===========================================================================
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, 2003.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from to .
Commission file number 0-10666
NBTY, INC.
(Exact name of registrant as specified in 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 offices)
(631) 567-9500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
------------------- ---------------------
Common Stock, par value $0.008 per share New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
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 to this Form 10-K [ ]
Indicate by check mark whether the Registrant is an accelerated filer.
YES [X] NO [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant on March 31, 2003, was approximately $1,260,000,000. For
purposes of the foregoing calculation only, all directors and executive
officers of the Registrant have been deemed affiliates. The number of
shares of Common Stock of the Registrant outstanding at March 31, 2003 was
approximately 66,452,000. The number of shares of Common Stock of the
Registrant outstanding at December 8, 2003 was approximately 66,622,000.
Documents Incorporated by Reference: None
NBTY, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2003
TABLE OF CONTENTS
Caption Page
------- ----
Forward Looking Statements
PART I
------
ITEM 1 BUSINESS
General 2
Business Strategy 3
Operating Segments 5
Employees and Advertising 7
Manufacturing, Distribution and Quality Control 8
Research and Development 9
Competition; Customers 9
Government Regulation 10
International Operations 16
Trademarks 16
Raw Materials 17
Seasonality 17
ITEM 2 PROPERTIES 17
ITEM 3 LEGAL PROCEEDINGS 21
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 23
PART II
-------
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 24
Dividend Policy 24
Price Range of Common Stock 24
ITEM 6 SELECTED FINANCIAL DATA 25
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 27
Background 27
Critical Accounting Policies and Estimates 28
Results of Operations 33
Seasonality 40
Liquidity and Capital Resources 40
Related Party Transactions 43
Inflation 44
Financial Covenants and Credit Rating 44
New Accounting Developments 45
i
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 46
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 47
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 47
ITEM 9A CONTROLS AND PROCEDURES 47
PART III
--------
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 49
Compensation of Directors 51
Audit Committee Financial Expert 52
Section 16(a) Beneficial Ownership Reporting Compliance 52
Code of Ethics for Senior Financial Officers 52
ITEM 11 EXECUTIVE COMPENSATION 53
Summary Compensation Table 53
Option Value at the End of Fiscal 2003 54
Employment and Consulting Agreements with Executive Officers
and Directors 54
Compensation Committee Interlocks and Insider Participation 56
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS 56
Securities Authorized For Issuance Under Equity Compensation Plans 59
NBTY, Inc. Employees' Stock Ownership Plan 59
Eligibility; Trustee 59
Contributions 59
Vesting 60
Distribution; Voting 60
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 60
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES 60
PART IV
-------
ITEM 15 EXHIBITS, FINANCIAL STATEMENTS SCHEDULES,
AND REPORTS ON FORM 8-K 62
Index to Consolidated Financial Statements and Schedules 65
Financial Statements F-1
Financial Statement Schedule S-1
Signatures
Certifications
Exhibits
ii
PART I
Forward Looking Statements
This Annual Report on Form 10-K (the "Report") contains 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 NBTY, Inc. Discussions containing such forward-looking
statements may be found in Items 1, 2, 3, 7 and 7A hereof, as well as
within this Report generally. In addition, when used in this Report, the
words "subject to," "believe," "expect," "plan," "estimate," "intend,"
"may," "will," "should," "can," or "anticipate," or the negative thereof,
or variations thereon, or similar expressions are intended to identify
forward-looking statements, which are inherently uncertain. Similarly,
discussions of strategy, although believed to be reasonable, are also
forward-looking statements and are inherently uncertain. All forward-
looking statements are subject to a number of risks and uncertainties that
could cause actual results to differ materially from projected results.
Factors 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) adverse publicity regarding the
consumption of nutritional supplements; (iv) inability to retain customers
of companies (or mailing lists) recently acquired; (v) increased
competition; (vi) increased costs; (vii) loss or retirement of key members
of management; (viii) increases in the cost of borrowings and/or
unavailability of additional debt or equity capital; (ix) unavailability
of, or inability to consummate, advantageous acquisitions in the future,
including those that may be subject to bankruptcy approval or the inability
of the Company (as defined below) to integrate acquisitions into the
mainstream of its business, or unanticipated fees and expenses associated
with the same; (x) changes in general worldwide economic and political
conditions in the markets in which the Company may compete from time to
time; (xi) the inability of the Company to gain and/or hold market share of
its customers; (xii) unavailability of electricity in certain geographical
areas; (xiii) exposure to and expenses of defending and resolving product
liability claims and other litigation; (xiv) the ability of the Company to
successfully implement its business strategy; (xv) the inability of the
Company to manage its retail, wholesale, manufacturing and other operations
efficiently; (xvi) consumer acceptance of the Company's products; (xvii)
the inability of the Company to renew leases on its retail locations;
(xviii) inability of the Company's retail stores to attain or maintain
profitability; (xix) the absence of clinical trials for many of the
Company's products; (xx) sales and earnings volatility and/or trends; (xxi)
the efficacy of the Company's Internet and online marketing and sales
efforts; (xxii) fluctuations in foreign currencies, especially the British
Pound and the Euro; (xxiii) import-export controls on sales to foreign
countries; (xxiv) the inability of the Company to secure favorable new
sites for, and delays in opening, new retail locations; (xxv) introduction
of new federal, state, local or foreign legislation or regulation or
adverse determinations by regulators, and more particularly the Food
Supplements Directive and the Traditional Herbal Medicinal Products
Directive in Europe; (xxvi) the mix of the Company's products and the
profit margins thereon; (xxvii) the availability and pricing of raw
materials; (xxviii) risk factors discussed in the Company's filings with
the U.S.
1
Securities and Exchange Commission (the "SEC"); and (xxix) other factors
beyond the Company's control.
Consequently, such forward-looking statements should be regarded solely as
the Company's current plans, estimates and beliefs. Readers are cautioned
not to place undue reliance on forward-looking statements. The Company
cannot guarantee future results, events, and levels of activity,
performance or achievements. The Company does not undertake and
specifically declines any obligation to update, republish or revise
forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrences of unanticipated events.
Industry data used throughout this Report was obtained from industry
publications and internal Company estimates. While the Company believes
such information to be reliable, its accuracy has not been independently
verified and cannot be guaranteed.
Item 1. BUSINESS
General
NBTY, Inc. (the "Company", "NBTY", "we" or "us") 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, the Netherlands and worldwide. Under a number
of the Company's and third-party brands, the Company offers over 9,000
products, including vitamins, minerals, herbs, 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 channels of
distribution: (i) Direct response/Puritan's Pride, 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) 533
Vitamin World(R) and Nutrition Warehouse(R) retail stores, as of September
30, 2003, operating throughout the U.S. in 45 states, Guam and Puerto Rico;
(iii) European retail operations, consisting of 524 Holland & Barrett(R),
GNC (UK)(R) and Nature's Way(R) retail stores, as of September 30, 2003,
operating throughout the United Kingdom and Ireland, and 65 De Tuinen(R)
retail stores, operating in the Netherlands; 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) and Rexall Sundown(R) brands. At September
30, 2003, the Company manufactured over 90% of the nutritional supplements
it sold.
The Company was incorporated in Delaware in 1979 under the name
Nature's Bounty, Inc. On March 26, 1995, the Company changed its name to
NBTY, Inc. 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 Internet address is www.nbty.com. The Company's
United Kingdom subsidiary, Holland & Barrett Europe Limited, has its
principal executive offices in Nuneaton, United Kingdom. The Company's
Dutch subsidiary, De Tuinen, B.V., has its principal executive offices in
Beverwijk, Holland.
2
The Company makes available, free of charge, on its web site, its
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and all amendments to these reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). Such reports are available as soon as is
reasonably practicable after the Company electronically files such
materials with the SEC.
Business Strategy
The Company targets the growing value-conscious consumer segment by
offering high-quality products at a value price. The Company's objectives
are to increase sales, improve manufacturing efficiencies, increase
profitability and strengthen its market position through the following key
strategies:
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. Specific
plans to expand channels of distribution include:
* Increase Wholesale Sales in the U.S. and in Foreign Markets. The
Company expects to strengthen its wholesale business by continuing
to increase its sales in food, drug and mass merchandising
channels by (i) increasing revenues derived from existing
customers through strong promotional activities and the aggressive
introduction of new and innovative products; (ii) increasing shelf
space in major retailers; (iii) leveraging the advertising and
promotion of its major specialty brands, such as Osteo Bi-Flex(R),
Carb Solutions(R), Flex-A-Min(R) and Knox(R); and (iv) continuing
to grow its private label revenue with new customers and timely
product introductions. In addition, the Company continues to form
new distribution alliances throughout the world for its products.
