UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION
pursuant to Section 13 OR 15(D) OFor 15(d)
of the Securities Exchange Act of 1934
FOR THE SECURITIES EXCHANGE ACT OF 1934
000-15701
(Commission file number 0-15701number)
NATURAL ALTERNATIVES INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware | 84-1007839 | |
(State | ( | |
1185 Linda Vista Drive San Marcos, California | (760) 744-7340 | |
(Address of principal executive | (Registrant’s telephone |
Securities registered pursuant to Section 12(b) of the Act:
Common Stock—$.01 par valueNone
Securities registered pursuant to Section 12(g) of the Act:
NoneCommon Stock, $0.01 par value per share
Indicate by check mark whether the RegistrantNatural Alternatives International, Inc. (NAI) (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 registrantNAI was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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 the Registrant’sNAI’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. ¨
Indicate by check mark whether NAI is an accelerated filer (as defined in Rule 12b-2 of the Act). ¨ Yes x No
Indicate by check mark whether NAI is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨ No x
The aggregate market value of the votingNAI’s common stock held by non-affiliates (assuming for this purpose that all officers and directors, and affiliates of officers and directors, are affiliates)NAI as of the Registrant, aslast business day of September 4, 2002NAI’s most recently completed second fiscal quarter (December 31, 2004) was approximately $15.5 million based$41,243,757 (based on the closing sale price asof $9.23 reported for such date by NASDAQ.
As of September 4, 2002, the Registrant had 5,855,426 outstanding8, 2005, 6,032,367 shares of NAI’s common stock $.01 par value,were outstanding, net of 272,40061,000 treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III (Items 10, 11, 12, 13 and 14) of this Form 10-K incorporates by reference portions of NAI’s definitive proxy statement for the 2003its Annual Meeting of Stockholders to be held December 2, 2005, to be filed within 120 days from June 30, 2002, ison or before October 28, 2005.
(i)
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
Certain statements in this report, including information incorporated by reference, are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect current views about future events and financial performance based on certain assumptions. They include opinions, forecasts, intentions, plans, goals, projections, guidance, expectations, beliefs or other statements that are not statements of historical fact. Words such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “believes,” “anticipates,” “intends,” “estimates,” “approximates,” “predicts,” or “projects,” or the negative or other variation of such words, and similar expressions may identify a statement as a forward-looking statement. Any statements that refer to projections of our future financial performance, our anticipated growth and trends in Part III, Items 10, 11, 12our business, our goals, strategies, focus and 13.plans, and other characterizations of future events or circumstances, including statements expressing general optimism about future operating results, are forward-looking statements. Forward-looking statements in this report may include statements about:
The forward-looking statements in this report speak only as of the date of this report and caution should be taken not to place undue reliance on any such forward-looking statements. Forward-looking statements are subject to certain events, risks, and uncertainties that may be outside of our control. When considering forward-looking statements, you should carefully review the risks, uncertainties and other cautionary statements in this report as they identify certain important factors that could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. These factors include, among others, the risks described under Item 7 and elsewhere in this report, as well as in other reports and documents we file with the SEC.
Overview
Our vision is to collectively herein as “Natural Alternatives”, “NAI”, orenrich the “Company”) are engaged inworld through the formulation, manufacturing and packagingbest of encapsulated and compressed tablets and powder blended vitamins and related nutritional supplements including phytochemicals derived from botanicals and foods. The Company has for many years providednutrition.
As our primary business activity, we provide private label contract manufacturing services to various companies engaged in the marketingthat market and distribution ofdistribute vitamins, mineral supplements,minerals, herbs, and other nutritional supplements, as well as other health care products, to consumers both within and nutrition consumer products (“core business” or “core products”). The Company seeks to further its customers’ objectives by assisting them in expanding their market share through a variety of special marketing and research programs including customer-specific nutritional product formulation; clinical studies assessment; product development; assistance with international product registration; and packaging and delivery system design. Revenues are not specifically derived from these activities, but are a component ofoutside the sales price for the core products delivered to the customer. Marketing, research and other services are provided to the customer prior to manufacturing the products.
Our U.S.-based manufacturing and distribution; and the leadership of an experienced management team.
Our California facilities also have been awarded GMP registration annually by NSF International (NSF) through the NSF Dietary Supplements Certification Program since October 2002.
GMP requirements are regulatory standards and Drug Administration (“FDA”) has proposed detailed Good Manufacturing Practices (“GMP”)guidelines establishing necessary processes, procedures and documentation for nutritional supplements but has not yet adopted final regulations. The Company believes it complies with GMP as proposedmanufacturers in an effort to assure the products produced by that manufacturer have the FDA.
Natural Alternatives International Europe S.A. (“NAIE”)(NAIE), a wholly-ownedour wholly owned subsidiary existing under the laws of the Company,Switzerland, also operates a manufacturing, warehousing, packaging and distribution facility in Manno, Switzerland. In January 2004, NAIE obtained a pharmaceutical license to process pharmaceuticals for packaging, importation, export and sale within Switzerland whichand other countries from the Swissmedic Authority of Bern, Switzerland. We believe the license can help improve our ability to develop relationships with new customers. The license is adjacentvalid until January 2009.
In addition to our operations in the United States and Switzerland, we have a full-time representative in Japan who provides a range of services to our customers seeking to expand into the Japanese market and other markets in the Pacific Rim. These services include regulatory and marketing assistance along with guidance and support in adapting products to these markets.
Originally founded in 1980, Natural Alternatives International, Inc. reorganized as a Delaware corporation in 1989. Unless the context requires otherwise, all references in this report to the city“Company,” “NAI,” “we,” “our,” and “us” refer to Natural Alternatives International, Inc. and, as applicable, NAIE and our other wholly owned subsidiaries. Our principal executive offices are located at 1185 Linda Vista Drive, San Marcos, California, 92078.
Business Strategy
Our goals are to increase and diversify our net sales while improving our overall financial results. To achieve these goals, we intend to:
Overall, we believe there is an opportunity to enhance consumer confidence in the quality of our nutritional supplements and their adherence to label claims through the education provided by direct sales and direct-to-consumer marketing programs. We believe our GMP certified manufacturing operations, science based product formulation, clinical studies and regulatory expertise provide us with a sustainable competitive advantage by providing our customers with a high degree of confidence in our products.
We believe the lack of relevant and reliable consumer education about nutrition and nutritional supplementation combined with the duplication of brands and products in the retail sales channel create a significant opportunity for the direct sales marketing channel. The direct sales marketing channel has proved, and we believe will continue to prove, to be a highly effective method for marketing high quality nutritional supplements as associates or other personalities educate consumers on the benefits of science based nutritional supplements. We believe this education process can lead to premium product pricing and avoid competing with brands of inferior quality and lower pricing in other distribution channels. Our two largest customers operate in the direct sales marketing channel. Thus, our growth has been fueled by the effectiveness of this marketing channel.
We believe our comprehensive approach to customer service is unique within our industry. We believe this approach, together with our commitment to high quality, innovative products and the leadership of our experienced management team, will provide the means to implement our strategies and achieve our goals. There can be no assurance, however, that we will successfully implement any of our business strategies or that we will increase or diversify our net sales or improve our overall financial results.
Products, Principal Markets and Methods of Distribution
Our primary business activity is to provide private label contract manufacturing facility providesservices to companies that market and distribute vitamins, minerals, herbs, and other nutritional supplements, as well as other health care products, to consumers both within and outside the United States. Our private label contract manufacturing capabilitycustomers include companies that market nutritional supplements through direct sales marketing channels, direct response television and retail stores. We manufacture products in a variety of forms, including capsules, tablets, chewable wafers and powders to accommodate a variety of consumer preferences.
We provide strategic partnering services to our private label contract manufacturing customers, including the following:
Additionally, under our direct-to-consumer marketing program, we develop, manufacture and market our own products. Under the direct-to-consumer marketing program, we work with nationally recognized physicians to develop brand name products that reflect their individual approaches to restoring, maintaining or improving health. Direct-to-consumer marketing program products are sold through a variety of distribution channels including television programs, print media and the internet.
We believe the direct-to-consumer marketing program can be an effective method for encapsulation and tableting, finished goods packaging,marketing our high quality control laboratory testing, warehousing, distribution and administration. NAIE is operating undernutritional supplements. In March 2000, we launched Dr. Cherry’s Pathway to HealingTM product line. As of June 30, 2005, the product line included nineteen condition specific, custom formulated products. The products are primarily marketed through a five-year Swiss federal and local income tax holiday ending in fiscal 2005.
For the last three fiscal years, ended June 30, 2002, 2001 and 2000, the percentage of the Company’s net sales from our private label contract manufacturing and direct-to-consumer marketing program were as follows (dollars in thousands):
Fiscal 2005 | Fiscal 2004 | Fiscal 2003 | |||||||
Private Label Contract Manufacturing | $ | 83,382 | $ | 68,493 | $ | 45,768 | |||
Direct-to-Consumer Marketing Program | 8,110 | 10,041 | 10,194 | ||||||
Total Net Sales | $ | 91,492 | $ | 78,534 | $ | 55,962 | |||
Research and Development
We are committed to customers in international markets was approximately 31%, 29% and 32%, respectively. Approximately 16%, 18% and 8% of the Company’s net sales for the same fiscal years, respectively, were manufactured by NAIE for customers with sales in the European marketplace.
As part of the study resultsservices we provide to our private label contract manufacturing customers, we may perform, but are generally presented at various scientific meetingsnot required to perform, certain research and symposia,development activities related to the development or improvement of their products. While our customers typically do not pay directly for this service, the cost of this service is included as a component of the price we charge to manufacture and generally also published in peer reviewed scientific journals.deliver their products. Research and development costs, which include costs associated with international regulatory compliance services we provide to our customers, are expensed when incurredas incurred.
Our research and were $821,000, $718,000 and $774,000development expenses for the last three fiscal years ended June 30 2002, 2001were $3.5 million for 2005, $2.8 million for 2004 and 2000, respectively.
SOURCES AND AVAILABILITY OF RAW MATERIALS
We use raw materials used in the Company’s products consist of nutrientour operations including powders, excipients, empty gelatin capsules, and necessary components for packaging and distribution ofdistributing our finished vitamin and nutritional supplement products. The nutrient powders and the empty gelatin capsules are purchased from manufacturers in the United States and foreign countries. To date, the Company has not experienced any difficulty in obtaining adequate sources of supply. Although there can be no assurance the Company will continue to be able to obtain adequate sources of theseWe typically buy raw materials in bulk from a limited number of qualified vendors located both within and outside the future,United States. During fiscal 2005, Carrington Laboratories Incorporated was our largest supplier, accounting for 35% of our total raw material purchases.
We test the Company believes it will be ableraw materials we buy to do so.
Major Customers
NSA International, Inc. has been our largest customer over the past several years. During the fiscal year ended June 30, 2002. For2005, NSA International, Inc. accounted for approximately 40% of our net sales. Our second largest customer was Mannatech, Incorporated, which accounted for approximately 39% of our net sales during fiscal 2005. Both NSA International, Inc. and Mannatech, Incorporated are private label contract manufacturing customers. No other customer accounted for 10% or more of our net sales during fiscal 2005. Our sales and marketing team is focused on obtaining new private label contract manufacturing customers and developing new direct-to-consumer marketing programs to reduce the year ended June 30, 2001,risks associated with deriving a significant portion of our net sales to NSA, Mannatechfrom a limited number of customers.
Competition
We compete with other manufacturers and Nikken USA, Ltd. (“Nikken”) comprised 72%distributors of vitamins, minerals, herbs, and other nutritional supplements both within and outside the Company’s net sales.
We believe competition in domesticour industry is based on, among other things, customized services offered, product quality and foreign markets in competitionsafety, innovation, price and customer service. We believe we compete favorably with other private labelcompanies because of our ability to provide comprehensive turn key solutions for customers, our certified manufacturing operations and marketing companies. our commitment to quality and safety through our research and development activities. Our future position in the industry will likely depend on, but not be limited to, the following:
The vitamin and nutritional supplement industry is highly competitive and we expect the level of competition continues to increase. The nutritional supplements category includes vitamins, minerals, herbs, botanicals, sports supplements, food supplements and homeopathic supplements. Competition forremain high over the sale of vitamins and supplements comes from many sources, including companies that sell supplements to supermarkets, large chain discount retailers, drug store chains and independent drug stores, health food stores, pharmaceutical companies and others who sell to wholesalers, as well as mail order vendors, eCommerce and network marketing companies. The Company doesnear term. We do not believe it is possible to accurately estimate the number or size of its many competitors sinceour competitors. The industry has undergone consolidation in the recent past and we expect that trend to continue in the near term.
Government Regulation
Our business is subject to varying degrees of regulation by a number of government authorities in the United States, 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, and the Environmental
Protection Agency. Various agencies of the states and localities in which we operate and in which our products are sold also regulate our business, such as the California Department of Health Services, Food and Drug Branch. The areas of our business that these and other authorities regulate include, among others:
The FDA, in particular, regulates the formulation, manufacturing, packaging, storage, labeling, promotion, distribution and sale of vitamin and other nutritional supplements in the United States, while the FTC regulates marketing and advertising claims. The FDA issued a final rule called “Statements Made for Dietary Supplements Concerning the Effect of the Product on the Structure or Function of the Body,” which includes regulations requiring companies, their suppliers and manufacturers to meet GMP in the preparation, packaging, storage and shipment of their products. The FDA also published a Notice of Advance Rule Making for Good Manufacturing Practices that would require manufacturing of dietary supplements to follow GMP. While the final regulations are subject to revision, we are committed to meeting or exceeding the standards set by the FDA.
The FDA has also issued regulations governing the labeling and marketing of dietary supplements and nutritional products. They include:
The Dietary Supplement Health and Education Act of 1994 (DSHEA) revised the provisions of the Federal Food, Drug and Cosmetic Act concerning the composition and labeling of dietary supplements and defined dietary supplements to include vitamins, minerals, herbs, amino acids and other dietary substances used to supplement industrydiets. DSHEA generally provides a regulatory framework to help ensure safe, quality dietary supplements and the dissemination of accurate information about such products. The FDA is largely privately heldgenerally prohibited from regulating 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.
We are also subject to a variety of other regulations in the United States, including those relating to bioterrorism, taxes, labor and highly fragmented.
Our operations outside the United States are similarly regulated by various agencies and entities in the countries in which we operate and in which our products are sold. The Company believesregulations of these countries may conflict with those in the industryUnited States and may vary from country to country. The sale of our products in certain European countries is subject to the rules and regulations of the European Union, which may be interpreted differently among the countries within the Union. In markets outside the United States, we may be required to obtain approvals, licenses or certifications from a country’s ministry of health or comparable agency before we begin operations or the marketing of products in that country. Approvals or licenses may be conditioned on reformulation of our products for a particular market or may be unavailable for certain products or product ingredients. These regulations may limit our ability to enter certain markets outside the United States.
Intellectual Property
Trademarks. We have developed and use registered trademarks in our business, particularly relating to corporate and product names. We own 21 trademark registrations in the United States and have six trademark applications pending with the United States Patent and Trademark Office. Federal registration of a trademark enables the registered owner of the mark to bar the unauthorized use of the registered mark in connection with a similar product in the same channels of trade by any third party anywhere in the United States, regardless of whether the registered owner has ever used the trademark in the area where the unauthorized use occurs.
We have filed applications and own trademark registrations and intend to register additional trademarks in foreign countries where products are or may be sold in the future. We have one trademark application filed with the Japan Trademark Office.
We also claim ownership and protection of certain product names, unregistered trademarks and service marks under common law. Common law trademark rights do not provide the same level of protection afforded by registration of a trademark. In addition, common law trademark rights are limited to the geographic area in which the trademark is actually used. We believe these trademarks, whether registered or claimed under common law, constitute valuable assets, adding to our recognition and the marketing of our products and that these proprietary rights have been and will continue to undergo significant consolidationbe important in enabling us to compete.
Trade Secrets. We own certain intellectual property, including trade secrets that we seek to protect, in part, through confidentiality agreements with mergeremployees and acquisition activityother parties. Although we regard our proprietary technology, trade secrets, trademarks and similar intellectual property as critical to our success, we rely on a combination of trade secrets, contract, patent, copyright and trademark law to establish and protect our rights in our products and technology. In addition, the near-term. Most industry experts expect consolidation activitylaws of certain foreign countries may not protect our intellectual property rights to continuethe same extent as the laws of the United States.
Patents and Patent Licenses. We own certain United States patents. In addition, we have licensed exclusive worldwide rights to four certain United States patents, and each patent’s corresponding foreign patent application, and are currently involved in research and development of products employing the licensed inventions. These patents relate to the ingredient formerly known as “Oxford Factor”. We are currently selling this ingredient to a customer for use in a limited market under the name of Beta-AlanineTM.
Backlogs
Our backlog was approximately $16.0 million at September 2, 2005 and $15.8 million at September 2, 2004. Our sales are made primarily pursuant to standard purchase orders for the foreseeable futuredelivery of products. Quantities of our products to be delivered and delivery schedules are frequently revised to reflect changes in food and nutrition companies, multilevel marketing organizations and eCommerce internet firms.
Working Capital Practices
We manufacture products including shortagefollowing receipt of certaincustomer specific purchase orders and as a result our inventory primarily consists of raw materials and damagework in process. Our raw material purchases are made primarily pursuant to property or injurystandard purchase orders for the delivery of raw materials based upon anticipated demand. Customer specific delivery requirements combined with raw material lead times impact the amount of inventory on hand at any given time. We typically purchase raw materials on 30-day payment terms. Discounts are taken periodically for early payment.
Sales are typically made based upon 30-day terms. A 2% discount is provided to persons.
EMPLOYEESEmployees
As of June 30, 2002, the Company2005, we employed 208 full-time employees in the United States, 134six of whom held executive management positions. Of the remaining full-time employees, with six32 were employed in executive management positions, 18 in the area of research, laboratory and quality control, eight11 in sales and marketing, while the remaining employees are engagedand 159 in productionmanufacturing and administration. The Company uses in its normal course of operationsFrom time to time we use temporary personnel to help us meet short-term operating requirements primarilyrequirements. These positions typically are in manufacturing and manufacturing support. As of June 30, 2002, approximately 35 individuals were employed as2005, we had 50 temporary personnel.
As of June 30, 2002, the Company’s Swiss subsidiary2005, NAIE employed 2625 full-time employees and two temporary personnel in Switzerland.employees. Most of these employees were engagedpositions are in the areas of manufacturing and manufacturing support.
Our employees are currentlynot represented by a union or any other form of collective bargaining unit. The Company believes its relationsagreement and we have not experienced any work stoppages as a result of labor disputes. We believe our relationship with itsour employees areis good.
GOVERNMENT REGULATIONSeasonality
We believe there is no material impact on our business or results of operations from seasonal factors.
Financial Information about Our Business Segment and Geographic Areas
Our business consists of one industry segment, the development, manufacturing, packaging, labeling, advertisingmarketing and distribution of the Company’snutritional supplements. Our products are subject to regulation by one or more federal agencies, includingsold both within the United States Food and Drug Administration (“FDA”), the Federal Trade Commission (“FTC”), the Consumer Product Safety Commission (“CPSC”),in markets outside the United States, Departmentincluding Europe, Australia and Japan. Our primary market outside the United States is Europe.
For the last three fiscal years, net sales by geographic region were as follows (dollars in thousands):
Fiscal 2005 | Fiscal 2004 | Fiscal 2003 | |||||||
Net Sales | |||||||||
United States | $ | 67,784 | $ | 56,350 | $ | 41,838 | |||
Markets Outside the United States | 23,708 | 22,184 | 14,124 | ||||||
Total Net Sales | $ | 91,492 | $ | 78,534 | $ | 55,962 | |||
The allocation of Agriculture (“USDA”)net sales between the United States and markets outside the Environmental Protection Agency (“EPA”). The Company’s activities are also regulated by various agenciesUnited States is based on the location of the statescustomers. Products manufactured by NAIE accounted for 46% of net sales in markets outside the United States in fiscal 2005, 42% in fiscal 2004 and localities51% in fiscal 2003. No products manufactured by NAIE were sold in the United States during the last three fiscal years.
For additional financial information, including financial information about our business segment and geographic areas, please see the consolidated financial statements and accompanying notes to the consolidated financial statements included under Item 8 of this report.
As we continue to expand into markets outside the United States, we will become increasingly subject to political, economic and other risks in the countries 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, labelingwhich we operate. For more information about these and sales of vitaminother risks, please see Items 7 and mineral supplements and may take regulatory action concerning medical claims, misleading or untruthful advertising, and product safety issues. These regulations include the FDA’s Good Manufacturing Practices (“GMP”) for foods. Detailed dietary supplement GMPs have been proposed but no regulations have been adopted. Additional dietary supplement regulations were adopted by the FDA pursuant to the implementation of the Dietary Supplement Health and Education Act of 1994 (“DSHEA”).
