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, 1999
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, 1999: 67,022,894
----------
NBTY, INC. and SUBSIDIARIES
INDEX
PART I Financial Information
Condensed Consolidated Balance Sheets -
June 30, 1999 (unaudited)and
September 30, 1998 1 - 2
Condensed Consolidated Statements of Operations -
(unaudited) - Three Months Ended
June 30, 1999 and 1998 3
Condensed Consolidated Statements of Operations -
(unaudited) Nine months Ended
June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows -
(unaudited) Nine months Ended
June 30, 1999 and 1998 5 - 6
Notes to Condensed Consolidated
Financial Statements (unaudited) 7 - 11
Management's Discussion and Analysis
of Financial Condition and
Results of Operations 12 - 20
PART II Other Information 21
Signature 22
NBTY, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(Dollars and shares in thousands)
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
----------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 23,568 $ 14,308
Accounts receivable, less
allowance for doubtful accounts
of $1,078 in 1999
and $1,045 in 1998 22,673 23,433
Inventories 132,341 119,607
Deferred income taxes 2,994 2,994
Prepaid property taxes, rent,
and other current assets 19,382 13,614
-------------------------
Total current assets 200,958 173,956
Property, plant and equipment 256,228 234,081
less accumulated depreciation
and amortization 80,715 67,746
-------------------------
175,513 166,335
Intangible assets, net 137,537 152,426
Other assets 7,566 7,740
-------------------------
Total assets $521,574 $500,457
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt
and capital lease obligations $ 1,305 $ 1,218
Accounts payable 52,479 50,389
Accrued expenses 48,194 33,243
-------------------------
Total current liabilities 101,978 84,850
Long-term debt 196,712 171,230
Obligations under capital leases 2,196 2,106
Deferred income taxes 8,001 8,203
Other liabilities 3,532 3,729
-------------------------
Total liabilities 312,419 270,118
-------------------------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.008 par; authorized 175,000
shares in 1999 and 75,000 shares in 1998;
issued 71,762 shares in 1999
and 72,714 shares in 1998 and
outstanding 67,023 shares in 1999
and 68,203 shares in 1998 574 582
Capital in excess of par 119,160 115,661
Retained earnings 120,630 105,989
-------------------------
240,364 222,232
Less 4,739 and 4,511 treasury shares, at cost
in 1999 and 1998, respectively (28,328) (3,206)
Stock subscriptions receivable (839) -
Accumulated other comprehensive earnings (2,042) 11,313
-------------------------
Total stockholders' equity 209,155 230,339
-------------------------
Total liabilities and stockholders' equity $521,574 $500,457
=========================
</TABLE>
See notes to condensed consolidated financial statements.
NBTY, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the three months
ended June 30,
---------------------
1999 1998
---- ----
<S> <C> <C>
Net sales $155,062 $138,931
---------------------
Costs and expenses:
Cost of sales 73,982 64,514
Catalog printing, postage and promotion 7,613 8,804
Selling, general and administrative 57,563 46,764
Litigation charges 4,600
Merger related costs 3,360
---------------------
143,758 123,442
---------------------
Income from operations 11,304 15,489
---------------------
Other income (expense):
Interest, net (4,456) (3,196)
Miscellaneous, net 203 1,328
---------------------
(4,253) (1,868)
---------------------
Income before income taxes 7,051 13,621
Income taxes 2,717 5,486
---------------------
Net income $ 4,334 $ 8,135
=====================
Net income per share:
Basic $ 0.06 $ 0.13
=====================
Diluted $ 0.06 $ 0.12
=====================
Weighted average common shares outstanding:
Basic 69,672 64,742
=====================
Diluted 70,534 69,008
=====================
</TABLE>
See notes to condensed consolidated financial statements.
NBTY, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the nine months
ended June 30,
---------------------
1999 1998
---- ----
<S> <C> <C>
Net sales $463,748 $425,751
---------------------
Costs and expenses:
Cost of sales 221,490 204,928
Catalog printing, postage and promotion 26,266 22,739
Selling, general and administrative 173,458 137,216
Litigation charges 4,600
Merger related costs 3,360
---------------------
425,814 368,243
---------------------
Income from operations 37,934 57,508
---------------------
Other income (expense):
Interest (14,083) (12,417)
Miscellaneous, net 720 2,728
---------------------
(13,363) (9,689)
---------------------
Income before income taxes 24,571 47,819
Income taxes 9,931 16,051
---------------------
Net income $ 14,640 $ 31,768
=====================
Net income per share:
Basic $ 0.21 $ 0.49
=====================
Diluted $ 0.20 $ 0.46
=====================
Weighted average common shares outstanding:
Basic 70,766 64,689
=====================
Diluted 71,895 68,986
=====================
</TABLE>
See notes to condensed consolidated financial statements.
