UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q


 

QUARTERLY REPORT

pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

FOR THE QUARTERLY PERIOD ENDED DECEMBERMARCH 31, 20032004

 

000-15701

(Commission file number)

 


 

NATURAL ALTERNATIVES INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)


 

Delaware 84-1007839
(State of incorporation) (IRS Employer Identification No.)

1185 Linda Vista Drive

San Marcos, California 92069

 (760) 744-7340
(Address of principal executive offices) (Registrant’s telephone number)

 


 

Indicate by check mark whether Natural 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 NAI was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

 

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 February 6,May 17, 2004, 5,828,2925,889,992 shares of NAI’s common stock were outstanding, net of 272,40061,000 treasury shares.

 



TABLE OF CONTENTS

 

     Page

SPECIAL NOTE

FORWARD-LOOKING STATEMENTS

  1

PART I

 

FINANCIAL INFORMATION

  2

Item 1.

 

Financial Statements

  2
  

Condensed Consolidated Balance Sheets

  2
  

Condensed Consolidated Statements of Operations and Comprehensive Income

  3
  

Condensed Consolidated Statements of Cash Flows

  4
  

Notes to Condensed Consolidated Financial Statements

  5

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  1011

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  1520

Item 4.

 

Controls and Procedures

  1621

PART II

 

OTHER INFORMATION

   

Item 1.

 

Legal Proceedings

  1621

Item 2.

 

Changes in Securities and Use of Proceeds

  1621

Item 3.

 

Defaults Upon Senior Securities

  1621

Item 4.

 

Submission of Matters to a Vote of Security Holders

  1622

Item 5.

 

Other Information

  1622

Item 6.

 

Exhibits and Reports on Form 8-K

  1622
SIGNATURES 1924

 

(i)


SPECIAL NOTE—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:

 

future financial and operating results, including projections of revenues, income, earnings per share, profit margins, expenditures, liquidity and other financial items;

 

inventories and facilities;

 

sources and availability of raw materials;

 

personnel;

 

operations outside the United States;

 

overall industry and market performance;

 

competition;

 

current and future economic and political conditions;

 

product development;

 

distribution channels and product sales and performance;

growth and acquisition strategies;

 

the outcome of regulatory and litigation matters;

 

customers;

 

management’s goals and plans for future operations; and

 

other assumptions described in this report underlying or relating to any forward-looking statements.

 

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.

1


PART I—I – FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

 

ITEM 1. FINANCIAL STATEMENTS

NATURAL ALTERNATIVES INTERNATIONAL, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

 

  December 31,
2003


 June 30,
2003


   March 31,
2004


 

  June 30,  

2003


 
  (Unaudited)     (Unaudited)   

Assets

      

Current assets:

      

Cash and cash equivalents

  $2,886  $5,482   $3,162  $5,482 

Accounts receivable, net of allowance for doubtful accounts of $55
at December 31, 2003 and $27 at June 30, 2003

   5,018   5,668 

Accounts receivable, net of allowance for doubtful accounts

of $89 at March 31, 2004 and $27 at June 30, 2003

   6,329   5,668 

Inventories, net

   12,307   7,845    12,270   7,845 

Prepaid expenses

   1,012   502    787   502 

Other current assets

   377   264    379   264 
  


 


  


 


Total current assets

   21,600   19,761    22,927   19,761 
  


 


  


 


Property and equipment, net

   10,910   10,820    10,804   10,820 

Other assets, net

   179   143    201   143 
  


 


  


 


Total assets

  $32,689  $30,724   $33,932  $30,724 
  


 


  


 


Liabilities and Stockholders’ Equity

      

Current liabilities:

      

Accounts payable

  $5,388  $5,001   $3,634  $5,001 

Accrued liabilities

   1,419   1,106    1,862   1,106 

Accrued compensation and employee benefits

   885   717    1,657   717 

Line of credit

   85   —      900   —   

Income taxes payable

   90   46    103   46 

Current portion of long-term debt

   573   570    575   570 
  


 


  


 


Total current liabilities

   8,440   7,440    8,731   7,440 
  


 


  


 


Long-term debt, less current portion

   2,099   2,386    1,955   2,386 

Long-term pension liability

   191   121    200   121 
  


 


  


 


Total liabilities

   10,730   9,947    10,886   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 December 31, 2003 and 6,087,532 at June 30, 2003

   61   61 

Common stock; $.01 par value; 8,000,000 shares authorized; issued and

outstanding 5,920,992 at March 31, 2004 and 6,087,532 at June 30, 2003

   59   61 

Additional paid-in capital

   11,465   11,426    10,689   11,426 

Retained earnings

   11,736   10,593    12,591   10,593 

Treasury stock, at cost, 272,400 shares at December 31, 2003 and June 30, 2003

   (1,303)  (1,303)

Treasury stock, at cost, 61,000 shares at March 31, 2004 and 272,400 shares at June 30, 2003

   (293)  (1,303)
  


 


  


 


Total stockholders’ equity

   21,959   20,777    23,046   20,777 
  


 


  


 


Total liabilities and stockholders’ equity

  $32,689  $30,724   $33,932  $30,724 
  


 


  


 


 

See accompanying notes to condensed consolidated financial statements.

2


NATURAL ALTERNATIVES INTERNATIONAL, INC.

Condensed Consolidated Statements Of Operations And Comprehensive Income

(In thousands, except share and per share amounts)

(Unaudited)

 

  

Three months ended

December 31,


 

Six months ended

December 31,


   

Three months ended

March 31,


 

Nine months ended

March 31,


 
  2003

 2002

 2003

 2002

   2004

 2003

 2004

 2003

 

Net sales

  $17,195  $13,010  $33,916  $26,146   $21,268  $13,755  $55,184  $39,901 

Cost of goods sold

   13,300   9,958   25,875   19,899    16,215   10,468   42,090   30,367 
  


 


 


 


  


 


 


 


Gross profit

   3,895   3,052   8,041   6,247    5,053   3,287   13,094   9,534 

Selling, general & administrative expenses

   3,346   2,797   6,862   5,589    4,047   3,076   10,909   8,665 
  


 


 


 


  


 


 


 


Income from operations

   549   255   1,179   658    1,006   211   2,185   869 
  


 


 


 


  


 


 


 


Other income (expense):

      

Interest income

   9   21   18   28    3   25   21   53 

Interest expense

   (51)  (70)  (94)  (153)   (69)  (56)  (163)  (208)

Foreign exchange gain (loss)

   130   (11)  145   (17)   (50)  13   95   (4)

Proceeds from vitamin antitrust litigation

   —     —     —     225    —     —     —     225 

Other, net

   (25)  (39)  (47)  (40)   (22)  (15)  (69)  (56)
  


 


 


 


  


 


 


 


   63   (99)  22   43    (138)  (33)  (116)  10 
  


 


 


 


  


 


 


 


Income before income taxes

   612   156   1,201   701    868   178   2,069   879 

Provision for income taxes

   36   7   58   15    13   6   71   21 
  


 


 


 


  


 


 


 


Net income

  $576  $149  $1,143  $686   $855  $172  $1,998  $858 
  


 


 


 


  


 


 


 


Net income per common share:

      

Basic

  $0.10  $0.03  $0.20  $0.12   $0.15  $0.03  $0.34  $0.15 
  


 


 


 


  


 


 


 


Diluted

  $0.09  $0.02  $0.19  $0.11   $0.13  $0.03  $0.32  $0.14 
  


 


 


 


  


 


 


 


Weighted average common shares outstanding:

      

Basic shares

   5,821,973   5,804,267   5,821,341   5,803,566    5,848,841   5,814,258   5,830,508   5,807,143 

Diluted shares

   6,161,851   6,021,919   6,134,798   5,975,742    6,335,462   6,061,391   6,201,686   6,004,304 

 

See accompanying notes to condensed consolidated financial statements.

3


NATURAL ALTERNATIVES INTERNATIONAL, INC.

