-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IR1pgZRVisK5vvxCmkZet9sabDbGB8wz9VfoI5CjseB5uUMLM6Y2x0jdXx9axRl8 odcjVzAcUobYxdZ8IlJ8kA== 0000910647-96-000212.txt : 19961217 0000910647-96-000212.hdr.sgml : 19961217 ACCESSION NUMBER: 0000910647-96-000212 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961216 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NBTY INC CENTRAL INDEX KEY: 0000070793 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 112228617 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-10666 FILM NUMBER: 96681295 BUSINESS ADDRESS: STREET 1: 90 ORVILLE DR CITY: BOHEMIA STATE: NY ZIP: 11716 BUSINESS PHONE: 5165679500 MAIL ADDRESS: STREET 1: 90 ORVILLE DRIVE CITY: BOHEMIA STATE: NY ZIP: 11716 FORMER COMPANY: FORMER CONFORMED NAME: NATURES BOUNTY INC DATE OF NAME CHANGE: 19920703 10-K 1 BODY OF 10-K 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, 1996. 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 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 90 Orville Drive 11716 ---------------- ----- Bohemia, New York (Zip Code) ----------------- (Address of principal executive office) (516) 567-9500 - -------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.008 per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment for this Form 10-K [X]. The aggregate market value of the voting stock held by nonaffiliates of the registrant, based upon the closing price of shares of Common Stock on the National Association of Securities Dealers Automated Quotation ("NASDAQ") National Market System at November 22, 1996 was approximately $251,552,000. The number of shares of Common Stock of the registrant outstanding at November 22, 1996 was approximately 18,592,119. Documents Incorporated by Reference: None PART I Item 1. BUSINESS Products NBTY, Inc. (the "Company"), collectively with its subsidiaries is a manufacturer and marketer of nutritional supplements in the United States. It sells more than 500 products consisting of vitamins and other nutritional supplements such as minerals, amino acids and herbs. Vitamins, minerals and amino acids are sold as a single vitamin and in multi-vitamin combinations and in varying potency levels in powder, tablet, soft gel, chewable, and hard shell capsule form. The Company's branded products are sold by independent and chain pharmacies, wholesalers, supermarkets and health food stores and by direct mail. Marketing and Distribution The Company markets its products through different channels of distribution: wholesale-retail and direct mail. Wholesale. The Company markets its products under various brand names to various stores including drug store chains and supermarkets, independent pharmacies, health food stores, health food store wholesalers and other retailers such as mass merchandisers. The Nature's Bounty brand is sold to drug store chains and drug wholesalers. The Company sells a full line of products to supermarket chains and wholesalers under the brand name Natural Wealth at prices designed for the "price conscious" consumer. In addition to a complete line of vitamins and other nutritional supplements, the Company sells a comprehensive line of over-the-counter products such as cold remedies and analgesic formulas to independent pharmacies under the Hudson brand name. The Company sells directly to health food stores under the brand name Good'N Natural and sells products, including a specialty line of vitamins, to health food wholesalers under the brand name American Health. Retail. The Company operates 83 retail locations in thirty states under the name Vitamin World. Such locations carry a full line of products under the Vitamin World brand name and products manufactured by others. Through direct interaction between the Company's personnel and the public, the Company is able to identify buying trends, customer preferences or dislikes, acceptances of new products and price trends in various regions of the country. This information is useful in initiating sales programs for all divisions of the Company. Direct Mail. The Company offers its full line of vitamins and other nutritional supplement products as well as selected personal care items under its Puritan's Pride brand name at prices which are normally at a discount from those of similar products sold in retail stores. International. The Company has expanded sales of various products to many countries throughout Europe, Asia and Latin America. In the United Kingdom, the Company has leased a warehouse for distribution of its products under the Vitamin World brand name. Sales and Advertising The Company has approximately 70 sales employees located throughout the country who are paid on a salary plus commission basis. In addition, the Company sells through commissioned sales representative organizations which sell the Company's products on an exclusive basis. In 1995 and 1996, the Company spent approximately $19.3 million and $17.6 million, respectively, on advertising in print and media, cooperative advertising with its customers. The Company creates its own advertising materials through a staff of approximately 22 employees. The Company expects advertising costs to increase as net sales increase. Manufacturing, Distribution and Quality Control All manufacturing is conducted in accordance with good manufacturing practice standards of the United States Food and Drug Administration and other applicable regulatory standards. The Company believes that the capacity of its manufacturing and distribution facilities is adequate to meet the requirements of its current business and, at the completion of its expansion program, will be adequate to meet the requirements of anticipated increases in net sales. The Company manufactures approximately 60% of its vitamins and other nutritional supplements and expects to increase such percentage upon completion of its manufacturing improvement program. The Company's manufacturing process places special emphasis on quality control. All raw materials used in production initially are held in quarantine during which time the Company's laboratory employees assay the production against the manufacture's certificate of analysis. Once cleared, a lot number is assigned, samples are retained and the material is processed by formulating, mixing and granulating, compression and sometimes coating operations. After the tablet is manufactured, laboratory employees test its weight, purity, potency, dissolution and stability. When a product such as vitamin tablets is ready for bottling, the Company's automated equipment counts the tablets, inserts them into bottles, adds a tamper-resistant cap with an inner safety seal and affixes a label. The Company uses computer-generated documentation for picking and packing for order fulfillment. The principal raw materials used in the manufacturing process are natural and synthetic vitamins, purchased from bulk manufacturers in the United States, Japan and Europe. Although raw materials are available from numerous sources, one supplier currently provides