Back to GetFilings.com
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[x] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the fiscal year ended September 30, 1995.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ________________
to__________________.
Commission file number 0-10666
NBTY, INC.
(Formerly NATURE'S BOUNTY, INC.)
(Exact name of registrant as specified in charter)
DELAWARE 11-2228617
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
90 Orville Drive 11716
Bohemia, New York (Zip Code)
(Address of principal executive office)
(516) 567-9500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.008 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days.
YES X NO __
Indicate by check mark is 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 for this Form 10-K [X].
The aggregate market value of the voting stock held by nonaffiliates of
the registrant, based upon the closing price of shares of Common Stock on
the National Association of Securities Dealers Automated Quotation
("NASDAQ") National Market System at November 29, 1995 was approximately
$82,683,644.
The number of shares of Common Stock of the registrant outstanding at
November 29, 1995 was approximately 19,477,676.
Documents Incorporated by Reference: None
PART I
Item 1. BUSINESS
Products
NBTY, Inc. (formerly known as Nature's Bounty, Inc.) (the
"Company"), collectively with its subsidiaries is a manufacturer and
marketer of nutritional supplements in the United States. It sells more
than 350 products consisting of vitamins and other nutritional supplements
such as minerals, amino acids and herbs. Vitamins, minerals and amino
acids are sold as a single vitamin and in multi-vitamin combinations and
in varying potency levels in powder, tablet, soft gel, chewable, and hard
shell capsule form. The Company's branded products are sold by
independent and chain pharmacies, wholesalers, supermarkets and health
food stores and by direct mail.
Marketing and Distribution
The Company markets its products through different channels of
distribution: wholesale-retail and direct mail.
Wholesale-Retail. The Company markets its products under various
brand names to various stores including drug store chains and
supermarkets, independent pharmacies, health food stores, health food
store wholesalers and other retailers such as mass merchandisers and
Company-owned stores. 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.
In addition to a complete line of vitamins and other nutritional
supplements, the Company sells a comprehensive line of over-the-counter
products such as cold remedies and analgesic formulas to independent
pharmacies under the Hudson brand name.
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 operates 39 retail locations in fifteen states under the
name Vitamin World. Such locations carry a full line of products under
the Vitamin World brand name and 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.
Direct Mail. The Company offers its full line of vitamins and other
nutritional supplement products as well as selected personal care items
under its Puritan's Pride brand name at prices which are normally at a
discount from those of similar products sold in retail stores. The
Company also sold personal care and other selected products under the
Beautiful Visions name until the sale of this operation in October, 1995.
Sales and Advertising
The Company has approximately 70 sales employees located throughout
the country who are paid on a salary plus commission basis. In addition,
the Company sells through commissioned sales representative organizations
which sell the Company's products on an exclusive basis.
In 1994 and 1995, the Company spent approximately $14.8 million and
$19.3 million, respectively, on print and media advertising, including
cooperative advertising with its customers. The Company creates its own
advertising materials through a staff of approximately 22 employees. The
Company expects advertising costs to increase as net sales increase.
Manufacturing, Distribution and Quality Control
All manufacturing is conducted in accordance with good manufacturing
practice standards of 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, at the completion of
its expansion program, will be adequate to meet the requirements of
anticipated increases in net sales. The Company manufactures
approximately 60% of its vitamins and other nutritional supplements and
expects to increase such percentage upon completion of its manufacturing
improvement program.
The Company's manufacturing process places special emphasis on
quality control. All raw materials used in production are initially held
in quarantine during which time the Company's laboratory employees assay
the production against the manufacturer's certificate of analysis. Once
cleared, a lot number is assigned, samples are retained and the material
is processed by formulating, mixing and granulating, compression and
sometimes coating operations. After the tablet is manufactured,
laboratory employees test its weight, purity, potency, dissolution and
stability. When a product such as vitamin tablets is 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
natural and synthetic vitamins, purchased from bulk manufacturers in the
United States, Japan and Europe. Although raw materials are available
from numerous sources, one supplier currently provides approximately 13%
of the Company's purchases, and no other single supplier accounts for more
than 10% of the Company's raw material purchases.
Research and Development
In 1993, 1994 and 1995, the Company did not expend any significant
amounts for research and development of new products.
Government Regulation
The processing, formulation, packaging, labeling and advertising of
the Company's products are subject to regulation by one or more federal
agencies, including the United States Food and Drug Administration (the
"FDA"), the Federal Trade Commission (the "FTC"), the Consumer Product
Safety Commission, the United States Department of Agriculture and the
Environmental Protection Agency. These activities are also regulated by
various agencies of the states and localities in which the Company's
products are sold. In addition, the United States Postal Service
regulates advertising claims with respect to the Company's products sold
by mail order.
In October 1994, the Dietary Supplement Health and Education Law was
signed into law. This new law, which amends the Federal Food, Drug and
Cosmetic Act, defines dietary supplements as a separate and distinct
entity, and not as food additives. Vitamins, minerals, amino acids, herbs
and other nutritional substances are included in the definition. It
expressly provides for the use of third party scientific literature which
shall not be regulated as labeling by the FDA, provided it is not false or
misleading. The new law also delayed the FDA's requirements for extensive
product label changes which were to be applied to products manufactured
after July 1, 1995. It provides a set of different label requirements for
ingredient content information, and directs the FDA to publish new label
regulations for supplements with a mandatory effective date of December
31, 1996. It makes no modifications on the requirements and proscriptions
regarding health claims for dietary supplements. The new law also
introduced the concept of good manufacturing practices to the manufacture
of dietary supplements. At this time, it would be premature to predict
its overall impact on the dietary supplement industry.
Competition
The market for vitamins and other nutritional supplements is highly
competitive in all of the Company's channels of distribution. The
Company's Nature's Bounty and Natural Wealth brands compete for sales to
drug store chains and supermarkets with heavily advertised national brands
manufactured by large pharmaceutical companies, as well as Your Life and
Nature Made brands, sold by privately-held vitamin companies, Leiner
Health Products, Inc. and Pharmavite Corp, respectively. The Vitamin
World stores compete with specialty vitamin stores, such as GNC Stores,
health food stores and other retail stores. With respect to direct mail
sales, the Company's Puritan's Pride brand is the largest seller of
vitamins and other nutritional supplements and competes with a large
number of smaller, usually less geographically diverse, direct mail
companies, some of which manufacture their own products and some of which
sell products manufactured by others.
It is not possible to estimate accurately the number of competitors
since the nutritional supplement industry is fragmented and for the most
part privately held. The Company is not capable of assessing market
penetration of such competitors since they do not publish sales and
marketing figures. No one company dominates the industry. However, it is
the Company's belief that there may be between one and two dozen companies
competing for the drug store and supermarket business. In its Vitamin
World operations, the Company competes regionally with specialty vitamin
stores, such as GNC Stores and local drug stores, health food stores,
supermarkets, department stores and mass merchandisers.
The Company believes that it competes favorably with other direct
mail sellers of similar products on a basis of price and customer service,
including speed of delivery and new product offerings. The Company
believes that it competes favorably with the large pharmaceutical
companies and other companies which sell to wholesalers, on the basis of
price, breadth of product line, reputation and customer service, including
innovative packaging and displays and other services. The Company
believes that it derives a competitive advantage from its ability to
manufacture and package its own vitamin and nutritional supplement
products, which affords it the flexibility to respond to the shifting
demands of each channel of distribution and, consequently, the ability to
achieve the manufacturing and operating efficiencies resulting from larger
production runs of products which can be packaged for sale in one or more
such channels.
Trademarks
The Company owns trademarks registered with the United States Patent
and Trademark Office and in some other major jurisdictions of the world
for its Nature's Bounty, Good'N Natural, Hudson, American Health,
Puritan's Pride, and Stur-Dee trademarks and has rights to use other names
essential to its business. Federally registered trademarks have a
perpetual life, as long as they are renewed on a timely basis and used
properly as trademarks, subject to the rights of third parties to seek
cancellation of the trademarks. The Company regards its trademarks and
other propriety rights as valuable assets and believes they have
significant value in the marketing of its products. The Company
vigorously protects its trademarks against infringement.
