<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 2, 1998
REGISTRATION NO. 333-52109
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
NATROL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 2833 95-3560780
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification
Organization) No.)
</TABLE>
21411 PRAIRIE STREET
CHATSWORTH, CALIFORNIA 91311
(818) 739-6000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
ELLIOTT BALBERT
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT
NATROL, INC.
21411 Prairie Street
Chatsworth, California 91311
(818) 739-6000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
JOHN R. LECLAIRE, P.C. JOHN A. BURGESS, ESQ.
ANDREW F. VILES, ESQ. VIRGINIA K. KAPNER, ESQ.
Goodwin, Procter & Hoar LLP Hale and Dorr LLP
Exchange Place 60 State Street
Boston, Massachusetts 02109-2881 Boston, Massachusetts 02109
(617) 570-1000 (617) 526-6000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
------------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. / / 333-
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / 333-
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 2, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
3,940,000 SHARES
[LOGO]
COMMON STOCK
------------------
Of the 3,940,000 shares of Common Stock offered hereby, 3,200,000 shares are
being sold by the Company and 740,000 shares are being sold by the Selling
Stockholders. See "Principal and Selling Stockholders." The Company will not
receive any of the proceeds from the sale of the shares by the Selling
Stockholders.
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering price
will be between $12.00 and $14.00 per share. See "Underwriting" for a discussion
of the factors to be considered in determining the initial public offering
price. The Common Stock has been approved for quotation on the Nasdaq National
Market upon completion of this offering under the symbol "NTOL."
SEE "RISK FACTORS" COMMENCING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS
TO DISCOUNTS AND TO TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2)(3) STOCKHOLDERS (3)
<S> <C> <C> <C> <C>
Per Share..................... $ $ $ $
Total (3)..................... $ $ $ $
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities under the Securities Act of 1933,
as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $1,050,000.
(3) The Company and the Selling Stockholders have granted to the Underwriters a
30-day option to purchase up to 295,500 and 295,500, respectively,
additional shares of Common Stock solely to cover over-allotments, if any.
If such option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions, Proceeds to Company and Proceeds to Selling
Stockholders will be $ , $ , $ and $ , respectively. See
"Underwriting."
------------------------------
The shares of Common Stock are offered by the several Underwriters subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of the shares of Common Stock
will be made at the offices of Adams, Harkness & Hill, Inc., Boston,
Massachusetts, on or about , 1998.
Adams, Harkness & Hill, Inc.
NationsBanc Montgomery Securities LLC
Piper Jaffray Inc.
The date of this Prospectus is , 1998.
<PAGE>
[A photographic display of certain of the Company's products set against a
graphic background with the Company's name and leaf logo prominently displayed
at the top of the page and the text "Quality Dietary Supplements" directly below
the logo.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN THESE
SECURITIES OR THE IMPOSITION OF PENALTY BIDS IN CONNECTION WITH THE OFFERING.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
Natrol-Registered Trademark-, Kavatrol-TM-, My Favorite
Multiple-Registered Trademark-, Mood Support-TM-,
Quintessence-Registered Trademark-, Highgar Farms-Registered Trademark-,
SAF-Registered Trademark-, Thera-C-TM-, Cravex-TM- and the Company's logo are
trademarks of the Company and are used throughout this document as such. All
other trademarks and trade names referred to in this Prospectus are the property
of their respective owners.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
APPEARING ELSEWHERE IN THIS PROSPECTUS. INVESTORS SHOULD CAREFULLY CONSIDER THE
RISK FACTORS CONTAINED IN THIS PROSPECTUS RELATED TO THE PURCHASE OF COMMON
STOCK OF THE COMPANY. SEE "RISK FACTORS."
THE COMPANY
Natrol, Inc. ("Natrol" or the "Company") manufactures and markets branded,
high-quality dietary supplements. The Company sells its products under the
Natrol brand name through multiple distribution channels throughout the United
States, including domestic health food stores and mass market drug, retail and
grocery store chains. The Company's select line of more than 145 products
consists of approximately 500 stock keeping units (i.e., units with different
unit counts or dosage strengths, or "SKUs") and includes vitamins, minerals,
herbs, specialty formulations, weight control products and hormones. The Company
recently strengthened its product categories through an acquisition which
included two brands of garlic products as well as a bulk ingredient business
which supplies dehydrated vegetable products to other manufacturers. The
Company's net sales have increased from $9.5 million in 1993 to $42.9 million in
1997.
The total United States retail market for dietary supplements is highly
fragmented and has experienced rapid growth, generating $6.5 billion in 1996
sales compared with $5.0 billion in 1994. The Company believes that this rapid
growth is due to a number of factors, including: (i) the aging of the "baby
boom" generation combined with consumers' tendency to purchase more dietary
supplements as they age; (ii) the publication of research findings supporting
the positive health effects of certain dietary supplements; (iii) increased
media attention on the use and efficacy of dietary supplements; (iv) the
nationwide trend toward preventive medicine in response to rising healthcare
costs; (v) increased consumer interest in herbs and herb-related supplements;
and (vi) increased interest in healthier lifestyles and the connection between
diet and health.
The Company has achieved growth within its industry by aggressively
promoting the Natrol brand and regularly introducing new products to meet
emerging trends and consumer demands. The Company uses a widespread multimedia
marketing and advertising strategy to build strong recognition of the Natrol
brand across multiple distribution channels. The Company invested 10.5%, 13.8%
and 16.2% of its annual net sales on marketing and advertising in 1995, 1996 and
1997, respectively, and seeks to invest approximately 15% of its annual net
sales on marketing and advertising on an ongoing basis. The Company's marketing
strategy focuses on national print, radio and television advertising as well as
cooperative advertising programs at the retail level. This strategy is designed
to create consumer demand, build strong relationships with the Company's
marketing partners and encourage retailers to carry more Natrol product
categories and a greater number of SKUs within those categories. Recent national
advertising initiatives include the "Natrol Health Minute," as heard on the
nationally syndicated Dr. Laura Schlessinger and Rush Limbaugh radio shows, and
commercials featured on the CNN/Turner Network.
Since its inception, the Company has emphasized the ongoing development and
marketing of new products in order to capitalize on and create market
opportunities. As a part of its product development efforts, the Company
introduced 34 new products with 53 SKUs in 1997 and 21 new products with 28 SKUs
in the three months ended March 31, 1998. Recent proprietary product
introductions include Kavatrol, Mood Support and the Natrol for Women product
line. Products introduced by the Company in 1997 accounted for $8.9 million, or
20.7%, of the Company's net sales in 1997. Net sales of these products together
with increased net sales of existing products enabled the Company to more than
offset substantial declines in net sales of Melatonin and DHEA.
The Company sells its products to health food stores through the leading
national distributors of dietary supplements, including United Natural Foods and
Tree of Life, as well as directly to GNC. The Company's mass market retail
customers include major drug and retail chains, including Walgreens, American
Drug Stores, Wal-Mart and Target, as well as grocery stores and supermarkets,
including Dominick's, Ralphs and Von's. The Company's products are also
available at a wide range of other distribution points, including mail order and
the Internet, airport shops, resort hotels and salons. The Company manufactures
substantially all of its products at its 90,000 square foot manufacturing
facility/headquarters located in Chatsworth, California. The Company believes
its manufacturing facility can support three times the Company's current sales
volume.
Natrol's objective is to manufacture and market high-quality dietary
supplements that are strongly identified with the Natrol brand. The Company
pursues this objective by: (i) continuing to build strong brand recognition;
(ii) expanding its presence and penetration in the health food store and mass
market distribution channels; (iii) continuing to develop new products; (iv)
expanding its bulk sales business; (v) developing additional distribution
channels such as mail order and the Internet, direct selling (multi-level
marketing as well as sales to health professionals), direct retail and
international; and (vi) pursuing strategic acquisitions that allow it to broaden
its product lines, increase the distribution channels it serves or otherwise
complement its business or further its strategic goals.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by:
The Company...................................... 3,200,000 shares
The Selling Stockholders......................... 740,000 shares
Common Stock to be outstanding after the offering
(1).............................................. 13,000,000 shares
Use of proceeds.................................... To repay existing indebtedness, to
redeem all outstanding shares of
Redeemable Preferred Stock, for capital
expenditures and for working capital
and other general corporate purposes,
including possible acquisitions. The
Company will not receive any of the
proceeds from the sale of shares of
Common Stock by the Selling
Stockholders. See "Use of Proceeds."
Proposed Nasdaq National Market symbol............. NTOL
</TABLE>
- ------------------------
(1) Excludes: (i) 720,000 shares of Common Stock issuable upon the exercise of
outstanding stock options at a weighted average exercise price of $5.87 per
share at June 30, 1998; and (ii) 750,000 and 225,000 additional shares of
Common Stock reserved for issuance under the Company's 1996 Stock Option and
Grant Plan, as amended (the "1996 Stock Plan"), and the Company's 1998
Employee Stock Purchase Plan (the "Purchase Plan"), respectively. Under the
terms of the 1996 Stock Plan, the sale of the 3,200,000 shares offered by
the Company hereby will result in the reservation for issuance of an
additional 480,000 shares of Common Stock under the 1996 Stock Plan. See
"Management--Employee Stock and Other Benefit Plans-- 1996 Stock Option and
Grant Plan" and "--1998 Employee Stock Purchase Plan."
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER ENDED
YEAR ENDED DECEMBER 31, 31, 1997 MARCH 31,
----------------------------------------------------- PRO --------------------
1993 1994 1995 1996 1997 FORMA(1) 1997 1998
--------- --------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF INCOME
DATA:
Net sales........................ $ 9,484 $ 12,214 $ 23,566 $ 40,802 $ 42,875 $ 51,583 $ 9,909 $ 13,116
Cost of goods sold............... 5,658 7,106 12,214 18,497 19,800 23,720 4,475 6,321
--------- --------- --------- --------- --------- ----------- --------- ---------
Gross profit................... 3,826 5,108 11,352 22,305 23,075 27,863 5,434 6,795
--------- --------- --------- --------- --------- ----------- --------- ---------
Selling and marketing expenses... 2,194 2,552 4,458 8,736 11,398 13,353 2,990 3,477
General and administrative
expenses....................... 1,197 1,739 3,378 5,431 4,450 7,632 1,055 1,230
--------- --------- --------- --------- --------- ----------- --------- ---------
Total operating expenses....... 3,391 4,291 7,836 14,167 15,848 20,985 4,045 4,707
--------- --------- --------- --------- --------- ----------- --------- ---------
Operating income................. 435 817 3,516 8,138 7,227 6,878 1,389 2,088
Interest income (expense), net... 33 (25) (19) 54 (220) (1,057) (35) (131)
--------- --------- --------- --------- --------- ----------- --------- ---------
Income before income tax
provision...................... 468 792 3,497 8,192 7,007 5,821 1,354 1,957
Income tax provision............. 189 301 1,453 2,299(3) 2,816 2,327 544 782
--------- --------- --------- --------- --------- ----------- --------- ---------
Net income....................... $ 279 $ 491 $ 2,044 $ 5,893 $ 4,191 $ 3,494 $ 810 $ 1,175
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
Basic earnings per share......... $ 0.05 $ 0.08 $ 0.34 $ 0.94 $ 0.59 $ 0.49 $ 0.11 $ 0.17
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
Diluted earnings per share....... $ 0.05 $ 0.08 $ 0.34 $ 0.83 $ 0.41 $ 0.34 $ 0.08 $ 0.11
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
Weighted average common shares
outstanding-basic.............. 6,000 6,000 6,000 6,275 7,100 7,100 7,100 7,100
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
Weighted average common shares
outstanding-diluted............ 6,000 6,000 6,000 7,065 10,273 10,273 10,262 10,273
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
<CAPTION>
THREE
MONTHS
ENDED MARCH
31, 1998
PRO
FORMA(2)
-----------
<S> <C>
CONSOLIDATED STATEMENT OF INCOME
DATA:
Net sales........................ $ 14,948
Cost of goods sold............... 7,168
-----------
Gross profit................... 7,780
-----------
Selling and marketing expenses... 4,002
General and administrative
expenses....................... 1,676
-----------
Total operating expenses....... 5,678
-----------
Operating income................. 2,102
Interest income (expense), net... (285)
-----------
Income before income tax
provision...................... 1,817
Income tax provision............. 727
-----------
Net income....................... $ 1,090
-----------
-----------
Basic earnings per share......... $ 0.15
-----------
-----------
Diluted earnings per share....... $ 0.11
-----------
-----------
Weighted average common shares
outstanding-basic.............. 7,100
-----------
-----------
Weighted average common shares
outstanding-diluted............ 10,273
-----------
-----------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED(4)
--------- --------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................................................. $ 2,229 $ 22,042
Working capital....................................................................... 5,299 29,624
Total assets.......................................................................... 32,029 51,843
Long-term debt, less current maturities............................................... 7,375 --
Convertible participating preferred stock............................................. 12,000 --
Total stockholders' equity (deficit).................................................. (389) 43,311
</TABLE>
- ------------------------------
(1) Gives effect to the Company's acquisition on February 27, 1998 (the
"Pure-Gar Acquisition") of substantially all of the assets and assumption of
specified liabilities of Pure-Gar L.P. ("Pure-Gar") as if such transaction
had been completed on January 1, 1997. The pro forma consolidated statement
of income data has been adjusted for the combined operating results of
Natrol and Pure-Gar, amortization of goodwill associated with the Pure-Gar
Acquisition, interest expense on the term loan and line of credit used to
fund the Pure-Gar Acquisition, and related tax effects. The pro forma
consolidated statement of income data includes a non-recurring legal
settlement expense incurred by Pure-Gar of $733,000. See "Capitalization"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
(2) Gives effect to the Pure-Gar Acquisition as if such transaction had been
completed on January 1, 1998. The pro forma consolidated statement of income
data has been adjusted for the combined operating results of Natrol and
Pure-Gar, amortization of goodwill associated with the Pure-Gar Acquisition,
interest expense on the term loan and line of credit used to fund the
Pure-Gar Acquisition and related tax effects. See "Capitalization" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(3) In 1996, the Company was taxed under Subchapter S of the Internal Revenue
Code of 1986, as amended (the "Code") for the period from July 1, 1996
through September 29, 1996, and was taxed under Subchapter C of the Code for
the period from January 1, 1996 through June 30, 1996 and for the period
from September 30, 1996 through December 31, 1996. Accordingly, the
provision for income taxes for the period in which the Company was taxed as
a Subchapter S corporation reflects primarily state income tax, if any. If
the Company had been subject to taxation under Subchapter C of the Code for
the entire year ended December 31, 1996, the pro forma provision for income
taxes would have been $3.2 million and pro forma basic earnings per share
and pro forma diluted earnings per share would have been $0.80 and $0.71,
respectively.
(4) Gives effect to (i) the sale of 3,200,000 shares of Common Stock offered by
the Company hereby at an assumed initial public offering price of $13.00 per
share and the receipt and application of the estimated net proceeds
therefrom as if such transaction had been completed on March 31, 1998 and
(ii) the conversion of all outstanding shares of the Company's Convertible
Participating Preferred Stock, par value $0.01 per share (the "Convertible
Preferred Stock"), into shares of Common Stock and shares of the Company's
Redeemable Preferred Stock, par value $0.01 per share (the "Redeemable
Preferred Stock"), concurrently with the completion of this offering and the
redemption of all shares of Redeemable Preferred Stock to be outstanding
immediately following such conversion for $6.0 million. See "Use of
Proceeds," "Capitalization" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
THE RESULTS FOR THE INTERIM PERIODS ARE NOT NECESSARILY INDICATIVE OF THE
RESULTS FOR THE FULL FISCAL YEAR. THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
DATA SET FORTH ABOVE DO NOT PURPORT TO (I) REPRESENT WHAT THE CONSOLIDATED
RESULTS OF OPERATIONS OF THE COMPANY WOULD HAVE BEEN IF THE TRANSACTIONS
REFLECTED THEREIN HAD IN FACT OCCURRED AT THE ASSUMED DATES OR (II) PREDICT THE
FUTURE CONSOLIDATED RESULTS OF OPERATIONS OF THE COMPANY.
------------------------------
The Company was incorporated under the laws of Delaware on October 1, 1997.
The Company's predecessor was incorporated under the laws of California in 1980.
The Company's principal executive offices are located at 21411 Prairie Street,
Chatsworth, California 91311, and its telephone number is (818) 739-6000.
------------------------
EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND HAS BEEN ADJUSTED TO
REFLECT (I) A 1-FOR-10 REVERSE STOCK SPLIT OF ALL CLASSES OF THE COMPANY'S
CAPITAL STOCK EFFECTED ON JANUARY 15, 1998, (II) A 100-FOR-1 STOCK SPLIT OF THE
COMMON STOCK EFFECTED ON JUNE 19, 1998, (III) THE CONVERSION OF ALL OUTSTANDING
SHARES OF THE CONVERTIBLE PREFERRED STOCK INTO SHARES OF COMMON STOCK AND SHARES
OF THE REDEEMABLE PREFERRED STOCK CONCURRENTLY WITH THE COMPLETION OF THIS
OFFERING AND (IV) THE REDEMPTION OF ALL SHARES OF THE REDEEMABLE PREFERRED STOCK
TO BE OUTSTANDING IMMEDIATELY FOLLOWING SUCH CONVERSION OF THE CONVERTIBLE
PREFERRED STOCK. UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES TO THE
"COMPANY" OR "NATROL" MEAN NATROL, INC., ITS PREDECESSOR AND ITS SUBSIDIARIES.
5
<PAGE>
RISK FACTORS
THE FOLLOWING RISK FACTORS SHOULD BE CAREFULLY CONSIDERED IN ADDITION TO THE
OTHER INFORMATION IN THIS PROSPECTUS BEFORE PURCHASING THE COMMON STOCK OFFERED
BY THIS PROSPECTUS. EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE
DISCUSSION CONTAINED IN THIS PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS"
THAT INVOLVE RISK AND UNCERTAINTIES. THESE STATEMENTS MAY BE IDENTIFIED BY THE
USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES," "EXPECTS," "MAY," "WILL,"
"SHOULD" OR "ANTICIPATES" OR THE NEGATIVE THEREOF OR SIMILAR EXPRESSIONS OR BY
DISCUSSIONS OF STRATEGY. THE CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS
SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS
WHEREVER THEY APPEAR IN THIS PROSPECTUS. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE DISCUSSED IN THIS PROSPECTUS. IMPORTANT FACTORS
THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED
BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE HEREIN.
EFFECT OF UNFAVORABLE PUBLICITY. The Company believes the dietary
supplement market is affected by national media attention regarding the
consumption of dietary supplements. Future scientific research or publicity may
not be favorable to the dietary supplement industry or to any particular
product, and may not be consistent with earlier favorable research or publicity.
Because of the
Company's dependence on consumers' perceptions, adverse publicity associated
with illness or other adverse effects resulting from the consumption of the
Company's products or any similar products distributed by other companies and
future reports of research that are perceived as less favorable or that question
earlier research could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company is highly dependent
upon consumers' perceptions of the safety and quality of its products as well as
dietary supplements distributed by other companies. Thus, the mere publication
of reports asserting that such products may be harmful or questioning their
efficacy could have a material adverse effect on the Company's business,
financial condition and results of operations, regardless of whether such
reports are scientifically supported or whether the claimed harmful effects
would be present at the dosages recommended for such products. See "--Absence of
Conclusive Clinical Studies."
DEPENDENCE ON NEW PRODUCTS. The Company believes growth of its net sales is
substantially dependent upon its ability to introduce new products. The Company
seeks to introduce additional products each year. The success of new products is
dependent upon a number of factors, including the Company's ability to develop
products that will appeal to consumers and respond to market trends in a timely
manner. There can be no assurance that the Company's efforts to develop new
products will be successful or that consumers will accept the Company's new
products. In addition, products currently experiencing strong popularity and
rapid growth may not maintain their sales over time. For example, the Company's
net sales of DHEA, a specialty dietary supplement introduced by the Company in
March 1996, peaked at $4.6 million for the three months ended December 31, 1996
and accounted for 39.5% of the Company's net sales in such period. In
comparison, the Company's net sales of DHEA were only $273,000, or 2.1% of the
Company's net sales, for the three months ended March 31, 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Business Strategy."
GOVERNMENT REGULATION. The manufacture, packaging, labeling, advertising,
promotion, distribution and sale of the Company's products are subject to
regulation by numerous governmental agencies, the most active of which is the
U.S. Food and Drug Administration (the "FDA"), which regulates the Company's
products under the Federal Food, Drug and Cosmetic Act (the "FDCA") and
regulations promulgated thereunder. The Company's products are also subject to
regulation by, among other regulatory entities, the Consumer Product Safety
Commission (the "CPSC"), the U.S. Department of Agriculture (the "USDA") and the
Environmental Protection Agency (the "EPA"). Advertising and other forms of
promotion and methods of marketing of the Company's products are subject to
regulation by the U.S. Federal Trade Commission (the "FTC"), which regulates
these activities under the Federal Trade
6
<PAGE>
Commission Act (the "FTCA"). The manufacture, labeling and advertising of the
Company's products are also regulated by various state and local agencies as
well as those of each foreign country to which the Company distributes its
products.
The Company's products are generally regulated as dietary supplements under
the FDCA, and are, therefore, not subject to pre-market approval by the FDA.
However, these products are subject to extensive regulation by the FDA relating
to adulteration and misbranding. For instance, the Company is responsible for
ensuring that all dietary ingredients in a supplement are safe, and must notify
the FDA in advance of putting a product containing a new dietary ingredient
(i.e., an ingredient not marketed for use as a supplement before October 15,
1994) on the market and furnish adequate information to provide reasonable
assurance of the ingredient's safety. Further, if the Company makes statements
about the supplement's effects on the structure or function of the body, the
Company must, among other things, have substantiation that the statements are
truthful and not misleading. In addition, the Company's product labels must bear
proper ingredient and nutritional labeling and the Company's supplements must be
manufactured in accordance with current Good Manufacturing Practice regulations
("GMPs") for foods. The FDA has issued an advanced notice of proposed rulemaking
to consider whether to develop specific GMP regulations for dietary supplements
and dietary supplement ingredients. Such regulations, if promulgated, may be
significantly more rigorous than current requirements and contain quality
assurance requirements similar to GMPs for drug products. A product can be
removed from the market if it is shown to pose a significant or unreasonable
risk of illness or injury. Moreover, if the FDA determines that the "intended
use" of any of the Company's products is for the diagnosis, cure, mitigation,
treatment or prevention of disease, the product would meet the definition of a
drug and would require pre-market approval of safety and effectiveness prior to
its manufacture and distribution. Failure of the Company to comply with
applicable FDA regulatory requirements may result in, among other things,
injunctions, product withdrawals, recalls, product seizures, fines and criminal
prosecutions.
The Company's advertising of its dietary supplement products is subject to
regulation by the FTC under the FTCA. Section 5 of the FTCA prohibits unfair
methods of competition and unfair or deceptive acts or practices in or affecting
commerce. Section 12 of the FTCA provides that the dissemination or the causing
to be disseminated of any false advertisement pertaining to, among other things,
drugs or foods, which includes dietary supplements, is an unfair or deceptive
act or practice. Under the FTC's "substantiation doctrine," an advertiser is
required to have a "reasonable basis" for all product claims at the time the
claims are first used in advertising or other promotions. Failure to adequately
substantiate claims may be considered either as a deceptive or unfair practice.
Pursuant to this FTC requirement, the Company is required to have adequate
substantiation for all advertising claims made about its products. The type of
substantiation will be dependent upon the product claims made. For example, a
health claim normally would require competent and reliable scientific evidence,
while a taste claim would require only survey evidence.
In recent years the FTC has initiated numerous investigations of dietary
supplement and weight loss products and companies. The FTC is reexamining its
regulation of advertising for dietary supplements and has announced that it will
issue a guidance document to assist dietary supplement marketers in
understanding and complying with the substantiation requirement. Upon release of
this guidance document, Natrol will be required to evaluate its compliance with
the guideline and may be required to change its advertising and promotional
practices.
On two occasions, claims made by the Company have been the subject of
investigation by the FTC. In both matters, the FTC terminated its investigation
without further action or any formal findings. The Company is not currently a
party to any investigation, consent order or other decree of the FTC. The
Company may be subject to investigation by the FTC in the future. If the FTC has
reason to believe the law is being violated (e.g., the Company does not possess
adequate substantiation for product claims), it can initiate enforcement action.
The FTC has a variety of processes and remedies available to it for
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enforcement, both administratively and judicially, including compulsory process
authority, cease and desist orders and injunctions. FTC enforcement could result
in orders requiring, among other things, limits on advertising, consumer
redress, divestiture of assets, rescission of contracts and such other relief as
may be deemed necessary. Violation of such orders could result in substantial
financial or other penalties. Any such action by the FTC could materially
adversely affect the Company's ability to successfully market its products.
The Company manufactures certain products pursuant to contracts with
customers who distribute the products under their own or other trademarks. Such
private label customers are subject to government regulations in connection with
their purchase, marketing, distribution and sale of such products, and the
Company is subject to government regulations in connection with its manufacture,
packaging and labeling of such products. However, the Company's private label
customers are independent companies, and their labeling, marketing and
distribution of such products is beyond the Company's control. The failure of
these customers to comply with applicable laws or regulations could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Governmental regulations in foreign countries where the Company plans to
commence or expand sales may prevent or delay entry into the market or prevent
or delay the introduction, or require the reformulation, of certain of the
Company's products. Compliance with such foreign governmental regulations is
generally the responsibility of the Company's distributors in those countries.
These distributors are independent contractors over whom the Company has limited
control.
The Company may be subject to additional laws or regulations by the FDA or
other federal, state or foreign regulatory authorities, the repeal of laws or
regulations which the Company considers favorable, such as the Dietary
Supplement Health and Education Act of 1994 ("DSHEA"), or more stringent
interpretations of current laws or regulations, from time to time in the future.
The Company is unable to predict the nature of such future laws, regulations,
interpretations or applications, nor can it predict what effect additional
governmental regulations or administrative orders, when and if promulgated,
would have on its business in the future. They could, however, require the
reformulation of certain products to meet new standards, the recall or
discontinuance of certain products that cannot be reformulated, imposition of
additional recordkeeping requirements, expanded documentation of the properties
of certain products, or expanded or different labeling or scientific
substantiation. Any or all of these requirements could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business--Regulatory Matters."
PRODUCT LIABILITY. The Company, like other retailers, distributors and
manufacturers of products designed for human consumption, faces an inherent risk
of exposure to product liability claims in the event that the use of its
products results in injury. The Company may be subjected to various product
liability claims, including, among others, that its products include inadequate
instructions for use or inadequate warnings concerning possible side effects and
interactions with other substances. In addition, although the Company maintains
strict quality controls and procedures, including the quarantine and testing of
raw materials and qualitative and quantitative testing of selected finished
products, there can be no assurance that the Company's products will not contain
contaminated substances. In addition, in certain cases the Company relies on
third party manufacturers for its products. With respect to product liability
claims, the Company has $2.0 million in aggregate liability insurance. If such
claims should exceed $2.0 million, the Company has excess umbrella liability
insurance of up to $15.0 million. However, there can be no assurance that such
insurance will continue to be available at a reasonable cost, or, if available,
will be adequate to cover liabilities. The Company generally seeks to obtain
contractual indemnification from parties supplying raw materials for its
products or manufacturing or marketing its products, and to be added as an
additional insured under such parties' insurance policies. Any such
indemnification or insurance, however, is limited by its terms and any such
indemnification, as a practical matter, is limited to the creditworthiness of
the indemnifying party. In the event that the Company does not have adequate
insurance or contractual indemnification, product
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liabilities relating to its products could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Legal Matters."
DEPENDENCE ON SIGNIFICANT CUSTOMERS. Net sales to Walgreens accounted for
15.3% of the Company's net sales for the three months ended March 31, 1998 and
17.7% and 12.6% of the Company's net sales in 1997 and 1996, respectively. Net
sales to Tree of Life accounted for 10.4% of the Company's net sales for the
three months ended March 31, 1998 and 11.6% and 10.2% of the Company's net sales
in 1997 and 1996, respectively. Net sales to GNC accounted for 3.0% of the
Company's net sales for the three months ended March 31, 1998 and 2.3% and 14.5%
of the Company's net sales in 1997 and 1996, respectively. The Company does not
have long-term contracts with any of its customers. There can be no assurance
that Walgreens, Tree of Life or the Company's other major customers will
continue as major customers of the Company. The loss of either Walgreens or Tree
of Life as a major customer, the loss of a significant number of other major
customers, or a significant reduction in purchase volume by or financial
difficulty of such customers, for any reason, could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business--Sales and Distribution."
DEPENDENCE ON KEY PERSONNEL. The Company believes that its continued
success depends to a significant extent on the management and other skills of
Elliott Balbert, the Company's Chairman, Chief Executive Officer and President,
and its senior management team, as well as its ability to attract other skilled
personnel. Many of the Company's employees are not covered by a non-competition
agreement, and the ability of the Company to enforce such an agreement in
California, the state in which the Company's operations are principally located,
is limited and uncertain. The loss or unavailability of the services of Mr.
Balbert or the other members of the Company's senior management team or the
inability to attract other skilled personnel could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Management."
ABILITY TO MANAGE GROWTH. The Company believes that continued growth may
strain the Company's management, operations, sales and administrative personnel
and other resources. In order to serve the needs of its existing and future
customers, the Company has increased and intends to continue to increase its
workforce, which requires the Company to attract, train, motivate, manage and
retain qualified employees. The Company's ability to manage further growth
depends in part upon the Company's ability to expand its operating, management,
information and financial systems, and production capacity, which may
significantly increase its future operating expenses. No assurance can be given
that the Company's business will grow in the future or that the Company will be
able to effectively manage such growth. The Company's inability to manage its
growth successfully could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--
Business Strategy."
RISKS ASSOCIATED WITH ACQUISITIONS. The Company recently completed its
first acquisition and expects to pursue additional acquisitions in the future as
a part of its business strategy. The Company faces significant competition for
acquisition opportunities from numerous companies, many of which have greater
financial resources than the Company. Accordingly, there can be no assurance
that attractive acquisition opportunities will be available to the Company.
There can be no assurance that the Company will be able to obtain financing for
or otherwise consummate any future acquisitions. Moreover, acquisitions involve
numerous risks, including the risk that the acquired business will not perform
in accordance with expectations, difficulties in the integration of the
operations and products of the acquired businesses with those of the Company,
the diversion of the Company's management's attention from other aspects of the
Company's business, the risks associated with entering geographic and product
markets in which the Company has limited or no direct prior experience and the
potential loss of key employees of the acquired business. The acquisition of
another business can also subject the Company to liabilities and claims arising
out of such business. Future acquisitions would likely require additional
financing, which would likely result in an increase in the Company's
indebtedness or the issuance of
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additional capital stock, which may be dilutive to the Company's stockholders,
including purchasers of shares offered hereby. In addition, to the extent the
Company has outstanding indebtedness under the Company's credit facility or is
required to incur indebtedness thereunder to consummate an acquisition, the
consent of the lender under the credit facility will be required prior to such
acquisition.
The Pure-Gar Acquisition resulted in a significant increase in the Company's
goodwill and any future acquisitions may result in additional goodwill and
related amortization expense. At March 31, 1998, goodwill on the Company's
balance sheet was $9.0 million, representing 28.0% of the Company's total assets
at that date. In the event of any sale or liquidation of the Company or a
portion of its assets, there can be no assurance that the value of the Company's
intangible assets will be realized. In addition, the Company continually
evaluates whether events and circumstances have occurred indicating that any
portion of the remaining balance of the amount allocable to the Company's
intangible assets may not be recoverable. When factors indicate that the amount
allocable to the Company's intangible assets should be evaluated for possible
impairment, the Company may be required to reduce the carrying value of such
assets. Any future determination requiring the write-off of a significant
portion of unamortized intangible assets could have a material adverse effect on
the Company's business, financial condition and operating results.
The Company regularly evaluates potential acquisitions of other businesses,
products and product lines and may hold discussions regarding such potential
acquisitions. As a general rule, the Company will publicly announce such
acquisitions only after a definitive agreement has been signed. See "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations-- Liquidity and Capital Resources" and "Business--Business
Strategy."
ABSENCE OF CONCLUSIVE CLINICAL STUDIES. Although many of the ingredients in
the Company's products are vitamins, minerals, herbs and other substances for
which there is a long history of human consumption, some of the Company's
products contain ingredients for which no such history exists. In addition,
although the Company believes all of its products are safe when taken as
directed by the Company, there is little long-term experience with human
consumption of certain of these product ingredients in concentrated form.
Accordingly, there can be no assurance that the Company's products, even when
used as directed, will have the effects intended or will not have harmful side
effects. Any such unintended effects may result in adverse publicity or product
liability claims which could have a material adverse effect on the Company's
business, financial condition and results of operations. See "--Effect of
Unfavorable Publicity" and "--Product Liability."
COMPETITION. The dietary supplement industry is highly competitive.
Numerous companies, many of which have greater size and financial, personnel,
distribution and other resources than the Company, compete with the Company in
the development, manufacture and marketing of dietary supplements. The Company's
principal competition in the health food store distribution channel comes from a
limited number of large nationally known manufacturers and many smaller
manufacturers of dietary supplements. In the mass market distribution channel,
the Company's principal competition comes from broadline manufacturers, major
private label manufacturers and other companies. In recent years, a number of
the Company's competitors have begun to market and sell their products under
different labels in both the health food store and the mass market distribution
channels. In addition, large pharmaceutical companies and packaged food and
beverage companies compete with the Company on a limited basis in the dietary
supplement market. With respect to Ester-C and the Company's Natrol Premium
category, the Company faces significant additional competition from large
pharmaceutical companies that market vitamins, multivitamins and minerals in the
mass market distribution channel. Increased competition from such companies
could have a material adverse effect on the Company because such companies have
greater financial and other resources available to them and possess
manufacturing, distribution and marketing capabilities far greater than those of
the Company. The Company also faces competition in both the health food store
and mass market distribution channels
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from private label dietary supplements and multivitamins offered by health and
natural food store chains, drugstore chains, mass merchandisers and supermarket
chains. See "Business--Competition."
RISKS ASSOCIATED WITH SUPPLY OF RAW MATERIALS. The Company obtains all of
its raw materials for the manufacture of its products from third-party
suppliers. Many of the raw materials used in the Company's products are
harvested internationally. With the exception of bulk garlic and
Ester-C-Registered Trademark-, the Company does not have contracts with any
suppliers committing such suppliers to provide the materials required for the
production of its products. In the last few years, natural vitamin E, beta
carotene and melatonin have had significant price fluctuations as a result of
short supply or increases in demand. The Company has experienced occasional
shortages of raw materials for a limited number of its products. There can be no
assurance that suppliers, including suppliers of bulk garlic and Ester-C, will
provide the raw materials needed by the Company in the quantities requested or
at a price the Company is willing pay. Because the Company does not control the
actual production of these raw materials, it is also subject to delays caused by
interruption in production of materials based on conditions not within its
control. Such conditions include job actions or strikes by employees of
suppliers, weather, crop conditions, transportation interruptions and natural
disasters or other catastrophic events. With respect to products that are sold
by the Company under the supplier's trademark, such as Ester-C and
Tonalin-Registered Trademark-, the Company is limited to that single supplier as
a source of raw material for that product. As a result, any shortage of raw
materials from that supplier would adversely affect the Company's ability to
manufacture that product. The inability of the Company to obtain adequate
supplies of raw materials for its products at favorable prices, or at all, could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Manufacturing and Product Quality."
SALES AND EARNINGS VOLATILITY. The Company's sales and earnings continue to
be subject to volatility based upon, among other things: (i) trends and general
conditions in the dietary supplement industry and the ability of the Company to
recognize such trends and effectively introduce and market new products in
response to such trends; (ii) the introduction of new products by the Company or
its competitors; (iii) the loss of one or more significant customers; (iv)
increased media attention on the use and efficacy of dietary supplements; (v)
consumers' perceptions of the products and operations of the Company or its
competitors; and (vi) the availability of raw materials from suppliers. Sales
and earnings volatility as a result of the foregoing factors may affect the
Company's operating results from period to period which may adversely affect the
market price of the Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISKS ASSOCIATED WITH MANUFACTURING. The Company's results of operations
are dependent upon the continued operation of its manufacturing facility in
Chatsworth, California, at its current levels. The operation of dietary
supplement manufacturing plants involves many risks, including the breakdown,
failure or substandard performance of equipment, natural and other disasters,
and the need to comply with the requirements of directives of government
agencies, including the FDA. In particular, the Company's manufacturing facility
is located in southern California, a geographic area that has historically been
prone to earthquakes, which in some cases have been catastrophic. Prior to the
Company's lease and build-out of the building in which its manufacturing
facility is located, the building was severely damaged in a major earthquake on
January 17, 1994, the epicenter of which was within five miles of the building.
Although the building was rebuilt with an enhanced ability to withstand
earthquakes and conforms to current local and state code requirements, the
Company's manufacturing facility could be damaged or destroyed in the event of
an earthquake. Any such damage or destruction would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company does not carry earthquake insurance because such insurance is
unobtainable on commercially reasonable terms in the Company's geographic
location. The Company's softgel and liquid products are manufactured by outside
contractors. The Company's profit margins on these products and its ability to
deliver these products on a timely basis are dependent on the ability of the
outside manufacturers to continue to supply products that meet the Company's
quality standards in a timely and cost-efficient
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manner. The occurrence of any of the foregoing or other material operational
problems could have a material adverse effect on the Company's business,
financial condition and results of operations during the period of such
operational difficulties. See "Business--Manufacturing and Product Quality."
RELIANCE ON INDEPENDENT BROKERS. The Company places significant reliance on
a network of independent brokers to act as its primary sales force to mass
market retailers. Although the Company employs management personnel, including
regional sales managers, to closely monitor the brokers, such brokers are not
employed or otherwise controlled by the Company and are generally free to
conduct their business at their own discretion. Although these brokers enter
into contracts with the Company, such contracts typically can be terminated upon
30 days notice by the Company or the independent broker. The simultaneous loss
of the services of a number of these independent brokers could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Sales and Distribution."
NO ASSURANCE OF FUTURE INDUSTRY GROWTH. Market data referred to in this
Prospectus and otherwise available to prospective investors regarding the size
and projected growth rates of the market for dietary supplements generally
indicate that this market is large and growing. However, there can be no
assurance that such market is as large as reported or that such projected growth
will occur or continue. Market data and projections such as those presented in
this Prospectus are inherently uncertain, subject to change and generally not
available for 1997 and 1998. In addition, the underlying market conditions are
subject to change based on economic conditions, consumer preferences and other
factors that are beyond the Company's control. An adverse change in size or
growth rate of the market for dietary supplements is likely to have a material
adverse effect on the Company's business, financial condition and results of
operations.
INTELLECTUAL PROPERTY PROTECTION. The Company's policy is to pursue
registrations for all of the trademarks associated with its key products. The
Company relies on common law trademark rights to protect its unregistered
trademarks as well as its trade dress rights. Common law trademark rights
generally are limited to the geographic area in which the trademark is actually
used, while a United States federal registration of a trademark enables the
registrant to stop the unauthorized use of the trademark by any third party
anywhere in the United States. The Company intends to register its trademarks in
certain foreign jurisdictions where the Company's products are sold. However,
the protection available, if any, in such jurisdictions may not be as extensive
as the protection available to the Company in the United States.
Currently, the Company has received one United States patent for its
Kavatrol product, has a second United States patent application pending for a
method of using its Kavatrol product and has received two United States patents
on its amino acid products, SAF and SAF for Kids. To the extent the Company does
not have patents on its products, another company may replicate one or more of
the Company's products.
Although the Company seeks to ensure that it does not infringe the
intellectual property rights of others, there can be no assurance that third
parties will not assert intellectual property infringement claims against the
Company. Natrol was contacted in June 1997 by a third party that claimed
Natrol's marketing of melatonin infringed the third party's patents relating to
a method of using melatonin and sought to license such patents to Natrol. Since
Natrol does not believe its marketing of melatonin infringes the third party's
patent claims, Natrol has declined to enter into a license agreement with the
third party. Any infringement claims by third parties against the Company may
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business-- Trademarks and Patents."
MATERIAL BENEFIT TO INSIDERS. In September 1996, the Company and its
stockholders completed a series of transactions involving TA Associates, Inc., a
private equity firm based in Boston, Massachusetts, and the then current
stockholders of the Company (the "TA Transaction"). In connection with the TA
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Transaction, investment funds associated with TA Associates, Inc. (the "TA
Investors") purchased from the Company's then current stockholders and the
Company an aggregate of 27,000 shares of Convertible Preferred Stock of the
Company. Upon the completion of this offering, the Convertible Preferred Stock
will convert into 2,700,000 shares of Common Stock and 13,500 shares of
Redeemable Preferred Stock. As required by the terms of the Redeemable Preferred
Stock, the Company will immediately redeem all of the shares of the Redeemable
Preferred Stock upon issuance for $6.0 million, representing approximately 15.9%
of the estimated net proceeds to be received by the Company from this offering
at an assumed initial public offering price of $13.00 per share. See "Use of
Proceeds," "Certain Transactions" and "Principal and Selling Stockholders."
EFFECTIVE CONTROL BY PRINCIPAL STOCKHOLDERS. After giving effect to the
sale of the shares of Common Stock offered hereby, Elliott Balbert, the
Company's Chairman, Chief Executive Officer and President, and the TA Investors
will beneficially own in the aggregate approximately 48.7% (45.3% assuming
exercise of the Underwriters' over-allotment option in full) and 16.6% (16.2%
assuming exercise of the Underwriters' over-allotment option in full),
respectively, of the outstanding Common Stock. As a result, Mr. Balbert and the
TA Investors will be able to control or exert significant influence over the
outcome of fundamental corporate transactions requiring stockholder approval,
including, but not limited to mergers and sales of assets and the election of
the members of the Company's Board of Directors. See "Principal and Selling
Stockholders" and "Shares Eligible for Future Sale."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of Common
Stock in the public market after this offering could adversely affect the market
price of the Common Stock. In addition to the 3,940,000 shares of Common Stock
offered hereby, up to approximately 8,760,000 shares of Common Stock owned by
current stockholders of the Company will be eligible for sale in the public
market pursuant to Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"), beginning on the later of 90 days after the date of this
Prospectus, and 120,000 shares of Common Stock owned by a current stockholder of
the Company will be eligible for sale in the public market in accordance with
Rule 701 under the Securities Act beginning 90 days after the date of this
Prospectus. In addition 180,000 shares subject to sale under Rule 701 are
subject to vesting provisions and will become eligible for sale in the public
market at various times as they become vested. All executive officers and
directors, certain stockholders of the Company, who in the aggregate will hold
9,010,000 shares of Common Stock (after giving effect to the sale of 740,000
shares by the Selling Stockholders in the offering) and the holders of options
to purchase 650,000 shares of Common Stock, have agreed, pursuant to certain
Lock-up Agreements (the "Lock-up Agreements"), that until 180 days after the
date of this Prospectus, they will not, directly or indirectly, offer, sell,
assign, transfer, encumber, contract to sell, grant an option to purchase, make
a distribution of, or otherwise dispose of, any shares of Common Stock, or any
securities convertible into or exchangeable for shares of Common Stock,
otherwise than (i) as a bona fide gift or gifts, provided that the donee or
donees thereof agree in writing as a condition precedent to such gift or gifts
to be bound by the terms of the Lock-up Agreements, or (ii) with the prior
written consent of Adams, Harkness & Hill, Inc. Stockholders of the Company who
in the aggregate will hold 2,160,000 shares of Common Stock following the
offering have the right on any date after three months after this offering to
require the Company to register their shares under the Securities Act for resale
to the public (i) on Form S-1, if the anticipated net aggregate proceeds exceed
$10.0 million (provided that only one registration on Form S-1 is required) and
(ii) on Form S-3 if the anticipated net aggregate sale price of such registered
shares exceeds $500,000 (provided that only one registration on Form S-3 is
required in any 12 month period). All of such holders are subject to a Lock-up
Agreement. Sales of substantial amounts of Common Stock (including shares issued
in connection with future acquisitions which may be issued with registration
rights), or the availability of such shares for sale, may adversely affect the
prevailing market price for the Common Stock and could impair the Company's
ability to obtain additional capital through an offering of its equity
securities. See "Shares Eligible for Future Sale."
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ABSENCE OF A PUBLIC TRADING MARKET; OFFERING PRICE; POSSIBLE VOLATILITY OF
STOCK PRICE. Prior to this offering, there has been no public market for the
Common Stock, and there can be no assurance that an active market will develop
or be sustained following the consummation of this offering. Consequently, the
offering price of the Common Stock will be determined by negotiation between the
Company, the Selling Stockholders and the representatives of the several
Underwriters based on several factors and will not necessarily reflect the
market price of the Common Stock after this offering or the price at which the
Common Stock may be sold in the public market after this offering. See
"Underwriting" for a description of the factors to be considered in determining
the initial public offering price. Following the completion of this offering,
the trading price of the Common Stock could be subject to wide fluctuations in
response to quarter-to-quarter variations in the Company's operating results,
material announcements by the Company or its competitors, governmental
regulatory action, conditions in the dietary supplement industry, or other
events or factors, many of which are beyond the Company's control. In addition,
the stock market has historically experienced extreme price and volume
fluctuations which have particularly affected the market prices of many dietary
supplement companies and which often have been unrelated to the operating
performance of such companies. The Company's operating results in future
quarters may be below the expectations of securities analysts and investors. In
such event, the price of the Common Stock would likely decline, perhaps
substantially. See "Underwriting."
COMPUTER SYSTEMS AND YEAR 2000 ISSUES. Many existing computer programs and
databases use only two digits to identify a year in the date field (i.e., 98
would represent 1998). These programs and databases were designed and developed
without considering the impact of the upcoming millennium. If not corrected,
many computer systems could fail or create erroneous results relating to the
year 2000. The Company does not anticipate any significant costs, problems or
uncertainties associated with becoming Year 2000 compliant and is currently
developing a plan to ensure that its computer systems are modified to be
compliant on a timely basis. Failure of the Company, its software providers or
the Company's customers or suppliers to adequately address the Year 2000 issue
could result in misstatement of reported financial information or otherwise
adversely affect the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Year 2000 Compliance."
DIVIDEND POLICY. The Company has not declared cash dividends on its Common
Stock since it ceased to be an S-corporation on September 30, 1996 and the
Company does not anticipate paying cash dividends on its Common Stock in the
foreseeable future. Under Delaware law, the Company is permitted to pay
dividends only out of its surplus, or, if there is no surplus, out of its net
profits. Under the terms of the Company's credit facility, the Company is
required to utilize 25% of annual Excess Cash Flow (as defined in the Company's
credit facility) to prepay outstanding indebtedness thereunder, which may have
the effect of limiting the Company's ability to pay cash dividends. In addition,
the payment of cash dividends may be prohibited under agreements governing debt
which the Company may incur in the future. See "Dividend Policy" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
ANTI-TAKEOVER PROVISIONS. Certain provisions of the Company's Amended and
Restated Certificate of Incorporation (the "Certificate") and By-laws (the
"By-laws"), certain sections of the Delaware General Corporation Law, and the
ability of the Board of Directors to issue shares of preferred stock and to
establish the voting rights, preferences and other terms thereof, may be deemed
to have an anti-takeover effect and may discourage takeover attempts not first
approved by the Board of Directors (including takeovers which stockholders may
deem to be in their best interests). Such provisions include, among other
things, a classified Board of Directors serving staggered three-year terms, the
elimination of stockholder voting by written consent, the removal of directors
only for cause, the vesting of exclusive authority in the Board of Directors to
determine the size of the Board of Directors and (subject to certain limited
exceptions) to fill vacancies thereon, the vesting of exclusive authority in the
Board of Directors (except as otherwise required by law) to call special
meetings of stockholders and certain advance notice
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requirements for stockholder proposals and nominations for election to the Board
of Directors. These provisions, and the ability of the Board of Directors to
issue preferred stock without further action by stockholders, could delay or
frustrate the removal of incumbent directors or the assumption of control by
stockholders and also could discourage or make more difficult a merger, tender
offer or proxy contest, even if such events would be beneficial to the interest
of stockholders. The Company will be subject to Section 203 of the Delaware
General Corporation Law which, in general, imposes restrictions upon certain
acquirors (including their affiliates and associates) of 15% or more of the
Company's Common Stock. See "Description of Capital Stock--Certain Provisions of
Certificate of Incorporation and By-Laws" and "--Statutory Business Combination
Provision."
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of the Common Stock in this
offering will incur immediate and substantial dilution in the net tangible book
value per share of Common Stock. At an assumed initial public offering price of
$13.00 per share (the midpoint of the range set forth on the cover page of this
Prospectus), investors in this offering will incur dilution of $10.36 per share.
See "Dilution."
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,200,000 shares of
Common Stock offered by the Company hereby at an assumed initial public offering
price of $13.00 per share, after deducting the estimated underwriting discounts
and estimated offering expenses payable by the Company, are estimated to be
$37.6 million ($41.2 million if the Underwriters' over-allotment option is
exercised in full). The Company expects to use the net proceeds as follows: (i)
approximately $8.5 million to repay all of the Company's outstanding
indebtedness under its existing bank credit facility with Wells Fargo Bank, N.A.
(the "Credit Facility"), including fees and accrued and unpaid interest; (ii)
$6.0 million to redeem all Redeemable Preferred Stock; (iii) approximately $1.0
million to fund additional capital expenditures related to the Company's
manufacturing facility; and (iv) the balance of approximately $22.1 million for
working capital and other general corporate purposes. The Company routinely
evaluates potential acquisitions of businesses and products that would
complement or expand the Company's business or further its strategic goals. The
Company may use a portion of the net proceeds from this offering for one or more
such transactions; however, it currently has no commitments or agreements with
respect to such transactions. Pending such use, the balance of the net proceeds
will be invested in short-term, investment grade, interest bearing obligations.
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Stockholders. See "Principal and Selling Stockholders."
The Credit Facility consists of a $9.0 million term loan (the "Term Loan")
and an $8.0 million revolving line of credit (the "Line of Credit"). The Term
Loan matures in February 2004 and the Line of Credit expires in May 2001. As of
June 30, 1998, the Company had no outstanding indebtedness under the Line of
Credit and the outstanding principal balance of the Term Loan was $8.5 million.
Amounts outstanding under the Credit Facility bear interest at variable rates
which are based upon either the prime rate or LIBOR, plus in either case a
margin which varies according to the Company's compliance with certain financial
ratios. The interest rate on such indebtedness at June 30, 1998 was 7.41% per
annum. The Company incurred $11.0 million in indebtedness under the Credit
Facility in connection with the Pure-Gar Acquisition in February 1998. See
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has not declared any cash dividends on its Common Stock since it
ceased to be an S corporation on September 30, 1996. The Company currently
intends to retain its earnings for future growth and, therefore, does not
anticipate paying cash dividends in the foreseeable future. Under Delaware law,
the Company is permitted to pay dividends only out of its surplus, or, if there
is no surplus, out of its net profits. Under the terms of the Credit Facility,
the Company is required to utilize 25% of annual Excess Cash Flow (as defined in
the Credit Facility) to prepay outstanding indebtedness thereunder, which may
have the effect of limiting the Company's ability to pay cash dividends. In
addition, the payment of cash dividends may be prohibited under agreements
governing debt which the Company may incur in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998 (i) on an actual basis, (ii) on a pro forma basis to give effect to the
conversion of the Convertible Preferred Stock and (iii) as adjusted to give
effect to the sale of the 3,200,000 shares of Common Stock offered by the
Company hereby at an assumed initial public offering price of $13.00 per share
and the application of the estimated net proceeds therefrom as described in "Use
of Proceeds." This table should be read in conjunction with the Consolidated
Financial Statements of the Company and Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
------------------------------------
<S> <C> <C> <C>
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- ------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Current maturities of long-term debt(1).................................... $ 1,500 $ 1,500 $ --
--------- ----------- ------------
--------- ----------- ------------
Long-term debt, less current maturities(1)................................. $ 7,375 $ 7,375 $ --
--------- ----------- ------------
Convertible Participating Preferred Stock, $0.01 par value per share:
27,000 shares authorized; 27,000 shares issued and outstanding, actual;
no shares authorized, issued or outstanding on a pro forma basis and as
adjusted................................................................. 12,000 -- --
Redeemable Preferred Stock, $0.01 par value per share: 13,500 shares
authorized; no shares issued or outstanding, actual; 13,500 shares issued
and outstanding on a pro forma basis; no shares authorized, issued or
outstanding, as adjusted(2).............................................. -- 6,000 --
Stockholders' equity:
Preferred Stock, $0.01 par value per share: no shares authorized, issued
or outstanding, actual; 2,000,000 shares authorized, no shares issued
or outstanding on a pro forma basis and as adjusted.................... -- -- --
Common Stock, $0.01 par value per share: 10,550,000 shares authorized,
7,100,000 shares issued and outstanding, actual; 50,000,000 shares
authorized, and 9,800,000 shares issued and outstanding on a pro forma
basis; 50,000,000 shares authorized, 13,000,000 shares issued and
outstanding, as adjusted(3)............................................ 71 98 130
Additional paid-in capital................................................. 560 12,533 50,201
Retained earnings (deficit)(4)............................................. (457) (6,457) (6,457)
Receivable from stockholder................................................ (563) (563) (563)
--------- ----------- ------------
Total stockholders' equity (deficit)................................... (389) 5,611 43,311
--------- ----------- ------------
Total capitalization............................................... $ 18,986 $ 18,986 $ 43,311
--------- ----------- ------------
--------- ----------- ------------
</TABLE>
- ------------------------------
(1) See Notes 3 and 9 of Notes to Consolidated Financial Statements for
information concerning long-term debt obligations.
(2) Upon completion of this offering and as presented on a pro forma basis, the
outstanding shares of Convertible Preferred Stock will convert into an
aggregate of 2,700,000 shares of Common Stock and an aggregate of 13,500
shares of Redeemable Preferred Stock. All shares of Redeemable Preferred
Stock will be redeemed for an aggregate of $6.0 million in cash and retired
as presented on an as adjusted basis. See "Use of Proceeds" and "Certain
Transactions."
(3) Excludes: (i) 720,000 shares of Common Stock currently issuable upon
exercise of outstanding stock options, including options with respect to
320,000 shares of Common Stock granted subsequent to March 31, 1998; (ii)
750,000 additional shares of Common Stock available for future grants under
the 1996 Stock Plan as of June 30, 1998; and (iii) 225,000 additional shares
of Common Stock available for future sales under the Purchase Plan. Under
the terms of the 1996 Stock Plan, the sale of the 3,200,000 shares offered
by the Company hereby will result in the reservation for issuance of an
additional 480,000 shares of Common Stock under the 1996 Stock Plan. See
"Management--Employee Stock and Other Benefit Plans--1996 Stock Option and
Grant Plan" and "--1998 Employee Stock Purchase Plan."
(4) Reflects a decrease in retained earnings (deficit) for an aggregate of $6.0
million for the redemption of the Redeemable Preferred Stock. See "Use of
Proceeds" and "Certain Transactions."
17
<PAGE>
DILUTION
The pro forma net tangible book value of the Common Stock as of March 31,
1998 was $(9.4) million, or $(0.96) per share. Pro forma net tangible net book
value per share represents the amount of total tangible assets of the Company
less total liabilities of the Company divided by the number of Common Stock
outstanding, including all outstanding stock grants and excluding all
outstanding stock options.
After giving effect to the sale of the 3,200,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price of
$13.00 per share the receipt and application by the Company of the estimated net
proceeds therefrom, the pro forma net tangible book value of the Common Stock as
of March 31, 1998 would have been $34.3 million, or $2.64 per share. This
represents an immediate increase in pro forma net tangible book value $3.60 per
share to existing stockholders and an immediate dilution to $10.36 per share to
purchasers of Common Stock in this offering. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $ 13.00
Pro forma net tangible book value per share at March 31, 1998.... $ (0.96)
Increase per share attributable to new stockholders.............. 3.60
---------
Pro forma net tangible book value per share after the offering....... 2.64
---------
Pro forma net tangible book value dilution per share to new
stockholders....................................................... $ 10.36
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1998
after giving effect to the conversion of all outstanding shares of Convertible
Preferred Stock, the differences between existing stockholders and the new
stockholders with respect to the number of shares of Common Stock purchased from
the Company, the total consideration and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------------- --------------------------- AVERAGE PRICE PAID
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------- ----------- -------------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................. 9,800,000 75.4% $ 2,145,150 4.9% $ 0.22
New stockholders...................... 3,200,000 24.6 41,600,000 95.1 13.00
------------- ----- -------------- -----
Total............................. 13,000,000 100.0% $ 43,745,150 100.0%
------------- ----- -------------- -----
------------- ----- -------------- -----
</TABLE>
Other than as noted above, the foregoing computations assume no exercise of
any outstanding stock options after March 31, 1998 or the Underwriters'
over-allotment option. As of March 31, 1998, options to purchase 400,000 shares
of Common Stock were outstanding and subsequent to such date the Company granted
options to purchase an additional 320,000 shares of Common Stock. To the extent
any of these options or the Underwriters' over-allotment option is exercised,
there will be further dilution to new stockholders. See "Underwriting" for
information concerning the Underwriters' over-allotment option.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated statement of income data for each of the
three years ended December 31, 1997 and consolidated balance sheet data at
December 31, 1996 and 1997 are derived from consolidated financial statements of
the Company which have been audited by Ernst & Young LLP, independent auditors,
and are included elsewhere herein. The balance sheet data at December 31, 1995,
is derived from audited financial statements not included herein. The selected
financial information for the years ended December 31, 1993 and 1994 are derived
from unaudited financial statements not included herein. The consolidated income
data for the three months ended March 31, 1997 and 1998 and the consolidated
balance sheet data at March 31, 1998 are derived from unaudited consolidated
financial statements also included elsewhere in the Prospectus. The unaudited
consolidated financial statements have been prepared by the Company on a basis
consistent with the Company's audited financial statements and, in the opinion
of management, include all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the Company's consolidated
financial position and results of operations for these periods. The consolidated
results of operations for the three months ended March 31, 1998 are not
necessarily indicative of results for the year ending December 31, 1998 or any
future period. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and Notes
thereto included herein.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- ----------------------
1993 1994 1995 1996 1997 1997 1998(1)
--------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF INCOME DATA:
Net sales............................................ $ 9,484 $ 12,214 $ 23,566 $ 40,802 $ 42,875 $ 9,909 $ 13,116
Cost of goods sold................................... 5,658 7,106 12,214 18,497 19,800 4,475 6,321
--------- --------- --------- --------- --------- --------- -----------
Gross profit....................................... 3,826 5,108 11,352 22,305 23,075 5,434 6,795
--------- --------- --------- --------- --------- --------- -----------
Selling and marketing expenses....................... 2,194 2,552 4,458 8,736 11,398 2,990 3,477
General and administrative expenses.................. 1,197 1,739 3,378 5,431 4,450 1,055 1,230
--------- --------- --------- --------- --------- --------- -----------
Total operating expenses........................... 3,391 4,291 7,836 14,167 15,848 4,045 4,707
--------- --------- --------- --------- --------- --------- -----------
Operating income..................................... 435 817 3,516 8,138 7,227 1,389 2,088
Interest income (expense), net....................... 33 (25) (19) 54 (220) (35) (131)
--------- --------- --------- --------- --------- --------- -----------
Income before income tax provision................... 468 792 3,497 8,192 7,007 1,354 1,957
Income tax provision................................. 189 301 1,453 2,299(2) 2,816 544 782
--------- --------- --------- --------- --------- --------- -----------
Net income........................................... $ 279 $ 491 $ 2,044 $ 5,893 $ 4,191 $ 810 $ 1,175
--------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- -----------
Basic earnings per share............................. $ 0.05 $ 0.08 $ 0.34 $ 0.94 $ 0.59 $ 0.11 $ 0.17
--------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- -----------
Diluted earnings per share........................... $ 0.05 $ 0.08 $ 0.34 $ 0.83 $ 0.41 $ 0.08 $ 0.11
--------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- -----------
Weighted average common shares outstanding--basic.... 6,000 6,000 6,000 6,275 7,100 7,100 7,100
--------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- -----------
Weighted average common shares outstanding--diluted.. 6,000 6,000 6,000 7,065 10,273 10,262 10,273
--------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................................... $ -- $ 560 $ 515 $ 285 $ 1,800 $ 2,229
Working capital.............................................. 251 926 2,741 4,496 8,424 5,299
Total assets................................................. 1,689 3,972 7,608 11,345 19,716 32,029
Long-term debt, less current maturities...................... 84 84 67 405 2,606 7,375
Convertible participating preferred stock.................... -- -- -- 12,000 12,000 12,000
Total stockholders' equity (deficit)......................... 895 1,259 3,303 (5,755) (1,564) (389)
Cash dividend declared per common share...................... $ 0.00 $ 0.00 $ 0.00 $ 0.55 $ 0.00 $ 0.00
</TABLE>
- ------------------------
(1) The Consolidated Statement of Income Data for the three months ended March
31, 1998, includes the historical results of Pure-Gar for the period from
February 27, 1998 to the date of the Pure-Gar Acquisition through the end of
the period, which may affect the comparability of such data to the prior
period. See "Unaudited Pro Forma Consolidated Statements of Income."
(2) In 1996, the Company was taxed under Subchapter S of the Code for the period
from July 1, 1996 through September 29, 1996, and was taxed under Subchapter
C of the Code for the period from January 1, 1996 through June 30, 1996 and
for the period from September 30, 1996 through December 31, 1996.
Accordingly, the provision for income taxes for the period in which the
Company was taxed as a Subchapter S corporation reflects primarily state
income tax, if any. If the Company had been subject to taxation under
Subchapter C of the Code for the entire year ended December 31, 1996, the
pro forma provision for income taxes would have been $3.2 million and pro
forma basic earnings per share and pro forma diluted earnings per share
would have been $0.80 and $0.71, respectively.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE RESULTS OF OPERATIONS AND FINANCIAL
CONDITION OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO INCLUDED ELSEWHERE IN
THIS PROSPECTUS. EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE
DISCUSSION CONTAINED IN THIS PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS"
THAT INVOLVE RISK AND UNCERTAINTIES. THESE STATEMENTS MAY BE IDENTIFIED BY THE
USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES," "EXPECTS," "MAY," "WILL,"
"SHOULD" OR "ANTICIPATES" OR THE NEGATIVE THEREOF OR SIMILAR EXPRESSIONS OR BY
DISCUSSIONS OF STRATEGY. THE CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS
SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS
WHEREVER THEY APPEAR IN THIS PROSPECTUS. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE DISCUSSED IN THIS PROSPECTUS. IMPORTANT FACTORS
THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED UNDER
THE CAPTION ENTITLED "RISK FACTORS," AS WELL AS THOSE DISCUSSED ELSEWHERE
HEREIN.
OVERVIEW
Natrol manufactures and markets branded, high-quality dietary supplements.
The Company sells its products under the Natrol brand name through multiple
distribution channels throughout the United States, including domestic health
food stores and mass market drug, retail and grocery store chains. The Company
recently strengthened its product categories through an acquisition which
included two brands of garlic products, as well as a bulk ingredient business
which supplies dehydrated vegetable products to other manufacturers.
Natrol derives its net sales primarily from sales of dietary supplement
products to health food and mass market retailers and sales of bulk raw
materials. The Company's growth in net sales historically has been a result of
the introduction of new products on an ongoing basis and the expansion of sales
through additional channels of distribution. During the last three years, the
Company's net sales have been affected by the success of certain products,
including Melatonin and DHEA, which were introduced in 1995 and 1996,
respectively. During 1995 and 1996, these products gained substantial popularity
with the general public and generated net sales of $6.7 million in 1995 and
$22.9 million in 1996. However, during 1997 the net-sales volume of these two
products declined by an aggregate of $9.8 million, or 42.9%. When consumer
products experience heightened public popularity, it is not uncommon for them to
enjoy peaks of pipeline sales followed by declines. Accordingly, the Company
anticipated a decline in net sales of Melatonin and DHEA and introduced 34 new
products with 53 SKUs in 1997, which accounted for $8.9 million, or 20.7%, of
net sales in 1997. Growth in existing product lines added an additional $6.8
million to 1997 net sales. In the three months ended March 31, 1998, the largest
product category comprised 25.6% of net sales. A combination of new product
introductions, increases of existing product sales and increased penetration in
the mass market and health food channels of distribution contributed to the
Company's net sales growth during 1997 and the three months ended March 31,
1998. The Company believes that its future growth in net sales will depend on a
combination of these factors to a greater extent than on the rapid success of a
limited number of products. The Company's future results may be affected
significantly by the success or failure of individual products or product lines
that rapidly achieve or lose widespread popularity.
The Company has derived a significant portion of its net sales from certain
of its mass market and health food distribution customers. Net sales to
Walgreens accounted for 15.3% of the Company's net sales for the three months
ended March 31, 1998 and 17.7% and 12.6% of the Company's net sales in 1997 and
1996, respectively. Net sales to Tree of Life accounted for 10.4% of the
Company's net sales for the three months ended March 31, 1998 and 11.6% and
10.2% of the Company's net sales in 1997 and 1996, respectively. Net sales to
GNC accounted for 3.0% of the Company's net sales for the three months ended
March 31, 1998 and 2.3% and 14.5% of the Company's net sales in 1997 and 1996,
respectively.
20
<PAGE>
During 1997 the Company invested heavily in corporate infrastructure and the
building out and equipping of a 90,000 square foot manufacturing and
headquarters facility. The facility has improved manufacturing efficiency, and
management believes the facility provides the flexibility to service customers
more effectively and respond rapidly to increases in demand for particular
products. The Company also developed a dedicated employee sales force (22
employees as of June 1, 1998) during 1997 to service the health food channel of
distribution. Net sales within the health food channel of distribution grew
approximately 23% during 1997.
On February 27, 1998, the Company acquired substantially all of the assets
and certain liabilities of Pure-Gar. The acquisition involved the purchase of
two brands of garlic supplements, Quintessence and Highgar Farms, as well as a
bulk ingredient business. In connection with the acquisition, the Company
recorded $9.0 million of goodwill which will be amortized on a straight line
basis over 15 years, amounting to $600,000 of annual amortization expenses.
RESULTS OF OPERATIONS
The following table sets forth the percentages of net sales represented by
certain items reflected in the Company's statements of income. The information
that follows should be read in conjunction with the Consolidated Financial
Statements of the Company and Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
Net sales........................................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............................................... 51.8 45.3 46.2 45.2 48.2
--------- --------- --------- --------- ---------
Gross profit................................................. 48.2 54.7 53.8 54.8 51.8
--------- --------- --------- --------- ---------
Selling and marketing expenses................................... 18.9 21.4 26.6 30.2 26.5
General and administrative expenses.............................. 14.3 13.3 10.4 10.6 9.4
--------- --------- --------- --------- ---------
Total operating expenses..................................... 33.2 34.7 37.0 40.8 35.9
--------- --------- --------- --------- ---------
Operating income................................................. 15.0 20.0 16.8 14.0 15.9
Interest income (expense), net................................... (0.1) 0.1 (0.6) (0.3) (1.0)
--------- --------- --------- --------- ---------
Income before income tax provision............................... 14.9 20.1 16.2 13.7 14.9
Income tax provision............................................. 6.2 5.6(1) 6.6 5.5 6.0
--------- --------- --------- --------- ---------
Net income....................................................... 8.7% 14.5% 9.6% 8.2% 8.9%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------------
(1) In 1996, the Company was taxed under Subchapter S of the Code for the period
from July 1, 1996 through September 29, 1996, and was taxed under Subchapter
C of the Code for the period from January 1, 1996 through June 30, 1996 and
for the period from September 30, 1996 through December 31, 1996.
Accordingly, the provision for income taxes for the period in which the
Company was taxed as a Subchapter S corporation reflects primarily state
income tax, if any. If the Company had been subject to taxation under
Subchapter C of the Code for the entire year ended December 31, 1996, the
pro forma provision for income taxes would have been 7.7% of net sales.
THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997
NET SALES. Sales are recognized at the time product is shipped. Net sales
are net of discounts, allowances, and estimated returns and credits. Net sales
increased 32.4%, or $3.2 million, to $13.1 million for the three months ended
March 31, 1998 from $9.9 million for the three months ended March 31, 1997. Of
the $3.2 million increase, $1.2 million, or 37.5%, was attributable to net sales
of Pure-Gar, acquired in February 1998, with the remainder due to increases in
net sales of the Company's other dietary supplement products. The net sales of
Pure-Gar for the month of March 1998 were higher than
21
<PAGE>
anticipated due to a larger-than-usual bulk product purchase by an existing
customer. The $2.0 million increase in net sales of the Company's other dietary
supplement products was primarily due to a $3.7 million increase in net sales of
products introduced since the end of the first quarter of 1997 and a $1.0
million increase in sales of existing products, which was partially offset by a
$2.7 million decrease in net sales of products in the Company's specialty
dietary supplements category, primarily Melatonin and DHEA. The Company believes
that sales of Melatonin have stabilized although there can be no assurance that
sales of Melatonin will not decrease in future quarters, perhaps substantially.
GROSS PROFIT. Gross profit increased 23.5%, or $1.3 million, to $6.7
million for the three months ended March 31, 1998 from $5.4 million for the
three months ended March 31, 1997. Gross margin decreased to 51.1% for the three
months ended March 31, 1998 from 54.8% for the three months ended March 31,
1997. The decline was primarily due to a shift in product mix. Based on its
current product mix the Company expects that gross margins over the near term
will be generally consistent with the gross margins for the three months ended
March 31, 1998.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses consist
primarily of advertising and promotional expenses, cost of distribution, and
related payroll expenses and commissions. Selling and marketing expenses
increased 16.3%, or $487,000, to $3.5 million for the three months ended March
31, 1998 from $3.0 million for the three months ended March 31, 1997. The
increase was primarily due to additional advertising, promotional and payroll
expenses to support increased net sales. As a percentage of net sales, selling
and marketing expenses decreased to 26.5% for the three months ended March 31,
1998 from 30.2% for the three months ended March 31, 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of personnel costs related to general management functions,
finance, accounting and information systems, research and development expenses,
as well as professional fees related to legal, audit and tax matters and
depreciation and amortization. General and administrative expenses increased
16.6%, or $175,000, to $1.2 million for the three months ended March 31, 1998
from $1.0 million for the three months ended March 31, 1997. This increase was
primarily attributable to building the infrastructure to support and manage the
Company's growth, as well as $50,000 of amortization of goodwill associated with
the Pure-Gar Acquisition. The Company may incur additional amortization expense
as a result of any future acquisitions. As a percentage of net sales, general
and administrative expenses decreased to 9.4% for the three months ended March
31, 1998 from 10.6% for the three months ended March 31, 1997.
INTEREST INCOME (EXPENSE), NET. Interest expense increased $96,000 to
$131,000 for the three months ended March 31, 1998 from $35,000 for the three
months ended March 31, 1997. The increase was a result of increased outstanding
indebtedness relating to the financing of the Pure-Gar Acquisition and capital
expenditures. See "--Liquidity and Capital Resources."
YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
NET SALES. Net sales increased 5.1%, or $2.1 million, to $42.9 million in
1997 from $40.8 million in 1996. The increase was due to net sales of $8.9
million attributable to products introduced in 1997 and a $3.0 million overall
increase in net sales of existing products, which more than offset a $9.8
million decrease in net sales of Melatonin and DHEA. The net increase in net
sales of new and existing products (other than Melatonin and DHEA ) was
primarily due to increased penetration and expanded presence in both the health
food store and mass market distribution channels.
GROSS PROFIT. Gross profit increased 3.5%, or $771,000, to $23.1 million in
1997 from $22.3 million in 1996. Gross margin decreased to 53.8% for 1997 from
54.7% for 1996. The decrease was primarily due to a shift in product mix as a
result of a decrease in sales in the Company's higher gross margin specialty
dietary supplements category, principally Melatonin and DHEA.
22
<PAGE>
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
30.5%, or $2.7 million, to $11.4 million in 1997 from $8.7 million in 1996. As a
percentage of net sales, selling and marketing expenses increased to 26.6% in
1997 from 21.4% in 1996. The increase was primarily due to increases in spending
to support increased net sales, in particular increases in print, radio and
television advertising, and other promotional expenses and payroll expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased 18.2%, or $981,000, to $4.5 million in 1997 from $5.4 million in 1996.
As a percentage of net sales, general and administrative expenses decreased to
10.4% in 1997 from 13.3% in 1996. This decrease was primarily attributable to
increased payroll expenses as a result of significantly higher management
performance-based incentive bonuses in 1996.
INTEREST INCOME (EXPENSE), NET. Interest expense increased $274,000 to
$220,000 in 1997 from interest income of $54,000 in 1996. The increase net was
primarily due to increased borrowings to fund capital expenditures.
