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, 1998.
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 of this Form 10-K [X].
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based upon the closing price of shares of Common Stock on the
National Association of Securities Dealers Automated Quotation ("NASDAQ")
National Market System at December 16, 1998 was approximately $347,218,200.
The number of shares of Common Stock of the registrant outstanding at
December 16, 1998 was approximately 68,082,000.
Documents Incorporated by Reference: Form 8-K, dated as of April 9, 1998,
June 19, 1998 and November 4, 1998 and Form S-3, effective July 1, 1998.
PART I
Item 1. BUSINESS
General
NBTY, Inc. (the "Company"), collectively with its subsidiaries, is a
manufacturer and marketer of nutritional supplements. It sells more than
900 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 mail order, the Company's
retail chain in the United States ("Vitamin World"), through its retail
chain in the United Kingdom ("Holland & Barrett"), and through independent
and chain pharmacies, supermarkets, health food stores, and wholesalers.
Marketing and Distribution
The Company markets its products through different channels of
distribution: mail order, retail (Vitamin World in the U.S. and Holland &
Barrett in the U.K.) and wholesale.
Mail Order. 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 and Nutrition Headquarters
brand names at prices which are normally at a discount from those of similar
products sold in retail stores.
U.S. Retail. The Company operates 230 retail locations in 40 states
and the territory of Guam under the name Vitamin World. Such locations
carry a full line of the Company's products under the Vitamin World brand
name and also carry products manufactured by others. Through direct
interaction between the Company's personnel and the public, the Company is
able to identify buying trends, customer preferences or dislikes,
acceptances of new products and price trends in various regions of the
country. This information is useful in initiating sales programs for all
divisions of the Company.
U.K. Retail. Holland & Barrett ("H&B") is one of the leading
nutritional supplement retailers in the United Kingdom which presently has
415 locations, which chain was acquired by NBTY in 1997. H&B markets a
broad line of nutritional supplement products, including vitamins, minerals
and other nutritional supplements (approximately 60% of H&B's revenues) and
food products, including fruits and nuts, confectionery and other items
(approximately 40% of H&B's revenues). In the United Kingdom, the Company
has leased warehouses for distribution of its products.
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. The Company
has expanded sales of various products to many countries throughout Europe,
Asia and Latin America.
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.
Sales and Advertising
The Company has approximately 1,300 sales associates located
throughout the U.S in its Vitamin World stores, and 70 associates who sell
to NBTY's wholesale distributors. In addition, NBTY sells through
commissioned sales representative organizations. For the fiscal years ended
September 30, 1997 and 1998, NBTY spent approximately $28 million and $32
million, respectively, on advertising and promotion including print and
media and cooperative advertising. NBTY creates its own advertising
materials through a staff of approximately 30 associates. H&B employs an
average of 2,300 sales associates in its retail stores. H&B runs
advertisements in national newspapers. H&B conducts sales promotions and
six times per year it publishes a glossy magazine with articles and
promotional materials. The Company expects advertising costs to increase as
net sales increase.
Manufacturing, Distribution and Quality Control
All manufacturing is conducted in accordance with good manufacturing
practice standards of the United States Food and Drug Administration and
other applicable regulatory standards. The Company believes that the
capacity of its manufacturing and distribution facilities is adequate to
meet the requirements of its current business and will be adequate to meet
the requirements of anticipated increases in net sales. The Company
manufactures approximately 90% of its vitamins and other nutritional
supplements.
The Company's manufacturing process places special emphasis on quality
control. All raw materials used in production initially are held in
quarantine during which time the Company's laboratory employees assay the
production against the manufacturer's certificate of analysis. Once
cleared, a lot number is assigned, samples are retained and the material is
processed by formulating, mixing and granulating, compression and sometimes
coating operations. After the tablet is manufactured, laboratory
employees test its weight, purity, potency, dissolution and stability. When
products such as vitamin tablets are ready for bottling, the Company's
automated equipment counts the tablets, inserts them into bottles, adds a
tamper-resistant cap with an inner safety seal and affixes a label. The
Company uses computer-generated documentation for picking and packing for
order fulfillment.
The principal raw materials used in the manufacturing process are
vitamins purchased from bulk manufacturers in the United States, Japan and
Europe. Although raw materials are available from numerous sources, one
supplier currently provides approximately 10% 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 1996, 1997 and 1998, 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, a new statutory framework
governing the composition and labeling of dietary supplements. With respect
to composition, DSHEA created a new class of "dietary supplements",
consisting of vitamins, minerals, herbs, amino acids and other dietary
substances for human use to supplement the diet, as well as concentrates,
metabolites, extracts or combinations of such dietary ingredients.
Generally, under DSHEA, dietary ingredients that were on the market before
October 15, 1994 may be sold without FDA preapproval and without notifying
the FDA. On the other hand, a new dietary ingredient (one not on the market
before October 15, 1994) requires proof that it has been used as an article
of food without being chemically altered, or evidence of a history of use or
other evidence of safety establishing that it is reasonably expected to be
safe. The FDA must be supplied with such evidence at least 75 days before
the initial use of a new dietary ingredient. There can be no assurance that
the FDA will accept the evidence of safety for any new dietary ingredients
that the Company may decide to use, and the FDA's refusal to accept such
evidence could result in regulation of such dietary ingredients as food
additives requiring FDA pre-approval prior to marketing.
As for labeling, DSHEA permits "statements of nutritional support" for
dietary supplements without FDA pre-approval. Such statements may describe
how particular dietary ingredients affect the structure, function or general
well-being of the body, or the mechanism of action by which a dietary
ingredient may affect body structure, function or well-being (but may not
state that a dietary supplement will diagnose, mitigate, treat, cure or
prevent a disease). A company making a statement of nutritional support
must possess substantiating evidence for the statement, disclose on the
label that the FDA has not reviewed that statement and that the product is
not intended for use for a disease, and notify the FDA of the statement
within 30 days after its initial use. However, there can be no assurance
that the FDA will not determine that a given statement of nutritional
support that the Company decides to make is a drug claim rather than an
acceptable nutritional support statement. Such a determination would
require deletion of the drug claim or the Company's submission and the FDA's
approval of a new drug application ("NDA"), which would entail costly and
time-consuming clinical studies. In addition, DSHEA allows the
dissemination of "third party literature", publications such as reprints of
scientific articles linking particular dietary ingredients with health
benefits. Third party literature may be used in connection with the sale of
dietary supplements to consumers at retail or by mail order. Such a
publication may be distributed if, among other things, it is not false or
misleading, no particular manufacturer or brand of dietary supplement is
mentioned, and a balances view of available scientific information on the
subject matter is presented. There can be no assurance, however, that all
pieces of third party literature that may be disseminated in connection with
the Company's products will be determined by the FDA to satisfy each of
these requirements, and any such failure could subject the product involved
to regulation as a new drug.
Management anticipates that the FDA may promulgate good manufacturing
practices ("GMPs") regulations authorized by DSHEA, which are specific to
dietary supplements. GMP regulation would require supplements to be
prepared, packaged and held in compliance with such rules, and may require
similar quality control provisions contained in the GMP regulations for
drugs. There can be no assurance that, if the FDA adopts GMP regulations
specific to dietary supplements, NBTY will be able to comply with such GMP
rules upon promulgation or without incurring material expenses to do so.
The FDA has finalized regulations to implement certain labeling
provisions of DSHEA.
NLEA prohibits the use of any health claim (as distinguished from
"statements of nutritional support" permitted by DSHEA) for foods, including
dietary supplements, unless the health claim is supported by significant
scientific agreement and is pre-approved by the FDA. To date, the FDA has
approved the use of health claims for dietary supplements only in connection
with the use of calcium for osteoporosis and the use of folic acid for
neural tube defects.
DSHEA created two new governmental bodies. The Commission on Dietary
Supplements was established for two years to provide recommendations for the
regulation of supplement labeling and health claims, including procedures
for making disease-related claims. The Office of Dietary Supplements,
established within the National Institute of Health, is charged with
coordinating research on dietary supplements and disease prevention,
compiling research results, and advising the Secretary of Health and Human
Services on supplement regulation, safety and health claims.
The FDA has broad authority to enforce the provisions of the FDCA
applicable to dietary supplements, including the power to seize adulterated
or misbranded products or unapproved new drugs, to request their recall from
the market, to enjoin their further manufacture or sale, to publicize
information about hazardous products, to issue warning letters and to
institute criminal proceedings. Although the regulation of dietary
supplements is less restrictive than that imposed upon drugs and food
additives, there can be no assurance that dietary supplements will continue
to be subject to the less restrictive regulations than those imposed upon
drugs and food additives, and there can also be no assurance that dietary
supplements will continue to be subject to the less restrictive statutory
scheme and regulations currently in effect. Further, there can be no
assurance that, if more stringent statutes are enacted or regulations are
promulgated, the Company will be able to comply with such statutes and
regulations without incurring material expenses to do so.
The over-the-counter pharmaceutical products distributed by the
Company are subject to regulation by a number of Federal and State
governmental agencies. In particular, the FDA regulates the 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, subject to civil monetary penalties.
The Company is also subject to regulation under various international,
state and local laws that include provisions specifying, among other things,
the marketing of dietary supplements and the operations of direct sales
programs. The Company may be subject to additional laws or regulations
administered by the FDA or other federal, state or foreign regulatory
authorities, the repeal of laws or regulations that the Company considers
favorable, such as DSHEA, or more stringent interpretations of current laws
or regulations, from time to time in the future. The Company is unable to
predict the nature of such future laws, regulations, interpretations or
applications, nor can it predict what effect additional governmental
regulations or administrative orders, when and if promulgated, would have on
its business in the future. These regulations could, however, require the
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 financial position, results of
operations and cash flows.