A new sales division in the U.K., Nutrition Warehouse Limited, was
established to take advantage of wholesale sales opportunities in
the U.K. and the European continent and in March 2003, the Company
purchased Food Supplement Company ("FSC"), a wholesale distributor
in Manchester, England. In July 2003, the Company acquired Rexall
Sundown, Inc. ("Rexall"). The transaction will complement NBTY's
existing wholesale products and provide NBTY with an enhanced
sales infrastructure and additional manufacturing capacity.
Rexall's portfolio of nutritional supplement brands includes
Rexall(R), Sundown(R), Osteo Bi-Flex(R), Carb Solutions(R),
MET-Rx(R) and Worldwide Sport Nutrition(R).
* Increase Puritan's Pride direct response sales. The Company
expects to continue to strengthen 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) testing new and more frequent promotions to further
improve response rates; and (iv) promoting its Internet web sites.
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 the
Company believes can be efficiently integrated into its own
operations without adding substantial overhead expenses.
3
* Increase Retail Sales in the U.S. Over the last several years, the
Company's strategy has focused on the development of a nationwide
chain of retail stores in the United States. To that end, at
September 30, 2003, the Company operated 533 Vitamin World(R) and
Nutrition Warehouse(R) retail stores located in regional and
outlet malls. The Company has added approximately 107 retail
stores in the past three fiscal years or approximately 20% of the
total number of stores in operation at September 30, 2003. New
stores historically do not have the same high customer traffic as
more mature stores. During the fiscal year ended September 30,
2003 ("fiscal 2003"), the Company operated 7 fewer Vitamin World
stores than in fiscal 2002. The Company plans, from time to time,
to open new stores in the next fiscal year. In June 2000, the
Company successfully introduced its Savings Passport Card, a
customer loyalty program, which increases customer traffic and
provides incentives to purchase at Vitamin World(R). It is an
additional tool for the Company to track customer preferences and
purchasing trends. At the end of fiscal 2003, there were over 4.2
million Savings Passport Card members.
* Increase Retail Sales in the U.K., Ireland and Europe. The Company
continues its strategy of selectively expanding the number of its
Holland & Barrett stores located throughout the U.K. At September
30, 2003, there were 462 Holland & Barrett(R) and 12 Nature's
Way(R) stores operating in the U.K. and Ireland. In fiscal 2003,
Holland & Barrett opened 15 new stores in the U.K. and Ireland.
The Company projects that, during the next fiscal year, it will
open 29 new retail stores in the U.K. and Ireland.
In order to expand retail sales in the U.K., in March 2003 the
Company (through its acquisition of GNC (UK)) acquired 50 GNC
retail stores in the U.K. In addition, in May 2003 the Company
acquired the De Tuinen retail chain in the Netherlands which, at
September 30, 2003 operated 65 retail stores. The Company
continues to evaluate opportunities to open additional GNC (UK)
stores in the U.K. and De Tuinen stores in Europe.
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 demand for new products and the continued publicity about the
importance of vitamins, minerals and nutritional supplements in the
promotion of general health as well as the growing number of overweight
consumers, 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 demand with high quality, value-oriented products.
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, which
can be 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
4
continually evaluates ways to further enhance its vertical integration by
leveraging manufacturing, distribution, purchasing and marketing
capabilities, and otherwise improving the efficacy of its operations.
Build Infrastructure to Support Growth. NBTY has technologically
advanced, state-of-the-art manufacturing and production facilities, with
total production capacity of approximately 36 billion tablets, capsules and
softgels per year. The Company regularly evaluates its operations and makes
investments in building infrastructure, as necessary, to support its
continuing growth.
Strategic Acquisitions. In the normal course of its business, the
Company seeks acquisition opportunities, both in the U.S. and
internationally, of companies which complement or extend the Company's
existing product lines, increase its market presence, expand its
distribution channels, and/or are compatible with its business philosophy.
In fiscal 2003, NBTY completed three such acquisitions: (i) the GNC retail
stores and FSC wholesale operations in the U.K.; (ii) the De Tuinen chain
of retail stores in the Netherlands; and (iii) Rexall Sundown, Inc.,
including the MET-Rx(R) and Worldwide Sport Nutrition(R) operations. For
additional information regarding the Company's acquisitions, see Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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 of the Company have an average of approximately 20
years with the Company.
Operating Segments
NBTY and its subsidiaries operate in the nutritional supplement
industry, focusing their products and services on four segments of this
industry: Wholesale, Direct Response, Retail U.S. and Retail Europe.
The following table sets forth the percentage of net sales for each
of the Company's operating segments:
Fiscal Year Ended September 30,
-------------------------------
2003 2002 2001
---- ---- ----
Wholesale 35% 30% 24%
Direct Response 17% 19% 21%
Retail:
U.S. 18% 21% 22%
Europe 30% 30% 33%
-----------------------
100% 100% 100%
Further information about the financial results of each of these
segments is found in Note 18 to the Consolidated Financial Statements in
this Report.
5
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(R), Rexall(R) and Sundown(R) brands are 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(R)
at prices designed for the "price conscious" consumer. The Company sells
directly to health food stores under the brand name Good 'N Natural(R) and
sells products, including a specialty line of vitamins, to health food
wholesalers under the brand name American Health(R). The Company has
expanded sales of various products to many countries throughout Europe,
Asia and Latin America.
Direct Response. The Company offers, through mail order and Internet
e-commerce, a full line of vitamins and other nutritional supplement
products as well as selected personal care items under its Puritan's
Pride(R) brand names at prices which are usually at a discount from those
of similar products sold in retail stores.
Through its Puritan's Pride(R) brand, NBTY is the leader in the U.S.
direct response nutritional supplement industry with more than 4 million
customers on our customer list, with response rates which management
believes to be above the industry average. 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 and
conducts insert programs with other mail order companies. The Company's use
of state-of-the-art equipment in its direct response operations, such as
computerized mailing, bar-coded addresses and automated picking and packing
systems enables the Company to fill each order typically within 24 hours of
its receipt. This 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 and www.vitamins.com web sites provide
a practical and convenient method for consumers wishing to purchase
products that promote healthy living. By using these web sites, consumers
have access to the full line of more than 1,000 products which are offered
through the Company's Puritan's Pride(R) mail order catalog. Consumer
orders are processed with the speed, economy and efficiency of the
Company's automated picking and packing system.
Retail U.S. At the end of fiscal 2003, the Company operated 533
retail stores located in 45 states, Guam and Puerto Rico, under the Vitamin
World(R) and Nutrition Warehouse(R) names. 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
6
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 and new product
introductions for all divisions of the Company.
In addition to www.puritan.com and www.vitamins.com, the Company also
maintains another web site, www.vitaminworld.com, to accommodate customers
who wish to purchase nutritional supplements on the Internet, or to find a
conveniently located store to make purchases in person. This web site
provides the consumer with information concerning the products offered in
the Company's retail stores and with information about store locations.
Retail Europe. The Company's Retail European sales are generated by
Holland & Barrett and GNC in the U.K., Nature's Way in Ireland and De
Tuinen in the Netherlands. Holland & Barrett is one of the leading
nutritional supplement retailers in the U.K., with 462 locations in the
U.K. at September 30, 2003. Holland & Barrett markets a broad line of
nutritional supplement products, including vitamins, minerals and other
nutritional supplements, as well as food products, including fruits and
nuts, confectionery and other items. GNC (UK) operated 50 locations in the
U.K. at September 30, 2003, specializing in the sale of vitamins, minerals
and sports nutrition products. At September 30, 2003 there were 12 Nature's
Way locations in Ireland selling a range of products similar to those
offered by Holland & Barrett. With 65 locations in Holland at September 30,
2003, De Tuinen is a leading retailer of health food products, selected
confectionery, and lifestyle giftware. Nutritional supplement products
manufactured by NBTY accounted for approximately 52% of European Retail's
total sales in fiscal 2003.
For additional information regarding financial information about the
geographic areas in which the Company and its subsidiaries conduct their
business, see Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Notes to the Company's
Consolidated Financial Statements contained in this Report.
Employees and Advertising
As of September 30, 2003, the Company employed approximately 10,000
persons, which included:
(i) 2,571 sales associates located throughout the U.S. in its
Vitamin World(R) and Nutrition Warehouse(R) retail stores;
(ii) 2,339 manufacturing, shipping and packaging associates
throughout the U.S.;
(iii) 898 associates in administration throughout the U.S.;
(iv) 260 associates who sell to NBTY's wholesale distributors and
customers;
(v) 36 in-house advertising associates;
(vi) 3,105 associates in its Holland & Barrett operations,
including:
(A) 2,779 retail associates,
(B) 172 associates in distribution, and
7
(C) 154 associates in administration;
(vii) 324 associates in its De Tuinen operations, including:
(A) 296 retail associates, and
(B) 28 associates in administration and warehousing;
(viii) 319 associates in GNC (UK) retail stores;
(ix) 75 associates in Nature's Way retail stores; and
(x) 78 associates in FSC wholesale administration, production and
warehousing.
In addition, NBTY sells through commissioned sales representative
organizations. The Company believes it has satisfactory employee and labor
relations.
