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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 June 30, 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 July 28, 2003
-------------- -------------------
Common Stock
Par value $.008 per share 66,456,570
NBTY, INC. and SUBSIDIARIES
FORM 10-Q
FISCAL QUARTER ENDED JUNE 30, 2003
INDEX
PART I. Financial Information Page
ITEM 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Income 2
Condensed Consolidated Statements of
Stockholders' Equity and Comprehensive Income 3
Condensed Consolidated Statements of Cash Flows 4 - 5
Notes to Condensed Consolidated Financial Statements 6 - 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 4. Submission of Matters to a Vote of Security Holders 33
ITEM 6. Exhibits and Reports on Form 8-K 34
Signatures 35
Certifications 36 - 37
Exhibits 38 - 39
ITEM 1:
NBTY, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars and shares in thousands)
June 30, September 30,
2003 2002
-------- -------------
Assets
Current assets:
Cash and cash equivalents $ 38,459 $ 26,229
Investments in bonds, at fair value 6,191 8,194
Accounts receivable, less allowance for doubtful accounts
of $4,237 at June 30, 2003 and $4,194 at
September 30, 2002 56,067 41,362
Inventories 235,477 204,402
Deferred income taxes 12,206 11,206
Prepaid expenses and other current assets 45,838 24,691
-------- --------
Total current assets 394,238 316,084
Property, plant and equipment, net 223,063 216,245
Goodwill 174,888 144,999
Intangible assets, net 44,864 48,413
Other assets 8,522 8,936
-------- --------
Total assets $845,575 $734,677
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt and capital
lease obligations $ 15,079 $ 23,044
Accounts payable 73,884 48,616
Accrued expenses and other current liabilities 87,691 58,714
-------- --------
Total current liabilities 176,654 130,374
Long-term debt 154,422 163,874
Deferred income taxes 16,692 16,928
Other liabilities 3,928 4,244
-------- --------
Total liabilities 351,696 315,420
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $.008 par; authorized 175,000 shares;
issued and outstanding 66,263 shares at June 30, 2003
and 66,133 shares at September 30, 2002 530 529
Capital in excess of par 128,282 126,283
Retained earnings 353,570 287,868
-------- --------
482,382 414,680
Accumulated other comprehensive income 11,497 4,577
-------- --------
Total stockholders' equity 493,879 419,257
-------- --------
Total liabilities and stockholders' equity $845,575 $734,677
======== ========
See notes to condensed consolidated financial statements.
1
NBTY, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars and shares in thousands, except per share amounts)
For the three months For the nine months
ended June 30, ended June 30,
-------------------- --------------------
2003 2002 2003 2002
---- ---- ---- ----
Net sales $308,474 $251,987 $827,701 $718,621
-------- -------- -------- --------
Costs and expenses:
Cost of sales 141,196 111,907 372,555 325,805
Discontinued product charge 6,000
Catalog printing, postage and promotion 15,378 12,544 46,015 34,285
Selling, general and administrative 110,924 89,217 303,470 257,765
Litigation recovery of raw material costs (15,051) (20,518)
-------- -------- -------- --------
267,498 198,617 728,040 597,337
-------- -------- -------- --------
Income from operations 40,976 53,370 99,661 121,284
-------- -------- -------- --------
Other income (expense):
Interest (3,890) (4,354) (11,709) (14,588)
Miscellaneous, net 2,023 270 5,536 2,325
-------- -------- -------- --------
(1,867) (4,084) (6,173) (12,263)
-------- -------- -------- --------
Income before income taxes 39,109 49,286 93,488 109,021
Provision for income taxes 9,641 19,579 27,786 42,577
-------- -------- -------- --------
Net income $ 29,468 $ 29,707 $ 65,702 $ 66,444
======== ======== ======== ========
Net income per share:
Basic $ 0.44 $ 0.45 $ 0.99 $ 1.01
Diluted $ 0.43 $ 0.44 $ 0.96 $ 0.98
Weighted average common shares outstanding:
Basic 66,263 66,056 66,232 65,895
Diluted 68,287 68,017 68,233 67,723
See notes to condensed consolidated financial statements.
2
NBTY, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
FOR THE YEAR ENDED SEPTEMBER 30, 2002 AND
NINE MONTHS ENDED JUNE 30, 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)
--------
$113,346
========
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 65,702 65,702 $ 65,702
Foreign currency
translation adjustment 8,923 8,923 8,923
Change in net unrealized
loss on available-for-sale
investments (2,003) (2,003) (2,003)
--------
$ 72,622
========
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, June 30, 2003 66,263 $530 $128,282 $353,570 $ - $ 11,497 $493,879
===============================================================================
See notes to condensed consolidated financial statements.
3
NBTY, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
For the nine months
ended June 30,
----------------------
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 65,702 $ 66,444
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on disposal/sale of property, plant
and equipment (843) (75)
Depreciation and amortization 32,539 31,512
Foreign currency exchange rate (gain) loss (970) 463
Amortization of deferred financing costs 591 585
Amortization of bond discount 93 93
Allowance for doubtful accounts (43) 1,384
Deferred income taxes (1,000)
Compensation expense for ESOP 1,283
Tax benefit from exercise of stock options 113 1,385
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (12,912) (11,295)
Inventories (13,323) 6,984
Prepaid expenses and other current assets (17,201) (8,206)
Other assets (1,209) 1,074
Accounts payable 5,743 (2,571)
Accrued expenses and other current liabilities 21,330 19,088
Other liabilities (317) 42
-------- --------
Net cash provided by operating activities 79,576 106,907
-------- --------
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired (32,049) (7,256)
Release of cash held in escrow 2,403 4,600
Purchase of property, plant and equipment (24,852) (16,427)
Proceeds from sale of property, plant and equipment 1,454 1,004
Proceeds from sale of intangibles 25
Purchase of investments (8,242)
-------- --------
Net cash used in investing activities (53,044) (26,296)
-------- --------
Cash flows from financing activities:
Principal payments under long-term debt agreements
and capital leases (17,510) (79,477)
Proceeds from stock options exercised 176 1,385
-------- --------
Net cash used in financing activities (17,334) (78,092)
-------- --------
Effect of exchange rate changes on cash and cash
equivalents 3,032 1,623
-------- --------
Continued
See notes to condensed consolidated financial statements.
