UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the period ended December 31, 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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act):
YES [X] NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Title of Class Shares Outstanding
Common Stock as of January 24, 2003
Par value $.008 per share 66,451,570
NBTY, INC. and SUBSIDIARIES
FORM 10-Q
FISCAL QUARTER ENDED DECEMBER 31, 2002
INDEX
PART I. Financial Information Page
ITEM 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Income 2
Condensed Consolidated Statements of
Stockholders' Equity and Comprehensive Income 3
Condensed Consolidated Statements of Cash Flows 4 - 5
Notes to Condensed Consolidated Financial Statements 6 - 13
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14 - 23
ITEM 3. Qualitative and Quantitative Disclosures about Market
Risk 24
ITEM 4. Controls and Procedures 25
PART II. Other Information
ITEM 6. Exhibits and Reports on Form 8-K 26
Signatures 27
Certifications 28 - 29
Exhibits 30 - 31
ITEM 1:
NBTY, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars and shares in thousands)
Assets December 31, September 30,
2002 2002
------------ -------------
<s> <c> <c>
Current assets:
Cash and cash equivalents $ 38,130 $ 26,229
Investments in bonds, at fair value 8,467 8,194
Accounts receivable, less allowance for
doubtful accounts of $4,422 at
December 31, 2002 and $4,194 at
September 30, 2002 36,848 41,362
Inventories 214,757 204,402
Deferred income taxes 11,206 11,206
Prepaid expenses and other current assets 23,912 24,691
-------------------------
Total current assets 333,320 316,084
Property, plant and equipment, net 218,711 216,245
Goodwill 147,770 144,999
Intangible assets, net 47,324 48,413
Other assets 5,758 8,936
-------------------------
Total assets $752,883 $734,677
=========================
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt
and capital lease obligations $ 22,889 $ 23,044
Accounts payable 38,463 48,616
Accrued expenses and other current liabilities 70,619 58,714
-------------------------
Total current liabilities 131,971 130,374
Long-term debt 158,194 163,874
Deferred income taxes 16,970 16,928
Other liabilities 4,215 4,244
-------------------------
Total liabilities 311,350 315,420
-------------------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.008 par; authorized 175,000
shares; issued and outstanding 66,233
shares at December 31, 2002 and
66,133 shares at September 30, 2002 530 529
Capital in excess of par 127,993 126,283
Retained earnings 304,492 287,868
-------------------------
433,015 414,680
Accumulated other comprehensive income 8,518 4,577
-------------------------
Total stockholders' equity 441,533 419,257
-------------------------
Total liabilities and stockholders' equity $752,883 $734,677
=========================
See notes to condensed consolidated financial statements.
1
NBTY, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars and shares in thousands, except per share amounts)
For the three months
ended December 31,
----------------------
2002 2001
---- ----
<s> <c> <c>
Net sales $241,404 $215,090
---------------------
Costs and expenses:
Cost of sales 106,680 100,910
Catalog printing, postage and promotion 13,855 9,010
Selling, general and administrative 93,375 81,912
---------------------
213,910 191,832
---------------------
Income from operations 27,494 23,258
---------------------
Other income (expense):
Interest (4,046) (6,008)
Miscellaneous, net 1,239 903
---------------------
(2,807) (5,105)
---------------------
Income before income taxes 24,687 18,153
Provision for income taxes 8,063 6,989
---------------------
Net income $ 16,624 $ 11,164
=====================
Net income per share:
Basic $ 0.25 $ 0.17
Diluted $ 0.24 $ 0.17
Weighted average common shares outstanding:
Basic 66,172 65,727
Diluted 68,078 67,251
See notes to condensed consolidated financial statements.
2
NBTY, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME FOR THE YEAR ENDED SEPTEMBER 30, 2002
AND THREE MONTHS ENDED DECEMBER 31, 2002
(Unaudited)
(Dollars and shares in thousands)
Common Stock Accumulated
------------------ Capital Stock Other Total Total
Number of in Excess Retained Subscriptions Comprehensive Stockholders' Comprehensive
Shares Amount of Par Earnings Receivable Income (Loss) Equity Income
--------- ------ --------- -------- ------------- ------------- ------------- -------------
<s> <c> <c> <c> <c> <c> <c> <c> <c>
Balance,
September 30, 2001 65,724 $526 $122,513 $193,184 $(839) $(12,978) $302,406 $ 41,799
========
Components of
comprehensive
income:
Net income 95,791 95,791 $ 95,791
Foreign currency
translation
adjustment 17,603 17,603 17,603
Change in net
unrealized gain
on available-for
-sale investments (48) (48) (48)
Treasury stock
retired (71) (1) (113) (1,107) (1,221)
Exercise of stock
options 480 4 2,068 2,072
Tax benefit from
exercise of stock
options 1,815 1,815
Repayment of stock
subscriptions
receivable 839 839
------------------------------------------------------------------------------------------------------
Balance,
September 30, 2002 66,133 529 126,283 287,868 - 4,577 419,257 $113,346
========
Components of
comprehensive
income:
Net income 16,624 16,624 $ 16,624
Foreign currency
translation
adjustment 3,668 3,668 3,668
Change in net
unrealized gain
on available-for
-sale investments 273 273 273
Shares issued and
contributed to ESOP 100 1 1,710 1,711
------------------------------------------------------------------------------------------------------
Balance,
December 31, 2002 66,233 $530 $127,993 $304,492 $ 0 $ 8,518 $441,533 $ 20,565
======================================================================================================
See notes to condensed consolidated financial statements.