NBTY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
For the nine months
ended June 30,
-------------------
1999 1998
---- ----
<S> <C> <C>
Net income $14,640 $31,768
Adjustments to reconcile net income to
cash provided by operating activities:
Gain on sale of product line (1,576)
Loss on sale of property, plant and
equipment 479 402
Depreciation and amortization 20,591 15,448
Provision for allowance for
doubtful accounts (33) 10
Changes in assets and liabilities,
net of acquistions:
Decrease (increase)in accounts
receivable 2,800 (1,173)
Increase in inventories (14,963) (24,593)
Increase in prepaid catalog
costs and other current assets (15,388) (6,005)
(Increase) decrease in other assets (394) 1,703
Increase(decrease) in accounts payable 3,864 (1,358)
Increase (decrease) in accrued expenses 31,353 (4,581)
(Decrease) increase in other liabilities (195) 1,240
--------------------
Net cash provided by operating
activities 42,754 11,285
--------------------
Cash flows from investing activities:
Purchase of property, plant and equipment (27,867) (51,049)
Proceeds from sale of property,
plant, and equipment 2 1
Proceeds from sale of product line 4,500
Proceeds from sale of short term
investments 8,362
Increase in intangible assets (503)
--------------------
Net cash used in investing activities (28,368) (38,186)
--------------------
Cash flows from financing activities:
Dividends paid (8,050)
Borrowings under long term debt
agreements 26,200 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 (829) (6,570)
Purchase of treasury stock (28,328)
Proceeds from stock options exercised 40
Repayment of promissory note (168,770)
Stock subscriptions receivable (839)
--------------------
Net cash (used in) provided by
financing activities (3,796) 15,035
--------------------
Effect of exchange rate changes on cash
and cash equivalents (1,330) (2,626)
--------------------
Net increase (decrease) in cash and cash
equivalents 9,260 (14,492)
Cash and cash equivalents at beginning of
period 14,308 20,262
--------------------
Cash and cash equivalents at end of period $23,568 $5,770
====================
Supplemental Disclosure of
Cash Flow Information:
Cash paid during the period
for interest $13,666 $14,823
Cash paid during the period for taxes $ 7,812 $12,859
</TABLE>
See notes to condensed consolidated financial statements.
NBTY, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the nine months ended June 30, 1999 and 1998
(Unaudited)
(In thousands, except per share amounts)
Supplemental Non-cash Investing and Financing Information:
During the nine months ended June 30, 1999, options were exercised
with 3,560 shares of common stock issued to certain officers for interest-
bearing stock subscriptions receivable aggregating $839 and cash of $67.
As a result of the exercise of those options, the Company expects to
receive a compensation deduction for tax purposes of approximately $14,847
and a tax benefit of approximately $5,790.
NBTY, INC. and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
1. Principles of consolidation and basis of presentation
The consolidated financial statements of NBTY, Inc. and Subsidiaries
have been prepared to give retroactive effect to the merger between
Nutrition Headquarters, Inc., Lee Nutrition, Inc. and Nutro
Laboratories, Inc. (collectively, the "Nutrition Headquarters Group"
and together with NBTY, the "Company") on April 20, 1998. Under the
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 8,772 shares of NBTY's common
stock exchanged for all the outstanding stock of Nutrition
Headquarters Group.
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany accounts
and transactions have been eliminated.
In the opinion of the Company, the unaudited condensed consolidated
financial statements contain all adjustments necessary to present
fairly its financial position as of June 30, 1999 and its results of
operations for the three and nine months ended June 30, 1999 and 1998
and statements of cash flows for the nine months ended June 30, 1999
and 1998. The condensed consolidated balance sheet as of September
30, 1998 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, 1999 and statements of cash flows for the nine months ended
June 30, 1999 are not necessarily indicative of the results to be
expected for the full year. This report should be read in conjunction
with the Company's annual report filed on Form 10-K for the fiscal year
ended September 30, 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.
