UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the period ended June 30, 1998
Commission File Number: 0-10666
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NBTY, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-2228617
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
90 Orville Drive, Bohemia, NY 11716
- ----------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (516) 567-9500
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 June 30, 1998: 64,742,394
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NBTY, INC. and SUBSIDIARIES
INDEX
PART I Financial Information
Condensed Consolidated Balance Sheets -
June 30, 1998 (unaudited)and September 30, 1997 1 - 2
Condensed Consolidated Statements of Operations -
(unaudited) - Three Months Ended June 30, 1998 and 1997 3
Condensed Consolidated Statements of Operations -
(unaudited) Nine months Ended June 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows -
(unaudited) Nine months Ended June 30, 1998 and 1997 5
Notes to Condensed Consolidated
Financial Statements (unaudited) 6 - 11
Management's Discussion and Analysis
of Financial Condition and Results
of Operations (unaudited) 12 - 19
PART II Other Information 20
Signature 21
NBTY, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(Dollars and shares in thousands)
June 30, September 30,
1998 1997
----------------------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 5,770 $ 20,262
Short-term investments - 8,362
Accounts receivable, less allowance for
doubtful accounts ($1,116 in 1997;
$1,056 in 1998) 19,770 19,603
Inventories 111,680 86,440
Deferred income taxes 6,032 6,032
Prepaid catalog costs and other
current assets 25,499 19,111
------------------------
Total current assets 168,751 159,810
Cash held in escrow - 144,262
Property, plant and equipment 217,725 173,447
less accumulated depreciation
and amortization 62,477 55,263
------------------------
155,248 118,184
Intangible assets, net 143,926 141,303
Other assets 7,473 7,618
------------------------
Total assets $475,398 $571,177
========================
See notes to condensed consolidated financial statements.
NBTY, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(Dollars and shares in thousands)
June 30, September 30,
1998 1997
----------------------------
(Unaudited)
Current liabilities:
Current portion of long-term debt
and capital lease obligations $ 1,220 $ 1,519
Demand note payable 1,873
Accounts payable 49,739 49,857
Accrued expenses 30,726 35,711
-------------------------
Total current liabilities 81,685 88,960
Long-term debt 218,123 168,550
Obligations under capital leases 2,201 2,700
Promissory note payable 528 169,909
Deferred income taxes 7,624 7,474
Other liabilities 3,533 2,293
-------------------------
Total liabilities 313,694 439,886
-------------------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.008 par; authorized
75,000 in 1998 in 1997; issued
69,254 in 1998 and 69,122 in 1997
and outstanding 64,742 shares in 1998
and 64,610 shares in 1997 554 553
Capital in excess of par 56,789 56,182
Retained earnings 98,918 75,199
-------------------------
156,261 131,934
Less 4,512 treasury shares at cost,
in 1998 and 1997, respectively (3,206) (3,206)
Cumulative translation adjustment 8,649 2,563
-------------------------
Total stockholders' equity 161,704 131,291
-------------------------
Total liabilities and stockholders' equity $475,398 $571,177
=========================
See notes to condensed consolidated financial statements.
NBTY, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)
For the three months
ended June 30,
--------------------
1998 1997
--------------------
Net sales $138,931 $80,219
--------------------
Costs and expenses:
Cost of sales 64,514 41,095
Catalog, printing, postage and promotion 8,804 7,010
Selling, general and administrative 46,764 20,758
Merger related costs 3,360
--------------------
123,442 68,863
--------------------
Income from operations 15,489 11,356
--------------------
Other income (expenses):
Interest, net (3,196) (630)
Miscellaneous, net 1,328 555
--------------------
(1,868) (75)
--------------------
Income before income taxes 13,621 11,281
Income taxes 5,486 3,455
--------------------
Net income $ 8,135 $ 7,826
====================
Basic earnings per share $ 0.13 $ 0.12
====================
Diluted earnings per share $ 0.12 $ 0.11
====================
Weighted average common shares
Basic 64,742 64,658
====================
Diluted 69,008 68,946
====================
See notes to condensed consolidated financial statements.