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 of Toxicity, which reports to the Department of Health. The
relevant legislation governing the sale of food includes the Food Safety Act
of 1990, which sets out general provisions relating to the sale of food; for
example, this law makes it unlawful to sell food that is harmful to human
health. In addition, there are various statutory instruments and European
Community ("E.C.") regulations governing specific areas such as the use of
sweeteners, coloring and additives in food. Trading standards officers
under the control of the Department of Trade and Industry also regulate
matters such as the cleanliness of the properties on which food is produced
and sold.
Food that has medicinal properties may fall under the jurisdiction of
the Medicine Control Agency ("MCA"), a regulatory authority whose
responsibility is to ensure that all medicines sold or supplied for human
use in the U.K. meet acceptable standards of safety, quality and efficacy.
These standards are determined by the 1968 Medicines Act together with an
increasing number of E.C. regulations and directives established by the
European Union. The latter take precedence over national laws. The MCA has
a "borderline department" which determines when food should be treated as a
medicine and should therefore fall under the relevant legislation relating
to medicines. The MCA operates as the agent of the licencing 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 other major jurisdictions of the world for its
Nature's Bounty, Good'N Natural, American Health, Puritan's Pride, Vitamin
World, Natural Wealth and Nutrition Headquarters trademarks, among others,
and has rights to use other names essential to its business. Federally
registered trademarks have a perpetual life, as long as they are renewed on
a timely basis and used properly as trademarks, subject to the rights of
third parties to seek cancellation of the trademarks if they claim priority
or confusion of usage. The Company regards its trademarks and other
propriety rights as valuable assets and believes they have significant value
in the marketing of its products. The Company vigorously protects its
trademarks against infringement.
H&B. H&B owns trademarks registered with the appropriate U.K.
authorities for its Holland & Barrett trademark and has rights to use other
names essential to its business.
Associates
NBTY. As of September 30, 1998, NBTY (excluding H&B) employed
approximately 3,000 persons, of whom 40 are in executive and administrative
capacities, approximately 75 are in sales, approximately 625 are in the
Company's Vitamin World stores and the balance are in manufacturing,
shipping and packaging. None of the Company's associates are represented by
a labor union. The Company believes its relationship with its associates is
excellent.
H&B. During fiscal 1998, H&B employed an average of 2,300 persons, of
whom 30 worked in executive or administrative capacities, 60 worked in
warehouse and distribution and the balance worked in retail stores. There
is no trade union representation at H&B. H&B management believes that its
relationship with its associates is excellent.
Item 2. PROPERTIES
NBTY. NBTY owns a total of approximately 1,000,000 square feet of
plant facilities located in Bohemia, New York, Holbrook, New York and
Bayport, 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 230 retail
locations under the name Vitamin World in the U.S. and Guam. The stores
have an average selling area of 1,200 to 1,500 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 415 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 Hinckley for warehouse and distribution
space.
Item 3. LEGAL PROCEEDINGS
Miscellaneous Claims and Litigations. The Company is involved in
miscellaneous claims and litigation, which taken individually or in the
aggregate, would not materially impact the Company's financial position,
results of operations or its business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 9, 1998, at the annual meeting of the shareholders, the
following directors were elected for a three year term: Arthur Rudolph,
Glenn Cohen and Michael L. Ashner. As of that date, the names of other
directors whose terms continue after the meeting were: Scott Rudolph, Aram
Garabedian, Bernard G. Owen, Alfred Sacks, Murray Daly, Bud Solk, and Nathan
Rosenblatt.
The following matters were voted upon, showing votes cast for, against
and withheld as well as the number of abstentions.
<TABLE>
<CAPTION>
Matters Votes For Votes Against Abstentions
- ------- --------- ------------- -----------
<S> <C> <C> <C>
I. Directors:
Arthur Rudolph 14,825,966 349,284
Glenn Cohen 14,824,400 350,850
Michael L. Ashner 14,824,900 350,350
II. 1998 Incentive
Stock Option Plan 10,121,643 5,002,055 51,552
III. Amendment to Certif-
icate of Incorporation
Amendment Increasing
Authorized Shares to
75,000,000 9,844,228 5,304,755 26,267
IV. Ratification of
PriceWaterhouse-
Coopers LLP 15,148,938 2,810 23,502
</TABLE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
DIVIDEND POLICY
Since 1973, the Company has not paid any cash dividends on its Common
Stock. On April 24, 1992, the Company effected a two-for-one stock split in
the form of a 100% stock dividend to stockholders of record on May 8, 1992.
On September 25, 1992, the Company effected a three-for-one stock split in
the form of a 200% stock dividend to stockholders of record on November 2,
1992. On August 3, 1993, the Company effected a two-for-one stock split in
the form of a 100% stock dividend to shareholders of record on August 13,
1993. In addition, in March, 1998 the Company effected a three-for-one
stock split in the form of a 200% stock dividend. Future determination as
to the payment of cash or stock dividends will depend upon the Company's
results of operations, financial condition and capital requirements and such
other factors as the Company's Board of Directors consider appropriate.
PRICE RANGE OF COMMON STOCK
The Common Stock is traded in the over-the-counter market and is
included for quotation on the National Association of Securities Dealers
National Market System under the trading symbol "NBTY". The following table
sets forth, for the periods indicated, the high and low closing sale prices
for the Common Stock, as reported on NASDAQ/NMS:
<TABLE>
<CAPTION>
Fiscal year ended September 30, 1997
High Low
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<S> <C> <C>
First Quarter 6.83 4.50
Second Quarter 7.83 4.79
Third Quarter 9.50 4.88
Fourth Quarter 11.50 6.13
Fiscal year ended September 30, 1998
First Quarter 8.46 6.42
Second Quarter 20.58 10.67
Third Quarter 24.38 14.63
Fourth Quarter 23.25 7.31
</TABLE>
On December 16, 1998, the closing sale price of the Common Stock was
$6.375. There were approximately 875 record holders of Common Stock as of
December 16, 1998. 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
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected Income Statement Data:
Net sales $220,821 $250,351 $265,670 $355,336 $572,124
Costs & expenses:
Cost of sales 118,217 137,254 138,186 177,909 271,233
Catalog printing, postage
& promotion 23,297 28,307 26,695 27,932 32,176
Selling, general &
administrative 59,157 67,032 68,414 96,653 190,276
Litigation settlement costs 6,368
Merger costs 3,528
------------------------------------------------------------
Income from operations 20,150 17,758 32,375 46,474 74,911
Interest expense, net (1,950) (2,284) (2,431) (7,471) (16,518)
Other, net 1,415 822 1,430 1,817 3,921
------------------------------------------------------------
Income before income taxes 19,615 16,296 31,374 40,820 62,314
Income taxes 4,872 3,374 9,168 11,694 23,474
------------------------------------------------------------
Net income $ 14,743 $ 12,922 $ 22,206 $ 29,126 $ 38,840
============================================================
Per Share Data:
Net income per common share:
Basic $ 0.24 $ 0.21 $ 0.35 $ 0.45 $ 0.59
Diluted $ 0.21 $ 0.19 $ 0.32 $ 0.42 $ 0.56
Weighted average common shares
outstanding (000):
Basic 61,428 62,159 64,197 64,611 65,563
Diluted 69,544 68,695 68,699 68,935 69,847
Selected Balance Sheet Data:
Working capital $ 44,945 $ 45,556 $ 57,559 70,850 89,106
Total assets 140,097 148,187 171,948 571,177 500,457
Long-term debt, capital lease
obligations and promissory
note payable, less current
portion 13,865 15,683 23,570 341,159 173,336
Total stockholders' equity 85,759 91,393 107,645 131,291 230,340
</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 certain forward looking
statements within the meaning of the Private Securities Litigation Reform
Act of 1995 with respect to the financial condition, results of operations
and business of the Company. All of these forward looking statements, which
can be identified by the use of terminology such as "believe", "expects",
"may", "will", "should", or "anticipates", or the negative thereof, or
variations thereon, or comparable terminology, or by discussions of strategy
which, although believed to be reasonable, are inherently uncertain.
Therefore, undue reliance should not be placed upon such estimates and
statements. Factors that may affect such differences include (i) adverse
publicity regarding the consumption of nutritional supplements; (ii) adverse
federal, state or foreign legislation or regulation or adverse
determinations by regulators; (iii) slow or negative growth in the
nutritional supplement industry; (iv) inability of the Company to
successfully implement its business strategy; (v) increased competition;
(vi) increased costs; (vii) loss or retirement of key members of management;
(viii) increases in the Company's cost or borrowings or inability or
unavailability of additional debt or equity capital; and (ix) changes in
general economic conditions in the markets in which the Company may, from
time to time, compete. Many of such factors, as well as those factors
discussed in the Company's Prospectus, dated July 1, 1998, filed with the
Securities and Exchange Commission, will be beyond the control of the
Company and its management.
Background
NBTY, founded in 1971, is a leading vertically integrated
manufacturer, marketer and retailer of a broad line of high quality, value-
priced nutritional supplements. NBTY has continued to grow through its
marketing practices and through a series of strategic acquisitions. Since
1986, the Company has acquired and integrated 12 companies participating in
the mail order, retail and manufacturing segments of the nutritional
supplement sector, including Holland & Barrett in August 1997. In April
1998, NBTY merged Nutrition Headquarters Group into the Company.
In August 1997, NBTY acquired Holland & Barrett, one of the leading
nutritional supplement retailers in the U.K., for an aggregate price of
approximately $169 million. The acquisition of H&B has been accounted for
under the purchase method of accounting, and, accordingly, the results of
its operations are included in the financial statements of the Company from
the date of acquisition. The excess of the cost of acquisition over the
fair value of H&B at the date of the acquisition resulted in goodwill of
approximately $134 million that is being amortized over 25 years. The
Company financed the acquisition of Holland & Barrett through a $150 million
offering of Senior Subordinated Notes due in 2007 and borrowings under the
Revolving Credit Facility. NBTY has gradually replaced products supplied by
outside sources to Holland & Barrett, with NBTY manufactured products under
the Holland & Barrett brand. Company manufactured products presently
account for approximately 30% of total H&B sales.
