Exclusive Manufacturing Agreement Dated 12/6/99

EXCLUSIVE MANUFACTURING AGREEMENT


This EXCLUSIVE MANUFACTURING AGREEMENT is made effective as of December 6, 1999, between Natural Alternatives International, Inc., a Delaware corporation, with offices at 1185 Linda Vista Drive, San Marcos, California 92069 ("NAI") and Custom Nutrition, LLC, a Delaware limited liability company with offices at 4250 Executive Square, Suite 101, La Jolla, CA 92037 (the "Company"). NAI and the Company may hereinafter be referred to as the "Parties."


W I T N E S S E T H :


WHEREAS, on March 17, 1999, NAI and FitnessAge Incorporated, Inc. ("FitnessAge") executed a letter or intent which contemplated the formation of a strategic alliance, including further definitive agreements, including this Agreement, to carry out the transactions proposed in the letter of intent;


WHEREAS, substantially concurrently herewith, NAI and FitnessAge have executed documentation to create and operate the Company; and


WHEREAS, NAI has agreed to develop and manufacture for the Company nutritional products as developed from time to time for promotion and resale by the Company.


NOW, THEREFORE, in consideration of these recitals and the agreements hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree as follows:


1. Definitions


1.1 "FDCA" means the Federal Food, Drug and Cosmetic Act, as amended from time to time, together with all regulations issued by the Food and Drug Administration and other governmental agencies pursuant thereto.


1.2 "FTCA" means the Federal Trade Commission Act, as amended from time to time, together with all regulations issued by the Federal Trade Commission and other governmental agencies pursuant thereto.


1.3 "Plant" means NAI's production facilities wherever located.


1.4 "Product" or "Products" means nutritional products, nutritional and dietary supplements and related materials or products of any description, including but not limited to capsules, tablets, powders, liquids, bars and other forms packaged in any and all manners and intended to be distributed by, through, or for the benefit of the Company.


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1.5 "Specifications" means such specifications and quality control requirements for the Products and for any ingredients and packaging materials as determined by the Company from time to time.


1.6 "Technical Information" means all customer and business information and all formulae, quality control data, test data and all other scientific and technical data and information relating to the Products which are now owned or controlled by the Parties or which may hereafter be developed by any Party in connection with the Products.


1.7 "Product Cost." The cost of Products developed and manufactured for the Company by NAI shall be as defined in Section 6.1 hereinbelow.


2. Product Development


2.1 Initial Development and Formulation. The Company will develop the types of Products the Company wishes to sell and distribute directly or for its benefit, all of which shall be subject to this Agreement, and shall establish the Specifications therefore. NAI will assist the Company in the design and formulation of the Products as requested by the Company. NAI shall manufacture and package the Products, as more specifically provided for herein.


2.2 Packaging and Labels. The Company and NAI shall collaborate and cooperate in the design and development of the Products and the marketing plans therefore, including the Specifications, packaging and labeling of the Products.


2.3 Ownership of Formulae. It is expressly agreed by the Parties that the formulae relating to the Products that are the subject of this Agreement, whether developed by NAI or the Company, shall be and become the sole and exclusive property of the Company, and NAI agrees to deliver copies of all formulations to the Company at the time of their initial development or when the Products are modified according to new formulae developed pursuant to this Agreement.


3. Production, Purchase Orders, Rolling Forecast, Inventory, Storage, Shipping and Reports


3.1 Production. NAI shall manufacture and package Products in quantities ordered by the Company in accordance with the Specifications, and the terms and conditions set forth in this Agreement. NAI shall manufacture all Products it sells to the Company and shall not purchase such Products from other sources for resale to the Company unless agreed to by the Company in writing and at the Company's sole discretion. NAI may develop for its own use in manufacturing the Products such specifications and quality control parameters as it may deem appropriate, provided they do not contradict the Specifications. The Parties agree NAI may supplement or otherwise modify such parameters at any time and from time to time provided they are in conformance with the Specifications or, if not within those Specifications, are subject to the Company's prior written approval which shall be granted or declined within ten (10) business days of a request therefore. The Company's failure to


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provide written approval to such modifications within the ten (10) business days shall be deemed a denial of NAI's right to deviate from the Specifications.


3.2 Purchase Orders. The Company has provided NAI with its initial purchase order. On or before January 10, 2000, and on or before the tenth day of each March, June, September and December thereafter, the Company shall provide NAI with a purchase order covering all Company projected Product requirements for the calendar quarter commencing on the first day of the following month. Such production/purchase orders shall be firm on submission and shall be filled by NAI in conformance with NAI's reasonable and customary procedures, and in accordance with this Agreement.


3.3 On-Line Ordering. NAI or its designee shall design, develop and establish an Internet based ordering system which will permit NAI to receive, process and fulfill orders from the Company, its distributors and customers via the world wide web. The Company shall design, develop and establish an Internet based order placing software that will interface with NAI's Internet based order processing system and allow the Company, its distributors and customers to place orders to NAI via the world wide web. The Company and NAI shall meet, confer and agree upon the structure and operation of the on-line ordering system.


