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, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ________________
to__________________.
Commission file number 0-10666
NBTY, INC.
(Exact name of registrant as specified in charter)
DELAWARE 11-2228617
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
90 Orville Drive 11716
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Bohemia, New York (Zip Code)
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(Address of principal executive office)
(516) 567-9500
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.008 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO __
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 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 December 15, 1997 was approximately $416,970,372.
The number of shares of Common Stock of the registrant outstanding at
December 15, 1997 was approximately 20,121,379.
Documents Incorporated by Reference: Form 8-K, dated as of August 7, 1997.
PART I
Item 1. BUSINESS
General
NBTY, Inc. (the "Company" or "NBTY"), collectively with its
subsidiaries is a manufacturer and marketer of nutritional supplements in
the United States. It sells more than 650 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.
In August, 1997, NBTY acquired Holland & Barrett ("H&B"), one of the
leading nutritional supplement retailers in the United Kingdom which
presently has 420 locations. Prior to the acquisition by NBTY, H&B marketed
a broad line of nutritional supplement products, including vitamins,
minerals and other nutritional supplements (approximately 58% of H&B's
revenues for its fiscal year 1997) and food products, including fruits and
nuts, confectionery and other items (approximately 42% of H&B's revenues for
its fiscal year 1997).
Marketing and Distribution
The Company markets its products through different channels of
distribution: wholesale-retail and direct mail and is supplemented by H&B's
retail position in the United Kingdom ("U.K.").
Direct Mail. The Company offers, through direct mail, 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.
Domestic Retail. The Company operates 127 retail locations in thirty-
eight states and the territory of Guam under the name Vitamin World.
Additionally, it has approximately 40 more locations which it has, or
expects to have, under lease by the end of 1998. Such locations carry a
full line of the Company's products under the Vitamin World brand name and
also carries 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.
International Retail. The Company has expanded sales of various
products to many countries throughout Europe, Asia and Latin America. In
the United Kingdom, the Company has leased warehouses for distribution of
its products.
Wholesale. The Company markets its products under various brand names
to various stores including drug store chains and supermarkets, independent
pharmacies, health food stores, health food store wholesalers and other
retailers such as mass merchandisers. The Nature's Bounty brand is sold to
drug store chains and drug wholesalers. The Company sells a full line of
products to supermarket chains and wholesalers under the brand name Natural
Wealth at prices designed for the "price conscious" consumer.
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.
H&B. H&B's product range is classified into two categories:
nutritional supplement products which generated approximately 58% of total
sales in fiscal year 1997, and food products which generated approximately
42% of total sales in fiscal year 1997. Nutritional supplement products
include herbal and alternative remedies, sports nutrition, aromatherapy, and
diet products. Food product lines include fruit and nuts, confectionery,
chilled and frozen foods, beverages and milk, vegetarian foods, herbal teas,
water and juices, honeys and spreads, breakfast foods, condiments and
biscuits.
Sales and Advertising
NBTY. NBTY has approximately 400 sales employees located throughout
the U.S. in its Vitamin World stores, and 70 employees who sell to NBTY's
wholesale distributors. In addition, NBTY sells through commissioned sales
representative organizations. For the fiscal years ended September 30, 1996
and 1997, NBTY spent approximately $11.3 million and $9.1 million,
respectively, on advertising in print media, including cooperative
advertising. NBTY creates its own advertising materials through a staff of
approximately 22 employees. H&B employed an average of 1,979 sales
employees in its retail stores. H&B runs advertisements weekly in four
national newspapers. It also conducts approximately 17 promotions per year
at its retail locations in addition to manager's specials. Six times per
year H&B publishes a glossy magazine with articles and promotional
materials.
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 initially are held in
quarantine during which time the Company's laboratory employees assay the
production against the manufacturer's certificate of analysis. Once
cleared, a lot number is assigned, samples are retained and the material is
processed by formulating, mixing and granulating, compression and sometimes
coating operations. After the tablet is manufactured, laboratory employees
test its weight, purity, potency, dissolution and stability. When products
such as vitamin tablets are ready for bottling, the Company's automated
equipment counts the tablets, inserts them into bottles, adds a tamper-
resistant cap with an inner safety seal and affixes a label. The Company
uses computer-generated documentation for picking and packing for order
fulfillment.
The principal raw materials used in the manufacturing process are
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 12% 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 1995, 1996 and 1997, the Company did not expend any significant
amounts for research and development of new products.
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, introduced a new statutory
framework governing the composition and labeling of dietary supplements.
With respect to composition, DSHEA creates a new class of "dietary
supplements", dietary ingredients 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 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 mat 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
practice ("GMP") regulations authorized by DSHEA, which are specific to
dietary supplements. GMP regulations 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. The Company currently manufactures its vitamins and nutritional
supplement products pursuant to the applicable food GMP rules. There can be
no assurance that, if the FDA adopts GMP regulations specific to dietary
supplements, NBTY will be able to comply with such GMP rules upon
promulgation or without incurring material expenses to do so.
The FDA has proposed, but not yet finalized, regulations to implement
certain labeling provisions of DSHEA. In addition, further DSHEA labeling
regulations are expected to be proposed by the FDA once the agency receives
the final report of the expert Commission on Dietary Supplement Labels,
established by DSHEA to provide recommendations on labeling claims for
supplements. The Commission on Dietary Supplements issued its draft report
in June 1997. It is uncertain when the final report will be issued or when
the FDA will propose further regulations. NBTY cannot determine what effect
such regulations, when promulgated, will have on its business in the future.
There can be no assurance that such regulations will not require expanded
or different labeling for NBTY's vitamins and nutritional products or,
among other things, require the recall, reformulation or discontinuance of
certain products, additional recordkeeping, warnings, notification
procedures and expanded documentation of the properties of certain products
and scientific substantiation regarding ingredients, product claims, safety
or efficacy.
NLEA prohibits the use of any health claim (as distinguished from
"statements of nutritional support" permitted by DSHEA) for foods, including
dietary supplements, unless the health claim is supported by significant
scientific agreement and is pre-approved by the FDA. To date, the FDA has
approved the use of health claims for dietary supplements only in connection
with the use of calcium for osteoporosis and the use of folic acid for
neural tube defects.
The FDA has broad authority to enforce the provisions of the FDCA
applicable to dietary supplements, including the power to seize adulterated
or misbranded products or unapproved new drugs, to request their recall from
the market, to enjoin their further manufacture or sale, to publicize
information about hazardous products, to issue warning letters and to
institute criminal proceedings. Although the regulation of dietary
supplements is less restrictive than that imposed upon drugs and food
additives, there can be no assurance that dietary supplements will continue
to be subject to the less restrictive 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 ("OTC") 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 formation,
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, also under pain of civil monetary penalties.
The Company is also subject to regulation under various international,
state and local laws that include provisions regulating, 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 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
reformation of certain products to meet new standards, the recall or
discontinuance of certain products not able to be reformulated, imposition
of additional recordkeeping requirements, expanded documentation of the
properties of certain products, expanded or different labeling, and/or
scientific substantiation. Any or all of such requirements could have a
material adverse effect on the Company's results of operations and financial
condition.
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, Fisheries and Food 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 on Toxicity, which reports to the Department of Health. The
relevant legislation governing the sale of food includes the Food Safety Act
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 Medicines Control Agency ("MCA"), a regulatory authority whose
responsibility is to ensure that all medicines sold or supplied for human
use in the U.K. meet acceptable standards of safety, quality and efficacy.
