**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,D.C. 20549**

 

----

 

**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  JUNE 30, 2004**                                                                                                                                             |
|                                                                                                                                                                                               |
| **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 itscharter)

 
| **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**                     | ** ** | **August 4, 2004** |
|-------------------------------|------------|-------------------------|
|                          |       |                    |
| Common stock, $0.01 par value |       | 13,345,742              |

 

 

----

 

PART 1. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

 

**Natrol, Inc.and Subsidiaries**

**Consolidated Balance Sheets**

(In thousands, except share and per sharedata)

(Unaudited)

 
| ** **                                                                                                              | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                                                                                                                    |       |                    |       |                        |       |
| **Assets**                                                                                                              |       |                    |       |                        |       |
| Current assets:                                                                                                         |       |                    |       |                        |       |
| Cash and cash equivalents                                                                                               |       | $                       | 3,314      |                        | $          | 2,599 |   |
|                                                                                                                    |       |                    |       |                        |       |
| Accounts receivable, net of allowances of  $640 and $635 at June 30, 2004 and December 31, 2003, respectively |       | 9,530                   |       | 7,698                       |       |
| Inventory                                                                                                               |       | 10,123                  |       | 9,053                       |       |
| Income taxes receivable                                                                                                 |       | 176                     |       | 349                         |       |
| Deferred income taxes                                                                                                   |       | 1,110                   |       | 1,110                       |       |
| Prepaid expenses and other current assets                                                                               |       | 773                     |       | 914                         |       |
| Net assets of discontinued operations                                                                                   |       | 60                      |       | 35                          |       |
| Total current assets                                                                                                    |       | 25,086                  |       | 21,758                      |       |
| Property and equipment:                                                                                                 |       |                    |       |                        |       |
| Building and improvements                                                                                               |       | 15,626                  |       | 15,612                      |       |
| Machinery and equipment                                                                                                 |       | 5,164                   |       | 5,215                       |       |
| Furniture and office equipment                                                                                          |       | 2,964                   |       | 3,158                       |       |
|                                                                                                                    |       | 23,754                  |       | 23,985                      |       |
| Accumulated depreciation                                                                                                |       | (7,547                  | )          | (7,315                      | )          |
| Property and equipment, net                                                                                             |       | 16,207                  |       | 16,670                      |       |
|                                                                                                                    |       |                    |       |                        |       |
| Restricted cash                                                                                                         |       | 5,000                   |       | 5,000                       |       |
| Deferred income taxes                                                                                                   |       | 3,902                   |       | 3,902                       |       |
| Goodwill, net of accumulated amortization  and impairment charge of $37,381                                             |       | 2,026                   |       | 4,026                       |       |
| Other assets                                                                                                            |       | 244                     |       | 83                          |       |
| Total assets                                                                                                            |       | $                       | 52,465     |                        | $          | 51,439 |   |
|                                                                                                                    |       |                    |       |                        |       |
| **Liabilities  and stockholders’ equity**                                                                          |       |                    |       |                        |       |
| Current liabilities:                                                                                                    |       |                    |       |                        |       |
| Accounts payable                                                                                                        |       | $                       | 3,915      |                        | $          | 5,601 |   |
| Accrued expenses                                                                                                        |       | 2,058                   |       | 1,732                       |       |
| Accrued payroll and related liabilities                                                                                 |       | 1,875                   |       | 772                         |       |
| Current portion of long-term debt                                                                                       |       | 339                     |       | 325                         |       |
| Total current liabilities                                                                                               |       | 8,187                   |       | 8,430                       |       |
| Long-term debt, less current portion                                                                                    |       | 7,277                   |       | 7,451                       |       |
| 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                                                                                       |       |                    |       |                        |       |
| Issued and outstanding shares-14,225,959  and 14,054,309 at June 30, 2004 and December 31, 2003, respectively |       | 142                     |       | 141                         |       |
| Additional paid-in capital                                                                                              |       | 62,600                  |       | 62,377                      |       |
| Accumulated deficit                                                                                                     |       | (22,860                 | )          | (24,079                     | )          |
|                                                                                                                    |       | 39,882                  |       | 38,439                      |       |
| Shares held in treasury, at cost-921,900  shares at June 30, 2004 and December 31, 2003                       |       | (2,881                  | )          | (2,881                      | )          |
| Total stockholders’ equity                                                                                         |       | 37,001                  |       | 35,558                      |       |
| Total liabilities and stockholders’ equity                                                                         |       | $                       | 52,465     |                        | $          | 51,439 |   |

 

See accompanying notes

 

2

----

 