3.4 Rolling Forecast. On or before January 15, 2000, the Company shall provide NAI with its forecast of Product requirements for the twelve (12) months January through December 2000. On or before the tenth day of each March, June, September and December following the date of the first forecast, the Company shall provide NAI with production forecast updates covering the following twelve (12) months commencing on the first day of the following month. Such forecasts provided by the Company shall be for the convenience of NAI only, and shall not be binding nor constitute purchase orders.


3.5 Inventory. NAI shall order and maintain an inventory of raw materials and packaging materials sufficient to meet the Company's production needs as determined by the purchase orders provided by it under this Section 3 and NAI's reasonable estimation of its own production needs. NAI shall not be required to maintain such inventory in excess of a rolling ninety (90) day supply.


3.6 Storage and Shipment. NAI shall provide suitable storage and warehousing space for all Products for the time and to the extent required for NAI to perform its obligations under this Agreement, which time shall not exceed fifteen (15) days from the originally scheduled shipping date set forth in the applicable purchase order for the Products. Products are to be stored in clean space suitable for storage of food and protection of its contents with respect to integrity and quality, in compliance with good commercial practice and all applicable laws, rules and regulations, including, without limitation, FDCA regulations. Charges, if any, for such storage and warehousing for Products will be paid by NAI and shall be considered a part of the actual cost of production and shall be charged to the Company as a part thereof pursuant to Section 6. NAI shall load Products onto such carriers as it may determine. All Products are delivered F.O.B. NAI's dock and all risk of loss of the Products shall remain with NAI until loaded onto such carriers unless the Company and NAI otherwise mutually agree. The carrier selection, shipment and payment procedures and bill of lading requirements shall be subject to the Company's


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approval which approval shall not be unreasonably withheld, and shall be in accordance with any reasonable instructions issued by the Company. Products are to be shipped via clean trucks and trailers suitable for transportation of food and protection of its contents with respect to integrity and quality, in compliance with good commercial practice and all applicable laws, rules and regulations, including, without limitation, Department of Transportation regulations. NAI is responsible for shipping all Products in accordance with this Agreement. Shipping charges shall be considered a part of the actual cost of production and shall be charged to the Company as a part thereof under Section 6 below.


3.7 Shipping Instructions. NAI shall prepare the Products for shipment to the Company or its designees in quantities and on dates designated by the Company. The Company shall send shipping instructions via facsimile to NAI at least three weeks before the shipment date designated by the Company. NAI shall use its best efforts to accommodate any adjustments to shipping instructions the Company wishes to make; however, adjustments to shipping instructions made less than three weeks prior to the requested shipping date may delay shipping dates, or otherwise be made only upon the mutual agreement of the Company and NAI.


3.8 Production and Shipping Reports. NAI shall regularly provide the Company with production reports and shipment of finished goods reports, in such form as the Company reasonably requests. Reports from NAI's facilities shall be sent to the Company by facsimile in the manner set forth in Section 17.1.


3.9 Inventory Reports. NAI shall provide the Company with regular periodic reports of NAI's inventories of finished Products and raw materials. The report shall be delivered by facsimile in the manner set forth in Section 17.1.


4. NAI's Exclusive Status


4.1 Exclusive Supplier. Except as provided for herein, the Company agrees to order and purchase all requirements it may have, from time to time, for all Products from NAI. The Company may enter into other agreements for the purchase or manufacture of Products during the term of this Agreement without the prior written consent of NAI if any of the following occur:


(a) NAI does not currently directly manufacture or produce the Products that the Company requires or desires and declines to commence manufacturing or producing them within 15 days of request by the Company;


(b) The Company can acquire the Products from other supplier(s) on substantially identical terms as provided in this Agreement and at a lower cost than that charged by NAI and NAI fails or refuses to meet such price; or


(c) Any other failed conditions as set forth in Section 4.2 below occurs.


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4.2 Failed Conditions. In connection with the Products referenced herein, if following diligent investigation, inquiry and conference with NAI, the Company in good faith does not believe NAI satisfies any one or more of the conditions contained herein or any Products are not being manufactured in accordance with the Specifications, or that NAI is unable to provide the Products required, the Company shall give NAI written notice of such determination. Such notice shall state in detail the condition(s) NAI does not satisfy, the reasons the Company believes NAI does not satisfy the stated condition(s), and a detailed statement of facts that would have to exist for NAI to satisfy the failed condition(s). NAI shall have fourteen (14) days following receipt of the written notice referenced in this Section to cure any inability or failure to satisfy any condition(s) listed in a notice from the Company. In the event such failure cannot be reasonably cured within fourteen (14) days, NAI may request from the Company whatever longer period is reasonably required, provided NAI commences such cure within seven (7) days of receipt of a notice from the Company and thereafter diligently pursues the cure to completion. The Company shall not unreasonably withhold its consent to such an additional cure period.


