10-Q 1 nbty-q2.txt FORM 10-Q FOR MARCH 31, 2003 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ___________________ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended March 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from __________ to __________ Commission File Number 0-10666 NBTY, INC. (Exact Name of Registrant as Specified in Its Charter) DELAWARE 11-2228617 (State or Other Jurisdiction of (IRS Employer Identification No.) Incorporation or Organization) 90 Orville Drive Bohemia, New York 11716 (Address of Principal Executive Offices, Including Zip Code) (631) 567-9500 (Registrant's Telephone Number, Including Area Code) ___________________ Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Shares Outstanding Title of Class as of April 29, 2003 -------------- -------------------- Common Stock Par value $.008 per share 66,451,570 NBTY, INC. and SUBSIDIARIES FORM 10-Q FISCAL QUARTER ENDED MARCH 31, 2003 INDEX PART I. Financial Information Page ITEM 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets 1 Condensed Consolidated Statements of Income 2 - 3 Condensed Consolidated Statements of Stockholders' Equity and Comprehensive Income 4 Condensed Consolidated Statements of Cash Flows 5 - 6 Notes to Condensed Consolidated Financial Statements 7 - 15 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 - 30 ITEM 3. Qualitative and Quantitative Disclosures about Market Risk 31 ITEM 4. Controls and Procedures 32 PART II. Other Information ITEM 1. Legal Proceedings 33 ITEM 6. Exhibits and Reports on Form 8-K 33 Signatures 34 Certifications 35 - 36 Exhibits 37 - 38 ITEM 1: NBTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars and shares in thousands) March 31, September 30, 2003 2002 --------- ------------- Assets Current assets: Cash and cash equivalents $ 33,774 $ 26,229 Investments in bonds, at fair value 8,012 8,194 Accounts receivable, less allowance for doubtful accounts of $4,292 at March 31, 2003 and $4,194 at September 30, 2002 46,649 41,362 Inventories 220,894 204,402 Deferred income taxes 11,206 11,206 Prepaid expenses and other current assets 35,285 24,691 -------- -------- Total current assets 355,820 316,084 Property, plant and equipment, net 219,410 216,245 Goodwill 163,911 144,999 Intangible assets, net 46,000 48,413 Other assets 6,634 8,936 -------- -------- Total assets $791,775 $734,677 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt and capital lease obligations $ 20,665 $ 23,044 Accounts payable 72,856 48,616 Accrued expenses and other current liabilities 68,498 58,714 -------- -------- Total current liabilities 162,019 130,374 Long-term debt 154,700 163,874 Deferred income taxes 16,612 16,928 Other liabilities 3,006 4,244 -------- -------- Total liabilities 336,337 315,420 -------- -------- Commitments and contingencies Stockholders' equity: Common stock, $.008 par; authorized 175,000 shares; issued and outstanding 66,263 shares at March 31, 2003 and 66,133 shares at September 30, 2002 530 529 Capital in excess of par 128,282 126,283 Retained earnings 324,102 287,868 -------- -------- 452,914 414,680 Accumulated other comprehensive income 2,524 4,577 -------- -------- Total stockholders' equity 455,438 419,257 -------- -------- Total liabilities and stockholders' equity $791,775 $734,677 ======== ========
See notes to condensed consolidated financial statements. 1 NBTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars and shares in thousands, except per share data) For the three months ended March 31, ---------------------- 2003 2002 ---- ---- Net sales $277,824 $251,544 -------- -------- Costs and expenses: Cost of sales 124,679 112,989 Discontinued product charge 6,000 Catalog printing, postage and promotion 16,782 12,731 Selling, general and administrative 99,170 86,636 Recovery of raw material costs (5,467) -------- -------- 246,631 206,889 -------- -------- Income from operations 31,193 44,655 -------- -------- Other income (expense): Interest (3,774) (4,226) Miscellaneous, net 2,274 1,152 -------- -------- (1,500) (3,074) -------- -------- Income before income taxes 29,693 41,581 Provision for income taxes 10,082 16,010 -------- -------- Net income $ 19,611 $ 25,571 ======== ======== Net income per share: Basic $ 0.30 $ 0.39 Diluted $ 0.29 $ 0.38 Weighted average common shares outstanding: Basic 66,261 65,883 Diluted 68,323 67,755
See notes to condensed consolidated financial statements. 2 NBTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars and shares in thousands, except per share data) For the six months ended March 31, ---------------------- 2003 2002 ---- ---- Net sales $519,228 $466,634 -------- -------- Costs and expenses: Cost of sales 231,359 213,899 Discontinued product charge 6,000 Catalog printing, postage and promotion 30,637 21,741 Selling, general and administrative 192,546 168,549 Recovery of raw material costs (5,467) -------- -------- 460,542 398,722 -------- -------- Income from operations 58,686 67,912 -------- -------- Other income (expense): Interest (7,820) (10,234) Miscellaneous, net 3,513 2,055 -------- -------- (4,307) (8,179) -------- -------- Income before income taxes 54,379 59,733 Provision for income taxes 18,145 22,998 -------- -------- Net income $ 36,234 $ 36,735 ======== ======== Net income per share: Basic $ 0.55 $ 0.56 Diluted $ 0.53 $ 0.54 Weighted average common shares outstanding: Basic 66,216 65,814 Diluted 68,205 67,536
See notes to condensed consolidated financial statements. 3 NBTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME FOR THE YEAR ENDED SEPTEMBER 30, 2002 AND SIX MONTHS ENDED MARCH 31, 2003 (Unaudited)
(Dollars and shares in thousands) Common Stock Accumulated ----------------- Capital Stock Other Total Total Number of in Excess Retained Subscriptions Comprehensive Stockholders' Comprehensive Shares Amount of Par Earnings Receivable Income (Loss) Equity Income --------- ------ --------- -------- ------------- ------------- ------------- -------------- Balance, September 30, 2001 65,724 $526 $122,513 $193,184 $(839) $(12,978) $302,406 Components of comprehensive income: Net income 95,791 95,791 $ 95,791 Foreign currency translation adjustment 17,603 17,603 17,603 Change in net unrealized gain on available-for-sale investments (48) (48) (48) --------- $113,394 ======== Treasury stock retired (71) (1) (113) (1,107) (1,221) Exercise of stock options 480 4 2,068 2,072 Tax benefit from exercise of stock options 1,815 1,815 Repayment of stock subscrip- tions receivable 839 839 ------------------------------------------------------------------------------ Balance, September 30, 2002 66,133 529 126,283 287,868 - 4,577 419,257 Components of comprehensive income: Net income 36,234 36,234 $ 36,234 Foreign currency translation adjustment (1,871) (1,871) (1,871) Change in net unrealized loss on available-for-sale investments (182) (182) (182) --------- $ 34,181 ======== Exercise of stock options 30 176 176 Tax benefit from exercise of stock options 113 113 Shares issued and contributed to ESOP 100 1 1,710 1,711 ------------------------------------------------------------------------------ Balance, March 31, 2003 66,263 $530 $128,282 $324,102 $ 0 $ 2,524 $455,438 ==============================================================================
See notes to condensed consolidated financial statements. 4 NBTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands) For the six months ended March 31, ---------------------- 2003 2002 ---- ---- Cash flows from operating activities: Net income $ 36,234 $ 36,735 Adjustments to reconcile net income to net cash provided by operating activities: Gain on disposal/sale of property, plant and equipment (962) (69) Depreciation and amortization 21,752 21,554 Foreign currency exchange rate gain (906) (62) Amortization of deferred financing costs 394 388 Amortization of bond discount 62 62 Allowance for doubtful accounts (98) 1,002 Compensation expense for ESOP 855 Tax benefit from exercise of stock options 113 791 Changes in assets and liabilities, net of acquisitions: Accounts receivable (4,240) (7,435) Inventories (6,877) 22,856 Prepaid expenses and other current assets (7,251) (342) Other assets 59 1,120 Accounts payable 7,426 (13,411) Accrued expenses and other current liabilities 1,359 3,921 Other liabilities (1,239) 15 -------- -------- Net cash provided by operating activities 46,681 67,125 -------- -------- Cash flows from investing activities: Cash paid for acquisitions, net of cash acquired (14,786) (7,256) Release of cash held in escrow 2,403 4,600 Purchase of property, plant and equipment (17,686) (10,516) Proceeds from sale of property, plant and equipment 1,293 991 -------- -------- Net cash used in investing activities (28,776) (12,181) -------- -------- Cash flows from financing activities: Principal payments under long-term debt agreements and capital leases (11,616) (38,027) Proceeds from stock options exercised 176 557 -------- -------- Net cash used in financing activities (11,440) (37,470) -------- -------- Effect of exchange rate changes on cash and cash equivalents 1,080 (1,246) -------- --------
Continued See notes to condensed consolidated financial statements. 5 NBTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued) (Unaudited)
(Dollars and shares in thousands) For the six months ended March 31, ---------------------- 2003 2002 ---- ---- Net increase in cash and cash equivalents $ 7,545 $ 16,228 Cash and cash equivalents at beginning of period 26,229 34,434 -------- -------- Cash and cash equivalents at end of period $ 33,774 $ 50,662 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 8,218 $ 9,946 Cash paid during the period for income taxes $ 15,480 $ 17,065
