1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X][ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30,December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-15701
NATURAL ALTERNATIVES INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1007839
- --------
(State of other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1185 LINDA VISTA DRIVE, SAN MARCOS, CALIFORNIA 92069
(Address of principal executive offices)
(Zip Code)
(760) 744-7340
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
5,759,8755,739,875
(Number of shares of common stock of the registrant outstanding,
net of treasury shares held, as of October 31,1999)
1January 31,2000)
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30December 31 June 30
1999 1999
---------- -----------------
(unaudited)
Current Assets:
Cash and cash equivalents $ 955440 $ 1,063
Accounts receivable - less allowance for doubtful accounts of
$474$323 at September 30,December 31, 1999 and $472 at June 30, 1999 8,1317,252 7,515
Inventories, net 9,230 9,8767,403 10,611
Income tax refund receivable 1,9282,746 2,229
Notes receivable - current portion 127739 127
Prepaid expenses 522436 371
Deposits 1,466 1,265726 530
Other current assets 356168 794
-------- --------
Total current assets 22,71519,910 23,240
-------- --------
Property and equipment, net 13,61014,474 12,274
Deferred income taxes 1,979 1,979
Investments 192196 195
Notes receivable, less current portion 319478 401
Other noncurrent assets, net 113147 507
-------- --------
Total assets 38,92837,184 38,596
======== ========
Current Liabilities:
Accounts payable 8,3965,140 8,305
Current installments of long-term debt 512,395 50
Accrued compensation and employee benefits 704569 786
-------- --------
Total current liabilities 9,1518,104 9,141
Deferred income taxes 593 593
Long-term debt, less current installments 1,3043,053 927
Accrual for loss on lease obligation 2,434 2,434
Long-term pension liability 410414 410
-------- --------
Total liabilities 13,89214,598 13,505
-------- --------
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 6,002,375 at September 30, 1999December 31, and
6,002,375 at
June 30, 1999 60 60
Additional paid-in capital 11,237 11,237
Retained earnings 15,05712,646 14,970
Treasury stock, at cost, 242,500262,500 shares at September
30,December
31, 1999 and 212,500 shares at June 30, 1999 (1,227)(1,283) (1,116)
Accumulated other comprehensive loss (91)(74) (60)
-------- --------
Total stockholders' equity 25,03622,586 25,091
-------- --------
Total liabilities and stockholders' equity $ 38,92837,184 $ 38,596
======== ========
See accompanying notes to unaudited financial statements.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
STATEMENTS OF OPERATIONS
(In thousands, except per-share information)
(Unaudited)
For the Three Months Ended September 30For the Six Months Ended
December 31 December 31
-------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net sales $ 15,26412,064 $ 16,98617,317 $ 27,328 $ 34,303
Cost of goods sold 12,075 12,33210,586 14,052 22,661 26,383
Inventory write-off 2,000 -- 2,000 --
-------- -------- -------- --------
Total cost of goods sold 12,586 14,052 24,661 26,383
-------- -------- -------- --------
Gross profit 3,189 4,654(loss) (522) 3,265 2,667 7,920
Selling, general &
administrative expenses 2,835 2,1733,219 2,641 6,054 4,815
-------- -------- -------- --------
Income (loss) from operations 354 2,481(3,741) 624 (3,387) 3,105
-------- -------- -------- --------
Other income (expense):
Interest income 28 6017 38 45 97
Interest expense (30)(75) (22) (105) (44)
Other, net (8)(48) -- (56) --
-------- -------- (10) 38-------- --------
(106) 16 (116) 53
-------- -------- -------- --------
Income (loss) before taxes 344 2,519(3,847) 640 (3,503) 3,158
Provision (benefit) for income taxes (1,436) 257 999(1,179) 1,256
-------- -------- -------- --------
Net income (loss) ($2,411) $ 87383 ($2,324) $ 1,5201,902
======== ======== ======== ========
Net income (loss) per common share:
Basic $ 0.02(0.42) $ 0.260.06 $ (0.40) $ 0.32
======== ======== ======== ========
Diluted $ 0.02(0.42) $ 0.250.06 $ (0.40) $ 0.31
======== ======== ======== ========
See accompanying notes to unaudited financial statements.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the ThreeSix Months
Ended September 30December 31
1999 1998
------- -------
Cash flows from operating activities:
Net income (loss) ($2,324) $ 87 $ 1,5201,902
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Bad debt provision 90 65180 155
Inventory write-off 2,000 --
Write-off of notes receivable 72 --
Tax benefit on option exercise -- 399439
Depreciation and amortization 422 475913 818
Other (16) (4)
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (706) 4,80683 3,637
Inventories 646 (451)1,208 2,494
Tax refund receivable 301 --(517) (171)
Prepaid expenses (151) (441)(65) (284)
Deposits (201) 70(196) (29)
Other assets 832 --986 (699)
(Decrease) increase in liabilities:
Accounts payable 91 (4,979)(3,160) (3,521)
Income taxes payable -- 430(378)
Accrued compensation and employee benefits (82) (126)(217) (195)
------- -------
Net cash provided by (used in) operating activities 1,401 1,768(1,053) 4,164
------- -------
Cash flows from investing activities:
Capital expenditures (1,786) (1,398)(3,113) (3,228)
Issuance of notes receivable --(791) (22)
Repayment of notes receivable 10 5
Other assets -- (342)30 39
------- -------
Net cash used in investing activities (1,776) (1,757)(3,874) (3,211)
------- -------
Cash flows from financing activities:
Borrowings on lines of credit 3951,070 --
Proceeds from long-term debt financing 3,459 --
Payments on long-term debt and capital leases (17) (18)(58) (37)
Issuance of common stock -- 576645
Payments to acquire treasury stock (111) --(167) (133)
------- -------
Net cash provided by financing activities 267 5584,304 475
------- -------
Net decreaseincrease (decrease) in cash and cash equivalents (108) (1,199)(623) 1,428
Cash and cash equivalents at beginning of period 1,063 4,714
------- -------
Cash and cash equivalents at end of period $ 955440 $ 3,5156,142
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the threesix months for:
Interest $ 2879 $ 2242
Income Taxes -- 493
======= =======
Disclosure of non-cash activities:
Fixed asset purchases in accounts payable $ -- $ 1861,196
======= =======
See accompanying notes to unaudited financial statements.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shareper-share data)
NOTE 1 - Interim Financial Information
The unaudited consolidated financial statements of Natural Alternatives
International, Inc. and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles and with Article 10 of
the Securities and Exchange Commission's Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete consolidated financial statements. In the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting of normal recurring adjustments,
considered necessary for a fair presentation of the Company's financial
information as of September 30,December 31, 1999 and 1998.
