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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the fiscal year ended September 30, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period
from to .
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Commission file number 0-10666
NBTY, INC.
(Exact name of registrant as specified in charter)
DELAWARE 11-2228617
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
90 Orville Drive 11716
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Bohemia, New York (Zip Code)
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(Address of principal executive office)
(516) 567-9500
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act
Common Stock, par value $0.008 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
YES [X] NO [ ]
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K [X].
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based upon the closing price of shares of Common Stock on the
National Association of Securities Dealers Automated Quotation ("NASDAQ")
National Market System at December 15, 1999 was approximately $547,135,072.
The number of shares of Common Stock of the registrant outstanding at
December 15, 1999 was approximately 67,215,611.
Documents Incorporated by Reference: None
NBTY, INC.
1999 ANNUAL REPORT OF FORM 10-K
TABLE OF CONTENTS
Caption Page
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Forward Looking Statements 4
PART I
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ITEM 1 BUSINESS 4
General 4
Business Strategy 4
Industry Overview 6
Marketing and Distribution 6
Sales, Marketing and Advertising 9
Manufacturing, Distribution and Quality Control 9
Research and Development 9
Competition 10
Compliance with Environmental Laws and Regulations 11
Government Regulation 11
Internal Operations 14
Trademarks 14
Associates 15
ITEM 2 PROPERTIES 15
ITEM 3 LEGAL PROCEEDINGS 17
ITEM 4 SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 17
PART II
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ITEM 5 MARKET FOR THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS 18
Dividend Policy 18
Price Range for Common Stock 18
ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA 19
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATION 20
Background 20
Results of Operations 20
Seasonality 24
Liquidity and Capital Resources 24
Inflation 25
Year 2000 25
The Company's State of Readiness 25
Third Parties and Their Exposure to the Year 2000 25
Risks 25
Recent Financial Accounting Standards Board Statements 26
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 26
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 26
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 26
PART III
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ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 27
ITEM 11 EXECUTIVE COMPENSATION 30
Summary Compensation Table 30
Employment Agreements 30
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 31
NBTY Inc. Employee Stock Ownership and Trust ("ESOP") 33
Eligibility 33
Contributions 33
Vesting 33
Distribution 33
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 34
PART IV
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ITEM 14 EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES 35
Financial Statements 35
Financial Statement Schedule 35
Exhibits 35
Signatures 36
Contributions
Contingency Plans
Recent Financial Accounting Standards Board Statements
Forward Looking Statements.
This annual report on Form 10-K contains certain forward looking
statements within the meaning of the Private Securities Litigation Reform
Act of 1995 with respect to the financial condition, results of operations
and business of the Company. All of these forward looking statements, which
can be identified by the use of terminology such as "believe", "expects",
"may", "will", "should", or "anticipates", or the negative thereof, or
variations thereon, or comparable terminology, or by discussions of strategy
which, although believed to be reasonable, are inherently uncertain.
Therefore, undue reliance should not be placed upon such estimates and
statements. Factors that may affect such differences include (i) adverse
publicity regarding the consumption of nutritional supplements; (ii) adverse
federal, state or foreign legislation or regulation or adverse
determinations by regulators; (iii) slow or negative growth in the
nutritional supplement industry; (iv) inability of the Company to
successfully implement its business strategy; (v) increased competition;
(vi) increased costs; (vii) loss or retirement of key members of management;
(viii) increases in the Company's cost or borrowings or inability or
unavailability of additional debt or equity capital; (ix) changes in general
economic conditions in the markets in which the Company may, from time to
time, compete; (x) the inability of the Company to assimilate acquisitions
into the mainstream of its business; (xi) exposure to product liability
claims; (xii) the Company's inability to manage growth and execute its
business plan; (xiii) the Company's ability to consummate future
acquisitions; (xiv) the absence of clinical trials for many of the Company's
products; (xv) sales and earnings volatility; (xvi) the Company's ability to
manufacture its products efficiently and (xvii) the rapidly changing nature
of the internet and on-line commerce, and (xviii) Year 2000 computer related
problems with the Company's systems and/or computer related problems with
the Company's suppliers or customers. Many of such factors, as well as
those factors discussed in the Company's Prospectus, dated July 1, 1998,
filed with the Securities and Exchange Commission, will be beyond the
control of the Company and its management.
PART I
Item 1. BUSINESS
General
NBTY, Inc. (the "Company") is a leading vertically integrated
manufacturer, marketer and retailer of a broad line of high quality, value-
priced nutritional supplements in the United States, the United Kingdom and
internationally. Under a number of brands, the Company offers approximately
1,000 products, including vitamins, minerals, herbs, amino acids, sports
nutrition products, diet aids and other nutritional supplements. NBTY
targets the growing value-conscious consumer segment by offering high
quality products at a value price point. NBTY markets its multi-branded
products through a four channel distribution system: (i) puritan.com/direct
response, the leading U.S. nutritional supplement e-commerce/direct response
program under the Puritan's Pride and Nutrition Headquarters brands,
catalogs, and through the internet; (ii) Vitamin World retail stores, of
which there are currently approximately 400 located strategically throughout
the United States and Guam and Holland & Barrett retail stores of which
there are currently 423 located strategically throughout the United Kingdom;
(iii) wholesale distribution to drug store chains, supermarkets, independent
pharmacies, health food stores primarily under the Nature's Bounty brand and
(iv) through a network marketing program through its Dynamic Essentials
subsidiary's approximately 6,000 distributors. NBTY currently manufactures
approximately 90% of the nutritional supplements it sells.
Business Strategy
The Company's objective is to increase sales, improve profitability
and strengthen its industry leading position through the following key
strategies:
Enhance Vertical Integration. Management believes that vertical
integration creates a significant competitive advantage by allowing the
Company to: (i) maintain higher quality standards while lowering product
costs, a portion of which are passed on to the customer as lower prices;
(ii) more quickly respond to scientific and popular reports and consumer
buying trends; (iii) assure delivery schedules; (iv) reduce dependence on
outside suppliers; and (v) improve overall operating margins. The Company
continually evaluates ways to further enhance its vertical integration. For
example, NBTY has become the primary supplier of nutritional supplements to
the Holland & Barrett stores. As a result, the costs of such products sold
by Holland & Barrett stores have been lowered. Management believes this
should increase overall profit margins while improving productivity for
NBTY's manufacturing facilities.
Introduce New Products and Product Innovations. The Company has
consistently been among the first in the industry to introduce new products
in response to recent scientific and popular reports. Given the changing
nature of consumer demands for new products and the growing publicity over
the importance of vitamins, minerals and nutritional supplements in the
promotion of general health, management believes that NBTY will continue to
attract new customers based upon its ability to rapidly respond to consumer
demands with high quality, value-oriented products.
Expand Existing Channels of Distribution. In order to increase sales
and profitability, enhance overall market share, and leverage manufacturing,
distribution, purchasing and marketing capabilities, the Company will
continue to expand its existing channels of distribution.
* Increase puritan.com/direct response Sales. NBTY expects to
continue to strengthen its e-commerce/direct response sales by:
(i) automated picking and packing to fulfill sales order
requests with greater speed and accuracy; (ii) increased
manufacturing capability to quickly introduce and deliver new
products in response to customer demand; and (iii) more frequent
promotions to further improve response rates; (iv) promote the
internet website. In addition, the Company intends to continue
its strategy of acquiring the customer lists, brand names and
inventory of other mail order companies which have a similar or
complimentary products and which the Company believes it can
integrate into its own operations without adding substantial
overhead expenses, such as the merger of Nutrition Headquarters
Group into the Company and the pending acquisition of Nutrition
Warehouse, Inc. and affiliated companies.
* Increase Retail Sales in the U.S. and U.K. In order to increase
retail sales, NBTY is actively expanding its Vitamin World
stores in the U.S. and selectively expanding its Holland &
Barrett stores in the U.K. During calendar year 1999, the
Company opened a total of 151 Vitamin World stores to increase
its penetration into regional malls and factory outlets. The
Company has more than 800 vitamin stores in operation,
approximately 400 in the U.S. and 423 in the U.K. NBTY
estimates that market potential could support the opening of an
additional 2,500 stores in the U.S.
Integrate Strategic Acquisitions. Since 1986, NBTY has successfully
acquired and integrated 14 vitamin, mineral and nutritional supplement
("VMS") companies. Most recently NBTY expects to merge Nutrition Warehouse
into the Company and expects to complete the acquisition of Nutrition
Warehouse group of companies by the end of December 1999. NBTY will
integrate Nutrition Warehouse Group mail order operations by: (i) merging
customer lists into the Company's computerized mailing list; (ii) expanding
product lines; (iii) redesigning mail order catalogs; (iv) repricing certain
products; and (v) implementing proven marketing techniques. The Company
intends to continue to pursue acquisition opportunities in the VMS sector,
both in the U.S. and internationally, that complement or extend its existing
product lines, expand its distribution channels or are compatible with its
business philosophy and strategic goals.
Build Infrastructure to Support Growth. NBTY has technologically
advanced, state-of-the-art manufacturing and production facilities, with
total production capacity of approximately ten billion tablets and capsules
per year. The Company's 131,000 square foot state-of-the-art soft gelatin
encapsulation manufacturing facility on 62 acres is capable of producing
five billion soft gel capsules per year. The Company regularly evaluates
its operations and makes investments in building infrastructure, as
necessary to support its continuing growth.
Experienced Management Team. The Company's management team has
extensive experience in the VMS industry and has developed long-standing
relationships with its suppliers and its customers. The executive officers
and directors have an average of approximately 19 years with the Company.
