**SECURITIES AND EXCHANGE COMMISSION**

**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 30,2005**

 

**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 STREETCHATSWORTH, CALIFORNIA 91311**

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

 

**(818) 739-6000**

(REGISTRANT’S TELEPHONE NUMBER, INCLUDINGAREA CODE)

 

INDICATE BY A CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALLREPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15 (d) OF THESECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCHSHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HASBEEN SUBJECT 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 8,  2005** |
|-------------------------------|------------|--------------------------|
|                          |       |                     |
| Common stock, $0.01 par value |       | 13,523,237               |

 

 

----

 

PART 1.FINANCIAL INFORMATION

ITEM1. CONSOLIDATED FINANCIAL STATEMENTS

 

**Natrol, Inc.and Subsidiaries**

**Consolidated Balance Sheets**

(In thousands, except share and per share data)

 
| ** **                                                                                                              | ** ** | **June 30,   2005** | ** ** | **December 31,   2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|------------------------------|------------|
| ** **                                                                                                              | ** ** | **(Unaudited)**          | ** ** | ** **                   | ** ** |
| **Assets**                                                                                                              |       |                     |       |                         |       |
| Current assets:                                                                                                         |       |                     |       |                         |       |
| Cash and cash equivalents                                                                                               |       | $                        | 3,854      |                         | $          | 6,022 |   |
|                                                                                                                    |       |                     |       |                         |       |
| Accounts receivable, net of allowances of  $242 and $421 at June 30, 2005 and December 31, 2004, respectively |       | 9,158                    |       | 7,431                        |       |
| Inventory                                                                                                               |       | 10,546                   |       | 9,723                        |       |
| Income taxes receivable                                                                                                 |       | 728                      |       | 956                          |       |
| Deferred income taxes                                                                                                   |       | 814                      |       | 814                          |       |
| Prepaid expenses and other current assets                                                                               |       | 678                      |       | 793                          |       |
| Total current assets                                                                                                    |       | 25,778                   |       | 25,739                       |       |
| Property and equipment:                                                                                                 |       |                     |       |                         |       |
| Land, building and improvements                                                                                         |       | 15,891                   |       | 15,891                       |       |
| Machinery and equipment                                                                                                 |       | 5,656                    |       | 5,332                        |       |
| Furniture and office equipment                                                                                          |       | 3,168                    |       | 3,112                        |       |
|                                                                                                                    |       | 24,715                   |       | 24,335                       |       |
| Accumulated depreciation                                                                                                |       | (8,664                   | )          | (8,022                       | )          |
| Property and equipment, net                                                                                             |       | 16,051                   |       | 16,313                       |       |
|                                                                                                                    |       |                     |       |                         |       |
| Restricted cash                                                                                                         |       | 5,000                    |       | 5,000                        |       |
| Deferred income taxes                                                                                                   |       | 3,628                    |       | 3,628                        |       |
| Goodwill, net of accumulated amortization  and impairment charge of $37,381                                             |       | 2,026                    |       | 2,026                        |       |
| Other assets                                                                                                            |       | 193                      |       | 218                          |       |
| Total assets                                                                                                            |       | $                        | 52,676     |                         | $          | 52,924 |   |
|                                                                                                                    |       |                     |       |                         |       |
| **Liabilities and stockholders’ equity**                                                                           |       |                     |       |                         |       |
| Current liabilities:                                                                                                    |       |                     |       |                         |       |
| Accounts payable                                                                                                        |       | $                        | 3,139      |                         | $          | 2,904 |   |
| Accrued expenses                                                                                                        |       | 3,091                    |       | 2,483                        |       |
| Accrued payroll and related liabilities                                                                                 |       | 835                      |       | 1,589                        |       |
| Current portion of long-term debt                                                                                       |       | 517                      |       | 503                          |       |
| Total current liabilities                                                                                               |       | 7,582                    |       | 7,479                        |       |
| Long-term debt, less current portion                                                                                    |       | 7,435                    |       | 7,685                        |       |
| 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-14,414,815  and 14,281,928 at June 30, 2005 and December 31, 2004, respectively |       | 144                      |       | 143                          |       |
| Additional paid-in capital                                                                                              |       | 62,907                   |       | 62,709                       |       |
| Accumulated deficit                                                                                                     |       | (22,511                  | )          | (22,211                      | )          |
|                                                                                                                    |       | 40,540                   |       | 40,641                       |       |
| Shares held in treasury, at cost-921,900  shares at June 30, 2005 and December 31, 2004                       |       | (2,881                   | )          | (2,881                       | )          |
| Total stockholders’ equity                                                                                         |       | 37,659                   |       | 37,760                       |       |
| Total liabilities and stockholders’ equity                                                                         |       | $                        | 52,676     |                         | $          | 52,924 |   |

 

