UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the period ended December 31, 2001
Commission File Number: 0-10666
-------
NBTY, INC.
(Exact name of registrant as specified in charter)
DELAWARE 11-2228617
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
90 Orville Drive
Bohemia, New York 11716
- --------------------------------------- -------------------
(Address of principal executive office) (Zip Code)
(631) 567-9500
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registration was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES [X] NO
Shares of Common Stock as of January 25, 2002: 65,799,258
NBTY, INC. and SUBSIDIARIES
INDEX
PART I Financial Information
Condensed Consolidated Balance Sheets -
December 31, 2001 (unaudited) and
September 30, 2001 1
Condensed Consolidated Statements of Income -
(unaudited) Three months ended
December 31, 2001 and 2000 2
Condensed Consolidated Statements of
Stockholders' Equity and Comprehensive Income -
Year ended September 30, 2001
and (unaudited) Three months ended
December 31, 2001 3
Condensed Consolidated Statements of Cash Flows -
(unaudited) Three months ended
December 31, 2001 and 2000 4 - 5
Notes to Condensed Consolidated
Financial Statements (unaudited) 6 - 12
Management's Discussion and Analysis
of Financial Condition and
Results of Operations 13 - 17
Qualitative and Quantitative Disclosures
about Market Risk 18
PART II Other Information 19
Signature 20
NBTY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars and shares in thousands)
Assets December 31, September 30,
2001 2001
------------ -------------
(Unaudited)
<s> <c> <c>
Current assets:
Cash and cash equivalents $ 39,610 $ 34,434
Accounts receivable, less allowance for
doubtful accounts of $3,672 at
December 31, 2001 and $3,222 at
September 30, 2001 35,853 34,730
Inventories 176,189 184,745
Deferred income taxes 5,318 5,318
Prepaid expenses and other current assets 18,626 21,341
------------------------
Total current assets 275,596 280,568
Property, plant and equipment, net 225,208 229,216
Intangible assets, net 188,243 185,728
Other assets 7,200 12,950
------------------------
Total assets $696,247 $708,462
========================
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt
and capital lease obligations $ 34,709 $ 34,911
Accounts payable 44,640 50,673
Accrued expenses 57,040 63,876
------------------------
Total current liabilities 136,389 149,460
Long-term debt 228,586 236,967
Obligations under capital leases 67 269
Deferred income taxes 16,736 16,761
Other liabilities 2,596 2,599
------------------------
Total liabilities 384,374 406,056
------------------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.008 par; authorized; 175,000
shares; issued 65,730 shares at December 31,
2001 and 65,724 shares at September 30, 2001
and outstanding 65,730 shares at December 31,
2001 and 65,724 shares at September 30, 2001 526 526
Capital in excess of par 122,549 122,513
Retained earnings 204,348 193,184
------------------------
327,423 316,223
Stock subscriptions receivable (839) (839)
Accumulated other comprehensive loss (14,711) (12,978)
------------------------
Total stockholders' equity 311,873 302,406
------------------------
Total liabilities and stockholders' equity $696,247 $708,462
========================
See notes to condensed consolidated financial statements.
1
NBTY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars and shares in thousands, except per share amounts)
For the three months
ended December 31,
---------------------
2001 2000
---- ----
<s> <c> <c>
Net sales $215,090 $166,829
---------------------
Costs and expenses:
Cost of sales 100,910 74,505
Catalog printing, postage and promotion 9,010 15,710
Selling, general and administrative 81,912 72,031
---------------------
191,832 162,246
---------------------
Income from operations 23,258 4,583
---------------------
Other income (expense):
Interest, net (6,008) (4,971)
Miscellaneous, net 903 1,426
---------------------
(5,105) (3,545)
---------------------
Income before income taxes 18,153 1,038
Income taxes 6,989 399
---------------------
Net income $ 11,164 $ 639
=====================
Net income per share:
Basic $ 0.17 $ 0.01
Diluted $ 0.17 $ 0.01
Weighted average common shares outstanding:
Basic 65,727 67,064
Diluted 67,251 67,254
See notes to condensed consolidated financial statements.
