Natural Alternatives International, Inc.

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Natural Alternatives International, Inc.

1185 Linda Vista Drive
San Marcos, California 92069
U.S.A.
Telephone: (760) 744-7340
Fax: (760) 744-9589
Web site: http://www.nai-online.com

Public Company
Incorporated: 1985
Employees: 114
Sales: $42.2 million (2001)
Stock Exchanges: NASDAQ
Ticker Symbol: NAII
NAIC: 325411 Medicinal and Botanical Manufacturing; 325412 Pharmaceutical Preparation Manufacturing

Natural Alternatives International, Inc. (NAI) formulates and manufactures nutritional supplements, including vitamins, minerals, herbs, and specialty formulas, for private-label distributors as well as for its proprietary product lines. NAI-branded products include Green Farm and Natural Alternatives nutritional supplements and ProLean weight loss products. NAI services to the private-label market include custom formulation, clinical studies of nutritional products, regulatory assistance, packaging design, and product marketing.

Providing Nutritional Alternatives to Pharmaceutical Drugs in 1980

Mark Le Doux founded Natural Alternatives International (NAI) in 1980 to produce proprietary vitamins and other nutritional supplements as healthy alternatives to drugs. Le Doux wanted to provide nutritional products that heal the causes of disease, rather than alleviate symptoms, as drugs tend to do. Le Doux’s guiding philosophy followed that of Hippocrates, who said, “Let food be your medicine.” The company’s employees included Elinor Le Doux as director of research, and Bruce Le Doux as director of medical sales. Marie Le Doux, Mark’s mother and a major investor, took the position of chairwoman.

NAI’s first line of vitamin and nutritional products eased the maladies of substance abuse during recovery from addiction; these products sold under private labels through physicians.

The company developed and produced nutritional products sold through various marketing and distribution channels. “Fitness Builder,” a line of products designed to promote physical fitness, found customers among athletes, body builders, and military personnel. NAI distributed Fitness Builder products through health food stores, wholesale distributors, consumer direct distributors, and military Post Exchanges in southern California. Products for the mass market included Med-Cap vitamin supplements, a line of all-capsule vitamins sold through large regional chains, and brand-name Natural Alternatives products, sold through large discount retail chains.

Contract manufacturing involved production of nutritional supplements for private-label brands. NAI manufactured and sold in bulk form tablet and capsule nutritional supplements for private label distribution to KAL brand vitamins and AMCON Industries, a division of Amway Corporation. In addition to manufacturing vitamins, NAI provided bottling and labeling of NAI-made products under private-label brands for Pharmavite Corporation; Filmore Foods; Prime Natural Products; Redken Laboratories; Simpak Corporation; and Ultra Drug Corporation. Over time NAI added label design, brochures, and other marketing services to enhance its private-label business.

After six years in operation NAI recorded $2.64 million in revenue and net income of $100,076 for the fiscal year ended June 30, 1986. Contract manufacturing accounted for 60 percent of revenues. Sales to health food stores accounted for 25 percent of NAI revenues, down from 50 percent the previous year as NAI streamlined its customer list to select chains, finding it too costly to develop products for each health food store. The upfront expenditure in bottles, labels, and product inventory involved a high level of risk because the investment did not always reap a return and many of the small companies proved to be a high credit risk.

In 1986 American Acquisitions, Inc. purchased NAI and then changed its name to NAI and dissolved the subsidiary, the original NAI. Just prior to the acquisition, the two companies integrated the board of directors and management. Le Doux remained CEO and William P. Spencer joined as COO and executive vice-president. The new company traded on the National Association of Securities Dealers exchange.