approximately 25% 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 1994, 1995 and 1996, the Company did not expend any significant amounts for research and development of new products. Government Regulation The processing, formulation, packaging, labeling and advertising of the Company's products are subject to regulation by one or more federal agencies, including the United States Food and Drug Administration (the "FDA"), the Federal Trade Commission (the "FTC"), the Consumer Product Safety Commission, the United States Department of Agriculture and the Environmental Protection Agency. These activities are also regulated by various agencies of the states and localities in which the Company's products are sold. In particular, the FDA regulates the safety, labeling and distribution of dietary supplements, including vitamins, minerals and herbs, food additives, food supplements, over-the-counter ("OTC") and prescription drugs and cosmetics. In addition, the FTC has overlapping jurisdiction with the FDA to regulate the labeling, promotion and advertising of vitamins, OTC drugs, cosmetics and foods. In addition, the United States Postal Service regulates advertising claims with respect to the Company's products sold by mail order. In The Dietary Supplement Health and Education Act of 1994 ("DSHEA") was enacted on October 25, 1994. DSHEA amends the Federal Food, Drug and Cosmetic Act by defining dietary supplements, which include vitamins, minerals, amino acids, nutritional supplements and herbs as a new category of food separate from conventional food. DSHEA provides a regulatory framework to ensure safe, quality dietary supplements and the dissemination of accurate information about such products. Under DSHEA, the FDA is generally prohibited from regulating the active ingredients in dietary supplements as food additives or as drugs unless product claims, such as claims that a product may heal, mitigate, cure or prevent an illness, disease or malady, trigger drug status. DSHEA provides for specific nutritional labeling requirements for dietary supplements effective January 1, 1997, although final regulations have not been published and implementation will be delayed. DSHEA permits substantiated, truthful and non-misleading statements of nutritional support to be made in labeling, such as statements describing general well-being resulting from consumption of a dietary ingredient or the role of a nutrient or dietary ingredient in affecting or maintaining structure or function of the body. Any statement of nutritional support beyond such "traditional" claims must be accompanied by disclosure that the FDA has not evaluated such statement and that the product is not intended to cure or prevent any disease. The Company anticipates that the FDA will promulgate good manufacturing practices ("GMPs") which are specific to dietary supplements and require at least some of the quality control provisions contained in the GMPs for drugs. The Company currently manufactures its vitamins and nutritional supplement products in compliance with the applicable food GMPs. The FDA has proposed but not finalized regulations to implement DSHEA. The Company cannot determine what effect such regulations, when promulgated, will have on its business in the future. Such regulations are most likely to require expanded or different labeling for the Company's vitamins and nutritional products and could, among other things, require the recall, reformulation or discontinuance of certain products, additional recordkeeping, warnings, notification procedures and expanded documentation of the properties of certain products and scientific substantiation regarding ingredients, product claims, safety or efficacy. The Company believes that it is in material compliance with all applicable laws. 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. Although the vitamin and nutritional supplement industry is subject to regulations by the FDA and local authorities, dietary supplements, including vitamins, minerals, herbs and nutritional supplements, have now been statutorily affirmed as a food and not as a drug or food additive. Therefore, the regulation of dietary supplements is far less restrictive than that imposed upon manufactures and distributors of drugs or food additives. Unlike food additives, which are more pervasively regulated, and new drugs, which require regulatory approval of formulation and labeling prior to marketing, dietary supplement companies are authorized to make substantiated statements of nutritional support and to market new, manufacture-substantiated-as-safe dietary supplement products without FDA preclearances. Failure to comply with applicable FDA requirements can result in sanctions being imposed on the Company or the manufacturers of its products, including, depending on the product category, warning letters, fines, product recalls and seizures. The OTC pharmaceutical products distributed by the Company are subject to regulation by a number of Federal and State governmental agencies. In particular, the FDA regulates the formulation, manufacture, packaging and labeling of all OTC pharmaceutical products. The Company believes that the OTC pharmaceutical products distributed by the Company comply in all material respects with existing regulations. The Company is subject to regulation under various international, state and local laws which include provisions regulating, among other things, the operations of direct sales programs. The Company believes that it is in material compliance with such provisions and has, in certain cases, established procedures providing greater protection for its distributors than is required by law. Competition The market for vitamins and other nutritional supplements is highly competitive in all of the Company's channels of distribution. The Company's Nature's Bounty and Natural Wealth brands compete for sales to drug store chains and supermarkets with heavily advertised national brands manufactured by large pharmaceutical companies, as well as Your Life and Nature Made, sold by Leiner Health Products, Inc. and Pharmavite Corp., respectively. The Vitamin World stores compete with specialty vitamin stores, such as GNC Stores, health food stores and other retail stores. With respect to direct mail sales, the Company's Puritan's Pride brand is the largest seller of vitamins and other nutritional supplements and competes with a large number of smaller, usually less geographically diverse, direct mail companies, some of which manufacture their own products and some of which sell products manufactured by others. It is not possible to estimate accurately the number of competitors since the nutritional supplement industry is fragmented. The Company is not capable of assessing market penetration of such competitors since they do not publish marketing figures. No one company dominates the industry. However, it is the Company's belief that there may be between one and two dozen companies competing for the drug store and supermarket business. In its