4
NBTY, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Unaudited)
(Dollars and shares in thousands)
For the nine months
ended June 30,
----------------------
2003 2002
---- ----
Net increase in cash and cash equivalents $ 12,230 $ 4,142
Cash and cash equivalents at beginning of period 26,229 34,434
-------- --------
Cash and cash equivalents at end of period $ 38,459 $ 38,576
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 8,656 $ 11,427
Cash paid during the period for income taxes $ 21,035 $ 30,619
Non-cash investing and financing activities:
Acquisitions accounted for under the purchase method are summarized as
follows:
For the nine months
ended June 30,
-------------------
2003 2002
---- ----
Fair value of assets acquired $ 59,505 $7,256
Liabilities assumed (24,315) -
Less: Cash acquired (3,141) -
-------- ------
Net cash paid $ 32,049 $7,256
======== ======
During the nine months ended June 30, 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.
5
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 June 30,
2003 and September 30, 2002 and for the three and nine months ended June 30,
2003 and June 30, 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 include
all normal and recurring adjustments necessary to present fairly its
consolidated financial position, results of operations and cash flows.
The results of operations for the three and nine months ended June 30, 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. 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 to provide alternative
methods of transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. In
6
NBTY, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts and number of stores)
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. There were no grants during the
nine month periods ended June 30, 2003 and June 30, 2002; therefore, the
pro forma and actual net income and related EPS are the same as amounts
reported.
Foreign currency
The financial statements of international subsidiaries are translated into
U.S. dollars using the exchange rate at each balance sheet date for assets
and liabilities and an average exchange rate for each period for revenues,
expenses, gains and losses. Where the local currency is the functional
currency, translation adjustments are recorded as a separate component of
stockholders' equity.
Reclassifications
Certain reclassifications have been made to conform prior year amounts to
the current year presentation.
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 November 2002, the FASB issued Emerging Issues Task Force (EITF) Issue
No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF 00-21
addresses certain aspects of the accounting by a company for arrangements
under which it will perform multiple revenue-generating activities. EITF 00-
21 addresses when and how an arrangement involving multiple deliverables
should be divided into separate units of accounting. EITF 00-21 provides
guidance with respect to the effect of certain customer rights due to
company nonperformance on the recognition of revenue allocated to delivered
units of accounting. EITF 00-21 also addresses the impact on the measurement
and/or allocation of arrangement consideration of customer cancellation
provisions and consideration that varies as a result of future actions of
the customer or the company. Finally, EITF 00-21 provides guidance with
respect to the recognition of the cost of certain deliverables that are
excluded from the revenue accounting arrangement. The
7
NBTY, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts and number of stores)
provisions of EITF 00-21 will apply to revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. The Company does not expect
the adoption of EITF 00-21 to have a material effect on its consolidated
financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, ("FIN")
"Consolidation of Variable Interest Entities," an interpretation of
Accounting Research Bulletin ("ARB") No. 51. FIN 46 addresses consolidation
by business enterprises of variable interest entities. FIN 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 believes that the provisions of FIN 46 will not have any impact on
the Company's consolidated financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 149 is generally effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The Company does not expect the adoption of
SFAS 149 to have a material impact on its consolidated financial position or
results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No.
150 requires that certain financial instruments, which under previous
guidance were accounted for as equity, must now be accounted for as
liabilities. The financial instruments affected include mandatorily
redeemable stock, certain financial instruments that require or may require
the issuer to buy back some of its shares in exchange for cash or other
assets and certain obligations that can be settled with shares of stock.
SFAS No. 150 is effective for all financial instruments entered into or
modified after May 31, 2003 and must be applied to the Company's existing
financial instruments effective July 1, 2003, the beginning of the first
fiscal period after June 15, 2003. The Company has not entered into any
financial instruments within the scope of SFAS 150 since May 31, 2003, nor
does it currently hold any significant financial instruments within its
scope.
2. Acquisitions
On May 20, 2003, the Company acquired the De Tuinen chain of retail stores
from Ahold. The De Tuinen chain operates 44 company owned stores and 21
franchised stores located throughout the Netherlands. This operation had
total revenue of approximately 30 million euro ($30.2 million USD) during
2002 and has been a wholly owned subsidiary of the Ahold group of companies
since 1991. The purchase price for this business was approximately $18,431.
Assets acquired and liabilities assumed include cash ($1,168), accounts
receivable ($3,693), inventories ($5,572), property, plant and equipment
($5,105), and current liabilities ($1,956). The excess cost of investment
over the net book value amounted to $4,849 and is classified as goodwill.
This transaction stipulates adjustments to the purchase price once the
"Closing Date Equity", as
8
NBTY, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts and number of stores)
defined, is finalized. The Company is still in the process of finalizing
such valuation; therefore the acquired assets and liabilities discussed
above are subject to change. This acquisition contributed $4,286 in sales
and a marginal operating loss during the current fiscal period.
On March 10, 2003, the Company acquired Health & Diet Group Ltd. and the FSC
wholesale business from Royal Numico N.V. Health & Diet Group owns and
operates 49 GNC stores in the U.K. 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 $16,759. Assets acquired and liabilities
assumed include cash ($1,973), accounts receivable ($1,522), inventories
($9,512), other current assets ($2,429), property, plant and equipment
($5,150), and current liabilities ($22,360). The excess cost of investment
over the net book value amounted to $18,533 and is classified as goodwill.
This transaction stipulates adjustments to the purchase price for agreed
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 $16,769 in sales and a $348
operating loss 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 $4,456 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 (losses) 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 nine month periods ended June
30, 2003 and 2002 are as follows:
9
NBTY, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts and number of stores)
For the three months For the nine months
ended June 30, ended June 30,
-------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income $29,468 $29,707 $65,702 $66,444
Changes in:
Unrealized holding (losses) gains (1,821) $ 316 (2,003) $ 316
Foreign currency translation adjustments 10,794 14,495 8,923 8,758
------- ------- ------- -------
Total comprehensive income $38,441 $44,518 $72,622 $75,518
======= ======= ======= =======
Accumulated other comprehensive income, which is classified as a separate
component of stockholders' equity, is comprised of net gains on foreign
currency translation of $13,548 and $4,625 at June 30, 2003 and September
30, 2002, respectively, and net unrealized holding losses on available-for-
sale securities of $2,051 at June 30, 2003 and $48 at September 30, 2002,
respectively.