Condensed Consolidated Statements Of Cash Flows

(In thousands)

(Unaudited)

 

  

Six Months Ended

December 31,


   Nine Months Ended
March 31,


 
  2003

 2002

   2004

 2003

 

Cash flow from operating activities

      

Net income

  $1,143  $686   $1,998  $858 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

      

Provision for uncollectible accounts receivable

   28   (80)   62   (75)

Depreciation and amortization

   1,338   1,222    2,029   1,830 

Non-cash compensation

   15   51    100   56 

Pension expense, net of contributions

   70   (41)   79   (64)

Loss on disposal of asset

   15   4    15   4 

Changes in operating assets and liabilities:

      

Accounts receivable

   622   (342)   (723)  (897)

Inventories

   (4,462)  553    (4,425)  (603)

Prepaid expenses

   (510)  (490)   (285)  (593)

Other assets

   (149)  24    (177)  682 

Accounts payable and accrued liabilities

   744   (492)   (574)  293 

Accrued compensation and employee benefits

   168   51    940   194 
  


 


  


 


Net cash provided by (used in) operating activities

   (978)  1,146    (961)  1,685 
  


 


  


 


Cash flows from investing activities

      

Proceeds from sale of property and equipment

   —     109    —     109 

Capital expenditures

   (1,443)  (526)   (2,028)  (752)

Repayment of notes receivable

   —     68    4   71 
  


 


  


 


Net cash used in investing activities

   (1,443)  (349)   (2,024)  (572)
  


 


  


 


Cash flows from financing activities

      

Net borrowings on line of credit

   85   —      900   —   

Borrowings on long-term debt

   —     2,500    —     2,500 

Payments on long-term debt

   (284)  (1,424)   (426)  (1,565)

Decrease in restricted cash

   —     1,500    —     1,500 

Proceeds from issuance of common stock

   24   24    191   30 
  


 


  


 


Net cash provided by (used in) financing activities

   (175)  2,600 
  


 


Net cash provided by financing activities

   665   2,465 
  


 


Net increase (decrease) in cash and cash equivalents

   (2,596)  3,397    (2,320)  3,578 

Cash and cash equivalents at beginning of period

   5,482   640    5,482   640 
  


 


  


 


Cash and cash equivalents at end of period

  $2,886  $4,037   $3,162  $4,218 
  


 


  


 


Supplemental disclosures of cash flow information

      

Cash paid during the period for interest

  $94  $153   $163  $208 
  


 


  


 


 

See accompanying notes to condensed consolidated financial statements.

4


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

A. Basis of Presentation and Significant Accounting Policies

 

Basis of Presentation

 

The accompanying interim, unaudited, condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and applicable rules and 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. In management’s opinion, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows have been included and are of a normal, recurring nature. The results of operations for the sixnine months ended DecemberMarch 31, 20032004 are not necessarily indicative of the operating results for the full fiscal year or any future periods.

 

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 to conform to the current year presentation.

 

Stock-BasedStock- Based Compensation

 

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—TransitionCompensation –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 date of grant using the Black-Scholes option valuation model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions, including expected life and stock price volatility. Because our options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect fair value estimates, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of our options.

5


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:

 

  Three Months Ended
December 31,


 

Six Months Ended

December 31,


   Three Months Ended
March 31,


   Nine Months Ended
March 31,


 
      2003    

     2002    

     2003    

     2002    

   2004

 2003

   2004

 2003

 
  (in thousands, except per share data)   (in thousands, except per share data) 

Net income—as reported

  $576  $149  $1,143  $686 

Net income - as reported

  $855  $172   $1,998  $858 

Plus: Reported stock-based compensation

   7   21   15   51    84   5    100   56 

Less: Fair value stock-based compensation

   (116)  (82)  (197)  (152)   (259)  (86)   (462)  (231)
  


 


 


 


  


 


  


 


Net income—pro forma

  $467  $88  $961  $585 
  


 


 


 


Net income - pro forma

  $680  $91   $1,636  $683 
  


 


  


 


Reported basic net income per common share

  $0.10  $0.03  $0.20  $0.12   $0.15  $0.03   $0.34  $0.15 
  


 


 


 


  


 


  


 


Pro forma basic net income per common share

  $0.08  $0.01  $0.16  $0.10   $0.12  $0.02   $0.28  $0.12 
  


 


 


 


  


 


  


 


Reported diluted net income per common share

  $0.09  $0.02  $0.19  $0.11   $0.13  $0.03   $0.32  $0.14 
  


 


 


 


  


 


  


 


Pro forma diluted net income per common share

  $0.08  $0.01  $0.16  $0.10   $0.11  $0.02   $0.26  $0.11 
  


 


 


 


  


 


  


 


 

Net Income per Common Share

 

We compute net income per common share in accordance with SFAS 128, “Earnings Per Share.” This statement requires the presentation of basic income per common share, using the weighted average number of shares outstanding during the period, and diluted income per common share, using the additional dilutive effect of all dilutive securities. The dilutive impact of stock options account for the additional weighted average shares of common stock outstanding for our diluted net income per common share computation. We calculated basic and diluted net income per common share as follows:

 

  Three Months Ended
December 31,


  

Six Months Ended

December 31,


  

Three Months Ended

March 31,


  

Nine Months Ended

March 31,


  2003

  2002

  2003

  2002

  2004

  2003

  2004

  2003

  (in thousands, except share and per share data)  (in thousands, except share and per share data)

Numerator

                        

Net income

  $576  $149  $1,143  $686  $855  $172  $1,998  $858

Denominator

                        

Basic weighted average common shares outstanding

   5,821,973   5,804,267   5,821,341   5,803,566   5,848,841   5,814,258   5,830,508   5,807,143

Dilutive effect of stock options

   339,878   217,652   313,457   172,176   486,621   247,133   371,178   197,161
  

  

  

  

  

  

  

  

Diluted weighted average common shares outstanding

   6,161,851   6,021,919   6,134,798   5,975,742   6,335,462   6,061,391   6,201,686   6,004,304
  

  

  

  

  

  

  

  

Basic net income per common share

  $0.10  $0.03  $0.20  $0.12  $0.15  $0.03  $0.34  $0.15
  

  

  

  

  

  

  

  

Diluted net income per common share

  $0.09  $0.02  $0.19  $0.11  $0.13  $0.03  $0.32  $0.14
  

  

  

  

  

  

  

  

 

Shares related to stock options of 20,00055,000 for the three months ended DecemberMarch 31, 2003,2004, and 95,00082,000 for the sixnine months ended DecemberMarch 31, 2003,2004, were excluded from the calculation of diluted net income per share, as the effect of their inclusion would be anti-dilutive.

 

Shares related to stock options of 105,00065,000 for the three months ended DecemberMarch 31, 2002,2003, and 117,500100,000 for the sixnine months ended DecemberMarch 31, 2002,2003, were excluded from the calculation of diluted net income per share, as the effect of their inclusion would be anti-dilutive.

6


B. Inventories

 

Inventories, (net)net at DecemberMarch 31, 2003,2004, consisted of (in thousands):

 

Raw materials

  $6,932     $6,102

Work in progress

   2,876      3,405

Finished goods

   2,499      2,763
  

     

  $12,307     $12,270
  

     

 

C. Property and Equipment

 

The following is a summary of property and equipment at DecemberMarch 31, 20032004 (in thousands):

 

  

Depreciable Life

In Years


         Depreciable Life
In Years


    

Land

      NA     $393   NA  $393 

Building and building improvements

  5 – 39      3,304   5 - 39   3,327 

Machinery and equipment

  3 – 15      16,811   3 - 15   16,925 

Office equipment and furniture

  5 – 7        4,083   5 - 7   4,383 

Vehicles

      3      212   3   228 

Leasehold improvements

  1 – 10      4,417   1 - 10   4,519 
        


     


Total property and equipment

         29,220       29,775 

Less: accumulated depreciation and amortization

         (18,310)      (18,971)
        


     


Property and equipment, net

        $10,910      $10,804 
        


     


 

D. Debt

 

We haveAs of March 31, 2004, we had a $6.5 million credit facility that expireswas due to expire on October 24, 2004. The facility iswas comprised of a $4.0 million working capital line of credit and a $2.5 million term loan and iswas secured by all of our assets. The working capital line of credit iswas subject to eligibility requirements for current accounts receivable and inventory balances. As of DecemberMarch 31, 2003,2004, we had $85,000$900,000 outstanding under the line of credit and a $1.8 million outstanding term loan balance. As of March 31, 2004, we had approximately $3.9$2.3 million available under the line of credit. The interest rate on the line of credit and term loan iswas prime plus 0.5%. This entire credit facility was refinanced on May 11, 2004.