NBTY, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)
For the nine months
ended June 30,
---------------------
1998 1997
---------------------
Net sales $425,751 $239,070
Costs and expenses:
Cost of sales 204,928 120,627
Catalog, printing, postage and promotion 22,739 21,136
Selling, general and administrative 137,216 61,204
Merger related costs 3,360 0
---------------------
368,243 202,967
---------------------
Income from operations 57,508 36,103
---------------------
Other income (expenses):
Interest (12,417) (1,950)
Miscellaneous, net 2,728 389
---------------------
(9,689) (1,561)
---------------------
Income before income taxes 47,819 34,542
Income taxes 16,051 10,846
---------------------
Net income $ 31,768 $ 23,696
=====================
Basic earnings per share $ 0.49 $ 0.37
=====================
Diluted earnings per share $ 0.46 $ 0.34
=====================
Weighted average common shares
Basic 64,689 64,578
=====================
Diluted 68,986 68,919
=====================
See notes to condensed consolidated financial statements.
NBTY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
For the nine months
ended June 30,
-------------------
1998 1997
-------------------
Net income $ 31,768 $23,696
Adjustments to reconcile net income to
cash provided by operating activities:
Gain on sale of product line (1,576)
Gain (loss) on sale of property,
plant and equipment 402 (197)
Depreciation and amortization 15,448 5,642
Provision for allowance for doubtful accounts 10 203
Changes in assets and liabilities,
net of acquistions:
Increase in accounts receivable (1,173) (3,079)
Increase in inventories (24,593) (20,246)
Increase in prepaid catalog
costs and other current assets (6,005) (2,132)
Decrease in other assets 1,703 579
(Decrease)increase in accounts payable (1,358) 13,578
(Decrease) increase in accrued expenses (4,581) 440
Increase in other liabilities 1,240
-------------------
Net cash provided by operating activities 11,285 18,484
-------------------
Cash flow from investing activities:
Purchase of property, plant and equipment (51,049) (13,639)
Proceeds from sale of property, plant
and equipment 1 289
Proceeds from sale of product line 4,500
Proceeds from sale of short term investments 8,362
Purchase of short-term investments (4,516)
Receipt of payments from direct-mail
cosmetics business 1,047
-------------------
Net cash used in investing activities (38,186) (16,820)
-------------------
Cash flows from financing activities:
Dividends paid (8,050) (6,555)
Borrowings under long term debt agreements 55,000
Cash held in escrow 144,730
Payment of demand note payable (1,345)
Principal payments under long-term
debt agreements and capital leases (6,570) (2,422)
Purchase of treasury stock (15)
Proceeds from stock options exercised 40 23
Repayment of promissory note (168,770)
-------------------
Net cash provided by (used in)
financing activities 15,035 (8,969)
-------------------
Effect of Exchange Rate Changes on Cash
and Cash Equivalents (2,626)
-------------------
Net decrease in cash and cash equivalents (14,492) (7,305)
Cash and cash equivalents at beginning of quarter 20,262 12,814
-------------------
Cash and cash equivalents at end of quarter $ 5,770 $ 5,509
===================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 14,823 $ 1,294
Cash paid during the period for taxes $ 12,859 $11,068
NBTY, INC. and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
1. Basis of presentation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All material inter-company
accounts and transactions have been eliminated.
Pooling of interests
On April 20, 1998, Nutrition Headquarters Group, Inc., Lee Nutrition,
Inc. and Nutro Laboratories, Inc. (collectively, the "Nutrition
Headquarters Group" or "NHG") was merged with and into NBTY. The
merger constituted a tax-free reorganization in accordance with
Section 368(a)(1)(A) of the Internal Revenue Service and has been
accounted for as a pooling of interests under APB No. 16.
All financial information has been restated to include the financial
position and results of operations of Nutrition Headquarters Group
for all periods presented.
Terms of the merger agreement
Each share of Nutrition Headquarters Group common stock was exchanged
for approximately 30 shares of NBTY's common stock with approximately
8.8 million shares of NBTY's common stock exchanged for all the
outstanding stock of Nutrition Headquarters Group.
Income taxes
Prior to the merger, Nutrition Headquarters Group had been treated as
an S corporation for Federal and state tax purposes. Accordingly,
taxable income was reported to the individual stockholders for
inclusion in their respective income tax returns with no provision
for these taxes, other than certain minimum taxes, included in the
Company's consolidated financial statements.
