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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITIONAL REPORTS
PURSUANT TO SECTIONS 13 AND 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
/X/ FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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: 000-24567
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NATROL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-3560780
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(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)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, par value $.01 per share
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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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Registration S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K. [ ]
The aggregate market value of the shares of the registrant's Common Stock held
by non-affiliates of the registrant on March 14, 1999 was approximately $81.0
million based upon the closing price per share of the registrant's Common Stock
as reported on the Nasdaq National Market on such date. Calculations of holdings
by non-affiliates is based upon the assumption, for these purposes only, that
executive officers, directors, and persons holding 10% or more of the
outstanding Common Stock are affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of March 14, 2000, the registrant had 13,499,035 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its 2000 Annual
Meeting of Stockholders are incorporated by reference into Part III of this Form
10-K.
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NATROL, INC.
1999 ANNUAL REPORT ON Form 10-K
TABLE OF CONTENTS
PART I
Item 1. Business . . . . . . . . . . . . . . . . .. . . . . . . 4
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . .26
Item 3. Legal Matters . . . . . . . . . . . . . . . . . . . . . 27
Item 4. Submission of Matters to a Vote of Security Holders . . 27
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . 27
Item 6. Selected Consolidated Financial Data . . . . . . . . . .29
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . 30
Item 7A. Quantitative and Qualatative Disclosures About Market
Risk . . . . . . . . . . . . . . . . . . . . . . . . .38
Item 8. Financial Statements and Supplementary Data . . . . . . 38
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . 38
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
PART IV
Item 14. Exhibits, Financial Statements, Schedules, and Reports on
Form 8-K . . . . . . . . . . . . . . . . . . . . . . . .39
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report 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) 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 under the caption
"Risk Factors" and elsewhere in this report.
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PART I
ITEM 1. BUSINESS
The Company's executive offices are located at 21411 Prairie Street, Chatsworth,
California 91311 and its telephone number is 818-739-6000. Unless the context
otherwise requires the terms the "Company" and "Natrol" refer to Natrol, Inc.
and, as applicable, its direct and indirect subsidiaries.
GENERAL
Natrol manufactures and markets branded, high-quality dietary supplements,
herbal teas, nutraceutical ingredients, and more recently, through its
acquisition of Prolab Nutrition, Inc., sports nutrition products.
Supplements are sold primarily under the Company's Natrol brand. These
supplements include vitamins, minerals, hormonal supplements, herbal products,
and specialty combination formulas that contribute to an individual's mental or
physical well-being. The Company sells its products through multiple
distribution channels throughout the United States. These channels include
domestic health food stores and mass market drug, retail, and grocery store
chains. The Company also sells its products through independent catalogs,
internet shopping sites, and, to a limited degree, within select foreign
countries. The Company's strategy emphasizes building strong recognition of the
Natrol brand across multiple distribution channels through a widespread
multi-media marketing and advertising strategy.
Herbal teas are sold under the Company's Laci Le Beau brand name. The Company
uses essentially the same sales people and brokers to sell teas as it does
supplements. And, as with its supplement business, the Company's strategy
emphasizes building strong recognition of the Laci Le Beau brand across multiple
distribution channels through a widespread multi-media marketing and advertising
strategy.
The Company's recently acquired Prolab sports nutrition line of products is
targeted to body builders and health minded individuals seeking a high degree of
physical fitness. Prolab's products include supplements designed to help these
individuals gain and lose weight as well as improve muscle mass and muscle
definition. Prolab products have traditionally been sold through gyms, health
food stores, and internationally, through selected distributors. The Company's
strategy is to capitalize upon Natrol's sales force and customer relations to
broaden the distribution of Prolab products.
The Company also sells nutraceutical grade ingredients, primarily garlic,
vegetable powders, kava kava, melatonin and cetyl myristoleate complex to other
manufacturers. In the year 2000, the Company renamed its ingredient supply
division from Pure-Gar to Essentially Pure Ingredients (EPI). The Company's
strategy is to establish exclusive relationships with primary manufacturers of
raw materials and to sell these ingredients to other users of nutraceutical
grade materials.
RECENT ACQUISITIONS
In October 1999, the Company purchased all of the stock of Prolab
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Nutrition, Inc. (Prolab) for $29,000,000 in cash and 124,270 shares of Common
Stock.
Prolab is a formulator, packager and marketer of sports nutrition products
for body builders and health minded individuals sold through gyms, health
food stores and other outlets both domestically and internationally. The
Company is now integrating Prolab's business with its own. This integration
includes capitalizing upon Natrol's manufacturing, product development,
marketing and sales expertise to broaden the products offered by Prolab as
well as the channels through which Prolab sells product.
SALES
BRANDED PRODUCTS
The Company distributes its branded products primarily to domestic health food
stores and mass market drug, retail and food stores. Although the Company sells
the same Natrol or Laci Le Beau products to both the health food and mass market
channels of distribution, it has built different sales organizations to meet the
differing requirements of each channel of trade.
At the time of the Company's acquisition of Prolab, Prolab products were sold
primarily through gyms, health food stores and internationally through
designated distributors. Nearly all Prolab sales were to distributors who in
turn serviced retail accounts. Prolab sales were generated by in-house sales
representatives as Prolab did not maintain a field sales force. Post
acquisition, Natrol's field sales force in both the mass market and health
channels will represent Prolab products.
The Company sells its branded Natrol and Laci Le Beau products to health food
stores through leading national distributors, including United Natural Foods and
Tree of Life, as well as directly to GNC (General Nutrition Company). Prolab
products are also sold to health food stores through distributors and, to GNC
directly. Prolab's distributor network focuses on health food stores and gyms
that cater to body builders and other individuals seeking a high level of
fitness. Natrol and Laci Le Beau products are sold by health food store chains
such as Wild Oats Markets, Whole Foods Market, Hi-Health, Vitamin Cottage, Fred
Meyer Nutrition Centers and Vitamin Shoppes, as well as most independent health
food stores.
Within the health food channel of trade, the Company maintains a sales staff of
more than 20 representatives across the country who are managed by regional
managers who report to the Company's vice president of sales. These sales
representatives call on individual store owners and distributors promoting the
Natrol, Laci Le Beau and Prolab lines.
The mass market distribution channel is managed by the Company's Vice President
of Sales, a national manager of mass market sales and regional managers who work
with a network of independent brokers. The Company's employees service certain
of its larger mass market accounts directly while independent brokers service
others in conjunction with the Company's management. The Company sells its
products to mass market merchandisers either directly or through distributors of
vitamins, minerals and other supplement products such as Bergen Brunswick,
McKesson and Cardinal. Some of the
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Company's major mass market retail customers are Walgreens, CVS, American
Drug Stores, Rite Aid, Long's Drug, Drug Emporium, Eckerd, Snyders, Brooks
Drug, Wal-Mart, Kmart, Target, Shopko, BJ's Wholesale Club and Sam's Clubs.
The Company also sells its products in grocery stores and supermarkets,
including Dominick's, Ralphs, Von's, Schnucks, Cub Foods, Food For Less and
Wegmans.
Within each channel of trade, the Company believes that there is opportunity for
growth in that a majority of outlets that carry the Company's products only
stock a small percentage of the products the Company offers. A prime objective
of the Natrol selling effort is to increase the amount of shelf space devoted to
Company products at each location.
The Company provides retailers in both the health food store and the mass market
distribution channel with a wide array of comprehensive services tailored to
meet their individual needs. In the health food store channel, the Company's
dedicated sales force maintains direct and regular contact with key store
personnel, informing them of new product developments and industry trends,
aiding them in the design of store sets and creating merchandising programs that
promote brand and category awareness. The Company's regional sales managers and
independent brokers in the mass market distribution channel work with corporate
buyers focusing on special promotional activities and brand and category
awareness in order to gain more shelf space. The objective of these activities
is to build strong relationships with the Company's marketing partners and to
increase the number of stores carrying its products and the amount of space
allocated to, and the overall number of, the Company's products and SKUs within
each store.
The Company had no customer whose sales amounted to more than 10% of the
Company's business during 1999 as opposed to 1998 when sales to one customer,
Walgreens, amounted to 15.9% of Natrol's total revenue or $10.9 million.
PRIVATE LABEL AND INGREDIENT SUPPLY SALES
The Company manufactures certain products pursuant to contracts with customers
who distribute the products under their own private labels. Sales to private
label customers accounted for 8% of the Company's revenues for 1999.
In its bulk ingredient business, the Company primarily sells nutraceutical grade
dehydrated vegetable products, mostly garlic, to other manufacturers,
distributors and marketers of dietary supplements. Non-vegetable based products
include Melatonin and Cetyl Myristoleate. The Company obtains its bulk vegetable
ingredients from Basic Vegetable Products, Inc. (BVP) pursuant to a multi-year
supply agreement that gives the Company the exclusive right to sell BVP's
vegetable powders in the dietary supplement industry.
Bulk ingredient sales are the responsibility of the Company's Essentially Pure
Ingredients (formerly Pure Gar) division. Sales personnel from this division
call on more than 120 customers nationwide.
The Company's strategy is to establish exclusive relationships with primary
manufacturers of raw materials and to sell these ingredients to other users of
nutraceutical grade materials. The
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Company expects to broaden its product offerings as favorable distribution
opportunities arise.
MARKETING
BRANDED PRODUCTS
Management believes the Company's strategy of selling the Natrol, Laci Le Beau
and Prolab brands through all channels of distribution including the health,
mass market, convenience store, gym and internet channels distinguishes the
Company from its competition. Most competitors sell products into each channel
using different brand names within each channel. Oftentimes, in the case of the
Company's competitors, the brand sold in the health channel is positioned as the
quality brand while the mass market line is positioned as the value brand.
The Company's core strategy is to continue to build the Natrol, Laci Le Beau and
Prolab brand names within multiple channels of distribution in order to develop
increased brand awareness and strong brand recognition among consumers seeking
products with a reputation for quality. The Company believes it can leverage its
reputation for high quality products developed within the health food
distribution channel in the mass market and other channels by positioning its
products as a high quality brand rather than a value brand. By selling each
brand (Natrol, Laci Le Beau and Prolab) across multiple distribution channels
and thus maintaining in each case a single brand identity, the Company believes
it can also leverage its advertising budget across multiple distribution
channels.
The Company utilizes print, radio and television advertising as well as
cooperative and other incentive programs to build consumer awareness and
generate sales revenue. The Company spent approximately $10.9 million or nearly
13.5% of total sales in 1999 on various marketing and sales incentive programs.
The Company generally uses targeted, health-oriented magazines, such as BETTER
NUTRITION, DELICIOUS and GREAT LIFE, to support the health food store
distribution channel and uses mainstream publications such as PREVENTION,
HEALTH, USA TODAY, TV GUIDE, MCCALLS, FAMILY CIRCLE,and WOMEN'S DAY to support
the mass market distribution channel.
Throughout 1999, the Company's television commercials were featured on the
CNN/Turner Network, including CNN's Larry King Live and CNN Headline News along
with TNT and TBS programs as well as several game show programs including Wheel
of Fortune, Jeopardy and Hollywood Squares.
Radio advertising in 1999 was limited to selected opportunities throughout
the year.
The Company constantly reviews its media mix for its effectiveness in creating
consumer demand. As such, the Company's use of certain media in past operating
periods is not necessarily an indicator of media choices to be made in future
operating periods.
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PRIVATE LABEL AND INGREDIENT SUPPLY SALES
The Company does not actively market its private label business and relies on
word-of-mouth as well as the delivery of information from its sales staff,
primarily its Essentially Pure Ingredients sales people.
The Company's Essentially Pure Ingredients division relies primarily on
visibility developed through trade shows, advertising in trade publications and
brochures to supplement the sales efforts of its sales people.
PRODUCTS
The Company sells premium dietary supplements, herbal tea products, and sports
nutrition products under the respective Natrol, Laci Le Beau and Prolab brand
names. The Company's EPI division markets ingredients, mostly vegetable based
powders suitable for nutraceutical usage to other manufacturers of supplements.
The Company's core Natrol brand focuses on supplements that are in high demand
as well as specialty niche and proprietary formulations that have potentially
strong margins. The Company's supplement products include vitamins, minerals,
herbs, specialty formulations, weight control products, hormones and various
nutrients. The Company positions Natrol as a premium brand of vitamins, minerals
and other supplements rather than a value brand. The Company manufactures and
sells approximately 190 products packaged into approximately 500 SKUs.
Laci Le Beau teas are flavored herbal teas. These teas include a Dieter's tea as
well as specialty teas such as Throat Care, Tummy Care, Heavenly Nights and
traditional herbal teas such as an Echinacea, St. John's Wort, Chamomile and
Green Tea. The Laci Le Beau Line consists of more than 20 herbal teas.
The Prolab sports nutrition line focuses on products used by body builders and
other athletes who perform at a high level of fitness. Prolab products are
designed to help individuals interested in fitness improve muscle mass, manage
weight and attain higher levels of overall fitness. The product line includes
creatine, whey, and diet and hormonal formulations.
EPI sells a variety of nutraceutical powders, each of which has nutraceutical
applications. The largest category is garlic powder which is refined to have
high levels of specific nutraceutical markers that are in demand by supplement
companies.
The Company's consumer products fall into the general definition of vitamin,
minerals, and supplements. Each year the Company strives to broaden its product
offering so as to increase revenue and gross profits while lessening the
Company's dependence upon any one product.
Only one branded product, Ester-C(R) accounted for more than 10% of the
Company's revenue in 1999. A buffered form of pH-neutral Vitamin C, Natrol
considers Ester-C(R) a cornerstone product. The Company sells approximately
45 SKUs of Ester-C(R), each offering a special potency, pill count, delivery
system or specialty combination, such as Ester-C(R) with zinc. Ester-C(R)
accounted for approximately 11% of the Company's gross sales.
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The Laci Le Beau tea business accounted for approximately 8.5% of the Company's
gross sales in 1999 and the EPI ingredients business accounted for 9.9% of the
Company's business. Prolab, which was acquired at the beginning of the fourth
quarter of 1999, accounted for 18.2% of that quarter's gross revenue. The
Company anticipates that Prolab will account for approximately 20% of gross
revenue during the year 2000.
RESEARCH & PRODUCT DEVELOPMENT
The Company believes it has an excellent reputation among retailers for
introducing items at the front end of the consumer demand curve and then working
to develop brand loyalty after product introduction.
The Company's product development department consists of an internal staff of
professionals with extensive nutraceutical and scientific backgrounds. This
group of product development professionals reports to the Vice President of
Sales & Marketing and works with marketing brand managers to evaluate product
categories and SKUs for trends in sales and profitability, de-emphasizing or
dropping products when profitability or SKU velocity lags. New products are
introduced to replace slower moving products, capitalize on market trends and
diversify the Company's product offerings.
The Company has established a focused process to anticipate consumer demand,
monitor product developments within the dietary supplement industry, and
facilitate the generation of new ideas for product introductions. The Company's
product development staff constantly reviews periodicals, scientific research
and relevant clinical studies within medical journals and searches on-line
databases. The staff meets with vendors and evaluates new ingredients. The
product development team also consults scientists and employs research
consultants on a regular basis regarding new product concepts.
Before a product is introduced, the product development team reviews the safety
and efficacy of ingredients, standards for production, and with assistance from
the Company's General Counsel reviews labeling information, label claims and
potential patent, trademark, legal or regulatory issues.
The Company actively participates in and supports a number of scientific and
educational industry organizations that promote consumer well being. These
include the Citizens for Health and the National Nutritional Foods Association.
The Company is also a founding member of the Corporate Alliance for Integrative
Medicine, a not-for-profit organization funding research at Harvard University
that was created to increase knowledge and awareness of the efficacy and safety
of vitamins, herbs and other dietary supplements.
MANUFACTURING AND PRODUCT QUALITY
DIETARY SUPPLEMENTS
The Company manufactures its branded Natrol and private label supplements as
well as Prolab tablets and capsules at its 90,000 square foot manufacturing
facility/headquarters located in Chatsworth, California. In December 1998, the
Company purchased its
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manufacturing facility/headquarters for $5.25 million (see "Properties"). At
this facility, the Company manufactures both tablets and two piece capsules
which account for more than 90% of the Company's supplement sales. The
Company uses third party vendors to produce its liquid products and softgels.
The Company places a strong emphasis on quality control because it believes that
quality standards play a critical factor in consumer purchasing decisions and in
differentiating the Natrol brand. The Company's products are manufactured in
accordance with current GMPs (Good Manufacturing Practices) of the FDA for foods
and the applicable regulations of other agencies.
The Company's manufacturing facility includes an on-site laboratory which is
staffed by the director of quality assurance, bench chemists and other quality
control personnel. The Company's laboratory contains equipment for performing
testing procedures, including high performance liquid chromatography,
ultra-violet and infra-red spectrophotometer, atomic absorption and thin layer
chromatography. The Company requires all raw materials or finished product
produced by third party vendors to be placed in quarantine upon receipt and
tested by the Company's quality control laboratory. The Company conducts sample
testing, weight testing, purity testing, dissolution testing and, where
required, microbiological testing. When raw materials are released from
quarantine, each lot is assigned a unique lot number which is tracked throughout
the manufacturing process. Materials are blended, tested and then encapsulated
or formed into pills which may or may not be coated. The Company routinely
performs qualitative and quantitative quality control procedures on its finished
products.
The Company obtains its raw materials for the manufacture of its products from
third-party suppliers. Many of the raw materials used in the Company's products
are harvested internationally. With the exception of bulk garlic and Ester-C(R),
the Company does not have contracts with any suppliers committing such suppliers
to provide the materials required for the production of its products. In the
last few years, natural vitamin E, beta carotene, Melatonin, Kava, Sam-E, and
St. John's Wort have had significant price fluctuations as a result of short
supply and/ or increases in demand. The Company has experienced occasional
shortages of raw materials for a limited number of its products, but to date has
only encountered short-term production interruptions as a result of such
shortages. Only one supplier, Inter-Cal Corporation (Inter-Cal), the Company's
source for Ester-C(R) accounted for more than 10% of raw material purchases in
1999. There can be no assurance that suppliers, including the supplier of
Ester-C(R), will provide the raw materials needed by the Company in the
quantitieS requested or at a price the Company is willing to pay. Because the
Company does not control the actual production of these raw materials, it is
also subject to delays caused by interruption in production of materials based
on conditions not within its control. Such conditions include job actions or
strikes by employees of suppliers, weather, crop conditions, transportation
interruptions and natural disasters or other catastrophic events. During 1999,
BVP encountered problems due to poor crop yields of garlic and also suffered
from work stoppages due to a strike. Both of these occurrences, from time to
time, affected the Company's ability of the Company's EPI division to deliver
garlic powders in a timely manner. With respect to products that are sold by the
Company under the supplier's trademark, such as Ester-C(R), the Company is
limited to that single
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supplier as a source of raw materials for that product. As a result, any
shortage of raw materials from that supplier would adversely affect the
Company's ability to manufacture that product. The inability of the Company
to obtain adequate supplies of raw materials for its products at favorable
prices, or at all, could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company is a party to a multi-year Distributorship/Packager/Supply
Agreement (the "Inter-Cal Agreement") with Inter-Cal under which Inter-Cal is
required to supply the Company with its requirements of bulk Ester-C(R).
Ester-C(R) products accounted for approximately 11% of the Company's gross
sales in 1999. The Inter-Cal Agreement requires the Company to use its best
efforts to promote and sell Ester-C(R) vitamin products worldwide with the
exception of certain specified countries, including Australia, New Zealand
and certain European countries. The Inter-Cal Agreement may be terminated by
Inter-Cal immediately if the Company violates the terms of certain provisions
relating to distribution and packaging and may be terminated by either party
upon a default of the obligations of the other party if the default has not
been cured within 60 days.
The Company has current manufacturing capability to produce four million tablets
and capsules per eight hour shift and 420,000 bottles per week per eight hour
shift. The Company believes it can triple current sales volumes without the
necessity of expanding its current manufacturing facility. Such a tripling of
production would require additional space for the warehousing of raw material as
well as the addition of some manufacturing and packaging equipment.
The Company operates flexible manufacturing lines which enable it to shift
output efficiently among various pieces of equipment depending upon such factors
as batch size, tablets or capsule count and labeling requirements. The Company
strives to fulfill and ship all orders within 48 hours.
During 1999, the Company shipped finished product from a leased 26,000 sq. ft.
facility located less than one-quarter mile from its manufacturing facility. In
December, 1999, the Company purchased a 132,000 sq. ft. warehouse facility also
located less than one-quarter mile from its manufacturing facility.
Approximately 52,000 sq. ft. of this warehouse facility is subleased. The
remaining 80,000 sq. ft. is now being used by the Company to ship finished goods
to the Company's customers. Finished goods are transferred from the Company's
packaging lines to the shipping facility for storage prior to shipment to
customers. The Company has two years remaining on the original 26,000 sq. ft.
shipping facility used during 1999 and is now working with its real estate
broker to sub-lease the facility. The cost of this unused facility is
approximately $17,000 per month.
TEAS
The Company primarily relies upon third parties for the milling, processing and
packaging of its herbal teas. The Company directly provides a majority of the
herbs and other raw materials used in the production of its teas.
PROLAB
The Company produces, at its headquarters/manufacturing facility,
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Prolab supplements that are sold in tablet or capsule form. However, the
Company relies on third party vendors to process and package a majority of
Prolab's products which consists of powders, nutrition bars and drinks.
Prolab, at its facility in Connecticut, packages a limited amount of powdered
product which is manufactured by third party vendors.
INGREDIENT SUPPLY
The Company's Essentially Pure Ingredients division provides raw material
ingredients to the Company and approximately 120 other customers. The Company
acquires nutraceutical grade garlic and other vegetable powders pursuant to a
multi-year Supply Agreement (the "BVP Agreement") with BVP, which requires Basic
Vegetable Products to sell and the Company to purchase specified amounts of
certain vegetable, fruit, herbal and botanical products (the "BVP Products").
The BVP Agreement gives the Company the exclusive right to sell certain BVP
Products in the dietary supplement industry. The BVP Agreement may be terminated
by either party upon a material breach of the obligations of the other party, or
certain other specified conditions, if the breach is not cured within 60 days,
or within 15 days in the case of non-payment by the Company.
The EPI division may source other raw ingredients and contract for the
processing of these ingredients when management feels market conditions are such
that the purchasing and processing of these materials would be beneficial to the
Company and its customers.
TRADEMARKS AND PATENTS
The Company regards its trademarks, patent applications and other proprietary
rights as valuable assets. The Company believes that protecting its key
trademarks is crucial to its business strategy of building strong brand name
recognition and that such trademarks have significant value in the marketing of
its products. The Company may in some cases seek to protect its research and
development efforts by filing patent applications for proprietary products.
The Company's policy is to pursue registrations for all of the trademarks
associated with its key products. The Company relies on common law trademark
rights to protect its unregistered trademarks as well as its trade dress rights.
Common law trademark rights generally are limited to the geographic area in
which the trademark is actually used, while a United States federal registration
of a trademark enables the registrant to stop the unauthorized use of the
trademark by any third party anywhere in the United States. Furthermore, the
protection available, if any, in foreign jurisdictions may not be as extensive
as the protection available to the Company in the United States.
Currently, the Company has received one United States patent for its Kavatrol
product, has a second United States patent application pending for a method of
using its Kavatrol product and has received two United States patents on its
amino acid products, SAF and SAF for Kids. To the extent the Company does not
have patents on its products, another company may replicate one or more of the
Company's products.
Although the Company seeks to ensure that it does not infringe on the
intellectual property rights of others, there can be no assurance that third
parties will not assert intellectual property
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infringement claims against the Company. Natrol was contacted in June 1997 by
a third party that claimed Natrol's marketing of Melatonin infringed on the
third party's patents relating to a method of using Melatonin and sought to
license such patents to Natrol. Since Natrol does not believe its marketing
of Melatonin infringes on the third party's patent claims, Natrol has
declined to enter into a license agreement with the third party. Any
infringement claims by third parties against the Company may have a material
adverse effect on the Company's business, financial condition and results of
operations.
COMPETITION
The dietary supplement industry is highly competitive. Numerous companies, many
of which have greater size and financial, personnel, distribution and other
resources than the Company, compete with the Company in the development,
manufacture and marketing of dietary supplements. The Company's principal
competition in the health food store distribution channel comes from a limited
number of large nationally known manufacturers and many smaller manufacturers of
dietary supplements. In the mass market distribution channel, the Company's
principal competition comes from broadline manufacturers, major private label
manufacturers and other companies. In addition, several large pharmaceutical
companies, including Warner Lambert, Bayer and American Home Products, have
begun to compete with the nutritional supplement companies, especially in the
herbal market. Increased competition from such companies could have a material
adverse effect on the Company because such companies have greater financial and
other resources available to them and possess manufacturing, distribution and
marketing capabilities far greater than those of the Company. The Company also
faces competition in both the health food store and mass market distribution
channels from private label dietary supplements and multivitamins offered by
health and natural food store chains, drugstore chains, mass merchandisers and
supermarket chains.
The Company competes on the basis of product quality, pricing, customer service
and marketing support. The Company believes that it competes favorably with its
competitors on the strength of the Company's brand recognition across multiple
distribution channels, an ability to quickly develop new products with market
potential, sophisticated marketing, advertising and promotional support, product
quality and an effective sales force and distribution network.
REGULATORY MATTERS
The manufacture, packaging, labeling, advertising, promotion, distribution and
sale of the Company's products are subject to regulation by numerous
governmental agencies, the most active of which is the U.S. Food and Drug
Administration (the "FDA"), which regulates the Company's products under the
Federal Food, Drug and Cosmetic Act (the "FDCA") and regulations promulgated
thereunder. The Company's products are also subject to regulation by, among
other regulatory agencies, the Consumer Product Safety Commission, the U.S.
Department of Agriculture (the "USDA") and the Environmental Protection Agency
(the "EPA"). Advertising of the Company's products is subject to regulation by
the U.S. Federal Trade Commission (the "FTC"), which regulates the Company's
advertising under the Federal Trade Commission Act (the "FTCA"). The
manufacture, labeling and advertising of the Company's products
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are also regulated by various state and local agencies as well as each
foreign country to which the Company distributes its products.
The Dietary Supplement Health and Education Act of 1994 ("DSHEA") revised the
provisions of the FDCA concerning the regulation of dietary supplements. In the
judgment of the Company, the DSHEA is favorable to the dietary supplement
industry. The legislation for the first time defined "dietary supplement." The
term "dietary supplement" is defined as a product intended to supplement the
diet that contains one or more of certain dietary ingredients, such as a
vitamin, a mineral, an herb or botanical, an amino acid, a dietary substance for
use by man to supplement the diet by increasing the total dietary intake, or a
concentrate, metabolite, constituent, extract, or combination of the preceding
ingredients. The substantial majority of the products marketed by the Company
are regulated as dietary supplements under the FDCA.
Under the current provisions of the FDCA there are four categories of claims
that pertain to the regulation of dietary supplements. Health claims are claims
that describe the relationship between a nutrient or dietary ingredient and a
disease or health related condition and can be made on the labeling of dietary
supplements if supported by significant scientific agreement and authorized by
the FDA in advance via notice and comment rulemaking. Nutrient content claims
describe the nutritional value of the product and may be made if defined by the
FDA through notice and comment rulemaking and if one serving of the product
meets the definition. Health claims may also be made if a scientific body of the
U.S. government with official responsibility for the public health has made an
authoritative statement regarding the claim, the claim accurately reflects that
statement and the manufacturer, among other things, provides the FDA with notice
of and the basis for the claim at least 120 days before the introduction of the
supplement with a label containing the health claim into interstate commerce.
For health claims that the FDA has approved, no prior notification is required.
Statements of nutritional support or product performance, which are permitted on
labeling of dietary supplements without FDA pre-approval, are defined to include
statements that: (i) claim a benefit related to a classical nutrient deficiency
disease and discloses the prevalence of such disease in the United States; (ii)
describe the role of a nutrient or dietary ingredient intended to affect the
structure or function in humans; (iii) characterize the documented mechanism by
which a dietary ingredient acts to maintain such structure or function; or (iv)
describe general well-being from consumption of a nutrient or dietary
ingredient. In order to make a nutritional support claim the marketer must
possess substantiation to demonstrate that the claim is not false or misleading
and if the claim is for a dietary ingredient that does not provide traditional
nutritional value, prominent disclosure of the lack of FDA review of the
relevant statement and notification to the FDA of the claim is required. Drug
claims are representations that a product is intended to diagnose, mitigate,
treat, cure or prevent a disease. Drug claims are prohibited from use in the
labeling of dietary supplements.
