<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported)
October 21, 1999
NATROL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State of other jurisdiction of incorporation)
000-24567 95-3560780
( Commission file number ) (I.R.S. Employer Identification
21411 Prairie Street, Chatsworth, California 91311
(Address of principal executive offices) (Zip code)
(818) 739-6000
(Registrant's telephone number, including area code)
<PAGE>
ITEM 7. COMBINED FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED. The following financial
statements of business acquired are filed as exhibits hereto:
EXHIBIT 99.1 - FINANCIAL STATEMENTS OF PROLAB NUTRITION, INC. AS OF
SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS THEN ENDED.
Independent Auditors' Report
Balance Sheet as of September 30, 1999
Statement of Income and Retained Earnings for the nine months ended
September 30, 1999
Statement of Cash Flows for the nine months ended September 30, 1999
Notes to Financial Statements
EXHIBIT 99.2 - FINANCIAL STATEMENTS OF PROLAB NUTRITION, INC. AS OF
December 31, 1998 AND FOR THE YEAR THEN ENDED.
Independent Auditors' Report
Balance Sheet as of December 31, 1998
Statement of Income and Retained Earnings for the year ended December 31,
1998
Statement of Cash Flows for the year ended December 31, 1998
Notes to Financial Statements
(b) PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS. The following pro forma
consolidated financial statements of business acquired are filed as
exhibits hereto:
EXHIBIT 99.3 - UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS OF NATROL, INC. AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1999 AND COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31,
1998
Unaudited Pro Forma Consolidated Statement of Income for the nine months
ended September 30, 1999
Unaudited Pro Forma Consolidated Statement of Income for the year ended
December 31, 1998
Unaudited Pro Forma Consolidated Balance Sheet as of September 30, 1999
Notes to Unaudited Pro Forma Consolidated Financial Statements
(c) EXHIBITS
23.1 - CONSENT OF INDEPENDENT ACCOUNTANTS
99.1 - FINANCIAL STATEMENTS OF PROLAB NUTRITION, INC. AS OF SEPTEMBER 30,
1999 AND FOR THE NINE MONTHS THEN ENDED.
99.2 - FINANCIAL STATEMENTS OF PROLAB NUTRITION, INC. AS OF DECEMBER 31,
1998 AND FOR THE YEAR THEN ENDED.
99.3 - UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF
NATROL, INC. AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
AND COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31,
1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and 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: 12/17/99 By: /s/ Elliott Balbert
Chairman, President and Chief Executive Officer
Date: 12/17/99 By: /s/ Dennis R. Jolicoeur
Chief Financial Officer and Executive
Vice President
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We agree to the inclusion in Form 8-K/A, dated October 21, 1999, of Natrol, Inc.
of our independent auditors' report dated September 24, 1999, on our audit of
the financial statements of Prolab Nutrition, Inc. as of December 31, 1998 and
for the year then ended. We further agree to the inclusion in Form 8-K/A, dated
October 21, 1999, of Natrol, Inc. of our independent auditors' report dated
October 27, 1999, on our audit of the financial statements of Prolab Nutrition,
Inc. as of September 30, 1999 and for the nine month period then ended.
Sansiveri, Kimball & McNamee, L.L.P.
Providence, Rhode Island
December 7, 1999
<PAGE>
[SANSIVERI, KIMBALL & MCNAMEE, L.L.P. LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Prolab Nutrition, Inc.:
We have audited the accompanying balance sheet of Prolab Nutrition, Inc. as
of September 30, 1999, and the related statements of income and retained
earnings and cash flows for the nine months then ended. 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 audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Prolab Nutrition, Inc.
as of September 30, 1999 and the results of its operations and its cash flows
for the nine months then ended, in conformity with generally accepted
accounting principles.
/s/ SANSIVERI, KIMBALL & MCNAMEE, L.L.P
October 27, 1999
<PAGE>
PROLAB NUTRITION, INC.
