**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 

**(Mark one)**

 

| **ý**                                                                                                          |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT  OF 1934**  |
|---------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------|
|                                                                                                                |   |                                                                                                 |
| **FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003**                                                          |
|                                                                                                                |   |                                                                                                 |
| **OR**                                                                                                              |
|                                                                                                                |   |                                                                                                 |
| **o**                                                                                                               |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT  OF 1934** |
|                                                                                                                |   |                                                                                                 |
| **FOR THE TRANSITION PERIOD  FROM             TO** |
|                                                                                                                |
| **COMMISSION FILE NO: 0-24567**                                                                                     |

 

| **NATROL, INC.**                                           |
|------------------------------------------------------------|
| (Exact name of registrant as specified in its charter)     |
|                                                       |   |   |   |   |
|                                                       | **DELAWARE** |   | **95-3560780** |   |
|                                                       | (State of  Incorporation) |   | (I.R.S.  Employer Identification No.) |   |
|                                                       |
| **21411 PRAIRIE STREET  CHATSWORTH, CALIFORNIA 91311**     |
| (ADDRESS OF  PRINCIPAL EXECUTIVE OFFICES)                  |
|                                                       |
| **(818) 739-6000**                                         |
| (REGISTRANT’S  TELEPHONE NUMBER, INCLUDING AREA CODE) |
|                                                            |  |  |  |  |

 

INDICATE BY A CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALLREPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIESEXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIODTHAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEENSUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.

YES  ý   NO  o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Exchange Act Rule  12b-2). Yes o  No ý

 

Indicate the number of shares outstanding of the issuer’s common stock,as of the latest practicable date:

 

| **Class**                      |   | **November 1,  2003** |
|--------------------------------|--------|----------------------------|
| Common  stock, $0.01 par value |   | 13,078,245                 |

 

 

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PART 1. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

 

**Natrol, Inc. and Subsidiaries**

**Consolidated Balance Sheets**

(In thousands, except share and per sharedata)

(Unaudited)

 
|                                                                                                                                                |   | **September 30,  2003** |   | **December 31,  2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|-----------------------------|--------|
|                                                                                                                                                |   |                         |   |                        |   |
| **Assets**                                                                                                                                          |   |                         |   |                        |   |
| Current  assets:                                                                                                                                    |   |                         |   |                        |   |
| Cash and  cash equivalents                                                                                                                          |   | $                            | 2,029  |                        | $      | 10,077 |   |
| Accounts  receivable, net of allowances for doubtful accounts of $527 and $409 at  September 30, 2003 and December 31, 2002, respectively |   | 9,703                        |   | 6,790                       |   |
| Inventory                                                                                                                                           |   | 8,044                        |   | 8,669                       |   |
| Income taxes  receivable                                                                                                                            |   | 572                          |   | —                      |   |
| Deferred  income taxes                                                                                                                              |   | 665                          |   | 665                         |   |
| Prepaid  expenses and other current assets                                                                                                          |   | 6,374                        |   | 1,452                       |   |
| Total current assets                                                                                                                                |   | 27,387                       |   | 27,653                      |   |
| Property and  equipment:                                                                                                                            |   |                         |   |                        |   |
| Building and  improvements                                                                                                                          |   | 15,612                       |   | 15,607                      |   |
| Machinery  and equipment                                                                                                                            |   | 5,142                        |   | 5,067                       |   |
| Furniture  and office equipment                                                                                                                     |   | 3,144                        |   | 3,003                       |   |
|                                                                                                                                                |   | 23,898                       |   | 23,677                      |   |
| Accumulated  depreciation and amortization                                                                                                          |   | (6,983                       | )      | (5,867                      | )      |
|                                                                                                                                                |   | 16,915                       |   | 17,810                      |   |
| Deferred  income taxes                                                                                                                              |   | 3,853                        |   | 3,853                       |   |
| Goodwill,  net of accumulated amortization and impairment charge of $37,381                                                                         |   | 4,026                        |   | 4,026                       |   |
| Other assets                                                                                                                                        |   | 85                           |   | 39                          |   |
| Total assets                                                                                                                                        |   | $                            | 52,266 |                        | $      | 53,381 |   |
|                                                                                                                                                |   |                         |   |                        |   |
| **Liabilities and stockholders’ equity**                                                                                                       |   |                         |   |                        |   |
| Current  liabilities:                                                                                                                               |   |                         |   |                        |   |
| Accounts  payable                                                                                                                                   |   | $                            | 5,087  |                        | $      | 4,395 |   |
| Accrued  expenses                                                                                                                                   |   | 2,441                        |   | 3,358                       |   |
| Accrued  payroll and related liabilities                                                                                                            |   | 1,018                        |   | 693                         |   |
| Income taxes  payable                                                                                                                               |   | —                       |   | 205                         |   |
| Current  portion of long-term debt                                                                                                                  |   | 318                          |   | 301                         |   |
| Total  current liabilities                                                                                                                          |   | 8,864                        |   | 8,952                       |   |
| Long-term  debt, less current portion                                                                                                               |   | 7,535                        |   | 7,778                       |   |
| Commitments  and contingencies                                                                                                                      |   |                         |   |                        |   |
| 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                                                                                                                  |   |                         |   |                        |   |
| Outstanding  shares—13,070,308 and 13,788,720 at September 30, 2003 and  December 31, 2002, respectively                             |   | 140                          |   | 138                         |   |
| Additional  paid-in capital                                                                                                                         |   | 62,285                       |   | 62,005                      |   |
| Accumulated  deficit                                                                                                                                |   | (23,677                      | )      | (22,611                     | )      |
|                                                                                                                                                |   | 38,748                       |   | 39,532                      |   |
| Shares held  in treasury, at cost—921,900 shares at September 30, 2003 and  December 31, 2002                                        |   | (2,881                       | )      | (2,881                      | )      |
| Total  stockholders’ equity                                                                                                                    |   | 35,867                       |   | 36,651                      |   |
| Total  liabilities and stockholders’ equity                                                                                                    |   | $                            | 52,266 |                        | $      | 53,381 |   |

 

See accompanying notes

 

2

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**Natrol, Inc. and Subsidiaries**