These standards are determined by the 1968 Medicines Act together with an
increasing number of E.C. regulations and directives laid down by the
European Union. 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 operates as the agent of the licensing authority (the
United Kingdom Health Ministers) and its activities cover every facet of
medicines controlled in the U.K. including involvement in the development of
common standards of medicine controlled in Europe. The MCA is responsible,
for example, for licensing, inspection and enforcement to ensure that legal
requirements concerning manufacture, distribution, sale, labeling,
advertising and promotion are upheld.
Trademarks
NBTY. NBTY owns trademarks registered with the United States Patent
and Trademark Office and many foreign jurisdictions for its Nature's Bounty,
Good'N Natural, Hudson, American Health, Natural Wealth, Puritan's Pride and
Vitamin World trademarks and has rights to use other names essential to its
business. U.S. 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 marks. NBTY regards
its trademarks and other proprietary rights as valuable assets and believes
they have significant value in the marketing of its products. NBTY
vigorously protects its trademarks against infringement.
H&B. H&B owns trademarks registered with the appropriate U.K.
authorities for its Holland & Barrett trademark and has rights to use other
names essential to its business.
Employees
NBTY . As of September 30, 1997, NBTY (excluding H&B) employed
approximately 1,460 persons, of whom 350 are in executive and administrative
capacities, approximately 70 are in wholesale sales, 400 are in the Vitamin
World stores and the balance are in manufacturing, shipping and packaging.
None of the Company's employees are represented by a labor union. The
Company believes its relationship with its employees is excellent.
H&B. During fiscal year 1997, H&B employed an average of 2,195
persons, of whom 99 worked in executive or administrative capacities, 1,979
worked in retail stores and 117 worked in warehouse and distribution. There
is no trade union representation at H&B. H&B management believes that its
relationship with its employees is excellent.
Item 2. PROPERTIES
NBTY. NBTY owns a total of approximately 800,000 square feet of plant
facilities located at 60, 90, 105 and 115 Orville Drive in Bohemia, New
York, 4320 Veterans Memorial Highway, Holbrook, and 35 Cartwright Loop,
Bayport, New York. The Company is constructing approximately a 100,000
square foot manufacturing facility on the 62 acre parcel it owns in Bayport,
New York and is completing the purchase of a 120,000 square foot building at
2100 Smithtown Avenue, Ronkonkoma, New York. NBTY also leases approximately
10,000 square feet of warehouse space in Southampton, England and
approximately 10,000 square feet of warehouse space in Reno, Nevada. NBTY
leases and operates 127 retail locations under the name Vitamin World in the
U.S. and Guam. The stores have an average selling area of 1,200 square
feet. Generally, NBTY 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.
H&B. H&B leases all of the locations of its 420 retail stores for
terms ranging between 10 and 25 years at varying rents. No percentage rents
are payable. H&B leases approximately 9,000 square feet of space in
Hinckley (U.K.) for executive and administrative staff and also leases a
44,500 square foot facility in Hinkley for warehouse and distribution space.
Item 3. LEGAL PROCEEDINGS
NBTY. NBTY and certain other companies in the industry have been
named as defendants in cases arising out of the ingestion of products
containing L-Tryptophan. NBTY had been named in more than 265 such
lawsuits, of which 4 are still pending against NBTY. The other 261 lawsuits
have been settled at no cost to NBTY. NBTY's supplier of L-Tryptophan
agreed to indemnify NBTY and the other companies named in the lawsuits
through the final resolution of all cases involving L-Tryptophan. In
addition, the supplier has posted, for the benefit of NBTY and the other
companies named in the lawsuits, a revolving, irrevocable letter of credit
of $20 million to be used 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, NBTY believes that the amount required to
either settle these cases or to pay judgments rendered therein will be paid
by the supplier or by NBTY's product liability insurance carrier.
In October 1994, litigation was commenced in the U.S. District Court,
Eastern District of New York, against NBTY and two of its officers. An
Amended Complaint was filed in October 1996, alleging that false and
misleading statements and representations were made concerning NBTY's sales
and earnings estimates for the fiscal years ending September 30, 1993 and
1994 and the fiscal quarters of 1994. Plaintiffs' case has been certified
as a class action. NBTY and its officers deny allegations of the Amended
Complaint and have vigorously contested the litigation. In 1994, prior to
commencement of the lawsuit, NBTY purchased a directors and officers
Indemnity Policy. On October 17, 1997, a Memorandum of Understanding was
entered into between the Company and the attorneys representing the
Plaintiff class agreeing to a settlement of the lawsuit for eight million
dollars, of which $4.4 million is cash and $3.6 million is in stock of NBTY.
The Company has the option to substitute a cash payment of $3.6 million in
lieu of issuing shares of stock. Subsequently, the Company entered into a
Stipulation of Settlement calling for, among other things, a total cash
payment of $8 million in settlement of the lawsuits. The Company has been
notified by its insurance carrier that it is willing to reimburse the
Company to the extent of $2.65 million.
H&B. H&B is not involved in any litigation believed to be material to
its business or operations.
Miscellaneous Claims and Litigations. The Company is involved in
miscellaneous claims and litigation, which taken individually or in the
aggregate, would not materially impact on the Company's financial position
or its business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 24, 1997, at the annual meeting of the shareholders, the
following directors were elected for a three year term: Aram Garabedian,
Bernard G. Owen and Alfred Sacks.
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. 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, 1996
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
First Quarter 5-3/4 4
Second Quarter 7-13/16 4-5/8
Third Quarter 11-3/8 7-7/16
Fourth Quarter 17-7/8 9-3/8
Fiscal year ended September 30, 1997
First Quarter 20-1/2 13-1/2
Second Quarter 23-1/2 14-3/8
Third Quarter 28-1/2 14-5/8
Fourth Quarter 34-1/2 18-3/8
</TABLE>
On December 15, 1997, the closing sale price of the Common Stock was
$27.00. There were approximately 617 record holders of Common Stock as of
December 15, 1997. The Company believes that there were in excess of 10,000
beneficial holders of Common Stock as of such date.
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars and shares in thousands, except per share amounts)
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Income
Statement Data:
Net Sales $138,430 $156,057 $178,760 $194,403 $281,407
Costs & Expenses:
Cost of Sales 67,951 79,891 93,875 95,638 135,886
Catalog, printing,
postage & promotion 11,507 14,786 19,262 17,635 19,227
Selling, general
& administrative 42,776 49,208 56,728 58,515 86,588
Litigation settlement costs 0 0 0 0 6,368
----------------------------------------------------
Income from operations 16,196 12,172 8,895 22,615 33,338
Interest expense (1,227) (914) (1,084) (1,445) (6,655)
Other, net 743 1,285 571 1,203 2,033
----------------------------------------------------
Income before income taxes 15,712 12,543 8,382 22,373 28,716
Income taxes 5,939 4,767 3,246 9,021 11,486
----------------------------------------------------
Net income $ 9,773 $ 7,776 $ 5,136 $ 13,352 $ 17,230
====================================================
Per Share Data:
Earnings per
common share:
Primary $ 0.53 $ 0.38 $ 0.26 $ 0.67 $ 0.86
Fully-diluted $ 0.53 $ 0.38 $ 0.26 $ 0.67 $ 0.86
Weighted average
number of shares
outstanding:
Primary 18,435 20,257 19,974 19,976 20,054
Fully-diluted 18,523 20,257 19,974 19,976 20,057
Selected Balance Sheet Data:
Working capital $ 42,869 $ 39,462 $ 40,665 $ 52,268 $ 63,480
Total assets $102,647 $115,112 $123,529 $145,550 $542,738
Long-term debt, capital lease
obligations and promissory note
payable, less current portion* $ 8,265 $ 7,566 $ 10,924 $ 18,397 $336,056
Total stockholders' equity $ 70,002 $ 78,017 $ 82,615 $ 96,950 $117,060
- --------------------
<F*> Includes Senior Subordinated Debt of $148,763 and Promissory Note of
$170,000 in 1997.