**Natrol, Inc.and Subsidiaries**

**Consolidated Statements of Operations**

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

**(Unaudited)**

 
| ** **                                                    | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                    | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                          |       |                                  |       |                                |       |   |   |   |   |
| Net sales                                                     |       | $                                     | 20,682     |                                | $          | 18,866 |   | $ | 41,107 |   | $ | 37,861 |   |
| Cost of goods sold                                            |       | 11,338                                |       | 12,262                              |       | 23,933 |   | 23,128 |   |
| Gross profit                                                  |       | 9,344                                 |       | 6,604                               |       | 17,174 |   | 14,733 |   |
|                                                          |       |                                  |       |                                |       |   |   |   |   |
| Selling and marketing expenses                                |       | 5,643                                 |       | 4,132                               |       | 10,262 |   | 9,101 |   |
| General and administrative expenses                           |       | 2,274                                 |       | 2,727                               |       | 4,599 |   | 5,366 |   |
| Total operating expenses                                      |       | 7,917                                 |       | 6,859                               |       | 14,861 |   | 14,467 |   |
| Operating income (loss) from continuing  operations           |       | 1,427                                 |       | (255                                | )          | 2,313 |   | 266 |   |
|                                                          |       |                                  |       |                                |       |   |   |   |   |
| Interest income                                               |       | 22                                    |       | 4                                   |       | 44 |   | 14 |   |
| Interest expense                                              |       | (156                                  | )          | (162                                | )          | (314 | ) | (324 | ) |
| Income (loss) from continuing operations  before income taxes |       | 1,293                                 |       | (413                                | )          | 2,043 |   | (44 | ) |
| Income tax provision (benefit)                                |       | 524                                   |       | (167                                | )          | 824 |   | (26 | ) |
| Income (loss) from continuing operations                      |       | 769                                   |       | (246                                | )          | 1,219 |   | (18 | ) |
| Discontinued operations:                                      |       |                                  |       |                                |       |   |   |   |   |
| (Loss) from operations                                        |       | —                                |       | (461                                | )          | — |   | (1,035 | ) |
| Income tax benefit                                            |       | —                                |       | 157                                 |       | — |   | 379 |   |
| Loss on discontinued operations                               |       | —                                |       | (304                                | )          | — |   | (656 | ) |
| Net Income (loss)                                             |       | $                                     | 769        |                                | $          | (550 | ) | $ | 1,219 |   | $ | (674 | ) |
| Basic income (loss) per share:                                |       |                                  |       |                                |       |   |   |   |   |
| Income (loss) per share from continuing  operations           |       | $                                     | .06        |                                | $          | (.02 | ) | $ | .09 |   | $ | .00 |   |
| Loss per share from discontinued operations                   |       | —                                |       | (.02                                | )          | — |   | (.05 | ) |
| Income (loss) per share                                       |       | $                                     | .06        |                                | $          | (.04 | ) | $ | .09 |   | $ | (.05 | ) |
|                                                          |       |                                  |       |                                |       |   |   |   |   |
| Diluted income (loss) per share:                              |       |                                  |       |                                |       |   |   |   |   |
| Income (loss) per share from continuing  operations           |       | $                                     | .05        |                                | $          | (.02 | ) | $ | .09 |   | $ | .00 |   |
| Loss per share from discontinued operations                   |       | —                                |       | (.02                                | )          | — |   | (.05 | ) |
| Income (loss) per share                                       |       | $                                     | .05        |                                | $          | (.04 | ) | $ | .09 |   | $ | (.05 | ) |
|                                                          |       |                                  |       |                                |       |   |   |   |   |
| Weighted-average shares outstanding—basic  and diluted   |       |                                  |       |                                |       |   |   |   |   |
| Basic                                                         |       | 13,240,248                            |       | 12,886,746                          |       | 13,201,354 |   | 12,878,722 |   |
| Diluted                                                       |       | 14,093,944                            |       | 12,886,746                          |       | 14,085,885 |   | 12,878,722 |   |

 

See accompanying notes

 

3

----

 

# **Natrol, Inc.and Subsidiaries**

**Consolidated Statements of Cash Flows**

(In thousands)

(Unaudited )

 
| ** **                                                                                            | ** ** | **Six Months Ended  June,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                            | ** ** | **2004**                    | ** ** | **2003** | ** ** |
|                                                                                                  |       |                        |       |   |   |
| **Operating  activities**                                                                             |       |                        |       |   |   |
| Net Income (loss)                                                                                     |       | $                           | 1,219      |   | $ | (674 | ) |
| Loss from discontinued operations                                                                     |       | —                      |       | 656 |   |
| Income (loss) from continuing operations                                                              |       | 1,219                       |       | (18 | ) |
|                                                                                                  |       |                        |       |   |   |
| Adjustments to reconcile income from  continuing operations to net cash used in operating activities: |       |                        |       |   |   |
| Loss from discontinued operations                                                                     |       | —                      |       | (656 | ) |
| Change in net assets of discontinued  operations                                                      |       | (25                         | )          | (65 | ) |
| Depreciation and amortization                                                                         |       | 642                         |       | 745 |   |
| Loss on disposal of property and equipment                                                            |       | 2                           |       | — |   |
| Provision for bad debts                                                                               |       | 105                         |       | 112 |   |
| Shares issued for services                                                                            |       | —                      |       | 15 |   |
| Changes in operating assets and  liabilities:                                                         |       |                        |       |   |   |
| Accounts receivable                                                                                   |       | (1,937                      | )          | (2,778 | ) |
| Inventory                                                                                             |       | (1,070                      | )          | 745 |   |
| Income taxes receivable/payable                                                                       |       | 173                         |       | (613 | ) |
| Prepaid expenses and other current assets                                                             |       | 141                         |       | 778 |   |
| Accounts payable                                                                                      |       | (1,686                      | )          | 1,753 |   |
| Accrued expenses                                                                                      |       | 326                         |       | (1,124 | ) |
| Accrued payroll and related liabilities                                                               |       | 1,103                       |       | 372 |   |
| Net cash used in operating activities                                                                 |       | (1,007                      | )          | (734 | ) |
|                                                                                                  |       |                        |       |   |   |
| **Investing  activities**                                                                             |       |                        |       |   |   |
| Purchases of property and equipment                                                                   |       | (181                        | )          | (127 | ) |
| Reduction in goodwill                                                                                 |       | 2,000                       |       | — |   |
| Other assets                                                                                          |       | (161                        | )          | 7 |   |
| Net cash provided by (used in) investing  activities                                                  |       | 1,658                       |       | (120 | ) |
|                                                                                                  |       |                        |       |   |   |
| **Financing  activities**                                                                             |       |                        |       |   |   |
| Repayments on long-term debt                                                                          |       | (160                        | )          | (151 | ) |
| Proceeds from issuance of common stock                                                                |       | 224                         |       | 14 |   |
| Net cash provided by (used in) financing  activities                                                  |       | 64                          |       | (137 | ) |
| Net increase (decrease)  in cash and cash equivalents                                            |       | 715                         |       | (991 | ) |
| Cash and cash equivalents, beginning of  period                                                       |       | 2,599                       |       | 10,077 |   |
| Cash and cash equivalents, end of period                                                              |       | $                           | 3,314      |   | $ | 9,086 |   |

