**SECURITIES ANDEXCHANGE COMMISSIONWASHINGTON, D.C. 20549**

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**FORM 10–Q**

** **
| **(Mark  one)** |                                                                                          |
|-----------------|-----------------------------------------------------------------------------------------------|
|            |                                                                                          |
| **ý**      | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|            |                                                                                          |
|            | **FOR THE QUARTERLY PERIOD  ENDED MARCH 31, 2002**                                            |

**OR**
| **o**  | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                   |
|--------|----------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                             |
|   | **FOR THE TRANSITION  PERIOD FROM        TO        ** |

 

**COMMISSIONFILE NO: 0-24567**

 

**NATROL,INC.**

(Exact name of registrant as specified in its charter)

** **
| **DELAWARE**              | **95-3560780**                        |
|---------------------------|---------------------------------------|
| (State of  Incorporation) | (I.R.S. Employer  Identification No.) |
|                      |                                  |

**21411 PRAIRIE STREETCHATSWORTH, CALIFORNIA 91311**(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)**(818) 739–6000**(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

INDICATEBY A CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BEFILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THEPRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WASREQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILINGREQUIREMENTS FOR THE PAST 90 DAYS.

YES  x  NO  o

Indicatethe number of shares outstanding of the issuer’s common stock, as of the latestpracticable date:

 

| **Class**                      |   | **Outstanding as of May 1, 2002** |
|--------------------------------|--------|-----------------------------------|
| Common stock,  $0.01 par value |   | 12,843,714                        |

 

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PART 1FINANCIAL INFORMATION

ITEM 1. CONSOLIDATEDFINANCIAL STATEMENTS

 

NATROL, INC.CONSOLIDATED BALANCE SHEETS(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)

 
|                                                                                                                            |   | **March 31,**   |   | **December  31,** |       |
|---------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|--------|-------------------|------------|
|                                                                                                                            |   | **2002**        |   | **2001**          | ** ** |
|                                                                                                                            |   | **(Unaudited)** |   |              |       |
| **Assets**                                                                                                                      |   |            |   |              |       |
| Current assets:                                                                                                                 |   |            |   |              |       |
| Cash  and cash equivalents                                                                                                      |   | $               | 7,838  |              | $          | 5,485 |   |
| Accounts  receivable, net of allowances of $479 and $363 at March 31, 2002 and December  31, 2001, respectively                 |   | 8,714           |   | 6,787             |       |
| Inventories                                                                                                                     |   | 8,443           |   | 9,743             |       |
| Deferred  taxes                                                                                                                 |   | 1,324           |   | 1,324             |       |
| Income  taxes receivable                                                                                                        |   | 1,390           |   | 1,408             |       |
| Prepaid  expenses and other current assets                                                                                      |   | 1,402           |   | 1,826             |       |
| Total current assets                                                                                                            |   | 29,111          |   | 26,573            |       |
|                                                                                                                            |   |            |   |              |       |
| Property  and equipment:                                                                                                        |   |            |   |              |       |
| Building  and improvements                                                                                                      |   | 15,625          |   | 15,625            |       |
| Machinery  and equipment                                                                                                        |   | 5,761           |   | 5,708             |       |
| Furniture  and office equipment                                                                                                 |   | 2,028           |   | 2,019             |       |
|                                                                                                                            |   | 23,414          |   | 23,252            |       |
| Accumulated  depreciation and amortization                                                                                      |   | (5,954          | )      | (5,606            | )          |
|                                                                                                                            |   | 17,460          |   | 17,746            |       |
|                                                                                                                            |   |            |   |              |       |
| Goodwill,  net of accumulated amortization of $24,123 at March 31, 2002 and December  31,  2001                            |   | 8,215           |   | 8,215             |       |
| Intangible  assets, net of accumulated amortization of $2,450 and $2,300 at March 31,  2002 and December 31, 2001, respectively |   | 6,619           |   | 6,769             |       |
| Other  assets                                                                                                                   |   | 52              |   | 54                |       |
| Total  assets                                                                                                                   |   | $               | 61,457 |              | $          | 59,357 |   |

*Seeaccompanying notes*

 

