Form 10-Q
Table of Contents

 

 

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 NAI’s common stock were outstanding, net of 180,941 treasury shares.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page  

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

     1   

PART I

  

FINANCIAL INFORMATION

     2   

Item 1.

  

Financial Statements

     2   
  

Condensed Consolidated Balance Sheets

     2   
  

Condensed Consolidated Statements of Operations and Comprehensive Income

     3   
  

Condensed Consolidated Statements of Cash Flows

     4   
  

Notes to Condensed Consolidated Financial Statements

     5   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     13   

Item 4.

  

Controls and Procedures

     17   

PART II

  

OTHER INFORMATION

     18   

Item 1.

  

Legal Proceedings

     18   

Item 1A.

  

Risk Factors

     18   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     18   

Item 3.

  

Defaults Upon Senior Securities

     18   

Item 5.

  

Other Information

     18   

Item 6.

  

Exhibits

     19   

SIGNATURES

     23   


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:

 

   

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;

 

   

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;

 

   

our ability to operate within the standards set by the Food and Drug Administration’s 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.

 

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Table of Contents

 

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.

 

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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.

 

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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.

 

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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 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.

 

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We currently have rights to certain U.S. patents, and each patent’s 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 CSI’s 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).

 

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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 RHL’s 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   
                 

 

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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 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 $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.

 

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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 period’s 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 period’s 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 period’s 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.

 

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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 NAIE’s 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 NAIE’s 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 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 on 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.

 

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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 RHL’s 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. MANAGEMENT’S 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.

 

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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 NSA’s 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. Cherry’s 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
        

 

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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, NAIE’s operations used $369,000 of operating cash flow primarily due to timing of inventory receipts and sales. As of September 30, 2010, NAIE’s 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 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 $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.

 

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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.

 

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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.

 

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PART II – OTHER INFORMATION

 

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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Table of Contents

 

ITEM 6. EXHIBITS

The following exhibit index shows those exhibits filed with this report and those incorporated by reference:

EXHIBIT INDEX

 

Exhibit
Number

  

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 NAI’s 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 NAI’s Current Report on Form 8-K dated February 9, 2009, filed with the commission on February 13, 2009
  4(i)    Form of NAI’s Common Stock Certificate    Exhibit 4(i) of NAI’s Annual Report on Form 10-K for the fiscal year ended June 30, 2005, filed with the commission on September 8, 2005
10.1    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
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 NAI’s 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 NAI’s 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 NAI’s 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 NAI’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003, filed with the commission on November 5, 2003
10.6    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
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 NAI’s 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 NAI’s 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 NAI’s 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 NAI’s Annual Report on Form 10-K for the fiscal year ended June 30, 2005, filed with the commission on September 8, 2005
10.11    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
10.12    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

 

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Table of Contents

 

Exhibit
Number

  

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 NAI’s 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 NAI’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2005, filed with the commission on February 14, 2006
10.15    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 NAI’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2005, filed with the commission on February 14, 2006
10.16    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 NAI’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2005, filed with the commission on February 14, 2006
10.17    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 NAI’s 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 NAI’s 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 NAI’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2006, filed with the commission on January 30, 2007
10.20    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
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 NAI’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2007, filed with the commission on February 8, 2008

 

20


Table of Contents

Exhibit
Number

  

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 NAI’s 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 NAI’s 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 NAI’s 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 NAI’s 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 NAI’s 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 NAI’s 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 NAI’s 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 NAI’s 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 NAI’s 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 NAI’s 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 NAI’s 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 NAI’s 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 NAI’s 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 NAI’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2010, filed with the commission on May 13, 2010

 

21


Table of Contents

Exhibit
Number

  

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 NAI’s 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 NAI’s 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 NAI’s 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.

 

22


Table of Contents

 

SIGNATURES

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.

 

23

First Amendment to Agreement to Sublicense

Exhibit 10.39

FIRST AMENDMENT TO

AGREEMENT TO SUBLICENSE

This First Amendment (“Amendment”) to the Agreement to Sublicense by and between Natural Alternatives International, Inc., a Delaware corporation (“NAI”), and Compound Solutions, Inc., a California corporation (“CSI”), dated effective as of March 3, 2009 (“Agreement”), is made and entered into effective as of October 18, 2010 (“Effective Date”). Unless otherwise defined herein, capitalized terms shall have the meanings given them in the Agreement.

1.        Section 1.3(e) of the Agreement is revised in its entirety to read as follows:

“US 7,504,376 filed November 18, 2003, entitled “Methods and Compositions for Increasing the Anaerobic Working Capacity in Tissues.”

2.        Section 1.3 of the Agreement is further revised to add new subsection (f) as follows:

“Allowed US application serial no. 12/231,240 filed August 29, 2008, entitled “Methods and Compositions for Increasing the Anaerobic Working Capacity in Tissues.”

3.        The Sublicense Agreement attached to the Agreement as Exhibit B is hereby replaced in its entirety with the Sublicense Agreement attached hereto.

