Life
improving it naturally.
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 .
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Natural Alternatives International, Inc. is a leading formulator and
manufacturer of nutritional supplements, providing strategic partnering
services to its customers. The Company’s comprehensive partnership
approach offers a wide range of innovative nutritional products and services to
clients, including: scientific research, clinical studies demonstrating product
efficacy, customer-specific nutritional product formulation, product testing and
evaluation, marketing management and support, packaging and delivery
system design, regulatory review and international product registration assistance.
D E A R S H A R E H O L D E R S ,
We used this time to focus on several important objectives, including controlling costs, improving our balance
sheet, targeting new revenue opportunities and increasing operational efficiencies. We reduced debt by more
L ast year was a time of transition, during which we made progress on many fronts.
hensive, real-time information available across the Company.
than $2.5 million and improved cash flow from operations. Gross profit increased through streamlining materials
management and manufacturing processes. Administrative expenses increased minimally due to costs associated
with the successful launch of the Dr. Cherry physician-branded product line and unrelated litigation costs. In addition, we
continued implementation of an enterprise-wide business software system that significantly improved operations by making compre-
We are optimistic about our industry and the opportunity for NAI. Supplements are a significant portion of the $140-billion global
nutrition market. The supplements market is driven by an aging population, increased media attention, emergence of supplements
into mainstream usage and expanding medical knowledge regarding their health benefits.
Recently, we have seen increased interest from consumers and international regulatory bodies for greater scientific validation
of supplements. For the past 20 years, NAI has placed great emphasis on clinical evaluation and quality control in product development.
Our focus in these areas ensures that NAI products consistently meet the intense scrutiny of consumers and regulatory agencies.
It’s our belief that consumer confidence must be maintained through regulatory bodies and trade groups that advocate product
quality and improved international manufacturing standards. In support of these objectives, Dr. John Wise, NAI’s Chief Science
Officer, and I are expanding the Company’s involvement in industry organizations such as the Council for Responsible Nutrition and
National Nutritional Foods Association.
Recent publications of scientific research are fostering greater acceptance of the role of well-designed supplements in promoting
health. As scientific publications continue to report their findings regarding nutritional supplementation, we are confident that quality
supplements will enjoy even greater acceptance in commerce.
In September, we announced senior management changes to further enhance our effectiveness and improve our responsive-
ness to customers and new market opportunities. The role of Chairman of the Board was added to my responsibilities and I relin-
quished the position of President. Randell Weaver, the Company’s Chief Financial Officer, was also appointed to the role of Chief
Operating Officer. Additional management changes are detailed on the following pages.
With the Company’s most pressing issues behind us we are now focused on achieving profitability by investing wisely, cutting
expenses appropriately and targeting strong markets and revenue sources. As I look at our talented employees, strengthened manu-
facturing and business processes and accomplishments in 2001, I am confident that we can execute our strategy of operating NAI
as a successful, profitable company.
Sincerely,
F O U N D E R , C H I E F E X E C U T I V E O F F I C E R A N D C H A I R M A N O F T H E B OA R D
M A R K A . L E D O U X
Building Consumer Confidence through Quality
Product quality is vital to consumer acceptance of supplements and confidence
in their effectiveness. NAI employs stringent manufacturing and quality control
standards to deliver the highest quality products. All raw materials are certified to
meet or exceed federally-mandated requirements and are tested to ensure they are
free of harmful pesticides, herbicides and heavy metal contamination. NAI maintains
Good Manufacturing Practices (GMP) and has been audited and approved for the
third time by the prestigious Therapeutic Goods Administration
(TGA) of Australia. TGA is an agency of the Australian
government that regulates therapeutic goods
to ensure their quality, safety and efficacy.
Diversifying Our Core Business
The Company enjoyed great success in the
first full year sales of Dr. Cherry products, the
Company’s first physician-branded product line
distributed direct to consumers. Sales exceeded
$5 million and Dr. Cherry products now represent
a growing client base of more than 10,000 con-
sumers. The line’s initial Basic Nutrient Support
supplement was followed in 2001 with the intro-
duction of condition-specific products for joints,
menopause, prostate and sleep that target Dr.
Cherry’s demographic audience.
Fighting Muscle Fatigue with
a Patented Process
The U.S. Patent Office awarded NAI two
patents for a significant new process that
enhances athletic performance by enabling
muscles to work harder for a longer period
of time. The Company’s process, known as
the “Oxford Factor”, substantially reduces
muscle fatigue by buffering against lactic
acid build-up during strenuous exercise.
With patents issued or pending in a number
of countries, NAI is seeking exclusive world-
wide rights for this invention. The patents
also grant NAI the exclusive right to combine
the Oxford Factor with creatine, a popular
supplement that improves muscle strength.
Advancing Supplements through Science
NAI conducts numerous clinical studies in affiliation
with renowned universities and research institutions.
The verified results ensure that our consumers receive
the most advanced nutritional supplements available.
The benefits of using an NAI product to reduce oxidative
stress has been demonstrated in a study at the Institute
of Social Medicine in Austria. An on-going study at the
University of Sydney in Australia is researching how the
same product protects LDL cholesterol against oxidative
damage. A test with U.S. Navy Special Forces demon-
strated how another NAI product combats oxidative
stress on the immune system that
occurs during heavy exercise.
A University of Maryland study showed
that NAI supplements virtually eliminate
the constriction of arteries that occurs
after high-fat meals. A study with
Scripps Hospital in San Diego and
the University of Texas incorporating
diet, exercise and NAI nutritional
supplements showed dramatic
improvements in body composition.
Participants lost fat while maintaining
or increasing lean muscle mass and
improving overall fitness.
Providing Solutions for the Self-Care Revolution
Demand for dietary supplements is driven by several
factors, including an aging population, a desire to control
one’s healthcare, high cost of doctor visits and the percep-
tion that supplements provide safe, effective self-care. In
response to these trends, the Company developed
condition-specific formulations for primary health concerns
that include: maintaining healthy cholesterol, promoting a
healthy heart, increasing vision acuity, enhancing memory,
increasing energy levels, promoting extended youthfulness,
easing menopause symptoms, promoting healthy weight
levels, improving sleep, alleviating joint pain, easing
prostate problems and providing antioxidants.
B U I L D I N G N A I G LO BA L LY
Natural Alternatives International Europe (NAIE), our European subsidiary in Lugano, Switzerland, upgraded and expanded manu-
facturing and infrastructure this year in response to increased levels of client growth. Manufacturing capacity was increased
through the addition of new encapsulation, tableting and blending equipment, and by doubling packaging throughput. The
facility was expanded with additional manufacturing and laboratory space. Key staff hired to implement new quality and
business systems brought total employment at NAIE to 23 people.
I M P R OV I N G B U S I N E S S I N F O R M AT I O N SYS T E M S
During 2001, NAI completed implementation of a top-tier enterprise software system that we believe will significantly improve
operations by providing real-time information about Company activities across all departments. From entering a customer sales
order to tracking manufacturing capacity and generating financial reports, the system seamlessly integrates operational data
to provide managers with more accurate and current information. Managers can make better decisions faster, which improves
business efficiencies and enables the Company to achieve on-time deliveries and better meet customer needs.
S T R E N G T H E N I N G M A N AG E M E N T
The Company made several senior management appointments intended to enhance NAI’s effectiveness, improve productivity
and responsiveness to customers and expand our ability to identify and capitalize on market opportunities. Randell Weaver,
the Company’s Chief Financial Officer, was named Chief Operating Officer and is now responsible for daily operations. Robert
Clausen was promoted to Senior Vice President of Manufacturing. In his expanded role, Mr. Clausen oversees worldwide
manufacturing and production, quality control, product development and regulatory affairs. Dr. John Wise was appointed Chief
Science Officer. John Egerer was promoted to Vice President and Corporate Controller and David Lough was appointed Vice
President Business Development.
S C I E N C E
H E A L T H
Q U A L I T Y
C A P A C I T Y
P R E V E N T I O N
W E L L N E S S
D E V E L O P M E N T
R E S E A R C H
N A T U R E
S U P P L I E R
I N T E R N A T I O N A L
P A R T N E R
L O N G E V I T Y
C O N S U M E R
M A N U FA C T U R I N G
D I E T
N A I G O A L S
Achieve profitability in a challenging global environment.
Focus on excellence in research, formulation, manufacturing and marketing.
Expand NAI’s role in the international regulatory environment through
participation in key regulatory and trade groups.
O F F I C E R S
Mark A. Le Doux
Chairman and Chief Executive Officer
Randell Weaver
Chief Operating Officer and
Chief Financial Officer
John A. Wise, Ph.D.
Chief Science Officer
Robert Clausen
Senior Vice President
Manufacturing
David Lough
Vice President
Business Development
John Egerer
Vice President and
Corporate Controller
B OA R D O F D I R E C T O R S
Mark A. Le Doux
Chairman and Chief Executive Officer
Marie Le Doux
Director
Lee Weldon
Director
J. Scott Schmidt
Director
Joe Davis
Director
I N D E P E N D E N T A U D I T O R S
Ernst & Young LLP
501 West Broadway, Suite 1100
San Diego, CA 92101
C O R P O R AT E C O U N S E L
Fisher Thurber LLP
4225 Executive Square, Suite 1600
La Jolla, California 92037
T R A N S F E R AG E N T & R E G I S T R A R
Chase Mellon Shareholder Services
85 Challenger Road
Ridgefield Park, New Jersey 07660
Tel: 800-522-6645
www.chasemellon.com
NAI™, NAIE™ are registered trademarks of Natural Alternatives
International, Inc.
This report includes forward-looking statements that reflect
management’s current views of future events. Actual results
may differ materially from the forward–looking statements
due to a number of important factors including but not limited
to those described in the most recent Forms 10-K and 10-Q.
Corporate Headquarters
Natural Alternatives International, Inc.
1185 Linda Vista Drive
San Marcos, California 92069
Telephone: 760-744-7340
Facsimile: 760-744-9589
E-Mail: info@nai-online.com
www.nai-online.com
NAI Europe
Centro Galleria 1
6928 Manno
Switzerland
NAI Asia
592-2 Obacho
Aoba-Ku Yokohama City
Kanagawa-Ku, Japan
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended June 30, 2001 Commission file number 0-15701
NATURAL ALTERNATIVES INTERNATIONAL, INC.
Incorporated in Delaware
1185 Linda Vista Drive, San Marcos, California
92069
(760) 744-7340
84-1007839
(I.R.S. Employer
Identification No.)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock - $.01 par value Nasdaq Stock Market
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______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of regulation S-K is not
contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of shares of voting stock held by non-affiliates (assuming for this purpose that
all officers and directors, and affiliates of directors, are affiliates) of the Registrant was approximately $8.30
million based on the closing sale price as of September 17, 2001.
At September 17, 2001, the Registrant had 5,785,606 outstanding shares of Common Stock, $.01 par
value, net of 262,500 shares held in the treasury.
Documents Incorporated by Reference
Registrant’s Proxy Statement, for the 2002 Annual Meeting of Stockholders, to be filed within 120 days
from June 30, 2001, is incorporated herein by reference.
1
ITEM 1. BUSINESS
PART I
Natural Alternatives International, Inc. and its subsidiaries (referred to collectively herein as ”Natural
Alternatives”, “NAI”, or the “Company”) are engaged in the formulation, manufacturing and packaging of
encapsulated and compressed tablets and powder blended vitamins and related nutritional supplements
including phytochemicals derived from botanicals and foods. The Company has for many years provided
private label contract manufacturing services to various companies engaged in the marketing and
distribution of vitamins, mineral supplements, herbs and other health and nutrition consumer products
(“core business” or “core products”). The Company seeks to further its customers' objectives by assisting
them in expanding their market share through a variety of special marketing and research programs
including, customer-specific nutritional product
formulation; clinical studies assessment; product
development; assistance with international product registration; and packaging and delivery system design.
Revenues are not specifically derived from these activities, but are a component of the sales price for the
core products delivered to the customer. In an attempt to diversify its sales channels while solidifying its
core business, the Company initiated, during the fourth quarter of fiscal 2000, a direct-to-consumer (“DTC”)
marketing program for its own products.
The Company’s strategy is to increase its revenues by capitalizing on key customer relationships through
new product introductions, developing new customer relationships in its core business both internationally
and domestically, expanding its DTC marketing program by increasing existing product lines, marketing
through additional mediums and securing new highly targeted physicians brands. The Company will also
continue to strengthen its financial position by effectively managing its cost structure. The Company
believes it can successfully implement its strategy by continuing to capitalize on its core product
development and manufacturing strengths; its ability to develop innovative science-based products;
adherence to stringent quality control and assurance standards; the utilization of fully integrated
manufacturing and distribution; and the leadership of an experienced management team.