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|                                                                                                                              |   | **March 31,**   |   | **December  31,** |       |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|--------|-------------------|------------|
|                                                                                                                              |   | **2002**        |   | **2001**          | ** ** |
| **Liabilities and stockholders’ equity**                                                                                     |   | **(Unaudited)** |   |              | ** ** |
| Current  liabilities:                                                                                                             |   |            |   |              |       |
| Line  of credit                                                                                                                   |   | —          |   | —            |       |
| Accounts  payable                                                                                                                 |   | 5,140           |   | 3,372             |       |
| Accrued  expenses                                                                                                                 |   | 4,606           |   | 4,240             |       |
| Accrued  payroll and related liabilities                                                                                          |   | 398             |   | 494               |       |
| Current  portion of long-term debt                                                                                                |   | 277             |   | 277               |       |
| Total  current liabilities                                                                                                        |   | 10,421          |   | 8,383             |       |
|                                                                                                                              |   |            |   |              |       |
| Deferred  income taxes, noncurrent                                                                                                |   | 251             |   | 251               |       |
| Long-term  debt, less current portion                                                                                             |   | 8,013           |   | 8,083             |       |
|                                                                                                                              |   |            |   |              |       |
| 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 — 13,764,614 and 13,712,354 at March 31, 2002 and  December 31, 2001, respectively       |   | 138             |   | 137               |       |
| Additional  paid-in capital                                                                                                       |   | 61,973          |   | 61,869            |       |
| Accumulated  deficit                                                                                                              |   | (16,458         | )      | (16,485           | )          |
|                                                                                                                              |   | 45,653          |   | 45,521            |       |
| Shares held in treasury, at cost— 921,900and  625,900 shares at March 31, 2002 and December 31, 2001  respectively |   | (2,881          | )      | (2,881            | )          |
| Total  stockholders’ equity                                                                                                  |   | 42,772          |   | 42,640            |       |
| Total  liabilities and stockholders’ equity                                                                                  |   | $               | 61,457 |              | $          | 59,357 |   |
|                                                                                                                                   |        |                 |        |                   |            |  |  |

*Seeaccompanying notes*

 

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NATROL, INC.CONSOLIDATED STATEMENTS OF INCOME(IN THOUSANDS EXCEPT SHARE AND PER SHAREAMOUNTS)

 
|                                               |   | **Three Months Ended****   March 31** |   |
|----------------------------------------------------|--------|--------------------------------------------|--------|
|                                               |   | **2002**                                   |   | **2001** |   |
|                                               |   | **(Unaudited)**                            |   |
| Net sales                                          |   | $                                          | 17,539 |   | $ | 19,056 |   |
| Cost of goods sold                                 |   | 10,960                                     |   | 11,273 |   |
| Gross profit                                       |   | 6,579                                      |   | 7,783 |   |
| Selling and marketing expenses                     |   | 3,734                                      |   | 3,834 |   |
| General and administrative expenses                |   | 2,646                                      |   | 2,674 |   |
| Total operating expenses                           |   | 6,380                                      |   | 6,508 |   |
| Operating income                                   |   | 199                                        |   | 1,275 |   |
| Interest income                                    |   | 19                                         |   | 67 |   |
| Interest expense                                   |   | (170                                       | )      | (273 | ) |
| Income before income tax provision                 |   | 48                                         |   | 1,069 |   |
| Income  tax provision                              |   | 21                                         |   | 412 |   |
| Net income                                         |   | $                                          | 27     |   | $ | 657 |   |
| Basic earnings per share                           |   | $                                          | 0.00   |   | $ | 0.05 |   |
| Diluted earnings per share                         |   | $                                          | 0.00   |   | $ | 0.05 |   |
| Weighted average shares outstanding — basic   |   | 12,833,913                                 |   | 12,838,867 |   |
| Weighted average shares outstanding — diluted |   | 13,140,471                                 |   | 12,839,328 |   |

 

*Seeaccompanying notes*

 

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NATROL, INC.CONSOLIDATEDSTATEMENTS OF CASH FLOWS(IN THOUSANDS EXCEPT SHARE AND PER SHAREAMOUNTS)

