10-Q 1 nbty-q3.txt BODY OF FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the period ended June 30, 2001 Commission File Number: 0-10666 ------- NBTY, Inc. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 11-2228617 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 90 Orville Drive, Bohemia, NY 11716 ---------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (631) 567-9500 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registration was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Shares of Common Stock as of August 6, 2001: 65,290,799 NBTY, INC. and SUBSIDIARIES INDEX
PART I Financial Information Condensed Consolidated Balance Sheets - June 30, 2001 (unaudited) and September 30, 2000 1 - 2 Condensed Consolidated Statements of Income - (unaudited) Three months ended June 30, 2001 and 2000 3 Condensed Consolidated Statements of Income - (unaudited) Nine months ended June 30, 2001 and 2000 4 Condensed Consolidated Statements of Stockholders' Equity - Year ended September 30, 2000 and (unaudited) Nine months ended June 30, 2001 5 Condensed Consolidated Statements of Cash Flows - (unaudited) Nine months ended June 30, 2001 and 2000 6 - 7 Notes to Condensed Consolidated Financial Statements (unaudited) 8 - 14 Management's Discussion and Analysis of Financial Condition and Results of Operations 15 - 22 Qualitative and Quantitative Disclosures about Market Risk 22 PART II Other Information 23 Signature 24
NBTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS (Dollars and shares in thousands) June 30, September 30, 2001 2000 -------- ------------- (Unaudited) Current assets: Cash and cash equivalents $ 44,461 $ 31,464 Accounts receivable, less allowance for doubtful accounts of $1,536 at June 30, 2001 and $1,227 at September 30, 2000. 39,558 24,913 Inventories 176,025 130,741 Deferred income taxes 3,549 3,549 Prepaid property taxes, rent, and other current assets 25,129 20,269 ------------------------ Total current assets 288,722 210,936 Property, plant and equipment 362,779 326,010 less accumulated depreciation and amortization 133,013 111,846 ------------------------ 229,766 214,164 Intangible assets, net 173,918 172,124 Other assets 13,138 6,389 ------------------------ Total assets $705,544 $603,613 ========================
See notes to condensed consolidated financial statements. NBTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY
(Dollars and shares in thousands) June 30, September 30, 2001 2000 --------- ------------- (Unaudited) Current liabilities: Current portion of long-term debt and capital lease obligations $ 37,392 $ 12,829 Accounts payable 55,519 61,100 Accrued expenses and income taxes 58,532 36,893 ------------------------- Total current liabilities 151,443 110,822 Long-term debt 254,256 199,095 Obligations under capital leases 515 1,383 Deferred income taxes 16,918 17,050 Other liabilities 2,816 2,820 ------------------------- Total liabilities 425,948 331,170 ------------------------- Commitments and contingencies Stockholders' equity: Common stock, $0.008 Par; authorized 175,000 shares; issued 68,549 shares at June 30, 2001 and 68,524 shares at September 30, 2000 and outstanding 65,291 shares at June 30, 2001 and 68,289 shares at September 30, 2000. 548 548 Capital in excess of par 124,031 123,798 Retained earnings 195,253 163,300 ------------------------- 319,832 287,646 Less: 3,258 and 235 treasury shares, at cost, at June 30, 2001 and September 30, 2000, respectively (17,211) (1,512) Stock subscriptions receivable (839) (839) Accumulated other comprehensive loss (22,186) (12,852) ------------------------- Total stockholders' equity 279,596 272,443 ------------------------- Total liabilities and stockholders' equity $705,544 $603,613 =========================
See notes to condensed consolidated financial statements. NBTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars and shares in thousands, except per share amounts) For the three months ended June 30, -------------------- 2001 2000 ---- ---- Net sales $203,926 $172,102 Cost and expenses: Cost of sales 87,460 74,020 Catalog printing, postage and promotion 11,388 7,135 Selling, general and administrative 78,060 69,287 Recovery of raw material cost - (2,511) -------------------- 176,908 147,931 -------------------- Income from operations 27,018 24,171 -------------------- Other income (expense): Interest, net (6,314) (5,011) Miscellaneous, net 1,030 934 -------------------- (5,284) (4,077) -------------------- Income before income taxes 21,734 20,094 Income taxes 8,368 8,037 -------------------- Net income $ 13,366 $ 12,057 ==================== Net income per share: Basic $ 0.20 $ 0.18 ==================== Diluted $ 0.20 $ 0.17 ==================== Weighted average common shares outstanding: Basic 65,281 67,495 ==================== Diluted 67,099 69,729 ====================
