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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 SEPTEMBER 30, 1998
OR
/ / 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:
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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 X NO
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Class Outstanding as of September 30,1998
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Common stock, $0.01 par value 13,295,500
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PART 1
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
NATROL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
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(Unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents ................................................... $ 32,101 $ 1,800
Accounts receivable, net of allowances of
$304 and $262 at September 30, 1998 and December
31, 1997 ................................................................... 13,136 5,397
Inventories ................................................................. 11,839 6,934
Deferred taxes .............................................................. 554 554
Prepaid expenses and other current assets ................................... 393 341
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Total current assets ......................................................... 58,023 15,026
Equipment and leasehold improvements:
Furniture and office equipment .............................................. 1,190 871
Machinery and equipment ..................................................... 3,297 2,804
Leasehold improvements ...................................................... 1,860 1,876
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6,347 5,551
Accumulated depreciation and amortization .................................... (1,496) (923)
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4,851 4,628
Other assets:
Goodwill .................................................................... 8,719 --
Deposits .................................................................... 43 43
Trademarks and patents, net ................................................. 16 19
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8,778 62
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Total assets ................................................................. $ 71,652 $ 19,716
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................ $ 8,844 $ 3,867
Accrued expenses ............................................................ 3,526 899
Accrued payroll and related liabilities ..................................... 1,049 414
Income taxes payable ........................................................ 780 422
Current portion of long-term debt ........................................... -- 999
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Total current liabilities .................................................... 14,199 6,601
</TABLE>
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<TABLE>
<S> <C> <C>
Deferred income taxes, noncurrent ............................................. 73 73
Long-term debt, less current portion .......................................... -- 2,606
Convertible participating preferred stock, $0.01 par value per share, 27,000
shares authorized, -0- and 27,000 shares issued and outstanding as of
September 30, 1998 and December 31, 1997;
liquidation preference of $12,000,000 ....................................... -- 12,000
Stockholders' equity (deficit):
Common stock, par value of $.01 per share:
Authorized shares - 50,000,000
Issued and outstanding shares - 13,295,500 ............................... 133 71
Additional paid-in capital .................................................... 60,172 560
Retained earnings (deficit) ................................................... (2,362) (1,632)
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57,943 (1,001)
Receivable from stockholder .................................................. (563) (563)
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Total stockholders' equity (deficit) ......................................... 57,380 (1,564)
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Total liabilities and stockholders' equity ................................... $ 71,652 $ 19,716
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See accompanying notes.
</TABLE>
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NATROL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
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(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales .................................................... $ 19,501 $ 11,392 $ 48,907 $ 29,492
Cost of goods sold ........................................... 9,327 5,368 23,581 13,658
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Gross profit .............................................. 10,174 6,024 25,326 15,834
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Selling and marketing expenses ............................... 4,591 2,670 12,322 8,485
General and administrative expenses .......................... 1,732 1,067 4,234 3,168
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Total operating expenses .................................. 6,323 3,737 16,556 11,653
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Operating income ............................................. 3,851 2,287 8,770 4,181
Interest income .............................................. (238) -- (281) --
Interest expense ............................................. 32 74 407 149
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Income before income tax provision ........................... 4,057 2,213 8,644 4,032
Income tax provision ......................................... 1,540 889 3,374 1,620
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Net income ................................................... $ 2,517 $ 1,324 $ 5,270 $ 2,412