2
NBTY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME FOR THE YEAR ENDED SEPTEMBER 30, 2001
AND THE THREE MONTHS ENDED DECEMBER 31, 2001
(Unaudited)
(Dollars and shares in thousands)
Accumu-
lated
Common Stock Treasury Stock Other Total
----------------- Capital -------------------- Stock Compre Total Compre-
Number of in Excess Retained Number of Subscriptions hensive Stockholders' hensive
Shares Amount of Par Earnings Shares Amount Receivable Loss Equity Income
--------- ------ --------- -------- --------- ------ ------------- ------- ------------- -------
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Balance,
September 30, 2000 68,524 $548 $123,798 $163,300 235 $ (1,512) $(839) $(12,852) $272,443 $32,521
=======
Net income for year
ended September
30, 2001 41,925 41,925 $41,925
Purchase of treasury
shares, at cost 3,023 (15,699) (15,699)
Treasury stock
retired (3,258) (26) (5,144) (12,041) (3,258) 17,211 -
Exercise of stock
options 458 4 2,600 2,604
Tax benefit from
exercise of stock
options 1,259 1,259
Foreign currency
translation
adjustment (126) (126) (126)
-----------------------------------------------------------------------------------------------------------
Balance,
September 30, 2001 65,724 526 122,513 193,184 - - (839) (12,978) 302,406 $41,799
=======
Net income for
three months ended
December 31, 2001 11,164 11,164 $11,164
Exercise of stock
options 6 36 36
Foreign currency
translation
adjustment (1,733) (1,733) (1,733)
-----------------------------------------------------------------------------------------------------------
Balance,
December 31, 2001 65,730 $526 $122,549 $204,348 - $ - $(839) $(14,711) $311,873 $ 9,431
===========================================================================================================
See notes to condensed consolidated financial statements.
3
NBTY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
For the three months
ended December 31,
--------------------
2001 2000
---- ----
<s> <c> <c>
Cash flows from operating activities
Net income $11,164 $ 639
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss (gain) on disposal/sale of property, plant
and equipment 26 (22)
Depreciation and amortization 10,543 10,766
Amortization of deferred financing costs 191 191
Amortization of bond discount 31 31
Allowance for doubtful accounts 450 10
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (2,184) (4,561)
Inventories 10,242 (12,460)
Prepaid real estate tax, catalog costs and other
current assets 2,358 4,553
Other assets 1,150 (2,362)
Accounts payable (5,709) (7,074)
Accrued expenses (6,204) 3,193
Other liabilities (3) (5)
-------------------
Net cash provided by (used in) operating activities 22,055 (7,101)
-------------------
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired (6,843)
Purchase of property, plant and equipment (5,585) (8,481)
Proceeds from sale of property, plant and equipment 2,817
-------------------
Net cash used in investing activities (12,428) (5,664)
-------------------
Cash flows from financing activities:
Net proceeds under Credit & Guarantee Agreement 27,000
Release of cash held in escrow 4,600
Principal payments under long-term debt agreements
and capital leases (8,816) (5,953)
Purchase of treasury stock (12,887)
Proceeds from stock options exercised 36
-------------------
Net cash (used in) provided by financing activities (4,180) 8,160
-------------------
Effect of exchange rate changes on cash and cash equivalents (271) 543
-------------------
Continued
See notes to condensed consolidated financial statements.
4
NBTY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(Unaudited)
(Dollars in thousands)
For the three months
ended December 31,
--------------------
2001 2000
---- ----
<s> <c> <c>
Net increase (decrease) in cash and cash equivalents $ 5,176 $(4,062)
Cash and cash equivalents at beginning of period 34,434 31,464
-------------------
Cash and cash equivalents at end of period $39,610 $27,402
===================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 7,268 $ 1,957
Cash paid during the period for income taxes $ 8,920 $ 159
See notes to condensed consolidated financial statements.
5
NBTY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
1. Principles of consolidation and basis of presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated.
In the opinion of the Company, the unaudited condensed consolidated
financial statements contain all adjustments necessary to present fairly its
financial position as of December 31, 2001 and its results of operations for
the three months ended December 31, 2001 and 2000 and statements of cash
flows for the three months ended December 31, 2001 and 2000. The condensed
consolidated balance sheet as of September 30, 2001 has been derived from
the audited balance sheet as of that date. The results of operations and
statements of cash flows for the three months ended December 31, 2001 are
not necessarily indicative of the results to be expected for the full year.
