNINGS (LOSS) BEFORE
INCOME TAXES (4,822,340) 9,666,765 1,839,920
Provision for income taxes (benefit) (Note I) (1,899,000) 3,795,000 720,000
------------ ------------ ------------
NET EARNINGS (LOSS) (2,923,340) 5,871,765 1,119,920
Unrealized gain (loss) on investments (11,423) 3,109 (36,028)
------------ ------------ ------------
Comprehensive Income (loss) $ (2,934,763) $ 5,874,874 $ 1,083,892
============ ============ ============
NET EARNINGS (LOSS) PER COMMON SHARE:
Basic $ (0.50) $ 1.06 $ 0.21
============ ============ ============
Diluted $ (0.50) $ 1.00 $ 0.20
============ ============ ============
See accompanying notes to consolidated financial statements.
23
24
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
Accumulated
Common Stock Additional Other
------------------------- Paid-in Retained Treasury Comprehensive
Shares Amount Capital Earnings Stock Income (Loss) Total
--------- ------- ---------- ----------- -------- ------------ -----------
Balance, June 30, 1996 5,351,875 $53,519 $6,220,196 $10,901,093 $ -- $(15,222) $17,159,586
Issuance of common
stock upon exercise of
employee stock options 77,889 779 369,630 -- -- -- 370,409
Income tax benefit from
stock options exercised -- -- 85,600 -- -- -- 85,600
Net unrealized loss on
investments -- -- -- -- -- (36,028) (36,028)
Net earnings -- -- -- 1,119,920 -- -- 1,119,920
--------- ------- ---------- ----------- -------- --------- -----------
Balance, June 30, 1997 5,429,764 54,298 6,675,426 12,021,013 -- (51,250) 18,699,487
Issuance of common
stock upon exercise of
employee stock options 338,445 3,384 1,646,202 -- -- -- 1,649,586
Income tax benefit from
stock options exercised -- -- 1,435,194 -- -- -- 1,435,194
Net unrealized gains on
investments -- -- -- -- -- 3,109 3,109
Net earnings -- -- -- 5,871,765 -- -- 5,871,765
--------- ------- ---------- ----------- -------- --------- -----------
Balance, June 30, 1998 5,768,209 57,682 9,756,822 17,892,778 -- (48,141) 27,659,141
Issuance of common
stock upon exercise of
stock options 234,166 2,342 1,105,676 -- -- -- 1,108,018
Income tax benefit from
stock options exercised -- -- 374,314 -- -- -- 374,314
Treasury stock purchased -- -- -- -- (1,116,250) -- (1,116,250)
Net unrealized loss on
investments -- -- -- -- -- (11,423) (11,423)
Net loss -- -- -- (2,923,340) -- -- (2,923,340)
--------- ------- ---------- ----------- ---------- --------- -----------
Balance, June 30, 1999 6,002,375 $60,024 $11,236,812 $14,969,438 $(1,116,250) $(59,564) $25,090,460
========= ======= =========== =========== =========== ======== ===========
See accompanying notes to consolidated financial statements.
24
25
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
1999 1998 1997
------------ ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $(2,923,340) $ 5,871,765 $ 1,119,920
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Bad debt provision 566,537 360,000 725,000
Write-off of notes receivable 353,017 -- --
Tax benefit on option exercise 374,314 1,435,194 85,600
Depreciation and amortization 1,637,837 1,515,402 1,276,355
Deferred income taxes (1,032,000) 10,000 (296,000)
Pension expense, net of contributions 162,649 88,839 158,560
Loss on disposal of assets 4,634 54,727 3,601
Loss on investments 675 -- --
Provision for loss on lease obligation,
net of amounts paid 4,739,193 -- --
Other 9,764 (36,808) (18,105)
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 4,476,874 (6,028,610) (1,747,544)
Inventories 1,628,975 (5,814,086) 708,742
Tax refund receivable (2,229,260) 842,209 (842,209)
Prepaid expenses 28,423 (189,155) 107,812
Deposits (623,488) (319,304) (221,756)
(Decrease) increase in:
Accounts payable (3,996,526) 5,044,941 2,785,720
Income taxes payable (378,055) 378,055 (520,246)
Accrued compensation and employee benefits 348,064 116,905 40,997
Customer deposits -- -- (2,606)
------------ ----------- -----------
Net Cash Provided by Operating Activities $ 3,148,287 $ 3,330,074 $ 3,363,841
------------ ----------- -----------
(continued)
25
26
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
1999 1998 1997
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment $ 10,000 $ 65,000 $ 10,000
Proceeds from sale of investments 225 -- --
Capital expenditures (5,700,338) (3,474,569) (2,236,165)
Issuance of notes receivable (640,748) (4,625) (183,909)
Repayment of notes receivable 342,708 142,966 109,262
Investment purchases (333,867) -- (20,000)
Other assets (399,285) (198,024) 438,037
------------ ------------ -----------
Net Cash Used in Investing Activities (6,721,305) (3,469,252) (1,882,775)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on lines of credit 700,000 -- 443,959
Payments on lines of credit (700,000) -- (443,959)