Industry Overview
The Company believes that it is well positioned to capitalize on the
continued growth in the VMS industry. As reported by industry sources, the
annual domestic retail market for vitamins, nutritional supplements and
minerals was approximately $12 billion in 1999. In the last several years,
public awareness of the positive effects of vitamins and nutritional
supplements on health has been heightened by widely publicized reports of
scientific findings supporting such claims. Recent studies have indicated a
correlation between the regular consumption of selected vitamins and
nutritional supplements and reduced incidences of a wide range of conditions
including cancer, heart disease, stroke, arthritis, osteoporosis, mental
fatigue and depression, declining immune function, macular degeneration,
memory loss and neural tube birth defects. The Company believes that the
rise of alternative medicine and the holistic health movement has also
contributed to increased sales of nutritional supplements and it is
anticipated to increase in the future.
The Company expects that the aging of the United States population,
together with a corresponding increased focus on preventative health
measures, will result in increased demand for vitamins and nutritional
supplement products. According to the United States Census Bureau, through
2010, the 36-and-older age group of consumers, which represents a
substantial majority of regular users of vitamins and nutritional
supplements, is expected to grow significantly faster than the general
United States population. Based on a national survey indicating that
approximately 56% of Americans consumed vitamins and nutritional supplements
on a regular basis in 1998, the Company believes that there is a large
untapped domestic and international market for vitamins and nutritional
supplements. Industry sources also report that vitamin consumers are taking
more vitamins and nutritional supplements per day than in the past.
The Company's principal executive offices are located at 90 Orville
Drive, Bohemia, New York 11716 and its telephone number is 516-567-9500.
The Company's United Kingdom subsidiary, Holland & Barrett, has its
principal executive office in Nuneaton, United Kingdom.
Marketing and Distribution
The Company operates in four reportable business segments:
puritan.com/direct response, retail (U.S. and U.K.) and wholesale (which
includes network marketing).
Operating Segments
The following table sets forth the percentage of net sales for each of
the Company's operating segments:
Fiscal Years Ended September 30,
1997 1998 1999
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puritan.com/direct response 46% 33% 28%
Retail: U.S. 11% 12% 17%
U.K. 7% 32% 35%
Wholesale (1) 36% 23% 20%
Includes Network Marketing
puritan.com/direct response The Company offers, through mail order
and e-commerce, its full line of vitamins and other nutritional supplement
products as well as selected personal care items under its Puritan's Pride
and Nutrition Headquarters brand names at prices which are normally at a
discount from those of similar products sold in retail stores. The Company
believes that its vitamin websites are among the most active vitamin
websites in the U.S.
Through its Puritan's Pride and Nutrition Headquarters brands, NBTY is
the leader in the U.S. direct response nutritional supplement industry with
over 4 million active customers and with response rates which management
believes to be in excess of the industry average. Through its catalogs, and
websites the Company offers a full line of vitamins and other nutritional
supplements at prices which are normally at a discount to retail stores.
The Company mails its catalogs approximately eight times a year. NBTY
intends to continue to add new customers to its e-commerce operation through
aggressive techniques and selective acquisitions. In addition, in 1996 the
Company expanded its mail order operations into the United Kingdom.
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 websites and increase average order sizes, the Company
places advertisements in newspaper supplements, conducts insert programs
with other mail order companies and has special promotions on a quarterly
basis which offer customers combinations of products and quantities at
promotional prices. NBTY's use of state-of-the-art equipment in its catalog
operations, such as computerized co-mailing, address bar coding and
automated picking and packing systems, enables the Company to fill orders
typically within 48 hours of their receipt. The Company's position as a
leading e-commerce nutritional supplement distributor and its utilization of
state-of-the-art systems 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 website provides a practical and
convenient method for consumers wishing to purchase products to promote
healthy living. By using this website, consumers have access to the full
line of more than 1,000 products which are offered through the Company's
Puritan's Pride mail order catalog. Consumer orders are processed with the
speed, economy and efficiency of the Company's state-of-the-art automated
picking and packing system.
The Company maintains another website, www.vitaminworld.com, to
accommodate customers who wish to purchase nutritional supplements on the
internet or in person at any one of its 400 stores located in 42 states. This
website provides the consumer with information concerning the products offered
in the Company owned and operated stores and with information about store
locations.
The internet plays an increasingly significant role in communications,
information and commerce. International Data Corporation ("IDC"), an
independent research company, estimates that the 97 million internet users
worldwide at the end of 1998 will grow to 320 million users by the end of
2002. The functionality of the internet makes it an attractive commercial
medium by providing features and information that have been unavailable in
the past. IDC estimates that worldwide consumer online commerce will grow
from approximately $11 billion in 1998 to approximately $94 billion by
2002. In addition, IDC estimates that, as the number of total internet
users grows, the number of online purchasers will grow at a compound annual
rate of 46% from 28 million in 1998 to 128 million in 2002. Baby boomers,
which represent 49% of all internet users, are an attractive demographic
group for online merchandisers.
Retail.
* U.S. The Company is on target for operating approximately 400
stores located in 42 states and the territory of Guam under the name Vitamin
World by the end of 1999. Such locations carry a full line of the Company's
products under the Vitamin World brand name and also carry products
manufactured by others. The Company's ultimate goal is to have
approximately 2,500 retail locations in the U.S. Through direct interaction
between the Company's personnel and the public, the Company is able to
identify buying trends, customer preferences or dislikes, acceptances of new
products and price trends in various regions of the country. This
information is useful in initiating sales programs for all divisions of the
Company.
* U.K. Holland & Barrett ("H&B"), one of the leading nutritional
supplement retailers in the United Kingdom presently having 423 locations,
was acquired by NBTY in 1997. H&B markets a broad line of nutritional
supplement products, including vitamins, minerals and other nutritional
supplements (approximately 60% of H&B's revenues) as well as food products,
including fruits and nuts, confectionery and other items (approximately 40%
of H&B's revenues). In the United Kingdom, the Company has leased
warehouses for distribution of its products. The Company is building a
warehouse in the U.K. which is scheduled for completion during the middle of
year 2000 in order to service a growing demand for nutritional supplements
and to provide a facility for future growth and additional retail locations
in the U.K. and operations in continental Europe.
Wholesale.
* Mass Marketing. The Company markets its products under various
brand names to various stores including drug store chains and supermarkets,
independent pharmacies, health food stores, health food store wholesalers
and other retailers such as mass merchandisers. The Nature's Bounty brand
is sold to drug store chains and drug wholesalers. The Company sells a full
line of products to supermarket chains and wholesalers under the brand name
Natural Wealth at prices designed for the "price conscious" consumer. The
Company sells directly to health food stores under the brand name Good'N
Natural and sells products, including a specialty line of vitamins, to
health food wholesalers under the brand name American Health. The Company
has expanded sales of various products to many countries throughout Europe,
Asia and Latin America.
* Network Marketing. In May 1999, following the acquisition of all
the assets and assumption of certain liabilities from a start-up company,
NBTY established Dynamic Essentials (DE), Inc. ("DEI"). DEI is a company in
the Network Marketing industry, comprised of approximately 6,000
distributors, marketing nutritional and personal care products throughout
the United States. DEI represents a strategic opportunity for NBTY to
establish an additional and untapped channel of distribution. Network
Marketing offers NBTY the opportunity to develop and market a line of
proprietary products such as LH12, a new weight loss system, as well as
innovative production techniques including an industry first SuperFresh
Nitrogen Packaging, a modified atmosphere packaging process.
The Company believes that this entity, through NBTY's financial
support and the strength of the experienced DEI management team, has the
potential to account for a material portion of the NBTY business within 3 to
5 years.
Sales, Marketing and Advertising
The Company has approximately 1,600 sales associates located
throughout the U.S in its Vitamin World stores, 70 associates who sell to
NBTY's wholesale distributors and approximately 6,000 network marketing
distributors. In addition, NBTY sells through commissioned sales
representative organizations. For the fiscal years ended September 30, 1998
and 1999, NBTY spent approximately $32 million and $33 million,
respectively, on advertising and promotions including print and media and
cooperative advertising. NBTY creates its own advertising materials through
a staff of approximately 30 associates. H&B employs an average of 2,500
sales associates in its retail stores. H&B runs advertisements in national
newspapers. H&B conducts sales promotions and six times per year by
publishing a glossy magazine with articles and promotional materials. The
Company expects advertising costs to increase as part of its effort to
increase net sales.
Manufacturing, Distribution and Quality Control
All of the Company's manufacturing is performed in the New York
metropolitan area and in Illinois and is conducted in accordance with good
manufacturing practice standards promulgated by the United States Food and
Drug Administration and other applicable regulatory standards. The Company
believes that the capacity of its manufacturing and distribution facilities
is adequate to meet the requirements of its current business and will be
adequate to meet the requirements of anticipated increases in net sales.
The Company's manufacturing process places special emphasis on quality
control. All raw materials used in production initially are held in
quarantine during which time the Company's laboratory employees assay the
production against the manufacturer's certificate of analysis. Once
cleared, a lot number is assigned, samples are retained and the material is
processed by formulating, mixing and granulating, compression and sometimes
coating operations. After the tablet is manufactured, laboratory employees
test its weight, purity, potency, dissolution and stability. When products
such as vitamin tablets are ready for bottling, the Company's automated
equipment counts the tablets, inserts them into bottles, adds a tamper-
resistant cap with an inner safety seal and affixes a label. The Company
uses computer-generated documentation for picking and packing for order
fulfillment.
The principal raw materials used in the manufacturing process are
vitamins purchased from bulk manufacturers in the United States, Japan and
Europe. Raw materials are available from numerous sources. No one supplier
accounts for more than 10% of the Company's raw material purchases.
The Company's manufacturing operations are designed to allow low cost
production of a wide variety of products of different quantities, sizes and
packaging while maintaining a high level of customer service and quality.
