<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 10-Q
(Mark one)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO ______
COMMISSION FILE NO: 000-24567
---------
NATROL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-3560780
( State of Incorporation ) (I.R.S. Employer Identification No.)
21411 PRAIRIE STREET
CHATSWORTH, CALIFORNIA 91311
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(818) 739-6000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY A CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES NO X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
Class Outstanding as of August 1,1998
----- -------------------------------
<S> <C>
Common stock, $0.01 par value 13,720,000
</TABLE>
<PAGE>
PART 1
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NATROL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
1998 1997
--------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . $ 411 $ 1,800
Accounts receivable, net of allowances of
$298 and $262 at June 30, 1998 and December 31,
1997 . . . . . . . . . . . . . . . . . . . . . . 8,714 5,397
Inventories. . . . . . . . . . . . . . . . . . . . 8,920 6,934
Deferred taxes . . . . . . . . . . . . . . . . . . 554 554
Prepaid expenses and other current assets. . . . . 292 341
--------------------------
Total current assets . . . . . . . . . . . . . . . . 18,891 15,026
Equipment and leasehold improvements:
Furniture and office equipment . . . . . . . . . . 1,120 871
Machinery and equipment. . . . . . . . . . . . . . 3,024 2,804
Leasehold improvements . . . . . . . . . . . . . . 1,860 1,876
--------------------------
6,004 5,551
Accumulated depreciation and amortization. . . . . . (1,302) (923)
--------------------------
4,702 4,628
Other assets:
Goodwill . . . . . . . . . . . . . . . . . . . . . 8,869 -
Deposits . . . . . . . . . . . . . . . . . . . . . 43 43
Trademarks and patents, net. . . . . . . . . . . . 17 19
Other. . . . . . . . . . . . . . . . . . . . . . . 475 -
--------------------------
9,404 62
--------------------------
Total assets . . . . . . . . . . . . . . . . . . . . $ 32,997 $ 19,716
--------------------------
--------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . $ 7,741 $ 3,867
Accrued expenses . . . . . . . . . . . . . . . . . 2,343 899
Accrued payroll and related liabilities. . . . . . 757 414
Income taxes payable . . . . . . . . . . . . . . . 394 422
Current portion of long-term debt. . . . . . . . . 1,500 999
--------------------------
Total current liabilities. . . . . . . . . . . . . . 12,735 6,601
Deferred income taxes, noncurrent. . . . . . . . . . 73 73
Long-term debt, less current portion . . . . . . . . 7,000 2,606
Convertible participating preferred stock, $0.01
par value per share, 27,000 shares authorized,
issued and outstanding as of December 31, 1997
and June 30, 1998; liquidation preference of
$12,000,000 . . . . . . . . . . . . . . . . . . . 12,000 12,000
Stockholders' equity (deficit):
Common stock, par value of $1 per share:
Authorized shares 1,055,000
Issued and outstanding shares 71,000. . . . . . 71 71
Additional paid-in capital . . . . . . . . . . . . . 560 560
Retained earnings (deficit). . . . . . . . . . . . . 1,121 (1,632)
--------------------------
1,752 (1,001)
Receivable from stockholder. . . . . . . . . . . . . (563) (563)
--------------------------
Total stockholders' equity (deficit) . . . . . . . . 1,189 (1,564)
--------------------------
Total liabilities and stockholders' equity . . . . . $ 32,997 $ 19,716
--------------------------
--------------------------
</TABLE>
See accompanying notes.