Employees
The Company employs approximately 1,180 persons, of whom 40 are in
executive and administrative capacities, approximately 80 are in sales,
approximately 230 are in the Company's Vitamin World stores and the
remainder are in manufacturing, shipping and packaging. None of the
Company's employees is represented by a labor union. The Company believes
its relationship with its employees is excellent.
Item 2. PROPERTIES
The Company owns a total of approximately 625,000 square feet of
plant facilities located at 60, 90, 105 and 115 Orville Drive in Bohemia,
New York and 4320 Veterans Memorial Highway, Holbrook, New York, of which
100,000 square feet is devoted to manufacturing, 72,000 square feet is
utilized for offices and the balance is or is to be used for shipping and
warehouse. The Company has contracted to purchase a 62 acre plot in close
proximity to its other facilities in Islip, New York in order to construct
additional manufacturing capacity.
The Company's property at 90 Orville Drive is subject to a mortgage
which collateralizes an $8.0 million taxable Industrial Development
Revenue Bond due September 1, 2000 with monthly principal and interest
payments of $74,821 through 2000 and a final payment of $6,891,258 on
September 1, 2000. The Company's property at 115 Orville Drive is subject
to a $2.4 million mortgage.
The Company operates 39 retail stores and kiosks in fifteen states
under the name Vitamin World. The stores have an average selling area of
1,000 square feet and each kiosk has a selling area of approximately 190
square feet. Generally, the Company leases the stores and kiosks for
three to five years for annual rents ranging from $12,000 to $65,000 and
percentage rents in the event sales exceed a specified amount.
Item 3. LEGAL PROCEEDINGS
L-tryptophan Litigation. The Company had been named in
approximately 265 lawsuits of which approximately 255 have been settled or
discontinued through September 30, 1995 at no cost to the Company. There
are approximately 10 cases still pending. There were in excess of 2,000
lawsuits filed nationwide against other companies in the industry,
including distributors, wholesalers and retailers claiming compensatory
and punitive damages alleging personal injury and wrongful death resulting
from the ingestion of L-tryptophan.
The Company and certain other companies in the industry, including
distributors, wholesalers and retailers (the "Indemnified Group") have
entered into an agreement with the Company's supplier of bulk L-
tryptophan, Showa Denko American, Inc. (the "Supplier") under which the
Supplier, a U.S. subsidiary of a major Japanese corporation, Showa Denko
K.K., has assumed the defense of all claims against the Indemnified Group
arising out of the ingestion of L-Tryptophan products and has agreed to
pay the legal fees and expenses in that defense. The Supplier and Showa
Denko K.K. have agreed to indemnify the Indemnified Group against any
judgments and to fund settlements arising out of those actions and claims
if it is determined that a cause of the injuries sustained by the
plaintiffs, was a constituent in the bulk material sold by the Indemnified
Group except to the extent that the Indemnified Group is found to have any
part of the responsibility for those injuries.
The Supplier has posted a revolving, irrevocable letter of credit of
$20 million to be used for the benefit of the Indemnified Group in the
event that the Supplier is unable or unwilling to satisfy any claims or
judgments. While not all of these suits quantify the amount demanded, it
can reasonably be assumed that the amount required to either settle these
cases or to pay judgments rendered therein will be paid by the Supplier.
To date, no cases in which the Company is a party have been reached
for trial. While the outcome of any litigation is uncertain, based upon
the Supplier's performance to date in settling cases, it is the opinion of
management of the Company and legal counsel that it is remote that the
Company will incur a material loss as a result of the L-tryptophan
litigation and claims.
Shareholder Litigation. In October 1994, two lawsuits were
commenced in the U.S. District Court, Eastern District of New York,
against the Company and two of its officers. The Complaints allege that
false and misleading statements and representations were made concerning
the Company's sales and earnings estimates for the fourth fiscal quarter
and for the year ended September 30, 1994. The allegations were that the
Defendants failed to disclose that: (a) sales were materially declining;
(b) manufacturing costs were increasing instead of decreasing; (c) profit
margins were materially declining; and (d) that because of the foregoing,
the Company would incur a loss in its fourth fiscal quarter. The
Plaintiffs seek Class Action certification and an unspecified amount of
monetary damages. The Company and its officers deny the allegations of
the Complaints and intend to vigorously contest the litigation. In 1994,
prior to commencement of these lawsuits, the Company purchased a directors
and officers Indemnity Policy. Special counsel has been retained to
represent the Company and its officers. Since the outcome of any
litigation is uncertain, the Company is unable to predict (i) whether it
will ultimately prevail; (ii) whether it will be fully or partially
indemnified, if at all; (iii) the amount of loss, if any, that may be
attributable to the above; and (iv) the amount of expense which may be
incurred in the defense of these actions.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 7, 1995, at the annual meeting of the shareholders, the
following directors were elected: Arthur Rudolph and Glenn Cohen.
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. In addition, 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. 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 may consider.
PRICE RANGE OF COMMON STOCK
The Common Stock is traded in the over-the-counter market and is
included for quotation on the National Association of Securities Dealers
National Market System under the trading symbol "NBTY". The following
table sets forth, for the periods indicated, the high and low closing sale
prices for the Common Stock, as reported on NASDAQ/NMS:
Fiscal year ended September 30, 1994
High Low
---- ---
First Quarter 21-1/2 16-1/8
Second Quarter 24-1/4 16
Third Quarter 22-1/4 7-1/4
Fourth Quarter 11-3/8 7-1/4
Fiscal year ended September 30, 1995
First Quarter 10-1/2 4-3/4
Second Quarter 8-3/8 5-1/16
Third Quarter 6-7/8 5-7/16
Fourth Quarter 7-1/4 5-1/2
On November 16, 1995, the closing sale price of the Common Stock was
$5.00. There were approximately 788 record holders of Common Stock as of
November 3, 1995. The Company believes that there were in excess of
10,000 beneficial holders of Common Stock as of such date.
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
Selected Income
Statement Data:
Net Sales $73,592 $100,907 $138,430 $156,057 $178,760
Costs & Expenses:
Cost of Sales $35,938 $ 50,555 $ 67,951 $ 79,891 $ 93,875
Catalog, printing,
postage & promotion $ 5,505 $ 7,455 $ 11,507 $ 14,786 $ 19,262
Selling, general
& administrative $28,891 $ 35,516 $ 42,776 $ 49,208 $ 56,728
------- -------- -------- -------- --------
Income from operations $ 3,258 $ 7,381 $ 16,196 $ 12,172 $ 8,895
Interest expense $ 1,383 $ 1,321 $ 1,227 $ 914 $ 1,084
Other, net $ (168) $ (181) $ 743 $ 1,285 $ 571
------- -------- -------- -------- --------
Income before Income taxes $ 1,707 $ 5,879 $ 15,712 $ 12,543 $ 8,382
Income taxes $ 689 $ 2,071 $ 5,939 $ 4,767 $ 3,246
------- -------- -------- -------- --------
Net income $ 1,018 $ 3,808 $ 9,773 $ 7,776 $ 5,136
======= ======== ======== ======== ========
Per Share Data:
Earnings per common share:
Primary $ 0.09 $ 0.28 $ 0.53 $ 0.38 $ 0.26
Fully-diluted $ 0.09 $ 0.25 $ 0.53 $ 0.38 $ 0.26
Weighted average number of
shares outstanding:
Primary 10,979 13,718 18,435 20,257 19,974
Fully-diluted 10,979 15,250 18,523 20,257 19,974
Selected Balance Sheet Data:
Working capital $ 8,651 $ 13,082 $ 41,980 $ 39,462 $ 40,665
Total assets $43,507 $ 58,300 $101,757 $115,112 $124,103
Long-term debt,
less current portion $14,202 $ 20,987 $ 8,265 $ 7,566 $ 10,924
Total stockholders' equity $12,794 $ 16,490 $ 70,002 $ 78,017 $ 82,615
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Results of Operations
The following table sets forth income statement data of the Company
as a percentage of net sales for the periods indicated:
Year Ended September 30
--------------------------------
1993 1994 1995
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales 49.1 51.2 52.5
Catalog printing & promotion 8.3 9.5 10.8
Selling, general & administrative 30.9 31.5 31.7
----- ----- -----
88.3 92.2 95.0
----- ----- -----
Income from operations 11.7 7.8 5.0
Interest expense and other (.3) .2 (.3)
----- ----- -----
Income before income taxes 11.4 8.0 4.7
Income taxes 4.3 3.1 1.8
----- ----- -----
Net income 7.1% 5.0% 2.9%
===== ===== =====
1995 Compared to 1994
Net Sales. Net sales for 1995 were $178.8 million, an increase of
$22.7 million or 14.5% over 1994. Of the $22.7 million increase, $12.5
million was attributable to wholesale-retail sales and $10.3 million was
attributable to mail order sales. In October, 1995, Beautiful Visions, a
cosmetic catalog operation, was sold. Sales for such operation in 1995
were $8.3 million, a decrease of $5 million from the prior year.