BALANCE SHEET
SEPTEMBER 30, 1999
- -------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,259,722
Receivables:
Accounts receivable - trade, net of allowance for doubtful accounts of $97,600 3,667,046
Note receivable - officer 500,000
Inventories 2,063,180
Refundable income taxes 117,187
Prepaid expenses 5,867
-------------------
Total current assets 8,613,002
-------------------
PROPERTY AND EQUIPMENT - At cost - 1,252,370
Less accumulated depreciation 127,090
-------------------
Property and equipment, net 1,125,280
-------------------
TOTAL $ 9,738,282
===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 14,430
Stockholders' loans 175,939
Accounts payable 3,667,832
Accrued expenses 242,494
Income taxes payable 1,791,466
-------------------
Total current liabilities 5,892,161
LONG-TERM DEBT - Less current portion 573,467
-------------------
Total liabilities 6,465,628
-------------------
STOCKHOLDERS' EQUITY:
Common stock, no par value, 5,000 shares authorized, 444 shares issued
and outstanding 1,000
Retained earnings 3,271,654
-------------------
Total stockholders' equity 3,272,654
-------------------
TOTAL $ 9,738,282
===================
</TABLE>
See notes to financial statements.
- -------------------------------------------------------------------------------
<PAGE>
PROLAB NUTRITION, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
NET SALES $ 23,966,382
COST OF GOODS SOLD 15,127,333
-------------------
GROSS MARGIN 8,839,049
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,491,946
-------------------
INCOME FROM OPERATIONS 3,347,103
-------------------
OTHER INCOME (EXPENSE):
Interest income 37,355
Interest expense (89,775)
-------------------
Other expense, net (52,420)
-------------------
INCOME BEFORE TAXES ON INCOME 3,294,683
PROVISION FOR TAXES ON INCOME - Current 1,457,669
-------------------
NET INCOME 1,837,014
RETAINED EARNINGS, BEGINNING OF THE PERIOD 1,434,640
-------------------
RETAINED EARNINGS, END OF THE PERIOD $ 3,271,654
===================
</TABLE>
See notes to financial statements.
- -------------------------------------------------------------------------------
<PAGE>
PROLAB NUTRITION, INC.
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,837,014
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 36,567
Bad debt expense 73,257
Changes in operating assets and liabilities:
Accounts receivable - trade (1,133,310)
Inventories 288,420
Refundable income taxes (117,187)
Prepaid expenses and other assets 19,083
Accounts payable 958,658
Accrued salaries and wages (1,200,000)
Accrued expenses 181,592
Income taxes payable 970,966
-------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,915,060
-------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Note receivable - officer (500,000)
Purchases of property and equipment (147,473)
Proceeds from sale of investments 400,000
-------------------
NET CASH USED BY INVESTING ACTIVITIES (247,473)
-------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on long-term debt 14,522
Payments on long-term debt (7,938)
Net proceeds from stockholder loans 7,645
-------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 14,229
-------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,681,816
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 577,906
-------------------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD $ 2,259,722
===================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 25,128
===================
Taxes $ 581,000
===================
</TABLE>
See notes to financial statements.
- -------------------------------------------------------------------------------
<PAGE>
PROLAB NUTRITION, INC.
NOTES TO FINANCIAL STATEMENTS
-----------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Prolab Nutrition, Inc. (the Company), a closely held business,
distributes, manufactures and markets food supplement products. The
Company's products are sold primarily to distributors, wholesalers and
retailers located throughout the United States and also on a worldwide
basis.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include time deposits with original
maturities of three months or less.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined on the first-in, first-out (FIFO) basis.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is computed on
accelerated methods for financial and tax reporting purposes.
Property and equipment are depreciated over useful lives as follows:
ASSET USEFUL LIFE
------- -------------
Building 39 Years
Building improvements 39 Years
Furniture and equipment 5-7 Years
Vehicles 5 Years
TAXES ON INCOME
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each year-end based on enacted
tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. The differences
relate primarily to the use of different depreciation methods and lives
for
1
<PAGE>
financial statement and income tax purposes for depreciable assets.
Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized. Income tax expense is
the tax payable for the period and the change during the period in
deferred tax assets and liabilities.
Deferred taxes have not been reported in the accompanying financial
statements since their affects would not be considered to be
significant.
EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) Profit Sharing Plan that covers all
eligible employees who have attained the age of 18 and who have
performed at least one year of service. Contributions to the plan
are at the discretion of management. No company contributions were
made for 1999.