**ConsolidatedStatements of Operations**

**(In thousands, except share and per sharedata)**

**(Unaudited)**

** **
|                                                                                            |   | **Three  months ended  September 30,** |   | **Nine  months ended  September 30,** |    |
|-------------------------------------------------------------------------------------------------|--------|---------------------------------------------|--------|--------------------------------------------|---------|
|                                                                                            |   | **2003**                                    |   | **2002**                                   |    | **2003** |   | **2002** |   |
|                                                                                            |   |                                        |   | **(As restated)**                          |    |   |   | **(As restated)** | ** ** |
| Net sales                                                                                       |   | $                                           | 17,599 |                                       | $       | 18,021 |   | $ | 55,754 |   | $ | 53,403 |   |
| Cost of goods sold                                                                              |   | 10,672                                      |   | 11,035                                     |    | 33,877 |   | 32,740 |   |
| Gross profit                                                                                    |   | 6,927                                       |   | 6,986                                      |    | 21,877 |   | 20,663 |   |
|                                                                                            |   |                                        |   |                                       |    |   |   |   |   |
| Selling and marketing expenses                                                                  |   | 4,533                                       |   | 4,675                                      |    | 14,219 |   | 12,758 |   |
| General and administrative expenses                                                             |   | 2,807                                       |   | 2,478                                      |    | 8,840 |   | 7,373 |   |
| Total operating expenses                                                                        |   | 7,340                                       |   | 7,153                                      |    | 23,059 |   | 20,131 |   |
| Operating income (loss)                                                                         |   | (413                                        | )      | (167                                       | )  | (1,182 | ) | 532 |   |
|                                                                                            |   |                                        |   |                                       |    |   |   |   |   |
| Interest income                                                                                 |   | 2                                           |   | 24                                         |    | 16 |   | 69 |   |
| Interest expense                                                                                |   | (163                                        | )      | (169                                       | )       | (487 | ) | (510 | ) |
| Income (loss) before income tax provision  (benefit) and cumulative effect of accounting change |   | (574                                        | )      | (312                                       | )  | (1,653 | ) | 91 |   |
| Income tax provision (benefit)                                                                  |   | (182                                        | )      | (124                                       |  ) | (587 | ) | 29 |   |
| Income (loss) before cumulative effect of  change in accounting principle                       |   | (392                                        | )      | (188                                       |  ) | (1,066 | ) | 62 |   |
| Cumulative effect of change in accounting  principle, net of income tax benefit of $4,139       |   | —                                      |   | —                                     |    | — |   | (6,819 | ) |
| Net loss                                                                                        |   | $                                           | (392   | )                                          | $       | (188 | )  | $ | (1,066 | ) | $ | (6,757 | ) |
| Income (loss) per share before cumulative  effect of change in accounting principle             |   | $                                           | (0.03  | )                                          | $       | (0.01 | )  | $ | (0.08 | ) | $ | 0.00 |   |
| Loss per share attributable to cumulative  effect of change in accounting principle             |   | —                                      |   | —                                     |    | — |   | (0.53 | ) |
| Loss per share                                                                                  |   | $                                           | (0.03  | )                                          | $       | (0.01 | )  | $ | (0.08 | ) | $ | (0.53 | ) |
|                                                                                            |   |                                        |   |                                       |    |   |   |   |   |
| Weighted-average shares outstanding—basic  and diluted                                     |   | 12,915,285                                  |   | 12,847,397                                 |    | 12,892,196 |   | 12,860,577 |   |

 

See accompanying notes

 

3

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# **Natrol, Inc.and Subsidiaries**

**Consolidated Statements of Cash Flows**

(In thousands)

(Unaudited)

 
|                                                                                                     |   | **Nine Months  Ended September 30,** |    |
|----------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|---------|
|                                                                                                     |   | **2003**                                  |    | **2002** |   |
|                                                                                                     |   |                                      |    |
| **Operating  activities**                                                                                |   |                                      |    |   |   |
| Net Loss                                                                                                 |   | $                                         | (1,066  | ) | $ | (6,757 | ) |
| Cumulative effect of change in accounting  principle, net of income taxes benefit of $4,139 in 2002 |   | —                                    |    | (6,819 | ) |
| Income (loss) before cumulative effect of  change in accounting principle                                |   | (1,066                                    | )       | 62 |   |
| Adjustments to  reconcile net loss to net cash provided by operating activities:                         |   |                                      |    |   |   |
| Depreciation  and amortization                                                                           |   | 1,116                                     |    | 901 |   |
| Provision for  bad debts                                                                                 |   | 118                                       |    | 257 |   |
| Shares issued  for services                                                                              |   | —                                    |    | 17 |   |
| Changes in  operating assets and liabilities:                                                            |   |                                      |    |   |   |
| Accounts  receivable                                                                                     |   | (3,031                                    | )       | (693 | ) |
| Inventory                                                                                                |   | 625                                       |    | 2,188 |   |
| Income taxes  receivable/payable                                                                         |   | (777                                      | )       | 1,655 |   |
| Prepaid  expenses and other current assets                                                               |   | (4,922                                    | )  | 603 |   |
| Accounts  payable                                                                                        |   | 692                                       |    | 1,720 |   |
| Accrued  expenses                                                                                        |   | (917                                      | )       | (535 | )  |
| Accrued  payroll and related liabilities                                                                 |   | 325                                       |    | (65 |  ) |
| Net cash  provided (used) by operating activities                                                        |   | (7,837                                    | )       | 6,110 |   |
|                                                                                                     |   |                                      |    |   |   |
| **Investing  activities**                                                                                |   |                                      |    |   |   |
| Purchases of  property and equipment                                                                     |   | (221                                      | )       | (995 | ) |
| Other assets                                                                                             |   | (46                                       | )       | 4 |   |
| Net cash used  in investing activities                                                                   |   | (267                                      | )       | (991 | ) |
|                                                                                                     |   |                                      |    |   |   |
| **Financing  activities**                                                                                |   |                                      |    |   |   |
| Repayments on  long-term debt                                                                            |   | (226                                      | )       | (208 | ) |
| Proceeds from  stock purchase plan                                                                       |   | 37                                        |    | 21 |   |
| Proceeds from  exercise of stock options                                                                 |   | 245                                       |    | 98 |   |
| Net cash  provided by (used in) financing activities                                                     |   | 56                                        |    | (89 | ) |
| Net increase  (decrease) in cash and cash equivalents                                                    |   | (8,048                                    | )       | 5,030 |   |
| Cash and cash  equivalents, beginning of period                                                          |   | 10,077                                    |    | 5,485 |   |
| Cash and cash  equivalents, end of period                                                                |   | $                                         | 2,029   |   | $ | 10,515 |   |
|                                                                                                     |   |                                      |    |   |   |
| **Supplemental  disclosures of cash flow information:**                                                  |   |                                      |    |   |   |
| Cash paid for interest                                                                                   |   | $                                         | 490     |   | $ | 510 |   |