Cost and Expenses. Cost of sales for 1995 was $93.9 million, an
increase of $14.0 million or 17.5% over 1994. Gross profit decreased to
47.5% in 1995 from 48.8% in 1994. Such decrease as a percentage of net
sales was due to various factors which included pricing pressures and
write-downs for labels and unsold Beautiful Visions inventory.
Catalog, Printing, Postage and Promotion. Catalog, printing, postage
and promotion for 1995 was $19.2 million, an increase of $4.5 million or
30.3% over 1994. Such cost, as a percentage of net sales was 10.8% in
1995 compared with 9.5% in 1994. This increase was mainly due to expanded
trade advertising and costs associated with promotional programs to
independent stores and chain stores.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 1995 was $56.7 million, an increase of $7.5
million or 15.3% over 1994; as a percentage of net sales, these costs
remained relatively constant at 31.7% in 1995 and 31.5% in 1994. The
increase was primarily a result of increases in salaries, wages, fringe
benefits and professional services.
Interest expense. Interest expense in 1995 was $1.0 million, an
increase of $.1 million.
Income taxes. The Company's effective tax rate was 38.7% in 1995
and 38.0% in 1994. The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes", in 1993. The
impact from the implementation of SFAS No. 109 was not material to the
Company's financial statements.
Seasonality. The Company believes that its business is not seasonal
except that historically it has the lowest net sales in its first fiscal
quarter, slightly higher net sales in its second fiscal quarter and may
have higher net sales in a quarter depending upon when it has engaged in
significant promotional activities.
Liquidity and Capital Resources.
Working capital was $40.7 million at September 30, 1995, compared
with $39.5 million at September 30, 1994, an increase of $1.2 million.
The Company finances its working capital with internally-generated
funds. The Company maintains an unsecured $15 million Revolving Credit
Agreement (RCA) expiring on March 31, 1996 and a $10 million Master
Equipment Lease Agreement (MELA) expiring December 31, 1995. As of
September 30, 1995, $15 million remained available under the RCA and $8.6
million under the MELA.
On November 7, 1994, the Company purchased a building which it
previously occupied under a long term lease. The purchase price of
approximately $3.1 million was funded with $.7 million in cash and $2.4
million in a 15 year mortgage note payable.
In September 1990, the Company financed its plant expansion program
with the proceeds of an $8 million taxable Industrial Development Revenue
Bond due September 1, 2000 with monthly principal and interest payments of
$74,821 through 2000 and a final payment of $6,891,258 on September 1,
2000. A portion of this loan, which is collateralized by a mortgage in
favor of an insurance company, was also utilized to repay debt which was
outstanding in 1989.
The mix of revenues among wholesale-retail and direct mail sales
remained relatively constant for 1995, 1994 and 1993.
The Company believes that existing cash balances, internally-
generated funds from operations and amounts available under the RCA and
MELA will provide sufficient liquidity to satisfy the Company's working
capital needs for the next 24 months and to finance anticipated capital
expenditures incurred in the ordinary course of business.
Stock-based Plans
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", which establishes financial accounting and
reporting standards for stock based plans. The Statement, which becomes
effective in fiscal 1997, requires the Company to choose between
accounting for issuances of stock and other equity instruments to
employees based on their fair value or disclosing the pro forma effects
such accounting would have had on the Company's net income and earnings
per share. The Company has begun to gather the documentation necessary to
address the impact of this Statement, although it has not yet decided
which method it will utilize relating to its stock based employee plans.
1994 Compared to 1993
Net Sales. Net sales for 1994 were $156.1 million, an increase of
$17.6 million or 12.7% over 1993. Of the $17.6 million increase, $11.7
million was attributable to wholesale sales, $4.4 million was attributable
to mail order sales and $1.5 million to Company-operated retail stores and
kiosks. The increase in mail order sales was comprised of an increase of
$6 million for nutritional supplements and a decrease of $1.7 million in
the Company's Beautiful Vision health and beauty aid catalogue operation.
Substantially all of the increases in net sales were due to increased
unit sales.
Cost and Expenses. Cost of sales for 1994 was $79.9 million, an
increase of $11.9 million of 17.6% over 1993. Gross profit decreased to
48.8% in 1994 from 50.9% in 1993. Such decrease as a percentage of net
sales was due primarily to non-recurring startup costs of the cosmetic
pencil operation and softness in demand for the Company's products in the
last quarter of the year.
Catalog, printing, postage and promotion for 1994 was $14.8 million,
an increase of $3.3 million or 28.5% over 1993. Such cost, as a
percentage of net sales, was 9.5% in 1994 compared with 8.3% in 1993.
This increase was mainly due to aggressive promotional programs to
independent stores and chain stores.
Selling, general and administrative expenses for 1994 was $49.2
million, an increase of $6.4 million or 15.0% over 1993; as a percentage
of net sales, these costs increased 0.6% in 1994 compared to 1993. The
increase was primarily a result of increases in salaries, wages, fringe
benefits and freight costs. In addition, certain fixed costs increased in
anticipation of higher sales volume which did not materialize.
Interest Expense. Interest expense in 1994 was $.9 million, a
decrease of $.3 million, as debt was decreased.
Income taxes. The Company's effective tax rate was 38% in 1994 and
37.8% in 1993. The Company adopted Statement of Accounting Standard
("SFAS") No. 109, "Accounting for Income Taxes", in 1993. The impact from
the implementation of SFAS No. 109 was not material to the Company's
financial statements.
Seasonality. The Company believes that its business is not seasonal
except that historically it has the lowest net sales in its first fiscal
quarter, slightly higher net sales in its second fiscal quarter and may
have higher net sales in a quarter depending upon when it has engaged in
significant promotional activities.
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 officers, directors, and significant employees of the Company as
of September 30, 1995. Their stated positions are as follows:
Year Commencement
first of term of
elected office as
Name Age Position Director Officer
- ---- --- -------- -------- ------------
Scott Rudolph 38 Chairman of
the Board
and President 1986 1986
Harvey Kamil 51 Executive Vice
President,
Secretary ---- 1982
Barry Drucker 47 Senior Vice
President-Sales ---- 1985
Patricia E. Ciccarone 39 Vice President-
Vitamin World ---- 1992
James P. Flaherty 37 Vice President-
Advertising ---- 1988
Abraham K. Kleinman 70 Vice President-
Manufacturing ---- 1982
Jean Palladino 60 Vice President-
Hudson ---- 1988
Abraham Rubenstein 65 Vice President-
Mail Order ---- 1985
William J. Shanahan 37 Vice President-
Data Processing ---- 1988
Robert Silverman 33 Vice President-
Good'N Natural ---- 1991
James A. Taylor 55 Vice President-
Production ---- 1982
Arthur Rudolph 67 Director 1971 1971
Aram Garabedian 60 Director 1971 ----
Bernard G. Owen 67 Director 1971 ----
Alfred Sacks 67 Director 1971 ----
Murray Daly 68 Director 1971 ----
Glenn Cohen 36 Director 1988 ----
Bud Solk 61 Director 1994 ----
Nathan Rosenblatt 38 Director 1994 ----
The Directors of the Company are elected to serve a three year term
or until their respective successors are elected and qualified. Officers
of the Company hold office until the meeting of the Board of Directors
immediately following the next annual shareholders meeting or until
removal by the Board, whether with or without cause.
