UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION
pursuant to Section 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OFor 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31,FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
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 92069 | (760) 744-7340 | ||
(Address of principal executive | (Registrant’s telephone |
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.
xYes x¨ Noo
At May 13,
Indicate by check mark whether NAI is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
¨ Yes x No
As of November 4, 2003, the registrant had 5,815,132 outstanding5,821,973 shares of NAI’s common stock $.01 par value,were outstanding, net of 272,400 treasury shares.
Part I. Financial InformationItem 1. Financial StatementsTABLE OF CONTENTS
Page | ||||
1 | ||||
PART I | FINANCIAL INFORMATION | 2 | ||
Item 1. | Financial Statements | 2 | ||
2 | ||||
Condensed Consolidated Statements of Operations and Comprehensive Income | 3 | |||
4 | ||||
5 | ||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 10 | ||
Item 3. | 13 | |||
Item 4. | Controls and Procedures | 13 | ||
PART II | OTHER INFORMATION | |||
Item 1. | Legal Proceedings | 14 | ||
Item 2. | Changes in Securities and Use of Proceeds | 14 | ||
Item 3. | Defaults Upon Senior Securities | 14 | ||
Item 4. | Submission of Matters to a Vote of Security Holders | 14 | ||
Item 5. | Other Information | 14 | ||
Item 6. | Exhibits and Reports on Form 8-K | 14 | ||
16 |
(i)
SPECIAL NOTE – FORWARD-LOOKING STATEMENTS
Certain statements in this report 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, 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. 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. 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 Items 2 and 3 and elsewhere in this report, as well as in other reports and documents we file with the SEC.
Unless the context requires otherwise, all references in this report to the “Company,” “NAI,” “we,” “our,” and “us” refer to Natural Alternatives International, Inc. and, as applicable, Natural Alternatives International Europe S.A. (NAIE), its wholly-owned subsidiary.
PART I – FINANCIAL INFORMATION
NATURAL ALTERNATIVES INTERNATIONAL, INC.
Condensed Consolidated Balance Sheets
(Dollars inIn thousands, except share data)
March 31, 2003 | June 30, 2002 | ||||||||
(Unaudited) | |||||||||
Assets | |||||||||
Current assets: | |||||||||
Cash and cash equivalents | $ | 4,218 | $ | 640 | |||||
Restricted cash | — | 1,500 | |||||||
Accounts receivable, net of allowance for doubtful accounts of $32 at March 31, 2003 and $105 at June 30, 2002 | 4,508 | 3,536 | |||||||
Inventories, net | 8,474 | 7,871 | |||||||
Income tax refund receivable | — | 701 | |||||||
Prepaid expenses | 864 | 271 | |||||||
Deposits | 244 | 168 | |||||||
Other current assets | 82 | 165 | |||||||
Total current assets | 18,390 | 14,852 | |||||||
Property and equipment, net | 11,248 | 12,439 | |||||||
Other assets: | |||||||||
Related parties notes receivable | 47 | 118 | |||||||
Other, net | 127 | 101 | |||||||
Total other assets | 174 | 219 | |||||||
Total assets | $ | 29,812 | $ | 27,510 | |||||
Liabilities and Stockholders’ Equity | |||||||||
Current liabilities: | |||||||||
Accounts payable | $ | 4,098 | $ | 4,112 | |||||
Accrued liabilities | 1,101 | 815 | |||||||
Accrued compensation and employee benefits | 676 | 482 | |||||||
Income taxes payable | 152 | 131 | |||||||
Current portion of long-term debt | 569 | 587 | |||||||
Total current liabilities | 6,596 | 6,127 | |||||||
Long-term debt, less current portion | 2,529 | 1,576 | |||||||
Long-term pension liability | 135 | 199 | |||||||
Total liabilities | 9,260 | 7,902 | |||||||
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 6,087,532 shares at March 31, 2003 and 6,073,179 shares at June 30, 2002 | 61 | 61 | |||||||
Additional paid-in capital | 11,448 | 11,362 | |||||||
Retained earnings | 10,346 | 9,488 | |||||||
Treasury stock, at cost, 272,400 shares at March 31, 2003 and June 30, 2002 | (1,303 | ) | (1,303 | ) | |||||
Total stockholders’ equity | 20,552 | 19,608 | |||||||
Total liabilities and stockholders’ equity | $ | 29,812 | $ | 27,510 | |||||
September 30, 2003 | June 30, 2003 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 3,179 | $ | 5,482 | ||||
Accounts receivable, net of allowance for doubtful accounts of $28 at September 30, 2003 and $27 at June 30, 2003 | 6,150 | 5,668 | ||||||
Inventories, net | 10,443 | 7,845 | ||||||
Prepaid expenses | 1,069 | 502 | ||||||
Other current assets | 287 | 264 | ||||||
Total current assets | 21,128 | 19,761 | ||||||
Property and equipment, net | 10,541 | 10,820 | ||||||
Other assets, net | 134 | 143 | ||||||
Total assets | $ | 31,803 | $ | 30,724 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 5,312 | $ | 5,001 | ||||
Accrued liabilities | 1,319 | 1,106 | ||||||
Accrued compensation and employee benefits | 764 | 717 | ||||||
Income taxes payable | 62 | 46 | ||||||
Current portion of long-term debt | 572 | 570 | ||||||
Total current liabilities | 8,029 | 7,440 | ||||||
Long-term debt, less current portion | 2,243 | 2,386 | ||||||
Long-term pension liability | 156 | 121 | ||||||
Total liabilities | 10,428 | 9,947 | ||||||
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 6,094,373 at September 30, 2003 and 6,087,532 at June 30, 2003 | 61 | 61 | ||||||
Additional paid-in capital | 11,457 | 11,426 | ||||||
Retained earnings | 11,160 | 10,593 | ||||||
Treasury stock, at cost, 272,400 shares at September 30, 2003 and June 30, 2003 | (1,303 | ) | (1,303 | ) | ||||
Total stockholders’ equity | 21,375 | 20,777 | ||||||
Total liabilities and stockholders’ equity | $ | 31,803 | $ | 30,724 | ||||
See accompanying notes to condensed consolidated condensed financial statements.
2
NATURAL ALTERNATIVES INTERNATIONAL, INC.
Natural Alternatives International, Inc.
Condensed Consolidated Statements ofOf Operations andAnd Comprehensive Income
(Dollars inIn thousands, except share and per share data)(Unaudited)amounts)
Three months ended March 31, | Nine months ended March 31, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
Net sales | $ | 13,755 | $ | 12,843 | $ | 39,901 | $ | 35,385 | ||||||||
Cost of goods sold | 10,468 | 9,956 | 30,367 | 27,768 | ||||||||||||
Gross profit | 3,287 | 2,887 | 9,534 | 7,617 | ||||||||||||
Selling, general & administrative expenses | 3,076 | 2,946 | 8,665 | 7,861 | ||||||||||||
Income (loss) from operations | 211 | (59 | ) | 869 | (244 | ) | ||||||||||
Other income (expense): | ||||||||||||||||
Interest income | 25 | 2 | 53 | 9 | ||||||||||||
Interest expense | (56 | ) | (159 | ) | (208 | ) | (510 | ) | ||||||||
Foreign exchange gain (loss) | 13 | (2 | ) | (4 | ) | (39 | ) | |||||||||
Proceeds from vitamin antitrust litigation | — | 1,000 | 225 | 1,000 | ||||||||||||
Other, net | (15 | ) | (2 | ) | (56 | ) | 12 | |||||||||
(33 | ) | 839 | 10 | 472 | ||||||||||||
Income before income taxes | 178 | 780 | 879 | 228 | ||||||||||||
Provision for income taxes | 6 | 21 | 21 | 63 | ||||||||||||
Net income | $ | 172 | $ | 759 | $ | 858 | $ | 165 | ||||||||
Net income per common share: | ||||||||||||||||
Basic | $ | 0.03 | $ | 0.13 | $ | 0.15 | $ | 0.03 | ||||||||
Diluted | $ | 0.03 | $ | 0.13 | $ | 0.14 | $ | 0.03 | ||||||||
Weighted average common shares outstanding: | ||||||||||||||||
Basic shares | 5,814,258 | 5,794,613 | 5,807,143 | 5,788,608 | ||||||||||||
Diluted shares | 6,061,391 | 5,795,833 | 6,004,304 | 5,789,015 |
(Unaudited)
. | Three Months Ended September 30, | |||||||
2003 | 2002 | |||||||
Net sales | $ | 16,721 | $ | 13,136 | ||||
Cost of goods sold | 12,575 | 9,941 | ||||||
Gross profit | 4,146 | 3,195 | ||||||
Selling, general & administrative expenses | 3,516 | 2,792 | ||||||
Income from operations | 630 | 403 | ||||||
Other income (expense): | ||||||||
Interest income | 9 | 7 | ||||||
Interest expense | (43 | ) | (82 | ) | ||||
Foreign exchange gain (loss) | 15 | (6 | ) | |||||
Proceeds from vitamin antitrust litigation | — | 225 | ||||||
Other, net | (22 | ) | (2 | ) | ||||
(41 | ) | 142 | ||||||
Income before income taxes | 589 | 545 | ||||||
Provision for income taxes | 22 | 8 | ||||||
Net income | $ | 567 | $ | 537 | ||||
Net income per common share: | ||||||||
Basic | $ | 0.10 | $ | 0.09 | ||||
Diluted | $ | 0.09 | $ | 0.09 | ||||
Weighted average common shares outstanding: | ||||||||
Basic shares | 5,820,709 | 5,804,267 | ||||||
Diluted shares | 6,106,834 | 5,928,884 |
See accompanying notes to condensed consolidated condensed financial statements.
