-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TzCqt6iMq/it9dzHS6PqRK09FhojyypRJgJ4+1lcn3h748teYu+AMHHt3Tfp85Ti g5NVMVSIDjXT2bTbezF7rw== 0000912057-99-005720.txt : 19991117 0000912057-99-005720.hdr.sgml : 19991117 ACCESSION NUMBER: 0000912057-99-005720 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATROL INC CENTRAL INDEX KEY: 0001025573 STANDARD INDUSTRIAL CLASSIFICATION: MEDICINAL CHEMICALS & BOTANICAL PRODUCTS [2833] IRS NUMBER: 953560780 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24567 FILM NUMBER: 99752414 BUSINESS ADDRESS: STREET 1: 21411 PRAIRIE ST CITY: CHATSWORTH STATE: CA ZIP: 91311 BUSINESS PHONE: 8187396000 10-Q 1 FORM 10-Q - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ FORM 10-Q (Mark one) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO ______ COMMISSION FILE NO: 000-24567 --------- NATROL, INC. (Exact name of registrant as specified in its charter) DELAWARE 95-3560780 (State of Incorporation ) (I.R.S. Employer Identification No.) 21411 PRAIRIE STREET CHATSWORTH, CALIFORNIA 91311 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (818) 739-6000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) INDICATE BY A CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Class Outstanding as of November 1, 1999 ----- ------------------------------- Common stock, $0.01 par value 13,464,765 PART 1 FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS NATROL, INC. CONSOLIDATED BALANCE SHEETS (in thousands except for share and per share amounts)
SEPTEMBER 30, DECEMBER 31, 1999 1998 ---------------- --------------- ASSETS (UNAUDITED) Current assets: Cash and cash equivalents $ 2,125 $ 559 Marketable securities 23,605 19,011 Accounts receivable, net of allowances of $447 and $332 at September 30, 1999 and December 31, 1998, respectively 13,243 9,987 Inventories 12,456 13,437 Deferred taxes 1,214 1,214 Income taxes receivable 165 - Prepaid expenses and other current assets 816 500 -------- -------- Total current assets 53,624 44,708 Property and equipment: Building and improvements 7,339 6,882 Machinery and equipment 4,892 3,826 Furniture and office equipment 1,513 1,239 -------- -------- 13,744 11,947 Accumulated depreciation (2,545) (1,756) -------- -------- 11,199 10,191 Goodwill, net of accumulated amortization of $1,293 and $588 at September 30, 1999 and December 31, 1998, respectively 13,070 13,775 Capitalized loan fees, net of accumulated amortization of $1 at September 30, 1999 49 - Other assets 50 34 -------- -------- Total other assets 13,169 13,809 -------- -------- TOTAL ASSETS $ 77,992 $ 68,708 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,137 $ 5,943 Accrued expenses 2,642 2,067 Accrued payroll and related liabilities 1,497 805 Income taxes payable - 221 Current portion of long-term debt 129 - -------- -------- Total current liabilities 8,405 9,036 Deferred income taxes, non-current 32 32 Long-term debt, less current portion 3,340 - Stockholders' equity: Common stock 136 133 Additional paid in capital 60,300 60,187 Retained earnings 6,342 (117) -------- -------- 66,778 60,203 Receivable from stockholder 563 563 -------- -------- Total stockholders' equity 66,215 59,640 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 77,992 $ 68,708 ======== ========
See accompanying notes NATROL, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands except for share and per share amounts) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1999 1998 ------------------ ------------------ ------------------- ------------------ (unaudited) Net sales $ 21,174 $ 19,501 $ 56,874 $ 48,907 Cost of goods sold 10,175 9,327 27,136 23,581 ------------ ------------ ------------ ------------ Gross profit 10,999 10,174 29,738 25,326 Selling and marketing expenses 5,081 4,591 13,873 12,322 General and administrative 2,027 1,732 6,061 4,234 ------------ ------------ ------------ ------------ Total operating expenses 7,108 6,323 19,934 16,556 ------------ ------------ ------------ ------------ Operating income 3,891 3,851 9,804 8,770 Interest income 252 238 724 281 Interest expense (47) (32) (82) (407) ------------ ------------ ------------ ------------ Income before income tax provision 4,096 4,057 10,446 8,644 Income tax provision 1,557 1,540 3,987 3,374 ------------ ------------ ------------ ------------ Net income $ 2,539 $ 2,517 $ 6,459 $ 5,270 ============ ============ ============ ============ Basic earnings per share $ 0.19 $ 0.21 $ 0.49 $ 0.61 Diluted earnings per share $ 0.19 $ 0.20 $ 0.47 $ 0.47 Weighted average shares outstanding - basic 13,340,495 11,842,446 13,319,203 8,694,945 Weighted average shares outstanding - diluted 13,652,060 12,904,382 13,661,457 11,311,938
See accompanying notes NATROL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands except for share and per share amounts) (UNAUDITED)