4.        Except as set forth herein, all other terms and conditions of the Agreement shall remain in full force and effect.

5.        This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, and such counterparts together shall constitute one instrument. Delivery by facsimile or other electronic means of an executed counterpart hereof shall have the same force and effect as delivery of an originally executed counterpart hereof.

[Signatures on following page.]


 

IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the Effective Date.

 

NAI

Natural Alternatives International, Inc.,

a Delaware corporation

/s/ Mark A. LeDoux        
Mark A. LeDoux, Chief Executive Officer

 

 

 

 

CSI

Compound Solutions, Inc.,

a California corporation

/s/ Barry Titlow        
Barry Titlow, Chief Executive Officer
License and Fee Agreement

Exhibit 10.40

LICENSE AND FEE AGREEMENT

This License and Fee Agreement (“Agreement’) is made and entered into effective as of November 10, 2010 (“Effective Date”), by and among Natural Alternatives International, Inc., a Delaware corporation (“NAI”), and Roger Harris (“Harris”), Mark Dunnett (“Dunnett”), and Kenny Johansson (“Johansson”). This Agreement is made with reference to the following facts:

RECITALS

A. NAI, Harris, Dunnett and Johansson are parties to that certain License Agreement effective as of April 28, 1997, as amended by that certain Amendment to License Agreement dated March 17, 2001, as further amended by that certain Second Amendment to License Agreement dated March 26, 2007, and as further amended by that certain Third Amendment to License Agreement effective as of March 3, 2009 (collectively, the “Prior License Agreement”).

B. Under the terms of the Prior License Agreement, Harris, Dunnett and Johansson licensed certain foreign and domestic patent rights to NAI and NAI agreed to make certain royalty payments to Harris, Dunnett and Johansson.

C. On or about July 8, 2010, certain assignments executed by Harris and Dunnett were recorded with the United States Patent and Trademark Office (“USPTO”) pursuant to which Harris and Dunnett assigned to NAI their entire right, title and interest in and to the following U.S. Patents, each entitled “Methods and Compositions for Increasing the Anaerobic Working Capacity in Tissues” or similar: U.S. Patent No. 5,965,596, U.S. Patent No. 6,172,098, U.S. Patent No. 6,426,361 and U.S. Patent No. 6,680,294 (collectively, the “Assignments”).

D. On or about June 2, 2010, a Quitclaim Assignment executed by Johansson was filed with the USPTO pursuant to which Johansson assigned and transferred to NAI all of his entire right, title and interest in and to each of the patents listed in Recital C above and certain other patents and patent rights (the “Quitclaim Assignment”).

E. Upon the recording of the Assignments and the Quitclaim Assignment with the USPTO, NAI became the owner of the patent rights previously licensed by Harris, Dunnett and Johansson to NAI under the Prior License Agreement.

F. NAI, Harris, Dunnett and Johansson now each desire to terminate the Prior License Agreement and to enter into this Agreement to provide for the license of certain patent rights by NAI to Harris, Dunnett and Johansson and, as consideration for the Assignments and the Quitclaim Assignment, the payment of certain fees by NAI to Harris, Dunnett and Johansson.

In consideration of the mutual covenants and obligations hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and incorporating the foregoing recitals as if fully set forth below, and intending to be legally bound, the parties agree as follows:


AGREEMENT

1. Termination of Prior License Agreement. Upon the execution of this Agreement by each of NAI, Harris, Dunnett and Johansson, the Prior License Agreement shall be deemed terminated and of no further effect and the termination obligations set forth in Section 7.7 thereof are hereby waived.

2. Definitions. When used herein, the following terms have the following meanings (such definitions to be applicable to both the singular and plural forms of such terms):

2.1. “Biological Matter” means the materials, substances, organisms, components and products comprising Compound X, a substance used to enhance the work capacity of muscle, as further described in Exhibit A.

2.2. “Change in Control” shall mean any one or more of the following events: (i) any purchase from NAI or acquisition by any unaffiliated person or entity of a majority of the total outstanding voting securities of NAI, (ii) any merger, consolidation, business combination or similar transaction involving NAI, or (iii) any sale (other than in the ordinary course of business), exchange, transfer, acquisition or disposition, of substantially all of the assets of NAI.

2.3. “Derivative Matter” means any material, substance, organism, component, or product incorporating, derived from, developed from, based upon or made from, the Biological Matter.

2.4. “Field of Use” means use of the Biological Matter and Derivative Matter to treat organisms and animals but specifically excluding humans, dogs, horses and camels.

2.5. “Improvement” means any improvement, variation, modification, or derivative work of any Invention (whether or not patentable), works of authorship, or Know-how included in the Patent Rights.

2.6. “Invention” means the structure, materials, design, concepts, techniques and processes embodied in the Patent Rights.

2.7. “Know-how” means all technical and proprietary information owned by NAI and/or used by NAI relating to the Invention and Products, including all samples, sources of supply, documentation, proprietary processes, and other similar tangible and intangible information and property in NAI’s possession or control useful in the manufacture, use or sale of Products, including all trade secret rights therein.