Under the new ownership arrangement, NAI began to expand its customer base, including international markets. Growth of the business originated primarily from new clients in the medical and contract manufacturing divisions. In 1988 the company experienced a sudden burst of growth with two major manufacturing contracts. An agreement with S.A. International involved a line of 22 proprietary nutritional supplements produced for export to Pacific Rim countries, including Taiwan, Singapore, and Malaysia. For Jenny Craig Weight Loss Centers NAI began to manufacture supplements used in that company’s weight loss programs. The five-year, $12 million contract covered distribution to half of Jenny Craig’s 300 clinics. Other significant contracts included Weider Health & Fitness, for sports nutrition supplements, and Neuro-genesis, for substance abuse recovery supplements. NAI invested in high-speed, state-of-the-art manufacturing and bottling equipment to keep pace with the influx of new business. New clients boosted NAI sales by 72.4 percent in fiscal 1989, to $7.3 million, and garnered net income of $439,000. (A recall of the controversial amino acid supplement L-Tryptophan had negligible impact on sales and earnings.) In April 1990, NAI shifted to the NASDAQ Additional List following a 1-to-50 reverse stock split, which allowed NAI to enter the exchange at $2 per share.

Seeking Diversified Market Base As Public Interest in Nutritional Supplements Grows During the 1990s

NAI secured its reputation in the area of health sciences with the introduction of revolutionary new products for immunity, metabolic fitness, substance abuse treatment, premature aging, and other consumer health concerns. During the early 1990s scientific studies increased demand for nutritional supplements and NAI capitalized on this interest by creating a radio program to inform the public about nutrition in general and NAI products in particular. Mark Le Doux hosted the 15-minute show “The Natural Alternative, Recipes for Healthier Living,” which aired Monday through Friday at 6:45 p.m. and on Sunday at 12:45 p.m. Radio stations carried the show in central and southern California and into Mexico.

In May 1990 NAI acquired the trademark and net assets of DBA Laboratories, makers of 115 nutritional products sold under the Sonergy brand. Customers included retail drug stores and grocery stores, primarily in southern California. NAI planned to expand distribution to all of California and later to other western states. NAI adopted the brand name for the new subsidiary, renamed Sonergy, Inc.

By 1991 NAI utilized more than 15,000 formulations for vitamin and nutritional supplements, produced for private-label businesses and its proprietary lines. The company’s manufacturing capacity reached 11 million capsules per day. In fiscal 1991, NAI reported $10.4 million in revenues, actually a 13 percent decline from the previous year, at $11.9 million. Along with an industrywide decline in sales, the company experienced a decline in demand as several clients reduced inventories and one client, who previously accounted for 7 percent of revenues, discontinued operations. Higher sales at Sonergy offset the decline, which would have been at 23 percent; Sonergy accounted for 1 percent of sales in 1990, but increased to 14 percent of sales in 1991. Net income declined from $1.13 million in 1990, to $252,394 in fiscal 1991.

NAI sought diverse opportunities for business expansion. In March 1992 NAI became an “Official Supplier” of nutritional supplements to the U.S. Olympic Committee. NAI produced a multivitamin-mineral supplement, a multisourced Vitamin C supplement, and a Calcium/Magnesium/Vitamin D supplement. Jameson Pharmaceuticals, Inc. distributed the products to drug, grocery, and mass merchant retailers. NAI acquired CellLife International for $412,500, including $255,000 in cash and the balance in stock. CellLife marketed raw materials to pharmaceutical companies in Europe. NAI planned to expand CellLife into markets in the United States and worldwide.

In fiscal 1992 and 1993, NAI experienced tremendous growth, with revenues increasing 39 percent and 34 percent, respectively. In fiscal 1992, NAI reported revenues of $14.5 million and net earnings of $753,837. Jenny Craig, NuSkin International, and Weider Health and Fitness accounted for 64 percent of revenues in 1992. In addition, NAI began to test market its Green Farm and Natural Alternatives proprietary lines of vitamins in Europe and Asia. In November 1992 NAI opened a manufacturing facility in Mexico, forming Natural Alternatives al de Mexico, SA de C.V.

NAI continued to find new manufacturing clients. When deciding whether to engage in manufacturing contracts, NAI looked for companies that fit certain standards. NAI sought clients on a financially sound footing, not high-risk, capital-intensive ventures. The client’s business needed to be large enough to create economies of scale and to be diversified in its product line. In addition, new clients had to be interested in global distribution.