Flexible production line change-over capabilities and reduced cycle times
allow the Company to respond quickly to changes in manufacturing schedules.
Research and Development
In 1997, 1998 and 1999, the Company did not expend any significant
amounts for research and development of new products.
Inventory Control. The Company has installed inventory and 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.
The Company's inventory control systems report purchasing, receiving,
shipping, sales and individual SKU level inventory stocking information.
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. This
system provides management with the information needed to determine the
proper timing and quantity of reorders.
Year 2000. At the present time, the Company believes that its systems
are substantially Year 2000 compliant and does not expect Year 2000 issues,
if any, to materially affect its products, services, competitive position or
financial performance. However, there can be no assurance that this will be
the case. Since the ability of third parties with whom the Company
transacts business to adequately address their Year 2000 issues is outside
the Company's control, there can be no assurance that the failure of such
third parties to adequately address their respective Year 2000 issues will
not have a material adverse effect on the Company's business, financial
condition, cash flows and results of operations (see "Management's
Discussion and Analysis - Year 2000).
Financial Reporting. The Company's financial reporting systems
provide management with detailed financial reporting to support management's
operating decisions and cost control efforts. This system provides
functions such as scheduling of payments, receiving of payments, general
ledger interface, vendor tracking and flexible reporting options.
Competition
The market for nutritional products is highly competitive.
Competition is based primarily on price, quality and assortment of products,
customer service, marketing support, and availability of new products. The
Company believes it competes favorably in all of these areas.
The Company's direct competition consists primarily of independent,
publicly and privately owned companies and is highly fragmented in terms of
both geographical market coverage and product categories. The Company
competes in the nutritional area with companies with broader product lines
and larger sales volumes.
There are numerous companies in the vitamin and nutritional supplement
industry selling products to retailers, including mass merchandisers, drug
store chains, independent drug stores and health food stores. Many
companies within the industry are privately held and the Company is unable
to precisely assess the size of all of its competitors or where it ranks in
comparison to such privately held competitors with respect to sales to
retailers.
With respect to its network marketing organization, the Company
believes its primary competition stems from other direct sales companies.
The Company competes in the recruitment of independent sales people with
other network marketing organizations some of whose product lines compete
with the Company's products.
The Company's products also compete with nationally advertised brand
name products. Most of the national brand companies have resources
substantially greater than those of the Company.
Compliance with Environmental Laws and Regulations
The nature of the Company's business has not required any material
capital expenditures to comply with Federal, State or local provisions
enacted or adopted regulating the discharge of materials into the
environment. No material expenditures to meet such provisions are
anticipated. Such regulatory provisions have not had any material effect
upon the Company's earnings or competitive position.
Government Regulation
United States. The manufacturing, packaging, labeling, advertising,
distribution and sale of NBTY's products are subject to regulation by one or
more federal agencies, the most active of which is the federal Food and Drug
Administration ("FDA"). The Company's products are also subject to
regulation by the Federal Trade Commission ("FTC"), the Consumer Product
Safety Commission, the U. S. Department of Agriculture and the Environmental
Protection Agency and by various agencies of the states and 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 production, packaging, labeling and distribution of dietary supplements,
including vitamins, minerals and herbs, and over-the-counter ("OTC") drugs.
In addition, the FTC has jurisdiction to regulate advertising of dietary
supplements and OTC drugs, while the U.S. Postal Service regulates
advertising claims with respect to such products sold by mail order.
The FDCA has been amended several times with respect to dietary
supplements, most recently by the Dietary Supplement Health and Education
Act of 1994 ("DSHEA") and the Nutrition Labeling and Education Act of 1990
("NLEA"). DSHEA enacted on October 15, 1994, a new statutory framework
governing the composition and labeling of dietary supplements. With respect
to composition, DSHEA created a new class of "dietary supplements",
consisting of vitamins, minerals, herbs, amino acids and other dietary
substances for human use to supplement the diet, as well as concentrates,
metabolites, extracts or combinations of such dietary ingredients.
Generally, under DSHEA, dietary ingredients that were on the market before
October 15, 1994 may be sold without FDA preapproval and without notifying
the FDA. On the other hand, a new dietary ingredient (one not on the market
before October 15, 1994) requires proof that it has been used as an article
of food without being chemically altered, or evidence of a history of use or
other evidence of safety establishing that it is reasonably expected to be
safe. The FDA must be supplied with such evidence at least 75 days before
the initial use of a 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 decide to use, and the FDA's refusal to accept such
evidence could result in regulation of such dietary ingredients as food
additives requiring FDA pre-approval prior to marketing.
As for labeling, DSHEA permits "statements of nutritional support" for
dietary supplements without FDA pre-approval. Such statements may describe
how particular dietary ingredients affect 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, mitigate, treat, cure or
prevent a disease). A company making a statement of nutritional support
must possess substantiating evidence for the statement, disclose on the
label that the FDA has not reviewed that statement and that the product is
not intended for use for a disease, and notify the FDA of the statement
within 30 days after its initial use. However, there can be no assurance
that the FDA will not determine that a given statement of nutritional
support that the Company decides to make is a drug claim rather than an
acceptable nutritional support statement. Such a determination would
require deletion of the drug claim or the Company's submission and the FDA's
approval of a new drug application ("NDA"), which would entail costly and
time-consuming clinical studies. In addition, DSHEA allows the
dissemination of "third party literature", publications such as reprints of
scientific articles linking particular dietary ingredients with health
benefits. Third party literature may be used in connection with the sale of
dietary supplements to consumers at retail or by mail order. Such a
publication may be distributed if, among other things, it is not false or
misleading, no particular manufacturer or brand of dietary supplement is
mentioned, and a balanced view of available scientific information on the
subject matter is presented. There can be no assurance, however, that all
pieces of third party literature that may be disseminated in connection with
the Company's products will be determined by the FDA to satisfy each of
these requirements, and any such failure could subject the product involved
to regulation as a new drug.
Management anticipates that the FDA may promulgate good manufacturing
practices ("GMPs") regulations authorized by DSHEA, which are specific to
dietary supplements. GMP regulation would require supplements to be
prepared, packaged and held in compliance with such rules, and may require
similar quality control provisions contained in the GMP regulations for
drugs. There can be no assurance that, if the FDA adopts GMP regulations
specific to dietary supplements, NBTY will be able to comply with such GMP
rules upon promulgation or without incurring material expenses to do so.
The FDA has finalized regulations to implement certain labeling
provisions of DSHEA.
NLEA prohibits the use of any health claim (as distinguished from
"statements of nutritional support" permitted by DSHEA) for foods, including
dietary supplements, unless the health claim is supported by significant
scientific agreement and is pre-approved by the FDA. To date, the FDA has
approved the use of health claims for dietary supplements only in connection
with the use of calcium for osteoporosis and the use of folic acid for
neural tube defects.
DSHEA created two new governmental bodies. The Commission on Dietary
Supplements was established for two years to provide recommendations for the
regulation of supplement labeling and health claims, including procedures
for making disease-related claims. The Office of Dietary Supplements,
established within the National Institute of Health, is charged with
coordinating research on dietary supplements and disease prevention,
compiling research results, and advising the Secretary of Health and Human
Services on supplement regulation, safety and health claims.
The FDA has broad authority to enforce the provisions of the FDCA
applicable to dietary supplements, including the power to seize adulterated
or misbranded products or unapproved new drugs, to request their recall from
the market, to enjoin their further manufacture or sale, to publicize
information about hazardous products, to issue warning letters and to
institute criminal proceedings. Although the regulation of dietary
supplements is less restrictive than that imposed upon drugs and food
additives, there can be no assurance that dietary supplements will continue
to be subject to the less restrictive regulations than those imposed upon
drugs and food additives, and there can also be no assurance that dietary
supplements will continue to be subject to the less restrictive statutory
scheme and regulations currently in effect. Further, there can be no
assurance that, if more stringent statutes are enacted or regulations are
promulgated, the Company will be able to comply with such statutes and
regulations without incurring material expenses to do so.
The over-the-counter pharmaceutical products distributed by the
Company are subject to regulation by a number of Federal and State
governmental agencies. In particular, the FDA regulates the formulation,
manufacture, packaging and labeling of all OTC pharmaceutical products
pursuant to a monograph system specifying OTC active drug ingredients that
are generally recognized as safe and effective for particular therapeutic
conditions. Compliance with applicable FDA monographs is required for the
lawful interstate sale of OTC drugs. The FDA has the same above-noted
enforcement powers for violations of the FDCA by drug manufacturers as it
does for such violations by dietary supplement producers.
The FTC, which exercises jurisdiction over the advertising of dietary
supplements, has in the past several years instituted enforcement actions
against several dietary supplement companies for false and misleading
advertising of certain products. These enforcement actions have resulted in
consent decrees and the payment of fines by the companies involved. In
addition, the FTC has increased its scrutiny of infomercials. The Company
is currently subject to an FTC consent decree for past advertising claims
for certain of its products, and the Company is required to maintain
compliance with this decree under pain of civil monetary penalties.
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 this order, subject to civil monetary penalties.
The Company is also subject to regulation under various international,
state and local laws that include provisions specifying, among other things,
the marketing of dietary supplements and the operations of direct sales
programs. The Company may be subject to additional laws or regulations
administered by the FDA or other federal, state or foreign regulatory
authorities, the repeal of laws or regulations that the Company considers
favorable, such as DSHEA, or more stringent interpretations of current laws
or regulations, from time to time in the future. The Company is unable to
predict the nature of such future laws, regulations, interpretations or
applications, nor can it predict what effect additional governmental
regulations or administrative orders, when and if promulgated, would have on
its business in the future. These regulations could, however, require the
reformulation of certain products to meet new standards, the recall or
discontinuance of certain products not able to be reformulated, imposition
of additional recordkeeping requirements, expanded documentation of the
properties of certain products, expanded or different labeling, and/or
scientific substantiation. Any or all of such requirements could have a
material adverse effect on the Company's financial position, results of
operations and cash flows.