This table summarizes our facilities consistas 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.
Location | Nature of Use | Square Feet | How Held | Lease Expiration | ||||
San Marcos, CA USA | Corporate headquarters | 49,000 | Owned/leased(4) | Various(4) | ||||
Vista, CA USA | Manufacturing, warehousing, packaging and distribution(3) | 162,000 | Leased | March 2014 | ||||
Manno, Switzerland(1) | Manufacturing, warehousing, packaging and distribution | 38,000 | Leased | December 2015 |
(1) | This facility is used by NAIE, our Swiss subsidiary. |
(2) | We expect to renew our leases in the normal course of business. |
(3) | We use approximately 93,000 square feet for production; 60,000 square feet for warehousing and 9,000 square feet for administrative functions. |
(4) | We own approximately 29,500 square feet and lease the remaining space with various expiration dates through 2007. |
From time to June 30, 2002, the Company received a final settlement payment of $225,000 as all of its claims under theVitamin Antitrust Litigation were settled.
On February 10, 2005, a complaint was filed against NAI on behalf of Novogen Research Pty. Ltd. in the United States District Court, Southern District of New York alleging a cause of action for patent infringement of a Novogen patent by products manufactured by NAI. The parties are attempting to resolve the matter in an out-of-court settlement but if we are unable to do so we intend to vigorously defend the action.
As of September 8, 2005, other than as set forth above, neither NAI nor its subsidiaries were a party to any material pending legal proceeding nor was any of their property the subject of any material pending legal proceeding.
We did not submit any matters to our stockholders for a vote during the fourth quarter ended June 30, 2005.
ITEM 5. MARKET FOR REGISTRANT’SOUR COMMON EQUITY, AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock trades on Thethe Nasdaq StockNational Market under the Symbol: NAII. The table below sets forthsymbol “NAII.” Below are the high and low salesclosing prices of our common stock as reported on the Company’s stockNasdaq National Market for each quarter of the fiscal years ended June 30, 20022005 and 2001.
High | Low | |||||
FY 2002 | ||||||
Fourth Quarter | $ | 3.10 | $ | 1.58 | ||
Third Quarter | $ | 2.45 | $ | 1.60 | ||
Second Quarter | $ | 2.25 | $ | 1.08 | ||
First Quarter | $ | 2.10 | $ | 1.24 | ||
FY 2001 | ||||||
Fourth Quarter | $ | 2.78 | $ | 1.94 | ||
Third Quarter | $ | 3.00 | $ | 2.09 | ||
Second Quarter | $ | 3.63 | $ | 1.66 | ||
First Quarter | $ | 2.31 | $ | 1.38 |
Fiscal 2005 | Fiscal 2004 | |||||||||||
High | Low | High | Low | |||||||||
First Quarter | $ | 9.65 | $ | 6.32 | $ | 5.47 | $ | 4.68 | ||||
Second Quarter | $ | 11.46 | $ | 7.88 | $ | 6.41 | $ | 4.70 | ||||
Third Quarter | $ | 9.85 | $ | 6.37 | $ | 9.60 | $ | 6.20 | ||||
Fourth Quarter | $ | 8.21 | $ | 6.75 | $ | 13.80 | $ | 7.27 |
In addition to the Nasdaq National Market, our shares are also listed for trading on the Berlin-Bremen Stock Exchange, the Frankfurt Stock Exchange, and the XETRA Stock Exchange, each of which is a foreign exchange located in Germany. We are not aware of any other exchanges on which our shares are traded.
Holders
As of June 30, 2002,September 8, 2005, there were approximately 418360 stockholders of record of NAIIour common stock.
Dividends
We have never paid a dividend on itsour common stock. Itstock and we do not intend to pay a dividend in the foreseeable future. Our current policy is the Company’s present policy to retain all earnings to help provide funds for future growth. Additionally, under the future growthterms of our credit facility, we are precluded from paying a dividend.
Recent Sales of Unregistered Securities
During the Company.
Repurchases
During fiscal 2005, we did not repurchase any shares of our common stock, nor were any repurchases made on our behalf.
The following table sets forth selectedtables contain certain financial data forinformation about NAI, including its subsidiaries. When you review this information, you should keep in mind that it is historical. Our future financial condition and results of operations will vary based on a variety of factors. You should carefully review the Company. The selected financial datafollowing information together with the information on risks under Item 7 and elsewhere in the table are derived from thethis report, and our consolidated financial statements of the Company. The following data should be readincluded in conjunction with, and is qualified in its entirety by, the Company’s consolidated financial statements and related notes and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includedthis report under Item 7 of this Form 10-K.
Year Ended June 30 | ||||||||||||||||||||
2002 | 2001 | 2000 | 1999 | 1998 | ||||||||||||||||
(Dollars in thousands, except per share amounts) | ||||||||||||||||||||
Net sales | $ | 50,037 | $ | 42,158 | $ | 47,827 | $ | 57,430 | $ | 67,894 | ||||||||||
Cost of goods sold | 39,068 | 33,970 | 44,152 | 45,010 | 49,158 | |||||||||||||||
Gross profit | 10,969 | 8,188 | 3,675 | 12,420 | 18,736 | |||||||||||||||
Selling, general & administrative expenses | 10,684 | 8,848 | 8,670 | 11,965 | 9,114 | |||||||||||||||
Loss on abandonment of leased facility | — | — | 1,729 | 5,392 | — | |||||||||||||||
Loss on impairment of intangible assets acquired | — | 1,544 | — | — | — | |||||||||||||||
Income (loss) from operations | 285 | (2,204 | ) | (6,724 | ) | (4,937 | ) | 9,622 | ||||||||||||
Other income (expense): | ||||||||||||||||||||
Interest income | 16 | 92 | 139 | 185 | 195 | |||||||||||||||
Interest expense | (665 | ) | (755 | ) | (399 | ) | (85 | ) | (110 | ) | ||||||||||
Equity in loss of unconsolidated joint venture | — | (38 | ) | (62 | ) | — | — | |||||||||||||
Foreign exchange gain (loss) | (68 | ) | 15 | 74 | — | — | ||||||||||||||
Proceeds from vitamin antitrust litigation | 3,410 | 298 | 116 | — | — | |||||||||||||||
Other, net | 259 | 73 | (45 | ) | 15 | (40 | ) | |||||||||||||
Total other income (expense) | 2,952 | (315 | ) | (177 | ) | 115 | 45 | |||||||||||||
Income (loss) before income taxes | 3,237 | (2,519 | ) | (6,901 | ) | (4,822 | ) | 9,667 | ||||||||||||
Provision (benefit) for income taxes | (642 | ) | 2,370 | (2,429 | ) | (1,899 | ) | 3,795 | ||||||||||||
Net income (loss) | $ | 3,879 | $ | (4,889 | ) | $ | (4,472 | ) | $ | (2,923 | ) | $ | 5,872 | |||||||
Net income (loss) per common share: | ||||||||||||||||||||
Basic | $ | 0.67 | $ | (0.85 | ) | $ | (0.78 | ) | $ | (0.50 | ) | $ | 1.06 | |||||||
Diluted | $ | 0.67 | $ | (0.85 | ) | $ | (0.78 | ) | $ | (0.50 | ) | $ | 1.00 | |||||||
Weighted average common shares: | ||||||||||||||||||||
Basic | 5,788 | 5,770 | 5,757 | 5,868 | 5,544 | |||||||||||||||
Diluted | 5,798 | 5,770 | 5,757 | 5,868 | 5,867 | |||||||||||||||
Balance sheet data at end of period: | ||||||||||||||||||||
Total assets | $ | 27,510 | $ | 25,068 | $ | 34,109 | $ | 38,596 | $ | 42,987 | ||||||||||
Working capital | 8,725 | 5,045 | 7,639 | 14,098 | 17,454 | |||||||||||||||
Long-term debt and capital lease obligations, net of current portion | 1,576 | 3,567 | 3,345 | 927 | 977 | |||||||||||||||
Total stockholders’ equity | 19,608 | 15,604 | 20,486 | 25,091 | 27,659 |
8.
Annual Financial Data
Annual Financial Information for Years Ended June 30 (Amounts in thousands, except per share amounts) | ||||||||||||||||||||
2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||
Net sales | $ | 91,492 | $ | 78,534 | $ | 55,962 | $ | 50,037 | $ | 42,158 | ||||||||||
Cost of goods sold | 73,095 | 59,964 | 42,781 | 39,068 | 33,970 | |||||||||||||||
Gross profit | 18,397 | 18,570 | 13,181 | 10,969 | 8,188 | |||||||||||||||
Selling, general & administrative expenses | 14,605 | 15,188 | 12,012 | 10,684 | 8,848 | |||||||||||||||
Loss on impairment of intangible assets acquired | — | — | — | — | 1,544 | |||||||||||||||
Income (loss) from operations | 3,792 | 3,382 | 1,169 | 285 | (2,204 | ) | ||||||||||||||
Other income (expense): | ||||||||||||||||||||
Interest income | 21 | 24 | 57 | 16 | 92 | |||||||||||||||
Interest expense | (280 | ) | (274 | ) | (252 | ) | (665 | ) | (755 | ) | ||||||||||
Foreign exchange gain (loss) | (137 | ) | 57 | 12 | (68 | ) | 15 | |||||||||||||
Proceeds from vitamin antitrust litigation | — | — | 225 | 3,410 | 298 | |||||||||||||||
Other, net | 13 | (165 | ) | (59 | ) | 259 | 35 | |||||||||||||
Total other income (expense) | (383 | ) | (358 | ) | (17 | ) | 2,952 | (315 | ) | |||||||||||
Income (loss) before income taxes | 3,409 | 3,024 | 1,152 | 3,237 | (2,519 | ) | ||||||||||||||
Provision for (benefit from) income taxes | 1,210 | 24 | 47 | (642 | ) | 2,370 | ||||||||||||||
Net income (loss) | $ | 2,199 | $ | 3,000 | $ | 1,105 | $ | 3,879 | $ | (4,889 | ) | |||||||||
Net income (loss) per common share: | ||||||||||||||||||||
Basic | $ | 0.37 | $ | 0.51 | $ | 0.19 | $ | 0.67 | $ | (0.85 | ) | |||||||||
Diluted | $ | 0.34 | $ | 0.48 | $ | 0.18 | $ | 0.67 | $ | (0.85 | ) | |||||||||
Weighted average common shares: | ||||||||||||||||||||
Basic | 5,949 | 5,843 | 5,809 | 5,788 | 5,770 | |||||||||||||||
Diluted | 6,465 | 6,304 | 6,021 | 5,798 | 5,770 | |||||||||||||||
Balance sheet data at end of period: | ||||||||||||||||||||
Total assets | $ | 44,138 | $ | 42,468 | $ | 30,724 | $ | 27,510 | $ | 25,068 | ||||||||||
Working capital | $ | 14,398 | $ | 17,468 | $ | 12,321 | $ | 8,725 | $ | 5,045 | ||||||||||
Long-term debt and capital lease obligations, net of current portion | $ | 2,979 | $ | 3,841 | $ | 2,386 | $ | 1,576 | $ | 3,567 | ||||||||||
Total stockholders’ equity | $ | 26,917 | $ | 24,128 | $ | 20,777 | $ | 19,608 | $ | 15,604 |
Quarterly Financial Data - Unaudited
Quarterly Financial Information for Fiscal 2005 and Fiscal 2004 (Amounts in thousands, except per share amounts) | ||||||||||||||||||||||||||||||||
Fiscal 2005 | Fiscal 2004 | |||||||||||||||||||||||||||||||
Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | |||||||||||||||||||||||||
Net sales | $ | 24,730 | $ | 22,490 | $ | 21,545 | $ | 22,727 | $ | 23,350 | $ | 21,268 | $ | 17,195 | $ | 16,721 | ||||||||||||||||
Cost of goods sold | 20,456 | 18,277 | 16,953 | 17,409 | 17,874 | 16,215 | 13,300 | 12,575 | ||||||||||||||||||||||||
Gross profit | 4,274 | 4,213 | 4,592 | 5,318 | 5,476 | 5,053 | 3,895 | 4,146 | ||||||||||||||||||||||||
Selling, general & administrative expenses | 3,433 | 3,538 | 3,710 | 3,924 | 4,279 | 4,047 | 3,346 | 3,516 | ||||||||||||||||||||||||
Income from operations | 841 | 675 | 882 | 1,394 | 1,197 | 1,006 | 549 | 630 | ||||||||||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||||||||||
Interest income | 6 | 5 | 6 | 4 | 3 | 3 | 9 | 9 | ||||||||||||||||||||||||
Interest expense | (89 | ) | (86 | ) | (54 | ) | (51 | ) | (111 | ) | (69 | ) | (51 | ) | (43 | ) | ||||||||||||||||
Foreign exchange gain (loss) | (115 | ) | (188 | ) | 168 | (2 | ) | (38 | ) | (50 | ) | 130 | 15 | |||||||||||||||||||
Other, net | (3 | ) | (8 | ) | 25 | (1 | ) | (96 | ) | (22 | ) | (25 | ) | (22 | ) | |||||||||||||||||
Total other income (expense) | (201 | ) | (277 | ) | 145 | (50 | ) | (242 | ) | (138 | ) | 63 | (41 | ) | ||||||||||||||||||
Income before income taxes | 640 | 398 | 1,027 | 1,344 | 955 | 868 | 612 | 589 | ||||||||||||||||||||||||
Provision for (benefit from) income taxes | 355 | 121 | 242 | 492 | (47 | ) | 13 | 36 | 22 | |||||||||||||||||||||||
Net income | $ | 285 | $ | 277 | $ | 785 | $ | 852 | $ | 1,002 | $ | 855 | $ | 576 | $ | 567 | ||||||||||||||||
Net income per common share: | ||||||||||||||||||||||||||||||||
Basic | $ | 0.05 | $ | 0.05 | $ | 0.13 | $ | 0.14 | $ | 0.17 | $ | 0.15 | $ | 0.10 | $ | 0.10 | ||||||||||||||||
Diluted | $ | 0.04 | $ | 0.04 | $ | 0.12 | $ | 0.13 | $ | 0.15 | $ | 0.13 | $ | 0.09 | $ | 0.09 | ||||||||||||||||
Weighted average common shares: | ||||||||||||||||||||||||||||||||
Basic | 5,982 | 5,958 | 5,929 | 5,924 | 5,881 | 5,849 | 5,822 | 5,821 | ||||||||||||||||||||||||
Diluted | 6,414 | 6,421 | 6,572 | 6,448 | 6,606 | 6,335 | 6,162 | 6,107 |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
The Company’sfollowing discussion and analysis of itsis intended to help you understand our financial condition and results of operations are based upon itsfor the last three fiscal years ended June 30, 2005. You should read the following discussion and analysis together with our audited consolidated financial statements and the notes to the consolidated financial statements included under Item 8 in this report. Our future financial condition and results of operations will vary from our historical financial condition and results of operations described below. You should carefully review the risks described under this Item 7 and elsewhere in this report, which identify certain important factors that could cause our future financial condition and results of operations to vary.
Executive Overview
The following overview does not address all of the matters covered in the other sections of this Item 7 or other items in this report or contain all of the information that may be important to our stockholders or the investing public. This overview should be read in conjunction with the other sections of this Item 7 and this report.
Major business developments of fiscal 2005 included the following:
Our focus for fiscal 2006 includes the following:
Looking forward, we expect to continue our trend of annual revenue growth. We anticipate quarterly revenue fluctuations due to, among other things, the timing of customer orders that are impacted by marketing programs, supply chain management, entry into new markets and new product introductions.
We also expect our long-term trend of growth in annual operating income to continue, however; there may be periodic quarterly declines in operating income due to revenue fluctuations, regulatory compliance costs and investments in new marketing, brand development and channel diversification initiatives. Regulatory compliance costs related to our TGA recertification are largely complete. We anticipate the reduction in regulatory compliance costs to be offset by incremental costs for implementing focused initiatives to establish our own branded products through new distribution channels.
Critical Accounting Policies and Estimates
Our consolidated financial statements included under Item 8 in this report have been prepared in accordance with United States generally accepted accounting principles generally accepted(GAAP). Our significant accounting policies are described in the United States.notes to our consolidated financial statements. The preparation of these financial statements in accordance with GAAP requires the Company tothat we make estimates and judgmentsassumptions that affect the amounts reported amountsin our financial statements and their accompanying notes. We have identified certain policies that we believe are important to the portrayal of assets, liabilities, revenuesour financial condition and expenses, and related disclosureresults of contingent assets and liabilities. On an on-going basis,operations. These policies require the Company evaluates the estimates including those related to bad debts and inventories. The Company bases itsapplication of significant judgment by our management. We base our estimates on our historical experience, industry standards, and on various other assumptions that we believe are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.circumstances. Actual results maycould differ from these estimates.
Revenue Recognition
We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (SAB 101). SAB 101 requires that four basic criteria be met before revenue can be recognized: 1) there is evidence that an arrangement exists; 2) delivery has occurred; 3) the more significant judgmentsfee is fixed or determinable; and estimates used in4) collectibility is reasonably assured. We recognize revenue upon determination that all criteria for revenue recognition have been met. The criteria are usually met at the preparationtime title passes to the customer, which usually occurs upon shipment. Revenue from shipments where title passes upon delivery is deferred until the shipment has been delivered.
As part of the consolidated financial statements:
Additionally, we record reductions to gross revenue for estimated market valuereturns of private label contract manufacturing products and direct-to-consumer products. The estimated returns are based upon assumptions about futurethe trailing six months of private label contract manufacturing gross sales and our historical experience for both private label contract manufacturing and direct-to-consumer product returns. However, the estimate for product returns does not reflect the impact of a large product recall resulting from product nonconformance or other factors as such events are not predictable nor is the related economic impact estimable.
Inventory Reserve
We operate primarily as a private label contract manufacturer that builds products following receipt of customer specific purchase orders. As a result, we have limited realization risk in finished goods and work-in-process inventories. Our inventory reserve primarily relates to, but is not necessarily limited to, realization risk for raw materials. Our estimate to reduce inventory to net realizable value is based upon expiration of the raw materials’ efficacy, foreseeable demand of raw materials, market conditions and market conditions.specific factors that arise from time to time related to regulatory and other factors. The reserve level reflects our historical experience. If future product demand and/or market conditions are less favorable than those projected by management,we estimate, additional inventory reserves may be required.
Accounting for Income Taxes—the Company is required toTaxes
We estimate income taxes in each of the jurisdictions in which it operates.we operate. This process involves estimating our actual current tax exposure, for the Company together with assessing temporary differences resulting from differing treatment of items, such as property plant and equipment depreciation, for tax and accountingfinancial reporting purposes. Actual income taxes could vary from these estimates due to future changes in income tax law or results from final tax examexamination reviews. At June 30, 2002, the Company assessed
We record valuation allowances to reduce our deferred tax assets to an amount that we believe is more likely than not to be realized. We consider estimated future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance on its deferred tax assets. A valuation allowance is provided when it is more likely than notallowance. If we determine that some portion or all of the deferred tax assetswe will not be realized. Based upon the historical operating losses and the uncertainty regarding sufficient near term taxable income, management believes that this evidence creates sufficient uncertainty regarding the realizability of the net deferred tax assets. Therefore, a full valuation allowance of $1,097,000 is recorded at June 30, 2002. Should the Company determine that it would be able to realize all or part of itsour deferred tax assets in the future, we will record an adjustment to the carrying value of the deferred tax asset, which
would be reflected as income tax expense. Conversely, if we determine that we will realize a deferred tax asset, which currently has a valuation allowance, we would reverse the valuation allowance, which would be reflected as income tax benefit.
Additionally, we have not recorded U.S. income tax expense for NAIE’s retained earnings that we have declared as indefinitely reinvested offshore, thus reducing our overall income tax expense. The earnings designated as indefinitely reinvested in NAIE are based upon the actual deployment of such earnings in NAIE’s assets and our expectations of the future cash needs of NAIE and NAI. Income tax laws are also a factor in determining the amount of foreign earnings to be indefinitely reinvested offshore.
We carefully review several factors that influence the ultimate disposition of NAIE’s retained earnings declared as reinvested offshore, and apply stringent standards to overcoming the presumption of repatriation. Despite this approach, because the determination involves our future plans and expectations of future events, the possibility exists that amounts declared as indefinitely reinvested offshore may ultimately be repatriated. For instance, NAI’s actual cash needs may exceed our current expectations or NAIE’s actual cash needs may be less than our current expectations. Additionally, changes may occur in tax laws and or accounting standards that could change our conclusion about the status of NAIE’s retained earnings. This would result in additional income tax expense in the fiscal year we determine that amounts are no longer indefinitely reinvested offshore.
On an interim basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision in accordance with the anticipated annual rate. As the fiscal year progresses, we continually refine our estimate based upon actual events and earnings by jurisdiction during the year. This continual estimation process periodically results in a change to our expected effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision equals the expected annual rate.