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,** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| ** **                                                  | ** ** | **2005**                               | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                        |       |                                   |       |                                 |       |   |   |   |   |
| Net sales                                                   |       | $                                      | 19,604     |                                 | $          | 20,682 |   | $ | 37,273 |   | $ | 41,107 |   |
| Cost of goods sold                                          |       | 12,076                                 |       | 11,338                               |       | 23,480 |   | 23,933 |   |
| Gross profit                                                |       | 7,528                                  |       | 9,344                                |       | 13,793 |   | 17,174 |   |
|                                                        |       |                                   |       |                                 |       |   |   |   |   |
| Selling and marketing expenses                              |       | 4,860                                  |       | 5,643                                |       | 9,045 |   | 10,262 |   |
| General and administrative expenses                         |       | 2,086                                  |       | 2,274                                |       | 5,003 |   | 4,599 |   |
| Total operating expenses                                    |       | 6,946                                  |       | 7,917                                |       | 14,048 |   | 14,861 |   |
| Operating income (loss)                                     |       | 582                                    |       | 1,427                                |       | (255 | ) | 2,313 |   |
|                                                        |       |                                   |       |                                 |       |   |   |   |   |
| Interest income                                             |       | 48                                     |       | 22                                   |       | 90 |   | 44 |   |
| Interest expense                                            |       | (160                                   | )          | (156                                 | )          | (320 | ) | (314 | ) |
| Income (loss) before taxes                                  |       | 470                                    |       | 1,293                                |       | (485 | ) | 2,043 |   |
| Income tax provision (benefit)                              |       | 179                                    |       | 524                                  |       | (184 | ) | 824 |   |
| Net Income (loss)                                           |       | $                                      | 291        |                                 | $          | 769 |   | $ | (301 | ) | $ | 1,219 |   |
|                                                        |       |                                   |       |                                 |       |   |   |   |   |
| Income (loss)  per share:                              |       |                                   |       |                                 |       |   |   |   |   |
| Basic                                                       |       | $                                      | .02        |                                 | $          | .06 |   | $ | (.02 | ) | $ | .09 |   |
| Diluted                                                     |       | $                                      | .02        |                                 | $          | .05 |   | $ | (.02 | ) | $ | .09 |   |
|                                                        |       |                                   |       |                                 |       |   |   |   |   |
| Weighted-average shares outstanding—basic  and diluted |       |                                   |       |                                 |       |   |   |   |   |
|                                                        |       |                                   |       |                                 |       |   |   |   |   |
| Basic                                                       |       | 13,453,164                             |       | 13,240,248                           |       | 13,418,981 |   | 13,201,354 |   |
| Diluted                                                     |       | 14,178,075                             |       | 14,093,944                           |       | 13,418,981 |   | 14,085,885 |   |

 

See accompanying notes

 

3

----

 

# **Natrol, Inc.and Subsidiaries**

**Consolidated Statements of Cash Flows**

(In thousands)

(Unaudited)

 
| ** **                                                                        | ** ** | **Six Months Ended   June,** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                        | ** ** | **2005**                     | ** ** | **2004** | ** ** |
|                                                                              |       |                         |       |   |   |
| **Operating activities**                                                          |       |                         |       |   |   |
| Net Income (loss)                                                                 |       | $                            | (301       | ) | $ | 1,219 |   |
|                                                                              |       |                         |       |   |   |
| Adjustments to reconcile income (loss) to  net cash used in operating activities: |       |                         |       |   |   |
| Change in net assets of discontinued  operations                                  |       | —                       |       | (25 | ) |
| Depreciation and amortization                                                     |       | 643                          |       | 642 |   |
| Loss on disposal of property and equipment                                        |       | —                       |       | 2 |   |
| Provision for bad debts                                                           |       | 179                          |       | 105 |   |
| Changes in operating assets and  liabilities:                                     |       |                         |       |   |   |
| Accounts receivable                                                               |       | (1,906                       | )          | (1,937 | ) |
| Inventory                                                                         |       | (824                         | )          | (1,070 | ) |
| Income taxes receivable/payable                                                   |       | 228                          |       | 173 |   |
| Prepaid expenses and other current assets                                         |       | 115                          |       | 141 |   |
| Accounts payable                                                                  |       | 235                          |       | (1,686 | ) |
| Accrued expenses                                                                  |       | 608                          |       | 326 |   |
| Accrued payroll and related liabilities                                           |       | (754                         | )          | 1,103 |   |
| Net cash used in operating activities                                             |       | (1,777                       | )          | (1,007 | ) |
|                                                                              |       |                         |       |   |   |
| **Investing activities**                                                          |       |                         |       |   |   |
| Purchases of property and equipment                                               |       | (380                         | )          | (181 | ) |
| Reduction in goodwill                                                             |       | —                       |       | 2,000 |   |
| Other assets                                                                      |       | 25                           |       | (161 | ) |
| Net cash provided by (used in) investing  activities                              |       | (355                         | )          | 1,658 |   |
|                                                                              |       |                         |       |   |   |
| **Financing activities**                                                          |       |                         |       |   |   |
| Repayments on long-term debt                                                      |       | (236                         | )          | (160 | ) |
| Proceeds from issuance of common stock                                            |       | 200                          |       | 224 |   |
| Net cash provided by (used in) financing  activities                              |       | (36                          | )          | 64 |   |
| Net increase (decrease) in cash and cash  equivalents                             |       | (2,168                       | )          | 715 |   |
| Cash and cash equivalents, beginning of  period                                   |       | 6,022                        |       | 2,599 |   |
| Cash and cash equivalents, end of period                                          |       | $                            | 3,854      |   | $ | 3,314 |   |

 

See accompanying notes

 

4

----

 

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

 

1. BASIS OF PRESENTATION

 