Claims made for the Company's dietary supplement products may include statements
of nutritional support and health and nutrient content claims when authorized by
the FDA or otherwise allowed by law. The FDA's interpretation of what
constitutes an acceptable statement of nutritional support may change in the
future thereby requiring that the Company revise its labeling. The FDA recently
issued a proposed rule on what constitutes permitted
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structure/function claims as distinguished from prohibited disease claims.
Although the Company believes its product claims comply with the law,
depending on the content of the final regulation, it may need to revise its
labeling. In addition, a dietary supplement that contains a new dietary
ingredient (i.e., one not on the market before October 15, 1994) must have a
history of use or other evidence of safety establishing that it is reasonably
expected to be safe. The manufacturer must notify the FDA at least 75 days
before marketing products containing new dietary ingredients and provide the
FDA the information upon which the manufacturer based its conclusion that the
product has a reasonable expectation of safety.
The FDA issued final dietary supplement labeling regulations in 1997 that
required a new format for product labels and necessitated revising dietary
supplement product labels by March 23, 1999. All companies in the dietary
supplement industry are required to comply with these labeling regulations and
the Company believes it does comply with these regulations. The FDA has also
announced that it is considering promulgating new GMPs specific to dietary
supplements. Such GMPs, if promulgated, may be significantly more rigorous than
currently applicable GMP requirements and contain quality assurance requirements
similar to GMP requirements for drug products. Therefore, the Company may be
required to expend additional capital and resources on manufacturing in the
future in order to comply with the law.
The failure of the Company to comply with applicable FDA regulatory requirements
could result in, among other things, injunctions, product withdrawals, recalls,
product seizures, fines and criminal prosecutions.
As a result of the Company's efforts to comply with applicable statutes and
regulations, the Company has from time to time reformulated, eliminated or
relabeled certain of its products and revised certain of its advertising claims.
The Company cannot predict the nature of any future laws, regulations,
interpretations or applications, nor can it determine what effect additional
governmental regulations or administrative orders, when and if promulgated,
would have on its business in the future. They could, however, require the
reformulation of certain products to meet new standards, the recall or
discontinuance of certain products not capable of reformulation, additional
record keeping, expanded documentation of the properties of certain products,
expanded or different labeling, and/or scientific substantiation. Any or all of
such requirements could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's advertising of its dietary supplement products is subject to
regulation by the FTC under the FTCA. Section 5 of the FTCA prohibits unfair
methods of competition and unfair or deceptive acts or practices in or affecting
commerce. Section 12 of the FTCA provides that the dissemination or the causing
to be disseminated of any false advertisement pertaining to drugs or foods,
which would include dietary supplements, is an unfair or deceptive act or
practice. Under the FTC's Substantiation Doctrine, an advertiser is required to
have a "reasonable basis" for all objective product claims before the claims are
made. Failure to adequately substantiate claims may be considered either
deceptive or unfair practices. Pursuant to this FTC requirement the Company is
required to have adequate substantiation for all material advertising claims
made for its products.
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On November 18, 1998, the FTC issued "Dietary Supplements: An Advertising
Guide for Industry." This guide provides marketers of dietary supplements
with guidelines on applying FTC law to dietary supplement advertising. It
includes examples of the principles that should be used when interpreting and
substantiating dietary supplement advertising. Although the guide provides
additional explanation, it does not substantively change the FTC's existing
policy that all supplement marketers have an obligation to ensure that claims
are presented truthfully and to verify the adequacy of the support behind
such claims. The Company's General Counsel, in conjunction with outside
counsel, reviews its advertising claims.
The FTC has a variety of processes and remedies available to it for enforcement,
both administratively and judicially, including compulsory process, cease and
desist orders and injunctions. FTC enforcement can result in orders requiring,
among other things, limits on advertising, corrective advertising, consumer
redress, divestiture of assets, rescission of contracts and such other relief as
may be deemed necessary. A violation of such orders could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Advertising and labeling for dietary supplements and conventional foods are also
regulated by state and local authorities. There can be no assurance that state
and local authorities will not commence regulatory action which could restrict
the permissible scope of the Company's product claims.
Governmental regulations in foreign countries where the Company plans to
commence or expand sales may prevent or delay entry into the market or prevent
or delay the introduction, or require the reformulation, of certain of the
Company's products. Compliance with such foreign governmental regulations is
generally the responsibility of the Company's distributors for those countries.
These distributors are independent contractors over whom the Company has limited
control.
In addition, the Company has in the past, from time to time, been the subject of
investigation by the FTC, however, the Company is not currently a party to any
consent order or other decree of the FTC. The Company may be the subject of
investigation in the future. The FTC may impose limitations on the Company's
advertising of its products. Any such limitations could materially adversely
affect the Company's ability to successfully market its products.
The Company manufactures certain products pursuant to contracts with customers
who distribute the products under their own or other trademarks. Such private
label customers are subject to government regulations in connection with their
purchase, marketing, distribution and sale of such products. The Company is
subject to government regulations in connection with its manufacture, packaging
and labeling of such products. However, the Company's private label customers
are independent companies, and their labeling, marketing and distribution of
such products is beyond the Company's control. The failure of these customers to
comply with applicable laws or regulations could have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company may be subject to additional laws or regulations by the FDA or other
federal, state or foreign regulatory authorities, the
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repeal of laws or regulations which the Company considers favorable, such as
the Dietary Supplement Health and Education Act of 1994, or more stringent
interpretations of current laws or regulations, from time to time in the
future. The Company is unable to predict the nature of such future laws,
regulations, interpretations or applications, nor can it predict what effect
additional governmental regulations or administrative orders, when and if
promulgated, would have on its business in the future. They could, however,
require the reformulation of certain products to meet new standards, the
recall or discontinuance of certain products not able to be reformulated,
imposition of additional record keeping requirements, expanded documentation
of the properties of certain products, expanded or different labeling and
scientific substantiation. Any or all of such requirements could have a
material adverse affect on the Company's business, financial condition and
results of operations.
EMPLOYEES
As of March 1, 2000, the Company had approximately 316 employees. Of such
employees, approximately 50 were engaged in marketing and sales, 193 were
devoted to production and distribution and 73 were responsible for management
and administration. None of the Company's employees is covered by a collective
bargaining agreement. The Company considers its relations with its employees to
be good.
RISK FACTORS
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 filings
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 price of the Company's Common
Stock to be affected adversely include but are not limited to:
INDUSTRY TRENDS.
The total United States retail market for nutritional supplements, the vitamin,
mineral and supplement market ("VMS") is highly fragmented. Industry sources
report that the industry has grown from $6.5 billion in 1996 to $8.9 billion in
1998, a 17% growth rate. There is evidence, however that the industry rate of
growth slowed substantially during 1999.
Information Resources, Inc. ("IRI") tracks sales data within the food, drug, and
mass market channels of distribution. Its data gives evidence that the rapid
growth rate between 1996 and 1998 has slowed. Dollar sales for VMS products in
the 52 weeks ending February 6, 2000 grew 2.6% in the drug class of trade, 10.5%
in the food class of trade and 13.3% in the mass market channel of trade. Growth
across all channels combined was only 8.1% during this 52 week period.
There can be no assurance that the higher industry growth rates of prior years
can be sustained, or, if not sustained, will return. In addition, there can be
no assurance that the industry growth rate
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will not continue to decline in future operating periods. Such a failure to
sustain growth in the industry may have a material adverse effect on the
Company's ability to sustain its historic rates of growth and its results of
operations.
COMPETITION. The dietary supplement industry is highly competitive. Numerous
companies, many of which have greater size and financial, personnel,
distribution and other resources than the Company, compete with the Company in
the development, manufacture and marketing of dietary supplements. The Company's
principal competition in the health food store distribution channel comes from a
limited number of large nationally known manufacturers and many smaller
manufacturers of dietary supplements. In the mass market distribution channel,
the Company's principal competition comes from broadline manufacturers, major
private label manufacturers and other companies. In addition, large
pharmaceutical companies have begun to compete with the Company and others in
the dietary supplement industry, in particular in the herbal sector of the
business. Packaged food and beverage companies compete with the Company on a
limited basis in the dietary supplement market. Increased competition from such
companies could have a material adverse effect on the Company because such
companies have greater financial and other resources available to them and
possess manufacturing, distribution and marketing capabilities far greater than
those of the Company. The Company also faces competition in both the health food
store and mass market distribution channels from private label dietary
supplements and multivitamins offered by health and natural food store chains,
drugstore chains, mass merchandisers and supermarket chains.
EFFECT OF UNFAVORABLE PUBLICITY. The Company believes the dietary supplement
market is significantly affected by national media attention regarding the
consumption of dietary supplements. Future scientific research or publicity may
not be favorable to the dietary supplement industry or to any particular
product, and may not be consistent with earlier favorable research or publicity.
Because of the Company's dependence on consumers' perceptions, adverse publicity
associated with illness or other adverse effects resulting from the consumption
of the Company's products or any similar products distributed by other companies
and future reports of research that are perceived as less favorable or that
question earlier research could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company is highly
dependent upon consumers' perceptions of the safety and quality of its products
as well as dietary supplements distributed by other companies. Thus, the mere
publication of reports asserting that such products may be harmful or
questioning their efficacy could have a material adverse effect on the Company's
business, financial condition and results of operations, regardless of whether
such reports are scientifically supported or whether the claimed harmful effects
would be present at the dosages recommended for such products. See "Absence of
Conclusive Clinical Studies."
DEPENDENCE ON NEW PRODUCTS. The Company believes growth of its net sales is
substantially dependent upon its ability to introduce new products. The Company
seeks to introduce additional products each year. The success of new products is
dependent upon a number of factors, including the Company's ability to develop
products that will appeal to consumers and respond to market trends in a timely
manner. There can be no assurance that the Company's efforts to develop new
products will be successful or that consumers will
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accept the Company's new products. In addition, products currently
experiencing strong popularity and rapid growth may not maintain their sales
volumes over time. For example, the Company's net sales of Kava and St.John's
Wort products fell approximately 64% during 1999, from more than $11 million
in 1998 to less than $4 million in 1999.
PRODUCT RETURNS. Product returns are a recurring part of the Company's business.
Products may be returned for various reasons including expiration dates or lack
of sufficient sales velocity. The Company accrues a reserve for returns based on
historical data. There is no guarantee that future returns will be in line with
past return percentages. As such it is possible that the Company could, at some
future time, have to accept returns substantially larger in scope than those
received in the past and that these returns could have an adverse material
effect on the Company's business, financial condition and results of operations.
DISTRIBUTION GAINS. One of the Company's prime goals is to gain additional
distribution in all channels of trade that sell vitamins and supplements to
consumers. Additional distributions gains will be necessary for the Company's
business to grow. During recent years the Company has gained substantial
additional distribution in the mass market channel of distribution, in
particular, chain drug stores. During 1999, the Company gained major new
distribution with Eckerd Drug, Rite Aid, and CVS stores, three of the largest
chain drug stores in the United States. Combined these stores have more than
10,000 outlets. The Company continues to seek distribution gains with chain drug
stores as well as with food, mass market retail, internet and convenience store
accounts. In order to maintain the Company's growth rate, additional
distribution gains are important. There is no certainty that the Company will
obtain additional distribution or will be able to maintain the distribution it
has in these retail and other retail outlets. The Company's failure to make
addition distribution gains or to maintain current distribution could have an
adverse material effect on the Company's business, financial condition and
results of operations.
GOVERNMENT REGULATION. The manufacture, packaging, labeling, advertising,
promotion, distribution and sale of the Company's products are subject to
regulation by numerous governmental agencies, the most active of which is the
U.S. Food and Drug Administration (the "FDA"), which regulates the Company's
products under the Federal Food, Drug and Cosmetic Act (the "FDCA") and
regulations promulgated thereunder. The Company's products are also subject to
regulation by, among other regulatory entities, the Consumer Product Safety
Commission (the "CPSC"), the U.S. Department of Agriculture (the "USDA") and the
Environmental Protection Agency (the "EPA"). Advertising and other forms of
promotion and methods of marketing of the Company's products are subject to
regulation by the U.S. Federal Trade Commission (the "FTC"), which regulates
these activities under the Federal Trade Commission Act (the "FTCA"). The
manufacture, labeling and advertising of the Company's products are also
regulated by various state and local agencies as well as those of each foreign
country to which the Company distributes its products.
The Company's products are generally regulated as dietary supplements under the
FDCA, and are, therefore, not subject to pre-market approval by the FDA.
However, these products are subject
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to extensive regulation by the FDA relating to adulteration and misbranding.
For instance, the Company is responsible for ensuring that all dietary
ingredients in a supplement are safe, and must notify the FDA in advance of
putting a product containing a new dietary ingredient (i.e., an ingredient
not marketed for use as a supplement before October 15, 1994) on the market
and furnish adequate information to provide reasonable assurance of the
ingredient's safety. Further, if the Company makes statements about the
supplement's effects on the structure or function of the body, the Company
must, among other things, have substantiation that the statements are
truthful and not misleading. In addition, the Company's product labels must
bear proper ingredient and nutritional labeling and the Company's supplements
must be manufactured in accordance with current Good Manufacturing Practice
regulations ("GMPs") for foods. The FDA has issued an advanced notice of
proposed rulemaking to consider whether to develop specific GMP regulations
for dietary supplements and dietary supplement ingredients. Such regulations,
if promulgated, may be significantly more rigorous than current requirements
and contain quality assurance requirements similar to GMPs for drug products.
A product can be removed from the market if it is shown to pose a significant
or unreasonable risk of illness or injury. Moreover, if the FDA determines
that the "intended use" of any of the Company's products is for the
diagnosis, cure, mitigation, treatment or prevention of disease, the product
would meet the definition of a drug and would require pre-market approval of
safety and effectiveness prior to its manufacture and distribution. Failure
of the Company to comply with applicable FDA regulatory requirements may
result in, among other things, injunctions, product withdrawals, recalls,
product seizures, fines and criminal prosecutions.
The Company's advertising of its dietary supplement products is subject to
regulation by the FTC under the FTCA. Section 5 of the FTCA prohibits unfair
methods of competition and unfair or deceptive acts or practices in or affecting
commerce. Section 12 of the FTCA provides that the dissemination or the causing
to be disseminated of any false advertisement pertaining to, among other things,
drugs or foods, which includes dietary supplements, is an unfair or deceptive
act or practice. Under the FTC's "substantiation doctrine," an advertiser is
required to have a "reasonable basis" for all product claims at the time the
claims are first used in advertising or other promotions. Failure to adequately
substantiate claims may be considered either as a deceptive or unfair practice.
Pursuant to this FTC requirement, the Company is required to have adequate
substantiation for all advertising claims made about its products. The type of
substantiation will be dependent upon the product claims made. For example, a
health claim normally would require competent and reliable scientific evidence,
while a taste claim would require only survey evidence.
In recent years the FTC has initiated numerous investigations of dietary
supplement and weight loss products and companies. The FTC is reexamining its
regulation of advertising for dietary supplements and has announced that it will
issue a guidance document to assist dietary supplement marketers in
understanding and complying with the substantiation requirement. Upon release of
this guidance document, Natrol will be required to evaluate its compliance with
the guideline and may be required to change its advertising and promotional
practices.
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On two occasions, claims made by the Company have been the subject of
investigation by the FTC. In both matters, the FTC terminated its investigation
without further action or any formal findings. The Company is not currently a
party to any investigation, consent order or other decree of the FTC. The
Company may be subject to investigation by the FTC in the future. If the FTC has
reason to believe the law is being violated (e.g., the Company does not possess
adequate substantiation for product claims), it can initiate enforcement action.
The FTC has a variety of processes and remedies available to it for enforcement,
both administratively and judicially, including compulsory process authority,
cease and desist orders and injunctions. FTC enforcement could result in orders
requiring, among other things, limits on advertising, consumer redress,
divestiture of assets, rescission of contracts and such other relief as may be
deemed necessary. Violation of such orders could result in substantial financial
or other penalties. Any such action by the FTC could materially adversely affect
the Company's ability to successfully market its products.
The Company manufactures certain products pursuant to contracts with customers
who distribute the products under their own or other trademarks. Such private
label customers are subject to government regulations in connection with their
purchase, marketing, distribution and sale of such products, and the Company is
subject to government regulations in connection with its manufacture, packaging
and labeling of such products. However, the Company's private label customers
are independent companies, and their labeling, marketing and distribution of
such products is beyond the Company's control. The failure of these customers to
comply with applicable laws or regulations could have a material adverse effect
on the Company's business, financial condition and results of operations.
Governmental regulations in foreign countries where the Company plans to
commence or expand sales may prevent or delay entry into the market or prevent
or delay the introduction, or require the reformulation, of certain of the
Company's products. Compliance with such foreign governmental regulations is
generally the responsibility of the Company's distributors in those countries.
These distributors are independent contractors over whom the Company has limited
control.
The Company may be subject to additional laws or regulations by the FDA or other
federal, state or foreign regulatory authorities, the repeal of laws or
regulations which the Company considers favorable, such as the Dietary
Supplement Health and Education Act of 1994 ("DSHEA"), or more stringent
interpretations of current laws or regulations, from time to time in the future.
The Company is unable to predict the nature of such future laws, regulations,
interpretations or applications, nor can it predict what effect additional
governmental regulations or administrative orders, when and if promulgated,
would have on its business in the future. They could, however, require the
reformulation of certain products to meet new standards, the recall or
discontinuance of certain products that cannot be reformulated, imposition of
additional record keeping requirements, expanded documentation of the properties
of certain products, or expanded or different labeling or scientific
substantiation. Any or all of these requirements could have a material adverse
effect on the Company's business, financial condition and results of operations.
PRODUCT LIABILITY. The Company, like other retailers, distributors
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and manufacturers of products designed for human consumption, faces an
inherent risk of exposure to product liability claims in the event that the
use of its products results in injury. The Company may be subjected to
various product liability claims, including, among others, that its products
include inadequate instructions for use or inadequate warnings concerning
possible side effects and interactions with other substances. In addition,
although the Company maintains strict quality controls and procedures,
including the quarantine and testing of raw materials and qualitative and
quantitative testing of selected finished products, there can be no assurance
that the Company's products will not contain contaminated substances. In
addition, in certain cases the Company relies on third party manufacturers
for its products. With respect to product liability claims, the Company has
$2.0 million in aggregate liability insurance. If such claims should exceed
$2.0 million, the Company has excess umbrella liability insurance of up to
$25.0 million. However, there can be no assurance that such insurance will
continue to be available at a reasonable cost, or, if available, will be
adequate to cover liabilities. The Company generally seeks to obtain
contractual indemnification from parties supplying raw materials for its
products or manufacturing or marketing its products, and to be added as an
additional insured under such parties' insurance policies. Any such
indemnification or insurance, however, is limited by its terms and any such
indemnification, as a practical matter, is limited to the creditworthiness of
the indemnifying party. In the event that the Company does not have adequate
insurance or contractual indemnification, product liabilities relating to its
products could have a material adverse effect on the Company's business,
financial condition and results of operations.
DEPENDENCE ON SIGNIFICANT CUSTOMERS. No customer during 1999 accounted for more
than 10% of the Company's business. However, the Company's top 10 customers
account for approximately 51% of the Company's business. The loss of any one of
these customers would have an adverse effect on the Company's growth rate. The
Company does not have long-term contracts with any of its customers. There is no
assurance that the Company's major customers will continue as major customers of
the Company. The loss of a significant number of other major customers, or a
significant reduction in purchase volume by or financial difficulty of such
customers, for any reason, could have a material adverse effect on the Company's
business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL. The Company believes that its continued success
depends to a significant extent on the management and other skills of Elliott
Balbert, the Company's Chairman, Chief Executive Officer and President, and its
senior management team, as well as its ability to attract other skilled
personnel. The Company's employees are not covered by a non-competition
agreement, and the ability of the Company to enforce such an agreement in
California, the state in which the Company's operations are principally located,
is limited and uncertain. The loss or unavailability of the services of Mr.
Balbert or the other members of the Company's senior management team or the
inability to attract other skilled personnel could have a material adverse
effect on the Company's business, financial condition and results of operations.
ABILITY TO MANAGE GROWTH. The Company believes that continued growth may strain
the Company's management, operations, sales and administrative personnel and
other resources. In order to serve the needs of its existing and future
customers, the Company has
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increased and intends to continue to increase its workforce, which requires
the Company to attract, train, motivate, manage and retain qualified
employees. The Company's ability to manage further growth depends in part
upon the Company's ability to expand its operating, management, information
and financial systems, and production capacity, which may significantly
increase its future operating expenses. No assurance can be given that the
Company's business will grow in the future or that the Company will be able
to effectively manage such growth. The Company's inability to manage its
growth successfully could have a material adverse effect on the Company's
business, financial condition and results of operations.
RISKS ASSOCIATED WITH ACQUISITIONS. The Company completed one acquisition in
1999, two acquisitions in 1998, and, expects to pursue additional acquisitions
in the future as a part of its business strategy. The Company faces significant
competition for acquisition opportunities from numerous companies, many of which
have greater financial resources than the Company. Accordingly, there can be no
assurance that attractive acquisition opportunities will be available to the
Company. There can be no assurance that the Company will be able to obtain
financing for or otherwise consummate any future acquisitions. Moreover,
acquisitions involve numerous risks, including the risk that the acquired
business will not perform in accordance with expectations, difficulties in the
integration of the operations and products of the acquired businesses with those
of the Company, the diversion of the management's attention from other aspects
of the Company's business, the risks associated with entering geographic and
product markets in which the Company has limited or no direct prior experience
and the potential loss of key employees of the acquired business. The Company is
currently working to integrate its Prolab acquisition, completed in October
1999. The Prolab acquisition is subject to all of the risks listed above.
The acquisition of another business can also subject the Company to liabilities
and claims arising out of such business. Future acquisitions would likely
require additional financing, which would likely result in an increase in the
Company's indebtedness or the issuance of additional capital stock, which may be
dilutive to the Company's stockholders, including purchasers of shares offered
hereby.
The Company's acquisitions resulted in a significant increase in the Company's
goodwill and any future acquisitions may result in additional goodwill and
related amortization expense. At December 31, 1999, goodwill on the Company's
balance sheet was $39.5 million, 42.7% of the Company's total assets at that
date. In the event of any sale or liquidation of the Company or a portion of its
assets, there can be no assurance that the value of the Company's intangible
assets will be realized. In addition, the Company continually evaluates whether
events and circumstances have occurred indicating that any portion of the
remaining balance of the amount allocable to the Company's intangible assets may
not be recoverable. When factors indicate that the amount allocable to the
Company's intangible assets should be evaluated for possible impairment, the
Company may be required to reduce the carrying value of such assets. Any future
determination requiring the write-off of a significant portion of unamortized
intangible assets could have a material adverse effect on the Company's
business, financial condition and operating results.
The Company regularly evaluates potential acquisitions of other
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<PAGE>
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.
ABSENCE OF CONCLUSIVE CLINICAL STUDIES. Although many of the ingredients in the
Company's products are vitamins, minerals, herbs and other substances for which
there is a long history of human consumption, some of the Company's products
contain ingredients for which no such history exists. In addition, although the
Company believes all of its products are safe when taken as directed by the
Company, there is little long-term experience with human consumption of certain
of these product ingredients in concentrated form. Accordingly, there can be no
assurance that the Company's products, even when used as directed, will have the
effects intended or will not have harmful side effects. Any such unintended
effects may result in adverse publicity or product liability claims which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
RISKS ASSOCIATED WITH SUPPLY OF RAW MATERIALS. The Company obtains all of its
raw materials for the manufacture of its products from third-party suppliers.
Many of the raw materials used in the Company's products are harvested
internationally. With the exception of bulk garlic and Ester-C(R), thE Company
does not have contracts with any suppliers committing such suppliers to provide
the materials required for the production of its products. In the last few
years, natural vitamin E, beta carotene and Melatonin have had significant price
fluctuations as a result of short supply and/ or increases in demand. The
Company has experienced occasional shortages of raw materials for a limited
number of its products. There can be no assurance that suppliers, including
suppliers of bulk garlic and Ester-C(R), will provide the raw materials needed
by the Company in the quantities requested or at A price the Company is willing
pay. Because the Company does not control the actual production of these raw
materials, it is also subject to delays caused by interruption in production of
materials based on conditions not within its control. Such conditions include
job actions or strikes by employees of suppliers, weather, crop conditions,
transportation interruptions and natural disasters or other catastrophic events.
During 1999, BVP, the Company's supplier of bulk garlic, experienced work
stoppages due to a strike as well as supply problems due to a poor harvest of
garlic bulbs. With respect to products that are sold by the Company under the
supplier's trademark, such as Ester-C(R), the Company is limited to that single
supplier as a source of raw material for that product. As a result, any shortage
of raw materials from that supplier would adversely affect the Company's ability
to manufacture that product. The inability of the Company to obtain adequate
supplies of raw materials for its products at favorable prices, or at all, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
SALES AND EARNINGS VOLATILITY. The Company's sales and earnings continue to be
subject to volatility based upon, among other things: (i) trends and general
conditions in the dietary supplement industry and the ability of the Company to
recognize such trends and effectively introduce and market new products in
response to such trends; (ii) the introduction of new products by the Company or
its competitors; (iii) the loss of one or more significant customers; (iv)
increased media attention on the use and efficacy of dietary supplements; (v)
consumers' perceptions of the products
24
<PAGE>
and operations of the Company or its competitors; and (vi) the availability
of raw materials from suppliers. Sales and earnings volatility as a result of
the foregoing factors may affect the Company's operating results from period
to period which may adversely affect the market price of the Common Stock.
POSSIBLE VOLATILITY OF STOCK PRICE. There can be no assurance that an active
market in the Company's stock will be sustained. The trading price of the Common
Stock has been subject to wide fluctuations.
The price of the Common Stock may fluctuate in the future in response to
quarter-to-quarter variations in the Company's operating results, material
announcements by the Company or its competitors, governmental regulatory action,
conditions in the dietary supplement industry, or other events or factors, many
of which are beyond the Company's control. In addition, the stock market has
historically experienced significant price and volume fluctuations which have
particularly affected the market prices of many dietary supplement companies and
which have, in certain cases, not had a strong correlation to the operating
performance of such companies. The Company's operating results in future
quarters may be below the expectations of securities analysts and investors. In
such event, the price of the Common Stock would likely decline, perhaps
substantially.
RISKS ASSOCIATED WITH MANUFACTURING. The Company's results of operations are
dependent upon the continued operation of its manufacturing facility in
Chatsworth, California, at its current levels. The operation of dietary
supplement manufacturing plants involves many risks, including the breakdown,
failure or substandard performance of equipment, natural and other disasters,
and the need to comply with the requirements of directives of government
agencies, including the FDA. In particular, the Company's manufacturing
facility is located in southern California, a geographic area that has
historically been prone to earthquakes, which in some cases have been
catastrophic. Prior to the Company's build-out of the building in which its
manufacturing facility is located, the building was severely damaged in a
major earthquake on January 17, 1994, the epicenter of which was within five
miles of the building. Although the building was rebuilt with an enhanced
ability to withstand earthquakes and conforms to current local and state code
requirements, the Company's manufacturing facility could be damaged or
destroyed in the event of an earthquake. Any such damage or destruction would
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company carries earthquake insurance on its
manufacturing facility but does not carry such insurance on its distribution
facility. In addition, the Company's softgel and liquid products, the Laci Le
Beau tea products as well as all of Prolab's non-tablet and capsule products
are manufactured by third party contractors. The Company's profit margins on
these products and its ability to deliver these products on a timely basis
are dependent on the ability of the outside manufacturers to continue to
supply products that meet the Company's quality standards in a timely and
cost-efficient manner. The occurrence of any of the foregoing or other
material operational problems could have a material adverse effect on the
Company's business, financial condition and results of operations during the
period of such operational difficulties.