This report should be read in conjunction with the Company's annual report
filed on Form 10-K for the fiscal year ended September 30, 2001.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during
the reporting period. The most significant estimates include the valuation
of inventories, the allowance for doubtful accounts receivable and the
recoverability of long-lived assets. Actual results could differ from those
estimates.
Reclassifications
Certain reclassifications have been made to conform prior year amounts to
the current year presentation.
New accounting developments
In June 2001, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 00-14, "Accounting for Certain Sales Incentives" effective no
later than periods beginning after December 15, 2001. EITF Issue No. 00-14
addresses the recognition, measurement and statement of earnings
classification for certain sales incentives. The Company has determined that
the impact of adoption and subsequent application of EITF Issue No. 00-14
did not have a material effect on its consolidated financial position or
results of operations.
In March 2001, the EITF released Issue No. 00-22, "Accounting for "Points"
and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and
Offers for Free Products or Services to Be Delivered in the Future." The
EITF reached a consensus addressing a vendor's accounting for offers to
customers to rebate or refund specified amounts of cash redeemable only if
the customer completes a specified cumulative level of revenue transactions
or remains a customer for a specified time period. Issue No. 00-22 requires
that the vendor recognize the cash rebate or refund obligation as a
reduction of revenue based on a systematic and rational allocation of the
cost of honoring rebates or refunds earned and claimed to each of the
underlying revenue transactions that result in progress by the customer
toward earning the rebate or refund. The
6
NBTY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
Company has determined that the impact of application of this guidance did
not have a material effect on its consolidated financial position or results
of operations.
In April 2001, the EITF reached a consensus on Issue No. 00-25, "Vendor
Income Statement Characterization of Consideration Paid to a Reseller of the
Vendor's Products." EITF Issue No. 00-25 requires that certain expenses
included in marketing, administrative and research costs be recorded as a
reduction of operating revenues and will be effective in the first quarter
of fiscal 2002. The Company has determined that the impact of adoption of
EITF Issue No. 00-25 did not have a material effect on the Company's
consolidated financial position or results of operations.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets." Upon adoption of SFAS No. 142,
goodwill and intangible assets that have indefinite useful lives will not be
amortized but rather will be tested at least annually for impairment. Other
intangible assets will continue to be amortized over their estimated useful
lives. The Company adopted the provisions of SFAS No. 142 on October 1,
2001. See note 7 for further discussion.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations," and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No.
143 addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS No. 144 supersedes FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," and the accounting and reporting provisions of
APB Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions," and addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets. The Company does not expect the adoption of SFAS No. 143 and 144,
effective October 1, 2002, to have a material impact on its consolidated
financial position or results of operations.
2. Acquisitions
On December 6, 2001, the Company acquired certain assets of the business of
HealthCentral.com and its affiliates. NBTY was the successful bidder in an
auction ordered by a bankruptcy court in Oakland, California. The purchase
price was approximately $2.8 million in cash. The assets include the
customer list of the mail order operation, L&H Vitamins, and the customer
list and URL's of Vitamins.com and WebRx.com. Assets acquired were
classified as intangibles ($2,800). These operations had sales for the last
12 months of approximately $15 million and a combined customer list of
approximately 1.8 million names, which has been merged into the existing
customer base of the Puritan's Pride/Direct Response business.
On December 13, 2001, the Company acquired certain assets and liabilities of
the Knox NutraJoint and Knox for Nails nutritional supplement business from
Kraft Foods for approximately $4 million in cash. Assets acquired include
inventory ($2,043), and intangibles ($2,000). The Company, upon completion
of any purchase price adjustments, will reevaluate its allocation of the
purchase price. Kraft's revenues for these brands were approximately $15
million in 2001. NBTY will license the Knox trademark at no charge to Kraft
Foods, Inc. for use in the Knox gelatine business, which was not part of the
sale.
7
NBTY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
3. Comprehensive income
Total comprehensive income for the Company includes net income and the
effects of foreign currency translation, which are charged or credited to
the cumulative translation adjustment account within stockholders' equity.
