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 June 30, 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 [ ]
The number of shares of the registrant's common stock outstanding as of July
29, 2002 was 66,292,994.
NBTY, INC. and SUBSIDIARIES
FORM 10Q
FISCAL QUARTER ENDED JUNE 30, 2002
INDEX
PART I. Financial Information Page
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Income 2 - 3
Condensed Consolidated Statements of
Stockholders' Equity and Comprehensive Income 4
Condensed Consolidated Statements of Cash Flows 5 - 6
Notes to Condensed Consolidated Financial Statements 7 -14
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15 - 25
ITEM 3. Qualitative and Quantitative Disclosures about
Market Risk 26
PART II. Other Information 27
ITEM 4. Submission of Matters to a Vote of Security Holders 27
ITEM 6. Exhibits and Reports on Form 8-K 27
Signature 28
Exhibits 29 - 30
NBTY, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars and shares in thousands)
Assets June 30, September 30,
2002 2001
-------- -------------
<s> <c> <c>
Current assets:
Cash and cash equivalents $ 38,576 $ 34,434
Investments in bonds 8,558
Accounts receivable, less allowance for
doubtful accounts of $4,606 at
June 30, 2002 and $3,222 at
September 30, 2001 44,643 34,730
Inventories 181,663 184,745
Deferred income taxes 5,318 5,318
Prepaid expenses and other current assets 29,579 21,341
-----------------------
Total current assets 308,337 280,568
Property, plant and equipment, net 218,317 229,216
Goodwill, net 141,655 137,818
Intangible assets, net 49,452 47,910
Other assets 7,276 12,950
-----------------------
Total assets $725,037 $708,462
=======================
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt
and capital lease obligations $ 23,212 $ 34,911
Accounts payable 48,840 50,673
Accrued expenses 83,243 63,876
-----------------------
Total current liabilities 155,295 149,460
Long-term debt and obligations under capital leases 169,551 237,236
Deferred income taxes 16,857 16,761
Other liabilities 2,640 2,599
-----------------------
Total liabilities 344,343 406,056
-----------------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.008 par; authorized 175,000
shares; issued 66,104 shares at June 30,
2002 and 65,724 shares at September 30, 2001
and outstanding 66,104 shares at June 30, 2002
and 65,724 shares at September 30, 2001 529 526
Capital in excess of par 125,280 122,513
Retained earnings 259,628 193,184
-----------------------
385,437 316,223
Stock subscriptions receivable (839) (839)
Accumulated other comprehensive loss (3,904) (12,978)
-----------------------
Total stockholders' equity 380,694 302,406
-----------------------
Total liabilities and stockholders' equity $725,037 $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 June 30,
---------------------
2002 2001
---- ----
<s> <c> <c>
Net sales $251,987 $203,926
---------------------
Costs and expenses:
Cost of sales 111,907 87,460
Catalog printing, postage and promotion 12,544 11,388
Selling, general and administrative 89,217 78,060
Recovery of raw material costs (15,051) -
---------------------
198,617 176,908
---------------------
Income from operations 53,370 27,018
---------------------
Other income (expense):
Interest (4,354) (6,314)
Miscellaneous, net 270 1,030
---------------------
(4,084) (5,284)
---------------------
Income before income taxes 49,286 21,734
Provision for income taxes 19,579 8,368
---------------------
Net income $ 29,707 $ 13,366
=====================
Net income per share:
Basic $ 0.45 $ 0.20
Diluted $ 0.44 $ 0.20
Weighted average common shares outstanding:
Basic 66,056 65,281
Diluted 68,017 67,099
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 nine months
ended June 30,
---------------------
2002 2001
---- ----
<s> <c> <c>
Net sales $718,621 $595,530
---------------------
Costs and expenses:
Cost of sales 325,805 259,769
Catalog printing, postage and promotion 34,285 38,799
Selling, general and administrative 257,765 232,436
Recovery of raw material costs (20,518) -
---------------------
597,337 531,004
---------------------
Income from operations 121,284 64,526
---------------------
Other income (expense):
Interest (14,588) (16,149)
Miscellaneous, net 2,325 3,579
---------------------
(12,263) (12,570)
---------------------
Income before income taxes 109,021 51,956
Provision for income taxes 42,577 20,003
---------------------
Net income $ 66,444 $ 31,953
=====================
Net income per share:
Basic $ 1.01 $ 0.49
Diluted $ 0.98 $ 0.48
Weighted average common shares outstanding:
Basic 65,895 65,865
Diluted 67,723 66,817
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 NINE MONTHS ENDED JUNE 30, 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
=======
Components of compre-
hensive income:
Net income 41,925 41,925 $41,925
Foreign currency
translation
adjustment (126) (126) (126)
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
-----------------------------------------------------------------------------------------------------------
Balance,
September 30, 2001 65,724 526 122,513 193,184 - - (839) (12,978) 302,406 $41,799
=======
Components of compre-
hensive income:
Net income 66,444 66,444 $66,444
Foreign currency
translation
adjustment 8,758 8,758 8,758
Change in net
unrealized gain on
available-for-sale
investments 316 316 316
Treasury stock
retired (10)
Exercise of stock
options 390 3 1,382 1,385
Tax benefit from
exercise of stock
options 1,385 1,385
-----------------------------------------------------------------------------------------------------------
Balance,
June 30, 2002 66,104 $529 $125,280 $259,628 - - $(839) $ (3,904) $380,694 $75,518
===========================================================================================================
See notes to condensed consolidated financial statements.