NINE MONTHS ENDED SEP 30 1999 1998 ------------------------------ OPERATING ACTIVITIES Net income $ 6,459 $ 5,270 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 790 576 Amortization of goodwill 705 350 Provision for bad debts 115 41 Changes in operating assets and liabilities: Accounts receivable (3,371) (5,720) Inventories 981 (3,182) Income taxes receivable/payable (386) 359 Prepaid expenses and other current assets (316) (51) Other assets (16) - Accounts payable (1,806) 3,079 Accrued expenses 575 2,626 Accrued payroll and related liabilities 692 635 --------- -------- Net cash provided by operating activities 4,422 3,983 INVESTING ACTIVITIES Assets purchased, net of liabilities assumed in connection with Pure-Gar acquisition - (11,104) Purchases of property and equipment (1,797) (647) Purchases of marketable securities (39,173) - Sales of marketable securities 34,579 - --------- -------- Net cash used in investing activities (6,391) (11,751) FINANCING ACTIVITIES Proceeds from long-term debt 3,501 9,000 Repayments on long-term debt (32) (12,605) Proceeds from issuance of Common Stock, net of issuance costs - 47,674 Redemption of redeemable preferred stock - (6,000) Capitalized loan fees (50) - Proceeds from stock purchase plan 62 - Proceeds from exercise of stock options 54 - --------- -------- Net cash provided by financing activities 3,535 38,069 --------- -------- Net increase in cash and cash equivalents 1,566 30,301 Cash and cash equivalents, beginning of period 559 1,800 --------- -------- Cash and cash equivalents, end of period $ 2,125 $ 32,101 ========= ======== Supplemental disclosures of cash flows information: Cash paid during year for: Interest $ 83 $ 407 Income taxes $ 3,987 $ 3,015
See accompanying notes NATROL, INC. NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1. BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited consolidated financial statements include all necessary adjustments (consisting of normal recurring accruals) and present fairly the consolidated financial position of Natrol, Inc. and its subsidiaries (collectively, the "Company" or "Natrol") as of September 30,1999, and the results of its operations for the three and nine months ended September 30, 1999 and 1998 and cash flows for the nine months ended September 30, 1999 and 1998, in conformity with generally accepted accounting principles for the interim financial information applied on a consistent basis. The results of operations for the three months and nine months ended September 30, 1999 are not necessarily indicative of the results to be expected for the full year. Certain information and footnote disclosures which are normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Natrol's December 31, 1998, or audited consolidated financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 1998 as filed with the Securities and Exchange Commission ("SEC")(file number 000-24567). 2. INVENTORIES Inventories consist of the following:
SEPTEMBER 30, DECEMBER 31, 1999 1998 ---------------------------- Raw material and packaging supplies $ 6,998 $ 7,549 Finished goods 5,458 5,888 ---------------------------- $12,456 $13,437 ============================
3. COMPREHENSIVE INCOME In the year ended December 31, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No 130, "Reporting Comprehensive Income." The provisions of SFAS No 130 require companies to classify items of comprehensive income by their nature in financial statements and display the accumulated balance of other comprehensive income separately from retained earnings in the financial statements. The Company's comprehensive income items are not material at September 30, 1999 or December 31, 1998 and therefore no disclosures have been made. 4. EARNINGS PER SHARE The Company calculates earnings per share in accordance with SFAS No. 128 "Earnings per share". Basic earnings per share has been computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share has been computed by dividing net income by the weighted average of securities or other contracts to issue Common Stock as if these securities were exercised or converted to Common Stock. Common Stock equivalent shares from stock options representing 460,000 shares have been excluded from the computation of diluted earnings per share for the period ended September 30, 1999 because the effect would be antidilutive. 5. STOCKHOLDERS' EQUITY STOCK OPTIONS SFAS No. 123, "Accounting for Stock-Based Compensation" encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees." Please refer to Natrol's prospectus dated July 22, 1998 and annual report on Form 10K for the year ended December 31, 1998 filed with the Securities and Exchange Commission for detail on the Company's Amended and Restated 1996 Stock Option and Grant Plan (the "Stock Option Plan") and the related disclosures. During the nine months ended September 30, 1999, 235,000 options were granted with exercise prices that were not less than the fair market value of the stock at the date of grant. 