INCOME TAX PROVISION. Provision for income taxes increased 22.5%, or
$518,000, to $2.8 million in 1997 from $2.3 million in 1996. The effective tax
rate for 1997 was 40.2%, compared to 28.0% for 1996. The Company was taxed under
Subchapter S of the Code for the period from July 1, 1996 through September 30,
1996, at which time the Company ceased to qualify as an S corporation. As a
result, the Company paid no federal income taxes for the third calendar quarter
of 1996. If the Company had been required to pay federal income taxes during
such quarter, the provision for income taxes would have been $3.2 million and
the effective tax rate would have been 39.1%
YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
NET SALES. Net sales increased 73.1%, or $17.2 million, to $40.8 million in
1996 from $23.6 million in 1995. The increase was due almost entirely to
increased sales of Melatonin and DHEA. The Company's net sales of Melatonin
increased markedly as a result of favorable publicity regarding the use of
melatonin and the Company's aggressive promotional efforts. The Company also
introduced DHEA in 1996 and benefitted from substantial favorable publicity
regarding its use.
GROSS PROFIT. Gross profit increased 96.5%, or $11.0 million, to $22.3
million in 1996 from $11.4 million in 1995. Gross margin increased to 54.7% in
1996 from 48.2% in 1995. The increase was primarily due to a shift in product
mix to products with higher gross margins, most significantly Melatonin and
DHEA.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
96%, or $4.3 million, to $8.7 million in 1996 from $4.5 million in 1995. As a
percentage of net sales, selling and marketing expenses increased to 21.4% in
1996 from 18.9 % in 1995. The increase was primarily due to increases in
spending to support increased net sales, in particular increases in print, radio
and television advertising.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 58.8%, or $2.0 million, to $5.4 million in 1996 from $3.4 million in
1995. This increase was primarily attributable to increased payroll expenses as
a result of significantly higher management performance-based incentive bonuses
in 1996. As a percentage of net sales, general and administrative expenses
decreased to 13.3% in 1996 from 14.3% in 1995.
INTEREST INCOME (EXPENSE), NET. Interest income increased $72,000 to
$54,000 in 1996 from interest expense of $19,000 in 1995. The increase was
primarily due to interest income on significantly higher cash balances as a
result of increased net sales in 1996.
INCOME TAX PROVISION. Provision for income taxes increased 58.2%, or
$846,000, to $2.3 million in 1996 from $1.5 million in 1995. The effective tax
rate for 1996 was 28.0%, compared to 41.5% for 1995.
23
<PAGE>
The Company was taxed under Subchapter S of the Code for the period from July 1,
1996 through September 30, 1996, at which time the Company ceased to qualify as
an S corporation. As a result, the Company paid no federal income taxes for the
third calendar quarter of 1996. If the Company had been required to pay federal
income taxes during such quarter, the provision for income taxes would have been
$3.2 million and the effective tax rate would have been 37.0%
QUARTERLY FINANCIAL INFORMATION; SEASONALITY
The following table sets forth unaudited quarterly operating results for
each of the Company's last nine quarters as well as certain of such data
expressed as a percentage of net sales for the periods indicated. This
information has been prepared by the Company on a basis consistent with the
Company's audited consolidated financial statements and includes all adjustments
(consisting only of normal recurring adjustments) that management considers
necessary for a fair presentation of the data. These quarterly results are not
necessarily indicative of future results of operations. This information should
be read in conjunction with the Consolidated Financial Statements of the Company
and Notes thereto included elsewhere in this Prospectus.
The Company believes that its business is characterized by mild seasonality.
Historically, the Company has recorded higher sales and profitability during the
third and fourth quarters of the year and the weaker sales and profitability
during the second quarter of the year. The Company does not believe that the
impact of seasonality on its results of operations is material. However, the
Company has experienced quarterly volatility in net sales as a result of, among
other things, trends and general conditions in the dietary supplement industry,
introduction of new products by the Company or its competitors and increased
media attention on the use and efficacy of dietary supplements. In addition,
advertising and marketing expenses have historically fluctuated from
quarter-to-quarter, which has in some cases contributed to quarterly variations
in the Company's operating income.
24
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
INCOME DATA:
Net sales................. $ 11,505 $ 7,369 $ 10,280 $ 11,648 $ 9,909 $ 8,191 $ 11,392 $ 13,382
Cost of goods sold........ 5,451 2,738 4,835 5,473 4,475 3,815 5,368 6,142
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit............ 6,054 4,631 5,445 6,175 5,434 4,376 6,024 7,240
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Selling and marketing
expenses................ 1,924 2,360 1,999 2,453 2,990 2,825 2,670 2,913
General and administrative
expenses................ 1,489 1,319 1,342 1,282 1,055 1,046 1,067 1,283
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating
expenses.............. 3,413 3,679 3,341 3,735 4,045 3,871 3,737 4,196
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income.......... 2,641 952 2,104 2,440 1,389 505 2,287 3,044
Interest income (expense),
net..................... (7) (11) 31 42 (35) (41) (74) (69)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before income tax
provision............... 2,634 941 2,135 2,482 1,354 464 2,213 2,975
Income tax provision...... 1,028 348 40(1) 882 544 187 889 1,196
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income................ $ 1,606 $ 593 $ 2,095 $ 1,600 $ 810 $ 277 $ 1,324 $ 1,779
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
MAR. 31,
1998
-----------
<S> <C>
CONSOLIDATED STATEMENT OF
INCOME DATA:
Net sales................. $ 13,116
Cost of goods sold........ 6,321
-----------
Gross profit............ 6,795
-----------
Selling and marketing
expenses................ 3,477
General and administrative
expenses................ 1,230
-----------
Total operating
expenses.............. 4,707
-----------
Operating income.......... 2,088
Interest income (expense),
net..................... (131)
-----------
Income before income tax
provision............... 1,957
Income tax provision...... 782
-----------
Net income................ $ 1,175
-----------
-----------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Basic earnings per
share................... $ 0.27 $ 0.10 $ 0.35 $ 0.23 $ 0.11 $ 0.04 $ 0.19 $ 0.25
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Diluted earnings per
share................... $ 0.27 $ 0.10 $ 0.32 $ 0.16 $ 0.08 $ 0.03 $ 0.13 $ 0.17
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Weighted average common
shares
outstanding-basic....... 6,000 6,000 6,012 7,100 7,100 7,100 7,100 7,100
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Weighted average common
shares outstanding-
diluted................. 6,000 6,000 6,503 10,262 10,262 10,262 10,273 10,273
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
Basic earnings per
-----------
-----------
Diluted earnings per
share................... $ 0.11
-----------
-----------
Weighted average common
shares
outstanding-basic....... 7,100
-----------
-----------
Weighted average common
shares outstanding-
diluted................. 10,273
-----------
-----------
<CAPTION>
share................... $ 0.17
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF NET
SALES:
Net sales................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold........ 47.4 37.2 47.0 47.0 45.2 46.6 47.1 45.9
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit............ 52.6 62.8 53.0 53.0 54.8 53.4 52.9 54.1
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Selling and marketing
expenses................ 16.7 32.0 19.4 21.1 30.2 34.5 23.4 21.8
General and administrative
expenses................ 12.9 17.9 13.1 11.0 10.7 12.8 9.4 9.6
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating
expenses.............. 29.6 49.9 32.5 32.1 40.9 47.3 32.8 31.4
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income.......... 23.0 12.9 20.5 20.9 13.9 6.1 20.1 22.7
Interest income (expense),
net..................... (0.1) (0.2) 0.3 0.4 (0.4) (0.5) (0.7) (0.5)
Income before income tax
provision............... 22.9 12.7 20.8 21.3 13.5 5.6 19.4 22.2
Income tax provision...... 8.9 4.7 0.4 7.6 5.5 2.3 7.8 8.9
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income................ 14.0% 8.0% 20.4% 13.7% 8.0% 3.3% 11.6% 13.3%
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
MAR. 31,
1998
-----------
<S> <C>
AS A PERCENTAGE OF NET
SALES:
Net sales................. 100.0%
Cost of goods sold........ 48.2
-----------
Gross profit............ 51.8
-----------
Selling and marketing
expenses................ 26.5
General and administrative
expenses................ 9.4
-----------
Total operating
expenses.............. 35.9
-----------
Operating income.......... 15.9
Interest income (expense),
net..................... (1.0)
Income before income tax
provision............... 14.9
Income tax provision...... 6.0
-----------
Net income................ 8.9%
-----------
-----------
</TABLE>
- ------------------------------
(1) The Company was taxed under Subchapter S of the Code for the period from
July 1, 1996 through September 29, 1996. Accordingly, the provision for
income taxes for the period in which the Company was taxed as a Subchapter S
corporation reflects primarily state income tax. If the Company had been
subject to taxation under Subchapter C of the Code for the quarter ended
September 30, 1996, the pro forma provision for income taxes would have been
$862 and pro forma basic earnings per share and pro forma diluted earnings
per share would have been $0.21 and $0.20, respectively.
25
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations and capital
requirements primarily through funds from operations and, to a lesser extent,
borrowings. At March 31, 1998, the Company had working capital of $5.3 million,
as compared to $8.4 million in working capital at December 31, 1997. The
decrease was primarily due to an increase in the current portion of long-term
debt as a result of increased borrowings due to the Pure-Gar Acquisition.
Net cash provided by operating activities was $3.4 million for the three
months ended March 31, 1998 and $2.1 million, $3.8 million and $409,000 in 1997,
1996 and 1995, respectively. The decrease in net cash provided by operating
activities in 1997 compared to 1996 was primarily due to a decrease in net
income and reflects higher levels of accounts receivable and inventory balances,
partially offset by higher levels of depreciation and amortization, provision
for reserves for doubtful accounts and other reserves and accounts payable. The
increase in inventory balances was primarily due to the purchase of larger
quantities of raw materials to obtain favorable volume discounts and the
purchase of raw materials for new products in anticipation of new product
introductions scheduled for 1998. The increase in accounts receivable was the
result of increased sales by the Company during such period to mass market
retailers from whom accounts receivable are on average outstanding for a longer
period of time. At March 31, 1998 the Company's average trade receivable aging
was under 45 days. The increase in net cash provided by operating activities in
1996 compared to 1995 was primarily due to an increase in net income and
reflected a decrease in accounts receivable which was only partially offset by
an increase in inventory balances.
Net cash used in investing activities was $11.2 million for the three months
ended March 31, 1998 and $3.2 million, $1.9 million and $409,000 in 1997, 1996
and 1995, respectively. Of the net cash used in investing activities in the
three months ended March 31, 1998, the Company used $11.1 million to consummate
the Pure-Gar Acquisition and invested $111,000 in property and equipment.
Substantially all net cash used in investing activities in 1997 and 1996
constituted capital expenditures made in connection with the build-out of the
Company's manufacturing facility/headquarters, which the Company began in 1996.
Net cash used in investing activities in 1995 consisted entirely of capital
expenditures.
Net cash provided by (used in) financing activities was $8.3 million for the
three months ended March 31, 1998 and $2.6 million, ($2.1 million) and ($44,000)
in 1997, 1996 and 1995, respectively. Net cash provided by financing activities
in the three months ended March 31, 1998 consisted entirely of borrowings to
finance in part the Pure-Gar Acquisition. Net cash provided by financing
activities in 1997 was comprised of net borrowings of $3.0 million to finance
capital expenditures made in connection with the build-out and equipping of the
Company's manufacturing facility, which was partially offset by $400,000 used to
pay dividends to stockholders declared in 1996. Net cash provided by financing
activities in 1996 was comprised of net borrowings of $415,000 used for capital
expenditures and proceeds of $854,000 from the sale by the Company to the TA
Investors of 1,921.9 shares of Convertible Preferred Stock. These amounts were
more than offset by $503,000 (net of $349,000 of compensation expense) used to
redeem shares of Common Stock from a stockholder and $2.9 million used to pay
dividends to stockholders. Net cash provided by financing activities in 1995 was
comprised entirely of net borrowings for working capital.
The Company's current Credit Facility consists of a $9.0 million term loan
and an $8.0 million revolving line of credit. The term loan matures in February
2004 and the line of credit expires in May 2001. As of March 31, 1998, the
Company had outstanding borrowings of $11.8 million under the Credit Facility.
The amounts outstanding under the Credit Facility bear interest at variable
rates which are based upon either the lender's base rate or LIBOR, plus, in
either case, a margin which varies according to the ratio of the Company's total
indebtedness to its earnings before interest, taxes, depreciation, and
amortization expenses for the relevant period. Furthermore, the Credit Facility
contains various financial
26
<PAGE>
covenants which are predicated on the Company's present and projected financial
condition. In the event that future operations differ materially from what is
expected, the Company may no longer be able to meet the tests set out in the
Credit Facility. Failure to meet these tests may result in a default by the
Company under the Credit Facility which may materially adversely affect the
Company's liquidity. The Credit Facility requires that the Company use 25% of
its net income after taxes, plus (i) depreciation and amortization expenses
minus (ii) unfinanced capital expenditures and scheduled principal debt and
capital lease payments, to repay outstanding indebtedness thereunder. The Credit
Facility restricts or prohibits the Company from incurring indebtedness,
incurring liens, disposing of assets or making investments or acquisitions,
without the consent of the lenders and requires the Company to maintain certain
financial ratios on an ongoing basis. As of June 1, 1998, the Company was in
compliance with the covenants and restrictions in the Credit Facility. The
Credit Facility is collateralized by pledges of all of the outstanding capital
stock of the Company's subsidiaries, and a lien on substantially all of the
assets of the Company.
The Company will use the net proceeds from this offering to repay all
outstanding indebtedness under the Credit Facility and to redeem for $6.0
million all Redeemable Preferred Stock to be issued upon the conversion of the
Company's Convertible Preferred Stock at the completion of this offering. The
Company believes that the remaining net proceeds from this offering, together
with cash generated from operations and borrowings under the Credit Facility,
will be sufficient to fund its anticipated working capital needs and capital
expenditures (other than financing necessary to complete future acquisitions, if
any) for at least the next 12 months. Future acquisitions, if any, could be
funded with cash from operations, the net proceeds of this offering, and
borrowings under the Credit Facility. There can be no assurance that attractive
acquisition opportunities will be available to the Company or will be available
at prices and upon such other terms that are attractive to the Company. To the
extent the Company has outstanding indebtedness under the Credit Facility or is
required to incur indebtedness thereunder to consummate an acquisition, the
consent of the lender under the Credit Facility will be required prior to such
acquisition. The Company regularly evaluates the potential acquisition of other
businesses, products and product lines and may hold discussions regarding such
potential acquisitions. As a general rule, the Company will publicly announce
such acquisitions only after a definitive agreement has been signed. The Company
currently has no commitments or agreements with respect to any acquisition. In
addition, in order to meet its long-term liquidity needs or consummate future
acquisitions, the Company may be required to incur additional indebtedness or
issue additional equity and debt securities, subject to market and other
conditions. There can be no assurance that such additional financing will be
available on terms acceptable to the Company or at all. The failure to raise the
funds necessary to finance its future cash requirements or consummate future
acquisitions could adversely affect the Company's ability to pursue its strategy
and could negatively affect its operations in future periods.
IMPACT OF INFLATION
Generally, the Company has been able to pass on inflation cost increases.
Consequently, inflation has not had a material impact on the Company's
historical operations or profitability.
YEAR 2000 COMPLIANCE
Many existing computer programs and databases use only two digits to
identify a year in the date field (i.e., 98 would represent 1998). These
programs and databases were designed and developed without considering the
impact of the upcoming millennium. If not corrected, many computer systems could
fail or create erroneous results relating to the year 2000. The Company does not
anticipate any significant costs, problems or uncertainties associated with
becoming Year 2000 compliant and is currently developing a plan to ensure that
its computer systems and other operations are modified to be compliant on a
timely basis.
27
<PAGE>
BUSINESS
OVERVIEW
Natrol, Inc. ("Natrol" or the "Company") manufactures and markets branded,
high-quality dietary supplements. The Company sells its products under the
Natrol brand name through multiple distribution channels throughout the United
States, including domestic health food stores and mass market drug, retail and
grocery store chains. Natrol's select line of more than 145 products consists of
approximately 500 SKUs and includes vitamins, minerals, herbs, speciality
formulations, weight control products and hormones. The Company's strategy
emphasizes building strong recognition of the Natrol brand across multiple
distribution channels through a widespread multimedia marketing and advertising
strategy. The Company recently strengthened its product categories through an
acquisition which included two brands of garlic products as well as a bulk
ingredient business which supplies dehydrated vegetable products to other
manufacturers.
INDUSTRY
Based on estimates in THE U.S. MARKET FOR VITAMINS, SUPPLEMENTS, AND
MINERALS, a 1997 market report prepared by Packaged Facts (the "Packaged Facts
Report"), an independent consumer marketing research firm, the retail market for
vitamins, minerals and other supplements (excluding sports nutrition and diet
products) has grown at a compound annual rate of 15% from $3.7 billion in 1992
to $6.5 billion in 1996. A large portion of this growth is attributable to an
increase in sales of other supplements (primarily herbal products), which grew
from $570 million in 1992 to $2.3 billion in 1996. Growth in this category has
been fueled by the popularity of such herbs as echinacea, garlic, ginseng,
ginkgo biloba and, more recently, saw palmetto and St. John's wort. The Packaged
Facts Report forecasts 13.6% compound annual growth in the market for vitamins,
minerals and other supplements (excluding sports nutrition and diet products),
including 25% compound annual growth in the market for other supplements,
through 2001. Compound annual growth rates from 1992 through 1996 for vitamins,
minerals and other supplements were 8.0%, 5.2% and 41.7%, respectively.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
RETAIL SALES AND GROWTH OF THE U.S. MARKET
<S> <C> <C> <C>
for Vitamins, Minerals and Other Supplements,
1992-1996
(dollars in billions)
Sales ($)
Other Supplements Vitamins Minerals
1992 0.6 2.6 0.6
1993 0.9 2.9 0.6
1994 1.3 3.1 0.6
1995 1.8 3.3 0.7
1996 2.3 3.5 0.7
</TABLE>
- ------------------------
Source: The Packaged Facts Report
The Company believes that growth in the dietary supplement industry has been
driven by: (i) the aging of the "baby boom" generation combined with consumers'
tendency to purchase more dietary supplements as they age; (ii) the publication
of research findings supporting the positive health effects of certain dietary
supplements; (iii) increased media attention on the use and efficacy of dietary
supplements; (iv) the nationwide trend toward preventive medicine in response to
rising healthcare
28
<PAGE>
costs; (v) increased consumer interest in herbs and herb-related supplements;
and (vi) increased interest in healthier lifestyles and the connection between
diet and health.
Dietary supplements are sold through several channels of distribution,
including health food stores, mass market retailers (drug store chains,
supermarkets and other mass merchandisers), and direct sales channels (including
network marketing and catalog distribution). In 1996, according to the Packaged
Facts Report, health food stores accounted for 38.2% of sales of vitamins,
minerals and other supplements, the mass market channel accounted for
approximately 45.8% of such sales and the remaining 16.0% of such sales were
generated through direct selling, mail order and the Internet.
The Company believes the United States health food store market is comprised
of over 9,500 stores, which are generally either independently owned or
associated with one of several regional or national chains, such as GNC, Wild
Oats Markets and Whole Foods Market. The health food store channel of
distribution has continued to experience growth in recent years as national
chains as well as other industry participants continue to add stores in new and
existing markets.
The United States mass market distribution channel consists of drug stores,
including chains such as Walgreens, American Drug Stores and Eckerd, mass
merchandisers such as Wal-Mart, Kmart, BJ's Wholesale Club and ShopKo, and food
stores, including national supermarket chains. In the mass market channel, sales
of vitamins, herbs and dietary supplements have generally grown in line with the
growth in all channels due to the proliferation of retail outlets and the
expansion of SKU's offered by these stores. According to the Packaged Facts
Report, in the mass market distribution channel, sales of vitamins, minerals and
other supplements have increased from approximately $2.3 billion in 1994 to
approximately $3.0 billion in 1996. Sales from herbal and other supplements have
shown the fastest rate of growth in the mass market distribution channel from
1994 to 1996. Within drug stores and mass merchandisers, sales from herbal and
other supplements increased as a percentage of total sales of dietary
supplements from an estimated 13.1% in 1994 to an estimated 20.9% in 1996.
Herbal and other supplements have begun to penetrate food stores as well,
increasing from 8% of total sales of dietary supplements in 1994 to 12% in 1996.
Total retail sales of vitamins, minerals and other supplements were $6.5
billion in 1996. The following chart sets forth the relative amount of total
sales in each channel of distribution in the dietary supplement industry in
1996:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
HEALTH AND NATURAL FOOD STORES 38.2%
<S> <C>
Drug Store Chains 20.2%
Mass Merchandisers 14.8%
Supermarkets 10.8%
Direct Selling 12.6%
Mail Order and the Internet 3.4%
</TABLE>
- ------------------------
Source: The Packaged Facts Report
29
<PAGE>
The dietary supplement industry is currently fragmented with hundreds of
manufacturers, marketers and distributors of vitamins, minerals and other
supplements in the various channels of distribution. Generally, most larger
companies sell multiple brands into each channel of distribution and smaller
companies generally target only one channel of distribution. The Company
believes that these industry dynamics present growth opportunities for a single
brand with strong brand recognition across multiple distribution channels.
BUSINESS STRATEGY
The Company's objective is to manufacture and market dietary supplements
that are strongly identified with the Natrol brand. Key elements of the
Company's strategy include the following:
- CONTINUE TO BUILD STRONG BRAND RECOGNITION. The Company's growth strategy
emphasizes building strong recognition of the Natrol brand across multiple
distribution channels. The Company consistently promotes the Natrol brand
through a widespread multimedia marketing and advertising strategy and
seeks to spend approximately 15% of its annual net sales on marketing and
advertising. The Company uses print, radio and television advertising to
reach millions of consumers each month throughout all of the nation's top
100 markets. Recent advertising initiatives include the "Natrol Health
Minute," as heard on the nationally syndicated Dr. Laura Schlessinger and
Rush Limbaugh radio shows, and commercials featured on the CNN/ Turner
Network.
- EXPAND PRESENCE AND PENETRATION IN THE HEALTH FOOD STORE AND MASS MARKET
DISTRIBUTION CHANNELS. The Company continually seeks to increase its
market penetration within both the health food store and mass market
distribution channels by gaining more shelf space within each store and
expanding the number of products and SKUs carried by retailers. Within the
health food store distribution channel, the Company's dedicated sales
force maintains direct and regular contact with key store personnel,
informing them of new product developments and industry trends, aiding
them in the design of store sets and creating merchandising programs which
promote brand and category awareness. Within the mass market distribution
channel, the Company's regional sales managers and network of independent
brokers work with corporate buyers, focusing on special promotional
activities and brand and category awareness. The number of the Company's
customers in the mass market distribution channel increased 35.2% in 1997
over 1996 and the average number of SKUs per customer in this channel
increased 34.3% in 1997 over 1996.
- CONTINUE TO DEVELOP NEW PRODUCTS. Since its inception, the Company has
focused on the ongoing development and marketing of new products in order
to capitalize on and create market opportunities. The Company has
established a focused process to anticipate consumer trends and to monitor
product developments within the dietary supplement industry. This process
includes communication with a panel of scientific advisors, the formal
review of periodicals, scientific research and use of on-line databases.
In addition, the Company develops proprietary products such as Kavatrol,
Mood Support and the Natrol for Women product line. The Company introduced
34 new products with 53 SKUs in 1997 and has introduced 21 new products
with 28 SKUs in the three months ended March 31, 1998.
- EXPAND BULK SALES BUSINESS. The Company believes that opportunities exist
for expansion of sales of bulk raw materials to other manufacturers,
distributors and marketers of dietary supplements. The Company's bulk
ingredient business currently involves the sale of dehydrated vegetable
products, primarily garlic, acquired from Basic Vegetable Products, L.P.
("BVP") pursuant to an exclusive, multi-year supply agreement. In the
future, the Company may seek to expand its bulk sales activities to
include sales of other bulk raw materials used in the manufacture of
dietary supplements.
30
<PAGE>
- DEVELOP ADDITIONAL DISTRIBUTION CHANNELS. The Company sells a substantial
majority of its products through the domestic health food stores and mass
market distribution channels. The Company believes that sales
opportunities exist in other distribution channels such as mail order and
the Internet, direct selling (multi-level marketing as well as sales to
health professionals), direct retail and international. Over time and as
the Company deems appropriate, the Company intends to enter or expand
these distribution channels either through internal growth or
acquisitions. The Company's products have been sold in Canada, China,
Turkey, Indonesia, Korea and a limited number of South American countries.
The Company believes that opportunities may develop as consumers in other
countries gain greater awareness of the benefits of dietary supplements.
- PURSUE STRATEGIC ACQUISITIONS. The Company believes that the dietary
supplement industry is currently fragmented and that attractive
acquisition opportunities may exist in the future. The Company intends to
pursue acquisition opportunities that will allow it to broaden its product
lines, increase the distribution channels it serves or otherwise
complement its business or further its strategic goals. The Company
completed its first acquisition, the Pure-Gar Acquisition, in February
1998. This acquisition involved the purchase of two well-known brands,
Quintessence and Highgar Farms, and enabled the Company to enter the
garlic supplement market and the bulk ingredient business from a position
of strength.
The Company intends to continue investing in its management team and
corporate infrastructure to support its business strategy. The Company has,
since January 1, 1997, hired a Director of Finance to support its Chief
Financial Officer, a Director of Administration, a product development manager,
a manager of information systems, a Director of International Sales, and a
number of mid-level managers and quality control and manufacturing personnel. In
addition, the Company has improved significantly its manufacturing capabilities
with its lease and build-out of a 90,000 square foot manufacturing/ headquarters
facility, which the Company occupied in March 1997. This facility has
substantial additional capacity and manufacturing flexibility which enables the
Company to bring products to market promptly in response to consumer demand and
to support increased sales volume.
PRODUCTS
The Company focuses on premium dietary supplement products that are in high
demand as well as specialty niche and proprietary formulations that have
potentially strong margins. The Company's products include vitamins, minerals,
herbs, specialty formulations, weight control products, hormones and various
nutrients. The Company positions Natrol as a premium brand of vitamins, minerals
and other supplements rather than a value brand. The Company manufactures and
sells more than 145 products packaged into approximately 500 SKUs. The Company's
consumer products are currently divided into seven product categories: Ester-C,
Herbals, Natrol Premium, Lifestyle Products, Garlic, Specialty Dietary
Supplements and Natural Diet Control. The Company also sells bulk raw materials.
The percentage of the Company's net sales represented by each of its product
categories fluctuates from period to period. For the three months ended March
31, 1998, the largest category accounted for 25.6% of net sales while the
smallest accounted for 3.6% of net sales and for 1997 the largest category
accounted for 29.4% of net sales while the smallest accounted for 3.5% of net
sales.
ESTER-C. Introduced in 1986, Ester-C is a buffered form of pH-neutral
Vitamin C and one of Natrol's cornerstone products. Although many Natrol
competitors sell Ester-C, according to Spence Information Services, Natrol's
Ester-C held approximately 25% of the Vitamin C market in health food stores in
1997. The Company has built its market share though heavy promotion, associating
Ester-C with the Natrol brand. The Company sells approximately 45 SKUs of
Ester-C, each offering a special potency, pill count, delivery system or
specialty combination, such as Ester-C with zinc.
HERBALS. Herbal supplements are popular in the health food store channel
and are becoming increasingly popular in the mass market distribution channel.
The Company's Herbals category consists
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of more than fifty herbal extracts. These include single herb products such as
St. John's wort, ginkgo biloba and kava kava, standardized extracts such as
bilberry, and specialty formulations that combine herbs designed to meet
particular consumer needs. Examples of the Company's specialty herb formulations
are Eye Support, Hair & Nail Formula, Liver Support and Mental Support.
LIFESTYLE PRODUCTS. This category is designed to meet particular lifestyle
needs. Product formulations are generally proprietary, and include Kavatrol, an
herbal kava formulation used as a calming aid, and Mood Support, a formulation
of St. John's wort and other herbs used for mood elevation. During the three
months ended March 31, 1998, the Company launched Natrol for Women, a line in
which each formulation is designed to meet nutritional needs specific to women.
The Company believes there is significant opportunity to expand the Lifestyle
Products category with formulations that are proprietary to the Natrol label.
NATROL PREMIUM. The Natrol Premium category includes My Favorite Multiple
(called the "Cadillac of vitamins" by the Center for Science in the Public
Interest) and the Company's core group of vitamins, minerals, anti-oxidants and
generic supplements. The Natrol Premium category, which contains approximately
80 SKUs and includes many widely consumed and popular vitamins, minerals and
other supplements, is important to Natrol's business as the Company seeks to
build broad-based consumer support and brand recognition.
GARLIC. The Company's Garlic category consists of two brands, Quintessence
and Highgar Farms, acquired in the Pure-Gar Acquisition. Quintessence is sold
through the health food store distribution channel while the Highgar Farms brand
is sold through the mass market distribution channel. Both brands have a solid
reputation for delivering high quality, high potency tablets and capsules. The
Company intends to integrate the Natrol name and logo into these brands.
SPECIALTY DIETARY SUPPLEMENTS. The Company's Specialty Dietary Supplements
category includes products such as Melatonin, DHEA and Pregnenolone. Melatonin
helped establish the Company's reputation within the mass market channel of
distribution. In 1996, the Company received the Rex Award for Market Maker of
the Year and the Rex Award for Best Nutritional Supplement, each from Drug Store
News, for its introduction of Melatonin into the chain drugstore distribution
channel. According to Information Resources, Inc., the Company ranked first in
net sales of Melatonin in the food, drug and mass trade class in the United
States in 1997.
NATURAL DIET CONTROL. The Company's Natural Diet Control category consists
of products sold for weight control or weight loss. The category includes
products such as Cravex, Tonalin, Absorbitol-Registered Trademark-, Chitosan,
Calcium Pyruvate and Citrimax-Registered Trademark-. Products within the natural
diet control category typically have a shorter life cycle than other dietary
supplement products, leading Natrol to be more aggressive with new product
development in this category.
The Company emphasizes the ongoing development and introduction of products
in response to emerging trends or scientific developments in the dietary
supplement market. The Company believes it has an excellent reputation among
retailers for introducing items at the front end of the consumer demand curve
and then working to develop brand loyalty after product introduction. Management
continually evaluates its product categories and SKUs for trends in sales and
profitability, de-emphasizing or dropping products when profitability or SKU
velocity lags and regularly introducing new products to replace slower moving
products, capitalize on market trends and diversify the Company's product
offerings. See "--Research and Product Development."
In its bulk ingredient business, the Company currently sells dehydrated
vegetable products, primarily garlic, to other manufacturers, distributors and
marketers of dietary supplements. The Company obtains bulk garlic from BVP
pursuant to a multi-year supply agreement that gives the Company the exclusive
right to sell BVP's vegetable powders in the dietary supplement industry. The
Company's future business may include sales of other bulk raw materials when, as
and if opportunities arise. See "--Manufacturing and Product Quality."
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MARKETING
The Company believes that its strategy of selling through both the health
food store and mass market channels of distribution under a single
label--Natrol--distinguishes the Company from its competition. Most of the
Company's competitors sell products into each channel using different brand
names, in some cases using a premium brand for the health channel and a value
brand for the mass market. The Company's core strategy is to continue to build
the Natrol brand name within multiple channels of distribution in order to
develop increased brand awareness and strong brand recognition among consumers
seeking products with a reputation for quality. The Company believes it can
leverage its reputation for high quality products developed within the health
food distribution channel in the mass market by positioning its products as a
premium, high quality brand rather than a value brand. By maintaining a single
brand identity, the Company believes it can also leverage its advertising budget
across multiple distribution channels.
The Company utilizes print, radio and television advertising. The Company
spent $2.1 million, or 16.0% of net sales on advertising and other marketing and
promotional activities in the three months ended March 31, 1998 and $6.9
million, or 16.2% of net sales, and $5.6 million, or 13.8% of net sales, in 1997
and 1996, respectively.
The Company generally uses targeted health-oriented magazines such as BETTER
NUTRITION, DELICIOUS and GREAT LIFE to support the health food store
distribution channel and uses mainstream publications such as PREVENTION,
HEALTH, USA TODAY, TV GUIDE, MCCALLS, FAMILY CIRCLE, WOMEN'S DAY and major
airline in-flight publications to support the mass market distribution channel.
The Company has utilized talk radio since 1991 when the Company first
advertised on the original LARRY KING LIVE SHOW. Throughout 1998, the Company's
"Natrol Health Minute," which features medical nutritional specialist Dr. Bruce
Hensel, will be heard on the nationally syndicated Dr. Laura Schlessinger and
Rush Limbaugh radio shows. The "Natrol Health Minute" campaign will feature
discussions about current health and nutrition issues. The campaign is intended
to make the Natrol name synonymous with good health.
In 1997, the Company first utilized television as part of its introductory
campaign for Kavatrol. Throughout 1998, the Company's commercials will be seen
on the CNN/Turner Network, including such programs as CNN HEADLINE NEWS, CNN
MORNING NEWS and BURDEN OF PROOF. In addition, the Natrol logo will appear on
HEADLINE WEATHER and HEADLINE SPORTS TICKER.
The Company also actively works to keep the news media aware of product
developments. In recent years the Company's products have appeared in
periodicals such as TIME, NEWSWEEK, THE WALL STREET JOURNAL and COSMOPOLITAN as
well as in television footage produced by programs such as 20/20, DATELINE, 48
HOURS and PRIME TIME LIVE.
SALES AND DISTRIBUTION
The Company distributes its products primarily to domestic health food
stores and mass market drug, retail and food stores. Net sales into these
distribution channels have historically accounted for a substantial majority of
the Company's total net sales. The Company's products are also available at a
wide range of other distribution points, including mail order and the Internet,
airport shops, resort hotels and salons.
The Company sells its products to health food stores through the leading
national distributors, including United Natural Foods and Tree of Life, as well
as directly to GNC. Natrol products are sold by health food store chains such as
Wild Oats Markets, Whole Foods Market, Hi-Health, Vitamin Cottage, Fred Meyer
Nutrition Centers and Vitamin Shoppes, as well as most independent health food
stores. The Company also distributes its products to domestic military
exchanges. During 1996 and 1997, in order to better develop retail business
within the health food store distribution channel, the Company converted
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from a sales network of independent brokers to a direct sales force of more than
22 employees under the supervision of three regional managers (at May 1, 1998).
The mass market distribution channel is managed by the Company's Vice
President of Sales and regional managers who work with a network of independent
brokers. The Company's employees service certain of its larger mass market
accounts directly while independent brokers service others in conjunction with
the Company's management. The Company sells its products to mass market
merchandisers either directly or through distributors of vitamins, minerals and
other supplement products such as Bergen Brunswick, McKesson and Cardinal. Some
of the Company's major mass market retail customers are Walgreens, CVS, American
Drug Stores, Rite Aid, Long's Drug, Drug Emporium, Eckerd, Snyders, Brooks Drug,
Wal-Mart, Kmart, Target, ShopKo and BJ's Wholesale Club. The Company also sells
its products in grocery stores and supermarkets, including Dominick's, Ralphs,
Von's, Cub Foods, Food For Less and Wegmans. The Company believes supermarket
and grocery stores present significant opportunities for growth in the dietary
supplement industry.
The Company provides retailers in both the health food store and the mass
market distribution channel with a wide array of comprehensive services tailored
to meet their individual needs. In the health food store channel, the Company's
dedicated sales force maintains direct and regular contact with key store
personnel, informing them of new product developments and industry trends,
aiding them in the design of store sets and creating merchandising programs that
promote brand and category awareness. The Company's regional sales managers and
independent brokers in the mass market distribution channel work with corporate
buyers focusing on special promotional activities and brand and category
awareness in order to gain more shelf space. The objective of these activities
is to build strong relationships with the Company's marketing partners and to
increase the number of stores carrying its products and the amount of space
allocated to, and the overall number of, the Company's products and SKUs within
each store.
Net sales to Walgreens accounted for 15.3% of the Company's net sales for
the three months ended March 31, 1998 and 17.7% and 12.6% of the Company's net
sales in 1997 and 1996, respectively. Net sales to Tree of Life accounted for
10.4% of the Company's net sales for the three months ended March 31, 1998 and
11.6% and 10.2% of the Company's net sales in 1997 and 1996, respectively. Net
sales to GNC accounted for 3.0% of the Company's net sales for the three months
ended March 31, 1998 and 2.3% and 14.5% of the Company's net sales in 1997 and
1996, respectively. The Company does not have long-term contracts with any of
its customers.
RESEARCH AND PRODUCT DEVELOPMENT
The Company emphasizes the ongoing development and introduction of products
in response to emerging trends in the dietary supplement market. The Company
believes it has an excellent reputation among retailers for introducing items at
the front end of the consumer demand curve and then working to develop brand
loyalty after product introduction. Management continually evaluates its product
categories and SKUs for trends in sales and profitability, de-emphasizing or
dropping products when profitability or SKU velocity lags and regularly
introducing new products to replace slower moving products, capitalize on market
trends and diversify the Company's product offerings. In addition, new products
often have higher gross margins than mature items. For these reasons, the
Company considers product development essential to maintaining growth and
profitability.
The Company believes it has developed a reputation among retailers for
consistently identifying new products with market potential. During 1996 and
1997 the Company was one of the first companies to market and promote broadly
melatonin, DHEA and St. John's wort. The Company has also introduced a number of
proprietary formulations including Kavatrol, Mood Support, Thera-C, and a line
of women's specialty products. As a result of its product development efforts,
the Company introduced 34 new products with 53 SKUs in 1997 and has introduced
21 products with 28 SKUs in the three months ended March 31, 1998.
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The Company has established a focused process to anticipate consumer
demands, monitor product developments within the dietary supplement industry,
and facilitate generation of new ideas for product introductions. In this
process, the Company's product development staff reviews periodicals, scientific
research and relevant clinical studies within medical journals and uses on-line
databases.
The Company also consults with a panel of scientific advisors to assist
members of its product development team. These advisors include: Dr. Terry
Willard, a recognized herbal expert, author and president of the Canadian
Association of Herbal Practitioners; Dr. Alexander Schauss, Director of the Life
Sciences Division, Natural and Medicinal Products Research of the American
Institute for Biosocial Research, Inc.; Dr. Ronald R. Watson, a scientist who
has published more than 150 articles relating to nutrition and immunology; and
Dr. Bruce Hensel, a physician and journalist. The Company also communicates with
other scientists on a regular basis regarding new product concepts.
The Company sponsors scientific research by independent researchers as a
part of its product development efforts. In order to implement its strategy of
consistently developing new products, in 1998 the Company is expanding its
budget for scientific research and product development. The Company is
sponsoring research by BVP which is focused on the development of functional
foods as well as the improvement of the potency of garlic and other dehydrated
vegetable products. The Company has agreed to pay BVP royalties with respect to
sales of products developed in connection with its research. The Company
recently sponsored a randomized, double-blind, placebo-controlled study at the
University of Virginia regarding the efficacy of the Company's proprietary
Kavatrol product, which produced favorable results. The Company has also
commissioned further independent research by the same researchers at the
University of Virginia on its proprietary Kavatrol product regarding dosage
levels.
MANUFACTURING AND PRODUCT QUALITY
The Company manufactures its products at its 90,000 square foot
manufacturing facility/ headquarters located in Chatsworth, California. At this
facility, the Company manufactures both tablets and two piece capsules which
accounted for more than 90% of the Company's net sales in 1997. The Company also
manufactures dietary supplement products pursuant to purchase orders with
customers who distribute and sell the products under their own brands and for
other customers as opportunities arise. The Company uses third party vendors to
produce its liquid products and softgels.
The Company places a strong emphasis on quality control because it believes
that quality standards play a critical factor in consumer purchasing decisions
and in differentiating the Natrol brand. The Company's products are manufactured
in accordance with current GMPs of the FDA for foods and the applicable
regulations of other agencies.
The Company's manufacturing facility includes an on-site laboratory which is
staffed by the director of quality assurance, bench chemists and other quality
control personnel. The Company's laboratory contains equipment for performing
testing procedures, including high performance liquid chromatography,
ultra-violet and infra-red spectrophotometry and thin layer chromatography. The
Company requires all raw materials or finished product produced by third party
vendors to be placed in quarantine upon receipt and tested by the Company's
quality control laboratory. The Company conducts sample testing, weight testing,
purity testing, dissolution testing and, where required, microbiological
testing. When raw materials are released from quarantine each lot is assigned a
unique lot number which is tracked throughout the manufacturing process.
Materials are blended, tested and then encapsulated or formed into pills which
may or may not be coated. The Company routinely performs qualitative and
quantitative quality control procedures on its finished products.
The Company obtains all of its raw materials for the manufacture of its
products from third-party suppliers. Many of the raw materials used in Company's
products are harvested internationally. With the exception of bulk garlic and
Ester-C, the Company does not have contracts with any suppliers committing such
suppliers to provide the materials required for the production of its products.
In the last few years, natural vitamin E, beta carotene and melatonin have had
significant price fluctuations as a result of short
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supply or increases in demand. The Company has experienced occasional shortages
of raw materials for a limited number of its products but to date has only
encountered short-term production interruptions as a result of such shortages.
No single supplier accounted for more than approximately 12.5% of the Company's
total purchases in 1997. There can be no assurance that suppliers, including
suppliers of bulk garlic and Ester-C, will provide the raw materials needed by
the Company in the quantities requested or at a price the Company is willing
pay. Because the Company does not control the actual production of these raw
materials, it is also subject to delays caused by interruption in production of
materials based on conditions not within its control. Such conditions include
job actions or strikes by employees of suppliers, weather, crop conditions,
transportation interruptions and natural disasters or other catastrophic events.
With respect to products that are sold by the Company under the supplier's
trademark, such as Ester-C and Tonalin, the Company is limited to that single
supplier as a source of raw materials for that product. As a result, any
shortage of raw materials from that supplier would adversely affect the
Company's ability to manufacture that product. The inability of the Company to
obtain adequate supplies of raw materials for its products at favorable prices,
or at all, could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company is a party to a multi-year Distributorship/Packager/Supply
Agreement (the "Inter-Cal Agreement") with Inter-Cal Corporation ("Inter-Cal"),
under which Inter-Cal is required to supply the Company with its requirements of
bulk Ester-C. The Inter-Cal Agreement requires the Company to use its best
efforts to promote and sell Ester-C vitamin products worldwide with the
exception of certain specified countries, including Australia and New Zealand
and certain European countries. The Inter-Cal Agreement may be terminated by
Inter-Cal immediately if the Company violates the terms of certain provisions
relating to distribution and packaging and may be terminated by either party
upon a default of the obligations of the other party if the default has not been
cured within 60 days. The Company is also a party to a multi-year Supply
Agreement (the "BVP Agreement") with BVP, which requires BVP to sell and the
Company to purchase specified amounts of certain vegetable, fruit, herbal and
botanical products (the "BVP Products") manufactured by BVP. The BVP Agreement
gives the Company the exclusive right to sell certain BVP Products in the
dietary supplement industry. The BVP Agreement may be terminated by either party
upon a material breach of the obligations of the other party, or certain other
specified conditions, if the breach is not cured within 60 days, or within 15
days in the case of non-payment by the Company.
The Company has the current manufacturing capability to produce four million
tablets and capsules per eight hour shift and 420,000 bottles per week per
shift. The Company, on average, operates its manufacturing facility one shift
per day, five to six days per week. At times certain of the Company's packaging
lines or capsule and tablet production lines run longer hours as demand
warrants. The Company believes it can triple current sales volumes without the
necessity of expanding the current facility. Such a tripling of production would
require additional space for warehousing and shipping operations but would not
require substantial capital investment.
The Company operates flexible manufacturing lines which enable it to shift
output efficiently among various pieces of equipment depending upon such factors
as batch size, tablets or capsule count, and labeling requirements. The Company
strives to fulfill and ship all orders within 48 hours.
The Company has a strong commitment to maintaining the quality of the
environment. Nearly all of the plastic or glass containers used by the Company
are recyclable. The Company does not use solvents in its manufacturing
processes. The Company believes it is in compliance with all applicable
environmental regulations.
COMPETITION
The dietary supplement industry is highly competitive. Numerous companies,
many of which have greater size and financial, personnel, distribution and other
resources than the Company, compete with the Company in the development,
manufacture and marketing of dietary supplements. The Company's
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principal competition in the health food store distribution channel comes from a
limited number of large nationally known manufacturers and many smaller
manufacturers of dietary supplements. In the mass market distribution channel,
the Company's principal competition comes from broadline manufacturers, major
private label manufacturers and other companies. In recent years, a number of
the Company's competitors have begun to market and sell their products under
different labels in both the health food store and the mass market distribution
channels. In addition, large pharmaceutical companies and packaged food and
beverage companies compete with the Company on a limited basis in the dietary
supplement market. With respect to Ester-C and the Company's Natrol Premium
category, the Company faces significant additional competition from large
pharmaceutical companies that market vitamins, multivitamins and minerals in the
mass market distribution channel. Increased competition from such companies
could have a material adverse effect on the Company because such companies have
greater financial and other resources available to them and possess
manufacturing, distribution and marketing capabilities far greater than those of
the Company. The Company also faces competition in both the health food store
and mass market distribution channels from private label dietary supplements and
multivitamins offered by health and natural food store chains, drugstore chains,
mass merchandisers and supermarket chains.
The Company competes on the basis of product quality, pricing, customer
service and marketing support. The Company believes that it competes favorably
with its competitors on the strength of the Company's strong brand recognition
across multiple distribution channels, ability to quickly develop new products
with market potential, sophisticated marketing, advertising and promotional
support, product quality, and strong and effective sales force and distribution
network.
REGULATORY MATTERS
The manufacture, packaging, labeling, advertising, promotion, distribution
and sale of the Company's products are subject to regulation by numerous
governmental agencies, the most active of which is the U.S. Food and Drug
Administration (the "FDA"), which regulates the Company's products under the
Federal Food, Drug and Cosmetic Act (the "FDCA") and regulations promulgated
thereunder. The Company's products are also subject to regulation by, among
other regulatory agencies, the Consumer Product Safety Commission, the U.S.
Department of Agriculture (the "USDA") and the Environmental Protection Agency
(the "EPA"). Advertising of the Company's products is subject to regulation by
the U.S. Federal Trade Commission (the "FTC"), which regulates the Company's
advertising under the Federal Trade Commission Act (the "FTCA"). The
manufacture, labeling and advertising of the Company's products are also
regulated by various state and local agencies as well as each foreign country to
which the Company distributes its products.
DSHEA revised the provisions of the FDCA concerning the regulation of
dietary supplements. In the judgment of the Company, the DSHEA is favorable to
the dietary supplement industry. The legislation for the first time defined
"dietary supplement." The term "dietary supplement" is defined as a product
intended to supplement the diet that contains one or more of certain dietary
ingredients, such as a vitamin, a mineral, an herb or botanical, an amino acid,
a dietary substance for use by man to supplement the diet by increasing the
total dietary intake, or a concentrate, metabolite, constituent, extract, or
combination of the preceding ingredients. The substantial majority of the
products marketed by the Company are regulated as dietary supplements under the
FDCA.
Under the current provisions of the FDCA there are four categories of claims
that pertain to the regulation of dietary supplements. Health claims are claims
that describe the relationship between a nutrient or dietary ingredient and a
disease or health related condition and can be made on the labeling of dietary
supplements if supported by significant scientific agreement and authorized by
FDA in advance via notice and comment rulemaking. Nutrient content claims
describe the nutritional value of the product and may be made if defined by the
FDA through notice and comment rulemaking and if one serving of the product
meets the definition. Health claims and nutrient content claims may also be made
if a scientific body of the U.S. government with official responsibility for the
public health has made an
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authoritative statement regarding the claim, the claim accurately reflects that
statement and the manufacturer, among other things, provides the FDA with notice
of and basis for the claim at least 120 days before the introduction of the
supplement with a label containing the claim into interstate commerce.
Statements of nutritional support or product performance, which are permitted on
labeling of dietary supplements without FDA pre-approval, are defined to include
statements that: (i) claim a benefit related to a classical nutrient deficiency
disease and discloses the prevalence of such disease in the United States; (ii)
describe the role of a nutrient or dietary ingredient intended to affect the
structure or function in humans; (iii) characterize the documented mechanism by
which a dietary ingredient acts to maintain such structure or function; or (iv)
describe general well-being from consumption of a nutrient or dietary
ingredient. In order to make a nutritional support claim the marketer must
possess substantiation to demonstrate that the claim is not false or misleading
and if the claim is for a dietary ingredient that does not provide traditional
nutritional value, prominent disclosure of the lack of FDA review of the
relevant statement and notification to the FDA of using the claim is required.
Drug claims are representations that a product is intended to diagnose,
mitigate, treat, cure or prevent a disease. Drug claims are prohibited from use
in the labeling of dietary supplements.
Claims made for the Company's dietary supplement products may include
statements of nutritional support and health and nutrient content claims when
authorized by the FDA or otherwise allowed by law. The FDA's interpretation of
what constitutes an acceptable statement of nutritional support may change in
the future thereby requiring that the Company revise its labeling. The FDA
recently issued a proposed rule on what constitutes permitted structure/function
claims as distinguished from prohibited disease claims. Although the Company
believes its product claims comply with the law, depending on the content of the
final regulation, it may need to revise its labeling. In addition, a dietary
supplement that contains a new dietary ingredient (i.e., one not on the market
before October 15, 1994) must have a history of use or other evidence of safety
establishing that it is reasonably expected to be safe. The manufacturer must
notify the FDA at least 75 days before marketing products containing new dietary
ingredients and provide the FDA the information upon which the manufacturer
based its conclusion that the product has a reasonable expectation of safety.
The FDA issued final dietary supplement labeling regulations in 1997 that
require a new format for product labels and will necessitate revising dietary
supplement product labels by March 23, 1999. All companies in the dietary
supplement industry are required to comply with these labeling regulations. The
FDA has also announced that it is considering promulgating new GMPs specific to
dietary supplements. Such GMPs, if promulgated, may be significantly more
rigorous than currently applicable GMP requirements and contain quality
assurance requirements similar to GMP requirements for drug products. Therefore,
the Company may be required to expend additional capital and resources on
manufacturing in the future in order to comply with the law.
The failure of the Company to comply with applicable FDA regulatory
requirements could result in, among other things, injunctions, product
withdrawals, recalls, product seizures, fines, and criminal prosecutions.
As a result of the Company's efforts to comply with applicable statutes and
regulations, the Company has from time to time reformulated, eliminated or
relabeled certain of its products and revised certain of its advertising claims.
The Company cannot predict the nature of any future laws, regulations,
interpretations or applications, nor can it determine what effect additional
governmental regulations or administrative orders, when and if promulgated,
would have on its business in the future. They could, however, require the
reformulation of certain products to meet new standards, the recall or
discontinuance of certain products not capable of reformulation, additional
recordkeeping, expanded documentation of the properties of certain products,
expanded or different labeling, and/or scientific substantiation. Any or all of
such requirements could have a material adverse effect on the Company's
business, financial condition and results of operations.
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The Company's advertising of its dietary supplement products is subject to
regulation by the FTC under the FTCA. Section 5 of the FTCA prohibits unfair
methods of competition and unfair or deceptive acts or practices in or affecting
commerce. Section 12 of the FTCA provides that the dissemination or the causing
to be disseminated of any false advertisement pertaining to drugs or foods,
which would include dietary supplements, is an unfair or deceptive act or
practice. Under the FTC's Substantiation Doctrine, an advertiser is required to
have a "reasonable basis" for all objective product claims before the claims are
made. Failure to adequately substantiate claims may be considered either
deceptive or unfair practices. Pursuant to this FTC requirement the Company is
required to have adequate substantiation for all material advertising claims
made for its products.
In recent years the FTC has initiated numerous investigations of dietary
supplement and weight loss products and companies. The FTC is reexamining its
regulation of advertising for dietary supplements and has announced that it will
issue a guidance document to assist supplement marketers in understanding and
complying with the substantiation requirement. Upon release of this guidance
document Natrol will be required to evaluate its compliance with the guideline
and may be required to change its advertising and promotional practices.
The FTC has a variety of processes and remedies available to it for
enforcement, both administratively and judicially, including compulsory process,
cease and desist orders, and injunctions. FTC enforcement can result in orders
requiring, among other things, limits on advertising, corrective advertising,
consumer redress, divestiture of assets, rescission of contracts and such other
relief as may be deemed necessary. A violation of such orders could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Advertising and labeling for dietary supplements and conventional foods are
also regulated by states and local authorities. There can be no assurance that
state and local authorities will not commence regulatory action which could
restrict the permissible scope of the Company's product claims.
Governmental regulations in foreign countries where the Company plans to
commence or expand sales may prevent or delay entry into the market or prevent
or delay the introduction, or require the reformulation, of certain of the
Company's products. Compliance with such foreign governmental regulations is
generally the responsibility of the Company's distributors for those countries.
These distributors are independent contractors over whom the Company has limited
control.
In addition, the Company has in the past, from time to time, been the
subject of investigation by the FTC, however, the Company is not currently a
party to any consent order or other decree of the FTC. The Company may be the
subject of investigation in the future. The FTC may impose limitations on the
Company's advertising of its products. Any such limitations could materially
adversely affect the Company's ability to successfully market its products.
The Company manufactures certain products pursuant to contracts with
customers who distribute the products under their own or other trademarks. Such
private label customers are subject to government regulations in connection with
their purchase, marketing, distribution and sale of such products. The Company
is subject to government regulations in connection with its manufacture,
packaging and labeling of such products. However, the Company's private label
customers are independent companies, and their labeling, marketing and
distribution of such products is beyond the Company's control. The failure of
these customers to comply with applicable laws or regulations could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company may be subject to additional laws or regulations by the FDA or
other federal, state or foreign regulatory authorities, the repeal of laws or
regulations which the Company considers favorable, such as the Dietary
Supplement Health and Education Act of 1994, or more stringent interpretations
of current laws or regulations, from time to time in the future. The Company is
unable to predict the nature of such future laws, regulations, interpretations
or applications, nor can it predict what effect additional governmental
regulations or administrative orders, when and if promulgated, would have on its
business in the future. They could, however, require the reformulation of
certain products to meet new standards,
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<PAGE>
the recall or discontinuance of certain products not able to be reformulated,
imposition of additional recordkeeping requirements, expanded documentation of
the properties of certain products, expanded or different labeling and
scientific substantiation. Any or all of such requirements could have a material
adverse affect on the Company's business, financial condition and results of
operations.
TRADEMARKS AND PATENTS
The Company regards its trademarks, patent applications and other
proprietary rights as valuable assets. The Company believes that protecting its
key trademarks is crucial to its business strategy of building strong brand name
recognition and that such trademarks have significant value in the marketing of
its products. The Company may in some cases seek to protect its research and
development efforts by filing patent applications for proprietary products.
The Company's policy is to pursue registrations for all of the trademarks
associated with its key products. The Company relies on common law trademark
rights to protect its unregistered trademarks as well as its trade dress rights.
Common law trademark rights generally are limited to the geographic area in
which the trademark is actually used, while a United States federal registration
of a trademark enables the registrant to stop the unauthorized use of the
trademark by any third party anywhere in the United States. Furthermore, the
protection available, if any, in foreign jurisdictions may not be as extensive
as the protection available to the Company in the United States.
Currently, the Company has received one United States patent for its
Kavatrol product, has a second United States patent application pending for a
method of using its Kavatrol product and has received two United States patents
on its amino acid products, SAF and SAF for Kids. To the extent the Company does
not have patents on its products, another company may replicate one or more of
the Company's products.
Although the Company seeks to ensure that it does not infringe the
intellectual property rights of others, there can be no assurance that third
parties will not assert intellectual property infringement claims against the
Company. Natrol was contacted in June 1997 by a third party that claimed
Natrol's marketing of melatonin infringed the third party's patents relating to
a method of using melatonin and sought to license such patents to Natrol. Since
Natrol does not believe its marketing of melatonin infringes the third party's
patent claims, Natrol has declined to enter into a license agreement with the
third party. Any infringement claims by third parties against the Company may
have a material adverse effect on the Company's business, financial condition
and results of operations.
LEGAL MATTERS
From time to time the Company is subject to litigation incidental to its
business including possible product liability claims. Such claims, if
successful, could exceed applicable insurance coverage.
The Company is not currently a party to any material legal proceedings.
EMPLOYEES
As of June 1, 1998, the Company had approximately 189 employees. Of such
employees, 36 were engaged in marketing and sales, 106 were devoted to
production and distribution and 47 were responsible for management and
administration. None of the Company's employees is covered by a collective
bargaining agreement. The Company considers its relations with its employees to
be good.
PROPERTIES
The Company leases a 90,000 square foot manufacturing, distribution and
office facility in Chatsworth, California. The Company has occupied this
facility since March 1997. The facility was designed and constructed to the
Company's specifications and includes areas for shipping and receiving,
quarantine of new materials, manufacture, quality control and laboratory
activities, research and development, packaging, warehousing and administrative
offices. The lease for the facility has a ten-year term (which expires in
October 2006). In 1997 the Company had total lease costs of $573,000 which
covered the manufacturing facility and other space.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
June 1, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- ------------------------------------------------------------------------
<S> <C> <C>
Elliott Balbert.................. 52 Chairman of the Board, Chief Executive Officer and President
Dennis R. Jolicoeur.............. 50 Chief Financial Officer, Treasurer, Executive Vice President and
Director
Cheryl A. Richitt................ 40 Vice President of Marketing
Gary P. DeMello.................. 44 Vice President of Operations
Jon J. Denis..................... 50 Vice President of Sales
Norman Kahn(1)(2)................ 67 Director
David Laufer(1)(2)............... 57 Director
P. Andrews McLane(1)(2).......... 50 Director
</TABLE>
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Mr. Balbert founded the Company in 1980 and has served as the Company's
Chairman of the Board, Chief Executive Officer and President since its
inception.
Mr. Jolicoeur joined the Company as Chief Financial Officer, Treasurer and
Executive Vice President in July 1996 and has served as a director of the
Company since that date. From October 1993 to June 1996, Mr. Jolicoeur was a
principal of Gardiner & Rauen, Inc., an investment banking firm. In 1980 Mr.
Jolicoeur founded Lighthouse Press, Inc. ("Lighthouse"), and actively managed
Lighthouse until 1989. In 1993, Mr. Jolicoeur and other investors acquired
Naiman Printing, Inc. ("Naiman"). Mr. Jolicoeur became President of each of
Lighthouse and Naiman in August 1994 following the dismissal of the then-acting
President of each company. Naiman and Lighthouse filed voluntary petitions under
Chapters 7 and 11, respectively, of the federal bankruptcy code in September
1996.
Ms. Richitt joined the Company in September 1989 and has served as Vice
President of Marketing since 1992. Prior to joining the Company, Ms. Richitt
held sales and administrative positions with Vidal Sassoon and Rachel Perry,
Inc., a natural cosmetics company.
Mr. DeMello joined the Company in June 1992 and has been Vice President of
Operations since that time. Prior to joining the Company, Mr. DeMello was the
Director of Purchasing for Tree of Life, Inc.
Mr. Denis joined the Company as Vice President of Sales in August 1997.
Prior to joining the Company, Mr. Denis served as Vice President of Sales at
Conair Inc., a personal care and appliance products company, for 15 years,
preceded by eight years in various sales positions at Revlon, Inc.
Mr. Kahn has served as a director of the Company since April 1995. Mr. Kahn,
a private investor, was the Managing Director of the San Marino Financial Group,
an investment banking firm, from 1993 to 1996.
Mr. Laufer has served as a director of the Company since 1996. Since 1996,
Mr. Laufer has been a partner of Arter & Hadden LLP, a law firm. Prior to
joining Arter & Hadden LLP, Mr. Laufer was a partner or co-managing partner of
Kindel & Anderson LLP, a law firm, from 1986 to 1996.
Mr. McLane has served as a director of the Company since September 1996. He
has been at TA Associates, Inc. or its predecessor since 1979, where he is
Senior Managing Director and a member of the firm's Executive Committee. Mr.
McLane is also a director of Affiliated Managers Group, Inc., an
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investment management company, and several private companies, including Altamira
Management Ltd., a Canadian mutual fund company, and Eight-in-One Pet Products,
Inc.
BOARD OF DIRECTORS
The number of directors of the Company is currently fixed at five. Following
the offering, the Company's Board of Directors will be divided into three
classes, with the members of each class of directors serving for staggered
three-year terms. The Board will consist of two Class I Directors (Messrs.
Jolicoeur and Kahn), two Class II Directors (Messrs. Laufer and McLane) and one
Class III Director (Mr. Balbert), whose initial terms will expire at the 1999,
2000 and 2001 annual meetings of stockholders, respectively. Mr. McLane was
elected a director as the nominee of the holders of the Convertible Preferred
Stock.
The Board of Directors has established an Audit Committee (the "Audit
Committee") and a Compensation Committee (the "Compensation Committee"). The
Audit Committee recommends the firm to be appointed as independent accountants
to audit the Company's financial statements and to perform services related to
such audit, reviews the scope and results of such audit with the independent
accountants, reviews with management and the independent accountants the
Company's year-end operating results, considers the adequacy of the internal
accounting procedures and considers the effect of such procedures on the
accountants' independence. The Audit Committee currently consists of Messrs.
Kahn, Laufer and McLane, none of whom is an officer or an employee of the
Company. The Compensation Committee reviews and recommends the compensation
arrangements for officers and other senior level employees, reviews general
compensation levels for other employees as a group, determines the options or
stock to be granted to eligible persons under the 1996 Stock Plan and takes such
other action as may be required in connection with the Company's compensation
and incentive plans. The Compensation Committee currently consists of Messrs.
Kahn, Laufer and McLane. See "--Compensation Committee Interlocks and Insider
Participation" and "Certain Transactions."
On April 8, 1998, the Company granted options to purchase 25,000 shares of
Common Stock under the 1996 Stock Plan to Mr. Laufer, a non-employee director.
Such options vest as follows: 12,500 shares vested on the date of grant, 4,200
shares vest on each of April 8, 1999 and April 8, 2000 and 4,100 shares vest on
April 8, 2001 as long as he continues to serve as a director of the Company.
Directors receive such compensation for their services as the Board of
Directors may from time to time determine. Further, each director is reimbursed
for reasonable travel and other expenses incurred in attending meetings.
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<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION. The following table sets forth information concerning
compensation for services rendered in all capacities awarded to, earned by or
paid to the Chief Executive Officer and the four other most highly compensated
executive officers of the Company for 1997 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------------------------------
ANNUAL COMPENSATION NUMBER OF SHARES
------------------------ UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS GRANTED(#) COMPENSATION(1)
- ---------------------------------------------------- ----------- ----------- -------------------- -----------------
<S> <C> <C> <C> <C>
Elliott Balbert..................................... $ 600,000 $ 400,000 -- $ 29,500
Chairman, Chief Executive Officer and President
Dennis R. Jolicoeur................................. 212,500 61,953 -- --
Chief Financial Officer
Cheryl R. Richitt................................... 128,786 62,274 100,000 --
Vice President of Marketing
Gary P. DeMello..................................... 112,180 44,234 -- --
Vice President of Operations
Jon J. Denis(2)..................................... 100,731 26,633 100,000 2,307
Vice President of Sales
</TABLE>
- ------------------------
(1) Mr. Balbert received $27,400 in life insurance benefits and $2,100 in
benefits for the use of a Company car. Mr. Denis received $2,307 in car
allowance.
(2) Mr. Denis joined the Company in August 1997.
OPTION GRANTS, EXERCISES AND HOLDINGS. The following table sets forth
information regarding stock options granted during 1997 to the Named Executive
Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE
----------------------------------------------------------------- AT ASSUMED ANNUAL
NUMBER OF PERCENT OF TOTAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(3)
OPTIONS EMPLOYEES IN OR BASE PRICE EXPIRATION ------------------------
NAME GRANTED(#)(1) FISCAL YEAR ($/SH)(2) DATE 5%($) 10%($)
- ------------------------------- -------------- --------------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cheryl R. Richitt.............. 100,000(4) 50% 2.10 7/29/07 132,067 334,686
Jon J. Denis................... 100,000(5) 50% 2.10 8/11/07 132,067 334,686
</TABLE>
- ------------------------------
(1) Vesting of options is subject to the continuation of such employee's service
relationship with the Company. The options terminate ten years after the
grant date, subject to earlier termination in accordance with the 1996 Stock
Plan and the applicable option agreement.
(2) The exercise price equals the fair market value of the stock as of the grant
date as determined by the Board of Directors after consideration of a number
of factors, including, but not limited to, the Company's financial
performance, the Company's status as a private company at the time of
grants, the minority interests represented by the option shares and the
price of shares of equity securities sold to or purchased by outside
investors.
(3) The amounts shown as potential realizable value illustrate what might be
realized upon exercise immediately prior to expiration of the option term
using the 5% and 10% appreciation rates established in regulations of the
Securities and Exchange Commission, compounded annually. The potential
realizable value of the options to each of Ms. Richitt and Mr. Denis using
the assumed initial public offering price of $13.00 per share is, in each
case, $1,907,563 at an assumed 5% appreciation rate and $3,161,865 at an
assumed 10% appreciation rate. The potential realizable value is not
intended to predict future appreciation of the price of the Common Stock.
The values shown do not consider nontransferability, vesting or termination
of the options upon termination of such employee's service relationship with
the Company.
(4) Options vest 6.25% on October 29, 1997 and then an additional 6.25% every
three months thereafter.
(5) Options vest in three equal annual installments commencing on the first
anniversary of the date of grant. These options were granted on August 11,
1997.
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<PAGE>
OPTION EXERCISES AND YEAR-END HOLDINGS. The following table sets forth
information concerning the number and value of unexercised options to purchase
Common Stock held by the Named Executive Officers. None of the Named Executive
Officers exercised any stock options during Fiscal 1997.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END ($)(1)
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------------------- ----------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Cheryl R. Richitt.................................... 71,250 128,750 791,250 1,411,250
Gary P. DeMello...................................... 45,000 55,000 500,625 611,875
Jon J. Denis......................................... -- 100,000 -- 1,090,000
</TABLE>
- ------------------------
(1) There was no public trading market for the Common Stock as of December 31,
1997. Accordingly, these values have been calculated on the basis of the
assumed initial public offering price of $13.00 per share, less the
applicable exercise price.
MANAGEMENT BONUS PLAN. The Board of Directors has adopted an individualized
bonus plan for each Named Executive Officer for 1998 to be administered by the
Compensation Committee. Awards under the Plan are determined on the basis of the
Company's financial performance and certain individual goals, in each case as
established by the Compensation Committee at the beginning of 1998.
EMPLOYEE STOCK AND OTHER BENEFIT PLANS
1996 STOCK OPTION AND GRANT PLAN. The 1996 Stock Plan was initially adopted
by the Board of Directors and approved by the Company's stockholders in November
1996. The 1996 Stock Plan as amended and restated was approved by the Company's
Board of Directors and stockholders in June 1998. The 1996 Stock Plan permits
(i) the grant of Incentive Options, (ii) the grant of Non-Qualified Options,
(iii) the issuance or sale of Common Stock with or without vesting or other
restrictions ("Restricted Stock") or without restrictions ("Unrestricted Stock"
and collectively with Restricted Stock, "Stock Grants"), (iv) the grant of
Common Stock upon the attainment of specified performance goals ("Performance
Share Awards"), (v) the grant of the right to receive cash dividends with the
holders of the Common Stock as if the recipient held a specified number of
shares of the Common Stock ("Dividend Equivalent Rights") and (vi) the grant of
the right to receive the value of the excess of the fair market value of the
Common Stock over the exercise price of such rights ("Stock Appreciation Rights"
or "SARs"). These grants may be made to officers and other employees, directors,
advisors, consultants and other key persons of the Company and its subsidiaries.
The 1996 Stock Plan provides for the issuance of 1,770,000 shares of Common
Stock, which amount shall be increased as of each June 30 and December 31 by an
additional number of shares of Common Stock equal to fifteen percent (15%) of
the shares of stock issued by the Company in the previous six months. The sale
of 3,200,000 shares of Common Stock offered by the Company hereby will result in
an additional 480,000 shares of Common Stock being reserved for issuance under
the 1996 Stock Plan. Of the shares reserved for issuance under the 1996 Stock
Plan, (i) 720,000 shares were subject to outstanding options with a weighted
average exercise price of $5.87 per share as of June 30, 1998 and (ii) 300,000
shares were sold as restricted stock awards for an aggregate purchase price of
$562,800 in November 1996. On and after the date the 1996 Stock Plan becomes
subject to Section 162(m) of the Code, options with respect to no more than
150,000 shares of Common Stock may be granted to any one individual in any
calendar year.
The 1996 Stock Plan is administered by the Compensation Committee. Subject
to the provisions of the 1996 Stock Plan, the Compensation Committee has full
power to determine from among the persons eligible for grants under the 1996
Stock Plan the individuals to whom grants will be made, the combination of
grants to participants and the specific terms of each grant, including vesting.
Incentive Options may be made only to officers or other full-time employees of
the Company or its subsidiaries,
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<PAGE>
including members of the Board of Directors who are also full-time employees of
the Company or its subsidiaries. The Compensation Committee may delegate the
power to grant options to non-executive employees to the Company's Chief
Executive Officer.
The exercise price of options granted under the 1996 Stock Plan is
determined by the Compensation Committee. In the case of Incentive Options, the
exercise price may not be less than 100% of the fair market value of the
underlying shares on the date of grant. If any employee of the Company or any
subsidiary owns (or is deemed to own) at the date of grant shares of stock
representing in excess of 10% of the combined voting power of all classes of
stock of the Company or any parent or subsidiary, the option exercise price for
Incentive Options granted to such employee may not be less than 110% of the fair
market value of the underlying shares on that date. Non-Qualified Options may be
granted at prices which are less than the fair market value of the underlying
shares on the date granted. Options typically are subject to vesting schedules,
terminate 10 years from the date of grant and may be exercised for specified
periods subsequent to the termination of the optionee's employment or other
service relationship with the Company. At the discretion of the Compensation
Committee, any option may include a "reload" feature pursuant to which an
optionee exercising an option receives in addition to the number of shares of
Common Stock due on the exercise of such an option an additional option with an
exercise price equal to the fair market value of the Common Stock on the date
such additional option is granted. Upon the exercise of options, the option
exercise price must be paid in full either in cash or by certified or bank check
or other instrument acceptable to the Compensation Committee or, in the sole
discretion of the Compensation Committee, by delivery of shares of Common Stock
already owned by the optionee. The exercise price may also be delivered to the
Company by a broker pursuant to irrevocable instructions to the broker selling
the underlying shares from the optionee.
The 1996 Stock Plan also permits Stock Grants, Performance Share Awards,
grants of Dividend Equivalent Rights and SARs. Stock Grants may be made to
persons under the 1996 Stock Plan, subject to such conditions and restrictions
as the Compensation Committee may determine. Prior to the vesting of shares,
recipients of Stock Grants generally will have all the rights of a stockholder
with respect to the shares, including voting and dividend rights, subject only
to the conditions and restrictions set forth in the 1996 Stock Plan or in any
agreement. The Compensation Committee may also make Stock Grants in recognition
of past services or other valid consideration, or in lieu of cash compensation.
In the case of Performance Share Awards, the issuance of shares of Common Stock
will occur only after the conditions and restrictions set forth in the grant
agreement are satisfied. SARs may be granted in tandem with, or independently
of, Incentive Options or Non-Qualified Options. The Compensation Committee may
also grant Dividend Equivalent Rights in conjunction with any other grant made
pursuant to the 1996 Stock Plan or as a free standing grant. Dividend Equivalent
Rights may be paid currently or deemed to be reinvested in additional shares of
Common Stock, which may thereafter accrue further dividends.
The Compensation Committee may, in its sole discretion, accelerate or extend
the date or dates on which all or any particular award or awards granted under
the 1996 Stock Plan may be exercised or vest. Generally, upon a dissolution,
liquidation or sale of a majority of the outstanding voting stock or
substantially all of the assets of the Company, 50% of all unvested options,
SARs and other awards shall become vested as of the effective date of such
transaction, except as the Compensation Committee may otherwise specify with
respect to particular awards and except that 100% of unvested options held by
directors vest in such circumstances. To the extent not fully vested and
exercised, options granted under the 1996 Plan terminate upon the dissolution,
liquidation or sale of a majority of the outstanding voting stock or
substantially all of the assets of the Company, except as the parties to any
such transaction may otherwise agree in their discretion. Vesting of options
which remain in effect following a change-in-control generally accelerates in
the event the optionee's service relationship with the Company is terminated by
the Company without cause or by the optionee for good reason within 18 months
following the change-in-control transaction.
