Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________ to __________
Commission File Number 0-10666
NBTY, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 11-2228617
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
90 Orville Drive
Bohemia, New York 11716
(Address of Principal Executive Offices, Including 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
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant 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:
Shares Outstanding
Title of Class as of April 29, 2003
-------------- --------------------
Common Stock
Par value $.008 per share 66,451,570
NBTY, INC. and SUBSIDIARIES
FORM 10-Q
FISCAL QUARTER ENDED MARCH 31, 2003
INDEX
PART I. Financial Information Page
ITEM 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Income 2 - 3
Condensed Consolidated Statements of
Stockholders' Equity and Comprehensive Income 4
Condensed Consolidated Statements of Cash Flows 5 - 6
Notes to Condensed Consolidated Financial Statements 7 - 15
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16 - 30
ITEM 3. Qualitative and Quantitative Disclosures about
Market Risk 31
ITEM 4. Controls and Procedures 32
PART II. Other Information
ITEM 1. Legal Proceedings 33
ITEM 6. Exhibits and Reports on Form 8-K 33
Signatures 34
Certifications 35 - 36
Exhibits 37 - 38
ITEM 1:
NBTY, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars and shares in thousands)
March 31, September 30,
2003 2002
--------- -------------
Assets
Current assets:
Cash and cash equivalents $ 33,774 $ 26,229
Investments in bonds, at fair value 8,012 8,194
Accounts receivable, less allowance for doubtful accounts
of $4,292 at March 31, 2003 and $4,194 at
September 30, 2002 46,649 41,362
Inventories 220,894 204,402
Deferred income taxes 11,206 11,206
Prepaid expenses and other current assets 35,285 24,691
-------- --------
Total current assets 355,820 316,084
Property, plant and equipment, net 219,410 216,245
Goodwill 163,911 144,999
Intangible assets, net 46,000 48,413
Other assets 6,634 8,936
-------- --------
Total assets $791,775 $734,677
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt and capital lease
obligations $ 20,665 $ 23,044
Accounts payable 72,856 48,616
Accrued expenses and other current liabilities 68,498 58,714
-------- --------
Total current liabilities 162,019 130,374
Long-term debt 154,700 163,874
Deferred income taxes 16,612 16,928
Other liabilities 3,006 4,244
-------- --------
Total liabilities 336,337 315,420
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $.008 par; authorized 175,000 shares;
issued and outstanding 66,263 shares at March 31, 2003
and 66,133 shares at September 30, 2002 530 529
Capital in excess of par 128,282 126,283
Retained earnings 324,102 287,868
-------- --------
452,914 414,680
Accumulated other comprehensive income 2,524 4,577
-------- --------
Total stockholders' equity 455,438 419,257
-------- --------
Total liabilities and stockholders' equity $791,775 $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 data)
For the three months
ended March 31,
----------------------
2003 2002
---- ----
Net sales $277,824 $251,544
-------- --------
Costs and expenses:
Cost of sales 124,679 112,989
Discontinued product charge 6,000
Catalog printing, postage and promotion 16,782 12,731
Selling, general and administrative 99,170 86,636
Recovery of raw material costs (5,467)
-------- --------
246,631 206,889
-------- --------
Income from operations 31,193 44,655
-------- --------
Other income (expense):
Interest (3,774) (4,226)
Miscellaneous, net 2,274 1,152
-------- --------
(1,500) (3,074)
-------- --------
Income before income taxes 29,693 41,581
Provision for income taxes 10,082 16,010
-------- --------
Net income $ 19,611 $ 25,571
======== ========
Net income per share:
Basic $ 0.30 $ 0.39
Diluted $ 0.29 $ 0.38
Weighted average common shares outstanding:
Basic 66,261 65,883
Diluted 68,323 67,755
See notes to condensed consolidated financial statements.
2
NBTY, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars and shares in thousands, except per share data)
For the six months
ended March 31,
----------------------
2003 2002
---- ----
Net sales $519,228 $466,634
-------- --------
Costs and expenses:
Cost of sales 231,359 213,899
Discontinued product charge 6,000
Catalog printing, postage and promotion 30,637 21,741
Selling, general and administrative 192,546 168,549
Recovery of raw material costs (5,467)
-------- --------
460,542 398,722
-------- --------
Income from operations 58,686 67,912
-------- --------
Other income (expense):
Interest (7,820) (10,234)
Miscellaneous, net 3,513 2,055
-------- --------
(4,307) (8,179)
-------- --------
Income before income taxes 54,379 59,733
Provision for income taxes 18,145 22,998
-------- --------
Net income $ 36,234 $ 36,735
======== ========
Net income per share:
Basic $ 0.55 $ 0.56
Diluted $ 0.53 $ 0.54
Weighted average common shares outstanding:
Basic 66,216 65,814
Diluted 68,205 67,536
See notes to condensed consolidated financial statements.
3
NBTY, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
FOR THE YEAR ENDED SEPTEMBER 30, 2002 AND
SIX MONTHS ENDED MARCH 31, 2003
(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
--------- ------ --------- -------- ------------- ------------- ------------- --------------
Balance, September 30, 2001 65,724 $526 $122,513 $193,184 $(839) $(12,978) $302,406
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)
---------
$113,394
========
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 subscrip-
tions receivable 839 839
------------------------------------------------------------------------------
Balance, September 30, 2002 66,133 529 126,283 287,868 - 4,577 419,257
Components of comprehensive
income:
Net income 36,234 36,234 $ 36,234
Foreign currency translation
adjustment (1,871) (1,871) (1,871)
Change in net unrealized
loss on available-for-sale
investments (182) (182) (182)
---------
$ 34,181
========
Exercise of stock options 30 176 176
Tax benefit from exercise of
stock options 113 113
Shares issued and contributed
to ESOP 100 1 1,710 1,711
------------------------------------------------------------------------------
Balance, March 31, 2003 66,263 $530 $128,282 $324,102 $ 0 $ 2,524 $455,438
==============================================================================
See notes to condensed consolidated financial statements.
