FORM 10-K
NATURAL ALTERNATIVES INTERNATIONAL INC - NAII
Filed: September 22, 2008 (period: June 30, 2008)
Annual report which provides a comprehensive overview of the company for the past year
Table of Contents
10-K - FORM 10-K
Part III
PART I
Item 1.
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
PART II
ITEM 5.
ITEM 7.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
PART III
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
PART IV
2
BUSINESS
RISK FACTORS
PROPERTIES
LEGAL PROCEEDINGS
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
MARKET FOR OUR COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
CONTROLS AND PROCEDURES
OTHER INFORMATION
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
PRINCIPAL ACCOUNTING FEES AND SERVICES
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
ITEM 15.
SIGNATURES
EX-10.44 (FIRST AMENDMENT TO THE AMENDED AND RESTATED
EMPLOYMENT AGREEMENT)
EX-10.45 (FIRST AMENDMENT TO EMPLOYMENT AGREEMENT DATED
NOVEMBER 20)
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, 2008
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 ⌧ 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 ⌧ 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. ⌧ 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. ⌧
Indicate by check mark whether NAI is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer � Accelerated filer � Non-accelerated filer � Smaller reporting company ⌧
Indicate by check mark whether NAI is a shell company (as defined in Rule 12b-2 of the Exchange Act): � Yes ⌧ No
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 31, 2007) was approximately $46,207,307 (based on the closing sale price of $8.63 reported by Nasdaq on December 31, 2007). For this
purpose, all of NAI’s officers and directors and their affiliates were assumed to be affiliates of NAI.
As of September 17, 2008, 7,037,063 shares of NAI’s common stock were outstanding, net of 180,941 treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
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 05, 2008, to be filed on or before October 28, 2008.
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
TABLE OF CONTENTS
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 7.
Item 8.
Item 9.
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
Market for Our Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Management’s Discussion and Analysis of Financial Condition and Results of Operation
Financial Statements and Supplementary Data
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
(i)
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
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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;
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, acquisition, divestment and consolidation 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
important factors that could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. These factors include,
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
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).
1
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
PART I
ITEM 1.
BUSINESS
General
Our vision is to enrich the world through the best of nutrition.
We are a leading formulator, manufacturer and marketer of nutritional supplements and provide strategic partnering services to our customers. Our
comprehensive partnership approach offers a wide range of innovative nutritional products and services to our clients including: scientific research, clinical
studies, proprietary ingredients, customer-specific nutritional product formulation, product testing and evaluation, marketing management and support, packaging
and delivery system design, regulatory review and international product registration assistance.
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 branded products under the Pathway to Healing® product line, which is aimed at restoring, maintaining and improving health.
History
Originally founded in 1980, Natural Alternatives International, Inc. reorganized as a Delaware corporation in 1989. Our principal executive offices are located at
1185 Linda Vista Drive, San Marcos, California, 92078.
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.
On December 5, 2005, we acquired Real Health Laboratories, Inc. (RHL), which primarily markets branded nutritional supplements. RHL’s operations include
in-house creative, supply chain management and call center and fulfillment activities.
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.
Overview
Our U.S.-based operations are located in San Marcos, Vista and San Diego, California and include manufacturing and distribution, sales and marketing, in-house
formulation, laboratory and other research and development services. Our manufacturing facilities were recertified on October 31, 2007 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. We expect our existing TGA
certification will be reviewed beginning late September 2008.
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.
2
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
NAIE 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
manufacturing 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.
Business Strategy
Our goals are to achieve long-term growth and profitability and to diversify our sales base. 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 primarily through direct-to-consumer channels; 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, the majority of our business has been fueled
primarily by the effectiveness of our customers in this marketing channel.
® ”
Since the acquisition of RHL, our banded products segment has included the legacy RHL business, which included the internet and catalog business “As We
Change
(AWC) and certain branded products primarily marketed through mass retail, with distribution to Food, Drug and Mass Market (FDM) retailers, and
NAI’s branded products primarily sold directly to consumers under the Pathway to Healing® product line. During the fourth quarter of fiscal 2008, we undertook
a careful review of our branded products portfolio and operations and decided to narrow our branded products focus and developed and approved a plan to sell
the legacy RHL business. We expect this plan will significantly improve our overall profitability and allow us to better pursue our growth strategies.
More specifically, on August 4, 2008, RHL sold certain assets related to its catalog and internet business conducted under the name “As We Change ®” to Miles
Kimball Company for a cash purchase price of $2,000,000. The purchase price was subject to certain post-closing adjustments based on a final accounting of the
value of the assets sold to and the liabilities assumed by the buyer at the closing. As a result of the post-closing review, the purchase price was increased by
$299,000, resulting in an aggregate purchase price of $2,299,000. Due to the sale of RHL’s “As We Change” business, we are in the process of terminating
approximately 30 employees that supported, either directly or indirectly, the “As We Change” business. These terminations are expected to be substantially
completed by September 30, 2008. We estimate that we will incur approximately $200,000 to $275,000 in severance and related payroll costs as a result of this
action.
3
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
We intend to market for sale the remaining legacy RHL business during fiscal 2009, with the exception of our Pathway to Healing ® product line. As a result of
our decision to sell the legacy RHL business, we have initiated an operational consolidation program during the first quarter of fiscal 2009 that will transition the
remaining branded products business operations to our corporate offices. We anticipate this program will be substantially completed by September 30, 2008 and
result in approximately $1.0 million to $1.2 million in severance and other business related exit costs. Due to the above changes, certain financial information in
this report has been reclassified to reflect the operations of RHL as discontinued operations as discussed in more detail in our consolidated financial statements
and accompanying notes to the consolidated financial statements included under Item 8 of this report.
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 continuing 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.
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, we develop, manufacture and market our own branded products and work with a nationally recognized physician to develop brand name products
that reflect his individual approach to restoring, maintaining or improving health. These products are currently sold through print media and internet distribution
channels.
For the last two fiscal years ended June 30, our net sales were derived from the following (dollars in thousands):
2008
2007
Private Label Contract Manufacturing
Branded Products
Discontinued Operations
Total Net Sales
Research and Development
$
$
%
%
$77,850 84 $80,732 83
3,905
6
11,276 12 10,562 11
$93,031 100 $97,128 100
4 5,834
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.
4
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
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 two fiscal years ended June 30 were $2.0 million for 2008 and $1.9 million for 2007.
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 2008, our two largest suppliers accounted for 31% of our total raw material
purchases. We did not experience any significant shortages or difficulties obtaining adequate supplies of raw materials during fiscal 2008 and we do not
anticipate any significant shortages or difficulties in the near term. During fiscal 2008, however, we experienced increases in various product raw material costs,
transportation costs and the cost of petroleum based raw materials and packaging supplies used in our business, which were associated with higher oil and fuel
costs. We anticipate raw material and product cost pricing pressures will continue throughout fiscal 2009.
Major Customers
NSA International, Inc. has been our largest customer over the past several years. During the fiscal year ended June 30, 2008, NSA International, Inc. accounted
for approximately 49% of our net sales from continuing operations. Our second largest customer was Mannatech, Incorporated, which accounted for
approximately 34% of our net sales from continuing operations during fiscal 2008. Both of these customers are private label contract manufacturing customers.
No other customer accounted for 10% or more of our net sales during fiscal 2008. We continue to focus on obtaining new private label contract manufacturing
customers and growing our remaining branded products 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, and beauty and skin care
products both within and outside the United States. The nutritional supplement industry is highly fragmented and competition for the sale of nutritional
supplements 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 turnkey
solutions for customers, our certified manufacturing operations and our commitment to quality and safety through our research and development activities.
5
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
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 industry is 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 total 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;
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 are required to comply with the new requirements by June 25, 2009. We are committed to meeting or
exceeding the standards set by the FDA and believe we are currently operating within the FDA mandated GMPs.
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.
6
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
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 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 act became effective in December 2007. The FDA
is in the process of developing industry guidance on how to comply with this 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.
Intellectual Property
Trademarks. We have developed and use registered trademarks in our business, particularly relating to corporate, brand and product names. We own 26
trademark registrations in the United States and have three trademark applications pending with the United States Patent and Trademark Office. In most
circumstances, 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 goods or services 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. However, to the extent a prior, common law user has used the mark with similar goods or services in a particular area of the
country, the federal registration will confer nationwide rights, subject to that geographic area.
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 Japanese Patent and Trademark Office.
We also claim ownership and protection of certain product names, unregistered trademarks and service marks under common law. While common law trademark
rights do not provide the same level of protection afforded by a federal registration of a trademark, trademark rights are based on use and offer protection within
the particular geographic area in which the mark is used. We believe these trademarks, whether registered or claimed under common law, constitute valuable
assets, adding to the recognition of our products and services in the marketplace. These and other 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.
