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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, 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
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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 November 1, 1999
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Common stock, $0.01 par value 13,464,765
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PART 1
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
NATROL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except for share and per share amounts)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
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<S> <C> <C>
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 2,125 $ 559
Marketable securities 23,605 19,011
Accounts receivable, net of allowances of $447 and $332 at
September 30, 1999 and December 31, 1998, respectively 13,243 9,987
Inventories 12,456 13,437
Deferred taxes 1,214 1,214
Income taxes receivable 165 -
Prepaid expenses and other current assets 816 500
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Total current assets 53,624 44,708
Property and equipment:
Building and improvements 7,339 6,882
Machinery and equipment 4,892 3,826
Furniture and office equipment 1,513 1,239
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13,744 11,947
Accumulated depreciation (2,545) (1,756)
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11,199 10,191
Goodwill, net of accumulated amortization of $1,293 and $588 at
September 30, 1999 and December 31, 1998, respectively 13,070 13,775
Capitalized loan fees, net of accumulated amortization of $1 at
September 30, 1999 49 -
Other assets 50 34
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Total other assets 13,169 13,809
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TOTAL ASSETS $ 77,992 $ 68,708
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LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 4,137 $ 5,943
Accrued expenses 2,642 2,067
Accrued payroll and related liabilities 1,497 805
Income taxes payable - 221
Current portion of long-term debt 129 -
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Total current liabilities 8,405 9,036
Deferred income taxes, non-current 32 32
Long-term debt, less current portion 3,340 -
Stockholders' equity:
Common stock 136 133
Additional paid in capital 60,300 60,187
Retained earnings 6,342 (117)
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66,778 60,203
Receivable from stockholder 563 563
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Total stockholders' equity 66,215 59,640
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$ 77,992 $ 68,708
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</TABLE>
See accompanying notes
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NATROL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except for share and per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------------------ ------------------ ------------------- ------------------
<S> <C> <C> <C> <C>
(unaudited)
Net sales $ 21,174 $ 19,501 $ 56,874 $ 48,907
Cost of goods sold 10,175 9,327 27,136 23,581
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Gross profit 10,999 10,174 29,738 25,326
Selling and marketing expenses 5,081 4,591 13,873 12,322
General and administrative 2,027 1,732 6,061 4,234
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Total operating expenses 7,108 6,323 19,934 16,556
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Operating income 3,891 3,851 9,804 8,770
Interest income 252 238 724 281
Interest expense (47) (32) (82) (407)
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Income before income tax provision 4,096 4,057 10,446 8,644
Income tax provision 1,557 1,540 3,987 3,374
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Net income $ 2,539 $ 2,517 $ 6,459 $ 5,270
============ ============ ============ ============
Basic earnings per share $ 0.19 $ 0.21 $ 0.49 $ 0.61
Diluted earnings per share $ 0.19 $ 0.20 $ 0.47 $ 0.47
Weighted average shares outstanding - basic 13,340,495 11,842,446 13,319,203 8,694,945
Weighted average shares outstanding - diluted 13,652,060 12,904,382 13,661,457 11,311,938
</TABLE>
See accompanying notes
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NATROL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands except for share and per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEP 30
1999 1998
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<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 6,459 $ 5,270
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 790 576
Amortization of goodwill 705 350
Provision for bad debts 115 41
Changes in operating assets and liabilities:
Accounts receivable (3,371) (5,720)
Inventories 981 (3,182)
Income taxes receivable/payable (386) 359
Prepaid expenses and other current assets (316) (51)
Other assets (16) -
Accounts payable (1,806) 3,079
Accrued expenses 575 2,626
Accrued payroll and related liabilities 692 635
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Net cash provided by operating activities 4,422 3,983
INVESTING ACTIVITIES
Assets purchased, net of liabilities assumed
in connection with Pure-Gar acquisition - (11,104)
Purchases of property and equipment (1,797) (647)
Purchases of marketable securities (39,173) -
Sales of marketable securities 34,579 -
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Net cash used in investing activities (6,391) (11,751)
FINANCING ACTIVITIES
Proceeds from long-term debt 3,501 9,000
Repayments on long-term debt (32) (12,605)
Proceeds from issuance of Common Stock, net of issuance costs - 47,674
Redemption of redeemable preferred stock - (6,000)
Capitalized loan fees (50) -
Proceeds from stock purchase plan 62 -
Proceeds from exercise of stock options 54 -
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Net cash provided by financing activities 3,535 38,069
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Net increase in cash and cash equivalents 1,566 30,301
Cash and cash equivalents, beginning of period 559 1,800
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Cash and cash equivalents, end of period $ 2,125 $ 32,101
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Supplemental disclosures of cash flows information:
Cash paid during year for:
Interest $ 83 $ 407
Income taxes $ 3,987 $ 3,015
</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 September 30,1999, and the results of its operations for the three and
nine months ended September 30, 1999 and 1998 and cash flows for the nine
months ended September 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
nine months ended September 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, or 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 ("SEC")(file number 000-24567).
