-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BKa6p8oR6ldI+bDn+lF6f0GDw/rOpuOLwepzLwol6+M/Iikjx/RvYE6xWDQCnzS2 5mxYs2oQEiJTLXB6J/vmKQ== 0000910647-03-000288.txt : 20030805 0000910647-03-000288.hdr.sgml : 20030805 20030804205424 ACCESSION NUMBER: 0000910647-03-000288 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030805 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NBTY INC CENTRAL INDEX KEY: 0000070793 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 112228617 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-10666 FILM NUMBER: 03822070 BUSINESS ADDRESS: STREET 1: 90 ORVILLE DR CITY: BOHEMIA STATE: NY ZIP: 11716 BUSINESS PHONE: 5165679500 MAIL ADDRESS: STREET 1: 90 ORVILLE DRIVE CITY: BOHEMIA STATE: NY ZIP: 11716 FORMER COMPANY: FORMER CONFORMED NAME: NATURES BOUNTY INC DATE OF NAME CHANGE: 19920703 10-Q 1 nbty-q3.txt BODY OF FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ________________________ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended June 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from __________ to __________ Commission File Number 0-10666 NBTY, INC. (Exact Name of Registrant as Specified in Its Charter) DELAWARE 11-2228617 (State or Other Jurisdiction of (IRS Employer Identification No.) Incorporation or Organization) 90 Orville Drive Bohemia, New York 11716 (Address of Principal Executive Offices, Including Zip Code) (631) 567-9500 (Registrant's Telephone Number, Including Area Code) ________________________ Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Shares Outstanding Title of Class as of July 28, 2003 -------------- ------------------- Common Stock Par value $.008 per share 66,456,570 NBTY, INC. and SUBSIDIARIES FORM 10-Q FISCAL QUARTER ENDED JUNE 30, 2003 INDEX PART I. Financial Information Page ITEM 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets 1 Condensed Consolidated Statements of Income 2 Condensed Consolidated Statements of Stockholders' Equity and Comprehensive Income 3 Condensed Consolidated Statements of Cash Flows 4 - 5 Notes to Condensed Consolidated Financial Statements 6 - 15 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 - 30 ITEM 3. Qualitative and Quantitative Disclosures about Market Risk 31 ITEM 4. Controls and Procedures 32 PART II. Other Information ITEM 1. Legal Proceedings 33 ITEM 4. Submission of Matters to a Vote of Security Holders 33 ITEM 6. Exhibits and Reports on Form 8-K 34 Signatures 35 Certifications 36 - 37 Exhibits 38 - 39 ITEM 1: NBTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars and shares in thousands) June 30, September 30, 2003 2002 -------- ------------- Assets Current assets: Cash and cash equivalents $ 38,459 $ 26,229 Investments in bonds, at fair value 6,191 8,194 Accounts receivable, less allowance for doubtful accounts of $4,237 at June 30, 2003 and $4,194 at September 30, 2002 56,067 41,362 Inventories 235,477 204,402 Deferred income taxes 12,206 11,206 Prepaid expenses and other current assets 45,838 24,691 -------- -------- Total current assets 394,238 316,084 Property, plant and equipment, net 223,063 216,245 Goodwill 174,888 144,999 Intangible assets, net 44,864 48,413 Other assets 8,522 8,936 -------- -------- Total assets $845,575 $734,677 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt and capital lease obligations $ 15,079 $ 23,044 Accounts payable 73,884 48,616 Accrued expenses and other current liabilities 87,691 58,714 -------- -------- Total current liabilities 176,654 130,374 Long-term debt 154,422 163,874 Deferred income taxes 16,692 16,928 Other liabilities 3,928 4,244 -------- -------- Total liabilities 351,696 315,420 -------- -------- Commitments and contingencies Stockholders' equity: Common stock, $.008 par; authorized 175,000 shares; issued and outstanding 66,263 shares at June 30, 2003 and 66,133 shares at September 30, 2002 530 529 Capital in excess of par 128,282 126,283 Retained earnings 353,570 287,868 -------- -------- 482,382 414,680 Accumulated other comprehensive income 11,497 4,577 -------- -------- Total stockholders' equity 493,879 419,257 -------- -------- Total liabilities and stockholders' equity $845,575 $734,677 ======== ========
See notes to condensed consolidated financial statements. 1 NBTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars and shares in thousands, except per share amounts) For the three months For the nine months ended June 30, ended June 30, -------------------- -------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Net sales $308,474 $251,987 $827,701 $718,621 -------- -------- -------- -------- Costs and expenses: Cost of sales 141,196 111,907 372,555 325,805 Discontinued product charge 6,000 Catalog printing, postage and promotion 15,378 12,544 46,015 34,285 Selling, general and administrative 110,924 89,217 303,470 257,765 Litigation recovery of raw material costs (15,051) (20,518) -------- -------- -------- -------- 267,498 198,617 728,040 597,337 -------- -------- -------- -------- Income from operations 40,976 53,370 99,661 121,284 -------- -------- -------- -------- Other income (expense): Interest (3,890) (4,354) (11,709) (14,588) Miscellaneous, net 2,023 270 5,536 2,325 -------- -------- -------- -------- (1,867) (4,084) (6,173) (12,263) -------- -------- -------- -------- Income before income taxes 39,109 49,286 93,488 109,021 Provision for income taxes 9,641 19,579 27,786 42,577 -------- -------- -------- -------- Net income $ 29,468 $ 29,707 $ 65,702 $ 66,444 ======== ======== ======== ======== Net income per share: Basic $ 0.44 $ 0.45 $ 0.99 $ 1.01 Diluted $ 0.43 $ 0.44 $ 0.96 $ 0.98 Weighted average common shares outstanding: Basic 66,263 66,056 66,232 65,895 Diluted 68,287 68,017 68,233 67,723
See notes to condensed consolidated financial statements. 2 NBTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME FOR THE YEAR ENDED SEPTEMBER 30, 2002 AND NINE MONTHS ENDED JUNE 30, 2003 (Unaudited)
(Dollars and shares in thousands) Common Stock Accumulated ---------------- Capital Stock Other Total Total Number of in Excess Retained Subscriptions Comprehensive Stockholders' Comprehensive Shares Amount of Par Earnings Receivable Income (Loss) Equity Income --------- ------ --------- -------- ------------- ------------- ------------- -------------- Balance, September 30, 2001 65,724 $526 $122,513 $193,184 $(839) $(12,978) $302,406 Components of comprehensive income: Net income 95,791 95,791 $ 95,791 Foreign currency translation adjustment 17,603 17,603 17,603 Change in net unrealized gain on available-for-sale investments (48) (48) (48) -------- $113,346 ======== Treasury stock retired (71) (1) (113) (1,107) (1,221) Exercise of stock options 480 4 2,068 2,072 Tax benefit from exercise of stock options 1,815 1,815 Repayment of stock subscrip- tions receivable 839 839 ------------------------------------------------------------------------------- Balance, September 30, 2002 66,133 529 126,283 287,868 - 4,577 419,257 Components of comprehensive income: Net income 65,702 65,702 $ 65,702 Foreign currency translation adjustment 8,923 8,923 8,923 Change in net unrealized loss on available-for-sale investments (2,003) (2,003) (2,003) -------- $ 72,622 ======== Exercise of stock options 30 176 176 Tax benefit from exercise of stock options 113 113 Shares issued and contributed to ESOP 100 1 1,710 1,711 ------------------------------------------------------------------------------- Balance, June 30, 2003 66,263 $530 $128,282 $353,570 $ - $ 11,497 $493,879 ===============================================================================
See notes to condensed consolidated financial statements. 3 NBTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands) For the nine months ended June 30, ---------------------- 2003 2002 ---- ---- Cash flows from operating activities: Net income $ 65,702 $ 66,444 Adjustments to reconcile net income to net cash provided by operating activities: Gain on disposal/sale of property, plant and equipment (843) (75) Depreciation and amortization 32,539 31,512 Foreign currency exchange rate (gain) loss (970) 463 Amortization of deferred financing costs 591 585 Amortization of bond discount 93 93 Allowance for doubtful accounts (43) 1,384 Deferred income taxes (1,000) Compensation expense for ESOP 1,283 Tax benefit from exercise of stock options 113 1,385 Changes in assets and liabilities, net of acquisitions: Accounts receivable (12,912) (11,295) Inventories (13,323) 6,984 Prepaid expenses and other current assets (17,201) (8,206) Other assets (1,209) 1,074 Accounts payable 5,743 (2,571) Accrued expenses and other current liabilities 21,330 19,088 Other liabilities (317) 42 -------- -------- Net cash provided by operating activities 79,576 106,907 -------- -------- Cash flows from investing activities: Cash paid for acquisitions, net of cash acquired (32,049) (7,256) Release of cash held in escrow 2,403 4,600 Purchase of property, plant and equipment (24,852) (16,427) Proceeds from sale of property, plant and equipment 1,454 1,004 Proceeds from sale of intangibles 25 Purchase of investments (8,242) -------- -------- Net cash used in investing activities (53,044) (26,296) -------- -------- Cash flows from financing activities: Principal payments under long-term debt agreements and capital leases (17,510) (79,477) Proceeds from stock options exercised 176 1,385 -------- -------- Net cash used in financing activities (17,334) (78,092) -------- -------- Effect of exchange rate changes on cash and cash equivalents 3,032 1,623 -------- --------
Continued See notes to condensed consolidated financial statements. 4 NBTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued) (Unaudited)
(Dollars and shares in thousands) For the nine months ended June 30, ---------------------- 2003 2002 ---- ---- Net increase in cash and cash equivalents $ 12,230 $ 4,142 Cash and cash equivalents at beginning of period 26,229 34,434 -------- -------- Cash and cash equivalents at end of period $ 38,459 $ 38,576 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 8,656 $ 11,427 Cash paid during the period for income taxes $ 21,035 $ 30,619
Non-cash investing and financing activities: Acquisitions accounted for under the purchase method are summarized as follows:
For the nine months ended June 30, ------------------- 2003 2002 ---- ---- Fair value of assets acquired $ 59,505 $7,256 Liabilities assumed (24,315) - Less: Cash acquired (3,141) - -------- ------ Net cash paid $ 32,049 $7,256 ======== ======