2.8. “Net Receipts” means, except as otherwise set forth herein, the total amount of money or other consideration received or earned by NAI from the sale, lease, rental or other commercial disposition to any third party of Products, less any taxes, duties, tariffs or other governmental charges on the manufacture, use, transportation, sale, lease, rental or other commercial disposition of Products to the extent the same are itemized separately from the price charged by NAI to third parties for the Products.


 

2.9. “Patent Rights” means (i) the patents and patent applications identified in Exhibit B, and (ii) any continuations, continuations-in-part, divisionals, reissues, reexaminations, renewals, extensions and foreign counterparts of the patents and patent applications described in clause (i).

2.10. “Products” means any manufacture or composition of matter (i) made in accordance with or incorporating the teachings of any Invention and covered in whole or in part by any of the claims of the Patent Rights, or (ii) incorporating any Know-how, or (iii) incorporating or made from Biological Matter and/or Derivative Matter. For purposes of this Agreement, “manufacture” means to make or have made.

3. License.

3.1. License Grant. Subject to the terms and conditions of this Agreement, during the term of this Agreement, NAI hereby grants to Harris, Dunnett and Johansson a worldwide, fully-paid, royalty-free license under the Patent Rights and Know-how to (i) manufacture, use, offer for sale, sell, lease, rent or otherwise commercially dispose of Products solely within the Field of Use, or (ii) to the extent not within the Field of Use, manufacture and use Products solely for each of their own personal use and consumption (the “Licensed Rights”). The license granted under Section 2.1(i) is exclusive unless otherwise agreed by NAI, Harris, Dunnett and Johansson.

3.2. Grant of Certain Additional Licenses by NAI. Harris, Dunnett and Johansson shall have the right of prior approval to the extent NAI wishes to license any of the Patent Rights and Know-how to a third party to manufacture, use, offer for sale, sell, lease, rent or otherwise commercially dispose of Products using the Biological Matter and Derivative Matter to treat dogs, horses or camels. NAI shall provide a copy of any such proposed license to Harris, Dunnett and Johansson at least fifteen (15) days in advance and if Harris, Dunnett and Johansson do not object within such fifteen (15) day period, their approval shall be deemed to have been given. Notwithstanding such approval rights, nothing herein shall be construed as granting a license or any other rights to Harris, Dunnett and Johansson with respect to Products to treat dogs, horses or camels, such rights being exclusively reserved to NAI.

3.3. Reservation of Rights and Ownership of Rights by NAI. Harris, Dunnett and Johansson each acknowledge, understand and agree that except for the specific Licensed Rights granted to them under this Agreement, NAI has, maintains and reserves for itself the exclusive rights, title and interest in and to all of the Patent Rights and Know-how and may use such rights for, among others, the manufacture, use, offer for sale, sale, lease, rental or other commercial disposition of Products. Harris, Dunnett and Johansson each further acknowledge, understand and agree that the Patent Rights and Know-how are and will remain the sole and exclusive property of NAI. Except as otherwise permitted herein, Harris, Dunnett and Johansson will not take any action inconsistent with NAI’s ownership of the Patent Rights and Know-how. Harris, Dunnett and Johansson will not contest or aid others in contesting the validity, enforceability, or NAI’s ownership of the Patent Rights and Know-how.


 

3.4. No Implied Licenses. Except as expressly provided in this Agreement, nothing contained in this Agreement is intended to confer by implication, estoppel, or otherwise, upon Harris, Dunnett or Johansson or any other party, a license or rights in any intellectual property rights of NAI.

3.5. Permits. Harris, Dunnett and Johansson shall be responsible for obtaining, at their cost, any permits, licenses, authorizations or approvals required or necessary by any government or other entity in connection with or required for the use of their Licensed Rights.

3.6. Transferability. Harris, Dunnett and Johansson may sublicense, transfer or assign to any third party the Licensed Rights granted to them under Section 2(i) of this Agreement with prior notice to NAI; provided, however, that any sublicense, transfer or assignment to a competitor of NAI shall require the prior approval of NAI, which approval shall be in its sole and absolute discretion. The Licensed Rights granted under Section 2(ii) are not sublicensable, transferable or assignable.

3.7. Marking Requirement. Harris, Dunnett and Johansson agree to mark any Products made by them or on their behalf under the Licensed Rights with all applicable patent numbers under which such Products were made in compliance with 35 U.S.C. §287(a). Such marking shall be directly applied to the Products, or when, from the character of the Products the marking cannot be directly applied to the Products, by fixing to the Products or their packaging a label containing a like marking.

3.8. Trademarks and Corporate Name. Harris, Dunnett and Johansson agree that they will not, without NAI’s prior written consent, (i) use any trade name, trademark, trade device, service mark, symbol or other identification owned by NAI, or any abbreviation, contraction or simulation thereof, or (ii) represent (directly or indirectly) that any Product made by them or on their behalf under the Licensed Rights is a Product of NAI, or is made in accordance with or utilizes any materials, information or documentation of NAI; provided, however, that such Products may be marked with a notice that such products are made under a license from NAI.