Vitamin World operations, the Company competes regionally with specialty vitamin stores, such as GNC stores and local drug stores, health food stores, supermarkets, department stores and mass merchandisers. The Company believes that it competes favorably with other direct mail sellers of similar products on a basis of price and customer service, including speed of delivery and new product offerings. The Company believes that it competes favorably with the large pharmaceutical companies and other companies which sell to wholesalers, on the basis of price, breadth of product line, reputation and customer service, including innovative packaging and displays and other services. The Company believes that it derives a competitive advantage from its ability to manufacture and package its own vitamin and nutritional supplement products, which affords it the flexibility to respond to the shifting demands of each channel of distribution and, consequently, the ability to achieve the manufacturing and operating efficiencies resulting from larger production runs of products which can be packaged for sale in one or more such channels. Trademarks The Company owns trademarks registered with the United States Patent and Trademark Office and many other major jurisdictions of the world for its Nature's Bounty, Good'N Natural, Hudson, American Health, Puritan's Pride, Vitamin World, Natural Wealth and Stur-Dee 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. Employees The Company employs approximately 1,300 persons, of whom 41 are in executive and administrative capacities, approximately 80 are in sales, approximately 400 are in the Company's Vitamin World stores and the remainder are in manufacturing, shipping and packaging. None of the Company's employees are represented by a labor union. The Company believes its relationship with its employees is excellent. Item 2. PROPERTIES The Company owns a total of approximately 625,000 square feet of plant facilities located at 60, 90, 105 and 115 Orville Drive in Bohemia, New York and 4320 Veterans Memorial Highway, Holbrook, New York, of which 100,000 square feet is devoted to manufacturing, 72,000 square feet is utilized for offices and the balance is or is to be used for shipping and warehouse. In 1995, the Company purchased a 62 acre plot in close proximity to its other facilities in Islip, New York in order to construct an additional manufacturing facility. The Company operates 68 retail stores and 15 kiosks in thirty states under the name Vitamin World. The stores have an average selling area of 1,000 square feet and each kiosk has a selling area of approximately 190 square feet. Generally, the Company leases the stores and kiosks for three to five years for annual base rents ranging from $12,000 to $94,000 and percentage rents in the event sales exceed a specified amount. Item 3. LEGAL PROCEEDINGS L-tryptophan Litigation. The Company and certain other companies in the industry, including distributors, wholesalers and retailers (the "Indemnified Group") had been named as defendants in cases arising out of the ingestion of products containing L-Tryptophan. The Company had been named in more than 265 such lawsuits, of which 4 are still pending against the Company. All of such companies have entered into an agreement with the Company's supplier of bulk L-tryptophan, Showa Denko America, Inc. (the "Supplier") under which the Supplier, a U.S. subsidiary of a major Japanese corporation, Showa Denko K.K., has assumed the defense of all claims against the Indemnified Group and has agreed to pay the legal fees and expenses in that defense. The Supplier and Showa Denko K.K. have agreed to indemnify the Indemnified Group against any judgments and to fund settlements arising out of those actions and claims. The Supplier has posted a revolving, irrevocable letter of credit of $20 million to be used for the benefit of the Indemnified Group in the event that the Supplier is unable or unwilling to satisfy any claims or judgments. While not all of these suits quantify the amount demanded, it can reasonably be assumed that the amount required to either settle these cases or to pay judgments rendered therein will be paid by the Supplier or by the Company's product liability insurance carrier. To date, no cases in which the Company is a party have been reached for trial. Shareholder Litigation. In October 1994, litigation was commenced in the U.S. District Court, Eastern District of New York, against the Company and two of its officers (the "Defendants"). The Complaint alleges that false and misleading statements and representations were made concerning the Company's sales and earnings estimates for the fourth fiscal quarter and the year ending September 30, 1994. The allegations are that: (a) sales were artificially inflated; (b) costs were improperly capitalized; (c) sales and profit margins were materially declining; (d) inventory and accounts receivable were overstated; and (e) that because of the foregoing, the Company would incur a loss in its fourth fiscal quarter. The Plaintiffs' seek Class Action certification and an unspecified amount of monetary damages. The Company and its officers deny the allegations of the complaint and intend to vigorously contest the litigation. In 1994, prior to commencement of these lawsuits, the Company purchased a directors and officers Indemnity Policy. Special counsel has been retained to represent the Company and its officers. Since the outcome of any litigation is uncertain, the Company is unable to predict (i) whether it will ultimately prevail; (ii) whether it will be fully or partially indemnified, if at all; (iii) the amount of loss, if any, that may be attributable to the above; and (iv) the amount of expense which may be incurred in the defense of these actions. Miscellaneous Claims and Litigations. The Company is involved in miscellaneous claims and litigation, which taken individually or in the aggregate, would not materially impact on the Company's financial position or its business. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On February 14, 1996, at the annual meeting of the shareholders, the following directors were elected: Bernard G. Owen and Alfred Sacks. PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS DIVIDEND POLICY Since 1973, the Company has not paid any cash dividends on its Common Stock. On April 24, 1992, the Company effected a two-for-one stock split in the form of a 100% stock dividend to stockholders of record on May 8, 1992. On September 25, 1992, the Company effected a three-for-one stock split in the form of a 200% stock dividend to stockholders of record on November 2, 1992. In addition, on August 3, 1993, the Company effected a two-for-one stock split in the form of a 100% stock dividend to shareholders of record on August 13, 1993. Future determination as to the payment of cash or stock dividends will depend upon the Company's results of operations, financial condition and capital requirements and such other factors as the Company's Board of Directors may consider. PRICE RANGE OF COMMON STOCK The Common Stock is traded in the over-the-counter market and is included for quotation on the National Association of Securities Dealers National Market System under the trading symbol "NBTY". The following table sets forth, for the periods indicated, the high and low closing sale prices for the Common Stock, as reported on NASDAQ/NMS:
Fiscal year ended September 30, 1995 High Low ---- --- First Quarter 10-1/2 4-3/4 Second Quarter 8-3/8 5-1/16 Third Quarter 6-7/8 5-7/16 Fourth Quarter 7-1/4 5-1/2 Fiscal year ended September 30, 1996 First Quarter 5-3/4 4 Second Quarter 7-13/16 4-5/8 Third Quarter 11-3/8 7-7/16 Fourth Quarter 17-7/8 9-3/8
On November 21, 1996, the closing sale price of the Common Stock was $16.44. There were approximately 682 record holders of Common Stock as of November 21, 1996. 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
1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- Selected Income Statement Data: Net Sales $100,907 $138,430 $156,057 $178,760 $194,403 Costs & Expenses: Cost of Sales 50,555 67,951 79,891 93,875 95,638 Catalog, printing, postage & promotion 7,455 11,507 14,786 19,262 17,635 Selling, general & administrative 35,516 42,776 49,208 56,728 58,515 ------------------------------------------------------------ Income from operations 7,381 16,196 12,172 8,895 22,615 Interest expense 1,321 1,227 914 1,084 1,445 Other, net (181) 743 1,285 571 1,203 ------------------------------------------------------------ Income before income taxes 5,879 15,712 12,543 8,382 22,373 Income taxes 2,071 5,939 4,767 3,246 9,021 ------------------------------------------------------------ Net income $ 3,808 $ 9,773 $ 7,776 $ 5,136 $ 13,352 ============================================================ Per Share Data: Earnings per common share: Primary $0.28 $0.53 $0.38 $0.26 $0.67 Fully-diluted $0.25 $0.53 $0.38 $0.26 $0.67 Weighted average number of shares outstanding: Primary 13,718 18,435 20,257 19,974 19,976 Fully-diluted 15,250 18,523 20,257 19,974 19,976 Selected Balance Sheet Data: Working capital $ 13,082 $ 42,869 $ 39,462 $ 40,665 $ 52,268 Total assets $ 58,300 $102,647 $115,112 $123,529 $145,550 Long-term debt and capital lease, obligations, less current portion $ 20,987 $ 8,265 $ 7,566 $ 10,924 $ 18,398 Total stockholders' equity $ 16,490 $ 70,002 $ 78,017 $ 82,615 $ 96,950
All amounts in thousands, except Per Share Data Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Results of Operations The following table sets forth income statement data of the Company as a percentage of net sales for the periods indicated:
Year Ended September 30 ------------------------------------ 1994 1995 1996 ---- ---- ---- Net sales 100.0% 100.0% 100.0% Costs and expenses: Cost of sales 51.2 52.5 49.2 Catalog printing & promotion 9.5 10.8 9.1 Selling, general & administrative 31.5 31.7 30.1 ------------------------------------- 92.2 95.0 88.4 ------------------------------------- Income from operations 7.8 5.0 11.6 Interest expense and other .2 (.3) (.1) ------------------------------------- Income before income taxes 8.0 4.7 11.5 Income taxes 3.1 1.8 4.6 ------------------------------------- Net income 5.0% 2.9% 6.9% =====================================
1996 Compared to 1995 Net Sales. Net sales for 1996 were $194.4 million, an increase of $15.6 million or 8.8% over 1995. Of the $15.6 million increase, $10.6 million was attributable to wholesale-retail sales and $13.2 million was attributable to mail order sales, less a decrease of $8.2 million from Beautiful Visions, a cosmetic catalog which was sold in October, 1995. Cost and Expenses. Cost of sales for 1996 was $95.6 million, an increase of $1.8 million or 1.9% over 1995. Gross profit increased to 50.8% in 1996 from 47.5% in 1995. Such increase was due to various factors, including increased sales of higher margin products, long-term purchase commitments of raw materials resulting in lower costs and manufacturing efficiencies. Catalog, Printing, Postage and Promotion. Catalog, printing, postage and promotion for 1996 was $17.6 million, an decrease of $1.6 million over 1995. Such cost, as a percentage of net sales was 9.1% in 1996 compared with 10.8% in 1995. The decrease was mainly due to the discontinuance of the Beautiful Visions mail order operation. Selling, General and Administrative Expenses. Selling, general and administrative expenses for 1996 was $58.5 million, an increase of $1.8 million over 1995; as a percentage of net sales, these costs were 30.1% in 1996 and 31.7% in 1995. Decreases in payroll fringes and other miscellaneous costs were offset by increases in outlet store rentals and professional fees. Interest expense. Interest expense in 1996 was $1.4 million, an increase of $.4 million. Income taxes. The Company's effective tax rate was 40.3% in 1996 and 38.7% in 1995. The Company adopted Statement of Accounting Standard ("SFAS") No. 109, "Accounting for Income Taxes", in 1993. The impact from the implementation of SFAS No. 109 was not material to the Company's financial statements. Seasonality. The Company believes that its business is not seasonal except that historically it has the lowest net sales in its first fiscal quarter, slightly higher net sales in its second fiscal quarter and may have higher net sales in a quarter depending upon when it has engaged in significant promotional activities. 1995 Compared to 1994 Net Sales. Net sales for 1995 were $178.8 million, an increase of $22.7 million or 14.5% over 1994. Of the $22.7 million increase, $12.5 million was attributable to wholesale-retail sales and $10.3 million was attributable to mail order sales. In October, 1995, Beautiful Visions, a cosmetic catalog operation, was sold. Sales for such operation in 1995 were $8.3 million, a decrease of $5 million from the prior year. Cost and Expense. Cost of sales for 1995 was $93.9 million, an increase of $14.0 million or 17.5% over 1994. Gross profit decreased to 47.5% in 1995 from 48.8% in 1994. Such decrease as a percentage of net sales was due to various factors which included pricing pressures and write- downs for labels and unsold Beautiful Visions inventory. Catalog, Printing, Postage and Promotion. Catalog, printing, postage and promotion for 1995 was $19.2 million, an increase of $4.5 million or 30.3% over 1994. Such cost, as a percentage of net sales was 10.8% in 1995 compared with 9.5% in 1994. This increase was mainly due to expanded trade advertising and costs associated with promotional programs to independent stores and chain stores. Selling, General and Administrative Expenses. Selling, general and administrative expenses for 1995 was $56.7 million, an increase of $7.5 million or 15.3% over 1994; as a percentage of net sales, these costs remained relatively constant at 31.7% in 1995 and 31.5% in 1994. The increase was primarily a result of increases in salaries, wages, fringe benefits and professional services. Interest Expense. Interest expense in 1995 was $1.0 million, an increase of $.1 million. Income