6. LONG-TERM DEBT In May, 1999 the Company entered into a $3.5 million, 15 year, fully amortizing mortgage loan from Wells Fargo Bank, NA at a fixed interest rate equal to 7.75% per annum. The loan is a non-recourse loan secured by the Company's headquarters and manufacturing facility. 7. SUBSEQUENT EVENTS On October 6, 1999 the Company entered into an agreement with a bank which provides for maximum borrowings on a revolving line of credit up to $10 million through the year 2002. The line of credit is collateralized by substantially all of the Company's assets and includes requirements that the Company comply with certain financial covenants. On October 8, 1999, the Company purchased all of the stock of Prolab Nutrition, Inc. ("Prolab") for $29 million in cash and 124,270 shares of Common Stock. The Company borrowed $6.25 million on the revolving line of credit in connection with the Prolab acquisition. Prolab markets sports nutrition products for body builders and health minded individuals through gyms, health food stores and other outlets both domestically and internationally. On October 8, 1999 Company granted certain employees of Prolab incentive stock options to purchase up to an aggregate of 500,000 shares of Natrol Common Stock. These employee options vest over a period of three years and may be exercised at the closing price on the day of the grant. On November 1, 1999, the Company granted certain employees of the Company and of its wholly owned subsidiary Prolab incentive stock options to purchase up to an aggregate of 30,000 shares of Natrol Common Stock. These employee options vest over a period of five years and may be exercised at the closing price on the day of the grant. In November, 1999 the Company agreed to purchase a 132,000 sq.ft. distribution facility within one mile of its headquarters and manufacturing plant for $7.2 million. Approximately 50,000 sq. ft. of this facility is currently being leased to a third party tenant. The Company anticipates relocating the operations of its shipping facility to the new building and subleasing its existing 25,000 sq. ft. shipping facility once the transaction is complete. The Company anticipates that it will finance the purchase price through a term mortgage loan and that the transaction will be complete in mid-December 1999. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CERTAIN RISK FACTORS THAT MAY AFFECT FUTURE RESULTS Information contained or incorporated by reference in this periodic report on Form 10-Q and in other SEC filings by the Company contains "forward looking statements." The Company is including this statement for the express purpose of availing itself of protections of the safe harbor provided by the Private Securities Litigation Reform Act of 1995 with respect to all such forward looking statements. Examples of forward looking statements include, but are not limited to, the use of forward-looking terminology such as "believes," "expects," "may," "will," "should" or "anticipates" or the negative thereof, other variations thereon, or comparable terminology, or by discussions of strategy. The Company's ability to predict results or the effect of certain events on the Company's operating results is inherently uncertain. Therefore, the Company wishes to caution each reader of this report to carefully consider the following factors and certain other factors discussed herein and in other past reports, including but not limited to, the Company's Prospectus dated July 22, 1998 and the Company's annual report on Form 10-K for the year ended December 31, 1998, each of which is filed with the Securities and Exchange Commission. Factors that could cause or contribute to the Company's actual results differing materially from those discussed herein or for the Company's stock price to be affected adversely include, but are not limited to: - (i) industry trends, including a potential general downturn or slowing of the growth of the dietary supplement industry, (ii) increased competition from current competitors and new market entrants, (iii) adverse publicity regarding the dietary supplement industry or the Company's products, (iv) the Company's dependence upon its ability to develop new products, (v) government regulation, (vi) exposure to product liability claims,(vii) dependence on significant customers, (viii) the Company's ability to keep and attract key management employees, (ix) the Company's inability to manage growth and execute its business plan, (x) the Company's ability to consummate future acquisitions and its ability to integrate acquired businesses, including without limitation Prolab, and to retain key personnel associated with any acquisition, (xi) the absence of clinical trials for many of the Company's products, (xii) the Company's inability to obtain raw materials that are in short supply, (xiii) sales and earnings volatility, (xiv) the Company's ability to manufacture its products efficiently, (xv) the Company's reliance on independent brokers to sell its products, (xvi) the inability of the Company