Government regulations in foreign countries where the company
presently operates or plans to commence or expand sales may prevent or delay
entry into the market or prevent or delay the introduction, or require the
reformulation, of certain of the Company's products. Compliance with such
foreign governmental regulations is generally the responsibility of the
Company's distributors in those countries. These distributors are
independent contractors over whom the Company has limited control.
The Company's products are also subject to regulation by, among other
regulatory entities, the Consumer Product Safety Commission (the "CPSC"),
the U.S. Department of Agriculture (the "USDA") and the Environmental
Protection Agency (the "EPA"). Advertising and other forms of promotion and
methods of marketing of the Company's products are subject to regulation by
the U.S. Federal Trade Commission (the "FTC"), which regulates these
activities under the Federal Trade Commission Act (the "FTCA"). The
manufacture, labeling and advertising of the Company's products are also
regulated by various state and local agencies as well as those of each
foreign country to which the Company distributes its products. Various state
agencies regulate network marketing distribution activities.
The Company may be subject to additional laws or regulations
administered by the FDA or other Federal, State or foreign regulatory
authorities, the repeal or amendment of laws or regulations which the
Company considers favorable, or more stringent interpretations of current
laws or regulations, from time to time in the future. The Company is unable
to predict the nature of such future laws, regulations, interpretations or
applications, nor can it predict what effect additional governmental
regulations or administrative orders, when and if promulgated, would have on
its business in the future. They could, however, require reformulation of
certain products to meet new standards, recall or discontinuance of certain
products not able to be reformulated, imposition of additional recordkeeping
requirements, expand documentation of the properties of certain products,
expanded or different labeling and scientific substantiation. Any or all
such requirements could have a material adverse effect on the Company's
results of operations and financial position.
United Kingdom. In the U.K., the manufacture, advertising, sale and
marketing of food products is regulated by a number of government agencies,
including the Ministry of Agriculture, Food and Fisheries and the Department
of Health. In addition, there are various independent committees and
agencies that report to the government, such as the Food Advisory Committee,
which suggests appropriate courses of action by the relevant government
department where there are areas of concern relating to food, and the
Committee of Toxicity, which reports to the Department of Health. The
relevant legislation governing the sale of food includes the Food Safety Act
of 1990, which sets out general provisions relating to the sale of food.
For example, this law makes it unlawful to sell food that is harmful to
human health. In addition, there are various statutory instruments and
European Community ("E.C.") regulations governing specific areas such as the
use of sweeteners, coloring and additives in food. Trading standards
officers under the control of the Department of Trade and Industry also
regulate matters such as the cleanliness of the properties on which food is
produced and sold.
Food that has medicinal properties may fall under the jurisdiction of
the Medicine Control Agency ("MCA"), a regulatory authority whose
responsibility is to ensure that all medicines sold or supplied for human
use in the U.K. meet acceptable standards of safety, quality and efficacy.
These standards are determined by the 1968 Medicines Act together with an
increasing number of E.C. regulations and directives established by the
European Union. The latter take precedence over national laws. The MCA has
a "borderline department" which determines when food should be treated as a
medicine and should therefore fall under the relevant legislation relating
to medicines. The MCA is responsible, for example, for licensing,
inspection and enforcement to ensure that legal requirements concerning
manufacture, distribution, sale, labeling, advertising and promotion are
upheld.
International Operations
In addition to the U.K., the Company markets its nutritional supplement
products through distributors and direct mail in many countries throughout
Europe, Asia, America and the Pacific Rim countries.
The Company's international operations are conducted in a manner
substantially the same as those conducted domestically; however, in order to
conform to local variations, economic realities, market customs, consumer
habits and regulatory environments, differences exist in the products and in
the distribution and marketing programs.
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 local economy. In addition, international
operations are subject to certain risks inherent in carrying on 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.
Trademarks
NBTY. NBTY owns trademarks registered with the United States Patent
and Trademark Office and many other major jurisdictions throughout the world
for its Nature's Bounty, Holland & Barrett, Good'N Natural, American Health,
Puritan's Pride, Vitamin World, Natural Wealth and Nutrition Headquarters
trademarks, among others, and has rights to use other names essential to its
business. Federally registered trademarks have a perpetual life, as long as
they are 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.
H&B. H&B owns trademarks registered with the appropriate U.K.
authorities for its Holland & Barrett trademark and has rights to use other
names essential to its business.
Associates
NBTY. As of September 30, 1999, NBTY (excluding H&B) employed
approximately 4,000 persons, of whom 40 are in executive and administrative
capacities, approximately 75 are in sales, approximately 850 are in the
Company's Vitamin World stores and the balance are in manufacturing,
shipping and packaging. None of the Company's associates are represented by
a labor union. The Company believes its relationship with its associates is
excellent.
H&B. During fiscal 1999, H&B employed an average of approximately
2,500 persons, of whom 30 worked in executive or administrative capacities,
60 worked in warehouse and distribution and the balance worked in retail
stores. There is no trade union representation at H&B. H&B management
believes that its relationship with its associates is excellent.
Item 2. PROPERTIES
NBTY. The Company owns a total of approximately 1,300,000 square feet
of plant facilities located in Bohemia, New York, Holbrook, New York,
Bayport, New York and elsewhere. The Company also leases approximately
75,000 square feet of warehouse space in Ronkonkoma, New York, 10,000 square
feet of warehouse space in Southampton, England and approximately 10,000
square feet of warehouse space in Reno, Nevada. The Company leases and
operates approximately 400 retail locations under the name Vitamin World in
42 States in the U.S. and Guam. The stores have an average selling area of
1,200 to 1,500 square feet. Generally, the Company leases the properties
for three to five years at annual base rents ranging from $12,000 to $94,000
and percentage rents in the event sales exceed a specified amount.
The following is a listing of all properties owned or leased by the
Company:
Type of Approx Leased Expiration
Location Facility Sq. Feet or Owned of Lease
- --------------------------------------------------------------------------------------------------
UNITED STATES:
- --------------
Bohemia, NY Administration & Production 169,000 Owned
Bohemia, NY Manufacturing 80,000 Owned
Bohemia, NY Manufacturing 75,000 Owned
Holbrook, NY Warehouse & Distribution 230,000 Owned
Holbrook, NY Engineering 17,000 Owned
Ronkonkoma, NY Administration &
Distribution 110,000 Owned
Ronkonkoma, NY Warehouse 75,000 Leased October 2005
Bayport, NY Production 17,500 Owned
Bayport, NY* Manufacturing 131,000 Owned
Reno, NV Warehouse 25,000 Leased June 2001
Carbondale, IL Administration & Production 80,000 Owned
Carbondale, IL Administration 15,000 Owned
South Plainfield, NJ Manufacturing 66,000 Owned
Murphysboro, IL Manufacturing 65,000 Owned
South Plainfield, NJ Warehouse 40,000 Leased May 2006
UNITED KINGDOM:
- ---------------
Southampton Warehouse 9,000 Leased September 2011
Hinckley Warehouse & Administration 50,000 Leased October 2016
Nuneaton Administration 9,000 Leased June 2012
Burton** Administration & Warehouse Owned
NBTY currently operates approximately 400 retail stores under the Vitamin
World name. The stores have an average selling area of 1,200 square feet.
Generally NBTY leases the stores for three to five years at annual base
rents ranging from $12,000 to $94,000 and percentage rents in the event
sales exceeds a specific amount. Holland & Barrett leases all of the
locations of its 423 retail stores for terms varying between 10 and 25 years
at varying rents. The stores have an average selling area of 1,200 square
feet. No percentage rents are payable.
* Situated on 62 acres owned by the Company which allows for construction
of additional facilities, if required.
** Under construction.
Warehousing and Distribution
The Company dedicated approximately 440,000 square feet to warehousing
and distribution in its Long Island, NY; Carbondale, IL; Reno, NV; and
Southampton and Hinckley, U.K. facilities.
The Company's warehouse and distribution centers are efficiently
integrated with the Company's order entry systems to enable the Company to
ship out mail orders typically within 48 hours of their receipt. Once a
customer's telephone order is completed, the Company's computer system
forwards the order to the Company's distribution center, where all necessary
distribution and shipping documents are printed to facilitate processing.
Thereafter, the orders are prepared, picked, packed and shipped continually
through the day. The Company operates a proprietary, state-of-the-art,
automated picking and packing system for frequently shipped items. The
Company is capable of fulfilling 25,000 orders daily. A system of conveyors
automatically routes boxes carrying merchandise throughout the distribution
center for fulfillment of orders. Completed orders are bar-coded and
scanned and the merchandise and ship date are verified and entered
automatically into the customer order file for access by sales associates
prior to being shipped. The Company ships its orders primarily through the
U.S. Postal Service, serving domestic and international markets.
The Company currently distributes its products from its distribution
centers through contact and common carriers in the U.S. and by Company owned
trucks in the U.K. Deliveries are made directly to Company owned and
operated Vitamin World stores once per week. In addition, the Company ships
products overseas by container loads. The Company also operates additional
distribution centers in Southampton and Hinckley, U.K. Deliveries are made
directly to Company owned and operated Holland & Barrett stores twice per
week. The Company is currently in the process of expanding its distribution
capacity in the U.K. The Company delivers products to distribution points
in the U.S. through contract and common carriers as directed by its retail
customers.