 

See accompanying notes

 

4

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NATROL, INC.NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

 

1. BASIS OF PRESENTATION

 

The accompanyingunaudited interim financial statements of Natrol, Inc. have been prepared inaccordance with accounting principles generally accepted in the United Statesof America and Article 10 of the Securities and Exchange Commission’sRegulation S-X.  Accordingly, they do not include all of the informationand footnotes required by accounting principles generally accepted in theUnited States of America, although the Company believes that the disclosuresincluded in these financial statements are adequate to make the information notmisleading.  In management’s opinion, the unaudited financial statementscontain all adjustments, consisting of normal recurring adjustments, necessaryto present fairly the Company’s financial statements as of September 30,2003 and for all interim periods presented.  The financial statementsshould be read in conjunction with the audited financial statements included inthe Annual Report of the Company filed on Form 10-K with the Securities andExchange Commission for the year ended December 31, 2002.  Theresults of operations for the periods ended September 30, 2003 are notnecessarily indicative of the results that may be expected for the fiscal yearending December 31, 2003.

 

2.               STOCK BASEDCOMPENSATION

 

The Company accounts for its employee stock option plan under theintrinsic value method prescribed by Accounting Principles Board Opinion No.25, *Accounting for Stock Issued toEmployees,*and related interpretations.  The Company has a stock-based compensation plan.  The Company’s operating results do notinclude a compensation charge related to this plan, as all options granted hadan exercise price equal to the market value of the underlying common stock onthe date of grant.  The following tableillustrates the effect on the operating results and per share amounts as if thefair value recognition provisions of Statement of Financial AccountingStandards No. 123, *Accounting forStock-Based Compensation,*had been applied to stock-based employeecompensation*:*

 
|                                                                                                                                           |   | **3 Months  Ended  September 30,** |   | **9 Months  Ended  September 30,** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|-----------------------------------------|--------|
|                                                                                                                                           |   | **2003**                                |   | **2002**                                |   | **2003** |   | **2002** |   |
| Income (loss) before  cumulative effect of accounting change                                                                                   |   | $                                       | (392   | )                                       | $      | (188 | ) | $ | (1,066 | ) | $ | 62 |   |
|                                                                                                                                           |   |                                    |   |                                    |   |   |   |   |   |
| Total stock-based expense determined under fair  valuebased method for  all awards, net of related tax benefits “Stock compensation” |   | 196                                     |   | 202                                     |   | 571 |   | 607 |   |
| Loss before cumulative effect of accounting  change-pro-forma                                                                                  |   | $                                       | (588   | )                                       | $      | (390 | ) | $ | (1,637 | ) | $ | (545 | ) |
|                                                                                                                                           |   |                                    |   |                                    |   |   |   |   |   |
| Net loss                                                                                                                                       |   | $                                       | (392   | )                                       | $      | (188 | ) | $ | (1,066 | ) | $ | (6,757 | ) |
| Stock Compensation                                                                                                                             |   | 196                                     |   | 202                                     |   | 571 |   | 607 |   |
| Pro forma net loss                                                                                                                             |   | $                                       | (588   | )                                       | $      | (390 | ) | $ | (1,637 | ) | $ | (7,364 | ) |
|                                                                                                                                           |   |                                    |   |                                    |   |   |   |   |   |
| Income (loss) per share before cumulative effect  of accounting change:                                                                        |   |                                    |   |                                    |   |   |   |   |   |
| Basic and diluted - as reported                                                                                                                |   | $                                       | (0.03  | )                                       | $      | (0.01 | ) | $ | (0.08 | ) | $ | 0.00 |   |
| Basic and diluted - pro forma                                                                                                                  |   | $                                       | (0.05  | )                                       | $      | (0.03 | ) | $ | (0.13 | ) | $ | (0.04 | ) |
|                                                                                                                                           |   |                                    |   |                                    |   |   |   |   |   |
| Net loss per share:                                                                                                                            |   |                                    |   |                                    |   |   |   |   |   |
|                                                                                                                                           |   |                                    |   |                                    |   |   |   |   |   |
| Basic and diluted - as reported                                                                                                                |   | $                                       | (0.03  | )                                       | $      | (0.01 | ) | $ | (0.08 | ) | $ | (0.53 | ) |
| Basic and diluted - pro forma                                                                                                                  |   | $                                       | (0.05  | )                                       | $      | (0.03 | ) | $ | (0.13 | ) | $ | (0.57 | ) |

 

5

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During the nine months ended September 30, 2003, 160,000 stockoptions were granted with exercise prices equal to the fair value of theunderlying Common Stock on the date of grant. The fair market value of the underlying Common Stock on the dates of thegrant ranges between $1.15 and $2.04 per share.

 

3.  INVENTORY

 

Inventories consist of the following:

 
|                                 |   | **September 30,  2003** |       | **December 31,  2002** |       |
|--------------------------------------|--------|------------------------------|------------|-----------------------------|------------|
|                                 |   |                         | ** ** |                        | ** ** |
| Raw material  and packaging supplies |   | $                            | 3,299      |                        | $          | 2,950 |   |
| Work in  Process                     |   | 1,350                        |       | 1,354                       |       |
| Finished  goods                      |   | 3,395                        |       | 4,365                       |       |
|                                 |   | $                            | 8,044      |                        | $          | 8,669 |   |

 

4. SHIPPING AND HANDLING COSTS

 

Outbound shipping costs are classified as selling and marketingexpenses and totaled $2.7 million and $2.2 million for the nine months endedSeptember 30, 2003 and 2002, respectively.

 

5. EARNINGS PER SHARE

 

Basic earnings per share have been computed by dividing net income(loss) by the weighted average number of common shares outstanding during theperiod. Diluted earnings per share have been computed by dividing net income bythe weighted average number of common shares and dilutive common stockequivalents (stock options).  Dilutedearnings per share are not computed for periods in which the Company incurs aloss.