3
NBTY, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
For the three months
ended December 31,
--------------------
2002 2001
---- ----
<s> <c> <c>
Cash flows from operating activities:
Net income $ 16,624 $11,164
Adjustments to reconcile net income to net cash
provided by operating activities:
(Gain) loss on disposal/sale of property, plant
and equipment (969) 26
Depreciation and amortization 10,555 10,543
Foreign currency exchange rate loss 1,420
Amortization of deferred financing costs 196 191
Amortization of bond discount 31 31
Allowance for doubtful accounts 228 450
Compensation expense for ESOP 428
Changes in assets and liabilities, net of acquisitions:
Accounts receivable 3,735 (2,184)
Inventories (9,372) 10,242
Prepaid expenses and other current assets 2,360 2,549
Other assets 1,132 959
Accounts payable (10,594) (5,709)
Accrued expenses and other current liabilities 8,823 (6,204)
Other liabilities (30) (3)
--------------------
Net cash provided by operating activities 24,567 22,055
--------------------
Cash flows from investing activities:
Cash paid for acquisitions (6,843)
Release of cash held in escrow 2,403 4,600
Purchase of property, plant and equipment (11,322) (5,585)
Proceeds from sale of property, plant and equipment 1,293
--------------------
Net cash used in investing activities (7,626) (7,828)
--------------------
Cash flows from financing activities:
Principal payments under long-term debt agreements
and capital leases (5,866) (8,816)
Proceeds from stock options exercised 36
--------------------
Net cash used in financing activities (5,866) (8,780)
--------------------
Effect of exchange rate changes on cash and cash equivalents 826 (271)
--------------------
Continued
See notes to condensed consolidated financial statements.
4
NBTY, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(Unaudited)
(Dollars in thousands)
For the three months
ended December 31,
--------------------
2002 2001
---- ----
<s> <c> <c>
Net increase in cash and cash equivalents $ 11,901 $ 5,176
Cash and cash equivalents at beginning of period 26,229 34,434
--------------------
Cash and cash equivalents at end of period $ 38,130 $39,610
====================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,151 $ 2,130
Cash paid during the period for income taxes $ 6,269 $ 8,920
Non-cash financing information:
During the three months ended December 31, 2002, the Company issued
100 shares of NBTY stock (having a total then market value of approximately
$1,711) as a contribution to the ESOP plan.
See notes to condensed consolidated financial statements.
5
NBTY, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
1. Principles of consolidation and basis of presentation
The accompanying condensed consolidated financial statements as of December
31, 2002 and September 30, 2002 and for the three months ended December 31,
2002 and December 31, 2001 have been prepared by NBTY, Inc. and Subsidiaries
(the "Company") and have not been audited. The consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. The Company's fiscal year ends on September 30. 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
accompanying unaudited condensed consolidated financial statements contain
all adjustments (such adjustments are of a normal recurring nature)
necessary to present fairly its financial position and its results of
operations and its cash flows.
The results of operations for the three months ended December 31, 2002 and
December 31, 2001 are not necessarily indicative of the results to be
expected for the full year ending September 30, 2003. As these are condensed
consolidated financial statements, this report should be read in conjunction
with the Company's consolidated financial statements and the notes included
in its Annual report on Form 10-K for the fiscal year ended September 30,
2002.
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, valuation of
deferred tax assets, and the recoverability of long-lived assets. Actual
results could differ from those estimates.
Foreign currency
The financial statements of international subsidiaries are translated into
U.S. dollars using the exchange rate at each balance sheet date for assets
and liabilities and an average exchange rate for each period for revenues,
expenses, gains and losses. Where the local currency is the functional
currency, translation adjustments are recorded as a separate component of
stockholders' equity.
Reclassifications
Certain reclassifications have been made to conform prior year amounts to
the current year presentation.
6
NBTY, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts and number of stores)
New accounting developments
In June 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting
for Asset Retirement Obligations." SFAS No. 143 requires, among other
things, that entities record the fair value of a liability for an asset
retirement obligation in the period in which the obligation is incurred.
This statement, which will become effective for the Company on October 1,
2003, is not expected to have a material impact on its consolidated
financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" which supersedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived-Assets to Be
Disposed Of." SFAS No. 144 provides a single accounting model for long-lived
assets to be disposed of. Although retaining many of the fundamental
recognition and measurement provisions of SFAS No. 121, the Statement
significantly changes the criteria that would have to be met to classify an
asset as held-for-sale. Under SFAS No. 144, assets held-for-sale are stated
at the lower of their fair values or carrying amounts and depreciation is no
longer recorded. The Company adopted SFAS No. 144 effective October 1, 2002.
