UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010
000-15701
(Commission file number)
NATURAL ALTERNATIVES INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware | 84-1007839 | |
(State of incorporation) | (IRS Employer Identification No.) | |
1185 Linda Vista Drive San Marcos, California 92078 |
(760) 744-7340 | |
(Address of principal executive offices) | (Registrant's telephone number) |
Indicate by check mark whether Natural Alternatives International, Inc. (NAI) (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that NAI was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes ¨ No
Indicate by check mark whether NAI has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that NAI was required to submit and post such files).
¨ Yes ¨ No
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 x
Indicate by check mark whether NAI is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨ Yes x No
As of November 12, 2010, 7,109,736 shares of NAIs common stock were outstanding, net of 180,941 treasury shares.
Page | ||||||
1 | ||||||
PART I |
2 | |||||
Item 1. |
2 | |||||
2 | ||||||
Condensed Consolidated Statements of Operations and Comprehensive Income |
3 | |||||
4 | ||||||
5 | ||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
13 | ||||
Item 4. |
17 | |||||
PART II |
18 | |||||
Item 1. |
18 | |||||
Item 1A. |
18 | |||||
Item 2. |
18 | |||||
Item 3. |
18 | |||||
Item 5. |
18 | |||||
Item 6. |
19 | |||||
23 |
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:
| future financial and operating results, including projections of net sales, revenue, income or loss, net income or loss per share, profit margins, expenditures, liquidity, and other financial items; |
| our ability to develop relationships with new customers and maintain or improve existing customer relationships; |
| future levels of our revenue concentration risk: |
| development of new products and marketing strategies; |
| currency exchange rates and their effect on our results of operations; |
| our ability to increase our marketing and advertising efforts for our Pathway to Healing® product line, the timing of such efforts and their effect on future sales; |
| 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; |
| managements 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; |
| our ability to operate within the standards set by the Food and Drug Administrations Good Manufacturing Practices; |
| sources and availability of raw materials; |
| operations outside the United States (U.S.); |
| the adequacy of reserves and allowances; |
| overall industry and market performance; |
| competition and competitive advantages resulting from our quality commitment; |
| 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, 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).
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, Natural Alternatives International Europe S.A. (NAIE), and our other wholly owned subsidiaries.
1
PART I FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
NATURAL ALTERNATIVES INTERNATIONAL, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
September 30, 2010 |
June 30, 2010 |
|||||||
(Unaudited) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 8,333 | $ | 8,547 | ||||
Accounts receivable - less allowance for doubtful accounts of $29 at September 30, 2010 and $26 at June 30, 2010 |
5,042 | 4,632 | ||||||
Inventories, net |
8,948 | 7,310 | ||||||
Income tax receivable |
1,142 | 1,142 | ||||||
Prepaids and other current assets |
1,389 | 1,354 | ||||||
Total current assets |
24,854 | 22,985 | ||||||
Property and equipment, net |
12,411 | 12,968 | ||||||
Other noncurrent assets, net |
183 | 195 | ||||||
Total assets |
$ | 37,448 | $ | 36,148 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 2,949 | $ | 2,049 | ||||
Accrued liabilities |
842 | 850 | ||||||
Accrued compensation and employee benefits |
823 | 1,366 | ||||||
Income taxes payable |
310 | 289 | ||||||
Liabilities of discontinued operations |
78 | 78 | ||||||
Total current liabilities |
5,002 | 4,632 | ||||||
Deferred rent |
862 | 906 | ||||||
Total liabilities |
5,864 | 5,538 | ||||||
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; issued and outstanding 7,290,677 at September 30, 2010 and June 30, 2010 |
72 | 72 | ||||||
Additional paid-in capital |
19,261 | 19,199 | ||||||
Accumulated other comprehensive loss |
(415 | ) | (415 | ) | ||||
Retained earnings |
13,765 | 12,853 | ||||||
Treasury stock, at cost, 180,941 shares at September 30, 2010 and June 30, 2010 |
(1,099 | ) | (1,099 | ) | ||||
Total stockholders equity |
31,584 | 30,610 | ||||||
Total liabilities and stockholders equity |
$ | 37,448 | $ | 36,148 | ||||
See accompanying notes to condensed consolidated financial statements.
2
NATURAL ALTERNATIVES INTERNATIONAL, INC.
Condensed Consolidated Statements Of Operations And Comprehensive Income
(In thousands, except share and per share data)
(Unaudited)
Three Months Ended September 30, |
||||||||
2010 | 2009 | |||||||
Net sales |
$ | 13,355 | $ | 16,961 | ||||
Cost of goods sold |
10,680 | 13,806 | ||||||
Gross profit |
2,675 | 3,155 | ||||||
Selling, general & administrative expenses |
1,740 | 1,748 | ||||||
Operating income from continuing operations |
935 | 1,407 | ||||||
Other income (expense): |
||||||||
Interest income |
3 | 5 | ||||||
Interest expense |
(12 | ) | (42 | ) | ||||
Foreign exchange gain |
56 | 23 | ||||||
Other, net |
1 | 25 | ||||||
Total other income |
48 | 11 | ||||||
Income from continuing operations before income taxes |
983 | 1,418 | ||||||
Provision for income taxes |
71 | 172 | ||||||
Income from continuing operations |
912 | 1,246 | ||||||
Income from discontinued operations, net of tax |
| 95 | ||||||
Net income and comprehensive income |
$ | 912 | $ | 1,341 | ||||
Net income per common share: |
||||||||
Basic: |
||||||||
Continuing operations |
$ | 0.13 | $ | 0.18 | ||||
Discontinued operations |
0.00 | 0.01 | ||||||
Basic net income per share |
$ | 0.13 | $ | 0.19 | ||||
Diluted: |
||||||||
Continuing operations |
$ | 0.13 | $ | 0.18 | ||||
Discontinued operations |
0.00 | 0.01 | ||||||
Diluted net income per share |
$ | 0.13 | $ | 0.19 | ||||
Weighted average common shares outstanding: |
||||||||
Basic |
7,109,736 | 7,068,793 | ||||||
Diluted |
7,120,843 | 7,110,810 |
See accompanying notes to condensed consolidated financial statements.
