FORM 10-K
NATURAL ALTERNATIVES INTERNATIONAL INC - NAII
Exhibit: �
Filed: October 15, 2007 (period: June 30, 2007)
Annual report which provides a comprehensive overview of the company for the past year
Table of Contents
Part III
(Items 10, 11, 12, 13 and 14) of this Form 10-K incorporates by reference portions of NAI
s
PART I
Item 1.
Business 2
ITEM 1. BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
ITEM 3.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
LEGAL PROCEEDINGS
PART II
ITEM 5. MARKET FOR OUR COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SEC
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
SIGNATURES
EX-10.44 (CONSULTING AGREEMENT EFFECTIVE AS OF JULY 1)
EX-21 (SUBSIDIARIES OF THE COMPANY)
EX-23.1 (CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM)
EX-31.1 (RULE 13A-14(A)/15D-14(A) CERTIFICATION OF CHIEF EXECUTIVE
OFFICER)
EX-31.2 (RULE 13A-14(A)/15D-14(A) CERTIFICATION OF CHIEF FINANCIAL OFFICER)
EX-32 (SECTION 1350 CERTIFICATION)
Table of Contents
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, 2007
000-15701
(Commission file number)
NATURAL ALTERNATIVES INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State of incorporation)
1185 Linda Vista Drive
San Marcos, California 92078
(Address of principal executive offices)
84-1007839
(IRS Employer Identification No.)
(760) 744-7340
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.01 par value per share
Name of exchange on which registered
Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if Natural Alternatives International, Inc. (NAI) is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of
1933. ¤ Yes x No
Indicate by check mark if NAI is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934. ¤ Yes x No
Indicate by check mark whether NAI (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that NAI was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. x Yes ¤ No
Indicate by check mark 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
NAI’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
Indicate by check mark whether NAI is a large accelerated filer, an accelerated filer, or a non-accelerated filer. (Check one):
Indicate by check mark whether NAI is a shell company (as defined in Rule 12b-2 of the Exchange Act.): ¤ Yes x No
Large accelerated filer ¤ Accelerated filer ¤ Non-accelerated filer x
The aggregate market value of NAI’s common stock held by non-affiliates of NAI as of the last business day of NAI’s most recently completed second fiscal
quarter (December 29, 2006) was approximately $45,238,820 (based on the closing sale price of $8.67 reported by Nasdaq on December 29, 2006). For this
purpose, all of NAI’s officers and directors and their affiliates were assumed to be affiliates of NAI.
As of October 15, 2007, 6,977,199 shares of NAI’s common stock were outstanding, net of 180,941 treasury shares.
Part III (Items 10, 11, 12, 13 and 14) of this Form 10-K incorporates by reference portions of NAI’s definitive proxy statement for its Annual Meeting of
Stockholders to be held December 11, 2007, to be filed on or before October 28, 2007.
DOCUMENTS INCORPORATED BY REFERENCE
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
TABLE OF CONTENTS
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
PART I
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Submission of Matters to a Vote of Security Holders
PART II
Item 5.
Market for Our Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operation
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
SIGNATURES
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
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Table of Contents
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
Certain statements in this report, including information incorporated by reference, are “forward-looking statements” within the meaning of Section 27A of the
Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995. Forward-looking
statements reflect current views about future events and financial performance based on certain assumptions. They include opinions, forecasts, intentions, plans,
goals, projections, guidance, expectations, beliefs or other statements that are not statements of historical fact. Words such as “may,” “will,” “should,” “could,”
“would,” “expects,” “plans,” “believes,” “anticipates,” “intends,” “estimates,” “approximates,” “predicts,” or “projects,” or the negative or other variation of such
words, and similar expressions may identify a statement as a forward-looking statement. Any statements that refer to projections of our future financial
performance, our anticipated growth and trends in our business, our goals, strategies, focus and plans, and other characterizations of future events or
circumstances, including statements expressing general optimism about future operating results, are forward-looking statements. Forward-looking statements in
this report may include statements about:
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future financial and operating results, including projections of net sales, revenue, income, net income per share, profit margins, expenditures,
liquidity, goodwill valuation and other financial items;
our ability to develop relationships with new customers and maintain or improve existing customer relationships;
development of new products, brands and marketing strategies;
the effect of the discontinuance of Dr. Cherry’s television program and our ability to develop a new marketing plan for, and to sustain, our Pathway
to Healing
product line;
®
distribution channels, product sales and performance and timing of product shipments;
our ability to expand the customer base of the As We Change
®
catalog and achieve higher sales, profitability and cash flows as a result;
inventories and the adequacy and intended use of our facilities;
current or future customer orders;
the impact on our business and results of operations and variations in quarterly net sales from seasonal and other factors;
management’s goals and plans for future operations;
our ability to improve operational efficiencies, manage costs and business risks and improve or maintain profitability;
growth, expansion, diversification and acquisition strategies, the success of such strategies, and the benefits we believe can be derived from such
strategies;
personnel;
the outcome of regulatory, tax and litigation matters;
sources and availability of raw materials;
operations outside the United States;
the adequacy of reserves and allowances;
overall industry and market performance;
competition;
current and future economic and political conditions;
the impact of accounting pronouncements; and
other assumptions described in this report underlying or relating to any forward-looking statements.
The forward-looking statements in this report speak only as of the date of this report and caution should be taken not to place undue reliance on any such
forward-looking statements. Forward-looking statements are subject to certain events, risks, and uncertainties that may be outside of our control. When
considering forward-looking statements, you should carefully review the risks, uncertainties and other cautionary statements in this report as they identify certain
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
important factors that could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. These factors include,
among others, the risks described under Item 1A of Part I and elsewhere in this report, as well as in other reports and documents we file with the United States
Securities and Exchange Commission (SEC).
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Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
PART I
ITEM 1.
BUSINESS
Overview
Our vision is to enrich the world through the best of nutrition.
As our primary business activity, we provide private label contract manufacturing services to companies that market and distribute vitamins, minerals, herbs, and
other nutritional supplements, as well as other health care products, to consumers both within and outside the United States. Additionally, we develop,
manufacture and market our own products, as well as market third party branded products, including a variety of high quality nutritional, beauty, skin care,
exercise, lifestyle and other personal care products, through our wholly owned subsidiary, Real Health Laboratories, Inc. (RHL), an integrated direct marketer of
branded nutritional supplements and other lifestyle products. RHL’s operations include in-house creative, catalog design, supply chain management and call
center and fulfillment activities.
Our U.S.-based manufacturing facilities are located in Vista, California. These facilities were recertified in June 2005 by the Therapeutic Goods Administration
(TGA) of Australia after its audit of our Good Manufacturing Practices (GMP). TGA evaluates new therapeutic products, prepares standards, develops testing
methods and conducts testing programs to ensure that products are high in quality, safe and effective. The TGA also conducts a range of assessment and
monitoring activities including audits of the manufacturing practices of companies who export and sell products to Australia. TGA certification enables us to
manufacture products for export into countries that have signed the Pharmaceutical Inspection Convention, which include most European countries as well as
several Pacific Rim countries. TGA certifications are generally reviewed every eighteen months and our existing TGA certification is currently under review.
Our California facilities also have been awarded GMP registration annually by NSF International (NSF) through the NSF Dietary Supplements Certification
Program since October 2002. GMP requirements are regulatory standards and guidelines establishing necessary processes, procedures and documentation for
manufacturers in an effort to assure the products produced by that manufacturer have the identity, strength, composition, quality and purity they are represented
to possess.
Natural Alternatives International Europe S.A. (NAIE), our wholly owned subsidiary existing under the laws of Switzerland, also operates a manufacturing,
warehousing, packaging and distribution facility in Manno, Switzerland. In January 2004, NAIE obtained a pharmaceutical license to process pharmaceuticals for
packaging, importation, export and sale within Switzerland and other countries from the Swissmedic Authority of Bern, Switzerland. In March 2007, following
the expansion of NAIE’s manufacturing facilities to include powder filling capabilities, NAIE obtained an additional pharmaceutical license from the
Swissmedic Authority certifying NAIE’s expanded facilities conform to GMP. We believe these licenses and NAIE’s new capabilities help strengthen our
relationships with existing customers and can improve our ability to develop relationships with new customers. The licenses are valid until January 2009.
In addition to our operations in the United States and Switzerland, we have a full-time representative in Japan who provides a range of services to our customers
currently present in or seeking to expand into the Japanese market and other markets in the Pacific Rim. These services include regulatory and marketing
assistance along with guidance and support in adapting products to these markets.
Originally founded in 1980, Natural Alternatives International, Inc. reorganized as a Delaware corporation in 1989. Unless the context requires otherwise, all
references in this report to the “Company,” “NAI,” “we,” “our,” and “us” refer to Natural Alternatives International, Inc. and, as applicable, NAIE, RHL and our
other wholly owned subsidiaries. Our principal executive offices are located at 1185 Linda Vista Drive, San Marcos, California, 92078.
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Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
Business Strategy
Our goals are to achieve long-term growth and diversify our sales. To accomplish these goals, we have sought and intend to continue to seek to:
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leverage our state of the art facilities to increase the value of the goods and services we provide to our highly valued private label contract
manufacturing customers and assist in developing relationships with additional quality oriented customers;
provide strategic partnering services to our private label contract manufacturing customers, including, but not limited to, customized product
formulation, clinical studies, regulatory assistance and product registration in foreign markets;
invest in expanding and marketing our own branded products, including those acquired through our acquisition of RHL; and
improve operational efficiencies and manage costs and business risks to improve profitability.
Overall, we believe there is an opportunity to enhance consumer confidence in the quality of our nutritional supplements and their adherence to label claims
through the education provided by direct sales and direct-to-consumer marketing programs. We believe our GMP and TGA certified manufacturing operations,
science based product formulations, peer-reviewed clinical studies and regulatory expertise provide us with a sustainable competitive advantage by providing our
customers with a high degree of confidence in the products we manufacture.
While today’s consumer may have access to a variety of information, we believe many consumers remain uneducated about nutrition and nutritional
supplementation, uncertain about the relevance or reliability of the information they have or are confused about conflicting claims or information, which we
believe creates a significant opportunity for the direct sales marketing channel. The direct sales marketing channel has proved, and we believe will continue to
prove, to be a highly effective method for marketing high quality nutritional supplements as associates or other personalities educate consumers on the benefits of
science based nutritional supplements. Our largest customers operate in the direct sales marketing channel. Thus, our growth has been fueled primarily by the
effectiveness of our customers in this marketing channel.
Further, we believe our acquisition of RHL in December 2005 has strengthened our ability to achieve certain of our goals. Through RHL, we are able to market
our own branded products and have expanded our distribution channels. Our acquisition of RHL also has provided the following benefits:
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Additional expertise in direct marketing and retail channels;
Existing, leading branded products in the Food, Drug and Mass Market (FDM) retail channel; and
Access to additional direct marketing and mass-market channels for our products and concepts.
We believe our comprehensive approach to customer service is unique within our industry. We believe this approach, together with our commitment to high
quality, innovative products and investment in our branded products, will provide the means to implement our strategies and achieve our goals. There can be no
assurance, however, that we will successfully implement any of our business strategies or that we will increase or diversify our sales or improve our overall
financial results.
Products, Principal Markets and Methods of Distribution
Our primary business activity is to provide private label contract manufacturing services to companies that market and distribute vitamins, minerals, herbs, and
other nutritional supplements, as well as other health care products, to consumers both within and outside the United States. Our private label contract
manufacturing customers include companies that market nutritional supplements through direct sales marketing channels, direct response television and retail
stores. We manufacture products in a variety of forms, including capsules, tablets, chewable wafers and powders to accommodate a variety of consumer
preferences.
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Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
We provide strategic partnering services to our private label contract manufacturing customers, including the following:
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customized product formulation;
clinical studies;
manufacturing;
marketing support;
international regulatory and label law compliance;
international product registration; and
packaging in multiple formats and labeling design.
Additionally, under our branded products segment, we develop, manufacture and market our own products and work with nationally recognized physicians and
others to develop brand name products that reflect their individual approaches to restoring, maintaining or improving health. These products are sold through a
Laboratories branded nutritional supplement
variety of distribution channels including television, print media and the internet. We also market the Real Health
product line, as well as third party products, through the As We Change
Laboratories
nutritional supplement product line consists of ten condition-specific, custom formulated products and is marketed through mass retail, with distribution to FDM
retailers. The AWC catalog is a lifestyle catalog geared towards women between the ages of 45 and 65. The quarterly print catalog offers a variety of high quality
nutritional, beauty, skin care, exercise, lifestyle and other personal care products.
(AWC) catalog and certain other distribution channels. The Real Health
®
®
®
For the last three fiscal years ended June 30, our net sales were derived from the following (dollars in thousands):
2007
2006
2005
Private Label Contract Manufacturing
Branded Products
Total Net Sales
Research and Development
$
$
%
%
%
$80,732 83 $85,758 86 $83,862 91
16,396 17 13,854 14 8,110
9
$97,128 100 $99,612 100 $91,972 100
$
We are committed to quality research and development. We focus on the development of new science based products and the improvement of existing products.
We periodically test and validate our products to help ensure their stability, potency, efficacy and safety. We maintain quality control procedures to verify that
our products comply with applicable specifications and standards established by the Food and Drug Administration and other regulatory agencies. We also direct
and participate in clinical research studies, often in collaboration with scientists and research institutions, to validate the benefits of a product and provide
scientific support for product claims and marketing initiatives. We believe our commitment to research and development, as well as our facilities and strategic
alliances with our suppliers and customers, allow us to effectively identify, develop and market high-quality and innovative products.
As part of the services we provide to our private label contract manufacturing customers, we may perform, but are not required to perform, certain research and
development activities related to the development or improvement of their products. While our customers typically do not pay directly for this service, the cost of
this service is included as a component of the price we charge to manufacture and deliver their products. Research and development costs, which include costs
associated with international regulatory compliance services we provide to our customers, are expensed as incurred.
Our research and development expenses for the last three fiscal years ended June 30 were $1.9 million for 2007, $1.7 million for 2006 and $3.5 million for 2005.
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Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
Sources and Availability of Raw Materials
We use raw materials in our operations including powders, excipients, empty capsules, and components for packaging and distributing our finished products. We
test the raw materials we buy to ensure their quality, purity and potency before we use them in our products. We typically buy raw materials in bulk from
qualified vendors located both within and outside the United States. During fiscal 2007, our three largest suppliers accounted for 39% of our total raw material
purchases. We did not experience any significant shortages or difficulties obtaining adequate supplies of raw materials during fiscal 2007 and we do not
anticipate any significant shortages or difficulties in the near term.
Major Customers
NSA International, Inc. has been our largest customer over the past several years. During the fiscal year ended June 30, 2007, NSA International, Inc. accounted
for approximately 40% of our net sales. Our second largest customer was Mannatech, Incorporated, which accounted for approximately 31% of our net sales
during fiscal 2007. Both of these customers are private label contract manufacturing customers. No other customer accounted for 10% or more of our net sales
during fiscal 2007. We continue to focus on obtaining new private label contract manufacturing customers and growing our branded products, including those
acquired through the acquisition of RHL, to reduce the risks associated with deriving a significant portion of our sales from a limited number of customers.
Competition
We compete with other manufacturers, distributors and marketers of vitamins, minerals, herbs, and other nutritional supplements, beauty, skin care, exercise,
lifestyle and other personal care products, both within and outside the United States. The nutritional supplement and lifestyle product industries are highly
fragmented and competition for the sale of nutritional supplements and lifestyle products comes from many sources. These products are sold primarily through
retailers (drug store chains, supermarkets, and mass market discount retailers), health and natural food stores, and direct sales channels (mail order, network
marketing and e-marketing companies). The products we produce for our private label contract manufacturing customers may compete with our own branded
products, although we believe such competition is limited.
We believe private label contract manufacturing competition in our industry is based on, among other things, customized services offered, product quality and
safety, innovation, price and customer service. We believe we compete favorably with other companies because of our ability to provide comprehensive turn key
solutions for customers, our certified manufacturing operations and our commitment to quality and safety through our research and development activities.
Our future competitive position for both private label contract manufacturing and branded products will likely depend on, but not be limited to, the following:
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the continued acceptance of our products by our customers and consumers;
our ability to continue to develop high quality, innovative products;
our ability to attract and retain qualified personnel;
the effect of any future governmental regulations on our products and business;
the results of, and publicity from, product safety and performance studies performed by governments and other research institutions;
the continued growth of the global nutrition industry; and
our ability to respond to changes within the industry and consumer demand, financially and otherwise.
The nutritional supplement and lifestyle product industries are highly competitive and we expect the level of competition to remain high over the near term. We
do not believe it is possible to accurately estimate the number or size of our competitors. The nutritional supplement industry has undergone consolidation in the
recent past and we expect that trend to continue in the near term.
Government Regulation
Our business is subject to varying degrees of regulation by a number of government authorities in the United States, 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, and the
Environmental Protection Agency. Various agencies of the states and localities in which we operate and in which our products are sold also regulate our
business, such as the California Department of Health Services, Food and Drug Branch. The areas of our business that these and other authorities regulate
include, among others:
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product claims and advertising;
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Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
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product labels;
product ingredients; and
how we manufacture, package, distribute, import, export, sell and store our products.
The FDA, in particular, regulates the formulation, manufacturing, packaging, storage, labeling, promotion, distribution and sale of vitamin and other nutritional
supplements in the United States, while the FTC regulates marketing and advertising claims. In August 2007, a new rule issued by the FDA went into effect
requiring companies that manufacture, package, label, distribute or hold nutritional supplements to meet certain GMPs to ensure such products are of the quality
specified and are properly packaged and labeled. Companies have up to three years to comply with the new requirements depending on the size of the company.
In our case, given the current number of our employees, we would be required to comply with the new requirements by June 25, 2009. We are committed to
meeting or exceeding the standards set by the FDA on a timely basis and believe we are well positioned to operate within the new GMPs mandated by the FDA.
The FDA also regulates the labeling and marketing of dietary supplements and nutritional products, including:
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the identification of dietary supplements or nutritional products and their nutrition and ingredient labeling;
requirements related to the wording used for claims about nutrients, health claims, and statements of nutritional support;
labeling requirements for dietary supplements or nutritional products for which “high potency” and “antioxidant” claims are made;
notification procedures for statements on dietary supplements or nutritional products; and
premarket notification procedures for new dietary ingredients in nutritional supplements.
The Dietary Supplement Health and Education Act of 1994 (DSHEA) revised the provisions of the Federal Food, Drug and Cosmetic Act concerning the
composition and labeling of dietary supplements and defined dietary supplements to include vitamins, minerals, herbs, amino acids and other dietary substances
used to supplement diets. DSHEA generally provides a regulatory framework to help ensure safe, quality dietary supplements and the dissemination of accurate
information about such products. The FDA is generally prohibited from regulating 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.
In December 2006, the Dietary Supplement and Nonprescription Drug Consumer Protection Act was passed, which further revised the provisions of the Federal
Food, Drug and Cosmetic Act. Under the new act, manufacturers, packers or distributors whose name appears on the product label of a dietary supplement or
nonprescription drug are required to include contact information on the product label for consumers to use in reporting adverse events associated with the
product’s use and to notify the FDA of any serious adverse event report within 15 business days of receiving such report. Events reported to the FDA would not
be considered an admission from a company that its product caused or contributed to the reported event. The new act becomes effective in December 2007. The
FDA is in the process of developing industry guidance on how to comply with this new law. We are committed to meeting or exceeding the provisions of this act
on a timely basis.
We are also subject to a variety of other regulations in the United States, including those relating to bioterrorism, taxes, labor and employment, import and
export, the environment and intellectual property.
Our operations outside the United States are similarly regulated by various agencies and entities in the countries in which we operate and in which our products
are sold. The regulations of these countries may conflict with those in the United States and may vary from country to country. The sale of our products in certain
European countries is subject to the rules and regulations of the European Union, which may be interpreted differently among the countries within the European
Union. In markets outside the United States, we may be required to obtain approvals, licenses or certifications from a country’s ministry of health or comparable
agency before we begin operations or the marketing of products in that country. Approvals or licenses may be conditioned on reformulation of our products for a
particular market or may be unavailable for certain products or product ingredients. These regulations may limit our ability to enter certain markets outside the
United States.
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Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
Intellectual Property
Trademarks. We have developed and use registered trademarks in our business, particularly relating to corporate, brand and product names. We own 28
trademark registrations in the United States and have five trademark applications pending with the United States Patent and Trademark Office. Federal
registration of a trademark enables the registered owner of the mark to bar the unauthorized use of the registered mark in connection with similar products in the
same channels of trade by any third party anywhere in the United States, regardless of whether the registered owner has ever used the trademark in the area
where the unauthorized use occurs.
We have filed applications and own trademark registrations and intend to register additional trademarks in foreign countries where our products are or may be
sold in the future. We have one trademark registered with the Japan Patent Office.
We also claim ownership and protection of certain product names, unregistered trademarks and service marks under common law. Common law trademark rights
do not provide the same level of protection afforded by registration of a trademark. In addition, common law trademark rights are limited to the geographic area
in which the trademark is actually used. We believe these trademarks, whether registered or claimed under common law, constitute valuable assets, adding to our
recognition and the marketing of our products and that these proprietary rights have been and will continue to be important in enabling us to compete.
Trade Secrets. We own certain intellectual property, including trade secrets we seek to protect, in part, through confidentiality agreements with employees and
other parties. Although we regard our proprietary technology, trade secrets, trademarks and similar intellectual property as critical to our success, we rely on a
combination of trade secrets, contract, patent, copyright and trademark law to establish and protect the rights in our products and technology. In addition, the
laws of certain foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States.
Patents and Patent Licenses. We own certain United States patents. In addition, we have an exclusive worldwide license to four certain United States patents,
and each patent’s corresponding foreign patent application, and are currently involved in research and development of products employing the licensed
inventions. These patents relate to the ingredient formerly known as “Oxford Factor.” We are currently selling this ingredient to a customer for use in a limited
market under the name Beta-Alanine
research and development of products employing the licensed inventions.
. We also have a nonexclusive worldwide license to five certain United States patents and are currently involved in
TM
Backlogs
Our backlog, comprised primarily of private label contract manufacturing orders, was approximately $15.1 million at September 3, 2007, and $24.3 million at
September 2, 2006. Our private label contract manufacturing sales are made primarily pursuant to standard purchase orders for the delivery of products.
Quantities of our private label contract manufacturing products to be delivered and delivery schedules are frequently revised to reflect changes in our customers’
needs. Customer orders generally can be cancelled or rescheduled without significant penalty to the customer. For these reasons, our backlog as of any particular
date is not representative of actual sales for any succeeding period, and therefore, we believe that backlog is not necessarily a good indicator of future revenue.
Working Capital Practices
We manufacture products based on anticipated demand or following receipt of customer specific purchase orders and as a result our inventory primarily consists
of raw materials and work in process. Our raw material purchases are made primarily pursuant to standard purchase orders for the delivery of raw materials based
upon anticipated demand. Customer specific delivery requirements, customer cancellation or rescheduling of orders and raw material lead times impact the
amount of inventory on hand at any given time. We typically purchase raw materials on 30-day payment terms. Discounts are taken periodically for early
payment.
Third party branded products inventory offered in our As We Change
the catalogs are mailed.
®
catalog is purchased in advance of catalog mailings to ensure products are available when
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Table of Contents
Private label contract manufacturing sales are typically made based upon 30-day terms. A 2% discount is provided to customers that pay within 10 days of
invoice date. RHL warrants its products for full satisfaction, generally from 30 to 120 days. Our policy requires us to replace the product or refund the purchase
price to the customer.
Employees
As of June 30, 2007, we employed 240 full-time employees in the United States, five of whom held executive management positions. Of the remaining full-time
employees, 44 were employed in research, laboratory and quality control, 34 in sales and marketing, and 157 in manufacturing and administration. From time to
time we use temporary personnel to help us meet short-term operating requirements. These positions typically are in manufacturing and manufacturing support.
As of June 30, 2007, we had 71 temporary personnel.
As of June 30, 2007, NAIE employed an additional 25 full-time employees. Most of these positions are in the areas of manufacturing and manufacturing support.
Our employees are not represented by a collective bargaining agreement and we have not experienced any work stoppages as a result of labor disputes. We
believe our relationship with our employees is good.
Seasonality
Although we believe there is no material impact on our business or results of operations from seasonal factors, we have experienced and expect to continue to
experience variations in quarterly net sales due to the timing of private label contract manufacturing orders and variations in product offerings included in our As
We Change
catalog.
®
Financial Information about Our Business Segments and Geographic Areas
Following our acquisition of RHL on December 5, 2005 through June 30, 2006, our business consisted of two segments identified as NAI, which primarily
provides private label contract manufacturing services to companies that market and distribute nutritional supplements and other health care products, and RHL,
which markets and distributes branded nutritional supplements and other lifestyle products.
Effective July 1, 2006, we changed our reporting segments to reflect the structure of our organization after the integration of previously outsourced fulfillment
and call center activities for our Dr. Cherry Pathway to Healing
product line into RHL’s existing operations. The new reportable segments are as follows:
®
•
•
Private label contract manufacturing, in which we primarily provide manufacturing services to companies that market and distribute nutritional
supplements and other health care products; and
Branded products, in which we market and distribute branded nutritional supplements and other lifestyle products in the following distribution
channels:
•
•
•
Direct-to-consumer marketing programs, under which we develop, manufacture and market our own products and work with nationally
recognized physicians and others to develop brand name products that reflect their individual approaches to restoring, maintaining or
improving health. These products are sold through a variety of distribution channels, including television programs, print media and the
internet. The Dr. Cherry Pathway to Healing
product line is sold under a direct-to-consumer marketing program;
®
Food, Drug and Mass Market (FDM) retail channel in which we sell the Real Health
®
Laboratories nutritional supplement product line; and
As We Change
®
(AWC) catalog, a lifestyle catalog geared towards women between the ages of 45 and 65, in which we sell our own
branded products as well as third party products. The quarterly print catalog offers a variety of high quality nutritional, beauty, skin care,
exercise, lifestyle and other personal care products.