7
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
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-AlanineTM. We also have a nonexclusive worldwide license to five certain United States patents and are currently involved in the
research and development of products employing the licensed inventions.
Employees
As of June 30, 2008, from continuing operations we employed 202 full-time employees in the United States, five of whom held executive management positions.
Of the remaining full-time employees, 36 were employed in research, laboratory and quality control, six in sales and marketing, and 155 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, 2008, we had 21 temporary personnel.
As of June 30, 2008, NAIE employed an additional 23 full-time employees. Most of these positions were 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.
Financial Information about Our Business Segments and Geographic Areas
Our operations are comprised of two reportable segments:
•
•
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 through direct-to-consumer marketing
programs, under which we develop, manufacture and market our own products and work with a nationally recognized physician to
develop brand name products that reflect his individual approach to restoring, maintaining or improving health. These products are
currently sold through print media and the internet.
Our private label contract manufacturing products are sold both in the United States and in markets outside the United States, including Europe, Australia and
Asia. The primary market outside the United States is Europe. Our branded products are only sold in the United States.
8
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
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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 and 7 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, 2008, sales to one customer, NSA International, Inc., were approximately 49% of our total net sales from continuing operations. Our second
largest customer was Mannatech, Incorporated, which accounted for approximately 34% of our net sales from continuing operations during fiscal 2008. 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.
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.
We may, in the future, pursue acquisitions of other companies that, if not successful, could adversely affect our business, financial condition and results of
operations.
In the future, we may pursue acquisitions of companies that we believe could complement or expand our business, augment our market coverage, provide us with
important relationships or otherwise offer us growth opportunities. Acquisitions involve numerous risks, including:
•
potential difficulties related to integrating the products, personnel and operations of the acquired company;
9
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
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•
•
•
•
•
•
•
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 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.
Our net sales and income from continuing operations declined during fiscal 2008 as compared to fiscal 2007 and 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 net losses in the past, including fiscal years 2008 and 2007, 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. We currently anticipate generating a net after-tax loss during the first quarter of fiscal 2009 related to severance and other business exit costs
associated with discontinuing our RHL operations. 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.
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.
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Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
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For the fiscal year ended June 30, 2008, our direct-to-consumer products accounted for approximately 4% of our net sales from continuing operations. 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. Additionally, there can be no
assurance that our existing line of credit will be sufficient to meet our working capital needs. Furthermore, if we fail to maintain certain loan covenants we may
no longer have access to the credit line. During fiscal 2008 we have been in default of our quarterly net after-tax income covenant under our credit facility since
the quarter ended December 31, 2007 and did not meet our annual after-tax net income covenant. While our lender agreed to waive its default rights resulting
from these covenant violations there is no guarantee that the lender will continue to do so if we do not meet future covenant requirements. We anticipate a net
after-tax loss during the first quarter of fiscal 2009 related to severance and other business exit costs associated with discontinuing our legacy RHL operations.
As a result, we do not expect to meet our net after-tax income covenant as of September 30, 2008. To the extent we do fail to meet this covenant, we intend to
request a waiver from our lender but there is no assurance when or if a waiver will be provided. The credit line terminates in November 2009. 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 2008, approximately 31% of our total raw material purchases were from two
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.
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Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
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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. During fiscal 2008, we experienced
increases in various product raw material costs, transportation costs and the cost of petroleum based raw materials and packaging supplies used in our business,
which were associated with higher oil and fuel costs. We anticipate raw material and product cost pricing pressures will continue throughout fiscal 2009.
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, our customers, 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, or our customers. During the second and third quarters of fiscal 2008 our
Mannatech contract manufacturing sales were adversely impacted due to certain negative publicity and heightened litigation and regulatory activities that
affected Mannatech’s domestic recruiting efforts and corresponding consumer sales. Thus, there can be no assurance that we will be able to reestablish our prior
sales levels with Mannatech, and 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.
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Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
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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 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.
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Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
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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 and third party fulfillment and call center activities are subject to certain risks.
We manufacture the vast majority of our products at our manufacturing facility in California. As a result, we are dependent on the uninterrupted and efficient
operation of these facilities. Our manufacturing 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.
As a result of our decision to sell the legacy RHL business, we also initiated an operational consolidation program during the first quarter of fiscal 2009. This
program included outsourcing our branded products fulfillment and call center activities. The operation of the third party service provider’s facilities is subject to
the interruption and similar risks described above for our facilities and there can be no assurance that these interruptions or any other operational problem at such
third party’s facilities would not have a material adverse effect on our business, financial condition and results of 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 23% of our outstanding shares of common stock as of
June 30, 2008, including approximately 18% 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:
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transactions resulting in a change in control;
mergers and acquisitions;
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Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
•
•
•
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.
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 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.
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Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
ITEM 2.
PROPERTIES
This table summarizes our facilities as of June 30, 2008. 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(4)
Manufacturing, warehousing, packaging and distribution
RHL headquarters, warehousing, call center and fulfillment
Square
Feet
How Held
Lease
Expiration
Date
32,300 Owned/leased(5) December 2008(5)
162,000
46,000
16,000
Leased
Leased
Leased
December 2015
March 2014
May 2009
(1)
This facility is used by NAI primarily for its private label contract manufacturing segment.
(2)
(3)
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.
This facility is used primarily by legacy RHL, our wholly owned subsidiary, for our branded products segment. We expect to vacate the facility on or
about September 30, 2008 and relocate our remaining branded products business to our San Marcos facility.
(4) We use approximately 93,000 square feet for production, 60,000 square feet for warehousing and 9,000 square feet for administrative functions.
(5) We own approximately 29,500 square feet and lease the remaining 2,800 square feet. We have an option for an additional one year term on the lease.
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 September 17, 2008, 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, 2008.
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Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
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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, 2008 and 2007:
Fiscal 2008
Fiscal 2007
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Holders
Low
High
High
Low
$ 7.71 $ 5.81 $ 10.84 $ 7.77
$ 8.68 $ 6.09 $ 9.25 $ 8.37
$ 9.18 $ 8.41 $ 9.26 $ 7.90
$ 9.00 $ 6.51 $ 8.22 $ 7.05
As of September 17, 2008, there were approximately 314 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, 2008, we did not sell any unregistered securities.
Repurchases
During the fourth quarter of the fiscal year ended June 30, 2008, we did not repurchase any shares of our common stock, nor were any repurchases made on our
behalf.
17
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
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 as of June 30, 2008 and 2007 and for
each of the last two fiscal years then ended. 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
Item 1A 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 profitability and to diversify our sales base. 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 2008, we established relationships with two new private label contract manufacturing
customers.
Going forward, in an effort to enhance stockholder value, improve working capital and enable us to focus on our core contract manufacturing business, we have
elected to narrow our branded products focus and portfolio. Specifically, on August 4, 2008, RHL sold certain assets related to its catalog and internet business
conducted under the name “As We Change ®” to Miles Kimball Company for a cash purchase price of $2,000,000. The purchase price was subject to certain
post-closing adjustments based on a final accounting of the value of the assets sold to and the liabilities assumed by the buyer at the closing. As a result of the
post-closing review, the purchase price was increased by $299,000, resulting in an aggregate purchase price of $2,299,000. We intend to market for sale legacy
RHL’s remaining business operations during fiscal 2009, with the exception of our Pathway to Healing ® product line. As the plan to dispose of the legacy RHL
business met the criteria of Statement of Financial Accounting Standards No. 144, Accounting for the Disposal of Long-lived Assets (SFAS 144), the current and
prior periods presented in this report on Form 10K have been reclassified to reflect the legacy RHL business as discontinued operations.
As a result of the sale of RHL’s “As We Change” business we expect to terminate approximately 30 employees that supported, either directly or indirectly, the
“As We Change” business. These terminations are expected to be substantially completed by September 30, 2008. We estimate that we will incur approximately
$200,000 to $275,000 in severance and related payroll costs as a result of this action.
As a result of our decision to sell the legacy RHL business, we also initiated an operational consolidation program during the first quarter of fiscal 2009 which
will transition the remaining branded products business operations to our corporate offices. This operational consolidation program is anticipated to be
substantially complete by September 30, 2008 and is expected to result in approximately $1.0 million to $1.2 million in severance and other business related exit
costs.
During fiscal 2008, our net sales from continuing operations were 5.6% lower than in fiscal 2007. Private label contract manufacturing sales declined 3.6% due
to lower volumes of existing products in existing markets sold to one of our largest customers. This decline was partially offset by an increase in sales to one of
our other largest customers and sales to new customers. Net sales from our branded products declined 33.1% in fiscal 2008 as compared to fiscal 2007 due to the
continued softening of our Pathway to Healing® product line.
18
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
The significant decline in our branded products sales during fiscal 2008 contributed to an increase in our revenue concentration as sales to our two largest private
label contract manufacturing customers as a percentage of our total sales from continuing operations increased to 83% from 79% in fiscal 2007. We expect our
contract manufacturing revenue concentration percentage for our two largest customers to decline during fiscal 2009 as sales to new customers increase over
fiscal 2008 sales volumes.