It is our policy to establish reserves based upon management’s assessment of exposure for certain positions taken in previously filed tax returns that may become payable upon audit by tax authorities. The tax reserves are analyzed at least annually, generally in the fourth quarter of each year, and adjustments are made as events occur which warrant adjustments to the reserve.
Derivative Financial Instruments
We use derivative financial instruments in the management of our foreign currency exchange risk inherent in our forecasted transactions denominated in Euros. We may hedge our foreign currency exposures by entering into offsetting forward exchange contracts and currency options. We account for derivative financial instruments using the deferral method under FAS 133, “Accounting for Derivatives and Related Hedging Activity,” when such instruments are intended to hedge identifiable, firm foreign currency commitments or anticipated transactions and are designated as, and effective as, hedges. Foreign exchange exposures arising from certain transactions that do not meet the criteria for the deferral method are marked-to-market.
We recognize any unrealized gains and losses associated with derivative instruments in income in the period in which the underlying hedged transaction is realized. In the event the derivative instrument is deemed ineffective or sold prior to maturity, we would recognize the resulting gain or loss in income at that time.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts to reflect our estimate of current and past due receivable balances that may not be collected. The allowance for doubtful accounts is based upon our assessment of the collectibility of specific customer accounts, the aging of accounts receivable and our history of bad debts. We believe that the allowance for doubtful accounts is adequate to cover anticipated losses in the receivable balance under current conditions; however, significant deterioration in the financial condition of our customers, resulting in an impairment of their ability to make payments, could materially change these expectations and additional allowance may be required.
Defined benefit pension plan
The plan obligation and related assets of the defined benefit pension plan are presented in the notes to the consolidated financial statements. Plan assets, which consist primarily of marketable equity and debt instruments, are valued based upon third party market quotations. Independent actuaries through the use of a number of assumptions determine plan obligation and annual pension expense. Key assumptions in measuring the plan obligation include the discount rate and estimated future return on plan assets. In determining the discount rate, we use an average long-term bond yield. Asset returns are based upon the historical returns of multiple asset classes to develop a risk free rate of return and risk premiums for each asset class. The overall rate for each asset class was developed by combining a long-term inflation component, the risk free rate of return and the associated risk premium. A weighted average rate is developed based on the overall rates and the plan’s asset allocation.
We have discussed the development and selection of these critical accounting policies with the Audit Committee of our Board of Directors and the Audit Committee has reviewed our disclosure relating to these policies.
Results of Operations
The results of operations for the fiscal years ended June 30 were as follows (dollars in thousands, except per share amounts):
2005 | 2004 | Percent Change (2005- 2004) | 2003 | Percent Change (2004- 2003) | ||||||||||||||
Private label contract manufacturing | $ | 83,382 | $ | 68,493 | 22 | % | $ | 45,768 | 50 | % | ||||||||
Direct-to-consumer marketing program | 8,110 | 10,041 | (19 | )% | 10,194 | (2 | )% | |||||||||||
Total net sales | 91,492 | 78,534 | 16 | % | 55,962 | 40 | % | |||||||||||
Cost of goods sold | 73,095 | 59,964 | 22 | % | 42,781 | 40 | % | |||||||||||
Gross profit | 18,397 | 18,570 | (1 | )% | 13,181 | 41 | % | |||||||||||
Gross profit % | 20.1 | % | 23.6 | % | 23.6 | % | ||||||||||||
Selling, general & administrative expenses | 14,605 | 15,188 | (4 | )% | 12,012 | 26 | % | |||||||||||
% of net sales | 16.0 | % | 19.3 | % | 21.5 | % | ||||||||||||
Other expenses, net | 383 | 358 | 7 | % | 17 | 2006 | % | |||||||||||
Income before income taxes | 3,409 | 3,024 | 13 | % | 1,152 | 163 | % | |||||||||||
% of net sales | 3.7 | % | 3.9 | % | 2.1 | % | ||||||||||||
Net income | $ | 2,199 | $ | 3,000 | (27 | )% | $ | 1,105 | 171 | % | ||||||||
% of net sales | 2.4 | % | 3.8 | % | 2.0 | % | ||||||||||||
Diluted net income per common share | $ | 0.34 | $ | 0.48 | (29 | )% | $ | 0.18 | 167 | % |
Fiscal 2005 Compared to Fiscal 2004
The percentage increase in private label contract manufacturing net sales was attributed to the following:
Strengthening of the Euro against the U.S dollar | 1 | % | |
NSA International, Inc. net sales growth | 8 | % | |
Mannatech, Incorporated net sales growth | 17 | % | |
Discontinuation of two customer relationships | (7 | )% | |
Other customers net sales growth | 3 | % | |
Total | 22 | % | |
The increase in our private label contract manufacturing net sales was partially offset by the decrease in our direct-to-consumer net sales. This decrease was a continuation of the decline in sales for the Dr. Cherry Pathway to HealingTM product line due to our prior reduction in media spending investment in new television markets for the product line and a reduction in new customer acquisitions from our primary television market. We market our Dr. Cherry Pathway to HealingTM product line primarily through weekly television programming. During the third quarter we completed what we believe are improvements to the content and style of several of the programs. The new programming was introduced in the beginning of April 2005. The initial impact of the new programming appears to be positive as fourth quarter net sales improved 5% over the third quarter of fiscal 2005. In addition, we terminated the Chopra Center EssentialsTM product line in June 2005.
Gross profit margin decreased to 20.1% in fiscal 2005 from 23.6%, or 3.5 percentage points, from fiscal 2004. The decrease in gross profit margin was primarily due to the following:
Percentage Points | |||
Shift in sales mix | (4.0 | ) | |
Incremental inventory reserves | (0.5 | ) | |
Incremental overhead expenses | (0.6 | ) | |
Reduction in royalties paid to third parties | 0.6 | ||
Reduction in direct and indirect labor | 1.0 | ||
Total | (3.5 | ) | |
Selling, general and administrative expenses decreased $583,000, or 4%, from the prior year primarily attributable to the following:
Other expense, net, increased $25,000 over the prior year primarily attributable to the following:
Our effective tax rate for fiscal 2005 was 35.5% compared to 1% in fiscal 2004. The increase in our effective rate is primarily attributable to the reduction in our valuation allowance on our net deferred tax assets in the future,prior year. Income taxes for fiscal 2005 differed from statutory rates primarily due to our Swiss federal and cantonal income tax holiday and the utilization of certain federal and state tax credits. Our Swiss tax holiday ended on June 30, 2005. We anticipate NAIE’s effective tax rate for Swiss federal, cantonal and communal taxes will be approximately 23% in fiscal 2006 compared to our fiscal 2005 effective rate of 5%.
During the fourth quarter of fiscal 2005 we repatriated $2.0 million of NAIE’s foreign earnings under the American Jobs Creation Act (the “Act”), which was signed into law by the President on October 22, 2004. The Act creates a temporary incentive for U.S. multinational corporations to repatriate accumulated income earned outside the U.S. by providing an adjustment85% dividend received deduction for certain dividends from controlled foreign corporations. The $2.0 million repatriation resulted in an increase of $232,000 in our tax provision for fiscal 2005. NAIE’s repatriated foreign earnings previously had been designated as permanently reinvested and the remaining undistributed retained earnings continue to be designated as such subsequent to the deferred tax assets would be recorded to operations in the period such determination was made.
RESULTS OF OPERATIONS
Consolidated private label contract manufacturing the remainder of $33.4 million. NAIE produced $7.5 million of the core business sales in fiscal 2001.
The Dr. Cherry Pathway to HealingTM product line comprised 100% of our direct-to-consumer net sales for the fiscal years ended June 30, 2004 and 2003. Direct-to-consumer net sales remained consistent due to a reduction in our media spending investment in new television markets for the Dr. Cherry Pathway to HealingTM product line, as the investment did not produce what we considered to be adequate results. Additionally, we experienced a reduction in new customer acquisitions from our primary television market, while the average order value remained consistent. We have identified opportunities to improve the content and style of the television programs and anticipate introducing the upgraded television programs in the third quarter of fiscal 2005.
Gross profit margin remained consistent despite a 1.4 percentage point increase in material cost as a percentage of net sales, due to a 1.5 percentage point decrease in labor and overhead as a percentage of net sales.
Our material cost as a percentage of net sales was $39.2 million (four customers) and $34.4 million (six customers)54.4% ($42.7 million) for fiscal years 20022004 and 2001, respectively, an53.0% ($29.6 million) in the prior year. The increase in material cost as a percentage of $4.8 million. Thenet sales increase was primarily due to new productan increase in inventory reserves of $854,000 for specific inventory realization risks and $111,000 for products as a result of terminating the Jennifer O’Neill Signature LineTM brand. The inventory allowance as a percentage of gross inventory at June 30, 2004 remained consistent with June 30, 2003. Additionally, 0.5 percentage points of the increase related to a shift in our sales combined with increasedmix to higher volume, of established products to the first and second largest customers of $2.1 million and $6.2 million, respectively. These increases were partially offset by decreased orders from smaller customers.
In June 2004, we began the lossbuild out of three customers, which represented combined net salestenant improvements for approximately 46,000 square feet at our Vista facility. We anticipate the build out will be completed by the end of $9.9 millionour second quarter in fiscal 2000 versus $238,000 for fiscal 2001. Loss of these three customers reflects the risk associated with our core business where price/cost is a prime driver. Sales2005. We anticipate being able to our second largest customer declined in 2001 by 53% to $4.2 million from $9.0 million for fiscal 2000. Fiscal 2000 sales were higher as this customer purchased large quantities of product from the Company to support a major product introduction, while fiscal 2001 sales volumes have stabilized at lower levels. The sales decreases associated with these customers were offset by increases with other existing customers. Sales to our largest customer during fiscal 2001 increased by $1.1 million to $21.9 million as a result of increased product shipped. Sales increased by $1.1 million in 2001 to our third largest customer as a result of increased volume of established products coupled with additional new products introduced during the 2001 fiscal year.
Selling, general and 36% for our core and DTC businesses, respectively.
During fiscal 2004, we made significant investments in our insurance carriersresearch and development initiatives primarily in the areas of $312,000.
Other expense increased over the prior year primarily due to a $1.7 million$61,000 charge for loss on leased facility. Fiscal 2001 operating expenses includedin conjunction with refinancing our credit facility in May 2004. The charge related to a charge of $1.5 million reflectingprepayment penalty and the write downoff of intangible assets acquiredcapitalized issuance costs and additional expenses associated with the attempted commercializationis included in interest expense in our consolidated statements of the underlying software obtainedincome. Additionally, we received proceeds from the FitnessAge and Custom Nutrition ventures.
At June 30, 2004, we reduced our valuation allowance on our deferred tax assets based on historical operating profits. The effective tax rate for fiscal 2004 was 1% compared to 4% in fiscal 2003. NAIE operates under a five-year Swiss federal and cantonal income tax holiday that ends June 30, 2005. Following the expiration of $2.3 million. Atour tax holiday, we anticipate NAIE’s effective tax rate for Swiss federal, cantonal and communal taxes will be approximately 23% compared to our current effective rate of approximately 5%.
Our net income was $3.0 million ($0.48 per diluted share) in fiscal 2004 and $1.1 million ($0.18 per diluted share) in fiscal 2003. Excluding the endeffect of fiscal 2001, changes in underlying estimates and assumptions as to the ultimate recoverylitigation settlement proceeds of these assets required management to establish a valuation reserve of $2.3 million thereon, resulting$225,000 in the charge toprior year, net income taxes, for the current year, of the same amount.
Liquidity and Capital Resources
Our primary sources of $4.5 million ($0.78 per share) for fiscal 2000. The change in net loss from fiscal 2000 to fiscal 2001 reflected a favorable change in operations offsetliquidity and capital resources are cash flows provided by operating activities and the significant charge to income taxes as described above.
Approximately $1.0 million of our operating cash flow was generated by NAIE in fiscal 2005. In June 2005, we repatriated $2.0 million of NAIE retained earnings under the American Jobs Creation Act. As of June 30, 2005, NAIE’s undistributed retained earnings are included in cash provided by operating activities. The Companyconsidered indefinitely reinvested.
Cash used approximately $681,000 in investing activities primarily onin fiscal 2005 was $7.7 million compared to $3.3 million in fiscal 2004 and $779,000 in fiscal 2003. Capital expenditures were $7.7 million in fiscal 2005 compared to $3.3 million in fiscal 2004 and $977,000 in fiscal 2003. Fiscal 2005 capital expenditures were primarily for the expansion of our Vista, California production facility, which included the acquisition of additional manufacturing equipment. The expanded facility should help us improve operational efficiency, increase manufacturing capacity and reduce business risk. On February 1, 2005, we amended our credit facility to increase the limitation on our capital expenditures for the fiscal year ended June 30, 2005 from $6.5 million to $8.0 million. All other terms and conditions of our credit facility remain in full force and effect. Capital expenditures included $960,000 of tenant improvements that were partially offsetfunded by the repaymentlandlord allowances.
Our consolidated debt decreased to $3.8 million at June 30, 2005 from $4.7 million at June 30, 2004. Our $12.0 million credit facility is comprised of notes receivable. The Company used approximately $4.0an $8.0 million in financing activities to pay down debt by approximately $2.5 million and place a $1.5 million cash deposit as collateral for the Company’s amended working capital line of credit agreement.
On May 13, 2005, we purchased seven option contracts designated and effective as cash flow hedges to protect against the foreign currency exchange risk inherent in a portion of our forecasted transactions denominated in Euros. The seven options expire monthly beginning June 2005 and ending December 2005. The option contracts had a notional amount of $4.2 million, a weighted average strike price of $1.19, and a purchase price of $21,000. The risk of loss associated with the options is limited to bepremium amounts paid upon expirationfor the option contracts. As of June 30, 2005, we had not exercised any of the agreementoptions and one of the options had expired.
On July 7, 2005, we purchased 12 option contracts designated and effective as cash flow hedges to protect against the foreign currency exchange risk inherent in a portion of our forecasted transactions denominated in Euros. The 12 options expire monthly beginning January 2006 and ending December 2006. The option contracts had a notional amount of $7.0 million, a weighted average strike price of $1.16, and a purchase price of $152,000. The risk of loss associated with the options is limited to premium amounts paid for the option contracts.
There are no other derivative financial instruments at June 30, 2005.
As of June 30, 2005, we had $1.9 million in cash and cash equivalents. We plan on October 31, 2002. The Company is working with prospective lenders to replace thefunding our current working capital line of credit facility.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet debt nor do we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons that may have a material current or future effect on financial condition, changes in financial condition, results of operations, liquidity, capital requirements will depend on many factors, including but not limited to: continued profitability from operations, the ability to seek additional financing; the effectivenessexpenditures, capital resources, or significant components of the Company’s diversified growth strategy; the effectiveness of the expansion of European operations and the ability to establish additional customersrevenue or changes to existing customer’s business.
CONTRACTUAL OBLIGATIONS AND COMMITMENTSContractual Obligations
This table summarizes the Company’sour known contractual obligations and estimated cash requirements as ofcommercial commitments at June 30, 2002. This table should be read in conjunction with the footnotes in the accompanying consolidated financial statements2005 (dollars in thousands):
Fiscal Year | Operating Leases | Term Notes | Total | ||||||
2003 | $ | 906 | $ | 587 | $ | 1,493 | |||
2004 | 375 | 642 | 1,017 | ||||||
2005 | 241 | 332 | 573 | ||||||
2006 | 108 | 83 | 191 | ||||||
2007 | -0- | 90 | 90 | ||||||
Thereafter | -0- | 429 | 429 | ||||||
Total | $ | 1,630 | $ | 2,163 | $ | 3,793 | |||
Payments Due By Period | |||||||||||||||
Contractual Obligations | Total | Less Than 1 Year | 1 –3 Years | 3 –5 Years | More Than 5 Years | ||||||||||
Long-Term Debt | $ | 3,840 | $ | 861 | $ | 1,783 | $ | 596 | $ | 600 | |||||
Operating Leases | 18,605 | 1,872 | 3,856 | 3,916 | 8,961 | ||||||||||
Total Obligations | $ | 22,445 | $ | 2,733 | $ | 5,639 | $ | 4,512 | $ | 9,561 | |||||
RECENT ACCOUNTING PRONOUNCEMENTSInflation
We do not believe that inflation or changing prices have had a material impact on our historical operations or profitability.
Recent Accounting Pronouncements
In August 2001,November 2004, the Financial Accounting Standards Board (the “FASB”)FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations.” This statement addresses financial accounting151, “Inventory Costs, an amendment of APB No. 43, Chapter 4” (SFAS 151). SFAS 151 clarifies that abnormal inventory costs such as costs of idle facilities, excess freight and reporting for obligations associated with the retirementhandling costs, and wasted materials (spoilage) are required to be recognized as current period charges. The provisions of tangible long-lived assets and the associated asset retirement costs. It applies to (a) all entities and (b) legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation of long-lived assets, except for certain obligations of lessees. This statement isSFAS 151 are effective for financial statements issued forour fiscal yearsyear beginning after June 15, 2002. The Company doesJuly 1, 2006. We do not believeexpect that the adoption of this statementSFAS 151 will have a material impact on itsour consolidated financial position or results of operations.
On December 16, 2004, the FASB finalized SFAS 123R, “Share Based Payment” (SFAS 123R), which will be effective for our interim and annual reporting periods beginning after June 15, 2005. SFAS 123R will require that we expense stock options and employee stock purchase plan shares using a binomial lattice valuation model that the FASB believes is capable of more fully reflecting certain characteristics of employee stock options. The effect of expensing stock options and employee stock purchase plan shares on our reported results of operations using the Black-Scholes model is presented in August 2001,the notes to our consolidated financial statements under Item 8 of this report.
In May 2005, the FASB issued Statement No. 154, “Accounting Changes and Error Corrections” (SFAS 154). SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which establishes one accounting model to be used for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations to include more disposal transactions. SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” and the accounting and reporting provisions of154 replaces APB Opinion No. 30,20, “Accounting Changes” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the Resultsnew accounting principle, unless it is impracticable to do so. SFAS 154 also provides that a correction of Operations—Reporting the Effects of Disposal oferrors in previously issued financial statements should be termed a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” for the disposal of a segment of a business (as previously defined in that Opinion).“restatement.” The provisions of SFAS No. 144 arenew standard is effective for financial statements issued for fiscal yearsaccounting changes and correction of errors beginning after December 15, 2001. TheJuly 1, 2005. We do not expect that the adoption of SFAS No. 144 had no154 will have a material impact on the Company’sour consolidated financial position or results of operations.
Risks
You should carefully consider the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” which rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt” and an amendment of that Statement, and SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” SFAS No. 145 also rescinds SFAS No. 44, “Accounting for Intangible Assets of Motor Carriers.” SFAS No. 145 amends SFAS No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. The Company does not expect the adoption of this statement will have a material impact on its results of operations or financial position.
Because we derive a significant portion of our revenues from a limited number of customers, our revenues would be adversely affected by the loss of a major customer or a significant change in its business or personnel.
We have in the past, and expect to anycontinue, to derive a significant portion of these risks.
Our future growth and stability depends, in part, on our ability to diversify our net sales. Our efforts to establish new products, brands, markets and customers could require significant initial investments, which may or may not result in higher net sales and improved financial results.
Our business strategy depends in large part on our ability to develop new products, marketing strategies, brands and customer relationships. These activities often require a significant up-front investment including, among others, customized formulations, regulatory compliance, product registrations, package design, product testing, pilot production runs, marketing and the build up of initial inventory. We may experience significant delays from the time we increase our operating expenses and make investments in inventory until the time we generate net sales from new products or customers, and it is possible that we may never generate any revenue from new products or customers after incurring such expenditures. If we incur significant expenses and investments in inventory that we are not able to recover, and we are not able to compensate for those expenses, our operating results could be adversely affected.
Our operating results will vary and there is no guarantee that we will earn a profit. Fluctuations in our operating results may adversely affect the share price of our common stock.
While our net sales and income from operations have both improved during the past three fiscal years, there can be no assurance that they will continue. The Company expectscontinue to improve, or that we will earn a profit in any given year. We have experienced losses in the past and may incur losses in the future. Our operating results may further fluctuate from periodyear to period as a resultyear due to various factors including differences related to the timing of differencesrevenues and expenses for financial reporting purposes and other factors described in when it incurs expenses and recognizes revenues from product sales. Some ofthis report. At times, these fluctuations may be significant.
RelianceA significant or prolonged economic downturn could have a material adverse effect on Limited Numberour results of Customersoperations.
Our results of operations are affected by the level of business activity of our customers, which in turn is affected by the level of consumer demand for their products. A significant or prolonged economic downturn may adversely affect the disposable income of many consumers and may lower demand for the products we produce for our private label contract manufacturing customers, as well as for our direct-to-consumer products. A decline in consumer demand and the level of business activity of our customers due to economic conditions could have a material adverse effect on our revenues and profit margins.