Our private label contract manufacturing products are sold both in the United States and in markets outside the United States, including Europe, Australia and
Japan. The primary market outside the United States is Europe. Our branded products are only sold in the United States.
8
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Table of Contents
For additional financial information, including financial information about our business segment and geographic areas, please see the consolidated financial
statements and accompanying notes to the consolidated financial statements included under Item 8 of this report.
Our activities in markets outside the United States are subject to political, economic and other risks in the countries in which our products are sold and in which
we operate. For more information about these and other risks, please see Items 1A, 7 and 7A in this report.
ITEM 1A. RISK FACTORS
You should carefully consider the risks described below, as well as the other information in this report, when evaluating our business and future prospects. If any
of the following risks actually occur, our business, financial condition and results of operations could be seriously harmed. In that event, the market price of our
common stock could decline and you could lose all or a portion of the value of your investment in our common stock.
Because we derive a significant portion of our revenues from a limited number of customers, our revenues would be adversely affected by the loss of a major
customer or a significant change in its business, personnel or the timing or amount of its orders.
We have in the past and expect to continue to derive a significant portion of our revenues from a relatively limited number of customers. During the fiscal year
ended June 30, 2007, sales to one customer, NSA International, Inc., were approximately 40% of our total net sales. Our second largest customer was Mannatech,
Incorporated, which accounted for approximately 31% of our net sales during fiscal 2007. The loss of one of these customers or other major customers, a
significant decrease in sales or the growth rate of sales to these customers, or a significant change in their business or personnel, would materially affect our
financial condition and results of operations. Furthermore, the timing of our customers’ orders is impacted by their marketing programs, supply chain
management, entry into new markets and new product introductions, all of which are outside of our control. All of these attributes have had and will have a
significant impact on our business. Based on press releases issued by Mannatech, Incorporated, Mannatech achieved record sales in each of its fiscal years ended
December 31, 2006, 2005 and 2004. While Mannatech similarly reported record sales for its second quarter ended June 30, 2007, based on disclosures in its
quarterly report on Form 10-Q for such quarter filed with the SEC, it’s outlook for the remainder of 2007 is uncertain due to certain negative publicity and
heightened litigation and regulatory activities that have affected or may affect recruiting efforts and sales in the near term. Thus, there can be no assurance that its
prior sales levels will continue.
Our future growth and stability depends, in part, on our ability to diversify our sales. Our efforts to establish new products, brands, markets and customers
could require significant initial investments, which may or may not result in higher sales and improved financial results.
Our business strategy depends in large part on our ability to develop new products, marketing strategies, brands and customer relationships. These activities often
require a significant up-front investment including, among others, customized formulations, regulatory compliance, product registrations, package design,
product testing, pilot production runs, marketing, brand development and the build up of initial inventory. We may experience significant delays from the time
we increase our operating expenses and make investments in inventory until the time we generate net sales from new products or customers, and it is possible
that we may never generate any revenue from new products or customers after incurring such expenditures. If we incur significant expenses and investments in
inventory that we are not able to recover, and we are not able to compensate for those expenses, our operating results could be adversely affected.
On December 5, 2005, we acquired RHL and may, in the future, pursue acquisitions of other companies that, if not successful, could adversely affect our
business, financial condition and results of operations.
On December 5, 2005, we completed our acquisition of RHL, an integrated direct marketer of nutritional supplements and other lifestyle products. RHL’s
business is subject to all of the operational risks that normally arise for a direct marketing company, including those related to competition, profitability,
economic conditions, suppliers, customers, adverse publicity, product liability claims and other litigation, regulation, personnel, and intellectual property rights.
9
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Table of Contents
In the future, we may pursue additional acquisitions of other companies as part of our strategy focused on long-term growth and diversification of sales and our
customer base. Acquisitions, including the RHL acquisition, involve numerous risks, including:
•
•
•
•
•
•
•
•
potential difficulties related to integrating the products, personnel and operations of the acquired company;
failure to operate as a combined organization utilizing common information and communication systems, operating procedures, financial controls
and human resources practices;
diverting management’s attention from the normal daily operations of the business;
entering markets in which we have no or limited prior direct experience and where competitors in such markets have stronger market positions;
potential loss of key employees of the acquired company;
potential inability to achieve cost savings and other potential benefits expected from the acquisition;
an uncertain sales and earnings stream from the acquired company; and
potential impairment charges, which may be significant, against goodwill and purchased intangible assets acquired in the acquisition due to changes
in conditions and circumstances that occur after the acquisition, many of which may be outside of our control.
There can be no assurance that our acquisition of RHL or other acquisitions that we may pursue will be successful. If we pursue an acquisition but are not
successful in completing it, or if we complete an acquisition but are not successful in integrating the acquired company’s employees, products or operations
successfully, our business, financial position or results of operations could be adversely affected.
We are required to assess the value of goodwill annually for potential impairment, which requires, among others, significant management judgment to
forecast future operating results used in the determination. In the fourth quarter of fiscal 2007, we recorded a $7.0 million non-cash, goodwill impairment
charge and may, in the future, be required to recognize additional impairment charges, which could be significant, against goodwill and purchased
intangible assets due to changes in conditions and circumstances, many of which may be outside of our control.
Following the acquisition of RHL on December 5, 2005, we recorded approximately $7.5 million of goodwill. In the fourth quarter of fiscal 2007, we recorded a
$7.0 million non-cash, goodwill impairment charge as a result of our annual testing of goodwill. There can be no assurance that an additional non-cash
impairment charge will not be required. Any such additional charge could have a negative effect on our results of operations but would not impact our cash flows
or cash position.
Our operating results will vary and there is no guarantee that we will earn a profit. Fluctuations in our operating results may adversely affect the share price
of our common stock.
While our net sales and income from operations have been relatively positive during the past three fiscal years, when compared to prior periods, there can be no
assurance that our net sales will improve in the near term, or that we will earn a profit in any given year. We have experienced losses in the past and may incur
losses in the future. Our operating results will fluctuate from year to year and/or from quarter to quarter due to various factors including differences related to the
timing of revenues and expenses for financial reporting purposes and other factors described in this report. At times, these fluctuations may be significant.
Fluctuations in our operating results may adversely affect the share price of our common stock.
A significant or prolonged economic downturn could have a material adverse effect on our results of operations.
Our results of operations are affected by the level of business activity of our customers, which in turn is affected by the level of consumer demand for their
products. A significant or prolonged economic downturn may adversely affect the disposable income of many consumers and may lower demand for the products
we produce for our private label contract manufacturing customers, as well as our branded products. A decline in consumer demand and the level of business
activity of our customers due to economic conditions could have a material adverse effect on our revenues and profit margins.
10
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
Because our direct-to-consumer sales rely on the marketability of key personalities, the inability of a key personality to perform his or her role or the
existence of negative publicity surrounding a key personality may adversely affect our revenues.
For the fiscal year ended June 30, 2007, our direct-to-consumer products accounted for approximately 7% of our net sales. These products may be marketed with
a key personality through a variety of distribution channels. The inability or failure of a key personality to fulfill his or her role, or the ineffectiveness of a key
personality as a spokesperson for a product, a reduction in the exposure of a key personality due to the discontinuance of a marketing program or otherwise or
negative publicity about a key personality may adversely affect the sales of our product associated with that personality and could affect the sale of other
products. A decline in sales would negatively affect our results of operations and financial condition.
Our industry is highly competitive and we may be unable to compete effectively. Increased competition could adversely affect our financial condition.
The market for our products is highly competitive. Many of our competitors are substantially larger and have greater financial resources and broader name
recognition than we do. Our larger competitors may be able to devote greater resources to research and development, marketing and other activities that could
provide them with a competitive advantage. Our market has relatively low entry barriers and is highly sensitive to the introduction of new products that may
rapidly capture a significant market share. Increased competition could result in price reductions, reduced gross profit margins or loss of market share, any of
which could have a material adverse effect on our financial condition and results of operations. There can be no assurance that we will be able to compete in this
intensely competitive environment.
We may not be able to raise additional capital or obtain additional financing if needed.
Our cash from operations may not be sufficient to meet our working capital needs and/or to implement our business strategies. Although we amended our credit
facility to increase our working capital line of credit to $12.0 million, there can be no assurance that this line of credit will be sufficient to meet our needs.
Furthermore, if we fail to maintain certain loan covenants we may no longer have access to the credit line. The credit line terminates in November 2008. As a
result, we may need to raise additional capital or obtain additional financing.
At any given time it may be difficult for companies to raise capital due to a variety of factors, some of which may be outside a company’s control, including a
tightening of credit markets, overall poor performance of stock markets, and/or an economic slowdown in the United States or other countries. Thus, there is no
assurance we would be able to raise additional capital if needed. To the extent we do raise additional capital, the ownership position of existing stockholders
could be diluted. Similarly, there can be no assurance that additional financing will be available if needed or that it will be available on favorable terms. Under
the terms of our credit facility, there are limits on our ability to create, incur or assume additional indebtedness without the approval of our lender.
Our inability to raise additional capital or to obtain additional financing if needed would negatively affect our ability to implement our business strategies and
meet our goals. This, in turn, would adversely affect our financial condition and results of operations.
The failure of our suppliers to supply quality materials in sufficient quantities, at a favorable price, and in a timely fashion could adversely affect the results
of our operations.
We buy our raw materials from a limited number of suppliers. During fiscal 2007, approximately 39% of our total raw material purchases were from three
suppliers. The loss of any of our major suppliers or of a supplier that provides any hard to obtain materials could adversely affect our business operations.
Although we believe that we could establish alternate sources for most of our raw materials, any delay in locating and establishing relationships with other
sources could result in product shortages, with a resulting loss of sales and customers. In certain situations we may be required to alter our products or to
substitute different materials from alternative sources.
11
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Table of Contents
We rely solely on one supplier to process certain raw materials that we use in the product line of our largest customer. The loss of or unexpected interruption in
this service would materially adversely affect our results of operations and financial condition.
A shortage of raw materials or an unexpected interruption of supply could also result in higher prices for those materials. Although we may be able to raise our
prices in response to significant increases in the cost of raw materials, we may not be able to raise prices sufficiently or quickly enough to offset the negative
effects of the cost increases on our results of operations.
There can be no assurance that suppliers will provide the quality raw materials needed by us in the quantities requested or at a price we are willing to pay.
Because we do not control the actual production of these raw materials, we are also subject to delays caused by interruption in production of materials based on
conditions outside of our control, including weather, transportation interruptions, strikes and natural disasters or other catastrophic events.
Our business is subject to the effects of adverse publicity, which could negatively affect our sales and revenues.
Our business can be affected by adverse publicity or negative public perception about our industry, our competitors, or our business generally. This adverse
publicity may include publicity about the nutritional supplements industry generally, the efficacy, safety and quality of nutritional supplements and other health
care products or ingredients in general or our products or ingredients specifically, and regulatory investigations, regardless of whether these investigations
involve us or the business practices or products of our competitors. There can be no assurance that we will be able to avoid any adverse publicity or negative
public perception in the future. Any adverse publicity or negative public perception will likely have a material adverse effect on our business, financial condition
and results of operations. Our business, financial condition and results of operations also could be adversely affected if any of our products or any similar
products distributed by other companies are alleged to be or are proved to be harmful to consumers or to have unanticipated health consequences.
We could be exposed to product liability claims or other litigation, which may be costly and could materially adversely affect our operations.
We could face financial liability due to product liability claims if the use of our products results in significant loss or injury. Additionally, the manufacture and
sale of our products involves the risk of injury to consumers from tampering by unauthorized third parties or product contamination. We could be exposed to
future product liability claims that, among others: our products contain contaminants; we provide consumers with inadequate instructions about product use; or
we provide inadequate warning about side effects or interactions of our products with other substances.
We maintain product liability insurance coverage, including primary product liability and excess liability coverage. The cost of this coverage has increased
dramatically in recent years, while the availability of adequate insurance coverage has decreased. While we currently expect to be able to continue our product
liability insurance, there can be no assurance that we will in fact be able to continue such insurance coverage, that our insurance will be adequate to cover any
liability we may incur, or that our insurance will continue to be available at an economically reasonable cost.
Additionally, it is possible that one or more of our insurers could exclude from our coverage certain ingredients used in our products. In such event, we may have
to stop using those ingredients or rely on indemnification or similar arrangements with our customers who wish to continue to include those ingredients in their
products. A substantial increase in our product liability risk or the loss of customers or product lines could have a material adverse effect on our results of
operations and financial condition.
If we or our private label contract manufacturing customers expand into additional markets outside the United States or our or their sales in markets outside
the United States increase, our business would become increasingly subject to political, economic, regulatory and other risks in those markets, which could
adversely affect our business.
Our future growth may depend, in part, on our ability and the ability of our private label contract manufacturing customers to expand into additional markets
outside the United States or to improve sales in markets outside the United States. There can be no assurance that we or our customers will be able to expand in
existing markets outside
12
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Table of Contents
the United States, enter new markets on a timely basis, or that new markets outside the United States will be profitable. There are significant regulatory and legal
barriers in markets outside the United States that must be overcome. We will be subject to the burden of complying with a wide variety of national and local
laws, including multiple and possibly overlapping and conflicting laws. We also may experience difficulties adapting to new cultures, business customs and legal
systems. Our sales and operations outside the United States are subject to political, economic and social uncertainties including, among others:
•
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•
•
•
•
•
•
changes and limits in import and export controls;
increases in custom duties and tariffs;
changes in government regulations and laws;
coordination of geographically separated locations;
absence in some jurisdictions of effective laws to protect our intellectual property rights;
changes in currency exchange rates;
economic and political instability; and
currency transfer and other restrictions and regulations that may limit our ability to sell certain products or repatriate profits to the United States.
Any changes related to these and other factors could adversely affect our business, profitability and growth prospects. If we or our customers expand into
additional markets outside the United States or improve sales in markets outside the United States, these and other risks associated with operations outside the
United States are likely to increase.
Our products and manufacturing activities are subject to extensive government regulation, which could limit or prevent the sale of our products in some
markets and could increase our costs.
The manufacturing, packaging, labeling, advertising, promotion, distribution, and sale of our products are subject to regulation by numerous national and local
governmental agencies in the United States and in other countries. Failure to comply with governmental regulations may result in, among other things,
injunctions, product withdrawals, recalls, product seizures, fines, and criminal prosecutions. Any action of this type by a governmental agency could materially
adversely affect our ability to successfully market our products. In addition, if the governmental agency has reason to believe the law is being violated (for
example, if it believes we do not possess adequate substantiation for product claims), it can initiate an enforcement action. Governmental agency enforcement
could result in orders requiring, among other things, limits on advertising, consumer redress, divestiture of assets, rescission of contracts, and such other relief as
may be deemed necessary. Violation of these orders could result in substantial financial or other penalties. Any action by the governmental agency could
materially adversely affect our ability and our customers’ ability to successfully market those products.
In markets outside the United States, before commencing operations or marketing our products, we may be required to obtain approvals, licenses, or
certifications from a country’s ministry of health or comparable agency. Approvals or licensing may be conditioned on reformulation of products or may be
unavailable with respect to certain products or product ingredients. We must also comply with product labeling and packaging regulations that vary from country
to country. Furthermore, the regulations of these countries may conflict with those in the United States and with each other. The sale of our products in certain
European countries is subject to the rules and regulations of the European Union, which may be interpreted differently among the countries within the European
Union. The cost of complying with these various and potentially conflicting regulations can be substantial and can adversely affect our results of operations.
We cannot predict the nature of any future laws, regulations, interpretations, or applications, nor can we determine what effect additional governmental
regulations, when and if adopted, would have on our business. They could include requirements for the reformulation of certain products to meet new standards,
the recall or discontinuance of certain products, additional record keeping, expanded or different labeling, and additional scientific substantiation. Any or all of
these requirements could have a material adverse effect on our operations.
13
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Table of Contents
If we are unable to attract and retain qualified management personnel, our business will suffer.
Our executive officers and other management personnel are primarily responsible for our day-to-day operations. We believe our success depends largely on our
ability to attract, maintain and motivate highly qualified management personnel. Competition for qualified individuals can be intense, and we may not be able to
hire additional qualified personnel in a timely manner and on reasonable terms. Our inability to retain a skilled professional management team could adversely
affect our ability to successfully execute our business strategies and achieve our goals.
Our manufacturing, fulfillment and call center activities are subject to certain risks.
We manufacture the vast majority of our products at our manufacturing facility in California and our fulfillment and call center activities are centralized at
RHL’s facility. As a result, we are dependent on the uninterrupted and efficient operation of these facilities, which are located within approximately 45 miles of
each other in the San Diego area of Southern California. Our manufacturing, fulfillment and call center operations are subject to power failures, blackouts, the
breakdown, failure or substandard performance of equipment, the improper installation or operation of equipment, natural or other disasters, and the need to
comply with the requirements or directives of governmental agencies, including the FDA. In addition, we may in the future determine to expand or relocate our
facilities, which may result in slow downs or delays in our operations. While we have implemented and are evaluating various emergency, contingency and
disaster recovery plans and maintain business interruption insurance, there can be no assurance that the occurrence of these or any other operational problems at
our facilities in California or at NAIE’s facility in Switzerland would not have a material adverse effect on our business, financial condition and results of
operations. Furthermore, there can be no assurance that our contingency plans will prove to be adequate or successful if needed or that our insurance will
continue to be available at a reasonable cost or, if available, will be adequate to cover any losses that we may incur from an interruption in our manufacturing and
distribution operations.
We may be unable to protect our intellectual property rights or may inadvertently infringe on the intellectual property rights of others.
We possess and may possess in the future certain proprietary technology, trade secrets, trademarks, tradenames, licenses and similar intellectual property. There
can be no assurance that we will be able to protect our intellectual property adequately. In addition, the laws of certain foreign countries may not protect our
intellectual property rights to the same extent as the laws of the United States. Litigation in the United States or abroad may be necessary to enforce our
intellectual property rights, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement. This litigation, even
if successful, could result in substantial costs and diversion of resources and could have a material adverse effect on our business, results of operation and
financial condition. If any such claims are asserted against us, we may seek to obtain a license under the third party’s intellectual property rights. There can be no
assurance, however, that a license would be available on terms acceptable or favorable to us, if at all.
Collectively, our officers and directors own a significant amount of our common stock, giving them influence over corporate transactions and other matters
and potentially limiting the influence of other stockholders on important policy and management issues.
Our officers and directors, together with their families and affiliates, beneficially owned approximately 24% of our outstanding shares of common stock as of
June 30, 2007, including approximately 19% of our outstanding shares of common stock beneficially owned by Mark LeDoux, our Chief Executive Officer and
the Chairman of the Board, and his family and affiliates. As a result, our officers and directors, and in particular Mr. LeDoux, could influence such business
matters as the election of directors and approval of significant corporate transactions.
Various transactions could be delayed, deferred or prevented without the approval of stockholders, including:
•
•
•
•
•
transactions resulting in a change in control;
mergers and acquisitions;
tender offers;
election of directors; and
proxy contests.
There can be no assurance that conflicts of interest will not arise with respect to the officers and directors who own shares of our common stock or that conflicts
will be resolved in a manner favorable to us or our other stockholders.
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Table of Contents
If our information technology system fails, our operations could suffer.
Our business depends to a large extent on our information technology infrastructure to effectively manage and operate many of our key business functions,
including order processing, customer service, product manufacturing and distribution, cash receipts and payments and financial reporting. A long term failure or
impairment of any of our information technology systems could adversely affect our ability to conduct day-to-day business.
If certain provisions of our Certificate of Incorporation, Bylaws and Delaware law are triggered, the future price investors might be willing to pay for our
common stock could be limited.
Certain provisions in our Certificate of Incorporation, Bylaws and Delaware corporate law help discourage unsolicited proposals to acquire our business, even if
the proposal would benefit our stockholders. Our Board of Directors is authorized, without stockholder approval, to issue up to 500,000 shares of preferred stock
having such rights, preferences, and privileges, including voting rights, as the Board of Directors designates. The rights of our common stockholders 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. Any or all of these provisions could
delay, deter or prevent a takeover of our company and could limit the price investors are willing to pay for our common stock.
Our stock price could fluctuate significantly.
Stock prices in general have been historically volatile and ours is no different. The trading price of our stock may fluctuate in response to:
•
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•
•
•
•
broad market fluctuations and general economic and/or political conditions;
fluctuations in our financial results;
relatively low trading volumes;
future offerings of our common stock or other securities;
the general condition of the nutritional supplement or lifestyle product industries;
increased competition;
regulatory action;
adverse publicity;
manipulative or illegal trading practices by third parties; and
product and other public announcements.
The stock market has historically experienced significant price and volume fluctuations. There can be no assurance that an active market in our stock will
continue to exist or that the price of our common stock will not decline. Our future operating results may be below the expectations of securities analysts and
investors. If this were to occur, the price of our common stock would likely decline, perhaps substantially.
From time to time our shares may be listed for trading on one or more foreign exchanges, with or without our prior knowledge or consent. Certain foreign
exchanges may have less stringent listing requirements, rules and enforcement procedures than the Nasdaq Global Market or other markets in the United States,
which may increase the potential for manipulative trading practices to occur. These practices, or the perception by investors that such practices could occur, may
increase the volatility of our stock price or result in a decline in our stock price, which in some cases could be significant.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
Not applicable.
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Table of Contents
ITEM 2.
PROPERTIES
This table summarizes our facilities as of June 30, 2007. We believe our facilities are adequate to meet our operating requirements for the foreseeable future.
Location
San Marcos, CA USA
Vista, CA USA
Manno, Switzerland
San Diego, CA USA
(1)
(2)
(3)
Nature of Use
NAI corporate headquarters
Manufacturing, warehousing, packaging and distribution(5)
Manufacturing, warehousing, packaging and distribution
RHL headquarters, warehousing, call center and fulfillment
Square
Feet
How Held
40,300 Owned/leased(6)
162,000
46,000
16,000
Leased
Leased
Leased
Lease
Expiration
Date(4)
Various (6)
March 2014
December 2015
May 2009
(1)
This facility is used by NAI primarily for its private label contract manufacturing segment.
(2)
This facility is used by NAIE, our wholly owned Swiss subsidiary, in connection with our private label contract manufacturing segment. NAIE sublets
approximately 3,000 square feet to a third party.
(3)
This facility is used primarily by RHL, our wholly owned subsidiary, for our branded products segment.
(4) We expect to renew our leases in the normal course of business, with the exception of our lease for approximately 8,000 square feet in San Marcos, CA
which terminates in February 2008.
(5) We use approximately 93,000 square feet for production, 60,000 square feet for warehousing and 9,000 square feet for administrative functions.
(6) We own approximately 29,500 square feet and lease the remaining 10,800 square feet. The lease for approximately 8,000 square feet terminates in
February 2008 and the lease for the remaining space terminates in December 2007.
ITEM 3.
LEGAL PROCEEDINGS
From time to time, we become involved in various investigations, claims and legal proceedings that arise in the ordinary course of our business. These matters
may relate to product liability, employment, intellectual property, tax, regulation, contract or other matters. The resolution of these matters as they arise will be
subject to various uncertainties and, even if such claims are without merit, could result in the expenditure of significant financial and managerial resources. While
unfavorable outcomes are possible, based on available information, we generally do not believe the resolution of these matters will result in a material adverse
effect on our business, consolidated financial condition, or results of operation. However, a settlement payment or unfavorable outcome could adversely impact
our results of operation. Our evaluation of the likely impact of these actions could change in the future and we could have unfavorable outcomes that we do not
expect.
As of October 15, 2007, neither NAI nor its subsidiaries were a party to any material pending legal proceeding nor was any of their property the subject of any
material pending legal proceeding.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to our stockholders for a vote during the fourth quarter ended June 30, 2007.
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Table of Contents
PART II
ITEM 5.
MARKET FOR OUR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Market Information
Our common stock trades on the Nasdaq Global Market under the symbol “NAII.” Below are the high and low closing prices of our common stock as reported
on the Nasdaq Global Market for each quarter of the fiscal years ended June 30, 2007 and 2006:
Fiscal 2007
Fiscal 2006
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Low
High
High
Low
$10.84 $7.77 $ 8.25 $6.64
$ 9.25 $8.37 $ 6.80 $5.27
$ 9.26 $7.90 $ 8.54 $6.34
$ 8.22 $7.05 $10.86 $8.00
In addition to the Nasdaq Global Market, our shares are also listed for trading on the Berlin-Bremen Stock Exchange, the Frankfurt Stock Exchange, and the
XETRA Stock Exchange, each of which is a foreign exchange located in Germany. We are not aware of any other exchanges on which our shares are traded.
Holders
As of October 15, 2007, there were approximately 317 stockholders of record of our common stock.
Dividends
We have never paid a dividend on our common stock and we do not intend to pay a dividend in the foreseeable future. Our current policy is to retain all earnings
to help provide funds for future growth. Additionally, under the terms of our credit facility, we are precluded from paying a dividend.
Recent Sales of Unregistered Securities
During the fiscal year ended June 30, 2007, we did not sell any unregistered securities.