Non-cash financing information: During the six months ended March 31, 2003, the Company issued 100 shares of NBTY stock (having a total then market value of approximately $1,711) as a contribution to the ESOP plan. See notes to condensed consolidated financial statements. 6 NBTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share amounts and number of stores) 1. Principles of consolidation and basis of presentation The accompanying condensed consolidated financial statements as of March 31, 2003 and September 30, 2002 and for the three and six months ended March 31, 2003 and March 31, 2002 have been prepared by NBTY, Inc. and Subsidiaries (the "Company") and have not been audited. The consolidated financial statements include the accounts of the Company and its wholly- owned subsidiaries. The Company's fiscal year ends on September 30. All intercompany accounts and transactions have been eliminated. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (such adjustments are of a normal recurring nature) necessary to present fairly its consolidated financial position, results of operations and cash flows. The results of operations for the six months ended March 31, 2003 are not necessarily indicative of the results to be expected for the full year ending September 30, 2003. As these are condensed consolidated financial statements, this report should be read in conjunction with the Company's consolidated financial statements and the notes included in its Annual report on Form 10-K for the fiscal year ended September 30, 2002. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. The most significant estimates include the valuation of inventories, the allowance for doubtful accounts receivable, valuation of deferred tax assets, and the recoverability of long-lived assets. Actual results could differ from those estimates. Stock-based compensation The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and provides pro forma disclosures of net income and earnings per share as if the method prescribed by SFAS No. 123, Accounting for Stock-Based Compensation, had been applied in measuring compensation expense. See "Recently Issued Accounting Pronouncements." Foreign currency The financial statements of international subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and an average exchange rate for each period for revenues, expenses, gains and losses. Where the local currency is the 7 NBTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share amounts and number of stores) functional currency, translation adjustments are recorded as a separate component of stockholders' equity. Reclassifications Certain reclassifications have been made to conform prior year amounts to the current year presentation. New accounting developments In June 2001, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires, among other things, that entities record the fair value of a liability for an asset retirement obligation in the period in which the obligation is incurred. This statement, which will become effective for the Company on October 1, 2003, is not expected to have a material impact on its consolidated financial position or results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived- Assets to Be Disposed Of." SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of. Although retaining many of the fundamental recognition and measurement provisions of SFAS No. 121, the Statement significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Under SFAS No. 144, assets held-for- sale are stated at the lower of their fair values or carrying amounts and depreciation is no longer recorded. The Company adopted SFAS No. 144 effective October 1, 2002. There was no impact on the Company as a result of adopting SFAS No. 144. In July 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which requires that a liability for a cost associated with an exit or disposal activity is recognized when incurred. This Statement also establishes that fair value is the objective for initial measurement of the liability. Severance pay under SFAS 146, in many cases, would be recognized over time rather than up-front. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. As of March 31, 2003, the Company has not entered into any such activities and therefore the adoption of this standard did not impact its consolidated financial position, results of operations, or disclosure requirements. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others" (the "Interpretation"), which addresses the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. The Interpretation also requires the guarantor to recognize a liability for the non-contingent component of the guarantee, which is the obligation to stand ready to perform in the event that specified triggering events or conditions occur. The recognition and measurement provisions of the Interpretation are effective for all guarantees entered into or modified after December 31, 2002. The Company does not enter into such transactions and therefore the adoption of this standard did not impact its consolidated financial position, results of operations, or disclosure requirements. 8 NBTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share amounts and number of stores) In December 2002, the FASB issued Statement No. 148, "Accounting for Stock- Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock- based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company is required to follow the prescribed format and provide the additional disclosures required by SFAS No. 148 in its annual financial statements for the year ending September 30, 2003 and must also provide the disclosures in its quarterly reports containing condensed consolidated financial statements for interim periods beginning in the current quarter. There were no grants during the six month periods ended March 31, 2003 and March 31, 2002; therefore, the pro forma and actual net income and related EPS are the same as amounts reported. In January 2003, the Emerging Issues Task Force ("EITF") issued EITF Issue No. 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor," which states that cash consideration received from a vendor is presumed to be a reduction of the prices of the vendor's products or services and should, therefore, be characterized as a reduction of cost of sales when recognized in the statement of operations. That presumption is overcome when the consideration is either a reimbursement of specific, incremental, identifiable costs incurred to sell the vendor's products, or a payment for assets or services delivered to the vendor. EITF Issue No. 02-16 is effective for arrangements entered into after November 21, 2002. The adoption of EITF Issue No. 02-16 did not have a material impact on the Company's consolidated financial position or results of operations. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities," an interpretation of ARB No. 51. Interpretation 46 addresses consolidation by business enterprises of variable interest entities. Interpretation 46 applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first year or interim period beginning after June 15, 2003 to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company has not yet determined the impact of implementing Interpretation 46. 2. Acquisitions On March 10, 2003, the Company acquired Health & Diet Group Ltd. and the FSC wholesale business from Royal Numico N.V. (NUMCc.AS). Health & Diet Group owns and operates 49 GNC stores in the U.K. and 7 GNC stores in Germany. FSC is a Manchester, U.K.-based wholesale operation whose products are sold to health food stores and pharmacies. The FSC branded products include comprehensive ranges of multivitamins, single vitamins and minerals, herbal formulas, and tinctures. These operations had total sales of approximately $57,000 during 2002. The purchase price for these businesses was approximately $16,532. Assets acquired and liabilities assumed include cash ($1,946), accounts receivable ($1,502), inventories ($9,383), other current assets ($2,396), property, plant and equipment ($5,080), and current liabilities ($22,057). The excess cost of investment over the net book value amounted to $18,282 and is classified as goodwill. This transaction stipulates adjustments to the purchase price for agreed 9 NBTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share amounts and number of stores) upon working capital requirements and inventory valuation procedures to be performed. The Company is still in the process of finalizing its valuation analysis and therefore the assets and liabilities allocated above are subject to change. This acquisition contributed $3,577 in sales and a marginal operating profit during the current fiscal period. On December 6, 2001, the Company acquired out of bankruptcy certain assets of HealthCentral.com for approximately $2,800 in cash. The assets include the customer list of the mail order operation, L&H Vitamins, and the customer list and URL's of Vitamins.com and WebRx.com. Assets acquired were classified as intangibles, specifically as a customer list ($2,800) which is being amortized over 15 years. These operations had sales for the last 12 months, prior to acquisition date, of approximately $15,000 and a combined customer list of approximately 1,800 names, which has been merged into the existing customer base of the Puritan's Pride/Direct Response business. On December 13, 2001, the Company acquired certain assets of the Knox NutraJoint and Knox for Nails nutritional supplement business from Kraft Foods North America, Inc. for approximately $4,500 in cash. Assets acquired include inventory ($2,456), and intangibles ($2,000). Approximately $1,800 of the $2,000 has been classified as a trademark with an indefinite life. Kraft's revenues for these brands were approximately $15,000 in 2001. 3. Comprehensive income Total comprehensive income for the Company includes net income, the effects of foreign currency translation and unrealized gains on available-for-sale securities, which are charged or credited to the cumulative other comprehensive income account within stockholders' equity. Total comprehensive income for the three and six month periods ended March 31, 2003 and 2002 are as follows:
For the three months For the six months ended March 31, ended March 31, -------------------- -------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Net income $19,611 $25,571 $36,234 $36,735 Changes in: Unrealized holding gains (455) (182) Foreign currency translation adjustments (5,539) (4,002) (1,871) (5,735) ------- ------- ------- ------- Total comprehensive income $13,617 $21,569 $34,181 $31,000 ======= ======= ======= =======
