-----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, TlwHZ964UvOQcgUPXRFylTGjMo9YvohTegPrsLoM+1yfr14cvXaRYn+q/VqEQNtp uFVFGTtM/Xp/TU0X948HmA== 0000910647-98-000222.txt : 19980814 0000910647-98-000222.hdr.sgml : 19980814 ACCESSION NUMBER: 0000910647-98-000222 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 SROS: NASD 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: SEC FILE NUMBER: 000-10666 FILM NUMBER: 98685391 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 BODY OF 10-Q FOR 3RD QUARTER UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the period ended June 30, 1998 Commission File Number: 0-10666 ------- NBTY, Inc. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 11-2228617 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 90 Orville Drive, Bohemia, NY 11716 - ----------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (516) 567-9500 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registration was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Shares of Common Stock as of June 30, 1998: 64,742,394 ---------- NBTY, INC. and SUBSIDIARIES INDEX PART I Financial Information Condensed Consolidated Balance Sheets - June 30, 1998 (unaudited)and September 30, 1997 1 - 2 Condensed Consolidated Statements of Operations - (unaudited) - Three Months Ended June 30, 1998 and 1997 3 Condensed Consolidated Statements of Operations - (unaudited) Nine months Ended June 30, 1998 and 1997 4 Condensed Consolidated Statements of Cash Flows - (unaudited) Nine months Ended June 30, 1998 and 1997 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6 - 11 Management's Discussion and Analysis of Financial Condition and Results of Operations (unaudited) 12 - 19 PART II Other Information 20 Signature 21 NBTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS (Dollars and shares in thousands)
June 30, September 30, 1998 1997 ---------------------------- (Unaudited) Current assets: Cash and cash equivalents $ 5,770 $ 20,262 Short-term investments - 8,362 Accounts receivable, less allowance for doubtful accounts ($1,116 in 1997; $1,056 in 1998) 19,770 19,603 Inventories 111,680 86,440 Deferred income taxes 6,032 6,032 Prepaid catalog costs and other current assets 25,499 19,111 ------------------------ Total current assets 168,751 159,810 Cash held in escrow - 144,262 Property, plant and equipment 217,725 173,447 less accumulated depreciation and amortization 62,477 55,263 ------------------------ 155,248 118,184 Intangible assets, net 143,926 141,303 Other assets 7,473 7,618 ------------------------ Total assets $475,398 $571,177 ========================
See notes to condensed consolidated financial statements. NBTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY (Dollars and shares in thousands)
June 30, September 30, 1998 1997 ---------------------------- (Unaudited) Current liabilities: Current portion of long-term debt and capital lease obligations $ 1,220 $ 1,519 Demand note payable 1,873 Accounts payable 49,739 49,857 Accrued expenses 30,726 35,711 ------------------------- Total current liabilities 81,685 88,960 Long-term debt 218,123 168,550 Obligations under capital leases 2,201 2,700 Promissory note payable 528 169,909 Deferred income taxes 7,624 7,474 Other liabilities 3,533 2,293 ------------------------- Total liabilities 313,694 439,886 ------------------------- Commitments and contingencies Stockholders' equity: Common stock, $.008 par; authorized 75,000 in 1998 in 1997; issued 69,254 in 1998 and 69,122 in 1997 and outstanding 64,742 shares in 1998 and 64,610 shares in 1997 554 553 Capital in excess of par 56,789 56,182 Retained earnings 98,918 75,199 ------------------------- 156,261 131,934 Less 4,512 treasury shares at cost, in 1998 and 1997, respectively (3,206) (3,206) Cumulative translation adjustment 8,649 2,563 ------------------------- Total stockholders' equity 161,704 131,291 ------------------------- Total liabilities and stockholders' equity $475,398 $571,177 =========================
See notes to condensed consolidated financial statements. NBTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Dollars and shares in thousands, except per share amounts)
For the three months ended June 30, -------------------- 1998 1997 -------------------- Net sales $138,931 $80,219 -------------------- Costs and expenses: Cost of sales 64,514 41,095 Catalog, printing, postage and promotion 8,804 7,010 Selling, general and administrative 46,764 20,758 Merger related costs 3,360 -------------------- 123,442 68,863 -------------------- Income from operations 15,489 11,356 -------------------- Other income (expenses): Interest, net (3,196) (630) Miscellaneous, net 1,328 555 -------------------- (1,868) (75) -------------------- Income before income taxes 13,621 11,281 Income taxes 5,486 3,455 -------------------- Net income $ 8,135 $ 7,826 ==================== Basic earnings per share $ 0.13 $ 0.12 ==================== Diluted earnings per share $ 0.12 $ 0.11 ==================== Weighted average common shares Basic 64,742 64,658 ==================== Diluted 69,008 68,946 ====================