 

See accompanying notes

 

4

----

 

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

 

1. BASIS OF PRESENTATION

 

The accompanyingconsolidated financial statements have been prepared by the Company, pursuantto the rules and regulations of the Securities and Exchange Commission(SEC).  This Report on Form 10-Q should be read in conjunction with theCompany’s annual report on Form 10-K for the year ended December 31, 2003. Certain information and footnote disclosures which are normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted pursuant to SEC rules and regulations.  The information reflectsall normal and recurring adjustments which, in the opinion of the Company’smanagement, are necessary for a fair presentation of the financial position ofthe Company and its results of operations for the interim periods set forthherein.  The results for the three months and six months endedJune 30, 2004 are not necessarily indicative of the results to be expectedfor the full year or any other future period.

 

2. STOCK BASED COMPENSATION

 

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 compensationplan.  The Company’s operating results donot include a compensation charge related to this plan, as all options grantedhad an exercise price equal to the market value of the underlying common stockon the date of grant.  The followingtable illustrates the effect on the operating results and per share amounts ifthe fair value recognition provisions of Statement of Financial AccountingStandards No. 123, *Accounting forStock-Based compensation,*had been applied to stock-based employeecompensation:

 
| ** **                                                                                                                                                                  | ** ** | **3 Months Ended  June 30,** | ** ** | **6 Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                                                                  | ** ** | **2004**                          | ** ** | **2003**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| Income (loss) from continuing operations                                                                                                                                    |       | $                                 | 769        |                              | $          | (246 | ) | $ | 1,219 |   | $ | (18 | ) |
|                                                                                                                                                                        |       |                              |       |                              |       |   |   |   |   |
| Total stock-based employee compensation  expense determined under the fair value-based method for all awards, net of  related tax benefits (“Stock Compensation”) |       | 18                                |       | 49                                |       | 34 |   | 90 |   |
| Income (loss) from continuing  operations—pro forma                                                                                                                    |       | $                                 | 751        |                              | $          | (295 | ) | $ | 1,185 |   | $ | (108 | ) |
| Loss from discontinued operations                                                                                                                                           |       | —                            |       | (304                              | )          | — |   | (656 | ) |
| Net Income (loss)—pro forma                                                                                                                                            |       | $                                 | 751        |                              | $          | (599 | ) | $ | 1,185 |   | $ | (764 | ) |
|                                                                                                                                                                        |       |                              |       |                              |       |   |   |   |   |
| Income per share from continuing  operations:                                                                                                                               |       |                              |       |                              |       |   |   |   |   |
| Basic—as reported                                                                                                                                                      |       | $                                 | .06        |                              | $          | (.02 | ) | $ | .09 |   | $ | .00 |   |
| Diluted—as reported                                                                                                                                                    |       | $                                 | .05        |                              | $          | (.02 | ) | $ | .09 |   | $ | .00 |   |
| Basic—pro forma                                                                                                                                                        |       | $                                 | .06        |                              | $          | (.02 | ) | $ | .09 |   | $ | .01 |   |
| Diluted—pro forma                                                                                                                                                      |       | $                                 | .05        |                              | $          | (.02 | ) | $ | .08 |   | $ | .01 |   |
|                                                                                                                                                                        |       |                              |       |                              |       |   |   |   |   |
| Net loss per share:                                                                                                                                                         |       |                              |       |                              |       |   |   |   |   |
| Basic—as reported                                                                                                                                                      |       |                              |       |                              |       |   |   |   |   |
| Diluted—as reported                                                                                                                                                    |       | $                                 | .06        |                              | $          | (.04 | ) | $ | .09 |   | $ | (.05 | ) |
| Basic—pro forma                                                                                                                                                        |       | $                                 | .05        |                              | $          | (.04 | ) | $ | .09 |   | $ | (.05 | ) |
| Diluted—pro forma                                                                                                                                                      |       | $                                 | .06        |                              | $          | (.05 | ) | $ | .09 |   | $ | (.06 | ) |
|                                                                                                                                                                        |       | $                                 | .05        |                              | $          | (.05 | ) | $ | .08 |   | $ | (.06 | ) |

 

Duringthe six months ended June 30, 2004, 60,000 stock options were granted withexercise prices ranging between $2.76 and $3.04 which equaled the fair value ofthe underlying common stock on the date of grant.

 

5

----

 

3. INVENTORY

 

Inventories consist of the following:

 
| ** **                          | ** ** | **June 30,  2004** | ** ** | **December 31, 2003** | ** ** |
|-------------------------------------|------------|-------------------------|------------|----------------------------|------------|
|                                |       |                    |       |                       |       |
| Raw material and packaging supplies |       | $                       | 4,627      |                       | $          | 3,736 |   |
| Finished goods                      |       | 5,496                   |       | 5,317                      |       |
| Total Inventory                     |       | $                       | 10,123     |                       | $          | 9,053 |   |

 

4. SHIPPING AND HANDLING COSTS

 

TheCompany records all amounts charged to customers for shipping and handling asrevenue. All outbound shipping and fulfillment costs are classified as sellingand marketing expenses and totaled $1,803 and $1,552 for six months endedJune 30, 2004 and 2003 respectively.

 

5. EARNINGS PER SHARE

 

Basic earnings per share has been computed by dividing net income(loss) by the weighted average number of common shares outstanding during theperiod. Diluted earnings per share has been computed by dividing net income(loss) by the weighted average number of common shares and dilutive commonstock equivalents (stock options), when dilutive.  Stock options to purchase 538,750  and 537,500 common shares for the three andsix months ended June 30, 2004, and stock options to purchase 1,322,500and 1,807,500 common shares for the three and six months ended June 30,2003 were outstanding but considered to be anti-dilutive.