Item 3. LEGAL PROCEEDINGS
Miscellaneous Claims and Litigations. The Company is involved in
miscellaneous claims and litigation, which taken individually or in the
aggregate, would not materially impact the Company's financial position,
results of operations or its business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 12, 1999, at the annual meeting of the shareholders, the
following directors were elected for a three year term: Scott Rudolph,
Murray Daly, Bud Solk and Nathan Rosenblatt. As of that date, the names of
other directors whose terms continue after the meeting were: Arthur Rudolph,
Aram Garabedian, Bernard G. Owen, Alfred Sacks, Glenn Cohen, Michael L.
Ashner and Michael Slade.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
DIVIDEND POLICY
Since 1973, the Company has not paid any cash dividends on its Common
Stock. On April 24, 1992, the Company effected a two-for-one stock split in
the form of a 100% stock dividend to stockholders of record on May 8, 1992.
On September 25, 1992, the Company effected a three-for-one stock split in
the form of a 200% stock dividend to stockholders of record on November 2,
1992. On August 3, 1993, the Company effected a two-for-one stock split in
the form of a 100% stock dividend to shareholders of record on August 13,
1993. In addition, in March, 1998 the Company effected a three-for-one
stock split in the form of a 200% stock dividend. Future determination as
to the payment of cash or stock dividends will depend upon the Company's
results of operations, financial condition and capital requirements and such
other factors as the Company's Board of Directors consider appropriate.
PRICE RANGE OF COMMON STOCK
The Common Stock is traded in the over-the-counter market and is
included for quotation on the National Association of Securities Dealers
National Market System under the trading symbol "NBTY". The following table
sets forth, for the periods indicated, the high and low closing sale prices
for the Common Stock, as reported on NASDAQ/NMS:
Fiscal year ended September 30, 1999
High Low
---- ---
First Quarter 10.00 4.38
Second Quarter 8.00 4.63
Third Quarter 6.88 4.44
Fourth Quarter 9.00 5.81
Fiscal year ended September 30, 1998
First Quarter 8.46 6.42
Second Quarter 20.58 10.67
Third Quarter 24.38 14.63
Fourth Quarter 23.25 7.31
On December 10, 1999, the closing sale price of the Common Stock was
$9.69. There were approximately 990 record holders of Common Stock as of
December 1, 1999. The Company believes that there were in excess of 10,000
beneficial holders of Common Stock as of such date.
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars and shares in thousands, except per share amounts)
1995 1996 1997 1998 1999
----------------------------------------------------------------
Selected Income Statement Data:
Net sales $250,351 $265,670 $355,336 $572,124 $630,894
Costs & expenses:
Cost of sales 137,254 138,186 177,909 271,233 293,521
Catalog printing, postage &
promotion 28,307 26,695 27,932 32,176 32,895
Selling, general &
administrative 67,032 68,414 96,653 190,276 236,367
Litigation settlement costs 6,368 4,952
Merger costs 3,528
----------------------------------------------------------------
Income from operations 17,758 32,375 46,474 74,911 63,160
Interest expense, net (2,284) (2,431) (7,471) (16,518) (18,945)
Other, net 822 1,430 1,817 3,921 1,388
----------------------------------------------------------------
Income before income taxes 16,296 31,374 40,820 62,314 45,603
Income taxes 3,374 9,168 11,694 23,474 18,324
----------------------------------------------------------------
Net income $ 12,922 $ 22,206 $ 29,126 $ 38,840 $ 27,279
================================================================
Per Share Data:
Net income per common share:
Basic $ 0.21 $ 0.35 $ 0.45 $ 0.59 $ 0.39
Diluted $ 0.19 $ 0.32 $ 0.42 $ 0.56 $ 0.39
Weighted average common shares
outstanding (000):
Basic 62,159 64,197 64,611 65,563 69,640
Diluted 68,695 68,699 68,935 69,847 70,826
Selected Balance Sheet Data:
Working capital $ 45,556 $ 57,559 $ 70,850 $ 89,106 $121,103
Total assets 148,187 171,948 571,177 500,457 539,384
Long-term debt, capital lease obligations
and promissory notes payable, less current
portion 15,683 23,570 341,159 173,531 234,903
Total stockholders' equity 91,393 107,645 131,291 230,339 223,949
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Background
NBTY, founded in 1971, is a leading vertically integrated
manufacturer, marketer and retailer of a broad line of high quality, value-
priced nutritional supplements. NBTY has continued to grow through its
marketing practices and through a series of strategic acquisitions. Since
1986, the Company has acquired and integrated 14 companies participating in
the direct response, retail and manufacturing of the nutritional supplement
sector, including Holland & Barrett in August 1997 and Nutrition
Headquarters Group in 1998. In November 1999 the Company signed an
agreement to acquire Nutrition Warehouse, Inc., a company operating a mail
order business and retail stores.
In April 1998, NBTY merged a group of affiliated, privately held
companies, referred to collectively as Nutrition Headquarters Group, into
the Company. In connection with such transaction, the Company issued
approximately 8.8 million shares of its Common Stock and incurred merger-
related transaction costs of approximately $4 million. Nutrition
Headquarters Group includes Nutrition Headquarters, Inc., a mail order VMS
company in Cambridge, Massachusetts and Nutro Laboratories, Inc., a South
Plainfield, New Jersey-based vitamin manufacturer. The merger of Nutrition
Headquarters Group into the Company was accounted for as a pooling of
interests and, accordingly, no goodwill was recorded in this transaction.
Financial information has been restated to include the results of operations
of Nutrition Headquarters Group for all periods presented.
NBTY markets its multi-branded products through four distribution
channels: (i) puritan.com/direct response, (ii) Retail-Company owned and
operated Vitamin World retail stores in the U.S. and Company owned and
operated Holland & Barrett retail stores in the U.K., (iii) wholesale
distribution to drug store chains, supermarkets, discounters, independent
pharmacies and health food stores, and (iv) a network marketing program.
NBTY's net sales from puritan.com/direct response, retail-U.S, retail-U.K.
and wholesale operations were approximately 28%, 17%, 35% and 20%,
respectively, for the year ended September 30, 1999. As a result of the
Company's efforts to expand its direct to consumer business, wholesale
sales, as a percentage of total net sales, decreased from approximately 23%
of net sales in fiscal 1998 to approximately 20% for the year ended
September 30, 1999.
The Company recognizes revenue upon shipment or, 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, other than two-piece capsule
forms. 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 puritan.com and retail sales
have typically been higher than gross margins from wholesale sales.
Results of Operations
The following table sets forth income statement data of the Company as
a percentage of net sales for the periods indicated:
Fiscal Years Ended September 30,
--------------------------------
1997 1998 1999
------------------------
Net Sales 100% 100% 100%
Costs and Expenses:
Cost of sales 50.0 47.4 46.5
Catalog printing & promotion 7.9 5.6 5.2
Selling, general & administrative 27.2 33.3 37.5
Litigation 1.8 0.0 0.8
Merger-related costs 0.0 0.6 0.0
-------------------------
86.9 86.9 90.0
-------------------------
Income from operations 13.1 13.1 10.0
Interest expense & other, net (1.6) (2.2) (2.8)
-------------------------
Income before income taxes 11.5 10.9 7.2
Income taxes 3.3 4.1 2.9
-------------------------
Net Income 8.2% 6.8% 4.3%
==========================
Fiscal Year Ended September 30, 1999 Compared to Year Ended September 30,
1998
Net Sales. Net sales for fiscal 1999 were $631 million, an increase
of $59 million or 10% compared with net sales of $572 million in fiscal
1998. Of the $59 million increase, $37 million was attributable to retail-
U.S. sales, $35 million was attributable to retail-U.K. sales, while there
were decreases of $1 million in wholesale and $12 million in
puritan.com/direct response. During 1999, the Company opened 151 stores
which contributed $18 million in increased sales in the U.S. and 8 stores in
the U.K. The decrease in sales for puritan.com/direct response was mainly
due to the discontinuance of unprofitable sales at Nutrition Headquarters.
Internet sales increased 550% to $4 million.
Cost of Sales. Cost of Sales for fiscal 1999 was $294 million, an
increase of $23 million compared with the cost of sales of $271 million for
fiscal 1998. As a percentage of sales, gross profit increased to 53.5% for
1999 from 52.6% for 1998. Such increase was due to various factors
including: (i) lower manufacturing costs resulting from increased
productivity at the Company's manufacturing facilities; (ii) higher
percentage of sales direct to the consumer; (iii) increased sales of new
products, which typically have higher gross margins; and (iv) generally
higher margins on products manufactured by NBTY and sold in H&B stores. The
Company's strategy is to continue to increase in-house manufacturing while
decreasing the use of outside suppliers in both the U.S. and the U.K. In
addition, cost of sales includes a year end adjustment to inventory of $5.4
million, which, is principally the result of the Company utilizing the gross
profit method for interim reporting.
Catalog, Printing, Postage and Promotion. Catalog, printing, postage
and promotion expenses were $33 million and $32 million for fiscal 1999 and
1998, respectively. Such costs as a percentage of net sales were 5.2% for
1999 and 5.6% for 1998. The decreased percentage was due to more efficient
printing and mailing methods of the Company's catalog operation and
increased sales.
Selling, General and Administrative. Selling, general and
administrative expenses for fiscal 1999 were $236 million, an increase of
$46 million, compared with $190 million for fiscal 1998. As a percentage of
sales, selling, general and administrative expenses were 37.5% and 33.3% in
1999 and 1998, respectively. Of the $46 million increase, $9 million was
attributable to rent expense, $17 million to payroll costs, mainly
associated with the retail-U.S. expansion program and $6 million was
attributable to an increased depreciation expense as a result of the
increase in capital expenditures.
Litigation Settlement Costs and Merger Related Costs. In 1999 the
Company incurred $5 million for litigation and settlement costs in
connection with terms of the purchase agreement of the 1997 acquisition of
Holland & Barrett and in 1998, $4 million for merger related costs for
Nutrition Headquarters.