The Company’s long-term growth strategies are focused on geographic diversification through its European
manufacturing facility and Asian sales presence, introduction of additional branded direct-to-consumer
product lines and development of strategic alliances with health companies focused on consumer sales.
RECENT MANAGEMENT CHANGES
The Company experienced changes in its management team during fiscal 2001.
During fiscal 2001, NAI’s management team was strengthened in September 2000 with the addition of
Robert Clausen as Vice President Operations. In May 2001 Peter Wulff, the Company’s CFO, left the
Company to return to the medical device industry. Randell Weaver replaced Mr. Wulff as CFO in May 2001
and was also named the Company’s Chief Operating Officer in September 2001. Mr. Clausen has
subsequently been promoted to Senior Vice President of Manufacturing. John Egerer, formerly Corporate
Controller, has also assumed new duties as Vice President Accounting and Corporate Controller. Douglas
Flaker, Vice President Marketing, also left the company in August 2001 to pursue other interests.
PRODUCTS AND MANUFACTURING
The Company is engaged in the research, design and manufacture of private label customized nutritional
supplements for domestic and international personal care and health product companies engaged in
marketing and distribution in a variety of sales channels. The Company purchases raw materials in bulk
from qualified vendors, and, after quality control testing and release, weighs and blends these materials
and then either encapsulates them, processes the powder blends into jars, or compresses them into solid
dosage forms of either chewable wafers or tablets. These materials are packaged by the Company and
delivered to its customers.
2
The Therapeutic Goods Administration (“TGA”) of Australia has certified the Company’s operations. The
TGA evaluates new therapeutic products, prepares standards, develops testing methods and conducts
testing programs to ensure that products are of high quality, safe and effective. TGA certification also
enables the Company to manufacture products for export into countries which have signed the
Pharmaceutical Inspection Convention, and includes most European countries as well as several Pacific
Rim countries.
The United States Pharmacopeia XXIV compendia (“USP”) contain specifications for vitamin and mineral
supplements. This USP monograph has long been the basis for determining the potency, purity, content
uniformity, disintegration, dissolution and bio-burden of drugs and related articles. The Company believes
its has the technical and quality control expertise to conform to all aspects of USP specifications.
Conformance with USP specifications allows the Company to use the USP designation on products
manufactured for its customers.
INTERNATIONAL OPERATIONS
Natural Alternatives International Europe S.A. (“NAIE”), a wholly-owned subsidiary of the Company,
operates a facility in Manno Switzerland, which is adjacent to the city of Lugano. The manufacturing facility
provides manufacturing capability in encapsulation and tablets, finished goods packaging, quality control
laboratory testing, warehousing, distribution and administration. NAIE enjoys a five-year Swiss federal and
local income tax holiday ending in fiscal 2005.
For the fiscal years ended June 30, 2001 and 2000, the percentage of the Company's net sales to
customers in international markets was approximately 29% and 32%, respectively. Approximately 18% and
8% of the Company’s net sales for the same fiscal years, respectively, were manufactured by NAIE for
customers marketing in the European marketplace.
RESEARCH AND DEVELOPMENT
The primary emphasis of the Company’s research and development activities is the development of new
products and enhancement of existing products. In addition, the Company continuously produces pilot or
sample runs of product formulation prototypes to ensure stability and/or efficacy and to determine
ingredient interaction and prospective customer acceptance of the final product. The Company has
implemented quality control procedures to verify that all products comply with established specifications
and standards in compliance with both USP and Good Manufacturing Practices promulgated by the Food
and Drug Administration. The Company also directs and participates in clinical research studies for
measuring the efficacy of certain products and/or formulations. These studies are conducted to establish
consumer benefits and scientific efficacy supporting both product claims and marketing initiatives. The
Company often collaborates with scientists and institutions, and the study results are generally presented
at various scientific meetings and symposia, and published in peer reviewed scientific journals. Research
of this type is a part of the operating expenses incurred by the Company, and the associated costs have
not been significant to date.
SOURCES AND AVAILABILITY OF RAW MATERIALS
Raw materials used in the Company’s products consist of nutrient powders, excipients, empty gelatin
capsules, and necessary components for packaging and distribution of finished vitamin and nutritional
supplement products. The nutrient powders and the empty gelatin capsules are purchased from
manufacturers in the United States, and foreign countries. To date, the Company has not experienced any
difficulty in obtaining adequate sources of supply. Although there can be no assurance that the Company
will continue to be able to obtain adequate sources in the future, the Company believes that it will be able
to do so.
3
MAJOR CUSTOMERS
NSA International, Inc. (“NSA”), Mannatech Incorporated (“Mannatech”) and Nikken USA, Ltd. (“Nikken”)
represented 72% of the Company's net sales for the fiscal year ended June 30, 2001. No other customers
represented 10% or more of the Company's net sales for the fiscal year ended June 30, 2001. For the year
ended June 30, 2000, NSA and Mannatech together represented 62% of the Company’s net sales.
The majority of the Company’s existing customers are either public or privately held direct marketing
organizations who distribute a variety of nutritional and health related products throughout the United
States, Europe and the Pacific Rim.
As of August 31, 2001, the Company’ s sales backlog was approximately $10.7 million.
COMPETITION
The Company’s products are sold in domestic and foreign markets in competition with other private label
manufacturing and marketing companies. The vitamin and nutritional supplement industry is highly
competitive, and competition continues to increase. The nutritional supplements category includes vitamins
and minerals, herbs and botanicals, and sports, meal and homeopathic supplements. Competition for the
sale of vitamins and supplements comes from many sources, including companies which sell vitamins to
supermarkets, large chain discount retailers, drug store chains and independent drug stores, health food
stores, pharmaceutical companies and others who sell to wholesalers, as well as mail order vendors,
eCommerce and network marketing companies. The Company does not believe it is possible to accurately
estimate the number or size of its many competitors since the vitamin industry is largely privately held and
highly fragmented.
The Company believes the industry will continue to undergo significant consolidation with merger and
acquisition activity in the near-term. Most industry experts expect this activity to continue for the
foreseeable future in food and nutrition companies, multilevel marketing organizations and eCommerce
internet firms.
The Company believes competition among manufacturers of vitamin and supplement products is based,
among other things, on price, timely delivery, product quality, safety, availability, product innovation,
marketing assistance and customer service. The competitive position of the Company will likely depend
upon continued acceptance of its products, its ability to attract and retain qualified personnel, future
governmental regulations affecting vitamins and nutritional supplements, and publication of vitamin product
safety and efficacy studies by the government and authoritative health and medical authorities.
The Company's operations are subject to the risks normally associated with manufacturing vitamins and
nutritional products, including shortage of certain raw materials and damage to property or injury to
persons.
EMPLOYEES
As of June 30, 2001, the Company employed in the United States 114 full-time employees, with five
employed in executive management positions, twenty in the area of research, laboratory and quality
control, seven in sales and marketing, while the remaining employees are engaged in production and
administration. The Company uses in its normal course of operations temporary personnel to meet short-
term operating level requirements primarily in manufacturing and manufacturing support. As of June 30,
2001 approximately 39 individuals were employed as temporary personnel.
As of June 30, 2001, the Company’s Swiss subsidiary employed 19 full-time employees and 4 temporary
personnel in Switzerland. Most of these employees were engaged in manufacturing and manufacturing
support.
The Company has never experienced a work stoppage. None of its employees are currently represented
by a union or any other form of collective bargaining unit. The Company believes its relations with its
employees are good.
4
GOVERNMENT REGULATION
The formulation, manufacturing, packaging, labeling, advertising and distribution 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 (“CPSC”), the United States Department of Agriculture (“DOA”) and the Environmental
Protection Agency (“EPA”). The Company’s activities are also regulated by various agencies of the states
and localities in which the Company's products are sold, including without limitation the California
Department of Health Services, Food and Drug branch. The FDA in particular regulates the advertising,
labeling and sales of vitamin and mineral supplements and may take regulatory action concerning medical
claims, misleading or untruthful advertising, and product safety issues. These regulations include the FDA's
Good Manufacturing Practices (“GMP”) for foods. Detailed dietary supplement GMPs have been proposed
but no regulations have been adopted. Additional dietary supplement regulations were adopted by the FDA
pursuant to the implementation of the Dietary Supplement Health and Education Act of 1994 (“DSHEA”).
The Company may be subject, from time to time, to additional laws or regulations administered by the FDA
or other Federal, State or foreign regulatory authorities, or to revised interpretations of current laws or
regulations. The Company is unable to predict the nature of such future laws, regulations, interpretations or
applications, nor can it predict what effect additional governmental regulations or administrative orders,
when and if promulgated, would have on its business in the future. They could, however, require the
Company to: reformulate certain products to meet new standards; recall or discontinue certain products not
able to be reformulated; expand documentation of the properties of certain products; expand or provide
different labeling and scientific substantiation; or, impose additional record keeping requirements. Any or all
such requirements could have a material adverse effect on the Company's results of operations and
financial position.
ITEM 2. PROPERTIES
The Company's U.S. corporate and manufacturing facilities consist of approximately 123,000 square feet
and are located in San Marcos and Vista, California. Of this space, the Company owns approximately
29,500 square feet and leases the remaining space. Approximately 68,000 square feet is used for
production related activities, 35,000 square feet is used for warehousing, 5,000 square feet is used for
laboratory and product development, and 15,000 square feet is used for offices.
The Company’s Swiss subsidiary leases approximately 22,000 square feet in Manno, a town adjacent to
Lugano, Switzerland. The facilities are used primarily for the manufacturing, packaging and distribution of
nutritional supplement products for the European marketplace.
The Company expects to renew its leases in the normal course of business. The Company believes that its
current facilities are adequate to meet its operating requirements for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to a lawsuit filed in January 2000 by its former President, Director and Chief
Financial Officer, William P. Spencer. 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. The Company has
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. 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
5
cross-complaint subsequently filed cross-actions against NAI, alleging similar claims to those alleged by
Mr. Spencer and add Imagenetix, Inc. as a claimant. Management believes the claims against it are without
merit, and the Company will prevail in its cross-complaint against each cross-defendant. 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
$416,000 in settlement payments from certain defendants. There can be no assurance the 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company’s common stock trades on The Nasdaq Stock Market under the Symbol: NAII. The table
below sets forth the high and low sales prices of the Company’s stock for fiscal 2001 and 2000.
First Quarter Ended September 30, 2000
Second Quarter Ended December 31, 2000
Third Quarter Ended March 31, 2001
Fourth Quarter Ended June 30, 2001
First Quarter Ended September 30, 1999
Second Quarter Ended December 31, 1999
Third Quarter Ended March 31, 2000
Fourth Quarter Ended June 30, 2000
High
$2.313
$3.625
$3.000
$2.780
$4.875
$4.250
$3.500
$2.125
Low
$1.375
$1.656
$2.094
$1.938
$3.188
$2.531
$1.750
$1.313
As of June 30, 2001, there were approximately 1,800 stockholders of record of NAII Common Stock.
The Company has never paid a dividend on its Common Stock. It is the Company's present policy to retain
all earnings to provide funds for the future growth of the Company.
7
ITEM 6. SELECTED FINANCIAL DATA
Five Year Summary of Selected Financial Data
____________________________________________________________________________________
Year Ended June 30
(Dollars in thousands except per share amounts)
2001
2000
1999
1998
1997
Net Sales
$42,158
$47,827
$57,430
$67,894
$49,444
Income (Loss) from Operations
($2,204)
($6,724)
($4,937)
$9,623
$1,815
Net Earnings (Loss)
($4,889)
($4,472)
($2,923)
$5,872
$1,120
Net Earnings (Loss) Per
Common Share:
Basic
Diluted
Current Assets
Total Assets
Long-Term Debt and Capital
Lease Obligations, Less
Current Installments
($0.85)
($0.78)
($0.50)
($0.85)
($0.78)
($0.50)
$1.06
$1.00
$0.21
$0.20
$11,037
$17,500
$23,239
$30,642
$18,858
$25,068
$34,109
$38,596
$42,987
$28,109
$3,567
$3,345
$927
$977
$1,124
Stockholders' Equity
$15,604
$20,486
$25,091
$27,660
$18,700
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-K contains certain “forward-looking statements” as such term is defined in the Private
Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission in its rules,
regulations and releases. These statements represent the Company’s expectations or beliefs, including,
but not limited to, statements concerning future financial and operating results, anticipated growth in
revenues and profit margins, improvements in management personnel, the impact of European operations,
and the utilization of inventories and facilities, statements concerning industry performance, the Company’s
operations, economic performance, financial condition, growth and acquisition strategies, margins and
growth in sales of the Company’s products. For this purpose, any statements contained in this 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 statements by their nature involve substantial risks and
uncertainties, certain of which are beyond the Company’s control, and actual results may differ materially
depending on a variety of important factors, including uncertainty related to government regulation, the
effect of adverse publicity, litigation, the centralized location of the Company’s manufacturing operations,
availability of raw materials, risks associated with international operations, competition, product liability
claims, volatility of stock price and those factors described in this and other Company filings with the
Securities and Exchange Commission.
