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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-15701
NATURAL ALTERNATIVES INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1007839
(State of other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1185 LINDA VISTA DRIVE, SAN MARCOS, CALIFORNIA 92069
(Address of principal executive offices)
(Zip Code)
(760) 744-7340
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
5,777,289
(Number of shares of common stock of the registrant outstanding,
net of treasury shares held, as of May 14, 2001
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I -- FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31 June 30
(Amounts in thousands except share data) 2001 2000
------- -------
(unaudited) (audited)
Current Assets:
Cash and cash equivalents $ 485 $ 815
Accounts receivable - less allowance for doubtful
accounts of $495 at March 31, 2000 and
$330 at June 30, 2000 3,735 4,097
Inventories (Note 2) 6,643 7,627
Income tax refund receivable -- 1,500
Deferred income taxes 1,467 1,467
Related parties notes receivable - current portion (Note 7) 12 815
Prepaid expenses 767 635
Deposits 506 390
Other current assets 168 110
------- -------
Total Current Assets 13,783 17,456
------- -------
Property and equipment, net 14,100 15,037
------- -------
Other Assets:
Deferred income taxes 1,935 1,592
Investments 44 232
Related parties notes receivable, less current portion (Note 7) 530 444
Investment in intangible assets acquired (Notes 8 and 9) 1,217 --
Other noncurrent assets, net 114 114
------- -------
Total Other Assets 3,840 2,382
------- -------
TOTAL ASSETS $31,723 $34,875
======= =======
See accompanying notes to unaudited financial statements.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I -- FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31 June 30
(Amounts in thousands except share data) 2001 2000
-------- --------
(unaudited) (audited)
Current Liabilities:
Accounts payable $ 3,991 $ 4,422
Lines of credit and notes payable (Note 5) 771 4,544
Current installments of long-term debt (Note 5) 845 490
Income taxes payable 43 --
Accrual for loss on lease obligation -- 50
Accrued compensation and employee benefits 425 355
-------- --------
Total Current Liabilities 6,075 9,861
Deferred income taxes 766 766
Long-term debt, less current installments (Note 5) 3,739 3,345
Long-term pension liability 223 417
-------- --------
Total Liabilities 10,803 14,389
-------- --------
Stockholders' Equity (Note 6):
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 6,039,789 at
March 31, 2001 and 6,024,380 at June 30, 2000 60 60
Additional paid-in capital 11,292 11,272
Retained earnings 10,912 10,498
Treasury stock, at cost, 262,500 shares (1,283) (1,283)
Accumulated other comprehensive loss (61) (61)
-------- --------
Total Stockholders' Equity 20,920 20,486
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 31,723 $ 34,875
======== ========
See accompanying notes to unaudited financial statements.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
Three months ended Nine months ended
(Dollars in thousands except share data) March 31 March 31
----------------------------- -----------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net sales $ 10,341 $ 9,538 $ 31,804 $ 36,866
----------- ----------- ----------- -----------
Cost of goods sold 8,051 8,942 24,658 31,912
Inventory write-off -- -- -- 2,000
----------- ----------- ----------- -----------
Total cost of goods sold 8,051 8,942 24,658 33,912
----------- ----------- ----------- -----------
GROSS PROFIT 2,290 596 7,146 2,954
Selling, general &
administrative expenses 2,864 2,102 6,771 7,224
Loss on abandonment of leased facility -- 1,039 -- 1,662
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (574) (2,545) 375 (5,932)
----------- ----------- ----------- -----------
Other income (expense):
Interest income 10 48 78 94
Interest expense (192) (113) (575) (218)
Equity in loss of unconsolidated joint
venture -- -- (38) --
Foreign exchange gain (loss) 47 -- (18) --
Other, net 188 (74) 292 (131)
----------- ----------- ----------- -----------
53 (139) (261) (255)
----------- ----------- ----------- -----------
EARNINGS (LOSS) BEFORE INCOME TAXES (521) (2,684) 114 (6,187)
Income tax benefit (287) (921) (300) (2,100)
----------- ----------- ----------- -----------
NET EARNINGS (LOSS) AND COMPREHENSIVE
INCOME (LOSS) ($ 234) ($ 1,763) $ 414 ($ 4,087)
=========== =========== =========== ===========
NET EARNINGS (LOSS) PER COMMON SHARE:
Basic $ (0.04) $ (0.31) $ 0.07 $ (0.71)
=========== =========== =========== ===========
Diluted $ (0.04) $ (0.31) $ 0.07 $ (0.71)
=========== =========== =========== ===========
Weighted average common shares outstanding:
Basic shares 5,777,289 5,739,875 5,767,016 5,758,061
Diluted shares 5,777,289 5,739,875 5,805,784 5,758,061
See accompanying notes to unaudited financial statements
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I -- FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended
March 31
---------------------
(Dollars in thousands) 2001 2000
------- -------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net earnings (loss) $ 414 ($4,087)
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Bad debt provision 220 240
Write-off of inventory -- 2,000
Write-off of notes receivable and accrued interest -- 72
Depreciation and amortization 1,869 1,401
Provision for deferred income taxes (343) (150)
Pension expense, net of contributions (194) --
Loss on disposal of assets 4 --
Loss on unconsolidated joint venture 38 --
Accrued interest - notes receivable (50) (42)
Other -- 46
Foreign exchange gains - notes payable (65) --
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 35 3,099
Inventories 984 334
Tax refund receivable 1,500 (1,288)
Prepaid expenses (132) (74)
Deposits (116) (665)
Other current assets (122) 1,022
Accounts payable (460) (2,226)
Income taxes payable 43 --
Accrued compensation and employee benefits 70 (203)
Accrual for loss on lease obligation (50) 600
------- -------
Net Cash Provided by Operating Activities $ 3,645 $ 79
------- -------
(continued)
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART 1 -- FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
Nine months ended
March 31
-----------------------
2001 2000
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures $ (936) $ (3,776)
Repayment of notes receivable 12 31
Issuance of notes receivable (100) (808)
Other assets (12) (100)
-------- --------
Net Cash Used in Investing Activities (1,036) (4,653)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on lines of credit and notes payable 13,736 4,849
Payments on lines of credit and notes payable (16,695) (171)
Issuance of common stock 20 --
Treasury stock acquisitions -- (167)
-------- --------
Net Cash (Used in) Provided by Financing Activities
(2,939) 4,511
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents (330) (63)
Cash and Cash Equivalents at Beginning of Period 815 1,063
-------- --------
Cash and Cash Equivalents at End of Period $ 485 $ 1,000
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 681 $ 203
======== ========
Cash paid (received) during the period for:
Income taxes ($ 1,500) $ 0
======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES:
Related parties notes receivable $ 855 $ 0
Investments 150 --
Accounts receivable 107 --
Other current assets 64 --
Accounts payable (29) --
-------- --------
$ 1,147 $ 0
======== ========
See accompanying notes to unaudited financial statements.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I -- FINANCIAL INFORMATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 -- Interim Financial Information
The unaudited consolidated financial statements of Natural Alternatives
International, Inc. and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles and with Article 10 of
the Securities and Exchange Commission's Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete consolidated financial statements. In the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting of normal recurring adjustments,
considered necessary for a fair presentation of the Company's financial
information as of and for the three and nine months ended March 31, 2001 and
2000.