<PAGE>
NATROL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
--------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . . $ 16,290 $ 8,191 $ 29,407 $ 18,100
Cost of goods sold . . . . . . . . . . . . . . . . . 7,933 3,815 14,254 8,290
--------------------------------------------------------
Gross profit. . . . . . . . . . . . . . . . . . . 8,357 4,376 15,153 9,810
--------------------------------------------------------
Selling and marketing expenses . . . . . . . . . . . 4,254 2,825 7,731 5,815
General and administrative expenses. . . . . . . . . 1,272 1,046 2,503 2,101
--------------------------------------------------------
Total operating expenses. . . . . . . . . . . . . 5,526 3,871 10,234 7,916
--------------------------------------------------------
Operating income . . . . . . . . . . . . . . . . . . 2,831 505 4,919 1,895
Interest income. . . . . . . . . . . . . . . . . . . (22) - (43) -
Interest expense . . . . . . . . . . . . . . . . . . 222 41 375 76
--------------------------------------------------------
Income before income tax provision . . . . . . . . . 2,631 464 4,587 1,819
Income tax provision . . . . . . . . . . . . . . . . 1,052 187 1,834 731
--------------------------------------------------------
Net income . . . . . . . . . . . . . . . . . . . . . $1,579 $277 $ 2,753 $1,088
--------------------------------------------------------
--------------------------------------------------------
Basic earnings per share . . . . . . . . . . . . . . $ 0.22 $ 0.04 $ 0.39 $ 0.15
--------------------------------------------------------
--------------------------------------------------------
Diluted earnings per share . . . . . . . . . . . . . $ 0.15 $ 0.03 $ 0.26 $ 0.11
--------------------------------------------------------
--------------------------------------------------------
Weighted average shares outstanding - basic. . . . . 7,100,000 7,100,000 7,100,000 7,100,000
--------------------------------------------------------
--------------------------------------------------------
Weighted average shares outstanding - diluted. . . . 10,620,403 10,261,538 10,562,163 10,261,538
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
See accompanying notes
<PAGE>
NATROL, INC.
PRO-FORMA UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NATROL, INC. PURE-GAR L.P SIX MONTHS
SIX MONTHS SIX MONTHS ENDED
ENDED ENDED JUNE 30,
JUNE 30, JUNE 30, BUSINESS 1998
1998 1998 COMBINATION PRO-FORMA
ACTUAL ACTUAL ADJUSTMENTS COMBINED
-------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $23,703 $5,704 $29,407
Cost of goods sold 11,471 2,783 14,254
-------------------------- ------------
Gross Profit 12,232 2,921 15,153
-------------------------- ------------
Selling and marketing expense 6,546 1,185 7,731
General and administrative expenses 1,899 603 100 (1) 2,602
-------------------------- ------------
Total operating expense 8,445 1,788 10,333
-------------------------- ------------
Operating income 3,787 1,133 4,820
Interest income (43) - (43)
Interest expense 274 101 136 (2) 511
-------------------------- ------------
Income before provision for income taxes 3,556 1,032 4,352
Income tax provision 1,834 - (93)(3) 1,741
-------------------------- ------------
Net income $1,722 $1,032 $2,611
-------------------------- ------------
Basic earnings per share $0.24 $0.37
----------- ------------
----------- ------------
Diluted earnings per share $0.16 $0.25
----------- ------------
----------- ------------
Weighted average shares:
Outstanding - basic 7,100,000 7,100,000
----------- ------------
----------- ------------
Weighted average shares
Outstanding - diluted 10,562,163 10,562,163
----------- ------------
----------- ------------
</TABLE>
- ------------------------------
(1) Gives effect to the amortization of goodwill of $300,000, as if the
acquisition of the Pure-Gar business (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 $289,000 offset by actual
interest expense of $160,000, 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 $8.9 million and $5.5
million, 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.
<PAGE>
NATROL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1998 1997
--------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,754 $ 1,087
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 381 294
Amortization of goodwill 200 -
Provision for bad debts 36 15
Changes in operating assets and liabilities:
Accounts receivable (1,292) 348
Inventories (263) (779)
Income taxes receivable/payable (28) (134)
Prepaid expenses and other current assets 49 35
Accounts payable 1,974 (1,077)
Accrued expenses 1,444 105
Accrued payroll and other related liabilities 343 90
--------------------------
Net cash provided by (used in) operating activities 5,598 (16)
INVESTING ACTIVITIES
Assets purchased, net of liabilities assumed
in connection with Pure-Gar acquisition (11,104) -
Purchases of equipment and leasehold improvements (304) (2,736)
--------------------------
Net cash used in investing activities (11,408) (2,736)
FINANCING ACTIVITIES
Proceeds from long-term debt 9,000 3,000
Repayments on long-term debt (4,105) (127)
Stock dividends paid - (400)
Offerings costs to be netted against proceeds (474) -
--------------------------
Net cash provided by financing activities 4,421 2,473
--------------------------
Net decrease in cash and cash equivalents (1,389) (279)
Cash and cash equivalents, beginning of period 1,800 285
--------------------------
Cash and cash equivalents, end of Period $ 411 $ 6
--------------------------
--------------------------
Supplemental disclosures of cash flows information:
Cash paid during the year for:
Interest $ 375 $ 70
Income Taxes $ 1,600 $ 985
</TABLE>
See accompanying notes
<PAGE>
NATROL, INC.