RELIANCE ON INDEPENDENT BROKERS. The Company places significant reliance on a
network of independent brokers to act as its primary
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<PAGE>
sales force to mass market retailers. Although the Company employs management
personnel, including regional sales managers, to closely monitor the brokers,
such brokers are not employed or otherwise controlled by the Company and are
generally free to conduct their business at their own discretion. Although
these brokers enter into contracts with the Company, such contracts typically
can be terminated upon 30 days notice by the Company or the independent
broker. The simultaneous loss of the services of a number of these
independent brokers could have a material adverse effect on the Company's
business, financial condition and results of operations
INTELLECTUAL PROPERTY PROTECTION. The Company's policy is to pursue
registrations for all of the trademarks associated with its key products. The
Company relies on common law trademark rights to protect its unregistered
trademarks as well as its trade dress rights. Common law trademark rights
generally are limited to the geographic area in which the trademark is actually
used, while a United States federal registration of a trademark enables the
registrant to stop the unauthorized use of the trademark by any third party
anywhere in the United States. The Company intends to register its trademarks in
certain foreign jurisdictions where the Company's products are sold. However,
the protection available, if any, in such jurisdictions may not be as extensive
as the protection available to the Company in the United States.
Currently, the Company has received one United States patent for its Kavatrol
product, has a second United States patent application pending for a method of
using its Kavatrol product and has received two United States patents on its
amino acid products, SAF and SAF for Kids. To the extent the Company does not
have patents on its products, another company may replicate one or more of the
Company's products.
Although the Company seeks to ensure that it does not infringe the intellectual
property rights of others, there can be no assurance that third parties will not
assert intellectual property infringement claims against the Company. Natrol was
contacted in June 1997 by a third party that claimed Natrol's marketing of
Melatonin infringed the third party's patents relating to a method of using
Melatonin and sought to license such patents to Natrol. Since Natrol does not
believe its marketing of Melatonin infringes the third party's patent claims,
Natrol has declined to enter into a license agreement with the third party. Any
infringement claims by third parties against the Company may have a material
adverse effect on the Company's business, financial condition and results of
operations.
ITEM 2. PROPERTIES
In December 1998, the Company purchased, for $5.25 million, the 90,000 square
foot manufacturing, distribution and office facility in Chatsworth, California
it had been leasing. The Company has occupied this facility since March 1997.
The facility was designed and constructed to the Company's specifications and
includes areas for receiving, quarantine of new materials, manufacture, quality
control and laboratory activities, research and development, packaging,
warehousing and administrative offices.
On March 1, 1999 the Company commenced leasing a 26,640 square foot shipping
facility located within one-quarter mile of its headquarters facility in
Chatsworth, California. The Company vacated this building when it purchased, in
December 1999, a
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<PAGE>
132,000 square foot warehouse facility for $7.2 million. This facility is
also located within one-quarter mile of the Company's headquarters facility.
The Company has approximately two years left to fulfill on the lease of the
26,640 square foot shipping facility leased in March, 1999. The Company is
working with its real estate broker to sublease this facility. The
approximate cost to the Company of this facility is $17,000 per month.
The Company also leases 6,800 square feet of space in Chatsworth, California
that is subleased for the remainder of the term of the lease on this space.
ITEM 3. LEGAL MATTERS
From time to time the Company is subject to litigation incidental to its
business, including possible product liability claims. Such claims, if
successful, could exceed applicable insurance coverage.
The Company is not currently a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the calendar year 1999, no matters were submitted
to a vote of the security holders of the Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Common Stock of the Company has traded on the Nasdaq National Market under
the symbol "NTOL" since the Company's initial public offering ("IPO") in July
1998, in which 3,200,000 shares of Common Stock were issued and sold by the
Company. The Company sold an additional 295,500 shares in connection with the
underwriter's exercise of their over-allotment option in the IPO. Prior to the
IPO, there was no market for the Common Stock. On March 14, 2000, the last
reported sales price of the Company's Common Stock as reported on the Nasdaq
National Market was $6.00. As of March 24, 2000 there were 21 holders of record
of the Company's Common Stock.
The high and low sales prices for the Common Stock as reported by the Nasdaq
National Market for the period ended December 31, 1998 and the year ended
December 31, 1999 are set below:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, 1998 HIGH LOW
- ----------------------------------- ---- ---
<S> <C> <C>
Quarter ended September 30, 1998 (from July 27, 1998) $17.88 7.44
Quarter ended December 31, 1998 15.63 6.13
FISCAL YEAR ENDED DECEMBER 31, 1999 HIGH LOW
- ----------------------------------- ---- ---
<S> <C> <C>
Quarter ended March 31, 1999 $10.63 $5.88
Quarter ended June 30,1999 9.03 5.75
Quarter ended September 30, 1999 9.06 6.75
Quarter ended December 31, 1999 9.13 7.00
</TABLE>
DIVIDEND POLICY
The Company currently intends to retain earnings to finance its operations and
future growth and does not anticipate paying dividends on its Common Stock in
the foreseeable future. Under Delaware law, the Company is permitted to pay
dividends only out of
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<PAGE>
its surplus, or, if there is no surplus, out of its net profits. The
Company's line of credit limits the Company's ability to issue dividends paid
during any fiscal year to a maximum of 25% of the Company's Cash Flow (as
defined in the loan documents) for the prior fiscal year. At some future
date, the Company may enter into similar loan agreements that have similar or
more restrictive covenants with respect to the payment of dividends to the
Company's shareholders.
RECENT SALES OF UNREGISTERED SECURITIES
On October 8, 1999, the Company issued an aggregate of 124,270 shares of Common
Stock to the then current stockholders of Prolab in connection with the
Company's acquisition of all of the issued and outstanding capital stock of
Prolab. The Company issued the shares of Common Stock to the then current
stockholders of Prolab in a private placement in reliance on Rule 506 of
Regulation D promulgated under the Securities Act of 1933, as amended.
USE OF PROCEEDS
The Company completed 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.
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, (d) $5.25
million to purchase its headquarters/ manufacturing facility in December 1998
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<PAGE>
(e) and the balance to consummate the acquisition of Prolab Nutrition, Inc.
in October 1999.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data is derived from the consolidated financial
statements of Natrol, Inc. and subsidiaries, which have been audited by Ernst &
Young LLP, independent auditors. The data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of the
Company and Notes thereto included herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
(in thousands except per share data)
CONSOLIDATED STATEMENT OF INCOME DATA:
Net sales................................ $23,566 $40,802 $42,875 $68,207 $81,590
Cost of goods sold....................... 12,214 18,497 19,800 32,012 39,850
------- ------- ------- ------- -------
Gross profit.......................... 11,352 22,305 23,075 36,195 41,740
------- ------- ------- ------- -------
Selling and marketing expenses........... 4,458 8,736 11,398 17,757 18,916
General and administrative expenses...... 3,378 5,431 4,450 6,513 8,542
------- ------- ------- ------- -------
Total operating expenses.............. 7,836 14,167 15,848 24,270 27,458
------- ------- ------- ------- -------
Operating income......................... 3,516 8,138 7,227 11,925 14,282
------- ------- ------- ------- -------
Interest income (expense), net........... (19) 54 (220) 197 538
------- ------- ------- ------- -------
Income before income tax provision....... 3,497 8,192 7,007 12,122 14,820
Income tax provision..................... 1,453 2,299(1) 2,816 4,606 5,632
------- ------- ------- ------- -------
Net income............................... $ 2,044 $ 5,893 $ 4,191 $ 7,516 $ 9,188
------- ------- ------- ------- -------
Basic earnings per share................. $ 0.34 $ 0.94 $ 0.59 $ 0.76 $ 0.69
Diluted earnings per share............... $ 0.34 $ 0.83 $ 0.41 $ 0.63 $ 0.67
Weighted average shares outstanding-basic 6,000 6,275 7,100 9,854 13,325
Weighted average shares
outstanding-diluted.................. 6,000 7,065 10,273 11,891 13,638
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1995 1996 1997 1998 1999
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
(in thousands except per share data)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 515 $ 285 $ 1,800 $ 559 $ 485
Marketable securities.............................. - - - 19,010 -
Working capital.................................... 2,741 4,496 8,424 35,673 19,626
Total assets....................................... 7,608 11,345 19,716 68,708 92,596
Long-term debt, less current maturities............ 67 405 2,606 - 8,700
Convertible participating preferred stock.......... - 12,000 12,000 - -
Total stockholders' equity (deficit)............... 3,303 (5,755) (1,564) 59,641 69,986
Cash dividend declared per common share............ $ 0.00 $0.55 $ 0.00 $0.00 $0.00
</TABLE>
- -----------
(1) In 1996, the Company was taxed under Subchapter S of the Internal
Revenue Code for the period from July 1, 1996 through September 29,
1996, and was taxed under Subchapter C of the Internal Revenue Code for
the period from January 1, 1996 through June 30, 1996 and for the
period from September 30, 1996 through December 31, 1996. Accordingly,
the provision for income taxes for the period in which the Company was
taxed as a Subchapter S corporation reflects primarily state income
tax, if any. If the Company had been subject to taxation under
Subchapter C of the Code for the entire year ended December 31, 1996,
the pro forma provision for income taxes would have been $3.2 million
and pro forma basic earnings per share and pro forma diluted earnings
per share would have been $0.80 and $0.71, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE "SELECTED CONSOLIDATED
FINANCIAL DATA" AND THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE
COMPANY AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS DOCUMENT.
OVERVIEW
Natrol's core business is the manufacturing and marketing of branded,
high-quality dietary supplements.
The Company sells its core products under the Natrol brand name through
multiple distribution channels throughout the United States, including
domestic health food stores and mass market drug, retail and grocery store
chains.
In addition to the core brand, Natrol sells herbal teas under the Laci Le Beau
brand name within the same channels of trade as the Natrol core brand. The
Company also markets sports nutrition products under the Prolab brand name.
Prolab products are sold primarily in the health food store channel of trade as
well as health clubs and gyms and internationally in select countries through
international distributors. The Company acquired the Laci
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<PAGE>
Le Beau brand of teas in October 1998 and the Prolab sports nutrition line of
products in October 1999. The Company is now expanding the distribution of
Prolab products into the mass market channel of trade.
Another aspect of the Company's business is the marketing of nutraceutical
grade raw materials, primarily garlic and other vegetable powders to other
manufacturers of nutritional supplement products.
The Company also manufactures certain products pursuant to contracts with
customers who distribute the products under their own private labels. Sales
to private label customers accounted for 8% of the Company's revenues for
1999. Approximately 66% of private label sales in 1999 were to one customer
which the Company believes was a one time opportunity and will not be
repeated in the year 2000. The Company's strategy with respect to private
label sales is to take advantage of its excess manufacturing capacity by
offering to manufacture products for other vendors. The Company does not
foresee adding capacity in order to meet private label demand and as such it
does not foresee private label sales growing as a percentage of its total
business.
The growth of the Company's revenue has been a result of success in gaining
additional distribution in new retail outlets and new channels of distribution;
new product introductions, as well as the addition of new product lines and
businesses through acquisition.
For example in 1995, the Company began a major effort to break into the mass
market channel of distribution. Sales in that channel have since grown to more
than 50% of the Company's branded business. Natrol products are now visible in
such stores as Walgreens, Rite Aid, Walmart, Eckerd, CVS, and Target. More
recently the Company has made progress in the internet channel of distribution.
The customer's internet customers include Vitamin Shoppes, Planetrx and
Mothernature.
Natrol's growth has been supported by the introduction of new products.
Melatonin, DHEA, St. John's Wort, and MSM were introduced in 1995, 1996,
1997, and 1998 respectively and have heavily affected sales in each of those
years as well as the year following. Typically, hot new products attract a
wide audience that drives high volumes of initial sales. These high volumes
generally taper off as fad users stop using the product. While hot products
sales can fade, sales of such products typically reach a base level that is
sustained by a core group of users. The length of these cycles can vary from
less than a year to several years. Melatonin, DHEA and St. John's Wort have
all cycled in this fashion. In each case the base level of sales fell to
below 50% of the product's peak. During 1999, for example, St John's Wort
sales decreased 51% from 1998's level. The Company is not certain that this
product has yet reached its base level and sales of St. John's Wort products
could fall further from the peak level reached in 1998. Offsetting the fall
in St. John's Wort were sales of the Company's MSM line of products
introduced in 1998 with broader distribution occurring in 1999. The Company
continually works to develop new products that can replace or supercede older
products whose popularity might be fading.
The Company has also grown through acquisitions, completing two in 1998 and one
in 1999. Each acquisition introduced the Company to
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<PAGE>
a new line of business. The EPI ingredient supply business, acquired in early
1998 (the Pure Gar acquisition) accounted for 9.9% of the Company's gross
sales in 1999. The Laci Le Beau tea business, also acquired in 1998,
accounted for approximately 8.5% of the Company's gross sales in 1999.
Prolab, which was acquired at the beginning of the fourth quarter of 1999,
accounted for 18.2% of that quarter's gross revenue. The Company anticipates
that Prolab will account for approximately 20% of the Company's gross revenue
during the year 2000.
As part of its business strategy, the Company expects to continue to consider
acquisitions that management believes are synergistic to the Company's core
business and which will be accretive to shareholders.
ACQUISITIONS DURING 1998 & 1999
During 1998, the Company completed two acquisitions.
On February 27, 1998, the Company acquired substantially all of the assets
and certain liabilities of Pure-Gar, L.P. The acquisition involved the
purchase of two brands of garlic supplements, Quintessence and Highgar Farms,
as well as a bulk ingredient business. In connection with the acquisition,
the Company recorded a purchase price of $11.0 million with $9.0 million of
goodwill which is being amortized on a straight line basis over 15 years,
amounting to $600,000 of annual amortization expense. Upon completing the
acquisition, the Company began the process of developing its own Garlipure
line of Natrol garlic supplements and then filling shelf space formerly
allocated by retailers to the acquired Highgar Farms and Quintessence lines
with its Garlipure line.
Many of the Company's ingredient customers are direct competitors to the
Company's core branded Natrol business and as such the Company maintains a
"Chinese Wall" between its Pure-Gar division and the rest of the Company. The
purpose is to ensure that Pure-Gar customer sales information is not
transferred to the rest of the Company. The Company's Pure-Gar ingredient
supply business was renamed Essentially Pure Ingredients in January, 2000.
On October 1, 1998, the Company acquired certain of the assets of Laci Le Beau
which consisted of Laci Le Beau Corporation as well as certain related
companies. The total purchase price for the acquisition was $7.5 million in
cash. Laci Le Beau is a formulator, packager and distributor of specialty teas
sold through the health channel of distribution as well as in food stores, drug
stores and mass market merchandisers. These channels of distribution are
essentially the same as those used by the Company's Natrol branded products.
Under the terms of the acquisition agreement, the Company acquired no accounts
receivable, nor did it assume any liabilities of Laci Le Beau. The acquisition
is being accounted for using the purchase method, and, accordingly, the assets
acquired are recorded at their estimated fair values. The excess of the cost of
the acquisition over the fair value of the assets purchased was approximately
$5.0 million and is being amortized over 15 years.
In October, 1999, the Company purchased all of the stock of Prolab Nutrition,
Inc. (Prolab) for $28,500,000 in cash and 124,270 shares of Common Stock. Prolab
is a formulator, packager and
32
<PAGE>
marketer of sports nutrition products for body builders and health minded
individuals through gyms, health food stores and other outlets both
domestically and internationally. Included in the purchase price were assets,
consisting of cash of $2,259,722, trade accounts receivables of $3,667,046,
inventories of $2,063,180, fixed assets of 1,125,280 and other assets of
$623,054, and liabilities assumed consisting of accounts payable of
$3,667,832, accrued expenses of $2,033,960, debt of $763,836. The acquisition
was accounted for using the purchase method, and accordingly, the acquired
assets and liabilities assumed are recorded at their estimated fair values
with revenues and expenses from the date of acquisition included in the
consolidated statement of income. The excess of cost over the fair value of
net assets acquired will be amortized over twenty years. The approximately
$27 million of goodwill is not deductible for tax purposes.
CAPITAL ADDITIONS
The Company purchased a warehouse/shipping facility in 1999 for $7.2 million.
Other capital expenditures amounted to $2.1 million not including approximately
$1.1 million of property and equipment purchased as part of the Prolab
acquisition. The Company purchased its headquarters facility in December, 1998
for $5.3 million. Other capital additions in fiscal 1998 amounted to $861,000.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET REVENUE. Net revenue in 1999 increased 19.6% to $81.6 million from $68.2
million in 1998. Of the $13.4 million increase, $4.8 million was due to sales
generated by Prolab Nutrition, Inc. which was acquired at the beginning of
October, 1999. Another $7.2 million in sales was generated through the sale of
Laci Le Beau teas which was acquired in October 1998. During 1998, Laci Le Beau
tea sales generated $1.6 million in sales revenue. The EPI raw material
division, originally acquired in late February 1999 (the Pure-Gar acquisition)
generated $6.8 million in sales revenue during 1999. During 1998, $6.5 million
of sales revenue was generated from the sale of raw material ingredients,
primarily nutraceutical grade garlic, attributable to the acquisition of EPI.
Only one product, Ester-C(R) with approximately 11% of revenue accounted for
more than 10% of the Company's revenue. No other product accounted for more
than 10% of the Company's revenues in 1999.
GROSS PROFIT. Gross profit increased 15.3% to $41.7 million, or $5.5 million,
in 1999 versus $36.2 million in 1998. The gross margin decreased slightly to
51.2% in 1999 from 53.1% in 1998. The decrease was due primarily to shifts in
product mix, including the addition of the Laci Le Beau tea business
(operational for one quarter in 1998) and the Prolab Nutrition business each
of which operates with a lower gross margin than the Natrol core brand.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased 6.5%,
or $1.1 million, to $18.9 million in 1999 from $17.8 million in 1998. As a
percentage of net sales, selling and
33
<PAGE>
marketing expenses decreased to 23.2% in 1999 from 26.0% in 1998. The
decrease was due to sales growth being more rapid in percentage terms than
the growth in corresponding payroll or consumer marketing expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 31.2%, or $2.0 million, to $8.5 million in 1999 from $6.5 million
in 1998. As a percentage of net sales, general and administrative expenses
increased to 10.5% in 1999 from 9.6% in 1998. Of the absolute dollar
increase, 34.4%, or $687,000, was due to the amortization of goodwill
recorded as a result of the acquisitions of Pure-Gar, Laci Le Beau and
Prolab. Another 13.5% or $272,000 was due to additional depreciation stemming
from capital additions including the purchase of the Company's headquarters
building in December 1998. The remainder was due to increased general and
administrative expenses incurred because of the acquisitions as well as
additional personnel and overhead that were added to support the Company's
growth during the year.
INTEREST INCOME (EXPENSE), NET. Net interest income for 1999 was $537,000
versus net interest income of $197,000 in 1998. Interest earned in 1999
amounted to $804,000. A portion of the interest earned was taxable as income
to the Company and a portion was non-taxable. Essentially all of the interest
expense paid during 1999 stemmed from a $3.5 mortgage, secured by the
Company's headquarters building, which was initiated in May of 1999.
Immediately after the Company's IPO, which was completed in July, 1998, the
Company retired all of its debt and began investing its surplus cash in
interest bearing investments. Total interest expense for 1998 amounted to
$407,000. Interest earned in 1998 amounted to $604,000.
INCOME TAX PROVISION. Provision for income taxes increased 22.3%, or $1.0
million, to $5.6 million in 1999 from $4.6 million in 1998. The effective tax
rate for 1999 and 1998 was 38.0%.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET REVENUE. Net revenue in 1998 increased 58.9% to $68.2 million from $42.9
million in 1997. Of the $25.3 million increase, $6.5 million was due to the
sale of raw material ingredients, primarily nutraceutical grade garlic,
attributable to the acquisition of Pure-Gar. Another $1.6 million in sales
were generated through the sale of Laci Le Beau teas. The remaining $17.2
million represents a 40% increase in sales of Natrol branded products. The
increase was achieved through distribution gains at the retail level as well
as additional sales from existing and new products.
Two product groupings represented 10% or more of sales in 1998; Ester-C(R) with
approximately 14% of revenue and Melatonin with approximately 10% of revenue.
Sales to Walgreens equaled 15.9% of the Company's revenue. No other customer
accounted for more than 10% of the Company's revenues in 1998.
GROSS PROFIT. Gross profit increased 56.8% to $36.2 million, or $13.1 million,
in 1998 versus $23.1 million in 1997. The gross margin decreased slightly to
53.1% in 1998 from 53.8% in 1997. The decrease was due primarily to shifts in
product mix, including the
34
<PAGE>
addition of the Pure-Gar ingredient supply business and the Laci Le Beau tea
business.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased 56.1%,
or $6.4 million, to $17.8 million in 1998 from $11.4 million in 1997. As a
percentage of net sales, selling and marketing expenses decreased to 26.0% in
1998 from 26.6% in 1997. The decrease was due to sales growth being more rapid
in percentage terms than the growth in corresponding payroll or consumer
marketing expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 44.4%, or $2.0 million, to $6.5 million in 1998 from $4.5 million in
1997. As a percentage of net sales, general and administrative expenses
decreased to 9.6% in 1998 from 10.4% in 1997. Of the absolute dollar increase,
30%, or $600,000, was due to the amortization of goodwill recorded as a result
of the acquisition of Pure-Gar and Laci Le Beau. The remainder was due to
increased general and administrative expenses incurred because of the two
acquisitions as well as additional personnel and overhead that were added to
support the Company's growth during the year.
INTEREST INCOME (EXPENSE), NET. Net interest income for 1998 was $197,000 versus
a net expense of $220,000 in 1997. Immediately after the Company's IPO, which
was completed in July, 1998, the Company retired all of its debt and began
investing its surplus cash in interest bearing investments. Total interest
expense for 1998 amounted to $407,000. Interest earned amounted to $604,000. A
portion of the interest earned was taxable as income to the corporation and a
portion was non-taxable.
INCOME TAX PROVISION. Provision for income taxes increased 64.2%, or $1.8
million, to $4.6 million in 1998 from $2.8 million in 1997. The effective tax
rate for 1998 was 38.0% compared to 40.2% for 1997.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had working capital of $19.6 million, as
compared to $35.7 million in working capital at December 31, 1998. The decrease
was primarily due to a decrease in cash and short term marketable securities
which were used to consummate the Prolab acquisition in October, 1999. Prolab
was purchased for $29 million in cash and 124,270 shares of Natrol stock.
Net cash provided by operating activities was $6.8 million for the year ended
December 31, 1999 versus cash provided of $4.5 million and $2.2 million in 1998
and 1997, respectively. The increase in net cash provided by operating
activities in 1999 compared to 1998 was primarily due to an increase in net
income earned, higher levels of depreciation and amortization, an increase in
provisions to reserves for doubtful accounts and other reserves, and a decrease
in inventory which were partially offset by higher levels of accounts receivable
and lower levels of accounts payables and other accrued expenses. The increase
in inventory balances shown on the balance sheet, from $13.4 million to $15.1
million, was primarily due to inventory acquired in the Prolab acquisition of
$2.1 million. Of the $5.8 increase in accounts receivable from $10.0 million in
1998 to $15.8 million in 1999, $3.6 million was due to the acquisition of Prolab
with the remaining $2.2 million being due to an increase in receivables for the
Company's non-
35
<PAGE>
Prolab business. The increase is the result of increased sales by
the Company as well as a lengthening of the term of the average receivable. At
December 31, 1999, the Company's average trade receivable aging was
approximately 55 days versus 1998 when the average receivable aging was 54 days.
The increase in net cash provided by operating activities in 1998 compared to
1997 was primarily due to higher levels of depreciation and amortization, an
increase in provisions to reserves for doubtful accounts and other reserves and
an increase in accounts payable and other accruals which were partially offset
by higher levels of inventory balances and accounts receivable. The increase in
inventory balances, from $6.9 million to $13.4 million, was primarily due to the
purchase of larger quantities of raw materials to obtain favorable volume
discounts and the necessity to carry additional inventory to support the
Company's broader product offerings with its introduction of several new
products during the year. The increase in accounts receivable was the result of
increased sales by the Company. At December 31, 1998, the Company's average
trade receivable aging was approximately 54 days versus 1997 when the average
receivable aging was 46 days. The lengthening of the average accounts receivable
aging is due in part to changes in the Company's customer mix, which includes
ingredient supply customers and a high proportion of mass market business where,
in each case, payment terms are typically longer than in the rest of the
Company's business.
Net cash used in investing activities was $16.9 million for the year ended 1999
and $43.8 and $3.2 million in 1998 and 1997, respectively. Of the net cash used
in investing activities in 1999, the Company used $26.6 million to consummate
the acquisition of Prolab, $7.2 million was used to purchase a
warehouse/shipping facility and $2.1 million was invested in plant and equipment
and $19 million in marketable securities was liquidated. Of the net cash used in
investing activities in 1998, the Company used $11.1 million to consummate the
Pure-Gar acquisition, $7.6 million to complete the Laci Le Beau acquisition,
$5.3 million to purchase its corporate headquarters facility and invested
$861,000 in plant and equipment. The remainder of cash used in investing
activities, or $19.0 million net, was used to purchase marketable securities.
Substantially all net cash used in investing activities in 1997 constituted
capital expenditures made in connection with the build-out of the Company's
manufacturing facility/headquarters, which the Company began in 1996.
Net cash provided by financing activities was $10.0 million for the year ended
December 31, 1999, $38.1 and $2.6 million in 1998 and 1997, respectively. Net
cash provided by financing activities in the year ended December 31, 1999
consisted of $8.1 million of mortgage debt assumed in connection with the
purchase of the Company's headquarters' facility and the Company's warehouse and
shipping facility, each of which was financed during 1999 as well as $1.8
million of net borrowing from the Company's $10 million line of credit. The
remainder of cash provided was generated from the sale of Common Stock to
employees through the Company's employee stock purchase program, the exercise of
stockholder options and the repayment of a portion of a shareholder loan.
On July 27, 1998, the Company completed the 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
36
<PAGE>
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 financing activities in the year ended December 31, 1998
consisted of net proceeds of $47.7 million from the Company's IPO $9.0 million
of borrowings to finance the acquisition of Pure-Gar in late February 1998. This
inflow of funds was offset by the repayment of $4.2 million of debt prior to the
IPO as well as the repayment of all of the Company's outstanding debt of $8.4
million in July 1998 and the redemption of $6.0 million of redeemable preferred
stock as described above.
Net cash provided by financing activities in 1997 was comprised of net
borrowings of $3.0 million to finance capital expenditures made in connection
with the build-out and equipping of the Company's manufacturing facility, which
was partially offset by $400,000 used to pay dividends to stockholders declared
in 1996.
As of the end of 1999, the Company had $10.5 million of outstanding debt. Of
this amount $1.8 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 the close of 1999 was approximately $500,000. 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
37
<PAGE>
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.
YEAR 2000 DISCLOSURE
In prior years, we discussed the nature and progress of our plans to become Year
2000 compliant. in mid 1999, we completed our remediation and testing of
systems. As a result of those planning and implementation efforts, we
experienced no significant disruptions in mission critical information
technology and non-information technology systems and we believe those systems
successfully responded to the Year 2000 date change. We are not aware of any
material problems resulting from Year 2000 issues, either with our products, our
internal systems, or the products and services of third parties. The costs
incurred to assess, remediate, and test the it and non-it systems through 1999
were primarily fixed labor costs and not significant. In addition, as we have
not yet encountered any significant Year 2000 disruptions in 2000, future costs
are also not expected to be significant. We will continue to monitor our
critical computer applications and those of our suppliers and vendors throughout
the Year 2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly.
IMPACT OF INFLATION
Generally, inflation has not had a material impact on the Company's historical
operations or profitability.
ITEM 7A: 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.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Accountants and the Consolidated Financial Statements
and notes thereto are presented under Item 14 of this Report.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
38
<PAGE>
Not Applicable
PART III
Information required under Part III (Items 10, 11, 12, and 13) is incorporated
herein by reference to the Company's definitive proxy statement to be filed with
the Securities and Exchange Commission within 120 days after the year covered by
this Form 10-K with respect to its Annual Meeting of Stockholders to be held on
June 13, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(a)(1) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS: PAGE(S)
Report of Independent Auditors................................................. F-1
Consolidated Balance Sheets as of December 31, 1999 and 1998................... F-2
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997.......................................... F-3
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997.......................................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................................... F-5
Notes to Consolidated Financial Statements..................................... F-7
(a)(2) Index to Consolidated Financial Statement Schedules:
All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or
are not material, and therefore have been omitted.
