N A T U R A L A L T E R N A T I V E S I N T E R N A T I O N A L , I N C . A n n u a l R e p o r t 2 0 0 0 M I L E S T O N E S Successful start-up of our new Swiss manufacturing facility. Expanded our capabilities with the installation of an in-house packaging facility. (cid:2) Diversified our sales channels with the launch of our first direct-to-consumer physician branded product line. Improved our long-term financial position through the termination of the Carlsbad lease obligation and the realignment of our operating structure. (cid:2) (cid:2) (cid:2) D E A R S H A R E H O L D E R S , The past year has been a time of repositioning Natural Alternatives International. We are taking the necessary steps to return NAI to profitability. We recognize certain challenges remain. However, as a management team, it is our priority to bring NAI to the forefront of our industry, where the science of nutri- tion gets down to business. C O R P O R A T E G O A L S This year we strengthened our board, management team and manufacturing capabilities for future growth and earnings. We made criti- cal changes to achieve our corporate goals, including diversifying our rev- enue base; improving quality control and customer service; and restoring our financial position. “Where the science of nutrition gets down to business.” We opened a new facility in Switzerland, introduced a direct- to-consumer physician’s branded product line, enhanced production capabilities for better efficiency and control, instituted higher levels of quality control and developed a profit restoration plan. We believe these initiatives position NAI to meet its goals of reducing overall costs, diversifying revenues, and in- creasing the efficiency of operations, bringing us closer to profitability. We are now positioned to focus our resources on our core business; expanding our customer base, streamlining expenses, and expand- ing new channels of distribution, while continuing to produce innova- tive customized nutritional supple- ments for the benefit of people around the world. A D D R E S S I N G C H A L L E N G E S In response to losing a major cus- tomer in December 1999, NAI initi- ated a cost containment program in January 2000 aimed at reducing overall company expenses. After much deliberation, we aggressively reduced executive compensation and cut the work force by 47% to a level commensurate with our current operating levels. These cost contain- ment initiatives, completed in May 2000, substantially reduced our com- pensation expenses and were an inte- gral part of our profit restoration plan. Additionally, in an effort to strengthen our balance sheet, we terminated our long-term lease obligation for the Carlsbad office and manufacturing facility in June 2000. Initially, we subleased the entire premises for five years. Shortly thereafter, we completed a buyout of the 15-year lease obligation from the landlord. The agreement provided for the sale of our leasehold interests to the landlord for essentially the same cost of performing our obliga- tions pursuant to the sublease agree- ments. The buyout terminated NAI’s interests and obligations in the facility that extended beyond the subleases, saving NAI occupancy costs of approximately $1.5 million per year and the risk of continuing to sublease the premises over the remaining life of the lease. This transaction eliminated a significant financial burden to NAI. “We believe the ability to offer in-house packaging will help control and reduce manufacturing costs, improve inventory and quality control, simplify production logistics and provide more dependable customer service.” timely and cost-effective manner. We believe this $2 million dollar in- vestment in integrated packaging ca- pabilities will realize several million dollars in annual savings, plus addi- tional soft cost savings in quality and inventory control, as well as in pro- viding dependable customer service. M A I N T A I N I N G S T R I N G E N T S T A N D A R D S In October 1999, the prestigious Therapeutic Goods Administration of Australia (TGA) certified NAI’s en- capsulating and tableting operations. In March 2000, NAI was re-certified TGA compliant in all areas includ- ing its new packaging operations. The TGA evaluates new therapeutic products, prepares standards, develops testing methods and conducts testing programs to ensure that products are high quality, safe and effective. During the past year, NAI also passed Good Manufacturing Practices audit compliances by certain of its current and prospective customers. Adherence to these stringent standards ensures standardized manufacturing and quality in all products manufactured and sold worldwide. Compliance with GMP standards facilitates access to over 30 countries around the world, greatly enhancing the ease with which registration and sales into key global markets can be achieved. B U I L D I N G N A I G L O B A L L Y In September 1999, we opened Natural Alternatives International Europe S.A. (NAIE) in Switzerland to diversify our geographic presence and sales chan- nels globally. NAIE is a full-service operation that includes a complete manufacturing plant, testing laboratory, packaging facility, warehouse and local administration. Over the last six months, NAIE has been profitable and sales are continually growing. We are proud of this achievement for a $1.5 million investment to date. In addition to our European expansion, the development of a sales presence in Japan has facilitated NAI’s ability to offer products to the Asian markets. In Japan, NAI has established an excellent reputation as