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated financial
statements include all necessary adjustments (consisting of normal recurring
accruals) and present fairly the consolidated financial position of Natrol, Inc.
and its subsidiary (collectively, the "Company" or "Natrol") as of June 30,
1998, and the results of its operations for the three and six months ended June
30, 1998 and 1997 and cash flows for the six months ended June 30, 1998 and
1997, in conformity with generally accepted accounting principles for the
interim financial information applied on a consistent basis. The result of
operations for the three months and six months ended June 30, 1998 are not
necessarily indicative of the results to be expected for the full year.
Certain information and footnote disclosures which are normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. These financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in Natrol's December 31, 1997 audited consolidated financial statements
included in the Company's prospectus dated July 22, 1998 as filed with the
Securities and Exchange Commission.
INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------------------------
<S> <C> <C>
Raw material and packaging supplies $ 7,025 $ 3,838
Finished goods 1,895 3,096
-------------------------
$ 8,920 $ 6,934
-------------------------
-------------------------
</TABLE>
3. COMPREHENSIVE INCOME
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 the 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 or six months ended June 30,
1998.
4. EARNINGS PER SHARE
The Company calculates earnings per share in accordance with SFAS No. 128
"Earnings per share". Basic earnings per common share was calculated based upon
the weighted average number of common shares outstanding during the respective
periods. Diluted earnings per share was calculated based upon the weighted
number of common shares outstanding and included the equivalent shares for
dilutive options outstanding during the respective periods.
<PAGE>
The weighted average common shares outstanding for the computation of basic
earnings per share for the three and six months ended June 30, 1998 were
7,100,000. Additionally, 3,520,403 and 3,462,163 of equivalent common shares
were included for the three and six months ended June 30, 1998, respectively,
for the diluted calculation.
5. STOCKHOLDERS' EQUITY
STOCK OPTIONS
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." Please refer to Natrol's prospectus dated July 22, 1998 with
the Securities and Exchange Commission for detail on the stock option plan and
the related disclosures.
During the three months ended June 30, 1998, the Company granted 320,000 options
under the stock option plan at exercise prices ranging from $10.40 to $13.00 per
share, which were determined to be not less than fair market value of the stock
at the date of grant.
6. SUBSEQUENT EVENTS
On July 27, 1998, the Company completed its initial public offering ("IPO") of
3,940,000 shares of its common stock priced at $15.00 per share. Of the total
shares offered, 3.2 million shares were sold by the Company. The Company sold
an additional 295,500 shares of common stock on August 6, 1998, pursuant to the
underwriters' exercise of the overallotment option granted in the IPO. The net
proceeds to the Company were $48.8 million including the shares sold pursuant to
the underwriters' exercise of the overallotment option. Of the net proceeds to
the Company, $8.375 million was used to pay off all long-term debt, including
accrued and unpaid interest. As more fully described in Natrol's prospectus
dated July 22, 1998, the total of 27,000 shares of convertible participating
preferred stock purchased by certain investors in September 1996 were converted
into 2,700,000 shares of Common Stock of the Company and shares of redeemable
preferred stock which were immediately redeemed for a total of $6.0 million.
The redemption price of the redeemable preferred stock was funded from the
proceeds of the IPO.
<PAGE>
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Information contained or incorporated by reference in this periodic report on
Form 10-Q and in other SEC filings by the Company contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 which can be identified by the use of forward-looking terminology such
as "believes," "expects," "may," "will," "should" or "anticipates" or the
negative thereof, other variations thereon, or comparable terminology, or by
discussions of strategy. No assurance can be given that future results covered
by the forward-looking statements will be achieved, and other factors could also
cause actual results to vary materially from the future results covered in such
forward-looking statements.
THE FOLLOWING DISCUSSION OF THE RESULTS OF OPERATIONS AND FINANCIAL
CONDITION OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE RESPONSE TO
PART I, ITEM 1 OF THIS REPORT.