(a)(3) INDEX TO EXHIBITS:
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession:
2.1 Asset Purchase Agreement by and among Natrol
Acquisition Corp., the Company, Laci Le Beau
Corporation, Shay Lee Corporation, and the
Nutrition Products Trust of 1995 dated as of
September 18, 1998 (incorporated herein by
reference to Item 7(c) of the Company's Current
Report on Form 8-K report filed October 9, 1998)
2.2 Stock Purchase Agreement by and among Natrol,
Inc., Thomas E. Roark, John Yves Morin, Dwight
Otis, Andrew M Esposito, Jr. and Prolab Nutrition,
Inc. dated as of October 8, 1999 (incorporated
herein by reference to Item 7 (c) of the Company's
Current Reports on Form 8-K filed October 19, 1999.
(3) Articles of Incorporation and By-Laws:
3.1 The Third Amended and Restated Certificate of
Incorporation of the Company incorporated herein
by reference to Exhibit 3.1 to the Company's
Annual Report on Form 10-K, as amended, filed on
March 31, 1999.
</TABLE>
39
<PAGE>
<TABLE>
<S> <C>
3.2 The Amended and Restated By-Laws of the Company
(incorporated herein by reference to Exhibit 3.6 to
the Company's Registration Statement on Form S-1, as
amended, File No. 333-52109).
(4) Instruments Defining the Rights of Security Holders, Including
Indentures:
4.1 Specimen Stock Certificate for shares of Common
Stock, $.01 par value, of the Company (incorporated
herein by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-1, as amended, File
No. 333-52109).
(10) Material Contracts
10.1 Natrol, Inc. Amended and Restated 1996 Stock Option
Plan (incorporated herein by reference to Exhibit
10.2 to the Company's Registration Statement on Form
S-1, as amended, File No. 333-52109);
10.2 Natrol, Inc. 1998 Employee Stock Purchase Plan
(incorporated herein by reference to Exhibit 10.3 to
the Company's Registration Statement on Form S-1, as
amended, File No. 333-52109);
10.3 Form of Indemnification Agreement between Natrol,
Inc. and each of its directors (incorporated herein
by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-1, as amended, File
No. 333-52109);
10.4 Restricted Stock Agreement, dated November 14, 1996,
by and between Natrol, Inc. and Dennis R. Jolicoeur
(incorporated herein by reference to Exhibit 10.5 to
the Company's Registration Statement on Form S-1, as
amended, File No. 333-52109);
10.5 Promissory Note of Dennis R. Jolicoeur, dated
November 14, 1996 (incorporated herein by reference
to Exhibit 10.6 to the Company's Registration
Statement on Form S-1, as amended, File No.
333-52109);
10.6 Pledge Agreement, dated November 14, 1996, by and
between Natrol, Inc. and Dennis R. Jolicoeur
(incorporated herein by reference to Exhibit 10.7 to
the Company's Registration Statement on Form S-1, as
amended, File No. 333-52109);
10.7 Form of Stock Option Agreement (incorporated herein
by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-1, as amended, File
No. 333-52109);
10.8 Supply Agreement, dated as of February 8, 1998, by
and between the Company and Basic Vegetable Products,
L.P. (incorporated herein by reference to Exhibit
10.10 to the Company's Registration Statement on Form
S-1, as amended, File No. 333-52109);
10.9 Distributorship/Packager/Supply Agreement, dated as
of January 1, 1995, by and between the Company and
Inter-Cal Corporation (incorporated herein by
reference to Exhibit 10.11 to the Company's
Registration Statement on Form S-1, as amended, File
No. 333-52109);
10.10 Letter Agreement dated July 18, 1997 between the
Company and Jon J. Denis (incorporated herein by
reference to Exhibit 10.12 to the Company's
Registration Statement on Form S-1, as amended, File
No. 333-52109);
10.11 Description of Salary and Incentive Bonus
Arrangements for Dennis R. Jolicoeur, Cheryl R.
Richitt and Gary P. DeMello (incorporated herein by
reference to Exhibit 10.13 to the Company's
Registration Statement on Form S-1, as amended, File
No. 333-52109);
</TABLE>
40
<PAGE>
<TABLE>
<S> <C>
10.12 Purchase and Sale Agreement between WHLW Real Estate
Limited Partnership, Natrol Real Estate, Inc. and
incorporated herein by reference to Exhibit 10.21 to
the Company's Annual Report on Form 10-k as amended,
filed on March 31, 1999.
10.13 Purchase and Sale Agreement between WHLW Real Estate
Limited Partnership, Natrol Real Estate, Inc. II, filed
herewith as Exhibit 10.13.
(21.1) Subsidiaries of Natrol, Inc.: A list of Subsidiaries
of the Company is filed herewith as Exhibit 21.1.
(23.1) Consent of Experts and Counsel: Consent of Ernst &
Young LLP is filed herewith as Exhibit 23.1.
(27.1) Financial Data Schedule: The Financial Data Schedule
is filed herewith as Exhibit 27.1.
(b) REPORTS ON FORM 8-K:
The registrant filed the following Current Reports on Form 8-K
during the three month period ended December 31, 1999:
1. On October 19, 1999, the Company filed a Current Report
on Form 8-K announcing that on October 8, 1999, the
Company had purchased all of the capital stock of
Prolab Nutrition, Inc. pursuant to a Stock Purchase
Agreement dated October 8, 1999.
2. On December 21, 1999, the Company filed an amendment to
a Current Report on Form 8-K/A filing the Financial
Statements of Prolab Nutrition, Inc. as of September
30, 1999 and for the nine months then ended as Exhibit
99.1, the financial statements of Prolab Nutrition,
Inc. as of December 31, 1998 and for the year ended as
Exhibit 99.2, and the Pro Forma Consolidated Financial
statements of Natrol, Inc. as of and for the nine
months ended September 30, 1999 and Consolidated
Statement of Income for the year ended December 31,
1998 as Exhibit 99.3.
</TABLE>
41
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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, this 30th day of
March, 2000.
Natrol, Inc.
By:/S/ ELLIOTT BALBERT
----------------------
Elliott Balbert
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE SIGNED
- ----------------------- ---------------------------- --------------
<S> <C> <C>
/S/ELLIOTT BALBERT Chairman of the Board, March 30, 2000
- -----------------------
Elliott Balbert Chief Executive Officer,
President and Director
(Principal Executive Officer)
/S/DENNIS R. JOLICOEUR Chief Financial Officer, March 30, 2000
- -----------------------
Dennis R. Jolicoeur Executive Vice President
and Director (Principal
Financial Officer and
Principal Accounting
Officer)
/S/NORMAN KAHN Director March 30, 2000
Norman Kahn
/S/DAVID LAUFER Director March 30, 2000
David Laufer
/S/ P. ANDREWS MCLANE Director March 30, 2000
Andrews McLane
- -----------------------
/S/ DENNIS DECONCINI Director March 30, 2000
- ----------------------
Dennis DeConcini March 30, 2000
/S/ KRAIG KITCHIN Director March 30, 2000
- ----------------------
Kraig Kitchin
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Natrol, Inc.
We have audited the accompanying consolidated balance sheets of Natrol, Inc.
and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity and cash flows for
each of the years in the three year period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Natrol, Inc.
and subsidiaries at December 31, 1999 and 1998 and the consolidated results
of its operations and its cash flows for each of the years in the three year
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
February 16, 2000
Woodland Hills, California
F-1
<PAGE>
Natrol, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
--------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 485,144 $ 559,424
Marketable securities - 19,010,826
Accounts receivable, net of allowances of $502,500 and $332,000
at December 31, 1999 and 1998, respectively 15,776,613 9,987,002
Inventories 15,060,793 13,437,455
Deferred taxes 1,076,076 1,214,076
Prepaid expenses and other current assets 1,028,213 499,366
--------------------------------------
Total current assets 33,426,839 44,708,149
Property and equipment:
Building and improvements 15,455,692 6,881,707
Machinery and equipment 5,286,859 3,826,351
Furniture and office equipment 1,655,290 1,238,749
--------------------------------------
22,397,841 11,946,807
Accumulated depreciation and amortization (2,869,722) (1,756,182)
--------------------------------------
19,528,119 10,190,625
Goodwill, net of accumulated amortization of $1,863,147 and $588,168
at December 31, 1999 and 1998 39,543,440 13,774,701
Capitalized loan fees, net of accumulated amortization of $2,258 at
December 31, 1999 48,559 -
Other assets 48,981 34,365
--------------------------------------
Total assets $ 92,595,938 $ 68,707,840
======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 1,800,000 $ -
Accounts payable 7,826,629 5,943,224
Accrued expenses 2,143,044 2,066,935
Accrued payroll and related liabilities 1,687,741 804,623
Income taxes payable 181,790 220,135
Current portion of long-term debt 160,900 -
--------------------------------------
Total current liabilities 13,800,104 9,034,917
Deferred income taxes, noncurrent 109,475 32,013
Long-term debt, less current portion 8,700,110 -
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 - 13,474,035 and 13,301,990 at
December 31, 1999 and 1998, respectively 134,740 133,020
Additional paid-in capital 61,334,380 60,187,301
Retained earnings (deficit) 9,071,192 (116,911)
--------------------------------------
70,540,312 60,203,410
Receivable from stockholder (554,063) (562,500)
--------------------------------------
Total stockholders' equity 69,986,249 59,640,910
--------------------------------------
Total liabilities and stockholders' equity $ 92,595,938 $ 68,707,840
======================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-2
<PAGE>
Natrol, Inc.
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
---------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 81,589,935 $ 68,206,585 $ 42,874,759
Cost of goods sold 39,849,632 32,011,641 19,799,712
---------------------------------------------------------
Gross profit 41,740,303 36,194,944 23,075,047
Selling and marketing expenses 18,915,663 17,757,395 11,398,390
General and administrative expenses 8,542,308 6,513,094 4,450,244
---------------------------------------------------------
Total operating expenses 27,457,971 24,290,489 15,848,634
---------------------------------------------------------
Operating income 14,282,332 11,924,455 7,226,413
Interest income 803,855 604,871 20,695
Interest expense (266,668) (407,452) (240,250)
---------------------------------------------------------
Income before income tax provision 14,819,519 12,121,874 7,006,858
Income tax provision 5,631,416 4,606,323 2,816,158
---------------------------------------------------------
Net income $ 9,188,103 $ 7,515,551 $ 4,190,700
=========================================================
Basic earnings per share $0.69 $0.76 $0.59
=========================================================
Diluted earnings per share $0.67 $0.63 $0.41
=========================================================
Weighted average shares outstanding - basic 13,324,510 9,854,411 7,100,000
=========================================================
Weighted average shares outstanding - diluted 13,637,653 11,890,513 10,272,859
=========================================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
NATROL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Redeemable Additional
Preferred Stock Common Stock Paid-In
Shares Amount Shares Amount Capital
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 - $ - 7,100,000 $ 71,000 $ 559,500
Net income - - - - -
--------------------------------------------------------------------
Balance at December 31, 1997 - - 7,100,000 71,000 559,500
Issuance of Common Stock at $15 per share
(net of approximately $4,720,000 of
offering costs) - - 3,495,500 34,955 47,605,218
Conversion of convertible participating
preferred stock to Common Stock - - 2,700,000 27,000 11,973,000
Conversion to convertible participating
stock to redeemable preferred stock 13,500 6,000,000 - - -
Redemption of redeemable preferred stock (13,500) (6,000,000) - - -
Issuance of Common Stock under employee
stock purchase plan - - 6,490 65 49,583
Net income - - - - -
--------------------------------------------------------------------
Balance at December 31, 1998 - - 13,301,990 133,020 60,187,301
Exercise of stock options - - 29,000 290 54,085
Shares issued in connection with Prolab
acquisition - - 124,270 1,243 977,383
Issuance of Common Stock under employee
stock purchase plan - - 18,775 187 115,611
Payments on shareholder loan - - - - -
Net income - - - - -
--------------------------------------------------------------------
Balance at December 31, 1999 - $ - 13,474,035 $ 134,740 $61,334,380
====================================================================
Retained Receivable
Earnings from
(Deficit) Stockholder Total
------------------------------------------------
Balance at January 1, 1997 $(5,823,162) $ (562,500) $(5,755,162)
Net income 4,190,700 - 4,190,700
------------------------------------------------
Balance at December 31, 1997 (1,632,462) (562,500) 1,564,462
Issuance of Common Stock at $15 per share
(net of approximately $4,720,000 of
offering costs) - - 47,640,173
Conversion of convertible participating
preferred stock to Common Stock - - 12,000,000
Conversion to convertible participating
stock to redeemable preferred stock (6,000,000) - -
Redemption of redeemable preferred stock - - (6,000,000)
Issuance of Common Stock under employee
stock purchase plan - - 49,648
Net income 7,515,551 - 7,515,551
------------------------------------------------
Balance at December 31, 1998 (116,911) (562,500) 59,640,910
Exercise of stock options - - 54,375
Shares issued in connection with Prolab
acquisition - - 978,626
Issuance of Common Stock under employee
stock purchase plan - - 115,798
Payments on shareholder loan - 8,437 8,437
Net income 9,188,103 - 9,188,103
------------------------------------------------
Balance at December 31, 1999 $ 9,071,192 $ (554,063) $69,986,249
================================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
Natrol, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
-----------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 9,188,103 $ 7,515,551 $ 4,190,700
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,115,797 837,014 690,335
Amortization of goodwill 1,274,979 588,168 -
Provision for bad debts and returns 170,630 69,230 1,002,683
Deferred taxes 215,462 (700,947) 138,163
Changes in operating assets and liabilities:
Accounts receivable (2,293,195) (3,387,913) (1,440,220)
Inventories 439,842 (3,335,621) (3,059,881)
Income taxes receivable/payable (1,712,624) (201,948) 600,944
Prepaid expenses and other current assets (522,980) (158,717) (140,126)
Deposits (14,616) 24,337 9,570
Accounts payable (1,784,427) 1,686,466 878,849
Accrued expenses (166,385) 1,167,624 (899,368)
Accrued payroll and related liabilities 883,118 390,936 167,183
-----------------------------------------------------
Net cash provided by operating activities 6,793,704 4,494,180 2,138,832
INVESTING ACTIVITIES
Assets purchased, net of liabilities assumed in
connection with acquisitions (26,578,024) (18,697,869) -
Purchases of marketable securities (69,203,000) (99,153,298) -
Sales of marketable securities 88,213,826 80,142,472 -
Purchases of property and equipment (9,325,753) (6,111,223) (3,219,650)
-----------------------------------------------------
Net cash used in investing activities (16,892,951) (43,819,918) (3,219,650)
FINANCING ACTIVITIES
Net borrowings on line of credit 1,800,000 - -
Proceeds from long-term debt 8,900,000 9,000,000 4,000,000
Repayments on long-term debt (802,826) (12,604,861) (1,004,167)
Capitalized loan fees (50,817) - -
Repayments on shareholder loan 8,437 - -
Proceeds from issuance of Common Stock, net of issuance
costs 170,173 47,689,821 -
Redemption of redeemable preferred stock - (6,000,000) -
Dividends paid to stockholders - - (400,000)
-----------------------------------------------------
Net cash provided by financing activities 10,024,967 38,084,960 2,595,833
-----------------------------------------------------
Net increase (decrease) in cash and cash equivalents (74,280) (1,240,778) 1,515,015
Cash and cash equivalents, beginning of year 559,424 1,800,202 285,187
-----------------------------------------------------
Cash and cash equivalents, end of year $ 485,144 $ 559,424 $ 1,800,202
=====================================================
</TABLE>
F-5
<PAGE>
Natrol, Inc.
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
-----------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 266,668 $ 407,452 $ 240,250
Income taxes $ 6,624,087 $ 5,509,261 $ 2,215,000
</TABLE>
SUPPLEMENTAL NON-CASH TRANSACTION:
In October 1999, the Company issued 124,270 shares of Common Stock valued at
$978,626 in connection with its acquisition of Prolab, Nutrition, Inc.
In July 1998, upon completion of the Company's initial public offering, all of
the convertible participating preferred stock then outstanding converted into
2,700,000 shares of Common Stock and 13,500 shares of redeemable preferred
stock.
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
Natrol, Inc.
Notes To Consolidated Financial Statements
December 31, 1999
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND PRESENTATION
Natrol, Inc. (collectively with its subsidiaries, referred to as the Company)
manufactures and markets branded, high-quality dietary supplement products,
including vitamins, minerals, hormonal supplements, herbal products, specialty
combination formulations and sports nutrition supplements. The Company primarily
sells its products under the Natrol and Prolab brand names through multiple
distribution channels throughout the United States, including domestic health
food stores and mass market drug, retail and grocery store chains.
On January 15, 1998, the Company reincorporated itself in the State of Delaware.
Effective with the reincorporation, a ten-for-one reverse stock split occurred
affecting all classes of stock then outstanding. The Company's Board of
Directors approved a one hundred-for-one stock split of the Company's Common
Stock which became effective on June 19, 1998. All references in the
accompanying consolidated financial statements to the number of shares of Common
Stock and per common share amounts have been retroactively adjusted to reflect
the stock splits. In addition, the Company's capital structure was changed
effective June 19, 1998 to reflect 50,000,000 shares of Common Stock and was
further changed to authorize an additional 2,000,000 shares of preferred stock.
The Board of Directors has authority to fix the rights, preferences, privileges
and restrictions, including voting rights, of these shares of preferred stock
without any future vote or action by the shareholders.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts and operations of
Natrol, Inc. and its wholly owned subsidiaries. All significant intercompany
accounts have been eliminated in consolidation.
ESTIMATES AND ASSUMPTIONS
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts in the consolidated financial
statements and accompanying notes. Actual results could
F-7
<PAGE>
Natrol, Inc.
Notes To Consolidated Financial Statements
December 31, 1999
differ from those estimates, although management does not believe that any
differences would materially affect the Company's consolidated financial
position or results of operations.
CASH EQUIVALENTS
The Company considers all highly liquid instruments with a maturity of three
months or less when purchased to be cash equivalents.
F-8
<PAGE>
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
MARKETABLE SECURITIES
At December 31, 1998, marketable securities consisted of certificates of
deposits, commercial paper and corporate and municipal bonds in the amounts of
$4,086,958, $2,458,846 and $12,465,022, respectively. The Company did not hold
any marketable securities at December 31, 1999.
In accordance with Statement on Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the Company
determines the appropriate classification of debt and equity securities at the
time of purchase and re-evaluates such designation as of each balance sheet
date. All marketable securities were classified as "available-for-sale"
securities at December 31, 1998. Available-for-sale securities are carried at
fair value with unrealized gains and losses reported as other comprehensive
income. Net unrealized gains and losses were not material to the consolidated
financial statements as of December 31, 1998, and therefore no amounts are
recorded in other comprehensive income. Realized gains and losses on investment
transactions are recognized when realized based on settlement dates and recorded
as interest income. Interest and dividends on securities are recognized when
earned.
INVENTORIES
Inventories are carried at the lower of cost (first-in, first-out method) or
market.
PROPERTY AND EQUIPMENT
Property and equipment are stated on the basis of cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets
ranging from five to ten years for furniture, machinery and equipment. Buildings
and improvements are depreciated using straight-line methods over five to forty
years. Amortization of leasehold improvements is computed using the
straight-line method over the shorter of the estimated lives of the assets or
the lease terms.
TRADEMARKS AND PATENTS
Costs of obtaining trademarks and patents are capitalized and amortized using
the straight-line basis over the estimated useful life of eleven years.
Trademarks and patents are included in other assets at $50,500 and $40,500 at
December 31, 1999 and 1998, respectively, net of accumulated amortization of
$29,245 and $25,295 at December 31, 1999 and 1998, respectively. The costs of
servicing the Company's patents and trademarks are expensed as incurred.
F-9
<PAGE>
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
The Company reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of any asset may not be recoverable. An impairment loss
would be recognized when the estimated undiscounted future cash flows expected
to result from the use of the asset and its eventual disposition is less than
the carrying amount. In an impairment is indicated, the amount of the loss to be
recorded is based on an estimate of the difference between the carrying amount
and the fair value of the asset. Fair value is based upon discounted estimated
cash flows expected to result from the use of the asset and its eventual
disposition and other valuation methods. No such impairment losses have been
identified by the Company for the periods presented.
INCOME TAXES
The Company accounts for income taxes under the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between enacted rates and laws that will be in effect when the differences are
expected to reverse. Deferred taxes arising from temporary differences that are
not related to an asset or liability are classified as current or noncurrent
depending on the periods in which the temporary differences are expected to
reverse.
REVENUE RECOGNITION
The Company sells its products to retail outlets through a direct sales force
and a national broker network. Sales are recorded when products are shipped to
customers by the Company. Net sales represent products shipped, less estimated
returns and allowances for which provisions are made at the time of sale.
Generally the returns and allowances are limited to damaged goods and the
estimates recorded are based upon known claims and an estimate of additional
returns.
ADVERTISING COSTS
Advertising and promotional costs are expensed at first showing. In addition,
the Company advertises on a cooperative basis by accruing an obligation to
reimburse retailers for qualified advertising of Company products. The Company
provides for cooperative advertising obligations in the same period as the
related revenue is recognized. Advertising and promotional costs amounted to
$10,936,242, $10,942,024 and $6,944,454, respectively, for the years ended
December 31, 1999, 1998 and 1997.
F-10
<PAGE>
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS
The Company incurs research and development costs relating to the development of
its dietary supplement products. Research and development costs are expensed as
incurred and amounted to $417,552, $433,549 and $357,064 for the years ended
December 31, 1999, 1998 and 1997, respectively. Research and development costs
are included in general and administrative expenses on the consolidated
statements of income.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standard (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."
EARNINGS PER SHARE
The Company calculates earnings per share in accordance with SFAS No. 128
"Earnings per Share." Basic earnings per share have been computed by dividing
net income by the weighted average number of common shares outstanding. Diluted
earnings per share have been computed by dividing net income by securities or
other contracts to issue Common Stock as if these securities were exercised or
converted to Common Stock.
F-11
<PAGE>
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE (CONTINUED)
The following table sets forth the calculation for basic and diluted earnings
per share for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
--------------------------------------------------
Earnings:
Net income $ 9,188,103 $ 7,515,551 $ 4,190,700
==================================================
<S> <C> <C> <C>
Shares:
Weighted average shares for basic earnings
per share 13,324,510 9,854,411 7,100,000
Conversion of convertible participating
preferred stock - 1,494,247 2,700,000
Share equivalent for redeemable preferred
stock - 255,247 461,538
Stock options 313,144 286,429 11,321
--------------------------------------------------
Weighted average shares for diluted earnings
per share 13,637,653 11,890,513 10,272,859
==================================================
</TABLE>
Shares issuable under stock options of 615,000 and 445,000 at December 31, 1999
and 1998, respectively, have been excluded from the computation of diluted
earnings per share because the effect would be antidilutive.
COMPREHENSIVE INCOME
In June 1997, SFAS 130 "Reporting Comprehensive Income" was issued. The
provisions of SFAS 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 December 31, 1999, 1998 or 1997 and therefore no disclosures have been made.
F-12
<PAGE>
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MAJOR CUSTOMERS
No customers had net sales which individually represented 10% or more of total
Company net sales during the year ended December 31, 1999. The Company had net
sales to one customer which individually represented 15.9% of total Company net
sales during the year ended December 31, 1998 and two customers which
individually represented 17.8% and 11.6%, respectively, of total Company net
sales during the year ended December 31, 1997.
MAJOR PRODUCTS
The Company's sales of one product comprised 11.5% of net sales during the year
ended December 31, 1999. The Company's sales of two products each comprised
approximately 14.0% and 10.0%, respectively, of net sales during the year ended
December 31, 1998. The Company's sales of two products each comprised
approximately 17.1% and 17.7%, respectively, of net sales during the year ended
December 31, 1997.
CONCENTRATION OF CREDIT RISK
Concentrations of credit risk with respect to trade receivables, other than
significant customers previously discussed, are limited, due to the distribution
of sales over a large customer base. The Company performs periodic credit
evaluations of its customers' financial conditions and generally does not
require collateral. Credit losses have been within management's expectations.
SEGMENT REPORTING
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No.131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS No. 131 did not affect the reported results of operations
or financial position. In addition, the adoption of the new statements did not
affect disclosures of segment information as the Company is engaged principally
in one line of business, the manufacturing and marketing of high-quality dietary
supplement products, including vitamins, minerals, herbs and specialty
formulations, weight control products and hormones, which represents more than
90% of consolidated sales.
F-13
<PAGE>
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 and 1997 consolidated
financial statements to conform to the presentation in 1999.
2. ACQUISITIONS
In October 1999, the Company purchased all of the outstanding shares of stock
of Prolab Nutrition, Inc. (Prolab) for $28,500,000 in cash, excluding
acquisition costs, and 124,270 shares of the Company's Common Stock. Prolab is
a distributor, manufacturer and marketer of food supplement products which
are sold primarily to distributors, wholesalers and retailers located
throughout the United States and also on a worldwide basis. Included in the
purchase price were assets, consisting primarily of cash of $2,259,722, trade
accounts receivable of $3,667,046, inventories of $2,063,180, fixed assets of
$1,125,280 and other assets of $623,054, and liabilities assumed consisting
primarily of accounts payable of $3,667,832, accrued expenses of $2,033,960
and debt of $763,836. The acquisition was accounted for using the purchase
method, and accordingly, the acquired assets and liabilities assumed are
recorded at their estimated fair values with revenues and expenses from the
date of acquisition included in the consolidated statements of income. The
excess of cost over the fair value of net assets acquired of $27,041,662 will
be amortized over twenty years. Amortization expense for the Prolab
acquisition for the year ended December 31, 1999 was $334,983 and is included
in general and administrative expenses.
On October 31, 1998, the Company completed the acquisition of certain of the
assets of Laci Le Beau Tea Company of Fresno, California, which consists of Laci
Le Beau, Inc., a California corporation, as well as certain related companies
(Laci Le Beau). The total purchase price for the acquisition was $7,500,000 in
cash. Laci Le Beau is a formulator, packager and distributor of specialty teas
sold through the health channel of distribution as well as in food stores, drug
stores and mass market merchandisers. These channels of distribution are
essentially the same as the Company's channels of distribution. Assets purchased
consisted primarily of inventories of $2,146,526, as well as fixed assets of
$153,474 and intangible assets of the business of $5,200,000. No liabilities
were assumed. The acquisition was accounted for using the purchase method, and
accordingly, the acquired assets are recorded at their estimated fair values
with revenues and expenses from the date of acquisition included in the
consolidated statement of income. The excess of cost over the fair value of
assets acquired will be amortized over fifteen years. Amortization expense for
the years ended December 31, 1999 and 1998 was $399,996 and $88,168,
respectively, and is included in general and administrative expenses.
F-14
<PAGE>
2. ACQUISITIONS (CONTINUED)
On February 27, 1998, the Company purchased substantially all of the assets and
assumed certain liabilities of Pure-Gar L.P. (Pure-Gar), a distributor of bulk
dehydrated vegetable products and dietary supplements, for a total purchase
price of $11,085,736, which included $85,736 of deferred acquisition costs.
Assets purchased include accounts receivable of $1,271,694 and inventories of
$1,021,127, as adjusted for purchase price accounting adjustments through
December 31, 1998, as well as fixed assets of $131,091 and intangible assets of
the business of $8,965,000. Liabilities assumed consisted primarily of trade
payables of $388,912. In addition, the Company entered into long-term supply and
royalty agreements with the seller. The supply agreement requires the seller to
sell and the Company to purchase specified amounts of certain vegetable, fruit,
herbal and botanical products (the "Products") manufactured by the seller. The
supply agreement gives the Company the exclusive right to sell certain Products
in the dietary supplement industry. The supply agreement may be terminated by
either party upon a material breach of the obligations of the other party, or
certain other specified conditions, if the breach is not cured within 60 days,
or 15 days in the case of nonpayment by the Company. The acquisition was
accounted for using the purchase method, and accordingly, the acquired assets
and liabilities are recorded at their estimated fair values with revenues and
expenses from the date of acquisition included in the consolidated statement of
income. The excess of cost over the fair value of assets acquired will be
amortized over fifteen years. Amortization expense for the years ended December
31, 1999 and 1998 was $600,000 and $500,000, respectively, and is included in
general and administrative expenses.