During the nine months ended June 30, 2003, the Company issued 100 shares of NBTY stock (having a total then market value of approximately $1,711) as a contribution to the ESOP plan. See notes to condensed consolidated financial statements. 5 NBTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share amounts and number of stores) 1. Principles of consolidation and basis of presentation The accompanying condensed consolidated financial statements as of June 30, 2003 and September 30, 2002 and for the three and nine months ended June 30, 2003 and June 30, 2002 have been prepared by NBTY, Inc. and Subsidiaries (the "Company") and have not been audited. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The Company's fiscal year ends on September 30. All intercompany accounts and transactions have been eliminated. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements include all normal and recurring adjustments necessary to present fairly its consolidated financial position, results of operations and cash flows. The results of operations for the three and nine months ended June 30, 2003 are not necessarily indicative of the results to be expected for the full year ending September 30, 2003. As these are condensed consolidated financial statements, this report should be read in conjunction with the Company's consolidated financial statements and the notes included in its Annual report on Form 10-K for the fiscal year ended September 30, 2002. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. The most significant estimates include the valuation of inventories, the allowance for doubtful accounts receivable, valuation of deferred tax assets, and the recoverability of long-lived assets. Actual results could differ from those estimates. Stock-based compensation The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and provides pro forma disclosures of net income and earnings per share as if the method prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation", had been applied in measuring compensation expense. In December 2002, the FASB issued Statement No. 148, "Accounting for Stock- Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In 6 NBTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share amounts and number of stores) addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company is required to follow the prescribed format and provide the additional disclosures required by SFAS No. 148 in its annual financial statements for the year ending September 30, 2003 and must also provide the disclosures in its quarterly reports containing condensed consolidated financial statements for interim periods. There were no grants during the nine month periods ended June 30, 2003 and June 30, 2002; therefore, the pro forma and actual net income and related EPS are the same as amounts reported. Foreign currency The financial statements of international subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and an average exchange rate for each period for revenues, expenses, gains and losses. Where the local currency is the functional currency, translation adjustments are recorded as a separate component of stockholders' equity. Reclassifications Certain reclassifications have been made to conform prior year amounts to the current year presentation. New accounting developments In June 2001, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires, among other things, that entities record the fair value of a liability for an asset retirement obligation in the period in which the obligation is incurred. This statement, which will become effective for the Company on October 1, 2003, is not expected to have a material impact on its consolidated financial position or results of operations. In November 2002, the FASB issued Emerging Issues Task Force (EITF) Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF 00-21 addresses certain aspects of the accounting by a company for arrangements under which it will perform multiple revenue-generating activities. EITF 00- 21 addresses when and how an arrangement involving multiple deliverables should be divided into separate units of accounting. EITF 00-21 provides guidance with respect to the effect of certain customer rights due to company nonperformance on the recognition of revenue allocated to delivered units of accounting. EITF 00-21 also addresses the impact on the measurement and/or allocation of arrangement consideration of customer cancellation provisions and consideration that varies as a result of future actions of the customer or the company. Finally, EITF 00-21 provides guidance with respect to the recognition of the cost of certain deliverables that are excluded from the revenue accounting arrangement. The 7 NBTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share amounts and number of stores) provisions of EITF 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company does not expect the adoption of EITF 00-21 to have a material effect on its consolidated financial position or results of operations. In January 2003, the FASB issued Interpretation No. 46, ("FIN") "Consolidation of Variable Interest Entities," an interpretation of Accounting Research Bulletin ("ARB") No. 51. FIN 46 addresses consolidation by business enterprises of variable interest entities. FIN 46 applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first year or interim period beginning after June 15, 2003 to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company believes that the provisions of FIN 46 will not have any impact on the Company's consolidated financial position or results of operations. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company does not expect the adoption of SFAS 149 to have a material impact on its consolidated financial position or results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and must be applied to the Company's existing financial instruments effective July 1, 2003, the beginning of the first fiscal period after June 15, 2003. The Company has not entered into any financial instruments within the scope of SFAS 150 since May 31, 2003, nor does it currently hold any significant financial instruments within its scope. 2. Acquisitions On May 20, 2003, the Company acquired the De Tuinen chain of retail stores from Ahold. The De Tuinen chain operates 44 company owned stores and 21 franchised stores located throughout the Netherlands. This operation had total revenue of approximately 30 million euro ($30.2 million USD) during 2002 and has been a wholly owned subsidiary of the Ahold group of companies since 1991. The purchase price for this business was approximately $18,431. Assets acquired and liabilities assumed include cash ($1,168), accounts receivable ($3,693), inventories ($5,572), property, plant and equipment ($5,105), and current liabilities ($1,956). The excess cost of investment over the net book value amounted to $4,849 and is classified as goodwill. This transaction stipulates adjustments to the purchase price once the "Closing Date Equity", as 8 NBTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share amounts and number of stores) defined, is finalized. The Company is still in the process of finalizing such valuation; therefore the acquired assets and liabilities discussed above are subject to change. This acquisition contributed $4,286 in sales and a marginal operating loss during the current fiscal period. On March 10, 2003, the Company acquired Health & Diet Group Ltd. and the FSC wholesale business from Royal Numico N.V. Health & Diet Group owns and operates 49 GNC stores in the U.K. FSC is a Manchester, U.K.-based wholesale operation whose products are sold to health food stores and pharmacies. The FSC branded products include comprehensive ranges of multivitamins, single vitamins and minerals, herbal formulas, and tinctures. These operations had total sales of approximately $57,000 during 2002. The purchase price for these businesses was approximately $16,759. Assets acquired and liabilities assumed include cash ($1,973), accounts receivable ($1,522), inventories ($9,512), other current assets ($2,429), property, plant and equipment ($5,150), and current liabilities ($22,360). The excess cost of investment over the net book value amounted to $18,533 and is classified as goodwill. This transaction stipulates adjustments to the purchase price for agreed upon working capital requirements and inventory valuation procedures to be performed. The Company is still in the process of finalizing its valuation analysis and therefore the assets and liabilities allocated above are subject to change. This acquisition contributed $16,769 in sales and a $348 operating loss during the current fiscal period. On December 6, 2001, the Company acquired out of bankruptcy certain assets of HealthCentral.com for approximately $2,800 in cash. The assets include the customer list of the mail order operation, L&H Vitamins, and the customer list and URL's of Vitamins.com and WebRx.com. Assets acquired were classified as intangibles, specifically as a customer list ($2,800) which is being amortized over 15 years. These operations had sales for the last 12 months, prior to acquisition date, of approximately $15,000 and a combined customer list of approximately 1,800 names, which has been merged into the existing customer base of the Puritan's Pride/Direct Response business. On December 13, 2001, the Company acquired certain assets of the Knox NutraJoint and Knox for Nails nutritional supplement business from Kraft Foods North America, Inc. for approximately $4,456 in cash. Assets acquired include inventory ($2,456), and intangibles ($2,000). Approximately $1,800 of the $2,000 has been classified as a trademark with an indefinite life. Kraft's revenues for these brands were approximately $15,000 in 2001. 3. Comprehensive income Total comprehensive income for the Company includes net income, the effects of foreign currency translation and unrealized (losses) gains on available-for-sale securities, which are charged or credited to the cumulative other comprehensive income account within stockholders' equity. Total comprehensive income for the three and nine month periods ended June 30, 2003 and 2002 are as follows: 9 NBTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share amounts and number of stores)
For the three months For the nine months ended June 30, ended June 30, -------------------- ------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Net income $29,468 $29,707 $65,702 $66,444 Changes in: Unrealized holding (losses) gains (1,821) $ 316 (2,003) $ 316 Foreign currency translation adjustments 10,794 14,495 8,923 8,758 ------- ------- ------- ------- Total comprehensive income $38,441 $44,518 $72,622 $75,518 ======= ======= ======= =======
Accumulated other comprehensive income, which is classified as a separate component of stockholders' equity, is comprised of net gains on foreign currency translation of $13,548 and $4,625 at June 30, 2003 and September 30, 2002, respectively, and net unrealized holding losses on available-for- sale securities of $2,051 at June 30, 2003 and $48 at September 30, 2002, respectively. 4. Investments in bonds The Company classifies its investments in bonds as available for sale and reports them at fair market value (based on quoted market prices), with net unrealized gains or losses on the securities recorded as accumulated other comprehensive income in stockholders' equity. Market quotes may not represent firm bids of such dealers or prices for actual sales. There is only a thinly traded market for such securities and market ratings as of June 30, 2003 are as follows: Moody's Investors Service, Inc. "Moody's" rated these debt securities as Caa2 and Standard & Poor's rated these debt securities as a CC. 5. Inventories The components of inventories are as follows:
June 30, September 30, 2003 2002 -------- ------------- Raw materials $ 80,306 $ 77,051 Work-in-process 9,662 8,527 Finished goods 145,509 118,824 -------- -------- $235,477 $204,402 ======== ========
6. Earnings per share (EPS) Basic EPS computations are based on the weighted average number of common shares outstanding during the three and nine month periods ended June 30, 2003 and June 30, 2002. 10 NBTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share amounts and number of stores) Diluted EPS includes the dilutive effect of outstanding stock options, as if exercised. The following is a reconciliation between basic and diluted EPS:
For the three months For the nine months ended June 30, ended June 30, -------------------- ------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Numerator: Numerator for basic EPS - income available to common stockholders $29,468 $29,707 $65,702 $66,444 ======= ======= ======= ======= Numerator for diluted EPS - income available to common stockholders $29,468 $29,707 $65,702 $66,444 ======= ======= ======= ======= Denominator: Denominator for basic EPS - 66,263 66,056 66,232 65,895 weighted-average shares Effect of dilutive securities: Stock options 2,024 1,961 2,001 1,828 ------- ------- ------- ------- Denominator for diluted EPS - weighted-average shares 68,287 68,017 68,233 67,723 ======= ======= ======= ======= Net EPS: Basic EPS $ 0.44 $ 0.45 $ 0.99 $ 1.01 ======= ======= ======= ======= Diluted EPS $ 0.43 $ 0.44 $ 0.96 $ 0.98 ======= ======= ======= =======
7. Goodwill and Intangible Assets SFAS No. 142 requires that goodwill and other intangible assets with indefinite useful lives not be amortized but, instead, tested for impairment at least annually. The Company continues to amortize other intangible assets, consisting primarily of customer lists, trademarks, and covenants not to compete using the straight line method over their estimated useful lives of two to fifteen years. The carrying amount of acquired intangible assets as of June 30, 2003 and September 30, 2002 is as follows:
June 30, 2003 September 30, 2002 ------------------------------ ------------------------------ Gross carrying Accumulated Gross carrying Accumulated Amortization amount Amortization amount Amortization Period (years) -------------- ------------ -------------- ------------ -------------- Amortized intangible assets: Customer lists $61,368 $18,820 $64,283 $18,668 6 - 15 Trademark and licenses 2,414 2,397 2,429 2,188 2 - 3 Covenants not to compete 2,605 2,106 2,605 1,848 5 - 7 ------- ------- ------- ------- $66,387 $23,323 $69,317 $22,704 ======= ======= ======= ======= Unamortized intangible asset: Trademark 1,800 - 1,800 - ------- ------- ------- ------- Total intangible assets $68,187 $23,323 $71,117 $22,704 ======= ======= ======= =======
11 NBTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share amounts and number of stores) The changes in the carrying amount of goodwill by segment for the nine month period ended June 30, 2003, are as follows:
Puritan's Pride/ United States European Direct Response Retail Retail Wholesale Consolidated ---------------- ------------- -------- --------- ------------ Balance at September 30, 2002 $15,197 $7,588 $117,322 $4,892 $144,999 Acquisitions during period 23,382 23,382 Foreign currency translation 6,507 6,507 ------- ------ -------- ------ -------- Balance at June 30, 2003 $15,197 $7,588 $147,211 $4,892 $174,888 ======= ====== ======== ====== ========
Aggregate amortization expense of definite lived intangible assets for the nine months ended June 30, 2003 and June 30, 2002 was approximately $3,549 and $3,233, respectively. Estimated amortization expense, assuming no changes in the Company's intangible assets, for each of the five succeeding fiscal years, beginning with fiscal 2003, is $4,637 (2003), $4,250 (2004), $4,041 (2005), $3,981 (2006), and $3,749 (2007). 8. Segment Information: The Company is organized by sales segments on a worldwide basis. The Company's management reporting system evaluates performance based on a number of factors; however, the primary measures of performance are the sales and pretax operating income or loss (prior to corporate allocations) of each segment, as this is the key performance indicator reviewed by management. Operating income or loss for each segment does not include corporate general and administrative expenses, interest expense and other miscellaneous income/expense items. Such unallocated expenses remain in the corporate segment. Corporate also includes the manufacturing assets of the Company and accordingly, items associated with these activities, such as the discontinued product charge and the litigation recovery of raw material costs remain unallocated in the corporate segment. The Company's segment reporting disclosures for the prior periods presented have been reclassified to conform to the current year presentation. The European Retail operations do not include any transfer pricing absorption. The accounting policies of all of the operating segments are the same as those described in the summary of significant accounting policies in Note 1. The Company reports four worldwide segments: Wholesale; Retail: United States; Retail: Europe; and Puritan's Pride/Direct Response. All of the Company's products fall into one of these four segments. The Wholesale segment is comprised of several divisions each targeting specific market groups which include wholesalers, distributors, chains, pharmacies, health food stores, bulk and international customers. The Retail United States segment generates revenue through its 536 Company-operated stores of proprietary brand and third-party products. The European Retail 12 NBTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share amounts and number of stores) segment generates revenue through its 593 Company-operated stores of proprietary brand and third-party products. The Puritan's Pride/Direct Response segment generates revenue through the sale of its products primarily through mail order catalog and the Internet. Catalogs are strategically mailed to customers who order by mail or by phoning customer service representatives in New York, Illinois and the United Kingdom. The following table represents key financial information of the Company's business segments:
For the three months For the nine months ended June 30, ended June 30, -------------------- ------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Wholesale: Revenue $ 93,939 $ 80,151 $252,906 $217,676 Operating income 21,630 20,559 53,784 44,211 Depreciation and amortization 290 94 741 797 Identifiable assets, at end of period 50,613 52,937 50,613 52,937 Capital expenditures 213 485 367 1,214 Retail: United States Revenue $ 54,423 $ 51,287 $158,242 $146,347 Operating income (loss) 902 (94) 340 (5,034) Depreciation and amortization 2,639 2,850 8,576 10,305 Identifiable assets, at end of period 63,732 74,353 63,732 74,353 Capital expenditures 549 805 1,660 3,238 Locations open at end of period 536 540 536 540 Europe Revenue $ 99,202 $ 71,165 $268,903 $216,484 Operating income 19,182 18,533 64,542 59,041 Depreciation and amortization 2,708 2,007 7,247 5,985 Identifiable assets, at end of period 326,690 241,188 326,690 241,188 Capital expenditures 3,261 1,174 7,028 3,289 Locations open at end of period 593 465 593 465
13 NBTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share amounts and number of stores)
For the three months For the nine months ended June 30, ended June 30, -------------------- ------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Puritan's Pride/Direct Response Revenue $ 60,910 $ 49,384 $147,650 $138,114 Operating income 19,771 17,711 44,744 51,940 Depreciation and amortization 1,413 1,343 4,350 4,009 Identifiable assets, at end of period 82,020 84,340 82,020 84,340 Capital expenditures 138 91 632 733 Corporate: Corporate expenses $(20,509) $(18,390) $(57,749) $(49,392) Discontinued product charge (6,000) Litigation recovery of raw material costs 15,051 20,518 Depreciation and amortization - manufacturing 2,504 2,612 7,707 7,396 Depreciation and amortization - other 1,233 1,052 3,918 3,020 Corporate manufacturing identifiable assets, at end of period 322,520 272,219 322,520 272,219 Capital expenditures - manufacturing 1,028 1,297 2,792 4,236 Capital expenditures - other 1,977 2,059 12,373 3,717 Consolidated totals: Revenue $308,474 $251,987 $827,701 $718,621 Operating income 40,976 53,370 99,661 121,284 Depreciation and amortization 10,787 9,958 32,539 31,512 Identifiable assets, at end of period 845,575 725,037 845,575 725,037 Capital expenditures 7,166 5,911 24,852 16,427
Foreign subsidiaries account for approximately 38% of total assets, 18% of total liabilities and 33% of net revenues, as of and for the nine month period ended June 30, 2003. 9. Discontinued Product Charge: Effective March 15, 2003, the Company voluntarily discontinued sales of products that contain ephedra. Income from operations during the nine months ended June 30, 2003 includes a one-time charge of approximately $6,000 ($3,558 or $0.06 basic and diluted earnings per share, after tax) associated with such discontinued sales. The Company's belief that its ephedra products were safe when used as directed has been supported by scientific evidence. However, in light of adverse publicity surrounding ephedra and the current environment in the U.S., the Company believed it was in its best interest to voluntarily cease selling ephedra products, which represented an insignificant portion of the Company's overall business. 14 NBTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share amounts and number of stores) 10. Litigation Recovery of Raw Material Costs: The Company was a plaintiff in a vitamin antitrust litigation matter brought in the United States District Court in the District of Columbia against F. Hoffmann-La Roche Ltd. and others for alleged price fixing. Settlements with certain defendants were made and the Company received $20,518 ($12,619 or $0.19 basic and diluted earnings per share, after tax) in settlement of price fixing litigation during the nine months ended June 30, 2002. 11. Litigation: On April 14, 2003, a complaint was filed by the United States of America against the Company arising from certain pseudoephedrine sales from November 2000 through December 2002. The complaint, filed in U.S. District Court for the Eastern District of New York, alleges technical recordkeeping and reporting violations of the Controlled Substances Act, 21 U.S.C. Sections 801-904 and Controlled Substances Import and Export Act, 21 U.S.C. Sections 951-971 in a fraction of the Company's sales of over-the-counter antihistamine and decongestant products containing pseudoephedrine. Total sales of such products generated approximately $160 of the Company's total sales for the fiscal years ended September 30, 2001 and September 30, 2002, respectively. The Company has cooperated in all respects with the Drug Enforcement Administration in its investigation of sales identified in the complaint. Accordingly, the Company believes that there is no valid basis nor precedent for the penalties sought, and has launched a vigorous defense. However, because this action is in its early stages, no determination can be made at this time as to the final outcome of this action. 