THREE MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 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 98.9%, or $8.1 million, to $16.3 million for the three months ended
June 30, 1998 from $8.2 million for the three months ended June, 1997. Of the
$8.1 million increase in net sales, $2.6 million, or 32.1%, was attributable to
net sales of Pure-Gar L.P. ("Pure-Gar"), acquired in late February 1998 (the
"Pure-Gar Acquisition"), with the remainder due to increases in net sales of the
Company's other dietary supplement products. 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 the three month period ending June 30, 1998.
GROSS PROFIT. Gross profit increased 91.0%, or $4.0 million, to $8.4
million for the three months ended June 30, 1998 from $4.4 million for the three
months ended June 30, 1997. Gross margin decreased to 51.3% for the three months
ended June 30, 1998 from 53.4% for the three months ended June 30, 1997. The
decline was primarily due to a shift in product mix and discounts related to
promotional activity.
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 50.6%, or $1.4 million to $4.3 million for the three months ended June
30, 1998 from $2.8 million for the three months ended June 30, 1997. The
increase was primarily due to additional advertising, promotional and payroll
expenses to support increased net sales.
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
21.6%, or $226,000, to $1.3 million for the three months ended June 30, 1998
from $1.0 million for the three months ended June 30, 1997. This increase was
primarily attributable to building the infrastructure to support and manage the
Company's growth, as well as $150,000 of amortization of goodwill associated
with the Pure-Gar Acquisition.
INTEREST EXPENSE. Interest expense increased $181,000 to $222,000 for the three
months ended June 30, 1998 from $41,000 for the three months ended June 30,
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."
SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
NET SALES. Net sales increased 62.5%, or $11.3 million, to $29.4 million
for the six months ended June 30, 1998 from $18.1 million for the six months
ended June 30, 1997. Of the $11.3 million increase, $3.8 million, or 33.6%, was
attributable to net sales of Pure-Gar, acquired in late February 1998. The
remainder of the increase in net sales resulted from increases in net sales of
the Company's other dietary supplement products. 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 the six-month period ending June 30, 1998.
<PAGE>
GROSS PROFIT. Gross profit increased 54.4%, or $5.3 million, to $15.2
million for the six months ended June 30, 1998 from $9.8 million for the six
months ended June 30, 1997. Gross margin decreased to 51.5% for the six months
ended June 30, 1998 from 54.2% for the six months ended June 30, 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 six months ended June 30,
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 32.9%, or $1.9 million to $7.7 million for the six months ended June
30, 1998 from $5.8 million for the six months ended June 30, 1997. The increase
was primarily due to additional advertising, promotional and payroll expenses to
support increased net sales.
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
19.1%, or $402,000, to $2.5 million for the six months ended June 30, 1998 from
$2.1 million for the six months ended June 30, 1997. This increase was primarily
attributable to building the infrastructure to support and manage the Company's
growth, as well as $200,000 of amortization of goodwill associated with the
Pure-Gar Acquisition.
INTEREST EXPENSE. Interest expense increased $299,000 to $375,000 for the
six months ended June 30, 1998 from $76,000 for the six months ended June 30,
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."
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 June 30, 1998, the Company had working capital of $6.2 million,
as compared to $8.4 million in working capital at December 31, 1997. The
decrease was primarily due the assumption of trade payables as a result of the
Pure-Gar Acquisition as well as 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 $5.6 million for the six
months ended June 30, 1998 as compared to net cash used of $16,000 during the
six months ended June 30, 1997. The increase in net cash provided by operating
activities in 1998 compared to 1997 was primarily due to an increase in net
income and reflects higher levels of accounts payable, accrued expenses,
depreciation and amortization of goodwill which were partially offset by
increases in trade receivables and inventory balances. The increase in accounts
payable was primarily due to the assumption of payable balances in the Pure-Gar
Acquisition as well as to higher sales volume. It is the Company's policy to
negotiate favorable payment terms from its vendors and to take payment discounts
whenever such discounts are made available to the Company. The increase in
accounts receivable was the result of increased sales by the Company during the
six month period to mass market retailers from whom accounts receivable are on
average outstanding for a longer period of time, as well the Company's
assumption of accounts receivable in the Pure-Gar Acquisition with longer
average periods outstanding. Receivables acquired in the Pure-Gar Acquisition
are fully guaranteed by the seller. At June 30, 1998 the Company's average
trade receivable aging was under 55 days as compared to 45 days at December 31,
1997.