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Basic earnings per share ..................................... $ 0.21 $ 0.19 $ 0.61 $ 0.34
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Diluted earnings per share ................................... $ 0.20 $ 0.13 $ 0.47 $ 0.23
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Weighted average shares
outstanding - Basic .................................... 11,842,446 7,100,000 8,694,945 7,100,000
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Weighted average shares
outstanding - Diluted .................................. 12,904,382 10,272,859 11,311,938 10,272,859
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</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. NINE MONTHS
NINE MONTHS NINE MONTHS ENDED
ENDED ENDED SEPTEMBER 30,
SEPTEMBER 30, SEPTEMBER 30, BUSINESS 1998
1998 1998 COMBINATION PRO-FORMA
ACTUAL ACTUAL ADJUSTMENTS COMBINED
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<S> <C> <C> <C> <C>
Net sales $ 40,739 $8,168 $ 48,907
Cost of goods sold 19,821 3,760 23,581
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Gross Profit 20,918 4,408 25,326
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Selling and marketing expense 10,715 1,607 12,322
General and administrative expenses 3,411 823 100 (1) 4,334
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Total operating expense 14,126 2,430 16,656
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Operating income 6,792 1,978 8,670
Interest income (281) -- (281)
Interest expense 306 101 136 (2) 543
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Income before provision for income
taxes 6,767 1,877 8,408
Income tax provision 3,374 -- (93)(3) 3,281
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Net income $ 3,393 $1,877 $ 5,127
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Basic earnings per share $ 0.24 $ 0.59
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Diluted earnings per share $ 0.16 $ 0.45
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Weighted average shares
Outstanding - basic 8,694,945 8,694,945
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Weighted average shares
Outstanding - diluted 11,311,938 11,311,938
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</TABLE>
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(1) Gives effect to the amortization of goodwill of $450,000, as if the
acquisition of the Pure-Gar L.P. business (the "Pure-Gar Acquisition") had
taken place on January 1, 1998, net of recorded goodwill amortization of
$350,000.
(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 incurred 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.
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NATROL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
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OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 5,270 $ 2,411
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 576 124
Amortization of goodwill 350 --
Provision for bad debts 41 (4)
Changes in operating assets and liabilities:
Accounts receivable (5,720) (2,557)
Inventories (3,182) (964)
Prepaid expenses and other assets (51) 10
Income taxes receivable/payable 359 149
Accounts payable 3,079 (477)
Accrued expenses 2,626 548
Accrued payroll and other related liabilities 635 91
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Net cash provided by (used in) operating activities 3,983 (669)
INVESTING ACTIVITIES
Assets purchased, net of liabilities assumed
in connection with Pure-Gar Acquisition (11,104) --
Purchases of equipment and leasehold improvements (647) (2,743)
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Net cash used in investing activities (11,751) (2,743)
FINANCING ACTIVITIES
Borrowings under line of credit agreement - 350
Proceeds from long-term debt 9,000 3,500
Repayments on long-term debt (12,605) (253)
Stock dividends paid -- (400)
Proceeds from initial public stock offering, net 47,674 --
Redemption of preferred stock (6,000) --
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Net cash provided by financing activities 38,069 3,197
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Net increase (decrease) in cash and cash equivalents 30,301 (215)
Cash and cash equivalents, beginning of period 1,800 285
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Cash and cash equivalents, end of period $ 32,101 $ 70
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Supplemental disclosures of cash flows information:
Cash paid during the year for:
Interest $ 407 $ 151
Income Taxes $ 3,015 $ 1,555
</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 September 30, 1998, and the results of its operations for the three and
nine months ended September 30, 1998 and 1997 and cash flows for the nine
months ended September 30, 1998 and 1997, in conformity with generally
accepted accounting principles for the interim financial information applied
on a consistent basis. The results of operations for the three months and
nine months ended September 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 (file No. 333-52109).
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
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<S> <C> <C>
Raw material and packaging supplies $ 8,998 $3,838
Finished goods 2,841 3,096
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$11,939 $6,934
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</TABLE>
3. COMPREHENSIVE INCOME
In September 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 nine months ended September 30, 1998.
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4. EARNINGS PER SHARE
The Company calculates earnings per share in accordance with SFAS No. 128
"Earnings per share". Basic earnings per common share were calculated based
upon the weighted average number of common shares outstanding during the
respective periods. Diluted earnings per share were calculated based upon the
weighted number of common shares outstanding and included the equivalent
shares for dilutive options outstanding during the respective periods.