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<PAGE>
RESTRICTED STOCK GRANT. In November 1996 the Company sold 300,000 shares of
Restricted Stock to Dennis R. Jolicoeur under the 1996 Stock Plan for an
aggregate purchase price of $562,800. These shares of Restricted Stock vest in
equal three-month installments over four years beginning on July 1, 1997, with
unvested shares subject to repurchase at cost upon the termination of Mr.
Jolicoeur's employment with the Company for any reason. A total of 50% of Mr.
Jolicoeur's unvested shares would vest on any sale of a majority of the voting
stock or substantially all of the assets of the Company with unvested shares
subject to repurchase at cost in the event of any such transaction except to the
extent outstanding awards are assumed by the buyer in any such transaction. In
the event of such an assumption vesting would occur upon termination of Mr.
Jolicoeur's employment with the Company without cause or for good reason within
18 months following such a transaction. See "Certain Transactions."
1998 EMPLOYEE STOCK PURCHASE PLAN. The Purchase Plan was adopted by the
Board of Directors and subsequently approved by the Company's stockholders in
May 1998. Up to 225,000 shares of Common Stock may be issued under the Purchase
Plan. The Purchase Plan is administered by the Compensation Committee.
The first offering under the Purchase Plan will begin on September 1, 1998
and end on December 31, 1998. Subsequent offerings will commence on each January
1 and July 1 thereafter and will have a duration of six months. Generally, all
employees who are customarily employed for more than 20 hours per week as of the
first day of the applicable offering period are eligible to participate in the
Purchase Plan. An employee who owns or is deemed to own shares of stock
representing in excess of 5% of the combined voting power of all classes of
stock of the Company may not participate in the Purchase Plan.
During each offering, an employee may purchase shares under the Purchase
Plan by authorizing payroll deductions of up to 10% of his or her cash
compensation during the offering period. The maximum number of shares which may
be purchased by any participating employee during any offering period is limited
to 1,000 shares (as adjusted by the Compensation Committee from time to time).
Unless the employee has previously withdrawn from the offering, his accumulated
payroll deductions will be used to purchase Common Stock on the last business
day of the period at a price equal to 85% of the fair market value of the Common
Stock on the first or last day of the offering period, whichever is lower. Under
applicable tax rules, an employee may purchase no more than $25,000 worth of
Common Stock in any calendar year. No Common Stock has been issued to date under
the Purchase Plan.
AGREEMENTS WITH NAMED EXECUTIVE OFFICERS
In July 1997 the Company and Jon J. Denis entered into a letter agreement
pursuant to which the Company agreed to pay Mr. Denis an annual base salary of
$270,000 and provide certain incentive compensation based on sales and severance
benefits equal to six months base salary for the first six months of the term
and three months base salary thereafter. The Company's obligations under the
letter agreement terminate in August 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Messrs. Kahn, Laufer and
McLane. None of these individuals is an executive officer of the Company. Mr.
Laufer is a partner of Arter & Hadden LLP, a law firm which provides services to
the Company. Mr. McLane is Senior Managing Director of TA Associates, Inc.
In September 1996, the TA Investors purchased from the Company 1,921.9
shares of Convertible Preferred Stock for $854,000. The Company used the
proceeds of this investment to redeem shares of Common Stock from Mr. Kahn. The
TA Investors also purchased 25,078.1 shares of Convertible Preferred Stock from
stockholders of the Company. The total consideration paid by the TA Investors
for the Convertible Preferred Stock was $12.0 million. Pursuant to this
transaction, the Company granted the TA
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<PAGE>
Investors (i) "piggy back" registration rights from the Company, (ii) certain
demand registration rights from the Company as described under "Shares Eligible
for Future Sale," (iii) certain rights (the "Co-Sale Rights") from the then
current stockholders to participate on a pro rata basis in certain resales of
Common Stock by such stockholders (who also agreed to restrictions on transfers
of their shares of Common Stock), and (iv) participation rights with respect to
certain future issuances of securities by the Company. In addition, the terms of
the Convertible Preferred Stock held by the TA Investors provide that the
holders thereof shall have the right to elect one director by a vote of a
majority of the holders of the outstanding shares thereof voting as a separate
class. As a condition to the purchase of the Convertible Preferred Stock by the
TA Investors, P. Andrews McLane, the nominee of the TA Investors as holders of
all of the outstanding shares of Convertible Preferred Stock, was elected as a
director of the Company. The Company also agreed to indemnify the TA Investors
and the controlling persons of the TA Investors (including Mr. McLane) against
claims and liabilities arising in connection with their investment in or
relating to the Company, including claims and liabilities under the securities
laws. Effective upon and subject to the completion of this offering, provisions
described above relating to the participation rights, the Co-Sale Rights, and
restrictions on transfers of shares will expire in accordance with their
original terms and, as a result of the conversion of all outstanding shares of
Convertible Preferred Stock upon completion of this offering and the retirement
of such class of stock, those stockholders who held shares of Convertible
Preferred Stock will no longer have the right to elect a director. The
registration rights and indemnification arrangements will remain in effect.
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<PAGE>
CERTAIN TRANSACTIONS
In September 1996, the TA Investors purchased from the Company 1,921.9
shares of Convertible Preferred Stock for $854,000. The Company used the
proceeds of this investment to redeem shares of Common Stock from Mr. Kahn. The
TA Investors also purchased 25,078.1 shares of Convertible Preferred Stock from
stockholders of the Company. The total consideration paid by the TA Investors
for the Convertible Preferred Stock was $12.0 million. Pursuant to this
transaction, the Company granted the TA Investors (i) "piggy back" registration
rights from the Company, (ii) certain demand registration rights from the
Company as described under "Shares Eligible for Future Sale," (iii) the Co-Sale
Rights from the then current stockholders (who also agreed to restrictions on
transfers of their shares of Common Stock), and (iv) participation rights with
respect to certain future issuances of securities by the Company. In addition,
the terms of the Convertible Preferred Stock held by the TA Investors provide
that the holders thereof shall have the right to elect one director by a vote of
a majority of the holders of the outstanding shares thereof voting as a separate
class. As a condition to the purchase of the Convertible Preferred Stock by the
TA Investors, P. Andrews McLane, the nominee of the TA Investors as holders of
all of the outstanding shares of Convertible Preferred Stock, was elected as a
director of the Company. The Company also agreed to indemnify the TA Investors
and the controlling persons of the TA Investors (including Mr. McLane) against
claims and liabilities arising in connection with their investment in or
relating to the Company, including claims and liabilities under the securities
laws. Effective upon and subject to the completion of this offering, provisions
described above relating to the participation rights, the Co-Sale Rights, and
restrictions on transfers of shares will expire in accordance with their
original terms and, as a result of the conversion of all outstanding shares of
Convertible Preferred Stock upon completion of the offering and the retirement
of such class of stock, those stockholders who held shares of Convertible
Preferred Stock will no longer have the right to elect one director. The
registration rights and indemnification arrangements will remain in effect.
In November 1996, the Company sold 300,000 shares of Restricted Stock to Mr.
Jolicoeur under the 1996 Stock Plan for an aggregate purchase price of $562,800.
Also in November 1996, the Company loaned Mr. Jolicoeur $562,500 and agreed to
pay Mr. Jolicoeur annual bonuses equal to the amount of interest on the loan
(computed at a rate of 6.6% per annum). The loan to Mr. Jolicoeur matures in
November 2004, is required to be prepaid to the extent of the after-tax net
proceeds realized from the sale of the Restricted Stock as such Restricted Stock
is sold, and is secured by a pledge of the Restricted Stock, with recourse to
Mr. Jolicoeur's personal assets limited to 25% of the principal and accrued and
unpaid interest thereon.
The Company has adopted a policy providing that all material transactions
between the Company and its officers, directors and other affiliates must (i) be
approved by a majority of the members of the Company's Board of Directors and by
a majority of the disinterested members of the Company's Board of Directors and
(ii) be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of Common Stock as of June 1, 1998 (after giving effect to the
conversion of all of the Convertible Preferred Stock upon completion of this
offering) and as adjusted to reflect the sale of the shares of Common Stock
offered hereby of (i) each person known by the Company to own beneficially five
percent or more of the outstanding shares of Common Stock, (ii) each director
and Named Executive Officer of the Company, (iii) all directors and executive
officers of the Company as a group and (iv) each of the Selling Stockholders.
Unless otherwise indicated below, to the knowledge of the Company, all persons
listed below have sole voting and investment power with respect to their shares
of Common stock, except to the extent authority is shared by spouses under
applicable law.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER THE
OFFERING(1) NUMBER OFFERING(1)(2)
---------------------- OF SHARES ----------------------
NAME OF BENEFICIAL OWNER(3) NUMBER PERCENT OFFERED(2) NUMBER PERCENT
- -------------------------------------- --------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Elliott Balbert (4)................... 6,325,000 64.5% -- 6,325,000 48.7%
TA Associates Group (5)............... 2,700,000 27.6 540,000 2,160,000 16.6
Dennis R. Jolicoeur (6)............... 300,000 3.1 -- 300,000 2.3
Cheryl R. Richitt (7)................. 123,750 1.2 -- 123,750 *
Gary P. DeMello (8)................... 60,000 * -- 60,000 *
Jon J. Denis (9)...................... -- -- -- -- --
Norman Kahn........................... 425,000 4.3 200,000 225,000 1.7
David Laufer(10)...................... 12,500 * -- 12,500 *
P. Andrews McLane (11)................ 4,607 * 921 3,686 *
All executive officers and directors
as a group (eight persons).......... 7,250,857 72.5 200,921 7,049,936 53.4
</TABLE>
- ------------------------------
* Less than 1%.
(1) All percentages have been determined as of May 1, 1998 in accordance with
Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). For purposes of this table, a person or group of persons is
deemed to have "beneficial ownership" of any shares of Common Stock which
such person has the right to acquire within 60 days after the date of this
Prospectus. For purposes of computing the percentage of outstanding shares
of Common Stock held by each person or group of persons named above, any
security which such person or persons have the right to acquire within 60
days after the date of this Prospectus is deemed to be outstanding, but is
not deemed to be outstanding for the purpose of computing the percentage
ownership of any other person.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) The address of the TA Associates Group is High Street Tower, Suite 2500, 125
High Street, Boston, MA 02110-2720. The address of Mr. McLane is c/o TA
Associates, Inc., High Street Tower, Suite 2500, 125 High Street, Boston, MA
02110-2720. The address of all other listed stockholders is c/o Natrol,
Inc., 21411 Prairie Street, Chatsworth, CA 91311.
(4) Includes 6,200,000 shares owned by the Balbert Family Trust, a revocable
trust of which Mr. Balbert and his wife, Cheryl Balbert, are trustees and of
which Mr. and Mrs. Balbert and other members of their family are the
beneficiaries. Also includes 125,000 shares of Common Stock owned by Mr.
Balbert's daughter, of which Mr. Balbert disclaims beneficial ownership. Mr.
Balbert has granted the Underwriters the right to purchase up to 295,500
shares of Common Stock solely to cover over-allotments. If the Underwriters'
over-allotment option is exercised in full, Mr Balbert will beneficially own
6,029,500 shares of Common Stock, or 45.3% of the outstanding shares of
Common Stock, upon completion of the offering, and all executive officers
and directors as a group will beneficially own 6,754,436 shares of Common
Stock, or 50.1% of the outstanding shares of Common Stock, upon completion
of the offering.
(5) Includes (i) 1,710,000 shares of Common Stock owned by Advent VII L.P., (ii)
787,500 shares of Common Stock owned by Advent Atlantic and Pacific III
L.P., (iii) 171,000 shares of Common Stock owned by Advent New York L.P.,
and (iv) 31,500 shares of Common Stock owned by TA Venture Investors L.P.
Advent VII L.P., Advent Atlantic and Pacific III L.P., Advent New York L.P.,
and TA Venture Investors L.P. are part of an affiliated group of investment
partnerships referred to, collectively, as the TA Associates Group. The
general partner of Advent VII L.P. is TA Associates VII L.P. The general
partner of Advent Atlantic and
49
<PAGE>
Pacific III L.P. is TA Associates AAP III Partners L.P. The general partner
of Advent New York L.P. is TA Associates VI L.P. The general partner of each
of TA Associates VII, L.P., TA Associates VI L.P. and TA Associates AAP III
Partners, L.P. is TA Associates, Inc. In such capacity, TA Associates, Inc.
exercises sole voting and investment power with respect to all of the shares
held of record by the named investment partnerships, with the exception of
those shares held by TA Venture Investors L.P.; individually, no
stockholder, director or officer of TA Associates, Inc. is deemed to have or
share such voting or investment power. Principals and employees of TA
Associates, Inc. (including Mr. McLane, a director of the Company) comprise
the general partners of TA Venture Investors L.P. In such capacity, Mr.
McLane may be deemed to share voting and investment power with respect to
the 31,500 shares held of record by TA Venture Investors L.P. Mr. McLane
disclaims beneficial ownership of all shares, except as to shares held by TA
Venture Investors L.P., as to which he holds a pecuniary interest. See Note
11.
(6) Constitutes shares of Restricted Stock held by Mr. Jolicoeur, of which
120,000 shares will be vested within 60 days of May 1, 1998 and 15,000
additional shares vest each calendar quarter thereafter, subject to
repurchase upon termination of Mr. Jolicoeur's employment with the Company
and in the event of a sale of a majority of the voting stock or
substantially all of the assets of the Company. See "Certain Transactions."
(7) Constitutes shares of Common Stock which may be purchased within 60 days of
May 1, 1998 upon the exercise of stock options. Excludes 76,250 shares of
Common Stock which may be acquired pursuant to unvested stock options, which
vest in quarterly installments through July 2001.
(8) Constitutes shares of Common Stock which may be purchased within 60 days of
May 1, 1998 upon the exercise of stock options. Excludes 140,000 shares of
Common Stock which may be acquired pursuant to unvested stock options, of
which 40,000 vest in quarterly installments through July 2000 and 100,000
vest in four annual installments commencing in April 1999.
(9) Mr. Denis may acquire 100,000 shares pursuant to unvested stock options
which vest in three annual installments commencing in August 1998.
(10) Constitutes shares of Common Stock which may be purchased within 60 days of
May 1, 1998 upon the exercise of stock options. Excludes 12,500 shares of
Common Stock which may be acquired pursuant to unvested stock options, which
vest in three annual installments commencing in April 1999.
(11) Constitutes shares of Common Stock beneficially owned by Mr. McLane through
TA Venture Investors Limited Partnership, all of which shares are included
in the 2,700,000 shares described in footnote (5) above. Does not include
any shares beneficially owned by Advent VII L.P., Advent Atlantic and
Pacific III L.P. or Advent New York L.P., of which Mr. McLane disclaims
beneficial ownership.
50
<PAGE>
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Prior to the completion of this offering, there are 27,000 shares of
Convertible Preferred Stock outstanding and 7,100,000 shares of Common Stock
(including all outstanding stock grants) outstanding. In connection with and
subject to this offering, each share of Convertible Preferred Stock will convert
into one hundred shares of Common Stock and one-half of a share of Redeemable
Preferred Stock and will thereafter be retired. Pursuant to the terms of the
Redeemable Preferred Stock, all of the outstanding shares of Redeemable
Preferred Stock will be redeemed by the Company at the time of this offering for
$6.0 million.
Upon completion of this offering, the authorized capital stock of the
Company will consist of 50,000,000 shares of Common Stock, of which 13,000,000
shares will be issued and outstanding, and 2,000,000 shares of undesignated
preferred stock issuable in one or more series by the Board of Directors
("Preferred Stock"), of which no shares will be issued and outstanding.
COMMON STOCK. The holders of Common Stock are entitled to one vote per
share on all matters to be voted on by stockholders and are entitled to receive
such dividends, if any, as may be declared from time to time by the Board of
Directors from funds legally available therefor. Any issuance of Preferred Stock
with a dividend preference over Common Stock could adversely affect the dividend
rights of holders of Common Stock. Holders of Common Stock are not entitled to
cumulative voting rights. Therefore, the holders of a majority of the shares
voted in the election of directors can elect all of the directors then standing
for election, subject to any voting rights of the holders of any then
outstanding Preferred Stock. The holders of Common Stock have no preemptive or
other subscription rights, and there are no conversion rights or redemption or
sinking fund provisions with respect to the Common Stock. All outstanding shares
of Common Stock, including the shares offered hereby, are, or will be upon
completion of the offering, fully paid and non-assessable.
The Certificate and By-laws, which will be effective upon completion of this
offering provide, subject to the rights of the holders of any Preferred Stock
then outstanding, that the number of directors shall be fixed by the Board of
Directors. The directors, other than those who may be elected by the holders of
any Preferred Stock, are divided into three classes, as nearly equal in number
as possible, with each class serving for a three-year term. Subject to any
rights of the holders of any Preferred Stock to elect directors, and to remove
any director whom the holders of any Preferred Stock had the right to elect, any
director of the Company may be removed from office only with cause and by the
affirmative vote of at least two-thirds of the total votes which would be
eligible to be cast by stockholders in the election of such director.
UNDESIGNATED PREFERRED STOCK. The Board of Directors of the Company is
authorized, without further action of the stockholders, to issue up to 2,000,000
shares of Preferred Stock in one or more series and to fix the designations,
powers, preferences and the relative, participating, optional or other special
rights of the shares of each series and any qualifications, limitations and
restrictions thereon as set forth in the Certificate. Any such Preferred Stock
issued by the Company may rank prior to the Common Stock as to dividend rights,
liquidation preference or both, may have full or limited voting rights and may
be convertible into shares of Common Stock.
The issuance of Preferred Stock could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring or seeking to acquire, a significant portion of the outstanding Common
Stock.
CERTAIN PROVISIONS OF CERTIFICATE OF INCORPORATION AND BY-LAWS
A number of provisions of the Certificate and By-laws which will be
effective upon completion of this offering concern matters of corporate
governance and the rights of stockholders. Certain of these provisions, as well
as the ability of the Board of Directors to issue shares of Preferred Stock and
to set the
51
<PAGE>
voting rights, preferences and other terms thereof, may be deemed to have an
anti-takeover effect and may discourage takeover attempts not first approved by
the Board of Directors, including takeovers which stockholders may deem to be in
their best interests. To the extent takeover attempts are discouraged, temporary
fluctuations in the market price of the Common Stock, which may result from
actual or rumored takeover attempts, may be inhibited. These provisions,
together with the classified Board of Directors and the ability of the Board to
issue Preferred Stock without further stockholder action, also could delay or
frustrate the removal of incumbent directors or the assumption of control by
stockholders, even if such removal or assumption would be beneficial to
stockholders of Company. These provisions also could discourage or make more
difficult a merger, tender offer or proxy contest, even if favorable to the
interests of stockholders, and could depress the market price of the Common
Stock. The Board of Directors believes that these provisions are appropriate to
protect the interests of the Company and all of its stockholders. The Board of
Directors has no present plans to adopt any other measures or devices which may
be deemed to have an anti-takeover effect.
MEETINGS OF STOCKHOLDERS. The By-laws provide that a special meeting of
stockholders may be called only by the President or the Board of Directors
unless otherwise required by law. The By-laws provide that only those matters
set forth in the notice of the special meeting may be considered or acted upon
at that special meeting unless otherwise provided by law. In addition, the
By-laws set forth certain advance notice and informational requirements and time
limitations on any director nomination or any new proposal which a stockholder
wishes to make at an annual meeting of stockholders.
INDEMNIFICATION AND LIMITATION OF LIABILITY. The By-laws provide that
directors and officers of the Company shall be, and in the discretion of the
Board of Directors non-officer employees may be, indemnified by the Company to
the fullest extent authorized by Delaware law, as it now exists or may in the
future be amended, against all expenses and liabilities reasonably incurred in
connection with service for or on behalf of the Company. The By-laws also
provide that the right of directors and officers to indemnification shall be a
contract right and shall not be exclusive of any other right now possessed or
hereafter acquired under any by-law, agreement, vote of stockholders or
otherwise. The Certificate contains a provision permitted by Delaware law that
generally eliminates the personal liability of Directors for monetary damages
for breaches of their fiduciary duty, including breaches involving negligence or
gross negligence in business combinations, unless the director has breached his
or her duty of loyalty, failed to act in good faith, engaged in intentional
misconduct or a knowing violation of law, paid a dividend or approved a stock
repurchase in violation of the Delaware General Corporation Law or obtained an
improper personal benefit. This provision does not alter a director's liability
under the federal securities laws and does not affect the availability of
equitable remedies, such as an injunction or rescission, for breach of fiduciary
duty. The Company also entered into indemnification agreements with each of its
directors reflecting the foregoing and requiring the advancement of expenses in
proceedings involving the directors in most circumstances.
AMENDMENT OF THE CERTIFICATE. The Certificate provides that an amendment
thereof must first be approved by a majority of the Board of Directors and (with
certain exceptions) thereafter approved by a majority (or 80% in the case of any
proposed amendment to the provisions of the Certificate relating to the
composition of the Board or amendments of the Certificate) of the total votes
eligible to be cast by holders of voting stock with respect to such amendment.
AMENDMENT OF BY-LAWS. The Certificate provides that the By-laws may be
amended or repealed by the Board of Directors or by the stockholders. Such
action by the Board of Directors requires the affirmative vote of a majority of
the directors then in office. Such action by the stockholders requires the
affirmative vote of at least two-thirds of the total votes eligible to be cast
by holders of voting stock with respect to such amendment or repeal at an annual
meeting of stockholders or a special meeting called for such purpose, unless the
Board of Directors recommends that the stockholders approve such amendment or
repeal at such meeting, in which case such amendment or repeal shall only
require the
52
<PAGE>
affirmative vote of a majority of the total votes eligible to be cast by holders
of voting stock with respect to such amendment or repeal.
ABILITY TO ADOPT SHAREHOLDER RIGHTS PLAN. The Board of Directors may in the
future resolve to issue shares of Preferred Stock or rights to acquire such
shares to implement a shareholder rights plan. A shareholder rights plan
typically gives stockholders of the Company special rights which are intended to
discourage persons seeking to gain control of the Company by means of a merger,
tender offer, proxy contest or otherwise if such change in control is not in the
best interest of the Company and its stockholders. The Board of Directors has no
present intention of adopting a shareholder rights plan and is not aware of any
attempt to obtain control of the Company.
STATUTORY BUSINESS COMBINATION PROVISION
Upon completion of the offering, the Company will be subject to the
provisions of Section 203 of the Delaware General Corporation Law ("Section
203"). Section 203 provides, with certain exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations with
a person or affiliate, or associate of such person, who is an "interested
stockholder" for a period of three years from the date that such person became
an interested stockholder unless: (i) the transaction resulting in a person
becoming an interested stockholder, or the business combination, is approved by
the board of directors of the corporation before the person becomes an
interested stockholder; (ii) the interested stockholder acquired 85% or more of
the outstanding voting stock of the corporation in the same transaction that
makes it an interested stockholder (excluding shares owned by persons who are
both officers and directors of the corporation, and shares held by certain
employee stock ownership plans); or (iii) on or after the date the person
becomes an interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66 2/3% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. Under Section 203, an
"interested stockholder" is defined (with certain limited exceptions) as any
person that is (i) the owner of 15% or more of the outstanding voting stock of
the corporation or (ii) an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation at any
time within the three-year period immediately prior to the date on which it is
sought to be determined whether such person is an interested stockholder.
A Delaware corporation may, at its option, exclude itself from the coverage
of Section 203 by amending its certificate of incorporation or by-laws by action
of its stockholders to exempt itself from coverage, provided that such by-law or
charter amendment shall not become effective until 12 months after the date it
is adopted. Neither the Certificate nor the By-laws contains any such exclusion.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is BankBoston, N.A.
53
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have a total of
13,000,000 shares of Common Stock outstanding. Of these shares, the 3,940,000
shares of Common Stock offered hereby will be freely tradable without
restriction or registration under the Securities Act by persons other than
"affiliates" of the Company, as defined in the Securities Act, who would be
required to sell such shares under Rule 144 under the Securities Act. The
remaining 9,060,000 shares of Common Stock outstanding will be "restricted
securities" as that term is defined by Rule 144 (the "Restricted Shares"). The
Restricted Shares were issued and sold by the Company in private transactions in
reliance upon exemptions from registration under the Securities Act.
Of the Restricted Shares, 8,760,000 shares of Common Stock owned by current
stockholders of the Company will be eligible for sale in the public market
pursuant to Rule 144 under the Securities Act beginning 90 days after the date
of this Prospectus, and 120,000 shares of Common Stock owned by current
stockholders of the Company will be eligible for sale in the public market in
accordance with Rule 701 under the Securities Act beginning 90 days after the
date of this Prospectus. In addition 180,000 shares subject to sale under Rule
701 are subject to vesting provisions and will become eligible for sale in the
public market at various times as they become vested. In addition, shares
acquired upon exercise of vested options as described below are eligible for
resale under Rule 701 under the Securities Act beginning 90 days after the date
of this Prospectus.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
for at least one year (including the holding period of any prior owner except an
affiliate), including persons who may be deemed "affiliates" of the Company,
would be entitled to sell within any three-month period a number of shares that
does not exceed the greater of one percent of the number of shares of Common
Stock then outstanding (approximately 130,000 shares upon completion of the
offering) or the average weekly trading volume of the Common Stock during the
four calendar weeks preceding the filing of a Form 144 with respect to such
sale. Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements, and to the availability of current public information
about the Company. In addition, a person who is not deemed to have been an
affiliate of the Company at the time during 90 days preceding a sale, and who
has beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner except an affiliate), would be
entitled to sell such shares under Rule 144(k) without regard to the
requirements described above. Rule 144 also provides that affiliates who are
selling shares that are not Restricted Shares must nonetheless comply with the
same restrictions applicable to Restricted Shares with the exception of the
holding period requirement.
Rule 701 promulgated under the Securities Act provides that shares of Common
Stock acquired pursuant to the exercise of options outstanding prior to this
offering or the grant of Common Stock prior to this offering pursuant to written
compensation plans or contracts may be resold by persons other than affiliates
beginning 90 days after the date of this Prospectus, subject only to the manner
of sale provisions of Rule 144, and by affiliates, beginning 90 days after the
date of this Prospectus, subject to all provisions of Rule 144 except its
one-year minimum holding period requirement.
The Company's executive officers and directors, certain stockholders, who in
the aggregate will hold 9,010,000 shares of Common Stock (after giving effect to
the sale of 740,000 shares by the Selling Stockholders in the offering) and the
holders of options to purchase 650,000 shares of Common Stock, have agreed,
pursuant to certain Lock-up Agreements, that until 180 days after the date of
this Prospectus, they will not, directly or indirectly, offer, sell, assign,
transfer, encumber, contract to sell, grant an option to purchase, make a
distribution of, or otherwise dispose of, any shares of Common Stock, or any
securities convertible into or exchangeable for shares of Common Stock,
otherwise than (i) as a bona fide gift or gifts, provided that the donee or
donees thereof agree in writing as a condition precedent to such gift or gifts
to be bound by the terms of the Lock-up Agreements, or (ii) with the prior
54
<PAGE>
written consent of Adams, Harkness & Hill, Inc. In addition, the Company has
agreed that, without the prior written consent of Adams, Harkness & Hill, Inc.
on behalf of the Underwriters, the Company will not, directly or indirectly,
sell, offer, contract to sell, make any short sale, pledge, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of any shares of
Common Stock or any securities, convertible into or exchangeable or exercisable
for or any rights to purchase or acquire Common Stock, or enter into any swap or
other agreement that transfers, in whole or in part any of the economic
consequences or ownership of Common Stock, during the 180-day period following
the date of this Prospectus, except that the Company may issue, and grant
options to purchase, shares of Common Stock under its current stock option and
purchase plans and may issue, and grant options to purchase, shares of Common
Stock under its current stock option and purchase plans and may issue shares of
Common Stock in connection with certain acquisition transactions, provided such
shares are subject to the 180-day Lock-up Agreement.
Upon completion of the offering, a total of (i) 2,250,000 shares of Common
Stock will be reserved for issuance under the 1996 Stock Plan, of which 720,000
shares will be issuable upon the exercise of outstanding stock options and
300,000 shares will have been granted as restricted stock, and (ii) 225,000
shares of Common Stock will be reserved for issuance under the Purchase Plan.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Management-- Employee Stock and Other Benefit Plans--1996 Stock
Option and Grant Plan" and "--1998 Employee Stock Purchase Plan." The Company
intends to file a registration statement on Form S-8 under the Securities Act to
register all shares of Common Stock issuable pursuant to the 1996 Stock Plan or
the Purchase Plan. The Company expects to file this registration statement
within approximately 90 days following the date of this Prospectus, and such
registration statement will become effective upon filing. Shares covered by this
registration statement will thereupon be eligible for sale in the public
markets, subject to Rule 144 limitations applicable to affiliates and the
Lock-up Agreements described above.
Stockholders of the Company who will own 2,160,000 shares of Common Stock
upon completion this offering have the right on any date three months after this
offering to require the Company to register their shares under the Securities
Act for resale to the public (i) on Form S-1, if the anticipated net aggregate
proceeds exceed $10.0 million (provided that only one registration on Form S-1
is required) and (ii) on Form S-3 if the anticipated net aggregate sale price of
such registered shares exceeds $500,000 (provided that only one registration on
Form S-3 is required in any 12 month period).
Prior to this offering, there has been no public market for the Common Stock
and no predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts of
such shares in the public market, or the perception that such sales could occur,
could materially and adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities.
55
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholders have agreed to sell to each of the
Underwriters named below, and each of such Underwriters, for whom Adams,
Harkness & Hill, Inc., NationsBanc Montgomery Securities LLC and Piper Jaffray
Inc. are acting as representatives (the "Representatives"), has severally agreed
to purchase from the Company and the Selling Stockholders, the respective number
of shares of Common Stock set forth opposite each Underwriter's name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
- ----------------------------------------------------------------------------- ---------------
<S> <C>
Adams, Harkness & Hill, Inc. ................................................
NationsBanc Montgomery Securities LLC........................................
Piper Jaffray Inc. ..........................................................
---------------
Total........................................................................ 3,940,000
---------------
---------------
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus, and in part to certain securities dealers at such
price less a concession of not in excess of $ per share. The
Underwriters may allow, and such dealers may re-allow, a concession not in
excess of $ per share to certain brokers and dealers. After the shares
of Common Stock are released for sale to the public, the offering price and
other selling terms may from time to time be varied by the Representatives.
The Company and the Selling Stockholders have granted the Underwriters an
option exercisable for 30 days after the date of this Prospectus to purchase up
to an aggregate of 591,000 additional shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise their over-allotment
option, the Underwriters have severally agreed, subject to certain conditions,
to purchase approximately the same percentage thereof that the number of shares
to be purchased by each of them, as shown in the foregoing table, bears to the
shares of Common Stock offered hereby. The Underwriters may exercise such option
only to cover over-allotments, if any, in connection with the sale of the
3,940,000 shares of Common Stock offered hereby.
The Company has agreed not to offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock for a period of 180 days after the date of
this Prospectus without the prior written consent of Adams, Harkness & Hill,
Inc., except for the shares of Common Stock offered hereby and except that the
Company may issue securities pursuant to the Company's stock plans, upon
exercise of outstanding options and warrants or in connection with certain
acquisition transactions, provided such shares are subject to the 180-day
Lock-up Agreement. In addition, the Company's executive officers and directors,
certain stockholders, who in the aggregate will hold 9,010,000 shares of Common
Stock (after giving effect to the sale of 740,000 shares by the Selling
Stockholders in the offering) and the holders of options to purchase 650,000
shares of Common Stock, have agreed, pursuant to certain Lock-up Agreements,
that until 180 days after the date of this Prospectus, they will not, directly
or indirectly, offer, sell, assign, transfer, encumber, contract to sell, grant
an option to purchase, make a distribution of, or otherwise dispose of, any
shares of Common Stock, or any securities convertible into or exchangeable for
shares of Common Stock, otherwise than (i) as a bona fide gift or gifts,
provided that the donee or donees thereof
56
<PAGE>
agree in writing as a condition precedent to such gift or gifts to be bound by
the terms of the Lock-up Agreements, or (ii) with the prior written consent of
Adams, Harkness & Hill, Inc.
The Representatives of the Underwriters have informed the Company that they
do not intend to confirm sales to any account over which they exercise
discretionary authority.
In connection with this offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with this offering. Stabilizing transactions consist of
certain bids or purchases made for the purpose of preventing or retarding a
decline in the market price of the Common Stock. Syndicate short positions
involve the sale by the Underwriters of a greater number of shares of Common
Stock than they are required to purchase from the Company in this offering. The
Underwriters also may impose a penalty bid, whereby the syndicate may reclaim
selling concessions allowed to syndicate members or other broker-dealers in
respect of the Common Stock sold in this offering for their account if the
syndicate repurchases the shares in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Common Stock, which may as a result be higher than the price that might
otherwise prevail in the open market. These transactions may be affected on
Nasdaq, in the over-the-counter market or otherwise, and may, if commenced, be
discontinued at any time.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price will be negotiated among the Company,
the Selling Stockholders and the Representatives. Among the factors to be
considered in determining the initial public offering price of the Common Stock,
in addition to prevailing market conditions, are the Company's historical
performance, estimates of the business potential and earnings prospects of the
Company, an assessment of the Company's management and the consideration of the
above factors in relation to market valuations of companies in related
businesses.
Application has been made to list the Common Stock for quotation and trading
on the Nasdaq National Market under the symbol "NTOL."
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against or contribute to losses arising out of certain
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Goodwin, Procter & Hoar LLP, Boston, Massachusetts.
Certain legal matters related to this offering will be passed upon for the
Underwriters by Hale and Dorr LLP, Boston, Massachusetts.
EXPERTS
The consolidated financial statements of the Company at December 31, 1996
and 1997, and for each of the three years in the period ended December 31, 1997,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
The financial statements of Pure-Gar as of and for the years ended December
31, 1996 and 1997 included in this Prospectus and elsewhere in this registration
statement have been audited by Farber & Hass LLP, independent public auditors,
as indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
57
<PAGE>
ADDITIONAL INFORMATION
The Company has not previously been subject to the reporting requirements of
the Exchange Act. The Company has filed with the Commission a Registration
Statement (which term shall include any amendments thereto) on Form S-1 under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
portions of which have been omitted as permitted by the rules and regulations of
the Commission. Statements contained in this Prospectus as to the contents of
any contract or other document are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each statement being qualified in
all respects by such reference. For further information with respect to the
Company and the Common Stock, reference is made to the Registration Statement,
including the exhibits and schedules thereto, copies of which may be examined
without charge at the Commission's principal office at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and the regional offices of the Commission located at 7
World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center,
500 West Madison Street, 14th Floor, Chicago, Illinois 60661-2511. Copies of
such materials may be obtained from the Public Reference Section of the
Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and
at its public reference facilities in New York, New York, and Chicago, Illinois,
at prescribed rates. The Commission also maintains a World Wide Web site that
contains reports, proxy and information statements and other information
regarding registrants (which, after this offering, will include the Company)
that file electronically with the Commission (at http://www.sec.gov).
Immediately following this offering, the Company will become subject to the
periodic reporting and other informational requirements of the Exchange Act. As
long as the Company is subject to such periodic reporting and information
requirements, it will file with the Commission all reports, proxy statements and
other information required thereby. The Company intends to furnish holders of
the Common Stock with annual reports containing financial statements audited by
an independent certified public accounting firm.
58
<PAGE>
NATROL, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF NATROL, INC.
Report of Ernst & Young LLP, Independent Public Auditors.............................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 and March 31, 1998
(unaudited)......................................................................... F-3
Consolidated Statements of Income for the Years Ended December 31, 1995, 1996 and 1997
and the Three Months Ended March 31, 1997 and 1998 (unaudited)...................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December
31, 1995, 1996 and 1997 and the Three Months Ended March 31, 1998 (unaudited)....... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and
1997 and the Three Months Ended March 31, 1997 and 1998 (unaudited)................. F-6
Notes to Consolidated Financial Statements............................................ F-7
CONSOLIDATED FINANCIAL STATEMENTS OF PURE-GAR L.P. (A DIVISION OF BASIC VEGETABLE
PRODUCTS L.P.)
Report of Farber & Hass LLP, Independent Public Auditors.............................. F-19
Balance Sheets as of December 28, 1996 and December 27, 1997.......................... F-20
Statements of Income for the Years Ended December 28, 1996 and December 27, 1997...... F-21
Statements of Partners' Equity for the Years Ended December 28, 1996 and December 27,
1997................................................................................ F-22
Statements of Cash Flows for the Years Ended December 28, 1996 and December 27,
1997................................................................................ F-23
Notes to Financial Statements......................................................... F-24
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Pro Forma Consolidated Statements of Income for the Year Ended December 31,
1997 and the Three Months Ended March 31, 1998...................................... F-27
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Natrol, Inc.
We have audited the accompanying consolidated balance sheets of Natrol, Inc.
and subsidiaries as of December 31, 1996 and 1997, and the related consolidated
statements of income, stockholders' equity (deficit) and cash flows for each of
the years in the three year period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Natrol, Inc.
and subsidiaries at December 31, 1996 and 1997 and the consolidated results of
their operations and their cash flows for each of the years in the three year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Woodland Hills, California
April 13, 1998, except with respect to Note 10, for which
the date is June 19, 1998
F-2
<PAGE>
NATROL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------------- MARCH 31, MARCH 31,
1996 1997 1998 1998
----------- ------------ ------------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 285,187 $ 1,800,202 $ 2,228,671
Accounts receivable, net of allowances of $160,000 in
1996 and $262,000 in 1997 and $307,000 at March
31,1998............................................. 3,999,124 5,396,625 7,649,634
Inventories........................................... 3,874,300 6,934,181 7,425,772
Deferred taxes........................................ 635,973 553,890 553,420
Income taxes receivable............................... 178,861 -- --
Prepaid expenses and other current assets............. 200,523 340,649 412,523
----------- ------------ ------------
Total current assets.................................... 9,173,968 15,025,547 18,270,020
Equipment and leasehold improvements:
Furniture and office equipment........................ 339,649 871,048 899,873
Machinery and equipment............................... 1,296,258 2,804,346 3,035,646
Leasehold improvements................................ 135,352 1,875,625 1,875,625
Construction in progress.............................. 1,193,546 -- --
----------- ------------ ------------
2,964,805 5,551,019 5,811,144
Accumulated depreciation and amortization............. (869,613) (922,839) (1,114,511)
----------- ------------ ------------
2,095,192 4,628,180 4,696,633
Other assets:
Deposits.............................................. 53,067 43,497 43,497
Trademarks and patents, net........................... 22,549 18,876 17,958
Goodwill.............................................. -- -- 9,001,229
----------- ------------ ------------
75,616 62,373 9,062,684
----------- ------------ ------------
Total assets............................................ $11,344,776 $ 19,716,100 $ 32,029,337
----------- ------------ ------------
----------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit........................................ $ -- $ -- $ 3,000,000
Accounts payable...................................... 2,988,997 3,867,846 5,084,344
Accrued expenses...................................... 838,715 899,311 1,853,359
Accrued payroll and related liabilities............... 246,504 413,687 584,728
Income taxes payable.................................. -- 422,083 948,573
Dividends payable..................................... 400,000 -- --
Current portion of long-term debt..................... 204,167 998,611 1,500,000
----------- ------------ ------------
Total current liabilities............................... 4,678,383 6,601,538 12,971,004
Deferred income taxes, noncurrent....................... 16,694 72,774 72,314
Long-term debt, less current portion.................... 404,861 2,606,250 7,375,000
Convertible participating preferred stock, $0.01 par
value per share, 27,000 shares authorized, issued and
outstanding as of December 31, 1996 and 1997;
liquidation preference of $12,000,000; no shares
authorized, issued or outstanding on a pro forma
basis................................................. 12,000,000 12,000,000 12,000,000 $ --
Redeemable preferred stock, $0.01 par value per share,
13,500 shares authorized; none issued and outstanding;
13,500 shares issued and outstanding on a pro forma
basis................................................. -- -- -- 6,000,000
Commitments
Stockholders' equity (deficit):
Preferred stock, par value of $0.01 per share:
Authorized shares--2,000,000..........................
Issued and outstanding shares--none................... -- -- -- --
Common stock, par value of $0.01 per share:
Authorized shares -- 50,000,000.....................
Issued and outstanding shares -- 7,100,000;
9,800,000 on a pro forma basis.................... 71,000 71,000 71,000 98,000
Additional paid-in capital............................ 559,500 559,500 559,500 12,532,500
Retained earnings (deficit)........................... (5,823,162) (1,632,462) (456,981) (6,456,981)
----------- ------------ ------------ --------------
(5,192,662) (1,001,962) 173,519 6,173,519
Receivable from stockholder........................... (562,500) (562,500) (562,500) (562,500)
----------- ------------ ------------ --------------
Total stockholders' equity (deficit).................... (5,755,162) (1,564,462) (388,981) $ 5,611,019
----------- ------------ ------------ --------------
Total liabilities and stockholders' equity.............. $11,344,776 $ 19,716,100 $ 32,029,337
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
NATROL, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------- ------------------------------
1995 1996 1997 1997 1998
------------- ------------- ------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.......................... $ 23,565,664 $ 40,802,352 $ 42,874,759 $ 9,908,946 $ 13,116,420
Cost of goods sold................. 12,214,148 18,497,818 19,799,712 4,474,497 6,320,642
------------- ------------- ------------- -------------- --------------
11,351,516 22,304,534 23,075,047 5,434,449 6,795,778
------------- ------------- ------------- -------------- --------------
Selling and marketing expenses..... 4,457,928 8,735,815 11,398,390 2,989,644 3,477,162
General and administrative
expenses......................... 3,378,175 5,431,368 4,450,244 1,055,038 1,230,300
------------- ------------- ------------- -------------- --------------
7,836,103 14,167,183 15,848,634 4,044,682 4,707,462
------------- ------------- ------------- -------------- --------------
Operating income................... 3,515,413 8,137,351 7,226,413 1,389,767 2,088,316
Interest income.................... 25,163 109,102 20,695 -- 21,146
Interest expense................... (43,891) (55,472) (240,250) (35,359) (152,481)
------------- ------------- ------------- -------------- --------------
Income before income tax
provision........................ 3,496,685 8,190,981 7,006,858 1,354,408 1,956,981
Income tax provision............... 1,452,670 2,298,593 2,816,158 544,355 781,500
------------- ------------- ------------- -------------- --------------
Net income......................... $ 2,044,015 $ 5,892,388 $ 4,190,700 $ 810,053 $ 1,175,481
------------- ------------- ------------- -------------- --------------
------------- ------------- ------------- -------------- --------------
Pro forma net income data (NOTE 4):
Income before provision for income
taxes............................ $ 3,496,685 $ 8,190,981 $ 7,006,858 $ 1,354,408 $ 1,956,981
Pro forma income tax provision
(actual for the years ended 1995
and 1997 and the three months
ended 1997 and 1998)............. 1,452,670 3,159,793 2,816,158 544,355 781,500
------------- ------------- ------------- -------------- --------------
Pro forma net income............... $ 2,044,015 $ 5,031,188 $ 4,190,700 $ 810,053 $ 1,175,481
------------- ------------- ------------- -------------- --------------
------------- ------------- ------------- -------------- --------------
Basic earnings per share........... $ 0.34 $ 0.94 $ 0.59 $ 0.11 $ 0.17
------------- ------------- ------------- -------------- --------------
------------- ------------- ------------- -------------- --------------
Diluted earnings per share......... $ 0.34 $ 0.83 $ 0.41 $ 0.08 $ 0.11
------------- ------------- ------------- -------------- --------------
------------- ------------- ------------- -------------- --------------
Weighted average shares
outstanding--basic............... 6,000,000 6,275,000 7,100,000 7,100,000 7,100,000
------------- ------------- ------------- -------------- --------------
------------- ------------- ------------- -------------- --------------
Weighted average shares
outstanding--diluted............. 6,000,000 7,065,385 10,272,859 10,261,538 10,272,859
------------- ------------- ------------- -------------- --------------
------------- ------------- ------------- -------------- --------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
NATROL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
ORIGINALLY ISSUED
COMMON STOCK COMMON STOCK ADDITIONAL RETAINED RECEIVABLE
--------------------- ---------------------- PAID-IN EARNINGS FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) STOCKHOLDER
---------- --------- --------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995............ 6,000,000 $ 10,000 -- $ -- $ 50,000 $ 1,199,435 $ --
Net income............................ -- -- -- -- -- 2,044,015 --
---------- --------- --------- ----------- ----------- ----------- ------------
Balance at December 31, 1995.......... 6,000,000 10,000 -- -- 50,000 3,243,450 --
Dividends, $0.55 per share............ -- -- -- -- -- (3,300,000) --
Exchanged shares in exchange for new
shares.............................. (6,000,000) (10,000) 7,027,780 70,278 (50,000) (13,250) --
Repurchase from stockholder........... -- -- (227,780) (2,278) -- (502,900) --
Restricted stock issued............... -- -- 300,000 3,000 559,500 -- (562,500)
Adjustment for redemption value of
convertible participating preferred
stock............................... -- -- -- -- -- (11,142,850) --
Net income............................ -- -- -- -- -- 5,892,388 --
---------- --------- --------- ----------- ----------- ----------- ------------
Balance at December 31, 1996.......... -- -- 7,100,000 71,000 559,500 (5,823,162) (562,500)
Net income............................ -- -- -- -- -- 4,190,700 --
---------- --------- --------- ----------- ----------- ----------- ------------
Balance at December 31, 1997.......... -- -- 7,100,000 71,000 559,500 (1,632,462) (562,500)
Net income (unaudited)................ -- -- -- -- -- 1,175,481 --
---------- --------- --------- ----------- ----------- ----------- ------------
Balance at March 31, 1998
(unaudited)......................... -- $ -- 7,100,000 $ 71,000 $ 559,500 $ (456,981) $ (562,500)
---------- --------- --------- ----------- ----------- ----------- ------------
---------- --------- --------- ----------- ----------- ----------- ------------
<CAPTION>
TOTAL
-----------
<S> <C>
Balance at January 1, 1995............ $ 1,259,435
Net income............................ 2,044,015
-----------
Balance at December 31, 1995.......... 3,303,450
Dividends, $0.55 per share............ (3,300,000)
Exchanged shares in exchange for new
shares.............................. (2,972)
Repurchase from stockholder........... (505,178)
Restricted stock issued............... --
Adjustment for redemption value of
convertible participating preferred
stock............................... (11,142,850)
Net income............................ 5,892,388
-----------
Balance at December 31, 1996.......... (5,755,162)
Net income............................ 4,190,700
-----------
Balance at December 31, 1997.......... (1,564,462)
Net income (unaudited)................ 1,175,481
-----------
Balance at March 31, 1998
(unaudited)......................... $ (388,981)
-----------
-----------
</TABLE>
See accompanying notes.
F-5
<PAGE>
NATROL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- ---------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................ $ 2,044,015 $ 5,892,388 $ 4,190,700 $ 810,053 $ 1,175,481
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........... 192,490 364,158 690,335 169,863 192,100
Amortization of goodwill................ -- -- -- -- 50,000
Provision for bad debts and returns..... 264,366 314,820 1,002,683 230,763 12,100
Deferred taxes.......................... (143,151) (397,461) 138,163 -- 10
Changes in operating assets and
liabilities:
Accounts receivable................... (3,155,866) (88,178) (1,440,220) (231,887) (204,393)
Inventories........................... (319,160) (1,770,548) (3,059,881) (236,721) 1,231,274
Income taxes receivable/payable....... 355,933 (1,031,246) 600,944 674,946 526,490
Deposits.............................. 5,450 (40,757) 9,570 -- --
Prepaid expenses and other current
assets.............................. 55,422 (52,632) (140,126) 46,473 (115,396)
Accounts payable...................... 710,906 549,052 878,849 (913,041) (638,117)
Accrued expenses...................... 187,210 (3,475) (899,368) 741,718 954,048
Accrued payroll and related
liabilities......................... 211,255 35,201 167,183 113,846 171,041
------------ ------------ ------------ ------------ -------------
Net cash provided by operating
activities.............................. 408,870 3,771,322 2,138,832 1,406,013 3,354,638
INVESTING ACTIVITIES
Assets purchased, net of liabilities
assumed in connection with Pure-Gar
acquisition............................. -- -- -- -- (11,085,736)
Purchases of equipment and leasehold
improvements............................ (409,354) (1,865,099) (3,219,650) (1,557,550) (110,572)
------------ ------------ ------------ ------------ -------------
Net cash used in investing activities..... (409,354) (1,865,099) (3,219,650) (1,557,550) (11,196,308)
FINANCING ACTIVITIES
Proceeds from long-term debt.............. 66,667 750,000 4,000,000 600,000 9,000,000
Repayments on long-term debt.............. (84,000) (207,639) (1,004,167) (51,041) (3,729,861)
Proceeds (repayments) on line of credit,
net..................................... (26,389) (127,778) -- -- 3,000,000
Convertible participating preferred stock
sold.................................... -- 854,178 -- -- --
Repurchase of common stock................ -- (505,178) -- -- --
Dividends paid to stockholders............ -- (2,900,000) (400,000) (400,000) --
------------ ------------ ------------ ------------ -------------
Net cash provided by (used in) financing
activities.............................. (43,722) (2,136,417) 2,595,833 148,959 8,270,139
------------ ------------ ------------ ------------ -------------
Net increase (decrease) in cash and cash
equivalents............................. (44,206) (230,194) 1,515,015 (2,578) 428,469
Cash and cash equivalents, beginning of
year.................................... 559,587 515,381 285,187 285,187 1,800,202
------------ ------------ ------------ ------------ -------------
Cash and cash equivalents, end of year.... $ 515,381 $ 285,187 $ 1,800,202 $ 282,609 $ 2,228,671
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest.............................. $ 43,891 $ 55,472 $ 240,250 $ 35,359 $ 152,481
Income taxes.......................... $ 916,990 $ 3,770,000 $ 2,215,000 $ -- $ --
</TABLE>
Supplemental non-cash transactions
During the year ended December 31, 1996, the Company adjusted retained earnings
(deficit) for $11,142,850, which increases the convertible participating
preferred stock to its redemption value.
See accompanying notes.
F-6
<PAGE>
NATROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
Natrol, Inc. (collectively with its subsidiaries, referred to as the
Company) manufactures and markets branded, high-quality dietary supplement
products, including vitamins, minerals, herbs and specialty formulations, weight
control products and hormones. The Company sells its products under the Natrol
brand name through multiple distribution channels throughout the United States,
including domestic health food stores and mass market drug, retail and grocery
store chains.
On July 1, 1996, the Company elected to be treated as an S Corporation for
federal income and California franchise tax purposes under Subchapter S of the
Internal Revenue Code and the corresponding provisions of the California
statute. Accordingly, the stockholders reported their equity in the earnings or
losses of the Company on their individual tax returns. In connection with this
election, the Company changed its year end from June 30 to a calendar year end.
On September 30, 1996, the Company filed an amendment to its charter whereby
all outstanding shares of common stock were split-up and converted to shares of
common stock and 25,078.1 shares of convertible participating preferred stock.
The original stockholders subsequently sold all of their convertible
participating preferred stock to unrelated third parties (the new stockholders).
The Company also sold an additional 1,921.9 shares of the convertible
participating preferred stock to the new stockholders. Upon completion of the
transactions, the new stockholders held 27,000 shares of convertible
participating preferred stock which were convertible into approximately 27% of
the then outstanding shares of Common Stock and 13,500 shares of redeemable
preferred stock.
Upon the creation and issuance of the convertible participating preferred
stock on September 30, 1996, the Company was required to change its status for
income tax purposes back to a C Corporation.
PRESENTATION
For purposes of comparability to the year ended December 31, 1997, the
consolidated financial information for the prior years has been restated to
include each of the twelve month periods ended December 31, 1995 and 1996. These
twelve month periods are referred to in the consolidated financial statements
and the following notes to the consolidated financial statements as the years
ended December 31, 1995 and 1996.
On January 15, 1998, the Company reincorporated itself in the State of
Delaware. Effective with the reincorporation, a ten-for-one reverse stock split
occurred affecting all classes of stock then outstanding. All references in the
accompanying consolidated financial statements to the number of shares and per
share amounts have been retroactively adjusted to reflect the reverse stock
split.
The pro forma March 31, 1998 unaudited information reflected in the
accompanying balance sheets reflect the conversion of the convertible
participating preferred stock into redeemable preferred stock and common stock.
Upon completion of the proposed initial public offering as described in Note 10
to the consolidated financial statements, the redeemable preferred stock will be
redeemed for $6,000,000.
The accompanying unaudited financial statements as of March 31, 1998 and for
the three months ended March 31, 1997 and 1998 have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and note disclosures normally included in
financial statements prepared in conformity with generally accepted accounting
principles have been condensed or omitted. In the opinion of the Company, all
adjustments,
F-7
<PAGE>
NATROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
consisting of only normal recurring accruals, necessary to present fairly the
financial position, results of operations and cash flows for the periods
presented have been made.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts and operations of
Natrol, Inc. and its wholly owned subsidiaries. All significant intercompany
accounts have been eliminated in consolidation.
ESTIMATES AND ASSUMPTIONS
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates, although management does not believe that any differences would
materially affect the Company's consolidated financial position or results of
operations.
MAJOR CUSTOMERS
The Company had net sales to two customers which individually represented
17.2% and 10.0%, respectively, of total Company net sales during the year ended
December 31, 1995. The Company had net sales to three customers which
individually represented 14.5%, 12.6% and 10.2%, respectively, of total Company
net sales during the year ended December 31, 1996. The Company had net sales to
two customers which individually represented 17.8% and 11.6%, respectively, of
total Company net sales during the year ended December 31, 1997. The Company had
net sales to two customers which individually represented 14.8% and 11.1% and
15.3% and 10.4%, respectively, of total Company net sales during the three
months ended March 31, 1997 and 1998, respectively.
MAJOR PRODUCTS
The Company's sales of two products each comprised approximately 28.7% and
27.3%, respectively, of net sales during the year ended December 31, 1995. The
Company's sales of three products each comprised approximately 36.0%, 18.8% and
18.1%, respectively, of net sales during the year ended December 31, 1996. The
Company's sales of two products each comprised approximately 17.1% and 17.7%,
respectively, of net sales during the year ended December 31, 1997. The
Company's sales of three products each comprised approximately 23.7%, 20.7% and
20.0%, respectively, of net sales during the three months ended March 31, 1997.
The Company's sales of two products each comprised approximately 15.1% and
12.2%, respectively, of net sales during the three months ended March 31, 1998.
CONCENTRATION OF CREDIT RISK
Concentrations of credit risk with respect to trade receivables, other than
significant customers previously discussed, are limited, due to the distribution
of sales over a large customer base. The Company performs periodic credit
evaluations of its customers' financial conditions and generally does not
require collateral. Credit losses have been within management's expectations.
F-8
<PAGE>
NATROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
The Company considers all highly liquid instruments with a maturity of three
months or less when purchased to be cash equivalents.
INVENTORIES
Inventories are carried at the lower of cost (first-in, first-out method) or
market.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated on the basis of cost.
Depreciation on furniture, machinery and equipment is computed using the
straight-line method over the estimated useful lives of the assets ranging from
five to ten years. Amortization on leasehold improvements is computed using the
straight-line method over the shorter of the estimated lives of the assets or
the lease terms.
TRADEMARKS AND PATENTS
Costs of obtaining trademarks and patents are capitalized and amortized
using the straight-line basis over the estimated useful life of eleven years.
Accumulated amortization was $17,951 and $21,624 at December 31, 1996 and 1997,
respectively. The costs of servicing the Company's patents and trademarks are
expensed as incurred.
REVENUE RECOGNITION
The Company sells its products to retail outlets through a direct salesforce
and a national broker network. Sales are recorded when products are shipped to
customers by the Company. Net sales represent products shipped, less estimated
returns and allowances for which provisions are made at the time of sale.
Generally the returns and allowances are limited to damaged goods and the
estimates recorded are based upon known claims and an estimate of additional
returns.
ADVERTISING COSTS
Advertising and promotional costs are expensed at first showing. In
addition, the Company advertises on a cooperative basis by accruing an
obligation to reimburse retailers for qualified advertising of Company products.
The Company provides for cooperative advertising obligations in the same period
as the related revenue is recognized. Advertising and promotional costs amounted
to $2,473,659, $5,638,500 and $6,944,454, respectively, for the years ended
December 31, 1995, 1996 and 1997 and $2,086,725 and $2,092,693 for the three
months ended March 31, 1997 and 1998, respectively.
RESEARCH AND DEVELOPMENT COSTS
The Company incurs research and development costs relating to the
development of its dietary supplement products. Research and development costs
are expensed as incurred and amounted to $106,848, $117,184 and $357,064 for the
years ended December 31, 1995, 1996 and 1997, respectively, and $64,414 and
$79,946 for the three months ended March 31, 1997 and 1998, respectively.
F-9
<PAGE>
NATROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for
Stock-Based Compensation" encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion (APB)
No. 25, "Accounting for Stock Issued to Employees."
EARNINGS PER SHARE
The Company calculates earnings per share in accordance with SFAS No. 128
"Earnings per Share." Pro forma basic earnings per share have been computed by
dividing pro forma net income by the pro forma weighted average number of common
shares outstanding. Pro forma diluted earnings per share have been computed by
dividing pro forma net income by securities or other contracts to issue common
stock as if these securities were exercised or converted to common stock.
The following table sets forth the calculation for basic and diluted
earnings per share for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------- ---------------------------------
1995 1996 1997 1997 1998
------------- ------------- -------------- -------------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Earnings:
Net income...................... $ 2,044,015 $ 5,892,388 $ 4,190,700 $ 810,053 $ 1,175,481
------------- ------------- -------------- -------------- -----------------
------------- ------------- -------------- -------------- -----------------
Shares:
Weighted average shares for
basic earnings per share...... 6,000,000 6,275,000 7,100,000 7,100,000 7,100,000
Conversion of convertible
participating preferred
stock......................... -- 675,000 2,700,000 2,700,000 2,700,000
Share equivalent for redeemable
preferred stock............... -- 115,385 461,538 461,538 461,538
Stock options................... -- -- 11,321 -- 11,321
------------- ------------- -------------- -------------- -----------------
Weighted average shares for
diluted earnings per share.... 6,000,000 7,065,385 10,272,859 10,261,538 10,272,859
------------- ------------- -------------- -------------- -----------------
------------- ------------- -------------- -------------- -----------------
</TABLE>
As discussed further in Notes 1 and 4, the Company elected to be taxed as an
S Corporation for federal income and California franchise tax purposes for the
period from July 1, 1996 through September 29, 1996, and was taxed as a C
Corporation for all the other periods in the year ended December 31, 1996.
Accordingly, the provision for income taxes for the period in which the Company
was taxed as an S Corporation reflects primarily state income tax, if any. If
the Company had been subject to tax as a C Corporation for the entire year ended
December 31, 1996, pro forma basic and diluted earnings per share would have
been $0.80 and $0.71, respectively.
F-10
<PAGE>
NATROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
The Company reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of any asset may not be recoverable. An impairment loss
would be recognized when the estimated undiscounted future cash flows expected
to result from the use of the asset and its eventual disposition is less than
the carrying amount. No such impairment losses have been identified by the
Company.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). This statement establishes standards for reporting and display of
comprehensive income and its components. Components of comprehensive income are
net income and all other non-owner changes in equity such as unrealized gains on
available-for-sale securities that are not included in net income. This
statement requires that an enterprise: (a) classify items of other comprehensive
income by their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings in the
equity section of the balance sheet. While SFAS No. 130 is effective for
financial statements issued for periods beginning after December 15, 1997, and
therefore was adopted in the year ended December 31, 1998, there were no items
of comprehensive income and no impact on the Company's results of operations or
related disclosures for the three months ended March 31, 1997 and 1998.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was issued in June 1997. SFAS No. 131 is effective for fiscal
years beginning subsequent to December 15, 1997, and therefore, will be adopted
by the Company for the year ended December 31, 1998. The Company does not expect
the adoption of SFAS No. 131 to result in any material changes in its disclosure
and this statement will have no impact on the Company's consolidated results of
operations, financial position or cash flows.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the presentation in 1997.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
<S> <C> <C>
1996 1997
------------- -------------
Raw material and packaging supplies............................. $ 2,309,822 $ 3,837,856
Finished goods.................................................. 1,564,478 3,096,325
------------- -------------
$ 3,874,300 $ 6,934,181
------------- -------------
------------- -------------
</TABLE>
F-11
<PAGE>
NATROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. FINANCING
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
<S> <C> <C>
1996 1997
----------- -------------
Note payable to a bank, payable in monthly installments of $41,667, beginning October
31, 1997, plus interest at the prime rate plus 0.25%, due October 31, 2002.......... $ -- $ 1,875,000
Note payable to a bank, payable in monthly installments of $25,000, beginning June 30,
1997, plus interest at the prime rate plus 0.25%, due June 30, 2002................. -- 1,325,000
Note payable to a bank, payable in monthly installments of $11,458, beginning July 1,
1996, plus interest at the prime rate plus 0.75%, due June 1, 2000.................. 481,250 343,750
Note payable to a bank, payable in monthly installments of $5,556 plus interest at the
prime rate plus 0.75%, due November 1, 1998......................................... 127,778 61,111
----------- -------------
609,028 3,604,861
Less current portion.................................................................. 204,167 998,611
----------- -------------
$ 404,861 $ 2,606,250
----------- -------------
----------- -------------
</TABLE>
Future maturities of long-term debt at December 31 are as follows:
<TABLE>
<S> <C>
1998........................................................................... $ 998,611
1999........................................................................... 937,500
2000........................................................................... 868,750
2001........................................................................... 675,000
2002........................................................................... 125,000
----------
$3,604,861
----------
----------
</TABLE>
In addition to the term loans, the Company has an agreement with a bank
which provides for maximum borrowings on a revolving line of credit up to
$2,500,000, based on a formula, through December 1, 1998, with interest at the
prime rate plus 0.5% (prime rate was 8.50% at December 31, 1997). No amounts
were outstanding under this agreement at December 31, 1996 and 1997. The line of
credit and term loans are collateralized by substantially all of the Company's
assets and include requirements that the Company comply with certain financial
covenants. The agreement provides for a letter of credit up to a maximum of
$250,000, of which no amounts were outstanding at December 31, 1996 and 1997.
This agreement was subsequently replaced by the agreement described in Note 9 to
the consolidated financial statements.
4. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under this method, deferred tax assets and
liabilities are determined based on differences between enacted rates and laws
that will be in effect when the differences are expected to reverse.
F-12
<PAGE>
NATROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
The income tax provision consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
<S> <C> <C> <C>
1995 1996 1997
------------- ------------- -------------
Current:
Federal............................................................ $ 1,260,351 $ 2,078,292 $ 2,161,400
State.............................................................. 335,470 617,762 516,595
------------- ------------- -------------
1,595,821 2,696,054 2,677,995
Deferred:
Federal............................................................ (133,574) (303,734) 72,202
State.............................................................. (9,577) (93,727) 65,961
------------- ------------- -------------
(143,151) (397,461) 138,163
------------- ------------- -------------
Total income tax provision........................................... $ 1,452,670 $ 2,298,593 $ 2,816,158
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
As described in Note 1 to the consolidated financial statements, in 1996 the
Company elected to be treated as an S Corporation for federal income and
California franchise tax purposes under Subchapter S of the Internal Revenue
Code and the corresponding provisions of the California statute. Upon the
creation and issuance of the convertible participating preferred stock as
discussed in Notes 1 and 6 to the consolidated financial statements, the Company
was required to change its status for income tax purposes back to a C
corporation. The following unaudited pro forma income tax information has been
determined as if the Company operated as a C corporation for the entire year
ended December 31, 1996. The pro forma information presented below represents
actual amounts for the years ended December 31, 1995 and 1997 as the Company was
operating as a C corporation during those periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
<S> <C> <C> <C>
1995 1996 1997
------------- ------------- -------------
Federal tax provision................................................ $ 1,126,777 $ 2,599,860 $ 2,233,602
State income taxes net of federal benefit............................ 325,893 559,933 582,556
------------- ------------- -------------
Total pro forma income tax provision................................. $ 1,452,670 $ 3,159,793 $ 2,816,158
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The difference between actual income tax expense and the U.S. Federal
statutory income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
Statutory rate...................................................................... 34.0% 34.0% 34.0%
State tax provision................................................................. 6.0 4.0 6.0
S Corporation status................................................................ -- (10.0) --
Other............................................................................... 1.5 -- --
--- --------- ---
Effective tax rate.................................................................. 41.5% 28.0% 40.0%
--- --------- ---
--- --------- ---
</TABLE>
F-13
<PAGE>
NATROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
The significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
<S> <C> <C>
1996 1997
----------- -----------
Deferred tax assets:
Accounts receivable reserves.......................................................... $ 334,712 $ 264,126
Inventory reserves.................................................................... 141,158 46,486
Various accrued liabilities........................................................... 93,938 120,626
State taxes........................................................................... 66,165 122,652
----------- -----------
635,973 553,890
Deferred tax liability:
Depreciation.......................................................................... (16,694) (72,774)
----------- -----------
$ 619,279 $ 481,116
----------- -----------
----------- -----------
</TABLE>
Deferred taxes arising from temporary differences that are not related to an
asset or liability are classified as current or noncurrent depending on the
periods in which the temporary differences are expected to reverse.
5. COMMITMENTS
The Company leases certain equipment and facilities under noncancelable
operating leases that expire in various years through 2001. Rent expense under
operating leases totaled $168,937, $406,446 and $641,731, for the years ended
December 31, 1995, 1996 and 1997, respectively, and $44,940 and $121,196 for the
three months ended March 31, 1997 and 1998, respectively. In August 1996, the
Company entered into a 120-month lease for an operating facility with an option
to extend the term of the lease for 60 months at 95% of the then market value
for similar space.
Future minimum lease payments under noncancelable operating leases with
initial terms of one year or more consisted of the following at December 31,
1997:
<TABLE>
<S> <C>
1998........................................................................... $ 503,720
1999........................................................................... 526,345
2000........................................................................... 520,811
2001........................................................................... 489,258
2002........................................................................... 448,085
Thereafter..................................................................... 1,711,430
----------
Total minimum lease payments................................................... $4,199,649
----------
----------
</TABLE>
6. STOCKHOLDERS' EQUITY
In September 1996, the shares of common stock held by the original
stockholders were split-up and converted into 7,027,780 shares of common stock
and 25,078.1 shares of convertible participating preferred stock. In addition,
the Company sold an additional 1,921.9 shares of its convertible participating
preferred stock to third party investors. The total of 27,000 shares of
convertible participating preferred stock purchased by the investors are
convertible into (i) approximately 27% of the then
F-14
<PAGE>
NATROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
outstanding shares of Common Stock of the Company on a fully diluted basis and
(ii) shares of redeemable preferred stock which are redeemable for a total of
$6.0 million. The total consideration paid by the investors for the convertible
participating preferred stock was $12.0 million.
Each share of convertible participating preferred stock is convertible based
on a formula upon the written election of not less than 66 2/3% of the
outstanding shares of convertible participating preferred stock such that each
outstanding share of convertible participating preferred stocks will convert
into one share of common stock (prior to giving effect the 100-for-1 stock split
described in Note 10) and one-half of one share of redeemable preferred stock,
subject to adjustment for stock splits, stock dividends, recapitalizations and
similar transactions. The convertible participating preferred stock has an
automatic conversion feature which provides for each share of convertible
participating preferred stock to be automatically converted into shares of
common stock and redeemable preferred stock based on the then effective
conversion price immediately upon the closing of the Company's first firm
commitment public offering pursuant to an effective registration statement under
the Securities Act of 1933, as amended, provided that such registration
statement covers the offer and sale of common stock of which the aggregate net
proceeds exceeds $15 million at a price per share reflecting a valuation of the
Company's equity of at least $50 million.
The convertible participating preferred stock contains a liquidation
preference of $444.445 per share, adjusted for any stock splits, stock
dividends, recapitalizations, plus any declared but unpaid dividends. The
convertible participating preferred stock contains voting rights equal to the
number of full shares of common stock they are convertible into.
Upon the occurrence of certain events on or after September 26, 2002, the
Company is required to redeem all of the outstanding shares of convertible
participating preferred stock at the liquidation preference value. Therefore, at
the time of the issuance of the convertible participating preferred stock, the
Company adjusted retained earnings (deficit) by $11,142,850, which represents
the difference between the proceeds received for the convertible participating
preferred stock by the Company and its redemption value. Thus, the convertible
participating preferred stock is recorded at its redemption value at December
31, 1996 and 1997.
RECEIVABLE FROM STOCKHOLDER
The receivable from stockholder represents an interest bearing note from a
stockholder in the amount of $562,500 issued by the stockholder to finance in
part the purchase of 300,000 shares of the Company's common stock. The note
bears interest at 6.60% per year with interest payments due annually. The note
is due within ten days of the receipt by the stockholder of proceeds from the
sale of the Company's common stock or November 14, 2006, whichever occurs first.
Included in interest income is $9,300 and $37,125 for the years ended December
31, 1996 and 1997, respectively, for interest from this stockholder.
STOCK OPTIONS
The Company has adopted the 1996 Stock Option and Grant Plan, as amended
(the Plan), which authorizes the Board of Directors of the Company to grant
incentive stock options or non-qualified stock options. Incentive stock options
may be granted only to employees of the Company. Non-qualified stock options may
be granted to officers and employees of the Company as well as to non-employees.
The
F-15
<PAGE>
NATROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
maximum number of shares of common stock to be issued under the Plan is
1,050,000 shares. All options granted under the Plan have been made at prices
not less than the estimated fair market value of the stock at the date of grant.
Generally the options granted under the Plan vest over 3-5 years. Options
granted under the plan have a term of not more than 10 years.
A summary of the Company's stock option activity, and related information is
as follows:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
---------------------------------------------
<S> <C> <C> <C>
WEIGHTED
AVERAGE EXERCISE
NUMBER OF EXERCISE PRICE PRICE
OPTIONS PER SHARE PER SHARE
----------- -------------- ----------------
Outstanding at January 1, 1996.................................... -- $ -- $ --
Granted......................................................... 200,000 1.875 1.875
----------- ------- ----------------
Outstanding at December 31, 1996.................................. 200,000 1.875 1.875
Granted......................................................... 200,000 2.100 2.100
----------- ------- ----------------
Outstanding at December 31, 1997.................................. 400,000 $ 1.988 $ 1.875-2.100
----------- ------- ----------------
----------- ------- ----------------
Exercisable at:
December 31, 1996............................................... 70,000 $ 1.875 $ 1.875
December 31, 1997............................................... 116,250 $ 1.887 $ 1.875-$2.100
----------- ------- ----------------
----------- ------- ----------------
</TABLE>
At December 31, 1997, 350,000 shares were available for future grant.
Subsequent to year end through April 13, 1998, the Company granted 255,000
options under the Plan at exercise prices ranging from $10.40 to $13.00 per
share, which were determined to be not less than the estimated fair market value
of the stock at the date of grant. After these options were granted, 95,000
shares were available for future grant. The weighted average remaining
contractual life for the outstanding options in years was 10 and 9.38 at
December 31, 1996 and 1997, respectively.
If the Company had elected to recognize compensation expense based on the
fair value of the options granted at grant date for its stock-based compensation
plans consistent with the method prescribed by SFAS No. 123, the Company's net
income would have been reduced by approximately $100 and $4,900 for the years
ended December 31, 1996 and 1997, respectively, and there would have been no
effect on the reported earnings per share. The fair value of the options is
estimated using the Black-Scholes option-pricing model with the following
weighted average assumptions for grants in 1996 and 1997, respectively: dividend
yield of 6.0% and 3.0%; risk free interest rate of 6.3% and 6.0%; and expected
life of 6.0 years and 5.0 years.
7. PROFIT SHARING PLAN
The Company has a profit sharing 401(k) plan that covers substantially all
of its employees. Eligible employees may contribute up to 10% of their
compensation. Contributions are discretionary, however, the Company generally
matches 10% of the employees' contributions up to the maximum of 1% of eligible
compensation. Amounts recognized as expense were $5,055, $12,764 and $0 for the
years ended December 31, 1995, 1996 and 1997, respectively.
F-16
<PAGE>
NATROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amount approximates fair value.
ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE: The carrying amount approximates
fair value.
LONG-TERM DEBT: The fair values of the Company's long-term notes payable are
estimated using discounted cash flow analyses, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements. The
carrying amount of long-term notes payable approximate their fair value.
9. SUBSEQUENT EVENTS
ACQUISITIONS
On February 27, 1998, the Company purchased substantially all of the assets
and assumed certain liabilities of Pure-Gar L.P. (Pure-Gar), a distributor of
bulk dehydrated vegetable products and dietary supplements, for a total purchase
price of $11,085,736, which included $85,736 of deferred acquisition costs.