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Forward-Looking Statements
This annual report on Form 10-K contains statements relating to future
results of the Company (including certain projections and business trends)
that are "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. Actual results may differ materially from
those projected as a result of certain risks and uncertainties, including
but not limited to, changes in political and economic conditions, demand for
and market acceptance of new and existing products, as well as other risks
and uncertainties detailed from time to time in the filings of the Company
with the Securities and Exchange Commission.
Results of Operations
The following table sets forth income statement data of the Company as
a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Year Ended September 30
-----------------------
1995 1996 1997
-----------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales 52.5 49.2 48.3
Catalog printing, postage,
& promotion 10.8 9.1 6.8
Selling, general & administrative 31.7 30.1 30.8
Litigation 0.0 0.0 2.3
-----------------------
95.0 88.4 88.2
-----------------------
Income from operations 5.0 11.6 11.8
Interest expense and other (0.3) (0.1) (1.6)
-----------------------
Income before income taxes 4.7 11.5 10.2
Income taxes 1.8 4.6 4.1
-----------------------
Net income 2.9% 6.9% 6.1%
=======================
</TABLE>
1997 Compared to 1996
Net Sales. Net sales for 1997 were $281.4 million, an increase of
$87.1 million or 44.8% over 1996. Of the $87.1 million increase, $28.0
million was attributable to mail order, $43.6 million to retail sales and
$15.5 million to wholesale sales. Retail sales attributable to the Holland
& Barrett acquisition in August 1997 was $23.7 million. Without Holland &
Barrett, sales would have increased 32.5%
Costs and Expenses. Cost of sales for 1997 was $135.9 million,
compared with $95.6 million for the prior year. Gross profit increased to
$51.7% in 1997 from 50.8% in 1996. Such increase was due to various
factors, including increased sales of new products and generally higher
margins on products as well as lower manufacturing costs resulting from
increased productivity. The Company's strategy is to increase in-house
manufacturing while decreasing the use of outside suppliers.
Catalog, Printing, Postage and Promotion. Catalog printing, postage
and promotion for 1997 was $19.2 million, an increase of $1.6 million over
1996. Such costs as a percentage of sales were 6.8% in 1997 and 9.1% in
1996. The decrease was mainly due to more efficient printing and mailing
methods and increased sales Company wide.
Selling, General and Administrative. Selling, General and
Administrative expenses for 1997 was $86.6 million, a $28.1 million increase
over 1996; as a percentage of net sales, these costs were 30.8% and 30.1% in
1997 and 1996, respectively. Increase payroll costs and building costs
resulted from the acquisition of Holland & Barrett.
Litigation. The Company agreed to settle a class action lawsuit. See
Legal Proceedings, page 7 hereof.
Income Taxes. The Company's effective tax rate remained consistent at
40% in 1997 and 1996.
Interest Expense. Interest expense was $6.7 million, an increase of
$5.2 million. Interest associated with the Holland & Barrett acquisition
aggregated $1.7 million. In addition, the Company recorded a loss of
approximately $2.3 million in connection with the settlement of a Treasury-
Lock instrument.
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.
1996 Compared to 1995
Net Sales. Net sales for 1996 were $194.4 million, an increase of
$15.6 million or 8.8% over 1995. Of the $15.6 million increase, $10.6
million was attributable to wholesale-retail sales and $13.2 million was
attributable to mail order sales, less a decrease of $8.2 million from
Beautiful Visions, a cosmetic catalog which was sold in October, 1995.
Cost and Expenses. Cost of sales for 1996 was $95.6 million, an
increase of $1.8 million or 1.9% over 1995. Gross profit increased to 50.8%
in 1996 from 47.5% in 1995. Such increase was due to various factors,
including increased sales of higher margin products, long-term purchase
commitments of raw materials resulting in lower costs and manufacturing
efficiencies.
Catalog, Printing, Postage and Promotion. Catalog, printing, postage
and promotion for 1996 was $17.6 million, an decrease of $1.6 million over
1995. Such cost, as a percentage of net sales was 9.1% in 1996 compared
with 10.8% in 1995. The decrease was mainly due to the discontinuance of
the Beautiful Visions mail order operation.
Selling, General and Administrative. Selling, general and
administrative expenses for 1996 was $58.5 million, an increase of $1.8
million over 1995; as a percentage of net sales, these costs were 30.1% in
1996 and 31.7% in 1995. Decreases in payroll fringes and other
miscellaneous costs were offset by increases in outlet store rentals and
professional fees.
Interest expense. Interest expense in 1996 was $1.4 million, an
increase of $.4 million.
Income taxes. The Company's effective tax rate was 40.3% in 1996 and
38.7% in 1995.
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 $63.5 million at September 30, 1997, compared with
$52.3 million on September 30, 1996, an increase of $11.2 million.
In September 1997, the Company entered into a $50 million Credit &
Guarantee Agreement (CGA) which expires September 30, 2003. The CGA
provides for borrowings for working capital and general corporate purposes.
Virtually all the Company's assets are secured under the CGA and subject to
normal banking terms and conditions and the maintenance of various financial
ratios and covenants the CGA provides that loans be made under a selection
of rate formulas including Prime or Eurocurrency rates. At September 30,
1997, there were no borrowings outstanding under this facility.
Additionally, the Company issued $150 million 8-5/8% senior
subordinated Notes ("Notes") due in 2007. The Notes are unsecured and
subordinated in right payment for all existing and future indebtedness of
the Company.
In connection with the acquisition of Holland & Barrett (H&B), the
Company issued two promissory notes (the "Promissory Notes") totalling
approximately $169,000,000 plus interest, as consideration for the purchase
of the capital stock of H&B. The Promissory Notes, which were
collateralized by two letters of credit issued by a lending institution,
were paid in full in October, 1997.
In May, 1997, the Company purchased land and a building for a purchase
price of approximately $600,000 with operating funds.
The Company believes that existing cash balances internally-generated
funds from operations and amounts available under CGA will provide
sufficient liquidity to satisfy the Companies working capital needs for the
next 24 months and to finance anticipated capital expenditures incurred in
the ordinary course of business.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
A market risk sensitive instrument entered into for purposes other
than trading. In connection with the H&B acquisition, the Purchase
Agreement and related documents were executed on August 7, 1997. NBTY
issued two promissory notes (the "promissory Notes") totaling approximately
$169.0 million as consideration for the purchase of the capital stock of
H&B. The Promissory Notes, which were collateralized by two letters of
credit issued by The Chase Manhattan Bank were paid on October 17, 1997.
In connection with the Acquisition, NBTY entered into a $50.0 million
revolving credit facility for borrowings for working capital and general
corporate purposes.
In addition, the Company recorded a loss of approximately $2.3 million
in connection with the settlement of a Treasury-Lock instrument.