 

6.  RECENTLY ISSUED ACCOUNTINGPRONOUNCEMENTS

 

In June 2002, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards (“SFAS”) No. 146, *Accounting for Costs Associated with Exit or DisposalActivities*. SFAS No. 146 requires that the liability for costsassociated with an exit or disposal activities be initially measured at fairvalue and recognized when the liability is incurred. As required, the Companywill apply the provisions of SFAS No. 146 prospectively to exit ordisposal activities, if any, initiated after December 31, 2002.

 

In November 2002, the FASB issued Interpretation No. 45, *Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others*(“FIN 45”).  This interpretationelaborates on disclosures to be made by a guarantor in its interim and annualfinancial statements with regard to its obligations under certain guaranteesthat it has issued.  It also clarifiesthat a guarantor is required to recognize, at the inception of a guarantee, aliability for the fair value of the obligation undertaken in issuing theguarantee.  The disclosure requirementsof FIN 45 are effective prospectively for guarantees issued or modified afterDecember 31, 2002.  The adoption ofthe recognition and initial measurement requirements of FIN 45 did not have amaterial impact on the Company’s financial position or results of operations.

 

In January 2003, the FASB issued Interpretation No. 46, *Consolidation of Variable Interest Entities*(“FIN 46”).  This interpretation ofAccounting Research Bulletin No. 51, “Consolidated Financial Statements,”addresses consolidation by business enterprises of variable interestentities.  Under current practice, twoenterprises generally have been included in consolidated financial statementsbecause one enterprise controls the other through voting interests.  FIN 46 defines the concept of “variableinterests” and requires existing unconsolidated variable interest entities tobe consolidated by their primary beneficiaries if the entities do not effectivelydisperse risks among the parties involved. This interpretation applies immediately to variable interest entities inwhich an enterprise holds a variable interest that it acquired afterJanuary 31, 2003. This interpretation may be applied immediately tovariable interest entities in which an enterprise holds a variable interestthat it acquired before February 1, 2003. The interpretation may be applied prospectively with a cumulative-effectadjustment as of the date on which it is first applied or by restatingpreviously issued financial statements for one or more years with acumulative-effect adjustment as of the beginning of the first yearrestated.  The adoption of FIN 46 didnot have a material impact on the Company’s financial position or results ofoperations.

 

6

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In May 2003, the FASB issued SFASNo. 150 *Accounting for Financial Instrumentswith the Characteristics of Both Liabilities and Equities*. SFAS No. 150 establishes standards regarding the manner in which an issuerclassifies and measures certain types of financial instruments havingcharacteristics of both liabilities and equity.  Pursuant to SFAS No. 150,such freestanding financial instruments (i.e., those entered into separatelyfrom an entity’s other financial instruments or equity transactions or that arelegally detachable and separately exercisable) must be classified asliabilities or, in some cases, assets.  In addition, SFAS No. 150 requiresthat financial instruments containing obligations to repurchase the issuingentity’s equity shares and, under certain circumstances, obligations that aresettled by delivery of the issuer’s shares be classified as liabilities. Certain aspects of SFAS No. 150 have been deferred; however, the Statement iseffective for financial instruments entered into or modified after May 31,2003 and for other instruments at the beginning of the first interim periodbeginning after June 15, 2003.  Theadaptation of SFAS No. 150 did not have a material impact on the Company’sfinancial position or results of operations.

 

7.  OPERATING SEGMENTS

 

The Company has three operating segments, asfollows:

•                  The Natrol operating segment whichmanufactures and markets Natrol and Laci LeBeau branded products, and which,under the EPI name, contract manufactures products and sells raw materialingredients

•                  ProlabNutrition, Inc. (“Prolab”)which develops, manufactures and markets sports nutrition products

•                  Annasa, Inc. (“Annasa”) was establishedduring 2002 to develop a direct-to-consumer, multi-level marketing business.

 

Segment information for the three and nine month periods endedSeptember 30, 2003 and September 30, 2002 is as follows (inthousands):

 
|                                           |   | **Natrol** |   | **Prolab** |   | **Annasa** |   | **Total** |   |
|------------------------------------------------|--------|------------|--------|------------|--------|------------|--------|-----------|--------|
|                                           |   |       |   |       |   |       |   |      |   |
| **Three months ended September 30, 2003** |   |       |   |       |   |       |   |      |   |
| Net sales                                      |   | $          | 12,379 |       | $      | 5,022      |   | $         | 198    |   | $ | 17,599 |   |
| Gross profit                                   |   | 5,497      |   | 1,316      |   | 114        |   | 6,927     |   |
| Income (loss) from operations                  |   | 191        |   | (83        | )      | (521       | )      | (413      | )      |
| Other expense                                  |   | (161       | )      | —     |   | —     |   | (161      | )      |
| Income (loss) before taxes                     |   | 30         |   | (83        | )      | (521       | )      | (574      | )      |
| Depreciation and amortization                  |   | 347        |   | 20         |   | 1          |   | 368       |   |
| Segment  assets                                |   | 41,852     |   | 10,318     |   | 96         |   | 52,266    |   |
| Additions to property and equipment            |   | 89         |   | 2          |   | —     |   | 91        |   |
|                                                |        |            |        |            |        |            |        |           |        |  |  |  |  |

 
|                                           |   | **Natrol** | ** ** | **Prolab** | ** ** | **Annasa** | ** ** | **Total** | ** ** |
|------------------------------------------------|--------|------------|------------|------------|------------|------------|------------|-----------|------------|
|                                           |   |       |       |       |       |       |       |      |       |
| **Three months ended September 30, 2002** |   |       |       |       |       |       |       |      |       |
| Net sales                                      |   | $          | 12,865     |       | $          | 5,156      |       |      | —     |   | $ | 18,021 |   |
| Gross profit                                   |   | 5,912      |       | 1,074      |       | —     |       | 6,986     |       |
| Income (loss) from operations                  |   | 530        |       | (278)      |       | $          | (419       | )         | (167       | ) |
| Other (expense) income                         |   | (153       | )          | 8          |       | —     |       | (145      | )          |
| Income (loss) before taxes                     |   | 377        |       | (270       | )          | (419       | )     | (312      | )          |
| Depreciation and amortization                  |   | 202        |       | 23         |       | —     |       | 225       |       |
| Segment  assets                                |   | 39,177     |       | 14,418     |       | 49         |       | 53,644    |       |
| Additions to property and equipment            |   | 452        |       | 3          |       | —     |       | 455       |       |
|                                                |        |            |            |            |            |            |            |           |            |  |  |  |  |