4
NBTY, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
For the six months
ended March 31,
----------------------
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 36,234 $ 36,735
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on disposal/sale of property, plant
and equipment (962) (69)
Depreciation and amortization 21,752 21,554
Foreign currency exchange rate gain (906) (62)
Amortization of deferred financing costs 394 388
Amortization of bond discount 62 62
Allowance for doubtful accounts (98) 1,002
Compensation expense for ESOP 855
Tax benefit from exercise of stock options 113 791
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (4,240) (7,435)
Inventories (6,877) 22,856
Prepaid expenses and other current assets (7,251) (342)
Other assets 59 1,120
Accounts payable 7,426 (13,411)
Accrued expenses and other current liabilities 1,359 3,921
Other liabilities (1,239) 15
-------- --------
Net cash provided by operating activities 46,681 67,125
-------- --------
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired (14,786) (7,256)
Release of cash held in escrow 2,403 4,600
Purchase of property, plant and equipment (17,686) (10,516)
Proceeds from sale of property, plant and equipment 1,293 991
-------- --------
Net cash used in investing activities (28,776) (12,181)
-------- --------
Cash flows from financing activities:
Principal payments under long-term debt agreements
and capital leases (11,616) (38,027)
Proceeds from stock options exercised 176 557
-------- --------
Net cash used in financing activities (11,440) (37,470)
-------- --------
Effect of exchange rate changes on cash and cash
equivalents 1,080 (1,246)
-------- --------
Continued
See notes to condensed consolidated financial statements.
5
NBTY, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Unaudited)
(Dollars and shares in thousands)
For the six months
ended March 31,
----------------------
2003 2002
---- ----
Net increase in cash and cash equivalents $ 7,545 $ 16,228
Cash and cash equivalents at beginning of period 26,229 34,434
-------- --------
Cash and cash equivalents at end of period $ 33,774 $ 50,662
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 8,218 $ 9,946
Cash paid during the period for income taxes $ 15,480 $ 17,065
Non-cash financing information:
During the six months ended March 31, 2003, 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.
6
NBTY, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts and number of stores)
1. Principles of consolidation and basis of presentation
The accompanying condensed consolidated financial statements as of March
31, 2003 and September 30, 2002 and for the three and six months ended
March 31, 2003 and March 31, 2002 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 consolidated financial
position, results of operations and cash flows.
The results of operations for the six months ended March 31, 2003 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.
Stock-based compensation
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
and provides pro forma disclosures of net income and earnings per share as
if the method prescribed by SFAS No. 123, Accounting for Stock-Based
Compensation, had been applied in measuring compensation expense. See
"Recently Issued Accounting Pronouncements."
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
7
NBTY, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts and number of stores)
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.
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. As of March 31, 2003, the Company has not entered
into any such activities and therefore the adoption of this standard did
not impact its consolidated financial position, results of operations, or
disclosure requirements.
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.
8
NBTY, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts and number of stores)
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 in the
current quarter. There were no grants during the six month periods ended
March 31, 2003 and March 31, 2002; therefore, the pro forma and actual net
income and related EPS are the same as amounts reported.
In January 2003, the Emerging Issues Task Force ("EITF") issued EITF Issue
No. 02-16, "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor," which states that cash consideration
received from a vendor is presumed to be a reduction of the prices of the
vendor's products or services and should, therefore, be characterized as a
reduction of cost of sales when recognized in the statement of operations.
That presumption is overcome when the consideration is either a
reimbursement of specific, incremental, identifiable costs incurred to sell
the vendor's products, or a payment for assets or services delivered to the
vendor. EITF Issue No. 02-16 is effective for arrangements entered into
after November 21, 2002. The adoption of EITF Issue No. 02-16 did not have
a material impact on the Company's consolidated financial position or
results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," an interpretation of ARB No. 51.
Interpretation 46 addresses consolidation by business enterprises of
variable interest entities. Interpretation 46 applies immediately to
variable interest entities created after January 31, 2003 and to variable
interest entities in which an enterprise obtains an interest after that
date. It applies in the first year or interim period beginning after June
15, 2003 to variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003. The Company
has not yet determined the impact of implementing Interpretation 46.
2. Acquisitions
On March 10, 2003, the Company acquired Health & Diet Group Ltd. and the
FSC wholesale business from Royal Numico N.V. (NUMCc.AS). Health & Diet
Group owns and operates 49 GNC stores in the U.K. and 7 GNC stores in
Germany. FSC is a Manchester, U.K.-based wholesale operation whose products
are sold to health food stores and pharmacies. The FSC branded products
include comprehensive ranges of multivitamins, single vitamins and
minerals, herbal formulas, and tinctures. These operations had total sales
of approximately $57,000 during 2002. The purchase price for these
businesses was approximately $16,532. Assets acquired and liabilities
assumed include cash ($1,946), accounts receivable ($1,502), inventories
($9,383), other current assets ($2,396), property, plant and equipment
($5,080), and current liabilities ($22,057). The excess cost of investment
over the net book value amounted to $18,282 and is classified as goodwill.
This transaction stipulates adjustments to the purchase price for agreed
9
NBTY, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts and number of stores)
upon working capital requirements and inventory valuation procedures to be
performed. The Company is still in the process of finalizing its valuation
analysis and therefore the assets and liabilities allocated above are
subject to change. This acquisition contributed $3,577 in sales and a
marginal operating profit during the current fiscal period.
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 and six month periods ended March 31,
2003 and 2002 are as follows:
For the three months For the six months
ended March 31, ended March 31,
-------------------- --------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income $19,611 $25,571 $36,234 $36,735
Changes in:
Unrealized holding gains (455) (182)
Foreign currency translation adjustments (5,539) (4,002) (1,871) (5,735)
------- ------- ------- -------
Total comprehensive income $13,617 $21,569 $34,181 $31,000
======= ======= ======= =======
Accumulated other comprehensive income, which is classified as a separate
component of stockholders' equity, is comprised of net gains on foreign
currency translation of $2,754 and $4,625 at March 31, 2003 and September
30, 2002, respectively, and net unrealized holding losses on available-for-
sale securities of $230 at March 31, 2003 and $48 at September 30, 2002,
respectively.