Scott Rudolph is the Chairman of the Board of Directors, President,
Chief Executive and is a shareholder of the Company. He is a trustee
of Dowling College, Long Island, New York. He joined the Company in
1986.
Harvey Kamil is Executive Vice President. He joined the Company in
July 1982.
Barry Drucker is Senior Vice President of Sales. He joined the
Company in 1976.
Patricia E. Ciccarone is Vice President of Vitamin World. She
joined the Company in 1988.
James P. Flaherty is Vice President of Advertising. He joined the
Company in 1979.
Abraham H. Kleinman is Vice President of Manufacturing. He joined
the Company in December, 1973.
Jean Palladino is Vice President of The Hudson Corporation. She
joined the Company in 1986.
Abraham Rubenstein is Vice President of Mail Order. He joined the
Company in January, 1985.
William J. Shanahan is Vice President of Data Processing. He joined
the Company in 1980.
Robert Silverman is Vice President of Good'N Natural. He joined the
Company in 1985.
James E. Taylor is Vice President of Production. He joined the
Company in December 1981.
Arthur Rudolph founded Arco Pharmaceuticals, Inc., the Company's
predecessor, in 1960 and had served as the Company's Chief Executive
Officer and Chairman of the Board of Directors since that date until
his resignation in September 1993. However, he remains a member of
the Board of Directors. Mr. Rudolph was responsible for the
formation of the Company in 1971. He is the father of Scott
Rudolph.
Aram Garabedian is, and has been since 1988, a real estate developer
in Rhode Island. He had been associated with Nature's Bounty, Inc.
and Arco Pharmaceuticals, Inc. for 20 years in a sales capacity and
as an officer and has served as a director since 1971.
Bernard G. Owen has been President of Cafiero, Cuchel and Owen
Insurance Agency for the past 25 years.
Alfred Sacks has been President of Al Sacks, Inc., an insurance
agency for the past 30 years.
Murray Daly, formerly a Vice President of J. P. Egan Office
Equipment Co., is currently a consultant to the office equipment
industry.
Glenn Cohen is the President of Glenn-Scott Landscaping, Inc.
Bud Solk is President of Bud Solk Associates, Inc., a full service
advertising and marketing agency located in Chicago, Illinois,
founded by him 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.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
Securities ownership of persons owning of record, or beneficially, 5% or
more of the outstanding Common Stock, as of September 30, 1995. 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 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 3,087,686 16.0
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Mathers and Co., Inc 1,870,000 9.6
(Par Value 100 Corporate North Record and
$.008) Bannockburn, IL 60015 Beneficial
Common Stock Nature's Bounty, Inc. 1,021,806 5.8
(Par Value Profit Sharing Plan Record and
$.008) Beneficial
Includes shares issuable upon exercise of options held by executive
officers and directors.
(b) Security Ownership of Management (directors and Officers)
Amount &
Nature of Percent
Name and Address of Beneficial of
Title of Class Beneficial Owner Ownership (1) Class (1)
- -------------- ------------------- ------------- ---------
Common Stock Scott Rudolph 3,087,686 16.0
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Harvey Kamil 768,439 4.2
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Barry Drucker 43,600 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Arthur Rudolph 0 ___
(Par value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Aram Garabedian 24,000 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Bernard G. Owen 41,000 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Alfred Sacks 24,000 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Murray Daly 27,000 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Glenn Cohen 12,000 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Bud Solk 0 ___
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Nathan Rosenblatt 0 ___
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock All Directors, 4,027,725 20.2
(Par Value Officers and as a Record and
$.008) group (11 persons) Beneficial
Includes shares issuable upon exercise of options held by executive
officers and directors.
Nature's Bounty, Inc. Profit Sharing Plan (formerly Employee Stock
Ownership Plan and Trust)
The basic terms of the Plan are as follows:
Eligibility
All employees 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 employee. 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
employee 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 employee is eligible, a portion of the stock in his or her
account becomes "vested" each year. For all participating employees after
January 1, 1989, the vesting is as follows:
Number of Years Percentage of Shares
of Service earned each year
--------------- --------------------
0 - 2 0%
3 20%
4 20%
5 20%
6 20%
7 20%
Distribution
If an employee retires, is disabled, dies or his or her employment
is otherwise terminated, that employee or that employee's estate will
receive the vested portion held in trust for that employee.
At the end of the vesting period, the employees become full
beneficial owners of the stock. There is no tax consequence attached to
his or her Plan for an employee until that employee sells the shares, at
which time any profit realized by the employee is taxed as a capital gain.
Distribution is to be made only in the shares of Nature's Bounty,
Inc. which shares were purchased for the Trust from the cash contributions
of the Company.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report
Page
Number
------
1. Financial Statements
Report of Independent Accountants F-1
Consolidated Balance Sheets as of
September 30, 1995 and 1994 F-2
Consolidated Statements of Income for the years
ended September 30, 1995, 1994 and 1993 F-3
Consolidated Statements of Stockholders' Equity
for the years ended September 30, 1995, 1994 and 1993 F-4
Consolidated Statements of Cash Flows for the years
ended September 30, 1995, 1994 and 1993 F-5 to F-6
Notes to Consolidated Financial Statements F-7 to F-18
2. Financial Statement Schedule
Schedule II S-1
Schedules not listed above are omitted because of the absence of the
conditions under which they are required or because the required
information is included in the financial statements or notes thereto.
3. Exhibits
11. Statement Re Computation of Per Share Earnings
(b) Reports on Form 8-K
None.
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 13, 1995 By: Scott Rudolph
Scott Rudolph
President, Chief Executive Officer
Dated: December 13, 1995 By: 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 13, 1995 By: Scott Rudolph
Scott Rudolph
Chairman, President and
Chief Executive Officer
Dated: December 13, 1995 By: Arthur Rudolph
Arthur Rudolph, Director
Dated: December 13, 1995 By: Aram Garabedian
Aram Garabedian, Director
Dated: December 13, 1995 By: Bernard G. Owen
Bernard G. Owen, Director
Dated: December 13, 1995 By: Alfred Sacks
Alfred Sacks, Director
Dated: December 13, 1995 By: Murray Daly
Murray Daly, Director
Dated: December 13, 1995 By: Glenn Cohen
Glenn Cohen, Director
Dated: December 13, 1995 By: Bud Solk
Bud Solk, Director
Dated: December 13, 1995 By: Nathan Rosenblatt
Nathan Rosenblatt, Director
NBTY, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
| Coopers | Coopers & Lybrand L.L.P.
| |
| &Lybrand | a professional services firm
REPORT of INDEPENDENT ACCOUNTANTS
To the Board of Directors of NBTY, Inc.:
We have audited the consolidated financial statements and the financial
statement schedule of NBTY, Inc. and Subsidiaries (formerly Nature's Bounty,
Inc. and Subsidiaries) listed in Item 14(a) of this Form 10-K. These
financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and the financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of NBTY, Inc. and Subsidiaries as of September 30, 1995 and 1994,
and the consolidated results of its operations and cash flows for each of
the three years in the period ended September 30, 1995, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
As discussed in Notes 1 and 8 to the consolidated financial statements, the
Company changed its method of accounting for income taxes in 1993.
/s/ COOPERS & LYBRAND L.L.P.
Melville, New York
November 7, 1995.