3
NATURAL ALTERNATIVES INTERNATIONAL, INC.
Condensed Consolidated Statements Of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended September 30, |
||||||||
2010 | 2009 | |||||||
Cash flows from operating activities |
||||||||
Income before discontinued operations |
$ | 912 | $ | 1,246 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
831 | 801 | ||||||
Increase (reduction) of uncollectible accounts receivable |
3 | (5 | ) | |||||
Non-cash compensation |
62 | 43 | ||||||
Deferred income taxes |
| (225 | ) | |||||
Pension expense, net of contributions |
12 | (37 | ) | |||||
Loss on disposal of assets |
3 | 1 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(413 | ) | 419 | |||||
Inventories, net |
(1,638 | ) | (1,552 | ) | ||||
Other assets |
(35 | ) | (378 | ) | ||||
Accounts payable and accrued liabilities |
848 | 957 | ||||||
Income taxes payable |
21 | 362 | ||||||
Accrued compensation and employee benefits |
(543 | ) | (227 | ) | ||||
Net cash provided by operating activities from continuing operations |
63 | 1,405 | ||||||
Net cash used in operating activities from discontinued operations |
| (87 | ) | |||||
Net cash provided by operating activities |
63 | 1,318 | ||||||
Cash flows from investing activities |
||||||||
Capital expenditures |
(317 | ) | (1,027 | ) | ||||
Proceeds from the sale of property & equipment |
40 | | ||||||
Net cash used by investing activities from continuing operations |
(277 | ) | (1,027 | ) | ||||
Net cash provided by investing activities from discontinued operations, including proceeds from the sale of the legacy RHL business assets |
| 500 | ||||||
Net cash used by investing activities |
(277 | ) | (527 | ) | ||||
Cash flows from financing activities |
||||||||
Payments on long-term debt |
| (303 | ) | |||||
Net cash used by financing activities |
| (303 | ) | |||||
Net (decrease) increase in cash and cash equivalents |
(214 | ) | 488 | |||||
Cash and cash equivalents at beginning of period |
8,547 | 3,995 | ||||||
Cash and cash equivalents at end of period |
$ | 8,333 | $ | 4,483 | ||||
Supplemental disclosures of cash flow information |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 5 | $ | 51 | ||||
Taxes |
$ | 55 | $ | 62 | ||||
See accompanying notes to condensed consolidated financial statements.
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and applicable rules and regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In management's opinion, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows have been included and are of a normal, recurring nature. The results of operations for the three months ended September 30, 2010 are not necessarily indicative of the operating results for the full fiscal year or any future periods.
You should read the financial statements and these notes, which are an integral part of the financial statements, together with our audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2010 (2010 Annual Report). The accounting policies used to prepare the financial statements included in this report are the same as those described in the notes to the consolidated financial statements in our 2010 Annual Report unless otherwise noted below.
Net Income per Common Share
We compute net income per common share using the weighted average number of common shares outstanding during the period, and diluted net 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 (in thousands, except per share data):
Three Months Ended September 30, |
||||||||
2010 | 2009 | |||||||
Numerator |
||||||||
Net income |
$ | 912 | $ | 1,341 | ||||
Denominator |
||||||||
Basic weighted average common shares outstanding |
7,110 | 7,069 | ||||||
Dilutive effect of stock options |
11 | 42 | ||||||
Diluted weighted average common shares outstanding |
7,121 | 7,111 | ||||||
Basic net income per common share |
$ | 0.13 | $ | 0.19 | ||||
Diluted net income per common share |
$ | 0.13 | $ | 0.19 | ||||
Shares related to stock options totaling 475,000 for the three months ended September 30, 2010, and 560,276 for the three months ended September 30, 2009, were excluded from the calculation of diluted net income per common share, as the effect of their inclusion would have been anti-dilutive.
Revenue Recognition
To recognize revenue four basic criteria must be met: 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. Revenue from sales transactions where the buyer has the right to return the product is recognized at the time of sale only if (1) the sellers 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 buyers 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.
5
We currently have rights to certain U.S. patents, and each patents corresponding foreign patent applications. All of these patents and patent rights relate to the ingredient known as beta-alanine marketed and sold under the CarnoSyn® trade name. We have sold this ingredient to a customer for use in a limited market, and in March 2009 entered into an agreement to sublicense with CSI under which we agreed to grant a sublicense of certain of our patent rights to customers of CSI who purchase beta-alanine from CSI. We receive a fee from CSI that varies based on the amount of net sales of beta-alanine sold by CSI less CSIs costs and other agreed upon expenses. We recorded royalty income as a component of revenue in the amount of $316,000 in the first quarter of fiscal 2011 and $298,000 in the first quarter of fiscal 2010. These royalty income amounts are offset by royalty expense paid to the original patent holders. We recognized royalty expense as a component of cost of goods sold in the amount of $59,000 in the first quarter of fiscal 2011 and $51,000 in the first quarter of fiscal 2010.
Stock-Based Compensation
We have an omnibus incentive plan that was approved by our Board of Directors effective as of October 15, 2009 and approved by our stockholders at the Annual Meeting of Stockholders held on November 30, 2009. Under the plan, we may grant nonqualified and incentive stock options and other stock-based awards to employees, non-employee directors and consultants. Our prior equity incentive plan was terminated effective as of November 30, 2009. We also had an employee stock purchase plan that was terminated effective as of June 30, 2009.
We estimate the fair value of stock option awards at the date of grant and estimated 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 we assume 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. 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 stock option grants is derived from historical experience.
Our net income included stock based compensation expense of approximately $62,000 for the three months ended September 30, 2010 and approximately $43,000 for the three months ended September 30, 2009.
