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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the fiscal year ended September 30, 2001.
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 charter)
DELAWARE 11-2228617
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
90 Orville Drive 11716
Bohemia, New York (Zip Code)
(Address of principal executive office)
(631) 567-9500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.008 per share
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment of this Form 10-K [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing price of shares of Common Stock on
the National Association of Securities Dealers Automated Quotation
("NASDAQ") National Market System at November 30, 2001 was approximately
$523,597,000. On such date, the closing price of the Registrant's Common
Stock as reported by NASDAQ, was $11.62. The number of shares of Common
Stock of the Registrant outstanding at November 30, 2001 was approximately
65,796,000.
Documents Incorporated by Reference: None
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NBTY, INC.
2001 ANNUAL REPORT OF FORM 10-K
TABLE OF CONTENTS
Caption Page
Forward Looking Statements 4
PART I
ITEM 1 BUSINESS 5
General 5
Business Strategy 5
Industry Overview 8
Marketing and Distribution 9
Operating Segments 9
Sales, Marketing and Advertising 11
Manufacturing, Distribution and Quality Control 12
Research and Development 13
Competition 13
Compliance with Environmental Laws and Regulations 13
Government Regulation 14
International Operations 18
Trademarks 18
ITEM 2 PROPERTIES 19
ITEM 3 LEGAL PROCEEDINGS 22
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 22
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 23
Dividend Policy 23
Price Range for Common Stock 23
ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA 25
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION 26
Background 26
Results of Operations 26
Seasonality 30
Liquidity and Capital Resources 30
Inflation 31
New Accounting Developments 31
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 33
2
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 33
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 33
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 34
ITEM 11 EXECUTIVE COMPENSATION 37
Summary Compensation Table 37
Employment Agreements 37
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 38
Management 38
NBTY Inc. Employee Stock Ownership Plan and Trust ("ESOP") 41
Eligibility 41
Contributions 41
Vesting 41
Distribution 41
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 42
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES 43
Financial Statements 44
Financial Statement Schedule 69
Signatures 70-71
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Forward Looking Statements
This annual report on Form 10-K contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995
with respect to the financial condition, results of operations and business
of the Company and the referenced acquisition. All of these forward-looking
statements, which can be identified by the use of terminology such as
"subject to", "believe," "expects," "may," "will," "should," or
"anticipates," or the negative thereof, or variations thereon, or
comparable terminology, or by discussions of strategy which, although
believed to be reasonable, are inherently uncertain. Factors which may
materially affect such forward-looking statements include: (i) slow or
negative growth in the nutritional supplement industry; (ii) interruption
of business or negative impact on sales and earnings due to acts of war,
terrorism, bio-terrorism, civil unrest or disruption of mail service; (iii)
the inability of, or the length of time required for, the Company to
assimilate acquisitions successfully into the mainstream of its business;
(iv) inability of the Company to successfully implement its business
strategy; (v) inability to retain customers of companies (or mailing lists)
recently acquired; (vi) fluctuations in foreign currencies, and more
particularly the British Pound; (vii) exposure to, expense of prosecuting,
defending and/or resolving claims or litigation, including but not limited
to, product liability claims, class action suits, stockholder derivative
suits, patent or trademark infringements suits and other litigation which
may arise from time to time; (viii) the ability of the Company to obtain
insurance coverage and any losses or damages sustained by the Company not
covered by insurance; (ix) increases in the Company's cost of borrowings
and unavailability of additional debt or equity capital; (x) adverse
publicity regarding the consumption of nutritional supplements; (xi)
increased competition or the inability of the Company to gain and/or hold
its market share of wholesale and retail customers; (xii) unavailability of
electricity in certain geographical areas; (xiii) loss or retirement of key
members of management; (xiv) the Company's inability to manage growth and
execute its business plan; (xv) the ability of the Company to manage its
retail operations efficiently; (xvi) consumer acceptance of the Company's
products; (xvii) uncertainty in negotiating and consummating acquisitions
that may be subject to bankruptcy court approval and bidding process set by
a bankruptcy court; (xviii) the ability of the Company to renew leases on
its retail locations; (xix) the Company's ability to consummate future
acquisitions; (xx) the absence of clinical trials for many of the Company's
products; (xxi) sales and earnings volatility; (xxii) the Company's ability
to manufacture its products efficiently; (xxiii) the rapidly changing
nature of the internet and on-line commerce; (xxiv) increased costs,
including, but not limited to, labor and material costs; (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) unavailability of, or inability to consummate,
advantageous acquisitions; (xxviii) the mix of the Company's products and
the profit margins thereon; (xxix) the availability and pricing of raw
materials; (xxx) other factors beyond the Company's control; (xxxi) adverse
federal, state or foreign legislation or regulation or adverse
determinations by regulators; (xxxii) changes in general worldwide economic
and political conditions in the markets in which the Company may compete
from time to time; (xxxiii) factors discussed in the Company's
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filings with the Securities and Exchange Commission.
Readers are cautioned not to place undue reliance on forward-looking
statements. The Company undertakes no 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, events, and levels of
activity, performance or achievements. The Company does not assume a duty
to update or revise any of the forward-looking statements as a result of
new information, future events or otherwise.
PART I
Item 1. BUSINESS
General
NBTY, Inc. (the "Company") is a leading vertically integrated manufacturer,
marketer and retailer of a broad line of high quality, value-priced
nutritional supplements in the United States, the United Kingdom, Ireland
and internationally. Under a number of brands, the Company offers over
1,500 products, including vitamins, minerals, herbs, amino acids, sports
nutrition products, diet aids and other nutritional supplements. The
Company is vertically integrated in that it purchases raw materials,
formulates and manufactures its products and then markets its products
through its four channel distribution system: (i) Puritan's Pride/direct
response, the leading U.S. nutritional supplement e-commerce/direct
response program under the Puritan's Pride(r) brand in catalogs and through
the internet; (ii) Vitamin World(r) and Nutrition Warehouse(r) retail stores,
of which there are currently 531 stores (with leases signed for an additional
20 stores) throughout the U.S. in 46 states, Guam and Puerto Rico; (iii)
Holland & Barrett(r) retail stores of which there are currently 461 located
throughout the United Kingdom and Ireland; and (iv) wholesale distribution to
mass merchandisers, drug store chains, supermarkets, independent pharmacies
and health food stores under various brand names, including the Nature's
Bounty(r) brand. The Company currently manufactures approximately 90% of the
nutritional supplements it sells. NBTY targets the growing value-conscious
consumer segment by offering high quality products at a value price point.
Business Strategy
The Company's objective is to increase sales, improve manufacturing
efficiencies, increase profitability and strengthen its market share
position through the following key strategies:
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Strategic Acquisitions. The Company seeks acquisition opportunities, both
in the U.S. and internationally, of companies which complement or extend
its existing product lines, increase the Company's market share, expand its
distribution channels, and/or are compatible with its business philosophy.
During fiscal year 2001, NBTY completed two acquisitions: NatureSmart, LLC
and affiliated companies, the mail order division of Whole Foods Market,
Inc.; and (2) Global Health Sciences, Inc. and related companies,
manufacturers and marketers of specialty nutritional supplements. NBTY has
successfully integrated the mail order operations of NatureSmart by: (i)
merging customer lists into the Company's computerized mailing list; (ii)
expanding product lines; (iii) redesigning mail order catalogs; (iv) re-
pricing certain products; and (v) implementing proven marketing techniques.
Enhance Vertical Integration. The Company believes that its vertical
integration gives it a significant competitive advantage by allowing it to:
(i) maintain higher quality standards while lowering product costs, a
portion of which are passed on to the customer as lower prices; (ii) more
quickly respond to scientific and popular reports and consumer buying
trends; (iii) more effectively meet customer delivery schedules; (iv)
reduce dependence upon outside suppliers; and (v) improve overall operating
margins. The Company continually evaluates ways to further enhance its
vertical integration by leveraging manufacturing, distribution, purchasing
and marketing capabilities, and otherwise improve its operations.
Introduce New Products. The Company has consistently been among the first
in the industry to introduce innovative products in response to new
studies, research and consumer preferences. Given the changing nature of
consumer demands for new products and the growing publicity over the
importance of vitamins, minerals and nutritional supplements in the
promotion of general health, management believes that NBTY will continue to
maintain its core customer base and attract new customers based upon its
ability to rapidly respond to consumer demands with high quality, value-
oriented products.
Expand Existing Channels of Distribution. The Company plans to continue
expanding and improving its existing channels of distribution through
aggressive marketing and synergistic acquisitions in order to increase
sales and profitability and enhance overall market share.
* Increase Puritan's Pride direct response sales. NBTY expects to
continue strengthening its leading position in the e-
commerce/direct response business by: (i) improving automated
picking and packing to fulfill sales order requests with
greater speed and accuracy; (ii) increasing manufacturing
capability to quickly introduce and deliver new products in
response to customer demand; (iii) using more frequent
promotions to further improve response rates; and (iv)
promoting the Internet web site. The Company also intends to
continue its strategy of acquiring the customer lists, brand
names and inventory of other mail order companies which have
similar or complementary products which
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the Company believes can be efficiently integrated into its own
operations without adding substantial overhead expenses.
* Increase Retail Sales in the U.S. Over the last several years,
the Company's strategy has been the development of a nationwide
chain of approximately 531 Vitamin World stores located in
regional and outlet malls. The Company has added approximately
333 Vitamin World stores in the past three fiscal years or
63% of the total number of stores presently in operation. New
stores historically do not have the same high customer traffic
as more mature stores. With the recent industry-wide downturn,
it has taken longer for new stores to reach profitability. As
a result, the Company has scaled back plans for new store
openings. In fiscal 2001, the Company opened 50 Vitamin World
stores and plans to open approximately 20 new stores in fiscal
2002. In an effort to increase customer traffic, the Company
successfully introduced its Savings Passport Card, a customer
loyalty program, which provides incentives for the consumer to
purchase at Vitamin World. It is an additional tool for the
Company to track customer preferences and purchasing trends.