 

6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of VariableInterest Entities (“FIN 46”). In December 2003, FIN 46 was replacedby FASB interpretation No. 46(R) “Consolidation of Variable Interest Entities.”FIN 46(R) clarifies the application of Accounting Research Bulletin No. 51,“Consolidated Financial Statements,” to certain entities in which equityinvestors do not have the characteristics of a controlling financial interestor do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from otherparties. FIN 46(R) requires an enterprise to consolidate a variable interestentity if that enterprise will absorb a majority of the entity’s expectedlosses, is entitled to receive a majority of the entity’s expected residualreturns, or both. FIN 46(R) is effective for entities being evaluated under FIN46(R) for consolidation no later than the end of the first reporting period thatends after March 15, 2004. The Company did not have any variable interestentities that were impacted by adoption of FIN 46(R).

 

7. DISCONTINUED OPERATIONS

 

In December 2003, the Companydiscontinued its Annasa and Tamsol units. Annasa, a subsidiary of Natrol and a multi-level marketer of proprietarynutritional products began operations in 2002. Tamsol, was also formed in 2002, to generate direct-to-consumer salesvia radio, television, direct mail and other non retail venues.  The Company has reclassified its financialstatements to segregate the revenues, direct costs and expenses (excludingallocated costs), assets and liabilities and cash flows of the discontinuedoperations.  The net operating results,net assets and net cash flows of these businesses have been reported as“Discontinued Operations” in the accompanying consolidated financialstatements.

 

 

6

----

 

Summarized financial information for the discontinued operations is asfollows:

 
| ** **                 | ** ** | **3 Months Ended  June 30, 2003** | ** ** | **Six Months Ended  June 30, 2003** | ** ** |
|----------------------------|------------|----------------------------------------|------------|------------------------------------------|------------|
| Annasa:                    |       |                                   |       |                                     |       |
| Revenue                    |       | $                                      | 116        |                                     | $          | 266 |   |
| Gross Margin               |       | 77                                     |       | 190                                      |       |
|                       |       |                                   |       |                                     |       |
| Selling and Marketing      |       | 200                                    |       | 454                                      |       |
| General and Administrative |       | 261                                    |       | 629                                      |       |
| Loss From Operations       |       | (384                                   | )          | (893                                     | )          |
| Income Tax Benefit         |       | 126                                    |       | 322                                      |       |
| Net Loss                   |       | $                                      | (258       | )                                        | $          | (571 | ) |
|                       |       |                                   |       |                                     |       |
| Tamsol:                    |       |                                   |       |                                     |       |
| Revenue                    |       | $                                      | 6          |                                     | $          | 28 |   |
| Gross Margin               |       | 6                                      |       | 28                                       |       |
|                       |       |                                   |       |                                     |       |
| Selling and Marketing      |       | 14                                     |       | 33                                       |       |
| General and Administrative |       | 69                                     |       | 137                                      |       |
| Loss From Operations       |       | (77                                    | )          | (142                                     | )          |
| Income Tax Benefit         |       | 31                                     |       | 57                                       |       |
| Net Loss                   |       | $                                      | (46        | )                                        | $          | (85 | ) |

 
| ** **                             | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|----------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Net assets of discontinued operations: |       |                    |       |                        |       |
| Current assets                         |       | $                       | 58         |                        | $          | 116 |   |
| Total assets                           |       | 60                      |       | 151                         |       |
| Current liabilities                    |       | 0                       |       | 116                         |       |
| Net assets of discontinued operations  |       | 60                      |       | 35                          |       |
|                                        |            |                         |            |                             |            |  |  |

 

8. LITIGATIONSETTLEMENT

 

During March 2004, the Company settledits litigation with the former owners of Prolab Nutrition, Inc.  The Company received $2 million in cash,which has been reflected as a reduction in goodwill in the accompanying June 30,2004 balance sheet.

 

 

ITEM2:

MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This report contains “forward looking statements.” Natrol, a Delawarecorporation organized in 1980, is including this statement for the expresspurpose of availing itself of protections of the safe harbor provided by thePrivate Securities Litigation Reform Act of 1995 with respect to all suchforward looking statements. Examples of forward looking statements include, butare not limited to, the use of forward-looking terminology such as “believes,”“expects,” “may,” “will,” “should,” “intend,” “estimate,” “assume,” “plan,” or“anticipates” or the negative thereof, other variations thereon, or comparableterminology, or by discussions of strategy that predict or indicate futureevents or trends or that are not historical facts. The Company cannot assurethe future results or outcome of the matters described in these statements;rather, these statements merely reflect its current expectations of theapproximate outcome of the matter discussed. The Company does not undertake anyobligation and does not currently intend to update any such statements at anytime in the future.

 

The Company’s ability to predict results or the effect of certainevents on the Company’s operating results is inherently uncertain.Forward-looking statements should not be unduly relied on since they involveknown and unknown risks, uncertainties and other factors, some of which arebeyond the Company’s control. These risks, uncertainties and other factors maycause actual results, performance or achievements to differ materially from theanticipated future results, performance or achievements expressed or implied bysuch forward-looking statements. Therefore, the Company wishes to caution eachreader of this report to carefully consider the following factors and certainother factors discussed herein and factors discussed in other past reports. Thefactors discussed herein may not be exhaustive. Therefore, the factorscontained herein should be read together with other reports and documents thatare filed by the Company with the SEC from time to time, which may supplement,modify, supersede or update the factors listed in this document.