4.3 Effect of Failed Condition. In the event NAI does not cure its inability to satisfy the conditions contained in a notice received from the Company pursuant to Section 4.2 within the time periods set forth therein, then the Company may, upon the earlier to occur of: (i) expiration of such time periods; or (ii) receipt of NAI's written notice it will not cure such conditions, enter into a manufacturing, supply or similar agreement provided the agreement is with an independent third party to purchase the Products that are the subject of the failed condition.


4.4 Alternative Source for Products. The Company may investigate alternative suppliers of the Products in order to (i) determine whether there are Products which the Company may desire to purchase that are not directly manufactured or produced by NAI; (ii) determine whether the Products that the Company is purchasing from NAI are being offered at the lowest available price; and/or (iii) to determine the availability of an alternative source for Products should NAI be unable or unwilling to supply such Products as provided for herein. The Company reserves the right to enter into Agreements and/or purchase Products from such alternative sources on terms and conditions substantially identical to the terms and conditions of this Agreement. NAI shall assist in the investigation and may recommend possible alternative sources of Products, but the Company reserves the right to approve any such alternative sources.


5. Means of Production. NAI shall furnish and maintain, at its own cost and expense, all equipment or resources necessary to manufacture and package the Product in accordance with the Specifications and in compliance with federal, state and local laws, rules and regulations.


6. Compensation, Payment, Materials and Title


6.1 Compensation. As full and complete compensation for all services performed and Products sold hereunder, NAI shall be entitled to receive compensation on a per Product basis at a price set forth in the then current, approved price schedule for all Products. From time to time, upon a change in costs, modification of a Product or development of a new Product, NAI shall deliver a revised price schedule along with the underlying documentation or explanation for the price change(s), to the


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Company for the Company's approval, which approval shall not be unreasonably withheld. Prices for all Products shall not exceed the Company's fully burdened actual cost of producing the Products, including but not limited to materials, testing, capitalized equipment costs, labor, capitalized leasehold improvements, storage, shipping, general and administrative costs. It is the intent of the Parties that NAI shall charge the Company the full cost of the Products as determined by Generally Accepted Accounting Principles prior to any profit. The price paid by the Company to NAI shall include all federal, state and local taxes that may be imposed on the sale or manufacture of the Products. In no event, however, shall the price paid by the Company to NAI exceed the price for which the Company could obtain the same Products from an alternative source on substantially identical terms as this Agreement. The price to the consumer for each Product will be established by the Company at the time of establishment of the Specifications and all subsequent changes thereto shall be made only with the approval of the Company.


6.2 Costs. NAI shall to use its best efforts to contain costs by obtaining competitive prices on raw materials and packaging materials and by continually reviewing and adjusting its operations in the manner deemed desirable by NAI to maintain the quality of the Products at the lowest reasonable cost to the Company, and otherwise to operate efficiently. The Company shall be entitled, at any reasonable time following advance notice to NAI, to audit any underlying documents relating to ingredients, packaging materials and other costs used by NAI to determine the price for Products.


6.3 Research. The Parties agree that from time to time, the other may suggest research, development, testing, and studies concerning the Products. Prior to commencement of such research, the Parties will meet, confer and cooperate in an effort to determine how to conduct, direct, control, and fund such research. The conduct of all studies shall be approved by the Company. The cost of any such research, development, testing and studies will be borne by the Company, unless otherwise agreed. This Section 6.3 shall not apply to NAI's testing or development of Products in the ordinary course of NAI's performance of its obligations under the terms of this Agreement.


6.4 Invoices. Invoices for Products shall be sent to the Company at the time of shipment. Payment in full shall be due within thirty (30) days after receipt by the Company of invoice. A late charge of 1.5% shall be paid by the Company for every 30-day period, or part thereof, any invoice remains unpaid after 30 days.


6.5 Production, Inventory and Audits. The Company and its agents shall have access to NAI's production plants once each calendar quarter, or otherwise following reasonable notice, for the purpose of performing production and inventory audits pertaining to this Agreement. NAI shall be notified in advance of the names of all visiting personnel or agents and their intended dates and times of arrival.


6.6 Title. Title to all Products shall be and remain in NAI until shipped, at which time title shall transfer to the Company, unless the Parties otherwise mutually agree.


7. Quality Control, Testing


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7.1 Specifications. NAI shall manufacture the Products strictly in accordance with all applicable laws, rules and regulations, and the Specifications.


7.2 Raw Materials. NAI shall store all raw materials, packaging materials and finished Products in a clean, dry area, free from insects and rodents, in a manner to prevent entry of foreign materials. Storage and handling shall be strictly in accordance with the provisions of all applicable laws, rules, regulations and the Specifications and any reasonable written instructions issued by the Company.


7.3 Quality of Materials. NAI shall have each shipment of raw materials and packaging materials, analyzed for such matters as it may reasonably elect before any said materials can be used in making and packaging the Product. Such analysis will be in the nature of quality control and may be conducted in-house or by an outside laboratory of NAI's choosing. Outside lab ...