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 March 31, 2002
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 April 25, 2002: 66,191,994
NBTY, INC. and SUBSIDIARIES
INDEX
PART I Financial Information
Condensed Consolidated Balance Sheets -
March 31, 2002 (unaudited) and
September 30, 2001 1
Condensed Consolidated Statements of Income -
(unaudited) Three months ended
March 31, 2002 and 2001 2
Condensed Consolidated Statements of Income -
(unaudited) Six months ended
March 31, 2002 and 2001 3
Condensed Consolidated Statements of
Stockholders' Equity and Comprehensive Income -
Year ended September 30, 2001
and (unaudited) Six months ended
March 31, 2002 4
Condensed Consolidated Statements of Cash Flows -
(unaudited) Six months ended
March 31, 2002 and 2001 5 - 6
Notes to Condensed Consolidated
Financial Statements (unaudited) 7 - 14
Management's Discussion and Analysis
of Financial Condition and
Results of Operations 15 - 24
Qualitative and Quantitative Disclosures
about Market Risk 25
PART II Other Information 26
Signature 27
NBTY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars and shares in thousands)
Assets March 31, September 30,
2002 2001
--------- -------------
(Unaudited)
<s> <c> <c>
Current assets:
Cash and cash equivalents $ 50,662 $ 34,434
Accounts receivable, less allowance for
doubtful accounts of $4,224 at
March 31, 2002 and $3,222 at
September 30, 2001 41,158 34,730
Inventories 163,377 184,745
Deferred income taxes 5,318 5,318
Prepaid expenses and other current assets 21,298 21,341
------------------------
Total current assets 281,813 280,568
Property, plant and equipment, net 218,420 229,216
Goodwill, net 134,443 137,818
Intangible assets, net 50,559 47,910
Other assets 6,842 12,950
------------------------
Total assets $692,077 $708,462
========================
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt
and capital lease obligations $ 28,929 $ 34,911
Accounts payable 36,594 50,673
Accrued expenses 67,249 63,876
------------------------
Total current liabilities 132,772 149,460
Long-term debt 205,217 236,967
Obligations under capital leases 36 269
Deferred income taxes 16,685 16,761
Other liabilities 2,613 2,599
------------------------
Total liabilities 357,323 406,056
------------------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.008 par; authorized; 175,000
shares; issued 65,953 shares at March 31,
2002 and 65,724 shares at September 30, 2001
and outstanding 65,953 shares at March 31, 2002
and 65,724 shares at September 30, 2001 528 526
Capital in excess of par 123,859 122,513
Retained earnings 229,919 193,184
------------------------
354,306 316,223
Stock subscriptions receivable (839) (839)
Accumulated other comprehensive loss (18,713) (12,978)
------------------------
Total stockholders' equity 334,754 302,406
------------------------
Total liabilities and stockholders' equity $692,077 $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 March 31,
---------------------
2002 2001
---- ----
<s> <c> <c>
Net sales $251,544 $224,775
---------------------
Costs and expenses:
Cost of sales 112,989 97,804
Catalog printing, postage and promotion 12,731 11,701
Selling, general and administrative 86,636 82,345
Recovery of raw material costs (5,467) -
---------------------
206,889 191,850
---------------------
Income from operations 44,655 32,925
---------------------
Other income (expense):
Interest (4,226) (4,865)
Miscellaneous, net 1,152 1,123
---------------------
(3,074) (3,742)
---------------------
Income before income taxes 41,581 29,183
Provision for income taxes 16,010 11,235
---------------------
Net income $ 25,571 $ 17,948
=====================
Net income per share:
Basic $ 0.39 $ 0.27
Diluted $ 0.38 $ 0.27
Weighted average common shares outstanding:
Basic 65,883 65,273
Diluted 67,755 66,050
See notes to condensed consolidated financial statements.
2
NBTY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars and shares in thousands, except per share amounts)
For the six months
ended March 31,
---------------------
2002 2001
---- ----
<s> <c> <c>
Net sales $466,634 $391,604
---------------------
Costs and expenses:
Cost of sales 213,899 172,309
Catalog printing, postage and promotion 21,741 27,411
Selling, general and administrative 168,549 154,376
Recovery of raw material costs (5,467) -
---------------------
398,722 354,096
---------------------
Income from operations 67,912 37,508
---------------------
Other income (expense):
Interest (10,234) (9,835)
Miscellaneous, net 2,055 2,549
---------------------
(8,179) (7,286)
---------------------
Income before income taxes 59,733 30,222
Provision for income taxes 22,998 11,636
---------------------
Net income $ 36,735 $ 18,586
=====================
Net income per share:
Basic $ 0.56 $ 0.28
Diluted $ 0.54 $ 0.28
Weighted average common shares outstanding:
Basic 65,814 66,162
Diluted 67,536 66,736
See notes to condensed consolidated financial statements.