12. Income Taxes: The effective income tax rate for the nine month period ended June 30, 2003 was 29.7%, compared to 39.1% for the prior comparable period. The change in the effective rate was principally due to Company recording a $4,000 after- tax benefit to record foreign tax credits. Such benefits resulted from certain tax saving strategies implemented in fiscal 2002. These tax planning activities may also benefit future fiscal years and therefore may further reduce the Company's overall effective income tax rate. 13. Subsequent Event: On July 25, 2003, the Company completed the acquisition of Rexall Sundown, Inc. ("Rexall") from Royal Numico, N.V. for $250 million in cash. The acquisition was financed by a new senior credit facility consisting of $275 million in term loans and $100 million in a revolving credit agreement. Rexall's portfolio of nutritional supplement brands includes Rexall(R), Sundown(R), Osteo Bi-Flex(R), CarbSolutions, MET-Rx(R) and WORLDWIDE Sports Nutrition(R). Rexall had sales of $455 million for the year ended December 31, 2002. On July 25, 2003, the Company entered into a new Credit and Guarantee Agreement ("new CGA") comprised of $375,000 Senior Secured Credit Facilities. The new CGA consists of a $100,000 Revolving Credit Facility, a $50,000 Term Loan A and a $225,000 Term Loan B. Terms of the new CGA are in many instances similar to the previous one. As with the previous CGA, interest rates charged on borrowings can vary depending on the interest rate option utilized. Options for the rate can either be the Alternate Base Rate or LIBOR plus applicable margin. The revolving credit facility and term loans are scheduled to mature on the earlier of (i) fifth anniversary of the closing date for the Revolving Credit Facility and Term Loan A, and the sixth anniversary date for Term Loan B; or (ii) March 15, 2007 if the Company's 8-5/8% senior subordinated Notes due September 15, 2007 are still outstanding. The proceeds were used to fund the Rexall acquisition, to refinance the existing CGA, and to pay fees, commissions, and expenses therewith. Following the closing date, the proceeds of loans borrowed under the new Revolving Facility shall be used for general corporate purposes. Virtually all of the company's assets are collateralized under the new CGA and are subject to normal banking terms and conditions and the maintenance of various financial ratios and covenants. 15 ITEM 2: NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (In thousands, except per share amounts and number of stores) The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements of the Company and the notes thereto included elsewhere herein. Forward Looking Statements: - --------------------------- NBTY is a leading vertically integrated U.S. manufacturer and distributor of a broad line of high-quality, value-priced nutritional supplements in the United States and throughout the world. The Company markets more than 1,100 products under several brands, including Nature's Bounty(R), Vitamin World(R), Puritan's Pride(R), Holland & Barrett(R), Nutrition Headquarters(R), American Health(R) and Nutrition Warehouse(R). Information contained in this form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements, which can be identified by the use of terminology such as "subject to," "believe," "expect," "may,""plan", "estimate", "intend", "will," "should," "can," or "anticipate," or the negative thereof, or variations thereon, or similarly, discussions of strategy, although believed to be reasonable, are also forward-looking statements and are inherently uncertain. All forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from projected results. Factors that may affect such forward-looking statements include (i) slow or negative growth in the nutritional supplement industry; (ii) disruptions of business or negative impact on sales and earnings due to acts of war, terrorism, bio-terrorism, or civil unrest, or disruption of mail service; (iii) adverse publicity regarding the consumption of nutritional supplements; (iv) inability to retain customers of companies (or mailing lists) recently acquired; (v) increased competition; (vi) increased costs; (vii) loss or retirement of key members of management; (viii) increases in the cost of borrowings and unavailability of additional debt or equity capital; (ix) unavailability of, or inability to consummate, advantageous acquisitions in the future including those that may be subject to bankruptcy approval, or the inability of the Company to integrate acquisitions into the mainstream of its business; (x) changes in general worldwide economic and political conditions in the markets in which the Company may compete from time to time; (xi) the inability of the Company to gain and/or hold market share of its wholesale and retail customers; (xii) loss or reduction in ephedra sales; (xiii) unavailability of electricity in certain geographical areas; (xiv) exposure to, expense of defending and resolving, product liability claims and other litigation; (xv) the ability of the Company to successfully implement its business strategy; (xvi) the inability of the Company to manage its retail operations efficiently; (xvii) consumer acceptance of the Company's products; (xvii) the inability of the Company to renew leases on its retail locations; (xix) inability of the Company's retail stores to attain profitability; (xx) the absence of clinical trials for many of the Company's products; (xxi) sales and earnings volatility and/or trends; (xxii) The effect on Company sales of the rapidly changing nature of the Internet and on-line commerce; (xxiii) fluctuations in foreign currencies, and more particularly the British Pound; (xxv) import-export controls on sales to foreign countries; (xxvi) the inability of the Company to secure favorable new sites for, and delays in opening, new retail locations; (xxvii) introduction of new federal, state, local or foreign legislation or regulation or adverse determinations by regulators, and more particularly the Food Supplements Directive and the Traditional Herbal Medicinal Products Directive in Europe; (xxviii) the mix of the Company's products and the profit margins thereon; (xxx) the availability and pricing of raw materials; (xxxi) risk factors discussed in the Company's filings with the Securities and Exchange Commission; and (xxxii) other factors beyond the Company's control. Consequently, such forward-looking statements should be regarded solely on the Company's current plans, estimates and beliefs. 16 NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (In thousands, except per share amounts and number of stores) Readers are cautioned not to place undue reliance on forward-looking statements. The Company cannot guarantee future results, trends, events, levels of activity, performance or achievements. The Company undertakes no obligation and specifically declines any obligation to republish or revise forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events. The Company cannot guarantee future results, trends, events, levels of activity, performance or achievements. Critical Accounting Policies and Estimates: - ------------------------------------------- The Company's significant accounting policies are described in note 1 of the Notes to Consolidated Financial Statements included in its Annual Report on Form 10-K for the fiscal year ended September 30, 2002. A discussion of the Company's critical accounting policies, and the related estimates, are included in Management's Discussion and Analysis of Results of Operations and Financial Condition in its Annual Report on Form 10-K for the fiscal year ended September 30, 2002. Management has discussed the development and selection of these policies with the Company's Board of Directors and the Board of Directors has reviewed its disclosures relating to them. There have been no significant changes in the Company's existing accounting policies or estimates since its fiscal year ended September 30, 2002. General: - -------- Operating results in all periods presented reflect the impact of acquisitions. The timing of those acquisitions and the changing mix of businesses as acquired companies are integrated into the Company may affect the comparability of results from one period to another. 17 NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (In thousands, except per share amounts and number of stores) Results of Operations: - ---------------------- The following table sets forth income statement data of the Company as a percentage of net sales for the periods indicated:
For the three months For the three months Change ended June 30, ended June 30, amount -------------------- -------------------- increase 2003 2003 2002 2002 (decrease) ---- ---- ---- ---- ---------- Net sales $308,474 100% $251,987 100% $ 56,487 -------- ---- -------- ---- -------- Costs and expenses: Cost of sales 141,196 45.8% 111,907 44.4% 29,289 Catalog printing, postage and promotion 15,378 5.0% 12,544 5.0% 2,834 Selling, general and administrative 110,924 36.0% 89,217 35.4% 21,707 Litigation recovery of raw material costs - (15,051) -6.0% 15,051 -------- ---- -------- ---- -------- 267,498 86.8% 198,617 78.8% 68,881 -------- ---- -------- ---- -------- Income from operations 40,976 13.2% 53,370 21.2% (12,394) -------- ---- -------- ---- -------- Other income (expense): Interest (3,890) -1.3% (4,354) -1.7% 464 Miscellaneous, net 2,023 0.7% 270 0.1% 1,753 -------- ---- -------- ---- -------- (1,867) -0.6% (4,084) -1.6% 2,217 -------- ---- -------- ---- -------- Income before income taxes 39,109 12.6% 49,286 19.6% (10,177) Provision for income taxes 9,641 3.1% 19,579 7.8% (9,938) -------- ---- -------- ---- -------- Net income $ 29,468 9.5% $ 29,707 11.8% $ (239) ======== ==== ======== ==== ========