In April 1998, NBTY merged a group of affiliated, privately held
companies, referred to collectively as Nutrition Headquarters Group, into
the Company. In connection with such transaction, the Company issued
approximately 8.8 million shares of its Common Stock and incurred merger-
related transaction costs of approximately $3.3 million. Nutritional
Headquarters Group includes Nutrition Headquarters, Inc.,
a mail order VMS company in Cambridge, Massachusetts and Nutro Laboratories,
Inc., a South Plainfield, New Jersey-based vitamin manufacturer. The merger
of Nutrition Headquarters Group into the Company was accounted for as a
pooling of interests and, accordingly, no goodwill was recorded in this
transaction. Financial information has been restated to include the results
of operations of Nutrition Headquarters
Group for all periods presented. Nutrition Headquarters Group
reported aggregate sales of approximately $77 million (including $3 million
of sales to the Company) for the fiscal year ended September 30, 1997, of
which approximately $50 million was attributable to mail order. The Company
is beginning to integrate Nutrition Headquarters Group's mail order
operations by: (i) merging customer lists into the Company's computerized
mailing list; (ii) expanding product lines; (iii) redesigning mail order
catalogs; (iv) re-pricing certain products; and (v) implementing proven
marketing techniques.
NBTY markets its multi-branded products through four distribution
channels: (i) mail order, (ii) Company-owned Vitamin World retail stores in
the U.S., (iii) Company-owned Holland & Barrett retail stores in the U.K.;
and (iv) wholesale distribution to drug store chains, supermarkets,
discounters, independent pharmacies and health food stores. NBTY's net
sales from mail order, retail-U.S, retail-U.K. and wholesale operations were
approximately 33%, 11%, 32% and 23%, respectively, for the year ended
September 30, 1998. As a result of the Company's efforts to expand its
direct to consumer business, wholesale sales, as a percentage of total net
sales, decreased from approximately 44% of net sales in fiscal 1995 to
approximately 23% for the year ended September 30, 1998.
The Company recognizes revenue upon shipment or, with respect to its
own retail stores, upon the sale of products. Net sales are net of all
discounts, allowances, returns and credits. Cost of sales includes the cost
of raw materials and all labor and overhead associated with the
manufacturing and packaging of the products, other than two-piece capsule
forms. Gross margins are affected by, among other things, changes in the
relative sales mix among the Company's four distribution channels.
Historically, gross margins from the Company's mail order and retail sales
have typically been higher than gross margins from wholesale sales.
Results of Operations
The following table sets forth income statement data of the Company as
a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Year Ended September 30
--------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales 52.0 50.0 47.4
Catalog printing & promotion 10.0 7.9 5.6
Selling, general & administrative 25.8 27.2 33.3
Litigation 0.0 1.8 0.0
Merger-related costs 0.0 0.0 0.6
----- ----- -----
87.8 86.9 86.9
----- ----- -----
Income from operations 12.2 13.1 13.1
Interest expense & other, net (0.4) (1.6) (2.2)
----- ----- -----
Income before income taxes 11.8 11.5 10.9
Income taxes 3.4 3.3 4.1
----- ----- -----
Net income 8.4% 8.2% 6.8%
=========================
</TABLE>
Year Ended September 30, 1998 Compared to Year Ended September 30, 1997
Net Sales. Net sales for fiscal 1998 were $572 million, an increase
of $216 million or 61% compared with net sales of $355 million in fiscal
1997. Of the $217 million increase, $24 million was attributable to mail
order, $25 million to retail-U.S. sales, $162 million to retail-U.K. sales
and $5 million to wholesale sales. During 1998, the Company's: (i) mail
order operations grew 15% as a result of a growing number of names in the
Company's mailing list; (ii) retail-U.S. operations grew 61% as a result of
continued new store openings and 18% growth in some store sales; (iii)
retail-U.K. operations were presented for the entire fiscal year of 1998 as
a result of the acquisition of H&B in August 1997; and (iv) wholesale
operations grew at 4% as a result of the Company's strategy to focus its
efforts on expanding its direct to consumer business. The acquisition of
H&B has been accounted for under the purchase method of accounting and
accordingly, the results of operations are included in the financial
statements from August 1997, the date of the acquisition. Without H&B,
sales would have increased approximately 17%.
Cost of Sales. Cost of Sales for fiscal 1998 was $271 million, an
increase of $93 million compared with costs of sales of $178 million for
fiscal 1997. Gross profit for 1998 was $301 million, an increase of $123
million or 70% compared with $177 million in the same period in 1997. As a
percentage of net sales, gross profit increased to 52.6% for 1998 from 50%
for the same period in 1997. Such increase was due to various factors,
including: (i) lower manufacturing costs resulting from increased
productivity at the Company's manufacturing facilities; (ii) higher
percentage of sales direct to the consumer; (iii) increased sales of new
products, which typically have higher gross margins; and (iv) generally
higher margins on products manufactured by NBTY and sold in H&B stores. The
Company's strategy is to continue to increase in-house manufacturing while
decreasing the use of outside suppliers in both the U.S. and the U.K.
Catalog, Printing, Postage and Promotion. Catalog, printing, postage
and promotion expenses were $32 million and $28 million for fiscal 1998 and
1997, respectively. Such costs as a percentage of net sales were 5.6% in
1998 and 7.9% in 1997. The decrease as a percentage of net sales was due to
the increase in retail sales from H&B as well as more efficient printing and
mailing methods of the Company's catalog operations.
Selling, General and Administrative. Selling, general and
administrative expenses for fiscal 1998 were $190 million, an increase of
$93 million compared with $97 million for fiscal 1997. As a percentage of
net sales, selling, general and administrative expenses were 33.3% and 27.2%
in 1998 and 1997, respectively. Of the $94 million increase, $28 million
was attributable to rent expense associated with H&B retail locations and
additional Vitamin World retail stores, $30 million was attributable to
payroll costs for H&B and $12 million was attributable to an increase in
depreciation and amortization, including $5 million in goodwill resulting
from the acquisition of H&B.
Interest Expenses. Interest expense was $17 million in fiscal 1998,
an increase of $9 million compared with net interest expense of $7.4 million
in fiscal 1997. The increase in net interest primarily resulted from the
issuance of $150 million of 8-5/8% Senior Subordinated Notes due in 2007 to
fund the acquisition of H&B.
Income Taxes. The Company's effective tax rate was 37.7% in fiscal
1998 and 28.6% in fiscal 1997. Prior to April, 1998, Nutrition Headquarters
Group was privately held and had subchapter S status and, accordingly,
recorded no income tax provision except for certain minimum taxes. It is
anticipated that the Company's effective tax rate on an on-going basis will
be approximately 40%.
Net Income. Net income for fiscal 1998 was $39 million, an increase
of $10 million or 33% compared with $29 million in fiscal 1997. Assuming
Nutrition Headquarters Group was taxed at the Company's effective rate, net
income would have been $36 million for fiscal 1998, an increase of $12
million or 50% compared with $24 million in fiscal 1997.
Fiscal Year Ended September 30, 1997 Compared to Fiscal Year Ended September
30, 1996.
Net Sales. Net sales for fiscal 1997 were $355 million, an increase
of $89 million or 33% compared with net sales of $266 million in fiscal
1996. Of the $89 million increase, $28 million was attributable to mail
order, $44 million to retail sales in the U.S. and the U.K. and $17 million
to wholesale sales. During this period, the Company's (i) mail order
operations grew 21% as a result of a growing number of names in the
Company's mailing list and greater consumer recognition of Puritan's Pride
quality and value; (ii) retail-U.S. operations grew 93 % as a result of 23%
growth in same store sales and 49 net new store openings; (iii) retail-U.K.
operations recorded sales of $24 million as a result of the acquisition of
Holland & Barrett in August 1997; and (iv) wholesale operations grew 16%.
Without Holland & Barrett, sales would have increased 25%.
Cost of Sales. Cost of sales for fiscal 1997 was $178 million, an
increase of $40 million or 29% compared with $138 million for fiscal 1996.
Gross profit for fiscal 1997 was $177 million, an increase of $50 million or
39% compared with $127 million in fiscal 1996. As a percentage of net
sales, gross profit increased to 50% in fiscal 1997 from 48% in fiscal 1996.
Such increase was due to various factors, including increased sales of new
products and generally higher margins on products as well as lower
manufacturing costs resulting from increased productivity. The Company's
strategy is to continue to increase in-house manufacturing while decreasing
the use of outside suppliers in both the U.S. and the U.K.
Catalog, Printing, Postage and Promotion. Catalog printing, postage
and promotion for fiscal 1997 was $28 million, an increase of $1 million or
4% compared with $27 million in fiscal 1996. Such costs as a percentage of
net sales were 8% in fiscal 1997 and 10% in fiscal 1996. The decrease as a
percentage of net sales was mainly due to more efficient printing and
mailing methods of the Company's catalog operation and increased Company-
wide sales.
Selling, General and Administrative. Selling, general and
administrative expenses for fiscal 1997 were $97 million, an increase of $29
million or 43% compared with $68 million in fiscal 1996. As a percentage of
net sales, these expenses were 27% and 26% for fiscal 1997 and 1996,
respectively. This increase was attributable to increased payroll cost and
building costs including rent expense resulting from the acquisition of
Holland & Barrett.
Litigation. In fiscal 1997, the Company agreed to settle a class
action lawsuit for approximately $5.6 million, net of insurance recoveries
and also recorded a charge to operations for related fees of $768,000.
Interest Expense, Net. Interest expenses, net was $7 million in
fiscal 1997, an increase of $5 million compared with net interest expenses,
of $2 million in fiscal 1996. Increased interest expense, net, associated
with the Holland & Barrett acquisition totaled $2 million in fiscal 1997.
In addition, the Company recorded a loss of approximately $2 million in
connection with the settlement of a treasury-lock instrument.