INVESTMENTS
In accordance with Statement on Financial Accounting Standards
(SFAS) No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES, the Company determines the appropriate
classification of debt and equity at the time of purchase. The
Company has classified these securities as "available for sale" and
accordingly, such investments should be reported at their fair
value. Since cost approximates fair value, no unrealized gains or
losses have been reported on the accompanying financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's principal financial instruments consist of cash,
investments, accounts receivable and accounts payable. Considerable
judgement is required to develop the estimates of fair value; thus,
the estimates are not necessarily indicative of the amounts that
could be realized in a current market exchange. However, the Company
believes the carrying value of these assets and liabilities is a
reasonable estimate of their fair market value at September 30,
1999.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising
costs for the nine months ended September 30, 1999 were
approximately $1,950,000.
ACCOUNTING 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 statement and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
2
<PAGE>
2. INVENTORIES
The components of inventories at September 30, 1999 are as follows:
<TABLE>
<S> <C>
Raw materials $ 380,312
Finished goods 1,732,868
----------
Total $2,113,180
==========
</TABLE>
3. LONG-TERM DEBT
As of September 30, 1999, long-term debt consisted of the following:
<TABLE>
<S> <C>
Term note payable to a bank due in monthly installments
of principal and interest of $5,225. Interest is computed
at a rate of 10% per annum with a balloon payment due in
June 2005.
The note is collateralized by real estate. $561,935
Note payable due in monthly installments of principal and
interest of $384 through July 2003 with interest at a rate
of 12% per annum. The note is collateralized by equipment. 14,048
4.9% note payable due in monthly payments of principal and
interest of $437 through February 2002. The note is
collateralized by a vehicle. 11,914
--------
Total 587,897
Less current portion 14,430
--------
Long-term portion $573,467
========
</TABLE>
3
<PAGE>
As of September 30, 1999, scheduled maturities of long-term debt are
as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ----------
<S> <C>
1999 $ 14,430
2000 15,781
2001 14,771
2002 12,823
2003 10,405
2004 and thereafter 519,687
----------
Total $ 587,897
==========
</TABLE>
4. STOCKHOLDER LOANS
Stockholder loans represent advances from the principal stockholders of
the Company. Such advances are payable on demand with interest at
5.85%.
5. TAXES ON INCOME
The provision for taxes on income consists of the following:
<TABLE>
<S> <C>
Current:
Federal $1,131,523
State 326,146
----------
Total $1,457,669
==========
</TABLE>
The difference between the Company's effective tax rate and the Federal
statutory tax rate are due principally to state income taxes.
6. COMMITMENTS
The Company leases certain property and equipment under various
operating leases that expire in 2000. The lease expense for the nine
months ended September 30, 1999 was $31,862.
4
<PAGE>
Approximate future minimum lease payments under these operating leases
are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1999 $6,000
2000 3,000
</TABLE>
7. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and trade
accounts receivable.
The Company does maintain cash in a local financial institution and
cash balances may exceed federally insured limits. The uninsured
cash balance at September 30, 1999 was approximately $2,100,000.
The Company's trade accounts receivable, except for those discussed
below, are due from a large customer base. The Company does perform
periodic credit evaluations of its customers and generally does not
require collateral. The Company has not experienced any significant
credit related losses.
8. MAJOR CUSTOMERS AND PRODUCTS
MAJOR CUSTOMERS
The Company had net sales to three customers that individually
represented 13.3%, 11.8% and 11.6%, respectively, of net sales for the
nine months ended September 30, 1999.
MAJOR PRODUCTS
The Company's sales of three products represented 24.7%, 22.6% and
17.2%, respectively, of net sales during the nine months ended
September 30, 1999.
9. SALE OF STOCK
Effective October 8, 1999, the stockholders of the Company sold all of
their common stock to Natrol, Inc., a publicly traded company. Natrol,
Inc. manufactures and markets branded, high-quality dietary
supplements.
-------------------------
5
<PAGE>
[SANSIVERI, KIMBALL & MCNAMEE, L.L.P. LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Prolab Nutrition, Inc.:
We have audited the accompanying balance sheet of Prolab Nutrition, Inc. as
of December 31, 1998, and the related statements of income and retained
earnings and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Prolab Nutrition, Inc.
as of December 31, 1998 and the results of its operations and its cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
/s/ SANSIVERI, KIMBALL & MCNAMEE, L.L.P.
September 24, 1999 (except for Note 9,
as to which the date is October 8, 1999)
<PAGE>
PROLAB NUTRITION, INC.