For the fiscal years ended September 30, 2001, 2002 and 2003, NBTY
spent approximately $49 million, $48 million and $66 million, respectively,
on advertising and promotions, including print, media and cooperative
advertising. A significant portion of the increased advertising relates to
additional promotions at the recently acquired Rexall Sundown operations.
NBTY creates its own advertising materials through its in-house staff of
associates. In the U.K. and Ireland, both Holland & Barrett and Nature's
Way have run advertisements on television and in national newspapers, and
conducted sales promotions. GNC (UK) and De Tuinen in Holland also
advertise in national newspapers and conduct sales promotions. In addition,
Holland & Barrett and De Tuinen each publish their own magazines with
articles and promotional materials.
Manufacturing, Distribution and Quality Control
At September 30, 2003, the Company employed approximately 2,340
manufacturing, shipping and packaging associates throughout the United
States. The Company's manufacturing activities are conducted in New York,
California, Colorado, Florida, New Jersey and Illinois. All of the
Company's manufacturing operations are subject to good manufacturing
practice regulations ("GMPs") promulgated by the United States Food and
Drug Administration ("the FDA") and other applicable regulatory standards.
The Company manufactures products for its four operating segments as well
as for third parties. The Company believes that, generally, 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 sales.
The Company places special emphasis on quality control. All raw
materials used in production are assigned a unique lot number and are
initially held in quarantine, during which time the Company's laboratory
chemists assay the raw materials for compliance with established
specifications. Once released, samples are retained and the material is
processed according to approved formulas by mixing, granulating,
compressing, encapsulating and sometimes coating operations. After the
tablet or capsule is manufactured, laboratory technicians test its weight,
purity, potency, disintegration and dissolution. 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
8
cap with an inner safety seal and affixes a label. The Company uses
computer-generated documentation for picking and packing for order
fulfillment.
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.
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. These systems
provide functions such as scheduling of payments, receiving of payments,
general ledger interface, vendor tracking and flexible reporting options.
Research and Development
In the last three fiscal years, the Company did not expend any
significant amounts for basic research and development of new products.
Competition; Customers
The market for nutritional supplement 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, which tend to be highly fragmented in terms of
both geographical market coverage and product categories. The Company also
competes in the nutritional supplement area with companies which may have
broader product lines and/or larger sales volumes. The Company's products
also compete with nationally advertised brand
9
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, supermarkets and
health food stores. Many companies within the industry are privately held.
Therefore, the Company is unable to precisely assess the size of all of its
competitors or where the Company ranks in comparison to such privately held
competitors with respect to sales to retailers.
One customer of the wholesale division represented, individually,
more than 10% of this division's sales in fiscal 2003 and accounted for
20% of the Company's accounts receivable at September 30, 2003. Additionally,
a new customer accounted for 10% of the Company's accounts receivable
at September 30, 2003. The loss of one or more of these customers is not
expected to have a material impact on the Company's consolidated financial
position or results of operations.
Government Regulation
United States. The formulation, manufacturing, packaging, labeling,
advertising, distribution and sale 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, 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, the FDA, pursuant to the Federal Food,
Drug, and Cosmetic Act ("FDCA"), regulates the formulation, manufacturing,
packaging, labeling, distribution and sale 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, in particular 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, 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 the 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 the 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 the FDA
10
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 the FDA
at least 75 days before the initial marketing of the new dietary
ingredient. There can be no assurance that the FDA will accept the evidence
of safety for any new dietary ingredients that the Company may want to
market, and the 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 unless such claim has been reviewed
and approved by the FDA). A company that uses a statement of nutritional
support in labeling must possess evidence substantiating that the statement
is truthful and not misleading. In some circumstances it is necessary to
disclose on the label that the FDA has not "evaluated" the statement, to
disclose the product is not intended for use for a disease, and to notify
the FDA about the Company's use of the statement within 30 days of
marketing the product. However, there can be no assurance that the FDA will
not determine that 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 a company
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 its
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 unapproved drug.
Recently, the FDA, as authorized by DSHEA, proposed GMPs specifically
for dietary supplements. These new GMP regulations, if finalized, would be
more detailed than the GMPs that currently apply to dietary supplements and
may, among other things, 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.
The 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
11
some of the labeling statements that NBTY would like to use will not be
deemed by the FDA to be "unauthorized health or disease claims" that are
not permitted to be used.
Although the regulation of dietary supplements is in some respects
less restrictive than the regulation of drugs, there can be no assurance
that dietary supplements will continue to be subject to less restrictive
regulation. The FDA regulates the formulation, manufacturing, packaging,
labeling and distribution of over-the-counter ("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 the applicable FDA monograph, the
product generally cannot be sold without first obtaining the FDA approval
of a new drug application, a long and expensive procedure. 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.
The 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 voluntary 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. In recent years, the FTC has instituted numerous enforcement
actions against dietary supplement companies for failure to adequately
substantiate 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 civil penalties and/or
restitution by the companies involved. NBTY and Rexall Sundown,
respectively, are each currently subject to an FTC consent decree resulting
from past advertising claims for certain of their respective products, and
are required to maintain compliance with these decrees and are subject to
an injunction and substantial civil monetary penalties if there should be
any failure to comply. Further, the U.S. 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. Civil penalty actions could have
a material adverse effect on NBTY's consolidated financial position or
results of operations.
In June 2003, the Company received a letter of inquiry from the FTC
concerning the Company's marketing of a certain weight loss product, as
well as the marketing of Royal Tongan Limu by a subsidiary of the Company,
Dynamic Essentials (DE), Inc. ("DEI"). Subsequent to the receipt of this
letter, the Company voluntarily stopped all sales and promotions of the
weight loss product in question and of Royal Tongan Limu. The Company also
ceased all operations of DEI and terminated all DEI employees. The Company
has had follow-up meetings and correspondence with the FTC. At this time,
it is not possible to estimate, if the FTC were to assert a claim, what the
outcome or amount of such claim would be.
12
In March 2003 the Company ceased selling products that contain
ephedra. Though the Company continues to believe that the ephedra products
it sold are safe to use as directed, the adverse publicity surrounding
ephedra products and the regulatory environment in the U.S. led management
to the decision to cease selling ephedra products, in the best interests of
the Company and its shareholders. Overall, sales of ephedra products
represented an insignificant portion of the Company's business. Subsequent
to the decision to cease selling ephedra products, the Company was named as
a defendant or a third-party defendant in a handful of actions, alleging
liability (under various theories, including negligence, false advertising,
strict liability in tort and failure to warn) as well as personal injury
with respect to the Company's sales, manufacturing and distribution of
products containing ephedra. The Company has notified its insurance
carriers and third party vendors with regard to each suit and vigorously
contests the allegations in these actions. The Company did not acquire any
ephedra assets, liabilities or operations in connection with its purchase
of Rexall Sundown. All such operations were retained by Royal Numico N.V.,
the prior owner of Rexall Sundown.
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 NBTY's 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.
In addition, 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, recalls 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 United Kingdom, the two main pieces of
legislation that affect the operations of Holland & Barrett and GNC (UK)
are the Medicines Act 1968, which regulates the licensing and sale of
medicines, and the Food Safety Act 1990, which provides for the safety of
food products. A large volume of secondary legislation in the form of
Statutory Instruments adds detail to the main provisions of the above Acts.
In the U.K. regulatory system a product intended to be taken orally
will fall within either the category of food or the category of medicine.
There is no special category of
13
dietary supplement as provided for in the U.S. by DSHEA. Some products
which are intended to be applied externally, for example creams and
ointments, may be classified as medicines and others as cosmetics.
The Medicines and Healthcare products Regulatory Agency ("MHRA") now
has responsibility for the implementation and enforcement of the Medicines
Act, and is the licensing authority for medicinal products. The MHRA
directly employs enforcement officers from a wide range of backgrounds,
including the police, and with a wide range of skills, including
information technology. The MHRA is an Executive Agency of the Department
of Health. The MHRA decides whether a product is a medicine or not and, if
so, considers whether it can be licensed. It determines the status of a
product by considering whether it is medicinal by "presentation" or by
"function". Many, though not all, herbal remedies are considered
"medicinal" by virtue of these two tests.
The Food Standards Agency ("FSA") deals with legislation, policy and
oversight of food products, with enforcement action in most situations
being handled by local authority Trading Standards Officers. The FSA
answers primarily to Ministers at the Department of Health and the
Department of Environment Food and Rural Affairs. Most vitamin and mineral
supplements, and some products with herbal ingredients, are considered to
be food supplements and fall under general food law which requires them to
be safe.
In July 2002, the European Union ("EU") published in its Official
Journal the final text of a Food Supplements Directive which came into EU
law on that date, and which sets out a process and timetable by which the
Member States of Europe must bring their domestic legislation in line with
its provisions. It seeks to harmonize the regulation of the composition,
labeling and marketing of food supplements (at this stage only vitamins and
minerals) throughout the EU. It does this by specifying what nutrients and
nutrient sources may be used (and by interpretation the rest which may
not), the level at which those nutrients may be present in a supplement,
and the labeling and other information which must be provided on packaging.