10
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 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 market ratings as of
March 31, 2003 are as follows: Moody's Investors Service, Inc. rated these
debt securities as Caa2 and Standard & Poor's rated 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:
March 31, September 30,
2003 2002
--------- -------------
Raw materials $ 83,141 $ 77,051
Work-in-process 11,237 8,527
Finished goods 126,516 118,824
-------- --------
$220,894 $204,402
======== ========
6. Earnings per share (EPS)
Basic EPS computations are based on the weighted average number of common
shares outstanding during the three and six month periods ended March 31,
2003 and March 31, 2002. Diluted EPS includes the dilutive effect of
outstanding stock options, as if exercised. The following is a
reconciliation between basic and diluted EPS:
For the three months For the six months
ended March 31, ended March 31,
-------------------- --------------------
2003 2002 2003 2002
---- ---- ---- ----
Numerator:
Numerator for basic EPS - income
available to common stockholders $19,611 $25,571 $36,234 $36,735
======= ======= ======= =======
Numerator for diluted EPS - income
available to common stockholders $19,611 $25,571 $36,234 $36,735
======= ======= ======= =======
Denominator:
Denominator for basic EPS - 66,261 65,883 66,216 65,814
weighted-average shares
Effect of dilutive securities:
Stock options 2,062 1,872 1,989 1,722
------- ------- ------- -------
Denominator for diluted EPS -
weighted-average shares 68,323 67,755 68,205 67,536
======= ======= ======= =======
Net EPS:
Basic EPS $ 0.30 $ 0.39 $ 0.55 $ 0.56
======= ======= ======= =======
Diluted EPS $ 0.29 $ 0.38 $ 0.53 $ 0.54
======= ======= ======= =======
11
NBTY, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts and number of stores)
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. 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 March 31, 2003 and September 30, 2002 is
as follows:
March 31, 2003 September 30, 2002
----------------------------- -----------------------------
Gross carrying Accumulated Gross carrying Accumulated Amortization
amount Amortization amount Amortization Period (years)
-------------- ------------ -------------- ------------ --------------
Amortized intangible assets:
Customer lists $61,368 $17,797 $64,283 $18,668 6 - 15
Trademark and licenses 2,414 2,364 2,429 2,188 2 - 3
Covenants not to compete 2,605 2,026 2,605 1,848 5 - 7
------- ------- ------- -------
$66,387 $22,187 $69,317 $22,704
======= ======= ======= =======
Unamortized intangible asset:
Trademark 1,800 - 1,800 -
------- ------- ------- -------
Total intangible assets $68,187 $22,187 $71,117 $22,704
======= ======= ======= =======
The changes in the carrying amount of goodwill by segment for the six month
period ended March 31, 2003, are as follows:
Puritan's Pride/ Retail United Retail United
Direct Response States Kingdom/Ireland Wholesale Consolidated
---------------- ------------- --------------- --------- ------------
Balance at
September 30, 2002 $15,197 $7,588 $117,322 $4,892 $144,999
Acquisitions during period 18,282 18,282
Foreign currency
translation 630 630
------- ------ -------- ------ --------
Balance at
March 31, 2003 $15,197 $7,588 $136,234 $4,892 $163,911
======= ====== ======== ====== ========
Aggregate amortization expense of definite lived intangible assets for the
six months ended March 31, 2003 and March 31, 2002 was approximately $2,430
and $2,151, 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 $4,637 (2003), $4,250 (2004), $4,041 (2005), $3,981
(2006), and $3,749 (2007).
12
NBTY, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts and number of stores)
8. Segment Information:
The Company is organized by sales segments on a worldwide basis. The
Company's management reporting system evaluates performance based on a
number of factors; however, the primary measures of performance are the
sales and 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. Corporate also includes the manufacturing assets of
the Company and accordingly, items associated with these activities, such as
the discontinued product charge and the recovery of raw material costs
remain unallocated in the corporate segment. The Company's segment
reporting disclosures for the prior periods presented have been reclassified
to exclude certain corporate general and administrative expenses to conform
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: Wholesale; Retail: United
States; Retail: United Kingdom/Ireland; and Puritan's Pride/Direct
Response. All of the Company's products fall into one of these four
segments. 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. The Retail United States segment
generates revenue through the sale of proprietary brand and third-party
products through its 540 Company-operated stores. The Retail United
Kingdom/Ireland segment generates revenue through the sale of proprietary
brand and third-party products in 524 Company-operated stores. 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 and the
United Kingdom.
The following table represents key financial information of the Company's
business segments:
For the three months For the six months
ended March 31, ended March 31,
-------------------- ----------------------
2003 2002 2003 2002
---- ---- ---- ----
Wholesale:
Revenue $84,850 $71,889 $158,967 $137,525
Operating income 17,950 14,063 32,154 23,652
Depreciation and amortization 242 370 451 704
Identifiable assets, at end of period 56,645 51,595 56,645 51,595
Capital expenditures 74 450 153 729
13
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 For the six months
ended March 31, ended March 31,
---------------------- ----------------------
2003 2002 2003 2002
---- ---- ---- ----
Retail:
United States
Revenue $ 53,556 $ 50,850 $103,819 $ 95,061
Operating income (loss) 1,093 (2,290) (562) (4,940)
Depreciation and amortization 3,000 3,975 5,936 7,455
Identifiable assets, at end of period 65,617 75,626 65,617 75,626
Capital expenditures 613 1,403 1,111 2,433
Locations open at end of period 540 539 540 539
United Kingdom/Ireland
Revenue $ 87,089 $ 72,714 $169,702 $145,318
Operating income 23,069 20,444 45,360 40,508
Depreciation and amortization 2,373 1,888 4,538 3,976
Identifiable assets, at end of period 275,211 217,847 275,211 217,847
Capital expenditures 2,255 1,031 3,768 2,113
Locations open at end of period 524 463 524 463
Puritan's Pride/Direct Response
Revenue $ 52,329 $ 56,091 $ 86,740 $ 88,730
Operating income 13,958 22,404 24,973 34,229
Depreciation and amortization 1,601 1,354 2,937 2,666
Identifiable assets, at end of period 80,140 82,493 80,140 82,493
Capital expenditures 255 450 494 643
Corporate:
Corporate expenses $(18,877) $(15,433) $(37,239) $(31,004)
Discontinued product charge (6,000) (6,000)
Recovery of raw material costs 5,467 5,467
Depreciation and amortization -
manufacturing 2,606 2,400 5,206 4,783
Depreciation and amortization -
other 1,375 1,023 2,684 1,970
Corporate manufacturing identifiable
assets, at end of period 314,162 264,516 314,162 264,516
Capital expenditures - manufacturing 1,597 947 2,270 2,940
Capital expenditures - other 1,570 650 9,890 1,658
Consolidated totals:
Revenue $277,824 $251,544 $519,228 $466,634
Operating income 31,193 44,655 58,686 67,912
Depreciation and amortization 11,197 11,010 21,752 21,554
Identifiable assets, at end of period 791,775 692,077 791,775 692,077
Capital expenditures 6,364 4,931 17,686 10,516
14
NBTY, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts and number of stores)
Foreign subsidiaries account for approximately 34% of total assets, 15% of
total liabilities and 33% of net revenues, as of and for the six month
period ended March 31, 2003.