Interest Expense, Net. Interest expenses was $19 million in fiscal
1999, an increase of $2 million, compared with net interest expense of $17
million in fiscal 1998. The increase in net interest primarily resulted
from the increase of long term debt from $171 million in 1998 to $217
million in 1999.
Income taxes. The Company's effective tax rate was 40.2% in fiscal
1999 and 37.7% in fiscal 1998. Prior to April 1998, Nutrition Headquarters
Group was privately held and had subchapter S status and, accordingly,
recorded no income tax provisions except for certain minimum taxes.
Net Income. Net income for fiscal 1999 was $27 million, compared with
$39 million in fiscal 1998, a decrease of $12 million.
Fiscal Year Ended September 30, 1998 Compared to Year Ended September 30,
1997
Net Sales. Net sales for fiscal 1998 were $572 million, an increase
of $216 million or 61% compared with net sales of $355 million in fiscal
1997. Of the $216 million increase, $24 million was attributable to direct
response, $25 million to retail-U.S. sales, $162 million to retail-U.K.
sales and $5 million to wholesale sales. During 1998, the Company's: (i)
direct response operations grew 15% as a result of a growing number of names
in the Company's mailing list; (ii) retail-U.S. operations grew 61% as a
result of continued new store openings and 18% growth in same store sales;
(iii) retail-U.K. operations were presented for the entire fiscal year of
1998 as a result of the acquisition of H&B in August 1997; and (iv)
wholesale operations grew 4% as a result of the Company's strategy to focus
its efforts on expanding its direct to consumer business. The acquisition
of H&B has been accounted for under the purchase method of accounting and,
accordingly, the results of operations are included in the financial
statements from August 1997, the date of the acquisition. Without H&B,
NBTY's total sales would have increased approximately 17%.
Cost of Sales. Cost of Sales for fiscal 1998 was $271 million, an
increase of $93 million compared with costs of sales of $178 million for
fiscal 1997. Gross profit for 1998 was $301 million, an increase of $123
million or 70% compared with $177 million in the same period in 1997. As a
percentage of net sales, gross profit increased to 52.6% for 1998 from 50%
for the same period in 1997. Such increase was due to various factors,
including: (i) lower manufacturing costs resulting from increased
productivity at the Company's manufacturing facilities; (ii) higher
percentage of sales direct to the consumer; (iii) increased sales of new
products, which typically have higher gross margins; and (iv) generally
higher margins on products manufactured by NBTY and sold in H&B stores. The
Company's strategy is to continue to increase in-house manufacturing while
decreasing the use of outside suppliers in both the U.S. and the U.K.
Catalog, Printing, Postage and Promotion. Catalog, printing, postage
and promotion expenses were $32 million and $28 million for fiscal 1998 and
1997, respectively. Such costs as a percentage of net sales were 5.6% in
1998 and 7.9% in 1997. The decrease as a percentage of net sales was due to
the increase in retail sales from H&B as well as more efficient printing and
mailing methods of the Company's catalog operations.
Selling, General and Administrative. Selling, general and
administrative expenses for fiscal 1998 were $190 million, an increase of
$93 million compared with $97 million for fiscal 1997. As a percentage of
net sales, selling, general and administrative expenses were 33.3% and 27.2%
in 1998 and 1997, respectively. Of the $93 million increase, $28 million
was attributable to rent expense associated with H&B retail locations and
additional Vitamin World retail stores, $30 million was attributable to
payroll costs for H&B and $12 million was attributable to an increase in
depreciation and amortization, including $5 million in goodwill resulting
from the acquisition of H&B.
Interest Expenses. Interest expense was $17 million in fiscal 1998,
an increase of $9 million compared with net interest expense of $7.4 million
in fiscal 1997. The increase in net interest primarily resulted from the
issuance of $150 million of 8-5/8% Senior Subordinated Notes due in 2007 to
fund the acquisition of H&B.
Income Taxes. The Company's effective tax rate was 37.7% in fiscal
1998 and 28.6% in fiscal 1997. Prior to April, 1998, Nutrition Headquarters
Group was privately held and had subchapter S status and, accordingly,
recorded no income tax provision except for certain minimum taxes. It is
anticipated that the Company's effective tax rate on an on-going basis will
be approximately 40%.
Net Income. Net income for fiscal 1998 was $39 million, an increase
of $10 million or 33% compared with $29 million in fiscal 1997. Assuming
Nutrition Headquarters Group was taxed at the Company's effective rate, net
income would have been $36 million for fiscal 1998, an increase of $12
million or 50% compared with $24 million in fiscal 1997.
Fiscal Year Ended September 30, 1997 Compared to Fiscal Year Ended September
30, 1996.
Net Sales. Net sales for fiscal 1997 were $355 million, an increase
of $89 million or 33% compared with net sales of $266 million in fiscal
1996. Of the $89 million increase, $28 million was attributable to
puritan.com/direct response, $44 million to retail sales in the U.S. and the
U.K. and $17 million to wholesale sales. During this period, the Company's
(i) mail order operations grew 21% as a result of a growing number of names
in the Company's mailing list and greater consumer recognition of Puritan's
Pride quality and value; (ii) retail-U.S. operations grew 93 % as a result
of 23% growth in same store sales and 49 net new store openings; (iii)
retail-U.K. operations recorded sales of $24 million as a result of the
acquisition of Holland & Barrett in August 1997; and (iv) wholesale
operations grew 16%. Without Holland & Barrett, sales would have increased
25%.
Cost of Sales. Cost of sales for fiscal 1997 was $178 million, an
increase of $40 million or 29% compared with $138 million for fiscal 1996.
Gross profit for fiscal 1997 was $177 million, an increase of $50 million or
39% compared with $127 million in fiscal 1996. As a percentage of net
sales, gross profit increased to 50% in fiscal 1997 from 48% in fiscal 1996.
Such increase was due to various factors, including increased sales of new
products and generally higher margins on products as well as lower
manufacturing costs resulting from increased productivity. The Company's
strategy is to continue to increase in-house manufacturing while decreasing
the use of outside suppliers in both the U.S. and the U.K.
Catalog, Printing, Postage and Promotion. Catalog printing, postage
and promotion for fiscal 1997 was $28 million, an increase of $1 million or
4% compared with $27 million in fiscal 1996. Such costs as a percentage of
net sales were 8% in fiscal 1997 and 10% in fiscal 1996. The decrease as a
percentage of net sales was mainly due to more efficient printing and
mailing methods of the Company's catalog operation and increased Company-
wide sales.
Selling, General and Administrative. Selling, general and
administrative expenses for fiscal 1997 were $97 million, an increase of $29
million or 43% compared with $68 million in fiscal 1996. As a percentage of
net sales, these expenses were 27% and 26% for fiscal 1997 and 1996,
respectively. This increase was attributable to increased payroll cost and
building costs including rent expense resulting from the acquisition of
Holland & Barrett.
Litigation. In fiscal 1997, the Company agreed to settle a class
action lawsuit for approximately $5.6 million, net of insurance recoveries
and also recorded a charge to operations for related fees of $768,000.
Interest Expense, Net. Interest expenses, net was $7 million in
fiscal 1997, an increase of $5 million compared with net interest expenses,
of $2 million in fiscal 1996. Increased interest expense, net, associated
with the Holland & Barrett acquisition totaled $2 million in fiscal 1997.
In addition, the Company recorded a loss of approximately $2 million in
connection with the settlement of a treasury-lock instrument.
Income Taxes. The Company's effective tax rate was 28.7% in fiscal
1997 and 29.2% in fiscal 1996. Nutrition Headquarters Group was privately
held and had subchapter S status and, accordingly, recorded no income tax
provision, except for certain minimum taxes.
Net Income. Net income for fiscal 1997 was $29 million, an increase
of $7 million or 32% compared with $22 million in fiscal 1996. Assuming
Nutrition Headquarters Group was taxed at the Company's effective rate, net
income would have been $24 million for fiscal 1997, an increase of $5
million or 26% compared with $19 million in fiscal 1996.
Seasonality
The Company believes that its business is not seasonal. Historically
the Company has slightly lower net sales in its first and third fiscal
quarters, and slightly higher net sales in its second and fourth fiscal
quarters. The Company may have higher net sales in a quarter depending upon
when it has engaged in significant promotional activities.
Liquidity and Capital Resources.
The Company requires liquidity for capital expenditures and working
capital needs, including debt service requirements. Total capital
expenditures for the Company were $45.8 million for fiscal 1999, of which
approximately $36.8 million was associated with the Company's retail
expansion program.
Working capital increased $32 million to $121 million. The Company
believes that the cash flow generated from its operations and amounts
available under the Revolving Credit Facility should be sufficient to fund
its debt service requirements, working capital needs, anticipating capital
expenditures and other operating expenses for the foreseeable future. In
April 1999, the Company entered into an amended and restated Credit and
Guarantee Agreement ("CGA") which expires September 2003. Under the terms
of the CGA, up to $75 million is converted to a five year term loan in April
2000. Virtually all the Company's assets are collateralized under the CGA.
During fiscal 1999, the Company utilized the CGA to buy back 4,702
shares ($34,438) of its common stock under its stock purchase plan.
The Company's debt instruments impose certain restrictions on the
Company regarding capital expenditures, limit the Company's ability to:
incur additional indebtedness, dispose of assets, make repayments of
indebtedness or amendments of debt instruments, pay distributions, create
liens on assets and enter into sale and leaseback transactions, investments,
loans or advances and acquisitions. Such restrictions could limit the
Company's ability to respond to market conditions, to provide for
unanticipated capital investments or to take advantage of business or
acquisition opportunities.
Inflation
Inflation has not had a significant impact on the Company in the past
three years nor is it expected to have a significant impact in the
foreseeable future.