There was no impact on the Company as a result of adopting SFAS No. 144.
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which requires that a
liability for a cost associated with an exit or disposal activity is
recognized when incurred. This Statement also establishes that fair value is
the objective for initial measurement of the liability. Severance pay under
SFAS 146, in many cases, would be recognized over time rather than up-front.
The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with early
application encouraged.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others" (the "Interpretation"), which
addresses the disclosure to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees. The
Interpretation also requires the guarantor to recognize a liability for the
non-contingent component of the guarantee, which is the obligation to stand
ready to perform in the event that specified triggering events or conditions
occur. The recognition and measurement provisions of the Interpretation are
effective for all guarantees entered into or modified after December 31,
2002. The Company does not enter into such transactions and therefore the
adoption of this standard did not impact its consolidated financial
position, results of operations, or disclosure requirements.
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-
Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-
Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-
based employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-
based employee compensation and the effect of the method used on reported
results. The Company is required to follow the prescribed format and provide
the additional disclosures required by SFAS No. 148 in its annual financial
statements for the year ending September 30, 2003 and must also provide the
disclosures in its quarterly reports containing condensed consolidated
financial statements for interim periods beginning with the quarterly period
ending March 31, 2003.
7
NBTY, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts and number of stores)
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, prior to acquisition date, of approximately $15,000 and a combined
customer list of approximately 1,800 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.
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 income account within stockholders' equity. Total
comprehensive income for the three months ended December 31, 2002 and 2001
are as follows:
For the three months
ended December 31,
--------------------
2002 2001
---- ----
<s> <c> <c>
Net income $16,624 $11,164
Changes in:
Unrealized holding gains 273
Foreign currency translation adjustments 3,668 (1,733)
-------------------
Total comprehensive income $20,565 $ 9,431
===================
Accumulated other comprehensive income, which is classified as a separate
component of stockholders' equity, is comprised of net gains on foreign
currency translation of $8,293 and $4,625 at December 31, 2002 and September
30, 2002, respectively, and net unrealized holding gains (losses) on
available-for-sale securities of $225 at December 31, 2002 and ($48) at
September 30, 2002, respectively.
8
NBTY, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts and number of stores)
4. Investments in bonds
The Company classifies its investments in bonds as available for sale and
reports them at fair market value (based on quoted market prices), with net
unrealized gains or losses on the securities recorded as accumulated other
comprehensive income (loss) in stockholders' equity. Market quotes may not
represent firm bids of such dealers or prices for actual sales. There is
only a thinly traded market for such securities and recent market ratings of
such debt are as follows: Moody's Investors Service, Inc. currently rates
these debt securities as Caa2 and Standard & Poor's currently rates these
debt securities as a CCC-. Both credit agencies' ratings remained unchanged
from the prior period.
5. Inventories
The components of inventories are as follows:
December 31, September 30,
2002 2002
------------ -------------
<s> <c> <c>
Raw materials $ 80,956 $ 77,051
Work-in-process 10,984 8,527
Finished goods 122,817 118,824
-------------------------
$214,757 $204,402
=========================
6. Earnings per share (EPS)
Basic EPS computations are based on the weighted average number of common
shares outstanding during the three month periods ended December 31, 2002
and December 31, 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 and number of stores)
For the three months
ended December 31,
--------------------
2002 2001
---- ----
<s> <c> <c>
Numerator:
Numerator for basic EPS - income
available to common stockholders $16,624 $11,164
===================
Numerator for diluted EPS - income
available to common stockholders $16,624 $11,164
===================
Denominator:
Denominator for basic EPS -
weighted-average shares 66,172 65,727
Effect of dilutive securities:
Stock options 1,906 1,524
-------------------
Denominator for diluted EPS -
weighted-average shares 68,078 67,251
===================
Net EPS:
Basic EPS $ 0.25 $ 0.17
===================
Diluted EPS $ 0.24 $ 0.17
===================
7. Goodwill and Intangible Assets
SFAS No. 142 requires that goodwill and other intangible assets with
indefinite useful lives not be amortized but, instead, tested for impairment
at least annually. Accordingly, effective October 1, 2001, the Company
ceased amortizing goodwill and a certain trademark, which are the only
intangible assets with an indefinite useful life. The Company continues to
amortize other intangible assets, consisting primarily of customer lists,
trademarks, and covenants not to compete using the straight line method over
their estimated useful lives of two to fifteen years. The carrying amount of
acquired intangible assets as of December 31, 2002 and September 30, 2002 is
as follows:
December 31, 2002 September 30, 2002
------------------------------- -------------------------------
Gross carrying Accumulated Gross carrying Accumulated Amortization
amount Amortization amount Amortization Period (years)
-------------- ------------ -------------- ------------ --------------
<s> <c> <c> <c> <c> <c>
Amortized intangible assets:
Customer lists $61,368 $16,650 $64,283 $18,668 6 - 15
Trademark and licenses 2,414 2,284 2,429 2,188 2 - 3
Covenants not to compete 1,300 624 2,605 1,848 5 - 7
-------------------------------------------------------------
$65,082 $19,558 $69,317 $22,704
=============================================================
Unamortized intangible asset:
Trademark 1,800 - 1,800 -
-------------------------------------------------------------
Total intangible assets $66,882 $19,558 $71,117 $22,704
=============================================================
10
NBTY, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts and number of stores)
The changes in the carrying amount of goodwill by segment for the three
month period ended December 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, 2002 $15,197 $7,588 $117,322 $4,892 $144,999
Foreign currency translation 2,771 2,771
---------------------------------------------------------------------------
Balance at December 31, 2002 $15,197 $7,588 $120,093 $4,892 $147,770
===========================================================================
Aggregate amortization expense of definite lived intangible assets for the
three months ended December 31, 2002 and December 31, 2001 was approximately
$1,100 and $1,000, respectively.