Because our direct-to-consumer sales rely on the marketability of key personalities, the inability of a key personality to perform his or her role or the existence of negative publicity surrounding a key personality may adversely affect our revenues.
For the fiscal year ended June 30, 2002, the Company had two major customers, which together2005, our direct-to-consumer products accounted for approximately 69%9% of the Company’sour net sales. The loss of any of these major customers, or any substantial reduction of their purchases from the Company, would have a material adverse impact on the business, operations and financial condition of the Company.
Our industry is highly competitive and we may be unable to compete effectively. Increased competition could adversely affect our financial condition.
The market for our products is highly competitive. Many of our competitors are substantially larger and have greater financial resources and broader name recognition than we do. Our larger competitors may be able to devote greater resources to research and development, marketing and other activities that could provide them with a competitive advantage. Our market has relatively low entry barriers and is highly sensitive to the introduction of new products that may rapidly capture a significant market share. Increased competition could result in price reductions, reduced gross profit margins or loss of market share, any of which could have a material adverse impacteffect on the business, operations andour financial condition and results of the Company.
We may not be able to raise additional capital or obtain additional financing if needed.
Our cash from operations may not be sufficient to meet our working capital needs and/or to implement our business strategies. Although we obtained an $8.0 million line of credit in May 2004, there can be no assurance that this line of credit will be sufficient to meet our needs. Furthermore, if we fail to maintain certain loan covenants we will no longer have access to the current lender will extend the existingcredit line. The credit line has a 2.5 year term and will terminate in November 2006. As a result, we may need to raise additional capital or obtain additional financing.
In recent years, it has been difficult for companies to raise capital due to a variety of factors including the Companyoverall poor performance of the stock markets and the economic slowdown in the United States and other countries. Thus, there is no assurance we would be able to raise additional capital if needed. To the extent we do raise additional capital, the ownership position of existing stockholders could be diluted. Similarly, there can be no assurance that additional financing will obtain a replacement credit facilitybe available if needed or ifthat it does, thatwill be available on favorable terms. Under the terms of our
credit facility, we may not create, incur or assume additional indebtedness without the new facility will be as favorableapproval of our lender. Our inability to raise additional capital or better than those of the current credit line. Failure to obtain a new line of credit could materially impair the Company’sadditional financing if needed would negatively affect our ability to fund growthimplement our business strategies and meet our goals. This, in operations or meet other working capital needsturn, would adversely affect our financial condition and results of operations.
The failure of our suppliers to supply quality materials in sufficient quantities, at a favorable price, and in a timely fashion could adversely affect the future.
We buy our raw materials from a limited number of raw material suppliers. Mannatech comprised 29%During fiscal 2005, Carrington Laboratories Incorporated was our largest supplier, accounting for 35% of the Company’sour total raw material purchasespurchases. The loss of Carrington Laboratories Incorporated or other major supplier could adversely affect our business operations. Although we believe that we could establish alternate sources for the year ended June 30, 2002. No other supplier represented more than 10%most of total raw material purchases for the year ended June 30, 2002. Although the Company currently has supply arrangements with several suppliers of theseour raw materials, any delay in locating and suchestablishing relationships with other sources could result in product shortages, with a resulting loss of sales and customers. In certain situations we may be required to alter our products or to substitute different materials are generally available from numerous sources,alternative sources.
We rely solely on one supplier to process certain raw materials that we use in the terminationproduct line of the supply relationship by any material supplierour largest customer. The loss of or unexpected interruption in this service would materially adversely affect our results of operations and financial condition.
A shortage of raw materials or an unexpected interruption of supply could materially adversely affectalso result in higher prices for those materials. Although we may be able to raise our prices in response to significant increases in the Company’s business, operations and financial condition.
There can be no assurance that suppliers will provide the stock price will not decline. Market conditionsquality raw materials needed by us in the vitaminquantities requested or at a price we are willing to pay. Because we do not control the actual production of these raw materials, we are also subject to delays caused by interruption in production of materials based on conditions outside of our control, including weather, transportation interruptions, strikes and nutritional supplement industry, such as increased price competition, consolidation, oversupplynatural disasters or other catastrophic events.
Our business is subject to the effects of vitamin and supplement products, operating results of competitors, adverse publicity, which could negatively affect our sales and other factors such as customer and product announcements by the Company and operating results which are lower than the expectations of analysts and our investors, may have a continuing adverse effect on the price of the Company’s stock.
Our business can be affected by adverse publicity or negative public perception about our industry, our competitors, or our business generally. This adverse publicity may include publicity about the nutritional supplements (vitamins, minerals, herbs and other ingredients). The Company regards these products as safe when taken as suggested byindustry generally, the Company. In addition, various scientific studies have suggested the ingredients in some of the Company’s products may involve health benefits. The Company believes the growth in the dietary supplements business of the last several years may, in part, be based on significant media attention and various scientific research suggesting potential health benefits from the consumption of certain vitamin products. The Company is indirectly dependent upon its customers’ perception of the overall integrity of its business, as well as theefficacy, safety and quality of itsnutritional supplements and other health care products or ingredients in general or our products or ingredients specifically, and similarregulatory investigations, regardless of whether these investigations involve us or the business practices or products distributed by other companies which may not adhereof our competitors. There can be no assurance that we will be able to avoid any adverse publicity or negative public perception in the same quality standards as the Company. Thefuture. Any adverse publicity or negative public perception will likely have a material adverse effect on our business, operations, and financial condition and results of the Companyoperations. Our business, financial condition and results of operations also could be adversely affected if any of the Company’sour products or any similar products distributed by other companies should proveare alleged to be or be assertedare proved to be harmful to consumers or should scientific studies provide unfavorable findings regarding the effect of products similar to those produced by the Company.
Exposure to Product Liability Claims
We could face financial liability due to product liability claims if the use of itsour products allegedly results in significant loss or injury. The Company maintainsAdditionally, the manufacture and sale of our products involves the risk of injury to consumers from tampering by unauthorized third parties or product contamination. We could be exposed to future product liability claims that, among others: our products contain contaminants; we provide consumers with inadequate instructions about product use; or we provide inadequate warning about side effects or interactions of our products with other substances.
We maintain product liability insurance coverage, including primary product liability and excess liability coverage. The cost of suchthis coverage has increased dramatically in the last year andrecent years, while the availability of adequate insurance coverage has decreased. There can be no assurance that adequate product liability insurance will continue to be available at an economically reasonable cost or that the Company’sour insurance will be adequate to cover any liability the Company incurs in respect to allwe may incur.
Additionally, it is possible product liability claims. In addition, some of the ingredients included inthat one or more of the products manufactured by the Company are subject to controversy involving potential negative side effects or questionable health benefits. Someour insurers including some providingcould exclude from our coverage to the Company, have recently excluded certain of these ingredients from their product liability coverage. Although the Company’s product liability insurance does not presently have any such limitations, the Company’s insurer could require such exclusions or limitations on coverageused in the future.our products. In such event, the Companywe may have to cease utilizing thestop using those ingredients or may have to rely on indemnification or similar arrangements with itsour customers who wish to continue to include suchthose ingredients in their products. In such an event, the consequentialA substantial increase in our product liability risk or the loss of customers or product lines could have a material adverse impacteffect on the Company’s business,our results of operations and financial condition.
Risks Associated with International MarketsAs we continue to expand into markets outside the United States our business becomes increasingly subject to political and economic risks in those markets, which could adversely affect our business.
Our future growth may be dependentdepend, in part, upon itson our ability to continue to expand its operations and those of its customers into markets outside the United States. There can be no assurance that we will be able to expand our presence in our existing markets outside the United States, enter new markets on a timely basis, or that new markets outside the United States will be profitable. There are significant regulatory and legal barriers in markets outside the United States that we must overcome. We will be subject to the burden of complying with a wide variety of national and local laws, including international markets. For the fiscal year ended June 30, 2002multiple and 2001, the percentage of the Company’s net sales to customers in international markets was approximately 31%possibly overlapping and 29%, respectively. NAIE operates a manufacturing facility in Switzerland, which is intended to facilitate an
Any changes related to currency fluctuations, (3) the potential imposition of trade or foreign exchange restrictions or increased tariffs,these and (4) economicother factors could adversely affect our business, profitability and political instability.growth prospects. As the Company continueswe continue to expand its international operations,into markets outside the United States, these and other risks associated with international operations outside the United States are likely to increase.
Government RegulationOur products and manufacturing activities are subject to extensive government regulation, which could limit or prevent the sale of our products in some markets and could increase our costs.
The manufacturing, processing, formulation, packaging, labeling, advertising, promotion, distribution, and advertisingsale of the Company’sour products are subject to regulation by one or more federalnumerous national and local governmental agencies includingin the United States Food and Drug Administration (“FDA”)in other countries. Failure to comply with governmental regulations may result in, among other things, injunctions, product withdrawals, recalls, product seizures, fines, and criminal prosecutions. Any action of this type by a governmental agency could materially adversely affect our ability to successfully market our products. In addition, if the governmental agency has reason to believe the law is being violated (for example, if it believes we do not possess adequate substantiation for product claims), it can initiate an enforcement action. Governmental agency enforcement could result in orders requiring, among other things, limits on advertising, consumer redress, divestiture of assets, rescission of contracts, and such other relief as may be deemed necessary. Violation of these orders could result in substantial financial or other penalties. Any action by the Federal Trade Commission (“FTC”), the Consumer Product Safety Commission,governmental agency could materially adversely affect our ability and our customers’ ability to successfully market those products.
In markets outside the United States, Departmentbefore commencing operations or marketing our products, we may be required to obtain approvals, licenses, or certifications from a country’s ministry of Agriculture,health or comparable agency. Approvals or licensing may be conditioned on reformulation of products or may be unavailable with respect to certain products or product ingredients. We must also comply with product labeling and packaging regulations that vary from country to country. Furthermore, the regulations of these countries may conflict with those in the United States Postal Service,and with each other. The sale of our products in certain European countries is subject to the United States Environmental Protection Agency,rules and the Occupational Safety and Health Administration. The Company’s activities are also regulated by various agenciesregulations of the statesEuropean Union, which may be interpreted differently among the countries within the Union. The cost of complying with these various and localities in whichpotentially conflicting regulations can be substantial and can adversely affect our results of operations.
We cannot predict the Company’s products are sold. In particular, the FDA regulates the safety, labeling and distributionnature of dietary supplements, including vitamins, minerals, herbs, food, and over-the-counter and prescription drugs and cosmetics. In addition, the FTC has overlapping jurisdiction with the FDA to regulate the labeling, promotion and advertising of vitamins, over-the-counter drugs, cosmetics and foods.
If we are unable to attract and retain qualified management personnel, our business operationswill suffer.
Our executive officers and financial condition of the Company.
Centralized Location of Manufacturing OperationsOur manufacturing activity is subject to certain risks.
We currently manufacturesmanufacture the vast majority of itsour products at itsour manufacturing facility in California. As a result, we are dependent on the uninterrupted and efficient operation of that facility. Our manufacturing operations are subject to power failures, the breakdown, failure or substandard performance of equipment, the improper installation or operation of equipment, natural or other disasters, and the need to comply with the requirements or directives of governmental agencies, including the FDA. In addition, we may in the future determine to expand or relocate our manufacturing facilities, which may result in Southern California. Accordingly,slow downs or delays in our manufacturing operations. While we maintain business interruption insurance, there can be no assurance that the occurrence of these or any event resultingother operational problems at our facility in the slowdownCalifornia or stoppage of the Company’s manufacturing operations or distribution facilitiesat NAIE’s facility in Southern California couldSwitzerland would not have a material adverse affecteffect on the Company. The Company maintainsour business, interruption insurance. Therefinancial condition and results of operations. Furthermore, there can be no assurance however, that suchour insurance will continue to be available at a reasonable cost or, if available, will be adequate to cover any losses that we may be incurredincur from an interruption in the Company’sour manufacturing and distribution operations.
ConcentrationWe may be unable to protect our intellectual property rights or may inadvertently infringe on the intellectual property rights of Ownership; Certain Anti-Takeover Considerationsothers.
We possess and executive officers beneficially ownmay possess in excessthe future certain proprietary technology, trade secrets, trademarks, tradenames and similar intellectual property. There can be no assurance that we will be able to protect our intellectual property adequately. In addition, the laws of 22.7%certain foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. Litigation in the United States or abroad may be necessary to enforce our intellectual property rights, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement. This litigation, even if successful, could result in substantial costs and diversion of resources and could have a material adverse effect on our business, results of operation and financial condition. If any such claims are asserted against us, we may seek to obtain a license under the third party’s intellectual property rights. There can be no assurance, however, that a license would be available on terms acceptable or favorable to us, if at all.
Collectively, our officers and directors own a significant amount of our common stock, giving them influence over corporate transactions and other matters and potentially limiting the influence of other stockholders on important policy and management issues.
Our officers and directors, together with their families and affiliates, beneficially owned approximately 25% of our outstanding Common Stockshares of common stock as of June 30, 2002. Accordingly, these shareholders2005. As a result, our officers and directors could influence such business matters as the election of directors and approval of significant corporate transactions.
Various transactions could be delayed, deferred or prevented without the approval of stockholders, including:
There can be no assurance that conflicts of interest will continuenot arise with respect to have the officers and directors who own shares of our common stock or that conflicts will be resolved in a manner favorable to us or our other stockholders.
If our information technology system fails, our operations could suffer.
Our business depends to a large extent on our information technology infrastructure to effectively manage and operate many of our key business functions, including order processing, customer service, product manufacturing and distribution, cash receipts and payments and financial reporting. A long term failure or impairment of any of our information technology systems could adversely affect our ability to substantially influenceconduct day-to-day business.
If certain provisions of our Certificate of Incorporation, Bylaws and Delaware law are triggered, the management, policies,future price investors might be willing to pay for our common stock could be limited.
Certain provisions in our Certificate of Incorporation, Bylaws and Delaware corporate law help discourage unsolicited proposals to acquire our business, operations ofeven if the Company. The Company’sproposal benefits our stockholders. Our Board of Directors has the authorityis authorized, without stockholder approval, to approve the issuance ofissue up to 500,000 shares of preferred stock and to fix thehaving such rights, preferences, privileges and restrictions,privileges, including voting rights, of those shares without any further vote or action byas the Company’s shareholders.board designates. The rights of the holders of Common Stockour common stockholders 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. CertainAny or all of these 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 difficultdeter or prevent a merger, tender offer or proxy content, or any change in control involving the Company, as well as the removaltakeover of management, even if such events would be beneficial to the interests of the Company’s shareholders,our company and maycould limit the price certain investors may beare willing to pay for our common stock.
Our stock price could fluctuate significantly.
Our stock price has been volatile in recent years. The trading price of our stock could fluctuate in response to:
The stock market has historically experienced significant price and volume fluctuations. There can be no assurance that an active market in our stock will continue to exist or that the price of our common stock will not decline. Our future operating results may be below the expectations of securities analysts and investors. If this were to occur, the price of our common stock would likely decline, perhaps substantially.
From time to time our shares may be listed for trading on one or more foreign exchanges, with or without our prior knowledge or consent. Certain foreign exchanges may have less stringent listing requirements, rules and enforcement procedures than the Nasdaq Stock Market or other markets in the United States, which may increase the potential for manipulative trading practices to occur. These practices, or the perception by investors that such practices could occur, may increase the volatility of our stock price or result in a decline in our stock price, which in some cases could be significant.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk, which is the potential loss arising from adverse changes in market rates and prices, such as interest and foreign currency exchange rates. We generally do not enter into derivatives or other financial instruments for trading or speculative purposes. We may, however, enter into financial instruments to try to manage and reduce the impact of changes in foreign currency exchange rates. We cannot predict with any certainty our future for sharesexposure to fluctuations in interest and foreign currency exchange rates or other market risks or the impact, if any, such fluctuations may have on our future business, product pricing, consolidated financial condition, results of Common Stock.
Interest Rates
At June 30, 2005, we had fixed rate debt of $602,000 and supplementary data as requiredvariable rate debt of approximately $3.2 million. The interest rates on our variable rate debt range from LIBOR plus 1.75% to LIBOR plus 2.25%. As of June 30, 2005, the weighted average effective interest rate on our variable rate debt was 4.50%. An immediate one hundred basis point (1.0%) increase in the interest rates on our variable rate debt, holding other variables constant, would have increased our interest expense by this item are set forth on pages 25 through 45.
Foreign Currencies
To the extent our business continues to expand outside the United States, an increasing share of our net sales and cost of sales will be transacted in currencies other than the United States dollar. Accounting practices require that our non-United States dollar-denominated transactions be converted to United States dollars for reporting purposes. Consequently, our reported net income may be significantly affected by fluctuations in currency exchange rates. When the United States dollar strengthens against currencies in which products are sold or disclaimer of opinionweakens against currencies in which we incur costs, net sales and were not qualified or modified as to uncertainty, audit scope or accounting principles.
Our main exchange rate exposures are with the auditSwiss Franc and the Euro against the United States dollar. This is due to NAIE’s operations in Switzerland and the payment in Euros by our largest customer for finished goods. Additionally, we pay our NAIE employees and certain operating expenses in Swiss Francs. We may enter into forward exchange contracts, foreign currency borrowings and option contracts to hedge our foreign currency risk. Our goal in seeking to manage foreign currency risk is to provide reasonable certainty to the functional currency value of foreign currency cash flows and to help stabilize the value of non-United States dollar-denominated earnings.
On May 13, 2005, we purchased seven option contracts designated and effective as cash flow hedges to protect against the foreign currency exchange risk inherent in a portion of our forecasted transactions denominated in Euros. The seven options expire monthly beginning June 2005 and ending December 2005. The option contracts had a notional amount of $4.2 million, a weighted average strike price of $1.19, and a purchase price of $21,000. The risk of loss associated with the options is limited to premium amounts paid for the option contracts. As of June 30, 2005, we had not exercised any of the Company’s financial statementsoptions and one of the options had expired.
On July 7, 2005, we purchased 12 option contracts designated and effective as cash flow hedges to protect against the foreign currency exchange risk inherent in a portion of our forecasted transactions denominated in Euros. The 12 options expire monthly beginning January 2006 and ending December 2006. The option contracts had a notional amount of $7.0 million, a weighted average strike price of $1.16, and a purchase price of $152,000. The risk of loss associated with the options is limited to premium amounts paid for the option contracts.
On June 30, 2005, the Swiss Franc closed at 1.28 to 1.00 United States dollar and the Euro closed at 0.83 to 1.00 United States dollar. A 10% adverse change to the exchange rates between the Swiss Franc and the Euro against the United States dollar, holding other variables constant, would have decreased our net income for the fiscal yearsyear ended June 30, 2000, and in the subsequent interim period through March 31, 2001, there were no disagreements with KPMG on any matter2005 by $762,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of accounting principles or practices, financial statement disclosure, or auditing scope and procedures, which disagreements if not resolved to their satisfaction would have caused them to make reference in connection with their opinion to the subject matter of the disagreement.
Natural Alternatives International, Inc.
