SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2004
OR
o	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 001-31788

 

NBTY, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

DELAWARE		11-2228617
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)
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 ý NO o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES ý NO o

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Title of Class		Shares Outstanding
Common Stock		as of May 2, 2004
Par value $.008 per share		66,734,498

 

 

NBTY, INC. and SUBSIDIARIES

FORM 10-Q

FISCAL QUARTER ENDED MARCH 31, 2004

INDEX

 

PART I.	Financial Information
ITEM 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets
	Condensed Consolidated Statements of Income
	Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income
	Condensed Consolidated Statements of Cash Flows
	Notes to Condensed Consolidated Financial Statements
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 3.	Qualitative and Quantitative Disclosures about Market Risk
ITEM 4.	Controls and Procedures
PART II.	Other Information
ITEM 4.	Submission of Matters to a Vote of Security Holders
ITEM 6.	Exhibits and Reports on Form 8-K
Signatures
Exhibits

 

 

ITEM 1:

NBTY, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(Dollars and shares in thousands)

 

		March 31, 2004			September 30, 2003
Assets
Current assets:
Cash and cash equivalents		$	54,709		$	49,349
Investments in bonds		—			4,158
Accounts receivable, less allowance for doubtful accounts of $8,077 at March 31, 2004 and $7,100 at September 30, 2003		93,128			80,829
Inventories		308,610			314,091
Deferred income taxes		37,021			37,021
Prepaid expenses and other current assets		31,902			44,736
Total current assets		525,370			530,184
Property, plant and equipment, net		298,806			298,344
Goodwill		212,722			213,362
Intangible assets, net		141,489			137,469
Other assets		17,631			16,423
Total assets		$	1,196,018		$	1,195,782
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt and capital lease obligations		$	2,834		$	12,841
Accounts payable		87,412			87,039
Accrued expenses and other current liabilities		124,994			116,029
Total current liabilities		215,240			215,909
Long-term debt		326,030			413,989
Deferred income taxes		55,092			40,213
Other liabilities		5,391			10,872
Total liabilities		601,753			680,983
Commitments and contingencies
Stockholders’ equity:
Common stock, $.008 par; authorized 175,000 shares; issued and outstanding 66,735 shares at March 31, 2004 and 66,620 shares at September 30, 2003		534			533
Capital in excess of par		132,900			130,208
Retained earnings		434,355			369,453
		567,789			500,194
Accumulated other comprehensive income		26,476			14,605
Total stockholders’ equity		594,265			514,799
Total liabilities and stockholders’ equity		$	1,196,018		$	1,195,782

 

See accompanying notes to condensed consolidated financial statements.

 

1

 

NBTY, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

(Dollars and shares in thousands, except per share amounts)

 

		For the three months ended March 31,
		2004			2003
Net sales		$	439,594		$	277,824
Costs and expenses:
Cost of sales		213,248			124,679
Discontinued product charge		—			6,000
Catalog printing, postage and promotion		19,322			16,782
Selling, general and administrative		138,294			99,170
		370,864			246,631
Income from operations		68,730			31,193
Other income (expense):
Interest		(6,759		)	(3,774		)
Miscellaneous, net		540			2,274
		(6,219		)	(1,500		)
Income before income taxes		62,511			29,693
Provision for income taxes		21,254			10,082
Net income		$	41,257		$	19,611
Net income per share:
Basic		$	0.62		$	0.30
Diluted		$	0.60		$	0.29
Weighted average common shares outstanding:
Basic		66,730			66,261
Diluted		69,098			68,323

 

See accompanying notes to condensed consolidated financial statements.

 

2

 

NBTY, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

(Dollars and shares in thousands, except per share amounts)

 

		For the six months ended March 31,
		2004			2003
Net sales		$	824,647		$	519,228
Costs and expenses:
Cost of sales		406,134			231,359
Discontinued product charge		—			6,000
Catalog printing, postage and promotion		39,459			30,637
Selling, general and administrative		268,665			192,546
		714,258			460,542
Income from operations		110,389			58,686
Other income (expense):
Interest		(13,564		)	(7,820		)
Miscellaneous, net		2,047			3,513
		(11,517		)	(4,307		)
Income before income taxes		98,872			54,379
Provision for income taxes		33,970			18,145
Net income		$	64,902		$	36,234
Net income per share:
Basic		$	0.97		$	0.55
Diluted		$	0.94		$	0.53
Weighted average common shares outstanding:
Basic		66,686			66,216
Diluted		68,997			68,205

 

See accompanying notes to condensed consolidated financial statements.

 

3

 

NBTY, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

FOR THE YEAR ENDED SEPTEMBER 30, 2003 AND

SIX MONTHS ENDED MARCH 31, 2004

(Unaudited)

 

(Dollars and shares in thousands)

 

		Common Sotock					Capital in Excess of Par			Retained Earnings			Accumulated Other Comprehensive Income			Total Stockholders’ Equity			Total Comprehensive Income
		Number of Shares		Amount
Balance, September 30, 2002		66,322		$	529		$	126,283		$	287,868		$	4,577		$	419,257
Components of comprehensive income
Net income										81,585						81,585			$	81,585
Foreign currency translation adjustment													9,980			9,980			9,980
Change in net unrealized gain on available-for-sale investments													48			48			48
																			$	91,613
Shares issued and contributed to ESOP		100		1			1,710									1,711
Exercise of stock options		198		3			1,143									1,146
Tax benefit from exercise of stock options							1,072									1,072
Balance, September 30, 2003		66,620		533			130,208			369,453			14,605			514,799
Components of comprehensive income
Net income										64,902						64,902			$	64,902
Foreign currency translation adjustment, net of taxes													11,871			11,871			11,871
																			$	76,773
Shares issued and contributed to ESOP		100		1			2,472									2,473
Exercise of stock options		15					88									88
Tax benefit from exercise of stock options							132									132
Balance, March 31, 2004		66,735		$	534		$	132,900		$	434,355		$	26,476		$	594,265

 

See accompanying notes to condensed consolidated financial statements.