For the three month period ended June 30, 2003 compared to the three month period ended June 30, 2002: Net sales. Net sales in the third quarter ended June 30, 2003 were $308,474, compared with $251,987 for the prior comparable period, an increase of $56,487, or 22.4%. The $56,487 increase is comprised of: $13,788 attributable to wholesale, $3,136 attributable to US retail, $28,037 attributable to European retail, and $11,526 to the Puritan's Pride direct response/e-commerce segment. Wholesale sales were $93,939, compared to $80,151, an increase of $13,788, or 17.2%. Such increase in the wholesale segment's sales was primarily due to an increase in sales to the mass market, drug chains and supermarkets ($14,274), sales contributed by the FSC acquisition ($2,885), offset by a decrease in Global Health Sciences sales ($3,371). Products such as Coral Calcium, Flex- 18 NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (In thousands, except per share amounts and number of stores) a-min(R), and the Knox NutraJoint(R) products continue to help the Company strengthen its leading market position. In addition, increases in the wholesale segment can be attributed to the Company expanding its distribution channel from new customer accounts. One customer of the wholesale division represented, individually, more than 10% of this segment's sales for the three month period ended June 30, 2003. For the prior comparable period, two customers represented, individually, more than 10% of this segment's sales. The Company does not believe that the loss of either of these customers or any other single customer of the Company would have a material adverse effect on the Company's consolidated financial condition or results of operations. Puritan's Pride/Direct Response sales were $60,910, compared to $49,384, an increase of $11,526, or 23.3%. Such increase was a result of the Company's catalog promotion strategy and enhancing the appearance of the catalog. U.S. retail sales were $54,423, compared to $51,287, an increase of $3,136, or 6.1%. Such increase was a direct result of the Savings Passport Program, a customer loyalty program. Same store sales for stores open more than one year increased 5.4% (or $2,692). European retail sales were $99,202, compared to $71,165, an increase of $28,037, or 39.4%. Such increase was attributable to an increase in same store sales for stores open more than one year of 17.5% (or $12,361) and sales contributed by the GNC U.K. and De Tuinen acquisitions ($10,307 and $4,286 respectively). The same store sales results include the positive effect of a strong British Pound ($7,541 or 10.7%). The Company operated 536 stores in the U.S. and 593 stores in Europe as of June 30, 2003, compared to 540 stores in the U.S. and 463 in the U.K./Ireland as of June 30, 2002. Cost of sales. Cost of sales in the third quarter ended June 30, 2003 were $141,196, or 45.8% as a percentage of sales, compared to $111,907, or 44.4% for the prior comparable period. Overall, gross profit as a percentage of sales decreased to 54.2% in the third quarter ended June 30, 2003 as compared to 55.6% for the prior comparable period. The wholesale segment's gross profit decreased to 40.8% from 45% as a percentage of sales, primarily due to changes in product mix, certain promotions and an increase in sales incentives and promotion costs classified as reductions in gross sales. Puritan's Pride/Direct Response's gross profit increased to 61.5% from 59.7% as a percentage of sales. The gross profit was affected by varied catalog promotions the Company ran in the third quarter ended June 30, 2003 which did not run in the prior comparable period. During the quarter ended June 30, 2002, the Company ran the 70% off catalog in May, which typically results in a lower than average gross profit margin. The U.S. retail gross profit increased, as a percentage of sales, to 59.4% from 58.6% primarily due to the Company's introduction of new higher gross margin items. The European retail gross profit decreased to 59.6% from 62.4% as a percentage of sales primarily as a result of the recent acquisitions of GNC U.K. and De Tuinen. These operations reported gross profit of 42.8% and 39.8% respectively, thereby affecting the European retail gross margin during the current quarter. Without these newly acquired operations, gross profit as a percentage of sales would have remained relatively unchanged as compared to the prior period. The Company's overall strategy is to improve margins by introducing new products which traditionally have a higher gross profit and by continuing to increase in-house manufacturing while decreasing the use of outside suppliers. In the third quarters ended June 30, 2003 and June 30, 2002, cost of sales included charges for under-absorbed factory overhead of $2,250 and $1,887, respectively. Catalog printing, postage, and promotion. Catalog printing, postage, and promotion expenses were $15,378 in the third quarter ended June 30, 2003, compared with $12,544 in the prior comparable period, an increase of $2,834. Such advertising expenses as a percentage of sales were 5% for the third quarters ended June 30, 2003 and 2002. Of the $2,834 increase, $2,804 was attributable to the increase in promotions for products, mainly via television, magazines, newspapers and mailing 19 NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (In thousands, except per share amounts and number of stores) programs, and $30 was attributable to an increase in catalog printing costs. Puritan's Pride/Direct Response's promotion and media increased $2,128 and European Retail promotion and media increased $1,965, primarily relating to advertising incurred for new products introduced and existing core products. Investments in additional advertising and sales promotions are part of the Company's strategic effort to increase long-term growth. The other Company segments' advertising expense variances are as follows: wholesale's advertising decreased $905 and U.S. retail's advertising decreased $354. Selling, general and administrative expenses. Selling, general and administrative expenses were $110,924 in the third quarter ended June 30, 2003, an increase of $21,707, as compared with $89,217 for the prior comparable period. As a percentage of sales, selling, general and administrative expenses were 36% for the third quarter ended June 30, 2003 and 35.4% for the prior comparable period. Of the $21,707 increase, $9,052 was attributable to increased payroll costs mainly associated with business acquisitions and general salary increases, $4,200 to increased rent expense and additional U.S. retail and European retail stores, $2,853 to increased freight costs mainly resulting from the Company's efforts to generate faster product delivery to customers, $1,075 to increased insurance costs mainly associated with an increase in general insurance rates, and $1,130 to broker commissions, which was directly associated with the increase in wholesale sales. Of the $21,707 increase in selling, general and administrative cost, $2,687 is attributed to the foreign exchange translation of the British Pound. Litigation recovery of raw material costs. During the quarter ended June 30, 2002, the Company received $15,051 for the settlement of price fixing litigation brought by the Company against certain raw material vitamin suppliers. Interest expense. Interest expense was $3,890 in the third quarter ended June 30, 2003, a decrease of $464 compared with interest expense of $4,354 in the third quarter ended June 30, 2002. Interest expense decreased due to the Company continuing to repay bank debt. The major components of interest expense are interest on Senior Subordinated Notes, and interest on the Credit and Guarantee Agreement (CGA) used for acquisitions, capital expenditures and other working capital needs. Miscellaneous, net. Miscellaneous, net was $2,023 in the third quarter ended June 30, 2003, an increase of $1,753, compared to $270 in the third quarter ended June 30, 2002. Such increase was primarily attributable to exchange rate fluctuations ($1,444), increases in investment income ($653), offset by decreases in net gains on sale of property plant and equipment ($55), and other miscellaneous decreases ($289). Income Taxes. The Company's income tax expense is impacted by a number of factors, including the amount of taxable earnings derived in foreign jurisdictions with tax rates that are lower than the U.S. federal statutory rate, state tax rates in the jurisdictions where the Company conducts business, and the Company's ability to utilize various tax credits and foreign tax credits. The effective income tax rate in the third quarter ended June 30, 2003 was 24.7%, compared to 39.7% in the third quarter ended June 30, 2002. The change in the effective rate was principally due to Company recording a $4,000 after-tax benefit to record foreign tax credits. Such benefit resulted from certain tax saving strategies implemented in fiscal 2002. These tax planning activities may also benefit future fiscal years and therefore may further reduce the Company's overall effective income tax rate. In addition, the effective rate decreased due to an increase in the percentage of income generated from foreign jurisdictions where the overall effective tax rate is approximately 30.5%. 20 NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (In thousands, except per share amounts and number of stores) Net income. After income taxes, the Company had net income in the third quarter ended June 30, 2003 of $29,468 (or basic and diluted earnings per share of $0.44 and $0.43, respectively), and $29,707 (or basic and diluted earnings per share of $0.45 and $0.44, respectively) in the third quarter ended June 30, 2002. Excluding the litigation recovery of raw material costs payment received by the Company resulting from price fixing litigation (as noted above), net income would have been $20,450 for the fiscal third quarter of 2002 or $0.30 per diluted share. 21 NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (In thousands, except per share amounts and number of stores) Results of Operations: - ---------------------- The following table sets forth income statement data of the Company as a percentage of net sales for the periods indicated:
For the nine months For the nine months Change ended June 30, ended June 30, amount -------------------- -------------------- increase 2003 2003 2002 2002 (decrease) ---- ---- ---- ---- ---------- Net sales $827,701 100% $718,621 100% $109,080 -------- ---- -------- ---- -------- Costs and expenses: Cost of sales 372,555 45.0% 325,805 45.3% 46,750 Discontinued product charge 6,000 0.7% - 6,000 Catalog printing, postage and promotion 46,015 5.6% 34,285 4.8% 11,730 Selling, general and administrative 303,470 36.7% 257,765 35.9% 45,705 Litigation recovery of raw material costs - (20,518) -2.9% 20,518 -------- ---- -------- ---- -------- 728,040 88.0% 597,337 83.1% 130,703 -------- ---- -------- ---- -------- Income from operations 99,661 12.0% 121,284 16.9% (21,623) -------- ---- -------- ---- -------- Other income (expense): Interest (11,709) -1.4% (14,588) -2.0% 2,879 Miscellaneous, net 5,536 0.7% 2,325 0.3% 3,211 -------- ---- -------- ---- -------- (6,173) -0.7% (12,263) -1.7% 6,090 -------- ---- -------- ---- -------- Income before income taxes 93,488 11.3% 109,021 15.2% (15,533) Provision for income taxes 27,786 3.4% 42,577 5.9% (14,791) -------- ---- -------- ---- -------- Net income $ 65,702 7.9% $ 66,444 9.3% $ (742) ======== ==== ======== ==== ========