to protect its intellectual property, (xvii) control by principal shareholders, (xviii) the possible sale of large amounts of stock by controlling shareholders, (xiv) volatility in the stock markets, (xx) a failure of the Company to properly address the year 2000 issue, (xxi) a general downturn in the national economy as a whole, and (xxii) continued market acceptance of Prolab's sports nutrition products. These and other such factors are discussed in more detail in previous filings with the Securities and Exchange Commission including, under the caption "Risk Factors and Factors Affecting Forward Looking Statements" in the Company's annual report on Form 10-K for the year ended December 31, 1998 and elsewhere in this report. THE FOLLOWING DISCUSSION OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE RESPONSE TO PART I, ITEM 1 OF THIS REPORT. THREE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 NET SALES. Sales are recognized at the time product is shipped. Net sales are net of discounts, allowances, and estimated returns and credits. Net sales increased 8.6%, or $1.7 million, to $21.2 million for the three months ended September 30, 1999 from $19.5 million for the three months ended September 30, 1998. Sales during the quarter were adversely affected by a decline in the Company's herbal category caused primarily by a decline in the sales of Kava Kava and St. John's Wort based products. These products received substantial national media attention during 1998. During 1999, sales of these products declined industry wide. Offsetting the decline in the herbal category was $1.4 million of net revenue generated from the sale of Laci Le Beau teas and dietary supplements. The Laci Le Beau tea business was acquired by the Company on October 1, 1998. A combination of new product introductions, increases of existing product sales, increased penetration in the mass market channel of distribution, increased private contract manufacturing, and increases in revenue from the Company's Pure-Gar ingredient supply business were other factors which contributed to the Company's ability post net sales gains during the three month period ending September 30, 1999. GROSS PROFIT. Gross profit increased 8.1%, or $825,000, to $11.0 million for the three months ended September 30, 1999 from $10.2 million for the three months ended September 30, 1998. Gross margin decreased to 52.0% for the three months ended September 30, 1999 from 52.2% for the three months ended September 30, 1998. Gross margin fluctuates from quarter to quarter depending upon customer mix, product mix and promotional activity and, as a result, the Company does not consider the decrease in gross margin during the quarter to be a significant event. SELLING AND MARKETING EXPENSES. Selling and marketing expenses consist primarily of advertising and promotional expenses, cost of distribution, and related payroll expenses and commissions. Selling and marketing expenses increased 10.7%, or $490,000, to $5.1 million for the three months ended September 30, 1999 from $4.6 million for the three months ended September 30, 1998. The increase was primarily due to additional advertising, promotional and payroll expenses to support increased net sales. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist primarily of personnel costs related to general management functions, finance, accounting and information systems, research and development expenses, as well as professional fees related to legal, audit and tax matters and depreciation and amortization. General and administrative expenses increased 17.0%, or $295,000, to $2.0 million for the three months ended September 30, 1999 from $1.7 million for the three months ended September 30, 1998. This increase was primarily attributable to the hiring of more employees to manage the Company's growth including its Laci Le Beau division acquired in October 1998 with corresponding increases in payroll and depreciation; additional goodwill attributable to the acquisition of Laci Le Beau; and a substantial increase in expenses such as legal and accounting fees, filing fees, insurance and other expenses attributable to the Company's operation as a publicly traded company. As a result of the Prolab acquisition the Company will record approximately $338,000 of additional goodwill each quarter, beginning with the fourth quarter of 1999. INTEREST INCOME. Interest income increased $14,000 to $252,000 for the three months ended September 30, 1999 from $238,000 for the three months ended September 30, 1998. The Company's average balance of cash and marketable securities during the third quarter of 1999 was $25.3 million. The Company's balance of cash and marketable securities at the beginning of the third quarter of 1998 was $411,000 but rose to $32.1 million at the close of the quarter due to the completion of the Company's initial public offering on July 22, 1998. The difference in interest earned during the third quarter