Fair Value of Financial Instruments
Our financial statements include the following financial instruments: cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses. We believe the carrying amounts of these assets and liabilities in the financial statements approximate the fair values of these financial instruments at September 30, 2010 and June 30, 2010. Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (i.e., the exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.
We use a three-level hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available under the circumstances.
The fair value hierarchy is broken down into three levels based on the source of inputs. In general, fair values determined by Level 1 inputs use quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. We classify cash, cash equivalents, and marketable securities balances as Level 1 assets. Fair values determined by Level 2 inputs are based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable or can be corroborated, either directly or indirectly by observable market data. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. These include certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. As of September 30, 2010 and June 30, 2010, we did not have any financial assets or liabilities classified as Level 2 or 3.
B. Discontinued Operations
In an effort to enhance stockholder value, improve working capital and enable us to focus on our core contract manufacturing business, during the fourth quarter of fiscal 2008 we undertook a careful review of our branded products portfolio and operations. As a result, we decided to narrow our branded products focus and portfolio and developed a plan to do so, which included a decision to sell the legacy business of Real Health Laboratories, Inc. (RHL).
6
On July 29, 2009, we entered into an Asset Purchase Agreement with PharmaCare US Inc. and PharmaCare Laboratories Pty Ltd. for the sale of substantially all of the remaining assets of RHL related to its wholesale and direct-to-consumer business. The sale closed on July 31, 2009 for a cash purchase price of $500,000. NAI provided a guarantee of RHLs indemnity obligations under the Asset Purchase Agreement, which potential liability is capped at the amount of the purchase price paid by the buyers to RHL. We recorded a loss of $6,000 as a result of this sale during the first quarter of fiscal 2010. Following the sale of substantially all of the assets of RHL, we changed the name of RHL to Disposition Company, Inc.
As part of the original Asset Purchase Agreement, we had the potential to receive up to an additional $500,000 from the buyers as a conditional earn-out if the RHL business acquired by the buyers met or exceeded certain budgeted profitability criteria during the period August 1, 2009 through July 31, 2010. Effective as of February 12, 2010, based on the loss of one or more customers, the results of operation of the RHL business since the closing date of the sale, the anticipated results of operation of the RHL business through July 31, 2010, and the corresponding anticipated reduction in and/or elimination of the conditional earn-out amount, and in an effort to avoid the time and expense associated with the procedures required in connection with the earn-out, including, without limitation, the time and expense associated with the preparation of the required reports and a review of the books and records of PharmaCare US and PharmaCare Australia, we amended the Asset Purchase Agreement to eliminate the potential earn-out compensation.
As the plan to dispose of the legacy RHL business met the criteria of accounting for the impairment or disposal of long-lived assets, the current and prior periods presented in this report have been classified to reflect the legacy RHL business as discontinued operations.
As a result of our decision to sell the legacy RHL business, we executed and substantially completed an operational consolidation program during the first quarter of fiscal 2009 that transitioned the remaining branded products business operations to our corporate offices. The program resulted in a charge to discontinued operations for severance and other business related exit costs during the year ended June 30, 2009. There was no balance or activity related to restructuring programs during the three months ended September 30, 2010. The following table presents the activity and the reserve balances related to these restructuring programs for the three months ended September 30, 2009 (in thousands):
Balance at June 30, 2009 |
Charges to Expense |
Cash Payments |
Balance at September 30, 2009 |
|||||||||||||
Employee termination costs |
$ | 19 | $ | 1 | $ | (14 | ) | $ | 6 | |||||||
Lease liabilities and related facility closure costs |
15 | | (6 | ) | 9 | |||||||||||
Total |
$ | 34 | $ | 1 | $ | (20 | ) | $ | 15 | |||||||
Accrued restructuring charges: |
||||||||||||||||
Current portion continuing operations |
$ | 6 | ||||||||||||||
Discontinued operations |
9 | |||||||||||||||
Total |
$ | 15 | ||||||||||||||
The following table summarizes the results of the legacy RHL business for the three months ended September 30 (in thousands):
2010 | 2009 | |||||||
Net sales |
$ | | $ | 323 | ||||
Cost of goods sold and operating expenses |
| 188 | ||||||
Restructuring expenses |
| 1 | ||||||
Loss on the sale of remaining Legacy RHL assets |
| 6 | ||||||
Other expense |
| 7 | ||||||
Income before income taxes |
| 121 | ||||||
Income tax provision |
| 26 | ||||||
Income from discontinued operations |
$ | | $ | 95 | ||||
7
Assets and liabilities of the legacy RHL business included in the Condensed Consolidated Balance Sheets are summarized as follows (in thousands):
September 30, 2010 |
June 30, 2010 |
|||||||
Total assets |
$ | | $ | | ||||
Liabilities |
||||||||
Accrued liabilities |
78 | 78 | ||||||
Total liabilities |
78 | 78 | ||||||
Net liabilities of discontinued operations |
$ | 78 | $ | 78 | ||||
C. Inventories
Inventories, net consisted of the following (dollars in thousands):
September 30, 2010 |
June 30, 2010 |
|||||||
Raw materials |
$ | 6,619 | $ | 5,541 | ||||
Work in progress |
1,665 | 1,000 | ||||||
Finished goods |
1,537 | 1,605 | ||||||
Reserves |
(873 | ) | (836 | ) | ||||
$ | 8,948 | $ | 7,310 | |||||
D. Property and Equipment
Property and equipment consisted of the following (in thousands):
Depreciable Life In Years |
September 30, 2010 |
June 30, 2010 |
||||||||||
Land |
N/A | $ | 393 | $ | 393 | |||||||
Building and building improvements |
7 39 | 2,755 | 2,755 | |||||||||
Machinery and equipment |
3 12 | 25,652 | 25,403 | |||||||||
Office equipment and furniture |
3 5 | 3,209 | 3,203 | |||||||||
Vehicles |
3 | 136 | 136 | |||||||||
Leasehold improvements |
1 15 | 10,073 | 10,067 | |||||||||
Total property and equipment |
42,218 | 41,957 | ||||||||||
Less: accumulated depreciation and amortization |
(29,807 | ) | (28,989 | ) | ||||||||
Property and equipment, net |
$ | 12,411 | $ | 12,968 | ||||||||
E. Debt
We have a $7.5 million working capital line of credit as of September 30, 2010. The working capital line of credit has a maturity date of November 1, 2011, is secured by our accounts receivable and other rights to payment, general intangibles, inventory and equipment, has a fluctuating or fixed interest rate as elected by NAI from time to time and borrowings are subject to eligibility requirements for current accounts receivable and inventory balances. As of September 30, 2010 and June 30, 2010, we did not have any amounts outstanding on our working capital line of credit.