Repurchases
During the fourth quarter of the fiscal year ended June 30, 2007, we did not repurchase any shares of our common stock, nor were any repurchases made on our
behalf.
17
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
Performance Graph
The graph below provides a comparison of cumulative total returns for our common stock, the Nasdaq Composite Index, and the Nasdaq Health Services Index
for the five year period ended June 30, 2007. The graph assumes an investment of $100 on June 30, 2002 in each of our common stock, and the stock comprising
the Nasdaq Composite Index and the Nasdaq Health Services Index. Each of the indices assumes that all dividends were reinvested. The graph lines merely
connect the prices on the dates indicated and do not reflect fluctuations between those dates.
The stock performance shown above is not indicative of future performance.
The performance information above is not deemed to be filed with the SEC or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, as
amended, and shall not be deemed incorporated by reference by any general statement incorporating by reference this report into any filing with the SEC, except
to the extent we specifically incorporate this information by reference.
18
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
ITEM 6.
SELECTED FINANCIAL DATA
The following tables contain certain financial information about NAI, including its subsidiaries. You should review this information together with our audited
consolidated financial statements and the notes to the consolidated financial statements included under Item 8 in this report. Our future financial condition and
results of operations will vary from our historical financial information below based on a variety of factors. You should carefully review the risks described under
Items 1A and 7A and elsewhere in this report, which identify certain important factors that could cause our future financial condition and results of operations to
vary.
Annual Financial Data
Net sales
Cost of goods sold
Gross profit
Selling, general & administrative expenses
Non-cash goodwill impairment charge
Income (loss) from operations
Other income (expense):
Interest income
Interest expense
Foreign exchange gain (loss)
Proceeds from vitamin antitrust litigation
Other, net
Total other income (expense)
Income (loss) before income taxes
Provision for income taxes
Net income (loss)
Net income (loss) per common share:
Basic
Diluted
Weighted average common shares:
Basic
Diluted
Balance sheet data at end of period:
Total assets
Working capital
Long-term debt, net of current portion
Total stockholders’ equity
Annual Financial Information for Years Ended June 30
(Amounts in thousands, except per share amounts)
2007
$97,128
75,842
21,286
18,968
7,037
(4,719)
11
(660)
77
—
125
(447)
(5,166)
119
$ (5,285)
2006
$99,612
78,364
21,248
16,630
—
4,618
28
(565)
41
—
(11)
(507)
4,111
1,441
$ 2,670
2005
$91,972
74,317
17,655
13,863
—
3,792
21
(280)
(137)
—
13
(383)
3,409
1,210
$ 2,199
2004
$78,534
59,964
18,570
15,188
—
3,382
24
(274)
57
—
(165)
(358)
3,024
24
$ 3,000
2003
$55,962
42,781
13,181
12,012
—
1,169
57
(252)
12
225
(59)
(17)
1,152
47
$ 1,105
$ (0.77)
$ (0.77)
$
$
0.42
0.39
$
$
0.37
0.34
$
$
0.51
0.48
$
$
0.19
0.18
6,836
6,836
6,340
6,776
5,949
6,465
5,843
6,304
5,809
6,021
$47,380
$16,216
$ 2,756
$30,022
$62,453
$13,172
$ 4,596
$33,291
$44,138
$14,398
$ 2,979
$26,917
$42,468
$17,468
$ 3,841
$24,128
$30,724
$12,321
$ 2,386
$20,777
19
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Quarterly Financial Information for Fiscal 2007 and Fiscal 2006
(Amounts in thousands, except per share amounts)
Fiscal 2007
Fiscal 2006
Q4
Q1
Q2
Q3
Q4
$24,127 $23,791 $24,049 $25,161 $34,380 $23,387 $19,945 $21,900
19,455 18,394 18,347 19,646 26,808 17,585 15,933 18,038
4,672 5,397 5,702 5,515 7,572 5,802 4,012 3,862
4,747 4,801 4,737 4,683 5,622 4,655 3,169 3,184
7,037 — — — — — — —
678
(7,112)
832 1,950 1,147
596
965
843
Q1
Q2
Q3
3
(126)
14
128
19
(7,093)
(498)
$ (6,595) $
3
(137)
7
10
(117)
479
110
369 $
4
(167)
48
(4)
(119)
846
292
554 $
1
1
(265)
(230)
51
8
(4)
(9)
(230)
(217)
602 1,733
557
215
387 $ 1,176 $
1
(159)
(8)
(4)
(170)
977
356
621 $
10
16
(58)
(83)
(23)
21
(3) —
(27)
(93)
651
750
239
289
412
461 $
$ (0.96) $
$ (0.96) $
0.05 $
0.05 $
0.08 $
0.08 $
0.06 $
0.05 $
0.18 $
0.16 $
0.09 $
0.09 $
0.07 $
0.07 $
0.07
0.06
6,898 6,885 6,840 6,720 6,589 6,572 6,186 6,013
6,898 7,202 7,185 7,201 7,169 7,006 6,485 6,469
20
Table of Contents
Quarterly Financial Data - Unaudited
Net sales
Cost of goods sold
Gross profit
Selling, general & administrative expenses
Non-cash goodwill impairment charge
Income (loss) from operations
Other income (expense):
Interest income
Interest expense
Foreign exchange gain (loss)
Other, net
Total other income (expense)
Income (loss) before income taxes
Provision for (benefit from) income taxes
Net income (loss)
Net income (loss) per common share:
Basic
Diluted
Weighted average common shares:
Basic
Diluted
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion and analysis is intended to help you understand our financial condition and results of operations for the last three fiscal years ended
June 30, 2007. You should read the following discussion and analysis together with our audited consolidated financial statements and the notes to the
consolidated financial statements included under Item 8 in this report. Our future financial condition and results of operations will vary from our historical
financial condition and results of operations described below based on a variety of factors. You should carefully review the risks described under Items 1A and
7A and elsewhere in this report, which identify certain important factors that could cause our future financial condition and results of operations to vary.
Executive Overview
The following overview does not address all of the matters covered in the other sections of this Item 7 or other items in this report or contain all of the
information that may be important to our stockholders or the investing public. This overview should be read in conjunction with the other sections of this Item 7
and this report.
Our primary business activity is providing private label contract manufacturing services to companies that market and distribute vitamins, minerals, herbs and
other nutritional supplements, as well as other health care products, to consumers both within and outside the United States. Historically, our revenue has been
largely dependent on sales to one or two private label contract manufacturing customers and subject to variations in the timing of such customers’ orders, which
in turn is impacted by such customers’ internal marketing programs, supply chain management, entry into new markets and new product introductions.
A cornerstone of our business strategy is to achieve long-term growth and diversify our sales. We have sought and expect to continue to seek to diversify our
sales both by developing relationships with additional, quality-oriented, private label contract manufacturing customers and developing and growing our own line
of branded products. To that end, during fiscal 2006, we established relationships with two new private label contract manufacturing customers, and completed
our acquisition of RHL, an integrated direct marketer of its own and third party branded nutritional supplements and other lifestyle products.
During fiscal 2007, our net sales were 2.5% lower than in fiscal 2006. Private label contract manufacturing sales contributed five percent of the overall decrease
primarily due to significant initial shipments in our fiscal 2006 fourth quarter of a single product to one of our new customers. Shipments to our new customer
continued in fiscal 2007 at a lower volume. The private label contract manufacturing sales decrease was partially offset by an increase in branded products sales.
The increase in branded products sales was primarily attributed to our acquisition of RHL in December 2005 resulting in only seven months of sales from these
acquired brands in fiscal 2006.
We believe the source of our revenue is important in the context of our overall business strategy. Sales from our branded products contributed 17% of our total
fiscal 2007 sales, an increase of three percent from fiscal 2006, primarily as a result of our acquisition of RHL. While the branded products sales growth
contributed to a reduction in our revenue concentration, sales to our two largest private label contract manufacturing customers as a percentage of our total sales
increased to 71% from 67% in fiscal 2006 as a result of lower sales to one of our new private label contract manufacturing customers as discussed above.
The increase in branded products sales over fiscal 2006 resulted in a favorable shift in mix from our lower margin private label contract manufacturing sales and
an improvement in gross profit margin to 21.9% from 21.3% in fiscal 2006. During fiscal 2007, however, in an effort to establish the foundation for long term
growth in our branded products sales and improve our gross profit margins, we made investments in the As We Change
overall customer base. Additionally, during fiscal 2007, sales from the Dr. Cherry Pathway to Healing
®
2006. Primarily as a result of the investments in the As We Change
segment contributed 43% of the overall 50% decrease in income from operations (excluding non-cash goodwill impairment charge) from fiscal 2006 despite the
increase in net sales.
product line decreased approximately 26% from fiscal
product line, our branded products
catalog and lower sales from the Pathway to Healing
catalog in an effort to increase the
®
®
®
Beginning in April 2007, Dr. Cherry ceased airing his weekly television program, which had served as the primary customer acquisition vehicle in marketing the
Pathway to Healing
loss of the television program is anticipated to have a negative impact on our ability to acquire new customers. We continue working with Dr. Cherry to evaluate
alternative marketing programs and revise marketing plans to support the product line.
product line. While sales of the product line have been primarily generated by continuity orders from long-standing repeat customers, the
®
21
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
In the fourth quarter of fiscal 2007, we recorded a $7.0 million non-cash goodwill impairment charge as a result of our annual testing of goodwill and other
intangible assets as discussed in our Critical Accounting Policies below.
During fiscal 2008, we plan to continue to focus on:
•
•
•
•
Leveraging our state of the art, certified facilities to increase the value of the goods and services we provide to our highly valued private label
contract manufacturing customers, and assist us in developing relationships with additional quality oriented customers;
Implementing focused initiatives to grow our branded product lines and to sustain our Pathway to Healing
®
product line;
Improving operational efficiencies and managing costs and business risks to improve profitability; and
Identifying and evaluating additional acquisition opportunities that could increase product lines, expand distribution channels, enhance
manufacturing capabilities or reduce risk associated with a variety of factors.
Critical Accounting Policies and Estimates
Our consolidated financial statements included under Item 8 in this report have been prepared in accordance with United States generally accepted accounting
principles (GAAP). Our significant accounting policies are described in the notes to our consolidated financial statements. The preparation of financial
statements in accordance with GAAP requires that we make estimates and assumptions that affect the amounts reported in our financial statements and their
accompanying notes. We have identified certain policies that we believe are important to the portrayal of our financial condition and results of operations. These
policies require the application of significant judgment by our management. We base our estimates on our historical experience, industry standards, and various
other assumptions that we believe are reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or
conditions. An adverse effect on our financial condition, changes in financial condition, and results of operations could occur if circumstances change that alter
the various assumptions or conditions used in such estimates or assumptions. Our critical accounting policies include those listed below.
Goodwill and Intangible Asset Valuation
The purchase method of accounting for acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value
of the net tangible and intangible assets acquired. Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to annual
impairment tests. The amounts and useful lives assigned to other intangible assets impact future amortization. Determining the fair values and useful lives of
intangible assets requires the use of estimates and the exercise of judgment. While there are a number of different generally accepted valuation methods to
estimate the value of intangible assets acquired, we primarily use the discounted cash flow method and relief-from-royalty method. These methods require
significant management judgment to forecast the future operating results used in the analysis. In addition, other significant estimates are required such as residual
growth rates and discount factors. The estimates we use to value and amortize intangible assets are consistent with the plans and estimates that we use to manage
our business and are based on available historical information and industry estimates and averages. These judgments can significantly affect our net operating
results.
We are required to assess goodwill impairment annually using the methodology prescribed by Statement of Financial Accounting Standards No. 142, “Goodwill
and Other Intangible Assets” (SFAS 142). SFAS 142 requires that goodwill be tested for impairment at the reporting unit level on an annual basis or more
frequently if we believe indicators of impairment exist. Application of the goodwill impairment test requires judgment, including the identification of reporting
units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units and determining the fair value of each reporting unit. Goodwill
impairment is determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair
value of a reporting unit with the net book value (or carrying amount), including goodwill. If the fair value of the reporting unit exceeds the carrying amount,
goodwill of the reporting unit is considered not impaired and the second
22
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
step of the impairment test is unnecessary. If the carrying amount of the reporting unit exceeds the fair value, the second step of the goodwill impairment test is
performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting
unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill,
an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of
goodwill recognized in a business combination, accordingly the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit as if the
reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.
®
Laboratories product line and the As We Change
Our branded products reporting unit for which we previously recorded approximately $7.5 million of goodwill, consists of the Dr. Cherry Pathway to Healing
product line, Real Health
a combination of the income approach and the market approach. Under the income approach, the fair value of a reporting unit is calculated based on the present
value of estimated future cash flows. The present value of future cash flows uses our estimates of revenue for the reporting unit, driven by assumed growth rates
and estimated costs as well as appropriate discount rates. Under the market approach, fair value is estimated based on market multiples of earnings for
comparable companies and similar transactions. The weighting applied to the income approach of 80% and market approach of 20% was based on the data
available and specific facts and circumstances.
catalog. The fair value of the branded products reporting unit was determined using
®
®
In performing the first step of the fiscal 2007 goodwill impairment test, we determined there was an indicator of impairment in the branded products reporting
unit because the carrying value of the reporting unit exceeded the estimated fair value. The excess of the carrying value over the estimated fair value of the
branded products reporting unit was primarily due to the following developments that led to lower expected future cash flows:
•
•
•
•
A decrease in sales from the Dr. Cherry Pathway to Healing
®
product line, the highest margin product line included in the branded products
reporting unit;
The lower volume of Pathway to Healing
product line sales decreased the anticipated cost savings from our integration of previously outsourced
fulfillment and call center activities following the acquisition of RHL, which reduced our ability to invest in expanding and marketing our branded
products;
®
The additional time and investment required to expand the Real Health
®
Laboratories product line to additional FDM retail customers and introduce
new products to existing FDM customers; and
Investments were made in fiscal 2007 to the As We Change
catalog in an effort to increase the active customer base and sales. We believe
additional time and investment are required to expand the active customer base to a level where the catalog can generate higher cash flow.
®
In performing the second step of the goodwill impairment test, we allocated the estimated fair values of the branded products reporting unit determined in step
one of the impairment test, to the assets and liabilities in accordance with SFAS 141.
Determining the fair value of the reporting unit under the first step of the goodwill impairment test and determining the fair value of individual assets and
liabilities of a reporting unit under the second step of the goodwill impairment test is judgmental in nature and often involves the use of significant estimates and
assumptions. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the magnitude of
any such charge. Estimates of fair value are primarily determined using discounted cash flows and market comparisons. These approaches use significant
estimates and assumptions, including projection and timing of future cash flows, discount rates reflecting the risk inherent in future cash flows, perpetual growth
rates, determination of appropriate market comparables, and determination of whether a premium or discount should be applied to comparables. It is reasonably
possible that the plans and estimates used to value these assets may be incorrect. If our actual results, or the plans and estimates used in future impairment
analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges.
Revenue Recognition
We recognize revenue in accordance with the SEC’s Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements” (SAB 104), Statement
of Financial Accounting Standards No. 48, “Revenue Recognition When Right of Return Exists” (SFAS 48), and Emerging Issues Task Force Abstract
No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)” (EITF 01-09).
23
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
SAB 104 requires four basic criteria be met before revenue can be recognized: 1) there is evidence that an arrangement exists; 2) delivery has occurred; 3) the fee
is fixed or determinable; and 4) collectibility is reasonably assured. SFAS 48 states that revenue from sales transactions where the buyer has the right to return
the product shall be recognized at the time of sale only if (1) the seller’s price to the buyer is substantially fixed or determinable at the date of sale; (2) the buyer
has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product; (3) the buyer’s obligation to the seller
would not be changed in the event of theft or physical destruction or damage of the product; (4) the buyer acquiring the product for resale has economic
substance apart from that provided by the seller; (5) the seller does not have significant obligations for future performance to directly bring about resale of the
product by the buyer; and (6) the amount of future returns can be reasonably estimated. We recognize revenue upon determination that all criteria for revenue
recognition have been met. The criteria are usually met at the time title passes to the customer, which usually occurs upon shipment. Revenue from shipments
where title passes upon delivery is deferred until the shipment has been delivered.
We account for RHL payments made to customers in accordance with EITF 01-09, which states that cash consideration (including a sales incentive) given by a
vendor to a customer is presumed to be a reduction of the selling prices of the vendor’s products or services and, therefore, should be characterized as a reduction
of revenue when recognized in the vendor’s income statement, rather than a sales and marketing expense. RHL has various agreements with customers that
provide for discounts and rebates. These agreements are classified as a reduction of revenue. Certain other costs associated with customers that meet the
requirements of EITF 01-09 are recorded as sales and marketing expense. Vendor considerations recorded as a reduction of sales were $235,000 for the year
ended June 30, 2007.
RHL warrants its products for full satisfaction, generally from 30 to 120 days. Our policy requires us to replace the product or refund the purchase price to the
customer. At the time product revenue is recognized, we record an allowance for anticipated returns with an offsetting decrease to revenue based on historical
experience. We periodically assess the adequacy of our liability and adjust the balance as necessary.
We record reductions to gross revenue for estimated returns of private label contract manufacturing products and branded products. The estimated returns are
based on the trailing six months of private label contract manufacturing gross sales and our historical experience for both private label contract manufacturing
and branded product returns. However, the estimate for product returns does not reflect the impact of a large product recall resulting from product
nonconformance or other factors as such events are not predictable nor is the related economic impact estimable.
As part of the services we provide to our private label contract manufacturing customers, we may perform, but are not required to perform, certain research and
development activities related to the development or improvement of their products. While our customers typically do not pay directly for this service, the cost of
this service is included as a component of the price we charge to manufacture and deliver their products.
Inventory Reserve
We operate primarily as a private label contract manufacturer that builds products based upon anticipated demand or following receipt of customer specific
purchase orders. From time to time, we build inventory for private label contract manufacturing customers under a specific purchase order with delivery dates
that may subsequently be rescheduled or canceled at the customer’s request. We value inventory at the lower of cost or market on an item-by-item basis and
establish reserves equal to all or a portion of the related inventory to reflect situations in which the cost of the inventory is not expected to be recovered. This
requires us to make estimates regarding the market value of our inventory, including an assessment for excess and obsolete inventory. In evaluating whether
inventory is stated at the lower of cost or market, management considers such factors as the amount of inventory on hand, the estimated time required to sell such
inventory, the remaining shelf life and efficacy, the foreseeable demand within a specified time horizon and current and expected market conditions. Based on
this evaluation, we record adjustments to cost of goods sold to adjust inventory to its net realizable value. These adjustments are estimates, which could vary
significantly, either favorably or unfavorably, from actual requirements if future economic conditions, customer demand or other factors differ from expectations.
24
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
Accounting for Income Taxes
We estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure, together with
assessing temporary differences resulting from differing treatment of items, such as property and equipment depreciation, for tax and financial reporting
purposes. Actual income taxes could vary from these estimates due to future changes in income tax law or results from final tax examination reviews.
We record valuation allowances to reduce our deferred tax assets to an amount that we believe is more likely than not to be realized. We consider estimated
future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. If we determine we will not
realize all or part of our deferred tax assets in the future, we will record an adjustment to the carrying value of the deferred tax asset, which would be reflected as
income tax expense. Conversely, if we determine we will realize a deferred tax asset, which currently has a valuation allowance, we will reverse the valuation
allowance, which would be reflected as income tax benefit.
Additionally, we have not recorded U.S. income tax expense for NAIE’s retained earnings that we have declared as indefinitely reinvested offshore, thus
reducing our overall income tax expense. The earnings designated as indefinitely reinvested in NAIE are based on the actual deployment of such earnings in
NAIE’s assets and our expectations of the future cash needs of NAIE and NAI. Income tax laws also are a factor in determining the amount of foreign earnings to
be indefinitely reinvested offshore.
We carefully review several factors that influence the ultimate disposition of NAIE’s retained earnings declared as reinvested offshore, and apply stringent
standards to overcome the presumption of repatriation. Despite this approach, because the determination involves our future plans and expectations of future
events, the possibility exists that amounts declared as indefinitely reinvested offshore may ultimately be repatriated. For instance, NAI’s actual cash needs may
exceed our current expectations or NAIE’s actual cash needs may be less than our current expectations. Additionally, changes may occur in tax laws and/or
accounting standards that could change our determination of the status of NAIE’s retained earnings. This would result in additional income tax expense in the
fiscal year in which we determine that amounts are no longer indefinitely reinvested offshore.
On an interim basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision in accordance with the
anticipated annual rate. As the fiscal year progresses, we refine our estimate based upon actual events and earnings by jurisdiction during the year. This continual
estimation process periodically results in a change to our expected effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision
during the quarter in which the change in estimate occurs so that the year-to-date provision equals the expected annual rate.
We establish reserves based on management’s assessment of exposure for certain positions taken in previously filed tax returns that may become payable upon
audit by tax authorities. The tax reserves are analyzed at least annually, generally in the fourth quarter of each year, and adjustments are made as events occur
that warrant adjustments to the reserve. During the fourth quarter of fiscal 2007, we reduced our tax contingency reserves after the Internal Revenue Service
completed an audit of our fiscal 2005 tax return.
Derivative Financial Instruments
We use derivative financial instruments in the management of our foreign currency exchange risk inherent in our forecasted transactions denominated in Euros.
We may hedge our foreign currency exposures by entering into offsetting forward exchange contracts and currency options. We account for derivative financial
instruments using the deferral method under Financial Accounting Standard 133, “Accounting for Derivatives and Related Hedging Activity” (FAS 133), when
such instruments are intended to hedge identifiable, firm foreign currency commitments or anticipated transactions and are designated as, and effective as,
hedges. Foreign exchange exposures arising from certain transactions that do not meet the criteria for the deferral method are marked-to-market.
We recognize any unrealized gains and losses associated with derivative instruments in income in the period in which the underlying hedged transaction is
realized. In the event the derivative instrument is deemed ineffective we would recognize the resulting gain or loss in income at that time.
25
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts to reflect our estimate of current and past due receivable balances that may not be collected. The allowance for
doubtful accounts is based upon our assessment of the collectibility of specific customer accounts, the aging of accounts receivable and our history of bad debts.
We believe that the allowance for doubtful accounts is adequate to cover anticipated losses in the receivable balance under current conditions. However,
significant deterioration in the financial condition of our customers, resulting in an impairment of their ability to make payments, could materially change these
expectations and an additional allowance may be required.
Defined Benefit Pension Plan
We sponsor a defined benefit pension plan. The plan obligation and related assets of the plan are presented in the notes to the consolidated financial statements.
Plan assets, which consist primarily of marketable equity and debt instruments, are valued based upon third party market quotations. Independent actuaries,
through the use of a number of assumptions, determine plan obligation and annual pension expense. Key assumptions in measuring the plan obligation include
the discount rate and estimated future return on plan assets. In determining the discount rate, we use an average long-term bond yield. Asset returns are based on
the historical returns of multiple asset classes to develop a risk free rate of return and risk premiums for each asset class. The overall rate for each asset class was
developed by combining a long-term inflation component, the risk free rate of return and the associated risk premium. A weighted average rate is developed
based on the overall rates and the plan’s asset allocation.
We have discussed the development and selection of these critical accounting policies with the Audit Committee of our Board of Directors and the Audit
Committee has reviewed our disclosure relating to these policies.
Results of Operations
The results of operations for the fiscal years ended June 30 were as follows (dollars in thousands, except per share amounts):
Private label contract manufacturing
Branded products
Total net sales
Cost of goods sold
Gross profit
Gross profit %
Selling, general & administrative expenses
% of net sales
Non-cash goodwill impairment charge
Income (loss) from operations
% of net sales
Other expenses, net
Income (loss) before income taxes
% of net sales
Net income (loss)
% of net sales
Basic/Diluted net income (loss) per common share
2007
$80,732
16,396
97,128
75,842
21,286
21.9%
18,968
19.5%
7,037
(4,719)
(4.9%)
447
(5,166)
(5.3%)
$ (5,285)
(5.4%)
$ (0.77)
2006
$85,758
13,854
99,612
78,364
21,248
21.3%
16,630
16.7%
—
4,618
4.6%
507
4,111
4.1%
$ 2,670
2.7%
0.39
$
% Change
(2007-2006)
(6)
18
(3)
(3)
—
14
n/a
(202)
(12)
(226)
(298)
(297)
2005
$83,862
8,110
91,972
74,317
17,655
19.2%
13,863
15.1%
—
3,792
4.1%
383
3,409
3.7%
$ 2,199
2.4%
0.34
$
% Change
(2006-2005)
2
71
8
5
20
20
n/a
22
32
21
21
15
26
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
Fiscal 2007 Compared to Fiscal 2006
The percentage decrease in private label contract manufacturing net sales was primarily attributed to the following:
Arbonne International
Shaklee Corporation
Mannatech, Incorporated
Impact of foreign exchange rates
Other customers
Total
Percentage
Change
(7)(1)
4(2)
1(3)
1
(5)(4)
(6)
1
2
3
4
During fiscal 2006, we established a relationship with Arbonne International, which included significant initial shipments of a single new product in our
fiscal 2006 fourth quarter. Shipments continued in fiscal 2007 but at a lower volume.
During fiscal 2006, we established a relationship with Shaklee Corporation.
Net sales to Mannatech, Incorporated increased primarily as a result of higher volumes of established products in existing markets contributing three
percentage points of net sales growth, partially offset by a shift in sales mix to lower priced products.
A decrease in net sales to other customers was primarily due to the discontinuation of a customer relationship contributing three percentage points of the
net sales reduction.
