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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, 2000.
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)
(631) 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment of this Form 10-K [X].
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing price of shares of Common Stock on
the National Association of Securities Dealers Automated Quotation
("NASDAQ") National Market System at December 7, 2000 was approximately
$256,552,600. On such date, the closing price of the Registrant's Common
Stock as reported by NASDAQ, was $5.03. The number of shares of Common
Stock of the Registrant outstanding at December 7, 2000 was approximately
68,289,000.
Documents Incorporated by Reference: None
NBTY, INC.
2000 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
i
Inflation 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
ii
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. 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 of borrowings and
unavailability of additional debt or equity capital; (ix) changes in
general worldwide economic and political conditions in the markets in which
the Company may compete from time to time; (x) the inability of the Company
to assimilate acquisitions into the mainstream of its business; (xi)
exposure to, expense of defending and resolving, product liability claims
and other litigation; (xii) the Company's inability to manage growth and
execute its business plan; (xiii) the ability of the Company to manage its
retail operations efficiently; (xiv) consumer acceptance of the Company's
products; (xv) the ability of the Company to renew leases on its retail
locations; (xvi) the Company's ability to consummate future acquisitions;
(xvii) the absence of clinical trials for many of the Company's products;
(xviii) sales and earnings volatility; (xix) the Company's ability to
manufacture its products efficiently; (xx) the rapidly changing nature of
the internet and on-line commerce; (xxi) fluctuations in foreign
currencies, and more particularly the British Pound; (xxii) import-export
controls on sales to foreign countries; (xxiii) the inability of the
Company to secure favorable new sites for, and delays in opening, new
retail locations; (xxiv) unavailability of, or inability to consummate,
advantageous acquisitions in the future; (xxv) the mix of the Company's
products and the profit margins thereon; (xxvi) the availability and
pricing of raw materials; (xxvii) other factors beyond the Company's
control; and (xxviii) factors discussed in the Company's filings with the
Securities and Exchange Commission.
Readers are cautioned not to place undue reliance on forward-looking
statements. The Company undertakes no obligation to republish or revise
forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrences of unanticipated events.
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
1
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's
Pride/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 500 located
strategically throughout the United States(1), Guam and Puerto Rico; (iii)
Holland & Barrett retail stores of which there are currently 432 located
strategically throughout the United Kingdom; and (iv) wholesale
distribution to drug store chains, supermarkets, independent pharmacies and
health food stores primarily under the Nature's Bounty brand and through a
network marketing program. NBTY currently manufactures approximately 90%
of the nutritional supplements it sells.
[FN]
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which includes 14 Nutrition Warehouse retail stores owned and
operated by the Company.
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 Holland & Barrett, which was purchased in 1997. 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's Pride direct response sales. NBTY expects to
continue to strengthen its e-commerce/direct response sales by:(i)
improving automated picking and packing to fulfill sales order requests
with greater speed and accuracy; (ii) increasing manufacturing capability
to quickly introduce and deliver new products in response to customer
demand; (iii) using more frequent
2
promotions to further improve response rates; and (iv) promoting 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 similar or complementary products and which the Company
believes it can integrate into its own operations without adding substantial
overhead expenses.
Increase Retail Sales in the U.S. and U.K. In order to increase
retail sales, NBTY is actively and strategically expanding its Vitamin
World stores in the U.S. and selectively expanding its Holland & Barrett
stores in the U.K. During calendar year 2000, the Company opened a total of
139 Vitamin World and Nutrition Warehouse stores to increase its
penetration into regional malls and factory outlets. To date, the Company
has more than 930 retail vitamin stores in operation, approximately 500 in
the U.S. and 432 in the U.K.
Integrate Strategic Acquisitions. NBTY completed the acquisition of
Nutrition Warehouse, Inc. and affiliated companies at the end of 1999 and
acquired the assets of: SDV Vitamins, a division of Rexall Sundown, Inc.,
Healthwatchers System and Feeling Fine Company in the year 2000. NBTY has
integrated Nutrition Warehouse mail order operations by: (i) merging
customer lists into the Company's computerized mailing list; (ii) expanded
product lines; (iii) redesigned mail order catalogs; (iv) re-priced certain
products; and (v) implemented proven marketing techniques. The Company
intends to continue to pursue acquisition opportunities, 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, on Long Island, New York,
is capable of producing five billion soft gel capsules per year. The
Company regularly evaluates its operations and makes investments in
building infrastructure, as necessary, to support its continuing growth.
Experienced Management Team. The Company's management team has
extensive experience in the nutritional supplement industry and has
developed long-standing relationships with its suppliers and its customers.
The executive officers and directors have an average of approximately 20
years with the Company.
Industry Overview
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.
3
The Company's principal executive offices are located at 90 Orville
Drive, Bohemia, New York 11716 and its telephone number is 631-567-9500.
The Company's United Kingdom subsidiary, Holland & Barrett, has its
principal executive office in Nuneaton, United Kingdom.
Marketing and Distribution
The Company operates in four reportable business segments: Puritan's
Pride/direct response, U.S. retail, U.K. retail, and wholesale (which
include 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,
1998 1999 2000
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Puritan's Pride/direct response 33% 28% 25%
Retail: U.S. 12% 17% 21%
U.K. 32% 35% 34%
Wholesale 23% 20% 20%
Puritan's Pride/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.
Through its Puritan's Pride and Nutrition Headquarters brands, NBTY
is the leader in the U.S. direct response nutritional supplement industry
with over six million customers and with response rates which management
believes to be above the industry average. The Company mails its catalogs
approximately eight times a year. NBTY intends to continue to appeal to
new customers in its direct response operation through aggressive marketing
techniques both in the U.S. and the U.K., and through selective
acquisitions.
In order to maximize sales per catalog and reduce mailing and
printing costs, the Company regularly updates its mail order list to
include new customers and to eliminate those who have not placed an order
within a designated period of time. In addition, in order to add new
customers to its mailing lists and websites and to increase average order
sizes, the Company places advertisements in newspaper supplements, conducts
insert programs with other mail order companies and has special promotions
on a quarterly basis which offer customers combinations of products and
quantities at promotional prices. The Company's use of state-of-the-art
equipment in its catalog operations, such as computerized co-mailing,
address bar coding and automated picking and packing systems enables the
Company to fill orders typically within 48 hours of their
4
receipt. The Company's position as a leading direct response nutritional
supplement distributor and its utilization of state-of-the-art picking and
packing 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 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 stores. This website provides
the consumer with information concerning the products offered in the
Company owned and operated stores and with information about store
locations.
* Retail U.S. The Company is on target for operating approximately
500 stores located in 45 states, Guam and Puerto Rico, under the name
Vitamin World by the end of calendar 2000. Such locations carry a full
line of the Company's products under the Vitamin World brand name and also
carry products manufactured by others. Through direct interaction between
the Company's personnel and the public, the Company is able to identify
buying trends, customer preferences or dislikes, acceptances of new
products and price trends in various regions of the country. This
information is useful in initiating sales programs for all divisions of the
Company.
* Retail U.K. Holland & Barrett ("H&B") is one of the leading
nutritional supplement retailers in the United Kingdom, presently having
432 locations. 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). During the 2000 fiscal year, the Company built a 146,000 square
foot warehouse in the U.K. 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 many stores, including leading drug store chains and
supermarkets, independent pharmacies, health food stores, health food store
wholesalers and other retailers such as mass merchandisers. The Nature's
Bounty brand is sold to drug store chains and drug wholesalers. The
Company sells a full line of products to supermarket chains and wholesalers
under the brand name Natural Wealth at prices designed for the "price
conscious" consumer. The Company sells directly to health food stores
under the brand name Good 'N Natural and sells products, including a
specialty line of vitamins, to health food wholesalers under the brand name
American Health. The Company has expanded sales of various products to
many countries throughout Europe, Asia and Latin America. In 1999, NBTY
established Dynamic Essentials (DE), Inc. ("DEI"), a company in the Network
Marketing industry comprised of approximately 3,000 independent
distributors, marketing nutritional and personal care products throughout
the United States. DEI represents a strategic opportunity for NBTY to
establish an additional
5
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. Additionally, DEI utilizes innovative production
techniques including an industry first SuperFresh Nitrogen Packaging, which
is a modified atmosphere packaging process.
Sales, Marketing and Advertising
The Company has approximately 2,460 sales associates located
throughout the U.S., Guam and Puerto Rico in its Vitamin World stores, and
60 associates who sell to NBTY's wholesale distributors and approximately
3,000 network marketing distributors. In addition, NBTY sells through
commissioned sales representative organizations. For the fiscal years
ended September 30, 1999 and 2000, NBTY spent approximately $33 million and
$34 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
approximately 3,000 associates, with approximately 2,752 in retail, 121 in
distribution and 120 in administration. H&B runs advertisements in
national newspapers. H&B conducts sales promotions and publishes 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
The Company employs approximately 1,804 manufacturing, shipping and
packaging associates throughout the United States. 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 technicians assay
the production against the manufacturer's certificate of analysis. Once
cleared, a lot number is assigned, samples are retained and the material is
processed by formulating, mixing and granulating, compression and sometimes
coating operations. After the tablet is manufactured, laboratory
technicians test its weight, purity, potency, dissolution and stability.
When products such as vitamin tablets are ready for bottling, the Company's
automated equipment counts the tablets, inserts them into bottles, adds a
tamper-resistant cap with an inner safety seal and affixes a label. The
Company uses computer-generated documentation for picking and packing for
order fulfillment.