Taxes. The Company's effective tax rate was 38.7% in 1995 and 38.0% in 1994. The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", in 1993. The impact from the implementation of SFAS No. 109 was not material to the Company's financial statements. Seasonality. The Company believes that its business is not seasonal except that historically it has the lowest net sales in its first fiscal quarter, slightly higher net sales in its second fiscal quarter and may have highest net sales in a quarter depending upon when it has engaged in significant promotional activities. Liquidity and Capital Resources. Working capital was $51.9 million at September 30, 1996, compared with $40.7 million at September 30, 1995, an increase of $11.3 million. The Company finances its working capital with internally-generated funds. The Company maintains an unsecured $15 million Revolving Credit Agreement (RCA) expiring on March 31, 1999 and a $8.4 million Master Equipment Lease Agreement (MELA) expiring on December 31, 1996. As of September 30, 1996, $15 million remained available under the RCA and $7.4 million under the MELA. In September 1990, the Company financed its plant expansion program with the proceeds of an $8 million taxable Industrial Development Revenue Bond due September 1, 2000 with monthly principal and interest payments of $74,821 through 2000 and a final payment of $6,891,258 on September 1, 2000. A portion of this loan, which is collateralized by a mortgage in favor of an insurance company, was also utilized to repay debt which was outstanding in 1989. The mix of revenues among wholesale, direct mail and retail sales remained relatively constant for 1996, 1995 and 1994. The Company believes that existing cash balances, internally-generated funds from operations and amounts available under the RCA and MELA will provide sufficient liquidity to satisfy the Company's working capital needs for the next 24 months and to finance anticipated capital expenditures incurred in the ordinary course of business. 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 October 31, 1996. Their stated positions are as follows:
Year Commencement first of term of elected office as Name Age Position Director Officer - ---- --- -------- -------- ------------ Scott Rudolph 39 Chairman of the Board and President 1986 1986 Harvey Kamil 52 Executive Vice President, Secretary ---- 1982 Barry Drucker 48 Senior Vice President-Sales ---- 1985 Patricia E. Ciccarone 40 Vice President- Vitamin World ---- 1992 James P. Flaherty 38 Vice President- Advertising ---- 1988 Abraham K. Kleinman 71 Vice President- Manufacturing ---- 1982 Jean Palladino 61 Vice President- Hudson ---- 1988 Abraham Rubenstein 66 Vice President- Mail Order ---- 1985 William J. Shanahan 38 Vice President- Data Processing ---- 1988 Robert Silverman 34 Vice President- Good'N Natural ---- 1991 James A. Taylor 56 Vice President- Production ---- 1982 William Dougherty 45 Vice President- Merchandising ---- 1996 Arthur Rudolph 68 Director 1971 1971 Aram Garabedian 61 Director 1971 ---- Bernard G. Owen 68 Director 1971 ---- Alfred Sacks 68 Director 1971 ---- Murray Daly 69 Director 1971 ---- Glenn Cohen 37 Director 1988 ---- Bud Solk 62 Director 1994 ---- Nathan Rosenblatt 39 Director 1994 ----
The Directors of the Company are elected to serve a three year term or until their respective successors are elected and qualified. Officers of the Company hold office until the meeting of the Board of Directors immediately following the next annual shareholders meeting or until removal by the Board, whether with or without cause. Scott Rudolph is the Chairman of the Board of Directors, President, Chief Executive and is a shareholder of the Company. He is a trustee of Dowling College, Long Island, New York. He joined the Company in 1986. Harvey Kamil is Executive Vice President. He joined the Company in July 1982. Barry Drucker is Senior Vice President of Sales. He joined the Company in 1976. Patricia E. Ciccarone is Vice President of Vitamin World. She joined the Company in 1988. James P. Flaherty is Vice President of Advertising. He joined the Company in 1979. Abraham H. Kleinman is Vice President of Manufacturing. He joined the Company in December, 1973. Jean Palladino is Vice President of The Hudson Corporation. She joined the Company in 1986. Abraham Rubenstein is Vice President of Mail Order. He joined the Company in January, 1985. William J. Shanahan is Vice President of Data Processing. He joined the Company in 1980. Robert Silverman is Vice President of Good'N Natural. He joined the Company in 1985. James E. Taylor is Vice President of Production. He joined the Company in December 1981. William Dougherty is Vice President of Merchandising. He joined the Company in 1994. Arthur Rudolph founded Arco Pharmaceuticals, Inc. the Company's predecessor, in 1960 and had served as the Company's Chief Executive Officer and Chairman of the Board of Directors since that date until his resignation in September 1993. However, he remains a member of the Board of Directors. He was responsible for the formation of the Company in 1971. He is the father of Scott Rudolph. Aram Garabedian is, and has been since 1988, a real estate developer in Rhode Island. He had been associated with the Company 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 engaged as President of Cafiero, Cuchel and Owen Insurance Agency for the past twenty-five years. 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, Inc. Bud Solk is President of Chase/Ehrenberg & Rosene, Inc., an advertising and marketing agency located in Chicago, Illinois. Previously, Mr. Solk had been President of Bud Solk Associates, Inc., which he founded in 1958. Nathan Rosenblatt is the President and Chief Executive Officer of Ashland Maintenance Corp., a commercial maintenance organization located in Long Island, New York. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) Security Ownership of Certain Beneficial Owners Securities ownership of persons owning of record, or beneficially, 5% or more of the outstanding Common Stock, as of September 30, 1996. The Company is not aware of any other beneficial holders of 5% or more of the Common Stock. All information with respect to beneficial ownership, set forth in the foregoing stock ownership table, is based on information furnished by the shareholder, director or officer, or contained in filings made with the Securities and Exchange Commission.
Amount & Nature Percent Name and Address of of Beneficial of Title of Class Beneficial Owner Ownership (1) Class (1) - -------------- ------------------- --------------- --------- Common Stock Scott Rudolph 3,673,555 18.8 (Par Value 90 Orville Drive Record and $.008) Bohemia, NY 11716 Beneficial Common Stock Harvey Kamil 718,439 3.8 (Par Value 90 Orville Drive Record and $.008) Bohemia, NY 1716 Beneficial Common Stock NBTY, Inc. 1,062,228 5.7 (Par Value Profit Sharing Plan Record and $.008) Beneficial Includes shares issuable upon exercise of options held by executive officers and directors.