Payments on long-term debt and capital leases (70,068) (265,935) (269,163)
Issuance of common stock 1,108,018 1,649,586 370,409
Treasury stock acquisitions (1,116,250) -- --
------------ ------------ -----------
Net Cash Provided by Financing Activities (78,300) 1,383,651 101,246
------------ ------------ -----------
Net Increase (Decrease) in Cash and Cash Equivalents (3,651,318) 1,244,473 1,582,312
Cash and Cash Equivalents at Beginning of year 4,714,212 3,469,739 1,887,427
------------ ------------ -----------
Cash and Cash Equivalents at End of year $ 1,062,894 $ 4,714,212 $ 3,469,739
============ ============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 84,494 $ 99,602 $ 147,373
Income taxes 1,196,000 1,494,000 2,289,959
============ ============ ===========
Disclosure of non-cash activities:
Net unrealized gains (losses) on investments $ (11,423) $ 3,109 $ (36,028)
Fixed asset purchases in accounts payable -- 432,720 --
Issuance of note receivable for payment of
account receivable -- 100,000 --
Write-off of notes receivable through the
allowance for doubtful accounts -- -- 15,504
============ ============ ===========
See accompanying notes to consolidated financial statements.
26
27
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 subsidiary, NAIE Natural Alternatives International Europe, SA.
All significant intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The carrying amount
reported in the balance sheet for cash and cash equivalents approximates its
fair value.
Inventories
Inventories are recorded at the lower of cost (first-in, first-out) or market
(net realizable value). Such costs include raw materials, labor and production
overhead.
Property and Equipment
Property and equipment are stated at cost. Property and equipment under capital
leases are recorded at the lower of fair market value or the present value of
future minimum lease payments and are amortized using the straight-line method
over the shorter of the estimated useful life of the asset or the lease term.
Depreciation of property and equipment is provided using the straight-line
method over their estimated useful lives, generally ranging from 3 to 39 years.
Leasehold improvements are amortized using the straight-line method over the
shorter of the life of the improvement or the remaining term of the lease.
Maintenance and repairs are expensed as incurred. Significant expenditures that
increase useful lives are capitalized.
Impairment of Long-Lived Assets
The Company accounts for its long-lived assets in accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. In 1999, the Company recorded a $2.3 million charge for the impairment of
certain assets. See Note L for discussion.
(continued
27
28
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Investments
The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The Company's investments, which
consist of equity securities, are classified as available for sale and are
carried at fair value, with unrealized gains and losses excluded from net
earnings and included in Accumulated Other Comprehensive Loss.
Revenue Recognition
Revenue from sales of product, and related cost of products sold, is recognized
upon shipment of product at which time title passes to the customer. Customers
generally do not have the right to return product unless damaged or defective.
Cost of Goods Sold
Cost of goods sold includes raw material, labor and overhead.
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 SFAS 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 operations in the period that includes the
enactment date.
Stock Option Plans
The Company accounts for its stock-based employee compensation for stock options
using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations, as allowed under SFAS 123. Accordingly, compensation cost is
measured as the excess, if any, of the fair value of the Company's stock at the
date of the grant over the price the employee must pay to acquire the stock.
Fair Value of Financial Instruments
The carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, notes receivable,
investments, and accounts approximates fair value due to the relatively short
maturity of such instruments. The carrying amounts for long-term debt
approximate fair value as the interest rates and terms are substantially similar
to rates and terms that could be obtained currently for similar instruments.
(continued
28
29
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, revenue and expenses, and
the disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
Net Earnings (Loss) per Share
The Company computes net earnings (loss) per share in accordance with Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128").
