** **

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

----

**FORM 10–Q**

**(Mark one)     **

        ý           **QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001**

** **

**OR**

** **

        o            **TRANSITION REPORTPURSUANT 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                          | November 1, 2001 |
|--------------------------------|------------------|
|                           |
| Common stock, $0.01  par value | 12,783,454       |

 

PART1

FINANCIAL INFORMATION

ITEM1. CONSOLIDATED FINANCIAL STATEMENTS

NATROL,INC.CONSOLIDATED BALANCE SHEETS(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
|                                                                                                                                  |   | **September 30,** |   | **December 31,** |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|--------|------------------|--------|
|                                                                                                                                  |   | **2001**          |   | **2000**         |   |
|                                                                                                                                  |   | (Unaudited)       |   |             |   |
| **Assets**                                                                                                                            |   |              |   |             |   |
| Current  assets:                                                                                                                      |   |              |   |             |   |
| Cash  and cash equivalents                                                                                                            |   | $                 | 3,535  |             | $      | 4,004 |   |
| Accounts  receivable, net of allowances of $652 and $479 at September 30, 2001 and  December 31, 2000, respectively                   |   | 11,545            |   | 9,574            |   |
| Inventories                                                                                                                           |   | 13,014            |   | 12,247           |   |
| Deferred  taxes                                                                                                                       |   | 1,076             |   | 1,076            |   |
| Income  taxes receivable                                                                                                              |   | 526               |   | 4,091            |   |
| Prepaid  expenses and other current assets                                                                                            |   | 1,637             |   | 839              |   |
| Total  current assets                                                                                                                 |   | 31,333            |   | 31,831           |   |
|                                                                                                                                  |   |              |   |             |   |
| Property  and equipment:                                                                                                              |   |              |   |             |   |
| Building  and improvements                                                                                                            |   | 15,625            |   | 15,571           |   |
| Machinery  and equipment                                                                                                              |   | 5,616             |   | 5,539            |   |
| Furniture  and office equipment                                                                                                       |   | 1,978             |   | 1,863            |   |
|                                                                                                                                  |   | 23,219            |   | 22,973           |   |
| Accumulated  depreciation and amortization                                                                                            |   | (5,261            | )      | (4,215           | )      |
|                                                                                                                                  |   | 17,958            |   | 18,758           |   |
|                                                                                                                                  |   |              |   |             |   |
| Goodwill,  net of accumulated amortiz­ation of $5,853 and $4,143 at September 30, 2001  and December 31, 2000, respectively |   | 35,554            |   | 37,264           |   |
| Other  assets                                                                                                                         |   | 56                |   | 68               |   |
| Total  assets                                                                                                                         |   | $                 | 84,901 |             | $      | 87,921 |   |

See accompanying notes

 
|                                                                                                                               |   | **September  30,** |   | **December 31,** |       |
|------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|------------------|------------|
|                                                                                                                               |   | **2001**                |   | **2000**         |       |
| **Liabilities and  stockholders’ equity**                                                                                     |   | (Unaudited)             |   |             | ** ** |
| Current  liabilities:                                                                                                              |   |                    |   |             |       |
| Line  of credit                                                                                                                    |   | $                       | -      |             | $          | 8,300 |   |
| Accounts  payable                                                                                                                  |   | 5,825                   |   | 4,186            |       |
| Accrued  expenses                                                                                                                  |   | 3,887                   |   | 2,967            |       |
| Accrued  payroll and related liabilities                                                                                           |   | 940                     |   | 723              |       |
| Current  portion of long–term debt                                                                                            |   | 256                     |   | 256              |       |
| Total  current liabilities                                                                                                         |   | 10,908                  |   | 16,432           |       |
|                                                                                                                               |   |                    |   |             |       |
| Deferred  income taxes, noncurrent                                                                                                 |   | 226                     |   | 226              |       |
| Long–term  debt, less current portion                                                                                         |   | 8,172                   |   | 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 – 13,705,354 and 13,658,820 at September 30, 2001 and  December 31, 2000, respectively    |   | 137                     |   | 137              |       |
| Additional  paid–in capital                                                                                                   |   | 61,859                  |   | 61,782           |       |
| Retained  earnings                                                                                                                 |   | 6,480                   |   | 3,855            |       |
|                                                                                                                               |   | 68,476                  |   | 65,774           |       |
| Shares  held in treasury, at cost— 921,900 and 625,900 shares at September 30, 2001  and December 31, 2000, respectively |   | (2,881                  | )      | (2,327           | )          |
| Receivable  from stockholder                                                                                                       |   | -                       |   | (554             | )          |
| Total  stockholders’ equity                                                                                                   |   | 65,595                  |   | 62,893           |       |
| Total  liabilities and stockholders’ equity                                                                                   |   | $                       | 84,901 |             | $          | 87,921 |   |