 

4

 

NBTY, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

(Dollars in thousands)

 

		For the six months ended March 31,
		2004			2003
Cash flows from operating activities:
Net income		$	64,902		$	36,234
Adjustments to reconcile net income to net cash provided by operating activities:
Loss/(gain) on disposal/sale of property, plant and equipment		492			(962		)
Depreciation and amortization		31,258			21,752
Foreign currency transaction gain		(240		)	(906		)
Amortization of deferred financing costs		1,812			394
Amortization of bond discount		62			62
Allowance for doubtful accounts		977			98
Compensation expense for ESOP		2,473			855
Tax benefit from exercise of stock options		132			113
Changes in assets and liabilities:
Accounts receivable		(12,417		)	(4,436		)
Inventories		9,905			(6,877		)
Prepaid expenses and other current assets		16,444			(7,251		)
Other assets		367			59
Accounts payable		(3,597		)	7,426
Accrued expenses and other liabilities		1,286			120
Net cash provided by operating activities		113,856			46,681
Cash flows from investing activities:
Purchase of property, plant and equipment		(21,916		)	(17,686		)
Proceeds from sale of property, plant and equipment		83			1,293
Proceeds from sale of investment in bonds		4,158			—
Cash paid for acquisitions, net of cash acquired		—			(14,786		)
Release of cash held in escrow		—			2,403
Net cash used in investing activities		(17,675		)	(28,776		)
Cash flows from financing activities:
Principal payments under long-term debt agreements and capital leases		(98,027		)	(11,616		)
Payments for debt issuance costs		(500		)	—
Proceeds from stock options exercised		88			176
Net cash used in financing activities		(98,439		)	(11,440		)
Effect of exchange rate changes on cash and cash equivalents		7,618			1,080
Net increase in cash and cash equivalents		$	5,360		$	7,545
Cash and cash equivalents at beginning of period		49,349			26,229
Cash and cash equivalents at end of period		$	54,709		$	33,774
Supplemental disclosure of cash flow information:
Cash paid during the period for interest		$	11,798		$	8,218
Cash paid during the period for income taxes		$	16,780		$	15,480

 

See accompanying 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 unaudited condensed consolidated financial statements as of March 31, 2004 and September 30, 2003 and for the three and six months ended March 31, 2004 and March 31, 2003 include the accounts of NBTY, Inc. and Subsidiaries (“NBTY” or the “Company”) after elimination of all significant intercompany accounts and transactions.  These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with Rule 10-01 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 management, all adjustments considered necessary for fair presentation have been included.

 

Operating results for the three and six months ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending September 30, 2004 or for any other period. The financial statements included herein should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2003 (“10-K”).

 

Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 and returns and discounts, income taxes, litigation reserves and the recoverability of long-lived assets.  Actual results could differ from those estimates.

 

Stock-based compensation

 

The Company has elected to continue to measure compensation for stock options issued to its employees and outside directors pursuant to APB No. 25 under the intrinsic value method.  The Company has adopted the disclosure requirements of SFAS No. 123 and SFAS No. 148.  The adoption of SFAS No. 148, during fiscal 2003, did not have a material impact on the Company’s consolidated financial position or results of operations.  There were no grants during the six months ended March 31, 2004 or March 31, 2003, and all previously issued options are fully vested; therefore, the pro forma and actual net income and related EPS are the same as amounts reported.

 

6

 

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.  Foreign currency transaction gains and losses are charged or credited to income as incurred. 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 December 2003, the Securities Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition.  SAB 104, which was effective upon issuance, updates portions of the interpretive guidance included in Topic 13 of the codification of Staff Accounting Bulletins in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The principal revisions relate to the incorporation of certain sections of the staff’s Frequently Asked Question (“FAQ”) document on revenue recognition into Topic 13.  The application of this revised guidance has not had a significant impact on the Company’s consolidated financial position, results of operations, or disclosure requirements.

 

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities”.  FIN No. 46 provides guidance for identifying a controlling interest in a variable interest entity (“VIE”) established by means other than voting interests. FIN No. 46 also requires consolidation of a VIE by an enterprise that holds such a controlling interest. On December 24, 2003, the FASB completed deliberations of the proposed modifications to FIN No. 46 (“Revised Interpretation”); the decisions reached include:

 

(1)   Deferral of the effective date;

(2)   Provisions for additional scope exceptions for certain other variable interests; and

(3)   Clarification of the impact of troubled debt restructurings on the requirement with respect to VIEs.

 

Based on the Board’s decisions, all public companies must apply the provisions of FIN No. 46 or the Revised Interpretation to variable interests in a special purpose entity (“SPE”) created before February 1, 2003 no later than periods ending after December 15, 2003. The Company adopted the revised provisions of FIN No. 46 during the quarter ended March 31, 2004.  The Company did not have to consolidate any entities as a result of adopting this Interpretation. Therefore the adoption of this standard did not impact its consolidated financial position, results of operations, or disclosure requirements.