By harmonizing the legislation, the Food Supplements Directive should
provide opportunities for businesses to market one product or range of
products to a larger number of potential customers without having to
reformulate or repackage it. This development may lead to some liberalizing
of the more restrictive regimes in France and Germany, providing new
business opportunities. Conversely, however, it may substantially limit the
range of nutrients and nutrient sources, and the potencies at which some
nutrients may be marketed by the Company in the more liberal countries,
such as the U.K., which may lead to some reformulation costs and loss of
some specialist products.
The provisions of the Food Supplements Directive were incorporated
into U.K. domestic law by Statutory Instrument in July 2003. The first
phase of compliance relates to the composition of food supplements and must
be attained by August 2005.
The EU is also considering a Traditional Herbal Medicinal Products
Directive ("THMPD") which would allow a traditional herbal medicine to be
licensed without
14
having to demonstrate its efficacy in the way that pharmaceutical products
have to do, provided that it is safe, is manufactured to high standards,
and has been on the market for 30 years. The THMPD is intended to provide a
safe home in EU law for a number of categories of herbal remedies, which
may otherwise be found to fall outside EU law. It does not, however,
provide a mechanism for new product development, and would entail some
compliance costs in registering the many herbal products already on the
market. The THMPD is currently anticipated to go into effect in the spring
of 2004. The THMPD will be implemented in stages, with full compliance
required by 2011.
Additional EU legislation is anticipated to further regulate the
composition, labeling and marketing of other products including sports
nutrition products, fortified foods, very low calorie diets, and foods for
particular nutritional purposes. Further progress is expected with
legislative initiatives to permit, but closely regulate, the use of health
claims made for products.
The EU has established a European Food Safety Authority, which will
have an important role to play in focusing attention on food standards in
Europe. Its Executive Director is Mr. Geoffrey Podger, who until 2003 was
the Chief Executive of the U.K.'s Food Standards Agency. Other members are
still being recruited.
Ireland. The legislative and regulatory situation in the Republic of
Ireland is similar, but not identical to that in the U.K.
The Irish Medicines Board has a similar role to that of the U.K.'s
MHRA and the Food Safety Authority of Ireland is analogous to the U.K.'s
FSA.
Like the U.K., Ireland will be required to bring its domestic
legislation into line with the provisions of the Food Supplements Directive
and the THMPD when the latter is finalized, and, indeed, with the other
forthcoming EU legislation mentioned above. Thus the market prospects for
Ireland are, in general, similar to those outlined in the U.K.
Holland. The regulatory environment in Holland is similar to the U.K.
in terms of availability of products. Holland currently has the same
liberal market, with no restrictions on potency of nutrients. Licensed
herbal medicines are available. However, there are some herbal medicines
which are sold freely as in the U.K. without the need to be licensed,
depending on the claims made for them. Holland is also more liberal
regarding certain substances, for which unlicensed sales are allowed. The
Government department dealing with this sector is the Ministry for Health,
Welfare and Sport.
Responsibility for food safety falls to the Keuringsdienst van Waren
(Inspectorate for Health Protection and Veterinary Public Health). This
authority deals with all nutritional products. The Medicines Evaluation
Board, which is the equivalent of the U.K.'s MHRA, is charged with the
responsibility for the safety of medicines which are regulated under the
Supply of Medicines Act.
The overall market prospects for Holland are, in general, similar to
those outlined for the U.K. above.
15
International Operations
In addition to the U.K., Ireland and Holland, the Company markets its
nutritional supplement products through distributors, retailers and direct
mail in more than 85 countries throughout Europe, North America, South
America, Asia, the Pacific Rim countries, Africa and the Caribbean Islands.
The Company's international operations are conducted in a manner to
conform to local variations, economic realities, market customs, consumer
habits and regulatory environments. The Company's products (including
labeling of such products) and the distribution and marketing programs of
the Company are modified in response to local and foreign legal
requirements and customer preferences.
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 and the Euro as compared to the U.S.
Dollar.
For additional information regarding financial information about the
geographic areas in which the Company and its subsidiaries conduct their
business, see Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Notes to the Company's
Consolidated Financial Statements contained in this Report.
Trademarks
U.S. The Company and its subsidiaries have applied for or registered
more than 2,100 trademarks with the United States Patent and Trademark
Office and many other major jurisdictions throughout the world for its
Nature's Bounty(R), Holland & Barrett(R), Good 'N Natural(R), American
Health(R), Puritan's Pride(R), Vitamin World(R), Natural Wealth(R),
Nutrition Headquarters(R), Rexall(R), Sundown(R), MET-Rx(R), Worldwide
Sport Nutrition(R) and Nutrition Warehouse(R) 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.
16
U.K./Ireland. Holland & Barrett 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. Holland & Barrett is the exclusive licensee of
the trademarks essential to the GNC (UK) business in the U.K.
Holland. De Tuinen owns trademarks registered in Holland and/or
throughout the European Community for its DeTuinen trademarks and has
rights to use other names essential to its business.
Raw Materials
In fiscal 2003, the Company spent approximately $290 million on raw
materials. The principal raw materials required in the Company's operations
are vitamins, minerals, herbs, gel caps, and bottling materials. The
Company purchases its vitamins, minerals and herbs from bulk manufacturers
and distributors in the United States, Japan, China and Europe. The Company
believes that there are adequate sources of supply for all of its principal
raw materials, and that the Company's relationships with its suppliers
yield improved quality, pricing and overall service to its customers.
Although there can be no assurance that the Company's sources of supply for
its principal raw materials will be adequate in all circumstances, in the
event that such sources are not adequate, the Company believes that
alternate sources can be developed in a timely manner. During fiscal 2003,
no one supplier accounted for more than 9% of the Company's raw material
purchases. The Company does not believe that the loss of any single
supplier would have a material adverse effect on the Company's consolidated
financial condition or results of operations.
Seasonality
While the Company believes that its business is not seasonal in
nature, the Company may have higher net sales in a particular quarter
depending upon when it has engaged in significant promotional activities.
Item 2. PROPERTIES
U.S. At September 30, 2003, the Company owned a total of
approximately 1.55 million square feet of plant and administrative
facilities. The Company also leased approximately 1.25 million square feet
of administrative, manufacturing, warehouse and distribution space in
various locations at the end of fiscal 2003. At September 30, 2003 the
Company leased and operated approximately 533 retail locations under the
name Vitamin World(R) and Nutrition Warehouse(R) in 45 states in the U.S.,
Guam and Puerto Rico. Generally, the Company leases the properties for
three to ten years at varying annual base rents and percentage rents in the
event sales exceed a specified amount. The retail stores have an average
selling area of approximately 940 square feet.
U.K./Ireland. Holland & Barrett owns a 178,000 square foot
administrative, manufacturing and distribution facility (which includes a
42,500 square foot mezzanine) in Burton. It is currently building an
extension for this facility which it expects will be
17
completed in January 2004, providing an additional 99,350 square feet
(including 13,200 square feet of mezzanines). Holland & Barrett leases all
but four of its 524 Holland & Barrett, GNC (UK), and Nature's Way retail
stores for terms varying between 10 and 35 years at varying annual base
rents. Nine Holland & Barrett stores are subject to percentage rents in the
event sales exceed a specified amount. Holland & Barrett and Nature's Way
stores each have an average selling area of approximately 945 square feet,
and the GNC (UK) stores have an average selling area of approximately 980
square feet.
Holland. In 2003, De Tuinen leased a 71,400 square foot
administrative and distribution facility in Beverwijk. De Tuinen leases
locations for 65 retail stores on renewable 5 year terms at varying annual
base rents. Of these, 41 are operated as company stores; the remaining 24
are sub-leased to, and operated by, franchisees. None of De Tuinen's stores
are subject to percentage rent.