 

 
|                                                                                          |   | **Three Months Ended** |       |
|-----------------------------------------------------------------------------------------------|--------|------------------------|------------|
|                                                                                          |   | **March 31**           |       |
|                                                                                          |   | **2002**               |       | **2001** | ** ** |
|                                                                                          |   | **(Unaudited)**        |       |
| **Operating  Activities**                                                                     |   |                   | ** ** |   | ** ** |
| Net  income                                                                                   |   | $                      | 27         |   | $ | 657 |   |
| Adjustments  to reconcile net income to net cash provided by (used in) operating  activities: |   |                   |       |   |   |
| Depreciation  and amortization                                                                |   | 348                    |       | 339 |   |
| Amortization  of goodwill and intangibles                                                     |   | 150                    |       | 570 |   |
| Provision  for bad debts                                                                      |   | 115                    |       | 134 |   |
| Stock  issued for services                                                                    |   | 1                      |       | — |   |
| Changes  in operating assets and liabilities:                                                 |   |                   |       |   |   |
| Accounts  receivable                                                                          |   | (2,042                 | )          | (1,696 | ) |
| Inventories                                                                                   |   | 1,300                  |       | 1,197 |   |
| Income  taxes receivable/payable                                                              |   | 18                     |       | 427 |   |
| Prepaid  expenses and other current assets                                                    |   | 424                    |       | 207 |   |
| Accounts  payable                                                                             |   | 1,768                  |       | 133 |   |
| Accrued  expenses                                                                             |   | 366                    |       | 1,069 |   |
| Accrued  payroll and other related liabilities                                                |   | (96                    | )          | (108 | ) |
| Net  cash provided by operating activities                                                    |   | 2,380                  |       | 2,929 |   |
|                                                                                          |   |                   |       |   |   |
| **Investing  activities**                                                                     |   |                   | ** ** |   | ** ** |
| Purchases  of property and equipment                                                          |   | (62                    | )          | (45 | ) |
| Other  assets                                                                                 |   | 2                      |       | 2 |   |
| Net  cash used in investing activities                                                        |   | (60                    | )          | (43 | ) |
|                                                                                          |   |                   |       |   |   |
| **Financing  activities**                                                                     |   |                   | ** ** |   | ** ** |
| Proceeds  (repayments) from line of credit, net                                               |   | —                 |       | (4,942 | ) |
| Repayments  on long-term debt                                                                 |   | (70                    | )          | (50 | ) |
| Proceeds from issuance  of common stock, net of issuance costs                                |   | 103                    |       | — |   |
| Net  cash provided by (used in) financing activities                                          |   | 33                     |       | (4,992 | ) |
| Net  increase (decrease) in cash and cash equiva­lents                                   |   | 2,353                  |       | (2,106 | ) |
| Cash  and cash equivalents, beginning of period                                               |   | 5,485                  |       | 4,004 |   |
| Cash  and cash equivalents, end of period                                                     |   | $                      | 7,838      |   | $ | 1,898 |   |
| Supplemental  disclosures of cash flows information: Cash paid for: Interest                  |   | $                      | 170        |   | $ | 273 |   |

*See accompanying note*

 

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

 

1. BASIS OF PRESENTATION

In the opinion ofmanagement, the accompanying unaudited consolidated financial statementsinclude all necessary adjustments (consisting of normal recurring accruals) andpresent fairly in all material respects the consolidated financial position ofNatrol, Inc. and its subsidiaries (collectively, the “Company” or “Natrol”) asof March 31, 2002 and the results of its operations and its cash flows for thethree months ended March 31, 2002 and 2001, in conformity with accountingprinciples generally accepted in the United States for interim financialinformation applied on a consistent basis. The results of operations for thethree months ended March 31, 2002 are not necessarily indicative of the resultsto be expected for the full year.

Certain information andfootnote disclosures which are normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States have been omitted.  Thesefinancial statements should be read in conjunction with the auditedconsolidated financial statements and notes thereto included in Natrol’s December31, 2001 audited consolidated financial statements included in the Company’sForm 10-K for the year ended December 31, 2001 as filed with the Securities andExchange Commission (file number 000–24567).