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make certain estimates
and assumptions that may affect the reported amounts of assets, liabilities,
revenues and expenses during the reporting periods. Actual results may differ
from such estimates. The consolidated results of operations for the interim
periods ended March 31, 2001 and 2000 are not necessarily indicative of the
consolidated operating results for the full year. It is suggested that these
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's annual report on Form
10-K for the year ended June 30, 2000.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
NOTE 2 - Inventories
Inventories are comprised of the following:
March 31 June 30
(Dollars in thousands) 2001 2000
------ ------
Raw materials $2,888 $4,187
Work in progress 1,221 2,409
Finished goods 2,534 1,031
------ ------
$6,643 $7,627
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NOTE 3 -- Net Earnings Per Share
Basic net earnings (loss) per share is computed by dividing net earnings (loss)
by the weighted average number of common shares outstanding during the period.
Diluted net earnings (loss) per share reflects the potential dilution that could
occur if stock options or other contracts to issue common stock were exercised
or converted into common stock. The computation of diluted net earnings (loss)
per share does not assume exercise or conversion of securities that would have
an anti-dilutive effect on net earnings (loss) per share.
(Amounts in thousands except share data) Three Months Ended March 31 Nine Months Ended March 31
----------------------------- ------------------------------
2001 2000 2001 2000
---------- ---------- ----------- -----------
NUMERATOR:
Net earnings (loss) - Numerator for
basic and diluted earnings (loss) per
share - earnings available to
common shareholders $ (234) $ (1,763) $ 414 $ (4,087)
========== ========== =========== ===========
DENOMINATOR:
Denominator for basic earnings (loss)
per share - weighted average shares 5,777,289 5,739,875 5,767,016 5,758,061
Effect of dilutive securities -
employee stock options -- -- 38,768 --
---------- ---------- ----------- -----------
Denominator for diluted earnings (loss)
per share - adjusted weighted average
shares with assumed conversions 5,777,289 5,739,875 5,805,784 5,758,061
========== ========== =========== ===========
Basic earnings (loss) per share $ (0.04) $ (0.31) $ 0.07 $ (0.71)
Diluted earnings (loss) per share $ (0.04) $ (0.31) $ 0.07 $ (0.71)
For the three months ended March 31, 2001, there were outstanding options to
purchase 215,000 shares of common stock, that were not included in the
computation of diluted net loss per share as their effect would have been
anti-dilutive.
For the three and nine months ended March 31, 2000, there were outstanding
options to purchase 313,000 shares of common stock, that were not included in
the computation of diluted net loss per share as their effect would have been
anti-dilutive.
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NOTE 4 -- Major Customers
The Company had substantial sales to five separate customers during one or more
of the periods shown in the following table. The loss of any of these customers
could have a material adverse impact on the Company's revenues and earnings.
Sales by customer, representing 8% or more of the respective period's total net
sales, are shown below.
Three months ended March 31 Nine months ended March 31
---------------------------------------------------- ----------------------------------------------------
2001 2000 2001 2000
---------------------- ----------------------- ---------------------- ----------------------
(Dollars in
thousands)
Sales by Sales by Sales by Sales by
Customer Customer %(a) Customer %(a) Customer %(a) Customer %(a)
- -------- ------- ------- ------- ------- ------- ------- ------- -------
Customer 1 $ 5,110 49% $ 6,365 67% $16,144 51% $14,981 41%
Customer 2 1,342 13% 1,321 14% 3,311 10% 5,963 16%
Customer 3 (b) (b) (b) 4,256 12%
Customer 4 (b) (b) (b) 3,747 10%
Customer 5 982 10% 870 9% 3,215 10% 2,964 8%
------- ------- ------- ------- ------- ------- ------- -------
$ 7,434 72% $ 8,556 90% $22,670 71% $31,911 87%
======= ======= ======= ======= ======= ======= ======= =======
(a) Percent of total sales
(b) Sales for the period were less than 8% of total sales.
Accounts receivable from these customers totaled $2.8 million and $3.4 million
at March 31, 2001 and June 30, 2000, respectively.
NOTE 5 -- Debt
On December 20, 2000, the Company replaced an existing credit agreement with
$9.35 million in new financing. The new financing consists of a two year $7.0
million working capital line of credit, a $1.6 million five-year equipment term
note, and a line of credit of up to $750,000 for new capital equipment
financing. Interest accrues at an annual rate of prime plus 0.5%. At March 31,
2001 the effective interest rate was 8.5%. As of March 31, 2001, amounts
outstanding under the working capital line of credit and equipment term note
were $401,000 and $1.52 million, respectively. Borrowings under the working
capital line of credit are collateralized by eligible accounts receivable and
inventory, as defined in the agreement; proceeds are to be used to support
ongoing operating requirements. Financial covenants associated with this
facility obligate the Company to comply with specified financial ratios and
tests, including minimum working capital and tangible net worth requirements,
maximum leverage ratios, and minimum earnings levels. As of March 31, 2001, the
Company was in compliance with all financial covenant provisions of the credit
agreement.
The Company also has a term note secured by a building due June 2011 with annual
interest at 8.25%. The note provides for principal and interest payable in
monthly installments of $11,000. As of March 31, 2001, the outstanding amount is
$886,000.
The Company's wholly owned subsidiary in Switzerland has a line of credit
agreement permitting borrowings up to CHF 1.0 million, or approximately $592,000
at March 31, 2001 at an annual interest rate of 5.5%. The line of credit
requires minimum annual principal payments of CHF 250,000, or $148,000, due
annually on December 31; management expects this line to be renewed in the
normal course of business. The agreement contains no financial covenants. As of
March 31, 2001, the Company has converted borrowings under the line of credit of
approximately $237,000 into various unsecured term notes with maturities from
six to twelve months at interest rates ranging from 5.5% to 6.0%. The amount
outstanding under the line of credit is approximately $370,000 at March 31,
2001. Availability under the line includes cash on hand, which was approximately
$167,000 at March 31, 2001.
On November 9, 1999, the Company entered into a term note agreement for $2.5
million, secured by equipment, at an annual interest rate of 9.2%. The note has
a five-year term that provides for principal and interest payable in monthly
installments of $52,000; proceeds have been used to support working capital
requirements. As of March 31, 2001 the outstanding amount is $1.94 million.