Theaccompanying unaudited consolidated financial statements have been prepared bythe Company, pursuant to the rules and regulations of the Securities andExchange Commission (SEC).  This Report on Form 10-Q should be readin conjunction with the Company’s annual report on Form 10-K for the yearended December 31, 2004.  Certain information and footnotedisclosures which are normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted pursuant to SEC rules andregulations.  The information reflects all normal and recurringadjustments which, in the opinion of the Company’s management, are necessaryfor a fair presentation of the financial position of the Company and itsresults of operations for the interim periods set forth herein.  Theresults for the three months and six months ended June 30, 2005 are notnecessarily indicative of the results to be expected for the full year or anyother 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 to Employees,*andrelated interpretations.  The Company hasa stock-based compensation plan.  TheCompany’s operating results do not include a compensation charge related tothis plan, as all options granted had an exercise price equal to the marketvalue of the underlying common stock on the date of grant.  The following table illustrates the effect onthe operating results and per share amounts if the fair value recognitionprovisions of Statement of Financial Accounting Standards No. 123, *Accounting for Stock-Based compensation,*hadbeen applied to stock-based employee compensation:

 
| ** **                                                                                                                                                                  | ** ** | **3 Months Ended   June 30,** | ** ** | **6 Months Ended   June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                                                                                  | ** ** | **2005**                           | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net Income (loss)                                                                                                                                                           |       | $                                  | 291        |                               | $          | 769 |   | $ | (301 | ) | $ | 1,219 |   |
|                                                                                                                                                                        |       |                               |       |                               |       |   |   |   |   |
| Total stock-based employee compensation  expense determined under the fair value-based method for all awards, net of  related tax benefits (“Stock Compensation”) |       | 25                                 |       | 18                                 |       | 35 |   | 34 |   |
| Net Income (loss) — pro forma                                                                                                                                          |       | $                                  | 266        |                               | $          | 751 |   | $ | (336 | ) | $ | 1,185 |   |
|                                                                                                                                                                        |       |                               |       |                               |       |   |   |   |   |
| Net loss per share:                                                                                                                                                         |       |                               |       |                               |       |   |   |   |   |
| Basic—as reported                                                                                                                                                      |       | $                                  | .02        |                               | $          | .06 |   | $ | (.02 | ) | $ | .09 |   |
| Diluted—as reported                                                                                                                                                    |       | $                                  | .02        |                               | $          | .05 |   | $ | (.02 | ) | $ | .09 |   |
| Basic—pro forma                                                                                                                                                        |       | $                                  | .02        |                               | $          | .06 |   | $ | (.03 | ) | $ | .09 |   |
| Diluted—pro forma                                                                                                                                                      |       | $                                  | .02        |                               | $          | .05 |   | $ | (.03 | ) | $ | .08 |   |

 

During the six monthsended June 30, 2005, 50,000 stock options were granted to employees with an average exercise price of$3.02 which equaled the fair market value of the underlying common stock on thedates of grant.

 

The fair value of the options isestimated using a Black-Scholes option-pricing model with the followingweighted-average assumptions for grants:

 
| ** **                       | ** ** | **Six Months  Ended June 31,** | ** ** |
|----------------------------------|------------|-------------------------------------|------------|
| ** **                       | ** ** | **2005**                            | ** ** | **2004** | ** ** |
|                             |       |                                |       |   |   |
| Expected dividend  yield         |       | 0.0                                 | %          | 0.0 | % |
| Expected stock  price volatility |       | 62.43                               |       | 67.12 |   |
| Risk free  interest rate         |       | 3.72                                | %          | 3.64 | % |
| Expected life of  options        |       | 5 years                             |       | 5 years |   |

 

These assumptions resulted in weighted-average fair valuesof $1.71, and $1.72 for each stock option granted in the six months ended June 30,2005 and 2004, respectively.

 

5

----

 

3. INVENTORY

 

Inventories consist of the following:

 
| ** **                          | ** ** | **June 30,   2005** | ** ** | **December 31,   2004** | ** ** |
|-------------------------------------|------------|--------------------------|------------|------------------------------|------------|
|                                |       |                     |       |                         |       |
| Raw material and packaging supplies |       | $                        | 6,874      |                         | $          | 5,357 |   |
| Finished goods                      |       | 3,672                    |       | 4,366                        |       |
| Total Inventory                     |       | $                        | 10,546     |                         | $          | 9,723 |   |

 

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 $1,568 and $1,803 for the six months ended June 30,2005 and 2004 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 1,465,842 and 2,494,430common shares for the three and six months ended June 30, 2005, andstock options to purchase 538,750  and537,500 common shares for the three and six months ended June 30, 2004were outstanding but considered to be anti-dilutive.

 

6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In November 2004, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 151, “Inventory Costs” an amendment ofAccounting Research Bulletin (“ARB”) No. 43, to clarify the accounting forabnormal amounts of idle facility expense, freight, handling costs, and wastedmaterial (spoilage). This SFAS requires that those items be recognized ascurrent-period charges regardless of whether they meet the criterion of “soabnormal”. In addition, this SFAS requires that allocation of fixed productionoverheads to the costs of conversion be based on the normal capacity of theproduction facilities. Companies are required to adopt the provisions of thisStatement for fiscal years beginning after June 15, 2005. The Company doesnot believe there will be a material effect on its consolidated financialposition or results of operations from the adoption of this standard.