 

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|                                          |   | **Natrol** |   | **Prolab** |   | **Annasa** |   | **Total** |   |
|-----------------------------------------------|--------|------------|--------|------------|--------|------------|--------|-----------|--------|
| **Nine months ended September 30, 2003** |   |       |   |       |   |       |   |      |   |
| Net sales                                     |   | $          | 40,085 |       | $      | 15,204     |   | $         | 465    |   | $ | 55,754 |   |
| Gross profit                                  |   | 18,364     |   | 3,209      |   | 304        |   | 21,877    |   |
| Income  (loss) from operations                |   | 1,479      |   | (1,247     | )      | (1,414     | )      | (1,182    | )      |
| Other income  (expense)                       |   | (479       | )      | 8          |   | —     |   | (471      | )      |
| Income (loss)  before taxes                   |   | 1,000      |   | (1,239     | )      | (1,414     | )      | (1,653    | )      |
| Depreciation  and amortization                |   | 1,052      |   | 61         |   | 3          |   | 1,116     |   |
| Segment  assets                               |   | 41,852     |   | 10,318     |   | 96         |   | 52,266    |   |
| Additions to  property and equipment          |   | 186        |   | 31         |   | 4          |   | 221       |   |
|                                               |        |            |        |            |        |            |        |           |        |  |  |  |  |

 
|                                          |   | **Natrol** | ** ** | **Prolab** | ** ** | **Annasa** | ** ** | **Total** | ** ** |
|-----------------------------------------------|--------|------------|------------|------------|------------|------------|------------|-----------|------------|
| **Nine months ended September 30, 2002** |   |       |       |       |       |       |       |      |       |
| Net sales                                     |   | $          | 38,265     |       | $          | 15,138     |       | —    |       | $ | 53,403 |   |
| Gross profit                                  |   | 17,126     |       | 3,537      |       | —     |       | 20,663    |       |
| Income  (loss) from operations                |   | 1,129      |       | (1         | )     | $          | (596       | )         | 532        |   |
| Other income  (expense)                       |   | (471       | )          | 30         |       | —     |       | (441      | )          |
| Income  (loss) before taxes                   |   | 658        |       | 29         |       | (596       | )          | 91        |       |
| Depreciation  and amortization                |   | 833        |       | 68         |       | —     |       | 901       |       |
| Segment  assets                               |   | 39,177     |       | 14,418     |       | 49         |       | 53,644    |       |
| Additions to  property and equipment          |   | 984        |       | 11         |       | —     |       | 995       |       |
|                                               |        |            |            |            |            |            |            |           |            |  |  |  |  |

 

8.               RESTATEMENT OF SEPTEMBER 30, 2002FINANCIAL STATEMENTS

 

The Company adopted SFAS No. 142, *Goodwilland Other Intangible Assets*, on January 1, 2002.  As initially applied, the Companyreclassified approximately $3.6 million out of goodwill and into a separatelyidentified intangible asset related to a supply contract.  The supply contract had originally beenacquired as part of the Company’s acquisition of EPI.  The supply contract had a remaining life of six years, and duringthe nine months ended September 30, 2002 the Company had recorded amortizationexpense of $450,000 and an increase in income tax expenses of $168,000.  During the fourth quarter of 2002, theCompany determined that the supply contract should not have been reclassifiedout of goodwill as it had not been assigned a cost equal to its estimated fairvalue at the date the EPI acquisition was initially recorded, and because theamount had not been separately identified in the accounting records orpreviously amortized over its useful life. As a result, the $3.6 million was reallocated to goodwill retroactive toJanuary 1, 2002.  Pursuant to therequirements of SFAS No. 142, goodwill is not amortized, but subject to anannual impairment test.  The Companyrecorded an impairment charge of $10,958,000 as a cumulative effect of a changein accounting principle in the first quarter of 2002.  The $3.6 million described above was included in that amount.

 

The interim financial statements for the three and nine month periodsended September 30, 2002 have respectively been restated to reflect areduction in amortization expense of $150,000 and $450,000 respectively.

 
|                                                                      |   | **Three  Months ended  September 30, 2002** |   | **Nine  Months ended  September 30, 2002** |   |
|---------------------------------------------------------------------------|--------|--------------------------------------------------|--------|-------------------------------------------------|--------|
|                                                                      |   | **As  Previously  Reported**                     |   | **As  Restated**                                |   | **As  Previously  Reported** |   | **As  Restated** |   |
|                                                                      |   | **(In  thousands)**                              |   | **(In thousands)**                              |   |
|                                                                      |   |                                             |   |                                            |   |   |   |   |   |
| Net Sales                                                                 |   | $                                                | 18,021 |                                            | $      | 18,021 |   | $ | 53,403 |   | $ | 53,403 |   |
| Gross profit                                                              |   | 6,986                                            |   | 6,986                                           |   | 20,663 |   | 20,663 |   |
| Operating expenses                                                        |   |                                             | 7,303  |                                            |   | 7,153 |   |   | 20,581 |   |   | 20,131 |   |
| Income (loss) before cumulative effect of change  in accounting principle |   | (282                                             | )      | (188                                            | )      | (220 | )  | 62 |   |

 

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ITEM 2:MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This report contains “forward looking statements.” Natrol, Inc., aDelaware corporation organized in 1980, (the “Company”), is including thisstatement for the express purpose of availing itself of protections of the safeharbor provided by the Private Securities Litigation Reform Act of 1995 withrespect to all such forward looking statements. Examples of forward lookingstatements include, but are not limited to, the use of forward-lookingterminology such as “believes,” “expects,” “may,” “will,” “should,” “intend,”“estimate,” “assume,” “plan,” or “anticipates” or the negative thereof, othervariations thereon, or comparable terminology, or by discussions of strategythat predict or indicate future events or trends or that are not historicalfacts. The Company cannot assure the future results or outcome of the mattersdescribed in these statements; rather, these statements merely reflect itscurrent expectations of the approximate outcome of the matter discussed. TheCompany does not undertake any obligation and does not currently intend toupdate any such statements at any time in the future.