The principal raw materials used in the manufacturing process are
vitamins purchased from bulk manufacturers in the United States, Japan and
Europe. Raw materials are available from numerous sources. No one
supplier accounts for more than 10% of the Company's raw material
purchases.
The Company's manufacturing operations are designed to allow low cost
production of a wide variety of products of different quantities, sizes and
packaging while maintaining a high level of customer service and quality.
6
Flexible production line changeover capabilities and reduced cycle times
allow the Company to respond quickly to changes in manufacturing schedules.
Research and Development
In 2000, 1999 and 1998, the Company did not expend any significant
amounts for research and development of new products.
Inventory Control. The Company has installed inventory control
systems at its facilities that enable it to track each product as it is
received from its supply sources through manufacturing and shipment to its
customers. To facilitate this tracking, a significant number of products
sold by the Company are bar coded. The Company's inventory control systems
report shipping, sales and individual SKU level inventory information. The
Company manages the retail sales process by monitoring customer sales and
inventory levels by product category. The Company believes that its
distribution capabilities enable it to increase flexibility in responding
to the delivery requirements of its customers.
Information from the Company's point-of-sale computer system is
regularly reviewed and analyzed by the purchasing staff to assist in making
merchandise allocation and markdown decisions. The Company uses an
automated reorder system to maintain in-stock positions on key items. These
systems provide management with the information needed to determine the
proper timing and quantity of reorders.
Financial Reporting. The Company's financial reporting systems
provide management with detailed financial reporting to support
management's operating decisions and cost control efforts. 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, highly fragmented in terms of
both geographical market coverage and product categories. The Company also
competes in the nutritional area with companies having 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.
7
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 pre-approval 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
8
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.
NLEA prohibits the use of any health claim (as distinguished from
"statements of nutritional support" permitted by DSHEA) for foods, unless
the health claim is supported by significant scientific agreement and is
pre-approved by the FDA.
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
9
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 record-keeping 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
10
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 record-keeping 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
11
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, North 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 relevant 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, and, more particularly, changes in the value
of the British pound.
Trademarks
U.S. The Company 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 maintained and renewed on a
timely basis and used properly as trademarks, subject to the rights of
third parties to seek cancellation of the trademarks if they claim priority
or confusion of usage. The Company regards its trademarks and other
proprietary rights as valuable assets and believes they have significant
value in the marketing of its products. The Company vigorously protects
its trademarks against infringement.
U.K. Operations. H&B owns trademarks registered with the appropriate
U.K. agencies for its Holland & Barrett trademark and has rights to use
other names essential to its business.
Associates
NBTY. As of September 30, 2000, NBTY (excluding H&B) employed
approximately 4,300 persons, of whom approximately 54 are in executive and
administrative capacities, 2,523 are in sales and 1,804 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.
12
H&B. During fiscal 2000, H&B employed an average of approximately
3,000 persons, of whom approximately 120 worked in executive or
administrative capacities, 121 worked in warehouse and distribution and
2,752 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
U.S. 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, 40,000
square feet in south Plainfield, New Jersey, and approximately 10,000
square feet of warehouse space in Reno, Nevada. The Company leases and
operates approximately 496 retail locations under the name Vitamin World
and Nutrition Warehouse in 45 States in the U.S. and Guam and Puerto Rico.
The stores have an average selling area of 1,200 to 1,500 square feet.
Generally, the Company leases the properties for three to five years at
annual base rents ranging from $12,000 to $94,000 and percentage rents in
the event sales exceed a specified amount.
U.K. Holland & Barrett leases all of the locations of its 432 retail
stores for terms varying between 10 and 25 years at varying rents. The
stores have an average selling area of 1,200 square feet. No percentage
rents are payable.
The following is a listing of all properties owned or leased by the
Company:
Type of Approx Leased
Location Facility Sq. Feet or Owned
- -------------------------------------------------------------------------------
UNITED STATES:
- --------------
Bohemia, NY Administration & Production 169,000 Owned
Bohemia, NY Manufacturing 80,000 Owned
Bohemia, NY Manufacturing 75,000 Owned
Holbrook, NY Warehouse & Distribution 230,000 Owned
Holbrook, NY Engineering 17,000 Owned
Ronkonkoma, NY Administration &
Distribution 110,000 Owned
Ronkonkoma, NY Warehouse 75,000 Leased
(term - October 2005)
Bayport, NY Production 17,500 Owned
Bayport, NY* Manufacturing 131,000 Owned
Mineola, NY Administrative 7,500 Owned
Reno, NV Warehouse 25,000 Leased
(term - June 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
(term - May 2006)
13
UNITED KINGDOM:
- ---------------
September 2011
Hinckley Warehouse & Administration 50,000 Leased
(term-October 2016)
Nuneaton Administration 9,000 Leased
(term-June 2012)
Burton Administration & Warehouse 146,000 Owned
* Situated on 62 acres owned by the Company, which allows for construction
of additional facilities, if required.
Warehousing and Distribution
The Company dedicated approximately 540,000 square feet to
warehousing and distribution in its Long Island, NY; Carbondale, IL; Reno,
NV; and Hinckley and Burton, U.K. facilities.
The Company's warehouse and distribution centers are efficiently
integrated with the Company's order entry systems to enable the Company to
ship out mail orders typically within 48 hours of their receipt. Once a
customer's telephone order is completed, the Company's computer system
forwards the order to the Company's distribution center, where all
necessary distribution and shipping documents are printed to facilitate
processing. Thereafter, the orders are prepared, picked, packed and shipped
continually throughout the day. The Company operates a proprietary, state-
of-the-art, automated picking and packing system for frequently shipped
items. The Company is capable of fulfilling 25,000 orders daily. A system
of conveyors automatically routes boxes carrying merchandise throughout the
distribution center for fulfillment of orders. Completed orders are bar-
coded and scanned and the merchandise and ship date are verified and
entered automatically into the customer order file for access by sales
associates prior to being shipped. The Company ships its orders primarily
through the U.S. Postal Service, serving domestic and international
markets.
The Company currently distributes its products from its distribution
centers through contract and common carriers in the U.S. and by Company
owned trucks in both the U.S. and the U.K. Deliveries are made directly to
Company owned and operated Vitamin World and Nutrition Warehouse stores
once per week. In addition, the Company ships products overseas by
container loads. The Company also operates additional distribution centers
in Burton, U.K. Deliveries are made directly to Company owned and operated
Holland & Barrett stores twice per week.
Item 3. LEGAL PROCEEDINGS
A consolidated stockholder class action is pending against the
Company and certain of its officers and directors in the U. S. District
Court of the Eastern District of New York, on behalf of stockholders who
purportedly purchased shares of the Company between January 27, 2000 and
June 15, 2000 (the "Class Period"). The class action alleges that the
Company and individuals failed to disclose
14
material facts during the Class Period that resulted in a decline in the
price of the Company's stock after June 15,2000.
In addition to the consolidated class actions, two stockholder
derivative actions were filed in 2000 in the Chancery Court in Delaware
against certain officers and directors. The derivative claims, which are
expected to be consolidated in the Delaware Court, are predicated upon the
stockholder class actions pending in New York.
The Company and the named individuals deny all claims of wrongdoing
and intend to defend the actions vigorously. However, no determination can
be made as to the final outcome. The Company maintains policies of
directors and officers professional liability insurance.
Miscellaneous Claims and Litigation. The Company is involved in
miscellaneous claims and litigation, which taken individually or in the
aggregate, would not materially impact the Company's financial position,
results of operations or its business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
[Not applicable.]
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
considers appropriate.
PRICE RANGE OF COMMON STOCK
The Common Stock is traded in the over-the-counter market and is
included for quotation on the National Association of Securities Dealers
National Market System under the trading symbol "NBTY". The following
table sets forth, for the periods indicated, the high and low closing sale
prices for the Common Stock, as reported on NASDAQ/NMS:
15
Fiscal year ended September 30, 2000
High Low
First Quarter 12.50 6.75
Second Quarter 16.00 9.94
Third Quarter 19.06 5.94
Fourth Quarter 7.88 5.75
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
On December 7, 2000, the closing sale price of the Common Stock was
$5.03. There were approximately 990 record holders of Common Stock as of
December 7, 2000. The Company believes that there were in excess of 10,000
beneficial holders of Common Stock as of such date.
16
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars and shares in thousands, except per share amounts)
1996 1997 1998 1999 2000
----------------------------------------------------------------
Selected Income Statement Data:
Net sales $265,670 $355,336 $572,124 $630,894 $720,856
Costs & expenses:
Cost of sales 138,186 177,909 271,233 293,521 312,960
Catalog printing, postage &
promotion 26,695 27,932 32,176 32,895 33,709
Selling, general &
administrative 68,414 96,653 190,276 236,367 279,379
Recovery of raw material costs (2,511)
Litigation settlement costs 6,368 4,952
Merger costs 3,528
----------------------------------------------------------------
Income from operations 32,375 46,474 74,911 63,159 97,319
Interest expense, net (2,431) (7,471) (16,518) (18,945) (18,858)
Other, net 1,430 1,817 3,921 1,388 4,491
----------------------------------------------------------------
Income before income taxes 31,374 40,820 62,314 45,602 82,952
Income taxes 9,168 11,694 23,474 18,323 31,444
----------------------------------------------------------------
Net income $ 22,206 $ 29,126 $ 38,840 $ 27,279 $ 51,508
================================================================
17
Per Share Data:
Net income per common share:
Basic $ 0.35 $ 0.45 $ 0.59 $ 0.39 $ 0.77
Diluted $ 0.32 $ 0.42 $ 0.56 $ 0.39 $ 0.74
Weighted average common shares
outstanding (000):
Basic 64,197 64,611 65,563 69,640 67,327
Diluted 68,699 68,935 69,847 70,826 69,318
Selected Balance Sheet Data:
Working capital $ 57,559 $ 70,850 $ 89,106 $121,103 $100,114
Total assets 171,948 571,177 500,457 539,384 603,613
Long-term debt, capital lease obligations
and promissory notes payable, less current
portion 23,570 341,159 173,531 219,508 200,478
Total stockholders' equity 107,645 131,291 230,339 223,949 272,443
18
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 17 companies participating in
the direct response, retail and manufacturing of the nutritional supplement
sector, including Holland & Barrett in August 1997, Nutrition Headquarters
Group in 1998 and Nutrition Warehouse Group in fiscal 2000.