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
June 30, 2003 are as follows: Moody's Investors Service, Inc. "Moody's"
rated these debt securities as Caa2 and Standard & Poor's rated these debt
securities as a CC.
5. Inventories
The components of inventories are as follows:
June 30, September 30,
2003 2002
-------- -------------
Raw materials $ 80,306 $ 77,051
Work-in-process 9,662 8,527
Finished goods 145,509 118,824
-------- --------
$235,477 $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 nine month periods ended June 30,
2003 and June 30, 2002.
10
NBTY, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts and number of stores)
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 nine months
ended June 30, ended June 30,
-------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
Numerator:
Numerator for basic EPS - income
available to common stockholders $29,468 $29,707 $65,702 $66,444
======= ======= ======= =======
Numerator for diluted EPS - income
available to common stockholders $29,468 $29,707 $65,702 $66,444
======= ======= ======= =======
Denominator:
Denominator for basic EPS - 66,263 66,056 66,232 65,895
weighted-average shares
Effect of dilutive securities:
Stock options 2,024 1,961 2,001 1,828
------- ------- ------- -------
Denominator for diluted EPS -
weighted-average shares 68,287 68,017 68,233 67,723
======= ======= ======= =======
Net EPS:
Basic EPS $ 0.44 $ 0.45 $ 0.99 $ 1.01
======= ======= ======= =======
Diluted EPS $ 0.43 $ 0.44 $ 0.96 $ 0.98
======= ======= ======= =======
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 June 30, 2003 and September 30, 2002 is as follows:
June 30, 2003 September 30, 2002
------------------------------ ------------------------------
Gross carrying Accumulated Gross carrying Accumulated Amortization
amount Amortization amount Amortization Period (years)
-------------- ------------ -------------- ------------ --------------
Amortized intangible assets:
Customer lists $61,368 $18,820 $64,283 $18,668 6 - 15
Trademark and licenses 2,414 2,397 2,429 2,188 2 - 3
Covenants not to compete 2,605 2,106 2,605 1,848 5 - 7
------- ------- ------- -------
$66,387 $23,323 $69,317 $22,704
======= ======= ======= =======
Unamortized intangible asset:
Trademark 1,800 - 1,800 -
------- ------- ------- -------
Total intangible assets $68,187 $23,323 $71,117 $22,704
======= ======= ======= =======
11
NBTY, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts and number of stores)
The changes in the carrying amount of goodwill by segment for the nine month
period ended June 30, 2003, are as follows:
Puritan's Pride/ United States European
Direct Response Retail Retail Wholesale Consolidated
---------------- ------------- -------- --------- ------------
Balance at
September 30, 2002 $15,197 $7,588 $117,322 $4,892 $144,999
Acquisitions during period 23,382 23,382
Foreign currency
translation 6,507 6,507
------- ------ -------- ------ --------
Balance at
June 30, 2003 $15,197 $7,588 $147,211 $4,892 $174,888
======= ====== ======== ====== ========
Aggregate amortization expense of definite lived intangible assets for the
nine months ended June 30, 2003 and June 30, 2002 was approximately $3,549
and $3,233, 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).
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 litigation 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 conform to the current year presentation. The European Retail 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: Europe; and Puritan's Pride/Direct Response. All of the
Company's products fall into one of these four segments. The Wholesale
segment is comprised of several divisions each targeting specific market
groups which include wholesalers, distributors, chains, pharmacies, health
food stores, bulk and international customers. The Retail United States
segment generates revenue through its 536 Company-operated stores of
proprietary brand and third-party products. The European Retail
12
NBTY, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts and number of stores)
segment generates revenue through its 593 Company-operated stores of
proprietary brand and third-party products. 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 nine months
ended June 30, ended June 30,
-------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
Wholesale:
Revenue $ 93,939 $ 80,151 $252,906 $217,676
Operating income 21,630 20,559 53,784 44,211
Depreciation and amortization 290 94 741 797
Identifiable assets, at end of period 50,613 52,937 50,613 52,937
Capital expenditures 213 485 367 1,214
Retail:
United States
Revenue $ 54,423 $ 51,287 $158,242 $146,347
Operating income (loss) 902 (94) 340 (5,034)
Depreciation and amortization 2,639 2,850 8,576 10,305
Identifiable assets, at end of period 63,732 74,353 63,732 74,353
Capital expenditures 549 805 1,660 3,238
Locations open at end of period 536 540 536 540
Europe
Revenue $ 99,202 $ 71,165 $268,903 $216,484
Operating income 19,182 18,533 64,542 59,041
Depreciation and amortization 2,708 2,007 7,247 5,985
Identifiable assets, at end of period 326,690 241,188 326,690 241,188
Capital expenditures 3,261 1,174 7,028 3,289
Locations open at end of period 593 465 593 465
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 nine months
ended June 30, ended June 30,
-------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
Puritan's Pride/Direct Response
Revenue $ 60,910 $ 49,384 $147,650 $138,114
Operating income 19,771 17,711 44,744 51,940
Depreciation and amortization 1,413 1,343 4,350 4,009
Identifiable assets, at end of period 82,020 84,340 82,020 84,340
Capital expenditures 138 91 632 733
Corporate:
Corporate expenses $(20,509) $(18,390) $(57,749) $(49,392)
Discontinued product charge (6,000)
Litigation recovery of raw material costs 15,051 20,518
Depreciation and amortization - manufacturing 2,504 2,612 7,707 7,396
Depreciation and amortization - other 1,233 1,052 3,918 3,020
Corporate manufacturing identifiable
assets, at end of period 322,520 272,219 322,520 272,219
Capital expenditures - manufacturing 1,028 1,297 2,792 4,236
Capital expenditures - other 1,977 2,059 12,373 3,717
Consolidated totals:
Revenue $308,474 $251,987 $827,701 $718,621
Operating income 40,976 53,370 99,661 121,284
Depreciation and amortization 10,787 9,958 32,539 31,512
Identifiable assets, at end of period 845,575 725,037 845,575 725,037
Capital expenditures 7,166 5,911 24,852 16,427
Foreign subsidiaries account for approximately 38% of total assets, 18% of
total liabilities and 33% of net revenues, as of and for the nine month
period ended June 30, 2003.