9. Discontinued Product Charge:
Effective March 15, 2003, the Company voluntarily discontinued sales of
products that contain ephedra. Income from operations during the six
months ended March 31, 2003 include a one-time charge of approximately
$6,000 ($3,960 or $0.06 basic and diluted earnings per share, after tax)
associated with such discontinued sales. The Company's belief that its
ephedra products were safe when used as directed has been supported by
scientific evidence, and the Company has not been a defendant in any
lawsuit for any of its ephedra products. However, in light of adverse
publicity surrounding ephedra and the current environment in the U.S., the
Company believed it was in its best interest to voluntarily cease selling
ephedra products, which represented an insignificant portion of the
Company's overall business.
10. Recovery of Raw Material Costs:
The Company was a plaintiff in a vitamin antitrust litigation matter
brought in the United States District Court in the District of Columbia
against F. Hoffmann-La Roche Ltd. and others for alleged price fixing.
Settlements with certain defendants were made, and in January 2002, the
Company received $5,467 ($3,362 or $0.05 basic and diluted earnings per
share, after tax) in partial settlement of on-going price fixing
litigation.
11. Subsequent Event:
On April 14, 2003, a complaint was filed by the United States of America
against the Company arising from certain pseudoephedrine sales from
November 2000 through December 2002. The complaint, filed in U.S. District
Court for the Eastern District of New York, alleges technical recordkeeping
and reporting violations of the Controlled Substances Act, 21 U.S.C.
Sections 801-904 and Controlled Substances Import and Export Act, 21 U.S.C.
Sections 951-971 in a fraction of the Company's sales of over-the-counter
antihistamine and decongestant products containing pseudoephedrine. Total
sales of such products generated approximately $160, or only 0.0002 percent
of the Company's total sales for the fiscal years ended September 30, 2001
and September 30, 2002, respectively. The Company has cooperated in all
respects with the Drug Enforcement Administration in its investigation of
sales identified in the complaint. Accordingly, the Company believes that
there is no valid basis nor precedent for the penalties sought, and intends
to launch a vigorous defense. However, because this action is in its early
stages, no determination can be made at this time as to the
final outcome of this action.
15
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 in this form 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, wholesale, manufacturing,
and other 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.
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)
Consequently, such forward-looking statements should be regarded solely as
the Company's current plans, estimates and beliefs. Readers are cautioned
not to place undue reliance on forward-looking statements. The Company
cannot guarantee future results, trends, events, levels of activity,
performance or achievements. The Company does not undertake and
specifically declines any obligation to update, republish or revise
forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrences of unanticipated events.
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 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.
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)
Results of Operations:
- ----------------------
The following table sets forth income statement data of the Company as a
percentage of net sales for the periods indicated:
For the three months For the three months Change
ended March 31, ended March 31, amount
-------------------- -------------------- increase
2003 2003 2002 2002 (decrease)
---- ---- ---- ---- ----------
Net sales $277,824 100% $251,544 100% $ 26,280
-------- ---- -------- ---- --------
Costs and expenses:
Cost of sales 124,679 44.9% 112,989 44.9% 11,690
Discontinued product charge 6,000 2.2% - 6,000
Catalog printing, postage and promotion 16,782 6.0% 12,731 5.1% 4,051
Selling, general and administrative 99,170 35.7% 86,636 34.4% 12,534
Recovery of raw material costs - (5,467) -2.2% 5,467
-------- ---- -------- ---- --------
246,631 88.8% 206,889 82.2% 39,742
-------- ---- -------- ---- --------
Income from operations 31,193 11.2% 44,655 17.8% (13,462)
-------- ---- -------- ---- --------
Other income (expense):
Interest (3,774) -1.4% (4,226) -1.7% 452
Miscellaneous, net 2,274 0.8% 1,152 0.5% 1,122
-------- ---- -------- ---- --------
(1,500) -0.6% (3,074) -1.2% 1,574
-------- ---- -------- ---- --------
Income before income taxes 29,693 10.6% 41,581 16.6% (11,888)
Provision for income taxes 10,082 3.6% 16,010 6.4% (5,928)
-------- ---- -------- ---- --------
Net income $ 19,611 7.0% $ 25,571 10.2% $ (5,960)
======== ==== ======== ==== ========
For the three month period ended March 31, 2003 compared
to the three month period ended March 31, 2002:
Net sales. Net sales in the second quarter ended March 31, 2003 were
$277,824, compared with $251,544 for the prior comparable period, an
increase of $26,280, or 10.4%. The $26,280 increase is comprised of:
$12,961 attributable to wholesale, $2,706 attributable to US retail,
$14,375 attributable to U.K./Ireland retail and a decrease of $3,762 in the
Puritan's Pride direct response/e-commerce segment.