In January 2000, NBTY completed the acquisition of a group of
affiliated, privately-held companies located in Long Island, New York
operating under the trade name of Nutrition Warehouse. The purchase price
consisted of $20 million in cash and 1,059,000 shares of NBTY common stock.
Nutrition Warehouse was comprised of a mail order operation and 14 retail
stores. The acquisition was accounted for as a purchase.
NBTY markets its multi-branded products through four distribution
channels: (i) Puritan's Pride/direct response, (ii) Retail-Company owned
and operated Vitamin World retail stores in the U.S., (iii) Company owned
and operated Holland & Barrett retail stores in the U.K., and (iv)
wholesale distribution to drug store chains, supermarkets, discounters,
independent pharmacies, health food stores and network marketing. NBTY's net
sales from Puritan's Pride/direct response, retail-U.S., retail-U.K. and
wholesale operations were approximately 25%, 21%, 34% and 20%, respectively,
for the year ended September 30, 2000.
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 direct response/e-commerce
and retail sales have typically been higher than gross margins from wholesale
sales.
Results of Operations
The following table sets forth income statement data of the Company
as a percentage of net sales for the periods indicated:
Fiscal Years Ended September 30,
--------------------------------
1998 1999 2000
------------------------
Net Sales 100% 100% 100%
19
Costs and Expenses:
Cost of sales 47.4 46.5 43.3
Catalog printing & promotion 5.6 5.2 4.7
Selling, general & administrative 33.3 37.5 38.8
Litigation 0.0 0.8 (0.3)
Merger-related costs 0.6 0.0 0.0
-----------------------
86.9 90.0 86.5
-----------------------
Income from operations 13.1 10.0 13.5
Interest expense & other, net (2.2) (2.8) (2.0)
-----------------------
Income before income taxes 10.9 7.2 11.5
Income taxes 4.1 2.9 4.4
-----------------------
Net Income 6.8% 4.3% 7.1%
=======================
Fiscal Year Ended September 30, 2000 Compared to Year Ended September 30,
1999
Net Sales. Net Sales for fiscal 2000 were $721 million, an increase
of $90 million or 14% compared with net sales of $631 million in fiscal
1999. Of the $90 million increase, $46 million was attributable to retail-
U.S. sales, $28 million was attributable to retail-U.K. sales, $9 million in
wholesale and $7 million direct response/e-commerce. During 2000, the
Company opened 139 stores which contributed $20 million in increased sales in
the U.S. and 3 stores in the U.K. The acquisition of Nutrition Warehouse
accounted for $7 million of the increase in retail U.S. sales.
Cost of Sales. Cost of Sales for fiscal 2000 was $313 million, an
increase of $19 million compared with the cost of sales of $294 million for
fiscal 1999. As a percentage of sales, cost of sales decreased and,
correspondingly, gross profit increased to 56.6% for 2000 from 53.5% for
1999. Such increase was due to various factors including: (i) lower
manufacturing costs resulting from increased productivity at the Company's
manufacturing facilities; (ii) increased sales of new products, which
typically have higher gross margins; and (iii) 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
for both 2000 and 1999, which is principally the result of the Company
utilizing the gross profit method for interim reporting, and the year-end
valuation of the Company's annual physical inventory.
Catalog, Printing, Postage and Promotion. Catalog, printing, postage
and promotion expenses were $34 million and $33 million for fiscal 2000 and
1999, respectively. Such costs as a percentage of net sales were 4.7% for
2000 and 5.2% for 1999. The decreased percentage was due to more efficient
printing and mailing methods of the Company's catalog operation and
increased sales.
Selling, General and Administrative. Selling, general and
administrative expenses for fiscal 2000 were $279 million, an increase of
$43 million, compared with $236 million for fiscal 1999. As a percentage of
sales, selling, general and administrative expenses were 38.8% and 37.5% in
20
2000 and 1999, respectively. Of the $43 million increase, $11 million
was attributable to rent expense, $17 million to payroll costs mainly
associated with the retail-U.S. expansion program and $5 million was
attributable to an increased depreciation expense as a result of the
increase in capital expenditures.
Recovery of raw materials costs. The Company received $2,511 in
partial settlement of ongoing price fixing litigation brought by the
Company against certain raw material vitamin suppliers.
Interest Expense, Net. Interest expense was $19 million in fiscal
2000, the same amount as in fiscal 1999.
Income Taxes. The Company's effective tax rate was 38.0% in fiscal
2000 and 40.2% in fiscal 1999. Such reduction is principally due to an
increase in retail sales at Holland & Barrett, which has a lower effective
tax rate than domestic sales.
Net Income. Net income for fiscal 2000 was $52 million, compared
with $27 million in fiscal 1999, an increase of $25 million.
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's
Pride/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's Pride/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
21
$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.
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 $51.7 million for fiscal 2000, of which
approximately $36.2 million was associated with the Company's retail
expansion program.
Working capital decreased $21 million to $100 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, anticipated 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 for $135,000. On
July 17, 2000, the CGA was amended to $149,300. The CGA is comprised of
two Revolving Credit Agreements of $50,000 each and a term loan of $49,300.
At September 30, 2000, there were borrowings of $54,100 under this
facility. In January 2000, the Company borrowed $20,000 for the cash
portion of the January 3, 2000 acquisition of Nutrition Warehouse, Inc.
For the fiscal year
22
ended September 30, 2000, the Company paid down $35,400 and borrowed $34,000
under this facility. Virtually all the Company's assets are collateralized
under the CGA.
The Company utilized the CGA to buy back 288 shares ($2,511) during
fiscal 2000 and 5,702 shares ($34,438) during fiscal year 1999 of its
common stock under its stock purchase plan.
The Company's debt instruments impose certain restrictions on the
Company regarding capital expenditures and limit the Company's ability to:
incur additional indebtedness, dispose of assets, make repayments of
indebtedness or amendments of debt instruments, pay distributions, create
liens on assets and enter into sale and leaseback transactions,
investments, loans or advances and acquisitions. Such restrictions could
limit the Company's ability to respond to market conditions, to provide for
unanticipated capital investments or to take advantage of business or
acquisition opportunities.
Inflation
Inflation has not had a significant impact on the Company in the past
three years nor is it expected to have a significant impact in the
foreseeable future.
Year 2000
The Company will continue to monitor its business processes and third
parties for potential problems that could arise during the calendar year
2000. Based on the Company's preparations prior to January 1, 2000 and the
absence of any problems to date, no significant disruptions are
anticipated.
New Accounting Standards
In December 1999, the Securities and Exchange Commission staff issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," ("SAB 101"). SAB 101 does not change existing revenue
recognition rules, but rather addresses and clarifies existing rules and
their application. SAB 101 is effective for the Company beginning July 1,
2001 or fourth quarter of fiscal 2001. Management is currently assessing
the impact of SAB 101 on the Company's results of operations and financial
position.
The Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" in June 1998
("SFAS 133"). This statement, as amended, is effective in fiscal years
beginning after June 15, 2000, although early adoption is permitted. This
statement requires the recognition of the fair value of any derivative
financial instruments on the balance sheet. Changes in fair value of the
derivative and, in certain instances, changes in the fair value of an
underlying hedged asset or liability, are recognized through either income
or as a component of other comprehensive income. The adoption of SFAS 133
is not expected to have a significant impact on the Company's financial
position or results of operations.
During 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-14,
"Accounting for Certain Sales Incentives", which addresses the recognition,
measurement and income
23
statement classification for sales incentives offered voluntarily without
charge to customers that can be used in, or that are exercisable by a
customer as a result of, a single exchange transaction. EITF 00-14
requires that costs relating to sales incentives, be classified as a
reduction of revenue, and not in marketing or selling expenses. The Company
will adopt EITF 00-14 effective April 1, 2001. Management does not believe
that the adoption of EITF 00-14 will have a material impact on the Company's
results of operations or presentation thereof.