Estimated amortization expense, assuming no changes in the Company's
intangible assets, for each of the five succeeding fiscal years, beginning
with fiscal 2003, is $4,140 (2003), $3,862 (2004), $3,714 (2005), $3,656
(2006), and $3,594 (2007).
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,
as this is the key performance indicator reviewed by management. 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 Company's segment reporting disclosures for the prior periods
presented have been reclassified to exclude corporate general and
administrative expenses, which conforms to the current year presentation.
The U.K./Ireland operations do not include any transfer pricing absorption.
The accounting policies of all of the operating segments are the same as
those described in the summary of significant accounting policies in Note 1.
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 by 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
542 Company-operated stores. The Retail United Kingdom/Ireland segment
generates revenue through the sale of proprietary brand and third-party
products in 468 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.
11
NBTY, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts and number of stores)
The following table represents key financial information of the Company's
business segments:
For the three months
ended December 31,
--------------------
2002 2001
---- ----
<s> <c> <c>
Puritan's Pride/Direct Response
Revenue $ 34,412 $ 32,638
Operating income 11,015 11,825
Depreciation and amortization 1,337 1,313
Identifiable assets, at end of period 83,787 87,212
Capital expenditures 240 193
Retail:
United States
Revenue $ 50,263 $ 44,211
Operating loss (1,654) (2,650)
Depreciation and amortization 2,936 3,480
Identifiable assets, at end of period 70,739 77,808
Capital expenditures 498 1,030
Locations open at end of period 542 533
United Kingdom/Ireland
Revenue $ 82,613 $ 72,604
Operating income 22,291 20,064
Depreciation and amortization 2,165 2,090
Identifiable assets, at end of period 247,030 213,002
Capital expenditures 1,513 1,073
Locations open at end of period 468 463
Wholesale:
Revenue $ 74,116 $ 65,637
Operating income 14,204 9,589
Depreciation and amortization 209 334
Identifiable assets, at end of period 59,064 61,434
Capital expenditures 79 62
12
NBTY, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts and number of stores)
For the three months
ended December 31,
-------------------------
2002 2001
---- ----
<s> <c> <c>
Corporate:
Corporate expenses $ (18,362) $ (15,570)
Depreciation and amortization - manufacturing 2,590 2,378
Depreciation and amortization - other 1,318 948
Corporate manufacturing identifiable assets, at end of period 292,263 256,791
Capital expenditures - manufacturing 662 2,219
Capital expenditures - other 8,330 1,008
Consolidated totals:
Revenue $ 241,404 $ 215,090
Operating income 27,494 23,258
Depreciation and amortization 10,555 10,543
Identifiable assets, at end of period 752,883 696,247
Capital expenditures 11,322 5,585
Foreign subsidiaries account for approximately 34% of net revenues, 32% of
assets and 11% of total liabilities as of December 31, 2002.
13
ITEM 2:
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:
- ---------------------------
NBTY is a leading vertically integrated U.S. manufacturer and distributor of
a broad line of high-quality, value-priced nutritional supplements in the
United States and throughout the world. The Company markets more than 1,100
products under several brands, including Nature's Bounty(R), Vitamin
World(R), Puritan's Pride(R), Holland & Barrett(R), Nutrition
Headquarters(R), American Health(R), Nutrition Warehouse(R) and Dynamic
Essentials(R).