On September 30, 2010, we were in compliance with all of the financial and other covenants required under our credit facility.
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 1.3 million, or approximately $1.3 million, which was the initial maximum aggregate amount that could be outstanding at any one time under the credit facility. This maximum amount is reduced annually by CHF 160,000, or approximately $155,000. 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 $483,000. As of September 30, 2010, there was no outstanding balance under this 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 NAIEs 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 $966), 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.
8
We did not use our working capital line of credit nor did we have any long-term debt outstanding during the three months ended September 30, 2010. The composite interest rate on all of our debt outstanding during the three months ended September 30, 2009 was 16.31%.
F. Defined Benefit Pension Plan
We sponsor a defined benefit pension plan that provides retirement benefits to employees based generally on years of service and compensation during the last five years before retirement. Effective June 20, 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.
The components included in the net periodic benefit for the periods ended September 30 were as follows (in thousands):
Three Months Ended September 30, |
||||||||
2010 | 2009 | |||||||
Interest cost |
$ | 22 | $ | 21 | ||||
Expected return on plan assets |
(10 | ) | (13 | ) | ||||
Net periodic benefit |
$ | 12 | $ | 8 | ||||
G. Economic Dependency
We had substantial net sales from continuing operations to certain customers during the periods 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, or in their ability to make payments when due, 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 periods total net sales were as follows (dollars in thousands):
Three Months Ended September 30, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Net Sales by Customer |
% of Total Net Sales |
Net Sales by Customer |
% of Total Net Sales |
|||||||||||||
Customer 1 |
$ | 2,542 | 19 | % | $ | 5,763 | 34 | % | ||||||||
Customer 2 |
6,933 | 52 | 8,457 | 50 | ||||||||||||
$ | 9,475 | 71 | % | $ | 14,220 | 84 | % | |||||||||
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. Raw material purchases from any one supplier representing 10% or more of the respective periods total raw material purchases were as follows (dollars in thousands):
Three Months Ended September 30, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Raw Material Purchases by Supplier |
% of Total Raw Material Purchases |
Raw Material Purchases by Supplier |
% of Total Raw Material Purchases |
|||||||||||||
Supplier 1 |
$ | 544 | 10 | % | $ | 1,199 | 16 | % | ||||||||
Supplier 2 |
(a | ) | (a | ) | 944 | 13 | ||||||||||
$ | 544 | 10 | % | $ | 2,143 | 29 | % | |||||||||
(a) | Purchases were less than 10% of the respective periods total raw material purchases. |
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H. Segment Information
Our business consists of two segments, 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 includes royalty income from our CSI sublicense agreement associated with the sale of beta-alanine under our CarnosSyn® trade name, and branded products, which markets and distributes branded nutritional supplements. Following the completion of the sale of substantially all of the assets of RHL, our branded products segment consists primarily of the products sold under our Pathway to Healing® product line.
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 Note A above and in the consolidated financial statements included in our 2010 Annual Report.
Our operating results by business segment were as follows (in thousands):
Three Months Ended September 30, |
||||||||
2010 | 2009 | |||||||
Net Sales |
||||||||
Private label contract manufacturing |
$ | 12,863 | $ | 16,373 | ||||
Branded products |
492 | 588 | ||||||
$ | 13,355 | $ | 16,961 | |||||
Three Months Ended September 30, |
||||||||
2010 | 2009 | |||||||
Income from Continuing Operations |
||||||||
Private label contract manufacturing |
$ | 2,089 | $ | 2,516 | ||||
Branded products |
97 | 107 | ||||||
Income from operations of reportable segments |
2,186 | 2,623 | ||||||
Corporate expenses not allocated to segments |
(1,251 | ) | (1,216 | ) | ||||
$ | 935 | $ | 1,407 | |||||
September 30, 2010 |
June 30, 2010 |
|||||||
Total Assets |
||||||||
Private label contract manufacturing |
$ | 37,173 | $ | 35,867 | ||||
Branded products |
275 | 281 | ||||||
$ | 37,448 | $ | 36,148 | |||||
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 sold only in the United States.
Net sales by geographic region, based on the customers location, were as follows (in thousands):
Three Months Ended September 30, |
||||||||
2010 | 2009 | |||||||
United States |
$ | 8,488 | $ | 11,120 | ||||
Markets outside the United States |
4,867 | 5,841 | ||||||
Total net sales |
$ | 13,355 | $ | 16,961 | ||||
Products manufactured by NAIE accounted for 64% of net sales in markets outside the United States for the three months ended September 30, 2010, and 53% for the three months ended September 30, 2009. No products manufactured by NAIE were sold in the United States during the three months ended September 30, 2010 and 2009.
10
Assets and capital expenditures by geographic region, based on the location of the company or subsidiary at which they were located or made, were as follows (in thousands):
Capital Expenditures | ||||||||||||||||||||||||
Long-Lived Assets | Total Assets | Three Months Ended | ||||||||||||||||||||||
September 30, 2010 |
June 30, 2010 |
September 30, 2010 |
June 30, 2010 |
September 30, 2010 |
September 30, 2009 |
|||||||||||||||||||
United States |
$ | 10,587 | $ | 10,985 | $ | 27,975 | $ | 27,262 | $ | 353 | $ | 984 | ||||||||||||
Europe |
2,007 | 2,178 | 9,473 | 8,886 | (36 | ) (1) | 43 | |||||||||||||||||
$ | 12,594 | $ | 13,163 | $ | 37,448 | $ | 36,148 | $ | 317 | $ | 1,027 | |||||||||||||
(1) | The European capital expenditure amount for the three months ended September 30, 2010 includes $20,000 of gross capital expenditures offset by a $56,000 Cantonal financial investment support grant. |
I. 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 carry forwards. 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.