 

AsOn May 11, 2004, we entered into a new $12.0 million credit facility with a bank. The facility is comprised of December 31, 2003,an $8.0 million working capital line of credit and $4.0 million in term loans secured by all of our assets. The working capital line of credit has a 2.5-year term, interest rate of LIBOR plus 1.75% and is subject to eligibility requirements for current accounts receivable and inventory balances. The term loans consist of a $700,000 ten year term loan with a twenty year amortization, secured by our building at an interest rate of LIBOR plus 2.25%; a $1.8 million four year term loan to refinance our outstanding term loan under the outstanding amountprevious credit facility, secured by equipment, at an interest rate of LIBOR plus 2.10%; and a $1.5 million five year term loan, secured by equipment, at an interest rate of LIBOR plus 2.10%. Monthly payments on the term loan was approximately $2.0 million, of which $1.5 million is classified as long-term debt as we intend and, based on our receipt of proposals to refinance our credit facility from two lenders, believe weloans will be able to refinance our existing credit facility for a term greater than one year on or before its expiration.approximately $62,000 plus interest.

 

On May 2, 1996, we entered into a term loan agreement for $1.1 million, secured by aour building, at an annual interest rate of 8.25%. The loan is due in June 2011 and provides for principal and interest payable in monthly installments of $10,800. The outstanding amount was $714,000$696,000 at DecemberMarch 31, 2003.2004.

 

The composite interest rate on all outstanding debt was 5.90%6.00% at DecemberMarch 31, 2003,2004, and 6.84%6.74% at DecemberMarch 31, 2002.

72003.


E. Commitments

 

We lease part of our manufacturing facilities under non-cancelable operating leases.

 

We lease approximately 74,000 square feet of our manufacturing facilities in Vista, California, from an unaffiliated third party. We have two non-cancelable operating leases, one for approximately 54,000 square feet at 1215 Park Center Drive that we use as a warehousing and blending facility and the other for approximately 20,000 square feet at 1211C Park Center Drive that we use for packaging. Both leases expire in June 2008. However, on October 27, 2003, we entered into a new lease for both facilities, as well as for an additional 46,000 square feet contiguous to our existing space at the 1215 Park Center Drive location. We intend to use the additional space for tableting and encapsulation, which are currently located at our San Marcos, California facility. The new lease begins in April 2004 and expires in March 2014.

 

As required under the terms of the new lease, on January 6, 2004, we provided a letter of credit in the amount of $330,000 to the landlord as collateral. The amount of the letter of credit will automatically be reduced 33.3% each year. The amount of the outstanding letter of credit reduced the availability under our line of credit.

On January 22, 2004, we signed a letter of intent to execute anexecuted our option under the new lease to expand the premises to include an additional 42,000 square feet contiguous to our existing space at 1211C Park Center Drive, for a total of 162,000 square feet of leased space in Vista, California. As we do not require the additional 42,000 square feet immediately, on February 25, 2004, we entered into a sublease agreement with the current tenant. The sublease is for a term of one year beginning April 1, 2004, and provides for monthly rental income equal to our rental expense for the space. We intendplan on using the space to initially subleaseexpand our packaging operations in fiscal 2006.

As required under the terms of the new lease and option to expand the premises, on May 11, 2004, we provided a letter of credit in the amount of $440,000 to the landlord. The amount of the letter of credit will be reduced by approximately 33% each year. The letter of credit reduces the availability under our line of credit by $440,000.

On April 5, 2004, we entered into an agreement with a general contractor to build out the tenant improvements for the additional 46,000 square feet contiguous to our existing space toat the current1215 Park Center Drive location that was leased on October 27, 2003. The agreement is for a term of approximately four months, commencing after building permits are received. We anticipate receiving the permits in June 2004. The agreement includes an approved budget of $3.2 million. Our new lease agreement provides a $960,000 tenant on a monthly basis and to eventually useimprovement allowance that will be funded by our landlord. The remaining $2.2 million will be disbursed over the space for additional packaging operationsterm of the agreement.

 

Minimum rental commitments as of December 31, 2003, (exclusive of property tax, insurance and maintenance) as of March 31, 2004 for the remainder of fiscal 2004 and the following four fiscal years, under all non-cancelable operating leases, (with initial or remaining lease terms in excess of one year) are set forth below (dollars in(in thousands):

 

2004

  $540

2005

   1,327

2006

   1,324

2007

   1,300

2008

   1,314

Thereafter

   6,938
   

   $12,743
   

   2004

  2005

  2006

  2007

  2008

  Thereafter

Gross minimum rental commitments

  $ 258  $ 1,576  $ 1,580  $ 1,564  $ 1,586  $ 8,668

Sublease income commitments

   (68)  (204)  —     —     —     —  
   


 


 

  

  

  

   $ 190  $ 1,372  $ 1,580  $ 1,564  $��1,586  $ 8,668
   


 


 

  

  

  

 

F. Defined Benefit Pension Plan

We sponsor a defined benefit pension plan, which provides retirement benefits to employees based generally on years of service and compensation during the last five years before retirement. Effective June 21, 1999, we adopted an amendment to freeze benefit accruals to the participants. At March 31, 2004, the amortized portion of the unfunded accrued liability for prior service cost, using a 30-year funding period, was approximately $200,000. This amount was accrued. Our policy is to fund the net pension cost accrued. However, we will not contribute an amount less than the minimum funding requirements of the Employee Retirement Income Security Act of 1974 or more than the maximum tax-deductible amount.

The components included in the net periodic benefit cost for the periods indicated are as follows (in thousands):

   Three Months
Ended March 31,


  Nine Months
Ended March 31,


 
   2004

  2003

  2004

  2003

 

Interest cost

  $17  $16  $50  $47 

Expected return on plan assets

   (16)  (17)  (48)  (51)
   


 


 


 


   $1  $(1) $2  $(4)
   


 


 


 


G. Economic Dependency

 

We had substantial net sales to twocertain customers during the periods shown in the following table. The loss of any of these customers could have a material adverse impact on our net sales and earnings. Sales by customer, representing 10% or more of the respective period’s total sales, were (dollars in(in thousands):

 

  Three Months Ended December 31,

 Six Months Ended December 31,

   Three Months Ended March 31,

  Nine Months Ended March 31,

  2003

 2002

 2003

 2002

   2004

  2003

  2004

  2003

  Net Sales by
Customer


  % of Total
Net Sales


 Net Sales by
Customer


  % of Total
Net Sales


 Net Sales by
Customer


  % of Total
Net Sales


 Net Sales by
Customer


  % of Total
Net Sales


   Net Sales by
Customer


  % of Total
Net Sales


  Net Sales by
Customer


  % of Total
Net Sales


  Net Sales by
Customer


  % of Total
Net Sales


  Net Sales by
Customer


  % of Total
Net Sales


Customer 1

  $7,741  45% $5,782  44% $14,669  43% $11,750  45%  $8,510  40%  $5,756  42%  $23,179  42%  $17,234  43%

Customer 2

   4,124  24   3,599  28   8,682  26   6,413  24    6,388  30   4,361  32   15,070  27   10,774  27

Customer 3

   2,036  10   (a)  (a)   (a)  (a)   (a)  (a)
  

  

 

  

 

  

 

  

  

  
  

  
  

  
  

  
  $11,865  69% $9,381  72% $23,351  69% $18,163  69%  $16,934  80%  $10,117  74%  $38,249  69%  $28,008  70%
  

  

 

  

 

  

 

  

  

  
  

  
  

  
  

  

(a)Net sales were less than 10% of total net sales.

 

We buy certain products from a limited number of raw material suppliers. The loss of any of these suppliers could have a material adverse impact on our net sales and earnings.

8


Raw material purchases from any one supplier representing 10% or more of the respective period’s total raw material purchases are shown below (dollars in(in thousands):

 

   Three Months Ended December 31,

  Six Months Ended December 31,

 
   2003

  2002

  2003

  2002

 
   Raw Material
Purchases by
Supplier


  % of Total
Raw
Material
Purchases


  Raw Material
Purchases by
Supplier


  % of Total
Raw
Material
Purchases


  Raw Material
Purchases by
Supplier


  % of Total
Raw
Material
Purchases


  Raw Material
Purchases by
Supplier


  % of Total
Raw
Material
Purchases


 

Supplier 1

  $1,980  24% $1,628  34 % $5,131  17 % $3,163  32 %

Supplier 2

   891  11   601  13   (a) (a)  1,108  11 

Supplier 3

   861  11   (a) (a)  (a) (a)  (a) (a)
   

  

 


 

 


 

 


 

   $3,732  46% $2,229  47 % $5,131  17 % $4,271  43 %
   

  

 


 

 


 

 


 

   Three Months Ended March 31,

  Nine Months Ended March 31,

   2004

  2003

  2004

  2003

   Raw Material
Purchases by
Supplier


  % of Total
Raw
Material
Purchases


  Raw Material
Purchases by
Supplier


  % of Total
Raw
Material
Purchases


  Raw Material
Purchases by
Supplier


  % of Total
Raw
Material
Purchases


  Raw Material
Purchases by
Supplier


  % of Total
Raw
Material
Purchases


Supplier 1

  $2,151  25%  $2,637  39%  $6,969  27%  $5,800  35%

Supplier 2

   950  11   (a)  (a)   (a)  (a)   (a)  (a)

Supplier 3

   889  10   (a)  (a)   (a)  (a)   1,654  10
   

  
  

  
  

  
  

  
   $3,990  46%  $2,637  39%  $6,969  27%  $7,454  45%
   

  
  

  
  

  
  

  

(a)Purchases were less than 10% of total raw material purchases.