 

7

 

2.     Acquisitions

 

Fiscal 2003 Acquisitions

 

Rexall

 

On July 25, 2003, NBTY acquired all of the issued and outstanding capital stock of Rexall Sundown, Inc. (“Rexall”) for $250,000 in cash (subject to adjustment based upon finalization of working capital balances at date of closing) from Numico USA, Inc., an indirect subsidiary of Royal Numico N.V., through the acquisition of certain partnership and limited liability company interests.  The acquisition was financed by a new senior credit facility (see Note 8).  The Company also incurred approximately $7,000 of direct transaction costs for a total purchase price of approximately $257,000.  Additionally, finance related costs of approximately $7,500 were paid to secure the financing for this acquisition which will be amortized until its maturity, which approximates six years.

 

The Company has retained essential Rexall employees consisting of product development, sales and service personnel. Management believes the transaction complements NBTY’s existing wholesale products and provides NBTY with an enhanced sales infrastructure and additional manufacturing capacity.  Rexall’s portfolio of nutritional supplement brands includes Rexall®, Sundown®, Osteo Bi-Flex®, Carb Solutions®, MET-Rx® and WORLDWIDE Sport Nutrition®.  Rexall brands contributed $81,748 and $156,658 in sales to NBTY’s wholesale segment during the three and six months ended March 31, 2004, respectively.

 

The Company accounted for the acquisition under the purchase method of accounting in accordance with SFAS No. 141, Business Combinations.  Under the purchase method of accounting, the total purchase price was allocated to the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values. The excess of the purchase price over those fair values was recorded as goodwill. The fair value assigned to the tangible and intangible assets acquired and liabilities assumed were based on estimates and assumptions provided by management, and other information compiled by management, including a valuation, prepared by an independent valuation specialist that utilized established valuation techniques appropriate for the industry.   The total goodwill recognized in connection with this acquisition was $25,918, all of which relates to the wholesale segment.  None of this goodwill is expected to be deductible for tax purposes.

 

Although management believes that the preliminary allocation of the estimated purchase price is reasonable, the final allocation (resulting from the finalization of working capital balances) may differ significantly from the amounts reflected in the accompanying unaudited condensed consolidated financial statements.

 

The acquisition gave rise to the consolidation and elimination of certain Rexall personnel positions, and the Company provided certain balance sheet adjustments for the same in accordance with EITF No. 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination.  At the closing of the acquisition, the Company anticipated headcount reductions across all areas of Rexall and, as such, included an estimated accrual for workforce reductions of approximately $12,000

 

8

 

comprised of severance and employee benefits. A summary of the workforce reduction accrual is outlined as follows:

 

		July 25, 2003 Accrual			Utilized			March 31, 2004 Accrual
Workforce reductions		$	12,000		$	9,422		$	2,578

 

The following unaudited condensed pro forma information presents a summary of consolidated results of operations of the Company and Rexall as if the acquisition had occurred at the beginning of fiscal 2003, with pro forma adjustments to give effect to the amortization of definite lived intangibles, adjustments in depreciation, interest expense on acquisition debt, elimination of impairment charges on intangibles recorded by Rexall, as well as the elimination of the cumulative effect of accounting change resulting from the adoption of SFAS No. 142, elimination of trademark fees, and certain other adjustments, together with related income tax effects.  The unaudited pro forma condensed consolidated financial information is based on estimates and assumptions and includes intercompany charges paid to Rexall’s former parent company, Royal Numico N.V.  The pro forma information does not give effect to anticipated intercompany product sales, or any incremental direct costs or adjustments for liabilities resulting from integration plans that may be recorded in connection with the acquisition, or potential cost savings, which may result from the consolidation of certain operations of NBTY and Rexall.

 

The unaudited pro forma condensed consolidated statement of operations data for the three and six months ended March 31, 2003 has been derived by combining the unaudited historical consolidated statement of operations of NBTY for the three and six months ended March 31, 2003 with the unaudited historical consolidated statement of operations of Rexall for the three and six months ended March 31, 2003.

 

9

 

		Three months ended March 31,						Six months ended March 31,
		2004 Actual Consolidated			2003 Pro Forma Consolidated			2004 Actual Consolidated			2003 Pro Forma Consolidated
Net sales		$	439,594		$	370,131		$	824,647		$	724,138
Net income (loss) before the cumulative effect of accounting change		$	41,257		$	(16,823	)	$	64,902		$	(5,816	)
Net income (loss)		$	41,257		$	(16,823	)	$	64,902		$	(5,816	)
Net income (loss) per share before the cumulative effect of accounting change
Basic		$	0.62		$	(0.25	)	$	0.97		$	(0.09	)
Diluted		$	0.60		$	(0.25	)	$	0.94		$	(0.09	)
Net income (loss) per share
Basic		$	0.62		$	(0.25	)	$	0.97		$	(0.09	)
Diluted		$	0.60		$	(0.25	)	$	0.94		$	(0.09	)
Weighted average common shares outstanding
Basic		66,730			66,261			66,686			66,216
Diluted		69,098			66,261			68,997			66,216

 

Included in Rexall’s pro forma loss from operations for the three and six months ended March 31, 2003 were non-recurring pre-tax expenses of $37,645 ($24,863 after-tax or $0.36 per diluted share) and $57,617 ($38,312 after-tax or $0.56 per diluted share), respectively. These expenses relate to charges incurred for inter-company expenses for such items as product mark-ups, litigation settlements and management stock purchase plan expenses.

 

De Tuinen

 

On May 20, 2003, the Company acquired the De Tuinen chain of retail stores from Royal Ahold N.V.  At the time of the acquisition, the De Tuinen chain operated 41 company owned stores and 24 franchised stores located throughout the Netherlands. This operation had total revenue of approximately $30,200 during 2002 and had been a wholly-owned subsidiary of the Ahold group of companies since 1991. The purchase price for this business was approximately $14,551 in cash.  This acquisition contributed $9,199 and $20,670 in sales and a $1,084 and $1,272 operating loss for the three and six months ended March 31, 2004, respectively.