During the three months ended September 30, 2010 we recorded U.S.-based federal tax expense of $235,000 that was fully offset by prior year net operating loss carry forwards through a release of a portion of our deferred tax asset valuation allowance during the quarter. We also recorded U.S.-based state tax expense from continuing operations of $40,000 during the three months ended September 30, 2010 that was fully offset by prior year net operating loss carry forwards through a release of a portion of our deferred tax asset valuation allowance during the quarter. In addition, our income tax expense for the three months ended September 30, 2010 included $70,000 of foreign tax expense based on income from continuing operations from NAIEs operations.
During the three months ended September 30, 2009 we recorded U.S.-based federal tax expense of $238,000 that was fully offset by a release of a portion of our deferred tax asset valuation allowance during the quarter. In addition, during the three months ended September 30, 2009 we recorded U.S.-based state tax expense from continuing operations of $104,000 as a result of our inability to carryforward our state net operating losses due to the suspension of carryforwards by the state of California during the current tax year and we recorded $68,000 of foreign tax expense based on income from continuing operations from NAIEs operations.
We have a valuation allowance that fully offsets our net deferred income tax asset because management was unable to conclude, in light of the cumulative loss we realized related to our U.S.-based operations for the three year period ended June 30, 2010, that realization of the net deferred income tax asset was more likely than not. At September 30, 2010, we had a $3.2 million gross deferred tax asset offset by a deferred tax liability of $163,000 and a valuation allowance of $3.1 million resulting in a net deferred tax asset of $0 as of September 30, 2010. This valuation allowance did not have any affect on the tax expense and related liability recorded for operating income recognized by our foreign subsidiary during the three months ended September 30, 2010.
We account for uncertain tax positions using the more-likely-than-not recognition threshold. Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of September 30, 2010 and June 30, 2010, we had not recorded any tax liabilities for uncertain tax positions.
We are subject to taxation in the U.S., Switzerland and various state jurisdictions. Our tax years for the fiscal year ended June 30, 2006 and forward are subject to examination by the United States and state tax authorities and our tax years for the fiscal year ended June 30, 2007 and forward are subject to examination by the Switzerland tax authorities.
We do not record U.S. income tax expense for NAIEs 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 on the actual deployment of such earnings in NAIEs 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 managements 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.
11
J. 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 operations. However, a settlement payment or unfavorable outcome could adversely impact our results of operations. 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 November 12, 2010, 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.
On July 31, 2009, RHL sold substantially all of its remaining assets related to its wholesale and direct-to-consumer business to PharmaCare US Inc. and PharmaCare Laboratories Pty Ltd. for a cash purchase price of $500,000. NAI provided a guarantee of RHLs indemnity obligations under the asset purchase agreement, which potential liability is capped at the amount of the purchase price paid by the buyers to RHL. The guaranty continues for a minimum period of three years from the date of the Asset Purchase Agreement.
K. Subsequent Events
On October 13, 2010, we purchased nine forward contracts designated and effective as cash flow hedges to protect against the foreign currency exchange risk inherent in a portion of our forecasted sales transactions denominated in Euros. The nine contracts expire monthly beginning November 2010 and ending July 2011. The forward contracts had a notional amount of 5.4 million Euros and a weighted average forward rate of $1.39.
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis is intended to help you understand our financial condition and results of operations for the three months ended September 30, 2010. You should read the following discussion and analysis together with our unaudited condensed consolidated financial statements and the notes to the condensed consolidated financial statements included under Item 1 in this report, as well as the risk factors and other information included in our 2010 Annual Report and other reports and documents we file with the SEC. 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.
Executive Overview
The following overview does not address all of the matters covered in the other sections of this Item 2 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 2 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, as well as general economic conditions.
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 by developing relationships with additional, quality-oriented, private label contract manufacturing customers, developing and growing our own line of branded products and commercializing our patent estate through contract manufacturing, royalty and license agreements.
During the first three months of fiscal 2011, our net sales from continuing operations were 21.3% lower than in the first three months of fiscal 2010. Private label contract manufacturing sales declined 21.4% due primarily to lower volumes of existing products in existing markets sold to two of our largests customers. This decline was partially offset by new product sales to existing customers and sales to three new customers. Our revenue concentration risk for our two largest customers decreased to 71% as a percentage of our total sales from continuing operations for the first three months of fiscal 2011 compared to 84% in the first three months of fiscal 2010. We expect our contract manufacturing revenue concentration percentage for our two largest customers to remain relatively consistent for the remainder of fiscal 2011.
Net sales from our branded products declined 16.3% in the first three months of fiscal 2011 as compared to the first three months of fiscal 2010 due to the continued softening of our Pathway to Healing® product line. During the first quarter of fiscal 2011 we began the process of re-launching a portion of our Pathway to Healing® product line and intend to further increase our Pathway to Healing® marketing and advertising efforts during the remainder of fiscal 2011 in an effort to expand our future sales opportunities.
During the remainder of fiscal 2011, 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; |
| Commercializing our patent estate through contract manufacturing, royalties and license agreements and protecting our proprietary rights; and |
| Improving operational efficiencies and managing costs and business risks to improve profitability. |
Looking forward, as a result of continued uncertain near-term economic conditions and anticipated reduced sales volumes combined with lower pricing programs from our largest customers we expect net sales and net operating income from continuing operations during the second quarter of fiscal 2011 to be lower than the comparable prior year period. Our results could be further negatively affected if the current trend of favorable foreign currency exchange activity associated with the strengthening of the Euro against the U.S. dollar does not continue.
Critical Accounting Policies and Estimates
The preparation of our financial statements 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.