9. Discontinued Product Charge:
Effective March 15, 2003, the Company voluntarily discontinued sales of
products that contain ephedra. Income from operations during the nine months
ended June 30, 2003 includes a one-time charge of approximately $6,000
($3,558 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.
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.
14
NBTY, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts and number of stores)
10. Litigation 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 the Company received $20,518 ($12,619 or
$0.19 basic and diluted earnings per share, after tax) in settlement of
price fixing litigation during the nine months ended June 30, 2002.
11. Litigation:
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 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 has launched 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.
12. Income Taxes:
The effective income tax rate for the nine month period ended June 30, 2003
was 29.7%, compared to 39.1% for the prior comparable period. The change in
the effective rate was principally due to Company recording a $4,000 after-
tax benefit to record foreign tax credits. Such benefits resulted from
certain tax saving strategies implemented in fiscal 2002. These tax planning
activities may also benefit future fiscal years and therefore may further
reduce the Company's overall effective income tax rate.
13. Subsequent Event:
On July 25, 2003, the Company completed the acquisition of Rexall Sundown,
Inc. ("Rexall") from Royal Numico, N.V. for $250 million in cash. The
acquisition was financed by a new senior credit facility consisting of $275
million in term loans and $100 million in a revolving credit agreement.
Rexall's portfolio of nutritional supplement brands includes Rexall(R),
Sundown(R), Osteo Bi-Flex(R), CarbSolutions, MET-Rx(R) and WORLDWIDE Sports
Nutrition(R). Rexall had sales of $455 million for the year ended December
31, 2002.
On July 25, 2003, the Company entered into a new Credit and Guarantee
Agreement ("new CGA") comprised of $375,000 Senior Secured Credit Facilities.
The new CGA consists of a $100,000 Revolving Credit Facility, a $50,000 Term
Loan A and a $225,000 Term Loan B. Terms of the new CGA are in many instances
similar to the previous one. As with the previous CGA, interest rates
charged on borrowings can vary depending on the interest rate option
utilized. Options for the rate can either be the Alternate Base Rate or
LIBOR plus applicable margin. The revolving credit facility and term loans
are scheduled to mature on the earlier of (i) fifth anniversary of the
closing date for the Revolving Credit Facility and Term Loan A, and the
sixth anniversary date for Term Loan B; or (ii) March 15, 2007 if the
Company's 8-5/8% senior subordinated Notes due September 15, 2007 are still
outstanding. The proceeds were used to fund the Rexall acquisition, to
refinance the existing CGA, and to pay fees, commissions, and expenses
therewith. Following the closing date, the proceeds of loans borrowed under
the new Revolving Facility shall be used for general corporate purposes.
Virtually all of the company's assets are collateralized under the new CGA
and are subject to normal banking terms and conditions and the maintenance
of various financial ratios and covenants.
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) and Nutrition Warehouse(R).
Information contained in this form 10-Q contains certain forward-looking
statements within the meaning of the Private Securities Litigation Reform
Act. Forward-looking statements, which can be identified by the use of
terminology such as "subject to," "believe," "expect," "may,""plan",
"estimate", "intend", "will," "should," "can," or "anticipate," or the
negative thereof, or variations thereon, or similarly, discussions of
strategy, although believed to be reasonable, are also forward-looking
statements and are inherently uncertain. All forward-looking statements are
subject to a number of risks and uncertainties that could cause actual
results to differ materially from projected results. 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, or disruption of mail service; (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
including those that may be subject to bankruptcy approval, or the inability
of the Company to integrate acquisitions into the mainstream of its
business; (x) changes in general worldwide economic and political conditions
in the markets in which the Company may compete from time to time; (xi) the
inability of the Company to gain and/or hold market share of its wholesale
and retail customers; (xii) loss or reduction in ephedra sales; (xiii)
unavailability of electricity in certain geographical areas; (xiv) exposure
to, expense of defending and resolving, product liability claims and other
litigation; (xv) the ability of the Company to successfully implement its
business strategy; (xvi) the inability of the Company to manage its retail
operations efficiently; (xvii) consumer acceptance of the Company's
products; (xvii) the inability of the Company to renew leases on its retail
locations; (xix) inability of the Company's retail stores to attain
profitability; (xx) the absence of clinical trials for many of the Company's
products; (xxi) sales and earnings volatility and/or trends; (xxii) The
effect on Company sales of the rapidly changing nature of the Internet and
on-line commerce; (xxiii) fluctuations in foreign currencies, and more
particularly the British Pound; (xxv) import-export controls on sales to
foreign countries; (xxvi) the inability of the Company to secure favorable
new sites for, and delays in opening, new retail locations; (xxvii)
introduction of new federal, state, local or foreign legislation or
regulation or adverse determinations by regulators, and more particularly
the Food Supplements Directive and the Traditional Herbal Medicinal Products
Directive in Europe; (xxviii) the mix of the Company's products and the
profit margins thereon; (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.
Consequently, such forward-looking statements should be regarded solely on
the Company's current plans, estimates and beliefs.
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)
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 undertakes no
obligation and specifically declines any obligation to republish or revise
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrences of unanticipated events.
The Company cannot guarantee future results, trends, events, levels of
activity, performance or achievements.
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 June 30, ended June 30, amount
-------------------- -------------------- increase
2003 2003 2002 2002 (decrease)
---- ---- ---- ---- ----------
Net sales $308,474 100% $251,987 100% $ 56,487
-------- ---- -------- ---- --------
Costs and expenses:
Cost of sales 141,196 45.8% 111,907 44.4% 29,289
Catalog printing, postage and promotion 15,378 5.0% 12,544 5.0% 2,834
Selling, general and administrative 110,924 36.0% 89,217 35.4% 21,707
Litigation recovery of raw material costs - (15,051) -6.0% 15,051
-------- ---- -------- ---- --------
267,498 86.8% 198,617 78.8% 68,881
-------- ---- -------- ---- --------
Income from operations 40,976 13.2% 53,370 21.2% (12,394)
-------- ---- -------- ---- --------
Other income (expense):
Interest (3,890) -1.3% (4,354) -1.7% 464
Miscellaneous, net 2,023 0.7% 270 0.1% 1,753
-------- ---- -------- ---- --------
(1,867) -0.6% (4,084) -1.6% 2,217
-------- ---- -------- ---- --------
Income before income taxes 39,109 12.6% 49,286 19.6% (10,177)
Provision for income taxes 9,641 3.1% 19,579 7.8% (9,938)
-------- ---- -------- ---- --------
Net income $ 29,468 9.5% $ 29,707 11.8% $ (239)
======== ==== ======== ==== ========
For the three month period ended June 30, 2003 compared to the three month
period ended June 30, 2002:
Net sales. Net sales in the third quarter ended June 30, 2003 were $308,474,
compared with $251,987 for the prior comparable period, an increase of $56,487,
or 22.4%. The $56,487 increase is comprised of: $13,788 attributable to
wholesale, $3,136 attributable to US retail, $28,037 attributable to European
retail, and $11,526 to the Puritan's Pride direct response/e-commerce segment.