See notes to condensed consolidated financial statements. NBTY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Dollars and shares in thousands, except per share amounts)
For the nine months ended June 30, --------------------- 1998 1997 --------------------- Net sales $425,751 $239,070 Costs and expenses: Cost of sales 204,928 120,627 Catalog, printing, postage and promotion 22,739 21,136 Selling, general and administrative 137,216 61,204 Merger related costs 3,360 0 --------------------- 368,243 202,967 --------------------- Income from operations 57,508 36,103 --------------------- Other income (expenses): Interest (12,417) (1,950) Miscellaneous, net 2,728 389 --------------------- (9,689) (1,561) --------------------- Income before income taxes 47,819 34,542 Income taxes 16,051 10,846 --------------------- Net income $ 31,768 $ 23,696 ===================== Basic earnings per share $ 0.49 $ 0.37 ===================== Diluted earnings per share $ 0.46 $ 0.34 ===================== Weighted average common shares Basic 64,689 64,578 ===================== Diluted 68,986 68,919 =====================
See notes to condensed consolidated financial statements. NBTY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollars in thousands)
For the nine months ended June 30, ------------------- 1998 1997 ------------------- Net income $ 31,768 $23,696 Adjustments to reconcile net income to cash provided by operating activities: Gain on sale of product line (1,576) Gain (loss) on sale of property, plant and equipment 402 (197) Depreciation and amortization 15,448 5,642 Provision for allowance for doubtful accounts 10 203 Changes in assets and liabilities, net of acquistions: Increase in accounts receivable (1,173) (3,079) Increase in inventories (24,593) (20,246) Increase in prepaid catalog costs and other current assets (6,005) (2,132) Decrease in other assets 1,703 579 (Decrease)increase in accounts payable (1,358) 13,578 (Decrease) increase in accrued expenses (4,581) 440 Increase in other liabilities 1,240 ------------------- Net cash provided by operating activities 11,285 18,484 ------------------- Cash flow from investing activities: Purchase of property, plant and equipment (51,049) (13,639) Proceeds from sale of property, plant and equipment 1 289 Proceeds from sale of product line 4,500 Proceeds from sale of short term investments 8,362 Purchase of short-term investments (4,516) Receipt of payments from direct-mail cosmetics business 1,047 ------------------- Net cash used in investing activities (38,186) (16,820) ------------------- Cash flows from financing activities: Dividends paid (8,050) (6,555) Borrowings under long term debt agreements 55,000 Cash held in escrow 144,730 Payment of demand note payable (1,345) Principal payments under long-term debt agreements and capital leases (6,570) (2,422) Purchase of treasury stock (15) Proceeds from stock options exercised 40 23 Repayment of promissory note (168,770) ------------------- Net cash provided by (used in) financing activities 15,035 (8,969) ------------------- Effect of Exchange Rate Changes on Cash and Cash Equivalents (2,626) ------------------- Net decrease in cash and cash equivalents (14,492) (7,305) Cash and cash equivalents at beginning of quarter 20,262 12,814 ------------------- Cash and cash equivalents at end of quarter $ 5,770 $ 5,509 =================== Supplemental Disclosure of Cash Flow Information: Cash paid during the period for interest $ 14,823 $ 1,294 Cash paid during the period for taxes $ 12,859 $11,068
NBTY, INC. and SUBSIDIARIES NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share amounts) 1. Basis of presentation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material inter-company accounts and transactions have been eliminated. Pooling of interests On April 20, 1998, Nutrition Headquarters Group, Inc., Lee Nutrition, Inc. and Nutro Laboratories, Inc. (collectively, the "Nutrition Headquarters Group" or "NHG") was merged with and into NBTY. The merger constituted a tax-free reorganization in accordance with Section 368(a)(1)(A) of the Internal Revenue Service and has been accounted for as a pooling of interests under APB No. 16. All financial information has been restated to include the financial position and results of operations of Nutrition Headquarters Group for all periods presented. Terms of the merger agreement Each share of Nutrition Headquarters Group common stock was exchanged for approximately 30 shares of NBTY's common stock with approximately 8.8 million shares of NBTY's common stock exchanged for all the outstanding stock of Nutrition Headquarters Group. Income taxes Prior to the merger, Nutrition Headquarters Group had been treated as an S corporation for Federal and state tax purposes. Accordingly, taxable income was reported to the individual stockholders for inclusion in their respective income tax returns with no provision for these taxes, other than certain minimum taxes, included in the Company's consolidated financial statements. 