Coopers & Lybrand L.L.P. is a member of Coopers & Lybrand International, a
limited liability association incorporated in Switzerland.
NBTY, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 1995 and 1994
ASSETS: 1995 1994 LIABILITIES AND STOCKHOLDERS' EQUITY: 1995 1994
Current assets: Current liabilities:
Cash and cash equivalents $ 10,378,476 $ 5,900,594 Current portion of long-term debt and
capital lease obligations $ 358,675 $ 5,698,312
Accounts receivable, less Accounts payable 16,411,562 13,251,382
allowance for doubtful Accrued expenses 10,287,989 8,209,471
accounts of $576,579 in 1995 Total current liabilities 27,058,226 27,159,165
and $594,522 in 1994 12,354,545 10,217,013
Inventories 36,972,592 41,426,175 Long-term debt and capital lease
obligations, less current portion 10,924,454 7,566,144
------------ ------------
Income tax receivable 1,300,198 Deferred income taxes 2,736,148 1,875,933
Other liabilities 768,985 493,986
------------ ------------
Deferred income taxes 1,846,875 1,870,925 Total liabilities 41,487,813 37,095,228
------------ ------------
Prepaid catalog costs and Commitments and contingencies (Notes 9 and 12)
other current assets 6,170,243 5,905,990
------------ ------------
Stockholders' equity:
Total current assets 67,722,731 66,620,895 Common stock, $.008 par; authorized
25,000,000 shares; issued 19,207,676
shares in 1995 and 18,777,676 shares
in 1994 and outstanding 17,766,119
shares in 1995 and 17,564,272 shares
in 1994 153,662 150,222
Property, plant and equipment,
net 48,324,576 39,799,443 Capital in excess of par 54,151,206 53,208,646
Retained earnings 30,656,586 25,520,728
------------ ------------
Intangible assets, net 5,813,031 5,524,865 84,961,454 78,879,596
Less 1,441,557 and 1,213,404 treasury shares
Deferred income taxes 574,611 374,772 at cost, in 1995 and 1994, respectively 2,346,009 862,722
------------ ------------
Other assets 1,668,309 2,792,127 Total stockholders' equity 82,615,445 78,016,874
------------ ------------ ------------ ------------
Total liabilities and stockholders'
Total assets $124,103,258 $115,112,102 equity $124,103,258 $115,112,102
============ ============ ============ ============
See notes to consolidated financial statements.
NBTY, Inc. and Subsidiaries
Consolidated Statements of Income
Years ended September 30, 1995, 1994 and 1993
1995 1994 1993
Net sales $178,759,871 $156,057,056 $138,430,413
------------ ------------ ------------
Costs and expenses:
Cost of sales 93,875,162 79,891,302 67,951,046
Catalog printing, postage and promotion 19,261,733 14,786,217 11,507,026
Selling, general and administrative 56,728,368 49,207,943 42,775,644
------------ ------------ ------------
169,865,263 143,885,462 122,233,716
------------ ------------ ------------
Income from operations 8,894,608 12,171,594 16,196,697
------------ ------------ ------------
Other income (expenses):
Interest (1,084,331) (913,583) (1,227,141)
Miscellaneous, net 571,098 1,284,953 742,624
------------ ------------ ------------
(513,233) 371,370 (484,517)
------------ ------------ ------------
Income before income taxes 8,381,375 12,542,964 15,712,180
Income taxes 3,245,517 4,766,526 5,939,680
------------ ------------ ------------
Net income $ 5,135,858 $ 7,776,438 $ 9,772,500
============ ============ ============
Net income per share $0.26 $0.38 $0.53
============ ============ ============
Weighted average common shares outstanding 19,974,270 20,257,325 18,435,143
============ ============ ============
See notes to consolidated financial statements.
NBTY, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended September 30, 1995, 1994 and 1993
Common stock Treasury stock
-------------------- ------------------------
Number of Capital in Retained Number
shares Amount excess of par earnings of shares Amount Total
---------- ------ ------------- -------- --------- ------ -----
Balance, September 30, 1992 5,999,838 $ 47,999 $ 9,332,496 $ 7,971,790 606,702 $ (862,722) $16,489,563
Net income for year ended
September 30, 1993 9,772,500 9,772,500
Exercise of stock options 782,500 6,260 1,493,740 1,500,000
Public offering of stock 1,725,000 13,800 29,020,761 29,034,561
Two-for-one stock split effected in
the form of a 100% stock dividend 8,507,338 68,059 (68,059) 606,702
Exercise of stock options 1,703,000 13,624 1,196,251 1,209,875
Tax benefit from exercise of stock
options 11,995,737 11,995,737
---------- -------- ----------- ----------- --------- ----------- -----------
Balance, September 30, 1993 18,717,676 149,742 52,970,926 17,744,290 1,213,404 (862,722) 70,002,236
Net income for year ended
September 30, 1994 7,776,438 7,776,438
Expenses associated with prior year
public offering of stock (225,000) (225,000)
Exercise of stock options 60,000 480 29,520 30,000
Tax benefit from exercise of
stock options 433,200 433,200
---------- -------- ----------- ----------- --------- ----------- -----------
Balance, September 30, 1994 18,777,676 150,222 53,208,646 25,520,728 1,213,404 (862,722) 78,016,874
Net income for year ended
September 30, 1995 5,135,858 5,135,858
Exercise of stock options 430,000 3,440 211,560 215,000
Tax benefit from exercise of
stock options 731,000 731,000
Purchase of treasury stock,
at cost 228,153 (1,483,287) (1,483,287)
---------- -------- ----------- ----------- --------- ----------- -----------
Balance, September 30, 1995 19,207,676 $153,662 $54,151,206 $30,656,586 1,441,557 $(2,346,009) $82,615,445
========== ======== =========== =========== ========= =========== ===========
See notes to consolidated financial statements.
NBTY, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended September 30, 1995, 1994 and 1993
1995 1994 1993
Cash flows from operating activities:
Net income $ 5,135,858 $ 7,776,438 $ 9,772,500
Adjustments to reconcile net income to cash
provided by operating activities:
Loss on disposal/sale of property, plant and equipment 374,126 519 26,309
Depreciation and amortization 4,840,570 4,243,985 3,969,985
(Recovery) provision for allowance for doubtful
accounts (17,943) 89,968 (34,009)
Increase (decrease) in deferred taxes 684,426 3,046,493 (70,655)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (2,119,589) (454,841) (3,490,817)
Inventories 4,453,583 (10,770,809) (6,176,753)
Income tax receivable 1,300,198 3,089,929 (2,219,261)
Prepaid catalog costs and other current assets (264,253) (2,297,276) (1,248,581)
Other assets 1,123,818 (2,465,151) (118,046)
Accounts payable 3,160,180 (2,828,998) 3,164,931
Accrued expenses 2,809,518 3,226,894 4,958,296
Other liabilities 274,999 (353,225) 129,936
----------- ----------- -----------
Net cash provided by operating activities 21,755,491 2,303,926 8,663,835
----------- ----------- -----------
Cash flows from investment activities:
Purchase of property, plant and equipment (11,547,570) (11,592,662) (13,853,522)
Increase in intangible assets (1,063,953) (253,772) (341,278)
Proceeds from sale of property, plant and equipment 11,000 2,600
Purchase of Prime Natural Health (5,034,786)
----------- ----------- -----------
Net cash used in investing activities (12,611,523) (11,835,434) (19,226,986)
----------- ----------- -----------
Cash flows from financing activities:
Net (payments) borrowings under line of credit
agreement (5,000,000) 5,000,000 (10,000,000)
Borrowings under long-term debt agreements 2,400,000
Principal payments under long-term debt agreements (797,799) (221,307) (2,755,686)
Purchase of treasury stock (1,292,287)
Proceeds from stock options exercised 24,000 30,000 2,709,875
Proceeds from public offering, less expenses (225,000) 29,034,561
----------- ----------- -----------
Net cash (used in) provided by financing
activities (4,666,086) 4,583,693 18,988,750
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 4,477,882 (4,947,815) 8,425,599
Cash and cash equivalents at beginning of year 5,900,594 10,848,409 2,422,810
----------- ----------- -----------
Cash and cash equivalents at end of year $10,378,476 $ 5,900,594 $10,848,409
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,085,647 $ 913,145 $ 1,303,855
=========== =========== ===========
Cash paid during the period for income taxes $ 1,648,765 $ 2,349,198 $ 2,984,675
=========== =========== ===========
Non-cash investing and financing information:
During fiscal 1995, the Company entered into two capital leases for
machinery and equipment aggregating $1,416,472.