See notes to condensed consolidated financial statements. NBTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars and shares in thousands, except per share amounts) For the nine months ended June 30, ------------------- 2001 2000 ---- ---- Net sales $595,530 $543,381 Cost and expenses: Cost of sales 259,769 239,116 Catalog printing, postage and promotion 38,799 25,025 Selling, general and administrative 232,436 205,559 Recovery of raw material cost - (2,511) -------------------- 531,004 467,189 -------------------- Income from operations 64,526 76,192 -------------------- Other income (expense): Interest, net (16,149) (14,360) Miscellaneous, net 3,579 2,395 -------------------- (12,570) (11,965) -------------------- Income before income taxes 51,956 64,227 Income taxes 20,003 25,691 -------------------- Net income $ 31,953 $ 38,536 ==================== Net income per share: Basic $ 0.49 $ 0.58 ==================== Diluted $ 0.48 $ 0.56 ==================== Weighted average common shares outstanding: Basic 65,865 66,937 ==================== Diluted 66,817 69,173 ====================
See notes to condensed consolidated financial statements. NBTY, Inc. and Subsidiaries Condensed Consolidated Statements of Stockholders' Equity for the year ended September 30, 2000 and the nine months ended June 30, 2001 (Unaudited)
(Dollars and shares in thousands) Accumu- lated Common stock Treasury stock Other --------------- Capital ----------------- Stock Compre- Total Total Number in Number sub- hensive Stock- Compre- of excess Retained of scriptions Income holders' hensive shares Amount of par earnings shares Amount receivable (Loss) Equity Income ------ ------ ------- -------- ------ ------ ---------- ------- -------- ------- Balances, September 30, 1999 66,096 $529 $106,332 $111,792 - - $(839) $ 6,135 $223,949 $22,101 ------- Net income for year ended September 30, 2000 51,508 51,508 $51,508 Purchase of treasury shares, at cost 288 (2,511) (2,511) Acquisition of Nutrition Warehouse 1,059 8 12,235 12,243 Treasury stock retired (53) (999) (53) 999 - Exercise of stock options 1,422 11 4,397 4,408 Tax benefit from exercise of stock options 1,833 1,833 Foreign currency translation adjustment (18,987) (18,987) (18,987) --------------------------------------------------------------------------------------------------- Balances, September 30, 2000 68,524 548 123,798 163,300 235 (1,512) (839) (12,852) 272,443 $32,521 ------- Net income for the nine months ended June 30, 2001 31,953 31,953 $31,953 Purchase of treasury shares, at cost 3,023 (15,699) (15,699) Exercise of stock options 25 155 155 Tax benefit from exercise of stock options 78 78 Foreign currency translation adjustment (9,334) (9,334) (9,334) --------------------------------------------------------------------------------------------------- Balances, June 30, 2001 68,549 $548 $124,031 $195,253 3,258 $(17,211) $(839) $(22,186) $279,596 $22,619 ===================================================================================================
See notes to condensed consolidated financial statements. NBTY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands) For the nine months ended June 30, ---------------------- 2001 2000 ---- ---- Net income $ 31,953 $ 38,536 Adjustments to reconcile net income to cash provided by operating activities: Loss on sale of property, plant and equipment 512 726 Depreciation and amortization 32,576 26,890 Amortization of bond discount 93 93 Provision for allowance for doubtful accounts 325 107 Tax benefit from exercise of stock options 78 1,681 Changes in assets and liabilities: Increase in accounts receivable (5,767) (4,057) (Increase) decrease in inventories (27,739) 5,104 Increase in prepaid catalog costs and other current assets (3,240) (6,069) (Increase)decrease in other assets (67) 1,522 (Decrease)increase in accounts payable (5,847) 3,736 Increase in accrued expenses 19,841 25,250 Decrease in other liabilities (5) (1,381) -------------------- Net cash provided by operating activities 42,713 92,138 -------------------- Cash flows from investing activities: Purchase of property, plant and equipment (26,961) (41,655) Proceeds from sale of property, plant, and equipment 4,162 110 Purchase of business, net of cash acquired (68,177) (41,728) Increase in intangible assets (40) (10) -------------------- Net cash used in investing activities (91,016) (83,283) -------------------- Cash flows from financing activities: Borrowings (Payments) under long-term debt agreements 91,064 (2,092) Principal payments under long-term debt agreements and capital leases (12,300) (1,918) Proceeds from stock options exercised 155 1,666 Purchase of treasury stock (15,699) Stock subscriptions receivable (1,760) -------------------- Net cash provided by (used in) financing activities 63,220 (4,104) -------------------- Effect of exchange rate changes on cash and cash equivalents (1,920) (1,257) -------------------- Net increase in cash and cash equivalents 12,997 3,494 Cash and cash equivalents at beginning of period 31,464 18,269 -------------------- Cash and cash equivalents at end of period $ 44,461 $ 21,763 ==================== Supplemental Disclosure of Cash Flow Information: Cash paid during the period for interest $ 12,558 $ 11,801 Cash paid during the period for taxes $ 8,982 $ 5,752