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
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<S> <C> <C>
Raw material and packaging supplies $ 6,998 $ 7,549
Finished goods 5,458 5,888
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$12,456 $13,437
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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 September 30, 1999 or December 31, 1998 and therefore no disclosures have
been made.
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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 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 460,000 shares have been
excluded from the computation of diluted earnings per share for the period
ended September 30, 1999 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 and annual report on Form 10K for the year ended December 31,
1998 filed 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 nine months ended
September 30, 1999, 235,000 options were granted with exercise prices that
were not less than the fair market value of the stock at the date of grant.
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
On October 6, 1999 the Company entered into an agreement with a bank which
provides for maximum borrowings on a revolving line of credit up to $10
million through the year 2002. The line of credit is collateralized by
substantially all of the Company's assets and includes requirements that the
Company comply with certain financial covenants.
On October 8, 1999, the Company purchased all of the stock of Prolab
Nutrition, Inc. ("Prolab") for $29 million in cash and 124,270 shares of
Common Stock. The Company borrowed $6.25 million on the revolving line of
credit in connection with the Prolab acquisition. Prolab markets sports
nutrition products for body builders and health minded individuals through
gyms, health food stores and other outlets both domestically and
internationally.
On October 8, 1999 Company granted certain employees of Prolab incentive
stock options to purchase up to an aggregate of 500,000 shares of Natrol
Common Stock. These employee options vest over a period of three years and
may be exercised at the closing price on the day of the grant.
On November 1, 1999, the Company granted certain employees of the Company and
of its wholly owned subsidiary Prolab incentive stock options to purchase up
to an
<PAGE>
aggregate of 30,000 shares of Natrol Common Stock. These employee options
vest over a period of five years and may be exercised at the closing price on
the day of the grant.
In November, 1999 the Company agreed to purchase a 132,000 sq.ft.
distribution facility within one mile of its headquarters and manufacturing
plant for $7.2 million. Approximately 50,000 sq. ft. of this facility is
currently being leased to a third party tenant. The Company anticipates
relocating the operations of its shipping facility to the new building and
subleasing its existing 25,000 sq. ft. shipping facility once the transaction
is complete. The Company anticipates that it will finance the purchase price
through a term mortgage loan and that the transaction will be complete in
mid-December 1999.
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CERTAIN RISK 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 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, including
without limitation Prolab, 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, (xxi) a
general downturn in the national economy as a whole, and (xxii) continued
market acceptance of Prolab's
<PAGE>
sports nutrition products. 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 SEPTEMBER 30, 1999 AND SEPTEMBER 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 8.6%, or $1.7 million, to $21.2 million for the three months ended
September 30, 1999 from $19.5 million for the three months ended September
30, 1998. Sales during the quarter were adversely affected by a decline in
the Company's herbal category caused primarily by a decline in the sales of
Kava Kava and St. John's Wort based products. These products received
substantial national media attention during 1998. During 1999, sales of these
products declined industry wide. Offsetting the decline in the herbal
category was $1.4 million of net revenue generated from the sale of Laci Le
Beau teas and dietary supplements. The Laci Le Beau tea business was acquired
by the Company on October 1, 1998. A combination of new product
introductions, increases of existing product sales, increased penetration in
the mass market channel of distribution, increased private contract
manufacturing, and increases in revenue from the Company's Pure-Gar
ingredient supply business were other factors which contributed to the
Company's ability post net sales gains during the three month period ending
September 30, 1999.