The following pro forma information presents a summary of consolidated
results of operations of the Company as if the acquisition of Prolab had
occurred at the beginning of the years ended December 31, 1999 and 1998 and
the acquisitions of Laci Le Beau and Pure-Gar had occurred at the beginning
of the years ended December 31, 1998 and 1997, with pro forma adjustments for
the amortization of goodwill, interest expense and certain income tax
adjustments. The pro forma financial information is not necessarily
indicative of the results of operations as they would have been had the
acquisitions been effected on the assumed dates or of future results of the
combined entities.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
--------------------------------------------------------
<S> <C> <C> <C>
(Unaudited)
Revenues $ 105,556,000 $ 92,194,000 $ 58,477,000
Income from operations 16,615,000 11,739,000 7,537,000
Net income 10,414,000 7,822,000 3,831,000
Basic earnings per share $0.78 $0.78 $0.54
Diluted earnings per share $0.76 $0.65 $0.37
</TABLE>
F-15
<PAGE>
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
------------------------------------
<S> <C> <C>
Raw material and packaging supplies $ 6,439,850 $ 7,549,122
Finished goods 8,620,943 5,888,333
------------------------------------
$ 15,060,793 $ 13,437,455
====================================
</TABLE>
4. FINANCING
On September 24, 1999, the Company entered into a credit agreement with a
bank that provides for a revolving line of credit for borrowings up to
$10,000,000, based on a formula, through 2002. Advances under the credit
agreement bear interest at the bank's adjusted LIBOR rate plus 1.25% or the
bank's prime rate at the option of the Company (8.25% at December 31, 1999).
The credit agreement requires the Company comply with certain financial
covenants and is collateralized by the Company's assets. The Company was in
compliance with all financial covenants at December 31, 1999. Interest
expense related to the credit agreement was $79,408 for the year ended
December 31, 1999.
On February 27, 1998, the Company entered into an amended credit facility
(Loan Agreement) with a bank that provided for a revolving line of credit for
borrowings up to $8,000,000, based on a formula, through April 30, 2001. The
Loan Agreement amended and restated a previous revolving line of credit
agreement with the bank. Advances under the Loan Agreement bear interest at
the bank's adjusted LIBOR rate plus 1.25% or the bank's prime rate at the
option of the Company. The credit facility was subsequently repaid in full in
July 1998 and terminated in August 1998. Interest expense related to the Loan
Agreement was $161,306 for the year ended December 31, 1998.
In addition to providing for the revolving loans, the Loan Agreement provided
for a term loan of $9,000,000 to be used for financing the acquisition of
Pure-Gar. The term loan called for monthly installments of $125,000 during
the period March 1, 1998 through February 28, 2004 and bore interest at the
bank's adjusted LIBOR rate plus 1.25% or the bank's prime rate at the option
of the Company. The term loan was repaid in full in July 1998. Interest
expense related to the term loan was $246,146 for the year ended December 31,
1998.
F-16
<PAGE>
4. FINANCING (CONTINUED)
During 1999, the Company entered into two mortgage notes payable in the
aggregate amount of $8,900,000 collateralized by the Company's facilities.
These notes are payable in monthly installments of $73,779 in the aggregate
including interest ranging from 7.75% to 8.32% maturing in 2014 and 2019.
Interest expense related to these notes for the year ended December 31, 1999
was $169,876.
Future maturities of long term debt at December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000 $ 160,900
2001 185,099
2002 201,090
2003 214,010
2004 230,371
Thereafter 7,869,540
-----------------
$ 8,861,010
=================
</TABLE>
5. INCOME TAXES
The income tax provision consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 4,566,332 $ 4,468,728 $ 2,161,400
State 849,622 838,542 516,595
------------------------------------------------------
5,415,954 5,307,270 2,677,995
Deferred:
Federal 172,922 (608,481) 72,202
State 42,540 (92,466) 65,961
------------------------------------------------------
215,462 700,947 138,163
------------------------------------------------------
Total income tax provision $ 5,631,416 $ 4,606,323 $ 2,816,158
======================================================
</TABLE>
F-17
<PAGE>
5. INCOME TAXES (CONTINUED)
The difference between actual income tax expense and the U.S. Federal statutory
income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
-----------------------------------------------
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0%
State tax provision 4.0 4.0 6.2
-----------------------------------------------
Effective tax rate 38.0% 38.0% 40.2%
===============================================
</TABLE>
The significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
------------------------------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable reserves $ 200,038 $ 139,279
Inventory reserves 78,640 98,105
Various accrued liabilities 543,208 695,762
State taxes 254,190 280,930
------------------------------------
1,076,076 1,214,076
Deferred tax liability:
Depreciation (109,475) (32,013)
------------------------------------
$ 966,601 $ 1,182,063
====================================
</TABLE>
Deferred taxes arising from temporary differences that are not related to an
asset or liability are classified as current or noncurrent depending on the
periods in which the temporary differences are expected to reverse.
6. STOCKHOLDERS' EQUITY
In July 1998, the Company completed its initial public offering in which it sold
3,495,500 shares of Common Stock at a price of $15.00 per share, with aggregate
net proceeds to the Company of $47,640,174. At the time of the initial public
offering, all of the convertible participating preferred stock converted into
2,700,000 shares of Common Stock and 13,500 shares of redeemable preferred
stock. The shares of redeemable preferred stock were then immediately redeemed
by the Company for $6,000,000 in cash.
F-18
<PAGE>
6. STOCKHOLDERS' EQUITY (CONTINUED)
In September 1996, the shares of Common Stock held by the original
stockholders were split up and converted into 7,027,780 shares of Common
Stock and 25,078.1 shares of convertible participating preferred stock. In
addition, the Company sold an additional 1,921.9 shares of its convertible
participating preferred stock to third party investors. The total of 27,000
shares of convertible participating preferred stock purchased by the
investors are convertible into (i) approximately 27% of the then outstanding
shares of Common Stock of the Company on a fully diluted basis and (ii)
shares of redeemable preferred stock which are redeemable for a total of $6.0
million. The total consideration paid by the investors for the convertible
participating preferred stock was $12.0 million.
Each share of convertible participating preferred stock is convertible based
on a formula upon the written election of not less than 66 2/3% of the
outstanding shares of convertible participating preferred stock such that
each outstanding share of convertible participating preferred stocks will
convert into one share of Common Stock (prior to giving effect the 100-for-1
stock split described in Note 1) and one-half of one share of redeemable
preferred stock, subject to adjustment for stock splits, stock dividends,
recapitalizations and similar transactions. The convertible participating
preferred stock has an automatic conversion feature which provides for each
share of convertible participating preferred stock to be automatically
converted into shares of Common Stock and redeemable preferred stock based on
the then effective conversion price immediately upon the closing of the
Company's first firm commitment public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended, provided
that such registration statement covers the offer and sale of Common Stock of
which the aggregate net proceeds exceeds $15 million at a price per share
reflecting a valuation of the Company's equity of at least $50 million.
RECEIVABLE FROM STOCKHOLDER
The receivable from stockholder represents an interest bearing note from a
stockholder in the amount of $554,063 and $562,500 at December 31, 1999 and
1998, respectively, issued by the stockholder to finance in part the purchase
of 300,000 shares of the Company's Common Stock. The note bears interest at
6.60% per year with interest payments due annually. The note is due within
ten days of the receipt by the stockholder of proceeds from the sale of the
Company's Common Stock or November 14, 2006, whichever occurs first. Included
in interest income is $36,568, $37,125 and $37,125 for the years ended
December 31, 1999, 1998 and 1997, respectively, for interest from this
stockholder.
F-19
<PAGE>
6. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS
The Company has adopted the 1996 Stock Option and Grant Plan, as amended (the
Plan), which authorizes the Board of Directors of the Company to grant
incentive stock options or non-qualified stock options. Incentive stock
options may be granted only to employees of the Company. Non-qualified stock
options may be granted to officers and employees of the Company as well as to
non-employees. The maximum number of shares of Common Stock to be issued
under the Plan is 2,294,325 shares, as amedned. All options granted under the
Plan have been made at prices not less than the estimated fair market value
of the stock at the date of grant. Generally the options granted under the
Plan vest over three to five years. Options granted under the plan have a
term of not more than ten years.
A summary of the Company's stock option activity, and related information is
as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER EXERCISE PRICE EXERCISE PRICE
OF OPTIONS PER SHARE PER SHARE
-----------------------------------------------------
<S> <C> <C> <C>
Outstanding at January 1, 1997 200,000 $ 1.88 $ 1.88
Granted 200,000 2.10 2.10
-----------------------------------------------------
Outstanding at December 31, 1997 400,000 1.99 1.88 - 2.10
Granted 445,000 10.87 10.40 - 13.00
-----------------------------------------------------
Outstanding at December 31, 1998 845,000 6.67 1.88 - 13.00
Granted 845,000 7.88 6.03 - 10.63
Forfeited (45,000) 10.39 6.03 - 11.25
Exercised (29,000) 1.88 1.88
-----------------------------------------------------
Outstanding at December 31, 1999 1,616,000 $ 7.28 $1.88 - 13.00
=====================================================
Exercisable at:
December 31, 1997 116,250 $ 1.88 $1.88
December 31, 1998 304,663 $ 4.78 $1.88 - $2.10
December 31, 1999 475,895 $ 5.43 $1.88 - 13.00
=====================================================
</TABLE>
At December 31, 1999 and 1998, 631,105 and 1,449,325 shares, respectively,
were available for future grant. The weighted average remaining contractual
life for the outstanding options in years was 8.83, 8.91 and 9.38 at December
31, 1999, 1998 and 1997, respectively.
F-20
<PAGE>
6. STOCKHOLDERS' EQUITY (CONTINUED)
If the Company had elected to recognize compensation expense based on the
fair value of the options granted at grant date for its stock-based
compensation plans consistent with the method prescribed by SFAS No. 123, the
Company's net income would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
--------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $ 9,188,103 $ 7,515,551 $ 4,190,700
Pro forma 8,790,433 7,367,551 4,185,800
Earnings per share:
As reported - basic $ 0.69 $ 0.76 $ 0.59
Pro forma - basic 0.66 0.75 0.59
As reported - diluted 0.67 0.63 0.41
Pro forma - diluted 0.64 0.62 0.41
</TABLE>
The fair value of the options is estimated using a Black-Scholes option-pricing
model with the following weighted average assumptions for grants:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------
<S> <C> <C> <C>
Expected dividend yield 0.0% 0.0% 3.0%
Expected stock price volatility 55.9 37.5 -
Risk free interest rate 5.5% 6.0% 6.0%
Expected life of options 5 years 5 years 5 years
</TABLE>
These assumptions resulted in weighted average fair values of $3.61, $3.35
and $0.27 for each stock option granted in 1999, 1998 and 1997, respectively.
7. COMMITMENTS
The Company leases certain equipment and facilities under noncancelable
operating leases that expire in various years through 2001. Rent expense
under operating leases totaled $255,356, $570,325 and $641,731, for the years
ended December 31, 1999, 1998 and 1997, respectively.
F-21
<PAGE>
7. COMMITMENTS (CONTINUED)
Future minimum lease payments under noncancelable operating leases with
initial terms of one year or more consisted of the following at December 31,
1999:
<TABLE>
<S> <C>
2000 $ 236,463
2001 237,720
2002 20,500
--------------
Total minimum lease payments $ 494,683
==============
</TABLE>
8. EMPLOYEE BENEFITS PLAN
The Company has a profit sharing 401(k) plan that covers substantially all of
its employees. Eligible employees may contribute up to 10% of their
compensation. Contributions are discretionary, however, the Company generally
matches 10% of the employees' contributions up to the maximum of 1% of
eligible compensation. Amounts recognized as expense were $10,045, $10,409
and $0 for the years ended December 31, 1999, 1998 and 1997, respectively.
In May 1998, the Board of Directors approved the Natrol, Inc. Employee Stock
Purchase Plan (the ESPP) which allows substantially all employees to purchase
shares of Common Stock of the Company, through payroll deductions, at 85% of
the fair market value of the shares at the beginning or end of the offering
period, whichever is lower. The ESPP provides for employees to authorize
payroll deductions of up to 10% of their compensation for each pay period. In
conjunction with the ESPP, the Company registered with the Securities and
Exchange Commission 225,000 shares of the Company's Common Stock reserved for
purchase under the ESPP. As of December 31, 1999, 199,735 shares are
available for issuance under this plan. For the year ended December 31, 1999,
18,775 shares were issued at prices ranging from $5.95 to $6.38 per share
under the plan. For the year ended December 31, 1998, 6,490 shares were
issued at $7.65 per share under the plan.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments.
CASH AND CASH EQUIVALENTS: the carrying amount approximates fair value.
MARKETABLE SECURITIES: the carrying amount approximates fair value based upon
quoted market prices.
F-22
<PAGE>
ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE: the carrying amount approximates fair
value.
F-23
<PAGE>
9. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
DEBT: The carrying amount of the Company's borrowings on its revolving line
of credit approximates fair value. The fair value of the Company's long-term
notes payable are estimated using discounted cash flow analyses, based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements. The carrying amount of long-term notes payable approximate
their fair value at December 31, 1999.
10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-----------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1999
Net sales $ 17,837 $ 17,864 $ 21,173 $ 24,716
Gross profit 9,341 9,399 10,998 12,002
Net income 2,049 1,871 2,539 2,729
Basic earnings per share $ 0.15 $ 0.14 $ 0.19 $ 0.20
Diluted earnings per share $ 0.15 $ 0.14 $ 0.19 $ 0.20
1998
Net sales $ 13,169 $ 16,344 $ 19,501 $ 19,193
Gross profit 7,017 8,788 10,174 10,217
Net income 1,175 1,578 2,517 2,245
Basic earnings per share $ 0.17 $ 0.22 $ 0.21 $ 0.17
Diluted earnings per share $ 0.11 $ 0.15 $ 0.20 $ 0.16
</TABLE>
Certain reclassifications have been made to the quarterly information as
previously reported by the Company in the table above to conform to the
presentation for the year ended December 31, 1999.
F-24
<PAGE>
EXHIBIT 10.13
PURCHASE AND SALE AGREEMENT
BETWEEN
WHLW REAL ESTATE LIMITED PARTNERSHIP
AS SELLER,
AND
NATROL REAL ESTATE II, INC.
AS PURCHASER
DATED: NOVEMBER 22, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Section 1. Agreement of Purchase and Sale................................1
Section 2. The Purchase Price............................................2
Section 3. Inspection Period; Certain Termination Provisions.............3
Section 4. Title and Contracts...........................................6
Section 5. Closing Date.................................................10
Section 6. "AS IS, WHERE IS AND WITH ALL FAULTS"........................10
Section 7. Satisfaction of Liens........................................13
Section 8. Violations...................................................13
Section 9. Representations, Warranties and Covenants....................13
Section 10. Operation of Property to Closing.............................16
Section 11. Closing Documents............................................16
Section 12. Prorations and Costs.........................................18
Section 13. Brokerage....................................................20
Section 14. Notices......................................................20
Section 15. Damage or Destruction Prior to Closing and Condemnation......21
Section 16. Reporting Requirements.......................................21
Section 17. Miscellaneous................................................22
Section 18. Confidentiality..............................................24
</TABLE>
<TABLE>
<CAPTION>
EXHIBITS Page
- --------
<S> <C> <C>
EXHIBIT A - Description of Land......................................A-1
EXHIBIT B - Assignment and Assumption of Leases......................B-1
EXHIBIT C - [Intentionally omitted]..................................C-1
EXHIBIT D - Assignment of Warranties, Permits, Contracts
and General Intangibles..................................D-1
EXHIBIT E - Purchaser's AS-IS Certificate............................E-1
EXHIBIT F - Natural Hazard Disclosure Statement......................F-1
EXHIBIT G - Grant Deed...............................................G-1
</TABLE>
<TABLE>
<CAPTION>
SCHEDULES
<S> <C>
SCHEDULE 1 - Disclosure Items
SCHEDULE 1.3 - Personal Property
SCHEDULE 1.5 - Schedule of Leases
SCHEDULE 1.7 - Property Contracts
SCHEDULE 9.1.4 - List of Material Contracts
</TABLE>
i
<PAGE>
PURCHASE AND SALE AGREEMENT
---------------------------
PURCHASE AND SALE AGREEMENT ("Agreement") made this 22nd day of
November, 1999 ("Agreement Date") between the Seller identified as such on
the execution page hereof ("Seller") and the Purchaser identified as such on
the execution page hereof ("Purchaser").
W I T N E S S E T H:
-------------------
WHEREAS, Purchaser desires to acquire and Seller desires to sell all
of Seller's right, title and interest in and to the industrial building more
particularly described on EXHIBIT A attached hereto.
NOW, THEREFORE, in consideration of Ten and no/100 ($10.00) Dollars
and other good and valuable consideration, the receipt and adequacy of which
are hereby acknowledged, and the mutual covenants and undertakings of the
parties set forth herein, the Seller and Purchaser agree as follows:
SECTION 1. AGREEMENT OF PURCHASE AND SALE
Seller hereby agrees to sell and convey and Purchaser agrees to purchase
on the terms and conditions herein set forth, all of Seller's right, title
and interest in and to the following:
1.1 The fee simple estate in and to the land described in EXHIBIT A
attached hereto (the "Land") together with the office building and all other
improvements located thereon ("Improvements"), together with all air rights,
water rights, mineral rights, rights of way, easements, appurtenances and
hereditaments appertaining thereto. The Land and Improvements are herein
referred to as the "Property";
1.2 All machinery, apparatus, equipment, fittings and fixtures in
or on the Property or which are attached thereto but excluding any such items
to the extent owned by tenants or other third parties ("Fixtures");
1.3 All of the personal property located in or on the Property
including, without limitation, the property listed on SCHEDULE 1.3 attached
hereto but specifically excluding the personal property in Seller's
management office on the Property and the personal property owned by tenants
("Personal Property");
1.4 All rights, if any, to general intangibles relating to the
Property (including, without limitation, any name or trade name used in
connection with the Improvements), but excluding the names or tradenames
Lincoln Property Company, Legacy Partners, Whitehall Street Real Estate
Limited Partnership, Lincoln-Whitehall, Lincoln-Whitehall Pacific, WHLW Real
Estate
1
<PAGE>
Limited Partnership ("WHLW") or any abbreviations or derivations of any of
the foregoing and related names and proprietary computer equipment, software
and systems);
1.5 The interest of Seller, as landlord, in the occupancy leasehold
estates created by those certain leases, tenancies and rental agreements and
all amendments thereto or assignments thereof that are described in the
Schedule of Leases attached hereto as SCHEDULE 1.5 (hereto collectively
referred to as the "Leases");
1.6 All assignable warranties and guaranties, if any, issued in
connection with the Property (collectively, the "Assignable Warranties");
1.7 Any transferable consents, authorizations, variances or
waivers, licenses, permits and approvals from any governmental or
quasi-governmental agency, department, board, commission, bureau or other
entity or instrumentality relating to the Property (collectively, the
"Permits"); and
1.8 All written agreements (other than the Leases and the Permitted
Exceptions as hereinbelow defined and the management and leasing agreement
with Legacy Partners Commercial, Inc. (formerly known as Lincoln Property
Company N.C., Inc. and LPC MS, Inc.) which shall be cancelled at Closing at
no cost to Purchaser), to which Seller is a party and which affect the
Property ("Contracts"), a schedule of which is attached hereto as SCHEDULE 1.7.
Except as herein otherwise specifically provided, it is intended
that Seller shall transfer to Purchaser all of Seller's right, title and
interest of every kind or nature in the Property, the Fixtures, the Leases,
the Personal Property, the Assignable Warranties, the Permits, Contracts and
all other interests of Seller in and to the Property (collectively, the
"Project").
SECTION 2. THE PURCHASE PRICE
The purchase price (the "Purchase Price") for the Project is Seven
Million One Hundred Seventy-two Thousand Two Hundred Ninety-four Dollars
($7,172,294) to be paid as follows:
2.1 One Hundred Thousand Dollars ($100,000) (the "Deposit") shall
be paid by Purchaser on the same day as the execution hereof, which amount
shall, subject to collection, be held in escrow by Fidelity National Title
Insurance Company (hereinafter referred to as "Escrow Agent" or "Title
Insurer"). The Deposit shall be held in an interest bearing account
reasonably acceptable to the parties and all interest on the Deposit shall
become part of the Deposit. The Deposit and interest earned thereon shall be
fully refundable to Purchaser until 5:00 p.m. (Pacific Time) on November 30,
1999 (the "Conditions Period"). For purposes hereof, the last day of the
Conditions Period shall mean and be referred to herein as the "Approval
Date". If Purchaser fails to deliver the Deposit with the Escrow Agent
strictly as and when contemplated herein, Seller shall have the right to
terminate this Agreement by delivering written notice thereof to Purchaser at
any time and thereafter neither party shall have any further rights or
obligations hereunder except for the indemnities contained
2
<PAGE>
in Sections 3.2 and 18 below, Purchaser's covenants made herein which are
expressly intended to survive any such termination and Purchaser's
obligations under Section 3.2(x) below to deliver to Seller the Due Diligence
Materials (defined below) (collectively, "Purchaser's Surviving
Obligations"). If the purchase and sale of the Project is consummated in
accordance with the terms and provisions of this Agreement, then the Deposit
shall be paid to Seller at Closing and credited against the Purchase Price.
In all other events, the Deposit shall be disposed of by the Escrow Agent as
provided herein.
2.2 The balance of the Purchase Price shall be paid on Closing,
plus or minus prorations and adjustments to be made pursuant to this
Agreement, in good immediately available United States funds. The balance of
the Purchase Price shall be wire transferred into escrow and Escrow Agent
shall receive confirmation of receipt thereof no later than 9:00 a.m.
(Pacific Time) on the date of Closing.
SECTION 3. INSPECTION PERIOD; CERTAIN TERMINATION PROVISIONS
3.1 Purchaser's obligations under this Agreement shall be subject
to the satisfaction of or waiver by Purchaser of the following described
matters (collectively, the "Pre-Closing Conditions") on or before the earlier
of (i) the time periods specified in each subsection below, or (ii) 5:00
p.m. (Pacific Time) on the Approval Date:
3.1.1 PHYSICAL INSPECTIONS. Within five (5) business days
after the Agreement Date, but only to the extent the same is actually in
Seller's possession and has not already been delivered to Purchaser by Seller
prior to the Agreement Date, without any warranty or representation as to the
accuracy or thoroughness thereof or to the ability of Purchaser to rely
thereon, Seller shall deliver to Purchaser a true and complete copy of the
most recent environmental site assessment report(s) with respect to an
evaluation of Hazardous Materials (defined below) in, on or under the
Property. After Purchaser has provided to Seller a certificate of
insurance(s) evidencing Purchaser's or Purchaser's agents', consultants'
and/or contractors' (as the case may be) procurement of a commercial general
liability insurance policy as required herein, Seller shall permit Purchaser
and its authorized agents, consultants and contractors to enter upon the
Property during reasonable business hours (provided, Purchaser shall not
interfere with or disturb any tenants' operations therein or Seller's
operation of the Property)to make and perform such environmental evaluations,
and other inspections and investigations of the physical condition of the
Property. Purchaser shall maintain, and shall ensure that its agents,
consultants and contractors maintain, public liability and property damage
insurance insuring against any liability arising out of any entry, tests or
investigations of the Property pursuant to the provisions hereof.
Notwithstanding the foregoing, Purchaser shall not be permitted to undertake
any intrusive or destructive testing of the Property, including without
limitation a "Phase II" environmental assessment, without in each instance
first obtaining Seller's written consent thereto, which consent Seller may give
or withhold in Seller's sole and absolute discretion. Prior to entering the
Property (and on each and every occasion), Purchaser shall deliver to Seller
prior written notice thereof [or verbal notice
3
<PAGE>
wherein Purchaser actually speaks with a representative of Seller (not a
voicemail message) with written notice delivered immediately thereafter, if
requested at such time], and shall afford Seller a reasonable opportunity to
have a representative of Seller present to accompany Purchaser while Purchaser
performs its evaluations, inspections, tests and other investigations of the
physical condition of the Property. Prior to any entry to perform any
necessary on-site inspections, tests or investigations, Purchaser shall give
Seller written notice thereof [or verbal notice wherein Purchaser actually
speaks with a representative of Seller (not a voicemail message) with written
notice delivered immediately thereafter, if requested at such time],
including the identity of the company or party(s) who will perform such
inspections, tests or investigations and the proposed scope of the inspections,
tests or investigations. Seller shall approve or disapprove any proposed
inspections, tests or investigations and the party(s) performing the same within
two (2) business days after receipt of such notice. Seller's failure to advise
Purchaser of its disapproval of any proposed inspections, tests or
investigations and the party(s) performing the same within such two (2)
business day period shall be deemed Seller's approval thereof, except to the
extent said proposed inspections, tests or investigations relate to "Phase
II" environmental matters, in which event Seller's failure to advise
Purchaser of its approval or disapproval of any proposed environmental
inspections, tests or investigations and the party(s) performing the same
within such two (2) business day period shall be deemed Seller's disapproval
thereof. Upon request, Purchaser shall promptly deliver to Seller copies of
any reports relating to any inspections, tests or investigations of the
Property performed by or on behalf of Purchaser. Prior to Purchaser
contacting any of the tenants, Purchaser shall give Seller written notice
thereof, including the identity of the company or persons who will perform
any tenant interview or contacts. Seller or its representative(s) may be
present at any such interview or meeting with any of the tenants and
Purchaser will reasonably cooperate and coordinate with Seller to effectuate
same. Purchaser shall have until 5:00 p.m. (Pacific Time) on the Approval
Date to notify Seller in writing of its approval or disapproval of any such
evaluations, inspections and investigations.
3.1.2 PLANS, PERMITS, REPORTS AND RELATED INFORMATION. Within
five (5) business days after the Agreement Date, but only to the extent the
same is actually in Seller's possession and has not already been delivered to
Purchaser by Seller prior to the Agreement Date, Seller will deliver to
Purchaser a true and complete copy of (a) property tax bills for the two (2)
most recent tax fiscal years; (b) without any warranty or representation as
to the accuracy thereof or to the ability of Purchaser to rely thereon, soils
reports, ADA reports, as-built plans and specifications, drawings, and
structural or engineering studies or reports; and (c) without any warranty or
representation as to the accuracy thereof or to the ability of Purchaser to
rely thereon, a copy of any existing survey(s) of the Property. Purchaser
shall have until 5:00 p.m. (Pacific Time) on the Approval Date to notify
Seller in writing of its disapproval of any such matters. In no event shall
Seller be required to prepare or obtain any information, report, document or
survey not presently in Seller's possession.
3.1.3 LEASES AND FINANCIAL INFORMATION. Within five (5)
business days after the Agreement Date, but only to the extent the same is
actually in Seller's or its property manager's possession and has not already
been delivered to Purchaser by Seller prior to the Agreement Date, Seller
will deliver to Purchaser or otherwise make available to Purchaser at Seller's
4
<PAGE>
property management company's offices during normal business hours for
inspection by Purchaser, the following described documents and information:
(i) a copy of the existing Leases, if any, together with any amendments or
modifications thereof affecting any portion of the Property, and any
correspondence with the tenants of the Property of a material nature; (ii) a
current rent roll for the Property, in the format customarily used by Seller,
with the information contained therein made as of the Agreement Date; (iii) a
copy of project operating reports, in the format and for the time periods
customarily prepared by Seller; and (iv) a copy of CAM reconciliations and
year-end financial statements for the Property for the two (2) most recent
full calendar years prior to the Closing and to the extent available, the
current year. Purchaser shall until 5:00 p.m. (Pacific Time) on the
Approval Date to notify Seller in writing, of its approval or disapproval of
the Leases and the financial information; provided, however, in no event
shall Seller be required to modify, terminate or otherwise supplement any of
the Leases. Seller shall assign its rights and interests in and to the
Leases and all security deposit(s), if any, then being held by Seller to
Purchaser at the Closing pursuant to the Assignment and Assumption of Leases
in substantially the form attached hereto as EXHIBIT B, and made a part
hereof.
3.1.4 ECONOMIC FEASIBILITY. Purchaser's determination, in its
sole and absolute discretion, of the economic feasibility of the Property for
Purchaser's intended ownership.
3.1.5 NATURAL HAZARD DISCLOSURE STATEMENT. By the date which
is two (2) business days prior to the Approval Date, Seller shall have
executed and delivered to Purchaser a Natural Hazard Disclosure Statement, as
and to the extent prescribed by California law, in substantially the form of
EXHIBIT F attached hereto and made a part hereof (the "NHDS").