3
NATURAL ALTERNATIVES INTERNATIONAL, INC.
Natural Alternatives International, Inc.
Condensed Consolidated Statements ofOf Cash Flows(Dollars in thousands)(Unaudited)
Nine months ended March 31, | |||||||||
2003 | 2002 | ||||||||
Cash flows from operating activities | |||||||||
Net income | $ | 858 | $ | 165 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||
Provision for uncollectible accounts receivable | (75 | ) | (134 | ) | |||||
Depreciation and amortization | 1,830 | 1,795 | |||||||
Stock based compensation | 56 | 3 | |||||||
Pension expense, net of contributions | (64 | ) | 2 | ||||||
Loss (gain) on disposal of asset | 4 | (46 | ) | ||||||
Loss on investments | — | 43 | |||||||
Foreign exchange loss on foreign debt | — | 39 | |||||||
Changes in operating assets and liabilities: | |||||||||
Accounts receivable | (897 | ) | (33 | ) | |||||
Inventories | (603 | ) | (2,539 | ) | |||||
Tax refund receivable | 701 | — | |||||||
Prepaid expenses | (593 | ) | (160 | ) | |||||
Other assets | (19 | ) | (136 | ) | |||||
Accounts payable and accrued liabilities | 293 | 1,879 | |||||||
Accrued compensation and employee benefits | 194 | 159 | |||||||
Net cash provided by operating activities | 1,685 | 1,037 | |||||||
Cash flows from investing activities | |||||||||
Capital expenditures | (752 | ) | (924 | ) | |||||
Proceeds from sale of property and equipment | 109 | 80 | |||||||
Repayment of notes receivable | 71 | 330 | |||||||
Issuance of notes receivable | — | (15 | ) | ||||||
Other assets | — | 1 | |||||||
Net cash used in investing activities | (572 | ) | (528 | ) | |||||
Cash flows from financing activities | |||||||||
Net borrowing on lines of credit | — | 1,094 | |||||||
Borrowings on long-term debt | 2,500 | — | |||||||
Payments on long-term debt | (1,565 | ) | (1,506 | ) | |||||
Decrease in restricted cash | 1,500 | — | |||||||
Proceeds from issuance of common stock | 30 | 18 | |||||||
Net cash provided by (used in) financing activities | 2,465 | (394 | ) | ||||||
Net increase in cash and cash equivalents | 3,578 | 115 | |||||||
Cash and cash equivalents at beginning of period | 640 | 499 | |||||||
Cash and cash equivalents at end of period | $ | 4,218 | $ | 614 | |||||
Supplemental disclosures of cash flow information | |||||||||
Cash paid during the year for interest | $ | 208 | $ | 510 | |||||
(In thousands)
(Unaudited)
Three Months Ended September 30, | ||||||||
2003 | 2002 | |||||||
Cash flow from operating activities | ||||||||
Net income | $ | 567 | $ | 537 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Provision for uncollectible accounts receivable | 1 | (10 | ) | |||||
Depreciation and amortization | 670 | 615 | ||||||
Non-cash compensation | 7 | 30 | ||||||
Pension expense, net of contributions | 35 | (27 | ) | |||||
Loss on disposal of asset | 3 | 3 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (483 | ) | (152 | ) | ||||
Inventories | (2,598 | ) | 350 | |||||
Prepaid expenses | (567 | ) | (604 | ) | ||||
Other assets | (14 | ) | 3 | |||||
Accounts payable and accrued liabilities | 540 | 176 | ||||||
Accrued compensation and employee benefits | 47 | 188 | ||||||
Net cash provided by (used in) operating activities | (1,792 | ) | 1,109 | |||||
Cash flows from investing activities | ||||||||
Proceeds from sale of property and equipment | — | 95 | ||||||
Capital expenditures | (394 | ) | (270 | ) | ||||
Repayment of notes receivable | — | 2 | ||||||
Net cash used in investing activities | (394 | ) | (173 | ) | ||||
Cash flows from financing activities | ||||||||
Net borrowings on lines of credit | — | 1,386 | ||||||
Payments on long-term debt | (141 | ) | (141 | ) | ||||
Proceeds from issuance of common stock | 24 | 3 | ||||||
Net cash provided by (used in) financing activities | (117 | ) | 1,248 | |||||
Net increase (decrease) in cash and cash equivalents | (2,303 | ) | 2,184 | |||||
Cash and cash equivalents at beginning of period | 5,482 | 640 | ||||||
Cash and cash equivalents at end of period | $ | 3,179 | $ | 2,824 | ||||
Supplemental disclosures of cash flow information | ||||||||
Cash paid during the period for interest | $ | 43 | $ | 83 | ||||
See accompanying notes to condensed consolidated condensed financial statements.
4
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO UNAUDITEDCONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 –(Unaudited)
A. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying interim, unaudited, condensed consolidated financial statements include the accounts of Natural Alternatives International, Inc. and its wholly owned subsidiary, Natural Alternatives International Europe, S.A. (“NAIE”), (the “Company”) and have been prepared byin accordance with the Company, without audit, pursuantinstructions to theForm 10-Q and applicable rules and regulations of the Securities and Exchange Commission.regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures herein are adequate to make the information presented not misleading. The Company suggests that these unaudited consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K.regulations. In preparing the consolidated financial statements, management is required to make certain estimates and assumptions that may affect the reported amounts of assets, liabilities, revenues and expenses during the reporting periods. Actual results may differ from such estimates. In themanagement’s opinion, of the Company, all adjustments necessary to present fairly the information in the following unaudited consolidated condensed financial statementsfor a fair presentation of the Companyfinancial position, results of operations and cash flows have been included.included and are of a normal, recurring nature. The results of operations for such interim periodsthe three months ended September 30, 2003 are not necessarily indicative of the operating results for the full year.fiscal year or any future periods.
Certain
You should read the financial statements and these notes, which are an integral part of the financial statements, together with our audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2003 (“2003 Annual Report”). The accounting policies used to prepare the financial statements included in this report are the same as those described in the notes to the consolidated financial statements in our 2003 Annual Report unless otherwise noted below.
We have reclassified certain prior period amounts have been reclassified to conform to the current periodyear presentation.
InventoriesStock-Based Compensation
Inventories are recorded
We have stock option plans under which we have granted non-qualified and incentive stock options to employees and non-employee directors. We also have an employee stock purchase plan. We account for stock-based awards to employees in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations. We have adopted the disclosure-only alternative of SFAS 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), as amended by SFAS 148, “Accounting for Stock-Based Compensation—Transition and Disclosure” (“SFAS 148”).
Pro forma information regarding net income and net income per common share is required and has been determined as if we had accounted for our stock-based awards under the fair value method, instead of the guidelines provided by APB 25. The fair value of the awards was estimated at the lowerdate of cost (firstgrant using the Black-Scholes option valuation model. The Black-Scholes option valuation model was developed for use in first out) or market (net realizable value). Inventories wereestimating 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 options.
