Natrol plans expansion of bulk sales of dietary supplements -- IPO.

NATROL PLANS EXPANSION OF BULK SALES OF SUPPLEMENT INGREDIENTS, the company said in a recent prospectus for an initial stock offering. Part of the company's strategy for growth involves expanding bulk sales to other manufacturers, distributors and marketers of dietary supplements. In addition to its dietary supplement product business, Chatsworth, Calif.-based Natrol sells "dehydrated vegetable products, primarily garlic" under an exclusive agreement with Suisun, Calif.-based Basic Vegetable Products. "In the future, the company may seek to expand its bulk sales activities to include sales of such other bulk raw materials used in the manufacture of dietary supplements."

According to the company's latest preliminary prospectus, dated July 2, public sale of Natrol stock could begin at the end of July at an offering price of between $12 and $14. The sale of approximately 3.9 mil. shares of common stock is anticipated to net proceeds of approximately $37.7 mil. Natrol will not receive the proceeds of the sale of 740,000 shares also being offered by selling stockholders.

Natrol plans to use the proceeds for the repayment of existing debt, redemption of all outstanding shares of redeemable preferred stock, capital expenditures, working capital and "other general corporate purposes, including possible acquisitions." The company "routinely evaluates potential acquisitions of businesses and products that would complement or expand the company's business or further its strategic goals," the prospectus notes, adding the firm has no "commitments or agreements" for any acquisitions.

Natrol also plans to "enter or expand" its distribution in mail order, Internet, direct sales, direct retail and international sales channels. The firm's products have been sold in Canada, China, Turkey, Indonesia, Korea and some South American countries.

Through the first quarter, sales were up 32.4% to $13.1 mil. Of the $3.2 mil. increase, $1.2 mil., or 37.5%, was attributable to net sales of Pure-Gar, which markets the Quintessence and Highgar Farms garlic products, acquired by the firm in February, Natrol said.

Sales in 1997 were $42.9 mil., up 5.2% over 1996 annual sales of $40.8 mil. Natrol sales increased 73.1% between 1995 and 1996, rising from $23.6 mil., after the firm's sales almost doubled between 1994 ($12.2 mil.) and 1995. The prospectus notes Natrol invested in the construction of a 90,000 sq. ft. manufacturing and headquarters facility the company has occupied since March 1997.

Sales to Walgreen's represented 15.3% of sales in the first quarter, and 17.7% and 12.6% of sales in 1997 and 1996, respectively. Sales to dietary supplement distributor Tree of Life made up 10.4% of sales in the first quarter and 11.6% and 10.2% of Natrol sales in 1997 and 1996, respectively, while sales to GNC accounted for 3% of first quarter sales and 2.3% and 14.5% of sales in the previous two years.

Natrol's pro forma net income for the first quarter was $1.1 mil., a 34.6% rise from net income of $810,000 in the first quarter of 1997. Earnings for 1997 (pro forma) of $3.5 mil. dropped 40.7% from 1996 earnings of $5.9 mil. Numbers were adjusted to account for the purchase of Pure-Gar.

Natrol spent $2.1 mil. on advertising and marketing in the first three months. In 1997, the company dedicated 16.2% of annual net sales, or $6.9 mil., to marketing and advertising, after spending $5.6 mil. (13.8%) and $2.5 mil. (10.5%) in 1996 and 1995, respectively. Natrol says it "seeks to invest approximately 15% of its annual net sales on marketing and advertising on an ongoing basis."

The prospectus highlights ad programs such as the "Natrol Health Minute," to be broadcast in 1998 on syndicated radio talk shows Laura Schlessinger and Rush Limbaugh, TV ads on the CNN network, and print ads in magazines such as Better Nutrition, Great Life and Delicious, as well as Prevention, Health, USA Today, TV Guide, McCalls, Family Circle and Woman's Day.

During the last three years, the company's net sales "have been affected by the success of certain products, including melatonin and DHEA, which were introduced in 1995 and 1996, respectively," the prospectus notes. "During 1995 and 1996, these products gained substantial popularity with the general public" and generated net sales of $6.7 mil. in 1995 and $22.9 mil. in 1996.

During 1997, sales of Natrol melatonin and DHEA "declined by an aggregate of $13.1 mil., or 57.1%," the company says. Natrol "anticipated" this decline and launched "30 new products with 58 SKUs in 1997, which accounted for $8.9 mil., or 20.7%, of net sales in 1997."

Natrol DHEA sales "peaked" at $4.6 mil. in the first three months of 1996, accounting for 39.5% of the company's net sales in that period. However, sales of the product reached "only $273,000 or 2.1% of the company's net sales," for the first quarter.

Natrol was founded in 1980 by Chairman, CEO and President Elliott Balbert. Products include brands such as Kavatrol kava kava, My Favorite Multiple, Mood Support with St. John's wort, SAF and SAF for Kids and Thera-C. Natrol is now launching a line of weight loss dietary supplements, including Cravex and an Absorbital Fat Binder product ("The Tan Sheet" July 6, p. 5).