BALANCE SHEET
DECEMBER 31, 1998
- -------------------------------------------------------------------------------
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 577,906
Investments 400,000
Accounts receivable - trade 2,606,993
Inventories 2,351,600
Prepaid expenses 12,000
-------------
Total current assets 5,948,499
-------------
PROPERTY AND EQUIPMENT - At cost - 1,104,897
Less accumulated depreciation 90,523
-------------
Property and equipment, net 1,014,374
OTHER ASSETS 12,950
-------------
TOTAL $ 6,975,823
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 10,690
Accounts payable 2,709,174
Accrued salaries and wages - officers 1,200,000
Accrued expenses 60,902
Income taxes payable 820,500
Stockholders' loans 168,294
------------
Total current liabilities 4,969,560
LONG-TERM DEBT - Less current portion 570,623
------------
Total liabilities 5,540,183
------------
STOCKHOLDERS' EQUITY:
Common stock, no par value, 5,000 shares authorized, 444 shares issued
and outstanding 1,000
Retained earnings 1,434,640
------------
Total stockholders' equity 1,435,640
------------
TOTAL $ 6,975,823
============
</TABLE>
See notes to financial statements.
- -------------------------------------------------------------------------------
<PAGE>
PROLAB NUTRITION, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1998
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
NET SALES $ 19,186,921
COST OF GOODS SOLD 13,062,560
----------------
GROSS MARGIN 6,124,361
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,314,792
----------------
INCOME FROM OPERATIONS 809,569
----------------
OTHER INCOME (EXPENSE):
Interest income 2,066
Interest expense (104,099)
Miscellaneous (534)
----------------
Other expense, net (102,567)
----------------
INCOME BEFORE TAXES ON INCOME 707,002
PROVISION FOR TAXES ON INCOME - Current 336,610
----------------
NET INCOME 370,392
RETAINED EARNINGS, BEGINNING OF THE YEAR 1,064,248
----------------
RETAINED EARNINGS, END OF THE YEAR $ 1,434,640
================
</TABLE>
See notes to financial statements.
- -------------------------------------------------------------------------------
<PAGE>
PROLAB NUTRITION, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 370,392
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 53,894
Bad debt expense 78,710
Changes in operating assets and liabilities:
Accounts receivable - trade (1,291,060)
Inventories (433,968)
Prepaid expenses and other assets 120,050
Accounts payable 805,958
Accrued salaries and wages - officers 1,200,000
Accrued expenses 60,902
Income taxes payable 328,554
---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,293,432
---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (182,207)
Purchase of investments (400,000)
---------------
NET CASH USED BY INVESTING ACTIVITIES (582,207)
---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (10,001)
Net repayments of stockholder loans (587,781)
---------------
NET CASH USED BY FINANCING ACTIVITIES (597,782)
---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 113,443
CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR 464,463
---------------
CASH AND CASH EQUIVALENTS, END OF THE YEAR $ 577,906
===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 63,530
===============
Taxes $ 119,725
===============
Noncash investing activities - Property and equipment acquisitions
through long-term debt obligations $ 18,971
===============
</TABLE>
See notes to financial statements.
- -------------------------------------------------------------------------------
<PAGE>
PROLAB NUTRITION, INC.
NOTES TO FINANCIAL STATEMENTS
-----------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Prolab Nutrition, Inc. (the Company), a closely held business,
distributes, manufactures and markets food supplement products. The
Company's products are sold primarily to distributors, wholesalers and
retailers located throughout the United States and also on a worldwide
basis.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include time deposits with original
maturities of three months or less.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined on the first-in, first-out (FIFO) basis.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is computed on
accelerated methods for financial and tax reporting purposes.
Property and equipment are depreciated over useful lives as follows:
<TABLE>
<CAPTION>
Asset Useful Life
----- -----------
<S> <C>
Building 39 Years
Building improvements 39 Years
Furniture and equipment 5-7 Years
Vehicles 5 Years
</TABLE>
TAXES ON INCOME
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each year-end based on enacted
tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. The differences
relate primarily to the use of different depreciation methods and lives
for
1
<PAGE>
financial statement and income tax purposes for depreciable assets.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income
tax expense is the tax payable for the period and the change during
the period in deferred tax assets and liabilities.
Deferred taxes have not been reported in the accompanying financial
statements since their affects would not be considered to be
significant.
EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) Profit Sharing Plan that covers all
eligible employees who have attained the age of 18 and who have
performed at least one year of service. Contributions to the plan
are at the discretion of management. No company contributions were
made for 1998.