 

InDecember 2004, the FASB issued SFAS No.153, “Exchanges of NonmonetaryAssets, an amendment of APB Opinion No. 29, Accounting for NonmonetaryTransactions.” The amendments made by Statement 153 are based on the principlethat exchanges of nonmonetary assets should be measured based on the fair valueof the assets exchanged. Further, the amendments eliminate the narrow exceptionfor nonmonetary exchanges of similar productive assets and replace it with abroader exception for exchanges of nonmonetary assets that do not havecommercial substance. Previously, Opinion 29 required that the accounting foran exchange of a productive asset for a similar productive asset or anequivalent interest in the same or similar productive asset should be based onthe recorded amount of the asset relinquished. Opinion 29 provided an exceptionto its basic measurement principle (fair value) for exchanges of similarproductive assets. The Board believes that exception required that somenonmonetary exchanges, although commercially substantive, be recorded on acarryover basis. By focusing the exception on exchanges that lack commercialsubstance, the Board believes that SFAS 153 produces financial reporting thatmore faithfully represents the economics of the transactions. SFAS 153 iseffective for nonmonetary asset exchanges occurring in fiscal periods beginningafter June 15, 2005. Earlier application is permitted for nonmonetaryasset exchanges occurring in fiscal periods beginning after the date ofissuance. The provisions of this Statement shall be applied prospectively. TheCompany has evaluated the impact of the adoption of SFAS 153, and does notbelieve the impact will be significant to the Company’s overall results ofoperations or financial position.

 

InDecember 2004, the FASB issued SFAS No.123 “Share-Based Payment”. SFAS123(R) will provide investors and other users of financial statements with morecomplete and neutral financial information by requiring that the compensationcost relating to share-based payment transactions be recognized in financialstatements. That cost will be measured based on the fair value of the equity orliability instruments issued. SFAS 123(R) covers a wide range of share-basedcompensation arrangements including share options, restricted share plans,performance-based awards, share appreciation rights, and employee sharepurchase plans. SFAS123(R) replaces FASB Statement No. 123, Accounting for Stock-BasedCompensation, and supersedes APB Opinion No. 25, Accounting for StockIssued to Employees. Statement 123, as originally issued in 1995, establishedas preferable a fair-value-based method of accounting for share-based paymenttransactions with employees. However, that Statement permitted entities theoption of continuing to apply the guidance in Opinion 25, as long as thefootnotes to financial statements disclosed what net income would have been hadthe preferable fair-value-based method been used. Public entities (other thanthose filing as small business issuers) will be required to apply Statement123(R) as of the first interim or annual reporting period that begins after June 15,2005. The Company has 

 

6

----

 

evaluated the impact of theadoption of SFAS 123(R), and does not believe the impact will be significant tothe Company’s overall results of operations or financial position.

 

In December 2004the Financial Accounting Standards Board issued two FASB Staff Positions—FSPFAS 109-1, Application of FASB Statement 109 “Accounting for Income Taxes” tothe Tax Deduction on Qualified Production Activities Provided by the AmericanJobs Creation Act of 2004, and FSP FAS 109-2 Accounting and Disclosure Guidancefor the Foreign Earnings Repatriation Provision within the American JobsCreation Act of 2004. Neither of these affected the Company as it does notparticipate in the related activities.

 

InMarch 2005, the FASB issued FASB Interpretation No. 47, “Accountingfor Conditional Asset Retirement Obligations” (“FIN 47”). FIN 47 provides guidance relating to the identification of andfinancial reporting for legal obligations to perform an asset retirementactivity. The Interpretation requires recognition of aliability for the fair value of a conditional asset retirement obligation whenincurred if the liability’s fair value can be reasonably estimated. FIN 47 alsodefines when an entity would have sufficient information to reasonably estimatethe fair value of an asset retirement obligation. The provision is effective nolater than the end of fiscal years ending after December 15, 2005. TheCompany will adopt FIN 47 beginning the first quarter of fiscal year 2006 anddoes not believe the adoption will have a material impact on its consolidatedfinancial position or results of operations or cash flows. 

 

In May 2005,the FASB issued FASB Statement No. 154,***AccountingChanges and Error Corrections.* This newstandard replaces APB Opinion No. 20,***AccountingChanges,* and FASB Statement No. 3,***ReportingAccounting Changes in Interim Financial Statements*, and represents another step in theFASB’s goal to converge its standards with those issued by the IASB. Amongother changes, Statement 154 requires that a voluntary change in accountingprinciple be applied retrospectively with all prior period financial statementspresented on the new accounting principle, unless it is impracticable to do so.Statement 154 also provides that (1) a change in method of depreciating oramortizing a long-lived nonfinancial asset be accounted for as a change inestimate (prospectively) that was effected by a change in accounting principle,and (2) correction of errors in previously issued financial statementsshould be termed a “restatement.” The new standard is effective for accountingchanges and correction of errors made in fiscal years beginning after December 15,2005. Early adoption of this standard is permitted for accounting changes andcorrection of errors made in fiscal years beginning after June 1, 2005.