Company Perspectives

Founded in 1980, NAI prides itself on a strong commitment to health, scientific integrity and quality. We provide comprehensive solutions that include custom formulations based on scientific research, the highest manufacturing standards, supervision of international regulatory compliance, and marketing support. We have established partnerships and work to develop tailored solutions for our clients’ nutritional product needs.

With state-of-the-art manufacturing facilities in San Marcos, California and Lugano Switzerland, and a sales presence in Yokohama, Japan, NAI is able to fulfill the needs of our customers around the world.

The pattern of growth continued during fiscal 1993, when NAI recorded revenues of $19.4 million, including a 50 percent increase in the fourth quarter to $6 million. Net income increased 28 percent to just less than $1 million. To improve profit margins NAI streamlined operations at CellLife and Sonergy. At Sonergy NAI eliminated some products and product lines, and maintained the high-profit weight loss products, changing the brand and subsidiary name to ProLean.

During the mid-1990s, public interest in nutritional supplements continued to rise, attracting the interest of related businesses, such as NordicTrack. In February 1995 NAI signed a supply agreement with NordicTrack to develop and manufacture a line of nutritional supplements and snacks and fitness programs to be distributed through the company’s retail locations and direct response call centers. The products were developed to be complementary to the fitness requirements of cross-country ski exercisers, treadmills, and other NordicTrack fitness equipment.

The company’s growth culminated in a five-year annual compound growth rate of 38 percent from 1991 to 1995 and earned NAI a place on Forbes magazine’s list of the World’s Best Small Companies in 1995. That year NAI reported record sales of $37.4 million and net income of $2 million. At the end of fiscal 1995 the company reported an order backlog valued at $13.6 million, compared with $3.8 million in 1994. In addition to growth through new business, NAI saw a dramatic increase in sales due to an expected increase in the price of raw materials. NAI’s success with the Jenny Craig line of nutritional supplements continued with the introduction of two new supplements in April 1996. Daily Success provided vitamins and minerals, including calcium and iron, and Protect Plus provided antioxidant nutrition.

A clinical study at the University of Texas in 1997 affirmed the health benefits of certain weight loss nutritional supplements co-designed by NAI and NSA, Inc. The eight-week test looked at the effectiveness of JuicePlus, made with extracts of fruits, such as apple, orange, pineapple, papaya, and other fruits, or vegetables, including carrots, parsley, beets, spinach, and tomatoes; Thins, a chewable wafer; and AbsorbaLean, a proprietary product made with plant fibers that absorb dietary fat from the bloodstream and body. Members of the test group saw an improvement in body composition, having lost fat and maintained muscle mass, as compared with the control group. Following the study, NAI obtained exclusive rights for Glucatrol, the fiber compound used in AbsorbaLean. The Shimizer Chemical Corporation had been processing the fiber, made from the Japanese Konjoc plant, for seven generations. Konjoc fiber absorbs water, fat, and cholesterol and stabilizes blood sugar.

As global demand for herbal and nutritional supplements grew dramatically, NAI sought to expand its manufacturing capacity. The company installed a tablet manufacturing operation to handle increased demand and planned to open a new manufacturing facility in Carlsbad in 1999. Sales increased to $67.9 million in fiscal 1998, including $14.9 million in international sales, garnering net income of $5.9 million. NAI reported an order backlog of $24 million.

In the spring of 1999 NAI entered into a joint venture with FitnessAge, Inc. to sell a line of customized natural supplements via the Internet. The site would include a fitness assessment program to be used with professional assistance at FitnessAge centers, health clubs, spas, weight loss centers, and other similar locations. The program determined individual needs through algorithms that calculated physiological age based on standard tests of fitness: cardio/respiratory; flexibility; strength/endurance; and body composition.

In a new venture with Jenny Craig, NAI began to manufacture Advanced Nutrients by Jenny Craig, developed by Dr. Art Ulene. Dr. Ulene appeared on the Today show for 20 years, becoming known nationally as “America’s Wellness Doctor.” The line of 22 products included five vitamin and mineral supplements, nine herbal supplements, and eight nutritional supplements. The line was sold exclusively through a new Jenny Craig web site.