During fiscal 1995, options were exercised with 430,000 shares of common
stock issued to certain officers and directors for $24,000 and an interest
bearing note in the amount of $191,000. The promissory note, including
interest, was paid by the surrender of 23,153 NBTY common shares to the
Company at the prevailing market price. As a result of the exercise of
these options, the Company is entitled to a compensation deduction of
approximately $1,827,500 and it is estimated that such compensation
deduction will ultimately result in a tax benefit of approximately $731,000
which has been recorded as an increase in capital in excess of par. In
addition, the Company has adjusted its current liability to recognize the
effect of this tax benefit. (See Note 10.)
During fiscal 1994, options were exercised with 60,000 shares of common
stock issued to certain directors for $30,000 in proceeds. As a result of
the exercise of these options, the Company was entitled to a compensation
deduction for tax purposes of approximately $1,140,000. Accordingly, the
tax benefit of $433,200 was recorded as a reduction to its current tax
liability and an increase to capital in excess of par. (See Note 10.)
During fiscal 1993, options were exercised with 3,268,000 shares of common
stock issued to certain key officers and a former executive officer for
$2,709,875 in proceeds. The exercise of these options resulted in a tax
benefit of $11,995,737 which was recorded as an increase to capital in
excess of par. In addition, the Company adjusted its current liability
($5,988,205), deferred tax asset ($3,836,666) and income tax receivable
($2,170,866) accounts to recognize the effect of such benefit. (See
Note 10.)
During fiscal 1993, the Company's Board of Directors declared a stock split
in the form of a 100% stock dividend. As a result, the common stock and
capital in excess of par accounts as of September 30, 1993 were adjusted in
the amount of $68,059 representing the par value of the common shares
issued.
See notes to consolidated financial statements.
NBTY, Inc. and Subsidiaries
Notes to Financial Statements
1. Business Operations and Summary of Significant Accounting Policies:
Business operations:
NBTY, Inc., formerly Nature's Bounty, Inc. (the "Company"),
manufactures and distributes vitamins, food supplements and health and
beauty aids. The Company has no single customer that represents more
than 10% of annual net sales or accounts receivable as of September
30, 1995. 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 and the United States
Environmental Protection Agency.
Principles of consolidation and basis of presentation:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All material 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.
Inventories:
Inventories are stated at the lower of cost or market. Cost is
determined on a first-in, first-out basis. The cost elements of
inventory include materials, labor and overhead.
Prepaid catalog costs:
Mail order production and mailing costs are capitalized as prepaid
catalog costs and charged to income over the catalog period, which
typically approximates three months.
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.
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 appropriate
periods not exceeding 40 years.
Income taxes:
In 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," which requires
recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between
the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are
expected to reverse (see Note 8).
Cash and cash equivalents:
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of
three months or less to be cash equivalents.
Common shares and earnings per share:
On August 3, 1993, the Company's Board of Directors declared a two-
for-one stock split in the form of a 100% stock dividend effective
August 13, 1993.
All per common share amounts have been retroactively restated to
account for the above stock split. In addition, stock options and the
respective exercise prices have been amended to reflect these
transactions (see Note 10).
Earnings per share are based on the weighted average number of common
shares outstanding during the period. Common stock equivalents are
not included in income per share computations since their effect on
the calculation is immaterial.
Stock-based plans:
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," which establishes financial accounting and
reporting standards for stock based plans. The Statement, which
becomes effective in fiscal 1997, requires the Company to choose
between accounting for issuances of stock and other equity instruments
to employees based on their fair value or disclosing the pro forma
effects such accounting would have had on the Company's net income and
earnings per share. The Company has begun to gather the documentation
necessary to address the impact of this Statement, although it has not
yet decided which method it will utilize relating to its stock based
employee plans.
2. Acquisition:
On June 1, 1993, the Company purchased certain assets from Prime
Natural Health Laboratories, Inc., a distributor of vitamins and food
supplements, for a cash purchase price of approximately $5,035,000.
Assets acquired consisted of inventory ($2,000,000), customer mailing
list ($1,303,500), accounts receivable ($891,500), covenant not to
compete ($500,000), machinery and equipment ($325,000) and trademarks
($15,000).
3. Inventories:
September 30,
---------------------------
1995 1994
----------- -----------
Raw materials $15,898,215 $18,626,131
Work-in-process 1,848,629 1,241,742
Finished goods 19,225,748 21,558,302
----------- -----------
$36,972,592 $41,426,175
=========== ===========
4. Property, Plant and Equipment:
September 30,
---------------------------
1995 1994
----------- -----------
Land $ 3,064,965 $ 1,964,965
Buildings and leasehold improvements 31,830,638 26,432,551
Machinery and equipment 22,279,226 18,603,399
Furniture and fixtures 6,065,382 5,366,478
Transportation equipment 200,982 200,982
Computer equipment 7,296,395 5,657,108
----------- -----------
70,737,588 58,225,483
Less accumulated depreciation and
amortization 22,413,012 18,426,040
----------- -----------
$48,324,576 $39,799,443
=========== ===========
Depreciation and amortization of property, plant and equipment for the
years ended September 30, 1995, 1994 and 1993 was approximately
$4,064,000, $3,190,000 and $2,421,000, respectively. The Company held
machinery and equipment with a carrying value of $1,410,384 at
September 30, 1995 under capital lease agreements.
5. Intangible Assets:
Intangible assets, at cost, acquired at various dates are as follows:
September 30,
---------------------------- Amortization
1995 1994 period
----------- ----------- ------------
Goodwill $ 469,400 $ 469,400 20-40
Customer lists 10,540,017 9,640,017 6-15
Trademark and licenses 1,134,514 970,561 2-3
Covenants not to compete 1,304,538 1,304,538 5-7
----------- -----------
13,448,469 12,384,516
Less accumulated amortization 7,635,438 6,859,651
----------- -----------
$ 5,813,031 $ 5,524,865
=========== ===========
Amortization included in the consolidated statements of income under
the caption "selling, general and administrative expenses" in 1995,
1994 and 1993 was approximately $776,000, $1,054,000 and $1,549,000,
respectively.
Effective October 1, 1993, the Company changed its estimates of the
lives of certain customer lists. Customer list amortization lives
that previously averaged 6 years were increased to an average of 15
years. This change was made to better reflect the estimated periods
during which an individual will remain a customer of the Company. The
change had the effect of reducing amortization expense by
approximately $500,000 and increasing the net income by $310,000 in
1994.
