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**SECURITIES AND EXCHANGECOMMISSION****WASHINGTON,D.C. 20549**––––––––––––

**FORM 10–Q**
| **(Mark  one)** |                                                                                           |
|-----------------|------------------------------------------------------------------------------------------------|
|            |                                                                                           |
| ý          | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES  EXCHANGE ACT OF 1934**  |
|            |                                                                                           |
|            | **FOR  THE QUARTERLY PERIOD ENDED JUNE 30, 2001**                                              |
|            |                                                                                           |
|            | **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 inits 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, INCLUDINGAREA 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  ý   NO  oIndicate the number of shares outstanding of the issuer's common stock, as ofthe latest practicable date:
| Class                          | Outstanding as of July  31,2001 |
|--------------------------------|---------------------------------|
|                                |
| Common stock, $0.01  par value | 12,742,457                      |

----

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PART1

FINANCIAL INFORMATION

ITEM1. CONSOLIDATED FINANCIAL STATEMENTS

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

|                                                                                                                                  | **June  30,**                                                                                                  |       | **December  31,** |   |
|---------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------|------------|-------------------|--------|
|                                                                                                                                  | **2001**                                                                                                       |       | **2000**          |   |
|                                                                                                                                  | ****                                                                                                           | ** ** | ****              | ****   |
|                                                                                                                                  | (Unaudited)                                                                                                    |       |              |   |
| **Assets**                                                                                                                            |                                                                                                           |       |              |   |
|                                                                                                                                  | Current assets:                                                                                                |       |              |   |   |
|                                                                                                                                  | Cash and cash  equivalents                                                                                     | $          | 3,571             |   | $ | 4,004 |   |
|                                                                                                                                  | Accounts receivable,  net of allowances of $515 and $479 at June 30, 2001 and December 31, 2000,  respectively | 8,571      |              | 9,574  |   |
|                                                                                                                                  | Inventories                                                                                                    | 11,872     |              | 12,247 |   |
|                                                                                                                                  | Deferred taxes                                                                                                 | 1,076      |              | 1,076  |   |
|                                                                                                                                  | Income taxes  receivable                                                                                       | 544        |              | 4,091  |   |
|                                                                                                                                  | Prepaid expenses and  other current assets                                                                     | 836        |              | 839    |   |
|                                                                                                                                  |                                                                                                                |       |                   |   |
| Total current assets                                                                                                                  | 26,470                                                                                                         |       | 31,831            |   |
|                                                                                                                                  |                                                                                                           |       |              |   |
| Property and  equipment:                                                                                                              |                                                                                                           |       |              |   |
|                                                                                                                                  | Building and  improvements                                                                                     | 15,625     |              | 15,571 |   |
|                                                                                                                                  | Machinery and equipment                                                                                        | 5,568      |              | 5,539  |   |
|                                                                                                                                  | Furniture and office  equipment                                                                                | 1,916      |              | 1,863  |   |
|                                                                                                                                  |                                                                                                                |       |                   |   |
|                                                                                                                                  | 23,109                                                                                                         |       | 22,973            |   |
| Accumulated  depreciation and amortization                                                                                            | (4,934                                                                                                         | )          | (4,215            | )      |
|                                                                                                                                  |                                                                                                                |       |                   |        |
|                                                                                                                                  | 18,175                                                                                                         |       | 18,758            |   |
|                                                                                                                                  |                                                                                                           |       |              |   |
| Goodwill, net of  accumulated amortiz­ation of $5,283 and $4,143 at  June 30, 2001 and December 31, 2000, respectively | 36,124                                                                                                         |       | 37,264            |   |
| Other assets                                                                                                                          | 65                                                                                                             |       | 68                |   |
|                                                                                                                                  |                                                                                                                |       |                   |        |
| Total assets                                                                                                                          | $                                                                                                              | 80,834     |              | $      | 87,921 |   |
|                                                                                                                                  |                                                                                                                |       |                   |        |