 

Health & Diet Group (“GNC (UK)”) and FSC Wholesale (“FSC”)

 

On March 10, 2003, the Company acquired Health & Diet Group Ltd. and the FSC wholesale business from Royal Numico N.V.  At the time of the acquisition, Health & Diet Group owned and operated 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 consolidated operations had total sales of approximately $57,000 during 2002. The purchase price for these businesses was approximately $16,759 in cash.   This transaction stipulates

 

10

 

adjustments to the purchase price for agreed upon working capital requirements and inventory valuation procedures to be performed.  This acquisition contributed $11,716 and $22,494 in sales and an $840 and $620 operating profit for the three and six months ended March 31, 2004, respectively.  GNC (UK) contributed a marginal profit, while FSC contributed a marginal loss during the six months ended March 31, 2004.

 

Pro forma financial information related to De Tuinen, GNC (UK) and FSC are not provided as their operations were not significant individually or in the aggregate to NBTY as a whole.  Such acquisitions were funded with internally generated cash.

 

3.     Comprehensive income

 

Total comprehensive income for the Company includes net income, the effects of foreign currency translation and unrealized gains on available-for-sale securities, which are charged or credited to the cumulative other comprehensive income account within stockholders’ equity. Total comprehensive income for the three and six months ended March 31, 2004 and 2003 is as follows:

 

		For the three months ended March 31,						For the six months ended March 31,
		2004			2003			2004			2003
Net income		$	41,257		$	19,611		$	64,902		$	36,234
Changes in:
Unrealized holding gains		—			(455		)	—			(182		)
Foreign currency translation adjustments		(6,484		)	(5,539		)	11,871			(1,871		)
Total comprehensive income		$	34,773		$	13,617		$	76,773		$	34,181

 

Accumulated other comprehensive income, which is classified as a separate component of stockholders’ equity, is comprised of net gains on foreign currency translation of $26,476 and $14,605 at March 31, 2004 and September 30, 2003, respectively.

 

Prior to January 1, 2004, the Company had not recorded deferred taxes relating to accumulated other comprehensive income.  During the quarter ended March 31, 2004, the Company recorded a deferred tax liability of $15,087 relating to accumulated other comprehensive income at March 31, 2004.  Of this amount, $6,663 related to other comprehensive income earned during the quarter ended December 31, 2003 and $5,302 related to other comprehensive income earned during prior years.

 

4.     Investments in bonds

 

The Company classified its investments in bonds as available for sale and reported 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.  The Company reviewed marketable securities for impairment based on criteria that include the extent to which cost exceeds market value, the duration of the market decline, and the financial condition and near-term prospects for the issuer.  As a result, the Company recorded an impairment charge of $4,084 in the results of operations during the fourth quarter of fiscal 2003.   The Company sold all of its investment in bonds during the first quarter ended December 31, 2003 at no further gain or loss.

 

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5.     Inventories

 

The components of inventories are as follows:

 

		March 31, 2004			September 30, 2003
Raw materials		$	116,314		$	118,371
Work-in-process		9,073			9,555
Finished goods		183,223			186,165
		$	308,610		$	314,091

 

6.     Earnings per share (EPS)

 

Basic EPS computations are based on the weighted average number of common shares outstanding during the three and six month periods ended March 31, 2004 and March 31, 2003.  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 ended March 31,						For the six months ended March 31,
		2004			2003			2004			2003
Numerator:
Numerator for basic EPS - income available to common stockholders		$	41,257		$	19,611		$	64,902		$	36,234
Numerator for diluted EPS - income available to common stockholders		$	41,257		$	19,611		$	64,902		$	36,234
Denominator:
Denominator for basic EPS - weighted-average shares		66,730			66,261			66,686			66,216
Effect of dilutive securities - Stock options		2,368			2,062			2,311			1,989
Denominator for diluted EPS - weighted-average shares		69,098			68,323			68,997			68,205
Net EPS:
Basic EPS		$	0.62		$	0.30		$	0.97		$	0.55
Diluted EPS		$	0.60		$	0.29		$	0.94		$	0.53

 

7.     Goodwill and Intangible Assets

 

Goodwill represents the excess of purchase price over the fair value of identifiable net assets of companies acquired.  Goodwill and intangible assets with indefinite useful lives are no longer amortized, but instead are tested for impairment at least annually.  The Company measures impairment

 

12

 

based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in its current business model or another valuation technique.  Other definite lived intangibles are amortized on a straight-line basis over periods not exceeding 20 years.  The carrying amount of acquired intangible assets as of March 31, 2004 and September 30, 2003 is as follows:

 

		March 31, 2004						September 30, 2003
		Gross carrying amount			Accumulated amortization			Gross carrying amount			Accumulated amortization			Amortization period (years)
Definite lived intangible assets
Brands		$	79,104		$	2,720		$	78,000		$	650		10 - 20
Customer lists		61,920			22,173			61,368			19,843			2 - 15
Private label relationships		11,500			383			11,500			96			20
Trademarks and licenses		9,683			2,333			2,414			2,399			2 - 20
Patents		5,000			175			5,000			44			19
Covenants not to compete		2,605			2,339			2,605			2,186			3 - 5
		169,812			30,123			160,887			25,218
Indefinite lived intangible asset
Trademark		1,800			—			1,800			—
Total intangible assets		$	171,612		$	30,123		$	162,687		$	25,218

 

The changes in the carrying amount of goodwill by segment for the six month period ended March 31, 2004, are as follows:

 