See accompanying notes

 

NATROL, INC.****CONSOLIDATEDSTATEMENTS OF OPERATIONS(IN THOUSANDS EXCEPT FOR SHARE AND PER SHAREAMOUNTS)
|   | **Three  months ended September 30,** | ** ** | **Nine  months ended September  30,** | ** ** |  
 

** **

** **

 
 

**2001**

** **

**2000**

** **

**2001**

** **

**2000**

** **

 
 

(Unaudited  )

 

(Unaudited)

 

 
Net sales

$

21,199

 

$

22,283

 

$

61,245

 

$

69,061

 

Cost of goods sold

10,937

 

12,109

 

33,046

 

30,232

 

Gross profit

10,262

 

10,174

 

28,199

 

30,232

 

 

 

 

 

 

 

 

 

 

Selling and marketing expenses

5,616

 

7,652

 

15,158

 

24,038

 

General and administrative expenses

2,800

 

2,926

 

8,201

 

8,560

 

Total operating expenses

8,416

 

10,578

 

23,359

 

32,598

 

Operating income  (loss)

1,846

 

(404

)

4,840

 

(2,366

)

 

 

 

 

 

 

 

 

 

Interest income

32

 

27

 

      126

 

70

 

Interest expense

(153

)

(463

)

(634

)

(1,069

)

Income (loss) before income tax provision (benefit)

1,725

 

(840

)

4,332

 

(3,365

)

Income tax provision (benefit)

677

 

(319

)

1,707

 

(1,172

)

Net income (loss)

$

1,048

 

$

(521

)

$

2,625

 

$

(2,193

)

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

$

0.08

 

$

(0.04

)

$

0.21

 

$

(0.16

)

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share

$

0.08

 

$

(0.04

)

$

0.20

 

$

(0.16

)

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

12,764,768

 

13,112,295

 

12,790,393

 

13,305,898

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - diluted

13,455,018

 

13,112,295

 

13,202,837

 

13,305,898

 

Seeaccompanying notes

 

 

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

 

**Nine  Months Ended September 30,**

 

 

**2001**

 

 

**2000**

 

**Operating Activities**

 

 

 

 

 

Net income (loss)

$

2,625

 

 

$

(2,193

)

Adjustments to reconcile  net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation  and amortization

1,046

 

 

993

 

Amortization  of goodwill

1,710

 

 

1,710

 

Provision  for bad debts

436

 

 

95

 

Shares  issued for services

8

 

 

126

 

Changes in  operating assets and liabilities:

 

 

 

 

 

Accounts  receivable

(2,407

)

 

1,247

 

Inventories

(768

)

 

705

 

Income taxes  receivable/payable

3,565

 

 

(2,940

)

Prepaid  expenses and other current assets

(798

)

 

(1,313

)

Accounts  payable

1,639

 

 

(22

)

Accrued  expenses

920

 

 

448

 

Accrued  payroll and related liabilities

217

 

 

(625

)

Net cash  provided by (used in) operating activities

8,193

 

 

(1,769

)

 

 

 

 

 

 

**Investing Activities**

 

 

 

 

 

Purchases of  property and equipment

(246

)

 

(525

)

Other assets

12

 

 

11

 

Net cash  used in investing activities

(234

)

 

(514

)

 

 

 

 

 

 

**Financing Activities**

 

 

 

 

 

Proceeds  (repayments) on line of credit, net

(8,300

)

 

7,500

 

Repayments  on long-term debt

(197

)

 

(173

)

Purchases of  treasury shares

-

 

 

(2,327

)

Proceeds  from stock purchase plan

22

 

 

47

 

Proceeds  from exercise of stock options

47

 

 

264

 

Net cash  provided by (used in) financing activities

(8,428

)

 

5,311

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash  equivalents

(469

)

 

3,028

 

Cash and cash equivalents, beginning of  period

4,004

 

 

485

 

Cash and cash equivalents, end of period

$

3,535

 

 

$

3,513

 

 

 

 

 

 

 