4. Fees.

4.1. Patent Fees. NAI shall pay all costs and fees required to obtain and maintain the Patent Rights.

4.2. Fees Due in Connection with Product Sales. During the term of this Agreement, and except as otherwise set forth herein, NAI agrees to pay to Harris, Dunnett and Johansson, or their respective designees, a fee equal to a percentage of the annual cumulative Net Receipts as set forth below, as applicable, on any sale, lease, rental or other commercial disposition (for purposes hereof, a “sale”) of Products by NAI to a third party. For purposes of determining the applicable percentage rate to be used in calculating the fee due, Net Receipts shall be reset to $0 each year on the first day of NAI’s fiscal year.


 

Sales of Products made, used in or imported into

any country where the Patent Rights are

formally recognized by the relevant legal

authorities

  

Sales of Products made, used in or imported into any

country where the Patent Rights are not, or are no

longer, formally recognized by the relevant legal

authorities

Annual Cumulative Net Receipts

(in U.S. dollars)

  

%

  

Annual Cumulative Net Receipts

(in U.S. dollars)

  

%

Less than $1 million

   6.0    Less than $1 million    2.50

$1 million but less than $2.5 million

   5.0    $1 million but less than $2.5 million    2.25

$2.5 million but less than $5 million

   4.5    $2.5 million but less than $5 million    2.00

$5 million to $10 million

   4.0    $5 million to $10 million    1.75

Greater than $10 million

   3.5    Greater than $10 million    1.50

4.3. License Fees. Harris, Dunnett and Johansson each acknowledge and agree that NAI may:

4.3.1. Enter into certain manufacturing or similar agreements with one or more third parties pursuant to which NAI agrees to grant a license of its Patent Rights and Know-how to such third party in exchange for the right of NAI to manufacture and/or package Products developed by such third party pursuant to such license. In such event, NAI agrees to pay Harris, Dunnett and Johansson a fee at the rates set forth in Section 4.2; provided, however, that for such purpose “Net Receipts” shall mean the gross invoice amount billed by NAI to such third party and received by NAI for such manufacturing and/or packaging services less shipping and storage costs, the cost of any required governmental authorizations and outside laboratory testing, research costs and returns, discounts, allowances and rebates.

4.3.2. Enter into agreements with one or more third party suppliers or distributors of raw materials used in Products pursuant to which NAI agrees to grant a license of its Patent Rights and Know-how to such third party’s customers in consideration for the payment of certain license fees to NAI by such third party supplier or distributor. In such event, from any license fees actually received by NAI, NAI agrees to pay Harris, Dunnett and Johansson a fee at the rates set forth in Section 4.2; provided, however, that for such purpose “Net Receipts” shall mean the aggregate gross sales price charged by such third party supplier or distributor to its customers for the sale and purchase of such raw materials less all applicable cash discounts, sales discounts and returns.

4.3.3. Enter into license or similar agreements other than of the type described in Sections 4.3.1 and 4.3.2 and from any royalties actually received by NAI from such licensees for the sale of Products, NAI shall pay Harris, Dunnett and Johansson an amount equal to 50% of the sum that NAI would otherwise have paid in fees under Section 4.2 if NAI had directly made such sales.


 

4.4. Payment. The fees set forth in Section 4.2 and 4.3.1 on the sale of Products are earned on the earlier of (i) the day on which NAI ships the Products to a distributor or customer, or (ii) the day on which NAI invoices the Products. Each fee payment to Harris, Dunnett and Johansson must be paid within 30 days after the end of each calendar quarter in which the fee is earned. Except as set forth in Sections 4.3.1 and 4.3.2, fees earned on Products for which refunds, credits or allowances are given or made by NAI shall be credited against future fees due to Harris, Dunnett and Johansson. Fees shall be paid in U.S. dollars. For sales of Products made by NAI in other currencies, the Net Receipts shall be converted to U.S. dollars in accordance with the exchange rates published in the Wall Street Journal at the end of the respective fee period. Notwithstanding anything herein to the contrary, NAI, at its election, may elect to pay any fee payment due Harris, Dunnett and Johansson hereunder by paying one-third (1/3) of such fee payment directly to each of Harris, Dunnett and Johansson or to such other person or entity as Harris, Dunnett or Johansson may instruct NAI as to their respective portion of any fee payment.

4.5. No Reductions. NAI’s obligations to make the payments set forth in this Section 4 shall be exclusive of, and shall not be reduced or offset by, any charges now or hereafter imposed on the manufacture, use, transportation, sale, lease, rental or other commercial disposition of the Products, such as (i) shipping or insurance charges, (ii) taxes of any nature (including, but not limited to, withholding taxes) imposed by any taxing jurisdiction within or outside the United States, and/or (iii) duties or tariffs, except as otherwise set forth or provided for in the applicable definition of Net Receipts. Any such charges shall be borne by, and shall be the sole responsibility of, NAI.