of 1999 when compared to the third quarter of 1998 was due to the difference in the average balance of cash and marketable securities as well as the difference in short-term interest rates during the respective periods. INTEREST EXPENSE. Interest expense increased $15,000 to $47,000 for the three months ended September 30, 1999 from $32,000 for the three months ended September 30, 1998. The increase was a result of increased outstanding indebtedness. See "Liquidity and Capital Resources." INCOME TAX PROVISION. The Company's effective tax rate for both the third quarter of 1999 and the third quarter of 1998 was 38.0%. NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 NET SALES. Net sales increased 16.3%, or $8.0 million, to $56.9 million for the nine months ended September 30, 1999 from $48.9 million for the nine months ended September 30, 1998. Sales during the nine month period were adversely affected by a decline in the Company's herbal category caused primarily by a decline in the sales of Kava Kava and St. John's Wort based products. Offsetting the decline in the herbal category was $5.1 million of net revenue generated from the sale of Laci Le Beau teas and dietary supplements. The Laci Le Beau tea business was acquired on October 1, 1998. A combination of new product introductions, increases of existing product sales and increased penetration in the mass market channel of distribution were other factors which contributed to the Company's ability to post net sales gains during the nine month period ending September 30, 1999. GROSS PROFIT. Gross profit increased 17.4%, or $4.4 million, to $29.7 million for the nine months ended September 30, 1999. Gross margin increased to 52.3% for the nine months ended September 30, 1999 from 51.8% for the nine months ended September 30, 1998. Gross margin fluctuates depending upon customer mix and product mix. The Company does not consider the increase in gross margin during the nine month period to be a significant event and anticipates that its gross margin will continue to fluctuate, both up and down, from period to period. SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased 12.6%, or $1.6 million, to $13.9 million for the nine months ended September 30, 1999 from $12.3 million for the nine months ended September 30, 1998. The increase was primarily due to additional advertising, promotional and payroll expenses to support increased net sales. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased 43.2%, or $1.8 million, to $6.1 million for the nine months ended September 30, 1999 from $4.2 million for the nine months ended September 30, 1998. This increase was primarily attributable to the hiring of additional staff to support and manage the Company's growth including its Pure-Gar and Laci Le Beau divisions acquired in February and October 1998 respectively with corresponding increases in payroll and depreciation; additional goodwill attributable to the acquisitions; and a substantial increase in expenses such as legal and accounting fees, filing fees, insurance and other expenses attributable to the Company's operation as publicly traded company. As a result of the Prolab acquisition the Company will record approximately $1.35 million of additional goodwill annually. INTEREST INCOME. Interest income increased $443,000 to $724,000 for the nine months ended September 30, 1999 from $281,000 for the nine months ended September 30, 1998. The increase was the result of the investment of cash generated through operations as well as the investment of cash proceeds from the Company's IPO completed in July, 1998. INTEREST EXPENSE. Interest expense decreased $325,000 to $82,000 for the nine months ended September 30, 1999 from $407,000 for the nine months ended September 30, 1998. The decrease was a result of decreased outstanding indebtedness. See "Liquidity and Capital Resources." INCOME TAX PROVISION. The Company's effective tax rate was reduced to 38.2% in the nine months ended September 30, 1999 from 39.0% in the nine months ended September 30, 1998. The increase in the income tax provision at September 30, 1999 from September 30, 1998 is directly related to the increase in pretax income offset by the decrease in the effective rate. LIQUIDITY AND CAPITAL RESOURCES Prior to its IPO, the Company had financed its operations and capital requirements primarily through funds from operations and, to a lesser extent, borrowings. At September 30, 1999, the Company had working capital of $45.2 million, as compared to $35.7 million at December 31, 1998. The increase was primarily due to an increase in trade receivables and a decrease in accounts payable and accrued expenses that fluctuate in the normal course of the Company's business as well as $3.5 million of cash received from the mortgaging of its headquarters and manufacturing facility in Chatsworth, California. On July 27, 1998, the Company completed its IPO of 3,940,000 shares of Common Stock