13
Our critical accounting policies are discussed under Item 7 of our 2010 Annual Report. There have been no significant changes to these policies during the three months ended September 30, 2010.
Results of Operations
The results of our operations for the three months ended September 30 were as follows (in thousands):
Three Months Ended | ||||||||||||||||||||||||
September 30, 2010 |
September 30, 2009 |
Increase (Decrease) | ||||||||||||||||||||||
Private label contract manufacturing |
$ | 12,863 | 96.3 | % | $ | 16,373 | 96.5 | % | $ | (3,510 | ) | (21.4 | )% | |||||||||||
Branded products |
492 | 3.7 | % | 588 | 3.5 | % | (96 | ) | (16.3 | )% | ||||||||||||||
Total net sales |
13,355 | 100.0 | % | 16,961 | 100.0 | % | (3,606 | ) | (21.3 | )% | ||||||||||||||
Cost of goods sold |
10,680 | 80.0 | % | 13,806 | 81.4 | % | (3,126 | ) | (22.6 | )% | ||||||||||||||
Gross profit |
2,675 | 20.0 | % | 3,155 | 18.6 | % | (480 | ) | (15.2 | )% | ||||||||||||||
Selling, general & administrative expenses |
1,740 | 13.0 | % | 1,748 | 10.3 | % | (8 | ) | (0.5 | )% | ||||||||||||||
Operating income from continuing operations |
935 | 7.0 | % | 1,407 | 8.3 | % | (472 | ) | (33.5 | )% | ||||||||||||||
Other income, net |
(48 | ) | (0.4 | )% | (11 | ) | (0.1 | )% | 37 | 336.4 | % | |||||||||||||
Income from continuing operations before income taxes |
983 | 7.4 | % | 1,418 | 8.4 | % | (435 | ) | (30.7 | )% | ||||||||||||||
Income tax expense |
71 | 0.5 | % | 172 | 1.0 | % | (102 | ) | (59.3 | )% | ||||||||||||||
Income from continuing operations |
912 | 6.8 | % | 1,246 | 7.3 | % | (333 | ) | (26.7 | )% | ||||||||||||||
Income from discontinued operations, net of tax |
| 0.0 | % | 95 | 0.6 | % | (95 | ) | (100.0 | )% | ||||||||||||||
Net income |
$ | 912 | 6.8 | % | $ | 1,341 | 7.9 | % | $ | (428 | ) | (31.9 | )% | |||||||||||
The percentage decrease in private label contract manufacturing net sales was primarily attributed to the following:
Mannatech, Incorporated (1) |
(19 | )% | ||
NSA International, Inc. (2) |
(9 | ) | ||
Other customers (3) |
7 | |||
Total |
(21 | )% | ||
1 | Net sales to Mannatech, Incorporated decreased primarily as a result of lower volumes of established products in existing markets. |
2 | The decrease in net sales to NSA International, Inc. included a decrease in international sales of 7.8% and a decline in domestic sales of 23.7%. These sales declines were due to lower consumer demand, lower average sales prices, and NSAs inventory management program. |
3 | The increase in net sales to other customers was primarily due to sales of new products for new and existing customers. |
Net sales from our continuing branded products segment decreased 16% during the first quarter of fiscal 2011 due primarily to the continuing softening of the Pathway to Healing® product line following the cessation of Dr. Cherrys weekly television program in April 2007, which had served as the primary acquisition vehicle in marketing the Pathway to Healing® product line.
Gross profit margin from continuing operations increased 1.4 percentage points primarily due to the following:
Contract manufacturing: |
||||
Shift in sales mix |
5.0 | % | ||
Incremental overhead expenses |
(1.7 | ) | ||
Incremental direct and indirect labor |
(2.2 | ) | ||
Branded products operations |
0.3 | |||
Total |
1.4 | % | ||
14
Private label contract manufacturing gross profit margin increased 1.0 percentage points to 19.0% in the first quarter of fiscal 2011 compared to 18.0% in the first quarter of fiscal 2010. The increase in gross profit as a percentage of sales was primarily due to a decrease in material costs as a percentage of sales.
Branded products gross profit margin increased 11.8 percentage points to 46.3% in the first quarter of fiscal 2011 from 34.5% in the first quarter of fiscal 2010 due primarily to decreased material costs and sales discounts and returns.
Other income, net increased $37,000 during the first quarter of fiscal 2011 as compared to the same period in the prior fiscal year primarily due to favorable foreign currency exchange activity associated with the strengthening of the Euro.
Our income tax expense from continuing operations decreased $102,000, or 59.3%, during the first quarter of fiscal 2011 as compared to the same period in the prior fiscal year primarily due to the use of federal and state domestic net operating loss carry forwards during the first quarter of fiscal 2011 as compared to state domestic taxable income in the first quarter of fiscal 2010. As a result, the tax expense from continuing operations for the first quarter of fiscal 2011 only included expense from our foreign subsidiary at a statutory tax rate of 20%. No net federal or state tax expense was recognized in the first fiscal quarter of 2011 for our U.S.-based income from operations as it was offset by a release of our net deferred tax asset valuation allowance.
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 $63,000 for the three months ended September 30, 2010 compared to net cash provided by operating activities of $1.3 million in the comparable quarter last year.
At September 30, 2010, changes in accounts receivable, consisting primarily of amounts due from our private label contract manufacturing customers, used $413,000 in cash during the three months ended September 30, 2010 compared to $419,000 of cash provided in the comparable prior year quarter. The decrease in cash provided by accounts receivable during the quarter ended September 30, 2010 was the result of lower sales as compared to the comparable prior year quarter. Days sales outstanding from continuing operations was 33 days during the three months ended September 30, 2010 compared to 30 days in the comparable quarter last year.
During the three months ended September 30, 2010, NAIEs operations used $369,000 of operating cash flow primarily due to timing of inventory receipts and sales. As of September 30, 2010, NAIEs undistributed retained earnings were considered indefinitely reinvested.