Information contained on this 10-Q 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) loss or reduction in ephedra
sales; (xiii) unavailability of electricity in certain geographical areas;
(xiv) exposure to, expense of defending and resolving, product liability
claims and other litigation; (xv) the ability of the Company to successfully
implement its business strategy; (xvi) the inability of the Company to
manage its retail operations efficiently; (xvii) consumer acceptance of the
Company's products; (xviii) uncertainty in negotiating and consummating
acquisitions which may be subject to bankruptcy court approval; (xix) the
inability of the Company to renew leases on its retail locations; (xx)
inability of the Company's retail stores to attain profitability; (xxi) the
absence of clinical trials for many of the Company's products; (xxii) sales
and earnings volatility and/or trends; (xxiii) the Company's ability to
manufacture its products efficiently; (xxiv) the rapidly changing nature of
the Internet and on-line commerce; (xxv) fluctuations in foreign currencies,
and more particularly the British Pound; (xxvi) import-export controls on
sales to foreign countries; (xxvii) the inability of the Company to secure
favorable new sites for, and delays in opening, new retail locations;
(xxviii) 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; (xxix) the mix of the Company's products and the profit
margins thereon; (xxx) the availability and pricing of raw materials; (xxxi)
risk factors discussed in the Company's filings with the Securities and
Exchange Commission; and (xxxii) other factors beyond the Company's control.
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)
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, trends, 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:
- -------------------------------------------
The Company's significant accounting policies are described in note 1 of the
Notes to Consolidated Financial Statements included in the its Annual Report
on Form 10-K for the fiscal year ended September 30, 2002. A discussion of
the Company's critical accounting policies, and the related estimates, are
included in Management's Discussion and Analysis of Results of Operations
and Financial Condition in its Annual Report on Form 10-K for the fiscal
year ended September 30, 2002. Management has discussed the development and
selection of these policies with the Company's Board of Directors and the
Board of Directors has reviewed its disclosures relating to them. There have
been no significant changes in the Company's existing accounting policies or
estimates since its fiscal year ended September 30, 2002.
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.
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)
Results of Operations:
- ----------------------
The following table sets forth income statement data of the Company as a
percentage of net sales for the periods indicated:
For the three months
ended December 31,
--------------------
2002 2001
---- ----
<s> <c> <c>
Net sales 100 % 100 %
----------------
Costs and expenses:
Cost of sales 44.2% 46.9%
Catalog printing, postage and promotion 5.7% 4.2%
Selling, general and administrative 38.7% 38.1%
----------------
88.6% 89.2%
================
Income from operations 11.4% 10.8%
================
Other income (expense):
Interest -1.7% -2.8%
Miscellaneous, net 0.5% 0.4%
----------------
-1.2% -2.4%
================
Income before income taxes 10.2% 8.4%
Provision for income taxes 3.3% 3.2%
----------------
Net income 6.9% 5.2%
================
For the three months in the fiscal first quarter ended December 31, 2002
compared to the three months in the fiscal first quarter ended December 31,
2001:
Net sales. Net sales in the first quarter ended December 31, 2002 were
$241,404, compared with $215,090 for the prior comparable period, an increase
of $26,314, or 12.2%. Of the $26,314 increase, $8,479 was attributable to
wholesale, $6,052 was attributable to US retail, $10,009 was attributable to
U.K./Ireland retail, and $1,774 was attributable to Puritan's Pride direct
response/e-commerce.
Wholesale sales were $74,116, compared to $65,637, an increase of $8,479, or
12.9%. Such increase in the wholesale segment's sales was primarily due to
an increase in sales of its core products to the mass market, drug chains
and supermarkets ($5,093) and an increase in network marketing sales
($2,199). Products such as Coral Calcium, Flex-a-min(R), and the Knox
NutraJoint(R) products continue to help the Company strengthen its leading
market position. In addition, increases in the wholesale segment can be
attributed to the Company expanding its distribution channel for its
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)
products by obtaining new customer accounts. Two customers of the wholesale
division represented, individually, more than 10% of this segment's sales for
the three month period ended December 31, 2002 and for the prior comparable
period. The Company does not believe that the loss of either of these customers
or any other single customer of the Company would have a material adverse
effect on the Company's consolidated financial condition or results of
operations. Puritan's Pride/Direct Response sales were $34,412, compared to
$32,638, an increase of $1,774, or 5.4%. Such increase was a result of the
Company changing its catalog promotion strategy to allow consumers to purchase
a varied number of bottles, increased response rates from customer lists
acquired and as a result of an increase in the number of products available via
catalog and website. U.S. retail sales were $50,263, compared to $44,211, an
increase of $6,052, or 13.6%. Such increase was a direct result of the success
of the Savings Passport Program, a customer loyalty program, an increase in
same store sales for stores open more than one year of 10.9% (or $4,695), and
an increase in the overall number of stores compared to last year. U.K./Ireland
retail sales were $82,613, compared to $72,604, an increase of $10,009, or
13.7%. Such increase was mainly attributable to an increase in same store sales
for stores open more than one year of 12.9% (or $9,050). These results include
the positive effect of a strong British Pound ($6,287 or 9.3%). The Company
operated 542 stores in the U.S. and 468 stores in the U.K./Ireland as of
December 31, 2002, compared to 533 stores in the U.S. and 463 in the
U.K./Ireland as of December 31, 2001.