G.H. Segment Information

 

Our segment information by geographic area was (dollars in(in thousands):

 

  

Net Sales for the

Three Months

Ended

December 31,


  

Net Sales for the

Six Months

Ended

December 31,


  

Net Sales for the Three

Months Ended March 31,


  Net Sales for the Nine
Months Ended March 31,


  2003

  2002

  2003

  2002

  2004

  2003

  2004

  2003

United States

  $14,951  $11,112  $29,734  $22,339  $ 18,932  $ 12,238  $ 48,666  $ 34,577

Europe

   2,244   1,898   4,182   3,807   2,336   1,517   6,518   5,324
  

  

  

  

  

  

  

  

  $17,195  $13,010  $33,916  $26,146  $ 21,268  $ 13,755  $ 55,184  $ 39,901
  

  

  

  

  

  

  

  

 

  Long Lived Assets

  Total Assets

  Long Lived Assets

  Total Assets

  

December 31,

2003


  

June 30,

2003


  

December 31,

2003


  

June 30,

2003


  March 31,
2004


  June 30,
2003


  March 31,
2004


  June 30,
2003


United States

  $10,186  $9,996  $28,081  $26,724  $10,118  $9,996  $28,777  $26,724

Europe

   1,261   1,362   4,608   4,000   1,224   1,362   5,155   4,000
  

  

  

  

  

  

  

  

  $11,447  $11,358  $32,689  $30,724  $11,342  $11,358  $33,932  $30,724
  

  

  

  

  

  

  

  

 

H.I. 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 sixnine months ended DecemberMarch 31, 2002.2003.

 

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.

9


ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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 sixthree and nine months ended DecemberMarch 31, 2003.2004. 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.

Executive Overview

The following Executive Overview does not address all of the matters covered in the other sections of this Item 2 or other items in this report or contain all of the information that may be important to our stockholders or the investing public. This Executive Overview should be read in conjunction with the other sections of this Item 2 and this report.

Our primary business activity is to provide private label contract manufacturing services to companies that market and distribute vitamins, minerals, herbs, and other nutritional supplements, as well as other health and personal care products, to consumers both within and outside the United States. Our private label contract manufacturing customers include companies that market nutritional supplements through direct sales marketing channels, direct response television and retail stores. Additionally, under our direct-to-consumer (“DTC”) marketing program, we develop, manufacture and market our own products. Under the DTC marketing program, we work with nationally recognized physicians and other personalities to develop brand name products that reflect their individual approaches to restoring, maintaining or improving health. DTC marketing program products are sold through a variety of distribution channels including television programs, print media, radio and the internet. We manufacture products in a variety of forms, including capsules, tablets, chewable wafers, and powders to accommodate a variety of consumer preferences.

We believe the lack of relevant and reliable consumer education about nutrition and nutritional supplementation combined with the duplication of brands and products in the retail sales channel creates a significant opportunity for the direct sales marketing channel. The direct sales marketing channel has proved, and we believe will continue to prove, to be a highly effective method for marketing high quality nutritional supplements as associates personally educate consumers on the benefits of science based nutritional supplements. We believe this education process can lead to premium product pricing and avoid competing with brands of inferior quality and lower pricing in the retail distribution channel. Our two largest customers operate in the direct sales marketing channel and, therefore; our growth has been fueled by the effectiveness of this marketing channel.

We believe the DTC marketing program can be an effective method for marketing our high quality nutritional supplements, as consumers are able to purchase science based nutritional supplements that are explained and recommended by a recognized physician. In March 2000, we launched Basic Nutrient Support, our first product developed in collaboration with Dr. Reginald B. Cherry, M.D. In fiscal 2001, we launched Dr. Cherry’s Pathway to Healing product line. As of March 31, 2004, the product line had grown to include nineteen condition specific custom formulated products. The products are primarily marketed through a weekly television program. This brand has comprised 100% of our DTC net sales as of March 31, 2004. We believe the recent decline in net sales for this brand has been largely due to the reduced effectiveness of the television programming to attract new customers in our primary television market and reduced media spending in new television markets. We are currently investing in upgrading the content and style of the television programs in an effort to attract new customers. We anticipate introducing the upgraded television programs in the second quarter of fiscal 2005. There can be no assurance that our investment in the upgraded television programs will produce higher net sales for this brand.

In April 2003, we introduced our Jennifer O’Neill Signature Line of nutritional supplements and skin care products. The products were marketed through print media and personal appearances. The marketing program did not produce favorable results and, therefore; was terminated in the third quarter of fiscal 2004.

In March 2004, we introduced our Chopra Center Essentials product line. As of March 31, 2004, the product line included eight condition specific custom formulated products. The product line was initially marketed through print media and the transformativehealth.com website. We plan to implement a direct mail marketing strategy in the second quarter of fiscal 2005.

Establishing, building and maintaining brands in the DTC marketing program requires significant cash outlays for product development, initial inventory build, introducing the brand, testing alternative marketing channels, upgrading marketing programs and performing fulfillment activities. Our investments in building new brands for the DTC marketing channel can be of a higher risk than growing our private label contract manufacturing business. We believe, however, that established DTC brands have the long-term potential to improve our operating margins due to higher gross margins than those derived from products sold to private label contract manufacturing customers.

Overall, we believe there is an opportunity to enhance consumer confidence in the quality of our nutritional supplements and their adherence to label claims through the education provided by direct sales and DTC marketing programs. We believe our Good Manufacturing Practices (“GMP”) certified manufacturing operations, science based product formulation, clinical studies and regulatory expertise provide us with a sustainable competitive advantage by providing our customers with a high degree of confidence in our products.

 

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.

 

Revenue Recognition

We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101Revenue Recognition in Financial Statements,” or SAB 101. SAB 101 requires that four basic criteria be met before revenue can be recognized: 1) there is evidence that an arrangement exists; 2) delivery has occurred; 3) the fee is fixed or determinable; and 4) collectibility is reasonably assured. We recognize revenue upon determination that all criteria for revenue recognition have been met. The criteria are usually met at the time title passes to the customer, which usually occurs upon shipment. Revenue from shipments where title passes upon delivery is deferred until the shipment has been delivered.

Additionally, we record reductions to gross revenue for estimated returns of private label contract manufacturing products and DTC products. The estimated returns are based upon the trailing six months of private label contract manufacturing gross sales and our historical experience for both private label contract manufacturing and DTC product returns. However, the estimate for product returns does not reflect the impact of a large product return resulting from changes in regulatory requirements, product nonconformance or other factors as such events are not predictable nor is the related economic impact estimable.

Inventory Reserve

We operate primarily as a private label contract manufacturer that builds products following receipt of customer specific purchase orders. As a result, we have limited realization risk in finished goods and work-in-process inventories. Our critical accounting policiesinventory reserve primarily relates to realization risk for raw materials. Our estimate to reduce inventory to net realizable value is based upon expiration of the raw materials’ efficacy, foreseeable demand of raw materials, market conditions and specific factors that arise from time to time related to regulatory and other factors. The reserve level reflects our historical experience. If demand and/or market conditions are discussedless favorable than we estimate, additional inventory reserves may be required.

Accounting for Income Taxes

We estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure, together with assessing temporary differences resulting from differing treatment of items, such as property 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 examination reviews. At March 31, 2004, we assessed the need for a valuation allowance on our 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 on the limited historical taxable income and the uncertainty about sufficient near term taxable income, we believe that this evidence creates sufficient uncertainty about the realizability of the net deferred tax assets. Therefore, a full valuation allowance was recorded at March 31, 2004.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts to reflect our estimate of current and past due receivable balances that could not be collected. The allowance for doubtful accounts is based upon the current month private label contract manufacturing gross sales and a review of specific accounts. We believe that the allowance for doubtful accounts is adequate to cover anticipated losses in the receivable balance under Item 7current conditions; however significant deterioration in the financial condition of our customers, resulting in an impairment of their ability to make payments, could materially change these expectations and additional allowance may be required.