For purposes of pro forma disclosures, we have amortized the estimated fair value of the options to expense over the options’ vesting periods. Our pro forma information under SFAS 123 and SFAS 148 is as follows (dollars in thousands):
March 31, 2003 | June 30, 2002 | ||||
Raw materials | $ | 3,681 | $ | 4,631 | |
Work in progress | 3,234 | 1,754 | |||
Finished goods | 1,559 | 1,486 | |||
$ | 8,474 | $ | 7,871 | ||
Property and Equipmentfollows:
Property and equipment are stated at cost less accumulated depreciation. Property and equipment were as follows (dollars in thousands):
Life Used for Depreciation | March 31, 2003 | June 30, 2002 | ||||||||
Land | NA | $ | 393 | $ | 393 | |||||
Building and building improvements | 5 - 39 years | 3,288 | 3,279 | |||||||
Machinery and equipment | 3 - 15 years | 15,399 | 15,517 | |||||||
Office equipment and furniture | 5 - 7 years | 4,158 | 4,054 | |||||||
Vehicles | 3 years | 197 | 197 | |||||||
Leasehold improvements | 5 - 39 years | 4,439 | 4,230 | |||||||
Total property and equipment | 27,874 | 27,670 | ||||||||
Less accumulated depreciation and amortization | (16,626 | ) | (15,231 | ) | ||||||
Property and equipment, net | $ | 11,248 | $ | 12,439 | ||||||
Three Months Ended September 30, | ||||||||
2003 | 2002 | |||||||
(in thousands, except per share data) | ||||||||
Net income—as reported | $ | 567 | $ | 537 | ||||
Plus: Reported stock-based compensation | 7 | 30 | ||||||
Less: Fair value stock-based compensation | (80 | ) | (70 | ) | ||||
Net income—pro forma | $ | 494 | $ | 497 | ||||
Reported basic net income per common share | $ | 0.10 | $ | 0.09 | ||||
Pro forma basic net income per common share | $ | 0.08 | $ | 0.09 | ||||
Reported diluted net income per common share | $ | 0.09 | $ | 0.09 | ||||
Pro forma diluted net income per common share | $ | 0.08 | $ | 0.08 | ||||
5
NATURAL ALTERNATIVES INTERNATIONAL, INC.NOTES TO UNAUDITED FINANCIAL STATEMENTS
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (Continued)
Net Income Perper Common Share
The Company computes
We compute net income per common share in accordance with Statement of Financial Accounting Standards (“SFAS”) No.SFAS 128, “Earnings Per Share.” This statement requires the presentation of basic net income per common share, using the weighted average number of shares outstanding during the period, and diluted net 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 per common share are calculated as follows (dollars in thousands, except per share amounts):follows:
Three Months Ended March 31, | Nine Months Ended March 31, | ||||||||||
2003 | 2002 | 2003 | 2002 | ||||||||
Numerator | |||||||||||
Net income | $ | 172 | $ | 759 | $ | 858 | $ | 165 | |||
Denominator | |||||||||||
Basic weighted average common shares outstanding | 5,814,258 | 5,794,613 | 5,807,143 | 5,788,608 | |||||||
Dilutive effect of stock options | 247,133 | 1,220 | 197,161 | 407 | |||||||
Diluted weighted average common shares outstanding | 6,061,391 | 5,795,833 | 6,004,304 | 5,789,015 | |||||||
Basic net income per share | $ | 0.03 | $ | 0.13 | $ | 0.15 | $ | 0.03 | |||
Diluted net income per share | $ | 0.03 | $ | 0.13 | $ | 0.14 | $ | 0.03 | |||
For
Three Months Ended September 30, | ||||||
2003 | 2002 | |||||
(in thousands, except share and per share data) | ||||||
Numerator | ||||||
Net income | $ | 567 | $ | 537 | ||
Denominator | ||||||
Basic weighted average common shares outstanding | 5,820,709 | 5,804,267 | ||||
Dilutive effect of stock options | 286,125 | 124,617 | ||||
Diluted weighted average common shares outstanding | 6,106,834 | 5,928,884 | ||||
Basic net income per common share | $ | 0.10 | $ | 0.09 | ||
Diluted net income per common share | $ | 0.09 | $ | 0.09 | ||
Shares related to stock options of 170,000 for the three and nine months ended March 31,September 30, 2003, thereand 110,000 for the three months ended September 30, 2002, were outstanding options to purchase 65,000 and 100,000 shares, respectively, of common stock, that were not included inexcluded from the computationcalculation of diluted net income per share, as their effect would have been anti-dilutive.
For the three and nine months ended March 31, 2002, there were outstanding options to purchase 573,400 and 533,410 shares, respectively, of common stock, that were not included in the computation of diluted net income per share as their effect would have been anti-dilutive.
Stock Based Compensation
The Company accounts for the issuance of stock option grants in accordance with Accounting Principles Board opinion (APB) No. 25 and related interpretations in accounting for stock options. In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123.” SFAS No. 148 amended SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amended the disclosure requirements of SFAS No. 123 to require prominent disclosures of the method used to account for stock-based employee compensation and the effect of the methodtheir inclusion would be anti-dilutive.
B. Inventories
Inventories (net) at September 30, 2003, consisted of (in thousands):
Raw materials | $ | 6,060 | |
Work in progress | 3,318 | ||
Finished goods | 1,065 | ||
$ | 10,443 | ||
C. Property and Equipment
The following is a summary of property and equipment at September 30, 2003 (in thousands):
Depreciable Life In Years | ||||||||
Land | NA | $ | 393 | |||||
Building and building improvements | 5 - 39 | 3,288 | ||||||
Machinery and equipment | 3 - 15 | 15,957 | ||||||
Office equipment and furniture | 5 - 7 | 4,003 | ||||||
Vehicles | 3 | 207 | ||||||
Leasehold improvements | 1 - 10 | 4,400 | ||||||
Total property and equipment | 28,248 | |||||||
Less: accumulated depreciation and amortization | (17,707 | ) | ||||||
Property and equipment, net | $ | 10,541 | ||||||
D. Debt
We have a $6.5 million credit facility which expires on reported results in both annualOctober 24, 2004. The facility is comprised of a $4.0 million working capital line of credit and interim financial statements. In accordance with SFAS No. 148, the following pro-forma information has been determined as if the Companya $2.5 million term loan and is secured by all of our assets. The working capital line of credit is subject to eligibility requirements for current accounts receivable and inventory balances. As of September 30, 2003, we had accounted for its employee stock options$4.0 million available under the fair value methodline of SFAS 123.
credit. The fair value of the option grants was estimatedinterest rate on the dateline of grant usingcredit and term loan is prime plus 0.5%. As of September 30, 2003 the Black-Scholes option pricing model withoutstanding amount on the following assumptionsterm loan was $2.1 million.
On May 2, 1996, we entered into a term loan agreement for the quarters ended March 31, 2003 and 2002: risk-free$1.1 million, secured by a building, at an annual interest rate of 4.0%8.25%. The loan is due in June 2011 and 4.4%, respectively; dividend yieldprovides for principal and interest payable in monthly installments of $10,800. The outstanding amount was $731,000 at September 30, 2003.
The composite interest rate of zero; expected life of four to six yearson all outstanding debt was 5.96% at September 30, 2003, and four to nine years, respectively, depending on option termination date; and volatility of 71% and 53%,7.37% at September 30, 2002.
6
NATURAL ALTERNATIVES INTERNATIONAL, INC.NOTES TO UNAUDITED FINANCIAL STATEMENTSE. Commitments
Note 1 – Basis
We lease part of Presentationour manufacturing facilities under non-cancelable operating leases.
We entered into two lease agreements during fiscal year 1999 for adjacent buildings located in Vista, California. The facilities are leased from an unaffiliated third party and Summaryconsist of Significant Accounting Policies (Continued)a total of approximately 74,000 square feet. The lease for the first building, 1215 Park Center Drive, commenced in August 1998 under a 5-year lease agreement for the rental of approximately 54,000 square feet that is utilized as a warehousing and blending facility. The lease for the second building, 1211C Park Center Drive, commenced in March 1999 under a 4.5-year lease agreement for the rental of approximately 20,000 square feet that is utilized as a packaging facility. In June 2003 we exercised our option to extend the lease terms for both facilities for an additional five years ending June 2008.
Stock Based Compensation (Continued)
respectively. For purposesOn October 27, 2003 we entered into a new lease, which includes the previous space and an additional 46,000 square feet available for manufacturing activities. The new lease will begin April 2004 at 1215 Park Center Drive contiguous to our existing space utilized
for warehousing and blending. The new space will be utilized for tableting and encapsulation, which are currently located in San Marcos, CA. The new lease provides for a total of pro forma disclosures,120,000 square feet through March of 2014.
Under the estimated fair valuenew lease we are required to deliver a Letter of Credit, as collateral, in the amount of $330,000 before January 5, 2004. The amount of the options is amortizedLetter of Credit will automatically reduce by 33.3% per year.
Minimum rental commitments as of October 27, 2003, (exclusive of property tax, insurance and maintenance) under all non-cancelable operating leases, including the new lease agreement referred to expense over the vesting periodabove, (with initial or remaining lease terms in excess of the related options. The Company’s pro forma information followsone year) are set forth below (dollars in thousands, except per share amounts)thousands):
Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
Net income as reported | $ | 172 | $ | 759 | $ | 858 | $ | 165 | ||||||||
Add: Stock-based employee compensation expense included in reported net income | 5 | — | 56 | 3 | ||||||||||||
Deduct: Stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects | (86 | ) | (78 | ) | (231 | ) | (117 | ) | ||||||||
Pro forma net income | $ | 91 | $ | 681 | $ | 683 | $ | 51 | ||||||||
Earnings per share: | ||||||||||||||||
Basic – as reported | $ | 0.03 | $ | 0.13 | $ | 0.15 | $ | 0.03 | ||||||||
Basic – pro forma | $ | 0.02 | $ | 0.12 | $ | 0.12 | $ | 0.01 | ||||||||
Diluted – as reported | $ | 0.03 | $ | 0.13 | $ | 0.14 | $ | 0.03 | ||||||||
Diluted – pro forma | $ | 0.02 | $ | 0.12 | $ | 0.11 | $ | 0.01 | ||||||||
Recent Accounting Pronouncements
2004 | $ | 796 | |
2005 | 1,327 | ||
2006 | 1,324 | ||
2007 | 1,300 | ||
2008 | 1,314 | ||
Thereafter | 6,938 | ||
$ | 12,999 | ||
In June 2002, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses significant issues regarding the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities. This statement requires that costs associated with exit or disposal activities be recognized when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is effective for all exit or disposal activities initiated after December 31, 2002. Adoption of this statement did not have a material impact on the Company’s results of operations or financial position.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.NOTES TO UNAUDITED FINANCIAL STATEMENTS
Note 2 –F. Economic Dependency
The Company
We had substantial net sales to two separate contract manufacturing customers during the periods shown in the following table. The loss of eitherany of these customers could have a material adverse impact on the Company’sour net sales and earnings. Net salesSales by customer, representing 10% or more of the respective quarter’speriod’s total net sales, are shown below (dollars in thousands):
Three months ended March 31, | Nine months ended March 31, | ||||||||||||||||||||||
2003 | 2002 | 2003 | 2002 | ||||||||||||||||||||
Customer 1 | $ | 5,756 | 42 | % | $ | 6,740 | 52 | % | $ | 17,234 | 43 | % | $ | 17,100 | 48 | % | |||||||
Customer 2 | 4,361 | 32 | % | 2,865 | 22 | % | 10,774 | 27 | % | 7,095 | 20 | % | |||||||||||
$ | 10,117 | 74 | % | $ | 9,605 | 74 | % | $ | 28,008 | 70 | % | $ | 24,195 | 68 | % | ||||||||
Accounts receivable from these customers totaled $3.8 million and $2.5 million at March 31, 2003 and June 30, 2002, respectively.