As of March 31, 2001, the composite interest rate on all outstanding debt was
8.3%.
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NOTE 6 -- Stockholders' Equity
During the nine months ended March 31, 2001, under the 1999 Omnibus Equity
Incentive Plan, the Company granted to various directors, officers and
employees, stock options to purchase shares, at fair market value, of the
Company's common stock as follows:
No. of Exercise
Date options Price
---- ------- -----
August 28, 2000 167,000 $ 2.00
January 8, 2001 20,000 $ 2.44
March 1, 2001 30,000 $ 2.69
-------
Total Granted 217,000
=======
NOTE 7 -- Related Party Transactions / Notes Receivable
During the second fiscal quarter, ended December 31, 2000, the Company made a
further advance on a non-interest bearing loan to the Chairperson of the Board
of Directors, in the amount of $50,000. Amounts owed on this loan, which is
secured by proceeds from a life insurance policy, were $350,000 and $300,000 at
March 31, 2001 and June 30, 2000, respectively.
On February 6, 2001, the Company made a 12% convertible interest-bearing loan to
a consulting organization Pulse Information Network, LLC ("PIN") of $50,000. The
principal, and all accrued interest, is payable on or before February 5, 2004.
The Company can convert the note at anytime into equity of PIN.
NOTE 8 -- Custom Nutrition Joint Venture
In March 1999, the Company entered into a letter of intent to form a joint
venture with FitnessAge Incorporated, a privately held development stage company
based in San Diego, CA ("FitnessAge"). In connection therewith, on March 30,
1999 the Company purchased 300,000 shares of FitnessAge common stock for
$150,000. On or about the same date, the family limited partnership of the Chief
Executive Officer and the Chairperson of the Board of Directors and Secretary
purchased 200,000 shares of the Common Stock of FitnessAge for $100,000.
During December 1999, the Company and FitnessAge formalized the joint venture by
forming a new company named Custom Nutrition, LLC, a Delaware limited liability
company ("Custom Nutrition") in which the Company at formation had a 40%
ownership. Custom Nutrition was formed for the purpose of developing,
merchandising, selling and distributing customized nutritional and related
products to health and fitness clubs, as well as over the Internet. Under terms
of a 10-year Exclusive Manufacturing Agreement, the Company is the exclusive
manufacturer of all nutritional supplements for Custom Nutrition. In addition,
Custom Nutrition obtained an exclusive royalty free license to FitnessAge's
proprietary software technology, including their physical fitness assessments
known as the FitnessAge System, as well as, software under development designed
to provide customized nutritional assessments. In accordance with the Custom
Nutrition LLC Operating Agreement, the Company was required to make an initial
capital contribution of $100,000, which was funded during the fourth quarter of
fiscal 2000. Income and losses were to be allocated and any additional capital
contribution requirements of Custom Nutrition were to be made 60% to FitnessAge
and 40% to the Company.
In addition, in November and December 1999, the Company loaned FitnessAge a
total of $750,000 (the "Loan"). The Loan was secured by all rights, title, and
interest of FitnessAge in Custom Nutrition and FitnessAge's allocable share of
gross revenues which at the time could have been received by Custom Nutrition
from a major customer and included interest accruing at an annual rate of 12%.
The principal together with all accrued and unpaid interest on the Loan was due
November 10, 2000. The Company had the right at any time to convert all or any
portion of the amount due on the Loan into the common stock of FitnessAge at a
conversion price of $0.75 per share. (See Note 9)
In conjunction with the Loan, the Company received a three-year Warrant (the
"Warrant") to purchase up to 150,000 shares of Common Stock of FitnessAge for
$0.75 per share. The Company may exercise the
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Warrant at any time up to and including November 1, 2002. The Company was issued
two additional warrants to purchase common stock as additional consideration for
providing a short-term loan to FitnessAge which was repaid prior to June 30,
2000. One warrant provides for the purchase of 80,000 shares of FitnessAge
common stock for $1.25 per share and the other warrant provides for the purchase
of 80,000 shares of FitnessAge common stock for $2.00 per share. The Company may
exercise these two Warrants at any time up to and including June 12, 2003. As of
March 31, 2001, the Company had not exercised any portion of these Warrants. The
Company also obtained the right to designate one representative of the Company
to be a member of FitnessAge's Board of Directors, which consists of five board
members, and registration rights and certain other rights as defined by the loan
documents and by an Investor Rights Agreement. As of March 31, 2001, the Company
waived its rights to board representation.
As of November 10, 2000, the Company agreed with FitnessAge to extend the
maturity of the Loan (the "Extension"). Pursuant to the Extension, the Company
combined all accrued and unpaid interest on the Loan into a revised payment
schedule requiring payments of $150,000 in February 2001, $150,000 in March
2001, $225,000 in June 2001 and complete pay-off of any outstanding principal
and accrued interest by September 2001. In consideration of the Extension,
FitnessAge provided the Company with additional collateral in the form of a
perpetual, irrevocable, nonexclusive, royalty-free worldwide license to
FitnessAge's proprietary physical assessment software technology.
The Company believes these assets have future commercial value based on the
alternatives that may be available including those described below. The Company
reclassified its interests in FitnessAge and Custom Nutrition to Investment in
Intangible Assets Acquired as of March 31, 2001. (See Note 9)
NOTE 9 -- FitnessAge Loan Default and Retention of Collateralized Assets
FitnessAge did not meet its loan payment obligation on February 1, 2001 pursuant
to the Extension discussed in Note 8. As a result, the Company notified
FitnessAge on February 2, 2001 of its decision to accelerate the maturity of the
Loan and its intention to retain the Loan collateral in satisfaction of
FitnessAge's obligations. As of February 23, 2001, the Company perfected its
interest in the collateralized assets, as defined per the escrow agreement and
the Uniform Commercial Code, and took full ownership and possession of Custom
Nutrition LLC and the perpetual, irrevocable, nonexclusive, royalty-free
worldwide license to FitnessAge's proprietary physical assessment software
technology. The Company retains its equity interest in FitnessAge by its
ownership of common stock and warrants as described in Note 8. The Company is
evaluating the actions it may take, including but not limited to, moving forward
to commercialize the assets alone, or with others, restructuring the joint
venture with FitnessAge, abandoning its investment, or other alternatives.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I -- FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain Forward-Looking Information
Information provided in this Quarterly Report on Form 10-Q may contain
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 that are not historical facts and information. These
statements represent the Company's expectations or beliefs, including, but not
limited to, statements concerning future financial and operating results,
statements concerning industry performance, the Company's operations, economic
performance, financial condition, margins and growth in sales of the Company's
products, capital expenditures, financing needs, as well as assumptions related
to the foregoing. For this purpose, any statements contained in this Quarterly
Report that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the generality of the foregoing,
words such as "may", "will", "expect", "believe", "anticipate", "intend",
"could", "estimate" or "continue" or the negative or other variations thereof or
comparable terminology are intended to identify forward-looking statements.