4
NBTY, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
For the nine months
ended June 30,
--------------------
2002 2001
---- ----
<s> <c> <c>
Cash flows from operating activities:
Net income $ 66,444 $ 31,953
Adjustments to reconcile net income to net cash
provided by operating activities:
(Gain) loss on disposal/sale of property, plant
and equipment (75) 512
Depreciation and amortization 31,512 32,576
Amortization of deferred financing costs 585 585
Amortization of bond discount 93 93
Allowance for doubtful accounts 1,384 325
Tax benefit from exercise of stock options 1,385 78
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (11,295) (5,767)
Inventories 6,984 (27,739)
Prepaid expenses and other current assets (8,206) (3,240)
Other assets 1,074 (67)
Accounts payable (2,571) (5,847)
Accrued expenses 19,088 19,256
Other liabilities 42 (5)
---------------------
Net cash provided by operating activities 106,444 42,713
---------------------
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired (7,256) (68,177)
Purchase of property, plant and equipment (16,427) (26,961)
Proceeds from sale of property, plant and equipment 1,004 4,162
Proceeds from sale of intangibles 25
Purchase of investments (8,242)
Increase in intangible assets (40)
---------------------
Net cash used in investing activities (30,896) (91,016)
---------------------
Cash flows from financing activities:
Net proceeds under Credit & Guarantee Agreement 91,064
Release of cash held in escrow 4,600
Principal payments under long-term debt agreements
and capital leases (79,477) (12,300)
Purchase of treasury stock (15,699)
Proceeds from stock options exercised 1,385 155
---------------------
Net cash (used in) provided by financing activities (73,492) 63,220
---------------------
Effect of exchange rate changes on cash and cash equivalents 2,086 (1,920)
---------------------
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 nine months
ended June 30,
--------------------
2002 2001
---- ----
<s> <c> <c>
Net increase in cash and cash equivalents $ 4,142 $ 12,997
Cash and cash equivalents at beginning of period 34,434 31,464
---------------------
Cash and cash equivalents at end of period $ 38,576 $ 44,461
=====================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 11,427 $ 12,558
Cash paid during the period for income taxes $ 30,619 $ 12,928
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 June 30, 2002 and
its results of operations for the three and nine months ended June 30, 2002
and 2001 and statements of cash flows for the nine months ended June 30,
2002 and 2001. All such adjustments are of a normal recurring nature. The
results for interim periods are not necessarily indicative of the results to
be expected for the full year ending September 30, 2002. As these are
condensed consolidated financial statements, 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 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 addresses financial accounting and reporting
for the impairment
7
NBTY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
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 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 out of bankruptcy certain assets
of HealthCentral.com for 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 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. 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
acquisition.
3. Comprehensive income
Total comprehensive income for the Company includes net income, the effects
of foreign currency translation and unrealized gains on available-for-sale
securities, which are charged or credited to the cumulative other
comprehensive loss account within stockholders' equity.
