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, 1997
Commission File Number: 0-10666
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NBTY, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 11-2228617
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
90 Orville Drive, Bohemia, NY 11716
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (516) 567-9500
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registration was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [X] NO [ ]
Shares of Common Stock as of December 31, 1997: 18,612,770
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NBTY, INC. and SUBSIDIARIES
INDEX
PART I Financial Information
Condensed Consolidated Balance Sheets - December 31, 1997
and September 30, 1997 1 - 2
Condensed Consolidated Statements of Operations - Three
Months Ended December 31, 1997 and 1996 3
Condensed Consolidated Statements of Operations - Six months
Ended March 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows - Three
months Ended December 31, 1997 and 1996 4
Notes to Condensed Consolidated Financial Statements 5 - 9
Management's Discussion and Analysis of Financial Condition
and Results of Operations 10 - 13
PART II Other Information 14
Signature 15
NBTY, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(Dollars and shares in thousands)
December 31, September 30,
1997 1997
------------ -------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 16,510 $ 18,419
Short-term investments -- 8,362
Accounts receivable, less allowance for doubtful accounts of
$988 at December 31, 1997 and $991 at September 30, 1997 14,730 15,701
Inventories 88,430 75,936
Deferred income taxes 6,032 6,032
Prepaid catalog costs and other current assets 22,762 18,885
--------------------------
Total current assets 148,464 143,335
Cash held in escrow -- 144,262
Property, plant and equipment 167,150 155,611
less accumulated depreciation and amortization 50,748 47,438
--------------------------
116,402 108,173
Intangible assets, net 141,663 140,447
Other assets 7,331 6,521
--------------------------
Total assets $ 413,860 $ 542,738
==========================
See notes to condensed consolidated financial statements.
NBTY, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(Dollars and shares in thousands)
December 31, September 30,
1997 1997
------------ -------------
(Unaudited)
Current liabilities:
Current portion of long-term debt and capital lease obligations $ 1,038 $ 1,016
Accounts payable 42,025 44,514
Accrued expenses 25,397 34,325
--------------------------
Total current liabilities 68,460 79,855
Long-term debt 208,332 163,447
Obligations under capital leases 2,566 2,700
Promissory note payable -- 169,909
Deferred income taxes 7,071 7,474
Other liabilities 2,293 2,293
--------------------------
Total liabilities 288,722 425,678
--------------------------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.008 par; authorized 25,000 shares; issued
20,117 shares at December 31, 1997 and at September 30, 1997
and outstanding 18,614 shares at December 31, 1997 and at
September 30, 1997 161 161
Capital in excess of par 56,304 56,304
Retained earnings 66,067 61,238
--------------------------
122,532 117,703
Less 1,504 treasury shares at cost, at December 31, 1997 and
September 30, 1997, respectively (3,206) (3,206)
Cumulative translation adjustment 5,812 2,563
--------------------------
Total stockholders' equity 125,138 117,060
--------------------------
Total liabilities and stockholders' equity $ 413,860 $ 542,738
==========================
See notes to condensed consolidated financial statements.
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,
----------------------
1997 1996
--------- --------
Net sales $ 109,366 $ 47,328
----------------------
Costs and expenses:
Cost of sales 53,551 22,571
Catalog, printing, postage and promotion 3,242 4,050
Selling, general and administrative 41,061 14,972
----------------------
97,854 41,593
----------------------
Income from operations 11,512 5,735
----------------------
Other income (expenses):
Interest, net (3,912) (462)
Miscellaneous, net 631 211
----------------------
(3,281) (251)
----------------------
Income before income taxes 8,231 5,484
Income taxes 3,402 2,193
----------------------
Net income $ 4,829 $ 3,291
======================
Basic earnings per share $ 0.26 $ 0.18
======================
Diluted earnings per share $ 0.24 $ 0.16
======================
Weighted average common shares
Basic 18,613 18,592
======================
Diluted 20,049 20,043
======================
See notes to condensed consolidated financial statements.