RESULTS OF OPERATIONS
Fiscal 2001 Compared to Fiscal 2000
Fiscal 2001’s net sales were $42.2 million a decrease from fiscal 2000 of $5.6 million, or 12%. Net sales for
fiscal 2001 were comprised of $36.5 million from our core business and $5.7 million from our DTC products
versus $46.9 million and $875,000, for the same products in fiscal 2000, respectively. Of the core business
for fiscal 2001, $7.5 million was produced by NAIE with NAI manufacturing the remainder of $29.0 million.
NAIE produced approximately $3.4 million of the core business sales in fiscal 2000.
DTC products were first shipped in March 2000 and included only a single product offering. Sales for fiscal
2000 were $875,000. During fiscal 2001, three additional products were introduced and sales increased
approximately $4.8 million.
Total net sales for all core business customers achieving individual volumes of at least $1.0 million was
$34.4 million (six customers) and $45.1 million (eight customers) for fiscal years 2001 and 2000,
respectively, a decrease of $10.7 million. The sales decline was primarily due to the loss of three
customers, which represented combined net sales of $9.9 million in fiscal 2000 versus $238,000 for fiscal
2001. Loss of these three customers reflects the risk associated with our core business where price/cost is
a prime driver. Sales to our second largest customer declined by 53% to $4.2 million from $9.0 million for
fiscal 2000. Fiscal 2000 sales were higher as this customer purchased large quantities of product from the
Company to support a major product introduction, while fiscal 2001 sales volumes have stabilized at lower
levels. The sales decreases associated with these customers were offset by increases with other existing
customers. Sales to our largest customer during fiscal 2001 increased by $1.1 million to $21.9 million as a
result of increased product shipped. Sales increased by $1.1 million to our third largest customer as a
result of increased volume of established products coupled with additional new products introduced during
the year.
Gross profit for fiscal 2001 increased to $8.2 million, 19% of net sales, from $3.7 million, or 8% of net sales,
for fiscal 2000. Gross profit for fiscal 2001 was favorably impacted primarily by: savings obtained by
bringing in-house the Company’s packaging operations (gross savings of $4.6 million), the favorable
material contribution margins generated by DTC product sales (approximately $1.1 million) and the $2.0
million inventory write-off in fiscal 2000, partially offset by increases to material costs associated with our
core business ($520,000) and the additional manufacturing, fulfillment, and royalty expenses required to
9
support in-house packaging and the DTC products ($2.5 million). Cost of goods sold for fiscal 2000
included an inventory write-off of $2.0 million, which represents approximately 4% of net sales. Excluding
this charge, gross profit would have been 12% for fiscal 2000.
Cost of goods sold, excluding the inventory write-off, decreased by $8.2 million, or 19%, to $34.0 million
from $42.2 million in fiscal 2000. The decrease in the absolute dollar amount of the cost of goods sold
resulted from the decrease in sales in fiscal 2001 versus fiscal 2000.
Material costs, including outside packaging costs, as a percentage of net sales, excluding the inventory
write-off, were 53% ($22.2 million) and 63% ($30.2 million) for fiscal years 2001 and 2000, respectively.
The decrease is primarily due to savings in packaging costs coupled with the effect of higher gross margins
generated by our direct-to-consumer (“DTC”) business, offset by some higher material costs affecting our
core products. During the fourth quarter of fiscal 2000, the Company began packaging most of its finished
goods internally. Prior to this period, independent third-party vendors performed all packaging of the
Company’s products. Cost of outside packaging during fiscal 2001 amounted to approximately $700,000,
or 2% of sales, versus $5.4 million (11% of sales) for fiscal 2000. Material costs, as a percentage of sales,
are approximately 55% and 36% for our core and DTC businesses, respectively.
Direct and indirect manufacturing expenses were, 28% and 25%, as a percentage of sales, for fiscal years
2001 and 2000, respectively. In absolute dollars, the expenses decreased to $11.7 million from $12.0
million. The reduction was primarily due to a cost containment program established previously in fiscal
2000, offset by additional expenses to support in-house packaging and fulfillment expenses required by the
DTC business.
SG&A for fiscal years 2001 and 2000 was $8.8 million (21% of net sales) and $8.7 million (18% of net
sales), respectively. The increase of fiscal 2001’s SG&A expenses, as a percentage of net sales, reflects
incremental expenditures for legal expense ($851,000), and selling and promotional expenses associated
with DTC sales increases, ($712,000), offset by savings in bad debts, and costs to support our Swiss
subsidiary. Legal expense incurred in fiscal 2001 is net of insurance proceeds received from our insurance
carriers of $312,000 (See Item 3. Legal Proceedings).
Fiscal 2000 operating expenses included a $1.7 million charge for loss on leased facility. Fiscal 2001
operating expenses included a charge of $1.5 million reflecting the write down of intangible assets acquired
and additional expenses associated with the attempted commercialization of the underlying software
obtained from the FitnessAge and Custom Nutrition ventures (See Note L to Consolidated Financial
Statements).
Other income for fiscal years 2001 and 2000, contain receipts of $300,000 and $116,000, respectively
obtained in partial settlement of claims associated with the Vitamin Antitrust Litigation (See Item 3. Legal
Proceedings).
The Company’s loss from operations was $2.2 million for fiscal 2001 compared to a loss of $6.7 million for
fiscal 2000. The decrease in loss from operations of $4.5 million was due primarily to an increase in gross
profit of $4.5 million. Operating expenses for both fiscal 2001 and fiscal 2000 were comparable in absolute
dollars at approximately $10.4 million.
Income tax expense for fiscal 2001 was $2.4 million, while fiscal 2000 reflected a benefit of $2.4 million, a
change of $4.8 million. The income tax benefit recorded in fiscal 2000 gave rise to net deferred tax assets
of $2.3 million. At the end of fiscal 2001, changes in underlying estimates and assumptions as to the
ultimate recovery of these assets required Management to establish a valuation reserve of $2.3 million
thereon, resulting in the charge to income taxes, for the current year, of the same amount (See Note G to
Consolidated Financial Statements).
The Company recorded a net loss for fiscal 2001 of $4.9 million ($0.85 per share) compared to a net loss of
$4.5 million ($0.78 per share) for fiscal 2000. The change in net loss from fiscal 2000 to fiscal 2001 reflects
the favorable change in operations offset by the significant charge to income taxes as described above.
10
Fiscal 2000 Compared To Fiscal 1999
Fiscal 2000 net sales of $47.8 million decreased $9.6 million, or 17%, compared to net sales of
approximately $57.4 million for fiscal 1999. The decrease was primarily due to the loss of a major customer
who accounted for sales of approximately $4.3 million, or 9%, for fiscal 2000 and $18.4 million, or 32%, for
fiscal 1999. The sales decrease from fiscal 1999 was also impacted by the loss of commodity herbal
product sales to another former customer of approximately $9.4 million. The Company experienced the
sales decrease to this customer commencing in the third quarter fiscal 1999 as a result of a sharp sales
decrease in the mass drug and retail consumer market starting during the time period of mid to late 1998.
The loss of these major customers was partially offset by increased sales to existing and new customers in
the private label product line and the launch in March 2000 of the Company’s first direct-to-consumer
physicians branded product line. The sales increase attributed to the Company’s largest customer
increased to $20.8 million, over fiscal year 1999 sales of $13.4 million, an increase of $7.4 million. The
Company’s second largest customer in fiscal 2000 also increased sales from $2.5 million in fiscal 1999 to
$9.0 million in fiscal 2000, an increase of $6.5 million. In addition, sales attributed to a new private label
product line customer contributed approximately $3.1 million in sales for fiscal 2000.
Management continues to focus its growth strategy through diversifying and expanding sales channels.
The expansion in fiscal 2000 was principally through the Company’s Swiss subsidiary who commenced
operations in September 1999 and contributed $3.4 million, or 7%, in net sales for fiscal 2000. The
Company believes NAIE is tracking to its business plan and sales volumes are anticipated to grow to meet
European market demand. During the latter part of the third quarter of fiscal 2000, the Company also
launched its first physician branded product line under the Dr. Cherry label. This new direct-to-consumer
product line contributed slightly less than $1.0 million in revenues during the fourth quarter fiscal 2000. The
Company has a 10-year Exclusive Licensing and Manufacturing Agreement for the distribution and
manufacture of these products and has contracted with an outside company to utilize their specialized
services to meet direct-to-consumer call center and order fulfillment capabilities. In addition, the Company
developed and sold to Custom Nutrition, a joint venture with FitnessAge Incorporated, customized sports
nutritional supplements in anticipation of FitnessAge launching its consumer health marketing programs
during the second half of calendar year 2000.
During fiscal 2000, the Company experienced an increase in cost of goods sold as a percentage of sales,
excluding the inventory write-off of $2.0 million, to 86.7% compared to 78.4% for fiscal 1999. The increase
reflects reduced selling prices which were not completely offset by reduced material costs; increased
manufacturing labor and overhead costs; and increased costs in quality control to ensure product
compliance with established GMP specifications and standards. During the second quarter fiscal 2000, the
Company wrote-off inventory of $2.0 million, which included $735,000 for deposits on inventory. The
analysis of inventory balances and subsequent write-off related primarily to the loss of a major customer in
December 1999, a decline in market share and continuing competitive pressures, which caused the
Company to re-evaluate all product lines and reduce or slow production of products with limited future
commercial value. The decrease in sales, increase in cost of goods sold and the inventory write-off resulted
in a reduction of gross profit of $8.1 million to approximately $4.3 million for fiscal 2000 compared to $12.4
million for fiscal 1999. The Company reduced manufacturing labor and overhead costs by $1.0 million and
outside packaging costs by $1.6 million during the last six months of fiscal 2000.
Selling, general and administrative expenses for fiscal 2000 were $9.3 million, or 19.5% as a percentage of
sales, which represented a decrease from 20.8% for fiscal 1999. In absolute dollars, the expenses
decreased by approximately $2.7 million to $9.3 million for fiscal 2000 from $12.0 million for fiscal 1999.
The expense reduction was primarily the result of reductions in personnel, consulting, commissions and
travel expenses. In addition, during fiscal 1999, the Company incurred approximately $0.6 million of
expenses related to the restructuring of the senior management team.
The Company’s loss from operations was $6.7 million for fiscal 2000 compared to a loss of $4.9 million for
fiscal 1999. The increase in loss from operations of $1.8 million was due to a decrease in gross profit of
$8.1 million, partially offset by the decrease in selling, general and administrative expenses of $2.7 million
and the loss on abandonment of leased facility of approximately $3.7 million. Cumulative loss from
operations for the two fiscal years 2000 and 1999 of $11.7 million included expenses relating to the loss on
abandonment of the Carlsbad facility of $7.1 million and the inventory write-off of $2.0 million. Loss from
operations during both fiscal 2000 and 1999 also included professional and consulting fees relating to the
11
training in new computer systems and management restructuring. These costs are expected to reduce
significantly as a result of both the cost containment program and cessation of such events.
The Company recorded a net loss for fiscal 2000 of $4.5 million compared to a net loss of $2.9 million for
fiscal 1999. The increase in net loss was due to the reasons described above. The income tax benefit of
35.2% compares with a benefit of 39.4% for fiscal 2000 and 1999, respectively. The lower percentage is
partially due to the consolidation of NAIE, the wholly-owned subsidiary located in Switzerland, which has
five-year income tax holiday ending in fiscal 2005. NAIE contributed in its first year of operations a net loss
of less than $0.2 million during fiscal 2000, which included start-up and development expenses, and
provided net earnings for the last six months of fiscal 2000 of approximately $0.5 million. Diluted net loss
per common share was $0.78 for fiscal 2000 compared to diluted net loss per common share of $0.50 for
1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations through cash flow from operations, capital and
operating lease transactions, working capital credit facilities and equipment financing arrangements.
At June 30, 2001, the Company had cash of approximately $0.5 million, a decrease from approximately
$0.8 million at June 30, 2000. The Company used approximately $1.1 million in investing activities primarily
to fund improvements to its management information systems, manufacturing facilities and equipment in
both the United States and Switzerland. The Company also used approximately $3.6 million cash to pay-
down debt. The cash used in both investing and financing activities, was provided from operations of
approximately $4.4 million.