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
Set forth below are the names and other relevant information
regarding executive officers and directors of the Company as of December 1,
2000. Their positions and tenure are as follows:
24
Year Commenced
first term of
elected office as
Name Age Position Director Officer
- --------------------------------------------------------------------------------
Scott Rudolph 43 Chairman of
the Board, Chief
Executive Officer,
and President 1986 1986
Harvey Kamil 56 Executive Vice
President,
Secretary ---- 1982
Michael C. Slade 51 Senior Vice President-
Strategic Planning,
Director 1998 1999
James P. Flaherty 43 Vice President-
Advertising ---- 1988
William J. Shanahan 42 Vice President-
Data Processing ---- 1988
Arthur Rudolph 72 Director 1971 1971
Aram Garabedian 65 Director 1971 ----
Bernard G. Owen 72 Director 1971 ----
Alfred Sacks 73 Director 1971 ----
Murray Daly 73 Director 1971 ----
Glenn Cohen 41 Director 1988 ----
Bud Solk 66 Director 1994 ----
25
Nathan Rosenblatt 43 Director 1994 ----
Michael L. Ashner 47 Director 1998 ----
26
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 a shareholder of the Company. He is the Vice
Chairman of Dowling College, Long Island, New York. He joined NBTY
in 1986. He is the son of Arthur Rudolph.
Harvey Kamil is the Executive Vice President, Chief Financial Officer
and Secretary. He is on the Board of Directors of the Council for
Responsible Nutrition and is on the Board of Directors of the
National Nutritional Food Association. He joined NBTY in 1982.
James P. Flaherty is the Vice President of Advertising. He joined
NBTY in 1979.
William J. Shanahan is the Vice President of Data Processing. He
joined NBTY in 1980.
Michael 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 founded the Company in 1971. He served as
NBTY's Chief Executive Officer and Chairman of the Board of Directors
since that date until his resignation in September 1993. He remains
a member of the Board of Directors and a consultant to the Company.
He is the father of Scott Rudolph.
Aram Garabedian was elected a State Senator of the Commonwealth of
Rhode Island in 2000 and had been a representative in that State's
legislature from 1972 through 1978, 1998 through 2000. Since 1988,
he has been 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.
Bernard G. Owen has been associated with Cafiero, Cuchel and Owen
Insurance Agency, Pitkin, Owen Insurance Agency and Wood-HEW Travel
Agency for more than the past 5 years. He currently serves as
Chairman of these firms.
Alfred Sacks has been engaged as President of Al Sacks, Inc., an
insurance agency for the past 30 years.
Murray Daly, formerly a Vice President of J. P. Egan Office Equipment
Co., has been a consultant to the office equipment industry for more
than 5 years.
Glenn Cohen is the President of Glenn-Scott Landscaping and Design
and has served in that capacity for more than 5 years.
27
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 and has served in that capacity for
more than 5 years.
Michael L. Ashner is President and Chief Executive Officer of
Winthrop Financial Assoc., a firm engaged in the organization and
administration of real estate limited partnership and has served in
that capacity for more than 5 years.
28
Item 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation
paid or accrued by the Company during the period ended September 30, 2000
to the Company's Chief Executive Officer and certain other highest
compensated executive officers of the Company whose total compensation
exceeded $100,000.
SUMMARY COMPENSATION TABLE
Long-Term 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 2000 621,792 425,000 1,000,000 7,316
Chairman of the Board, 1999 609,600 500,000 260,000 4,801
President and Chief 1998 600,008 400,000 1,050,000 7,672
Executive Officer ---------
Harvey Kamil 2000 310,896 200,000 250,000 7,316
Executive Vice President, 1999 304,800 225,000 250,000 4,801
Chief Financial Officer 1998 300,000 225,000 150,000 7,672
-------
Michael C. Slade 2000 300,000 50,000 30,000 7,316
Senior Vice President 1999 275,000 ------- ------- 3,312
Strategic Planning 1998 ------- ------- ------- -----
James Flaherty 2000 185,000 75,000 30,000 7,316
Vice President 1999 174,700 75,000 20,000 4,801
Marketing & Advertising 1998 167,500 75,000 30,000 7,672
------
William Shanahan 2000 165,000 70,000 20,000 7,316
Vice President 1999 152,000 60,000 20,000 4,801
Data Processing 1998 146,000 60,000 30,000 7,672
------
29
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 and founder of the Company. The agreement has
been renewed for successive one year terms to provide services through
December 31, 2001 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. Mr. Slade
has exercised his option to renew through 2001.
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
30
Security ownership of persons owning of record, or beneficially, 5% or more
of the outstanding Common Stock, as of December 15, 2000. 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 12,670,126 18.6
Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock NBTY, Inc. 3,095,109 4.5
(Par Value Employee Stock Record and
$.008) Ownership Plan 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) 12,670,126 18.6
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Harvey Kamil 1,541,725 2.3
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Arthur Rudolph 1,586,893 2.3
(Par value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Michael Slade 2,200,698 3.1
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
31
Common Stock James Flaherty 131,750 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock William Shanahan 205,000 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Aram Garabedian 96,000 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Bernard G. Owen 69,400 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Alfred Sacks 95,000 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Murray Daly 88,000 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Glenn Cohen 60,000 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Bud Solk 80,000 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 65,000 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock All Directors & 18,919,592 27.60
(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
32
benefit of Scott Rudolph and others.
Includes 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
- -----------------------------------------
Less than 2 0%
2 but less than 3 20%
3 but less than 4 20%
4 but less than 5 20%
5 but less than 6 20%
6 or more 20%
Distribution
If an associate retires, is disabled, dies or his or her employment
is otherwise terminated, that associate or that associate's estate will
receive the vested portion held in trust for such associate.
At the end of the vesting period, the associates become full
beneficial owners of the stock. There is no tax consequence attached to
his or her Plan for an associate until that associate sells the shares, at
which
33
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, 2000, the following
transactions occurred:
A. Gail Radvin, Inc., a corporation wholly-owned by Gail Radvin,
received commissions from the Company totaling $520,000 on account of
sales in certain foreign countries and had trade receivable balances of
approximately $2.5 million as of September 30, 2000. 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.
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 in compensation.
D. Arthur Rudolph, a director, has been retained under a
Consulting Agreement, at a minimum annual fee of $400,000, payable monthly,
which Agreement has been renewed until December 31, 2001.
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
34
Consolidated Balance Sheets as of
September 30, 2000 and 1999 F-2
Consolidated Statements of Income for the years
ended September 30, 2000, 1999 and 1998 F-3
Consolidated Statements of Stockholders' Equity
for the years ended September 30, 2000, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for the years
ended September 30, 2000, 1999 and 1998 F-5 to F-6
Notes to Consolidated Financial Statements F-7 to F-23
2. Financial Statement Schedule
Schedule II S-1
3. Exhibits
11. Statement Re: Computation of Earnings Per Share
35
Item 8 Financial Statements and Supplementary Data
Report of Independent Accountants
To the Board of Directors and Stockholders of NBTY, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 34, present fairly, in all material
respects, the financial position of NBTY, Inc. and Subsidiaries at
September 30, 2000 and 1999, and the results of their operations and their
cash flows for each of the three years in the period ended September 30,
2000 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial
statement schedule listed in the index appearing under Item 14(a)(2) on
page 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 of America which require that we plan and
perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
November 14, 2000
New York, New York
F-1
NBTY, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2000 and 1999
(Dollars and shares in thousands)
- ---------------------------------------------------------------------------
Assets 2000 1999
Current assets:
Cash and cash equivalents $ 31,464 $ 18,269
Accounts receivable, less allowance for doubtful
accounts of $1,227 in 2000 and $1,248 in 1999 24,913 24,336
Inventories 130,741 135,466
Deferred income taxes 3,549 3,250
Prepaid expenses and other current assets 20,269 19,243
----------------------
Total current assets 210,936 200,564
Property, plant and equipment, net 214,164 189,562
Intangible assets, net 172,124 141,410
Other assets 6,389 7,848
----------------------
Total assets $603,613 $539,384
======================
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt and capital
lease obligations $ 12,829 $ 1,799
Accounts payable 61,100 45,366
Accrued expenses 36,893 32,296
----------------------
Total current liabilities 110,822 79,461
Long-term debt 199,095 217,136
Obligations under capital leases 1,383 2,372
Deferred income taxes 17,050 12,233
Other liabilities 2,820 4,233
----------------------
Total liabilities 331,170 315,435
----------------------
Commitments and contingencies (Notes 11 and 15)
Stockholders' equity:
Common stock, $.008 par; authorized 175,000 shares
in 2000 and 1999; issued 68,524 shares in 2000
and 66,096 shares in 1999 and outstanding 68,289
shares in 2000 and 66,096 shares in 1999 548 529
Capital in excess of par 123,798 106,332
Retained earnings 163,300 111,792
----------------------
287,646 218,653
Less, 235 treasury shares at cost, in 2000 (1,512)
Stock subscriptions receivable (839) (839)
Accumulated other comprehensive (loss) earnings (12,852) 6,135
----------------------
Total stockholders' equity 272,443 223,949
----------------------
Total liabilities and stockholders' equity $603,613 $539,384
=====================
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
NBTY, Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended September 30, 2000, 1999 and 1998
(Dollars and shares in thousands, except per share amounts)
- ---------------------------------------------------------------------------
2000 1999 1998
Net sales $720,856 $630,894 $572,124
------------------------------------
Costs and expenses:
Cost of sales 312,960 293,521 271,233
Catalog printing, postage and promotion 33,709 32,895 32,176
Selling, general and administrative 279,379 236,367 190,276
Recovery of raw material costs (2,511)
Litigation settlement costs 4,952
Merger related costs 3,528
------------------------------------
623,537 567,735 497,213
------------------------------------
Income from operations 97,319 63,159 74,911
------------------------------------
Other income (expense):
Interest, net (18,858) (18,945) (16,518)
Miscellaneous, net 4,491 1,388 3,921
------------------------------------
(14,367) (17,557) (12,597)
------------------------------------
Income before income taxes 82,952 45,602 62,314
Income taxes 31,444 18,323 23,474
------------------------------------
Net income $ 51,508 $ 27,279 $ 38,840
====================================
Net income per share:
Basic $ 0.77 $ 0.39 $ 0.59
Diluted $ 0.74 $ 0.39 $ 0.56
Weighted average common shares outstanding:
Basic 67,327 69,640 65,563
Diluted 69,318 70,826 69,847
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
NBTY, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years Ended September 30, 2000, 1999 and 1998
(Dollars and shares in thousands)
- ---------------------------------------------------------------------------
Accumulated
Other
Common Stock Treasury Stock Compre- Total
----------------- Capital ----------------- Stock hensive Total Compre-
Number of in Excess Retained Number of Subscriptions Income Stockholders' hensive
Shares Amount of Par Earnings Shares Amount Receivable (Loss) Equity Income
--------- ------ --------- -------- --------- ------ ------------- ------------ ------------- -------
Balance, September
30, 1997 23,041 $185 $ 56,550 $ 75,199 1,503 $ (3,206) $ - $ 2,563 $131,291
Net income for year
ended September
30, 1998 38,840 38,840 $ 38,840
S corporation
distributions (8,050) (8,050)
Exercise of stock
options 44 40 40
Three-for-one
stock split
effected in the
form of a 200%
stock dividend 46,169 369 (369) 3,008 -
Exercise of stock
options 10 3 3
Tax benefit from
exercise of stock
options 611 611
Public offering
of common stock 3,450 28 58,826 58,854
Foreign currency
translation
adjustment 8,750 8,750 8,750
------------------------------------------------------------------------------------------------------------
Balance, September
30, 1998 72,714 582 115,661 105,989 4,511 (3,206) - 11,313 230,339 $ 47,590
========
Net income for year
ended September
30, 1999 27,279 27,279 $ 27,279
Purchase of treasury
shares, at cost 5,702 (34,438) (34,438)
Treasury stock
retired (10,213) (82) (16,086) (21,476) (10,213) 37,644 -
Exercise of stock
options 3,595 29 888 (839) 78
Tax benefit from
exercise of stock
options 5,869 5,869
Foreign currency
translation
adjustment (5,178) (5,178) (5,178)
------------------------------------------------------------------------------------------------------------
Balance, September
30, 1999 66,096 529 106,332 111,792 - - (839) 6,135 223,949 $ 22,101
========
Net income for year
ended September
30, 2000 51,508 51,508 $ 51,508
Purchase of treasury
shares, at cost 288 (2,511) (2,511)
Acquisition of
Nutrition Warehouse 1,059 8 12,235 12,243
Treasury stock
retired (53) (999) (53) 999 -
Exercise of stock
options 1,422 11 4,397 4,408
Tax benefit from
exercise of
stock options 1,833 1,833
Foreign currency
translation
adjustment (18,987) (18,987) (18,987)
------------------------------------------------------------------------------------------------------------
Balance, September
30, 2000 68,524 $548 $123,798 $163,300 235 $(1,512) $(839) $(12,852) $272,443 $ 32,521
===========================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
NBTY, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended September 30, 2000, 1999 and 1998
(Dollars in thousands)
- ---------------------------------------------------------------------------
2000 1999 1998
Cash flows from operating activities
Net income $ 51,508 $ 27,279 $ 38,840
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of product line (2,563)
Loss on disposal/sale of property, plant
and equipment 1,119 401 587
Depreciation and amortization 38,501 29,228 22,059
Amortization of deferred financing costs 787 683 704
Amortization of bond discount 124 124 119
Allowance for doubtful accounts 21 11 38
Deferred income taxes 4,827 2,892 2,139
Tax benefit from exercise of stock options 1,833 5,869 611
Changes in assets and liabilities, net of acquisitions:
Accounts receivable 5,803 11,155 (2,673)
Inventories 8,039 (16,785) (31,890)
Prepaid real estate tax, catalog costs and other
current assets 1,914 (7,870) 5,178
Other assets 417 1,323 2,938
Accounts payable 6,093 (16,588) (1,133)
Accrued expenses 2,643 1,193 (3,962)
Other liabilities (211) 1,240
-------------------------------------
Net cash provided by operating activities 123,418 38,915 32,232
-------------------------------------
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired (45,119)
Purchase of property, plant and equipment (51,786) (45,810) (68,044)
Increase in intangible assets (513) (7,171)
Proceeds from sale of property, plant and equipment 256 493
Proceeds from sale of short-term investments 8,362
Proceeds from sale of product line 4,640
-------------------------------------
Net cash used in investing activities (96,649) (46,323) (61,720)
-------------------------------------
Cash flows from financing activities:
Net proceeds under line of credit agreement 2,800 46,193 8,000
Proceeds from public offering, less expenses 58,854
Cash held in escrow 144,262
Principal payments under long-term debt agreements
and capital leases (17,667) (1,365) (8,012)
Purchase of treasury stock (1,512) (34,438)
Proceeds from stock options exercised 4,408 78 43
Distributions to stockholders (8,050)
Repayment of promissory note (169,909)
-------------------------------------
Net cash (used in) provided by financing activities (11,971) 10,468 25,188
-------------------------------------
Effect of exchange rate changes on cash and cash equivalents (1,603) 901 (1,654)
-------------------------------------
Continued
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
NBTY, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
September 30, 2000, 1999 and 1998
(Dollars in thousands)
- ---------------------------------------------------------------------------
2000 1999 1998
Net increase (decrease) in cash and cash equivalents $ 13,195 $ 3,961 $ (5,954)
Cash and cash equivalents at beginning of year 18,269 14,308 20,262
-------------------------------------
Cash and cash equivalents at end of year $ 31,464 $ 18,269 $ 14,308
=====================================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 20,224 $ 18,320 $ 19,852
Cash paid during the period for income taxes $ 16,116 $ 8,785 $ 18,105
Non-cash investing and financing information:
In connection with the acquisition of Nutrition Warehouse, Inc. and its
affiliated companies, on January 1, 2000, the Company issued 1,059 shares
of NBTY stock having a market value of approximately $12,200 (Note 2).
During fiscal 2000 and 1999, the Company entered into a capital lease for
computer equipment for approximately $1,000 and $1,600, respectively.
In July 2000, the Company sold certain assets for approximately $650 in
exchange for a note to be paid over the next five years.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
NBTY, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
- ---------------------------------------------------------------------------
1. Business Operations and Summary of Significant Accounting Policies
Business operations
The Company (as defined below) manufactures and sells vitamins, food
supplements, and health and beauty aids primarily in the United States and
the United Kingdom. The processing, formulation, packaging, labeling and
advertising of the Company's products are subject to regulation by one or
more federal agencies, including the Food and Drug Administration, the
Federal Trade Commission, the Consumer Product Safety Commission, the
United States Department of Agriculture, the United States Environmental
Protection Agency and the United States Postal Service.
Within the United Kingdom, the manufacturing, advertising, sales and
marketing of food products is regulated by a number of governmental
agencies, including the Ministry of Agriculture, Fisheries and Food, the
Department of Health, the Food Advisory Committee and the Committee on
Toxicity.
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.
Principles of consolidation and basis of presentation
The consolidated financial statements of NBTY, Inc. and Subsidiaries
("NBTY") have been prepared to give retroactive effect to the merger
between Nutrition Headquarters, Inc., Lee Nutrition, Inc. and Nutro
Laboratories, Inc. (collectively, the "Nutrition Headquarters Group" and
with NBTY collectively, the "Company"), which has been accounted for as a
pooling of interests. On April 20, 1998, Nutrition Headquarters Group was
merged with and into NBTY. Under terms of the merger agreement, each share
of Nutrition Headquarters Group common stock was exchanged for
approximately 30 shares of NBTY's common stock with approximately 8,772
shares of NBTY's common stock exchanged for all the outstanding stock of
Nutrition Headquarters Group.
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated.
Revenue recognition
The Company recognizes revenue upon shipment or, with respect to its
own retail store operations, upon the sale of products. The Company has no
single customer that represents more than 10% of annual net sales or
accounts receivable as of and for the years ended September 30, 2000, 1999
and 1998.
F-7
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during
the reporting period. The most significant estimates include the valuation
of inventories, the allowance for doubtful accounts receivable and the
recoverability of long-lived assets. Actual results could differ from
those estimates.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined on the weighted average method which approximates first-in,
first-out basis. The cost elements of inventory include materials, labor and
overhead. In fiscal 2000 and 1999, no one supplier provided more than 10%
of purchases.
Prepaid catalog costs
Mail order production and mailing costs are capitalized as prepaid
catalog costs and charged to expense over the catalog period, which typically
approximates three months.
Advertising
All media and cooperative advertising costs are generally expensed as
incurred. Total expenses relating to advertising and promotion for fiscal
2000, 1999 and 1998 were $17,046, $13,323 and $16,356, respectively.
Included in prepaid expenses and other current assets is approximately
$1,172 and $1,185 relating to prepaid advertising at September 30, 2000 and
1999, respectively.
Property, plant and equipment
Property, plant and equipment are carried at cost. Depreciation is
provided on a straight-line basis over the estimated useful lives of the
related assets. Expenditures which significantly improve or extend the life
of an asset are capitalized. Amortization of leasehold improvements is
computed using the straight-line method over the shorter of the estimated
useful lives of the related assets or lease term.
Maintenance and repairs are charged to expense in the year incurred.