3
NBTY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME FOR THE YEAR ENDED SEPTEMBER 30, 2001
AND THE SIX MONTHS ENDED MARCH 31, 2002
(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 six
months ended
March 31, 2002 36,735 36,735 $36,735
Treasury stock
retired (10) -
Exercise of stock
options 239 2 555 557
Tax benefit from
exercise of stock
options 791 791
Foreign currency
translation
adjustment (5,735) (5,735) (5,735)
-----------------------------------------------------------------------------------------------------------
Balance,
March 31, 2002 65,953 $528 $123,859 $229,919 - $ - $(839) $(18,713) $334,754 $31,000
===========================================================================================================
See notes to condensed consolidated financial statements.
4
NBTY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
For the six months
ended March 31,
--------------------
2002 2001
---- ----
<s> <c> <c>
Cash flows from operating activities
Net income $36,735 $18,586
Adjustments to reconcile net income to net cash
provided by operating activities:
(Gain) loss on disposal/sale of property, plant
and equipment (69) 295
Depreciation and amortization 21,554 21,778
Amortization of deferred financing costs 388 388
Amortization of bond discount 62 62
Allowance for doubtful accounts 1,002 (11)
Tax benefit from exercise of stock options 791
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (7,435) (8,655)
Inventories 22,856 (17,639)
Prepaid expenses and other current assets (730) 1,942
Other assets 1,508 (1,836)
Accounts payable (13,411) (695)
Accrued expenses 3,921 13,558
Other liabilities 15 (15)
-------------------
Net cash provided by operating activities 67,187 27,758
-------------------
Cash flows from investing activities:
Cash paid for acquisitions (7,256)
Purchase of property, plant and equipment (10,516) (15,946)
Proceeds from sale of property, plant and equipment 991 2,817
-------------------
Net cash used in investing activities (16,781) (13,129)
-------------------
Cash flows from financing activities:
Net proceeds under Credit & Guarantee Agreement 24,064
Release of cash held in escrow 4,600
Principal payments under long-term debt agreements
and capital leases (38,027) (9,123)
Purchase of treasury stock (15,712)
Proceeds from stock options exercised 557
-------------------
Net cash used in financing activities (32,870) (771)
-------------------
Effect of exchange rate changes on cash and cash equivalents (1,308) (1,943)
-------------------
Continued
See notes to condensed consolidated financial statements.
5
NBTY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
(Dollars in thousands)
For the six months
ended March 31,
--------------------
2002 2001
---- ----
<s> <c> <c>
Net increase in cash and cash equivalents $16,228 $11,915
Cash and cash equivalents at beginning of period 34,434 31,464
-------------------
Cash and cash equivalents at end of period $50,662 $43,379
===================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 9,946 $10,575
Cash paid during the period for income taxes $17,065 $ 9,341
See notes to condensed consolidated financial statements.
6
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.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of the Company, the unaudited
condensed consolidated financial statements contain all adjustments
necessary to present fairly its financial position as of March 31, 2002 and
its results of operations for the three and six months ended March 31, 2002
and 2001 and statements of cash flows for the six months ended March 31,
2002 and 2001.
The condensed consolidated balance sheet as of September 30, 2001 has been
derived from the audited balance sheet as of that date but does not include
all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. The results of operations and statements of cash flows for the
six months ended March 31, 2002 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 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 6 for further discussion.
7
NBTY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
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.
In February 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 01-09, "Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of the Vendor's Products)"
effective no later than periods beginning after December 15, 2001. EITF
Issue No. 01-09 codifies and reconciles EITF Issue No. 00-14, Accounting for
Certain Sales Incentives, EITF Issue No. 00-22, Accounting for "Points" and
Certain Other Time-Based or Volume-Based Sales Incentive Offers, and EITF
Issue No. 00-25, Accounting for Consideration from a Vendor to a Retailer in
Connection with the Purchase or Promotion of the Vendor's Products. This
EITF addresses the following items:
1) The income statement characterization of consideration given by
a vendor to a customer, specifically whether that consideration
should be presented in the vendor's income statement as a
reduction of revenue or as a cost or expense.
2) Whether a vendor should recognize consideration given to a
customer as an asset in certain circumstances rather than as an
immediate charge in the income statement.
3) When to recognize the "cost" of a sales incentive and how to
measure it.
The Company has determined that the impact of adoption and subsequent
application of EITF Issue No. 01-09 did not have a material effect 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 $2,800 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, specifically as a customer list ($2,800) which is being
amortized over 15 years. These operations had sales for the last 12 months
of approximately $15,000 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 North America, Inc. for approximately $4,500 in cash. Assets
acquired include inventory ($2,456), and intangibles ($2,000). Approximately
$1,800 of the $2,000 has been classified as a trademark with an indefinite
life. Kraft's revenues for these brands were approximately $15,000 in 2001.
8
NBTY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
NBTY will license the Knox trademark at no charge to Kraft Foods North
America, Inc. for use in the Knox gelatine business, which was not part of
the sale.