Capital expenditures for fiscal 2001 amounted to $960,000. These expenditures relate primarily to the
continuing development of the Swiss manufacturing facility of approximately $355,000 and domestic
manufacturing and information system improvements of approximately $605,000. The domestic capital
expenditures for manufacturing were spent on improvements to leasehold and building improvements and
for the acquisition of equipment primarily for our finished goods packaging operation. Additional
expenditures were made to improve the Company’s management information system as well as to improve
speed and security of the Company’s local-area and web-based networks. These expenditures were
funded primarily from cash provided by operations.
At June 30, 2001, the Company had working capital of approximately $5.4 million compared to
approximately $7.6 million at June 30, 2000. The $2.2 million decrease in working capital was primarily the
result of a decrease in current assets of $6.4 million offset by a decrease in current liabilities of $4.2 million.
Current assets declined primarily due to a decrease in inventories of approximately $1.4 million, collection
of the income tax receivable of $1.5 million and the establishment of a valuation reserve against the
deferred tax asset of approximately $1.5 million. Current liabilities declined primarily as cash was used to
pay-down debt of $3.7 million.
For fiscal 2001, the Company’s consolidated outstanding debt decreased to approximately $4.7 million
from approximately $8.4 million at June 30, 2000. The decrease of $3.7 million reflects the pay-down of
debt discussed in the previous paragraph. The composite interest rate on all outstanding debt as of June
30, 2001 was approximately 8.06%.
The Company has access to funds from existing working capital credit facilities to support future ongoing
operating requirements of approximately $3.1 million, net of borrowings outstanding under these facilities
as of June 30, 2001 of approximately $465,000. The working capital line of credit facilities are subject to
eligibility requirements for current accounts receivable and inventory balances. As of June 30, 2001 total
excess borrowing capacity based on eligible working capital balances was approximately $3.0 million. One
or more of the Company’s loan agreements contain a number of financial covenants. Such covenants
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 earnings.
The Company was not in compliance with certain of these ratios as of June 30, 2001, which the lender has
agreed to waive at June 30, 2001. As of July 1, 2001 the Company and the lender have amended the credit
agreement to provide new debt covenant restrictions under which the Company is compliant.
12
The Company believes that 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; the effectiveness of the expansion of
European operations and the ability to establish additional customers or changes to existing customer’s
business.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No.
101, “Revenue Recognition in Financial Statements” (“SAB No. 101”). SAB No. 101, as amended by SAB
No. 101B, summarizes certain of the SEC’s staff’s views in applying generally accepted accounting
principles to revenue recognition in financial statements. The Company implemented SAB No. 101 in fiscal
2001 with no significant effect to its financial statements.
In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting
Standards No. 141, Business Combinations (“FAS 141”) and No. 142, Goodwill and Other Intangible
Assets (“FAS 142”). FAS 141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. Under FAS 142, goodwill and intangible assets with indefinite
lives are no longer amortized but are reviewed annually, or more frequently if impairment indicators arise,
for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives, but with no maximum life. The amortization provisions of FAS 142 apply
to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible
assets acquired prior to July 1, 2001, the Company is required to adopt FAS 142 effective July 1, 2002.
The Company has not yet determined the impact these standards will have on its results of operations and
financial position.
ITEM 7A. 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 June 30, 2001, the Company’s cash equivalents consisted of financial instruments with original
maturities of three months or less.
The Company’s debt as of June 30, 2001 totaled $4.7 million and was comprised of fixed rate loans of $3.0
million and variable rate loans of $1.7 million. The average composite interest rates at June 30, 2001 for
fixed rate and variable rate loans were 8.5% and 7.25%, respectively.
NAIE has a line of credit denominated in Swiss Francs. The maximum borrowing allowed under the line is
CHF 1.0 million ($558,000). 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 June 30, 2001, the
Swiss Franc closed at 1.79 to 1 U.S. dollar. The same rate was 1.64 Swiss Francs to 1 U.S. dollar at June
30, 2000. Foreign exchange gain for the year-ended June 30, 2001 was $15,000.
An immediate adverse change of one hundred basis points in interest rates would increase interest
expense on an annual basis by $17,000. A 10% adverse change to the Swiss Franc exchange rate would
decrease earnings by $38,000.
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
13
operations could be seriously harmed by any of the following risks. In addition, the market price of our
common stock could decline due to any of these risks.
Recent Losses; Declining Sales
The Company incurred a net loss of approximately $4.9 million for the fiscal year ended June 30, 2001.
Sales for the fiscal year ended June 30, 2001, declined to approximately $42.2 million, compared to
approximately $47.8 million for the fiscal year ended June 30, 2000. There can be no assurance
management’s efforts to reverse these trends will be effective, or if they are, the Company cannot predict
the level of profitability or whether the Company will be able to maintain profitability. The Company expects
that 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.
Decline in Stock Price
The Company's stock price has experienced significant volatility at times during the past few years and is
currently near historic lows. In view of the Company's recent losses and the fact there can be no
assurances of future profitability, there can be no assurance that the stock price will not continue to decline.
Market conditions in the vitamin and nutritional supplement industry, such as increased price competition,
consolidation, oversupply of vitamin and supplement products, operating results of competitors, adverse
publicity and other factors such as customer and product announcements by the Company and operating
results which are lower than the expectations of analysts and our investors, may have a continuing adverse
affect on the price of the Company's stock.
Reliance on Limited Number of Customers for Majority of Revenue
For the fiscal year ended June 30, 2001, the Company had 3 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, and minimum earnings.
The Company was not in compliance with certain of these ratios at June 30, 2001, which the lender has
agreed to waive through June 30, 2001. As of July 1, 2001, the Company and the lender have amended
the credit agreement to provide new debt covenant restrictions under which the Company is compliant.
There can be no assurance the Company will be able to comply with the covenants or restrictions
contained therein during future quarters. 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 thereunder 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.
14
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. Mr. Spencer was terminated by the Company 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 he 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. 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, and internet 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. No supplier represented more than 10% of total raw material purchases for the fiscal year ended
June 30, 2001. 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.
Effect of Adverse Publicity
The Company's products consist primarily of dietary supplements (vitamins, minerals, herbs and other
ingredients). The Company regards these products as safe when taken as suggested by the Company. In
addition, various scientific studies have suggested the ingredients in some of the Company's products may
involve health benefits. The Company believes the growth in the dietary supplements business of the last
several years may, in part, be based on significant media attention and various scientific research
suggesting potential health benefits from the consumption of certain vitamin products. The Company is
indirectly dependent upon its customers' perception of the overall integrity of its business, as well as the
15
safety and quality of its products and similar products distributed by other companies which may not adhere
to the same quality standards as the Company. The business, operations, and financial condition of the
Company could be adversely affected if any of the Company's products or any similar products distributed
by other companies should prove or be asserted to be harmful to consumers, or should scientific studies
provide unfavorable findings regarding the effect of products similar to those produced by the Company.
Exposure to Product Liability Claims
The Company, like other retailers, distributors and manufacturers of products that are ingested, faces a risk
of exposure to product liability claims in the event that, among other things, the use of its products allegedly
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. For the fiscal year ended June 30, 2001 and
2000, the percentage of the Company's net sales to customers in international markets was approximately
29% and 32%, respectively. NAIE operates a manufacturing facility in Switzerland, which is intended to
facilitate an increase in sales of the Company's products overseas and which contributed approximately
18% and 8% of the Company’s net sales for the fiscal years ended June 30, 2001 and 2000, respectively.
The Company may experience difficulty expanding in international markets due to regulatory barriers, the
necessity of adapting to new regulatory systems, and problems related to entering new markets with
different cultural bases and political systems. Operating in international markets exposes the Company to
certain risks, including, among other things, (1) changes in or interpretations of foreign import, currency
transfer and other restrictions and regulations that among other things may limit the Company's ability to
sell certain products or repatriate profits to the United States, (2) exposure to currency fluctuations, (3) the
potential imposition of trade or foreign exchange restrictions or increased tariffs, 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,
promotion and advertising of vitamins, over-the-counter drugs, cosmetics and foods.
16
The Dietary Supplement Health and Education Act of 1994 ("DSHEA") was enacted on October 25, 1994.
DSHEA amends the Federal Food, Drug and Cosmetic Act by defining dietary supplements, which include
vitamins, minerals, nutritional supplements and herbs as a new category of food separate from
conventional food. DSHEA provides a regulatory framework to ensure safe, quality dietary supplements
and the dissemination of accurate information about such products. Under DSHEA, the FDA is generally
prohibited from regulating the active ingredients in dietary supplements as drugs unless product claims,
such as claims that a product may heal, mitigate, cure or prevent an illness, disease or malady, trigger drug
status.
DSHEA provides for specific nutritional labeling requirements for dietary supplements. DSHEA permits
substantiated, truthful and non-misleading statements of nutritional support to be made in labeling, such as
statements describing general well being resulting from consumption of a dietary ingredient or the role of a
nutrient or dietary ingredient in affecting or maintaining a structure or function of the body. The Company
anticipates the FDA will finalize manufacturing process regulations that are specific to dietary supplements
and require at least some of the quality control provisions applicable to drugs. The Company currently
manufactures its vitamins and nutritional supplement products in compliance with the food good
manufacturing processes.
The FDA is developing additional regulations to implement DSHEA. Labeling regulations may require
expanded or different labeling for the Company's vitamin and nutritional products. The Company cannot
determine what effect such regulations, when fully implemented, will have on its business in the future.
Such regulations could, among other things, require the recall, reformulation or discontinuance of certain
products, additional record keeping, warnings, notification procedures and expanded documentation of the
properties of certain products or scientific substantiation regarding ingredients, product claims, safety or
efficacy. Failure to comply with applicable FDA requirements could result in sanctions being imposed on
the Company or the manufacturers of its products, including warning letters, fines, product recalls and
seizures.
Governmental regulations in foreign countries where the Company plans to commence or expand sales
may prevent or delay entry into a market or prevent or delay the introduction, or require the reformulation
of, certain of the Company's products. In addition, the Company cannot predict whether new domestic or
foreign legislation regulating its activities will be enacted. Such new legislation could have a material
adverse effect on the business, operations and financial condition of the Company.
Failure to Attract and Retain Management Could Harm Our Ability to Achieve Profitability
The Company’s success is dependent in large part upon its continued ability to identify, hire, retain, and
motivate highly skilled management employees. Competition for these employees is intense, and the
Company may not be able to hire additional qualified personnel in a timely manner and on reasonable
terms. The majority of the Company's current corporate officers began their employment with the
Company in fiscal years 2000 and 2001. The inability of the Company to retain competent professional
management could adversely effect our ability to execute our business strategy.
Centralized Location of Manufacturing Operations
The Company currently manufactures the vast majority of its products at its manufacturing facilities in San
Marcos, California. Accordingly, any event resulting in the slowdown or stoppage of the Company's
manufacturing operations or distribution facilities in San Marcos could have a material adverse 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.
17
Concentration of Ownership; Certain Anti-Takeover Considerations
The Company's directors and executive officers beneficially own in excess of 22.9% of the outstanding
Common Stock as of June 30, 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 content, or any change in control involving the Company, as well as the removal of management,
even if such events would be beneficial to the interests of the Company's shareholders, and may limit the
price certain investors may be willing to pay in the future for shares of Common Stock.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data as required by this item are set forth on pages 25
through 51.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Form 8-K filed May 24, 2001, and amended June 12, 2001
Item 4. Changes In Registrant's Certifying Accountant
(b)
their appointment as independent auditors has been terminated effective May 16, 2001.
On May 16, 2001, the Board of Directors of the Company notified KPMG LLP (“KPMG”) that
The reports of KPMG on the Company’s financial statements for the fiscal years ended June 30, 1999
and June 30, 2000 did not contain any adverse opinion or disclaimer of opinion and were not qualified
or modified as to uncertainty, audit scope, or accounting principles.
In connection with the audits of the Company’s financial statements for the fiscal years ended June 30,
1999 and June 30, 2000, and in the subsequent interim period through March 31, 2001, there were no
disagreements with KPMG on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope and procedures, which disagreements if not resolved to their satisfaction
would have caused them to make reference in connection with their opinion to the subject matter of the
disagreement.
The Company provided KPMG with a copy of this disclosure and requested KPMG to furnish it with a
letter addressed to the Securities Exchange Commission stating whether it agrees with the above
statements. A copy of that letter dated May 24, 2001 was filed as Exhibit 16.1 to a current report filed
with the Securities and Exchange Commission on Form 8-K as amended.