These forward-looking statements are based on current expectations and involve
various risks and uncertainties that could cause actual results and outcomes for
future periods to differ materially from any forward-looking statement or views
expressed herein. The Company's financial performance and the forward-looking
statements contained herein are further qualified by other risks including but
not limited to those set forth herein and in the Company's most recent Form
10-K.
RESULTS OF OPERATIONS
THIRD QUARTER OF FISCAL 2001 AND 2000
Net sales for the third quarter of fiscal 2001 of $10.3 million increased
approximately $800,000, or 8%, compared to net sales of $9.5 million for the
third quarter of fiscal 2000. This increase reflects additional sales from our
direct-to-consumer product line and our smaller customers partially offset by
net decrease of sales from our five largest customers. Sales to our five largest
customers totaled $9.1 million in the third quarter of fiscal 2000, while sales
to the same group was only $7.5 million in the current year a decrease of $1.6
million. Sales to our largest customer decreased by $1.3 million reflecting
stabilization in inventory levels built-up during fiscal 2000. The remaining
decline in sales is due to the loss of certain customers in fiscal 2000. The
decline in sales of these major customers were offset by an increase in sales
from our direct-to-consumer natural products, sold under the Dr. Cherry
physicians branded label, which was first introduced during the third quarter of
fiscal year 2000. Sales from the direct-to-consumer product totaled $1.7 million
during the third quarter of fiscal 2001 as compared to $66,000 for the same
period in fiscal 2000.
Gross profit for the third quarter of fiscal 2001 increased to $2.3 million,
representing 22% of net sales, an increase of $1.7 million over the $596,000, 6%
of sales, for the third quarter of fiscal 2000. Direct and indirect
manufacturing expenses decreased from period to period by $640,000 to 21% versus
27% of net sales for fiscal 2001 and fiscal 2000, respectively. Material costs,
including outside packaging costs, decreased to $6.0 million for the current
period, 58% of net sales, from $6.2 million, 65% of net sales, for the same
period last year. During the fourth quarter of fiscal 2000, the Company began
packaging most of its finished goods internally. Prior to this conversion in the
fourth quarter of fiscal 2000, independent 3rd-party vendors packaged all of the
Company's products. Savings from bringing this function in-house have been
significant. Cost of outside packaging during the third quarter of fiscal 2000
were approximately $1.2 million or 13% of net sales, compared with $180,000, or
2%, for the same period of fiscal 2001. The favorable impact on gross margin
achieved through bringing packaging operations in-house, were augmented by the
reduction of direct and indirect manufacturing expenses achieved primarily as a
result of the cost containment program (discussed below), partially offset by
the internal operating costs for in-house packaging.
Selling, general and administrative expenses, excluding the loss on abandonment
of leased facility, were as a percentage of net sales 28% and 22% for the
quarters ended March 31, 2001 and 2000, respectively. In absolute dollars the
expenses increased by $762,000 to $2.9 million for the third quarter of fiscal
2001. The noted increase over the prior year was primarily the result of
increased litigation expense ($236,000),
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bad debt expense ($240,000) and additional advertising and fulfillment expenses
($358,000) associated with our direct-to-consumer product sales. Litigation
expense for the current quarter is net of $184,000 of insurance proceeds
received in March 2001. These increases were partially offset by the
non-recurring nature of certain costs incurred in the third quarter of fiscal
2000 associated with the start-up of our Swiss manufacturing subsidiary. During
the third quarter of fiscal 2000, the Company increased the reserve, for the
loss on abandonment of the leased facility, by $600,000, to a total of $3.0
million at March 31, 2000.
The Company is a plaintiff in an anti-trust lawsuit against several
manufacturers of vitamins and other raw materials purchased by the Company.
Other income for the quarter ended March 31, 2001 includes receipt of
approximately $188,000 in settlement of the claims made against one of the
defendants in the suit. See Part II -- Item 1. Legal Proceedings.
NINE MONTHS ENDED MARCH 31, 2001 AND 2000
Net sales for the nine months ended March 31, 2001 of $31.8 million decreased
$5.1 million, or 14%, compared to net sales of $36.9 million for the same period
of fiscal 2000. The sales decline was primarily due to the loss of two of our
larger customers (NuSkin Enterprises Inc. and Bally Total Fitness) with combined
sales of $8.0 million during the first nine months ended March 31, 2000 and
$238,000 during the same period in fiscal 2001. NuSkin informed the Company in
December 1999 that its production needs have been transitioned to other vendors.
Sales to our second largest customer in the first nine months of fiscal 2001
decreased by $2.7 million from $6.0 million for the first nine months ended
March 31, 2000. Fiscal 2000 sales were higher as this customer acquired large
quantities of product to support an inventory build for a major product
introduction, while fiscal 2001 sales volumes have stabilized at lower levels.
The loss of these major customers were offset by an increase in sales to our
largest customer coupled with sales from our direct-to-consumer natural products
sold under the Dr. Cherry physicians branded label which was first introduced
during the third quarter of fiscal year 2000. Sales to our largest customer of
$16.1 million for the first nine months of fiscal 2001, increased by $1.1
million from $15.0 million for the same period last year, while the
direct-to-consumer sales volume of the Dr. Cherry brand totaled $4.0 million
during the first nine months of fiscal 2001, an increase of $3.9 million.
Gross profit for the first nine months ended March 31, 2001 increased to $7.1
million, representing 22% of net sales, an increase of approximately $4.2
million over the gross profit of $3.0 million, or 8% of net sales, for the same
period of fiscal 2000. Direct and indirect manufacturing expenses decreased by
$820,000 for the first nine months ended March 31, 2001, versus the same period
of the previous year. This reduction is directly related to our continuing cost
containment program partially offset by the internal operating costs for
in-house packaging. Material costs, including outside packaging costs, decreased
to $16.8 million for the current period, 53% of net sales, from $23.2 million,
63% of net sales, for the same period last year. During the fourth quarter of
fiscal 2000, the Company began packaging most of its finished goods internally.
Prior to this independent 3rd-party vendors performed all packaging of the
Company's products. Savings from bringing this function in-house have been
significant. Cost of outside packaging during the first nine months ended March
31, 2000 were approximately $4.6 million or 14% of net sales, compared with
$600,000, or 2%, for the same period of fiscal 2001. During the second quarter
of fiscal 2000, the Company wrote-off inventory of $2.0 million, 5% of sales,
which included $735,000 for deposits on inventory. The analysis of inventory
balances and subsequent write-off in fiscal 2000, related primarily to the loss
of the major customers, a decline in market share and continuing competitive
pressures, which caused the Company to re-evaluate all product lines and reduce
or slow production of products with limited future value.