Year 2000.
The Year 2000 problem is a result of software computer programs being
written using two digits rather than four to define the applicable year.
The Company recognized, that without corrective action, that the risk that
its software programs or computer hardware that have date-sensitive software
or embedded chips may recognize a date using "00" as the year 1900 rather
than the Year 2000. This could result in a system failure or a
miscalculation causing disruptions of operations including, among other
things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. The Company recognized the
need to ensure that its operations will not be adversely impacted by Year
2000 software and hardware failure. The Company developed a plan to ensure
that its systems are compliant with the requirements to process transactions
in the Year 2000. That plan consisted of four phases: assessment,
remediation, testing and implementation, and encompasses internal
information technology (IT) systems and non-IT systems, as well as third
party exposures.
The following is a status report of the Company's effort to date:
The Company's State of Readiness
The Company believes that it has completed the assessment,
remediation, testing and IT systems and non-IT systems phases. To the best
of its knowledge, management of the Company believes that all U.S. and U.K.
production systems and networks are Y2K compliant. The Company retained an
outside firm to assist the Company's personnel. It is estimated that the
costs of this project are approximately $1 million. With the exception of
these consulting fees, other costs to comply with the year 2000 issue have
been immaterial.
Third Parties And Their Exposure To The Year 2000
The Company has requested from a majority of its principal suppliers
and vendors written statements regarding their knowledge of and plans for
meeting Year 2000 requirements. To date, the Company is not aware of any
principal supplier or vendor with a Year 2000 issue that could materially
impact the Company's results of operations, liquidity, or capital resources.
However, the Company has no means of ensuring that external agents will be
Year 2000 ready. The Company has numerous alternate suppliers that it could
utilize in the event of a problem with any particular supplier.
Risks
Management of the Company believes that it has an effective program to
resolve the Year 2000 issue. The Company has completed all necessary phases
of the Year 2000 program. However, there can be no assurance that the
Company is risk free of the Year 2000 issue. Principally, certain aspects
of the Company's operations are dependent on third parties and their ability
to meet Year 2000 requirements. In addition, disruptions in the economy
which could result from the Year 2000 issues could also materially adversely
affect the Company. The amount of potential liability and lost revenue, if
any, cannot be reasonably estimated at this time.
Recent Financial Accounting Standards Board Statements
Effective October 1, 1998, the Company adopted SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
established standards for reporting information about operating segments.
it also establishes standards for disclosures regarding products and
services, geographic areas and major customers. SFAS No. 131 requires
comparative information for earlier years to be restated. The adoption of
SFAS No. 131 did not affect the Company's results of operations or financial
position, but did affect the disclosure of segment information.
Effective october 1, 1998, the Company also adopted SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes standards for
the reporting and display of comprehensive income and its components in a
full set of financial statements. As shown in the consolidated statement of
stockholders' equity, comprehensive income includes net income and the
effect of translations which are charged or credited to the cumulative
translation adjustment.
In addition, the Company adopted the provisions of Statement of
Position No. 98-5, "Reporting on the Cost of Start-Up Activities ("SOP No.
98-5"), for fiscal 1999. SOP No. 98-5 required that all start-up (or pre-
opening) activities and organization costs be expensed as incurred. The
adoption of SOP No. 98-5 did not have a material impact on the company's
results of operations or financial position.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See attached financial statements. Part IV, Item 14. Exhibits.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
In connection with the adoption of SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information", the Company reclassified
certain persons who were formerly named as NBTY, Inc. executive officers and
re-positioned such persons into the business segment in which each directly
functions. Accordingly, such reclassified persons are Officers of a
subsidiary or division and are not considered, nor do they function as, an
NBTY, Inc. executive officer.
Set forth below are the names and other relevant information regarding
executive officers and directors of the Company as of December 1, 1999.
Their stated positions are as follows:
Year Commencement
first of term of
elected office as
Name Age Position Director Officer
- -----------------------------------------------------------------------------------
Scott Rudolph 42 Chairman of
the Board, Chief
Executive Officer,
and President 1986 1986
Harvey Kamil 55 Executive Vice
President,
Secretary ---- 1982
Michael C. Slade 50 Senior Vice President-
Strategic Planning,
Director 1998 1999
James P. Flaherty 42 Vice President-
Advertising ---- 1988
William J. Shanahan 41 Vice President-
Data Processing ---- 1988
Arthur Rudolph 71 Director 1971 1971
Aram Garabedian 64 Director 1971 ----
Bernard G. Owen 71 Director 1971 ----
Alfred Sacks 72 Director 1971 ----
Murray Daly 72 Director 1971 ----
Glenn Cohen 40 Director 1988 ----
Bud Solk 66 Director 1994 ----
Nathan Rosenblatt 42 Director 1994 ----
Michael L. Ashner 46 Director 1998 ----
The Directors of the Company are elected to serve a three-year term or
until their respective successors are elected and qualified. Officers of
the Company hold office until the meeting of the Board of Directors
immediately following the next annual shareholders meeting or until removal
by the Board, whether with or without cause.
Scott Rudolph is the Chairman of the Board of Directors, President,
Chief Executive and is a shareholder of the Company. Mr, Rudolph
founded U.S. Nutrition Corp., a mail order vitamin company in 1976,
which was purchased by NBTY in 1986. He is the Chairman of Dowling
College, Long Island, New York. He joined NBTY in 1986. He is the
son of Arthur Rudolph.
Harvey Kamil is Executive Vice President, Chief Financial Officer and
Secretary. He is on the Board of Directors of the Council for
Responsible Nutrition. He joined NBTY in 1982.
James P. Flaherty is Vice President of Advertising. He joined NBTY in
1979.
William J. Shanahan is Vice President of Data Processing. He joined
NBTY in 1980.
Michael Slade is the Senior Vice President - Strategic Planning and is
the President of the Company's wholly-owned subsidiary, Nutrition
Headquarters (Delaware), Inc. He previously was an owner and Chief
Executive Officer of that corporation's predecessor before its
acquisition by the Company in 1998.
Arthur Rudolph founded Arco Pharmaceuticals, Inc., NBTY's predecessor,
in 1960 and served as NBTY's Chief Executive Officer and Chairman of
the Board of Directors since that date until his resignation in
September 1993. He remains a member of the Board of Directors and a
consultant to the Company. He was responsible for the formation of
NBTY in 1971. He is the father of Scott Rudolph.
Aram Garabedian is, and has been since 1988, a real estate developer
in Rhode Island. He was associated with NBTY and its predecessor,
Arco Pharmaceuticals, Inc., for 20 years in a sales capacity and as an
officer. He has served as a director since 1971.
Bernard G. Owen has been associated with Cafiero, Cuchel and Owen
Insurance Agency, Pitkin, Owen Insurance Agency and Wood-HEW Travel
Agency for more than the past 5 years. He currently serves as
Chairman of these firms.
Alfred Sacks has been engaged as President of Al Sacks, Inc., an
insurance agency for the past 30 years.
Murray Daly, formerly a Vice President of J. P. Egan Office Equipment
Co., is currently a consultant to the office equipment industry.
Glenn Cohen is the President of Glenn-Scott Landscaping and Design for
more than 5 years.
Bud Solk has been President of Chase/Ehrenberg & Rosene, Inc., an
advertising and marketing agency located in Chicago, Illinois since
1995. Previously, Mr. Solk had been President of Bud Solk Associates,
Inc., which he founded in 1958.
Nathan Rosenblatt is the President and Chief Executive Officer of
Ashland Maintenance Corp., a commercial maintenance organization
located in Long Island, New York.
Michael L. Ashner is President and Chief Executive Officer of Winthrop
Financial Assoc., a firm engaged in the organization and
administration of real estate limited partnership.
Item 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
Long-Term All Other
Compensation Awards Compensation:
Name and Annual Compensation Restricted Stock Pension Plan
Principal Position Year Salary $ Bonus$ Stock($) Options # and 401(k) Plan $
- ------------------------------------------------------------------------------------------------------------------
Scott Rudolph 1999 609,600 500,000 260,000 4,801
Chairman of the Board, 1998 600,008 400,000 1,050,000 7,672
President and Chief 1997 488,838 350,000 --------- 4,792
Executive Officer
Harvey Kamil 1999 304,800 225,000 250,000 4,801
Executive Vice President 1998 300,000 225,000 150,000 7,672
Chief Financial Officer 1997 271,611 200,000 ------- 4,592
Michael C. Slade 1999 275,000 ------- ------- 3,312
Senior Vice President 1998 ------- ------- ------- -----
Strategic Planning 1997 ------- ------- ------- -----
James Flaherty 1999 174,700 75,000 20,000 4,801
Vice President 1998 167,500 75,000 30,000 7,672
Marketing & Advertising 1997 151,000 50,000 ------ 4,792
William Shanahan 1999 152,000 60,000 20,000 4,801
Vice President 1998 146,000 60,000 30,000 7,672
Data Processing 1997 140,000 40,000 ------ 4,792
Employment Agreements
Scott Rudolph, Chairman of the Board, President and Chief Executive
Officer of the Company, entered into an employment agreement effective
February 1, 1994, as amended, to terminate January 31, 2004. During the
period of the employment agreement, the salary payable to Scott Rudolph
shall be fixed by the Board of Directors of the Company, provided that in no
event will the executive salary be at a rate lower than $600,000 per year,
with bonuses, certain fringe benefits accorded other executives of NBTY, and
with annual cost of living index increases.
Harvey Kamil, Executive Vice President, Chief Financial Officer and
Secretary of the Company, entered into an employment agreement effective
February 1, 1994, as amended, to terminate January 31, 2004. During the
period of the employment agreement, the salary payable to Harvey Kamil shall
be fixed by the Board of Directors of the Company, provided that in no event
will the executive salary be at a rate lower than $300,000 per year, with
bonuses, certain fringe benefits accorded other executives of NBTY, and with
annual cost of living index increases.