See notes to condensed consolidated financial statements. NBTY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS For the nine months ended June 30, 2001 and 2000 (Unaudited) (In thousands, except per share amounts) Supplemental Non-cash Investing and Financing Information: In connection with the Company's January 1, 2000 acquisition of Nutrition Warehouse, Inc. and its affiliated companies (NW), the Company issued approximately 1,059 shares of its common stock with a total then market value of $12,244. NBTY, INC. and SUBSIDIARIES NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share amounts) 1. Principles of consolidation and basis of presentation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. In the opinion of the Company, the unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly its financial position as of June 30, 2001 and its results of operations for the three and nine months ended June 30, 2001 and 2000 and statements of cash flows for the nine months ended June 30, 2001 and 2000. The condensed consolidated balance sheet as of September 30, 2000 has been derived from the audited balance sheet as of that date. The results of operations for the three and nine months ended June 30, 2001 and statements of cash flows for the nine months ended June 30, 2001 are not necessarily indicative of the results to be expected for the full year. This report should be read in conjunction with the Company's annual report filed on Form 10-K for the fiscal year ended September 30, 2000. 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 and the recoverability of long-lived assets. Actual results could differ from those estimates. Reclassifications Certain reclassifications have been made to conform prior year amounts to the current year presentation. New accounting standards In July 2001, The Financial Accounting Standards Board (FASB) issued Statements No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets." Effective October 1, 2001, the Company will no longer be required to amortize goodwill and certain other intangibles as a charge to earnings. Management has estimated that adoption of these standards will reduce amortization expense of goodwill and other certain intangibles by approximately $5.5 million annually. Effective October 1, 2000, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". As the Company has determined, it does not have any derivatives or hedging activities, the adoption of SFAS No. 133 did not affect the Company's financial position or results of operations as of and for the nine months ended June 30, 2001. In December 1999, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," ("SAB 101"). SAB 101 does not change existing revenue recognition rules, but rather addresses and clarifies existing rules and their application. SAB 101 is effective for the Company beginning July 1, 2001 or fourth quarter of fiscal 2001. Management believes the impact of SAB 101 will not be material to the Company's results of operations and financial position. NBTY, INC. and SUBSIDIARIES NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share amounts) 2. Acquisitions During May 2001, the Company completed the acquisition of NatureSmart, LLC for approximately $29 million and purchased certain assets of Global Health Sciences Inc. in an auction ordered by a bankruptcy court in California for approximately $40 million. The transactions stipulated adjustments to the purchase price for agreed upon working capital. The Company has determined that there are working capital deficiencies, (approximately $1.5 million for NatureSmart and $6.5 million for Global Health Sciences) and therefore the amounts noted above as cash paid for the acquisitions are expected to be reduced upon resolution of these matters. The transactions were funded by borrowings under the Credit and Guarantee Agreement (CGA). NatureSmart: Assets acquired and liabilities assumed include accounts receivable ($643), inventory ($10,882), other current assets ($618), property, plant and equipment ($6,871), intangibles ($1,309), and current liabilities ($3,565). The excess cost of investment over the net book value of NatureSmart at the date of acquisition resulted in an increase in goodwill of $12,612 which will be amortized over 20 years. NatureSmart develops, manufacturers and markets nutritional supplements. NatureSmart's sales for the year ended September 24, 2000 were approximately $59 million. Global Health Sciences: Assets acquired and liabilities assumed include cash ($1,427) accounts receivable ($8,569), inventory ($7,894), other current assets ($1,663), and property, plant and equipment ($14,000). The excess cost of investment over the net book value of Global Health Sciences at the date of acquisition amounted to $6,681, which is classified by the Company as other assets. The Company, upon completion of any purchase price adjustments, will reevaluate its classification of the $6,681 included in other assets. Global Health Sciences manufactures and markets specialty nutritional supplements in powder and tablet form. Global Health Sciences had sales of approximately $171 million for the twelve month period ended April 2001. These two acquisitions contributed $11 million of sales and a marginal operating loss for the current quarter. During the quarter ended June 30, 2000, the Company acquired certain assets and liabilities of Longevity Formulas, Inc. (also known as "Healthwatchers System") and Martin Health Systems, Inc. for $5,150. In addition, the Company acquired the mailing list of Rexall Sundown's SDV vitamin catalog and mail order business for $16,500. The list contains approximately 750,000 customer names, which has been merged into the existing customer base of the Puritan's Pride/Direct Response business. On January 1, 2000, the Company acquired Nutrition Warehouse, Inc. and its affiliated companies ("NW") for $20 million in cash and approximately 1,059 shares of NBTY stock with a total then market value of $12.2 million. NW operated an e-commerce/direct response business as well as fourteen retail stores in various locations in New York. The e-commerce business has been combined with the Company's Puritan.com operations. Annual revenues approximated $14 million for the e-commerce/direct response business and $14 million in retail sales for the year ended December 31, 1999. The cash portion of the acquisition was funded with $20 million in borrowings under the Company's Credit and Guarantee Agreement (CGA). NBTY, INC. and SUBSIDIARIES NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share amounts 3. Comprehensive income Total comprehensive income for the Company includes net income and the effects of foreign currency translation, which are charged or credited to the cumulative translation adjustment account within stockholders' equity. Total comprehensive income for the three and nine months ended June 30, 2001 and 2000 are as follows:
For the three months For the nine months ended June 30, ended June 30, -------------------- ------------------- 2001 2000 2001 2000 ---- ---- ---- ---- Net income $13,366 $12,057 $31,953 $ 38,536 Changes in cumulative translation adjustments (1,646) (9,484) (9,334) (15,479) --------------------------------------------- Comprehensive income $11,720 $ 2,573 $22,619 $ 23,057 =============================================
Accumulated other comprehensive loss, which is classified as a separate component of stockholders' equity, is comprised of cumulative translation adjustments of $(22,186) and $(12,852) at June 30, 2001 and September 30, 2000, respectively. NBTY, INC. and SUBSIDIARIES NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share amounts) 4. Inventories Inventories have been estimated using the gross profit method for the interim periods. The components of inventories are as follows:
June 30, September 30, 2001 2000 -------- ------------- Raw materials and Work-in-process $ 67,714 $ 45,083 Finished goods 108,311 85,658 ----------------------- $176,025 $130,741 =======================
5. 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, 2001 and 2000. 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, -------------------- ------------------- 2001 2000 2001 2000 ---- ---- ---- ---- Numerator: Numerator for basic EPS - income available to common stockholders $13,366 $12,057 $31,953 $38,536 ============================================== Numerator for diluted EPS - income available to common stockholders $13,366 $12,057 $31,953 $38,536 ============================================== Denominator: Denominator for basic EPS - weighted - average shares 65,281 67,495 65,865 66,937 Effect of dilutive securities: Stock options 1,818 2,234 952 2,236 ---------------------------------------------- Denominator for diluted EPS - weighted - average shares 67,099 69,729 66,817 69,173 ============================================== Net EPS: Basic EPS $ 0.20 $ 0.18 $ 0.49 $ 0.58 ============================================== Diluted EPS $ 0.20 $ 0.17 $ 0.48 $ 0.56 ==============================================
NBTY, INC. and SUBSIDIARIES NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share amounts) 6. New Credit Facility On April 27, 2001 the Company entered into an amended and restated Credit and Guarantee Agreement (CGA) which provides for aggregate borrowings up to $188,400. The CGA is comprised of two revolving credit agreements of $100,000 (increased by $50,000 in April 2001) and $50,000 and a term loan of $38,400. As of August 31, 2001, the outstanding balance of the $100,000 facility will convert to a term loan, payable in 16 equal consecutive installments commencing on September 30, 2001 and ending on June 30, 2005. The $50,000 revolving credit facility expires on September 30, 2003. The $38,400 term loan is payable in 16 equal consecutive installments commencing on June 30, 2001 with the balance payable on March 31, 2005. At June 30, 2001 there were borrowings of $134,200 under this facility at an annual borrowing rate of 7.125%. The current portion of the CGA is $34,425. 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. 7. Stock Options During the nine months ended June 30, 2001, options were exercised with 25 shares of common stock issued to a director for cash of $155. As a result of the exercise of those options, the Company expects to receive a compensation deduction for tax purposes of approximately $203 and a tax benefit of approximately $78. During the nine months ended June 30, 2000, options were exercised with 1,361 shares of common stock issued to executives for cash of $1,666, interest bearing stock subscriptions receivable of $1,760 and $964 of NBTY shares. As a result of the exercise of those options, the Company received a compensation deduction for tax purposes of approximately $4,310 and a tax benefit of approximately $1,681. 