Assets purchased include accounts receivable of $2,060,716 and inventories of
$1,722,865, as well as fixed assets of $149,063 and intangible assets of the
business of $8,965,000. Liabilities assumed consisted primarily of trade
payables of $1,854,614. In addition, the Company entered into long-term supply
and royalty agreements with the seller. The supply agreement requires the seller
to sell and the Company to purchase specified amounts of certain vegetable,
fruit, herbal and botanical products (the "Products") manufactured by the
seller. The supply agreement gives the Company the exclusive right to sell
certain Products in the dietary supplement industry. The supply agreement may be
terminated by either party upon a material breach of the obligations of the
other party, or certain other specified conditions, if the breach is not cured
within 60 days, or 15 days in the case of non-payment by the Company. The
acquisition was accounted for using the purchase method, and accordingly, the
acquired assets and liabilities are recorded at their estimated fair values. The
excess of cost over the fair value of assets acquired will be amortized over
fifteen years. Amortization expense for the three months ended March 31, 1998
was $50,000 and is included in general and administrative expenses.
Pro forma revenues, net income, basic earnings per share and diluted
earnings per share would have been $51,583,312, $3,493,037, $0.23 and $0.16,
respectively, for the year ended December 31, 1997, if the acquisition of
Pure-Gar had taken place on January 1, 1997. Pro forma revenues, net income,
basic earnings per share and diluted earnings per share would have been
$14,948,264, $1,090,636, $0.09 and $0.06, respectively, for the three months
ended March 31, 1998, if the acquisition of Pure-Gar had taken place on January
1, 1998.
FINANCING
On February 27, 1998, the Company entered into an amended credit facility
(Loan Agreement) with a bank that provides for a revolving line of credit for
borrowings up to $8,000,000, based on a formula, through April 30, 2001. The
Loan Agreement amends and restates the previous revolving line of credit
agreement with the bank. Advances under the Loan Agreement bear interest at the
bank's adjusted LIBOR rate plus 1.25% or the bank's prime rate at the option of
the Company. The Loan Agreement also provides for a letter of credit up to a
maximum of $250,000. Proceeds from the initial funding under the Loan
F-17
<PAGE>
NATROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SUBSEQUENT EVENTS (CONTINUED)
Agreement were used to assist in the funding of the Pure-Gar acquisition and
further fundings are to be used for working capital requirements.
In addition to providing for the revolving loans, the Loan Agreement
provides for a term loan of $9,000,000 to be used for financing the acquisition
of Pure-Gar. The term loan calls for monthly installments of $125,000 during the
period March 1, 1998 through February 28, 2004 and bears interest at the bank's
adjusted LIBOR rate plus 1.25% or the bank's prime rate at the option of the
Company. Mandatory prepayments are required on the term loan based on excess
cash flows, as defined.
The Loan Agreement is collateralized by substantially all of the assets of
the Company and requires the Company to maintain certain minimum amounts and
ratios of net worth and other financial measurements.
10. PROPOSED INITIAL PUBLIC OFFERING (UNAUDITED)
During May 1998, the Company's Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission, relating to
an initial public offering of 3,200,000 shares of the Company's unissued common
stock and 740,000 shares to be sold by selling stockholders. If the initial
public offering is consummated under the terms anticipated, all of the
convertible participating preferred stock will convert into 2,700,000 shares of
common stock and 13,500 shares of redeemable preferred stock. The shares of
redeemable preferred stock are then required to be immediately redeemed by the
Company for $6,000,000 in cash.
In connection with the initial public offering, the Board of Directors
approved a one hundred-for-one-stock split of the Company's common stock which
became effective on June 19, 1998. All references in the accompanying
consolidated financial statements to the number of shares of common stock and
per common share amounts have been retroactively adjusted to reflect the stock
split. In addition, the Company's capital structure was changed effective June
19, 1998 to reflect 50,000,000 shares of common stock and will be further
changed prior to the registration statement going effective to authorize an
additional 2,000,000 shares of preferred stock. The Board of Directors has
authority to fix the rights, preferences, privileges and restrictions, including
voting rights, of these shares of preferred stock without any future vote or
action by the shareholders.
F-18
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Natrol, Inc.:
We have audited the accompanying balance sheets of Pure-Gar L.P. (a division
of Basic Vegetable Products, L.P.) (the "Partnership") as of December 28, 1996
and December 27, 1997 and the related statements of income, partners' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the accompanying financial statements present fairly, in all
material respects, the financial position of the Partnership at December 28,
1996 and December 27, 1997 and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
Farber & Hass LLP
Oxnard, California
April 17, 1998
F-19
<PAGE>
PURE-GAR L.P.
(A DIVISION OF BASIC VEGETABLE PRODUCTS, L.P.)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash......................................................................... $ 465 $ 42,000
Accounts receivable (less allowance for doubtful accounts of $53,000 in 1996
and 1997).................................................................... 1,074,415 1,683,976
Inventories.................................................................. 2,684,242 1,922,753
Prepaid expenses and other current assets.................................... 169,431 66,684
-------------- --------------
Total current assets........................................................... 3,928,553 3,715,413
Property and equipment......................................................... 208,248 270,616
Less accumulated depreciation and amortization............................... (73,425) (113,497)
-------------- --------------
Property and equipment--net.................................................... 134,823 157,119
-------------- --------------
Total assets................................................................... $ 4,063,376 $ 3,872,532
-------------- --------------
-------------- --------------
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Bank overdraft............................................................... $ 271,872 $ --
Accounts payable............................................................. 225,611 175,166
Accrued expenses............................................................. 313,090 234,458
Related party payable........................................................ 2,144,049 2,318,698
-------------- --------------
Total current liabilities...................................................... 2,954,622 2,728,322
-------------- --------------
Partners' equity:
Limited partner.............................................................. 1,097,666 1,132,768
General partner.............................................................. 11,088 11,442
-------------- --------------
Total partners' equity......................................................... 1,108,754 1,144,210
-------------- --------------
Total liabilities and partners' equity......................................... $ 4,063,376 $ 3,872,532
-------------- --------------
-------------- --------------
</TABLE>
See notes to financial statements.
F-20
<PAGE>
PURE-GAR L.P.
(A DIVISION OF BASIC VEGETABLE PRODUCTS, L.P.)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 28, DECEMBER 27,
1996 1997
-------------- --------------
<S> <C> <C>
Net sales...................................................................... $ 7,947,565 $ 8,708,553
Cost of goods sold............................................................. 3,802,207 3,920,226
-------------- --------------
Gross profit................................................................... 4,145,358 4,788,327
-------------- --------------
Operating expenses:
Selling and marketing expenses............................................... 1,900,559 1,954,543
General and administrative expenses.......................................... 1,924,024 1,849,161
Litigation settlement expense................................................ -- 733,120
-------------- --------------
Total operating expenses....................................................... 3,824,583 4,536,824
-------------- --------------
Income from operations......................................................... 320,775 251,503
Related party interest expense................................................. (177,785) (229,735)
Other income................................................................... 119,412 13,688
-------------- --------------
Net income..................................................................... $ 262,402 $ 35,456
-------------- --------------
-------------- --------------
Pro forma net income data:
Income before provision for income taxes....................................... $ 262,402 $ 35,456
Pro forma income taxes......................................................... 85,587 5,318
-------------- --------------
Pro forma net income........................................................... $ 176,815 $ 30,138
-------------- --------------
-------------- --------------
</TABLE>
See notes to financial statements.
F-21
<PAGE>
PURE-GAR L.P.
(A DIVISION OF BASIC VEGETABLE PRODUCTS, L.P.)
STATEMENTS OF PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 28, 1996 AND DECEMBER 27, 1997
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNER TOTAL
--------- ------------- -------------
<S> <C> <C> <C>
Partners' equity at January 1, 1996..................................... $ 8,464 $ 837,888 $ 846,352
Net income for 1996..................................................... 2,624 259,778 262,402
--------- ------------- -------------
Partners' equity at December 28, 1996................................... 11,088 1,097,666 1,108,754
Net income for 1997..................................................... 354 35,102 35,456
--------- ------------- -------------
Partners' equity at December 27, 1997................................... $ 11,442 $ 1,132,768 $ 1,144,210
--------- ------------- -------------
--------- ------------- -------------
</TABLE>
See notes to financial statements.
F-22
<PAGE>
PURE-GAR L.P.
(A DIVISION OF BASIC VEGETABLE PRODUCTS, L.P.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 28, DECEMBER 27,
1996 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................................... $ 262,402 $ 35,456
Adjustment to reconcile net income to net cash used in operating activities:
Depreciation and amortization................................................ 26,776 40,072
Changes in operating assets and liabilities:
Accounts receivable.......................................................... 71,028 (609,561)
Inventories.................................................................. (1,812,793) 761,489
Prepaid expenses............................................................. (133,426) 102,747
Accounts payable, accrued expenses and other liabilities..................... 350,953 (400,949)
-------------- --------------
Net cash used in operating activities.......................................... (1,235,060) (70,746)
-------------- --------------
CASH FLOWS USED BY INVESTING ACTIVITIES
Capital expenditures......................................................... (74,779) (62,368)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net related party borrowings from limited partner............................ 1,303,186 174,649
-------------- --------------
NET INCREASE (DECREASE) IN CASH................................................ (6,653) 41,535
CASH, BEGINNING OF YEAR........................................................ 7,118 465
-------------- --------------
CASH, END OF YEAR.............................................................. $ 465 $ 42,000
-------------- --------------
-------------- --------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest................................................................... $ -- $ --
Taxes...................................................................... $ -- $ --
</TABLE>
See notes to financial statements.
F-23
<PAGE>
PURE-GAR L.P.
(A DIVISION OF BASIC VEGETABLE PRODUCTS, L.P.)
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
Pure-Gar L.P. (a division of Basic Vegetable Products, L.P.), a Delaware
Limited Partnership (the "Partnership"), is a distributor of dehydrated
vegetable products and dietary supplements. The Partnership utilizes the 52/53
week convention to report financial results.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Partnership to
significant concentrations of credit risk are principally trade accounts
receivable.
Concentrations of credit risk with respect to trade accounts receivable are
due to concentrations of sales to certain customers. At December 28, 1996, one
customer accounted for 24% of the Partnership's trade receivables. At December
27, 1997, two customers accounted for 17% and 16%, respectively, of the
Partnership's trade receivables. The Partnership performs ongoing credit
evaluations of its customers and normally does not require collateral to support
accounts receivable.
MAJOR CUSTOMERS
During the year ended December 28, 1996, two customers accounted for 35% and
24%, respectively, of the Partnership's net sales. During the year ended
December 27, 1997, two customers accounted for 22% and 20%, respectively, of the
Partnership's net sales.
MAJOR SUPPLIER
The Partnership purchases substantially all of its raw garlic from the
Partnership's limited partner, Basic Vegetable Products, L.P. ("BVP") (see Note
3). During the years ended December 28, 1996 and December 27, 1997, these
purchases amounted to approximately $2,979,000 and $2,748,000, respectively,
which includes a mark-up of approximately $687,000 and $634,000, respectively.
INVENTORIES
Inventories consist primarily of finished goods which are stated at the
lower of cost (first-in, first-out basis) or market. The net amount of
inventories at December 27, 1997 reflects an allowance for slow-moving and
obsolete inventories totalling $208,094.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The Partnership uses the
straight-line method of depreciation.
The estimated useful lives are as follows:
<TABLE>
<S> <C>
Furniture and fixtures........................................ 5 years
Life of
Leasehold improvements........................................ Lease
</TABLE>
F-24
<PAGE>
PURE-GAR L.P.
(A DIVISION OF BASIC VEGETABLE PRODUCTS, L.P.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Partnership sells its products to retail outlets and food processors
through a direct sales force, sales representatives and a national broker
network. Sales are recorded when products are shipped to customers by the
Partnership. Net sales represents products shipped, less estimated returns and
allowances for which provisions are made at the time of sale.
RESEARCH AND DEVELOPMENT
Company-sponsored research and development costs related to both present and
future products are expensed as incurred.
INCOME TAXES
The Partnership is not subject to Federal and state income taxes. Instead,
each Partner's share of Partnership profit is reported on their separate income
tax return.
PRO FORMA NET INCOME DATA
The unaudited pro forma net income data included in the Statements of Income
was presented as if the Partnership operated as a C Corporation for the entire
years ended December 28, 1996 and December 27, 1997. The pro forma income taxes
represents only Federal taxes since there are no income taxes in the State of
Washington where its primary facility was located.
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Based on borrowing rates currently available to the Partnership for bank
loans with similar terms and maturities, the fair value of the Partnership's
related party debt approximates the carrying value. Furthermore, the carrying
value of all other financial instruments potentially subject to valuation risk
(principally consisting of accounts receivable and accounts payable) also
approximates fair value.
F-25
<PAGE>
PURE-GAR L.P.
(A DIVISION OF BASIC VEGETABLE PRODUCTS, L.P.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Furniture and fixtures.............................................. $ 135,806 $ 227,056
Leasehold improvements.............................................. 43,560 43,560
Construction in progress............................................ 28,882 --
----------- -----------
Total property and equipment........................................ $ 208,248 $ 270,616
----------- -----------
----------- -----------
</TABLE>
3. RELATED PARTY ACTIVITIES
The Partnership purchases substantially all of its raw garlic from the
Partnership's limited partner, BVP. In addition, BVP allocated certain operating
expenses to the Partnership based on BVP management's estimate of the
utilization of common occupancy and labor costs for its various operating
entities and divisions. Management believes the allocation methodology to be
reasonable. Total purchases and allocated operating expenses amounted to
$7,039,642 and $5,552,652 in the years ended December 28, 1996 and December 27,
1997, respectively. Borrowings from BVP are subject to interest at 8%.
Repayments are made to BVP as funds are available. The balance in the related
party payable at December 28, 1996 and December 27, 1997 represents borrowings
and accrued interest thereon.
4. LEASE COMMITMENTS
The Partnership leases office facilities and equipment under operating lease
agreements. Total lease expense was $50,445 and $101,823 in the years ended
December 28, 1996 and December 27, 1997, respectively. Future minimum payments
required under non-cancellable operating leases as of December 27, 1997 total
$29,538 for 1998.
5. LITIGATION SETTLEMENT
In March 1997, the Partnership settled a lawsuit with a supplier for
$733,120. Management does not anticipate any further liability to be incurred
related to this issue.
6. SUBSEQUENT EVENT (UNAUDITED)
In February 1998, the partners entered into an agreement with Natrol, Inc.
to sell substantially all of the Partnership's assets and certain specified
liabilities for approximately $11 million. In addition, the partners entered
into long-term supply and royalty agreements with the buyer. The financial
statements do not contain any adjustments to reflect the sale of the
Partnership's assets and liabilities.
F-26
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
The unaudited pro forma consolidated statements of income presented below
are based on the financial statements of the Company, giving effect to the
assumptions and adjustments set forth in the footnotes to the pro forma
consolidated statements of income. The pro forma statements of income have been
prepared by management based on the historical financial statements of the
Company and Pure-Gar L.P. (Pure-Gar) as of and for the years ended December 31,
1997 and December 27, 1997, respectively, and as of and for the three months
ended March 31, 1998, adjusted where necessary to reflect the acquisition of
Pure-Gar (which occured on February 27, 1998) and related operations as if the
acquisition had been consummated at the beginning of the periods presented. The
pro forma consolidated financial information is presented for illustrative
purposes and it does not purport to represent what the consolidated results of
the operations of the Company for the periods presented would have been had the
acquisition been consummated as of such dates and is not indicative of the
results of that may be obtained in the future.
<TABLE>
<CAPTION>
NATROL, INC. PURE-GAR L.P.
YEAR ENDED YEAR ENDED BUSINESS YEAR ENDED
DECEMBER 31, 1997, DECEMBER 27, 1997, COMBINATION DECEMBER 31, 1997,
ACTUAL ACTUAL ADJUSTMENTS PRO FORMA COMBINED
-------------------- -------------------- ------------- --------------------
<S> <C> <C> <C> <C>
Net sales.......................... $ 42,874,759 $ 8,708,553 $ 51,583,312
Cost of goods sold................. 19,799,712 3,920,226 23,719,938
-------------------- ----------- --------------------
Gross profit..................... 23,075,047 4,788,327 27,863,374
-------------------- ----------- --------------------
Selling and marketing expenses... 11,398,390 1,954,543 13,352,933
General and administrative
expenses....................... 4,450,244 2,582,281 600,000(1) 7,632,525(3)
-------------------- ----------- --------------------
Total expenses................... 15,848,634 4,536,824 20,985,458
-------------------- ----------- --------------------
Operating income................... 7,226,413 251,503 6,877,916
Interest income (expense), net..... (219,555) (216,047) (681,832)(2) (1,117,434)
-------------------- ----------- --------------------
Income before income tax
provision........................ 7,006,858 35,456 5,760,482
Income tax provision............... 2,816,158 -- (512,733)(4) 2,303,425
-------------------- ----------- --------------------
Net income......................... $ 4,190,700 $ 35,456 $ 3,457,057
-------------------- ----------- --------------------
-------------------- ----------- --------------------
Basic earnings per share........... $ 0.59 $ 0.49
-------------------- --------------------
-------------------- --------------------
Diluted earnings per share......... $ 0.41 $ 0.34
-------------------- --------------------
-------------------- --------------------
Weighted average common shares
outstanding--basic............... 7,100,000 7,100,000
-------------------- --------------------
-------------------- --------------------
Weighted average common shares
outstanding--diluted............. 10,272,859 10,272,859
-------------------- --------------------
-------------------- --------------------
</TABLE>
- ------------------------
(1) Gives effect to the amortization of goodwill of $600,000, as if the
acquisition of Pure-Gar L.P. (the "Pure-Gar Acquisition") had taken place on
January 1, 1997.
(2) Gives effect to pro forma interest expense of $1,151,817 offset by actual
interest expense of $469,985, as if the debt incurred in the Pure-Gar
Acquisition was made on January 1, 1997. Pro forma interest expense is based
on a term note (8.5% interest rate) and line of credit (8.5% to 7.69%
interest rate) with principal balances of $8,875,000 and $5,524,167,
respectively.
(3) Pro forma general and administrative expenses include a non-recurring legal
settlement expense incurred by Pure-Gar of $733,000.
(4) Gives effect to taxes for adjustments described in footnotes 1 and 2 such
that the pro forma income tax provision is at the statutory rate for the
period presented.
F-27
<PAGE>
<TABLE>
<CAPTION>
NATROL, INC. PURE-GAR L.P. THREE MONTHS
THREE MONTHS THREE MONTHS ENDED
ENDED ENDED BUSINESS MARCH 31, 1998,
MARCH 31, 1998, MARCH 31, 1998, COMBINATION PRO FORMA
ACTUAL ACTUAL ADJUSTMENTS COMBINED
---------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
Net sales.................................... $ 11,879,996 $ 3,068,268 -- $ 14,948,264
Cost of goods sold........................... 5,707,501 1,735,495 -- 7,442,996
---------------- ---------------- ----------------
Gross Profit............................... 6,172,495 1,332,773 -- 7,505,268
---------------- ---------------- ----------------
Selling expenses............................. 3,283,612 717,945 -- 4,001,557
General and administrative expenses.......... 1,198,943 377,134 100,000(1) 1,676,077
---------------- ---------------- ------------- ----------------
Total expenses............................. 4,482,555 1,095,079 -- 5,677,634
---------------- ---------------- ------------- ----------------
Operating income............................. 1,689,940 237,694 -- 1,827,634
Interest income (expense), net............... (63,207) (100,424) 136,276(2) (299,907)
---------------- ---------------- ------------- ----------------
Income before income tax provision........... 1,626,733 137,270 -- 1,527,727
Income tax provision......................... 650,694 -- 39,603(3) 611,091
---------------- ---------------- ------------- ----------------
Net income................................... $ 976,039 $ 137,270 -- $ 916,636
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Basic earnings per share..................... $ 0.14 $ 0.15
---------------- ----------------
---------------- ----------------
Diluted earnings per share................... $ 0.10 $ 0.11
---------------- ----------------
---------------- ----------------
Weighted average common shares
outstanding--basic......................... 7,100,000 7,100,000
---------------- ----------------
---------------- ----------------
Weighted average common shares
outstanding--diluted....................... 10,272,859 10,272,859
---------------- ----------------
---------------- ----------------
</TABLE>
- ------------------------
(1) Gives effect to the amortization of goodwill of $150,000, as if the Pure-Gar
Acquisition had taken place on January 1, 1998, net of recorded goodwill
amortization.
(2) Gives effect to pro forma interest expense of $299,907 offset by actual
interest expense of $163,631, as if the debt incurred in the Pure-Gar
Acquisition was made on January 1, 1998. Pro forma interest expense is based
on a term note (8.5% interest rate) and line of credit (8.5% to 7.69%
interest rate) with principal balances of $8,875,000 and $5,524,167,
respectively.
(3) Gives effect to taxes for adjustments described in footnotes 1 and 2 such
that the pro forma income tax provision is at the statutory rate for the
period presented.
F-28
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 16
Dividend Policy........................................................... 16
Capitalization............................................................ 17
Dilution.................................................................. 18
Selected Consolidated Financial Data...................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 20
Business.................................................................. 28
Management................................................................ 41
Certain Transactions...................................................... 48
Principal and Selling Stockholders........................................ 49
Description of Capital Stock.............................................. 51
Shares Eligible for Future Sale........................................... 54
Underwriting.............................................................. 56
Legal Matters............................................................. 57
Experts................................................................... 57
Additional Information.................................................... 58
Index to Financial Statements............................................. F-1
</TABLE>
------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
3,940,000 SHARES
[LOGO]
COMMON STOCK
--------------
PROSPECTUS
--------------
Adams, Harkness & Hill, Inc.
NationsBanc Montgomery
Securities LLC
Piper Jaffray Inc.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (1)
The following table sets forth the estimated expenses payable by the Company
in connection with this offering (excluding underwriting discounts and
commissions):
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
- ------------------------------------------------------------------------------- -------------
<S> <C>
SEC Registration Fee........................................................... $ 18,714
NASD Filing Fee................................................................ 6,844
Nasdaq Listing Fee............................................................. 84,875
Accounting Fees and Expenses................................................... 190,000
Legal Fees and Expenses........................................................ 450,000
Printing Expenses.............................................................. 175,000
Blue Sky Qualification Fees and Expenses....................................... 11,800
Transfer Agent's Fee........................................................... 10,500
Miscellaneous.................................................................. 102,267
-------------
TOTAL........................................................................ $ 1,050,000
</TABLE>
- ------------------------
(1) The amounts set forth above, except for the SEC, NASD and Nasdaq fees, are
in each case estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In accordance with Section 145 of the General Corporation Law of the State
of Delaware (the "DGCL"), Article VIII of the Company's Amended and Restated
Certificate of Incorporation (the "Certificate") provides that no director of
the Company shall be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) in respect of
certain unlawful dividend payments or stock redemptions or repurchases, or (iv)
for any transaction from which the director derived an improper personal
benefit. In addition, the Certificate provides that if the DGCL is amended to
authorize the further elimination or limitation of the liability of directors,
then the liability of a director of the Corporation shall be eliminated or
limited to the fullest extent permitted by the DGCL, as so amended.
Article V of the Company's Amended and Restated By-laws provides for
indemnification by the Company of its officers and certain non-officer employees
under certain circumstances against expenses (including attorneys fees,
judgments, fines and amounts paid in settlement) reasonably incurred in
connection with the defense or settlement of any threatened, pending or
completed legal proceeding in which any such person is involved by reason of the
fact that such person is or was an officer or employee of the Company if such
person acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the best interests of the Company, and, with respect to
criminal actions or proceedings, if such person had no reasonable cause to
believe his or her conduct was unlawful.
The Company has entered into indemnification agreements with each of its
directors reflecting the foregoing provisions of its By-laws and requiring the
advancement of expenses in proceedings involving such directors in most
circumstances.
The Stock Purchase and Shareholders Agreement, filed as Exhibit 2.1 hereto,
provides for indemnification by the Company of certain of its existing principal
stockholders and the controlling persons of
II-1
<PAGE>
such stockholders (one of whom is a director of the Company) against claims and
liabilities, including claims and liabilities arising under the securities laws.
Under Section 10 of the Underwriting Agreement filed as Exhibit 1.1 hereto,
the Underwriters have agreed to indemnify, under certain conditions, the
Company, its directors, certain officers and persons who control the Company
within the meaning of the Securities Act against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order below is information regarding the number
of share of capital stock issued by the Company for the past three years
beginning in May 1995. Further included is the consideration, if any, received
by the Company for such shares, and information relating to the section of the
Securities Act of 1933, as amended (the "Securities Act"), or rule of the
Securities and Exchange Commission under which exemption from registration was
claimed. The following transactions give effect to the Company's 100-to-1 stock
split of its Common Stock, effected on June 19, 1998.
(1) In September 1996, pursuant to a Stock Purchase and Shareholders'
Agreement, the Company and certain stockholders of the Company sold an
aggregate of 27,000 shares of the Company's Convertible Participating
Preferred Stock for an aggregate purchase price of $12.0 million to
Advent VII L.P., Advent Atlantic and Pacific III L.P., Advent New York
L.P., and TA Venture Investors Limited Partnership, in reliance upon the
exemption from registration under Regulation D of the Securities Act.
(2) In November 1996, pursuant to the Company's 1996 Stock Plan, the Company
sold 300,000 shares of restricted Common Stock for an aggregate purchase
price of $562,800 to an employee in reliance upon the exemption from
registration under Rule 701 promulgated under the Securities Act.
(3) In November 1996, pursuant to the Company's 1996 Stock Plan, the Company
granted options to purchase up to an aggregate of 200,000 shares of
Common Stock to two employees in reliance upon the exemption from
registration under Rule 701 promulgated under the Securities Act.
(4) In July 1997, pursuant to the Company's 1996 Stock Plan, the Company
granted an option to purchase up to 100,000 shares of Common Stock to an
employee in reliance upon the exemption from registration under Rule 701
promulgated under the Securities Act.
(5) In August 1997, pursuant to the Company's 1996 Stock Plan, the Company
granted an option to purchase up to 100,000 shares of Common Stock to an
employee in reliance upon the exemption from registration under Rule 701
promulgated under the Securities Act.
(6) In April 1998, pursuant to the Company's 1996 Stock Plan, the Company
granted options to purchase up to an aggregate of 225,000 shares of
Common Stock to eight employees in reliance upon the exemption from
registration under Rule 701 promulgated under the Securities Act.
(7) In April 1998, pursuant to the Company's 1996 Stock Plan, the Company
granted options to purchase up to an aggregate of 25,000 shares of Common
Stock to a director in reliance upon the exemption from registration
under Rule 701 promulgated under the Securities Act.
(8) In April 1998, pursuant to the Company's 1996 Stock Plan, the Company
granted an option to purchase up to 5,000 shares of Common Stock to a
consultant in reliance upon the exemption from registration under Rule
701 promulgated under the Securities Act.
(9) In May 1998, pursuant to the Company's 1996 Stock Plan, the Company
granted an option to purchase up to 25,000 shares of Common Stock to an
employee in reliance upon the exemption from registration under Rule 701
promulgated under the Securities Act.
II-2
<PAGE>
(10) In June 1998, pursuant to the Company's 1996 Stock Plan, the Company
granted an option to purchase up to 5,000 shares of Common Stock to an
employee in reliance upon the exemption from registration under Rule 701
promulgated under the Securities Act.
(11) In June 1998, pursuant to the Company's 1996 Stock Plan, the Company
granted options to purchase up to 35,000 shares of Common Stock to two
consultants in reliance upon the exemption from registration under Rule
701 promulgated under the Securities Act.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
<C> <C> <S>
1.1 Form of Underwriting Agreement.
* 2.1 Stock Purchase and Shareholders' Agreement dated as of September 30, 1996 by and among the
Registrant and the Investors named therein (excluding schedules, which the Registrant agrees to
furnish supplementally to the Commission upon request).
* 3.1 Amended and Restated Certificate of Incorporation.
3.2 Amendment to Amended and Restated Certificate of Incorporation.
3.3 Form of Second Amended and Restated Certificate of Incorporation (to be filed immediately prior to
effectiveness of the Registration Statement).
3.4 Form of Third Amended and Restated Certificate of Incorporation (to be filed following the closing
of the Offering referred to in the Registration Statement).
* 3.5 By-Laws.
3.6 Form of Amended and Restated By-laws (to be effective upon effectiveness of the Registration
Statement).
* 4.1 Specimen certificate for shares of Common Stock, $.01 par value, of the Registrant.
5.1 Opinion of Goodwin, Procter & Hoar LLP as to the validity of the securities being offered.
* 10.1 Lease dated as of August 12, 1996, as amended by Amendment No. 1, between the Registrant and
Lincoln-Whitehall Pacific, L.L.C.
10.2 Amended and Restated 1996 Stock Option and Grant Plan of the Registrant.
10.3 1998 Employee Stock Purchase Plan of the Registrant.
* 10.4 Form of Indemnification Agreement between the Registrant and each of its directors.
* 10.5 Restricted Stock Agreement dated November 14, 1996 by and between the Registrant and Dennis R.
Jolicoeur.
* 10.6 Promissory Note of Dennis R. Jolicoeur dated November 14, 1996.
* 10.7 Pledge Agreement dated as of November 14, 1996 by and between the Registrant and Dennis R.
Jolicoeur.
* 10.8 Amended and Restated Credit Agreement with Wells Fargo Bank, N.A.
* 10.9 Form of Stock Option Agreement
+ 10.10 Supply Agreement dated as of February 28, 1998, by and between the Registrant and Basic Vegetable
Products, L.P.
+ 10.11 Distributorship/Packager/Supply Agreement dated as of January 1, 1995 by and between the Registrant
and Inter-Cal Corporation.
* 10.12 Letter Agreement dated July 18, 1997 between the Registrant and Jon J. Denis.
10.13 Description of salary and incentive bonus arrangements for Dennis R. Jolicoeur, Cheryl R. Richitt
and Gary P. DeMello.
* 21.1 Subsidiaries of the Registrant.
23.1 Consent of Goodwin, Procter & Hoar LLP (included in Exhibit 5.1 hereto).
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Farber & Hass.
* 24.1 Powers of Attorney
* 27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* Previously filed.
+ Portions of these Exhibits have been deleted from the publicly filed
documents and have been filed separately with the Commission pursuant to a
request for confidential treatment.
II-4
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are not required
or because the required information is given in the Financial Statements or
Notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 2 to the Registration Statement (File No.
333-52109) to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Chatsworth, State of California, on July 2, 1998.
<TABLE>
<S> <C>
NATROL,
INC.
By:
/S/
ELLIOTT
BALBERT
-
Elliott
Balbert
PRESIDENT
AND CHIEF
EXECUTIVE
OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/S/ ELLIOTT BALBERT
- ------------------------------ Chairman of the Board, July 2, 1998
Elliott Balbert Chief Executive Officer,
President and Director
(Principal Executive
Officer)
/S/ DENNIS R. JOLICOEUR
- ------------------------------ Chief Financial Officer, July 2, 1998
Dennis R. Jolicoeur Executive Vice President
and Director (Principal
Financial Officer and
Principal Accounting
Officer)
*
- ------------------------------ Director July 2, 1998
Norman Kahn
*
- ------------------------------ Director July 2, 1998
David Laufer
*
- ------------------------------ Director July 2, 1998
P. Andrews McLane
*By: /S/ ELLIOTT BALBERT
--------------------------
Elliott Balbert,
Attorney-in-Fact
II-6
<PAGE>
SCHEDULE II
NATROL, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------------------- ----------- ------------------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF PERIOD EXPENSE ACCOUNTS DEDUCTIONS OF PERIOD
- -------------------------------------------- ----------- ----------- ----------- ----------- -----------
Year Ended December 31, 1997 $ 198,000 $ 801,000 -- $ 794,000(1) $ 205,000
Year Ended December 31, 1996 $ 200,000 $ 541,000 -- $ 543,000(1) $ 198,000
Year Ended December 31, 1995 $ 205,000 $ 244,000 -- $ 249,000(1) $ 200,000
</TABLE>
- ------------------------
(1) Represents actual returns of goods.
S-1
<PAGE>
NATROL, INC.
4,531,000 Shares(1)
Common Stock
(par value $.01 per share)
--------------
Underwriting Agreement
, 1998
Adams, Harkness & Hill, Inc.
NationsBanc Montgomery Securities LLC
Piper Jaffray Inc.
As representatives of the several
Underwriters named in Schedule I hereto,
c/o Adams, Harkness & Hill, Inc.
60 State Street
Boston, Massachusetts 02109
Dear Sirs:
Natrol, Inc., a Delaware corporation (together with its predecessor,
the "Company"), proposes, subject to the terms and conditions stated herein,
to issue and sell to you and the several Underwriters named in Schedule I
hereto (collectively, the "Underwriters"), for whom you are acting as
representatives (the "Representatives"), an aggregate of 3,200,000 shares
(the "Company Firm Shares") and, at the election of the Underwriters, up to
295,500 additional shares (the "Company Optional Shares") of common stock of
the Company, $.01 par value per share ("Common Stock"), and the Selling
Stockholders named in Schedule II hereto (the "Selling Stockholders"),
propose, subject to the terms and conditions stated herein, to sell to the
Underwriters an aggregate of 740,000 shares (the "Selling Stockholder Firm
Shares", and together with the Company Firm Shares, the "Firm Shares") and at
the election of the Underwriters, up to an additional 295,500 shares (the
"Selling Stockholder Optional Shares", and together with the Company Optional
Shares, the "Optional Shares") of Common Stock. The Firm Shares, and the
Optional Shares which the Underwriters elect to purchase pursuant to Section
3 hereof, are herein collectively called the "Shares".
- --------
(1) Includes 591,000 shares subject to an option to purchase additional shares
to cover over-allotments.
-1-
<PAGE>
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, each of the Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-52109)
(the "Initial Registration Statement") in respect of the Shares has been
filed with the Securities and Exchange Commission (the "Commission"); to the
Company's knowledge, based solely on oral advice provided by the Commission
on the date hereof, the Initial Registration Statement, including any
pre-effective amendments thereto and any post-effective amendment thereto,
each in the form heretofore delivered to you, and to you for each of the
other Underwriters, has been declared effective by the Commission in such
form; other than a registration statement, if any, increasing the size of the
offering (a "Rule 462(b) Registration Statement"), filed pursuant to Rule
462(b) under the Securities Act of 1933, as amended (the "Act"), which became
effective upon filing, no other document with respect to the Initial
Registration Statement has heretofore been filed with the Commission; and the
Company has received no stop order suspending the effectiveness of the
Initial Registration Statement, any post-effective amendment thereto or the
Rule 462(b) Registration Statement, if any, the Company has received no
notice of the initiation or planned initiation of any proceeding for that
purpose and, to the Company's knowledge, no proceeding for that purpose has
been initiated or threatened by the Commission (any preliminary prospectus
included in the Initial Registration Statement and incorporated by reference
in the Rule 462(b) Registration Statement, if any, or filed with the
Commission pursuant to Rule 424(a) of the rules and regulations of the
Commission under the Act is hereinafter called a "Preliminary Prospectus";
the various parts of the Initial Registration Statement and the Rule 462(b)
Registration Statement, if any, including all exhibits thereto and including
the information contained in the form of final prospectus filed with the
Commission pursuant to Rule 424(b) under the Act in accordance with Section
6(a) hereof and deemed by virtue of Rule 430A under the Act to be part of the
Initial Registration Statement at the time it was declared effective or the
Rule 462(b) Registration Statement, if any, at the time it became effective,
each as amended at the time such part of such registration statement became
effective, are hereinafter collectively called the "Registration Statement";
and such final prospectus, in the form first filed pursuant to Rule 424(b)
under the Act, is hereinafter called the "Prospectus");
(b) The Company has received no order preventing or suspending
the use of any Preliminary Prospectus has been issued by the Commission, and
each Preliminary Prospectus, at the time of filing thereof, conformed in all
material respects to the requirements of the Act and the rules and
regulations of the Commission thereunder, and did not contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions (i) which have been corrected in a subsequent
-2-
<PAGE>
Preliminary Prospectus or the final Prospectus or (ii) made in reliance upon
and in conformity with information furnished in writing to the Company by or
on behalf of an Underwriter through you expressly for use therein. The
Company acknowledges that the statements set forth in the last paragraph on
the front cover page (insofar as such information relates to the
Underwriters), the legends required by Item 502(d) of Regulation S-K under
the Act and the information under the heading "Underwriting" in the
Prospectus constitute the only information relating to any Underwriter
furnished in writing to the Company by or on behalf of the Representatives
specifically for inclusion in the Registration Statement;
(c) The Registration Statement conforms, and the Prospectus and
any further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of the
Act and the rules and regulations of the Commission thereunder and do not and
will not, as of the applicable effective date as to the Registration
Statement and any amendment thereto and as of the applicable date of the
Prospectus and any amendment or supplement thereto, contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by or on behalf of an
Underwriter through you expressly for use therein;
(d) There are no contracts or other documents required to be
described in the Registration Statement or to be filed as exhibits to the
Registration Statement by the Act or by the rules and regulations thereunder
which have not been described or filed as required; the contracts so
described in the Prospectus to which the Company or any of its subsidiaries
is a party have been duly authorized, executed and delivered by the Company
or its subsidiaries, constitute valid and binding agreements of the Company
or its subsidiaries and are enforceable against and by the Company or its
subsidiaries in accordance with their respective terms except as such
enforceability may be limited by (i) applicable bankruptcy, insolvency,
moratorium, reorganization, fraudulent conveyance or similar laws in effect
which affect the enforcement of creditors rights generally, (ii) general
principles of equity, whether considered in a proceeding at law or in equity
and (iii) state or federal securities laws or policies relating to the
non-enforceability of the indemnification or contribution provisions
contained herein, and are in full force and effect on the date hereof; and
neither the Company nor any of its subsidiaries, nor, to the best of the
Company's knowledge, any other party is in material breach of or material
default under any of such contracts;
(e) Neither the Company nor any of its subsidiaries has sustained
since the date of the latest audited financial statements included in the
Prospectus
-3-
<PAGE>
any material loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from any
labor dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus; and, since the
respective dates as of which information is given in the Registration
Statement and the Prospectus, there has not been any change in the capital
stock or long-term debt of the Company or any of its subsidiaries or any
material adverse change, or any development involving a prospective material
adverse change, in or affecting the business, assets, management, financial
position, stockholders' equity or results of operations of the Company and
its subsidiaries, taken as a whole (hereinafter a "Material Adverse Change"),
otherwise than as set forth or contemplated in the Prospectus;
(f) The Company and its subsidiaries have valid title to all
properties and assets described in the Prospectus as owned by them, in each
case free and clear of all liens, charges, encumbrances or restrictions,
except such as are described in the Prospectus or are not material to the
business of the Company; any real property and buildings held under lease by
the Company and its subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not
interfere with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries; the Company and its
subsidiaries own or lease all such properties as are necessary to their
operations as now conducted or as proposed to be conducted, except where the
failure to so own or lease would not result in a Material Adverse Change;
(g) Each of the Company and its subsidiaries has been duly
incorporated and is an existing corporation in good standing under the laws
of its respective jurisdiction of organization, each with full corporate
power and corporate authority to own its properties and conduct its business
as described in the Prospectus, and each has been duly qualified as a foreign
corporation for the transaction of business and is in good standing under the
laws of each other jurisdiction in which it owns or leases properties, or
conducts any business, so as to require such qualification (except where the
failure to be so qualified in any such jurisdiction would not result in a
Material Adverse Change);
(h) The Company had as of March 31, 1998 an authorized
capitalization as set forth under the heading "Capitalization" in the
Prospectus, and all the issued shares of capital stock of the Company have
been duly authorized and validly issued, are fully paid and non-assessable
and conform in all material respects to the description of the Common Stock
contained in the Prospectus; all of the issued shares of capital stock of
each subsidiary of the Company have been duly authorized and validly issued,
are fully paid and non-assessable and are owned of record by the Company,
free and clear of all liens, encumbrances or claims, except for pledges
pursuant to the Amended and Restated Credit Agreement between the Company and
Wells Fargo Bank, N.A. (the "Credit Agreement") as described in the
Prospectus;
-4-
<PAGE>
except as disclosed in or contemplated by the Prospectus and the financial
statements of the Company, and the related notes thereto, included in the
Prospectus, neither the Company nor any subsidiary has outstanding any
options to purchase, or any preemptive rights or other rights to subscribe
for or to purchase any securities or obligations convertible into, or any
contracts or commitments to issue or sell, shares of its capital stock or any
such options, rights, convertible securities or obligations; and the
description of the Company's stock option and stock purchase plans and the
options or other rights granted and exercised thereunder set forth in the
Prospectus accurately and fairly presents in all material respects the
information required to be shown with respect to such plans, options and
rights;
(i) The unissued Shares to be issued and sold by the Company to
the Underwriters hereunder have been duly authorized and, when issued and
delivered against payment therefor as provided herein, will be validly issued
and fully paid and non-assessable and will conform in all material respects
to the description of the Common Stock contained in the Prospectus; no
preemptive rights or other rights to subscribe for or purchase exist with
respect to the issuance and sale of the Shares by the Company pursuant to
this Agreement; no stockholder of the Company has any right which has not
been satisfied or waived to require the Company to register the sale of any
shares of capital stock owned by such stockholder under the Act in the public
offering contemplated by this Agreement; and no further approval or authority
of the stockholders or the Board of Directors of the Company will be required
for the issuance and sale of the Shares to be sold by the Company as
contemplated herein;
(j) The Company has full corporate power and authority to enter
into this Agreement; this Agreement has been duly authorized, executed and
delivered by the Company, constitutes a valid and binding obligation of the
Company and is enforceable against the Company in accordance with its terms
except as such enforceability may be limited by (i) applicable bankruptcy,
insolvency, moratorium, reorganization, fraudulent conveyance or similar laws
in effect which affect the enforcement of creditors rights generally, (ii)
general principles of equity, whether considered in a proceeding at law or in
equity and (iii) state or federal securities laws or policies relating to the
non-enforceability of the indemnification or contribution provisions
contained herein;
(k) The issue and sale of the Shares by the Company and the
compliance by the Company with all of the provisions of this Agreement and
the consummation of the transactions herein contemplated will not conflict
with or result in a breach or violation of any of the terms or provisions of,
or constitute a default under, any material indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which the Company
or any of its subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any of the property or assets of the
Company or any of its subsidiaries is subject, nor will such
-5-
<PAGE>
action result in any violation of the provisions of the Certificate of
Incorporation or By-laws of the Company or any statute or any order, rule or
regulation of any court or governmental agency or body having jurisdiction
over the Company or any of its subsidiaries or any of their properties; and
no consent, approval, authorization, order, registration or qualification of
or with any such court or governmental agency or body is required for the
issue and sale of the Shares or the consummation by the Company of the
transactions contemplated by this Agreement, except the registration under
the Act of the Shares and such consents, approvals, authorizations,
registrations or qualifications as may be required under state securities or
Blue Sky laws or the by-laws and rules of the National Association of
Securities Dealers, Inc. (the "NASD") in connection with the purchase and
distribution of the Shares by the Underwriters;
(l) There are no legal or governmental actions, suits or
proceedings pending or, to the best of the Company's knowledge, threatened to
which the Company or any of its subsidiaries is or may be a party or of which
property owned or leased by the Company or any of its subsidiaries is or may
be the subject, or related to environmental or discrimination matters, which
actions, suits or proceedings, if adversely decided, would result in a
Material Adverse Change; no labor disturbance by the employees of the Company
or any of its subsidiaries exists or, to the knowledge of the Company, is
imminent which would result in a Material Adverse Change; and neither the
Company nor any of its subsidiaries is a party or subject to the provisions
of any material injunction, judgment, decree or order of any court,
regulatory body, administrative agency or other governmental body;
(m) The Company and its subsidiaries possess all governmental or
regulatory licenses, certificates, authorizations or permits that are
necessary to enable them to own, lease and operate their respective
properties and to carry on their respective businesses as presently conducted
and which the failure to possess would result in a Material Adverse Change,
and neither the Company nor any of its subsidiaries has received any written
notice of proceedings relating to the revocation or modification of any such
license, certificate, authority or permit which, singly or in the aggregate,
would be expected to result in a Material Adverse Change;
(n) Each of Ernst & Young LLP and Farber & Hass LLP, who have
certified certain financial statements of the Company and Pure-Gar, L.P.,
respectively, are independent public accountants within the meaning of the
Act and the rules and regulations of the Commission thereunder;
(o) The financial statements and schedules of the Company, and
the related notes thereto, included in the Registration Statement and the
Prospectus present fairly in all material respects the financial position of
the Company as of the respective dates of such financial statements and
schedules, and the results of operations and cash flows of the Company for
the respective periods covered
-6-
<PAGE>
thereby; such statements, schedules and related notes have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis as certified by the independent public accountants named in
paragraph (n) above; no other financial statements or schedules are required
to be included in the Registration Statement; and the selected financial data
set forth in the Prospectus under the captions "Summary Consolidated
Financial Data," "Capitalization," "Selected Consolidated Financial Data" and
"Unaudited Pro Forma Consolidated Statements of Income" present fairly in all
material respects the information set forth therein on the basis stated in
the Registration Statement;
(p) Except as disclosed in or specifically contemplated by the
Prospectus, the Company and its subsidiaries own or possess sufficient
trademarks, trade names, patent rights, copyrights, licenses, approvals and
governmental authorizations to conduct their business as now conducted except
where the failure to so own or possess would not result in a Material Adverse
Change; except as disclosed in the Registration Statement and Prospectus, the
Company has no knowledge of any material infringement by the Company of
trademark, trade name rights, patent rights, copyrights, licenses, trade
secret or other similar rights of others; and there is no claim being made
against the Company regarding trademark, trade name, patent, copyright,
license, trade secret or other infringement which, if adversely decided,
would result in a Material Adverse Change;
(q) The Company and each of its subsidiaries have filed all
necessary federal, state and foreign income and franchise tax returns and
have paid all taxes shown as due thereon; and the Company has no knowledge of
any tax deficiency which has been or is reasonably likely to be asserted or
threatened against the Company or any of its subsidiaries which would result
in a Material Adverse Change;
(r) The Company is not an "investment company" or an "affiliated
person" of, or "promoter" or "principal underwriter" for, an "investment
company," as such terms are defined in the Investment Company Act of 1940, as
amended (the "Investment Company Act");
(s) Each of the Company and its subsidiaries maintains insurance
of the types and in the amounts which it deems adequate for its business,
including, but not limited to, insurance covering real and personal property
owned or leased by the Company and its subsidiaries against theft, damage,
destruction, acts of vandalism and all other risks customarily insured
against by companies engaged in businesses substantially similar to that of
the Company, all of which insurance is in full force and effect;
(t) Neither the Company nor any of its subsidiaries has at any
time during the last five years (i) made any unlawful contribution to any
candidate for
-7-
<PAGE>
foreign office, or failed to disclose fully any contribution in violation of
law, or (ii) made any payment to any foreign, federal or state governmental
officer or official, or other person charged with similar public or
quasi-public duties, other than payments required or permitted by the laws of
the United States or any jurisdiction thereof;
(u) The Company has not taken and will not take, directly or
indirectly through any of its directors, officers or controlling persons, any
action which is designed to or which has constituted or which might
reasonably be expected to cause or result in stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale of
the Shares;
(v) The Company has filed a registration statement pursuant to
Section 12(g) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), to register the Common Stock, has filed an application to
list the Common Stock on the Nasdaq National Market and has received
notification that the listing has been approved, subject to notice of
issuance of the Shares;
(w) The Company and each of its subsidiaries is conducting its
business in compliance with all the laws, rules and regulations of the
jurisdictions in which it is conducting business, including, without
limitation, those of the United States, and all governmental bodies having
jurisdiction over the Company, including but not limited to the United States
Food and Drug Administration, Federal Trade Commission, Consumer Product
Safety Commission, Department of Agriculture and Environmental Protection
Agency and those relating to employment and employment practices, except
where the failure to so comply would not result in a Material Adverse Change.
Neither the Company nor any of its subsidiaries has received any notification
of any asserted present or past failure of the Company or its subsidiaries to
comply with any such laws, rules or regulations to the extent such notice
would reasonably be expected to result in a Material Adverse Change; and
(x) Neither the Company nor any of its subsidiaries has violated
any foreign, federal, state or local law or regulation relating to the
protection of human health and safety, the environment or toxic substance or
wastes, pollutants or contaminants, except where the failure to so comply
would not result in a Material Adverse Change.
2. Representations and Agreements of the Selling
Stockholders. Each of the Selling Stockholders, severally and not jointly,
represents and warrants to, and agrees with, each of the Underwriters that:
(a) All consents, approvals, authorizations and orders necessary
for the execution and delivery by such Selling Stockholder of this Agreement
and the Power of Attorney and Custody Agreement (the "Custody Agreement")
hereinafter referred to, and for the sale and delivery of the Shares to be
sold by such Selling
-8-
<PAGE>
Stockholder hereunder, have been obtained; and such Selling Stockholder has
full right, power and authority to enter into and perform this Agreement and
the Custody Agreement and to sell, assign, transfer and deliver the Shares to
be sold by such Selling Stockholder hereunder;
(b) This Agreement and the Custody Agreement have each been duly
authorized, executed and delivered by such Selling Stockholder and each such
document constitutes a valid and binding obligation of such Selling
Stockholder, enforceable against such Selling Stockholder in accordance with
its terms except as such enforceability may be limited by (i) applicable
bankruptcy, insolvency, moratorium, reorganization, fraudulent conveyance or
similar laws in effect which affect the enforcement of creditors rights
generally, (ii) general principles of equity, whether considered in a
proceeding at law or in equity and (iii) state or federal securities laws or
policies relating to the non-enforceability of the indemnification or
contribution provisions contained herein and therein;
(c) No consent, approval, authorization or order of, or any
filing or declaration with, any court or governmental agency or body is
required in connection with the sale of the Shares by such Selling
Stockholder or the consummation by such Selling Stockholder of the
transactions on his or its part contemplated by this Agreement and the
Custody Agreement, except such as have been obtained under the Act or the
rules and regulations thereunder and such as may be required under state
securities or Blue Sky laws or the by-laws and rules of the NASD in
connection with the purchase and distribution by the Underwriters of the
Shares;
(d) The sale of the Shares to be sold by such Selling Stockholder
hereunder and the performance by such Selling Stockholder of this Agreement
and the Custody Agreement and the consummation of the transactions
contemplated hereby and thereby will not result in a breach or violation of
any of the terms or provisions of, or constitute a default under, or give any
party a right to terminate any of its obligations under, or result in the
acceleration of any obligation under, any material indenture, mortgage, deed
of trust, voting trust agreement, loan agreement, bond, debenture, note
agreement or other evidence of indebtedness, lease, contract or other
agreement or instrument to which such Selling Stockholder is a party or by
which such Selling Stockholder or any of his or its material properties is
bound or affected, or violate or conflict with the Certificate of
Incorporation or By-laws of such Selling Stockholder if such Selling
Stockholder is a corporation, the Agreement of Limited Partnership of such
Selling Stockholder if such Selling Stockholder is a limited partnership or
any judgment, ruling, decree, order, statute, rule or regulation of any court
or other governmental agency or body applicable to such Selling Stockholder;
(e) Such Selling Stockholder has, and at the applicable Time of
Delivery (as defined below) will have, good and valid title to the Shares to
be sold by
-9-
<PAGE>
such Selling Stockholder hereunder, free and clear of all liens, encumbrances
or claims (except those in favor of the Underwriters created by this
Agreement or the Custody Agreement); and, upon delivery of such Shares and
payment therefor pursuant hereto, good and valid title to such Shares, free
and clear of all liens, encumbrances or claims, will pass to each of the
several Underwriters who have purchased such Shares in good faith and without
notice of any such lien, encumbrance or claim or any other adverse claim
within the meaning of the Uniform Commercial Code;
(f) Such Selling Stockholder will not, directly or indirectly,
offer, sell, assign, transfer, encumber, contract to sell, grant an option to
purchase, make a distribution of, or otherwise dispose of, any shares of
Common Stock or any securities convertible into or exchangeable for, or any
rights to purchase or acquire, shares of Common Stock held by such Selling
Stockholder, acquired by such Selling Stockholder after the date hereof or
which may be deemed to be beneficially owned (as defined in the rules and
regulations of the Commission) by such Selling Stockholder, for a period of
180 days following the date of the Prospectus, other than (i) the sale of the
Shares pursuant to this Agreement, (ii) with the prior written consent of
Adams Harkness & Hill, Inc. or (iii) pursuant to a bona fide gift to a person
or entity who agrees in writing to be bound by the provisions of the
agreements set forth in this paragraph (f);
(g) Such Selling Stockholder has not taken and will not at any
time take, directly or indirectly, any action designed, or which might
reasonably be expected, to cause or result in, or which will constitute,
stabilization of the price of shares of Common Stock to facilitate the sale
or resale of any of the Shares;
(h) To the extent that any statements or omissions made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto are made in reliance upon and in conformity
with written information furnished to the Company by such Selling Stockholder
expressly for use therein, such statements contained in the Preliminary
Prospectus and the Registration Statement in reliance thereon did, and such
statements contained in the Prospectus and any further amendments or
supplements to the Registration Statement and the Prospectus in reliance
thereon, when they become effective or are filed with the Commission, as the
case may be, will not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they
were made, not misleading;
(i) Such Selling Stockholder has reviewed the Registration
Statement and Prospectus and, although such Selling Stockholder has not
independently verified the accuracy or completeness of all the information
contained therein, nothing has come to the attention of such Selling
Stockholder that would lead such
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Selling Stockholder to believe that on the Effective Date, the Registration
Statement contained any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary in order
to make the statements therein not misleading; and, on the Effective Date the
Prospectus contained and, at each Time of Delivery, contains any untrue
statement of a material fact or omitted or omits to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and
(j) Such Selling Stockholder has carefully reviewed the
representations and warranties of the Company contained in this Agreement and
the information contained in the Registration Statement. Based on the
foregoing (i) such Selling Stockholder has no reason to believe and does not
believe that the representations of the Company contained in this Agreement
are not true and correct in all material respects; (ii) such Selling
Stockholder has no knowledge of any fact, condition or information not
disclosed in the Registration Statement which has materially adversely
affected or which may materially adversely affect the business of the
Company; and (iii) the sale of the Shares by such Selling Stockholder
pursuant to this Agreement is not prompted by any adverse information
concerning the Company which is not set forth in the Registration Statement.
In order to document the Underwriters' compliance with the reporting
and withholding provisions of the Tax Equity and Fiscal Responsibility Act of
1982 with respect to the transactions herein contemplated, each of the
Selling Stockholders agrees to deliver to you prior to or at the Closing Date
a properly completed and executed United States Treasury Department Form W-9
(or other applicable form or statement specified by Treasury Department
regulations in lieu thereof).
Certificates in negotiable form representing the shares of Convertible
Participating Preferred Stock, par value $.01 per share, of the Company (the
"Convertible Preferred Stock") which, immediately prior to the consummation
of the transactions contemplated hereby, will convert into all of the Shares
to be sold by such Selling Stockholder, have been placed in custody under the
Custody Agreement, in the form heretofore furnished to you, duly executed and
delivered by such Selling Stockholder to the Custodian (as defined in the
Custody Agreement), and that such Selling Stockholder has duly executed and
delivered a Power-of-Attorney, in the form heretofore furnished to you,
appointing Elliott Balbert and Dennis Jolicoeur, and each of them, as such
Selling Stockholder's attorney-in-fact (the "Attorney-in-Fact") with
authority to execute and deliver this Agreement on behalf of such Selling
Stockholder, to determine (subject to the provisions of the Custody
Agreement) the purchase price to be paid by the Underwriters to such Selling
Stockholder as provided in Section 3 hereof, to authorize the delivery of the
Shares to be sold by such Selling Stockholder hereunder and otherwise to act
on behalf of the Selling
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Stockholder in connection with the transactions contemplated by this
Agreement and the Custody Agreement.
Each of the Selling Stockholders specifically agrees that the Shares
represented by the certificates held in custody for such Selling Stockholder
under the Custody Agreement are subject to the interests of the Underwriters
hereunder, and that the arrangements made by such Selling Stockholder for
such custody, and the appointment by such Selling Stockholder of the
Attorneys-in-Fact by the Power-of-Attorney, are to that extent irrevocable.
Each of the Selling Stockholders specifically agrees that the obligations of
such Selling Stockholder hereunder shall not be terminated by operation of
law, whether by the death or incapacity of such Selling Stockholder or, in
the case of an estate or trust, by the death or incapacity of any executor or
trustee or the termination of such estate or trust, or in the case of a
partnership or corporation, by the dissolution of such partnership or
corporation, or by the occurrence of any other event. If such Selling
Stockholder or any such executor or trustee should die or become
incapacitated, or if any such estate or trust should be dissolved, of if such
corporation or partnership should be dissolved, or if any other such event
should occur, before the delivery of the Shares hereunder, certificates
representing the Shares to be sold by such Selling Stockholder shall be
delivered by or on behalf of such Selling Stockholder in accordance with the
terms and conditions of this Agreement and of the Custody Agreement, and
actions taken by the Attorneys-in-Fact pursuant to the Powers-of-Attorney
shall be as valid as if such death, incapacity, termination, dissolution or
other event had not occurred, regardless of whether or not the Custodian, the
Attorneys-in-Fact, or any of them, shall have received notice of such death,
incapacity, termination, dissolution or other event.
3. Shares Subject to Sale. (a) On the basis of the representations,
warranties and agreements of the Company and the Selling Stockholders
contained herein, and subject to the terms and conditions of this Agreement,
(i) the Company agrees to issue and sell the Company Firm Shares to the
several Underwriters, (ii) each of the Selling Stockholders agrees, severally
and not jointly, to sell its respective Selling Stockholder Firm Shares to
the several Underwriters, and (iii) each of the Underwriters agrees,
severally and not jointly, to purchase from the Company and the Selling
Stockholders, at a purchase price per share of $___, the respective number of
Firm Shares (to be adjusted by you so as to eliminate fractional shares)
determined by multiplying the aggregate number of Firm Shares by a fraction,
the numerator of which is the aggregate number of Firm Shares to be purchased
by such Underwriter as set forth opposite the name of such Underwriter in
Schedule I hereto and the denominator of which is the aggregate number of
Firm Shares to be purchased by all the Underwriters and (b) in the event and
to the extent that the Underwriters shall exercise the election to purchase
Optional Shares as provided below, (i) the Company agrees to issue and sell
the Company Optional Shares to the several Underwriters, (ii) each of the
Selling Stockholders agree to sell its respective Selling Stockholder
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Optional Shares to the several Underwriters, and (iii) each of the
Underwriters agrees, severally and not jointly, to purchase from the Company
and the Selling Stockholders, at the purchase price per share set forth in
clause (a) of this Section 3, that portion of the number of Optional Shares
as to which such election shall have been exercised (to be adjusted by you so
as to eliminate fractional shares) determined by multiplying such number of
Optional Shares by a fraction the numerator of which is the maximum number of
Optional Shares which such Underwriter is entitled to purchase as set forth
opposite the name of such Underwriter in Schedule I hereto and the
denominator of which is the maximum number of the Optional Shares which all
of the Underwriters are entitled to purchase hereunder.
In addition, subject to the terms and conditions of this Agreement, the
Company and the Selling Stockholders, as and to the extent indicated in
Schedule II hereto, each hereby grant, severally and not jointly, to the
Underwriters the right to purchase at their election up to 295,500 Company
Optional Shares and 295,500 Selling Stockholder Optional Shares,
respectively, at the purchase price per share set forth in the paragraph
above, for the sole purpose of covering over-allotments in the sale of the
Firm Shares. Any such election to purchase Optional Shares shall be made in
proportion to the maximum number of Optional Shares to be sold by the Company
and each of the Selling Stockholders. Any such election to purchase Optional
Shares may be exercised by written notice from you to the Company and the
Selling Stockholders, given within a period of 30 calendar days after the
date of this Agreement and setting forth the aggregate number of Optional
Shares to be purchased and the date on which such Optional Shares are to be
delivered, as determined by you but in no event earlier than the First Time
of Delivery (as defined in Section 5 hereof) or, unless you, the Company and
the Selling Stockholders otherwise agree in writing, earlier than two or
later than three business days after the date of such notice.
4. Offering. Upon the authorization by you of the release of the Firm
Shares, the several Underwriters propose to offer the Firm Shares for sale
upon the terms and conditions set forth in the Prospectus.
5. Closing. Certificates in definitive form for the Shares to be
purchased by each Underwriter hereunder, and in such denominations and
registered in such names as Adams, Harkness & Hill, Inc. may request upon at
least forty-eight hours' prior notice to the Company and the
Attorneys-in-Fact, shall be delivered by or on behalf of the Company and each
of the Selling Stockholders to you for the account of such Underwriter,
against payment by such Underwriter or on its behalf of the purchase price
therefor by wire transfer of same day funds all at the office of Adams,
Harkness & Hill, Inc., 60 State Street, Boston, Massachusetts 02109. The time
and date of such delivery and payment shall be, with respect to the Firm
Shares, 9:30 a.m., Boston time, on ________, 1998 or such other time and date
as you and the Company may agree upon in writing, and, with respect to the
Optional
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<PAGE>
Shares, 9:30 a.m., Boston time, on the date specified by you in the written
notice given by you of the Underwriters' election to purchase such Optional
Shares, or at such other time and date as you and the Company may agree upon
in writing. Such time and date for delivery of the Firm Shares is herein
called the "First Time of Delivery," such time and date for delivery of the
Optional Shares, if not the First Time of Delivery, is herein called the
"Second Time of Delivery," and each such time and date for delivery is herein
called a "Time of Delivery." Such certificates will be made available for
checking and packaging at least twenty four hours prior to each Time of
Delivery at such location as you may specify.
6. Covenants of the Company. The Company agrees with each of the
Underwriters:
(a) To prepare the Prospectus in a form approved by you and to
file such Prospectus pursuant to Rule 424(b) under the Act not later than
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier
time as may be required by Rule 430A(a)(3) under the Act; to make no further
amendment or any supplement to the Registration Statement or Prospectus of
which you shall not have been previously advised and furnished with a copy or
to which you shall have reasonably objected in writing promptly after
reasonable notice thereof; to advise you, promptly after it receives notice
thereof, of the time when the Registration Statement, or any amendment
thereto, has been filed or becomes effective or any supplement to the
Prospectus or any amended Prospectus has been filed and to furnish you copies
thereof; to advise you, promptly after it receives notice thereof, of the
issuance by the Commission of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or Prospectus, of the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding for any such
purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or Prospectus or for additional
information; and, in the event of the issuance of any stop order or of any
order preventing or suspending the use of any Preliminary Prospectus or
prospectus or suspending any such qualification, to use promptly its best
efforts to obtain its withdrawal;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with
such laws so as to permit the continuance of sales and dealings therein in
such jurisdictions for as long as may be necessary to complete the
distribution of the Shares, provided that in connection therewith the Company
shall not be required to qualify as a foreign corporation or to file a
general consent to service of process in any jurisdiction;
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(c) To furnish the Underwriters with copies of the Prospectus in
such quantities as you may from time to time reasonably request, and, if the
delivery of a prospectus is required at any time prior to the expiration of
nine months after the time of issuance of the Prospectus in connection with
the offering or sale of the Shares and if at such time any events shall have
occurred as a result of which the Prospectus as then amended or supplemented
would include an untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in light of
the circumstances under which they were made when such Prospectus is
delivered, not misleading, or, if for any other reason it shall be necessary
during such same period to amend or supplement the Prospectus in order to
comply with the Act, to notify you and upon your request to prepare and
furnish without charge to each Underwriter and to any dealer in securities as
many copies as you may from time to time reasonably request of an amended
Prospectus or a supplement to the Prospectus which will correct such
statement or omission or effect such compliance, and in case any Underwriter
is required to deliver a prospectus in connection with sales of any of the
Shares at any time nine months or more after the time of issue of the
Prospectus, upon your request but at the expense of such Underwriter, to
prepare and deliver to such Underwriter as many copies as you may request of
an amended or supplemented Prospectus complying with Section 10(a)(3) of the
Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than fifteen months after the
effective date of the Registration Statement (as defined in Rule 158(c)), an
earning statement of the Company and its subsidiaries (which need not be
audited) complying with Section 11(a) of the Act and the rules and
regulations of the Commission thereunder;
(e) During the period beginning from the date hereof and
continuing to and including the date 180 days after the date of the
Prospectus, not to offer, sell, contract to sell or otherwise dispose of any
securities of the Company which are substantially similar to the Shares,
without your prior written consent other than (i) the sale of the Shares to
be sold by the Company hereunder, (ii) the Company's issuance of shares and
the award of options under its stock plans in amounts not in excess of the
amount shown as available for grant in the Prospectus, (iii) the Company's
issuance of shares of Common Stock and the Company's Redeemable Preferred
Stock, par value $.01 per share, upon the conversion of the outstanding
shares of the Convertible Preferred Stock in connection with the consummation
of the transactions contemplated hereby and by the Prospectus and (iv) the
Company's issuance of shares of Common Stock, with five business days prior
written notification to Adams, Harkness & Hill, Inc., in connection with the
acquisition by the Company of another company or entity, provided that the
terms of such issuance contractually prohibit the resale or other disposition
of such shares of Common Stock through the date 180 days after the date of
the Prospectus;
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(f) During a period beginning from the date hereof and continuing
to and including the date 180 days after the date of the Prospectus, not to
grant options to purchase shares of Common Stock at a price less than the
initial public offering price;
(g) To furnish to its stockholders as soon as practicable after
the end of each fiscal year an annual report (including a balance sheet and
statements of income, stockholders' equity and cash flow of the Company and
its consolidated subsidiaries certified by independent public accountants)
and, as soon as practicable after the end of each of the first three quarters
of each fiscal year (beginning with the fiscal quarter ending after the
effective date of the Registration Statement), to furnish or make available
to its stockholders (within the meaning of Rule 158(b) under the Act)
consolidated summary financial information of the Company and its
subsidiaries for such quarter in reasonable detail;
(h) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders of the Company
generally, and deliver to you (i) as soon as they are available, copies of
any reports and financial statements furnished to or filed with the
Commission, the Nasdaq National Market or any national securities exchange on
which any class of securities of the Company is listed; and (ii) such
additional information concerning the business and financial condition of the
Company as you may from time to time reasonably request (such financial
statements to be on a combined or consolidated basis to the extent the
accounts of the Company and its subsidiaries are combined or consolidated in
reports furnished to its stockholders generally or to the Commission);
(i) To use the net proceeds acquired by it from the sale of the
Shares in substantially the manner specified in the Prospectus under the
caption "Use of Proceeds" and in a manner such that the Company will not
become an "investment company" as that term is defined in the Investment
Company Act;
(j) Not to file with the Commission any registration statement on
Form S-8 relating to shares of its Common Stock prior to 90 days after the
effective date of the Registration Statement; and
(k) Not to accelerate the vesting of any option issued under any
stock option plan such that any such option may be exercised within 180 days
from the date of the Prospectus other than in accordance with its terms.
7. Covenants of the Selling Stockholders. Each of the Selling
Stockholders agrees to pay or cause to be paid all taxes, if any, on the
transfer and sale of the Shares to be sold by such Selling Stockholder
hereunder and the fees and expenses, if any, of counsel and accountants
retained by such Selling Stockholder.
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The Company agrees with such Selling Stockholders to pay all costs and
expenses incident to the performance of the obligations of the Selling
Stockholders under this Agreement (except as set forth above), including, but
not limited to, all expenses incident to the delivery of the certificates for
the Shares to be sold by the Selling Stockholders, the costs and expenses
incident to the preparation, printing and filing of the Registration
Statement (including all exhibits thereto), all Preliminary Prospectuses and
the Prospectus and any amendments or supplements thereto, the expenses of
qualifying the Shares to be sold by the Selling Stockholders under the state
securities or Blue Sky laws, all filing fees and the reasonable fees and
expenses of counsel for the Underwriters payable in connection with the
review of the offering of the Shares by the NASD, and the cost of furnishing
to the Underwriters the required copies of the Registration Statement and
Prospectus and any amendments or supplements thereto; provided that each
Selling Stockholder agrees to pay or cause to be paid his or its pro rata
share (based on the percentage which the number of Shares sold by such
Selling Stockholder bears to the total number of Shares sold) of all
underwriting discounts and commissions.
8. Expenses. The Company covenants and agrees with the several
Underwriters that the Company will pay or cause to be paid the following: (i)
the fees, disbursements and expenses of the Company's counsel and accountants
in connection with the registration of the Shares under the Act and all other
expenses incurred by it in connection with the preparation, printing and
filing of the Registration Statement, any Preliminary Prospectus and the
Prospectus and amendments and supplements thereto and the mailing and
delivering of copies thereof to the Underwriters and dealers; (ii) the cost
of printing or producing any Agreement among Underwriters, this Agreement,
the Blue Sky Memoranda and any other documents in connection with the
offering, purchase, sale and delivery of the Shares; (iii) all expenses in
connection with the qualification of the Shares for offering and sale under
state securities laws as provided in Section 6(b) hereof, including the fees
and disbursements of counsel for the Underwriters in connection with such
qualification and in connection with the Blue Sky survey; (iv) the filing fee
of the NASD; (v) the cost of preparing stock certificates; (vi) the cost and
charges of any transfer agent or registrar; and (vii) all other costs and
expenses incident to the performance of its obligations hereunder which are
not otherwise specifically provided for in this Section. It is understood,
however, that, except as provided in this Section, Section 10 and Section 13
hereof, the Underwriters will pay all of their own costs and expenses,
including the fees and disbursements of their counsel, stock transfer taxes
on resale of any of the Shares by them, and any advertising expenses
connected with any offers they may make.