4.6. Statements. With each fee payment under this Section 4, NAI shall submit to Harris, Dunnett and Johansson a statement of: (i) the number of sales of Products from all sources during the applicable period, (ii) the total of the Net Receipts during the applicable period, and (iii) a computation of the fee payment.

4.7. Licensee Statements. Once each year, NAI shall forward to Harris, Dunnett and Johansson a copy of any reports received by NAI for its licensees during the previous 12-month period reasonably necessary for conducting a fee accounting of such licensees.

4.8. Interest. If any fee to be paid by NAI pursuant to this Section 4 becomes delinquent, any such delinquent amount shall bear interest until paid in full, including payment of such interest. The interest will be compounded annually and will accrue at the lesser of (i) the highest annual rate allowed under applicable law at the time the outstanding amount becomes delinquent, or (ii) 0.0005 multiplied by the outstanding amount per day of delinquency.


 

4.9. Inspection. NAI agrees to keep or have kept separate and adequately detailed accounting records of all sales of Products by NAI, and all sales reports received by NAI for its licensees. Such accounting records shall be kept for a minimum of two years. During the term of this Agreement and for one year thereafter, Harris, Dunnett and Johansson or their agents shall have the right to inspect the relevant accounting records of NAI to verify the accuracy of the fees paid or payable by NAI to Harris, Dunnett and Johansson. All inspected information shall be kept in confidence from third parties. Harris, Dunnett and Johansson must give at least 10 days’ prior written notice to NAI before any inspection, and may not inspect more than twice in any 12 month period. All inspections must be during NAI’s ordinary business hours, and shall be conducted so as to not unreasonably interfere with normal business activities. If any inspection discloses that the amount of fees paid to Harris, Dunnett and Johansson was incorrect in the favor of either NAI or Harris, Dunnett and Johansson, then any amount due to a party must be paid within 10 days by the other party or parties from whom such amount is owed. If the inspection demonstrates that the fees paid for the period in question were less than 95% of the correct amount owed, NAI shall be liable to Harris, Dunnett and Johansson for the cost of inspection. Otherwise, Harris, Dunnett and Johansson shall be solely responsible for the cost of any inspection.

5. Improvements.

5.1. Ownership of Improvements. As between NAI and Harris, Dunnett and Johansson, NAI will exclusively own all Improvements, including all intellectual property rights therein. Within ten (10) business days after the end of any calendar year, Harris, Dunnett and Johansson will notify NAI in writing if any Improvement has been created, conceived, made, developed, reduced to practice, or invented by Harris, Dunnett and Johansson during such calendar year and provide a written description of such Improvement.

5.2. License Grant in Improvements. NAI hereby grants to Harris, Dunnett and Johansson a license to all Improvements commensurate in scope with, and not any broader than, the Licensed Rights granted under this Agreement.

5.3. Assignment of Improvements. Harris, Dunnett and Johansson hereby irrevocably and unconditionally grant, convey, assign, and transfer to NAI any and all rights and interest Harris, Dunnett and Johansson may have in the Improvements, including all intellectual property rights therein, including the right to sue and recover damages for past, present, and future infringement or misappropriation thereof.

5.4. Unassignable Intellectual Property Rights. If Harris, Dunnett and Johansson have any intellectual property rights in any Improvements that cannot be assigned to NAI as a matter of law (“Unassignable IP Rights”), Harris, Dunnett and Johansson grant to NAI an exclusive (without reservation), irrevocable, perpetual, worldwide, transferable, fully-paid, and royalty-free license, with the right to sublicense, under the Unassignable IP Rights: to (i) use, make, have made, sell, offer to sell, or import any Product; (ii) use any process in manufacturing any Product; (iii) use any method or process, or otherwise practice any invention, method, or technology embodied in such Improvements; (iv) reproduce, create derivative works of, distribute, publicly display, and publicly perform any copyrighted work included in such Improvements; and (v) otherwise exploit such Improvements in every conceivable manner, subject in all cases to the Licensed Rights granted by NAI to Harris, Dunnett and Johansson pursuant to the terms of this Agreement.


 

5.5. Cooperation. Harris, Dunnett and Johansson agree to perform, without charge to NAI, all acts reasonably necessary to permit and assist NAI in perfecting and enforcing the full benefits, enjoyment, rights, and title throughout the world in all Improvements and the intellectual property rights therein assigned or licensed to NAI under Section 5.3 or Section 5.4. Such acts may include execution of documents and assistance or cooperation in the registration and enforcement of applicable intellectual property rights or other legal proceedings, including providing documents and materials in the possession or control of Harris, Dunnett or Johansson.

5.6. Attorney-In-Fact. If NAI is unable for any reason to obtain a signature of Harris, Dunnett or Johansson on any document necessary to perfect the conveyance, assignment, license, or transfer to NAI of any Improvements or any intellectual property right therein, Harris, Dunnett and Johansson hereby irrevocably designate and appoint NAI and its duly authorized officers and agents as agent and attorney-in-fact of Harris, Dunnett and Johansson, which appointment is coupled with an interest and is provided in connection with the assignment and the grant of the licenses contemplated hereby, to act for and on behalf of Harris, Dunnett and Johansson to execute, verify, and file any documents and to perform all other lawfully permitted acts to further the purpose of this Section 5 with the same legal force and effect as if executed by Harris, Dunnett and Johansson.