Accumulated other comprehensive income, which is classified as a separate component of stockholders' equity, is comprised of net gains on foreign currency translation of $2,754 and $4,625 at March 31, 2003 and September 30, 2002, respectively, and net unrealized holding losses on available-for- sale securities of $230 at March 31, 2003 and $48 at September 30, 2002, respectively. 10 NBTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share amounts and number of stores) 4. Investments in bonds The Company classifies its investments in bonds as available for sale and reports them at fair market value (based on quoted market prices), with net unrealized gains or losses on the securities recorded as accumulated other comprehensive income in stockholders' equity. Market quotes may not represent firm bids of such dealers or prices for actual sales. There is only a thinly traded market for such securities and market ratings as of March 31, 2003 are as follows: Moody's Investors Service, Inc. rated these debt securities as Caa2 and Standard & Poor's rated these debt securities as a CCC-. Both credit agencies' ratings remained unchanged from the prior period. 5. Inventories The components of inventories are as follows:
March 31, September 30, 2003 2002 --------- ------------- Raw materials $ 83,141 $ 77,051 Work-in-process 11,237 8,527 Finished goods 126,516 118,824 -------- -------- $220,894 $204,402 ======== ========
6. Earnings per share (EPS) Basic EPS computations are based on the weighted average number of common shares outstanding during the three and six month periods ended March 31, 2003 and March 31, 2002. Diluted EPS includes the dilutive effect of outstanding stock options, as if exercised. The following is a reconciliation between basic and diluted EPS:
For the three months For the six months ended March 31, ended March 31, -------------------- -------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Numerator: Numerator for basic EPS - income available to common stockholders $19,611 $25,571 $36,234 $36,735 ======= ======= ======= ======= Numerator for diluted EPS - income available to common stockholders $19,611 $25,571 $36,234 $36,735 ======= ======= ======= ======= Denominator: Denominator for basic EPS - 66,261 65,883 66,216 65,814 weighted-average shares Effect of dilutive securities: Stock options 2,062 1,872 1,989 1,722 ------- ------- ------- ------- Denominator for diluted EPS - weighted-average shares 68,323 67,755 68,205 67,536 ======= ======= ======= ======= Net EPS: Basic EPS $ 0.30 $ 0.39 $ 0.55 $ 0.56 ======= ======= ======= ======= Diluted EPS $ 0.29 $ 0.38 $ 0.53 $ 0.54 ======= ======= ======= =======
11 NBTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share amounts and number of stores) 7. Goodwill and Intangible Assets SFAS No. 142 requires that goodwill and other intangible assets with indefinite useful lives not be amortized but, instead, tested for impairment at least annually. The Company continues to amortize other intangible assets, consisting primarily of customer lists, trademarks, and covenants not to compete using the straight line method over their estimated useful lives of two to fifteen years. The carrying amount of acquired intangible assets as of March 31, 2003 and September 30, 2002 is as follows:
March 31, 2003 September 30, 2002 ----------------------------- ----------------------------- Gross carrying Accumulated Gross carrying Accumulated Amortization amount Amortization amount Amortization Period (years) -------------- ------------ -------------- ------------ -------------- Amortized intangible assets: Customer lists $61,368 $17,797 $64,283 $18,668 6 - 15 Trademark and licenses 2,414 2,364 2,429 2,188 2 - 3 Covenants not to compete 2,605 2,026 2,605 1,848 5 - 7 ------- ------- ------- ------- $66,387 $22,187 $69,317 $22,704 ======= ======= ======= ======= Unamortized intangible asset: Trademark 1,800 - 1,800 - ------- ------- ------- ------- Total intangible assets $68,187 $22,187 $71,117 $22,704 ======= ======= ======= =======
The changes in the carrying amount of goodwill by segment for the six month period ended March 31, 2003, are as follows:
Puritan's Pride/ Retail United Retail United Direct Response States Kingdom/Ireland Wholesale Consolidated ---------------- ------------- --------------- --------- ------------ Balance at September 30, 2002 $15,197 $7,588 $117,322 $4,892 $144,999 Acquisitions during period 18,282 18,282 Foreign currency translation 630 630 ------- ------ -------- ------ -------- Balance at March 31, 2003 $15,197 $7,588 $136,234 $4,892 $163,911 ======= ====== ======== ====== ========
Aggregate amortization expense of definite lived intangible assets for the six months ended March 31, 2003 and March 31, 2002 was approximately $2,430 and $2,151, respectively. Estimated amortization expense, assuming no changes in the Company's intangible assets, for each of the five succeeding fiscal years, beginning with fiscal 2003, is $4,637 (2003), $4,250 (2004), $4,041 (2005), $3,981 (2006), and $3,749 (2007). 12 NBTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share amounts and number of stores) 8. Segment Information: The Company is organized by sales segments on a worldwide basis. The Company's management reporting system evaluates performance based on a number of factors; however, the primary measures of performance are the sales and pretax operating income or loss (prior to corporate allocations) of each segment, as this is the key performance indicator reviewed by management. Operating income or loss for each segment does not include corporate general and administrative expenses, interest expense and other miscellaneous income/expense items. Such unallocated expenses remain in the corporate segment. Corporate also includes the manufacturing assets of the Company and accordingly, items associated with these activities, such as the discontinued product charge and the recovery of raw material costs remain unallocated in the corporate segment. The Company's segment reporting disclosures for the prior periods presented have been reclassified to exclude certain corporate general and administrative expenses to conform to the current year presentation. The U.K./Ireland operations do not include any transfer pricing absorption. The accounting policies of all of the operating segments are the same as those described in the summary of significant accounting policies in Note 1. The Company reports four worldwide segments: Wholesale; Retail: United States; Retail: United Kingdom/Ireland; and Puritan's Pride/Direct Response. All of the Company's products fall into one of these four segments. The Wholesale segment (including Network Marketing) is comprised of several divisions each targeting specific market groups. These market groups include wholesalers, distributors, chains, pharmacies, health food stores, bulk and international customers. The Retail United States segment generates revenue through the sale of proprietary brand and third-party products through its 540 Company-operated stores. The Retail United Kingdom/Ireland segment generates revenue through the sale of proprietary brand and third-party products in 524 Company-operated stores. The Puritan's Pride/Direct Response segment generates revenue through the sale of its products primarily through mail order catalog and the Internet. Catalogs are strategically mailed to customers who order by mail or by phoning customer service representatives in New York, Illinois and the United Kingdom. The following table represents key financial information of the Company's business segments:
For the three months For the six months ended March 31, ended March 31, -------------------- ---------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Wholesale: Revenue $84,850 $71,889 $158,967 $137,525 Operating income 17,950 14,063 32,154 23,652 Depreciation and amortization 242 370 451 704 Identifiable assets, at end of period 56,645 51,595 56,645 51,595 Capital expenditures 74 450 153 729
13 NBTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share amounts and number of stores)
For the three months For the six months ended March 31, ended March 31, ---------------------- ---------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Retail: United States Revenue $ 53,556 $ 50,850 $103,819 $ 95,061 Operating income (loss) 1,093 (2,290) (562) (4,940) Depreciation and amortization 3,000 3,975 5,936 7,455 Identifiable assets, at end of period 65,617 75,626 65,617 75,626 Capital expenditures 613 1,403 1,111 2,433 Locations open at end of period 540 539 540 539 United Kingdom/Ireland Revenue $ 87,089 $ 72,714 $169,702 $145,318 Operating income 23,069 20,444 45,360 40,508 Depreciation and amortization 2,373 1,888 4,538 3,976 Identifiable assets, at end of period 275,211 217,847 275,211 217,847 Capital expenditures 2,255 1,031 3,768 2,113 Locations open at end of period 524 463 524 463 Puritan's Pride/Direct Response Revenue $ 52,329 $ 56,091 $ 86,740 $ 88,730 Operating income 13,958 22,404 24,973 34,229 Depreciation and amortization 1,601 1,354 2,937 2,666 Identifiable assets, at end of period 80,140 82,493 80,140 82,493 Capital expenditures 255 450 494 643 Corporate: Corporate expenses $(18,877) $(15,433) $(37,239) $(31,004) Discontinued product charge (6,000) (6,000) Recovery of raw material costs 5,467 5,467 Depreciation and amortization - manufacturing 2,606 2,400 5,206 4,783 Depreciation and amortization - other 1,375 1,023 2,684 1,970 Corporate manufacturing identifiable assets, at end of period 314,162 264,516 314,162 264,516 Capital expenditures - manufacturing 1,597 947 2,270 2,940 Capital expenditures - other 1,570 650 9,890 1,658 Consolidated totals: Revenue $277,824 $251,544 $519,228 $466,634 Operating income 31,193 44,655 58,686 67,912 Depreciation and amortization 11,197 11,010 21,752 21,554 Identifiable assets, at end of period 791,775 692,077 791,775 692,077 Capital expenditures 6,364 4,931 17,686 10,516