priced at $15.00 per share. Of the total shares offered, 3,200,000 shares were sold by the Company. The Company sold an additional 295,500 shares of Common Stock on August 6, 1998, pursuant to the underwriters' exercise of the overallotment option granted in the IPO. The net proceeds to the Company from the IPO were $47.7 million, including the shares sold pursuant to the underwriters' exercise of the overallotment option. Of the net proceeds to the Company, $8.4 million was used to repay in full long-term debt. As more fully described in Natrol's prospectus dated July 22, 1998, all of the 27,000 shares of convertible participating preferred stock purchased by certain investors in September 1996 were converted into 2,700,000 shares of Common Stock of the Company and shares of redeemable preferred stock, which were immediately redeemed for a total of $6.0 million. The redemption price of the redeemable preferred stock was funded from the proceeds of the IPO. Net cash provided by operating activities was $4.4 million for the nine months ended September 30, 1999 as compared to $4.0 million during the nine months ended September 30, 1998. The increase in cash provided by operating activities was primarily due to a $1.2 million increase in net income, a $1.0 million decrease in inventories, and a $569,000 increase in depreciation and amortization offset by an increase in accounts receivable of $3.4 million, an increase in prepaid expenses of $316,000 and a decrease in accounts payable and other current liabilities of $539,000. The higher level of goodwill amortization is the result of the Pure-Gar and Laci Le Beau acquisitions completed in February and October of 1998, respectively. Net cash used in investing activities was $6.4 million for the nine months ended September 30, 1999 and $11.8 million during the nine months ended September 30, 1998. During the first nine months of 1999, the Company invested $1.8 million in new plant, property and equipment. This investment was offset by net changes in marketable securities of $4.6 million. Of the net cash used in investing activities in the nine months ended September 30, 1998, the Company used $11.1 million to consummate the Pure-Gar acquisition and $647,000 to invest in property, plant, and equipment. Cash provided by financing activities during the nine months ended September 30, 1999 was $3.5 million as opposed to the nine months ended September 30, 1998 when financing activities provided $38.1 million in cash. Net cash provided by financing activities during the nine months ended September 30, 1999 consisted of $3.5 million received as a result of the mortgaging of the Company's headquarters and manufacturing facility located in Chatsworth, California as well as $116,000 from the sale of stock to employees pursuant to the Company's Stock Purchase Plan as well as the exercise of stock options by certain employees. Net cash provided by financing activities in the nine months ended September 30, 1998 consisted of $47.7 million raised from the Company's IPO and receipt from $9 million from bank borrowings offset by repayments of bank debt amounting to $12.6 million and the redemption of $6 million of preferred stock. The Company's cash and marketable securities balances combined at September 30, 1999 were approximately $25.7 million. The Company used a majority of this cash along with $6.25 million of borrowings from a $10 million line of credit (see "Subsequent Events") established in October, 1999 to purchase Prolab Nutrition, Inc. for $29 million in cash and 124,270 shares of the Company's Common Stock. The Company believes that its cash balances, together with cash generated from operations and remaining balances available from its line of credit will be sufficient to fund its anticipated working capital needs and capital expenditures (other than financing necessary to complete future acquisitions, if any) for at least the next 12 months. The Company's $10 million line of credit contains various financial covenants which are predicated on the Company's present and projected financial condition. In the event that future operations differ materially from what is expected, the Company may no longer be able to meet the tests set out in the Credit Facility. Failure to meet these tests may result in a default by the Company under the Credit Facility which may materially adversely affect the Company's liquidity. The Credit Facility restricts or prohibits the Company from incurring indebtedness, incurring liens, disposing of assets or making certain investments or acquisitions, without the consent of the lenders and requires the Company to maintain certain financial ratios on an ongoing basis. The Credit Facility is collateralized by pledges of all of the outstanding capital stock of the Company's subsidiaries, and a lien on substantially all of the assets of the Company. The Credit Facility also restricts the Company's ability to pay dividends, repurchase