8. Change in accounting estimate Effective April 1, 2001, the Company changed its accounting estimate for the useful live of certain long-lived assets, primarily leasehold improvements and furniture and fixtures based upon the term of the leases. Management believes that the useful life of these assets approximates the term of the respective leases. The effect of this change in estimate has been accounted for on a prospective basis and resulted in a decrease in depreciation and amortization expense of approximately $600 for the quarter ended June 30, 2001. NBTY, INC. and SUBSIDIARIES NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share amounts) 9. Segment Information: The Company's segments are organized by sales market on a worldwide basis. The Company's management reporting system evaluates performance based on a number of factors; however, the primary measure of performance is the pretax operating income of each segment. Accordingly, the Company reports four worldwide segments: Puritan's Pride/Direct Response, Retail: United States and United Kingdom, and Wholesale. All of the Company's products fall into one of these four segments. 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 phoning customer service representatives in New York, Illinois or the United Kingdom. The Retail United States segment generates revenue through the sale of proprietary brand and third-party products through its 523 Company-operated stores. The Retail United Kingdom segment generates revenue through the sale of proprietary brand and third- party products in 458 Company-operated stores. The Wholesale segment (including Network Marketing) is comprised of several divisions each targeting specific market groups. These market groups include wholesalers, distributors, mass marketers, retail chains, pharmacies, health food stores, bulk and international customers. The following table represents key financial information of the Company's business segments: NBTY, INC. and SUBSIDIARIES NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except per share amounts) Three months ended Nine months ended June 30, June 30, ------------------ ----------------- 2001 2000 2001 2000 ---- ---- ---- ---- Puritan's Pride/Direct Response Revenue $ 42,475 $ 42,899 $127,878 $135,039 Operating income 13,915 12,948 39,423 37,902 Depreciation and amortization 1,189 1,037 3,401 2,130 Retail: United States Revenue $ 45,268 $ 35,450 $128,680 $108,276 Operating loss (4,976) (5,543) (22,801) (11,929) Depreciation and amortization 3,004 2,917 10,260 7,786 United Kingdom Revenue $ 63,427 $ 57,194 $198,798 $192,057 Operating income 13,948 7,990 40,926 33,067 Depreciation and amortization 3,090 2,952 9,278 9,198 Wholesale Revenue $ 52,756 $ 36,559 $140,174 $108,009 Operating income 4,664 6,275 7,012 14,670 Depreciation and amortization 408 311 925 689 Corporate Operating (loss) income $ (533) $ 2,501 $ (34) $ 2,482 Depreciation and amortization 3,099 2,335 8,712 7,087 Recovery of raw material costs (2,511) - (2,511) Consolidated totals Revenue $203,926 $172,102 $595,530 $543,381 Operating income 27,018 24,171 64,526 76,192 Depreciation and amortization 10,790 9,552 32,576 26,890 Interest expense, net 6,314 5,011 16,149 14,360 Miscellaneous income, net 1,030 934 3,579 2,395 Income taxes 8,368 8,037 20,003 25,691 Net income 13,366 12,057 31,953 38,536
The following table reflects identifiable assets by market segment at June 30, 2001 and 2000:
June 30, 2001 2000 ---- ---- Puritan's Pride/Direct response $ 77,076 $ 89,976 Retail United States 83,493 69,709 Retail United Kingdom 222,647 201,754 Wholesale 59,781 24,685 Corporate manufacturing assets 262,547 212,734 ---------------------- Consolidated totals $705,544 $598,858 ======================
NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (In thousands, except per share amounts) Results of Operations: The following table sets forth income statement data of the Company as a percentage of net sales for the periods indicated:
Three months Nine months Ended Ended June 30, June 30, ------------------- ---------------- 2001 2000 2001 2000 ---- ---- ---- ---- Net sales 100.0% 100.0% 100.0% 100.0% Cost and expenses: Cost of sales 42.9% 43.0% 43.6% 44.0% Catalog printing, postage and promotion 5.6% 4.2% 6.5% 4.6% Selling, general and administrative 38.3% 40.3% 39.0% 37.8% Recovery of raw material cost -1.5% -0.5% -------------------------------------- 86.8% 86.0% 89.1% 85.9% -------------------------------------- Income from operations 13.2% 14.0% 10.9% 14.1% -------------------------------------- Other income (expense): Interest, net -3.1% -2.8% -2.7% -2.6% Miscellaneous, net 0.5% 0.5% 0.6% 0.4% -------------------------------------- -2.6% -2.3% -2.1% -2.2% -------------------------------------- Income before income taxes 10.6% 11.7% 8.8% 11.9% Income taxes 4.1% 4.7% 3.4% 4.7% -------------------------------------- Net income 6.5% 7.0% 5.4% 7.2% ======================================