Selling, general and administrative expenses were as a percentage of net sales
21% and 20% for the first nine months of fiscal 2001 and 2000, respectively. In
absolute dollars the expenses decreased by $453,000 to $6.8 million as reported
for the first nine months of fiscal 2001. The reduction was primarily the result
of (i) the continuing benefits of the cost containment program, discussed below,
(ii) the non-recurring nature of certain costs incurred in fiscal 2000
associated with the start-up of our Swiss manufacturing subsidiary, (iii)
training and implementation expenses associated with the installation of our
integrated manufacturing and accounting computer software system in May 1999,
and (iv) rent of an abandoned leased facility. These savings were partially
offset by an increase during fiscal 2001 of litigation expenses of $563,000 and
an increase in advertising and fulfillment expenses of $863,000 associated with
our direct-to-consumer product sales. Litigation expense for fiscal 2001 is net
of $184,000 of insurance proceeds received in March 2001. During the third
quarter of fiscal 2000, the Company increased the reserve for the loss on
abandonment of the leased facility by $600,000, to a total of $3.0 million at
March 31, 2000.
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The Company is a plaintiff in an anti-trust lawsuit against several
manufacturers of vitamins and other raw materials purchased by the Company.
Other income for the nine months ended March 31, 2001 includes receipt of
approximately $299,000 in settlement of the claims made against one of the
defendants in the suit. See Part II -- Item 1. Legal Proceedings.
COST CONTAINMENT PROGRAM
In January 2000, the Company announced a cost containment program designed to
reduce future operating expenses. The program initiated expense control measures
intended to counteract the loss of a major customer and streamline business
processes to improve future operating performance. The program included an
immediate reduction of approximately 27% in the Company workforce, consisting of
both permanent and temporary personnel.
In May 2000, the Company took additional steps, which were completed by the end
of June 2000, as follows:
(i) Substantial reduction of outside packaging services, as a result of the
capital expansion initiative to invest in the integration of in-house
finished goods packaging capabilities and to substantially eliminate
future outside packaging services.
(ii) An additional reduction in force of 25% effective May 2000, including
reductions in executive compensation and benefits.
(iii) Successfully terminating the long-term lease obligation related to the
Carlsbad facility in June 2000. Initially the Company entered into two
sublease agreements for the entire premises for approximately five
years. Shortly thereafter, the Company completed a buyout of the
fifteen-year lease obligation from the landlord. The buyout agreement
provided for the sale of the Company's leasehold interests and
obligations to the landlord for essentially the same cost of performing
its obligations pursuant to the sublease agreements, resulting in the
Company paying a $3.0 million settlement fee to the landlord.
Management is committed to the restoration of net earnings by maintaining its
operating cost structures with current operating levels.
The Company will continue to concentrate its efforts on improving operational
efficiencies, resource requirements, and core business processes to improve
operating performance. In addition, the Company will continue to focus on
existing customers and realizing the returns from the strategies implemented to
diversify and expand geographical and distribution channels through its Swiss
manufacturing operations, FitnessAge/Custom Nutrition business venture and
physician branding direct-to-consumer initiatives.
INCOME TAXES
Our effective tax rates (excluding our Swiss subsidiary) were benefits of 36%
and 34% for the nine months in fiscal 2001 and 2000, respectively. The total
benefit for income taxes of $300,000 for fiscal 2001 reflects the benefit of a
five-year tax holiday, which applies, at the Swiss federal level, a zero tax
rate to pretax earnings of our Swiss subsidiary, which was profitable in fiscal
2001. Earnings of our Swiss subsidiary are taxed at the local level. The
effective Swiss tax rate is approximately 4% and resulted in $43,000 of tax
expense for the nine months ended March 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations through cash flow from
operations, its working capital line of credit facility and equipment financing
arrangements.
At March 31, 2001, the Company has cash and cash equivalents of approximately
$485,000, a decrease from $815,000 at June 30, 2000. Net cash provided by
operations during the first nine months of fiscal 2001 amounted to $3.6 million,
which was used primarily to fund our investing activities including the
acquisition of capital equipment and to reduce outstanding debt.
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Capital expenditures for the first nine months ended March 31, 2001 amounted to
$936,000. These expenditures relate primarily to the acquisition of production
equipment in both our U.S. and Swiss manufacturing facilities.
During the first nine months of fiscal 2001, the Company's consolidated
outstanding debt decreased approximately $3.0 million to $5.4 million from
approximately $8.4 million at June 30, 2000. The net decrease reflects positive
cash flow from operations affecting the Company's lines of credit (borrowings of
$10.0 million, net of repayments of $13.0 million) and excludes the $3.7 million
associated with the establishment our new financing, the initial proceeds, from
which, were used to extinguish existing debt in December 2000. See Note 5 to the
Unaudited Financial Statements. The composite interest rate on all outstanding
debt at March 31, 2001 was approximately 8.3%.
The Company has access to approximately $8.3 million of funds from existing
working capital credit facilities to support future operating requirements.
Borrowings outstanding under these facilities as of March 31, 2001 total
approximately $1.0 million. The working capital line of credit facilities are
subject to eligibility requirements for current accounts receivable and
inventory balances. As of March 31, 2001, total excess borrowing capacity based
on eligible working capital balances was approximately $4.0 million. One or more
of the Company's loan agreements contain a number of covenants that restrict the
operations of the Company. Such restrictions include requiring the Company to
comply with specified financial ratios and tests, including minimum tangible net
worth requirements, maximum leverage ratios, debt coverage ratios, and minimum
net income. As of March 31, 2001, the Company was in compliance with all
restrictive covenants of these agreements.
The Company believes its available cash and existing credit facilities should be
sufficient to fund near-term operating activities. However, the Company's
ability to fund future operations and meet capital requirements will depend on
many factors, including but not limited to: the ability to seek additional
capital; the effectiveness of the Company's diversified growth strategy, cost
containment program, vertical integration of packaging operations, the expansion
of Swiss manufacturing operations, and the ability to establish additional
customers or changes to existing customer's business.
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RISK FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
In addition to the other information included in this Report, the following
factors should be considered in evaluating the Company's business and future
prospects. The Company's business and results of operations could be seriously
harmed by any of the following risks. In addition, the market price of our
common stock could decline due to many factors, including but not limited to,
any of these risks.
DECLINING SALES, INDETERMINATE PROFITS
The net earnings and net sales for the first nine months of fiscal 2001 were
$414,000 and $31.8 million, respectively, as compared with a loss of $4.1
million and sales of $36.9 million for the same period of fiscal 2000. The
Company implemented a cost containment program and a return to profitability
program in the prior fiscal year in an effort to reduce expenses to be
consistent with current operating levels. The Company is experiencing continued
difficulty in maintaining expenses consistent with operating levels and there
can be no assurance it will be able to do so in the future. The Company cannot
predict with any assurance whether the Company will be able to achieve
profitability in future periods. In addition the Company expects operating
results will fluctuate from period to period as a result of differences in when
it incurs expenses and recognizes revenues from product sales. Some of these
fluctuations may be significant.