Total comprehensive income for the three months ended December 31, 2001 and
2000 are as follows:
For the three months
ended December 31,
--------------------
2001 2000
---- ----
<s> <c> <c>
Net income $11,164 $ 639
Changes in cumulative translation adjustment (1,733) 2,373
--------------------
Comprehensive earnings $ 9,431 $3,012
====================
Accumulated other comprehensive loss, which is classified as a separate
component of stockholders' equity, is comprised of cumulative translation
adjustments of $(14,711) and $(12,978) at December 31, 2001 and September
30, 2001, respectively.
4. Inventories
Effective October 1, 2001, the Company changed its method of accounting for
inventories for interim reporting from the gross profit method to the first-
in, first-out (FIFO) method. This change was made to improve the accuracy of
the valuation of inventory on an interim basis. The change did not have a
significant effect on the Company's consolidated financial position or
results of operations for the first quarter ending December 31, 2001, nor is
it anticipated that it will have a material effect on future periods.
December 31, September 30,
2001 2001
------------ -------------
<s> <c> <c>
Raw materials $ 63,567 $ 66,519
Work-in-process 4,476 4,558
Finished goods 108,146 113,668
------------------------
$176,189 $184,745
========================
5. Earnings per share (EPS)
Basic EPS computations are based on the weighted average number of common
shares outstanding during the three month period ended December 31, 2001 and
2000. Diluted EPS includes the dilutive effect of outstanding stock options,
as if exercised. The following is a reconciliation between basic and diluted
EPS:
8
NBTY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
For the three months
ended December 31,
--------------------
2001 2000
---- ----
<s> <c> <c>
Numerator:
Numerator for basic EPS - income available to
common stockholders $11,164 $ 639
====================
Numerator for diluted EPS - income available to
common stockholders $11,164 $ 639
====================
Denominator:
Denominator for basic EPS - weighted-average shares 65,727 67,064
Effect of dilutive securities:
Stock options 1,524 190
--------------------
Denominator for diluted EPS - weighted-average shares 67,251 67,254
====================
Net EPS:
Basic EPS $ 0.17 $ 0.01
====================
Diluted EPS $ 0.17 $ 0.01
====================
6. Intangible Assets
On October 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 142 "Goodwill and Intangible Assets" (SFAS 142). SFAS 142
includes requirements to annually test goodwill and indefinite lived
intangible assets for impairment rather than amortize them; accordingly, the
Company no longer amortizes goodwill and indefinite lived intangibles,
thereby eliminating an annual amortization charge of approximately $6.1
million, which is not deductible for tax purposes. The carrying amount of
acquired intangible assets as of December 31, 2001 and September 30, 2001 is
as follows:
December 31, 2001 September 30, 2001
------------------------------- -------------------------------
Gross carrying Accumulated Gross carrying Accumulated Amortization
amount Amoritization amount Amoritization Period
-------------- ------------- -------------- ------------- ------------
<s> <c> <c> <c> <c> <c>
Goodwill $159,635 $23,089 $161,117 $23,299 none
Customer lists 64,311 15,974 61,511 15,107 6 - 15
Trademark and licenses 2,404 1,871 2,404 1,763 2 - 3
Trademark 1,800 none
Covenants not to compete 2,604 1,577 2,405 1,540 5 - 7
------------------------------------------------------------
$230,754 $42,511 $227,437 $41,709
============================================================
The Company currently has unamortized goodwill remaining from the
acquisition of Holland & Barrett ($105,263), NatureSmart ($16,170),
Nutrition Warehouse ($7,508), Naturesway ($3,924), Feeling Fine ($3,069), and
Global Health Sciences ($612) and the Company currently owns one trademark,
Knox ($1,800) all of which are subject to the provisions of SFAS 142. The
Company did not record any transition intangible asset impairment loss upon
adoption of SFAS 142. The changes in the carrying amount of goodwill for the
three months ended December 31, 2001 primarily related
9
NBTY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
to the translation of the Company's international subsidiaries into U.S.
Dollars. Aggregate amortization expense of definite lived intangible assets
for the three months ended December 31, 2001 and December 31, 2000 was
approximately $1,000 for each period.