 

7

----

 

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 becauseprivate label brands control the largest share of the vitamin, mineral andsupplement (VMS) sector; (iii) adverse publicity regarding the dietarysupplement industry or the Company’s products; (iv) exposure to productliability claims, in particular because the Company beginning in July, 2003 haschosen to self-insure against product liability claims due to the high price ofproduct liability insurance, the inability to secure occurrence based coverage,as well as the limited amount of coverage provided by insurers willing toprovide insurance at high prices; (v) exposure to and the expense ofresolving and defending potential product liability claims that are left uncoveredby insurance including potential claims involving ephedrine based productswhich the company sold prior to April, 2003; (vi) the Company’s dependenceupon its ability to develop new products; (vii)  returns of the Company’sproducts which may be returned by customers at any time due to lack of sellthrough to consumers or because competitors have convinced the Company’scustomers that Natrol’s products should be replaced with competitor products;(viii) the Company’s ability to manage inventory or sell its inventorybefore such inventory becomes outdated, (xix) the Company’s ability togain or expand or maintain distribution within new or existing customers andnew or existing channels of trade; (x) an increase in the cost ofobtaining and maintaining shelf space with major national retailers who demandvarious forms of incentives from their suppliers such as slotting fees, coopadvertising, or rebates; (xi) adverse changes in government regulation orchanges in local or national laws; (xii) dependence on significantcustomers; (xiii) the Company’s ability to keep and attract key managementemployees; (xiv) the Company’s inability to manage growth and execute itsbusiness plan, or the Company’s ability to modify its business plan in responseto market conditions, including, but not limited to, its ability to enter intonew businesses and capitalize upon new business opportunities; (xv) theCompany’s ability to consummate future acquisitions and its ability tointegrate acquired businesses; (xvi) the absence of conclusive clinicalstudies for many of the Company’s products; (xvii) the Company’s inabilityto obtain raw materials that are in short supply including its ability toobtain garlic powders or arabinogalactan for its 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 principalshareholders, (xxiv) the possible sale of large amounts of stock bycontrolling stockholders; (xxv) a general downturn in the national economyas a whole; (xxvi) continued market acceptance of Natrol supplements, LaciLe Beau teas, Prolab’s sports nutrition products, and EPI’s raw materialproducts, (xxvii) increases in the cost of borrowings; (xxviii) and,the unavailability of additional debt or equity capital; (xix) legalactions brought forth by federal, state and local governmental and privateparties.

 

OVERVIEW

 

Since divesting itself of its unprofitable multi-level marketing anddirect marketing units in 2003 (see discontinued operations), the Company’sbusiness plan has been to focus on its core Natrol, Prolab sports nutrition andLaci Le Beau tea brands.  The Natrol andLaci Le Beau brands are sold in health food stores, in mass-market drug, foodand retail chains as well as club stores.  Prolab products are sold through distributors who in turn service retailaccounts.  Prolab’s distributor networkfocuses on health food stores, health clubs and fitness facilities that caterto body builders and other individuals seeking a high level of fitness.   With the integration of Prolab as a brandwithin Natrol, Natrol’s health food oriented sales professionals have becomeresponsible for presenting appropriate Prolab products to health foodretailers, who in turn, order from distributors who carry Prolab product. Inaddition, more than 40% of Prolab sales are to distributors who sell Prolabproducts outside the United States.  TheCompany is continually seeking to expand the distribution of its best sellingitems to additional retail outlets and to create promotional opportunities forits products within its existing customer base.

 

The Company also provides contract manufacturing services to othersupplement companies.

 

Key issues for Company’s management include product development,product introductions, inventory management, and controlling the cost of doingbusiness in its various channels of trade.

 

The nutritional supplement business is dependent upon new productintroductions for both growth and to replace volume lost by products reachingthe end of their product life cycles.  Assuch, the Company is continually researching potential new products forplacement into the marketplace. Developing a single new product can be amulti-year effort depending upon the complexity of the product and the amountof testing that must be completed to validate the product concept.

 

Product introductions do not come without risk.  Most customers maintain a right ofreturn,  so that if a new product is notsuccessful, product returns can be high. A broad product launch, one in which a new product is introduced intothousands of retail outlets, can cause a strain on corporate resources sinceinventories must be built and delivered with a corresponding increase inaccounts receivable.  In addition, productintroductions generally require advertising and public relations efforts.  Oftentimes retailers demand slotting fees orother up front expenditures.  A failurein a product launch can be very expensive.

 

Nutritional supplements must maintain potency levels during theirselling life.  As a result, products mustbe stamped with an expiration date and retailers will not accept product withlimited shelf life into their warehouses. Shelf life issues require a high 

 

8

----

 

degree of inventory management of raw materials and finished goods toensure that shelf life is maximized and that the out-of-date inventory isminimized.

 

The competition for shelf space at retailers is intense. We haveongoing discussions with our retail customers with regards to the allocation ofshelf space and promotional support for our products.  Retailers look to their vendors forpromotional support for the products on their shelves in order to maximizesales.  Vendors such as Natrol look toretailers for advantageous placement of their products and promotion of theirproducts within stores and within a retailer’s promotional media such asnewspaper advertisements placed by retailers. The cost of promotions and support to the retailer on the part ofvendors such as Natrol can be very high and Management must continually reviewits promotional efforts with retailers to ensure that sales remain profitable.

 

During the first half of 2004, the Company’s overall strategy ofconcentrating on its core business has been successful and results for thefirst and second quarters of 2004 have been positive when measured againstperformance in 2003.  However, acrossproduct lines, results have been mixed.

 

Future challenges include maintaining the current positive trends forthe Company across all product lines as as well as developing new innovativeproducts and delivery systems that will capture the support of consumers.

 

The Company continues to believe that additional opportunities forgrowth exist as it seeks to improve its position with retailers and consumers.Management seeks to capitalize on these opportunities in what remains a verycompetitive marketplace.