RESULTS OF INVESTMENT IN JOINT VENTURE
In fiscal 2000 the Company loaned approximately $750,000 to a joint venture
partner. The debt became due and payable and was extended and restructured in
the second fiscal quarter of 2001. In the third fiscal quarter of 2001 the
borrower was not able to meet its obligations under the restructured debt. As a
result the Company, in February 2001, perfected its rights and took full
ownership and possession of the loan collateral. The Company is evaluating the
actions it may take, including but not limited to, moving forward to
commercialize the acquired assets by itself or in future joint ventures or by
sub-licenses to third parties. At the present time the Company has not completed
this evaluation. If the Company abandons its investment or is unable to salvage
a reasonable business opportunity from its investment it will likely have a
material adverse impact upon its operations and financial condition.
RELIANCE ON LIMITED NUMBER OF CUSTOMERS FOR MAJORITY OF REVENUE
For the first nine months of fiscal 2001, the Company had three major customers,
which together accounted for approximately 72% of the Company's net sales. The
loss of any of these major customers, or any substantial reduction of their
purchases from the Company, would have a material adverse impact on the
business, operations and financial condition of the Company.
RESTRICTIVE FINANCING COVENANTS.
One or more of the Company's loan agreements contain a number of covenants that
restrict the operations of the Company. Such restrictions include requiring the
Company to comply with specified financial ratios and tests, including minimum
tangible net worth requirements, maximum leverage ratios, debt coverage ratios,
minimum net income and minimum Earnings before Interest, Depreciation and
Amortization ("EBITDA") to cash interest expense ratios. As of March 31, 2001,
the Company was in compliance with all financial covenant provisions of its
various credit agreements, but does not currently anticipate it will be in
compliance with such requirements at the end of the current fiscal year ended
June 30, 2001. There can be no assurance the Company will be able to comply with
the existing covenants or that the lender will restructure them in a fashion
that the Company could presently comply with in future periods. The Company's
ability to comply with such covenants and other restrictions may be affected by
events beyond its control, including prevailing economic, financial and industry
conditions. The breach of any such covenants or restrictions could result in a
default under the various loan agreements that would permit the lenders to
declare all amounts outstanding there under to be immediately due and payable,
together with accrued and unpaid interest, and to terminate their commitments to
make further extensions of credit. Any such action could have a material adverse
impact upon the business operations and financial condition of the Company.
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DECLINE IN STOCK PRICE
The Company's stock price has experienced significant volatility at times during
the past few years and is currently at or near historic lows. In view of the
Company's difficulty in maintaining profitability there can be no assurance that
the stock price will not continue to languish at the current level or decline
further. Current market conditions in the vitamin and nutritional supplement
industry including increased price competition, consolidation, oversupply of
vitamin and supplement products, operating results of competitors, adverse
publicity and other factors such as operating results lower than the
expectations of analysts and investors, may have a continuing adverse affect on
the price of the Company's stock.
LAWSUIT BY FORMER PRESIDENT, DIRECTOR AND CHIEF FINANCIAL OFFICER
The Company is a party to a lawsuit filed by its former President, Director and
Chief Financial Officer, William P. Spencer. The Company terminated Mr. Spencer
for cause in January 1999. The lawsuit includes various claims, and alleges
damages in excess of six million dollars. The Company has responded to the
lawsuit and has denied it has any liability associated with the claim.
Management believes the claims against the Company are without merit. The
Company filed a cross-complaint in the lawsuit against Mr. Spencer and
Imagenetix, Inc., a corporation in which Mr. Spencer is currently a director,
principal shareholder and chief executive, and three other individuals, two of
whom are former employees of the Company and the other a former consultant to
the Company. Both the Company's and the other parties' complaints have been
amended, and additional parties have been added. Management believes the Company
will not be found liable on any claim, and will prevail in its cross-complaint
against each cross-defendant. The Company has expended considerable sums to date
in connection with the ongoing litigation and anticipates continuing expenses in
connection with the litigation to be significant in the present and future
periods. In the event the Company obtains a judgment in its favor there can be
no assurance the Company will be able to collect all or any portion thereof. In
the event a judgment is obtained against the Company in the amount of the
damages alleged in the lawsuit or any significant portion thereof, it would have
a material adverse impact upon the financial condition of the Company.
POTENTIAL FOR INCREASED COMPETITION
The market for the Company's products is highly competitive. The Company
competes with other dietary supplement products and over-the-counter
pharmaceutical manufacturers. Among other factors, competition among these
manufacturers is based upon price. If one or more manufacturers significantly
reduce their prices in an effort to gain market share, the Company's business,
operations and financial condition could be adversely affected. Many of the
Company's competitors, particularly manufacturers of nationally advertised brand
name products, are larger and have resources substantially greater than those of
the Company. There has been speculation about the potential for increased
participation in these markets by major international pharmaceutical companies.
In the future, if not already, one or more of these companies could seek to
compete more directly with the Company by manufacturing and distributing their
own or others' products, or by significantly lowering the prices of existing
national brand products. The Company sells substantially all of its supplement
products to customers who re-sell and distribute the products. Although the
Company does not currently participate significantly in other channels such as
health food stores, direct mail, internet sales and direct sales, the Company is
expanding its operations and its products, and will likely face increased
competition in such distribution and sales channels as more vendors and
customers utilize them.
RELIANCE ON LIMITED NUMBER OF SUPPLIERS; AVAILABILITY AND COST OF PURCHASED
MATERIALS
The Company purchases certain products it does not manufacture from a limited
number of raw material suppliers. Although the Company currently has supply
arrangements with several suppliers of these raw materials, and such materials
are generally available from numerous sources, the termination of the supply
relationship by any material supplier or an unexpected interruption of supply
could materially adversely affect the Company's business, operations and
financial condition.
The Company relies on a single supplier to process certain raw materials for a
product line of the Company's largest customer. An unexpected interruption of
supply of this service would materially adversely affect the Company's business,
operations and financial condition.