Defined benefit pension plan

The plan obligation and related assets of the defined benefit retirement plan are presented in the Notes to Consolidated Financial Statements included in our 2003 Annual Report. TherePlan assets, which consist primarily of marketable equity and debt instruments, are valued based upon third party market quotations. Independent actuaries through the use of a number of assumptions determine plan obligation and annual pension expense. Key assumptions in measuring the plan obligation include the discount rate and estimated future return on plan assets. In determining the discount rate, the actuary utilizes an average long-term bond yield. Asset returns are based upon the historical returns of multiple asset classes to develop a risk free rate of return and risk premiums for each asset class. The overall rate for each asset class was developed by combining a long-term inflation component, the risk free rate of return and the associated risk premium. A weighted average rate is developed based on the overall rates and the plan’s asset allocation.

We have been no significant changesdiscussed the development and selection of these critical accounting policies with the Audit Committee of our Board of Directors and the Audit Committee has reviewed our disclosure relating to these policies during the six months ended December 31, 2003.policies.

 

Recent Developments

 

On January 22, 2004, in an effort to enhancewe executed the option under our long-term manufacturing capacity and improve efficiency of our operations, we signed a letter of intent to execute our optionoperating lease to expand the premises contiguous to our packaging operations. Theinclude an additional 42,000 square feet will initially be subleasedcontiguous to our existing space at 1211C Park Center Drive, for a total of 162,000 square feet of leased space in Vista, California. As we do not require the additional 42,000 square feet immediately, on February 25, 2004, we entered into a sublease agreement with the current tenanttenant. The sublease is for a term of one year beginning April 1, 2004, and provides for monthly rental income equal to our monthly rental expense for the space. We plan on a monthly basis. We intend to utilizeusing the space to expand our packaging operations in fiscal 2006.

On April 5, 2004, we entered into an agreement with a general contractor to build out the tenant improvements for additional packaging operations.46,000 square feet contiguous to our existing space at the 1215 Park Center Drive location that was leased on October 27, 2003. The agreement is for a term of approximately four months, commencing after building permits are received. The agreement includes an approved budget of $3.2 million. Our new lease agreement provides a $960,000 tenant improvement allowance that will be funded by our landlord. The remaining $2.2 million will be disbursed over the term of the agreement.

On May 11, 2004, we entered into a new $12.0 million credit facility with a bank. The facility is comprised of an $8.0 million working capital line of credit and $4.0 million in term loans and is secured by all of our assets. The working capital line of credit has a 2.5-year term, interest rate of LIBOR plus 1.75% and is subject to eligibility requirements for current accounts receivable and inventory balances. The term loans consist of a $700,000 ten year term loan with a twenty year amortization, secured by our building at an interest rate of LIBOR plus 2.25%; a $1.8 million four year term loan to refinance our outstanding term loan under the previous credit facility, secured by equipment, at an interest rate of LIBOR plus 2.10%; and a $1.5 million five year term loan, secured by equipment, at an interest rate of LIBOR plus 2.10%. Monthly payments on the term loans will be approximately $62,000 plus interest.

 

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 numbervariety of customers.factors.

 

Results of Operations—Operations – Three Months Ended DecemberMarch 31, 20032004 vs. Three Months Ended DecemberMarch 31, 20022003

 

Net Sales

 

  Three Months Ended December 31,

  Three Months Ended March 31,

  2003

  2002

  2004

  2003

  (in thousands)  (in thousands)

Private Label Contract Manufacturing

  $14,731  $10,595  $18,966  $11,259

Direct-to-Consumer Marketing Program

   2,464   2,415   2,302   2,496
  

  

  

  

Total Net Sales

  $17,195  $13,010  $ 21,268  $ 13,755
  

  

  

  

 

Total net sales for the quarter ended DecemberMarch 31, 20032004 increased $4.2$7.5 million, or 32%55% over the comparable quarter last year. The net sales growth resulted from a $4.1$7.7 million, or 39%68%, increase in private label contract manufacturing sales andoffset by a $49,000,($194,000), or 2%8%, increasedecrease in DTC net sales from our direct-to-consumer marketing program. sales.

The increase in private label contract manufacturing sales was due primarily to an increase of $2.5$4.8 million in net sales forto our two largest customers, due toincluding $1.4 million from new product salesproducts and an increase in volumes of$3.4 million from established products. Additionally, we had netthe increase in private label contract manufacturing sales of $1.8included $3.2 million of new products formulated for new private label contract manufacturing customers. Looking forward, we anticipate moderate growth in private label contract manufacturing sales in the fourth quarter of approximately 4% to 6% over the third quarter of fiscal 2004.

The decrease in DTC sales was partially offset bydue to a slightreduction in our media spending investment in new television markets for the Dr. Cherry Pathway to moderate declineHealing brand, as the investment did not produce what we considered to be adequate results. Additionally, we experienced a reduction in net salesnew customer acquisitions from our direct-to-consumer marketing program.primary television market, while the average order value remained consistent. During the third quarter we identified opportunities to improve the content and style of the television programs. We anticipate introducing the upgraded television programs in the second quarter of fiscal 2005. Looking forward, we anticipate a further reduction in DTC sales over the near term.

 

10


Gross Profit

 

  Three Months Ended
December 31,


   Three Months Ended March 31,

  2003

 2002

   2004

  2003

  (in thousands)   (in thousands)

Gross Profit

  $3,895  $3,052   $5,053     $3,287   

As a Percentage of Net Sales

   22.7%  23.5%   23.8%   23.9%

 

Gross profit margin was consistent at 23.8% for the three months ended March 31, 2004 compared to 23.9% for the comparable quarter last year. The gross profit margin remained consistent due to a 1.5 percentage point increase in material cost as a percentage of net sales, offset by a 1.4 percentage point decrease in labor and overhead as a percentage of net sales. Looking forward, we expect our quarterly gross profit margin to 22.7% from 23.5% was primarily due to an increase in material cost. remain relatively consistent with the third quarter of fiscal 2004.

Our material cost as a percentage of net sales was 52.3%54.3% ($9.011.5 million) infor the three months ended DecemberMarch 31, 20032004 and 51.5%52.8% ($6.77.3 million) infor the comparable quarter last year. The increase in material cost as a percentage of net sales was primarily due to recording additional inventory reserves of $300,000 during$145,000 for raw materials identified as slow moving or for which there has been limited demand. Additionally, inventory reserves of $111,000 were recorded for Jennifer O’Neill Signature Line products along with $120,000 of remaining royalty payments due to Jennifer O’Neill as of March 31, 2004 as a result of terminating the three months ended December 31, 2003 for specific inventory realization risks,Jennifer O’Neill Signature Line brand. These charges were partially offset by a favorable shift in our sales mix from lower to higher margin products. The inventory allowanceproducts of $84,000.

Our labor and overhead expenses as a percentage of gross inventory at December 31, 2003 remained consistent with June 30, 2003. Our direct and indirect manufacturing expensesnet sales were consistent at 25.0% of net sales21.9% ($4.7 million) for the three months ended DecemberMarch 31, 20032004 compared to 25.1% in23.3% ($3.2 million) for the comparable quarter last year. Looking forward we anticipate gross marginThe decrease in labor and overhead as a percentage of net sales was primarily due to improve slightly.fixed cost leverage on higher net sales.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses were $3.3$4.0 million (19.5%(19.0% of net sales) in the three months ended DecemberMarch 31, 2003, compared to $2.8$3.1 million (21.5%(22.4% of net sales) in the comparable quarter last year. The increase in absolute dollars of $971,000 was primarily due to the additional direct-to-consumer media$600,000 for anticipated compensation payments under our fiscal 2004 Management Incentive Plan, $109,000 in compensation and productionrelocation costs of $156,000 to market the Dr. Cherry’s Pathway to HealingTM brandstrengthen our research and development team, $135,000 in several new television markets, sales personnel costs of $82,000,property, product liability and general liability insurance premiums, of $115,000$88,000 in sales commissions, $51,000 for clinical studies, $34,000 in pension expense, $34,000 in bad debt expense for inherent collection risks and $65,000 for additional pension expense. Our investment$31,000 in expandingregulatory consulting, partially offset by the Dr. Cherry’s Pathway to Healing brand to new television markets produced results that did not meet$200,000 reduction in our expectations. We are evaluating our marketing plan in the fiscal third quarter in an effort to strengthen the Dr. Cherry’s Pathway to Healing brand.DTC media investment. Looking forward, we anticipate selling, general and administrative expenses for the fourth quarter of fiscal 2004 to increase modestly due to incentive compensation costs.remain relatively consistent as a percentage of net sales with the third quarter of fiscal 2004.