2. In the opinion of the Company, the unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly its financial position as of June 30, 1998 and results of operations for the three and nine months ended June 30, 1998 and 1997 and statements of cash flows for the nine months ended June 30, 1998 and 1997. The consolidated condensed balance sheet as of September 30, 1997 has been derived from the audited balance sheet as of that date. The results of operations for the three and nine months ended June 30, 1998 and statements of cash flows for the nine months ended June 30, 1998 are not necessarily indicative of the results to be expected for the full year. This report should be read in conjunction with the registration statement filed on Form S-3 as filed with the Securities and Exchange Commission on May 8, 1998. 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. Actual results could differ from those estimates. Common shares and earnings per share On March 9, 1998, the Company's Certificate of Incorporation was amended to authorize the issuance of up to 75 million shares of common stock, par value $.008 per share. In addition, the Company's Board of Directors declared a three-for-one stock split in the form of a 200% stock dividend effective March 23, 1998. On April 20, each share of Nutrition Headquarters Group common stock was exchanged for one share of NBTY's common stock with approximately 8,772 shares of NBTY's common stock exchanged for all the outstanding stock of Nutrition Headquarters Group. All per common share amounts have been retroactively restated to account for the above stock split and the merger of NHG with NBTY. In addition, stock options and respective exercise prices have been amended to reflect these transactions. Accounting changes New accounting standards In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings Per Share." The statement simplifies the standards for computing earnings per share ("EPS") and makes them comparable to international EPS standards. The statement requires the presentation of both "basic" and "diluted" EPS on the face of the income statement with a supplementary reconciliation of the amounts used in the calculations. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("FAS 133"). FAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999 (October 1, 1999 for the Company). FAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. Management of the Company anticipates that, due to its limited use of derivative instruments, the adoption of FAS 133 will not have a significant effect on the Company's results of operations or its financial position. In February 1998, the American Institute of Certified Public Accountants' Accounting Standards Executive Committee issued Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP No. 98-1"). SOP No. 98-1 requires certain costs incurred in connection with developing or obtaining internal-use software to be capitalized and other costs to be expensed. The Company adopted SOP 98-1 effective February 1998, and its implementation had no material effect on the Company's financial position or results of operations. In April 1998, the American Institute of Certified Public Accountants' Accounting Standards Executive Committee issued Statement of Position No. 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP No. 98-5"). SOP No. 98-5 requires that all start- up (or pre-opening) activities and organization costs be expensed as incurred. The Company expects that the implementation of this statement will not have a material effect on its financial position or results of operations. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. In addition, in June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which establishes standards for reporting information about operating segments. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. Both of these new standards are effective for fiscal years beginning after December 15, 1997 and require comparative information for earlier years to be restated. The implementation of these new standards will not affect the Company's results of operations and financial position, but may have an impact on future financial statement disclosures. 3. In April 1998, the Company sold certain assets of its cosmetic pencil operation for approximately $6 million, of which $4.5 million was paid by cash with additional payments of $1.5 million over the next three years. The cosmetic pencil operation had sales of approximately $1.9 million and operating losses of approximately $0.8 million in fiscal 1997. The gain on such sale of approximately $1.6 million is included in other income in the condensed consolidated statements of income. 4. Acquisition of Holland & Barrett Holdings Ltd. On August 7, 1997, the Company acquired all of the issued and outstanding capital stock of Holland & Barrett Holdings Ltd.