NBTY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
For the three months
ended December 31,
----------------------
1997 1996
--------- ---------
Net income $ 4,829 $ 3,291
Adjustments to reconcile net income to cash used in operating
activities:
Depreciation and amortization 4,607 1,499
Provision (recovery) for allowance for doubtful accounts (3) 139
Decrease in deferred taxes (488)
Changes in assets and liabilities, net of acquistions:
Increase in accounts receivable (1,080) (2,237)
Increase in inventories (12,166) (3,952)
Increase in prepaid catalog costs and other current assets (3,668) (363)
Decrease in other assets 1,835 148
(Decrease)increase in accounts payable (3,092) 2,735
Decrease in accrued expenses (8,126) (1,978)
----------------------
Net cash used in operating activities (17,352) (718)
----------------------
Cash flow from investing activities:
Purchase of property, plant and equipment (10,825) (3,194)
Proceeds from sale of short-term investments 8,362
Purchase of short-term investments (2,778)
Receipt of payments from direct-mail cosmetics business 257
----------------------
Net cash used in investing activities (2,463) (5,715)
----------------------
Cash flows from financing activities:
Borrowings under long term debt agreements 45,000
Cash held in escrow 144,730
Principal payments under long-term debt agreements and
capital leases (254) (265)
Repayment of promissory note (170,280)
----------------------
Net cash provided by (used in) financing activities 19,196 (265)
----------------------
Effect of Exchange Rate Changes on Cash and Cash Equivalents (1,290)
----------------------
Net decrease in cash and cash equivalents (1,909) (6,698)
Cash and cash equivalents at beginning of quarter 18,419 9,292
----------------------
Cash and cash equivalents at end of quarter $ 16,510 $ 2,594
======================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 2,446 $ 462
Cash paid during the period for taxes $ 6,520 $ 1,990
======================
See notes to condensed consolidated financial statements.
NBTY, INC. and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
1. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to
present fairly its financial position as of December 31, 1997 and results
of operations for the three months ended December 31, 1997 and 1996 and
statements of cash flows for the three months ended December 31, 1997 and
1996. The consolidated condensed balance sheet as of September 30, 1997
has been derived from the audited balance sheet as of that date. 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, 1997.
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. Actual results could differ
from those estimates.
Foreign currency translation
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, and gains and losses. Where the local
currency is the functional currency, translation adjustments are
recorded as a separate component of stockholder's equity.
Accounting changes
Effective October 1, 1996, the Company adopted the disclosure-only
provisions of Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation." As permitted by SFAS
No. 123, the Company continues to measure compensation cost in
accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." As the Company has not
granted any options during the three months ended December 31, 1997,
nor fiscal 1997 or 1996, there would not have been any impact on the
Company's financial position or results of operations on a pro forma
basis.
Effective October 1, 1996, the Company adopted SFAS No.
121,"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." This statement requires that
certain assets be reviewed for impairment and, if impaired, be
measured at fair value, whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable.
The adoption of SFAS No. 121 at October 1, 1996 and its application
during fiscal 1997 and the three months ended December 31, 1997 had no
material impact on the Company's financial position or results of
operations.
New accounting standards
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings Per Share." The statement simplifies
the standards for computing earnings per share ("EPS") and makes them
comparable to international EPS standards. The statement requires the
presentation of both "basic" and "diluted" EPS on the face of the
income statement with a supplementary reconciliation of the amounts
used in the calculations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of
comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distribution to
owners. Among other disclosures, SFAS No. 130 requires that all items
that are required to be recognized under current accounting standards
as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other
financial statements.
In addition, in June 1997, the FASB issued SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information," which
establishes standards for reporting information about operating
segments. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers.
Both of these new standards are effective for fiscal years beginning
after December 15, 1997 and require comparative information for
earlier years to be restated. The implementation of these new
standards will not affect the Company's results of operations and
financial position, but may have an impact on future financial
statement disclosures.
Year 2000 Software Compatibility
The Company is continually updating its information systems, and has
evaluated significant computer software applications for compatibility
with the year 2000. With the system changes implemented to date and
other planned changes, the Company anticipates that its computer
software applications will be compatible with the year 2000.
Expenditures specifically related to software modifications for year
2000 compatibility are not expected to be material.