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 and six months ended March 31, 2002
and 2001 are as follows:
For the three months For the six months
ended March 31, ended March 31,
-------------------- ------------------
2002 2001 2002 2001
---- ---- ---- ----
<s> <c> <c> <c> <c>
Net income $25,571 $17,948 $36,735 $18,586
Changes in cumulative
translation adjustment (4,002) (10,061) (5,735) (7,688)
-------------------------------------------
Comprehensive earnings $21,569 $ 7,887 $31,000 $10,898
===========================================
Accumulated other comprehensive loss, which is classified as a separate
component of stockholders' equity, is comprised of cumulative translation
adjustments of ($18,713) and ($12,978) at March 31, 2002 and September 30,
2001, respectively.
4. Inventories
The components of inventories are as follows:
March 31, September 30,
2002 2001
--------- -------------
<s> <c> <c>
Raw materials $ 63,588 $ 66,519
Work-in-process 4,823 4,558
Finished goods 94,966 113,668
------------------------
$163,377 $184,745
========================
5. Earnings per share (EPS)
Basic EPS computations are based on the weighted average number of common
shares outstanding during the three and six-month periods ended March 31,
2002 and 2001. Diluted EPS includes the dilutive effect of outstanding stock
options, as if exercised. The following is a reconciliation between basic
and diluted EPS:
9
NBTY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
For the three months For the six months
ended March 31, ended March 31,
-------------------- ------------------
2002 2001 2002 2001
---- ---- ---- ----
<s> <c> <c> <c> <c>
Numerator:
Numerator for basic EPS - income
available to common stockholders $25,571 $17,948 $36,735 $18,586
=========================================
Numerator for diluted EPS - income
available to common stockholders $25,571 $17,948 $36,735 $18,586
=========================================
Denominator:
Denominator for basic EPS -
weighted-average shares 65,883 65,273 65,814 66,162
Effect of dilutive securities:
Stock options 1,872 777 1,722 574
-----------------------------------------
Denominator for diluted EPS -
weighted-average shares 67,755 66,050 67,536 66,736
=========================================
Net EPS:
Basic EPS $ 0.39 $ 0.27 $ 0.56 $ 0.28
=========================================
Diluted EPS $ 0.38 $ 0.27 $ 0.54 $ 0.28
=========================================
6. Goodwill and 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 $6,100,
which is not deductible for tax purposes. The carrying amount of acquired
intangible assets as of March 31, 2002 and September 30, 2001 is as follows:
March 31, 2002 September 30, 2001
------------------------------- -------------------------------
Gross carrying Accumulated Gross carrying Accumulated Amortization
amount Amoritization amount Amoritization Period
-------------- ------------- -------------- ------------- ------------
<s> <c> <c> <c> <c> <c>
Amortized intangible assets
Customer lists $64,311 $16,872 $61,511 $15,107 6 - 15
Trademark and licenses 2,404 2,002 2,404 1,763 2 - 3
Covenants not to compete 2,605 1,687 2,405 1,540 5 - 7
-----------------------------------------------------------
$69,320 $20,561 $66,320 $18,410
===========================================================
Unamortized intangible assets
Trademark $ 1,800
=======
10
NBTY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
The changes in the carrying amount of goodwill by segment for the six month
period ended March 31, 2002, are as follows:
Puritan's Pride/ Retail United Retail United
Direct Response States Kingdom/Ireland Wholesale Consolidated
---------------- ------------- --------------- --------- ------------
<s> <c> <c> <c> <c> <c>
Balance at
September 30, 2001 $16,202 $7,588 $110,719 $3,309 $137,818
Purchase price
adjustments (265) 387 122
Foreign currency
translation (3,497) (3,497)
---------------------------------------------------------------------------
Balance at
March 31, 2002 $15,937 $7,588 $107,222 $3,696 $134,443
===========================================================================
The Company currently has unamortized goodwill remaining from the
acquisition of Holland & Barrett ($103,291), NatureSmart ($15,984),
Nutrition Warehouse ($7,509), Naturesway ($3,962), Feeling Fine ($3,069),
and Global Health Sciences ($628) 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 six months ended March 31, 2002 primarily related to the
translation of the Company's international subsidiaries into U.S. dollars.
Aggregate amortization expense of definite lived intangible assets for the
three and six months ended March 31, 2002 was approximately $1,200 and
$2,200, respectively. Aggregate amortization expense of definite lived
intangible assets for the three and six months ended March 31, 2001 was
approximately $900 and $1,800, respectively.