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, 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. The consolidated results of operations for the interim
periods ended September 30,December 31, 1999 and 1998 are not necessarily indicative of the
consolidated operating results for the full year. It is suggested that these
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's annual report on Form
10-K for the year ended June 30, 1999.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Reclassifications
Certain amounts in prior periods' consolidated financial statements have been
reclassified to conform to the presentation for the quarter ending September 30,ended December 31,
1999.
NOTE 2 - Inventories
Inventories are comprised of the following:
September 30December 31 June 30
1999 1999
------------ ------------------ --------
Raw materials $5,944 $6,722$ 4,484 $ 7,457
Work in progress 95204 270
Finished goods 3,1912,715 2,884
------ ------
$9,230 $9,876
====== ======------- -------
$ 7,403 $10,611
======= =======
The Company wrote-off inventory of $2.0 million, which included $735,000 for
deposits on inventory. The analysis of inventory balances and subsequent
write-off related primarily to the loss of a major customer in December 1999, a
decline in market share and continuing competitive pressures which caused the
Company to re-evaluate all product lines and reduce or slow production of
products with limited future sales potential.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shareper-share data)
NOTE 3 - Comprehensive Net Income
Comprehensive net income is comprised of the following:
For the three months For the six months
ended September 30
---------------------------------------December 31 ended December 31
-------------------- ----------------------
1999 1998 1999 1998
------- ------ ------- -------
Net income (loss) ($2,411) $383 ($2,324) $ 87 $ 1,5201,902
Foreign currency translation adjustments (28)13 -- (15) --
Unrealized lossgain (loss) on investments (3) (8)4 2 1 (6)
------- ---- ------- -------
Comprehensive income (loss) ($2,394) $385 ($2,338) $ 56 $ 1,5121,896
======= ==== ======= =======
NOTE 4 - Cost Containment Program
In January 2000, the Company publicly announced a cost containment program
designed to reduce future operating expenses. The program initiated expense
control measures intended to counteract the loss of a major customer and
improving operating performance. The program included an immediate reduction of
approximately 27% in the Company workforce, consisting of both permanent and
temporary personnel. The reduction-in-force is not expected to result in
significant separation agreement and other termination costs.
NOTE 5 - Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding during the period.
Diluted net income (loss) per share reflects the potential dilution that could
occur if stock options or other contracts to issue common stock were exercised
or converted into common stock. The computation of diluted net income (loss) per
share does not assume exercise or conversion of securities that would have an
anti-dilutive effect on net income (loss) per share. Basic and diluted net
income (loss) per share have been calculated as follows:
For the three months For the six months
ended September 30
---------------------------------------December 31 ended December 31
----------------------------- ----------------------------
1999 1998 1999 1998
----------- ---------- ----------- ----------
NUMERATOR:
Numerator:
Net income (loss) - Numerator for
basic and diluted income (loss) per
share - income (loss) available to
common shareholders ($2,411) $ 87383 ($2,324) $ 1,5201,902
=========== ========== =========== ==========
DENOMINATOR:Denominator:
Denominator for basic
income (loss) per share - weighted
average shares 5,776,427 5,831,8915,758,734 5,893,483 5,767,055 5,862,209
Effect of dilutive securities -
employee stock options 551 347,217
---------- ------------ 145,751 -- 261,091
Denominator for diluted income
(loss) per share - adjusted weighted
average shares and assumed
conversions 5,776,978 6,179,1085,758,734 6,039,234 5,767,055 6,123,300
=========== ========== =========== ==========
Basic income (loss) per share ($0.42) $ 0.020.06 ($0.40) $ 0.260.32
Diluted income (loss) per share ($0.42) $ 0.020.06 ($0.40) $ 0.250.31
For the three months ended September 30, 1999, there were outstanding options to
purchase 274,500 shares of common stock that were not included in the
computation of diluted net income per share as their effect would have been
anti-dilutive.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per-share data)
For the three and six months ended December 31, 1999, there were outstanding
options to purchase 366,500 shares of common stock that were not included in the
computation of diluted net loss per share as their effect would have been
anti-dilutive.
NOTE 56 - Major Customers
The Company had substantial sales to foursix separate customers during one or more
of the periods shown in the following table. The loss of anyCompany lost one of these major
customers could have anduring the quarter ended December 31, 1999 which resulted in a
material adverse impact on the Company's revenues and income in the
short-term.income. Sales by customer,
representing 10% or more of the respective period's total net sales, are shown
below.
Three Months Ended
September 30,For the three months For the six months
ended December 31 ended December 31
---------------------------------- ------------------------------------
1999 September 30, 1998 --------------------------- -----------------------------1999 1998
--------------- -------------- ---------------- ----------------
Sales by Sales by Sales by Sales by
Customer Customer %(a) Customer %(a) Customer %(a) Customer %(a)
-------- -------- ----------- -------- ----------- -------- ---- -------- ----
Customer 1 $3,661 30% $ 4,975 33%2,773 16% $ 3,463 20%8,616 32% $ 6,236 18%
Customer 2 3,095 20% 4,967 29%1,999 17% (b) 4,642 17% (b)
Customer 3 (b) 2,923 17%6,349 37% 4,210 15% 11,316 33%
Customer 4 2,643 17%2,152 18% (b) 3,239 12% (b)
Customer 5 1,172 10% (b) (b) (b)
Customer 6 (b) 4,655 27% (b) 7,578 22%
------- -- ------- -- ------- -- ------- $10,713 70% $11,353 67%--
$8,984 74%(c) $13,777 80% $20,707 76% $25,130 73%
====== == ======= == ======= == ======= =========
(a) Percent of total net sales.
(b) Net sales for the period were less than 10% of total net sales.
(c) Total does not foot due to rounding.
NOTE 6-7 - Related Party Transactions
The Company entered into an agreement with the father-in-law and mother-in-law
of the Chief Executive Officer of the Company in December 1991, which provides
commissions on sales to a particular customer. The agreement will expire in
December 2001. TheEffective January 1, 1993, the
commission equalsis equal to 5% of sales and ispayable upon collection from the
customer, and capped at $25,000 per calendar quarter, effective January 1, 1993.quarter. Amounts paid under this
agreement were $25,000$50,000 for each of the quarterssix-month periods ended September 30,December 31, 1999
and 1998. There were no amounts owed under the agreement at September 30,December 31, 1999 or
1998. The agreement will expire in December 2001 or as defined in the agreement;
future commissions on sales are anticipated to decline or cease as no orders are
expected from the particular customer for the foreseeable future.
During the quarterssix months ended September 30,December 31, 1999 and 1998, the Company had sales of
$13,000 and $203,000,$252,000, respectively, to a customer in which directors, officers
and employees previously had direct or indirect equity ownership. At September
30,December
31, and June 30, 1999, the net accounts receivable from this customer were $0
and $83,000, respectively. The Company recovered accounts receivable of $35,000
during the quartersix months ended September 30,December 31, 1999 and $39,000 was written off. In
addition, at September 30,December 31, 1999 and June 30, 1999, the Company had notes
receivable, net, of $0 and $50,000, respectively. As of November 11, 1999 no
remaining directors, officers or employees of the Company had any direct or
indirect equity ownership in the customer.