The percentage increase in net sales of our branded products was primarily attributed to the following distribution channels:
®
(“AWC”) catalog
As We Change
FDM retail channel
Direct-to-consumer marketing program
Total
Percentage
Change
26(1)
7(1)
(15)(2)
18
1
2
RHL was acquired on December 5, 2005 resulting in only seven months of net sales from these acquired brands for fiscal 2006.
Net sales from our direct-to-consumer marketing programs decreased primarily from lower sales of the Dr. Cherry Pathway to Healing
®
product line.
Gross profit margin increased 0.6 percentage points primarily due to the following:
Shift in sales mix
Changes in overhead expenses
Reduced inventory reserves
Incremental direct and indirect labor
Total
Percentage
Change
1.6(1)
(0.9)
0.1
(0.2)
0.6
1
The shift in sales mix resulted primarily from higher margin branded products sales comprising a higher percentage of sales compared to fiscal
2006 as a result of the RHL acquisition and changes within private label contract manufacturing sales mix.
27
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
Private label contract manufacturing gross profit margin remained relatively consistent at 15.4% in fiscal 2007 compared to 15.6% in fiscal 2006 primarily due to
reduced fixed cost leverage on lower net sales partially offset by a favorable shift in sales mix.
Branded products gross profit margin decreased 2.8 percentage points to 53.8% in fiscal 2007 from 56.6% in fiscal 2006 primarily due to a shift in sales mix to
As We Change
catalog sales from the Dr. Cherry Pathway to Healing
product line sales.
®
®
Selling, general and administrative expenses increased $2.3 million, or 14%, primarily due to the inclusion of the results from NAI’s acquisition of Real Health
Laboratories, Inc. for a full year in fiscal 2007 as compared to a partial year in fiscal 2006. The incremental branded products expenses were partially offset by
reduced personnel expenses for the termination of certain private label contract manufacturing sales and marketing personnel in June 2006.
In the fourth quarter of fiscal 2007, we recorded a $7.0 million non-cash goodwill impairment charge as a result of our annual testing of goodwill and other
intangible assets as discussed in our Critical Accounting Policies above.
Other expense, net decreased $60,000 primarily due to a favorable legal settlement of $90,000 awarded during our fiscal 2007 fourth quarter. Additionally,
foreign exchange gains increased $36,000 due to the strengthening of the Euro and the related impact on the translation of Euro denominated cash and
receivables. These gains were partially offset by an increase in interest expense of $95,000 primarily due to the additional $3.8 million term loan obtained in
December 2005 to partially fund the RHL acquisition and an increase in our weighted average interest rate on our variable rate debt.
Our effective tax rate for fiscal 2007 was 2.3% compared to 35.1% in fiscal 2006. The decrease in our effective rate was primarily attributed to reducing our tax
contingency reserves after the Internal Revenue Service completed an audit of our fiscal 2005 tax return in our fiscal 2007 fourth quarter.
Fiscal 2006 Compared to Fiscal 2005
The percentage increase in private label contract manufacturing net sales was attributed to the following:
Arbonne International
NSA International, Inc.
Mannatech, Incorporated
Impact of foreign exchange rates
Other customers
Total
Percentage
Change
12(1)
1(2)
(8)(3)
(1)
(2)
2
1
2
3
During fiscal 2006, we established a relationship with Arbonne International, which included $9.0 million of net sales for initial shipments of a single new
product.
Growth in net sales to NSA International, Inc. over the prior year resulted primarily from higher volumes of established products in existing markets,
which contributed two percentage points of the net sales growth, partially offset by lower average prices per unit, which reduced our net sales growth by
one percentage point.
The reduction in net sales to Mannatech, Incorporated from the prior year resulted primarily from a shift in sales mix to lower priced products, which
resulted in five percentage points of the decrease and lower volumes of established products in existing markets of three percentage points.
Net sales to our two largest customers as a percentage of total net sales decreased to 67% from 79% in the prior year.
28
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
Gross profit margin increased 2.1 percentage points to 21.3% in fiscal 2006 from 19.2% in fiscal 2005. The increase in gross profit margin was primarily due to
the following:
Shift in sales mix
Change in inventory reserves
Incremental direct and indirect labor
Reduced overhead expenses
Total
Percentage
Change
1.7(1)
0.3
(0.1)
0.2(2)
2.1
1
2
The shift in sales mix resulted primarily from higher margin branded products sales comprising a higher percentage of sales compared to fiscal 2005 as a
result of the RHL acquisition. Additionally, contract manufacturing powder sales comprised a lower percentage of sales compared to fiscal 2005. Powder
products typically include higher material cost as a percentage of selling price compared to capsule or tablet products, resulting in lower gross profit
margins.
Overhead expenses decreased 0.2 percentage points primarily due to higher sales and improved fixed cost leverage, however in absolute dollars
overhead increased $700,000, from the prior year primarily due to:
•
Incremental expenses related to our facility expansion in Vista, California and Manno, Switzerland as follows:
•
•
Rent and facility related expenses of $396,000; and
Depreciation and amortization expenses related primarily to our facility expansion in Vista, California of $410,000;
•
•
Incremental inbound freight and shipping expense of $408,000; partially offset by
Reduced outsourced lab testing and consulting of $429,000 in conjunction with the preparation for our TGA audit in fiscal 2005.
Selling, general and administrative expenses increased $2.8 million, or 20%, from the prior year primarily due to the following:
•
•
•
Additional RHL selling, general and administrative expenses of $4.1 million; and
Incremental direct-to-consumer marketing brand development expenses of $489,000, primarily for the launch on a test basis of a direct mail campaign
featuring Dr. Richard Linchitz, a nationally recognized physician, and Theraflex
, one of our proprietary formulas; partially offset by
TM
Reduced NAI selling, general and administrative expenses of $1.9 million primarily due to the following:
•
•
•
•
Nonrecurring compliance expenses incurred in fiscal 2005 for TGA regulatory of $706,000 and Sarbanes-Oxley of $323,000;
Reduced personnel expenses of $456,000 primarily due to the termination of certain regulatory compliance and product formulation personnel in
June 2005, partially offset by employee restructuring costs for the termination of the Senior Vice President - Sales & Marketing in June 2006;
Reduced stock compensation expense of $102,000 primarily associated with the acceleration of the vesting of all outstanding and unvested stock
options in fiscal 2005; and
Reduced bad debt expense of $211,000, primarily due to lower risk of collection associated with our private label contract manufacturing customers
during fiscal 2006.
Other expense, net increased $124,000 primarily due to the following:
•
An increase in interest expense of $285,000 primarily due to the following:
•
•
•
Additional $3.8 million term loan obtained in December 2005 to partially fund the RHL acquisition;
Increase in our weighted average interest rate on our variable rate debt; and
Incremental utilization of our line of credit to fund inventory purchases in the third quarter for orders shipped in the fourth quarter.
•
Foreign exchange gain of $41,000 compared to a foreign exchange loss of $137,000 in the prior year. This improvement of $178,000 was primarily due to
the net loss associated with derivative financial instruments to manage our foreign currency exchange risk of $29,000 compared to $109,000 in the prior
year.
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Our effective tax rate for fiscal 2006 was 35.1% compared to 35.5% in fiscal 2005.
29
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
Liquidity and Capital Resources
Our primary sources of liquidity and capital resources are cash flows provided by operating activities and the availability of borrowings under our credit facility.
Net cash provided by operating activities was $15.1 million in fiscal 2007 compared to net cash used in operating activities of $3.8 million in fiscal 2006 and
provided by operating activities of $2.5 million in fiscal 2005.
At June 30, 2007, changes in accounts receivable, consisting primarily of amounts due from our private label contract manufacturing customers, provided $7.8
million in cash during fiscal 2007 compared to $2.3 million of cash used in the prior year. Cash provided by accounts receivable in fiscal 2007 was due to higher
collections from our record quarterly sales in our fiscal 2006 fourth quarter. Days sales outstanding was 35 days during fiscal 2007 compared to 45 days in fiscal
2006. This decrease in days sales outstanding was primarily due to timing of shipments.
At June 30, 2007, changes in inventory provided $3.0 million in cash during fiscal 2007 compared to $3.3 million of cash used in fiscal 2006. The decrease in
inventory at June 30, 2007 was primarily for selling through inventory on hand as of June 30, 2006 for a private label contract manufacturing customer during
fiscal 2007.
Approximately $1.7 million of our operating cash flow was generated by NAIE in fiscal 2007. In June 2005, we repatriated $2.0 million of NAIE retained
earnings under the American Jobs Creation Act. As of June 30, 2007, NAIE’s undistributed retained earnings are considered indefinitely reinvested.
Cash used in investing activities in fiscal 2007 was $2.7 million compared to $7.9 million in fiscal 2006 and $7.7 million in fiscal 2005. Cash used in investing
activities for fiscal 2006 included $5.6 million of net cash used in the acquisition of RHL. Capital expenditures were $2.7 million in fiscal 2007 compared to $2.3
million in fiscal 2006 and $7.7 million in fiscal 2005. Fiscal 2007 capital expenditures were primarily for manufacturing equipment in our Vista, California and
Manno, Switzerland facilities and call center computer software and hardware for our RHL facility. Additionally, we recently completed the expansion of our
manufacturing facility in Manno, Switzerland to include powder filling capabilities. Fiscal 2006 capital expenditures were primarily for manufacturing
equipment in our Vista, California and Manno, Switzerland facilities. Fiscal 2005 capital expenditures were primarily for the expansion of our Vista, California
production facility, which included the acquisition of additional manufacturing equipment. Fiscal 2005 capital expenditures included $960,000 of tenant
improvements that were funded by landlord allowances.
Our consolidated debt decreased to $4.6 million at June 30, 2007 from $15.9 million at June 30, 2006 primarily due to net payments of $9.6 million to our
outstanding working capital line of credit balance at June 30, 2006. Our fiscal 2006 working capital line of credit balance was primarily for additional investment
in inventory for orders from a new private label contract manufacturing customer that were subsequently shipped in the fourth quarter of fiscal 2006 and during
fiscal 2007.
We have a bank credit facility of $20.9 million, comprised of a $12.0 million working capital line of credit and $8.9 million in term loans. The working capital
line of credit is secured by our accounts receivable and other rights to payment, general intangibles, inventory and equipment, has an interest rate of Prime Rate
or LIBOR plus 1.75%, as elected by NAI from time to time, and borrowings are subject to eligibility requirements for current accounts receivable and inventory
balances. The term loans consist of a $1.1 million, 15 year term loan due June 2011, secured by our San Marcos building, at an interest rate of 8.25%; a
$700,000, 10 year term loan with a twenty year amortization, secured by our San Marcos building, at an interest rate of LIBOR plus 2.25%; a $1.8 million, four
year term loan, secured by our accounts receivable and other rights to payment, general intangibles, inventory and equipment, at an interest rate of LIBOR plus
2.10%; a $1.5 million, five year term loan, secured by equipment, at an interest rate of LIBOR plus 2.10%; and a $3.8 million, four year term loan, secured by
equipment, at an interest rate of LIBOR plus 2.10%. Monthly payments on the term loans are approximately $145,000 plus interest.
We amended our credit facility on December 1, 2005 and again on March 29, 2006 to increase our working capital line of credit from $8.0 million to $12.0
million, and to extend the maturity date from November 1, 2006 to November 1, 2007, as well as to make certain modifications to the financial covenants,
including: (i) an increase in our ratio of total liabilities/tangible net worth covenant from 1.25/1.0 to 1.75/1.0 through June 30, 2006 (the ratio returned to 1.25/1.0
from July 1, 2006 through June 30, 2007 and was to return to 1.0/1.0 thereafter but was subsequently further amended); (ii) a limit on capital expenditures of
$5,500,000 for fiscal years 2006 and 2007; (iii)
30
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
an increase in our ability to incur additional aggregate annual operating lease expenses from $100,000 to $500,000 without prior approval from the lender; (iv) an
increase in our ability to create specific indebtedness other than with our current lender from $0 to $1,000,000; (v) replacement of the EBITDA coverage ratio
with a fixed charge coverage ratio (aggregate of net profit after taxes, depreciation and amortization expenses and net contributions/aggregate current maturity of
long-term debt and capitalized lease payments) not less than 1.25/1.0 as of each fiscal quarter end; (vi) an increase in borrowings against eligible inventory from
$3.0 million to $6.0 million, provided the outstanding borrowings shall not at any time exceed eligible accounts receivable; (vii) a change in permissible accounts
receivable concentration to allow up to 35% for a new customer acceptable to the lender; and (viii) a change in the calculation of the fixed charge coverage ratio
to a rolling 4-quarter basis from each fiscal quarter end.
On January 24, 2007, we further amended our credit facility to extend the maturity date for the working capital line of credit from November 1, 2007 to
November 1, 2008, and maintain the ratio of total liabilities/tangible net worth covenant at 1.25/1.0 for the remainder of the term of the credit facility.
As of June 30, 2007, we were not in compliance with our quarterly net income and annual net income financial covenants under our credit facility, which
require quarterly net income after taxes of at least $1.00 and annual fiscal year net income of at least $750,000. As of June 30, 2007, our net loss was $6.6 million
for our fourth quarter of fiscal 2007 and $5.3 million for fiscal 2007. Our lender has agreed to waive their default rights as a result of these covenant violations as
of June 30, 2007.
Additionally, as of September 28, 2007, we were not in compliance with our annual Form 10-K financial reporting covenant under our credit facility, which
requires that a copy of our annual report on Form 10-K be provided to our lender not later than 90 days after our fiscal year end. Our lender also has agreed to
waive their default rights as a result of this covenant violation as of September 28, 2007.
As of June 30, 2007, we did not have an outstanding balance on the working capital line of credit and the amount outstanding on the term loans was $4.6 million.
On September 22, 2006, NAIE, our wholly owned subsidiary, entered into a credit facility to provide it with a credit line of up to CHF 1,300,000, or
approximately $1.1 million, which is the initial maximum aggregate amount that can be outstanding at any one time under the credit facility. This maximum
amount will be reduced by CHF 160,000, or approximately $130,000, at the end of each year beginning on December 31, 2007. On February 19, 2007, NAIE
amended its credit facility to provide that the maximum aggregate amount that may be outstanding under the facility cannot be reduced below CHF 500,000, or
approximately $407,000. As of June 30, 2007, there was no outstanding balance under the credit facility.
Under its credit facility, NAIE may draw amounts either as current account loan credits to its current or future bank accounts or as fixed loans with a maximum
term of 24 months. Current account loans will bear interest at the rate of 5% per annum. Fixed loans will bear interest at a rate determined by the parties based on
current market conditions and must be repaid pursuant to a repayment schedule established by the parties at the time of the loan. If a fixed loan is repaid early at
NAIE’s election or in connection with the termination of the credit facility, NAIE will be charged a pre-payment penalty equal to 0.1% of the principal amount of
the fixed loan or CHF 1,000 (approximately $800), whichever is greater. The bank reserves the right to refuse individual requests for an advance under the credit
facility, although its exercise of such right will not have the effect of terminating the credit facility as a whole.
As of June 30, 2007, we had $4.9 million in cash and cash equivalents and $7.5 million available under our line of credit. We believe our available cash, cash
equivalents and potential cash flows from operations will be sufficient to fund our current working capital needs, capital expenditures and debt payments through
at least the next 12 months.
Off-Balance Sheet Arrangements
As of June 30, 2007, we did not have any significant off-balance sheet debt nor did we have any transactions, arrangements, obligations (including contingent
obligations) or other relationships with any unconsolidated entities or other persons that have or are reasonably likely to have a material current or future effect
on our financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of
revenue or expenses material to investors.
31
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
Contractual Obligations
This table summarizes our known contractual obligations and commercial commitments at June 30, 2007 (dollars in thousands).
Contractual Obligations
Long-Term Debt
Operating Leases
Total Obligations
(1)
Payments Due By Period
Total
$ 4,581
16,645
$21,226
Less Than
1 Year
$ 1,825
2,239
$ 4,064
1 –3 Years
2,147
$
4,383
6,530
$
3 –5 Years
181
$
4,458
4,639
$
More Than
5 Years
$
$
428
5,565
5,993
1
Operating lease obligations are shown net of $72,000 in sublease rental income that should be received through March 2009.
Inflation
We do not believe that inflation or changing prices have had a material impact on our historical operations or profitability.
Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.”
FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s
financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” Tax positions must meet a more-likely-than-not recognition
threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 is be effective for our fiscal year beginning July 1,
2007 and the provisions of FIN 48 will be applied to all tax positions upon initial adoption of the interpretation. The cumulative effect of applying the provisions
of this interpretation will be reported as an adjustment to the opening balance of retained earnings for that fiscal year. We have evaluated the provisions of FIN
48 and do not expect that the adoption will have a material impact on our consolidated financial position or results of operations.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair
value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The
provisions of SFAS 157 are effective for our fiscal year beginning July 1, 2008. We are currently evaluating the impact of SFAS 157.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(SFAS 159). SFAS 159 allows measurement of specified financial instruments, warranty and insurance contracts at fair value on a contract by contract basis,
with changes in fair value recognized in earnings in each period. The provisions of SFAS 159 are effective for our fiscal year beginning July 1, 2009. We are
currently evaluating the impact of SFAS 159.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk, which is the potential loss arising from adverse changes in market rates and prices, such as interest and foreign currency exchange
rates. We generally do not enter into derivatives or other financial instruments for trading or speculative purposes. We may, however, enter into financial
instruments to try to manage and reduce the impact of changes in foreign currency exchange rates. We cannot predict with any certainty our future exposure to
fluctuations in interest and foreign currency exchange rates or other market risks or the impact, if any, such fluctuations may have on our future business, product
pricing, consolidated financial condition, results of operations or cash flows. The actual impact of any fluctuations in interest or foreign currency exchange rates
may differ significantly from those discussed below.
32
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
Interest Rates
At June 30, 2007, we had fixed rate debt of $429,000 and variable rate debt of approximately $4.2 million. The interest rates on our variable rate debt range from
LIBOR plus 1.75% to LIBOR plus 2.25%. As of June 30, 2007, the weighted average effective interest rate on our variable rate debt was 7.78%. An immediate
one hundred basis point (1.0%) increase in the interest rates on our variable rate debt, holding other variables constant, would have increased our interest expense
by $82,000 for the fiscal year ended June 30, 2007. Interest rates have been at or near historic lows in recent years but have been increasing during the past year.
There can be no guarantee that interest rates will not rise further. Any increase in interest rates may adversely affect our results of operations and financial
condition.
Foreign Currencies
To the extent our business continues to expand outside the United States, an increasing share of our net sales and cost of sales will be transacted in currencies
other than the United States dollar. Accounting practices require that our non-United States dollar-denominated transactions be converted to United States dollars
for reporting purposes. Consequently, our reported net income may be significantly affected by fluctuations in currency exchange rates. When the United States
dollar strengthens against currencies in which products are sold or weakens against currencies in which we incur costs, net sales and costs could be adversely
affected.
Our main exchange rate exposures are with the Swiss Franc and the Euro against the United States dollar. This is due to NAIE’s operations in Switzerland and
the payment in Euros by our largest customer for finished goods. Additionally, we pay our NAIE employees and certain operating expenses in Swiss Francs. We
may enter into forward exchange contracts, foreign currency borrowings and option contracts to hedge our foreign currency risk. Our goal in seeking to manage
foreign currency risk is to provide reasonable certainty to the functional currency value of foreign currency cash flows and to help stabilize the value of
non-United States dollar-denominated earnings.
On July 7, 2005, we purchased 12 option contracts designated and effective as cash flow hedges to protect against the foreign currency exchange risk inherent in
a portion of our forecasted transactions denominated in Euros. The 12 options were to expire monthly beginning January 2006 and ending December 2006, but
we sold the options that had not yet expired as of July 6, 2006 as described below. The option contracts had a notional amount of $7.0 million, a weighted
average strike price of $1.16, and a purchase price of $152,000. The risk of loss associated with the options was limited to the purchase price paid for the option
contracts.
On April 6, 2006, we purchased seven option contracts designated and effective as cash flow hedges to protect against the foreign currency exchange risk
inherent in a portion of our forecasted transactions denominated in Euros. The seven options were to expire monthly beginning January 2007 and ending July
2007, but we sold the options in July 2006 as described below. The option contracts had a notional amount of $4.9 million, a weighted average strike price of
$1.16, and a purchase price of $62,000. The risk of loss associated with the options was limited to the purchase price paid for the option contracts.
On July 6, 2006, we sold the then unexpired options purchased on July 7, 2005 and April 6, 2006 for $13,000. The proceeds were used to purchase 12 option
contracts designated and effective as cash flow hedges to protect against the foreign currency exchange risk inherent in a portion of our forecasted transactions
denominated in Euros. The 12 options expire monthly beginning August 2006 and ending July 2007. The option contracts had a notional amount of $8.9 million,
a weighted average strike price of $1.24, and a purchase price of $103,000. The risk of loss associated with the options is limited to the purchase price paid for
the option contracts. As of June 30, 2007, 11 of the options had expired. As of June 30, 2007, the unrealized losses associated with the options sold on July 6,
2006 were $7,000 and will be recognized in cost of goods sold under the original monthly option contract expiration dates.
On January 18, 2007, we purchased three option contracts designated and effective as cash flow hedges to protect against the foreign currency exchange risk
inherent in a portion of our forecasted transactions denominated in Euros. The three options expire monthly beginning August 2007 and ending October 2007.
The option contracts had a notional amount of $1.9 million, a weighted average strike price of $1.24, and a purchase price of $12,000. The risk of loss associated
with the options is limited to the purchase price paid for the option contracts.
33
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
On April 3, 2007, we purchased three option contracts designated and effective as cash flow hedges to protect against the foreign currency exchange risk inherent
in a portion of our forecasted transactions denominated in Euros. The three options expire monthly beginning November 2007 and ending January 2008. The
option contracts had a notional amount of $1.9 million, a weighted average strike price of $1.29, and a purchase price of $18,000. The risk of loss associated with
the options is limited to the purchase price paid for the option contracts.
On June 30, 2007, the Swiss Franc closed at 1.23 to 1.00 United States dollar and the Euro closed at 0.74 to 1.00 United States dollar. A 10% adverse change to
the exchange rates between the Swiss Franc and the Euro against the United States dollar, holding other variables constant, would have decreased our net income
for the fiscal year ended June 30, 2007 by $471,000.
34
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Natural Alternatives International, Inc.
We have audited the accompanying consolidated balance sheets of Natural Alternatives International, Inc. as of June 30, 2007 and 2006, and the related
consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended
June 30, 2007. Our audits also included the financial statement schedule listed at Item 15(2). 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 audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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. We were not engaged to
perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits provide 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. at June 30, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended
June 30, 2007, in conformity with U.S. generally accepted accounting principles. 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.
San Diego, California
October 12, 2007
/s/ Ernst & Young LLP
35
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
Natural Alternatives International, Inc.
Consolidated Balance Sheets
As of June 30
(Dollars in thousands, except share and per share data)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable - less allowance for doubtful accounts of
$20 at June 30, 2007 and $217 June 30, 2006
Inventories, net
Deferred income taxes
Other current assets
Total current assets
Property and equipment, net
Goodwill and purchased intangibles, net
Other noncurrent assets, net
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued liabilities
Accrued compensation and employee benefits
Line of credit
Income taxes payable
Current portion of long-term debt
Total current liabilities
Long-term debt, less current portion
Deferred income taxes
Deferred rent
Long-term pension liability
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Preferred stock; $.01 par value; 500,000 shares authorized; none issued or outstanding
Common stock; $.01 par value; 20,000,000 shares authorized at June 30, 2007 and June 30, 2006, issued and outstanding
7,001,230 at June 30, 2007 and 6,685,546 at June 30, 2006
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Treasury stock, at cost, 70,000 shares at June 30, 2007 and 61,000 shares at June 30, 2006
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
36
2007
2006
$ 4,876
$ 2,157
5,264
14,099
1,441
2,204
27,884
15,059
4,268
169
$47,380
$ 6,330
1,840
1,403
—
270
1,825
11,668
2,756
1,620
1,238
76
17,358
12,839
17,054
1,059
1,916
35,025
15,943
11,303
182
$62,453
$ 5,221
2,265
1,964
9,574
1,063
1,766
21,853
4,596
1,260
1,262
191
29,162
—
—
69
17,335
(184)
13,177
(375)
30,022
$47,380
67
15,331
(276)
18,462
(293)
33,291
$62,453
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
Natural Alternatives International, Inc.
Consolidated Statements Of Operations And Comprehensive Income (Loss)
For the Years Ended June 30
(Dollars in thousands, except share and per share data)
Net sales
Cost of goods sold
Gross profit
Selling, general & administrative expenses
Non-cash goodwill impairment charge
Income (loss) from operations
Other income (expense):
Interest income
Interest expense
Foreign exchange gain (loss)
Other, net
Income (loss) before income taxes
Provision for income taxes
Net income (loss)
Unrealized gain (loss) resulting from change in fair value of derivative instruments, net of tax
Change in minimum pension liability, net of tax
Comprehensive income (loss)
Net income (loss) per common share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
See accompanying notes to consolidated financial statements.
37
2007
97,128
75,842
21,286
18,968
7,037
(4,719)
11
(660)
77
125
(447)
(5,166)
119
(5,285)
54
38
(5,193)
(0.77)
(0.77)
$
$
$
$
$
2006
99,612
78,364
21,248
16,630
–
4,618
28
(565)
41
(11)
(507)
4,111
1,441
2,670
(89)
(50)
2,531
0.42
0.39
$
$
$
$
$
2005
91,972
74,317
17,655
13,863
–
3,792
21
(280)
(137)
13
(383)
3,409
1,210
2,199
8
(49)
2,158
0.37
0.34
$
$
$
$
$
6,836,018
6,836,018
6,340,110
6,775,661
5,949,212
6,464,714
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
Natural Alternatives International, Inc.