3.2 Any due diligence conducted by Purchaser, whether prior to or after
the execution and delivery of this Agreement, shall be at the sole cost and
expense of the Purchaser. Purchaser shall be fully responsible to Seller for
all of the acts and/or omissions of Purchaser, its employees, agents and
representatives on or affecting the Project in the course of any such
inspections or assessments. In connection with any such due diligence
activities, whether conducted prior to or after the date of this Agreement,
Purchaser (i) shall indemnify, defend and hold Seller harmless from and
against all costs, expenses, losses, claims, damages and/or liabilities
relating to any physical damage or personal injury or death resulting from
Purchaser's inspection of the Property, provided Purchaser shall not be
liable to Seller solely as a result of the discovery by Purchaser of a
preexisting condition on the Property; (ii) shall promptly repair any damage
resulting from any such inspections; (iii) shall fully comply with all laws,
ordinances, rules and regulations in connection with such inspections; (iv)
shall conduct its activities in a manner to minimize any disturbance to
Seller, its employee and others; (v) shall not contact any governmental
agencies without the prior written consent of Seller (which consent shall not
be unreasonably withheld or delayed) and shall permit a representative of
Seller to accompany Purchaser on any interviews with governmental agencies;
(vi) shall not permit any inspections, investigations or other due diligence
activities to result in any liens, judgments or other encumbrances being
filed against the Property and shall, at its sole cost and expense, promptly
discharge of record any such liens or encumbrances that are so filed or
recorded; (vii) shall not permit any borings, drillings or samplings to be
done on or at the Property without the prior written consent of Seller;
(viii) shall, promptly following the
5
<PAGE>
termination of this Agreement, provide Seller with copies of inspection
reports and studies prepared by third parties in connection with Purchaser's
inspection and due diligence, provided Purchaser makes no warranty or
representation as to the accuracy or thoroughness of the reports or studies
and Seller shall not be entitled to rely thereon;(ix) shall maintain, with
insurance companies satisfactory to Seller, a policy of comprehensive
general public liability insurance, with a broad form contractual liability
endorsement covering Purchaser's indemnification obligations hereunder, and
with a combined single limit of not less than $1,000,000 per occurrence for
bodily injury and property damage, automobile liability coverage including
owned and hired vehicles with a combined single limit of $1,000,000 per
occurrence for bodily injury and property damage, and an excess umbrella
liability policy for bodily injury and property damage in the amount of
$5,000,000, insuring Seller and its manager (and their successors, assigns
and affiliates) as additional insureds (certificates of which shall be
given to Seller prior to the first entry by Purchaser on the Property), all
of which insurance shall be written on an "occurrence form", shall contain a
cross-liability provision and a provision that the insurance provided by
Purchaser hereunder shall be primary and non-contributing with any other
insurance available to Seller, and (x) shall return to Seller all materials
with respect to the Property provided to Purchaser by Seller if Purchaser
fails to acquire the Property for any reason. Such insurance shall apply
exclusively to any costs, expenses, losses, claims, damages and/or liabilities
incurred by Seller as a direct or indirect result of any act or omission by
Purchaser or any of Purchaser's agents, consultants and/or contractors on or
about the Property. The provisions of this paragraph shall survive the
termination of this Agreement.
3.3 In the event that this Agreement terminates pursuant to any
other Section of this Agreement which refers to this Section 3.3, (a)
Purchaser shall receive a full refund of the Deposit, together with all
interest actually earned thereon and (b) except for obligations that this
Agreement expressly states survive termination, neither party shall have any
further rights or claims or liabilities towards the other.
SECTION 4. TITLE AND CONTRACTS
4.1 Purchaser shall accept title to the Property if Title Insurer
(as hereinafter defined) will insure the Property subject only to the
Permitted Exceptions (as hereinafter defined).
4.1.1 Seller has ordered a preliminary title report ("Title
Report") to be issued by the Title Insurer and Seller has delivered to
Purchaser the Title Report. All exceptions to title and other matters
appearing on the Title Report (other than any such exceptions described in
the second sentence of Section 4.1.2 hereof) shall constitute "Permitted
Exceptions" for purposes of this Agreement. In the event the Title Insurer
amends or updates the Title Report ("Title Report Update") after the date on
which the Purchaser posts the Deposit, Purchaser shall furnish Seller with a
statement of objections, if any, to the title to the Property to any matter
first raised in the Title Report Update ("Objections") within three (3)
business days after its receipt of the Title Report Update ("Title Update
Review Period"). Should Purchaser fail so to timely notify Seller of any
such Objections to title to the Property which are first disclosed in a
Title Report Update, Purchaser shall
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be deemed to have agreed to accept title subject to all matters of record.
All title matters and exceptions (i) arising out of the Leases including,
without limitation, new Leases or amendments to Leases entered into pursuant
to the terms hereof, or (ii) set forth in the Title Report, in any Title
Report Update which are not Objections that Seller agrees to satisfy pursuant
to Sections 4.1.2 and 4.2 hereof, and all title matters and exceptions which
are waived or deemed to be waived are hereafter referred to as the "Permitted
Exceptions". In no event shall the provisions of this Section be deemed to
extend the Closing Date (it being understood and agreed that the failure by
the Purchaser to notify Seller of any Objections as set forth above or to
terminate this Agreement as set forth in Section 4.3 below by the Approval
Date shall be deemed to be a waiver of all Objections that the Seller has not
agreed to cure prior to the Approval Date or that the Seller is not obligated
to cure pursuant to the second sentence of Section 4.1.2 and that, in the
event purchaser does not timely notify Seller of Objections or terminate this
Agreement, all such Objections shall be deemed to be "Permitted Exceptions"
for all purposes of this Agreement).
4.1.2 If Purchaser notifies Seller within the Title Update
Review Period, if applicable, of any Objections first raised in the Title
Report Update, then within five (5) days after Seller's receipt of
Purchaser's notice ("Seller Response Period"), Seller shall notify Purchaser
("Seller's Title Notice") of the Objections which Seller agrees to satisfy on
or prior to the Closing, at Seller's sole cost and expense, and of the
Objections that Seller cannot or will not satisfy. Notwithstanding the
foregoing sentence, Seller shall, in any event, be obligated to cure those
Objections (i) that are monetary liens or security interests against the
Project other than taxes and assessments not yet delinquent or (ii) that have
been voluntarily placed against the Property by Seller after the date hereof
and that are not otherwise permitted pursuant to the provisions hereof. If
Seller (a) delivers Seller's Title Notice stating that Seller cannot or will
not satisfy any such Objections first raised in the Title Report update or
(b) fails to send the Seller's Title Notice within the Seller Response
Period, then Purchaser has the option on or prior to the date that is two (2)
days after the delivery by the Seller of the Seller's Title Notice of either
(i) terminating this Agreement by delivering written notice thereof to Seller
in which event it shall be deemed that Purchaser terminated this Agreement
pursuant to Section 3.3 hereof and the rights of the parties shall be as set
forth therein or (ii) it shall be deemed to have waived such Objections, in
which event those Objections shall become "Permitted Exceptions".
4.1.3 It is a condition to Purchaser's obligations to close
that provided Purchaser shall meet the requirements of the Title Insurer and
comply with its obligations under this Agreement including, without
limitation, to pay the Purchase Price, the Title Insurer shall issue a
standard American Land Title Association Owners Title Policy (on their
current form but deleting the creditors' rights exception) (the "Title
Policy") to Purchaser in the amount of the Purchase Price, insuring that
Purchaser has good and indefeasible fee simple title to the Property, subject
only to the Permitted Exceptions. Purchaser will pay for the Title Policy
which shall include (a) limiting the standard parties in possession exception
to the rights of other parties in possession under the Leases shown on
SCHEDULE 1.5 as same may be revised pursuant to the terms hereof, as tenants
only, and (b) deleting any general mechanic's lien exception. The Title
Policy shall contain such endorsements as reasonably required by Purchaser,
provided that Seller shall have no obligation to take any action or provide
any indemnity or agreement to Title Insurer to support the issuance of such
endorsements, and Purchaser shall pay the costs for all such endorsements.
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4.1.4 In the event that Seller shall be unable to convey title
to the Property as herein provided, Purchaser shall, at its election, either
(a) accept such title as Seller is able to convey without abatement or
reduction of the Purchase Price or any credit or allowance on account
thereof; or (b) terminate this Agreement. Upon such termination, the rights
of the parties shall be as set forth in Section 3.3 hereof. Seller shall
have no obligation or liability to Purchaser for any damages or other
compensation which Purchaser may have sustained by reason of Seller's
inability to convey title in accordance with the terms of this Agreement.
Notwithstanding anything to the contrary herein contained, Seller shall not
be required to bring any action or proceeding or take any other steps to
remove any defects in or objections to title or to expend any monies
therefor, nor shall Purchaser have any right of action against Seller
therefor at law or in equity for damages or specific performance for Seller's
inability to convey title in accordance with the terms of this Agreement,
provided, however, the Seller shall satisfy any mortgage or other lien which
may be satisfied by payment of a sum of money only, except for the liens for
taxes and assessments not yet delinquent, and Seller shall remove at Closing
any exceptions to title the Property created by the intentional acts of
Seller after the date hereof which are in breach of this Agreement. In the
event the Property is encumbered by any mortgage or other liens which may be
satisfied by a sum of money only, except for the liens for taxes and
assessments not yet delinquent, and which is not a Permitted Exception,
Purchaser shall have the right, at the time of Closing, to apply a portion
of the Purchase Price towards the payment and satisfaction of such mortgage
or other liens and receive a credit against the Purchase Price for the
amount so applied. Seller shall, however, have the right at its option, to
remedy any title defects or objections and for such purpose shall be entitled
to one or more adjournments of the Closing, but not for more than fifteen
(15) days beyond the date Purchaser gives written notice of such defect or
objection. Purchaser's obligations shall remain in full force and effect in
the meantime.
4.2 Within five (5) business days after the Agreement Date, but only to
the extent the same is actually in Seller's possession, Seller will deliver
to Purchaser a copy of all service agreements, commission agreements,
maintenance agreements, easement agreements, improvement agreements,
license agreements, and other agreements related to or affecting the
Property and not included as part of the title documents delivered pursuant
to Section 4.1.1 hereof (collectively, the "Contracts"). Purchaser shall
have until 5:00 p.m. Pacific Time on November 24, 1999, to either approve of
any such Contracts, or to notify Seller in writing, specifying any Contracts
which Purchaser desires be terminated on or before the Closing, and which, by
their express terms, may be terminated on or before the Closing, (the
"Disapproved Contracts"); provied, however, in no event shall Seller be
required to terminate any Contracts which by their terms are not terminable
prior to the Closing or otherwise not terminable without payment by Seller of
a penalty, charge or premium. Seller shall have until 5:00 p.m. Pacific Time
on November 29, 1999, to notify Purchaser, in writing, of its agreement to
lawfully terminate such Disapproved Contracts prior to the Closing, with such
Disapproved Contracts being terminated effective on or before the Closing.
Those Contracts not expressly disapproved by Purchaser (collectively, the
"Approved Contracts") shall be assigned by Seller to Purchaser at the
Closing. Seller shall assign its rights and interests under the Approved
Contracts to Purchaser at the Closing pursuant to the Assignment and
Assumption of Contracts, Warranties and Permits in substantially the form
attached hereto as EXHIBIT D, and made a part hereof. Failure by Seller to
agree to so terminate some or all of the Disapproved Contracts within
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the specified period shall be deemed to be a failure of this condition,
unless Purchaser withdraws its disapproval or rejection, in writing, prior to
the 5:00 p.m. (Pacific Time) on the Approval Date.
4.3 FAILURE OF CONDITIONS. In the event that any or all of the
Pre-Closing Conditions and/or the conditions set forth in this Section 4 are
not satisfied or waived within the applicable time periods specified above,
then Purchaser may terminate this Agreement by delivering written notice
thereof to Seller on or before the expiration of said time periods. If
Purchaser so elects to terminate this Agreement, the Deposit shall be
returned to Purchaser and neither Purchaser nor Seller shall have any further
liability or obligation to each other, except for the indemnities contained
in Sections 3.2 and 18. Notwithstanding anything to the contrary contained
herein, if Purchaser terminates this Agreement for failure of a Pre-Closing
Condition or for any other reason. Purchaser shall deliver to Seller a copy
of all materials, tests, audits, surveys, reports, studies and the results of
any and all investigations and inspections conducted by Purchaser (excluding
any proprietary materials) (collectively, the "Purchaser's Documents") and
Purchaser shall also return to Seller any and all documents, leases,
agreements, reports and other materials given to Purchaser by or on behalf of
Seller (collectively, the "Seller's Documents") (the Purchaser's Documents
and the Seller's Documents are collectively referred to herein as the "Due
Diligence Materials") within ten (10) days after such termination of this
Agreement. The foregoing covenants of Purchaser shall survive any such
termination of this Agreement. If Purchaser fails to terminate this Agreement
by delivering written notice thereof to Seller prior to 5:00 p.m. (Pacific
Time) on the Approval Date the Deposit shall become non-refundable to
Purchaser. If the Pre-Closing Conditions and the conditions set forth in this
Section 4 are satisfied or waived by Purchaser but any or all of the
Purchaser's Closing Conditions are not satisfied or waived by Purchaser on or
before the date established for the Closing, then Purchaser shall notify
Seller in writing of those Purchaser's Closing Conditions which have not been
satisfied or otherwise waived by Purchaser (the "Purchaser's Closing
Conditions Failure Notice"). Seller shall have three (3) business days after
Purchaser has delivered to Seller the Purchaser's Closing Conditions Failure
Notice (and the Closing shall be extended, if necessary to give Seller such
three (3) business day period) to notify Purchaser in writing of Seller's
election either to (a) take such actions as may be necessary to cure such
matters to Purchaser's reasonable satisfaction prior to the date of Closing
(as same may be extended), or (b) advise Purchaser that Seller will not cure
such matters (the "Seller's Conditions Notice"). If Seller elects not to cure
such matters, then within two (2) business days after Purchaser's receipt of
the Seller's Conditions Notice (and the Closing shall be extended, if
necessary to give Purchaser such two (2) business day period), Purchaser, at
its sole option, may elect to do any of the following: (1) Purchaser may
elect to terminate this Agreement by delivering written notice thereof to
Seller, in which event Seller shall promptly cause the return to Purchaser of
the Deposit, and the parties shall have no further obligations hereunder
except for Purchaser's Surviving Obligations; or (2) Purchaser may elect to
waive the Purchaser's Closing Condition(s) in question and proceed with the
purchase of the Property. If Purchaser elects to terminate the Agreement,
neither party shall have any further liability or obligation hereunder except
for Purchaser's Surviving Obligations. If Seller elects to cure such matters
as set forth in the Purchaser's Closing Conditions Failure Notice, Seller
shall promptly take any and all actions as may be necessary to cure same and
the date of the Closing may be extended for a period of time reasonably
acceptable to both Seller and Purchaser to enable Seller to accomplish same.
Failure by Purchaser to notify Seller within the specified time periods set
forth herein, shall be deemed an approval by Purchaser of each such matter,
in which event all such conditions and contingencies shall be conclusively
deemed to be satisfied and approved. If any of the Seller's Closing
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Conditions are not satisfied or otherwise waived by Seller prior to the
Closing Date, Seller may elect, in its sole and absolute discretion, to
terminate this Agreement.
SECTION 5. CLOSING DATE
The sale contemplated by this Agreement shall be consummated and closed
at 8:00 a.m. (Pacific Time) on December 15, 1999 ("Closing Date") at the
offices of the Title Insurer (or its agent), or at such earlier time or
other place as the parties shall mutually agree. TIME SHALL BE OF THE ESSENCE
WITH RESPECT TO PURCHASER'S and SELLER'S OBLIGATION TO CLOSE ON THE CLOSING
DATE subject, however, to Seller's rights to adjourn the Closing Date
expressly set forth in this Agreement. The consummation and the closing of
the purchase and sale of Project as contemplated by this Agreement,
including, without limitation, the recordation of the grant deed, is herein
referred to as the "Closing".
Seller's obligation to sell the Property is conditioned upon the
satisfaction (or Seller's written waiver) on or prior to the Closing Date of
the following conditions:
(i) There shall exist on the Closing Date no pending
order or decree from any governmental authority or
entity prohibiting, enjoining or restraining
Purchaser from consummating the transactions
contemplated hereby with respect to the Property;
(ii) Purchaser shall have paid to Seller in cash the
balance of the Purchase Price;
(iii) The Purchaser shall have a signed a Natural Hazard
Disclosure Statement, substantially in the form of
EXHIBIT F, which shall serve to acknowledge
Purchaser's receipt from the Seller of such
Natural Hazard Disclosure Statement and the
Purchaser's understanding thereof; and
(iv) Purchaser shall not otherwise be in material
default of its obligations hereunder.
SECTION 6. "AS IS, WHERE IS AND WITH ALL FAULTS"
6.1 The Purchaser has made, and shall make, such
investigations and inspections of the Project and the books and records
relating thereto to satisfy itself as to all matters relating to its
purchase of the Project and Purchaser shall purchase the Project in "AS IS,
WHERE IS AND WITH ALL FAULTS" condition, at the date hereof, subject to
normal wear and tear until Closing (consistent with Seller's obligations in
Section 10 hereof) and subject to casualty damage as herein provided.
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This Agreement and the Exhibits and Schedules attached hereto contain
all the terms of the agreement entered into between the parties, and
Purchaser acknowledges that neither Seller nor any representatives of Seller
has made any representations or held out any inducements to Purchaser, other
than those herein expressed. Without limiting the generality of the
foregoing Purchaser has not relied on any representations or warranties and
neither Seller nor its representatives has made any representations or
warranties other than as expressly set forth herein, in either case express
or implied, as to (i) the current or future real estate tax liability,
assessment or valuation of the Property; (ii) the potential qualification of
the Property for any and all benefits conferred by federal, state or
municipal laws, whether for subsidies, special real estate tax treatment,
insurance, mortgages, or any other benefits, whether similar or dissimilar to
those enumerated; (iii) the compliance of the Property, in its current or any
future state, with applicable zoning ordinances and the ability to obtain a
change in the zoning or a variance in respect to the Property's
non-compliance, if any, with said zoning ordinances; (iv) the availability of
any financing for the purchase, alteration, rehabilitation or operation of
the Property from any source, including but not limited to, state, city, or
federal government or any institutional lender; (v) the current or future use
of the Property; (vi) except as set forth in, and subject to the limitations
set forth in, the NHDS, whether any Real Property lies within a special flood
hazard area, regulated wetlands, an area of potential flooding, a very high
hazard severity zone, a wildland fire area, an earthquake fault zone or a
seismic hazard zone; or (vii) the physical condition of the Property
including, without limitation, any environmental conditions (including,
without limitation, the presence of asbestos or other hazardous materials)
which may exist.
Without limiting the above, and subject to the limitation expressly set
forth in the third to last paragraph of this Section 6.1, the Purchaser, on
behalf of itself and its respective agents, present and former officers,
directors, shareholders, partners, employees, parent and subsidiary
affiliates, predecessors, affiliates, related entities, successors,
subrogees, and assigns, and anyone acting in concert with or claiming rights
derivative of any of them (collectively, the "Purchaser Parties"), waives its
right to recover from, and forever releases and discharges, and covenants not
to sue each of Seller and Lincoln-Whitehall Pacific, L.L.C.
("Lincoln-Whitehall"), and its respective direct and indirect owners,
partners, members, property management company (including the general
partners, officers, directors, members, shareholders, employees or agents
thereof), principals, officers, directors, trustees, beneficiaries, agents,
predecessors, servants, employees, successors, assigns, heirs,
administrators, attorneys, subsidiaries, affiliated companies, insurance
carriers, representatives and adjusters, and all other persons, corporations,
or associations related to or acting in conjunction with, Seller or
Lincoln-Whitehall (each a "Seller Party" and collectively, the "Seller
Parties") from any and all Claims (as hereinafter defined) arising from or
relating to the physical condition of the Property, the lease or occupation
by the tenants of the Property or any law or regulation applicable thereto,
including, without limitation, the future assumption of responsibility for the
presence or alleged presence of asbestos or harmful, hazardous or toxic
substances in, on, under or about the Property, including, without limitation,
any claims under or on account of (i) the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as the same may have been
or may be amended from time to time, and similar state statutes, and any rules
and regulations promulgated thereunder, (ii) any other federal, state or
local law, ordinance, rules or regulation, now or hereafter in effect, that
deals with or otherwise in any manner relates to, environmental or health
and safety matters of any kind, or (iii) this Agreement or the common law.
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In furtherance of the releases set forth in this section, Purchaser (for
itself and on behalf of the Purchaser Parties) hereby expressly waives to the
maximum extent legally permissible any and all rights or benefits conferred
by any law that is inconsistent with the waiver and release contained in this
Section 6.1 and expressly consents that each such waiver and release shall be
given full force and effect according to each and all of its express terms
and conditions, including, without limitation, those relating to unknown and
unsuspected Claims (as hereinafter defined), if any, as well as those
relating to any other Claims set forth herein.
THE PURCHASER ACKNOWLEDGES THAT IT MAY HEREAFTER DISCOVER CLAIMS OR FACTS
IN ADDITION TO OR DIFFERENT FROM THOSE WHICH IT NOW KNOWS OR BELIEVES TO
EXIST WITH RESPECT TO THE SUBJECT MATTER OF THE RELEASES AND WHICH, IF KNOWN
OR SUSPECTED AT THE TIME OF EXECUTING THIS AGREEMENT, MAY HAVE MATERIALLY
AFFECTED THE RELEASES. NEVERTHELESS, THE PURCHASER (FOR ITSELF AND ON BEHALF
OF THE PURCHASER PARTIES) HEREBY WAIVES ANY RIGHT, CLAIM OR CAUSE OF ACTION
THAT MIGHT ARISE AS A RESULT OF SUCH DIFFERENT OR ADDITIONAL CLAIM OF FACTS.
THE PURCHASER ACKNOWLEDGES THAT IT UNDERSTANDS THE SIGNIFICANCE AND
CONSEQUENCE OF SUCH RELEASES AND THAT IT HAS BEEN ADVISED BY ITS LEGAL COUNSEL
IN CONNECTION WITH SUCH RELEASES AND SPECIFIC WAIVER.
IN CONNECTION WITH THE RELEASES CONTAINED HEREIN, THE PURCHASER (FOR
ITSELF AND ON BEHALF OF THE PURCHASER PARTIES) EXPRESSLY WAIVES THE BENEFITS
OF SECTION 1542 OF THE CALIFORNIA CIVIL CODE, WHICH PROVIDES AS FOLLOWS: "A
GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW
OR EXPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH
IF KNOWN TO HIM MUST HAVE MATERIALLY AFFECTED THE SETTLEMENT WITH THE DEBTOR."
INITIALS OF SELLER. [ILLEGIBLE] INITIALS OF PURCHASER
- --------------- ----------
As used in this Agreement, "Claims" mean any claim, demand, lien,
agreement, contract, covenant, action, suit, cause of action (whether based
on statutory or common law theories), obligation, loss, cost, expense
(including, without limitation, reasonable attorneys' fees (whether or not
litigation is commenced), penalty, damages, order or other liability, of any
kind whatsoever, whether at law or in equity, fixed or contingent, known or
unknown, and whether accruing prior to the date hereof, now or in the future.
The provisions of this Section 6 shall survive the Closing and
conveyance of title to the Property.
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SECTION 7. SATISFACTION OF LIENS
If on the Closing there are any monetary liens or encumbrances on the
Property which Seller is obligated to pay and discharge, Seller may use or
instruct the Title Insurer to use any cash portion of the Purchase Price for
the Property to satisfy the same, provided that Seller shall have delivered
to Purchaser or the Title Insurer on or before the Closing, instruments in
recordable form sufficient to satisfy such liens and encumbrances of record,
together with the cost of recording or filing said instruments. The existence
of any such liens or encumbrances shall not be deemed objections to title if
Seller shall comply with the foregoing requirements and shall cause each of
such liens and encumbrances to be discharged at or prior to Closing or cause
the Title Insurer to insure against collection of the same out of the
Property, which insurance against collection shall be subject to Purchaser's
consent not to be unreasonably withheld. Nothing herein shall be deemed to
modify the provisions of Section 4.1 of this Agreement.
SECTION 8. VIOLATIONS
Seller shall have no obligation or liability with respect to any
violations of any laws, ordinances, statutes, codes, rules or regulations
relating to the Property ("Violations").
SECTION 9. REPRESENTATIONS, WARRANTIES AND COVENANTS
9.1 Subject to the information disclosed or contained in the
Disclosure Items (as defined herein), in the Due Diligence Materials, or in
any third party or other reports or similar documents received or prepared by
Purchaser in connection with its investigation of the Properties, Seller
hereby represents and warrants for the exclusive benefit of Purchaser as of
the date hereof as follows:
9.1.1 Seller is duly organized, validly existing and in
good standing under the laws of the State of its organization and is entitled
to and has all requisite power and authority to own and operate its assets as
they are presently owned and operated.
9.1.2 The execution of this Agreement by Seller, the
consummation of the transactions herein contemplated, and the execution and
delivery of all documents to be executed and delivered by Seller pursuant
hereto, have been duly authorized by all requisite action on the part of
Seller and this Agreement has been, and all documents to be delivered by
Seller pursuant hereto will be, duly executed and delivered by Seller and is
or will be, as the case may be, binding upon and enforceable against it in
accordance with their respective terms.
9.1.3 Neither the execution of this Agreement nor the
carrying out of the transactions contemplated herein will result in any
violation of or be in conflict with the instruments pursuant to which Seller
was organized and/or operates or any applicable law, rule or regulation of
any public, governmental or quasi-governmental agency or authority, or of any
instrument or
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agreement to which Seller is a party, nor will it result in the creation or
imposition of any lien on the Property nor will it result in the termination
or the right to terminate any agreement to which Seller is a party or which
affects the Property and no consent or approval of any third party is
required for the execution of this Agreement or the carrying out of the
transactions contemplated herein.
9.1.4 Attached hereto as SCHEDULE 9.1.4 is a list of all
material agreements, instruments and understandings (excluding the Leases and
Permitted Exceptions) to which Seller is party and which affect the Property.
The property management agreement with Legacy Partners Commercial, Inc.
(formerly known as Lincoln Property Company N.C., Inc. and LPC MS Inc.) shall
be terminated by Seller on the Closing.
9.1.5 Seller is not a foreign person (as defined in
Section 1445 of the Internal Revenue Code of 1986, as amended, and the
Regulations promulgated thereunder).
Except for any material changes made in compliance with Section
10 hereof, if any of the foregoing representations and warranties shall
change in any way which would have a material adverse affect on the Property,
the income derived therefrom, the expenses relating thereto, or the operation
thereof, Purchaser shall have the right to terminate this Agreement within
the shorter of five (5) days of Purchaser's obtaining actual knowledge of any
such change or the time then remaining to Closing. If Purchaser timely
exercises its right to terminate this Agreement it shall be deemed that
Purchaser terminated this Agreement pursuant to Section 3.3 hereof and the
rights of the parties shall be as set forth therein. If Purchaser fails to
timely exercise its right to terminate this Agreement as provided above, this
Agreement shall remain in full force and effect. The provisions of this
Paragraph shall not survive the Closing. For purposes hereof, "material
adverse affect" shall mean a change that in the aggregate would have an
adverse effect on the Property, the income derived therefrom and/or the
expenses related thereto in excess of Fifty Thousand Dollars ($50,000).
Notwithstanding anything to the contrary contained herein,
Seller makes no representations or warranties with respect to the matters
(the "Disclosure Item") set forth in SCHEDULE 1 attached hereto and made a
part hereof. Notwithstanding anything to the contrary contained herein or in
any document delivered in connection herewith, Seller shall have no liability
with respect to the Disclosure Items.
9.2 Purchaser hereby warrants and represents for the sole and
exclusive benefit of Seller as follows:
(a) Purchaser is, and will continue to be at all times until
the Closing, a California corporation, duly organized and validly existing
in the state of its formation and will at Closing be in good standing under
the laws of the State in which the Project is located. Purchaser is and shall
continue to be entitled to and has and shall continue to have all requisite
power and authority to own and operate its assets as they are presently owned
and operated.
(b) The execution of this Agreement by the Purchaser has been
duly authorized by all requisite action on the part of the Purchaser and this
Agreement is binding upon and enforceable against the Purchaser in accordance
with its terms. The consummation of the
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transactions contemplated herein and the execution and delivery of all
documents to be executed and delivered by the Purchaser pursuant hereto have
or will (if Purchaser elects to proceed with the transaction in accordance
with this Agreement), prior to the Closing Date, be duly authorized by all
requisite action on the part of the Purchaser and all such documents to be
executed and delivered by the Purchaser pursuant hereto will be duly executed
and delivered by it and will be binding upon and enforceable against the
Purchaser in accordance with their respective terms.