There are over one and one-half million Savings Passport Card
members. The Company operates retail stores under Vitamin World
and Nutrition Warehouse names.
* Increase Retail Sales in the U.K. and Ireland. The Company
continues its strategy of selectively expanding the number of
its Holland & Barrett stores located throughout the U.K.
Presently, there are 461 Holland & Barrett stores in the U.K.
In fiscal 2001, Holland & Barrett opened or acquired 26 new
stores. In addition, in June 2001, Holland & Barrett expanded
its operations into Ireland through the acquisition of a chain
of 12 health food stores doing business as Nature's Way. It is
projected that during fiscal 2002, approximately 24 new stores
will be opened in the U.K. and Ireland.
Build Infrastructure to Support Growth. NBTY has technologically advanced,
state-of-the-art manufacturing and production facilities, with total
production capacity of approximately ten billion tablets and capsules per
year. The Company's 131,000 square foot state-of-the-art soft gelatin
encapsulation manufacturing facility on Long Island, New York, is capable
of producing five billion soft gel capsules per year. The Company regularly
evaluates its operations and makes investments in building infrastructure,
as necessary, to support its continuing growth. During fiscal year 2001,
the Company purchased and/or leased additional space in New York, Colorado
and California.
Experienced Management Team. The Company's management team has extensive
experience in the nutritional supplement industry and has developed long-
standing relationships with its suppliers and its customers. The executive
officers and directors have an average of approximately 20 years with the
Company.
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Recent Acquisitions. During fiscal 2001, the Company completed certain
acquisitions.
* On May 25, 2001, it completed the acquisition of the business
of Global Health Sciences, Inc. and certain of its affiliated
companies ("Global Group"). NBTY was the successful bidder in
an auction ordered by a bankruptcy court in California. The
purchase price was approximately $40 million in cash, less
adjustments. The Global Group is located in Anaheim,
California and is a leading manufacturer of nutritional powders
with a reputation for high quality. It manufactures products
used for meal replacements, weight control and protein powders
formulated to improve physical performance, and it also
produces formulations for herbal, vitamin and mineral tablets.
For the twelve-month period ended April 30, 2001, and prior to
its acquisition by the Company, the Global Group had sales of
$171 million.
* In May 2001, the Company completed the acquisition of
NatureSmart, LLC from Whole Foods Market, Inc. for
approximately $29 million in cash. NatureSmart, located in
Thornton, Colorado, prior to its acquisition by the Company,
had annual sales in fiscal 2000 of $59 million. NatureSmart,
through its four divisions, manufactures and markets
nutritional supplements, including vitamins, minerals, herbs
and personal care products through mail order operations having
approximately 350,000 active customers. It also manufactures
private label vitamins for mass market, specialty retailers and
healthcare professionals.
Management believes that the above acquisitions will provide the Company
with manufacturing and marketing capability in the West and will supplement
the Company's current operations.
* In June, 2001, the Company's Holland & Barrett subsidiary
acquired a chain of twelve vitamin retail stores in Ireland
doing business under the name of Nature's Way.
* In December, 2000, the Company completed the purchase of a
chain of five retail vitamin stores in the Buffalo, New York
area, doing business as Vitamin City.
Industry Overview
During the past year, there was a general weakness in the U.S. economy. An
industry reporting source, Information Resources, Inc. ("IRI") disclosed an
industry-wide decrease in the nutritional supplement segment of the food,
drug and mass-market sector. Following the events that occurred in
September, 2001, retail sales declined further as traffic in shopping malls
was dramatically curtailed. However, despite these facts, the Company was
able to report record sales due, in part, to its four-channel distribution
system and its ability to gain a larger share of the market.
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The Company's principal executive offices are located at 90 Orville Drive,
Bohemia, New York 11716 and its telephone number is 631-567-9500. The
Company's United Kingdom subsidiary, Holland & Barrett, has its principal
executive offices in Nuneaton, United Kingdom.
Marketing and Distribution
The Company operates in four reportable business segments: Puritan's
Pride/direct response, U.S. retail, U.K./Ireland retail, and wholesale
(which includes network marketing).
Operating Segments
The following table sets forth the percentage of net sales for each of the
Company's operating segments:
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Fiscal Years Ended September 30,
--------------------------------
1999 2000 2001
---- ---- ----
Puritan's Pride/direct response 28% 25% 21%
Retail:
U.S. 17% 21% 22%
U.K./Ireland. 35% 34% 33%
Wholesale 20% 20% 24%
--- --- ---
100% 100% 100%
Puritan's Pride/direct response. The Company offers, through mail order and
e-commerce, a full line of vitamins and other nutritional supplement
products as well as selected personal care items under its Puritan's Pride
brand names at prices which are normally at a discount from those of similar
products sold in retail stores.
Through its Puritan's Pride brand, NBTY is the leader in the U.S.
direct response nutritional supplement industry with over six million
customers and with response rates which management believes to be above
the industry average. The Company mails its catalogs approximately
eight times a year. NBTY intends to continue to appeal to new customers
in its direct response operation through aggressive marketing
techniques both in the U.S. and the U.K., and through selective
acquisitions.
In order to maximize sales per catalog and reduce mailing and printing
costs, the Company regularly updates its mail order list to include new
customers and to eliminate those who have not placed an order within a
designated period of time. In addition, in order to add new customers to
its mailing lists and web sites and to increase average order sizes, the
Company places advertisements in newspaper supplements, conducts insert
programs with other mail order companies and has special promotions on a
quarterly basis which offer customers combinations of products and
quantities at promotional prices. The Company's use of state-of-the-art
equipment in its catalog operations, such as computerized mailing, address
bar coding and automated picking and packing systems enables the Company to
fill orders typically within 48 hours of their receipt which allows the
Company to lower its per customer distribution costs, thereby enhancing
margins and enabling the Company to offer its products at lower prices than
its competitors.
The Company's www.puritan.com web site provides a practical and convenient
method for consumers wishing to purchase products to promote healthy
living. By using this web site, consumers have access to the full line of
more than 1,000 products which are offered through the Company's Puritan's
Pride mail order catalog. Consumer orders are processed with the speed,
economy and efficiency of the Company's automated picking and packing
system.
The Company maintains another web site, www.vitaminworld.com, to
accommodate customers who wish to purchase nutritional supplements on the
internet, or to find a
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conveniently located store to make purchases in person. This web site
provides the consumer with information concerning the products offered in
the Company owned and operated stores and with information about store
locations.
Retail U.S. The Company expects to be operating approximately 551 stores
located in 46 states, Guam and Puerto Rico, under the Vitamin World and
Nutrition Warehouse names by the end of calendar 2002. Each location
carries a full line of the Company's products under the Company's brand
names as well as products manufactured by others. Through direct
interaction between the Company's personnel and the public, the Company is
able to identify buying trends, customer preferences or dislikes,
acceptances of new products and price trends in various regions of the
country. This information is useful in initiating sales programs for all
divisions of the Company.
Retail U.K./Ireland Holland & Barrett ("H&B") is one of the leading
nutritional supplement retailers in the United Kingdom, presently having
approximately 461 locations. H&B markets a broad line of nutritional
supplement products, including vitamins, minerals and other nutritional
supplements (approximately 65% of H&B's revenues) as well as food products,
including fruits and nuts, confectionery and other items (approximately 35%
of H&B's revenues). Nutritional supplement products manufactured by NBTY
accounted for more than 47% of H&B's total sales. During June 2001, H&B
completed the acquisition of a chain of twelve retail stores in Ireland
selling nutritional supplements under the name Nature's Way.
Wholesale/Mass Marketing. The Company markets its products under various
brand names to many stores, including leading drug store chains and
supermarkets, independent pharmacies, health food stores, health food store
wholesalers and other retailers such as mass merchandisers. The Nature's
Bounty brand is sold to drug store chains and drug wholesalers. The Company
sells a full line of products to supermarket chains and wholesalers under
the brand name Natural Wealth at prices designed for the "price conscious"
consumer. The Company sells directly to health food stores under the brand
name Good 'N Natural and sells products, including a specialty line of
vitamins, to health food wholesalers under the brand name American Health.
The Company has expanded sales of various products to many countries
throughout Europe, Asia and Latin America.
Sales, Marketing and Advertising
Worldwide, the Company employs approximately 7,900 persons, which includes
2,575 sales associates located throughout the U.S., Guam and Puerto Rico in
its Vitamin World, Nutrition Warehouse and Vitamin City stores and
approximately 51 associates who sell to NBTY's wholesale distributors and
customers. In addition, NBTY sells through commissioned sales
representative organizations. For the fiscal years ended September 30,
1999, 2000 and 2001, NBTY spent approximately $33 million, $34 million and
$49 million, respectively, on advertising and promotions including print
and media and cooperative advertising. NBTY creates its own advertising
materials through its in-house staff of approximately 33 associates. H&B
employs approximately 3,072 associates, with approximately 2,783 in retail,
162 in distribution and 127 in administration. H&B runs
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advertisements in national newspapers, conducts sales promotions and
publishes a glossy magazine with articles and promotional materials.
Manufacturing, Distribution and Quality Control
The Company employs approximately 1,200 manufacturing, shipping and
packaging associates throughout the United States. The Company's
manufacturing is performed in New York, California, Colorado, New Jersey
and Illinois and is conducted in accordance with good manufacturing
practice standards promulgated by the United States Food and Drug
Administration and other applicable regulatory standards. The Company
believes that the capacity of its manufacturing and distribution facilities
is adequate to meet the requirements of its current business and will be
adequate to meet the requirements of anticipated increases in net sales.
The Company's manufacturing process places special emphasis on quality
control. All raw materials used in production initially are held in
quarantine during which time the Company's laboratory technicians assay the
production against the manufacturer's certificate of analysis. Once
cleared, a lot number is assigned, samples are retained and the material is
processed by formulating, mixing and granulating, compression and sometimes
coating operations. After the tablet or capsule is manufactured, laboratory
technicians test its weight, purity, potency, dissolution and stability.