9. Conditions of Underwriters' Obligations. The obligations of the
Underwriters hereunder, as to the Shares to be delivered at each Time of
Delivery, shall be subject, in their sole reasonable discretion, to the
condition that all representations and warranties and other statements of the
Company and each
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Selling Stockholder herein are, at and as of such Time of Delivery, true and
correct, the condition that the Company and each Selling Stockholder shall
each have performed all of their respective obligations hereunder theretofore
to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed for such
filing by the rules and regulations under the Act and in accordance with
Section 6(a) hereof; no stop order suspending the effectiveness of the
Registration Statement or any part thereof shall have been issued to the
Company and no proceeding for that purpose shall have been initiated or, to
the knowledge of the Company, threatened by the Commission; and all requests
for additional information on the part of the Commission shall have been
complied with to your reasonable satisfaction;
(b) Hale and Dorr LLP, counsel to the Underwriters, shall have
furnished to you such opinion or opinions, dated such Time of Delivery, with
respect to this Agreement, the Registration Statement, the Prospectus, and
other related matters as you may reasonably request, and such counsel shall
have received such papers and information as they may reasonably request to
enable them to pass upon such matters;
(c) Goodwin, Procter & Hoar LLP, counsel to the Company and the
Selling Stockholders, shall have furnished to you their written opinion,
dated such Time of Delivery, in form and substance reasonably satisfactory to
you, to the effect that:
(i) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of
Delaware, with corporate power and authority to own its properties
and conduct its business as described in the Registration Statement
and Prospectus;
(ii) The Company has an authorized capitalization as set forth
under the caption "Capitalization" in the Prospectus, and all of the
issued shares of capital stock of the Company (other than the
Shares) have been duly authorized and validly issued, are fully paid
and non-assessable, and, to the best of such counsel's knowledge,
were not issued in violation of or subject to any preemptive rights
or similar rights to subscribe for or purchase any securities which
have not been waived; the Shares have been duly authorized and when
issued and paid for as contemplated by this Agreement will be
validly issued, fully paid and non-assessable and, to the best of
such counsel's knowledge, will not have been issued in violation of
or subject to any preemptive or
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similar rights; and the Shares conform as to legal matters to the
description of the Common Stock contained in the Prospectus;
(iii) The Company has been duly qualified as a foreign
corporation for the transaction of business and is in good standing
under the laws of the jurisdictions listed on Annex A to the opinion
(such counsel being entitled to rely in respect of the opinion in
this clause upon certificates of public officials);
(iv) Each subsidiary of the Company listed on Annex B to the
opinion has been duly incorporated and is an existing corporation in
good standing under the laws of its jurisdiction of organization;
and all of the issued shares of capital stock of each such
subsidiary have been duly authorized and validly issued, are fully
paid and non-assessable, and are owned of record by the Company,
free and clear, to the best of such counsel's knowledge, of all
liens, encumbrances or claims except pledges pursuant to the Credit
Agreement (such counsel being entitled to rely in respect of the
opinion in this clause in respect of matters of fact upon
certificates of officers of the Company or its subsidiaries);
(v) Such counsel does not know of any litigation or any
governmental proceeding instituted or threatened against the Company
or its subsidiaries that would be required to be disclosed in the
Prospectus that is not so disclosed;
(vi) The Company has corporate power and authority to enter
into this Agreement and this Agreement has been duly authorized,
executed and delivered by the Company;
(vii) The issuance and sale of the Shares being delivered at
such Time of Delivery by the Company hereunder will not (A) result
in any violation of the provisions of the Certificate of
Incorporation or bylaws of the Company, (B) conflict with or result
in a breach or violation on the part of the Company or any
subsidiary of any of the terms or provisions of, or constitute a
default under, any agreement to which the Company or any of its
subsidiaries is a party or by which the Company or any of its
subsidiaries or their respective property to bound filed as an
exhibit to the Registration Statement, or (C) to the best of such
counsel's knowledge, result in a violation on the part of the
Company of any applicable Massachusetts or Federal statute or
regulation or the Delaware General Corporation Law;
(viii) To the best of such counsel's knowledge, no consent,
approval, authorization, order, registration or qualification of or
with
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any such court or governmental agency or body is required to be
obtained by the Company for the issue and sale of the Shares or the
consummation by the Company of the transactions contemplated by this
Agreement, except the registration of the Shares under the Act and
the rules and regulations thereunder and as may be required under
state securities or Blue Sky laws (as to which such counsel need
express no opinion) or the NASD (as to which such counsel need
express no opinion);
(ix) Such counsel does not know of any documents that are
required to be filed as exhibits to the Registration Statement and
are not so filed or of any documents that are required to be
summarized in the Registration Statement and the Prospectus and are
not so summarized;
(x) The statements under the captions ["Risk Factors -
AntiTakeover Provisions"; "Risk Factors - Shares Eligible for Future
Sale"; "Management - Employee Stock and other Benefit Plans";
"Certain Transactions"; "Description of Capital Stock"; and "Shares
Eligible for Future Sale"] in the Prospectus, insofar as such
statements constitute a summary of documents referred to therein or
matters of law, are accurate summaries and fairly and correctly
present, in all material respects, the information called for with
respect to such documents and matters (provided, however, that such
counsel may rely on representations of the Company with respect to
the factual matters contained in such statements);
(xi) Except as disclosed in the Prospectus, to the best of
such counsel's knowledge, the Company has not granted any rights,
warrants or options to acquire, instruments convertible into or
exchangeable or exercisable for, or entered into any commitments,
plans or arrangements to issue any shares of capital stock of the
Company or any security convertible units or exchangeable for
capital stock of the Company;
(xii) No holders of securities of the Company have rights
under the provisions of the Certificate of Incorporation or bylaws
of the Company or under any agreement filed as an exhibit to the
Registration Statement which have not been waived or satisfied to
the registration of shares of Common Stock or other securities
because of the filing of the Registration Statement by the Company
or the offering contemplated hereby;
(xiii) The Company is not an "investment company" or an
"affiliated person" of, or "promoter" or "principal underwriter"
for, an "investment company" as defined in the Investment Company
Act;
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(xiv) The Registration Statement and the Prospectus and any
further amendments and supplements thereto made by the Company prior
to such Time of Delivery (other than financial, statistical or
accounting data and related schedules therein, as to which such
counsel need express no opinion) appeared on their face to be
appropriately responsive in all material respects to the
requirements of the Act and the applicable rules and regulations
thereunder;
(xv) To the best of such counsel's knowledge, this Agreement,
the Power-of-Attorney and the Custody Agreement have been duly
authorized, executed and delivered by or on behalf of each of the
Selling Stockholders; each of the Power-of-Attorney and the Custody
Agreement is a valid and binding agreement of such Selling
Stockholder, enforceable in accordance with its terms except as such
enforceability may be limited by (i) applicable bankruptcy,
insolvency, moratorium, reorganization, fraudulent conveyance or
similar laws in effect which affect the enforcement of creditors
rights generally, (ii) general principles of equity, whether
considered in a proceeding at law or in equity and (iii) state or
federal securities laws or policies relating to the
non-enforceability of the indemnification or contribution provisions
contained therein; to the best of such counsel's knowledge, the
performance of this Agreement, the Power-of-Attorney and the Custody
Agreement and the consummation of the transactions therein
contemplated by each of the Selling Stockholders will not result in
the violation of the provisions of the Agreement of Limited
Partnership of such Selling Stockholder if such Selling Stockholder
is a partnership or any order, rule or regulation known to such
counsel of any Massachusetts or Federal court or governmental agency
or body having jurisdiction over such Selling Stockholder;
(xvi) To the best of such counsel's knowledge, each of the
Selling Stockholders has full right, power and authority to enter
into this Agreement and the Custody Agreement and to sell, transfer
and deliver the Shares to be sold by such Selling Stockholder;
immediately prior to the date hereof, such Selling Stockholder was
the record owner of the Shares to be sold by such Selling
Stockholder on the date hereof; each Underwriter that is a
"protected purchaser" within the meaning of Article 8 of the
Massachusetts Uniform Commercial Code (the "Code") will acquire,
upon payment for such Shares as provided in the Underwriting
Agreement, its interest in the Shares free of any adverse claim, as
defined in the Code.
Such counsel shall have also furnished to you a letter, dated such Time of
Delivery, that they have participated in the preparation of the Registration
Statement
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and Prospectus and have participated in discussions with your
representatives, those of counsel for the Underwriters, and those of the
Company and its accountants. On the basis of the information that such
counsel gained in the course of the performance of the services referred to
above, considered in the light of such counsel's understanding of the
applicable law and the experience such counsel has gained through its
practice under the Act, such counsel will confirm to you that, in such
counsel's opinion, nothing that came to such counsel's attention in the
course of such review has caused such counsel to believe that the
Registration Statement or any further amendment thereto made by the Company
prior to such Time of Delivery contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, or that, as of its
date, the Prospectus or any further amendment or supplement thereto made by
the Company prior to such Time of Delivery, contained any untrue statement of
a material fact or omitted to state any material fact necessary in order to
make the statements therein, in light of the circumstances under which they
were made, not misleading or that, as of such Time of Delivery, either the
Registration Statement or the Prospectus or any further amendment or
supplement thereto made by the Company prior to such Time of Delivery
contains an untrue statement of a material fact or omits to state a material
fact necessary to make the statements therein, in light of the circumstances
in which they were made, not misleading; and they do not know of any
amendment to the Registration Statement required to be filed.
Such counsel shall also include a statement in such letter as to the
matters set forth in this paragraph. The Registration Statement has become
effective under the Act. To the best of such counsel's knowledge, no stop
order suspending the effectiveness of the Registration Statement has been
issued by the Commission nor has any proceeding been instituted or
contemplated for that purpose under the Act. The Prospectus has been filed
with the Commission pursuant to Rule 424(b) of the Rules and Regulations
under the Act within the time period required thereby.
Such letter may also state the limitations inherent in the independent
verification of factual matters and the character of determinations involved
in the registration process are such, however, that such counsel does not
assume any responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the Prospectus except
for those made under the captions ["Risk Factors -- Anti-Takeover Provisions,"
"Management --Employee Stock and Other Benefit Plans," "Certain Transactions,"
"Description of Capital Stock" and "Shares Eligible for Future Sale"] in the
Prospectus, insofar as they describe provisions, therein described, of documents
governed by the Delaware General Corporation Law or of United States Federal tax
law. Also, such counsel does not express any opinion or belief as to (i) the
statements in the Registration Statement or the Prospectus made under the
captions "Risk Factors -- Government Regulation," "Risk Factors -- Intellectual
Property Protection," "Business -- Regulatory
Matters" and
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<PAGE>
"Business -- Trademarks and Patents," (ii) any statement or claim in the
Registration Statement or the Prospectus with respect to the use or intended
use of the Company's products, and (iii) the financial statements, other
financial, statistical or accounting data and related schedules contained in
the Registration Statement or the Prospectus.
(e) Gronek & Armstrong, regulatory counsel to the Company, shall
have furnished to you their written opinion, dated such Time of Delivery, in
form and substance satisfactory to you, to the effect that:
(i) The statements under the captions ["Risk Factors
Government Regulation"; and "Business - Government Regulation"] in
the Prospectus, insofar as such statements constitute a summary of
documents referred to therein or matters of law, are accurate
summaries and fairly and correctly present, in all material
respects, the information called for with respect to such documents
and matters (provided, however, that such counsel may rely on
representations of the Company with respect to the factual matters
contained in such statements and provided, further, that such
counsel shall state that nothing has come to the attention of such
counsel which leads them to believe that such representations are
not true and correct in all material respects); and
(ii) Such counsel has no reason to believe that, with respect
only to the portions of the Registration Statement and Prospectus
set forth in clause (i) of this subsection (e), as of its effective
date, the Registration Statement or any further amendment made
thereto by the Company prior to such Time of Delivery contained an
untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the
statements therein not misleading or that, as of its date, the
Prospectus or any further amendment or supplement thereto made by
the Company prior to such Time of Delivery contained an untrue
statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading or that, as of
such Time of Delivery, either the Registration Statement or the
Prospectus or any further amendment or supplement thereto made by
the Company prior to such Time of Delivery contains an untrue
statement of a material fact, or omits to state a material fact
necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading.
(f) Abelman, Frayne & Schwab, intellectual property counsel to
the Company, shall have furnished to you their written opinion, dated such
Time of Delivery, in form and substance satisfactory to you, to the effect
that:
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(i) Such counsel is familiar with the technology used by the
Company and its subsidiaries in their businesses and the manner of
its use thereof and has read the Registration Statement and the
Prospectus, including particularly the portions of the Registration
Statement and the Prospectus referring to trademarks, trade names,
patents, mask works, copyrights, licenses, trade secrets or other
intellectual property rights;
(ii) Such counsel has no reason to believe that the
Registration Statement or the Prospectus (A) contains any untrue
statement of a material fact with respect to trademarks, trade
names, patents, mask works, copyrights, licenses, trade secrets or
other intellectual property rights owned or used by the Company or
any of its subsidiaries, or the manner of its use thereof, or any
allegation on the part of any person that the Company or any of its
subsidiaries is infringing any trademarks, trade names, patent
rights, mask works, copyrights, licenses, trade secrets or other
intellectual property rights of any such person or (B) omits to
state any material fact relating to trademarks, trade names,
patents, mask works, copyrights, license, trade secrets or other
intellectual property rights owned or used by the Company or any of
its subsidiaries, or the manner of its use thereof, or any
allegation of which such counsel have knowledge, that is required to
be stated in the Registration Statement or the Prospectus or is
necessary to make the statements therein not misleading;
(iii) To the best of such counsel's knowledge, there are no
adversarial legal or governmental proceedings pending relating to
trademarks, trade names, patent rights, mask works, copyrights,
licenses, trade secrets or other intellectual property rights of the
Company or any of its subsidiaries, and to the best of such
counsel's knowledge no such adversarial proceedings are threatened
or contemplated by governmental authorities or others;
(iv) Such counsel does not know of any contracts or other
documents relating to the Company's or any of its subsidiaries'
trademarks, trade names, patents, mask works, copyrights, licenses,
trade secrets or other intellectual property rights of a character
required to be filed as an exhibit to the Registration Statement or
required to be described in the Registration Statement or the
Prospectus that are not filed or described as required;
(v) To the best of such counsel's knowledge, neither the
Company nor any of its subsidiaries is infringing or otherwise
violating any trademarks, trade names, patents, mask works,
copyrights, licenses, trade secrets or other intellectual property
rights of others, and to the
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best of such counsel's knowledge there are no infringements by any
of the Company's or any of its subsidiaries' trademarks, trade
names, patents, mask works, copyrights, licenses, trade secrets or
other intellectual property rights which in the judgment of such
counsel could affect materially the use thereof by the Company or
any of its subsidiaries; and
(vi) To the best of such counsel's knowledge, the Company or
one of its subsidiaries owns or possesses sufficient licenses, or
other rights to use all trademarks, trade names, patents, mask
works, copyrights, licenses, trade secrets or other intellectual
property rights necessary conduct the business now being or proposed
to be conducted by the Company and its subsidiaries as described in
the Prospectus.
(g) At 10:00 a.m., Boston time, on the effective date of the
Registration Statement and the effective date of the most recently filed
post-effective amendment to the Registration Statement and also at each Time
of Delivery, Ernst & Young LLP and Farber & Hass shall each have furnished to
you a letter or letters, dated the respective date of delivery thereof, in
form and substance satisfactory to you, to the effect set forth in Annex I
hereto;
(h) (i) Neither the Company nor any of its subsidiaries have
sustained since the date of the latest audited financial statements included
in the Prospectus any loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance, or
from any labor dispute or court or governmental action, order or decree,
otherwise than as set forth or contemplated in the Prospectus, and (ii) since
the respective dates as of which information is given in the Prospectus there
shall not have been any change in the capital stock or long-term debt of the
Company or any change, or any development involving a prospective change, in
or affecting the business, assets, management, financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries, otherwise than as set forth or contemplated in the Prospectus,
the effect of which, in any such case described in clause (i) or (ii), is in
your judgment so material and adverse as to make it impracticable or
inadvisable to proceed with the public offering or the delivery of the Shares
being delivered at such Time of Delivery on the terms and in the manner
contemplated in the Prospectus;
(i) On or after the date hereof there shall not have occurred any
of the following: (i) additional material governmental restrictions, not in
force and effect on the date hereof, shall have been imposed upon trading in
securities generally or minimum or maximum prices shall have been generally
established on the New York Stock Exchange or on the American Stock Exchange
or in the over the counter market by the NASD, or trading in securities
generally shall have been suspended on either such Exchange or in the over
the counter market by the NASD, or a general banking
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<PAGE>
moratorium shall have been established by federal or New York authorities,
(ii) an outbreak of major hostilities or other national or international
calamity or any substantial change in political, financial or economic
conditions shall have occurred or shall have accelerated or escalated to such
an extent, as, in the judgment of the Representatives, to affect adversely
the marketability of the Shares, or (iii) there shall be any action, suit or
proceeding pending or threatened, or there shall have been any development or
prospective development involving particularly the business or properties or
securities of the Company or any of its subsidiaries or the transactions
contemplated by this Agreement, which, in the judgment of the
Representatives, may materially and adversely affect the Company's business
or earnings and make it impracticable or inadvisable to offer or sell the
Shares;
(j) The Shares to be sold by the Company at such Time of Delivery
shall have been accepted for quotation, subject to notice of issuance, on the
Nasdaq National Market System; and
(k) Each director, executive officer and stockholder holding the
Company's capital stock and holder of options to purchase the Company's
capital stock shall have executed and delivered to you agreements in which
such holder undertakes not to, directly or indirectly, offer, sell, assign,
transfer, encumber, contract to sell, grant an option to purchase, make a
distribution of, or otherwise dispose of, any shares of Common Stock or any
securities convertible into or exchangeable for, or any rights to purchase or
acquire, shares of Common Stock held by such person, acquired by such person
after the date hereof or which may be deemed to be beneficially owned (as
defined in the rules and regulations of the Commission) by such person, for a
period of 180 days following the date of the Prospectus, other than (i) with
the prior written consent of Adams Harkness & Hill, Inc. or (ii) pursuant to
a bona fide gift to a person or entity who agrees in writing to be bound by
the provisions of the agreements set forth in this paragraph (k); and
(l) The Company and each Selling Stockholder shall have furnished
or caused to be furnished to you at such Time of Delivery certificates of
officers of the Company and of each Selling Stockholder, respectively,
satisfactory to you, as to the accuracy of the representations and warranties
of the Company and each of the Selling Stockholders, respectively, herein at
and as of such Time of Delivery, as to the performance by the Company and
each of the Selling Stockholders of all of their obligations hereunder to be
performed at or prior to such Time of Delivery, and as to such other matters
as you may reasonably request and the Company shall have furnished or caused
to be furnished certificates as to the matters set forth in subsections (a)
and (h) of this Section, and as to such other matters as you may reasonably
request.
10. Indemnification and Contribution. (a) The Company agrees and each
of the Selling Stockholders, severally and not jointly, agrees to indemnify
and hold
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harmless each Underwriter and each person, if any, who controls such
Underwriter within the meaning of Section 15 of the Act or Section 20(a) of
the Exchange Act (each, a "Company Indemnified Party") against any losses,
claims, damages or liabilities, joint or several, to which such Company
Indemnified Party may become subject, under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances in which they
were made, not misleading, and will reimburse any Company Indemnified Party
for any legal or other expenses reasonably incurred by such Company
Indemnified Party in connection with investigating or defending any such
action or claim as such expenses are incurred; provided, however, that the
Company and the Selling Stockholders shall not be liable in any such case to
the extent that any such loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration
Statement or the Prospectus or any such amendment or supplement in reliance
upon and in conformity with written information furnished to the Company by
or on behalf of any Underwriter expressly for use therein; and, provided
further, that the liability of each of the Selling Stockholders under the
indemnity agreement in this Section 8 shall not exceed the total initial
public offering price of the Shares sold by such Selling Stockholder under
this Agreement, less underwriters' discounts. The indemnity contained in this
Section 10(a) with respect to any Preliminary Prospectus shall not inure to
the benefit of any Underwriter from whom the person asserting such loss,
claim, damage or liability purchased the Shares which are subject thereof (or
to the benefit of any person controlling such Underwriter) if at or prior to
the written confirmation of the sale of such Shares a copy of the Prospectus
(or the Prospectus as amended or supplemented) was not sent or delivered to
such person and the untrue statement or omission of a material fact contained
in the Preliminary Prospectus was corrected in the Prospectus (or the
Prospectus as amended or supplemented) unless the failure is the result of
non-compliance by the Company.
(b) Each Underwriter will indemnify and hold harmless the
Company, each Selling Stockholder, each of the directors of the Company, each
of the officers of the Company who shall have signed the Registration
Statement, and each other person, if any, who controls the Company or any
Selling Stockholder within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act (each, an "Underwriter Indemnified Party") against
any losses, claims, damages or liabilities to which any Underwriter
Indemnified Party may become subject, under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in any Preliminary Prospectus, the
Registration
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<PAGE>
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made,
not misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission
was made in any Preliminary Prospectus, the Registration Statement or the
Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by or on behalf
of such Underwriter expressly for use therein; and will reimburse any
Underwriter Indemnified Party for any legal or other expenses reasonably
incurred by it or them in connection with investigating or defending any such
action or claim as such expenses are incurred.
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against
the indemnifying party under such subsection, notify the indemnifying party
in writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have
to any indemnified party otherwise than under such subsection. In case any
such action shall be brought against any indemnified party and it shall
notify the indemnifying party of the commencement thereof, the indemnifying
party shall be entitled to participate therein and, to the extent that it
shall wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party and, after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party under such
subsection for any legal expenses of other counsel or any other expenses, in
each case subsequently incurred by such indemnified party, in connection with
the defense thereof other than reasonable costs of investigation. No
indemnifying party shall, without the written consent of the indemnified
party, effect the settlement or compromise of, or consent to the entry of any
judgment with respect to, any pending or threatened action or claim in
respect of which indemnification or contribution may be sought hereunder
(whether or not the indemnified party is an actual or potential party to such
action or claim) unless such settlement, compromise or judgment (i) includes
an unconditional release of the indemnified party from all liability arising
out of such action or claim and (ii) does not include a statement as to or an
admission of fault, culpability or a failure to act, by or on behalf of any
indemnified party.
(d) If the indemnification provided for in this Section 10 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of
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such losses, claims, damages or liabilities (or actions in respect thereof)
in such proportion as is appropriate to reflect the relative benefits
received by the Company and the Selling Stockholders on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law or if the indemnified party failed to give the notice required
under subsection (c) above, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as
is appropriate to reflect not only such relative benefits but also the
relative fault of the Company and the Selling Stockholders on the one hand
and the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Stockholders on the one hand and the Underwriters on the other shall be
deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company and the Selling
Stockholders, respectively, bear to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the
table on the cover page of the Prospectus. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company or the Selling
Stockholders on the one hand or the Underwriters on the other and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company, the Selling
Stockholders and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this subsection (d) were determined by
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to above in this subsection
(d). The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions in respect thereof)
referred to above in this subsection (d) shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at
which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission and no Selling
Stockholder shall be required to contribute any amount in excess of the net
proceeds received by such Selling Stockholder with respect to the Shares sold
by such Selling Stockholder. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (d) to
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contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) The obligations of the Company and the Selling Stockholders
under this Section 10 shall be in addition to any liability which the Company
and the Selling Stockholders may otherwise have and shall extend, upon the
same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 10 shall be in addition to any liability
which the respective Underwriters may otherwise have and shall extend, upon
the same terms and conditions, to each officer and director of the Company
and to each person, if any, who controls the Company within the meaning of
the Act.
11. Termination. (a) If any Underwriter shall default in its obligation
to purchase the Shares which it has agreed to purchase hereunder at a Time of
Delivery, you may in your discretion arrange for you or another party or
other parties to purchase such Shares on the terms contained herein. If
within thirty-six hours after such default by any Underwriter you do not
arrange for the purchase of such Shares, then the Company and the Selling
Stockholders shall be entitled to a further period of thirty-six hours within
which to procure another party or other parties satisfactory to you to
purchase such Shares on such terms. In the event that, within the respective
prescribed periods, you notify the Company and the Selling Stockholders that
you have so arranged for the purchase of such Shares, or the Company and the
Selling Stockholders notify you that they have so arranged for the purchase
of such Shares, you or the Company and the Selling Stockholders shall have
the right to postpone such Time of Delivery for a period of not more than
seven days, in order to effect whatever changes may thereby be made necessary
in the Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees to file promptly any amendments to the
Registration Statement or the Prospectus which in your opinion may thereby be
made necessary. The term "Underwriter" as used in this Agreement shall
include any person substituted under this Section with like effect as if such
person had originally been a party to this Agreement with respect to such
Shares.
(b) If, after giving effect to any arrangements for the purchase
of the Shares of a defaulting Underwriter or Underwriters by you and the
Company as provided in subsection (a) above, the aggregate number of such
Shares which remains unpurchased does not exceed one-tenth of the aggregate
number of all the Shares to be purchased at such Time of Delivery, then the
Company shall have the right to require each non-defaulting Underwriter to
purchase the number of Shares which such Underwriter agreed to purchase
hereunder at such Time of Delivery and, in addition, to require each
non-defaulting Underwriter to purchase its pro rata share (based on the
number of Shares which such Underwriter agreed to purchase hereunder) of the
Shares of such defaulting Underwriter or Underwriters for which
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such arrangements have not been made; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the purchase
of the Shares of a defaulting Underwriter or Underwriters by you and the
Company as provided in subsection (a) above, the aggregate number of such
Shares which remains unpurchased exceeds one-tenth of the aggregate number of
all the Shares to be purchased at such Time of Delivery, or if the Company
shall not exercise the right described in subsection (b) above to require
non-defaulting Underwriters to purchase Shares of a defaulting Underwriter or
Underwriters, then this Agreement (or, with respect to the Second Time of
Delivery, the obligations of the Underwriters to purchase and of the Company
and the Selling Stockholders to sell the Optional Shares) shall thereupon
terminate, without liability on the part of any non-defaulting Underwriter,
the Company or any Selling Stockholder, except for the expenses to be borne
by the Company and the Underwriters as provided in Section 8 hereof and the
indemnity and contribution agreements in Section 10 hereof; but nothing
herein shall relieve a defaulting Underwriter from liability for its default.
12. Survival. The respective indemnities, agreements, representations,
warranties and other statements of the Company, each Selling Stockholder and
the several Underwriters, as set forth in this Agreement or made by or on
behalf of them, respectively, pursuant to this Agreement, shall remain in
full force and effect, regardless of any investigation (or any statement as
to the results thereof) made by or on behalf of any Underwriter or any
controlling person of any Underwriter, or the Company or any Selling
Stockholder, or any officer or director or controlling person of the Company
or any Selling Stockholder, and shall survive delivery of and payment for the
Shares.
13. Expenses of Termination. If this Agreement shall be terminated
pursuant to Section 11 hereof, the Company shall not then be under any
liability to any Underwriter except as provided in Section 8 and Section 10
hereof; but, if for any other reason this Agreement is terminated, the
Company will reimburse the Underwriters through you for all out-of-pocket
expenses approved in writing by you, including fees and disbursements of
counsel, reasonably incurred by the Underwriters in making preparations for
the purchase, sale and delivery of the Shares not so delivered, but the
Company shall then be under no further liability to any Underwriter in
respect of the Shares not so delivered except as provided in Section 8 and
Section 10 hereof.
14. Notice. In all dealings hereunder, you shall act on behalf of each
of the Underwriters, and the parties hereto shall be entitled to act and rely
upon any statement, request, notice or agreement on behalf of any Underwriter
made or given by you jointly or by Adams, Harkness & Hill, Inc. on behalf of
you as the Representatives; and in dealing with any Selling Stockholder
hereunder, you and the
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Company shall be entitled to act and rely upon any statement, request, notice
or agreement on behalf of such Selling Stockholder made or given by any or
all of the Attorneys-in-Fact for such Selling Stockholder.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex
or facsimile transmission to you as the Representatives in care of Adams,
Harkness & Hill, Inc., 60 State Street, Boston, MA 02109, Attention: Joseph
W. Hammer and if to the Company shall be delivered or sent by mail, telex or
facsimile transmission to the address of the Company set forth in the
Registration Statement, Attention: President, with a copy to John R.
LeClaire, P.C., Goodwin, Procter & Hoar LLP, Exchange Place, Boston, MA
02109; and if to any Selling Stockholder shall be delivered or sent by mail,
telex or facsimile transmission to the Selling Stockholder at the address of
such Selling Stockholder set forth in Schedule II hereto; provided, however,
that any notice to an Underwriter pursuant to Section 10(d) hereof shall be
delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its Underwriter's Questionnaire or
telex constituting such Questionnaire, which address will be supplied to the
Company by you on request. Any such statements, requests, notices or
agreements shall take effect upon receipt thereof.
14. Miscellaneous. (a) This Agreement shall be binding upon, and inure
solely to the benefit of, the Underwriters, the Company and the Selling
Stockholders and, to the extent provided in Sections 10 and 12 hereof, the
officers and directors of the Company and each person who controls the
Company, any Selling Stockholder or any Underwriter, and their respective
heirs, executors, administrators, successors and assigns, and no other person
shall acquire or have any right under or by virtue of this Agreement. No
purchaser of any of the Shares from any Underwriter shall be deemed a
successor or assign by reason merely of such purchase.
(b) Time shall be of the essence of this Agreement. As used
herein, the term "business day" shall mean any day when the Commission's
office in Washington, D.C. is open for business.
(c) This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts.
(d) This Agreement may be executed by any one or more of the
parties hereto in any number of counterparts, each of which shall be deemed
to be an original, but all such counterparts shall together constitute one
and the same instrument.
If the foregoing is in accordance with your understanding, please sign
and return to us six counterparts hereof, and upon the acceptance hereof by
you, on behalf of each of the Underwriters, this letter and such acceptance
hereof shall
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<PAGE>
constitute a binding agreement among each of the Underwriters, the Company
and the Selling Stockholders. It is understood that your acceptance of this
letter on behalf of each of the Underwriters is pursuant to the authority set
forth in a form of Agreement among Underwriters, the form of which shall be
submitted to the Company and the Selling Stockholders for examination, upon
request, but without warranty on your part as to the authority of the signors
thereof.
[Remainder of page intentionally left blank]
-33-
<PAGE>
Any person executing and delivering this Agreement as Attorney-in-Fact
for the Selling Stockholders represents by so doing that he has been duly
appointed as Attorney-in-Fact by each Selling Stockholder pursuant to a
validly existing and binding Power-of-Attorney which authorizes such
Attorney-in-Fact to take such action.
Very truly yours,
NATROL, INC.
By:___________________________
Name:_________________________
Title:________________________
SELLING STOCKHOLDERS
(Names in Schedule II to the Agreement)
By:___________________________
Name:_________________________
Title: Attorney-in-Fact
Accepted as of the date
hereof at Boston, Massachusetts
ADAMS, HARKNESS & HILL, INC.
NATIONSBANC MONTGOMERY SECURITIES LLC
PIPER JAFFRAY INC.
By:______________________________
(Adams, Harkness & Hill, Inc.
On behalf of each of
the Underwriters)
-34-
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of
Optional
Total Shares to
Number of Purchased if
Firm Maximum
Shares to be Option
Purchased Exercised
--------- ---------
<S> <C> <C>
Adams, Harkness & Hill, Inc.........
NationsBanc Montgomery
Securities LLC....................
Piper Jaffray Inc...................
----------- -------------
TOTAL............................... 3,940,000 591,000
----------- -------------
----------- -------------
</TABLE>
-35-
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
Total Total Number
Number of of Optional
Firm Shares Shares to
to be Sold be Sold
---------- -------
<S> <C> <C>
The Company 3,200,000 295,500
The Selling Stockholders:
Elliott Balbert ---- 295,500
c/o Natrol, Inc.
21411 Prairie Street
Chatsworth, CA 91311
Norman Kahn 200,000 ----
c/o Natrol, Inc.
21411 Prairie Street
Chatsworth, CA 91311
Advent VII, L.P. [_________]
Advent Atlantic and [_________]
Pacific III L.P.
Advent New York L.P. [_________]
TA Venture Investors [_________]
Limited Partnership
c/o TA Associates, Inc.
High Street Tower
Suite 2500
125 High Street
Boston, MA 02110-2720
Attn: P. Andrews McLane ----
----------- ------------
TOTAL............................ 3,940,000 591,000
----------- ------------
----------- ------------
</TABLE>
-36-
<PAGE>
ANNEX I
Pursuant to Section 9(g) of the Underwriting Agreement, Ernst & Young
LLP, and Farber & Hass shall furnish letters to the Underwriters to the
effect that:
(i) They are independent certified public accountants with respect to
the Company and its subsidiaries within the meaning of the Act and the
applicable published rules and regulations thereunder;
(ii) In their opinion, the consolidated financial statements and any
supplementary financial information and schedules (and, if applicable,
prospective financial statements and/or pro forma financial information)
examined by them and included in the Prospectus or the Registration Statement
comply as to form in all material respects with the applicable accounting
requirements of the Act and the related published rules and regulations
thereunder; and, if applicable, they have made a review in accordance with
standards established by the American Institute of Certified Public
Accountants of the unaudited consolidated interim financial statements,
selected consolidated financial data, pro forma financial information,
prospective financial statements and/or condensed financial statements
derived from audited consolidated financial statements of the Company for the
periods specified in such letter, as indicated in their reports thereon,
copies of which have been furnished to the representatives of the
Underwriters (the "Representatives");
(iii) The unaudited selected financial information with respect to the
consolidated results of operations and financial position of the Company for
the five most recent fiscal years included in the Prospectus agrees with the
corresponding amounts (after restatements where applicable) in the audited
consolidated financial statements for such five fiscal years;
(iv) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited consolidated financial statements
and other information referred to below, a reading of the latest available
interim consolidated financial statements of the Company and its
subsidiaries, inspection of the minute books of the Company and its
subsidiaries since the date of the latest audited consolidated financial
statements included in the Prospectus, inquiries of officials of the Company
and its subsidiaries responsible for financial and accounting matters and
such other inquiries and procedures as may be specified in such letter,
nothing came to their attention that caused them to believe that:
(A) the unaudited consolidated statements of income, consolidated
balance sheets and consolidated statements of cash flows included in the
-37-
<PAGE>
Prospectus do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the related published
rules and regulations thereunder, or are not in conformity with generally
accepted accounting principles applied on a basis substantially consistent
with the basis for the audited consolidated statements of income,
consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus;
(B) any other unaudited consolidated income statement data and
consolidated balance sheet items included in the Prospectus do not agree
with the corresponding items in the unaudited consolidated financial
statements from which such data and items were derived, and any such
unaudited data and items were not determined on a basis substantially
consistent with the basis for the corresponding amounts in the audited
consolidated financial statements included in the Prospectus;
(C) the unaudited consolidated financial statements which were not
included in the Prospectus but from which were derived any unaudited
condensed consolidated financial statements referred to in Clause (A) and
any unaudited consolidated income statement data and consolidated balance
sheet items included in the Prospectus and referred to in Clause (B) were
not determined on a basis substantially consistent with the basis for the
audited consolidated financial statements included in the Prospectus;
(D) any unaudited pro forma consolidated condensed financial
statements included in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of the Act
and the published rules and regulations thereunder or the pro forma
adjustments have not been properly applied to the historical amounts in
the compilation of those statements;
(E) as of a specified date not more than five days prior to the date
of such letter, there have been any changes in the consolidated capital
stock (other than issuances of capital stock upon exercise of options and
stock appreciation rights, upon earn-outs of performance shares and upon
conversions of convertible securities, in each case which were outstanding
on the date of the latest financial statements included in the Prospectus)
or any increase in the combined long-term debt of the Company and its
subsidiaries, or any decreases in combined net current assets or net
assets or other items specified by the Representatives, or any increases
in any items specified by the Representatives, in each case as compared
with amounts shown in the latest balance sheet
included in the Prospectus, except in each case for changes, increases or
decreases which the Prospectus discloses have occurred or may occur or
which are described in such letter; and
-38-
<PAGE>
(F) for the period from the date of the latest financial statements
included in the Prospectus to the specified date referred to in Clause (E)
there were any decreases in consolidated net revenues or operating profit
or the total or per share amounts of consolidated net income or other
items specified by the Representatives, or any increases in any items
specified by the Representatives, in each case as compared with the
comparable period of the preceding year and with any other period of
corresponding length specified by the Representatives, except in each case
for decreases or increases which the Prospectus discloses have occurred or
may occur or which are described in such letter; and
(v) In addition to the examination referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of minute
books, inquiries and other procedures referred to in paragraphs (iii) and
(iv) above, they have carried out certain specified procedures, not
constituting an examination in accordance with generally accepted auditing
standards, with respect to certain amounts, percentages and financial
information specified by the representatives, which are derived from the
general accounting records of the Company and its subsidiaries, which appear
in the Prospectus, or in Part II of, or in exhibits and schedules to, the
Registration Statement specified by the Representatives, and have compared
certain of such amounts, percentages and financial information with the
accounting records of the Company and its subsidiaries and have found them to
be in agreement.
-39-
<PAGE>
Exhibit 3.2
CERTIFICATE OF AMENDMENT
TO THE
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
NATROL, INC.
Natrol, Inc., a corporation organized and existing under the laws of the
State of Delaware (the "Corporation"), pursuant to Section 242 of the General
Corporation Law of the State of Delaware (the "DGCL"), DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation (the "Board"), in
accordance with the provisions of Section 141(f) of the DGCL, duly adopted
resolutions by unanimous written consent dated June 15, 1998 in accordance with
Section 242 of the DGCL (i) proposing an amendment to the Amended and Restated
Certificate of Incorporation of the Corporation, (ii) declaring such amendment
to be advisable and in the best interests of the Corporation, and (iii)
directing that such amendment be submitted to and be considered by the
stockholders of the Corporation entitled to vote thereon for approval by the
affirmative vote of such stockholders. Such resolution proposed to amend the
Amended and Restated Certificate of Incorporation as follows:
(1) Article IV of the Amended and Restated Certificate of Incorporation is
hereby amended to read in its entirety as follows:
"The total number of shares of capital stock which the Corporation
shall have authority to issue is Fifty Million Forty Thousand Five
Hundred (50,040,500) shares, of which Fifty Million (50,000,000)
shares shall be Common Stock, par value $.01 per share (the "Common
Stock"); and Forty Thousand Five Hundred (40,500) shares shall be
preferred stock, par value $.01 per share (the "Preferred Stock").
SECOND: That thereafter, pursuant to the resolution of the Board certified
to in the preceding paragraph, the proposed amendment as set forth in this
Certificate of Amendment to the Amended and Restated Certificate of
Incorporation was submitted to the stockholders of the
<PAGE>
Corporation entitled to vote thereon by the Board, who recommended such
amendment as being advisable and in the best interests of the Corporation, and
such amendment was duly adopted by a stockholder consent in lieu of a meeting of
the stockholders, with the holders of a majority of the outstanding shares of
the Company's Common Stock and sixty-six and two-thirds percent of the
outstanding shares of the Company's Convertible Participating Preferred Stock,
in addition to the holders of a majority of the outstanding shares of Common
Stock and Convertible Participating Preferred Stock (on an as converted basis)
voting as a single class, consenting to the adoption of this Certificate of
Amendment to the Amended and Restated Certificate of Incorporation in accordance
with the provisions of Sections 228 and 242 of the DGCL and the terms of the
Amended and Restated Certificate of Incorporation, such holders being all of the
holders of the Corporation's capital stock entitled to vote thereon.
2
<PAGE>
THIS CERTIFICATE OF AMENDMENT TO THE AMENDED AND RESTATED CERTIFICATE
OF INCORPORATION is executed as of this 19th day of June, 1998.
NATROL, INC.
By: /s/ ELLIOTT BALBERT
------------------------------
Elliott Balbert
President
3
<PAGE>
Exhibit 3.3
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
NATROL, INC.
NATROL, INC., a corporation organized and existing under the laws of the
State of Delaware (the "Corporation"), hereby certifies as follows:
1. The name of the Corporation is Natrol, Inc. The date of the filing of
its original Certificate of Incorporation with the Secretary of State of the
State of Delaware was October 1, 1997.
2. This Second Amended and Restated Certificate of Incorporation amends,
restates and integrates the provisions of the Amended and Restated Certificate
of Incorporation of the Corporation filed with the Secretary of State of the
State of Delaware on January 15, 1998, as heretofore amended (the "Restated
Certificate of Incorporation"), and (i) was duly adopted by the Board of
Directors in accordance with the provisions of Section 245 of the General
Corporation Law of the State of Delaware (the "DGCL"), (ii) was declared by the
Board of Directors to be advisable and in the best interests of the Corporation
and was directed by the Board of Directors to be submitted to and be considered
by the stockholders of the Corporation entitled to vote thereon for approval by
the affirmative vote of such stockholders in accordance with Section 242 of the
DGCL and (iii) was duly adopted by a stockholder consent in lieu of a meeting of
the stockholders, with the holders of a majority of the outstanding shares of
the Company's common stock, par value $.01 per share (the "Common Stock"), and
sixty-six and two-thirds percent of the outstanding shares of the Company's
Convertible Participating Preferred Stock, par value $.01 per share (the
"Convertible Preferred Stock"), in addition to the holders of a majority of the
outstanding shares of Common Stock and Convertible Preferred Stock (on an as
converted basis) voting as a single class, consenting to the adoption of this
Second Amended and Restated Certificate of Incorporation in accordance with the
provisions of Sections 228 and 242 of the DGCL and the terms of the Amended and
Restated Certificate of Incorporation, as amended, such holders being all of the
holders of the Corporation's capital stock entitled to vote thereon.
3. The text of the Restated Certificate of Incorporation is hereby amended
and restated in its entirety to provide as herein set forth in full.
ARTICLE I
The name of the Corporation is Natrol, Inc.
<PAGE>
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street in the City of Wilmington, County of New Castle.
The name of its registered agent at such address is The Corporation Trust
Company.
ARTICLE III
The nature of the business or purposes to be conducted or promoted by the
Corporation is to engage in any lawful act or activity for which corporations
may be organized under the DGCL.
ARTICLE IV
The total number of shares of capital stock which the Corporation shall
have authority to issue is Fifty Two Million Forty Thousand Five Hundred
(52,040,500) shares, of which (a) Twenty Seven Thousand (27,000) shares shall be
Convertible Participating Preferred Stock, par value $.01 per share (the
"Convertible Preferred Stock"), (b) Thirteen Thousand Five Hundred (13,500)
shares shall be Redeemable Preferred Stock, par value $.01 per share (the
"Redeemable Preferred Stock"), (c) Fifty Million (50,000,000) shares shall be
common stock, par value $.01 per share (the "Common Stock"), and (d) Two Million
(2,000,000) shares shall be undesignated preferred stock, par value $.01 per
share (the "Undesignated Preferred Stock"). The Convertible Preferred Stock and
the Redeemable Preferred Stock are sometimes collectively referred to herein as
the "Preferred Stock."
Except as otherwise restricted by this Second Amended and Restated
Certificate of Incorporation, the Corporation is authorized to issue, from time
to time, all or any portion of the capital stock of the Corporation which may
have been authorized but not issued, to such person or persons and for such
lawful consideration as it may deem appropriate, and generally in its absolute
discretion to determine the terms and manner of any disposition of such
authorized but unissued capital stock.
Any and all such shares issued for which the full consideration has been
paid or delivered shall be deemed fully paid shares of capital stock, and the
holder of such shares shall not be liable for any further call or assessment or
any other payment thereon.
The number of authorized shares of the class of Undesignated Preferred
Stock may from time to time be increased or decreased (but not below the number
of shares outstanding) by the affirmative vote of the holders of a majority of
the shares of Common Stock entitled to vote, without a vote of the holders of
the Undesignated Preferred Stock.
2
<PAGE>
The designations, powers, preferences and rights of, and the
qualifications, limitations and restrictions upon, each class or series of stock
shall be determined in accordance with, or as set forth below in, this Article
IV.
A. CONVERTIBLE PARTICIPATING PREFERRED STOCK
1. Designation. A total of 27,000 shares of the Corporation's Preferred
Stock shall be designated as Convertible Participating Preferred Stock, $.01 par
value per share (the "Convertible Preferred Stock").
2. Election of Directors; Voting.
(a) Election of Directors. The holders of outstanding shares of
Convertible Preferred Stock shall, voting together as a separate class, be
entitled to elect one (1) Director of the Corporation. Such Director shall
be the candidate receiving the highest number of affirmative votes (with
each holder of Convertible Preferred Stock entitled to cast one vote for
or against each candidate with respect to each share of Convertible
Preferred Stock held by such holder) of the outstanding shares of
Convertible Preferred Stock (the "Convertible Preferred Stock Director
Designee"), with votes cast against such candidate and votes withheld
having no legal effect. The election of the Convertible Preferred Stock
Director Designee by the holders of the Convertible Preferred Stock shall
occur (i) at the annual meeting of holders of capital stock, (ii) at any
special meeting of holders of capital stock, (iii) at any special meeting
of holders of Convertible Preferred Stock called by holders of a majority
of the outstanding shares of Convertible Preferred Stock or (iv) by the
unanimous written consent of holders of the outstanding shares of
Convertible Preferred Stock. If at any time when any share of Convertible
Preferred Stock is outstanding the Convertible Preferred Stock Director
Designee should cease to be a Director for any reason, the vacancy shall
only be filled by the vote or written consent of the holders of the
outstanding shares of Convertible Preferred Stock, voting together as a
separate class, in the manner and on the basis specified above. The
holders of outstanding shares of Convertible Preferred Stock shall also be
entitled to vote for all other Directors of the Corporation together with
holders of all other shares of the Corporation's outstanding capital stock
entitled to vote thereon, voting as a single class, with each outstanding
share entitled to the same number of votes specified in Section A.2(b).
(b) Voting Generally. The holder of each share of Convertible
Preferred Stock shall be entitled to the number of votes equal to the
largest number of full shares of Common Stock (as defined in Section C of
this Article IV) into which each share of Convertible Preferred Stock
could be converted pursuant to Section A.6 hereof on the record date for
the vote or for written consent of stockholders, if applicable. The holder
of each share of Convertible Preferred Stock shall be entitled to notice
of any stockholders' meeting in accordance with the By-laws of the
Corporation and shall vote with holders of the Common Stock, voting
together as single class, upon all matters
3
<PAGE>
submitted to a vote of stockholders excluding those matters required to be
submitted to a class or series vote pursuant to the terms hereof
(including without limitation Section A.8) or by law. Fractional votes
shall not, however, be permitted and any fractional voting rights
resulting from the above formula (after aggregating all shares of Common
Stock into which shares of Convertible Preferred Stock held by each holder
could be converted) shall be rounded to the nearest whole number (with
one-half rounded upward to one).
3. Dividends. The holders of Convertible Preferred Stock shall be entitled
to receive dividends out of funds legally available therefor at such times and
in such amounts as the Board of Directors may determine in its sole discretion,
provided, however, that no such dividend may be declared or paid on any shares
of Convertible Preferred Stock unless at the same time a dividend is declared or
paid on all outstanding shares of Common Stock and vice versa, with holders of
Convertible Preferred Stock and Common Stock sharing in any such dividends as if
they constituted a single class of stock and with each holder of a share of
Convertible Preferred Stock entitled to receive such dividends based on the
number of shares of Common Stock into which such share of Convertible Preferred
Stock is then convertible hereunder. The right to dividends on shares of
Convertible Preferred Stock shall not be cumulative, and no right shall accrue
to holders of Convertible Preferred Stock by reason of the fact that dividends
on said shares are not declared in any prior period.
4. Liquidation.
(a) Liquidation Preference. Upon any liquidation, dissolution or
winding up of the Corporation and its subsidiaries, whether voluntary or
involuntary (a "Liquidation Event"), each holder of outstanding shares of
Convertible Preferred Stock shall be entitled to be paid out of the assets
of the Corporation available for distribution to stockholders, whether
such assets are capital, surplus or earnings, and before any amount shall
be paid or distributed to the holders of Common Stock or of any other
stock ranking on liquidation junior to the Convertible Preferred Stock, an
amount in cash equal to (i) $444.44445 per share (adjusted appropriately
for stock splits, stock dividends, recapitalizations and the like with
respect to the Convertible Preferred Stock) plus (ii) any declared but
unpaid dividends to which such holder of outstanding shares of Convertible
Preferred Stock is then entitled, if any (the "Convertible Preferred
Liquidation Preference Amount"); provided, however, that if, upon any
Liquidation Event, the amounts payable with respect to the Convertible
Preferred Stock are not paid in full, the holders of the Convertible
Preferred Stock shall share ratably in any distribution of assets in
proportion to the full respective preferential amounts to which they are
entitled; and provided further, however, that if upon any Liquidation
Event the holders of the outstanding shares of Convertible Preferred Stock
would receive more than the Convertible Preferred Liquidation Preference
Amount in the event their shares were converted into Redeemable Preferred
Stock (as defined in Section B of this Article IV) and Common Stock
immediately prior to the record date for distributions in connection with
such Liquidation Event, then each outstanding share of Convertible
4
<PAGE>
Preferred Stock shall receive an amount per share equal to one-half of the
liquidation preference for a share of Redeemable Preferred Stock under
Section B.4 before any amount shall be paid or distributed to the holders
of Common Stock or of any other stock ranking on liquidation junior to the
Convertible Preferred Stock, and thereafter shall share ratably with the
holders of Common Stock in the assets available for distribution, with
such distributions to be made in cash and as if each share of Convertible
Preferred Stock had been converted into the number of shares of Redeemable
Preferred Stock and Common Stock issuable upon the conversion of such
share of Convertible Preferred Stock immediately prior to any such
Liquidation Event. The provisions of this Section A.4 shall not in any way
limit the right of the holders of Convertible Preferred Stock to elect to
convert their shares into Redeemable Preferred Stock and Common Stock
pursuant to Section A.6 prior to or in connection with any Liquidation
Event.
(b) Notice. Prior to the occurrence of any Liquidation Event, the
Corporation will furnish each holder of Convertible Preferred Stock notice
in accordance with Section A.9 hereof, together with a certificate
prepared by the chief financial officer of the Corporation describing in
detail the facts of such Liquidation Event, stating in detail the
amount(s) per share of Convertible Preferred Stock each holder of
Convertible Preferred Stock would receive pursuant to the provisions of
Section A.4(a) hereof and stating in detail the facts upon which such
amount was determined.
5. Redemption.
(a) Redemption Events.
(i) On or After September 26, 2002. Upon the election of the
holder or holders of not less than sixty-six and two-thirds percent of the
voting power of the outstanding Convertible Preferred Stock made at any
time on or after September 26, 2002, the Corporation shall redeem all (and
not less than all, other than pursuant to Section A.5(e) below) of the
outstanding shares of Convertible Preferred Stock at the Convertible
Preferred Redemption Price specified in Section A.5(d). The foregoing
election shall be made by such holders giving the Corporation and each of
the other holders of Convertible Preferred Stock not less than fifteen
(15) days prior written notice, which notice shall set forth the date for
such redemption.
(ii) Extraordinary Transactions. Upon the election of the
holder or holders of not less than sixty-six and two-thirds percent in
voting power of the outstanding Convertible Preferred Stock in connection
with (A) a merger or consolidation of the Corporation with or into another
corporation (with respect to which less than a majority of the outstanding
voting power of such surviving corporation is
5
<PAGE>
held by stockholders of the Corporation immediately prior to such event),
(B) the sale or transfer of all or substantially all of the properties and
assets of the Corporation and its subsidiaries, (C) any purchase by any
party of shares of capital stock of the Corporation (either through a
negotiated stock purchase or a tender for such shares), the effect of
which is that such party that did not beneficially own a majority of the
voting power of the outstanding shares of capital stock of the Corporation
immediately prior to such purchase beneficially owns at least a majority
of such voting power immediately after such purchase, or (D) the
redemption or repurchase of shares representing a majority of the voting
power of the outstanding shares of capital stock of the Corporation (each
an "Extraordinary Transaction"), then, as a part of and as a condition to
the effectiveness of such Extraordinary Transaction, unless the holders of
Convertible Preferred Stock shall have elected to convert their shares of
Convertible Preferred Stock into Redeemable Preferred Stock and Common
Stock in accordance with the voluntary conversion provisions of Section
A.6 prior to the effective date of such Extraordinary Transaction, the
Corporation shall, on the effective date of such Extraordinary
Transaction, redeem all (but not less than all, other than as provided in
Section A.5(e) below) of the outstanding shares of Convertible Preferred
Stock for an amount (subject to Section A.5(e)) equal to the Convertible
Preferred Liquidation Preference Amount; provided, however, that if upon
any Extraordinary Transaction the holders of the outstanding shares of
Convertible Preferred Stock would receive more than the Convertible
Preferred Liquidation Preference Amount in the event their shares were
converted into Redeemable Preferred Stock and Common Stock immediately
prior to such Extraordinary Transaction, then each outstanding share of
Convertible Preferred Stock shall receive an amount equal to one-half of
the per share liquidation preference for a share of Redeemable Preferred
Stock under Section B.4 before any amount shall be paid or distributed to
the holders of Common Stock or of any other stock ranking on liquidation
junior to the Convertible Preferred Stock, payable in cash, and thereafter
shall share ratably with the holders of the Common Stock in the proceeds
of such Extraordinary Transaction or, as applicable, shall receive from
the Corporation an amount equal to the amount per share that would be paid
if the shares of Common Stock receivable upon conversion of the
Convertible Preferred Stock were being acquired in the Extraordinary
Transaction at the same price per share as is paid for Common Stock, which
amount shall be paid in the same form of consideration as is paid to
holders of Common Stock, as if each share of Convertible Preferred Stock
had been converted into the number of shares of Redeemable Preferred Stock
and Common Stock issuable upon the conversion of such share of Convertible
Preferred Stock immediately prior to such Extraordinary Transaction. The
foregoing election shall be made by such holders giving the Corporation
and each holder of Convertible Preferred Stock not less than five (5) days
prior written notice, which notice shall set forth the date for such
redemption. The provisions of this Section A.5 shall not in any way limit
the right of the holders of Convertible Preferred Stock to elect to
convert their shares into shares of Redeemable Preferred Stock and Common
Stock pursuant to Section A.6 prior to or in connection with any
Extraordinary Transaction.
6
<PAGE>
(b) Valuation of Distribution Securities. Any securities or other
consideration to be delivered to the holders of the Convertible Preferred
Stock upon any Extraordinary Transaction in accordance with the terms
hereof shall be valued as follows:
(i) If traded on a nationally recognized securities exchange
or inter-dealer quotation system, the value shall be deemed to be the
average of the closing prices of the securities on such exchange or system
over the 30-day period ending three (3) business days prior to the
closing;
(ii) If traded over-the-counter, the value shall be deemed to
be the average of the closing bid prices over the 30-day period ending
three (3) business days prior to the closing; and
(iii) If there is no active public market, the value shall be
the fair market value thereof, as mutually determined by the Corporation
and the holders of not less than sixty-six and two-thirds percent in
voting power of the outstanding shares of Convertible Preferred Stock,
provided that if the Corporation and the holders of sixty-six and
two-thirds percent in voting power of the outstanding shares of
Convertible Preferred Stock are unable to reach agreement, then by
independent appraisal by a mutually agreed to investment banker, the fees
of which shall be paid in equal amounts by the Corporation and the holders
of the outstanding shares of Convertible Preferred Stock.
(c) Notice. Prior to the occurrence of any Extraordinary
Transaction, the Corporation will furnish each holder of Convertible
Preferred Stock notice in accordance with Section A.9 hereof, together
with a certificate prepared by the chief financial officer of the
Corporation describing in detail all material terms of such Extraordinary
Transaction, including without limitation the consideration to be
delivered in connection with such Extraordinary Transaction and the
identities of the parties to the Extraordinary Transaction.
(d) Redemption Date; Redemption Price. Upon the election of the
holders of not less than sixty-six and two-thirds of the voting power of
the outstanding Convertible Preferred Stock to cause the Corporation to
redeem the Convertible Preferred Stock pursuant to Section A.5(a)(i) or
(ii), all holders of Convertible Preferred Stock shall be deemed to have
elected to cause the Convertible Preferred Stock to be so redeemed. Any
date upon which a redemption shall occur in accordance with Section A.5(a)
shall be referred to as a "Convertible Preferred Redemption Date." The
redemption price for each share of Convertible Preferred Stock redeemed
pursuant to Section A.5 shall be the Convertible Preferred Liquidation
Preference Amount or such greater amount as may be payable pursuant to the
proviso to Section A.5(a)(ii), if applicable; provided, however, that if
at a Convertible Preferred Redemption Date shares of Convertible Preferred
Stock are unable to be redeemed (as contemplated by
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<PAGE>
Section A.5(e) below), the holders of Convertible Preferred Stock shall
also be entitled to any interest accrued pursuant to Section A.5(e)
(collectively, the "Convertible Preferred Redemption Price"). The
Convertible Preferred Redemption Price shall be payable in cash in
immediately available funds on the Convertible Preferred Redemption Date
except to the extent contemplated by the proviso to Section A.5(a)(ii) and
subject to Section A.5(e). Until the full Convertible Preferred Redemption
Price has been paid for all shares of Convertible Preferred Stock being
redeemed: (A) no dividend whatsoever shall be paid or declared, and no
distribution shall be made, on any capital stock of the Corporation; and
(B) no shares of capital stock of the Corporation (other than the
Convertible Preferred Stock in accordance with this Section A.5) shall be
purchased, redeemed or acquired by the Corporation and no monies shall be
paid into or set aside or made available for a sinking fund for the
purchase, redemption or acquisition thereof.
(e) Redemption Prohibited. If, at a Convertible Preferred Redemption
Date, the Corporation is prohibited under the DGCL from redeeming all
shares of Convertible Preferred Stock for which redemption is required
hereunder, then it shall redeem such shares on a pro-rata basis among the
holders of Convertible Preferred Stock in proportion to the full
respective redemption amounts to which they are entitled hereunder to the
extent possible and shall redeem the remaining shares to be redeemed as
soon as the Corporation is not prohibited from redeeming some or all of
such shares under the DGCL, subject to Section A.8(i). The shares of
Convertible Preferred Stock not redeemed shall remain outstanding and
entitled to all of the rights and preferences provided in this Article IV.
In the event that the Corporation fails to redeem shares for which
redemption is required pursuant to this Section A.5, then during the
period from the applicable Convertible Preferred Redemption Date through
the date on which such shares are redeemed, the applicable Convertible
Preferred Redemption Price of such shares shall bear interest at the rate
of 10% per annum, which interest rate shall increase by an additional .5%
at the end of each six (6) month period thereafter until the Convertible
Preferred Redemption Price (and any interest thereon) is paid in full,
subject to a maximum rate of 15% per annum and with such interest to be
compounded annually. In the event the Corporation fails to redeem shares
for which redemption is required pursuant to this Section A.5 within
twelve (12) months after the date on which redemption is required, for any
reason, and such failure thereafter continues (the period during which
such failure shall continue being referred to herein as a "Voting
Period"), the number of Directors constituting the Board of Directors
shall be automatically increased by a number equal to the number of
Directors then constituting the Board of Directors, plus two, and the
holders of shares of Convertible Preferred Stock then outstanding shall be
entitled, voting as a class on a one-vote-per-share basis (to the
exclusion of the holders of all other securities and classes of capital
stock of the Corporation), to elect such additional Directors. As soon as
practicable after the commencement of the Voting Period, the Corporation
shall call a special meeting of the holders of shares of Convertible
Preferred Stock by mailing a notice of such special meeting to such
holders, such meeting to be held not more than ten (10) days after the
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date of mailing of such notice. If the Corporation fails to send a notice,
the meeting may be called by any such holder on like notice. The record
date for determining the holders entitled to notice of and to vote at such
special meeting shall be the close of business on the fifth business day
preceding the day on which such notice is mailed. At any such special
meeting and at each meeting of holders of shares of Convertible Preferred
Stock held during a Voting Period at which Directors are to be elected (or
with respect to any action by written consent in lieu of a meeting of
shareholders), such holders, voting together as a class (to the exclusion
of the holders of all other securities and classes of capital stock of the
Corporation), shall be entitled to elect the number of Directors
prescribed in this Section A.5(e), and each share of Convertible Preferred
Stock shall be entitled to one (1) vote (whether voted in person by the
holder thereof or by proxy or pursuant to a shareholders' consent). The
terms of office of all persons who are Directors of the Corporation at the
time of a special meeting of the holders of Convertible Preferred Stock to
elect Directors shall continue, notwithstanding the election at such
meeting of the additional Directors that such holders are entitled to
elect, and the persons so elected by such holders, together with the
remaining incumbent Directors, shall constitute the duly elected Directors
of the Corporation. Simultaneously with the termination of a Voting Period
upon the redemption of all outstanding shares of Convertible Preferred
Stock, the terms of office of the additional Directors elected by the
holders of the Convertible Preferred Stock shall terminate, the remaining
Directors shall constitute the Directors of the Corporation and the voting
rights of such holders to elect additional Directors pursuant to this
Section A.5(e) shall cease.
(f) Dividend After Convertible Preferred Redemption Date. From and
after a Convertible Preferred Redemption Date, no shares of Convertible
Preferred Stock subject to redemption shall be entitled to dividends, if
any, as contemplated by Section A.3, provided, however, that in the event
that shares of Convertible Preferred Stock are unable to be redeemed and
continue to be outstanding in accordance with Section A.5(e), such shares
shall continue to be entitled to interest thereon as provided in Sections
A.5(e) until the date on which such shares are actually redeemed by the
Corporation.
(g) Surrender of Certificates. Each holder of shares of Convertible
Preferred Stock to be redeemed shall surrender the certificate or
certificates representing such shares to the Corporation, duly assigned or
endorsed for transfer (or accompanied by duly executed stock powers
relating thereto), or shall deliver an affidavit or agreement satisfactory
to the Corporation to indemnify the Corporation from any loss incurred by
it in connection therewith (an "Affidavit of Loss") with respect to such
certificates at the principal executive office of the Corporation or the
office of the transfer agent for the Convertible Preferred Stock or such
office or offices in the continental United States of an agent for
redemption as may from time to time be designated by notice to the holders
of Convertible Preferred Stock, and each surrendered certificate shall be
canceled and retired. Upon receipt of the certificate or
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certificates, as the case may be, or an Affidavit of Loss, the Corporation
shall pay the applicable Convertible Preferred Redemption Price by
certified check or wire transfer.
6. Conversion. The holders of the Convertible Preferred Stock shall have
the following conversion rights:
(a) Voluntary Conversion. At any time the holders of shares of
Convertible Preferred Stock shall be entitled, upon the written election
of the holder or holders of not less than sixty-six and two-thirds percent
in voting power of the outstanding shares of Convertible Preferred Stock
as provided in Section A.6(c) below, without the payment of any additional
consideration, to cause all (but not less than all) of the outstanding
shares of Convertible Preferred Stock to be converted into (i) the number
of fully paid and nonassessable shares of Common Stock (as hereinafter
defined) which results from dividing the Conversion Price (as defined in
this Section A.6(a)) per share in effect for the Convertible Preferred
Stock at the time of conversion into the per share Conversion Value (as
defined in this Section A.6(a)) of the Convertible Preferred Stock and
(ii) one half (.5) of a fully paid and nonassessable share of Redeemable
Preferred Stock per share of Convertible Preferred Stock. Upon the
election to so convert in the manner and on the basis specified in the
preceding sentence all holders of the Convertible Preferred Stock shall be
deemed to have elected to voluntarily convert all outstanding shares of
Convertible Preferred Stock pursuant to this Section A.6. The "Conversion
Price" per share of Convertible Preferred Stock shall be $4.4444445, and
the per share "Conversion Value" of Convertible Preferred Stock shall be
$444.44445. The Conversion Price per share of Convertible Preferred Stock
and the Conversion Rate shall be subject to adjustment from time to time
as provided in Section A.7 hereof. The number of shares of Common Stock
into which a share of a Convertible Preferred Stock is convertible is
hereinafter referred to as the "Common Stock Conversion Rate." The number
of shares of Redeemable Preferred Stock into which a share of Convertible
Preferred Stock is convertible is hereinafter referred to as the
"Redeemable Conversion Rate." If the holders of shares of Convertible
Preferred Stock elect to convert the outstanding shares of Convertible
Preferred Stock at a time when there are any declared but unpaid dividends
or other amounts due on or in respect of such shares, such dividends and
other amounts shall be paid in full in cash by the Corporation in
connection with such conversion.
(b) Automatic Conversion Upon QPO. Each share of Convertible
Preferred Stock shall automatically be converted, without the payment of
any additional consideration, into shares of Common Stock and Redeemable
Preferred Stock as of, and in all cases subject to, the closing of the
Corporation's first firm commitment public offering pursuant to an
effective registration statement under Securities Act of 1933, as amended,
provided that (i) such registration statement covers the offer and sale of
Common Stock of which the aggregate net proceeds attributable to sales for
the account of the Corporation exceed $15,000,000 at a price per share
reflecting a valuation for the Corporation's equity of at least
$50,000,000, and (ii) either all outstanding shares of
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Redeemable Preferred Stock are redeemed immediately upon and as of the
closing of such offering or contemporaneously with such offering cash in
an amount sufficient to redeem all outstanding shares of Redeemable
Preferred Stock is segregated and irrevocably held by the Corporation for
payment to holders of Redeemable Preferred Stock in connection with the
redemption thereof pursuant to Section B.5(a)(i) (a "QPO" or a "Qualified
Public Offering"); provided that if a closing of a QPO occurs, all
outstanding shares of Convertible Preferred Stock shall be deemed to have
been converted into shares of Common Stock and Redeemable Preferred Stock
immediately prior to such closing. Any such conversion shall be at the
Common Stock Conversion Rate and Redeemable Conversion Rate in effect upon
the closing of a QPO, as applicable.
(c) Procedure for Voluntary Conversion; Effective Date. Upon
election to convert pursuant to Section A.6(a), each holder of Convertible
Preferred Stock (i) shall provide written notice of conversion (the
"Voluntary Conversion Notice") to the Corporation and (ii) shall surrender
the certificate or certificates representing its Convertible Preferred
Stock, duly assigned or endorsed for transfer to the Corporation (or
accompanied by duly executed stock powers relating thereto), at the
principal executive office of the Corporation or the offices of the
transfer agent for the Convertible Preferred Stock or such office or
offices in the continental United States of an agent for conversion as may
from time to time be designated by notice to the holders of the
Convertible Preferred Stock by the Corporation, or shall deliver an
Affidavit of Loss with respect to such certificates. The Voluntary
Conversion Notice shall specify (i) the number of shares of Convertible
Preferred Stock held by such holder, (ii) the name or names in which such
holder wishes the certificate or certificates for Common Stock and
Redeemable Preferred Stock to be issued upon such conversion and (iii) the
address to which such holder wishes delivery to be made of such new
certificates to be issued upon such conversion. The issuance by the
Corporation of shares of Common Stock and Redeemable Preferred Stock upon
a conversion of Convertible Preferred Stock pursuant to Section A.6(a)
hereof shall be effective as of the surrender of the certificate or
certificates for the Convertible Preferred Stock to be converted, duly
assigned or endorsed for transfer to the Corporation (or accompanied by
duly executed stock powers relating thereto), or as of the delivery of an
Affidavit of Loss. Upon surrender of a certificate representing
Convertible Preferred Stock for conversion, or delivery of an Affidavit of
Loss, the Corporation shall issue and send by hand delivery, by courier or
by first class mail (postage prepaid) to the holder thereof or to such
holder's designee, at the address designated by such holder, certificates
for the number of shares of Common Stock and Redeemable Preferred Stock to
which such holder shall be entitled upon conversion. The issuance of
certificates for Common Stock and Redeemable Preferred Stock upon
conversion of Convertible Preferred Stock will be made without charge to
the holders of such shares for any issuance tax in respect thereof or
other costs incurred by the Corporation in connection with such conversion
and the related issuance of such stock. Notwithstanding anything to the
contrary set forth in this Section A.6(c), in the event that the holders
of shares of Convertible
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Preferred Stock elect to convert such shares pursuant to Section A.6(a) in
connection with any Liquidation Event or Extraordinary Transaction, (i)
the Voluntary Conversion Notice shall be delivered to the Corporation no
later than five (5) days before the effective date of or record date for
(as applicable) such Liquidation Event or Extraordinary Transaction and
such Voluntary Conversion Notice shall be effective as of, and shall in
all cases be subject to, the occurrence of such Liquidation Event or
closing of such Extraordinary Transaction and (ii) if such Liquidation
Event or Extraordinary Transaction occurs, all outstanding shares of
Convertible Preferred Stock shall be deemed to have been converted into
shares of Common Stock and Redeemable Preferred Stock immediately prior
thereto, provided that the Corporation shall make appropriate provisions
(x) for the Common Stock issued upon such conversion to be treated on the
same basis as all other Common Stock in such Liquidation Event or
Extraordinary Transaction and (y) for the payment of the Redeemable
Preferred Liquidation Preference Amount (as defined in Section B.4) in
connection with any Liquidation Event or the redemption of the Redeemable
Preferred Stock (issued upon such conversion) upon election of such
redemption in connection with any Extraordinary Transaction, if
applicable, as provided herein.
(d) Procedure for Automatic Conversion. As of, and in all cases
subject to, the closing of a QPO (the "Automatic Conversion Date"), all
outstanding shares of Convertible Preferred Stock shall be converted
automatically without any further action by the holders of such shares and
whether or not the certificates representing such shares of Convertible
Preferred Stock are surrendered to the Corporation or its transfer agent;
provided, however, that all holders of Convertible Preferred Stock shall
be given prior written notice of the occurrence of a QPO in accordance
with Section A.9 hereof. The Corporation shall not be obligated to issue
certificates evidencing the shares of Redeemable Preferred Stock or Common
Stock issuable on the Automatic Conversion Date (or the cash payment for
the shares of Redeemable Preferred Stock which are redeemed immediately
after such automatic conversion as provided below and in Section
B.5(a)(i)) unless certificates evidencing such shares of the Convertible
Preferred Stock being converted, or an Affidavit of Loss with respect to
such certificates, is delivered to the Corporation or its transfer agent.
On the Automatic Conversion Date, all rights with respect to the
Convertible Preferred Stock so converted shall terminate, except any of
the rights of the holders thereof upon surrender of their certificate or
certificates therefor or delivery of an Affidavit of Loss thereof to
receive certificates for the number of shares of Common Stock and
Redeemable Preferred Stock into which such Convertible Preferred Stock has
been converted (or the cash payment to which such holder is entitled as
provided below and in Section B.5(a)(i)). If so required by the
Corporation, certificates surrendered for conversion shall be endorsed or
accompanied by written instrument or instruments of transfer, in form
satisfactory to the Corporation, duly executed by the registered holder or
by his or its attorney duly authorized in writing. Upon surrender of such
certificates or Affidavit of Loss the Corporation shall issue and deliver
to such holder, promptly (and in any event in such time as is sufficient
to enable such holder to participate in such QPO) at such office and
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in its name as shown on such surrendered certificate or certificates, a
certificate or certificates for the number of shares of Common Stock and
number of shares of Redeemable Preferred Stock into which the shares of
the Convertible Preferred Stock surrendered were convertible on the
Automatic Conversion Date. Notwithstanding anything to the contrary set
forth in this Section A.6(d), the Corporation may deliver, in lieu of
certificates for Redeemable Preferred Stock, cash in an amount determined
pursuant to Section B.5(b) hereof on account of the redemption of such
Redeemable Preferred Stock, and upon payment of such cash the Redeemable
Preferred Stock into which such Convertible Preferred Stock would have
been converted shall be deemed to have been issued and redeemed by the
Corporation.
(e) No Impairment. The Corporation shall not, by amendment of this
Second Amended and Restated Certificate of Incorporation or through any
Extraordinary Transaction or other reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed hereunder by
the Corporation but shall at all times in good faith assist in the
carrying out of all the provisions of this Section A.6 and in the taking
of all such action as may be necessary or appropriate in order to protect
the conversion and other rights of the holders of the Convertible
Preferred Stock and the Redeemable Preferred Stock against impairment.
(f) Reservation of Stock Issuable Upon Conversion. The Corporation
shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock and Redeemable Preferred Stock solely for
the purpose of effecting the conversion of the shares of Convertible
Preferred Stock such number of its shares of Common Stock and Redeemable
Preferred Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of Convertible Preferred Stock; and
if at any time the number of authorized but unissued shares of Common
Stock and Redeemable Preferred Stock shall not be sufficient to effect the
conversion of all then outstanding shares of Convertible Preferred Stock,
the Corporation will take such corporate action as may be necessary to
increase its authorized but unissued shares of Common Stock and Redeemable
Preferred Stock to such number of shares as shall be sufficient for such
purpose.
(g) No Closing of Transfer Books. The Corporation shall not close
its books against the transfer of shares of Convertible Preferred Stock in
any manner which would interfere with the timely conversion of any shares
of Convertible Preferred Stock.
7. Adjustments.
(a) If the number of shares of Common Stock outstanding at any time
after the date hereof is increased by a stock dividend payable in shares
of Common Stock or
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by a subdivision or split-up of shares of Common Stock, then, on the date
such payment is made or such change is effective, the Conversion Price of
the Convertible Preferred Stock shall be appropriately decreased so that
the number of shares of Common Stock issuable on conversion of any shares
of Convertible Preferred Stock shall be increased in proportion to such
increase of outstanding shares of Common Stock.
(b) If the number of shares of Common Stock outstanding at any time
after the date hereof is decreased by a combination or reverse split of
the outstanding shares of Common Stock, then, on the effective date of
such combination or reverse split, the Conversion Price of the Convertible
Preferred Stock shall be appropriately increased so that the number of
shares of Common Stock issuable on conversion of any shares of Convertible
Preferred Stock shall be decreased in proportion to such decrease in
outstanding shares of Common Stock.
(c) In case, at any time after the date hereof, of any capital
reorganization (other than a reorganization constituting an Extraordinary
Transaction), or any reclassification of the stock of the Corporation
(other than as a result of a stock dividend payable on shares of Common
Stock in the form of Common Stock or subdivision, split-up or combination
involving the Common Stock), the shares of Convertible Preferred Stock
shall, after such capital reorganization or reclassification, be
convertible into the kind and number of shares of stock or other
securities or property of the Corporation or otherwise to which such
holder would have been entitled if immediately prior to such capital
reorganization or reclassification he or it had converted his or its
shares of Convertible Preferred Stock into Common Stock and Redeemable
Preferred Stock. The provisions of this clause (c) shall similarly apply
to successive capital reorganizations or reclassifications.
(d) All calculations under this Section A.7 shall be made to the
nearest cent or to the nearest one hundredth (1/100) of a share, as the
case may be.
(e) Upon the occurrence of each adjustment or readjustment pursuant
to this Section A.7, the Corporation at its expense shall promptly compute
such adjustment or readjustment in accordance with the terms hereof and
prepare and furnish to each holder of Convertible Preferred Stock a
certificate setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based. The
Corporation shall, upon written request at any time of any holder of
Convertible Preferred Stock, furnish or cause to be furnished to such
holder a like certificate setting forth (i) such adjustments and
readjustments, (ii) the Conversion Prices before and after such adjustment
or readjustment, and (iii) the number of shares of Common Stock and
Redeemable Preferred Stock and the amount, if any, of other property which
at the time would be received upon the conversion of such holder's shares
of Convertible Preferred Stock.