stock, or make other distributions to shareholders. Dividend payments are specifically restricted to an amount not to exceed 25% of the Company's cash flow as defined in the loan documents. Permitted future acquisitions, if any, could be funded with cash-on-hand, cash from operations as well as future borrowings that could replace the existing line of credit. Future borrowings may also include covenants restricting the Company's ability to issue dividends or to make additional acquisitions. There can be no assurance that attractive acquisition opportunities will be available to the Company or will be available at prices and upon such other terms that are attractive to the Company. The Company regularly evaluates the potential acquisition of other businesses, products and product lines and may hold discussions regarding such potential acquisitions. As a general rule, the Company will publicly announce such acquisitions only after a definitive agreement has been signed. In addition, in order to meet its long-term liquidity needs or consummate future acquisitions, the Company may be required to incur additional indebtedness or issue additional equity and debt securities, subject to market and other conditions. There can be no assurance that such additional financing will be available on terms acceptable to the Company or at all. The failure to raise the funds necessary to finance its future cash requirements or consummate future acquisitions could adversely affect the Company's ability to pursue its strategy and could negatively affect its operations in future periods. IMPACT OF INFLATION Generally, inflation has not had a material impact on the Company's historical operations or profitability. YEAR 2000 READINESS DISCLOSURE The statements in the following section include "Year 2000 readiness disclosure" within the meaning of the Year 2000 Information and Readiness Disclosure Act. Many existing computer programs and databases use two digits to identify a year in the date field (i.e., 98 would represent 1998). These programs and databases were designed and developed without considering the impact of the upcoming millennium. If not corrected, many computer systems could fail or create erroneous results relating to the year 2000. If the Company, its significant customers, or suppliers fail to make necessary modifications and conversions on a timely basis, the year 2000 issue could have a material adverse effect on Company operations. However, the impact cannot be quantified at this time. The Company believes that its competitors face a similar risk. The Company has developed plans to address the possible exposures related to the impact on its computer systems of the year 2000 issue. Key financial, information and operational systems, including equipment with embedded microprocessors, have been or are currently being inventoried and assessed, and detailed plans have been or are currently being developed for the required systems modifications or replacements. Progress against these plans is monitored and reported to management on a regular basis. The Company is also focusing on major customers and suppliers to assess their compliance. The Company has received assurances from material customers that such material customers expect to be Year 2000 compliant and is seeking such assurances from its other material customers and suppliers. Nevertheless, there can be no assurance that there will not be a material adverse effect on the Company if third party, governmental or business entities do not convert or replace their systems in a timely manner and in a way that is compatible with the Company's systems. In the event a material customer or supplier is not Year 2000 compliant, the Company's business, financial condition and results of operations could be materially and adversely affected. The costs incurred to date related to these programs have not been material and the Company does not expect its future costs related to these programs to be material. Such costs have been and will continue to be funded through operating cash flows. The Company presently believes that the total cost of achieving year 2000 compliant systems is not expected to be material to its financial condition, liquidity, or results of operations. Time and cost estimates are based on currently available information. Developments that could affect estimates include, but are not limited to, the availability and cost of trained personnel; the ability to locate and correct all relevant computer code and systems; and remediation success of the Company's customers and suppliers. The preceding "Year 2000 Readiness Disclosure" contains various forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and the Section 27A of the Securities Act of 1933. These forward-looking statements represent the Company's beliefs or expectations regarding future events. When used in the "Year 2000 Readiness Disclosure", the words "believes," "expects," "estimates" and