During fiscal 2008, we invested substantial time and incurred substantial costs associated with hiring and training new quality assurance and other manufacturing
support personnel, increased testing activity, and documentation and validation processes related to our GMPs compliance programs. These additional expenses
negatively impacted our operating income from continuing operations during fiscal 2008. Although the cost of GMP compliance is significant, we believe our
commitment to quality and our steadfast support of the FDA mandated GMPs makes us well positioned to operate within the higher standards of the FDA’s
GMPs and differentiates us from our competitors.
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® product line. While sales of the product line have been primarily generated by continuity orders from long-standing repeat customers, the
loss of the television program has had 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.
In the fourth quarter of fiscal 2007, we recorded a $7.0 million non-cash goodwill impairment charge in discontinued operations as a result of our annual testing
of goodwill and other intangible assets as discussed in our Critical Accounting Policies below. Based on the required analysis performed as of the annual test
date, no impairment loss was required for the fiscal year ended June 30, 2008.
During fiscal 2009, 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 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.
19
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
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 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. We have selected April 1 as the annual date to test for impairment.
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 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.
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 No. 141, Business Combinations (SFAS 141). As a result our annual testing, in
the fourth quarter of fiscal 2007, we recorded a $7.0 million non-cash goodwill impairment charge.
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.
20
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
Based on the required analysis performed as of the annual test date, no impairment loss was required for the fiscal year ended June 30, 2008.
Impairment of Assets
In accordance with the provisions of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, our
policy is to evaluate whether there has been a permanent impairment in the value of long-lived assets and certain identifiable intangibles when certain events
have taken place that indicate the remaining unamortized balance may not be recoverable. When factors indicate that the intangible assets should be evaluated for
possible impairment, we use an estimate of related undiscounted cash flows. Factors considered in the valuation include current operating results, trends and
anticipated undiscounted future cash flows. There have been no impairment losses recorded as of and for the fiscal years ended June 30, 2008 and 2007.
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). 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) collectability 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 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. These costs are recorded in selling, general and
administrative expense.
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. Once we establish an
inventory reserve amount in a fiscal period, the reduced inventory value is maintained until the inventory is sold or otherwise disposed of. 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.
21
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
Accounting for Income Taxes
On July 1, 2007, we adopted the provisions of the Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – An Interpretation of FASB Statement No. 109 (FIN 48). 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. Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense. Upon adoption of FIN 48 on July 1, 2007, we
did not record any interest or penalties.
As of June 30, 2008 and 2007, we had unrecognized tax liabilities of $47,000. The total amount of such unrecognized tax liabilities, if recognized, would not
materially affect our effective tax rate.
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.
22
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
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. As of June 30, 2008,
we had one option contract outstanding totaling 500,000 Euros.
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. Effective June 21, 1999, we adopted an amendment to freeze benefit accruals to the participants. 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 following table sets forth selected consolidated operating results for each of the last two fiscal years, presented as a percentage of net sales (dollars in
thousands).
23
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
Private label contract manufacturing
Branded products
Total net sales
Cost of goods sold
Gross profit
Selling, general & administrative expenses
Operating income from continuing operations
Other (income) expenses, net
Income from continuing operations before income taxes
Income tax expense
Income from continuing operations
Loss from discontinued operations, net of tax
Net loss
Fiscal Year Ended
June 30, 2008
June 30, 2007
Increase (Decrease)
$ 77,850
3,905
81,755
68,843
12,912
11,838
1,074
(102)
1,176
264
912
(1,283)
(371)
$
95% $ 80,732
5,834
5%
86,566
100%
70,844
84%
15,722
16%
11,956
14%
3,766
1%
320
(0)%
3,446
1%
739
0%
2,707
1%
(2)%
(7,992)
(0)% $ (5,285)
93% $ (2,882)
(1,929)
(4,811)
(2,001)
(2,810)
(118)
(2,692)
(422)
(2,270)
(475)
(1,795)
6,709
4,914
7%
100%
82%
18%
14%
4%
0%
4%
1%
3%
(9)%
(6)% $
(4)%
(33)%
(6)%
(3)%
(18)%
(1)%
(71)%
(132)%
(66)%
(64)%
(66)%
(84)%
(93)%
24
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
Fiscal 2008 Compared to Fiscal 2007
The percentage decrease in private label contract manufacturing net sales was primarily attributed to the following:
NSA International, Inc. (NSA)
Mannatech, Incorporated
Other customers
Total
Percentage
Change
1(1)
(3)(2)
(2)(3)
(4)
1
2
3
International sales to NSA International, Inc. (“NSA”) increased 33.8% during fiscal 2008 and were partially offset by a decline in domestic sales to NSA
of 7.2%.
Net sales to Mannatech, Incorporated decreased primarily as a result of lower volumes of established products in existing markets along with a shift in
sales mix to lower priced products.
A decrease in net sales to other customers was primarily due to the discontinuation of certain product lines and customer relationships.
Net sales from our branded products segment decreased 33% during the current fiscal year due primarily to the cessation of the Dr. Cherry weekly television
program during April 2007, which has serviced as the primary acquisition vehicle in marketing the Pathway to Healing® product line.
Gross profit margin from continuing operations decreased 2.4 percentage points primarily due to the following:
Shift in sales mix
Changes in overhead expenses
Incremental direct and indirect labor
Branded products operations
Total
Percentage
Change
1.8
(1.2)
(3.9)
0.9
(2.4)
Private label contract manufacturing gross profit margin declined 1.7 percentage points to 13.7% in fiscal 2008 compared to 15.4% in fiscal 2007. The decrease
in gross profit as a percentage of sales was primarily due to higher per unit private label manufacturing costs associated with lower production levels, increased
product testing costs associated with new product offerings and system and process validation costs related to improving our existing processes and
implementing newly required GMPs. Additionally, during fiscal 2008 we experienced a favorable sales mix shift to higher margin product sales as compared to
the prior year and favorable currency exchange rates associated with our international sales.
Branded products gross profit margin increased 1.0 percentage points to 56.9% in fiscal 2008 from 55.9% in fiscal 2007 due to lower sales discounts and returns.
Selling, general and administrative expenses from continuing operations decreased $118,000, or 1%, primarily due to a $1.2 million decrease in
direct-to-consumer operating costs primarily associated with lower marketing and advertising expenses, employee compensation costs and reduced call center
and fulfillment expenses. These decreases were partially offset by increased consulting costs primarily related to our Sarbanes-Oxley compliance effort,
increased private label contract manufacturing marketing expenses and increased research and development costs.
Other income, net increased $422,000 primarily due to a $315,000 reduction in interest expense associated with lower borrowings and interest rates during the
current fiscal year and $219,000 in favorable foreign currency exchange gains due to the strengthening of the Euro and the related impact on the translation of
Euro denominated cash and receivables. These amounts were partially offset by lower other income amounts in fiscal 2008 as compared to a $90,000 favorable
legal settlement recorded in the prior year results.
25
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
Our effective tax rate from continuing operations for fiscal 2008 was 22.5% as compared to 21.5% in fiscal 2007. The increase in our effective rate was primarily
attributed to a reduction in our tax contingency reserves in fiscal 2007 after the Internal Revenue Service completed an audit of our fiscal 2005 tax return in the
fourth quarter of fiscal 2007 with no corresponding reduction in fiscal 2008.
Net Loss from Discontinued Operations
During the fourth quarter of fiscal 2008 we undertook a careful review of our branded products portfolio and operations. As a result of this review we decided, to
narrow our branded product focus and portfolio, which we expect to significantly improve our overall profitability and allow us to better pursue our growth
strategies. As a result, we developed and approved a plan to sell the legacy RHL business prior to the end of the current fiscal year.
More specifically, on August 4, 2008, RHL sold certain assets related to its catalog and internet business conducted under the name “As We Change ®” to Miles
Kimball Company for a cash purchase price of $2,000,000. The purchase price was subject to certain post-closing adjustments based on a final accounting of the
value of the assets sold to and the liabilities assumed by the buyer at the closing. As a result of the post-closing review, the purchase price was increased by
$299,000, resulting in an aggregate purchase price of $2,299,000. We intend to market for sale legacy RHL’s remaining business operations during fiscal 2009,
with the exception of our Pathway to Healing® product line. As the plan to dispose of the legacy RHL business met the criteria of Statements of Financial
Accounting Standards No. 144, Accounting for the Disposal of Long-lived Assets (SFAS 144), the current and prior periods presented in this report on Form 10K
have been reclassified to reflect the legacy RHL business as discontinued operations.
As a result of the sale of RHL’s “As We Change” business we expect to terminate approximately 30 employees that supported, either directly or indirectly, the
“As We Change” business. These terminations are expected to be substantially completed by September 30, 2008. We estimate that we will incur approximately
$200,000 to $275,000 in severance and related payroll costs as a result of this action.