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 consolidatedfinancial position of Natrol, Inc. and its subsidiaries (collectively, the"Company" or "Natrol") as of September 30, 2001 and theresults of its operations for the three and nine months ended September 30,2001 and 2000 and cash flows for the nine months ended September 30, 2001 and2000, in conformity with accounting principles generally accepted in the UnitedStates for interim financial information applied on a consistent basis. Theresults of operations for the three and nine months ended September 30, 2001are not necessarily indicative of 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:

 

**September  30,**

 

**December  31,**

 

 

**2001**

 

**2000**

 

 

 

 

 

 

Raw  material and packaging supplies

$

5,669

 

$

5,335

 

Finished  goods

7,345

 

6,912

 

 

$

13,014

 

$

12,247

 

3.COMPREHENSIVE INCOMEThe Company’s comprehensive income items were not material at September 30,2001 and 2000, or December 31, 2000 and therefore no disclosures have beenmade.

4.SHIPPING AND HANDLING COSTSOutbound shipping and fulfillment costs are classified as selling and marketingexpenses and totaled $878 and $818 for the three months ended September 30,2001 and 2000, respectively, and $2,453 and $2,332 for the nine month periodsending September 30, 2001 and September 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 1,060,000 shares have beenexcluded from the computation of diluted earnings per share for the threemonths ending September 30, 2001 and for the nine months ending September 30,2001 because the 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 September 30, 2001, 15,000 stock options were granted withexercise prices equal to the fair value of the underlying Common Stock on thedate of grant.

RECEIVABLEFROM STOCKHOLDERThe receivable from stockholder represented an interest bearing note from astockholder issued by the stockholder to purchase 300,000 shares of the Company’sCommon Stock. The note bore interest at 6.60% per year with interest paymentsdue annually. In February 2001, the Company repurchased the 296,000 remainingshares collateralizing the note by exchanging the outstanding note for theshares. The closing price of the Company’s Common Stock on the date of thetransaction was $1.875 per share, which is the same as the original purchaseprice paid by the stockholder, and the Company recorded no gain or loss on thetransaction. The repurchased shares are included in treasury stock on theaccompanying balance sheet.

7.CREDIT AGREEMENT

InAugust 2001, the Company amended its credit agreement with its bank to reducethe amount of the revolving line of credit available for borrowings from $10.0million to $5.0 million, based on a formula. Other terms of the agreementremain substantially the same.

8. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial AccountingStandards Board (FASB) issued Statements of Financial Accounting Standards No.141, *BusinessCombinations*, and No. 142, *Goodwill and Other Intangible Assets*,effective for fiscal years beginning after December 15, 2001. Under the newrules, goodwill will no longer be amortized but will be subject to annualimpairment tests in accordance with these new Statements. Other intangibleassets will continue to be amortized over their useful lives. The Company willapply the new rules on accounting for goodwill and other intangible assetsbeginning in the first quarter of 2002. Application of the nonamortizationprovisions of the Statement could potentially result in a decrease inamortization expense of as much as $2,280 per year. However, during 2002, theCompany will perform the first of the required impairment tests of goodwill asof January 1, 2002 and has not yet determined what the effect of these testswill be on the earnings and financial position of the Company.

InApril 2001, the Emerging Issues Task Force (EITF) of the FASB reached aconsensus 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 “forwardlooking statements.”  The Company isincluding this statement for the express purpose of availing itself ofprotections of the safe harbor provided by the Private Securities LitigationReform Act of 1995 with 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 negativethereof, other variations thereon, or comparable terminology, or by discussionsof strategy that predict or indicate future events or trends or that are nothistorical facts. The Company cannot assure the future results or outcome ofthe matters described in these statements; rather, these statements merelyreflect its current expectations of the approximate outcome of the matterdiscussed. The Company does not intend to update any such statements at anytime 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 consummatefuture acquisitions and its ability to integrate acquired businesses, includingwithout limitation Prolab Nutrition, Inc. ("Prolab"), acquiredin October, 1999 (xiv) the absence of clinical trials for many of theCompany's products, (xv) the Company's inability to obtain raw materialsthat are in short supply including its ability to obtain garlic powders underits supply agreement with ConAgra for its Essentially Pure Ingredient (EPI) rawmaterial sales 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) controlof the Company by principal shareholders, (xxiii) the possible sale oflarge amounts of stock by controlling shareholders, (xxiv) a continuedgeneral downturn in the national economy as a whole,  (xxv) continued market acceptance of Natrol supplements, LaciLe Beau teas, Prolab's sports nutrition products, and Essentially PureIngredients' raw material products, and (xxvi) continuing political andeconomic uncertainty stemming from terrorists attacks on the United States andthe ongoing war on terrorism.