 

In March 2005, the SEC released StaffAccounting Bulletin No. 107, “Share-Based Payment” (“SAB 107”), which providesinterpretive guidance related to the interaction between SFAS 123(R) andcertain SEC rules and regulations.  Italso provides the SEC staff’s views regarding valuation of share-based paymentarrangements.  In April 2005, the SECamended the compliance dates for SFAS 123(R), to allow companies to implementthe standard at the beginning of their next fiscal year, instead of the nextreporting period beginning after June 15, 2005. Management is currently evaluating the impact SAB 107 will have on ourconsolidated financial statements.

 

**ITEM 2****: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

Thisreport contains “forward looking statements.” Natrol, Inc., a Delawarecorporation organized in 1980, the “Company” or “Natrol”, 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, other variationsthereon, or comparable terminology, or by discussions of strategy that predictor indicate future events or trends or that are not historical facts. TheCompany cannot assure the future results or outcome of the matters described inthese statements; rather, these statements merely reflect its currentexpectations of the approximate outcome of the matter discussed. The Company doesnot undertake any obligation and does not currently intend to update any suchstatements at any time in the future.

 

TheCompany’s ability to predict results or the effect of certain events on theCompany’s operating results is inherently uncertain. Forward-looking statementsshould not be unduly relied on since they involve known and unknown risks,uncertainties and other factors, some of which are beyond the Company’scontrol. These risks, uncertainties and other factors may cause actual results,performance or achievements to differ materially from the anticipated futureresults, performance or achievements expressed or implied by such forward-lookingstatements. Therefore, the Company wishes to caution each reader of this reportto carefully consider the following factors 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.

 

Factorsthat could cause or contribute to the Company’s actual results differingmaterially from those discussed herein or for the Company’s stock price to beaffected adversely include, but are not limited to: (i) industry trends,including a general downturn or slowing of the growth of the dietary supplementindustry; (ii) increased competition from current competitors and newmarket entrants including but not limited to increased competition from privatelabel house brands supported by retailers seeking to increase the market shareof their proprietary house brands. Private label brands control the largestshare of the vitamin, mineral and supplement (VMS) sector; (iii) adversepublicity regarding the dietary supplement industry or the Company’s products; (iv) exposureto product liability claims, in particular because the Company has chosen toself-insure against product liability claims due to the high price of productliability insurance, the inability to secure occurrence based coverage, as wellas the limited amount of coverage provided by insurers willing to provideinsurance at high prices; (v) exposure to and the expense of defending andresolving potential product liability claims that are left uncovered byinsurance as well as the expense of defending and resolving other litigationwhich may or may not be covered by insurance; (vi) the Company’sdependence upon its ability to develop new products; (vii)  returns of the

 

7

----

 

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) theCompany’s ability to manage inventory or sell its inventory before suchinventory becomes outdated, (ix) the Company’s ability to gain or expandor maintain distribution within new or existing customers and new or existingchannels of trade; (x) an increase in the cost of obtaining andmaintaining shelf space with major national retailers who demand various formsof incentives from their suppliers such as slotting fees, coop advertising, orrebates; (xi) adverse changes in government regulation or changes in localor national laws; (xii) dependence on significant customers;(xiii) the Company’s ability to keep and attract key management employees;(xiv) the Company’s inability to manage growth and execute its businessplan, or the Company’s ability to modify its business plan in response tomarket conditions, including, but not limited to, its ability to enter into newbusinesses and capitalize upon new business opportunities or to divest itselfof businesses that are not profitable or do not deliver sufficient profit tomeet that Company’s goals; (xv) the Company’s ability to consummate futureacquisitions and its ability to integrate acquired businesses; (xvi) theabsence of conclusive clinical studies for many of the Company’s products;(xvii) the Company’s inability to obtain raw materials that are in shortsupply (xviii) sales and earnings volatility, (xix) volatility of thestock market; (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 material products,(xxvii) increases in the cost of borrowings; (xxviii)  theunavailability of additional debt or equity capital; (xix) legal actionsbrought forth by federal, state and local governmental and private parties; and(xxx) the introduction of new federal, state, local or foreign legislation orregulation or adverse determinations by regulators anywhere in the world(including the banning of products).

 

**OVERVIEW**

 

TheCompany’s business plan has been to focus on its core Natrol, Prolab sportsnutrition and Laci Le Beau tea brands. The Natrol and Laci Le Beau brands are sold in health food stores, inmass-market drug, food and retail chains as well as club stores.   Prolab products are sold throughdistributors who in turn service retail accounts.  Prolab’s distributor network focuses onhealth food stores, health clubs and fitness facilities that cater to bodybuilders and other individuals seeking a high level of fitness.   Historically, more than 40% of Prolab salesare to distributors who sell Prolab products outside the United States.  The Company is continually seeking to expandthe distribution of its best selling items to additional retail outlets and tocreate promotional opportunities for its products within its existing customerbase.

 

TheCompany provides contract manufacturing services to other supplement companies.However, contract manufacturing is not a prime focus of the Company.

 

Keyissues for the Company’s management include product development, productintroductions, inventory management, and controlling the cost of doing businessin its various channels of trade.

 

Thenutritional supplement business is dependent upon new product introductions forboth growth and to replace volume lost by products reaching the end of theirproduct life cycles.  As such, theCompany is continually researching potential new products for placement intothe marketplace. Developing a single new product can be a multi-year effortdepending upon the complexity of the product and the amount of testing thatmust be completed to validate the product concept.