Cost of sales. Cost of sales in the first quarter ended December 31, 2002 were
$106,680, or 44.2% as a percentage of sales, compared to $100,910, or 46.9% for
the prior comparable period. As a percentage of sales, gross profit increased
to 55.8% in the first quarter ended December 31, 2002 as compared to 53.1% for
the prior comparable period. The overall increase in gross profit reflects
improvements in operating efficiencies and capacity utilization.
The wholesale segment's gross profit increased to 42.3% from 32.8% as a
percentage of sales, primarily due to higher gross margins on new product
introductions and improvements in manufacturing efficiencies. Puritan's
Pride/Direct Response's gross profit decreased to 64.5% from 66.3% as a
percentage of sales. Price reductions on certain products and varied catalog
promotions the Company ran in the first quarter ended December 31, 2002
versus the prior comparable period were major factors in such decrease. Such
decrease was offset slightly by greater manufacturing efficiencies. The U.S.
retail gross profit decreased slightly as a percentage of sales to 59.2%
from 59.4%. The U.K./Ireland retail gross profit increased to 62.2% from
61.6% as a percentage of sales. The Company's strategy is to improve margins
by continuing to increase in-house manufacturing while decreasing the use of
outside suppliers in both the U.S. and the U.K. In the first quarters ended
December 31, 2002 and December 31, 2001, cost of sales included under-
absorbed factory overhead of $2,158 and $4,011, respectively.
Catalog printing, postage, and promotion. Catalog printing, postage, and
promotion expenses were $13,855 in the first quarter ended December 31, 2002,
compared with $9,010 in the prior comparable period, an increase of $4,845.
Such advertising expenses as a percentage of sales were 5.7% for the first
quarter ended December 31, 2002 and 4.2% for the prior comparable period. The
$4,845 increase was primarily attributable to an increase in wholesale
advertising promotion and media for new products introduced and existing
core products ($3,546). Flex-a-min(R) and Knox NutraJoint(R) product
advertising comprised approximately $1,600 and $400 respectively, of such
increase. The other segments also increased advertising as follows:
Puritan's Pride/Direct Response's advertising increased $493, U.S. retail's
advertising increased $430, and U.K./Ireland retail's advertising increased
$376.
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)
Selling, general and administrative expenses. Selling, general and
administrative expenses were $93,375 in the first quarter ended December 31,
2002, an increase of $11,463, as compared with $81,912 for the prior comparable
period. As a percentage of sales, selling, general and administrative expenses
were 38.7% for the first quarter ended December 31, 2002 and 38.1% for the
prior comparable period. Of the $11,463 increase, $4,301 was attributable to
increased payroll costs mainly associated with business acquisitions and the
Vitamin World expansion program, $2,378 to increased rent expense and
additional retail U.S. and U.K./Ireland stores, $2,081 to increased insurance
costs mainly associated with an increase in general insurance rates, and $1,022
to increased professional fees for the implementation and integration of new
software purchased.
Interest expense. Interest expense was $4,046 for the three months in the first
quarter ended December 31, 2002, a decrease of $1,962 compared with interest
expense of $6,008 for the three months in the first quarter ended December 31,
2001. Interest expense decreased due to the Company continuing to repay bank
debt. The major components of interest expense are interest on Senior
Subordinated Notes associated with the Holland & Barrett acquisition, and
interest on the Credit and Guarantee Agreement (CGA) used for acquisitions and
capital expenditures.
Miscellaneous, net. Miscellaneous, net was $1,239 for the three months in the
first quarter ended December 31, 2002, an increase of $336, compared to $903
for the three months in the first quarter ended December 31, 2001. Such
increase was primarily attributable to increases in investment income ($793)
and increases in net gains on sale of property plant and equipment ($995)
offset by exchange rate fluctuations ($1,420).
Income Taxes. The Company's income tax expense is impacted by a number of
factors, including the amount of taxable earnings derived in foreign
jurisdictions with tax rates that are lower than the U.S. federal statutory
rate, state tax rates in the jurisdictions where the Company conducts
business, and the Company's ability to utilize various tax credits and
foreign tax credits. The effective income tax rate for the three months in
the first quarter ended December 31, 2002 was 32.7%, compared to 38.5% for
the three months in the first quarter ended December 31, 2001. The change in
the effective rate was due to tax saving strategies implemented in fiscal
2002, some of which are carried forward and are expected to benefit future
fiscal years. In addition, the effective rate decreased due to an increase
in the percentage of income generated from foreign jurisdictions where the
overall effective tax rate is approximately 30.5%.
Net income. After income taxes, the Company had net income for the three months
in the first quarter ended December 31, 2002 of $16,624 (or basic and diluted
earnings per share of $0.25 and $0.24, respectively), and $11,164 (or basic and
diluted earnings per share of $0.17) for the three months in the first quarter
ended December 31, 2001.
Seasonality:
- ------------
The Company believes that its business is not seasonal in nature. The Company
may have higher net sales in a quarter depending upon when it has engaged in
significant promotional activities.