In March 1999, the Company entered into a letter of intent to form a joint
venture with FitnessAge, Inc., a privately held development stage company
based in San Diego, CA ("FitnessAge"). In connection therewith, on March 30,
1999 the Company purchased 300,000 shares of common stock of FitnessAge. On or
about the same date, the family limited partnership of the Chief Executive
Officer and the Secretary and Chairperson of the Board of Directors purchased
200,000 shares of Common Stock of FitnessAge for the same price per share.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per-share data)
NOTE 8 - Custom Nutrition Joint Venture Alliance with FitnessAge, Inc.
In March 1999, the Company entered into a letter of intent to form a joint
venture with FitnessAge. In connection therewith, the Company purchased
300,000 shares of FitnessAge common stock for $150,000, on March 30, 1999.
On December 6, 1999, the Company and FitnessAge formalized the joint venture by
forming a new company named Custom Nutrition, LLC, a Delaware limited liability
company ("Custom Nutrition"). Custom Nutrition was formed for the purpose of
developing, merchandising, selling and distributing customized nutritional and
related products to health and fitness clubs, as well as over the internet.
Under terms of a 10-year Exclusive Manufacturing Agreement, the Company is the
exclusive manufacturer of all nutritional supplements for Custom Nutrition. In
addition, Custom Nutrition obtained an exclusive royalty free license to
FitnessAge's proprietary software technology, including their physical fitness
assessments known as the FitnessAge System, as well as, software under
development designed to provide customized nutritional assessments. In
accordance with its Operating Agreement, the Company is required to make an
initial capital contribution of $100,000, which has not been funded as of
December 31, 1999; income and losses and any additional capital contribution
requirements of Custom Nutrition will be allocated 60% to FitnessAge and 40% to
the Company. The Company is currently accounting for this investment under the
equity method of accounting. As of December 31, 1999, there were no sales or
expenses recorded by Custom Nutrition, which is expected to commence operations
during the first half of calendar year 2000.
In addition, in November and December, the Company provided FitnessAge a total
of $750,000 as part of a convertible secured loan made by the Company to
FitnessAge (the "Loan"). The Loan is collateralized by all of the assets of
FitnessAge and includes interest accruing at an annual rate of 12%. The
principal together with all accrued and unpaid interest is due November 10,
2000. The Company has the right at any time to convert all or any portion of the
amount due on the Loan into the common stock of FitnessAge at a conversion price
of $0.75 per share. As of December 31, 1999, the balance of the Loan was
$750,000 plus accrued interest, and the Company's direct aggregate investment in
FitnessAge was approximately $900,000. The Company is currently accounting for
this investment under the cost method of accounting.
In conjunction with the Loan, the Company received a three-year Warrant (the
"Warrant") to purchase up to 150,000 shares of Common Stock of FitnessAge for
$1.00 per share. The Company may exercise the Warrant at any time up to and
including November 1 2002. As of December 31, 1999, the Company had not
exercised any portion of this Warrant. The Company also obtained: the right to
designate one representative of the Company to be a member of FitnessAge's Board
of Directors, which consists of five board members; and registration rights and
certain other rights as defined by the loan documents and by an Investor Rights
Agreement. If the Company converted the Loan and exercised the Warrant, the
Company would own less than five percent, on an as converted basis, of
FitnessAge Common stock.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain Forward-Looking Information
Information provided in this Quarterly 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 those
set forth from time to time in the documents filed by the Company with the
Securities and Exchange Commission, including the Company's most recent Form
10-K.
RESULTS OF OPERATIONS
FIRSTSECOND QUARTER OF FISCAL 2000 AND 1999
Net sales decreased 10.1%30.3%, or $1.7approximately $5.3 million, to approximately $15.3$12.1
million for the quarter ended September 30,December 31, 1999, from approximately $17.0$17.3
million for the quarter ended September 30,December 31, 1998. The decrease was primarily due
to the loss of a decrease inmajor customer, Nu Skin Enterprises Inc., which accounted for
approximately 37% of net sales of
products to domestic markets of approximately $2.6 million and was partially
offset by an increase in sales to our customers into international markets of
approximately $0.9 million. Sales into international markets increased 26.7% to
approximately $5.7 million for the quarter ended September 30, 1999 from
approximately $4.5 millionDecember 31, 1998. Nu Skin
informed the Company that its production needs have been transitioned to other
vendors for the quarter ended September 30, 1998. This
increase is primarilyforeseeable future. As of December 31, 1999 the resultCompany expects
no adverse impact from the settlement of existing customers continued expansionoutstanding receivables from Nu Skin.
Sales of products into Asiandomestic markets decreased approximately 21%, or $2.4
million, to approximately $9.1 million and European markets. NAIE Natural Alternatives International Europe, SA,
a subsidiary established in fiscal 1999 in Switzerland, began production and
recorded its initial sales during the quarter ended September 30, 1999.
Management believes that the expansion into international markets
should
continuedecreased approximately 50%, or $2.9 million, to $2.9 million, primarily as parta
result of the new strategic focus to diversify and expand geographic
distribution channels. In addition, management believes the decrease in total
net sales is attributable to increased product and price competition in the
domestic nutritional supplement market as well as increased competition for new
distributors.loss of this major customer. Domestic sales growth was also
negatively impacted by the loss of customer sales for several herbal products dueproducts.
Management continues to the overall reduction of
industry market demand.strategically focus its efforts for increasing sales
into diversifying and expanding geographic distribution channels. Industry
competition could adversely affect the Company's results of operations in any
given quarter and such adverse affects often cannot be anticipated.
For the quarter ended September 30,December 31, 1999, the Company experienced an increase in
cost of goods sold as a percentage of sales, excluding the inventory write-off
of $2.0 million, to 79.1%87.7% compared to 72.6%81.1% for the quarter ended September 30,December 31,
1998. The increase reflects depressed market prices
due to reduced industry demand;sales prices; increased manufacturing
overhead costs; and increased costs related to implementation of stringentadditional
quality control procedures to ensure continued product compliance with
established GMP specifications and standards;standards. The Company wrote-off inventory of
$2.0 million, which included $735,000 for deposits on inventory. The analysis of
inventory balances and increased manufacturing
overhead costs.subsequent inventory write-off related primarily to the
loss of a major customer in December 1999, a decline in market share and
continuing competitive pressures which caused the Company to re-evaluate all
product lines and reduce or slow production of products with limited future
sales potential. The increase in cost of goods sold and the inventory write-off
resulted in a reductiongross loss of gross profit margins to 20.9%approximately $0.5 million for the quarter ended
September 30,December 31, 1999 compared to 27.4%a gross profit of approximately $3.3 million for
the quarter ended September 30,December 31, 1998.