(c) Neither the execution of this Agreement nor the carrying
out by the Purchaser of the transactions contemplated herein will result in
any violation of or be in conflict with the Articles of Organization or
By-Laws of the Purchaser, or any applicable law, rule or regulation of any
public, governmental or quasi-governmental agency or authority, or of any
instrument or agreement to which the Purchaser is a party and no consent or
approval of any governmental authority or third party is required for the
execution of this Agreement or the carrying out by Purchaser of the
transactions contemplated herein.
(d) Purchaser has not (i) made a general assignment for the
benefit of creditors, (ii) filed any voluntary petition in bankruptcy or
suffered the filing, of any involuntary petition by Purchaser's creditors,
(iii) suffered the appointment of a receiver to take possession of all, or
substantially all, of Purchaser's assets, (iv) suffered the attachment or
other judicial seizure of all, or substantially all, of Purchaser's assets,
(v) admitted in writing its inability to pay its debts as they come due, or
(vi) made an offer of settlement, extension or composition to its creditors
generally. Purchaser has, and as of the Closing Date will have, sufficient
funds to pay the Purchase Price and consummate the transactions contemplated
by this Agreement.
(e) Purchaser (i) is a sophisticated investor, (ii) is
represented by competent counsel, (iii) understands the assumptions of risk
and liability set forth in this Agreement and that, prior to Closing,
Purchaser and its agents will have inspected the Property, fully observed the
physical characteristics and condition of the Property, including without
limitation, the suitability of the topography, the availability of water
rights or utilities, the present and future zoning, subdivision and any and
all other land use matters, the condition of the soil, subsoil or groundwater
of the Property and any and all other environmental matters, the purpose(s) to
which the Property is suited, drainage, flooding, access to public roads, and
proposed routes or roads or extensions relative to the Property, and (iv)
understands that it will have no recourse whatsoever against the Seller or
its Affiliates.
9.3 The representations and warranties set forth in Section
9.1 and Section 9.2 hereof shall not survive the Closing; PROVIDED that the
representation contained in Section 9.2(e) shall survive the Closing.
Notwithstanding anything to the contrary contained herein, if prior to the
Closing, Purchaser has actual knowledge that any representation or warranty
of Seller set forth in this Agreement (including, without limitation, any of
the representations and warranties in Section 9.1) is not true, and
nevertheless Purchaser proceeds to close the transaction, then Purchaser
shall be deemed to have irrevocably and unconditionally waived its rights to
assert any claim against Seller after the Closing with respect to any
misrepresentation of which it had actual knowledge prior to the Closing. For
purposes of this Section 9.3, Purchaser shall be deemed to have actual
knowledge of the contents of the Due Diligence Materials, the Disclosure
Items and all information
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specifically delivered to Purchaser or made available to Purchaser. The
provisions of the preceding sentence shall survive the Closing.
SECTION 10. OPERATION OF PROPERTY TO CLOSING
10.1 From the date hereof until the Closing, or the
termination of this Agreement, whichever shall first occur, (a) Seller shall
continue to operate the Property in the manner in which it presently operates
the Project; (b) Seller will maintain the existing insurance covering the
Property or if any of such policies is expiring such policies shall be
replaced with new policies containing similar coverage provided the same is
available; (c) Seller shall not place any mortgage or any other encumbrance
on the Property and Seller will not remove any of the Fixtures unless it
replaces the same with Fixtures of similar quality and (d) Seller will
continue to do routine repairs to the Property in the same manner in which
such repairs are presently made. If required to comply with its obligations
contained in subdivisions (a) and (d) of the preceding sentence, Seller, to
the extent required by the terms of the Leases, spend up to the aggregate sum
of Ten Thousand Dollars ($10,000) for capital repairs and replacements to the
Property. Notwithstanding anything to the contrary contained herein, Seller
shall not be obligated to make any capital repairs and replacements to the
Property exceeding the aggregate sum of Ten Thousand Dollars ($10,000) in
order to comply with its obligations herein. In the event Seller would need
to make such an expenditure in excess of Ten Thousand Dollars ($10,000) to
comply with the foregoing provisions of subdivision 10.1(a) and (d) of the
first sentence of this Section 10.1 and the terms of the Leases and it shall
be unwilling to do so, then Purchaser shall have the right either (a) to
terminate this Agreement as provided in Section 3.3 hereof as its sole and
exclusive remedy or (b) to close on the acquisition of title to Property and
receive a credit towards the Purchase Price in the amount of Ten Thousand
Dollars ($10,000).
10.2 Between the date hereof and the Closing, the Seller shall
not enter into any new Contract without the prior written approval of the
Purchaser nor shall it amend, modify, extend or terminate any Contract
without the prior written approval of the Purchaser, unless such amendment,
modification, extension or termination is expressly provided for in the
applicable Contract or unless with respect to the extension or replacement of
a Contract it is on terms generally similar to the existing arrangement and
may be terminated by Purchaser on not more than thirty (30) days' notice
without any penalty.
SECTION 11. CLOSING DOCUMENTS
11.1 At the Closing, Seller shall execute where appropriate and
deliver the following documents to the Title Insurer.
11.1.1 a grant deed in the proper form for recording and
meeting the requirements of the Title Insurer;
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11.1.2 an assignment of Seller's interest in the Leases
in the form of EXHIBIT B attached hereto and made a part hereof together with
the original copies or photocopies of the same (to the extent they are in
writing);
11.1.3 an assignment of assignable warranties, permits,
contracts, general intangibles (including, without limitation, trade names,
to the extent provided herein) and other items transferring Seller's right,
title and interest in and to Assignable Warranties, Permits, Contracts and
General Intangibles (including, without limitation, trade names, to the extent
provided herein) if any, in the form of EXHIBIT D attached hereto and made a
part hereof duly executed by Seller;
11.1.4 a FIRPTA Affidavit of Seller stating that Seller
is not a foreign person (as defined in Section 1445 of the Internal Revenue
Code of 1986, as amended, and the Regulations promulgated thereunder) and a
California 590 Certificate;
11.1.5 a Natural Hazard Disclosure Statement,
substantially in the form of EXHIBIT F, in respect of the Property described
on EXHIBIT A, which the Purchaser shall sign to acknowledge Purchaser's
receipt from the Seller of such Natural Hazard Disclosure Statement and the
Purchaser's understanding thereof; and
11.1.6 copies of any "As-Built" surveys commissioned by
Seller and in Seller's possession on the Closing Date;
11.1.7 such other instruments and documents which shall
be useful and necessary in connection with the transaction herein
contemplated and which do not impose any liability not agreed to in this
Agreement.
11.2 At the Closing, the Purchaser shall execute and deliver
the following documents in addition to payment of the balance of the Purchase
Price:
11.2.1 reasonable evidence of Purchaser's authority to
execute and deliver this Agreement and the documents to be delivered by it
pursuant thereto.
11.2.2 an instrument of assumption of all of Seller's
obligations under the Leases in the form of EXHIBIT B.
11.2.3 an instrument acknowledging the assignment of the
Assignable Warranties, Permits, Contracts and General Intangibles in the form
of EXHIBIT D.
11.2.4 [intentionally omitted].
11.2.5 a Purchaser's "AS-IS" Certificate in the form of
EXHIBIT E.
11.2.6 a countersigned copy of the Natural Hazard
Disclosure Statement.
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11.2.7 such other instruments or documents which shall
be useful and necessary in connection with the transaction herein
contemplated.
SECTION 12. PRORATIONS AND COSTS
12.1 PRORATIONS. Purchaser and Seller shall apportion (based
on the actual number of days in a calendar month) as of 12:01 a.m. on the day
of the Closing (except as may otherwise be herein provided), the items
hereinafter set forth. Any errors or omissions in computing apportionments
at Closing shall be promptly corrected after Closing. The obligations set
forth in this Section 12 shall survive the Closing. The items to be adjusted
are:
12.1.1 City, state, county, school, real property taxes
and other assessments for the fiscal year of sale (such apportionment shall
be based upon the latest assessment available); should such proration be
inaccurate based on the actual tax bills, if the same has not been received
by the date of the Closing, either party may demand after the date of
Closing, and shall be entitled to receive upon demand, a payment correcting
any inaccurate apportionment favoring the other party,
12.1.2 All rent and other tenant charges to the extent
that any rent or other tenant charges have been collected at Closing. From
and after the Closing Date, Seller shall have and hereby reserves the right
to pursue any remedy against the tenant of the Property in the event it owes
rent or other charges with respect to the period prior to the Closing. The
provisions of this Paragraph shall survive the Closing.
12.1.3 All other income and ordinary operating expenses
of the Project including, without limitation, maintenance and other service
charges and all other normal operating charges with respect to the Project
shall be prorated at the Closing effective as of the Closing Date, and
appropriate cash adjustments shall be made by Purchaser.
12.1.4 At the Closing, Purchaser shall receive a credit
against the Purchase Price equal to the amount of the tenant security
deposit(s), if any, and the Seller shall be entitled to retain such security
deposits. At the Closing, the Purchaser shall assume all bonds and
assessments relating to the Property.
12.1.5 If, at the time of the delivery of the deed, the
Property or any part thereof shall have been affected by an assessment or
assessments, which are or may become payable in annual installments, of which
the first installment is then a charge or lien, then for the purposes of this
Agreement, all the unpaid installments of any such assessment due and payable
in calendar years prior to the year in which the Closing occurs shall be paid
by the Seller and all installments becoming due and payable after the
delivery of the deed shall be assumed and paid by the Purchaser, except,
however, that any installments which are due and payable in the calendar year
in which the Closing occurs shall be adjusted pro rata.
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12.1.6 At the Closing, Purchaser shall reimburse Seller for the
amount of any transferable utility or other deposits (other than security
deposits which are covered by Section 12.1.4) assigned to Purchaser.
12.2 COSTS. Seller shall pay any City and County transfer taxes
applicable to the sale, one-half (1/2) of the escrow fee and the recording
charges for recording the Deed. Purchaser shall pay the costs of obtaining
the ALTA title insurance policy, the cost of any endorsements, and one-half
(1/2) of the escrow fee. Any other costs and expenses of the sale of the
Property and the escrow therefor shall be paid according to local custom.
12.3 TAX CERTIORARI PROCEEDINGS. Seller is hereby authorized, but
not obligated, to (a) commence (prior to the Closing Date) or continue (after
the Closing Date) any proceeding for the reduction of the assessed valuation
of the Property for any tax year which, in accordance with the laws and
regulations applicable to the Property, requires that, to preserve the right
to bring a tax certiorari proceeding with respect to such tax year, such
proceeding be commenced prior to the Closing Date and (b) endeavor to settle
any such proceeding in Seller's discretion; PROVIDED, HOWEVER, that if such
proceeding is (i) for a tax year in which the Closing Date occurs or would
affect such tax year or any subsequent tax year, such settlement shall not be
made without Purchaser's prior consent, which consent shall not be
unreasonably withheld or delayed, and (ii) for a tax year which commences
after the Closing Date, the right to continue and settle such proceeding,
including, without limitation, any contracts or agreements with tax
certiorari counsel with respect to any such tax year, shall be deemed
assigned to Purchaser at the Closing. After the Closing, (i) Seller shall
retain all rights (subject to any rights of any tenant under its Lease) with
respect to any tax year ending prior to the tax year (and all refunds
relating thereto) in which the Closing Date occurs, and shall have the sole
right to participate in and settle any proceeding relating thereto (PROVIDED,
that such settlement does not affect the assessed tax value for any
subsequent tax year), and (ii) Purchaser shall have all rights with respect
to any tax year (and all refunds relating thereto) which ends after the
Closing Date; PROVIDED, HOWEVER, that if the proceeding is for a tax year in
which the Closing Date occurs, such settlement shall not be made without
Seller's prior consent, which consent shall not be unreasonably withheld or
delayed. With respect to any such proceeding for a tax year in which the
Closing Date occurs (whether commenced by Seller or Purchaser), any refund or
credit of taxes for such tax year shall be applied first to the unreimbursed
out-of-pocket expenses, including reasonable counsel fees, necessarily
incurred in obtaining such refund or credit, and second, to any tenant
entitled to same, and the balance shall be apportioned between Seller and
Purchaser as of the Closing Date in accordance with the proportion of the
applicable tax year occurring before and after the Closing Date. In each
case, the party which commenced the proceeding shall deliver to the other
copies of receipted tax bills and any decision or settlement agreement
evidencing the reduction in taxes. If any refund shall be received by Seller
which is for the account of Purchaser as provided in this Section 12.3, then
Seller shall hold Purchaser's share thereof in trust for Purchaser and,
promptly upon receipt thereof, pay such share to Purchaser or any other party
entitled to same as provided above. If any refund shall be received by
Purchaser which is for the account of Seller as provided in this Section
12.3, then Purchaser shall hold Seller's share thereof in trust for Seller
and, promptly upon receipt thereof, pay such share to Seller or any other
party entitled to same as provided above. Each party shall execute any and
all consents or other documents as may be reasonably necessary to be executed
by such party so as to permit the other party to commence or
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continue any tax certiorari proceeding which such other party is authorized
to commence or continue pursuant to the terms of this Section 12.3 or to
collect any refund or credit with respect to any such tax proceeding. The
provisions of this Section 12.3 shall survive the Closing.
SECTION 13. BROKERAGE
Seller and Purchaser represent and warrant to each other that no broker
or finder, other than CB Richard Ellis and Cushman & Wakefield, was
instrumental in arranging or bringing about this transaction and that there
are no claims or rights for brokerage commissions or finder's fees in
connection with the transactions contemplated hereby by any person or entity
other than CB Richard Ellis and Cushman & Wakefield, whose fee shall be the
sole responsibility of Seller pursuant to separate agreements between Seller
and CB Richard Ellis and between Seller and Cushman & Wakefield. If any
person brings a claim for a commission or finders' fee based upon any
contact, dealings or communication with Purchaser or Seller, then the party
through whom such person makes its claim shall defend the other party (the
"INDEMNIFIED PARTY") from such claim, and shall indemnify the Indemnified
Party and hold the Indemnified Party harmless from any and all costs,
damages, claims, liabilities or expenses (including without limitation,
reasonable attorneys' fees and disbursements) incurred by the Indemnified
Party in defending against the claim. In addition, Purchaser hereby agrees
to indemnify and hold harmless each Seller Party from any and all Claims
resulting from any claim made by any Person for a brokerage commission,
finders' fee or similar fee arising out of or relating to any action taken
(or any communication made) by Purchaser, or any of its agents, employees or
contractors, in connection with the proposed resale by Purchaser of any
Property or the marketing of such Property by Purchaser or by any Person on
behalf of Purchaser. The provisions of this Section 13 shall survive the
Closing or, if the Closing does not occur, any termination of this Agreement.
SECTION 14. NOTICES
All notices or other communications hereunder to either party shall be
(i) in writing and shall be deemed to be given on the third business day after
deposit of both the original to the party and copy(ies) to the party's counsel
and other addresses as provided after the signatures below in a regularly
maintained receptacle for the United States mail, by registered or certified
mail, return receipt requested, postage prepaid, addressed as provided
hereinafter, and (ii) addressed as set forth on the signature page of this
Agreement.
Notices may also be given by facsimile to the facsimile numbers set forth
on the signature page hereto, with the original notice being mailed or by
overnight courier service or United States Express Mail, in which event, the
notice shall be deemed delivered on the date of facsimile (provided there is
confirmation of delivery) or on the next business day in the event overnight
courier service or United States Express Mail (in each case with next business
day delivery specified) is used.
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SECTION 15. DAMAGE OR DESTRUCTION PRIOR TO CLOSING AND CONDEMNATION
15.1 If prior to the Closing, the Project is damaged or destroyed
by fire or other casualty but the Project is not "materially damaged or
destroyed" by such fire or other casualty, the Purchaser shall be required to
perform this Agreement and shall be entitled to the insurance proceeds
received by Seller or payable pursuant to the policies of insurance maintained
by Seller plus a credit against the Purchase Price in the amount of the
applicable insurance deductible and, if applicable, any uninsured amount
(i.e., the reasonably estimated cost of repair of the damage and destruction,
which cost is not reimbursable by insurance coverage) or self-insured
retention, LESS any sums reasonably expended by Seller prior to the Closing
for the restoration or repair of the Property and/or in collecting such
insurance proceeds or condemnation awards. If the Project is materially
damaged or destroyed by fire or other casualty, the Purchaser may terminate
this Agreement on written notice to the Seller given within ten (10) days
after Purchaser receives written notice of the occurrence of such fire or
casualty. If Purchaser shall exercise such option, it shall be deemed that
Purchaser terminated this Agreement pursuant to Section 3.3 hereof and the
rights of the parties shall be as set forth therein. If Purchaser does not
exercise such option to terminate, the Agreement shall remain in full force
and effect in accordance with its terms and Purchaser shall be entitled to the
proceeds of insurance as provided in the first sentence of this Section 15.1
and a credit against the Purchase Price in the amount of the applicable
insurance deductible. In no event shall the Purchaser be entitled to any
abatement or reduction of the Purchase Price by reason of such damage. In the
event of any damage by fire or other casualty the determination as to whether
such damage or destruction is material shall be made by an engineer or
contractor designated by Seller and approved by Purchaser, provided, however,
Purchaser shall not unreasonably withhold or delay such approval and if, it
shall disapprove, Purchaser shall give the reasons for such disapproval. For
purposes hereof, the Project shall be deemed "materially damaged or destroyed"
if the cost of repair and restoration of such damage or destruction is greater
than One Million Dollars ($1,000,000).
15.2 In the event proceedings to condemn the Property or any
material portion thereof (including, without limitation, the parking structure
or any access to the Property) are commenced before the Closing, the Purchaser
shall have the right to terminate this Agreement in which event it shall be
deemed that Purchaser terminated this Agreement pursuant to Section 3.3 hereof
and the rights of the parties shall be as set forth herein. In the event
Purchaser does not elect to terminate this Agreement, Seller shall assign to
Purchaser, at the Closing, all of Seller's right, title and interest in and to
any condemnation proceeds payable with respect to the Property.
SECTION 16. REPORTING REQUIREMENTS
Purchaser and Seller shall each deposit such other instruments as are
reasonably required by the Title Insurer or otherwise required to close the
escrow and consummate the purchase and sale of the Property in accordance with
the terms hereof, including, without limitation, an agreement designating
Title Insurer as the "Reporting Person" for the transaction pursuant to
Section 6045(e) of the Internal Revenue Code and the regulations promulgated
thereunder, and executed by Seller,
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Purchaser and Title Insurer. Such agreement shall comply with the
requirements of Section 6045(e) of the Internal Revenue Code and the
regulations promulgated thereunder.
SECTION 17. MISCELLANEOUS
17.1 This Agreement constitutes the entire Agreement between the
parties. This Agreement cannot be changed, modified, waived or terminated
orally but only by an agreement in writing signed by the parties hereto. This
Agreement shall be binding upon the parties hereto and their respective heirs,
executors, personal representatives and permitted successors and assigns.
17.2 (a) IF THE SALE IS NOT CONSUMMATED DUE TO ANY DEFAULT BY
PURCHASER HEREUNDER OR THE FAILURE BY PURCHASER TO SATISFY THE CONDITIONS TO
SELLER'S OBLIGATION REQUIRED TO BE SATISFIED BY PURCHASER PRIOR TO THE CLOSING
DATE, THEN SELLER SHALL RETAIN THE DEPOSIT, AND ANY INTEREST ACCRUED THEREON,
AS LIQUIDATED DAMAGES. THE PARTIES HAVE AGREED THAT SELLER'S ACTUAL DAMAGES,
IN THE EVENT OF A FAILURE TO CONSUMMATE THIS SALE DUE TO PURCHASER'S DEFAULT,
WOULD BE EXTREMELY DIFFICULT OR IMPRACTICABLE TO DETERMINE. AFTER
NEGOTIATION, THE PARTIES HAVE AGREED THAT, CONSIDERING ALL THE CIRCUMSTANCES
EXISTING ON THE DATE OF THIS AGREEMENT, THE AMOUNT OF THE DEPOSIT IS A
REASONABLE ESTIMATE OF THE DAMAGES THAT SELLER WOULD INCUR IN SUCH EVENT.
SELLER'S RETENTION OF THE DEPOSIT AS LIQUIDATED DAMAGES IS NOT INTENDED TO BE
A FORFEITURE OR PENALTY BUT IS INTENDED TO CONSTITUTE LIQUIDATED DAMAGES TO
SELLER PURSUANT TO CALIFORNIA CIVIL CODE SECTIONS 1671, 1676 AND 1677. BY
PLACING THEIR INITIALS BELOW EACH PARTY SPECIFICALLY CONFIRMS THE ACCURACY OF
THE STATEMENTS MADE ABOVE AND THE FACT THAT EACH PARTY WAS REPRESENTED BY
COUNSEL WHO EXPLAINED, AT THE TIME THIS AGREEMENT WAS MADE, THE CONSEQUENCES
OF THIS LIQUIDATED DAMAGES PROVISION. THE FOREGOING IS NOT INTENDED TO LIMIT
ANY INDEMNIFICATIONS GIVEN BY PURCHASER IN THIS AGREEMENT OR PURCHASER'S
OBLIGATIONS TO PAY COSTS SET FORTH IN SECTION 12.2.
INITIALS: SELLER PURCHASER: /s/ [ILLEGIBLE]
-------------------- ---------------------
(b) In the event Purchaser shall be ready, willing and able
to close and shall have performed or tendered performance of all of its
obligations in a timely manner and Seller shall default in its obligations
under this Agreement, the parties hereto agree that Purchaser's remedy shall
be limited to the termination of this Agreement as set forth in Section 3.3
hereof or to specific performance of this Agreement. Expect for any liability
or obligation of Seller expressly provided for in Section 9.1 (subject to
the limitations thereon set forth in Section 9.3 and elsewhere in this
Agreement) or in Section 13 of this Agreement, Purchaser hereby
unconditionally and irrevocably waives, to the greatest extent permitted by
law, any claim for damages against Seller arising out of
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this Agreement including, without limitation, any claim arising out of any
default or misrepresentation by Seller hereunder.
(c) In the event of a default by either party hereto which
becomes the subject of litigation, the losing party agrees to pay the
reasonable legal fees to the prevailing party. The provision of this Section
shall survive the Closing or the termination of this Agreement.
17.3 Time shall be of the essence of the obligations of the
parties under this Agreement; provided, however, if the final date of any
period set forth herein (including, but not limited to, the Closing Date)
falls on a Saturday, Sunday or legal holiday under the laws of the State in
which the Project is located, or the United States of America, the final date
of such period shall be extended to the next day that is not a Saturday,
Sunday or legal holiday. The term "days" as used herein shall mean calendar
days, with the exception of "business days", which term shall mean each day
except for any Saturday, Sunday or legal holiday under the laws of the State
in which the Project is located or the United States of America.
17.4 This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
original, and the execution of separate counterparts by Purchaser and Seller
shall bind Purchaser and Seller as if they had each executed the same
counterpart.
17.5 This Agreement shall be governed, construed and enforced in
accordance with the laws of the State of California.
17.6 No agreements or covenants to perform any obligation or
representations and warranties contained in this Agreement shall survive the
delivery of the deed except as expressly provided herein. Acceptance of the
deed is an acceptance of all of the obligations of the Seller hereunder
except such as may expressly be stated to survive the Closing.
17.7 The headings used in this Agreement are for convenience only
and do not constitute substantive matters to be considered in construing same.
17.8 The parties agree that neither this Agreement nor any
memorandum or notice thereof shall be recorded.
17.9 This Agreement may not be assigned by the Purchaser, without
the consent of the Seller, provided, that the Purchaser may assign its rights
or obligations under this Agreement to a wholly-owned subsidiary of Purchaser
that is reasonably satisfactory to Seller (which wholly-owned subsidiary
shall not be permitted to assign its rights or obligations under this
Agreement) that executes and delivers to Seller an assignment and assumption
instrument acceptable to Seller pursuant to which the Purchaser assigns all of
its rights, title and interest in and to this Agreement to the assignee
(including all rights to the Deposit and all interest earned thereon) and the
assignee assumes and agrees to be bound by all of the obligations of the
Purchaser under this Agreement and the Confidentiality Agreement. In
connection with any assignment pursuant to the terms hereof, the assignee
shall reconfirm in a written instrument reasonably acceptable to Seller and
delivered to
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Seller concurrently with or prior to the assignment, said representations and
warranties as applied to the assignee. No other assignment of this Agreement
shall be permitted except upon the prior written consent of Seller. No
assignment of this Agreement shall release the Purchaser herein; provided
that the assignor shall be released with respect to its obligation to
consummate the transactions contemplated herein. No assignment shall excuse
timely payment by Purchaser or its assignee hereunder.
17.10 Submission of this form of Agreement for examination shall
not bind Seller in any manner nor be construed as an offer to sell and no
contract or obligations of Seller shall arise until this instrument is
executed by both Seller and Purchaser and delivery is made to each and the
Deposit has been received by the Escrow Agent.
17.11 The obligations of Seller are intended to be binding only
on the Seller and shall not be personally binding upon, nor shall any resort
be had to, the private properties of any of its trustees, officers,
beneficiaries, directors, members, or shareholders, or of its investment
manager, the general partners, officers, directors, members, or shareholders
thereof, or any employees or agents of Seller or its investment manager.
SECTION 18. CONFIDENTIALITY
The Purchaser will maintain strict confidentiality of all aspects of this
Agreement including, without limitation, any information obtained through the
due diligence process (including, without limitation, any papers, documents,
data, plans or other information or materials provided by Seller or its
affiliates or agents concerning the Project and any memoranda, reports,
summaries, or together documents, writings or recordings relating to the
Project or to such information (the "Evaluation Material")). The Purchaser
agrees that such information and Evaluation Material will be used for no
purpose other than evaluating a possible transaction involving the Purchaser,
as a principal, exclusively for its own account, and not as a broker, finder
or similar agent for any other person, and that, except as may be agreed in
writing by the Seller, the Purchaser will not copy or duplicate any
Evaluation Material. In addition, the Purchaser agrees that the Purchaser and
the Related Parties (as defined below) of the Purchaser will not, without the
prior written consent of Seller, disclose to any person (other than a person
authorized hereunder), the fact that the Evaluation Material has been made
available to the Purchaser, that discussions or negotiations between the
Purchaser and the Seller are now taking place or will take place, or any of
the terms, conditions or other facts with respect to the possible acquisition
of the Project.
In furtherance of the foregoing, except as may be required by law or
as may be necessary to evaluate the Property for Purchaser's acquisition and
financing therefor, Purchaser will not divulge any such information or the
Evaluation Material to other persons or entities including, without
limitation, appraisers, real estate brokers, or competitors of Seller.
Notwithstanding the foregoing, Purchaser shall have the right to disclose
information with respect to the Property to officers, directors, employees,
attorneys, accountants, environmental auditors, engineers, permitted assignees
under this Agreement and other consultants (collectively, "Related Parties")
to the extent
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necessary for Purchaser to evaluate its acquisition of the Property provided
that all Related Parties are told that such information is confidential and
agree (in writing for any third party engineers, environmental auditors or
other consultants) to keep such information confidential.
The Purchaser agrees that the Seller will have no adequate remedy at
law if the Purchaser were to violate any of the terms of this Section 18.
Accordingly, in the event of such a breach by the Purchaser, the Seller and
its affiliates have the right, in addition to any other right the Seller and
its affiliates may have, to seek injunctive relief to restrain any breach or
threatened breach by us or specific enforcement of such terms. The Purchaser
further agrees that it shall be responsible to the Seller and the Seller
Parties for any breach by the Purchaser or any of the Purchaser Related
Parties of the terms of this Section 18.
Although the Seller has endeavored to include in the Evaluation
Material information known to it which it believe to be relevant for the
purpose of the Purchaser's investigation, the Purchaser understands and
acknowledges that neither the Seller nor any of the Seller Parties makes any
representation or warranty to us as to the accuracy or completeness of the
Evaluation Material. The Purchaser further agrees that none of the Seller or
any of the Seller Parties shall have liability to the Purchaser or any of the
Purchaser's representatives or agents resulting from the use of or reliance
on the Evaluation Material by the Purchaser or the Purchaser's
representatives and agents. The Purchaser acknowledges that the Seller is not
responsible to the Purchaser to determine whether toxic or hazardous wastes
or substances or other undesirable materials are present at the Project and
that it is solely the responsibility of the Purchaser to conduct
investigations to determine the presence of such materials.