The weighted average common shares outstanding for the computation of basic
earnings per share for the three and nine months ended September 30, 1998
were 11,842,446 and 8,694,945 respectively. Additionally, 1,061,936 and
2,616,993 of equivalent common shares were included for the three and nine
months ended September 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
Company's Amended and Restated 1996 Stock Option and Grant Plan ("the Stock
Option Plan") and the related disclosures. During the three months ended
September 30, 1998, no stock options were granted. See "Subsequent Events"
for stock options granted after September 30, 1998.
6. INITIAL PUBLIC OFFERING
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 (less $1 million
of expenses due to the offering) 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.
7. SUBSEQUENT EVENTS
Acquisition.
On October 1, 1998, the Company completed the acquisition of certain of the
assets of the Laci Le Beau Tea Company of Fresno, Ca. which consists of Laci
Le Beau, Inc., a California corporation as well as certain related companies
("Laci Le Beau"). The total purchase price for the acquisition was $7.5
million in cash. Laci Le Beau is a formulator, packager and distributor of
specialty teas
<PAGE>
sold through the health channel of distribution as well as in food stores,
drug stores and mass market merchandisers. These channels of distribution are
essentially the same as the Company's channels of distribution. During the 12
months prior to the acquisition date, Laci Le Beau's revenues were
approximately $7.2 million. Under the terms of the acquisition agreement, the
Company acquired no accounts receivable, nor did it assume any liabilities of
Laci Le Beau. The acquisition is being accounted for using the purchase
method, and, accordingly, the assets acquired are recorded at their estimated
fair values. The excess of the cost of the acquisition over the fair value of
the assets purchased amounts to approximately $5 million and will be
amortized over 15 years.
Stock Option Grants
On October 26, 1998 incentive based stock options for 125,000 shares of
common stock were granted to key employees at an exercise price of $11.25 per
share, the closing price of the stock on that day. The shares vest over a
four year period and were granted pursuant to provisions of the Company's
Stock Option Plan. Please refer to Natrol's prospectus dated July 22, 1998
with the Securities and Exchange Commission for a description of the Stock
Option Plan.
<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. The Company's actual results could differ
materially from those discussed herein. Important risk factors that could
cause or contribute to such differences include (i) the effect of unfavorable
publicity regarding the Company's products or the dietary supplements
industry generally, (ii) the Company's inability to successfully introduce
and market new products, (iii) the risk of increased governmental regulations
of the Company's products, (iv) the risk of exposure to product liability
claims in the event the use of the Company's products results in injury and
(v) the loss of a significant number of the Company's major customers as well
as those factors discussed in the Company's Prospectus, dated July 22, 1998,
filed with the Securities Exchange Commission.
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 SEPTEMBER 30, 1998 AND SEPTEMBER 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 71.2%, or $8.1 million, to $19.5 million for the three months ended
September 30, 1998 from $11.4 million for the three months ended September,
1997. Of the $8.1 million increase in net sales, $2.5 million, or 30.9%, was
attributable to net sales of Pure-Gar L.P., 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, increased sales of existing products 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
ended September 30, 1998.
GROSS PROFIT. Gross profit increased 68.9%, or $4.2 million, to $10.2
million for the three months ended September 30, 1998 from $6.0 million for
the three months ended September 30, 1997. Gross margin decreased to 52.2%
for the three months ended September 30, 1998 from 52.9% for the three months
ended September 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 71.9%, or $1.9 million to $4.6 million for the three months ended
September 30, 1998 from $2.7 million for the three months ended September 30,
1997. The increase was primarily due to additional advertising as well as
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,
<PAGE>
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 62.3%, or $665,000, to $1.7 million for the three months
ended September 30, 1998 from $1.1 million for the three months ended
September 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 decreased $42,000 to $32,000 for the three
months ended September 30, 1998 from $74,000 for the three months ended
September 30, 1997. The decrease was a result of the Company's use of cash
generated from the Company's IPO concluded on July 27, 1998 to eliminate all
outstanding indebtedness relating to capital expenditures and to the
financing of the Pure-Gar Acquisition. See "--Liquidity and Capital
Resources."