(c)
The Registrant engaged the accounting firm of Ernst & Young LLP (“Ernst & Young”), on May
21, 2001, as the independent auditors to audit the Registrant's financial statements. Neither the
Registrant nor anyone acting on its behalf has previously consulted Ernst & Young for any purpose,
within the last two most recent fiscal years or any subsequent interim period.
18
Item 7. Financial Statements and Exhibits
(c)
Exhibit 16.1 Letter from KPMG to the Securities Exchange Commission dated May 24, 2001.
19
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be included under the caption “Directors and Executive Officers of
the Registrant” in the Registrant’s Proxy Statement for the next Annual Meeting of Stockholders and is
incorporated herein by reference.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this item will be included under the caption “Executive Compensation” in the
Registrant’s Proxy Statement for the 2001 Annual Meeting of Stockholders and is incorporated herein by
reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be included under the caption “Security Ownership of Certain
Beneficial Owners and Management” in the Registrant’s Proxy Statement for the 2001 Annual Meeting of
Stockholders and is incorporated herein by reference.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be included under the caption “Certain Relationships and Related
Transactions” in the Registrant’s Proxy Statement for the 2001 Annual Meeting of Stockholders and is
incorporated herein by reference.
20
PART IV
ITEM 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)
1. FINANCIAL STATEMENTS
The financial statements listed in the accompanying index to the consolidated financial statements are filed
as part of this report.
2. FINANCIAL STATEMENT SCHEDULES
The financial statement schedule listed in the accompanying index to the consolidated financial statements
is filed as part of this annual report. Schedules not included have been omitted because they are not
applicable or the information required is included in the financial statements and notes thereto.
(B) EXHIBITS
23.1 Consent of KPMG LLP, Independent Auditors
23.2
Consent of Ernst & Young LLP, Independent Auditors
(C) REPORTS FORM 8-K
The following filings, and amendment, on Form 8-K were filed during the fourth fiscal quarter, of the
fiscal year reported herein, ended June 30, 2001:
Form 8-K filed May 24, 2001, and amended June 12, 2001
Item 4. Changes in Registrant’s Certifying Accountant
21
NATURAL ALTERNATIVES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
JUNE 30, 2001
Independent Auditors' Report.........................................................................................................................23
Independent Auditors' Report.........................................................................................................................24
Consolidated Balance Sheets as of June 30, 2001 and 2000 ....................................................................... 25
Consolidated Statements of Operations and Comprehensive Loss
for the years ended June 30, 2001, 2000 and 1999 ...................................................................................... 27
Consolidated Statements of Stockholders' Equity for the years ended June 30, 2001, 2000 and 1999....... 28
Consolidated Statements of Cash Flows for the years ended June 30, 2001, 2000 and 1999.....................29
Notes to Consolidated Financial Statements ................................................................................................. 31
Schedule II - Valuation and Qualifying Accounts for the years ended June 30, 2001, 2000 and 1999 ........ 51
22
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
NATURAL ALTERNATIVES INTERNATIONAL, INC.
We have audited the accompanying consolidated balance sheet of Natural Alternatives International, Inc.
and subsidiaries as of June 30, 2001, and the related consolidated statements of operations and
comprehensive loss, stockholders’ equity and cash flows for the year then ended. Our audit also included
the financial statement schedule listed in the Index at Item 14 (a)(2) for the year ended June 30, 2001.
These financial statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Natural Alternatives International, Inc. and subsidiaries at June 30, 2001,
and the consolidated results of their operations and their cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
San Diego, California
August 13, 2001
except the second paragraph of
Note E, as to which the date is
October 10, 2001
23
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
NATURAL ALTERNATIVES INTERNATIONAL, INC.
We have audited the consolidated balance sheet of Natural Alternatives International, Inc. and subsidiaries
as of June 30, 2000 and the related consolidated statements of operations and comprehensive loss,
stockholders’ equity, and cash flows for each of the years in the two-year period ended June 30, 2000. In
connection with our audits of the consolidated financial statements, we have also audited the financial
statement schedule as of June 30, 2000. These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility is to express an opinion
on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Natural Alternatives International, Inc. and subsidiaries as of
June 30, 2000, and the consolidated results of their operations and their cash flows for each of the years in
the two-year period ended June 30, 2000, in conformity with accounting principles generally accepted in
the United States of America. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
San Diego, California
October 9, 2000
KPMG LLP
24
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND 2000
ASSETS
(Amounts in thousands except share data)
Current Assets:
Cash and cash equivalents
Accounts receivable - less allowance for doubtful
accounts of $470 at June 30, 2001 and
$330 at June 30, 2000 (Notes F and M)
Inventories (Notes C and F)
Income tax refund receivable (Note G)
Deferred income taxes (Note G)
Related parties notes receivable - current portion (Note K)
Prepaid expenses
Deposits
Other current assets
Total Current Assets
Property and equipment, net (Notes D and F)
Other Assets:
Deferred income taxes (Note G)
Related parties notes receivable, less current portion (Note K)
Other noncurrent assets, net
Total Other Assets
TOTAL ASSETS
June 30
2001
June 30
2000
$499
3,331
6,201
-
-
-
481
353
172
11,037
13,478
-
451
102
553
$815
4,097
7,627
1,500
1,467
815
635
390
154
17,500
15,037
826
444
302
1,572
$25,068
$34,109
See accompanying notes to consolidated financial statements.
(continued)
25
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS (continued)
JUNE 30, 2001 AND 2000
LIABILITIES AND STOCKHOLDERS' EQUITY
(Amounts in thousands except share data)
Current Liabilities:
Accounts payable
Accrued compensation and employee benefits
Lines of credit (Note F)
Notes payable (Note F)
Income taxes payable (Note G)
Current accrual for loss on lease obligation
Current installments of long-term debt and capital lease
Total Current Liabilities
Deferred income taxes (Note G)
Long-term debt and capital lease, less current installments (Note F)
Long-term pension liability (Note H)
Total Liabilities
Commitments and contingencies (Notes F, H, J and N)
Stockholders' Equity (Note I):
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 6,048,106 at
June 30, 2001 and 6,024,380 at June 30, 2000
Additional paid-in capital
Retained earnings
Treasury stock, at cost, 262,500 shares at June 30, 2001
and June 30, 2000
Accumulated other comprehensive loss (Note E)
Total Stockholders' Equity
June 30
2001
June 30
2000
$4,149
320
242
-
72
-
889
5,672
-
3,567
225
9,464
-
60
11,307
5,609
(1,283)
(89)
15,604
$4,422
355
2,803
1,741
-
50
490
9,861
-
3,345
417
13,623
-
60
11,272
10,498
(1,283)
(61)
20,486
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$25,068
$34,109
See accompanying notes to consolidated financial statements.
26
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
(Dollars in thousands except
share data)
Net sales
Cost of goods sold
Inventory write-off
GROSS PROFIT
Selling, general &
administrative expenses
Loss on abandonment of leased facility
Loss associated with impairment of
intangible assets acquired
LOSS FROM OPERATIONS
Other income (expense):
Interest income
Interest expense
Equity in loss of unconsolidated joint
venture
Foreign exchange gain
Other, net
LOSS BEFORE
INCOME TAXES
Provision for income taxes (benefit) (Note G)
2001
2000
1999
$42,158
$47,827
$57,430
33,970
8,188
8,848
-
-
1,544
(2,204)
92
(755)
(38)
15
371
(315)
(2,519)
2,370
42,152
2,000
3,675
8,670
1,729
-
45,010
12,420
11,965
5,392
-
-
(6,724)
(4,937)
139
(399)
(62)
74
71
(177)
(6,901)
(2,429)
185
(85)
-
-
15
115
(4,822)
(1,899)
NET LOSS
($4,889)
($4,472)
($2,923)
Unrealized loss on investments
Comprehensive Loss
(28)
(1)
(12)
($4,917)
($4,473)
($2,935)
NET LOSS PER COMMON SHARE:
Basic
Diluted
($0.85)
($0.85)
($0.78)
($0.78)
($0.50)
($0.50)
Weighted average common shares outstanding:
Basic shares
Diluted shares
5,769,585
5,769,585
5,756,705
5,756,705
5,868,159
5,868,159
See accompanying notes to consolidated financial statements.
27
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
(Dollars in thousands)
Shares
Amount
Common Stock
Additional
Paid-in
Capital
Accumulated
Other
Retained
Earnings
Treasury
Comprehensive
Stock
(Loss)
Total
Balance, June 30, 1998
5,768,209
$58
$9,757
$17,893
Issuance of common
stock upon exercise of
stock options
234,166
Income tax benefit from
stock options exercised
Treasury stock purchased
Net unrealized loss on
investments
Net loss
-
-
-
-
2
-
-
-
-
1,106
374
-
-
-
-
-
-
-
(2,923)
-
-
-
(1,116)
-
-
($48)
$27,660
-
-
-
(12)
-
1,108
374
(1,116)
(12)
(2,923)
Balance, June 30, 1999
6,002,375
$60
$11,237
$14,970
($1,116)
($60)
$25,091
Issuance of common
stock for employe stock
purchase plan
Treasury stock purchased
Net unrealized loss on
investments
Net loss
22,005
-
-
-
-
-
-
-
35
-
-
-
-
-
-
(4,472)
-
(167)
-
-
-
-
(1)
-
35
(167)
(1)
(4,472)
Balance, June 30, 2000
6,024,380
$60
$11,272
$10,498
($1,283)
($61)
$20,486
Issuance of common
stock for employee stock
purchase plan
Net unrealized loss on
investments
Net loss
23,726
-
-
-
-
-
35
-
-
-
-
(4,889)
-
-
-
-
35
(28)
(28)
-
(4,889)
Balance, June 30, 2001
6,048,106
$60
$11,307
$5,609
($1,283)
($89)
$15,604
See accompanying notes to consolidated financial statements.
28
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
(Dollars in thousands)
2001
2000
1999
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss
($4,889)
($4,472)
($2,923)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Provision for uncollectible accounts receivable
Write-off of inventory
Write-off of notes receivable
Tax benefit on option exercise
Depreciation and amortization
Impairment charge on intangible assets
Deferred income taxes
Pension expense, net of contributions
Loss on disposal of assets
Loss on investments
Loss on abandonment of leased facility,
net of amounts paid
Other
Foreign exchange gains on foreign debt
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Tax refund receivable
Prepaid expenses
Deposits
Accrued interest on related parties notes receivable
Other current assets
Other noncurrent assets
Accounts payable
Income taxes payable
Accrued compensation and employee benefits
286
-
89
-
2,487
1,216
2,293
(192)
32
37
(50)
-
-
373
1,426
1,500
154
37
(53)
(109)
12
(302)
72
(35)
(142)
2,000
80
-
2,182
-
(907)
7
162
63
(2,384)
-
(86)
3,560
249
729
420
875
(64)
-
393
(3,883)
-
(431)
566
-
353
374
1,638
-
(1,032)
163
5
1
4,739
10
-
4,477
1,629
(2,229)
28
(624)
-
-
-
(3,997)
(378)
348
Net Cash Provided by (Used in) Operating Activities
$4,384
($1,649)
$3,148
(continued)
29
NATURAL ALTERNATIVES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment
Capital expenditures
Issuance of notes receivable
Repayment of notes receivable
Investment purchases
Increases intangible assets
Other assets
2001
2000
1999
$
-
(960)
(100)
17
-
(11)
-
$
54
(5,161)
(826)
78
(100)
-
-
$
10
(5,700)
(641)
343
(334)
-
(399)
Net Cash Used in Investing Activities
(1,054)
(5,955)
(6,721)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowing on lines of credit
Borrowings on long-term debt and capital leases
Payments on long-term debt and capital leases
Issuance of common stock
Treasury stock acquisitions
Net Cash (Used in) Provided by Financing Activities
Net Decrease in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
(2,561)
1,708
(2,828)
35
-
(3,646)
(316)
815
2,833
5,455
(800)
35
(167)
7,356
(248)
1,063
-
-
(70)
1,108
(1,116)
(78)
(3,651)
4,714
Cash and Cash Equivalents at End of Year
$
499
$
815
$
1,063
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest
Income taxes (refunded) paid
Disclosure of non-cash activities:
Net unrealized gains (losses) on investments
$
676
(1,497)
$
365
(2,252)
$
84
1,196
$
(28)
$
(1)
$
(12)
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
Related parties notes receivable
Investments
Accounts receivable
Other current assets
Accounts payable
$
855
150
107
64
29
1,205
$
$
-
-
-
-
-
-
$
$
-
-
-
-
-
-
$
See accompanying notes to consolidated financial statements.
30
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Natural Alternatives International, Inc. manufactures vitamins, micronutrients and related nutritional
supplements, and provides innovative private-label products for specialized corporate, institutional and
commercial accounts worldwide. The Company operates in a single segment, nutritional supplements.