 

Income from Operations

 

Our income from operations was $549,000$1.0 million for the three months ended DecemberMarch 31, 2003,2004, compared to $255,000$211,000 in the comparable quarter last year. The improvement in our income from operations was due to the increase in gross profit of $843,000 from higher net sales, partially offset by incremental selling, general and administrative expenses of $549,000.

Other income (expense)

Other income (expense) was $63,000 for the three months ended December 31, 2003, compared to ($99,000) in the comparable quarter last year. The improvement was primarily due to the increase of $141,000 in foreign exchange gains on the translation of Euro denominated cash and receivables.

Net Income

Our net income was $576,000 ($0.09 per diluted share) for the three months ended December 31, 2003 compared to $149,000 ($0.02 per diluted share) in the comparable quarter last year. The net income improvement was due to the increase in income from operations of $294,000 combined with an increase in other income of $162,000.

11


Results of Operations—Six Months Ended December 31, 2003 vs. Six Months Ended December 31, 2002

Net Sales

   Six Months Ended
December 31,


   2003

  2002

   (in thousands)

Private Label Contract Manufacturing

  $28,449  $21,120

Direct-to-Consumer Marketing Program

   5,467   5,026
   

  

Total Net Sales

  $33,916  $26,146
   

  

Total net sales for the six months ended December 31, 2003 increased $7.8 million, or 30%, over the comparable period last year. The net sales growth resulted from a $7.3 million, or 35%, increase in private label contract manufacturing sales and a $441,000, or 9%, increase in net sales from our direct-to-consumer marketing program. The increase in private label contract manufacturing sales was due primarily to an increase of $5.2 million in net sales for our two largest customers due to new product sales and an increase in volumes of established products. Additionally, we had net sales of $2.5 million of new products formulated for new private label contract manufacturing customers.

Gross Profit

   Six Months Ended
December 31,


 
   2003

  2002

 
   (in thousands) 

Gross Profit

  $8,041  $6,247 

As a Percentage of Net Sales

   23.7%  23.9%

Gross profit margin was consistent at 23.7% for the six months ended December 31, 2003 compared to 23.9% for the comparable period last year. Our direct and indirect manufacturing expenses were 23.1% of net sales for the six months ended December 31, 2003 and 24.0% of net sales in the comparable period last year. The decrease in direct and indirect manufacturing expenses was due to improved fixed cost leverage on higher net sales. Our material cost as a percentage of net sales was 53.2% ($18.0 million) for the six months ended December 31, 2003 and 52.1% ($13.6 million) in the comparable period last year. The increase in material cost as a percentage of net sales was primarily due to recording additional inventory reserves of $653,000 during the six months ended December 31, 2003 for specific inventory realization risks, partially offset by a favorable shift in sales mix. The inventory allowance as a percentage of gross inventory at December 31, 2003 remained consistent with June 30, 2003.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $6.9 million (20.2% of net sales) in the six months ended December 31, 2003, compared to $5.6 million (21.4% of net sales) in the comparable period last year. The increase in absolute dollars was primarily due to additional direct-to-consumer media and production costs of $354,000 to market the Dr. Cherry’s Pathway to HealingTM brand in several new television markets, sales personnel costs of $117,000, research and development personnel and professional costs of $202,000 for strengthening regulatory compliance, insurance premiums of $187,000, public company reporting and compliance matters of $71,000, bad debt allowance of $60,000 and $89,000 for additional pension expense.

Income from Operations

Our income from operations was $1.2 million for the six months ended December 31, 2003 compared to $658,000 in the comparable period last year. The improvement in our income from operations was due to the increase in gross profit of $1.8 million from higher net sales, partially offset by incremental selling, general and administrative expenses of $1.3 million.$971,000.

 

12


Other income (expense)

 

Other income (expense) was $22,000($138,000) for the sixthree months ended DecemberMarch 31, 2003,2004, compared to $43,000($33,000) in the comparable quarter last year. The decrease was primarily due to the increase of $63,000 in foreign exchange losses on the translation of Euro denominated cash and receivables. Looking forward, in the fourth quarter of fiscal 2004 we anticipate incurring a $30,000 prepayment penalty, in addition to a $37,000 write-off of deferred loan origination costs as a result of refinancing our credit facility. Additionally, if the US dollar continues to strengthen against the Euro in the fourth quarter of fiscal 2004, we anticipate incurring additional foreign exchange losses for the translation of Euro denominated cash and receivables.

Income taxes

Based on the historical operating losses and the uncertainty about sufficient near term taxable income, a full valuation allowance was recorded at March 31, 2004. If we continue to achieve operating results comparable to recent quarters, we anticipate a reduction of the valuation allowance and the recognition of a deferred tax benefit in the fourth quarter of fiscal 2004.

Net Income

Our net income was $855,000 ($0.13 per diluted share) for the three months ended March 31, 2004 compared to $172,000 ($0.03 per diluted share) in the comparable quarter last year. The net income improvement was due to the increase in income from operations of $795,000 offset by an increase in other expense of $105,000.

Results of Operations – Nine Months Ended March 31, 2004 vs. Nine Months Ended March 31, 2003

Net Sales

   Nine Months Ended March 31,

   2004

  2003

   (in thousands)

Private Label Contract Manufacturing

  $47,415  $32,379

Direct-to-Consumer Marketing Program

   7,769   7,522
   

  

Total Net Sales

  $ 55,184  $ 39,901
   

  

Total net sales for the nine months ended March 31, 2004 increased $15.3 million, or 38%, over the comparable period last year. The net sales growth resulted from a $15.0 million, or 46%, increase in private label contract manufacturing sales and a $247,000, or 3%, increase in net sales from our direct-to-consumer marketing program.

The increase in private label contract manufacturing sales was due primarily to an increase of $10.2 million in net sales for our two largest customers, including $2.9 million from new products and $7.3 million from established products. Additionally, the increase in private label contract manufacturing sales included $5.7 million of new products formulated for new private label contract manufacturing customers.

Gross Profit

   Nine Months Ended March 31,

 
   2004

  2003

 
   (in thousands) 

Gross Profit

  $13,094  $9,534 

As a Percentage of Net Sales

   23.7%  23.9%

Gross profit margin was consistent at 23.7% for the nine months ended March 31, 2004 compared to 23.9% for the comparable period last year. The gross profit margin remained consistent due to a 1.2 percentage point increase in material cost as a percentage of net sales, offset by a 1.0 percentage point decrease in labor and overhead as a percentage of net sales.

Our material cost as a percentage of net sales was 53.6% ($29.6 million) in the nine months ended March 31, 2004 and 52.4% ($20.9 million) in the comparable period last year. The increase in material cost as a percentage of net sales was primarily due to recording inventory reserves of $779,000 for specific inventory realization risks and $111,000 for Jennifer O’Neill Signature Line products as a result of terminating the Jennifer O’Neill Signature Line brand. Additionally, incremental royalty payments of $220,000 were recognized for Jennifer O’Neill and Deepak Chopra. These charges were partially offset by a favorable shift in our sales mix to higher margin products of $800,000.

Our labor and overhead expenses as a percentage of net sales were 22.7% ($12.5 million) for the nine months ended March 31, 2004 compared to 23.7% ($9.5 million) in the comparable period last year. The decrease in labor and overhead as a percentage of net sales was primarily due to fixed cost leveraging on higher net sales.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $10.9 million (19.8% of net sales) in the nine months ended March 31, 2004, compared to $8.7 million (21.7% of net sales) in the comparable period last year. The increase in absolute dollars of $2.2 million was primarily due to the additional $690,000 for anticipated compensation payments under our fiscal 2004 Management Incentive Plan, $319,000 in property, product liability and general liability insurance premiums, $194,000 in regulatory consulting, $185,000 in compensation and relocation costs to strengthen our research and development team, $185,000 in DTC media investment, $184,000 in sales commissions, $139,000 in pension expense and $96,000 in bad debt expense.

Income from Operations

Our income from operations was $2.2 million for the nine months ended March 31, 2004 compared to $869,000 in the comparable period last year. The improvement in our income from operations was due to the increase in gross profit of $3.6 million from higher net sales, partially offset by incremental selling, general and administrative expenses of $2.2 million.