Notwithstanding the foregoing, the Seller or the Purchaser may make
a public announcement concerning the transactions contemplated by this
Agreement to the extent required to comply with applicable law or regulation
or the rules of a stock exchange on which the stock of the Purchaser is
listed or quoted; PROVIDED, that the Purchaser shall provide the Seller with
a copy of any such proposed announcement not less than two (2) business days
prior to the scheduled release of such announcement and provide the Seller
with the opportunity to approve such proposed release (such approval not to
be unreasonably withheld).
The provisions of this Section 18 shall survive the Closing or any
termination of this Agreement. In the event that this Agreement is
terminated, the Purchaser agrees to return all Evaluation Materials to the
Seller immediately upon the request of the Seller and not to retain any
copies, extracts or other reproductions, in whole or in part, of such
Evaluation Materials.
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IN WITNESS WHEREOF, this Agreement has been entered into as of the
day and year first above written.
SELLER: WHLW Real Estate Limited Partnership
By: WHLW Gen-Par, Inc.
General Partner
By:
----------------------------------
Its:
----------------------------------
PURCHASER: Natrol Real Estate II, Inc.,
a California corporation
By: /s/ Dennis R. Jolicoeur
----------------------------------
Dennis R. Jolicoeur
Its: CFO
----------------------------------
By:
----------------------------------
Its:
----------------------------------
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ADDRESS FOR NOTICES TO SELLER:
Legacy Partners Commercial, Inc.
4000 East Third Avenue, Sixth Floor
Foster City, CA 94404-1167
Attention: Robert Phipps and Darleen Barnes
Fax No.: (650) 235-2589 and (650) 572-9527
with a copy to: Real Estate Law Group
2330 Marinship Way, Suite 211
Sausalito, CA 94965
Attention: Ann Gaffney Shores
Fax No.: (415) 331-7272
with a copy to: Whitehall Street Real Estate Limited Partnership
85 Broad Street
New York, New York 10004
Attention: Mr. Adam Brooks
Facsimile number: 212-357-5505
and a copy to: Whitehall Street Real Estate Limited Partnership
100 Crescent Court, Suite 1000
Dallas, Texas 75201
Attention: Mr. Paul Milosevich
Phone number: 214-855-6364
Facsimile number: 214-855-6305
or to such other address as either party may from time to time specify in
writing to the other party. Any notice shall be effective only upon delivery
or refusal of delivery.
ADDRESS FOR NOTICE TO PURCHASER:
Natrol Real Estate II, Inc.
21411 Prairie Street
Chatsworth, CA 91311
Attention: Elliott Balbert
Fax No.: (818) 739-6001
Phone No.: (818) 739-6000
27
<PAGE>
with a copy to: Arter & Hadden, LLP
5959 Topanga Canyon Blvd.
Suite 244
Woodland Hills, California 91367
Attention: Deborah Feldman
Fax No.: 818-346-6502
Phone No.: 818-712-0036
28
<PAGE>
EXHIBIT "A"
DESCRIPTION OF LAND
9453 Owensmouth Avenue, Chatsworth, California
LOTS 7,8,9 AND 10 OF TRACT NO. 33150, IN THE CITY OF LOS ANGELES, COUNTY OF
LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 910 PAGES 63 TO
65 INCLUSIVE OF MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY.
Assessor's Parcel No: 2746-014-018
A-1
<PAGE>
EXHIBIT B
ASSIGNMENT AND ASSUMPTION OF LEASES
ASSIGNMENT AND ASSUMPTION OF LEASES (this "Assignment") made as of the
day of December __, 1999 by and between WHLW Real Estate Limited Partnership
("Assignor") and Natrol Real Estate II, Inc., ("Assignee").
W I T N E S S E T H:
WHEREAS, Assignor and Assignee are parties to that certain Purchase and
Sale Agreement, dated November __, 1999 (the "Purchase Agreement") covering
the Premises set forth on Exhibit A hereto; and
WHEREAS, Assignor has simultaneously herewith conveyed to the Assignee
all of Assignor's right, title and interest in and to the Premises located at
9453 Owensmouth Avenue, Chatsworth, California, and in connection therewith,
Assignor has agreed to assign to Assignee all of Assignor's right, title and
interest in and to the leases described on the Schedule of Leases attached as
Exhibit "B" hereto and the guaranties, security deposits and other documents
related thereto, if any (collectively, the "Leases").
NOW, THEREFORE, in consideration of the sum of Ten Dollars ($10.00) and
other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. Assignor hereby assigns unto Assignee, all of the right, title and
interest of Assignor in and to the Leases.
TO HAVE AND TO HOLD the same unto Assignee, its successors and assigns
from and after the date hereof, subject to the terms, covenants and
conditions of the Leases.
2. This Assignment is made without representation or warranty by
Assignor except as provided in that certain Certificate delivered by Assignor
to Assignee on the date hereof.
3. Assignee assumes the performance of all of the obligations of
Assignor under the Leases to be first performed from and after the date
hereof and does not assume any obligations or liabilities under the Lease
accruing prior to the date hereof.
4. Effective as of the date hereof, Assignee hereby agrees to
indemnify, defend (with counsel reasonably acceptable to Assignor), and to
hold Assignor and each other Seller Party (as defined in the Purchase
Agreement) harmless from any and all Claims (as defined in the Purchase
B-1
<PAGE>
Agreement), arising on or subsequent to the date hereof, under, relating to
or arising out of the Leases.
5. Any rental and other payments under the Leases shall be prorated
between the parties as provided in the Purchase Agreement.
6. In the event of any dispute between Assignor and Assignee arising
out of the obligations of Assignor under this Assignment or concerning the
meaning or interpretation of any provision contained herein, the losing party
shall pay the prevailing party's costs and expenses of such dispute,
including, without limitation, reasonable attorneys' fees and costs. Any such
attorneys' fees and other expenses incurred by either party in enforcing a
judgment in its favor under this Assignment shall be recoverable separately
from and in addition to any other amount included in such judgment, and such
attorneys' fees obligation is intended to be severable from the other
provisions of this Assignment and to survive and not be merged into any such
judgment.
7. This Assignment shall be governed by and construed in accordance
with the laws of the State of California.
8. This Assignment is made without recourse and without any express
or implied representation or warranty of any kind. Assignee on behalf of
itself and its agents, employees, representatives, successors and assigns
hereby agrees that in no event or circumstance shall Assignor or any Seller
Party have any personal liability under this Assignment, or to any of
Assignee's creditors, or to any other party in connection with the Property.
This Assignment may be executed in counterparts, each of which shall be
deemed an original, and all of which shall taken together be deemed one
document.
9. This Assignment is delivered pursuant to the Purchase Agreement
and Assignee expressly acknowledges and affirms the provisions thereof.
10. This Assignment shall be binding on and inure to the benefit of
the parties hereto, their heirs, executors, administrators, successors in
interest and assigns.
11. This Assignment may be executed in separate counterparts, which,
together, shall constitute one and the same fully executed Assignment.
12. The obligations of Assignor are intended to be binding only on
Assignor and shall not be personally binding upon, nor shall any resort be
had to, the private properties of any Seller Party.
Capitalized terms used herein and not defined herein shall have the
meanings given to them in the Purchase Agreement.
B-2
<PAGE>
IN WITNESS WHEREOF, this Assignment has been duly executed as of the
date first above written.
ASSIGNOR:
WHLW Real Estate Limited Partnership
By: WHLW Gen-Par, Inc.
General Partner
Name:
-------------------------------
Title:
------------------------------
ASSIGNEE:
Natrol Real Estate II, Inc.,
a California corporation
Name: /s/ DENNIS R. JOLICOEUR
-------------------------------
Title: CFO
------------------------------
Name:
-------------------------------
Title:
------------------------------
B-3
<PAGE>
EXHIBIT C
[Intentionally Omitted]
C-1
<PAGE>
EXHIBIT D
ASSIGNMENT OF WARRANTIES, PERMITS, CONTRACTS
AND GENERAL INTANGIBLES
ASSIGNMENT OF WARRANTIES, PERMITS, CONTRACTS AND GENERAL INTANGIBLES
(this "Assignment") made as of the ____ day of December, 1999 by and between
WHLW Real Estate Limited Partnership ("Assignor") and Natrol Real Estate II,
Inc. ("Assignee").
WITNESSETH:
WHEREAS, Assignor has simultaneously herewith conveyed to the Assignee
all of Assignor's right, title and interest in and to the premises located on
Exhibit "A" attached hereto (the "Premises"), and in connection therewith,
Assignor has agreed to assign to Assignee all of Assignor's right, title and
interest in and to (i) the warranties and/or guaranties, if any, relating to
the Premises to the extent assignable (collectively, "Warranties"), (ii) any
governmental approvals or permits relating to the Premises to the extent
assignable (collectively, "Permits"), (iii) the agreements, contracts,
instruments and understandings listed on Annex ___ attached hereto
(collectively, the "Contracts") and (iv) general intangibles relating to the
Property including, without limitation, the trade name, to the extent
provided in the Purchase Agreement, if any, used to identify the Premises or
any variation thereof, provided Assignor makes absolutely no representation
or warranty that it has any ownership of or right to use any trade name
(collectively, "General Intangibles").
NOW, THEREFORE, in consideration of the sum of Ten Dollars ($10.00) and
other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto hereby agree as follows:
1. To the extent assignable, Assignor hereby assigns unto Assignee, all
of the right, title and interest, if any, of Assignor in and to the
Warranties, Permits, Contracts and General Intangibles;
TO HAVE AND TO HOLD the same unto Assignee, its successors and assigns
from and after the date hereof.
2. Effective as of the date hereof, Assignee hereby assumes and
unconditionally agrees to observe and perform all of the Assignor's
obligations under, relating to or arising out of the Contracts, originating
on or subsequent to the date hereof. Assignee hereby agrees to indemnify
Assignor and its affiliates, against and hold Assignor and its affiliates
harmless from any and all Claims (as defined in the Purchase Agreement),
originating on or subsequent to the date hereof, under, relating to or
arising out of the Contracts.
D-1
<PAGE>
3. In the event of any dispute between Assignor and Assignee arising
out of the obligations of Assignor under this Agreement or concerning the
meaning or interpretation of any provision contained herein, the losing party
shall pay the prevailing party's costs and expenses of such dispute,
including, without limitation, reasonable attorneys' fees and costs. Any such
attorneys' fees and other expenses incurred by either party in enforcing a
judgment in its favor under this Assignment shall be recoverable separately
from and in addition to any other amount included in such judgment, and such
attorneys' fees obligation is intended to be severable from the other
provisions of this Assignment and to survive and not be merged into any such
judgment.
4. This Assignment shall not be construed as a representation or
warranty by Assignor as to the transferability or enforceability of the
Warranties, the Permits, the Contracts or the Intangible Property
(collectively, the "INTERESTS"), and Assignor shall have no liability to
Assignee in the event that any or all of the Interests (a) are not
transferable to Assignee or (b) are canceled or terminated by reason of this
assignment or any acts of Assignee. Furthermore, Assignee on behalf of itself
and the Purchaser Parties hereby agrees that in no event or circumstance
shall Assignor or any Seller Party have any personal liability under this
Assignment, or to any of Assignee's creditors, or to any other party in
connection with the Interests.
5. This Assignment shall be governed by and construed and in accordance
with the laws of the State of California.
6. This Assignment is made without recourse and without any express or
implied representation or warranty of any kind or nature, except as expressly
set forth in the Purchase Agreement.
7. This Assignment is delivered pursuant to the Purchase Agreement
attached hereto and to which this Assignment is an Exhibit thereof, and
Assignee expressly acknowledges and affirms the provisions thereof. This
Assignment may be executed in counterparts, each of which shall be deemed an
original, and all of which shall taken together be deemed one document.
8. This Assignment shall be binding on Assignor and its successors,
assigns and legal representatives and shall inure to the benefit of the
Assignee and its successors, assigns and legal representatives.
9. This Assignment may be executed in separate counterparts, which,
together, shall constitute one and the same fully executed Assignment.
10. The obligations of Assignor are intended to be binding only on the
property of Assignor and shall not be personally binding upon, nor shall any
resort be had to, the private properties of any Seller Party.
Capitalized terms used herein and not defined herein shall have the
meanings given to them in the Purchase Agreement.
D-2
<PAGE>
IN WITNESS WHEREOF, this Assignment has been duly executed as of the
date first above written.
ASSIGNOR:
WHLW Real Estate Limited Partnership
By: WHLW Gen-Par, Inc.
General Partner
Name:
----------------------------
Title:
---------------------------
ASSIGNEE:
Natrol Real Estate II, Inc.,
a California corporation
Name: /s/ Dennis R. Jolicoeur
----------------------------
Title: Dennis R. Jolicoeur, CFO
---------------------------
Name:
----------------------------
Title:
---------------------------
D-3
<PAGE>
EXHIBIT E
PURCHASER'S AS-IS CERTIFICATE
THIS CERTIFICATE AND AGREEMENT ("Certificate"), is made as of the ____
day of December, 1999, by Natrol Real Estate II, Inc. ("Purchaser"), to and
for the benefit and WHLW Real Estate Limited Partnership ("Seller").
RECITALS
Seller and Purchaser are parties to a Purchase and Sale Agreement, dated
as of November __, 1999 the ("Purchase Agreement"), which provides for the
sale of a certain real property (the "Property") legally described on EXHIBIT
A attached to the Purchase Agreement and incorporated herein by this
reference. Any capitalized terms not otherwise defined herein shall have the
meaning ascribed to such term in the Purchase Agreement; and
The Purchase Agreement requires, INTER ALIA, that, as a condition
precedent to Seller's obligations under the Purchase Agreement, Purchaser
shall execute and deliver this Certificate to Seller at Closing.
NOW, THEREFORE, in consideration of TEN AND NO/100 DOLLARS ($10.00) and
other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Purchaser hereby certifies and agrees as follows:
1. Purchaser hereby acknowledges that it has examined and investigated
to its full satisfaction all facts, circumstances and matters relating to the
Property, or otherwise relevant to its purchase of the foregoing, including
without limitation:
(i) all matters relating to governmental and other legal
requirements with respect to the Property, such as taxes, assessments,
zoning, use permit requirements and building codes;
(ii) All zoning, land use, building, environmental and other
statutes, rules, or regulations applicable to the Property;
(iii) to the extent in the possession of Seller or Seller's
property manager, a copy of a survey of the Property (a "SURVEY"):
(iv) to the extent in the possession of Seller or Seller's property
manager, reports, studies, assessments, investigations and other
materials related to the presence of Hazardous Materials at, on or
under the Property and the compliance of such Property with all
environmental laws, including environmental assessment reports;
E-1
<PAGE>
(v) the Leases with respect to the Property and all matters in
connection therewith, including, without limitation, the ability of the
tenants thereof to pay the rent;
(vi) the Contracts and any other documents or agreements of
significance affecting the Property;
(vii) all matters relating to the income and operating or capital
expenses of the Property and all other financial matters; and
(viii) all matters relating to title to the Property;
(ix) the physical condition of the Property, including, without
limitation, the interior, the exterior, the square footage of the
improvements or the leasehold improvements and of the tenant space
therein, the structure, the roof, the paving, the utilities, and all
other physical and functional aspects of the Property, including the
presence or absence of Hazardous Materials;
(x) any easements and/or access rights affecting the Property;
(xi) all matters that would be revealed by an ALTA as-built
survey, a physical inspection or an environmental site assessment of the
Property;
(xii) reflected on the Natural Hazard Disclosure Statement; and
(xiii) all other matters of significance affecting, or otherwise
deemed relevant by Purchaser with respect to, the Property.
2. Purchaser acknowledges and agrees that (i) it has been given the
full opportunity to inspect and investigate all aspects of the Property,
either independently or through agents, representatives or experts of
Purchaser's choosing, as Purchaser considers necessary or appropriate,
including without limitation those set forth in the Purchase Agreement, (ii)
it has completed its independent investigation of the Property and the Due
Diligence Materials, and (iii) it is acquiring the Property based exclusively
on such independent investigation. The funding of the Deposit by Purchaser
and the execution of this certificate conclusively constitute Purchaser's
approval of each and every aspect of the Property. Purchaser (i) is a
sophisticated investor, (ii) is represented by competent counsel, (iii)
understands the assumptions of risk and liability set forth in this
Certificate and that, prior to Closing, Purchaser and its agents have
inspected the Property, fully observed the physical characteristics and
condition of the Property, performed a thorough investigation of the
suitability of Purchaser's intended use of the Property, including without
limitation, the suitability of the topography, the availability of water
rights or utilities, the present and future
E-2
<PAGE>
zoning, subdivision and any and all other land use matters, the condition of
the soil, subsoil or groundwater of the Property and any and all other
environmental matters, the purpose(s) to which the Property is suited,
drainage, flooding, access to public roads, and proposed routes or roads or
extensions relative to the Property, (iv) acknowledges that its posting of
the Deposit was deemed to be an acknowledgment by the Purchaser that, as of
the date hereof, it had received the Date Diligence Materials and (v)
understands that it will have no recourse whatsoever against Seller or any
Seller Party except as expressly set forth in the Purchase Agreement and this
Certificate. Such independent investigation by Purchaser included items set
forth in the Purchase Agreement, the Purchaser agreeing that it has completed
its due diligence investigation of the Property prior to the date hereof and
is satisfied with the results of such investigation and the Due Diligence
Materials.
3. PURCHASER SPECIFICALLY REPRESENTS, ACKNOWLEDGES AND AGREES THAT
(i) SELLER SHALL SELL AND PURCHASER SHALL PURCHASE THE PROPERTY "AS IS, WHERE
IS AND WITH ALL FAULTS," (ii) PURCHASER IS NOT RELYING ON ANY REPRESENTATIONS
OR WARRANTIES OF ANY KIND WHATSOEVER, WHETHER ORAL OR WRITTEN, EXPRESS OR
IMPLIED, STATUTORY OR OTHERWISE, FROM SELLER, NOR ANY SELLER PARTY AS TO ANY
MATTER, CONCERNING THE PROPERTY, OR SET FORTH, CONTAINED OR ADDRESSED IN THE
DUE DILIGENCE MATERIALS (INCLUDING WITHOUT LIMITATIONS, THE COMPLETENESS
THEREOF), INCLUDING WITHOUT LIMITATION: (i) the quality, nature, habitability,
merchantability, use, operation, value, marketability, adequacy or physical
condition of the Property or any aspect or portion thereof, including,
without limitation, structural elements, foundation, roof, appurtenances,
access, landscaping, parking facilities, electrical, mechanical, HVAC,
plumbing, sewage, and utility systems, facilities and appliances, soils,
geology and groundwater, or whether the Property lies within a special flood
hazard area, an area of potential flooding, a very high fire hazard severity
zone, a wildland fire area, an earthquake fault zone or a seismic hazard
zone, (ii) the dimensions or lot size of any Property or the square footage
of the Improvements thereon or of any tenant space therein, (iii) the
development or income potential, or rights of or relating to, the Property,
or the Property's use, habitability, merchantability, or fitness, or the
suitability, value or adequacy of the Property for any particular purpose,
(iv) the zoning or other legal status of the Property or any other public or
private restrictions on the use of the Property, (v) the compliance of the
Property or its operation with any applicable codes, laws, regulations,
statutes, ordinances, covenants, conditions and restrictions of any
Governmental Authority or of any other person or entity (including, without
limitation, the Americans with Disabilities Act), (vi) the ability of
Purchaser to obtain any necessary governmental approvals, licenses or permits
for Purchaser's intended use or development of the Property, (vii) the
presence or absence of Hazardous Materials on, in, under, above or about the
Property or any adjoining or neighboring property, (viii) the quality of any
labor and materials used in any Improvements, (ix) the condition of title to
the Property, (x) the Leases, Contracts or any other agreements affecting the
Property or the intentions of any party with respect to the negotiation
and/or execution of any lease or contract with respect to the Property, (xi)
Seller's ownership of the
E-3
<PAGE>
Property or any portion thereof or (xii) the economics of, or the income and
expenses, revenue or expense projections or other financial matters, relating
to, the operation of the Property. Without limiting the generality of the
foregoing, Purchaser expressly acknowledges and agrees that Purchaser is not
relying on any representation or warranty of the Seller, nor any Seller
Party, whether implied, presumed or expressly provided as law or otherwise,
arising by virtue of any statute, common law or other legally binding right or
remedy in favor of Purchaser except as provided in Section 3.3 of the
Purchase Agreement. Purchaser further acknowledges and agrees that Seller is
under no duty to make any inquiry regarding any matter that may or may not be
known to Seller or any partner, officer, employee, attorney, property
manager, agent or broker of such Seller.
4. ANY REPORTS, REPAIRS OR WORK REQUIRED BY PURCHASER ARE THE SOLE
RESPONSIBILITY OF PURCHASER, AND PURCHASER AGREES THAT THERE IS NO OBLIGATION
ON THE PART OF SELLER TO MAKE ANY CHANGES, ALTERATIONS OR REPAIRS TO THE
PROPERTY OR TO CURE ANY VIOLATIONS OF LAW OR TO COMPLY WITH THE REQUIREMENTS
OF ANY INSURER. PURCHASER IS SOLELY RESPONSIBLE FOR OBTAINING ANY CERTIFICATE
OF OCCUPANCY OR ANY OTHER APPROVAL OR PERMIT NECESSARY FOR TRANSFER OR
OCCUPANCY OF ANY PROPERTY AND FOR ANY REPAIRS OR ALTERATIONS NECESSARY TO
OBTAIN THE SAME, ALL AT PURCHASER'S SOLE COST AND EXPENSE.
5. Purchaser acknowledges and agrees that the provisions of this
Certificate were a material factor in Seller's acceptance of the Purchase
Price and agreement to sell the Property to Purchaser, and Seller is
unwilling to sell the Properties unless Seller and the other Seller Parties
are expressly released to the extent set forth in Section 6 of the Purchase
Agreement.
IN WITNESS WHEREOF, Purchaser has executed this Certificate as of
the date first set forth herein above.
NATROL REAL ESTATE II, INC.,
a California corporation
By: /s/ Dennis R. Jolicoeur
-------------------------------------
Name: Dennis R. Jolicoeur
Title: CFO
E-4
<PAGE>
EXHIBIT F
NATURAL HAZARD DISCLOSURE STATEMENT
This statement applies to the following described real property: 9453
Owensmouth Avenue, Chatsworth, California
The undersigned Seller discloses the following information with the knowledge
that even though this is not a warranty, the undersigned prospective
Purchaser may rely on this information in deciding whether and on what terms
to purchase the subject real property. The following disclosures are made by
the Seller based solely upon the information contained in the report attached
hereto and made a part hereof. This information is merely a disclosure and
shall not be deemed to be part of any contract between the Purchaser and
Seller.
THIS REAL PROPERTY LIES WITHIN THE FOLLOWING HAZARDOUS AREA(S):
A VERY HIGH FIRE HAZARD SEVERITY ZONE pursuant to Section 51178 or 51179 of
the Government Code. The owner of this property is subject to the maintenance
requirements of Section 51182 of the Government Code.
/ / Yes / / No
A WILDLAND AREA THAT MAY CONTAIN SUBSTANTIAL FOREST FIRE RISKS AND HAZARDS
pursuant to Section 4125 of the Public Resources Code. The owner of this
property is subject to the maintenance requirements of Section 4291 of the
Public Resources Code. Additionally, it is not the state's responsibility to
provide fire protection services to any building or structure located within
the wildlands unless the Department of Forestry and Fire Protection has
entered into a cooperative agreement with a local agency for those purposes
pursuant to Section 4142 of the Public Resources Code.
/ / Yes / / No
THESE HAZARDS MAY LIMIT YOUR ABILITY TO DEVELOP THE REAL PROPERTY, TO OBTAIN
INSURANCE, OR TO RECEIVE ASSISTANCE AFTER A DISASTER.
THE ATTACHED REPORT ON WHICH THESE DISCLOSURES ARE BASED ESTIMATE WHERE
NATURAL HAZARDS EXIST. THEY ARE NOT DEFINITIVE INDICATORS OF WHETHER OR NOT A
PROPERTY WILL BE AFFECTED BY A NATURAL DISASTER. PURCHASER IS HEREBY ADVISED
TO OBTAIN INDEPENDENT PROFESSIONAL ADVICE REGARDING THOSE HAZARDS AND OTHER
HAZARDS THAT MAY AFFECT THE SUBJECT PROPERTY.
This statement may be signed in one or more counterparts.
\\\\\ CONTINUED ON NEXT PAGE
F-1
<PAGE>
Seller hereby states that the information set forth herein is true and
correct to the best of the Seller's knowledge based solely upon the
information contained in the attached report, and such knowledge is limited
to be as of the date specified below. Seller has not independently verified
the information contained in this statement and the attached report, and
Seller is not personally aware of any errors or inaccuracies in the
information contained in this statement.
SELLER:
By:
-------------------------
Its:
-------------------------
Date:
-------------------------
Purchaser hereby represents and warrants that it has read and understands the
information contained in this disclosure statement and in the attached report
and will rely upon the information contained in the report as though the
report were addressed directly to Purchaser.
PURCHASER:
By: /s/ Dennis R. Jolicoeur
-------------------------
Its: CFO
-------------------------
Date: 11/20/99
-------------------------
F-2
<PAGE>
EXHIBIT G
GRANT DEED
Recording Requested by and
When Recorded Mail to,
and Mail Tax Statements to:
______________________________
______________________________
______________________________
Attention: _____________________
- -----------------------------------------------------------------------------
Space Above This Line for Recorder's use
GRANT DEED
The undersigned Grantor declared that Documentary Transfer Tax is
not part of the public records.
For valuable consideration, receipt of which is acknowledged,
_____________, a _____________ ("Grantor"), hereby grants to _______________,
a ___________________________, (Grantee), that certain real property located
in the City of ____________, County of _________, State of California, as
legally described in EXHIBIT A attached hereto and made a part hereof (the
"Property") together with all of Grantor's right, title and interest in and
to all improvements and structures located thereon, and all easements,
appurtenances, rights and privileges of Grantor appertaining to the Property.
The Property is conveyed subject to:
(a) The lien of supplemental taxes, if any, assessed pursuant to
the provisions of Chapter 3.5 (commencing with Section 75) of the Revenue and
Taxation Code of the State of California;
(b) The liens for real property taxes for the fiscal year 19__ -
19__ not yet due and payable;
(c) All liens, encumbrances, easements, leases, covenants,
conditions and restrictions of record;
(d) All matters which would be disclosed by an inspection of the
Property; and
G-1
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF NATROL, INC.
Natrol Products, Inc.
Natrol Acquisition, Inc.
Natrol Real Estate, Inc.
Natrol Real Estate, Inc. II
Prolab Nutrition, Inc.
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
pertaining to the Natrol, Inc. 1998 Employee Stock Purchase Plan (Form S-8
No. 333-62549) and the Natrol, Inc. Amended and Restated 1996 Stock Option
and Grant Plan (Form S-8 No. 333-67229) of our report dated February 16,
2000, with respect to the consolidated financial statements of Natrol, Inc.
and subsidiaries included in the Annual Report (Form 10-K) for the year ended
December 31, 1999.
ERNST & YOUNG LLP
Woodland Hills, California
March 27, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 485
<SECURITIES> 0
<RECEIVABLES> 16,279
<ALLOWANCES> 503
<INVENTORY> 15,061
<CURRENT-ASSETS> 33,427
<PP&E> 22,398
<DEPRECIATION> 2,870
<TOTAL-ASSETS> 92,596
<CURRENT-LIABILITIES> 13,800
<BONDS> 8,700
0
0
<COMMON> 135
<OTHER-SE> 69,852
<TOTAL-LIABILITY-AND-EQUITY> 92,596
<SALES> 81,590
<TOTAL-REVENUES> 81,590
<CGS> 39,850
<TOTAL-COSTS> 67,308
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 267
<INCOME-PRETAX> 14,820
<INCOME-TAX> 5,631
<INCOME-CONTINUING> 9,188
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,188
<EPS-BASIC> 0.69
<EPS-DILUTED> 0.67
</TABLE>