		Wholesale			Retail/ United States			Retail/ Europe			Direct Response/ Puritan’s Pride			Consolidated
Balance at September 30, 2003		$	38,929		$	7,588		$	151,648		$	15,197		$	213,362
Fair value adjustments during period		(8,119		)	—			(7,995		)	—			(16,114		)
Foreign currency translation		—			—			15,474			—			15,474
Balance at March 31, 2004		$	30,810		$	7,588		$	159,127		$	15,197		$	212,722

 

The goodwill associated with the acquisitions during the prior twelve months is subject to revision based on the finalization of working capital balances.  Goodwill adjustments during the first six months of fiscal 2004 relate to re-allocations of net excess purchase price to assets acquired and liabilities assumed in connection with the fiscal 2003 acquisitions.   Such decreases to goodwill include adjustments to fair value of intangibles $9,200, adjustments to fair value of insurance costs $5,200, adjustments to fair value of other liabilities of $5,100, offset by re-allocations of net excess purchase price to assets acquired and liabilities assumed of approximately $2,917 and additional direct costs paid of approximately $469.

 

Aggregate amortization expense of intangible assets for the six months ended March 31, 2004 and 2003 was approximately $5,712 and $2,430, respectively.

 

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Estimated amortization expense, assuming no changes in the Company’s intangible assets, for each of the five succeeding fiscal years, beginning with fiscal 2004, is $10,603 (2004), $10,233 (2005), $10,059 (2006), $9,827 (2007) and $9,782 (2008).

 

8.             Debt

 

On July 25, 2003, the Company entered into a new Credit and Guarantee Agreement (“CGA”) comprised of $375,000 Senior Secured Credit Facilities. This CGA consisted 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 were in many instances similar to the previous one. On December 19, 2003, the Company refinanced $224,000 of Term B loans outstanding under its July 2003 credit agreement with a new class of Term C loans on more favorable terms of LIBOR plus 2%.  The Company fully repaid Term Loan A during the fiscal second quarter ended March 31, 2004.  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.  At March 31, 2004 the annual borrowing rate for Term Loan C approximated 3.1%, and $174,315 remained outstanding.  The Company also has a $100,000 Revolving Credit Facility maintained by the Company under its Credit & Guarantee Agreement (“CGA”), which the Company has not drawn upon to date.  No borrowings were outstanding under the Revolving Credit Facility at March 31, 2004.  Costs of approximately $500 were paid in connection with this debt refinancing, which will be amortized until Term C’s maturity, which approximates six years.

 

9.             Income Taxes

 

The Company’s income tax expense is impacted by a number of factors, including the international tax structure developed, state tax rates in the jurisdictions where the Company conducts business, and the Company’s ability to utilize state tax credits that will begin to expire in 2013. The effective income tax rate for the six months ended March 31, 2004 was 34.4%, compared to 33.4% for the prior comparable period.  The effective income tax rates were less than the U.S. federal statutory tax rate primarily due to the enhanced tax structure of foreign subsidiaries.   These tax structures should also continue to impact future fiscal years and therefore the Company’s overall effective income tax rate will vary.

 

10.          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 pre-tax 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 within corporate.  Corporate also includes the manufacturing assets of the Company and, accordingly, items associated with these activities, such as the discontinued product charge (recorded during the six months ended March 31, 2003) remain unallocated in the corporate segment.  The European Retail operation does not include the impact of any intercompany transfer pricing. 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 to the consolidated financial statements included in the 10-K.

 

The Company reports four segments: Wholesale; Retail: United States; Retail: Europe; and Direct Response/Puritan’s Pride.  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

 

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customers. The Retail: United States segment generates revenue through the sales in its 545 owned and operated Vitamin World stores of proprietary brand and third-party products.  The Retail: Europe segment generates revenue through its 573 Company-operated stores and 26 franchise stores.  Such revenue consists of sales of proprietary brand and third-party products as well as franchise fees.  The Direct Response/Puritan’s Pride segment generates revenue through the sale of proprietary brand and third-party 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 ended March 31,						For the six months ended March 31,
		2004			2003			2004			2003
Wholesale:
Revenue		$	189,425		$	84,850		$	368,620		$	158,967
Operating income		40,999			17,950			71,007			32,154
Depreciation and amortization		2,764			242			5,442			452
Identifiable assets, at end of period		340,204			52,571			340,204			52,571
Capital expenditures		462			74			618			153
Retail:
United States
Revenue		$	56,100		$	53,556		$	109,511		$	103,819
Operating income (loss)		1,193			1,093			1,390			(562		)
Depreciation and amortization		3,027			3,000			6,186			5,936
Identifiable assets, at end of period		60,617			65,617			60,617			65,617
Capital expenditures		2,272			613			3,677			1,111
Locations open at end of period		545			540			545			540
Europe
Revenue		$	123,416		$	87,089		$	240,466		$	169,702
Operating income		29,683			23,069			55,982			45,360
Depreciation and amortization		3,394			2,373			5,900			4,538
Identifiable assets, at end of period		349,123			275,211			349,123			275,211
Capital expenditures		5,005			2,255			9,065			3,768
Locations open at end of period		599			524			599			524
Direct Response/Puritan’s Pride:
Revenue		$	70,653		$	52,329		$	106,050		$	86,740
Operating income		23,418			13,958			32,686			24,973
Depreciation and amortization		1,393			1,601			2,808			2,938
Identifiable assets, at end of period		81,588			80,140			81,588			80,140
Capital expenditures		47			255			54			494
Corporate:
Corporate expenses		$	(26,563	)	$	(18,877	)	$	(50,676	)	$	(37,239	)
Discontinued product charge		—			(6,000		)	—			(6,000		)
Depreciation and amortization - manufacturing		3,882			2,606			7,742			5,206
Depreciation and amortization - other		1,619			1,375			3,180			2,682
Corporate manufacturing identifiable assets, at end of period		364,486			314,162			364,486			314,162
Capital expenditures - manufacturing		1,963			1,597			2,866			2,270
Capital expenditures - other		3,212			1,570			5,636			9,890
Consolidated totals:
Revenue		$	439,594		$	277,824		$	824,647		$	519,228
Operating income		68,730			31,193			110,389			58,686
Depreciation and amortization		16,079			11,197			31,258			21,752
Identifiable assets, at end of period		1,196,018			787,701			1,196,018			787,701
Capital expenditures		12,961			6,364			21,916			17,686