Income Taxes. The Company's effective tax rate was 28.7% in fiscal
1997 and 29.2% in fiscal 1996. Nutrition Headquarters Group was privately
held and had subchapter S status and, accordingly, recorded no income tax
provision, except for certain minimum taxes.
Net Income. Net income for fiscal 1997 was $29 million, an increase
of $7 million or 32% compared with $22 million in fiscal 1996. Assuming
Nutrition Headquarters Group was taxed at the Company's effective rate, net
income would have been $24 million for fiscal 1997, an increase of $5
million or 26% compared with $19 million in fiscal 1996.
Fiscal Year Ended September 30, 1996 Compared to Fiscal Year Ended September
30, 1995
Net Sales. Net sales for fiscal 1996 were $266 million, an increase
of $16 million or 6% compared with net sales of $250 million in fiscal 1995.
Of the $16 million increase, $11 million was attributable to increases in
wholesale and retail sales and $13 million was attributable to mail order
sales, offset be a decrease of $8 million from Beautiful Visions, a cosmetic
mail order catalog which was sold in 1995.
Cost of Sales. Cost of sales for fiscal 1996 was $138 million, an
increase of $1 million or 1% compared with $137 million in fiscal 1995.
Gross profit for fiscal 1996 was $127 million, an increase of $14 million
or 12% compared with $113 million in fiscal 1995. As a percentage of net
sales, gross profit increased to 48% in fiscal 1996 from 45% in fiscal 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 fiscal 1996 was $27 million, a decrease of $1 million
compared with $28 million in fiscal 1995. Such cost, as a percentage of
net sales were 10% in fiscal 1996 compared with 11% in fiscal 1995. The
decrease was mainly due to the discontinuance of the Beautiful Visions mail
order catalog.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for fiscal 1996 were $68 million, an increase of $1
million or 1% compared with $67 million in fiscal 1995. As a percentage of
net sales, these costs were 26% in fiscal 1996 and 27% in 1995,
respectively. This decrease was attributable to decreases in payroll fringe
benefits and other miscellaneous costs which were offset by increases in
outlet store rentals and professional fees.
Interest Expense, Net. Interest expense, net in fiscal 1996 and
fiscal 1995 remained constant at $2 million.
Income taxes. The Company's effective tax rate was 29.2% in fiscal
1996 and 20.7% in fiscal 1995. Nutrition Headquarters Group was privately
held and had sub-chapter S status and accordingly, recorded no income tax
provision, except for certain minimum taxes.
Net Income. Net income for fiscal 1996 was $22 million, an increase
of $9 million or 69% compared with $13 million in fiscal 1995. Assuming
Nutrition Headquarters Group was taxed at the Company's effective rate, net
income would have been $19 million for fiscal 1996, an increase of $9
million or 90% compared with $10 million in fiscal 1995.
Seasonality
The Company believes that its business is not seasonal. Historically
the Company has slightly lower net sales in its first and third fiscal
quarters, and slightly higher net sales in its second and fourth fiscal
quarters. The Company may have higher net sales in a quarter depending upon
when it has engaged in significant promotional activities.
Discontinued Operation
In April 1998, the Company sold certain assets of its cosmetic pencil
operation for approximately $6 million, of which $4.5 million was in cash
with additional payments aggregating $1.5 million to be paid over the next
three years. There can be no assurance that the Company will receive all of
said additional payments in the future. The cosmetic pencil business, which
had insignificant operations in fiscal 1998 operation had sales of
approximately $1.9 million and operating losses of approximately $800,000 in
fiscal 1997. The gain on such sale of approximately $2.6 million is
included in other income.
Liquidity and Capital Resources.
The Company requires liquidity for capital expenditures and working
capital needs, including debt service requirements. Total capital
expenditures for the Company was $68 million for fiscal 1998. The Company
has recently completed construction of a soft gel manufacturing facility for
a total cost of approximately $35 million. For information as to the
Company's commitments and contingencies, including future minimal rent
payments and other commitments, see Note 11 to the Consolidated Financial
Statements.
The Company believes that the cash flow generated from its operations
and amounts available under the Revolving Credit Facility should be
sufficient to fund its debt service requirements, working capital needs,
anticipated capital expenditures and other operating expenses for the
foreseeable future. The Revolving Credit Facility provides the Company with
available borrowings up to an aggregate principal amount of $60 million.
The Company's debt instruments impose certain restrictions on the
Company regarding capital expenditures, limit the Company's ability to:
incur additional indebtedness, dispose of assets, make repayments of
indebtedness or amendments of debt instruments, pay distributions, create
liens on assets, enter into sale and leaseback transactions, investments,
loans or advances and acquisitions. Such restrictions could limit the
Company's ability to respond to market conditions, to provide for
unanticipated capital investments or to take advantage of business or
acquisition opportunities.
Inflation
Inflation has not had a significant impact on the Company in the past
three years nor is it expected to have a significant impact in the
foreseeable future.
Year 2000.
The Year 2000 problem is a result of software computer programs being
written using two digits rather than four to define the applicable year.
The Company recognizes the risk that its software programs or computer
hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the Year 2000. This could
result in a system failure or a miscalculation causing disruptions of
operations including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business
activities. The Company recognizes the need to ensure that its operations
will not be adversely impacted by Year 2000 software and hardware failure.
The Company is developing a plan to ensure that its systems are compliant
with the requirements to process transactions in the Year 2000. That plan
consists of four phases: assessment, remediation, testing and
implementation, and encompasses internal information technology (IT) systems
and non-IT systems, as well as third party exposures.
The following is a status report of the Company's effort to date:
The Company's State of Readiness
The Company has not yet completed the assessment of its IT systems and
non-IT systems.
Third Parties And Their Exposure To The Year 2000
The Company has requested from a majority of its principal suppliers
and vendors written statements regarding their knowledge of and plans for
meeting Year 2000 requirements. To date, the Company is not aware of any
principal supplier or vendor with a Year 2000 issue that could materially
impact the Company's results of operations, liquidity, or capital resources.
However, the Company has no means of ensuring that external agents will be
Year 2000 ready. The inability of external agents to complete their Year
2000 resolution process in a timely fashion could materially impact the
Company. The effect of non-compliance by external agents cannot be
determined.
Risks
Management of the Company believes that it is working on an effective
program to resolve the Year 2000 issue in a timely manner. The Company has
not yet completed all necessary phases of the Year 2000 program. The
Company has retained an outside firm to assist the Company's personnel. It
is estimated that the costs of this project are approximately $200,000. In
the event that the Company does not complete any additional phases, the
Company could experience business interruptions. In addition, disruptions
in the economy generally resulting from the Year 2000 issues could also
materially adversely affect the Company. The amount of potential liability
and lost revenue cannot be reasonably estimated at this time.
Contingency Plans
The Company currently has no contingency plans in place in the event
it does not complete all phases of the Year 2000 program. The Company plans
to evaluate the status of completion in September 1999 and determine whether
such a plan is necessary.
Recent Financial Accounting Standards Board Statements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for the reporting and display of
comprehensive income, its components (revenues, expenses, gain and losses)
and accumulated balances in a full set of general purpose 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 they may have an
impact on future financial statement disclosures.
In February 1998, the American Institute of Certified Public
Accountants' Accounting Standards Executive Committee issued Statement of
Position No. 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use" ("SOP No. 98-1"). SOP No. 98-1 requires
certain costs incurred in connection with developing or obtaining internal-
use software to be capitalized and other costs to be expensed. The Company
adopted SOP 98-1 during fiscal 1998, and its application had no material
effect on the Company's financial position as of September 30, 1998 or its
results of operations for the period then ended.
In April 1998, the American Institute of Certified Public Accountants'
Accounting Standards Executive Committee issued Statement of Position No.
98-5, "Reporting on the Costs of Start-Up Activities" ("SOP No. 98-5"). SOP
No. 98-5 requires the cost of start-up (or pre-opening) activities and
organization costs to be expenses as incurred. This SOP No. 98-5 is
effective for the Company beginning October 1, 1998. The Company does not
expect its application during fiscal 1999 to have a material impact on its
financial position or results of operations.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See attached financial statements. Part IV, Item 14. Exhibits.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names and other relevant information regarding
officers, directors, and significant employees of the Company as of December
15, 1998. 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> <C> <C>
Scott Rudolph 41 Chairman of
the Board
and President 1986 1986
Harvey Kamil 54 Executive Vice
President,
Secretary ---- 1982
Barry Drucker 50 Senior Vice
President-Sales ---- 1985
Patricia E. Ciccarone 42 Vice President-
Vitamin World ---- 1992
James P. Flaherty 41 Vice President-
Advertising ---- 1988
Abraham K. Kleinman 73 Vice President-
Manufacturing ---- 1982
Abraham Rubenstein 68 Vice President-
Mail Order ---- 1985
William J. Shanahan 40 Vice President-
Data Processing ---- 1988
Robert Silverman 36 Vice President-
Good'N Natural ---- 1991
James A. Taylor 58 Vice President-
Production ---- 1982
William Dougherty 48 Vice President-
Merchandising ---- 1996
Dan Parkhideh 38 Vice President-
Capsule Works ---- 1998
Arthur Rudolph 70 Director 1971 1971
Aram Garabedian 63 Director 1971 ----
Bernard G. Owen 70 Director 1971 ----
Alfred Sacks 71 Director 1971 ----
Murray Daly 71 Director 1971 ----
Glenn Cohen 39 Director 1988 ----
Bud Solk 65 Director 1994 ----
Nathan Rosenblatt 41 Director 1994 ----
Michael L. Ashner 45 Director 1998 ----
Michael Slade 49 Director 1998 ----
</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 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 chan. 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.
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.
Dan Parkhideh is Vice President of Capsule Works. He joined NBTY in
1995.
William Dougherty 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 is, and has been since 1988, a real estate developer
in Rhode Island. He was associated with NBTY and its predecessor,
Arco Pharmaceuticals, Inc., for 20 years in a sales capacity and as an
officer. He has served as a director since 1971.