 

2. INVENTORIES

Inventories consist ofthe following:
|                                 |   | **MARCH 31,** |   | **DECEMBER 31,** |   |
|--------------------------------------|--------|---------------|--------|------------------|--------|
|                                 |   | **2002**      |   | **2001**         |   |
|                                 |   |          |   |             |   |
| Raw  material and packaging supplies |   | $             | 3,709  |             | $      | 4,280 |   |
| Finished  goods                      |   | 4,734         |   | 5,463            |   |
|                                 |   | $             | 8,443  |             | $      | 9,743 |   |

 

3. COMPREHENSIVE INCOME

The Company’scomprehensive income items were not material at and for the periods ended March31, 2002 and 2001or December 31, 2001 and therefore no disclosures have beenmade.

4. SHIPPING AND HANDLINGCOSTS

Outbound shipping andfulfillment costs are classified as selling and marketing expenses and totaled$621,000 and $655,000 for the three months ended March 31, 2002 and 2001,respectively.

 

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5. EARNINGS PER SHARE

The Company calculatesearnings per share in accordance with SFAS No. 128 “Earnings per share”.  Basic earnings per share has been computedby dividing net income by the weighted average number of common sharesoutstanding. Diluted earnings per share has been computed by dividing netincome by the weighted average of securities or other contracts to issue CommonStock as if these securities were exercised or converted to Common Stock.  Common Stock equivalent shares from stockoptions representing 2,214,941shares have been excluded from the computation ofdiluted earnings per share because the effect would be antidilutive.

6. STOCKHOLDERS’ EQUITY

STOCK OPTIONS

Statement of FinancialAccounting Standards No. 123, “Accounting for Stock-Based Compensation”encourages, but does not require, companies to record compensation cost forstock-based employee compensation plans at fair value. The Company has chosento continue to account for stock-based compensation using the intrinsic valuemethod prescribed in Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees.” During the three months ended March 31, 2002,no stock options were granted.

7. CREDIT AGREEMENT

At March 31, 2002 andDecember 31,2001 the Company was in violation of certain covenants in its lineof credit agreement with Wells Fargo Bank, N.A.  During these periods the Company had no borrowings under its lineof credit.  The Company is currentlyrenegotiating the terms of its line of credit but there is no guarantee thatthe Company will be able to negotiate terms that it deems acceptable and assuch there is no guarantee that the Company will have access to capital underits line of credit agreement.

8. REVENUE RECOGNITION

TheCompany sells its products to retail outlets through a direct sales force and anational broker network. The Company recognizes revenue from sales only afterproduct is shipped.  Net sales representproducts shipped less returns, estimates for future returns, spoilageallowances, allowances for product deemed to be unsaleable by customers, andfree goods shipped to customers for promotional or other purposes. Estimatesand allowances are based upon known claims and an estimate of additionalreturns.

EffectiveJanuary 1, 2002 the Company adopted the Financial Accounting Standards Board’s(FASB) Emerging Issues Task Force (EITF) Issue No. 01-9 “Accounting forConsideration Given by a Vendor to a Customer or Reseller of the Vendor’sProducts,” which codified and reconciled the consensus reached on EITF IssueNo. 00-14, “Accounting for Certain Sales Incentives,” EITF Issue No. 00-22“Accounting for ‘Points’ and Certain Other Time-Based or Volume Based SalesIncentive Offers, and Offers of Free Products or Services to be Delivered inthe Future,” and EITF Issue No. 00-25 “Vendor Income Statement Characterizationof Consideration Paid to a Reseller of the Vendor’s Products.”  The guidance in these Issues is to beapplied for financial statements for any period beginning after December 15,2001. Under this pronouncement, slotting fees, rebates, price reductionscanbacks and miscellaneous other expense items which in effect reduce the costof product to the Company’s customers must be deducted from gross sales revenuewhen calculating net sales revenue. As a result of the adoption of this Issue,net sales for the quarter ending March 31, 2001 have been reduced from $19.8million to $19.1 million with  sellingand marketing expenses being reduced by the same amount due to thereclassification of certain expenses from selling and marketing expenses to netsales.

9.ACCOUNTING FOR GOODWILL AND INTANGIBLES

TheCompany reviews for the impairment of long-lived assets and certainidentifiable intangibles whenever events or changes in circumstances indicatethat the carrying amount of any asset may not be recoverable. An impairmentloss would be recognized when the estimated undiscounted future cash flows expectedto result from the use of the asset and its eventual disposition is less thanthe carrying amount. If an impairment is indicated, the amount of the loss tobe recorded is based on an estimate of the difference between the carryingamount and the fair value of the asset. Fair value is based upon discountedestimated cash flows expected to result from the use of the asset and itseventual disposition and other valuation methods.