When products such as vitamin tablets are ready for bottling, the Company's
automated equipment counts the tablets, inserts them into bottles, adds a
tamper-resistant cap with an inner safety seal and affixes a label. The
Company uses computer-generated documentation for picking and packing for
order fulfillment.
The principal raw materials used in the manufacturing process are vitamins
purchased from bulk manufacturers in the United States, Japan and Europe.
Raw materials are available from numerous sources. No one supplier accounts
for more than 10% of the Company's raw material purchases.
The Company's manufacturing operations are designed to allow low cost
production of a wide variety of products of different quantities, sizes and
packaging while maintaining a high level of customer service and quality.
Flexible production line changeover capabilities and reduced cycle times
allow the Company to respond quickly to changes in manufacturing schedules.
Inventory Control. The Company has installed inventory control systems at
its facilities that enable it to track each product as it is received from
its supply sources through manufacturing and shipment to its customers. To
facilitate this tracking, a significant number of products sold by the
Company are bar coded. The Company's inventory control systems report
shipping, sales and individual SKU level inventory information. The Company
manages the retail sales process by monitoring customer sales and inventory
levels by product category. The Company believes that its distribution
capabilities enable it to increase flexibility in responding to the
delivery requirements of its customers.
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Information from the Company's point-of-sale computer system is regularly
reviewed and analyzed by the purchasing staff to assist in making
merchandise allocation and markdown decisions. The Company uses an
automated reorder system to maintain in-stock positions on key items. These
systems provide management with the information needed to determine the
proper timing and quantity of reorders.
Financial Reporting. The Company's financial reporting systems provide
management with detailed financial reporting to support management's
operating decisions and cost control efforts. This system provides
functions such as scheduling of payments, receiving of payments, general
ledger interface, vendor tracking and flexible reporting options.
Research and Development
In 2001, 2000 and 1999, the Company did not expend any significant amounts
for basic research and development of new products.
Competition
The market for nutritional products is highly competitive. Competition is
based primarily on price, quality and assortment of products, customer
service, marketing support, and availability of new products. The Company
believes it competes favorably in all of these areas.
The Company's direct competition consists primarily of publicly and
privately owned companies, highly fragmented in terms of both geographical
market coverage and product categories. The Company also competes in the
nutritional area with companies which may have broader product lines and/or
larger sales volumes. The Company's products also compete with nationally
advertised brand name products. Most of the national brand companies have
resources substantially greater than those of the Company.
There are numerous companies in the vitamin and nutritional supplement
industry selling products to retailers, including mass merchandisers, drug
store chains, independent drug stores and health food stores. Many
companies within the industry are privately held and the Company is unable
to precisely assess the size of all of its competitors or where it ranks in
comparison to such privately held competitors with respect to sales to
retailers.
Compliance with Environmental Laws and Regulations
The nature of the Company's business has not required any material capital
expenditures to comply with Federal, State or local provisions enacted or
adopted regulating the discharge of materials into the environment. No
material expenditures to meet such provisions are anticipated. Such
regulatory provisions have not had any material adverse effect upon the
Company's earnings or competitive position.
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Government Regulation
United States. The formulation, manufacturing, packaging, labeling,
advertising and distribution of NBTY's products are subject to regulation
by one or more federal agencies, including the Food and Drug Administration
("FDA"), the Federal Trade Commission ("FTC"), the Postal Service, the
Consumer Product Safety Commission, the Department of Agriculture and the
Environmental Protection Agency and also by various agencies of the states,
localities and foreign countries in which NBTY's products are sold. In
particular, FDA, pursuant to the Federal Food, Drug, and Cosmetic Act
("FDCA"), regulates the formulation, manufacturing, packaging, labeling and
distribution of dietary supplements, including vitamins, minerals and
herbs, and of over-the-counter ("OTC") drugs, while the FTC has
jurisdiction to regulate advertising of these products, and the Postal
Service regulates advertising claims with respect to such products sold by
mail order.
The FDCA has been amended several times with respect to dietary
supplements, most recently by the Dietary Supplement Health and Education
Act of 1994 ("DSHEA"). DSHEA established a new framework governing the
composition and labeling of dietary supplements. With respect to
composition, DSHEA defined "dietary supplements" as vitamins, minerals,
herbs, other botanicals, amino acids and other dietary substances for human
use to supplement the diet, as well as concentrates, metabolites,
constituents, extracts or combinations of such dietary ingredients.
Generally, under DSHEA, dietary ingredients that were on the market before
October 15, 1994 may be used in dietary supplements without notifying FDA.
However, a "new" dietary ingredient (i.e., a dietary ingredient that was
"not marketed in the United States before October 15, 1994") must be the
subject of a new dietary ingredient notification submitted to FDA unless
the ingredient has been "present in the food supply as an article used for
food" without being "chemically altered." A new dietary ingredient
notification must provide FDA evidence of a "history of use or other
evidence of safety" establishing that use of the dietary ingredient "will
reasonably be expected to be safe." A new dietary ingredient notification
must be submitted to FDA at least 75 days before the initial marketing of
the new dietary ingredient. There can be no assurance that FDA will accept
the evidence of safety for any new dietary ingredients that we may want to
market, and FDA's refusal to accept such evidence could prevent the
marketing of such dietary ingredients.
DSHEA permits "statements of nutritional support" to be included in
labeling for dietary supplements without FDA pre-approval. Such statements
may describe how a particular dietary ingredient affects the structure,
function or general well-being of the body, or the mechanism of action by
which a dietary ingredient may affect body structure, function or well-
being (but may not state that a dietary supplement will diagnose, cure,
mitigate, treat, or prevent a disease). A company that uses a statement of
nutritional support in labeling must possess evidence substantiating that
the statement is truthful and not misleading, must disclose on the label
that the FDA has not "evaluated" the statement, must also disclose on the
label that the product is not intended for use for a disease, and must
notify FDA about the company's use of the statement within 30 days after
its initial use. However, there can be no assurance that FDA will not
determine that
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a particular statement of nutritional support that a company wants to use
is an unacceptable drug claim or an unauthorized version of a "health
claim." Such a determination might prevent it from using the claim.
In addition, DSHEA provides that certain so-called "third party
literature," e.g., a reprint of a peer-reviewed scientific publication
linking a particular dietary ingredient with health benefits, may be used
"in connection with the sale of a dietary supplement to consumers" without
the literature being subject to regulation as labeling. Such literature
must not be false or misleading; the literature may not "promote" a
particular manufacturer or brand of dietary supplement; and a balanced view
of the available scientific information on the subject matter must be
presented. There can be no assurance, however, that all third party
literature that NBTY would like to disseminate in connection with our
products will satisfy each of these requirements, and failure to satisfy
all requirements could prevent use of the literature or subject the product
involved to regulation as an illegal drug.
Management expects that FDA soon will propose "good manufacturing practice"
("GMP") regulations, authorized by DSHEA, specifically for dietary
supplements. GMP regulations would require dietary supplements to be
prepared, packaged and held in compliance with certain rules, and might
require quality control provisions similar to those in the GMP regulations
for drugs. There can be no assurance that, if the FDA adopts GMP
regulations for dietary supplements, NBTY will be able to comply with the
new rules without incurring substantial expenses in order to do so.
FDA generally prohibits the use in labeling for a dietary supplement of any
"health claim" (that is not authorized as a "statement of nutritional
support" permitted by DSHEA) unless the claim is pre-approved by the FDA.
There can be no assurance that some of the labeling statements that NBTY
would like to use will not be deemed by FDA to be "unauthorized health
claims" that are not permitted to be used.
Although the regulation of dietary supplements is in some respects less
restrictive than the regulation of other foods or of drugs, there can be no
assurance that dietary supplements will continue to be subject to less
restrictive regulation. Further, there can be no assurance that, if more
stringent statutes are enacted for dietary supplements, or if more
stringent regulations are promulgated, NBTY will be able to comply with
such statutes or regulations without incurring substantial expense in order
to do so, or that it will be able to comply at all.
FDA regulates the formulation, manufacturing, packaging, labeling and
distribution of OTC drug products pursuant to a "monograph" system that
specifies active drug ingredients that are generally recognized as safe and
effective for particular uses. If an OTC drug is not in compliance with an
applicable FDA monograph, the product generally cannot be sold without
first obtaining FDA approval of a new drug application ("NDA"), a long and
expensive procedure.
15
FDA has broad authority to enforce the provisions of the FDCA applicable to
dietary supplements and OTC drugs, including powers to issue a public
"warning letter" to a company, to publicize information about illegal
products, to request a recall of illegal products from the market, and to
request the Department of Justice to initiate a seizure action, an
injunction action, or a criminal prosecution in the United States courts.
The FTC exercises jurisdiction over the advertising of dietary supplements
and OTC drugs. In recent years the FTC has instituted numerous enforcement
actions against dietary supplement and OTC drug companies for failure to
have adequate substantiation for claims made in advertising or for the use
of false or misleading advertising claims. These enforcement actions have
often resulted in consent decrees and the payment of fines by the companies
involved. NBTY is currently subject to an FTC consent decree resulting
from past advertising claims for certain of its products, and is required
to maintain compliance with this decree and is subject to substantial civil
monetary penalties if there should be any failure to comply. Further, the
Postal Service has issued cease and desist orders against certain mail
order advertising claims made by dietary supplement manufacturers including
NBTY, and NBTY is required to maintain compliance with the order applicable
to it, subject to civil monetary penalties for any noncompliance.
Violations of these orders could result in substantial monetary penalties,
which could have a material adverse effect on its business.
NBTY is also subject to regulation under various state, local, and
international laws that include provisions governing, among other things,
the formulation, manufacturing, packaging, labeling, advertising and
distribution of dietary supplements and OTC drugs. Government regulations
in foreign countries may prevent or delay the introduction, or require the
reformulation, of certain of its products. Compliance with such foreign
governmental regulations is generally the responsibility of NBTY's
distributors in those countries. These distributors are independent
contractors over whom the Company has only limited or minimal control.