The following is a listing of all material properties (excluding
retail locations and de minimis sales office locations) owned or leased by
the Company, which are used in all four of the Company's business segments:
Type of Approx. Leased
Location Facility Sq. Feet or Owned
-------- -------- -------- --------
UNITED STATES:
- --------------
Bohemia, NY Administration & Manufacturing 169,000 Owned
Bohemia, NY Manufacturing 80,000 Owned
Bohemia, NY(1) Manufacturing 75,000 Owned
Bohemia, NY Manufacturing & Warehousing 62,000 Owned
Bohemia, NY Administration & Warehousing 110,000 Leased
(term - 2009)
Bohemia, NY Administration & Warehousing 130,000 Leased
(term - 2009)
Holbrook, NY(1) Distribution 230,000 Owned
Holbrook, NY Distribution 108,000 Owned
Ronkonkoma, NY Administration & Distribution 110,000 Owned
Ronkonkoma, NY Warehousing 75,000 Leased
(term - September 2004)
Bayport, NY IT Services 12,000 Owned
Bayport, NY Manufacturing 131,000 Owned
Mineola, NY Administrative 13,000 Owned
Mineola, NY Administration & Warehousing 4,000 Owned
Reno, NV Distribution 40,000 Leased
(term - 2006)
Carbondale, IL Administration, Manufacturing 77,000 Owned
and Distribution
18
Type of Approx. Leased
Location Facility Sq. Feet or Owned
-------- -------- -------- --------
Carbondale, IL Administration 15,000 Owned
Murphysboro, IL(2) Manufacturing 62,000 Owned
Murphysboro, IL(2) Warehousing 30,000 Leased
(term - 2008)
South Plainfield, NJ Manufacturing 68,000 Owned
South Plainfield, NJ Manufacturing & Distribution 60,000 Leased
(term - 2006)
North Glenn, CO Administration 4,900 Leased
(term - June 2004)
Thornton, CO Manufacturing 72,000 Leased
(term - 2006)
Anaheim, CA Manufacturing & Distribution 286,140 Leased
(term - 2006)
Anaheim, CA Manufacturing 64,000 Leased
(term - 2008)
Anaheim, CA Administration & Manufacturing 20,000 Owned
Lake Mary, FL Administration (term - 2008) 12,250 Leased
Boca Raton, FL Administration 92,000 Owned
Boca Raton, FL Administration 58,000 Owned
Boca Raton, FL Manufacturing 84,000 Owned
Deerfield Beach, FL Manufacturing 157,000 Owned
Boca Raton, FL Warehousing 100,000 Owned
Sparks, NV Distribution (term - 2005) 100,647 Leased
Harrisburg, PA Distribution (term - 2005) 140,000 Leased
Bentonville, AR Sales Office 4,200 Leased
UNITED KINGDOM:
- --------------
Nuneaton Administration 8,300 Leased
(term - 2012)
Nuneaton Administration & Distribution 7,200 Leased
(term - 2010)
Burton Administration, Manufacturing 178,000 Owned
and Distribution
Manchester(3) Administration, Manufacturing 58,500 Leased
and Distribution (term - 2003)
Guildford Administration (term - 2005) 3,600 Leased
HOLLAND:
- -------
Beverwijk Administration & Distribution 71,400 Leased
(term - 2008)
- --------------------
The property is subject to a first mortgage. For additional
information regarding the mortgage, see the Company's Consolidated
Financial Statements contained in this Report.
19
On December 5, 2003, the Company ceased its operations at its
Murphysboro, IL facility.
Holland & Barrett's lease for this property expired in October, 2003.
Holland & Barrett will continue to occupy these premises until
February 2004 when it will relocate the Manchester operations to the
Burton facility.
Warehousing and Distribution
The Company has dedicated approximately 1.5 million square feet to
warehousing and distribution in its Long Island, NY; Carbondale, IL; Reno,
NV; Anaheim, CA; Thornton, CO; South Plainfield, NJ; Boca Raton, FL;
Sparks, NV; Harrisburg, PA; Burton, Manchester and Radcliffe, U.K.
facilities; and Beverwijk, Holland.
The Company's warehouse and distribution centers are integrated with
the Company's order entry systems to enable the Company to ship out mail
orders typically within 24 hours of their receipt. Once a customer's
telephone, mail or Internet order is completed, the Company's computer
system forwards the order to its 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 15,000 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 currently ships its U.S. orders
primarily through the United Parcel Service, Inc. (UPS), serving domestic
and international markets. Holland & Barrett and GNC (UK) use Parcelforce
and ANC for deliveries in the U.K., and Nature's Way uses the Irish postal
service for deliveries in Ireland.
The Company currently distributes its products from its distribution
centers through contract and common carriers in the U.S. and the
Netherlands and by Company-owned trucks in both the U.S. and the U.K.
Deliveries are made directly to the Vitamin World(R) and Nutrition
Warehouse(R) stores once per week. In addition, the Company ships products
overseas by container loads. The Company also operates additional
distribution centers in Burton, U.K. and Beverwijk, Holland. Deliveries are
made directly to Company owned and operated Holland & Barrett, GNC (UK),
Nature's Way, and De Tuinen stores once or twice per week, depending on
each store's inventory requirements.
All of the Company's properties are covered by all-risk and liability
insurance, which the Company believes is customary for the industry.
Management believes that these properties, taken as a whole, are
generally well-maintained, and are adequate for current and reasonably
foreseeable business needs. Management also believes that substantially all
of the Company's properties are being utilized to a significant degree.
20
Item 3. LEGAL PROCEEDINGS
Pseudoephedrine Products
On April 14, 2003, a complaint was filed by the United States of
America against the Company arising from certain pseudoephedrine sales by
the Company from November 2000 through December 2002. The complaint, filed
in U.S. District Court for the Eastern District of New York, alleges
technical recordkeeping and reporting violations of the Controlled
Substances Act, 21 U.S.C. Sections 801-904, and Controlled Substances
Import and Export Act, 21 U.S.C. Sections 951-971, in a small fraction of
the Company's sales of over-the-counter antihistamine and decongestant
products containing pseudoephedrine. Total sales of such products generated
approximately $160,000, or only 0.0002 percent, of the Company's total
sales for the fiscal years ended September 30, 2001 and September 30, 2002.
The Company has cooperated in all respects with the Drug Enforcement
Administration in its investigation of sales identified in the complaint.
Accordingly, the Company believes that there is no valid basis nor precedent
for the penalties sought (which consist of monetary fines), and has launched
a vigorous defense. However, because this action is in its early stages, no
determination can be made at this time as to the final outcome of this
action, nor can its materiality be accurately ascertained.
Prohormone Products
On July 25, 2002, a putative consumer class action was filed in New
York state court against several manufacturers and retailers of so-called
prohormone supplements naming Vitamin World as a defendant. Prohormones are
substances such as androstenedione that plaintiffs allege are hormone
precursors ingested to promote muscle growth. Plaintiffs allege that the
advertising and labeling of certain prohormone supplements overstate their
efficacy and do not fully disclose their risks, and seek class
certification and injunctive and monetary relief. The action was severed
into separate class actions against each of the defendants. On December 6,
2002, an amended class action complaint was filed against Vitamin World
that purported to elaborate on the claims initially alleged. The court has
not yet certified a class and the matter is currently in discovery. The
Company believes that this action is without merit and intends to
vigorously defend against the claims asserted. However, because this action
is in its early stages, no determination can be made at this time as to the
final outcome of this action, nor can its materiality be accurately
ascertained.
In addition to the foregoing prohormone case in which the Company is
a defendant, there are two other cases filed in 2002 naming MET-Rx as a
defendant. On July 25, 2002, one putative consumer class action was filed
in California state court and one putative consumer class action was filed
in Florida state court. Plaintiffs in each of these cases allege that the
advertising and labeling of certain prohormone supplements overstate their
efficacy and do not fully disclose their risks, and seek class
certification, injunctive and monetary relief. In the Florida action,
plaintiffs allege in the alternative that if the prohormone products were
effective as advertised, they were anabolic steroids, controlled substances
under Florida law. On this alternative theory, plaintiffs seek treble
damages under the Florida Civil RICO statute. The cases are currently in
the discovery
21
phase. The Company believes that these actions are without merit and
intends to vigorously defend against the claims asserted. However, because
these actions are in their early stages, no determination can be made at
this time as to their final outcome, nor can their materiality be
accurately ascertained.
Nutrition Bars
On August 28, 2001, the Company was also named as a defendant, along
with other companies, in a putative class action commenced in an Alabama
state court. Plaintiffs allege that NBTY manufactured and marketed
misbranded nutrition bars which understated carbohydrate content.
Plaintiffs seek class certification, injunctive, declaratory, and monetary
relief. Class discovery is being taken, and no class has been certified.
NBTY is vigorously opposing class certification on the basis that the
plaintiffs were not damaged as alleged as a result of any action by NBTY.
On October 3, 2002, the Company was named as a defendant in a second
putative class action commenced in the same Alabama state court as the
above-identified litigation. Plaintiffs, in an attempt to pursue several
retailers, including Vitamin World, and not manufacturers of nutrition
bars, allege that NBTY marketed misbranded nutrition bars. In November
2002, NBTY filed a motion to dismiss or abate the lawsuit based on the
principle that the court lacks subject-matter jurisdiction because the
earlier-filed lawsuit, which seeks identical relief for the same purported
class action against the manufacturers, preempts this second attempt to
certify a class against NBTY.
In addition to the foregoing nutrition bar cases in which the Company
is a defendant, there are six other cases filed in 2002 naming Rexall or a
subsidiary of Rexall as a defendant, each making substantially the same
allegations. NBTY acquired these cases with the purchase of Rexall. Three
cases were brought in California state court, on August 8, 2002, June 21,
2002 and August 29, 2002, respectively. One case was brought in Florida
state court on December 23, 2002, one case in Oklahoma state court on
December 31, 2002 and one case in Arkansas state court on December 31,
2002. Plaintiffs allege misbranding of nutrition bars and violations of
state unfair trade and practices statutes, unjust enrichment, misleading
advertising, unfair competition and other similar causes of action.