 

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InJune 2001, the FASB issued Statement of Financial Accounting Standards (SFAS)No. 142, “Goodwill and Other Intangible Assets.” SFAS 142 prohibits theamortization of goodwill and intangibles with indefinite useful lives andrequires these assets to be reviewed for impairment at least annually.Intangible assets with finite lives will continue to be amortized over theirestimated useful lives. The Company began applying SFAS 142 in the firstquarter of fiscal 2002 and application of the nonamortization provisions ofthis standard is expected to result in an increase in net income of $821,000 in2002 on an annual basis. SFAS 142 requires testing of goodwill impairment undera two-step process. The first step is screen for potential impairment, whilethe second step measures the amount of impairment, if any.

During2001, the Company reviewed the goodwill associated with its Laci Le Beau, EPI,and Prolab acquisitions.  The Companymeasured the valuation of the unamortized goodwill associated with theseacquisitions relative to the market capitalization of the Company as a whole,relative to the undiscounted cash flows produced by these entities as well aspotential future discounted cash flows with these cash flows being discountedby a required rate of return that took into account the risk-free rate ofreturn as measured by the 20-year long bond rate of return as well as othermeasures of risk such as the Company’s small capitalization, risk associatedwith market size, volatility, historical cash flows and earnings, depth ofmanagement and other measures.

Afterthe review, the Company determined that the unamortized goodwill associatedwith its Laci Le Beau acquisition was not impaired.  It further determined that in accordance with SFAS 142 no write down of this goodwill would benecessary in 2002 unless conditions surrounding this division’s performancechange substantially.  In 2001, theCompany amortized $340,000 relative to goodwill associated with its acquisitionof Laci Le Beau. In the quarter ending March 31, 2001, the Company recordedamortization of $85,000 relative to goodwill associated with its acquisition ofLaci Le Beau.

The Company nextdetermined that the unamortized goodwill associated with its acquisition of EPIwas also not impaired.  However, theCompany also determined that due to the nature of its supply agreement withConAgra, which expires in approximately six years and the fact that ConAgra isEPI’s major source of supply for the majority of its business, the goodwillrecorded related to the intangible value of the favorable terms of the contractacquired should be amortized. As such, this intangible is continuing to beamortized at the rate of $600,000 per year, consistent with the amount ofgoodwill amortized for EPI in 2001.

With respect to Prolab,the Company determined that it was appropriate to write down associatedgoodwill by $20 million during 2001. The Company considered all of the factorsmentioned above but focused on the Company’s declining sales volume, issuessurrounding Prolab’s ephedrine-based products, the Sports Nutrition market as awhole, and undiscounted cash flows. Based on all of these considerations, the Company deemed that inaccordance with current accounting rules in effect in 2001 that a $20 millionwrite down of goodwill was appropriate. In addition, the Company reviewed the Prolab business and futureexpectations in accordance with SFAS 142. The Company does not believe that a further write down of goodwill is orwill be necessary during 2002.  However,in accordance with SFAS 142, the Company will review the valuation of all ofits goodwill during the third quarter of 2002 and it cannot guarantee that afurther reduction of Prolab’s goodwill or a reduction of Laci Le Beau’s orEPI’s goodwill in addition to what has been described will not be necessary. Inthe quarter ending March 31, 2001, the Company recorded amortization of$334,983 relative to goodwill associated with its acquisition of Prolab.

## *10. LONG-LIVED ASSETS*

InAugust 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets” (SFAS 144), which addresses financial accountingand reporting for the impairment of long-lived assets and supercedes SFAS No.121, “Accounting for the Impairment of Long-Lived Assets and Long-Lived Assetsto Be Disposed Of,” and the accounting and reporting provisions of APB OpinionNo. 30, “Reporting the Results of Operations — Reporting the Effects of aDisposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions,” for the disposal of a segmentof a business. The Company adopted SFAS 144 in the first quarter of 2002 andthe adoption of the statement had no effect on the Company’s financial positionor results of operations.