 

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 JUNE 30, 2004 AND JUNE 30, 2003

 

NET SALES. The Company recognizes revenue from sales only after productis shipped and title is transferred. Net sales represent product shipped lessactual and estimated future returns, spoilage allowances, allowances forproduct deemed to be unsaleable by customers, free goods shipped to customersfor promotional or other purposes and slotting fees. Estimates and allowancesare based upon known claims and an estimate of additional returns when theamount of future returns from customers can be reasonably estimated.

 

Net sales increased 9.6%, or $1.8 million, to $20.7 million for thesecond quarter of 2004 from $18.9 million in the second quarter of 2003.  The growth came from the Company’s Natrolbrand.  Net sales of the Natrol brandincreased approximately 13.8% over the comparable three month period in2003.  The increase was due to manyfactors including broader distribution of certain products, promotional effortsmade by the Company, and strong consumer demand for Natrol products.  Net sales of Prolab brand products decreased5.2% and net sales of the Company’s EPI division, which along withmanufacturing Natrol products, sells raw materials and contract manufacturingservices, decreased 23.5%.  The majorityof the decrease in EPI sales was due to a reduction in the sale of garlicpowders. The reduction in the sale of garlic powders was partially offset by ahigher level of contract manufacturing. Contract manufacturing sales, however, have, in general, lower grossmargins than does the sale of garlic powders. The Company estimates that theweakness in the sale of garlic powders may continue through the end of 2004 andperhaps longer due to negative industry trends and strong competition amongstsuppliers.

 

GROSS PROFIT.  Gross profitincreased 41.6%, or $2.7 million, to $9.3 million for the three months endedJune 30, 2004 from $6.6 million for the three months ended June 30, 2003.Gross margin increased to 45.2% for the three months ended June 30, 2004from 35.0% for the three months ended June 30, 2003.  The increase in gross margin and gross profitwas due, in part, to overall favorable product mix which resulted in a lower costof products, and an approximately 26.4% reduction in the amount of deductionsgiven to customers that reduce revenue from approximately $3.2 million in thesecond quarter of 2003 to approximately $2.3 million in the second quarter of2004. These deductions include returns, allowances for damages and outdates,slotting fees, rebates, and other promotional expenses.  Additionally, during the second quarter of2003, the Company had an unusually large, $1.3 million write-down of inventoryas opposed to a $254,000 write-down in the second quarter of 2004.  Expenses related to inventory write-downs areincluded in costs of goods sold and, as such, have an impact on gross margins.

 

SELLING AND MARKETING EXPENSES. Selling and marketing expenses consist primarily of advertising andpromotional expenses, cost of distribution, and related payroll expenses andcommissions. Selling and marketing expenses increased 36.6%, or $1.5 million,to $5.6 million for the three months ended June 30, 2004 from $4.1 millionfor the three months ended June 30, 2003. Approximately 75% of theincrease was due to increased spending on coop advertising, and various formsof media including brochures, public relations, celebrity endorsements, radio,television and advertising in publications. Approximately 12% of the increase was due to increased shippingcosts.  These expenditures rose due tothe higher level of sales as well as higher costs of freight caused, in part,by higher fuel prices.  The remainder ofthe increase was due to personnel costs as well a general increase in

 

9

----

 

expenditures necessary to support the selling and marketing efforts ofthe Company.

 

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist primarily of personnel costsrelated to general management functions, finance, accounting and informationsystems, as well as professional fees related to legal, audit and tax mattersand depreciation. General and administrative expenses decreased 16.5%, orapproximately $451,000 to $2.3 million for the three months ended June 30,2004 from $2.7 million for the three months ended June 30, 2003.  The cost of general and product liabilityinsurance was approximately $257,000 less in the second quarter 2004 than inthe second quarter 2003 due to the implementation of the Company’s selfinsurance program in July of 2003. Legal expenditures were $182,000 lessin the second quarter 2004 than in the second quarter 2003.  The decrease was due to a number of factorsincluding a greater proportional use of in-house counsel as opposed to outsidecounsel.  Approximately $200,000 ofsavings generated by the consolidation of Prolab’s administrative functionsinto Natrol were offset by the establishment of an independent ProductDevelopment department and other increases in payroll.

 

INTEREST EXPENSE.  Interest expense was $156,000 for the threemonths ended June 30, 2004 as compared to $162,000 for the three monthsended June 30, 2003. The Company pays interest on approximately $7.6million of long-term mortgage debt.

 

INCOME TAX PROVISION. For the three months ended June 30, 2004 andJune 30, 2003 the Company’s effective tax rate was approximately 40.5%.

 

DISCONTINUED OPERATIONS. In December 2003, the Company discontinuedits Annasa and Tamsol units.  Annasa, asubsidiary of Natrol, a multi-level marketer of proprietary nutritionalproducts began operations in 2002. Tamsol, was also formed in 2002, to generate direct-to-consumer salesvia radio, television, direct mail and other non retail venues.  The Company has reclassified its financialstatements to segregate the revenues, direct costs and expenses (excludingallocated costs), assets and liabilities and cash flows of the discontinuedoperations.  The net operating results,net assets and net cash flows of these businesses have been reported as“Discontinued Operations” in the accompanying consolidated financialstatements. As the operations were shut down as of the end of calendar 2003,the Company had no revenue or expenses from discontinued operations in thesecond quarter of 2004.  During thesecond quarter of 2003, the Company had a net loss of approximately $304,000from discontinued operations.