This statement requires the presentation of basic earnings (loss) per share,
computed using the weighted average number of shares outstanding during the
period, and diluted earnings (loss) per share, computed using the additional
dilutive effect of all dilutive securities. The dilutive impact of stock options
account for the additional weighted average shares of common stock outstanding
for the Company's diluted earnings (loss) per share computation. Basic and
diluted earnings (loss) per share have been calculated as follows:
For the Years Ended June 30, 1999, 1998, and 1997
1999 1998 1997
------------ ----------- -----------
Numerator:
Net earnings (loss) - Numerator for
basic and diluted earnings (loss) per
share - earnings (loss) available to
common shareholders ($2,923,340) $ 5,871,765 $ 1,119,920
============ =========== ===========
Denominator:
Denominator for basic earnings
(loss) per share - weighted
average shares 5,868,159 5,544,337 5,395,438
Effect of dilutive securities -
employee stock options -- 322,303 197,638
------------ ----------- -----------
Denominator for diluted earnings
(loss) per share - adjusted weighted
average shares with assumed
conversions 5,868,159 5,866,640 5,593,076
============ =========== ===========
Basic earnings (loss) per share $ (0.50) $ 1.06 $ 0.21
Diluted earnings (loss) per share $ (0.50) $ 1.00 $ 0.20
Options totaling 142,147 shares were excluded from the calculation of diluted
earnings (loss) per share for the year ended June 30, 1999 as the effect of
their inclusion would be anti-dilutive.
(continued)
29
30
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Concentrations of Credit Risk
Financial instruments that subject the Company to concentrations of credit risk
consist primarily of cash and cash equivalents and accounts receivable. The
Company places its cash and cash equivalents with highly rated financial
institutions. Credit risk with respect to receivables is concentrated with the
Company's three largest customers (see Note M). These three customers'
receivable balances collectively represent 55% of gross accounts receivable at
June 30, 1999 and 57% at June 30, 1998. Concentrations of credit risk related to
the remaining accounts receivable balance are limited due to the number of
customers comprising the Company's remaining customer base.
Reclassifications
Certain amounts in prior years' consolidated financial statements have been
reclassified to conform to the 1999 presentation.
B. INTERNATIONAL SUBSIDIARY
On January 22, 1999, NAIE Natural Alternatives International Europe, SA was
incorporated as a wholly-owned subsidiary of the Company, which is based in
Switzerland. Operations are expected to commence in the first quarter of fiscal
2000.
C. INVENTORIES
Inventories are comprised of the following at June 30:
1999 1998
---------- -----------
Raw materials $6,722,040 $7,049,954
Work in progress 269,961 3,971,315
Finished goods 2,883,960 483,667
---------- -----------
$9,875,961 $11,504,936
========== ===========
30
31
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
D. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at June 30:
Life Used For
Depreciation 1999 1998
-------------- ----------- -----------
Land NA $392,600 $392,600
Building and building improvements 5 - 39 years 3,232,805 3,140,655
Machinery and equipment 3 - 15 years 12,784,168 10,077,375
Office equipment and furniture 5 to 7 years 2,549,478 2,304,243
Equipment under capital leases 5 Years -- 516,362
Vehicles 3 years 178,837 42,684
Leasehold improvements 5 to 39 years 1,842,313 1,274,076
----------- -----------
Total property and equipment 20,980,201 17,747,995
Less accumulated depreciation and amortization (8,706,136) (7,216,130)
----------- -----------
Property and equipment, net $12,274,065 $10,531,865
=========== ===========
At June 30, 1998 accumulated depreciation and amortization includes $477,532 of
amortization of equipment under capital leases.
E. INVESTMENTS
Investments consist of marketable securities. Securities held at June 30, 1999
and 1998 are considered "available for sale securities." Securities are valued
at $383,515 and $61,971 as of June 30, 1999 and 1998. The security portfolio
includes gross unrealized losses, net of tax, of $59,564 and $48,141 at June 30,
1999 and 1998.
F. LINE OF CREDIT AGREEMENTS
The Company has revolving lines of credit agreements permitting borrowings up to
$3,000,000, which are secured by the Company's receivables, inventories,
equipment, and vehicles and bear interest at the bank's prime rate, which was
7.75% at June 30, 1999. Advances against the revolving lines of credit cannot
exceed 70% of eligible receivables. These agreements contain financial covenants
concerning limitations on maintenance of debt, certain financial ratios and
other matters. The lines of credit expire on January 19, 2000; 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, 1999 and 1998,
respectively. The Company received a waiver for certain debt covenants for which
it was not compliant as of June 30, 1999.