*See accompanying notes*

 

|                                             | **June  30,**                                                                                                                 |   |   | **December  31,** |       |
|--------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------|--------|--------|-------------------|------------|
|                                             | **2001**                                                                                                                      |   |   | **2000**          |       |
|                                             | ****                                                                                                                          |   | ****   | ****              | ****       |
| **Liabilities and stockholders’  equity**   | (Unaudited)                                                                                                                   |   |   |              | ** ** |
| Current liabilities:                             |                                                                                                                          |   |   |              |       |
|                                             | Line of credit                                                                                                                | $      | -      |              |       | $ | 8,300 |   |
|                                             | Accounts payable                                                                                                              | 4,945  |   |              | 4,186      |   |
|                                             | Accrued expenses                                                                                                              | 1,811  |   |              | 2,967      |   |
|                                             | Accrued payroll and  related liabilities                                                                                      | 858    |   |              | 723        |   |
|                                             | Current portion of  long–term debt                                                                                       | 256    |   |              | 256        |   |
|                                             |                                                                                                                               |   |        |                   |            |
| Total current  liabilities                       | 7,870                                                                                                                         |   |   | 16,432            |       |
|                                             |                                                                                                                          |   |   |              |       |
| Deferred income taxes,  noncurrent               | 226                                                                                                                           |   |   | 226               |       |
| Long–term debt,  less current portion       | 8,260                                                                                                                         |   |   | 8,370             |       |
|                                             |                                                                                                                          |   |   |              |       |
| Commitments                                      |                                                                                                                          |   |   |              |       |
|                                             |                                                                                                                          |   |   |              |       |
| 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 – 13,664,357 and 13,658,820 at June 30, 2001 and December 31,  2000, respectively    | 137    |   |              | 137        |   |
|                                             | Additional paid–in  capital                                                                                              | 61,790 |   |              | 61,782     |   |
|                                             | Retained earnings                                                                                                             | 5,432  |   |              | 3,855      |   |
|                                             |                                                                                                                               |   |        |                   |            |
|                                             | 67,359                                                                                                                        |   |   | 65,774            |       |
|                                             | Shares held in  treasury, at cost— 921,900 and 625,900 shares at June 30, 2001 and  December 31, 2000, respectively | (2,881 | )      |              | (2,327     | ) |
|                                             | Receivable from  stockholder                                                                                                  | -      |   |              | (554       | ) |
|                                             |                                                                                                                               |   |        |                   |            |
| Total stockholders’  equity                 | 64,478                                                                                                                        |   |   | 62,893            |       |
|                                             |                                                                                                                               |   |        |                   |            |
| Total liabilities and  stockholders’ equity | $                                                                                                                             | 80,834 |   |              | $          | 87,921 |   |
|                                             |                                                                                                                               |   |        |                   |            |
|                                                  |                                                                                                                               |        |        |                   |            |  |  |  |  |

*See accompanying notes*

 

NATROL, INC.****CONSOLIDATEDSTATEMENTS OF OPERATIONS(IN THOUSANDS EXCEPT FOR SHARE AND PER SHAREAMOUNTS)

|                                                | **Three  months ended** | ** ** |   | **Six  months ended** | ** ** |
|-----------------------------------------------------|-------------------------|------------|--------|-----------------------|------------|
|                                                | **June  30,**           | ** ** |   | **June  30,**         | ** ** |
|                                                | **2001**                | ** ** |   | **2000**              | ** ** |   | **2001** | ** ** |   | **2000** | ** ** |
|                                                | ****                    |
|                                                | (Unaudited  )           |       |   | (Unaudited)           |       |
| Net sales                                           | $                       | 20,277     |   |                  | $          | 24,083 |   |   | $ | 40,046 |   |   | $ | 46,777 |   |
| Cost of goods sold                                  | 11,043                  |       |   | 14,808                |       |   | 22,109 |   |   | 26,720 |   |
|                                                |                         |            |        |                       |            |  |  |  |  |  |  |
| Gross profit                                        | 9,234                   |       |   | 9,275                 |       |   | 17,937 |   |   | 20,057 |   |
|                                                |                    |       |   |                  |       |   |   |   |   |   |   |
| Selling and marketing expenses                      | 4,788                   |       |   | 9,942                 |       |   | 9,542 |   |   | 16,385 |   |
| General and administrative expenses                 | 2,726                   |       |   | 2,713                 |       |   | 5,400 |   |   | 5,634 |   |
|                                                |                         |            |        |                       |            |  |  |  |  |  |  |
| Total operating expenses                            | 7,514                   |       |   | 12,655                |       |   | 14,942 |   |   | 22,019 |   |
|                                                |                         |            |        |                       |            |  |  |  |  |  |  |
| Operating income  (loss)                            | 1,720                   |       |   | (3,380                | )          |   | 2,995 |   |   | (1,962 | ) |
|                                                |                    |       |   |                  |       |   |   |   |   |   |   |
| Interest income                                     | 27                      |       |   | 26                    |       |   | 93 |   |   | 43 |   |
| Interest expense                                    | (209                    | )          |   | (342                  | )          |   | (481 | ) |   | (606 | ) |
|                                                |                         |            |        |                       |            |  |  |  |  |  |  |
| Income (loss) before income tax provision (benefit) | 1,538                   |       |   | (3,696                | )          |   | 2,607 |   |   | (2,525 | ) |
| Income tax provision (benefit)                      | 618                     |       |   | (1,288                | )          |   | 1,030 |   |   | (854 | ) |
|                                                |                         |            |        |                       |            |  |  |  |  |  |  |
| Net income (loss)                                   | $                       | 920        |   |                  | $          | (2,408 | ) |   | $ | 1,577 |   |   | $ | (1,671 | ) |
|                                                |                         |            |        |                       |            |  |  |  |  |  |  |
|                                                |                    |       |   |                  |       |   |   |   |   |   |   |
| Basic earnings (loss) per share                     | $                       | 0.07       |   |                  | $          | (0.18 | ) |   | $ | 0.12 |   |   | $ | (0.13 | ) |
|                                                |                    |       |   |                  |       |   |   |   |   |   |   |
| Diluted earnings (loss) per share                   | $                       | 0.07       |   |                  | $          | (0.18 | ) |   | $ | 0.12 |   |   | $ | (0.13 | ) |
|                                                |                    |       |   |                  |       |   |   |   |   |   |   |
| Weighted average shares outstanding - basic         | 12,742,282              |       |   | 13,163,430            |       |   | 12,791,880 |   |   | 13,238,175 |   |
|                                                |                    |       |   |                  |       |   |   |   |   |   |   |
| Weighted average shares outstanding - diluted       | 12,894,621              |       |   | 13,163,430            |       |   | 12,890,350 |   |   | 13,238,175 |   |