## *11. RECLASSIFICATIONS*

Certainreclassifications have been made to the 2001 consolidated financial statementsto conform to the presentation in 2002.

 

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ITEM 2:

MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CERTAIN FACTORS THAT MAYAFFECT FUTURE RESULTS

Information contained orincorporated by reference in this quarterly report on Form 10–Q and inother SEC filings by the Company contains “forward looking statements.”  The Company is including this statement forthe express purpose of availing itself of protections of the safe harborprovided by the Private Securities Litigation Reform Act of 1995 with respectto all such forward looking statements. Examplesof forward looking statements include, but are not limited to, the use offorward–looking terminology such as “believes,” “expects,” “may,” “will,”“should”, “intend”, “estimate”, “assume”, “plan” or “anticipates” or thenegative thereof, other variations thereon, or comparable terminology, or bydiscussions of strategy that predict or indicate future events or trends orthat are not historical facts. The Company cannot assure the future results oroutcome of the matters described in these statements; rather, these statementsmerely reflect its current expectations of the approximate outcome of thematter discussed. The Company does not intend to update any such statements atany 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 upon 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 certain other factors discussedherein and in other past reports, including but not limited to the prior yearannual reports on Form 10-K filed with the Securities and ExchangeCommission. The factors discussed herein and contained in that Form 10-K maynot be exhaustive. Therefore, the factors contained herein should be readtogether with other reports and documents that are filed by the Company withthe SEC from time to time, including Form 10-Q which may supplement, modify,supersede or update the factors listed in this document.

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 which has occurred during the past two years and may continue,(ii) increased competition from current competitors and new market entrantsincluding but not limited to increased competition from private label housebrands supported by retailers seeking to increase the market share of theirproprietary house brands, (iii) adverse publicity regarding the dietarysupplement industry or the Company’s products including recent publicityregarding ephedrine-based products, (iv) the Company’s dependence upon itsability to develop new products, (v) a continued high rate (or increase inthe rate) of returns of the Company’s products, (vi) the Company’s abilityto gain or expand or maintain distribution within new or existing customers andnew or existing channels of trade, (vii) 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, (viii) adverse changes in government regulation,(ix) exposure to product liability claims including product liabilityclaims from products which include ephedrine or other products for which theCompany has either not been able to secure product liability coverage or beenable to secure such coverage at reasonable prices. (as of March 15, 2002, theavailability of product liability insurance for ephedrine-based products wasnon-existent), (x) dependence on significant customers, (xi) theCompany’s ability to keep and attract key management employees, (xii) theCompany’s inability to manage growth and execute its business plan, or theCompany’s ability to modify its business plan in response to market conditions,including, but not limited to, its ability to enter new businesses andcapitalize upon new business opportunities (xiii) the Company’s ability toconsummate future acquisitions and its ability to integrate acquired businesses,including without limitation Prolab Nutrition, Inc. (“Prolab”), acquiredin October, 1999 for which the Company took a $20 million impairment charge inthe year ending December 31, 2001 due to the write down of goodwill associatedwith the acquisition, (xiv) the absence of conclusive clinical studies formany of the Company’s products, (xv) the Company’s inability to obtain rawmaterials that are in short supply including its ability to obtain garlicpowders under its supply agreement with ConAgra for its Essentially PureIngredient (EPI) raw material sales division, (xvi) sales and earningsvolatility, (xvii) volatility of the stock market (xviii) theCompany’s ability to manufacture its products efficiently, (xix) theCompany’s ability to manage inventory or sell its inventory before suchinventory becomes outdated, (xx) the Company’s reliance on independentbrokers to sell its products, (xxi) the inability of the Company toprotect its intellectual property, (xxii) control of the Company byprincipal shareholders, (xxiii) the possible sale of large amounts ofstock by controlling shareholders, (xxiv) a continued general downturn inthe national economy as a whole, and (xxv) continued market acceptance ofNatrol supplements, Laci Le Beau teas, Prolab’s sports nutrition products, andEssentially Pure Ingredients’ raw material products.

THE FOLLOWING DISCUSSIONOF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION OF THE COMPANY SHOULD BEREAD IN CONJUNCTION WITH THE FINANCIAL STATEMENTS INCLUDED IN THE RESPONSE TOPART I, ITEM 1 OF THIS REPORT.