Wholesale sales were $93,939, compared to $80,151, an increase of $13,788,
or 17.2%. Such increase in the wholesale segment's sales was primarily due
to an increase in sales to the mass market, drug chains and supermarkets
($14,274), sales contributed by the FSC acquisition ($2,885), offset by a
decrease in Global Health Sciences sales ($3,371). Products such as Coral
Calcium, Flex-
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)
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 from 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 June 30, 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 $60,910, compared to
$49,384, an increase of $11,526, or 23.3%. Such increase was a result of the
Company's catalog promotion strategy and enhancing the appearance of the
catalog. U.S. retail sales were $54,423, compared to $51,287, an increase of
$3,136, or 6.1%. Such increase was a direct result of the Savings Passport
Program, a customer loyalty program. Same store sales for stores open more than
one year increased 5.4% (or $2,692). European retail sales were $99,202,
compared to $71,165, an increase of $28,037, or 39.4%. Such increase was
attributable to an increase in same store sales for stores open more than one
year of 17.5% (or $12,361) and sales contributed by the GNC U.K. and De Tuinen
acquisitions ($10,307 and $4,286 respectively). The same store sales results
include the positive effect of a strong British Pound ($7,541 or 10.7%). The
Company operated 536 stores in the U.S. and 593 stores in Europe as of June 30,
2003, compared to 540 stores in the U.S. and 463 in the U.K./Ireland as of June
30, 2002.
Cost of sales. Cost of sales in the third quarter ended June 30, 2003 were
$141,196, or 45.8% as a percentage of sales, compared to $111,907, or 44.4%
for the prior comparable period. Overall, gross profit as a percentage of
sales decreased to 54.2% in the third quarter ended June 30, 2003 as
compared to 55.6% for the prior comparable period. The wholesale segment's
gross profit decreased to 40.8% from 45% as a percentage of sales, primarily
due to changes in product mix, certain promotions and an increase in sales
incentives and promotion costs classified as reductions in gross sales.
Puritan's Pride/Direct Response's gross profit increased to 61.5% from 59.7%
as a percentage of sales. The gross profit was affected by varied catalog
promotions the Company ran in the third quarter ended June 30, 2003 which
did not run in the prior comparable period. During the quarter ended June
30, 2002, the Company ran the 70% off catalog in May, which typically
results in a lower than average gross profit margin. The U.S. retail gross
profit increased, as a percentage of sales, to 59.4% from 58.6% primarily
due to the Company's introduction of new higher gross margin items. The
European retail gross profit decreased to 59.6% from 62.4% as a percentage
of sales primarily as a result of the recent acquisitions of GNC U.K. and De
Tuinen. These operations reported gross profit of 42.8% and 39.8%
respectively, thereby affecting the European retail gross margin during the
current quarter. Without these newly acquired operations, gross profit as a
percentage of sales would have remained relatively 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 the third quarters ended June 30, 2003 and June 30,
2002, cost of sales included charges for under-absorbed factory overhead of
$2,250 and $1,887, respectively.
Catalog printing, postage, and promotion. Catalog printing, postage, and
promotion expenses were $15,378 in the third quarter ended June 30, 2003,
compared with $12,544 in the prior comparable period, an increase of $2,834.
Such advertising expenses as a percentage of sales were 5% for the third
quarters ended June 30, 2003 and 2002. Of the $2,834 increase, $2,804 was
attributable to the increase in promotions for products, mainly via
television, magazines, newspapers and mailing
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)
programs, and $30 was attributable to an increase in catalog printing costs.
Puritan's Pride/Direct Response's promotion and media increased $2,128 and
European Retail promotion and media increased $1,965, primarily relating to
advertising incurred for new products introduced and existing core products.
Investments in additional advertising and sales promotions are part of the
Company's strategic effort to increase long-term growth. The other Company
segments' advertising expense variances are as follows: wholesale's
advertising decreased $905 and U.S. retail's advertising decreased $354.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $110,924 in the third quarter ended June 30, 2003,
an increase of $21,707, as compared with $89,217 for the prior comparable
period. As a percentage of sales, selling, general and administrative expenses
were 36% for the third quarter ended June 30, 2003 and 35.4% for the prior
comparable period. Of the $21,707 increase, $9,052 was attributable to
increased payroll costs mainly associated with business acquisitions and
general salary increases, $4,200 to increased rent expense and additional U.S.
retail and European retail stores, $2,853 to increased freight costs mainly
resulting from the Company's efforts to generate faster product delivery to
customers, $1,075 to increased insurance costs mainly associated with an
increase in general insurance rates, and $1,130 to broker commissions, which
was directly associated with the increase in wholesale sales. Of the $21,707
increase in selling, general and administrative cost, $2,687 is attributed to
the foreign exchange translation of the British Pound.
Litigation recovery of raw material costs. During the quarter ended June 30,
2002, the Company received $15,051 for the settlement of price fixing
litigation brought by the Company against certain raw material vitamin
suppliers.
Interest expense. Interest expense was $3,890 in the third quarter ended June
30, 2003, a decrease of $464 compared with interest expense of $4,354 in the
third quarter ended June 30, 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, and interest on the Credit and
Guarantee Agreement (CGA) used for acquisitions, capital expenditures and other
working capital needs.
Miscellaneous, net. Miscellaneous, net was $2,023 in the third quarter ended
June 30, 2003, an increase of $1,753, compared to $270 in the third quarter
ended June 30, 2002. Such increase was primarily attributable to exchange rate
fluctuations ($1,444), increases in investment income ($653), offset by
decreases in net gains on sale of property plant and equipment ($55), and other
miscellaneous decreases ($289).