As a result of our decision to sell the legacy RHL business, we also initiated an operational consolidation program during the first quarter of fiscal 2009 which
will transition the remaining branded products business operations to our corporate offices. This operational consolidation program is anticipated to be
substantially complete by September 30, 2008 and is expected to result in approximately $1.0 million to $1.2 million in severance and other business related exit
costs.
For fiscal 2008, net loss from discontinued operations was $1.3 million, or $(0.18) net loss per basic share, and for fiscal 2007, net loss from discontinued
operations was $8.0 million, or $(1.17) net loss per basic share.
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 $2.7 million in fiscal 2008 compared to net cash provided by operating activities of $14.8 million in fiscal 2007.
At June 30, 2008, changes in accounts receivable, consisting primarily of amounts due from our private label contract manufacturing customers, used $1.5
million in cash during fiscal 2008 compared to $7.9 million of cash provided in the prior year. Cash used by accounts receivable in fiscal 2008 was due to the
increase in shipments during the fourth quarter of 2008 as compared to the prior year and the timing of collections. Days sales outstanding from continuing
operations was 25 days during fiscal 2008 compared to 38 days in fiscal 2007. This decrease in days sales outstanding was primarily due to timing of shipments.
At June 30, 2008, changes in inventory used $788,000 in cash during fiscal 2008 compared to $2.9 million of cash provided in fiscal 2007. The increase in
inventory at June 30, 2008 was primarily related to early receipt of raw materials associated with new customer products scheduled for shipment in early fiscal
2009.
26
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
Approximately $1.1 million of our operating cash flow was generated by NAIE in fiscal 2008. In June 2005, we repatriated $2.0 million of NAIE retained
earnings under the American Jobs Creation Act. As of June 30, 2008, NAIE’s undistributed retained earnings are considered indefinitely reinvested.
Cash used in investing activities in fiscal 2008 was $1.4 million compared to $2.7 million in fiscal 2007. Capital expenditures were $1.4 million in fiscal 2008
compared to $2.4 million in fiscal 2007. Capital expenditures for both years were primarily for manufacturing equipment in our Vista, California and Manno,
Switzerland facilities. Additionally, during fiscal 2007, we completed the expansion of our manufacturing facility in Manno, Switzerland to include powder
filling capabilities.
Our consolidated debt decreased to $2.7 million at June 30, 2008 from $4.6 million at June 30, 2007 primarily due to net payments of $1.9 million to our term
loan balances during fiscal 2008.
We have a bank credit facility of $10.2 million, comprised of a $7.5 million working capital line of credit and $2.7 million in outstanding 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. As of June 30, 2008 the outstanding balances on the term loans consisted of a $300,000 , 15 year term loan due June 2011, secured by
our San Marcos building, at an interest rate of 8.25%; a $600,000, 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 $300,000, five year term loan, secured by equipment, at an interest rate of LIBOR plus 2.10%; and a $1.5 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 $153,000 plus interest. As of
June 30, 2008 and June 30, 2007 our working capital line of credit balance was zero.
On January 24, 2007, we 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.
On December 18, 2007, we further amended our credit facility to (i) extend the maturity date for the working capital line of credit from November 1, 2008 to
November 1, 2009; (ii) reduce the maximum principal amount available under the working capital line of credit from $12.0 million to $7.5 million; (iii) reduce
the maximum borrowings against inventory from $6.0 million to $3.75 million, provided any such borrowings do not at any time exceed eligible accounts
receivable; and (iv) extend the availability of the Foreign Exchange Facility from November 1, 2007 to November 1, 2008 and the allowable contract term
thereunder from November 1, 2008 to November 1, 2009.
As of June 30, 2008, 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. Our net loss was $168,000 for our fourth quarter
of fiscal 2008 and $371,000 for fiscal 2008. Our lender has agreed to waive their default rights as a result of these covenant violations as of June 30, 2008. We
anticipate a net after-tax loss during the first quarter of fiscal 2009 related to severance and other exit costs associated with discontinuing our RHL operations. As
a result, we do not expect to meet our net after-tax income covenant as of September 30, 2008. If we fail to meet this covenant, we intend to request a waiver
from our lender but there is no assurance when or if a waiver will be provided. Therefore, in accordance with Financial Accounting Standards Board (FASB)
Statement No. 78, Classification of Obligations that are Callable by the Creditor, we have reclassified all of our long-term debt to current at June 30, 2008.
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 $1.3 million, which is the initial maximum aggregate amount that can be outstanding at any one time under the credit facility. This maximum
amount was reduced by CHF 160,000, or approximately $157,000, as of December 31, 2007 and will be reduced by and additional CHF 160,000 at the end of
each succeeding calendar year. 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 $491,000. As of June 30, 2008, 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 $1,000), 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.
27
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
As of June 30, 2008, we had $3.5 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, 2008, 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.
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 September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS 157). This standard
provides guidance for using fair value to measure assets and liabilities and information about the extent to which companies measure assets and liabilities at fair
value, the information used to measure fair value, and the effect of fair value measurements on earnings. This framework is intended to provide increased
consistency in how fair value determinations are made under various existing accounting standards that permit, or in some cases require, estimates of fair market
value. SFAS 157 also expands financial statement disclosure requirements about a company’s use of fair value measurements, including the effect of such
measures on earnings. The provisions of SFAS 157 are effective for financial statements issued for fiscal years beginning after November 15, 2007. We are in the
process of determining the effects, if any, the adoption of SFAS 157 will have on our consolidated financial position or results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB
Statements No. 115 (SFAS 159). SFAS 159 allows the irrevocable election of fair value as the initial and subsequent measurement attribute for certain financial
assets and liabilities and other items on an instrument-by-instrument basis. Changes in fair value would be reflected in earnings as they occur. The objective of
SFAS 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related
assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective as of the beginning of the first fiscal year
beginning after November 15, 2007. We are in the process of determining the effects, if any, the adoption of SFAS 159 will have on our consolidated financial
position or results of operations.
In December 2007, the FASB revised SFAS No. 141, Business Combinations (SFAS 141), which establishes principles and requirements for how the acquirer in
a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling
interest in the acquiree, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (iii) determines
what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141
(Revised 2007) is effective for fiscal years beginning on or after December 15, 2008 and early adoption and retrospective application is prohibited. We do not
expect the adoption of this statement will have a material impact on our consolidated financial position or results of operations.
28
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
Also, in December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements: an Amendment to ARB No. 51 (SFAS
160). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.
Specifically, it requires the recognition of a noncontrolling interest as equity in the consolidated financial statements, which will be separate from the parent’s
equity. SFAS 160 is effective for fiscal years and interim periods in those fiscal years beginning on or after December 15, 2008 and early adoption is prohibited.
We do not expect the adoption of this statement will have a material impact on our consolidated financial position or results of operations.
29
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
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, 2008 and 2007, and the related
consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the two years in the period ended
June 30, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements 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 audits 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, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the two years in the period ended
June 30, 2008, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
San Diego, California
September 9, 2008
30
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
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
$17 at June 30, 2008 and $15 at June 30, 2007
Inventories, net
Deferred income taxes
Income tax receivable
Prepaids and other current assets
Current assets of discontinued operations
Total current assets
Property and equipment, net
Deferred income taxes
Other noncurrent assets, net
Long-term assets of discontinued operations
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued liabilities
Accrued compensation and employee benefits
Income taxes payable
Current portion of long-term debt
Current liabilities of discontinued operations
Total current liabilities
Long-term debt, less current portion
Deferred income taxes
Deferred rent
Long-term pension liability
Long-term liabilities of discontinued operations
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, 2008 and June 30, 2007, issued and outstanding
7,210,937 at June 30, 2008 and 7,001,230 at June 30, 2007
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Treasury stock, at cost, 180,941 shares at June 30, 2008 and 70,000 shares at June 30, 2007
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
31
2008
2007
$ 3,518
$ 4,095
6,401
14,135
746
1,354
1,223
6,379
33,756
12,823
271
160
—
$ 47,010
$ 7,245
1,048
1,332
409
2,730
2,882
15,646
—
—
1,164
198
—
17,008
4,944
13,346
1,231
546
964
2,758
27,884
14,483
—
169
4,844
$ 47,380
$ 5,801
1,104
1,238
270
1,825
1,430
11,668
2,756
223
1,238
76
1,397
17,358
—
—
71
18,485
(261)
12,806
(1,099)
30,002
$ 47,010
69
17,335
(184)
13,177
(375)
30,022
$ 47,380
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
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
Operating income from continuing operations
Other income (expense):
Interest income
Interest expense
Foreign exchange gain
Other, net
Income from continuing operations before income taxes
Provision for income taxes
Income from continuing operations
Loss from discontinued operations, net of tax
Net loss
Unrealized gain resulting from change in fair value of derivative instruments, net of tax
Change in minimum pension liability, net of tax
Comprehensive loss
Net income (loss) per common share:
Basic:
Continuing operations
Discontinued operations
Net loss
Diluted:
Continuing operations
Discontinued operations
Net loss
Weighted average common shares outstanding:
Basic
Diluted
See accompanying notes to consolidated financial statements.
