<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 MARCH 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO ______
COMMISSION FILE NO: 0-24567
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 the issuer's common stock, as of
the latest practicable date:
Class Outstanding as of May 1, 2000
----- -------------------------------
Common stock, $0.01 par value 134,499,035
================================================================================
<PAGE>
PART 1
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
NATROL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
-----------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,472 $ 485
Accounts receivable, net of allowances of $537 and $503 at March
31, 2000 and December 31, 1999, respectively 17,643 15,777
Inventories 16,499 15,061
Deferred taxes 1,076 1,076
Income tax receivable 112 -
Prepaid expenses and other current assets 1,424 1,028
-----------------------------------------------
Total current assets 38,226 33,427
Property and equipment:
Building and improvements 15,556 15,456
Machinery and equipment 5,516 5,287
Furniture and office equipment 1,712 1,655
-----------------------------------------------
22,784 22,398
Accumulated depreciation and amortization
(3,199) (2,870)
-----------------------------------------------
19,585 19,528
Goodwill, net of accumulated amortization of $2,433 and $1,863 at March 31, 2000
and December 31, 1999, respectively 38,973 39,543
Capitalized loan fees, net of accumulated amortization of $3 and $2 at March 31,
2000 and December 31, 1999, respectively 48 49
Other assets 48 49
-----------------------------------------------
Total assets $96,880 $ 92,596
===============================================
</TABLE>
SEE ACCOMPANYING NOTES
<PAGE>
(Consolidated Balance Sheets - continued)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
-----------------------------------------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 6,250 $ 1,800
Accounts payable 8,095 7,827
Accrued expenses 2,084 2,143
Accrued payroll and related liabilities 674 1,688
Income taxes payable - 182
Current portion of long-term debt 166 161
-----------------------------------------------
Total current liabilities 17,269 13,801
Deferred income taxes, noncurrent 109 109
Long-term debt, less current portion 8,654 8,700
Commitments
Stockholders' equity:
Preferred stock, par value of $0.01 per share:
Authorized shares - 2,000,000
Issued and outstanding shares - none - -
Common stock, par value of $0.01 per share:
Authorized shares - 50,000,000
Issued and outstanding shares - 13,499,035 at March 31, 2000
and December 31, respectively 135 135
Additional paid-in capital 61,460 61,334
Retained earnings 9,807 9,071
-----------------------------------------------
71,402 70,540
Receivable from stockholder (554) (554)
-----------------------------------------------
Total stockholders' equity 70,848 69,986
-----------------------------------------------
Total liabilities and stockholders' equity $ 96,880 $ 92,596
===============================================
</TABLE>
SEE ACCOMPANYING NOTES
<PAGE>
NATROL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
2000 1999
-------------------------------------
(Unaudited)
<S> <C> <C>
Net sales $ 22,694 $ 17,837
Cost of goods sold 11,919 8,495
-------------------------------------
Gross profit 10,775 9,342
-------------------------------------
Selling and marketing expenses 6,461 4,247
General and administrative expenses 2,898 2,028
-------------------------------------
Total operating expenses 9,359 6,275
-------------------------------------
Operating income 1,416 3,067
Interest income 17 230
Interest expense (263) -
-------------------------------------
Income before income tax provision 1,170 3,297
Income tax provision 434 1,248
-------------------------------------
Net income $ 736 $2,049
=====================================
Basic earnings per share $ 0.06 $ 0.15
=====================================
Diluted earnings per share $ 0.05 $ 0.15
=====================================
Weighted average shares
outstanding - basic 13,310,142 13,301,990
=====================================
Weighted average shares
outstanding - diluted 13,559,781 13,608,803
=====================================
</TABLE>
SEE ACCOMPANYING NOTES
<PAGE>
NATROL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
2000 1999
-------------------------------------------
(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 736 $ 2,049
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 330 217
Amortization of goodwill 570 235
Provision for bad debts 34 51
Stock Issued for services 126 -
Changes in operating assets and liabilities:
Accounts receivable (1,900) (3,106)
Inventories (1,438) 1,331
Income taxes receivable/payable (294) 1,215
Deposits - (49)
Prepaid expenses and other current asset (394) (502)
Accounts payable 267 (2,067)
Accrued expenses (59) 1,196
Accrued payroll and other related liabilities (1,014) 153
-------------------------------------------
Net cash provided by (used in) operating activities (3,036) 723
INVESTING ACTIVITIES
Purchases of property and equipment (386) (534)
Purchases of marketable securities - 6,728
Sales of marketable securities - 7,197
-------------------------------------------
Net cash used in investing activities (386) (65)
FINANCING ACTIVITIES
Proceeds from line of credit, net 4,450 -
Repayments on long-term debt (41) -
-------------------------------------------
Net cash provided by financing activities 4,409 -
-------------------------------------------
Net increase in cash and cash equivalents 987 658
Cash and cash equivalents, beginning of period 485 559
===========================================
Cash and cash equivalents, end of period $ 1,472 $ 1,217
===========================================
Supplemental disclosures of cash flows information:
Cash paid for:
Interest $ 263 $ -
</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 in all material respects the consolidated financial
position of Natrol, Inc. and its subsidiaries (collectively, the "Company" or
"Natrol") as of March 31, 2000 and the results of its operations and its cash
flows for the three months ended March 31, 2000 and 1999, in conformity with
generally accepted accounting principles for interim financial information
applied on a consistent basis. The results of operations for the three months
ended March 31, 2000 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, 1999 audited consolidated financial statements
included in the Company's Form 10-K for the year ended December 31, 1999 as
filed with the Securities and Exchange Commission (file number 000-24567).