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 SEPTEMBER 30, 2001 AND SEPTEMBER 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 4.9%, or $1.1 million, to $21.2 million for the three monthsended September 30, 2001 from $22.3 million for the three months endedSeptember 30, 2000.  Net sales duringthe quarter were adversely affected by returns of approximately $2.6 millionwhich is approximately $0.6 million less than the $3.2 million of returnsexperienced in the quarter ending September 30, 2000. The net decline inshipments  of $1.7 million was due to anoverall 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 increased 0.9%, or $88,000, to $10.3 million for thethree months ended September 30, 2001 from $10.2 million for the three monthsended September 30, 2000. Gross margin increased to 48.4% for the three months endedSeptember 30, 2001 from 45.7% for the three months ended September 30,2000.  Gross margin increased due to alower level of returns, a decrease in inventory adjustments, a percentagedecrease in manufacturing overhead expenses and positive changes in the productmix sold during the quarter ended September 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 26.6%, or $2.0 million, to $5.6 million for thethree months ended September 30, 2001 from $7.7 million for the three monthsended September 30, 2000. The level of selling and marketing expenditures inthe quarter ending September 30, 2001 was in line with historicalaverages.  Sales and marketingexpenditures in the quarter ending September 30, 2000 were high by historicalstandards, increasing 50.6% relative the same quarter in 1999.  The increase in the quarter ending September30, 2000 was primarily due to additional advertising and an increase in salesincentives and promotional programs with retailers designed to secure shelfspace, increase sales to consumers and support the Company’s higher level ofsales.

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 4.3%, or $126,000, to $2.8 million  for the three months ended September 30,2001 from  $2.9 million for the threemonths ended September 30, 2000.  Thedecrease is not considered to be of significance for the quarter.

INTERESTEXPENSE.  Interest expense decreased66.9% to $153,000 for the three months ended September 30, 2001 from $463,000for the three months ended September 30, 2000. The decrease was due to the factthat the Company did not use its line of credit during the quarter endedSeptember 30, 2001. During the quarter ending September 30, 2000, the Companymaintained an average line of credit balance of $9.0 million.

INCOMETAX PROVISION. The Company’s effective tax rate increased to 39.2% in the thirdquarter of 2001 from 38.0% in the third quarter of 2000. Due to the Company’snet loss for the three months ended September 30, 2000, the Company recorded anincome tax benefit for that quarter.

NINE  MONTHS ENDED SEPTEMBER 30, 2001 ANDSEPTEMBER 30, 2000

NET SALES. Net sales decreased 11.3%, or$7.8million, to $61.2 million for the nine months ended September 30, 2001 from$69.1 million for the nine months endedSeptember 30, 2000. Net sales during the nine month period were adverselyaffected by returns of approximately $9.8 million which is approximately $2.7million more than the $7.1 million of returns experienced in the nine monthsending September 30, 2000. The remaining decline was due to an overall weaknessin 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 declined 6.7%, or $2.0 million, to $28.2 million forthe nine months ended September 30, 2001 from $30.2 million for the nine monthsended September 30, 2000. Gross margin increased to 46.0% for the nine monthsended September 30, 2001 from 43.8% for the nine months ended September 30,2000. Gross margin increased due to a decrease in inventory adjustments, apercentage decrease in manufacturing overhead expenses and positive changes inproduct mix sold during the nine months ended September 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 36.9%, or $8.8 million, to $15.2 million for the ninemonths ended September 30, 2001 from $24.0 million for the nine months endedSeptember 30, 2000. The level of selling and marketing expenditures during thenine months ending September 30, 2001 was in line with historical averages.  Selling and marketing expenses during thenine months ending September 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 $359,000 to $8.2 million for thenine months ended September 30, 2001 from $8.6 million for the nine monthsended September 30, 2000. General and administrative expenses were favorablyaffected by the fact that Elliott Balbert, President and Chairman of the Boardof Natrol, voluntarily chose to not accept a salary during the first six monthsof 2001. His salary during the six months ended June 30, 2000 amounted to$300,000.  Had he not refused to take asalary during the nine months ending September 30, 2001, general andadministrative expenses would have declined by $59,000.  The Company does not consider the change inyear over year general and administrative expenses to be significant.

INTERESTEXPENSE.  Interest expense decreased to$634,000 for the nine months ended September 30, 2001 from $1.1 million for thenine months ended September 30, 2000. The decrease was due to the Company’sability to reduce its borrowings from its line of credit from $8.3 million tozero during the nine months ending September 30, 2001.  The Company increased its borrowings fromits line of credit from $1.8 million to $9.3 million during the nine monthsended September 30, 2000.