 

The Company’s ability to predict results orthe effect of certain events on the Company’s operating results is inherentlyuncertain. Forward-looking statements should not be unduly relied on since theyinvolve known and unknown risks, uncertainties and other factors, some of whichare beyond the Company’s control. These risks, uncertainties and other factorsmay cause actual results, performance or achievements to differ materially fromthe anticipated future results, performance or achievements expressed orimplied by such forward-looking statements. Therefore, the Company wishes tocaution each reader of this report to carefully consider the following factorsand certain other factors discussed herein and factors discussed in other pastreports. The factors discussed herein may not be exhaustive. Therefore, thefactors contained herein should be read together with other reports anddocuments that are filed by the Company with the SEC from time to time, whichmay supplement, modify, supersede or update the factors listed in thisdocument.

 

Factors that could cause or contribute to the Company’s actual resultsdiffering materially from those discussed herein or for the Company’s stockprice to be affected adversely include, but are not limited to:(i) industry trends, including a general downturn or slowing of the growthof the dietary supplement industry; (ii) increased competition fromcurrent competitors and new market entrants including but not limited toincreased competition from private label house brands supported by retailersseeking to increase the market share of their proprietary house brands;(iii) adverse publicity regarding the dietary supplement industry or theCompany’s products including recent publicity regarding ephedrine-basedproducts; (iv) exposure to product liability claims including productliability claims for which the Company self insures; (v) exposure to andthe expense of resolving and defending potential liability claims that are leftuncovered by the Company’s insurance policies other than product liability forwhich the company self insures; (vi) the Company’s dependence upon itsability to develop new products; (vii) a continued high rate (or increasein the rate) of returns of the Company’s products; (viii) the Company’sability to manage inventory or sell its inventory before such inventory becomesoutdated, (xix) the Company’s ability to gain or expand or maintaindistribution within new or existing customers and new or existing channels oftrade; (x) an increase in the cost of obtaining and maintaining shelfspace with major national retailers who demand various forms of incentives fromtheir suppliers such as slotting fees, coop advertising, or rebates;(xi) adverse changes in government regulation or changes in local ornational laws; (xii) dependence on significant customers; (xiii) theCompany’s ability to keep and attract key management employees; (xiv) theCompany’s inability to manage growth and execute its business plan, or theCompany’s ability to modify its business plan in response to market conditions,including, but not limited to, its ability to enter into new businesses andcapitalize upon new business opportunities; (xv) the Company’s ability toconsummate future acquisitions and its

 

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ability to integrate acquired businesses; (xvi) the absence ofconclusive clinical studies for many of the Company’s products; (xvii) theCompany’s inability to obtain raw materials that are in short supply includingits ability to obtain garlic powders under its supply agreement with ConAgrafor its Essentially Pure Ingredient (EPI) raw material sales division;(xviii) sales and earnings volatility, (xix) volatility of the stockmarket; (xx) the Company’s ability to manufacture its productsefficiently; (xxi) the Company’s reliance on independent brokers to sellits products; (xxii) the inability of the Company to protect itsintellectual property; (xxiii) control of the Company by principal shareholders,(xxiv) the possible sale of large amounts of stock by controllingstockholders; (xxv) a general downturn in the national economy as a whole;(xxvi) continued market acceptance of Natrol supplements, Laci Le Beauteas, Prolab’s sports nutrition products and EPI’s raw material products;(xxvii) increases in the cost of borrowings; (xxviii) unavailabilityof additional debt or equity capital; (xix) legal actions brought forth bygovernmental and private agencies; and, (xx) that its investment in a newmulti-level marketing company, Annasa Inc., will prove not to beprofitable in the near or long-term.

 

RESULTS OF OPERATIONS

 

The following discussion of the results of operations and the financialcondition of the Company should be read in conjunction with the response toPART 1. ITEM 1 of this report.

 

THREE MONTHS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002

 

NET SALES. Sales are recognized at the time product is shipped, FOBshipping point. Net sales are net of discounts, allowances, estimated returnsand credits, slotting fees, rebates and other expenses that reduce the cost ofproduct to the Company’s customers.  Netsales decreased 2.3%, or $422,000, to $17.6 million for the three months endedSeptember 30, 2003 from $18.0 million for the three months ended September 30,2002.  The Natrol segment declinedapproximately $486,000 when comparing the third quarter of 2003 with the thirdquarter of 2002.  Approximately $300,000of decline in sales was due to the increased cost of discounts, and allowancesfor promotional activity and returns.

 

Net sales for the Prolab segment declined $134,000 when comparing thethird quarter of 2003 with the third quarter of 2002.  During the third quarter 2003, the Company announced that allcustomer service and accounting functions would be moved from Prolab’s facilityin Connecticut to the Natrol’s corporate headquarters facility inCalifornia.  This factor may haveaffected the level of Prolab’s sales during the quarter.

 

For the Company as a whole, for the three months ended September 30,2003 the cost of returns, damages, and outdates were 5.6% of gross shipments asopposed to 5.5% of gross shipments during the same period in 2002. For the ninemonths ended September 30, 2003 the cost of returns, damages, and outdatesfell to 4.8% of gross shipments from 9.1% for 2002.  The decline in returns is the result of cooperative effortsbetween the Company and its mass-market customers to improve store leveldisplay and distribution of the Company’s products thereby reducing the levelof returns.

 

The declines in net sales revenue for the Natrol and Prolab operatingsegments were partially offset by $200,000 of net sales revenue generated bythe Annasa segment.  The Annasa segmentdid not generate revenue during the first nine months of 2002.

 

GROSS PROFIT.  Gross profitdecreased by less than 1% or $59,000 to $6.9 million for the three months endedSeptember 30, 2003 when compared to the three months endedSeptember 30, 2002.  Gross marginincreased to 39.4% for the three months ended September 30, 2003 from38.8% for the three months ended September 30, 2002.  The increase in gross margin was due toproduct mix and promotional activity and is not considered significant.