Seeaccompanying notes

 

 

NATROL, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE AMOUNTS)(Unaudited)

|                                                                                                | **Six  Months Ended June 30,**                |   |
|-----------------------------------------------------------------------------------------------------|-----------------------------------------------|--------|
|                                                                                                | **2001**                                      |   |   | **2000** |   |
|                                                                                                |                                               |   |
|                                                                                                |                                          |   |   |   |   |
| **Operating Activities**                                                                            |                                          |   |   |   |   |
| Net income (loss)                                                                                   | $                                             | 1,577  |   |   | $ | (1,671 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in) operating activities: |                                          |   |   |   |   |
|                                                                                                | Depreciation and amortization                 | 720    |   |   | 658 |   |
|                                                                                                | Amortization of goodwill                      | 1,140  |   |   | 1,140 |   |
|                                                                                                | Provision for bad debts                       | 307    |   |   | 102 |   |
|                                                                                                | Shares issued for services                    | 6      |   |   | 126 |   |
| Changes in operating assets and  liabilities:                                                       |                                          |   |   |   |   |
|                                                                                                | Accounts receivable                           | 695    |   |   | 715 |   |
|                                                                                                | Inventories                                   | 374    |   |   | 551 |   |
|                                                                                                | Income taxes receivable/payable               | 3,547  |   |   | (2,680 | ) |
|                                                                                                | Prepaid expenses and other current assets     | 3      |   |   | (628 | ) |
|                                                                                                | Accounts payable                              | 758    |   |   | (1,248 | ) |
|                                                                                                | Accrued expenses                              | (1,156 | ) |   | 342 |   |
|                                                                                                | Accrued payroll and related liabilities       | 136    |   |   | (796 | ) |
|                                                                                                |                                               |        |  |  |   |
|                                                                                                |                                          |   |   |   |   |
| Net cash provided by (used in) operating  activities                                                | 8,107                                         |   |   | (3,389 | ) |
|                                                                                                |                                          |   |   |   |   |
| **Investing Activities**                                                                            |                                          |   |   |   |   |
|                                                                                                | Purchases of property and equipment           | (135   | ) |   | (443 | ) |
|                                                                                                | Other assets                                  | 2      |   |   | 8 |   |
|                                                                                                |                                               |        |  |  |   |
|                                                                                                |                                          |   |   |   |   |
| Net cash used in investing activities                                                               | (133                                          | )      |   | (435 | ) |
|                                                                                                |                                          |   |   |   |   |
| **Financing Activities**                                                                            |                                          |   |   |   |   |
|                                                                                                | Proceeds (repayments) on line of credit,  net | (8,300 | ) |   | 6,850 |   |
|                                                                                                | Repayments on long-term debt                  | (109   | ) |   | (102 | ) |
|                                                                                                | Purchases of treasury shares                  | -      |   |   | (2,021 | ) |
|                                                                                                | Proceeds from stock purchase plan             | 2      |   |   | 45 |   |
|                                                                                                | Proceeds from exercise of stock options       | -      |   |   | 266 |   |
|                                                                                                |                                               |        |  |  |   |
| Net cash provided by (used in) financing  activities                                                | (8,407                                        | )      |   | 5,038 |   |
|                                                                                                |                                               |        |  |  |   |
| Net increase (decrease) in cash and cash  equivalents                                               | (433                                          | )      |   | 1,214 |   |
| Cash and cash equivalents, beginning of  period                                                     | 4,004                                         |   |   | 485 |   |
|                                                                                                |                                               |        |  |  |   |
| Cash and cash equivalents, end of period                                                            | $                                             | 3,571  |   |   | $ | 1,699 |   |
|                                                                                                |                                               |        |  |  |   |