8
NBTY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
Total comprehensive income for the three and nine months ended June 30, 2002
and 2001 are as follows:
<CAPTI0N>
For the three months For the nine months
ended June 30, ended June 30,
-------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
<s> <c> <c> <c> <c>
Net income $29,707 $13,366 $66,444 $31,953
Changes in:
Unrealized holding gains 316 316
Foreign currency translation
adjustments 14,495 (1,646) 8,758 (9,334)
-----------------------------------------
Comprehensive earnings $44,518 $11,720 $75,518 $22,619
=========================================
Accumulated other comprehensive loss, which is classified as a separate
component of stockholders' equity, is comprised of cumulative translation
adjustments of ($4,220) and ($12,978) at June 30, 2002 and September 30,
2001, respectively, and net unrealized gains on available-for-sale
securities of $316 at June 30, 2002.
4. Investments in bonds
These available-for-sale securities are stated at estimated fair value based
upon market quotes. Unrealized gains and losses are included in Accumulated
other comprehensive loss within the stockholders' equity section of the
balance sheet. The cost of such investments at June 30, 2002 was $8,242.
5. Inventories
The components of inventories are as follows:
June 30, September 30,
2002 2001
-------- -------------
<s> <c> <c>
Raw materials $ 65,838 $ 66,519
Work-in-process 5,520 4,558
Finished goods 110,305 113,668
-----------------------
$181,663 $184,745
=======================
6. Earnings per share (EPS)
Basic EPS computations are based on the weighted average number of common
shares outstanding during the three and nine-month periods ended June 30,
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 nine months
ended June 30, ended June 30,
-------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
<s> <c> <c> <c> <c>
Numerator:
Numerator for basic EPS - income
available to common stockholders $29,707 $13,366 $66,444 $31,953
=========================================
Numerator for diluted EPS - income
available to common stockholders $29,707 $13,366 $66,444 $31,953
=========================================
Denominator:
Denominator for basic EPS -
weighted-average shares 66,056 65,281 65,895 65,865
Effect of dilutive securities:
Stock options 1,961 1,818 1,828 952
-----------------------------------------
Denominator for diluted EPS -
weighted-average shares 68,017 67,099 67,723 66,817
=========================================
Net EPS:
Basic EPS $ 0.45 $ 0.20 $ 1.01 $ 0.49
=========================================
Diluted EPS $ 0.44 $ 0.20 $ 0.98 $ 0.48
=========================================
7. 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 June 30, 2002 and September 30, 2001 is as follows:
June 30, 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 $64,286 $17,770 $61,511 $15,107 6 - 15
Trademark and licenses 2,404 2,106 2,404 1,763 2 - 3
Covenants not to compete 2,605 1,767 2,405 1,540 5 - 7
-----------------------------------------------------------
$69,295 $21,643 $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 nine month
period ended June 30, 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) 384 119
Foreign currency
translation 3,718 3,718
--------------------------------------------------------------------------
Balance at
June 30, 2002 $15,937 $7,588 $114,437 $3,693 $141,655
==========================================================================
The Company currently has unamortized goodwill remaining from the
acquisition of Holland & Barrett ($109,988), NatureSmart ($15,984),
Nutrition Warehouse ($7,510), Natures Way ($4,480), Feeling Fine ($3,069),
and Global Health Sciences ($624) 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 nine months ended June 30, 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 nine months ended June 30, 2002 was approximately $1,100 and
$3,300, respectively. Aggregate amortization expense of definite lived
intangible assets for the three and nine months ended June 30, 2001 was
approximately $975 and $2,800, respectively.
Estimated amortization expense for the next five fiscal years is as follows:
For the year ending September 30,
- ---------------------------------
<s> <c>
2002 $4,271
2003 $4,150
2004 $3,851
2005 $3,705
2006 $3,654
As required by SFAS 142, the results for the nine months ended June 30, 2002
have not been restated. A reconciliation of net income, as if SFAS 142 had
been adopted, is presented below for the three and nine months ended June
30, 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 nine months
ended June 30, ended June 30,
-------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
<s> <c> <c> <c> <c>
Reported net income $29,707 $13,366 $66,444 $31,953
Addback: goodwill amortization 1,526 4,472
-----------------------------------------
Adjusted net income $29,707 $14,892 $66,444 $36,425
=========================================
Basic earnings per share:
Reported net income $ 0.45 $ 0.20 $ 1.01 $ 0.49
Addback: goodwill amortization 0.02 0.07
-----------------------------------------
Adjusted net income $ 0.45 $ 0.22 $ 1.01 $ 0.56
=========================================
Diluted earnings per share:
Reported net income $ 0.44 $ 0.20 $ 0.98 $ 0.48
Addback: goodwill amortization 0.02 0.07
-----------------------------------------
Adjusted net income $ 0.44 $ 0.22 $ 0.98 $ 0.55
=========================================
8. 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 or loss (prior to corporate allocations) of each segment.