Wholesale sales were $84,850, compared to $71,889, an increase of $12,961,
or 18%. Such increase in the wholesale segment's sales was primarily due
to an increase in sales to the mass market, drug chains and supermarkets
($4,858), an increase in Global Health Science's sales ($5,254), and sales
contributed by the FSC acquisition ($988). Products such as Coral Calcium,
Flex-a-min(R), and the
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)
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
products by obtaining new customer accounts. One customer of the wholesale
division represented, individually, more than 10% of this segment's sales
for the three month period ended March 31, 2003. For the prior comparable
period, two customers represented, individually, more than 10% of this
segment's sales. 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
$52,329, compared to $56,091, a decrease of $3,762, or 6.7%. Such decrease
was a result of the Company changing its catalog promotion strategy. The
timing of promotional catalog mailings was not comparable to the second
quarter a year ago. The three-for-one sales catalog which ran from January
through March last year will be running from March through May this year
and is expected to generate a comparable increase in sales for the third
quarter. U.S. retail sales were $53,556, compared to $50,850, an increase
of $2,706, or 5.3%. Such increase was a direct result of the success of
the Savings Passport Program, a customer loyalty program. Same store sales
for stores open more than one year increased 3.7% (or $1,864).
U.K./Ireland retail sales were $87,089, compared to $72,714, an increase of
$14,375, or 19.8%. Such increase was mainly attributable to an increase in
same store sales for stores open more than one year of 14.3% (or $10,088)
and sales contributed by the GNC U.K. acquisition ($2,589). The same store
sales results include the positive effect of a strong British Pound ($8,732
or 12.4%). The Company operated 540 stores in the U.S. and 524 stores in
the U.K./Ireland as of March 31, 2003, compared to 539 stores in the U.S.
and 463 in the U.K./Ireland as of March 31, 2002.
Cost of sales/Discontinued product charge. Cost of sales in the second
quarter ended March 31, 2003 were $130,679, or 47.1% as a percentage of
sales, compared to $112,989, or 44.9% for the prior comparable period. As
a percentage of sales, gross profit decreased to 52.9% in the second
quarter ended March 31, 2003 as compared to 55.1% for the prior comparable
period. Included in the current quarter's cost of sales is a $6,000 charge
(or 2.2% as a percentage of sales) for the voluntary discontinuance of
sales of products containing ephedra. Without this charge, as a percentage
of sales, gross profit would have remained unchanged from the prior
comparable period at 55.1%. The Company's belief that its ephedra products
were safe when used as directed has been supported by scientific evidence,
and the Company has not been a defendant in any lawsuit for any of its
ephedra products. However, in light of adverse publicity surrounding
ephedra and the current environment in the U.S., the Company believed it
was in its best interest to voluntarily cease selling ephedra products,
effective March 15, 2003, which represented an insignificant portion of the
Company's overall business.
The wholesale segment's gross profit increased to 41.1% from 40.4% 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 slightly to 61.1% from 61.3%
as a percentage of sales. The gross profit was affected by price reductions
on certain products and varied catalog promotions the Company ran in the
second quarter ended March 31, 2003 versus the prior comparable period.
Such decrease was offset by greater manufacturing efficiencies. The U.S.
retail gross profit increased as a percentage of sales to 59.1% from 56.9%
primarily due to the Company's modified price structure in the stores and
the introduction of new higher gross margin items. The U.K./Ireland retail
gross profit decreased to 62.7% from 63.5% as a percentage of sales
primarily as a result of the recent GNC U.K. acquisition. That operation
reported a 40.5% gross profit thereby affecting the total U.K. gross margin
during the current quarter. Without the GNC U.K. operation, gross profit as a
percentage of sales would have remained relatively
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)
unchanged as compared to the prior period. The Company's overall strategy
is to improve margins by introducing new products which traditionally have
a higher gross profit and 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 second quarters ended March 31, 2003 and March 31, 2002, cost of
sales included under-absorbed factory overhead of $2,250 and $3,185,
respectively.
Catalog printing, postage, and promotion. Catalog printing, postage, and
promotion expenses were $16,782 in the second quarter ended March 31, 2003,
compared with $12,731 in the prior comparable period, an increase of
$4,051. Such advertising expenses as a percentage of sales were 6% for the
second quarter ended March 31, 2003 and 5.1% for the prior comparable
period. The $4,051 increase was primarily attributable to an increase in
Puritan's Pride/Direct Response's advertising promotion and media for new
products introduced and existing core products ($3,268). These investments
in additional advertising and sales promotions are part of the Company's
strategic effort to increase long-term growth. The other segments'
advertising expense variances are as follows: wholesale's advertising
increased $1,769, U.S. retail's advertising decreased $682, and
U.K./Ireland retail's advertising decreased $304.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $99,170 in the second quarter ended March 31,
2003, an increase of $12,534, as compared with $86,636 for the prior
comparable period. As a percentage of sales, selling, general and
administrative expenses were 35.7% for the second quarter ended March 31,
2003 and 34.4% for the prior comparable period. Of the $12,534 increase,
$2,270 was attributable to increased payroll costs mainly associated with
business acquisitions and general salary increases, $1,361 to increased
rent expense and additional U.S. retail. and U.K./Ireland stores, $2,047 to
increased freight costs mainly resulting from the Company's efforts to
generate faster product delivery to customers, $1,411 to increased
insurance costs mainly associated with an increase in general insurance
rates, and $766 to increased professional fees for the implementation and
integration of new software purchased. Of the $12,534 increase in selling,
general and administrative cost, $2,710 is attributed to the foreign exchange
translation of the British Pound.
Recovery of raw material costs. During the quarter ended March 31, 2002,
the Company received $5,467 in partial settlement of on-going price fixing
litigation brought by the Company against certain raw material vitamin
suppliers.
Interest expense. Interest expense was $3,774 in the second quarter ended
March 31, 2003, a decrease of $452 compared with interest expense of $4,226
in the second quarter ended March 31, 2002. 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, capital expenditures and other
working capital needs.
Miscellaneous, net. Miscellaneous, net was $2,274 in the second quarter
ended March 31, 2003, an increase of $1,122, compared to $1,152 in the second
quarter ended March 31, 2002. Such increase was primarily attributable to
exchange rate fluctuations ($1,409) offset by decreases in investment income
($43), decreases in net gains on sale of property plant and equipment ($78),
and other miscellaneous income decreases ($166).