2. The results of operations and cash flows for the three months ended
December 31, 1997 are not necessarily indicative of the results to be
expected for the full year.
3. Acquisition of Holland & Barrett Holdings Ltd.: On August 7, 1997, the
Company acquired all of the issued and outstanding capital stock of
Holland & Barrett Holdings Ltd.("H&B") from Lloyds Chemist's plc
("Lloyds") for an aggregate purchase price of approximately $169,000 plus
acquisition costs of approximately $811. The acquisition has been
accounted for under the purchase method and, accordingly, the results of
operations are included in the financial statements from the date of
acquisition. H&B markets a broad line of nutritional supplement products,
including vitamins, minerals and other nutritional supplements and food
product. At the date of acquisition, H&B operated approximately 410
retail stores in the United Kingdom.
The Company issued to Lloyds two promissory notes (the "Promissory
Notes") totaling approximately $170,000 as consideration for the purchase
of capital stock of H&B. The Promissory Notes, which are collateralized
by two letters of credit issued by a lending institution, were paid in
full in October 1997.
In connection with the Acquisition, the Company (i) entered into a
$50,000 credit and guarantee agreement (the "Credit and Guarantee
Agreement"), which provides borrowings for working capital and general
corporate purposes, and (ii) issued $150,000 in Senior Subordinated Notes
due 2007.
Assets acquired and liabilities assumed included cash ($5,580), inventory
($18,045), other current assets ($11,078), property, plant and equipment
($31,554), and current and long-term liabilities ($27,154 and $4,058,
respectively). The excess cost of investment over the net book value of
H&B at the date of acquisition resulted in an increase in goodwill of
$133,725 which will be amortized over 25 years. Additionally, finance
related costs of approximately $5,600 will be amortized over 10 years.
4. Inventories have been estimated by using the gross profit method for the
interim periods. The components of the inventories are as follows:
December 31, September 30,
1997 1997
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(UNAUDITED)
Raw materials and work-in-process $ 37,306 $ 33,408
Finished goods 51,124 42,528
------------------------
$ 88,430 $ 75,936
========================
5. Intangible assets, at cost, acquired at various dates are as follows:
December 31, September 30,
1997 1997
------------ -------------
(UNAUDITED)
Goodwill $ 139,654 $ 136,972
Customer lists 9,816 9,816
Trademark and licenses 1,201 1,201
Covenants not to compete 1,305 1,305
--------------------------
151,976 149,294
Less, accumulated amortization 10,313 8,847
--------------------------
$ 141,663 $ 140,447
==========================
6. Accrued expenses:
December 31, September 30,
1997 1997
------------ -------------
(UNAUDITED)
Litigation settlement costs $ 5,600
Payroll and related payroll taxes $ 3,441 4,185
Customer deposits 1,119 2,363
Accrued purchases 8,229 2,800
Income taxes payable 6,605 7,456
Other 6,003 11,921
------------------------
$ 25,397 $ 34,325
========================
7. Basic earnings per share are based on the weighted average number of
common shares outstanding during the three month periods ended December
31, 1997 and 1996. Diluted earnings per share include the effect of
outstanding stock options, if exercised. The following is a
reconciliation between the basic and diluted earnings per share:
For the three months
December 31,
--------------------
1997 1996
-------- --------
Numerator:
Numerator for basic earnings per share --
income available to common stockholders $ 4,829 $ 3,291
Numerator for dilutive earnings per share --
income available to common stockholders $ 4,829 $ 3,291
====================
Denominator:
Denominator for basic earnings per share --
weighted-average shares 18,613 18,592
Effective of dilutive securities:
Stock options 1,436 1,451
Denominator for diluted earnings per share --
weighted-average shares 20,049 20,043
====================
Basic earnings per share $ 0.26 $ 0.18
====================
Diluted earnings per share $ 0.24 $ 0.16
====================
8. Shareholder litigation:
In October 1994, two lawsuits were commenced in the U.S. District Court,
Eastern District of New York, against the Company and two of its
officers. On October 17, 1997, a Memorandum of Understanding was entered
into between the Company and the attorneys representing the Plaintiff
class agreeing to an $8,000 ($4,400 cash, $3,600 stock) settlement of the
lawsuit. Subsequently, the Company entered into a Capital Stipulation of
Settlement calling for, among other things, a total cash payment of
$8,000. Cash payments aggregating $8,000 were made in November and
December 1997. The Company had been notified by its insurance carrier
that it was willing to reimburse the Company to the extent of $2,400. The
Company recorded a $5,600 provision for its portion of the settlement in
fiscal 1997, which, along with related legal fees of approximately $768,
has been reflected separately in the fiscal 1997 statements of income
(refer to the Company's 10-K). In January 1998, an insurance carrier paid
the Company $2,650.