31
32
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
G. LONG-TERM DEBT
Long-term debt consisted of the following as of June 30:
1999 1998
----------- -----------
Note payable to bank, secured by building, interest at 8.25%
principal and interest payments of $10,769 monthly, due
2011 $ 977,350 $ 1,023,876
Less current installments (50,486) (46,501)
----------- -----------
Long-term debt, less current installments $ 926,864 $ 977,375
=========== ===========
Aggregate amounts of long-term debt maturities as of June 30, 1999
are as follows:
2000 $ 50,486
2001 54,812
2002 59,509
2003 64,608
2004 60,145
Thereafter 687,790
-------------
$ 977,350
=============
H. CAPITAL LEASE OBLIGATION
The Company leased certain equipment under a capital lease, which expired in
fiscal year 1999. The present value of the future minimum capital lease payments
as of June 30 are as follows:
1999 1998
--------- ---------
Capital lease payable to AT&T Credit Corporation, secured by phone
system, interest at 13%, principal and interest in monthly
installments of
$2,504. Lease expired May 1999. $ -- $ 24,964
Less amount representing interest -- (1,422)
--------- ---------
Present value of net minimum lease payments -- 23,542
Less current installments -- (23,542)
--------- ---------
Capital lease obligations - less current installments $ -- $ --
========= =========
32
33
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
I. INCOME TAXES
Income taxes (benefit) for the year ended June 30 consist of the following:
1999 1998 1997
------------ ----------- -----------
Current:
Federal ($ 857,000) $ 3,104,000 $ 850,000
State (10,000) 681,000 166,000
(867,000) 3,785,000 1,016,000
Deferred:
Federal (689,000) 8,500 (215,000)
State (343,000) 1,500 (81,000)
(1,032,000) 10,000 (296,000)
Income taxes (benefit) ($1,899,000) $ 3,795,000 $ 720,000
The provision (benefit) for deferred income taxes for the year ended June 30
consists of the following:
1999 1998 1997
------------ ------- -----------
Accrual for loss on lease obligation $ (971,000) $ -- $ --
Accelerated depreciation and
amortization for tax purposes 93,000 13,000 95,000
Increase in valuation allowance -- -- 2,000
Inventories (106,000) (24,000) (131,000)
Bad debt expense (245,000) 238,000 (309,000)
Accrued vacation expense 7,000 1,000 (15,000)
Customer deposits -- -- (1,000)
State income taxes 232,000 (207,000) 63,000
Other, net 14,000 (11,000) --
Net operating loss carryforward (56,000) -- --
------------ ------- -----------
($1,032,000) $ 10,000 ($296,000)
============ ========= ===========
33
34
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
I. INCOME TAXES (continued)
Net deferred tax assets and deferred tax liabilities as of June 30 are as
follows:
1999 1998
---------- ---------
Deferred tax assets:
Accrual for loss on lease obligation $ 971,000 $ --
Allowance for doubtful accounts 443,000 198,000
Accrued vacation expense 46,000 53,000
Investment loss carryforward 36,000 36,000
State income taxes -- 232,000
Allowance for inventories 463,000 357,000
Other, net -- 14,000
Net operating loss carryforward 56,000 --
---------- ---------
Total gross deferred tax assets 2,015,000 890,000
Less valuation allowance 36,000 36,000
---------- ---------
Net deferred tax assets 1,979,000 854,000
Deferred tax liabilities:
Accumulated depreciation and amortization 593,000 500,000
---------- ---------
Net deferred tax asset $1,386,000 $ 354,000
========== ==========
The valuation allowance for deferred tax assets was $36,000 at June 30, 1999 and
1998. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Management considers, among other
things, the scheduled reversal of deferred tax liabilities, projected future
taxable income, and other planning strategies. In making this assessment,
management believes it is more likely than not that the Company will realize the
benefit of the deferred tax asset, net of the existing valuation allowance, at
June 30, 1999 and 1998.