INVESTMENTS
Investments consist of U.S. government bonds.
In accordance with Statement on Financial Accounting Standards
(SFAS) No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES, the Company determines the appropriate
classification of debt and equity at the time of purchase. The
Company has classified these securities as "available for sale" and
accordingly, such investments should be reported at their fair
value. Since cost approximates fair value, no unrealized gains or
losses have been reported on the accompanying financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's principal financial instruments consist of cash,
investments, accounts receivable and accounts payable. Considerable
judgement is required to develop the estimates of fair value; thus,
the estimates are not necessarily indicative of the amounts that
could be realized in a current market exchange. However, the Company
believes the carrying value of these assets and liabilities is a
reasonable estimate of their fair market value at December 31, 1998.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising
costs for the year ended December 31, 1998 were approximately
$1,545,000.
ACCOUNTING 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
2
<PAGE>
liabilities at the date of the financial statement and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
2. INVENTORIES
The components of inventories at December 31, 1998 are as follows:
<TABLE>
<S> <C>
Raw materials $ 472,908
Finished goods 1,878,692
-----------
Total $ 2,351,600
===========
</TABLE>
3. LONG-TERM DEBT
As of December 31, 1998, long-term debt consisted of the following:
<TABLE>
<S> <C>
Term note payable to a bank due in monthly installments of principal
and interest of $5,225. Interest is computed at a rate of 10% per
annum with a balloon payment due in June 2005. The note is
collateralized by real estate. $ 566,407
4.9% note payable due in monthly payments of principal and interest
of $437 through February 2002. The note is collateralized by a
vehicle. 14,906
---------
Total 581,313
Less current portion 10,690
---------
Long-term portion $ 570,623
=========
</TABLE>
3
<PAGE>
As of December 31, 1998, scheduled maturities of long-term debt are as
follows:
<TABLE>
YEAR AMOUNT
---- --------
<S> <C>
1999 $ 10,690
2000 11,833
2001 12,808
2002 8,866
2003 9,416
2004 and thereafter 527,700
--------
Total $581,313
========
</TABLE>
4. STOCKHOLDER LOANS
Stockholder loans represent advances from the principal stockholders of
the Company. Such advances are payable on demand with interest at
5.85%.
5. TAXES ON INCOME
The provision for taxes on income consists of the following:
<TABLE>
<S> <C>
Current:
Federal $267,070
State 69,540
--------
Total $336,610
========
</TABLE>
The difference between the Company's effective tax rate and the Federal
statutory tax rate are due principally to state income taxes.
6. COMMITMENTS
The Company leases certain property and equipment under various
operating leases that expire in 2000. The lease expense for the year
ended December 31, 1998 was $16,832.
4
<PAGE>
Approximate future minimum lease payments under these operating
leases are as follows:
<TABLE>
Year Amount
---- ------
<S> <C>
1999 $6,000
2000 3,000
</TABLE>
7. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents and trade accounts receivable.
The Company does maintain cash and cash equivalents in a local
financial institution and cash balances may exceed federally insured
limits. The uninsured cash balance at December 31, 1998 was
approximately $475,000.
The Company's trade accounts receivable, except for those discussed
below, are due from a large customer base. The Company does perform
periodic credit evaluations of its customers and generally does not
require collateral. The Company has not experienced any significant
credit related losses.
8. MAJOR CUSTOMERS AND PRODUCTS
MAJOR CUSTOMERS
The Company had net sales to two customers that individually
represented 17.3% and 15.2%, respectively, of net sales for the year
ended December 31, 1998.
MAJOR PRODUCTS
The Company's sales of two products represented 37.0% and 31.9%,
respectively, of net sales during the year ended December 31, 1998.
9. SUBSEQUENT EVENT
Effective October 8, 1999, the stockholders of the Company sold
all of their common stock to Natrol, Inc., a publicly traded
company. Natrol, Inc. manufactures and markets branded,
high-quality dietary supplements.