32
2008
2007
$
$
$
$
$
$
$
81,755
68,843
12,912
11,838
1,074
20
(286)
296
72
102
1,176
264
912
(1,283)
(371)
39
(116)
(448)
0.13
(0.18)
(0.05)
0.13
(0.18)
(0.05)
$
$
$
$
$
$
$
86,566
70,844
15,722
11,956
3,766
11
(660)
77
252
(320)
3,446
739
2,707
(7,992)
(5,285)
54
38
(5,193)
0.40
(1.17)
(0.77)
0.37
(1.11)
(0.74)
6,982,852
7,037,682
6,836,018
7,176,243
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
Natural Alternatives International, Inc.
Consolidated Statements Of Stockholders’ Equity
For the Years Ended June 30
(Dollars in thousands)
Balance, June 30, 2006
Issuance of common stock for employee stock purchase plan
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Other
Total
Retained
Earnings
Treasury
Stock
Comprehensive
Loss
6,685,546
$
67 $
15,331 $
18,462 $
(293) $
(276) $ 33,291
and stock option exercises
315,684
2
1,083
Compensation expense related to stock options and employee
stock purchase plan
Repurchase of common stock
Tax benefit from exercise 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 loss
Balance, June 30, 2007
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 gain 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, 2008
—
—
—
—
—
—
—
—
—
7,001,230
—
—
—
69
209,707
2
—
—
—
—
—
—
249
—
672
—
—
—
17,335
531
425
194
—
—
—
—
—
—
(5,285)
13,177
—
—
—
—
—
—
(82)
—
—
—
—
(375)
—
—
(724)
—
—
—
—
7,210,937
—
—
—
$
71 $
—
—
—
18,485 $
—
—
(371)
12,806 $
—
—
—
(1,099) $
—
1,085
—
—
—
249
(82)
672
54
38
—
(184)
54
38
(5,285)
30,022
—
—
—
—
533
425
(724)
194
39
39
(116)
(116)
—
(371)
(261) $ 30,002
See accompanying notes to consolidated financial statements.
33
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
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
Income before discontinued operations
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Provision (reduction) for uncollectible accounts receivable
Depreciation and amortization
Non-cash equipment 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:
Accounts receivable
Inventories
Other assets
Accounts payable and accrued liabilities
Income taxes payable
Accrued compensation and employee benefits
Net cash provided by operating activities from continuing operations
Net cash provided by operating activities from discontinued operations
Net cash provided by operating activities
Cash flows from investing activities
Capital expenditures
Proceeds from sale of property & equipment
Net cash used by operating activities from continuing operations
Net cash used by operating activities from discontinued operations
Net cash used in investing activities
Cash flows from financing activities
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 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 resulting from change in fair value of derivative instruments
Change in minimum pension liability, net of tax
See accompanying notes to consolidated financial statements.
34
2008
2007
$
912
$ 2,707
2
2,960
74
(194)
66
425
(72)
—
(1,461)
(788)
(205)
1,312
(475)
94
2,650
38
2,688
(1,372)
—
(1,372)
(44)
(1,416)
(1,852)
—
533
(724)
194
(1,849)
(577)
4,095
$ 3,518
(43)
3,104
201
(672)
(1,209)
249
(78)
(4)
7,912
2,881
64
635
(1,029)
(580)
14,138
677
14,815
(2,376)
70
(2,306)
(353)
(2,659)
(1,781)
(9,574)
1,085
(82)
672
(9,680)
2,476
1,619
$ 4,095
$
$
$
$
419
360
39
116
$
$
$
$
698
668
54
38
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
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.
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. During the fourth quarter of
fiscal 2008 we undertook a careful review of our branded products portfolio and operations. As a result of this review, we decided to narrow our branded
products focus and portfolio. As such the current and prior periods presented in this report have been reclassified to reflect the originally acquired RHL
operations as discontinued operations, pursuant to Statements of Financial Accounting Standards No. 144, Accounting for the Disposal of Long-lived Assets
(SFAS 144).
Principles of Consolidation
The consolidated financial statements include the accounts of Natural Alternatives International, Inc. (NAI) and our wholly owned subsidiary, NAIE. 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.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). This new standard provides guidance for using fair value to
measure assets and liabilities and information about the extent to which companies measure assets and liabilities at fair value, the information used to measure
fair value, and the effect of fair value measurements on earnings. This framework is intended to provide increased consistency in how fair value determinations
are made under various existing accounting standards that permit, or in some cases require, estimates of fair market value. SFAS 157 also expands financial
statement disclosure requirements about a company’s use of fair value measurements, including the effect of such measures on earnings. The provisions of SFAS
157 are effective for financial statements issued for fiscal years beginning after November 15, 2007. We are in the process of determining the effects, if any, the
adoption of SFAS 157 will have on our consolidated financial position or results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB
Statements No. 115 (SFAS 159). SFAS 159 allows the irrevocable election of fair value as the initial and subsequent measurement attribute for certain financial
assets and liabilities and other items on an instrument-by-instrument basis. Changes in fair value would be reflected in earnings as they occur. The objective of
SFAS 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related
assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective as of the beginning of the first fiscal year
beginning after November 15, 2007. We are in the process of determining the effects, if any, the adoption of SFAS 159 will have on our consolidated financial
position or results of operations.
In December 2007, the FASB revised SFAS No. 141, Business Combinations (SFAS 141), which establishes principles and requirements for how the acquirer in
a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling
interest in the acquiree, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (iii) determines
what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141
(Revised 2007) is effective for fiscal years beginning on or after December 15, 2008 and early adoption and retrospective application is prohibited. We do not
expect the adoption of this statement will have a material impact on our consolidated financial position or results of operations.
35
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
Also, in December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements: an Amendment to ARB No. 51 (SFAS
160). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.
Specifically, it requires the recognition of a noncontrolling interest as equity in the consolidated financial statements, which will be separate from the parent’s
equity. SFAS 160 is effective for fiscal years and interim periods in those fiscal years beginning on or after December 15, 2008 and early adoption is prohibited.
We do not expect the adoption of this statement will have a material impact on our consolidated financial position or results of operations.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Accounts Receivable
We perform ongoing credit evaluations of our customers and adjust credit limits based on payment history and customer credit-worthiness. An allowance for
estimated doubtful accounts is maintained based on historical experience and customer credit issues identified. We monitor collections regularly and adjust the
allowance for doubtful accounts as necessary to recognize any changes in credit exposure. Upon conclusion that a receivable is uncollectible, we record the
respective amount as a charge against allowance for doubtful accounts.
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
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.
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.
36
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
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 Statement of Financial Accounting Standards No. 133, Accounting for Derivatives and Related Hedging Activity
(SFAS 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. As of June 30, 2008,
we had one option contract outstanding totaling 500,000 Euros.
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 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.
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.
37
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
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.
Research and development costs are expensed when incurred. Our research and development expenses for the last two fiscal years ended June 30 were $2.0
million for 2008 and $1.9 million for 2007. These costs are included in selling, general and administrative expenses.
Advertising Costs
We expense the production costs of advertising the first time the advertising takes place. We incurred and expensed advertising costs in continuing operations in
the amount of $290,000 during the fiscal year ended June 30, 2008 and $805,000 during fiscal 2007. These costs were included in selling, general and
administrative expenses in the accompanying statements of operations.
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.
On July 1, 2007 we adopted the provisions of the Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – An Interpretation of FASB Statement No. 109 (FIN 48). 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. Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense. Upon adoption of FIN 48 on July 1, 2007, we
did not record any interest or penalties.
As of June 30, 2008 and 2007, we had unrecognized tax liabilities of $47,000. The total amount of such unrecognized tax liabilities, if recognized, would not
materially affect our effective tax rate.
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).
38
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
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. 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 2008 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,
2008
4.0
2.8 – 4.37%
39%
0%
2007
4.0 – 5.0
4.4 – 4.9%
40%
0%
Employee Stock Purchase Plans
Fiscal Years Ended June 30,
2008
2007
0.5
3.3 – 4.9%
31%
0%
0.5
4.8%
33%
0%
$
2.60
$
2.75
$
0.68
$
0.75
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 aggregate intrinsic value of awards outstanding as of June 30, 2008 was $1.2 million. The aggregate intrinsic value of awards exercisable as of June 30, 2008
was $1.1 million. In addition, the aggregate intrinsic value of awards exercised was $923,000 during fiscal 2008 and $1.6 million during fiscal 2007. The total
remaining unrecognized compensation cost related to unvested awards amounted to $853,000 at June 30, 2008 and is expected to be recognized over the next 2.8
years. The weighted average remaining requisite service period of the unvested awards was 1.7 years. The total fair value of shares vested during the fiscal year
ended June 30, 2008 was $332,000. The total fair value of shares vested during the fiscal year ended June 30, 2007 was $131,000.