Estimated amortization expense for the next five fiscal years is as follows:
Estimated amortization expense:
- -------------------------------
<s> <c>
For year ended September 30, 2002 $4,161
For year ended September 30, 2003 $4,009
For year ended September 30, 2004 $3,711
For year ended September 30, 2005 $3,580
For year ended September 30, 2006 $3,529
As required by SFAS 142, the results for the first quarter of Fiscal 2001
have not been restated. A reconciliation of net income, as if SFAS 142 had
been adopted, is presented below for the three months ended December 31,
2001 and December 31, 2000, exclusive of amortization expense that is
related to goodwill that is not being amortized:
For the three months
ended December 31,
--------------------
2001 2000
---- ----
<s> <c> <c>
Reported net income $11,164 $ 639
Addback: goodwill amortization 1,370
--------------------
Adjusted net income $11,164 $2,009
====================
Basic earnings per share:
Reported net income $ 0.17 $ 0.01
Addback: goodwill amortization 0.02
--------------------
Adjusted net income $ 0.17 $ 0.03
====================
Diluted earnings per share:
Reported net income $ 0.17 $ 0.01
Addback: goodwill amortization 0.02
--------------------
Adjusted net income $ 0.17 $ 0.03
====================
7. Segment Information:
The Company's segments are organized by sales market on a worldwide basis.
The Company's management reporting system evaluates performance based on a
number of factors; however, the primary measure of performance is the pretax
operating income of each segment. Accordingly, the Company reports four
worldwide segments: Puritan's Pride/Direct Response, Retail: United States
and United Kingdom/Ireland, and Wholesale. All of the Company's products
fall into one of these four segments. The Puritan's Pride/Direct Response
segment generates revenue through the sale of its products primarily through
mail order catalog and the internet. Catalogs are strategically mailed to
customers who order by mail or phoning customer service representatives in
New York, Illinois or
10
NBTY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
the United Kingdom. The Retail United States segment generates revenue
through the sale of proprietary brand and third-party products through its
533 Company-operated stores. The Retail United Kingdom/Ireland segment
generates revenue through the sale of proprietary brand and third-party
products in 463 Company-operated stores. The results shown below relating to
the UK /Ireland operations do not include any transfer pricing absorption.
The Wholesale segment (including Network Marketing) is comprised of several
divisions each targeting specific market groups. These market groups include
wholesalers, distributors, chains, pharmacies, health food stores, bulk and
international customers.
The following table represents key financial information of the Company's
business segments:
For the three months
ended December 31,
--------------------
2001 2000
---- ----
<s> <c> <c>
Puritan's Pride/Direct Response
Revenue $32,638 $27,834
Operating income 7,864 6,012
Depreciation and amortization 1,313 1,186
Retail:
United States
Revenue $44,211 $38,754
Operating loss (7,502) (12,145)
Depreciation and amortization 3,480 3,573
United Kingdom/Ireland
Revenue $72,604 $60,581
Operating income 18,306 11,937
Depreciation and amortization 2,090 3,215
Wholesale:
Revenue $65,637 $39,660
Operating income (loss) 4,590 (1,221)
Depreciation and amortization 334 182
11
NBTY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
For the three months
ended December 31,
--------------------
2001 2000
---- ----
<s> <c> <c>
Corporate allocations:
Depreciation and amortization - other $ 948 $ 854
Depreciation - manufacturing 2,378 1,756
Consolidated totals:
Revenue $215,090 $166,829
Operating income 23,258 4,583
Depreciation and amortization 10,543 10,766
The following table reflects identifiable assets by market segment:
December 31,
--------------------
2001 2000
---- ----
<s> <c> <c>
Puritan's Pride/Direct Response $ 71,156 $ 72,208
Retail United States 77,808 81,760
Retail United Kingdom/Ireland 205,707 210,744
Wholesale 54,351 26,556
Corporate and manufacturing assets 287,225 220,064
--------------------
$696,247 $611,332
====================
8. Subsequent events:
The Company is a plaintiff in an ongoing vitamin antitrust litigation matter
brought in the United States District Court in the District of Columbia
against F. Hoffmann-La Roche Ltd. and others for alleged price fixing.
Certain of the defendants have pleaded guilty in criminal proceedings
arising from the same set of facts. Partial settlements with certain
defendants have been made and negotiations with other defendants are
currently being held. In January 2002, the Company received $5,467 in
partial settlement of ongoing price fixing litigation.