The Company's segment reporting disclosures have been changed to exclude
corporate general and administrative allocations, as this is the key
performance indicator reviewed by management. Prior periods presented have
been reclassified to conform to the current year presentation. Operating
income or loss for each segment does not include corporate general and
administrative expenses, interest expense and other miscellaneous income/
expense items. Such unallocated expenses remain in the corporate segment.
The U.K./Ireland operations do not include any transfer pricing absorption.
The Company reports four worldwide segments: Puritan's Pride/Direct
Response, Retail: United States, Retail: 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
540 Company-operated stores. The Retail United Kingdom/Ireland segment
generates revenue through the sale of proprietary brand and third-party
products in 465 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 nine months
ended June 30, ended June 30,
-------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
<s> <c> <c> <c> <c>
Puritan's Pride/Direct Response
Revenue $ 49,384 $ 42,475 $138,114 $127,878
Income from operations 17,711 17,517 51,940 50,757
Depreciation and amortization 1,343 1,251 4,009 3,629
Retail:
United States
Revenue $ 51,287 $ 45,268 $146,347 $128,680
Loss from operations (94) (669) (5,034) (10,834)
Depreciation and amortization 2,850 3,003 10,305 10,260
United Kingdom/Ireland
Revenue $ 71,165 $ 63,427 $216,484 $198,798
Income from operations 18,533 15,705 59,041 47,100
Depreciation and amortization 2,007 3,083 5,985 9,258
Wholesale:
Revenue $ 80,151 $ 52,756 $217,676 $140,174
Income from operations 20,559 8,329 44,211 17,575
Depreciation and amortization 94 297 797 708
Corporate:
Recovery of raw material costs $ 15,051 $ 20,518
Corporate expenses (18,390) $(13,864) (49,392) $(40,072)
Depreciation and amortization - other 1,050 931 3,020 2,756
Depreciation - manufacturing 2,612 2,225 7,396 5,965
Consolidated totals:
Revenue $251,987 $203,926 $718,621 $595,530
Income from operations 53,370 27,018 121,284 64,526
Depreciation and amortization 9,956 10,790 31,512 32,576
</TABLE
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:
June 30,
--------------------
2002 2001
---- ----
<s> <c> <c>
Puritan's Pride/Direct Response $ 68,435 $ 77,076
Retail United States 74,362 83,493
Retail United Kingdom/Ireland 233,847 222,647
Wholesale 53,561 59,781
Corporate manufacturing assets 294,832 262,547
--------------------
$725,037 $705,544
====================
9. Recovery of raw material costs:
The Company was a plaintiff in a vitamin antitrust litigation matter brought
in the United States District Court in the District of Columbia against
several vitamin manufacturers for alleged price fixing. Certain of the
defendants have pleaded guilty in criminal proceedings arising from the same
set of facts. Settlements with certain defendants have been made. In January
and May 2002, the Company received $5,467 and $15,051, respectively,
($12,619 or $.19 per share, after tax) relating to such settlements.
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)
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements of the Company and the notes thereto
included elsewhere herein.