Consolidated Statements Of Stockholders’ Equity
For the Years Ended June 30
(Dollars in thousands)
Common Stock
Accumulated
Balance, June 30, 2004
Issuance of common stock for employee stock purchase plan and stock
5,970,992 $
option exercises
Compensation expense related to stock options
Compensation expense related to the acceleration of stock options
Unrealized gain resulting from change in fair value of derivative
instruments, net of tax
Change in minimum pension liability, net of tax
Net income
Balance, June 30, 2005
Issuance of common stock for employee stock purchase plan and stock
option exercises
Issuance of common stock related to business acquisition
Compensation expense related to stock options and employee stock
purchase plan
Compensation expense related to the acceleration of stock options
Unrealized loss resulting from change in fair value of derivative
instruments, net of tax
Change in minimum pension liability, net of tax
Net income
Balance, June 30, 2006
Issuance of common stock for employee stock purchase plan and stock
option exercises
Compensation expense related to stock options and employee stock
purchase plan
Repurchase of common stock
Tax benefit from exercise of stock options
Unrealized loss resulting from change in fair value of derivative
instruments, net of tax
Change in minimum pension liability, net of tax
Net loss
Balance, June 30, 2007
Shares
Amount
Additional
Paid-in
Capital
Retained
Earnings
60 $ 10,864 $ 13,593 $ (293) $
Treasury
Stock
Other
Comprehensive
Loss
93,475
—
—
1
—
—
427
72
131
—
—
—
—
—
—
—
—
—
6,064,467
—
—
—
61
—
—
—
11,494
—
—
2,199
15,792
—
—
—
(293)
Total
(96) $ 24,128
—
—
—
8
(49)
—
(137)
428
72
131
8
(49)
2,199
26,917
111,079
510,000
1
5
462
3,250
—
—
—
—
—
—
463
3,255
—
—
—
—
88
37
—
—
—
—
—
—
—
6,685,546
—
—
—
67
—
—
—
15,331
—
—
2,670
18,462
—
—
—
(293)
—
—
(89)
(50)
—
(276)
88
37
(89)
(50)
2,670
33,291
315,684
2
1,083
—
—
—
1,085
—
—
—
249
—
672
—
—
—
—
(82)
—
—
—
—
—
—
—
—
—
(5,285)
69 $ 17,335 $ 13,177 $ (375) $
—
—
—
7,001,230 $
—
—
—
—
—
—
—
—
—
249
(82)
672
54
54
38
38
—
(5,285)
(184) $ 30,022
See accompanying notes to consolidated financial statements.
38
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
Natural Alternatives International, Inc.
Consolidated Statements Of Cash Flows
For the Years Ended June 30
(Dollars in thousands)
Cash flows from operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Provision (reduction) for uncollectible accounts receivable
Depreciation and amortization
Amortization of purchased intangibles
Non-cash equipment impairment charge
Non-cash goodwill impairment charge
Tax benefit from exercise of stock options
Deferred income taxes
Non-cash compensation
Pension benefit (expense), net of contributions
Loss on disposal of assets
Changes in operating assets and liabilities (net of effects of business acquisition):
Accounts receivable
Inventories
Other assets
Accounts payable and accrued liabilities
Income taxes payable
Accrued compensation and employee benefits
Net cash provided by (used in) operating activities
Cash flows from investing activities
Capital expenditures
Proceeds from sale of property & equipment
Net cash paid for business acquisition
Repayment of notes receivable
Net cash used in investing activities
Cash flows from financing activities
Borrowings on long-term debt
Payments on long-term debt
Net borrowings (payments) on line of credit
Issuance of common stock
Repurchase of common stock
Tax benefit from exercise of stock options
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures of cash flow information
Cash paid during the year for:
Taxes
Interest
Disclosure of non-cash activities:
Net unrealized gains (losses) resulting from change in fair value of
derivative instruments
Change in minimum pension liability, net of tax
See accompanying notes to consolidated financial statements.
39
2007
2006
2005
$ (5,285)
$ 2,670
$ 2,199
(199)
3,330
252
201
7,037
(672)
169
249
(78)
12
7,774
2,955
(94)
215
(247)
(561)
15,058
(2,729)
70
–
–
(2,659)
–
(1,781)
(9,574)
1,085
(82)
672
(9,680)
2,719
2,157
$ 4,876
(34)
2,990
148
–
–
–
(530)
125
(98)
–
(2,264)
(3,279)
(569)
(3,901)
399
527
(3,816)
(2,295)
–
(5,617)
–
(7,912)
3,800
(1,868)
9,574
463
–
–
11,969
241
1,916
$ 2,157
89
2,559
–
–
–
–
(404)
203
17
20
(2,034)
(124)
(427)
1,351
344
(1,275)
2,518
(7,706)
–
–
13
(7,693)
–
(832)
–
428
–
–
(404)
(5,579)
7,495
$ 1,916
$
$
$
$
698
668
$ 1,558
536
$
$ 1,075
280
$
54
38
$
$
(89)
50
$
$
8
49
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Organization and Summary of Significant Accounting Policies
Organization
We provide private label contract manufacturing services to companies that market and distribute vitamins, minerals, herbs, and other nutritional supplements, as
well as other health care products, to consumers both within and outside the United States. We also develop, manufacture and market our own products.
Subsidiaries
On January 22, 1999, Natural Alternatives International Europe S.A. (NAIE) was formed as our wholly owned subsidiary, based in Manno, Switzerland. In
September 1999, NAIE opened its 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 Swiss federal
and cantonal income tax holiday that ended June 30, 2005.
On December 5, 2005, we acquired Real Health Laboratories, Inc. (RHL), which primarily markets branded nutritional supplements and other lifestyle products.
RHL’s operations include in-house creative, catalog design, supply chain management and call center and fulfillment activities.
Principles of Consolidation
The consolidated financial statements include the accounts of Natural Alternatives International, Inc. (NAI) and our wholly owned subsidiaries, NAIE and RHL.
All significant intercompany accounts and transactions have been eliminated. The functional currency of NAIE, our foreign subsidiary, is the United States
dollar. The financial statements of NAIE have been translated at either current or historical exchange rates, as appropriate, with gains and losses included in the
consolidated statements of operations.
Reclassifications
Certain reclassications to prior period information have been made to conform to current presentation. For the fiscal year ended June 30, 2007, we recorded
$642,000 of shipping costs for our private label contract manufacturing sales in cost of goods sold on the Statements Of Operations And Comprehensive Income
(Loss) in accordance with the Financial Accounting Standards Board Emerging Issue Task Force No. 00-10, “Accounting for Shipping and Handling Fees and
Costs.” Private label contract manufacturing shipping costs of $481,000 for the fiscal year ended June 30, 2006 and $480,000 for the fiscal year ended June 30,
2005, were reclassified from net sales to cost of goods sold to conform to current year presentation.
For the fiscal year ended June 30, 2007, we recorded $1.4 million of shipping costs for our branded products sales in cost of goods sold on the Statement Of
Operations And Comprehensive Income (Loss). Branded products shipping costs of $1.1 million for the fiscal year ended June 30, 2006 and $742,000 for the
fiscal year ended June 30, 2005, were reclassified from selling, general and administrative expenses to cost of goods sold to conform to current year presentation.
For the three fiscal years ended June 30, 2007, all costs incurred on the shipment of product to customers were included in costs of goods sold. Shipping and
handling costs for the last three fiscal years ended June 30 were $2.0 million for 2007, $2.0 million for 2006 and $1.4 million for 2005.
Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.”
FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s
financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” Tax positions must meet a more-likely-than-not recognition
threshold at the effective date to be recognized upon the adoption of FIN 48 and in
40
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
subsequent periods. FIN 48 is be effective for our fiscal year beginning July 1, 2007 and the provisions of FIN 48 will be applied to all tax positions upon initial
adoption of the interpretation. The cumulative effect of applying the provisions of this interpretation will be reported as an adjustment to the opening balance of
retained earnings for that fiscal year. We have evaluated the provisions of FIN 48 and do not expect that the adoption will have a material impact on our
consolidated financial position or results of operations.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair
value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The
provisions of SFAS 157 are effective for our fiscal year beginning July 1, 2008. We are currently evaluating the impact of SFAS 157.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(SFAS 159). SFAS 159 allows measurement of specified financial instruments, warranty and insurance contracts at fair value on a contract by contract basis,
with changes in fair value recognized in earnings in each period. The provisions of SFAS 159 are effective for our fiscal year beginning July 1, 2009. We are
currently evaluating the impact of SFAS 159.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Inventories
Our 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
We state property and equipment at cost. Depreciation of property and equipment is provided using the straight-line method over their estimated useful lives,
generally ranging from 1 to 39 years. We amortize leasehold improvements using the straight-line method over the shorter of the life of the improvement or the
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 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 exceeds the fair value of the assets. We report assets to be disposed of at the lower of the carrying amount or fair value less costs to sell.
Goodwill and Other Intangible Assets
Under SFAS 142, goodwill and other intangible assets with indefinite useful lives are not amortized, but are reviewed annually for impairment or more
frequently if impairment indicators arise. Separable intangible assets that have finite lives are amortized over their useful lives. Under SFAS 142, goodwill and
other intangible assets with indefinite useful lives resulting from acquisitions are not amortized.
Statement of Financial Accounting Standards No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144) addresses financial
accounting and reporting for the impairment of long-lived assets (excluding goodwill) and for long-lived assets to be disposed of. However, SFAS 144 retains the
fundamental provisions of Statement of Financial Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of” for recognition and measurement of the impairment of long-lived assets to be held and used.
41
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
Revenue Recognition
We recognize revenue in accordance with the SEC’s Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements” (SAB104), Statement of
Financial Accounting Standards No. 48, “Revenue Recognition When Right of Return Exists” (SFAS 48) and Emerging Issues Task Force Abstract (EITF)
No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)” (EITF 01-09). SAB 104 requires
that four basic criteria be met before revenue can be recognized: 1) there is evidence that an arrangement exists; 2) delivery has occurred; 3) the fee is fixed or
determinable; and 4) collectibility is reasonably assured. SFAS 48 states that revenue from sales transactions where the buyer has the right to return the product
shall be recognized at the time of sale only if (1) the seller’s price to the buyer is substantially fixed or determinable at the date of sale; (2) the buyer has paid the
seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product; (3) the buyer’s obligation to the seller would not be
changed in the event of theft or physical destruction or damage of the product; (4) the buyer acquiring the product for resale has economic substance apart from
that provided by the seller; (5) the seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer;
and (6) the amount of future returns can be reasonably estimated. We recognize revenue upon determination that all criteria for revenue recognition have been
met. The criteria are usually met at the time title passes to the customer, which usually occurs upon shipment. Revenue from shipments where title passes upon
delivery is deferred until the shipment has been delivered.
We account for RHL payments made to customers in accordance with EITF 01-09, which states that cash consideration (including a sales incentive) given by a
vendor to a customer is presumed to be a reduction of the selling prices of the vendor’s products or services and, therefore, should be characterized as a reduction
of revenue when recognized in the vendor’s income statement, rather than a sales and marketing expense. RHL has various agreements with customers that
provide for discounts and rebates. These agreements are classified as a reduction of revenue. Certain other costs associated with customers that meet the
requirements of EITF 01-09 are recorded as sales and marketing expense. Vendor considerations recorded as a reduction of sales were $235,000 for the year
ended June 30, 2007 and $148,000 for the year ended June 30, 2006.
RHL warrants its products for full satisfaction, generally from 30 to 120 days. Our policy requires us to replace the product or refund the purchase price to the
customer. At the time product revenue is recognized, we record an allowance for anticipated returns with an offsetting decrease to revenue based on historical
experience. We periodically assess the adequacy of our liability and adjust the balance as necessary.
We record reductions to gross revenue for estimated returns of private label contract manufacturing products and branded products. The estimated returns are
based upon the trailing six months of private label contract manufacturing gross sales and our historical experience for both private label contract manufacturing
and branded product returns. However, the estimate for product returns does not reflect the impact of a large product recall resulting from product
nonconformance or other factors as such events are not predictable nor is the related economic impact estimable.
Cost of Goods Sold
Cost of goods sold includes raw material, labor and manufacturing overhead.
Shipping and Handling Costs
In accordance with EITF No. 00-10, “Accounting for Shipping and Handling Fees and Costs,” we include fees earned on the shipment of our products to
customers in sales and include costs incurred on the shipment of product to customers in costs of goods sold.
Research and Development Costs
As part of the services we provide to our private label contract manufacturing customers, we may perform, but are not obligated to perform, certain research and
development activities related to the development or improvement of their products. While our customers typically do not pay directly for this service, the cost of
this service is included as a component of the price we charge to manufacture and deliver their products.
42
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
Research and development costs are expensed when incurred. Our research and development expenses for the last three fiscal years ended June 30 were $1.9
million for 2007, $1.7 million for 2006 and $3.5 million for 2005.
Advertising Costs
®
We expense the production costs of advertising the first time the advertising takes place, except for direct-response advertising for RHL branded products and the
As We Change
catalog, which is capitalized and amortized over its expected period of future benefits. These direct-response advertising costs consist primarily
of catalogs. The capitalized costs of the advertising are amortized over the projected life of the catalog following its publication, typically six months. We
incurred and expensed advertising costs in the amount of $5.4 million during the fiscal year ended June 30, 2007, $3.6 million during fiscal 2006 and $865,000
during fiscal 2005. These costs were included in selling, general and administrative expenses in the accompanying statements of operations.
We included advertising costs of $665,000 at June 30, 2007 and $630,000 at June 30, 2006 in other current assets in the accompanying balance sheets.
Income Taxes
We account 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, for each of the jurisdictions in which we
operate, 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.
We do not record U.S. income tax expense for NAIE’s retained earnings that are declared as indefinitely reinvested offshore, thus reducing our overall income
tax expense. The amount of earnings designated as indefinitely reinvested in NAIE is based upon the actual deployment of such earnings in NAIE’s assets and
our expectations of the future cash needs of our U.S. and foreign entities. Income tax laws are also a factor in determining the amount of foreign earnings to be
indefinitely reinvested offshore.
It is our policy to establish reserves based on management’s assessment of exposure for certain positions taken in previously filed tax returns that may become
payable upon audit by tax authorities. The tax reserves are analyzed at least annually, generally in the fourth quarter of each year, and adjustments are made as
events occur that warrant adjustments to the reserve.
Stock-Based Compensation
We have an equity incentive plan under which we have granted nonqualified and incentive stock options to employees, non-employee directors and consultants.
We also have an employee stock purchase plan. Before July 1, 2005, we accounted for stock-based awards to employees, including shares issued pursuant to the
employee stock purchase plan, under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued
to Employees” (APB 25), and related interpretations, as permitted by Statement of Financial Accounting Standard No. 123, “Accounting for Stock-Based
Compensation” (SFAS 123).
Effective July 1, 2005, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123R, “Share Based Payment”
(SFAS 123R), using the modified-prospective-transition method. Under that transition method, compensation cost is recognized (a) for all stock-based awards
granted before, but not yet vested as of, July 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and
(b) for all stock-based awards granted after July 1, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. Results
for periods prior to implementation have not been restated.
We estimated the fair value of the stock option awards at the date of grant and employee stock purchase plan shares at the beginning of the offering period using
the Black-Scholes option valuation model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that
have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions.
43
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
Black-Scholes uses assumptions related to volatility, the risk-free interest rate, the dividend yield (which is assumed to be zero, as we have not paid any cash
dividends) and employee exercise behavior. Expected volatilities used in the model are based mainly on the historical volatility of our stock price and other
factors. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect in the period of grant. The expected life of the fiscal 2007 grants is
derived from historical experience.
The per share fair value of options granted in connection with stock option plans and rights granted in connection with the employee stock purchase plan reported
below has been estimated at the date of grant or beginning of the offering period, as applicable, with the following weighted average assumptions:
Expected life (years)
Risk-free interest rate
Volatility
Dividend yield
Weighted average fair value
Employee Stock Options
Fiscal Years Ended June 30,
2006
4.0 – 5.0
4.4 – 4.9%
47%
0%
2007
4.0 – 5.0
4.4 – 4.9%
40%
0%
$
2.75
$
2.76
2005
4.0 – 8.0
3.4 – 3.8%
54%
0%
$
3.82
Employee Stock Purchase Plans
Fiscal Years Ended June 30,
2006
0.5
3.9%
51%
0%
2007
0.5
4.8%
33%
0%
2005
0.5
2.0%
54%
0%
$ 0.75
$ 1.11
$ 2.36
For purposes of these disclosures, we have amortized the estimated fair value of our stock option awards to expense over the options’ vesting periods and of our
employee stock purchase plan shares to expense over the offering period. The following table illustrates the effect on net income (loss) and net income (loss) per
common share as if the fair value method had been applied to all outstanding and unvested awards in each period (dollars in thousands, except per share data):
Net income (loss) - as reported
Plus: Reported stock-based compensation
Less: Fair value stock-based compensation
Net income (loss) - pro forma
Reported basic net income (loss) per common share
Pro forma basic net income (loss) per common share
Reported diluted net income (loss) per common share
Pro forma diluted net income (loss) per common share
Fiscal Years Ended June 30,
2007
$(5,285)
249
(249)
$(5,285)
$ (0.77)
$ (0.77)
$ (0.77)
$ (0.77)
2006
$2,670
125
(125)
$2,670
$ 0.42
$ 0.42
$ 0.39
$ 0.39
2005
$ 2,199
203
(2,658)
$ (256)
$ 0.37
$ (0.04)
$ 0.34
$ (0.04)
Effective April 27, 2005, our Board of Directors approved the acceleration of the vesting of all outstanding and unvested options held by directors, officers and
other employees under our 1999 Omnibus Equity Incentive Plan. As a result of the acceleration, options to acquire 827,932 shares of our common stock, which
otherwise would have vested over the next 36 months, became immediately exercisable. This action was taken to eliminate, to the extent permitted, the transition
expense that we otherwise would have incurred in connection with the adoption of SFAS 123R. Under the accounting guidance of APB 25, the accelerated
vesting resulted in a charge for stock-based compensation of approximately $131,000, which was recognized in the fourth quarter of fiscal 2005. In the fourth
quarter of fiscal 2006 we recorded an additional charge of $37,000.
The aggregate intrinsic value of awards outstanding as of June 30, 2007 was $1.7 million. The aggregate intrinsic value of awards exercisable as of June 30, 2007
was $1.6 million. In addition, the aggregate intrinsic value of awards exercised was $1.6 million during fiscal 2007. The total remaining unrecognized
compensation cost related to unvested awards amounted to $771,000 at June 30, 2007 and is expected to be recognized over the next three years. The weighted
average remaining requisite service period of the unvested awards was 2.2 years.
44
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
Fair Value of Financial Instruments
The carrying amounts of certain of our financial instruments, including cash and cash equivalents, accounts receivable, notes receivable, accounts payable, line of
credit and notes payable approximate 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
Our management 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 United States generally accepted accounting principles.
Actual results could differ from those estimates.
Net Income per Common Share
We compute net income per common share in accordance with Statement of Financial Accounting Standards No. 128, “Earnings Per Share” (SFAS 128). SFAS
128 requires the presentation of basic income per common share, using the weighted average number of common shares outstanding during the period, and
diluted income per common share, using the additional dilutive effect of all dilutive securities. The dilutive impact of stock options account for the additional
weighted average shares of common stock outstanding for our diluted net income per common share computation. We calculated basic and diluted net income
per common share as follows (amounts in thousands, except per share data):
Numerator
Net income (loss)
Denominator
Basic weighted average common shares outstanding
Dilutive effect of stock options
Diluted weighted average common shares outstanding
Basic net income (loss) per common share
Diluted net income (loss) per common share
For the Years Ended June 30,
2005
2007
2006
$(5,285)
$2,670 $2,199
6,836
—
6,836
$ (0.77)
$ (0.77)
5,949
6,340
516
436
6,776
6,465
$ 0.42 $ 0.37
$ 0.39 $ 0.34
Shares related to stock options of 240,000 for the fiscal year ended June 30, 2007, 284,000 for fiscal 2006 and 193,000 for fiscal 2005, were excluded from the
calculation of diluted net income (loss) per common share, as the effect of their inclusion would be anti-dilutive.
Concentrations of Credit Risk
Financial instruments that subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. We place our cash
and cash equivalents with highly rated financial institutions. Credit risk with respect to receivables is concentrated with our three largest customers, whose
receivable balances collectively represented 75% of gross accounts receivable at June 30, 2007 and 79% at June 30, 2006. Concentrations of credit risk related to
the remaining accounts receivable balances are limited due to the number of customers comprising our remaining customer base.
45
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
B. Goodwill and Purchased Intangibles
Goodwill and other acquisition-related intangibles as of June 30, 2007 were as follows (dollars in thousands):
Goodwill
Distributor relationships
Direct consumer relationships
Tradenames
Non-compete agreements
Amortization
Life in Years
N/A
13
9
20
2
Gross
Amount
$ 7,495
500
400
3,300
10
$11,705
Accumulated
Amortization
—
$
(60)
(70)
(262)
(8)
(400)
$
Impairment
Charge (1)
(7,037)
$
—
—
—
—
(7,037)
$
Net
Amount
$ 458
440
330
3,038
2
$ 4,268
(1)
Non-cash goodwill impairment charge as a result of annual testing in accordance with SFAS 142.
®
®
product line, Real Health
Our branded products reporting unit for which we have previously recorded approximately $7.5 million of goodwill, consists of the Dr. Cherry Pathway to
Healing
catalog. The fair value of the branded products reporting unit was
determined using a combination of the income approach and the market approach. Under the income approach, the fair value of a reporting unit is calculated
based on the present value of estimated future cash flows. The present value of future cash flows uses our estimates of revenue for the reporting unit, driven by
assumed growth rates and estimated costs as well as appropriate discount rates. Under the market approach, fair value is estimated based on market multiples of
earnings for comparable companies and similar transactions. The weighting applied to the income approach of 80% and market approach of 20% was based on
the data available and specific facts and circumstances.
Laboratories product line and the As We Change
®
In performing the first step of the fiscal 2007 goodwill impairment test, we determined there was an indicator of impairment in the branded products reporting
unit because the carrying value of the reporting unit exceeded the estimated fair value. The excess of the carrying value over the estimated fair value of the
branded products reporting unit was primarily due to the following developments that led to lower expected future cash flows:
•
•
•
•
A decrease in sales from the Dr. Cherry Pathway to Healing
®
product line, the highest margin product line included in the branded products
reporting unit;
The lower volume of Pathway to Healing
product line sales decreased the anticipated cost savings from our integration of previously outsourced
fulfillment and call center activities following the acquisition of RHL, which reduced our ability to invest in expanding and marketing our branded
products;
®
The additional time and investment required to expand the Real Health
®
Laboratories product line to additional Food, Drug and Mass Market
(FDM) retail customers and introduce new products to existing FDM customers; and
Investments were made in fiscal 2007 to the As We Change
catalog in an effort to increase the active customer base and sales. We believe
additional time and investment are required to expand the active customer base to a level where the catalog can generate higher cash flow.
®
In performing the second step of the goodwill impairment test, we allocated the estimated fair values of the branded products reporting unit determined in step
one of the impairment test, to the assets and liabilities in accordance with SFAS 141.
The estimated future amortization expense of purchased intangible assets as of June 30, 2007 was as follows (dollars in thousands):
Fiscal year 2008
Fiscal year 2009
Fiscal year 2010
Fiscal year 2011
Fiscal year 2012
Thereafter
46
$ 249
247
247
247
247
2,573
$3,810
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
C. Inventories
Inventories, net consisted of the following at June 30 (dollars in thousands):
Raw materials
Work in progress
Finished goods
D. Property and Equipment
Property and equipment consisted of the following 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
E. Debt
2007
$ 6,997
3,410
3,692
$14,099
2006
$ 8,461
5,339
3,254
$17,054
Depreciable Life
In Years
NA
7 – 39
3 – 12
3 – 5
3
1 – 15
2007
$
393
2,726
19,514
4,470
204
10,325
37,632
(22,573)
$ 15,059
2006
$
393
2,721
20,208
3,843
204
9,434
36,803
(20,860)
$ 15,943
We amended our credit facility on December 1, 2005 and again on March 29, 2006 to increase our working capital line of credit from $8.0 million to $12.0
million, extend the maturity date from November 1, 2006 to November 1, 2007 and modify certain financial covenants. We also obtained an additional $3.8
million term loan on December 5, 2005, to fund, in part, the cash purchase price of the RHL acquisition.
As a result of the amendments and additional term loan, our bank credit facility increased to a total of $20.9 million, comprised of a $12.0 million working
capital line of credit and $8.9 million in term loans. The working capital line of credit is secured by our accounts receivable and other rights to payment, general
intangibles, inventory and equipment, has an interest rate of Prime Rate or LIBOR plus 1.75%, as elected by NAI from time to time, and borrowings are subject
to eligibility requirements for current accounts receivable and inventory balances. The term loans consist of a $1.1 million, 15 year term loan due June 2011,
secured by our San Marcos building, at an interest rate of 8.25%; a $700,000, 10 year term loan with a twenty year amortization, secured by our San Marcos
building, at an interest rate of LIBOR plus 2.25%; a $1.8 million, four year term loan, secured by our accounts receivable and other rights to payment, general
intangibles, inventory and equipment, at an interest rate of LIBOR plus 2.10%; a $1.5 million, five year term loan, secured by equipment, at an interest rate of
LIBOR plus 2.10%; and the $3.8 million, four year term loan, secured by equipment, at an interest rate of LIBOR plus 2.10%. Monthly payments on the term
loans are approximately $145,000 plus interest.