Direct-to-consumer sales, were approximately $2.5 million and $2.0 million for the three months ended March 31, 2003 and 2002, respectively, and $7.5 million and $5.8 million for the nine months ended March 31, 2003 and 2002, respectively.(in thousands):
The Company purchases
Three Months Ended September 30, | ||||||||||||
2003 | 2002 | |||||||||||
Net Sales by Customer | % of Total Net Sales | Net Sales by Customer | % of Total Net Sales | |||||||||
Customer 1 | $ | 6,928 | 41 | % | $ | 5,619 | 43 | % | ||||
Customer 2 | 4,558 | 27 | 2,814 | 21 | ||||||||
$ | 11,486 | 69 | % | $ | 8,433 | 64 | % | |||||
We buy certain products it does not manufacture from a limited number of raw material suppliers. The CompanyWe had substantial purchases from three separate suppliers during the periods shown in the following table. The loss of any of these suppliers could have a material adverse impact on the Company’sour sales and earnings.
Raw material purchases, representing 10% or more of the respective quarter’s raw material purchases, are shown below (dollars in(in thousands):
Three months ended March 31, | Nine months ended March 31, | ||||||||||||||||||||||||||
2003 | 2002 | 2003 | 2002 | ||||||||||||||||||||||||
Supplier 1 | $ | 2,637 | 39 | % | $ | (a | ) | — | $ | 5,800 | 35 | % | $ | (a | ) | — | |||||||||||
Supplier 2 | (a | ) | — | (a | ) | — | 1,654 | 10 | % | (a | ) | — | |||||||||||||||
Supplier 3 | (a | ) | — | 2,514 | 36 | % | (a | ) | — | 5,227 | 33 | % | |||||||||||||||
$ | 2,637 | 39 | % | $ | 2,514 | 36 | % | $ | 7,454 | 45 | % | $ | 5,227 | 33 | % | ||||||||||||
(a) Purchases were less than 10% of total raw material purchases
Three Months Ended September 30, | |||||||||||||
2003 | 2002 | ||||||||||||
Raw Material Purchases by Supplier | % of Total Raw Material Purchases | Raw Material Purchases by Supplier | % of Total Raw Material Purchases | ||||||||||
Supplier 1 | $ | 3,151 | 34 | % | $ | 1,204 | 23 | % | |||||
Supplier 2 | (a | ) | — | 689 | 13 | ||||||||
Supplier 3 | (a | ) | — | 552 | 11 | ||||||||
$ | 3,151 | 34 | % | $ | 2,445 | 47 | % | ||||||
(a) | Purchases were less than 10% of total raw material purchases. |
Accounts payable to suppliers representing 10% or more of raw material purchases for the third quarter of fiscal 2003, was $583,000 and zero at March 31, 2003 and June 30, 2002, respectively.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.NOTES TO UNAUDITED FINANCIAL STATEMENTS
Note 3 –G. Segment Information
The Company’s
Our segment information by geographic area was as follows (dollars in(in thousands):
Net Sales for the Three months ended March 31, | Net Sales for the Nine months ended March 31, | ||||||||||
2003 | 2002 | 2003 | 2002 | ||||||||
United States | $ | 12,238 | $ | 11,010 | $ | 34,577 | $ | 29,994 | |||
International | 1,517 | 1,833 | 5,324 | 5,391 | |||||||
$ | 13,755 | $ | 12,843 | $ | 39,901 | $ | 35,385 | ||||
Long Lived Assets | Total Assets | ||||||||||
March 31, 2003 | June 30, 2002 | March 31, 2003 | June 30, 2002 | ||||||||
United States | $ | 10,338 | $ | 11,450 | $ | 26,245 | $ | 24,290 | |||
International | 1,448 | 1,527 | 3,567 | 3,220 | |||||||
$ | 11,786 | $ | 12,977 | $ | 29,812 | $ | 27,510 | ||||
Net Sales for the Three Months Ended September 30, | ||||||
2003 | 2002 | |||||
United States | $ | 14,783 | $ | 11,227 | ||
Europe | 1,938 | 1,909 | ||||
$ | 16,721 | $ | 13,136 | |||
Long Lived Assets | Total Assets | |||||||||||
September 30, 2003 | June 30, 2003 | September 30, 2003 | June 30, 2003 | |||||||||
United States | $ | 9,793 | $ | 9,996 | $ | 27,622 | $ | 26,724 | ||||
Europe | 1,286 | 1,362 | 4,181 | 4,000 | ||||||||
$ | 11,079 | $ | 11,358 | $ | 31,803 | $ | 30,724 | |||||
Note 4 - Financial ConditionH. Contingencies
We were a plaintiff in an anti-trust lawsuit against several manufacturers of vitamins and other raw materials that we purchased. Other similarly situated companies filed a number of similar lawsuits against some or all of the same manufacturers. Our lawsuit was consolidated with some of the others and captionedIn re: Vitamin Antitrust Litigation. As of June 30, 2003 all of the Company’s claims under theVitamin Antitrust Litigation were settled. Settlement payments received by the Company of $225,000 are included in proceeds from vitamin antitrust litigation in the accompanying statements of operations for the three months ended September 30, 2002.
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 resolution of these matters as they arise will be subject to various uncertainties. While unfavorable outcomes are possible, we believe the resolution of these matters, individually or in the aggregate, will not result in a material adverse effect on our business, financial condition or results of operations.
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF |
FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis is intended to help you understand our financial condition and results of operations for the three months ended September 30, 2003. You should read the following discussion and analysis together with our unaudited financial statements and the notes to the financial statements included under Item 1 in this report, as well as the information included in our 2003 Annual Report. Our future financial condition and results of operations will vary from our historical financial condition and results of operations as described below.
Critical Accounting Policies and Estimates
The preparation of our financial statements requires that we make estimates and assumptions that affect the amounts reported in our financial statements and their accompanying notes. We have identified certain policies that we believe are important to the portrayal of our financial condition and results of operations. These policies require the application of significant judgment by our management. We base our estimates on our historical experience, industry standards, and various other assumptions that we believe are reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions. An adverse effect on our financial condition, changes in financial condition, and results of operations could occur if circumstances change that alter the various assumptions or conditions used in such estimates or assumptions.
Our critical accounting policies are discussed under Item 7 of our 2003 Annual Report. There have been no significant changes to these policies during the three months ended September 30, 2003.
Recent Developments
On October 31,27, 2003, in an effort to enhance our manufacturing capacity and improve the efficiency of our operations, we amended our Vista, California property leases to increase the square footage by an additional 46,000 square feet. The total leased property in Vista, California increased from approximately 74,000 square feet to approximately 120,000 square feet. The new lease, including the additional space, commences on April 1, 2004 and has a term of ten years. The new space will be utilized for tableting and encapsulation, which are currently located in San Marcos, CA.
Additionally, we continue to evaluate expansion opportunities that could increase product lines, enhance our manufacturing capabilities or reduce risks associated with reliance on a limited number of customers.
Results of Operations – Three Months Ended September 30, 2003 vs. Three Months Ended September 30, 2002
Net Sales
Three Months Ended September 30, | ||||||
2003 | 2002 | |||||
(in thousands) | ||||||
Private Label Contract Manufacturing | $ | 13,718 | $ | 10,525 | ||
Direct-to-Consumer Marketing Program | 3,003 | 2,611 | ||||
Total Net Sales | $ | 16,721 | $ | 13,136 | ||
Our total net sales increased $3.6 million, or 27%, during the Company entered intothree months ended September 30, 2003, compared to the comparable period ended September 30, 2002. The net sales growth resulted from a $3.2 million, or 30%, increase in our private label contract manufacturing sales and a $392,000, or 15%, increase in net sales from our direct-to-consumer marketing program. Our private label contract manufacturing sales increase was due primarily to new $6.5product sales together with an increase in the volume of established products for our two largest customers. Our direct-to-consumer marketing program increase was due primarily to the introduction of four new direct-to-consumer products.