 

Productintroductions do not come without risk. Product launches can require substantial marketing support. Oftentimesretailers demand slotting fees or other up front expenditures. If a productlaunch is not as successful as anticipated, additional promotional expendituresmay be needed to sustain sales and reduce possible returns.  Most vendors retain certain rights as theyrelate to product returns. A broad product launch, one in which a new productis introduced into thousands of retail outlets, can cause a strain on corporateresources since inventories must be produced and delivered.  The resulting sales increase also leads to anincrease in accounts receivable with customers.

 

Successfulproducts can, at times, become unpopular almost overnight.  For example, the Company’s Carb Interceptproduct successfully grew its business through 2003 and 2004 before losing itspopularity quickly in 2005 after low-carbohydrate diets and dieting receivedsubstantial negative publicity in late 2004. During the first quarter of 2005, sales of Carb Intercept were $2.0million less than in the first quarter of 2004, and, during the second quarterof 2005, sales of Carb Intercept were $3.0 million less than in the secondquarter of 2005.  Historically, suchsharp declines do not happen often. However, when they do, the Company’s resources can be affected in anumber of ways.  For example, additionalpromotional dollars may be required to support falling demand and to preventreturns from customers.  In addition,inventory, which was previously considered good, may be scrapped because salesoutlets cannot be found.  Products do notgenerally fail completely.  For example,in the case of Carb Intercept, although sales have been sharply reduced,shipments of Carb Intercept amounted to $918,000 during the first six months of2005 and sales at some customers are steady even if they are at lower levelsthan what was experienced in 2004.

 

Nutritionalsupplements must maintain potency levels during their selling life.  As a result, products must be stamped with anexpiration date and retailers will not accept product with limited shelf lifeinto their warehouses.  Shelf life issuesrequire a high degree of supply chain management of raw materials andfinished goods to ensure that shelf life is maximized and that the out-of-dateinventory is minimized.

 

8

----

 

The competition for shelf space at retailers is intense. Natrol hasongoing discussions with its retail customers with regards to the allocation ofshelf space and the level of promotional support for 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 are profitable.

 

Future challenges include the development of new, innovative productsand delivery systems that will capture the support of consumers and allow theCompany to grow regardless of the product life cycle of any one product.

 

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 to Part 1Item 1 of this report.

 

## **THREEMONTHS ENDED JUNE 30, 2005 AND JUNE 30, 2004**

## ** **

NET SALES. The Companyrecognizes revenue from sales only after product is shipped and title istransferred. Net sales represent product shipped less actual and estimatedfuture returns, spoilage allowances, allowances for product deemed to beunsaleable by customers, and slotting fees, rebates and other expenditureswhich, using Generally Accepted Accounting Principles (GAAP) should beaccounted for as reductions of revenue. Estimates and allowances are based uponknown claims and an estimate of additional returns, however, the amount offuture returns can be reasonably estimated.

 

Net sales decreased 5.2%, or $1.1 million, to $19.6 million for thesecond quarter of 2005 from $20.7 million in the second quarter of 2004.  The most significant reason for the decreasein net sales was a decline in consumer demand for the Natrol brand’s CarbIntercept product.  Sales of this productwere $3.0 million less during the second quarter of 2005 than in the secondquarter of 2004. Sales of the Company’s Prolab sports nutrition brand were$680,000 less in the second quarter of 2005 than in the second quarter of 2004.The Company believes the decline in the Carb Intercept product is directly tiedto negative publicity surrounding low carbohydrate diets that began appearingtowards the end of 2004.  The Companybelieves that a factor in the decline in Prolab’s business were price increasesthat were implemented because of sharp increases in the price of whey which isa component in a majority of the Prolab products. Partially offsetting thesedeclines were sales from new product introductions, in particular brainSpeedÔ,whose shipments amounted to  $2.0 millionduring the quarter ended June 30, 2005, as well as increased sales fromthe Company’s other products.

 

GROSS PROFIT.  Gross profitdecreased 19.4%, or $1.8 million, to $7.5 million for the three months ended June 30,2005 from $9.3 million for the three months ended June 30, 2004. Grossmargin decreased to 38.4% for the three months ended June 30, 2005 from45.2% for the three months ended June 30, 2004. The primary reasons forthe decrease in margin were inventory write downs, primarily due to CarbIntercept, that were $614,000 larger during the first three months of 2005 thanduring the first three months of 2004; increases in the cost of raw materials,primarily whey, at Prolab resulting in approximately $396,000 more in cost ofgoods sold during the first three months of 2005 when compared to the firstthree months of 2004; product mix, and increases in the costs of such rawmaterials as Co-Enzyme Q10. It is the Company’s policy to evaluate itsinventory on a monthly basis taking into consideration such factors as shelflife and the velocity of sales.  Theprecipitous decline in the sales of Carb Intercept, a decline which escalatedin the second quarter of 2005, caused the Company to write down its CarbIntercept inventory in both the first and second quarters of 2005 due to a lackof sufficient consumer demand to use on-hand raw materials and finished goodsbefore these materials would have expiring shelf lives.

 

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 decreased 13.9%, or $783,000, to$4.9 million for the three months ended June 30, 2005 from $5.6 million forthe three months ended June 30, 2004. Of the total decrease inexpenditures, approximately $188,000 was due to lower shipping expenses duringthe second quarter of 2005 than the second quarter of 2004.  Sales and marketing payroll and payroll relatedexpenditures were $137,000 less during the second quarter of 2005 than in thesecond quarter of  2004.  The balance of the decrease was due to lessspending on traditional media.