From time to time in the future, NBTY may become subject to additional laws
or regulations administered by the FDA or by other federal, state, local or
foreign regulatory authorities, to the repeal of laws or regulations that
the Company considers favorable, such as DSHEA, or to more stringent
interpretations of current laws or regulations. The Company is not able to
predict the nature of such future laws, regulations, repeals or
interpretations, and it cannot predict what effect additional governmental
regulation, when and if it occurs, would have on its business in the
future. Such developments could, however, require reformulation of certain
products to meet new standards, recall or discontinuance of certain
products not able to be reformulated, additional record-keeping
requirements, increased documentation of the properties of certain
products, additional or different labeling, additional scientific
substantiation, or other new requirements. Any such developments could
have a material adverse effect on NBTY.
United Kingdom. In the U.K., the manufacture, advertising, sale and
marketing of food products is regulated by a number of government agencies
including the Department for Environment, Food and Rural Affairs and the
Food Standards Agency. In addition,
16
there are various independent committees and agencies that report to the
government, such as the Food Advisory Committee, which reports to MAFF and
suggests appropriate courses of action by the relevant government
department where there are areas of concern relating to food, and the
Committee on Toxicity, which reports to the Food Standards Agency. The
relevant legislation governing the sale of food includes the Food Safety
Act of 1990, which sets out general provisions relating to the sale of
food; for example, this law makes it unlawful to sell food that is harmful
to human health. In addition, there are various statutory instruments and
European Commission ("E.C.") regulations governing specific areas such as
the use of sweeteners, coloring and additives in food. Trading standards
officers under the control of the U.K. Department of Trade and Industry
also regulate matters such as the cleanliness of the properties on which
food is produced and sold. There can be no assurance that more stringent
regulations will not be promulgated or that, if more stringent regulations
are promulgated, that the Company will be able to meet such regulations
without incurring material expense to do so.
Food that has medicinal properties may fall under the jurisdiction of the
Medicines Control Agency ("MCA"), a regulatory authority whose
responsibility is to ensure that all medicines sold or supplied for human
use in the U.K. meet acceptable standards of safety, quality and efficacy.
These standards are determined by the 1968 Medicines Act together with an
increasing number of E.C. regulations and directives laid down by the
European Union ("E.U."). The latter take precedence over national law. The
MCA has a 'borderline department' that determines when food should be
treated as a medicine and should therefore fall under the relevant
legislation relating to medicines. The MCA operates as the agent of the
licensing authority (the United Kingdom Health Ministers) and its
activities cover every facet of medicines controlled in the U.K., including
involvement in the development of common standards of medicines controlled
in Europe. The MCA is responsible, for example, for licensing, inspection
and enforcement to ensure that legal requirements concerning manufacture,
distribution, sale, labeling, advertising and promotion are upheld.
Although the general tendency has been to liberalize restrictions on
nutritional products and consider them food supplements rather than
medicines, there can be no assurance that all new U.K. or E.U. regulations
will be favorable for us. Any move by the U.K. or E.U. to restrict existing
products or potencies, as well as the development of new products or
potencies, could have a material adverse effect on the Company. Further,
the Company is unable to predict what effect the formation of the E.U. will
have on it.
Ireland. In Ireland, the sale of nutritional supplements and herbal
products falls under the jurisdiction of the Irish Medicines Board
("IMB"). Its role is similar in nature to that of the MCA in the U.K. as
described above.
17
International Operations
In addition to the U.K. and Ireland, the Company markets its nutritional
supplement products through distributors, retailers and direct mail in more
than 70 countries throughout Europe, Asia, North America and the Pacific
Rim countries.
The Company's international operations are conducted in a manner to conform
to local variations, economic realities, market customs, consumer habits
and regulatory environments. Differences exist in the products, in the
distribution and marketing programs and in labeling.
The Company's international operations are subject to many of the same
risks faced by the Company's domestic operations. These include competition
and the strength of the relevant economy. In addition, international
operations are subject to certain risks inherent in conducting business
abroad, including foreign regulatory restrictions, fluctuations in monetary
exchange rates, import-export controls and the economic and political
policies of foreign governments. The importance of these risks increases as
the Company's international operations grow and expand. Virtually all of
the Company's international operations are affected by foreign currency
fluctuations, and, more particularly, changes in the value of the British
Pound as compared to the U.S. dollar.
Trademarks
U.S. The Company owns more than 1,000 trademarks registered with the
United States Patent and Trademark Office and many other major
jurisdictions throughout the world for its Nature's Bounty, Holland &
Barrett, Good' N Natural, American Health, Puritan's Pride, Vitamin World,
Natural Wealth and Nutrition Headquarters trademarks, among others, and has
rights to use other names essential to its business. Federally registered
trademarks have a perpetual life, as long as they are maintained and
renewed on a timely basis and used properly as trademarks, subject to the
rights of third parties to seek cancellation of the trademarks if they
claim priority or confusion of usage. The Company regards its trademarks
and other proprietary rights as valuable assets and believes they have
significant value in the marketing of its products. The Company vigorously
protects its trademarks against infringement.
U.K./Ireland H&B owns trademarks registered in the United Kingdom and/or
throughout the European Community for its Holland & Barrett and Nature's
Way trademarks and has rights to use other names essential to its business.
18
Item 2. PROPERTIES
U.S. The Company owns a total of approximately 1,300,000 square feet of
plant and administrative facilities and it also leases approximately
687,000 square feet of warehouse and manufacturing space in various
locations. The Company leases and operates approximately 531 retail
locations under the name Vitamin World and Nutrition Warehouse in 46 states
in the U.S., Guam and Puerto Rico. The stores have an average selling area
of 1,200 to 1,500 square feet. Generally, the Company leases the properties
for three to five years at annual base rents ranging from $12,000 to
$121,000 and percentage rents in the event sales exceed a specified amount.
U.K./Ireland. Holland & Barrett owns a newly constructed 187,000 square
foot administrative and warehouse facility (which includes a 51,500 square
foot mezzanine) in Burton and leases a 9,300 square foot administrative
building in Nuneaton. Additionally, it leases all of the locations of its
461 retail stores for terms varying between 10 and 25 years at varying
rents. The stores have an average selling area of 1,200 square feet. No
percentage rents are payable.
The following is a listing of all properties owned or leased by the Company
and used in its business:
Type of Approx Leased
Location Facility Sq. Feet or Owned
-------- -------- -------- --------
UNITED STATES:
Bohemia, NY Administration & Production 169,000 Owned
Bohemia, NY Manufacturing 80,000 Owned
Bohemia, NY Manufacturing 75,000 Owned
Holbrook, NY Warehouse & Distribution 230,000 Owned
Holbrook, NY Engineering 17,000 Owned
Holbrook, NY Manufacturing 104,500 Owned
Ronkonkoma, NY Administration & Distribution 110,000 Owned
Ronkonkoma, NY Warehouse 75,000 Leased
(term-October 2005)
Bayport, NY Production 17,500 Owned
Bayport, NY Manufacturing 131,000 Owned
Mineola, NY Administrative 7,500 Owned
Reno, NV Warehouse 25,000 Leased
(term-June 2006)
Carbondale, IL Administration & Production 80,000 Owned
Carbondale, IL Administration 15,000 Owned
19
South Plainfield, NJ Manufacturing 66,000 Owned
Murphysboro, IL Manufacturing 65,000 Owned
South Plainfield, NJ Warehouse 40,000 Leased
(term-May 2006)
Thornton, CO Warehouse & Manufacturing 72,000 Leased
(term-November 2006)
Anaheim, CA Warehouse & Manufacturing 286,139 Leased
(term-July 2006)
Anaheim, CA Warehouse 60,000 Leased
(term-January 2003)
Anaheim, CA Administration & Manufacturing 20,000 Owned
UNITED KINGDOM:
Nuneaton Administration 9,300 Leased
(term-June 2012)
Burton Administration & Warehouse 187,000 Owned
Warehousing and Distribution
The Company has dedicated approximately 1,050,000 square feet to
warehousing and distribution in its Long Island, NY; Carbondale, IL; Reno,
NV; Anaheim, CA; Thornton, CO; South Plainfield, NJ and Burton, U.K.
facilities.
The Company's warehouse and distribution centers are efficiently integrated
with the Company's order entry systems to enable the Company to ship out
mail orders typically within 48 hours of their receipt. Once a customer's
telephone order is completed, the Company's computer system forwards the
order to the Company's distribution center, where all necessary
distribution and shipping documents are printed to facilitate processing.
Thereafter, the orders are prepared, picked, packed and shipped continually
throughout the day. The Company operates a proprietary, state-of-the-art,
automated picking and packing system for frequently shipped items. The
Company is capable of fulfilling 25,000 orders daily. A system of conveyors
automatically routes boxes carrying merchandise throughout the distribution
center for fulfillment of orders. Completed orders are bar-coded and
scanned and the merchandise and ship date are verified and entered
automatically into the customer order file for access by sales associates
prior to being shipped. The Company ships its orders primarily through the
U.S. Postal Service, serving domestic and international markets.
The Company currently distributes its products from its distribution
centers through contract and common carriers in the U.S. and by Company
owned trucks in both the U.S. and the U.K. Deliveries are made directly to
Company owned and operated Vitamin World and Nutrition Warehouse stores
once per week. In addition, the Company ships products overseas by
container loads. The Company also operates additional distribution
20
centers in Burton, U.K. Deliveries are made directly to Company owned and
operated Holland & Barrett stores twice per week.
21
Item 3. LEGAL PROCEEDINGS
A consolidated stockholder class action is pending against the Company and
certain of its officers and directors in the U. S. District Court of the
Eastern District of New York, on behalf of stockholders who purportedly
purchased shares of the Company's common stock between January 27, 2000 and
June 15, 2000 (the "Class Period"). The class action alleges that the
Company and certain officers and directors failed to disclose material
facts during the Class Period which purportedly resulted in a decline in
the price of the Company's stock after June 15, 2000. In October, 2001, the
Company has made an application to the court seeking dismissal of the
lawsuit on the basis that it is legally deficient. That motion is presently
pending.