Bernard G. Owen has been associated with Cafiero, Cuchel and Owen
Insurance Agency, Pitkin, Owen Insurance Agency and Wood-HEW Travel
Agency for more than the past 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 is 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.
Michael L. Ashner is President and Chief Executive Officer of Winthrop
Financial Assoc., a firm engaged in the organization and
administration of real estate limited partnership.
Michael Slade is the President of the Company's wholly-owned
subsidiary, Nutrition Headquarters (Delaware), Inc. He previously was
an owner and Chief Executive Officer of that corporation's predecessor
before its acquisition by the Company in 1998.
Item 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term All Other
Compensation Awards Compensation:
Name and Annual Compensation Restricted Stock Pension Plan
Principal Position Year Salary $ Bonus $ Stock($) Options # and 401(k) Plan $
- ------------------ ---- -------- ------- ---------- --------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Scott Rudolph 1998 600,000 400,000 1,050,000 7,672
Chairman of the Board, 1997 488,838 350,000 4,792
President and Chief 1996 474,600 275,000 5,709
Executive Officer
Harvey Kamil 1998 300,000 225,000 150,000 7,672
Executive Vice President 1997 271,611 200,000 4,592
Chief Financial Officer 1996 263,700 150,000 5,709
Barry Drucker 1998 284,000 720,000 30,000 7,672
Senior Vice President 1997 274,000 25,000 4,792
1996 263,700 150,000 5,709
James Flaherty 1998 167,500 75,000 30,000 7,672
Vice President 1997 161,000 50,000 4,792
Marketing & Advertising 1996 154,500 25,000 5,709
James H. Taylor 1998 141,000 110,000 30,000 7,672
Vice President 1997 135,500 100,000 4,377
Production 1996 130,295 100,000 5,709
</TABLE>
Employment Agreements
Scott Rudolph, Chairman of the Board, President and Chief Executive
Officer of the Company, entered into an employment agreement effective
February 1, 1994, as amended, to terminate January 31, 2004. During the
period of the employment agreement, the salary payable to Scott Rudolph
shall be fixed by the Board of Directors of the Company, provided that in no
event will the executive salary be at a rate lower than $600,000 per year,
with bonuses, certain fringe benefits accorded other executives of NBTY, and
with annual cost of living index increases.
Harvey Kamil, Executive Vice President, Chief Financial Officer and
Secretary of the Company, entered into an employment agreement effective
February 1, 1994, as amended, to terminate January 31, 2004. During the
period of the employment agreement, the salary payable to Harvey Kamil shall
be fixed by the Board of Directors of the Company, provided that in no event
will the executive salary be at a rate lower than $300,000 per year, with
bonuses, certain fringe benefits accorded other executives of NBTY, and with
annual cost of living index increases.
Each of the above agreements also provides for the immediate
acceleration of the payment of all compensation for the term of the contract
and the registration and sale of all issued stock, stock options and shares
underlying options in the event of certain changes of control, or
involuntary (i) termination of employment, (ii) reduction of compensation,
or (iii) diminution of responsibilities or authority.
Effective January 1, 1997, the Company entered into a consulting
agreement with Rudolph Management Associates, Inc. for the services of
Arthur Rudolph, a director of the Company. The agreement has been renewed
to provide services from January 1, 1998 through December 31, 2000 with the
consulting fee fixed by the Board of Directors of the Company, provided that
in no event will the consulting fee be at a rate lower than $400,000 per
year, payable monthly, with certain fringe benefits accorded to other
executives of NBTY.
On April 20, 1998, the Company entered into a one-year consulting
agreement with Michael C. Slade, on of the former shareholders of Nutrition
Headquarters Group. Under the terms of the agreement, Mr. Slade is the
President of Nutrition Headquarters Group subsidiary and will receive an
annual compensation of $275,000 renewable at Mr. Slade's option, for up to
two additional one-year periods. The agreement also provides for fringe
benefits accorded other executives of NBTY.
Four members of Holland & Barrett's senior executive staff have
service contracts, terminable by the Company upon twelve months notice, at
annual salaries ranging between approximately $75,000 and $200,000.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Management
(a) Security Ownership of Certain Beneficial Owners
Security ownership of persons owning of record, or beneficially, 5% or more
of the outstanding Common Stock, as of December 15, 1998. 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 11,343,058 16.67
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock NBTY, Inc. 2,986,533 4.39
(Par Value Profit Sharing Plan Record and
$.008) Beneficial
<F1> Includes shares issuable upon exercise of options held by executive
officers and directors. (directors and
</TABLE>
(b) Security Ownership of Management (Directors and Officers)
<TABLE>
<CAPTION>
Amount &
Nature of Percent
Name and Address of Beneficial of
Title of Class Beneficial Owner Ownership (1) Class (1)
- -------------- ------------------- ------------- ---------
<S> <C> <C> <C>
Common Stock Scott Rudolph(2) 11,343,058 16.67
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Harvey Kamil 1,626,906 2.38
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Arthur Rudolph 2,056,893 3.02
(Par value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Barry Drucker 282,500 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Aram Garabedian 6,000 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Bernard G. Owen 39,500 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Alfred Sacks 30,000 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 87,000 Nil
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Bud Solk 16,000 ----
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Nathan Rosenblatt 0 ----
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Michael Ashner 0 ----
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock Michael Slade 2,582,861 3.79
(Par Value 90 Orville Drive Record and
$.008) Bohemia, NY 11716 Beneficial
Common Stock All Directors & Executive 18,082,718 25.86
(Par Value Officers as a Record and
$.008) group (14 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.
<F3> Includes 589,222 shares held in a Trust created for the benefit of Mr.
Slade's wife.
</TABLE>
NBTY Inc. Employee Stock Ownership Plan and Trust ("ESOP")
- ----------------------------------------------------------
The basic terms of the Plan are as follows:
Eligibility
All associates of the Company, including officers, over the age of 21
and who have been employed by the Company for one year or more are eligible
participants in the Plan.
Contributions
Contributions are made on a voluntary basis by the Company. There is
no minimum contribution required in any one year.
There will be no contributions required by an associate. All
contributions will be made by the Company at the rate of up to 15% of the
Company's annual payroll, at the discretion of the Company. Each eligible
associate receives an account or share in the Trust and the cash and/or
shares of stock contributed to the Plan each year are credited to his or her
account.
Vesting
Once an associate is eligible, a portion of the stock in his or her
account becomes "vested" each year, as follows:
<TABLE>
<CAPTION>
Number of Years Percentage of Shares
of Service earned each year
- --------------- --------------------
<C> <C>
0 - 2 0%
3 20%
4 20%
5 20%
6 20%
7 20%
</TABLE>
Distribution
If an associate retires, is disabled, dies or his or her employment is
otherwise terminated, that associate or that associate's estate will receive
the vested portion held in trust for such associate.
At the end of the vesting period, the associates become full
beneficial owners of the stock. There is no tax consequence attached to his
or her Plan for an associate until that associate sells the shares, at which
time any profit realized by the associate is taxed as a capital gain.
Distribution is to be made only in the shares of NBTY, Inc. which
shares were purchased for the Trust from the cash contributions of the
Company.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has had, and in the future may continue to have, business
transactions with firms affiliated with certain of the Company's directors.
Each such transaction is in the ordinary course of the Company's business.
During the fiscal year ended September 30, 1998, the following
transactions occurred:
A. Gail Radvin, Inc., a corporation wholly-owned by Gail Radvin,
received commissions from the Company totalling $474,070 on account of sales
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 $1,214,102.
C. Glenn-Scott Landscaping & Design, a company owned by Glenn Cohen,
a director, performed landscaping and maintenance on the Company's
properties and received $82,387 in compensation.
D. Arthur Rudolph, a director, has been retained under a Consulting
Agreement, at an annual fee of $400,000, payable monthly, which Agreement
expires on December 31, 2000.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULE AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report
Page
Number
------
1. Financial Statements
Report of Independent Accountants F-1
Consolidated Balance Sheets as of
September 30, 1998 and 1997 F-2
Consolidated Statements of Income for the years
ended September 30, 1998, 1997 and 1996 F-3
Consolidated Statements of Stockholders' Equity
for the years ended September 30, 1998, 1997 and 1996 F-4
Consolidated Statements of Cash Flows for the years
ended September 30, 1998, 1997 and 1996 F-5 to F-6
Notes to Consolidated Financial Statements F-7 to F-21
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
Statement Re: Computation of Per Share Earnings
Form 8-K, dated as of April 9, 1998, June 19, 1998 and November 4,
1998; Registration of Form S-3, effective July 1, 1998.