Cost and related accumulated depreciation for property, plant and equipment
are removed from the accounts upon sale or disposition and the resulting gain
or loss is reflected in earnings.
Intangible assets
Goodwill represents the excess of purchase price over the fair value
of identifiable net assets of companies acquired. Goodwill and other
intangibles are amortized on a straight-line basis over periods not
exceeding 40 years.
The Company follows the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of."
This statement requires that certain assets be reviewed for impairment and,
if impaired, remeasured at fair value whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable.
Foreign currency
The financial statements of international subsidiaries are translated
into U.S. dollars using the exchange rate at each balance sheet date for
assets and liabilities and an average exchange rate for each period for
revenues, expenses, gains and losses. Where the local currency is the
functional currency, translation adjustments are recorded as a separate
component of stockholders' equity.
F-8
Income taxes
The Company recognizes deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax
basis of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse.
Cash and cash equivalents
The Company considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents.
Shipping and handling costs
The Company incurs shipping and handling costs in all divisions of its
operations. These costs are included in selling, general and
administrative costs and are $19,277, $19,096 and $16,404 for the years
ended September 30, 2000, 1999 and 1998, respectively.
Reclassifications
Certain reclassifications have been made to conform prior year amounts
to the current year presentation.
New accounting standards
In December 1999, the Securities and Exchange Commission staff issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," ("SAB 101"). SAB 101 does not change existing revenue
recognition rules, but rather, addresses and clarifies existing rules and
their application. SAB 101 is effective for the Company beginning July 1,
2001, the fourth quarter of fiscal 2001. Management is currently assessing
the impact of SAB 101 on the Company's results of operations and financial
position.
The Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" in June 1998.
This statement, as amended, is effective in fiscal years beginning after June
15, 2000, although early adoption is permitted. This statement requires
the recognition of the fair value of any derivative financial instruments
on the balance sheet. Changes in fair value of the derivative and, in
certain instances, changes in the fair value of an underlying hedged asset
or liability, are recognized through either income or as a component of
other comprehensive income. The adoption of SFAS 133 is not expected to
have a significant impact on the Company's financial position or results of
operations.
During 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-14,
"Accounting for Certain Sales Incentives", which addresses the recognition,
measurement and income statement classification for sales incentives
offered voluntarily without charge to customers that can be used in, or
that are exercisable by a customer as a result of, a single exchange
transaction. EITF 00-14 requires that costs relating to sales incentives
be classified as a reduction of revenue, and not in marketing or selling
expenses. The Company will adopt EITF 00-14 effective April 1, 2001.
Management does not believe that the adoption of EITF 00-14 will have a
material impact on the Company's results of operations or presentation
thereof.
2. Acquisitions
In September 2000, the Company acquired certain assets and
liabilities of Feeling Fine Company LLC for $2,964. In June 2000, the
Company acquired certain assets and liabilities of Longevity
F-9
Formulas, Inc. (also known as "Healthwatchers System") and Martin Health
Systems, Inc. for $5,150. In April 2000, the Company acquired the mailing list
of Rexall Sundown's SDV vitamin catalog and mail order list for $16,500.
On January 1, 2000, the Company acquired Nutrition Warehouse, Inc.
and its affiliated companies ("NW") for $20,000 in cash and approximately
1,059 shares of NBTY stock having a market value of $12,200. NW operated a
direct response/e-commerce business as well as 14 retail stores in various
locations in New York state. The e-commerce business has been combined
with the Company's Puritan.com operations and the retail stores have been
merged into the Company's U.S. retail operations. Annual revenues
approximated $14,000 for the e-commerce/direct response business as well as
$14,000 in retail sales for the year ended December 31, 1999. The cash
portion of the acquisition was funded with $20,000 in borrowings under the
Company's Credit and Guarantee Agreement.
3. Divestitures
In July 2000, the Company sold certain assets of Bio Nutritional
Formulas, Inc. for approximately $650 which will be paid in full over the
ensuing five years. Bio Nutritional Formulas had sales of approximately
$1,200 and operating income of approximately $150 in fiscal 1999. No gain
was recognized on the sale.
In April 1998, the Company sold certain assets of its cosmetic pencil
operation for approximately $6,000, of which $4,500 was paid in cash with
additional payments aggregating $1,500 to be paid over the ensuing three
years. The cosmetic pencil business had insignificant operating results in
fiscal 1998. The gain on such sale of approximately $2,600 is included in
other income in the consolidated statements of income for the year ended
September 30, 1998.
4. Inventories
September 30,
------------------
2000 1999
---- ----
Raw materials $ 42,982 $ 47,212
Work-in-process 2,101 4,904
Finished goods 85,658 83,350
----------------------
$130,741 $135,466
======================
F-10
5. Property, Plant and Equipment
Depreciation
September 30, and
---------------------- Amortization
2000 1999 Period
---- ---- ------------
Land $ 10,571 $ 10,128
Buildings and leasehold improvements 72,314 64,388 5 - 40
Machinery and equipment 75,973 70,801 3 - 10
Furniture and fixtures 130,322 100,938 5 - 10
Transportation equipment 4,907 4,237 4
Computer equipment 31,923 26,541 5
----------------------
326,010 277,033
Less accumulated depreciation and
amortization 111,846 87,471
----------------------
$214,164 $189,562
======================
Depreciation and amortization of property, plant and equipment for the
years ended September 30, 2000, 1999 and 1998 was approximately $29,275,
$22,177 and $15,952, respectively.
Property, plant and equipment includes approximately $6,010 and $4,803
for assets recorded under capital leases at September 30, 2000 and 1999,
respectively. Accumulated amortization of these capital leases at
September 30, 2000 and 1999 was approximately $2,075 and $1,528, respectively.
6. Intangible Assets
Intangible assets, at cost, acquired at various dates are as follows:
Depreciation
September 30, and
---------------------- Amortization
2000 1999 Period
---- ---- ------------
Goodwill $139,550 $142,889 20 - 40
Customer lists 60,862 19,867 6 - 15
Trademarks and licenses 1,661 1,472 2 - 3
Covenants not to compete 1,854 1,305 5 - 7
---------------------
203,927 165,533
Less accumulated amortization 31,803 24,123
---------------------
$172,124 $141,410
=====================
Amortization included in the consolidated statements of income under
the caption "selling, general and administrative expenses" in 2000, 1999
and 1998 was approximately $9,226, $7,051 and $6,107, respectively.
F-11
7. Accrued Expenses
September 30,
2000 1999
Payroll and related taxes $ 6,953 $ 6,453
Customer deposits 5,543 4,838
Accrued purchases and interest 1,522 3,081
Income taxes payable 11,405 5,566
Other 11,470 12,358
--------------------
$36,893 $32,296
====================
8. Long-Term Debt
September 30,
2000 1999
Senior debt:
8-5/8% Senior subordinated notes due 2007, net of unamortized
discount of $871 in 2000 and $995 in 1999 (a) $149,129 $149,005
Note payable due in monthly payments of $9, including interest
at 8%, maturing March 2001 205 683
Mortgages:
First mortgage payable in monthly principal and interest
(10.375%) installments (b) 7,010
First mortgage payable in monthly principal and interest
(9.73%) installments of $25, maturing in November 2009 1,844 1,963
First mortgage payable in monthly principal and interest
(7.375%) installments of $55 through 2011 4,881 5,218
First mortgage payable in monthly principal and interest
(9.0%) installments of $3 through 2011 209
Credit and Guarantee Agreement (c) 7,500 54,000
Term loan payable in quarterly principal and interest
installments of $2,700 through March 2005 (c) 46,600
--------------------
210,368 217,879
Less current portion 11,273 743
--------------------
$199,095 $217,136
====================
(a) The 8-5/8% Senior Subordinated Notes (the "Notes") are unsecured and
subordinated in right of payment for all existing and future
indebtedness of the Company. The Notes provide for the payment of
interest semi-annually at the rate of 8-5/8% per annum.
F-12
(b) The Company repaid the outstanding mortgage during fiscal 2000 with
long-term borrowings available under its Credit and Guarantee
Agreement.
(c) In April 1999, the Company entered into an amended and restated
Credit and Guarantee Agreement ("CGA"), which expires September 30,
2003, for $135,000. On July 17, 2000, the CGA was amended to
$149,300. The CGA is comprised of two revolving credit agreements of
$50,000 each and a term loan of $49,300. At September 30, 2000,
there were borrowings of $54,100 under this facility at an annual
borrowing rate of 7.81%. The CGA provides that loans be made under a
selection of rate formulas, including prime or Euro currency rates.
Virtually all of the Company's assets are collateralized under the
CGA. In addition, the Company is subject to the maintenance of
various financial ratios and covenants.
Required principal payments of long-term debt are as follows:
Years ending
September 30,
2001 $ 11,273
2002 11,312
2003 11,355
2004 18,901
2005 4,051
Thereafter 153,476
--------
$210,368
========
The fair value of the Company's long-term debt at September 30, 2000
and 1999, based upon current market rates, approximates the amounts
disclosed above.