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) For the three months ended June 30, 2001 compared to the three months ended June 30, 2000: Net sales. Net sales in the third quarter ended June 30, 2001 were $203,926 compared with $172,102 for the prior comparable period, an increase of $31,824 or 18.5%. Puritan's Pride/Direct Response sales were $42,475 compared to $42,899, a decrease of $424 or 1.0%, wholesale sales were $52,756 compared to $36,559, an increase of $16,197 or 44.3% , U.S. retail sales were $45,268 compared to $35,450, an increase of $9,818 or 27.7% and U.K. retail sales were $63,427 compared to $57,194, an increase of $6,233 or 10.9%. Revenue increases in three of the Company's four segments are attributed to the continued consumer acceptance of the broad base of the Company's products. The decrease in Direct Response reflects the general industry weakness in nutritional supplements. The Company operated 523 stores in the U.S. and 458 stores in the U.K. as of June 30, 2001 compared to 459 stores in the U.S. and 424 in the U.K. as of June 30, 2000. Sales growth in the U.S. retail channel reflected the greater number of stores compared to last year and increase in same store sales for stores open more than one year of 10.5% Costs and expenses. Cost of sales were $87,460 for 2001, or 42.9% as a percentage of sales, compared to $74,020, or 43.0% for 2000. The increase of $13,440 was due primarily to the increase in the wholesale segment's cost of sales, which increased $12,374, or from 55.6% to 62.0% as a percentage of sales, primarily due to Global Health Sciences' costs of sales of $6,598 on sales of $6,465. The increase was mitigated by a decrease in the Direct Response segment's cost of sales, which decreased from 35.9% to 30.4% as a percentage of sales, primarily due to higher gross margins on new product introductions and improvements in manufacturing efficiencies. The increase was also mitigated by the U.S. retail segment's cost of sales decreasing as a percentage of sales from 43% to 39.9%, primarily due to sales price increases on all product lines during the prior quarter. Catalog printing, postage, and promotion expenses were $11,388 in 2001 compared with $7,135 in 2000, and increase of $4,253. Of this increase $1,392 was attributed to an increase in catalog printing and mailing costs and the balance for radio and television for certain of the Company's products. As a percentage of sales, catalog printing, postage and promotion expenses were 5.6% for the current quarter and 4.2% for the prior comparable quarter. Selling, general and administrative expenses were $78,060 for the quarter, or 38.3% as a percentage of sales, compared with $69,287 or 40.3% as a percentage of sales in 2000. The largest categories with increases were salaries, fringe benefits (health insurance), and rent expense which increased primarily due to the U.S. retail store expansion program. Recovery of raw materials costs. During the quarter ended June 30, 2000, the Company received $2,511 in partial settlement of ongoing price fixing litigation brought by the Company against certain raw material vitamin suppliers. Interest expense. Interest expense was $6,314 for 2001, an increase of $1,303 compared to $5,011 in 2000. Interest expense increased due to the additional borrowings to fund the two acquisitions completed in the current quarter. The major components are interest on Senior Subordinated Notes associated with the Holland & Barrett acquisition, the Credit and Guarantee Agreement (CGA) used for acquisitions and for capital expenditures. 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) For the three months ended June 30, 2001 compared to the three months ended June 30, 2000: Other income (expense) - Miscellaneous, net for the three months ended June 30, 2001 increased $96 primarily due to a $135 increase in investment income, a $151 increase in exchange rate gains on intercompany balances offset by a $169 decrease in rental income, net. Income before income taxes was $21,734 for 2001 and $20,094 for 2000. After income taxes, the Company had a net profit of $13,366 (or basic and diluted earnings per share of $0.20) for the three months ended June 30, 2001, and $12,057 (or basic earnings per share of $0.18, diluted earnings per share of $0.17) for the three months ended June 30, 2000. 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) For the nine months ended June 30, 2001 compared to the nine months ended June 30, 2000: Net sales. Net sales for the nine months ended June 30, 2001 were $595,530 compared with $543,381 for the prior comparable period, an increase of $52,149 or 9.6%. Puritan's Pride/Direct Response sales were $127,878 compared to $135,039, a decrease of $7,161 or 5.3%, wholesale sales were $140,174 compared to $108,009, an increase of $32,165 or 29.8%, U.S. retail sales were $128,680 compared to $108,276, an increase of $20,404 or 18.8% and U.K. retail sales were $198,798 compared to $192,057, an increase of $6,741 or 3.5%. Revenue increases in three of the Company's four segments are attributed to continued consumer acceptance of the broad base of the Company's products. The decrease in Direct Response reflects the general industry weakness in nutritional supplements. The Company operated 523 stores in the U.S. and 458 stores in the U.K. as of June 