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.
39
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
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,
2008
2007
$
(371)
$
(5,285)
6,983
55
7,038
(0.05)
(0.05)
$
$
6,836
340
7,176
(0.77)
(0.74)
$
$
Shares related to stock options of 708,000 for the fiscal year ended June 30, 2008 and 240,000 for fiscal 2007, 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 two largest customers, whose
receivable balances collectively represented 84% of gross accounts receivable at June 30, 2008 and 64% at June 30, 2007. Concentrations of credit risk related to
the remaining accounts receivable balances are limited due to the number of customers comprising our remaining customer base.
B. Discontinued Operations
During the fourth quarter of fiscal 2008 we undertook a careful review of our branded products portfolio and operations. As a result of this review we decided, to
narrow our branded product focus and portfolio, which we expect to significantly improve our overall profitability and allow us to better pursue our growth
strategies. As a result, we developed and approved a plan to sell the legacy RHL business prior to the end of the current fiscal year.
More specifically, on August 4, 2008, RHL sold certain assets related to its catalog and internet business conducted under the name “As We Change ®” to Miles
Kimball Company for a cash purchase price of $2,000,000. The purchase price was subject to certain post-closing adjustments based on a final accounting of the
value of the assets sold to and the liabilities assumed by the buyer at the closing. As a result of the post-closing review, the purchase price was increased by
$299,000, resulting in an aggregate purchase price of $2,299,000. We intend to market for sale legacy RHL’s remaining business operations during fiscal 2009,
with the exception of our Pathway to Healing® product line. As the plan to dispose of the legacy RHL business met the criteria of Statements of Financial
Accounting Standards No. 144, Accounting for the Disposal of Long-lived Assets (SFAS 144), the current and prior periods presented in this report on Form 10K
have been reclassified to reflect the legacy RHL business as discontinued operations.
As a result of the sale of RHL’s “As We Change” business we expect to terminate approximately 30 employees that supported, either directly or indirectly, the
“As We Change” business. These terminations are expected to be substantially completed by September 30, 2008. We estimate that we will incur approximately
$200,000 to $275,000 in severance and related payroll costs as a result of this action.
40
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
As a result of our decision to sell the legacy RHL business, we also initiated an operational consolidation program during the first quarter of fiscal 2009 which
will transition the remaining branded products business operations to our corporate offices. This operational consolidation program is anticipated to be
substantially complete by September 30, 2008 and is expected to result in approximately $1.0 million to $1.2 million in severance and other business related exit
costs.
The following table summarizes the results of the legacy RHL business at June 30 (dollars in thousands):
Net sales
Cost of goods sold and operating expenses
Intangible impairment charges
Other expense
Loss before income taxes
Income tax benefit
Loss from discontinued operations
2008
$ 11,276
13,119
—
63
(1,906)
(623)
$ (1,283)
2007
$ 10,562
12,010
7,037
127
(8,612)
(620)
$ (7,992)
Assets and liabilities of the legacy RHL business included in the Consolidated Balance Sheets are summarized as follows at June 30 (dollars in thousands):
2008
2007
Assets
Cash
Accounts receivable, net
Inventory, net
Other current assets
Deferred income tax asset
Plant and equipment, net
Goodwill and intangible assets
Total assets
Liabilities
Accounts payable
Accrued liabilities
Deferred income tax liability
Total liabilities
Net assets of discontinued operations
$
575 $
349
805
204
80
351
4,015
780
320
753
694
211
576
4,268
$ 6,379 $ 7,602
$
678 $
529
901
1,397
2,827
$ 3,497 $ 4,775
1,046
1,158
2,882
C. Inventories
Inventories, net consisted of the following at June 30 (dollars in thousands):
Raw materials
Work in progress
Finished goods
Reserve
41
2008
$ 10,428
2,517
1,997
(807)
$ 14,135
2007
$ 8,501
3,391
3,280
(1,826)
$ 13,346
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
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. Goodwill and Purchased Intangibles
Depreciable Life
In Years
NA
7 – 39
3 – 12
3 – 5
3
1 – 15
2008
$
393
2,723
19,963
3,774
204
10,283
37,340
(24,517)
$ 12,823
2007
$
393
2,726
19,470
3,604
204
10,220
36,617
(22,134)
$ 14,483
All previously reported goodwill and intangibles balances were related to our legacy RHL business and have been reclassified as discontinued operations in
accordance with SFAS 144.
F. Debt
We have a bank credit facility of $10.2 million, comprised of a $7.5 million working capital line of credit and $2.7 million in outstanding 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. As of June 30, 2008 the outstanding balances on the term loans consisted of a $300,000 , 15 year term loan due June 2011, secured by
our San Marcos building, at an interest rate of 8.25%; a $600,000, 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 $300,000, five year term loan, secured by equipment, at an interest rate of LIBOR plus 2.10%; and a $1.5 million, four year
term loan, secured by equipment, at an interest rate of LIBOR plus 2.10%. As of June 30, 2008, we did not have an outstanding balance on the working capital
line of credit. Monthly payments on the term loans are approximately $153,000 plus interest.
On January 24, 2007, we 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.
On December 18, 2007, we further amended our credit facility to (i) extend the maturity date for the working capital line of credit from November 1, 2008 to
November 1, 2009; (ii) reduce the maximum principal amount available under the working capital line of credit from $12.0 million to $7.5 million; (iii) reduce
the maximum borrowings against inventory from $6.0 million to $3.75 million, provided any such borrowings do not at any time exceed eligible accounts
receivable; and (iv) extend the availability of the Foreign Exchange Facility from November 1, 2007 to November 1, 2008 and the allowable contract term
thereunder from November 1, 2008 to November 1, 2009.
As of June 30, 2008, 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. Our net loss was $168,000 for our fourth quarter
of fiscal 2008 and $371,000 for fiscal 2008. Our lender has agreed to waive their default rights as a result of these covenant violations as of June 30, 2008. We
anticipate a net after-tax loss during the first quarter of fiscal 2009 related to severance and other exit costs associated with discontinuing our RHL operations. As
a result, we do not expect to meet our net after-tax income covenant as of September 30, 2008. If we fail to meet this covenant, we intend to request a waiver
from our lender but there is no assurance when or if a waiver will be provided. Therefore, in accordance with Financial Accounting Standards Board (FASB)
Statement No. 78, Classification of Obligations that are Callable by the Creditor, we have reclassified all of our long-term debt to current at June 30, 2008.
42
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
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 $1.3 million, which is the initial maximum aggregate amount that can be outstanding at any one time under the credit facility. This maximum
amount was reduced by CHF 160,000, or approximately $157,000, as of December 31, 2007 and will be reduced by and additional CHF 160,000 at the end of
each succeeding calendar year. 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 $491,000. As of June 30, 2008, 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 $1,000), 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.
The composite interest rate on all of our outstanding debt was 7.44% at June 30, 2008 and 7.84% at June 30, 2007.
As we do not expect to meet our net after-tax net income covenant as of September 30, 2008, all of our debt amounts have been classified as current liabilities in
our consolidated balance sheet as of June 30, 2008. However, the aggregate amounts of long-term debt contractual maturities as of June 30, 2008 were as follows
(dollars in thousands):
2009
2010
2011
2012
2013
Thereafter
G. Income Taxes
The provision (benefit) for income taxes for the years ended June 30 consisted of the following (dollars in thousands):
Current:
Federal
State
Foreign
Deferred:
Federal
State
Stock option benefit recorded to additional paid in capital
Provision for income taxes
43
$1,455
679
146
35
35
380
$2,730
2008
2007
$ (293)
2
295
4
99
(33)
66
194
$ 264
$ (65)
(54)
96
(23)
165
88
253
509
$ 739
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
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)
2008
2007
$
3
184
3
292
386
283
46
$ 1,197
(180)
(180)
$ 1,017
$
4
183
—
686
244
344
—
$ 1,461
(453)
(453)
$ 1,008
At June 30, 2008, we had state tax net operating loss carryforwards of approximately $788,000. The state tax loss carryforwards will begin to expire in 2018,
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’s effective tax rate for Swiss federal, cantonal and communal taxes is approximately 20%. NAIE had net income of $1,181,000 for the fiscal year ended
June 30, 2008. Undistributed earnings of NAIE amounted to approximately $5.6 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 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
Return to provision – difference
Tax contingency reserve reduction
Other
Income taxes as reported
Effective tax rate
H. Employee Benefit Plans
2008
$ 400
(5)
75
(207)
2
—
(1)
$ 264
22.5%
2007
$ 1,172
148
19
(140)
—
(422)
(38)
739
$
21.5%
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. 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 continuing operations totaled $266,000 for the fiscal year ended June 30,
2008 and $249,000 for fiscal 2007.