On January 24, 2007, we further amended our credit facility to extend the maturity date for the working capital line of credit from November 1, 2007 to
November 1, 2008, and maintain the ratio of total liabilities/tangible net worth covenant at 1.25/1.0 for the remainder of the term of the credit facility.
As of June 30, 2007 we were not in compliance with our quarterly net income and annual net income financial covenants under our credit facility. Quarterly net
income after taxes may not be less than $1.00 and annual fiscal year net income net less than $750,000. As of June 30, 2007 our net loss was $6.6 million for our
fourth quarter of fiscal 2007 and $5.3 million for fiscal 2007. Our lender has agreed to waive their default rights as a result of these covenant violations as of
June 30, 2007.
47
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
Additionally, as of September 28, 2007, we were not in compliance with our annual Form 10-K financial reporting covenant under our credit facility, which
requires that a copy of our annual report on Form 10-K be provided to our lender not later than 90 days after our fiscal year end. Our lender also has agreed to
waive their default rights as a result of this covenant violation as of September 28, 2007.
As of June 30, 2007, we did not have an outstanding balance on the working capital line of credit and the amount outstanding on the term loans was $4.6 million.
As of June 30, 2007, we had $7.5 million available under the line of credit.
As of May 1, 2007, in accordance with our lease agreement, we no longer have an amount outstanding under our letter of credit issued to our landlord.
On September 22, 2006, NAIE, our wholly owned subsidiary, entered into a credit facility to provide it with a credit line of up to CHF 1,300,000, or
approximately $1.1 million, which is the initial maximum aggregate amount that can be outstanding at any one time under the credit facility. This maximum
amount will be reduced by CHF 160,000, or approximately $130,000, at the end of each year beginning on December 31, 2007. On February 19, 2007, NAIE
amended its credit facility to provide that the maximum aggregate amount that may be outstanding under the facility cannot be reduced below CHF 500,000, or
approximately $407,000. As of June 30, 2007, there was no outstanding balance under the credit facility.
The composite interest rate on all of our outstanding debt was 7.84% at June 30, 2007 and 7.16% at June 30, 2006.
Aggregate amounts of long-term debt maturities as of June 30, 2007 were as follows (dollars in thousands):
2008
2009
2010
2011
2012
Thereafter
F. Income Taxes
The provision for income taxes for the years ended June 30 consisted of the following (dollars in thousands):
Current:
Federal
State
Foreign
Deferred:
Federal
State
Provision for income taxes
48
$ 1,825
1,455
692
146
35
428
$ 4,581
2007
2006
2005
$ (83)
(3)
96
10
96
13
109
$119
$1,515
229
227
1,971
(558)
28
(530)
$1,441
$1,320
94
109
1,523
(398)
85
(313)
$1,210
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
Net deferred tax assets and deferred tax liabilities as of June 30 were as follows (dollars in thousands):
Deferred tax assets:
Allowance for doubtful accounts
Accrued vacation expense
Tax credit carryforward
Allowance for inventories
Other, net
Deferred rent
Net operating loss carryforward
Total gross deferred tax assets
Deferred tax liabilities:
Accumulated depreciation and amortization
Deferred tax liabilities
Net deferred tax assets (liabilities)
2007
2006
$
6
212
153
807
281
344
30
$ 1,833
(2,012)
(2,012)
$ (179)
$
85
166
163
875
244
423
26
$ 1,982
(2,183)
(2,183)
$ (201)
At June 30, 2007, we had state tax net operating loss carryforwards of approximately $507,000. The state tax loss carryforwards will begin to expire in 2014,
unless previously utilized.
During the fourth quarter of fiscal 2007, we reduced our tax contingency reserves by $422,000 after the Internal Revenue Service completed an audit of our fiscal
2005 tax return.
NAIE obtained from the Swiss tax authorities a five-year Swiss federal and cantonal income tax holiday that ended June 30, 2005. NAIE’s effective tax rate for
Swiss federal, cantonal and communal taxes is approximately 20%. NAIE had net income of $903,000 for the fiscal year ended June 30, 2007. Undistributed
earnings of NAIE amounted to approximately $4.4 million at June 30, 2007. These earnings are considered to be indefinitely reinvested and, accordingly, no
provision for U.S. federal taxes has been provided thereon.
A reconciliation of income taxes computed by applying the statutory federal income tax rate of 34% to net income before income taxes for the year ended
June 30 is as follows (dollars in thousands):
Income taxes (benefit) computed at statutory federal income tax rate
State income taxes, net of federal income tax expense
Expenses not deductible for tax purposes
Foreign tax rate differential
Foreign tax withholding
Dividend tax
Goodwill impairment, not deductible for tax purposes
Tax contingency reserve reduction
Other
Income taxes as reported
Effective tax rate
G. Employee Benefit Plans
2007
$(1,756)
56
32
(140)
—
—
2,393
(422)
(44)
119
2.3%
$
2006
$1,396
188
37
(108)
—
—
—
—
(72)
$1,441
35.1%
2005
$1,159
118
53
(304)
101
131
—
—
(48)
$1,210
35.5%
We have a profit sharing plan pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”), whereby participants may contribute a
percentage of compensation not in excess of the maximum allowed under the Code. All employees with six months of continuous employment are eligible to
participate in the plan. We may make contributions to the plan at the discretion of our Board of Directors. Effective January 1, 2004, the plan was amended to
require that we match 100% of the first 3% and 50% of the next 2% of a participant’s compensation contributed to the plan. The total contributions under the
plan charged to operations totaled $302,000 for the fiscal year ended June 30, 2007, $321,000 for fiscal 2006, and $315,000 for fiscal 2005.
49
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
We have a “Cafeteria Plan” pursuant to Section 125 of the Code, whereby health care benefits are provided for active employees through insurance companies.
Substantially all active full-time employees are eligible for these benefits. We recognize 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 $969,000 for the fiscal year ended June 30, 2007, $858,000
for fiscal 2006, and $876,000 for fiscal 2005.
In December 1999, we adopted an employee stock purchase plan that initially provided for the issuance of up to 150,000 shares of our common stock. Since
July 1, 2004, the number of shares available for purchase under the plan has increased by 25,000 each year on July 1 and will continue to increase by such
amount each July 1 until determined otherwise by the Board of Directors. The plan is intended to qualify under Section 423 of the Code and is for the benefit of
qualifying employees. Under the terms of the plan, participating employees may have up to 15% of their compensation withheld through payroll deductions to
purchase shares of our common stock at 85% of the closing sale price for the stock as quoted on the Nasdaq Global Market on either the first or last trading day
in the offering period, whichever is lower. As of June 30, 2007, 162,173 shares of common stock were issued pursuant to this plan and 62,827 shares were
available for future issuance.
We sponsor a defined benefit pension plan, which provides retirement benefits to employees based generally on years of service and compensation during the last
five years before retirement. Effective June 21, 1999, we adopted an amendment to freeze benefit accruals to the participants. We contribute an amount not less
than the minimum funding requirements of the Employee Retirement Income Security Act of 1974 nor more than the maximum tax-deductible amount.
Disclosure of Funded Status
The following table sets forth the defined benefit pension plan’s funded status and amount recognized in our consolidated balance sheets at June 30 (dollars in
thousands):
Change in Benefit Obligation
Benefit obligation at beginning of year
Interest cost
Actuarial (gain) loss
Benefits paid
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
Fair value of plan assets at end of year
Reconciliation of Funded Status
Benefit obligation in excess of fair value of plan assets
Unrecognized net actuarial loss
Net amount recognized
Additional Minimum Liability Disclosures
Accrued benefit liability
2007
2006
$1,546
82
22
(101)
$1,549
$1,355
175
44
(101)
$1,473
$ (76)
260
$ 184
$1,488
82
(24)
—
$1,546
$1,282
(7)
80
—
$1,355
$ (191)
323
$ 132
$ (76)
$ (191)
The weighted-average rates used for the years ended June 30 in determining the projected benefit obligations for the defined benefit pension plan were as
follows:
Discount rate
Compensation increase rate
50
2007
5.50%
N/A
2006
5.50%
N/A
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
Net Periodic Benefit Cost
The components included in the defined benefit pension plan’s net periodic benefit income for the fiscal years ended June 30 were as follows (dollars in
thousands):
Interest cost
Expected return on plan assets
Recognized actuarial loss
Net periodic benefit income
We expect to contribute $43,000 to our defined benefit pension plan in fiscal 2008.
The following benefit payments are expected to be paid:
2008
2009
2010
2011
2012
2013-2017
2007
$ 82
(106)
15
(9)
$
2006
$ 82
(106)
7
$ (17)
2005
$ 73
(89)
—
$ (16)
$ 184
237
274
314
374
2,752
$4,135
The weighted-average rates used for the years ended June 30 in determining the defined benefit pension plan’s net pension costs, were as follows:
Discount rate
Expected long-term rate of return
Compensation increase rate
2007
5.50%
8.00%
N/A
2006
5.50%
8.00%
2005
6.00%
8.00%
N/A
N/A
Our expected rate of return is determined based on a methodology that considers historical returns of multiple classes analyzed to develop a risk free real rate of
return and risk premiums for each asset class. The overall rate for each asset class was developed by combining a long-term inflation component, the risk free
real rate of return, and the associated risk premium. A weighted average rate was developed based on those overall rates and the target asset allocation of the
plan.
Our defined benefit pension plan’s weighted average asset allocation at June 30 and weighted average target allocation were as follows:
Equity securities
Debt securities
Real estate
2007
63%
37%
— %
100%
2006
60%
40%
— %
100%
Target
Allocation
60%
40%
— %
100%
The underlying basis of the investment strategy of our defined benefit pension plan is to ensure that pension funds are available to meet the plan’s benefit
obligations when they are due. Our investment strategy is a long-term risk controlled approach using diversified investment options with relatively minimal
exposure to volatile investment options like derivatives.
H. Stockholders’ Equity
Treasury Stock
In January 1999, the Board of Directors approved a repurchase program of up to 500,000 shares of our common stock. This program was terminated by the
Board of Directors in October 2002 after the repurchase of 272,400 shares. During March 2004, 211,400 shares of such repurchased common stock were
cancelled and returned to the status of authorized but unissued shares of our common stock.
On September 25, 2006, our former Chief Scientific Officer surrendered 9,000 shares of our common stock as payment of the exercise price for incentive stock
options.
On June 29, 2007, the independent members of the Board of Directors approved the repurchase of 100,000 shares of our common stock from Mark LeDoux, our
Chief Executive Officer and the Chairman of the Board, his wife, their family limited partnership and related children’s trust, conditioned on a purchase price
equal to a 10% discount from the closing price on such date. The repurchase was completed on July 6, 2007.
51
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
Stock Option Plans
On December 6, 1999, our stockholders approved the adoption of the 1999 Omnibus Equity Incentive Plan (the “1999 Plan”). A total of 500,000 shares of
common stock were initially reserved under the 1999 Plan for issuance to our directors, officers, other employees, and consultants. Under the terms of the 1999
Plan, the aggregate number of shares of common stock that may be awarded is automatically increased on January 1
by a number equal to the lesser of 2.5% of the total number of common shares then outstanding or 100,000 shares. The 1999 Plan has increased by 100,000
common shares on January 1 of each year from 2000 through 2007. In addition, at our Annual Meetings of Stockholders held on January 30, 2004 and
December 31, 2004, our stockholders approved amendments to the 1999 Plan to increase the number of shares of common stock available under the 1999 Plan by
an additional 500,000 shares, for a total increase of 1,000,000 shares.
st
of each year, commencing January 1, 2000,
Grants under the 1999 Plan can be either incentive stock options or nonqualified stock options. Options granted under the 1999 Plan have either a five or a
ten-year term.
Effective April 27, 2005, our Board of Directors approved the acceleration of the vesting of all outstanding and unvested options held by directors, officers and
other employees under the 1999 Plan. As a result of the acceleration, options to acquire 827,932 shares of our common stock, which otherwise would have vested
over the next 36 months, became immediately exercisable. This action was taken to eliminate, to the extent permitted, the transition expense that we otherwise
would have incurred in connection with the adoption of SFAS 123R. Included in the options to acquire 827,932 shares of our common stock were options to
purchase 545,992 shares with exercise prices greater than our closing stock price on the date of acceleration. Under the accounting guidance of APB 25, the
accelerated vesting resulted in a charge for stock-based compensation of approximately $131,000, which was recognized in the fourth quarter of fiscal 2005. In
the fourth quarter of fiscal 2006 we recorded an additional charge of $37,000.
Stock option activity for the three years ended June 30, 2007 was as follows:
Outstanding at June 30, 2004
Exercised
Forfeited
Granted
Outstanding at June 30, 2005
Exercised
Forfeited
Granted
Outstanding at June 30, 2006
Exercised
Forfeited
Granted
Outstanding at June 30, 2007
Exercisable at June 30, 2007
Weighted-average remaining
contractual life in years
Available for grant at June 30, 2007
52
Weighted
Average
Exercise Price
4.76
$
2.86
$
5.82
$
8.56
$
5.45
$
3.93
$
8.99
$
7.41
$
5.54
$
4.61
$
8.00
$
8.89
$
6.45
$
5.71
$
1999
Plan
1,269,700
(49,945)
(20,955)
240,500
1,439,300
(93,700)
(79,500)
140,000
1,406,100
(388,305)
(20,400)
240,000
1,237,395
904,995
2.71
456,652
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
The following is a further breakdown of the options outstanding at June 30, 2007:
Range of Exercise Prices
$2.00 - $3.02
$3.70 - $5.59
$6.50 - $7.93
$8.05 - $10.47
$2.00 - $10.47
I. Commitments
Weighted
Average
Remaining
Contractural
Life
1.83
1.64
2.65
3.83
2.71
Weighted
Average
Exercise
Price
$ 2.41
5.09
$
6.93
$
8.90
$
6.45
$
Number
Exercisable
212,995
235,000
263,900
193,100
904,955
Weighted
Average
Exercise
Price
$ 2.41
5.09
$
6.81
$
8.60
$
5.71
$
Number
Outstanding
212,995
235,000
379,900
409,500
1,237,395
We lease a total of 172,800 square feet of our facilities from unaffiliated third parties under non-cancelable operating leases, including 162,000 square feet at our
manufacturing facility in Vista, California and 10,800 square feet at our San Marcos, California facility. The lease for approximately 8,000 square feet at the San
Marcos facility terminates in February 2008 and the lease for the remaining leased space at San Marcos terminates in December 2007. The lease on the Vista
facility expires in March 2014.
As required under the terms of our Vista lease, on May 11, 2004, we provided a letter of credit in the amount of $440,000 to the landlord. The amount of the
letter of credit was reduced by approximately 33% each year. As of June 30, 2007 we did not have an outstanding amount on the letter of credit.
NAIE leases facility space in Manno, Switzerland. The leased space totals approximately 46,000 square feet. We primarily use the facilities for manufacturing,
packaging, warehousing and distributing nutritional supplement products for the European marketplace. The lease expires in December 2015.
On March 28, 2007, we entered into an agreement to sublet approximately 3,000 square feet at our Manno, Switzerland facility. The sublease is for a term of two
years that began on April 1, 2007, and provides for monthly rental income equal to our rental expense for the space.
RHL leases facility space in San Diego, California. The leased space totals approximately 16,000 square feet. We primarily use the facilities for RHL’s
headquarters, warehousing and a call center and fulfillment. The lease expires in May 2009.
Minimum rental commitments (exclusive of property tax, insurance and maintenance) under all non-cancelable operating leases with initial or remaining lease
terms in excess of one year, including the lease agreements referred to above, are set forth below as of June 30, 2007 (dollars in thousands):
Gross minimum rental commitments
Sublease income commitments
2008
$2,280
(41)
$2,239
2009
$2,244
(31)
$2,213
2010
2011
2012
There-
after
$2,170 $2,209 $2,249 $5,565
—
—
$2,170 $2,209 $2,249 $5,565
—
—
Rental expense totaled $2.2 million for the fiscal year ended June 30, 2007, $2.0 million for fiscal 2006 and $1.7 million for fiscal 2005. Rental expense was
offset by sublease rental income in the amount of $11,000 in fiscal 2007, $0 in fiscal 2006 and $137,000 in fiscal 2005.
J. Foreign Currency Instruments
On July 7, 2005, we purchased 12 option contracts designated and effective as cash flow hedges to protect against the foreign currency exchange risk inherent in
a portion of our forecasted transactions denominated in Euros. The 12 options were to expire monthly beginning January 2006 and ending December 2006, but
we sold the options that had not yet expired as of July 6, 2006 as described below. The option contracts had a notional amount of $7.0 million, a weighted
average strike price of $1.16, and a purchase price of $152,000. The risk of loss associated with the options was limited to the purchase price paid for the option
contracts.
53
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
On April 6, 2006, we purchased seven option contracts designated and effective as cash flow hedges to protect against the foreign currency exchange risk
inherent in a portion of our forecasted transactions denominated in Euros. The seven options were to expire monthly beginning January 2007 and ending July
2007, but we sold the options in July 2006 as described below. The option contracts had a notional amount of $4.9 million, a weighted average strike price of
$1.16, and a purchase price of $62,000. The risk of loss associated with the options was limited to the purchase price paid for the option contracts.
On July 6, 2006, we sold the then unexpired options purchased on July 7, 2005 and April 6, 2006 for $13,000. The proceeds were used to purchase 12 option
contracts designated and effective as cash flow hedges to protect against the foreign currency exchange risk inherent in a portion of our forecasted transactions
denominated in Euros. The 12 options expire monthly beginning August 2006 and ending July 2007. The option contracts had a notional amount of $8.9 million,
a weighted average strike price of $1.24, and a purchase price of $103,000. The risk of loss associated with the options is limited to the purchase price paid for
the option contracts. As of June 30, 2007, 11 of the options had expired. As of June 30, 2007, the unrealized losses associated with the options sold on July 6,
2006 were $7,000 and will be recognized in cost of goods sold under the original monthly option contract expiration dates.
On January 18, 2007, we purchased three option contracts designated and effective as cash flow hedges to protect against the foreign currency exchange risk
inherent in a portion of our forecasted transactions denominated in Euros. The three options expire monthly beginning August 2007 and ending October 2007.
The option contracts had a notional amount of $1.9 million, a weighted average strike price of $1.24, and a purchase price of $12,000. The risk of loss associated
with the options is limited to the purchase price paid for the option contracts.
On April 3, 2007, we purchased three option contracts designated and effective as cash flow hedges to protect against the foreign currency exchange risk inherent
in a portion of our forecasted transactions denominated in Euros. The three options expire monthly beginning November 2007 and ending January 2008. The
option contracts had a notional amount of $1.9 million, a weighted average strike price of $1.29, and a purchase price of $18,000. The risk of loss associated with
the options is limited to the purchase price paid for the option contracts.
For the fiscal year ended June 30, 2007, approximately $219,000 had been charged to income for option contracts outstanding during the year, $106,000 for the
fiscal year ended June 30, 2006 and $109,000 for the fiscal year ended June 30, 2005.
K. Economic Dependency
We had substantial net sales to certain customers during the fiscal years ended June 30 shown in the following table. The loss of any of these customers, or a
significant decline in sales or the growth rate of sales to these customers could have a material adverse impact on our net sales and net income. Net sales to any
one customer representing 10% or more of the respective year’s total net sales for the three years ended June 30 were as follows (dollars in thousands):
Customer 1
Customer 2
Customer 3
Net Sales by
Customer
$38,786
29,822
(a)
$68,608
2007
% of Total
Net Sales
40%
31%
(a)
71%
2006
Net Sales by
Customer
$37,700
29,241
10,133
$77,074
% of Total
Net Sales
38%
29%
10%
77%
Net Sales by
Customer
$36,991
35,193
(a)
$72,184
2005
% of Total
Net Sales
40%
39%
(a)
79%
(a)
Net sales were less than 10% of the respective period’s total net sales.
Accounts receivable from these customers totaled $3.9 million at June 30, 2007 and $10.5 million at June 30, 2006.
54
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
We buy certain products from a limited number of raw material suppliers. The loss of any of these suppliers could have a material adverse impact on our net sales
and net income. During fiscal 2007, approximately 39% of our total raw material purchases were from three suppliers. Accounts payable to these suppliers were
$1.6 million at June 30, 2007. No other supplier comprised 10% or more of our raw material purchases for the year ended June 30, 2007.
L. Contingencies
From time to time, we become involved in various investigations, claims and legal proceedings that arise in the ordinary course of our business. These matters
may relate to product liability, employment, intellectual property, tax, regulation, contract or other matters. The resolution of these matters as they arise will be
subject to various uncertainties and, even if such claims are without merit, could result in the expenditure of significant financial and managerial resources. While
unfavorable outcomes are possible, based on available information, we generally do not believe the resolution of these matters will result in a material adverse
effect on our business, consolidated financial condition, or results of operation. However, a settlement payment or unfavorable outcome could adversely impact
our results of operation. Our evaluation of the likely impact of these actions could change in the future and we could have unfavorable outcomes that we do not
expect.
As of October 15, 2007, neither NAI nor its subsidiaries were a party to any material pending legal proceeding nor was any of their property the subject of any
material pending legal proceeding.
M. Segment Information
Following our acquisition of RHL on December 5, 2005 through June 30, 2006, our business consisted of two segments, as defined by Statement of Financial
Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information,” identified as NAI, which primarily provides private
label contract manufacturing services to companies that market and distribute nutritional supplements and other health care products, and RHL, which markets
and distributes branded nutritional supplements and other lifestyle products.
Effective July 1, 2006, we changed our reporting segments to reflect the structure of our organization after the integration of previously outsourced fulfillment
and call center activities for our Dr. Cherry Pathway to Healing
product line into RHL’s existing operations. The new reportable segments are as follows:
®
•
•
Private label contract manufacturing, in which we primarily provide manufacturing services to companies that market and distribute nutritional
supplements and other health care products; and
Branded products, in which we market and distribute branded nutritional supplements and other lifestyle products in the following distribution
channels:
•
•
•
Direct-to-consumer marketing programs, under which we develop, manufacture and market our own products and work with nationally
recognized physicians and others to develop brand name products that reflect their individual approaches to restoring, maintaining or
improving health. These products are sold through a variety of distribution channels, including television programs, print media and the
internet. The Dr. Cherry Pathway to Healing
product line is sold under a direct-to-consumer marketing program;
®
Food, Drug and Mass Market (FDM) retail channel in which we sell the Real Health
®
Laboratories nutritional supplement product line; and
As We Change
®
(AWC) catalog, a lifestyle catalog geared towards women between the ages of 45 and 65, in which we sell our own
branded products as well as third party products. The quarterly print catalog offers a variety of high quality nutritional, beauty, skin care,
exercise, lifestyle and other personal care products.
We evaluate performance based on a number of factors. The primary performance measures for each segment are net sales and income or loss from operations
before corporate allocations. Operating income or loss for each segment does not include corporate general and administrative expenses, interest expense and
other miscellaneous income and expense items. Corporate general and administrative expenses include, but are not limited to: human resources, legal, finance,
information technology, and other corporate level related expenses, which are not allocated to either segment. The accounting policies of our segments are the
same as those described in the summary of significant accounting policies in Note A.
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Table of Contents
Our operating results by business segment shown below for the fiscal years ended June 30, 2006 and 2005 have been restated to reflect our new reporting
segments, with the exception of the information on total assets as we believe it would be impractical to restate such information. Accordingly, the total asset
information is provided only for our new reporting segments as of June 30, 2007. Our operating results by business segment for the years ended June 30 were as
follows (dollars in thousands):
Net Sales
Private label contract manufacturing
Branded products
Income (loss) from Operations
Private label contract manufacturing
(1)
Branded products
Income from operations of reportable segments
Corporate expenses not allocated to segments
(1)
Fiscal 2007 operating loss included non-cash goodwill impairment charge of $7.0 million.
Total Assets
Private label contract manufacturing
Branded products
2007
2006
2005
$80,732
16,396
$97,128
$85,758
13,854
$99,612
$83,862
8,110
$91,972
2007
2006
2005
$10,315
(8,260)
2,055
(6,774)
$ (4,719)
$10,347
757
11,104
(6,486)
$ 4,618
$ 8,787
1,804
10,591
(6,799)
$ 3,792
2007
$39,583
7,797
$47,380
Our private label contract manufacturing products are sold both in the United States and in markets outside the United States, including Europe, Australia and
Japan. Our primary market outside the United States is Europe. Our branded products are only sold in the United States.
Net sales by geographic region, based upon the customers’ location, for the three years ended June 30 were as follows (dollars in thousands):
2007
2006
2005
United States
Markets outside the United States
Total net sales
$76,308 $78,955 $68,140
23,832
$97,128 $99,612 $91,972
20,820
20,657
Products manufactured by NAIE accounted for 45% of net sales in markets outside the United States in fiscal 2007, 49% in fiscal 2006, and 46% in fiscal 2005.
No products manufactured by NAIE were sold in the United States during the fiscal years ended June 30, 2007, 2006 and 2005.