(b) Security Ownership of Management (directors and Officers)
Amount & Nature of Percent Name and Address of Beneficial of Title of Class Beneficial Owner Ownership (1) Class (1) - -------------- ------------------- ------------- --------- Common Stock Scott Rudolph(2) 3,673,555 18.8 (Par Value 90 Orville Drive Record and $.008) Bohemia, NY 11716 Beneficial Common Stock Harvey Kamil 718,439 3.8 (Par Value 90 Orville Drive Record and $.008) Bohemia, NY 11716 Beneficial Common Stock Arthur Rudolph 671,500 3.6 (Par value 90 Orville Drive Record and $.008) Bohemia, NY 11716 Beneficial Common Stock Barry Drucker 43,600 Nil (Par Value 90 Orville Drive Record and $.008) Bohemia, NY 11716 Beneficial Common Stock Aram Garabedian 24,000 Nil (Par Value 90 Orville Drive Record and $.008) Bohemia, NY 11716 Beneficial Common Stock Bernard G. Owen 31,500 Nil (Par Value 90 Orville Drive Record and $.008) Bohemia, NY 11716 Beneficial Common Stock Alfred Sacks 15,000 Nil (Par Value 90 Orville Drive Record and $.008) Bohemia, NY 11716 Beneficial Common Stock Murray Daly 22,000 Nil (Par Value 90 Orville Drive Record and $.008) Bohemia, NY 11716 Beneficial Common Stock Glenn Cohen 12,000 Nil (Par Value 90 Orville Drive Record and $.008) Bohemia, NY 11716 Beneficial Common Stock Bud Solk 0 ___ (Par Value 90 Orville Drive Record and $.008) Bohemia, NY 11716 Beneficial Common Stock Nathan Rosenblatt 0 ___ (Par Value 90 Orville Drive Record and $.008) Bohemia, NY 11716 Beneficial Common Stock All Directors, 4,801,994 23.7 (Par Value Officers and as a Record and $.008) group (11 persons) Beneficial Each named person or group is deemed to be the beneficial owner of securities which may be acquired within 60 days through the exercise or conversion of options, if any, and such securities are deemed to be outstanding for the purpose of computing the percentage beneficially owned by such person or group. Such securities are not deemed to be outstanding for the purpose of computing the percentage of class beneficially owned by any person or group. Accordingly, the indicated number of shares includes shares issuable upon exercise of options (including employee stock options) and any other beneficial ownership of securities held by such person or group. Includes shares held in a Trust created by Arthur Rudolph for the benefit of Scott Rudolph and others.
NBTY Inc. Profit Sharing Plan (formerly Employee Stock Ownership Plan and Trust) The basic terms of the Plan are as follows: Eligibility All employees of the Company, including officers, over the age of 21 and who have been employed by the Company for one year or more are eligible participants in the Plan. Contributions Contributions are made on a voluntary basis by the Company. There is no minimum contribution required in any one year. There will be no contributions required by an employee. All contributions will be made by the Company at the rate of up to 15% of the Company's annual payroll, at the discretion of the Company. Each eligible employee receives an account or share in the Trust and the cash and/or shares of stock contributed to the Plan each year are credited to his or her account. Vesting Once an employee is eligible, a portion of the stock in his or her account becomes "vested" each year, as follows:
Number of Years Percentage of Shares of Service earned each year --------------- -------------------- 0 - 2 0% 3 20% 4 20% 5 20% 6 20% 7 20%
Distribution If an employee retires, is disabled, dies or his or her employment is otherwise terminated, that employee or that employee's estate will receive the vested portion held in trust for that employee. At the end of the vesting period, the employees become full beneficial owners of the stock. There is no tax consequence attached to his or her Plan for an employee until that employee sells the shares, at which time any profit realized by the employee is taxed as a capital gain. Distribution is to be made only in the shares of 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, 1996, the following transactions occurred: A. Gail Radvin, Inc., a corporation wholly-owned by Gail Radvin, received commissions from the Company totalling $417,182 on account of sales made in certain foreign countries. Gail Radvin is the sister of Arthur Rudolph ( a director) and the aunt of Scott Rudolph (Chairman and President). B. Chase/Ehrenberg & Rosene, Inc., a company partly owned by Bud Solk, a director, placed $505,832 of advertising for the Company. C. Cafiero, Cuchel & Owen, a company partly-owned by Bernard G. Owen, a director, received $2,091,228 in premiums for various policies obtained for the Company. D. In February, 1996, the following officers, in connection with the exercise of stock options, executed promissory notes in favor of the Company. Each of the notes was with full recourse, each bore interest at the prime rate, and was due and payable as set forth below: (i) Scott Rudolph $312,500 12/31/96 (ii) Harvey Kamil $125,000 12/31/96 E. Arthur Rudolph, a director, has been retained under a Consulting Agreement, at a monthly fee of $25,000, which Agreement expires on December 31, 1996. The Company and Mr. Rudolph are presently negotiating a renewal of the Agreement under substantially comparable terms. 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, 1996 and 1995 F-2 Consolidated Statements of Income for the years ended September 30, 1996, 1995 and 1994 F-3 Consolidated Statements of Stockholders' Equity for the years ended September 30, 1996, 1995 and 1994 F-4 Consolidated Statements of Cash Flows for the years ended September 30, 1996, 1995 and 1994 F-5 to F-6 Notes to Consolidated Financial Statements F-7 to F-18 2. Financial Statement Schedule Schedule II S-1 Schedules not listed above are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements or notes thereto. 3. Exhibits 11. Statement Re: Computation of Per Share Earnings (b) Reports on Form 8-K None. NBTY, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 Coopers Coopers & Lybrand L.L.P. & Lybrand a professional services firm REPORT of INDEPENDENT ACCOUNTANTS To the Board of Directors of NBTY, Inc.: We have audited the consolidated financial statements and the financial statement schedule of NBTY, Inc. and Subsidiaries (formerly Nature's Bounty, Inc. and Subsidiaries) listed in Item 14(a) of this Form 10-K. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of NBTY, Inc. and Subsidiaries as of September 30, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Melville, New York November 5, 1996. NBTY, Inc. and Subsidiaries Consolidated Balance Sheets September 30, 1996 and 1995