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
-------------------------
<S> <C> <C>
Raw material and packaging supplies $ 6,630 $ 6,440
Finished goods 9,869 8,621
-------------------------
$16,499 $15,061
=========================
</TABLE>
3. COMPREHENSIVE INCOME
The Company's comprehensive income items are not material at March 31, 2000 or
December 31, 1999 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 710,000 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 March 31, 1999, 25,000
options were granted.
6. SUBSEQUENT EVENTS
On April 28, 1999 the Board of Directors of the Company authorized a stock
repurchase program for the Company's Common Stock. Under the stock repurchase
program, the Company can effect stock repurchases from time to time of up to an
aggregate of $10 million of its Common Stock. The stock repurchase program has
no expiration date. The Company did not repurchase any of its Common Stock until
May 2000. As of May 10, 2000 the Company had purchased approximately 160,000
shares of its Common Stock for an aggregate purchase price of approximately
$550,000. The stock repurchase program is administered by the Company's senior
management and purchases are discretionary subject to general guidelines
promulgated by the Board of Directors. There can be no assurance that the
Company will purchase additional shares at future dates. As a general rule, the
Company will not make any public announcement with respect to any purchases
under the stock repurchase program.
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,"
<PAGE>
"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 reports on Form 10-K for the years ended December 31, 1998
and December 31, 1999, 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) an increase in returns of the Company's
products sold in past years, (vi) the Company's ability to gain or expand
distribution within new or existing accounts and new or existing channels of
trade, (vii) adverse changes in government regulation, (viii) exposure to
product liability claims,(ix) dependence on significant customers, (x) the
Company's ability to keep and attract key management employees, (xi) the
Company's inability to manage growth and execute its business plan, (xii) the
Company's ability to consummate future acquisitions and its ability to integrate
acquired businesses, including without limitation Prolab Nutrition, Inc.
("Prolab"), acquired in October, 1999, and to retain key personnel associated
with any acquisition, (xiii) the absence of clinical trials for many of the
Company's products, (xiv) the Company's inability to obtain raw materials that
are in short supply, (xv) sales and earnings volatility, (xvi) the Company's
ability to manufacture its products efficiently, (xvii) the Company's reliance
on independent brokers to sell its products, (xviii) the inability of the
Company to protect its intellectual property, (xix) control of the Company by
principal shareholders, (xx) the possible sale of large amounts of stock by
controlling shareholders, (xxi) volatility in the stock markets, (xxii) a
general downturn in the national economy as a whole, and (xxiii) continued
market acceptance of Natrol supplements, Laci Le Beau teas, Prolab's sports
nutrition products, and Essentially Pure Ingredients' raw material 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, 1999.
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 MARCH 31, 2000 AND MARCH 31, 1999
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 27.2%, or $4.9 million, to $22.7 million for the three months ended
March 31, 2000 from $17.8 million for the three months ended March 31, 1999.
$5.9 million of the quarter's revenue was generated through Prolab Nutrition,
Inc. (Prolab), a wholly owned subsidiary of the Company which was acquired in
October 1999. The gain in sales from Prolab was offset by a sales decline of $1
million in the Company's other business. The Company's herbal business, declined
by more than $2
<PAGE>
million in the first quarter of this year. This fall off was due to the
declining popularity of St. John's Wort, Gingko Biloba, Garlic and Kava Kava.
The decline in the herbal category was offset by increased sales of the
Company's other products, in particular the Company's joint care products.
GROSS PROFIT. Gross profit increased 15.4%, or $1.4 million, to $10.8 million
for the three months ended March 31, 2000 from $9.3 million for the three months
ended March 31, 1999. Gross margin decreased to 47.5% for the three months ended
March 31, 2000 from 52.4% for the three months ended March 31, 1999. The decline
was largely due to the Prolab business. Prolab's products generally have a lower
gross margin than those of the rest of the Company.
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
52.1%, or $2.3 million to $6.5 million for the three months ended March 31, 2000
from $4.2 million for the three months ended March 31, 1999. Of the $2.3 million
increase, approximately $825,000 was due to the selling and marketing expenses
related to Prolab. The remainder of the increase was to due to increased
advertising and distribution expenses of the Natrol and Laci Le Beau brands.
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 of goodwill. General and administrative expenses increased
42.9%, or $870,000, to $2.9 million for the three months ended March 31, 2000
from $2.0 million for the three months ended March 31, 1999. Of this increase,
88.5% or $771,000, including $335,000 of goodwill was attributable to the
acquisition of Prolab in October 1999. Goodwill during the three months ended
March 31, 2000 amounted to $570,000 as opposed to $235,000 for the three months
ended March 31, 1999. The remainder of the increase was due to increases
payroll, depreciation and other infrastructure expenses to support the Company's
business.