Other income (expense)

Other income (expense) was ($116,000) for the nine months ended March 31, 2004, compared to $10,000 in the comparable period last year. The decrease in other income (expense) was primarily due to the prior year proceeds from the settlement of claims associated with the vitamin antitrust litigation of $225,000, partially offset by $162,000a $99,000 increase in foreign exchange gains onin fiscal 2004 from the translation of Euro denominated cash and receivables.

 

Net Income

 

Our net income was $1.1$2.0 million ($0.190.32 per diluted share) for the sixnine months ended DecemberMarch 31, 20032004 compared to $686,000$858,000 ($0.110.14 per diluted share) in the comparable period last year. The net income improvement was due to the increase in income from operations of $521,000.$1.3 million offset by an increase in other expense of $126,000. Excluding the effects of litigation settlement proceeds of $225,000 in the first quarter of fiscal 2003, net income increased $1.4 million or $0.21 per diluted share.

 

Liquidity and Capital Resources

 

Our working capital increased in the sixnine months ended DecemberMarch 31, 20032004 to $13.2$14.2 million versus $12.3 million at June 30, 2003. Cash and cash equivalents decreased $2.6$2.3 million primarily as a result of an increase of $4.5$4.4 million in inventory. Inventory increased primarily due to customer requirements and anticipatedpotential revenue growth.

 

Accounts receivable, decreased $650,000net of the allowance for doubtful accounts, increased $661,000 at DecemberMarch 31, 20032004 compared to June 30, 2003 due to a reductionthe increase in the number ofnet sales. Days sales outstanding decreased to 23 days sales outstandingat March 31, 2004 from 26 days to 24 days.at June 30, 2003. Accounts payable as a percentage of inventory was 44%30% at DecemberMarch 31, 20032004 versus 64% at June 30, 2003 due to timing of disbursements to vendors.

 

Approximately $950,000$1.5 million of our operating cash flow was generated by NAIE in the sixnine months ended DecemberMarch 31, 2003. There are currently2004. As of March 31, 2004, there were no material restrictions on the transfer of these funds within the Company.

 

Capital expenditures for the sixnine months ended DecemberMarch 31, 20032004 were approximately $1.4$2.0 million. These expenditures were primarilyincluded approximately $1.3 million for the continuing investment in our domestic manufacturing equipment of approximately $1.1 million.equipment. We plan on significantly increasinginvesting approximately $1.0 million of capital expenditures in the remaining six monthsfourth quarter of fiscal 2004 to expand manufacturing capacity and improve efficiency in encapsulation, tableting and packaging operations. Additionally, in the first four months of fiscal 2005 we plan on investing $2.2 million in tenant improvements, net of a $960,000 tenant improvement allowance that will be funded by our landlord, to build out the 46,000 square feet contiguous to our existing space at 1215 Park Center Drive.

Our consolidated debt decreasedincreased to $2.8$3.4 million at DecemberMarch 31, 20032004 from $3.0 million at June 30, 2003. Our consolidated debt of $2.8$3.4 million includesincluded a $714,000$696,000 term loan secured by aour building. Additionally, as of March 31, 2004, we have outstandinghad a $2.0$1.8 million term loan outstanding and $85,000a $900,000 working capital line of credit balance that arewere part of a credit facility that expireswas due to expire in October 2004. The credit facility was secured by all of our assets. The working capital line of credit was subject to eligibility requirements for current accounts receivable and inventory balances. As of March 31, 2004, we had $2.3 million available under the line of credit, net of the outstanding letter of credit. The interest rate on the term loan and line of credit was prime plus 0.5%.

On May 11, 2004 we entered into a new $12.0 million credit facility with a bank to refinance our existing credit facility. The new facility is comprised of an $8.0 million working capital line of credit and $4.0 million in term loans and is secured by all of our assets. The working capital line of credit has a 2.5-year term, interest rate of LIBOR plus 1.75% and is subject to eligibility requirements for current accounts receivable and inventory balances. AsThe term loans consist of December 31, 2003, we had $3.9a $700,000 ten year term loan with a twenty year amortization, secured by our building at an interest rate of LIBOR plus 2.25%; a $1.8 million availablefour year term loan to refinance our outstanding term loan under the previous credit facility, secured by equipment, at an interest rate of LIBOR plus 2.10%; and a $1.5 million five year term loan, secured by equipment, at an interest rate of LIBOR plus 2.10%. Monthly payments on the new term loans will be approximately $62,000 plus interest.

The new credit facility provided a $2.2 million increase in our cash position and an additional $4.4 million in borrowing capacity from the line of credit. The interest rate on the term loan and line of credit, is prime plus 0.5%.

As of December 31, 2003, approximately $1.5 million of the outstanding balance on our term loan was classified as long-term debt as we intend and, based on our receipt of proposals to refinance our credit facility from two lenders, believe we will be able to refinance our existing credit facility for a term greater than one year on or before its expiration. There is no assurance, however, that we will in fact be able to refinance the credit facility. If we are unable to do so, we would need to pay the outstanding balance on the credit facility on or before October 24, 2004 from our available cash balance at that time. While we believe we would be able to do so, there can be no guarantee that we will have sufficient available cash when and if needed.

On January 6, 2004, as required by our new lease, we provided a letter of credit to the landlord, as collateral, in the amount of $330,000. The amountnet of the letter of credit will automatically reduce by 33.3% per year. The amount outstandingissued on the letter of creditMay 11, 2004 to our landlord, which reduced the availability under ourthe line of credit.credit by $440,000.

 

We plan on funding our current working capital needs, capital expenditures and debt payments using cash flow from operations and our existingnew credit facility. Additionally, we are evaluating expanding our credit facility to provide sufficient capital for our long-term growth strategies.

 

13


At December 31, 2003, we had no outstanding option contracts. There are no other derivative financial instruments at December 31, 2003. On January 6, 2004 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 hadhave a notional amount of $8.3 million and a purchase price of $55,000. The premium associated with each option contract is marked-to-market and realized gains or losses are recognized on the settlement date in cost of goods sold. For the nine months ended March 31, 2004 approximately $22,000 had been charged to cost of goods sold for options contracts outstanding during the year. The risk of loss associated with purchased options is limited to premium amounts paid for the option contracts.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet debt nor do we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any special purposes entities.unconsolidated entities or other persons that may have a material current or future effect on financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses.

Contractual Obligations

 

This table summarizes our known contractual obligations and commercial commitments at December 31, 2003May 11, 2004 (in thousands).

 

Contractual

Obligations


    Total

    Fiscal
2004


    Fiscal
2005


    Fiscal
2006


    Fiscal
2007


    Fiscal
2008


    Thereafter

Long-term Debt

    $2,672    $286    $1,784    $83    $90    $97    $332

Operating Leases

     12,743     540     1,327     1,324     1,300     1,314     6,938

Purchase Obligation(1)

     457     276     181     —       —       —       —  
     

    

    

    

    

    

    

Total Obligations

    $15,872    $1,102    $3,292    $1,407    $1,390    $1,411    $7,270
     

    

    

    

    

    

    

(1) On October 20, 2003 we entered into a purchase obligation for certain raw materials from a supplier for one year. Raw materials are to be delivered by the supplier as needed. This obligation is not recorded in our consolidated financial statements until delivery of raw material has occurred.

Contractual Obligations


  Total

  Less Than
1 Year


  1 – 3
Years


  3 – 5
Years


  More Than
5 Years


Long-term Debt

  $4,739  $830  $949  $1,005  $1,955

Operating Leases(1)

   14,810   1,069   3,096   3,108   7,537

Construction agreement(2)

   2,192   2,192   —     —     —  

Purchase Obligation(3)

   246   246   —     —     —  
   

  

  

  

  

Total Obligations

  $21,987  $4,337  $4,045  $4,113  $9,492
   

  

  

  

  


(1)Operating lease obligations are shown net of $249,000 in sublease rental income that should be received through March 2005.
(2)Construction agreement obligation is shown net of $960,000 tenant improvement allowance provided under our lease agreement signed on October 27, 2003.
(3)On October 20, 2003 we entered into a purchase obligation for certain raw materials from a supplier for one year. Raw materials are to be delivered by the supplier as needed. This obligation is not recorded in our consolidated financial statements until delivery of raw material has occurred.