30, 2001 compared to 459 stores in the U.S. and 424 in the U.K. as of June 30, 2000. Sales growth in the U.S. retail channel reflected the greater number of stores compared to last year. U.S. same store sales decreased $2,192 or 2.3% for stores open more than one year. Costs and expenses. Cost of sales were $259,769 for 2001, or 43.6% as a percentage of sales, compared to $239,116, or 44.0% as a percentage of sales. The Direct Response segment's cost of sales decreased from 36.6% to 33.4% as a percentage of sales, primarily due to higher gross margins on new product introductions and improvements in manufacturing efficiencies. Cost of sales for the U.K. retail segment decreased from 42.1% to 38.8% as a percentage of sales, primarily due to increased efficiencies gained by the new distribution plant located in Burton on Trent in the U.K. The decreases in cost of sales, as a percentage of sales, were partially offset by the increase in the wholesale segment's cost of sales, which increased from 57.9% to 61.1% as a percentage of sales. Catalog printing, postage, and promotion expenses were $38,799 in 2001, compared with $25,025 in 2000. This increase was due primarily to an increase in print and television media advertising in wholesale, the Flex-A- Min advertising campaign and costs related to the Vitamin World Savings Passport Program. As a percentage of sales, catalog printing, postage and promotion expenses were 6.5% for the nine months and 4.6% for the prior comparable nine months. Selling, general and administrative expenses were $232,436 for 2001, or 39.0% as a percentage of sales, compared with $205,559 or 37.8% as a percentage of sales for 2000. The largest categories with increases were salaries, fringe benefits (health insurance), and rent expense, which increased primarily due to the U.S. retail store expansion program. Recovery of raw materials costs. During the nine months ended June 30, 2000, the Company received $2,511 in partial settlement of ongoing price fixing litigation brought by the Company against certain raw material vitamin suppliers. Interest expense. Interest expense was $16,149 for 2001, an increase of $1,789 compared to $14,360 for 2000. The major components are interest on Senior Subordinated Notes associated with the Holland & Barrett acquisition, the Credit and Guarantee Agreement (CGA) used for the stock repurchase, acquisitions and for capital expenditures. The increase in interest expense was due primarily to the additional borrowings to fund the stock repurchase program and the acquisitions. 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) For the nine months ended June 30, 2001 compared to the nine months ended June 30, 2000: Other income (expense) - Miscellaneous, net for the nine months ended June 30, 2001 increased $1,184, primarily due to a $342 increase in investment income, a $908 increase in exchange rate gains on intercompany balances offset by a $372 decrease in rental income, net. Income before income taxes was $51,956 for 2001 and $64,227 for 2000. After income taxes, the Company had a net profit of $31,953 (or basic earnings per share of $0.49, diluted earnings per share of $0.48) for the nine months ended June 30, 2001, and $38,536 (or basic earnings per share of $0.58, diluted earnings per share of $0.56) for the nine months ended June 30, 2000. NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (Unaudited) (In thousands, except per share amounts and number of stores) Liquidity and Capital Resources --------------------------------------- Working capital was $137.3 million at June 30, 2001, compared with $100.1 million at September 30, 2000, an increase of $37.2 million. The increase was due primarily to increases in cash, accounts receivable, and inventories, partially offset by an increase in current portion of long-term debt, accrued expenses and income taxes. On April 27, 2001 the Company entered into an amended and restated Credit and Guarantee Agreement (CGA) which provides for aggregate borrowings up to $188,400. The CGA is comprised of two revolving credit agreements of $100,000 (increased by $50,000 in April 2001) and $50,000 and a term loan of $38,400. As of August 31, 2001, the outstanding balance of the $100,000 facility will convert to a term loan, payable in 16 equal consecutive installments commencing on September 30, 2001 and ending on June 30, 2005. The $50,000 revolving credit facility expires on September 30, 2003. The $38,400 term loan is payable in 16 equal consecutive installments commencing on June 30, 2001 with the balance payable on March 31, 2005. At June 30, 2001 there were borrowings of $134,200 under this facility at an annual borrowing rate of 7.125%. The current portion of the CGA is $34,425. 