Income taxes
Prior to the merger, Nutrition Headquarters Group had been treated as
an S corporation for Federal and state income 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.
Common shares and earnings per share
On April 12, 1999, the Company's Certificate of Incorporation was
amended to authorize the issuance of up to 175,000 shares of common
stock, par value $.008 per share. In March 1998, 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.
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.
The Company retired 4,511 treasury shares during fiscal 1999 and
accordingly, such retired shares are considered unissued. The
company has repurchased 4,739 treasury shares for $28,328 at an
average price of $5.98 per share.
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share." The statement requires the presentation of both
"basic" and "diluted" EPS on the face of the income statement. Basic
EPS is based on the weighted average number of shares of common stock
outstanding during each period while diluted EPS is based on the
weighted average number of shares of common stock and common stock
equivalents outstanding during each period. The Company adopted the
provisions of SFAS 128 effective October 1, 1998.
Reclassifications
Certain reclassifications have been made to conform prior year
amounts to the current year presentation.
Accounting changes
In February 1998, the American Institute of Certified Public
Accountants' Accounting Standards Executive Committee ("AcSEC")
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 during
fiscal 1998, and its application had no material effect on the
Company's financial position or results of operations.
In April 1998, the American Institute of Certified Public
Accountants' AcSEC 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 adopted SOP
98-5 on October 1, 1998, and its application had no material effect
on the Company's financial position or results of operations.
New accounting standards
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 by
public business enterprises in annual financial statements and
requires those enterprises to report selected information about
operating segments in interim financial reports to stockholders. It
also establishes standards for disclosures regarding products and
services, geographic areas and major customers. This SFAS is
effective for the Company on September 30, 1999.
In June 1998, the FASB issued SFAS No. 133, "Statement of Financial
Accounting Standards Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133"). SFAS 133 is effective for fiscal
years beginning after June 15, 1999 (October 1, 1999 for the
Company). SFAS 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. In June 1999, the FASB issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of Effective Date of Statement 133" which
postponed the adoption date of SFAS No. 133. As such, the Company is
not required to adopt this statement until fiscal year 2002.
Management of the Company anticipates that, due to its limited use of
derivative instruments, the adoption of SFAS 133 will not have a
significant effect on the Company's results of operations or its
financial position.
2. Acquisitions
In May 1999, the Company acquired the assets and certain liabilities
of a multi-level marketing company, Dynamic Essentials, Inc. (DEI)
for approximately $1,200 in cash. DEI was formed in December 1998 and
had aggregate sales of $2,081 during its first six months.
In August 1998, the Company acquired certain assets of three
privately held vitamin mail order companies: Home Health Products,
Inc., Barth-Spencer Corporation and Darby Health Group, Inc. for
$7,800 in cash. The aggregate sales of these companies were
approximately $20,000 in 1997. The mail order databases of the
acquired operations have been incorporated into NBTY's active direct
response customer base to increase the number of active customers.
3. Comprehensive earnings
On June 1, 1997, the FASB issued SFAS No. 130, "Reporting of
Comprehensive Income," which establishes standards for the reporting
and display of comprehensive income, its components (revenues,
expenses, gains and losses) and accumulated balances in a full set of
general purpose financial statements. Comprehensive income for the
Company includes net income and the effects of translation which are
charged or credited to the cumulative translation adjustments account
within stockholders' equity. SFAS No. 130 was adopted on October 1,
1998. Comprehensive earnings for the three and nine months ended June
30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
For the three months For the nine months
Ended June 30, Ended June 30,
-------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $4,334 $8,135 $14,640 $31,768
Changes in cumulative
translation adjustment (4,094) 751 (13,355) 6,086
----------------------------------------------
Comprehensive earnings $ 240 $8,886 $ 1,285 $37,854
==============================================
</TABLE>
Accumulated other comprehensive earnings (deficit), which had been
classified as a separate component of stockholders' equity, is
comprised of cumulative translation adjustments of $(2,042) and
$11,313 at June 30, 1999 and September 30, 1998, respectively.