--------------------------
5
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
INTRODUCTION
The accompanying unaudited pro forma condensed consolidated financial statements
reflect the consolidated financial position of Natrol, Inc. (the Company) as of
September 30, 1999 and the results of its operations for the year ended December
31, 1998 and nine months ended September 30, 1999 after giving pro forma effects
to the purchase of Prolab Nutrition, Inc. (Prolab) completed after the close of
business on October 7, 1999. The unaudited pro forma information does not
purport to be indicative of actual results that would have been achieved had the
acquisition actually been completed as of the dates indicated on the following
pages nor which may be achieved in the future.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
Nine months ended September 30, 1999
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Nine Months
Prolab Nutrition, Ended
Natrol, Inc. Inc. September 30,
Nine Months Ended Nine Months Ended Business 1999
September 30, 1999 September 30, 1999 Combination Pro Forma
Actual Actual Adjustments Combined
--------------------- ------------------- ------------------- ----------------
<S> <C> <C> <C> <C>
Net Sales $ 56,874 $ 23,966 $ 80,840
Cost of goods sold 27,136 15,127 42,263
--------------------- ------------------- ----------------
Gross profit 29,738 8,839 38,577
--------------------- ------------------- ----------------
Selling and marketing expenses 13,873 4,020 17,893
General and administrative
expenses 6,061 1,472 (a) 1,005 8,538
--------------------- ------------------- ----------------
Total expenses 19,934 5,492 26,431
--------------------- ------------------- ----------------
Operating income 9,804 3,347 12,146
Interest income (expense), net 642 (52) (b) (304) 286
--------------------- ------------------- ----------------
Income before income tax
provision 10,446 3,295 12,432
Income tax provision 3,987 1,458 (c) (339) 5,106
--------------------- ------------------- ----------------
Net income $ 6,459 $ 1,837 $ 7,326
===================== =================== ================
Basic earnings per share $ 0.49 $ .55
===================== ================
Diluted earnings per share $ 0.47 $ .53
===================== ================
Weighted average common shares
outstanding - basic 13,319,203 13,443,473
===================== ================
Weighted average common shares
outstanding - diluted 13,661,457 13,785,727
===================== ================
</TABLE>
See notes to the unaudited pro forma condensed consolidated financial
statements.
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
Year ended December 31, 1998
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Prolab Nutrition, Year Ended
Natrol, Inc. Inc. December 31,
Year Ended Year Ended Business 1998
December 31, 1998 December 31, 1998 Combination Pro Forma
Actual Actual Adjustments Combined
--------------------- ------------------- ------------------- ----------------
<S> <C> <C> <C> <C>
Net Sales $ 68,207 $ 19,187 $ 87,394
Cost of goods sold 32,012 13,063 45,075
--------------------- ------------------- ------------------- ----------------
Gross profit 36,195 6,124 42,319
Selling and marketing expenses 17,757 3,845 21,602
General and administrative
expenses 6,513 1,470 (d) 1,340 9,323
--------------------- ------------------- ------------------- ----------------
Total expenses 24,270 5,315 30,295
--------------------- ------------------- ------------------- ----------------
Operating income 11,925 809 11,394
Interest income (expense), net 197 (103) (e) (226) (132)
--------------------- ------------------- ------------------- ----------------
Income before income tax
provision 12,122 706 11,262
Income tax provision 4,606 336 (f) (153) 4,789
--------------------- ------------------- ------------------- ----------------
Net income $ 7,516 $ 370 $ 6,473
===================== =================== =================== ================
Basic earnings per share $ 0.76 $ .65
===================== ================
Diluted earnings per share $ 0.63 $ .54
===================== ================
Weighted average common shares
outstanding - basic 9,854,411 9,978,681
===================== ================
Weighted average common shares
outstanding - diluted 11,890,513 12,014,783
===================== ================
</TABLE>
See notes to the unaudited pro forma condensed consolidated financial
statements.