("H&B") from Lloyds Chemist's plc ("Lloyds") for an aggregate purchase price of approximately $169,000 plus acquisition costs of approximately $3,174. The acquisition has been accounted for under the purchase method and, accordingly, the results of operations are included in the financial statements from the date of acquisition. H&B markets a broad line of nutritional supplement products, including vitamins, minerals and other nutritional supplements and food products. At the date of acquisition, H&B operated approximately 410 retail stores in the United Kingdom. The Company issued to Lloyds two promissory notes (the "Promissory Notes") totaling approximately $170,000 as consideration for the purchase of the capital stock of H&B. The Promissory Notes, which were collateralized by two letters of credit issued by a lending institution, were paid in full in October 1997. In connection with the Acquisition, the Company (i) entered into a $50,000 credit and guarantee agreement (the "Credit and Guarantee Agreement"), which provides borrowings for working capital and general corporate purposes, and (ii) issued $150,000 in Senior Subordinated Notes due 2007. Assets acquired and liabilities assumed included cash ($5,580), inventory ($18,045), other current assets ($11,078), property, plant and equipment ($31,554), and current and long-term liabilities ($27,154 and $4,058, respectively). The excess cost of investment over the net book value of H&B at the date of acquisition resulted in an increase in goodwill of $136,899 which will be amortized over 25 years. Additionally, finance related costs of approximately $5,600 will be amortized over 10 years. 5. Inventories have been estimated using the gross profit method for the interim periods. The components of the inventories are as follows:
June 30, September 30, 1998 1997 ------------------------- Raw materials and Work-in-process $ 50,281 $37,347 Finished goods 61,399 49,093 ---------------------- $111,680 $86,440 ======================
6. Basic earnings per share are computed by dividing net earnings by the weighted average number of common shares outstanding during the three and nine month periods ended June 30, 1998 and 1997. Diluted earnings per share include the effect of outstanding stock options, as if exercised. The following is a reconciliation between the basic and diluted earnings per share, as required by SFAS No. 128:
For the three months For the nine months June 30, June 30, -------------------- ------------------- 1998 1997 1998 1997 ------------------------------------------ Numerator: Numerator for basic earnings per share - income available to common stockholders $8,135 $7,826 $31,768 $23,696 ========================================== Numerator for dilutive earnings per share - income available to common stockholders $8,135 $7,826 $31,768 $23,696 ========================================== Denominator: Denominator for basic earnings per share -- weighted-average shares 64,742 64,658 64,689 64,578 Effect of dilutive securities: Stock options 4,265 4,288 4,297 4,341 ------------------------------------------ Denominator for diluted earnings per share -- weighted-average shares 69,008 68,946 68,986 68,919 ========================================== Basic earnings per share $ 0.13 $ 0.12 $ 0.49 $ 0.37 ========================================== Diluted earnings per share $ 0.12 $ 0.11 $ 0.46 $ 0.34 ==========================================
7. Foreign operations: In connection with the Company's recent acquisition of H&B which operates primarily in the United Kingdom, the Company has significantly expanded its operations outside the United States. The following information has been summarized by geographic area as of June 30, 1998:
Identifiable Assets ------------------------- June 30, September 30, 1998 1997 ------------------------- United States $256,076 $356,987 United Kingdom 219,322 214,190 ----------------------- $475,398 $571,177 =======================
For the three months ended June 30,
Sales Operating income ------------------- ------------------ 1998 1997 1998 1997 ----------------------------------------- United States $ 92,615 $79,665 $13,026 $12,024 United Kingdom 46,316 554 2,462 (668) ----------------------------------------- $138,931 $80,219 $15,488 $11,356 =========================================
For the nine months ended June 30,
Sales Operating income -------------------- ------------------ 1998 1997 1998 1997 ----------------------------------------- United States $282,853 $237,286 $47,989 $37,481 United Kingdom 142,899 1,784 9,519 (1,378) ----------------------------------------- $425,751 $239,070 $57,508 $36,103 =========================================