Plaintiffs seek disgorgement of profits, restitution, declaratory and
injunctive relief. NBTY contends that the California action is not
appropriate for class certification because the named plaintiffs are
inadequate class representatives and not typical of persons who purchased
the nutrition bars.
The Company believes that all of the above described nutrition bar
suits are without merit and intends to vigorously defend against the claims
asserted. Based upon the information available at this time, the Company
believes that its accrual is adequate for the exposure in the nutrition bar
litigation. However, because these actions are in their early stages, no
determination can be made at this time as to their final outcome, nor can
their materiality or the adequacy of the accrual be accurately ascertained.
In addition to the foregoing, other regulatory inquiries, claims,
suits and complaints (including product liability claims) arise in the
ordinary course of the Company's business. See Item 1. "Government
Regulation". The Company believes
22
that such other inquiries, claims, suits and complaints would not have a
material adverse effect on the Company's consolidated financial condition
or results of operations, if adversely determined against the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
23
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
DIVIDEND POLICY
Since its incorporation in 1979, 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 stockholders 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 contained in the Company's Credit
Agreement and Guarantee and Collateral Agreement (collectively, the "CGA"),
limitations contained in the indenture governing the 8 5/8% Senior
Subordinated Notes due 2007 of the Company, and such other factors as the
Company's Board of Directors considers appropriate.
The CGA prohibits the Company from paying dividends or making any
other distributions (other than dividends payable solely in shares of the
Company's common stock) to its stockholders. The Company's Indenture
governing its 8 5/8% Senior Subordinated Notes due 2007 similarly prohibits
the Company from paying dividends or making any other distributions to its
stockholders. In addition, except as specifically permitted in the CGA, the
CGA does not allow the Company's subsidiaries to advance or loan money to,
or make a capital contribution to or invest in, the Company. Furthermore,
except as expressly permitted in the Indenture, the Company's subsidiaries
are not permitted to invest in the Company. However, the CGA and the
Indenture do permit the Company's subsidiaries to pay dividends to the
Company.
For additional information regarding these lending arrangements and
securities, see Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources" and
the Notes to the Consolidated Financial Statements in this Report.
PRICE RANGE OF COMMON STOCK
Since September 19, 2003, the Common Stock has traded on the New York
Stock Exchange (the "NYSE") under the trading symbol "NTY". Prior to that
date, the Common Stock was included for quotation on the National
Association of Securities Dealers National Market System ("NASDAQ/NMS")
under the trading symbol "NBTY". The following table sets forth, for the
periods indicated, the high and low sale prices for
24
the Common Stock, as reported on NASDAQ/NMS until September 19, 2003 and
thereafter on the NYSE:
Fiscal Year Ended September 30, 2003
------------------------------------
High Low
---- ---
First Quarter ended December 31, 2002 $18.63 $11.48
Second Quarter ended March 31, 2003 $20.00 $16.10
Third Quarter ended June 30, 2003 $21.75 $14.75
Fourth Quarter ended September 30, 2003 $27.45 $20.25
Fiscal Year Ended September 30, 2002
------------------------------------
High Low
---- ---
First Quarter ended December 31, 2001 $14.07 $ 6.70
Second Quarter ended March 31, 2002 $18.00 $10.61
Third Quarter ended June 30, 2002 $19.55 $14.37
Fourth Quarter ended September 30, 2002 $17.32 $12.35
On December 8, 2003, there were approximately 650 record holders of
Common Stock. The Company believes that there were approximately 12,275
beneficial holders of Common Stock as of December 8, 2003.
For additional information regarding the Company's securities
authorized for issuance under the Company's equity compensation plans, see
Item 12. "Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters."
Item 6. SELECTED FINANCIAL DATA
The following table sets forth the selected financial data derived
from the audited financial statements of the Company. For additional
information, see the consolidated financial statements of the Company and
the notes thereto. The selected historical financial data of the Company
should also be read in conjunction with Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
25
(Dollars and shares in thousands, except per share amounts)
Fiscal Years Ended September 30,
2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------
Selected Income Statement Data:
Net sales $1,192,548 $964,083 $806,898 $720,856 $630,894
Costs & expenses:
Cost of sales 554,804 433,611 355,167 312,960 293,521
Discontinued product charge 4,500
Catalog printing, postage & promotion 66,455 47,846 49,410 33,709 32,895
Selling, general & administrative 435,748 348,334 315,228 279,379 236,367
Litigation recovery of raw material costs - (21,354) - (2,511) -
Litigation settlement costs - - - - 4,952
--------------------------------------------------------------
Income from operations 131,041 155,646 87,093 97,319 63,159
Interest expense (17,384) (18,499) (21,958) (18,858) (18,945)
Investment write down (4,084) - - - -
Miscellaneous, net 5,424 1,560 2,748 4,491 1,388
--------------------------------------------------------------
Income before income taxes 114,997 138,707 67,883 82,952 45,602
Provision for income taxes 33,412 42,916 25,958 31,444 18,323
--------------------------------------------------------------
Net income $ 81,585 $ 95,791 $ 41,925 $ 51,508 $ 27,279
==============================================================
Per Share Data:
Net income per share:
Basic $ 1.23 $ 1.45 $ 0.64 $ 0.77 $ 0.39
Diluted $ 1.19 $ 1.41 $ 0.62 $ 0.74 $ 0.39
Weighted average common shares
outstanding:
Basic 66,452 65,952 65,774 67,327 69,640
Diluted 68,538 67,829 67,125 69,318 70,826
Selected Balance Sheet Data:
Working capital $ 314,275 $185,710 $131,108 $100,114 $121,103
Total assets 1,204,383 730,140 708,462 603,613 539,384
Long-term debt, capital lease obligations
and promissory notes payable, less current
portion 413,989 163,874 237,236 200,478 219,508
Total stockholders' equity 514,799 419,257 302,406 272,443 223,949
26
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Readers are cautioned that forward-looking statements contained
herein should be read in conjunction with the Company's disclosures under
the heading "Forward Looking Statements" on page 1. This discussion should
also be read in conjunction with the Notes to the Company's Consolidated
Financial Statements contained in this Report. Dollar amounts are in
thousands, unless otherwise noted.
Background
NBTY 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 34 companies and/or businesses
engaged in the manufacturing, retail and direct response sale of
nutritional supplements, including:
* Fiscal 1997: Holland & Barrett;
* Fiscal 1998: Nutrition Headquarters Group;
* Fiscal 2000: Nutrition Warehouse Group;
* Fiscal 2001: Global Health Sciences (the "Global Group"),
NatureSmart, and Nature's Way;
* Fiscal 2002: Healthcentral.com, Knox NutraJoint (R), and
Synergy Plus(R) product lines/operations; and
* Fiscal 2003: Rexall Sundown Inc., Health and Diet Group Ltd.
("GNC (UK)") and FSC Wholesale, and the DeTuinen
chain of retail stores.
NBTY markets its products through four distribution channels: (i)
Wholesale: wholesale distribution to drug store chains, supermarkets,
discounters, independent pharmacies, and health food stores, (ii) U.S.
Retail: Vitamin World and Nutrition Warehouse retail stores in the U.S.,
(iii) European Retail: Holland & Barrett, Nature's Way, GNC (UK), and
DeTuinen retail stores in the U.K., Ireland, and Netherlands, and (iv)
Direct Response: Puritan's Pride. NBTY's net sales from wholesale
operations, U.S. Retail, European Retail, and Direct Response were
approximately 35%, 18%, 30% and 17%, respectively, of total sales for the
fiscal year ended September 30, 2003.
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.
27
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles ( "GAAP") in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting period. The most
significant estimates include:
* revenue recognition and estimating allowance for doubtful accounts;
* inventory valuation and obsolescence;
* valuation of long-lived and intangible assets and goodwill
including the values assigned to acquired intangible assets;
* income tax valuation allowance;
* foreign currency; and
* estimating accruals for, and probability of, the outcome of current
litigation.
The Company continually evaluates its accounting policies and the
estimates it uses to prepare the consolidated financial statements. In
general, the estimates are based on historical experience, on information
from third party professionals and on various other sources and assumptions
that are believed to be reasonable under the facts and circumstances at the
time such estimates are made. Management considers an accounting estimate
to be critical if:
* it requires assumptions to be made that were uncertain at the time
the estimate was made; and
* changes in the estimate, or the use of different estimating
methods, could have a material impact on the Company's
consolidated results of operations or financial condition.