Gross Profit
Three Months Ended September 30, | ||||||||
2003 | 2002 | |||||||
(in thousands) | ||||||||
Gross Profit | $ | 4,146 | $ | 3,195 | ||||
As a Percentage of Net Sales | 24.8 | % | 24.3 | % |
The improvement in gross profit margin to 24.8% from 24.3% was due to additional fixed cost leverage on higher net sales and improved efficiency from investments in our packaging operations. Our direct and indirect manufacturing expenses were 21.2% and 22.9% of net sales in the three months ended September 30, 2003 and September 30, 2002, respectively. Our material costs as a percentage of net sales was 54% in the three months ended September 30, 2003 ($9.0 million) and 52.7% in the three months ended September 30, 2002 ($6.9 million).
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $3.5 million two-year credit facility.(21% of net sales) in the three months ended September 30, 2003, compared to $2.8 million (21.3% of net sales) in the three months ended September 30, 2002. The facility isincrease in absolute dollars was primarily due to increases in direct-to-consumer fulfillment costs of $84,000 associated with incremental sales, additional direct-to-consumer media and production costs of $198,000 to market the Dr. Cherry’s Pathway to HealingTM brand in several new television markets, sales personnel costs of $90,000, research and development personnel and professional costs of $173,000 for strengthening regulatory compliance, insurance premiums of $71,000, and $65,000 for public company reporting and compliance matters.
Income from Operations
Our income from operations was $630,000 for the three months ended September 30, 2003, compared to $403,000 for the three months ended September 30, 2002. The improvement in our income from operations was due to the increase in gross profit of $951,000 from improved gross margin on higher net sales, partially offset by incremental selling, general and administrative expenses of $724,000.
Net Income
Our net income was $567,000 ($0.09 per diluted share) in the three months ended September 30, 2003 compared to $537,000 ($0.09 per diluted share) in the three months ended September 30, 2002. Excluding the effect of the litigation settlement proceeds in the prior period, net income increased $255,000 from $312,000 ($0.05 per diluted share).
Liquidity and Capital Resources
Our working capital increased in the three months ended September 30, 2003 to $13.1 million versus $12.3 million at June 30, 2003. Cash and cash equivalents decreased $2.3 million primarily as a result of an increase of $2.6 million in inventory. Inventory increased primarily due to customer requirements and anticipated revenue growth.
Accounts receivable increased $482,000 due to higher net sales in the three months ended September 30, 2003, as compared with the three months ended June 30, 2003 while days sales outstanding remained consistent. Accounts payable as a percentage of inventory was 51% at September 30, 2003 versus 64% at June 30, 2003 due to timing of disbursements to vendors.
Approximately $400,000 of our operating cash flow was generated by NAIE in the three months ended September 30, 2003. There are currently no material restrictions on the transfer of these funds within the Company.
Capital expenditures for the three months ended September 30, 2003 were approximately $394,000. These expenditures were primarily for the continuing investment in our domestic manufacturing of approximately $371,000. We plan on significantly increasing capital expenditures in the remaining nine months of fiscal 2004 to expand manufacturing capacity and improve efficiency in encapsulation, tableting and packaging operations.
Our consolidated debt decreased to $2.8 million at September 30, 2003 from $3.0 million at June 30, 2003. Our consolidated debt of $2.8 million was comprised of a $4$731,000 term loan secured by a building and a $2.1 million term loan included in our new credit facility. We have a $6.5 million credit facility expiring in October 2004. The facility includes a $4.0 million working capital line of credit and a $2.5 million term loan.loan and is secured by all of our assets. The working capital line of credit is subject to eligibility requirements for current accounts receivable and inventory balances. As of March 31,September 30, 2003, the Companywe had $3.8$4.0 million available under the line of credit. The interest rate on the line of credit and the term loan is prime plus 0.5%.
We plan on funding our current working capital needs, capital expenditures and debt payments using cash flow from operations and our existing credit facility. Additionally, we are evaluating expanding our credit facility to provide sufficient capital for our long-term growth strategies.
On June 24, 2003 we purchased option contracts designated as cash flow hedges to protect against the foreign currency exchange risk inherent in our forecasted transactions denominated in Euros. The option contracts had a notional amount of $1.5 million and a purchase price of $16,100. The premium associated with each option contract is amortized on a straight-line basis over the term of the option, and mark-to-market amounts and realized gains or losses are recognized on the settlement date in foreign exchange gain (loss). The risk of loss associated with purchased options is limited to premium amounts paid for the option contracts. At September 30, 2003, the value of the purchased options of $1,300 was included in other current assets in the consolidated financial statements. There are no other derivative financial instruments at September 30, 2003.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet debt nor do we have any transactions, arrangements or relationships with any special purposes entities.
Contractual Obligations
This table summarizes our known contractual obligations and commercial commitments, including the new lease agreement, at October 27, 2003 (in thousands).
Contractual Obligations | Total | Fiscal 2004 | Fiscal 2005 | Fiscal 2006 | Fiscal 2007 | Fiscal 2008 | Thereafter | ||||||||||||||
Long-term Debt | $ | 2,815 | $ | 429 | $ | 1,784 | $ | 83 | $ | 90 | $ | 97 | $ | 332 | |||||||
Operating Leases | 12,999 | 796 | 1,327 | 1,324 | 1,300 | 1,314 | 6,938 | ||||||||||||||
Total Obligations | $ | 15,814 | $ | 1,225 | $ | 3,111 | $ | 1,407 | $ | 1,390 | $ | 1,411 | $ | 7,270 | |||||||
Recent Accounting Pronouncements
Recent accounting pronouncements are discussed under Item 7 of our 2003 Annual Report. As of March 31,September 30, 2003, the outstanding amount on the linewe are not aware of credit was zero. The term loan provides for principal and interest payable in monthly installments of $47,000 with a final balloon payment of $1.6 million on the second anniversary of the loan agreement. As of March 31, 2003 the outstanding amount was $2.3 million.
On May 2, 1996, the Company entered into a term note agreement for $1.1 million, secured by a building, at an annual interest rate of 8.25%. The note is due in June 2011 and provides for principal and interest payable in monthly installments of $10,800. As of March 31, 2003, the outstanding amount was $765,000.
The composite interest rate on all outstanding debt at March 31, 2003 and 2002 was 6.74% and 9.82%, respectively.
Note 5 - Contingencies
The Company was a plaintiff in an antitrust lawsuit against several manufacturers of vitamins and other raw materials purchased by the Company. Other similarly situated companies filed a number of similar lawsuits against some or all of the same manufacturers. The Company’s lawsuit was consolidated with some of the others and captioned In re: Vitamin Antitrust Litigation, and was pending in U.S. District Court in Washington D.C. A final settlement payment of $225,000 and a payment of $1,000,000 were received by the Company and are included in proceeds from vitamin antitrust litigation in the accompanying statements of operations for the nine months ended March 31, 2003 and 2002, respectively. Settlement payments received by the Company of $0 and $1,000,000 are included in proceeds from vitamin antitrust litigation in the accompanying statements of operations for the three months ended Mach 31, 2003 and 2002, respectively. All of its claims under the Vitamin Antitrust Litigation were settled.
9
From time to time the Company may be subject to various claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with its legal counsel, there are no outstanding mattersany additional pronouncements that are expected to have a material adversematerially effect on the Company’s consolidatedour financial position or results of operations or liquidity.operations.
Certain Forward-Looking InformationRisks
Information provided in this Quarterly
You should carefully consider the risks described under Item 7 of our 2003 Annual Report, on Form 10-Q may contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 that are not historical facts and information. These statements represent the Company’s expectations or beliefs, including, but not limited to, statements concerning future financial and operating results, statements concerning industry performance, the Company’s operations, economic performance, financial condition, margins and growth in sales of the Company’s products, capital expenditures, financing needs, as well as assumptions related to the foregoing. For this purpose, any statements contained in this Quarterly Report that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” ��estimate” or “continue” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. These forward-looking statements are based on current expectations and involve various risks and uncertainties that could cause actual results and outcomes for future periods to differ materially from any forward-looking statement or views expressed herein. The Company’s financial performance and the forward-looking statements contained herein are further qualified by other risks including but not limited to those set forth herein and in the Company’s most recent Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
The Company’s discussion and analysis of its financial condition and results of operations is based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates the estimates including those related to bad debts and inventories. The Company bases its estimates on historical experience and on various other assumptions that 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. Actual results may differ from these estimates.
The Company believes the following critical accounting policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements:
Allowance for Doubtful Accounts – the Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowance may be required.
Reserve for Inventory – the Company records valuation reserves on its inventory for estimated excess and obsolete inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future product demand and market conditions. If future product demand or market conditions are less favorable than those projected by management, additional inventory reserves may be required.
10
Depreciation of Long-Lived Assets – the Company assigns useful lives for long-lived assets based on periodic studies of actual asset lives and the intended use for those assets. Any change in these asset lives would be reported in the statement of operations as soon as any change in estimate is determined.