14 NBTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share amounts and number of stores) Foreign subsidiaries account for approximately 34% of total assets, 15% of total liabilities and 33% of net revenues, as of and for the six month period ended March 31, 2003. 9. Discontinued Product Charge: Effective March 15, 2003, the Company voluntarily discontinued sales of products that contain ephedra. Income from operations during the six months ended March 31, 2003 include a one-time charge of approximately $6,000 ($3,960 or $0.06 basic and diluted earnings per share, after tax) associated with such discontinued sales. The Company's belief that its ephedra products were safe when used as directed has been supported by scientific evidence, and the Company has not been a defendant in any lawsuit for any of its ephedra products. However, in light of adverse publicity surrounding ephedra and the current environment in the U.S., the Company believed it was in its best interest to voluntarily cease selling ephedra products, which represented an insignificant portion of the Company's overall business. 10. Recovery of Raw Material Costs: The Company was a plaintiff in a vitamin antitrust litigation matter brought in the United States District Court in the District of Columbia against F. Hoffmann-La Roche Ltd. and others for alleged price fixing. Settlements with certain defendants were made, and in January 2002, the Company received $5,467 ($3,362 or $0.05 basic and diluted earnings per share, after tax) in partial settlement of on-going price fixing litigation. 11. Subsequent Event: On April 14, 2003, a complaint was filed by the United States of America against the Company arising from certain pseudoephedrine sales from November 2000 through December 2002. The complaint, filed in U.S. District Court for the Eastern District of New York, alleges technical recordkeeping and reporting violations of the Controlled Substances Act, 21 U.S.C. Sections 801-904 and Controlled Substances Import and Export Act, 21 U.S.C. Sections 951-971 in a fraction of the Company's sales of over-the-counter antihistamine and decongestant products containing pseudoephedrine. Total sales of such products generated approximately $160, or only 0.0002 percent of the Company's total sales for the fiscal years ended September 30, 2001 and September 30, 2002, respectively. The Company has cooperated in all respects with the Drug Enforcement Administration in its investigation of sales identified in the complaint. Accordingly, the Company believes that there is no valid basis nor precedent for the penalties sought, and intends to launch a vigorous defense. However, because this action is in its early stages, no determination can be made at this time as to the final outcome of this action. 15 ITEM 2: NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (In thousands, except per share amounts and number of stores) The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements of the Company and the notes thereto included elsewhere herein. Forward Looking Statements: --------------------------- NBTY is a leading vertically integrated U.S. manufacturer and distributor of a broad line of high-quality, value-priced nutritional supplements in the United States and throughout the world. The Company markets more than 1,100 products under several brands, including Nature's Bounty(R), Vitamin World(R), Puritan's Pride(R), Holland & Barrett(R), Nutrition Headquarters(R), American Health(R), Nutrition Warehouse(R) and Dynamic Essentials(R). Information contained in this form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our financial condition, results of operations and business. All of these forward-looking statements, which can be identified by the use of terminology such as "subject to," "believe," "expects," "may," "will," "should," "can," or "anticipates," or the negative thereof, or variations thereon, or comparable terminology, or by discussions of strategy which, although believed to be reasonable, are inherently uncertain. Factors that may affect such forward-looking statements include (i) slow or negative growth in the nutritional supplement industry; (ii) disruptions of business or negative impact on sales and earnings due to acts of war, terrorism, bio-terrorism, or civil unrest; (iii) adverse publicity regarding the consumption of nutritional supplements; (iv) inability to retain customers of companies (or mailing lists) recently acquired; (v) increased competition; (vi) increased costs; (vii) loss or retirement of key members of management; (viii) increases in the cost of borrowings and unavailability of additional debt or equity capital; (ix) unavailability of, or inability to consummate, advantageous acquisitions in the future or the inability of the Company to integrate acquisitions into the mainstream of its business; (x) changes in general worldwide economic and political conditions in the markets in which the Company may compete from time to time; (xi) the inability of the Company to gain and/or hold market share of its wholesale and retail customers; (xii) loss or reduction in ephedra sales; (xiii) unavailability of electricity in certain geographical areas; (xiv) exposure to, expense of defending and resolving, product liability claims and other litigation; (xv) the ability of the Company to successfully implement its business strategy; (xvi) the inability of the Company to manage its retail, wholesale, manufacturing, and other operations efficiently; (xvii) consumer acceptance of the Company's products; (xviii) uncertainty in negotiating and consummating acquisitions which may be subject to bankruptcy court approval; (xix) the inability of the Company to renew leases on its retail locations; (xx) inability of the Company's retail stores to attain profitability; (xxi) the absence of clinical trials for many of the Company's products; (xxii) sales and earnings volatility and/or trends; (xxiii) the Company's ability to manufacture its products efficiently; (xxiv) the rapidly changing nature of the Internet and on-line commerce; (xxv) fluctuations in foreign currencies, and more particularly the British Pound; (xxvi) import-export controls on sales to foreign countries; (xxvii) the inability of the Company to secure favorable new sites for, and delays in opening, new retail locations; (xxviii) introduction of new federal, state or foreign legislation or regulation or adverse determinations by regulators, and more particularly the Food Supplements Directive and the Traditional Herbal Medicinal Products Directive in Europe; (xxix) the mix of the Company's products and the profit margins thereon; (xxx) the availability and pricing of raw materials; (xxxi) risk factors discussed in the Company's filings with the Securities and Exchange Commission; and (xxxii) other factors beyond the Company's control. 16 NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (In thousands, except per share amounts and number of stores) Consequently, such forward-looking statements should be regarded solely as the Company's current plans, estimates and beliefs. Readers are cautioned not to place undue reliance on forward-looking statements. The Company cannot guarantee future results, trends, events, levels of activity, performance or achievements. The Company does not undertake and specifically declines any obligation to update, republish or revise forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events. Critical Accounting Policies and Estimates: ------------------------------------------- The Company's significant accounting policies are described in note 1 of the Notes to Consolidated Financial Statements included in its Annual Report on Form 10-K for the fiscal year ended September 30, 2002. A discussion of the Company's critical accounting policies, and the related estimates, are included in Management's Discussion and Analysis of Results of Operations and Financial Condition in its Annual Report on Form 10-K for the fiscal year ended September 30, 2002. Management has discussed the development and selection of these policies with the Company's Board of Directors and the Board of Directors has reviewed its disclosures relating to them. There have been no significant changes in the Company's existing accounting policies or estimates since its fiscal year ended September 30, 2002. General: -------- Operating results in all periods presented reflect the impact of acquisitions. The timing of those acquisitions and the changing mix of businesses as acquired companies are integrated into the Company may affect the comparability of results from one period to another. 17 NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (In thousands, except per share amounts and number of stores) Results of Operations: ---------------------- The following table sets forth income statement data of the Company as a percentage of net sales for the periods indicated:
For the three months For the three months Change ended March 31, ended March 31, amount -------------------- -------------------- increase 2003 2003 2002 2002 (decrease) ---- ---- ---- ---- ---------- Net sales $277,824 100% $251,544 100% $ 26,280 -------- ---- -------- ---- -------- Costs and expenses: Cost of sales 124,679 44.9% 112,989 44.9% 11,690 Discontinued product charge 6,000 2.2% - 6,000 Catalog printing, postage and promotion 16,782 6.0% 12,731 5.1% 4,051 Selling, general and administrative 99,170 35.7% 86,636 34.4% 12,534 Recovery of raw material costs - (5,467) -2.2% 5,467 -------- ---- -------- ---- -------- 246,631 88.8% 206,889 82.2% 39,742 -------- ---- -------- ---- -------- Income from operations 31,193 11.2% 44,655 17.8% (13,462) -------- ---- -------- ---- -------- Other income (expense): Interest (3,774) -1.4% (4,226) -1.7% 452 Miscellaneous, net 2,274 0.8% 1,152 0.5% 1,122 -------- ---- -------- ---- -------- (1,500) -0.6% (3,074) -1.2% 1,574 -------- ---- -------- ---- -------- Income before income taxes 29,693 10.6% 41,581 16.6% (11,888) Provision for income taxes 10,082 3.6% 16,010 6.4% (5,928) -------- ---- -------- ---- -------- Net income $ 19,611 7.0% $ 25,571 10.2% $ (5,960) ======== ==== ======== ==== ========