Forward Looking Statements:
- ---------------------------
This report contains certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 with respect to our
financial condition, results of operations and business. All of these
forward-looking statements, which can be identified by the use of
terminology such as "subject to," "believe," "expects," "may," "will,"
"should," "can," or "anticipates," or the negative thereof, or variations
thereon, or comparable terminology, or by discussions of strategy which,
although believed to be reasonable, are inherently uncertain. Factors that
may affect such forward-looking statements include (i) slow or negative
growth in the nutritional supplement industry; (ii) disruptions of business
or negative impact on sales and earnings due to acts of war, terrorism, bio-
terrorism, or civil unrest; (iii) adverse publicity regarding the
consumption of nutritional supplements; (iv) inability to retain customers
of companies (or mailing lists) recently acquired; (v) increased
competition; (vi) increased costs; (vii) loss or retirement of key members
of management; (viii) increases in the cost of borrowings and unavailability
of additional debt or equity capital; (ix) unavailability of, or inability
to consummate, advantageous acquisitions in the future or the inability of
the Company to integrate acquisitions into the mainstream of its business;
(x) changes in general worldwide economic and political conditions in the
markets in which the Company may compete from time to time; (xi) the
inability of the Company to gain and/or hold market share of its wholesale
and retail customers; (xii) unavailability of electricity in certain
geographical areas; (xiii) exposure to, expense of defending and resolving,
product liability claims and other litigation; (xiv) the ability of the
Company to successfully implement its business strategy; (xv) the inability
of the Company to manage its retail operations efficiently; (xvi) consumer
acceptance of the Company's products; (xvii) uncertainty in negotiating and
consummating acquisitions which may be subject to bankruptcy court approval;
(xviii) the inability of the Company to renew leases on its retail
locations; (xix) inability of the Company's retail stores to attain
profitability; (xx) the absence of clinical trials for many of the Company's
products; (xxi) sales and earnings volatility; (xxii) the Company's ability
to manufacture its products efficiently; (xxiii) the rapidly changing nature
of the Internet and on-line commerce; (xxiv) fluctuations in foreign
currencies, and more particularly the British Pound; (xxv) import-export
controls on sales to foreign countries; (xxvi) the inability of the Company
to secure favorable new sites for, and delays in opening, new retail
locations; (xxvii) introduction of new federal, state or foreign legislation
or regulation or adverse determinations by regulators, and more particularly
the Food Supplements Directive and the Traditional Herbal Medicinal Products
Directive in Europe; (xxviii) the mix of the Company's products and the
profit margins thereon; (xxix) the availability and pricing of raw
materials; (xxx) risk factors discussed in the Company's filings with the
Securities and Exchange Commission; and (xxxi) other factors beyond the
Company's control. Readers are cautioned not to place undue reliance on
forward-looking statements. The Company undertakes no obligation to
republish or revise forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrences of
unanticipated events. The Company cannot guarantee future results, events,
levels of activity, performance or achievements. The Company does not assume
a duty to update or revise any of the forward-looking statements as a result
of new information, future events or otherwise.
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
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)
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 could be reported under different conditions or
using different assumptions follows:
Revenue Recognition:
- --------------------
The Company applies the provisions of Staff Accounting Bulletin 101 "Revenue
Recognition". The Company recognizes revenue from products shipped when
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 on-going 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 $6,100,
which is not deductible for tax purposes. 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
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)
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
($109,988), NatureSmart ($15,984), Nutrition Warehouse ($7,510), Natures Way
($4,480), Feeling Fine ($3,069), and Global Health Sciences ($624).
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, 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 30% of net revenues, 32% of
assets and 10% of total liabilities as of June 30, 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.
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
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)
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 $4,220 and $12,978 were included as part of accumulated
other comprehensive loss within the balance sheet at June 30, 2002 and
September 30, 2001, respectively. During the first nine months of 2002 and
2001, translation gains (losses) of $8,758 and ($9,334), 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 gains (losses) would have increased (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.
General
- -------
Operating results in all periods presented reflect the impact of
acquisitions. The timing of those acquisitions and the changing mix of
businesses as acquired companies are integrated into the Company may affect
the comparability of results from one period to another.
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)
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 For the nine months
ended June 30, ended June 30,
-------------------- -------------------
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 44.4% 42.9% 45.3% 43.6%
Catalog printing, postage and promotion 5.0% 5.6% 4.8% 6.5%
Selling, general and administrative 35.4% 38.3% 35.9% 39.0%
Recovery of raw material costs -6.0% -2.9%
------------------------------------------
78.8% 86.8% 83.1% 89.1%
------------------------------------------
Income from operations 21.2% 13.2% 16.9% 10.9%
------------------------------------------
Other income (expense):
Interest -1.7% -3.1% -2.0% -2.7%
Miscellaneous, net 0.1% 0.5% 0.3% 0.6%
------------------------------------------
-1.6% -2.6% -1.7% -2.1%
------------------------------------------
Income before income taxes 19.6% 10.6% 15.2% 8.8%
Income taxes 7.8% 4.1% 5.9% 3.4%
------------------------------------------
Net income 11.8% 6.5% 9.3% 5.4%
==========================================
For the three months ended June 30, 2002 compared to the three months ended
June 30, 2001:
Net sales. Net sales in the third quarter ended June 30, 2002 were $251,987
compared with $203,926 for the prior comparable period, an increase of $48,061
or 23.6%. Wholesale sales were $80,151 compared to $52,756, an increase of
$27,395 or 51.9%. Such increase in the wholesale segment's sales was primarily
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)
due to newly acquired businesses ($11,878) and an increase in sales of core
products to the mass market. Products such as Apple Cider Vinegar, Flex-A-
Min(R), and the Knox NutraJoint(R) products continue to help the Company
strengthen its leading market position. In addition, greater consumer awareness
and acceptance of natural alternatives including flaxseed oil, fish oils and
soy-based products has also contributed to increased sales and enhanced market
position. Puritan's Pride/Direct Response sales were $49,384 compared to
$42,475, an increase of $6,909 or 16.3%. Such increase was attributable to
greater website sales and growing number of products available via catalog.