2. In the opinion of the Company, the unaudited condensed consolidated
financial statements contain all adjustments necessary to present
fairly its financial position as of June 30, 1998 and results of
operations for the three and nine months ended June 30, 1998 and 1997
and statements of cash flows for the nine months ended June 30, 1998
and 1997. The consolidated condensed balance sheet as of September 30,
1997 has been derived from the audited balance sheet as of that date.
The results of operations for the three and nine months ended June 30,
1998 and statements of cash flows for the nine months ended June 30,
1998 are not necessarily indicative of the results to be expected for
the full year. This report should be read in conjunction with the
registration statement filed on Form S-3 as filed with the Securities
and Exchange Commission on May 8, 1998.
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.
Common shares and earnings per share
On March 9, 1998, the Company's Certificate of Incorporation was
amended to authorize the issuance of up to 75 million shares of
common stock, par value $.008 per share. In addition, the Company's
Board of Directors declared a three-for-one stock split in the form
of a 200% stock dividend effective March 23, 1998.
On April 20, each share of Nutrition Headquarters Group common stock
was exchanged for one share of NBTY's common stock with approximately
8,772 shares of NBTY's common stock exchanged for all the outstanding
stock of Nutrition Headquarters Group.
All per common share amounts have been retroactively restated to
account for the above stock split and the merger of NHG with NBTY. In
addition, stock options and respective exercise prices have been
amended to reflect these transactions.
Accounting changes
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 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities ("FAS 133"). FAS 133 is effective for all fiscal quarters
of all fiscal years beginning after June 15, 1999 (October 1, 1999
for the Company). FAS 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it
is, the type of hedge transaction. Management of the Company
anticipates that, due to its limited use of derivative instruments,
the adoption of FAS 133 will not have a significant effect on the
Company's results of operations or its financial position.
In February 1998, the American Institute of Certified Public
Accountants' Accounting Standards Executive Committee issued
Statement of Position No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP No. 98-1").
SOP No. 98-1 requires certain costs incurred in connection with
developing or obtaining internal-use software to be capitalized and
other costs to be expensed. The Company adopted SOP 98-1 effective
February 1998, and its implementation had no material effect on the
Company's financial position or results of operations.
In April 1998, the American Institute of Certified Public
Accountants' Accounting Standards Executive Committee issued
Statement of Position No. 98-5, "Reporting on the Costs of Start-Up
Activities" ("SOP No. 98-5"). SOP No. 98-5 requires that all start-
up (or pre-opening) activities and organization costs be expensed as
incurred. The Company expects that the implementation of this
statement will not have a material effect on its financial position
or results of operations.
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 distributions
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.
3. In April 1998, the Company sold certain assets of its cosmetic pencil
operation for approximately $6 million, of which $4.5 million was paid
by cash with additional payments of $1.5 million over the next three
years. The cosmetic pencil operation had sales of approximately $1.9
million and operating losses of approximately $0.8 million in fiscal
1997. The gain on such sale of approximately $1.6 million is included
in other income in the condensed consolidated statements of income.
4. 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
$3,174. 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 products. 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 the capital stock of H&B. The Promissory Notes, which
were 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 $136,899 which will be amortized over 25
years. Additionally, finance related costs of approximately $5,600
will be amortized over 10 years.