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 December
15, 1997. Their stated positions are as follows:
<TABLE>
<CAPTION>
Year Commencement
first of term of
elected office as
Name Age Position Director Officer
- ---------------------------------------------------------------------
<S> <C> <C>
Scott Rudolph 40 Chairman of
the Board
and President 1986 1986
Harvey Kamil 53 Executive Vice
President,
Secretary ---- 1982
Barry Drucker 49 Senior Vice
President-Sales ---- 1985
Patricia E. Ciccarone 41 Vice President-
Vitamin World ---- 1992
James P. Flaherty 40 Vice President-
Advertising ---- 1988
Abraham K. Kleinman 72 Vice President-
Manufacturing ---- 1982
Jean Palladino 62 Vice President-
Hudson ---- 1988
Abraham Rubenstein 67 Vice President-
Mail Order ---- 1985
William J. Shanahan 39 Vice President-
Data Processing ---- 1988
Robert Silverman 35 Vice President-
Good'N Natural ---- 1991
James A. Taylor 57 Vice President-
Production ---- 1982
William Doherty 47 Vice President-
Merchandising ---- 1996
Arthur Rudolph 69 Director 1971 1971
Aram Garabedian 62 Director 1971 ----
Bernard G. Owen 69 Director 1971 ----
Alfred Sacks 70 Director 1971 ----
Murray Daly 70 Director 1971 ----
Glenn Cohen 38 Director 1988 ----
Bud Solk 64 Director 1994 ----
Nathan Rosenblatt 40 Director 1994 ----
</TABLE>
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 Officer and is a shareholder of the Company. Mr. Rudolph
founded U.S. Nutrition Corp., a mail order vitamin company in 1976, which
was purchased by NBTY in 1986. He is the Chairman of Dowling College, Long
Island, New York. He joined NBTY in 1986. He is the son of Arthur Rudolph.
Harvey Kamil is Executive Vice President, Chief Financial Officer and
Secretary. He is on the Board of Directors of the Council for Responsible
Nutrition. He joined NBTY in 1982.
Barry Drucker is Senior Vice President of Sales. He joined NBTY in
1976.
Patricia E. Ciccarone is Vice President of Vitamin World. She
previously served as Director of Stores for Park Lane, a 500 store hosiery
chain. She joined NBTY in 1988.
James P. Flaherty is Vice President of Advertising. He joined NBTY in
1979.
Abraham H. Kleinman is Vice President of Manufacturing. He joined
NBTY in 1973.
Jean Palladino is Vice President of The Hudson Corporation. She
joined NBTY in 1986.
Abraham Rubenstein is Vice President of Mail Order. He joined NBTY in
1985.
William J. Shanahan is Vice President of Data Processing. He joined
NBTY in 1980.
Robert Silverman is Vice President of Good'N Natural. He joined NBTY
in 1985.
James E. Taylor is Vice President of Production. He joined NBTY in
1981.
William Doherty is Vice President of Merchandising. He joined NBTY in
1994.
Arthur Rudolph founded Arco Pharmaceuticals, Inc., NBTY's predecessor,
in 1960 and served as NBTY's Chief Executive Officer and Chairman of the
Board of Directors since that date until his resignation in September 1993.
He remains a member of the Board of Directors and was responsible for the
formation of NBTY in 1971. He is the father of Scott Rudolph.
Aram Garabedian has been since 1988, a real estate developer in Rhode
Island. He was associated with NBTY and its predecessor, Arco
Pharmaceuticals, Inc., for 20 years in a sales capacity and as an officer.
He has served as a director since 1971.
Bernard G. Owen has been associated with Cafiero, Cuchel and Owen
Insurance Agency, Pitkin, Owen Insurance Agency and Wood-HEW Travel Agency
for more than the past five 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 thirty 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 has been the President of Glenn-Scott Landscaping and
Design for more than five years.
Bud Solk has been President of Chase/Ehrenberg & Rosene, Inc., an
advertising and marketing agency located in Chicago, Illinois since 1995.
Previously, Mr. Solk had been President of Bud Solk Associates, Inc., which
he founded in 1958.
Nathan Rosenblatt is the President and Chief Executive Officer of
Ashland Maintenance Corp., a commercial maintenance organization located in
Long Island, New York.
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, 1997. 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.
<TABLE>
<CAPTION>
Amount & Nature Percent
Name and Address of of Beneficial of
Title of Class Beneficial Owner Ownership (1) Class (1)
- --------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock Scott Rudolph 3,127,315 16.0
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Harvey Kamil 685,631 3.6
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 1716 Beneficial
Common Stock NBTY, Inc. 1,062,228 5.7
(Par Value Profit Sharing Plan Record and
$.008) Beneficial
- --------------------
<F1> Includes shares issuable upon exercise of options held by executive
officers and directors.
</TABLE>
(b) Security Ownership of Management (directors and Officers)
<TABLE>
<CAPTION>
Amount & Nature Percent
Name and Address of of Beneficial of
Title of Class Beneficial Owner Ownership (1) Class (1)
- --------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock Scott Rudolph(2) 3,127,315 16.0
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Harvey Kamil 685,631 3.6
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Arthur Rudolph 647,982 3.5
(Par value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Barry Drucker 98,799 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Aram Garabedian 14,000 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Bernard G. Owen 27,500 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Alfred Sacks 14,000 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Murray Daly 12,000 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Glenn Cohen 29,000 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Bud Solk --- ---
(Par Value 90 Orville Drive
$.008) Bohemia, NY 11716
Common Stock Nathan Rosenblatt --- ---
(Par Value 90 Orville Drive
$.008) Bohemia, NY 11716
Common Stock All Directors, 4,084,057 20.4
(Par Value Officers and as a Record and
$.008) group (11 persons) Beneficial
- --------------------
<F1> 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.
<F2> Includes shares held in a Trust created by Arthur Rudolph for the
benefit of Scott Rudolph and others.
</TABLE>
NBTY 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, as follows:
<TABLE>
<CAPTION>
Number of Years Percentage of Shares
of Service earned each year
- --------------------------------------
<S> <C>
0 - 2 0%
3 20%
4 20%
5 20%
6 20%
7 20%
</TABLE>
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 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, 1997, the following
transactions occurred:
A. Gail Radvin, Inc., a corporation wholly-owned by Gail Radvin,
received commissions from the Company totalling $540,593 on account of sales
of $8,630,559 made in certain foreign countries. 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 $14,237.
C. Cafiero, Cuchel & Owen, a company partly-owned by Bernard G. Owen,
a director, received $428,643 in premiums for various policies obtained for
the Company.
D. Glenn-Scott Landscaping & Design, a company owned by Glenn Cohen,
a director, performed landscaping and maintenance on the Company's
properties and received $63,482 in compensation.
E. Arthur Rudolph, a director, has been retained under a Consulting
Agreement, at an annual fee of $344,637, payable monthly, which Agreement
expires on December 31, 1997. The Company and Mr. Rudolph are presently
negotiating a renewal of the Agreement.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULE AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
1. Financial Statements
Report of Independent Accountants F-1
Consolidated Balance Sheets as of
September 30, 1997 and 1996 F-2
Consolidated Statements of Income for the years
ended September 30, 1997, 1996 and 1995 F-3
Consolidated Statements of Stockholders' Equity
for the years ended September 30, 1997, 1996 and 1995 F-4
Consolidated Statements of Cash Flows for the years
ended September 30, 1997, 1996 and 1995 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
27. Financial Data Schedule
(b) Report on Form 8-K dated as of August 7, 1997
</TABLE>
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 18, 1997 By: /s/ Scott Rudolph
----------------------------------
Scott Rudolph
President, Chief Executive Officer
Dated: December 18, 1997 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 18, 1997 By: /s/ Scott Rudolph
----------------------------------
Scott Rudolph
Chairman, President and
Chief Executive Officer
Dated: December 18, 1997 By: /s/ Arthur Rudolph
----------------------------------
Arthur Rudolph, Director
Dated: December 18, 1997 By: /s/ Aram Garabedian
----------------------------------
Aram Garabedian, Director
Dated: December 18, 1997 By: /s/ Bernard G. Owen
----------------------------------
Bernard G. Owen, Director
Dated: December 18, 1997 By: /s/ Alfred Sacks
----------------------------------
Alfred Sacks, Director
Dated: December 18, 1997 By: /s/ Murray Daly
----------------------------------
Murray Daly, Director
Dated: December 18, 1997 By: /s/ Glenn Cohen
----------------------------------
Glenn Cohen, Director
Dated: December 18, 1997 By: /s/ Bud Solk
----------------------------------
Bud Solk, Director
Dated: December 18, 1997 By: /s/ Nathan Rosenblatt
----------------------------------
Nathan Rosenblatt, Director
NBTY, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
REPORT of INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of NBTY, Inc.:
We have audited the consolidated financial statements and the financial
statement schedule of NBTY, 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, 1997 and 1996,
and the consolidated results of their operations and their cash flows for
each of the three years in the period ended September 30, 1997, 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.