44
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
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 to continuing operations for these benefits totaled $968,000 for the fiscal year ended
June 30, 2008 and $823,000 for fiscal 2007.
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, 2008, 175,184 shares of common stock were issued pursuant to this plan and 74,816 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
2008
2007
$ 1,549
80
12
(202)
$ 1,439
$ 1,473
(81)
50
(202)
$ 1,240
$ (198)
454
256
$
$ (198)
$ 1,546
82
22
(101)
$ 1,549
$ 1,355
175
44
(101)
$ 1,473
$
$
$
(76)
260
184
(76)
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
45
2008
5.50%
N/A
2007
5.50%
N/A
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
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
The following benefit payments are expected to be paid:
2009
2010
2011
2012
2013
2014-2017
2008
$
80
(111)
10
$ (21)
2007
$
82
(106)
15
(9)
$
$
7
13
19
24
23
294
$380
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
2008
5.50%
8.00%
N/A
2007
5.50%
8.00%
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
Cash and money market funds
2008
57%
40%
3%
100%
2007
63%
37%
0%
100%
Target
Allocation
60%
40%
0%
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.
46
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
I. Stockholders’ Equity
Treasury 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 at a total cost of $650,000.
Stock Option Plans
On December 6, 1999, our stockholders approved the adoption of the 1999 Omnibus Equity Incentive Plan (the “1999 Plan”). As of June 30, 2008, a total of
2.4 million shares of common stock are 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 1st of each year, commencing
January 1, 2000, 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.
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.
Stock option activity for the two years ended June 30, 2008 was as follows:
Outstanding at June 30, 2006
Exercised
Forfeited
Granted
Outstanding at June 30, 2007
Exercised
Forfeited
Granted
Outstanding at June 30, 2008
Weighted-average remaining
contractual life in years
Available for grant at June 30, 2008
The following is a further breakdown of the options outstanding at June 30, 2008:
Weighted
Average
Exercise Price
5.54
$
4.61
$
8.00
$
8.89
$
6.45
$
3.93
$
8.24
$
9.04
$
7.50
$
1999
Plan
1,406,100
(388,305)
(20,400)
240,000
1,237,395
(276,595)
(48,000)
225,000
1,137,800
2.48
379,652
Range of Exercise Prices
$2.00 - $3.02
$3.70 - $5.59
$6.50 - $7.93
$8.05 - $10.47
$2.00 - $10.47
Weighted-average remaining
contractual life in years
Number
Outstanding
54,000
190,000
350,800
543,000
1,137,800
Weighted
Average
Exercise
Price
$
$
$
$
$
2.19
5.19
7.10
9.10
7.50
Number
Exercisable
54,000
190,000
226,300
270,900
741,200
Weighted
Average
Exercise
Price
$
$
$
$
$
2.19
5.19
6.89
8.76
6.80
2.48
1.65
47
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
J. Commitments
We lease a total of 164,800 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 2,800 square feet at our San Marcos, California facility. The lease for approximately 2,800 square feet at San
Marcos terminates in December 2008. The lease on the Vista facility expires in March 2014.
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 totaling approximately 16,000 square feet. We expect to vacate the facility on or about September 30, 2008
and relocate our remaining branded products business to our San Marcos facility. We will, however, remain obligated under the lease until 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, 2008 (dollars in thousands):
2009
2010
2011
2012
2013
There-
after
Total
Gross minimum rental commitments
Sublease income commitments
$ 2,442 $ 2,351 $ 2,390 $ 2,430 $ 2,471 $ 3,728 $ 15,812
(38)
—
$ 2,404 $ 2,351 $ 2,390 $ 2,430 $ 2,471 $ 3,728 $ 15,774
—
—
—
—
(38)
Rental expense from continuing operations totaled $2.2 million for the fiscal year ended June 30, 2008 and $2.1 million for fiscal 2007. Rental expense was
offset by sublease rental income in the amount of $53,000 in fiscal 2008 and $11,000 in fiscal 2007.
K. Foreign Currency Instruments
On July 6, 2006, 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 expired 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 was 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, $7,000 of
unrealized losses associated with previously sold options was 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 expired 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 was 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 expired 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 was limited to the purchase price paid for the option contracts.
48
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
On August 14, 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 expired monthly beginning February 2008 and ending April 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 $10,000. The risk of loss associated
with the options was limited to the purchase price paid for the option contracts.
On September 7, 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 expired monthly beginning May 2008 and ending July 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 $12,000. The risk of loss associated with
the options was limited to the purchase price paid for the option contracts.
For the fiscal years ended June 30, 2008 and 2007, approximately $68,000 and $219,000 was charged to income for option contracts expiring during the year.
L. Economic Dependency
We had substantial net sales from continuing operations 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 from continuing operations. Net sales from continuing operations to any one customer representing 10% or more of the respective year’s total net sales
for the two years ended June 30 were as follows (dollars in thousands):
Customer 1
Customer 2
2008
2007
Net Sales by
Customer
39,927
27,821
67,748
$
$
% of Total
Net Sales
49%
34%
83%
Net Sales by
Customer
38,786
29,822
68,608
$
$
% of Total
Net Sales
45%
34%
79%
Accounts receivable from these customers totaled $5.4 million at June 30, 2008 and $3.2 million at June 30, 2007.
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 2008, approximately 31% of our total raw material purchases were from two suppliers. Accounts payable to these suppliers were
$437,000 at June 30, 2008. No other supplier comprised 10% or more of our raw material purchases for the year ended June 30, 2008.
M. 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 September 17, 2008, 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.
N. Segment Information
Our business consists of two segments, as defined by Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information, identified as private label contract manufacturing, which primarily provides private label contract manufacturing services to companies that
market and distribute nutritional supplements and other health care products, and branded products, which markets and distributes branded nutritional
supplements.
49
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
During the fourth quarter of fiscal 2008 we undertook a careful review of our branded products portfolio and operations. As a result of this review we decided, to
narrow our branded product focus and portfolio, which we expect to significantly improve our overall profitability and allow us to better pursue our growth
strategies. As a result, we developed and approved a plan to sell the legacy RHL business prior to the end of the current fiscal year.
More specifically, on August 4, 2008, RHL sold certain assets related to its catalog and internet business conducted under the name “As We Change ®” to Miles
Kimball Company for a cash purchase price of $2,000,000. The purchase price was subject to certain post-closing adjustments based on a final accounting of the
value of the assets sold to and the liabilities assumed by the buyer at the closing. As a result of the post-closing review, the purchase price was increased by
$299,000, resulting in an aggregate purchase price of $2,299,000. We intend to market for sale legacy RHL’s remaining business operations during fiscal 2009,
with the exception of our Pathway to Healing® product line. As the plan to dispose of the legacy RHL business met the criteria of Statements of Financial
Accounting Standards No. 144, Accounting for the Disposal of Long-lived Assets (SFAS 144), the current and prior periods presented in this report on Form 10K
have been reclassified to reflect the legacy RHL business as discontinued operations.
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.
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
Operating Income from Continuing Operations
Private label contract manufacturing
Branded products
Income from operations of reportable segments
Corporate expenses not allocated to segments
Total Assets
Private label contract manufacturing
Branded products
2008
2007
$ 77,850
3,905
$ 81,755
$ 80,732
5,834
$ 86,566
2008
2007
$ 8,166
400
8,566
(7,492)
$ 1,074
$ 10,315
225
10,540
(6,774)
$ 3,766
2008
$ 40,569
62
$ 40,631
Our private label contract manufacturing products are sold both in the United States and in markets outside the United States, including Europe, Australia and
Asia. Our primary market outside the United States is Europe. Our branded products are only sold in the United States.
50
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
Net sales by geographic region, based upon the customers’ location, for the two years ended June 30 were as follows (dollars in thousands):
United States
Markets outside the United States
Total net sales
2008
2007
$ 57,597 $ 65,746
20,820
$ 81,755 $ 86,566
24,158
Products manufactured by NAIE accounted for 52% of net sales in markets outside the United States in fiscal 2008 and 45% in fiscal 2007. No products
manufactured by NAIE were sold in the United States during the fiscal years ended June 30, 2008 and 2007.
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 two years
ended June 30 were as follows (dollars in thousands):
2008
United States
Europe
2007
United States
Europe
Long-Lived
Assets
$
$
11,473
1,781
13,254
Total
Assets
$ 33,196
7,435
$ 40,631
Capital
Expenditures
1,232
$
140
1,372
$
Long-Lived
Assets
$
$
12,687
1,965
14,652
Total
Assets
$ 33,891
5,887
$ 39,778
Capital
Expenditures
1,328
$
1,048
2,376
$
51
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure 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, 2008. Based on such evaluation, which included a determination that the material weakness in internal
control over financial reporting regarding our annual goodwill impairment analysis that existed as of June 30, 2007 and was previously disclosed in our Annual
Report on Form 10-K for the fiscal year ended June 30, 2007 had been remediated, our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective for their intended purpose described above as of June 30, 2008.