For Classic Beauty Supplements, Inc. NAI formulated and manufactured a proprietary line of nine products for distribution through spas and beauty salons. Designed specifically for women, the line included products for hair and nail strength, skin radiance, energy, diet and weight loss, PMS, menopause, and general well being. Classic Beauty launched the line at the International Esthetics, Cosmetics and Spa Conference and distribution began June 1, 1999.

NAI completed a collaborative study with the Naval Health Research Center in San Diego to evaluate the effectiveness of supplements designed to reduce “oxidative stress” caused by the body’s use of oxygen during strenuous activity. The study took place at the Marine Corps Mountain Warfare Training Center in Bridgeport, California; 50 volunteers tested the supplements in cold-weather, mountain training.

Rapid growth led NAI to open two new facilities in September 1999. NAI consolidated several small, raw materials warehouses into one large, state-of-the-art facility in Vista, California. The company also tested and quarantined raw materials at that facility. A manufacturing facility in Lugano, Switzerland, handled encapsulation, tablet compression, and packaging for products distributed in Europe. In addition, NAI opened a sales office in Yokohama, Japan.

Key Dates

1980:: Company is founded by Mark Le Doux.
1986:: New investment and ownership arrangement funds company growth.
1988:: NAI signs agreements to manufacture supplements for S.A. International and Jenny Craig Weight Loss Centers.
1992:: NAI enters raw materials distribution with acquisition of CellLife International.
1995:: Forbes lists NAI on its list of the World’s Best Small Companies.
1998:: Revenues peak at $67.9 million before a decline in sales for the company and industry.
2000:: NAI implements cost-cutting program to maintain profitability.

Many Factors Leading to Decline in Sales Between 1999 and 2001

NAI experienced a dramatic shift in its financial situation when NuSkin Enterprises, one of the company’s largest customers, did not renew its manufacturing contract with NAI and began the process of transferring to another manufacturer. Sales declined 15.5 percent from $67.9 million in 1998, with a net profit of $5.9 million, to $57.4 million in 1999, with a net loss of $2.9 million. Other factors contributing to the decline in sales included a slower economy and a sudden drop in public interest in certain herbal and anti-aging supplements that became explosively popular during the mid-1990s.

NAI implemented a number of measures to reduce expenses, including discontinuation of low-profit products and the layoff of 95 people, or 47 percent of the company’s workforce, between January and June 2000. The company halted use of temporary production personnel and reduced executive compensation and benefits. CEO Mark LeDoux reduced his annual salary by 31 percent. NAI also began to restructure its executive management, culminating in Mark Le Doux stepping down as CEO and taking the position of chairman of the board. In addition, NAI found new tenants for the Carlsbad facility, freeing the company from its lease commitment and saving unnecessary overhead expenses.

The company implemented in-house packaging capabilities to reduce operating expenses. NAI diversified distribution by establishing a Direct-to-Customer sales operation through television, direct mail, and e-commerce distribution. In addition, NAI redesigned its web site for easier consumer navigation. ASD Systems, Inc. installed new software to improve the efficiency of call center services, order fulfillment, customer services, and Internet order processing; ASD handled these distribution services as well.

Although NAI attained new clients, the company’s revenues continued to decline as the company lost two additional contract manufacturing customers. In fiscal 2001 NAI reported $42.2 million in revenues, including $5.7 million from the new consumer direct business. The company reported a loss of $4.9 million due to noncash charges, such as equipment depreciation, which were not operations related. On the brighter side, product sales in Europe more than doubled, from $3.4 million in 2000 to $7.5 million in 2001. NSA, distributor of the popular Juice Plus line and other products, renewed its exclusive contract with NAI in January 2001. NAI continued to seek new opportunities for nutritionally enhanced products through an October 2001 agreement with Bon Coeur, Inc. to use that company’s proprietary bio-food technology and formulas.