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 third quarter ended
June 30, 2003 was 24.7%, compared to 39.7% in the third quarter ended June
30, 2002. The change in the effective rate was principally due to Company
recording a $4,000 after-tax benefit to record foreign tax credits. Such
benefit resulted from certain tax saving strategies implemented in fiscal
2002. These tax planning activities may also benefit future fiscal years and
therefore may further reduce the Company's overall effective income tax
rate. 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%.
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)
Net income. After income taxes, the Company had net income in the third quarter
ended June 30, 2003 of $29,468 (or basic and diluted earnings per share of
$0.44 and $0.43, respectively), and $29,707 (or basic and diluted earnings per
share of $0.45 and $0.44, respectively) in the third quarter ended June 30,
2002. Excluding the litigation recovery of raw material costs payment received
by the Company resulting from price fixing litigation (as noted above), net
income would have been $20,450 for the fiscal third quarter of 2002 or $0.30
per diluted share.
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 nine months For the nine months Change
ended June 30, ended June 30, amount
-------------------- -------------------- increase
2003 2003 2002 2002 (decrease)
---- ---- ---- ---- ----------
Net sales $827,701 100% $718,621 100% $109,080
-------- ---- -------- ---- --------
Costs and expenses:
Cost of sales 372,555 45.0% 325,805 45.3% 46,750
Discontinued product charge 6,000 0.7% - 6,000
Catalog printing, postage and promotion 46,015 5.6% 34,285 4.8% 11,730
Selling, general and administrative 303,470 36.7% 257,765 35.9% 45,705
Litigation recovery of raw material costs - (20,518) -2.9% 20,518
-------- ---- -------- ---- --------
728,040 88.0% 597,337 83.1% 130,703
-------- ---- -------- ---- --------
Income from operations 99,661 12.0% 121,284 16.9% (21,623)
-------- ---- -------- ---- --------
Other income (expense):
Interest (11,709) -1.4% (14,588) -2.0% 2,879
Miscellaneous, net 5,536 0.7% 2,325 0.3% 3,211
-------- ---- -------- ---- --------
(6,173) -0.7% (12,263) -1.7% 6,090
-------- ---- -------- ---- --------
Income before income taxes 93,488 11.3% 109,021 15.2% (15,533)
Provision for income taxes 27,786 3.4% 42,577 5.9% (14,791)
-------- ---- -------- ---- --------
Net income $ 65,702 7.9% $ 66,444 9.3% $ (742)
======== ==== ======== ==== ========
For the nine month period ended June 30, 2003 compared to the nine month period
ended June 30, 2002:
Net sales. Net sales for the nine month period ended June 30, 2003 were
$827,701, compared with $718,621 for the prior comparable period, an increase
of $109,080, or 15.2%. The $109,080 increase is comprised of: $35,230
attributable to wholesale, $11,895 attributable to US retail, $52,419
attributable to European retail, and $9,536 attributable to the Puritan's Pride
direct response/e-commerce segment.
Wholesale sales were $252,906, compared to $217,676, an increase of $35,230,
or 16.2%. Such increase in the wholesale segment's sales was primarily due
to an increase in sales to the mass market, drug chains and supermarkets
($29,156), an increase in Global Health Science's sales ($2,201), and sales
contributed by the FSC acquisition ($3,873). Products such as Coral Calcium,
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)
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 from new customer accounts. One customer of the
wholesale division represented, individually, more than 10% of this segment's
sales for the nine month period ended June 30, 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 $147,650, compared to
$138,114, an increase of $9,536, or 6.9%. Such increase was a result of the
Company's catalog promotion strategy and enhancing the appearance of the
catalog. The timing of promotional catalog mailings was not comparable to the
same like period a year ago. The three-for-one sales catalog, which ran from
January through March last year, ran from March through May this year and
generated a significant sales increase in the third quarter. U.S. retail sales
were $158,242, compared to $146,347, an increase of $11,895, or 8.1%. Such
increase was a direct result of the Savings Passport Program, a customer
loyalty program. Same store sales for stores open more than one year increased
6.2% (or $8,714). European retail sales were $268,903, compared to $216,484, an
increase of $52,419, or 24.2%. Such increase was attributable to an increase in
same store sales for stores open more than one year of 15.1% (or $32,355) and
sales contributed by the GNC U.K. and De Tuinen acquisitions ($12,896 and
$4,286 respectively). These results include the positive effect of a strong
British Pound ($22,966 or 10.6%). The Company operated 536 stores in the U.S.
and 593 stores in Europe as of June 30, 2003, compared to 540 stores in the
U.S. and 463 in the U.K./Ireland as of June 30, 2002.
Cost of sales/Discontinued product charge. Cost of sales for the nine month
period ended June 30, 2003 were $378,555, or 45.7% as a percentage of sales,
compared to $325,805, or 45.3% for the prior comparable period. Overall, gross
profit, as a percentage of sales, decreased to 54.3% during the nine month
period ended June 30, 2003 as compared to 54.7% for the prior comparable
period. Included in the current period's cost of sales is a $6,000 charge (or
..7% 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% during the nine month period ended
June 30, 2003 as compared to 54.3% 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. 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 41.4% from 39.8% 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 increased to 62% from 61.9% as a
percentage of sales. The gross profit was affected by varied catalog
promotions the Company ran during the current period ended June 30, 2003
which did not run in the prior comparable period. The U.S. retail gross
profit increased, as a percentage of sales, to 59.2% from 58.3% primarily
due to the Company's introduction of new higher gross margin items. The
European retail gross profit decreased as a percentage of sales to 61.4%
from 62.5%. primarily as a result of the recent acquisitions of GNC U.K. and
De Tuinen. These operations reported gross profit of 42.4% and 39.8%
respectively, thereby affecting the total European retail gross margin
during the current nine month period. Without these newly acquired
operations, gross profit as a percentage of sales would have remained
relatively unchanged as compared to the prior period. The Company's overall
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)
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. During
the nine month periods ended June 30, 2003 and June 30, 2002, cost of sales
included charges for under-absorbed factory overhead of $6,659 and $9,082,
respectively.