COOPERS & LYBRAND L.L.P.
Melville, New York
November 6, 1997.
NBTY, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 1997 and 1996
(Dollars and shares in thousands)
<TABLE>
<CAPTION>
ASSETS: 1997 1996
--------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 18,419 $ 9,292
Short-term investments 8,362 11,024
Accounts receivable, less allowance
for doubtful accounts of $991
in 1997 and $794 in 1996 15,701 11,625
Inventories 75,936 38,070
Deferred income taxes 6,032 3,155
Prepaid catalog costs and other
current assets 18,885 5,683
--------------------
Total current assets 143,335 78,849
Cash held in escrow 144,262
Property, plant and equipment, net 108,173 61,732
Intangible assets, net 140,447 3,975
Other assets 6,521 994
--------------------
Total assets $542,738 $145,550
====================
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY: 1997 1996
--------------------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt and capital
lease obligations $ 1,016 $ 935
Accounts payable 44,514 10,943
Accrued expenses 34,325 14,705
--------------------
Total current liabilities 79,855 26,583
Long-term debt 163,447 15,178
Obligations under capital 2,700 3,219
Promissory note payable 169,909
Deferred income taxes 7,474 2,827
Other liabilities 2,293 793
--------------------
Total liabilities 425,678 48,600
--------------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.008 par; authorized 25,000
shares; issued 20,117 shares in 1997 and
20,080 shares in 1996 and outstanding
18,614 shares in 1997 and 18,593 shares
in 1996 161 160
Capital in excess of par 56,304 56,014
Retained earnings 61,238 44,008
--------------------
117,703 100,182
Less 1,503 and 1,487 treasury shares
at cost, in 1997 and 1996, respectively (3,206) (2,648)
Stock subscriptions receivable (584)
Cumulative translation adjustment 2,563
--------------------
Total stockholders' equity 117,060 96,950
--------------------
Total liabilities and stockholders' equity $542,738 $145,550
====================
</TABLE>
See notes to consolidated financial statements.
NBTY, Inc. and Subsidiaries
Consolidated Statements of Income
Years ended September 30, 1997, 1996 and 1995
(Dollars and shares in thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------
<S> <C> <C> <C>
Net sales $281,407 $194,403 $178,760
--------------------------------
Costs and expenses:
Cost of sales 135,886 95,638 93,875
Catalog printing, postage and promotion 19,227 17,635 19,262
Selling, general and administrative 86,588 58,515 56,728
Litigation settlement costs 6,368
--------------------------------
248,069 171,788 169,865
--------------------------------
Income from operations 33,338 22,615 8,895
--------------------------------
Other income (expense):
Interest, net (6,655) (1,445) (1,084)
Miscellaneous, net 2,033 1,203 571
--------------------------------
(4,622) (242) (513)
--------------------------------
Income before income taxes 28,716 22,373 8,382
Income taxes 11,486 9,021 3,246
--------------------------------
Net income $ 17,230 $ 13,352 $ 5,136
================================
Net income per share $ 0.86 $ 0.67 $ 0.26
================================
Weighted average common shares outstanding 20,054 19,976 19,974
================================
</TABLE>
See notes to consolidated financial statements.
NBTY, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended September 30, 1997, 1996 and 1995
(Dollars and shares in thousands)
<TABLE>
<CAPTION>
Common stock Treasury stock
---------------- ----------------- Stock Cumulative
Number of Capital in Retained Number of subscriptions translation
shares Amount excess of par earnings shares Amount receivable adjustment Total
--------- ------ ------------- -------- --------- ------ ------------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1994 18,778 $150 $53,209 $25,520 1,213 $ (863) $ 78,016
Net income for year ended
September 30, 1995 5,136 5,136
Exercise of stock options 430 3 212 215
Tax benefit from exercise of
stock options 731 731
Purchase of treasury stock,
at cost 228 (1,483) (1,483)
--------------------------------------------------------------------------------------------
Balance, September 30, 1995 19,208 153 54,152 30,656 1,441 (2,346) 82,615
Net income for year ended
September 30, 1996 13,352 13,352
Exercise of stock options 872 7 588 $(584) 11
Tax benefit from exercise of
stock options 1,274 1,274
Purchase of treasury stock,
at cost 46 (302) (302)
--------------------------------------------------------------------------------------------
Balance, September 30, 1996 20,080 160 56,014 44,008 1,487 (2,648) (584) 96,950
Net income for year ended
September 30, 1997 17,230 17,230
Gain on foreign currency
translation $2,563 2,563
Exercise of stock options 37 1 33 34
Tax benefit from exercise of
stock options 257 257
Repayment of stock
subscriptions receivable
for options exercised 96 96
Stock tendered as payment
for options exercised 16 (558) 488 (70)
--------------------------------------------------------------------------------------------
Balance, September 30, 1997 20,117 $161 $56,304 $61,238 1,503 $(3,206) $ - $2,563 $117,060
============================================================================================
</TABLE>
See notes to consolidated financial statements.
NBTY, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended September 30, 1997, 1996 and 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 17,230 $ 13,352 $ 5,136
Adjustments to reconcile net income to cash provided by
operating activities:
Loss on disposal/sale of property, plant and equipment 31 374
Depreciation and amortization 8,167 5,623 4,840
Provision (recovery) for allowance for doubtful accounts 197 216 (18)
Deferred income taxes (2,750) (642) 685
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (4,048) 1,616 (2,120)
Inventories (19,545) (2,036) 4,454
Prepaid catalog costs and other current assets (4,499) 487 (264)
Other assets 47 675 1,124
Accounts payable 13,694 (5,468) 3,160
Accrued expenses 14,590 5,690 2,810
Other liabilities 1,500 24 275
Income tax receivable 1,300
---------------------------------
Net cash provided by operating activities 24,614 19,537 21,756
---------------------------------
Cash flows from investment activities:
Increase in intangible assets (1,843) (67) (1,064)
Purchase of property, plant and equipment (21,092) (15,750) (11,548)
Proceeds from sale of property, plant and equipment 20 4
Proceeds from sale of short-term investments 2,662
Purchase of short-term investments (11,024)
Receipt of payments on notes from sale of direct mail
cosmetics business 1,047 741
Proceeds from sale of direct mail cosmetic business 350
Cash from acquisition 5,580
---------------------------------
Net cash used in investing activities (13,626) (25,746) (12,612)
---------------------------------
Cash flows from financing activities:
Net payments under line of credit agreement (5,000)
Proceeds from bond offering, net of discount 148,763
Cash held in escrow (144,262)
Bond issue costs (5,575)
Borrowings under long-term debt agreements 6,000 2,400
Principal payments under long-term debt agreements
and capital leases (932) (586) (798)
Purchase of treasury stock (70) (302) (1,292)
Proceeds from stock options exercised 34 11 24
Repayment of stock subscription receivable 96
---------------------------------
Net cash (used in) provided by financing activities (1,946) 5,123 (4,666)
---------------------------------
Effect of exchange rate changes on cash and cash equivalents 85
---------------------------------
Net increase (decrease) in cash and cash equivalents 9,127 (1,086) 4,478
Cash and cash equivalents at beginning of year 9,292 10,378 5,900
---------------------------------
Cash and cash equivalents at end of year $ 18,419 $ 9,292 $ 10,378
=================================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 2,717 $ 1,454 $ 1,086
Cash paid during the period for income taxes $ 14,008 $ 5,387 $ 1,649
</TABLE>
Non-cash investing and financing information:
In connection with the acquisition of Holland & Barrett Holdings Ltd. on
August 7, 1997, the Company issued two promissory notes aggregating $170,000
as consideration for the purchase of capital stock. Such notes were paid in
October 1997 from the cash held in escrow at September 30, 1997. (See Note
2)
During fiscal 1997, 1996 and 1995, options were exercised with shares of
common stock issued to certain officers and directors. Accordingly, the tax
benefit of approximately $257, $1,274 and $731 for the years ended September
30, 1997, 1996 and 1995, respectively, was recorded as an increase in
capital in excess of par and a reduction in taxes currently payable. In
addition, during fiscal 1997, common stock was surrendered to the Company in
satisfaction of $488 of the stock subscription outstanding at September 30,
1996. (See Note 12)
During fiscal 1996, the Company entered into capital leases for machinery
and equipment aggregating $2,635.