We have audited the accompanying consolidated balance sheets of Natural Alternatives International, Inc. as of June 30, 20022005 and 2001,2004, and the related consolidated statements of operationsincome and comprehensive income, (loss), stockholders’ equity, and cash flows for each of the three years then ended.in the period ended June 30, 2005. Our audits also included the financial statement schedule listed in the Indexindex at Item 14 (a)(2) for each of the two years in the period ended June 30, 2002.15(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditingthe standards generally accepted inof the United States.Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includesstatements, assessing the accounting principles used and significant estimates made by management, as well asand evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Natural Alternatives International, Inc. at June 30, 20022005 and 2001,2004, and the consolidated results of theirits operations and theirits cash flows for each of the three years thenin the period ended June 30, 2005, in conformity with accounting principlesU.S. generally accepted in the United States.accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
San Diego, California
August 9, 2002
5, 2005
Consolidated Balance Sheets
As of June 30
(Dollars in thousands, except share and per share data)
2002 | 2001 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 640 | $ | 499 | ||||
Restricted cash | 1,500 | — | ||||||
Accounts receivable—less allowance for doubtful accounts of $105 at June 30, 2002 and $470 at June 30, 2001 | 3,536 | 3,331 | ||||||
Inventories, net | 7,871 | 6,201 | ||||||
Income tax refund receivable | 701 | — | ||||||
Prepaid expenses | 271 | 481 | ||||||
Deposits | 168 | 33 | ||||||
Other current assets | 165 | 172 | ||||||
Total current assets | 14,852 | 10,717 | ||||||
Property and equipment, net | 12,439 | 13,798 | ||||||
Other assets: | ||||||||
Related parties notes receivable | 118 | 451 | ||||||
Other noncurrent assets, net | 101 | 102 | ||||||
Total other assets | 219 | 553 | ||||||
Total assets | $ | 27,510 | $ | 25,068 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities | $ | 4,927 | $ | 4,149 | ||||
Accrued compensation and employee benefits | 482 | 320 | ||||||
Line of credit | — | 242 | ||||||
Income taxes payable | 131 | 72 | ||||||
Current portion of long-term debt and capital lease | 587 | 889 | ||||||
Total current liabilities | 6,127 | 5,672 | ||||||
Long-term debt and capital lease, less current portion | 1,576 | 3,567 | ||||||
Long-term pension liability | 199 | 225 | ||||||
Total liabilities | 7,902 | 9,464 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock; $.01 par value; 500,000 shares authorized; none issued or outstanding | — | — | ||||||
Common stock; $.01 par value; 8,000,000 shares authorized, issued and outstanding 6,073,179 at June 30, 2002 and 6,048,106 at June 30, 2001 | 61 | 60 | ||||||
Additional paid-in capital | 11,362 | 11,307 | ||||||
Retained earnings | 9,488 | 5,609 | ||||||
Treasury stock, at cost, 272,400 shares at June 30, 2002 and 262,500 shares at June 30, 2001 | (1,303 | ) | (1,283 | ) | ||||
Accumulated other comprehensive loss | — | (89 | ) | |||||
Total stockholders’ equity | 19,608 | 15,604 | ||||||
Total liabilities and stockholders’ equity | $ | 27,510 | $ | 25,068 | ||||
2005 | 2004 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 1,916 | $ | 7,495 | ||||
Accounts receivable - less allowance for doubtful accounts of $221 at June 30, 2005 and $132 at June 30, 2004 | 10,834 | 8,889 | ||||||
Inventories, net | 12,987 | 12,863 | ||||||
Deferred income taxes | 421 | 1,010 | ||||||
Other current assets | 1,012 | 633 | ||||||
Total current assets | 27,170 | 30,890 | ||||||
Property and equipment, net | 16,507 | 11,380 | ||||||
Other assets: | ||||||||
Deferred income taxes | 276 | — | ||||||
Other noncurrent assets, net | 185 | 198 | ||||||
Total other assets | 461 | 198 | ||||||
Total assets | $ | 44,138 | $ | 42,468 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 7,973 | $ | 7,567 | ||||
Accrued liabilities | 1,923 | 2,078 | ||||||
Accrued compensation and employee benefits | 1,351 | 2,626 | ||||||
Income taxes payable | 664 | 320 | ||||||
Current portion of long-term debt | 861 | 831 | ||||||
Total current liabilities | 12,772 | 13,422 | ||||||
Long-term debt, less current portion | 2,979 | 3,841 | ||||||
Deferred income taxes | — | 717 | ||||||
Deferred rent | 1,264 | 220 | ||||||
Long-term pension liability | 206 | 140 | ||||||
Total liabilities | 17,221 | 18,340 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock; $.01 par value; 500,000 shares authorized; none issued or outstanding | — | — | ||||||
Common stock; $.01 par value; 20,000,000 shares authorized at June 30, 2005 and 8,000,000 at June 30, 2004, issued and outstanding 6,064,467 at June 30, 2005 and 5,970,992 at June 30, 2004 | 61 | 60 | ||||||
Additional paid-in capital | 11,494 | 10,864 | ||||||
Accumulated other comprehensive loss | (137 | ) | (96 | ) | ||||
Retained earnings | 15,792 | 13,593 | ||||||
Treasury stock, at cost, 61,000 shares at June 30, 2005 and June 30, 2004 | (293 | ) | (293 | ) | ||||
Total stockholders’ equity | 26,917 | 24,128 | ||||||
Total liabilities and stockholders’ equity | $ | 44,138 | $ | 42,468 | ||||
See accompanying notes to consolidated financial statements.
Natural Alternatives International, Inc.
Consolidated Statements Of OperationsIncome And Comprehensive Income (Loss)
For the Years Ended June 30
(Dollars in thousands, except share and per share data)
2002 | 2001 | 2000 | ||||||||||
Net sales | $ | 50,037 | $ | 42,158 | $ | 47,827 | ||||||
Cost of goods sold | 39,068 | 33,970 | 44,152 | |||||||||
Gross profit | 10,969 | 8,188 | 3,675 | |||||||||
Selling, general & administrative expenses | 10,684 | 8,848 | 8,670 | |||||||||
Loss on abandonment of leased facility | — | — | 1,729 | |||||||||
Loss on impairment of intangible assets acquired | — | 1,544 | — | |||||||||
Income (loss) from operations | 285 | (2,204 | ) | (6,724 | ) | |||||||
Other income (expense): | ||||||||||||
Interest income | 16 | 92 | 139 | |||||||||
Interest expense | (665 | ) | (755 | ) | (399 | ) | ||||||
Equity in loss of unconsolidated joint venture | — | (38 | ) | (62 | ) | |||||||
Foreign exchange gain (loss) | (68 | ) | 15 | 74 | ||||||||
Proceeds from vitamin antitrust litigation | 3,410 | 298 | 116 | |||||||||
Other, net | 259 | 73 | (45 | ) | ||||||||
2,952 | (315 | ) | (177 | ) | ||||||||
Income (loss) before income taxes | 3,237 | (2,519 | ) | (6,901 | ) | |||||||
Provision for (benefit from) income taxes | (642 | ) | 2,370 | (2,429 | ) | |||||||
Net income (loss) | $ | 3,879 | $ | (4,889 | ) | $ | (4,472 | ) | ||||
Unrealized loss on investments | — | (28 | ) | (1 | ) | |||||||
Comprehensive income (loss) | $ | 3,879 | $ | (4,917 | ) | $ | (4,473 | ) | ||||
Net income (loss) per common share: | ||||||||||||
Basic | $ | 0.67 | $ | (0.85 | ) | $ | (0.78 | ) | ||||
Diluted | $ | 0.67 | $ | (0.85 | ) | $ | (0.78 | ) | ||||
Weighted average common shares outstanding: | ||||||||||||
Basic shares | 5,787,712 | 5,769,585 | 5,756,705 | |||||||||
Diluted shares | 5,798,453 | 5,769,585 | 5,756,705 |
2005 | 2004 | 2003 | ||||||||||
Net sales | $ | 91,492 | $ | 78,534 | $ | 55,962 | ||||||
Cost of goods sold | 73,095 | 59,964 | 42,781 | |||||||||
Gross profit | 18,397 | 18,570 | 13,181 | |||||||||
Selling, general & administrative expenses | 14,605 | 15,188 | 12,012 | |||||||||
Income from operations | 3,792 | 3,382 | 1,169 | |||||||||
Other income (expense): | ||||||||||||
Interest income | 21 | 24 | 57 | |||||||||
Interest expense | (280 | ) | (274 | ) | (252 | ) | ||||||
Foreign exchange gain (loss) | (137 | ) | 57 | 12 | ||||||||
Proceeds from vitamin antitrust litigation | — | — | 225 | |||||||||
Other, net | 13 | (165 | ) | (59 | ) | |||||||
(383 | ) | (358 | ) | (17 | ) | |||||||
Income before income taxes | 3,409 | 3,024 | 1,152 | |||||||||
Provision for income taxes | 1,210 | 24 | 47 | |||||||||
Net income | $ | 2,199 | $ | 3,000 | $ | 1,105 | ||||||
Unrealized gain resulting from change in fair value of derivative instruments, net of tax | 8 | — | — | |||||||||
Additional minimum pension liability, net of tax | (49 | ) | (96 | ) | — | |||||||
Comprehensive income | $ | 2,158 | $ | 2,904 | $ | 1,105 | ||||||
Net income per common share: | ||||||||||||
Basic | $ | 0.37 | $ | 0.51 | $ | 0.19 | ||||||
Diluted | $ | 0.34 | $ | 0.48 | $ | 0.18 | ||||||
Weighted average common shares outstanding: | ||||||||||||
Basic shares | 5,949,212 | 5,843,241 | 5,809,140 | |||||||||
Diluted shares | 6,464,714 | 6,304,167 | 6,021,155 |
See accompanying notes to consolidated financial statements.
Natural Alternatives International, Inc.
Consolidated Statements Of Stockholders’ Equity
For the Years Ended June 30
(Dollars in thousands)
Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive (Loss) | Total | |||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||
Balance, June 30, 1999 | 6,002,375 | $ | 60 | $ | 11,237 | $ | 14,970 | $ | (1,116 | ) | $ | (60 | ) | $ | 25,091 | |||||||||
Issuance of common stock for employee stock purchase plan | 22,005 | — | 35 | — | — | — | 35 | |||||||||||||||||
Treasury stock purchased | — | — | — | — | (167 | ) | — | (167 | ) | |||||||||||||||
Net unrealized loss on investments | — | — | — | — | — | (1 | ) | (1 | ) | |||||||||||||||
Net loss | — | — | — | (4,472 | ) | — | — | (4,472 | ) | |||||||||||||||
Balance, June 30, 2000 | 6,024,380 | 60 | 11,272 | 10,498 | (1,283 | ) | (61 | ) | 20,486 | |||||||||||||||
Issuance of common stock for employee stock purchase plan | 23,726 | — | 35 | — | — | — | 35 | |||||||||||||||||
Net unrealized loss on investments | — | — | — | — | — | (28 | ) | (28 | ) | |||||||||||||||
Net loss | — | — | — | (4,889 | ) | — | — | (4,889 | ) | |||||||||||||||
Balance, June 30, 2001 | 6,048,106 | 60 | 11,307 | 5,609 | (1,283 | ) | (89 | ) | 15,604 | |||||||||||||||
Issuance of common stock for employee stock purchase plan and stock option exercises | 25,073 | 1 | 53 | — | — | — | 54 | |||||||||||||||||
Treasury stock purchased | — | — | — | — | (20 | ) | — | (20 | ) | |||||||||||||||
Compensation expense related to stock options granted to employees | — | — | 2 | — | — | — | 2 | |||||||||||||||||
Net realized loss on disposal of investments | — | — | — | — | — | 89 | 89 | |||||||||||||||||
Net income | — | — | — | 3,879 | — | — | 3,879 | |||||||||||||||||
Balance, June 30, 2002 | 6,073,179 | $ | 61 | $ | 11,362 | $ | 9,488 | $ | (1,303 | ) | $ | — | $ | 19,608 | ||||||||||
Common Stock | Additional Capital | Retained Earnings | Treasury Stock | Accumulated Comprehensive (Loss) | Total | |||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||
Balance, June 30, 2002 | 6,073,179 | $ | 61 | $ | 11,362 | $ | 9,488 | $ | (1,303 | ) | $ | — | $ | 19,608 | ||||||||||||
Issuance of common stock for employee stock purchase plan and stock option exercises | 14,353 | — | 33 | — | — | — | 33 | |||||||||||||||||||
Compensation expense related to stock options | — | — | 31 | — | — | — | 31 | |||||||||||||||||||
Net income | — | — | — | 1,105 | — | — | 1,105 | |||||||||||||||||||
Balance, June 30, 2003 | 6,087,532 | 61 | 11,426 | 10,593 | (1,303 | ) | — | 20,777 | ||||||||||||||||||
Issuance of common stock for employee stock purchase plan and stock option exercises | 94,860 | 1 | 327 | — | — | — | 328 | |||||||||||||||||||
Cancellation of treasury stock | (211,400 | ) | (2 | ) | (1,008 | ) | — | 1,010 | — | — | ||||||||||||||||
Compensation expense related to stock options | — | — | 119 | — | — | — | 119 | |||||||||||||||||||
Additional minimum pension liability, net of tax | — | — | — | — | — | (96 | ) | (96 | ) | |||||||||||||||||
Net income | — | — | — | 3,000 | — | — | 3,000 | |||||||||||||||||||
Balance, June 30, 2004 | 5,970,992 | 60 | 10,864 | 13,593 | (293 | ) | (96 | ) | 24,128 | |||||||||||||||||
Issuance of common stock for employee stock purchase plan and stock option exercises | 93,475 | 1 | 427 | — | — | — | 428 | |||||||||||||||||||
Compensation expense related to stock options | — | — | 72 | — | — | — | 72 | |||||||||||||||||||
Compensation expense related to the acceleration of stock options | — | — | 131 | — | — | — | 131 | |||||||||||||||||||
Unrealized gain resulting from change in fair value of derivative instruments, net of tax | — | — | — | — | — | 8 | 8 | |||||||||||||||||||
Additional minimum pension liability, net of tax | — | — | — | — | — | (49 | ) | (49 | ) | |||||||||||||||||
Net income | — | — | — | 2,199 | — | — | 2,199 | |||||||||||||||||||
Balance, June 30, 2005 | 6,064,467 | $ | 61 | $ | 11,494 | $ | 15,792 | $ | (293 | ) | $ | (137 | ) | $ | 26,917 | |||||||||||
See accompanying notes to consolidated financial statements.
Natural Alternatives International, Inc.
Consolidated Statements Of Cash Flows
For the Years Ended June 30
(Dollars in thousands)
2002 | 2001 | 2000 | ||||||||||
Cash flows from operating activities | ||||||||||||
Net income (loss) | $ | 3,879 | $ | (4,889 | ) | $ | (4,472 | ) | ||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||
Provision for uncollectible accounts receivable | (58 | ) | 286 | (142 | ) | |||||||
Increase in inventory reserve | 1,535 | — | 2,000 | |||||||||
Write-off of notes receivable | — | 89 | 80 | |||||||||
Depreciation and amortization | 2,407 | 2,487 | 2,182 | |||||||||
Impairment charge on intangible assets | — | 1,216 | — | |||||||||
Deferred income taxes | — | 2,293 | (907 | ) | ||||||||
Non-cash compensation | 2 | — | — | |||||||||
Pension expense, net of contributions | (26 | ) | (192 | ) | 7 | |||||||
(Gain) loss on disposal of assets | (54 | ) | 32 | 162 | ||||||||
Loss on investments | 89 | 37 | 63 | |||||||||
Loss on abandonment of leased facility, net of amounts paid | — | (50 | ) | (2,384 | ) | |||||||
Foreign exchange gains on foreign debt | — | — | (86 | ) | ||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (147 | ) | 373 | 3,560 | ||||||||
Inventories | (3,205 | ) | 1,426 | 249 | ||||||||
Tax refund receivable | (701 | ) | 1,500 | 729 | ||||||||
Prepaid expenses | 210 | 154 | 420 | |||||||||
Deposits | (135 | ) | 37 | 875 | ||||||||
Accrued interest on related parties notes receivable | — | (53 | ) | (64 | ) | |||||||
Other current assets | 7 | (109 | ) | — | ||||||||
Other noncurrent assets | 1 | 12 | 393 | |||||||||
Accounts payable | 778 | (302 | ) | (3,883 | ) | |||||||
Income taxes payable | 59 | 72 | — | |||||||||
Accrued compensation and employee benefits | 162 | (35 | ) | (431 | ) | |||||||
Net cash provided by (used in) operating activities | 4,803 | 4,384 | (1,649 | ) | ||||||||
Cash flows from investing activities | ||||||||||||
Proceeds from sale of property and equipment | 82 | — | 54 | |||||||||
Capital expenditures | (1,076 | ) | (960 | ) | (5,161 | ) | ||||||
Issuance of notes receivable | — | (100 | ) | (826 | ) | |||||||
Repayment of notes receivable | 313 | 17 | 78 | |||||||||
Investment purchases | — | — | (100 | ) | ||||||||
Increase in intangible assets | — | (11 | ) | — | ||||||||
Net cash used in investing activities | (681 | ) | (1,054 | ) | (5,955 | ) | ||||||
Cash flows from financing activities | ||||||||||||
Net (payments) borrowing on lines of credit | (242 | ) | (2,561 | ) | 2,833 | |||||||
Borrowings on long-term debt and capital leases | — | 1,708 | 5,455 | |||||||||
Payments on long-term debt and capital leases | (2,293 | ) | (2,828 | ) | (800 | ) | ||||||
Increase in restricted cash | (1,500 | ) | — | — | ||||||||
Issuance of common stock | 54 | 35 | 35 | |||||||||
Treasury stock acquisitions | — | — | (167 | ) | ||||||||
Net cash (used in) provided by financing activities | (3,981 | ) | (3,646 | ) | 7,356 | |||||||
Net increase (decrease) in cash and cash equivalents | 141 | (316 | ) | (248 | ) | |||||||
Cash and cash equivalents at beginning of year | 499 | 815 | 1,063 | |||||||||
Cash and cash equivalents at end of year | $ | 640 | $ | 499 | $ | 815 | ||||||
Supplemental disclosures of cash flow information | ||||||||||||
Cash paid during the year for: | ||||||||||||
Interest | $ | 394 | $ | 676 | $ | 365 | ||||||
Income taxes refunded | — | (1,497 | ) | (2,252 | ) | |||||||
Disclosure of non-cash activities: | ||||||||||||
Net unrealized gains (losses) on investments | $ | — | $ | (28 | ) | $ | (1 | ) | ||||
Supplemental schedule of non-cash activities | ||||||||||||
Related parties notes receivable | $ | 20 | $ | 855 | $ | — | ||||||
Investments | — | 150 | — | |||||||||
Accounts receivable | 307 | 107 | — | |||||||||
Inventory | 1,500 | 64 | — | |||||||||
Accounts payable | — | 29 | — | |||||||||
$ | 1,827 | $ | 1,205 | $ | — | |||||||
2005 | 2004 | 2003 | ||||||||||
Cash flows from operating activities | ||||||||||||
Net income | $ | 2,199 | $ | 3,000 | $ | 1,105 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Provision for uncollectible accounts receivable | 89 | 105 | (46 | ) | ||||||||
Depreciation and amortization | 2,559 | 2,676 | 2,477 | |||||||||
Deferred income taxes | (404 | ) | (293 | ) | — | |||||||
Non-cash compensation | 203 | 119 | 31 | |||||||||
Pension benefit (expense), net of contributions | 17 | (77 | ) | (78 | ) | |||||||
Loss on disposal of assets | 20 | 86 | 10 | |||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (2,034 | ) | (3,326 | ) | (2,086 | ) | ||||||
Inventories | (124 | ) | (5,018 | ) | 26 | |||||||
Tax refund receivable | — | — | 701 | |||||||||
Other assets | (427 | ) | 71 | (175 | ) | |||||||
Accounts payable and accrued liabilities | 1,351 | 3,758 | 1,180 | |||||||||
Income taxes payable | 344 | 274 | (85 | ) | ||||||||
Accrued compensation and employee benefits | (1,275 | ) | 1,909 | 235 | ||||||||
Net cash provided by operating activities | 2,518 | 3,284 | 3,295 | |||||||||
Cash flows from investing activities | ||||||||||||
Proceeds from sale of property and equipment | — | — | 109 | |||||||||
Capital expenditures | (7,706 | ) | (3,322 | ) | (977 | ) | ||||||
Repayment of notes receivable | 13 | 7 | 89 | |||||||||
Net cash used in investing activities | (7,693 | ) | (3,315 | ) | (779 | ) | ||||||
Cash flows from financing activities | ||||||||||||
Borrowings on long-term debt | — | 4,055 | 2,500 | |||||||||
Payments on long-term debt | (832 | ) | (2,339 | ) | (1,707 | ) | ||||||
Increase in restricted cash | — | — | 1,500 | |||||||||
Issuance of common stock | 428 | 328 | 33 | |||||||||
Net cash provided by (used in) financing activities | (404 | ) | 2,044 | 2,326 | ||||||||
Net increase (decrease) in cash and cash equivalents | (5,579 | ) | 2,013 | 4,842 | ||||||||
Cash and cash equivalents at beginning of year | 7,495 | 5,482 | 640 | |||||||||
Cash and cash equivalents at end of year | $ | 1,916 | $ | 7,495 | $ | 5,482 | ||||||
Supplemental disclosures of cash flow information | ||||||||||||
Cash paid during the year for: | ||||||||||||
Taxes | $ | 1,075 | $ | 44 | $ | — | ||||||
Interest | $ | 280 | $ | 243 | $ | 252 | ||||||
Disclosure of non-cash activities: | ||||||||||||
Treasury stock cancelled | $ | — | $ | 1,010 | $ | — | ||||||
Net unrealized gains resulting from change in fair value of derivative instruments | $ | 8 | $ | — | $ | — | ||||||
Additional minimum pension liability | $ | 49 | $ | 96 | $ | — | ||||||
See accompanying notes to consolidated financial statements.
A. Organization and Summary of Significant Accounting Policies
Organization
We provide private label contract manufacturing services to companies that market and distribute vitamins, micronutrientsminerals, herbs, and relatedother nutritional supplements, as well as other health care products, to consumers both within and provides innovative private-label products for specialized corporate, institutionaloutside the United States. We also develop, manufacture and commercial accounts worldwide. The Company operatesmarket our own products. We operate in a single segment, nutritional supplements.