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EFFECT OF ADVERSE PUBLICITY
The Company's products consist primarily of dietary supplements (vitamins,
minerals, herbs and other ingredients). The Company regards these products as
safe when taken as suggested by the Company. In addition, various scientific
studies have suggested the ingredients in some of the Company's products may
involve health benefits. The Company believes the growth in the dietary
supplements business of the last several years may, in part, be based on
significant media attention and various scientific research that has suggested
there may be potential health benefits from the consumption of certain vitamin
products. The Company is indirectly dependent upon its customers' perception of
the overall integrity of its business, as well as the safety and quality of its
products and similar products distributed by other companies who may not adhere
to the same quality standards as the Company. The business, operations, and
financial condition of the Company could be adversely affected if any of the
Company's products or any similar products distributed by other companies should
prove or be asserted to be harmful to consumers, or should scientific studies
provide unfavorable findings regarding the effect of products similar to those
produced by the Company.
EXPOSURE TO PRODUCT LIABILITY CLAIMS
The Company, like other retailers, distributors and manufacturers of products
that are ingested, faces a risk of exposure to product liability claims in the
event that, among other things, the use of its products results in injury. The
Company maintains product liability insurance coverage, including primary
product liability and excess liability coverage. There can be no assurance that
product liability insurance will continue to be available at an economically
reasonable cost or that the Company's insurance will be adequate to cover any
liability the Company incurs in respect to all possible product liability
claims. In addition, some of the ingredients included in one or more of the
products manufactured by the Company are subject to controversy involving
potential negative side effects or questionable health benefits. Some insurers
have recently excluded certain of these ingredients from their product liability
coverage. Although the Company's product liability insurance does not presently
have any such limitations, the Company's insurer could require such exclusions
or limitations on coverage in the future. In such event, the Company may have to
cease utilizing the ingredients or may have to rely on indemnification or
similar arrangements with its customers who wish to continue to include such
ingredients in their products. In such an event, the consequential increase in
product liability risk or the loss of customers or product lines could have a
material adverse impact on the Company's business, operations, and financial
condition.
RISKS ASSOCIATED WITH INTERNATIONAL MARKETS
The Company's growth may be dependent in part upon its ability to expand its
operations and those of its customers into new markets, including international
markets. The Company has a manufacturing facility in Switzerland, which is
intended to facilitate an increase in sales of the Company's products overseas.
The Company may experience difficulty entering new international markets due to
regulatory barriers, the necessity of adapting to new regulatory systems, and
problems related to entering new markets with different cultural bases and
political systems. Operating in international markets exposes the Company to
certain risks, including, among other things, (1) changes in or interpretations
of foreign import, currency transfer and other restrictions and regulations that
among other things may limit the Company's ability to sell certain products or
repatriate profits to the United States, (2) exposure to currency fluctuations,
(3) the potential imposition of trade or foreign exchange restrictions or
increased tariffs, and (4) economic and political instability. As the Company
continues to expand its international operations, these and other risks
associated with international operations are likely to increase.
GOVERNMENT REGULATION
The manufacturing, processing, formulation, packaging, labeling and advertising
of the Company's products are subject to regulation by one or more federal
agencies, including the United States Food and Drug Administration ("FDA"), the
Federal Trade Commission ("FTC"), the Consumer Product Safety Commission, the
United States Department of Agriculture, the United States Postal Service, the
United States Environmental Protection Agency, and the Occupational Safety and
Health Administration. The Company's activities are also regulated by various
agencies of the states and localities in which the Company's products are sold.
In particular, the FDA regulates the safety, labeling and distribution of
dietary supplements, including vitamins, minerals, herbs, food, and
over-the-counter and prescription drugs and cosmetics. In addition, the FTC has
overlapping jurisdiction with the FDA to regulate the labeling,
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promotion and advertising of vitamins, over-the-counter drugs, cosmetics and
foods.
The Dietary Supplement Health and Education Act of 1994 ("DSHEA") was enacted on
October 25, 1994. DSHEA amends the Federal Food, Drug and Cosmetic Act by
defining dietary supplements, which include vitamins, minerals, nutritional
supplements and herbs as a new category of food separate from conventional food.
DSHEA provides a regulatory framework to ensure safe, quality dietary
supplements and the dissemination of accurate information about such products.
Under DSHEA, the FDA is generally prohibited from regulating the active
ingredients in dietary supplements as drugs unless product claims, such as
claims that a product may heal, mitigate, cure or prevent an illness, disease or
malady, trigger drug status.
DSHEA provides for specific nutritional labeling requirements for dietary
supplements. DSHEA permits substantiated, truthful and non-misleading statements
of nutritional support to be made in labeling, such as statements describing
general well being resulting from consumption of a dietary ingredient or the
role of a nutrient or dietary ingredient in affecting or maintaining a structure
or function of the body. The Company anticipates the FDA will finalize
manufacturing process regulations that are specific to dietary supplements and
require at least some of the quality control provisions applicable to drugs. The
Company currently manufactures its vitamins and nutritional supplement products
in compliance with the food good manufacturing processes.
The FDA is developing additional regulations to implement DSHEA. Labeling
regulations may require expanded or different labeling for the Company's vitamin
and nutritional products. The Company cannot determine what effect such
regulations, when fully implemented, will have on its business in the future.
Such regulations could, among other things, require the recall, reformulation or
discontinuance of certain products, additional record keeping, warnings,
notification procedures and expanded documentation of the properties of certain
products or scientific substantiation regarding ingredients, product claims,
safety or efficacy. Failure to comply with applicable FDA requirements could
result in sanctions being imposed on the Company or the manufacturers of its
products, including warning letters, fines, product recalls and seizures.
Governmental regulations in foreign countries where the Company plans to
commence or expand sales may prevent or delay entry into a market or prevent or
delay the introduction, or require the reformulation of, certain of the
Company's products. In addition, the Company cannot predict whether new domestic
or foreign legislation regulating its activities will be enacted. Such new
legislation could have a material adverse effect on the business, operations and
financial condition of the Company.
DISTRIBUTION AND MANAGEMENT OF OPERATIONS
In fiscal 1999, the Company leased and commenced operating three additional
facilities. Two of these are adjacent facilities comprising 74,000 square feet
in Vista, California used as a receiving, warehousing, weighing, blending,
finished goods packaging, and distribution facility. The third new facility is
an 18,000 square foot manufacturing facility in Lugano, Switzerland. All of
these facilities were completed and became fully operational during fiscal 2000.
During fiscal 1999, the Company also implemented an entirely new software system
to manage its materials, manufacturing and accounting operations, and use of
this system has continued to be refined in fiscal 2001. While the Company
believes new facilities and operating systems will increase the Company's
manufacturing and distribution capabilities, there can be no assurance they will
result in improved sales, profit margins or earnings. A significant, unexpected
disruption of these systems and facilities could have a material adverse effect
on the Company's results of operations.
FAILURE TO ATTRACT AND RETAIN MANAGEMENT COULD HARM OUR ABILITY TO ACHIEVE
PROFITABILITY AND GAIN
The Company's success is dependent in large part upon its continued ability to
identify, hire, retain, and motivate highly skilled management employees. These
types of qualified individuals are currently in great demand in the marketplace.