INTEREST INCOME. Interest income for the three months ended March 31, 2000
decreased to $17,000 from $230,000 for the three months ended March 31, 1999.
The Company depleted its cash balances in October, 1999 when it used
approximately $29 million of cash to complete the purchase of Prolab.
INTEREST EXPENSE. The Company recorded interest expense of $263,000 for the
three months ended March 31, 2000 as compared to no interest expense for the
three months ended March 31, 1999. The increase was due to mortgage debt
incurred during the last three quarters of 1999 to purchase the Company's 80,000
sq. ft. headquarters facility as well as a 132,000 sq. ft. shipping facility and
to interest payments made on the Company's short-term borrowings from its line
of credit.
INCOME TAX PROVISION. The Company's effective tax rate was approximately 37.1%
in the first quarter of 2000 as opposed to 37.9% in the first quarter of 1999.
The change in the income tax provision at March 31, 2000 from March 31, 1999 is
not considered material by the Company and is due to temporary differences in
the makeup of taxable and non-taxable expenses.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company had working capital of $21.0 million, as compared
to $19.6 million in working capital at December 31, 1999. The increase was
primarily due to an increase in accounts receivable and inventories and a
decrease accrued expenses including payroll.
Net cash used by operating activities was $3.0 million for the three months
ended March 31, 2000 versus cash provided of $723,000 for the three months ended
March 31, 1999. The decrease in cash provided by operating activities was
primarily due to an increase in accounts receivable of $1.9 million, an increase
in inventory of $1.4 million, an increase in prepaid expenses of $394,000, a
decrease in accrued expenses including payroll and trade payables of $806,000
during the first quarter of 2000 which were partially offset by net income of
$736,000 and $900,000 of depreciation and amortization. The Company also issued
25,000 shares of its stock valued at $126,000 in consideration for promotional
services from Ms. Cory Everson, a sports fitness expert who is endorsing
Prolab's sports nutrition products.
Net cash used in investing activities was $386,000 for the three months ended
March 31, 2000 and $65,000 during the three months ended March 31, 2000. During
the first quarter of 2000, the Company invested $386,000 in new plant, property,
& equipment.
Net cash provided by financing activities was $4.4 million for the three months
ended March 31, 2000. No cash was provided by financing activities for the three
months ended March 31, 1999. The Company borrowed $4.5 million from its line of
credit during the three months ended March 31, 2000 and repaid $41,000 of
long-term debt.
As of March 31, 2000, the Company had $15.1 million of outstanding debt. Of this
amount, $6.25 million was from the Company's $10 million line of credit
established with its prime bank, Wells Fargo, N.A., and the remainder from a
mortgage on the Company's manufacturing/headquarters facility and a mortgage on
the Company's shipping facility.
The Company's cash balance at March 31, 2000 was approximately $1.5 million. The
Company believes that this amount, together with cash generated from operations
and the cash availability 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. Future acquisitions, if any, could be funded with 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 discussions regarding such potential acquisitions. As
a general rule, the Company will publicly announce such acquisitions only after
a definitive agreement has been signed. The Company currently has no commitments
or agreements with respect to any acquisition. 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
<PAGE>
operations in future periods.
Item 3. QUANTITATIVE AND QUALITATIVE 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 changes in interest rates. The risks related to foreign currency
exchange rates are immaterial and the Company does not use derivative financial
instruments.
The Company is subject to interest rate market risk associated with its variable
rate line of credit and fixed rate long-term debt. Given the short-term nature
and variable rates on borrowings on the line, the Company does not believe that
the risk is significant. Additionally, the Company does not believe that the
risk is significant for its long-term debt due to the low fixed rate and
insignificance of the long-term debt to the Company's consolidated balance
sheet.
PART II
OTHER INFORMATION
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 March 31, 2000.
<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: 5/15/00 By: /s/ ELLIOTT BALBERT
--------------------------------------------
Chairman, President and Chief Executive Officer
Date: 5/15/00 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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,472
<SECURITIES> 0
<RECEIVABLES> 18,180
<ALLOWANCES> 537
<INVENTORY> 16,499
<CURRENT-ASSETS> 38,226
<PP&E> 22,784
<DEPRECIATION> (3,199)
<TOTAL-ASSETS> 96,880
<CURRENT-LIABILITIES> 17,269
<BONDS> 8,820
0
0
<COMMON> 135
<OTHER-SE> 70,713
<TOTAL-LIABILITY-AND-EQUITY> 96,880
<SALES> 22,694
<TOTAL-REVENUES> 22,694
<CGS> 11,919
<TOTAL-COSTS> 9,359
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 34
<INTEREST-EXPENSE> 263
<INCOME-PRETAX> 1,170
<INCOME-TAX> 434
<INCOME-CONTINUING> 736
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 736
<EPS-BASIC> $0.06
<EPS-DILUTED> $0.05
</TABLE>