8. Subsequent events: On July 1, 1998, the Company sold 3,450,000 shares (including a 15% over-allotment option) of common stock, $.008 par value per share, in a public offering at $18.00 per share. After expenses, the Company realized approximately $55 million which was used to repay the Company's Credit and Guarantee Agreement and for working capital. The Company acquired the assets of three privately held vitamin mail order companies: Home Health Products, Inc., Virginia Beach, Virginia; Barth-Spencer Corporation in Pompano Beach, Florida and Darby Health Group, Inc. in Westbury, New York for $7.8 million in cash. The aggregate sales of these companies were approximately $20 million in 1997. The mail order databases of the acquired operations will be incorporated into NBTY's active mail order customer base to increase the number of active customers. NBTY, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS (Unaudited) (In thousands, except per share amounts) Results of Operations: The following table sets forth income statement data of the Company as a percentage of net sales for the periods indicated:
Three months Nine months Ended ended June 30, June 30, ---------------- ---------------- 1998 1997 1998 1997 ------------------------------------ Net sales 100.0% 100.0% 100.0% 100.0% Cost and expenses: Cost of sales 46.4 51.2 48.1 50.5 Catalog printing, postage and promotion 6.3 8.7 5.3 8.8 Selling, general and administrative 33.7 25.9 32.2 25.6 Merger related costs 2.5 0.0 0.9 0.0 ----------------------------------- 88.9 85.8 86.5 84.9 ----------------------------------- Income from operations 11.1 14.2 13.5 15.1 Other income (expenses), net (1.3) (0.1) (2.3) (0.7) ----------------------------------- Income before income taxes 9.8 14.1 11.2 14.4 Income taxes 3.9 4.3 3.7 4.5 ----------------------------------- Net income 5.9% 9.8% 7.5% 9.9% ===================================
For the three months ended June 30, 1998 compared to the three months ended June 30, 1997: Net sales. Net sales in the third quarter ended June 30, 1998 were $138,931 compared with $80,219 for the prior comparable period, an increase of $58,712 or 73.2%. Mail order sales were $44.1 million, compared to $37.7 for the prior comparable period (increase of $6.4 million or 17.1%), wholesale sales were $32.7 million compared to $31.7 million (increase of $1.0 million or 3.0%), U.S. retail revenues were $16.7 million compared to $10.7 million (increase of $6.0 million or 55.7%) and U.K. retail revenues resulting from the H&B acquisition in August 1997 were $45.4 million. On a consolidated basis, excluding Holland & Barrett, net sales increased $13.3 million or 16.6%. Costs and expenses. Cost of sales as a percentage of sales were 46.4% for 1998 and 51.2% for 1997. The decrease was associated with changes in product mix and Holland & Barrett. In the quarter ended June 30, 1998, products supplied by outside vendors were replaced by NBTY manufactured products which resulted in higher gross profits. Catalog printing, postage, and promotion expenses were $8,804 in 1998, an increase of $1,794 (25.6% increase), from $7,010 in 1997. As a percentage of sales, expenses were 6.3% for the current quarter and 8.7% for the prior comparable quarter due to an increase in retail revenues in 1998. Selling, general and administrative expenses were $46,764 for the quarter, or 33.7% as a percentage of sales, compared with $20,758, or 25.9% as a percentage of sales, an increase of $26,006 (125.3% increase). The largest segments and increases are indirect salaries, rents, freight and property taxes. These expenses increased due to the acquisition of Holland & Barrett retail operation and the U.S. retail expansion program. Merger related costs. One-time costs associated with the merger between Nutrition Headquarters Group (NHG) and NBTY will aggregate approximately $3.4 million. These estimates include professional fees and separation pay for the consolidation of certain administrative areas. Interest expense. Interest expense was $3,196, an increase of $2,566 compared with the comparable quarter. The major component is interest associated with the Holland & Barrett acquisition and the Credit and Guarantee Agreement. Income taxes Prior to the merger, NHG had been treated as an S corporation for Federal and state tax purposes. Accordingly, taxable income was reported to the individual stockholders for inclusion in their respective income tax returns with no provision for these taxes, other than certain minimum taxes, included in the Company's Consolidated Financial Statements. Income before income taxes was $13,621 for 1998 and $11,281 for 1997. After income taxes, the Company had a net profit of $8,135 (or basic earnings per share of $0.13, diluted earnings per share of $0.12) for the three month period ended June 30, 1998, and $7,826 (or basic earnings per share of $0.12, diluted earnings per share of $0.11) for the three months ended June 30, 1997. Assuming NHG was taxed at the Company's effective rate, net income would have been $8.2 million for fiscal 1998, an increase of $1.4 million or 20.2% compared with $6.8 million in 1997. For the nine months ended June 30, 1998 compared to the nine months ended June 30, 1997. Net sales. Net sales in the nine months ended June 30, 1998 were $425,751 compared with $239,070 for the prior comparable period, an increase of $186,681 or 78.1%. Mail order sales were $138.1 million, compared to $114.9 for the prior comparable period (increase of $23.2 million or 20.1%), wholesale sales were $99.4 million compared to $95.4 million (increase of $4.0 million or 4.2%), U.S. retail revenues were $48.0 million compared to $28.6 million (increase of $19.4 million or 67.7%) and U.K retail revenues were $140.2 million in 1998. Revenue increases were due primarily to the August 7, 1997 acquisition of Holland & Barrett. On a consolidated basis, excluding Holland & Barrett, net sales increased $46.6 or 19.5%. Costs and expenses. Cost of sales as a percentage of sales were 48.1% and 50.5% for the comparable nine months in 1998 and 1997. The decrease was associated with changes in product mix and Holland & Barrett. In the nine months ended June 30, 1998, products supplied by outside vendors were replaced by NBTY manufactured products which resulted in higher gross profits. Catalog printing, postage, and promotion expenses were $22,739 in 1998, an increase of $1,603 (7.6% increase) from $21,136 in 1997. As a percentage of sales, expenses were 5.3% for the current nine months and 8.8% for the prior comparable period due to an increase in retail revenues in 1998. Selling, general and administrative expenses were $137,216, or 32.2% as a percentage of sales, compared with $61,204, or 25.6% as a percentage of sales, an increase of $76,012 (124.2% increase). The largest increases are from indirect salaries, rents, freight and property taxes. These expenses increased due to the acquisition of Holland & Barrett retail operation and the U.S. retail expansion program. Merger related costs. One-time costs associated with the merger between Nutrition Headquarters Group (NHG) and NBTY will aggregate approximately $3.4 million. These estimates include professional fees and separation pay for the consolidation of certain administrative areas. Interest expense. Interest expense was $12,417, an increase of $10,467 compared to the comparable nine month period. Such change is primarily due to interest associated with the Holland & Barrett acquisition and the Credit and Guarantee Agreement. Income taxes Prior to the merger, Nutrition Headquarters Group had been treated as an S corporation for Federal and state tax purposes. Accordingly, taxable income has been reported to the individual stockholders for their inclusion in their respective income tax returns with no provision for these taxes, other than certain minimum taxes, included in the Company's consolidated financial statements. Income taxes were approximately $16,051 in 1998 and $10,846 in 1997. Income before income taxes was $47,819 for 1998 and $34,542 for 1997. After income taxes, the Company had a net profit of $31,768 (or basic earnings per share of $0.49, diluted earnings per share of $0.46) for the nine month period ended June 30, 1998, and $23,696 (or basic earnings per share of $0.37, diluted earnings per share of $0.34) for the nine months ended June 30, 1997. Assuming NHG was taxed at the Company's effective rate, net income would have been approximately $29.0 million for the nine months ended June 30, 1998, an increase of $8.2 million or 39.7% compared with $20.8 million in 1997. Liquidity and Capital Resources Working capital was $87.1 million at June 30, 1998, compared with $70.9 million at September 30, 1997, an increase of $16.2 million. In September 1997, the Company entered into a $50 million Credit and Guarantee Agreement (CGA) which expires September 30, 2003. The CGA was increased to $60 million on April 28, 1998. The CGA provides for borrowings for working capital and general corporate purposes. Virtually all the Company's assets are secured under the CGA and subject to normal banking terms and conditions and the maintenance of various financial ratios and covenants. The CGA provides that loans be made under a selection of rate formulas including Prime or Eurocurrency rates. At June 30, 1998, there were borrowings of $55,000 under this facility. These borrowings were repaid in July 1998. Additionally, the Company issued $150 million 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. In connection with the acquisition of Holland & Barrett (H&B), the Company issued two promissory notes (the "Promissory Notes") totaling approximately $169,000 plus interest, as consideration for the purchase of the capital stock of H&B. The Promissory Notes, which were collateralized by two letters of credit issued by a lending institution, were paid in full in October 1997. In November and December 1997, the Company paid an aggregate $5,350 in connection with a litigation settlement, net of a reimbursement made by an insurance carrier. In December 1997, the Company purchased a building for a purchase price of approximately $3,900 with operating funds. The Company sold certain assets of its cosmetic pencil operation for approximately $6 million, of which $4.5 million was paid in cash. On July 1, 1998, the Company sold 3,450,000 shares of common stock in a public offering. The Company realized approximately $55 million which was used to repay the Company's Credit and Guarantee Agreement and for working capital. The Company has capitalized $944 interest on construction of the softgel