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 28, 1998 By: /s/ Scott Rudolph
--------------------------
Scott Rudolph
President, Chief Executive
Officer
Dated: December 28, 1998 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 28, 1998 By: /s/ Scott Rudolph
--------------------------
Scott Rudolph
Chairman, President and
Chief Executive Officer
Dated: December 28, 1998 By: /s/ Arthur Rudolph
--------------------------
Arthur Rudolph, Director
Dated: December 28, 1998 By: /s/ Aram Garabedian
--------------------------
Aram Garabedian, Director
Dated: December 28, 1998 By: /s/ Bernard G. Owen
--------------------------
Bernard G. Owen, Director
Dated: December 28, 1998 By: /s/ Alfred Sacks
--------------------------
Alfred Sacks, Director
Dated: December 28, 1998 By: /s/ Murray Daly
--------------------------
Murray Daly, Director
Dated: December 28, 1998 By: /s/ Glenn Cohen
--------------------------
Glenn Cohen, Director
Dated: December 28, 1998 By: /s/ Bud Solk
--------------------------
Bud Solk, Director
Dated: December 28, 1998 By: /s/ Nathan Rosenblatt
--------------------------
Nathan Rosenblatt, Director
Dated: December 28, 1998 By: /s/ Michael L. Ashner
--------------------------
Michael L. Ashner, Director
Dated: December 28, 1998 By: /s/ Michael Slade
--------------------------
Michael Slade, Director
NBTY, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
Item 8 Financial Statements and Supplementary Data
- --------------------------------------------------
Report of Independent Accountants
To the Board of Directors and Stockholders of NBTY, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 27 present fairly, in all material
respects, the consolidated financial position of NBTY, Inc. and Subsidiaries
as of September 30, 1998 and 1997 and the consolidated results of their
operations and their cash flows for each of the three years in the period
ended September 30, 1998, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 14(a)(2) on page 27, presents
fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements and financial statement schedule
based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
November 19, 1998
NBTY, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 1998 and 1997
(Dollars and shares in thousands)
<TABLE>
<CAPTION>
ASSETS: 1998 1997
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 14,308 $ 20,262
Short-term investments 8,362
Accounts receivable, less allowance
for doubtful accounts of $1,045
in 1998 and $1,116 in 1997 23,433 19,603
Inventories 119,607 86,440
Deferred income taxes 2,994 6,032
Prepaid real estate tax, catalog costs
and other current assets 13,614 19,111
----------------------
Total current assets 173,956 159,810
Cash held in escrow 144,262
Property, plant and equipment, net 166,335 118,184
Intangible assets, net 152,426 141,303
Other assets 7,740 7,618
----------------------
Total assets $500,457 $571,177
======================
LIABILITIES AND
STOCKHOLDERS' EQUITY: 1998 1997
---- ----
Current liabilities:
Current portion of long-term debt and
capital lease obligations $ 1,218 $ 1,519
Demand note payable 1,873
Accounts payable 50,389 49,857
Accrued expenses 33,243 35,711
----------------------
Total current liabilities 84,850 88,960
Long-term debt 171,230 168,550
Obligations under capital leases 2,106 2,700
Promissory note payable 169,909
Deferred income taxes 8,203 7,474
Other liabilities 3,729 2,293
----------------------
Total liabilities 270,118 439,886
Commitments and contingencies
Stockholders' equity:
Common stock, $.008 par; authorized 75,000
shares; issued 72,714 shares in 1998 and
23,041 shares in 1997 and outstanding 68,203
shares in 1998 and 21,538 shares in 1997 582 185
Capital in excess of par 115,661 56,550
Retained earnings 105,989 75,199
----------------------
222,232 131,934
----------------------
Less 4,511 and 1,503 treasury shares at cost,
in 1998 and 1997, respectively (3,206) (3,206)
Cumulative translation adjustment 11,313 2,563
----------------------
Total stockholders' equity 230,339 131,291
----------------------
Total liabilities and stockholders' equity $500,457 $571,177
======================
</TABLE>
See notes to consolidated financial statements.
NBTY, Inc. and Subsidiaries
Consolidated Statements of Income
Years ended September 30, 1998, 1997 and 1996
(Dollars and shares in thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales $572,124 $355,336 $265,670
------------------------------------
Costs and expenses:
Cost of sales 271,233 177,909 138,186
Catalog printing, postage and
promotion 32,176 27,932 26,695
Selling, general and
administrative 190,276 96,653 68,414
Merger related costs 3,528
Litigation settlement costs 6,368
------------------------------------
497,213 308,862 233,295
------------------------------------
Income from operations 74,911 46,474 32,375
------------------------------------
Other income (expense):
Interest, net (16,518) (7,471) (2,431)
Miscellaneous, net 3,921 1,817 1,430
------------------------------------
(12,597) (5,654) (1,001)
------------------------------------
Income before income taxes 62,314 40,820 31,374
Income taxes 23,474 11,694 9,168
------------------------------------
Net income $ 38,840 $ 29,126 $ 22,206
====================================
Net income per share:
Basic $0.59 $0.45 $0.35
Diluted $0.56 $0.42 $0.32
Weighted average common shares outstanding:
Basic 65,563 64,611 64,197
Diluted 69,847 68,935 68,699
</TABLE>
See notes to consolidated financial statements.
NBTY, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended September 30, 1998, 1997 and 1996
(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, 1995 22,132 $177 $ 54,398 $ 39,162 1,441 $(2,346) $ 91,391
Net income for year ended
September 30, 1996 22,206 22,206
S corporation distributions (6,935) (6,935)
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 23,004 184 56,260 54,433 1,487 (2,648) (584) 107,645
Net income for year ended
September 30, 1997 29,126 29,126
S corporation distributions (8,360) (8,360)
Foreign currency translation
adjustment $ 2,563 2,563
Exercise of stock options 37 1 33 34
Tax benefit from exercise
of stock options 257 257
Repayment of stock subscrip-
tions receivable for options
exercised 96 96
Stock tendered as payment for
options exercised 16 (558) 488 (70)
-----------------------------------------------------------------------------------------------
Balance, September 30, 1997 23,041 185 56,550 75,199 1,503 (3,206) - 2,563 131,291
Net income for year ended
September 30, 1998 38,840 38,840
S corporation distributions (8,050) (8,050)
Foreign currency translation
adjustment 8,750 8,750
Exercise of stock options 44 40 40
Three-for-one stock split
effected in the form of a
200% stock dividend 46,169 369 (369) 3,008
Exercise of stock options 10 3 3
Tax benefit from exercise of
stock options 611 611
Public offering of common stock 3,450 28 58,826 58,854
-----------------------------------------------------------------------------------------------
Balance, September 30, 1998 72,714 $582 $115,661 $105,989 4,511 $(3,206) $ $11,313 $230,339
===============================================================================================
</TABLE>
See notes to consolidated financial statements.
NBTY, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 38,840 $ 29,126 $ 22,206
Adjustments to reconcile net income to cash
provided by operating activities:
Gain on sale of product line (2,563)
(Gain) loss on disposal/sale of property,
plant and equipment 587 (194) (43)
Depreciation and amortization 22,059 9,627 7,091
Amortization of deferred financing costs 704
Amortization of bond discount 119
Allowance for doubtful accounts 38 197 283
Deferred income taxes 2,139 (2,750) (642)
Changes in assets and liabilities, net of
acquisitions:
Accounts receivable (2,673) (4,841) 1,441
Inventories (31,890) (20,877) (1,054)
Prepaid real estate tax, catalog costs and
other current assets 5,178 (4,461) 665
Other assets 2,938 36 603
Accounts payable (1,133) 14,586 (6,399)
Accrued expenses (3,351) 14,553 5,565
Other liabilities 1,240 1,500 24
---------------------------------------
Net cash provided by operating activities 32,232 36,502 29,740
---------------------------------------
Cash flows from investing activities:
Increase in intangible assets (7,171) (1,843) (67)
Purchase of property, plant and equipment (68,044) (23,712) (16,809)
Proceeds from sale of property, plant and
equipment 493 293 155
Proceeds from sale of short-term investments 8,362 2,662
Proceeds from sale of product line 4,640
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
Other (263) 181
---------------------------------------
Net cash used in investing activities (61,720) (16,236) (26,473)
---------------------------------------
Cash flows from financing activities:
Net proceeds under line of credit agreement 8,000
Proceeds from bond offering, net of discount 148,763
Proceeds from public offering, less expenses 58,854
Cash held in escrow 144,262 (144,262)
Bond issue costs (5,575)
Borrowings under long-term debt agreements 99 6,000
Principal payments under long-term debt
agreements and capital leases (8,012) (3,628) (2,802)
Purchase of treasury stock (70) (302)
Proceeds from stock options exercised 43 34 11
Distributions to stockholders (8,050) (8,360) (6,935)
Repayment of promissory note (169,909)
Repayment of stock subscription receivable 96
---------------------------------------
Net cash provided by (used in)
financing activities 25,188 (12,903) (4,028)
---------------------------------------
Effect of exchange rate changes on cash and
cash equivalents (1,654) 85
---------------------------------------
Net (decrease) increase in cash and cash
equivalents (5,954) 7,448 (761)
Cash and cash equivalents at beginning of year 20,262 12,814 13,575
---------------------------------------
Cash and cash equivalents at end of year $ 14,308 $ 20,262 $ 12,814
=======================================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 19,852 $ 3,568 $ 2,493
Cash paid during the period for income taxes $ 18,105 $ 14,206 $ 5,496
</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 1998, 1997 and 1996, options were exercised with shares of
common stock issued to certain officers and directors. Accordingly, the tax
benefit of approximately $611, $257 and $1,274 for the years ended September
30, 1998, 1997 and 1996, 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 13)
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
The Company (as defined below) 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, 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 of NBTY, Inc. and Subsidiaries,
formerly Nature's Bounty, Inc. ("NBTY"), have been prepared to give
retroactive effect to the merger between Nutrition Headquarters, Inc.,
Lee Nutrition, Inc. and Nutro Laboratories, Inc. (collectively, the
"Nutrition Headquarters Group" and with NBTY collectively, the
"Company"), which has been accounted for as a pooling of interests.
On April 20, 1998, Nutrition Headquarters Group was merged with and
into NBTY. Under terms of the merger agreement, each share of
Nutrition Headquarters Group common stock was exchanged for
approximately 30 shares of NBTY's common stock with approximately
8,772 shares of NBTY's common stock exchanged for all the outstanding
stock of Nutrition Headquarters Group.
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany accounts
and transactions have been eliminated.
In March 1998, the Company's board of directors declared a three-for-
one stock split payable in the form of a 200% stock dividend. All
share and per common share amounts have been retroactively restated to
account for the stock split. In addition, stock options and the
related exercise prices have been amended to reflect this transaction.
Also, in March 1998, the Company's certificate of incorporation was
amended to authorize the issuance of up to 75,000 shares of common
stock, par value $.008 per share.
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, 1998, 1997 and 1996.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets,
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenues
and expenses during the reporting period. The most significant
estimates include the valuation of inventories, the allowance for
doubtful accounts receivable and the recoverability of long-lived
assets. Actual results could differ from those estimates.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined on the weighted average method which approximates first-in,
first-out basis. The cost elements of inventory include materials,
labor and overhead. In fiscal 1998, no one supplier provided more
than 10% of purchases, however, one supplier provided approximately
12% of the Company's purchases in 1997 and 1996, respectively.