INTEREST INCOME. Interest income for the three months ended September 30,
1998 amounted to $238,000. There was no interest income earned for the three
months ended September 30, 1997. Interest income was earned on funds received
in connection with the Company's IPO which are maintained in the Company's
cash management accounts.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
NET SALES. Net sales increased 65.8%, or $19.4 million, to $48.9 million for
the nine months ended September 30, 1998 from $29.5 million for the nine
months ended September 30, 1997. Of the $19.4 million increase, $6.3 million,
or 32.5%, 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, increased sales of existing
products and increased penetration in the mass market and health food
channels of distribution contributed to the Company's net sales growth during
the nine-month period ending September 30, 1998.
GROSS PROFIT. Gross profit increased 60.1%, or $9.5 million, to $25.3
million for the nine months ended September 30, 1998 from $15.8 million for
the nine months ended September 30, 1997. Gross margin decreased to 51.7% for
the nine months ended September 30, 1998 from 53.6% for the nine months ended
September 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
nine months ended September 30, 1998.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
45.2%, or $3.8 million, to $12.3 million for the nine months ended September
30, 1998 from $8.5 million for the nine months ended September 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
increased 33.6%, or $1.1 million to $4.2 million for the nine months ended
September 30, 1998 from $3.2 million for the nine months ended September 30,
1997. This increase was primarily attributable to building the infrastructure
to support and manage the Company's growth, as well as $350,000 of
amortization of goodwill associated with the Pure-Gar Acquisition.
INTEREST EXPENSE. Interest expense increased $258,000 to $407,000 for the
nine months ended September 30, 1998 from $149,000 for the nine months ended
September 30, 1997. The increase was a result of increased outstanding
<PAGE>
indebtedness relating to the financing of the Pure-Gar Acquisition and
capital expenditures. The Company used a portion of the cash generated from
the its IPO to eliminate all outstanding indebtedness relating to capital
expenditures and to the financing of the Pure-Gar Acquisition.
See "--Liquidity and Capital Resources."
INTEREST INCOME. Interest income for the nine months ended September 30, 1998
amounted to $281,000. There was no interest income earned for the nine months
ended September 30, 1997. Interest income was primarily earned on funds
received in connection with the Company's IPO which are maintained in the
Company's cash management accounts.
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 September 30, 1998, the Company had working capital of $43.8
million, as compared to $8.4 million in working capital at December 31, 1997.
The increase was primarily due to cash raised from the Company's IPO.
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 from the IPO 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, all of the
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.
Net cash provided by operating activities was $3.9 million for the
nine months ended September 30, 1998 as compared to $669,000 of net cash used
during the nine months ended September 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.
Inventory levels grew during the nine months ending September 30,
1998 due to an increase in inventory levels necessary to support the
Company's higher volume of business as well as the stocking of certain raw
materials that are in short supply, including in particular, kava root.
Net cash used in investing activities was $11.7 million for the nine
months ended September 30, 1998 and $2.7 million during the nine months ended
September 30, 1997. Of the net cash used in investing activities in the nine
months ended September 30, 1998, the Company used $11.1 million to consummate
the Pure-Gar Acquisition and invested $647,000 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.
Net cash provided by financing activities was $38.1 million for the nine
months ended September 30, 1998 and $3.1 million during the nine months ended
<PAGE>
September 30, 1997. Net cash provided by financing activities in the nine
months ended September 30, 1998 consisted of net proceeds of $47.7 million
from the Company's IPO which was completed on July 27, 1998 as well as $9
million of borrowings to finance the Pure-Gar Acquisition in late February,
1998. This inflow of funds was offset by the repayment $4.2 million of debt
prior to the IPO as well as the repayment of all of the Company's outstanding
debt of $8.375 million, and the redemption of $6.0 million of redeemable
preferred stock as described above using the proceeds of the IPO.