(continued)
34
35
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
I. INCOME TAXES (continued)
A reconciliation of income taxes computed by applying the statutory federal
income tax rate of 34% to earnings before income taxes for the year ended June
30 is as follows:
1999 1998 1997
------------ ---------- --------
Income taxes (benefit) computed at
statutory federal income tax rate $ (1,640,000) $3,286,700 $626,000
State income taxes (benefit), net of federal
income tax benefit (expense) (220,000) 451,000 56,000
Increase in valuation allowance -- -- 2,000
Expenses not deductible for tax purposes 32,000 35,000 31,000
Other (71,000) 22,300 5,000
------------ ---------- --------
Income taxes (benefit) as reported $ (1,899,000) $3,795,000 $720,000
============ ========== ========
Effective tax rate 39.4% 39.3% 39.1%
============ ========== ========
J. 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 $167,218, $146,277, and $114,206 in 1999, 1998 and
1997, 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 $365,613,
$241,815, and $228,805 for 1999, 1998 and 1997, respectively.
The Company sponsors a defined benefit pension plan (the "Plan"), which provides
retirement benefits to employees based generally on years of service and
compensation during the last five years before retirement. Effective June 21,
1999, the Company adopted an amendment to freeze benefit accruals of the
participants of the Plan, resulting in the recognition of $97,606 of net
curtailment gains in 1999. The gain resulted from the net decrease of the
Company's benefit obligation. At June 30, 1999, the estimated amortized portion
of the unfunded estimated accrued liability for prior service cost, using a
30-year funding period, amounted to $410,048. This amount has been accrued in
the current period. The Company's policy is to fund the net pension cost
accrued. However, the Company would not contribute an amount less than the
minimum funding requirements of the Employee Retirement Income Security Act of
1974 or more than the maximum tax-deductible amount.
(continued)
35
36
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
J. EMPLOYEE BENEFIT PLANS (continued)
Disclosure of Funded Status
The following table sets forth the Plan's funded status and amount recognized in
the Company's consolidated balance sheets at June 30, after the effect of
curtailment:
1999 1998
----------- -----------
Change in Benefit Obligation
Benefit obligation at beginning of year $ 2,084,109 $ 1,207,944
Service cost 527,319 268,815
Interest cost 124,216 84,171
Plan participant contributions -- --
Actuarial (gain)/loss 165,610 530,572
Benefits paid 0 (7,393)
Effect of curtailment (1,722,023) --
----------- -----------
Benefit obligation at end of year $ 1,179,231 $ 2,084,109
=========== ===========
Change in Plan Assets
Fair value of plan assets at beginning of year $ 313,750 $ --
Actual return on plan assets 18,812 5,368
Employer contributions 436,621 315,775
Plan participant contributions -- --
Benefits paid -- (7,393)
----------- -----------
Fair value of plan assets at end of year $ 769,183 $ 313,750
=========== ===========
Reconciliation of Funded Status
Funded status (under)/over funded $ (410,048) $(1,770,359)
Unrecognized net actuarial (gain)/loss -- 529,132
Unrecognized transition (asset)/obligation -- --
Unrecognized prior service cost -- 993,828
----------- -----------
(Accrued)/Prepaid benefit cost $ (410,048) $ (247,399)
=========== ===========
Additional Minimum Liability Disclosures
Accrued benefit liability $ -- $ (662,564)
Intangible asset $ -- $ 415,165
Other comprehensive income, not adjusted
for applicable income tax $ -- $ --
(continued)
36
37
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
J. EMPLOYEE BENEFIT PLANS (continued)
Net Periodic Benefit Cost
The Net Periodic Benefit Cost for the fiscal years ending June 30 includes the
following components:
1999 1998
---------- ----------
Components of Net Periodic Benefit Cost
Service cost $ 527,319 $ 268,815
Interest cost 124,216 84,171
Expected return on Plan Assets (32,078) (7,681)
Recognized net actuarial (gain)/loss 18,110 --
Amortization of transition (asset)/obligation -- --
Amortization of prior service cost 59,309 59,309
Effect of special events (curtailment) (97,606) --
---------- ----------
Net periodic benefit cost $ 599,270 $ 404,614
========== ==========
Assumption and Method Disclosures
1999 1998
------------- --------------
Discount rate 6.00% 6.00%
Expected long term rate of return 7.50% 7.50%
Weighted average rate of compensation increase N/A N/A
Amortization method Straight-line Straight-line
K. STOCKHOLDERS' EQUITY
Treasury Stock
In February 1999, the Board of Directors approved a repurchase program of up to
500,000 shares of the Company's common stock. As of June 30, 1999, 199,500
shares had been repurchased under this repurchase approval. In addition, the
Company repurchased 13,000 from an officer of the Company, bringing the
aggregate amount of repurchases to 212,500 shares of common stock for a total,
net of broker fees, of $1,116,250.