Accounting for Income Taxes – the Company is required to estimate income taxes in each of the jurisdictions in which it operates. This process involves estimating 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 financial reporting purposes. Actual income taxes could vary from these estimates due to future changes in income tax law or results from final tax exam reviews. At March 31, 2003, the Company assessed the need for a valuation allowance on its deferred tax assets. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets 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 is recorded at March 31, 2003. Should the Company determine that it would be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be recorded to operations in the period such determination was made.
RESULTS OF OPERATIONS
Natural Alternatives International, Inc. and its subsidiary (referred to collectively herein as “NAI” or the “Company”) are engaged in the formulation, manufacturing and packaging of encapsulated and compressed tablets and powder blended vitamins and related nutritional supplements including phytochemicals derived from botanicals and foods. The Company provides private label contract manufacturing services to various companies engaged in the marketing and distribution of vitamins, mineral supplements, herbs and other health and nutrition consumer products (“core business”).
In fiscal 2001, the Company introduced its direct-to-consumer (“DTC”) business with the launch of Dr. Cherry’s Pathway to Healing™ product line. This product line, which is primarily marketed through television media, has grown to include fifteen products and comprises all of the Company’s DTC sales through the third quarter of fiscal 2003. During the fiscal third quarter, the Company announced the signing of an exclusive worldwide licensing agreement with Jennifer O’Neill and developed the Jennifer O’Neill Signature Line™ (“Signature Line”) of health and beauty care products. The Signature Line will be available for sale in the fourth quarter of fiscal 2003.
The Company’s strategy continues to focus on increasing revenues in both its core and DTC business lines. Growth in the core business is anticipated from serving its primary core customers, developing new relationships with other strong prospective core customers both internationally and domestically and pursuing strategic partnerships for the development and marketing of proprietary products. Development in the DTC business is expected from expanding the existing product lines, marketing the existing product lines in additional television markets and securing additional licensors.
The Company anticipates successful execution of its strategies to produce near term consistent operating profitability resulting from moderate sales growth that will be partially offset by increasing costs for DTC brand development and licensor acquisition efforts. The growth in the core business is dependent upon many factors including maintaining and improving the satisfaction of our current core customers, obtaining orders for new products from current core customers, obtaining additional volumes on existing products from current core customers and securing new core customers. The growth in the DTC business is dependent upon the market acceptance of Dr. Cherry and Jennifer O’Neill, effectiveness of media placement and the performance of the outsourced call center. The Company’s ability to maintain consistent operating profitability could be adversely affected by several factors that are discussed below in Risk Factors That May Affect Future Operations Results.
11
Third Quarter Fiscal 2003 (“fiscal 2003”)versus Third Quarter Fiscal 2002 (“fiscal 2002”)
Consolidated net sales increased 7% to $13.8 million from $12.8 million for the comparable quarter last year. The consolidated net sales growth resulted from a $478,000, or 24%, increase in DTC sales and a $434,000, or 4%, increase in core sales. The growth in DTC sales to $2.5 million from $2.0 million for the comparable quarter last year is primarily due to five additional product offerings. The DTC line of business represented 18% of consolidated net sales for the third quarter of fiscal 2003 compared to 16% for the comparable quarter last year. Core sales increased to $11.3 from $10.8 million for the comparable quarter last year.
Gross profit margin increased to 23.9% from 22.5% for the comparable quarter last year. The increase in gross profit margin is primarily due to improvement in fixed cost leverage resulting from additional sales volumes. Material cost as a percent of net sales increased slightly to 52.9% from 52.0% for the comparable quarter last year. The increase in material cost as a percent of net sales was primarily due to a shift in product mix, partially offset by lower pricing from our primary vendors.
Selling, general and administrative expenses (“SG&A”) increased 4% to $3.1 million from $2.9 million for the comparable quarter last year. The increase of $130,000 is primarily due to increases in DTC fulfillment and recurring media costs of $128,000 associated with incremental sales, new DTC media and production costs of $264,000 for introducing Dr. Cherry’s Pathway to Healing™ brand in several new television markets, sales and executive personnel costs of $50,000, insurance premiums of $80,000, research and development personnel costs of $150,000, clinical study costs of $25,000 and information systems costs of $40,000. These increases were partially offset by a $150,000 reduction in employee separation expenses and $500,000 reduction of DTC costs incurred in the prior year for correcting customer service, processing and reporting issues caused by a third party DTC call and fulfillment center that was replaced in December 2001.
Income from operations was $211,000 compared to a loss from operations of ($59,000) for the comparable quarter last year. The increase in income from operations of $270,000 was due primarily to improved gross margin on higher net sales, partially offset by the incremental SG&A expenses discussed above.
Proceeds from the Vitamin Antitrust Litigation were $0 and $1.0 million for the three months ended March 31, 2003 and 2002, respectively.
First Nine Months of Fiscal 2003 (“fiscal 2003”)versus First Nine Months of Fiscal 2002 (“fiscal 2002”)
Consolidated net sales increased 13% to $39.9 million from $35.4 million for the comparable period last year. The consolidated net sales growth resulted from a $2.8 million or 9% increase in core sales and a $1.8 million or 30% increase in DTC sales. The growth in core sales to $32.4 million from $29.6 million for the comparable period of the prior year is primarily due to new products sold to existing major core customers. The growth in DTC sales to $7.5 million from $5.8 million for the comparable period of the prior year is primarily due to five additional product offerings. The DTC line of business represented 19% of consolidated net sales compared to 16% for the same period of the prior year.
Gross profit margin increased to 23.9% from 21.5% for the comparable period last year. The increase in gross profit margin is primarily due to improvement in fixed cost leverage resulting from additional sales volumes. Material cost as a percent of net sales remained consistent at 52% for the nine months ended fiscal 2003 and fiscal 2002.
SG&A increased 10% to $8.7 million from $7.9 million for the comparable period last year. The increase of $804,000 is primarily due to increases in DTC fulfillment and recurring media costs of $431,000 associated with incremental sales, new DTC media and production costs of $264,000 for introducing Dr. Cherry’s Pathway to Healing™ brand in several new television markets, sales and executive personnel costs of $350,000, research and development personnel costs of $300,000, insurance premiums of $270,000, information systems costs of $140,000 and clinical study costs of $115,000. These increases were partially offset by a $350,000 reduction in legal costs, $300,000 reduction in employee separation
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expenses, and $500,000 reduction of DTC costs incurred in the prior year for correcting customer service, processing and reporting issues caused by a third party DTC call and fulfillment center that was replaced in December 2001. Overall, SG&A decreased as a percentage of net sales to 21.7% from 22.2% in the comparable period last year.
Income from operations was $869,000 compared to a loss from operations of ($244,000) for the comparable period last year. The increase in income from operations was due primarily to improved gross margin on higher net sales, partially offset by the incremental SG&A expenses discussed above.
Proceeds from vitamin antitrust litigation were $225,000 and $1,000,000 for the nine months ended March 31, 2003 and 2002, respectively. Proceeds received in fiscal 2003 represent the final settlement payment from the Vitamin Antitrust Litigation.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities were $1.7 million for the first nine months of fiscal 2003 compared to $1.0 million for the comparable period last year. Operating cash flow increased primarily due to an increase in net income from $858,000 in the current fiscal year compared to $165,000 in the comparable period last year plus an increase in current assets of $1.4 million for the currrent fiscal year compared to an increase in current assets of $2.9 million in the comparable period last year. These increases were partially offset by an increase in current liabilities of $487,000 in the current fiscal year compared to an increase in current liabilities of $2.0 million in the comparable period last year.
At March 31, 2003, the Company had cash and working capital of $4.2 million and $11.8 million, respectively, compared to $640,000 and $8.7 million, respectively, at June 30, 2002. The improvement in working capital is primarily due to the $1.7 million of operating cash flow generated during the first nine months ended March 31, 2003 and the $1.3 million from refinancing the credit facility.
On October 31, 2002, the Company entered into a new $6.5 million two-year credit facility. The facility is comprised of a $4 million working capital line of credit and a $2.5 million term loan. The working capital line of credit is subject to eligibility requirements for current accounts receivable and inventory balances. As of March 31, 2003 the Company had $3.8 million available under the line of credit. The interest rate on the line of credit and term loan is prime plus 0.5%. The new facility replaced the $2.5 million line of credit that expired on October 31, 2002, and refinanced the $1.2 million outstanding term note. The new credit facility provided a $1.3 million increase in the Company’s cash position, freed up $1.5 million of cash previously restricted as collateral for the prior line of credit and provided an additional $1.5 million of borrowing capacity.
The Company believes that its available cash and existing credit facility should be sufficient to fund near-term operating activities. However, the Company’s ability to fund future operations and meet capital requirements will depend on many factors, including but not limited to: continued profitability from operations, maintaining adequate financing, the effectiveness of the Company’s diversified growth strategy, the effectiveness of the expansion of European operations, the ability to establish additional customers and changes to existing customers’ business.
RISK FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
In addition to the other information includedin our 2003 Annual Report and in this Report, the following factors should be considered inreport, when evaluating the Company’sour business and future prospects. The Company’sIf any of the identified risks actually occur, our business, financial condition and results of operations could be seriously harmed by any of the following risks.harmed. In addition,that event, the market price of our common stock could decline due to any of these risks.