similar expressions are intended to identify forward-looking statements. Forward-looking statements include, without limitation, the Company's expectations as to when it will complete the modification and testing phases of its Year 2000 project plan as well as its Year 2000 contingency plans; its estimated cost of achieving Year 2000 readiness; and the Company's belief that its internal systems will be Year 2000 compliant in a timely manner. All forward-looking statements involve a number of risks and uncertainties that could cause the actual results to differ materially from the projected results. Factors that may cause these differences include, but are not limited to, the availability of qualified personnel and other information technology resources; the ability to identify and remediate all date sensitive lines of computer code or to replace embedded computer chips in affected systems or equipment; and the actions of governmental agencies or other third parties with respect to Year 2000 problems. ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK The following discussion about the Company's market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. The Company is exposed to market risk related to change in interest rates. The Company maintains a portfolio of highly liquid cash equivalents and marketable securities. Marketable securities consist primarily of certificates of deposits, commercial paper and corporate and municipal bonds. Given the short-term nature and liquidity of these investments, the Company believes that it is not subject to significant interest rate risk. The Company's portfolio of such assets was liquidated in October, 1999 in order to complete the Company's acquisition of Prolab (See "Subsequent Events"). The Company is also subject to interest rate market risk associated with its fixed rate long-term debt. However, the Company does not believe that the risk is significant due to the low fixed rate and the insignificance of the long-term debt to the Company's consolidated balance sheet. PART II OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (a) Not applicable. (b) Not applicable. (c) Not applicable. (d) The Company completed its initial public offering (the "IPO") in July 1998. The IPO was made pursuant to a Registration Statement on Form S-1, originally filed with the Securities and Exchange Commission on May 7, 1998, as amended (Commission File No. 333-52109), which was declared effective on July 21, 1998. The IPO commenced on July 22, 1998 and terminated shortly thereafter after the sale into the public market of all of the registered shares of Common Stock. The shares of Common Stock sold in the IPO were offered for sale by a syndicate of underwriters represented by Adams, Harkness & Hill, Inc., NationsBanc Montgomery Securities LLC and Piper Jaffray Inc. The Company registered an aggregate of 4,531,000 shares of Common Stock (including 591,000 shares issuable upon the exercise of the underwriters' overallotment option) for sale in the IPO at a per share price of $15.00, for an aggregate offering price of approximately $68.0 million. Of the 4,531,000 shares sold in the IPO, 3,495,500 shares were registered for the Company's account. The Company incurred the following expenses in connection with the IPO: Underwriting discounts and commissions $3.67 million Other expenses $1.05 million ------------- Total expenses $4.72 million After deducting the expenses set forth above, the Company received approximately $47.7 million in net proceeds from the IPO. The Company used approximately (a) $8.4 million of the proceeds to repay in July 1998 borrowings under the Company's then existing senior credit facility with Wells Fargo Bank, N.A., including fees and accrued and unpaid interest, (b) $6.0 million to redeem all of the outstanding shares of the Company's Redeemable Preferred Stock in July 1998, (c) $7.5 million to complete the acquisition of the Laci Le Beau tea business in October 1998, (d) $5.25 million to purchase its headquarters/manufacturing facility in December 1998 and, (e) $29.0 million of such proceeds to consummate the acquisition of Prolab on October 8, 1999. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS none ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) 27.1 Financial Data Schedule (b) No current reports on Form 8-K were filed by the Company during the three month period ended September 30, 1999. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NATROL, INC. Date: 11/15/99 By: /s/ Elliott Balbert Chairman, President and Chief Executive Officer Date: 11/15/99 By: /s/ Dennis R. Jolicoeur Chief Financial Officer and Executive Vice President EX-27.1 2 EXHIBIT 27.1
5 1,000 3-MOS DEC-31-1999 JUL-01-1999 SEP-30-1999 2,125 23,605 13,243 447 12,456 53,624 13,744 2,545 77,992 8,405 3,469 0 0 136 66,079 77,992 21,174 21,174 10,175 17,283 0 0 47 4,096 1,557 2,539 0 0 0 2,539 0.19 0.19
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