Selling, general and administrative expenses increased as a percentage of net
sales to 18.6%26.7% for the quarter ended September 30,December 31, 1999 from 12.8%15.2% for the
quarter ended September 30,December 31, 1998. In absolute 8dollars, the expenses increased by
approximately $0.6 million to approximately $3.2 million for the quarter ended
December 31, 1999 from approximately $2.6 million for the quarter ended December
31, 1998. The
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
percentage increase was due primarily to the fixed nature of selling, general
and administrative expenses and the decrease in net sales as noted above. The
increase in absolute dollars was primarily due to: the continued investment in
IT processes and technologies; abandoned facility lease costs; and increased
compensation and legal fees.
The Company's loss from operations was approximately $3.7 million for the
quarter ended December 31, 1999, compared to income of $0.6 million for the
quarter ended December 31, 1998. The decrease of approximately $4.3 million was
due to: a decrease of approximately $3.8 million in gross profit which included
the inventory write-off of $2.0 million; and approximately $0.6 million increase
in selling, general and administrative expenses.
The Company recorded a net loss for the quarter ended December 31, 1999 of
approximately $2.4 million compared to net income of approximately $0.4 million
for the quarter ended December 31, 1998. The decrease of approximately $2.8
million was due to the reasons described above. The income tax benefit of 37.3%
compares with a provision for taxes of 40.2% for the quarters ended December 31,
1999 and 1998, respectively. The lower percentage is the result of the
consolidation of a wholly owned subsidiary in Switzerland, which has a low
relative tax rate. Diluted net loss per common share was $0.42 for the quarter
ended December 31, 1999 compared to diluted net income per common share of $0.06
for the quarter ended December 31, 1998.
SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
Net sales decreased 20.3% or approximately $7.0 million to approximately $27.3
million for the six months ended December 31, 1999, from approximately $34.3
million for the six months ended December 31, 1998. The decrease was primarily
due to the loss of a major customer, Nu Skin Enterprises Inc., which accounted
for approximately 15% and 33% of net sales for the six months ended December 31,
1999 and 1998, respectively. Nu Skin informed the Company that its production
needs have been transitioned to other vendors for the foreseeable future. As of
December 31, 1999, the Company expects no adverse impact from the settlement of
outstanding receivables from Nu Skin. Sales of products into domestic markets
decreased approximately 21%, or $5.1 million, to approximately $18.7 million and
sales into international markets decreased approximately 18%, or $1.9 million,
to $8.6 million, primarily as a result of the loss of this major customer.
Domestic sales growth was also negatively impacted by the loss of customer sales
for several herbal products. Management continues to strategically focus its
efforts for increasing sales into diversifying and expanding geographic
distribution channels. Industry competition could adversely affect the Company's
results of operations in any given period and such adverse affects often cannot
be anticipated.
For the six months ended December 31, 1999, the Company experienced an increase
in cost of goods sold as a percentage of sales, excluding the inventory
write-off of $2.0 million, to 82.9% compared to 76.9% for the six months ended
December 31, 1998. The increase reflects reduced sales prices; increased costs
related to implementation of additional quality control procedures to ensure
continued product compliance with established GMP specifications and standards;
and increased manufacturing overhead costs. The Company wrote-off inventory of
$2.0 million, which included $735,000 for deposits on inventory. The analysis of
inventory balances and subsequent write-off related primarily to the loss of a
major customer in December 1999, a decline in market share and continuing
competitive pressures which caused the Company to re-evaluate all product lines
and reduce or slow production of products with limited future sales potential.
The increase in cost of goods sold and the inventory write-off resulted in a
reduction of gross profit of $5.3 million to $2.7 million for the six months
ended December 31, 1999 compared to $7.9 million for the six months ended
December 31, 1998.
Selling, general and administrative expenses increased as a percentage of sales
to 22.2% for the six months ended December 31, 1999 from 14.0% for the six
months ending December 31, 1998. In absolute dollars, the expenses increased to
approximately $2.8$6.1 million for the quartersix months ended September 30,December 31, 1999
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
from approximately $2.2$4.8 million for the quartersix months ended September 30,December 31, 1998. The
percentage increase was due primarily to the fixed nature of selling, general
and administrative expenses and the decrease in net sales as noted above. The
increase in absolute dollars was primarily due to: the continued investment in
upgrading management infrastructureIT processes and IT technology; unfavorabletechnologies; abandoned facility lease arrangements;costs; and increased
compensation and legal fees.
The Company's incomeloss from operations was $0.4approximately $3.4 million for the quartersix
months ended September 30,December 31, 1999 compared to $2.5income of approximately $3.1 million
for the quartersix months ended September 30,December 31, 1998. ThisThe decrease of approximately $6.5
million was due toto: a $1.5decrease of approximately $5.3 million decrease in gross profit
which included the inventory write-off of $2.0 million; and $0.6approximately $1.2
million increase in selling, general and administrative expenses.
The Company recorded a net incomeloss for the quartersix months ended September 30,December 31, 1999 of
approximately $87,000$2.3 million compared to net income of approximately $1.5$1.9 million
for the quartersix months ended September 30,December 31, 1998. This decrease was due to the reasons
described above. The higherincome tax benefit of 33.7% compares with a provision for
income taxes of 74.7% from 39.6%39.8% for the quarterquarters ended September 30,December 31, 1999 and 1998, respectively,respectively.
The lower percentage is the result of the consolidation of foreign entities.a wholly owned
subsidiary in Switzerland, which has a low relative tax rate. Diluted incomenet loss
per common share was $.02$.40 for the quartersix months ended September 30,December 31, 1999 compared to
diluted net income per common share of $0.25$0.31 for the quartersix months ended September 30,December
31, 1998.
COST CONTAINMENT PROGRAM
In January 2000, the Company publicly announced a cost containment program
designed to reduce future operating expenses. The program initiated expense
control measures intended to counteract the loss of a major customer and
improving operating performance. The program included an immediate reduction of
approximately 27% in the Company workforce, consisting of both permanent and
temporary personnel. The reduction-in-force is not expected to result in
significant separation agreement and other termination costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations through product sales,
capital and operating lease transactions, working capital credit facility and
equipment financing arrangements.
For the six months ended December 31, 1999, net cash used in operating
activities was approximately $1.1 million compared to net cash provided of
approximately $4.2 million for the six months ended December 31, 1998. This
decrease of approximately $5.2 million was due primarily to the decrease in net
income of approximately $2.2 million, excluding the $2.0 million inventory
write-off in the current period, and approximately $3.6 million less for
accounts receivable collections.