Recent Operating Income; Increasing Sales
The Company’s income from operations increased to $869,000 for the nine months ended March 31, 2003, compared toand you could lose all or a loss from operation of ($244,000) for the same period last year. Sales for the nine months ended March 31, 2003 increased to $39.9 million compared to $35.4 million for the same period last year. There can be no assurance that increases in income from operations will continue or that the Company will have net income from operations and not a net loss in future periods.
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The Company expects operating results may further fluctuate from period to period as a result of differences in when it incurs expenses and recognizes revenues from product sales. Some of these fluctuations may be significant.
Reliance on Limited Number of Customers
For the nine months ended March 31, 2003, the Company had two major customers, which together accounted for approximately 70%portion of the Company’s net sales. The lossvalue of either 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.
Reliance on a Key Personality
For the nine months ended March 31, 2003, the Company’s DTC product line was approximately 19% of the Company’s net sales. DTC products are marketed with a key personality through a variety of distribution channels including weekly television programming, internet and a monthly newsletter. The inability of the key personality to fulfill his current role, or the reduction of television or other media exposure could have a material adverse impact on the business, operations and financial condition of the Company.
Potential for Increased Competition
The market for the Company’s products is highly competitive. The Company competes with other dietary supplement products and over-the-counter pharmaceutical manufacturers. Among other factors, competition among these manufacturers is based upon price. If one or more manufacturers significantly reduce their pricesyour investment in an effort to gain market share, the Company’s business, operations and financial condition could be adversely affected. Many of the Company’s competitors, particularly manufacturers of nationally advertised brand name products, are larger and have resources substantially greater than those of the Company. There has been speculation about the potential for increased participation in these markets by major international pharmaceutical companies. In the future, if not already, one or more of these companies could seek to compete more directly with the Company by manufacturing and distributing their own or others’ products, or by significantly lowering the prices of existing national brand products. The Company sells substantially all of its supplement products to customers who re-sell and distribute the products. Although the Company does not currently participate significantly in other channels such as health food stores, direct mail, and internet sales, the Company is expanding its operations and its products, including direct mail and internet sales, and will likely face increased competition in such distribution and sales channels as more vendors and customers utilize them.
Availability of Line of Credit
Effective October 31, 2002, the Company entered into a new $6.5 million two-year credit facility. The liquidity provided by a line of credit is an important component of a sound financial management plan. Failure to maintain the loan covenants required to allow the Company continuing access to this new line of credit could materially impair the Company’s ability to fund growth in operations or meet other working capital needs in the future.
Reliance on Limited Number of Suppliers; Availability and Cost of Purchased Materials
The Company purchases certain products it does not manufacture from a limited number of raw material suppliers. For the nine months ended March 31, 2003, the Company had two major suppliers, which together accounted for 45% of raw material purchases. No other supplier represented more than 10% of total raw material purchases for the nine months ended March 31, 2003. Although the Company currently has supply arrangements with several suppliers of these raw materials, and such materials are generally available from numerous sources, the termination of the supply relationship by any material supplier or an unexpected interruption of supply could materially adversely affect the Company’s business, operations and financial condition.
The Company relies on a single supplier to process certain raw materials for a product line of the Company’s largest customer. An unexpected interruption of supply of this service would materially adversely affect the Company’s business, operations and financial condition.
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Decline in Stock Price
The Company’s stock price has experienced volatility, during the past few years. In view of the Company’s recent results and the fact there can be no assurances of future profitability, there can be no assurance that the stock price will not decline. Market conditions in the vitamin and nutritional supplement industry, such as increased price competition, consolidation, oversupply of vitamin and supplement products, operating results of competitors, adverse publicity and other factors such as customer and product announcements by the Company or operating results which are lower than the expectations of analysts and our investors, may have an adverse effect on the price of the Company’s stock.
Effect of Adverse Publicity
The Company’s products consist primarily of dietary supplements (vitamins, minerals, herbs and other ingredients). The Company regards these products as safe when taken as suggested by the Company. In addition, various scientific studies have suggested the ingredients in some of the Company’s products may involve health benefits. The Company believes the growth in the dietary supplements business of the last several years may, in part, be based on 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 the safety and quality of its products and similar products distributed by other companies that may not adhere to the same quality standards as the Company. The business, operations, and financial condition of the Company could be adversely affected if any of the Company’s products or any similar products distributed by other companies should prove or be asserted to be harmful to consumers, or should scientific studies provide unfavorable findings regarding the effect of products similar to those produced by the Company.
Exposure to Product Liability Claims
The Company, like other retailers, distributors and manufacturers of products that are ingested, faces a risk of exposure to product liability claims in the event that, among other things, the use of its products allegedly results in injury. The Company maintains product liability insurance coverage, including primary product liability and excess liability coverage. The cost of such coverage has increased dramatically in the last year and 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’s insurance will be adequate to cover any liability the Company incurs in respect to all possible product liability claims. The Company’s product liability insurance includes certain exclusions and limitations, the Company’s insurer could expand such exclusions or limitations on coverage in the future. In such event, the Company may have to cease utilizing the ingredients or may have to rely on indemnification or similar arrangements with its customers who wish to continue to include such ingredients in their products. In such an event, the consequential increase in product liability risk or the loss of customers or product lines could have a material adverse impact on the Company’s business, operations, and financial condition.
Risks Associated with International Markets
The Company’s growth may be dependent in part upon its ability to expand its operations and those of its customers into new markets, including international markets. For the nine months ended March 31, 2003 and 2002, the percentage of the Company’s net sales to customers in international markets was approximately 25.4% and 28.6%, respectively. NAIE operates a manufacturing facility in Switzerland, which is intended to facilitate an increase in sales of the Company’s products overseas and which contributed approximately 13.3% and 15.2% of the Company’s net sales for the nine months ended March 31, 2003 and 2002, respectively. The Company may experience difficulty expanding in international markets due to regulatory barriers, the necessity of adapting to new regulatory systems, and problems related to entering new markets with different cultural bases and political systems. Operating in international markets exposes the Company to certain risks, including, among other things, (1) changes in or interpretations of foreign import, currency transfer and other restrictions and regulations that among other things may limit the Company’s ability to sell certain products or repatriate profits to the United States, (2) exposure to currency fluctuations, (3) the potential imposition of trade or foreign exchange restrictions or increased tariffs, (4) economic and political instability, and (5) the impact of various government’s
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regulations and the enforcement thereof. As the Company continues to expand its international operations, these and other risks associated with international operations are likely to increase.
Government Regulation
The manufacturing, processing, formulation, packaging, labeling and advertising of the Company’s products are subject to regulation by one or more federal agencies, including the United States Food and Drug Administration (“FDA”), the Federal Trade Commission (“FTC”), the Consumer Product Safety Commission, the United States Department of Agriculture, the United States Postal Service, the United States Environmental Protection Agency, and the Occupational Safety and Health Administration. The Company’s activities are also regulated by various agencies of the states and localities in which the Company’s products are sold. In particular, the FDA regulates the safety, labeling and distribution of dietary supplements, including vitamins, minerals, herbs, food, 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.
The Dietary Supplement Health and Education Act of 1994 (“DSHEA”) was enacted on October 25, 1994. DSHEA amends the Federal Food, Drug and Cosmetic Act by defining dietary supplements, which include vitamins, minerals, nutritional supplements and herbs as a new category of food separate from conventional food. DSHEA provides a regulatory framework to ensure safe, quality dietary supplements and the dissemination of accurate information about such products. Under DSHEA, the FDA is generally prohibited from regulating the active ingredients in dietary supplements as drugs unless product claims, such as claims that a product may heal, mitigate, cure or prevent an illness, disease or malady, trigger drug status.
DSHEA provides for specific nutritional labeling requirements for dietary supplements. DSHEA permits substantiated, truthful and non-misleading statements of nutritional support to be made in labeling, such as statements describing general well being resulting from consumption of a dietary ingredient or the role of a nutrient or dietary ingredient in affecting or maintaining a structure or function of the body. The Company anticipates the FDA will finalize manufacturing process regulations that are specific to dietary supplements and require at least some of the quality control provisions applicable to drugs. The Company currently manufactures its vitamins and nutritional supplement products in compliance with the food good manufacturing processes.
The FDA is developing additional regulations to implement DSHEA. Labeling regulations may require expanded or different labeling for the Company’s vitamin and nutritional products. The Company cannot determine what effect such regulations, when fully implemented, will have on its business in the future. Such regulations could, among other things, require the recall, reformulation or discontinuance of certain products, additional record keeping, warnings, notification procedures and expanded documentation of the properties of certain products or scientific substantiation regarding ingredients, product claims, safety or efficacy. Failure to comply with applicable FDA requirements could result in sanctions being imposed on the Company or the manufacturers of its products, including warning letters, fines, product recalls and seizures.