Principles of Consolidation
The consolidated financial statements include the accounts of Natural Alternatives International, Inc. and its
wholly-owned subsidiary, NAIE Natural Alternatives International Europe, SA (“Company”). All significant
intercompany accounts and transactions have been eliminated. The functional currency of the Company’s
foreign subsidiary is the United States dollar. The financial statements of the subsidiary have been
translated at either current or historical exchange rates, as appropriate, with gains and losses included in
the consolidated statements of operations.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when
purchased to be cash equivalents.
Inventories
Inventories are recorded at the lower of cost (first-in, first-out) or market (net realizable value). Such costs
include raw materials, labor and manufacturing overhead.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and equipment is provided using the
straight-line method over their estimated useful lives, generally ranging from 3 to 39 years. Leasehold
improvements are amortized using the straight-line method over the shorter of the life of the improvement
or the remaining term of the lease. Maintenance and repairs are expensed as incurred. Significant
expenditures that increase economic useful lives are capitalized.
Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the
assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
Revenue Recognition
Revenue from sales of product, and related cost of products sold, are recognized at the time title passes to
the customer, which usually occurs upon shipment. Customers generally do not have the right to return
product unless damaged or defective.
(continued)
31
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cost of Goods Sold
Cost of goods sold includes raw material, labor and manufacturing overhead.
Research and Development Costs
Research and development costs are charged to expense when incurred and were $718,000, $774,000,
and $754,000 for the years ended June 30, 2001, 2000, and 1999, respectively.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Under this method, deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in operations in the period that includes the enactment date.
Stock Option Plans
The Company accounts for its stock-based employee compensation for stock options using the intrinsic
value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations, as allowed under SFAS 123. Accordingly, compensation cost is
measured as the excess, if any, of the fair value of the Company's stock at the date of the grant over the
price the employee must pay to acquire the stock.
Fair Value of Financial Instruments
The carrying amounts of certain of the Company's financial instruments, including cash and cash
equivalents, accounts receivable, notes receivable, investments, accounts payable, line of credit and note
payable approximates fair value due to the relatively short maturity of such instruments. The carrying
amounts for long-term debt approximate fair value as the interest rates and terms are comparable to rates
and terms that could be obtained currently for similar instruments.
Use of Estimates
Management of the Company has made a number of estimates and assumptions relating to the reporting
of assets and liabilities, revenue and expenses, and the disclosure of contingent assets and liabilities to
prepare these consolidated financial statements in conformity with accounting principles generally accepted
in the United States. Actual results could differ from those estimates.
Net Earnings (Loss) per Share
The Company computes net earnings (loss) per share in accordance with Statement of Financial
Accounting Standards No. 128, “Earnings Per Share” (“SFAS 128”). This statement requires the
presentation of basic earnings (loss) per share, computed using the weighted average number of shares
outstanding during the period, and diluted earnings (loss) per share, computed using the additional dilutive
effect of all dilutive securities. The dilutive impact of stock options account for the additional weighted
average shares of common stock outstanding for the Company’s diluted earnings (loss) per share
computation. Basic and diluted earnings (loss) per share have been calculated as follows:
32
(continued)
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
For the Years Ended June 30, 2001, 2000, and 1999
(Amounts in thousands except share data)
2001
2000
1999
Numerator:
Net loss - Numerator for
basic and diluted loss per
share - loss available to
common shareholders (In thousands)
Denominator:
Denominator for basic
loss per share - weighted
average shares
Denominator for diluted
loss per share - adjusted weighted
average shares with assumed
conversions
Basic loss per share
Diluted loss per share
($4,889)
($4,472)
($2,923)
5,769,585
5,756,705
5,868,159
5,769,585
5,756,705
5,868,159
$
(0.85)
$
(0.78)
$
(0.50)
$
(0.85)
$
(0.78)
$
(0.50)
For the years ended June 30, 2001, 2000 and 1999, shares related to stock options of 524,400, 313,000
and 352,750, respectively, were excluded from the calculation of diluted loss per share, as the effect of
their inclusion would be anti-dilutive.
Concentrations of Credit Risk
Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash
and cash equivalents and accounts receivable. The Company places its cash and cash equivalents with
highly rated financial institutions. Credit risk with respect to receivables is concentrated with the Company’s
largest customers (see Note M). These customers’ receivable balances collectively represent 85% of gross
accounts receivable at June 30, 2001 and 71% at June 30, 2000. Concentrations of credit risk related to
the remaining accounts receivable balances are limited due to the number of customers comprising the
Company’s remaining customer base.
Reclassifications
In July 2000, the Emerging Issues Task Force (“EITF”) finalized its consensus on Issue No. 00-10,
“Accounting for Shipping and Handling Revenues and Costs.” Pursuant to EITF Issue No. 00-10 and the
Securities and Exchange Commission’s position on this issue, all amounts billed to customers for shipping
and handling should be included in “net sales” and costs incurred related to shipping and handling should
be included in “cost of goods sold.” The Company had previously included shipping and handling revenues
and costs in “selling” expenses. The Company’s Statement of Operations for all periods presented has
been reclassified and reflects the classification required by EITF Issue No. 00-10. As a result, revenues for
the years ended June 30, 2001, 2000 and 1999 were increased by the amounts billed to customers for
freight of $240,000, $75,000 and $11,000, respectively, which was previously offset by Shipping Expenses
in the warehouse operations. Shipping Expenses were $279,000, $337,000 and $224,000 for fiscal years
2001, 2000 and 1999, respectively.
Certain other prior period amounts have been reclassified to conform with the current period presentation.
33
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
B.
INTERNATIONAL SUBSIDIARY
On January 22, 1999, Natural Alternatives International Europe, SA (“NAIE”), was incorporated as a wholly-
owned subsidiary of the Company, based in Manno Switzerland, which is adjacent to the city of Lugano. In
September 1999, NAIE opened its new manufacturing facility to provide manufacturing capability in
encapsulation and tablets, finished goods packaging, quality control laboratory testing, warehousing,
distribution and administration. Upon formation, NAIE obtained from the Swiss tax authorities a five-year
federal and local income tax holiday ending in fiscal 2005.
C.
INVENTORIES
Inventories are comprised of the following at June 30:
(Dollars in thousands)
2001
2000
Raw materials
Work in progress
Finished goods
$2,758
2,196
1,247
$6,201
$4,187
2,409
1,031
$7,627
D.
PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at June 30:
(Dollars in thousands)
Land
Building and building improvements
Machinery and equipment
Office equipment and furniture
Vehicles
Leasehold improvements
Total property and equipment
Less accumulated depreciation and amortization
Property and equipment, net
Life Used For
Depreciation
NA
5 - 39 years
3 - 15 years
5 - 7 years
3 years
5 - 39 years
2001
2000
$393
3,277
14,675
3,813
197
4,100
26,455
(12,977)
$13,478
$393
3,285
14,301
3,679
179
3,920
25,757
(10,720)
$15,037
E.
INVESTMENTS
The Company’s investments include equity securities classified as available for sale and carried at fair
value, with unrealized gains and losses excluded from net earnings and are included in Accumulated Other
Comprehensive Loss. Securities are valued at $17,000 and $44,000 as of June 30, 2001 and 2000 and are
included in other current assets in the accompanying balance sheet. The security portfolio includes gross
unrealized losses, net of tax, of $89,000 and $61,000 at June 30, 2001 and 2000, respectively.
34
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F.
DEBT
On December 20, 2000, the Company replaced an existing $9.0 million working capital line of credit with
$9.35 million in new financing. The new financing consists of a $7.0 million working capital line of credit, a
$1.6 million term note, and an additional $750,000 term note facility to be used to finance equipment
purchases. The entire credit facility carries an annual interest rate of prime plus 0.5%, for an effective
interest rate of 7.25% at June 30, 2001. Borrowings under the 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. As of June 30, 2001, the Company was not in compliance with certain
financial covenant provisions of the credit agreement.
In October 2001, the Company and the lender amended the credit agreement to provide new debt
covenant restrictions and waive default rights and remedies as of June 30, 2001. Under the amended
agreement the working capital line of credit was reduced to $2.5 million. The entire credit facility, including
the term note, now expires on July 1, 2002. The term note is to be repaid in monthly installments of
approximately $26,700 with the balance due upon expiration of the agreement on July 1, 2002.
As of June 30, 2001, amounts outstanding under the line of credit, the term note, and the equipment
purchases facility were $213,000, $1.4 million, and $-0-, respectively. The Company expects this line to be
refinanced in the normal course of business.
On May 2, 1996, the Company entered into a term note agreement for $1.1 million, secured by a building,
at an annual interest rate of 8.25%. The note is due in June 2011 and provides for principal and interest
payable in monthly installments of $10,800. As of June 30, 2001 the outstanding amount is $872,000.
NAIE has a line of credit agreement permitting borrowings up to CHF 1.0 million, or approximately
$558,000 at June 30, 2001, at an annual interest rate of 5.5%. The line of credit requires minimum annual
principal payments of CHF 250,000, or $139,000, 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
June 30, 2001, the Company has converted approximately $223,000 of amounts previously borrowed
under the line of credit, 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 was
approximately $30,000 as of June 30, 2001.
In March 2001, NAIE entered into a capital lease arrangement with a bank for CHF 182,000, or
approximately $108,000. The lease provides for monthly payments of approximately $3,000 over its thirty
six (36) month term. Proceeds were used to finance capital equipment purchased.
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. As of June 30, 2001 the outstanding amount is $1.828
million.
(continued)
35
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F.
DEBT (continued)
The composite interest rate on all outstanding debt at June 30, 2001 was 8.06%.
Aggregate amounts of long-term debt maturities
as of June 30, 2001 are as follows:
(Dollars in thousands)
2002
2003
2004
2005
2006
Thereafter
$
857
908
963
651
243
742
$
4,364
Future minimum payments under capital lease obligation
as of June 30, 2001 are as follows:
(Dollars in thousands)
$
2002
2003
2004
2005
2006
Thereafter
Less amount representing interest
Present value of minimum lease payments
Less current portion
36
36
27
-
-
-
99
7
92
(32)
Long-term portion
$
60
36
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
G.
INCOME TAXES
Income taxes (benefit) for the year ended June 30 consist of the following:
(Dollars in thousands)
2001
2000
1999
Current:
Federal
State
Deferred:
Federal
State
$
-
-
-
1,992
378
2,370
($1,525)
3
(1,522)
(755)
(152)
(907)
Income taxes (benefit)
$2,370
($2,429)
($857)
(10)
(867)
(689)
(343)
(1,032)
($1,899)
The provision (benefit) for deferred income taxes for the year ended June 30 consists of the following:
(Dollars in thousands)
2001
2000
1999
Accrual for loss on lease obligation
Accelerated depreciation and
amortization for tax purposes
Increase in valuation allowance
Inventories
Bad debt expense
Accrued vacation expense
Customer deposits
State income taxes
Credit carryforward
Investment loss carryforward
Other, net
Net operating loss carryforward
$
-
$
951
$
(971)
21
83
(697)
308
(15)
(80)
-
(126)
36
(102)
(1,286)
($907)
93
-
(106)
(245)
7
-
232
-
-
14
(56)
($1,032)
91
3,355
(90)
(51)
(18)
-
-
-
-
304
(1,221)
$2,370
37
(continued)
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
G.
INCOME TAXES (continued)
Net deferred tax assets and deferred tax liabilities as of June 30 are as follows:
(Dollars in thousands)
Deferred tax assets:
Accrual for loss on lease obligation
Allowance for doubtful accounts
Accrued vacation expense
Credit carryforward
Allowance for inventories
Other, net
Deposits
Net operating loss carryforward
Total gross deferred tax assets
Less valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Accumulated depreciation and amortization
Federal impact of state NOL carryforward
Net deferred tax liabilities
2001
2000
$
-
184
78
126
1,220
116
-
2,456
4,180
3,474
706
706
-
706
$
20
135
61
126
1,160
102
80
1,494
3,178
119
3,059
614
152
766
Net deferred tax asset
$
-
$2,293
At June 30, 2001, the Company has federal and state tax net operating loss carry forwards of
approximately $6,400,000 and $4,700,000, respectively. The federal and state tax loss carryforwards will
begin to expire in 2019 and 2005, respectively, unless previously utilized.
A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either
expire before the Company is able to realize their benefit, or that future deductibility is uncertain. The
valuation allowance for deferred tax assets was $119,000 at June 30, 2000. In assessing the realizability of
deferred tax assets, management considered, among other things, the scheduled reversal of deferred tax
liabilities, projected future taxable income, and other planning strategies. As of June 30, 2000 management
believed it was more likely than not that the Company would realize the benefit of the net deferred tax
asset, net of the existing valuation allowance.