Estimated amortization expense for the next five fiscal years is as follows:
For the year ending September 30,
- ---------------------------------
<s> <c>
2002 $4,161
2003 $4,009
2004 $3,711
2005 $3,580
2006 $3,529
As required by SFAS 142, the results for the six months ended March 31, 2002
have not been restated. A reconciliation of net income, as if SFAS 142 had
been adopted, is presented below for the three and six months ended March
31, 2002 and 2001, exclusive of amortization expense that is related to
goodwill that is not being amortized:
11
NBTY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
For the three months For the six months
ended March 31, ended March 31,
-------------------- ------------------
2002 2001 2002 2001
---- ---- ---- ----
<s> <c> <c> <c> <c>
Reported net income $25,571 $17,948 $36,735 $18,586
Addback: goodwill amortization 1,577 2,947
-----------------------------------------
Adjusted net income $25,571 $19,525 $36,735 $21,533
=========================================
Basic earnings per share:
Reported net income $ 0.39 $ 0.27 $ 0.56 $ 0.28
Addback: goodwill amortization 0.02 0.05
-----------------------------------------
Adjusted net income $ 0.39 $ 0.29 $ 0.56 $ 0.33
=========================================
Diluted earnings per share:
Reported net income $ 0.38 $ 0.27 $ 0.54 $ 0.28
Addback: goodwill amortization 0.02 0.04
-----------------------------------------
Adjusted net income $ 0.38 $ 0.29 $ 0.54 $ 0.32
=========================================
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. Operating income for each segment includes
all corporate allocated expenses. Interest expense and other miscellaneous
income and expense items are not allocated to a segment. Income and expenses
not allocated to one of the segments discussed below remain in the corporate
segment. The results shown below relating to the UK /Ireland operations do
not include any transfer pricing absorption.
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 the United
Kingdom. The Retail United States segment generates revenue through the sale
of proprietary brand and third-party products through its 539 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 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.
12
NBTY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
The following table represents key financial information of the Company's
business segments:
For the three months For the six months
ended March 31, ended March 31,
--------------------- --------------------
2002 2001 2002 2001
---- ---- ---- ----
<s> <c> <c> <c> <c>
Puritan's Pride/Direct Response
Revenue $ 56,091 $ 57,569 $ 88,730 $ 85,403
Operating income 17,624 19,496 25,488 25,508
Depreciation and amortization 1,354 1,193 2,666 2,379
Retail:
United States
Revenue $ 50,850 $ 44,659 $ 95,061 $ 83,413
Operating loss (6,675) (5,680) (14,177) (17,825)
Depreciation and amortization 3,975 3,684 7,455 7,257
United Kingdom/Ireland
Revenue $ 72,714 $ 74,789 $145,318 $135,371
Operating income 18,846 15,041 37,152 26,978
Depreciation and amortization 1,888 2,960 3,976 6,175
Wholesale:
Revenue $ 71,889 $ 47,758 $137,525 $ 87,417
Operating income 9,393 4,068 13,982 2,847
Depreciation and amortization 370 229 704 412
Corporate:
Recovery of raw material costs $ 5,467 $ 5,467
Depreciation and amortization - other 1,023 $ 970 1,970 $ 1,825
Depreciation - manufacturing 2,400 1,975 4,783 3,730
Consolidated totals:
Revenue $251,544 $224,775 $466,634 $391,604
Operating income 44,655 32,925 67,912 37,508
Depreciation and amortization 11,010 11,011 21,554 21,778
13
NBTY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
The following table reflects identifiable assets by market segment:
March 31,
--------------------
2002 2001
---- ----
<s> <c> <c>
Puritan's Pride/Direct Response $ 66,588 $ 66,369
Retail United States 75,630 81,023
Retail United Kingdom/Ireland 210,506 218,678
Wholesale 52,223 35,714
Corporate manufacturing assets 287,130 223,308
--------------------
$692,077 $625,092
====================
8. Recovery of raw material costs:
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 ($3,362
or $.05 per share, after tax) in partial settlement of ongoing price fixing
litigation.
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)
Critical Accounting Policies and Estimates:
- -------------------------------------------
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the
preparation of financial statements. 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. Significant accounting policies
are described in Note 1 to the consolidated financial statements, which are
included in the Company's Annual Report on Form 10-K, for the fiscal year
ended September 30, 2001. Certain accounting policies are deemed "critical",
as they require management's highest degree of judgment, estimates and
assumptions. A discussion of critical accounting policies, the judgments and
uncertainties affecting their application, and the likelihood that
materially different amounts would be reported under different conditions or
using different assumptions follows:
Revenue Recognition:
- --------------------
The Company applies the provisions of Staff Accounting Bulletin 101 "Revenue
Recognition". Revenue is recognized at the time its products are shipped
and title and risk of loss has passed to its customers, and with respect to
its own retail store operations, upon sale of products. The Company's net
sales represent gross sales invoiced to customers, less certain related
charges, including discounts, returns, rebates and other allowances.
Accounts Receivable:
- --------------------
The Company performs ongoing credit evaluations of its customers and adjusts
credit limits based upon payment history and the customer's current credit
worthiness, as determined by the review of their current credit information.