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8. Covenants. So long as any shares of Convertible Preferred Stock (or
Redeemable Preferred Stock, as applicable) shall be outstanding, the Corporation
shall not, without first having provided the written notice of such proposed
action to each holder of outstanding shares of Convertible Preferred Stock (or
Redeemable Preferred Stock, as applicable) and having obtained the affirmative
vote or written consent of the holders of not less than sixty-six and two-thirds
percent in voting power of the outstanding shares of Convertible Preferred Stock
(or Redeemable Preferred Stock, as applicable), voting as a single class, with
each share of Convertible Preferred Stock (or Redeemable Preferred Stock, as
applicable) entitling the holder thereof to one vote per share of Convertible
Preferred Stock held by such holder:
(a) (i) amend, alter or repeal any provision of, or add any
provision to, Article IV of this Second Amended and Restated Certificate
of Incorporation, or (ii) otherwise amend, alter or repeal any provision
of, or add any provision to, this Second Amended and Restated Certificate
of Incorporation or the Corporation's by-laws if such latter action would
alter or change the preferences, rights, privileges or powers of, or the
restrictions provided for the benefit of, any of the Convertible Preferred
Stock or the Redeemable Preferred Stock;
(b) merge with or into or consolidate with another entity (other
than any reincorporation merger not involving any change in the rights and
obligations of the parties hereto), in either case in which the
Corporation is not the surviving corporation or in which the owners of the
Corporation's outstanding equity securities prior to the merger or
consolidation do not own at least a majority of the outstanding equity
securities of the merged as consolidated entity;
(c) reclassify any capital stock;
(d) create, obligate itself to create, authorize or issue any new
class or classes of stock or new series of common stock or preferred stock
or any security convertible into or evidencing the right to purchase
shares of any new class or series of common stock or preferred stock or
any new capital stock of the Corporation having preference over or being
on parity with the Convertible Preferred Stock or the Redeemable Preferred
Stock in any respect;
(e) apply any of its assets to the redemption, retirement, purchase
or other acquisition, directly or indirectly, through subsidiaries or
otherwise, of any shares of Common Stock except from employees, officers
or Directors of, or consultants, advisors or independent contractors to,
the Corporation or any of its subsidiaries pursuant to an agreement
containing vesting and/or repurchase provisions approved by the Board of
Directors of the Corporation or a committee thereof in connection with the
grant of such stock under the Corporation's 1996 Stock Option and Grant
Plan, as amended;
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(f) effect (I) any Liquidation Event, to the extent a voluntary act
of the Corporation, (II) any Extraordinary Transaction or other sale or
transfer of all or any substantial portion of the properties and assets of
any subsidiary of the Corporation, (III) any recapitalization of the
Corporation or (IV) any other transaction or series of related
transactions in which more than 50% of the voting power of the Corporation
is disposed of;
(g) authorize the issuance of, issue or reserve for issuance, any
equity securities (including without limitation options, warrants,
convertible or exchangeable securities or rights giving the holder thereof
the right to acquire equity securities or any of the foregoing) or
otherwise engage in any equity financing, including without limitation in
connection with a stock acquisition, but excluding the issuance of stock
options for up to 1,050,000 shares of Common Stock (subject to adjustments
for stock splits, stock dividends and the like) to directors, officers,
employees, advisers and consultants on terms approved by the Board of
Directors;
(h) declare or make dividend payments on any shares of its Common
Stock or any other class of its capital stock; or
(i) enter into any agreement or arrangement or take any other action
that eliminates, amends, restricts or otherwise materially adversely
affects the rights of the holders of the Convertible Preferred Stock or
the Redeemable Preferred Stock or its ability to perform its obligations
hereunder. Without limitation of the foregoing, the Corporation shall take
such action as shall be necessary or appropriate to remove promptly any
impediment to its ability to redeem Convertible Preferred Stock or
Redeemable Preferred Stock under the circumstances contemplated by Section
A.5(e) or B.5(c).
9. Notice
(a) Liquidation Events, Extraordinary Transactions, Etc. In the
event (i) the Corporation establishes a record date to determine the
holders of any class of securities who are entitled to receive any
dividend or other distribution or who are entitled to vote at a meeting
(or by written consent) in connection with any of the transactions
identified in clause (ii) hereof, or (ii) any Liquidation Event (as
defined in Section A.4), any Extraordinary Transaction (as defined in
Section A.5), any QPO (as defined in Section A.6) or any other public
offering becomes reasonably likely to occur, the Corporation shall mail or
cause to be mailed by first class mail (postage prepaid) to each holder of
Convertible Preferred Stock (or each holder of Redeemable Preferred Stock,
as applicable) at least forty-five (45) days prior to such record date
specified therein or the expected effective date of any such transaction,
a notice specifying (A) the date of such record date for the purpose of
such dividend or distribution or meeting or consent and a description of
such dividend or distribution or the action to be taken at such meeting or
by such consent, (B) the date on which any such Liquidation
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Event, Extraordinary Transaction, QPO or other public offering is expected
to become effective, and (C) the date on which the books of the
Corporation shall close or a record shall be taken with respect to any
such event.
(b) Waiver of Notice. The holder or holders of not less than
sixty-six and two-thirds percent in voting power of the outstanding shares
of Convertible Preferred Stock (or Redeemable Preferred Stock, as
applicable) may, at any time upon written notice to the Corporation, waive
any notice provisions specified herein for the benefit of such holders,
and any such waiver shall be binding upon all holders of such securities.
(c) General. In the event that the Corporation provides any notice,
report or statement to any holder of Common Stock, the Corporation shall
at the same time provide a copy of any such notice, report or statement to
each holder of outstanding shares of Convertible Preferred Stock (or
Redeemable Preferred Stock, as applicable).
10. No Reissuance of Convertible Preferred Stock. No share or shares of
Convertible Preferred Stock acquired by the Corporation by reason of redemption,
purchase, conversion or otherwise shall be reissued, and all such shares shall
be canceled, retired and eliminated from the shares which the Corporation shall
be authorized to issue.
11. Contractual Rights of Holders. The various provisions set forth herein
for the benefit of the holders of the Convertible Preferred Stock and the
Redeemable Preferred Stock shall be deemed contract rights enforceable by them,
including without limitation however, one or more actions for specific
performance.
B. REDEEMABLE PREFERRED STOCK
1. Designation; Ranking. A total of 13,500 shares of the Corporation's
Preferred Stock shall be designated as Redeemable Preferred Stock, $.01 par
value per share (the "Redeemable Preferred Stock").
2. Election of Directors; Voting.
(a) Election of Directors. The holders of outstanding shares of
Redeemable Preferred Stock shall, voting together as a separate class, be
entitled to elect one (1) Director. Such Director shall be the candidate
receiving the highest number of affirmative votes (with each holder of
Redeemable Preferred Stock entitled to cast one vote for or against each
candidate with respect to each share of Redeemable Preferred Stock held by
such holder) of the outstanding shares of Redeemable Preferred Stock (the
"Redeemable Preferred Stock Director Designee"), with votes cast against
such candidate and votes withheld having no legal effect. The election of
the Redeemable Preferred Stock Director Designee by the holders of the
Redeemable Preferred Stock shall occur (i) at the annual meeting of
holders of capital stock, (ii) at any special
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meeting of holders of capital stock, (iii) at any special meeting of
holders of Redeemable Preferred Stock called by holders of a majority of
the outstanding shares of Redeemable Preferred Stock or (iv) by the
unanimous written consent of holders of the outstanding shares of
Redeemable Preferred Stock. Upon conversion of the Convertible Preferred
Stock, the Convertible Preferred Stock Director Designee then serving on
the Corporation's board of directors shall continue in such capacity as
the Redeemable Preferred Stock Designee. If at any time when any share of
Redeemable Preferred Stock is outstanding the Redeemable Preferred Stock
Director Designee should cease to be a Director for any reason, the
vacancy shall only be filled by the vote or written consent of holders of
the outstanding shares of Redeemable Preferred Stock, voting together as a
separate class, in the manner and on the basis specified above.
(b) Voting Generally. Except as set forth above with respect to the
election of the Redeemable Preferred Stock Director Designee, the holders
of Redeemable Preferred Stock shall not be entitled to vote on any matters
except to the extent otherwise required under the DGCL.
3. Dividends. The holders of outstanding shares of Redeemable Preferred
Stock shall be entitled to receive, out of any funds legally available therefor,
cumulative dividends on the Redeemable Preferred Stock in cash, at the rate per
annum of five percent (5%) of the Redeemable Base Liquidation Amount (as defined
in Section B.4 below) per share of Redeemable Preferred Stock (a "Redeemable
Cumulative Dividend"). Such dividends will accrue commencing as of the date of
issuance of the Redeemable Preferred Stock and be cumulative, to the extent
unpaid, whether or not they have been declared and whether or not there are
profits, surplus or other funds of the Corporation legally available for the
payment of dividends. Redeemable Cumulative Dividends shall become due and
payable with respect to any share of Redeemable Preferred Stock as provided in
Section B.4 and Section B.5. So long as any shares of Redeemable Preferred Stock
are outstanding: (A) no dividend whatsoever shall be paid or declared, and no
distribution shall be made, on any capital stock of the Corporation ranking
junior to the Redeemable Preferred Stock; and (B) no shares of capital stock of
the Corporation ranking junior to the Redeemable Preferred Stock shall be
purchased, redeemed or acquired by the Corporation and no monies shall be paid
into or set aside or made available for a sinking fund for the purchase,
redemption or acquisition thereof. All numbers relating to the calculation of
dividends pursuant to this Section B.3 shall be subject to equitable adjustment
in the event of any stock split, combination, reorganization, recapitalization,
reclassification or other similar event involving a change in the Redeemable
Preferred Stock.
4. Liquidation. Upon any Liquidation Event, each holder of outstanding
shares of Redeemable Preferred Stock shall be entitled to be paid out of the
assets of the Corporation available for distribution to stockholders, whether
such assets are capital, surplus, or earnings as follows, and before any amount
shall be paid or distributed to the holders of Common Stock or of any other
stock ranking on liquidation junior to the Redeemable Preferred Stock, an amount
in cash equal to the sum of (a) $444.44445 per share (adjusted appropriately for
stock
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splits, stock dividends, recapitalizations and the like with respect to the
Redeemable Preferred Stock) (the "Redeemable Base Liquidation Amount"), plus (b)
any unpaid dividends to which such holder of outstanding shares of Redeemable
Preferred Stock is entitled pursuant to Section B.3 and B.5(d) hereof, plus (c)
any interest accrued pursuant to Section B.5(c) (the "Redeemable Liquidation
Preference Amount"); provided, however, that if, upon any Liquidation Event, the
amounts payable with respect to the Redeemable Preferred Stock are not paid in
full, the holders of the Redeemable Preferred Stock shall share ratably in any
distribution of assets in proportion to the full respective preferential amounts
to which they are entitled.
5. Redemption.
(a) Redemption Events.
(i) Automatic. Immediately upon and as of, and in all cases
subject to, the closing of a QPO, the Corporation shall redeem all
(and not less than all) of the outstanding shares of Redeemable
Preferred Stock at the Redemption Price specified in Section B.5(b).
(ii) On or After September 26, 2001. Upon the election of the
holder or holders of not less than sixty-six and two-thirds percent
of the outstanding Redeemable Preferred Stock (or the holder or
holders of not less than sixty-six and two thirds percent of the
outstanding Convertible Preferred Stock proposing to convert the
same in order to effect a redemption of the Redeemable Preferred
Stock received upon such conversion hereunder) made at any time on
or after September 26, 2001 the Corporation shall redeem all (and
not less than all, other than pursuant to Section B.5(c) below) of
the outstanding shares of Redeemable Preferred Stock. The foregoing
election shall be made by such holders giving the Corporation and
each of the other holders of Redeemable Preferred Stock (or
Convertible Preferred Stock, as applicable) not less than fifteen
(15) days prior written notice which notice shall set forth the date
for such redemption.
(iii) Upon Extraordinary Transactions. Upon the election of
the holder or holders of not less than sixty-six and two-thirds
percent in voting power of the outstanding Redeemable Preferred
Stock (or Convertible Preferred Stock, as applicable, proposing to
convert the same in order to effect a redemption of the Redeemable
Preferred Stock received upon such conversion hereunder), the
Corporation shall redeem all (and not less than all, other than
pursuant to Section B.5(c) below) of the outstanding shares of
Redeemable Preferred Stock upon the occurrence of an Extraordinary
Transaction (as defined in Section A.5). The foregoing election
shall be made by such holders giving the Corporation and each other
holder of Redeemable Preferred Stock (or
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Convertible Preferred Stock, as applicable) not less that five (5)
days prior written notice, which notice shall set forth the date for
such redemption.
(b) Redemption Date; Redemption Price. Upon the election of the
holders of not less than sixty-six and two-thirds percent in voting power
of the outstanding Redeemable Preferred Stock to cause the Corporation to
redeem the Redeemable Preferred Stock pursuant to Section B.5(a)(ii) or
(iii), all holders of Redeemable Preferred Stock shall be deemed to have
elected to cause the Redeemable Preferred Stock to be so redeemed. Any
date upon which a redemption shall occur in accordance with Section B.5(a)
shall be referred to as a "Redemption Date." The redemption price for each
share of Redeemable Preferred Stock redeemed pursuant to this Section B.5
shall be the sum of (x) the Redeemable Base Liquidation Amount, plus (y)
any unpaid dividends to which such holder of outstanding shares of
Redeemable Preferred Stock is entitled under Section B.3 and Section
B.5(d) hereof (the "Redemption Price"); provided, however, that if at a
Redemption Date shares of Redeemable Preferred Stock are unable to be
redeemed (as contemplated by Section B.5(c) below), in addition to the
Redemption Price the holders of Redeemable Preferred Stock shall be
entitled to any interest accrued pursuant to Section B.5(c). The
Redemption Price shall be payable in cash in immediately available funds
on the Redemption Date. Until the full Redemption Price, including any
interest thereon, has been paid in cash for all shares of Redeemable
Preferred Stock redeemed as of the applicable Redemption Date: (A) no
dividend whatsoever shall be paid or declared, and no distribution shall
be made, on any capital stock of the Corporation; and (B) no shares of
capital stock of the Corporation (other than the Redeemable Preferred
Stock in accordance with this Section B.5) shall be purchased, redeemed or
acquired by the Corporation and no monies shall be paid into or set aside
or made available for a sinking fund for the purchase, redemption or
acquisition thereof.
(c) Redemption Prohibited. If, at a Redemption Date, the Corporation
is prohibited under the DGCL from redeeming all shares of Redeemable
Preferred Stock for which redemption is required hereunder, then it shall
redeem such shares on a pro-rata basis among the holders of Redeemable
Preferred Stock in proportion to the full respective redemption amounts to
which they are entitled hereunder to the extent possible and shall redeem
the remaining shares to be redeemed as soon as the Corporation is not
prohibited from redeeming some or all of such shares under the DGCL,
subject to Section A.8(i). The shares of Redeemable Preferred Stock not
redeemed shall remain outstanding and entitled to all of the rights and
preferences provided in this Article IV. In the event that the Corporation
fails to redeem shares for which redemption is required pursuant to
Section B.5, then during the period from the applicable Redemption Date
through the date on which such shares are redeemed, the applicable
Redemption Price of such shares shall bear interest at the rate of 10% per
annum, which interest rate shall increase by an additional .5% at the end
of each six (6) month period thereafter until the Redemption Price (and
any interest thereon) is paid in full, subject to a maximum rate of 15%
per annum and with such interest to be
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compounded annually. In the event the Corporation fails to redeem shares
for which redemption is required pursuant to Section B.5 within twelve
(12) months after the date on which redemption is required, for any
reason, and such failure thereafter continues (the period during which
such failure shall continue being referred to herein as a "Voting
Period"), the number of Directors constituting the Board of Directors
shall be automatically increased by a number equal to the number of
Directors then constituting the Board of Directors, plus two, and the
holders of shares of Redeemable Preferred Stock then outstanding shall be
entitled, voting as a class on a one-vote-per-share basis (to the
exclusion of the holders of all other securities and classes of capital
stock of the Corporation), to elect such additional Directors. As soon as
practicable after the commencement of the Voting Period, the Corporation
shall call a special meeting of the holders of shares of Redeemable
Preferred Stock by mailing a notice of such special meeting to such
holders, such meeting to be held not less than ten (10) nor more than
thirty (30) days after the date of mailing of such notice. If the
Corporation fails to send a notice, the meeting may be called by any such
holder on like notice. The record date for determining the holders
entitled to notice of and to vote at such special meeting shall be the
close of business on the fifth business day preceding the day on which
such notice is mailed. At any such special meeting and at each meeting of
holders of shares of Redeemable Preferred Stock held during a Voting
Period at which Directors are to be elected (or with respect to any action
by written consent in lieu of a meeting of shareholders), such holders,
voting together as a class (to the exclusion of the holders of all other
securities and classes of capital stock of the Corporation), shall be
entitled to elect the number of Directors prescribed in this Section
B.5(c), and each share of Redeemable Preferred Stock shall be entitled to
one (1) vote (whether voted in person by the holder thereof or by proxy or
pursuant to a shareholders' consent). The terms of office of all persons
who are Directors of the Corporation at the time of a special meeting of
the holders of Redeemable Preferred Stock to elect Directors shall
continue, notwithstanding the election at such meeting of the additional
Directors that such holders are entitled to elect, and the persons so
elected by such holders, together with the remaining incumbent Directors,
shall constitute the duly elected Directors of the Corporation.
Simultaneously with the termination of a Voting Period upon the redemption
of all outstanding shares of Redeemable Preferred Stock, the terms of
office of the additional Directors elected by the holders of the
Redeemable Preferred Stock shall terminate, the remaining Directors shall
constitute the Directors of the Corporation and the voting rights of such
holders to elect additional Directors pursuant to this Section B.5(c)
shall cease.
(d) Dividend After Redemption Date. From and after the closing of a
QPO or an Extraordinary Transaction (in the case of a redemption pursuant
to Section B.5(a)(i) or (iii)) or the date specified for redemption in the
election notice of the requisite holders as set forth in Section
B.5(a)(ii), no shares of Redeemable Preferred Stock subject to redemption
shall be entitled to any further dividends pursuant to Section B.3 hereof,
provided, however, that in the event that shares of Redeemable Preferred
Stock are unable to be redeemed and continue to be outstanding in
accordance
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with Section B.5(c), such shares shall continue to be entitled to
dividends through such date and interest as provided in Section B.5(c)
until the date on which such shares are actually redeemed by the
Corporation.
(e) Surrender of Certificates. Each holder of shares of Redeemable
Preferred Stock to be redeemed shall surrender the certificate or
certificates representing such shares to the Corporation, duly assigned or
endorsed for transfer (or accompanied by duly executed stock powers
relating thereto), or shall deliver an Affidavit of Loss with respect to
such certificates at the principal executive office of the Corporation or
the office of the transfer agent for the Redeemable Preferred Stock or
such office or offices in the continental United States of an agent for
redemption as may from time to time be designated by notice to the holders
of Redeemable Preferred Stock (or the holders of Convertible Preferred
Stock, as applicable), and each surrendered certificate shall be canceled
and retired. Upon receipt of the certificate or certificates, as the case
may be, or an Affidavit of Loss, the Corporation shall pay the applicable
Redemption Price by certified check or wire transfer.
6. Notice. In the event that the Corporation provides or is required to
provide notice to any holder of Convertible Preferred Stock or any holder of
Common Stock in accordance with the provisions of this Second Amended and
Restated Certificate of Incorporation (including the provisions of Section
A.5(c) and Section A.9) and/or the Corporation's by-laws, the Corporation shall
at the same time provide a copy of any such notice to each holder of outstanding
shares of Redeemable Preferred Stock.
7. No Reissuance of Redeemable Preferred Stock. No share or shares of
Redeemable Preferred Stock acquired by the Corporation by reason of redemption,
purchase, conversion or otherwise shall be reissued, and all such shares shall
be canceled, retired and eliminated from the shares which the Corporation shall
be authorized to issue.
8. Covenants. So long as any shares of Redeemable Preferred Stock shall be
outstanding the provisions of Section A.8 shall apply to all shares of
Redeemable Preferred Stock as if such shares were shares of Convertible
Preferred Stock.
C. COMMON STOCK
1. Designation; Ranking. A total of 50,000,000 shares of the Corporation's
common stock shall be designated as Common Stock, $.01 par value per share (the
"Common Stock").
2. Voting.
(a) Election of Directors. The holders of Common Stock voting
together with the holders of outstanding Convertible Preferred Stock as a
single class, shall be entitled to elect all of the Directors of the
Corporation other than the Director who is
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subject to election by the holders of Convertible Preferred Stock or
Redeemable Preferred Stock as a separate class) for so long as any shares
of Convertible Preferred Stock or Redeemable Preferred Stock remain
outstanding and thereafter shall be entitled to elect all of the Directors
of the Corporation. Such Directors shall be the candidates receiving the
highest number of affirmative votes entitled to be cast (with each holder
entitled to cast one vote for or against each candidate with respect to
each share held by such holder), with votes cast against such candidates
and votes withheld having no legal effect. The election of such Directors
shall occur at the annual meeting of holders of capital stock or at any
special meeting called and held in accordance with the by-laws of the
Corporation. If a person elected in accordance with the foregoing
provisions should cease to be a Director for any reason, the vacancy shall
only be filled by the vote or written consent of holders of the
outstanding shares entitled to vote for such Directors, in the manner and
on the basis specified above.
(b) Other Voting. The holder of each share of Common Stock shall be
entitled to one vote for each such share as determined on the record date
for the vote or consent of stockholders and shall vote together with the
holders of the Convertible Preferred Stock as a single class upon any
items submitted to a vote of stockholders, except as otherwise provided
herein.
3. Dividends. The holders of Common Stock shall be entitled to receive
dividends out of funds legally available therefor at such times and in such
amounts as the Board of Directors may determine in its sole discretion, with
holders of Convertible Preferred Stock and Common Stock sharing pari passu in
such dividends as contemplated by Section A.3.
4. Liquidation. Upon any Liquidation Event, after the payment or provision
for payment of all debts and liabilities of the Corporation and all preferential
amounts to which the holders of Convertible Preferred Stock or Redeemable
Preferred Stock, as applicable, are entitled with respect to the distribution of
assets in liquidation, the holders of Common Stock (and to the extent applicable
under Section A.4(a) Convertible Preferred Stock) shall be entitled to share
ratably in the remaining assets of the Corporation available for distribution.
5. Fractional Shares; Uncertificated Shares. The Corporation may issue
fractional shares (up to five decimal places) of Common Stock and Preferred
Stock. Fractional shares shall be entitled to dividends (on a pro rata basis),
and the holders of fractional shares shall be entitled to all rights as
stockholders of the Corporation to the extent provided herein and under
applicable law in respect of such fractional shares. Shares of Common Stock and
preferred stock, or fractions thereof, may, but need not be represented by share
certificates. Such shares, or fractions thereof, not represented by share
certificates ("Uncertificated Shares") shall be registered in the stock records
book of the Corporation. The Corporation at any time at its sole option may
deliver to any registered holder of such shares share certificates to represent
Uncertificated Shares previously issued (or deemed issued) to such holder.
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D. UNDESIGNATED PREFERRED STOCK
1. Authority to Issue. Subject to any limitations prescribed by law, the
Board of Directors or any authorized committee thereof is expressly authorized
to provide for the issuance of the shares of Undesignated Preferred Stock in one
or more series of such stock, and by filing a certificate pursuant to applicable
law of the State of Delaware, to establish or change from time to time the
number of shares to be included in each such series, and to fix the
designations, powers, preferences and the relative, participating, optional or
other special rights of the shares of each series and any qualifications,
limitations and restrictions thereof. Any action by the Board of Directors or
any authorized committee thereof under this Article D shall require the
affirmative vote of a majority of the directors then in office or a majority of
the members of such committee.
2. Powers, Preferences, Rights, Qualifications, Limitations and
Restriction of Each Series of Undesignated Preferred Stock. The Board of
Directors or any authorized committee thereof shall have the right to determine
or fix one or more of the following with respect to each series of Undesignated
Preferred Stock to the fullest extent permitted by law:
(a) The distinctive serial designation and the number of shares
constituting such series;
(b) The dividend rates or the amount of dividends to be paid on the
shares of such series, whether dividends shall be cumulative and, if so,
from which date or dates, the payment date or dates for dividends, and the
participating and other rights, if any, with respect to dividends;
(c) The voting powers, full or limited, if any, of the shares of
such series;
(d) Whether the shares of such series shall be redeemable and, if
so, the price or prices at which, and the terms and conditions on which,
such shares may be redeemed;
(e) The amount or amounts payable upon the shares of such series and
any preferences applicable thereto in the event of voluntary or
involuntary liquidation, dissolution or winding up of the Corporation;
(f) Whether the shares of such series shall be entitled to the
benefit of a sinking or retirement fund to be applied to the purchase or
redemption of such shares, and if so entitled, the amount of such fund and
the manner of its application, including the price or prices at which such
shares may be redeemed or purchased through the application of such fund;
(g) Whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes or of any other
series of the same
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or any other class or classes of stock of the Corporation and, if so
convertible or exchangeable, the conversion price or prices, or the rate
or rates of exchange, and the adjustments thereof, if any, at which such
conversion or exchange may be made, and any other terms and conditions of
such conversion or exchange;
(h) The price or other consideration for which the shares of such
series shall be issued;
(i) Whether the shares of such series which are redeemed or
converted shall have the status of authorized but unissued shares of
Undesignated Preferred Stock (or series thereof) and whether such shares
may be reissued as shares of the same or any other class or series of
stock; and
(j) Such other powers, preferences, rights, qualifications,
limitations and restrictions thereof as the Board of Directors or any
authorized committee thereof may deem advisable.
ARTICLE V
STOCKHOLDER ACTION
Any action required or permitted to be taken by the stockholders of the
Corporation at any annual or special meeting of stockholders of the Corporation
must be effected at a duly called annual or special meeting of stockholders and
may not be taken or effected by a written consent of stockholders in lieu
thereof.
ARTICLE VI
DIRECTORS
1. General. The business and affairs of the Corporation shall be managed
by or under the direction of the Board of Directors except as otherwise provided
herein or required by law.
2. Election of Directors. Election of Directors need not be by written
ballot unless the By-laws of the Corporation shall so provide.
3. Terms of Directors. The number of Directors of the Corporation shall be
fixed by resolution duly adopted from time to time by the Board of Directors.
The Directors, other than those who may be elected by the holders of any series
of Undesignated Preferred Stock of the Corporation, shall be classified, with
respect to the term for which they severally hold office, into three classes, as
nearly equal in number as possible. The initial Class I Directors of the
Corporation shall be Dennis R. Jolicoeur and Norman Kahn; the initial Class II
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Directors of the Corporation shall be David Laufer and P. Andrews McLane; and
the initial Class III Director of the Corporation shall be Elliott Balbert. The
initial Class I Directors shall serve for a term expiring at the annual meeting
of stockholders to be held in 1999, the initial Class II Directors shall serve
for a term expiring at the annual meeting of stockholders to be held in 2000,
and the initial Class III Director shall serve for a term expiring at the annual
meeting of stockholders to be held in 2001. At each annual meeting of
stockholders, the successor or successors of the class of Directors whose term
expires at that meeting shall be elected by a plurality of the votes cast at
such meeting and shall hold office for a term expiring at the annual meeting of
stockholders held in the third year following the year of their election. The
Directors elected to each class shall hold office until their successors are
duly elected and qualified or until their earlier resignation or removal.
Notwithstanding the foregoing, whenever, pursuant to the provisions of
Article IV of this Second Amended and Restated Certificate of Incorporation, the
holders of any one or more series of Undesignated Preferred Stock shall have the
right, voting separately as a series or together with holders of other such
series, to elect Directors at an annual or special meeting of stockholders, the
election, term of office, filling of vacancies and other features of such
directorships shall be governed by the terms of this Second Amended and Restated
Certificate of Incorporation and any certificate of designations applicable
thereto, and such Directors so elected shall not be divided into classes
pursuant to this Article V.3.
During any period when the holders of any series of Undesignated Preferred
Stock have the right to elect additional Directors as provided for or fixed
pursuant to the provisions of Article IV hereof, then upon commencement and for
the duration of the period during which such right continues: (i) the then
otherwise total authorized number of Directors of the Corporation shall
automatically be increased by such specified number of Directors, and the
holders of such Undesignated Preferred Stock shall be entitled to elect the
additional Directors so provided for or fixed pursuant to said provisions, and
(ii) each such additional Director shall serve until such Director's successor
shall have been duly elected and qualified, or until such Director's right to
hold such office terminates pursuant to said provisions, whichever occurs
earlier, subject to such Director's earlier death, disqualification, resignation
or removal. Except as otherwise provided by the Board of Directors in the
resolution or resolutions establishing such series, whenever the holders of any
series of Undesignated Preferred Stock having such right to elect additional
Directors are divested of such right pursuant to the provisions of such stock,
the terms of office of all such additional Directors elected by the holders of
such stock, or elected to fill any vacancies resulting from the death,
resignation, disqualification or removal of such additional Directors, shall
forthwith terminate and the total and authorized number of Directors of the
Corporation shall be reduced accordingly.
4. Vacancies. Subject to the rights, if any, of the holders of any series
of Undesignated Preferred Stock, Convertible Preferred Stock or Redeemable
Preferred Stock to elect Directors and to fill vacancies in the Board of
Directors relating thereto, any and all vacancies in the Board of Directors,
however occurring, including, without limitation, by reason of an increase in
size of the Board of Directors, or the death, resignation,
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disqualification or removal of a Director, shall be filled solely by the
affirmative vote of a majority of the remaining Directors then in office, even
if less than a quorum of the Board of Directors. Any Director appointed in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the class of Directors in which the new directorship was
created or the vacancy occurred and until such Director's successor shall have
been duly elected and qualified or until his or her earlier resignation or
removal. Subject to the rights, if any, of the holders of any series of
Undesignated Preferred Stock, Convertible Preferred Stock or Redeemable
Preferred Stock to elect Directors, when the number of Directors is increased or
decreased, the Board of Directors shall determine the class or classes to which
the increased or decreased number of Directors shall be apportioned; provided,
however, that no decrease in the number of Directors shall shorten the term of
any incumbent Director. In the event of a vacancy in the Board of Directors, the
remaining Directors, except as otherwise provided by law, may exercise the
powers of the full Board of Directors until the vacancy is filled.
5. Removal. Subject to the rights, if any, of any series of Undesignated
Preferred Stock, Convertible Preferred Stock or Redeemable Preferred Stock to
elect Directors and to remove any Director whom the holders of any such stock
have the right to elect, any Director (including persons elected by Directors to
fill vacancies in the Board of Directors) may be removed from office (i) only
with cause and (ii) only by the affirmative vote of at least two-thirds of the
total votes which would be eligible to be cast by stockholders in the election
of such Director. At least 30 days prior to any meeting of stockholders at which
it is proposed that any Director be removed from office, written notice of such
proposed removal shall be sent to the Director whose removal will be considered
at the meeting. For purposes of this Second Amended and Restated Certificate of
Incorporation, "cause," with respect to the removal of any Director shall mean
only (i) conviction of a felony, (ii) declaration of unsound mind by order of
court, (iii) gross dereliction of duty, (iv) commission of any action involving
moral turpitude, or (v) commission of an action which constitutes intentional
misconduct or a knowing violation of law if such action in either event results
both in an improper substantial personal benefit and a material injury to the
Corporation.
ARTICLE VII
LIMITATION OF LIABILITY
A Director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability (a) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders, (b) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (c) under Section 174 of the DGCL or (d) for any transaction
from which the Director derived an improper personal benefit. If the DGCL is
amended after the effective date of this Second Amended and Restated Certificate
of Incorporation to authorize corporate action further eliminating or limiting
the personal liability
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of Directors, then the liability of a Director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the DGCL, as so
amended.
Any repeal or modification of this Article VII by either of (i) the
stockholders of the Corporation or (ii) an amendment to the DGCL, shall not
adversely affect any right or protection existing at the time of such repeal or
modification with respect to any acts or omissions occurring before such repeal
or modification of a person serving as a Director at the time of such repeal or
modification.
ARTICLE VIII
AMENDMENT OF BY-LAWS
1. Amendment by Directors.
Except as otherwise provided by law, the By-laws of the Corporation may be
amended or repealed by the Board of Directors by the affirmative vote of a
majority of the Directors then in office.
2. Amendment by Stockholders.
The By-laws of the Corporation may be amended or repealed at any annual
meeting of stockholders, or special meeting of stockholders called for such
purpose, by the affirmative vote of at least two-thirds of the total votes
eligible to be cast on such amendment or repeal by holders of voting stock,
voting together as a single class; provided, however, that if the Board of
Directors recommends that stockholders approve such amendment or repeal at such
meeting of stockholders, such amendment or repeal shall only require the
affirmative vote of a majority of the total votes eligible to be cast on such
amendment or repeal by holders of voting stock, voting together as a single
class.
ARTICLE IX
AMENDMENT OF CERTIFICATE OF INCORPORATION
The Corporation reserves the right to amend or repeal this Second Amended
and Restated Certificate of Incorporation in the manner now or hereafter
prescribed by statute and this Second Amended and Restated Certificate of
Incorporation, and all rights conferred upon stockholders herein are granted
subject to this reservation. No amendment or repeal of this Second Amended and
Restated Certificate of Incorporation shall be made unless the same is first
approved by the Board of Directors pursuant to a resolution adopted by the Board
of Directors in accordance with Section 242 of the DGCL, and, except as
otherwise provided by law, thereafter approved by the stockholders. Whenever any
vote of the holders of voting
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stock is required, and in addition to any other vote of holders of voting stock
that is required by this Second Amended and Restated Certificate of
Incorporation or by law, the affirmative vote of a majority of the total votes
eligible to be cast by holders of voting stock with respect to such amendment or
repeal, voting together as a single class, at a duly constituted meeting of
stockholders called expressly for such purpose shall be required to amend or
repeal any provisions of this Second Amended and Restated Certificate of
Incorporation; provided, however, that the affirmative vote of not less than 80%
of the total votes eligible to be cast by holders of voting stock, voting
together as a single class, shall be required to amend or repeal any of the
provisions of Article V, Article VI, Article VII or Article IX of this Second
Amended and Restated Certificate of Incorporation.
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THIS SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION is executed
as of this ____ day of July, 1998.
NATROL, INC.
By:
----------------------------
Name: Elliott Balbert
Title: President
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Exhibit 3.4
THIRD AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
NATROL, INC.
NATROL, INC., a corporation organized and existing under the laws of the
State of Delaware (the "Corporation"), hereby certifies as follows:
1. The name of the Corporation is Natrol, Inc. The date of the filing of
its original Certificate of Incorporation with the Secretary of State of the
State of Delaware was October 1, 1997.
2. This Third Amended and Restated Certificate of Incorporation amends,
restates and integrates the provisions of the Second Amended and Restated
Certificate of Incorporation of the Corporation filed with the Secretary of
State of the State of Delaware on July __, 1998, as heretofore amended (the
"Second Amended and Restated Certificate of Incorporation"), and (i) was duly
adopted by the Board of Directors in accordance with the provisions of Section
245 of the General Corporation Law of the State of Delaware (the "DGCL"), (ii)
was declared by the Board of Directors to be advisable and in the best interests
of the Corporation and was directed by the Board of Directors to be submitted to
and be considered by the stockholders of the Corporation entitled to vote
thereon for approval by the affirmative vote of such stockholders in accordance
with Section 242 of the DGCL and (iii) was duly adopted by a stockholder consent
in lieu of a meeting of the stockholders, with the holders of a majority of the
outstanding shares of the Company's common stock, par value $.01 per share (the
"Common Stock"), and sixty-six and two-thirds percent of the outstanding shares
of the Company's Convertible Participating Preferred Stock, par value $.01 per
share (the "Convertible Preferred Stock"), in addition to the holders of a
majority of the outstanding shares of Common Stock and Convertible Preferred
Stock (on an as converted basis) voting as a single class, consenting to the
adoption of this Third Amended and Restated Certificate of Incorporation in
accordance with the provisions of Sections 228 and 242 of the DGCL and the terms
of the Second Amended and Restated Certificate of Incorporation, as amended,
such holders being all of the holders of the Corporation's capital stock
entitled to vote thereon.
3. The text of the Second Amended and Restated Certificate of
Incorporation is hereby amended and restated in its entirety to provide as
herein set forth in full.
ARTICLE I
The name of the Corporation is Natrol, Inc.
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ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street in the City of Wilmington, County of New Castle.
The name of its registered agent at such address is The Corporation Trust
Company.
ARTICLE III
The nature of the business or purposes to be conducted or promoted by the
Corporation is to engage in any lawful act or activity for which corporations
may be organized under the DGCL.
ARTICLE IV
The total number of shares of capital stock which the Corporation shall
have authority to issue is Fifty Two Million (52,000,000) shares, of which (a)
Fifty Million (50,000,000) shares shall be common stock, par value $.01 per
share (the "Common Stock"), and (b) Two Million (2,000,000) shares shall be
undesignated preferred stock, par value $.01 per share (the "Undesignated
Preferred Stock").
Except as otherwise restricted by this Third Amended and Restated
Certificate of Incorporation, the Corporation is authorized to issue, from time
to time, all or any portion of the capital stock of the Corporation which may
have been authorized but not issued, to such person or persons and for such
lawful consideration as it may deem appropriate, and generally in its absolute
discretion to determine the terms and manner of any disposition of such
authorized but unissued capital stock.
Any and all such shares issued for which the full consideration has been
paid or delivered shall be deemed fully paid shares of capital stock, and the
holder of such shares shall not be liable for any further call or assessment or
any other payment thereon.
The number of authorized shares of the class of Undesignated Preferred
Stock may from time to time be increased or decreased (but not below the number
of shares outstanding) by the affirmative vote of the holders of a majority of
the shares of Common Stock entitled to vote, without a vote of the holders of
the Undesignated Preferred Stock.
The designations, powers, preferences and rights of, and the
qualifications, limitations and restrictions upon, each class or series of stock
shall be determined in accordance with, or as set forth below in, this Article
IV.
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A. COMMON STOCK
1. Designation; Ranking. A total of 50,000,000 shares of the Corporation's
common stock shall be designated as Common Stock, $.01 par value per share (the
"Common Stock").
2. Voting. Each holder of record shall be entitled to one vote for each
share of Common Stock standing in his name on the books of the Corporation.
Except as required by law or as set forth herein, the holders of Common Stock
(to the extent permitted by this Section 2) and Undesignated Preferred Stock (to
the extent permitted by Article B hereof) shall vote together as a single class
on all matters submitted to the stockholders for a vote.
3. Dividends. The holders of Common Stock shall be entitled to receive
dividends out of funds legally available therefor at such times and in such
amounts as the Board of Directors may determine in its sole discretion.
4. Liquidation. Upon any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary (a "Liquidation Event"), after the
payment or provision for payment of all debts and liabilities of the Corporation
and all preferential amounts to which the holders of Undesignated Preferred
Stock are entitled with respect to the distribution of assets in liquidation,
the holders of Common Stock shall be entitled to share ratably in the remaining
assets of the Corporation available for distribution.
B. UNDESIGNATED PREFERRED STOCK
1. Authority to Issue. Subject to any limitations prescribed by law, the
Board of Directors or any authorized committee thereof is expressly authorized
to provide for the issuance of the shares of Undesignated Preferred Stock in one
or more series of such stock, and by filing a certificate pursuant to applicable
law of the State of Delaware, to establish or change from time to time the
number of shares to be included in each such series, and to fix the
designations, powers, preferences and the relative, participating, optional or
other special rights of the shares of each series and any qualifications,
limitations and restrictions thereof. Any action by the Board of Directors or
any authorized committee thereof under this Article B shall require the
affirmative vote of a majority of the directors then in office or a majority of
the members of such committee.
2. Powers, Preferences, Rights, Qualifications, Limitations and
Restriction of Each Series of Undesignated Preferred Stock. The Board of
Directors or any authorized committee thereof shall have the right to determine
or fix one or more of the following with respect to each series of Undesignated
Preferred Stock to the fullest extent permitted by law:
(a) The distinctive serial designation and the number of shares
constituting such series;
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(b) The dividend rates or the amount of dividends to be paid on the
shares of such series, whether dividends shall be cumulative and, if so,
from which date or dates, the payment date or dates for dividends, and the
participating and other rights, if any, with respect to dividends;
(c) The voting powers, full or limited, if any, of the shares of
such series;
(d) Whether the shares of such series shall be redeemable and, if
so, the price or prices at which, and the terms and conditions on which,
such shares may be redeemed;
(e) The amount or amounts payable upon the shares of such series and
any preferences applicable thereto in the event of voluntary or
involuntary liquidation, dissolution or winding up of the Corporation;
(f) Whether the shares of such series shall be entitled to the
benefit of a sinking or retirement fund to be applied to the purchase or
redemption of such shares, and if so entitled, the amount of such fund and
the manner of its application, including the price or prices at which such
shares may be redeemed or purchased through the application of such fund;
(g) Whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes or of any other
series of the same or any other class or classes of stock of the
Corporation and, if so convertible or exchangeable, the conversion price
or prices, or the rate or rates of exchange, and the adjustments thereof,
if any, at which such conversion or exchange may be made, and any other
terms and conditions of such conversion or exchange;
(h) The price or other consideration for which the shares of such
series shall be issued;
(i) Whether the shares of such series which are redeemed or
converted shall have the status of authorized but unissued shares of
Undesignated Preferred Stock (or series thereof) and whether such shares
may be reissued as shares of the same or any other class or series of
stock; and
(j) Such other powers, preferences, rights, qualifications,
limitations and restrictions thereof as the Board of Directors or any
authorized committee thereof may deem advisable.
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ARTICLE V
STOCKHOLDER ACTION
Any action required or permitted to be taken by the stockholders of the
Corporation at any annual or special meeting of stockholders of the Corporation
must be effected at a duly called annual or special meeting of stockholders and
may not be taken or effected by a written consent of stockholders in lieu
thereof.
ARTICLE VI
DIRECTORS
1. General. The business and affairs of the Corporation shall be managed
by or under the direction of the Board of Directors except as otherwise provided
herein or required by law.
2. Election of Directors. Election of Directors need not be by written
ballot unless the By-laws of the Corporation shall so provide.
3. Terms of Directors. The number of Directors of the Corporation shall be
fixed by resolution duly adopted from time to time by the Board of Directors.
The Directors, other than those who may be elected by the holders of any series
of Undesignated Preferred Stock of the Corporation, shall be classified, with
respect to the term for which they severally hold office, into three classes, as
nearly equal in number as possible. The initial Class I Directors of the
Corporation shall be Dennis R. Jolicoeur and Norman Kahn; the initial Class II
Directors of the Corporation shall be David Laufer and P. Andrews McLane; and
the initial Class III Director of the Corporation shall be Elliott Balbert. The
initial Class I Directors shall serve for a term expiring at the annual meeting
of stockholders to be held in 1999, the initial Class II Directors shall serve
for a term expiring at the annual meeting of stockholders to be held in 2000,
and the initial Class III Director shall serve for a term expiring at the annual
meeting of stockholders to be held in 2001. At each annual meeting of
stockholders, the successor or successors of the class of Directors whose term
expires at that meeting shall be elected by a plurality of the votes cast at
such meeting and shall hold office for a term expiring at the annual meeting of
stockholders held in the third year following the year of their election. The
Directors elected to each class shall hold office until their successors are
duly elected and qualified or until their earlier resignation or removal.
Notwithstanding the foregoing, whenever, pursuant to the provisions of
Article IV of this Third Amended and Restated Certificate of Incorporation, the
holders of any one or more series of Undesignated Preferred Stock shall have the
right, voting separately as a series or together with holders of other such
series, to elect Directors at an annual or special meeting of stockholders, the
election, term of office, filling of vacancies and other features of such
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directorships shall be governed by the terms of this Third Amended and Restated
Certificate of Incorporation and any certificate of designations applicable
thereto, and such Directors so elected shall not be divided into classes
pursuant to this Article V.3.
During any period when the holders of any series of Undesignated Preferred
Stock have the right to elect additional Directors as provided for or fixed
pursuant to the provisions of Article IV hereof, then upon commencement and for
the duration of the period during which such right continues: (i) the then
otherwise total authorized number of Directors of the Corporation shall
automatically be increased by such specified number of Directors, and the
holders of such Undesignated Preferred Stock shall be entitled to elect the
additional Directors so provided for or fixed pursuant to said provisions, and
(ii) each such additional Director shall serve until such Director's successor
shall have been duly elected and qualified, or until such Director's right to
hold such office terminates pursuant to said provisions, whichever occurs
earlier, subject to such Director's earlier death, disqualification, resignation
or removal. Except as otherwise provided by the Board of Directors in the
resolution or resolutions establishing such series, whenever the holders of any
series of Undesignated Preferred Stock having such right to elect additional
Directors are divested of such right pursuant to the provisions of such stock,
the terms of office of all such additional Directors elected by the holders of
such stock, or elected to fill any vacancies resulting from the death,
resignation, disqualification or removal of such additional Directors, shall
forthwith terminate and the total and authorized number of Directors of the
Corporation shall be reduced accordingly.
4. Vacancies. Subject to the rights, if any, of the holders of any series
of Undesignated Preferred Stock to elect Directors and to fill vacancies in the
Board of Directors relating thereto, any and all vacancies in the Board of
Directors, however occurring, including, without limitation, by reason of an
increase in size of the Board of Directors, or the death, resignation,
disqualification or removal of a Director, shall be filled solely by the
affirmative vote of a majority of the remaining Directors then in office, even
if less than a quorum of the Board of Directors. Any Director appointed in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the class of Directors in which the new directorship was
created or the vacancy occurred and until such Director's successor shall have
been duly elected and qualified or until his or her earlier resignation or
removal. Subject to the rights, if any, of the holders of any series of
Undesignated Preferred Stock to elect Directors, when the number of Directors is
increased or decreased, the Board of Directors shall determine the class or
classes to which the increased or decreased number of Directors shall be
apportioned; provided, however, that no decrease in the number of Directors
shall shorten the term of any incumbent Director. In the event of a vacancy in
the Board of Directors, the remaining Directors, except as otherwise provided by
law, may exercise the powers of the full Board of Directors until the vacancy is
filled.
5. Removal. Subject to the rights, if any, of any series of Undesignated
Preferred Stock to elect Directors and to remove any Director whom the holders
of any such stock have the right to elect, any Director (including persons
elected by Directors to fill vacancies in the Board of Directors) may be removed
from office (i) only with cause and (ii) only by the
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affirmative vote of at least two-thirds of the total votes which would be
eligible to be cast by stockholders in the election of such Director. At least
30 days prior to any meeting of stockholders at which it is proposed that any
Director be removed from office, written notice of such proposed removal shall
be sent to the Director whose removal will be considered at the meeting. For
purposes of this Third Amended and Restated Certificate of Incorporation,
"cause," with respect to the removal of any Director shall mean only (i)
conviction of a felony, (ii) declaration of unsound mind by order of court,
(iii) gross dereliction of duty, (iv) commission of any action involving moral
turpitude, or (v) commission of an action which constitutes intentional
misconduct or a knowing violation of law if such action in either event results
both in an improper substantial personal benefit and a material injury to the
Corporation.
ARTICLE VII
LIMITATION OF LIABILITY
A Director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability (a) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders, (b) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (c) under Section 174 of the DGCL or (d) for any transaction
from which the Director derived an improper personal benefit. If the DGCL is
amended after the effective date of this Third Amended and Restated Certificate
of Incorporation to authorize corporate action further eliminating or limiting
the personal liability of Directors, then the liability of a Director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the DGCL, as so amended.
Any repeal or modification of this Article VII by either of (i) the
stockholders of the Corporation or (ii) an amendment to the DGCL, shall not
adversely affect any right or protection existing at the time of such repeal or
modification with respect to any acts or omissions occurring before such repeal
or modification of a person serving as a Director at the time of such repeal or
modification.
ARTICLE VIII
AMENDMENT OF BY-LAWS
1. Amendment by Directors.
Except as otherwise provided by law, the By-laws of the Corporation may be
amended or repealed by the Board of Directors by the affirmative vote of a
majority of the Directors then in office.
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2. Amendment by Stockholders.
The By-laws of the Corporation may be amended or repealed at any annual
meeting of stockholders, or special meeting of stockholders called for such
purpose, by the affirmative vote of at least two-thirds of the total votes
eligible to be cast on such amendment or repeal by holders of voting stock,
voting together as a single class; provided, however, that if the Board of
Directors recommends that stockholders approve such amendment or repeal at such
meeting of stockholders, such amendment or repeal shall only require the
affirmative vote of a majority of the total votes eligible to be cast on such
amendment or repeal by holders of voting stock, voting together as a single
class.
ARTICLE IX
AMENDMENT OF CERTIFICATE OF INCORPORATION
The Corporation reserves the right to amend or repeal this Third Amended
and Restated Certificate of Incorporation in the manner now or hereafter
prescribed by statute and this Third Amended and Restated Certificate of
Incorporation, and all rights conferred upon stockholders herein are granted
subject to this reservation. No amendment or repeal of this Third Amended and
Restated Certificate of Incorporation shall be made unless the same is first
approved by the Board of Directors pursuant to a resolution adopted by the Board
of Directors in accordance with Section 242 of the DGCL, and, except as
otherwise provided by law, thereafter approved by the stockholders. Whenever any
vote of the holders of voting stock is required, and in addition to any other
vote of holders of voting stock that is required by this Third Amended and
Restated Certificate of Incorporation or by law, the affirmative vote of a
majority of the total votes eligible to be cast by holders of voting stock with
respect to such amendment or repeal, voting together as a single class, at a
duly constituted meeting of stockholders called expressly for such purpose shall
be required to amend or repeal any provisions of this Third Amended and Restated
Certificate of Incorporation; provided, however, that the affirmative vote of
not less than 80% of the total votes eligible to be cast by holders of voting
stock, voting together as a single class, shall be required to amend or repeal
any of the provisions of Article V, Article VI, Article VII or Article IX of
this Third Amended and Restated Certificate of Incorporation.
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THIS THIRD AMENDED AND RESTATED CERTIFICATE OF INCORPORATION is executed
as of this ____ day of July, 1998.
NATROL, INC.
By:
---------------------------------
Name: Elliott Balbert
Title: President
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Exhibit 3.6
AMENDED AND RESTATED
BY-LAWS
OF
NATROL, INC.
ARTICLE I
Stockholders
SECTION 1. Annual Meeting. The annual meeting of stockholders shall be
held at the hour, date and place within or without the United States which is
fixed by the majority of the Board of Directors, the Chairman of the Board, if
one is elected, or the President, which time, date and place may subsequently be
changed at any time by vote of the Board of Directors. If no annual meeting has
been held for a period of thirteen months after the Corporation's last annual
meeting of stockholders, a special meeting in lieu thereof may be held, and such
special meeting shall have, for the purposes of these By-laws or otherwise, all
the force and effect of an annual meeting. Any and all references hereafter in
these By-laws to an annual meeting or annual meetings also shall be deemed to
refer to any special meeting(s) in lieu thereof.
SECTION 2. Matters to be Considered at Annual Meetings. At any annual
meeting of stockholders or any special meeting in lieu of annual meeting of
stockholders (the "Annual Meeting"), only such business shall be conducted, and
only such proposals shall be acted upon, as shall have been properly brought
before such Annual Meeting. To be considered as properly brought before an
Annual Meeting, business must be: (a) specified in the notice of meeting, (b)
otherwise properly brought before the meeting by, or at the direction of, the
Board of Directors, or (c) otherwise properly brought before the meeting by any
holder of record (both as of the time notice of such proposal is given by the
stockholder as set forth below and as of the record date for the Annual Meeting
in question) of any shares of capital stock of the Corporation entitled to vote
at such Annual Meeting who complies with the requirements set forth in this
Section 2.
In addition to any other applicable requirements, for business to be
properly brought before an Annual Meeting by a stockholder of record of any
shares of capital stock entitled to vote at such Annual Meeting, such
stockholder shall: (a) give timely notice as required by this Section 2 to the
Secretary of the Corporation and (b) be present at such meeting, either in
person or by a representative. For the first Annual Meeting following the
initial public offering of common stock of the Corporation, a stockholder's
notice shall be timely if
<PAGE>
delivered to, or mailed to and received by, the Corporation at its principal
executive office not later than the close of business on the later of (a) the
75th day prior to the scheduled date of such Annual Meeting or (b) the 15th day
following the day on which public announcement of the date of such Annual
Meeting is first made or sent by the Corporation. For all subsequent Annual
Meetings, a stockholder's notice shall be timely if delivered to, or mailed to
and received by, the Corporation at its principal executive office not less than
75 days nor more than 120 days prior to the anniversary date of the immediately
preceding Annual Meeting (the "Anniversary Date"); provided, however, that in
the event the Annual Meeting is scheduled to be held on a date more than 30 days
before the Anniversary Date or more than 60 days after the Anniversary Date, a
stockholder's notice shall be timely if delivered to, or mailed to and received
by, the Corporation at its principal executive office not later than the close
of business on the later of (a) the 75th day prior to the scheduled date of such
Annual Meeting or (b) the 15th day following the day on which public
announcement of the date of such Annual Meeting is first made by the
Corporation.
For purposes of these By-laws, "public announcement" shall mean: (a)
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service, (b) a report or other document filed
publicly with the Securities and Exchange Commission (including, without
limitation, a Form 8-K), or (c) a letter or report sent to stockholders of
record of the Corporation at the time of the mailing of such letter or report.
A stockholder's notice to the Secretary shall set forth as to each matter
proposed to be brought before an Annual Meeting: (a) a brief description of the
business the stockholder desires to bring before such Annual Meeting and the
reasons for conducting such business at such Annual Meeting, (b) the name and
address, as they appear on the Corporation's stock transfer books, of the
stockholder proposing such business, (c) the class and number of shares of the
Corporation's capital stock beneficially owned by the stockholder proposing such
business, (d) the names and addresses of the beneficial owners, if any, of any
capital stock of the Corporation registered in such stockholder's name on such
books, and the class and number of shares of the Corporation's capital stock
beneficially owned by such beneficial owners, (e) the names and addresses of
other stockholders known by the stockholder proposing such business to support
such proposal, and the class and number of shares of the Corporation's capital
stock beneficially owned by such other stockholders, and (f) any material
interest of the stockholder proposing to bring such business before such meeting
(or any other stockholders known to be supporting such proposal) in such
proposal.
If the Board of Directors or a designated committee thereof determines
that any stockholder proposal was not made in a timely fashion in accordance
with the provisions of this Section 2 or that the information provided in a
stockholder's notice does not satisfy the information requirements of this
Section 2 in any material respect, such proposal shall not be presented for
action at the Annual Meeting in question. If neither the Board of Directors nor
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such committee makes a determination as to the validity of any stockholder
proposal in the manner set forth above, the presiding officer of the Annual
Meeting shall determine whether the stockholder proposal was made in accordance
with the terms of this Section 2. If the presiding officer determines that any
stockholder proposal was not made in a timely fashion in accordance with the
provisions of this Section 2 or that the information provided in a stockholder's
notice does not satisfy the information requirements of this Section 2 in any
material respect, such proposal shall not be presented for action at the Annual
Meeting in question. If the Board of Directors, a designated committee thereof
or the presiding officer determines that a stockholder proposal was made in
accordance with the requirements of this Section 2, the presiding officer shall
so declare at the Annual Meeting.
Notwithstanding the foregoing provisions of this By-Law, a stockholder
shall also comply with all applicable requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and the rules and regulations
thereunder with respect to the matters set forth in this Section 2, and nothing
in this Section 2 shall be deemed to affect any rights of stockholders to
request inclusion of proposals in the Corporation's proxy statement pursuant to
Rule 14a-8 under the Exchange Act.
SECTION 3. Special Meetings. Except as otherwise required by law and
subject to the rights, if any, of the holders of any series of preferred stock,
special meetings of the stockholders of the Corporation may be called only by
the President or the Board of Directors pursuant to a resolution approved by the
affirmative vote of a majority of the directors then in office.
SECTION 4. Matters to be Considered at Special Meetings. Only those
matters set forth in the notice of the special meeting may be considered or
acted upon at a special meeting of stockholders of the Corporation, unless
otherwise provided by law.
SECTION 5. Notice of Meetings; Adjournments. A written notice of each
Annual Meeting stating the hour, date and place of such Annual Meeting shall be
given by the Secretary or an Assistant Secretary (or other person authorized by
these By-laws or by law) not less than 10 days nor more than 60 days before the
Annual Meeting, to each stockholder entitled to vote thereat and to each
stockholder who, by law or under the Certificate of Incorporation of the
Corporation (as the same may hereafter be amended and/or restated, the
"Certificate") or under these By-laws, is entitled to such notice, by delivering
such notice to him or by mailing it, postage prepaid, addressed to such
stockholder at the address of such stockholder as it appears on the
Corporation's stock transfer books. Such notice shall be deemed to be given when
hand delivered to such address or deposited in the mail so addressed, with
postage prepaid.
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Notice of all special meetings of stockholders shall be given in the same
manner as provided for Annual Meetings, except that the written notice of all
special meetings shall state the purpose or purposes for which the meeting has
been called.
Notice of an Annual Meeting or special meeting of stockholders need not be
given to a stockholder if a written waiver of notice is signed before or after
such meeting by such stockholder or if such stockholder attends such meeting,
unless such attendance was for the express purpose of objecting at the beginning
of the meeting to the transaction of any business because the meeting was not
lawfully called or convened. Neither the business to be transacted at, nor the
purpose of, any Annual Meeting or special meeting of stockholders need be
specified in any written waiver of notice.
The Board of Directors may postpone and reschedule any previously
scheduled Annual Meeting or special meeting of stockholders and any record date
with respect thereto, regardless of whether any notice or public disclosure with
respect to any such meeting has been sent or made pursuant to Section 2 of this
Article I or Section 3 of Article II hereof or otherwise. In no event shall the
public announcement of an adjournment, postponement or rescheduling of any
previously scheduled meeting of stockholders commence a new time period for the
giving of a stockholder's notice under Section 2 of Article I and Section 3 of
Article II of these By-laws.
When any meeting is convened, the presiding officer may adjourn the
meeting if (a) no quorum is present for the transaction of business, (b) the
Board of Directors determines that adjournment is necessary or appropriate to
enable the stockholders to consider fully information which the Board of
Directors determines has not been made sufficiently or timely available to
stockholders, or (c) the Board of Directors determines that adjournment is
otherwise in the best interests of the Corporation. When any Annual Meeting or
special meeting of stockholders is adjourned to another hour, date or place,
notice need not be given of the adjourned meeting other than an announcement at
the meeting at which the adjournment is taken of the hour, date and place to
which the meeting is adjourned; provided, however, that if the adjournment is
for more than 30 days, or if after the adjournment a new record date is fixed
for the adjourned meeting, notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote thereat and each stockholder who, by
law or under the Certificate or these By-laws, is entitled to such notice.
SECTION 6. Quorum. The holders of shares of voting stock representing a
majority of the voting power of the outstanding shares of voting stock issued,
outstanding and entitled to vote at a meeting of stockholders, represented in
person or by proxy at such meeting, shall constitute a quorum; but if less than
a quorum is present at a meeting, the holders of voting stock representing a
majority of the voting power present at the meeting or the presiding officer may
adjourn the meeting from time to time, and the meeting may be held as adjourned
without further notice, except as provided in Section 5 of this Article I. At
such adjourned
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meeting at which a quorum is present, any business may be transacted which might
have been transacted at the meeting as originally noticed. The stockholders
present at a duly constituted meeting may continue to transact business until
adjournment, notwithstanding the withdrawal of enough stockholders to leave less
than a quorum.
SECTION 7. Voting and Proxies. Stockholders shall have one vote for
each share of stock entitled to vote owned by them of record according to the
books of the Corporation, unless otherwise provided by law or by the
Certificate. Stockholders may vote either in person or by proxy, but no proxy
shall be voted or acted upon after three years from its date, unless the
proxy provides for a longer period. Proxies shall be filed with the Secretary
of the meeting before being voted. Except as otherwise limited therein or as
otherwise provided by law, proxies shall entitle the persons authorized
thereby to vote at any adjournment of such meeting, but they shall not be
valid after final adjournment of such meeting. A proxy with respect to stock
held in the name of two or more persons shall be valid if executed by or on
behalf of any one of them unless at or prior to the exercise of the proxy the
Corporation receives a specific written notice to the contrary from any one
of them. A proxy purporting to be executed by or on behalf of a stockholder
shall be deemed valid, and the burden of proving invalidity shall rest on the
challenger.
SECTION 8. Action at Meeting. When a quorum is present, any matter
before any meeting of stockholders shall be decided by the vote of a majority
of the voting power of shares of voting stock present in person or
represented by proxy at such meeting and entitled to vote on such matter,
except where a larger vote is required by law, by the Certificate or by these
By-laws. Any election of directors by stockholders shall be determined by a
plurality of the votes cast, except where a larger vote is required by law,
by the Certificate or by these By-laws. The Corporation shall not directly or
indirectly vote any shares of its own stock that belong to the Corporation;
provided, however, that the Corporation may vote shares which it holds in a
fiduciary capacity to the extent permitted by law.
SECTION 9. Stockholder Lists. The Secretary or an Assistant Secretary (or
the Corporation's transfer agent or other person authorized by these By-laws or
by law) shall prepare and make, at least 10 days before every Annual Meeting or
special meeting of stockholders, a complete list of the stockholders entitled to
vote at the meeting, arranged in alphabetical order, and showing the address of
each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder, for
any purpose germane to the meeting, during ordinary business hours, for a period
of at least 10 days prior to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or, if not so specified, at the place where the meeting is to be
held. The list shall also be produced and kept at the hour, date and place of
the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
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SECTION 10. Presiding Officer. The Chairman of the Board, if one is
elected, or if not elected or in his or her absence, the President, shall
preside at all Annual Meetings or special meetings of stockholders and shall
have the power, among other things, to adjourn such meeting at any time and from
time to time, subject to Sections 5 and 6 of this Article I. The order of
business and all other matters of procedure at any meeting of the stockholders
shall be determined by the presiding officer.
SECTION 11. Voting Procedures and Inspectors of Elections. The Corporation
shall, in advance of any meeting of stockholders, appoint one or more inspectors
to act at the meeting and make a written report thereof. The Corporation may
designate one or more persons as alternate inspectors to replace any inspector
who fails to act. If no inspector or alternate is able to act at a meeting of
stockholders, the presiding officer shall appoint one or more inspectors to act
at the meeting. Any inspector may, but need not, be an officer, employee or
agent of the Corporation. Each inspector, before entering upon the discharge of
his or her duties, shall take and sign an oath faithfully to execute the duties
of inspector with strict impartiality and according to the best of his or her
ability. The inspectors shall perform such duties as are required by the General
Corporation Law of the State of Delaware, as amended from time to time (the
"DGCL"), including the counting of all votes and ballots. The inspectors may
appoint or retain other persons or entities to assist the inspectors in the
performance of the duties of the inspectors. The presiding officer may review
all determinations made by the inspectors, and in so doing the presiding officer
shall be entitled to exercise his or her sole judgment and discretion and he or
she shall not be bound by any determinations made by the inspectors. All
determinations by the inspectors and, if applicable, the presiding officer,
shall be subject to further review by any court of competent jurisdiction.
ARTICLE II
Directors
SECTION 1. Powers. The business and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors except as otherwise
provided by the Certificate or required by law.
SECTION 2. Number and Terms. The number of directors of the Corporation
shall be fixed by resolution duly adopted from time to time by the Board of
Directors. The directors shall hold office in the manner provided in the
Certificate.
SECTION 3. Director Nominations. Nominations of candidates for election as
directors of the Corporation at any Annual Meeting may be made only (a) by, or
at the direction of, a majority of the Board of Directors or (b) by any holder
of record (both as of the time notice of such nomination is given by the
stockholder as set forth below and as of the
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record date for the Annual Meeting in question) of any shares of the capital
stock of the Corporation entitled to vote at such Annual Meeting who complies
with the timing, informational and other requirements set forth in this Section
3. Any stockholder who has complied with the timing, informational and other
requirements set forth in this Section 3 and who seeks to make such a
nomination, or his, her or its representative, must be present in person at the
Annual Meeting. Only persons nominated in accordance with the procedures set
forth in this Section 3 shall be eligible for election as directors at an Annual
Meeting.
Nominations, other than those made by, or at the direction of, the Board
of Directors, shall be made pursuant to timely notice in writing to the
Secretary of the Corporation as set forth in this Section 3. For the first
Annual Meeting following the initial public offering of common stock of the
Corporation, a stockholder's notice shall be timely if delivered to, or mailed
to and received by, the Corporation at its principal executive office not later
than the close of business on the later of (a) the 75th day prior to the
scheduled date of such Annual Meeting or (b) the 15th day following the day on
which public announcement of the date of such Annual Meeting is first made or
sent by the Corporation. For all subsequent Annual Meetings, a stockholder's
notice shall be timely if delivered to, or mailed to and received by, the
Corporation at its principal executive office not less than 75 days nor more
than 120 days prior to the Anniversary Date; provided, however, that in the
event the Annual Meeting is scheduled to be held on a date more than 30 days
before the Anniversary Date or more than 60 days after the Anniversary Date, a
stockholder's notice shall be timely if delivered to, or mailed and received by,
the Corporation at its principal executive office not later than the close of
business on the later of (a) the 75th day prior to the scheduled date of such
Annual Meeting or (b) the 15th day following the day on which public
announcement of the date of such Annual Meeting is first made by the
Corporation.
A stockholder's notice to the Secretary shall set forth as to each person
whom the stockholder proposes to nominate for election or re-election as a
director: (a) the name, age, business address and residence address of such
person, (b) the principal occupation or employment of such person, (c) the class
and number of shares of the Corporation's capital stock which are beneficially
owned by such person on the date of such stockholder notice, and (d) the consent
of each nominee to serve as a director if elected. A stockholder's notice to the
Secretary shall further set forth as to the stockholder giving such notice: (a)
the name and address, as they appear on the Corporation's stock transfer books,
of such stockholder and of the beneficial owners (if any) of the Corporation's
capital stock registered in such stockholder's name and the name and address of
other stockholders known by such stockholder to be supporting such nominee(s),
(b) the class and number of shares of the Corporation's capital stock which are
held of record, beneficially owned or represented by proxy by such stockholder
and by any other stockholders known by such stockholder to be supporting such
nominee(s) on the record date for the Annual Meeting in question (if such date
shall then have been made publicly available) and on the date of such
stockholder's notice, and (c) a description of all arrangements or
understandings between such stockholder and each nominee
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and any other person or persons (naming such person or persons) pursuant to
which the nomination or nominations are to be made by such stockholder.
If the Board of Directors or a designated committee thereof determines
that any stockholder nomination was not made in accordance with the terms of
this Section 3 or that the information provided in a stockholder's notice does
not satisfy the informational requirements of this Section 3 in any material
respect, then such nomination shall not be considered at the Annual Meeting in
question. If neither the Board of Directors nor such committee makes a
determination as to whether a nomination was made in accordance with the
provisions of this Section 3, the presiding officer of the Annual Meeting shall
determine whether a nomination was made in accordance with such provisions. If
the presiding officer determines that any stockholder nomination was not made in
a timely fashion in accordance with the terms of this Section 3 or that the
information provided in a stockholder's notice does not satisfy the
informational requirements of this Section 3 in any material respect, then such
nomination shall not be considered at the Annual Meeting in question. If the
Board of Directors, a designated committee thereof or the presiding officer
determines that a nomination was made in accordance with the terms of this
Section 3, the presiding officer shall so declare at the Annual Meeting and
ballots shall be provided for use at the meeting with respect to such nominee.
Notwithstanding anything to the contrary in the second sentence of the
second paragraph of this Section 3, in the event that the number of directors to
be elected to the Board of Directors of the Corporation is increased and there
is no public announcement by the Corporation naming all of the nominees for
director or specifying the size of the increased Board of Directors at least 75
days prior to the Anniversary Date, a stockholder's notice required by this
Section 3 shall also be considered timely, but only with respect to nominees for
any new positions created by such increase, if such notice shall be delivered
to, or mailed to and received by, the Corporation at its principal executive
office not later than the close of business on the 15th day following the day on
which such public announcement is first made by the Corporation.
No person shall be elected by the stockholders as a director of the
Corporation unless nominated in accordance with the procedures set forth in this
Section. Election of directors at an Annual Meeting need not be by written
ballot, unless otherwise provided by the Board of Directors or presiding officer
at such Annual Meeting. If written ballots are to be used, ballots bearing the
names of all the persons who have been nominated for election as directors at
the Annual Meeting in accordance with the procedures set forth in this Section
shall be provided for use at the Annual Meeting.
SECTION 4. Qualification. No director need be a stockholder of the
Corporation.
SECTION 5. Vacancies. Subject to the rights, if any, of the holders of any
series of preferred stock to elect directors and to fill vacancies in the Board
of Directors relating
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thereto, any and all vacancies in the Board of Directors, however occurring,
including, without limitation, by reason of an increase in size of the Board of
Directors, or the death, resignation, disqualification or removal of a director,
shall be filled solely by the affirmative vote of a majority of the remaining
directors then in office, even if less than a quorum of the Board of Directors.
Any director appointed in accordance with the preceding sentence shall hold
office for the remainder of the full term of the class of directors in which the
new directorship was created or the vacancy occurred and until such director's
successor shall have been duly elected and qualified or until his or her earlier
resignation or removal. Subject to the rights, if any, of the holders of any
series of preferred stock to elect directors, when the number of directors is
increased or decreased, the Board of Directors shall determine the class or
classes to which the increased or decreased number of directors shall be
apportioned; provided, however, that no decrease in the number of directors
shall shorten the term of any incumbent director. In the event of a vacancy in
the Board of Directors, the remaining directors, except as otherwise provided by
law, may exercise the powers of the full Board of Directors until the vacancy is
filled.
SECTION 6. Removal. Directors may be removed from office in the manner
provided in the Certificate.
SECTION 7. Resignation. A director may resign at any time by giving
written notice to the Chairman of the Board, if one is elected, the President or
the Secretary. A resignation shall be effective upon receipt, unless the
resignation otherwise provides.
SECTION 8. Regular Meetings. The regular annual meeting of the Board of
Directors shall be held, without notice other than this Section 8, on the same
date and at the same place as the Annual Meeting following the close of such
meeting of stockholders. Other regular meetings of the Board of Directors may be
held at such hour, date and place as the Board of Directors may by resolution
from time to time determine without notice other than such resolution.
SECTION 9. Special Meetings. Special meetings of the Board of Directors
may be called, orally or in writing, by or at the request of a majority of the
directors, the Chairman of the Board, if one is elected, or the President. The
person calling any such special meeting of the Board of Directors may fix the
hour, date and place thereof.
SECTION 10. Notice of Meetings. Notice of the hour, date and place of all
special meetings of the Board of Directors shall be given to each director by
the Secretary or an Assistant Secretary, or in case of the death, absence,
incapacity or refusal of such persons, by the Chairman of the Board, if one is
elected, or the President or such other officer designated by the Chairman of
the Board, if one is elected, or the President. Notice of any special meeting of
the Board of Directors shall be given to each director in person, by telephone,
or by facsimile, telex, telecopy, telegram, or other written form of electronic
communication, sent to
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his or her business or home address, at least 24 hours in advance of the
meeting, or by written notice mailed to his or her business or home address, at
least 48 hours in advance of the meeting. Such notice shall be deemed to be
delivered when hand delivered to such address, read to such director by
telephone, deposited in the mail so addressed, with postage thereon prepaid if
mailed, dispatched or transmitted if faxed, telexed or telecopied, or when
delivered to the telegraph company if sent by telegram.
When any Board of Directors meeting, either regular or special, is
adjourned for 30 days or more, notice of the adjourned meeting shall be given as
in the case of an original meeting. It shall not be necessary to give any notice
of the hour, date or place of any meeting adjourned for less than 30 days or of
the business to be transacted thereat, other than an announcement at the meeting
at which such adjournment is taken of the hour, date and place to which the
meeting is adjourned.
A written waiver of notice signed before or after a meeting by a director
and filed with the records of the meeting shall be deemed to be equivalent to
notice of the meeting. The attendance of a director at a meeting shall
constitute a waiver of notice of such meeting, except where a director attends a
meeting for the express purpose of objecting at the beginning of the meeting to
the transaction of any business because such meeting is not lawfully called or
convened. Except as otherwise required by law, by the Certificate or by these
By-laws, neither the business to be transacted at, nor the purpose of, any
meeting of the Board of Directors need be specified in the notice or waiver of
notice of such meeting.
SECTION 11. Quorum. At any meeting of the Board of Directors, a majority
of the directors then in office shall constitute a quorum for the transaction of
business, but if less than a quorum is present at a meeting, a majority of the
directors present may adjourn the meeting from time to time, and the meeting may
be held as adjourned without further notice, except as provided in Section 10 of
this Article II. Any business which might have been transacted at the meeting as
originally noticed may be transacted at such adjourned meeting at which a quorum
is present.