Seeaccompanying notes

 

 

 

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

1.BASIS OF PRESENTATIONIn the opinion of management, the accompanying unaudited consolidated financialstatements include all necessary adjustments (consisting of normal recurringaccruals) and present fairly in all material respects the consolidated financialposition of Natrol, Inc. and its subsidiaries (collectively, the"Company" or "Natrol") as of June 30, 2001 and the resultsof its operations for the three and six months ended June 30, 2001 and 2000 andcash flows for the six months ended June 30, 2001 and 2000, in conformity withaccounting principles generally accepted in the United States for interimfinancial information applied on a consistent basis. The results of operationsfor the three and six months ended June 30, 2001 are not necessarily indicativeof the results to be expected for the full year.

Certaininformation and footnote disclosures which are normally included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States have been omitted. These consolidated financial statements should be read in conjunctionwith the audited consolidated financial statements and notes thereto includedin Natrol's December 31, 2000 audited consolidated financial statementsincluded in the Company's Form 10-K for the year ended December 31, 2000 asfiled with the Securities and Exchange Commission (file number 000–24567).

2.INVENTORIESInventories consist of the following:

|                                 | **June  30,** |   |   | **December  31,** |   |
|--------------------------------------|---------------|--------|--------|-------------------|--------|
|                                 | **2001**      |   |   | **2000**          |   |
|                                 | ****          |   | ****   | ****              |   |
|                                 |          |   |   |              |   |
| Raw  material and packaging supplies | $             | 6,598  |   |              | $      | 5,335 |   |
| Finished  goods                      | 5,274         |   |   | 6,912             |   |
|                                 |               |   |        |                   |   |
|                                 | $             | 11,872 |   |              | $      | 12,247 |   |
|                                 |               |   |        |                   |   |

3.COMPREHENSIVE INCOMEThe Company’s comprehensive income items were not material at June 30, 2001 orDecember 31, 2000 and therefore no disclosures have been made.

4.SHIPPING AND HANDLING COSTSOutbound shipping and fulfillment costs are classified as selling and marketingexpenses and totaled $839 and $763 for the three months ended June 30, 2001 and2000, respectively, and $1,575 and $1,514 for the six month periods ending June30, 2001 and June 30, 2000, respectively.

5.EARNINGS PER SHAREThe Company calculates earnings per share in accordance with SFAS No. 128"Earnings per share".  Basicearnings per share has been computed by dividing net income by the weightedaverage number of common shares outstanding. Diluted earnings per share hasbeen computed by dividing net income by the weighted average of securities orother contracts to issue Common Stock as if these securities were exercised orconverted to Common Stock.  Common Stockequivalent shares from stock options representing 1,682,500 shares have beenexcluded from the computation of diluted earnings per share for the threemonths ending June 30, 2001 and for the six months ending June 30, 2001 becausethe effect would be antidilutive.

6.STOCKHOLDERS' EQUITYSTOCK OPTIONSStatement of Financial Accounting Standards No. 123, “Accounting forStock-Based Compensation” encourages, but does not require, companies to recordcompensation cost for stock-based employee compensation plans at fair value.The Company has chosen to continue to account for stock-based compensationusing the intrinsic value method prescribed in Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees.” During the threemonths ended June 30, 2001, 460,000 stock options were granted with exerciseprices equal to the fair value of the underlying Common Stock on the date ofgrant.