Collections and payments from customers are continuously monitored and an
allowance for doubtful accounts is maintained which is based upon historical
experience and any specific customer collection issues that have been
identified. While such bad debt expenses have historically been within
expectations and allowances established, the Company cannot guarantee that
it will continue to experience the same credit loss rates that it has in the
past.
Inventories:
- ------------
Inventories are stated at the lower of cost or market. The cost elements of
inventory include materials, labor and overhead. The Company regularly
reviews inventory quantities on hand and records a provision for excess and
obsolete inventory based primarily on estimated forecasts of product demand
and production requirements for the next twelve months.
Goodwill and 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. SFAS 142 includes
requirements to annually test goodwill and indefinite lived intangible
assets for
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)
impairment rather than amortize them; accordingly, the Company no longer
amortizes goodwill and indefinite lived intangibles. Definite lived
intangibles are amortized on a straight-line basis over periods not
exceeding 15 years.
Goodwill represents the excess of purchase price over the fair value of
identifiable net assets of companies acquired. The Company currently has
unamortized goodwill remaining from the acquisition of Holland & Barrett
($103,291), NatureSmart ($15,984), Nutrition Warehouse ($7,509), Naturesway
($3,962), Feeling Fine ($3,069), and Global Health Sciences ($628).
Impairment of Long-Lived Assets:
- --------------------------------
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed of." This statement requires
that certain assets be reviewed for impairment and, if impaired, remeasured
at fair value whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable.
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.
Foreign Currency:
- -----------------
Foreign subsidiaries account for approximately 31% of net revenues, 34% of
assets and 28% of total liabilities as of March 31, 2002.
In preparing the consolidated financial statements, the financial statements
of the foreign subsidiaries are translated from the currency in which they
keep their accounting records, generally the local currency, into United
States dollars. This process results in exchange gains and losses, which,
under the relevant accounting guidance are either, included within the
statement of operations or as a separate component of stockholders' equity
under the caption "Accumulated other comprehensive loss."
Under the relevant accounting guidance, the treatment of these translation
gains or losses is dependent upon management's determination of the
functional currency of each subsidiary. The functional currency is
determined based on management's judgment and involves consideration of all
relevant economic facts and circumstances affecting the subsidiary.
Generally, the currency in which the subsidiary transacts a majority of its
transactions, including billings, financing, payroll and other expenditures
would be considered the functional currency but any dependency upon the
parent and the nature of the subsidiary's operations must also be
considered.
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)
If any subsidiary's functional currency is deemed to be the local currency,
then any gain or loss associated with the translation of that subsidiary's
financial statements is included in accumulated other comprehensive loss.
However, if the functional currency is deemed to be the United States
dollar, then any gain or loss associated with the translation of these
financial statements would be included within the statement of operations.
If the Company disposes of subsidiaries, then any cumulative translation
gains or losses would be recorded into the statement of operations. If the
Company determines that there has been a change in the functional currency
of a subsidiary to the United States dollar, any translation gains or losses
arising after the date of change would be included within the statement of
operations.
Based on an assessment of the factors discussed above, the Company considers
the relevant subsidiary's local currency to be the functional currency for
each of its foreign subsidiaries. Accordingly, cumulative translation losses
of approximately $18.7 million and $12.9 million were included as part of
accumulated other comprehensive loss within the balance sheet at March 31,
2002 and September 30, 2001, respectively. During the first six months of
2002 and 2001, translation adjustments of $5.7 million and $7.7 million,
respectively, were included under accumulated other comprehensive loss. Had
the Company determined that the functional currency of its subsidiaries was
the United States dollar, these losses would have reduced net income for
each of the periods presented.
The magnitude of these gains or losses is dependent upon movements in the
exchange rates of the foreign currencies against the United States dollar.
These currencies include the Euro and the United Kingdom Pound Sterling. Any
future translation gains or losses could be significantly higher than those
noted in each of these years. In addition, if a change in the functional
currency of a foreign subsidiary has occurred at any point in time, then the
Company would be required to include any translation gains or losses from
the date of change in the statement of operations.