6. Accrued Expenses:
September 30,
---------------------------
1995 1994
----------- -----------
Payroll and related payroll taxes $ 2,166,355 $ 1,647,347
Customer deposits 2,034,175 2,013,529
Accrued purchases 1,734,844 1,759,257
Income taxes payable 39,815 49,747
Other 4,312,800 2,739,591
----------- -----------
$10,287,989 $ 8,209,471
=========== ===========
7. Long-Term Debt and Capital Lease Obligations:
September 30,
--------------------------
1995 1994
----------- -----------
Revolving credit agreement (a) $ 5,000,000
Mortgages:
First mortgage, payable in monthly principal
and interest (10-3/8%) installments (b) $ 7,566,144 7,672,821
First mortgage payable in monthly principal
and interest (9.73%) installments of $25,396 (c) 2,338,432
First mortgage, payable in monthly principal
and interest (9-1/2%) installments of $8,351,
with a final payment of approximately $565,000
made in December 1994 570,995
Second mortgage, payable in monthly principal
and interest (7-3/4%) installments of $6,997
to 1994 20,640
Capital lease obligations:
Capital lease obligation, payable in monthly
principal and interest (8.17%) installments
of $11,189 (d) 694,859
Capital lease obligation payable in monthly
principal and interest (8.17%) installments
of $11,009 (d) 683,694
----------- -----------
11,283,129 13,264,456
Less current portion 358,675 5,698,312
----------- -----------
$10,924,454 $ 7,566,144
=========== ===========
(a) The Company has a three-year $15,000,000 revolving credit
facility (the "Agreement") with banks which expires on March 31,
1996. The Agreement requires monthly interest payments on a
formula basis at varying rates ranging from below the prime
lending rate to 1/2% over prime. A commitment fee of 3/8 of 1%
per annum is charged on the unused balance of the remaining
credit facility. The $5,000,000 outstanding under this credit
facility at September 30, 1994 was repaid October 3, 1994.
Under the most restrictive covenants of the Agreement, the
Company is required to maintain tangible net worth of at least
$71,300,000, a current ratio of at least 1.75 to 1.00 and has a
limitation on the amount of capital expenditures. In November
1995, the Company received waivers relating to noncompliance of
certain covenants which existed as of September 30, 1995.
(b) In September 1990, the Company obtained an $8,000,000 first
mortgage, collateralized by the underlying building, issued
through the Town of Islip, New York Industrial Development
Agency. The taxable bond, held by an insurance company, has
monthly principal and interest payments of $74,821 for ten years
through 2000, with a final payment of $6,891,258 in September
2000.
(c) In November 1994, the Company purchased a building which it
previously occupied under a long-term lease. The purchase price
of approximately $3,090,000 was funded with $690,000 in cash and
the balance through a 15-year mortgage note payable. This
agreement contains restrictive covenants identical to the
covenants noted in (a) above.
(d) During 1995, the Company entered into two long-term leases
expiring in fiscal 2002 for certain operating machinery and
equipment. The leases provide the Company with bargain purchase
options at the end of such terms. For financial reporting
purposes, the lease has been classified as a capital lease.
Required principal payments of debt and capital lease obligations are
as follows:
Years ended
September 30,
1996 $ 358,675
1997 393,307
1998 431,325
1999 473,064
2000 518,893
Thereafter 9,107,865
-----------
$11,283,129
===========
8. Income taxes:
During fiscal 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS No. 109"). SFAS No. 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or tax
returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement and
tax bases of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to reverse. The
cumulative effect of this change in accounting principle on prior
years is insignificant to the Company's statement of income.
Provision for income taxes consists of the following:
Year ended September 30,
--------------------------------------
1995 1994 1993
---------- ---------- ----------
Federal
Current $2,224,935 $ 856,774 $5,145,611
Deferred 636,516 3,156,289 15,459
State
Current 336,156 515,893 778,610
Deferred 47,910 237,570
---------- ---------- ----------
Total provision $3,245,517 $4,766,526 $5,939,680
========== ========== ===========
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,
-------------------------------------------------------------------------
1995 1994 1993
----------------------- ----------------------- -----------------------
Percent of Percent of Percent of
pretax pretax pretax
Amount income Amount income Amount income
---------- ---------- ---------- ---------- ---------- ----------
Income tax expense at statutory rate* $2,849,668 34.0% $4,390,037 35.0% $5,460,582 34.7%
State income taxes, net of federal
income tax benefit 253,483 3.0% 489,751 3.9% 507,651 3.2%
Other, individually less than 5% 142,366 1.7% (113,262) (0.9%) (28,553) (0.1%)
---------- ----- ---------- ----- ---------- -----
Actual income tax provision $3,245,517 38.7% $4,766,526 38.0% $5,939,680 37.8%
========== ===== ========== ===== ========== =====
* For 1993, the Federal income tax rate represents a blended average
of the rate in effect at the beginning of the Company's fiscal year
(34%) and the rate at January 1, 1993 (35%).
The components of deferred tax assets and liabilities are as follows:
1995 1994
----------- -----------
Deferred tax assets:
Current:
Inventory capitalization $ 178,034 $ 221,200
Accrued expenses and reserves not
currently deductible 1,049,584 511,407
Tax credits 555,822 1,075,118
Miscellaneous 63,435 63,200
----------- -----------
Current deferred tax assets 1,846,875 1,870,925
----------- -----------
Noncurrent:
Intangibles 231,701 179,642
Reserves not currently deductible 342,910 195,130
----------- -----------
Total noncurrent 574,611 374,772
----------- -----------
Deferred tax liabilities:
Property, plant and equipment (2,736,148) (1,875,933)
----------- -----------
Net deferred tax (liability) asset $ (314,662) $ 369,764
=========== ===========
The Company has a net operating loss carryforward of approximately
$6 million for state financial and income tax reporting purposes
expiring in fiscal 2007.
9. Commitments:
Leases:
The Company conducts retail operations located in enclosed malls under
operating leases which expire at various dates through 2002. Some of
the leases provide for additional rentals based upon sales plus
certain tax and maintenance costs.
Future minimal rental payments under the retail location and
automotive leases that have initial or noncancelable lease terms in
excess of one year at September 30, 1995 are as follows:
Year ending
September 30,
1996 $ 1,907,187
1997 1,295,628
1998 1,006,349
1999 663,537
2000 399,747
Thereafter 392,709
-----------
$ 5,665,157
===========
Operating lease rental expense, including real estate tax and
maintenance costs and leases on a month to month basis, was
approximately $1,248,000, $1,200,000 and $1,106,000 for the years
ended September 30, 1995, 1994 and 1993, respectively.
Purchase Commitments:
The Company was committed to make future purchases under various
purchase order arrangements with fixed price provisions aggregating
approximately $972,000 and $6,400,000 at September 30, 1995 and 1994,
respectively.
Employment contracts:
The Company has employment agreements with two of its officers. The
agreements, which expire in January 2004, provide for minimum salary
levels, as adjusted for cost of living changes, as well as contain
provisions regarding severance and changes in control of the Company.
The commitment for salaries as of September 30, 1995 was approximately
$727,000 per year.
10. Stock Option Plans:
In December 1982, the Board of Directors of the Company adopted the
Non-Qualified Stock Option Plan under which 525,000 shares of common
stock were reserved for issuance. The Non-Qualified Plan was ratified
by shareholders in February 1983. The Company granted options under
the Non-Qualified Plan for 525,000 shares of common stock at prices
ranging from $1.67 to $1.84 per share representing a price in excess
of the market value at the time of grant. Such options were exercised
in December 1992.
The Board of Directors approved the issuance of 1,608,000 non-
qualified stock options on December 11, 1989, exercisable at $0.50 per
share, which options terminated on December 10, 1994. The Board also
approved the issuance of 2,220,000 non-qualified options on September
23, 1990, exercisable at $0.63 per share, which options terminate on
September 23, 2000. In addition, on March 11, 1992, the Board of
Directors approved the issuance of an aggregate of 1,800,000 non-
qualified stock options to directors and officers, exercisable at
$0.92 per share, and expiring on March 10, 2002. The exercise price
of each of the aforementioned issuances was in excess of the market
price at the date such options were granted.
During fiscal 1995, options were exercised with 430,000 shares of
common stock issued to certain officers and directors for $24,000 and
an interest bearing note in the amount of $191,000. The promissory
note, including interest, was paid by the surrender of 23,153 NBTY
common shares to the Company at the prevailing market price. As a
result of the exercise of these options, the Company is entitled to a
compensation deduction of approximately $1,827,500 and it is estimated
that such compensation deduction will ultimately result in a tax
benefit of approximately $731,000 which has been recorded as an
increase in capital in excess of par. In addition, the Company has
adjusted its current liability to recognize the effect of this tax
benefit.