Catalog printing, postage, and promotion. Catalog printing, postage, and
promotion expenses were $46,015 during the nine month period ended June 30,
2003, compared with $34,285 in the prior comparable period, an increase of
$11,730. Such advertising expenses as a percentage of sales were 5.6% during
the nine month period ended June 30, 2003 and 4.8% for the prior comparable
period. Of the $11,730 increase, 11,953 was attributable to the increase in
promotions for products, mainly via television, magazines, newspapers and
mailing programs, offset by a decrease in catalog printing costs of $223.
Puritan's Pride/Direct Response's promotion and media increased $5,889,
Wholesale's advertising increased $4,411 and European Retail promotion and
media increased $2,038, offset by a decrease in the U.S. retail's advertising
costs of $608. Increased advertising costs primarily related to promoting new
products recently introduced and existing core products. Investments in
additional advertising and sales promotions are part of the Company's
strategic effort to increase long-term growth.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $303,470 during the nine month period ended June
30, 2003, an increase of $45,705, as compared with $257,765 for the prior
comparable period. As a percentage of sales, selling, general and
administrative expenses were 36.7% during the nine month period ended June 30,
2003 and 35.9% for the prior comparable period. Of the $45,705 increase,
$14,810 was attributable to increased payroll costs mainly associated with
business acquisitions and general salary increases, $7,210 to increased rent
expense and additional U.S. retail and European retail stores, $5,549 to
increased freight costs mainly resulting from the Company's efforts to generate
faster product delivery to customers, $4,568 to increased insurance costs
mainly associated with an increase in general insurance rates, $2,786 to broker
commissions, which was directly associated with the increase in wholesale
sales, and $1,138 to increased professional fees for the implementation and
integration of new software purchased. Of the $45,705 increase in selling,
general and administrative cost, $6,446 is attributed to the foreign exchange
translation of the British Pound.
Litigation recovery of raw material costs. During the nine month period ended
June 30, 2002, the Company received $20,518 for the settlement of price fixing
litigation brought by the Company against certain raw material vitamin
suppliers.
Interest expense. Interest expense was $11,709 for the nine month period ended
June 30, 2003, a decrease of $2,879, compared with interest expense of $14,588
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, and interest on the Credit and Guarantee
Agreement used for acquisitions, capital expenditures, and other working
capital needs.
Miscellaneous, net. Miscellaneous, net was $5,536 for the nine month period
ended June 30, 2003, an increase of $3,211, compared to $2,325 for the prior
comparable period. Such increase was primarily attributable to exchange rate
fluctuations ($1,433), increases in investment income ($1,402), increases in
net gains on sale of property plant and equipment ($863), offset by other
miscellaneous decreases ($487).
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 nine month period
ended June 30, 2003 was 29.7%, compared to 39.1% for the prior comparable
period. The change in the effective rate was principally due to Company
recording a $4,000 after-tax benefit to record foreign tax credits. Such
benefits resulted from certain tax saving strategies implemented in fiscal
2002. These tax planning activities may also benefit future fiscal years and
therefore may further reduce the Company's overall effective income tax
rate. 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 nine month
period ended June 30, 2003 of $65,702 (or basic and diluted earnings per share
of $0.99 and $0.96, respectively), and $66,444 (or basic and diluted earnings
per share of $1.01 and $0.98, respectively) for the prior comparable period.
Excluding the one-time litigation recovery of raw material costs payment
received by the Company resulting from price fixing litigation (as noted
above), net income would have been $53,825 for the nine month period ended June
30, 2002 or $0.79 per diluted share.
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 $38,459 and $26,229
at June 30, 2003 and September 30, 2002, respectively. The Company
generated cash from operating activities of $79,576 and $106,907 during
the nine month periods ended June 30, 2003 and June 30, 2002, respectively.
The overall decrease in cash from operating activities during the nine
month period ended June 30, 2003 was mainly attributable to an increase in
inventory and an increase in prepaid expenses and other current assets 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.
During the first quarter ended December 31, 2002, 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 SKU's (Stock Keeping
Units) 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.
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 used in investing activities was $53,044 and $26,296 during the nine
month periods ended June 30, 2003 and June 30, 2002, respectively. During
the nine month period ended June 30, 2003, cash flows used in investing
activities consisted primarily of net cash paid for the De Tuinen, FSC and
GNC U.K. business acquisitions ($32,049), the purchase of property, plant
and equipment ($24,852), partially offset by proceeds from the sale of
property, plant and equipment ($1,454), 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 nine month
period ended June 30, 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 ($16,427), the purchase of high yield; high risk corporate
bonds ($8,242), 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 and intangibles
($1,029).
Net cash used in financing activities was $17,334 and $78,092 during the
nine months ended June 30, 2003 and June 30, 2002, respectively. For the
nine month period ended June 30, 2003 cash flows used in financing
activities included principal payments under long-term debt agreements
($17,510), partially offset by proceeds from the exercise of stock options
($176). Cash used in financing activities during the nine month period
ended June 30, 2002 included principal payments under long-term debt
agreements ($79,477), partially offset by proceeds from the exercise of
stock options ($1,385).
For the nine month period ended June 30, 2003, working capital increased
$31,874 to $217,584. This increase was primarily attributable to the
Company increasing its current assets, specifically cash, accounts
receivable, inventory, 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 inventory. 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 number of average
days' sales outstanding (on wholesale sales) at June 30, 2003, was 60
days, compared with 55 days at June 30, 2002. The inventory turnover rate
was approximately 2.26 times during the nine month period ended June 30,
2003 compared with 2.37 times during the prior comparable period.
At June 30, 2003, the Company had a CGA comprised of one term loan and a
revolving credit facility. There were borrowings of $14,500 under one term
loan, which is classified as current at June 30, 2003. This term loan has
an annual borrowing rate of 2.765% and is payable in quarterly
installments of $5,563. At June 30, 2003, the Company had no borrowing
under its $50,000 revolving credit facility, which expires on September
30, 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.
On July 25, 2003, the Company entered into a new Credit and Guarantee
Agreement ("new CGA") comprised of $375,000 Senior Secured Credit
Facilities. The new CGA consists of a
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)
$100,000 Revolving Credit Facility, a $50,000 Term Loan A and a $225,000
Term Loan B. Terms of the new CGA are in many instances similar to the
previous one. As with the previous CGA, interest rates charged on
borrowings can vary depending on the interest rate option utilized.