Results of Operations:
- ----------------------
The following table sets forth income statement data of the Company as a
percentage of net sales for the periods indicated:
17
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)
For the three months For the six months
ended March 31, ended March 31,
-------------------- ------------------
2002 2001 2002 2001
---- ---- ---- ----
<s> <c> <c> <c> <c>
Net sales 100.0% 100.0% 100.0% 100.0%
--------------------------------------
Costs and expenses:
Cost of sales 44.9% 43.5% 45.8% 44.0%
Catalog printing, postage and promotion 5.1% 5.2% 4.7% 7.0%
Selling, general and administrative 34.4% 36.6% 36.1% 39.4%
Recovery of raw material costs -2.2% -1.2%
--------------------------------------
82.2% 85.3% 85.4% 90.4%
--------------------------------------
Income from operations 17.8% 14.7% 14.6% 9.6%
--------------------------------------
Other income (expense):
Interest -1.7% -2.2% -2.2% -2.5%
Miscellaneous, net 0.5% 0.5% 0.4% 0.6%
--------------------------------------
-1.2% -1.7% -1.8% -1.9%
--------------------------------------
Income before income taxes 16.6% 13.0% 12.8% 7.7%
Income taxes 6.4% 5.0% 4.9% 3.0%
--------------------------------------
Net income 10.2% 8.0% 7.9% 4.7%
--------------------------------------
For the three months ended March 31, 2002 compared to the three months ended
March 31, 2001:
Net sales. Net sales in the second quarter ended March 31, 2002 were $251,544
compared with $224,775 for the prior comparable period, an increase of $26,769
or 11.9%. Wholesale sales were $71,889 compared to $47,758, an increase of
$24,131 or 50.5%. Such increase in the wholesale segment's sales was primarily
due to newly acquired businesses ($12,621) and an increase in sales of core
products to the mass market. Products such as Apple Cider Vinegar, Flex-A-Min,
Body Success, and the Knox NutraJoint products continue to help the Company
strengthen its leading market position. Puritan's Pride/Direct Response sales
were $56,091 compared to $57,569, a decrease of $1,478 or 2.6%. U.S. retail
sales were $50,850 compared to $44,659, an increase of $6,191 or 13.9%. Such
increase was a direct result of the success of the Savings Passport Program; a
greater number of stores compared to last year and an increase in same store
sales for stores open more than one year of 9.7% or $4,152. U.K. retail sales
were $72,714 compared to $74,789, a decrease of $2,075 or 2.8%. A sales
promotion that ran the prior year was not repeated in the current period, which
related to the slight decrease in sales. The Company operated 539 stores in the
U.S. and 463 stores in the U.K. as of March 31, 2002 compared to 515 stores in
the U.S. and 442 in the U.K. as of March 31, 2001.
Costs and expenses. Cost of sales were $112,989 for 2002, or 44.9% as a
percentage of sales, compared to $97,804, or 43.5% for 2001. The increase of
$15,185 was due primarily to the increase in
18
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 wholesale segment's cost of sales, which increased $13,048. Such increase
in the Wholesale segment's cost of sales was primarily due to newly acquired
businesses ($10,607) and as a result of the increase in sales of core products
to the mass market. As a result of the Company increasing sales of higher
margin products to the mass market, the Wholesale segment's gross profit
improved from 37.7% to 40.4% as compared to the prior like quarter. The Direct
Response segment's cost of sales increased from 34.8% to 38.7% as a percentage
of direct response sales. Such increase was attributable to the type of
promotion the Company ran in 2002 versus 2001. In 2002, the Company primarily
ran a 3 for 1 catalog and in 2001 the catalog was 5 for 2. U.K. retail costs of
sales were $26,554 compared to $30,790, a decrease of $4,236 or 13.8%. A sales
promotion that ran the prior year was not repeated during the current period
and therefore the gross margin increased from 58.8% to 63.5%. The remaining
increase in cost of sales resulted from the U.S. retail segment's cost of sales
increasing as a percentage of sales from 39.8% to 43.1%. Such increase was
primarily due to the Savings Passport Program's promotions. The U.S retail
segment's gross profit decreased from 60.2% to 56.9% as a result of the above
mentioned promotional strategies. Included in cost of sales was under-absorbed
factory overhead of $3,185.
Catalog printing, postage, and promotion expenses were $12,731 in 2002 compared
with $11,701 in 2001, an increase of $1,030. Such expenses as a percentage of
sales were 5.1% for 2002 and 5.2% for 2001. Of the $1,030 increase, $1,564
was attributable to the increase in promotions for products such as Flex-A-
Min and Body Success, which was offset by a decrease in catalog printing
($534).
Selling, general and administrative expenses were $86,636, an increase of
$4,291 for the quarter, compared with $82,345 in 2001. As a percentage of
sales, selling, general and administrative expenses were 34.4% and 36.6% in
2002 and 2001, respectively. Of the $4,291 increase, $1,026 was attributable to
rent expense, $2,044 to payroll costs mainly associated with the Vitamin World
expansion program, and $1,019 was attributable to increased insurance costs
mainly associated with an increase in insurance rates.
Recovery of raw material costs. During the quarter ended March 31, 2002, the
Company received $5,467 in partial settlement of ongoing price fixing
litigation brought by the Company against certain raw material vitamin
suppliers.
Interest expense. Interest expense was $4,226 for the three months ended March
31, 2002, a decrease of $639, compared with interest expense of $4,865 for the
three months ended March 31, 2001. Interest expense decreased due to the
Company repaying bank debt during the quarter. 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 March 31,
2002 increased $29 primarily attributable to less income realized from exchange
rate fluctuations ($144) offset by a small gain on fixed asset disposals in
2002 as compared to a $235 loss on disposal of businesses and related fixed
assets in 2001.
Income Taxes - The Company's effective income tax rate was approximately
38.5% for the three months ended March 31, 2002 and March 31, 2001.