Prepaid catalog costs
Mail order production and mailing costs are capitalized as prepaid
catalog costs and charged to expense over the catalog period, which
typically approximates three months.
Advertising
All media (television, radio, magazine) and cooperative advertising
costs are generally expensed as incurred. Total expenses relating to
advertising and promotion for fiscal 1998, 1997 and 1996 were $16,356,
$19,782 and $17,885, respectively. Included in prepaid expenses and
other current assets is approximately $2,000 and $1,123 relating to
prepaid advertising at September 30, 1998 and 1997, 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 periods not
exceeding 40 years.
Foreign currency
The financial statements of international subsidiaries are translated
into U.S. dollars using the exchange rate at each balance sheet date
for assets and liabilities and an average exchange rate for each
period for revenues, expenses, and gains and losses. Where the local
currency is the functional currency, translation adjustments are
recorded as a separate component of stockholders' 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
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share." The statement requires the presentation of both
"basic" and "diluted" earnings per share ("EPS") on the face of the
income statement. Basic EPS is based on the weighted average number
of shares of common stock outstanding during each period while diluted
EPS is based on the weighted average number of shares of common stock
and common stock equivalents outstanding during each period.
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 SFAS No. 123, "Accounting for Stock-Based Compensation."
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 1998, 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
1998 and 1997 had no material impact on the Company's financial
position or results of operations.
New accounting standards
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for the reporting and display of
comprehensive income, its components (revenues, expenses, gains and
losses) and accumulated balances in a full set of general purpose
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 they may have an impact on future financial statement disclosures.
In February 1998, the American Institute of Certified Public
Accountants' Accounting Standards Executive Committee issued Statement
of Position No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP No. 98-1"). SOP
No. 98-1 requires certain costs incurred in connection with developing
or obtaining internal-use software to be capitalized and other costs
to be expensed. The Company adopted SOP 98-1 during fiscal 1998, and
its application had no material effect on the Company's financial
position as of September 30, 1998 or its results of operations for the
period then ended.
In April 1998, the American Institute of Certified Public Accountants'
Accounting Standards Executive Committee issued Statement of Position
No. 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP No.
98-5"). SOP No. 98-5 requires that all start-up (or pre-opening)
activities and organization costs be expensed as incurred. This SOP
is effective for the Company beginning October 1, 1998. The Company
does not expect its application during fiscal 1999 to have a material
impact on its financial position or results of operations.
2. Acquisitions:
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 products through
its retail stores.
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 were
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 included 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 is being amortized over 25 years.
Additionally, finance related costs of approximately $5,600 are being
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,
---------------------
1997 1996
<S> <C> <C>
Net sales $506,326 $421,049
Net income $ 24,354 $ 14,964
Net income per diluted share $ 0.35 $ 0.22
</TABLE>
Other Acquisitions
In fiscal 1998, the Company acquired certain assets, principally mail
order databases, of three privately held vitamin mail order companies:
Home Health Products, Inc., Barth-Spencer Corporation and Darby Health
Group, Inc. for an aggregate $7.8 million in cash. The mail order
databases of the acquired operations have been incorporated into
NBTY's active mail order customer base to increase the number of
active customers.
3. Divestitures:
In April 1998, the Company sold certain assets of its cosmetic pencil
operation for approximately $6 million, of which $4.5 million was paid
in cash with additional payments aggregating $1.5 million to be paid
over the next three years. The cosmetic pencil business, which had
insignificant operations in fiscal 1998, had sales of approximately
$1.9 million and an operating loss of approximately $0.8 million in
fiscal 1997. The gain on such sale of approximately $2.6 million is
included in other income in the consolidated statements of income.
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 for fiscal 1996. 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,
--------------------
1998 1997
<S> <C> <C>
Raw materials $ 45,670 $32,712
Work-in-process 5,243 4,635
Finished goods 68,694 49,093
--------------------
$119,607 $86,440
====================
</TABLE>
5. Property, Plant and Equipment:
<TABLE>
<CAPTION>
September 30,
---------------------
1998 1997
<S> <C> <C>
Land $ 6,743 $ 5,836
Buildings and leasehold improvements 78,814 51,423
Machinery and equipment 62,754 43,858
Furniture and fixtures 67,482 54,385
Transportation equipment 2,611 2,511
Computer equipment 15,677 15,434
--------------------
234,081 173,447
Less accumulated depreciation and amortization 67,746 55,263
--------------------
$166,335 $118,184
====================
</TABLE>
Depreciation and amortization of property, plant and equipment for the
years ended September 30, 1998, 1997 and 1996 was approximately
$15,952, $8,363 and $6,205, respectively.
Property, plant and equipment includes approximately $4,020 and $4,392
for assets recorded under capital leases for fiscal 1998 and 1997,
respectively. Accumulated amortization of these capital leases for
the years ended September 30, 1998 and 1997 was approximately $1,268
and $812, respectively.
Included in property, plant and equipment at September 30, 1998 is
approximately $944 of interest costs capitalized in connection with
the construction of a softgel facility.
6. Intangible Assets:
Intangible assets, at cost, acquired at various dates are as follows:
<TABLE>
<CAPTION>
September 30,
--------------------- Amortization
1998 1997 period
<S> <C> <C> <C>
Goodwill $147,266 $136,972 20-40
Customer lists 19,867 12,732 6-15
Trademark and licenses 1,201 1,201 2-3
Covenants not to compete 1,305 1,305 5-7
---------------------
169,639 152,210
Less accumulated amortization 17,213 10,907
---------------------
$152,426 $141,303
=====================
</TABLE>
Amortization included in the consolidated statements of income under
the caption "selling, general and administrative expenses" in 1998,
1997 and 1996 was approximately $6,107, $1,264 and $886, respectively.
7. Accrued Expenses:
<TABLE>
<CAPTION>
September 30,
-------------------
1998 1997
<S> <C> <C>
Litigation settlement costs $ 5,600
Payroll and related payroll taxes $ 4,566 4,622
Customer deposits 4,002 2,568
Accrued purchases and interest 2,785 2,800
Income taxes payable 9,666 7,597
Other 12,224 12,524
-------------------
$33,243 $35,711
===================
</TABLE>
8. Long-Term Debt:
<TABLE>
<CAPTION>
September 30,
---------------------
1998 1997
<S> <C> <C>
Senior debt:
8-5/8% Senior subordinated notes due 2007, net of
unamortized discount of $1,237 (a) $148,881 $148,763
Second subordinated promissory notes, principal payable on
April 1, 2011 (b) 2,245
Note payable to a bank due in monthly payments of $16,
including interest at 8.15%, maturing April 2016 1,814
Note payable due in monthly payments of $9, including
interest at 8%, maturing March 2001 318 341
Mortgages:
First mortgage payable in monthly principal and interest
(10.375%) installments (c) 7,171 7,317
First mortgage payable in monthly principal and interest
(9.73%) installments of $25 (d) 2,071 2,169
First mortgage payable in monthly principal and interest
(7.375%) installments of $55 through 2011 5,442 5,693
Revolving credit agreement (e) 8,000
Other (f) 1,151
---------------------
171,883 169,493
Less current portion 653 943
---------------------
$171,230 $168,550
=====================
<Fa> 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 has registered these Notes under the Securities Act of 1933
through an exchange offer with terms substantially identical to the
original Notes.
<Fb> Interest on the second promissory notes, which were repaid during
fiscal 1998, was payable per annum at the lower of 10% or the prime
rate plus 2%. These promissory notes which were payable to a relative
of a stockholder, were collateralized by a second subordinated pledge
of capital stock of the Company and guaranteed by certain
stockholders.
<Fc> 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.
<Fd> 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.
<Fe> 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. In April
1998, the borrowing limit provided under the terms of the Agreement
was increased to $60,000. The Agreement provides that loans may be
made under a selection of rate formulas, including the prime or Euro
currency rates (7.125% at September 30, 1998). The Agreement provides
for the maintenance of various financial ratios and covenants.
<Ff> Included in other was approximately $617 as of September 30, 1997
relating to loans made by a stockholder. These notes, which were at
fixed interest rates ranging from 8.0% to 10.0%, were repaid during
1998.
</TABLE>
Required principal payments of long-term debt are as follows:
<TABLE>
<CAPTION>
Years ending
September 30,
<C> <C>
1999 $ 653
2000 7,554
2001 514
2002 481
2003 8,521
Thereafter 154,160
--------
$171,883
========
</TABLE>
In August 1997, in connection with the promissory notes issued as
consideration for the purchase of H&B, the Company delivered 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 canceled.
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, 1998 are as follows:
<TABLE>
<CAPTION>
Years ending
September 30,
<C> <C>
1999 $ 757
2000 753
2001 752
2002 696
2003 163
------
3,121
Less, amount representing interest 450
------
Present value of minimum lease payments (including $565
due within one year) $2,671
======
</TABLE>
10. Income Taxes:
Provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
Year ended September 30,
------------------------------
1998 1997 1996
<S> <C> <C> <C>
Federal
Current $16,398 $14,207 $7,551
Deferred 2,596 (2,530) (501)
State
Current 1,686 1,426 2,259
Deferred 267 (220) (141)
Foreign provision (benefit) 2,527 (1,189)
------------------------------
Total provision $23,474 $11,694 $9,168
==============================
</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,
---------------------------------------------------------------------------
1998 1997 1996
---------------------- --------------------- ----------------------
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 $21,810 35.0% $14,287 35.0% $10,981 35.0%
State income taxes, net
of federal income tax benefit 2,243 3.6% 857 2.1% 1,428 4.6%
S corporation earnings not
subject to income taxes (a) (2,988) (4.8%) (4,236) (10.4%) (3,150) (10.0%)
Amortization of goodwill 2,155 3.5%
Other, individually less than 5% 254 0.5% 786 1.9% (91) (0.2%)
------------------------------------------------------------------------
Actual income tax provision $23,474 37.8% $11,694 28.6% $ 9,168 29.2%
========================================================================
<Fa> Prior to the merger, Nutrition Headquarters Group had been treated as
an S corporation for Federal and state tax purposes. Accordingly,
taxable income had previously been reported to the individual
stockholders for inclusion in their respective income tax returns with
no provision for these taxes, other than certain minimum taxes,
included in its financial statements.