For the nine month period ended June 30, 2003 compared to the nine month period ended June 30, 2002: Net sales. Net sales for the nine month period ended June 30, 2003 were $827,701, compared with $718,621 for the prior comparable period, an increase of $109,080, or 15.2%. The $109,080 increase is comprised of: $35,230 attributable to wholesale, $11,895 attributable to US retail, $52,419 attributable to European retail, and $9,536 attributable to the Puritan's Pride direct response/e-commerce segment. Wholesale sales were $252,906, compared to $217,676, an increase of $35,230, or 16.2%. Such increase in the wholesale segment's sales was primarily due to an increase in sales to the mass market, drug chains and supermarkets ($29,156), an increase in Global Health Science's sales ($2,201), and sales contributed by the FSC acquisition ($3,873). Products such as Coral Calcium, 22 NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (In thousands, except per share amounts and number of stores) Flex-a-min(R), and the Knox NutraJoint(R) products continue to help the Company strengthen its leading market position. In addition, increases in the wholesale segment can be attributed to the Company expanding its distribution channel from new customer accounts. One customer of the wholesale division represented, individually, more than 10% of this segment's sales for the nine month period ended June 30, 2003. For the prior comparable period, two customers represented, individually, more than 10% of this segment's sales. The Company does not believe that the loss of either of these customers or any other single customer of the Company would have a material adverse effect on the Company's consolidated financial condition or results of operations. Puritan's Pride/Direct Response sales were $147,650, compared to $138,114, an increase of $9,536, or 6.9%. Such increase was a result of the Company's catalog promotion strategy and enhancing the appearance of the catalog. The timing of promotional catalog mailings was not comparable to the same like period a year ago. The three-for-one sales catalog, which ran from January through March last year, ran from March through May this year and generated a significant sales increase in the third quarter. U.S. retail sales were $158,242, compared to $146,347, an increase of $11,895, or 8.1%. Such increase was a direct result of the Savings Passport Program, a customer loyalty program. Same store sales for stores open more than one year increased 6.2% (or $8,714). European retail sales were $268,903, compared to $216,484, an increase of $52,419, or 24.2%. Such increase was attributable to an increase in same store sales for stores open more than one year of 15.1% (or $32,355) and sales contributed by the GNC U.K. and De Tuinen acquisitions ($12,896 and $4,286 respectively). These results include the positive effect of a strong British Pound ($22,966 or 10.6%). The Company operated 536 stores in the U.S. and 593 stores in Europe as of June 30, 2003, compared to 540 stores in the U.S. and 463 in the U.K./Ireland as of June 30, 2002. Cost of sales/Discontinued product charge. Cost of sales for the nine month period ended June 30, 2003 were $378,555, or 45.7% as a percentage of sales, compared to $325,805, or 45.3% for the prior comparable period. Overall, gross profit, as a percentage of sales, decreased to 54.3% during the nine month period ended June 30, 2003 as compared to 54.7% for the prior comparable period. Included in the current period's cost of sales is a $6,000 charge (or ..7% as a percentage of sales) for the voluntary discontinuance of sales of products containing ephedra. Without this charge, as a percentage of sales, gross profit would have increased to 55% during the nine month period ended June 30, 2003 as compared to 54.3% for the prior comparable period. The Company's belief that its ephedra products were safe when used as directed has been supported by scientific evidence. However, in light of adverse publicity surrounding ephedra and the current environment in the U.S., the Company believed it was in its best interest to voluntarily cease selling ephedra products, effective March 15, 2003, which represented an insignificant portion of the Company's overall business. The wholesale segment's gross profit increased to 41.4% from 39.8% as a percentage of sales, primarily due to higher gross margins on new product introductions and improvements in manufacturing efficiencies. Puritan's Pride/Direct Response's gross profit increased to 62% from 61.9% as a percentage of sales. The gross profit was affected by varied catalog promotions the Company ran during the current period ended June 30, 2003 which did not run in the prior comparable period. The U.S. retail gross profit increased, as a percentage of sales, to 59.2% from 58.3% primarily due to the Company's introduction of new higher gross margin items. The European retail gross profit decreased as a percentage of sales to 61.4% from 62.5%. primarily as a result of the recent acquisitions of GNC U.K. and De Tuinen. These operations reported gross profit of 42.4% and 39.8% respectively, thereby affecting the total European retail gross margin during the current nine month period. Without these newly acquired operations, gross profit as a percentage of sales would have remained relatively unchanged as compared to the prior period. The Company's overall 23 NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (In thousands, except per share amounts and number of stores) strategy is to improve margins by introducing new products which traditionally have a higher gross profit and by continuing to increase in- house manufacturing while decreasing the use of outside suppliers. During the nine month periods ended June 30, 2003 and June 30, 2002, cost of sales included charges for under-absorbed factory overhead of $6,659 and $9,082, respectively. Catalog printing, postage, and promotion. Catalog printing, postage, and promotion expenses were $46,015 during the nine month period ended June 30, 2003, compared with $34,285 in the prior comparable period, an increase of $11,730. Such advertising expenses as a percentage of sales were 5.6% during the nine month period ended June 30, 2003 and 4.8% for the prior comparable period. Of the $11,730 increase, 11,953 was attributable to the increase in promotions for products, mainly via television, magazines, newspapers and mailing programs, offset by a decrease in catalog printing costs of $223. Puritan's Pride/Direct Response's promotion and media increased $5,889, Wholesale's advertising increased $4,411 and European Retail promotion and media increased $2,038, offset by a decrease in the U.S. retail's advertising costs of $608. Increased advertising costs primarily related to promoting new products recently introduced and existing core products. Investments in additional advertising and sales promotions are part of the Company's strategic effort to increase long-term growth. Selling, general and administrative expenses. Selling, general and administrative expenses were $303,470 during the nine month period ended June 30, 2003, an increase of $45,705, as compared with $257,765 for the prior comparable period. As a percentage of sales, selling, general and administrative expenses were 36.7% during the nine month period ended June 30, 2003 and 35.9% for the prior comparable period. Of the $45,705 increase, $14,810 was attributable to increased payroll costs mainly associated with business acquisitions and general salary increases, $7,210 to increased rent expense and additional U.S. retail and European retail stores, $5,549 to increased freight costs mainly resulting from the Company's efforts to generate faster product delivery to customers, $4,568 to increased insurance costs mainly associated with an increase in general insurance rates, $2,786 to broker commissions, which was directly associated with the increase in wholesale sales, and $1,138 to increased professional fees for the implementation and integration of new software purchased. Of the $45,705 increase in selling, general and administrative cost, $6,446 is attributed to the foreign exchange translation of the British Pound. Litigation recovery of raw material costs. During the nine month period ended June 30, 2002, the Company received $20,518 for the settlement of price fixing litigation brought by the Company against certain raw material vitamin suppliers. Interest expense. Interest expense was $11,709 for the nine month period ended June 30, 2003, a decrease of $2,879, compared with interest expense of $14,588 for the prior comparable period. Interest expense decreased due to the Company continuing to repay bank debt. The major components of interest expense are interest on Senior Subordinated Notes, and interest on the Credit and Guarantee Agreement used for acquisitions, capital expenditures, and other working capital needs. Miscellaneous, net. Miscellaneous, net was $5,536 for the nine month period ended June 30, 2003, an increase of $3,211, compared to $2,325 for the prior comparable period. Such increase was primarily attributable to exchange rate fluctuations ($1,433), increases in investment income ($1,402), increases in net gains on sale of property plant and equipment ($863), offset by other miscellaneous decreases ($487). 24 NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (In thousands, except per share amounts and number of stores) Income Taxes. The Company's income tax expense is impacted by a number of factors, including the amount of taxable earnings derived in foreign jurisdictions with tax rates that are lower than the U.S. federal statutory rate, state tax rates in the jurisdictions where the Company conducts business, and the Company's ability to utilize various tax credits and foreign tax credits. The effective income tax rate for the nine month period ended June 30, 2003 was 29.7%, compared to 39.1% for the prior comparable period. The change in the effective rate was principally due to Company recording a $4,000 after-tax benefit to record foreign tax credits. Such benefits resulted from certain tax saving strategies implemented in fiscal 2002. These tax planning activities may also benefit future fiscal years and therefore may further reduce the Company's overall effective income tax rate. In addition, the effective rate decreased due to an increase in the percentage of income generated from foreign jurisdictions where the overall effective tax rate is approximately 30.5%. Net income. After income taxes, the Company had net income for the nine month period ended June 30, 2003 of $65,702 (or basic and diluted earnings per share of $0.99 and $0.96, respectively), and $66,444 (or basic and diluted earnings per share of $1.01 and $0.98, respectively) for the prior comparable period. Excluding the one-time litigation recovery of raw material costs payment received by the Company resulting from price fixing litigation (as noted above), net income would have been $53,825 for the nine month period ended June 30, 2002 or $0.79 per diluted share. Seasonality: - ------------ The Company believes that its business is not seasonal in nature. The Company may have higher net sales in a quarter depending upon when it has engaged in significant promotional activities. Liquidity and Capital Resources: - -------------------------------- The Company's primary sources of liquidity and capital resources are cash generated from operations. The Company also maintains a Credit & Guarantee Agreement ("CGA"). Cash and cash equivalents totaled $38,459 and $26,229 at June 30, 2003 and September 30, 2002, respectively. The Company generated cash from operating activities of $79,576 and $106,907 during the nine month periods ended June 30, 2003 and June 30, 2002, respectively. The overall decrease in cash from operating activities during the nine month period ended June 30, 2003 was mainly attributable to an increase in inventory and an increase in prepaid expenses and other current assets as compared to the prior like period. Inventory levels increased over the prior comparable period in order to maintain high fulfillment shipment levels and to quickly respond to customer orders. In addition, the Company is aggressive in obtaining new distribution channels for its products and accordingly inventory levels are increased to respond to anticipated demand. Increases in inventory are also attributable to the new CVS supplier contract and the recent addition of the Marc's store chain. During the first quarter ended December 31, 2002, the Company was named exclusive supplier for CVS private label nutritional supplements; shipments commenced in April 2003. Marc's stores, headquartered in Cleveland, Ohio, are expected to carry over 180 SKU's (Stock Keeping Units) of Nature's Bounty brand products. The increase in prepaid expenses and other current assets is mainly attributable to a change in insurance carriers (dates of coverage do not correspond with the prior like period, increasing the prepaid cost) and increases in general insurance rates. 