U.S. retail sales were $51,287 compared to $45,268, an increase of $6,019 or
13.3%. Such increase was a direct result of the success of the Savings Passport
Program, an increase in the overall number of stores compared to last year and
an increase in same store sales for stores open more than one year of 11% or
$4,803. U.K./Ireland retail sales were $71,165 compared to $63,427, an increase
of $7,738 or 12.2%. Such increase was mainly attributable to a greater number
of stores open this year as compared to last year and an increase in same store
sales for stores open more than one year of 10.4% or $6,239. The Company
operated 540 stores in the U.S. and 465 stores in the U.K./Ireland as of June
30, 2002 compared to 523 stores in the U.S. and 458 in the U.K./Ireland as of
June 30, 2001.
Cost of sales. Cost of sales were $111,907 for 2002, or 44.4% as a percentage
of sales, compared to $87,460, or 42.9% for 2001. The $24,447 increase in cost
of sales was directly associated with the increase in the Company's net sales.
The Wholesale segment's cost of sales decreased from 62% to 55% as a percentage
of wholesale sales as a result of the Company increasing sales of higher margin
products to the mass market. The Puritan's Pride/Direct Response segment's cost
of sales increased from 30.4% to 40.3% as a percentage of direct response
sales. Such increase was attributable to price reductions on certain products
and the type of catalog promotions the Company ran in 2002 versus 2001. In
2002, the Company primarily ran a 70% off and a 3 for 1 catalog. U.K./Ireland
retail costs of sales increased from 36.7% to 37.6% as a percentage of
U.K./Ireland sales. The remaining increase in cost of sales resulted from
the U.S. retail segment's cost of sales increasing from 39.9% to 41.4% as a
percentage of U.S. retail sales. Such increase was primarily due to the
Savings Passport Program's promotions. Included in cost of sales was
under-absorbed factory overhead of $1,887.
Catalog printing, postage, and promotion expenses were $12,544 in 2002 compared
with $11,388 in 2001, an increase of $1,156. Such expenses as a percentage of
sales were 5% for 2002 and 5.6% for 2001. Of the $1,156 increase, $1,715 was
attributable to the increase in promotions for products, mainly via
magazines, newspapers and mailing programs, which was offset by a decrease in
catalog printing ($559).
Selling, general and administrative expenses were $89,217, an increase of
$11,157 for the quarter, compared with $78,060 in 2001. As a percentage of
sales, selling, general and administrative expenses were 35.4% and 38.3% in
2002 and 2001, respectively. Of the $11,157 increase, $866 was attributable to
rent expense, $4,103 to payroll costs mainly associated with the Vitamin World
expansion program and business acquisitions, $2,083 to increased insurance
costs mainly associated with an increase in general insurance rates, $1,518 to
freight and $881 to broker commissions, which was directly associated with the
increase in wholesale sales.
Recovery of raw material costs. During the quarter ended June 30, 2002, the
Company received $15,051 in settlement of price fixing litigation brought by
the Company against certain raw material vitamin suppliers.
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)
Interest expense. Interest expense was $4,354 for the three months ended June
30, 2002, a decrease of $1,960 compared with interest expense of $6,314 for the
three months ended June 30, 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 June 30,
2002 decreased $760 primarily attributable to exchange rate fluctuations
($1,089).
Income Taxes - The Company's effective income tax rate was approximately 39%
for the three months ended June 30, 2002 and June 30, 2001.
Net income - After income taxes, the Company had net income of $29,707 (or
basic and diluted earnings per share of $0.45 and $0.44, respectively) for the
three months ended June 30, 2002, and $13,366 (or basic and diluted earnings
per share of $0.20) for the three months ended June 30, 2001.