one of the first companies autho- rized to introduce encapsulated nutritional supplements. E X P A N D I N G O U R C A P A B I L I T I E S In March 2000, we completed our Vista, California manufacturing expansion initiatives including ware- housing, distribution, weighing and blending operations. Additionally, we installed a new state-of-the-art finished goods packaging facility. This new capability substantially eliminates the need to use outside packaging services for finished goods manufactured by NAI. We believe the ability to offer in-house packag- ing will help control and reduce manufacturing costs, improve inven- tory and quality control, simplify production logistics and provide more dependable customer service. The Vista facility enables us to package tablets, capsules, powders, blister cards, and packettes. These improvements increase our capacity and efficiency levels, reduce manu- facturing costs, streamline produc- tion logistics and enable us to deliver products to our clients in a more NAI is certified TGA compliant in all manu- facturing areas includ- ing its new packaging operations. Additionally, NAI meets all Good Manufacturing Practices (GMP) audit compli- ances which ensures standardized manufac- turing and quality in all products sold world- wide. Compliance with GMP facilitates access to over 30 countries all around the world. NAI Management Team: (left to right) David Lough, Peter Wulff, Doug Flaker, John Wise. D I V E R S I F Y I N G C O R E B U S I N E S S Over the past year, we diversified NAI’s sales channels and implemented new growth strategies to further de- velop our core customer base. These channels include: fitness and health clubs; physician branding; direct mail; E-Commerce; as well as traditional methods of retail and direct sales. In November 1999, NAI entered into a joint venture agreement with Fitness Age, Inc., a company in San Diego, working to develop novel fitness assessment measurement software for both consumers and healthcare professionals. Jointly we created a new company, Custom Nutrition LLC, where NAI has a 40% equity interest in the operating profits derived from the retail rev- enues of mass customized nutritional supplements anticipated to be mar- keted in health and fitness markets, E-Commerce and other consumer health channels. NAI is also the ex- clusive supplier to this new company. In March 2000, NAI launched its first direct-to-consumer physician- branded product line, licensed exclusively from Dr. Reginald Cherry M.D., offering an innovative basic nutritional support product through television and direct sales mailings. NAI will be formulating additional physician-branded lines and is seeking to expand its customized line of products sold through direct-to-consumer channels in the upcoming year. N E W M A N A G E M E N T T E A M NAI’s management team was strengthened this year with the addition of Peter C. Wulff as our CFO and Treasurer in November 1999. We also welcomed Joe E. Davis as a new member of the Board of Directors in February 2000. Mr. Davis replaced Bill Kellas who re- signed in November 1999 after pro- viding many years of service to NAI. We remain dedicated to providing innovative, high quality products and services to our esteemed clients and the consumer. We believe the many changes to NAI’s foundation and infrastructure over the past year will position us for profitability. We appreciate your continued confidence, support and patience. Sincerely, MARK A. LE DOUX FOUNDER, PRESIDENT AND CHIEF EXECUTIVE OFFICER B O A R D O F D I R E C T O R S Mark A. LeDoux, J.D. Founder, President and Chief Executive Officer Marie A. LeDoux Director Joe E. Davis Director J. Scott Schmidt Director Lee G. Weldon Director M A N A G E M E N T Mark A. LeDoux, J.D. Founder, President and Chief Executive Officer Peter C. Wulff Chief Financial Officer and Treasurer R. David Lough Executive Vice President Dr. John A. Wise, Ph.D. Vice President, Science and Technology Douglas E. Flaker Vice President, Marketing Robert K. Clausen Vice President, Operations I N D E P E N D E N T A U D I T O R S KPMG LLP 750 B Street San Diego, California 92101 C O R P O R A T E C O U N S E L Fisher Thurber LLP 4225 Executive Square La Jolla, California 92037 T R A N S F E R A G E N T & R E G I S T R A R Chase Mellon Shareholders Services 85 Challenger Road Ridgefield Park, New Jersey 07660 Tel: 800-522-6645 www.chasemellon.com I N V E S T O R A N D P U B L I C R E L A T I O N S Susan E. Atkins & Associates 10650 Scripps Ranch Boulevard Suite 224 San Diego, California 92131 NAI™, NAIE™are registered trademarks of Natural Alternatives International, Inc. This report includes forward-looking statements that reflect manage- ment’s current views of future events. Actual results may differ materially from the forward-looking statements due to a number of important factors described in the most recent Forms 10-K and 10-Q. a i n r o f i l a C , r a M l e D , . c n I , z e n í t r a M r e l l e K s s o G y b d e c u d o r p d n a d e n g i s e D C O R P O R AT E H E A D Q U A R T E R S N AT U R A L A LT E R N AT I V E S I N T E R N AT I O N A L , I N C . 1 1 8 5 L I N D A V I S TA D R I V E S A N M A R C O S , C A L I F O R N I A 9 2 0 6 9 T E L E P H O N E : 7 6 0 - 7 4 4 - 7 3 4 0 F A C S I M I L E : 7 6 0 - 7 4 4 - 9 5 8 9 E - M A I L : i n f o @ n a i - o n l i n e . c o m w w w. n a i - o n l i n e . c o m N A I E U R O P E C E N T R O G A L L E R I A 1 6 9 2 8 M A N N O S W I T Z E R L A N D N A I A S I A 5 9 2 - 2 O B A C H O A O B A - K U Y O K O H A M A C I T Y K A N A G AW A - K E N , J A P A N