International Subsidiary
On January 22, 1999, Natural Alternatives International Europe, SA (“NAIE”),NAIE was incorporatedformed as aour wholly-owned subsidiary, of the Company, based in Manno, Switzerland, which is adjacent to the city of Lugano. In September 1999, NAIE opened its new manufacturing facility to provide manufacturing capability in encapsulation and tablets, finished goods packaging, quality control laboratory testing, warehousing, distribution and administration. Upon formation, NAIE obtained from the Swiss tax authorities a five-year Swiss federal and localcantonal income tax holiday ending in fiscalthat ended June 30, 2005.
Principles of Consolidation
The consolidated financial statements include the accounts of Natural Alternatives International, Inc.NAI and itsour wholly-owned subsidiary, NAIE Natural Alternatives International Europe, SA (“Company”).NAIE. All significant intercompany accounts and transactions have been eliminated. The functional currency of the Company’sour foreign subsidiary is the United States dollar. The financial statements of the subsidiaryNAIE have been translated at either current or historical exchange rates, as appropriate, with gains and losses included in the consolidated statements of operations.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Inventories
Our inventories are recorded at the lower of cost (first-in, first-out) or market (net realizable value). Such costs include raw materials, labor and manufacturing overhead.
Property and Equipment
We state property and equipment are stated at cost. Depreciation of property and equipment is provided using the straight-line method over their estimated useful lives, generally ranging from 31 to 39 years. LeaseholdWe amortize leasehold improvements are amortized using the straight-line method over the shorter of the life of the improvement or the expected term of the lease. In some locations, leasehold improvements are amortized over a period longer than the initial lease term as management believes it is more likely than not that the renewal option in the underlying lease will be exercised. Maintenance and repairs are expensed as incurred. Significant expenditures that increase economic useful lives are capitalized.
Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of
Revenue Recognition
We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (SAB 101). SAB 101 requires that four basic criteria be met before revenue can be recognized: 1) there is evidence that an arrangement exists; 2) delivery has occurred; 3) the fee is fixed or determinable; and related cost of products sold,4) collectibility is reasonably assured. We recognize revenue upon determination that all criteria for revenue recognition have been met. The criteria are recognizedusually met at the time title passes to the customer, which usually occurs upon shipment. Customers generally do not haveRevenue from shipments where title passes upon delivery is deferred until the rightshipment has been delivered.
Additionally, we record reductions to returngross revenue for estimated returns of private label contract manufacturing products and direct-to-consumer products. The estimated returns are based upon the trailing six months of private label contract manufacturing gross sales and our historical experience for both private label contract manufacturing and direct-to-consumer product unless damaged or defective.
Cost of Goods Sold
Cost of goods sold includes raw material, labor and manufacturing overhead.
Research and Development Costs
As part of the services we provide to our private label contract manufacturing customers, we may perform, but are not obligated to perform, certain research and development activities related to the development or improvement of their products. While our customers typically do not pay directly for this service, the cost of this service is included as a component of the price we charge to manufacture and deliver their products.
Research and development costs are expensed when incurredincurred. Our research and were $821,000, $718,000 and $774,000development expenses for the last three fiscal years ended June 30 2002, 2001were $3.5 million for 2005, $2.8 million for 2004 and 2000, respectively.
Advertising Costs
We expense advertising costs are expensed as incurred. During the years ended June 30, 2002, 2001 and 2000, the CompanyWe incurred and expensed advertising costs in the amountsamount of $679,000, $501,000$865,000 during the fiscal year ended June 30, 2005, $1.3 million during fiscal 2004 and $261,000, respectively.$1.5 million during fiscal 2003. These costs are included in selling, general and administrative expenses in the accompanying statements of operations.
Income Taxes
We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates, for each of the jurisdictions in which we operate, 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.
We do not record U.S. income tax expense for NAIE’s retained earnings that are declared as indefinitely reinvested offshore, thus reducing our overall income tax expense. The Company accountsamount of earnings designated as indefinitely reinvested in NAIE is based upon the actual deployment of such earnings in NAIE’s assets and our expectations of the future cash needs of our U.S. and foreign entities. Income tax laws are also a factor in determining the amount of foreign earnings to be indefinitely reinvested offshore.
It is our policy to establish reserves based upon management’s assessment of exposure for its stock-based employee compensation forcertain positions taken in previously filed tax returns that may become payable upon audit by tax authorities. The tax reserves are analyzed at least annually, generally in the fourth quarter of each year, and adjustments are made as events occur which warrant adjustments to the reserve.
Stock-Based Compensation
We have equity incentive plans under which we have granted nonqualified and incentive stock options usingto employees, non-employee directors and consultants. We also have an employee stock purchase plan. We account for stock-based awards to employees, including shares issued pursuant to the intrinsic value method prescribed byemployee stock purchase plan, in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), and related interpretations, as allowed underinterpretations. We have adopted the disclosure-only alternative of Statement of Financial Accounting Standards No. (“SFAS”) 123. Accordingly, compensation cost123, “Accounting for Stock-Based Compensation” (SFAS 123), as amended by SFAS No. 148, “Accounting for Stock-Based Compensation –Transition and Disclosure” (SFAS 148).
Pro forma information regarding net income and net income per common share is measuredrequired and has been determined as if we had accounted for our stock-based awards under the excess, if any,fair value method, instead of the guidelines provided by APB 25. We estimated the fair value of the stock option awards at the date of grant and employee stock purchase plan shares at the beginning of the offering period using the Black-Scholes option valuation model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions, including expected life and stock price volatility. Because our options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect fair value estimates, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of our stock option awards.
Effective April 27, 2005, our Board of Directors approved the Company’sacceleration of the vesting of all outstanding and unvested options held by directors, officers and other employees under our 1999 Omnibus Equity Incentive Plan. As a result of the acceleration, options to acquire 827,932 shares of our common stock, which otherwise would have vested over the next 36 months, became immediately exercisable. This action was taken to eliminate, to the extent permitted, the transition expense that we otherwise would incur in connection with the adoption of SFAS 123R. Included in the options to acquire 827,932 shares of our common stock were options to purchase 545,992 shares with exercise prices greater than our closing stock price on the date of acceleration. Under the accounting guidance of APB 25, the accelerated vesting resulted in a charge for stock-based compensation of approximately $131,000, which was recognized in the fourth quarter of fiscal 2005. Additionally, our pro forma disclosure includes the effect of this accelerated vesting, as calculated under SFAS 123, of $1.8 million which would have otherwise been recognized in our consolidated statements of operations over the next three fiscal years, upon the adoption of SFAS 123R in the first quarter of fiscal 2006.
The per share fair value of options granted in connection with stock option plans and rights granted in connection with employee stock purchase plans reported below has been estimated at the date of grant with the grantfollowing weighted average assumptions:
Employee Stock Options | Employee Stock Purchase Plans | |||||||||||||||||||||||
Fiscal Years Ended June 30, | Fiscal Years Ended June 30, | |||||||||||||||||||||||
2005 | 2004 | 2003 | 2005 | 2004 | 2003 | |||||||||||||||||||
Expected life (years) | 4.0 – 8.0 | 4.0 – 8.0 | 4.0–6.0 | 0.5 | 0.5 | 0.5 | ||||||||||||||||||
Risk-free interest rate | 3.4–3.8 | % | 2.4–3.7 | % | 4.0 | % | 2.0 | % | 1.0 | % | 1.5 | % | ||||||||||||
Volatility | 54 | % | 64 | % | 71 | % | 54 | % | 64 | % | 71 | % | ||||||||||||
Dividend yield | 0 | % | 0 | % | 0 | % | 0 | % | 0 | % | 0 | % | ||||||||||||
Weighted average fair value | $ | 3.82 | $ | 3.21 | $ | 1.75 | $ | 2.36 | $ | 1.82 | $ | 1.10 |
For purposes of pro forma disclosures, we have amortized the estimated fair value of our stock option awards to expense over the priceoptions’ vesting periods and the estimated fair value of our employee must pay to acquirestock purchase plan shares over the stock.
Fiscal Years Ended June 30, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
Net income - as reported | $ | 2,199 | $ | 3,000 | $ | 1,105 | ||||||
Plus: Reported stock-based compensation | 203 | 119 | 31 | |||||||||
Less: Fair value stock-based compensation | (2,658 | ) | (718 | ) | (299 | ) | ||||||
Net income (loss) - pro forma | $ | (256 | ) | $ | 2,401 | $ | 837 | |||||
Reported basic net income per common share | $ | 0.37 | $ | 0.51 | $ | 0.19 | ||||||
Pro forma basic net income (loss) per common share | $ | (0.04 | ) | $ | 0.41 | $ | 0.14 | |||||
Reported diluted net income per common share | $ | 0.34 | $ | 0.48 | $ | 0.18 | ||||||
Pro forma diluted net income (loss) per common share | $ | (0.04 | ) | $ | 0.38 | $ | 0.14 | |||||
Fair Value of Financial Instruments
The carrying amounts of certain of the Company’sour financial instruments, including cash and cash equivalents, accounts receivable, notes receivable, investments, accounts payable, line of credit and notenotes payable
Use of Estimates
Our management 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 accounting principlesUnited States generally accepted in the United States.accounting principles. Actual results could differ from those estimates.
Net Income (Loss) per Common Share
We compute net income (loss) per common share in accordance with SFAS 128, “Earnings Per Share.” This statement requires the presentation of basic income (loss) per common share, using the weighted average number of common shares outstanding during the period, and diluted income per common share, 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’sour diluted net income per common share computation. BasicWe calculated basic and diluted net income (loss)per common share as follows (amounts in thousands, except per share are calculated as follows:
For the Years Ended June 30, | |||||||||||
2002 | 2001 | 2000 | |||||||||
(Dollars in thousands, except share data) | |||||||||||
Numerator | |||||||||||
Net income (loss) | $ | 3,879 | $ | (4,889 | ) | $ | (4,472 | ) | |||
Denominator | |||||||||||
Basic weighted average common shares outstanding | 5,787,712 | 5,769,585 | 5,756,705 | ||||||||
Dilutive effect of stock options | 10,741 | — | — | ||||||||
Diluted weighted average common shares outstanding | 5,798,453 | 5,769,585 | 5,756,705 | ||||||||
Basic net income (loss) per share | $ | 0.67 | $ | (0.85 | ) | $ | (0.78 | ) | |||
Diluted net income (loss) per share | $ | 0.67 | $ | (0.85 | ) | $ | (0.78 | ) | |||
For the Years Ended June 30, | |||||||||
2005 | 2004 | 2003 | |||||||
Numerator | |||||||||
Net income | $ | 2,199 | $ | 3,000 | $ | 1,105 | |||
Denominator | |||||||||
Basic weighted average common shares outstanding | 5,949 | 5,843 | 5,809 | ||||||
Dilutive effect of stock options | 516 | 461 | 212 | ||||||
Diluted weighted average common shares outstanding | 6,465 | 6,304 | 6,021 | ||||||
Basic net income per common share | $ | 0.37 | $ | 0.51 | $ | 0.19 | |||
Diluted net income per common share | $ | 0.34 | $ | 0.48 | $ | 0.18 | |||
Shares related to stock options of 137,000, 524,400,193,000 for the fiscal year ended June 30, 2005, 61,000 for fiscal 2004 and 313,000, respectively,74,000 for fiscal 2003, were excluded from the calculation of diluted lossnet income per common share, as the effect of their inclusion would be anti-dilutive.
Concentrations of Credit Risk
Financial instruments that subject the Companyus to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company places itsWe place our cash and cash equivalents with highly rated financial institutions. Credit risk with respect to receivables is concentrated with the Company’sour largest customers. These customers’customers, whose receivable balances collectively represent 71%represented 86% of gross accounts receivable at June 30, 20022005 and 85%73% at June 30, 2001.2004. Concentrations of credit risk related to the remaining accounts receivable balances are limited due to the number of customers comprising the Company’sour remaining customer base.
Inventories, net are comprisedconsisted of the following at June 30:
2002 | 2001 | |||||
(Dollars in thousands) | ||||||
Raw materials | $ | 4,631 | $ | 2,758 | ||
Work in progress | 1,754 | 2,196 | ||||
Finished goods | 1,486 | 1,247 | ||||
$ | 7,871 | $ | 6,201 | |||
2005 | 2004 | |||||
Raw materials | $ | 8,068 | $ | 7,915 | ||
Work in progress | 3,230 | 3,066 | ||||
Finished goods | 1,689 | 1,882 | ||||
$ | 12,987 | $ | 12,863 | |||
C. Property and Equipment
Property and equipment at June 30:
Life Used for Depreciation | 2002 | 2001 | ||||||||
(Dollars in thousands) | ||||||||||
Land | NA | $ | 393 | $ | 393 | |||||
Building and building improvements | 5–39 years | 3,279 | 3,277 | |||||||
Machinery and equipment | 3–15 years | 15,517 | 14,995 | |||||||
Office equipment and furniture | 5–7 years | 4,054 | 3,813 | |||||||
Vehicles | 3 years | 197 | 197 | |||||||
Leasehold improvements | 5–39 years | 4,230 | 4,100 | |||||||
Total property and equipment | 27,670 | 26,775 | ||||||||
Less accumulated depreciation and amortization | (15,231 | ) | (12,977 | ) | ||||||
Property and equipment, net | $ | 12,439 | $ | 13,798 | ||||||
Depreciable Life In Years | 2005 | 2004 | ||||||||
Land | NA | $ | 393 | $ | 393 | |||||
Building and building improvements | 7 – 39 | 2,713 | 3,235 | |||||||
Machinery and equipment | 3 – 12 | 18,470 | 17,345 | |||||||
Office equipment and furniture | 3 – 5 | 3,280 | 4,038 | |||||||
Vehicles | 3 | 204 | 204 | |||||||
Leasehold improvements | 1 – 15 | 9,244 | 4,954 | |||||||
Total property and equipment | 34,304 | 30,169 | ||||||||
Less: accumulated depreciation and amortization | (17,797 | ) | (18,789 | ) | ||||||
Property and equipment, net | $ | 16,507 | $ | 11,380 | ||||||
E.D. Debt
We have a $12.0 million credit facility with a bank. The facility is comprised of an existing $9.0$8.0 million working capital line of credit with a $9.35and $4.0 million credit facility.in term loans. The financing consisted of a $7.0 million working capital line of credit a $1.6 million term note,expires in November 2006, is secured by our accounts receivable and an additional $750,000 term note facility for financingother rights to payment, general intangibles, inventory and equipment, purchases. The entire credit facility carriedhas an annual interest rate of primePrime Rate or LIBOR plus 0.5%1.75%, as elected by the Company from time to time, and borrowings are subject to eligibility requirements for current accounts receivable and inventory balances. The term loans consist of a $700,000 ten year term loan with a twenty year amortization, secured by our San Marcos building, at an effective interest rate of 7.25%LIBOR plus 2.25%; a $1.8 million four year term loan, secured by our accounts receivable and other rights to payment, general intangibles, inventory and equipment, at an interest rate of LIBOR plus 2.10%; and a $1.5 million five year term loan, secured by equipment, at an interest rate of LIBOR plus 2.10%. Monthly payments on the term loans are approximately $63,000 plus interest. As of June 30, 2001. Borrowings2005, the outstanding amount on the term loans was $3.2 million and we did not have an outstanding balance on the working capital line of credit. As of June 30, 2005, we had $7.7 million available under the line of credit, were collateralized by eligible accounts receivable and inventory, as defined innet of a $270,000 outstanding letter of credit issued to our landlord.
On February 1, 2005, we amended our credit facility with the agreement; proceeds were usedbank to support ongoing operating requirements.
Additionally, we have a term noteloan agreement for $1.1 million, secured by aour San Marcos building, at an annual interest rate of 8.25%. The noteloan is due in June 2011 and provides for principal and interest payable in monthly installments of $10,800. As of June 30, 20022005, the outstanding amount on the loan was $813,000.
The composite interest rate on all of our outstanding debt was 5.18% at June 30, 20022005 and 2001 was 8.84% and 8.06%, respectively.
Aggregate amounts of long-term debt maturities as of June 30, 2002 are2005 were as follows (dollars in thousands):
2003 | $ | 587 | |
2004 | 642 | ||
2005 | 332 | ||
2006 | 83 | ||
2007 | 90 | ||
Thereafter | 429 | ||
$ | 2,163 | ||
2006 | $ | 861 | |
2007 | 895 | ||
2008 | 888 | ||
2009 | 445 | ||
2010 | 151 | ||
Thereafter | 600 | ||
$ | 3,840 | ||
NATURAL ALTERNATIVES INTERNATIONAL, INC.
The provision (benefit) for (benefit from) income taxes for the years ended June 30 consisted of the following:
2002 | 2001 | 2000 | |||||||||
(Dollars in thousands) | |||||||||||
Current: | |||||||||||
Federal | $ | (701 | ) | $ | — | $ | (1,525 | ) | |||
State | — | — | 3 | ||||||||
Foreign | 59 | — | — | ||||||||
(642 | ) | — | (1,522 | ) | |||||||
Deferred: | |||||||||||
Federal | — | 1,992 | (755 | ) | |||||||
State | — | 378 | (152 | ) | |||||||
Foreign | — | — | — | ||||||||
— | 2,370 | (907 | ) | ||||||||
Provision (benefit) for income taxes | $ | (642 | ) | $ | 2,370 | $ | (2,429 | ) | |||
2002 | 2001 | 2000 | ||||||||||
(Dollars in thousands) | ||||||||||||
Accrual for loss on lease obligation | $ | — | $ | — | $ | 951 | ||||||
Accelerated depreciation and amortization for tax purposes | 826 | 91 | 21 | |||||||||
Increase (decrease) in valuation allowance | (2,377 | ) | 3,355 | 83 | ||||||||
Inventories | 703 | (90 | ) | (697 | ) | |||||||
Bad debt expense | 155 | (51 | ) | 308 | ||||||||
Accrued vacation expense | (10 | ) | (18 | ) | (15 | ) | ||||||
Customer deposits | — | — | (80 | ) | ||||||||
Credit carryforward | (313 | ) | — | (126 | ) | |||||||
Investment loss carryforward | — | — | 36 | |||||||||
Other, net | (1 | ) | 304 | (102 | ) | |||||||
Net operating loss carryforward | 1,017 | (1,221 | ) | (1,286 | ) | |||||||
$ | — | $ | 2,370 | $ | (907 | ) | ||||||
2005 | 2004 | 2003 | ||||||||||
Current: | ||||||||||||
Federal | $ | 1,320 | $ | 175 | $ | — | ||||||
State | 94 | 3 | — | |||||||||
Foreign | 109 | 139 | 47 | |||||||||
1,523 | 317 | 47 | ||||||||||
Deferred: | ||||||||||||
Federal | (398 | ) | 1,045 | (372 | ) | |||||||
State | 85 | 293 | (163 | ) | ||||||||
Change in valuation allowance | — | (1,631 | ) | 535 | ||||||||
(313 | ) | (293 | ) | — | ||||||||
Provision for income taxes | $ | 1,210 | $ | 24 | $ | 47 | ||||||
2002 | 2001 | |||||
(Dollars in thousands) | ||||||
Deferred tax assets: | ||||||
Allowance for doubtful accounts | $ | 29 | $ | 184 | ||
Accrued vacation expense | 88 | 78 | ||||
Tax credit carryforward | 439 | 126 | ||||
Allowance for inventories | 517 | 1,220 | ||||
Other, net | 117 | 116 | ||||
Net operating loss carryforward | 1,439 | 2,456 | ||||
Total gross deferred tax assets | 2,629 | 4,180 | ||||
Less valuation allowance | 1,097 | 3,474 | ||||
Net deferred tax assets | 1,532 | 706 | ||||
Deferred tax liabilities: | ||||||
Accumulated depreciation and amortization | 1,532 | 706 | ||||
Net deferred tax liabilities | 1,532 | 706 | ||||
Net deferred tax asset | $ | — | $ | — | ||
2005 | 2004 | |||||||
Deferred tax assets: | ||||||||
Allowance for doubtful accounts | $ | 85 | $ | 48 | ||||
Accrued vacation expense | 189 | 156 | ||||||
Tax credit carryforward | 99 | 128 | ||||||
Allowance for inventories | 659 | 414 | ||||||
Other, net | 93 | — | ||||||
Net operating loss carryforward | 31 | 264 | ||||||
Total gross deferred tax assets | $ | 1,156 | $ | 1,010 | ||||
Deferred tax liabilities: | ||||||||
Accumulated depreciation and amortization | (459 | ) | (717 | ) | ||||
Deferred tax liabilities | (459 | ) | (717 | ) | ||||
Net deferred tax assets | $ | 697 | $ | 293 | ||||
At June 30, 2002, the Company has federal and2005, we had state tax net operating loss carryforwards of approximately $3,335,000 and $5,229,000, respectively.$530,000. The Federal and state tax loss carryforwards will begin to expire in 2019 and 2005, respectively,2007, unless previously utilized.
NAIE obtained from the Swiss tax authorities a five year Federalfive-year Swiss federal and localcantonal income tax holiday ending in fiscalthat ended June 30, 2005. Following the expiration of our tax holiday, we anticipate NAIE’s effective tax rate for Swiss federal, cantonal and communal taxes will be approximately 23%. NAIE had net income of $1,163,000$1.0 million for the fiscal year ended June 30, 2002.