For the nine months ended June 30, 2002 compared to the nine months ended June
30, 2001:
Net sales. Net sales for the nine months ended June 30, 2002 were $718,621
compared with $595,530 for the prior comparable period, an increase of $123,091
or 20.7%. Wholesale sales were $217,676 compared to $140,174, an increase of
$77,502 or 55.3%. Such increase in the wholesale segment's sales was primarily
due to newly acquired business ($39,663) and an increase in sales of core
products to the mass market. Puritan's Pride/Direct Response sales were
$138,114 compared to $127,878, an increase of $10,236 or 8%. Such increase was
attributable to the Company increasing the number of products available via
catalog and an increase in website sales. U.S. retail sales were $146,347
compared to $128,680, an increase of $17,667 or 13.7%. 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
8.4% or $9,871. U.K. retail sales were $216,484 compared to $198,798, an
increase of $17,686 or 8.9%. Such increase was mainly attributable to a greater
number of stores open this year as compared to last year and an increase in
same store sales for stores open more than one year of 5% or $8,924. 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 540 stores in the U.S. and 465 stores in the U.K./Ireland as
of June 30, 2002 compared to 523 stores in the U.S. and 458 in the U.K./Ireland
as of June 30, 2001.
Cost of sales. Cost of sales were $325,805 for 2002, or 45.3% as a percentage
of sales, compared to $259,769, or 43.6% for 2001. The $66,036 increase was
directly associated with the increase in the Company's net sales. The Wholesale
segment's cost of sales decreased from 61.1% to 60.2% primarily as a result of
increasing sales of higher margin products to the mass market. The Puritan's
Pride/Direct Response segment's cost of sales increased from 33.4% to 38.1%
primarily due to price reductions on certain products and the type of catalog
promotions the Company ran in 2002 versus 2001. The U.S. Retail segment's cost
of sales decreased from 42.1% to 41.7% as a percentage of U.S. retail 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
$9,083.
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)
Catalog printing, postage, and promotion expenses were $34,285 in 2002 compared
with $38,799 in 2001, a decrease of $4,514. Such expenses as a percentage of
sales were 4.8% for 2002 and 6.5% 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(R)
advertising campaign. The Company also had a decrease in catalog printing
($317).
Selling, general and administrative expenses were $257,765, an increase of
$25,329 for the nine-month period, compared with $232,436 in 2001. As a
percentage of sales, selling, general and administrative expenses were 35.9%
and 39% in 2002 and 2001, respectively. Of the $25,329 increase, $3,010 was
attributable to rent expense, $12,214 to payroll costs mainly associated with
the Vitamin World expansion program and business acquisitions, $3,144 to
increased insurance costs mainly associated with an increase in general
insurance rates, $3,020 to freight and $2,189 to broker commissions, which was
directly associated with the increase in wholesale sales.
Recovery of raw material costs. During the nine months ended June 30, 2002, the
Company received $20,518 in settlement of price fixing litigation brought by
the Company against certain raw material vitamin suppliers.
Interest expense. Interest expense was $14,588 for the nine months ended June
30, 2002, a decrease of $1,561, compared with interest expense of $16,149 for
the nine months ended June 30, 2001. Interest expense decreased due to the
Company repaying bank debt during the last two quarters. 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 nine months ended June 30, 2002
decreased $1,254 primarily attributable to exchange rate fluctuations ($1,504).
Income Taxes - The Company's effective income tax rate was approximately 39%
for the nine months ended June 30, 2002 and June 30, 2001.
Net income - After income taxes, the Company had net income of $66,444 (or
basic and diluted earnings per share of $1.01, and $0.98, respectively) for the
nine months ended June 30, 2002, and $31,953 (or basic and diluted earnings per
share of $0.49, and $0.48, respectively) for the nine months ended June 30,
2001.
Seasonality
- -----------
The Company believes that its business is not seasonal. Historically, the
Company has slightly lower net sales in its first and third fiscal quarters,
and slightly higher net sales in its second and fourth fiscal quarters. The
Company may have higher net sales in a quarter depending upon when it has
engaged in significant promotional activities.
Liquidity and Capital Resources
- -------------------------------
As of June 30, 2002, the Company had cash and cash equivalents of $38,576.
Net cash provided by operating activities was $106,444 for the nine months
ended June 30, 2002, compared to net cash provided by operating activities
of $42,713 in 2001. The overall increase in cash from operating activities
was attributable to an increase in earnings (which included the recovery
of raw material
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)
costs), and a decrease in inventories; such amount was slightly offset by
a smaller increase in accounts receivable as compared to the prior like
nine-month period.