Net cash provided by financing activities in 1997 was comprised of
net borrowings of $3.6 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 September 30, 1998, the Company had no outstanding debt. All
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 completed the acquisition of certain assets of Laci Le Beau,
Inc. and certain related entities on October 1, 1998 for $7.5 million in
cash. This cash investment is not reflected in the September 30, 1998 balance
(see "Financial Information - Subsequent Events").
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, inflation has not had a material impact on the Company's
historical operations or profitability.
YEAR 2000 READINESS DISCLOSURE
The statements in the following section include "Year 200 readiness
disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act.
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
<PAGE>
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. If the Company, its
significant customers, or suppliers fail to make necessary modifications and
conversions on a timely basis, the year 2000 issue could have a material
adverse effect on Company operations. However, the impact cannot be
quantified at this time. The Company believes that its competitors face a
similar risk.
The Company has developed plans to address the possible exposures
related to the impact on its computer systems of the year 2000 issue. Key
financial, information and operational systems, including equipment with
embedded microprocessors, have been or are currently being inventoried and
assessed, and detailed plans have been or are currently being developed for
the required systems modifications or replacements. Progress against these
plans is monitored and reported to management on a regular basis.
Implementation of required changes to critical systems is expected to be
completed during fiscal 1999. The Company is also focusing on major customers
and suppliers to assess their compliance. The Company has received assurances
from customers that such customers expect to be Year 2000 compliant and is
seeking such assurances from its other material customers and suppliers.
Nevertheless, there can be no assurance that there will not be a material
adverse effect on the Company if third party governmental or business
entities do not convert or replace their systems in a timely manner and in a
way that is compatible with the Company's systems. In the event a material
customer or supplier is not Year 2000 compliant, the Company's business,
financial condition and results of operations could be materially and
adversely affected.
The costs incurred to date related to these programs have not been
material and the Company does not expect its future costs related to these
programs to be material. Such costs have been and will continue to be funded
through operating cash flows. The Company presently believes that the total
cost of achieving year 2000 compliant systems is not expected to be material
to its financial condition, liquidity, or results of operations.
Time and cost estimates are based on currently available
information. Developments that could affect estimates include, but are not
limited to, the availability and cost of trained personnel; the ability to
locate and correct all relevant computer code and systems; and remediation
success of the Company's customers and suppliers.
The preceding "Year 2000 Readiness Disclosure" contains various
forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934 and the Section 27A Securities Act of 1933.
These forward-looking statements represent the Company's beliefs or
expectations regarding future events. When used in the "Year 2000 Readiness
Disclosure", the words "believes," "expects," "estimates" and similar
expressions are intended to identify forward-looking statements.
Forward-looking statements include, without limitation, the Company's
expectations as to when it will complete the modification and testing phases
of its Year 2000 project plan as well as its Year 2000 contingency plans; its
estimated cost of achieving Year 2000 readiness; and the Company's belief
that its internal systems will be Year 2000 compliant in a timely manner. All
forward-looking statements involve a number of risks and uncertainties that
could cause the actual results to differ materially from the projected
results. Factors that may cause these differences include, but are not
limited to, the availability of qualified personnel and other information
technology resources; the ability to identify and remediate all date
sensitive lines of computer code or to replace embedded computer chips in
affected systems or equipment; and the actions of governmental agencies or
other third parties with respect to Year 2000 problems.
<PAGE>
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(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.
(b) The Company completed the IPO of its Common Stock in July 1998. The
IPO was effected 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 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
sold 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>
<S> <C>
Underwriting discounts and commissions.............................. $3.7
Other expenses...................................................... 1.0
----
Total expenses..................................................... $4.7
</TABLE>
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.
The Company has invested the remaining proceeds in short-term
investments pending use thereof.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K:
No Form 8-K was filed by the Company during the three month period ended
September 30, 1998.
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: 11/01/98 By: /s/ Elliott Balbert
Chairman, President and Chief Executive Officer
Date: 11/01/98 By: /s/ Dennis R. Jolicoeur
Chief Financial Officer and Executive
Vice President
<TABLE> <S> <C>
<PAGE>
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