Employee Stock Option Plans
Effective June 5, 1992, the Company adopted the 1992 Incentive Stock Option Plan
for which 500,000 common shares have been reserved for issuance to officers,
directors, and key employees of the Company. The plan provides that no option
may be granted at an exercise price less than the fair market value of the
common stock of the Company on the date of grant. On September 9, 1993, 200,000
options were granted with an exercise price equal to the fair market value price
of $4.875 per share. On January 21, 1998, 300,000 options were granted with an
exercise price equal to the fair market value price of $10.50 per share. During
1999, 188,250 of these options were forfeited, and on May 10, 1999 an additional
70,000 options were granted with an exercise price equal to the fair market
value price of $3.78 per share.
(continued)
37
38
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
K. STOCKHOLDERS' EQUITY (continued)
Also effective June 5, 1992, the Company adopted the 1992 Nonqualified Stock
Option Plan and reserved a total of 250,000 common shares for issuance to
officers, employees, and consultants of the Company. On September 9, 1993,
250,000 options were granted with an exercise price equal to the fair market
value price of $4.875 per share. All remaining options under this plan were
exercised as of June 30, 1999.
Effective December 9, 1994, the Board of Directors approved the 1994
Nonqualified Stock Option Plan for which 500,000 common shares were reserved for
issuance to officers, employees, and consultants of the Company. On January 24,
1995, 500,000 options were granted with an exercise price equal to the fair
market value price of $4.625 per share. During fiscal 1999, 125,000 of the
unexercised options were forfeited.
All stock options under each of the plans have five-year terms and all options
become fully vested within three years of their grant date.
Stock option activity during the periods indicated is summarized below:
1992 1992 1994
Incentive Nonqualified Nonqualified
Plan Plan Plan
--------- ------------ ------------
Outstanding at June 30, 1996 124,002 233,498 489,000
Exercised 27,833 12,556 37,500
------- -------- -------
Outstanding at June 30, 1997 96,169 220,942 451,500
Exercised 57,778 159,333 121,334
Granted 300,000 -- --
------- -------- -------
Outstanding and exercisable at June 30, 1998 338,391 61,609 330,166
Exercised 38,391 61,609 34,166
Forfeited 188,250 -- 125,000
Granted 70,000 -- --
------- -------- -------
Outstanding and exercisable at June 30, 1999 181,750 -- 171,000
======= ======== =======
Weighted-average exercise price:
June 30, 1999 $ 7.91 $ -- $ 4.63
June 30, 1998 $ 9.86 $ 4.88 $ 4.63
Weighted-average remaining contractual life in years 4.25 -- 0.5
Available for grant at June 30, 1999 118,250 -- --
======= ======== =======
The fair value of the option grants was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions for fiscal
1999: risk-free interest rate equal to 5.90% at the grant date; dividend yield
of zero; expected life of three years; and volatility of 62.1%. The weighted
average fair value of options granted during fiscal year 1999 was $1.74. The
assumptions used for fiscal 1998 are as follows: risk-free interest rate equal
to 5.33% at the grant date; dividend yield of zero; expected life of three
years; and volatility of 53.4%. The weighted average fair value of options
granted during fiscal year 1998 was $4.27.
(continued)
38
39
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
K. STOCKHOLDERS' EQUITY (continued)
On May 10, 1999, the Board of Directors adopted the 1999 Omnibus Equity
Incentive Plan ("1999 Plan") and reserved for issuance thereunder 500,000 shares
of common stock for officers, directors, employees and consultants of the
Company. The 1999 Plan is subject to shareholder approval which is currently
scheduled to be requested at the Annual Meeting of Shareholders on December 6,
1999. No options have been granted under the 1999 Plan.
The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock option
grants to employees in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net earnings (loss) would have been
the pro forma amounts indicated below:
1999 1998
----------- -----------
Net earnings (loss), as reported $(2,923,340) $ 5,871,765
Pro forma net earnings (loss) $(3,311,091) $ 5,700,965
Basic earnings (loss) per share, as reported $ (0.50) $ 1.06
Pro forma basic earnings (loss) per share $ (0.56) $ 1.03
Diluted earnings (loss) per share, as reported $ (0.50) $ 1.00
Pro forma diluted earnings (loss) per share $ (0.56) $ 0.97
Proforma net earnings (loss) reflect only options granted in fiscal years 1999
and 1998 as there were no options granted by the Company during fiscal year 1997
or 1996. The full impact of calculating compensation cost for stock options
under Statement No. 123 is not reflected in the proforma net earnings (loss)
amounts presented above because compensation cost is reflected over the options'
vesting period and compensation cost for options granted prior to July 1, 1995
is not considered.