Capital expenditures for the six months ended December 31, 1999 amounted to
approximately $3.1 million. These expenditures relate primarily to manufacturing
facility improvements for expanding and upgrading the Company's warehouse,
blending and encapsulation production operations. The Company anticipates
additional capital expenditures of approximately $2.3 million during fiscal year
2000 primarily to complete the manufacturing quality improvements purchased and
for the purchase of packaging equipment in its vertical integration initiative
in final product packaging and labeling operations, which are currently
outsourced. These expenditures are expected to be paid primarily from borrowings
under the Company's term note described below. If these financing alternatives
become unavailable, the Company may be required to defer or restrict certain
commercial activities or delay or eliminate expenditures for certain of its
potential products and/or markets.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
At September 30,December 31, 1999, the Company had working capital of approximately $13.6
million and borrowings available under revolving lines of credit of
approximately $4.3 million. As of September 30, 1999, there were approximately
$0.4 million of borrowings under these lines.
For the three months ended September 30, 1999, net cash provided by operating
activities was approximately $1.4$11.8
million compared to approximately $1.8$14.1 million for the three months ended Septemberat June 30, 1998. This decrease of approximately
$.41999. The $2.3
million was due primarily to a decrease in net income andworking capital resulted from an increase in accounts receivable,current
installments of long-term debt of approximately $2.3 million used to finance
manufacturing facility improvements and expansion and decreases in inventories
of approximately $3.2 million, partially offset by decreasesa reduction in inventories and other
assets and the timingaccounts
payable of payments on accounts payable.approximately $3.2 million. Current maturities of long-term debt at
September 30,December 31, 1999 amounted to approximately $51,000, which
the Company expects to pay out of working capital.
At September 30, 1999, the Company had revolving line of credit agreements
permitting borrowings up to $4.3 million, secured by the Company's receivables,
inventory, equipment, and vehicles and bear interest at the bank's prime rate.
The loan agreements with the banks contain financial covenants concerning
limitations on maintenance of debt, certain financial ratio's and other matters,
for all of which the Company is in full compliance as of September 30, 1999.$2.4 million.
On October 4, 1999, the Company replaced an existing $3.0 million revolving
working capital line of credit with $9.0 million in new financing, consisting of
a $5.0 million revolving working capital line of credit and a $4.0 million term
note. Borrowings under the revolving working capital line of credit are
collateralized by eligible accounts receivable and inventory, as defined in the
agreement; proceeds will be used to support working
capitalongoing operating requirements. As
of December 31, 1999, the Company was not in compliance with certain financial
covenant provisions of the line of credit agreement, which the financial
institution has waived through fiscal year 2000. The line of credit expires on
December 1, 2000; management expects this line to be renewed in the normal
course of business. Borrowings under the term note will be used for new
equipment purchases, as defined. The term note expires on April 1, 2000; the
loan will be converted to a five-year term loan provided that the Company is in
compliance with all terms and conditions, as defined. As of December 31, 1999,
amounts outstanding under the revolving line of credit and term note were
$100,000 and $958,000, respectively.
The Company's wholly owned subsidiary in Switzerland has a revolving line of
credit agreement permitting borrowings up to CHF 2.0 million, or approximately
$1.3 million at December 31, 1999. The line of credit expires on December 31,
2000; management expects this line to be renewed in the normal course of
business. The agreement contains no financial covenants As of December 31, 1999,
the Company converted approximately $1.0 million of the amounts outstanding to
term notes with payments starting in calendar year 2001. As of December 31,
1999, the Company is in compliance with all terms and conditions of the
revolving line of credit agreement.
On November 9, 1999, the Company entered into a term note agreement for $2.5
million, secured by equipment. The note has a five-year term that provides for
principal and interest payable in monthly installments of $52,000; proceeds will
be used to support working capital requirements. 9As of December 31, 1999,
$2,467,000 was outstanding under this term note. As of December 31, 1999, the
Company is in compliance with all terms and conditions of the term note.
The Company has funds available from existing credit facilities to support
future ongoing operating requirements and capital expenditures of approximately
$8.3 million, net of borrowings outstanding as of December 31, 1999 of
approximately $2.0 million. The Company believes that its available cash and
cash equivalents and existing credit facilities should be sufficient to fund
ongoing operating activities during fiscal year 2000. The Company's ability to
fund future operations and meet capital requirements will depend on many
factors, including: the effectiveness of the Company's diversified growth
strategy; the effectiveness of the cost containment program; vertical
integration of packaging operations; the expansion of Switzerland manufacturing
operations; the ability to establish additional alliances or changes to existing
alliances; and the ability to establish sub-lease arrangements for the abandoned
office and manufacturing facility. The Company may seek additional financing
sources, but there can be no assurance that such additional financing sources
will be available at acceptable terms, if any at all.
CUSTOM NUTRITION JOINT VENTURE ALLIANCE WITH FITNESSAGE, INC.
In March 1999, the Company entered into a letter of intent to form a joint
venture with FitnessAge, Inc., a privately held development stage company based
in San Diego, CA ("FitnessAge"). In connection therewith, the Company purchased
300,000 shares of FitnessAge common stock for $150,000, on March 30, 1999.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Capital expendituresOn December 6, 1999, the Company and FitnessAge formalized the joint venture by
forming a new company named Custom Nutrition, LLC, a Delaware limited liability
company ("Custom Nutrition"). Custom Nutrition was formed for the three months ended September 30, 1999 amountedpurpose of
developing, merchandising, selling and distributing customized nutritional and
related products to approximately $1.8 million. These expenditures relate primarily to manufacturing
facility improvements for expandinghealth and upgradingfitness clubs, as well as over the Company's warehouse,
blending and encapsulation production operations. The Company also purchased
packaging equipment in its vertical integration initiative in final product
packaging and labeling operations, which is currently outsourced. The Company
anticipates capital expendituresinternet.
Under terms of approximately $4.0 million during FY 2000
primarily to complete the manufacturing quality improvements and vertical
integration initiatives. These expenditures are expected to be paid from
borrowings under the Company's term commitment described above. If these
financing alternatives become unavailable,a 10-year Exclusive Manufacturing Agreement, the Company may beis the
exclusive manufacturer of all nutritional supplements for Custom Nutrition. In
addition, Custom Nutrition obtained an exclusive royalty free license to
FitnessAge's proprietary software technology, including their physical fitness
assessments known as the FitnessAge System, as well as, software under
development designed to provide customized nutritional assessments. In
accordance with its Operating Agreement, the Company is required to defer
or restrict certain commercial activities or delay or eliminate expenditures for
certainmake an
initial capital contribution of its potential products and/or markets.
YEAR 2000 ISSUES
The year 2000 issue ("Year 2000 Issue") is the result$100,000, which has not been funded as of
computer programs being
written using two digits rather than four digits to represent the yearDecember 31, 1999; income and affects both information technology (IT)losses and non-IT systems. Thus, computer
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in system failures or miscalculations causing
disruptionsany additional capital contribution
requirements of operations, including among others, a temporary inability to
process certain data or engage in similar normal business activities.