For the three month period ended March 31, 2003 compared to the three month period ended March 31, 2002: Net sales. Net sales in the second quarter ended March 31, 2003 were $277,824, compared with $251,544 for the prior comparable period, an increase of $26,280, or 10.4%. The $26,280 increase is comprised of: $12,961 attributable to wholesale, $2,706 attributable to US retail, $14,375 attributable to U.K./Ireland retail and a decrease of $3,762 in the Puritan's Pride direct response/e-commerce segment. Wholesale sales were $84,850, compared to $71,889, an increase of $12,961, or 18%. Such increase in the wholesale segment's sales was primarily due to an increase in sales to the mass market, drug chains and supermarkets ($4,858), an increase in Global Health Science's sales ($5,254), and sales contributed by the FSC acquisition ($988). Products such as Coral Calcium, Flex-a-min(R), and the 18 NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (In thousands, except per share amounts and number of stores) Knox NutraJoint(R) products continue to help the Company strengthen its leading market position. In addition, increases in the wholesale segment can be attributed to the Company expanding its distribution channel for its products by obtaining new customer accounts. One customer of the wholesale division represented, individually, more than 10% of this segment's sales for the three month period ended March 31, 2003. For the prior comparable period, two customers represented, individually, more than 10% of this segment's sales. The Company does not believe that the loss of either of these customers or any other single customer of the Company would have a material adverse effect on the Company's consolidated financial condition or results of operations. Puritan's Pride/Direct Response sales were $52,329, compared to $56,091, a decrease of $3,762, or 6.7%. Such decrease was a result of the Company changing its catalog promotion strategy. The timing of promotional catalog mailings was not comparable to the second quarter a year ago. The three-for-one sales catalog which ran from January through March last year will be running from March through May this year and is expected to generate a comparable increase in sales for the third quarter. U.S. retail sales were $53,556, compared to $50,850, an increase of $2,706, or 5.3%. Such increase was a direct result of the success of the Savings Passport Program, a customer loyalty program. Same store sales for stores open more than one year increased 3.7% (or $1,864). U.K./Ireland retail sales were $87,089, compared to $72,714, an increase of $14,375, or 19.8%. Such increase was mainly attributable to an increase in same store sales for stores open more than one year of 14.3% (or $10,088) and sales contributed by the GNC U.K. acquisition ($2,589). The same store sales results include the positive effect of a strong British Pound ($8,732 or 12.4%). The Company operated 540 stores in the U.S. and 524 stores in the U.K./Ireland as of March 31, 2003, compared to 539 stores in the U.S. and 463 in the U.K./Ireland as of March 31, 2002. Cost of sales/Discontinued product charge. Cost of sales in the second quarter ended March 31, 2003 were $130,679, or 47.1% as a percentage of sales, compared to $112,989, or 44.9% for the prior comparable period. As a percentage of sales, gross profit decreased to 52.9% in the second quarter ended March 31, 2003 as compared to 55.1% for the prior comparable period. Included in the current quarter's cost of sales is a $6,000 charge (or 2.2% as a percentage of sales) for the voluntary discontinuance of sales of products containing ephedra. Without this charge, as a percentage of sales, gross profit would have remained unchanged from the prior comparable period at 55.1%. The Company's belief that its ephedra products were safe when used as directed has been supported by scientific evidence, and the Company has not been a defendant in any lawsuit for any of its ephedra products. However, in light of adverse publicity surrounding ephedra and the current environment in the U.S., the Company believed it was in its best interest to voluntarily cease selling ephedra products, effective March 15, 2003, which represented an insignificant portion of the Company's overall business. The wholesale segment's gross profit increased to 41.1% from 40.4% as a percentage of sales, primarily due to higher gross margins on new product introductions and improvements in manufacturing efficiencies. Puritan's Pride/Direct Response's gross profit decreased slightly to 61.1% from 61.3% as a percentage of sales. The gross profit was affected by price reductions on certain products and varied catalog promotions the Company ran in the second quarter ended March 31, 2003 versus the prior comparable period. Such decrease was offset by greater manufacturing efficiencies. The U.S. retail gross profit increased as a percentage of sales to 59.1% from 56.9% primarily due to the Company's modified price structure in the stores and the introduction of new higher gross margin items. The U.K./Ireland retail gross profit decreased to 62.7% from 63.5% as a percentage of sales primarily as a result of the recent GNC U.K. acquisition. That operation reported a 40.5% gross profit thereby affecting the total U.K. gross margin during the current quarter. Without the GNC U.K. operation, gross profit as a percentage of sales would have remained relatively 19 NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (In thousands, except per share amounts and number of stores) unchanged as compared to the prior period. The Company's overall strategy is to improve margins by introducing new products which traditionally have a higher gross profit and by continuing to increase in-house manufacturing while decreasing the use of outside suppliers in both the U.S. and the U.K. In the second quarters ended March 31, 2003 and March 31, 2002, cost of sales included under-absorbed factory overhead of $2,250 and $3,185, respectively. Catalog printing, postage, and promotion. Catalog printing, postage, and promotion expenses were $16,782 in the second quarter ended March 31, 2003, compared with $12,731 in the prior comparable period, an increase of $4,051. Such advertising expenses as a percentage of sales were 6% for the second quarter ended March 31, 2003 and 5.1% for the prior comparable period. The $4,051 increase was primarily attributable to an increase in Puritan's Pride/Direct Response's advertising promotion and media for new products introduced and existing core products ($3,268). These investments in additional advertising and sales promotions are part of the Company's strategic effort to increase long-term growth. The other segments' advertising expense variances are as follows: wholesale's advertising increased $1,769, U.S. retail's advertising decreased $682, and U.K./Ireland retail's advertising decreased $304. Selling, general and administrative expenses. Selling, general and administrative expenses were $99,170 in the second quarter ended March 31, 2003, an increase of $12,534, as compared with $86,636 for the prior comparable period. As a percentage of sales, selling, general and administrative expenses were 35.7% for the second quarter ended March 31, 2003 and 34.4% for the prior comparable period. Of the $12,534 increase, $2,270 was attributable to increased payroll costs mainly associated with business acquisitions and general salary increases, $1,361 to increased rent expense and additional U.S. retail. and U.K./Ireland stores, $2,047 to increased freight costs mainly resulting from the Company's efforts to generate faster product delivery to customers, $1,411 to increased insurance costs mainly associated with an increase in general insurance rates, and $766 to increased professional fees for the implementation and integration of new software purchased. Of the $12,534 increase in selling, general and administrative cost, $2,710 is attributed to the foreign exchange translation of the British Pound. Recovery of raw material costs. During the quarter ended March 31, 2002, the Company received $5,467 in partial settlement of on-going price fixing litigation brought by the Company against certain raw material vitamin suppliers. Interest expense. Interest expense was $3,774 in the second quarter ended March 31, 2003, a decrease of $452 compared with interest expense of $4,226 in the second quarter ended March 31, 2002. Interest expense decreased due to the Company continuing to repay bank debt. The major components of interest expense are interest on Senior Subordinated Notes associated with the Holland & Barrett acquisition, and interest on the Credit and Guarantee Agreement (CGA) used for acquisitions, capital expenditures and other working capital needs. Miscellaneous, net. Miscellaneous, net was $2,274 in the second quarter ended March 31, 2003, an increase of $1,122, compared to $1,152 in the second quarter ended March 31, 2002. Such increase was primarily attributable to exchange rate fluctuations ($1,409) offset by decreases in investment income ($43), decreases in net gains on sale of property plant and equipment ($78), and other miscellaneous income decreases ($166). 20 NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (In thousands, except per share amounts and number of stores) Income Taxes. The Company's income tax expense is impacted by a number of factors, including the amount of taxable earnings derived in foreign jurisdictions with tax rates that are lower than the U.S. federal statutory rate, state tax rates in the jurisdictions where the Company conducts business, and the Company's ability to utilize various tax credits and foreign tax credits. The effective income tax rate in the second quarter ended March 31, 2003 was 34%, compared to 38.5% in the second quarter ended March 31, 2002. The change in the effective rate was due to tax saving strategies implemented in fiscal 2002, some of which are carried forward and are expected to benefit future fiscal years. In addition, the effective rate decreased due to an increase in the percentage of income generated from foreign jurisdictions where the overall effective tax rate is approximately 30.5%. Net income. After income taxes, the Company had net income in the second quarter ended March 31, 2003 of $19,611 (or basic and diluted earnings per share of $0.30 and $0.29, respectively), and $25,571 (or basic and diluted earnings per share of $0.39 and $0.38, respectively) in the second quarter ended March 31, 2002. Excluding one-time events, earnings per diluted share for the fiscal second quarter of 2003 and 2002 were $0.34 and $0.33, respectively. 21 NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (In thousands, except per share amounts and number of stores) Results of Operations: ---------------------- The following table sets forth income statement data of the Company as a percentage of net sales for the periods indicated:
For the six months For the six months Change ended March 31, ended March 31, amount -------------------- -------------------- increase 2003 2003 2002 2002 (decrease) ---- ---- ---- ---- ---------- Net sales $519,228 100% $466,634 100% $ 52,594 -------- ---- -------- ---- -------- Costs and expenses: Cost of sales 231,359 44.6% 213,899 45.8% 17,460 Discontinued product charge 6,000 1.2% - 6,000 Catalog printing, postage and promotion 30,637 5.9% 21,741 4.7% 8,896 Selling, general and administrative 192,546 37.1% 168,549 36.1% 23,997 Recovery of raw material costs - (5,467) -1.2% 5,467 -------- ---- -------- ---- -------- 460,542 88.8% 398,722 85.4% 61,820 -------- ---- -------- ---- -------- Income from operations 58,686 11.2% 67,912 14.6% (9,226) -------- ---- -------- ---- -------- Other income (expense): Interest (7,820) -1.5% (10,234) -2.2% 2,414 Miscellaneous, net 3,513 0.7% 2,055 0.4% 1,458 -------- ---- -------- ---- -------- (4,307) -0.8% (8,179) -1.8% 3,872 -------- ---- -------- ---- -------- Income before income taxes 54,379 10.4% 59,733 12.8% (5,354) Provision for income taxes 18,145 3.5% 22,998 4.9% (4,853) -------- ---- -------- ---- -------- Net income $ 36,234 6.9% $ 36,735 7.9% $ (501) ======== ==== ======== ==== ========
For the six month period ended March 31, 2003 compared to the six month period ended March 31, 2002: Net sales. Net sales for the six month period ended March 31, 2003 were $519,228, compared with $466,634 for the prior comparable period, an increase of $52,594, or 11.3%. The $52,594 increase is comprised of: $21,442 attributable to wholesale, $8,758 attributable to US retail, and $24,384 attributable to U.K./Ireland retail and a decrease of $1,990 in the Puritan's Pride direct response/e-commerce segment. Wholesale sales were $158,967, compared to $137,525, an increase of $21,442, or 15.6%. Such increase in the wholesale segment's sales was primarily due to an increase in sales to the mass 22 NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (In thousands, except per share amounts and number of stores) market, drug chains and supermarkets ($10,822), an increase in Global Health Science's sales ($5,572), and sales contributed by the FSC acquisition ($988). Products such as Coral Calcium, Flex-a-min(R), and the Knox NutraJoint(R) products continue to help the Company strengthen its leading market position. In addition, increases in the wholesale segment can be attributed to the Company expanding its distribution channel for its products by obtaining new customer accounts. Two customers of the wholesale division represented, individually, more than 10% of this segment's sales for the six month period ended March 31, 2003 and for the prior comparable period. The Company does not believe that the loss of either of these customers or any other single customer of the Company would have a material adverse effect on the Company's consolidated financial condition or results of operations. Puritan's Pride/Direct Response sales were $86,740, compared to $88,730, a decrease of $1,990, or 2.2%. Such decrease was a result of the Company changing its catalog promotion strategy. The timing of promotional catalog mailings was not comparable to same like period a year ago. The three-for-one sales catalog which ran from January through March last year will be running from March through May this year and is expected to generate a comparable increase in sales for the third quarter. U.S. retail sales were $103,819, compared to $95,061, an increase of $8,758, or 9.2%. Such increase was a direct result of the success of the Savings Passport Program, a customer loyalty program. Same store sales for stores open more than one year increased 6.9% (or $6,344). U.K./Ireland retail sales were $169,702, compared to $145,318, an increase of $24,384, or 16.8%. Such increase was mainly attributable to an increase in same store sales for stores open more than one year of 13.6% (or $19,138). These results include the positive effect of a strong British Pound ($15,006 or 10.7%). The Company operated 540 stores in the U.S. and 524 stores in the U.K./Ireland as of March 31, 2003, compared to 539 stores in the U.S. and 463 in the U.K./Ireland as of March 31, 2002. Cost of sales/Discontinued product charge. Cost of sales for the six month period ended March 31, 2003 were $237,359, or 45.8% as a percentage of sales, compared to $213,899, or 45.8% for the prior comparable period. As a percentage of sales, gross profit remained unchanged at 54.2% during the six month period ended March 31, 2003. Included in the current period's cost of sales is a $6,000 charge (or 1.2% as a percentage of sales) for the voluntary discontinuance of sales of products containing ephedra. Without this charge, as a percentage of sales, gross profit would have increased to 55.4% during the six month period ended March 31, 2003 as compared to 54.2% for the prior comparable period. The Company's belief that its ephedra products were safe when used as directed has been supported by scientific evidence, and the Company has not been a defendant in any lawsuit for any of its ephedra products. However, in light of adverse publicity surrounding ephedra and the current environment in the U.S., the Company believed it was in its best interest to voluntarily cease selling ephedra products, effective March 15, 2003, which represented an insignificant portion of the Company's overall business. The wholesale segment's gross profit increased to 41.7% from 36.8% as a percentage of sales, primarily due to higher gross margins on new product introductions and improvements in manufacturing efficiencies. Puritan's Pride/Direct Response's gross profit decreased to 62.4% from 63.1% as a percentage of sales. Price reductions on certain products and varied catalog promotions the Company ran during the period ended March 31, 2003 versus the prior comparable period were major factors in such decrease. A portion of the decrease was offset by greater manufacturing efficiencies. The U.S. retail gross profit increased as a percentage of sales to 59.2% from 58.1% primarily due to the Company's modified price structure in the stores and the introduction of new higher gross margin items. The U.K./Ireland retail gross profit remained unchanged at 62.5% as a percentage of sales. Without the GNC U.K. operation, gross margin would have increased to 62.8% from 62.5% as a percentage of sales. That operation reported a 40.5% gross profit thereby affecting 23 NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (In thousands, except per share amounts and number of stores) the total U.K. gross margin during the current quarter. The Company's overall strategy is to improve margins by introducing new products which traditionally have a higher gross profit and by continuing to increase in- house manufacturing while decreasing the use of outside suppliers in both the U.S. and the U.K. During the six month periods ended March 31, 2003 and March 31, 2002, cost of sales included under-absorbed factory overhead of $4,409 and $7,196, respectively. Catalog printing, postage, and promotion. Catalog printing, postage, and promotion expenses were $30,637 during the six month period ended March 31, 2003, compared with $21,741 in the prior comparable period, an increase of $8,896. Such advertising expenses as a percentage of sales were 5.9% during the six month period ended March 31, 2003 and 4.7% for the prior comparable period. The $8,896 increase was primarily attributable to an increase in wholesale advertising promotion and media ($5,316) and Puritan's Pride/Direct Response's advertising promotion and media ($3,761) for new products introduced and existing core products. These investments in additional advertising and sales promotions are part of the Company's strategic effort to increase long-term growth. The other segments' advertising expense variances are as follows: U.S. retail's advertising decreased $253, and U.K./Ireland retail's advertising increased $72. Selling, general and administrative expenses. Selling, general and administrative expenses were $192,546 during the six month period ended March 31, 2003, an increase of $23,997, as compared with $168,549 for the prior comparable period. As a percentage of sales, selling, general and administrative expenses were 37.1% during the six month period ended March 31, 2003 and 36.1% for the prior comparable period. Of the $23,997 increase, $5,743 was attributable to increased payroll costs mainly associated with business acquisitions and general salary increases, $2,999 to increased rent expense and additional retail U.S. and U.K./Ireland stores, $2,696 to increased freight costs mainly resulting from the Company's efforts to generate faster product delivery to customers, $3,492 to increased insurance costs mainly associated with an increase in general insurance rates, and $1,788 to increased professional fees for the implementation and integration of new software purchased. Of the $23,997 increase in selling, general and administrative cost, $4,880 is attributed to the foreign exchange translation of the British Pound. Recovery of raw material costs. During the six month period ended March 31, 2002, the Company received $5,467 in partial settlement of on-going price fixing litigation brought by the Company against certain raw material vitamin suppliers. Interest expense. Interest expense was $7,820 for the six month period ended March 31, 2003, a decrease of $2,414, compared with interest expense of $10,234 for the prior comparable period. Interest expense decreased due to the Company continuing to repay bank debt. The major components of interest expense are interest on Senior Subordinated Notes associated with the Holland & Barrett acquisition, and interest on the Credit and Guarantee Agreement used for acquisitions, capital expenditures, and other working capital needs. Miscellaneous, net. Miscellaneous, net was $3,513 for the six month period ended March 31, 2003, an increase of $1,458, compared to $2,055 for the prior comparable period. Such increase was primarily attributable to increases in investment income ($750) and increases in net gains on sale of property plant and equipment ($918) offset by exchange rate fluctuations ($11), and other miscellaneous income decreases ($199). 