9. Capital Lease Obligations
The Company enters into various capital leases for machinery and
equipment which provide the Company with bargain purchase options at the
end of such lease terms. Future minimum payments under capital lease
obligations as of September 30, 2000 are as follows:
Years ending
September 30,
2001 $ 1,496
2002 1,355
2003 254
2004 4
2005 1
--------
3,110
Less, amount representing interest 171
--------
Present value of minimum lease payments (including $1,556
due within one year) $ 2,939
========
F-13
10. Income Taxes
Provision for income taxes consists of the following:
Year ended September 30,
2000 1999 1998
Federal
Current $12,640 $ 6,214 $16,398
Deferred 4,551 2,810 2,596
State
Current 1,300 639 1,686
Deferred 468 289 267
Foreign provision 12,485 8,371 2,527
-----------------------------
Total provision $31,444 $18,323 $23,474
=============================
The following is a reconciliation of the income tax expense computed
using the statutory Federal income tax rate to the actual income tax
expense and its effective income tax rate.
Year ended September 30,
2000 1999 1998
-------------------- -------------------- --------------------
Percent Percent Percent
of pretax of pretax of pretax
Amount income Amount income Amount income
Income tax expense at statutory rate $29,033 35.0% $15,961 35.0% $21,810 35.0%
State income taxes, net of federal
income tax benefit 2,986 3.6% 1,642 3.6% 2,243 3.6%
S corporation earnings not subject
to income taxes (a) (2,988) (4.8%)
Amortization of goodwill 2,155 2.6% 2,155 4.7% 2,155 3.5%
Other, individually less than 5% (2,730) (3.3%) (1,435) (3.1%) 254 0.5%
-----------------------------------------------------------------
$31,444 37.9% $18,323 40.2% $23,474 37.8%
=================================================================
(a) Prior to the merger, Nutrition Headquarters Group had been treated as
an S corporation for Federal and state tax purposes. Accordingly,
taxable income had previously been reported to the individual
stockholders for inclusion in their respective income tax returns
with no provision for these taxes, other than certain minimum taxes,
included in its financial statements.
F-14
The components of deferred tax assets and liabilities are as follows:
2000 1999
Deferred tax assets:
Current
Inventory capitalization $ 637 $ 455
Accrued expenses and reserves not currently deductible 2,512 2,395
Tax credits 400 400
---------------------
Total current $ 3,549 $ 3,250
=====================
Noncurrent
Intangibles (347)
Reserves not currently deductible $ 270 653
---------------------
Total noncurrent $ 270 $ 306
=====================
Deferred tax liabilities:
Property, plant and equipment $(17,320) $(12,539)
=====================
11. Commitments
Operating leases
The Company conducts retail operations under operating leases which
expire at various dates through 2020. Some of the leases contain renewal
options and provide for contingent rent based upon sales plus certain tax
and maintenance costs.
Future minimum rental payments (excluding real estate tax and
maintenance costs) for retail locations and other leases that have initial
or noncancelable lease terms in excess of one year at September 30, 2000
are as follows:
Years ending
September 30,
2001 $ 49,769
2002 48,119
2003 45,739
2004 40,659
2005 35,857
Thereafter 23,119
--------
$243,262
========
Operating lease rental expense (including real estate taxes and
maintenance costs), and leases on a month to month basis were approximately
$54,749, $44,299 and $31,562 for the years ended September 30, 2000, 1999
and 1998, respectively.
F-15
Purchase commitments
The Company was committed to make future purchases under various
purchase order arrangements with fixed price provisions aggregating
approximately $10,595 at September 30, 2000.
Capital commitments
The Company had approximately $2,696 in open capital commitments at
September 30, 2000, primarily related to a manufacturing facility as well
as to computer hardware and software.
Employment and consulting agreements
The Company has employment agreements with two of its officers. The
agreements, which expire in January 2004, provide for minimum salary
levels, including cost of living adjustments, and also contain provisions
regarding severance and changes in control of the Company. The commitment
for salaries as of September 30, 2000 was approximately $900 per year.
The Company entered into an employment agreement with a former
stockholder and officer of Nutrition Headquarters Group who is currently an
officer and director of the Company. Such agreement was for a one-year
term, subject to extension at the sole option of the officer for two
additional one-year terms, and requires an annual payment of $275. The
agreement was extended to April 2001.
The Company maintains a consulting agreement with Rudolph Management
Associates, Inc. for the services of Arthur Rudolph, a director of the
Company. The agreement requires services to be provided to the Company
through December 31, 2001 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 per year, payable monthly, with certain fringe
benefits accorded to other executives of the Company.
Four members of H&B'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.
12. Earnings Per Share
Basic earnings per share ("EPS") computations are calculated
utilizing the weighted average number of common shares outstanding during
the fiscal years. Diluted EPS include the weighted average number of
common shares outstanding and the effect of common stock equivalents. The
following is a reconciliation between basic and diluted EPS:
Year ended September 30,
2000 1999 1998
Numerator:
Numerator for basic EPS - income available to
common stockholders $51,508 $27,279 $38,840
==============================
Numerator for diluted EPS - income available to
common stockholders $51,508 $27,279 $38,840
==============================
F-16
Denominator:
Denominator for basic EPS - weighted-average shares $67,327 $69,640 $65,563
Effect of dilutive securities:
Stock options 1,991 1,186 4,284
------------------------------
Denominator for diluted EPS - weighted-average shares $69,318 $70,826 $69,847
==============================
Net EPS: $ 0.77 $ 0.39 $ 0.59
Basic EPS
==============================
Diluted EPS $ 0.74 $ 0.39 $ 0.56
==============================
13. Stock Option Plans
The Board of Directors approved the issuance of 6,660 non-qualified
options on September 23, 1990, exercisable at $0.21 per share, which
terminated on September 23, 2000. In addition, on March 11, 1992, the
Board approved the issuance of an aggregate of 5,400 non-qualified stock
options to directors and officers, exercisable at $0.31 per share and
expiring on March 10, 2002. During fiscal 1999, the Board approved the
issuance of 3,000 options expiring at varying dates in 2008 and 2009 with
exercise prices ranging from $4.75 to $6.19 per share. During fiscal 2000,
the Board approved the issuance of 2,288 options expiring in 2010 with an
exercise price of $5.88 per share. The exercise price of each of the
aforementioned issuances was at or in excess of the market price at the
date such options were granted. Stock options granted under the plans
generally become exercisable on grant date and have a maximum term of ten
years.
During fiscal 2000, options were exercised with 1,422 shares of
common stock issued to certain officers and directors for $4,408. As a
result of the exercise of those options, the Company will receive a
compensation deduction for tax purposes of approximately $4,700.
Accordingly, a tax benefit of approximately $1,833 was credited to capital
in excess of par.
During fiscal 1999, options were exercised with 3,595 shares of
common stock issued to certain officers and directors for $78 and interest
bearing notes aggregating $839. As a result of the exercise of those
options, the Company received a compensation deduction for tax purposes of
approximately $15,049. Accordingly, a tax benefit of approximately $5,869
was credited to capital in excess of par.
During fiscal 1998, options were exercised with 142 shares of common
stock issued to certain directors for $43. As a result of the exercise of
those options, the Company received a compensation deduction for tax
purposes of approximately $1,652. Accordingly, a tax benefit of
approximately $611 was credited to capital in excess of par.
F-17
A summary of stock option activity is as follows:
2000 1999 1998
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
average average average
Number exercise Number exercise Number exercise
of shares price of shares price of shares price
Outstanding at beginning of year 3,720 4.53 4,316 $ .26 4,458 $.25
Exercised (1,422) 2.87 (3,596) .26 (142) .31
Forfeited (50)
Granted 2,288 5.88 3,000 5.55
--------------------------------------------------------------------
Outstanding at end of year 4,536 $5.71 3,720 $4.53 4,316 $.26
====================================================================
Exercisable at end of year 4,536 $5.71 3,650 $4.53 4,316 $.26
====================================================================
Fair value of options granted during year $3.64
=====
As of September 30, 2000, the weighted average remaining contractual
life of outstanding options was 8.5 years.
The following table summarizes information about stock options
outstanding at September 30, 2000:
Options Outstanding Options Exercisable
-------------------------------------- -----------------------
Weighted Weighted
Remaining Average Average
Range of Shares Contractual Exercise Shares Exercise
Exercise Prices Outstanding Life Price Exercisable Price
$0.31 120 1 year $ .31 120 $ .31
$4.75 - $5.88 4,416 9 years $5.88 4,416 $5.88
----- -----
4,536 4,536
===== =====
The fair value of options granted during fiscal 2000 has been
estimated on the date of grant using the Black-Scholes options pricing
model with the following assumptions: no dividend yield; expected
volatility of 70%; a risk-free interest rate of 6%; and a weighted average
expected life of 4.8 years.
The Company applies APB Opinion 25 and related interpretations in
accounting for stock options; accordingly, no compensation cost has been
recognized. Had compensation cost been determined based upon the fair
value of the stock options at grant date, consistent with the method under
SFAS No. 123, the Company's net income and earnings per share for fiscal
2000 would have been reduced to the following pro forma amounts indicated.
F-18
Net income attributable to common stockholders as reported $51,508
Pro forma net income $46,428
Basic EPS as reported $ .77
Diluted EPS as reported $ .74
Pro forma basic EPS $ .69
Pro forma diluted EPS $ .67
14. Employee Benefit Plans
The Company maintains defined contribution savings plans and an
employee stock ownership plan. The accompanying financial statements
reflect contributions to these plans in the approximate amount of $1,670,
$1,966 and $501 for the years ended September 30, 2000, 1999 and 1998,
respectively.
15. Litigation
Shareholder litigation
A consolidated stockholder class action is pending against the
Company and certain of its officers and directors in the U.S. District
Court of the Eastern District of New York, on behalf of stockholders who
purportedly purchased shares of the Company between January 27, 2000 and
June 15, 2000 (the "Class Period"). The class action alleges that the
Company and individuals failed to disclose material facts during the Class
Period that resulted in a decline in the price of the Company's stock after
June 15, 2000.