 

SIX MONTHS ENDED JUNE 30, 2004 AND JUNE 30, 2003

 

NET SALES. Net sales increased 8.6%, or $3.2 million, to $41.1 millionfor the six months ended June 30, 2004 from $37.9 million for the sixmonths ended June 30, 2003.  Thegrowth came from the Company’s Natrol brand. Net sales of the Natrol brand increased 13.7% when comparing the firstsix months of 2004 to the first six months of 2003.  The increase was due to many factorsincluding broader distribution of certain products, promotional efforts made bythe Company, and strong consumer demand for Natrol products. Net sales ofProlab brand products decreased .9% during the same comparison period and netsales of the Company’s EPI division, which along with manufacturing Natrolproducts, sells raw materials and contract manufacturing services increased1.0% during the same time frame.  Theincrease was due to a higher level of contract manufacturing business whichoffset a 44.8% decrease in the sale of garlic due to negative industry trendsand strong competition amongst suppliers. The Company estimates that the weakness in the sale of garlic powdersmay continue through the end of 2004 and perhaps longer.

 

GROSS PROFIT.  Gross profitincreased 16.6%, or $2.4 million, to $17.1 million for the six months endedJune 30, 2004 from $14.7 million for the six months ended June 30,2003. Gross margin increased to 41.8% for the six months ended June 30,2004 from 38.9% for the six months ended June 30, 2003.  The increase in gross margin and gross profitwas due, in part, to overall favorable product mix which resulted in a lowercost of products as well as an approximately 7.7% reduction in the amount ofdeductions given to customers that reduce revenue.  These deductions include returns, allowancesfor damages and outdates, slotting fees, rebates, and other promotionalexpenses.  Additionally, during thesecond quarter of 2003, the Company had an unusually large, $1.3 millionwrite-down of inventory which had a significant impact on gross margins in thecomparable 2003 period. Ongoing gross margins can be impacted by product mix.Additionally, periodic short-term changes in demand for certain raw materialscan result in fluctuating prices which can also have an impact on grossmargins.  Currently, prices for whey, animportant raw material included in many Prolab products have risenrapidly,  which will in turn affect themargin on whey products sold under the Prolab brand name.

 

SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased 12.8%, or $1.2 million, to$10.3 million for the six months ended June 30, 2004 from $9.1 million forthe six months ended June 30, 2003. Approximately 46% of the increase wasdue to increased spending on coop advertising, and various forms of mediaincluding brochures, public relations, celebrity endorsements, radio, televisionand advertising in publications. Approximately 21% of the increase was due to increased shippingcosts.  These expenditures rose due tothe higher level of sales as well as higher costs of freight caused in part byhigher fuel prices.  Approximately 27% ofthe increase was due to personnel costs. The remainder was due to a general increase in expenditures necessary tosupport the selling and marketing efforts of the Company.

 

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist primarily of personnel costsrelated to general management functions, finance, accounting and informationsystems, as well as professional fees related to legal, audit and tax mattersand depreciation. General and administrative expenses decreased 14.3%, or $766,000to $4.6 million for the six months

 

10

----

 

ended June 30, 2004 from $5.4 million for the six months endedJune 30, 2003.  The cost of generaland product liability insurance was approximately $596,000 less in six monthsended June 30, 2004 than in six months ended June 30, 2003 due to theimplementation of the Company’s self insurance program in July of 2003.Legal expenditures were $492,000 less in the first half of 2004 than in the firsthalf of 2003.  These savings were offsetby the establishment of a product development department whose expenses areincluded within general and administrative expenses.  These expenses amounted to $421,000.Approximately $575,000 of savings generated by the consolidation of Prolab’sadministrative functions into Natrol were offset by the establishment of anindependent Product Development department and other increases in payroll.

 

INTEREST EXPENSE.  Interest expense was $314,000 for the sixmonths ended June 30, 2004 as compared to $324,000 for the six monthsended June 30, 2003. The Company pays interest on approximately $7.6million of long-term mortgage debt.

 

INCOME TAX PROVISION. For the six months ended June 30, 2004 theCompany’s effective tax rate was approximately 40.3%.  For the six months ended June 30, 2003the Company’s effective tax rate was 59.6%. The difference is due to the Company’s loss from continuing operationsduring the six months ended June 30, 2003 and the disproportionate effectof items that are not deductible for tax purposes on the tax calculations hadduring 2003.

 

DISCONTINUED OPERATIONS.In December 2003, the Company discontinued its Annasa and Tamsolunits.  Annasa, a subsidiary of Natrol, amulti-level marketer of proprietary nutritional products began operations in2002.  Tamsol, was also formed in 2002,to generate direct-to-consumer sales via radio, television, direct mail andother non retail venues.  The Company hasreclassified its financial statements to segregate the revenues, direct costsand expenses (excluding allocated costs), assets and liabilities and cash flowsof the discontinued operations.  The netoperating results, net assets and net cash flows of these businesses have beenreported as “Discontinued Operations” in the accompanying consolidatedfinancial statements. As the operations were shut down as of the end ofcalendar 2003, the Company had no revenue or expenses from discontinuedoperations in the second quarter of 2004. During the six months ended June 30, 2003, the Company had a netloss of $656,000 from discontinued operations.

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of June 30, 2004, the Company had working capital of $16.9million as compared to $13.3 million in working capital at December 31,2003. The Company’s cash balance at June 30, 2004 was approximately $3.3million.  The increase in working capitalwas due to income earned during the 2004 period and the $2.0 million cashreceived from settling litigation with the former owners of Prolab Nutrition,Inc. The cash received in the settlement was recorded as a reduction ofgoodwill.