4. Inventories
Inventories have been estimated using the gross profit method for the
interim periods. The components of the inventories are as follows:
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
-------- -------------
<S> <C> <C>
Raw materials and
Work-in-process $ 52,987 $ 50,913
Finished goods 79,354 68,694
-----------------------
$132,341 $119,607
=======================
</TABLE>
5. Earnings per share (EPS)
Basic EPS computations are based on the weighted average number of
common shares outstanding during the three and nine month periods
ended June 30, 1999 and 1998. Diluted EPS includes the dilutive
effect of outstanding stock options, if exercised. The following is
a reconciliation between the basic and diluted EPS, as required by
SFAS No. 128:
<TABLE>
<CAPTION>
For the three months For the nine months
June 30, June 30,
-------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic EPS --
Income available
To common stockholders $ 4,334 $ 8,135 $14,640 $31,768
=============================================
Numerator for diluted EPS --
Income available
To common stockholders $ 4,334 $ 8,135 $14,640 $31,768
=============================================
Denominator:
Denominator for basic EPS --
Weighted average shares 69,672 64,742 70,766 64,689
Effect of dilutive securities:
Stock options 862 4,265 1,129 4,297
---------------------------------------------
Denominator for diluted EPS --
Weighted average shares 70,534 69,008 71,895 68,986
=============================================
Net EPS:
Basic EPS $ 0.06 $ 0.13 $ 0.21 $ 0.49
=============================================
Diluted EPS $ 0.06 $ 0.12 $ 0.20 $ 0.46
=============================================
</TABLE>
6. Stock options:
During the nine months ended June 30, 1999, options were exercised
with 3,560 shares of common stock issued to certain officers for
interest-bearing stock subscriptions receivable aggregating $839 and
cash of $67. As a result of the exercise of those options, the
Company expects to receive a compensation deduction for tax purposes
of approximately $14,847 and a tax benefit of approximately $5,790.
7. Foreign operations:
The following information has been summarized by geographic area as
of June 30, 1999 and 1998 and for the three and nine months then
ended:
<TABLE>
<CAPTION>
Identifiable Assets
June 30,
---------------------
1999 1998
---- ----
<S> <C> <C>
United States $296,083 $256,077
United Kingdom 225,491 219,322
---------------------
$521,574 $475,399
=====================
<CAPTION>
Three months ended Three months ended
June 30, 1999 June 30, 1998
---------------------- ----------------------
Operating Operating
Sales Income Sales Income
----- --------- ----- ---------
<S> <C> <C> <C> <C>
United States $100,830 $ 3,946 $ 92,615 $13,027
United Kingdom 54,232 7,358 46,316 2,462
------------------------------------------------
$155,062 $11,304 $138,931 $15,489
================================================
<CAPTION>
Nine months ended Nine months ended
June 30, 1999 June 30, 1998
----------------------- -----------------------
Operating Operating
Sales Income Sales Income
----- --------- ----- ---------
<S> <C> <C> <C> <C>
United States $293,928 $18,729 $282,853 $47,989
United Kingdom 169,820 19,205 142,899 9,519
------------------------------------------------
$463,748 $37,934 $425,751 $57,508
================================================
</TABLE>
8. Commitment and contingencies:
In August 1997, the Company acquired Holland & Barrett from the
German-based GEHE AG. A dispute arose over certain provisions of the
purchase agreement. On July 30, 1999, the court rendered a decision
in favor of GEHE. Results for the third quarter and nine months of
1999 were affected by a litigation charge of $4,600 which includes
the amount of the judgment plus interest and legal fees.
NBTY, INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
(In thousands, except per share amounts)
Results of Operations:
The following table sets forth income statement data of the Company
as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Three months Nine months
Ended Ended
June 30, June 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales 47.7 46.4 47.8 48.1
Catalog printing, postage and promotion 4.9 6.3 5.7 5.3
Selling, general and administrative 37.1 33.7 37.4 32.2
Litigation charges 3.0 1.0
Merger related costs 2.5 .9
------------------------------------------
92.7 88.9 91.9 86.5
------------------------------------------
Income from operations 7.3 11.1 8.1 13.5
Other income (expenses), net (2.7) (1.3) (2.9) (2.3)
------------------------------------------
Income before income taxes 4.6 9.8 5.2 11.2
Income taxes 1.8 3.9 2.1 3.7
------------------------------------------
Net income 2.8% 5.9% 3.1% 7.5%
==========================================
</TABLE>
NBTY, INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
(In thousands, except per share amounts)
Results of Operations
- ---------------------
For the three months ended June 30, 1999 compared to the three months ended
June 30, 1998:
Net sales. Net sales in the third quarter ended June 30, 1999 were
$155,062 compared with $138,931 for the prior comparable period, an
increase of $16,131 or 11.6%. Direct response sales were $40,460,
compared to $44,135 for the prior comparable period (decrease of
$3,675 or 8.3%), wholesale sales were $33,729 compared to $32,671
(increase of $1,058 or 3.2%), U.S. retail sales were $26,949 compared
to $16,695 (increase of $10,254 or 61.4%) and U.K. retail sales were
$53,485 compared to $45,430 (increase $8,055 or 17.7%). The new
multi-level marketing division was $439 for the three months. The
Company operated 292 stores in the U.S. and 415 stores in the U.K. as
of June 30, 1999 compared to 142 stores in the U.S. and 418 in the
U.K. as of June 30, 1998. Sales growth in the U.S. retail channel
reflected the greater number of stores compared to last year.