Net cash used in investing activities was $11.4 million for the six months
ended June 30, 1998 and $2.7 million during the six months ended June 30, 1997.
Of the net cash used in investing activities in the six months ended June 30,
1998, the Company used $11.1 million to consummate the Pure-Gar Acquisition and
invested $304,000 in property and equipment. Substantially all net cash used in
investing activities in 1997 constituted capital expenditures made in
connection with the build-out of the Company's manufacturing
facility/headquarters which the Company occupied at the end of March, 1997.
<PAGE>
Net cash provided by financing activities was $4.4 million for the six
months ended June 30, 1998 and $2.5 million during the six months ended June 30,
1997. Net cash provided by financing activities in the six months ended June 30,
1998 consisted entirely of borrowings to finance the Pure-Gar Acquisition which
was offset by debt repayment as well as the expenditure of $474,000 to prepare
the Company for the IPO which was completed on July 27, 1998. Net cash provided
by financing activities in 1997 was comprised of net borrowings of $2.9 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.
As of June 30, 1998, the Company's current credit facility consisted of a
$9.0 million term loan and an $8.0 million revolving line of credit (the "Credit
Facility") and as of June 30, 1998, the Company had outstanding borrowings of
$8.5 million under the Credit Facility. The outstanding borrowings were repaid
on July 27, 1998 from proceeds received from the IPO and the outstanding
revolving line of credit was terminated.
The Company believes that the remaining net proceeds from its IPO, together
with cash generated from operations 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.
One of the Company's business strategies is to pursue acquisition
opportunities, including product line acquisitions, that complement its existing
products, expand its distribution channels or are compatible with its business
philosophy and strategic goals. 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. Future acquisitions, if any, could be financed by
current cash on hand, funds from operations, bank borrowings, public offerings
or private placements of equity or debt securities, or a combination of the
foregoing. 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 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.
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
<PAGE>
(a) On June 19, 1998, the Company effected a one hundred-for-one stock
split with respect to its Common Stock. On July 27, 1998, the
Company's Convertible Preferred Stock was converted into Redeemable
Preferred Stock and Common Stock, in each case in accordance with the
terms of these securities and in conjunction with the closing of the
IPO. See Item 4(c) below.
Further, an amendment to the Company's certificate of incorporation
was approved by the Company's Board of Directors on June 17, 1998 and
by its stockholders on June 19, 1998 establishing a classified Board
of Directors and effecting certain other changes as described in Item
4(c) below, affecting the rights of the holders of the Company's
Common Stock.
(b) Not applicable
(c) Not applicable
(d) The Company completed the IPO of its Common Stock in July 1998. The
IPO was made pursuant to a Registration Statement on Form S-1,
originally filed with the Commission on May 8, 1998, as amended
(Commission File No. 333-52109), which registration statement became
effective on July 21, 1998. The IPO commenced on July 22, 1998 and
terminated shortly thereafter after the sale into the public market of
all of the registered shares of Common Stock and, 1,035,500 shares
were registered for the account of stockholders of the Company. The
Company did not receive any of the proceeds from the sale of the
selling stockholders' shares.
The shares of Common Stock sold in the IPO were offered for sale in the
United States by a syndicate of underwriters represented by Adams, Harkness &
Hill, Inc., NationsBanc Montgomery Securities LLC and Piper Jaffray Inc.
The Company registered an aggregate of 4,531,000 shares of Common Stock
(including 591,000 shares issued upon the exercise of the underwriters'
overallotment option) for sale in the IPO at a per share price of $15.00, for an
aggregate offering price of $67,965,000. Of such shares, 3,495,500 were
registered for the Company's account. As stated above, all of such shares were
sold shortly after the commencement of the offering.
The Company incurred the following expenses in connection with the IPO (in
millions):
<TABLE>
<CAPTION>
<S> <C>
Underwriting discounts and commissions.............................. $ 3.7
Other expenses...................................................... 1.0*
---------
Total expenses..................................................... $ 4.7
</TABLE>
*Estimated
After deducting the expenses set forth above, the Company received
approximately $47.7 million in net proceeds of the IPO. The Company used $8.375
million of the proceeds to repay the borrowings under the Company's then
existing senior credit facility with Wells Fargo Bank and $6.0 million of the
net proceeds to redeem outstanding shares of Redeemable Preferred Stock held by
investment funds associated with TA Associates, Inc. P. Andrews McLane, a
director of the Company, is a Senior Managing Director of TA Associates, Inc.