 

Net cash used by operating activities was $1.0 million for the sixmonths ended June 30, 2004 versus net cash used of $ 0.7 million for thesix months ended June 30, 2003. Cash used by operating activities duringthe six months ended June 30, 2004 consisted primarily of cash used bychanges in operating assets and liabilities of $2.9 million partially offset by$1.9 million of cash provided by net income and non-cash charges.  The increases in cash used by operatingassets and liabilities consisted principally of an increase in accountsreceivable of $1.9 million, an increase in inventory of $1.1 million and adecrease in accounts payable and accrued expenses of $1.4 million offset by anincrease in accrued payroll of $1.1 million. The increase in accountsreceivable is due to the higher level of sales and the timing of thosesales.  The increase in inventory levelsis also due to the higher level of sales. The increase in accrued payroll is due to the timing of payroll andaccruals for bonus payments to support the Company’s bonus plan which was filedas an exhibit to the Company’s 10-K for the year ending period after December 31,2003.  Cash provided by net income andnon-cash charges consisted principally of $1.2 million of net income anddepreciation of $642,000.

 

Net cash provided by investing activities was $1.7 million for the sixmonths ended June 30, 2004 versus net cash used of approximately $120,000during the six months ended June 30, 2003. The settlement of thelitigation with the former owners of Prolab Nutrition, Inc., which was recordedas a reduction of goodwill, provided $2.0 million of cash which was offset byan increase in investment in property and equipment and other assets. All ofthe investment in the six months ended June 30, 2003 was in property andequipment and increase in other assets.

 

Net cash provided by financing activities was approximately $64,000 forthe six months ended June 30, 2004 as opposed to approximately $137,000used in financing activities during the six months ended June 30, 2003.During the six months ended June 30, 2004, the Company made principalpayments of approximately $160,000 on its long-term mortgage debt and receivedapproximately $224,000 from the exercise of stock options and the purchase ofstock through the Company’s Employee Stock Purchase Plan.  During the six months ended June 30,2003 the Company made principal payments of $151,000 on its long-term mortgagedebt.

 

As of June 30, 2004, the Company had $7.6 million of outstandingdebt all of which is the result of long-term mortgage debt on the Company’smanufacturing/headquarters facility and on the Company’s shipping facility. TheCompany has no line of credit in place.

 

The Company believes that its cash balance together with cash generatedfrom operations should be sufficient to fund its anticipated working capitalneeds and planned capital expenditures for the next twelve months.However, if the Company does not meet its operating plan it may also needadditional borrowings to fund working capital needs. The Company currently hasno outstanding debt

 

11

----

 

on its books other than the mortgage debt on its properties. In orderto meet current financing needs for working capital, the Company may need toopen bank lines of credit.  In order tomeet its long-term liquidity needs, the Company may be required to incuradditional indebtedness or issue additional equity and debt securities, subjectto market and other conditions. There can be no assurance that such additionalfinancing will be available on terms acceptable to the Company or at all. Thefailure to raise the funds necessary to finance its future cash requirements orconsummate future acquisitions could adversely affect the Company’s ability topursue new acquisitions and could negatively affect its operations in futureperiods.

 

## **CRITICALACCOUNTING POLICIES**

 

Management’s beliefs regarding significantaccounting policies have not changed significantly from those discussed in Item7 of the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2003.

 

CONTRACTUAL OBLIGATIONS

 

Contractual obligations have not changedsignificantly from those discussed in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2003.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

There has been no material change during the six months endedJune 30, 2004 from the disclosures about market risk provided in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2003.

 

ITEM 4. CONTROLS AND PROCEDURES

 

## **An evaluation was conducted under the supervisionand with the participation of the Company’s management, including the ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of theCompany’s disclosure controls and procedures (as defined in Exchange Act Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as ofJune 30, 2004.  Based on thisevaluation, our Chief Executive Officer and Chief Financial Officer haveconcluded that the Company’s disclosure controls and procedures are, to thebest of their knowledge, effective to ensure that information required to bedisclosed by the Company in reports that it files or submits under the ExchangeAct is recorded, processed, summarized and reported within the time periodsspecified in Securities and Exchange Commission rules and forms. There were nosignificant changes in the Company’s internal control over financial reportingthat occurred during the fiscal quarter covered by this report that havematerially affected or are reasonably likely to materially affect the Company’sinternal control over financial reporting.**

 

12

----

 

PART II

 

OTHER INFORMATION

 

ITEM1.  LEGAL PROCEEDINGS

 

None

 

ITEM 2.  CHANGES IN SECURITIES,USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

None

 

ITEM 3.  DEFAULTS UPON SENIORSECURITIES

 

None

 

ITEM 4.  SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS

 

a)                                      The 2003 Annual Meeting of Stockholders ofNatrol, Inc. (the “Annual Meeting”) was held on June 10, 2004.

b)                                     At the Annual Meeting, the following werere-elected to the Company’s Board of Directors:

 
| ** **        | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|-------------------|------------|---------------|------------|--------------------|------------|
| Elliott Balbert   |       | 13,005,807    |       | 66,863             |       |
| Dennis De Concini |       | 13,007,187    |       | 65,483             |       |

 

The following individuals are members of the Company’s Board ofDirectors whose terms of office as directors continued after the AnnualMeeting.

 
| Elliott  Balbert     |
|----------------------|
| Vernon Brunner       |
| Gordon  F. Bruner    |
| Dennis  De Concini   |
| Dennis  R. Jolicoeur |
| Ronald  J. Consiglio |

 

ITEM 5.  OTHER INFORMATION

 

None

 

ITEM 6.  EXHIBITS AND REPORTS ONFORM 8-K

 

On May 14, 2004, the Company furnished a Current Report, dated the samedate, on form 8-K regarding its earnings press release for the first quarterended March 31 2004.

 

On June 9, 2004, the Company furnished a Current Report, dated thesame date, on Form 8-K regarding the adoption of a Code of Ethics.

 
| 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  |

 

13

----

 

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:  8/16/04 | By:          | /s/ Elliott Balbert |   |
|                |         | Chairman, President and Chief Executive  Officer |
|                |         |   |
| Date:  8/16/04 | By:          | /s/ Dennis R. Jolicoeur |   |
|                |         | Chief Financial Officer and Executive  Vice President |

 

14

----