RECEIVABLEFROM STOCKHOLDERThe receivable from stockholder represented an interest bearing note from astockholder issued by the stockholder to purchase 300,000 shares of theCompany’s Common Stock. The note bore interest at 6.60% per year with interestpayments due annually. In February 2001, the Company repurchased the 296,000remaining shares collateralizing the note by exchanging the outstanding notefor the shares. The closing price of the Company’s Common Stock on the date ofthe transaction was $1.875 per share, which is the same as the originalpurchase price paid by the stockholder, and the Company recorded no gain orloss on the transaction. The repurchased shares are included in treasury stockon the accompanying balance sheet.

7. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial AccountingStandards Board (FASB) issued Statements of Financial Accounting Standards No.141, Business Combinations, andNo. 142, Goodwill and Other IntangibleAssets, effective for fiscal years beginning after December 15, 2001.Under the new rules, goodwill will no longer be amortized but will be subjectto annual impairment tests in accordance with these new Statements. Otherintangible assets will continue to be amortized over their useful lives. TheCompany will apply the new rules on accounting for goodwill and otherintangible assets beginning in the first quarter of 2002. Application of thenonamortization provisions of the Statement could potentially result in adecrease in amortization expense of as much as $2,280 per year. However, during2002, the Company will perform the first of the required impairment tests ofgoodwill as of January 1, 2002 and has not yet determined what the effect ofthese tests will be on the earnings and financial position of the Company.

In April 2002, the Emerging Issues TaskForce (EITF) of the FASB reached a consensus on EITF Issue 00-25, Vendor Income Statement Characterization ofConsideration from a Vendor to a Retailer. This consensus creates apresumption that consideration paid by a vendor to a retailer, such as slottingfees and cooperative advertising, should be classified as a reduction ofrevenues unless certain criteria are met. This consensus is effective forfiscal quarters beginning after December 15, 2001. The adoption of thisconsensus will not impact the Company’s financial position or results ofoperations, although adoption may result in the reclassification of some ofthese expenses from selling and marketing expenses to a reduction of revenuesin the first quarter of fiscal 2002.

 

ITEM2:MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

CERTAINFACTORS THAT MAY AFFECT FUTURE RESULTSInformation contained or incorporated by reference in this quarterly report onForm 10–Q and in other SEC filings by the Company contains “forward lookingstatements.”  The Company is includingthis statement for the express purpose of availing itself of protections of thesafe harbor provided by the Private Securities Litigation Reform Act of 1995with respect to all such forward looking statements. Examples of forward looking statements include, but are not limited to,the use of forward–looking terminology such as "believes,""expects," "may," "will," "should","intend", "estimate", "assume", "plan"or "anticipates" or the negative thereof, other variations thereon,or comparable terminology, or by discussions of strategy that predict orindicate future events or trends or that are not historical facts. The Companycannot assure the future results or outcome of the matters described in thesestatements; rather, these statements merely reflect its current expectations ofthe approximate outcome of the matter discussed. The Company does not intend toupdate any such statements at any time in the future.

The Company's ability to predict results or the effectof certain events on the Company's operating results is inherently uncertain.Forward–looking statements should not be relied on since they involveknown and unknown risks, uncertainties and other factors, some of which arebeyond the Company's control. These risks, uncertainties and other factors maycause actual results, performance or achievements to differ materially from theanticipated future results, performance or achievements expressed or implied bysuch forward–looking statements. Therefore, the Company wishes to cautioneach reader of this report to carefully consider the following factors andcertain other factors discussed herein and in other past reports, including butnot limited to the prior year annual reports on Form 10-K filed with theSecurities and Exchange Commission. The factors discussed herein and containedin that Form 10-K may not be exhaustive. Therefore, the factors containedherein should be read together with other reports and documents that are filedby the Company with the SEC from time to time, including Form 10-Q which maysupplement, modify, supersede or update the factors listed in this document.