As reflected in the Company’s filings on Form 10-Q for the three fiscal quarters ended March 31, 2001
and based upon various forecasts of future taxable income, management believed that as to the deferred
tax assets as of June 30, 2000 and subsequent additions through the third quarter of fiscal 2001, it was
more likely than not that the Company would realize the benefit of the net deferred tax assets. During the
fourth fiscal quarter of 2001, management reviewed the likelihood of the realizability of the net deferred tax
assets. Based upon the comprehensive business plan completed in June 2001, the historical operating
losses and the uncertainty regarding sufficient near term taxable income, management believes that this
evidence creates sufficient uncertainty regarding the realizability of the net deferred tax assets. Therefore,
a valuation allowance of $3,474,000 was recorded.
As was discussed in Note B, NAIE obtained from the Swiss tax authorities a five year federal and local
income tax holiday ending in fiscal 2005. NAIE had income of $1,471,000 for the year ended June 30,
2001.
38
(continued)
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
G. INCOME TAXES (continued)
A reconciliation of income taxes computed by applying the statutory federal income tax rate of 34% to
earnings before income taxes for the year ended June 30 is as follows:
(Dollars in thousands)
2001
2000
1999
Income taxes (benefit) computed at
statutory federal income tax rate
State income taxes (benefit), net of federal
income tax benefit (expense)
Increase (decrease) in valuation allowance
Expenses not deductible for tax purposes
Foreign tax holiday
Other
$
(857)
$
(2,346)
$
(1,640)
(101)
3,355
70
(442)
345
(214)
83
68
57
(77)
(220)
-
32
-
(71)
Income taxes (benefit) as reported
$
2,370
$
(2,429)
$
(1,899)
Effective tax rate
94.1%
35.2%
39.4%
H.
EMPLOYEE BENEFIT PLANS
The Company has a profit sharing plan pursuant to Section 401(k) of the Internal Revenue Code, whereby
participants may contribute a percentage of compensation, but not in excess of the maximum allowed
under the Code. All employees with twelve months and at least one thousand hours of service during the
twelve-month period are eligible to participate in the plan. The Company may make contributions at the
discretion of its Board of Directors. The Company contributed and expensed $-0-, $117,000, and $167,000
in 2001, 2000, and 1999, respectively.
The Company has a "Cafeteria Plan" pursuant to Section 125 of the Internal Revenue Code, whereby
health care benefits are provided for active employees through insurance companies. Substantially all
active full-time employees are eligible for these benefits. The Company recognizes the cost of providing
these benefits by expensing the annual premiums, which are based on benefits paid during the year. The
premiums expensed for these benefits totaled $271,000, $348,000, and $366,000 for 2001, 2000, and
1999, respectively.
In December 1999, the Company adopted an employee stock purchase plan that provides for the issuance
of up to 150,000 shares of Common Stock. The plan is intended to qualify under Section 423 of the Internal
Revenue Code and is for the benefit of qualifying employees, as designated by the Human Resource
Committee of the Board of Directors. Under the terms of the plan, participating employees are eligible to
have a maximum of 10% of their compensation withheld through payroll deductions to purchase shares of
Common Stock at the lower of 85% of (i) the fair market value at the beginning of each offering period or (ii)
the fair market value on predetermined dates. As of June 30, 2001, 45,731 shares of Common Stock have
been issued pursuant to this plan.
The Company sponsors a defined benefit pension plan (the “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, the Company adopted an amendment to freeze benefit accruals to the
participants of the Plan, resulting in the recognition of $97,606 of net curtailment gains in 1999. The gain
resulted from the net decrease of the Company’s benefit obligation. At June 30, 2001, the estimated
amortized portion of the unfunded estimated accrued liability for prior service cost, using a 30-year funding
period, amounted to approximately $225,000. This amount has been accrued. The Company’s policy is to
fund the net pension cost accrued. However, the Company would 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.
(continued)
39
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
H.
EMPLOYEE BENEFIT PLANS (continued)
Disclosure of Funded Status
The following table sets forth the Plan’s funded status and amount recognized in the Company’s
consolidated balance sheets at June 30, after the effect of curtailment:
(Dollars in thousands)
2001
2000
Change in Benefit Obligation
Benefit obligation at beginning of year
Interest cost
Actuarial (gain)/loss
Benefits paid
Other
Benefit obligation at end of year
Change in Plan Assets
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Other
Fair value of plan assets at end of year
Reconciliation of Funded Status
Funded status (under)/over funded
Unrecognized net actuarial (gain)/loss
(Accrued)/Prepaid benefit cost
Additional Minimum Liability Disclosures
Accrued benefit liability
$
$
$
$
988
68
141
-
(219)
978
768
18
201
-
(219)
768
$
1,179
69
(227)
(33)
-
988
$
$
$
769
32
-
(33)
-
768
$
$
(210)
(15)
(225)
$
$
(220)
(197)
(417)
$
(210)
$
(220)
(continued)
40
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
H.
EMPLOYEE BENEFIT PLANS (continued)
Net Periodic Benefit Cost
The Net Periodic Benefit Cost for the fiscal years ending June 30 includes the following components:
(Dollars in thousands)
2001
2000
Components of Net Periodic Benefit Cost
Interest cost
Expected return on Plan Assets
Recognized net actuarial (gain)/loss
Effect of special events (curtailment)
Net periodic benefit cost
68
(58)
(6)
4
$8
68
(61)
-
-
$7
Assumption and Method Disclosures
Discount rate
Expected long term rate of return
2001
2000
6.50%
7.50%
7.00%
7.50%
Amortization method
Straight-line
Straight-line
I.
STOCKHOLDERS' EQUITY
Treasury Stock
In February 1999, the Board of Directors approved a repurchase program of up to 500,000 shares of the
Company’s common stock. As of June 30, 2001, 262,500 shares had been repurchased under this
repurchase program, including 13,000 shares from an officer of the Company.
Stock Option Plans
Effective June 5, 1992, the Company adopted the 1992 Incentive Stock Option Plan for which 500,000
common shares have been reserved for issuance to officers, directors, and key employees of the
Company. The plan provides that no option may be granted at an exercise price less than the fair market
value of the common stock of the Company on the date of grant. On September 9, 1993, 200,000 options
were granted with an exercise price equal to the fair market value price of $4.875 per share. On January
21, 1998, 300,000 options were granted with an exercise price equal to the fair market value price of
$10.50 per share. During fiscal 1999, 188,250 options were forfeited, and on May 10, 1999 an additional
70,000 options were granted with an exercise price equal to the fair market value price of $3.78 per share.
During fiscal 2000 an additional 30,000 options were granted on December 6, 1999 to equal the fair market
value price of $3.19 per share and 38,750 options were forfeited. During fiscal 2001 no options were
granted under this plan, but 8,000 were forfeited.
41
(continued)
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
I.
STOCKHOLDERS' EQUITY (continued)
Also effective June 5, 1992, the Company adopted the 1992 Nonqualified Stock Option Plan and reserved
a total of 250,000 common shares for issuance to officers, employees, and consultants of the Company.
On September 9, 1993, 250,000 options were granted with an exercise price equal to the fair market value
price of $4.875 per share. All remaining options under this plan were exercised or forfeited as of June 30,
1999. As of June 30, 2001, no additional shares are reserved.
Effective December 9, 1994, the Board of Directors approved the 1994 Nonqualified Stock Option Plan for
which 500,000 common shares were reserved for issuance to officers, employees, and consultants of the
Company. On January 24, 1995, 500,000 options were granted with an exercise price equal to the fair
market value price of $4.625 per share. During the fiscal years 2000 and 1999, a total of 34,166 options
were exercised, while 296,000 options were forfeited. As of June 30, 2001, no additional shares are
reserved.
On October 28, 1998, and as amended March 11, 1999, the Board of Directors adopted the 1998 Outside
Director Compensation Plan that provided non-employee directors an annual grant of nonqualified stock
options. During fiscal 2000, three options for 10,000 shares each, were granted as of March 11, 1999, at a
fair market value price of $5.75 per share, and one grant of 10,000 shares was subsequently forfeited.
At the Company’s Annual Meeting held on December 6, 1999, the Stockholders approved the adoption of
the 1999 Omnibus Equity Incentive Plan (the “1999 Plan”) and reserved a total of 500,000 common shares
for issuance to officers, directors, employees, and consultants of the Company. Grants under this Plan can
be either Incentive Stock Options, or Nonqualified Stock Options. During fiscal 2000 there were three
grants under this Plan - 108,500 options were granted at $2.031 per share, 30,000 options were granted at
$2.156 per share, and 12,000 options were granted at $1.813 per share on February 10, 2000, March 1,
2000, and June 29, 2000, respectively. Of the 150,500 options granted in fiscal 2000, 30,500 were forfeited
as of June 30, 2000. During fiscal 2001 total options granted were 233,000; 167,000 options were granted
at $2.00 per share on August 28, 2000, 20,000 options at $2.44 per share were granted on January 8,
2001, 30,000 options were granted at $2.81 per share on March 12, 2001, 10,000 options at $2.38 per
share were granted on April 16, 2001, and 6,000 options were granted at $2.35 per share on June 22,
2001. Total options forfeited during fiscal 2001 were 13,600.
With the exception of the 1999 Plan; all stock options under each of the plans have five-year terms and all
options become fully vested within three years of their grant date. The stock options granted under the
1999 Plan have either a five or a ten-year term and become fully vested within three years of their grant
date.
(continued)
42
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
I.
STOCKHOLDERS' EQUITY (continued)
Stock option activity during the periods indicated is summarized below:
Outstanding and exercisable at June 30, 1998
Exercised
Forfeited
Granted
Outstanding at June 30, 1999
Exercised
Forfeited
Granted
Outstanding at June 30, 2000
Exercised
Forfeited
Granted
Outstanding at June 30, 2001
Exercisable at June 30, 2001
Weighted-average exercise price:
June 30, 2001
June 30, 2000
1992
Incentive
Plan
338,391
(38,391)
(188,250)
70,000
181,750
-
(38,750)
30,000
173,000
-
(8,000)
-
165,000
128,333
1992
Nonqualified
Plan
61,609
(61,609)
-
-
-
-
-
-
-
-
-
-
-
-
1994
Nonqualified
Plan
330,166
(34,166)
(125,000)
-
171,000
-
(171,000)
-
-
-
-
-
-
-
1998 Outside
Director Plan
1999 Plan
-
-
-
-
-
-
(10,000)
30,000
20,000
-
-
-
20,000
13,334
-
-
-
-
-
-
(30,500)
150,500
120,000
-
(13,600)
233,000
339,400
36,540
$
$
7.13
7.29
$
-
$
-
$
-
$
-
$
$
5.75
5.75
$
$
2.13
2.04
Weighted-average remaining contractual life in years
Available for grant at June 30, 2001
2.3
143,000
-
-
-
-
2.7
-
8.2
160,600
The fair value of the option grants was estimated on the date of the grant using the Black-Scholes option-
pricing model with the following assumptions for fiscal 2001: risk-free interest rate of 6.0% at the grant date;
dividend yield of zero; expected life of four years depending on the option termination date; and volatility of
52%. The weighted average fair value of the options granted during fiscal 2001 was $2.17 per share.
The fair value of the option grants was estimated on the date of the grant using the Black-Scholes option-
pricing model with the following assumptions for fiscal 2000: risk-free interest rate of 6.0% at the grant date;
dividend yield of zero; expected life of three to six years depending on the option termination date; and
volatility of 88%. The weighted average fair value of the options granted during fiscal 2000 was $1.61 per
share.
The fair value of the option grants was estimated on the date of the grant using the Black-Scholes option-
pricing model with the following assumptions for fiscal 1999: risk-free interest rate of 5.9% at the grant date;
dividend yield of zero; expected life of three to six years depending on the option termination date; and
volatility of 62.1%. The weighted average fair value of the options granted during fiscal 1999 was $1.74 per
share.
The Company applies APB Opinion No. 25 in accounting for its Plans and, accordingly, no compensation
cost has been recognized for its stock option grants to employees in the financial statements. Had the
Company determined compensation cost based on the fair value at the grant date for its stock options
under SFAS No. 123, the Company’s net earnings (loss) would have been the pro forma amounts indicated
below. These proforma amounts are not necessarily representative of the effects on reported net income
(loss) for future years.
(continued)
43
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
I.