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
(in thousands)
<TABLE>
<CAPTION>
Natrol, Inc. September 30,
September 30, Business 1999
1999 Combination Pro Forma
Actual Adjustments Combined
------------------ --------------------- ---------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,125 (g) 2,260 $ 4,385
Marketable securities 23,605 (g) (22,750) 855
Accounts receivable, net 13,243 (g) 3,667 16,910
Inventories 12,456 (g) 2,063 14,519
Deferred taxes 1,214 1,214
Income taxes receivable 165 (g) 117 282
Prepaid expenses and other current assets 816 (g) 6 822
------------------ ---------------
Total current assets 53,624 38,987
Equipment and leasehold improvements, net 11,199 (g 1,125 12,324
Goodwill 13,070 (g) 26,706 39,776
Capitalized loan fees 49 49
Deposits 50 50
------------------ ---------------
Total other assets 13,169 39,875
------------------ ---------------
Total assets $ 77,992 $ 91,186
================== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ - (g) 6,250 $ 6,250
Accounts payable 4,137 (g) 3,668 7,805
Accrued expenses 2,642 (g) 243 2,885
Accrued payroll and related liabilities 1,497 1,497
Due to shareholders (g) 176 176
Income taxes payable - (g) 1,792 1,792
Current portion of long-term debt 129 (g) 14 143
------------------ ---------------
Total current liabilities 8,405 20,548
Deferred income taxes - noncurrent 32 32
Long-term debt, net of current portion 3,340 (g) 573 3,913
Stockholders' equity
Common stock 136 (g) 1 137
Additional paid-in capital 60,300 (g) 977 61,277
Retained earnings 6,342 6,342
------------------ ---------------
66,778 67,756
Receivable from stockholder (563) (g) (500) (1,063)
------------------ ---------------
Total stockholders' equity 66,215 66,693
------------------ ---------------
Total liabilities and stockholders' equity $ 77,992 $ 91,186
================== ===============
</TABLE>
See notes to the unaudited pro forma condensed consolidated financial statements
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
The unaudited pro forma condensed consolidated statement of income for the nine
months ended September 30, 1999 gives effect to the consolidated results of
operations for the nine months ended September 30, 1999, as if the acquisition
of Prolab occurred at January 1, 1999. The unaudited pro forma condensed
consolidated statement of income for the year ended December 31, 1998 gives
effect to the operations for the year ended December 31, 1998, as if the
acquisition Prolab occurred at January 1, 1998. These results are not
necessarily indicative of the consolidated results of operations of the Company
as they may be in the future, or as they might have been had these events been
effective at January 1, 1998 and 1999, respectively. The unaudited pro forma
condensed consolidated balance sheet gives effect to the financial position at
September 30, 1999, as if the acquisition of Prolab occurred at September 30,
1999. Such consolidated financial position is not necessarily indicative of the
consolidated financial position of the Company as it may be in the future, or as
it might have been had these events been effective at September 30, 1999. The
unaudited pro forma condensed consolidated financial information should be read
in conjunction with the historical financial statements of the Company and
Prolab and the related notes thereto contained in the Natrol, Inc. annual report
on Form 10K as of and for the year ended December 31, 1998 and quarterly report
on Form 10Q as of and for the quarter ended September 30, 1999 as filed with the
Securities and Exchange Commission.
PRO FORMA ADJUSTMENTS FOR THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 ARE AS FOLLOWS:
(a) Gives effect to the amortization of goodwill of $1,005 as if the
acquisition of Prolab had taken place on January 1, 1999.
(b) Gives effect to pro forma interest expense of $304 as if the line of credit
borrowings used to partially fund the acquisition of Prolab had been
incurred on January 1, 1999. Pro forma interest expense is based on line of
credit borrowings of $6,250 with interest at Libor plus 1.25%.
(c) Gives effect to taxes for adjustments described in footnotes (a) and (b)
such that the pro forma income tax provision is at the Company's
anticipated effective tax rate.
PRO FORMA ADJUSTMENTS FOR THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1998 ARE AS FOLLOWS:
(d) Gives effect to the amortization of goodwill of $1,340 as if the
acquisition of Prolab had taken place on January 1, 1998.
(e) Gives effect to pro forma interest expense of $226 as if the line of credit
borrowings used to partially fund the acquisition of Prolab had been
incurred on January 1, 1998 and fully repaid on July 22, 1998, the date the
Company completed its initial public offering. Pro forma interest expense
is based on line of credit borrowings of $6,250 with interest at Libor plus
1.25%.
(f) Gives effect to taxes for adjustments described in footnotes (d) and (e)
such that the pro forma income tax provision is at the Company's
anticipated effective tax rate.
PRO FORMA ADJUSTMENTS FOR THE UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET AT
SEPTEMBER 30, 1999 ARE AS FOLLOWS:
(g) Reflects preliminary purchase price allocation for the purchase of all of
the Prolab common stock. Assets, net of liablities acquired in connection
with the Prolab stock purchase totaled $3,273 in exchange for cash of
$29,000 and 124,270 shares of the Company's common stock.