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)
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 in the second quarter
ended March 31, 2003 was 34%, compared to 38.5% in the second quarter ended
March 31, 2002. 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 in the second
quarter ended March 31, 2003 of $19,611 (or basic and diluted earnings per
share of $0.30 and $0.29, respectively), and $25,571 (or basic and diluted
earnings per share of $0.39 and $0.38, respectively) in the second quarter
ended March 31, 2002. Excluding one-time events, earnings per diluted
share for the fiscal second quarter of 2003 and 2002 were $0.34 and $0.33,
respectively.
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)
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 six months For the six months Change
ended March 31, ended March 31, amount
-------------------- -------------------- increase
2003 2003 2002 2002 (decrease)
---- ---- ---- ---- ----------
Net sales $519,228 100% $466,634 100% $ 52,594
-------- ---- -------- ---- --------
Costs and expenses:
Cost of sales 231,359 44.6% 213,899 45.8% 17,460
Discontinued product charge 6,000 1.2% - 6,000
Catalog printing, postage and promotion 30,637 5.9% 21,741 4.7% 8,896
Selling, general and administrative 192,546 37.1% 168,549 36.1% 23,997
Recovery of raw material costs - (5,467) -1.2% 5,467
-------- ---- -------- ---- --------
460,542 88.8% 398,722 85.4% 61,820
-------- ---- -------- ---- --------
Income from operations 58,686 11.2% 67,912 14.6% (9,226)
-------- ---- -------- ---- --------
Other income (expense):
Interest (7,820) -1.5% (10,234) -2.2% 2,414
Miscellaneous, net 3,513 0.7% 2,055 0.4% 1,458
-------- ---- -------- ---- --------
(4,307) -0.8% (8,179) -1.8% 3,872
-------- ---- -------- ---- --------
Income before income taxes 54,379 10.4% 59,733 12.8% (5,354)
Provision for income taxes 18,145 3.5% 22,998 4.9% (4,853)
-------- ---- -------- ---- --------
Net income $ 36,234 6.9% $ 36,735 7.9% $ (501)
======== ==== ======== ==== ========
For the six month period ended March 31, 2003 compared
to the six month period ended March 31, 2002:
Net sales. Net sales for the six month period ended March 31, 2003 were
$519,228, compared with $466,634 for the prior comparable period, an
increase of $52,594, or 11.3%. The $52,594 increase is comprised of:
$21,442 attributable to wholesale, $8,758 attributable to US retail, and
$24,384 attributable to U.K./Ireland retail and a decrease of $1,990 in the
Puritan's Pride direct response/e-commerce segment.
Wholesale sales were $158,967, compared to $137,525, an increase of
$21,442, or 15.6%. Such increase in the wholesale segment's sales was
primarily due to an increase in sales to the mass
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)
market, drug chains and supermarkets ($10,822), an increase in Global
Health Science's sales ($5,572), and sales contributed by the FSC
acquisition ($988). 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
products by obtaining new customer accounts. Two customers of the wholesale
division represented, individually, more than 10% of this segment's sales
for the six month period ended March 31, 2003 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 $86,740,
compared to $88,730, a decrease of $1,990, or 2.2%. Such decrease was a
result of the Company changing its catalog promotion strategy. The timing
of promotional catalog mailings was not comparable to same like period a
year ago. The three-for-one sales catalog which ran from January through
March last year will be running from March through May this year and is
expected to generate a comparable increase in sales for the third quarter.
U.S. retail sales were $103,819, compared to $95,061, an increase of
$8,758, or 9.2%. Such increase was a direct result of the success of the
Savings Passport Program, a customer loyalty program. Same store sales for
stores open more than one year increased 6.9% (or $6,344). U.K./Ireland
retail sales were $169,702, compared to $145,318, an increase of $24,384,
or 16.8%. Such increase was mainly attributable to an increase in same
store sales for stores open more than one year of 13.6% (or $19,138).
These results include the positive effect of a strong British Pound
($15,006 or 10.7%). The Company operated 540 stores in the U.S. and 524
stores in the U.K./Ireland as of March 31, 2003, compared to 539 stores in
the U.S. and 463 in the U.K./Ireland as of March 31, 2002.
Cost of sales/Discontinued product charge. Cost of sales for the six month
period ended March 31, 2003 were $237,359, or 45.8% as a percentage of
sales, compared to $213,899, or 45.8% for the prior comparable period. As
a percentage of sales, gross profit remained unchanged at 54.2% during the
six month period ended March 31, 2003. Included in the current period's
cost of sales is a $6,000 charge (or 1.2% as a percentage of sales) for the
voluntary discontinuance of sales of products containing ephedra. Without
this charge, as a percentage of sales, gross profit would have increased to
55.4% during the six month period ended March 31, 2003 as compared to 54.2%
for the prior comparable period. The Company's belief that its ephedra
products were safe when used as directed has been supported by scientific
evidence, and the Company has not been a defendant in any lawsuit for any
of its ephedra products. However, in light of adverse publicity surrounding
ephedra and the current environment in the U.S., the Company believed it
was in its best interest to voluntarily cease selling ephedra products,
effective March 15, 2003, which represented an insignificant portion of the
Company's overall business.
The wholesale segment's gross profit increased to 41.7% from 36.8% 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 62.4% from 63.1% as a
percentage of sales. Price reductions on certain products and varied
catalog promotions the Company ran during the period ended March 31, 2003
versus the prior comparable period were major factors in such decrease. A
portion of the decrease was offset by greater manufacturing efficiencies.
The U.S. retail gross profit increased as a percentage of sales to 59.2%
from 58.1% primarily due to the Company's modified price structure in the
stores and the introduction of new higher gross margin items. The
U.K./Ireland retail gross profit remained unchanged at 62.5% as a
percentage of sales. Without the GNC U.K. operation, gross margin would
have increased to 62.8% from 62.5% as a percentage of sales. That
operation reported a 40.5% gross profit thereby affecting
23
NBTY, INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
(In thousands, except per share amounts and number of stores)
the total U.K. gross margin during the current quarter. The Company's
overall strategy is to improve margins by introducing new products which
traditionally have a higher gross profit and by continuing to increase in-
house manufacturing while decreasing the use of outside suppliers in both
the U.S. and the U.K. During the six month periods ended March 31, 2003 and
March 31, 2002, cost of sales included under-absorbed factory overhead of
$4,409 and $7,196, respectively.