Costs and expenses. Cost of sales as a percentage of sales were 47.7%
for 1999 and 46.4% for 1998. The increase was associated with changes
in product mix.
Catalog printing, postage, and promotion expenses were $7,613 in 1999, a
decrease of $1,191 (13.5% decrease) from $8,804 in 1998. This decrease
was due primarily to a reduction in print media advertising in direct
response. As a percentage of sales, expenses were 4.9% for the current
quarter and 6.3% for the prior comparable quarter.
Selling, general and administrative expenses were $57,563 for the
quarter, or 37.1% as a percentage of sales, compared with $46,764 or
33.7% as a percentage of sales, an increase of $10,799 (23.1%
increase). The largest categories and increases are indirect salaries
and rents which increased due primarily to the U.S. retail store
expansion program.
Litigation charges. In August 1997, the Company acquired Holland &
Barrett from the German-based GEHE AG. A dispute arose over certain
provisions of the purchase agreement. On July 30, 1999, the court
rendered a decision in favor of GEHE. Results for the third quarter
of 1999 were affected by a litigation charge of $4,600 which includes
the amount of the judgment plus interest and legal fees.
Interest expense. Interest expense was $4,456, an increase of $1,260
compared to $3,196 during the comparable quarter. The major components
are interest on Senior Subordinated Notes associated with the Holland
& Barrett acquisition and the Credit and Guarantee Agreement (CGA)
used for the stock repurchase and for capital expenditures.
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 $7,051 for 1999 and $13,621 for 1998.
After income taxes, the Company had a net profit of $4,334 (or basic
earnings per share of $0.06, diluted earnings per share of $0.06) for
the three month period ended June 30, 1999, and $8,135 (or basic
earnings per share of $0.13, diluted earnings per share of $0.12) for
the three months ended June 30, 1998.
Results of Operations
- ----------------------
For the nine months ended June 30, 1999 compared to the nine months ended June
30, 1998:
Net sales. Net sales in the nine months ended June 30, 1999 were
$463,748 compared with $425,751 for the prior comparable period, an
increase of $37,997 or 8.9%. Direct response sales were $129,686,
compared to $138,067 for the prior comparable period (decrease of
$8,381 or 6.1%), wholesale sales were $94,497 compared to $99,433
(decrease of $4,936 or 5.0%), U.S. retail sales were $71,948 compared
to $48,009 (increase of $23,939 or 49.9%) and U.K. retail sales were
$167,178 compared to $140,242 (increase $26,936 or 19.2%). The new
multi-level marketing division was $439 for the current year. The
Company operated 292 stores in the U.S. and 415 stores in the U.K.
as of June 30, 1999 compared to 142 stores in the U.S. and 418 in the
U.K. as of June 30, 1998. The Company experienced more competitive
pressures and accordingly, direct response and wholesale sales channels
showed decreases in sales. Sales growth in the U.S. retail channel
reflected the greater number of stores compared to last year.
Costs and expenses. Cost of sales as a percentage of sales were 47.8%
for 1999 and 48.1% for 1998. The decrease was associated with changes
in product mix and lower raw material pricing from suppliers. In
addition, in the nine months ended June 30, 1999 compared to the nine
months ended June 30, 1998, a significant number of products supplied
by outside vendors to Holland and Barrett were replaced by NBTY
supplied products.