NBTY, INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
(In thousands, except per share amounts)
Results of Operations:
The following table sets forth income statement data of the Company as a
percentage of net sales for the periods indicated:
Three months ended
December 31,
------------------
1997 1996
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Net sales . . . . . . . . . . . . . . . . . . . . 100.0 % 100.0 %
Cost and expenses:
Cost of sales . . . . . . . . . . . . . . . . . 49.0 47.7
Catalog printing, postage and promotion . . . . 3.0 8.6
Selling, general and administrative . . . . . . 37.5 31.6
------------------
89.5 87.9
------------------
Income from operations . . . . . . . . . . . . . 10.5 12.1
Other income (expenses), net. . . . . . . . . . . (3.0) (0.5)
------------------
Income before income taxes. . . . . . . . . . . . 7.5 11.6
Income taxes. . . . . . . . . . . . . . . . . . . 3.1 4.6
------------------
Net income. . . . . . . . . . . . . . . . . . . . 4.4 % 7.0 %
==================
Foreign operations:
In connection with the Company's recent acquisition of H&B which operates
primarily in the United Kingdom, the Company has significantly expanded its
operations outside the United States. The following information has been
summarized by geographic area as of December 31, 1997:
Identifiable Assets
-----------------------------
December 31, September 30,
1997 1997
------------ -------------
United States $ 202,751 $ 328,548
United Kingdom 211,109 214,190
--------------------------
$ 413,860 $ 542,738
==========================
For the three months ended December 31,
1997 1996 1997 1996
--------- -------- -------- -------
Sales Operating income
--------------------- -------------------
United States $ 59,472 $ 46,731 $ 8,388 $ 5,937
United Kingdom 49,894 597 3,124 (202)
---------------------------------------------
$ 109,366 $ 47,328 $ 11,512 $ 5,735
=============================================
Results of Operations
- ---------------------
For the three months ended December 31, 1997 compared to the three months ended
December 31, 1996:
Net sales. Net sales in the first quarter ended December 31, 1997 were
$109,366 compared with $47,328 for the prior comparable period, an
increase of $62,038 or 131.1%. Sales increases were across all channels
of distribution. Mail order sales were $20.0 million, compared to $14.6
for the prior comparable period (increase of $5.4 million or 37.0%),
wholesale sales were $25.3 million compared to $24.2 million (increase of
$1.1 million or 4.4%) and retail revenues were $64.1 million compared to
$8.5 million (increase of $55.6 million or 651.9%).
Revenue increases were due primarily to the August 7, 1997 acquisition of
Holland & Barrett. On a consolidated basis, excluding Holland & Barrett,
net sales increased $12,893 or 27.2%. Excluding Holland & Barrett, retail
sales increased $6.4 or 75.4% due to an increase in the number of retail
stores over the comparable period and favorable comparable stores sales.
Costs and expenses. Cost of sales as a percentage of sales were 49.0% for
1997 and 47.7% for 1996. The increase was associated with changes in
product mix and the acquisition of the Holland & Barrett. Traditionally,
Holland & Barrett has operated with lower margins on health food
products.
Catalog printing, postage, and promotion expenses were $3,242 in 1997, a
decrease of $808 (20.0% decrease), from $4,050 in 1996. As a percentage
of sales, expenses were 3.0% for the current quarter and 8.6% for the
prior comparable quarter.