6. Prosecution and Enforcement.

6.1. Prosecution. NAI will have sole control over the filing, prosecution, and maintenance (collectively, “Prosecution”) of the Patent Rights. During the term of this Agreement, NAI agrees to use commercially reasonable efforts to maintain and protect the Patent Rights, to make any necessary filings, and to pay any necessary fees or other amounts due with respect thereto.

6.2. Enforcement. Harris, Dunnett and Johansson will promptly notify NAI in writing upon becoming aware of any known or suspected infringement or other improper use of any Patent Rights or Know-how. Such notice will include the identity of the third party or parties known or suspected to have infringed the Patent Rights or Know-how and any available information that is relevant to such infringement. NAI will have sole control over enforcement and defense of all Patent Rights and Know-how in all fields including the Field of Use. If NAI asserts or files any claim (including counterclaims), suit, or action (a “Claim”) against any third party based upon alleged infringement of any Patent Rights or Know-how, Harris, Dunnett and Johansson will cooperate with NAI, at NAI’s request and expense, in litigating or settling such Claim, including joining NAI as a party to any such suit or action. Until NAI has recovered all of its costs, disbursements and expenses, including attorneys’ fees, incurred in connection with a Claim, NAI will be entitled to all damages awarded as a result of or agreed to in a monetary settlement of any such Claim, and thereafter, 10% of any remaining amount awarded shall be paid to Harris, Dunnett and Johansson.

7. Term and Termination.

7.1. Term. The term of this Agreement shall commence on the Effective Date and continue until the expiration date of the last to expire of the patents within the Patent Rights.


 

7.2. Termination.

7.2.1. NAI, at its option, may immediately terminate this Agreement and all rights and licenses granted under this Agreement if any of Harris, Dunnett or Johansson default in the performance of any material obligation and if the default has not been remedied within 30 days after written notice by NAI to Harris, Dunnett and Johansson describing the default.

7.2.2. Harris, Dunnett and Johansson, at their option, may immediately terminate this Agreement upon 10 days’ prior written notice to NAI, in the event that (i) NAI ceases to function as a going concern, other than as a result of a Change in Control, or (ii) NAI files (or has filed against it) a petition in bankruptcy or any petition seeking any reorganization, liquidation, dissolution or similar relief under any state or federal law relating to insolvency or relief for debtors, or any trustee, receiver or custodian is appointed with respect to all or a substantial part of the assets of NAI or NAI makes a general assignment for the benefit of creditors; provided, however, that this Agreement may not be terminated if NAI becomes a party to involuntary bankruptcy proceedings which are discharged or denied within 60 days. If an event described in 7.2.2(i) or (ii) occurs and Harris, Dunnett and Johansson exercise their termination right, upon request by Harris, Dunnett and Johansson, NAI agrees to use commercially reasonable efforts to cause all of NAI’s rights, title and interest in and to the Patent Rights and Know-how to be assigned to Harris, Dunnett and Johansson.

7.2.3. Within 30 days after any termination of this Agreement, NAI shall pay all fees owed to Harris, Dunnett and Johansson pursuant to Section 4 of this Agreement as of the date of termination to Harris, Dunnett and Johansson, and provide an accounting for the final period.

7.3. Effect of Termination. Upon termination of this Agreement in accordance with Section 7.2.1: (a) all licenses granted by NAI to Harris, Dunnett and Johansson under this Agreement will be immediately revoked; and (b) Harris, Dunnett and Johansson will immediately cease all activities performed under such licenses.

7.4. Survival. Upon termination, Sections 2, 3.3, 3.4, 5.1, 5.3, 5.4, 5.5, 5.6, 7.3, 8, and 9 shall survive.

8. Representations, Warranties and Disclaimers.

8.1. Power and Authority. As of the Effective Date, each party represents and warrants that it has full right, power, and authority to enter into this Agreement, to perform its obligations and duties under this Agreement, and that the performance of such obligations and duties does not and will not conflict with or result in a breach of any other agreements of such party or any judgment, order, or decree by which such party is bound.

8.2. Additional Representations of Harris, Dunnett and Johansson. Harris, Dunnett and Johansson each represent and warrant to NAI that (i) all Products used, manufactured, sold, or otherwise commercially disposed of by Harris, Dunnett or Johansson pursuant to the Licensed Rights will be of the best quality and will be free of defects in materials and workmanship; and (ii) the Products and the manufacture, sale, marketing and distribution of such Products pursuant to the Licensed Rights will comply with the terms of this Agreement, including, without limitation, the product labeling requirements, and all applicable international, federal and state laws governing and/or related thereto as in effect from time to time.