Other Stock Options
On January 24, 1995, the Board of Directors granted 100,000 options with an
exercise price of $4.625 in exchange for consulting services and reserved
100,000 common shares. The options were exercised in January 1999.
On March 14, 1997, 45,000 options were granted pursuant to a consulting
agreement at prices ranging from $9.00 to $15.00 per share. Consulting expense
incurred as a result of these options was $84,000 for the year ended June 30,
1997. None of the options were exercised and all had expired as of June 30,
1999.
L. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Company leases part of its main facilities under leases that are classified
as noncancelable operating leases. In August 1997, the Company entered into a
15-year lease agreement under which the lessor was to construct a build-to-suit
office and manufacturing facility in Carlsbad, California. Monthly lease
payments commenced in November, 1998, at $103,000 per month and are subject to
annual inflation adjustments. In March 1999, the Company made the decision to
sublease, and not occupy, the partially completed facility. In the third quarter
of 1999, the Company recorded a $2.3 million charge for impairment of leasehold
assets and an accrual of $2.7 million representing the present value of the
excess of future lease payments over estimated sub-lease income. The Company has
an option to acquire the facility during the sixth year of the lease.
(continued)
39
40
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
L. COMMITMENTS AND RELATED PARTY TRANSACTIONS (continued)
The Company entered into two lease agreements during fiscal year 1999 for
adjacent buildings located in Vista, California. The facilities are leased from
an unaffiliated third party and consist of a total of approximately 74,000
square feet. The lease for the first building commenced in August 1998 under a
5-year lease agreement and consists of approximately 54,000 square feet to be
utilized as a warehousing and blending facility. The lease for the second
building commenced in March 1999 under a 3.5-year lease agreement for the rental
of approximately 20,000 square feet to be utilized as a packaging facility.
Minimum rental commitments (exclusive of property tax, insurance and
maintenance) under all noncancelable operating leases, including the leases
agreements referred to above, (with initial or remaining lease terms in excess
of one year) are set forth below:
2000 $ 1,838,618
2001 1,832,931
2002 1,817,001
2003 1,850,836
2004 1,491,810
Thereafter 15,438,588
-----------
$24,269,784
===========
Rental expense totaled $419,254, $193,018, and $169,079 for the years ended June
30, 1999, 1998 and 1997, respectively.
During 1997, the Company had sales of $14,812 to a company in which a key
employee and beneficial owner of 1% of the stock of the Company was formerly the
president and part owner. At June 30, 1997, the amount receivable from this
company was $775,302, which was fully reserved because the Company had
determined the account to be doubtful of collection. The Company recovered
$263,400 in the year ended June 30, 1998 and $511,902 was written off in the
year ended June 30, 1999.
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, 1999, 1998 and 1997. There
were no amounts owed under the agreement at June 30, 1999 or 1998.
During fiscal year 1993, the Company entered into an agreement with an unrelated
party 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 for the year ended June 30, 1997.
Included in notes receivable are notes with the Chief Executive Officer, the
Vice President of Science and Technology, the Vice President of Marketing,
Business Development and Strategic Management, and the Vice President of
Operations. During fiscal 1999, the Company made 6% interest-bearing loans,
which are secured by Company stock, for $20,000 each to the Vice President of
Science and Technology, the Vice President of Marketing, Business Development
and Strategic Management, and the Vice President of Operations. The balances of
these notes as of June 30, including accrued interest, are shown below:
1999 1998
-------- --------
Chief Executive Officer $ 63,208 $ 84,685
Vice President of Science and Technology 79,036 52,538
Vice President of Marketing, Business
Development and Strategic Management 20,143 --
Vice President of Operations 20,143 --
(continued)
40
41
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
L. COMMITMENTS AND RELATED PARTY TRANSACTIONS (continued)
In addition, during the year ended June 30, 1999, the Company made a 5-1/2%
interest-bearing loan to the Executive Vice President in the amount of $250,000.