In addition to the consolidated class action, two stockholder derivative
actions were filed in 2000 in the Chancery Court in Delaware and in a
Florida state court against certain officers and directors. The derivative
claims are predicated upon the stockholder class actions pending in New
York. Proceedings in the Delaware derivative action have been stayed
pending the outcome of the Company's motion to dismiss the consolidated
class action suit and a motion is pending to dismiss the Florida action on
jurisdictional grounds.
The Company and the named individual defendants deny all claims of
wrongdoing and are defending the actions vigorously. However, no
determination can be made as to the final outcome. The Company maintains
policies of directors and officers professional liability insurance.
The Company has also been named as a defendant, along with other companies,
in a purported class action commenced in an Alabama state court.
Plaintiffs allege that one of the Company's Vitamin World stores sold a
misbranded nutritional supplement bar. In October, 2001, the Company filed
a motion to dismiss this lawsuit, which does not specify any monetary
damages, on the basis that only the federal or state governments may bring
an action of this nature and that the law does not provide for individual
plaintiffs to maintain such a suit.
The Company is a plaintiff in a vitamin antitrust litigation brought in the
United States District Court in the District of Columbia against F.
Hoffmann-La Roche Ltd. and others for alleged price fixing. Certain of the
defendants have pleaded guilty in criminal proceedings arising from the
same set of facts. Partial settlements with certain defendants have been
made and negotiations with other defendants are currently being held.
Miscellaneous Claims and Litigation. The Company is involved in
miscellaneous claims and litigation, which taken individually or in the
aggregate, would not materially impact the Company's financial position,
results of operations or its business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
[Not applicable.]
22
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
DIVIDEND POLICY
Since 1973, the Company has not paid any cash dividends on its Common
Stock. On April 24, 1992, the Company effected a two-for-one stock split in
the form of a 100% stock dividend to stockholders of record on May 8, 1992.
On September 25, 1992, the Company effected a three-for-one stock split in
the form of a 200% stock dividend to stockholders of record on November 2,
1992. On August 3, 1993, the Company effected a two-for-one stock split in
the form of a 100% stock dividend to shareholders of record on August 13,
1993. In addition, in March 1998, the Company effected a three-for-one
stock split in the form of a 200% stock dividend. Future determination as
to the payment of cash or stock dividends will depend upon the Company's
results of operations, financial condition, capital requirements,
restrictions imposed by the Company's lending institutions and such other
factors as the Company's Board of Directors considers appropriate.
PRICE RANGE OF COMMON STOCK
The Common Stock is traded in the over-the-counter market and is included
for quotation on the National Association of Securities Dealers National
Market System under the trading symbol "NBTY". The following table sets
forth, for the periods indicated, the high and low closing sale prices for
the Common Stock, as reported on NASDAQ/NMS:
Fiscal year ended September 30, 2001
------------------------------------
High Low
---- ---
First Quarter 6.97 3.94
Second Quarter 8.50 4.38
Third Quarter 13.40 8.00
Fourth Quarter 17.76 10.55
Fiscal year ended September 30, 2000
------------------------------------
High Low
---- ---
First Quarter 12.50 6.75
Second Quarter 16.00 9.94
Third Quarter 19.06 5.94
23
Fourth Quarter 7.88 5.75
On November 30, 2001, the closing sale price of the Common Stock was
$11.62. There were approximately 835 record holders of Common Stock as of
November 30, 2001. The Company believes that there were in excess of 13,000
beneficial holders of Common Stock as of such date.
24
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars and shares in thousands, except per share amounts)
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Selected Income Statement Data:
Net sales $355,336 $572,124 $630,894 $720,856 $806,898
Costs & expenses:
Cost of sales 177,909 271,233 293,521 312,960 355,167
Catalog printing, postage & promotion 27,932 32,176 32,895 33,709 49,410
Selling, general & administrative 96,653 190,276 236,367 279,379 315,228
Recovery of raw material costs (2,511)
Litigation settlement costs 6,368 4,952
Merger costs 3,528
----------------------------------------------------------------
Income from operations 46,474 74,911 63,159 97,319 87,093
Interest expense, net (7,471) (16,518) (18,945) (18,858) (21,958)
Other, net 1,817 3,921 1,388 4,491 2,748
----------------------------------------------------------------
Income before income taxes 40,820 62,314 45,602 82,952 67,883
Income taxes 11,694 23,474 18,323 31,444 25,958
----------------------------------------------------------------
Net income $ 29,126 $ 38,840 $ 27,279 $ 51,508 $ 41,925
================================================================
Per Share Data:
Net income per common share:
Basic $ 0.45 $ 0.59 $ 0.39 $ 0.77 $ 0.64
Diluted $ 0.42 $ 0.56 $ 0.39 $ 0.74 $ 0.62
Weighted average common shares
outstanding (000):
Basic 64,611 65,563 69,640 67,327 65,774
Diluted 68,935 69,847 70,826 69,318 67,125
Selected Balance Sheet Data:
Working capital $ 70,850 $ 89,106 $121,103 $100,114 $131,108
Total assets 571,177 500,457 539,384 603,613 708,462
Long-term debt, capital lease obligations
and promissory notes payable, less current
portion 341,159 173,531 219,508 200,478 237,236
Total stockholders' equity 131,291 230,339 223,949 272,443 302,406
25
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Background
NBTY, founded in 1971, is a leading vertically integrated manufacturer,
marketer and retailer of a broad line of high quality, value-priced
nutritional supplements. NBTY has continued to grow through its marketing
practices and through a series of strategic acquisitions. Since 1986, the
Company has acquired and integrated approximately 27 companies and/or
businesses engaged in the direct response, retail and manufacturing of the
nutritional supplement sector, including Holland & Barrett in 1997,
Nutrition Headquarters Group in 1998, Nutrition Warehouse Group in 2000 and
Global Health Sciences and NatureSmart in 2001.
NBTY markets its products through four distribution channels: (i) Puritan's
Pride/direct response, (ii) Vitamin World retail stores in the U.S., (iii)
Holland & Barrett retail stores in the U.K. and Ireland, and (iv) wholesale
distribution to drug store chains, supermarkets, discounters, independent
pharmacies, and health food stores. NBTY's net sales from Puritan's
Pride/direct response, Vitamin World, Holland & Barrett and wholesale
operations were approximately 21%, 22%, 33% and 24%, respectively, for the
year ended September 30, 2001.
The Company recognizes revenues from products shipped when risk of loss and
title transfers to its customers, and with respect to its own retail
stores, upon the sale of products. Net sales are net of all discounts,
allowances, returns and credits. Cost of sales includes the cost of raw
materials and all labor and overhead associated with the manufacturing and
packaging of the products. Gross margins are affected by, among other
things, changes in the relative sales mix among the Company's four
distribution channels. Historically, gross margins from the Company's
direct response/e-commerce and retail sales have typically been higher than
gross margins from wholesale sales.
Results of Operations
The following table sets forth income statement data of the Company as a
percentage of net sales for the periods indicated:
Fiscal Years Ended September 30,
--------------------------------
1999 2000 2001
---- ---- ----
Net Sales 100 % 100 % 100 %
Costs and Expenses:
Cost of sales 46.5 43.3 44.0
Catalog printing & promotion 5.2 4.7 6.1
Selling, general & administrative 37.5 38.8 39.1
26
Litigation 0.8 (0.3)
-------------------------
90.0 86.5 89.2
-------------------------
Income from operations 10.0 13.5 10.8
Interest expense & other, net (2.8) (2.0) (2.4)
-------------------------
Income before income taxes 7.2 11.5 8.4
Income taxes 2.9 4.4 3.2
-------------------------
Net Income 4.3% 7.1% 5.2%
=========================
Fiscal Year Ended September 30, 2001 Compared to
Year Ended September 30, 2000
Net Sales. Net sales for fiscal 2001 were $807 million, an increase of $86
million or 11.9% compared with net sales of $721 million in fiscal 2000. Of
the $86 million increase, $26 million was attributable to Vitamin World
sales, $14 million was attributable to Holland & Barrett sales, and $57
million to wholesale, offset by a decrease of $11 million in direct
response/e-commerce. During 2001, the Company opened 50 stores which
contributed $8 million in increased sales in the U.S. and 26 stores in the
U.K. which contributed $2.3 million in sales. The acquisition of Global
Health Sciences and NatureSmart accounted for $29.4 million in sales.
Cost of Sales. Cost of sales for fiscal 2001 was $355 million, an increase
of $42 million compared with the cost of sales of $313 million for fiscal
2000. As a percentage of sales, cost of sales increased and,
correspondingly, gross profit decreased to 56% for 2001 from 56.7% for
2000. Such decrease was primarily due to Global Health Sciences' cost of
sales of $18 million on sales of $16.8 million. The increase was mitigated
by a decrease in the Direct Response segment's cost of sales, which
decreased from 36.4% to 33.7% as a percentage of sales, primarily due to
higher gross margins on new product introductions and improvements in
manufacturing efficiencies. The increase was also mitigated by the Vitamin
World cost of sales decreasing as a percentage of sales from 43% to 41.6%,
primarily due to sales price increases on all product lines during the
current year. The Company's strategy is to continue to increase in-house
manufacturing while decreasing the use of outside suppliers in both the
U.S. and the U.K. In addition, cost of sales includes a year end adjustment
to inventory of approximately $3.9 million for 2001 and $5.4 million for
2000, which is principally the result of the Company utilizing the gross
profit method for interim reporting, and the year-end valuation of the
Company's annual physical inventory.
Catalog, Printing, Postage and Promotion. Catalog, printing, postage and
promotion expenses were $49 million and $34 million for fiscal 2001 and
2000, respectively. Such costs as a percentage of net sales were 6.1% for
2001 and 4.7% for 2000. The increased percentage was due to an increase in
printing and mailing costs per catalog, resulting from an increase in
postage costs, and the change to a larger catalog order size and for radio
and television advertisements relating to the Flex-a-Min advertising
campaign.