Factors that could cause or contribute to the Company'sactual results differing materially from those discussed herein or for theCompany's stock price to be affected adversely include, but are not limited to:(i) industry trends, including a general downturn or slowing of the growthof the dietary supplement industry which has occurred during the past year andmay continue, (ii) increased competition from current competitors and newmarket entrants, (iii) adverse publicity regarding the dietary supplementindustry or the Company's 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 distribution within new or existing accounts and new orexisting channels of trade, (vii) 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, (viii) adverse changes in government regulation,(ix) exposure to product liability claims, (x) dependence onsignificant customers, (xi) the Company's ability to keep and attract keymanagement employees, (xii) the Company's inability to manage growth andexecute its business plan, (xiii) the Company's ability to consummate futureacquisitions and its ability to integrate acquired businesses, includingwithout limitation Prolab Nutrition, Inc. ("Prolab"), acquiredin October, 1999, and to retain key personnel associated with any acquisition,(xiv) the absence of clinical trials for many of the Company's products,(xv) the Company's inability to obtain raw materials that are in shortsupply including its ability to obtain garlic powders under its supplyagreement with ConAgra for its Essentially Pure Ingredient (EPI) raw materialsales division, (xvi) sales and earnings volatility,(xvii) volatility of the stock market (xviii) the Company's abilityto manufacture its products efficiently, (xix) the Company's ability tomanage inventory or sell its inventory before such inventory becomes outdated,(xx) the Company's reliance on independent brokers to sell its products,(xxi) the inability of the Company to protect its intellectual property,(xxii) control of the Company by principal shareholders, (xxiii) thepossible sale of large amounts of stock by controlling shareholders,(xxiv) a general downturn in the national economy as a whole, and(xxv) continued market acceptance of Natrol supplements, Laci Le Beauteas, Prolab's sports nutrition products, and Essentially Pure Ingredients' rawmaterial products.

 

RESULTSOF OPERATIONS

THEFOLLOWING DISCUSSION OF THE RESULTS OF OPERATIONS AND FINANCIALCONDITION OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE RESPONSE TOPART I, ITEM 1 OF THIS REPORT.

THREEMONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000

NET SALES. Sales are recognized at thetime product is shipped. Net sales are net of discounts, allowances, andestimated returns and credits.  Netsales decreased 15.8%, or $3.8 million, to $20.3 million for the three monthsended June 30, 2001 from $24.1 million for the three months ended June 30,2001.  Net sales during the quarter wereadversely affected by returns of approximately $3.5 million which isapproximately $1.6 million more than the $1.9 million of returns experienced inthe quarter ending June 30, 2000. The remaining decline was due to an overallweakness in the general market for vitamins and nutritional supplements.  The Company cannot predict when consumerdemand for vitamins and supplements as a whole will improve.

GROSS PROFIT.  Gross profit decreased 0.4%, or $41,000, to $9.2 million for thethree months ended June 30, 2001 from $9.3 million for the three months endedJune 30, 2000. Gross margin increased to 45.5% for the three months ended June30, 2001 from 38.5% for the three months ended June 30, 2000.  Gross margin increased due to a decrease ininventory adjustments, a percentage decrease in manufacturing overhead expensesand positive changes in the product mix sold during the quarter ended June 30,2001.

SELLINGAND MARKETING EXPENSES.  Selling andmarketing expenses consist primarily of advertising and promotional expenses,cost of distribution, and related payroll expenses and commissions. Selling andmarketing expenses decreased 51.8%, or $5.2 million, to $4.8 million for thethree months ended June 30, 2001 from $9.9 million for the three months endedJune 30, 2000. The level of selling and marketing expenditures in the quarterending June 30, 2001 was in line with historical averages.  Sales and marketing expenditures in thequarter ending June 30, 2000 were high by historical standards, increasing118.7% relative the same quarter in 1999. The increase in the quarter ending June 30, 2000 was primarily due toadditional advertising and an increase in sales incentives and promotionalprograms with retailers designed to secure shelf space, increase sales toconsumers and support the Company’s higher level of sales.

GENERALAND ADMINISTRATIVE EXPENSES.  Generaland administrative expenses consist primarily of personnel costs related togeneral management functions, finance, accounting and information systems,research and development expenses, as well as professional fees related tolegal, audit and tax matters and depreciation and amortization. General andadministrative expenses were essentially the same, $2.7 million for the threemonths ended June 30, 2001 and for the three months ended June 30, 2000.  General and administrative expenses werefavorably affected by the fact that Elliott Balbert, President and Chairman ofthe Board of Natrol, voluntarily chose to not accept a salary during thisquarter. His salary during the quarter ended June 30, 2000 amounted to$150,000.  Had he not refused to take asalary during the quarter ending June 30, 2001, general and administrativeexpenses would have risen 6.0% to $2.9 million.  This increase was primarily attributable to a write down of baddebts during the quarter.  Mr. Balbertwill resume accepting a salary in the third quarter of 2001 amounting to$150,000 per quarter.

INTERESTEXPENSE.  Interest expense decreased38.9% to $209,000 for the three months ended June 30, 2001 from $342,000 forthe three months ended June 30, 2000. The decrease was due to the Company’sability to reduce the balance of its line of credit from $3.4 million to zeroduring the quarter. During the quarter ending June 30, 2000, the Companymaintained an average line of credit balance of $7.4 million.