 

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, professional fees related to legal, auditand tax matters and depreciation. General and administrative expenses decreased8.3%, or approximately $188,000 to $2.1 million for the three months ended June 30,2005 from $2.3 million for the three months ended June 30, 2004.  Due to the Company’s profit performance,$170,000 less was accrued for employee bonuses during the second quarter of2005 than during the second quarter of 2004. The Company also benefited from a$215,000 settlement from its insurance carrier reimbursing the Company forexpenses incurred in the defense of prior litigation.  This receipt was recorded as an offset tolegal expenses.  This savings was offsetby other 

 

9

----

 

legal expenses as well as the general cost of supporting the Company’sbusiness.

 

INTEREST EXPENSE.  Interest expense was $160,000 for the threemonths ended June 30, 2005 as compared to $156,000 for the three monthsended June 30, 2004. 

 

INCOME TAX PROVISION. For the three monthsended June 30, 2005 the Company’s effective tax rate was approximately38.0%.  For the three months ended June 30,2004 the Company’s effective tax rate was 40.5%.

 

## **SIXMONTHS ENDED JUNE 30, 2005 AND JUNE 30, 2004**

## ** **

NET SALES Net sales decreased 9.3%, or $3.8 million, to $37.3 millionfor the six months ended June 30, 2005 from $41.1 million for the sixmonths ended June 30, 2004. The most significant reason for the decreasein net sales was a decline in consumer demand for the Natrol brand’s CarbIntercept product.  Sales of this productwere $5.0 million less during the six months ended June 30, 2005 thanduring the six months ended June 30, 2004. Sales of the Company’s Prolabsports nutrition products fell $1.7 million and ingredient/ private label salesfell approximately $580,000 when comparing the first six months of 2005 withthe first six months of 2004.  Partiallyoffsetting these declines were sales of new products as well as growth in otherNatrol products.

 

GROSS PROFIT.  Gross profitdecreased 19.7%, or $3.4 million, to $13.8 million for the six months ended June 30,2005 from $17.2 million for the six months ended June 30, 2004. Grossmargin decreased to 37.0% for the six months ended June 30, 2005 from41.8% for the six months ended June 30, 2004.  The primary reasons for the decrease inmargin were inventory write downs, primarily due to Carb Intercept, that were$780,000 larger during the first six months of 2005 than during the first sixmonths of 2004; increases in the cost of raw materials, primarily whey, atProlab resulting in approximately $475,000 more in cost of goods sold duringthe first six months of 2005 when compared to the first six months of 2004;product mix, and increases in the costs of such raw materials as Co-Enzyme Q10.It is the Company’s policy to evaluate its inventory on a monthly basis takinginto consideration such factors as shelf life and the velocity of sales.  The precipitous decline in the sales of CarbIntercept, a decline which escalated in the second quarter of 2005,  caused the Company to write down its CarbIntercept inventory in both the first and second quarters of 2005 due to a lackof sufficient consumer demand to use on-hand raw materials and finished goodsbefore these materials would have expiring shelf lives.

 

SELLING AND MARKETING EXPENSES. Selling and marketing expenses decreased 11.8%, or $1.2 million, toapproximately $9.0 million for the six months ended June 30, 2005 from$10.3 million for the six months ended June 30, 2004. Of the totaldecrease in expenditures, approximately $235,000 was due to lower shippingexpenses during first six months of 2005 than during the first six months of2004.  Sales and marketing payroll andpayroll related expenditures were $521,000 less during the  first six months of 2005 than during the firstsix months of 2004.  The balance of thedecrease was due to less spending on traditional media.

 

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 8.8%, or $404,000 to $5.0 million for the six months ended June 30,2005 from $4.6 million for the six months ended June 30, 2004.  Legal expenses were $612,000 more during thefirst six months of 2005 when compared to the first six months of 2004.  The increase was due to the timing oflitigation and a $265,000 accrual related to a legal settlement relative toAndro-based products last sold by Prolab in August 2002.  The Company also spent $195,000 more duringthe first six months of 2005 on its Sarbanes-Oxley Compliance efforts than itdid during the first six months of 2004. Offsetting these increases was a$432,000 reduction in the Company’s accrual for management incentives duringthe first six months of 2005 when compared to the first six months of2004.  The accrual was reduced due to theCompany’s profit performance.

 

INTEREST EXPENSE.  Interest expense was $320,000 for the sixmonths ended June 30, 2005 as compared to $314,000 for the six monthsended June 30, 2004. 

 

INCOME TAX PROVISION. For the six months ended June 30, 2005 theCompany’s effective tax rate was approximately 38.0%.  For the six months ended June 30, 2004the Company’s effective tax rate was 40.3%. 

 

**LIQUIDITYAND CAPITAL RESOURCES**

** **

As of June 30, 2005, the Company had working capital of $18.2million as compared to $18.3 million in working capital at December 31,2004. The Company’s cash balance at June 30, 2005 was approximately $3.9million.  