In addition to the pending consolidated class actions, two
stockholder derivative actions were filed in 2000 in the Chancery Court in
Delaware against certain officers and directors. The derivative claims,
which are expected to be consolidated in the Delaware Court, are predicated
upon the stockholder class actions pending in New York.
The Company and the named individuals deny all claims of wrongdoing
and intend to defend the actions vigorously, however, no determination can
be made as to the final outcome. The Company maintains policies of
directors and officers professional liability insurance.
Gehe AG
In August 1997, the Company acquired Holland & Barrett Holdings Ltd.
from German-based Gehe AG. A dispute arose over certain provisions of the
purchase agreement. On July 30, 1999, the court rendered a decision in
favor of Gehe AG. Accordingly, a litigation charge of $4,952, which
includes the amount of the judgment plus interest and plaintiff legal fees,
was reflected separately in the statement of income for fiscal 1999.
Other litigation
The Company is also involved in miscellaneous claims and routine
litigation which management believes, taken individually or in the
aggregate, would not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
In fiscal 2000, the Company received $2,511 in partial settlement of
ongoing price fixing litigation brought by the Company against certain raw
material vitamin suppliers.
F-19
16. Segment Information
The Company's segments are organized by sales market on a worldwide
basis. The Company's management reporting system evaluates performance
based on a number of factors; however, the primary measure of performance
is the pre-tax operating income of each segment. Accordingly, the Company
reports four worldwide segments: Puritan's Pride/Direct Response, Retail:
United States and United Kingdom and Wholesale. All of the Company's
products fall into one of these four segments. The Puritan's Price/Direct
Response segment generates revenue through the sale of its products
primarily through mail order catalog and internet. Catalogs are
strategically mailed to customers who order by mail or by phoning customer
service representatives in New York, Illinois and the United Kingdom. The
Retail United States segment generates revenue through the sale of
proprietary brand and third-party products through its 476 Company-operated
stores. The Retail United Kingdom segment generates revenue through the
sale of proprietary brand and third-party products in 427 Company-operated
stores. The Wholesale segment (including Network Marketing) is comprised
of several divisions each targeting specific market groups. These market
groups include wholesalers, distributors, chains, pharmacies, health food
stores, bulk and international customers.
The following table represents key financial information of the
Company's business segments (in thousands, except for number of locations):
Fiscal years ended
September 30,
2000 1999 1998
Puritan's Pride/Direct Response
Revenue $ 182,693 $ 176,053 $ 187,820
Operating income 53,865 43,496 41,010
Depreciation and amortization 3,682 2,074 996
Identifiable assets 69,513 29,926 32,404
Capital expenditures 1,980 320 120
Retail:
United States
Revenue $ 149,055 $ 103,172 $ 66,576
Operating (loss) income (19,782) (12,147) 5,418
Depreciation and amortization 11,438 6,051 2,919
Identifiable assets 78,672 55,960 46,805
Capital expenditures 25,173 25,148 12,917
Locations open at end of year 476 352 193
F-20
United Kingdom
Revenue $ 248,602 $ 220,405 $ 185,833
Operating income 40,977 26,830 9,228
Depreciation and amortization 12,347 12,294 11,445
Identifiable assets 200,373 221,817 223,742
Capital expenditures 13,949 11,753 13,526
Locations open at end of year 427 423 415
Wholesale:
Revenue $ 140,506 $ 131,264 $ 131,895
Operating income 29,542 18,243 29,055
Depreciation and amortization 1,240 498 427
Identifiable assets 17,003 18,209 17,225
Capital expenditures 1,486 1,134 516
Corporate:
Depreciation and amortization $ 9,794 $ 8,311 $ 6,272
Recovery of raw material costs (2,511)
Litigation settlement costs 4,952
Merger related costs 3,528
Manufacturing identifiable assets 238,052 213,472 180,280
Capital expenditures - manufacturing 4,439 3,627 29,611
Capital expenditures - Other 4,759 3,828 11,354
Consolidated totals:
Revenue $ 720,856 $ 630,894 $ 572,124
Recovery of raw material costs (2,511)
Litigation settlement costs 4,952
Operating income 97,319 63,159 74,911
Depreciation and amortization 38,501 29,228 22,059
Merger related costs 3,528
Interest expense, net 18,858 18,945 16,518
Income taxes (a) 31,444 18,323 23,474
Net income 51,508 27,279 38,840
Identifiable assets 603,613 539,384 500,456
Capital expenditures 51,786 45,810 68,044
F-21
Revenue by location of customer
United States $ 458,543 $ 392,617 $ 369,796
United Kingdom 248,602 224,364 189,555
Other foreign countries 13,711 13,913 12,773
-----------------------------------
Consolidated totals $ 720,856 $ 630,894 $ 572,124
===================================
Long-lived assets
United States $ 238,019 $ 167,120 $ 141,272
United Kingdom 148,269 163,852 177,489
-----------------------------------
Consolidated totals $ 386,288 $ 330,972 $ 318,761
===================================
(a) Reflects taxes at subchapter "S" rates for pooling of interests prior
to April 1998.
17. Related Party Transactions
Nutrition Headquarters Group had outstanding loans to a stockholder
in the aggregate amount of $617, which were paid in fiscal 1999. Interest
on these loans amounted to approximately $21 and $35 for the years ended
September 30, 1999 and 1998, respectively.
For the year ended September 30, 1998, Nutrition Headquarters Group
provided distributions to its stockholders in the aggregate amount of
$8,050.
Nutrition Headquarters Group had outstanding promissory notes of
$2,245 as of September 30, 1997, which were payable to a relative of a
stockholder. Interest on the obligation amounted to approximately $124 for
the year ended September 30, 1998.
In addition, an entity owned by a relative of an officer received
sales commissions of $520, $472 and $474 in 2000, 1999 and 1998,
respectively, and had trade receivable balances approximating $2,529 and
$2,200 at September 30, 2000 and 1999, respectively.
F-22
18. Quarterly Results of Operations (Unaudited)
The following is a summary of the unaudited quarterly results of
operations for fiscal 2000 and 1999:
Quarter ended
------------------------------------------------------
December 31, March 31, June 30, September 30,
2000:
Net sales $171,172 $200,107 $172,102 $177,475
Gross profit 90,229 115,954 98,082 103,631
Income before income taxes 14,028 30,105 20,094 18,725(a)
Net income 8,417 18,063 12,057 12,971
Net income per diluted share $ .12 $ .26 $ .17 $ .19
1999
Net sales $141,013 $167,673 $155,062 $167,146
Gross profit 72,055 89,124 81,080 95,116
Income before income taxes 6,035 11,485 7,051 21,032(a)
Net income 3,468 6,838 4,334 12,639
Net income per diluted share $ .05 $ .09 $ .06 $ .19
(a) Year-end adjustments resulting in an increase to pre-tax income of
approximately $5,400 in both 2000 and 1999, primarily related to
adjustments of inventory amounts. These adjustments principally
result from the utilization of the gross profit method to value
inventory during interim periods and the year-end valuation of the
Company's annual physical inventory.
F-23
NBTY, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
for the years ended September 30, 2000, 1999 and 1998
(Dollars in thousands)
Column A Column B Column C Column D Column E
Additions
Balance at Balance at
beginning Charged to Charged to end of
Description of period costs and expenses other accounts Deductions period
----------- ---------- ------------------ -------------- ---------- ----------
Fiscal year ended September 30, 2000:
Allowance for doubtful accounts $1,248 $ 6 $(27)(a) $1,227
Fiscal year ended September 30, 1999:
Allowance for doubtful accounts $1,045 $278 $(75)(a) $1,248
Fiscal year ended September 30, 1998:
Allowance for doubtful accounts $1,116 $ 15 $(86)(a) $1,045
(a) Uncollectable accounts written off.
S-1
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Dated: December 22, 2000 By: /s/ Scott Rudolph
-----------------
Scott Rudolph
President, Chief Executive
Officer
Dated: December 22, 2000 By: /s/ Harvey Kamil
----------------
Harvey Kamil
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Dated: December 22, 2000 By: /s/ Scott Rudolph
-------------------------------
Scott Rudolph
Chairman, President and
Chief Executive Officer
Dated: December 22, 2000 By: /s/ Arthur Rudolph
-------------------------------
Arthur Rudolph, Director
Dated: December 22, 2000 By: /s/ Aram Garabedian
-------------------------------
Aram Garabedian, Director
Dated: December 22, 2000 By: /s/ Bernard G. Owen
-------------------------------
Bernard G. Owen, Director
Dated: December 22, 2000 By: /s/ Alfred Sacks
-------------------------------
Alfred Sacks, Director
Dated: December 22, 2000 By: /s/ Murray Daly
-------------------------------
Murray Daly, Director
Dated: December 22, 2000 By: /s/ Glenn Cohen
-------------------------------
Glenn Cohen, Director
Dated: December 22, 2000 By: /s/ Bud Solk
-------------------------------
Bud Solk, Director
Dated: December 22, 2000 By: /s/ Nathan Rosenblatt
-------------------------------
Nathan Rosenblatt, Director
Dated: December 22, 2000 By: /s/ Michael L. Ashner
-------------------------------
Michael L. Ashner, Director
Dated: December 22, 2000 By: /s/ Michael Slade
-------------------------------
Michael Slade, Director