Catalog printing, postage, and promotion expenses were $26,266 in 1999
an increase of $3,527 (15.5% increase), from $22,739 in 1998. As a
percentage of sales, expenses were 5.7% for the nine months and 5.3%
for the prior nine months. Such increase was principally due to H&B's
television commercials in October 1998 and greater number of catalogs
being mailed and advertising for store openings.
Selling, general and administrative expenses were $173,458 for the nine
months, or 37.4% as a percentage of sales, compared with $137,216 or
32.2% as a percentage of sales, an increase of $36,242 (26.4%
increase). The largest segments and increases are indirect salaries,
rents, freight, depreciation of property, plant and equipment and
legal. These expenses increased due primarily to the U.S. retail
expansion program.
Litigation charges. In August 1997, the Company acquired Holland &
Barrett from the German-based GEHE AG. A dispute arose over certain
provisions of the purchase agreement. On July 30, 1999, the court
rendered a decision in favor of GEHE. Results for the nine months of
1999 were affected by a litigation charge of $4,600 which includes
the amount of the judgment plus interest and legal fees.
Interest expense. Interest expense was $14,083, an increase of $1,666
compared to $12,417 during the comparable quarter. The major
components are interest on Senior Subordinated Notes associated with
the Holland & Barrett acquisition and the Credit and Guarantee
Agreement (CGA) used for the stock repurchase and capital expenditures
and the write-off of fees associated with the amended and restated CGA.
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
- ---------------------
For the nine months ended June 30, 1999 compared to the nine months ended June
30, 1998 (continued):
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 $24,571 for 1999 and $47,819 for 1998.
After income taxes, the Company had a net profit of $14,640 (or basic
earnings per share of $0.21, diluted earnings per share of $0.20) for
the nine month period ended June 30, 1999, and $31,768 (or basic
earnings per share of $0.49, diluted earnings per share of $0.46) for
the nine months ended June 30, 1998.
Liquidity and Capital Resources
- -------------------------------
Working capital was $98,980 at June 30, 1999, compared with $89,106
at September 30, 1998, an increase of $9,874.
In April 1999, the Company entered into an amended and restated
Credit and Guarantee Agreement (CGA) which expires September 30, 2003
increasing the borrowing limit from $60,000 to $135,000. The CGA
provides for borrowings for working capital, general corporate
purposes and acquisition of the Company's securities. 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 and subject to normal banking terms
and conditions and the maintenance of various financial ratios and
covenants. At June 30, 1999, there were borrowings of $34,000 under
this facility. The Company plans on utilizing the funds for working
capital needs and to buy back its common stock under its existing
stock purchase plan. For the three months ended June 30, 1999, the
Company repurchased $28,328 (4,739 shares) of its common stock.
In connection with the August 1997 acquisition of Holland & Barrett,
the Company issued $150,000 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 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.
In April 1998, the Company sold certain assets of its cosmetic pencil
operation for approximately $6,000, of which $4,500 was paid in cash.
On July 1, 1998, the Company sold 3,450 shares of common stock in a
public offering. The Company realized approximately $55,000 which was
used to repay borrowings under the Company's Credit and Guarantee
Agreement and for working capital.
The Company believes that existing cash balances, internally-
generated funds from operations, amounts available under the CGA and
other debt facilities 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 $42,754 in 1999 and
$11,285 in 1998 primarily due to increases in depreciation and
amortization and accrued expenses. Net cash used in investing
activities was $28,368 in 1999 and $38,186 in 1998 due to retail stores
and plant expansion programs. Net cash used in financing activities
was $3,796 due to the repurchase of $28,328 of its common stock in 1999
and net cash provided by financing activities was $15,035 due to
borrowings under the CGA in 1998.
Management believes that inflation did not have a significant impact on its
operations.
Year 2000.
The Year 2000 problem is a result of software computer programs being
written using two digits rather than four to define the applicable
year. The Company recognizes the risk that its software programs or
computer hardware that have date-sensitive software or embedded chips
may recognize a date using "00" as the year 1900 rather than the Year
2000. This could result in system failures or miscalculations
causing disruptions to operations including, among other things, a
temporary inability to process transactions, send invoices, or engage
in similar normal business activities. The Company recognizes the
need to ensure that its operations will not be adversely impacted by
Year 2000 software and hardware failure. The Company is developing a
plan to ensure that its systems are compliant with the requirements
to process transactions in the Year 2000. That plan consists of four
phases: assessment, remediation, testing and implementation, and
encompasses internal information technology (IT) systems and non-IT
systems, as well as third party exposures.