25 NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (In thousands, except per share amounts and number of stores) Cash used in investing activities was $53,044 and $26,296 during the nine month periods ended June 30, 2003 and June 30, 2002, respectively. During the nine month period ended June 30, 2003, cash flows used in investing activities consisted primarily of net cash paid for the De Tuinen, FSC and GNC U.K. business acquisitions ($32,049), the purchase of property, plant and equipment ($24,852), partially offset by proceeds from the sale of property, plant and equipment ($1,454), and cash received that was previously held in escrow from the fiscal 2001 acquisitions of Global Health Sciences ($1,850) and NatureSmart ($553). During the nine month period ended June 30, 2002 cash flows used in investing activities consisted primarily of cash paid for the business acquisitions of Knox ($4,456) and Healthcentral.com ($2,800), the purchase of property, plant and equipment ($16,427), the purchase of high yield; high risk corporate bonds ($8,242), partially offset by cash received that was previously held in escrow for the acquisition of Global Health Sciences ($4,600) and proceeds from the sale of property, plant and equipment and intangibles ($1,029). Net cash used in financing activities was $17,334 and $78,092 during the nine months ended June 30, 2003 and June 30, 2002, respectively. For the nine month period ended June 30, 2003 cash flows used in financing activities included principal payments under long-term debt agreements ($17,510), partially offset by proceeds from the exercise of stock options ($176). Cash used in financing activities during the nine month period ended June 30, 2002 included principal payments under long-term debt agreements ($79,477), partially offset by proceeds from the exercise of stock options ($1,385). For the nine month period ended June 30, 2003, working capital increased $31,874 to $217,584. This increase was primarily attributable to the Company increasing its current assets, specifically cash, accounts receivable, inventory, and prepaid expenses and other current assets. Continued growth in sales of the Company's principal promoted products during the period, as noted above, contributed to such increases in cash, accounts receivable and inventory. The Company continues to respond to consumer preferences and to monitor the market for trends and ideas, and these efforts have translated into increased sales. The number of average days' sales outstanding (on wholesale sales) at June 30, 2003, was 60 days, compared with 55 days at June 30, 2002. The inventory turnover rate was approximately 2.26 times during the nine month period ended June 30, 2003 compared with 2.37 times during the prior comparable period. At June 30, 2003, the Company had a CGA comprised of one term loan and a revolving credit facility. There were borrowings of $14,500 under one term loan, which is classified as current at June 30, 2003. This term loan has an annual borrowing rate of 2.765% and is payable in quarterly installments of $5,563. At June 30, 2003, the Company had no borrowing under its $50,000 revolving credit facility, which expires on September 30, 2003. The Company is required to pay a commitment fee, which varies between .25% and .50% per annum, depending on the Company's ratio of Debt to EBITDA, on any unused portion of the revolving credit facility. The CGA provides that loans be made under a selection of rate formulas, including prime or Euro currency rates. Virtually all of the Company's assets are collateralized under the CGA. In addition, the Company is subject to the maintenance of various financial ratios and covenants. On July 25, 2003, the Company entered into a new Credit and Guarantee Agreement ("new CGA") comprised of $375,000 Senior Secured Credit Facilities. The new CGA consists of a 26 NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (In thousands, except per share amounts and number of stores) $100,000 Revolving Credit Facility, a $50,000 Term Loan A and a $225,000 Term Loan B. Terms of the new CGA are in many instances similar to the previous one. As with the previous CGA, interest rates charged on borrowings can vary depending on the interest rate option utilized. Options for the rate can either be the Alternate Base Rate or LIBOR plus applicable margin. The revolving credit facility and term loans are scheduled to mature on the earlier of (i) fifth anniversary of the closing date for the Revolving Credit Facility and Term Loan A, and the sixth anniversary date for Term Loan B; or (ii) March 15, 2007 if the Company's 8-5/8% senior subordinated Notes due September 15, 2007 are still outstanding. The proceeds were used to fund the Rexall acquisition, to refinance the existing CGA, and to pay fees, commissions, and expenses therewith. Following the closing date, the proceeds of loans borrowed under the new Revolving Facility shall be used for general corporate purposes. Virtually all of the company's assets are collateralized under the new CGA and are subject to normal banking terms and conditions and the maintenance of various financial ratios and covenants. The Company issued $150,000 of 8-5/8% senior subordinated Notes ("Notes") due in 2007. The Notes are unsecured and subordinated in right of payment for all existing and future indebtedness of the Company. A summary of contractual cash obligations as of June 30, 2003 is as follows:
Payments Due By Period ------------------------------------------------------- Less Than 1-3 4-5 After 5 Total 1 Year Years Years Years ----- --------- ----- ----- ------- Long-term debt and capital leases $169,501 $ 15,079 $ 2,029 $150,260 $ 2,133 Operating leases 351,422 52,173 89,089 73,306 136,854 Purchase commitments 31,710 31,710 Capital commitments 15,154 10,554 4,600 Employment & consulting agreements 5,373 1,570 2,340 1,463 -------- -------- ------- -------- -------- Total contractual cash obligations $573,160 $111,086 $98,058 $225,029 $138,987 ======== ======== ======= ======== ========
The Company conducts retail operations under operating leases, which expire at various dates through 2029. Some of the leases contain renewal options and provide for contingent rent based upon sales plus certain tax and maintenance costs. Future minimum rental payments (excluding real estate tax and maintenance costs) for retail locations and other leases that have initial or noncancelable lease terms in excess of one year are noted in the above table. The Company was committed to make future purchases under various purchase arrangements with fixed price provisions aggregating approximately $31,710 at June 30, 2003. During the nine months ended June 30, 2003 no one supplier individually represented greater than 10% of the Company's raw material purchases. The Company does not believe that the loss of any single supplier would have a material adverse effect on the Company's consolidated financial condition or results of operations. 27 NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (In thousands, except per share amounts and number of stores) The Company had approximately $1,254 in open capital commitments at June 30, 2003, primarily related to computer hardware and software. Also, the Company has a commitment of approximately $13,900 for the construction of an automated warehouse over the next 18 months. The Company believes that existing cash balances, internally-generated funds from operations, and amounts available under the CGA will provide sufficient liquidity to satisfy the Company's working capital needs for the next 12 months and to finance anticipated capital expenditures incurred in the normal course of business and potential acquisitions. The Company has employment agreements with two of its executive officers. The agreements, entered into in October 2002, have a term of 5 years and are automatically renewed each year thereafter unless either party notifies the other to the contrary. These agreements provide for minimum salary levels and contain provisions regarding severance and changes in control of the Company. The annual commitment for salaries to these two officers as of June 30, 2003 was approximately $1,170. In addition, four members of Holland & Barrett's ("H&B") senior executive staff have service contracts terminable by the Company upon twelve months notice. The aggregate commitment for such H&B executive staff as of June 30, 2003 was approximately $175. The Company maintains a consulting agreement with Rudolph Management Associates, Inc. for the services of Arthur Rudolph, a director of the Company. The consulting fee (which is paid monthly) is fixed by the Board of Directors of the Company, provided that in no event will the consulting fee be at a rate lower than $450 per year. In addition, Mr. Arthur Rudolph receives certain fringe benefits accorded to other executives of the Company. The Company has grown through acquisitions, and expects to continue seeking to acquire entities in similar or complementary businesses. Such acquisitions are likely to require the incurrence and/or assumption of indebtedness and/or obligations, the issuance of equity securities or some combination thereof. In addition, the Company may from time to time determine to sell or otherwise dispose of certain of its existing businesses; the Company cannot predict if any such transactions will be consummated, nor the terms or forms of consideration which might be required in any such transactions. Inflation: - ---------- Management believes that inflation did not have a significant impact on the Company's operations. Inflation has not had a significant impact on the Company in the past three years nor is it expected to have a significant impact in the foreseeable future. Financial Covenants and Credit Rating: - -------------------------------------- The Company's credit arrangements impose certain restrictions on the Company regarding capital expenditures and limit the Company's ability to: incur additional indebtedness, dispose of assets, make repayments of indebtedness or amendments of debt instruments, pay distributions, create liens on assets and enter into sale and leaseback transactions, investments, loans or advances and acquisitions. Such restrictions could limit the Company's ability to respond to market conditions, to provide for unanticipated capital investments or to take advantage of business or acquisition opportunities. 