<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, 1999
/ / 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 X NO
----- -----
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 August 1,1999
----- -------------------------------
Common stock, $0.01 par value 13,340,495
<PAGE>
PART 1
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
NATROL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except for share amounts)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,567 $ 559
Marketable securities 23,367 19,011
Accounts receivable, net of allowances of
$483 and $383, at June 30, 1999 and
December 31, 1998, respectively 12,291 9,987
Inventories 12,442 13,437
Deferred taxes 1,214 1,214
Income taxes receivable 171 --
Prepaid expenses and other current assets 1,042 500
------------ ------------
Total current assets 52,094 44,708
Property and equipment:
Building and improvements 7,332 6,882
Machinery and equipment 4,440 3,826
Furniture and office equipment 1,487 1,239
------------ ------------
13,259 11,947
Accumulated depreciation (2,283) (1,756)
------------ ------------
10,976 10,191
Goodwill, net of accumulated amortization
of $1,058 and $588 at June 30, 1999
and December 31, 1998, respectively 13,305 13,775
Capitalized loan fees, net 50 --
Other assets 46 34
------------ ------------
Total other assets 13,401 13,809
------------ ------------
TOTAL ASSETS $ 76,471 $ 68,708
============ ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 5,001 $ 5,943
Accrued expenses 3,026 2,067
Accrued payroll and related liabilities 1,236 805
Income taxes payable -- 221
Current portion of long-term debt 129 --
------------ ------------
Total current liabilities 9,392 9,036
Deferred income taxes, non-current 32 32
Long-term debt, less current portion 3,372 --
Commitments
Stockholders' equity:
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Common stock 136 133
Additional paid in capital 60,299 60,187
Retained earnings 3,803 (117)
-------- --------
64,238 60,203
Receivable from stockholder 563 563
-------- --------
Total stockholders' equity 63,675 59,640
-------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY
$ 76,471 $ 68,708
======== ========
</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,
1999 1998 1999 1998
---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net sales $ 17,864 $ 16,290 $ 35,701 $ 29,407
Cost of goods sold 8,465 7,933 16,961 14,254
---------------- ----------------- ---------------- -----------------
Gross profit 9,399 8,357 18,740 15,153
Selling and marketing expenses
4,545 4,254 8,792 7,731
General and administrative
expenses 2,006 1,272 4,033 2,503
---------------- ----------------- ---------------- -----------------
Total operating expenses 6,551 5,526 12,825 10,234
---------------- ----------------- ---------------- -----------------
Operating income 2,848 2,831 5,915 4,919
Interest income 240 22 471 43
Interest expense 36 222 36 375
---------------- ----------------- ---------------- -----------------
Income before income tax
provision 3,052 2,631 6,350 4,587
Income tax provision 1,181 1,053 2,430 1,833
---------------- ----------------- ---------------- -----------------
Net income $ 1,871 $ 1,578 $ 3,920 $ 2,754
================ ================= ================ =================
Basic earnings per share $ 0.14 $ 0.22 $ 0.29 $ 0.39
Diluted earnings per share $ 0.14 $ 0.15 $ 0.29 $ 0.26
Weighted average shares
outstanding - basic
13,314,880 7,100,000 13,308,443 7,100,000
Weighted average shares
outstanding - diluted
13,599,733 10,619,120 13,640,578 10,562,163
</TABLE>
See accompanying notes
<PAGE>
NATROL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
1999 1998
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 3,920 $ 2,754
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 529 381
Amortization of goodwill 470 200
Provision for bad debts 105 36
Changes in operating assets and liabilities:
Accounts receivable (2,409) (1,292)
Inventories 995 (263)
Income taxes receivable/payable (392) (28)
Deposits (12) --
Prepaid expenses and other current assets (542) 49
Accounts payable (942) 1,974
Accrued expenses 959 1,444
Accrued payroll and other related 431 343
liabilities
-------- --------
Net cash provided by operating activities 3,112 5,598
INVESTING ACTIVITIES
Assets purchased, net of liabilities assumed
in connection with Pure-Gar acquisition -- (11,104)
Purchases of property, equipment and leasehold
improvements (1,312) (304)
Purchase of marketable securities (23,302) --
Sales of marketable securities 18,944 --
-------- --------
Net cash used in investing activities (5,670) (11,408)
FINANCING ACTIVITIES
Proceeds from long-term debt 3,501 9,000
Repayments on long-term debt -- (4,105)
Offerings costs to be netted against proceeds -- (474)
Capitalized loan fees (51) --
Proceeds from stock purchase plan 61 --
Proceeds from exercise of stock options 54 --
-------- --------
Net cash provided by financing activities 3,565 4,421
-------- --------
Net increase in cash and cash equivalents 1,007 (1,389)
Cash and cash equivalents, beginning of period 559 1,800
-------- --------
Cash and cash equivalents, end of period $ 1,567 $ 411
======== ========
</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 subsidiaries (collectively, the "Company" or "Natrol") as of June 30,
1999, and the results of its operations for the three and six months ended June
30, 1999 and 1998 and cash flows for the six months ended June 30, 1999 and
1998, 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 six months ended June 30, 1999 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, 1998 audited consolidated financial statements
included in the Company's annual report on Form 10-K for the year ended December
31, 1998 as filed with the Securities and Exchange Commission (file number
000-24567).
INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------------------------
<S> <C> <C>
Raw material and packaging supplies $ 6,990 $ 7,549
Finished goods 5,542 5,888
-------------------------
$ 12,442 $ 13,437
-------------------------
-------------------------
</TABLE>
3. COMPREHENSIVE INCOME
In the year ended December 31, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No 130, "Reporting Comprehensive Income." The
provisions of SFAS No 130 require companies to classify items of comprehensive
income by their nature in financial statements and display the accumulated
balance of other comprehensive income separately from retained earnings in the
financial statements. The Company's comprehensive income items are not material
at June 30, 1999 or December 31, 1998 and therefore no disclosures have been
made.
<PAGE>
4. EARNINGS PER SHARE
The Company calculates earnings per share in accordance with SFAS No. 128
"Earnings per share". Basic earnings per share has been computed by dividing net
income by the weighted average number of common shares outstanding. Diluted
earnings per share has been computed by dividing net income by the weighted
average of securities or other contracts to issue Common Stock as if these
securities were exercised or converted to Common Stock. Common Stock equivalent
shares from stock options representing 515,000 shares have been excluded from
the computation of diluted earnings per share because the effect would be
antidilutive.
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 June 30, 1999, 185,000
options were granted.
6. LONG-TERM DEBT
In May, 1999 the Company entered into a $3.5 million, 15 year, fully amortizing
mortgage loan from Wells Fargo Bank, NA at a fixed interest rate equal to 7.75%
per annum. The loan is a non-recourse loan secured by the Company's headquarters
and manufacturing facility.
7. SUBSEQUENT EVENTS
none
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." The Company is including this statement for the express purpose of
availing itself of protections of the safe harbor provided by the Private
Securities Litigation Reform Act of 1995 with respect to all such forward
looking statements. Examples of forward looking statements include, but are not
limited to, 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 ability to predict results or the effect of certain events on the
Company's operating results is inherently uncertain. Therefore, the Company
wishes to caution each reader of this report to carefully consider the following
<PAGE>
factors and certain other factors discussed herein and in other past reports,
including but not limited to, the Company's Prospectus dated July 22, 1998 and
the Company's annual report on Form 10-K for the year ended December 31, 1998,
each of which is filed with the Securities and Exchange Commission.
Factors that could cause or contribute to the Company's actual results differing
materially from those discussed herein or for the Company's stock price to be
affected adversely include, but are not limited to: - (i) industry trends,
including a potential general downturn or slowing of the growth of the dietary
supplement industry, (ii) increased competition from current competitors and new
market entrants, (iii) adverse publicity regarding the dietary supplement
industry or the Company's products, (iv) the Company's dependence upon its
ability to develop new products, (v) government regulation, (vi) exposure to
product liability claims,(vii) dependence on significant customers, (viii) the
Company's ability to keep and attract key management employees, (ix) the
Company's inability to manage growth and execute its business plan, (x) the
Company's ability to consummate future acquisitions and its ability to integrate
acquired businesses and to retain key personnel associated with any acquisition,
(xi) the absence of clinical trials for many of the Company's products, (xii)
the Company's inability to obtain raw materials that are in short supply, (xiii)
sales and earnings volatility, (xiv) the Company's ability to manufacture its
products efficiently, (xv) the Company's reliance on independent brokers to sell
its products, (xvi) the inability of the Company to protect its intellectual
property, (xvii) control by principal shareholders, (xviii) the possible sale of
large amounts of stock by controlling shareholders, (xiv) volatility in the
stock markets, (xx) a failure of the Company to properly address the year 2000
issue and (xxi) a general downturn in the national economy as a whole. These and
other such factors are discussed in more detail in previous filings with the
Securities and Exchange Commission including, under the caption "Risk Factors
and Factors Affecting Forward Looking Statements" in the Company's annual report
on Form 10-K for the year ended December 31, 1998 and elsewhere in this report.