 

8.3. Specific Disclaimers by NAI. Nothing in this Agreement will be construed as giving rise to:

8.3.1. a warranty or representation by NAI as to the validity, enforceability, or scope of any Patent Rights or Know-how;

8.3.2. a warranty or representation by NAI that using, making, manufacturing, selling, or otherwise commercially disposing of any Product pursuant to the Licensed Rights will not infringe, directly or indirectly, any patent or other intellectual property rights of any third party under the laws of the United States or any other jurisdiction; or

8.3.3. a warranty or representation by NAI that any pending application included in the Patent Rights will issue as patents.

8.3.4. THE EXPRESS WARRANTIES SET FORTH IN SECTION 8.1 ARE THE ONLY WARRANTIES MADE BY NAI IN CONNECTION WITH THIS AGREEMENT AND ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS, IMPLIED, OR STATUTORY.

8.4. Indemnity. Harris, Dunnett and Johansson each agree to defend, indemnify and hold NAI, its subsidiaries and affiliates and their respective officers, directors, agents and employees harmless from and against any and all claims, losses, liabilities, damages, costs and expenses (including reasonable attorneys’ fees) directly or indirectly arising from or relating to (i) any breach of this Agreement by Harris, Dunnett or Johansson, including any breach of the representations and warranties made by them, (ii) any activities relating to, concerning, or based on the manufacture, sale, distribution or other commercial disposition of Products pursuant to the Licensed Rights, or (iv) any claims or causes of action relating to product liability or for injury to property or person arising from any defects in Products manufactured, sold, distributed or otherwise commercially disposed of pursuant to the Licensed Rights. NAI will have the right to participate in the defense of such claim with its own counsel. No settlement of a claim will be binding on NAI without NAI’s prior written consent. In no event shall NAI be liable for any indirect, special, incidental or consequential damages (including, without limitation, damages for loss of profits or expected savings or other economic losses, or for injury to persons or property) arising out of or in connection with this Agreement or its subject matter regardless of whether NAI knows or should know of the possibility of such damages. The foregoing exclusions and limitations shall apply to all claims and actions of any kind, whether based on contract, tort (including but not limited to negligence), or any other grounds.

9. General.

9.1. Assignment. Subject to Section 3.6, this Agreement may be assigned by the parties and shall inure to the benefit of and be binding upon all of the parties to this Agreement and their respective successors and assigns.


 

9.2. Entire Agreement. This Agreement and any exhibits hereto constitute the entire agreement between the parties hereto with respect to the subject matter hereof. This Agreement supersedes and replaces all prior or contemporaneous understandings, negotiations, commitments, writings and agreements between the parties hereto, whether written or oral, express or implied, with respect to its subject matter. Each party to this Agreement acknowledges that no representations, warranties, inducements, promises or agreements, oral or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not embodied herein.

9.3. Severability. If any provision of this Agreement is held invalid, illegal or unenforceable for any reason by any court of competent jurisdiction (or, if applicable, an arbitrator), the remaining provisions of this Agreement shall not be affected and shall remain in full force and effect, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had not been contained in this Agreement. Any provision of this Agreement held invalid, illegal or unenforceable only in part or degree shall remain in full force and effect to the extent not held invalid, illegal or unenforceable.

9.4. No Implied Waivers; Amendment. No waiver of any term, provision or condition of this Agreement in any one or more instances, shall be deemed to be, or be construed as, a further or continuing waiver of any such term, provision or condition or as a waiver of any other term, provision or condition of this Agreement. No amendment or modification of the terms or conditions of this Agreement shall be valid unless in writing and signed by the parties.

9.5. Attorneys’ Fees. If any arbitration or legal proceeding is brought for the enforcement of this Agreement, or because of an alleged breach, default or misrepresentation in connection with any provision of this Agreement or other dispute concerning this Agreement, the successful or prevailing party shall be entitled to recover reasonable attorneys’ fees incurred in connection with such arbitration or legal proceeding. The term “prevailing party” shall mean the party that is entitled to recover its costs in the proceeding under applicable law, or the party designated as such by the court or the arbitrators.

9.6. Arbitration. Any dispute, controversy or claim arising from, out of or in connection with or relating to this Agreement or any breach or alleged breach of this Agreement, will upon the request of any party involved be submitted to any private arbitration service utilizing former judges as mediators and approved by the parties. The dispute once submitted shall be settled by binding arbitration conducted in San Diego, California (or at any other place or under any other form of arbitration mutually acceptable to parties involved). The single arbitrator shall follow and apply the federal rules of evidence and the applicable local federal rules governing discovery in the arbitration. Any award rendered shall be final, binding and conclusive upon the parties and shall be non-appealable, and a judgment thereon may be entered in the highest state or federal court of the forum having jurisdiction. Subject to Section 9.5, the expenses of the arbitration shall be borne equally by the parties to the arbitration provided that each party shall pay for and bear the cost of its own experts, evidence and attorneys’ fees, except that in the discretion of the arbitrator, any award may include the costs, fees and expenses of a party’s attorney.