28 NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (In thousands, except per share amounts and number of stores) As of July 17, 2003, Moody's Investors Service, Inc. rated the Company's Notes as a B1, and the CGA's implied rating as a Ba2; Standard & Poor's rated the Notes as a B+, the CGA as a BB+, and gave the Company an overall corporate credit rating as BB. Both credit agencies' ratings remained unchanged from the prior period. Such ratings on the CGA were withdrawn upon the completion of the financing on July 25, 2003. Moody's Investors Service, Inc. rated the new $375,000 CGA as a Ba2; Standard & Poor's assigned a BB rating to the $375,000 CGA due 2007. New accounting developments: - ---------------------------- In June 2001, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires, among other things, that entities record the fair value of a liability for an asset retirement obligation in the period in which the obligation is incurred. This statement, which will become effective for the Company on October 1, 2003, is not expected to have a material impact on its consolidated financial position or results of operations. In November 2002, the FASB issued Emerging Issues Task Force (EITF) Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF 00-21 addresses certain aspects of the accounting by a company for arrangements under which it will perform multiple revenue-generating activities. EITF 00- 21 addresses when and how an arrangement involving multiple deliverables should be divided into separate units of accounting. EITF 00-21 provides guidance with respect to the effect of certain customer rights due to company nonperformance on the recognition of revenue allocated to delivered units of accounting. EITF 00-21 also addresses the impact on the measurement and/or allocation of arrangement consideration of customer cancellation provisions and consideration that varies as a result of future actions of the customer or the company. Finally, EITF 00-21 provides guidance with respect to the recognition of the cost of certain deliverables that are excluded from the revenue accounting arrangement. The provisions of EITF 00- 21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company does not expect the adoption of EITF 00-21 will have a material effect on its consolidated financial position or results of operations. In January 2003, the FASB issued Interpretation No. 46, ("FIN") "Consolidation of Variable Interest Entities," an interpretation of Accounting Research Bulletin ("ARB") No. 51. Interpretation 46 addresses consolidation by business enterprises of variable interest entities. Interpretation 46 applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first year or interim period beginning after June 15, 2003 to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company believes that the provisions of FIN 46 will not have any impact on the Company's consolidated financial position or results of operations. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is generally effective for contracts entered into or modified 29 NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (In thousands, except per share amounts and number of stores) after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company does not expect the adoption of SFAS 149 to have a material impact on its consolidated financial position or results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and must be applied to the Company's existing financial instruments effective July 1, 2003, the beginning of the first fiscal period after June 15, 2003. The Company has not entered into any financial instruments within the scope of SFAS 150 since May 31, 2003, nor does it currently hold any significant financial instruments within its scope. 30 ITEM 3: NBTY, INC. and SUBSIDIARIES QUANTITATIVE and QUALITATIVE DISCLOSURES ABOUT MARKET RISK Quantitative and Qualitative Disclosures About Market Risk: - ----------------------------------------------------------- The Company is subject to currency and interest rate risks that arise from normal business operations. The Company regularly assesses these risks and has not entered into any significant hedging transactions. To manage the potential loss arising from changing interest rates and its impact on long-term debt, the Company's policy is to manage interest rate risks by maintaining a combination of fixed and variable rate financial instruments. 31 ITEM 4: NBTY, INC. and SUBSIDIARIES CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures - ------------------------------------------------ The management of the Company, including the Chief Executive Officer and the Chief Financial Officer, have conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 as of a date (the "Evaluation Date") within 90 days prior to the filing date of this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures were effective in ensuring that all material information relating to the Company, including its consolidated subsidiaries, required to be filed in this quarterly report has been made known to them in a timely manner. Changes in Internal Controls - ---------------------------- There have been no significant changes made in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the Evaluation Date. 32 NBTY, INC. and SUBSIDIARIES PART II OTHER INFORMATION Item 1. Legal Proceedings The Company is involved from time to time in claims, proceedings and litigation arising from its business and property ownership. The Company does not believe that any such claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on the Company's consolidated financial position or results of its operations. On April 14, 2003, a complaint was filed by the United States of America against the Company arising from certain pseudoephedrine sales from November 2000 through December 2002. The complaint, filed in U.S. District Court for the Eastern District of New York, alleges technical recordkeeping and reporting violations of the Controlled Substances Act, 21 U.S.C. Sections 801-904 and Controlled Substances Import and Export Act, 21 U.S.C. Sections 951-971 in a fraction of the Company's sales of over-the-counter antihistamine and decongestant products containing pseudoephedrine. Total sales of such products generated approximately $160 of the Company's total sales for the fiscal years ended September 30, 2001 and September 30, 2002, respectively. The Company has cooperated in all respects with the Drug Enforcement Administration in its investigation of sales identified in the complaint. Accordingly, the Company believes that there is no valid basis nor precedent for the penalties sought, and intends to launch a vigorous defense. However, because this action is in its early stages, no determination can be made at this time as to the final outcome of this action. Item 4. Submission of Matters to a Vote of Security Holders The following propositions were approved on May 12, 2003, at NBTY, Inc.'s Annual Meeting of Stockholders: Proposition 1: Re-elected Directors to serve until the 2006 Annual Meeting. Votes Votes Total for against Votes ------------------------------------- Aram G. Garabedian 55,224,644 2,621,504 57,846,148 Bernard G. Owen 56,626,650 1,219,498 57,846,148 Alfred Sacks 56,777,180 1,068,968 57,846,148 Proposition 2: Ratified the designation of PricewaterhouseCoopers LLP as independent accountants to audit the consolidated financial statements of the Company for the 2003 fiscal year. Votes Votes Total for against Votes ------------------------------------- 52,938,439 4,885,900 57,824,339 33 Item 6. Exhibits and Reports on Form 8-K a. Exhibits Exhibit 99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 b. Reports on Form 8-K during the quarter ended June 30, 2003. On April 25, 2003, NBTY filed a current report on Form 8-K to accompany its press release announcing certain financial results for the second quarter ended March 31, 2003. On June 10, 2003, NBTY filed a current report on Form 8-K to announce it had signed a contract to acquire Rexall Sundown, Inc. ("Rexall") from Royal Numico, N.V. 34 NBTY, INC. and SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NBTY, INC. (Registrant) Date: August 5, 2003 By: /s/ Scott Rudolph -------------- ----------------------------- Scott Rudolph Chairman and Chief Executive Officer (Principal Executive Officer) Date: August 5, 2003 By: /s/ Harvey Kamil -------------- ------------------------------ Harvey Kamil President and Chief Financial Officer (Principal Financial and Accounting Officer) 35 NBTY, INC. and SUBSIDIARIES CERTIFICATIONS I, Scott Rudolph, certify that: 1. I have reviewed this quarterly report on Form 10-Q of NBTY, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: August 5, 2003 -------------- /s/ Scott Rudolph Scott Rudolph Chief Executive Officer 36 NBTY, INC. and SUBSIDIARIES CERTIFICATIONS I, Harvey Kamil, certify that: 1. I have reviewed this quarterly report on Form 10-Q of NBTY, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: August 5, 2003 -------------- /s/ Harvey Kamil Harvey Kamil Chief Financial Officer 37 EX-99 3 nbq3-991.txt EXHIBIT 99.1 NBTY, INC. and SUBSIDIARIES Exhibit 99.1 ------------ CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Scott Rudolph, Chief Executive Officer of NBTY, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) the Quarterly Report on Form 10-Q of the Company for the period ended June 30, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 5, 2003 Signature: /s/ Scott Rudolph ------------------------------------ Scott Rudolph Chief Executive Officer 38 NBTY, INC. and SUBSIDIARIES Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 EX-99 4 nbq3-992.txt EXHIBIT 99.2 NBTY, INC. and SUBSIDIARIES Exhibit 99.2 ------------ CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Harvey Kamil, Chief Financial Officer of NBTY Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) the Quarterly Report on Form 10-K of the Company for the period ended June 30, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 5, 2003 Signature: /s/ Harvey Kamil ------------------------------------ Harvey Kamil Chief Financial Officer 39 NBTY, INC. and SUBSIDIARIES Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 -----END PRIVACY-ENHANCED MESSAGE-----