manufacturing plant. The Company believes that existing cash balances, internally-generated funds from operations, amounts available under the CGA and proceeds from the July 1998 public offering of the Company's common stock will provide sufficient liquidity to satisfy the Companies' working capital needs for the next 12 months and to finance anticipated capital expenditures incurred in the normal course of business. Net cash provided by operating activities was $11.3 million in 1998 and $18.5 million in 1997 primarily due to increases in inventory. Net cash used in investing activities was $38.2 million and $16.8 million in 1997 due to plant expansion. Net cash provided by financing activities was $15.0 million in 1998 and $9.0 million was used in financing activities in 1997. Management believes that inflation did not have a significant impact on its operations. Year 2000 Software Compatibility The Company is continually updating its information systems, and has evaluated significant computer software applications for compatibility with the year 2000. With the system changes implemented to date and other planned changes, the Company anticipates that its computer software applications will be compatible with the year 2000. Expenditures specifically related to software modifications for year 2000 compatibility are not expected to be significant to the Company's results of operations or financial position. New pronouncements In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133). FAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999 (October 1, 1999 for the Company). FAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. Management of the Company anticipates that, due to its limited use of derivative instruments, the adoption of FAS 133 will not have a significant effect on the Company's results of operations or its financial position. In February 1998, the American Institute of Certified Public Accountants' Accounting Standards Executive Committee issued Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP No. 98-1"). SOP No. 98-1 requires certain costs incurred in connection with developing or obtaining internal-use software to be capitalized and other costs to be expensed. The Company adopted SOP 98-1 effective February 1998, and its implementation had no material effect on the Company's financial position or results of operations. In April 1998, the American Institute of Certified Public Accountants' Accounting Standards Executive Committee issued Statement of Position No. 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP No. 98- 5"). SOP No. 98-5 requires that all start-up (or pre-opening) activities and organization costs be expensed as incurred. The Company expects that its application of this will not have a material effect on its financial position or results of operations. This filing contains certain forward-looking statements and information that are based on the beliefs of management, as well as assumptions made by and information currently available to the Company's management. When used in this document, the words "anticipate," "believe," "estimate," and "expect" and similar expressions, as they relate to the Company are intended to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated or expected. The Company does not intend to update these forward-looking statements. NBTY, INC. AND SUBSIDIARIES PART II OTHER INFORMATION (Unaudited) (In thousands) Item 1. Legal Proceedings LITIGATION: Gehe ag (Holland & Barrett's former parent company), has filed an action, in February 1998, against the Company for non-payment of a deferred tax in connection with the H&B acquisition. The Company and its corporate counsel believe there is no payment due Gehe. In November and December 1997, the Company paid an aggregate $5,350 in connection with a litigation settlement, net of a reimbursement made by its insurance carrier. Reference is made to Item 3, Legal Proceedings in Form 10-K for the year ended September 30, 1997. Item 2. Changes in Securities Not applicable. Item 3. Defaults upon Senior Securities Not applicable. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders On March 9, 1998, the stockholders approved to increase the number of authorized $.008 par value common shares from 25,000 to 75,000. Item 5. Other Information Not applicable Item 6. Exhibits and Reports on Form 8-K A Form 8-K was filed during the third quarter of the fiscal year ending September 30, 1998. NBTY, INC. and SUBSIDIARIES SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized. NBTY, INC. Date August 12, 1998 Harvey Kamil -------------------------------- Harvey Kamil, Executive Vice President, Secretary (Principal Financial and Accounting Officer) EX-27 2 FDS FOR 3RD QUARTER ENDED JUN-30-1998
5 1,000 9-MOS SEP-30-1998 OCT-01-1997 JUN-30-1998 5,770 0 20,826 1,056 111,680 168,751 217,725 62,477 475,398 81,685 222,072 0 0 554 161,150 475,398 425,751 425,751 204,928 159,955 3,360 0 12,417 47,819 16,051 31,768 0 0 0 31,768 0.49 0.46
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