The loan, including accrued interest, was repaid in February 1999.
During the year ended June 30, 1999, the Company made noninterest-bearing loans
to the Chairman of the Board and the former President in the amount of $50,000
and $6,901, respectively. Amounts owed on these loans, which are secured by
proceeds from life insurance policies on their respective lives, were $250,000
and $200,000 for the Chairman of the Board and $0 and $82,815 for the former
President at June 30, 1999 and 1998, respectively.
M. ECONOMIC DEPENDENCY
The Company had substantial sales to four separate customers during one or more
of the periods shown in the following table. The loss of any of these customers
could have 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:
1999 1998 1997
------------------- ------------------- -------------------
Sales by Sales by Sales by
Customer Customer %(a) Customer %(a) Customer %(a)
- ---------- ----------- ---- ----------- ---- ----------- ----
Customer 1 $18,389,660 32% $24,914,144 37% $17,934,985 36%
Customer 2 13,392,763 23% 11,659,906 17% 6,851,560 14%
Customer 3 (b) (b) 5,936,477 12%
Customer 4 9,382,527 16% (b) (b)
---------- -- ---------- -- ---------- --
41,164,950 71% 36,574,050 54% 30,723,022 62%
(a) Percent of total sales (b) Sales for the year were less than 10% of total
sales.
Accounts receivable from these customers totaled $4,396,947 and $7,834,849 at
June 30, 1999 and 1998, respectively.
N. CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, based in part on the
advice of counsel, the ultimate disposition of these matters will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
41
42
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
O. QUARTERLY DATA (unaudited)
The following is a summary of unaudited quarterly data:
Year Ended June 30, 1999
----------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
----------- ----------- ------------ ------------ ------------
Net sales $16,985,802 $17,317,129 $ 13,122,768 $ 10,004,199 $ 57,429,898
Gross profit 4,654,109 3,265,419 1,890,817 2,609,252 $ 12,419,597
Net earnings (loss) 1,519,771 382,628 (4,320,762) (504,977) $ (2,923,340)
Net earnings (loss) per
common share:
Basic 0.26 0.06 (0.73) (0.09) (0.50)
Diluted 0.25 0.06 (0.73) (0.09) (0.50)
Year Ended June 30, 1998
-----------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
----------- ----------- ----------- ----------- -----------
Net sales $12,032,576 $16,297,341 $18,960,255 $20,604,133 $67,894,305
Gross profit 3,161,354 4,442,561 5,223,250 5,909,423 18,736,588
Net earnings 598,420 1,363,023 1,823,729 2,086,593 5,871,765
Net earnings per
common share:
Basic $ 0.11 $ 0.25 $ 0.33 $ 0.36 $ 1.06
Diluted $ 0.11 $ 0.24 $ 0.31 $ 0.34 $ 1.00
42
43
SCHEDULE II
NATURAL ALTERNATIVES INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
Balance at
Allowance for doubtful beginning of Balance at
accounts period Provision Deductions(*) end of period
- ------------------------ ------------ --------- ------------- -------------
Year ended June 30, 1999 $1,073,000 $567,000 $1,168,000 $ 472,000
Year ended June 30, 1998 $1,006,000 $360,000 $ 293,000 $1,073,000
Year ended June 30, 1997 $ 319,000 $725,000 $ 38,000 $1,006,000
(*) Accounts written off
See accompanying independent auditors report.
43
44
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 27, 1999 By: /s/ Mark A. Ledoux
----------------------------------------
(Mark A. LeDoux, Chief Executive Officer,
President and Assistant Treasurer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Marie A. LeDoux Chairperson of the Board, September 27, 1999
- --------------------------------- Secretary, and Director
(Marie A. LeDoux)
/s/ Mark A. LeDoux Chief Executive Officer, September 27, 1999
- --------------------------------- President, Assistant
(Mark A. LeDoux) Treasurer and Director
/s/ David Lough Executive Vice President September 27, 1999
- ---------------------------------
(David Lough)
/s/ William R. Kellas Director September 27, 1999
- ---------------------------------
(William R. Kellas)
/s/ Lee G. Weldon Director September 27, 1999
- ---------------------------------
(Lee G. Weldon)
/s/ J. Scott Schmidt Director September 27, 1999
- ---------------------------------
(J. Scott Schmidt)
44