ASSETS: 1996 1995 LIABILITIES AND STOCKHOLDERS' EQUITY: 1996 1995 Current assets: Current liabilities: Cash and cash equivalents $ 9,292,374 $ 10,378,476 Current portion of long-term debt and capital lease obligations $ 934,887 $ 358,675 Short-term investments 11,024,624 Accounts payable 10,943,228 16,411,562 Accrued expenses 14,704,507 10,287,989 ------------ ------------ Accounts receivable, less allowance Total current liabilities 26,582,622 27,058,226 for doubtful accounts of $793,669 in 1996 and $576,579 in 1995 11,625,112 12,354,545 Long-term debt 15,178,412 9,705,534 Obligations under capital leases 3,219,127 1,218,920 (less current portion) Inventories 38,070,071 36,972,592 Deferred income taxes 2,827,198 2,161,537 Other liabilities 792,985 768,985 ------------ ------------ Deferred income taxes 3,155,163 1,846,875 Total liabilities 48,600,344 40,913,202 ------------ ------------ Prepaid catalog costs and other Commitments and contingencies current assets 5,682,874 6,170,243 ------------ ------------ Stockholders' equity: Total current assets 78,850,218 67,722,731 Common stock, $.008 par; authorized 25,000,000 shares; issued 20,079,676 shares in 1996 and 19,207,676 shares in 1995 and outstanding 18,592,119 shares in 1996 and 17,766,119 shares in 1995 160,638 153,662 Property, plant and equipment, net 61,731,625 48,324,576 Capital in excess of par 56,012,910 54,151,206 Retained earnings 44,008,465 30,656,586 ------------ ------------ Intangible assets, net 3,974,573 5,813,031 100,182,013 84,961,454 Less 1,487,557 and 1,441,557 treasury Other assets 993,785 1,668,309 shares at cost, in 1996 and 1995, ------------ ------------ respectively 2,648,256 2,346,009 Stock subscriptions receivable 583,900 ------------ ------------ Total stockholders' equity 96,949,857 82,615,445 ------------ ------------ Total assets $145,550,201 $123,528,647 Total liabilities and ============ ============ stockholders' equity $145,550,201 $123,528,647 ============ ============
See notes to consolidated financial statements. NBTY, Inc. and Subsidiaries Consolidated Statements of Income Years ended September 30, 1996, 1995 and 1994
1996 1995 1994 Net sales $194,403,040 $178,759,871 $156,057,056 ------------ ------------ ------------ Costs and expenses: Cost of sales 95,638,272 93,875,162 79,891,302 Catalog printing, postage and promotion 17,634,801 19,261,733 14,786,217 Selling, general and administrative 58,515,059 56,728,368 49,207,943 ------------ ------------ ------------ 171,788,132 169,865,263 143,885,462 ------------ ------------ ------------ Income from operations 22,614,908 8,894,608 12,171,594 ------------ ------------ ------------ Other income (expenses): Interest, net (1,445,036) (1,084,331) (913,583) Miscellaneous, net 1,203,061 571,098 1,284,953 ------------ ------------ ------------ (241,975) (513,233) 371,370 ------------ ------------ ------------ Income before income taxes 22,372,933 8,381,375 12,542,964 Income taxes 9,021,054 3,245,517 4,766,526 ------------ ------------ ------------ Net income $ 13,351,879 $ 5,135,858 $ 7,776,438 ============ ============ ============ Net income per share Primary $ 0.67 $ 0.26 $ 0.38 ============ ============ ============ Weighted average common shares outstanding Primary 19,975,678 19,974,270 20,257,325 ============ ============ ============
See notes to consolidated financial statements. NBTY, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity Years ended September 30, 1996, 1995 and 1994
Common stock Treasury stock ------------------ ------------------- Stock Number of Capital in Retained Number of subscriptions shares Amount excess of par earnings shares Amount receivables Total ------------------------------------------------------------------------------------------------- Balance, September 30, 1993 18,717,676 $149,742 $52,970,926 $17,744,290 1,213,404 $ (862,722) $70,002,236 Net income for year ended September 30, 1994 7,776,438 7,776,438 Expenses associated with prior year public offering of stock (225,000) (225,000) Exercise of stock options 60,000 480 29,520 30,000 Tax benefit from exercise of stock options 433,200 433,200 ---------- -------- ----------- ----------- --------- ----------- --------- ----------- Balance, September 30, 1994 18,777,676 150,222 53,208,646 25,520,728 1,213,404 (862,722) 78,016,874 Net income for year ended September 30, 1995 5,135,858 5,135,858 Exercise of stock options 430,000 3,440 211,560 215,000 Tax benefit from exercise of stock options 731,000 731,000 Purchase of treasury stock, at cost 228,153 (1,483,287) (1,483,287) ---------- -------- ----------- ----------- --------- ----------- --------- ----------- Balance, September 30, 1995 19,207,676 153,662 54,151,206 30,656,586 1,441,557 (2,346,009) 82,615,445 Net income for year ended September 30, 1996 13,351,879 13,351,879 Exercise of stock options 872,000 6,976 587,904 $(583,900) 10,980 Tax benefit from exercise of stock options 1,273,800 1,273,800 Purchase of treasury stock, at cost 46,000 (302,247) (302,247) ---------- -------- ----------- ----------- --------- ----------- --------- ----------- Balance, September 30, 1996 20,079,676 $160,638 $56,012,910 $44,008,465 1,487,557 $(2,648,256) $(583,900) $96,949,857 ========== ======== =========== =========== ========= =========== ========= ===========
See notes to consolidated financial statements. NBTY, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years ended September 30, 1996, 1995 and 1994
1996 1995 1994 --------------------------------------- Cash flows from operating activities: Net income $13,351,879 $ 5,135,858 $ 7,776,438 Adjustments to reconcile net income to cash provided by operating activities: Loss on disposal/sale of property, plant and equipment 422 374,126 519 Depreciation and amortization 5,623,277 4,840,570 4,243,985 Provision (recovery) for allowance for doubtful accounts 217,090 (17,943) 89,968 Deferred income taxes (642,627) 684,426 3,046,493 Changes in assets and liabilities: Accounts receivable 1,615,504 (2,119,589) (454,841) Inventories (2,035,883) 4,453,583 (10,770,809) Income tax receivable 1,300,198 3,089,929 Prepaid catalog costs and other current assets 487,369 (264,253) (2,297,276) Other assets 674,524 1,123,818 (2,465,151) Accounts payable (5,468,334) 3,160,180 (2,828,998) Accrued expenses 5,690,318 2,809,518 3,226,894 Other liabilities 24,000 274,999 (353,225) ----------- ----------- ----------- Net cash provided by operating activities 19,537,539 21,755,491 2,303,926 ----------- ----------- ----------- Cash flows from investment activities: Purchase of property, plant and equipment (15,750,517) (11,547,570) (11,592,662) Increase in intangible assets (66,691) (1,063,953) (253,772) Proceeds from sale of property, plant and equipment 4,270 11,000 Purchase of short-term investments (11,024,624) Receipt of payments on notes from sale of direct mail cosmetics business 741,303 Proceeds from sale of direct mail cosmetic business 350,000 ----------- ----------- ----------- Net cash used in investing activities (25,746,259) (12,611,523) (11,835,434) ----------- ----------- ----------- Cash flows from financing activities: Net (payments) borrowings under line of credit agreement (5,000,000) 5,000,000 Borrowings under long-term debt agreements 6,000,000 2,400,000 Principal payments under long-term debt agreements and capital leases (586,115) (797,799) (221,307) Purchase of treasury stock (302,247) (1,292,287) Proceeds from stock options exercised 10,980 24,000 30,000 Proceeds from public offering, less expenses (225,000) ----------- ----------- ----------- Net cash provided by (used in) financing activities 5,122,618 (4,666,086) 4,583,693 ----------- ----------- ----------- Net (decrease) increase in cash and cash equivalents (1,086,102) 4,477,882 (4,947,815) Cash and cash equivalents at beginning of year 10,378,476 5,900,594 10,848,409 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 9,292,374 $10,378,476 $ 5,900,594 =========== =========== =========== Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 1,454,380 $ 1,085,647 $ 913,145 =========== =========== =========== Cash paid during the period for income taxes $ 5,386,714 $ 1,648,765 $ 2,349,198 =========== =========== ===========