2002 | 2001 | 2000 | ||||||||||
(Dollars in thousands) | ||||||||||||
Income taxes (benefit) computed at statutory federal income tax rate | $ | 1,101 | $ | (857 | ) | $ | (2,346 | ) | ||||
State income taxes (benefit), net of federal income tax benefit (expense) | 128 | (101 | ) | (214 | ) | |||||||
Net operating loss carryback refund | (701 | ) | — | — | ||||||||
Increase (decrease) in valuation allowance | (863 | ) | 3,355 | 83 | ||||||||
Expenses not deductible for tax purposes | 3 | 70 | 68 | |||||||||
Foreign tax holiday | (356 | ) | (442 | ) | 57 | |||||||
Other | 46 | 345 | (77 | ) | ||||||||
Income taxes (benefit) as reported | $ | (642 | ) | $ | 2,370 | $ | (2,429 | ) | ||||
Effective tax rate | (19.8 | )% | 94.1 | % | (35.2 | )% | ||||||
2005 | 2004 | 2003 | ||||||||||
Income taxes computed at statutory federal income tax rate | $ | 1,159 | $ | 1,029 | $ | 392 | ||||||
State income taxes, net of federal income tax expense | 118 | 196 | 67 | |||||||||
Increase (decrease) in valuation allowance | — | (1,631 | ) | 534 | ||||||||
Expenses not deductible for tax purposes | 53 | 69 | 12 | |||||||||
Foreign tax holiday | (304 | ) | (187 | ) | (228 | ) | ||||||
Foreign tax withholding | 101 | — | — | |||||||||
Dividend tax | 131 | — | — | |||||||||
Prior year adjustments | — | 305 | (668 | ) | ||||||||
Transfer pricing adjustment | — | 264 | — | |||||||||
Other | (48 | ) | (21 | ) | (62 | ) | ||||||
Income taxes as reported | $ | 1,210 | $ | 24 | $ | 47 | ||||||
Effective tax rate | 35.5 | % | 0.8 | % | 4.1 | % | ||||||
G.F. Employee Benefit Plans
We have a profit sharing plan pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”), whereby participants may contribute a percentage of compensation not in excess of the maximum allowed under the Code. All employees with twelvesix months and at least one thousand hours of service during the twelve-month periodcontinuous employment are eligible to participate in the plan. The CompanyWe may make contributions to the plan at the discretion of itsour Board of Directors. Effective July 1, 2001, the plan was amended to require the Company tothat we match one half of the first 6% of a participant’s compensation contributed to the plan. DuringEffective January 1, 2004, the plan was amended to require that we match 100% of the first 3% and 50% of the next 2% of a participant’s compensation contributed to the plan. The total contributions under the plan charged to operations totaled $315,000 for the fiscal year ended June 30, 2002, the Company contributed $73,000 in matching contributions to the plan. Prior to July 1, 2001, Company contributions to the plan were made at the discretion of the Board of Directors. During the years ended June 30, 20012005, $200,000 for fiscal 2004, and 2000, the Company contributed $-0- and $117,000, respectively. Contributions to the plan are expensed and included in selling, general and administrative expenses in the accompanying statements of operations.
We have a “Cafeteria Plan” pursuant to Section 125 of the 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 recognizesWe recognize 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 $342,000, $271,000$876,000 for the fiscal year ended June 30, 2005, $697,000 for fiscal 2004, and $348,000$492,000 for 2002, 2001, and 2000, respectively.
In December 1999, the Companywe adopted an employee stock purchase plan that provides for the issuance of up to 150,000 shares of the Company’sour common stock. Beginning July 1, 2004, the number of shares available for purchase under the plan will increase by 25,000 each year on July 1 until determined otherwise by the Board of Directors. The plan is intended to qualify under Section 423 of the Internal Revenue Code and is for the benefit of qualifying employees, as designated by the Human Resource Committee of the Board of Directors.employees. Under the terms of the plan, participating employees are eligiblemay have up to have a maximum of 15% of their compensation withheld through payroll deductions to purchase shares of our common stock at the lower of 85% of (i) the fair market value atclosing sale price for the beginning of eachstock as quoted on the Nasdaq National Market on either the first or last trading day in the offering period, or (ii) the fair market value on predetermined dates.whichever is lower. As of June 30, 2002, 64,7272005, 129,544 shares of common stock have beenwere issued pursuant to this plan.
We sponsor 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 Companywe adopted an amendment to freeze benefit accruals to the participants. At
Disclosure of Funded Status
The following table sets forth the Plan’sdefined benefit pension plan’s funded status and amount recognized in the Company’sour consolidated balance sheets at June 30 after(dollars in thousands):
2005 | 2004 | |||||||
Change in Benefit Obligation | ||||||||
Benefit obligation at beginning of year | $ | 1,286 | $ | 1,102 | ||||
Interest cost | 73 | 72 | ||||||
Actuarial loss | 139 | 118 | ||||||
Benefits paid | (10 | ) | (6 | ) | ||||
Benefit obligation at end of year | $ | 1,488 | $ | 1,286 | ||||
Change in Plan Assets | ||||||||
Fair value of plan assets at beginning of year | $ | 1,146 | $ | 937 | ||||
Actual return on plan assets | 83 | 139 | ||||||
Employer contributions | 63 | 76 | ||||||
Benefits paid | (10 | ) | (6 | ) | ||||
Fair value of plan assets at end of year | $ | 1,282 | $ | 1,146 | ||||
Reconciliation of Funded Status | ||||||||
Benefit obligation in excess of fair value of plan assets | $ | (206 | ) | $ | (140 | ) | ||
Unrecognized net actuarial loss | 241 | 96 | ||||||
Net amount recognized | $ | 35 | $ | (44 | ) | |||
Additional Minimum Liability Disclosures | ||||||||
Accrued benefit liability | $ | (206 | ) | $ | (140 | ) |
The weighted-average rates used for the effect of curtailment:
2002 | 2001 | |||||||
(Dollars in thousands) | ||||||||
Change in Benefit Obligation | ||||||||
Benefit obligation at beginning of year | $ | 978 | $ | 988 | ||||
Interest cost | 63 | 68 | ||||||
Actuarial (gain)/loss | 8 | 141 | ||||||
Benefits paid | (16 | ) | — | |||||
Other | — | (219 | ) | |||||
Benefit obligation at end of year | $ | 1,033 | $ | 978 | ||||
Change in Plan Assets | ||||||||
Fair value of plan assets at beginning of year | $ | 768 | $ | 768 | ||||
Actual return on plan assets | 84 | 18 | ||||||
Employer contributions | 21 | 201 | ||||||
Benefits paid | (16 | ) | — | |||||
Other | — | (219 | ) | |||||
Fair value of plan assets at end of year | $ | 857 | $ | 768 | ||||
Reconciliation of Funded Status | ||||||||
Funded status (under)/over funded | $ | (176 | ) | $ | (210 | ) | ||
Unrecognized net actuarial (gain)/loss | (23 | ) | (15 | ) | ||||
Accrued benefit cost | $ | (199 | ) | $ | (225 | ) | ||
Additional Minimum Liability Disclosures | ||||||||
Accrued benefit liability | $ | (176 | ) | $ | (210 | ) |
2005 | 2004 | |||||
Discount rate | 5.50 | % | 6.00 | % | ||
Compensation increase rate | N/A | N/A |
Net Periodic Benefit Cost
The Net Periodic Benefit Costcomponents included in the defined benefit pension plan’s net periodic benefit cost for the fiscal years endingended June 30 includeswere as follows (dollars in thousands):
2005 | 2004 | 2003 | ||||||||||
Interest cost | $ | 73 | $ | 72 | $ | 67 | ||||||
Expected return on plan assets | (89 | ) | (73 | ) | (64 | ) | ||||||
Net periodic benefit cost (income) | $ | (16 | ) | $ | (1 | ) | $ | 3 | ||||
The weighted-average rates used for the following components:
2002 | 2001 | 2000 | ||||||||||
(Dollars in thousands) | ||||||||||||
Components of Net Periodic Benefit Cost | ||||||||||||
Interest cost | $ | 63 | $ | 68 | $ | 68 | ||||||
Expected return on Plan Assets | (68 | ) | (58 | ) | (61 | ) | ||||||
Recognized net actuarial (gain)/loss | — | (6 | ) | — | ||||||||
Effect of special events (curtailment) | — | 4 | — | |||||||||
Net periodic benefit cost (income) | $ | (5 | ) | $ | 8 | $ | 7 | |||||
2005 | 2004 | 2003 | |||||||
Discount rate | 6.00 | % | 6.00 | % | 6.50 | % | |||
Expected long term rate of return | 8.00 | % | 8.00 | % | 7.50 | % | |||
Compensation increase rate | N/A | N/A | N/A |
2002 | 2001 | 2000 | |||||||
Discount rate | 6.50 | % | 6.50 | % | 7.00 | % | |||
Expected long term rate of return | 7.50 | % | 7.50 | % | 7.50 | % | |||
Amortization method | Straight-line | Straight-line | Straight-line |
Our defined benefit pension plan’s weighted average asset allocation at June 30 and weighted average target allocation were as follows:
2005 | 2004 | Target Allocation | |||||||
Equity securities | 62 | % | 61 | % | 60 | % | |||
Debt securities | 30 | % | 31 | % | 32 | % | |||
Real estate | 8 | % | 8 | % | 8 | % | |||
100 | % | 100 | % | 100 | % | ||||
The underlying basis of the investment strategy of our defined benefit pension plan is to ensure that pension funds are available to meet the plan’s benefit obligations when they are due. Our investment strategy is a long-term risk controlled approach using diversified investment options with a relatively minimal exposure to volatile investment options like derivatives.
H.G. Stockholders’ Equity
Treasury Stock
In FebruaryJanuary 1999, the Board of Directors approved a repurchase program of up to 500,000 shares of the Company’sour common stock. As of June 30, 2001, 262,500 shares were repurchased under this program. In fiscal 2002, 9,900 shares were repurchased from a former Vice President of the Company pursuant to a separation agreement.
Stock Option Plan for which 500,000 common shares were reserved for issuance to officers, employees, and consultants of the Company.
On October 28, 1998, and as amended March 11, 1999, the Board of Directors adopted the 1998 Outside Director Compensation Plan that provides non-employee directors an annual grant of nonqualified stock options. Three options for 10,000 shares each, were granted on March 11, 1999, at a fair market value price of $5.75 per share, and one grant of 10,000 shares was subsequently forfeited. The Outside Director Compensation Plan was subsequently included with the 1999 Plan and ceased to exist as a separate stock option plan. Pursuant to the former Outside Director Compensation Plan and the 1999 Plan, each non-employee director receives an annual grant of a Non-Qualified Option to purchase 10,000 shares on the first day of March of each fiscal year. Each such option has an exercise price equal to the fair market value on the date of grant, a five-year term and vests over 3 years providing the non-employee director remains willing to serve as a non-employee director of the Company.
Grants under thisthe 1999 Plan can be either Incentive Stock Options, or Nonqualified Stock Options.
Effective April 27, 2005, our Board of Directors approved the acceleration of the vesting of all outstanding and become fullyunvested options held by directors, officers and other employees under our 1999 Omnibus Equity Incentive Plan. As a result of the acceleration, options to acquire 827,932 shares of our common stock, which otherwise would have vested within three yearsover the next 36 months, became immediately exercisable. This action was taken to eliminate, to the extent permitted, the transition expense that we otherwise would incur in connection with the adoption of their grant date.
1992 Incentive Plan | 1994 Nonqualified Plan | 1998 Outside Director Plan | 1999 Plan | Total All Plans | Weighted Average Exercise Price | ||||||||||||
Outstanding at June 30, 1999 | 181,750 | 171,000 | — | — | 352,750 | 6.32 | |||||||||||
Forfeited | (38,750 | ) | (171,000 | ) | (10,000 | ) | (30,500 | ) | (250,250 | ) | 4.79 | ||||||
Granted | 30,000 | — | 30,000 | 150,500 | 210,500 | 2.73 | |||||||||||
Outstanding at June 30, 2000 | 173,000 | — | 20,000 | 120,000 | 313,000 | 5.18 | |||||||||||
Forfeited | (8,000 | ) | — | — | (13,600 | ) | (21,600 | ) | 5.17 | ||||||||
Granted | — | — | — | 233,000 | 233,000 | 2.17 | |||||||||||
Outstanding at June 30, 2001 | 165,000 | — | 20,000 | 339,400 | 524,400 | 3.84 | |||||||||||
Exercised | — | — | — | (6,104 | ) | (6,104 | ) | 2.02 | |||||||||
Forfeited | (80,000 | ) | — | — | (186,296 | ) | (266,296 | ) | 2.51 | ||||||||
Granted | — | — | — | 274,800 | 274,800 | 2.01 | |||||||||||
Outstanding at June 30, 2002 | 85,000 | — | 20,000 | 421,800 | 526,800 | 3.58 | |||||||||||
Exercisable at June 30, 2002 | 85,000 | — | 20,000 | 120,840 | 225,840 | 5.59 | |||||||||||
Weighted-average remaining contractual life in years | .6 | — | 1.7 | 8.3 | 6.66 | ||||||||||||
Available for grant at June 30, 2002 | 215,000 | — | — | 72,096 | 287,096 | ||||||||||||
1992 Incentive Plan | 1998 Outside | 1999 Plan | Total All Plans | Weighted Average Exercise Price | ||||||||||
Outstanding at June 30, 2002 | 85,000 | 20,000 | 421,800 | 526,800 | 3.58 | |||||||||
Exercised | — | — | (6,199 | ) | (6,199 | ) | 2.17 | |||||||
Forfeited | (85,000 | ) | — | (135,401 | ) | (220,401 | ) | 5.57 | ||||||
Granted | — | — | 285,000 | 285,000 | 3.08 | |||||||||
Outstanding at June 30, 2003 | — | 20,000 | 565,200 | 585,200 | 2.60 | |||||||||
Exercised | — | (20,000 | ) | (61,700 | ) | (81,700 | ) | 3.40 | ||||||
Forfeited | — | — | (8,600 | ) | (8,600 | ) | 5.61 | |||||||
Granted | — | — | 774,800 | 774,800 | 6.26 | |||||||||
Outstanding at June 30, 2004 | — | — | 1,269,700 | 1,269,700 | 4.76 | |||||||||
Exercised | — | — | (49,945 | ) | (49,945 | ) | 2.86 | |||||||
Forfeited | — | — | (20,955 | ) | (20,955 | ) | 5.82 | |||||||
Granted | — | — | 240,500 | 240,500 | 8.56 | |||||||||
Outstanding at June 30, 2005 | — | — | 1,439,300 | 1,439,300 | 5.45 | |||||||||
Exercisable at June 30, 2005 | — | — | 1,439,300 | 1,439,300 | 5.45 | |||||||||
Weighted-average remaining contractual life in years | — | — | 3.71 | 3.71 | ||||||||||
Available for grant at June 30, 2005 | — | — | 536,752 | 536,752 | ||||||||||
During fiscal 2002, the Companywe granted options to purchase 90,000 shares to employees at an exercise price below the fair market value of the stock on the grant date. The CompanyDuring fiscal 2004, we granted options to purchase 150,000 shares to an employee at an exercise price below the fair market value of the stock on the grant date. We recorded approximately $2,000$72,000 of compensation expense in fiscal 2002 related to these option grants.grants in fiscal 2005, $63,000 in fiscal 2004 and $31,000 in fiscal 2003. As a result of June 30, 2002, the Company expects to record approximately $86,000acceleration of vesting of all outstanding and unvested options on April 27, 2005, we expensed the unamortized deferred compensation associated with these options.
Additionally, during fiscal 2004 we recorded $56,000 of compensation expense over the vesting period of the related stockto options through fiscal 2005.
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 2002, 2001 and 2000: risk-free interest rates of 4.40%, 6.0% and 6.0%, respectively; dividend yield rate of zero; expected life of four to nine years, four years, and three to six years, respectively, depending on option termination date; and volatility of 53%, 52% and 88%, respectively. The weighted average fair valueis a further breakdown of the options granted was $1.45, $2.17 and $1.61 per share, respectively.
Range of Exercise Prices | Number Outstanding | Weighted Average Remaining Contractural Life | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price | |||||||
$1.80 - $2.03 | 166,800 | 4.64 | $ | 1.97 | 166,800 | $ | 1.97 | |||||
$2.04 - $3.02 | 245,400 | 2.34 | $ | 2.63 | 245,400 | $ | 2.63 | |||||
$3.03 - $5.21 | 310,000 | 3.49 | $ | 4.96 | 310,000 | $ | 4.96 | |||||
$5.22 - $6.65 | 407,600 | 3.56 | $ | 6.56 | 407,600 | $ | 6.56 | |||||
$6.66 - $10.47 | 309,500 | 4.71 | $ | 8.58 | 309,500 | $ | 8.58 | |||||
$ 1.80 - $10.47 | 1,439,300 | 3.71 | $ | 5.45 | 1,439,300 | $ | 5.45 | |||||
NATURAL ALTERNATIVES INTERNATIONAL, INC.
2002 | 2001 | 2000 | |||||||||
(Dollars in thousands) | |||||||||||
Net income (loss), as reported | $ | 3,879 | $ | (4,889 | ) | $ | (4,472 | ) | |||
Pro forma net income (loss) | $ | 3,740 | $ | (4,993 | ) | $ | (4,750 | ) | |||
Basic net income (loss) per share, as reported | $ | 0.67 | $ | (0.85 | ) | $ | (0.78 | ) | |||
Pro forma basic net income (loss) per share | $ | 0.67 | $ | (0.87 | ) | $ | (0.83 | ) | |||
Diluted earnings net income (loss) per share, as reported | $ | 0.67 | $ | (0.85 | ) | $ | (0.78 | ) | |||
Pro forma diluted net income (loss) per share | $ | 0.67 | $ | (0.87 | ) | $ | (0.83 | ) |
We 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 181,500 square feet of our manufacturing facilities from unaffiliated third parties under non-cancelable operating leases, including 162,000 square feet at our manufacturing facility in Vista, California and 19,500 square feet at our San Marcos, California facility. The leases on the San Marcos facility have various expiration dates through 2007. The lease on the Vista facility expires in March 2014.
On February 25, 2004, we entered into an agreement to sublet 42,000 square feet at our Vista, California facility. The sublease was for a term of seven months that began on April 1, 2004, and provided for monthly rental income equal to our rental expense for the space. The sublease agreement ended October 31, 2004. The space is currently being used for warehousing.
As required under the terms of our Vista lease, on May 11, 2004, we provided a letter of credit in the amount of $440,000 to the landlord. The amount of the letter of credit will be reduced by approximately 74,00033% each year. On April 1, 2005, we reduced our outstanding amount to $270,000.
NAIE leases facility space in Manno, Switzerland. The leased space totals approximately 38,000 square feet. The leaseWe primarily use the facilities 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 amanufacturing, packaging, 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 non-cancelable operating leases including the lease agreements referred to above, (withwith initial or remaining lease terms in excess of one year)year, including the lease agreements referred to above, are set forth below as of June 30, 2005 (dollars in thousands):
2003 | $ | 906 | |
2004 | 375 | ||
2005 | 241 | ||
2006 | 108 | ||
$ | 1,630 | ||
2006 | $ | 1,872 | |
2007 | 1,937 | ||
2008 | 1,919 | ||
2009 | 1,939 | ||
2010 | 1,977 | ||
Thereafter | 8,961 | ||
$ | 18,605 | ||
Rental expense totaled $818,000, $780,000 and $647,000$1.7 million for the yearsfiscal year ended June 30, 2002, 20012005, $1.2 million for fiscal 2004, and 2000, respectively.
I. Foreign Currency Instruments
On August 9, 2004, we purchased ten monthly participating forward contracts designated and effective as cash flow hedges against the foreign currency exchange risk inherent in our forecasted transactions denominated in Euros. The participating forward contracts consisted of ten put options providing protection if the exchange rate of the United States dollar to the Euro decreased below our contracted strike price of $1.1892, and ten call options that offset the initial cost of the purchased put options. The call options obligated us to give up 50% of the foreign currency gain related to the forecasted transaction if the United States dollar/Euro exchange rate increased above our contracted strike price. The participating forward contracts had an initial notional amount of $1.5 million and a weighted average strike price of $1.1892. As of June 30, 2005, we had exercised all of the participating forward contracts.
On May 13, 2005, we purchased seven option contracts designated and effective as cash flow hedges to protect against the foreign currency exchange risk inherent in a portion of our forecasted transactions denominated in Euros. The seven options expire monthly beginning June 2005 and ending December 2005. The option contracts had a notional amount of $4.2 million, a weighted average strike price of $1.19, and a purchase price of $21,000. The risk of loss associated with the options is limited to premium amounts paid for the option contracts. As of June 30, 2005, we had not exercised any of the options and one of the options had expired.