12
NBTY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share amounts and number of stores)
Results of Operations:
The following table sets forth income statement data of the Company as a
percentage of net sales for the periods indicated:
For the three months
ended December 31,
--------------------
2001 2000
---- ----
<s> <c> <c>
Net sales 100.0% 100.0%
-------------------
Costs and expenses:
Cost of sales 46.9% 44.7%
Catalog printing, postage and promotion 4.2% 9.4%
Selling, general and administrative 38.1% 43.2%
-------------------
89.2% 97.3%
-------------------
Income from operations 10.8% 2.7%
-------------------
Other income (expense):
Interest, net -2.8% -3.0%
Miscellaneous, net 0.4% 0.9%
-------------------
-2.4% -2.1%
-------------------
Income before income taxes 8.4% 0.6%
Income taxes 3.2% 0.2%
-------------------
Net income 5.2% 0.4%
-------------------
For the three months ended December 31, 2001 compared to the three months ended
December 31, 2000:
Net sales. Net sales in the first quarter ended December 31, 2001 were $215,090
compared with $166,829 for the prior comparable period, an increase of $48,261
or 28.9%. Puritan's Pride/Direct Response sales were $32,638 compared to
$27,834, an increase of $4,804 or 17.3%, Wholesale sales were $65,637 compared
to $39,660, an increase of $25,977 or 65.5%, Such increase in the wholesale
segment's sales was primarily due to newly acquired businesses ($15,163). U.S.
retail sales were $44,211 compared to $38,754, an increase of $5,457 or 14.1%
and U.K. retail sales were $72,604 compared to $60,581, an increase of $12,023
or 19.8%. Revenue increases in all of the Company's four segments are
attributed to the continued consumer acceptance of the broad base of the
Company's products. The Company operated 533 stores in the U.S. and 463 stores
in the U.K. as of December 31, 2001 compared to 500 stores in the U.S. and 440
in the U.K. as of December 31, 2000. Sales growth in the U.S. retail channel
reflected the greater number of stores compared to last year and an increase in
same store sales for stores open more than one year of 6.1%
13
NBTY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share amounts and number of stores)
Costs and expenses. Cost of sales were $100,910 for 2001, or 46.9% as a
percentage of sales, compared to $74,505, or 44.7% for 2000. The increase of
$26,405 was due primarily to the increase in the wholesale segment's cost of
sales, which increased $20,831, from 58.6% to 67.2% as a percentage of sales.
Such increase on wholesale cost of sales was primarily due to Global Health
Sciences' cost of sales of $12,182 on sales of $13,683. The overall cost of
sales increase was mitigated by a decrease in the Direct Response segment's
cost of sales, which decreased from 35% to 33.7% as a percentage of sales,
primarily due to higher gross margins on new product introductions and
improvements in manufacturing efficiencies. The increase was also mitigated by
the U.S. retail segment's cost of sales decreasing as a percentage of sales
from 47.2% to 40.6%, primarily due to sales price increases on all product
lines from the prior like quarter. Included in cost of sales was under-absorbed
factory overhead of $1,462.
Catalog printing, postage, and promotion expenses were $9,010 in 2001 compared
with $15,710 in 2000, a decrease of $6,700. Such expenses as a percentage of
sales were 4.2% for 2001 and 9.4% for 2000. The decrease was primarily
attributable to the Company not incurring any expenses in 2001 for radio and
television advertisements relating to the Flex-A-Min advertising campaign.
This decrease was partially offset by an increase in postage costs and other
additional costs associated with an increase in the number of catalogs mailed.
Selling, general and administrative expenses were $81,912, an increase of
$9,881 for the quarter, compared with $72,031 in 2000. As a percentage of
sales, selling, general and administrative expenses were 38.1% and 43.2% in
2001 and 2000, respectively. Of the $9,881 increase, $1,117 was attributable to
rent expense, $6,067 to payroll costs mainly associated with the Vitamin World
expansion program and $478 was attributable to increased depreciation expense
as a result of an increase in capital expenditures.
Interest expense, net. Net interest expense was $6,008 for the three months
ended December 31, 2001, an increase of $1,037, compared with net interest
expense of $4,971 for the three months ended December 31, 2000. Net interest
expense increased due to the additional borrowings to fund the two acquisitions
completed in the third quarter of 2001. The major components are interest on
Senior Subordinated Notes associated with the Holland & Barrett acquisition,
and the Credit and Guarantee Agreement (CGA) used for acquisitions and capital
expenditures.