Net income - After income taxes, the Company had net income of $25,571 (or
basic and diluted earnings per share of $0.39 and $0.38, respectively) for the
three months ended March 31, 2002, and $11,235 (or basic and diluted earnings
per share of $0.27) for the three months ended March 31, 2001.
19
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)
For the six months ended March 31, 2002 compared to the six months ended March
31, 2001:
Net sales. Net sales for the six months ended March 31, 2002 were $466,634
compared with $391,604 for the prior comparable period, an increase of $75,030
or 19.2%. Puritan's Pride/Direct Response sales were $88,730 compared to
$85,403, an increase of $3,327 or 3.9%, Wholesale sales were $137,525 compared
to $87,417, an increase of $50,108 or 57.3%. Such increase in the wholesale
segment's sales was primarily due to newly acquired business ($27,786). U.S.
retail sales were $95,061 compared to $83,413, an increase of $11,648 or 14%
and U.K. retail sales were $145,318 compared to $135,371, an increase of $9,947
or 7.3%. Revenue increases in all of the Company's four segments are
attributable to the continued consumer acceptance of the broad base of the
Company's products. The Company operated 539 stores in the U.S. and 463 stores
in the U.K. as of March 31, 2002 compared to 515 stores in the U.S. and 442 in
the U.K. as of March 31, 2001. 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 7.6% or $5,886.
Costs and expenses. Cost of sales were $213,899 for 2002, or 45.8% as a
percentage of sales, compared to $172,309, or 44% for 2001. The increase of
$41,590 was due primarily to the increase in the wholesale segment's cost of
sales, which increased $33,879, from 60.6% to 63.2% as a percentage of sales.
Such increase in the wholesale segment's cost of sales was primarily due to
newly acquired businesses ($23,623) and as a result of the increase in sales of
core products to the mass market. The overall cost of sales increase was
mitigated by a decrease in the U.S. retail segment's cost of sales, which
decreased from 43.2% to 41.9% as a percentage of sales, primarily due to sales
price increases on all product lines from the prior like period. Included in
cost of sales was under-absorbed factory overhead of $7,197.
Catalog printing, postage, and promotion expenses were $21,741 in 2002 compared
with $27,411 in 2001, a decrease of $5,670. Such expenses as a percentage of
sales were 4.7% for 2002 and 7% for 2001. The decrease was primarily
attributable to the Company not incurring any significant expenses in 2002
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 $168,549, an increase of
$14,173 for the six-month period, compared with $154,376 in 2001. As a
percentage of sales, selling, general and administrative expenses were 36.1%
and 39.4% in 2002 and 2001, respectively. Of the $14,173 increase, $2,143 was
attributable to rent expense, $8,111 to payroll costs mainly associated with
the Vitamin World expansion program, and $1,019 was attributable to increased
insurance costs mainly associated with an increase in insurance rates.
Recovery of raw material costs. During the six months ended March 31, 2002, the
Company received $5,467 in partial settlement of ongoing price fixing
litigation brought by the Company against certain raw material vitamin
suppliers.
Interest expense. Interest expense was $10,234 for the six months ended March
31, 2002, an increase of $399, compared with interest expense of $9,835 for the
six months ended March 31, 2001. Interest expense increased due to the
additional borrowings to fund the two acquisitions completed in the third
quarter of 2001. Such increase was offset by principal payments made by the
Company in the second
20
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)
quarter of 2002. The major components are interest on Senior Subordinated Notes
associated with the Holland & Barrett acquisition, and the CGA used for
acquisitions and capital expenditures.
Miscellaneous, net - Miscellaneous, net for the six months ended March 31, 2002
decreased $494 primarily attributable to exchange rate fluctuations ($415).
Income Taxes - The Company's effective income tax rate was approximately
38.5% for the six months ended March 31, 2002 and March 31, 2001.
Net income - After income taxes, the Company had net income of $36,735 (or
basic and diluted earnings per share of $0.56, and $0.54, respectively) for the
six months ended March 31, 2002, and $18,586 (or basic and diluted earnings per
share of $0.28) for the six months ended March 31, 2001.
Liquidity and Capital Resources
- -------------------------------
As of March 31, 2002, the Company had cash and cash equivalents of
$50,662. Net cash provided by operating activities was $67,187 for the six
months ended March 31, 2002, compared to net cash provided by operating
activities of $27,758 in 2001. The overall increase in cash from operating
activities was attributable to a significant increase in earnings,
recovery of raw material costs, and a significant decrease in inventories;
such amount was slightly offset by a smaller increase in accounts
receivable as compared to the prior like six-month period.
In the six months ended March 31, 2002 and 2001, 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 $16,781 for the six months ended March 31, 2002, resulting
primarily from the cash paid for the business acquisitions of Knox
($4,456) and Healthcentral.com ($2,800), and the purchase of property,
plant and equipment ($10,516), offset by proceeds from the sale of
property, plant and equipment ($991). In the six months ended March 31,
2001, net cash used in investing activities was $13,129, consisting
primarily of cash paid for the purchase of property, plant and equipment
($15,946), offset by proceeds from the sale of property, plant and
equipment ($2,817).