Competition for these employees is intense, and the Company may not be able to
hire additional qualified personnel in a timely manner and on reasonable terms.
The majority of the Company's current corporate officers began their employment
with the Company in fiscal years 1999 and 2000. The inability of the Company to
retain competent professional management could adversely affect our ability to
execute our business strategy.
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CENTRALIZED LOCATION OF MANUFACTURING OPERATIONS
The Company currently manufactures the vast majority of its products at its
manufacturing facilities in San Marcos, California. Accordingly, any event
resulting in the slowdown or stoppage of the Company's manufacturing operations
or distribution facilities in San Marcos could have a material adverse affect on
the Company. The Company maintains business interruption insurance. There can be
no assurance, however, that such insurance will continue to be available at a
reasonable cost or, if available, will be adequate to cover any losses that may
be incurred from an interruption in the Company's manufacturing and distribution
operations.
CONCENTRATION OF OWNERSHIP; CERTAIN ANTI-TAKEOVER CONSIDERATIONS
The Company's directors and executive officers beneficially own in excess of
24.9% of the outstanding Common Stock as of March 31, 2001. Accordingly, these
shareholders will continue to have the ability to substantially influence the
management, policies, and business operations of the Company. The Company's
Board of Directors has the authority to approve the issuance of 500,000 shares
of preferred stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the Company's shareholders. The rights of the holders of Common
Stock will be subject to, and may be adversely affected by, the rights of
holders of any preferred stock that may be issued in the future. Certain
provisions of Delaware law, as well as the issuance of preferred stock, and
other "anti-takeover" provisions in the Company's Articles and Bylaws, could
delay or inhibit the removal of incumbent directors and could delay, defer, make
more difficult or prevent a merger, tender offer or proxy contest, or any change
in control involving the Company, as well as the removal of management, even if
such events would be beneficial to the interests of the Company's shareholders,
and may limit the price certain investors may be willing to pay in the future
for shares of Common Stock.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks from adverse changes in interest rates,
and foreign exchange rates affecting the return on our investments and the cost
of our debt. The Company does not use derivative financial instruments to reduce
the impact of changes in interest or foreign exchange rates.
At March 31, 2001, the Company's cash equivalents consisted of financial
instruments with original maturities of three months or less.
The Company's debt as of March 31, 2001 totaled $5.4 million and was comprised
of fixed rate loans of $3.5 million and variable rate loans of $1.9 million. The
average composite interest rates at March 31, 2001 for fixed rate and variable
rate loans were 8.2% and 8.5%, respectively.
The Company's wholly owned Swiss subsidiary has a line of credit denominated in
Swiss Francs. The balance of borrowing under the line was CHF 1.0 million at
March 31, 2001 ($607,000). The interest rate applied to the line is fixed, but
the Company is exposed to movements in the exchange rate between the Swiss Franc
and the U.S. Dollar. On March 31, 2001, the Swiss Franc closed at 1.69 to 1 U.S.
dollar. The same rate was 1.64 Swiss Francs to 1 U.S. dollar at June 30, 2000.
Foreign exchange loss for the first nine months of fiscal 2001 was $18,000.
An immediate adverse change of one hundred basis points in interest rates would
increase interest expense on an annual basis by $19,000. A 10% adverse change to
the Swiss Franc exchange rate would decrease earnings by $67,000.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to a lawsuit filed by its former President, Director and
Chief Financial Officer, William P. Spencer. The lawsuit was filed in January
2000, and was served upon the Company in March 2000. Mr. Spencer was terminated
by the Company for cause in January 1999. The lawsuit alleges damages for
wrongful termination, breach of option contract, conversion, breach of
employment contract, discriminatory and retaliatory discharge, workplace
harassment and slander. The lawsuit seeks damages in an amount to be proved at
trial, and alleges damages in excess of six million dollars. The Company has
responded to the lawsuit and has denied it has any liability. Management
believes the claims against the Company are without merit. The Company has filed
a cross-complaint in the lawsuit against Mr. Spencer and Imagenetix, Inc., (a
corporation in which Mr. Spencer is a director, principal shareholder and chief
executive), and three other individuals, two of whom are former employees of the
Company and the other a former consultant to the Company. The cross-complaint
seeks damages and injunctive relief for breach of fiduciary duty;
fraud-concealment of material facts; intentional interference with prospective
economic advantage; negligent interference with prospective economic advantage;
civil conspiracy; intentional interference with contract; trade libel; slander
per se; breach of contract; conversion; misappropriation of trade secrets;
breach of duty of loyalty; unlawful, unfair and/or fraudulent business acts or
practices and an accounting. The additional defendants in NAI's cross-complaint
subsequently filed cross-actions against NAI, alleging similar claims to those
alleged by Mr. Spencer. The complaint against NAI was also amended to add
Imagenetix, Inc. as a claimant. Management believes the additional claims are
without merit, and the Company will prevail in its cross-complaint against each
cross-defendant. The Company subsequently amended its complaint, adding
additional claims against certain parties. In the event a judgment is obtained
against the Company in the amount of the damages alleged in the lawsuit or any
significant portion thereof, it would have a material adverse impact upon the
financial condition of the Company.
The Company is a plaintiff in an anti-trust lawsuit against several
manufacturers of vitamins and other raw materials purchased by the Company.
Other similarly situated companies have filed a number of similar lawsuits
against some or all of the same manufacturers. The Company's lawsuit has been
consolidated with some of the others and is captioned In re: Vitamin Antitrust
Litigation, and is pending in U.S. District Court in Washington D.C. One or more
consumer class actions have also been filed against some or all of the same
defendants, and at least one of these is presently in a settlement process. The
Company brought its own action to insure it understood what actually occurred.
To date the Company has received $415,000 in settlement payments from certain
defendants. There can be no assurance the remaining claims will be resolved, or,
if they are, that it will result in a material benefit to the Company.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, after consultation
with its legal counsel, the ultimate disposition of these matters will not have
a material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS BY THE COMPANY ON ITS SENIOR SECURITIES
None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 8, 2001, at the Company's annual meeting, the shareholders elected
each of the following two directors with the following votes:
Votes Votes
Name For Withheld
- ---- --- --------
Mark A. Le Doux 5,412,403 49,539
Joe E. Davis 5,413,168 48,774
The shareholders approved a second proposal to ratify the appointment of KPMG
LLP as independent auditors for the fiscal year ending June 30, 2001. This
proposal received the following votes: for 5,439,958; against 16,479; and
abstain 5,505.
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None
(b) No reports on Form 8-K were filed during the quarter for which this report
is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NATURAL ALTERNATIVES INTERNATIONAL, INC.
/s/ Peter C. Wulff Date: May 15, 2001
- -----------------------------
Peter C. Wulff
Chief Financial Officer
and Treasurer
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