Options for the rate can either be the Alternate Base Rate or LIBOR plus
applicable margin. The revolving credit facility and term loans are
scheduled to mature on the earlier of (i) fifth anniversary of the closing
date for the Revolving Credit Facility and Term Loan A, and the sixth
anniversary date for Term Loan B; or (ii) March 15, 2007 if the Company's
8-5/8% senior subordinated Notes due September 15, 2007 are still
outstanding. The proceeds were used to fund the Rexall acquisition, to
refinance the existing CGA, and to pay fees, commissions, and expenses
therewith. Following the closing date, the proceeds of loans borrowed
under the new Revolving Facility shall be used for general corporate
purposes. Virtually all of the company's assets are collateralized under
the new CGA and are subject to normal banking terms and conditions and the
maintenance of various financial ratios and covenants.
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.
A summary of contractual cash obligations as of June 30, 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 $169,501 $ 15,079 $ 2,029 $150,260 $ 2,133
Operating leases 351,422 52,173 89,089 73,306 136,854
Purchase commitments 31,710 31,710
Capital commitments 15,154 10,554 4,600
Employment & consulting agreements 5,373 1,570 2,340 1,463
-------- -------- ------- -------- --------
Total contractual cash obligations $573,160 $111,086 $98,058 $225,029 $138,987
======== ======== ======= ======== ========
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 $31,710
at June 30, 2003. During the nine months ended June 30, 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.
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 had approximately $1,254 in open capital commitments at June
30, 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 June
30, 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 June 30, 2003 was approximately $175.
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.
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)
As of July 17, 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. Such ratings on the CGA were withdrawn
upon the completion of the financing on July 25, 2003. Moody's Investors
Service, Inc. rated the new $375,000 CGA as a Ba2; Standard & Poor's
assigned a BB rating to the $375,000 CGA due 2007.
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 November 2002, the FASB issued Emerging Issues Task Force (EITF) Issue
No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF 00-21
addresses certain aspects of the accounting by a company for arrangements
under which it will perform multiple revenue-generating activities. EITF 00-
21 addresses when and how an arrangement involving multiple deliverables
should be divided into separate units of accounting. EITF 00-21 provides
guidance with respect to the effect of certain customer rights due to
company nonperformance on the recognition of revenue allocated to delivered
units of accounting. EITF 00-21 also addresses the impact on the measurement
and/or allocation of arrangement consideration of customer cancellation
provisions and consideration that varies as a result of future actions of
the customer or the company. Finally, EITF 00-21 provides guidance with
respect to the recognition of the cost of certain deliverables that are
excluded from the revenue accounting arrangement. The provisions of EITF 00-
21 will apply to revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The Company does not expect the adoption of
EITF 00-21 will have a material effect on its consolidated financial
position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, ("FIN")
"Consolidation of Variable Interest Entities," an interpretation of
Accounting Research Bulletin ("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 believes that the provisions of FIN 46
will not have any impact on the Company's consolidated financial position or
results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 149 is generally effective for contracts
entered into or modified
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)
after June 30, 2003 and for hedging relationships designated after June 30,
2003. The Company does not expect the adoption of SFAS 149 to have a
material impact on its consolidated financial position or results of
operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No.
150 requires that certain financial instruments, which under previous
guidance were accounted for as equity, must now be accounted for as
liabilities. The financial instruments affected include mandatorily
redeemable stock, certain financial instruments that require or may require
the issuer to buy back some of its shares in exchange for cash or other
assets and certain obligations that can be settled with shares of stock.
SFAS No. 150 is effective for all financial instruments entered into or
modified after May 31, 2003 and must be applied to the Company's existing
financial instruments effective July 1, 2003, the beginning of the first
fiscal period after June 15, 2003. The Company has not entered into any
financial instruments within the scope of SFAS 150 since May 31, 2003, nor
does it currently hold any significant financial instruments within its
scope.
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
- ------------------------------------------------
The management of the Company, including the Chief Executive Officer and the
Chief Financial Officer, have conducted an evaluation of the effectiveness
of the Company's disclosure controls and procedures pursuant to Rule 13a-14
under the Securities Exchange Act of 1934 as of a date (the "Evaluation
Date") within 90 days prior to the filing date of this report. Based on that
evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that, as of the Evaluation Date, the Company's disclosure controls
and procedures were effective in ensuring that all material information
relating to the Company, including its consolidated subsidiaries, required
to be filed in this quarterly report has been made known to them in a timely
manner.
Changes in Internal Controls
- ----------------------------
There have been no significant changes made in the Company's internal
controls or in other factors that could significantly affect internal
controls subsequent to the Evaluation Date.
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 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 4. Submission of Matters to a Vote of Security Holders
The following propositions were approved on May 12, 2003, at NBTY,
Inc.'s Annual Meeting of Stockholders:
Proposition 1: Re-elected Directors to serve until the 2006 Annual
Meeting.
Votes Votes Total
for against Votes
-------------------------------------
Aram G. Garabedian 55,224,644 2,621,504 57,846,148
Bernard G. Owen 56,626,650 1,219,498 57,846,148
Alfred Sacks 56,777,180 1,068,968 57,846,148
Proposition 2: Ratified the designation of PricewaterhouseCoopers LLP
as independent accountants to audit the consolidated financial
statements of the Company for the 2003 fiscal year.
Votes Votes Total
for against Votes
-------------------------------------
52,938,439 4,885,900 57,824,339
33
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 99.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
b. Reports on Form 8-K during the quarter ended June 30, 2003.
On April 25, 2003, NBTY filed a current report on Form 8-K to
accompany its press release announcing certain financial results for
the second quarter ended March 31, 2003.
On June 10, 2003, NBTY filed a current report on Form 8-K to announce
it had signed a contract to acquire Rexall Sundown, Inc. ("Rexall")
from Royal Numico, N.V.
34
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: August 5, 2003 By: /s/ Scott Rudolph
-------------- -----------------------------
Scott Rudolph
Chairman and Chief Executive
Officer
(Principal Executive Officer)
Date: August 5, 2003 By: /s/ Harvey Kamil
-------------- ------------------------------
Harvey Kamil
President and Chief Financial
Officer
(Principal Financial and
Accounting Officer)
35
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: August 5, 2003
--------------
/s/ Scott Rudolph
Scott Rudolph
Chief Executive Officer
36
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: August 5, 2003
--------------
/s/ Harvey Kamil
Harvey Kamil
Chief Financial Officer
37