On October 9, 1995, the Company sold certain assets of its direct-mail
cosmetics business for $2,495. The Company received $350 in cash and non-
interest bearing notes aggregating $2,145 for inventory, a customer list and
other intangible assets. The inventory note was repaid in full in October
1996. In April 1997, the Company received the final payment of the customer
list note. (See Note 3)
See notes to consolidated financial statements.
NBTY, Inc. and Subsidiaries
Notes to Financial Statements
(In thousands, except per share amounts)
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 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 ("U.K."), 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, among
others.
Principles of consolidation and basis of presentation
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, 1997, 1996 and 1995.
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.
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. One supplier provided
approximately 12% of the Company's purchases in 1997 and 1996.
In fiscal 1995, 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 expense
All media (television, radio, magazine) and cooperative
advertising costs are generally expensed as incurred. Total
expenses relating to advertising and promotion for fiscal 1997,
1996 and 1995 were $11,338, $9,098 and $8,823, 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.
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.
Foreign currency translation
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, and gains
and losses. Where the local currency is the functional
currency, translation adjustments are recorded as a separate
component of stockholder's equity.
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 bases 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.
Short-term investments
Short-term interest bearing investments are those with
maturities of less than one year but greater than three months
when purchased. These investments are readily convertible to
cash and are stated at market value, which approximates cost.
Realized gains and losses are included in other income on a
specific identification basis in the period they are realized.
Common shares and earnings per share
Earnings per share are based on the weighted average number of
shares of common stock and common stock equivalents outstanding
during each period. For 1997, common stock equivalents, which
consisted of common shares issuable upon the exercise of
outstanding stock options, were 1,441. Common stock equivalents
are not included in income per share computations in 1996 and
1995 since their effect on the calculation is immaterial.
Reclassifications
Certain reclassifications have been made to conform prior year
amounts to the current year presentation.
Accounting changes
Effective October 1, 1996, the Company adopted the
disclosure-only provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" No. 123. As permitted by SFAS No. 123, the
Company continues to measure compensation cost in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." As the Company has not granted any
options during fiscal 1997 or 1996, there would not have been
any impact on the Company's financial position or results of
operations on a pro forma basis.
Effective October 1, 1996, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." This statement requires
that certain assets be reviewed for impairment and, if impaired,
be measured at fair value, whenever events or changes in
circumstances indicate that the carrying amount of the asset may
not be recoverable. The adoption of SFAS No. 121 at October 1,
1996 and its application during fiscal 1997 had no material
impact on the Company's financial position or results of
operations.
New accounting standards
In February 1997, the Financial Accounting Standards Board
("FASB") issued SFAS No. 128, "Earnings Per Share." The
statement simplifies the standards for computing earnings per
share ("EPS") and makes them comparable to international EPS
standards. The statement requires the presentation of both
"basic" and "diluted" EPS on the face of the income statement
with a supplementary reconciliation of the amounts used in the
calculations. The statement is effective for financial
statements issued for periods ending after December 15, 1997,
including interim periods; earlier application is not permitted.
Had the statement been required to be implemented for the
periods presented, the effect on EPS would have been
insignificant.
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting
and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from
investments by owners and distribution to owners. Among other
disclosures, SFAS No. 130 requires that all items that are
required to be recognized under current accounting standards as
components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other
financial statements.
In addition, in June 1997, the FASB issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related
Information," which establishes standards for reporting
information about operating segments. It also establishes
standards for disclosures regarding products and services,
geographic areas and major customers.
Both of these new standards are effective for periods beginning
after December 15, 1997 and require comparative information for
earlier years to be restated. The implementation of these new
standards will not affect the Company's results of operations
and financial position, but may have an impact on future
financial statement disclosures.
2. Acquisition of Holland & Barrett Holdings Ltd.:
On August 7, 1997, the Company acquired all of the issued and
outstanding capital stock of Holland & Barrett Holdings Ltd.
("H&B") from Lloyds Chemist's plc ("Lloyds") for an aggregate
purchase price of approximately $169,000 plus acquisition costs
of approximately $811. The acquisition has been accounted for
under the purchase method and, accordingly, the results of
operations are included in the financial statements from the
date of acquisition. H&B markets a broad line of nutritional
supplement products, including vitamins, minerals and other
nutritional supplements and food product. At the date of
acquisition, H&B operated approximately 410 retail stores in the
United Kingdom.
The Company issued to Lloyds two promissory notes (the
"Promissory Notes") totaling approximately $170,000 as
consideration for the purchase of capital stock of H&B. The
Promissory Notes, which are collateralized by two letters of
credit issued by a lending institution, were paid in full in
October 1997.
In connection with the Acquisition, the Company (i) entered into
a $50,000 revolving credit facility (the "Revolving Credit
Facility"), which provides borrowings for working capital and
general corporate purposes, and (ii) issued $150,000 in Senior
Subordinated Notes due 2007.
Assets acquired and liabilities assumed include cash ($5,580),
inventory ($18,045), other current assets ($11,078), property,
plant and equipment ($31,554), and current and long-term
liabilities ($27,154 and $4,058, respectively). The excess cost
of investment over the net book value of H&B at the date of
acquisition resulted in an increase in goodwill of $133,725
which will be amortized over 25 years. Additionally, finance
related costs of approximately $5,600 will be amortized over 10
years.
The following unaudited condensed pro forma information presents
a summary of consolidated results of operations of the Company
and H&B as if the acquisition had occurred at the beginning of
fiscal 1996, with pro forma adjustments to give effect to the
amortization of goodwill, interest expense on acquisition debt
and certain other adjustments, together with related income tax
effects. The pro forma information, which does not give effect
to anticipated intercompany product sales, is not necessarily
indicative of the results of operations had H&B been acquired as
of the earliest period presented below.
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
------------- -------------
<S> <C> <C>
Net sales $428,953 $345,305
Net income $ 12,458 $ 6,110
Net income per share $ 0.62 $ 0.31
</TABLE>
3. Sale of Direct-Mail Cosmetics Business:
On October 9, 1995, the Company sold certain assets of its
direct-mail cosmetics business for $2,495. The Company received
$350 in cash and non interest bearing notes aggregating $2,145
for inventory, a customer list and other intangible assets.
Revenues applicable to this marginally unprofitable business
were $137 and $8,284 for fiscal 1996 and 1995, respectively.