STATUS: The Company's plan to resolve the Year 2000 Issue involved four phases:
assessment, remediation, testing and implementation. The Company completed its
assessment of its IT systems and implemented its new computer software system
during the fourth quarter of its 1999 fiscal year. The manufacturer represents
this system as Year 2000 compliant. The Company also completed its assessment of
non-IT systems, most of which are equipment used in production. Systems
identified as not being Year 2000 compliant were brought into compliance by
upgrading either the software or hardware. The Company fully implemented these
upgrades by the end of its 1999 fiscal year. The Company has determined that its
production equipment and alarm, heating, and air-conditioning systems will not
be affected by the Year 2000 issue.
The Company has queried its significant suppliers, vendors and other outside
parties and none of the responses received thus far have indicated any
significant deficiencies. The Company will continue to monitor their Year 2000
compliance status, but has no means of ensuring that these third-party service
providersCustom Nutrition will be Year 2000 ready. These services include, but are not limitedallocated 60% to providers that supply electricity, telephone, banking, shippingFitnessAge and raw
materials for the Company's manufacturing operations. Any disruption of these
critical services could adversely affect the Company's ability40% to receive,
process, ship and collect on customer orders in a timely fashion. In the event
of a temporary disruption in the supply of raw materials, the Company believes
it currently maintains adequate supplies to sustain manufacturing of finished
product until alternative sources become available. In the past, the Company has
been able to locate alternative sources, but there can be no assurance the
Company will be successful in locating such sources in the future. In addition,
the Company believes that a disruption of communication services could seriously
impact the Company's ability to receive and process orders. The Company has
manual processes in place which it believes would provide temporary replacement
for such services.
COSTS: The Company incurred approximately $1 million in costs in fiscal year
1999 to replace its financial and manufacturing software systems and to
remediate or replace embedded microprocessors in its production equipment; the
Company incurred and expensed additional costs of $136,000 during the first
quarter and anticipates additional costs of $150,000 during fiscal year 2000.
If, however, additional unanticipated costs are incurred, this could have a
material adverse effect on the Company's business, results of operations and
financial condition.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
RISKS: While management of the Company believes it effectively implemented its
program to resolve the Year 2000 Issue in a timely manner, as noted above,
disruptions in the economy generally resulting from Year 2000 Issues could also
materially adversely effect
the Company. The Company is unablecurrently accounting for this investment under the
equity method of accounting. As of December 31, 1999, there were no sales or
expenses recorded by Custom Nutrition, which is expected to estimate if it
has any potential liability or potential lost revenue at this time. There can be
no assurance thatcommence operations
during the first half of calendar year 2000.
In addition, in November and December, the Company will not discover Year 2000 compliance issues that
will haveprovided FitnessAge a material adverse effecttotal
of $750,000 as part of a convertible secured loan made by the Company to
FitnessAge (the "Loan"). The Loan is collateralized by all of the assets of
FitnessAge and includes interest accruing at an annual rate of 12%. The
principal together with all accrued and unpaid interest is due November 10,
2000. The Company has the right at any time to convert all or any portion of the
amount due on the Loan into the common stock of FitnessAge at a conversion price
of $0.75 per share. As of December 31, 1999, the balance of the Loan was
$750,000 plus accrued interest, and the Company's business, resultsdirect aggregate investment in
FitnessAge was approximately $900,000. The Company is currently accounting for
this investment under the cost method of operationsaccounting.
In conjunction with the Loan, the Company received a three-year Warrant (the
"Warrant") to purchase up to 150,000 shares of Common Stock of FitnessAge for
$1.00 per share. The Company may exercise the Warrant at any time up to and
financial condition.including November 1 2002. As of December 31, 1999, the Company had not
exercised any portion of this Warrant. The Company also obtained: the right to
designate one representative of the Company to be a member of FitnessAge's Board
of Directors, which consists of five board members; and registration rights and
certain other rights as defined by the loan documents and by an Investor Rights
Agreement. If the Company converted the Loan and exercised the Warrant, the
Company would own less the five percent, on an as converted basis, of FitnessAge
common stock.
YEAR 2000 ISSUES
As of the date of this filing, the Company has not experienced any significant
year 2000 problems with its internal systems or equipment, nor has the Company
detected any significant year 2000 problems affecting its customers or
suppliers.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Statement
establishes accounting and reporting standards requiring that derivative
instruments be recorded in the balance sheet as either an asset or liability
measured at its fair value and that changes in the derivative's fair value be
recognized currently in income unless specific hedge accounting criteria are
met. SFAS No. 133, as amended, is effective for fiscal years beginning after
June 15, 2000. The adoption of this Statement will not have a material effect on
the Company's consolidated financial statements as the Company does not
currently hold any derivative or hedging instruments.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
RISK FACTORS THAT MAY AFFECT
FUTURE OPERATING RESULTS
In addition to the other information included in this Report, the following
factors should be considered in evaluating the Company's business and future
prospects. The Company's business and results of operations could be seriously
harmed by any of the following risks. In addition, the market price of our
common stock could decline due to any of these risks.
CURRENT LOSSES AND EXPECTED FUTURE LOSSES; DECLINING SALES
The Company incurred a net loss of approximately $2.9 million for the fiscal
year ended June 30, 1999. Sales for the fiscal year ended June 30, 1999 declined
to approximately $57.0 million compared to approximately $68.0 million for the
fiscal year ended June 30, 1998. Sales for the six months ended December 31,
1999 were approximately $27.3 million versus sales of approximately $34.3
million for the comparable period of 1998. The Company incurred a net loss of
approximately $2.3 million for the six months ended December 31, 1999, and
expects to incur a net loss for the fiscal year ended June 30, 2000. The Company
is expected to continue to incur significant marketing and general and
administrative expenses during fiscal year 2000. There can be no assurance the
Company will achieve profitability in 2001 or thereafter.
STOCK PRICE VOLATILITY
The Company's stock price has experienced significant volatility at times during
the past two years. In view of the Company's current losses and expected losses
through June 30, 2000, and the fact there can be no assurances losses will not
continue, it is expected that volatility in the stock price will continue.
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 and operating results
which are lower than the expectations of analysts and our investors, may have a
significant adverse effect on the price of the Company's stock.
LOSS OF MAJOR CUSTOMER
During the quarter ended December 31, 1999, one of the Company's major
customers, NuSkin Enterprises, Inc. ("NuSkin"), advised the Company it would
stop purchasing products from the Company, and no longer purchases any Company
products. For the fiscal year ended June 30, 1999, NuSkin accounted for
approximately $18.4 million or approximately 32% of the Company's sales, and for
the six months ended December 31, 1999, NuSkin accounted for approximately $4.2
million or 15% of the Company's sales. The loss of NuSkin as a customer is
expected to have a material adverse impact on the revenues of the Company.