Assets and capital expenditures by geographic region, based on the location of the company or subsidiary at which they were located or made, for the three years
ended June 30 were as follows (dollars in thousands):
2007
United States
Europe
Long-Lived
Assets
$ 17,362
1,965
$ 19,327
Total
Assets
$41,493
5,887
$47,380
Capital
Expenditures
1,681
$
1,048
2,729
$
56
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
2006
United States
Europe
2005
United States
Europe
Long-Lived
Assets
$ 27,735
1,202
$ 28,937
Long-Lived
Assets
$ 17,144
1,053
$ 18,197
Total
Assets
$57,661
4,792
$62,453
Total
Assets
$40,470
3,668
$44,138
Capital
Expenditures
1,835
$
460
2,295
$
Capital
Expenditures
7,397
$
309
7,706
$
57
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Table of Contents
Fiscal year ended June 30, 2007:
Inventory reserves
Allowance for doubtful accounts
Fiscal year ended June 30, 2006:
Inventory reserves
Allowance for doubtful accounts
Fiscal year ended June 30, 2005:
Inventory reserves
Allowance for doubtful accounts
SCHEDULE II
Natural Alternatives International, Inc.
Valuation And Qualifying Accounts
For the Years Ended June 30, 2007, 2006 and 2005
(Dollars in thousands)
Balance at Beginning
of Period
Provision
(Deductions)
Balance at End
of Period
$
$
$
$
$
$
2,416
217
1,815
221
1,113
132
$ 1,415
$
(41)
$ 1,594(1)
57(2)
$
$ 1,529
101
$
$
$
$
$
$
$
(1,722)(3)
(156)
(993)
(61)
(827)
(12)
$
$
$
$
$
$
2,109
20
2,416
217
1,815
221
(1)
Includes $77,000 related to purchase price accounting for the RHL acquisition.
(2)
Includes $160,000 related to purchase price accounting for the RHL acquisition.
(3)
Includes $523,000 of raw material inventory used to produce finished good inventory that was sold during fiscal 2007. The raw material inventory was
reserved before fiscal 2007.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
We maintain certain disclosure controls and procedures as defined under the Securities Exchange Act of 1934. They are designed to help ensure that material
information is: (1) gathered and communicated to our management, including our principal executive and financial officers, in a manner that allows for timely
decisions regarding required disclosures; and (2) recorded, processed, summarized, reported and filed with the SEC as required under the Securities Exchange
Act of 1934 and within the time periods specified by the SEC.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of
our disclosure controls and procedures as of June 30, 2007. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were not effective for their intended purpose described above as of June 30, 2007 because of the material weakness identified
below.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a
material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Management has determined that a
material weakness in internal control over financial reporting existed as of June 30, 2007 regarding our annual goodwill impairment analysis. In particular,
management has determined that we did not have an appropriate process in place to develop and support the forecasts and plans necessary to complete our annual
goodwill impairment analysis in a timely manner. As a result, while we were able to complete our analysis and record an adjustment to impair goodwill in our
financial statements before their publication in this report, we were unable to timely file this report.
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Table of Contents
There were no changes to our internal controls during the fourth quarter ended June 30, 2007 that have materially affected, or that are reasonably likely to
materially affect, our internal controls. The matter identified above and the steps necessary to remediate such weakness are under review by management and our
Board of Directors. In addition, at the end of our 2008 fiscal year, management will be required to provide an assessment of the effectiveness of our internal
control over financial reporting. We are in the process of performing the system and process documentation, evaluation and testing required for management to
make this assessment. We have not completed this process or our assessment. In the course of evaluation and testing, management may identify additional
deficiencies that will need to be addressed and remediated. There can be no assurance that our remediation efforts will be successful or that our control
procedures will be effective in accomplishing their objectives at all times.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information for this item is incorporated by reference to the sections “Our Board of Directors,” “Our Executive Officers,” “Section 16(a) Beneficial
Ownership Reporting Compliance,” and “Code of Ethics” in our definitive proxy statement for our Annual Meeting of Stockholders to be held on December 11,
2007, to be filed on or before October 28, 2007.
ITEM 11.
EXECUTIVE COMPENSATION
The information for this item is incorporated by reference to the sections “Director Compensation” and “Executive Officer Compensation” in our definitive
proxy statement for our Annual Meeting of Stockholders to be held on December 11, 2007, to be filed on or before October 28, 2007.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information for this item is incorporated by reference to the sections “Stock Holdings of Certain Owners and Management” and “Securities Authorized for
Issuance Under Equity Compensation Plans” in our definitive proxy statement for our Annual Meeting of Stockholders to be held on December 11, 2007, to be
filed on or before October 28, 2007.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information for this item is incorporated by reference to the section “Certain Relationships and Related Transactions” in our definitive proxy statement for
our Annual Meeting of Stockholders to be held on December 11, 2007, to be filed on or before October 28, 2007.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information for this item is incorporated by reference to the sections “Audit Fees,” “Audit-Related Fees,” “Tax Fees,” “All Other Fees” and “Pre-Approval
Polices and Procedures” in our definitive proxy statement for our Annual Meeting of Stockholders to be held on December 11, 2007, to be filed on or before
October 28, 2007.
59
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Table of Contents
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
(1)
Financial Statements. The financial statements listed below are included under Item 8 of this report:
•
•
•
•
•
Consolidated Balance Sheets as of June 30, 2007 and 2006;
Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended June 30, 2007, 2006 and 2005;
Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2007, 2006 and 2005;
Consolidated Statements of Cash Flows for the years ended June 30, 2007, 2006 and 2005; and
Notes to Consolidated Financial Statements.
(2)
Financial Statement Schedule. The following financial statement schedule is included under Item 8 of this report:
•
Schedule II - Valuation and Qualifying Accounts for the years ended June 30, 2007, 2006 and 2005.
(3)
Exhibits. The following exhibit index shows those exhibits filed with this report and those incorporated by reference:
60
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
EXHIBIT INDEX
Exhibit
Number
3(i)
3(ii)
3(iii)
Description
Amended and Restated Certificate of Incorporation of Natural
Alternatives International, Inc. filed with the Delaware Secretary of
State on January 14, 2005
Incorporated By Reference To
Exhibit 3(i) of NAI’s Quarterly Report on Form 10-Q for the quarterly
period ended December 31, 2004, filed with the commission on
February 14, 2005
By-laws of Natural Alternatives International, Inc. dated as of December
21, 1990
NAI’s Registration Statement on Form S-1 (File No. 33-44292) filed
with the commission on December 21, 1992
Amendment to the By-laws of Natural Alternatives International, Inc.
effective as of June 29, 2007
Exhibit 3(ii) of NAI’s Current Report on Form 8-K dated June 29, 2007,
filed with the commission on July 6, 2007
4(i)
Form of NAI’s Common Stock Certificate
Exhibit 4(i) of NAI’s Annual Report on Form 10-K for the fiscal year
ended June 30, 2005, filed with the commission on September 8, 2005
10.1
10.2
1999 Omnibus Equity Incentive Plan as adopted effective May 10, 1999,
amended effective January 30, 2004, and further amended effective
December 3, 2004*
Exhibit 10.1 of NAI’s Quarterly Report on Form 10-Q for the quarterly
period ended December 31, 2004, filed with the commission on
February 14, 2005
1999 Employee Stock Purchase Plan as adopted effective October 18,
1999
Exhibit B of NAI’s definitive Proxy Statement filed with the
commission on October 21, 1999
10.3
Management Incentive Plan*
Exhibit 10.3 of NAI’s Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2003, filed with the commission on
November 5, 2003
10.4
10.5
10.6
10.7
10.8
Amended and Restated Employment Agreement dated as of January 30,
2004, by and between NAI and Randell Weaver*
Exhibit 10.5 of NAI’s Annual Report on Form 10-K for the fiscal year
ended June 30, 2004, filed with the commission on September 14, 2004
Amended and Restated Employment Agreement dated as of January 30,
2004, by and between NAI and Mark A. LeDoux*
Exhibit 10.6 of NAI’s Annual Report on Form 10-K for the fiscal year
ended June 30, 2004, filed with the commission on September 14, 2004
Amended and Restated Employment Agreement dated as of January 30,
2004, by and between NAI and John Reaves*
Exhibit 10.8 of NAI’s Annual Report on Form 10-K for the fiscal year
ended June 30, 2004, filed with the commission on September 14, 2004
Amended and Restated Exclusive License Agreement effective as of
September 1, 2004 by and among NAI and Dr. Reginald B. Cherry
Exhibit 10.11 of NAI’s Annual Report on Form 10-K for the fiscal year
ended June 30, 2004, filed with the commission on September 14, 2004
Exclusive License Agreement effective as of September 1, 2004 by and
among NAI and Reginald B. Cherry Ministries, Inc.
Exhibit 10.12 of NAI’s Annual Report on Form 10-K for the fiscal year
ended June 30, 2004, filed with the commission on September 14, 2004
61
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Table of Contents
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
First Amendment to Exclusive License Agreement effective as of
December 10, 2004 by and among NAI and Reginald B. Cherry Ministries,
Inc.
Exhibit 10.3 of NAI’s Quarterly Report on Form 10-Q for the quarterly
period ended December 31, 2004, filed with the commission on
February 14, 2005
Lease of Facilities in Vista, California between NAI and Calwest Industrial
Properties, LLC, a California limited liability company (lease reference
date June 12, 2003)
Exhibit 10.10 of NAI’s Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2003, filed with the commission on
November 5, 2003
Credit Agreement dated as of May 1, 2004 by and between NAI and Wells
Fargo Bank, National Association
Exhibit 10.11 of NAI’s Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2004, filed with the commission on May 17, 2004
First Amendment to Credit Agreement dated as of February 1, 2005 by and
between NAI and Wells Fargo Bank, National Association
Exhibit 10.1 of NAI’s Current Report on Form 8-K dated February 1,
2005, filed with the commission on February 7, 2005
Form of Indemnification Agreement entered into between NAI and each of
its directors
Exhibit 10.15 of NAI’s Annual Report on Form 10-K for the fiscal year
ended June 30, 2004, filed with the commission on September 14, 2004
Lease of Facilities in Manno, Switzerland between NAIE and Mr. Silvio
Tarchini dated May 9, 2005 (English translation)
Exhibit 10.19 of NAI’s Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2005, filed with the commission on May 13, 2005
Lease of Facilities in Manno, Switzerland between NAIE and Mr. Silvio
Tarchini dated July 25, 2003 (English translation)
Exhibit 10.19 of NAI’s Annual Report on Form 10-K for the fiscal year
ended June 30, 2005, filed with the commission on September 8, 2005
Lease of Facilities in Manno, Switzerland between NAIE and Mr. Silvio
Tarchini dated June 8, 2004 (English translation)
Exhibit 10.20 of NAI’s Annual Report on Form 10-K for the fiscal year
ended June 30, 2005, filed with the commission on September 8, 2005
Lease of Facilities in Manno, Switzerland between NAIE and Mr. Silvio
Tarchini dated February 7, 2005 (English translation)
Exhibit 10.21 of NAI’s Annual Report on Form 10-K for the fiscal year
ended June 30, 2005, filed with the commission on September 8, 2005
License Agreement effective as of April 28, 1997 by and among Roger
Harris, Mark Dunnett and NAI
Exhibit 10.22 of NAI’s Annual Report on Form 10-K for the fiscal year
ended June 30, 2005, filed with the commission on September 8, 2005
Amendment to License Agreement effective as of March 17, 2001 by and
among Roger Harris, Mark Dunnett and NAI
Exhibit 10.23 of NAI’s Annual Report on Form 10-K for the fiscal year
ended June 30, 2005, filed with the commission on September 8, 2005
Amendment effective as of September 15, 2005 to Lease of Facilities in
Manno, Switzerland between NAIE and Mr. Silvio Tarchini dated May 9,
2005 (English translation)
Exhibit 10.24 of NAI’s Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2005, filed with the commission on
November 4, 2005
62
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Stock Purchase Agreement effective as of December 5, 2005, by and
among NAI and William H. Bunten II and/or Elizabeth W. Bunten, as the
trustees of The Bunten Family Trust dated April 14, 2001, John F. Dullea
and Carolyn A. Dullea, as the trustees of The John F. and Carolyn A.
Dullea Trust dated June 20, 2001, Lincoln Fish, and Michael L. Irwin, as
trustee of The Michael L. Irwin Trust u/t/a June 25, 1991
Exhibit 10.1 of NAI’s Current Report on Form 8-K dated December 5,
2005, filed with the commission on December 9, 2005
Form of Lock-Up Agreement effective as of December 5, 2005 entered into
between NAI and each Selling Stockholder
Exhibit 10.2 of NAI’s Current Report on Form 8-K dated December 5,
2005, filed with the commission on December 9, 2005
Employment Agreement effective as of December 5, 2005, by and between
RHL and John F. Dullea*
Exhibit 10.3 of NAI’s Current Report on Form 8-K dated December 5,
2005, filed with the commission on December 9, 2005
Lease of RHL Facilities in San Diego, California between RHL and Lessor
dated February 5, 2003
Exhibit 10.4 of NAI’s Current Report on Form 8-K dated December 5,
2005, filed with the commission on December 9, 2005
Promissory Note made by NAI for the benefit of Wells Fargo Equipment
Finance, Inc. in the amount of $3,800,000
Exhibit 10.5 of NAI’s Current Report on Form 8-K dated December 5,
2005, filed with the commission on December 9, 2005
Patent License Agreement by and between Unither Pharma, Inc. and RHL
dated May 1, 2002
Exhibit 10.6 of NAI’s Current Report on Form 8-K dated December 5,
2005, filed with the commission on December 9, 2005
10.21
10.22
10.23
10.24
10.25
10.26
10.27
Second Amendment to Credit Agreement dated as of December 1, 2005 by
and between NAI and Wells Fargo Bank, National Association
10.28
Exclusive License Agreement by and between NAI and Richard Linchitz,
M.D. effective as of August 23, 2005
10.29
Letter amendment to Lease of RHL Facilities in San Diego, California
between RHL and Lessor dated January 10, 2006
Exhibit 10.30 of NAI’s Quarterly Report on Form 10-Q for the quarterly
period ended December 31, 2005, filed with the commission on February
14, 2006
Exhibit 10.32 of NAI’s Quarterly Report on Form 10-Q for the quarterly
period ended December 31, 2005, filed with the commission on February
14, 2006
Exhibit 10.33 of NAI’s Quarterly Report on Form 10-Q for the quarterly
period ended December 31, 2005, filed with the commission on February
14, 2006
10.30
10.31
10.32
10.33
First Amendment to Lease of Facilities in Vista, California between NAI
and Calwest Industrial Properties, LLC, a California limited liability
company, effective December 21, 2004
Exhibit 10.34 of NAI’s Quarterly Report on Form 10-Q for the quarterly
period ended December 31, 2005, filed with the commission on February
14, 2006
Second Amendment to Lease of Facilities in Vista, California between NAI
and Calwest Industrial Properties, LLC, a California limited liability
company, effective January 13, 2006
Exhibit 10.35 of NAI’s Quarterly Report on Form 10-Q for the quarterly
period ended December 31, 2005, filed with the commission on February
14, 2006
Third Amendment to Credit Agreement dated as of March 15, 2006 by and
between NAI and Wells Fargo Bank, National Association
Exhibit 10.35 of NAI’s Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2006, filed with the commission on May 9, 2006
Standard Sublease Multi-Tenant by and between J. Gelt Corporation dba
Casa Pacifica and RHL (lease reference date March 6, 2006)
Exhibit 10.37 of NAI’s Annual Report on Form 10-K for the fiscal year
ended June 30, 2006, filed with the commission on September 18, 2006
63
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10.34
10.35
10.36
Loan Agreement between NAIE and Credit Suisse dated as of
September 22, 2006, including general conditions (portions of the Loan
Agreement have been omitted pursuant to a request for confidential
treatment)
Exhibit 10.36 of NAI’s Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2006, filed with the commission on
November 1, 2006
Employment Agreement effective as of November 20, 2006, by and
between NAI and Alvin McCurdy*
Exhibit 10.1 of NAI’s Current Report on Form 8-K dated November 20,
2006, filed with the commission on November 21, 2006
Fourth Amendment to Credit Agreement dated as of November 1, 2006,
and entered into on January 24, 2007, by and between NAI and Wells Fargo
Bank, National Association
Exhibit 10.37 of NAI’s Quarterly Report on Form 10-Q for the quarterly
period ended December 31, 2006, filed with the commission on January
30, 2007
10.37
Revolving Line of Credit Note (as revised) made by NAI for the benefit of
Wells Fargo Bank, National Association in the amount of $12,000,000
Sublease Contract for facilities in Manno, Switzerland, between NAIE and
Vertime SA effective as of April 1, 2007 (portions of the Sublease Contract
have been omitted pursuant to a request for confidential treatment) (English
translation)
Second Amendment to License Agreement Amending The First
Amendment Dated March 17, 2001 to License Agreement Dated April 28,
1997 by and among Roger Harris, Mark Dunnett and NAI dated as of
March 26, 2007
Exhibit 10.38 of NAI’s Quarterly Report on Form 10-Q for the quarterly
period ended December 31, 2006, filed with the commission on January
30, 2007
Exhibit 10.39 of NAI’s Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2006, filed with the commission on May 14, 2007
Exhibit 10.40 of NAI’s Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2007, filed with the commission on May 14, 2007
First Amendment to Loan Agreement between NAIE and Credit Suisse
dated as of February 19, 2007
Exhibit 10.41 of NAI’s Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2007, filed with the commission on May 14, 2007
Settlement Agreement and Release of Claims and Rights between NAI and
DHL Express, Inc. dated April 16, 2007
Exhibit 10.42 of NAI’s Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2007, filed with the commission on May 14, 2007
Settlement Agreement executed as of June 26, 2006, by and between
Novogen Research Pty. Ltd. and NAI
Exhibit 10.36 of NAI’s Annual Report on Form 10-K for the fiscal year
ended June 30, 2006, filed with the commission on September 18, 2006
Consulting Agreement effective as of July 1, 2007, by and between Dr.
John A. Wise and NAI
Filed herewith
10.38
10.40
10.41
10.42
10.43
10.44
21 Subsidiaries of the Company
23.1 Consent of Independent Registered Public Accounting Firm
Filed herewith
Filed herewith
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
Filed herewith
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
Filed herewith
32 Section 1350 Certification
Filed herewith
* Indicates management contract or compensatory plan or arrangement.
64
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Natural Alternatives International, Inc., the registrant, has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: October 15, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Natural
Alternatives International, Inc., in the capacities and on the dates indicated.
NATURAL ALTERNATIVES INTERNATIONAL, INC.
By: /s/ Mark A. LeDoux
Mark A. LeDoux, Chief Executive Officer
Signature
/s/ Mark A. LeDoux
(Mark A. LeDoux)
/s/ John R. Reaves
(John R. Reaves)
/s/ Joe E. Davis
(Joe E. Davis)
/s/ Alan G. Dunn
(Alan G. Dunn)
/s/ Alan J. Lane
(Alan J. Lane)
/s/ Lee G. Weldon
(Lee G. Weldon)
Title
Date
Chief Executive Officer and
Chairman of the Board of Directors
(principal executive officer)
Chief Financial Officer
(principal financial officer and
principal accounting officer)
Director
Director
Director
Director
65
October 15, 2007
October 15, 2007
October 15, 2007
October 15, 2007
October 15, 2007
October 15, 2007
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
CONSULTING AGREEMENT
Exhibit 10.44
This Consulting Agreement (“Agreement”) is made and entered into effective as of July 1, 2007 (“Effective Date”), by and between Dr. John A. Wise
(“Consultant”) and Natural Alternatives International, Inc., a Delaware corporation (“Company”). Company and Consultant may be referred to collectively as the
“Parties.”
RECITALS
A. Consultant has expertise in all areas of Company’s business and has been employed by Company most recently as Chief Scientific Officer. Consultant
has agreed to transition from full time employment to consulting work for Company.
B. This Agreement is intended to replace Consultant and Company’s current Amended and Restated Employment Agreement dated effective January 30,
2004. Consultant, in consideration of terminating his employment with Company and in consideration of replacing the Amended and Restated Employment
Agreement dated effective January 30, 2004, with this Agreement, is willing to provide consulting services to Company on the terms and conditions specified in
this Agreement.
C. Company is willing to engage Consultant as an independent contractor, and not as an employee, on the terms and conditions specified in this
Agreement.
In consideration of and incorporating the foregoing recitals as if fully set forth below and intending to be legally bound, the Parties agree as follows:
AGREEMENT
1.Engagement. Consultant accepts the offer of Company to act as an independent contractor to provide consulting services for Company on the terms and
conditions specified in this Agreement. Consultant’s services may be terminated by either Consultant or Company at any time for any reason or no reason, with
or without Cause (defined below), upon written notice to the other or without any notice upon the death of Consultant. The status of the consulting relationship
may not be modified except by an agreement in writing signed by the President or Chief Executive Officer of Company and by Consultant, the terms of which
must be approved in advance in writing by Company’s Board of Directors.
2.Term. This Agreement will commence on the Effective Date and shall terminate exactly two (2) years and six (6) months after commencement
(“Term”). Consultant and Company understand and agree nothing Consultant or Company does during the Term can be construed to create an implied or express
contract of employment contrary to this Agreement.
3.Description of Services of Consultant. Consultant’s schedule under this Agreement on a given day shall generally be subject to Consultant’s discretion
provided Consultant and Company anticipate Consultant shall be available to work on such matters as the President of the Company may identify from time to
time following reasonable notice. It is anticipated Consultant may be asked by the President of the Company to travel on occasion
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
following reasonable notice to other locations including other offices of the Company and its subsidiaries both within and outside the United States. Consultant
represents to Company that Consultant has no other outstanding commitments inconsistent with any of the terms of this Agreement or the services to be rendered
under it. Upon the request of Company, Consultant agrees to testify in any proceeding designated by Company.
4.Compensation.
a.Consulting Fee. During the Term, Company agrees to pay Consultant a monthly consulting fee of Ten Thousand Dollars per month ($10,000)
payable no less frequently than monthly. Company shall not be responsible for withholding income or other taxes from any fees or expenses paid to Consultant.
Consultant shall be solely responsible for filing all returns and paying any income, social security or other tax levied upon or determined with respect to the
payments made to Consultant pursuant to this Agreement.
b.Additional Benefits. During the Term, Consultant shall not be entitled to receive and/or participate in any benefits normally associated with his
previous employment with Company. However, in consideration of Consultant terminating his employment with Company, terminating his Amended and
Restated Employment Agreement dated effective January 30, 2004, and entering into this Agreement, Consultant will be entitled, during the Term, to receive
continuing group health insurance coverage pursuant to COBRA and Company will pay directly to the provider on behalf of Consultant the first eighteen
(18) months premiums for such continuation coverage. Company agrees, during the Term, to pay an additional twelve (12) months premiums following the first
18 months premiums if such coverage remains available to Consultant. In the event Consultant is not entitled to receive continuing group health insurance
coverage pursuant to COBRA beyond the first 18 months of the Term, Company will provide to Consultant for a supplementary twelve (12) months as additional
monthly compensation for the remaining Term, the same dollar amount per month expended on premiums for such continuation coverage in the first 18 months.
In the event Consultant finds alternate employment following the Effective Date of this Agreement after which Consultant no longer requires COBRA
continuation coverage, Company will have no further obligation to pay the balance of any such unused continuation coverage to Consultant.
c.Stock Options. Company and Consultant acknowledge and agree as of the Effective Date of this Agreement, Consultant holds the Incentive and
Nonqualified stock options to buy shares of Company’s common stock in the amounts and subject to the terms and conditions set forth on attached and
incorporated Exhibit A (collectively, the “Options”). Company and Consultant acknowledge and agree pursuant to the terms of the Options and the Company’s
1999 Omnibus Equity Incentive Plan under which the Options were granted, each of the Options will remain in effect and exercisable following Consultant’s
change in status from an employee of Company to independent contractor under this Agreement as follows:
i. With respect to the Incentive Stock Option granted August 28, 2000, (40,000 shares outstanding, fully vested) and the Incentive Stock
Option granted September 8, 2003, (24,427 shares outstanding, fully vested), Consultant may exercise these Incentive Stock Options within three (3) months
from the Effective Date of this Agreement. To
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
the extent Consultant does not exercise these Incentive Stock Options within three (3) months from the Effective Date, the Incentive Stock Options granted
August 28, 2000, and September 8, 2003, shall terminate.
ii. With respect to the Incentive Stock Option granted September 8, 2003, (5,473 shares of which are outstanding, fully vested and now
treated as a Nonqualified Stock Option), Consultant may exercise this Nonqualified Stock Option within three (3) months from the Effective Date of this
Agreement. To the extent Consultant does not exercise this Nonqualified Stock Option within three (3) months from the Effective Date, the Nonqualified Stock
Option granted September 8, 2003, shall terminate.
iii. With respect to the Incentive Stock Option granted January 30, 2004, (25,893 shares outstanding, fully vested and now treated as a
Nonqualified Stock Option), Consultant may exercise this Nonqualified Stock Option by the option expiration date of January 29, 2009, or 12 months following
termination of this Agreement, whichever date is earlier. To the extent Consultant does not exercise this Nonqualified Stock Option the earlier of January 29,
2009, or 12 months following termination of this Agreement, this Nonqualified Stock Option shall terminate.
iv. With respect to the Nonqualified Stock Option granted January 30, 2004, (34,107 shares outstanding, fully vested ), Consultant may
exercise this Nonqualified Stock Option by the option expiration date of January 29, 2009, or 12 months following termination of this Agreement, whichever
date is earlier. To the extent Consultant does not exercise this Nonqualified Stock Option the earlier of January 29, 2009, or 12 months following termination of
this Agreement, this Nonqualified Stock Option shall terminate.
d.Expenses. Expenses incurred by Consultant in connection with services provided by Consultant and authorized in advance in writing by Company
shall be reimbursed by Company to Consultant. Consultant acknowledges and agrees Consultant is solely responsible for procuring and paying for the services of
any legal or other professional service necessary or appropriate for the performance of Consultant’s services.
e.No Other Compensation. Consultant acknowledges and agrees, except as expressly provided in this Agreement, Consultant is not entitled to any
other compensation or benefits from the Company.