 

SELLING AND MARKETING EXPENSES. Selling and marketing expenses consist primarily of sales and marketingpayroll, advertising and certain promotional expenses, distribution costs andcommissions paid to independent brokers. Selling and marketing expenses decreased 3.0%, or $142,000, to $4.5million for the three months ended September 30, 2003 from $4.7 millionfor the three months ended September 30, 2002. The Company incurred$369,000 of selling and marketing expenses as part of its launch of its Annasamulti-level marketing subsidiary during the quarter ended September 30, 2003as opposed to $188,000 incurred during the quarter ended September 20,2002.  Offsetting the $181,000 increasein selling and marketing expenses within the Annasa segment

 

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were a decline in expenses of approximately $323,000 at the Prolab andNatrol segments.  Selling and marketingexpenses include the cost of distribution. This cost rose significantly for the Natrol and Prolab operatingsegments in 2003, from approximately $655,000 for the quarter endedSeptember 30, 2002 to $798,000 for the quarter ended September 30,2003.  The cost increase was due tohigher freight charges from commercial shippers as well as the increased costof shipping labor.

 

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist primarily of personnel costsrelated to general management functions, finance, accounting and informationsystems, as well as insurance costs and professional fees related to legal,audit and tax matters and depreciation. General and administrative expensesincreased 13.3%, or $329,000, to $2.8 million for the three months endedSeptember 30, 2003 from $2.5 million for the three months endedSeptember 30, 2002.  Approximately$45,000 of the increase was due to increased expenses for Annasa as compared tothe third quarter of 2002.  Theremaining increase in expenses was primarily due to professional fees paid toconsultants.

 

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INCOME TAX PROVISION. For the three months ended September 30,2003 the Company’s effective tax rate was approximately 31.7%.  For the three months endedSeptember 30, 2002 the Company’s effective tax rate was 39.7%.

 

 

NINE MONTHS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002

 

NET SALES. Net sales increased 4.4%, or $2.4 million, to $55.8 millionfor the nine months ended September 30, 2003 from $53.4 million for thenine months ended September 30, 2002. The increase in net sales was primarily due to a $3.5 million reductionin the cost of returns, damages and outdates during the nine months endedSeptember 30,2003 as compared to the same nine months of 2002.  Returns and damage claims are netted againstgross sales when calculating net sales. The savings in returns were partially offset by an increased level inpromotional expenditures and other discounts which are netted against grosssales when calculating net sales.  Forthe nine months ended September 20, 2003 the cost of returns, damages, andoutdates fell to 4.4% of gross shipments from 9.9% of gross shipments duringthe same period in 2002.

 

GROSS PROFIT.  Gross profitincreased 5.9%, or $1.2 million, to $21.9 million for the nine months endedSeptember 30, 2003 from $20.7 million for the nine months endedSeptember 30, 2002. Gross margin increased to 39.2% for the nine monthsended September 30, 2003 from 38.7% for the nine months endedSeptember 30, 2002. The increase in gross margin was due to changes inproduct mix and promotional activity as well as the decline in returns.

 

SELLING AND MARKETING EXPENSES. Selling and marketing expensesincreased 11.5%, or $1.5 million, to $14.2 million for the nine months endedSeptember 30, 2003 from $12.8 million for the nine months endedSeptember 30, 2002. The Company incurred $921,000 of selling and marketingexpenses as part of its launch of its Annasa multi-level marketing subsidiaryduring the nine months ended September 30, 2003 as opposed to $253,000 ofAnnasa related selling and marketing expenses incurred during the nine monthsended September 30, 2002. Approximately $530,000 of the approximately$730,000 remaining increase in selling and marketing expenses was due to theincreased costs of shipping product to customers, which was due to higherfreight charges from commercial shippers as well as the increased cost ofshipping labor.

 

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrativeexpenses increased 19.9%, or $1.5 million, to $8.8 million for the nine monthsended September 30, 2003 from $7.4 million for the nine months endedSeptember 30, 2002.  Of theincrease, $465,000 was due to increased expenditures by the Annasa segment,$751,000 was due to increased insurance costs, $225,000 was due to the use ofconsultants for a special project. In July, the Company began to self-insureits product liability insurance in order to reduce its insurance costs (relateddiscussion is included within *Liquidity andCapital Resources*).

 

CUMMULATIVEEFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. In January 2002, the Companyadopted SFAS No. 142, *Goodwill andOther Intangible Assets.* SFAS No. 142 requires that goodwillnot be amortized. In accordance with such adoption, the Company identified allreporting units in conjunction with the provisions of SFAS No. 142 andallocated all goodwill accordingly. Goodwill is evaluated for impairmentannually, or whenever events or changes in circumstances indicate that thecarrying amount of goodwill may not be recoverable. As it adopted SFAS No. 142,the Company tested goodwill for impairment using the two-step process prescribedin SFAS No.142. The first step is a screen for potential impairment, while thesecond step measures the amount of the impairment, if any. The Companyperformed the first step of the impairment test, and determined that the therewas no impairment of the Prolab segment, but that there was potentialimpairment of the Natrol segment. The Company performed the second step as ofJanuary 1, 2002 for the Natrol segment and determined that its goodwillbalance of $10,958,000 was impaired. The impairment loss was recorded as acumulative effect of a change in accounting principle in the accompanyingconsolidated statement of operations for the nine months endedSeptember 30, 2002.

 

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INCOME TAX PROVISION. TheCompany’s effective tax rate was approximately 35.5% in the nine months endedSeptember 30, 2003 as compared to 31.9% in the nine months endedSeptember 30, 2002.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

At September 30, 2003, the Company had working capital of $18.5million as compared to $18.7 million in working capital at December 31,2002. The Company’s cash balance at September 30, 2003 was approximately$2.0 million.  The Company had anadditional $5.0 million at the end of the quarter which is restricted as partof a self-insurance program.  Thisamount is classified as *Prepaid expenses andother current assets* on the accompanying September 30, 2003balance sheet.  Should the Companycancel its self-insurance program and choose to insure itself using traditionalinsurance policies, this amount would be returned and available for use by theCompany.