27
Selling, General and Administrative. Selling, general and administrative
expenses for fiscal 2001 were $315 million, an increase of $36 million,
compared with $279 million for fiscal 2000. As a percentage of sales,
selling, general and administrative expenses were 39.1% and 38.8% in 2001
and 2000, respectively. Of the $36 million increase, $7 million was
attributable to rent expense, $19 million to payroll costs mainly
associated with the Vitamin World expansion program and $4 million was
attributable to increased depreciation expense as a result of an increase
in capital expenditures.
Recovery of raw materials costs. In fiscal 2000, the Company received $2.5
million in partial settlement of ongoing price fixing litigation brought by
the Company against certain raw material vitamin suppliers.
Interest Expense, Net. Net interest expense was $22 million in fiscal
2001, an increase of $3 million, compared with net interest expense of $19
million in fiscal 2000. Net interest expense increased due to the
additional borrowings to fund the two acquisitions completed in the third
quarter of 2001. The major components are interest on Senior Subordinated
Notes associated with the Holland & Barrett acquisition, and the Credit and
Guarantee Agreement (CGA) used for acquisitions and capital expenditures.
Miscellaneous, net. Miscellaneous, net was $2.7 million and $4.5 million
for fiscal 2001 and 2000, respectively. The $1.8 million decrease was
primarily attributable to exchange rate fluctuations ($.9 million), and a
gain on disposal of certain businesses and related fixed assets ($.6
million) in 2000.
Income Taxes. The Company's effective income tax rate was approximately 38%
for fiscal years 2001 and 2000.
Net Income. Net income for fiscal 2001 was $42 million, compared with $52
million in fiscal 2000, a decrease of $10 million.
Fiscal Year Ended September 30, 2000 Compared to
Year Ended September 30, 1999
Net Sales. Net sales for fiscal 2000 were $721 million, an increase of $90
million or 14% compared with net sales of $631 million in fiscal 1999. Of
the $90 million increase, $46 million was attributable to Vitamin World
sales, $28 million was attributable to Holland & Barrett sales, $9 million
in wholesale and $7 million direct response/e-commerce. During 2000, the
Company opened 139 stores which contributed $20 million in increased sales
in the U.S. and 3 stores in the U.K. The acquisition of Nutrition Warehouse
accounted for $7 million of the increase in retail U.S. sales.
Cost of Sales. Cost of sales for fiscal 2000 was $313 million, an increase
of $19 million compared with the cost of sales of $294 million for fiscal
1999. As a percentage of sales, cost of sales decreased and,
correspondingly, gross profit increased to 56.7% for 2000 from 53.5% for
1999. This increase was attributable to the Company's Direct Response
segment's cost of sales, which decreased from 40.1% to 36.4% as a
percentage of sales, primarily due to an increase in sales of new products,
which typically have higher gross margins, and lower manufacturing costs
resulting from increased efficiency
28
and productivity at the Company's manufacturing facilities. The Company's
Vitamin World division's cost of sales decreased as a percentage of sales
from 44.2% to 43%, primarily due to sales price increases on all product
lines during the current year. In addition, as the Company generally
experiences higher margins on products manufactured by NBTY and sold in H&B
stores, H&B stores cost of sales decreased from 45.1% to 41.5% as a
percentage of sales. The Company's strategy is to continue to increase in-
house manufacturing while decreasing the use of outside suppliers in both
the U.S. and the U.K. In addition, cost of sales includes a year end
adjustment to inventory of $5.4 million for both 2000 and 1999, which is
principally the result of the Company utilizing the gross profit method for
interim reporting, and the year-end valuation of the Company's annual
physical inventory.
Catalog, Printing, Postage and Promotion. Catalog, printing, postage and
promotion expenses were $34 million and $33 million for fiscal 2000 and
1999, respectively. Such costs as a percentage of net sales were 4.7% for
2000 and 5.2% for 1999. The decreased percentage was due to more efficient
printing and mailing methods of the Company's catalog operation and
increased sales.
Selling, General and Administrative. Selling, general and administrative
expenses for fiscal 2000 were $279 million, an increase of $43 million,
compared with $236 million for fiscal 1999. As a percentage of sales,
selling, general and administrative expenses were 38.8% and 37.5% in 2000
and 1999, respectively. Of the $43 million increase, $11 million was
attributable to rent expense, $17 million to payroll costs mainly
associated with the retail-U.S. expansion program and $5 million was
attributable to an increased depreciation expense as a result of the
increase in capital expenditures.
Recovery of raw materials costs. The Company received $2.5 million in
partial settlement of ongoing price fixing litigation brought by the
Company against certain raw material vitamin suppliers.
Interest Expense, Net. Net interest expense was $19 million in fiscal
2000, the same amount as in fiscal 1999.
Miscellaneous, net. Miscellaneous, net was $4.5 million and $1.4 million
for fiscal 2000 and 1999, respectively. The $3.1 million increase was
primarily attributable to an increase in rental income, net ($1.1 million),
exchange rate fluctuations ($.9 million), and investment income ($.5
million).
Income Taxes. The Company's effective tax rate was approximately 38% in
fiscal 2000 and 40% in fiscal 1999. Such reduction was principally due to
an increase in retail sales at Holland & Barrett, which has a lower
effective tax rate than domestic sales.
Net Income. Net income for fiscal 2000 was $52 million, compared with $27
million in fiscal 1999, an increase of $25 million.
29
Seasonality
The Company believes that its business is not seasonal. Historically, the
Company has slightly lower net sales in its first and third fiscal
quarters, and slightly higher net sales in its second and fourth fiscal
quarters. The Company may have higher net sales in a quarter depending upon
when it has engaged in significant promotional activities.
Liquidity and Capital Resources
As of September 30, 2001, the Company had cash and cash equivalents of
$34.4 million. Net cash provided by operating activities was $62.8 million
for fiscal 2001 compared to $123.4 million in fiscal 2000. The overall
decline in cash from operating activities was attributable to a significant
increase in inventories, accounts receivable and deferred tax assets, which
were offset by an increase in noncash charges for depreciation and
amortization, and an increase in accounts payable. In fiscal 2000, net cash
provided by operating activities increased $84.5 million, to $123.4
million, primarily due to decreases in inventories, accounts receivable
and deferred tax assets, and increases in noncash charges for depreciation
and amortization, and an increase in accounts payable.
In fiscal 2001 and 2000, the Company's investing activities consisted
primarily of cash paid for business acquisitions and purchase of property,
plant and equipment. Net cash used in investing activities was $96.1
million for fiscal 2001, resulting primarily from the cash paid for the
business acquisitions of Global Health Sciences and NatureSmart ($63.0
million), and the purchase of property, plant and equipment ($37.2
million), offset by proceeds from the sale of property, plant and equipment
($4.2 million). In fiscal 2000, net cash used in investing activities was
$96.6 million, consisting primarily of cash paid for business acquisitions
and a mailing list and the purchase of property and equipment. Net cash
paid for business acquisitions/mailing list ($51.8 million) and property,
plant and equipment ($45.1 million).
Net cash provided by financing activities in fiscal 2001 was $35.6 million
and included borrowings under the Company's Credit & Guarantee Agreement
("CGA") of $71.5 million, proceeds from the exercise of stock options of
$2.6 million, which were offset by principal payments under long-term debt
agreements ($12.8 million), purchase of treasury stock ($15.7 million) and
cash held in escrow ($10 million). Cash used in financing activities of $12
million during fiscal 2000 included principal payments under long-term debt
agreements ($17.7 million) and the purchase of treasury stock ($1.5
million) offset by borrowings under the Company's Credit & Guarantee
Agreement ("CGA") of $2.8 million and proceeds from the exercise of stock
options ($4.4 million).
Working capital increased $31 million to $131 million in fiscal 2001. The
Company believes that the cash flow generated from its operations and
amounts available under the Revolving Credit Facility should be sufficient
to fund its debt service requirements, working capital needs, anticipated
capital expenditures and other operating expenses for the foreseeable
future. On April 27, 2001, the Company entered into an amended and restated
Credit and Guarantee Agreement ("CGA") which provides for aggregate
borrowings up to $188.4 million. The CGA is comprised of two revolving
credit agreements
30
of $100 million (increased by $50 million in April 2001) and $50 million and a
term loan of $38.4 million. On August 31, 2001, the outstanding balance of
the $100 million facility converted to a term loan, payable in 16 equal
consecutive installments commencing on September 30, 2001, and ending on June
30, 2005. The $50 million revolving credit facility expires on September 30,
2003. The $38.4 million term loan is payable in 16 equal consecutive
installments commencing on June 30, 2001 with the balance payable on March
31, 2005. At September 30, 2001, there were borrowings of $114.6 million
under this facility at an annual borrowing rate of 5.75%. The current
portion of the CGA is $33 million. 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.
The Company utilized the CGA to buy back 3,023,000 shares ($15.7 million)
during fiscal 2001 of its common stock under its stock purchase plan.
The Company's debt instruments 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.
Inflation
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.
New Accounting Developments
Effective October 1, 2000, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." As the Company has
determined it does not have any derivatives or hedging activities, the
adoption of SFAS No. 133 did not affect the Company's consolidated
financial position or results of operations as of and for the year ended
September 30, 2001.
In June 2001, the Emerging Issues Task Force ("EITF") reached a consensus
on Issue No. 00-14, "Accounting for Certain Sales Incentives" effective no
later than periods beginning after December 15, 2001. EITF Issue No. 00-14
addresses the recognition, measurement and statement of earnings
classification for certain sales incentives. The Company has determined
that the impact of adoption or subsequent application of EITF Issue No. 00-
14 will not have a material effect on its consolidated financial position
or results of operations.
31
In March 2001, the EITF released Issue No. 00-22, "Accounting for "Points"
and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and
Offers for Free Products or Services to Be Delivered in the Future." The
EITF reached a consensus addressing a vendor's accounting for offers to
customers to rebate or refund specified amounts of cash redeemable only if
the customer completes a specified cumulative level of revenue transactions
or remains a customer for a specified time period. Issue No. 00-22
requires that the vendor recognize the cash rebate or refund obligation as
a reduction of revenue based on a systematic and rational allocation of the
cost of honoring rebates or refunds earned and claimed to each of the
underlying revenue transactions that result in progress by the customer
toward earning the rebate or refund. The Company has determined that the
impact of application of this guidance will not have a material effect on
its consolidated financial position or results of operations.