 

Net cash used by operating activities was $1.8 million for the sixmonths ended June 30, 2005 versus net cash used  of $ 1.0 million for the six months ended June 30,2004. Cash used by operating activities during the six months ended June 30,2005  consisted primarily of cashprovided by non-cash charges of $0.8 million offset by changes in operatingassets and liabilities of $2.3 and the Company’s loss of $0.3 million. Cashused by operating assets and liabilities consisted primarily of an increase inaccounts receivable of $1.9 million, an increase in inventory of $0.8 millionand a decrease in payroll and related liabilities of $0.8 million. The increasein accounts receivable was due to the timing of sales and a large increase inthe Company’s net under 30 days trade receivables.  The increased inventory was due to anincrease in raw material inventory.  TheCompany is carrying larger inventories of certain raw material ingredients suchas CoEnzyme-Q10 that have been in short supply. The decrease in payrollliabilities is due to the 

 

10

----

 

payment of incentive bonuses during the first quarter of 2005 that wereaccrued as an expense in the year ended December 31, 2004.  Offsetting these uses of cash was an increasein accrued expenses of $0.6 million, an increase in income taxes payable of$0.2 million, an increase in trade payables of $0.2 million, and a decrease inprepaid expenses of $0.1 million.

 

Net cash used in investing activities was $355,000 for the six monthsended June 30, 2005 versus net cash provided of approximately $1.7 millionduring the six months ended June 30, 2004. During the six months ended June 30,2005, the Company invested $380,000 in property and equipment and $25,000 ofcash was provided from the conversion of miscellaneous other assets.

 

Net cash used in financing activities was approximately $36,000 for thesix months ended June 30, 2005 as opposed to approximately $64,000provided by financing activities during the six months ended June 30,2004. During the six months ended June 30, 2005, the Company madeprincipal payments of approximately $236,000 on its long-term debt and receivedapproximately $200,000 from the exercise of stock options and the purchase ofstock through the Company’s Employee Stock Purchase Plan.  

 

As of June 30, 2005, the Company had $8.0 million of outstandingdebt. The company has a $3.0 million line of credit in place, which, as of theend of the quarter, was unused.

 

The Company believes that its cash balance together with cash generatedfrom operations and its line of credit should be sufficient to fund itsanticipated working capital needs and planned capital expenditures for the nexttwelve months. However, if the Company fails to meet certain covenantsrelated to its line of credit, the line of credit may not be available to fundthe Company’s future needs.

 

In order to meet its long-term liquidity needs, the Company may berequired to incur additional indebtedness or issue additional equity and debtsecurities, subject to market and other conditions. There can be no assurancethat such additional financing will be available on terms acceptable to theCompany or at all. The failure to raise the funds necessary to finance its futurecash requirements or consummate future acquisitions could adversely affect theCompany’s ability to pursue new acquisitions and could negatively affect itsoperations in future periods.

 

## **CRITICAL ACCOUNTINGPOLICIES**

## ** **

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, 2004.

 

**CONTRACTUAL OBLIGATIONS**

 

Contractual obligations have not changed significantly from thosediscussed in Item 7 of the Company’s Annual Report on Form 10-K for theyear ended December 31, 2004.

 

## **ITEM 3**. QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK

## ** **

There has been no materialchange during the three months ended June 30, 2005 from the disclosuresabout market risk provided in Item 7a of the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2004.

 

**ITEM 4****. CONTROLS**

 

## **Anevaluation was conducted under the supervision and with the participation ofthe Company’s management, including the Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of the Company’s disclosure controlsand procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934) as of June 30, 2005.  Based on this evaluation, our Chief ExecutiveOfficer and Chief Financial Officer have concluded that the Company’sdisclosure controls and procedures are, to the best of their knowledge,effective to ensure that information required to be disclosed by the Company inreports that it files or submits under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms. There were no significant changes inthe Company’s internal control over financial reporting that occurred duringthe fiscal quarter covered by this report that have materially affected or arereasonably likely to materially affect the Company’s internal control overfinancial reporting.**

 

11

----

 

**PART II**

** **

## **OTHERINFORMATION**

## ** **

**ITEM 1.  LEGALPROCEEDINGS**

** **

None

 

## **ITEM2.  CHANGES IN SECURITIES, USE OFPROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES**

## ** **

None

 

## **ITEM3.  DEFAULTS UPON SENIOR SECURITIES**

## ** **

None

 

## **ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

## ** **

a)             The 2004 Annual Meeting ofStockholders of Natrol, Inc. (the “Annual Meeting”) was held on June 09,2005.

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

 
| ** **          | ** ** | **Votes  For** | ** ** | **Votes  Withheld** | ** ** |
|---------------------|------------|----------------|------------|---------------------|------------|
| Dennis R. Jolicoeur |       | 13,330,819     |       | 52,815              |       |

 

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      |
| Dennis  De Concini   |
| Dennis  R. Jolicoeur |
| Ronald  J. Consiglio |

 

ITEM 5.  OTHER INFORMATION

 

None

 

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

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

 

 

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: August 12, 2005 | By:          | /s/ Elliott Balbert |   |
|                       |         | Chairman, President and Chief Executive  Officer |
|                       |         |   |
| Date: August 12, 2005 | By:          | /s/ Dennis R. Jolicoeur |   |
|                       |         | Chief Financial Officer and Executive  Vice President |
|                            |              |  |  |  |

 

12

----