The inventory note was repaid in full in October 1996 and, in
April 1997, the Company received the final payment of the
customer list note.
4. Inventories:
<TABLE>
<CAPTION>
September 30,
--------------------
1997 1996
<S> <C> <C>
Raw materials $ 29,892 $ 17,132
Work-in-process 3,516 1,523
Finished goods 42,528 19,415
--------------------
$ 75,936 $ 38,070
====================
</TABLE>
5. Property, Plant and Equipment:
<TABLE>
<CAPTION>
September 30,
--------------------
1997 1996
<S> <C> <C>
Land $ 5,050 $ 4,765
Buildings and leasehold improvements 47,819 38,088
Machinery and equipment 33,540 28,560
Furniture and fixtures 53,552 8,484
Transportation equipment 1,015 641
Computer equipment 14,635 8,545
--------------------
155,611 89,083
Less accumulated depreciation and amortization 47,438 27,351
--------------------
$108,173 $ 61,732
====================
</TABLE>
Depreciation and amortization of property, plant and equipment
for the years ended September 30, 1997, 1996 and 1995 was
approximately $7,104, $4,974 and $3,190, respectively.
Property, plant and equipment includes approximately $4,051 for
assets recorded under capital leases for fiscal 1997 and 1996.
6. Intangible Assets:
Intangible assets, at cost, acquired at various dates are as
follows:
<TABLE>
<CAPTION>
September 30,
------------------- Amortization
1997 1996 period
<S> <C> <C> <C>
Goodwill $136,972 $ 469 20-40
Customer lists 9,816 8,784 6-15
Trademark and licenses 1,201 1,201 2-3
Covenants not to compete 1,305 1,305 5-7
-------------------
149,294 11,759
Less accumulated amortization 8,847 7,784
-------------------
$140,447 $ 3,975
===================
</TABLE>
Amortization included in the consolidated statements of income
under the caption "selling, general and administrative expenses"
in 1997, 1996 and 1995 was approximately $1,063, $649 and $776,
respectively.
7. Accrued Expenses:
<TABLE>
<CAPTION>
September 30,
------------------
1997 1996
<S> <C> <C>
Litigation settlement costs $ 5,600
Payroll and related payroll taxes 4,185 $ 2,731
Customer deposits 2,363 1,863
Accrued purchases and interest 2,800
Income taxes payable 7,456 2,670
Other 11,921 7,441
------------------
$34,325 $14,705
==================
</TABLE>
8. Long-Term Debt:
<TABLE>
<CAPTION>
September 30,
-------------------
1997 1996
<S> <C> <C>
Senior debt:
8-5/8% Senior subordinated notes due 2007, net of
unamortized discount of $1,237 (a) $148,763
Mortgages:
First mortgage, payable in monthly principal and interest
(10.375%) installments (b) 7,317 $ 7,447
First mortgage payable in monthly principal and interest
(9.73%) installments of $25 (c) 2,169 2,258
First mortgage, payable in monthly principal and interest
(7.375%) installments of $55 (d) 5,693 5,926
-------------------
Revolving credit agreement (e)
163,942 15,631
Less current portion 495 453
-------------------
$163,447 $15,178
===================
</TABLE>
(a) In September 1997, the Company issued 10-year Senior
Subordinated Notes due 2007. The Notes are unsecured and
subordinated in right of payment for all existing and future
indebtedness of the Company. The Company is in the process of
registering these Notes under the Securities Act of 1933 through
an exchange offer. Such Exchange Notes, once issued, will have
terms substantially identical to the original Notes.
(b) In September 1990, the Company obtained an $8,000 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 $75 for ten years
through 2000, with a final payment of $6,891 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 was funded with $690 in cash and the
balance through a 15-year mortgage note payable. This agreement
contains various restrictive covenants which require the
maintenance of certain financial ratios and limits capital
expenditures.
(d) In April 1996, the Company obtained a $6,000 first mortgage
with a fixed interest rate of 7.375%, collateralized by the
underlying real estate. The mortgage has monthly principal and
interest payments of $55 for fifteen years through 2011.
(e) In September 1997, the Company entered into a Revolving
Credit Agreement (the "Agreement") with five banks that provides
for borrowings up to $50,000, which expires September 23, 2003.
Virtually all of the Company's assets serve as collateral under
the Agreement, which is subject to normal banking terms and
conditions. The Agreement provides that loans may be made under
a selection of rate formulas including Prime or Euro currency
rates. The Agreement provides for the maintenance of various
financial ratios and covenants. As of September 30, 1997, there
were no outstanding borrowings under the Agreement.
Required principal payments of long-term debt are as follows:
<TABLE>
<CAPTION>
Years ended
September 30,
<C> <C>
1998 $ 495
1999 539
2000 7,420
2001 444
2002 481
Thereafter 154,563
--------
$163,942
========
</TABLE>
In August 1997, in connection with the promissory notes issued
as consideration for the purchase of H&B, the Company was issued
two standby letters of credit aggregating $170,000. At
September 30, 1997, there were no borrowings outstanding under
the letters of credit. As of October 17, 1997, upon payment of
the promissory notes, the letters of credit were cancelled.
In 1997, the Company recorded a loss of $2,265 in connection
with an interest rate lock which was settled on October 28, 1997.
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, 1997 are as
follows:
<TABLE>
<S> <C>
1998 $ 759
1999 759
2000 759
2001 759
2002 692
Thereafter 172
------
3,900
Less, amount representing interest 679
------
Present value of minimum lease payments (including $521
due within one year) $3,221
======
</TABLE>
10. Income Taxes:
Provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
Year ended September 30,
---------------------------
1997 1996 1995
<S> <C> <C> <C>
Federal
Current $14,207 $7,551 $2,225
Deferred (2,530) (501) 637
State
Current 1,218 2,112 336
Deferred (220) (141) 48
Foreign benefit (1,189)
---------------------------
Total provision $11,486 $9,021 $3,246
===========================
</TABLE>
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.
<TABLE>
<CAPTION>
Year ended September 30,
---------------------------------------------------------------------
1997 1996 1995
--------------------- -------------------- --------------------
Percent of Percent of Percent of
pretax pretax pretax
Amount income Amount income Amount income
<S> <C> <C> <C> <C> <C> <C>
Income tax expense at
statutory rate $10,051 35.0% $7,831 35.0% $2,850 34.0%
State income taxes, net
of federal income tax benefit 649 2.3% 1,281 5.7% 254 3.0%
Other, individually less than 5% 786 2.7% (91) (0.4%) 142 1.7%
------------------------------------------------------------------
Actual income tax provision $11,486 40.0% $9,021 40.3% $3,246 38.7%
==================================================================
</TABLE>
The components of deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred tax assets:
Current:
Inventory capitalization $ 351 $ 243
Accrued expenses and reserves not currently deductible 5,350 2,591
Tax credits 331 321
------------------
Current deferred tax assets 6,032 3,155
------------------
Noncurrent:
Intangibles 333 335
Reserves not currently deductible 188 200
------------------
Total noncurrent 521 535
------------------
Deferred tax liabilities:
Property, plant and equipment (7,995) (3,362)
------------------
Net deferred tax (liability) asset $(1,442) $ 328
==================
</TABLE>
Available state tax credits of $331 and $321 in 1997 and 1996,
respectively, are scheduled to expire through fiscal 2002.
11. Commitments:
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 additional rentals based
upon sales plus certain tax and maintenance costs.