For the fiscal year ended June 30, 2005, approximately $109,000 had been charged to income for option contracts outstanding during the year.
J. Related Party Transactions
During fiscal 1999, the Companywe made a 6% interest-bearing loansinterest bearing loan of $20,000 secured by Company common stock, to our Chief Scientific Officer. The note and interest due were being paid in biweekly payments of $550. The balance of the Vice President of Science and Technology, the former Vice President of Marketing, and a former Vice President of Operations. During fiscal 2000 an additional loan of $19,000, with interest at 6% and secured by a second deed of trust on his principal residence, was made to a former Vice President of Marketing. During fiscal 2000 the loan amount,note, including accrued interest, was paid in full in September 2004.
K. Economic Dependency
We had substantial net sales to the Vice President of Operations, was repaid upon termination of his employment. As of June 30, 2001, the notes receivable from the former Vice President of Marketing of $39,000 plus accrued interest of $4,000 were fully reserved as uncollectible. During fiscal 2001, certain notes and accrued interest receivable, totaling $61,216 from the Company’s Vice President of Science and Technology, which had been fully reserved in fiscal 1999, as uncollectible, were forgiven. During fiscal 2002, the note and accrued interest receivables from the former Vice President of Marketing, which had been fully reserved in fiscal 2001, were repaid as part of a separation agreement. During fiscal 2002, the Company made a non-interest loan for $14,000 to the Vice President of Science and Technology. The loan has a 13 month term and provides for monthly payments of $1,100.
2002 | 2001 | |||||
Chief Executive Officer | $ | 76 | $ | 71 | ||
Vice President of Science and Technology | 42 | 27 | ||||
Chairperson—Board of Directors | — | 350 | ||||
Other Current Employees | — | 1 | ||||
Other | — | 2 | ||||
$ | 118 | $ | 451 | |||
2002 | 2001 | 2000 | ||||||||||||||||||
Sales by Customer | %(a) | Sales by Customer | %(a) | Sales by Customer | %(a) | |||||||||||||||
Customer 1 | $ | 23,975 | 48 | % | $ | 21,889 | 52 | % | $ | 20,818 | 44 | % | ||||||||
Customer 2 | 10,432 | 21 | % | 4,242 | 10 | % | 8,958 | 18 | % | |||||||||||
Customer 3 | (b | ) | — | 4,219 | 10 | % | (b | ) | — | |||||||||||
$ | 34,407 | 69 | % | $ | 30,350 | 72 | % | $ | 29,776 | 62 | % | |||||||||
2005 | 2004 | 2003 | ||||||||||||||||
Net Sales by Customer | % of Total Net Sales | Net Sales by Customer | % of Total Net Sales | Net Sales by Customer | % of Total Net Sales | |||||||||||||
Customer 1 | $ | 36,991 | 40 | % | $ | 31,182 | 40 | % | $ | 24,119 | 43 | % | ||||||
Customer 2 | 35,193 | 39 | % | 23,464 | 30 | % | 15,337 | 27 | % | |||||||||
$ | 72,184 | 79 | % | $ | 54,646 | 70 | % | $ | 39,456 | 70 | % | |||||||
Accounts receivable from these customers totaled $2,528,000 and $2,817,000$9.5 million at June 30, 20022005, and 2001, respectively.
M.L. Contingencies
From time to time, we become involved in various investigations, claims and legal proceedings that arise in the ordinary course of our business. These matters may relate to product liability, employment, intellectual property, tax, regulation, contract or other matters. The Companyresolution of these matters as they arise will be subject to various uncertainties and, even if such claims are without merit, could result in the expenditure of significant financial and managerial resources. While unfavorable outcomes are possible, based on available information, we generally do not believe the resolution of these matters, including that discussed below, will result in a material adverse effect on our business, consolidated financial condition, or results of operation. However, a settlement payment or unfavorable outcome could adversely impact our results of operation. Our evaluation of the likely impact of these actions, including that discussed below, could change in the future and we could have unfavorable outcomes that we do not expect.
On February 10, 2005, a complaint was filed against NAI on behalf of Novogen Research Pty. Ltd. in the United States District Court, Southern District of New York alleging a cause of action for patent infringement of a Novogen patent by products manufactured by NAI. The parties are attempting to resolve the matter in an out-of-court settlement but if we are unable to do so we intend to vigorously defend the action.
We were a plaintiff in an anti-trust lawsuit against several manufacturers of vitamins and other raw materials purchased by the Company.that we purchased. Other similarly situated companies filed a number of similar lawsuits against some or all of the same manufacturers. The Company’sOur lawsuit was consolidated with some of the others and captionedIn re: Vitamin Antitrust LitigationLitigation., and is pending in U.S. District Court in Washington D.C. As of June 30, 2003, all of our claims under the vitamin antitrust litigation were settled. Settlement payments that we received by the Company of $3,410,000, $298,000$225,000 in fiscal 2003 and $116,000$3.4 million in fiscal 2002 are included in proceeds from vitamin antitrust litigation in the accompanying statements of operationsincome for fiscal 2003 and 2002, 2001as applicable.
M. Segment Information
Our business consists of one segment, the development, manufacturing, marketing and 2000, respectively. Subsequent todistribution of nutritional supplements. Our products are sold both in the United States and in markets outside the United States, including Europe, Australia and Japan. Our primary market outside the United States is Europe.
Net sales by geographic region, based upon the customers’ location, were as follows (dollars in thousands):
Year Ended June 30 | |||||||||
2005 | 2004 | 2003 | |||||||
United States | $ | 67,784 | $ | 56,350 | $ | 41,838 | |||
Markets Outside the United States | 23,708 | 22,184 | 14,124 | ||||||
Total Net Sales | $ | 91,492 | $ | 78,534 | $ | 55,962 | |||
Products manufactured by NAIE accounted for 46% of net sales in markets outside the United States in fiscal 2005, 42% in fiscal 2004 and 51% in fiscal 2003.
No products manufactured by NAIE were sold in the United States during the fiscal years ended June 30, 2002,2005, 2004 and 2003.
Assets and capital expenditures by geographic region, based on the Company receivedlocation of the company or subsidiary at which they were located or made, were as follows (dollars in thousands):
2005 | Long-Lived Assets | Total Assets | Capital Expenditures | ||||||
United States | $ | 17,144 | $ | 40,470 | $ | 7,397 | |||
Europe | 1,053 | 3,668 | 309 | ||||||
$ | 18,197 | $ | 44,138 | $ | 7,706 | ||||
2004 | Long-Lived Assets | Total Assets | Capital Expenditures | ||||||
United States | $ | 10,833 | $ | 38,625 | $ | 3,138 | |||
Europe | 1,135 | 3,843 | 184 | ||||||
$ | 11,968 | $ | 42,468 | $ | 3,322 | ||||
2003 | Long-Lived Assets | Total Assets | Capital Expenditures | ||||||
United States | $ | 9,996 | $ | 26,724 | $ | 755 | |||
Europe | 1,362 | 4,000 | 222 | ||||||
$ | 11,358 | $ | 30,724 | $ | 977 | ||||
SCHEDULE II
Natural Alternatives International, Inc.
Valuation And Qualifying Accounts
For The Years Ended June 30, 2005, 2004 and 2003
(Dollars in thousands) | ||||||||||||||
Balance at Beginning of Period | Provision | (Deductions) | Balance at End of Period | |||||||||||
Fiscal year ended June 30, 2005: | ||||||||||||||
Inventory reserves | $ | 1,113 | $ | 1,529 | $ | (827 | ) | $ | 1,815 | |||||
Allowance for doubtful accounts | $ | 132 | $ | 101 | $ | (12 | ) | $ | 221 | |||||
Fiscal year ended June 30, 2004: | ||||||||||||||
Inventory reserves | $ | 708 | $ | 965 | $ | (560 | ) | $ | 1,113 | |||||
Allowance for doubtful accounts | $ | 27 | $ | 106 | $ | (1 | ) | $ | 132 | |||||
Fiscal year ended June 30, 2003: | ||||||||||||||
Inventory reserves | $ | 1,467 | $ | 19 | $ | (778 | ) | $ | 708 | |||||
Allowance for doubtful accounts | $ | 105 | $ | (46 | ) | $ | (32 | ) | $ | 27 |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
We maintain certain disclosure controls and procedures. They are designed to help ensure that material information is: (1) gathered and communicated to our management, including our principal executive and financial officers, on a final settlement paymenttimely basis; and (2) recorded, processed, summarized, reported and filed with the SEC as required under the Securities Exchange Act of $225,000, as all of its claims under theVitamin Antitrust Litigation were settled.
Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and others. In November 2001,procedures as of June 30, 2005. Based on their evaluation, they concluded that our disclosure controls and procedures were effective for their intended purpose described above. There were no changes to our internal controls during the parties mutually resolved their disputes with each other, dismissed all pending claims against one another and entered into a confidential settlement agreement.
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information for this item is incorporated by reference to the Company opened its new wholly owned manufacturing subsidiarysections “Our Board of Directors,” “Our Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,” and “Code of Ethics” in Switzerland. our definitive proxy statement for our Annual Meeting of Stockholders to be held on December 2, 2005, to be filed on or before October 28, 2005.
ITEM 11. EXECUTIVE COMPENSATION
The Company’s segment information for this item is incorporated by geographic areareference to the sections “Director Compensation” and “Executive Officer Compensation” in our definitive proxy statement for our Annual Meeting of Stockholders to be held on December 2, 2005, to be filed on or before October 28, 2005.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information for this item is incorporated by reference to the sections “Stock Holdings of Certain Owners and Management” and “Securities Authorized for Issuance Under Equity Compensation Plans” in our definitive proxy statement for our Annual Meeting of Stockholders to be held on December 2, 2005, to be filed on or before October 28, 2005.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information for this item is incorporated by reference to the section “Certain Relationships and Related Transactions” in our definitive proxy statement for our Annual Meeting of Stockholders to be held on December 2, 2005, to be filed on or before October 28, 2005.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information for this item is incorporated by reference to the sections “Audit Fees,” “Audit-Related Fees,” “Tax Fees,” “All Other Fees” and “Pre-Approval Polices and Procedures” in our definitive proxy statement for our Annual Meeting of Stockholders to be held on December 2, 2005, to be filed on or before October 28, 2005.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
(1) | Financial Statements. The financial statements listed below are included under Item 8 of this report: |
2002 | Sales | Long Lived Assets | Total Assets | Capital Expenditures | ||||||||
United States | $ | 41,807 | $ | 11,450 | $ | 24,290 | $ | 720 | ||||
Europe | 8,230 | 1,527 | 3,220 | 356 | ||||||||
$ | 50,037 | $ | 12,977 | $ | 27,510 | $ | 1,076 | |||||
2001 | Sales | Long Lived Assets | Total Assets | Capital Expenditures | ||||||||
United States | $ | 34,639 | $ | 12,678 | $ | 22,674 | $ | 605 | ||||
Europe | 7,519 | 1,370 | 2,394 | 355 | ||||||||
$ | 42,158 | $ | 14,048 | $ | 25,068 | $ | 960 | |||||
2000 | Sales | Long Lived Assets | Total Assets | Capital Expenditures | ||||||||
United States | $ | 44,429 | $ | 14,560 | $ | 32,006 | $ | 3,742 | ||||
Europe | 3,398 | 1,267 | 2,869 | 1,419 | ||||||||
$ | 47,827 | $ | 15,827 | $ | 34,875 | $ | 5,161 | |||||
Year Ended June 30, 2002 | ||||||||||||||||
1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | Total | ||||||||||||
(Amounts in thousands, except per share amounts) | ||||||||||||||||
Net sales | $ | 9,887 | $ | 12,655 | $ | 12,843 | $ | 14,652 | $ | 50,037 | ||||||
Gross profit | 2,024 | 2,706 | 2,887 | 3,352 | 10,969 | |||||||||||
Net income (loss) | $ | (658 | ) | $ | 64 | $ | 759 | $ | 3,714 | $ | 3,879 | |||||
Net income (loss) per common share: | ||||||||||||||||
Basic | $ | (0.11 | ) | $ | 0.01 | $ | 0.13 | $ | 0.64 | $ | 0.67 | |||||
Diluted | $ | (0.11 | ) | $ | 0.01 | $ | 0.13 | $ | 0.64 | $ | 0.67 |
Year Ended June 30, 2001 | ||||||||||||||||||
1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | Total | ||||||||||||||
(Amounts in thousands, except per share amounts) | ||||||||||||||||||
Net sales | $ | 10,223 | $ | 11,240 | $ | 10,341 | $ | 10,354 | $ | 42,158 | ||||||||
Gross profit | 2,011 | 2,845 | 2,290 | 1,042 | 8,188 | |||||||||||||
Net income (loss) | $ | 205 | $ | 443 | $ | (234 | ) | $ | (5,303 | ) | $ | (4,889 | ) | |||||
Net income (loss) per common share: | ||||||||||||||||||
Basic | $ | 0.04 | $ | 0.08 | $ | (0.04 | ) | $ | (0.93 | ) | $ | (0.85 | ) | |||||
Diluted | $ | 0.04 | $ | 0.08 | $ | (0.04 | ) | $ | (0.93 | ) | $ | (0.85 | ) |
(2) | Financial Statement Schedule. The following financial statement schedule is included under Item 8 of this report: |
Allowance for doubtful accounts | ||||||||||||||
Balance at beginning of period | Provision | (Deductions) | Balance at end of period | |||||||||||
(Dollars in thousands) | ||||||||||||||
2002 | $ | 470 | $ | (58 | ) | $ | (307 | ) | $ | 105 | ||||
2001 | $ | 330 | $ | 286 | $ | (146 | ) | $ | 470 | |||||
2000 | $ | 472 | $ | 389 | $ | (531 | ) | $ | 330 |
(3) | Exhibits. The following exhibit index shows those exhibits filed with this report and those incorporated by reference: |
EXHIBIT INDEX
Exhibit Number | Description | Incorporated By Reference To | ||
3(i) | Amended and Restated Certificate of Incorporation of Natural Alternatives International, Inc. filed with the Delaware Secretary of State on January 14, 2005 | Exhibit 3(i) of NAI’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2004, filed with the commission on February 14, 2005 | ||
3(ii) | By-laws of Natural Alternatives International, Inc. dated as of December 21, 1990 | NAI’s Registration Statement on Form S-1 (File No. 33-44292) filed with the commission on December 21, 1992 | ||
4(i) | Form of NAI’s Common Stock Certificate | Filed herewith | ||
10.1 | 1999 Omnibus Equity Incentive Plan as adopted effective May 10, 1999, amended effective January 30, 2004, and further amended effective December 3, 2004 | Exhibit 10.1 of NAI’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2004, filed with the commission on February 14, 2005 | ||
10.2 | 1999 Employee Stock Purchase Plan as adopted effective October 18, 1999 | Exhibit B of NAI’s definitive Proxy Statement filed with the commission on October 21, 1999 | ||
10.3 | Management Incentive Plan | Exhibit 10.3 of NAI’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003, filed with the commission on November 5, 2003 | ||
10.4 | Amended and Restated Employment Agreement dated as of January 30, 2004, by and between NAI and Mark Zimmerman | Exhibit 10.4 of NAI’s Annual Report on Form 10-K for the fiscal year ended June 30, 2004, filed with the commission on September 14, 2004 | ||
10.5 | Amended and Restated Employment Agreement dated as of January 30, 2004, by and between NAI and Randell Weaver | Exhibit 10.5 of NAI’s Annual Report on Form 10-K for the fiscal year ended June 30, 2004, filed with the commission on September 14, 2004 | ||
10.6 | Amended and Restated Employment Agreement dated as of January 30, 2004, by and between NAI and Mark A. LeDoux | Exhibit 10.6 of NAI’s Annual Report on Form 10-K for the fiscal year ended June 30, 2004, filed with the commission on September 14, 2004 | ||
10.7 | Amended and Restated Employment Agreement dated as of January 30, 2004, by and between NAI and John Wise | Exhibit 10.7 of NAI’s Annual Report on Form 10-K for the fiscal year ended June 30, 2004, filed with the commission on September 14, 2004 | ||
10.8 | Amended and Restated Employment Agreement dated as of January 30, 2004, by and between NAI and John Reaves | Exhibit 10.8 of NAI’s Annual Report on Form 10-K for the fiscal year ended June 30, 2004, filed with the commission on September 14, 2004 | ||
10.9 | Amended and Restated Employment Agreement dated as of January 30, 2004, by and between NAI and Timothy E. Belanger | Exhibit 10.9 of NAI’s Annual Report on Form 10-K for the fiscal year ended June 30, 2004, filed with the commission on September 14, 2004 | ||
10.10 | Amended and Restated Exclusive License Agreement effective as of September 1, 2004 by and among NAI and Dr. Reginald B. Cherry | Exhibit 10.11 of NAI’s Annual Report on Form 10-K for the fiscal year ended June 30, 2004, filed with the commission on September 14, 2004 |
10.11 | Exclusive License Agreement effective as of September 1, 2004 by and among NAI and Reginald B. Cherry Ministries, Inc. | Exhibit 10.12 of NAI’s Annual Report on Form 10-K for the fiscal year ended June 30, 2004, filed with the commission on September 14, 2004 | ||
10.12 | First Amendment to Exclusive License Agreement effective as of December 10, 2004 by and among NAI and Reginald B. Cherry Ministries, Inc. | Exhibit 10.3 of NAI’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2004, filed with the commission on February 14, 2005 | ||
10.13 | Lease of Facilities in Vista, California between NAI and Calwest Industrial Properties, LLC, a California limited liability company dated October 27, 2003 | Exhibit 10.10 of NAI’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003, filed with the commission on November 5, 2003 | ||
10.14 | Credit Agreement dated as of May 1, 2004 by and between NAI and Wells Fargo Bank, National Association | Exhibit 10.11 of NAI’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004, filed with the commission on May 17, 2004 | ||
10.15 | First Amendment to Credit Agreement dated as of February 1, 2005 by and between NAI and Wells Fargo Bank, National Association | Exhibit 10.1 of NAI’s Current Report on Form 8-K dated February 1, 2005, filed with the commission on February 7, 2005 | ||
10.16 | Form of Indemnification Agreement entered into between NAI and each of its directors | Exhibit 10.15 of NAI’s Annual Report on Form 10-K for the fiscal year ended June 30, 2004, filed with the commission on September 14, 2004 | ||
10.17 | Amended and Restated Exclusive License Agreement effective as of February 5, 2003, by and among NAI, Chopra Enterprises, LLC, Deepak Chopra, M.D., and David Simon, M.D. | Exhibit 10.16 of NAI’s Annual Report on Form 10-K for the fiscal year ended June 30, 2004, filed with the commission on September 14, 2004 | ||
10.18 | Lease of Facilities in Manno, Switzerland between NAIE and Mr. Silvio Tarchini dated May 9, 2005 (English translation) | Exhibit 10.19 of NAI’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005, filed with the commission on May 13, 2005 | ||
10.19 | Lease of Facilities in Manno, Switzerland between NAIE and Mr. Silvio Tarchini dated July 25, 2003 (English translation) | Filed herewith | ||
10.20 | Lease of Facilities in Manno, Switzerland between NAIE and Mr. Silvio Tarchini dated June 8, 2004 (English translation) | Filed herewith | ||
10.21 | Lease of Facilities in Manno, Switzerland between NAIE and Mr. Silvio Tarchini dated February 7, 2005 (English translation) | Filed herewith | ||
10.22 | License Agreement effective as of April 28, 1997 by and among Roger Harris, Mark Dunnett and NAI | Filed herewith | ||
10.23 | Amendment to License Agreement effective as of March 17, 2001 by and among Roger Harris, Mark Dunnett and NAI | Filed herewith | ||
21 | Subsidiaries of the Company | Filed herewith | ||
23.1 | Consent of Independent Registered Public Accounting Firm | Filed herewith |
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | Filed herewith | ||
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer | Filed herewith | ||
32 | Section 1350 Certification | Filed herewith |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Natural Alternatives International, Inc., the registrant, has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: September 8, 2005
NATURAL ALTERNATIVES INTERNATIONAL, INC. | ||||||
By: | /s/ | |||||
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 andNatural Alternatives International, Inc., in the capacities and on the dates indicated.
Signature | Title | Date | ||
/s/ (Mark A. LeDoux) | Chief Executive Officer and Chairman of the Board of Directors (principal executive officer) | September | ||
/s/ John R. Reaves (John R. Reaves) | ||||
Chief Financial Officer ( | principal accounting officer) | September | ||
/s/ Joe E. Davis (Joe E. Davis) | ||||
Director | September | |||
/s/ Alan G. Dunn (Alan G. Dunn) | ||||
Director | September | |||
/s/ Alan J. Lane (Alan J. Lane) | Director | September 8, 2005 | ||
/s/ Lee G. Weldon (Lee G. Weldon) | Director | September 8, 2005 |
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