SECTION 12. Action at Meeting. At any meeting of the Board of Directors at
which a quorum is present, a majority of the directors present may take any
action on behalf of the Board of Directors, unless otherwise required by law, by
the Certificate or by these By-laws.
SECTION 13. Action by Consent. Any action required or permitted to be
taken at any meeting of the Board of Directors may be taken without a meeting if
all members of the Board of Directors consent thereto in writing. Such written
consent shall be filed with the records of the meetings of the Board of
Directors and shall be treated for all purposes as a vote at a meeting of the
Board of Directors.
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SECTION 14. Manner of Participation. Directors may participate in meetings
of the Board of Directors by means of conference telephone or similar
communications equipment by means of which all directors participating in the
meeting can hear each other, and participation in a meeting in accordance
herewith shall constitute presence in person at such meeting for purposes of
these By-laws.
SECTION 15. Committees. The Board of Directors, by vote of a majority of
the directors then in office, may elect from its number one or more committees,
including, without limitation, an Executive Committee, a Compensation and Option
Committee and an Audit Committee, and may delegate thereto some or all of its
powers except those which by law, by the Certificate or by these By-laws may not
be delegated. Except as the Board of Directors may otherwise determine, any such
committee may make rules for the conduct of its business, but unless otherwise
provided by the Board of Directors or in such rules, its business shall be
conducted so far as possible in the same manner as is provided by these By-laws
for the Board of Directors. All members of such committees shall hold such
offices at the pleasure of the Board of Directors. The Board of Directors may
abolish any such committee at any time. Any committee to which the Board of
Directors delegates any of its powers or duties shall keep records of its
meetings and shall report its action to the Board of Directors. The Board of
Directors shall have power to rescind any action of any committee, to the extent
permitted by law, but no such rescission shall have retroactive effect.
SECTION 16. Compensation of Directors. Directors shall receive such
compensation for their services as shall be determined by a majority of the
Board of Directors provided that directors who are serving the Corporation as
employees and who receive compensation for their services as such, shall not
receive any salary or other compensation for their services as directors of the
Corporation.
ARTICLE III
Officers
SECTION 1. Enumeration. The officers of the Corporation shall consist of a
President, a Treasurer, a Secretary and such other officers, including, without
limitation, a Chairman of the Board, a Chief Executive Officer and one or more
Vice Presidents (including Executive Vice Presidents or Senior Vice Presidents),
Assistant Vice Presidents, Assistant Treasurers and Assistant Secretaries, as
the Board of Directors may determine.
SECTION 2. Election. At the regular annual meeting of the Board following
the Annual Meeting of stockholders, the Board of Directors shall elect the
President, the Treasurer and the Secretary. Other officers may be elected by the
Board of Directors at such regular annual meeting of the Board of Directors or
at any other regular or special meeting.
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SECTION 3. Qualification. No officer need be a stockholder or a director.
Any person may occupy more than one office of the Corporation at any time. Any
officer may be required by the Board of Directors to give bond for the faithful
performance of his or her duties in such amount and with such sureties as the
Board of Directors may determine.
SECTION 4. Tenure. Except as otherwise provided by the Certificate or by
these Bylaws, each of the officers of the Corporation shall hold office until
the regular annual meeting of the Board of Directors following the next Annual
Meeting of stockholders and until his or her successor is elected and qualified
or until his or her earlier resignation or removal.
SECTION 5. Resignation. Any officer may resign by delivering his or her
written resignation to the Corporation addressed to the President or the
Secretary, and such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
SECTION 6. Removal. Except as otherwise provided by law, the Board of
Directors may remove any officer with or without cause by the affirmative vote
of a majority of the directors then in office.
SECTION 7. Absence or Disability. In the event of the absence or
disability of any officer, the Board of Directors may designate another officer
to act temporarily in place of such absent or disabled officer.
SECTION 8. Vacancies. Any vacancy in any office may be filled for the
unexpired portion of the term by the Board of Directors.
SECTION 9. Chairman of the Board. The Chairman of the Board, if one is
elected, shall preside, when present, at all meetings of the stockholders and of
the Board of Directors. The Chairman of the Board shall have such other powers
and shall perform such other duties as the Board of Directors may from time to
time designate.
SECTION 10. Chief Executive Officer. The Chief Executive Officer, if one
is elected, shall, subject to the direction of the Board of Directors, have
general supervision and control of the Corporation's business. If there is no
Chairman of the Board or if he or she is absent, the Chief Executive Officer
shall preside, when present, at all meetings of stockholders and of the Board of
Directors. The Chief Executive Officer shall have such other powers and perform
such other duties as the Board of Directors may from time to time designate.
SECTION 11. President. The President shall generally have such powers and
shall perform such duties as the Board of Directors may from time to time
designate. However, if no Chief Executive Officer is elected, the President
shall have general supervision and control of the Corporation's business. If
there is neither a Chairman of the Board nor a Chief
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Executive Officer or if both such officers are absent, the President shall
preside, when present, at all meetings of stockholders and of the Board of
Directors.
SECTION 12. Vice Presidents and Assistant Vice Presidents. Any Vice
President (including any Executive Vice President or Senior Vice President) and
any Assistant Vice President shall have such powers and shall perform such
duties as the Board of Directors or the Chief Executive Officer may from time to
time designate.
SECTION 13. Treasurer and Assistant Treasurers. The Treasurer shall,
subject to the direction of the Board of Directors and except as the Board of
Directors or the Chief Executive Officer may otherwise provide, have general
charge of the financial affairs of the Corporation and shall cause to be kept
accurate books of account. The Treasurer shall have custody of all funds,
securities, and valuable documents of the Corporation. He or she shall have such
other duties and powers as may be designated from time to time by the Board of
Directors or the Chief Executive Officer.
Any Assistant Treasurer shall have such powers and perform such duties as
the Board of Directors or the Chief Executive Officer may from time to time
designate.
SECTION 14. Secretary and Assistant Secretaries. The Secretary shall
record all the proceedings of the meetings of the stockholders and the Board of
Directors (including committees of the Board) in books kept for that purpose. In
his or her absence from any such meeting, a temporary secretary chosen at the
meeting shall record the proceedings thereof. The Secretary shall have charge of
the stock ledger (which may, however, be kept by any transfer or other agent of
the Corporation). The Secretary shall have custody of the seal of the
Corporation, and the Secretary, or an Assistant Secretary, shall have authority
to affix it to any instrument requiring it, and, when so affixed, the seal may
be attested by his or her signature or that of an Assistant Secretary. The
Secretary shall have such other duties and powers as may be designated from time
to time by the Board of Directors or the Chief Executive Officer. In the absence
of the Secretary, any Assistant Secretary may perform his or her duties and
responsibilities.
Any Assistant Secretary shall have such powers and perform such duties as
the Board of Directors or the Chief Executive Officer may from time to time
designate.
SECTION 15. Other Powers and Duties. Subject to these By-laws and to such
limitations as the Board of Directors may from time to time prescribe, the
officers of the Corporation shall each have such powers and duties as generally
pertain to their respective offices, as well as such powers and duties as from
time to time may be conferred by the Board of Directors or the Chief Executive
Officer.
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ARTICLE IV
Capital Stock
SECTION 1. Certificates of Stock. Each stockholder shall be entitled to a
certificate of the capital stock of the Corporation in such form as may from
time to time be prescribed by the Board of Directors. Such certificate shall be
signed by the Chairman of the Board of Directors, the President or a Vice
President and by the Treasurer or an Assistant Treasurer, or the Secretary or an
Assistant Secretary. The Corporation seal and the signatures by the
Corporation's officers, the transfer agent or the registrar may be facsimiles.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed on such certificate shall have ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the Corporation with the same effect as if he or she were such
officer, transfer agent or registrar at the time of its issue. Every certificate
for shares of stock which are subject to any restriction on transfer and every
certificate issued when the Corporation is authorized to issue more than one
class or series of stock shall contain such legend with respect thereto as is
required by law.
SECTION 2. Transfers. Subject to any restrictions on transfer and unless
otherwise provided by the Board of Directors, shares of stock may be transferred
only on the books of the Corporation by the surrender to the Corporation or its
transfer agent of the certificate theretofore properly endorsed or accompanied
by a written assignment or power of attorney properly executed, with transfer
stamps (if necessary) affixed, and with such proof of the authenticity of
signature as the Corporation or its transfer agent may reasonably require.
SECTION 3. Record Holders. Except as may otherwise be required by law, by
the Certificate or by these By-laws, the Corporation shall be entitled to treat
the record holder of stock as shown on its books as the owner of such stock for
all purposes, including the payment of dividends and the right to vote with
respect thereto, regardless of any transfer, pledge or other disposition of such
stock, until the shares have been transferred on the books of the Corporation in
accordance with the requirements of these By-laws.
It shall be the duty of each stockholder to notify the Corporation of his
or her post office address and any changes thereto.
SECTION 4. Record Date. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted by the Board of Directors, and which record date: (a) in the case of
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determination of stockholders entitled to vote at any meeting of stockholders,
shall, unless otherwise required by law, not be more than sixty nor less than
ten days before the date of such meeting and (b) in the case of any other
action, shall not be more than sixty days prior to such other action. If no
record date is fixed: (a) the record date for determining stockholders entitled
to notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held and (b) the record date for determining stockholders
for any other purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto.
SECTION 5. Replacement of Certificates. In case of the alleged loss,
destruction or mutilation of a certificate of stock, a duplicate certificate may
be issued in place thereof, upon such terms as the Board of Directors may
prescribe.
ARTICLE V
Indemnification
SECTION 1. Definitions. For purposes of this Article:
(a) "Director" means any person who serves or has served the Corporation
as a director on the Board of Directors of the Corporation.
(b) "Officer" means any person who serves or has served the Corporation as
an officer appointed by the Board of Directors of the Corporation;
(c) "Non-Officer Employee" means any person who serves or has served as an
employee of the Corporation, but who is not or was not a Director or Officer;
(d) "Proceeding" means any threatened, pending or completed action, suit,
arbitration, alternate dispute resolution mechanism, inquiry, investigation,
administrative hearing or other proceeding, whether civil, criminal,
administrative, arbitrative or investigative;
(e) "Expenses" means all reasonable attorneys' fees, retainers, court
costs, transcript costs, fees of expert witnesses, private investigators and
professional advisors (including, without limitation, accountants and investment
bankers), travel expenses, duplicating costs, printing and binding costs, costs
of preparation of demonstrative evidence and other courtroom presentation aids
and devices, costs incurred in connection with document review, organization,
imaging and computerization, telephone charges, postage, delivery service fees,
and all other disbursements, costs or expenses of the type customarily incurred
in connection
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with prosecuting, defending, preparing to prosecute or defend, investigating,
being or preparing to be a witness in, settling or otherwise participating in, a
Proceeding;
(f) "Corporate Status" describes the status of a person who (i) in the
case of a Director, is or was a director of the Corporation and is or was acting
in such capacity, (ii) in the case of an Officer, is or was an officer, employee
or agent of the Corporation or is or was a director, officer, employee or agent
of any other corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise which such Officer is or was serving at the request of
the Corporation, and (iii) in the case of a Non-Officer Employee, is or was an
employee of the Corporation or is or was a director, officer, employee or agent
of any other corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise which such Non-Officer Employee is or was serving at
the request of the Corporation. For purposes of subsection (ii) of this Section
1(f), an officer or director of the Company who is serving as a director,
partner, trustee, officer, employee or agent of a Subsidiary shall be deemed to
be serving at the request of the Company;
(g) "Disinterested Director" means, with respect to each Proceeding in
respect of which indemnification is sought hereunder, a Director of the
Corporation who is not and was not a party to such Proceeding; and
(h) "Subsidiary" shall mean any corporation, partnership, limited
liability company, joint venture, trust or other entity of which the Corporation
owns (either directly or through or together with another Subsidiary of the
Corporation) either (i) a general partner, managing member or other similar
interest or (ii) (A) 50% or more of the voting power of the voting capital
equity interests of such corporation, partnership, limited liability company,
joint venture or other entity, or (B) 50% or more of the outstanding voting
capital stock or other voting equity interests of such corporation, partnership,
limited liability company, joint venture or other entity.
SECTION 2. Indemnification of Directors and Officers. Subject to the
operation of Section 4 of this Article V, each Director and Officer shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the DGCL, as the same exists or may hereafter be amended (but, in
the case of any such amendment, only to the extent that such amendment permits
the Corporation to provide broader indemnification rights than such law
permitted the Corporation to provide prior to such amendment) against any and
all Expenses, judgments, penalties, fines and amounts reasonably paid in
settlement that are incurred by such Director or Officer or on such Director's
or Officer's behalf in connection with any threatened, pending or completed
Proceeding or any claim, issue or matter therein, which such Director or Officer
is, or is threatened to be made, a party to or participant in by reason of such
Director's or Officer's Corporate Status, if such Director or Officer acted in
good faith and in a manner such Director or Officer reasonably believed to be in
or not opposed to the best interests of the Corporation and, with respect to any
criminal proceeding, had no reasonable cause to believe
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his or her conduct was unlawful. The rights of indemnification provided by this
Section 2 shall continue as to a Director or Officer after he or she has ceased
to be a Director or Officer and shall inure to the benefit of his or her heirs,
executors, administrators and personal representatives. Notwithstanding the
foregoing, the Corporation shall indemnify any Director or Officer seeking
indemnification in connection with a Proceeding initiated by such Director or
Officer only if such Proceeding was authorized by the Board of Directors of the
Corporation, unless such Proceeding was brought to enforce an Officer or
Director's rights to Indemnification under these by-laws.
SECTION 3. Indemnification of Non-Officer Employees. Subject to the
operation of Section 4 of this Article V, each Non-Officer Employee may, in the
discretion of the Board of Directors of the Corporation, be indemnified by the
Corporation to the fullest extent authorized by the DGCL, as the same exists or
may hereafter be amended, against any or all Expenses, judgments, penalties,
fines and amounts reasonably paid in settlement that are incurred by such
Non-Officer Employee or on such Non-Officer Employee's behalf in connection with
any threatened, pending or completed Proceeding, or any claim, issue or matter
therein, which such Non-Officer Employee is, or is threatened to be made, a
party to or participant in by reason of such Non-Officer Employee's Corporate
Status, if such Non-Officer Employee acted in good faith and in a manner such
Non-Officer Employee reasonably believed to be in or not opposed to the best
interests of the Corporation and, with respect to any criminal proceeding, had
no reasonable cause to believe his or her conduct was unlawful. The rights of
indemnification provided by this Section 3 shall exist as to a Non-Officer
Employee after he or she has ceased to be a Non-Officer Employee and shall inure
to the benefit of his or her heirs, personal representatives, executors and
administrators. Notwithstanding the foregoing, the Corporation may indemnify any
Non-Officer Employee seeking indemnification in connection with a Proceeding
initiated by such Non-Officer Employee only if such Proceeding was authorized by
the Board of Directors of the Corporation.
SECTION 4. Good Faith. Unless ordered by a court or required by Section
145(c) of the DGCL, no indemnification shall be provided pursuant to this
Article V to a Director, to an Officer or to a Non-Officer Employee unless a
determination shall have been made that such person acted in good faith and
in a manner such person reasonably believed to be in or not opposed to the
best interests of the Corporation and, with respect to any criminal
Proceeding, such person had no reasonable cause to believe his or her conduct
was unlawful. Such determination shall be made by (a) a majority vote of the
Disinterested Directors, even though less than a quorum of the Board of
Directors, (b) a committee comprised of Disinterested Directors, such
committee having been designated by a majority vote of the Disinterested
Directors (even though less than a quorum), (c) if there are no such
Disinterested Directors, or if a majority of Disinterested Directors so
directs, by independent legal counsel in a written opinion, or (d) by the
stockholders of the Corporation.
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SECTION 5. Advancement of Expenses to Directors Prior to Final
Disposition. The Corporation shall advance all Expenses incurred by or on behalf
of any Director in connection with any Proceeding in which such Director is
involved by reason of such Director's Corporate Status within 10 days after the
receipt by the Corporation of a written statement from such Director requesting
such advance or advances from time to time, whether prior to or after final
disposition of such Proceeding. Such statement or statements shall reasonably
evidence the Expenses incurred by such Director and shall be preceded or
accompanied by an undertaking by or on behalf of such Director to repay any
Expenses so advanced if it shall ultimately be determined that such Director is
not entitled to be indemnified against such Expenses.
SECTION 6. Advancement of Expenses to Officers and Non-Officer Employees
Prior to Final Disposition.
(a) Advancement to Officers. The Corporation may, at the discretion of the
Board of Directors of the Corporation, advance any or all Expenses incurred by
or on behalf of any Officer in connection with any Proceeding in which such is
involved by reason of such Officer's Corporate Status upon the receipt by the
Corporation of a statement or statements from such Officer requesting such
advance or advances from time to time, whether prior to or after final
disposition of such Proceeding. Such statement or statements shall reasonably
evidence the Expenses incurred by such Officer and shall be preceded or
accompanied by an undertaking by or on behalf of such to repay any Expenses so
advanced if it shall ultimately be determined that such Officer is not entitled
to be indemnified against such Expenses.
(b) Advancement to Non-Officer Employees. The Corporation may, at the
discretion of the Board of Directors or of any Officer who is authorized to act
on behalf of the Corporation, advance any or all Expenses incurred by or on
behalf of any Non-Officer Employee in connection with any Proceeding in which
such Non-Officer Employee is involved by reason of such Non-Officer Employee's
Corporate Status upon the receipt by the Corporation of a statement or
statements from such Non-Officer Employee requesting such advance or advances
from time to time, whether prior to or after final disposition of such
Proceeding. Such statement or statements shall reasonably evidence the Expenses
incurred by such Non-Officer Employee and shall be preceded or accompanied by an
undertaking by or on behalf of such Non-Officer Employee to repay any Expenses
so advanced if it shall ultimately be determined that such Non-Officer Employee
is not entitled to be indemnified against such Expenses.
SECTION 7. Contractual Nature of Rights. The foregoing provisions of this
Article V shall be deemed to be a contract between the Corporation and each
Director and Officer entitled to the benefits hereof at any time while this
Article V is in effect, and any repeal or modification thereof shall not affect
any rights or obligations then existing with respect to any state of facts then
or theretofore existing or any Proceeding theretofore or thereafter brought
based in whole or in part upon any such state of facts. If a claim for
indemnification or
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advancement of Expenses hereunder by a Director or Officer is not paid in full
by the Corporation within (a) 60 days after receipt by the Corporation's of a
written claim for indemnification, or (b) in the case of a Director, 10 days
after receipt by the Corporation of documentation of Expenses and the required
undertaking, such Director or Officer may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim, and if
successful in whole or in part, such Director or Officer shall also be entitled
to be paid the expenses of prosecuting such claim. The failure of the
Corporation (including its Board of Directors or any committee thereof,
independent legal counsel, or stockholders) to make a determination concerning
the permissibility of such indemnification or, in the case of a Director,
advancement of Expenses, under this Article V shall not be a defense to the
action and shall not create a presumption that such indemnification or
advancement is not permissible.
SECTION 8. Non-Exclusivity of Rights. The rights to indemnification and
advancement of Expenses set forth in this Article V shall not be exclusive of
any other right which any Director, Officer, or Non-Officer Employee may have or
hereafter acquire under any statute, provision of the Certificate or these
Bylaws, agreement, vote of stockholders or Disinterested Directors or otherwise.
SECTION 9. Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any Director, Officer or Non-Officer Employee
against any liability of any character asserted against or incurred by the
Corporation or any such Director, Officer or Non-Officer Employee, or arising
out of any such person's Corporate Status, whether or not the Corporation would
have the power to indemnify such person against such liability under the DGCL or
the provisions of this Article V.
ARTICLE VI
Miscellaneous Provisions
SECTION 1. Fiscal Year. Except as otherwise determined by the Board of
Directors, the fiscal year of the Corporation shall end on the last day of
December of each year.
SECTION 2. Seal. The Board of Directors shall have power to adopt and
alter the seal of the Corporation.
SECTION 3. Execution of Instruments. All deeds, leases, transfers,
contracts, bonds, notes and other obligations to be entered into by the
Corporation in the ordinary course of its business without director action may
be executed on behalf of the Corporation by the Chairman of the Board, if one is
elected, the President or the Treasurer or any other officer, employee or agent
of the Corporation as the Board of Directors or Executive Committee may
authorize.
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SECTION 4. Voting of Securities. Unless the Board of Directors otherwise
provides, the Chairman of the Board, if one is elected, the President or the
Treasurer may waive notice of and act on behalf of this Corporation, or appoint
another person or persons to act as proxy or attorney in fact for this
Corporation with or without discretionary power and/or power of substitution, at
any meeting of stockholders or shareholders of any other corporation or
organization, any of whose securities are held by this Corporation.
SECTION 5. Resident Agent. The Board of Directors may appoint a resident
agent upon whom legal process may be served in any action or proceeding against
the Corporation.
SECTION 6. Corporate Records. The original or attested copies of the
Certificate, By-laws and records of all meetings of the incorporators,
stockholders and the Board of Directors and the stock transfer books, which
shall contain the names of all stockholders, their record addresses and the
amount of stock held by each, may be kept outside the State of Delaware and
shall be kept at the principal office of the Corporation, at the office of its
counsel or at an office of its transfer agent or at such other place or places
as may be designated from time to time by the Board of Directors.
SECTION 7. Certificate. All references in these By-laws to the Certificate
shall be deemed to refer to the Restated Certificate of Incorporation of the
Corporation, as amended and in effect from time to time.
SECTION 8. Amendment of By-laws.
(a) Amendment by Directors. Except as provided otherwise by law, these
By-laws may be amended or repealed by the Board of Directors.
(b) Amendment by Stockholders. These By-laws may be amended or repealed at
any Annual Meeting of stockholders, or special meeting of stockholders called
for such purpose, by the affirmative vote of at least two-thirds of the total
votes eligible to be cast on such amendment or repeal by holders of voting
stock, voting together as a single class; provided, however, that if the Board
of Directors recommends that stockholders approve such amendment or repeal at
such meeting of stockholders, such amendment or repeal shall only require the
affirmative vote of a majority of the total votes eligible to be cast on such
amendment or repeal by holders of voting stock, voting together as a single
class.
Adopted June 17, 1998 and effective as of July __, 1998.
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Exhibit 5.1
[Letterhead of Goodwin, Procter & Hoar LLP]
July 2, 1998
Natrol, Inc.
21411 Prairie Street
Chatsworth, CA 91311
Ladies and Gentlemen:
This opinion is furnished in connection with the filing by Natrol, Inc., a
Delaware corporation (the "Company"), with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, of a Registration
Statement on Form S-1 (the "Registration Statement") relating to 4,531,000
shares of common stock, par value $.01 per share (the "Common Stock"), of the
Company (the "Registered Shares"), including 591,000 shares which the
Underwriters (as defined below) have options to purchase solely for the purpose
of covering over-allotments. All of the Registered Shares are to be sold by the
Company to the several underwriters (the "Underwriters") for whom Adams,
Harkness & Hill, Inc., NationsBanc Montgomery Securities LLC and Piper Jaffray,
Inc. are acting as representatives pursuant to an underwriting agreement to be
entered into between the Company and the Underwriters (the "Underwriting
Agreement").
In connection with rendering this opinion, we have examined the form of
the proposed Underwriting Agreement; the Certificate of Incorporation and
By-laws of the Company, each as amended to date; such records of the corporate
proceedings of the Company as we deemed material; and such other certificates,
receipts, records and documents as we considered necessary for the purposes of
this opinion. In our examination, we have assumed the genuineness of all
signatures, the legal capacity of natural persons, the authenticity of all
documents submitted to us as certified, photostatic or facsimile copies, the
authenticity of the originals of such copies and the authenticity of telephonic
confirmations of public officials and others. As to facts material to our
opinion, we have relied upon certificates or telephonic confirmations of public
officials and certificates, documents, statements and other information of the
Company or representatives or officers thereof.
We are attorneys admitted to practice in The Commonwealth of
Massachusetts. We express no opinion concerning the laws of any jurisdictions
other than the laws of the United States of America and The Commonwealth of
Massachusetts and the Delaware General Corporation Law.
Based upon the foregoing, we are of the opinion that when the Underwriting
Agreement is completed (including the insertion therein of pricing terms) and
executed by the Company
<PAGE>
Natrol, Inc.
July 2, 1998
Page 2
and the Underwriters, and the Registered Shares are sold to the Underwriters and
paid for pursuant to the terms of the Underwriting Agreement, the Registered
Shares will be duly authorized, validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the heading "Legal
Matters" in the Prospectus which is a part of such Registration Statement.
Very truly yours,
/s/ GOODWIN, PROCTER & HOAR LLP
Goodwin, Procter & Hoar LLP
<PAGE>
Exhibit 10.2
NATROL, INC.
AMENDED AND RESTATED 1996 STOCK OPTION AND GRANT PLAN
SECTION 1. GENERAL PURPOSE OF THE PLAN; DEFINITIONS
The name of the plan is the Natrol, Inc. Amended and Restated 1996 Stock
Option and Grant Plan (the "Plan"). The purpose of the Plan is to encourage and
enable the officers, employees, directors, consultants, advisors, and other key
persons of Natrol, Inc. (the "Company") and its Subsidiaries (as defined below)
upon whose judgment, initiative and efforts the Company largely depends for the
successful conduct of its business to acquire a proprietary interest in the
Company. It is anticipated that providing such persons with a direct stake in
the Company's welfare will assure a closer identification of their interests
with those of the Company, thereby stimulating their efforts on the Company's
behalf and strengthening their desire to remain with the Company.
The following terms shall be defined as set forth below:
"Act" means the Securities Exchange Act of 1934, as amended.
"Award" or "Awards," except where referring to a particular category of
grant under the Plan, shall include Incentive Stock Options, Non-Qualified Stock
Options, Stock Appreciation Rights, Restricted Stock Awards, Unrestricted Stock
Awards, Performance Share Awards and Dividend Equivalent Rights.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended, and any
successor Code, and related rules, regulations and interpretations.
"Committee" has the meanings specified in Section 2.
"Dividend Equivalent Right" means Awards granted pursuant to Section 10.
"Effective Date" means the date on which the Plan is approved by
stockholders as set forth in Section 16.
"Fair Market Value" of the Stock on any given date means (i) if the Stock
is admitted to quotation on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"), the Fair Market Value on any given date
shall not be less than the average of the highest bid and lowest asked prices of
the Stock reported for such date or, if no bid and asked prices were reported
for such date, for the last day preceding such date for which such prices were
reported; or (ii) if the Stock is admitted to trading on a national securities
exchange or the NASDAQ National Market System, the Fair Market Value on any date
shall not be less than the closing price reported for the Stock on such exchange
or system for such date or, if no sales were reported for such date, for the
last date preceding such date for which a sale was
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reported; or (iii) if the Stock is not publicly traded on a securities exchange
or traded in the over-the-counter market or, if traded or quoted, there are no
transactions or quotations within the last ten trading days or trading has been
halted for extraordinary reasons, the Fair Market Value on any given date shall
be determined in good faith by the Committee with reference to the rules and
principles of valuation set forth in Section 20.2031-2 of the Treasury
Regulations. Notwithstanding the foregoing, the Fair Market Value of the Stock
on the first day of the Company's Initial Public Offering shall be the initial
public price as set forth in the final prospectus for such Initial Public
Offering.
"Incentive Stock Option" means any Stock Option designated and qualified
as an "incentive stock option" as defined in Section 422 of the Code.
"Independent Director" means a member of the Board who is neither an
employee or officer of the Company or any Subsidiary.
"Initial Public Offering" means the first underwritten public offering
pursuant to an effective registration statement under the Securities Act of
1933, as amended, covering the offer and sale of Stock to the public.
"Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
"Option" or "Stock Option" means any option to purchase shares of Stock
granted pursuant to Section 5.
"Performance Share Award" means any Award granted pursuant to Section 9.
"Restricted Stock Award" means any Award granted pursuant to Section 7.
"Stock" means the Common Stock, par value $.01 per share, of the Company,
subject to adjustments pursuant to Section 3.
"Stock Appreciation Rights" means any Award granted pursuant to Section 6.
"Subsidiary" means any corporation or other entity (other than the
Company) in any unbroken chain of corporations or other entities, beginning with
the Company, if each of the corporations or entities (other than the last
corporation or entity in the unbroken chain) owns stock or other interests
possessing 50% or more of the economic interest or the total combined voting
power of all classes of stock or other interests in one of the other
corporations or entities in the chain.
"Unrestricted Stock Award" means any Award granted pursuant to Section 8.
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SECTION 2. ADMINISTRATION OF PLAN; COMMITTEE AUTHORITY TO SELECT
PARTICIPANTS AND DETERMINE AWARDS
(a) Committee. The Plan shall be administered by the Board of Directors of
the Company, or at the discretion of the Board, by a committee of the Board
comprised, except as contemplated by Section 2(c), of not less than two
Independent Directors. All references herein to the Committee shall deemed to
refer to the entity then responsible for administration of this Plan at the
relevant time (i.e., either the Board of Directors or a committee or committees
of the Board, as applicable).
(b) Powers of Committee. The Committee shall have the power and authority
to grant Awards consistent with the terms of the Plan, including the power and
authority:
(i) to select the officers, employees, Independent Directors,
consultants and key persons of the Company and its Subsidiaries to whom
Awards may from time to time be granted;
(ii) to determine the time or times of grant, and the extent, if
any, of Incentive Stock Options, Non-Qualified Stock Options, Stock
Appreciation Rights, Restricted Stock Awards, Unrestricted Stock Awards,
Performance Share Awards and Dividend Equivalent Rights, or any
combination of the foregoing, granted to any one or more participants;
(iii) to determine the number of shares of Stock to be covered by
any Award;
(iv) to determine and modify from time to time the terms and
conditions, including restrictions, not inconsistent with the terms of the
Plan, of any Award, which terms and conditions may differ among individual
Awards and participants, and to approve the form of written instruments
evidencing the Awards;
(v) to accelerate at any time the exercisability or vesting of all
or any portion of any Award and/or to include provisions in Awards
providing for such acceleration;
(vi) to impose any limitations on Awards granted under the Plan,
including limitations on transfers, repurchase provisions and the like and
to exercise repurchase rights or obligations;
(vii) subject to the provisions of Section 5(a)(iii), to extend at
any time the period in which Stock Options may be exercised;
(viii) to determine at any time whether, to what extent, and under
what circumstances Stock and other amounts payable with respect to an
Award shall be deferred either automatically or at the election of the
participant and whether and to
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what extent the Company shall pay or credit amounts constituting interest
(at rates determined by the Committee) or dividends or deemed dividends on
such deferrals; and
(ix) at any time to adopt, alter and repeal such rules, guidelines
and practices for administration of the Plan and for its own acts and
proceedings as it shall deem advisable; to interpret the terms and
provisions of the Plan and any Award (including related written
instruments); to make all determinations it deems advisable for the
administration of the Plan; to decide all disputes arising in connection
with the Plan; and to otherwise supervise the administration of the Plan.
All decisions and interpretations of the Committee shall be binding on all
persons, including the Company and Plan participants.
(c) Delegation of Authority to Grant Awards. The Board, in its discretion,
may appoint the Chief Executive Officer of the Company as a one-person Committee
in addition to the Committee contemplated by Section 2(a) having authority
(co-extensive with such other Committee) to grant Awards to individuals who are
not subject to the reporting and other provisions of Section 16 of the Act or
"covered employees" within the meaning of Section 162(m) of the Code.
SECTION 3. STOCK ISSUABLE UNDER THE PLAN; MERGERS; SUBSTITUTION
(a) Stock Issuable. The maximum number of shares of Stock reserved and
available for issuance under the Plan shall be such aggregate number of shares
of Stock as does not exceed the sum of (i) 1,770,000 shares; plus (ii) as of
each June 30 and December 31 after June 30, 1998, an additional positive number
equal to fifteen percent (15%) of the shares of Stock issued by the Company
during the six-month period then ended; provided, however, that the maximum
number of shares of Stock for which Incentive Stock Options may be granted under
the Plan shall not exceed 1,770,000 shares. For purposes of the foregoing
limitations, the shares of Stock underlying any Awards which are forfeited,
canceled, reacquired by the Company, satisfied without the issuance of Stock or
otherwise terminated (other than by exercise) shall be added back to the shares
of Stock available for issuance under the Plan. Subject to such overall
limitation, shares of Stock may be issued up to such maximum number pursuant to
any type or types of Award. The shares available for issuance under the Plan may
be authorized but unissued shares of Stock or shares of Stock reacquired by the
Company. Upon the exercise of a Stock Appreciation Right settled in shares of
Stock, the right to purchase an equal number of shares of Stock covered by a
related Stock Option, if any, shall be deemed to have been surrendered and will
no longer be exercisable, and said number of shares of Stock shall no longer be
available under the Plan.
(b) Recapitalizations. If, through or as a result of any merger,
consolidation, sale of all or substantially all of the assets of the Company,
reorganization, recapitalization, reclassification, stock dividend, stock split,
reverse stock split or other similar transaction, the outstanding shares of
Stock as a class are increased or decreased or are exchanged for a
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different number or kind of shares or other securities of the Company or any
successor company, or additional shares or new or different shares or other
securities of the Company or any successor Company or other non-cash assets are
distributed with respect to such shares of Stock or other securities, the
Committee shall make an appropriate or proportionate adjustment in (i) the
maximum number of shares reserved for issuance under the Plan, (ii) the number
of Stock Options or Stock Appreciation Rights that can be granted to any one
individual participant, (iii) the number and kind of shares or other securities
subject to any then outstanding Awards under the Plan, and (iv) the price for
each share subject to any then outstanding Stock Options, Stock Appreciation
Rights or other Awards under the Plan, without changing the aggregate exercise
price (i.e., the exercise price multiplied by the number of shares) as to which
such Stock Options, Stock Appreciation Rights or other Awards remain
exercisable. The adjustment by the Committee shall be final, binding and
conclusive. No fractional shares of Stock shall be issued under the Plan
resulting from any such adjustment, but the Committee in its discretion may make
a cash payment in lieu of fractional shares.
(c) Mergers and Other Transactions. In the case of (i) the dissolution or
liquidation of the Company, (ii) the sale of all or substantially all of the
assets of the Company on a consolidated basis to an unrelated person or entity,
(iii) a merger, reorganization or consolidation in which the holders of the
Company's outstanding voting power immediately prior to such transaction do not
own a majority of the outstanding voting power of the surviving or resulting
entity immediately upon completion of such transaction, (iv) the sale of all of
the Stock of the Company to an unrelated person or entity or (v) any other
transaction in which the owners of the Company's outstanding voting power prior
to such transaction do not own at least a majority of the outstanding voting
power of the relevant entity after the transaction (in each case, a
"Transaction"), 50% of all unvested Options, Stock Appreciation Rights and other
Awards which are not vested as of the effective date of such Transaction (or
100% in the case of Options or other Awards held by non-employee Directors)
shall become vested as of such effective date, except as the Committee may
otherwise specify with respect to particular Awards. Upon the effectiveness of
the Transaction, the Plan and all outstanding Options, Stock Appreciation Rights
and other Awards granted hereunder shall terminate, unless provision is made in
connection with the Transaction for the assumption of Awards, the continuation
of Awards by the Company as survivor or the substitution of such Awards with new
Awards of the successor entity or parent thereof, with appropriate adjustment as
to the number and kind of shares and, if appropriate, the per share exercise
prices, as provided in Section 3(b) above. In the event of such termination,
each grantee shall be permitted to exercise for a period of at least 15 days
prior to the date of such termination all outstanding Options, Stock
Appreciation Rights and other Awards held by such grantee which are then
exercisable or become exercisable upon the effectiveness of the Transaction.
Notwithstanding anything herein to the contrary, in the event that provision is
made in connection with the Transaction for the assumption or continuation of
Awards, or the substitution of such Awards with new Awards of the successor
entity or parent thereof, then, except as the Committee may otherwise determine
with respect to particular Awards, any Award so assumed or continued or
substituted therefor shall be deemed vested and exercisable in full upon the
date on which the grantee's employment or service relationship with the Company
and its subsidiaries or
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successor entity terminates if such termination occurs (i) within eighteen (18)
months after such Transaction and (ii) such termination is by the Company or its
Subsidiaries or successor entity without Cause (as defined below) or by the
grantee for Good Reason (as defined below), subject, however, to the following
sentence. Notwithstanding the foregoing, in the event that the Company receives
written advice from its independent public accountants in connection with any
Transaction to the effect that vesting of any Award under the circumstances
contemplated by the preceding sentence would preclude or otherwise adversely
affect the ability of the Company or any other party to such Transaction to
account for the same as a "pooling of interests" within the meaning of APB No.
16 (or any successor provision), which Transaction would otherwise qualify for
such accounting treatment, then vesting of such Awards shall not accelerate on a
subsequent termination of grantee's employment or service relationship within 18
months following such Transaction as contemplated by the preceding sentence. For
purposes of this Section 3(c), the term "Cause" means a vote of the Board of
Directors of the Company or the successor entity, as the case may be, resolving
that the grantee should be dismissed as a result of (i) any material breach by
the grantee of any agreement to which the grantee and the Company are parties,
(ii) any act (other than retirement) or omission to act by the grantee which
would reasonably be likely to have a material adverse effect on the business of
the Company or its subsidiaries or successor entity, as the case may be, or on
the grantee's ability to perform services for the Company or its subsidiaries or
successor entity, as the case may be, including, without limitation, the
conviction of any crime (other than ordinary traffic violations), or (iii) any
material misconduct or willful and deliberate non-performance of duties by the
grantee in connection with the business or affairs of the Company or its
subsidiaries or successor entity, as the case may be; and the term "Good Reason"
means the occurrence of any of the following events: (A) a substantial adverse
change in the nature or scope of the grantee's responsibilities, authorities,
title, powers, functions, or duties; (B) a reduction in the grantee's annual
base salary except for across-the-board salary reductions similarly affecting
all or substantially all management employees; or (C) the relocation of the
offices at which the grantee is principally employed to a location more than
fifty (50) miles from such offices.
(d) Substitute Awards. The Committee may grant Awards under the Plan in
substitution for stock and stock based awards held by employees of another
corporation who become employees of the Company or a Subsidiary as the result of
a merger or consolidation of the employing corporation with the Company or a
Subsidiary or the acquisition by the Company or a Subsidiary of property or
stock of the employing corporation. The Committee may direct that the substitute
awards be granted on such terms and conditions as the Committee considers
appropriate in the circumstances. Any substitute Awards granted under this Plan
shall not count against the share limitation set forth in Section 3(a).
SECTION 4. ELIGIBILITY
Participants in the Plan will be such officers and other employees,
Independent Directors, consultants, advisors and other key persons (including
prospective employees) of the Company and its Subsidiaries who are responsible
for or contribute to the management, growth
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or profitability of the Company and its Subsidiaries as are selected from time
to time by the Committee, in its sole discretion.
SECTION 5. STOCK OPTIONS
Any Stock Option granted under the Plan shall be pursuant to a stock
option agreement which shall be in such form as the Committee may from time to
time approve. Option agreements need not be identical.
Stock Options granted under the Plan may be either Incentive Stock Options
or NonQualified Stock Options. Incentive Stock Options may be granted only to
employees of the Company or any Subsidiary that is a "subsidiary corporation"
within the meaning of Section 424(f) of the Code. Non-Qualified Stock Options
may be granted to officers, employees, Independent Directors, advisors,
consultants and other key persons of the Company and its Subsidiaries. To the
extent that any Option does not qualify as an Incentive Stock Option, it shall
be deemed a Non-Qualified Stock Option.
No Incentive Stock Option shall be granted under the Plan after November
5, 2006.
(a) Terms of Stock Options. Stock Options granted under the Plan shall be
subject to the following terms and conditions and shall contain such additional
terms and conditions, not inconsistent with the terms of the Plan, as the
Committee shall deem desirable:
(i) Exercise Price. The exercise price per share for the Stock
covered by a Stock Option shall be determined by the Committee at the time
of grant but shall not be less than 100% of the Fair Market Value on the
date of grant in the case of Incentive Stock Options. If an employee owns
or is deemed to own (by reason of the attribution rules applicable under
Section 424(d) of the Code) more than 10% of the combined voting power of
all classes of stock of the Company or any parent or subsidiary
corporation and an Incentive Stock Option is granted to such employee, the
option price of such Incentive Stock Option shall be not less than 110% of
the Fair Market Value on the grant date.
(ii) Grant of Discount Options in Lieu of Cash Compensation. Upon
the request of a participant and with the consent of the Committee granted
in its sole discretion, such participant may elect each calendar year to
receive a Non-Qualified Stock Option in lieu of any cash bonus or other
compensation to which he may become entitled during the following calendar
year, but only if such participant makes an irrevocable election to waive
receipt of all or a portion of such cash compensation. Such election shall
be made on or before the date set by the Committee which date shall be no
later than 15 days (or such shorter period permitted by the Committee)
preceding January 1 of the calendar year for which the cash compensation
would otherwise be paid. A Non-Qualified Stock Option shall be granted to
each participant who made such an irrevocable election on the date the
waived cash compensation would otherwise
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be paid. The exercise price per share shall be determined by the
Committee. The number of shares of Stock subject to the Stock Option shall
be determined by dividing the amount of the waived cash compensation by
the difference between the Fair Market Value of the Stock on the date the
Stock Option is granted and the exercise price per share of the Stock
Option. The Stock Option shall be granted for a whole number of shares so
determined; the value of any fractional share shall be paid in cash.
(iii) Option Term. The term of each Stock Option shall be fixed by
the Committee, but no Incentive Stock Option shall be exercisable more
than ten years after the date the option is granted. If an employee owns
or is deemed to own (by reason of the attribution rules of Section 424(d)
of the Code) more than 10% of the combined voting power of all classes of
stock of the Company or any parent or subsidiary corporation and an
Incentive Stock Option is granted to such employee, the term of such
option shall be no more than five years from the date of grant.
(iv) Exercisability; Rights of a Stockholder. Stock Options shall
become vested and exercisable at such time or times, whether or not in
installments, as shall be determined by the Committee at or after the
grant date; provided, however, that Stock Options granted in lieu of cash
compensation shall be exercisable in full as of the grant date. The
Committee may at any time accelerate the exercisability of all or any
portion of any Stock Option. An optionee shall have the rights of a
stockholder only as to shares acquired upon the exercise of a Stock Option
and not as to unexercised Stock Options.
(v) Method of Exercise. Stock Options may be exercised in whole or
in part, by giving written notice of exercise to the Company, specifying
the number of shares to be purchased. Payment of the purchase price may be
made by one or more of the following methods; provided, however, that the
methods set forth in subsections (B) and (C) below shall become available
only after the closing of the Initial Public Offering:
(A) In cash, by certified or bank check or other instrument
acceptable to the Committee;
(B) Through the delivery (or attestation to the ownership) of
shares of Stock that have been purchased by the optionee on the open
market or that have been held by the optionee for at least six
months, and are not then subject to restrictions under any Company
plan, if permitted by the Committee in its discretion; such
surrendered shares shall be valued at Fair Market Value on the
exercise date;
(C) By the optionee delivering to the Company a properly
executed exercise notice together with irrevocable instructions to a
broker to promptly deliver to the Company cash or a check payable
and acceptable to the Company
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to pay the purchase price; provided that in the event the optionee
chooses to pay the purchase price as so provided, the optionee and
the broker shall comply with such procedures and enter into such
agreements of indemnity and other agreements as the Committee shall
prescribe as a condition of such payment procedure; or
(D) By the optionee delivering to the Company a promissory
note if the Board has authorized the loan of funds to the optionee
for the purpose of enabling or assisting the optionee to effect the
exercise of his Stock Option; provided that at least so much of the
exercise price as represents the par value of the Stock shall be
paid other than with a promissory note.
Payment instruments will be received subject to collection. The delivery
of certificates representing the shares of Stock to be purchased pursuant
to the exercise of a Stock Option will be contingent upon receipt from the
optionee (or a purchaser acting in his stead in accordance with the
provisions of the Stock Option) by the Company of the full purchase price
for such shares and the fulfillment of any other requirements contained in
the Stock Option or applicable provisions of laws. In the event an
optionee chooses to pay the purchase price by previously-owned shares of
stock through the attestation method described in Section 5(a)(v)(B), the
shares of Stock transferred to the optionee upon the exercise of the Stock
Option shall be net of the number of shares attested to.
(vi) Termination. Unless otherwise provided in the option agreement
or determined by the Committee, upon the optionee's termination of
employment (or other business relationship) with the Company and its
Subsidiaries, the optionee's rights in his Stock Options shall
automatically terminate.
(vii) Annual Limit on Incentive Stock Options. To the extent
required for "incentive stock option" treatment under Section 422 of the
Code, the aggregate Fair Market Value (determined as of the time of grant)
of the shares of Stock with respect to which Incentive Stock Options
granted under this Plan and any other plan of the Company or its parent
and subsidiary corporations become exercisable for the first time by an
optionee during any calendar year shall not exceed $100,000. To the extent
that any Stock Option exceeds this limit, it shall constitute a
Non-Qualified Stock Option.
(b) Reload Options. At the discretion of the Committee, Options granted
under the Plan may include a "reload" feature pursuant to which an optionee
exercising an option by the delivery of a number of shares of Stock in
accordance with Section 5(a)(v)(B) hereof would automatically be granted an
additional Option (with an exercise price equal to the Fair Market Value of the
Stock on the date the additional Option is granted and with the same expiration
date as the original Option being exercised, and with such other terms as the
Committee may provide) to purchase that number of shares of Stock equal to the
number delivered to exercise the original Option.
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(c) Non-transferability of Options. No Stock Option shall be transferable
by the optionee otherwise than by will or by the laws of descent and
distribution and all Stock Options shall be exercisable, during the optionee's
lifetime, only by the optionee, or by the optionee's legal representative or
guardian in the event of the optionee's incapacity. Notwithstanding the
foregoing, the Committee may provide in an option agreement that the optionee
may transfer, without consideration for the transfer, his Non-Qualified Stock
Options to members of his immediate family, to trusts for the benefit of such
family members, to partnerships in which such family members are the only
partners; provided, however, that the transferee agrees in writing to be bound
by the terms and conditions of this Plan and the applicable Option Agreement.
SECTION 6. STOCK APPRECIATION RIGHTS.
(a) Nature of Stock Appreciation Rights. A Stock Appreciation Right is an
Award entitling the recipient to receive an amount in cash or shares of Stock or
a combination thereof having a value equal to the excess of the Fair Market
Value of the Stock on the date of exercise over the exercise price per Stock
Appreciation Right set by the Committee at the time of grant, which price shall
determined by the Committee in its sole discretion (or over the option exercise
price per share, if the Stock Appreciation Right was granted in tandem with a
Stock Option) multiplied by the number of shares of Stock with respect to which
the Stock Appreciation Right shall have been exercised, with the Committee
having the right to determine the form of payment.
(b) Grant and Exercise of Stock Appreciation Rights. Stock Appreciation
Rights may be granted by the Committee in tandem with, or independently of, any
Stock Option granted pursuant to Section 5 of the Plan. In the case of a Stock
Appreciation Right granted in tandem with a Non-Qualified Stock Option, such
Stock Appreciation Right may be granted either at or after the time of the grant
of such Option. In the case of a Stock Appreciation Right granted in tandem with
an Incentive Stock Option, such Stock Appreciation Right may be granted only at
the time of the grant of the Option.
A Stock Appreciation Right or applicable portion thereof granted in tandem
with a Stock Option shall terminate and no longer be exercisable upon the
termination or exercise of the related Option.
(c) Terms and Conditions of Stock Appreciation Rights. Stock Appreciation
Rights shall be subject to such terms and conditions as shall be determined from
time to time by the Administrator, subject to the following:
(i) Stock Appreciation Rights granted in tandem with Options shall
be exercisable at such time or times and to the extent that the related
Stock Options shall be exercisable.
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(ii) Upon exercise of a Stock Appreciation Right, the applicable
portion of any related Option shall be surrendered.
SECTION 7. RESTRICTED STOCK AWARDS
(a) Nature of Restricted Stock Awards. A Restricted Stock Award is an
Award entitling the recipient to acquire, at par value or such other purchase
price determined by the Committee, shares of Stock subject to such restrictions
and conditions as the Committee may determine at the time of grant ("Restricted
Stock"). Conditions may be based on continuing employment (or other business
relationship) and/or achievement of pre-established performance goals and
objectives.
(b) Rights as a Stockholder. Upon execution of a written instrument
setting forth the Restricted Stock Award and paying any applicable purchase
price, a participant shall have the rights of a stockholder with respect to the
voting of the Restricted Stock, subject to such conditions contained in the
written instrument evidencing the Restricted Stock Award. Unless the Committee
shall otherwise determine, certificates evidencing the Restricted Stock shall
remain in the possession of the Company until such Restricted Stock is vested as
provided in Section 7(d) below.
(c) Restrictions. Restricted Stock may not be sold, assigned, transferred,
pledged or otherwise encumbered or disposed of except as specifically provided
herein or in the written instrument evidencing the Restricted Stock Award. If a
participant's employment (or other business relationship) with the Company and
its Subsidiaries terminates for any reason, or upon such other events as may be
stated in the instrument evidencing the Restricted Stock Award, the Company or
its assigns shall have the right or shall agree, as may be specified in the
relevant restricted stock agreement, to repurchase same or all of the shares of
Stock subject to the Award at such purchase price as shall be set forth in such
instrument.
(d) Vesting of Restricted Stock. The Committee at the time of grant shall
specify the date or dates and/or the attainment of pre-established performance
goals, objectives and other conditions on which Restricted Stock shall become
vested, subject to such further rights of the Company or its assigns as may be
specified in the instrument evidencing the Restricted Stock Award.
(e) Waiver, Deferral and Reinvestment of Dividends. The written instrument
evidencing the Restricted Stock Award may require or permit the immediate
payment, waiver, deferral or investment of dividends paid on the Restricted
Stock.
SECTION 8. UNRESTRICTED STOCK AWARDS
(a) Grant or Sale of Unrestricted Stock. The Committee may, in its sole
discretion, grant (or sell at a purchase price determined by the Committee) an
Unrestricted Stock Award
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to any participant, pursuant to which such participant may receive shares of
Stock free of any vesting restrictions ("Unrestricted Stock") under the Plan.
Unrestricted Stock Awards may be granted or sold as described in the preceding
sentence in respect of past services or other valid consideration, or in lieu of
any cash compensation due to such individual.
(b) Elections to Receive Unrestricted Stock In Lieu of Compensation. Upon
the request of a participant and with the consent of the Committee, each such
participant may, pursuant to an advance written election delivered to the
Company no later than the date specified by the Committee, receive a portion of
the cash compensation otherwise due to such participant in the form of shares of
Unrestricted Stock either currently or on a deferred basis.
(c) Restrictions on Transfers. The right to receive shares of Unrestricted
Stock on a deferred basis may not be sold, assigned, transferred, pledged or
otherwise encumbered, other than by will or the laws of descent and
distribution.
SECTION 9. PERFORMANCE SHARE AWARDS
(a) Nature of Performance Share Awards. A Performance Share Award is an
Award entitling the recipient to acquire shares of Stock upon the attainment of
specified performance goals. The Committee may make Performance Share Awards
independent of or in connection with the granting of any other Award under the
Plan. The Committee in its sole discretion shall determine whether and to whom
Performance Share Awards shall be made, the performance goals applicable under
each such Award, the periods during which performance is to be measured, and all
other limitations and conditions applicable to the awarded Performance Shares;
provided, however, that the Committee may rely on the performance goals and
other standards applicable to other performance unit plans of the Company in
setting the standards for Performance Share Awards under the Plan.
(b) Restrictions on Transfer. Performance Share Awards and all rights with
respect to such Awards may not be sold, assigned, transferred, pledged or
otherwise encumbered.
(c) Rights as a Shareholder. A participant receiving a Performance Share
Award shall have the rights of a shareholder only as to shares actually received
by the participant under the Plan and not with respect to shares subject to the
Award but not actually received by the participant. A participant shall be
entitled to receive a stock certificate evidencing the acquisition of shares of
Stock under a Performance Share Award only upon satisfaction of all conditions
specified in the written instrument evidencing the Performance Share Award (or
in a performance plan adopted by the Committee).
(d) Termination. Except as may otherwise be provided by the Committee at
any time, a participant's rights in all Performance Share Awards shall
automatically terminate upon the participant's termination of employment (or
business relationship) with the Company and its Subsidiaries for any reason.
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(e) Acceleration, Waiver, Etc. At any time prior to the participant's
termination of employment (or other business relationship) by the Company and
its Subsidiaries, the Committee may in its sole discretion accelerate, waive or,
subject to Section 13, amend any or all of the goals, restrictions or conditions
imposed under any Performance Share Award.
SECTION 10. DIVIDEND EQUIVALENT RIGHTS
(a) Dividend Equivalent Rights. A Dividend Equivalent Right is an Award
entitling the recipient to receive credits based on cash dividends that would be
paid on the shares of Stock specified in the Dividend Equivalent Right (or other
award to which it relates) if such shares were held by the recipient. A Dividend
Equivalent Right may be granted as a component of another Award or as a
freestanding award. The terms and conditions of Dividend Equivalent Rights shall
be specified in the grant. Dividend equivalents credited to the holder of a
Dividend Equivalent Right may be paid currently or may be deemed to be
reinvested in additional shares of Stock, which may thereafter accrue additional
equivalents. Any such reinvestment shall be at Fair Market Value on the date of
reinvestment or such other price as may then apply under a dividend reinvestment
plan sponsored by the Company, if any. Dividend Equivalent Rights may be settled
in cash or shares of Stock or a combination thereof, in a single installment or
installments. A Dividend Equivalent Right granted as a component of another
Award may provide that such Dividend Equivalent Right shall be settled upon
exercise, settlement, or payment of, or lapse of restrictions on, such other
award, and that such Dividend Equivalent Right shall expire or be forfeited or
annulled under the same conditions as such other award. A Dividend Equivalent
Right granted as a component of another Award may also contain terms and
conditions different from such other award.
(b) Interest Equivalents. Any Award under this Plan that is settled in
whole or in part in cash on a deferred basis may provide in the grant for
interest equivalents to be credited with respect to such cash payment. Interest
equivalents may be compounded and shall be paid upon such terms and conditions
as may be specified by the grant.
SECTION 11. TAX WITHHOLDING
(a) Payment by Participant. Each participant shall, no later than the date
as of which the value of an Award or of any Stock or other amounts received
thereunder first becomes includable in the gross income of the participant for
Federal income tax purposes, pay to the Company, or make arrangements
satisfactory to the Committee regarding payment of, any federal, state, or local
taxes of any kind required by law to be withheld with respect to such income.
The Company and its Subsidiaries shall, to the extent permitted by law, have the
right to deduct any such taxes from any payment of any kind otherwise due to the
participant.
(b) Payment in Stock. Subject to approval by the Committee, a participant
may elect to have such tax withholding obligation satisfied, in whole or in
part, by (i) authorizing the Company to withhold from shares of Stock to be
issued pursuant to any Award a number of shares with an aggregate Fair Market
Value (as of the date the withholding is effected) that
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would satisfy the withholding amount due, (ii) transferring to the Company
shares of Stock owned by the participant with an aggregate Fair Market Value (as
of the date the withholding is effected) that would satisfy the withholding
amount due, or (iii) in a combination of (i) and (ii).
SECTION 12. TRANSFER, LEAVE OF ABSENCE, ETC.
For purposes of the Plan, the following events shall not be deemed a
termination of employment:
(a) a transfer to the employment of the Company from a Subsidiary or from
the Company to a Subsidiary, or from one Subsidiary to another; or
(b) an approved leave of absence for military service or sickness, or for
any other purpose approved by the Company, if the employee's right to
re-employment is guaranteed either by a statute or by contract or under the
policy pursuant to which the leave of absence was granted or if the Committee
otherwise so provides in writing.
SECTION 13. AMENDMENTS AND TERMINATION
The Board may, at any time, amend or discontinue the Plan and the
Committee may, at any time, amend or cancel any outstanding Award (or provide
substitute Awards at the same or reduced exercise or purchase price or with no
exercise or purchase price in a manner not inconsistent with the terms of the
Plan), but such price, if any, must satisfy the requirements which would apply
to the substitute or amended Award if it were then initially granted under this
Plan for the purpose of satisfying changes in law or for any other lawful
purpose, but no such action shall adversely affect rights under any outstanding
Award without the holder's written consent. If and to the extent determined by
the Committee to be required by the Code to ensure that Incentive Stock Options
granted under the Plan are qualified under Section 422 of the Code, Plan
amendments shall be subject to approval by the Company stockholders who are
eligible to vote at a meeting of stockholders.
SECTION 14. STATUS OF PLAN
With respect to the portion of any Award which has not been exercised and
any payments in cash, Stock or other consideration not received by a
participant, a participant shall have no rights greater than those of a general
creditor of the Company unless the Committee shall otherwise expressly determine
in connection with any Award or Awards. In its sole discretion, the Committee
may authorize the creation of trusts or other arrangements to meet the Company's
obligations to deliver Stock or make payments with respect to Awards hereunder,
provided that the existence of such trusts or other arrangements is consistent
with the foregoing sentence.
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SECTION 15. GENERAL PROVISIONS
(a) No Distribution; Compliance with Legal Requirements. The Committee may
require each person acquiring Stock pursuant to an Award to represent to and
agree with the Company in writing that such person is acquiring the shares
without a view to distribution thereof.
No shares of Stock shall be issued pursuant to an Award until all
applicable securities law and other legal and stock exchange or similar
requirements have been satisfied. The Committee may require the placing of such
stop-orders and restrictive legends on certificates for Stock and Awards as it
deems appropriate.
(b) Other Compensation Arrangements; No Employment Rights. Nothing
contained in this Plan shall prevent the Board from adopting other or additional
compensation arrangements, including trusts, and such arrangements may be either
generally applicable or applicable only in specific cases. The adoption of this
Plan and the grant of Awards do not confer upon any employee any right to
continued employment with the Company or any Subsidiary.
(c) Trading Policy Restrictions. Stock Option and Stock Appreciation Right
exercises and other Awards under the Plan shall be subject to the Company's
insider trading policy, as in effect from time to time.
SECTION 16. EFFECTIVE DATE OF PLAN
This Plan shall become effective upon approval by the holders of a
majority of the shares of Stock of the Company present or represented and
entitled to vote at a meeting of stockholders. Subject to such approval by the
stockholders and to the requirement that no Stock may be issued hereunder prior
to such approval, Stock Options and other Awards may be granted hereunder on and
after adoption of this Plan by the Board. This Plan amends in certain respects
and integrates and supersedes versions of the Plan as heretofore in effect.
SECTION 17. GOVERNING LAW
This Plan shall be governed by Delaware law except to the extent such law
is preempted by federal law.
Adopted and Effective: June 17, 1998
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Exhibit 10.3
NATROL, INC.
EMPLOYEE STOCK PURCHASE PLAN
The purpose of the Natrol, Inc. Employee Stock Purchase Plan ("the Plan")
is to provide eligible employees of Natrol, Inc. (the "Company") and its
subsidiaries with opportunities to purchase shares of the Company's common
stock, par value $.01 per share (the "Common Stock"). Two hundred twenty-five
thousand (225,000) shares of Common Stock in the aggregate have been approved
and reserved for this purpose. The Plan is intended to constitute an "employee
stock purchase plan" within the meaning of Section 423(b) of the Internal
Revenue Code of 1986, as amended (the "Code"), and shall be interpreted in
accordance with that intent.
1. Administration. The Plan will be administered by the Company's Board of
Directors (the "Board") or by a committee appointed by the Board for such
purpose (the "Committee"). The Board or the Committee has authority to make
rules and regulations for the administration of the Plan, and its
interpretations and decisions with regard thereto shall be final and conclusive.
No member of the Board or the Committee shall be liable for any action or
determination with respect to the Plan or any option granted hereunder.
2. Offerings. The Company will make one or more offerings to eligible
employees to purchase the Common Stock under the Plan ("Offerings"). The initial
Offering will begin on September 1, 1998 and will end on December 31, 1998.
Thereafter, an Offering will begin on the first business day occurring on or
after each January 1 and July 1 and will end on the last business day occurring
on or before the following June 30 and December 31, respectively. The Committee
may, in its discretion, choose an Offering period of six months or less for each
of the Offerings and choose a different Offering period for each Offering.
<PAGE>
3. Eligibility. All employees of the Company (including employees who are
also directors of the Company) and all employees of each Designated Subsidiary
(as defined in Section 11) are eligible to participate in any one or more of the
Offerings under the Plan, provided that as of the first day of the applicable
Offering (the "Offering Date") they are customarily employed by the Company or a
Designated Subsidiary for more than twenty (20) hours a week.
4. Participation. An employee eligible on any Offering Date may
participate in such Offering by submitting an enrollment form to his or her
appropriate payroll location at least fifteen (15) business days before the
Offering Date (or by such other deadline as shall be established for the
Offering). The form will (a) state a whole percentage to be deducted from such
employee's Compensation (as defined in Section 11) per pay period, (b) authorize
the purchase of Common Stock for such employee in each Offering in accordance
with the terms of the Plan and (c) specify the exact name or names in which
shares of Common Stock purchased for such employee are to be issued pursuant to
Section 10. An employee who does not enroll in accordance with these procedures
will be deemed to have waived the right to participate. Unless an employee files
a new enrollment form or withdraws from the Plan, such employee's deductions and
purchases will continue at the same percentage of Compensation for future
Offerings, provided such employee remains eligible. Notwithstanding the
foregoing, participation in the Plan will neither be permitted nor be denied
contrary to the requirements of the Code.
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5. Employee Contributions. Each eligible employee may authorize payroll
deductions at a minimum of one percent (1%) up to a maximum of ten percent (10%)
of his or her Compensation for each pay period. The Company will maintain book
accounts showing the amount of payroll deductions made by each participating
employee for each Offering. No interest will accrue or be paid on payroll
deductions.
6. Deduction Changes. An employee may not increase his or her payroll
deduction during any Offering, but may decrease his or her payroll deduction for
the remainder of the Offering. An employee may also terminate his or her payroll
deduction for the remainder of the Offering, either with or without withdrawing
from the Offering under Section 7. To reduce or terminate his or her payroll
deduction (without withdrawing from the Offering), an employee must submit a new
enrollment form at least fifteen (15) business days (or such shorter period as
shall be established) before the payroll date on which the change becomes
effective. Subject to the requirements of Sections 4 and 5, an employee may
either increase or decrease his or her payroll deduction with respect to the
next Offering by filing a new enrollment form at least fifteen (15) business
days before the next Offering Date (or by such other deadline as shall be
established for the Offering).
7. Withdrawal. An employee may withdraw from participation in the Plan by
delivering a written notice of withdrawal to his or her appropriate payroll
location. The employee's withdrawal will be effective as of the next business
day. Following an employee's withdrawal, the Company will promptly refund such
employee's entire account balance under the Plan (after payment for any Common
Stock purchased before the effective date of withdrawal). Partial withdrawals
are not permitted. The employee may not begin participation
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again during the remainder of the Offering, but may enroll in a subsequent
Offering in accordance with Section 4.
8. Grant of Options. On each Offering Date, the Company will grant to each
eligible employee who is then a participant in the Plan an option ("Option") to
purchase on the last day of such Offering (the "Exercise Date"), at the Option
Price hereinafter provided for, a maximum of one thousand (1,000) shares of
Common Stock reserved for the purposes of the Plan, or such other maximum number
of shares as shall have been established by the Board or the Committee in
advance of the offering. The purchase price for each share purchased under such
Option (the "Option Price") will be 85% of the Fair Market Value of the Common
Stock on the Offering Date or the Exercise Date, whichever is less.
Notwithstanding the foregoing, no employee may be granted an option
hereunder if such employee, immediately after the option was granted, would be
treated as owning stock possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of the Company or any
Parent or Subsidiary (as defined in Section 11). For purposes of the preceding
sentence, the attribution rules of Section 424(d) of the Code shall apply in
determining the stock ownership of an employee, and all stock which the employee
has a contractual right to purchase shall be treated as stock owned by the
employee. In addition, no employee may be granted an Option which permits his or
her rights to purchase stock under the Plan, and any other employee stock
purchase plan of the Company and its Parents and Subsidiaries, to accrue at a
rate which exceeds $25,000 of the fair market value of such stock (determined on
the option grant date or dates) for each calendar year in which the Option is
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outstanding at any time. The purpose of the limitation in the preceding sentence
is to comply with Section 423(b)(8) of the Code.
9. Exercise of Option and Purchase of Shares. Each employee who continues
to be a participant in the Plan on the Exercise Date shall be deemed to have
exercised his or her Option on such date and shall acquire from the Company such
number of whole shares of Common Stock reserved for the purpose of the Plan as
his or her accumulated payroll deductions on such date will purchase at the
Option Price, subject to any other limitations contained in the Plan. Any amount
remaining in an employee's account at the end of an Offering solely by reason of
the inability to purchase a fractional share will be carried forward to the next
Offering; any other balance remaining in an employee's account at the end of an
Offering will be refunded to the employee promptly.
10. Issuance of Certificates. Certificates representing shares of Common
Stock purchased under the Plan may be issued only in the name of the employee,
in the name of the employee and another person of legal age as joint tenants
with rights of survivorship, or in the name of a broker authorized by the
employee to be his or her nominee for such purpose.
11. Definitions.
The term "Compensation" means the amount of total cash compensation, prior
to salary reduction pursuant to either Section 125 or 401(k) of the Code,
including base pay, overtime, commissions and bonuses, but excluding allowances
and reimbursements for expenses such as relocation allowances or travel
expenses, income or gains on the exercise of Company stock options, and similar
items.
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The term "Designated Subsidiary" means any present or future Subsidiary
(as defined below) that has been designated by the Board or the Committee to
participate in the Plan. The Board or the Committee may so designate any
Subsidiary, or revoke any such designation, at any time and from time to time,
either before or after the Plan is approved by the stockholders.
The term "Fair Market Value of the Common Stock" means (i) if the Common
Stock is admitted to trading on a national securities exchange or the National
Association of Securities Dealers National Market System, the closing price
reported for the Common Stock on such exchange or system for such date or, if no
sales were reported for such date, for the last date preceding such date for
which a sale was reported, or (ii) if clause (i) does not apply but the Common
Stock is admitted to quotation on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"), the average of the highest bid and lowest
asked prices of the Common Stock reported on NASDAQ for such date or, if no bid
and asked prices were reported for such date, for the last day preceding such
date for which such prices were reported.
The term "Parent" means a "parent corporation" with respect to the
Company, as defined in Section 424(e) of the Code.
The term "Subsidiary" means a "subsidiary corporation" with respect to the
Company, as defined in Section 424(f) of the Code.
12. Rights on Termination of Employment. If a participating employee's
employment terminates for any reason before the Exercise Date for any Offering,
no payroll deduction will be taken from any pay due and owing to such employee
and the balance in such employee's account will be paid to such employee or, in
the case of death, to such employee's
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designated beneficiary as if such employee had withdrawn from the Plan under
Section 7. An employee will be deemed to have terminated employment, for this
purpose, if the corporation that employs such employee, having been a Designated
Subsidiary, ceases to be a Subsidiary, or if such employee is transferred to any
corporation other than the Company or a Designated Subsidiary.
13. Special Rules. Notwithstanding anything herein to the contrary, the
Board or the Committee may adopt special rules applicable to the employees of a
particular Designated Subsidiary, whenever the Board or the Committee determines
that such rules are necessary or appropriate for the implementation of the Plan
in a jurisdiction where such Designated Subsidiary has employees; provided that
such rules are consistent with the requirements of Section 423(b) of the Code.
Such special rules may include (by way of example, but not by way of limitation)
the establishment of a method for employees of a given Designated Subsidiary to
fund the purchase of shares other than by payroll deduction, if the payroll
deduction method is prohibited by local law or is otherwise impracticable. Any
special rules established pursuant to this Section 13 shall, to the extent
possible, result in the employees subject to such rules having substantially the
same rights as other participants in the Plan.
14. Optionees Not Stockholders. Neither the granting of an Option to an
employee nor the deductions from his or her pay shall constitute such employee a
holder of the shares of Common Stock covered by an Option under the Plan until
such shares have been purchased by and issued to such employee.
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15. Rights Not Transferable. Rights under the Plan are not transferable by
a participating employee other than by will or the laws of descent and
distribution, and are exercisable during the employee's lifetime only by the
employee.
16. Application of Funds. All funds received or held by the Company under
the Plan may be combined with other corporate funds and may be used for any
corporate purpose.
17. Adjustment in Case of Changes Affecting Common Stock. In the event of
a subdivision of outstanding shares of Common Stock, or the payment of a
dividend in Common Stock, the number of shares approved for the Plan, and the
share limitation set forth in Section 8, shall be increased proportionately, and
such other adjustment shall be made as may be deemed equitable by the Board or
the Committee. In the event of any other change affecting the Common Stock, such
adjustment shall be made as may be deemed equitable by the Board or the
Committee to give proper effect to such event.
18. Amendment of the Plan. The Board or the Committee may at any time, and
from time to time, amend the Plan in any respect, except that without the
approval, within twelve (12) months of such Board or Committee action, by the
holders of a majority of the shares of stock of the Company present or
represented and entitled to vote at a meeting of stockholders, no amendment
shall be made increasing the number of shares approved for the Plan or making
any other change that would require stockholder approval in order for the Plan,
as amended, to qualify as an "employee stock purchase plan" under Section 423(b)
of the Code.
19. Insufficient Shares. If the total number of shares of Common Stock
that would otherwise be purchased on any Exercise Date plus the number of shares
purchased under
8
<PAGE>
previous Offerings under the Plan exceeds the maximum number of shares issuable
under the Plan, the shares then available shall be apportioned among
participants in proportion to the amount of payroll deductions accumulated on
behalf of each participant that would otherwise be used to purchase Common Stock
on such Exercise Date.
20. Termination of the Plan. The Plan may be terminated at any time by the
Board or the Committee. Upon termination of the Plan, all amounts in the
accounts of participating employees shall be promptly refunded.
21. Governmental Regulations. The Company's obligation to sell and deliver
Common Stock under the Plan is subject to obtaining all governmental approvals
required in connection with the authorization, issuance, or sale of such stock.
The Plan shall be governed by Delaware law except to the extent that such
law is preempted by federal law.
22. Issuance of Shares. Shares may be issued upon exercise of an Option
from authorized but unissued Common Stock, from shares held in the treasury of
the Company, or from any other proper source.
23. Tax Withholding. Participation in the Plan is subject to any required
tax withholding on income of the participant in connection with the Plan. Each
employee agrees, by entering the Plan, that the Company and its Subsidiaries
shall have the right to deduct any such taxes from any payment of any kind
otherwise due to the employee, including shares issuable under the Plan.
9
<PAGE>
24. Notification Upon Sale of Shares. Each employee agrees, by entering
the Plan, to give the Company prompt notice of any disposition of shares
purchased under the Plan where such disposition occurs within two years after
the date of grant of the Option pursuant to which such shares were purchased.
25. Effective Date and Approval of Shareholders. The Plan shall take
effect on the first day of the Company's initial public offering, subject to
approval by the holders of a majority of the shares of stock of the Company
present or represented and entitled to vote at a meeting of stockholders, which
approval must occur within twelve (12) months of the adoption of the Plan by the
Board.
10
<PAGE>
CERTAIN MATERIALS HAVE BEEN OMITTED AND
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED THEREFOR
Exhibit 10.10
SUPPLY AGREEMENT
THIS SUPPLY AGREEMENT (this "Agreement") is entered into as of February
27, 1998 (the "Effective Date") by and between BASIC VEGETABLE PRODUCTS,
L.P., a Delaware limited partnership ("Seller"), and NATROL, INC., a Delaware
corporation ("Buyer").
RECITALS
WHEREAS, the parties hereto, among others, have entered into an Asset
Purchase Agreement of even date herewith (the "Asset Purchase Agreement")
pursuant to which Seller will sell, and Buyer will purchase, the assets and
business of PURE-GAR, L.P., a Delaware limited partnership ("Pure-Gar");
WHEREAS, the parties hereto have entered into a Research and Development
Agreement (the "R & D Agreement") pursuant to which Seller will develop new
and improved products for sale to Buyer; and
WHEREAS, the parties hereto desire to enter into a long-term agreement
pursuant to which Seller will sell, and Buyer will purchase, certain
vegetable, fruit, herbal and botanical products for use in the business of
Pure-Gar and other businesses of Buyer;
NOW, THEREFORE, the parties agree as follows:
AGREEMENT
1. PURCHASE AND SALE OF PRODUCTS.
(a) Purchase and Sale. On the terms and subject to the conditions set
forth in this Agreement, Seller will sell, and Buyer will purchase, Products
in the quantities and at the prices set forth herein.