Governmental regulations in foreign countries where the Company plans to commence or expand sales may prevent or delay entry into a market or prevent or delay the introduction, or require the reformulation of certain of the Company’s products. In addition, the Company cannot predict whether new domestic or foreign legislation regulating its activities will be enacted. Such new legislation could have a material adverse effect on the business, operations and financial condition of the Company.
Failure to Attract and Retain Management Could Harm Our Ability to Maintain Profitability
The Company’s success is dependent in large part upon its continued ability to identify, hire, retain and motivate highly skilled management employees. Competition for these employees is intense, and the Company may not be able to hire additional qualified personnel in a timely manner and on reasonable terms. The majority of the Company’s current corporate officers began their employment with the Company in fiscal years 2002 and 2001. The inability of the Company to retain competent professional management could adversely affect our ability to execute our business strategy.
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Centralized Location of Manufacturing Operations
The Company currently manufactures the vast majority of its products at its manufacturing facilities in Southern California. Accordingly, any event resulting in the slowdown or stoppage of the Company’s manufacturing operations or distribution facilities in Southern California could have a material adverse effect on the Company. The Company maintains business interruption insurance. There can be no assurance, however, that such insurance will continue to be available at a reasonable cost or, if available, will be adequate to cover any losses that may be incurred from an interruption in the Company’s manufacturing and distribution operations.
Concentration of Ownership; Certain Anti-Takeover Considerations
The Company’s directors and executive officers beneficially own in excess of 24.5% of the outstanding common stock as of March 31, 2003. Accordingly, these shareholders will continue to have the ability to substantially influence the management, policies and business operations of the Company. The Company’s Board of Directors has the authority to approve the issuance of 500,000 shares of preferred stock and to fix the rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the Company’s shareholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of holders of any preferred stock that may be issued in the future. Certain provisions of Delaware law, as well as the issuance of preferred stock, and other “anti-takeover” provisions in the Company’s Articles and Bylaws, could delay or inhibit the removal of incumbent directors and could delay, defer, make more difficult or prevent a merger, tender offer or proxy contest, or any change in control involving the Company, as well as the removal of management, even if such events would be beneficial to the interests of the Company’s shareholders, and may limit the price certain investors may be willing to pay in the future for shares of common stock.
The Company is
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risksrisk, which is the potential loss arising from adverse changes in interestmarket rates and prices, such as foreign currency exchange rates affecting the return on our investments and the cost of our debt. The Company doesinterest rates. We generally do not use derivativeenter 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 interest or foreign currency exchange rates. We cannot predict with any certainty our future exposure to fluctuations in foreign currency exchange and interest 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 operations or cash flows. The actual impact of any fluctuations in foreign currency exchange or interest rates may differ significantly from those discussed below.
Interest Rates
At March 31,September 30, 2003, the Company’s cash equivalents consisted of financial instruments with original maturities of three months or less.
The Company’s debt as of March 31, 2003 totaled $3.1 million and was comprised ofwe had fixed rate loansdebt of $765,000$731,000 and variable rate loansdebt of $2.3$2.1 million. The average compositeinterest rate on our variable rate debt is equal to prime plus 0.5%, and was 4.5% as of September 30, 2003. An immediate one hundred basis point (1%) increase in the interest rate on our variable rate debt, holding other variables constant, would increase our annual interest expense by $5,400. Interest rates have been at or near historic lows in recent years. There can be no guarantee that interest rates will not rise. Any increase in interest rates may adversely affect our results of operations and financial condition.
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 earnings may be significantly affected by fluctuations in currency exchange rates. When the United States dollar strengthens against currencies in which products are sold or weakens against currencies in which we incur costs, net sales and costs could be adversely affected.
Our main exchange rate exposures are with the Swiss 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 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 June 24, 2003, we bought option contracts designated as cash flow hedges to protect against the foreign currency exchange risk inherent in a portion of our forecasted transactions denominated in Euros. The option contracts had a notional amount of $1.5 million and a purchase price of $16,100. The options allow us to sell $227,273 Euros a month for a period of six months at March 31,an exchange rate of 1.10 Euros to 1.00 United States dollar. The risk of loss associated with the options is limited to premium amounts paid for the option contracts. As of September 30, 2003, we had not exercised any of the options and three of the options had expired.
On September 30, 2003, the Swiss Franc closed at 1.32 to 1.00 United States dollar and the Euro closed at 0.86 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 would have decreased our earnings for fixed rate and variable rate loans were 8.25% and 4.75%, respectively.the three months ended September 30, 2003 by $271,000.
ItemITEM 4. Controls and ProceduresCONTROLS AND PROCEDURES
The Company’s
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 timely basis; and (2) recorded, processed, summarized, reported and filed with the SEC as required under the Securities Exchange Act of 1934.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, believeevaluated the Company’seffectiveness of our disclosure controls and procedures as defined in Securities Exchange Act Rules 13a-14 and 15d-14, are effective. This conclusion was reached after anof September 30, 2003. Based on their evaluation, of thesethey concluded that our disclosure controls and procedures as of March 31, 2003.
We are not aware of any significantwere effective for their intended purpose described above. There were no changes in the Company’sto our internal controls including any corrective actions with regardduring the quarterly period ended September 30, 2003 that have materially affected, or that are reasonably likely to significant deficiencies and material weaknesses, or in other factors that could significantlymaterially affect, these controls after March 31, 2003.our internal controls.
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Part II. Other InformationPART II – OTHER INFORMATION
The Company was a plaintiff in an antitrust lawsuit against several manufacturers of vitamins and other raw materials purchased by the Company. Other similarly situated companies filed a number of similar lawsuits against some or all of the same manufacturers. The Company’s lawsuit was consolidated with some of the others and captioned In re: Vitamin Antitrust Litigation, and was pending in U.S. District Court in Washington D.C. A final settlement payment of $225,000 and a payment of $1,000,000 were received by the Company and are included in proceeds from vitamin antitrust litigation in the accompanying statement of operations for the nine months ended March 31, 2003 and 2002, respectively. All of its claims under the Vitamin Antitrust Litigation were settled.
From time to time, the Company may be subject towe become involved in various investigations, claims and legal actions arisingproceedings that arise in the ordinary course of our business. InThese matters may relate to product liability, employment, intellectual property, tax, regulation, contract or other matters. The resolution of these matters as they arise will be subject to various uncertainties. While unfavorable outcomes are possible, we believe the opinionresolution of management, after consultation with its legal counsel, there are no outstandingthese matters, that are expected to haveindividually or in the aggregate, will not result in a material adverse effect on the Company’s consolidatedour business, financial position,condition or results of operations or liquidity.operations.
As of November 4, 2003, neither NAI nor its subsidiaries were a party to any material pending legal proceedings nor was any of their property the subject of any material pending legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS BY THE COMPANY ON ITSUPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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 | ||
Restated Certificate of Incorporation of Natural Alternatives International, Inc. filed with the Delaware Secretary of State on July 31, 1996 | Exhibit 3(i) of NAI’s Annual Report on Form 10-K for the fiscal year ended June 30, 2003, filed with the commission on September 17, 2003 | |||
3(ii) | ||||
NAI’s Registration Statement on Form | ||||
10.1 | 1999 Omnibus Equity Incentive Plan as adopted effective May 10, 1999 | Exhibit A of NAI’s definitive Proxy Statement filed with the commission on October 21, 1999 | ||
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 | Filed herewith | ||
10.4 | Form of Executive Employment Agreement dated as of September 13, 2003, by and between NAI and Mark Zimmerman | Filed herewith | ||
10.5 | Form of Executive Employment Agreement dated as of September 13, 2003, by and between NAI and Randell Weaver | Filed herewith | ||
10.6 | Form of Executive Employment Agreement dated as of September 13, 2003, by and between NAI and Mark A. LeDoux | Filed herewith | ||
10.7 | Form of Executive Employment Agreement dated as of September 13, 2003, by and between NAI and John Wise | Filed herewith | ||
10.8 | Form of Executive Employment Agreement dated as of September 13, 2003, by and between NAI and John Reaves | Filed herewith | ||
10.9 | Form of Executive Employment Agreement dated as of September 13, 2003, by and between NAI and Timothy E. Belanger | Filed herewith | ||
10.10 | Lease of Facilities in Vista, California between NAI and Calwest Industrial Properties, LLC, a California limited liability company dated October 27, 2003 | 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 |
(b) Reports on Form 8-K
On September 9, 2003, we filed a Current Report on Form 8-K with the SEC that included a press release issued on September 9, 2003, announcing our financial results for the fourth quarter and fiscal year ended June 30, 2003. This report was the only report on Form 8-K that we filed during the quarterly period ended September 30, 2003.
Pursuant to the requirements 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: November 4, 2003
NATURAL ALTERNATIVES INTERNATIONAL, INC. | ||||
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Certifications
I, Mark A. LeDoux, Chief Executive Officer of Natural Alternatives International, Inc., certify that:
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Certifications
I, John R. Reaves, Chief Financial Officer of Natural Alternatives International, Inc., certify that:
By: | /s/ JOHN R. REAVES | ||
John R. Reaves, | |||
Chief Financial Officer |
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Mr. Reaves is the principal financial officer of Natural Alternatives International, Inc. and has been duly authorized to sign on its behalf.
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