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)
Liquidity and Capital Resources:
- --------------------------------
The Company's primary sources of liquidity and capital resources are cash
generated from operations and its Credit & Guarantee Agreement ("CGA").
Cash and cash equivalents totaled $38,130 and $26,229 at December 31, 2002
and September 30, 2002, respectively. The Company generated cash from
operating activities of $24,567 and $22,055 in the fiscal first quarters
ended December 31, 2002 and December 31, 2001, respectively. The overall
increase in cash from operating activities during the fiscal first quarter
ended December 31, 2002 was mainly attributable to an increase in earnings
and a decrease in accounts receivable, partially offset by an increase in
inventory. The increase in earnings was a result of increased sales,
continued effort to control selling, general and administrative expenses,
lower interest expense due to the pay down of debt, and a decrease in
income tax expense as a result of tax planning strategies implemented. The
decrease in accounts receivable was primarily due to increased collections
as compared to sales. The number of days sales outstanding decreased to 45
days at December 31, 2002 from 49 days at December 31, 2001. Inventory
levels increased over the prior comparable period in order to allow the
Company to quickly respond to customer orders, thereby eliminating and/or
decreasing the number of products on backorder. In addition, the Company
is proactive as it relates to obtaining new distribution channels for its
products. Increases in inventory also relate to the new supplier contract
with CVS. The Company was awarded exclusive supplier rights for CVS
private label and nutritional supplement business.
Cash used in investing activities was $7,626 and $7,828 for three months
in the fiscal first quarter ended December 31, 2002 and December 31, 2001,
respectively. Fiscal first quarter ended December 31, 2002 cash flows used
in investing activities consisted primarily of the purchase of property,
plant and equipment ($11,322), partially offset by proceeds from the sale
of property, plant and equipment ($1,293), and escrowed cash received from
the fiscal 2001 acquisitions of Global Health Sciences ($1,850) and
NatureSmart ($553). Fiscal first quarter ended December 31, 2001 cash
flows used in investing activities consisted primarily of cash paid for
the business acquisitions of Knox ($4,043) and Healthcentral.com ($2,800),
the purchase of property, plant and equipment ($5,585), partially offset
by cash received that was previously held in escrow for the acquisition of
Global Health Sciences ($4,600).
Net cash used in financing activities was $5,866 and $8,780 for the three
months in the fiscal first quarter ended December 31, 2002 and December 31,
2001, respectively. Fiscal first quarter ended December 31, 2002 cash flows
used in financing activities included principal payments under long-term
debt agreements ($5,866). Cash used in financing activities for the fiscal
first quarter ended December 31, 2001 included principal payments under
long-term debt agreements ($8,816) and proceeds from the exercise of stock
options ($36).
For the fiscal first quarter ended December 31, 2002, working capital
increased $15,637 to $201,348. This increase was primarily attributable to
the Company increasing its current assets, specifically cash and
inventories. Continued growth in sales of the Company's principal promoted
products during the period, as noted above, contributed to such increases
in cash (accounts receivable turnover has improved) and inventories. The
CGA is comprised of one term loan and a revolving credit facility. At
December 31, 2002, there were borrowings of $25,625 under one term loan.
This term loan has an annual borrowing rate of 3.308% and is payable in
quarterly installments of $5,563. The current portion of this term loan at
December 31, 2002 was $22,250. At December 31, 2002, the Company had no
borrowing under its $50,000 revolving credit facility, which expires on
September
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)
30, 2003. Stand-by letters of credit totaling $684 were outstanding under
such facility at December 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 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 December 31, 2002 is as
follows:
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 $181,007 $ 22,817 $ 4,655 $150,910 $ 2,625
Operating leases 351,422 52,173 89,089 73,306 136,854
Purchase commitments 19,819 19,819
Capital commitments 14,212 9,612 4,600
Employment & consulting agreements 6,483 2,095 2,340 2,048
Standby letter of credit 684 684
Capital leases 76 72 4
-------------------------------------------------------------
Total contractual
cash obligations $573,703 $107,272 $100,688 $226,264 $139,479
=============================================================
The Company conducts retail operations under operating leases, which expire
at various dates through 2029. Some of the leases contain renewal options
and provide for contingent rent based upon sales plus certain tax and
maintenance costs. Future minimum rental payments (excluding real estate tax
and maintenance costs) for retail locations and other leases that have
initial or noncancelable lease terms in excess of one year are noted in the
above table.
The Company was committed to make future purchases under various purchase
arrangements with fixed price provisions aggregating approximately $19,819
at December 31, 2002. During the three months ended December 31, 2002 one
supplier accounted for approximately 11% of the Company's raw material
purchases. The Company does not believe that the loss of this or any other
single supplier would have a material adverse effect on the Company's
consolidated financial results of operations.
The Company had approximately $312 in open capital commitments at December
31, 2002, primarily related to computer hardware and software. Also, the
Company has a remaining commitment of approximately $13,900 for the
construction of an automated warehouse over the next 18 months.