(b) Products. "Products" shall mean any of the following:
(i) "Schedule 1 Products," which shall consist of all products
currently produced by Seller and currently sold to Pure-Gar, as set forth on
Schedule 1;
(ii) "Schedule 2 Products," which shall consist of all vegetable and
herbal products produced by Seller from time to time but not currently sold
to Pure-Gar; and
(iii) "New Products" developed by Seller pursuant to the terms of the
R & D Agreement.
(c) Product Specifications. Products supplied pursuant to this Agreement
shall comply
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
with certain product specifications that are unique to each Product (the
applicable "Product Specifications"). With respect to Schedule 1 Products,
the Product Specifications shall be as set forth on Schedule 1. With respect
to any Schedule 2 Product, the Product Specifications shall be as issued by
Seller from time to time. With respect to New Products, the Product
Specifications shall be as designated in the New Product Notice delivered
pursuant to Section 3(c) of this Agreement.
2. PRICES.
(a) Prices for Schedule 1 Products and Schedule 2 Products. Subject to
paragraph (b) below, prices for Schedule 1 Products initially shall be set at
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXX, as disclosed to Buyer and as set forth on Schedule 2(a) attached
hereto; prices for Schedule 2 Products initially shall be set at XXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX relating to
such Schedule 2 Products; and prices for New Products shall be set by Buyer
and Seller XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX. Thereafter,
such prices shall be subject to increases in an amount XXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX with
respect to Products supplied pursuant to this Agreement; provided, however,
that Seller shall not effect a price increase for any Product more frequently
than XXXXXXXXXXXXXXXXXXXXXXXX, and in the manner provided for herein. In the
event of any such change in price, Seller shall deliver to Buyer a written
notice (a "Price Notice") specifying the Products affected and the new price,
no later than December 1 preceding the calendar year in which the new price
is to take effect. New prices shall take effect ninety (90) days after Buyer
has received a Price Notice with respect to such new prices. Each Price
Notice shall include a written explanation of each price increase with such
explanation to include reasonable detail with respect to each Cost category
set forth below, which contributed to such increase. The XXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXX shall be calculated by XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXX
(i) XXXXXXXXXXXXXXXXXXXXXXXXXXXXX
(ii) XXXXXXXXXXXXXXXXXXXXXXXXXXXXX
(iii) XXXXXXXXXXXXXXXXXXXXXXXXXXXXX
(iv) XXXXXXXXXXXXXXXXXXXXXXXXXXXXX
(v) XXXXXXXXXXXXXXXXXXXXXXXXXXXXX
(vi) XXXXXXXXXXXXXXXXXXXXXXXXXXXXX
(vii) XXXXXXXXXXXXXXXXXXXXXXXXXXXXX
(b) Premium Pricing. Notwithstanding paragraph (a) above,
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
if Buyer submits a Purchase Commitment containing Volume Targets with respect
to a Schedule 1 Product or Schedule 2 Product derived from garlic that is
derived from high-allicin garlic (minimum allicin yield of XXXXXX parts per
million ("ppm")), or organically grown, that constitutes a Premium Product
Order pursuant to Section 4(b) hereof, then the price with respect to such
Product shall be the price determined under paragraph (a), increased by XXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX. Such provision shall apply only to the
amount
<PAGE>
of Product to be supplied by Seller in excess of the applicable Volume Target
for such Product.
3. REQUIREMENTS.
(a) Schedule 1 Products. Buyer shall be obligated to purchase from Seller
its requirements of Schedule 1 Products for use in all bulk and branded
products sold by Buyer, whether through Pure-Gar or otherwise. Seller shall
be obligated to supply to Buyer Schedule 1 Products in the amount of such
requirements, subject to certain requirements relating to advance notice and
maximum production capabilities, as set forth in Section 4.
(b) Schedule 2 Products. In the event that Buyer shall require any
Schedule 2 Product for any of its operations, whether of Pure-Gar or
otherwise, Buyer shall submit to Seller a notice setting forth its
requirements with respect to volume (a "Requirements Notice"), and Seller
shall have the right to competitively bid to supply to Buyer Buyer's
requirements of such products pursuant to the terms of this Agreement. Upon
acceptance by Buyer of such bid, such Schedule 2 Product shall thereafter
become a Schedule 1 Product under this Agreement.
(c) New Products. Upon the development of a New Product, Seller shall
deliver a notice (the "New Product Notice") to Buyer, describing the New
Product, its product specifications, and its estimated price to Buyer
pursuant to the terms of this Agreement, together with such supporting
information and data as to its use as Seller may have available to it. Buyer
shall have ninety (90) days to evaluate such New Product and to place an
order for such amounts of such New Product as the parties hereto shall
mutually agree. If an order is placed within such period and accepted by
Seller, such New Product shall thereafter become a Schedule 1 Product under
this Agreement.
(d) Other Products. In the event that Buyer shall require any vegetable,
fruit, herbal or botanical products not constituting Schedule 1 Products,
Schedule 2 Products or New Products, for any of its operations, whether of
Pure-Gar or otherwise, Buyer shall submit to Seller a notice setting forth
its requirements with respect to product specifications and volume, and
Seller shall have the right to competitively bid to supply Buyer with some or
all of Buyer's requirements of such products pursuant to terms to be mutually
agreed upon outside the scope of this Agreement.
4. QUANTITIES AND PRODUCTION SCHEDULING.
(a) Annual Purchase Commitment. For each calendar year or partial calendar
year during the Term of this Agreement (a "Contract Year") beginning with
1999, Buyer shall submit to Seller a purchase commitment (the "Purchase
Commitment") specifying the volume of each Product contemplated to be supplied
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
pursuant to the Supply Agreement during the following year (the "Volume
Targets"). The Purchase Commitment with respect to each Contract Year shall
be submitted prior to August 31 of the preceding year; provided, however,
that within 30 days of receipt by Buyer of a Price Notice with respect to
Products, Buyer shall have the right to deliver a notice to Seller reducing
Buyer's Purchase Commitment for such Products. Such Volume Targets with
respect to all Products shall not be less than XXXXXXXXXXXXXXXXXXXXXXX pounds
of garlic nor more than XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX pounds
of garlic. With respect to Contract Year 1998, Volume Targets shall be as set
forth on Schedule 4A attached hereto.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
(b) Obligations of the Parties Regarding Volume Targets. During each
Contract Year, with respect to each Product for which there is a Volume
Target:
(i) Buyer shall purchase from Seller, and Seller shall sell to Buyer,
at least XXX of the applicable Volume Target for such Product;
(ii) Buyer shall have the right to purchase from Seller, and Seller
shall sell to Buyer if ordered, up to XXXX of the applicable Volume Target
for such Product; and
(iii) if Buyer shall give Seller reasonable notice that its
requirements for such Product shall exceed XXXX of the applicable Volume
Target, Seller shall exercise commercially reasonable efforts to make such
amount available to Buyer for purchase; provided, however, that in the event
Seller is unable to fulfill Buyer's requirements for such Product within 30
days, Buyer shall have the right to purchase such unfulfilled amount of such
Product from other sources.
Notwithstanding the foregoing, if Buyer submits a Purchase Commitment
containing Volume Targets that (A) with respect to high-allicin Schedule 1
Products (minimum allicin yield of XXXXX ppm), exceed XXX of the sum of all
Volume Targets for Schedule 1 Products derived from garlic; (B) with respect
to ultrahigh-allicin Schedule 1 Products (minimum allicin yield of XXXXX
ppm), exceed XXX of the sum of all Volume Targets for Schedule 1 Products
derived from garlic; or (C) with respect to Schedule 1 Products derived from
organic garlic, exceed the volume of such Products supplied to Pure-Gar by
Seller during calendar year 1997 as set forth on Schedule 4B attached hereto
(individually and collectively, "Premium Product Orders"), then Seller shall
be obligated to exercise only commercially reasonable efforts to make such
amounts available to Buyer for purchase; provided, however, that in the event
Seller is unable to commit to fulfill Buyer's requirements for such Product
within 30 days, Buyer shall have the right to purchase such unfulfilled
amount of such Product from other sources.
Buyer shall pay such premium on such amount of Product in excess of the
Volume Targets which are based on the Products which can be normally produced
using Seller's current processes.
(c) Forecasts. Buyer shall provide Seller with advance forecasts of its
volume requirements with respect to each Product, as follows:
(i) on an annual basis, for each Contract Year, concurrently with the
submission of the Purchase Commitment with respect to the immediately prior
Contract Year; and
(ii) on a monthly basis, for the subsequent 90-day period or portion
of such period within the Term.
Forecasts made pursuant to this paragraph shall not be binding upon either
party.
5. EXCLUSIVITY AND NON-COMPETE.
(a) Exclusivity. Except as otherwise provided herein, Seller shall
exclusively supply
<PAGE>
the Schedule 1 Products to Buyer in Buyer's Marketing Channels as defined on
Schedule 5 attached hereto. During the Term, neither Seller nor any affiliate
of Seller shall sell Schedule 1 Products (including Schedule 2 Products which
have become Schedule 1 Products pursuant to Section 3(b) of this Agreement
and New Products which have become Schedule 1 Products pursuant to Section
3(c) of this Agreement) to purchasers other than Buyer that market such
Products in Buyer's Marketing Channels; provided, however, that with respect
to Schedule 2 Products which have become Schedule 1 Products, Seller shall
have the right to continue to make sales to purchasers with whom Seller has
continuing supply relationships that exist at the time Seller first supplies
such Product to Buyer pursuant to this Agreement.
Notwithstanding the foregoing, Seller and any affiliate of Seller shall be
free at all times to sell any Product to its industrial ingredients customers
and shall be free at all times to sell all Schedule 1 Products, Schedule 2
Products and New Products to purchasers that do not market such Products in
Buyer's Marketing Channels.
(b) Resale Restriction. At the request of Buyer, Seller shall use
reasonable efforts to enforce the restriction in Section 5(a) against any of
Seller's customers that resell Products obtained from Seller into any of
Buyer's Marketing Channels.
(c) Non-Compete. The Seller hereby agrees as follows:
(i) During the Term of this Agreement as set forth in Section 6 below
but without giving effect to any earlier termination other than a termination
by reason of the breach or insolvency of Buyer (the "Noncompete Period"),
Seller will not, without the express written consent of Buyer, directly or
indirectly, anywhere in the United States or any of its territories, engage
in any activity which is exclusively reserved to Natrol under Schedule 5
hereto.
(ii) It is specifically understood and agreed that any breach of the
provisions of this Section 5(c) by Seller will result in irreparable injury
to the Buyer and its subsidiaries and affiliates that the remedy at law alone
will be an inadequate remedy for such breach and that, in addition to any
other remedy it may have, the Buyer and its subsidiaries and affiliates shall
be entitled to enforce the specific performance of this Section 5(c) by
Seller through both temporary and permanent injunctive relief without the
necessity of proving actual damages or the posting of any bond, but without
limitation of their right to damages, and any and all other remedies
available to them, it being understood that injunctive relief is in addition
to, and not in lieu of, such other remedies. In the event that any covenant
contained in this Section 5(c) shall be determined by any court of competent
jurisdiction to be unenforceable by reason of its extending for too great a
period of time or over too great a geographical area or by reason of its
being too extensive in any other respect, it shall be interpreted to extend
only over the maximum period of time for which it may be enforceable and/or
over the maximum geographical area as to which it may be enforceable and/or
to the maximum extent in all other respects as to which it may be
enforceable, all as determined by such court in such action. The existence of
any claim or cause of action which Seller may have against the Buyer or any
of its subsidiaries or affiliates shall not constitute a defense or bar to
the enforcement of any of the provisions of this Section 5(c).
<PAGE>
(iii) The restrictions set forth in this Section 5(c) have been
specifically negotiated by sophisticated commercial parties; are integrally
related to the exclusivity arrangements contemplated hereby, are reasonable
and necessary in time, scope, and geographic area (as Seller has conducted
the Pur-Gar business throughout the United States, including without
limitation all counties of California); are integral and essential to the
sale and purchase of the assets and business of Pure-Gar pursuant to the
Asset Purchase Agreement (the "Pure-Gar Business"); constitute a material
inducement to the Buyer to enter into the Asset Purchase Agreement in
consideration of the payment of the substantial consideration specified
therein for the assets conveyed thereunder, and of the payments made pursuant
to this Agreement, in addition to the exclusivity granted in Section 5(a)
hereof, so that Buyer might realize the value of its purchase of the Pure-Gar
Business.
6. TERM AND TERMINATION.
(a) Term. The term of this Agreement (the "Term") will begin on the
Effective Date and expire on August 31, 2005; provided, however, that the
Term will be extended automatically for successive one-year periods
thereafter unless either party gives notice during the month of August in any
year of its intent not to renew this Agreement at least two (2) years in
advance, in which case this Agreement shall terminate upon the end of such
two-year period.
(b) Termination. Notwithstanding anything contained herein to the
contrary, either party shall have the right, in addition and without
prejudice to any other rights or remedies, to immediately terminate this
Agreement by giving notice to the other party (which notice shall specify the
reason for the termination and the effective date of such termination), upon
or after the occurrence of any of the following events:
(i) the other party commits any material breach of the terms hereof
that, in the case of a breach capable of remedy, has not been remedied within
sixty (60) days of the receipt by the party in default of notice specifying
the breach and requiring its remedy; provided, however, that in the case of a
failure by Buyer to pay for Products and such failure is not being contested
by Buyer in good faith, then Buyer shall have fifteen (15) days from its
receipt of written notice from Seller of such failure to pay to cure such
failure. From and after the date of such failure to cure, Seller will have no
obligation to accept any order for Products hereunder unless all amounts owed
by Seller hereunder have been paid and the order is accompanied by full
payment of the purchase price of the Products covered thereby.
(ii) the entry of an "Order for Relief" naming the other party as a
"Debtor" under Title 11 of the United States Code or upon the entry of a
decree or order by a court having competent jurisdiction in respect to any
petition filed or action respecting a party directly involved in a
reorganization, arrangement, creditors' composition, readjustment,
liquidation, dissolution, bankruptcy or similar relief under any other
present or future United States or other statute, law or regulation, whether
or not resulting in the appointment of a receiver, liquidator, assignee,
trustee, custodian, sequestrator or other similar official, and the
continuation of any such decree or order is unstayed and in effect for a
period of thirty consecutive days; or
(iii) the making by the other party of an assignment for the benefit of
creditors,
<PAGE>
or the admission by such party in writing of its inability to pay its debts
generally as they become due or the taking of action by a party in
furtherance of any such action.
(c) Effect of Termination. Termination or expiration of this Agreement
will not affect any other rights of the parties which may have accrued up to
the date of such termination or expiration and, in addition, neither party
will be relieved of any obligation for any sums due to the other party, and
with respect to Section 5(c), Seller will not be relieved of any obligations
thereunder, unless termination is by reason of the breach by or insolvency of
Buyer.
7. TAXES.
(a) Payment by Buyer. Prices provided for in Section 2 are exclusive of
all applicable federal, state or local sales, use, property, value added,
excise or similar taxes that may be levied upon Seller as a result of sale or
delivery of any Product sold under this Agreement. All such taxes will be
assumed and paid by Buyer. If a resale certificate or other such document of
exemption is required in order to exempt the sale of Products from any such
taxes, Buyer will furnish Seller with such a certificate or document prior to
delivery by Seller.
(b) Reimbursement of Seller. In the event that Seller is required to pay
or at the request of Buyer pays any such taxes, Buyer agrees to reimburse
Seller therefor upon being appropriately invoiced for the same in the exact
amount paid by Buyer.
8. PAYMENT.
Payment to Seller for Products shall be due within thirty (30) days of the
date of Seller's invoice for such Products.
9. SHIPMENT; PACKAGING; TITLE; RISK OF LOSS.
(a) Shipment. Buyer shall purchase all Products F.O.B. Seller's plant. At
Buyer's request, Seller will arrange for shipping of Products by a
Buyer-approved carrier. Buyer agrees to reimburse Seller for all prepaid
freight charges.
(b) Shipment to Buyer's Customers. At Buyer's request, Seller will arrange
for shipping of Products directly to Buyer's customers, subject to Seller's
policies regarding minimum order quantities.
(c) Packaging. Seller shall package and deliver each Product in bulk
containers that are standard for such Product.
(d) Title and Risk of Loss. Title and risk of loss for Products shall
transfer to Buyer at the earlier of delivery to the F.O.B. point or to a
Buyer-approved carrier; provided, however, that in the event any Products are
rejected as non-conforming in accordance with Section 10, title and risk of
loss shall transfer to Seller upon delivery of such Products to Seller's
plant until conforming
<PAGE>
Products are delivered by Seller to the F.O.B. point or to a Buyer-approved
carrier.
10. NON-CONFORMING PRODUCT.
Buyer may reject any shipment of a Product that is not in conformity with
the Product Specifications for such Product within ninety (90) days of
delivery. If Buyer does not reject any shipment within such period by
delivering notice of its rejection to Seller, including a description of the
basis therefor, such shipment will be deemed to have been accepted by Buyer.
Upon receiving any such notice of rejection, Seller shall have the option to
either:
(a) refund payments made by Buyer, plus all transportation costs paid by
Buyer; or
(b) require Buyer to return the non-conforming Products, freight collect,
to Buyer's plant and promptly replace such Products with conforming Products.
The party shipping Products pursuant to this Section 10 will bear the entire
risk of loss while a shipment is in transit.
11. REPRESENTATIONS AND WARRANTIES OF THE PARTIES.
(a) Authorization; Binding Obligation. Each party represents and warrants
to the other that it is and will be free to enter into, and to fully perform,
this Agreement and that no agreement or understanding with any other person,
firm or corporation exists or will exist which would interfere with its
obligations hereunder. Each party represents and warrants to the other that
this Agreement is a legal, valid and binding obligation of such party,
enforceable against it in accordance with the terms of this Agreement.
(b) Product Specifications. Seller represents and warrants to Buyer that
all Products sold to Buyer pursuant to this Agreement shall be manufactured
and processed in accordance with, and such Products shall comply with,
applicable Product Specifications.
12. EXCUSABLE DELAY.
(a) Force Majeure. Neither party hereto shall be liable for
nonperformance for reasons of force majeure (all such causes being "Force
Majeure Causes") including, but not limited to:
(i) acts of God, acts of a public enemy, acts of the Governments of
any state or political subdivision or any department or regulatory agency
thereof or entity created thereby, quotas, embargoes, acts of any person
engaged in subversive activity or sabotage, fires, floods, explosions, or
other catastrophes, epidemics, or quarantine restrictions, strikes or other
labor stoppages, slowdowns or disputes, voluntary or involuntary compliance
with any valid or invalid law, or regulation of any governmental agency or
authority, lack of transportation facilities, or any other cause beyond the
control of the parties; or
(ii) a failure or shortage in whole or part in the crop or raw
material grown by
<PAGE>
Sellers' contractors from which the Products are produced; provided, however,
that in the case of a raw materials shortage, Seller shall allocate to Buyer
no less than its pro-rata share of the available materials, except as may be
required by any agreement to which Seller is a party as of the date of this
Agreement.
The settlement of strikes or other labor stoppages shall be entirely within
the discretion of such party claiming nonperformance and such party shall not
be required to settle strikes or other labor stoppages by acceding to the
demands of the workforce when such course is inadvisable in the discretion of
such party.
(b) Notice and Cure. In the event of nonperformance due to a Force
Majeure Cause, such party claiming nonperformance shall immediately notify
the other party and make reasonable efforts to cure such Force Majeure Cause
and resume performance at the earliest possible date; provided, further, that
during the pendency of any Force Majeure Cause, the party not claiming
nonperformance shall have the right to sell or purchase, as that case may be,
the Products or substitute Products in any manner.
13. CONFIDENTIALITY.
(a) Confidential Information. Except as provided herein, each party will
treat as confidential and proprietary and not disclose to any unauthorized
third party any Confidential Information of the other party, unless such
information:
(i) was already in the possession of or otherwise available to the
receiving party at the time such information was received under this
Agreement;
(ii) is published or otherwise becomes generally available to the
public through no fault of the receiving party; or
(iii) is lawfully made available to the receiving party without
restriction by any person or entity which is not bound by, and does not
impose, an obligation of confidentiality with respect to such information.
"Confidential Information" means all materials, specifications, trade
secrets, marketing and other strategic information and other information and
know-how, including without limitation, proprietary information and materials
(whether or not patentable) regarding a party's technology, products,
business, information or objectives. Confidential Information shall not
include the terms of this Agreement.
(b) Restrictions on Use and Disclosure. Except as provided herein,
neither party will:
(i) use any Confidential Information for any purpose other than in
connection with the performance of its obligations under this Agreement, the
Asset Purchase Agreement, the R & D Agreement, the Royalty Agreement or any
related agreement between the parties; or
<PAGE>
(ii) disclose, reveal or otherwise make Confidential Information
(other than its own) available to any third party without the prior written
consent of the other party, unless such disclosure is required by operation
of applicable law and, to the extent practicable, made under an agreement of
confidentiality with the governmental authority requiring such disclosure.
(c) Precautions. Both parties will take such reasonable and prudent steps
and precautionary measures as may be required to ensure compliance with this
Section 13 by such of their employees, officers, agents, representatives,
affiliates and other persons as are given access to such Confidential
Information.
(d) Survival. The obligations of the parties in this Section 13 will
survive until five (5) years after the termination of this Agreement.
14. INDEMNIFICATION.
Each party shall indemnify, defend and hold the other party, its
employees and agents harmless from and against any and all liabilities,
damages, injuries, claims, suits, judgments, causes of action and expenses
(including attorneys' fees, court costs and out-of-pocket expenses),
including without limitation claims brought by third parties seeking to
recover for personal injury or property damage on any theory of product
liabilities directly suffered or incurred by such other party as a result of
(i) any breach of any representation or warranty made by such first party
hereunder, or (ii) any act or deed, whether by way of tort or contract,
committed or omitted by such first party, its employees or agents in the
performance of this Agreement, except for acts or deeds committed or omitted
by such first party in reliance on representations and warranties made to
such first party by such other party under this Agreement.
15. GENERAL.
(a) Limitation of Liability. IN NO EVENT WILL ANY PARTY HERETO BE LIABLE
UNDER ANY PROVISION OF THIS AGREEMENT FOR ANY INDIRECT, SPECIAL, INCIDENTAL
OR CONSEQUENTIAL DAMAGES INCURRED BY THE OTHER PARTY OR ANY THIRD PARTY,
WHETHER IN AN ACTION IN CONTRACT OR TORT OR BASED ON A WARRANTY.
(b) Governing Law. This Agreement is made in accordance with and will be
governed and construed under the laws of the State of Delaware, excluding
conflict of law principles that would cause the law of another jurisdiction
to apply, as applied to agreements executed and performed entirely in
Delaware by Delaware residents.
(c) Assignment. This Agreement is not assignable or transferable by
either party in whole or in part except with the written consent of the other
party, which consent shall not be unreasonably withheld; provided, however,
that Seller may assign its interest to a purchaser of its garlic processing
business or garlic processing plant, without consent; and provided further,
that the Buyer may assign its interest to a purchase of its business (whether
by sale of assets, capital stock,
<PAGE>
merger or otherwise) without consent. In the case of any permitted assignment
or transfer of or under this Agreement, this Agreement or the relevant
provisions thereof, will be binding upon, and inure to the benefit of, the
successors, executors, heirs, representatives, administrators and assigns of
the parties hereto.
(d) Notices. All notices and other communications required or permitted
to be given under this Agreement will be in writing and will be effective
when delivered personally, or one (1) business day after being transmitted by
facsimile, or two (2) business days after being sent by commercial overnight
carrier, or five (5) business days after being mailed if sent by registered
or certified mail, postage prepaid, and addressed to the party at its address
set forth below, unless by such notice a different person, address or number
has been designated for giving notice hereunder:
If to Seller, to:
Basic Vegetable Products, L.P.
324 Campus Lane, Suite C
Suisun, CA 94585
Attn: Chief Financial Officer
Facsimile Number: (707) 864-4501
with a copy to:
Cooley Godward LLP
One Maritime Plaza
20th Floor
San Francisco, CA 94111-3580
Attention: Susan Cooper Philpot
Facsimile Number: (415) 951-3699
If to Buyer, to:
Natrol, Inc.
21411 Prairie Street
Chatsworth, CA 91311
Attention: President
Facsimile Number: (818) 730-6001
with a copy to:
Goodwin Procter & Hoar LLP
Exchange Place
53 State Street
Boston, MA 02109
Attention: William V. Buccella
Facsimile Number: (617) 523-1231
<PAGE>
(e) Relationship of Parties. The parties hereto agree that under this
Agreement, Seller will operate as an independent contractor and not as an
agent or employee of Buyer. Except as described in Section 10 above with
respect to shipping arrangements, Seller has no express or implied
authorization to incur any obligation or in any manner otherwise make any
commitments on behalf of Buyer. In no way will Seller be liable to Buyer, its
employees or third parties for any losses, injury, damages or the like
occasioned by Seller's activities in connection with this Agreement, except
as expressly provided herein.
(f) Amendment and Waiver. This Agreement may be amended only with the
written approval of both parties. Any of the provisions of this Agreement may
be waived, generally or in a specific instance, with the written approval of
the party giving such waiver. The failure of either party to enforce the
provisions of this Agreement will not be deemed a waiver of such provisions
or of the right of such party thereafter to enforce such provisions or any
other provision.
(g) Severability. In the event that any provision of this Agreement will
be unenforceable or invalid under any applicable law or be so held by
applicable court decision, such unenforceability or invalidity will not
render this Agreement unenforceable or invalid as a whole, and, in such
event, such provision will be changed and interpreted so as to best
accomplish the objectives of such unenforceable or invalid provision within
the limits of applicable law or applicable court decision.
(h) Remedies. Except as expressly provided in this Agreement, the right
and remedies provided in this Agreement will be cumulative and not exclusive
of any other right and remedies provided by law or otherwise.
(i) Section Headings. The section headings appearing in this Agreement
are inserted only as a matter of convenience and in no way define, limit,
construe or describe the scope or extent of such section or in any way affect
such section.
(j) Counterparts. This Agreement may be executed in counterparts with the
same force and effect as if each of the signatories had executed the same
instrument.
(k) Arbitration. Except with respect to matters as to which injunctive
relief is being sought, any dispute arising out of or relating to this
Agreement that has not been settled within thirty (30) days by good faith
negotiation between the parties to this Agreement shall be submitted to
J.A.M.S./Endispute for final and binding arbitration on an expedited basis
pursuant to its arbitration rules and regulations. Any such arbitration shall
be conducted in San Francisco, California. Such proceedings shall be
administered by the J.A.M.S./Endispute arbitrator(s) and shall be guided by
the following agreed upon procedures:
(i) mandatory exchange of all relevant documents, to be accomplished
within forty-five (45) days of the initiation of such arbitration;
(ii) no other discovery;
<PAGE>
(iii) hearings before the arbitrator(s) shall consist of a summary
presentation by each side of not more than three (3) hours; such hearings to
take place on one or two days at a maximum; and
(iv) decision to be rendered by the arbitrator(s) not more than ten
(10) days following such hearings.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above set forth.
BASIC VEGETABLE PRODUCTS, L.P. NATROL, INC.
By: BVP, Inc. By: /s/ Elliott Balbert
-----------------------
Its: General Partner
Name: Elliott Balbert
--------------------
By: /s/ D.L. Wittchow
-----------------------------
Title: President
--------------------
Name: D.L. Wittchow
-----------------------------------
Title: President and CEO
----------------------------------
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 1
Product Description Pure-Gar Resource Code
------------------- ----------------------
<S> <C>
A-0 Garlic Powder 408710
A-1500 Garlic Powder 409701
A-1500 Garlic, Granular 409741
A-1500 Organic Garlic Powder 409711
A-1500 Organic Garlic, Granular 409761
A8000 Garlic Powder 409706
A10,000 Garlic Powder 409707
A13,000 Garlic Powder 409708
Nutraceutical Tomato Powder 476120
Nutraceutical Broccoli Powder 416910
Nutraceutical Spinach Powder 472070
Organic Parsley Powder 455030
Organic Spinach Powder 472600
</TABLE>
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
P U R E - G A R
A SUBSIDIARY OF BASIC VEGETABLE PRODUCTS
January 15, 1998
Client: Pure-Gar
Product: Garlic Powder A-0
CERTIFICATION OF GUARANTEE
Test Product Code: Item# 08710 Lot# K P.O. #
Analytical Test Results: Order #
<TABLE>
<CAPTION>
ATTRIBUTES METHOD
- ---------- ------
<S> <C> <C>
Alliin: XXXXXX ppm minimum C-18 HPLC
*Gamma-glutamylcysteines XXXXXX ppm minimum C-18 HPLC
Moisture: XXXX A 2.2
Granulation: XXXX mesh, none A 6.0
XXXX mesh, XXX minimum
XXXX mesh, XXX maximum
** Total Sulfur: XXXX ppm minimum Leco Analyzer
<CAPTION>
MICROBIOLOGICAL METHOD
- ----------------- -------
<S> <C> <C>
Total Plate Count: XXXXXXX/g maximum M 1.0
Mold: XXXXX/g maximum M 2.0
Coliforms: XX/g maximum M 4.0
</TABLE>
- ----------
* Determined using a C-18 HPLC column
** Determined using a Leco Sulfur Analyzer
Basic Vegetable Products certifies the attributes listed. No claims or
reference regarding listing can be used in advertisement without the written
approval of Basic Vegetable Products. This analysis represents the typical
standard of identity for this product as supplied to Pure-Gar.
------------------------
C.O.G. Administrator
P.O. Box 98813 Tacoma, WA 98498 253-582-6421 FAX: 253-582-6734
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
P U R E - G A R
A SUBSIDIARY OF BASIC VEGETABLE PRODUCTS
January 15, 1998
Client: Pure-Gar
Product: Garlic Powder A-1500
CERTIFICATION OF GUARANTEE
Test Product Code: Resource # 09701 Lot # P.O. #
Analytical Test Results: B/L #
<TABLE>
<CAPTION>
ATTRIBUTES METHOD
- ---------- ------
<S> <C> <C>
*Allicin yield XXXXX ppm minimum C-18 HPLC
*Total Thiosulfinates yield XXXXX ppm minimum C-18 HPLC
*Alliin XXXXXX ppm minimum C-18 HPLC
*Gamma-glutamylcysteines XXXXXX ppm minimum C-18 HPLC
Moisture XXXX maximum A 2.2
Granulation XXX mesh, none A 6.0
XXX mesh, XX maximum
XXX mesh, XXX maximum
**Total sulfur XXXXX ppm minimum Leco Analyzer
MICROBIOLOGICAL
- ----------------
Total Plate Count XXXXXXX/g maximum M 1.0
Mold XXXXX/g maximum M 2.0
Coliform XX/g maximum M 4.0
E. coli less than XX/g M 4.0
Salmonella Negative/XX grams M 15.0
</TABLE>
- -----------
* Determined using a C-18 HPLC column
** Determined using a Leco Sulfur Analyzer
Basic Vegetable Products certifies the attributes listed. No claims or reference
regarding listing can be used in advertisement without the written approval of
Basic Vegetable Products. This analysis represents the typical standard of
identity for this product as supplied to Pure-Gar.
--------------------------
C.O.G. Administrator
P.O. Box 98813 Tacoma, WA 98498 253-582-6421 FAX: 253-582-6734
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
P U R E - G A R
A SUBSIDIARY OF BASIC VEGETABLE PRODUCTS
January 15, 1998
Client: Pure-Gar
Product: Garlic Granular A-1500
CERTIFICATION OF GUARANTEE
Test Product Code: Resource # 09741 Lot # P.O. #
Analytical Test Results: B/L #
<TABLE>
<CAPTION>
ATTRIBUTES METHOD
- ---------- ------
<S> <C> <C>
*Allicin yield XXXXX ppm minimum C-18 HPLC
*Total Thiosulfinates yield XXXXX ppm minimum C-18 HPLC
*Alliin XXXXXX ppm minimum C-18 HPLC
*Gamma-glutamylcysteines XXXXXX ppm minimum C-18 HPLC
** Total Sulfur XXXXX ppm minimum Leco Analyzer
Moisture XXXX maximum A 2.2
Granulation XXX mesh, XX maximum A 6.0
XXXX mesh, XXX maximum
MICROBIOLOGICAL
- ----------------
Total Plate Count XXXXXXX/g maximum M 1.0
Mold XXXXX/g maximum M 2.0
Coliform XX/g maximum M 4.0
E. coli less than XX/g M 4.0
Salmonella Negative/XX grams M 15.0
</TABLE>
- ------------
* Determined using a C-18 HPLC column
** Determined using a Leco Sulfur Analyzer
Basic Vegetable Products certifies the attributes listed. No claims or reference
regarding listing can be used in advertisement without the written approval of
Basic Vegetable Products. This analysis represents the typical standard of
identity for this product as supplied to Pure-Gar.
--------------------------
C.O.G. Administrator
P.O. Box 98813 Tacoma, WA 98498 253-582-6421 FAX: 253-582-6734
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
P U R E - G A R
A SUBSIDIARY OF BASIC VEGETABLE PRODUCTS
January 15, 1998
Client: Pure-Gar
Product: Garlic Powder A-1500, Organic
CERTIFICATION OF GUARANTEE
Test Product Code: Resource # 09711 Lot # P.O. #
Analytical Test Results: B/L #
<TABLE>
<CAPTION>
ATTRIBUTES METHOD
- ---------- ------
<S> <C> <C>
*Allicin yield XXXXX ppm minimum C-18 HPLC
*Total Thiosulfinates yield XXXXX ppm minimum C-18 HPLC
*Alliin XXXXXX ppm minimum C-18 HPLC
*Gamma-glutamylcysteines XXXXXX ppm minimum C-18 HPLC
Moisture XXXX maximum A 2.2
Granulation XXX mesh, none A 6.0
XXX mesh, XX maximum
XXX mesh, XXX maximum
** Total Sulfur XXXXX ppm minimum Leco Analyzer
MICROBIOLOGICAL
- -----------------
Aerobic Plate Count: XXXXXXX/g maximum M 1.0
Mold: XXXXX/g maximum M 2.0
Coliform: XX/g maximum M 4.0
E. coli less than XX/g M 4.0
Salmonella Negative/XX grams M 15.0
</TABLE>
- ------------
* Determined using a C-18 HPLC column
** Determined using a Leco Sulfur Analyzer
ORGANIC CERTIFICATION
This product has been organically grown in accordance with the standards
established by the California Certified Organics Farmers and the provisions of
the California Organic Food Act of 1990.
Certificate Number: ft045 Date Issued: 2/19/93
Basic Vegetable Products certifies the attributes listed. No claims or reference
regarding listing can be used in advertisement without the written approval of
Basic Vegetable Products. This analysis represents the typical standard of
identity for this product as supplied to Pure-Gar.
--------------------------
C.O.G. Administrator
P.O. Box 98813 Tacoma, WA 98498 253-582-6421 FAX: 253-582-6734
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
P U R E - G A R
A SUBSIDIARY OF BASIC VEGETABLE PRODUCTS
January 15, 1998
Client: Pure-Gar
Product: Organic Granulated Garlic A-1500
CERTIFICATION OF GUARANTEE
Test Product Code: Resource # 09761 Lot # P.O. #
Analytical Test Results: B/L #
<TABLE>
<CAPTION>
ATTRIBUTES METHOD
- ---------- ------
<S> <C> <C>
*Allicin yield XXXXX ppm minimum C-18 HPLC
Moisture XXXX maximum A 2.2
Granulation XXX mesh, XX maximum A 6.0
XXX mesh, XXX maximum
XXXX mesh, XXX maximum
MICROBIOLOGICAL
- ----------------
Total Plate Count XXXXXX/g maximum M 1.0
Mold XXXXX/g maximum M 2.0
Coliform XX/g maximum M 4.0
E. coli less than XX/g M 4.0
Salmonella Negative/XX grams M 15.0
</TABLE>
- -----------
* Determined using a C-18 HPLC column
ORGANIC CERTIFICATION
This product has been organically grown in accordance with the standards
established by the California Certified Organics Farmers and the provisions of
the California Organic Food Act of 1990.
Certificate Number: ft045 Date Issued: 2/19/93
Basic Vegetable Products certifies the attributes listed. No claims or reference
regarding listing can be used in advertisement without the written approval of
Basic Vegetable Products. This analysis represents the typical standard of
identity for this product as supplied to Pure-Gar.
--------------------------
C.O.G. Administrator
P.O. Box 98813 Tacoma, WA 98498 253-582-6421 FAX: 253-582-6734
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
P U R E - G A R
A SUBSIDIARY OF BASIC VEGETABLE PRODUCTS
January 15, 1998
Client: Pure-Gar
Product: Garlic Powder A-8000
CERTIFICATION OF GUARANTEE
Test Product Code: Resource # 09706 Lot # P.O. #
Analytical Test Results: Order #
<TABLE>
<CAPTION>
ATTRIBUTES METHOD
- ---------- ------
<S> <C> <C>
*Allicin yield: XXXXX ppm minimum C-18 HPLC
*Total Thiosulfinates yield: XXXXX ppm minimum C-18 HPLC
*Alliin: XXXXXX ppm minimum C-18 HPLC
*Gamma-glutamylcysteines: XXXXX ppm minimum C-18 HPLC
Moisture: XXXX maximum A 2.2
Granulation: XXX mesh, none A 6.0
XXX mesh, XX maximum
XXX mesh, XXX maximum
** Total Sulfur: XXXXX ppm minimum Leco Analyzer
MICROBIOLOGICAL
- ---------------
Total Plate Count: XXXXXXX/g maximum M 1.0
Mold: XXXXX/g maximum M 2.0
Coliform: XX/g maximum M 4.0
E. coli: less than XX/g M 4.0
Salmonella Negative/XX grams M 15.0
</TABLE>
- ----------
* Determined using a C-18 HPLC column
** Determined using a Leco Sulfur Analyzer
Basic Vegetable Products certifies the attributes listed. No claims or reference
regarding listing can be used in advertisement without the written approval of
Basic Vegetable Products. This analysis represents the typical standard of
identity for this product as supplied to Pure-Gar.
--------------------------
C.O.G. Administrator
P.O. Box 98813 Tacoma, WA 98498 253-582-6421 FAX: 253-582-6734
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
P U R E - G A R
A SUBSIDIARY OF BASIC VEGETABLE PRODUCTS
January 15, 1998
Client: Pure-Gar
Product: Garlic Powder A-10,000
CERTIFICATION OF GUARANTEE
Test Product Code: Resource # 09707 Lot # P.O. #
Analytical Test Results: Order #
<TABLE>
<CAPTION>
ATTRIBUTES METHOD
- ---------- ------
<S> <C> <C>
*Allicin yield: XXXXXX ppm minimum C-18 HPLC
*Total Thiosulfinates yield: XXXXXX ppm minimum C-18 HPLC
*Alliin: XXXXXX ppm minimum C-18 HPLC
*Gamma-glutamylcysteines: XXXXX ppm minimum C-18 HPLC
Moisture: XXXX maximum A 2.2
Granulation: XXX mesh, none A 6.0
XXX mesh, XX maximum
XXX mesh, XXX maximum
** Total Sulfur: XXXXX ppm minimum Leco Analyzer
MICROBIOLOGICAL
- -----------------
Total Plate Count: XXXXXXX/g maximum M 1.0
Mold: XXXXX/g maximum M 2.0
Coliform: XX/g maximum M 4.0
E. coli: less than XX/g M 4.0
Salmonella Negative/XXg M 15.0
</TABLE>
- -----------
* Determined using a C-18 HPLC column
** Determined using a Leco Sulfur Analyzer
Basic Vegetable Products certifies the attributes listed. No claims or reference
regarding listing can be used in advertisement without the written approval of
Basic Vegetable Products. This analysis represents the typical standard of
identity for this product as supplied to Pure-Gar.
--------------------------
C.O.G. Administrator
P.O. Box 98813 Tacoma, WA 98498 253-582-6421 FAX: 253-582-6734
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
P U R E - G A R
A SUBSIDIARY OF BASIC VEGETABLE PRODUCTS
January 15, 1998
Client: Pure-Gar
Product: Garlic Powder A-13,000
CERTIFICATION OF GUARANTEE
Test Product Code: Resource # 09708 Lot # P.O. #
Analytical Test Results: Order #
<TABLE>
<CAPTION>
ATTRIBUTES METHOD
- ---------- ------
<S> <C> <C>
*Allicin yield XXXXXX ppm minimum C-18 HPLC
*Total Thiosulfinates yield XXXXXX ppm minimum C-18 HPLC
*Alliin XXXXXX ppm minimum C-18 HPLC
*Gamma-glutamylcysteines XXXXX ppm minimum C-18 HPLC
**Total Sulfur XXXXX ppm minimum Leco Analyzer
Moisture XXXX maximum A 2.2
Granulation XXX mesh, XX maximum A 6.0
XXX mesh, XX maximum
XXX mesh, XXX maximum
MICROBIOLOGICAL
- ----------------
Total Plate Count: XXXXXXX/g maximum M 1.0
Mold: XXXXX/g maximum M 2.0
Coliform: XX/g maximum M 4.0
E. coli: less than XX/g M 4.0
Salmonella Negative/XXg M 15.0
</TABLE>
- ------------
* Determined using a C-18 HPLC column
** Determined using a Leco Sulfur Analyzer
Basic Vegetable Products certifies the attributes listed. No claims or reference
regarding listing can be used in advertisement without the written approval of
Basic Vegetable Products. This analysis represents the typical standard of
identity for this product as supplied to Pure-Gar.
--------------------------
C.O.G. Administrator
P.O. Box 98813 Tacoma, WA 98498 253-582-6421 FAX: 253-582-6734
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
P U R E - G A R
A SUBSIDIARY OF BASIC VEGETABLE PRODUCTS
January 15, 1998
Client: Pure-Gar
Product: Nutraceutical Tomato Powder
CERTIFICATION OF GUARANTEE
Test Product Code: Resource # 76120 Lot # P.O. #
Analytical Test Results: Order #
<TABLE>
<CAPTION>
ATTRIBUTES METHOD
- ---------- ------
<S> <C> <C>
Total Lycopene XXXXX ppm minimum HPLC
Vitamin C XX mg/XXXg minimum AOAC 984.26
Moisture XXXX maximum A 2.2
Granulation XXX mesh, XXX minimum A 6.0
MICROBIOLOGICAL
- ------------------
Total Plate Count XXXXXXX/g maximum M 1.0
Yeast/Mold XXX/g maximum M 2.0
Coliform XXX/g maximum M 4.0
E. coli less than XX/g M 4.0
Salmonella Negative/XXg M 15.0
S. aureus XX/g M 14.0
</TABLE>
Basic Vegetable Products certifies the attributes listed. No claims or reference
regarding listing can be used in advertisement without the written approval of
Basic Vegetable Products. This analysis represents the typical standard of
identity for this product as supplied to Pure-Gar.
--------------------------
C.O.G. Administrator
P.O. Box 98813 Tacoma, WA 98498 253-582-6421 FAX: 253-582-6734
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
P U R E - G A R
A SUBSIDIARY OF BASIC VEGETABLE PRODUCTS
January 15, 1998
Client: Pure-Gar
Product: Nutraceutical Broccoli Powder 16910
Test Product Code: Resource # 16910, Lot # K P.O. #
Manufacture Date: Expiration Date:
Analytical Test Results: Order #
<TABLE>
<CAPTION>
ATTRIBUTES METHOD
- ---------- ------
<S> <C> <C>
Sulforaphane Yield XXXXX ppm minimum HPLC
Total Glucosinolates XXXXX ppm minimum *
Vitamin C XXX mg/XXXg minimum AOAC 984.26
Beta-carotene XXXXX I.U./XXXg minimum HPLC
Total sulfur XXXXX ppm minimum Leco SC432DR
Analyzer
Moisture: XXXX maximum A 2.2
Granulation: XXX mesh, XXX minimum A 6.0
MICROBIOLOGICAL METHOD
- --------------- ------
Total Plate Count: XXXXXXX/g maximum M 1.0
Yeast/Mold: XXX/g maximum M 2.0
Coliforms: XXX/g maximum M 4.0
E. coli: less than XX/g M 4.0
Salmonella: Negative/XXg M 15.0
S. aureus: less than XX/g M 14.0
</TABLE>
- ----------
* Measured by Small Scale Method for the Determination of Total
Glucosinolates; modified method published by Heaney and Fenwick (Methods of
Enzymatic Analysis, H.C. Bergmeyer ed., Vering Chemie, Deerfield Beach, FL,
pp. 208-214, 1984)
Basic Vegetable Products certifies the attributes listed. No claims or reference
regarding listing can be used in advertisement without the written approval of
Basic Vegetable Products. This analysis represents the typical standard of
identity for this product as supplied to Pure-Gar.
------------------------
C.O.G. Administrator
P.O. Box 98813 Tacoma, WA 98498 253-582-6421 FAX: 253-582-6734
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
P U R E - G A R
A SUBSIDIARY OF BASIC VEGETABLE PRODUCTS
January 15, 1998
Client: Pure-Gar
Product: Nutraceutical Spinach Powder
CERTIFICATION OF GUARANTEE
Test Product Code: Resource #72070, Lot # P.O. #
Analytical Test Results: Order #
<TABLE>
<CAPTION>
ATTRIBUTES METHOD
- ---------- ------
<S> <C> <C>
Lutein XXX ppm minimum HPLC
Beta-carotene XXXXXX I.U./100g minimum HPLC
Folate X mg/XXXg minimum (2)
Calcium XXX mg/XXXg minimum AOAC 975.03
Iron XX mg/XXXg minimum AOAC 975.03
Moisture XXXX maximum A 2.2
Granulation XXX mesh, XX maximum A 6.0
<CAPTION>
MICROBIOLOGICAL METHOD
- --------------- -------
<S> <C> <C>
Total Plate Count XXXXXXX/g maximum M 1.0
Yeast/Mold XXX/g maximum M 2.0
Coliforms XXX/g maximum M 2.0
E. coli less than XX/g M 4.0
Salmonella Negative/XXg M 15.0
S. aureus XX/g M 14.0
</TABLE>
- ----------
(2) Methods of Analysis for Infant Formula (1985); Infant Formula Council.
Basic Vegetable Products certifies the attributes listed. No claims or
reference regarding listing can be used in advertisement without the written
approval of Basic Vegetable Products. This analysis represents the typical
standard of identity for this product as supplied to Pure-Gar.
--------------------------
C.O.G. Administrator
P.O. Box 98813 Tacoma, WA 98498 253-582-6421 FAX: 253-582-6734
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
P U R E - G A R
A SUBSIDIARY OF BASIC VEGETABLE PRODUCTS
January 15, 1998
Client: Pure-Gar
Product: Organic Parsley Powder
CERTIFICATION OF GUARANTEE
Test Product Code: Resource #55030, Lot # P.O. #
Analytical Test Results: Order #
<TABLE>
<CAPTION>
ATTRIBUTES METHOD
- ---------- ------
<S> <C> <C>
Moisture XXXX maximum A2.2
MICROBIOLOGICAL METHOD
- --------------- ------
Total Plate Count XXXXXX/g maximum M 1.0
Yeast/Mold XXX/g maximum M 2.0
Coliforms XX/g maximum M 2.0
E. coli Negative M 4.0
Salmonella Negative M 15.0
</TABLE>
ORGANIC CERTIFICATION
This product has been organically grown in accordance with the standards
established by the California Certified Organic Farmers and the provisions of
the California Organic Act of 1990.
Certificate Number: ft045
Date Issued: 02/19/93
Basic Vegetable Products certifies the attributes listed. No claims or
reference regarding listing can be used in advertisement without the written
approval of Basic Vegetable Products. This analysis represents the typical
standard of identity for this product as supplied to Pure-Gar.
--------------------------
C.O.G. Administrator
P.O. Box 98813 Tacoma, WA 98498 253-582-6421 FAX: 253-582-6734
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
P U R E - G A R
A SUBSIDIARY OF BASIC VEGETABLE PRODUCTS
January 15, 1998
Client: Pure-Gar
Product: Organic Spinach Powder
CERTIFICATION OF GUARANTEE
Test Product Code: Resource #72600, Lot # P.O. #
Analytical Test Results: Order #
<TABLE>
<CAPTION>
ATTRIBUTES METHOD
- ---------- ------
<S> <C> <C>
Moisture XXXX A2.2
MICROBIOLOGICAL METHOD
- --------------- ------
Total Plate Count XXXXXX/g maximum M 1.0
Yeast/Mold XXX/g maximum M 2.0
Coliforms XX/g maximum M 2.0
E. coli Negative M 4.0
Salmonella Negative M 15.0
</TABLE>
ORGANIC CERTIFICATION
This product has been organically grown in accordance with the standards
established by the California Certified Organic Farmers and the provisions of
the California Organic Act of 1990.
Certificate Number: ft045
Date Issued: 02/19/93
Basic Vegetable Products certifies the attributes listed. No claims or
reference regarding listing can be used in advertisement without the written
approval of Basic Vegetable Products. This analysis represents the typical
standard of identity for this product as supplied to Pure-Gar.
--------------------------
C.O.G. Administrator
P.O. Box 98813 Tacoma, WA 98498 253-582-6421 FAX: 253-582-6734
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
BASIC VEGETABLE PRODUCTS, LP
Transfer Pricing for Sale to PureGar
<TABLE>
<CAPTION>
DESCRIPTION 1996 TRANSFER PRICE 1997 TRANSFER PRICE**
- ------------ ------------------- ---------------------
<S> <C> <C>
GARLIC A500 ORG SEL PWD XXXXX XXXXX
GARLIC A-0 PWD 200#DM PG XXXXX XXXXX
GARLIC A-0 PWD 50#BX PG XXXXX XXXXX
GARLIC A1500 PWD 600K TT XXXXX XXXXX
GARLIC A1500 PWD 250#DM PG XXXXX XXXXX
GARLIC A1500 PWD 50#BX PG XXXXX XXXXX
GARLIC A7000 PWD 250#DM PG XXXXX XXXXX
GARLIC A8000 PWD 250#DM PG XXXXX XXXXX
GARLIC A8000 PWD 50#BX PG XXXXX XXXXX
GARLIC A10000 PWD 250#DM PG XXXXX XXXXX
GARLIC A10000 PWD 50#BX PG XXXXX XXXXX
GARLIC A13000 PWD 250#DM PG XXXXX XXXXX
GARLIC A13000 PWD 50#BX PG XXXXX XXXXX
GARLIC A1500 ORG PWD 50#BX PG XXXXX XXXXX
GARLIC ORG A1500 PWD 50#BX PG XXXXX XXXXX
GARLIC A1500 GRLD 60BK TT XXXXX XXXXX
"OBS" GAR A1500 GRL 200#DM XXXXX XXXXX
GAR ORG A1500 GRLD 200#DM XXXXX XXXXX
GARLIC A1500 PWD -80 250#DM XXXXX XXXXX
BROC PWD -60NU 50# HSBX XXXXX XXXXX
CARROT PWD -60 NUTRA 50#BX XXXXX XXXXX
PARSLEY PWD -60 NS 50#BX XXXXX XXXXX
SPINACH PWD -60 NUTRA NS XXXXX XXXXX
TOM-CB ORG NU PWD -35 40#DM XXXXX XXXXX
</TABLE>
- -----------
** Contract transfer price to remain same as 1997 for existing products. Any new
products will include XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
<PAGE>
Schedule 5
Date: February 27, 1998
Given that that it is extremely difficult to legally define the channels
of distribution to which Natrol is being granted "Exclusivity", we feel a
mutually signed memorandum of understanding would be helpful in documenting
the spirit of the Supply Agreement.
As a supplier of raw material to numerous trade classes, Natrol expects
to have the right to sell any product that BVP manufactures during the term
of the Supply Agreement. Our primary interest is nutraceutical grade garlic,
our secondary interest is BVP's Schedule II Products, and our third interest
is any New Products developed or supplied by BVP.
Natrol clearly understands that BVP's customer base consists of
industrial clients such as Lipton, C.W. Post, Taco Bell, General Mills, and
that B.V.P. retains the rights to sell product to these customers.
Natrol's business, post the Pure-Gar acquisition, consists of selling
branded vitamins and supplements through various channels of distribution as
well as the sale of bulk material to manufacturers/processors of
nutraceutical products.
Natrol's primary channels of distribution include but are not limited to,
multi-level marketers, catalog sales companies, retailers and wholesalers who
sell to retailers, manufacturers of pills in encapsulated, soft-gel and
compressed pill form. Natrol anticipates expanding its channels of
distribution to infomercials, international, department stores and any and
all channels through which dietary supplements can be sold. Through the
acquisition of Pure-Gar we are also selling to a limited number of brokers
who re-sell to our primary channels of distribution. Natrol currently sells
product that is intended to eventually be sold as vitamins, nutraceutical &
herbal supplements or functional foods.
We believe that BVP and Natrol agree that Natrol should have exclusively
within these primary channels of distribution where the intent of the Natrol
is to produce a vitamin, a nutraceutial or herbal supplement of functional
food. We believe it is the definite intent of the supply agreement to give
Natrol exclusive rights to sell bulk materials and or pills in their various
forms to any company that is manufacturing or packaging pills in their
various forms for sale as vitamins or nutraceutical herbs and supplements.
Unfortunately, as with any supply agreement, there are gray areas of
crossover that cannot be defined precisely.
One area of crossover would be if one of BVPs existing industrial
customers, let us say, Kellogg decided to enter the traditional vitamin and
supplement business. For purposes of
<PAGE>
illustration only, it would be Natrol's expectation that if Kellogg decided to
produce a Garlic Pill, BVP would inform Kellogg that it had to purchase its raw
material from the Natrol. However, it is clearly understood by Natrol that if
Kellogg decided to add Garlic or another BVP nutraceutical product to Total
Cereal, BVP would maintain all rights to sell directly to Kellogg.
Natrol sees the biggest area of potential confusion to be functional
foods yet to be developed by BVP.
Again, for purposes of illustration, let us say that BVP develops powder
or some other raw material mix (liquid, paste, etc.) to make a functional
food "power bar".
It is clear that Natrol would have the rights to sell this mix to
marketers within its channels of distribution. This would include companies
like Pharmavite, Rexall Sundown, Herbalife, Avon, Walmart, Walgreen, etc. who
sell to wholesalers, retailers, or customers.
However, it is also clear that BVP would sell the same mix to its
existing and developing customer base. Natrol understands that Lipton,
Campbell Soup or General Mills could decide to manufacture a power bar in
direct competition to Natrol and sell this power bar to Walmart, Walgreen,
and other retailers that are part of their individual distribution networks.
The key element that has to be acknowledged as part of the spirit of this
agreement is that BVP would not sell this mix directly to Rexall sundown,
Pharmavite, Walgreen's, Herbalife, etc., i.e., customers who now and in the
future are part of Natrol's primary distribution channels.
Natrol believes that in acknowledging this memorandum, both BVP and
Natrol are further acknowledging an understanding of the nuances of the
differentiation within the examples outlined above.
As good business people, we will operate in good faith within the
guidelines of this letter. Should there be any honest disagreement in the
future, the parties will use there best efforts to resolve potential issues
informally but if necessary the parties will let an independent arbitrator
resolve the issue using the scope of this memorandum for guidance.
<PAGE>
CERTAIN MATERIALS HAVE BEEN OMITTED AND
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED THEREFOR
Exhibit 10.11
INTER-CAL CORPORATION
DISTRIBUTORSHIP/PACKAGER/SUPPLY AGREEMENT
AGREEMENT made as of January 1, 1995, by and between Inter-Cal Corporation,
an Arizona corporation ("Inter-Cal"), and NATROL, INC., a California corporation
("Natrol") which also does business as Nutritionals, Etc. ("Nutritionals"). This
Agreement supersedes that certain Distributorship Agreement between Inter-Cal
and Natrol dated as of September 1, 1990, as well as that certain Packager
Agreement between Inter-Cal and Nutritional dated as of December 8, 1993.
ARTICLE I
APPOINTMENT OF NATROL AS AUTHORIZED DISTRIBUTOR
1.1 Appointment of Natrol. Inter-Cal appoints Natrol as an Authorized
Distributor of the Ester-C-Registered Trademark- vitamin products for human
oral consumption shown on Exhibit A hereto (the "Products") in the geographic
area shown on Exhibit B hereto (the "Territory"). Inter-Cal may appoint other
Distributors in the Territory.
1.2 Development of Territory. Natrol will use its best efforts to promote
and sell the Products in the Territory. Natrol will not promote or sell the
Products outside the Territory and will refer inquiries from outside the
Territory to Inter-Cal.
1.3 Sales to Resellers/Sales through Intermediaries. Natrol may sell the
Products under its own label to end-users or resellers in the Territory. The
Products may not be sold for resale under any other label without Inter-Cal's
prior written approval. Natrol may sell the Products directly or through
authorized agents, brokers, or other intermediaries. Intermediaries and
resellers must comply with the same conditions imposed on Natrol by this
Agreement.
1.4 Repackaging/Purchases from Nutritionals. The Products must be repackaged
by Natrol. Natrol may also purchase the Products from Nutritionals pursuant to
Article II below. All provisions of paragraphs 2.4 and 2.5 below shall apply
regardless of whether the Products are purchased from Inter-Cal by Natrol or
Nutritionals.
ARTICLE II
APPOINTMENT OF NUTRITIONALS AS AUTHORIZED PACKAGER
2.1 Appointment of Nutritionals. Inter-Cal authorizes Nutritionals to
purchase Ester C-Registered Trademark- Ascorbate in the form of bulk powder
for any or all of the following purposes: manufacturing, processing,
packaging, labeling, and resale exclusively to Natrol and such other
companies as Inter-Cal may authorize in writing (each of which is referred to
herein as an "Account"). Authorization of additional Accounts shall not be
unreasonably withheld.
2.2 Shipments by Inter-Cal. Each shipment shall be labeled with the Product
name, the statement "For use only in manufacturing, processing or repackaging,"
Inter-Cal's name and address, and a lot/batch number. For each shipment,
Inter-Cal shall also provide an itemization of ingredients to be used by
Nutritionals or Natrol in preparing its own labels.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
2.3 Resale. The Products shall be resold by Nutritionals exclusively to
Natrol and other authorized Accounts and shall not be shipped in any form
outside the Territory assigned to each Account. Nutritionals shall immediately
cease sales to any Account upon receipt of written notice from Inter-Cal that
the Account is no longer authorized to distribute the Products.
2.4 Storage and Packaging of Products. The Products must be stored in cool,
dry places under sanitary conditions. The Products may not be blended,
formulated, tabletted, or packaged in combination with any other form of vitamin
C. All handling, labeling, and repackaging must conform to the current Good
Manufacturing Practices set forth in Title 21 of the Code of Federal
Regulations, Sections 110 and following; the Food, Drug & Cosmetic Act; the Fair
Packaging & Labeling Act; and all applicable regulations. All labels must
contain the information required by paragraph 2.5.
2.5 Trademarks and Patents. Ester-C-Registered Trademark-, the EC logo,
and the Inter-Cal name, as well as any other brand names, trademarks, or
patents which Inter-Cal may identify in writing, are the exclusive property
of Inter-Cal or its licensor. Neither Natrol nor Nutritionals will take any
action inconsistent with the ownership of Inter-Cal and its licensor, nor
will Natrol or Nutritionals use or attempt to register any confusingly
similar name or mark. The information "Manufactured under U.S. Patent No.
4,822,816. Other foreign patents pending," as well as "(EC logo) and
Ester-C-Registered Trademark- are licensed trademarks of Inter-Cal
Corporation" must appear on the labels of all items containing
Inter-Cal Products. Natrol and Nutritionals agree not to apply an
Ester-C-Registered Trademark- label to any non-Ester-C-Registered Trademark-
product and to immediately notify Inter-Cal if any request for such labeling
is received from any Account.
ARTICLE III
ASSURANCES OF PRICING AND SUPPLY
3.1 Pricing. For the period extending through XXXXXXXXXXX, Inter-Cal
assures Natrol and Nutritionals that the bulk price of
Ester-C-Registered Trademark- Calcium Ascorbate will remain at the current
level of $XXXXX per pound and zinc, potassium, magnesium, and sodium mineral
ascorbates at $XXXXX per pound on orders intended for use in Products marketed
under Natrol's proprietary label. However, orders intended for use in non-Natrol
products shall not be eligible for these prices, and each purchase order shall
clearly indicate whether the order is intended for use in Natrol proprietary
Products.
3.1.1 Conditions. This assurance is subject to (1) Natrol's and
Nutritionals' continued performance of their obligations under this
Agreement, including aggressive promotional efforts at the level of XXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX, (2) best
efforts to achieve annual sales increases (to include whenever possible, but
not limited to, distributor sales promotions, distributor consumer flyer
programs, broker coop budgets, consumer sampling, trade and broker sales
tools, consumer print advertising, broadcast advertising (radio and
television), direct trade advertising, response marketing, and any other
marketing and sales vehicles which can reasonably be used to promote the
sale of Ester-C-Registered Trademark-), and (3) Inter-Cal's right to
increase the price from time to time to reflect increases in its actual
cost of production (raw
2
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
materials, labor, equipment, and similar items). Inter-Cal may require
Natrol to provide proof of performance of conditions (1) and (2).
Inter-Cal will provide Natrol and Nutritionals with written notice at
least 60 days before the effective date of any increase in price and
will also provide Natrol and Nutritionals with satisfactory evidence of
the increased cost of production. Prices are FOB, Prescott, Arizona,
and do not include shipping or insurance charges.
3.2 Supply. For the period extending through January 1, 2000, Inter-Cal
assures Natrol and Nutritionals of a continuing source of supply of the Products
sufficient to meet each company's reasonable needs.
3.2.1 Conditions. This assurance is subject to (1) Natrol's and
Nutritionals' continued performance of their obligations under this
Agreement and (2) Natrol's and Nutritionals' recognition that there may be
occasional interruptions in the supply due to Acts of God or other causes
beyond Inter-Cal's reasonable control.
ARTICLE IV
INTERNATIONAL SALES
The pricing to Natrol and Nutritionals as set forth in paragraph 3.1 is for
Natrol-brand Products intended for domestic sale (United States, Canada, and
Puerto Rico). At such time as Inter-Cal may authorize Natrol to distribute the
Products internationally, then Inter-Cal, Natrol and Nutritionals shall
negotiate a royalty or other lawful arrangement.
ARTICLE V
GENERAL
5.1 Compliance with Laws. Natrol and Nutritionals will each comply with high
ethical standards and all laws applicable to their operations.
5.2 Records. Natrol and Nutritionals shall each make its records
concerning Ester-C-Registered Trademark- products, including production and
shipment records, available to Inter-Cal upon reasonable notice to ensure
compliance with this Agreement.
5.3 No Misrepresentations. Natrol and Nutritionals will not misrepresent the
Products or their benefits. Natrol and Nutritionals will immediately discontinue
the use of any advertising or promotional materials which Inter-Cal considers
misleading or deceptive.
5.4 Purchase Orders. Purchase orders must be in a form satisfactory to
Inter-Cal. Nothing printed or written on any purchase order shall modify or
expand Inter-Cal's obligations under this Agreement.
5.5 Payment. Payment is due 30 days after the invoice date. A late charge of
XXX per month will be added to past due amounts. An account 60 days past due
automatically becomes a COD account.
3
<PAGE>
5.6 Warranty. The Products are warranteed by Inter-Cal to be free from
physical or manufacturing defects when shipped. Defects shall be reported in
writing to Inter-Cal within 60 days after delivery. Inter-Cal may, at its
option, cure the defects, replace the Products, or refund the purchase price.
Failure to notify Inter-Cal of defects within 60 days after delivery constitutes
final acceptance by Natrol or Nutritionals (as the case may be).
5.7 Inter-Cal's Indemnity to Natrol and Nutritionals. Inter-Cal will
indemnify, defend, and hold Natrol and Nutritionals harmless against any claim
that (1) any Product as delivered by Inter-Cal was defective or caused injury or
death to any person or animal, or (2) any Product or Inter-Cal trademark, brand
name, or patent infringes a mark, name, or patent of any other person.
5.8 Natrol's and Nutritionals' Indemnities to Inter-Cal. Natrol and
Nutritionals will each indemnify, defend, and hold Inter-Cal harmless against
any claim concerning (1) any representation or advertising by Natrol or
Nutritionals or its respective employees, agents, or reseller customers, (2) any
intentional or negligent wrongdoing on the part of Natrol or Nutritionals or its
respective employees or agents in the formulation, manufacturing, repackaging,
labeling, storage, promotion, or sale of the Products, or (3) Natrol's or
Nutritionals' use of any additive, binder, excipient, or other material.
5.9 Survival of Indemnities. The parties' obligations under paragraphs 5.7
and 5.8 will survive seven years after the termination of this Agreement.
5.10 Term. The term of this Agreement is five years expiring January 1,
2000. Thereafter, this Agreement shall automatically renew for successive
two-year periods, but without the special pricing provided for in paragraph 3.1.
5.11 Termination.
a. Inter-Cal may terminate this Agreement immediately upon written
notice if Natrol or Nutritionals promotes or sells the Products outside
the Territory or blends, formulates, tablets, or packages the Products
in combination with any other form of vitamin C, or if Natrol or
Nutritionals sells the Products to any unauthorized Account.
b. Except as stated in subparagraph "a," this Agreement may be
terminated in writing by either party if the other party has failed to
perform any obligation and the default has not been cured within 60
days after the defaulting party has received written notice of the
default. A default by either Natrol or Nutritionals shall be deemed a
default by both companies. Inter-Cal may suspend further shipments or
request payment in advance while a default by Natrol or Nutritionals
remains uncured.
c. If Inter-Cal terminates this Agreement for reason other than one set
forth in subparagraph "a," it will ship reasonable quantities of the
Products to Natrol and
4
<PAGE>
Nutritionals for 90 days after termination to enable them to fulfill
existing contracts.
5.12 Limitation on Liability. In any dispute arising out of this Agreement,
neither party will be liable to the other for incidental or consequential
damages (such as loss of goodwill, sales, or profits, repurchase of inventory,
or expenses incurred in promotion or advertising).
5.13 Non-Assignment. Because Inter-Cal is relying on Natrol's qualifications
and expertise, neither Natrol nor Nutritionals may assign this Agreement without
Inter-Cal's prior written consent, which shall not be unreasonably withheld.
5.14 Notices. Notices must be sent by certified or registered mail and are
deemed received two days after being sent.
5.15 Entire Agreement. This Agreement and any exhibits and addenda constitute
the entire understanding between the parties and supersede any prior agreements
or understandings. No Inter-Cal representative may waive any provision or modify
this Agreement by oral representations. Amendments must be in writing and signed
by both parties.
5.16 Independent Contractors. Natrol and Nutritionals are each independent
contractors and are solely responsible for their employees and agents. There is
no partnership or joint venture between Inter-Cal and Natrol or Nutritionals.
5.17 Binding Effect. This Agreement is binding on the parties and their
respective successors and permitted assigns.
5.18 Applicable Law/Jurisdiction. This Agreement will be enforced under the
laws of Arizona as applicable to contracts made and performed there. Each party
consents to jurisdiction and venue in the United States District Court for the
District of Arizona and the Superior Court of the State of Arizona.
5.19 Severability. If any provision of this Agreement is invalid or
unenforceable, the remaining provisions will not be affected. If any provision
is deemed unreasonable, a reasonable provision shall be implied.
5.20 Force Majeure. Either party will be relieved of its obligations under
this Agreement if performance is impossible due to causes beyond its reasonable
control (such as fire, flood, and other natural disasters). If the inability to
perform continues for more than 180 days, the other party may terminate this
Agreement upon written notice.
5.21 Attorney Fees. In any dispute arising out of this Agreement, the court
or arbitrator shall award the prevailing party its costs and reasonable attorney
fees.
5
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of January
1, 1995.
INTER-CAL CORPORATION
533 Madison Avenue
Prescott, Arizona 86301
By: /s/ Nancy J. Chandler
---------------------------------
Nancy J. Chandler
Vice President of Operations
NATROL, INC.
20731 Marilla Street
P.O. Box 5000
Chatsworth, California 91311
By: /s/ Elliott Balbert
---------------------------------
Elliott Balbert
President
NUTRITIONALS, ETC.
20731 Marilla Street
Chatsworth, California 91311
By: /s/ Elliott Balbert
---------------------------------
Elliott Balbert
President
6
<PAGE>
EXHIBITS A & B
Attached to and made a part of Distributorship Agreement by and between
Inter-Cal Corporation and Natrol, Inc.
7
<PAGE>
EXHIBIT A
The product line is Ester-C-Registered Trademark- brand ascorbates for
oral human supplementation.
8
<PAGE>
EXHIBIT B
The territory is worldwide excluding the following countries:
Austria Iceland
Australia New Zealand
Benelux Norway
Chile Poland
Denmark Sweden
Finland Switzerland
Germany Taiwan
Hungary
INTER-CAL CORPORATION NATROL, INC.
By: /s/ Nancy J. Chandler By: /s/ Elliott Balbert
------------------------------- ----------------------------------
(Signature) (Signature)
NAME: NANCY J. CHANDLER NAME: ELLIOTT BALBERT
------------------------------ -------------------------------
(Print Name) (Print Name)
TITLE: Vice-President of Operations TITLE: President
------------------------------ ------------------------------
DATE: 2/16/95 DATE: 2/22/95
------------------------------- -------------------------------
9
<PAGE>
EXECUTIVE SALARY AND BONUS INCENTIVES FOR
THE PERIOD FROM JULY 1, 1997 THROUGH DECEMBER 31, 1998
The following notes memorialize the senior executive compensation arrangements
for the time period between July 1, 1997 through December 31, 1998 for:
Gary DeMello:
1. Base salary will be set at $125,000.
2. Profit participation based on company profits annualized (prorated for
the period July 1, 1997 through December 31, 1997) as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
$0 through $2,500,000 will earn a .25% bonus
$2,500,000 through $5,000,000 will earn a .50% bonus
$5,000,000 through $10,000,000 will earn a .75% bonus
above $10,000,000 will earn a 1.00% bonus
</TABLE>
3. There will also be the possibility of earning a productivity bonus if a
fair and equitable one can be developed. If this is not possible, then
a discretionary bonus will be considered.
4. On May 1st Mr. DeMello's salary was increased to $150,000 and on
January 1, 1999 his compensation will be raised to $175,000.
<PAGE>
Cheryl Richitt:
1. Base salary will be set at $150,000.
2. Profit participation based on company profits annualized (prorated for
the period July 1, 1997 through December 31, 1997) as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
$0 through $2,500,000 will earn a .25% bonus
$2,500,000 through $5,000,000 will earn a .50% bonus
$5,000,000 through $10,000,000 will earn a .75% bonus
above $10,000,000 will earn a 1.00% bonus
</TABLE>
3. A new business development incentive bonus will be offered for calender year
1998.
Increase or develop "new" sales, as a result of creative marketing and
you will be eligible for additional earning bonuses. Some parameters
that must be met before eligibility of the bonus are as follows:
A. Core business for 1998, i.e. prior years sales must remain the
same, at the very least, as 1997.
B. The profitability of 1998 must be at a 15% pretax percentage.
C. We are looking for a minimum growth of 25% in new sales for
1998.
The products that will quality for this incentive bonus are:
i. Kavatrol;
ii. My Favorite Multiple;
iii.Tanning or Beauty Salon sales with the new line of
products in development;
iv. Discretionary additions.
4. Generate $5,000,000 in new business or above prior year's base receive
$10,000.
Generate $7,500,000 in new business or above prior year's base
receive $50,000.
Generate $10,000,000 in new business or above prior year's base
receive $100,000.
<PAGE>
Dennis Jolicoeur:
1. Base salary will be set at $225,000.
2. Profit participation based on company profits annualized (prorated for
the period July 1, 1997 through December 31, 1997) as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
$0 through $2,500,000 will earn a .25% bonus
$2,500,000 through $5,000,000 will earn a .50% bonus
$5,000,000 through $10,000,000 will earn a .75% bonus
above $10,000,000 will earn a 1.00% bonus
</TABLE>
3. New Business Development Incentive Bonus for 1998.
A. Any acquisitions will earn a $10,000 bonus for each
$10,000,000 in sales of the acquired company.
B. If we conduct a successful IPO in 1998 the company will pay
you a .1% bonus on proceeds net of costs.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated April 13, 1998, except with respect to Note 10, for
which the date is June 19, 1998 in Amendment No. 2 to the Registration Statement
(Form S-1 No. 333-52109) and related Prospectus of Natrol, Inc. for the
registration of 3,940,000 shares of its common stock.
Our audit also included the financial statement schedule of Natrol, Inc.
listed in Item 16(b). The schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on the schedule based on
our audits. In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Woodland Hills, California
July 1, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated April 17, 1998 in Amendment No. 2 to the
Registration Statement (Form S-1 No. 333-52109) and related Prospectus of
Natrol, Inc. for the registration of 3,940,000 shares of its common stock.
/s/ FARBER & HASS LLP
Oxnard, California
July 1, 1998