Mr. McLane disclaims beneficial ownership of all such shares of Redeemable
Preferred Stock and proceeds of such redemption other than with respect to
$10,237.78, in which he holds a pecuniary interest.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
(a) The stockholders of the Company voted by written consent in lieu of a
special meeting effective June 19, 1998 (the "Written Consent").
(b) As described in paragraph (c) below, on June 19, 1998 the Company's
stockholders approved the Second Amended and Restated Certificate of
Incorporation including designation of the Company's current
directors, Elliott Balbert, Dennis R. Jolicoeur, P. Andrews McLane,
David Laufer and Norman Kahn, under a classified board arrangement.
(c) Pursuant to the Written Consent, the Company's stockholders approved
the Second Amended and Restated Certificate of Incorporation and a
Restated Certificate of Incorporation, approved amendments to the
Company's 1996 Stock Option and Grant Plan (the "1996 Plan") and
approved the Company's 1998 Employee Stock Purchase Plan (the "ESPP").
The votes for these proposals were as follows (all Common Stock
numbers give effect to the one hundred-for-one stock split described
in item 2(a)):
<TABLE>
<CAPTION>
Abstentions/
Broker
Class Outstanding For Against Withheld Non Votes
----- ----------- --- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
1. Approval of second Amended Common: 9,800,000 9,800,000 0 0 0
and Restated Certificate of
Incorporation/ Convertible
Restated Certificate of Preferred: 27,000 27,000 0 0 0
Incorporation
2. Amendments to Common: 9,800,000 9,800,000 0 0 0
1996 Plan and
approval of ESPP Convertible
Preferred: 27,000 27,000 0 0 0
</TABLE>
By adopting the Second Amended and Restated Certificate of Incorporation, the
stockholders approved the classification of the current Board of Directors as
follows:
Class I - Term Expires at Annual Meeting of Stockholders held in 1999:
Dennis R. Jolicoeur
Norman Kahn
Class II - Term Expires at Annual Meeting of Stockholders held in 2000:
David Laufer
P. Andrews McLane
Class III - Term Expires at Annual Meeting of Stockholders held in 2001:
Elliott Balbert
Each Director received the same number of votes in connection with the
foregoing.
<PAGE>
The above described Second Amended and Restated Certificate of
Incorporation (the "Certificate") became effective in connection with the
IPO and, among other things; (i) provides for the classification of
directors as described above; (ii) increases the number of shares of Common
Stock authorized to 50,000,000 and authorizes 2,000,000 shares of
undesignated preferred stock; (iii) prohibits action by stockholders by
written consent; and (iv) provides that amendments to the Certificate
relating to the establishment of the Board of Directors and amendments to
the Certificate shall require 80% of the total votes eligible to be cast.
(d) Not applicable
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K:
No reports have been filed on Form 8-K since the filing of the Company's
Prospectus.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATROL, INC.
Date: 09/01/98 By: /s/ Elliott Balbert
Chairman, President and Chief Executive Officer
Date: 09/01/98 By: /s/ Dennis R. Jolicoeur
Chief Financial Officer and Executive
Vice President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001025573
<NAME> NATROL, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 411
<SECURITIES> 0
<RECEIVABLES> 9,012
<ALLOWANCES> (298)
<INVENTORY> 8,920
<CURRENT-ASSETS> 18,891
<PP&E> 6,004
<DEPRECIATION> (1,302)
<TOTAL-ASSETS> 32,997
<CURRENT-LIABILITIES> 12,735
<BONDS> 7,000
12,000
0
<COMMON> 71
<OTHER-SE> 1,118
<TOTAL-LIABILITY-AND-EQUITY> 32,997
<SALES> 29,407
<TOTAL-REVENUES> 29,407
<CGS> 14,254
<TOTAL-COSTS> 24,488
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 36
<INTEREST-EXPENSE> 332
<INCOME-PRETAX> 4,587
<INCOME-TAX> 1,834
<INCOME-CONTINUING> 2,753
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,753
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.26
</TABLE>