(b) Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the
effectiveness of internal control over financial reporting as of June 30, 2008. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f)
promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal
financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2008 based upon criteria in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this
assessment, management believes that the Company’s internal control over financial reporting was effective as of June 30, 2008 based on those criteria issued by
COSO.
This report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the
SEC that permit the Company to provide only management’s report in this report.
52
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
(c) Changes in Internal Control Over Financial Reporting
During the fourth quarter ended June 30, 2008, we implemented certain processes designed to remediate the material weakness in internal control over financial
reporting regarding our annual goodwill impairment analysis that existed as of June 30, 2007 and was previously disclosed in our Annual Report on Form 10-K
for the fiscal year ended June 30, 2007. Specifically, we identified and implemented processes to develop and support the forecasts and plans necessary to
complete our annual goodwill impairment analysis in a timely manner and, as a result, were able to timely complete our goodwill impairment analysis for the
fiscal year ended June 30, 2008. There were no other changes to our internal controls during the fourth quarter ended June 30, 2008 that have materially affected,
or that are reasonably likely to materially affect, our internal controls.
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 5,
2008, to be filed on or before October 28, 2008.
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 5, 2008, to be filed on or before October 28, 2008.
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 5, 2008, to be
filed on or before October 28, 2008.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information for this item is incorporated by reference to the sections “Certain Relationships and Related Transactions” and “Our Board of Directors –
Independence” in our definitive proxy statement for our Annual Meeting of Stockholders to be held on December 5, 2008, to be filed on or before October 28,
2008.
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 5, 2008, to be filed on or before
October 28, 2008.
53
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
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, 2008 and 2007;
Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended June 30, 2008 and 2007;
Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2008 and 2007;
Consolidated Statements of Cash Flows for the years ended June 30, 2008 and 2007; and
Notes to Consolidated Financial Statements.
(2)
Exhibits. The following exhibit index shows those exhibits filed with this report and those incorporated by reference:
54
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
EXHIBIT INDEX
Exhibit
Number
3(i)
3(ii)
3(iii)
4(i)
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
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
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
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
Management Incentive Plan*
Amended and Restated Employment Agreement dated as of January
30, 2004, by and between NAI and Randell Weaver*
Amended and Restated Employment Agreement dated as of January
30, 2004, by and between NAI and Mark A. LeDoux*
Amended and Restated Exclusive License Agreement effective as of
September 1, 2004 by and among NAI and Dr. Reginald B. Cherry
Exclusive License Agreement effective as of September 1, 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 September 30, 2003, filed with the commission on
November 5, 2003
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
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
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
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
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
55
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
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
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
56
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
10.23
10.24
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
Second Amendment to Credit Agreement dated as of December 1, 2005 by
and between NAI and Wells Fargo Bank, National Association
10.25
Exclusive License Agreement by and between NAI and Richard Linchitz,
M.D. effective as of August 23, 2005
10.26
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
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
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
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
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
57
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
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Table of Contents
10.36
10.37
10.38
10.39
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
Consulting Agreement effective as of July 1, 2007, by and between Dr.
John A. Wise and NAI
Exhibit 10.44 of NAI’s Annual Report on Form 10-K for the fiscal year
ended June 30, 2007, filed with the commission on October 15, 2007.
Fifth Amendment to Credit Agreement dated as of November 1, 2007, and
entered into on December 18, 2007, by and between NAI and Wells Fargo
Bank, National Association
Exhibit 10.40 of NAI’s Quarterly Report on Form 10-Q for the quarterly
period ended December 31, 2007, filed with the commission on February
8, 2008
10.40
Revolving Line of Credit Note made by NAI for the benefit of Wells Fargo
Bank, National Association in the amount of $7,500,000
10.41
Separation Agreement and General Release of Claims effective as of
November 27, 2007, by and between NAI and John Reaves
Exhibit 10.41 of NAI’s Quarterly Report on Form 10-Q for the quarterly
period ended December 31, 2007, filed with the commission on February
8, 2008
Exhibit 10.42 of NAI’s Quarterly Report on Form 10-Q for the quarterly
period ended December 31, 2007, filed with the commission on February
8, 2008
10.42
10.43
10.44
10.45
Employment Agreement effective as of February 11, 2008, by and between
NAI and Kenneth Wolf*
Exhibit 10.1 of NAI’s Current Report on Form 8-K dated February 11,
2008, filed with the commission on February 14, 2008
Asset Purchase Agreement by and between RHL and Miles Kimball
Company dated August 4, 2008
Exhibit 10.1 of NAI’s Current Report on Form 8-K dated August 4, 2008,
filed with the commission on August 8, 2008
First Amendment to the Amended and Restated Employment Agreement
dated January 30, 2004 by and between NAI and Randell Weaver, entered
into effective as of June 28, 2008*
Filed herewith
First Amendment to Employment Agreement dated November 20, 2006 by
and between NAI and Alvin McCurdy, entered into effective as of June 28,
2008*
Filed herewith
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.
58
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
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: September 22, 2008
NATURAL ALTERNATIVES INTERNATIONAL, INC.
By:
/s/ Mark A. LeDoux
Mark A. LeDoux, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Natural
Alternatives International, Inc., in the capacities and on the dates indicated.
Signature
/s/ Mark A. LeDoux
(Mark A. LeDoux)
/s/ Ken Wolf
(Ken Wolf)
/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
59
September 22, 2008
September 22, 2008
September 22, 2008
September 22, 2008
September 22, 2008
September 22, 2008
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
FIRST AMENDMENT TO
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
Exhibit 10.44
This First Amendment (“Amendment”) to the Amended and Restated Employment Agreement by and between Natural Alternatives International, Inc., a
Delaware corporation (“Company”), and Randell Weaver (“Employee”), dated effective as of January 30, 2004 (“Agreement”), is made and entered into
effective as of June 28, 2008. Unless otherwise defined herein, capitalized terms shall have the meanings given them in the Agreement.
1. Pursuant to Section 4(a) of the Agreement, Employee’s base salary is hereby increased to Three Hundred Twenty Five Thousand dollars ($325,000)
effective as of June 28, 2008.
2. Except as set forth herein, all other terms and conditions of the Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of June 28, 2008.
EMPLOYEE
/s/ Randell Weaver
Randell Weaver
COMPANY
Natural Alternatives International, Inc.,
a Delaware corporation
/s/ Mark LeDoux
Mark LeDoux, Chief Executive Officer
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This First Amendment (“Amendment”) to the Employment Agreement by and between Natural Alternatives International, Inc., a Delaware corporation
(“Company”), and Alvin McCurdy (“Employee”), dated effective as of November 20, 2006 (“Agreement”), is made and entered into effective as of June 28,
2008. Unless otherwise defined herein, capitalized terms shall have the meanings given them in the Agreement.
1. Pursuant to Section 4(a) of the Agreement, Employee’s base salary is hereby increased to Two Hundred Twenty Five Thousand dollars ($225,000)
effective as of June 28, 2008.
2. Except as set forth herein, all other terms and conditions of the Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of June 28, 2008.
Exhibit 10.45
EMPLOYEE
/s/ Alvin McCurdy
Alvin McCurdy
COMPANY
Natural Alternatives International, Inc.,
a Delaware corporation
/s/ Randell Weaver
Randell Weaver, President
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
List of Subsidiaries of
Natural Alternatives International, Inc., a Delaware corporation
Exhibit 21
Natural Alternatives International Europe S.A.
Name of Subsidiary
Transformative Health Products, Inc.
Real Health Laboratories, Inc.
State or other Jurisdiction
of Incorporation or Organization
Switzerland
Delaware, USA
California, USA
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
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 our report dated September 9, 2008, with respect to the consolidated financial statements of Natural Alternatives International, Inc. included in its Annual
Report (Form 10-K) for the year ended June 30, 2008.
/s/ Ernst & Young LLP
San Diego, California
September 17, 2008
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c) 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
d) 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;
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: September 22, 2008
/s/ Mark A. LeDoux
Mark A. LeDoux, Chief Executive Officer
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to
Rule 13a-14(a)/15d-14(a)
I, Ken Wolf, 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c) 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
d) 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;
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: September 22, 2008
/s/ Ken Wolf
Ken Wolf, Chief Financial Officer
Source: NATURAL ALTERNATIVES, 10-K, September 22, 2008
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, 2008 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: September 22, 2008
Date: September 22, 2008
/s/ Mark A. LeDoux
Mark A. LeDoux, Chief Executive Officer
/s/ Ken Wolf
Ken Wolf, 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, September 22, 2008