INCOMETAX PROVISION. The Company’s effective tax rate increased to 40.2% in thesecond quarter of 2001 from 34.8% in the second quarter of 2000. Due to theCompany’s net loss for the three months ended June 30, 2000, the Companyrecorded an income tax benefit for that quarter.

SIXMONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000

NET SALES. Net sales decreased 14.4%, or$6.7 million, to $40.0 million for the six months ended June 30, 2001 from$46.8 million for the six months ended June 30, 2000. Net sales during the sixmonth period were adversely affected by returns of approximately $7.1 millionwhich is approximately $3.8 million more than the $3.3 million of returnsexperienced in the six months ending June 30, 2000. The remaining decline wasdue to an overall weakness in the general market for vitamins and nutritionalsupplements.  The Company cannot predictwhen consumer demand for vitamins and supplements as a whole will improve.

GROSS PROFIT.  Gross profit declined 10.6%, or $2.1 million, to $17.9 millionfor the six months ended June 30, 2001 from $20.1 million for the six monthsended June 30, 2000. Gross margin increased to 44.8% for the six months endedJune 30, 2001 from 42.9% for the six months ended June 30, 2000. Gross marginincreased due to a decrease in inventory adjustments, a percentage decrease inmanufacturing overhead expenses and positive changes in product mix sold duringthe six months ended June 30, 2001.

SELLINGAND MARKETING EXPENSES.  Selling andmarketing expenses consist primarily of advertising and promotional expenses,cost of distribution, and related payroll expenses and commissions. Selling andmarketing expenses decreased 41.8%, or $6.8 million, to $9.5 million for thesix months ended June 30, 2001 from $16.4 million for the six months ended June30, 2000. The level of selling and marketing expenditures during the six monthsending June 30, 2001 was in line with historical averages.  Selling and marketing expenses during thesix months ending June 30, 2000 were above historical averages  due to additional advertising and anincrease in sales incentives and promotional programs with retailers designedto secure shelf space, increase sales to consumers and support the Company’shigher level of sales.

GENERALAND ADMINISTRATIVE EXPENSES.  Generaland administrative expenses consist primarily of personnel costs related togeneral management functions, finance, accounting and information systems,research and development expenses, as well as professional fees related tolegal, audit and tax matters and depreciation and amortization. General andadministrative expenses decreased 4.2%, or $234,000 to $5.4 million for the sixmonths ended June 30, 2001 from $5.6 million for the six months ended June 30,2000. General and administrative expenses were favorably affected by the factthat Elliott Balbert, President and Chairman of the Board of Natrol, voluntarilychose to not accept a salary during the first six months of 2001. His salaryduring the six months ended June 30, 2000 amounted to $300,000.  Had he not refused to take a salary duringthe six months ending June 30, 2001, general and administrative expenses wouldhave risen by $66,000.  This increasewas primarily attributable to a write down of bad debts during the period.  Mr. Balbert will resume accepting a salaryin the third quarter of 2001 amounting to $150,000 per quarter.

INTERESTEXPENSE.  Interest expense decreased to$481,000 for the six months ended June 30, 2001 from $606,000 for the sixmonths ended June 30, 2000. The decrease was due to the Company’s ability toreduce its borrowings from its line of credit from $8.3 million to zero duringthe six months ending June 30, 2001. The Company increased its borrowings from its line of credit from $1.8million to $8.7 million during the six months ended June 30, 2000.

INCOMETAX PROVISION. The Company’s effective tax rate was increased to 39.5% in thesix months ended June 30, 2001 from 33.8% in the six months ended June 30,2000.  Due to the Company’s net loss forthe six months ended June 30, 2000, the Company recorded an income tax benefitfor the period.

**LIQUIDITYAND CAPITAL RESOURCES**

 

At June 30, 2001, the Company had working capital of$18.6 million, as compared to $15.4 million in working capital atDecember 31, 2000. The increase wasprimarily due to a decrease in the balance of the Company’s line of creditoffset by decreases in cash, trade receivables, inventories and income taxesreceivable.

Net cash provided by operating activitieswas $8.1 million for the six months ended June 30, 2001 versus net cash used of$3.4 million for the six months ended June 30, 2000. The increase in cash providedby operating activities during the six month period ended June 30, 2001 wasprimarily due to net income of $1.6 million, a decrease in trade receivables of$695,000, a decrease in inventory levels of $374,000, depreciation andamortization of $1.9 million, a decrease of prepaid expenses and income taxreceivables of $3.5 million offset by a decrease in accrued expenses of $1.2million.