Net cash used in financing activities during the six months ended 2002 was
$32,870, and included principal payments under long-term debt agreements
($38,027) offset by proceeds from the exercise of stock options ($557),
and cash received that was previously held in escrow for the acquisition
of Global Health Sciences ($4,600). Cash used in financing activities of
$771 during fiscal 2001 included borrowings under the CGA of $24,064,
offset by principal payments under long-term debt agreements ($9,123), and
purchase of treasury stock ($15,712).
For the six months ended March 31, 2002, working capital increased $17,933
to $149,041. This increase was primarily attributable to the Company
repaying its bank debt and decreasing its trade payables. Presently, the
CGA is comprised of two term loans and a revolving credit facility. At
March 31, 2002, there were borrowings of $77,813 under the term loans at
an annual borrowing rate of 4.853%. 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 March 31, 2002 was $27,750. The
$50,000 revolving credit facility expires on September 30, 2003 and was
unused at March 31, 2002. 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
21
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)
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.
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.
A summary of contractual cash obligations as of March 31, 2002 is as
follows:
Payments Due By Period
-------------------------------------------------------
Less Than 1-3 4-5 After 5
Total 1 Year Years Years Years
----- --------- ----- ----- -------
(in thousands)
<s> <c> <c> <c> <c> <c>
Long-term debt $233,500 $28,283 $ 45,703 $ 6,973 $152,541
Operating leases 373,793 50,706 90,231 72,156 160,700
Capital leases 682 646 36
-------------------------------------------------------
Total contractual
cash obligations $607,975 $79,635 $135,970 $79,129 $313,241
=======================================================
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.
Financial Covenants and Credit Rating
- -------------------------------------
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.
Moody's Investors Service, Inc. currently rates the Company's Guaranteed
senior secured credit facility, maturing 2003, as a Ba1, the Senior
implied rating as a Ba2, and the Senior subordinated notes, due 2007, as a
B1. Standard & Poor's currently rates the Company's Guaranteed senior
secured credit facility, maturing 2003, as a BB+, the overall corporate
credit rating as BB, and the Senior subordinated notes, due 2007, as a B+.
Both credit agencies' ratings remained unchanged from the prior period.
New accounting developments
- ---------------------------
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
22
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)
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 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.
In February 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 01-09, "Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of the Vendor's Products)"
effective no later than periods beginning after December 15, 2001. EITF
Issue No. 01-09 codifies and reconciles EITF Issue No. 00-14, Accounting for
Certain Sales Incentives, EITF Issue No. 00-22, Accounting for "Points" and
Certain Other Time-Based or Volume-Based Sales Incentive Offers, and EITF
Issue No. 00-25, Accounting for Consideration from a Vendor to a Retailer in
Connection with the Purchase or Promotion of the Vendor's Products. This
EITF addresses the following items:
1) The income statement characterization of consideration given by
a vendor to a customer, specifically whether that consideration
should be presented in the vendor's income statement as a
reduction of revenue or as a cost or expense.
2) Whether a vendor should recognize consideration given to a
customer as an asset in certain circumstances rather than as an
immediate charge in the income statement.
3) When to recognize the "cost" of a sales incentive and how to
measure it.
The Company has determined that the impact of adoption and subsequent
application of EITF Issue No. 01-09 did not have a material effect 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
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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)
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.
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NBTY, INC. AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Quantitative and Qualitative Disclosures About Market Risk
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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.
25
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
The following propositions were approved on April 29, 2002, at NBTY, Inc.'s
Annual Meeting of Stockholders:
Proposition 1: Re-elected Directors to serve until the 2005 Annual Meeting.
Votes Votes Total
For Against Votes
Scott Rudolph 46,774,956 9,511,235 56,286,191
Murray Daly 55,735,208 550,983 56,286,191
Nathan Rosenblatt 55,744,498 541,693 56,286,191
Elected Director
Peter White 55,747,408 538,783 56,286,191
Proposition 2: Adopt the NBTY, Inc. Year 2002 Stock Option Plan.
Votes Votes Total
For Against Votes
51,300,958 4,851,770 56,152,728
Proposition 3: Ratified the designation of PricewaterhouseCoopers LLP as
independent accountants to audit the consolidated financial statements of
the Company for the 2002 fiscal year.
Votes Votes Total
For Against Votes
54,845,478 1,376,204 56,221,682
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
On January 31, 2002, the Company filed Form 8-K in connection with
Harvey Kamil's appointment to President of NBTY, Inc.
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NBTY, INC. AND SUBSIDIARIES
SIGNATURE
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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.
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Date May 3, 2002 /s/ Harvey Kamil
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Harvey Kamil
President and Chief Financial Officer
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