 

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Foreign subsidiaries accounted for approximately 30% of net revenues, 29% of total assets and 11% of total liabilities as of March 31, 2004 and approximately 33%, 34% and 15%, respectively, as of March 31, 2003.

 

11.          Discontinued Product Charge

 

Effective March 15, 2003, the Company voluntarily discontinued sales of products that contain ephedra.  Income from operations during the six months ended March 31, 2003 include a one-time charge of approximately $6,000 ($3,960 or $0.06 basic and diluted earnings per share, after tax) associated with such discontinued sales.

 

 

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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)

 

Readers are cautioned that certain statements contained herein are forward-looking statements and should be read in conjunction with the Company’s disclosures under the heading “Forward Looking Statements” below. The following discussion should also be read in conjunction with the Condensed Consolidated Financial Statements of the Company and the notes thereto included elsewhere herein.

 

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 approximately 1,500 products under several brands, including Nature’s Bounty®, Vitamin World®, Puritan’s Pride®, Holland & Barrett®, Rexall®, Sundown®, CarbSolutions™, MET-Rx®, GNC (UK)®, CarbWise™ and American Health®.

 

NBTY markets its products through four distribution channels: (i) Wholesale: wholesale distribution to drug store chains, supermarkets, discounters, independent pharmacies, and health food stores, (ii) U.S. Retail: Vitamin World and Nutrition Warehouse retail stores in the U.S., (iii) European Retail: Holland & Barrett, Nature’s Way, GNC (UK), and DeTuinen retail stores in the U.K., Ireland, and the Netherlands, and (iv) Direct Response: Puritan’s Pride sales via catalogs and Internet. During the fiscal second quarter 2004 Vitamin World opened 5 new stores, closed 3 stores and at the end of the quarter operated 545 stores.  During the same period, the Company’s European retail division opened 6 new stores, closed 3 stores and at the end of the quarter operated 599 stores in the UK, Ireland and the Netherlands.

 

The Company recognizes revenues from products delivered when risk of loss and title transfers to its customers, and with respect to its own retail stores, upon the sale of products. Net sales are net of all discounts, allowances, returns and credits. Cost of sales includes the cost of raw materials and all labor and overhead associated with the manufacturing and packaging of the products. Gross margins are affected by, among other things, changes in the relative sales mix among the Company’s four distribution channels, as well as gross margins of acquired entities. Historically, gross margins from the Company’s direct response/e-commerce and retail sales have typically been higher than gross margins from wholesale sales.

 

Forward Looking Statements:

 

Information contained in this form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our financial condition, results of operations and business. All of these forward-looking statements, which can be identified by the use of terminology such as “subject to,” “believe,” “expects,” “may,” “will,” “should,” “can,” or “anticipates,” or the negative thereof, or variations thereon, or comparable terminology, or by discussions of strategy which, although believed to be reasonable, are inherently uncertain. Factors which may materially affect such forward-looking statements include: (i) slow or negative growth in the nutritional supplement industry; (ii) interruption of business or negative impact on sales and earnings due to acts of war, terrorism, bio-terrorism, civil unrest or disruption of mail service; (iii) adverse publicity regarding 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 NBTY to integrate acquisitions into the mainstream of its business; (x) changes in general worldwide economic and political conditions in the markets in which NBTY may compete from time to time; (xi) the inability of NBTY to gain and/or hold market share of its customers; (xii) unavailability of electricity in certain geographical areas; (xiii) the inability of NBTY to obtain and/or renew insurance; (xiv) exposure to and expense of defending and resolving, product liability claims and other litigation; (xv) the ability of NBTY to successfully implement its

 

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business strategy; (xvi) the inability of NBTY to manage its retail, wholesale, manufacturing and other operations efficiently; (xvii) consumer acceptance of NBTY’s products; (xviii) the inability of NBTY to renew leases on its retail locations; (xix) inability of NBTY’s retail stores to attain or maintain profitability; (xx) the absence of clinical trials for many of NBTY’s products; (xxi) sales and earnings volatility and/or trends; (xxii) the efficacy of NBTY’s Internet and on-line sales and marketing; (xxiii) fluctuations in foreign currencies, including the British Pound and the Euro; (xxiv) import-export controls on sales to foreign countries; (xxv) the inability of NBTY to secure favorable new sites for, and delays in opening, new retail locations; (xxvi) introduction of new federal, state, local or foreign legislation or regulation or adverse determinations by regulators anywhere in the world (including the banning of products) and more particularly the Food Supplements Directive and the Traditional Herbal Medicinal Products Directive in Europe; (xxvii) the mix of NBTY’s products and the profit margins thereon; (xxviii) the availability and pricing of raw materials; (xxix) risk factors discussed in NBTY’s filings with the U.S. Securities and Exchange Commission; and (xxx) other factors beyond NBTY’s control.

 

Consequently, such forward-looking statements should be regarded solely as the Company’s current plans, estimates and beliefs.