24 NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (In thousands, except per share amounts and number of stores) Income Taxes. The Company's income tax expense is impacted by a number of factors, including the amount of taxable earnings derived in foreign jurisdictions with tax rates that are lower than the U.S. federal statutory rate, state tax rates in the jurisdictions where the Company conducts business, and the Company's ability to utilize various tax credits and foreign tax credits. The effective income tax rate for the six month period ended March 31, 2003 was 33.4%, compared to 38.5% for the prior comparable period. The change in the effective rate was due to tax saving strategies implemented in fiscal 2002, some of which are carried forward and are expected to benefit future fiscal years. In addition, the effective rate decreased due to an increase in the percentage of income generated from foreign jurisdictions where the overall effective tax rate is approximately 30.5%. Net income. After income taxes, the Company had net income for the six month period ended March 31, 2003 of $36,234 (or basic and diluted earnings per share of $0.55 and $0.53, respectively), and $36,735 (or basic and diluted earnings per share of $0.56 and $0.54, respectively) for the prior comparable period. Excluding one-time events, earnings per diluted share for the first six months of 2003 and 2002 were $0.59 and $0.49, respectively. Seasonality: ------------ The Company believes that its business is not seasonal in nature. The Company may have higher net sales in a quarter depending upon when it has engaged in significant promotional activities. Liquidity and Capital Resources: -------------------------------- The Company's primary sources of liquidity and capital resources are cash generated from operations. The Company also maintains a Credit & Guarantee Agreement ("CGA"). Cash and cash equivalents totaled $33,774 and $26,229 at March 31, 2003 and September 30, 2002, respectively. The Company generated cash from operating activities of $46,681 and $67,125 during the six month periods ended March 31, 2003 and March 31, 2002, respectively. The overall decrease in cash from operating activities during the six month period ended March 31, 2003 was mainly attributable to an increase in inventory, an increase in prepaid expenses and other current assets, and a smaller increase in accounts receivable as compared to the prior like period. Inventory levels increased over the prior comparable period in order to maintain high fulfillment shipment levels and to quickly respond to customer orders. In addition, the Company is aggressive in obtaining new distribution channels for its products and accordingly inventory levels are increased to respond to anticipated demand. Increases in inventory are also attributable to the new CVS supplier contract and the recent addition of the Marc's store chain. Last quarter the Company was named exclusive supplier for CVS private label nutritional supplements; shipments commenced in April 2003. Marc's stores, headquartered in Cleveland, Ohio, are expected to carry over 180 SKUs of Nature's Bounty brand products. The increase in prepaid expenses and other current assets is mainly attributable to a change in insurance carriers (dates of coverage do not correspond with the prior like period, increasing the prepaid cost) and increases in general insurance rates. The increase in accounts receivable and cash was primarily due to increased sales and improved collections. The number of days sales outstanding during the six month periods ended March 31, 2003 and March 31, 2002 was 53 days and 54 days, respectively. Cash used in investing activities was $28,776 and $12,181 during the six month periods ended March 31, 2003 and March 31, 2002, respectively. During the six month period ended March 31, 2003, 25 NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (In thousands, except per share amounts and number of stores) cash flows used in investing activities consisted primarily of net cash paid for the FSC and GNC U.K. business acquisitions ($14,786), the purchase of property, plant and equipment ($17,686), partially offset by proceeds from the sale of property, plant and equipment ($1,293), and cash received that was previously held in escrow from the fiscal 2001 acquisitions of Global Health Sciences ($1,850) and NatureSmart ($553). During the six month period ended March 31, 2002 cash flows used in investing activities consisted primarily of cash paid for the business acquisitions of Knox ($4,456) and Healthcentral.com ($2,800), the purchase of property, plant and equipment ($10,516), partially offset by cash received that was previously held in escrow for the acquisition of Global Health Sciences ($4,600) and proceeds from the sale of property, plant and equipment ($991). Net cash used in financing activities was $11,440 and $37,470 during the six months ended March 31, 2003 and March 31, 2002, respectively. For the six month period ended March 31, 2003 cash flows used in financing activities included principal payments under long-term debt agreements ($11,616), partially offset by proceeds from the exercise of stock options ($176). Cash used in financing activities during the six month period ended March 31, 2002 included principal payments under long-term debt agreements ($38,027), partially offset by proceeds from the exercise of stock options ($557). For the six month period ended March 31, 2003, working capital increased $8,091 to $193,801. This increase was primarily attributable to the Company increasing its current assets, specifically cash, accounts receivables, inventories, and prepaid expenses and other current assets. Continued growth in sales of the Company's principal promoted products during the period, as noted above, contributed to such increases in cash, accounts receivable and inventories. The Company continues to respond to consumer preferences and to monitor the market for trends and ideas, and these efforts have translated into increased sales. The CGA is comprised of one term loan and a revolving credit facility. At March 31, 2003, there were borrowings of $20,063 under one term loan, which is classified as current at March 31, 2003. This term loan has an annual borrowing rate of 2.916% and is payable in quarterly installments of $5,563. At March 31, 2003, the Company had no borrowing under its $50,000 revolving credit facility, which expires on September 30, 2003. Stand-by letters of credit totaling $686 were outstanding under such facility at March 31, 2003. The Company is required to pay a commitment fee, which varies between .25% and .50% per annum, depending on the Company's ratio of Debt to EBITDA, on any unused portion of the revolving credit facility. The CGA provides that loans be made under a selection of rate formulas, including prime or Euro currency rates. Virtually all of the Company's assets are collateralized under the CGA. In addition, the Company is subject to the maintenance of various financial ratios and covenants. In connection with the August 1997 acquisition of Holland & Barrett, the Company issued $150,000 of 8-5/8% senior subordinated Notes ("Notes") due in 2007. The Notes are unsecured and subordinated in right of payment for all existing and future indebtedness of the Company. 26 NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (In thousands, except per share amounts and number of stores) A summary of contractual cash obligations as of March 31, 2003 is as follows:
Payments Due By Period --------------------------------------------------------------- Less Than 1-3 4-5 After 5 Total 1 Year Years Years Years ----- --------- ----- ----- ------- Long-term debt and capital leases $175,365 $ 20,665 $ 2,045 $150,235 $ 2,420 Operating leases 351,422 52,173 89,089 73,306 136,854 Purchase commitments 43,027 43,027 Capital commitments 14,512 9,912 4,600 Employment & consulting agreements 5,953 1,858 2,340 1,755 Standby letter of credit 686 686 -------- -------- ------- -------- -------- Total contractual cash obligations $590,965 $128,321 $98,074 $225,296 $139,274 ======== ======== ======= ======== ========
The Company conducts retail operations under operating leases, which expire at various dates through 2029. Some of the leases contain renewal options and provide for contingent rent based upon sales plus certain tax and maintenance costs. Future minimum rental payments (excluding real estate tax and maintenance costs) for retail locations and other leases that have initial or noncancelable lease terms in excess of one year are noted in the above table. The Company was committed to make future purchases under various purchase arrangements with fixed price provisions aggregating approximately $43,027 at March 31, 2003. During the six months ended March 31, 2003 no one supplier individually represented greater than 10% of the Company's raw material purchases. The Company does not believe that the loss of any single supplier would have a material adverse effect on the Company's consolidated financial condition or results of operations. The Company had approximately $612 in open capital commitments at March 31, 2003, primarily related to computer hardware and software. Also, the Company has a commitment of approximately $13,900 for the construction of an automated warehouse over the next 18 months. The Company believes that existing cash balances, internally-generated funds from operations, and amounts available under the CGA will provide sufficient liquidity to satisfy the Company's working capital needs for the next 12 months and to finance anticipated capital expenditures incurred in the normal course of business and potential acquisitions. The Company has employment agreements with two of its executive officers. The agreements, entered into in October 2002, have a term of 5 years and are automatically renewed each year thereafter unless either party notifies the other to the contrary. These agreements provide for minimum salary levels and contain provisions regarding severance and changes in control of the Company. The annual commitment for salaries to these two officers as of March 31, 2003 was approximately $1,170. In addition, four members of Holland & Barrett's ("H&B") senior executive staff have service contracts terminable by the Company upon twelve months notice. The aggregate commitment for such H&B executive staff as of March 31, 2003 was approximately $350. 