 

9.7. Governing Law. The laws of the state of California (without giving effect to its conflicts of laws principles) govern all matters arising out of or relating to this Agreement and all of the transactions it contemplates, including without limitation, its validity, interpretation, construction, performance, and enforcement. Any action or proceeding arising out of or relating to this Agreement or arising out of or in any manner relating to the relationship between the parties shall only be brought in the state or federal courts in the County of San Diego, California, and each of the parties hereto submits to the personal jurisdiction of such court (and of the appropriate appellate courts wherever located) in any such action or proceeding, and selects the courts in the County of San Diego, California for proper venue in any such action or proceeding.

9.8. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which, when taken together, shall be deemed to constitute one and the same instrument. The exchange of copies of this Agreement and of signature pages by facsimile transmission or other electronic means shall constitute effective execution and delivery of this Agreement as to the parties and may be used in lieu of the original Agreement for all purposes. Signatures of the parties transmitted by facsimile or other electronic means shall be deemed to be their original signatures for all purposes.

9.9. Construction. The captions and headings contained in this Agreement are for convenience of reference only, and shall not be deemed to define or limit the provisions hereof. Each party acknowledges that such party, after negotiation, has reviewed and revised this Agreement. The terms of this Agreement shall be fairly construed and the usual rule of construction, to the effect that any ambiguities herein should be resolved against the drafting party, shall not be employed in the interpretation of this Agreement or any amendments, modifications or exhibits hereto or thereto.

9.10. Relationship of the Parties. The terms and provisions of this Agreement shall not in any respect be construed to constitute any party as the agent, employee, partner or joint venturer of the other. Nothing contained in this Agreement shall be deemed to confer any right or benefit on any person who is not a party to this Agreement.

9.11. Further Assurances. The parties agree (i) to furnish upon request to each other such further information, (ii) to execute and deliver to each other such other documents, and (iii) to do such other acts and things, all as the other party may reasonably request for the purpose of carrying out the intent of this Agreement.

9.12. Notice. All notices, consents, waivers and other communications required or permitted under this Agreement must be in writing and will be deemed to have been given by a party (a) when delivered by hand; (b) one day after deposit with a nationally recognized overnight courier service; or (c) five days after deposit in the United States mail, if sent by certified mail, return receipt requested; in each case costs prepaid and, if to NAI, to the following address and marked to the attention of the person (by name or title) designated below, or if to Harris, Dunnett or Johansson, to the address designated below their respective signatures on the signature page hereto (or to such other address or person as a party may designate by notice to the other parties).

If to NAI:

Natural Alternatives International Inc.

1185 Linda Vista Drive

San Marcos, CA 92078

Attn: Chief Executive Officer

Telephone: (760) 736-7742


 

9.13. Remedy. Each party acknowledges and agrees that any actual or threatened breach of Sections 3.1, 5.2 and 9.14 by the other party will constitute immediate and irreparable harm to NAI for which monetary damages would be an inadequate remedy and that injunctive relief is an appropriate remedy for such breach.

9.14. Confidential Information. The parties acknowledge that certain information that has been or may be disclosed by the parties in connection herewith is considered confidential by the disclosing party. The parties agree that they shall not, without the prior written consent of the other party, disclose any Confidential Information of the other party, to any person other than such party’s attorneys, consultants, accountants, lenders, investors, governmental bodies or agencies, and any other persons who need such information in connection with the performance of the obligations under this Agreement. Disclosure of Confidential Information is not precluded if such disclosure is in response to a valid order of a court or other governmental body of the United States or any political subdivision thereof; provided that the recipient of the Confidential Information will first give notice to the disclosing party and make a reasonable effort to obtain a protective order requiring that the Confidential Information be disclosed only for the limited purposes for which the order was issued. A party hereto who is the recipient of Confidential Information from the other party shall use such Confidential Information only for the limited purpose for which it was disclosed. The parties acknowledge that money damages for a breach under this Section 9.14 may be inadequate and that either party shall be entitled to seek specific enforcement of this provision.

[Signatures on following page.]


IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective Date.

Natural Alternatives International, Inc.,

a Delaware corporation

 

By:   

/s/ Mark LeDoux

   Mark LeDoux, Chief Executive Officer

 

/s/ Roger Harris

Roger Harris
Address:   

 

 

 

/s/ Mark Dunnett

Mark Dunnett
Address:   

 

 

 

/s/ Kenny Johansson

Kenny Johansson
Address:   

 

 

 

Certification of CEO

 

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 Quarterly Report on Form 10-Q 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; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 12, 2010

 

/s/ Mark A. LeDoux

Mark A. LeDoux, Chief Executive Officer
Certification of CFO

 

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 Quarterly Report on Form 10-Q 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; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 12, 2010

 

/s/ Kenneth E. Wolf
Kenneth E. Wolf, Chief Financial Officer
Certification of CEO and CFO

 

Exhibit 32

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)

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 Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2010 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: November 12, 2010     /s/ Mark A. LeDoux
    Mark A. LeDoux, Chief Executive Officer
Date: November 12, 2010     /s/ Kenneth E. Wolf
    Kenneth E. 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-Q or as a separate disclosure document.