 

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THREE MONTHS ENDED MARCH31, 2002 AND MARCH 31, 2001

NET SALES. Sales arerecognized at the time product is shipped. Net sales are net of discounts,allowances, and estimated returns and credits, slotting fees, rebates and otherexpenses that reduce the cost of product to the Company’s customers.  Net sales decreased 8.0%, or $1.5 million,to $17.5 million for the three months ended March 31, 2002 from $19.1 millionfor the three months ended March 31, 2001. Approximately half of the decline innet sales was due to a lower volume of shipments with the remainder being dueto the Company providing for an increased level of returns stemming frominventory realignments at certain large mass market accounts. The market for nutritional supplements is verycompetitive and for the last two years industry trends have been negative. Inthis environment, major retail outlets were not as willing as in past years topromote vitamins, minerals and supplements (VMS) as they had in the past.  Many retailers reduced the amount of shelfspace devoted to the VMS sector and retailers in general demanded higher levelsof promotional support from vendors of VMS product. All of the factorsmentioned above contributed to the decline in net sales for the quarter.

GROSS PROFIT.  Gross profit decreased 15.5%, or $1.2million, to $6.6 million for the three months ended March 31, 2002 from $7.8million for the three months ended March 31, 2001. Gross margin decreased to37.5% for the three months ended March 31, 2002 from 40.8% for the three monthsended March 31, 2001. The decline was due to the Company providing for returnsstemming from inventory realignments at certain large mass market accountswhich reduced net sales without reducing cost of goods sold.

SELLING AND MARKETINGEXPENSES.  Selling and marketingexpenses consist primarily of advertising and promotional expenses and relatedpayroll expenses and commissions. Selling and marketing expenses decreased2.6%, or $100,000 to $3.7 million for the three months ended March 31, 2002from $3.8 million for the three months ended March 31, 2001. The reduction isnot considered material.

GENERAL ANDADMINISTRATIVE EXPENSES.  General andadministrative expenses consist primarily of personnel costs related to generalmanagement functions, finance, accounting and information systems, research anddevelopment expenses, as well as professional fees related to legal, audit andtax matters and depreciation and amortization of goodwill. General and administrativeexpenses decreased 1.0%, or $28,000, and were approximately $2.6 million forthe three months ended March 31, 2002. However, amortization of goodwill forthe quarter ending March 31,  2002amounted to only $150,000 as opposed to the $453,000 recorded in the quarterended March 31, 2001 as a result of the application of SFAS 142.  In the quarter ended March 31, 2001, Mr.Balbert, Natrol’s President, did not draw a salary.    For the quarter ending March 31, 2002, Mr. Balbert’s salaryamounted to $150,000.  The only othersignificant change in general and administrative expenses were legal expenseswhich rose $304,000. The Company is currently defending itself in a number ofmatters that at this time it does not consider material and does not believewill lead to material judgments against the Company.

INTEREST INCOME. Interestincome for the three months ended March 31, 2002 fell to $19,000 from $67,000for the three months ended March 31, 2001. The decline was due to lower interest rates.

INTEREST EXPENSE.  The Company recorded interest expense of$170,000 for the three months ended March 31, 2002 as compared to interestexpense of $273,000 for the three months ended March 31, 2001. The Company paysinterest on approximately $8.3 million of long-term mortgage debt as well asinterest on its line of credit.  Duringthe quarter ended March 31, 2002, the Company had no borrowings under its lineof credit whereas in the quarter ended March 31, 2001, the Company had averageborrowings of $6.7 million under its line of credit.

INCOME TAX PROVISION. TheCompany’s effective tax rate was approximately 44% in the first quarter of 2002as opposed to 38.5% in the first quarter of 2001.  The change in the income tax provision at March 31, 2002 fromMarch 31, 2001 is not considered material by the Company and is due totemporary differences in the makeup of taxable and non-taxable expenses.

**LIQUIDITYAND CAPITAL RESOURCES**

AtMarch 31, 2002, the Company had working capital of $18.7 million, ascompared to $18.2 million in working capital at December 31, 2001. TheCompany’s cash balance at March 31, 2002 was approximately $7.8 million.