Cash used in investing activities in the three months ended September 30, 2010 was $277,000 compared to $527,000 in the comparable quarter last year. Capital expenditures were $317,000 during the three months ended September 30, 2010 compared to $1.0 million in the comparable quarter last year. Capital expenditures for both years were primarily for manufacturing equipment in our Vista, California and Manno, Switzerland facilities. Additionally, during the three months ended September 30, 2009, we received $500,000 in proceeds related to the sale of the remaining assets of the legacy RHL business.
We did not have any consolidated debt as of either September 30, 2010 or June 30, 2010.
We have a $7.5 million working capital line of credit as of September 30, 2010. The working capital line of credit has a maturity date of November 1, 2011, is secured by our accounts receivable and other rights to payment, general intangibles, inventory and equipment, has a fluctuating or fixed interest rate as elected by NAI from time to time and borrowings are subject to eligibility requirements for current accounts receivable and inventory balances. As of September 30, 2010 and June 30, 2010, we did not have any amounts outstanding on our working capital line of credit.
On September 30, 2010, we were in compliance with all of the financial and other covenants required under our credit facility.
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 1.3 million, or approximately $1.3 million, which was the initial maximum aggregate amount that could be outstanding at any one time under the credit facility. This maximum amount is reduced annually by CHF 160,000, or approximately $155,000. 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 $483,000. As of September 30, 2010, there was no outstanding balance under this 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 NAIEs 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 $966), 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.
15
As of September 30, 2010, we had $8.3 million in cash and cash equivalents and $4.2 million available under our working 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 and capital expenditures through at least the next 12 months.
Off-Balance Sheet Arrangements
As of September 30, 2010, we did not have any 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.
Recent Accounting Pronouncements
Recent accounting pronouncements are discussed in the notes to our consolidated financial statements included under Item 8 of our 2010 Annual Report. Other than the pronouncements discussed in our 2010 Annual Report, we are not aware of any other pronouncements that materially affect our financial position or results of operations.
16
ITEM 4. | 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 September 30, 2010. Based on such evaluation, 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 September 30, 2010.
There were no changes to our internal control over financial reporting during the quarterly period ended September 30, 2010 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
17
ITEM 1. | 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 operations. However, a settlement payment or unfavorable outcome could adversely impact our results of operations. 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 November 12, 2010, 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 1A. | RISK FACTORS |
You should carefully consider the risks described under Item 1A of our 2010 Annual Report, as well as the other information in our 2010 Annual Report, this report and other reports and documents we file with the SEC, when evaluating our business and future prospects. If any of the identified 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.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
ITEM 5. | OTHER INFORMATION |
None.
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ITEM 6. | EXHIBITS |
The following exhibit index shows those exhibits filed with this report and those incorporated by reference:
EXHIBIT INDEX
Exhibit |
Description |
Incorporated By Reference To | ||
3(i) | Amended and Restated Certificate of Incorporation of Natural Alternatives International, Inc. filed with the Delaware Secretary of State on January 14, 2005 | Exhibit 3(i) of NAIs Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2004, filed with the commission on February 14, 2005 | ||
3(ii) | Amended and Restated By-laws of Natural Alternatives International, Inc. dated as of February 9, 2009 | Exhibit 3(ii) of NAIs Current Report on Form 8-K dated February 9, 2009, filed with the commission on February 13, 2009 | ||
4(i) | Form of NAIs Common Stock Certificate | Exhibit 4(i) of NAIs Annual Report on Form 10-K for the fiscal year ended June 30, 2005, filed with the commission on September 8, 2005 | ||
10.1 | 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 NAIs Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2004, filed with the commission on February 14, 2005 | ||
10.2 | Amended and Restated Exclusive License Agreement effective as of September 1, 2004 by and among NAI and Dr. Reginald B. Cherry | Exhibit 10.11 of NAIs Annual Report on Form 10-K for the fiscal year ended June 30, 2004, filed with the commission on September 14, 2004 | ||
10.3 | Exclusive License Agreement effective as of September 1, 2004 by and among NAI and Reginald B. Cherry Ministries, Inc. | Exhibit 10.12 of NAIs Annual Report on Form 10-K for the fiscal year ended June 30, 2004, filed with the commission on September 14, 2004 | ||
10.4 | 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 NAIs Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2004, filed with the commission on February 14, 2005 | ||
10.5 | 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 NAIs Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003, filed with the commission on November 5, 2003 | ||
10.6 | Credit Agreement dated as of May 1, 2004 by and between NAI and Wells Fargo Bank, National Association | Exhibit 10.11 of NAIs Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004, filed with the commission on May 17, 2004 | ||
10.7 | 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 NAIs Current Report on Form 8-K dated February 1, 2005, filed with the commission on February 7, 2005 | ||
10.8 | Form of Indemnification Agreement entered into between NAI and each of its directors | Exhibit 10.15 of NAIs Annual Report on Form 10-K for the fiscal year ended June 30, 2004, filed with the commission on September 14, 2004 | ||
10.9 | Lease of Facilities in Manno, Switzerland between NAIE and Mr. Silvio Tarchini dated May 9, 2005 (English translation) | Exhibit 10.19 of NAIs Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005, filed with the commission on May 13, 2005 | ||
10.10 | Lease of Facilities in Manno, Switzerland between NAIE and Mr. Silvio Tarchini dated July 25, 2003 (English translation) | Exhibit 10.19 of NAIs Annual Report on Form 10-K for the fiscal year ended June 30, 2005, filed with the commission on September 8, 2005 | ||
10.11 | Lease of Facilities in Manno, Switzerland between NAIE and Mr. Silvio Tarchini dated June 8, 2004 (English translation) | Exhibit 10.20 of NAIs Annual Report on Form 10-K for the fiscal year ended June 30, 2005, filed with the commission on September 8, 2005 | ||