LONG-TERM LEASE COMMITMENT FOR ABANDONED FACILITY
The Company has a 15-year lease commitment for an approximately 82,500 square
foot build-to-suit office and manufacturing facility in Carlsbad, California
that the Company has determined not to occupy. The monthly lease payments, which
commenced in November, 1998, are currently in excess of $105,000 and are subject
to annual inflation adjustments through the remainder of the lease term. The
Company is attempting to sublease the partially completed facility. The Company
believes it will be required to expend significant sums for commissions, tenant
improvements and other sublease expenses in the event it is successful in
subleasing all or any portion of the property. If the Company is not able to
sublease the property at terms consistent with those used when the Company
accrued for the loss on the sublease, it is expected to continue to have a
material adverse impact on the operations and financial condition of the
Company.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
RELIANCE ON LIMITED NUMBER OF CUSTOMERS FOR MAJORITY OF REVENUE
For the fiscal year ended June 30, 1999, the Company had three major customers,
which together accounted for approximately 71% of the Company's net sales. For
the six months ended December 31, 1999, there were four major customers who each
accounted for 10% or more of the Company's net sales, which together accounted
for 76% of the Company's net sales. The Company lost one of these major
customers, NuSkin, during the quarter ended December 31, 1999, as a customer.
The loss of any additional major customers, or any of these customers
substantially reducing their purchases from the Company, could have a material
adverse impact on the business, operations and financial condition of the
Company.
LAWSUIT BY FORMER PRESIDENT, DIRECTOR AND CHIEF FINANCIAL OFFICER
A lawsuit has been filed against the Company by its former President, Director
and Chief Financial Officer, William P. Spencer. The complaint was filed on
January 14, 2000 in the California Superior Court for the County of San Diego,
North County Branch. The complaint, which has not yet been served upon the
Company as of the date of this filing, alleges damages for wrongful termination,
breach of option contract, conversion, breach of employment contract,
discriminatory and retaliatory discharge, workplace harassment and slander. The
complaint seeks damages in an amount to be proved at trial and alleges damages
in excess of six million dollars. The former officer and director was terminated
for cause in January of 1999. Management believes the lawsuit is without merit.
The Company intends to vigorously defend itself in the event it is served with
the complaint. In the event a judgment was obtained in the amount of the damages
alleged in the complaint or any significant portion thereof, it would have a
material adverse impact upon the 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 prices 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 also recently been speculation about the potential for
increased participation in these markets by major international pharmaceutical
companies. In the future, one or more of these companies could seek to compete
more directly with the Company by manufacturing and distributing their own or
others products, or by significantly lowering the prices of 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, internet sales and direct sales, the Company may expand its
operations and its products may face competition from such alternative channels
as more customers utilize these channels of distribution to obtain similar
products.
RELIANCE ON LIMITED NUMBER OF SUPPLIERS; AVAILABILITY AND COST OF PURCHASED
MATERIALS
The Company purchases from a limited number of raw material suppliers certain
products the Company does not manufacture. No supplier represented more than 10%
of total raw material purchases for the fiscal year ended June 30, 1999 or for
the six month period ended December 31, 1999. 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.
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
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
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 material media attention and various scientific research suggesting
potential health benefits for the consumption of certain vitamin products. The
Company is indirectly dependent upon its customers' consumers' perception of the
overall integrity of its business, as well as the safety and quality of its
products and similar products distributed by other companies which may not
adhere to the same quality standards as the Company. The 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 result in injury. The
Company maintains product liability insurance coverage, including primary
product liability and excess liability coverage. There can be no assurance
product liability insurance will continue to be available at an economically
reasonable cost or that the Company's insurance will be adequate to cover any
liability the Company incurs in respect to all possible product liability
claims.
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 fiscal year ended June 30, 1999 and six months ended December
31, 1999, the percentage of the Company's net sales by customers into
international markets were 30.8% and 31.5%, respectively. The Company also has a
manufacturing facility in Switzerland, which is designed to increase sales of
the Company's products overseas. The Company may experience difficulty entering
new 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, and (4) economic and
political instability. As the Company continues to expand its international
operations, these and other risks associated with international operations are
likely to increase.
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, OTC 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,
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
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 for drugs. The Company
currently manufactures its vitamins and nutritional supplement products in
compliance with 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 recordkeeping, warnings,
notification procedures and expanded documentation of the properties of certain
products or scientific substantiation regarding ingredients, product claims,
safety or efficacy. Failure to comply with applicable FDA requirements 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.
DISTRIBUTION AND MANAGEMENT OF OPERATIONS
In fiscal 1999, the Company leased and completed development of two additional
facilities. One new facility, comprising 74,000 square feet in Vista,
California, is used as warehousing, mixing, blending and packaging facility. The
Company also owns a Swiss subsidiary that leased and developed a 18,000 square
foot manufacturing facility in Lugano, Switzerland. During fiscal 1999, the
Company also implemented an entirely new software system to manage its materials
and manufacturing operations. While the Company believes these activities will
increase the Company's manufacturing and distribution capabilities, there can be
no assurance the expected operating improvements will be realized, or these new
facilities will result in improved sales, profit margins or earnings. A
significant, unexpected disruption of these systems and facilities could have a
material adverse effect on the Company's results of operations.
FAILURE TO ATTRACT AND RETAIN MANAGEMENT COULD HARM OUR ABILITY TO ACHIEVE
PROFITABILITY AND GAIN
We believe our success is dependent in large part upon our continued ability to
identify, hire, retain and motivate highly skilled management employees. These
types of qualified individuals are currently in great demand in the marketplace.
Competition for these employees is intense and we may not be able to hire
additional qualified personnel in a timely manner and on reasonable terms. The
majority of our Officers began their employment with the Company in late fiscal
year 1998 and 1999. The loss of any one of them could adversely affect our
ability to execute our business strategy.
CENTRALIZED LOCATION OF MANUFACTURING OPERATIONS
The Company currently manufactures the vast majority of its products at its
manufacturing facilities in San Marcos, California. Accordingly, any event
resulting in the slowdown or stoppage of the Company's manufacturing operations
or distribution facilities in San Marcos could have a material adverse effect on
the Company. The Company maintains business interruption insurance. There can be
no assurance, however, that such insurance will continue to be available at a
reasonable cost or, if available, will be
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
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 CONSIDERATION
The Company's directors and executive officers beneficially own in excess of 27%
of the outstanding Common Stock as of June 30, 1999. Accordingly, these
shareholders will continue to have the ability to substantially influence the
management, policies and business operations of the Company. The Company's Board
of Directors has the authority to approve the issuance of 5,000,000 shares of
preferred stock and to fix the rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the Company's shareholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of holders of any
preferred stock that may be issued in the future. Certain provisions of Delaware
law, as well as the issuance of preferred stock, and other "anti-takeover"
provisions in the Company's Articles and Bylaws, could delay or inhibit the
removal of incumbent directors and could delay, defer, make more difficult or
prevent a merger, tender offer or proxy content, 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.
RESTRICTIVE FINANCING COVENANTS.