Miscellaneous, net - Miscellaneous, net for the three months ended December 31,
2001 decreased $523 primarily attributable to exchange rate fluctuations ($300)
and a gain on disposal of businesses and related fixed assets ($50) in 2000. In
2001, the company incurred a small loss on such disposals.
Income Taxes - The Company's effective income tax rate was approximately 38%
for the three months ended December 31, 2001 and December 31, 2000.
Net income - After income taxes, the Company had a net profit of $11,164 (or
basic and diluted earnings per share of $0.17) for the three months ended
December 31, 2001, and $639 (or basic and diluted earnings per share of $0.01)
for the three months ended December 31, 2000.
Liquidity and Capital Resources
As of December 31, 2001, the Company had cash and cash equivalents of
$39,610. Net cash provided by operating activities was $22,055 for the
three months ended December 31, 2001 compared to net cash used in
operating activities of $7,101 in 2000. The overall increase in cash
14
NBTY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share amounts and number of stores)
from operating activities was attributable to a significant increase in
earnings and a significant decrease in inventories; such amount was
slightly offset by a smaller increase in accounts receivable as compared
to the prior quarter.
In fiscal 2001 and 2000, the Company's investing activities consisted
primarily of cash paid for business acquisitions and the purchase of
property, plant and equipment. Net cash used in investing activities was
$12,428 for fiscal 2001, resulting primarily from the cash paid for the
business acquisitions of Knox ($4,043) and Healthcentral.com ($2,800), and
the purchase of property, plant and equipment ($5,585). In fiscal 2000,
investing activities used net cash of $5,664, consisting primarily of cash
paid for the purchase of property, plant and equipment ($8,481), offset by
proceeds from the sale of property, plant and equipment ($2,817).
Net cash used in financing activities during the three months ended 2001
was $4,180, and included principal payments under long-term debt
agreements ($8,816) offset by proceeds from the exercise of stock options
($36), and cash received that was previously held in escrow ($4,600). Cash
provided by financing activities of $8,160 during fiscal 2000 included
borrowings under the Company's Credit & Guarantee Agreement ("CGA") of
$27,000, offset by principal payments under long-term debt agreements
($5,953), and purchase of treasury stock ($12,887).
For the three months ended December 31, 2001, working capital increased
$8,099 to $139,207. The Company believes that the cash flow generated from
its operations and amounts available under the Revolving Credit Facility
should be sufficient to fund its debt service requirements, working
capital needs, anticipated capital expenditures and other operating
expenses for the foreseeable future. Presently, the Credit and Guarantee
Agreement ("CGA") is comprised of two term loans and a revolving credit
facility. At December 31, 2001, there were borrowings of $106,375 under
the term loans at an annual borrowing rate of 4.375%. The term loans are
payable in 16 equal consecutive installments with the final payment
payable on June 30, 2005. The current portion of the term loans at
December 31, 2001 was $33,050. The $50,000 revolving credit facility
expires on September 30, 2003 and was unused at December 31, 2001. The
Company is required to pay a commitment fee, which varies between .25% and
.50% per annum, depending on the Company's ratio of Debt to EBITDA, on any
unused portion of the revolving credit facility. The CGA provides that
loans be made under a selection of rate formulas, including prime or Euro
currency rates. Virtually all of the Company's assets are collateralized
under the CGA. In addition, the Company is subject to the maintenance of
various financial ratios and covenants.
The Company's debt instruments impose certain restrictions on the Company
regarding capital expenditures and limit the Company's ability to: incur
additional indebtedness, dispose of assets, make repayments of
indebtedness or amendments of debt instruments, pay distributions, create
liens on assets and enter into sale and leaseback transactions,
investments, loans or advances and acquisitions. Such restrictions could
limit the Company's ability to respond to market conditions, to provide
for unanticipated capital investments or to take advantage of business or
acquisition opportunities.
In connection with the August 1997 acquisition of Holland & Barrett, the
Company issued $150 million of 8-5/8% senior subordinated Notes ("Notes")
due in 2007. The Notes are unsecured and subordinated in right of payment
for all existing and future indebtedness of the Company.