 

Net cash used in operating activities was $7.8 million for the ninemonths ended September 30, 2003 versus net cash provided of $6.1 millionfor the nine months ended September 30, 2002. Cash used in operatingactivities during the nine month period ended September 30, 2003 wasprimarily due to the Company’s net loss of $1.1 million, an increase inaccounts receivable of $3.0 million, an increase in income tax receivables of$777,000, an increase in prepaid expenses and other current assets ofapproximately $4.9 and a decrease in accrued expenses of $917,000, offset by anincrease in net accounts payables and other accruals of $1.0 million,depreciation and amortization of $1.1 million and a decrease in inventory of$625,000.  In July 2003, theCompany placed $5 million into escrow with an insurance company as part of aself-insurance program. The Company earns 1.65% on the $5 million.  When the funds were placed into escrow, theCompany reclassified the asset to *Prepaidexpenses and other current assets.*Should the company cancel theself-insurance program and choose to insure itself using traditional insurancepolicies, the restricted funds would no longer be restricted and the fundswould return to the Company.  The policyperiod of the self-insurance program is five years, but the Company may cancelthe program at any time.

 

The Company elected to self insure upon completion of a retrospectivereview and analysis of cost, coverage, litigation asserted by insurers issuingstandard general and product liability coverage, litigation expense and claimsresolution history.  The Companyconcluded that the use of traditional insurance did not limit the Company’sexposure to advertising and regulatory claims which traditional coveragerefused to cover, and that self-insurance would not increase the risk of claimsarising out of the normal course of business. This program has reduced insurance premiums, based on actual paymentsmade in 2002, by approximately $1.2 million annually.

 

Accounts receivable as of September 30, 2003 was approximately$3.0 million higher than December 31, 2002 in part due to the timing ofsales.  In particular, an increase insales to a large account during the later half of the third quarter of 2003resulted in an increase in this customer’s accounts receivable balance by $1.2million at September 30, 2003 from December 31, 2002.  This customer is current as ofSeptember 30, 2003.  In addition,the Company maintained more than $600,000 of accounts receivable balances as ofSeptember 30, 2003 related to accounts that had no balances as ofDecember 31, 2002.  Furthermore,certain of the Company’s mass-market accounts maintained credit balances as ofDecember 31, 2002 due to credits claimed for returns.  These same mass-market merchants hadpositive balances as of September 30, 2003.  The level of returns for the nine months ended September 30,2003 has fallen to 4.8% of gross shipments compared to 9.1% for 2002.  The Company’s average days sales in accountsreceivable is approximately 47 days for nine months ended September 30,2003.

 

Net cash used in investing activities was $267,000 for the nine monthsended September 30, 2003 versus net cash used of $991,000 during the ninemonths ended September 30, 2002. Nearly all of the cash used in investingactivities in both periods was for property and equipment. During 2002, theCompany invested in SAP software and installation as it upgraded its computerizedmanagement systems.  Expenditures in2003 were primarily for manufacturing equipment.

 

Net cash provided by financing activities was $56,000 for the ninemonths ended September 2003 as opposed to $89,000 used by financingactivities during the nine months ended September 30, 2002. During thenine months ended September 30, 2003, the Company made principal paymentsof $226,000 on its long-term mortgage debt. During the nine months ended September 30, 2002, the Company madeprincipal payments of $208,000 on its long-term mortgage debt.  During the nine months endedSeptember 30, 2003 the Company received $282,000 from proceeds

 

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of the exercise of stock options and the sale of stock to employeesthrough its employee stock purchase program versus $119,000 received during thesame period in 2002.

 

As of September 30, 2003, the Company had $7.9 million ofoutstanding debt, all of which is the result of long-term mortgage debt on theCompany’s manufacturing/headquarters facility and on the Company’s shippingfacility.

 

The Company may need to establish a line of credit due to the declinein available cash due to the self-insurance program and cash required forongoing operations.  The Companybelieves that due to Company’s debt to equity ratio and the quality of itsassets, it will be able to borrow funds should it need to.  However, should the Company have to borrowfunds, the cost of borrowing may be unfavorable and the terms of suchborrowings may limit the Company’s ability to grow.

 

The Company’s contractual obligations and commitments have not changedsignificantly from those discussed in item 7 of the Company’s Annual Report onfiled on From 10-K for the year ended December 31, 2002.

 

## **CRITICALACCOUNTING POLICIES**

## ** **

Management’s beliefs regarding significant accounting policies have notchanged significantly from those discussed in Item 7 of the Company’s AnnualReport on Form 10-K for the year ended December 31, 2002.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

There has been no material change during the nine months endedSeptember 30, 2003 from the disclosures about market risk provided in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2002.

 

**Item 4.****           Controls and Procedures**

 

As required by Rules 13a-15 and 15d-15 of the Securities Exchange Actof 1934, the Company has evaluated, with the participation of management,including the Chief Executive Officer and the Chief Financial Officer, theeffectiveness of its disclosure controls and procedures as of the end of theperiod covered by this report.  Based onsuch evaluation, the Chief Executive Officer and Chief Financial Officer haveconcluded that such disclosure controls and procedures are effective inensuring that material information relating to the Company, including itsconsolidated subsidiaries, is made known to the certifying officers by otherswithin the Company and its consolidated subsidiaries during the period coveredby this report.

 

From time to time, the Company reviews the disclosure controls andprocedures, and may from time to time make changes aimed at enhancing theireffectiveness and to ensure that the Company’s systems evolve with itsbusiness.  There was no change in theCompany’s internal control over financial reporting that occurred during thequarter ended September 30, 2003 that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

PART II

OTHER INFORMATION

 

ITEM 4.  SUBMISSION OF MATTERSTO A VOTE OF SECURITY HOLDERS

 

None

 

ITEM 6.  EXHIBITS AND REPORTS ONFORM 8-K

 
| Exhibit 31.1 |   | Certification of Chief Financial Officer |
|--------------|--------|------------------------------------------|
| Exhibit 31.2 |   | Certification of President/CEO/Chairman  |
| Exhibit 32.1 |   | Certification of Chief Financial Officer |
| Exhibit 32.2 |   | Certification of President/CEO/Chairman  |

 

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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 theundersigned thereunto duly authorized.

 
|           | NATROL, INC. |
|----------------|--------------|
|           |         |   |
| Date: 11/14/03 | By:          | /s/ Elliott Balbert |   |
|           |         | Chairman, President and Chief  Executive Officer |
|           |         |   |
| Date: 11/14/03 | By:          | /s/ Dennis R. Jolicoeur |   |
|           |         | Chief Financial Officer and Executive  Vice President |

 

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