One or more of the Company's loan agreements contain a number of covenants that
restrict the operations of the Company. Such restriction includes requiring the
Company to comply with specified financial ratios and tests, including minimum
tangible net worth requirements, maximum leverage ratios, debt coverage ratios
and minimum EBITDA to cash interest expense ratios. The Company was not in
compliance with certain of these ratios at December 31, 1999 which the financial
institution has agreed to waive through fiscal year 2000. There can be no
assurance the Company will be able to comply with such covenants or restrictions
in the future years. The Company's ability to comply with such covenants and
other restrictions may be affected by events beyond its control, including
prevailing economic, financial and industry conditions. The breach of any such
covenants or restrictions could result in a default under the various loan
agreements that would permit the lenders thereunder to declare all amounts
outstanding thereunder to be immediately due and payable, together with accrued
and unpaid interest, and terminate their commitments to make further extensions
of credit thereunder.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks which arise in the normal course of
business from changes in interest rates, foreign currency exchange rates and
stock market fluctuations. At September 30,December 31, 1999, the Company maintains a portion
of its cash and cash equivalents in financial instruments with original
maturities of threesix months or less. These financial instruments, principally
comprised of government backed money market funds, are subject to interest rate
risk and will decline in value if interest rates increase. The Company also
maintains a short-term investment portfolio containing common stocks that are
subject to market risk. The Company has not used derivative financial
instruments in its investment portfolio and believes that its investment in
market-risk-sensitive instruments is not material. Based upon our overall
currency rate exposure at September 30,December 31, 1999, we do not believe that our exposure
to currency rate fluctuations will have a material impact on our consolidated
financial position or consolidated results of operations.
Market rate risk related to Long Term Debt is diminimus due to the fixed
interest rate and fixed payment structure of the debt.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART III - OTHERFINANCIAL INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A lawsuit has been filed against the Company by its former President, Director
and Chief Financial Officer, William P. Spencer. The complaint was filed on
January 14, 2000 in the California Superior Court for the County of San Diego,
North County Branch. The complaint, which has not yet been served upon the
Company as of the date of this filing, alleges damages for wrongful termination,
breach of option contract, conversion, breach of employment contract,
discriminatory and retaliatory discharge, workplace harassment and slander. The
complaint seeks damages in an amount to be proved at trial and alleges damages
in excess of six million dollars. The former officer and director was terminated
for cause in January of 1999. Management believes the lawsuit is without merit.
The Company is involved in various claims and legal actions arisingintends to vigorously defend itself in the ordinary course of business.event it is served with
the complaint. In the opinionevent a judgment was obtained in the amount of management, basedthe damages
alleged in part on the advice of counsel, the ultimate disposition of these matters will notcomplaint or any significant portion thereof, it would have a
material adverse impact onupon the Company's consolidated financial position,
operations or cash flows.condition of the Company.
ITEM 2. CHANGES IN SECURITIES
During the quartersix month period ending September 30,December 31, 1999, 30,00050,000 common shares were
repurchased pursuant to the Board of Directors approved repurchase program of up
to 500,000 shares of the Company's common stock. As of September 30,December 31, 1999,
229,500249,500 shares had been repurchased under this repurchase program.
ITEM 3. DEFAULTS BY THE COMPANY ON ITS SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.On December 6, 1999, at the Company's annual meeting, the shareholders elected
each of the following three directors with the following votes:
Name Votes For Votes Withheld
- ---- --------- --------------
Marie A. LeDoux 5,213,568 251,537
Lee G. Weldon 5,218,768 246,337
J. Scott Schmidt 5,218,738 246,307
The shareholders also approved a second proposal to adopt the Omnibus Equity
Incentive Plan (the "Omnibus Plan"). The Board of Directors reserved 500,000
shares of common stock, plus an annual increase as defined, for the Omnibus
Plan. The purpose of the Omnibus Plan is to promote the interests of the Company
through awards in the form of restricted shares, stock units, options and stock
appreciation rights. This second proposal received the following votes: for
2,728,647; against 1,048,965; broker non-votes 1,622,158; and abstain 25,335. In
addition, the shareholders approved the proposal to adopt the Company's Employee
Stock Purchase Plan (the "Stock Purchase Plan"). The Board of Directors reserved
150,000 shares of common stock for the Stock Purchase Plan, plus an annual
increase as defined, to be added on the first day of the Company's fiscal year
beginning July 1, 2000. The Stock Purchase Plan provides eligible employees of
the Company with a means to purchase, through payroll deductions, shares of
Common Stock at a discount consistent with the provisions of the Internal
Revenue Code of 1986, as amended. This third proposal received the following
votes: for 3,340,994; against 484,327; and abstain 20,285. Finally, the
shareholders approved a fourth proposal to ratify the appointment of KPMG LLP as
independent auditors for the fiscal year ending June 30, 2000. This fourth
proposal received the following votes: for 5,430,897; against 19,427; and
abstain 14,781.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The following exhibits are filed herewith:
27.0.10.1 Operating Agreement of Custom Nutrition, LLC between FitnessAge Inc. and
Natural Alternatives International, Inc. dated December 6, 1999.
10.2 Exclusive Manufacturing Agreement between Natural Alternatives
International, Inc. and Custom Nutrition, LLC dated December 6, 1999.
10.3 Loan Agreement by and between FitnessAge, Inc. and Natural Alternatives
International, Inc. dated November 11, 1999.
10.4 First Amendment to Loan Agreement and Security Agreement by and between
FitnessAge, Inc. and Natural Alternatives International, Inc. dated
December 6, 1999.
10.5 FitnessAge, Inc. Convertible Secured Promissory Note dated November 11,
1999.
10.6 FitnessAge, Inc. Convertible Secured Promissory Note dated December 6,
1999.
10.7 Security Agreement between Natural Alternatives International, Inc. and
FitnessAge, Inc. dated November 11, 1999.
10.8 Warrant dated November 11, 1999.
10.9 Investor Rights Agreement by and among FitnessAge, Inc. and Natural
Alternatives International, Inc. dated November 11, 1999.
10.10 Executive Employment Agreement between Mark A. LeDoux and Natural
Alternatives International, Inc. beginning October 1, 1999.
10.11 Executive Employment Agreement between David Lough and Natural
Alternatives International, Inc. beginning October 1, 1999.
10.12 Executive Employment Agreement between Peter C. Wulff and Natural
Alternatives International, Inc. beginning October 25, 1999.
10.13 Executive Employment Agreement between Douglas E. Flaker and Natural
Alternatives International, Inc. beginning October 1, 1999.
10.14 Executive Employment Agreement between David K. Shunick and Natural
Alternatives International, Inc. beginning October 1, 1999.
27.0 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for which this report
is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NATURAL ALTERNATIVES INTERNATIONAL, INC.
PETER C. WULFF Date: November 15 , 1999February 14, 2000
- ----------------------------
Peter C. Wulff
Chief Financial Officer
and Treasurer
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