15
NBTY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share amounts and number of stores)
The Company believes that existing cash balances, internally-generated
funds from operations, and amounts available under the CGA will provide
sufficient liquidity to satisfy the Company's working capital needs for
the next 12 months and to finance anticipated capital expenditures
incurred in the normal course of business and potential acquisitions.
Management believes that inflation did not have a significant impact on its
operations.
New accounting developments
In June 2001, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 00-14, "Accounting for Certain Sales Incentives" effective no
later than periods beginning after December 15, 2001. EITF Issue No. 00-14
addresses the recognition, measurement and statement of earnings
classification for certain sales incentives. As the Company has determined,
the impact of adoption and subsequent application of EITF Issue No. 00-14
did not have a material effect on its consolidated financial position or
results of operations.
In March 2001, the EITF released Issue No. 00-22, "Accounting for "Points"
and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and
Offers for Free Products or Services to Be Delivered in the Future." The
EITF reached a consensus addressing a vendor's accounting for offers to
customers to rebate or refund specified amounts of cash redeemable only if
the customer completes a specified cumulative level of revenue transactions
or remains a customer for a specified time period. Issue No. 00-22 requires
that the vendor recognize the cash rebate or refund obligation as a
reduction of revenue based on a systematic and rational allocation of the
cost of honoring rebates or refunds earned and claimed to each of the
underlying revenue transactions that result in progress by the customer
toward earning the rebate or refund. As the Company has determined, the
impact of application of this guidance did not have a material effect on its
consolidated financial position or results of operations.
In April 2001, the EITF reached a consensus on Issue No. 00-25, "Vendor
Income Statement Characterization of Consideration Paid to a Reseller of the
Vendor's Products." EITF Issue No. 00-25 requires that certain expenses
included in marketing, administrative and research costs be recorded as a
reduction of operating revenues and will be effective in the first quarter
of fiscal 2002. As the Company has determined, the impact of adoption of
EITF Issue No. 00-25 did not have a material effect on the Company's
consolidated financial position or results of operations.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets." Upon adoption of SFAS No. 142,
goodwill and intangible assets that have indefinite useful lives will not be
amortized but rather will be tested at least annually for impairment. Other
intangible assets will continue to be amortized over their estimated useful
lives. The Company adopted the provisions of SFAS No. 142 on October 1,
2001. Based upon the Company's current amount of goodwill and qualifying
intangible assets, management expects the adoption to reduce its fiscal 2002
annualized amortization expense, which is not deductible for tax purposes,
by approximately $6.1 million.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations," and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No.
143 addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS No. 144 supersedes FASB Statement No. 121,
"Accounting for the
16
NBTY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share amounts and number of stores)
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," and the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," and addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The Company
does not expect the adoption of SFAS No. 143 and 144, effective October 1,
2002, to have a material impact on its consolidated financial position or
results of operations.
CAUTIONARY STATEMENT FOR "SAFE HARBOR" PURPOSES UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This filing contains certain forward-looking statements and information
that are based on the beliefs of management, as well as assumptions made by
and information currently available to the Company's management. When used
in this document, the words "anticipate," "believe," "estimate," and
"expect" and similar expressions, as they relate to the Company are intended
to identify forward-looking statements. Such statements reflect the current
views of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated or expected. The Company does not intend to
update these forward-looking statements. See section "Forward Looking
Statements" of our Annual Report on Form 10-K for the fiscal year ended
September 30, 2001, which lists important factors that could cause actual
results to differ materially from those discussed in this report.
17
NBTY, INC. AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------
The Company is subject to currency and interest rate risks that arise from
normal business operations. The Company regularly assesses these risks and
has not entered into any significant hedging transactions.
To manage the potential loss arising from changing interest rates and its
impact on long-term debt, the Company's policy is to manage interest rate
risks by maintaining a combination of fixed and variable rate financial
instruments.
18
NBTY, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
(Unaudited)
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
There was no Form 8-K filed during the quarter covered by this report.
19
NBTY, INC. AND SUBSIDIARIES
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned there unto duly authorized.
NBTY, INC.
Date February 6, 2002 /s/ Harvey Kamil
-------------------------------------
Harvey Kamil,
President and Chief Financial Officer
20