 

Readers are cautioned not to place undue reliance on forward-looking statements. The Company cannot guarantee future results, events, and levels of activity, performance or achievements. The Company does not undertake and specifically declines any obligation to update, republish or revise forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events.

 

Industry data used throughout this Report was obtained from industry publications and internal Company estimates. While the Company believes such information to be reliable, its accuracy has not been independently verified and cannot be guaranteed.

 

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, 2003. 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, 2003.  Management has discussed the development and selection of these policies with the Audit Committee of the Company’s Board of Directors, and the Audit Committee of 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, 2003.

 

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.

 

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Results of Operations:

 

The following table sets forth income statement data of the Company and its percentage of net sales for the periods indicated:

 

		For the three months ended March 31,					For the three months ended March 31,
		2004			% of net sales		2003			% of net sales		Change
Net sales		$	439,594		100	%	$	277,824		100	%	$	161,770
Costs and expenses:
Cost of sales		213,248			48.5	%	124,679			44.9	%	88,569
Discontinued product charge		—			—		6,000			2.2	%	(6,000		)
Catalog printing, postage and promotion		19,322			4.4	%	16,782			6.0	%	2,540
Selling, general and administrative		138,294			31.5	%	99,170			35.7	%	39,124
		370,864			84.4	%	246,631			88.8	%	124,233
Income from operations		68,730			15.6	%	31,193			11.2	%	37,537
Other income (expense):
Interest		(6,759		)	-1.5	%	(3,774		)	-1.4	%	(2,985		)
Miscellaneous, net		540			0.1	%	2,274			0.8	%	(1,734		)
		(6,219		)	-1.4	%	(1,500		)	-0.5	%	(4,719		)
Income before income taxes		62,511			14.2	%	29,693			10.7	%	32,818
Provision for income taxes		21,254			4.8	%	10,082			3.6	%	11,172
Net income		$	41,257		9.4	%	$	19,611		7.1	%	$	21,646

 

For the three month period ended March 31, 2004 compared to the three month period ended March 31, 2003:

 

Net sales.   Net sales in the second quarter ended March 31, 2004 were $439,594, compared with $277,824 for the prior comparable period, an increase of $161,770 or 58.2%. The $161,770 increase is comprised of the following:

 

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		Three months ended March 31,						Dollar Increase			Percent Increase
		2004			2003			2004 vs. 2003			2004 vs. 2003
Wholesale		$	189,425		$	84,850		$	104,575		123.2	%
U.S. Retail / Vitamin World		56,100			53,556			2,544			4.8	%
European Retail / Holland & Barrett / GNC		123,416			87,089			36,327			41.7	%
Direct Response / Puritan’s Pride		70,653			52,329			18,324			35.0	%
Total		$	439,594		$	277,824		$	161,770		58.2	%

 

The US Nutrition wholesale division, which operates Nature’s Bounty and Rexall, increased its net sales primarily due to the acquisition of the Rexall product lines ($81,748), such as Osteo Bi-Flex®, MET-Rx®, WORLDWIDE Sport Nutrition®, Sundown® and Carb Solutions®. The Company has maintained Rexall’s retail shelf space and optimizes that space by replacing slow-moving Rexall products with faster-selling reformulated Rexall products, as well as Nature’s Bounty premium products.  Additionally, wholesale net sales increases resulted from increased sales to the mass market, drug chains and supermarkets.  Products such as Flex-a-minÒ, Knox NutraJointÒ and CarbWise™ continue to help the Company strengthen its leading market position.  The Company continues to obtain new customer accounts and to increase its wholesale presence in the nutritional supplement marketplace.  Consumer sales information obtained from the Company’s Vitamin World retail stores and Puritan’s Pride direct-response/e-commerce operations are used to provide its mass-market customers with timely and vital data and analyses to drive sales.  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.  Two customers of the wholesale division represented, individually, more than 10% of the wholesale segment net sales for the three month period ended March 31, 2004 and for the prior comparable period.  While no one customer represented, individually, more than 10% of consolidated net sales, the loss of either of these two customers may have a material adverse effect on the wholesale segment if the Company is unable to replace such customer(s).

 

U.S. retail net sales increased due to the success of the Savings Passport Program, a customer loyalty program.  The number of customers in the Savings Passport Program increased approximately 1.2 million to 4.5 million customers as compared to 3.3 million customers at the comparable prior period.   Same store sales for stores open more than one year increased 3.8% (or $1,993).  Vitamin World operations achieved profitability in the current fiscal second quarter and EBITDA (as defined below) increased $127 to $4,220 from $4,093 from the fiscal second quarter a year ago. During the current fiscal second quarter of 2004,  Vitamin World opened 5 new stores, closed 3 stores and at the end of the quarter operated 545 stores. The Company operated 540 stores in the U.S as of March 31, 2003.

 

European retail net sales increases were directly attributable to (1) the GNC (UK) ($10,160) and De Tuinen ($9,199) acquisitions that the Company completed in fiscal 2003 (50 GNC stores in the UK and 67 DeTuinen stores in the Netherlands were in operation at March 31, 2004) and (2) an increase in Holland & Barrett’s same store sales for stores open more than one year of 20.8% (or $16,875).  These results include the positive effect of a strong British Pound ($11,944 or 14.7%).  During the fiscal second

 

20

 

quarter of 2004, the Company’s European retail division opened 6 new stores, closed 3 stores and at the end of the quarter operated 599 stores in the UK, Ireland and the Netherlands. The Company operated 524 in the U.K./Ireland as of March 31, 2003.