5. Inventories have been estimated using the gross profit method for the
interim periods. The components of the inventories are as follows:
June 30, September 30,
1998 1997
-------------------------
Raw materials and
Work-in-process $ 50,281 $37,347
Finished goods 61,399 49,093
----------------------
$111,680 $86,440
======================
6. Basic earnings per share are computed by dividing net earnings by the
weighted average number of common shares outstanding during the three
and nine month periods ended June 30, 1998 and 1997. Diluted earnings
per share include the effect of outstanding stock options, as if
exercised. The following is a reconciliation between the basic and
diluted earnings per share, as required by SFAS No. 128:
For the three months For the nine months
June 30, June 30,
-------------------- -------------------
1998 1997 1998 1997
------------------------------------------
Numerator:
Numerator for basic earnings
per share - income available
to common stockholders $8,135 $7,826 $31,768 $23,696
==========================================
Numerator for dilutive earnings
per share - income available
to common stockholders $8,135 $7,826 $31,768 $23,696
==========================================
Denominator:
Denominator for basic earnings
per share -- weighted-average
shares 64,742 64,658 64,689 64,578
Effect of dilutive securities:
Stock options 4,265 4,288 4,297 4,341
------------------------------------------
Denominator for diluted earnings
per share -- weighted-average
shares 69,008 68,946 68,986 68,919
==========================================
Basic earnings per share $ 0.13 $ 0.12 $ 0.49 $ 0.37
==========================================
Diluted earnings per share $ 0.12 $ 0.11 $ 0.46 $ 0.34
==========================================
7. 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 June 30, 1998:
Identifiable
Assets
-------------------------
June 30, September 30,
1998 1997
-------------------------
United States $256,076 $356,987
United Kingdom 219,322 214,190
-----------------------
$475,398 $571,177
=======================
For the three months ended June 30,
Sales Operating income
------------------- ------------------
1998 1997 1998 1997
-----------------------------------------
United States $ 92,615 $79,665 $13,026 $12,024
United Kingdom 46,316 554 2,462 (668)
-----------------------------------------
$138,931 $80,219 $15,488 $11,356
=========================================
For the nine months ended June 30,
Sales Operating income
-------------------- ------------------
1998 1997 1998 1997
-----------------------------------------
United States $282,853 $237,286 $47,989 $37,481
United Kingdom 142,899 1,784 9,519 (1,378)
-----------------------------------------
$425,751 $239,070 $57,508 $36,103
=========================================
8. Subsequent events:
On July 1, 1998, the Company sold 3,450,000 shares (including a 15%
over-allotment option) of common stock, $.008 par value per share, in a
public offering at $18.00 per share. After expenses, the Company
realized approximately $55 million which was used to repay the
Company's Credit and Guarantee Agreement and for working capital.
The Company acquired the assets of three privately held vitamin mail
order companies: Home Health Products, Inc., Virginia Beach, Virginia;
Barth-Spencer Corporation in Pompano Beach, Florida and Darby Health
Group, Inc. in Westbury, New York for $7.8 million in cash. The
aggregate sales of these companies were approximately $20 million in
1997. The mail order databases of the acquired operations will be
incorporated into NBTY's active mail order customer base to increase
the number of active customers.
NBTY, INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
(Unaudited)
(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 Nine months
Ended ended
June 30, June 30,
---------------- ----------------
1998 1997 1998 1997
------------------------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost and expenses:
Cost of sales 46.4 51.2 48.1 50.5
Catalog printing, postage and promotion 6.3 8.7 5.3 8.8
Selling, general and administrative 33.7 25.9 32.2 25.6
Merger related costs 2.5 0.0 0.9 0.0
-----------------------------------
88.9 85.8 86.5 84.9
-----------------------------------
Income from operations 11.1 14.2 13.5 15.1
Other income (expenses), net (1.3) (0.1) (2.3) (0.7)
-----------------------------------
Income before income taxes 9.8 14.1 11.2 14.4
Income taxes 3.9 4.3 3.7 4.5
-----------------------------------
Net income 5.9% 9.8% 7.5% 9.9%
===================================
For the three months ended June 30, 1998 compared to the three months ended
June 30, 1997:
Net sales. Net sales in the third quarter ended June 30, 1998 were
$138,931 compared with $80,219 for the prior comparable period, an
increase of $58,712 or 73.2%. Mail order sales were $44.1 million,
compared to $37.7 for the prior comparable period (increase of $6.4
million or 17.1%), wholesale sales were $32.7 million compared to $31.7
million (increase of $1.0 million or 3.0%), U.S. retail revenues were
$16.7 million compared to $10.7 million (increase of $6.0 million or
55.7%) and U.K. retail revenues resulting from the H&B acquisition in
August 1997 were $45.4 million. On a consolidated basis, excluding
Holland & Barrett, net sales increased $13.3 million or 16.6%.
Costs and expenses. Cost of sales as a percentage of sales were 46.4%
for 1998 and 51.2% for 1997. The decrease was associated with changes
in product mix and Holland & Barrett. In the quarter ended June 30,
1998, products supplied by outside vendors were replaced by NBTY
manufactured products which resulted in higher gross profits.
Catalog printing, postage, and promotion expenses were $8,804 in 1998,
an increase of $1,794 (25.6% increase), from $7,010 in 1997. As a
percentage of sales, expenses were 6.3% for the current quarter and
8.7% for the prior comparable quarter due to an increase in retail
revenues in 1998.