Netcash used in investing activities was $133,000 for the six months ended June30, 2001 and $435,000 during the six months ended June 30, 2000. Nearly all ofthe investing activity in both periods was in property, plant and equipment.

Net cash used by financing activities was$8.4 million for the six months ended June 20, 2001 as opposed to $5.0 millionprovided by financing activities during the six months ended June 30, 2000.During the six ending June 30, 2001, the Company reduced its line of credit by$8.3 million as opposed to borrowing $6.9 million from its line of creditduring the six months ended June 30, 2000. The Company repaid $109,000 and $102,000 of long-term debt in the sixmonths ended June 30, 2001 and 2000, respectively.

As of June 30, 2001, the Company had $8.5 million ofoutstanding debt all of which is the result of a mortgage on the Company’s manufacturing/headquartersfacility and a mortgage on the Company’s shipping facility.

The Company’s cash balance at June 30, 2000 wasapproximately $3.6 million. The Company believes that this amount, togetherwith cash generated from operations and the cash availability from its line ofcredit, will be sufficient to fund its anticipated working capital needs andcapital expenditures (other than financing necessary to complete futureacquisitions, if any) for at least the next 12 months. The Company’s line ofcredit includes restrictions on future acquisitions and does not permit theCompany to pay dividends or to repurchase stock. Future borrowings forpotential acquisitions or other corporate needs may include additionalrestrictive covenants and such financing may not be available. In addition,there can be no assurance that attractive acquisition opportunities will beavailable to the Company or will be available at prices and upon such otherterms that are attractive to the Company. The Company regularly evaluates thepotential acquisition of other businesses, products and product lines and mayhold discussions regarding such potential acquisitions. As a general rule, theCompany will publicly announce such acquisitions only after a definitiveagreement has been signed. The Company currently has no commitments oragreements with respect to any acquisition. In addition, in order to meet itslong–term liquidity needs or consummate future acquisitions, the Companymay be required to incur additional indebtedness or issue additional equity anddebt securities, subject to market and other conditions. There can be noassurance that such additional financing will be available on terms acceptableto the Company or at all. The failure to raise the funds necessary to financeits future cash requirements or consummate future acquisitions could adverselyaffect the Company's ability to pursue its strategy and could negatively affectits operations in future periods.

Item3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK

The following discussion about the Company's market riskdisclosures involves forward–looking statements. Actual results coulddiffer materially from those projected in the forward–looking statements.The Company is exposed to market risk related to changes in interest rates. Therisks related to foreign currency exchange rates are immaterial and the Companydoes not use derivative financial instruments.

TheCompany is subject to interest rate market risk associated with its variablerate line of credit and fixed rate long-term debt. Given the short-term natureand variable rates on borrowings on the 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 II            |
|--------------------|
| OTHER  INFORMATION |

ITEM4.   SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS

| a) | The 2001 Annual Meeting of Stockholders of Natrol,  Inc. (the “Annual Meeting”) was held on June 14, 2001. |
|----|----------------------------------------------------------------------------------------------------------------------|
| b) | At the Annual Meeting, the following were  re-elected to the Company’s Board of Directors:                      |

 

|   |              | Votes  For | Votes  Withheld |
|--------|-------------------|------------|-----------------|
|   |              |            |                 |
|   | Elliott  Balbert  | 13,052,759 | 37,745          |
|   | Dennis  DeConcini | 12,037,919 | 52,585          |

Thefollowing individuals are members of the Company’s Board of Directors whoseterms of office as directors continued after the Annual Meeting:

|   | Vernon  Brunner    |
|--------|--------------------|
|   | Dennis  Griffin    |
|   | Dennis  Jolicoeur  |
|   | Norman  Kahn       |
|   | P.  Andrews McLane |

 

ITEM6.  EXHIBITS AND REPORTS ON FORM 8-K

No reports on Form 8-K were filed duringthe quarter for which this report is filed

 

|   | SIGNATURES |
|--------|------------|

Pursuantto the requirements of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

|          |                                             | NATROL, INC.                       |   |
|---------------|--------------------------------------------------|------------------------------------|--------|
|          |                                             |                               |   |
| Date: 8/14/01 |                                             | By:   /s/ Elliott Balbert     |   |
|          |                                             |                                    |   |
|          | Chairman, President and Chief Executive  Officer |                               |
|          |                                             |                               |   |
| Date: 8/14/01 |                                             | By:   /s/ Dennis R. Jolicoeur |   |
|          |                                             |                                    |   |
|          | Chief Financial Officer and Executive            |                               |
|          | Vice President                                   |                               |