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, 1999 AND JUNE 30, 1998
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 9.7%, or $1.6 million, to $17.9 million for the three months ended
June 30, 1999 from $16.3 million for the three months ended June, 1998. Sales
during the quarter was affected by a decline in the Company's herbal category
caused primarily by a decline in the sales of two products, Gingko Biloba and
St. John's Wort. These products received substantial national media attention
during 1998. During 1999, sales of these products declined industry wide. The
Company cannot determine whether or not sales of these products will continue to
decline in future months. Offsetting the decline in the herbal category was $1.5
million of net revenue generated from the sale of Laci Le Beau teas and dietary
supplements. The Laci Le Beau tea business was acquired on October 1, 1998. A
combination of new product introductions, increases of existing product sales
and increased penetration in the mass market channel of distribution were other
factors which contributed to the Company's ability to overcome the decline in
the herbal category and post net sales gains during the three month period
ending June 30, 1999.
GROSS PROFIT. Gross profit increased 12.5%, or $1.0 million, to $9.4 million for
the three months ended June 30, 1999 from $8.4 million for the three months
ended
<PAGE>
June 30, 1998. Gross margin increased to 52.6% for the three months ended
June 30, 1999 from 51.3% for the three months ended June 30, 1998. Gross margin
fluctuates depending upon customer mix and product mix. The Company does not
consider the increase in gross margin during the quarter to be a significant
event and anticipates that its gross margin will continue to fluctuate, both up
and down, from quarter to quarter.
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 6.8%,
or $291,000, to $4.5 million for the three months ended June 30, 1999 from $4.3
million for the three months ended June 30, 1998. 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 57.7%, or
$734,000, to $2.0 million for the three months ended June 30, 1999 from $1.3
million for the three months ended June 30, 1998. This increase was primarily
attributable to building the infrastructure to support and manage the Company's
growth including its Laci Le Beau division acquired in October 1998 with
corresponding increases in payroll and depreciation; additional goodwill
attributable to the acquisition of Laci Le Beau; and a substantial increase in
expenses such as legal and accounting fees, filing fees, insurance and other
expenses attributable to the Company's operation as a publicly traded company.
INTEREST INCOME. Interest income increased $218,000 to $240,000 for the three
months ended June 30, 1999 from $22,000 for the three months ended June 30,
1998. The increase was the result of the investment of cash generated through
operations as well as the investment of cash proceeds from the Company's IPO
completed in July, 1998.
INTEREST EXPENSE. Interest expense decreased $186,000 to $36,000 for the three
months ended June 30, 1999 from $222,000 for the three months ended June 30,
1998. The decrease was a result of decreased outstanding indebtedness. During
the quarter, the Company entered into a fully amortizing 15-year, $3.5 million
mortgage secured exclusively by its headquarters building in Chatsworth,
California. See "Liquidity and Capital Resources."
INCOME TAX PROVISION. The Company's effective tax rate was reduced to 38.7% in
the second quarter of 1999 from 40.0% in the second quarter of 1998. The
increase in the income tax provision at June 30, 1999 from June 30, 1998 is
directly related to the increase in pretax income offset by the decrease in the
effective rate.
SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
NET SALES. Net sales increased 21.4%, or $6.3 million, to $35.7 million for the
six months ended June 30, 1999 from $29.4 million for the six months ended June
30, 1998. Sales during the the six month period was affected by a decline in the
Company's herbal category caused primarily by a decline in the sales of Gingko
Biloba and St. John's Wort. Offsetting the decline in the herbal category was
$3.4 million of net revenue generated from the sale of Laci Le Beau teas and
dietary supplements. The Laci Le Beau tea business was acquired on October 1,
1998. A combination of new product introductions, increases of existing product
sales and increased penetration in the mass market channel of distribution were
other factors which contributed to the Company's ability to overcome the decline
<PAGE>
in the herbal category and post net sales gains during the six month period
ending June 30, 1999.
GROSS PROFIT. Gross profit increased 23.7%, or $3.6 million, to $18.7 million
for the six months ended June 30, 1999 from $15.1 million for the six months
ended June 30, 1998. Gross margin increased to 52.5% for the six months ended
June 30, 1999 from 51.5% for the six months ended June 30, 1998. Gross margin
fluctuates depending upon customer mix and product mix. The Company does not
consider the increase in gross margin during the six month period to be a
significant event and anticipates that its gross margin will continue to
fluctuate, both up and down, from period to period.