In April 2001, the EITF reached a consensus on Issue No. 00-25, "Vendor
Income Statement Characterization of Consideration Paid to a Reseller of
the Vendor's Products." EITF Issue No. 00-25 requires that certain
expenses included in marketing, administrative and research costs be
recorded as a reduction of operating revenues and will be effective in the
first quarter of fiscal 2002. The Company has determined that the impact
of adoption of EITF Issue No. 00-25 will not have a material effect on the
Company's consolidated financial position or results of operations.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires the use of the purchase method of
accounting for all business combinations initiated after June 30, 2001,
thereby eliminating the pooling-of-interests methods of accounting. SFAS
No. 141 also addresses the recognition and measurement of goodwill and
other intangible assets acquired in a business combination. The adoption
of SFAS No. 141 by the Company on July 1, 2001, did not significantly
affect the Company's consolidated financial position or results of
operations.
Upon adoption of SFAS No. 142, goodwill and intangible assets that have
indefinite useful lives will not be amortized but rather will be tested at
least annually for impairment. Other intangible assets will continue to be
amortized over their estimated useful lives. The Company will adopt the
provisions of SFAS No. 142 on October 1, 2001. Based upon the Company's
current amount of goodwill and qualifying intangible assets, management
expects the adoption to reduce its fiscal 2002 annualized amortization
expense, which is not deductible for tax purposes, by approximately $6.1
million.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations," and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No.
143 addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS No. 144 supersedes FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-
32
Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,"
and addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. The Company does not expect the adoption of
SFAS No. 143 and 144 to have a material impact on its consolidated
financial position or results of operations.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to currency fluctuations, primarily with respect to
the British Pound, and interest rate risks that arise from normal business
operations. The Company regularly assesses these risks and has not entered
into any hedging transactions.
To manage the potential loss arising from changing interest rates and its
impact on long-term debt, the Company's policy is to manage interest rate
risks by maintaining a combination of fixed and variable rate financial
instruments.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See attached financial statements. Part IV, Item 14. Exhibits.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
33
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names and other relevant information regarding
executive officers and directors of the Company as of November 30, 2001.
Their positions and tenure are as follows:
Year Commenced
first term of
elected office as
Name Age Position Director Officer
---- --- -------- -------- ---------
Scott Rudolph 44 Chairman of the Board, Chief
Executive Officer, and President 1986 1986
Harvey Kamil 57 Executive Vice President,
Secretary - 1982
Michael C. Slade 52 Senior Vice President-Strategic
Planning, Director 1998 1999
James P. Flaherty 44 Vice President-Advertising - 1988
William J. Shanahan 43 Vice President-Data Processing - 1988
Arthur Rudolph 73 Director 1971 -
Aram Garabedian 66 Director 1971 -
Bernard G. Owen 73 Director 1971 -
Alfred Sacks 74 Director 1971 -
Murray Daly 74 Director 1971 -
Glenn Cohen 42 Director 1988 -
Nathan Rosenblatt 44 Director 1994 -
Michael L. Ashner 48 Director 1998 -
Peter J.White 47 Director 2001 -
The Directors of the Company are elected to serve a three-year term or
until their respective successors are elected and qualified. Officers of
the Company hold office until the meeting of the Board of Directors
immediately following the next annual stockholders' meeting or until
removal by the Board, whether with or without cause.
Scott Rudolph is the Chairman of the Board of Directors, President, Chief
Executive and a shareholder of the Company. He is the Vice Chairman of
Dowling College, Long Island, New York. He joined NBTY in 1986. He is the
son of Arthur Rudolph.
34
Harvey Kamil is the Executive Vice President, Chief Financial Officer and
Secretary. He is on the Board of Directors of the Council for Responsible
Nutrition and is on the Board of Directors of the National Nutritional Food
Association. He joined NBTY in 1982.
James P. Flaherty is the Vice President of Advertising. He joined NBTY in
1979.
William J. Shanahan is the Vice President of Data Processing. He joined
NBTY in 1980.
Michael C. Slade is the Senior Vice President of Strategic Planning. He
previously was an owner and Chief Executive Officer of Nutrition Headquarters,
Inc., before its acquisition by the Company in 1998.
Arthur Rudolph founded Arco Pharmaceuticals, Inc., NBTY's predecessor, in
1960 and founded the Company in 1971. He served as NBTY's Chief Executive
Officer and Chairman of the Board of Directors since that date until his
resignation in September 1993. He remains a member of the Board of
Directors and a consultant to the Company. He is the father of Scott
Rudolph.
Aram Garabedian was elected a State Senator of the State of Rhode Island in
2000 and had been a representative in that State's legislature from 1972
through 1978, and 1998 through 2000. Since 1988, he has been a real estate
developer in Rhode Island and is the President of Bliss Properties, Inc. He
was associated with NBTY and its predecessor, Arco Pharmaceuticals, Inc.,
for more than 20 years in a sales capacity and as an officer.
Bernard G. Owen has been associated with Cafiero, Cuchel and Owen Insurance
Agency, Pitkin, Owen Insurance Agency and Wood-HEW Travel Agency for more
than the past 5 years. He currently serves as Chairman of these firms.
Alfred Sacks has been engaged as President of Al Sacks, Inc., an insurance
agency for the past 30 years.
Murray Daly, formerly a Vice President of J. P. Egan Office Equipment Co.,
has been a consultant to the office equipment industry for more than 5
years.
Glenn Cohen is the President of Save-On Sprinklers Co. and has served in
that capacity for more than 5 years.
Nathan Rosenblatt is the President and Chief Executive Officer of Ashland
Maintenance Corp., a commercial maintenance organization located in Long
Island, New York and has served in that capacity for more than 5 years.
Michael L. Ashner is President and Chief Executive Officer of Winthrop
Financial Assoc., a firm engaged in the organization and administration of
real estate limited partnership and has served in that capacity for more
than the past 5 years.
35
Peter J. White is President of I.J. White Corporation, a company that
manufactures equipment for the food industry, and has served in that
capacity for more than the past 10 years.
36
Item 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation paid or
accrued by the Company during the period ended September 30, 2001 to the
Company's Chief Executive Officer and certain other highest compensated
executive officers of the Company whose total compensation exceeded
$100,000.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation Awards All Other
Annual Compensation ----------------------- Compensation:
Name and ------------------- Restricted Stock Pension Plan
Principal Position Year Salary $ Bonus $ Stock ($) Options # and 401(k) Plan $
------------------ ---- -------- ------- ---------- --------- -----------------
Scott Rudolph 2001 634,024 500,000 ________ 500,000 10,500
Chairman, President 2000 621,792 425,000 ________ 1,000,000 7,316
and Chief Executive Officer 1999 609,600 500,000 ________ 260,000 4,801
Harvey Kamil 2001 317,012 225,000 ________ 125,000 10,500
Executive Vice President, 2000 310,896 200,000 ________ 250,000 7,316
Chief Financial Officer 1999 304,800 225,000 ________ 250,000 4,801
Michael C. Slade 2001 306,346 50,000 ________ 70,000 10,500
Senior Vice President 2000 300,000 50,000 ________ 30,000 7,316
Strategic Planning 1999 275,000 - ________ - 3,312
James Flaherty 2001 194,519 75,000 ________ - 3,750
Vice President 2000 185,000 75,000 ________ 30,000 7,316
Marketing & Advertising 1999 174,700 75,000 ________ 20,000 4,801
William Shanahan 2001 171,981 75,000 ________ - 10,500
Vice President 2000 165,000 70,000 ________ 20,000 7,316
Data Processing 1999 152,000 60,000 ________ 20,000 4,801
Employment Agreements
Scott Rudolph, Chairman of the Board, President and Chief Executive Officer
of the Company, entered into an employment agreement effective February 1,
1994, as amended, to terminate January 31, 2004. During the period of the
employment agreement, the salary payable to Scott Rudolph shall be fixed by
the Board of Directors of the Company, provided that in no event will the
executive salary be at a rate lower than $600,000 per year, with bonuses,
certain fringe benefits accorded other executives of NBTY, and with annual
cost of living index increases.
Harvey Kamil, Executive Vice President, Chief Financial Officer and
Secretary of the Company, entered into an employment agreement effective
February 1, 1994, as amended, to terminate January 31, 2004. During the
period of the employment agreement, the salary payable to Harvey Kamil
shall be fixed by the Board of Directors of the Company, provided that in
no event will the executive salary be at a rate lower
37
than $300,000 per year, with bonuses, certain fringe benefits accorded
other executives of NBTY, and with annual cost of living index increases.
Each of the above agreements also provides for the immediate acceleration
of the payment of all compensation for the term of the contract and the
registration and sale of all issued stock, stock options and shares
underlying options in the event of certain changes of control, or
involuntary (i) termination of employment, (ii) reduction of compensation,
or (iii) diminution of responsibilities or authority.
Effective January 1, 1997, the Company entered into a consulting agreement
with Rudolph Management Associates, Inc. for the services of Arthur
Rudolph, a director and founder of the Company. The agreement has been
renewed for successive one year terms to provide services through December
31, 2002 with the consulting fee fixed by the Board of Directors of the
Company, provided that in no event will the consulting fee be at a rate
lower than $400,000 per year, payable monthly, with certain fringe benefits
accorded to other executives of NBTY.
Four members of Holland & Barrett's senior executive staff have service
contracts, terminable by the Company upon twelve months' notice. The
commitment for salaries as of September 30, 2001, was approximately
$600,000 per year.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Management
(a) Security Ownership of Certain Beneficial Owners Security
ownership of persons owning of record, or beneficially, 5% or
more of the outstanding Common Stock, as of November 30, 2001.
The Company is not aware of any other beneficial holders of 5%
or more of the Common Stock. All information with respect to
beneficial ownership, set forth in the foregoing stock
ownership table, is based on information furnished by the
shareholder, director or executive officer, or contained in
filings made with the Securities and Exchange Commission.