5.Termination of Agreement.
a.Due to Death. Consultant’s services shall terminate automatically in the event of Consultant’s death. Company shall have no obligation to
Consultant or Consultant’s estate for payment of the monthly consulting fee or any other form of compensation or benefit other than amounts accrued through the
date of Consultant’s death.
b.With Cause, No Compensation Due. Company may terminate this Agreement for Cause. For purposes of this Agreement, Cause shall mean the
occurrence of one or more of the following events: (i) Consultant’s commission of any fraud against the Company; (ii) Consultant engaging in any conduct in
breach of this Agreement; (iii) Consultant’s conviction
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
of any crime involving moral turpitude; (iv) Consultant’s conviction of a violation of any state or federal law that could result in a material adverse impact upon
the business of the Company, and (v) except as otherwise expressly permitted in this Agreement, Consultant engaging in other professional employment or
consulting or directly or indirectly participating in or assisting any business that is a current or potential supplier, customer or competitor of the Company without
first disclosing such relationships in advance in writing to the President of the Company. No compensation will be due to Consultant if this Agreement is
terminated for Cause other than amounts accrued through the date of such termination.
c.Discontinuation of Services/Availability; No Compensation Due. This Agreement shall terminate automatically in the event Consultant elects
to discontinue services or is no longer available or able to render services under the Agreement. Company shall have no obligation to Consultant for payment of
the monthly consulting fee or any other form of compensation or benefit other than amounts accrued through the date of Consultant’s election to discontinue
services or due to Consultant’s unavailability or inability to render services under the Agreement.
6.Termination Obligations.
a.Return of Company Property. Upon termination of this Agreement for any reason, Consultant agrees to return all Company Property to the
Company promptly but in no event later than two (2) business days following termination of this Agreement. All equipment and all tangible and intangible
information relating to Company, its employees, its customers and its vendors and business furnished to, obtained by, or prepared by Consultant or any other
person during the course of or incident to the Term of this Agreement are and shall remain the sole property of Company (“Company Property”). For purposes of
this Agreement, Company Property shall include, but not be limited to, computer equipment, books, manuals, records, reports, notes, correspondence, contracts,
customer lists, business cards, advertising, sales, financial, personnel, operations, and manufacturing materials and information, data processing reports,
computer programs, software, customer information and records, business records, price lists or information and samples and in each case shall include all copies
thereof in any medium, including paper, electronic and magnetic media and all other forms of information storage.
b.Termination of Benefits. Unless otherwise set forth above, all benefits to which Consultant is otherwise entitled shall cease upon termination of
this Agreement.
c.Consultant Cooperation. Following termination of this Agreement, Consultant shall cooperate fully with Company in all matters including but
not limited to advising the Company of all pending work on behalf of the Company and the orderly transfer of work to employees or representatives of Company.
Upon the request of Company, Consultant agrees to testify in any proceeding designated by Company and agrees to cooperate in the defense of any action
brought by any third party against Company related in any way to Consultant’s services to Company during the Term. Company shall provide legal
representation for Consultant in any such proceeding and shall reimburse reasonable expenses actually incurred by Consultant in connection with furnishing such
testimony.
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
d.Survival of Obligations. Consultant’s obligations under this Section 6 shall survive termination of this Agreement.
7.Confidential Information, Third Party Information and Inventions.
a.Company Confidential Information. Consultant will not use or disclose Confidential Information or Company Property whether before, during
or after the Term, except to the extent required to perform consulting services for Company or in accordance with instruction or authorization of Company,
without prior written consent of Company or pursuant to process or requirements of law after Consultant has disclosed such process or requirements to Company
so as to afford it the opportunity to seek appropriate relief therefrom. “Confidential Information” means any invention of any person in which Company has an
interest and in addition means all information and material that is proprietary to Company whether or not marked as “confidential” or “proprietary” and which is
disclosed to or obtained by Consultant that relates to Company’s past, present or future business activities. Confidential Information includes all information or
materials prepared by, for or on behalf of Company and includes, without limitation, all of the following: designs, drawings, specifications, techniques, models,
data, source code, object code, documentation, diagrams, flow charts, research, development, processes, procedures, “know-how,” new product or new
technology information, product copies, development or marketing techniques and materials, development or marketing timetables, strategies and development
plans, including trade names, trademarks, customer, supplier or personnel names and other information related to customers, suppliers or personnel, pricing
policies, financial information, other information of a similar nature whether or not reduced to writing or other tangible form and any other trade secrets or
nonpublic business information including Company Property. Confidential Information is to be broadly defined and includes all information that has or could
have commercial value or other utility in the business in which the Company is engaged or contemplates engaging and all information of which the unauthorized
disclosure could be detrimental to the interests of the Company whether or not such information is identified as Confidential Information by the Company.
b.Third Party Information. Consultant acknowledges during the Term of this Agreement he may have access to patent, copyright, confidential,
trade secret or other proprietary information of third parties subject to restrictions on the use or disclosure by Company. During and following the Term of this
Agreement, Consultant will not use or disclose any such information other than as consistent with the restrictions under this Agreement.
8.Competitive Activity. Consultant shall not be prevented from engaging anywhere, directly or indirectly (as a principal, shareholder, partner, director,
manager, member, officer, agent, employee, consultant or otherwise), or be financially interested in any business including in a business involved in business
activities that are the same as, similar to, or in competition with the business activities carried on by Company or any business that is a current or potential
supplier, customer or competitor of Company; provided, however, that if such business is a current or potential supplier, customer or competitor of Company,
Consultant shall advise the President of Company in writing of Consultant’s engagement or investment in such company as soon as reasonably practicable and,
provided further, Consultant shall not use or disclose any Company Confidential Information, Company Property or Company trade secrets when engaging or
investing in such competitive activities.
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
9. Interference with Company’s Business.
a. Notwithstanding any other provision of this Agreement, for a period of one year after termination of this Agreement, Consultant shall not, directly
or indirectly, employ, solicit for employment or advise or recommend to any other person that such other person employ or solicit for employment any person
employed or under contract (whether as a consultant, employee or otherwise) by or to Company.
b. Notwithstanding any other provision of this Agreement and to the fullest extent permitted by law, for a period of one year after termination of this
Agreement Consultant shall not, directly or indirectly, solicit any clients or customers of Company. Consultant agrees such solicitation would necessarily involve
disclosure or use of Confidential Information or Company Property in breach of this Agreement.
10.Independent Contractor. Consultant is and throughout this Agreement shall be an independent contractor under a “work for hire” agency arrangement
and not an employee or partner of Company. All work product developed by Consultant shall be deemed owned and assigned to Company. This Agreement is
not authority for Consultant to act for Company as its agent or make commitments for Company. Consultant shall, at Consultant’s sole expense and
responsibility, provide all personnel, equipment and offices necessary to provide the services as well as any licenses and permits usual or necessary for providing
the services referenced and contemplated in this Agreement. After consulting with the President of the Company, Consultant is responsible for the means and
methods used in performing consulting services under this Agreement and for determining his own schedule. Consultant shall not be entitled to nor receive any
benefit normally provided to Company employees such as, but not limited to, vacation payment, retirement, health care or sick pay.
a. Consultant agrees all right, title and interest in and to all original works of authorship produced by Consultant or composed in conjunction with
services to be performed by Consultant for Company shall belong to Company and Company shall have the right to obtain registrations of copyright throughout
the world. To the extent permitted by The Copyright Act (Title 17, United States Code), all works produced or composed under this Agreement shall be
considered works made for hire and belong to Company. Consultant agrees to assign and does assign to Company its rights to all works of authorship produced
or composed in connection with this Agreement. Consultant agrees to cooperate with Company to secure or protect Company’s interest in any copyright relating
to this Agreement.
b. In consideration of this Agreement and without additional compensation, Consultant agrees to and does sell, assign and transfer to Company, its
successors and assignees, the entire right, title and interest in and to all inventions, discoveries or improvements conceived or first actually reduced to practice in
the performance of services arising out of this Agreement and to all applications for and Letters Patent covering same, as well as any reissues, divisions and
extensions of said applications or Letters Patent. Consultant further agrees to furnish
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Company with complete information on each such invention, discovery or improvement and to make, execute and deliver to Company all patents or patent
applications as well as all papers, documents, affidavits, statements or other instruments in such form, terms and contents as required by Company in or incident
to the prosecution of any applications for patent filed by Consultant or Company with respect to such inventions, discoveries or improvements or in the
adjustment or settlement of any interference or other actions or proceedings in which such applications may become involved. Before final payment is made
under this Agreement, Consultant shall furnish to Company either complete information with respect to inventions, discoveries or improvements conceived or
actually reduced to practice in connection with services performed under this Agreement or provide a statement declaring no inventions, discoveries or
improvements emanated from such services. Such information or statement shall be provided to Company pursuant to the notice provisions of this Agreement.
11.Taxes. Consultant shall pay all federal, state, local and other taxes due as a result of Consultant’s compensation under this Agreement including
estimated taxes. Consultant agrees to defend, indemnify and hold harmless Company for any claims, losses, costs, fees, liabilities, damages or injuries threatened
or suffered by Company arising out of or related to Consultant’s breach of this condition.
12.Representations and Warranties. Consultant represents and warrants; (a) Consultant has no obligations legal or otherwise inconsistent with the terms
of this Agreement or with Consultant’s undertaking this relationship with Company, (b) to abide by all federal, state, local and all other laws, ordinances and
regulations and to not violate any applicable law, rule or regulation or any proprietary or other right of any third party, (c) Consultant will not use in the
performance of his responsibilities under this Agreement any confidential information or trade secrets of any other person or entity and (d) Consultant has not
entered into or will enter into any agreement (whether oral or written) in conflict with this Agreement.
13.Indemnification. Consultant agrees to indemnify, defend and hold harmless Company from and against all claims, demands and actions and any
liabilities, damages or expenses resulting therefrom, including court costs and reasonable attorney fees, arising out of or relating to services performed by
Consultant under this Agreement or the representations and warranties made by Consultant under this Agreement. Consultant’s obligations under this Section
shall survive the termination for any reason of this Agreement.
14.Arbitration. Any dispute, controversy or claim arising from, out of or in connection with or relating to this Agreement, or any breach or alleged breach
of this Agreement, except allegations of violations of Federal or State securities laws, may upon the request of either party involved be submitted to Judicial
Arbitration and Mediation Services, Inc., or any other organization utilizing retired judges as arbitrators, and settled by binding final arbitration in the City of San
Diego, California (or at any other place or under any other form of binding arbitration mutually acceptable to the parties involved). The federal rules of evidence
and discovery as applied in the Southern District of California shall apply to the arbitration proceeding. Any award rendered shall be final, binding and
conclusive upon the Parties and shall be non-appealable and a judgment thereon may be entered in the highest court of the forum, state or federal, having
jurisdiction. The expenses of the arbitration shall be awarded by the arbitrator to the prevailing party and any award may include the costs, fees and expenses of a
party’s attorneys if the arbitrator expressly provides.
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
15.Release. This Agreement is intended to replace Consultant and Company’s current Amended and Restated Employment Agreement dated effective
January 30, 2004. Consultant, in consideration of terminating his employment with Company and in consideration of replacing the Amended and Restated
Employment Agreement dated effective January 30, 2004, with this Consulting Agreement is willing to enter into this release. Consultant and Company desire to
settle and compromise all possible claims between them arising out of their relationship to date including Consultant’s former employment with Company and
the termination of Consultant’s employment with the Company as of the Effective Date and to provide for a general release of all claims relating to termination
of Consultant’s former employment and termination of the Amended and Restated Employment Agreement dated effective January 30, 2004. Consultant, in
consideration of terminating his employment with Company on the Effective Date and in consideration of entering into this Consulting Agreement, further
acknowledges and agrees as follows:
a. Consultant unconditionally, irrevocably and absolutely releases and discharges Company, its directors, officers, employees, volunteers, agents,
attorneys, stockholders, insurers, successors and/or assigns and any related, parent or subsidiary entity, from all losses, liabilities, claims, demands, causes of
action or suits of any type, whether in law or in equity, related directly or indirectly or in any way in connection with any transaction, affairs or occurrences
between them to date, including, but not limited to, Consultant’s employment with the Company, the termination of said employment and the termination of the
Amended and Restated Employment Agreement dated effective January 30, 2004 (“Released Claims”). Consultant agrees and understands this Agreement
further applies without limitation to all wage claims, tort and/or contract claims, claims for wrongful termination and claims arising under Title VII of the Civil
Rights Act of 1991, the Americans with Disabilities Act, the Age Discrimination in Employment Act, the Equal Pay Act, the California Fair Employment and
Housing Act, the Fair Labor Standards Act, the Family and Medical Leave Act, the California Labor Code, all federal or state statutes or provisions governing
discrimination in employment and the California Business and Professions Code.
b. Consultant irrevocably and absolutely agrees Consultant will not prosecute nor allow to be prosecuted on Consultant’s behalf in any
administrative agency whether federal or state or in any court whether federal or state any claim or demand of any type related to the Released Claims and all
other matters released above, it being an intention of the parties that with the execution by Consultant of this Agreement, Company, its officers, directors,
employees, volunteers, agents, attorneys, stockholders, successors and/or assigns and all related, parent or subsidiary entities will be absolutely, unconditionally
and forever discharged of and from all obligations to or on behalf of Consultant related in any way to the Released Claims and all other released matters.
16.Civil Code Section 1542 Waiver. Consultant expressly accepts and assumes the risk that if facts with respect to matters covered by this Agreement and
the Released Claims are found hereafter to be other than or different from the facts now believed or assumed to be true,
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
this Agreement shall nevertheless remain effective. It is understood and agreed this Agreement shall constitute a general release and shall be effective as a full
and final accord and satisfaction and as a bar to all actions, causes of action, costs, expenses, attorney fees, damages, claims and liabilities whatsoever, whether
or not now known, suspected, claimed or concealed pertaining to the Released Claims. Consultant acknowledges Consultant is familiar with California Civil
Code §1542, which provides and reads as follows:
“A general release does not extend to claims which the creditor does not know of or suspect to exist in his or her favor at the time of executing the release,
which if known by him or her must have materially affected his or her settlement with the debtor.”
Consultant expressly waives and relinquishes all rights or benefits Consultant may have under or which may be conferred upon Consultant by the provisions of
California Civil Code §1542 as well as any other similar state or federal statute or common law principle to the fullest extent Consultant may lawfully waive such
rights or benefits pertaining to the released claims. The releases contained in this Agreement, including the waiver under Civil Code §1542, expressly exclude the
release of any future claims between Consultant and Company arising during the Term of this Agreement.
17.Miscellaneous Provisions.
a. Entire Agreement. This Agreement and any attachments and/or exhibits contains the entire agreement between the Parties. It supersedes all other
agreements either oral or in writing between the Parties with respect to Consultant’s employment by the Company. Each party to this Agreement acknowledges
no representations, inducements, promises or agreements, oral or otherwise, have been made by any party, or anyone acting on behalf of any party, that are not
included in this Agreement and each party acknowledges no other agreement, statement or promise not contained in this Agreement shall be valid or binding.
b. Governing Law. This Agreement shall be construed and enforced in accordance with the laws of the State of California.
c. Severability. Should any part or provision of this Agreement be held by a court of competent jurisdiction to be illegal, unenforceable, invalid or
void, the remaining provisions of this Agreement shall continue in full force and effect and the validity of the remaining provisions shall not be affected by such
holding.
d. Attorneys Fees. If any arbitration or legal proceeding is brought to enforce, interpret or apply this Agreement, or because of an alleged breach,
default or misrepresentation in connection with any provision of this Agreement or other dispute concerning this Agreement, the successful or prevailing party
shall be entitled to recover reasonable attorneys fees incurred in connection with such arbitration or legal proceeding. The term “prevailing party” shall mean the
party which is entitled to recover its costs in the proceeding under applicable law or the party designated as such by the court or the arbitrator.
e. Interpretation. This Agreement shall be construed as a whole according to its fair meaning and not in favor of or against any party. By way of
example and not in
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
limitation, this Agreement shall not be construed in favor of the party receiving a benefit nor against the party responsible for any particular language in this
Agreement. The headings and captions contained in this Agreement are for convenience of reference only and shall not constitute a part of this Agreement and
shall not be used in the construction or interpretation of this Agreement.
f. Amendment; Waiver. This Agreement may not be modified or amended by oral agreement or course of conduct, but only by an agreement in
writing signed by the President or Chief Executive Officer of the Company and Consultant, the terms of which were approved in advance in writing by the
Company’s Board of Directors. The failure of either party at any time to require the performance by the other party of any provision shall in no way affect the
full right to require such performance at any time thereafter nor shall the waiver by either party of a breach of any provision be taken or held to be a waiver of
any succeeding breach of such provision or waiver of the provision itself or a waiver of any other provision of this Agreement.
g. Assignment. This Agreement is binding on and is for the benefit of the Parties and their respective successors, heirs, executors, administrators and
other legal representatives. Neither this Agreement nor any right or obligation hereunder may be assigned by Company (except to an affiliate of the Company or
to a person, as defined herein, in accordance with a Change in Control) or by Consultant.
h. No Restrictions; No Violation. Consultant represents and warrants that: (i) Consultant is not a party to any agreement that would restrict or
prohibit Consultant from entering into this Agreement or performing fully Consultant’s obligations hereunder; and (ii) the execution by Consultant of this
Agreement and the performance by Consultant of Consultant’s obligations and duties pursuant to this Agreement will not result in any breach of any other
agreement to which Consultant is a party.
i. Counterparts. This Agreement may be executed in counterparts each of which will be deemed an original copy of this Agreement and all of which
when taken together will be deemed to constitute one and the same agreement. The exchange of copies of this Agreement and of signature pages by facsimile
transmission shall constitute effective execution and delivery of this Agreement as to the Parties and may be used in lieu of the original Agreement for all
purposes. Signatures of the parties transmitted by facsimile shall be deemed to be their original signatures for all purposes.
j. Legal Representation; Independent Counsel. The law firm of Fisher Thurber LLP has prepared this Agreement on behalf of the Company based on
the Company’s instructions. Fisher Thurber LLP does not represent any other party to this Agreement. In executing this Agreement, Consultant represents
Consultant has neither requested nor been given legal advice or counsel by Fisher Thurber LLP or any of its attorneys. Consultant is aware of Consultant’s right
to obtain separate legal counsel with respect to the negotiation and execution of this Agreement and acknowledges Fisher Thurber LLP has recommended that
Consultant retain Consultant’s own counsel for such purpose. Consultant further acknowledges Consultant; (i) has read and understands this Agreement and its
exhibits and attachments, (ii) has had the
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
opportunity to retain separate counsel in connection with the negotiation and execution of this Agreement, and (iii) has relied on the advice of separate counsel
with respect to this Agreement or made the conscious decision not to retain counsel in connection with the negotiation and execution of this Agreement.
k. Notice. All notices, consents, waivers and other communications under this Agreement must be in writing and will be deemed to have been duly
given upon (i) delivery by hand (with written confirmation of receipt), (ii) two business days after deposit with a nationally and internationally recognized
overnight delivery service (receipt requested, delivery prepaid), or (iii) five (5) business days after deposit if sent by registered or certified mail, return receipt
requested, postage prepaid and addressed to the intended recipient. Notices shall be sent in each case to the appropriate addresses indicated for each party below,
or to such other addresses as a party may designate in writing by notice to the other party. If a specific contact person is designated in a provision, notice
concerning the subject matter of such provision shall be directed to such person. The address or the name of any party or contact person or other number may be
changed by sending notice in the manner set forth above:
If to NAI:
Natural Alternatives International, Inc.
1185 Linda Vista Drive
San Marcos CA 92078
Attn: President or Chief Operating Officer
with a copy to:
Fisher Thurber LLP
4225 Executive Square, Suite 1600
La Jolla CA 92037
Attention: David A. Fisher
If to Dr. John A. Wise:
Dr. John A. Wise
1185 Linda Vista Dr.
San Marcos, CA 92078
[signature page follows]
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
The Parties have executed this Agreement effective as of the Effective Date.
COMPANY
Natural Alternatives International, Inc.,
a Delaware corporation
By:
/s/ Randell Weaver
Randell Weaver, President
CONSULTANT
Dr. John A. Wise,
an individual
/s/ Dr. John A. Wise
Dr. John A. Wise
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Type of Security
1992 Incentive Stock Option Plan – TERMINATED
1992 Incentive Stock Option Plan – TERMINATED
1992 Incentive Stock Option Plan – TERMINATED
1994 Nonqualified Stock Option Plan – TERMINATED
1999 Omnibus Equity Incentive Plan
1999 Omnibus Equity Incentive Plan
1999 Omnibus Equity Incentive Plan
1999 Omnibus Equity Incentive Plan
1999 Omnibus Equity Incentive Plan
1999 Omnibus Equity Incentive Plan
1999 Omnibus Equity Incentive Plan
* Now treated as a Nonqualified Stock Option
Company Name: Natural Alternatives International, Inc.
John A. Wise
Stock Options
Date of
Issuance
9/9/93
Basis of
Issuance
Original
Issue
Date of
Disposition
9/8/98
Basis of
Disposition
Option Exercised
Outstanding Number
58,888
No
6/30/98
Option Exercised
1/20/03
Expired
1/23/99
Expired
Cancelled – terms
of employment not met
9/25/06
Option Exercised
No
No
No
No
Yes
No
Yes
Yes
Yes
Yes
47,112
45,000
60,000
20,000
40,000
30,000
5,473*
24,527
34,107
25,893*
Total Outstanding Shares: 130,000
9/9/93
1/21/98
1/24/95
2/10/00
8/28/00
8/20/02
9/8/03
9/8/03
1/30/04
1/30/04
Original
Issue
Original
Issue
Original
Issue
Original
Issue
Original
Issue
Original
Issue
Option
Grant
Original
Issue
Original
Issue
Original
Issue
Exhibit A
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
List of Subsidiaries of
Natural Alternatives International, Inc., a Delaware corporation
Exhibit 21
Natural Alternatives International Europe S.A.
Name of Subsidiary
Custom Nutrition, LLC
Transformative Health Products, Inc.
Real Health Laboratories, Inc.
State or other Jurisdiction
of Incorporation or Organization
Switzerland
Delaware, USA
Delaware, USA
California, USA
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
EXHIBIT 23.1
We consent to the incorporation by reference in the Registration Statements:
Consent of Independent Registered Public Accounting Firm
1.
2.
3.
4.
Form S-8 No. 333-140185, pertaining to the 1999 Omnibus Equity Incentive Plan and the 1999 Employee Stock Purchase Plan,
Form S-3 No. 333-132191, as amended, and related prospectus, pertaining to the registration of 510,000 shares of Natural Alternatives
International, Inc. Common Stock,
Form S-8 No. 333-131968, pertaining to the 1999 Omnibus Equity Incentive Plan and the 1999 Employee Stock Purchase Plan,
Form S-8 No. 333-32828, pertaining to the 1999 Omnibus Equity Incentive Plan, the 1999 Employee Stock Purchase Plan, and the Two Outstanding
Non-Employee Director Option Agreements outside of any plan,
5.
Form S-8 No. 333-117020, pertaining to the 1999 Omnibus Equity Incentive Plan
of Natural Alternatives International, Inc. of our report dated October 12, 2007, with respect to the consolidated financial statements and schedule of Natural
Alternatives International, Inc. included in its Annual Report (Form 10-K) for the year ended June 30, 2007.
/s/ Ernst & Young LLP
San Diego, California
October 12, 2007
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to
Rule 13a-14(a)/15d-14(a)
I, Mark A. LeDoux, Chief Executive Officer of Natural Alternatives International, Inc., certify that:
1. I have reviewed this Annual Report on Form 10-K of Natural Alternatives International, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date: October 15, 2007
/s/ Mark A. LeDoux
Mark A. LeDoux, Chief Executive Officer
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to
Rule 13a-14(a)/15d-14(a)
I, John R. Reaves, Chief Financial Officer of Natural Alternatives International, Inc., certify that:
1. I have reviewed this Annual Report on Form 10-K of Natural Alternatives International, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date: October 15, 2007
/s/ John R. Reaves
John R. Reaves, Chief Financial Officer
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
Exhibit 32
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the
undersigned officers of Natural Alternatives International, Inc., a Delaware corporation, does hereby certify, to such officer’s knowledge, that the Annual Report
on Form 10-K for the fiscal year ended June 30, 2007 of Natural Alternatives International, Inc. fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) and that information contained in such report fairly presents, in all material respects, the financial
condition and results of operations of Natural Alternatives International, Inc.
Date: October 15, 2007
Date: October 15, 2007
/s/ Mark A. LeDoux
Mark A. LeDoux, Chief Executive Officer
/s/ John R. Reaves
John R. Reaves, Chief Financial Officer
The foregoing certification is furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of
Title 18, United States Code) and is not being filed as part of the Form 10-K or as a separate disclosure document.
_______________________________________________
Created by 10KWizard www.10KWizard.com
Source: NATURAL ALTERNATIVES, 10-K, October 15, 2007