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
13.7%, or $1.1 million, to $8.8 million for the six months ended June 30, 1999
from $7.7 million for the six months ended June 30, 1998. 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 61.1%, or $1.5
million, to $4.0 million for the six months ended June 30, 1999 from $2.5
million for the six months ended June 30, 1998. This increase was primarily
attributable to building the infrastructure to support and manage the Company's
growth including its Pure-Gar and Laci Le Beau divisions acquired in February
and October 1998 respectively with corresponding increases in payroll and
depreciation; additional goodwill attributable to the; and a substantial
increase in expenses such as legal and accounting fees, filing fees, insurance
and other expenses attributable to the Company's operation as publicly traded
company.
INTEREST INCOME. Interest income increased $428,000 to $471,000 for the six
months ended June 30, 1999 from $43,000 for the six months ended June 30, 1998.
The increase was the result of the investment of cash generated through
operations as well as the investment of cash proceeds from the Company's IPO
completed in July, 1998.
INTEREST EXPENSE. Interest expense decreased to $339,000 to $36,000 for the six
months ended June 30, 1999 from $375,000 for the six months ended June 30, 1998.
The decrease was a result of decreased outstanding indebtedness. See "Liquidity
and Capital Resources."
INCOME TAX PROVISION. The Company's effective tax rate was reduced to 38.3% in
the six months ended June 30, 1998 from 40.0% in the six months ended June 30,
1998. The increase in the income tax provision at June 30, 1999 from June 30,
1998 is directly related to the increase in pretax income offset by the decrease
in the effective rate.
LIQUIDITY AND CAPITAL RESOURCES
Prior to its IPO, the Company had financed its operations and capital
requirements primarily through funds from operations and, to a lesser extent,
borrowings. At June 30, 1999, the Company had working capital of $42.7 million,
as compared to $ 35.7 million at December 31, 1998. The increase was primarily
due to an increase in trade receivables and prepaid expenses that fluctuate in
the normal course of the Company's business as well as $3.5 million of cash
received from the
<PAGE>
mortgaging of its headquarters facility in Chatsworth, California.
On July 27, 1998, the Company completed the sale of its IPO of 3,940,000 shares
of Common Stock priced at $15.00 per share. Of the total shares offered,
3,200,000 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 $47.7 million, including the shares sold pursuant to
the underwriters' exercise of the overallotment option. Of the net proceeds to
the Company, $8.4 million was used to repay in full long-term debt. 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 $3.1 million for the six months
ended June 30, 1999 as compared to $5.6 million during the six months ended June
30, 1998. The decrease in cash provided by operating activities was primarily
due to an increase in accounts receivable of $2.4 million and a decrease of
prepaid expenses of $542,000 during the first six months of 1999 which were
offset by net income of $3.9 million, and a decrease in inventories of $1.0
million, and higher levels of goodwill amortization and depreciation as a result
of the Pure-Gar and Laci Le Beau acquisitions.
Net cash used in investing activities was $5.6 for the six months ended June 30,
1999 and $11.4 million during the six months ended June 30, 1998. During the
first six months of 1999, the Company invested $1.3 in new plant, property and
equipment. This investment was offset by net changes in marketable securities of
$4.4 million. 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 $304,000 to invest in property, plant, and equipment.
Cash provided by financing activities during the six months ended June 30, 1999
was $3.6 million as opposed to the six months ended June 30, 1998 when financing
activities provided $4.4 million in cash. Net cash provided by financing
activities during the six months ended June 30, 1999 consisted of $3.5 million
received as a result of the mortgaging of the Company's headquarters facility
located in Chatsworth, California as well as $115,000 from the sale of stock to
employees pursuant to the Company's Stock Purchase Plan as well as the exercise
of stock options by certain employees. 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.