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. During May 2001, the Company completed the acquisition of NatureSmart, LLC at a cost of approximately $29 million and purchased certain assets of Global Health Sciences Inc. in an auction ordered by a bankruptcy court in California at a cost of approximately $40 million. Both transactions were funded by borrowings under the CGA. During the quarter ended June 30, 2000, the Company acquired certain assets and liabilities of Longevity Formulas, Inc. (also known as "Healthwatchers System") and Martin Health Systems, Inc. for $5,150. In addition, the Company acquired the mailing list of Rexall Sundown's SDV vitamin catalog and mail order business for $16,500. On January 1, 2000, the Company acquired Nutrition Warehouse, Inc. and its affiliated companies ("NW") for $20 million in cash and approximately 1,059 shares of NBTY stock with a then market value of $12.2 million. The cash portion of the acquisition was funded by $20 million in borrowings under the CGA. In connection with the August 1997 acquisition of Holland & Barrett, the Company issued $150 million 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. 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. NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (Unaudited) (In thousands, except per share amounts and number of stores) Liquidity and Capital Resources --------------------------------------- Net cash provided by operating activities was $42.7 million for the nine months ended June 30, 2001 and $92.1 million for the nine months ended June 30, 2000. The decrease was primarily due to a decrease in net income as well as increases in inventory and accounts receivable. Net cash used in investing activities was $91 million in 2001 and $83.3 million in 2000; primarily due to new retail store openings, plant expansion programs and acquisitions. The 2000 total for net cash used in investing activities included the acquisitions of Nutrition Warehouse, the mailing list of Rexall Sundown's SDV vitamin catalog and mail order business, and certain assets of Healthwatchers System. Net cash provided by financing activities was $63.2 million in 2001. Net cash used in financing activities was $4.1 million in 2000. The change was primarily due to the new borrowings used to fund acquisitions and the stock repurchase program. Management believes that inflation did not have a significant impact on its operations. NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (Unaudited) (In thousands, except per share amounts and number of stores) New accounting standards ------------------------------ In July 2001, The Financial Accounting Standards Board (FASB) issued Statements No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets." Effective October 1, 2001, the Company will no longer be required to amortize goodwill and other certain intangibles as a charge to earnings. Management has estimated that adoption of these standards will reduce amortization expense of goodwill and certain other intangibles by approximately $5.5 million annually. Effective October 1, 2000, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". As the Company has determined, it does not have any derivatives or hedging activities, the adoption of SFAS No. 133 did not affect the Company's financial position or results of operations as of and for the nine months ended June 30, 2001. In December 1999, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," ("SAB 101"). SAB 101 does not change existing revenue recognition rules, but rather addresses and clarifies existing rules and their application. SAB 101 is effective for the Company beginning July 1, 2001 or fourth quarter of fiscal 2001. Management believes the impact of SAB 101 will not be material to the Company's results of operations and financial position. This filing contains certain forward-looking statements and information that are based on the beliefs of management, as well as assumptions made by and information currently available to the Company's management. When used in this document, the words "anticipate," "believe," "estimate," and "expect" and similar expressions, as they relate to the Company are intended to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated or expected. The Company does not intend to update these forward-looking statements. 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 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. NBTY, INC. AND SUBSIDIARIES PART II OTHER INFORMATION (Unaudited) (Votes in thousands) Item 1. Legal Proceedings Not applicable. Item 2. Changes in Securities Not applicable. Item 3. Defaults upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders The following propositions were approved on May 14, 2001 at NBTY, Inc's Annual Meeting of Stockholders. Proposition 1: Re-elected Directors to serve until the 2004 Annual Meeting.
Votes Votes Total for against Votes Arthur Rudolph 56,271 371 56,642 Michael C. Slade 56,271 371 56,642 Michael L. Ashner 56,271 371 56,642 Glenn Cohen 56,271 371 56,642
Proposition 2: Ratified the designation of PricewaterhouseCoopers LLP as independent accountants to audit the consolidated financial statements of the Company for the 2001 fiscal year.
Votes Votes Total for against Votes 56,348 294 56,642
Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K There was no Form 8-K filed during the quarter covered by this report. NBTY, INC. and SUBSIDIARIES SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized. NBTY, INC. ---------- Date August 14, 2001 /s/ Harvey Kamil ------------------------------------ Harvey Kamil, Executive Vice President, Secretary (Principal Financial and Accounting Officer)