Each of the above agreements also provides for the immediate
acceleration of the payment of all compensation for the term of the contract
and the registration and sale of all issued stock, stock options and shares
underlying options in the event of certain changes of control, or
involuntary (i) termination of employment, (ii) reduction of compensation,
or (iii) diminution of responsibilities or authority.
Effective January 1, 1997, the Company entered into a consulting
agreement with Rudolph Management Associates, Inc. for the services of
Arthur Rudolph, a director of the Company. The agreement has been renewed
to provide services from January 1, 1998 through December 31, 2000 with the
consulting fee fixed by the Board of Directors of the Company, provided that
in no event will the consulting fee be at a rate lower than $400,000 per
year, payable monthly, with certain fringe benefits accorded to other
executives of NBTY.
On April 20, 1998, the Company entered into a one-year consulting
agreement with Michael C. Slade, one of the former shareholders of Nutrition
Headquarters Group. Under the terms of the agreement, as amended, Mr. Slade
is the Senior Vice President - Strategic Planning of the Company and the
President of Nutrition Headquarters Group subsidiary. He receives an annual
compensation of $275,000 renewable at Mr. Slade's option, for up to two
additional one-year periods. The agreement also provides for fringe
benefits accorded other executives of NBTY.
Four members of Holland & Barrett's senior executive staff have
service contracts, terminable by the Company upon twelve months notice, at
annual salaries ranging between approximately $75,000 and $200,000.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Management
(a) Security Ownership of Certain Beneficial Owners
Security ownership of persons owning of record, or beneficially, 5% or more
of the outstanding Common Stock, as of December 15, 1999. The Company is
not aware of any other beneficial holders of 5% or more of the Common Stock.
All information with respect to beneficial ownership, set forth in the
foregoing stock ownership table, is based on information furnished by the
shareholder, director or executive officer, or contained in filings made
with the Securities and Exchange Commission.
Amount & Nature Percent
Name and Address of of Beneficial of
Title of Class Beneficial Owner Ownership (1) Class (1)
- ----------------------------------------------------------------------------
Common Stock Scott Rudolph 12,408,058 18.46
Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock NBTY, Inc. 2,585,301 3.85
(Par Value Profit Sharing Plan Record and
$.008) Beneficial
Includes shares issuable upon exercise of options held by executive
officers and directors.
(b) Security Ownership of Management (Directors and Executive
Officers)
Amount & Nature Percent
Name and Address of of Beneficial of
Title of Class Beneficial Owner Ownership (1) Class (1)
- ----------------------------------------------------------------------------
Common Stock Scott Rudolph(2) 12,408,058 18.46
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Harvey Kamil 2,281,432 3.39
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Arthur Rudolph 2,056,893 3.06
(Par value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Michael Slade 2,137,448 3.18
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock James Flaherty 150,963 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock William Shanahan 145,000 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Aram Garabedian 36,000 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Bernard G. Owen 44,400 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Alfred Sacks 60,000 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Murray Daly 58,000 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Glenn Cohen 87,000 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Bud Solk 50,000 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Nathan Rosenblatt 30,000 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Michael Ashner 55,000 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock All Directors & 19,612,182 26.50
(Par Value Executive Officers Record and
$.008) as a group Beneficial
(14 persons)
Each named person or group is deemed to be the beneficial owner of
securities which may be acquired within 60 days through the exercise or
conversion of options, if any, and such securities are deemed to be
outstanding for the purpose of computing the percentage beneficially owned
by such person or group. Such securities are not deemed to be outstanding
for the purpose of computing the percentage of class beneficially owned by
any person or group. Accordingly, the indicated number of shares includes
shares issuable upon exercise of options (including employee stock options)
and any other beneficial ownership of securities held by such person or
group.
Includes shares held in a Trust created by Arthur Rudolph for the
benefit of Scott Rudolph and others.
Includes 530,847 shares held in a Trust created for the benefit of Mr.
Slade's wife.
NBTY Inc. Employee Stock Ownership Plan and Trust ("ESOP")
- ----------------------------------------------------------
The basic terms of the Plan are as follows:
Eligibility
All associates of the Company, including officers, over the age of 21
and who have been employed by the Company for one year or more are eligible
participants in the Plan.
Contributions
Contributions are made on a voluntary basis by the Company. There is
no minimum contribution required in any one year.
There will be no contributions required by an associate. All
contributions will be made by the Company at the rate of up to 15% of the
Company's annual payroll, at the discretion of the Company. Each eligible
associate receives an account or share in the Trust and the cash and/or
shares of stock contributed to the Plan each year are credited to his or her
account.
Vesting
Once an associate is eligible, a portion of the stock in his or her
account becomes "vested" each year, as follows:
Number of Years Percentage of Shares
of Service earned each year
- -----------------------------------------
0 - 2 0%
3 20%
4 20%
5 20%
6 20%
7 20%
Distribution
If an associate retires, is disabled, dies or his or her employment is
otherwise terminated, that associate or that associate's estate will receive
the vested portion held in trust for such associate.
At the end of the vesting period, the associates become full
beneficial owners of the stock. There is no tax consequence attached to his
or her Plan for an associate until that associate sells the shares, at which
time any profit realized by the associate is taxed as a capital gain.
Distribution is to be made only in the shares of NBTY, Inc. which
shares were purchased for the Trust from the cash contributions of the
Company.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has had, and in the future may continue to have, business
transactions with firms affiliated with certain of the Company's directors.
Each such transaction is in the ordinary course of the Company's business.
During the fiscal year ended September 30, 1999, the following
transactions occurred:
A. Gail Radvin, Inc., a corporation wholly-owned by Gail Radvin,
received commissions from the Company totalling $432,886.48 on account of
sales in certain foreign countries and had trade receivable balances of
approximately $2.2 million as of September 30, 1999. Gail Radvin is the
sister of Arthur Rudolph (a director) and the aunt of Scott Rudolph
(Chairman and President).
B. Chase/Ehrenberg & Rosene, Inc., a company partly owned by Bud
Solk, a director, placed advertising for the Company and received
commissions of $163,923.67.
C. Glenn-Scott Landscaping & Design, a company owned by Glenn
Cohen, a director, performed landscaping and maintenance on the Company's
properties and received $81,477.96 in compensation.
D. Arthur Rudolph, a director, has been retained under a
Consulting Agreement, at an annual fee of $400,000, payable monthly, which
Agreement expires on December 31, 2000.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES
(a) The following documents are filed as a part of this report Page
Number
------
1. Financial Statements
Report of Independent Accountants F-1
Consolidated Balance Sheets as of
September 30, 1999 and 1998 F-2
Consolidated Statements of Income for the years
ended September 30, 1999, 1998 and 1997 F-3
Consolidated Statements of Stockholders' Equity
for the years ended September 30, 1999, 1998 and 1997 F-4
Consolidated Statements of Cash Flows for the years
ended September 30, 1999, 1998 and 1997 F-5 to F-6
Notes to Consolidated Financial Statements F-7 to F-22
NBTY, Inc. and Subsidiaries
Consolidated Financial Statements
For the Years Ended
September 30, 1999, 1998 and 1997
Item 8 Financial Statements and Supplementary Data
- --------------------------------------------------
Report of Independent Accountants
To the Board of Directors and Stockholders of NBTY, Inc. and Subsidiaries:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 35 present fairly, in all material
respects, the financial position of NBTY, Inc. and Subsidiaries at
September 30, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended September 30,
1999 in conformity with accounting principles generally accepted in the
United States. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 14(a)(2) on page 35
presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule
are the responsibility of the Company's management; our responsibility is
to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements
in accordance with auditing standards generally accepted in the United
States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
New York, New York
November 15, 1999
NBTY, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 1999 and 1998 (Dollars and shares in thousands)
1999 1998
ASSETS:
Current assets:
Cash and cash equivalents $ 18,269 $ 14,308
Accounts receivable, less allowance for doubtful accounts of
$1,248 in 1999 and $1,045 in 1998 24,336 23,433
Inventories 135,466 119,607
Deferred income taxes 3,250 2,994
Prepaid expenses and other current assets 19,243 13,614
---------------------
Total current assets 200,564 173,956
Property, plant and equipment, net 189,562 166,335
Intangible assets, net 141,410 152,426
Other assets 7,848 7,740
---------------------
Total assets $539,384 $500,457
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt and capital lease obligations $ 1,799 $ 1,218
Accounts payable 45,366 50,389
Accrued expenses 32,296 33,243
---------------------
Total current liabilities 79,461 84,850
Long-term debt 217,136 171,230
Obligations under capital leases 2,372 2,106
Deferred income taxes 12,233 8,203
Other liabilities 4,233 3,729
---------------------
Total liabilities 315,435 270,118
---------------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.008 par; authorized 175,000 shares in 1999 and
75,000 shares in 1998; issued 66,096 shares in 1999 and 72,714 shares in
1998 and outstanding 66,096 shares in 1999 and 68,203 shares in 1998 529 582
Capital in excess of par 106,332 115,661
Retained earnings 111,792 105,989
---------------------
218,653 222,232
Less, 4,511 treasury shares at cost in 1998 (3,206)
Stock subscriptions receivable (839)
Accumulated other comprehensive earnings 6,135 11,313
---------------------
Total stockholders' equity 223,949 230,339
---------------------
Total liabilities and stockholders' equity $539,384 $500,457
=====================
See notes to consolidated financial statements.
NBTY, Inc. and Subsidiaries
Consolidated Statements of Income
Years ended September 30, 1999, 1998 and 1997
(Dollars and shares in thousands, except per share amounts)
1999 1998 1997
Net