Selling, general and administrative expenses were $46,764 for the
quarter, or 33.7% as a percentage of sales, compared with $20,758, or
25.9% as a percentage of sales, an increase of $26,006 (125.3%
increase). The largest segments and increases are indirect salaries,
rents, freight and property taxes. These expenses increased due to the
acquisition of Holland & Barrett retail operation and the U.S. retail
expansion program.
Merger related costs.
One-time costs associated with the merger between Nutrition
Headquarters Group (NHG) and NBTY will aggregate approximately $3.4
million. These estimates include professional fees and separation pay
for the consolidation of certain administrative areas.
Interest expense. Interest expense was $3,196, an increase of $2,566
compared with the comparable quarter. The major component is interest
associated with the Holland & Barrett acquisition and the Credit and
Guarantee Agreement.
Income taxes
Prior to the merger, NHG had been treated as an S corporation for
Federal and state tax purposes. Accordingly, taxable income was
reported to the individual stockholders for inclusion in their
respective income tax returns with no provision for these taxes, other
than certain minimum taxes, included in the Company's Consolidated
Financial Statements.
Income before income taxes was $13,621 for 1998 and $11,281 for 1997.
After income taxes, the Company had a net profit of $8,135 (or basic
earnings per share of $0.13, diluted earnings per share of $0.12) for
the three month period ended June 30, 1998, and $7,826 (or basic
earnings per share of $0.12, diluted earnings per share of $0.11) for
the three months ended June 30, 1997. Assuming NHG was taxed at the
Company's effective rate, net income would have been $8.2 million for
fiscal 1998, an increase of $1.4 million or 20.2% compared with $6.8
million in 1997.
For the nine months ended June 30, 1998 compared to the nine months ended
June 30, 1997.
Net sales. Net sales in the nine months ended June 30, 1998 were
$425,751 compared with $239,070 for the prior comparable period, an
increase of $186,681 or 78.1%. Mail order sales were $138.1 million,
compared to $114.9 for the prior comparable period (increase of $23.2
million or 20.1%), wholesale sales were $99.4 million compared to $95.4
million (increase of $4.0 million or 4.2%), U.S. retail revenues were
$48.0 million compared to $28.6 million (increase of $19.4 million or
67.7%) and U.K retail revenues were $140.2 million in 1998.
Revenue increases were due primarily to the August 7, 1997 acquisition
of Holland & Barrett. On a consolidated basis, excluding Holland &
Barrett, net sales increased $46.6 or 19.5%.
Costs and expenses. Cost of sales as a percentage of sales were 48.1%
and 50.5% for the comparable nine months in 1998 and 1997. The decrease
was associated with changes in product mix and Holland & Barrett. In
the nine months ended June 30, 1998, products supplied by outside
vendors were replaced by NBTY manufactured products which resulted in
higher gross profits.
Catalog printing, postage, and promotion expenses were $22,739 in 1998,
an increase of $1,603 (7.6% increase) from $21,136 in 1997. As a
percentage of sales, expenses were 5.3% for the current nine months and
8.8% for the prior comparable period due to an increase in retail
revenues in 1998.
Selling, general and administrative expenses were $137,216, or 32.2% as
a percentage of sales, compared with $61,204, or 25.6% as a percentage
of sales, an increase of $76,012 (124.2% increase). The largest
increases are from indirect salaries, rents, freight and property
taxes. These expenses increased due to the acquisition of Holland &
Barrett retail operation and the U.S. retail expansion program.
Merger related costs.
One-time costs associated with the merger between Nutrition
Headquarters Group (NHG) and NBTY will aggregate approximately $3.4
million. These estimates include professional fees and separation pay
for the consolidation of certain administrative areas.
Interest expense. Interest expense was $12,417, an increase of $10,467
compared to the comparable nine month period. Such change is primarily
due to interest associated with the Holland & Barrett acquisition and
the Credit and Guarantee Agreement.
Income taxes
Prior to the merger, Nutrition Headquarters Group had been treated as
an S corporation for Federal and state tax purposes. Accordingly,
taxable income has been reported to the individual stockholders for
their inclusion in their respective income tax returns with no
provision for these taxes, other than certain minimum taxes, included
in the Company's consolidated financial statements. Income taxes were
approximately $16,051 in 1998 and $10,846 in 1997.
Income before income taxes was $47,819 for 1998 and $34,542 for 1997.