During fiscal 1994, options were exercised with 60,000 shares of
common stock issued to certain directors for $30,000. As a result of
the exercise of these options, the Company was entitled to a
compensation deduction for tax purposes of approximately $1,140,000
which resulted in a tax benefit of approximately $433,200. Such
benefit has been recorded as an increase to capital in excess of par.
Furthermore, during fiscal 1993, options were exercised with 3,268,000
shares of common stock issued to certain key officers and a former
executive officer for $2,709,875. The compensation deduction of
approximately $33,000,000 resulted in a tax benefit to the Company of
approximately $12,000,000.
A summary of stock option activity is as follows:
Common Exercise price
shares per share
---------- --------------
Shares under option, September 30, 1993
(fully exercisable) 2,885,000 $.50 - $.92
Exercised in 1994 60,000 $.50
--------- -----------
Shares under option, September 30, 1994
(fully exercisable) 2,825,000 $.50 - $.92
Exercised in 1995 430,000 $.50
--------- -----------
Shares under option, September 30, 1995
(fully exercisable) 2,395,000 $.63 - $.92
========= ===========
11. Employee benefit plans:
The Company maintains a defined contribution savings plan, which
qualifies under Section 401(k) of the Internal Revenue Code, and an
employee stock ownership plan. The accompanying financial statements
reflect contributions to these plans in the approximate amount of
$498,000, $103,000 and $255,000 for the years ended September 30,
1995, 1994 and 1993, respectively.
12. Litigation:
L-tryptophan:
In 1989, prior to a request from the Food and Drug Administration
("FDA") for a national, industry-wide recall, the Company halted sales
and distribution and also ordered a recall of L-tryptophan products.
Subsequently, the FDA indicated that there is a strong epidemiological
link between the ingestion of L-tryptophan and a blood disorder known
as eosinophilia-myalagia syndrome. The Company had been named in
approximately 265 lawsuits of which approximately 255 have been
settled or discontinued through September 30, 1995 at no cost to the
Company. There were in excess of 2,000 lawsuits filed nationwide
against other companies in the industry, including distributors,
wholesalers and retailers claiming compensatory and punitive damages
for alleged personal injury and alleged wrongful death. There are 10
cases still pending against the Company.
The Company and certain other companies in the industry, including
distributors, wholesalers and retailers (the "Indemnified Group"),
have entered into an agreement with the Company's supplier of bulk L-
tryptophan (the "Supplier"), under which the Supplier, a U.S.
subsidiary of a major Japanese corporation, has assumed the defense of
all claims against the Indemnified Group arising out of the ingestion
of L-tryptophan products and has agreed to pay the legal fees and
expenses in that defense. The Supplier and its Japanese parent
company have agreed to indemnify the Indemnified Group against any
judgments and to fund settlements arising out of those actions and
claims if it is determined that a cause of the injuries sustained by
the plaintiffs was a constituent in the bulk material sold by the
Supplier to the Indemnified Group, except to the extent that the
Indemnified Group is found to have any part of the responsibility for
those injuries.
The Supplier has posted a revolving, irrevocable letter of credit of
$20 million to be used for the benefit of the Indemnified Group in the
event that the Supplier is unable or unwilling to satisfy any claims
or judgments. While not all of these suits quantify the amount
demanded, it can reasonably be assumed that the amount required to
either settle these cases or to pay judgments rendered therein will be
paid by the Supplier.
While the outcome of any litigation is uncertain, it is the opinion of
management and legal counsel of the Company that it is remote that the
Company will incur a material loss as a result of the L-tryptophan
litigation and claims. Accordingly, no provision for liability, if
any, that may result therefrom has been made in the Company's
financial statements.
Shareholder litigation:
In October 1994, two lawsuits were commenced in the U.S. District
Court, Eastern District of New York, against the Company and two of
its officers. The complaints allege that false and misleading
statements and representations were made concerning the Company's
sales and earnings estimates for the fourth fiscal quarter and the
year ended September 30, 1994. The allegations were that the
defendants failed to disclose that: (a) sales were materially
declining; (b) manufacturing costs were increasing instead of
decreasing; (c) profit margins were materially declining and (d) that
because of the foregoing, the Company would incur a loss in its fourth
fiscal quarter. The plaintiffs seek Class Action certification and an
unspecified amount of monetary damages. The Company and its officers
deny the allegations of the complaints and intend to vigorously
contest the litigation. In 1994, prior to commencement of these
lawsuits, the Company purchased a directors and officers Indemnity
Policy. Special counsel has been retained to represent the Company
and its officers. Since the outcome of any litigation is uncertain,
the Company is unable to predict (i) whether it will ultimately
prevail; (ii) whether it will be fully or partially indemnified, if at
all; (iii) the amount of loss, if any, that may be attributable to the
above, and (iv) the amount of expense which may be incurred in the
defense of these actions.
Other litigation:
The Company is also involved in miscellaneous claims and litigation
which, taken individually or in the aggregate, would not have a
material adverse effect on the Company's financial position or its
business.
13. Quarterly results of operations (unaudited):
The following is a summary of the unaudited quarterly results of
operations for fiscal 1995 and 1994 (dollars in thousands, except per
share data):
Quarter ended
-----------------------------------------------------
December 31, March 31, June 30, September 30,
------------ --------- -------- -------------
1995:
Net sales $ 37,478 $ 50,945 $ 41,650 $ 48,687
Gross profit 18,380 25,220 20,564 20,720
Income before income taxes 1,648 4,336 2,004 394 (a)
Net income 939 2,552 1,152 493
Earnings per share $0.05 $0.13 $0.06 $0.02
1994:
Net sales $ 32,740 $ 47,001 $ 35,863 $ 40,453
Gross profit 16,659 23,890 18,389 17,228
Income before income taxes 2,755 6,629 3,136 23 (b)
Net income 1,653 4,165 1,945 13
Earnings per share* $0.08 $0.21 $0.10 $0.00
* Aggregate quarterly earnings per share do not equal fiscal year
earnings per share due to rounding.
(a) 1995 year-end adjustments resulting in a charge to operations
included approximately $1,475,000 for various accruals and for
the write-off of certain equipment associated with the Company's
cosmetic pencil operation, and $900,000 pertaining to the
identification of obsolete inventory.
(b) 1994 year-end adjustments resulting in a charge to operations
included approximately $1,300,000 in start-up costs for the
cosmetic pencil operation and $250,000 for an FTC settlement
which was paid in fiscal 1995.
14. Subsequent Event:
On October 9, 1995, the Company sold certain assets of its direct-mail
cosmetics business for approximately $2,495,000. The Company received
$350,000 in cash and non-interest bearing notes aggregating
approximately $2,145,000 for inventory, a customer list and other
intangible assets. The notes will be paid over a three-year period
based on a predetermined formula with guaranteed minimum payments. A
final payment for the remaining outstanding balance will be made on
September 30, 1998. Revenues applicable to this marginally
unprofitable business were approximately $8,284,000, $13,276,000 and
$14,946,000 for fiscal 1995, 1994 and 1993, respectively.
Schedule II
NBTY, Inc. and Subsidiaries
Valuation and Qualifying Accounts
for the years ended September 30, 1995, 1994 and 1993
Column A Column B Column C Column D Column E
- ---------------------------------- ------------ ------------------------------------ ---------------- -------------
Balance at
beginning of Charged to Charged to Balance at
Description period costs and expenses other accounts Deductions end of period
- ----------- ------------ ------------------ -------------- ---------- -------------
1995:
Allowance for doubtful accounts $ 594,522 $ 233,691 $ (251,634) (a) $ 576,579
========= ========= =========== ========== =========
1994:
Allowance for doubtful accounts $ 604,554 $ 89,968 $ 594,522
========= ========= =========== ========== =========
1993:
Allowance for doubtful accounts $ 538,563 $ 21,454 $ (55,463) (a) $ 504,554
========= ========= =========== ========== =========
(a) Uncollectible accounts written off.