 

Recent Accounting Pronouncements

 

Recent accounting pronouncements are discussedIn January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51”. FIN 46 was revised in December 2003 and clarifies the application of ARB 51 to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. The application of FIN 46 may require that an entity be subject to consolidation even though the investor does not have a controlling financial interest that, under Item 7ARB 51, was usually deemed to exist through ownership of our 2003 Annual Report. Asa majority voting interest. FIN 46, as revised, is generally effective for all entities subject to the interpretation no later than the end of December 31, 2003, we are not awarethe first reporting period that ends after March 15, 2004. We currently have no investments in entities within the scope of any additional pronouncements that materiallyFIN 46 and as a result the application of FIN 46 had no material effect on our financial positionstatements.

In December 2003, the FASB revised Statement of Financial Accounting Standards No. 132, “Employers’ Disclosures about Pension and Other Postretirement Benefits” (“Revised Statement 132”). Revised Statement 132 revises employers’ required disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by FASB Statements No. 87, “Employers’ Accounting for Pensions”, No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits” and No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”. Revised Statement 132 requires disclosures in addition to those in the original FASB No. 132. Revised Statement 132 is effective for financial statements with fiscal years ending after December 15, 2003. The interim period disclosures required by Revised Statement 132 are effective for interim periods beginning after December 15, 2003. We adopted Revised Statement 132 beginning in the third quarter of fiscal 2004 and it did not have a material impact on our financial statements or related footnotes.

In March 2004, the FASB issued an exposure document entitled “Share-Based Payment - an amendment of Statements No. 123 and 95 (Proposed Statement of Financial Accounting Standards)”. The proposed statement would eliminate the ability to account for share-based compensation transactions using APB Opinion No. 25 and generally require instead that such transactions be accounted for using a fair-value-based method. This accounting, if approved, will result in significant compensation expense charges to our future results of operations. The proposed statement, if adopted, would be applied to public entities prospectively for fiscal years beginning after December 15, 2004, as if all share-based compensation awards granted, modified, or settled after December 15, 2004, had been accounted for using the fair-value method of accounting. Retrospective application of the proposed statement is not permitted.

 

Risks

 

You should carefully consider the risks described under Item 7 of our 2003 Annual Report, as well as the other information in our 2003 Annual Report and in this report, when evaluating our business and future prospects. If any of the identified risks actually occur, our business, financial condition and results of operations could be seriously harmed. In that event, the market price of our common stock could decline and you could lose all or a portion of the value of your investment in our common stock.

14


ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to market risk, which is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange and interest rates. We generally do not enter into derivatives or other financial instruments for trading or speculative purposes. We may, however, enter into financial instruments to try to manage and reduce the impact of changes in foreign currency exchange rates. We cannot predict with any certainty our future 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 DecemberMarch 31, 2003,2004, we had fixed rate debt of $714,000$696,000 and variable rate debt of approximately $2.1$2.7 million. The interest rate on our variable rate debt iswas equal to prime plus 0.5%, and was 4.5% as of DecemberMarch 31, 2003.2004. An immediate one hundred basis point (1%(1.0%) increase in the interest rate on our variable rate debt, holding other variables constant, would increase our interest expense by $11,000$23,000 for the sixnine months ended DecemberMarch 31, 2003.2004. We intend to refinancerefinanced our credit facility on or before October 24,May 11, 2004. If we do refinance our credit facility, theThe new facility may have different terms than our existing facility, which may include differentincludes variable interest rates.rates ranging from LIBOR plus 1.75% to LIBOR plus 2.25%. 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.

As of December 31, 2003, we had no outstanding purchased options.

On January 6, 2004, 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 $8.3 million and a purchase price of $55,000. The risk of loss associated with the options is limited to premium amounts paid for the option contracts. As of March 31, 2004, we had not exercised any of the options and three of the options had expired.

 

On DecemberMarch 31, 2003,2004, the Swiss Franc closed at 1.241.28 to 1.00 United States dollar and the Euro closed at 0.800.82 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 the sixnine months ended DecemberMarch 31, 20032004 by $555,000.$1.1 million.

15


ITEM 4.CONTROLS AND PROCEDURES

ITEM 4. CONTROLS AND PROCEDURES

 

We maintain certain disclosure controls and procedures. They are designed to help ensure that material information is: (1) gathered and communicated to our management, including our principal executive and financial officers, on a 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, evaluated the effectiveness of our disclosure controls and procedures as of DecemberMarch 31, 2003.2004. Based on their evaluation, they concluded that our disclosure controls and procedures were effective for their intended purpose described above. There were no changes to our internal controls during the quarterly period ended DecemberMarch 31, 20032004 that have materially affected, or that are reasonably likely to materially affect, our internal controls.

 

PART II—II - OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

ITEM 1. LEGAL PROCEEDINGS

 

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.

 

As of February 6,May 17, 2004, 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

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

 

None.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None.Our annual meeting of stockholders was held on January 30, 2004. The following table sets forth the matters voted upon at the meeting and the results of the voting on each matter voted upon:

 

Matter Voted Upon


  

Votes

For


  Withheld

  Votes
Against


  Abstentions

  Broker
Non-Votes


Election of two Class I directors to serve until the next annual meeting of stockholders held to elect Class I directors and until their successors are elected and qualified:

               

Mark A. LeDoux

  5,014,948  398,378  —    —    —  

Joe E. Davis

  5,013,246  400,080  —    —    —  

Approval of an amendment to our 1999 Omnibus Equity Incentive Plan, including an increase of 500,000 shares authorized for issuance under the plan

  2,085,650  —    609,798  59,111  5,413,326

Ratification of the selection of Ernst & Young LLP as our independent auditors for the fiscal year ending June 30, 2004

  5,385,920  —    13,675  13,731  420,721

In accordance with the terms set forth in the proxy statement related to the solicitation of proxies for use at the annual meeting, an abstention from voting was used for the purpose of establishing a quorum, and was considered a vote “against” a proposal. A broker non-vote was also used for the purpose of establishing a quorum, but was not counted in the voting process. Each of the above directors and matters was approved by the stockholders at the annual meeting.

ITEM 5.OTHER INFORMATION

ITEM 5. OTHER INFORMATION

 

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:

 

16ITEM 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


3(i) 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) By-laws of Natural Alternatives International, Inc. dated as of December 21, 1990 NAI’s Registration Statement on Form S-1 (File No. 33-44292) filed with the commission on December 21, 1992
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 Exhibit 10.3 of NAI’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003, filed with the commission on November 5, 2003
10.4 Form of Executive Employment Agreement dated as of September 13, 2003, by and between NAI and Mark Zimmerman Exhibit 10.4 of NAI’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003, filed with the commission on November 5, 2003
10.5 Form of Executive Employment Agreement dated as of September 13, 2003, by and between NAI and Randell Weaver Exhibit 10.5 of NAI’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003, filed with the commission on November 5, 2003
10.6 Form of Executive Employment Agreement dated as of September 13, 2003, by and between NAI and Mark A. LeDoux Exhibit 10.6 of NAI’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003, filed with the commission on November 5, 2003
10.7 Form of Executive Employment Agreement dated as of September 13, 2003, by and between NAI and John Wise Exhibit 10.7 of NAI’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003, filed with the commission on November 5, 2003
10.8 Form of Executive Employment Agreement dated as of September 13, 2003, by and between NAI and John Reaves Exhibit 10.8 of NAI’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003, filed with the commission on November 5, 2003
10.9 Form of Executive Employment Agreement dated as of September 13, 2003, by and between NAI and Timothy E. Belanger Exhibit 10.9 of NAI’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003, filed with the commission on November 5, 2003
10.10 Lease of Facilities in Vista, California between NAI and Calwest Industrial Properties, LLC, a California limited liability company dated October 27, 2003 Exhibit 10.10 of NAI’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003, filed with the commission on November 5, 2003
10.11Credit Agreement dated as of May 1, 2004 by and between NAI and Wells Fargo Bank, National AssociationFiled 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

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(b) Reports on Form 8-K

 

On October 27, 2003,February 2, 2004, we filed a Current Report on Form 8-K with the SEC that included a press release issued on October 27, 2003,February 2, 2004, announcing our financial results for the firstsecond quarter ended September 30,December 31, 2003. This report was the only report on Form 8-K that we filed during the quarterly period ended DecemberMarch 31, 2003.2004.

 

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SIGNATURES

 

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: February 6,May 17, 2004

 

NATURAL ALTERNATIVES INTERNATIONAL, INC.

By:

 

/s/ John R. Reaves


  

John R. Reaves, Chief Financial Officer

 

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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