The following is a status report of the Company's effort to date:
The Company's State of Readiness
The Company has completed the assessment of its IT systems and non-IT
systems.
Third Parties And Their Exposure To The Year 2000
The Company has requested from a majority of its principal suppliers
and vendors written statements regarding their knowledge of and plans
for meeting Year 2000 requirements. To date, the Company is not aware
of any principal supplier or vendor with a Year 2000 issue that could
materially impact the Company's results of operations, liquidity, or
capital resources. However, the Company has no means of ensuring that
external agents will be Year 2000 ready. The inability of external
agents to complete their Year 2000 resolution process in a timely
fashion could materially impact the Company. The effect of
non-compliance by external agents, if any, cannot be determined.
Risks
Management of the Company believes that it is working on an effective
program to resolve the Year 2000 issue in a timely manner. The
Company has not yet completed all necessary phases of the Year 2000
program. The Company has retained an outside firm to assist the
Company's personnel. It is estimated that the costs of this project
will approximate $200. In the event that the Company does not
complete any additional phases, the Company could experience business
interruptions. In addition, disruptions in the economy generally
resulting from the Year 2000 issues could also materially adversely
affect the Company. The amount of potential liability and lost
revenue cannot be reasonably estimated at this time.
Contingency Plans
The Company currently has no contingency plans in place in the event
it does not complete all phases of the Year 2000 program. The
Company plans to evaluate the status of completion in September 1999
and determine whether such a plan is necessary.
New pronouncements
- ------------------
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 by public
business enterprises in annual financial statements and requires those
enterprises to report selected information about operating segments in
interim financial reports to stockholders. It also establishes
standards for disclosures regarding products and services, geographic
areas and major customers. This SFAS is effective for the Company on
September 30, 1999. The adoption of SFAS No. 131 will not have a
significant impact on the results of operations or its financial
position, however it may require changes to certain disclosures.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 is
effective for all fiscal quarters of all fiscal years beginning after
June 15, 1999 (October 1, 1999 for the Company). SFAS No. 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 SFAS No. 133 will not have a significant
effect on the Company's results of operations or its financial position.
This filing contains certain forward-looking statements and
information that are based on the beliefs of management, as well as
assumptions made by and information currently available to the
Company's management. When used in this document, the words
"anticipate," "believe," "estimate," and "expect" and similar
expressions, as they relate to the Company are intended to identify
forward-looking statements. Such statements reflect the current views
of the Company with respect to future events and are subject to certain
risks, uncertainties and assumptions. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described
herein as anticipated, believed, estimated or expected. The Company
does not intend to update these forward-looking statements.
NBTY, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
(Unaudited)
Item 1. Legal Proceedings
LITIGATION:
In August 1997, the Company acquired Holland & Barrett from the
German-based GEHE AG. A dispute arose over certain provisions
of the purchase agreement. On July 30, 1999, the court rendered
a decision in favor of GEHE. A litigation charge of $4,600,
which includes the amount of the judgment plus interest and
legal fees, will be paid in August 1999.
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 Note 15 in Form 10-K for the year ended September 30, 1998.
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
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
There was no Form 8-K filed during the third quarter of the
fiscal year ending September 30, 1999.
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, 1999
/s/ Harvey Kamil
------------------------------------
Harvey Kamil, Executive Vice
President, Secretary
(Principal Financial
and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 23,568
<SECURITIES> 0
<RECEIVABLES> 23,751
<ALLOWANCES> 1,078
<INVENTORY> 132,341
<CURRENT-ASSETS> 200,958
<PP&E> 256,228
<DEPRECIATION> 80,715
<TOTAL-ASSETS> 521,574
<CURRENT-LIABILITIES> 101,978
<BONDS> 200,213
0
0
<COMMON> 574
<OTHER-SE> 208,581
<TOTAL-LIABILITY-AND-EQUITY> 521,574
<SALES> 463,748
<TOTAL-REVENUES> 463,748
<CGS> 221,490
<TOTAL-COSTS> 204,324
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,083
<INCOME-PRETAX> 24,571
<INCOME-TAX> 9,931
<INCOME-CONTINUING> 14,640
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,640
<EPS-BASIC> 0.21
<EPS-DILUTED> 0.20
</TABLE>