10.12 | Lease of Facilities in Manno, Switzerland between NAIE and Mr. Silvio Tarchini dated February 7, 2005 (English translation) | Exhibit 10.21 of NAIs Annual Report on Form 10-K for the fiscal year ended June 30, 2005, filed with the commission on September 8, 2005 |
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Exhibit |
Description |
Incorporated By Reference To | ||
10.13 | 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 NAIs Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005, filed with the commission on November 4, 2005 | ||
10.14 | Second Amendment to Credit Agreement dated as of December 1, 2005 by and between NAI and Wells Fargo Bank, National Association | Exhibit 10.30 of NAIs Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2005, filed with the commission on February 14, 2006 | ||
10.15 | 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 NAIs Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2005, filed with the commission on February 14, 2006 | ||
10.16 | 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 NAIs Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2005, filed with the commission on February 14, 2006 | ||
10.17 | 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 NAIs Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2006, filed with the commission on May 9, 2006 | ||
10.18 | 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 NAIs Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2006, filed with the commission on November 1, 2006 | ||
10.19 | 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 NAIs Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2006, filed with the commission on January 30, 2007 | ||
10.20 | First Amendment to Loan Agreement between NAIE and Credit Suisse dated as of February 19, 2007 | Exhibit 10.41 of NAIs Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2007, filed with the commission on May 14, 2007 | ||
10.21 | 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 NAIs Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2007, filed with the commission on February 8, 2008 |
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Exhibit |
Description |
Incorporated By Reference To | ||
10.22 | Sixth Amendment to Credit Agreement dated as of November 1, 2008, by and between NAI and Wells Fargo Bank, National Association | Exhibit 10.41 of NAIs Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2009, filed with the commission on May 13, 2009 | ||
10.23 | Agreement to Sublicense by and between NAI and Compound Solutions, Inc. dated as of March 3, 2009 | Exhibit 10.44 of NAIs Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2009, filed with the commission on May 13, 2009 | ||
10.24 | Seventh Amendment to Credit Agreement dated as of June 1, 2009, by and between NAI and Wells Fargo Bank, National Association | Exhibit 10.38 of NAIs Annual Report on Form 10-K for the fiscal year ended June 30, 2009, filed with the commission on September 28, 2009. | ||
10.25 | 2009 Omnibus Incentive Plan* | Exhibit D of NAIs definitive Proxy Statement filed with the commission on October 16, 2009 | ||
10.26 | Manufacturing Agreement by and between NSA, Inc. and NAI dated April 1, 2005 | Exhibit 10.43 of NAIs Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2009, filed with the commission on February 16, 2010 | ||
10.27 | Manufacturing Agreement by and between Mannatech, Inc. and NAI dated April 22, 1998 | Exhibit 10.44 of NAIs Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2009, filed with the commission on February 16, 2010 | ||
10.28 | First Amendment to Manufacturing Agreement by and between Mannatech, Incorporated and NAI dated May 23, 2003 | Exhibit 10.45 of NAIs Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2009, filed with the commission on February 16, 2010 | ||
10.29 | Second Amendment to Manufacturing Agreement by and between Mannatech, Incorporated and NAI dated July 1, 2003 | Exhibit 10.46 of NAIs Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2009, filed with the commission on February 16, 2010 | ||
10.30 | Third Amendment to Manufacturing Agreement by and between Mannatech, Incorporated and NAI dated July 1, 2004 | Exhibit 10.47 of NAIs Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2009, filed with the commission on February 16, 2010 | ||
10.31 | Fourth Amendment to Manufacturing Agreement by and among Mannatech, Incorporated, Mannatech Swiss International GmbH and NAI dated January 1, 2008 | Exhibit 10.48 of NAIs Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2009, filed with the commission on February 16, 2010 | ||
10.32 | Manufacturing Sales Agreement by and between Mannatech, Incorporated and NAI dated November 19, 2004 | Exhibit 10.49 of NAIs Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2009, filed with the commission on February 16, 2010 | ||
10.33 | Amendment to Manufacturing Sales Agreement by and among Mannatech, Incorporated, Mannatech Swiss International GmbH and NAI dated January 1, 2008 | Exhibit 10.50 of NAIs Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2009, filed with the commission on February 16, 2010 | ||
10.34 | Exclusive Manufacturing Agreement by and between NSA, Inc., NAI and NAIE dated as of April 1, 2005 | Exhibit 10.51 of NAIs Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2009, filed with the commission on February 16, 2010 | ||
10.35 | Eighth Amendment to Credit Agreement dated as of March 16, 2010, by and between NAI and Wells Fargo Bank, National Association | Exhibit 10.51 of NAIs Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2010, filed with the commission on May 13, 2010 |
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Exhibit |
Description |
Incorporated By Reference To | ||
10.36 | Revolving Line of Credit Note made by NAI for the benefit of Wells Fargo Bank, National Association in the amount of $7,500,000 (with Addendum) | Exhibit 10.52 of NAIs Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2010, filed with the commission on May 13, 2010 | ||
10.37 | Amended and Restated Employment Agreement dated as of August 31, 2010, by and between NAI and Mark A. LeDoux* | Exhibit 10.41 of NAIs Annual Report on Form 10-K for the fiscal year ended June 30, 2010, filed with the commission on September 17, 2010 | ||
10.38 | Amended and Restated Employment Agreement dated as of August 31, 2010, by and between NAI and Kenneth E. Wolf | Exhibit 10.42 of NAIs Annual Report on Form 10-K for the fiscal year ended June 30, 2010, filed with the commission on September 17, 2010 | ||
10.39 | First Amendment to the Agreement to Sublicense by and between NAI and Compound Solutions, Inc. dated as of October 18, 2010 | Filed herewith | ||
10.40 | License and Fee Agreement effective November 10, 2010 by and among Roger Harris, Mark Dunnett, Kenny Johansson and NAI | 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. |
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Pursuant to the requirements 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: November 12, 2010
NATURAL ALTERNATIVES INTERNATIONAL, INC. | ||
By: | /s/ Kenneth E. Wolf | |
Kenneth E. Wolf, Chief Financial Officer |
Mr. Wolf is the principal financial officer of Natural Alternatives International, Inc. and has been duly authorized to sign on its behalf.
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