27 NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (In thousands, except per share amounts and number of stores) The Company maintains a consulting agreement with Rudolph Management Associates, Inc. for the services of Arthur Rudolph, a director of the Company. The consulting fee (which is paid monthly) is fixed by the Board of Directors of the Company, provided that in no event will the consulting fee be at a rate lower than $450 per year. In addition, Mr. Arthur Rudolph receives certain fringe benefits accorded to other executives of the Company. The Company has grown through acquisitions, and expects to continue seeking to acquire entities in similar or complementary businesses. Such acquisitions are likely to require the incurrence and/or assumption of indebtedness and/or obligations, the issuance of equity securities or some combination thereof. In addition, the Company may from time to time determine to sell or otherwise dispose of certain of its existing businesses, the Company cannot predict if any such transactions will be consummated, nor the terms or forms of consideration which might be required in any such transactions. Inflation: ---------- Management believes that inflation did not have a significant impact on the Company's operations. Inflation has not had a significant impact on the Company in the past three years nor is it expected to have a significant impact in the foreseeable future. Financial Covenants and Credit Rating: -------------------------------------- The Company's credit arrangements impose certain restrictions on the Company regarding capital expenditures and limit the Company's ability to: incur additional indebtedness, dispose of assets, make repayments of indebtedness or amendments of debt instruments, pay distributions, create liens on assets and enter into sale and leaseback transactions, investments, loans or advances and acquisitions. Such restrictions could limit the Company's ability to respond to market conditions, to provide for unanticipated capital investments or to take advantage of business or acquisition opportunities. At March 31, 2003, Moody's Investors Service, Inc. rated the Company's Notes as a B1, and the CGA's implied rating as a Ba2; Standard & Poor's rated the Notes as a B+, the CGA as a BB+, and gave the Company an overall corporate credit rating as BB. Both credit agencies' ratings remained unchanged from the prior period. New accounting developments: ---------------------------- In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires, among other things, that entities record the fair value of a liability for an asset retirement obligation in the period in which the obligation is incurred. This statement, which is effective for the Company October 1, 2003, is not expected to have a material impact on the Company. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived- Assets to Be Disposed Of." SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of. Although retaining many of the 28 NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (In thousands, except per share amounts and number of stores) fundamental recognition and measurement provisions of SFAS No. 121, the Statement significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Under SFAS No. 144, assets held-for- sale are stated at the lower of their fair values or carrying amounts and depreciation is no longer recorded. The Company adopted SFAS No. 144 effective October 1, 2002. There was no impact on the Company as a result of adopting SFAS No. 144. In July 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which requires that a liability for a cost associated with an exit or disposal activity be recognized when incurred. This Statement also establishes that fair value is the objective for initial measurement of the liability. Severance pay under SFAS 146, in many cases, would be recognized over time rather than up-front. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. As of March 31, 2003, the Company has not entered into any such activities and therefore the adoption of this standard did not impact its consolidated financial position, results of operations, or disclosure requirements. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others" (the "Interpretation"), which addresses the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. The Interpretation also requires the guarantor to recognize a liability for the non-contingent component of the guarantee, which is the obligation to stand ready to perform in the event that specified triggering events or conditions occur. The recognition and measurement provisions of the Interpretation are effective for all guarantees entered into or modified after December 31, 2002. The Company does not enter into such transactions and therefore the adoption of this standard did not impact its consolidated financial position, results of operations, or disclosure requirements. In December 2002, the FASB issued Statement No. 148, "Accounting for Stock- Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock- based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company is required to follow the prescribed format and provide the additional disclosures required by SFAS No. 148 in its annual financial statements for the year ending September 30, 2003 and must also provide the disclosures in its quarterly reports containing condensed consolidated financial statements for interim periods beginning in the current quarter. There were no grants during the six month periods ended March 31, 2003 and March 31, 2002; therefore, the pro forma and actual net income and related EPS are the same as amounts reported. In January 2003, the Emerging Issues Task Force ("EITF") issued EITF Issue No. 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor," which states that cash consideration received from a vendor is presumed to be a reduction of the prices of the vendor's products or services and should, therefore, be characterized as a reduction of cost of sales when recognized in the statement of operations. That presumption is 29 NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (In thousands, except per share amounts and number of stores) overcome when the consideration is either a reimbursement of specific, incremental, identifiable costs incurred to sell the vendor's products, or a payment for assets or services delivered to the vendor. EITF Issue No. 02-16 is effective for arrangements entered into after November 21, 2002. The adoption of EITF Issue No. 02-16 did not have a material impact on the Company's consolidated financial position or results of operations. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities," an interpretation of ARB No. 51. Interpretation 46 addresses consolidation by business enterprises of variable interest entities. Interpretation 46 applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first year or interim period beginning after June 15, 2003 to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company has not yet determined the impact of implementing Interpretation 46. 30 ITEM 3: NBTY, INC. and SUBSIDIARIES QUANTITATIVE and QUALITATIVE DISCLOSURES ABOUT MARKET RISK Quantitative and Qualitative Disclosures About Market Risk: ----------------------------------------------------------- The Company is subject to currency and interest rate risks that arise from normal business operations. The Company regularly assesses these risks and has not entered into any significant hedging transactions. To manage the potential loss arising from changing interest rates and its impact on long-term debt, the Company's policy is to manage interest rate risks by maintaining a combination of fixed and variable rate financial instruments. 31 ITEM 4: NBTY, INC. and SUBSIDIARIES CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures ------------------------------------------------ An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of the Company's disclosure controls and procedures within 90 days of this report. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of the evaluation date. Changes in Internal Controls ---------------------------- There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation. 32 NBTY, INC. and SUBSIDIARIES PART II OTHER INFORMATION Item 1. Legal Proceedings The Company is involved from time to time in claims, proceedings and litigation arising from its business and property ownership. The Company does not believe that any such claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on the Company's consolidated financial position or results of its operations. On April 14, 2003, a complaint was filed by the United States of America against the Company arising from certain pseudoephedrine sales from November 2000 through December 2002. The complaint, filed in U.S. District Court for the Eastern District of New York, alleges technical recordkeeping and reporting violations of the Controlled Substances Act, 21 U.S.C. Sections 801-904 and Controlled Substances Import and Export Act, 21 U.S.C. Sections 951-971 in a fraction of the Company's sales of over-the-counter antihistamine and decongestant products containing pseudoephedrine. Total sales of such products generated approximately $160, or only 0.0002 percent of the Company's total sales for the fiscal years ended September 30, 2001 and September 30, 2002, respectively. The Company has cooperated in all respects with the Drug Enforcement Administration in its investigation of sales identified in the complaint. Accordingly, the Company believes that there is no valid basis nor precedent for the penalties sought, and intends to launch a vigorous defense. However, because this action is in its early stages, no determination can be made at this time as to the final outcome of this action. Item 6. Exhibits and Reports on Form 8-K a. Exhibits Exhibit 99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 b. Reports on Form 8-K during the quarter ended March 31, 2003. There was no Form 8-K filed during the quarter covered by this report. 33 NBTY, INC. and SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NBTY, INC. (Registrant) Date: May 2, 2003 By: /s/ Scott Rudolph ----------- -------------------------------- Scott Rudolph Chairman and Chief Executive Officer (Principal Executive Officer) Date: May 2, 2003 By: /s/ Harvey Kamil ----------- -------------------------------- Harvey Kamil President and Chief Financial Officer (Principal Financial and Accounting Officer) 34 NBTY, INC. and SUBSIDIARIES CERTIFICATIONS I, Scott Rudolph, certify that: 1. I have reviewed this quarterly report on Form 10-Q of NBTY, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 2, 2003 ----------- /s/ Scott Rudolph Scott Rudolph Chief Executive Officer 35 NBTY, INC. and SUBSIDIARIES CERTIFICATIONS I, Harvey Kamil, certify that: 1. I have reviewed this quarterly report on Form 10-Q of NBTY, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 2, 2003 ----------- /s/ Harvey Kamil Harvey Kamil Chief Financial Officer 36