Amount & Nature Percent
Name and Address of of Beneficial of
Title of Class Beneficial Owner Ownership (1) Class (1)
- -------------- ------------------- --------------- ---------
Common Stock Scott Rudolph 13,735,326 20.9%
(Par Value $.008) 90 Orville Drive Record and Beneficial
Bohemia, NY 11716
Common Stock NBTY, Inc. 2,449,959 3.7%
(Par Value $.008) Employee Stock
Ownership Plan
38
Common Stock Barclays Global Investors 3,760,817 5.7%
(Par Value $.008) International
Includes shares issuable upon exercise of options held by executive
officers and directors.
(b) Security Ownership of Management (Directors and Executive
Officers).
Amount & Nature Percent
Name and Address of of Beneficial of
Title of Class Beneficial Owner Ownership (1) Class (1)
- -------------- ------------------- --------------- ---------
Common Stock Scott Rudolph (2) 13,735,326 20.9%
(Par Value $.008) 90 Orville Drive Record and Beneficial
Bohemia, NY 11716
Common Stock Arthur Rudolph 2,056,893 3%
(Par value $.008) 90 Orville Drive Record and Beneficial
Bohemia, NY 11716
Common Stock Harvey Kamil 1,931,432 2.9%
(Par Value $.008) 90 Orville Drive Record and Beneficial
Bohemia, NY 11716
Common Stock Michael Slade (3) 2,312,698 3.5%
(Par Value $.008) 90 Orville Drive Record and Beneficial
Bohemia, NY 11716
Common Stock James Flaherty 150,963 Nil
(Par Value $.008) 90 Orville Drive Record and Beneficial
Bohemia, NY 11716
Common Stock William Shanahan 217,000 Nil
(Par Value $.008) 90 Orville Drive Record and Beneficial
Bohemia, NY 11716
Common Stock Aram Garabedian 60,000 Nil
(Par Value $.008) 90 Orville Drive Record and Beneficial
Bohemia, NY 11716
Common Stock Bernard G. Owen 73,500 Nil
(Par Value $.008) 90 Orville Drive Record and Beneficial
Bohemia, NY 11716
Common Stock Alfred Sacks 100,000 Nil
(Par Value $.008) 90 Orville Drive Record and Beneficial
Bohemia, NY 11716
39
Common Stock Murray Daly 60,000 Nil
(Par Value $.008) 90 Orville Drive Record and Beneficial
Bohemia, NY 11716
Common Stock Glenn Cohen 60,000 Nil
(Par Value $.008) 90 Orville Drive Record and Beneficial
Bohemia, NY 11716
Common Stock Nathan Rosenblatt 30,000 Nil
(Par Value $.008) 90 Orville Drive Record and Beneficial
Bohemia, NY 11716
Common Stock Michael Ashner 135,000 Nil
(Par Value $.008) 90 Orville Drive Record and Beneficial
Bohemia, NY 11716
Common Stock Peter J. White 2,000 Nil
(Par Value $.008) 90 Orville Drive Record and Beneficial
Bohemia, NY 11716
Common Stock All Directors & 20,882,812 31.7%
(Par Value $.008) Executive Officers as a group Record and Beneficial
(14 persons)
Each named person or group is deemed to be the beneficial owner of
securities which may be acquired within 60 days through the exercise
or conversion of options, if any, and such securities are deemed to
be outstanding for the purpose of computing the percentage
beneficially owned by such person or group and are deemed to be
outstanding for the purpose of computing the percentage of class
beneficially owned by any person or group.
Includes shares held in a Trust created by Arthur Rudolph for the
benefit of Scott Rudolph and others.
Includes shares held in a Trust created for the benefit of Mr.
Slade's wife.
40
NBTY Inc. Employee Stock Ownership Plan and Trust (the "Plan")
The basic terms of the Plan are as follows:
Eligibility
All associates of the Company, including officers, over the age of 21 and
who have been employed by the Company for one year or more are eligible
participants in the Plan.
Contributions
Contributions are made on a voluntary basis by the Company. There is no
minimum contribution required in any one year.
There will be no contributions required by an associate. All contributions
will be made by the Company at the rate of up to 15% of the Company's
annual payroll, at the discretion of the Company. Each eligible associate
receives an account or share in the Trust and the cash and/or shares of
stock contributed to the Plan each year are credited to his or her account.
Vesting
Once an associate is eligible, a portion of the stock in his or her account
becomes "vested" each year, as follows:
Number of Years Percentage of Shares
of Service earned each year
--------------- --------------------
Less than 2 0%
2 but less than 3 20%
3 but less than 4 20%
4 but less than 5 20%
5 but less than 6 20%
6 or more 20%
Distribution
If an associate retires, is disabled, dies or his or her employment is
otherwise terminated, that associate or that associate's estate will
receive the vested portion held in trust for such associate.
At the end of the vesting period, the associates become full beneficial
owners of the stock. There is no tax consequence attached to his or her
Plan for an associate until that associate sells the shares, at which time
any profit realized by the associate is taxed as a capital gain.
41
Distribution is to be made only in the shares of NBTY, Inc. which shares
were purchased for the Trust from the cash contributions of the Company.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has had, and in the future may continue to have, business
transactions with firms affiliated with certain of the Company's directors.
Each such transaction is in the ordinary course of the Company's business.
During the fiscal year ended September 30, 2001, the following transactions
occurred:
A. Gail Radvin, Inc., a corporation wholly-owned by Gail Radvin,
received commissions from the Company totaling $501,000 on
account of sales in certain foreign countries and had trade
receivable balances of approximately $3,142,000 as of September
30, 2001. Gail Radvin is the sister of Arthur Rudolph (a
director) and the aunt of Scott Rudolph (Chairman and
President).
B. Arthur Rudolph, a director, has been retained under a
Consulting Agreement, at a minimum annual fee of $400,000,
payable monthly, which Agreement has been renewed until
December 31, 2002.
42
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES
(a) The following documents are filed as a part of this report
Page
Number
1. Financial Statements
Report of Independent Accountants 44
Consolidated Balance Sheets as of September 30, 2001
and 2000 45
Consolidated Statements of Income for the years ended
September 30, 2001, 2000 and 1999 46
Consolidated Statements of Stockholders' Equity for the
years ended September 30, 2001, 2000 and 1999 47
Consolidated Statements of Cash Flows for the years ended
September 30, 2001, 2000 and 1999 48 - 49
Notes to Consolidated Financial Statements 50 - 68
2. Financial Statement Schedule
Schedule II 69
4. Signatures 70 - 71
3. Exhibits
11. Statement Re: Computation of Earnings Per Share 72
43
NBTY, Inc. and Subsidiaries
Consolidated Financial Statements
For the Years Ended
September 30, 2001, 2000 and 1999
Report of Independent Accountants
To the Board of Directors and Stockholders
of NBTY, Inc:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 43 present fairly, in all material
respects, the financial position of NBTY, Inc and its Subsidiaries at
September 30, 2001 and September 30, 2000, and the results of their
operations and their cash flows for each of the three years in the period
ended September 30, 2001 in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the index appearing under Item
14(a)(2) on page 43 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits
of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and
perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
November 6, 2001
New York, New York
F-44
NBTY, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2001 and 2000
(Dollars and shares in thousands)
- ---------------------------------------------------------------------------
Assets 2001 2000
Current assets:
Cash and cash equivalents $ 34,434 $ 31,464
Accounts receivable, less allowance for doubtful
accounts of $3,222 in 2001 and $1,227 in 2000 34,730 24,913
Inventories 184,745 130,741
Deferred income taxes 5,318 3,549
Prepaid expenses and other current assets 21,341 20,269
---------------------
Total current assets 280,568 210,936
Property, plant and equipment, net 229,216 214,164
Intangible assets, net 185,728 172,124
Other assets 12,950 6,389
---------------------
Total assets $708,462 $603,613
=====================
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt and capital
lease obligations $ 34,911 $ 12,829
Accounts payable 50,673 61,100
Accrued expenses 63,876 36,893
---------------------
Total current liabilities 149,460 110,822
Long-term debt 236,967 199,095
Obligations under capital leases 269 1,383
Deferred income taxes 16,761 17,050
Other liabilities 2,599 2,820
---------------------
Total liabilities 406,056 331,170
---------------------
Commitments and contingencies (Notes 11 and 15)
Stockholders' equity:
Common stock, $.008 par; authorized 175,000 shares
in 2001 and 2000; issued 65,724 shares in 2001
and 68,524 shares in 2000 and outstanding 65,724
shares in 2001 and 68,289 shares in 2000 526 548
Capital in excess of par 122,513 123,798
Retained earnings 193,184 163,300
---------------------
316,223 287,646
Less, 235 treasury shares at cost, in 2000 - (1,512)
Stock subscriptions receivable (839) (839)
Accumulated other comprehensive loss (12,978) (12,852)
---------------------
Total stockholders' equity 302,406 272,443
---------------------
Total liabilities and stockholders' equity $708,462 $603,613
=====================
The accompanying notes are an integral part of these consolidated financial
statements.
45
NBTY, Inc. and Subsidiaries
Consolidated Statements of Income
Years ended September 30, 2001, 2000 and 1999
(Dollars and shares in thousands, except per share amounts)
- ---------------------------------------------------------------------------
2001 2000 1999
Net sales $806,898 $720,856 $630,894
--------------------------------
Costs and expenses:
Cost of sales 355,167 312,960 293,521
Catalog printing, postage and promotion 49,410 33,709 32,895
Selling, general and administrative 315,228 279,379 236,367
Recovery of raw material costs (2,511)
Litigation settlement costs 4,952
--------------------------------
719,805 623,537 567,735
--------------------------------
Income from operations 87,093 97,319 63,159
--------------------------------
Other income (expense):
Interest, net (21,958) (18,858) (18,945)
Miscellaneous, net 2,748 4,491 1,388
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(19,210) (14,367) (17,557)
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Income before income taxes 67,883 82,952 45,602
Provision for income taxes 25,958 31,444 18,323
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Net income $ 41,925 $ 51,508 $ 27,279