INCOMETAX PROVISION. The Company’s effective tax rate increased to 39.4% in the ninemonths ended September 30, 2001 from 34.9% in the nine months ended September30, 2000.  Due to the Company’s net lossfor the nine months ended September 30, 2000, the Company recorded an incometax benefit for that period.

**LIQUIDITYAND CAPITAL RESOURCE**

At September 30, 2001, the Company had working capital of$20.4 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 credit, anincrease in trade receivables, inventories and prepaid expenses,  offset by decreases in cash, income tax  receivables and an increase in tradepayables, accrued expenses and accrued payroll liabilities

Net cash provided by operating activitieswas $8.2 million for the nine months ended September 30, 2001 versus net cashused of $1.8 million for the nine months ended September 30, 2000. The increasein cash provided by operating activities during the nine month period endedSeptember 30, 2001 was primarily due to net income of $2.6 million, a decreasein income tax receivables of $3.6 million, an increase in payables, accruedexpenses and payroll liabilities of $2.8 million, offset by an increase inaccounts receivable of $2.4 million and an increase in inventories of  $0.8 million.

Netcash used in investing activities was $234,000 for the nine months endedSeptember 30, 2001 and $514,000 during the nine months ended September 30,2000. Nearly all of the investing activity in both periods was in property,plant and equipment.

Net cash used by financing activities was$8.4 million for the nine months ended September 30, 2001 as opposed to $5.3million provided by financing activities during the nine months ended September30, 2000. During the nine ending September 30, 2001, the Company reduced itsline of credit by $8.3 million as opposed to borrowing $7.5 million from itsline of credit during the nine months ended September 30, 2000.  The Company repaid $198,000 and $173,000 oflong-term debt in the nine months ended September 30, 2001 and 2000,respectively. During the nine months ended September 30, 2000 the Companyrepurchased $2.3 million of stock which it classified as treasury shares.  The Company also received $264,000 from theexercise of employee stock options as well as $47,000 from the Company’semployee stock purchase plan during the nine months ended September 30, 2000.

As of September 30, 2001, the Company had $8.4 million ofoutstanding debt all of which is the result of a mortgage on the Company’smanufacturing/headquarters facility and a mortgage on the Company’s shippingfacility.

The Company’s cash balance at September 30, 2001 wasapproximately $3.5 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 entered intoan amendment of its line of credit with Wells Fargo Bank, N.A. on August 1,2001 to reduce borrowing availability under the line of credit from $10.0million to $5.0 million. The Company’s line of credit includes restrictions onfuture acquisitions and does not permit the Company to pay dividends or torepurchase stock. Future borrowings for potential acquisitions or othercorporate needs may include additional restrictive covenants and such financingmay not be available. In addition, there can be no assurance that attractiveacquisition opportunities will be available to the Company or will be availableat prices and upon such other terms that are attractive to the Company. TheCompany regularly evaluates the potential acquisition of other businesses,products and product lines and may hold discussions regarding such potentialacquisitions. As a general rule, the Company will publicly announce suchacquisitions only after a definitive agreement has been signed. The Companycurrently has no commitments or agreements with respect to any acquisition. Inaddition, in order to meet its long–term liquidity needs or consummatefuture acquisitions, the Company may be required to incur additionalindebtedness or issue additional equity and debt securities, subject to marketand other conditions. There can be no assurance that such additional financingwill be available on terms acceptable to the Company or at all. The failure toraise the funds necessary to finance its future cash requirements or consummatefuture acquisitions could adversely affect the Company's ability to pursue itsstrategy and could negatively affect its operations in future periods.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK

The following discussion about the Company's market riskdisclosures involves forward–looking statements. Actual results could differmaterially from those projected in the forward–looking statements. TheCompany 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

OTHERINFORMATION

 

ITEM6.  EXHIBITS AND REPORTS ON FORM 8-K

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

Exhibit 10.1  First Amendment to Credit Agreement with Wells Fargo Bank, N.A.entered into on August 1, 2001

 

                        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: 11/14/01

 

By:   /s/ Elliott Balbert

 

 

 

 

 

 

 

Chairman, President and Chief Executive  Officer

 

 

 

 

 

Date: 11/14/01

 

By:   /s/ Dennis R. Jolicoeur

 

 

 

 

 

 

 

Chief Financial Officer and Executive Vice  President

 

 

 

 

 

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