Catalog printing, postage, and promotion. Catalog printing, postage, and
promotion expenses were $30,637 during the six month period ended March 31,
2003, compared with $21,741 in the prior comparable period, an increase of
$8,896. Such advertising expenses as a percentage of sales were 5.9% during
the six month period ended March 31, 2003 and 4.7% for the prior comparable
period. The $8,896 increase was primarily attributable to an increase in
wholesale advertising promotion and media ($5,316) and Puritan's
Pride/Direct Response's advertising promotion and media ($3,761) for new
products introduced and existing core products. These investments in
additional advertising and sales promotions are part of the Company's
strategic effort to increase long-term growth. The other segments'
advertising expense variances are as follows: U.S. retail's advertising
decreased $253, and U.K./Ireland retail's advertising increased $72.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $192,546 during the six month period ended
March 31, 2003, an increase of $23,997, as compared with $168,549 for the
prior comparable period. As a percentage of sales, selling, general and
administrative expenses were 37.1% during the six month period ended March
31, 2003 and 36.1% for the prior comparable period. Of the $23,997 increase,
$5,743 was attributable to increased payroll costs mainly associated with
business acquisitions and general salary increases, $2,999 to increased
rent expense and additional retail U.S. and U.K./Ireland stores, $2,696 to
increased freight costs mainly resulting from the Company's efforts to
generate faster product delivery to customers, $3,492 to increased
insurance costs mainly associated with an increase in general insurance
rates, and $1,788 to increased professional fees for the implementation and
integration of new software purchased. Of the $23,997 increase in selling,
general and administrative cost, $4,880 is attributed to the foreign exchange
translation of the British Pound.
Recovery of raw material costs. During the six month period ended March
31, 2002, the Company received $5,467 in partial settlement of on-going
price fixing litigation brought by the Company against certain raw material
vitamin suppliers.
Interest expense. Interest expense was $7,820 for the six month period
ended March 31, 2003, a decrease of $2,414, compared with interest expense
of $10,234 for the prior comparable period. 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 used for acquisitions, capital expenditures, and other working
capital needs.
Miscellaneous, net. Miscellaneous, net was $3,513 for the six month period
ended March 31, 2003, an increase of $1,458, compared to $2,055 for the
prior comparable period. Such increase was primarily attributable to
increases in investment income ($750) and increases in net gains on sale of
property plant and equipment ($918) offset by exchange rate fluctuations
($11), and other miscellaneous income decreases ($199).
24
NBTY, INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
(In thousands, except per share amounts and number of stores)
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 six month period
ended March 31, 2003 was 33.4%, compared to 38.5% for the prior comparable
period. 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 six
month period ended March 31, 2003 of $36,234 (or basic and diluted earnings
per share of $0.55 and $0.53, respectively), and $36,735 (or basic and
diluted earnings per share of $0.56 and $0.54, respectively) for the prior
comparable period. Excluding one-time events, earnings per diluted share
for the first six months of 2003 and 2002 were $0.59 and $0.49,
respectively.
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.
Liquidity and Capital Resources:
- --------------------------------
The Company's primary sources of liquidity and capital resources are cash
generated from operations. The Company also maintains a Credit & Guarantee
Agreement ("CGA"). Cash and cash equivalents totaled $33,774 and $26,229
at March 31, 2003 and September 30, 2002, respectively. The Company
generated cash from operating activities of $46,681 and $67,125 during the
six month periods ended March 31, 2003 and March 31, 2002, respectively.
The overall decrease in cash from operating activities during the six month
period ended March 31, 2003 was mainly attributable to an increase in
inventory, an increase in prepaid expenses and other current assets, and a
smaller increase in accounts receivable as compared to the prior like
period. Inventory levels increased over the prior comparable period in
order to maintain high fulfillment shipment levels and to quickly respond
to customer orders. In addition, the Company is aggressive in obtaining
new distribution channels for its products and accordingly inventory levels
are increased to respond to anticipated demand. Increases in inventory are
also attributable to the new CVS supplier contract and the recent addition
of the Marc's store chain. Last quarter the Company was named exclusive
supplier for CVS private label nutritional supplements; shipments commenced
in April 2003. Marc's stores, headquartered in Cleveland, Ohio, are
expected to carry over 180 SKUs of Nature's Bounty brand products. The
increase in prepaid expenses and other current assets is mainly
attributable to a change in insurance carriers (dates of coverage do not
correspond with the prior like period, increasing the prepaid cost) and
increases in general insurance rates. The increase in accounts receivable
and cash was primarily due to increased sales and improved collections.
The number of days sales outstanding during the six month periods ended
March 31, 2003 and March 31, 2002 was 53 days and 54 days, respectively.
Cash used in investing activities was $28,776 and $12,181 during the six
month periods ended March 31, 2003 and March 31, 2002, respectively.
During the six month period ended March 31, 2003,
25
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)
cash flows used in investing activities consisted primarily of net cash
paid for the FSC and GNC U.K. business acquisitions ($14,786), the purchase
of property, plant and equipment ($17,686), partially offset by proceeds
from the sale of property, plant and equipment ($1,293), and cash received
that was previously held in escrow from the fiscal 2001 acquisitions of
Global Health Sciences ($1,850) and NatureSmart ($553). During the six
month period ended March 31, 2002 cash flows used in investing activities
consisted primarily of cash paid for the business acquisitions of Knox
($4,456) and Healthcentral.com ($2,800), the purchase of property, plant
and equipment ($10,516), partially offset by cash received that was
previously held in escrow for the acquisition of Global Health Sciences
($4,600) and proceeds from the sale of property, plant and equipment
($991).
Net cash used in financing activities was $11,440 and $37,470 during the
six months ended March 31, 2003 and March 31, 2002, respectively. For the
six month period ended March 31, 2003 cash flows used in financing
activities included principal payments under long-term debt agreements
($11,616), partially offset by proceeds from the exercise of stock options
($176). Cash used in financing activities during the six month period ended
March 31, 2002 included principal payments under long-term debt agreements
($38,027), partially offset by proceeds from the exercise of stock options
($557).