STOCKHOLDERS' EQUITY (continued)
(Dollars in thousands except per share data)
Net loss, as reported
Pro forma net loss
Basic loss per share, as reported
Pro forma basic loss per share
Diluted earnings loss per share, as reported
Pro forma diluted loss per share
Other Stock Options
2001
2000
1999
($4,889)
($4,993)
($0.85)
($0.87)
($0.85)
($0.87)
($4,472)
($4,750)
($0.78)
($0.83)
($0.78)
($0.83)
($2,923)
($3,311)
($0.50)
($0.56)
($0.50)
($0.56)
On January 24, 1995, the Board of Directors granted 100,000 options with an exercise price of $4.625 in
exchange for consulting services and reserved 100,000 common shares. The options were exercised in
January 1999. As of June 30, 2001, no additional shares are reserved.
J.
COMMITMENTS
The Company leases part of its main facilities under leases that are classified as non-cancelable operating
leases.
The Company entered into two lease agreements during fiscal year 1999 for adjacent buildings located in
Vista, California. The facilities are leased from an unaffiliated third party and consist of a total of
approximately 74,000 square feet. The lease for the first building commenced in August 1998 under a 5-
year lease agreement and consists of approximately 54,000 square feet to be utilized as a warehousing
and blending facility. The lease for the second building commenced in March 1999 under a 3.5-year lease
agreement for the rental of approximately 20,000 square feet to be utilized as a packaging facility.
NAIE leases two units in Manno, a town adjacent to Lugano, Switzerland. Both units total approximately
22,000 square feet. The facilities are used primarily for the use of manufacturing, packaging and
distribution of nutritional supplement products for the European marketplace. The Company entered into a
five-year lease agreement in March 1999 for the initial unit containing 18,000 square feet, with the facility
becoming fully operational for manufacturing operations in September 1999. The lease for the second unit
(the term of which is the same as the first unit) was completed in March 2001, for an additional 4,000
square feet. This unit is expected to be operational in the fourth quarter of fiscal 2002.
Minimum rental commitments (exclusive of property tax, insurance and maintenance) under all non-
cancelable operating leases, including the lease agreements referred to above, (with initial or remaining
lease terms in excess of one year) are set forth below:
(continued)
44
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
J.
COMMITTMENTS (continued)
(Dollars in thousands)
2002
2003
2004
2005
2006
$822
817
354
239
108
$2,340
Rental expense totaled $780,000, $647,000 and $419,000 for the years ended June 30, 2001, 2000
and1999, respectively.
K.
RELATED PARTY TRANSACTIONS
The Company had sales of $-0-, $24,000, and $553,000 for fiscal year 2001, 2000 and 1999, respectively,
to a customer in which directors, officers and employees previously had direct and indirect equity
ownership. At June 30, 1999 the amount receivable from this company was $91,000, net of a $74,000 bad
debt allowance reserve. During fiscal 2000, the Company received payments of $155,000 and wrote off
the remaining balance of $34,000. In addition, at June 30, 1999 the Company had a net note receivable
from this customer of $50,000. This entire amount was written off as uncollectable during the year ended
June 30, 2000. A lawsuit was filed during fiscal 2001 and $65,000 was received from this company. The
total amount was credited to Other Income as recovery of amounts previously written off.
During fiscal 1999, the Company made 6% interest-bearing loans of $20,000, secured by Company
common stock, to the Vice President of Science and Technology, the Vice President, Marketing, and a
former Vice President, Operations. During fiscal 2000 an additional loan of $19,000, with interest at 6% and
secured by a second deed of trust on a principal residence, was made to a former Vice President,
Marketing. During fiscal 2000 the loan amount, including accrued interest, to the Vice President,
Operations, was repaid upon termination of his employment. As of June 30, 2001, the notes receivable
from the former Vice President, Marketing were fully reserved as uncollectible. The amount reserved was
$39,000 plus accrued interest of approximately $4,000. During fiscal 2001, certain notes and accrued
interest receivable, totaling $61,216 from the Company’s Vice President of Science and Technology, which
had been fully reserved in fiscal 1999, as uncollectible, were forgiven.
During fiscal 2001, 2000 and 1999, the Company paid the brother and sister-in-law of the Chief Executive
Officer approximately $25,000, $58,000 and $33,000, respectively, in settlement of an existing consulting
arrangement. As of June 30, 2001, the agreement has expired.
During each of the fiscal years 2001, 2000 and 1999, the Company made non-interest loans to a member
of the Board of Directors in the amount of $50,000. Amounts owed on these loans, which are secured by
proceeds from life insurance policies, were $350,000, $300,000 and $250,000 at June 30, 2001, 2000 and
1999, respectively.
During fiscal 2001, the Company made a loan to a consultant of $50,000. As of June 30, 2001, the note
and interest receivable (total of $52,000), was reserved as uncollectible.
(continued)
45
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
K.
RELATED PARTY TRANSACTIONS (continued)
The balances of these notes receivables from related parties and employees as of June 30, including
accrued interest are shown below.
(Dollars in thousands)
2001
2000
Chief Executive Officer
Vice President of Science and Technology
Vice President, Marketing
Chairperson - Board of Directors
Other Current Employees
Former Officers
Former Employees
Other
Former Customers
FitnessAge (See Note L)
$
$
71
27
-
350
1
-
-
2
-
-
451
67
21
41
300
24
-
1
-
-
805
1,259
$
$
The Company accrued interest from related parties notes receivable of $4,000 and $67,000 for fiscal 2001
and fiscal 2000, respectively.
L.
JOINT VENTURE AND INTANGIBLE ASSETS ACQUIRED
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 November 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 through
various channels to individuals who have taken the FitnessAge assessment. Under terms of a 10-year
Exclusive Manufacturing Agreement, the Company was to be the exclusive manufacturer of all nutritional
supplements and related products sold by Custom Nutrition. Custom Nutrition has 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.
(continued)
46
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
L.
JOINT VENTURE AND INTANGIBLE ASSETS ACQUIRED (continued)
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.
During the year ended June 30, 2000, the Company had sales of $135,000 to Custom Nutrition. At June
30, 2000, the net accounts receivable from this customer was approximately $80,000.
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.
FitnessAge did not meet its loan payment obligation on February 1, 2001 pursuant to the Extension. 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 retained its equity interest in
FitnessAge by its ownership of common stock. As of March 31, 2001, the Company believed the assets
had future value based on various alternatives, including but not limited to, moving forward to
commercialize the assets alone, or with others, restructuring the joint venture with FitnessAge, or other
alternatives.
As of June 30, 2001, the management and the Board of Directors determined based on their on-going
evaluation of the various alternatives to commercialize the physical assessment software, that the
Company will not dedicate the resources necessary to recover the carrying value of the asset.
Management has determined that the fair value of the asset is de minimus and therefore recorded a charge
of $1,216,000 to write off the carrying value of the intangible asset. In addition, the Company has incurred
expenses of approximately $328,000 in its efforts toward commercializing the assets.
M.
ECONOMIC DEPENDENCY
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 10% or more of the respective year’s
total sales, are shown below:
(continued)
47
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
M.
ECONOMIC DEPENDENCY (continued)
Customer
Customer 1
Customer 2
Customer 3
Customer 4
Customer 5
2001
Sales by
Customer
%(a)
2000
Sales by
Customer
$
21,889,000
4,242,000
52%
10%
$
20,818,000
8,958,000
(b)
(b)
4,219,000
10%
(b)
(b)
(b)
%(a)
44%
18%
1999
Sales by
Customer
$
13,393,000
(b)
18,390,000
9,383,000
(b)
%(a)
23%
32%
16%
$
30,350,000
72%
$
29,776,000
62%
$
41,166,000
71%
(a) Percent of total sales (b) Sales for the year were less than 10% of total sales.
Accounts receivable from these customers totaled $2,817,000 and $2,889,000 at June 30, 2001 and
2000, respectively.
N.
CONTINGENCIES
The Company is a party to a lawsuit filed in January 2000 by its former President, Director and Chief
Financial Officer, William P. Spencer. Mr. Spencer was terminated by the Company, for cause in January
1999. His termination has had no direct effect on the Company’s financial statements. 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. The Company has 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. 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 as those alleged by Mr. Spencer. The complaint against
the Company was further amended to add Imagenetix, Inc. as a claimant and several current or former
employees of the Company as defendants. 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.
While the Company believes the allegations contained in these lawsuits are without merit, the claims have
not progressed sufficiently for the Company to estimate the possible exposure, if any.
48
(continued)
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
N.
CONTINGENCIES (continued)
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 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.
O.
SEGMENT INFORMATION
Prior to July 1, 1999 the Company operated solely within the United States. During the year ended June
30, 2000 the Company opened its new wholly owned manufacturing subsidiary in Switzerland. The
Company’s segment information by geographic area as of and for the years ended June 30, 2001 and
2000, respectively, is as follows:
Capital
Expenditures
$
$
605
355
960
Capital
Expenditures
$
$
3,742
1,419
5,161
2001
Sales
Long Lived
Assets
Total
Assets
United States
Europe
$
$
34,639
7,519
42,158
$
$
12,678
1,370
14,048
$
$
22,674
2,394
25,068
2000
Sales
Long Lived
Assets
Total Assets
United States
Europe
$
$
44,429
3,398
47,827
$
$
32,006
2,869
34,875
$
$
14,560
1,267
15,827
49
NATURAL ALTERNATIVES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
P.
QUARTERLY DATA (unaudited)
The following is a summary of unaudited quarterly data:
(Amounts in thousands
except per share amounts)
Year Ended June 30, 2001
Net sales
Gross profit
Net earnings (loss)
Net earnings (loss)
per common share:
Basic
Diluted
Net sales
Gross profit
Net earnings (loss)
Net earnings (loss)
per common share:
Basic
Diluted
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Total
$10,223
2,011
$205
$11,240
2,845
$443
$10,341
2,290
($234)
$10,354
1,042
($5,303)
$42,158
8,188
($4,889)
$0.04
$0.04
$0.08
$0.08
($0.04)
($0.04)
($0.93)
($0.93)
($0.85)
($0.85)
Year Ended June 30, 2000
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Total
$15,264
3,188
$87
$12,064
(527)
($2,411)
$9,538
(126)
($1,763)
$10,961
1,140
($385)
$47,827
3,675
($4,472)
$0.02
$0.02
($0.42)
($0.42)
($0.31)
($0.31)
($0.07)
($0.07)
($0.78)
($0.78)
50
NATURAL ALTERNATIVES INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
SCHEDULE II
Allowance for doubtful
accounts
(Dollars in thousands)
Year ended June 30, 2001
Year ended June 30, 2000
Balance at
beginning of
period
Provision
(Deductions)
Balance at
end of period
$330
$472
$286
$389
($146)
($531)
$470
$330
$472
Year ended June 30, 1999
$1,073
$567
($1,168)
See accompanying independent auditors report.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant)
Date: October 12, 2001
By: ___/s/ Mark A. LeDoux__________________________
(Mark A. LeDoux, Chief Executive Officer)
By: : ___/s/ Randell Weaver__________________________
(Randell Weaver, Chief Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
_/s/ Mark A. LeDoux
(Mark A. LeDoux)
_/s/ Marie A. LeDoux
(Marie A. LeDoux)
_/s/ Joe E. Davis
(Joe E. Davis)
_/s/ Lee G. Weldon
(Lee G. Weldon)
/s/ J. Scott Schmidt
(J. Scott Schmidt)
Chairman of the Board of Directors
October 12, 2001
Director
October 12, 2001
Director
October 12, 2001
Director
October 12, 2001
Director
October 12, 2001
52
Independent Accountants’ Consent
Exhibit 23.1
The Board of Directors
Natural Alternatives International, Inc.:
We consent to incorporation by reference in the registration statements (Nos. 33-00947 and 333-32828) on
Form S-8 of Natural Alternatives International, Inc. of our report dated October 9, 2000, relating to the
consolidated balance sheet of Natural Alternatives International, Inc. and subsidiaries as of June 30, 2000,
and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and
cash flows for each of the years in the two-year period ended June 30, 2000, and the related financial
statement schedule, which report appears in the June 30, 2001, annual report on Form 10-K of Natural
Alternatives International, Inc.
/s/
KPMG LLP
San Diego, California
October 11, 2001
53
Exhibit 23.2
Consent of Ernst & Young LLP, Independent Auditors
The Board of Directors
Natural Alternatives International, Inc.
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-00947 and
333-32828) pertaining to the 1994 Nonqualified Stock Option Plan, 1999 Omnibus Equity Incentive Plan
and the 1999 Employee Stock Purchase Plan of Natural Alternatives International, Inc. of our report dated
August 13, 2001, except the second paragraph of Note E, as to which the date is October 10, 2001, with
respect to the consolidated financial statements and schedule of Natural Alternatives International, Inc.
included in the Annual Report (Form 10-K) for the year ended June 30, 2001.
/s/
Ernst & Young LLP
San Diego, CA
October 11, 2001
54