After income taxes, the Company had a net profit of $31,768 (or basic
earnings per share of $0.49, diluted earnings per share of $0.46) for
the nine month period ended June 30, 1998, and $23,696 (or basic
earnings per share of $0.37, diluted earnings per share of $0.34) for
the nine months ended June 30, 1997. Assuming NHG was taxed at the
Company's effective rate, net income would have been approximately
$29.0 million for the nine months ended June 30, 1998, an increase of
$8.2 million or 39.7% compared with $20.8 million in 1997.
Liquidity and Capital Resources
Working capital was $87.1 million at June 30, 1998, compared with $70.9
million at September 30, 1997, an increase of $16.2 million.
In September 1997, the Company entered into a $50 million Credit and
Guarantee Agreement (CGA) which expires September 30, 2003. The CGA
was increased to $60 million on April 28, 1998. 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 June 30, 1998, there were borrowings of $55,000 under this
facility. These borrowings were repaid in July 1998.
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 the capital stock of H&B. The Promissory Notes, which were
collateralized by two letters of credit issued by a lending
institution, were paid in full in October 1997.
In November and December 1997, the Company paid an aggregate $5,350 in
connection with a litigation settlement, net of a reimbursement made by
an insurance carrier.
In December 1997, the Company purchased a building for a purchase price
of approximately $3,900 with operating funds.
The Company sold certain assets of its cosmetic pencil operation for
approximately $6 million, of which $4.5 million was paid in cash.
On July 1, 1998, the Company sold 3,450,000 shares of common stock in a
public offering. The Company realized approximately $55 million which
was used to repay the Company's Credit and Guarantee Agreement and for
working capital.
The Company has capitalized $944 interest on construction of the
softgel manufacturing plant.
The Company believes that existing cash balances, internally-generated
funds from operations, amounts available under the CGA and proceeds
from the July 1998 public offering of the Company's common stock 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 provided by operating activities was $11.3 million in 1998 and
$18.5 million in 1997 primarily due to increases in inventory. Net cash
used in investing activities was $38.2 million and $16.8 million in
1997 due to plant expansion. Net cash provided by financing activities
was $15.0 million in 1998 and $9.0 million was used in financing
activities in 1997.
Management believes that inflation did not have a significant impact on
its operations.
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 significant to the Company's
results of operations or financial position.
New pronouncements
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (FAS 133). FAS 133 is effective for all fiscal quarters of
all fiscal years beginning after June 15, 1999 (October 1, 1999 for the
Company). FAS 133 requires that all derivative instruments be recorded
on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated
as part of a hedge transaction and, if it is, the type of hedge
transaction. Management of the Company anticipates that, due to its
limited use of derivative instruments, the adoption of FAS 133 will not
have a significant effect on the Company's results of operations or its
financial position.
In February 1998, the American Institute of Certified Public
Accountants' Accounting Standards Executive Committee issued Statement
of Position No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP No. 98-1"). SOP No. 98-1
requires certain costs incurred in connection with developing or
obtaining internal-use software to be capitalized and other costs to be
expensed. The Company adopted SOP 98-1 effective February 1998, and
its implementation had no material effect on the Company's financial
position or results of operations.
In April 1998, the American Institute of Certified Public Accountants'
Accounting Standards Executive Committee issued Statement of Position
No. 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP No. 98-
5"). SOP No. 98-5 requires that all start-up (or pre-opening)
activities and organization costs be expensed as incurred. The Company
expects that its application of this will not have a material effect on
its financial position or results of 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
(Unaudited)
(In thousands)
Item 1. Legal Proceedings
LITIGATION:
Gehe ag (Holland & Barrett's former parent company), has filed an
action, in February 1998, against the Company for non-payment of a
deferred tax in connection with the H&B acquisition. The Company
and its corporate counsel believe there is no payment due Gehe.
In November and December 1997, the Company paid an aggregate $5,350
in connection with a litigation settlement, net of a reimbursement
made by its insurance carrier. 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
On March 9, 1998, the stockholders approved to increase the number
of authorized $.008 par value common shares from 25,000 to 75,000.
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
A Form 8-K was filed during the third 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 August 12, 1998
Harvey Kamil
--------------------------------
Harvey Kamil, Executive Vice President,
Secretary
(Principal Financial
and Accounting Officer)