GROSS PROFIT. Gross profit increased 8.1%, or $825,000, to $11.0 million for
the three months ended September 30, 1999 from $10.2 million for the three
months ended September 30, 1998. Gross margin decreased to 52.0% for the
three months ended September 30, 1999 from 52.2% for the three months ended
September 30, 1998. Gross margin fluctuates from quarter to quarter depending
upon customer mix, product mix and promotional activity and, as a result, the
Company does not consider the decrease in gross margin during the quarter to
be a significant event.
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 10.7%, or $490,000, to $5.1 million for the three months ended
September 30, 1999 from $4.6 million for the three months ended September 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 17.0%, or $295,000, to $2.0 million for the three months
ended September 30, 1999 from $1.7 million for the three months ended
September 30, 1998. This increase was primarily attributable to the hiring of
more employees to 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
<PAGE>
and accounting fees, filing fees, insurance and other expenses attributable
to the Company's operation as a publicly traded company. As a result of the
Prolab acquisition the Company will record approximately $338,000 of
additional goodwill each quarter, beginning with the fourth quarter of 1999.
INTEREST INCOME. Interest income increased $14,000 to $252,000 for the three
months ended September 30, 1999 from $238,000 for the three months ended
September 30, 1998. The Company's average balance of cash and marketable
securities during the third quarter of 1999 was $25.3 million. The Company's
balance of cash and marketable securities at the beginning of the third
quarter of 1998 was $411,000 but rose to $32.1 million at the close of the
quarter due to the completion of the Company's initial public offering on
July 22, 1998. The difference in interest earned during the third quarter of
1999 when compared to the third quarter of 1998 was due to the difference in
the average balance of cash and marketable securities as well as the
difference in short-term interest rates during the respective periods.
INTEREST EXPENSE. Interest expense increased $15,000 to $47,000 for the three
months ended September 30, 1999 from $32,000 for the three months ended
September 30, 1998. The increase was a result of increased outstanding
indebtedness. See "Liquidity and Capital Resources."
INCOME TAX PROVISION. The Company's effective tax rate for both the third
quarter of 1999 and the third quarter of 1998 was 38.0%.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
NET SALES. Net sales increased 16.3%, or $8.0 million, to $56.9 million for
the nine months ended September 30, 1999 from $48.9 million for the nine
months ended September 30, 1998. Sales during the nine month period were
adversely affected by a decline in the Company's herbal category caused
primarily by a decline in the sales of Kava Kava and St. John's Wort based
products. Offsetting the decline in the herbal category was $5.1 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 post net sales
gains during the nine month period ending September 30, 1999.
GROSS PROFIT. Gross profit increased 17.4%, or $4.4 million, to $29.7 million
for the nine months ended September 30, 1999. Gross margin increased to 52.3%
for the nine months ended September 30, 1999 from 51.8% for the nine months
ended September 30, 1998. Gross margin fluctuates depending upon customer mix
and product mix. The Company does not consider the increase in gross margin
during the nine 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 increased
12.6%, or $1.6 million, to $13.9 million for the nine months ended September
30, 1999 from $12.3 million for the nine months ended September 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
increased 43.2%, or $1.8 million, to $6.1 million for the nine months ended
September 30, 1999 from $4.2 million for the nine months ended September 30,
1998. This increase was primarily attributable to the hiring of additional
staff to support and manage the Company's growth including its Pure-Gar and
Laci Le
<PAGE>
Beau divisions acquired in February and October 1998 respectively with
corresponding increases in payroll and depreciation; additional goodwill
attributable to the acquisitions; 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. As a
result of the Prolab acquisition the Company will record approximately $1.35
million of additional goodwill annually.
INTEREST INCOME. Interest income increased $443,000 to $724,000 for the nine
months ended September 30, 1999 from $281,000 for the nine months ended
September 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 $325,000 to $82,000 for the nine
months ended September 30, 1999 from $407,000 for the nine months ended
September 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 38.2%
in the nine months ended September 30, 1999 from 39.0% in the nine months
ended September 30, 1998. The increase in the income tax provision at
September 30, 1999 from September 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 September 30, 1999, the Company had working capital of $45.2
million, as compared to $35.7 million at December 31, 1998. The increase was
primarily due to an increase in trade receivables and a decrease in accounts
payable and accrued expenses that fluctuate in the normal course of the
Company's business as well as $3.5 million of cash received from the
mortgaging of its headquarters and manufacturing facility in Chatsworth,
California.