Selling, general and administrative expenses were $41,061 for the quarter,
or 37.5% as a percentage of sales, compared with $14,972, or 31.6% as a
percentage of sales, an increase of $26,089 (174.3% increase). Excluding
Holland & Barrett, expenses increased $5,955 or 39.8%. The largest
segments are indirect salaries, building, freight and property taxes.
Increases were primarily in indirect salaries, building and property
taxes. These expenses increased due to the acquisition of Holland &
Barrett retail operation and the domestic retail outlet expansion
program.
Interest expense. Interest expense was $3,912, an increase of $3,450.
Interest associated with the Holland & Barrett acquisition was $3,507
representing interest of 8-5/8% on $150,000 subordinated debt and
interest on the Credit and Guarantee Agreement.
Other income includes rental income of $59 and $147 in 1997 and 1996,
respectively.
Income before income taxes was $8,231 for 1997 and $5,484 for 1996. After
income taxes, the Company had a net profit of $4,829 (or basic earnings
per share of $0.26, diluted earnings per share of $0.24) for the three
month period ended December 31, 1997, and $3,291 (or basic earnings per
share of $0.18, diluted earnings per share of $0.16) for the three months
ended December 31, 1996.
Liquidity and Capital Resources
- -------------------------------
Working capital was $80.0 million at December 31, 1997, compared with $63.5
million at September 30, 1997, an increase of $16.5.
In September 1997, the Company entered into a $50 million Credit and
Guarantee Agreement (CGA) which expires September 30, 2003. The CGA
provides for borrowings for working capital and general corporate
purposes. Virtually all the Company's assets are secured under the CGA
and subject to normal banking terms and conditions and the maintenance of
various financial ratios and covenants the CGA provides that loans be
made under a selection of rate formulas including Prime or Eurocurrency
rates. At December 31, 1997, there were borrowings of $45,000 under this
facility.
Additionally, the Company issued $150 million 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.
In connection with the acquisition of Holland & Barrett (H&B), the Company
issued two promissory notes (the "Promissory Notes") totaling
approximately $169,000 plus interest, as consideration for the purchase
of capital stock of H&B. The Promissory Notes, which are collateralized
by two letters of credit issued by a lending institution, were paid in
full in October 1997.
The Company paid $8,000 in connection with a litigation settlement. In
January 1998, an insurance carrier paid the Company $2,650.
In December 1997, the Company purchased a building for a purchase price of
approximately $3,900 with operating funds.
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 Companies' working capital needs for
the next 12 months and to finance anticipated capital expenditures
incurred in the normal course of business.
Net cash used in operating activities was $17,352 in 1997 and $718 provided
by operating activities in 1996. Cash used in operating activities was
primarily due to increases in inventory in 1997. Net cash used in
investing activities was $2,463 in 1997 due to plant expansion offset by
proceeds of short-term investments and $5,715 in 1996 due to plant
expansion and short-term investments purchases. Net cash provided by
financing activities was $19,196 in 1997 and $265 was used in financing
activities in 1996.
Management believes that inflation did not have a significant impact on
operations.
This filing contains certain forward-looking statements and information that
are based on the beliefs of management, as well as assumptions made by
and information currently available to the Company's management. When
used in this document, the words "anticipate," "believe," "estimate," and
"expect" and similar expressions, as they relate to the Company are
intended to identify forward-looking statements. Such statements reflect
the current views of the Company with respect to future events and are
subject to certain risks, uncertainties and assumptions. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated or expected.
The Company does not intend to update these forward-looking statements.
NBTY, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
Item 1. Legal Proceedings
LITIGATION:
The Company paid $8,000 in settlement of a shareholder suit. In
January 1998, an insurance carrier agreed to indemnify and has
paid $2,650 to the Company. Reference is made to Item 3, Legal
Proceedings in Form 10-K for the year ended September 30, 1997.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults upon Senior Securities Not applicable.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
There was no Form 8-K filed during the first quarter of the fiscal
year ending September 30, 1998.
NBTY, INC. and SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned there unto duly authorized.
NBTY, INC.
Date February 11, 1998
/s/ HARVEY KAMIL
--------------------------------------------
Harvey Kamil, Executive Vice President,
Secretary
(Principal Financial and Accounting Officer)