For the six month period ended March 31, 2003, working capital increased
$8,091 to $193,801. This increase was primarily attributable to the Company
increasing its current assets, specifically cash, accounts receivables,
inventories, and prepaid expenses and other current assets. 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 and inventories. The Company continues to respond to consumer
preferences and to monitor the market for trends and ideas, and these
efforts have translated into increased sales.
The CGA is comprised of one term loan and a revolving credit facility. At
March 31, 2003, there were borrowings of $20,063 under one term loan, which
is classified as current at March 31, 2003. This term loan has an annual
borrowing rate of 2.916% and is payable in quarterly installments
of $5,563. At March 31, 2003, the Company had no borrowing under its
$50,000 revolving credit facility, which expires on September 30, 2003.
Stand-by letters of credit totaling $686 were outstanding under such
facility at March 31, 2003. 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 $150,000 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.
26
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)
A summary of contractual cash obligations as of March 31, 2003 is as
follows:
Payments Due By Period
---------------------------------------------------------------
Less Than 1-3 4-5 After 5
Total 1 Year Years Years Years
----- --------- ----- ----- -------
Long-term debt and capital leases $175,365 $ 20,665 $ 2,045 $150,235 $ 2,420
Operating leases 351,422 52,173 89,089 73,306 136,854
Purchase commitments 43,027 43,027
Capital commitments 14,512 9,912 4,600
Employment & consulting agreements 5,953 1,858 2,340 1,755
Standby letter of credit 686 686
-------- -------- ------- -------- --------
Total contractual cash obligations $590,965 $128,321 $98,074 $225,296 $139,274
======== ======== ======= ======== ========
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 $43,027
at March 31, 2003. During the six months ended March 31, 2003 no one
supplier individually represented greater than 10% of the Company's raw
material purchases. The Company does not believe that the loss of any
single supplier would have a material adverse effect on the Company's
consolidated financial condition or results of operations.
The Company had approximately $612 in open capital commitments at March 31,
2003, primarily related to computer hardware and software. Also, the
Company has a commitment of approximately $13,900 for the construction of
an automated warehouse over the next 18 months.
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 March 31, 2003 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 aggregate
commitment for such H&B executive staff as of March 31, 2003 was
approximately $350.
27
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 maintains a consulting agreement with Rudolph Management
Associates, Inc. for the services of Arthur Rudolph, a director 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 the
Company's 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.
At March 31, 2003, Moody's Investors Service, Inc. rated the Company's
Notes as a B1, and the CGA's implied rating as a Ba2; Standard & Poor's
rated the Notes as a B+, the CGA as a BB+, and gave 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
28
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)
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. As of March 31, 2003, the Company has not entered
into any such activities and therefore the adoption of this standard did
not impact its consolidated financial position, results of operations, or
disclosure requirements.
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 in the
current quarter. There were no grants during the six month periods ended
March 31, 2003 and March 31, 2002; therefore, the pro forma and actual net
income and related EPS are the same as amounts reported.
In January 2003, the Emerging Issues Task Force ("EITF") issued EITF Issue
No. 02-16, "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor," which states that cash consideration
received from a vendor is presumed to be a reduction of the prices of the
vendor's products or services and should, therefore, be characterized as a
reduction of cost of sales when recognized in the statement of operations.
That presumption is
29
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)
overcome when the consideration is either a reimbursement of specific,
incremental, identifiable costs incurred to sell the vendor's products, or
a payment for assets or services delivered to the vendor. EITF Issue No.
02-16 is effective for arrangements entered into after November 21, 2002.
The adoption of EITF Issue No. 02-16 did not have a material impact on the
Company's consolidated financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," an interpretation of ARB No. 51.
Interpretation 46 addresses consolidation by business enterprises of
variable interest entities. Interpretation 46 applies immediately to
variable interest entities created after January 31, 2003 and to variable
interest entities in which an enterprise obtains an interest after that
date. It applies in the first year or interim period beginning after June
15, 2003 to variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003. The Company
has not yet determined the impact of implementing Interpretation 46.
30
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.
31
ITEM 4:
NBTY, INC. and SUBSIDIARIES
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.
32
NBTY, INC. and SUBSIDIARIES
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved from time to time in claims, proceedings and
litigation arising from its business and property ownership. The Company
does not believe that any such claim, proceeding or litigation, either
alone or in the aggregate, will have a material adverse effect on the
Company's consolidated financial position or results of its operations.
On April 14, 2003, a complaint was filed by the United States of America
against the Company arising from certain pseudoephedrine sales from
November 2000 through December 2002. The complaint, filed in U.S. District
Court for the Eastern District of New York, alleges technical recordkeeping
and reporting violations of the Controlled Substances Act, 21 U.S.C.
Sections 801-904 and Controlled Substances Import and Export Act, 21 U.S.C.
Sections 951-971 in a fraction of the Company's sales of over-the-counter
antihistamine and decongestant products containing pseudoephedrine. Total
sales of such products generated approximately $160, or only 0.0002 percent
of the Company's total sales for the fiscal years ended September 30, 2001
and September 30, 2002, respectively. The Company has cooperated in all
respects with the Drug Enforcement Administration in its investigation of
sales identified in the complaint. Accordingly, the Company believes that
there is no valid basis nor precedent for the penalties sought, and intends
to launch a vigorous defense. However, because this action is in its early
stages, no determination can be made at this time as to the final outcome
of this action.
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 March 31, 2003.
There was no Form 8-K filed during the quarter covered by this
report.
33
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: May 2, 2003 By: /s/ Scott Rudolph
----------- --------------------------------
Scott Rudolph
Chairman and Chief Executive
Officer
(Principal Executive Officer)
Date: May 2, 2003 By: /s/ Harvey Kamil
----------- --------------------------------
Harvey Kamil
President and Chief Financial
Officer
(Principal Financial and
Accounting Officer)
34
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: May 2, 2003
-----------
/s/ Scott Rudolph
Scott Rudolph
Chief Executive Officer
35
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: May 2, 2003
-----------
/s/ Harvey Kamil
Harvey Kamil
Chief Financial Officer
36