On July 27, 1998, the Company completed 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 $4.4 million for the nine
months ended September 30, 1999 as compared to $4.0 million during the nine
months ended September 30, 1998. The increase in cash provided by operating
activities was primarily due to a $1.2 million increase in net income, a $1.0
million decrease in inventories, and a $569,000 increase in depreciation and
amortization offset by an increase in accounts receivable of $3.4 million, an
increase in prepaid expenses of $316,000 and a decrease in accounts payable
and other current liabilities of $539,000. The higher level of goodwill
amortization is the result of the Pure-Gar and Laci Le Beau acquisitions
completed in February and October
<PAGE>
of 1998, respectively.
Net cash used in investing activities was $6.4 million for the nine months
ended September 30, 1999 and $11.8 million during the nine months ended
September 30, 1998. During the first nine months of 1999, the Company
invested $1.8 million in new plant, property and equipment. This investment
was offset by net changes in marketable securities of $4.6 million. 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 $647,000 to invest in property, plant, and equipment.
Cash provided by financing activities during the nine months ended September
30, 1999 was $3.5 million as opposed to the nine months ended September 30,
1998 when financing activities provided $38.1 million in cash. Net cash
provided by financing activities during the nine months ended September 30,
1999 consisted of $3.5 million received as a result of the mortgaging of the
Company's headquarters and manufacturing facility located in Chatsworth,
California as well as $116,000 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 nine
months ended September 30, 1998 consisted of $47.7 million raised from the
Company's IPO and receipt from $9 million from bank borrowings offset by
repayments of bank debt amounting to $12.6 million and the redemption of $6
million of preferred stock.
The Company's cash and marketable securities balances combined at September
30, 1999 were approximately $25.7 million. The Company used a majority of
this cash along with $6.25 million of borrowings from a $10 million line of
credit (see "Subsequent Events") established in October, 1999 to purchase
Prolab Nutrition, Inc. for $29 million in cash and 124,270 shares of the
Company's Common Stock. The Company believes that its cash balances, together
with cash generated from operations and remaining balances available from its
line of credit 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. The Company's
$10 million line of credit contains various financial covenants which are
predicated on the Company's present and projected financial condition. In the
event that future operations differ materially from what is expected, the
Company may no longer be able to meet the tests set out in the Credit
Facility. Failure to meet these tests may result in a default by the Company
under the Credit Facility which may materially adversely affect the Company's
liquidity. The Credit Facility restricts or prohibits the Company from
incurring indebtedness, incurring liens, disposing of assets or making
certain investments or acquisitions, without the consent of the lenders and
requires the Company to maintain certain financial ratios on an ongoing
basis. The Credit Facility is collateralized by pledges of all of the
outstanding capital stock of the Company's subsidiaries, and a lien on
substantially all of the assets of the Company. The Credit Facility also
restricts the Company's ability to pay dividends, repurchase stock, or make
other distributions to shareholders. Dividend payments are specifically
restricted to an amount not to exceed 25% of the Company's cash flow as
defined in the loan documents. Permitted future acquisitions, if any, could
be funded with cash-on-hand, cash from operations as well as future
borrowings that could replace the existing line of credit. Future borrowings
may also 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 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
<PAGE>
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 customers and suppliers.
The preceding "Year 2000 Readiness Disclosure" contains various forward-looking
<PAGE>
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, the Company
believes that it is not subject to significant interest rate risk. The
Company's portfolio of such assets was liquidated in October, 1999 in order
to complete the Company's acquisition of Prolab (See "Subsequent Events").
The Company is also subject to interest rate market risk associated with its
fixed rate long-term debt. However, the Company does not believe that the
risk is significant due to the low fixed rate and the insignificance of the
long-term debt to the Company's consolidated balance sheet.
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.
<PAGE>
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 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:
Underwriting discounts and commissions $3.67 million
Other expenses $1.05 million
-------------
Total expenses $4.72 million
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, (d) $5.25 million to purchase its
headquarters/manufacturing facility in December 1998 and, (e) $29.0
million of such proceeds to consummate the acquisition of Prolab on
October 8, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
none
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) 27.1 Financial Data Schedule
(b) No current reports on Form 8-K were filed by the Company during the
three month period ended September 30, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATROL, INC.
Date: 11/15/99 By: /s/ Elliott Balbert
Chairman, President and Chief Executive Officer
Date: 11/15/99 By: /s/ Dennis R. Jolicoeur
Chief Financial Officer and Executive
Vice President
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