Actual results could differ from those estimates. Significant
accounting policies are described in Note 1 to the consolidated financial
statements, which are included in Item 8 in this Form 10-K filing. In many
cases, the accounting treatment of a particular transaction is specifically
dictated by GAAP. There are also areas in which management's judgment in
selecting any available alternative would not produce a materially
different result.
Certain of the Company's accounting policies are deemed "critical",
as they require management's highest degree of judgment, estimates and
assumptions. The following critical accounting policies are not intended to
be a comprehensive list of all of the Company's accounting policies or
estimates.
Revenue Recognition
The Company applies the provisions of Staff Accounting Bulletin 101
"Revenue Recognition". The Company recognizes revenue from products shipped
when title and
28
risk of loss has passed to its customers, and with respect to its own
retail store operations, upon the sale of its products. The Company's net
sales represent gross sales invoiced to customers, less certain related
charges, including discounts, returns, rebates and other allowances. Most
of the Company's sales require judgments principally in the areas of
returns, rebates and other allowances. The provision for estimated sales
returns and other allowances and deferrals require significant judgment
whereby the Company must estimate, based on historical trends and
individual agreements with customers, the reduction of revenue at the time
of revenue recognition. If these estimates, which are based on historical
experience, are significantly below the actual amounts, revenue could be
adversely affected. The Company has no single customer that represents more
than ten percent of annual net sales of the Company for the fiscal years
ended September 30, 2003, 2002 and 2001. For the fiscal years ended 2003,
2002 and 2001, one customer, two customers and one customer, respectively,
represented, individually, more than 10% of the wholesale division net
sales.
Accounts Receivable
The Company performs on-going credit evaluations of its customers and
adjusts credit limits based upon payment history and the customer's current
credit worthiness, as determined by the review of their current credit
information. Collections and payments from customers are continuously
monitored. The Company also maintains an allowance for doubtful accounts,
which is estimated based upon historical experience as well as specific
customer collection issues that have been identified. While such bad debt
expenses have historically been within expectations and allowances
established, the Company cannot guarantee that it will continue to
experience the same credit loss rates that it has in the past. One customer
accounted for 20% and 24% of the Company's accounts receivable at September
30, 2003 and 2002, respectively. Additionally, a new customer accounted for
10% of the Company's accounts receivable at September 30, 2003. The loss of
either or both of these customers is not expected to have a material impact
on the Company's consolidated financial position or results of operations.
Inventories
Inventories are stated at the lower of cost or market. The cost
elements of inventory include materials, labor and overhead. The Company
regularly reviews inventory quantities on hand and records a provision for
excess and obsolete inventory based primarily on estimated forecasts of
product demand and production requirements for the next twelve months. In
assessing the realization of inventories, the Company is required to make
judgments as to future demand requirements and compare that with inventory
levels. It is possible that changes in consumer demand could cause a
reduction in the net realizable value of inventory.
Goodwill and Intangible Assets
Goodwill and indefinite-lived intangibles are tested for impairment
annually or more frequently if impairment indicators arise in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets". These evaluations require the use
of judgment as to the effects of external factors and market conditions on
the Company's conduct of its operations, and they require the use of
estimates in projecting future operating results. If actual external
conditions or future operating results differ from the Company's judgments,
impairment charges may be necessary to reduce the carrying value of the
subject assets.
29
Pursuant to SFAS No. 142, the Company performs an annual goodwill
impairment review for each business segment, as defined in Note 6,
"Goodwill and Intangible Assets" to the Consolidated Financial Statements,
or when events or changes in circumstances indicate the carrying value may
not be recoverable. The Company considers the following to be some examples
of important indicators that may trigger an impairment review: (i)
significant under-performance or loss of key contracts acquired in an
acquisition relative to expected historical or projected future operating
results; (ii) significant changes in the manner or use of the acquired
assets or in the Company's overall strategy with respect to the manner or
use of the acquired assets or changes in the Company's overall business
strategy; (iii) significant negative industry or economic trends; (iv)
increased competitive pressures; (v) a significant decline in the Company's
stock price for a sustained period of time; and (vi) regulatory changes. In
assessing the recoverability of the Company's goodwill and intangibles, the
Company must make assumptions regarding estimated future cash flows and
other factors to determine the fair value of the respective assets. The
fair value of an asset could vary, depending upon the estimating method
employed, as well as assumptions made. This may result in a possible
impairment of the intangible assets and/or goodwill, or alternatively an
acceleration in amortization expense. An impairment charge would reduce
operating income in the period it was determined that the charge was
needed. As a result of the September 30, 2003 impairment testing, no
impairment adjustments were deemed necessary.
Purchase Price Allocation
During fiscal 2003, the Company acquired all of the issued and
outstanding capital stock of Rexall for $250,000 in cash (subject to
adjustment based upon finalization of working capital balances on the
closing date). Prior to this acquisition, Rexall was owned by Numico USA,
Inc., an indirect subsidiary of Royal Numico N.V. This acquisition was
accomplished through purchase by the Company of certain partnership and
limited liability company interests. The Company also incurred
approximately $6,000 of direct transaction costs as well as approximately
$5,000 in insurance and other indirect costs for a total purchase price of
approximately $261,000. Additionally, finance related costs of
approximately $7,500 were paid to secure the financing for this
acquisition, which costs will be amortized until its approximate 6 year
maturity. The total purchase price was allocated to the tangible and
intangible assets acquired and the liabilities assumed based on their
estimated fair value. The excess of the purchase price over the fair value
was recorded as goodwill. The fair value assigned to the tangible and
intangible assets acquired and liabilities assumed was based upon estimates
and assumptions developed by management and other information compiled by
management, including a valuation, prepared by an independent valuation
specialist that utilized established valuation techniques appropriate for
the industry. Upon completion of the valuation of the fair value of the net
assets acquired (which the Company expects to finalize by end of fiscal
2004), actual results may differ from those presented herein.
30
Impairment of Long-Lived Assets
The Company follows the provisions of SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." This statement requires
that certain assets be reviewed for impairment and, if impaired, remeasured
at fair value whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. Impairment loss
estimates are primarily based upon management's analysis and review of the
carrying value of long-lived assets at each balance sheet date, utilizing an
undiscounted future cash flow calculation. During fiscal years 2003, 2002
and 2001, the Company recognized impairment losses of $1,117, $700 and
$500, respectively, on assets to be held and used. The impairment losses
related primarily to leasehold improvements and furniture and fixtures for
U.S. Retail operations and were recorded in selling, general and
administrative expense.
Income Taxes
The Company estimates the degree to which tax assets and loss
carryforwards will result in a benefit based on expected profitability by
tax jurisdiction. A valuation allowance for such tax assets and loss
carryforwards is provided when it is determined that such assets will more
likely than not go unused. If it becomes more likely than not that a tax
asset or loss carryforward will be used, the related valuation allowance on
such assets is reversed. If actual future taxable income by tax
jurisdiction varies from estimates, additional allowances or reversals of
reserves may be necessary.
Foreign Currency
Foreign subsidiaries account for approximately 31% of net revenues,
27% of assets and 11% of total liabilities of the Company as of September
30, 2003.
In preparing the consolidated financial statements, the financial
statements of the foreign subsidiaries are translated from the currency in
which they keep their accounting records, generally the local currency,
into U.S. Dollars. This process results in exchange gains and losses,
which, under the relevant accounting guidance, are either included within
the statement of operations or as a separate component of stockholders'
equity under the caption "Accumulated other comprehensive income."
Under the relevant accounting guidance, the treatment of these
translation gains or losses is dependent upon management's determination of
the functional currency of each subsidiary. The functional currency is
determined based on management's judgment and involves consideration of all
relevant economic facts and circumstances affecting the subsidiary.
Generally, the currency in which the subsidiary transacts a majority of its
transactions, including billings, financing, payroll and other expenditures
would be considered the functional currency but any dependency upon the
parent and the nature of the subsidiary's operations must also be
considered.
If a subsidiary's functional currency is deemed to be the local
currency, then any gain or loss associated with the translation of that
subsidiary's financial statements is
31
included in accumulated other comprehensive income. However, if the
functional currency is deemed to be the U.S. Dollar, then any gain or loss
associated with the translation of these financial statements would be
included within the statement of operations. If the Company disposes of
subsidiaries, then any cumulative translation gains or losses would be
recorded into the statement of operations. If the Company determines that
there has been a change in the functional currency of a subsidiary to the
U.S. Dollar, any translation gains or losses arising after the date of
change would be included within the statement of operations.
Based on an assessment of the factors discussed above, the Company
considers the relevant subsidiary's local currency to be the functional
currency for each of its foreign subsidiaries. During fiscal years 2003,
2002 and 2001, translation gains (losses) of $9,980, $17,603 and ($126),
respectively, were included under accumulated other comprehensive income
(loss). Accordingly, cumulative translation gains of approximately $14,605
and $4,625 were included as part of accumulated other comprehensive income
within the balance sheet at September 30, 2003 and September 30, 2002,
respectively. Had the Company determined that the functional currency of
its subsidiaries was the U.S. Dollar, these gains (losses) would have
increased (reduced) net income for each of the periods presented.