For the nine months ended June 30, 2002, 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 $30,896 for the nine months ended June 30, 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 ($16,427), offset by proceeds from the sale of
property, plant and equipment ($1,004). In addition, the Company made a
strategic investment in high yield; high risk corporate bonds ($8,242).
For the nine months ended June 30, 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 $91,016, consisting primarily of cash paid for the business
acquisitions, net of cash acquired, of Global Health Sciences ($38,807)
and NatureSmart ($29,370), and the purchase of property, plant and
equipment ($26,961), offset by proceeds from the sale of property, plant
and equipment ($4,162).
Net cash used in financing activities during the nine months ended 2002
was $73,492, and included principal payments under long-term debt
agreements ($79,477) offset by proceeds from the exercise of stock options
($1,385), and cash received that was previously held in escrow for the
acquisition of Global Health Sciences ($4,600). Cash provided by financing
activities of $63,220 during fiscal 2001 included borrowings under the CGA
of $91,064, offset by principal payments under long-term debt agreements
($12,300), and purchase of treasury stock ($15,699).
For the nine months ended June 30, 2002, working capital increased $21,934
to $153,042. This increase was primarily attributable to the Company
repaying its bank debt and increasing its current assets. Presently, the
CGA is comprised of two term loans and a revolving credit facility. At
June 30, 2002, there were borrowings of $36,750 under one term loan. This
term loan has an annual borrowing rate of 4.598% and is payable in
quarterly installments of $5,563. The current portion of this term loan at
June 30, 2002 was $22,250. The Company repaid the other term loan during
the third quarter 2002. The $50,000 revolving credit facility expires on
September 30, 2003 and was unused at June 30, 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 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 June 30, 2002 is as
follows:
23
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)
Payments Due By Period
------------------------------------------------------------
Less Than 1-3 4-5 After 5
Total 1 Year Years Years Years
----- --------- ----- ----- -------
<s> <c> <c> <c> <c> <c>
Long-term debt $192,339 $22,795 $ 15,725 $ 1,442 $152,377
Operating leases 373,793 50,706 90,231 72,156 160,700
Capital leases 424 417 7
------------------------------------------------------------
Total contractual
cash obligations $566,556 $73,918 $105,963 $73,598 $313,077
============================================================
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.
NBTY has grown through acquisitions, and expects to continue seeking to
acquire entities in similar or complementary businesses. Such acquisitions
are likely to require the incurrence and/or assumption of indebtedness
and/or obligations, the issuance of equity securities or some combination
thereof. In addition, NBTY may from time to time determine to sell or
otherwise dispose of certain of its existing businesses, NBTY cannot predict
if any such transactions will be consummated, nor the terms or forms of
consideration which might be required in any such transactions.
Inflation:
- ----------
Management believes that inflation did not have a significant impact on its
operations. Inflation has not had a significant impact on the Company in the
past three years nor is it expected to have a significant impact in the
foreseeable future.
Financial Covenants and Credit Rating
- -------------------------------------
The Company's credit arrangements 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 Notes as a B1, and the
CGA has an implied rating of Ba2. Standard & Poor's currently rates the
Notes as a B+, the CGA as a BB+, and gives the Company an overall
corporate credit rating as BB. Both credit agencies' ratings remained
unchanged from the prior period.
24
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)
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. 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 $6,100.
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 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 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.
25
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.
26
NBTY, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
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, final tabulations are as follows:
Proposition 1: Re-elect Directors to serve until the 2005 Annual Meeting.
Votes Votes Total
For Against Votes
Scott Rudolph 51,522,275 9,686,140 61,208,415
Murray Daly 60,657,282 551,133 61,208,415
Nathan Rosenblatt 60,666,572 541,843 61,208,415
Elect Director
Peter White 60,669,482 538,933 61,208,415
Proposition 2: Adopt the NBTY, Inc. Year 2002 Stock Option Plan.
Votes Votes Total
For Against Votes
54,530,375 6,542,827 61,073,202
Proposition 3: Ratify 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
59,532,747 1,608,359 61,141,106
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 99.1 Certification of Chief Executive Officer Pursuant
to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification of Chief Financial Officer Pursuant
to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
b. Reports on Form 8-K during the quarter ended June 30, 2002.
There was no Form 8-K filed during the quarter covered by this
report.
27
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, thereunto duly authorized.
NBTY, INC.
(Registrant)
Date: August 7, 2002 By: /s/ Harvey Kamil
--------------------------
Harvey Kamil
President and Chief Financial Officer
(Principal Financial and Accounting
Officer)
28