Net cash provided by operating activities was $2.4  million forthe three months ended March 31, 2002 versus net cash provided of $2.9 for thethree months ended March 31, 2001. The decrease in net cash provided byoperating activities during the quarter was 

 

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primarily due to fall in net income of $630,000, from $657,000 in thequarter ended March 31, 2001 to $27,000 in the quarter ended March 31,2002.  During the quarter ended March31, 2002, accounts receivable increased $2.0 million.  This use of cash was primarily offset by a decrease ininventories of $1.3 million, an increase in accounts payable and other accruedexpenses of $2.1 million, a decrease in prepaid expenses of $424,000 anddepreciation and amortization of $498,000.

Net cash used ininvesting activities was $60,000 for the three months ended March 31, 2002 and$43,000 during the three months ended March 31, 2001. Nearly all of theinvesting activity in both periods was in property, plant and equipment.

Net cash provided by financing activities was $33,000 for the threemonths ended March 31, 2002 as opposed to $5.0 million of net cash used byfinancing activities during the three months ended March 31, 2001. During thequarter ending March 31, 2001, the Company reduced its line of credit by $4.9million whereas the Company had no borrowings from its line of credit duringthe three months ended March 31, 2002. The Company repaid $70,000 and $50,000 of long-term debt in the quartersended March 31, 2002 and 2001, respectively. In the quarter ended March 31, 2002, the Company issued $103,000 asconsideration for the issuance of stock to employees exercising stock optionsor purchasing stock via its Employee Stock Purchase Program.

Asof March 31, 2002, the Company had $8.3 million of outstanding debt dueexclusively to a mortgage on the Company’s manufacturing/headquarters facilityand a mortgage on the Company’s shipping facility.

AtMarch 31, 2002, the Company was out of compliance with certain financial ratioscontained in its line of credit. The Company is currently working with itsbank, Wells Fargo, N.A., to renegotiate its line of credit agreement and thecovenants therein. There is no guarantee that the Company will be able tonegotiate terms that it finds satisfactory with Wells Fargo.  However, given the strength of the Company’sbalance sheet, the Company’s historical cash flows, and the large number ofunencumbered assets in its possession, the Company believes that it can obtainsufficient financing to maintain its operations from alternative financialinstitutions should that be necessary. If the Company is unable to do so, itssources of liquidity will be reduced. In providing the Company with additional funds, WellsFargo or other potential lenders may seek to institute covenants restrictingthe Company from certain activities and if the Company deems it necessary toborrow funds with these restrictions in place, it may find that its ability to compete effectively in its market sectoris hindered.

Regardless of itsability to borrow additional funds, the Company believes that its current cashbalance together with cash generated from operations will be sufficient to fundits anticipated working capital needs and capital expenditures for the next12 months.

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK

Thefollowing discussion about the Company’s market risk disclosures involvesforward–looking statements. Actual results could differ materially fromthose projected in the forward–looking statements. The Company is exposedto market risk related to changes in interest rates. The risks related toforeign currency exchange rates are immaterial and the Company does not usederivative financial instruments.

The Company is subject tointerest rate market risk associated with its variable rate line of credit andfixed rate long-term debt. Given the short-term nature and variable rates onborrowings on the line of credit and the fact that the Company has noborrowings currently outstanding under its line of credit, the Company does notbelieve the risk is significant. Additionally, the Company does not believethat the risk is significant for its long-term debt due to the low fixed ratesand insignificance of the long-term debt to the Company’s consolidated balancesheet.

PART IIOTHER INFORMATION

 

ITEM 6: EXHIBITS ANDREPORTS ON FORM 8-K

(a)      Nocurrent reports on Form 8-K were filed by the Company during the three monthperiod ended March 31, 2002.

 

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SIGNATURES

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|           | NATROL,  INC.                                    |
|----------------|--------------------------------------------------|
| Date:  5/14/02 | By:  /s/ Elliott Balbert                    |
|           | Chairman,  President and Chief Executive Officer |
|           |                                             |
|           |                                             |
| Date:  5/14/02 | By:  /s/ Dennis R. Jolicoeur                |
|           | Chief  Financial Officer and Executive           |
|           | Vice  President                                  |

 

 

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