The magnitude of these gains or losses is dependent upon movements in
the exchange rates of the foreign currencies against the U.S. Dollar. These
currencies include the Euro and the British Pound. Any future translation
gains or losses could be significantly higher than those noted in each of
these years. In addition, if a change in the functional currency of a
foreign subsidiary has occurred at any point in time, the Company would be
required to include any translation gains or losses from the date of such
change in the statement of operations.
Contingencies
As discussed in Note 17 of the Notes to the Consolidated Financial
Statements, NBTY is unable to make a reasonable estimate of the liabilities
that may result from the final resolution of certain contingencies
disclosed. Assessments of each potential liability will be made as
additional information becomes available. NBTY currently does not believe
that these matters will have a material adverse affect on its consolidated
financial position or results of operations.
General
Operating results in all periods presented reflect the impact of
acquisitions, beginning with the date acquired. The timing of those
acquisitions and the changing mix of businesses as acquired companies are
integrated into the Company impacts the comparability of results from one
period to another.
32
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 Year
Ended September 30, Increase/(Decrease)
----------------------- --------------------
2003 vs. 2002 vs.
2003 2002 2001 2002 2001
---- ---- ---- -------- --------
Net sales 100% 100% 100% 23.7% 19.5%
Costs and expenses:
Cost of sales 46.5% 45.0% 44.0% 27.9% 22.1%
Discontinued product charge 0.4% - - 100.0% -
Catalog printing, postage and promotion 5.6% 5.0% 6.1% 38.9% -3.2%
Selling, general and administrative 36.5% 36.1% 39.1% 25.1% 10.5%
Litigation recovery of raw material costs - -2.2% - -100.0% 100.0%
---- ---- ---- ------ -----
89.0% 83.9% 89.2% 31.3% 12.3%
---- ---- ---- ------ -----
Income from operations 11.0% 16.1% 10.8% -15.8% 78.7%
---- ---- ---- ------ -----
Other income (expense):
Interest -1.5% -1.9% -2.7% -6.0% -15.8%
Investment write down -0.3% - - 100.0% -
Miscellaneous, net 0.5% 0.2% 0.3% 247.7% -43.2%
---- ---- ---- ------ -----
-1.3% -1.7% -2.4% -5.3% -11.8%
---- ---- ---- ------ -----
Income before income taxes 9.7% 14.4% 8.4% -17.1% 104.3%
Provision for income taxes 2.8% 4.5% 3.2% -22.2% 65.3%
---- ---- ---- ------ -----
Net income 6.9% 9.9% 5.2% -14.8% 128.5%
==== ==== ==== ====== =====
33
Fiscal Year Ended September 30, 2003 Compared to Fiscal Year Ended
September 30, 2002
Net Sales. Net sales for fiscal 2003 were $1,192,548, an increase of
$228,465, or 23.7%, compared with net sales of $964,083 in fiscal 2002. The
$228,465 increase is comprised of the following:
Fiscal Year Dollar Percent
Ended September 30, Increase Increase
---------------------- -------- --------
2003 vs. 2003 vs.
2003 2002 2002 2002
---- ---- -------- --------
Wholesale $ 416,627 $291,287 $125,340 43.0%
U.S. Retail / Vitamin World 212,380 198,602 13,778 6.9%
European Retail /
Holland & Barrett / GNC 363,597 290,881 72,716 25.0%
Direct Response /
Puritan's Pride 199,944 183,313 16,631 9.1%
---------- -------- -------- ----
Total $1,192,548 $964,083 $228,465 23.7%
========== ======== ======== ====
Wholesale sales were $416,627, compared to $291,287 in the prior
year, an increase of $125,340, or 43%. Such increase in the wholesale
segment's sales was primarily due to the acquisition of Rexall ($72,815),
an increase in sales to the mass market, drug chains and supermarkets
($46,646), and sales contributed by the FSC acquisition ($5,879). Products
such as Coral Calcium, Flex-a-min(R), and the Knox NutraJoint(R) products
continue to help the Company strengthen its leading market position. In
addition, increases in the wholesale segment can be attributed to the
Company expanding its distribution channel with new customer accounts. U.S.
Retail sales were $212,380, compared to $198,602 in the prior year, an
increase of $13,778, or 6.9%. Such increase was a direct result of the
Savings Passport Program, a customer loyalty program. Same store sales for
stores open more than one year increased 5.4% or $10,192. European Retail
sales were $363,597, compared to $290,881, an increase of $72,716, or 25%.
Such increase was attributable to an increase in same store sales for
stores open more than one year of 11.8% (or $34,018) and sales contributed
by the GNC (UK) and De Tuinen acquisitions ($21,589 and $13,245,
respectively). These results include the positive effect of a strong
British Pound ($25,887 or 8.9%). There were 533 retail stores located
within the U.S. and 589 retail stores located within Europe as of September
30, 2003, compared to 544 stores in the U.S. and 468 in the U.K./Ireland as
of September 30, 2002. Direct Response/Puritan's Pride sales were $199,944,
compared to $183,313, an increase of $16,631, or 9.1%. Such increase was a
result of the Company's catalog promotion strategy, enhancement of the
appearance of the catalog, and improved customer service.
Cost of Sales/Discontinued product charge. Cost of sales (including
the discontinued product charge) for fiscal 2003 was $559,304, an increase
of $125,693,
34
compared with the cost of sales of $433,611 for fiscal 2002. Overall, gross
profit, as a percentage of sales, decreased 1.9% to 53.1% during the fiscal
year ended September 30, 2003 as compared to 55% for the prior comparable
period. Included in the current period's cost of sales is a $4,500 charge
(or 0.4% as a percentage of sales) for the Company's voluntary
discontinuance of sales of products containing ephedra. Without this
charge, as a percentage of sales, gross profit would have decreased 1.5% to
53.5% during fiscal 2003 as compared to 55% for the prior comparable
period. The Company's belief that its ephedra products were safe when used
as directed has been supported by credible scientific evidence. However, in
light of adverse publicity surrounding ephedra and the current environment
in the U.S., the Company believed it was in its best interest to
voluntarily cease selling ephedra products, effective March 15, 2003.
Historically, ephedra products represented an insignificant portion of the
Company's overall business.
The Wholesale segment's gross profit, as a percentage of sales, for
fiscal 2003 was 40% as compared to 41% for fiscal 2002. Such gross profit
was impacted by the product sales mix of existing product lines, such as
the increase in Private Label sales (at a 34% gross margin level), and
lower gross margins contributed by the FSC (European wholesale)
acquisition. These factors were partially offset by higher gross margins on
new product introductions and improvements in manufacturing efficiencies.
Direct Response/Puritan's Pride's gross profit, as a percentage of sales,
was 62% for fiscal 2003 as compared to 61% for fiscal 2002. The gross
profit was affected by varied catalog pricing promotions the Company ran
during fiscal 2003. The U.S. Retail gross profit, as a percentage of sales,
for fiscal 2003 was 60% as compared to 59% for fiscal 2002. Margin
improvement was primarily due to the Company's introduction of new higher
gross margin items in such segment. The European Retail gross profit
decreased 2%, as a percentage of sales, to 61% from 63% primarily as a result
of the recent acquisitions of GNC (UK) and De Tuinen. These operations
reported gross profit of 43% and 38%, respectively, thereby affecting the
total European Retail gross profit margin during fiscal 2003. Without these
newly acquired operations, gross profit as a percentage of sales would have
remained unchanged from the prior period. The Company's overall strategy is
to improve margins by introducing new products which traditionally have a
higher gross profit and by continuing to increase in-house manufacturing
while decreasing the use of outside suppliers. During fiscal 2003 and 2002,
cost of sales included charges for under-absorbed factory overhead relating
to certain underutilized manufacturing facilities of $8,261 and $11,375,
respectively.
Catalog, Printing, Postage and Promotion. Catalog printing, postage,
and promotion expenses were $66,455 for fiscal 2003, compared with $47,846
for fiscal 2002, an increase of $18,609. Such advertising expenses as a
percentage of sales were 5.6% during fiscal 2003 and 5% for the prior
comparable period. Of the $18,609 increase, $19,367 was attributable to the
increase in promotions for products, mainly via television, magazines,
newspapers and mailing programs, offset by a decrease in catalog printing
costs of $758. Direct Response/Puritan's Pride's promotion and media
expenses increased $6,263; Wholesale's advertising expenses increased
$10,919 (of which $6,438 related to Rexall product related advertising);
and European Retail promotion and media increased $2,156. Such increase was
offset by a $729 decrease in the U.S. Retail's advertising costs. Increased
advertising costs primarily related to promoting new products recently
35
introduced as well as existing core products. Investments in additional
advertising and sales promotions are part of the Company's strategic effort
to increase long-term growth.
Selling, General and Administrative. Selling, general and
administrative expenses wer