Future minimal rental payments under the retail location and
other leases that have initial or noncancelable lease terms in
excess of one year at September 30, 1997 are as follows:
<TABLE>
<CAPTION>
Year ending
September 30,
<S> <C>
1998 $ 25,322
1999 24,501
2000 23,522
2001 22,176
2002 20,804
Thereafter 161,623
--------
$277,948
========
</TABLE>
Operating lease rental expense, including real estate tax and
maintenance costs, and leases on a month to month basis were
approximately $7,750, $1,979 and $1,248 for the years ended
September 30, 1997, 1996 and 1995, respectively.
Purchase commitments
The Company was committed to make future purchases under various
purchase order arrangements with fixed price provisions
aggregating approximately $26,102 and $12,923 at September 30,
1997 and 1996, respectively.
Capital commitments
The Company had approximately $15,800 in open capital
commitments related to a manufacturing facility and computer
hardware and software at September 30, 1997.
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, 1997 was approximately $749 per year.
The Company also has a two-year consulting agreement with its
former chairman and current director which expires on December
31, 1997. Such agreement requires annual payments of
approximately $350. The parties are presently negotiating a
renewal of the agreement under substantially comparable terms.
In addition, an entity owned by a relative of an officer
received sales commissions of $541, $417 and $510 in 1997, 1996
and 1995, respectively.
12. Stock Option Plans:
The Board of Directors approved the issuance of 2,220
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 approved the issuance
of an aggregate of 1,800 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 1997, options were exercised with 37 shares of
common stock issued to certain officers and a director for $23.
As a result of the exercise of those options, the Company
received a compensation deduction for tax purposes of
approximately $643 and a tax benefit of approximately $257 which
was credited to capital in excess of par.
During fiscal 1996, options were exercised with 872 shares of
common stock issued to certain officers and directors for $11
and interest bearing notes in the amount of $584. As a result
of the exercise of these options, the Company was entitled to a
compensation deduction for tax purposes of approximately $3,145
and a tax benefit of approximately $1,274 which was credited to
capital in excess of par.
During fiscal 1995, options were exercised with 430 shares of
common stock issued to certain officers and directors for $24
and an interest bearing note in the amount of $191. The
promissory note, including interest, was paid by the surrender
of 23 NBTY common shares to the Company at the prevailing market
price. As a result of the exercise of these options, the
Company was entitled to a compensation deduction of
approximately $1,828 which resulted in a tax benefit of
approximately $731 which was credited to capital in excess of
par.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
average average average
Number exercise Number exercise Number exercise
of shares price of shares price of shares price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,523 $.76 2,395 $.76 2,825 $.72
Exercised 37 $.92 872 $.68 430 $.50
-------------------------------------------------------------------
Outstanding at end of year 1,486 $.76 1,523 $.76 2,395 $.76
===================================================================
Exercisable at end of year 1,486 $.76 1,523 $.76 2,395 $.76
===================================================================
</TABLE>
As of September 30, 1997, the weighted average remaining
contractual life of outstanding options was 4 years. In
addition, there were no options available for grant at September
30, 1997, 1996 or 1995.
13. 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 $1,209, $489 and $498 for the years ended
September 30, 1997, 1996 and 1995, respectively.
14. Litigation:
L-tryptophan:
The Company and certain other companies in the industry have
been named as defendants in cases arising out of the ingestion
of products containing L-tryptophan. The Company had been named
in more than 265 lawsuits, of which four are still pending
against the Company. The other 261 lawsuits have been settled
at no cost to the Company. The Company's supplier of
L-tryptophan agreed to indemnify the Company and the other
companies named in the lawsuits through the final resolution of
all cases involving L-tryptophan. In addition, the supplier has
posted, for the benefit of the Company and the other companies
named in the lawsuits, a revolving, irrevocable letter of credit
of $20,000 to be used 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, the Company
believes that the amount required to either settle these cases
or to pay judgments rendered therein will be paid by the
supplier or by the Company's product liability insurance carrier.
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. On October 17, 1997, a
Memorandum of Understanding was entered into between the Company
and the attorneys representing the Plaintiff class agreeing to
an $8,000 ($4,400 cash, $3,600 stock) settlement of the lawsuit.
Subsequently, the Company entered into a Capital Stipulation of
Settlement calling for, among other things, a total cash payment
of $8,000. The Company has been notified by its insurance
carrier that it is willing to reimburse the Company to the
extent of $2,400. Accordingly, as of September 30, 1997, the
Company recorded a $5,600 provision for its portion of the
settlement which, along with related legal fees of approximately
$768, has been reflected separately in the statement of income.
Other litigation:
The Company is also involved in miscellaneous claims and
litigation which management believes, taken individually or in
the aggregate, would not have a material adverse effect on the
Company's financial position or its business.
15. Foreign Operations:
In connection with the Company's recent acquisition of H&B which
operates primarily in the United Kingdom, the Company has
significantly expanded its operations outside of the United
States. The following information has been summarized by
geographic area as of September 30, 1997 and for the year then
ended.
<TABLE>
<CAPTION>
Identifiable Operating
Assets Sales Income
------------ ----- ---------
<S> <C> <C> <C>
United States $328,548 $254,910 $36,619
United Kingdom 214,190 26,497 (3,281)
----------------------------------
$542,738 $281,407 $33,338
==================================
</TABLE>
16. Quarterly Results of Operations (Unaudited):
The following is a summary of the unaudited quarterly results of
operations for fiscal 1997 and 1996:
<TABLE>
<CAPTION>
Quarter ended
------------------------------------------------------
December 31, March 31, June 30, September 30,
------------ --------- -------- -------------
<S> <C> <C> <C> <C>
1997:
Net sales $47,327 $75,019 $61,761 $97,300
Gross profit 24,757 39,342 31,803 49,619
Income before income taxes 5,484 12,723 8,548 1,961(a)
Net income 3,290 7,634 5,129 1,177
Net income per share $ 0.16 $ 0.38 $ 0.26 $ 0.06
1996:
Net sales $38,589 $55,605 $47,900 $52,309
Gross profit 17,779 27,760 24,453 28,773
Income before income taxes (412) 7,502 6,503 8,780(a)
Net income (251) 4,576 3,763 5,264
Net income per share $ (0.01) $ 0.23 $ 0.19 $ 0.26
- -----------------------
<Fa> Year-end adjustments resulting in an increase to pre-tax
income of approximately $2.1 million and $2 million primarily
related to adjustments of inventory amounts in 1997 and 1996,
respectively.
</TABLE>
SCHEDULE II
NBTY, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
for the years ended September 30, 1997, 1996 and 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
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
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fiscal year ended September 30, 1997:
Allowance for doubtful accounts ........................ $794 $288 ($ 91)(a) $991
Fiscal year ending September 30, 1996:
Allowance for doubtful accounts ........................ $577 $217 $794
Fiscal year ending September 30, 1995:
Allowance for doubtful accounts ........................ $595 $234 ($252)(a) $577
- --------------------
<Fa> Uncollectible accounts written-off
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 171,043
<SECURITIES> 0
<RECEIVABLES> 16,692
<ALLOWANCES> 991
<INVENTORY> 75,936
<CURRENT-ASSETS> 143,335
<PP&E> 155,611
<DEPRECIATION> 47,439
<TOTAL-ASSETS> 542,738
<CURRENT-LIABILITIES> 80,855
<BONDS> 335,933
0
0
<COMMON> 161
<OTHER-SE> 116,899
<TOTAL-LIABILITY-AND-EQUITY> 542,738
<SALES> 281,407
<TOTAL-REVENUES> 281,407
<CGS> 135,886
<TOTAL-COSTS> 135,886
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,655
<INCOME-PRETAX> 28,716
<INCOME-TAX> 11,486
<INCOME-CONTINUING> 17,230
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,230
<EPS-PRIMARY> 0.86
<EPS-DILUTED> 0.86
</TABLE>