</TABLE>
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets:
Current:
Inventory capitalization $ 324 $ 351
Accrued expenses and reserves not currently deductible 2,270 5,350
Tax credits 400 331
-------------------
Current deferred tax assets 2,994 6,032
-------------------
Noncurrent:
Intangibles 67 333
Reserves not currently deductible 653 188
-------------------
Total noncurrent 720 521
-------------------
Deferred tax liabilities:
Property, plant and equipment (8,923) (7,995)
-------------------
Net deferred tax liability $(5,209) $(1,442)
===================
</TABLE>
Available state tax credits of $400 and $331 in 1998 and 1997,
respectively, are scheduled to expire through fiscal 2002.
11. Commitments:
Operating Leases
The Company conducts retail operations under operating leases which
expire at various dates through 2020. Some of the leases contain
renewal options and provide for contingent rent based upon sales plus
certain tax and maintenance costs.
Future 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, 1998 are as follows:
<TABLE>
<CAPTION>
Year ending
September 30,
<C> <C>
1999 $ 32,438
2000 31,332
2001 29,590
2002 27,835
2003 25,440
Thereafter 166,919
--------
$313,554
========
</TABLE>
Operating lease rental expense, including real estate tax and
maintenance costs, and leases on a month to month basis were
approximately $31,562, $7,852 and $2,092 for the years ended September
30, 1998, 1997 and 1996, respectively.
Purchase commitments
The Company was committed to make future purchases under various
purchase order arrangements with fixed price provisions aggregating
approximately $28,624 at September 30, 1998.
Capital commitments
The Company had approximately $5,000 in open capital commitments
primarily related to a manufacturing facility as well as to computer
hardware and software at September 30, 1998.
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 commitments for salaries as of September 30, 1998 were
approximately $900 per year.
Effective April 20, 1998, the Company entered into an employment
agreement with a former stockholder and officer of Nutrition
Headquarters Group who is currently an associate of the Company. Such
agreement is for a one-year term, subject to extension at the sole
option of the officer for two additional one-year terms, and requires
an annual payment of $275.
Effective January 1, 1997, the Company entered into a consulting
agreement with Rudolph Management Associates, Inc. for the services of
Arthur Rudolph, a director of the Company. The agreement has been
renewed to provide services from January 1, 1998 through December 31,
2000 with the consulting fee fixed by the Board of Directors of the
Company, provided that in no event will the consulting fee be at a
rate lower than $400,000 per year, payable monthly, with certain
fringe benefits accorded to other executives of the Company. In
addition, an entity owned by a relative of an officer received sales
commissions of $474, $541 and $417 in 1998, 1997 and 1996,
respectively.
12. Earnings Per Share:
Basic EPS computations are based on the weighted average number of
common shares outstanding during the fiscal years. Diluted EPS
include the diluted effect of outstanding stock options, if exercised.
The following is a reconciliation between the basic and diluted EPS:
<TABLE>
<CAPTION>
Year ended
September 30,
-------------------------------
1998 1997 1996
<S> <C> <C> <C>
Numerator:
Numerator for EPS - income available to common
stockholders $38,840 $29,126 $22,206
===============================
Numerator for dilutive EPS - income available to
common stockholders $38,840 $29,126 $22,206
===============================
Denominator:
Denominator for basic EPS - weighted-average shares 65,563 64,611 64,197
Effect of dilutive securities:
Stock options 4,284 4,324 4,502
-------------------------------
Denominator for diluted EPS - weighted-average shares 69,847 68,935 68,699
===============================
Net EPS:
Basic EPS $ 0.59 $ 0.45 $ 0.35
===============================
Diluted EPS $ 0.56 $ 0.42 $ 0.32
===============================
</TABLE>
13. Stock Option Plans:
The Board of Directors approved the issuance of 6,660 non-qualified
options on September 23, 1990, exercisable at $0.21 per share, which
options terminate on September 23, 2000. In addition, on March 11,
1992, the Board approved the issuance of an aggregate of 5,400 non-
qualified stock options to directors and officers, exercisable at
$0.31 per share and expiring on March 10, 2002. 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 1998, options were exercised with 142 shares of common
stock issued to certain officers and directors for $43. As a result
of the exercise of those options, the Company will receive a
compensation deduction for tax purposes of approximately $1,652.
Accordingly, a tax benefit of approximately $611 was credited to
capital in excess of par.
During fiscal 1997, options were exercised with 37 shares of common
stock issued prior to the aforementioned stock split 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 prior to the aforementioned stock split 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 received 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.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- ----------------------
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 4,458 $.25 4,569 $.25 7,185 $.25
Exercised 142 $.31 111 $.31 2,616 $.23
------------------------------------------------------------------------
Outstanding at end of year 4,316 $.26 4,458 $.25 4,569 $.25
========================================================================
Exercisable at end of year 4,316 $.26 4,458 $.25 4,569 $.25
========================================================================
</TABLE>
As of September 30, 1998, the weighted average remaining contractual
life of outstanding options was 3 years. In addition, there were no
options available for grant at September 30, 1998, 1997 or 1996.
14. Employee Benefit Plans:
The Company maintains defined contribution savings plans and an
employee stock ownership plan. The accompanying financial statements
reflect contributions to these plans in the approximate amount of
$501, $1,209 and $489 for the years ended September 30, 1998, 1997 and
1996, respectively.
15. Litigation:
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. In 1997, the Company entered into a Capital Stipulation
of Settlement calling for, among other things, a total cash payment of
$8,000 to the plaintiff class. The Company was notified by its
insurance carrier that it was willing to reimburse the Company to the
extent of $2,400. Accordingly, 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 for fiscal 1997.
Other litigation:
The Company is also involved in miscellaneous claims and routine
litigation which management believes, taken individually or in the
aggregate, would not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
16. Foreign Operations:
In connection with the Company's 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,
1998 and 1997 and for the years then ended.
<TABLE>
<CAPTION>
September 30, 1998
---------------------------------------
Identifiable Operating
Assets Sales Income
------------ ----- ---------
<S> <C> <C> <C>
United States $277,155 $382,569 $66,175
United Kingdom 223,302 189,555 8,736
------------------------------------
$500,457 $572,124 $74,911
====================================
<CAPTION>
September 30, 1997
---------------------------------------
Identifiable Operating
Assets Sales Income
------------ ----- ---------
<S> <C> <C> <C>
United States $356,987 $328,838 $49,755
United Kingdom 214,190 26,498 (3,281)
------------------------------------
$571,177 $355,336 $46,474
====================================
</TABLE>
17. Related Party Transactions:
Nutrition Headquarters Group had outstanding loans to a stockholder in
the aggregate amount of $617. Interest on these loans amounted to
approximately $35, $56 and $30 for the years ended September 30, 1998,
1997 and 1996, respectively.
For the years ended September 30, 1998, 1997 and 1996, Nutrition
Headquarters Group provided distributions to its stockholders in the
aggregate amount of $8,050, $8,360 and $6,935, respectively.
Nutrition Headquarters Group had outstanding promissory notes of
$2,245, as of September 30, 1997, which were payable to a relative of
a stockholder. Interest on the obligation amounted to approximately
$124 for the year ended September 30, 1998 and $224 for each of the
two years ended September 30, 1997 and 1996.
18. Quarterly Results of Operations (Unaudited):
The following is a summary of the unaudited quarterly results of
operations for fiscal 1998 and 1997:
<TABLE>
<CAPTION>
Quarter ended
---------------------------------------------------------
December 31, March 31, June 30, September 30,
------------ --------- -------- -------------
<S> <C> <C> <C> <C>
1998:
Net sales $129,533 $157,287 $138,931 $146,372
Gross profit 64,317 82,089 74,417 80,068
Income before income taxes 11,490 22,709 13,621 14,495(a)
Net income 8,018 15,617 8,135 7,072
Net income per diluted share $ 0.12 $ 0.23 $ 0.12 $ 0.10(b)
1997:
Net sales $ 64,772 $ 94,079 $ 80,219 $116,266
Gross profit 31,619 47,700 39,124 58,984
Income before income taxes 7,442 15,818 11,281 6,279(a)
Net income 5,186 10,684 7,826 5,430
Net income per diluted share $ 0.08 $ 0.15 $ 0.11 $ 0.09(b)
<Fa> Year-end adjustments resulting in an increase to pre-tax income of
approximately $3,400 and $2,100 in 1998 and 1997, respectively,
primarily related to adjustments of inventory amounts.
<Fb> Amounts may not equal fiscal year totals due to rounding.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 14,308
<SECURITIES> 0
<RECEIVABLES> 24,478
<ALLOWANCES> 1,045
<INVENTORY> 119,607
<CURRENT-ASSETS> 173,956
<PP&E> 234,081
<DEPRECIATION> 67,746
<TOTAL-ASSETS> 500,457
<CURRENT-LIABILITIES> 84,850
<BONDS> 174,554
0
0
<COMMON> 582
<OTHER-SE> 229,757
<TOTAL-LIABILITY-AND-EQUITY> 500,457
<SALES> 572,124
<TOTAL-REVENUES> 572,124
<CGS> 271,233
<TOTAL-COSTS> 222,452
<OTHER-EXPENSES> 3,528
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,518
<INCOME-PRETAX> 62,314
<INCOME-TAX> 23,474
<INCOME-CONTINUING> 38,840
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,840
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.56
</TABLE>