 

Direct Response/ Puritan’s Pride net sales increased as a result of the Company’s catalog promotion strategy, enhanced appearance of the Company’s catalogs, and the Company’s ability to more effectively target market its customer base.  During the fiscal second quarter, the Company shipped 63,000 more orders than in the prior like quarter, and average order size increased $14 to $79 from $65.  In addition, Puritan’s Pride on-line net sales increased 58% for the fiscal second quarter and comprised 20% of the Direct Response’s segment net sales for this fiscal second quarter, reflecting the growing popularity of shopping on-line.

 

Cost of sales.   Cost of sales in the second quarter ended March 31, 2004 were $213,248 or 48.5% as a percentage of net sales, compared to $130,679, or 47.1% for the prior comparable period.  Overall, gross profit as a percentage of net sales decreased 1.5% to 51.5% in the second quarter ended March 31, 2004 as compared to 53.0% for the prior comparable period.  Gross profit as a percentage of net sales by segment is as follows:

 

		GROSS PROFIT BY SEGMENT
		Three months ended March 31,				Percent Change
		2004		2003		2004 vs. 2003
Wholesale		39.2	%	41.1	%	-1.9	%
U.S. Retail / Vitamin World		59.5	%	59.1	%	0.4	%
European Retail / Holland & Barrett / GNC		61.5	%	62.7	%	-1.2	%
Direct Response / Puritan’s Pride		60.7	%	61.1	%	-0.4	%
Total (without discontinued product charge)		51.5	%	55.2	%	-3.7	%
Discontinued product charge		0.0	%	-2.2	%	2.2	%
Total		51.5	%	53.0	%	-1.5	%

 

The wholesale segment’s gross profit decreased 1.9% to 39.2% from 41.1% as a percentage of net sales, primarily due to lower gross profit contributions from Rexall’s product lines (34.4%).  The gross profit was also affected by changes in product mix and an increase in sales incentives and promotion costs classified as reductions in gross sales. The U.S. retail gross profit increased 0.4% to 59.5% from 59.1% as a percentage of net sales, primarily due to the Company’s introduction of new higher gross margin items and the stores selling more in-house manufactured product.  The European retail gross profit decreased 1.2% to 61.5% from 62.7% as a percentage of net sales primarily as a result of the recent acquisitions of GNC (UK) and De Tuinen, which historically experienced lower gross profit margins.  Both these operations reported gross profit of 48.6%, 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 increased 0.5% to 63.9% from 63.4% as compared to the prior period.  Direct Response/ Puritan’s Pride gross profit decreased 0.4% to 60.7% from 61.1% as a

 

21

 

percentage of net sales.  The gross profit was affected by varied catalog promotions the Company ran in the second quarter ended March 31, 2004 which did not run in the prior comparable period.  The Company also modified its promotional strategy to identify, target and aggressively add new customers to its mailing lists. 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.

 

Catalog printing, postage, and promotion.  Catalog printing, postage, and promotion expenses were $19,322 in the second quarter ended March 31, 2004, compared with $16,782 in the prior comparable period, an increase of $2,540. Such advertising expenses as a percentage of net sales were 4.4% for the second quarter ended March 31, 2004 as compared to 6.0% for the prior comparable period. Of the $2,540 increase, $1,874 was attributable to the increase in promotions for products, mainly via television, magazines, newspapers and mailing programs and $666 attributable to an increase in catalog printing costs. The wholesale segment promotion and media increased $1,460 primarily due to advertising expenses incurred for Rexall related products ($3,490) offset by decreases in television advertising on NBTY related products ($2,030). Other segments’ advertising variances are as follows: Puritan’s Pride/Direct Response promotion and media increased $436, European retail promotion and media increased $870 offset by a decrease in U.S. retail advertising expenses $226.  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 $138,294 in the second quarter ended March 31, 2004, an increase of $39,124 as compared with $99,170 for the prior comparable period.   As a percentage of net sales, selling, general and administrative expenses were 31.5% for the second quarter ended March 31, 2004 and 35.7% for the prior comparable period.  Of the $39,124 increase, $15,710 was attributable to increased payroll costs mainly associated with business acquisitions and general salary increases, $6,885 to increased rent expense and additional European retail stores, $3,951 to increased freight costs mainly resulting from the increase in sales and the Company’s efforts to generate faster product delivery to customers, $3,622 to increased depreciation and amortization expense as a result of acquisitions and an increase in capital expenditures and $2,446 to increased insurance costs mainly associated with an increase in general insurance rates.  Of the $39,124 increase in selling, general and administrative cost, $4,554 was attributed to the foreign exchange translation.  The increase in the selling, general and administrative expenses by segment are as follows: Wholesale $14,828, European retail $13,746, U.S retail $1,842, Puritan’s Pride/Direct Response $1,038 and an increase in unallocated corporate expenses of $7,670.

 

Interest expense.   Interest expense was $6,759 in the second quarter ended March 31, 2004, an increase of $2,985 compared with interest expense of $3,774 for the prior comparable period. Interest expense increased due to increased borrowings under a new credit agreement entered into by the Company in conjunction with the Rexall acquisition.   On July 25, 2003, the Company entered into a new Credit and Guarantee Agreement (“CGA”) comprised of $375,000 Senior Secured Credit Facilities. The new CGA consisted of a $100,000 Revolving Credit Facility, a $50,000 Term Loan A and a $225,000 Term Loan B. On December 19, 2003, the Company refinanced $224,000 of Term Loan B outstanding under the CGA with a new class of Term C loans on more favorable terms, LIBOR plus 2%.  The Company fully repaid Term Loan A during the fiscal second quarter.  The major components of interest expense are interest on Senior Subordinated Notes, and interest on the CGA used for acquisitions, capital expenditures and other working capital needs.

 

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