The Company's cash and marketable securities balances combined at June 30, 1999
were approximately $24.9 million. The Company believes that this amount,
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. Future acquisitions, if any, could be funded with cash-on-hand, cash
from operations as well as future borrowings. Future borrowings may include
covenants restricting the Company's ability to issue dividends or to make
additional acquisitions. There can be no assurance that attractive acquisition
opportunities will be available to the Company or will be available at prices
and upon such other terms that are attractive to the Company. The Company
regularly evaluates the potential acquisition of other businesses, products and
product lines and may hold
<PAGE>
discussions regarding such potential acquisitions. As a general rule, the
Company will publicly announce such acquisitions only after a definitive
agreement has been signed. In addition, in order to meet its long-term
liquidity needs or consummate future acquisitions, the Company may be
required to incur additional indebtedness or issue additional equity and debt
securities, subject to market and other conditions. There can be no assurance
that such additional financing will be available on terms acceptable to the
Company or at all. The failure to raise the funds necessary to finance its
future cash requirements or consummate future acquisitions could adversely
affect the Company's ability to pursue its strategy and could negatively
affect its operations in future periods.
IMPACT OF INFLATION
Generally, 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 2000 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 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. The Company is also focusing on
major customers and suppliers to assess their compliance. The Company has
received assurances from material customers that such material 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
<PAGE>
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 of the 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.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company's market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. The Company is exposed to market
risk related to change in interest rates.
The Company maintains a portfolio of highly liquid cash equivalents and
marketable securities. Marketable securities consist primarily of certificates
of deposits, commercial paper and corporate and municipal bonds. Given the
short-term nature and liquidity of these investments and that the Company has no
borrowings with variable rates, the Company believes that it is not subject to
significant interest rate risk.
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable
(b) Not applicable
(c) Not applicable
(d) The Company completed its initial public offering (the "IPO") in July
1998. The IPO was made pursuant to a Registration Statement on Form
S-1, originally filed with the Securities and Exchange Commission on
May 7, 1998, as amended (Commission File No. 333-52109), which was
declared 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.
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.
<PAGE>
The Company registered an aggregate of 4,531,000 shares of Common Stock
(including 591,000 shares issuable 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 approximately $68.0
million. Of the 4,531,000 shares sold in the IPO, 3,495,500 shares were
registered for the Company's account.
The Company incurred the following expenses in connection with the IPO:
<TABLE>
<S> <C>
Underwriting discounts and commissions $3.67 million
Other expenses $1.05 million
-------------
Total expenses $4.72 million
</TABLE>
After deducting the expenses set forth above, the Company received
approximately $47.7 million in net proceeds from the IPO. The Company
used approximately (a) $8.4 million of the proceeds to repay in July
1998 borrowings under the Company's then existing senior credit
facility with Wells Fargo Bank, N.A., including fees and accrued and
unpaid interest, (b) $6.0 million to redeem all of the outstanding
shares of the Company's Redeemable Preferred Stock in July 1998, (c)
$7.5 million to complete the acquisition of the Laci Le Beau tea
business in October 1998, and (d) $5.25 million to purchase its
headquarters/ manufacturing facility in December 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The 1999 Annual Meeting of Stockholders of Natrol, Inc. (the "Annual
Meeting") was held on June 15, 1999.
b)(c) At the Annual Meeting, the folowing were re-elected to the Company's Board
of Directors:
<TABLE>
<CAPTION>
Votes For Votes Withheld
------------ --------------
<S> <C> <C>
Dennis R. Jolicoeur 12,727,879 18,464
Norman Kahn 12,728,879 17,764
</TABLE>
The following individuals are members of the Company's Board of Directors whose
terms of office as directors continued after the Annual Meeting"
Elliott Balbert
P. Andrews McLane
David Laufer
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
No current reports on Form 8-K were filed by the Company during the three month
period ended June 30, 1999.
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: 8/15/99 By: /s/ Elliott Balbert
Chairman, President and Chief Executive Officer
<PAGE>
Date: 8/15/99 By: /s/ Dennis R. Jolicoeur
Chief Financial Officer and Executive
Vice President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,567
<SECURITIES> 23,367
<RECEIVABLES> 12,774
<ALLOWANCES> 483
<INVENTORY> 12,442
<CURRENT-ASSETS> 52,094
<PP&E> 13,259
<DEPRECIATION> 2,283
<TOTAL-ASSETS> 76,471
<CURRENT-LIABILITIES> 9,392
<BONDS> 3,500
0
0
<COMMON> 136
<OTHER-SE> 63,539
<TOTAL-LIABILITY-AND-EQUITY> 76,471
<SALES> 17,864
<TOTAL-REVENUES> 17,864
<CGS> 8,465
<TOTAL-COSTS> 15,016
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36
<INCOME-PRETAX> 3,052
<INCOME-TAX> 1,181
<INCOME-CONTINUING> 1,871
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,871
<EPS-BASIC> 0.14
<EPS-DILUTED> .14
</TABLE>