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)
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.
The Company has employment agreements with two of its executive officers.
The agreements, entered into in October 2002, have a term of 5 years and
are automatically renewed each year thereafter unless either party
notifies the other to the contrary. These agreements provide for minimum
salary levels and contain provisions regarding severance and changes in
control of the Company. The annual commitment for salaries to these two
officers as of December 31, 2002 was approximately $1,170. In addition,
four members of Holland & Barrett's ("H&B") senior executive staff have
service contracts terminable by the Company upon twelve months notice. The
annual aggregate commitment for such H&B executive staff as of December
31, 2002 was approximately $525.
The Company maintains a consulting agreement with Rudolph Management
Associates, Inc. for the services of Arthur Rudolph, a director of the
Company. Effective January 1, 2003, the Company amended its consulting
agreement with Rudolph Management Associates, Inc. for the services of
Arthur Rudolph, a director and founder of the Company. The consulting fee
(which is paid monthly) is fixed by the Board of Directors of the Company,
provided that in no event will the consulting fee be at a rate lower than
$450 per year. In addition, Mr. Arthur Rudolph receives certain fringe
benefits accorded to other executives of the Company.
The Company 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, the Company may from time to time
determine to sell or otherwise dispose of certain of its existing
businesses, the Company 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.
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)
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.
New accounting developments:
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires, among other things, that entities
record the fair value of a liability for an asset retirement obligation in
the period in which the obligation is incurred. This statement, which is
effective for the Company October 1, 2003, is not expected to have a
material impact on the Company.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" which supersedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived-Assets to Be
Disposed Of." SFAS No. 144 provides a single accounting model for long-lived
assets to be disposed of. Although retaining many of the fundamental
recognition and measurement provisions of SFAS No. 121, the Statement
significantly changes the criteria that would have to be met to classify an
asset as held-for-sale. Under SFAS No. 144, assets held-for-sale are stated
at the lower of their fair values or carrying amounts and depreciation is no
longer recorded. The Company adopted SFAS No. 144 effective October 1, 2002.
There was no impact on the Company as a result of adopting SFAS No. 144.
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which requires that a
liability for a cost associated with an exit or disposal activity be
recognized when incurred. This Statement also establishes that fair value is
the objective for initial measurement of the liability. Severance pay under
SFAS 146, in many cases, would be recognized over time rather than up-front.
The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with early
application encouraged.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others" (the "Interpretation"), which
addresses the disclosure to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees. The
Interpretation also requires the guarantor to recognize a liability for the
non-contingent component of the guarantee, which is the obligation to stand
ready to perform in the event that specified triggering events or conditions
occur. The recognition and measurement provisions of the Interpretation are
effective for all guarantees entered into or modified after December 31,
2002. The Company does not enter into such transactions and therefore the
adoption of this standard did not impact its consolidated financial
position, results of operations, or disclosure requirements.
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-
Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-
Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-
based employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual
and interim financial
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)
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
Company is required to follow the prescribed format and provide the
additional disclosures required by SFAS No. 148 in its annual financial
statements for the year ending September 30, 2003 and must also provide the
disclosures in its quarterly reports containing condensed consolidated
financial statements for interim periods beginning with the quarterly period
ending March 31, 2003.
23
ITEM 3.
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.
24
NBTY, INC. and SUBSIDIARIES
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
- ------------------------------------------------
An evaluation was performed under the supervision and with the participation
of the Company's management, including the Chief Executive Officer ("CEO")
and Chief Financial Officer ("CFO"), of the effectiveness of the design and
operation of the Company's disclosure controls and procedures within 90 days
of this report. Based on that evaluation, the Company's management,
including the CEO and CFO, concluded that the Company's disclosure controls
and procedures were effective as of the evaluation date.
Changes in Internal Controls
- ----------------------------
There have been no significant changes in the Company's internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of their evaluation.
25
NBTY, INC. and SUBSIDIARIES
PART II. OTHER INFORMATION
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 December 31, 2002.
There was no Form 8-K filed during the quarter covered by this
report.
26
NBTY, INC. and SUBSIDIARIES
SIGNATURES
----------
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: January 31, 2003 By: /s/ Scott Rudolph
---------------- -------------------------------------
Scott Rudolph
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: January 31, 2003 By: /s/ Harvey Kamil
---------------- -------------------------------------
Harvey Kamil
President and Chief Financial Officer
(Principal Financial and
Accounting Officer)
27
NBTY, INC. and SUBSIDIARIES
CERTIFICATIONS
I, Scott Rudolph, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NBTY, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: January 31, 2003
----------------
/s/ Scott Rudolph
Scott Rudolph
Chief Executive Officer
28
NBTY, INC. and SUBSIDIARIES
CERTIFICATIONS
I, Harvey Kamil, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NBTY, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: January 31, 2003
----------------
/s/ Harvey Kamil
Harvey Kamil
Chief Financial Officer
29