Non-cash investing and financing information: The Company entered into capital leases for machinery and equipment aggregating $2,635,412 during fiscal 1996 and $1,416,472 in fiscal 1995. During fiscal 1996, 1995 and 1994, options were exercised with shares of common stock issued to certain officers and directors. Accordingly, the tax benefit of approximately $1,274,000, $731,000 and $433,000 for the years ended September 30, 1996, 1995 and 1994, respectively, was recorded as an increase in capital in excess of par and a reduction in taxes currently payable. (See Note 11.) On October 9, 1995, the Company sold certain assets of its direct-mail cosmetics business for approximately $2,495,000. The Company received $350,000 in cash and non-interest bearing notes aggregating approximately $2,145,000 for inventory, a customer list and other intangible assets. The notes will be paid over a three-year period based on a predetermined formula with guaranteed minimum payments. A final payment for the remaining outstanding balance will be made on September 30, 1998. See notes to consolidated financial statements. NBTY, Inc. and Subsidiaries Notes to Financial Statements 1. Business Operations and Summary of Significant Accounting Policies: Business operations NBTY, Inc., formerly Nature's Bounty, Inc. (the "Company"), manufactures and distributes vitamins, food supplements and health and beauty aids. The 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. Principles of consolidation and basis of presentation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated. Revenue recognition The Company recognizes revenue upon shipment or, with respect to its own retail store operations, upon the sale of products. The Company has no single customer that represents more than 10% of annual net sales or accounts receivable as of September 30, 1996. Inventories Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis. The cost elements of inventory include materials, labor and overhead. One supplier provided approximately 12% of the Company's purchases in 1996. Prepaid catalog costs Mail order production and mailing costs are capitalized as prepaid catalog costs and charged to income over the catalog period, which typically approximates three months. Property, plant and equipment Property, plant and equipment are carried at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the related assets. Expenditures which significantly improve or extend the life of an asset are capitalized. Maintenance and repairs are charged to expense in the year incurred. Cost and related accumulated depreciation for property, plant and equipment are removed from the accounts upon sale or disposition and the resulting gain or loss is reflected in earnings. Intangible assets Goodwill represents the excess of purchase price over the fair value of identifiable net assets of companies acquired. Goodwill and other intangibles are amortized on a straight-line basis over appropriate periods not exceeding 40 years. Income taxes 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 For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Short-term investments Short-term interest bearing investments are those with maturities of less than one year but greater than three months when purchased. These investments are readily convertible to cash and are stated at market value, which approximates cost. Realized gains and losses are included in other income on a specific identification basis in the period they are realized. Common shares and earnings per share Earnings per share are based on the weighted average number of common shares outstanding during the period. Common stock equivalents are not included in income per share computations since their effect on the calculation is immaterial. Stock-based plans In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," which establishes financial accounting and reporting standards for stock based plans. The Statement, which becomes effective in fiscal 1997, requires the Company to choose between accounting for issuances of stock and other equity instruments to employees based on their fair value or to continue to use an intrinsic value based method and disclosing the pro forma effects such accounting would have had on the Company's net income and earnings per share. The Company will continue to use the intrinsic value based method, which generally does not result in compensation cost. Reclassifications Certain reclassifications have been made to conform prior year amounts to the current year presentation 2. Sale of Direct-Mail Cosmetics Business: On October 9, 1995, the Company sold certain assets of its direct-mail cosmetics business for approximately $2,495,000. The Company received $350,000 in cash and non interest bearing notes aggregating approximately $2,145,000 for inventory, a customer list and other intangible assets. The notes will be paid over a three-year period based on a predetermined formula with guaranteed minimum payments. A final payment for the remaining outstanding balance will be made on September 30, 1998. Revenues applicable to this marginally unprofitable business were $136,648, $8,283,517 and $13,276,045 for fiscal 1996, 1995 and 1994, respectively. 3. Inventories:
September 30, ------------------------- 1996 1995 Raw materials $17,131,532 $15,898,215 Work-in-process 1,522,803 1,848,629 Finished goods 19,415,736 19,225,748 ----------- ----------- $38,070,071 $36,972,592 =========== ===========
4. Property, Plant and Equipment:
September 30, ------------------------- 1996 1995 Land $ 4,764,965 $ 3,064,965 Buildings and leasehold improvements 38,087,461 31,830,638 Machinery and equipment 28,560,427 22,279,226 Furniture and fixtures 8,484,103 6,065,382 Transportation equipment 640,982 200,982 Computer equipment 8,544,945 7,296,395 ----------- ----------- 89,082,883 70,737,588 Less accumulated depreciation and amortization 27,351,258 22,413,012 ----------- ----------- $61,731,625 $48,324,576 =========== ===========
Depreciation and amortization of property, plant and equipment for the years ended September 30, 1996, 1995 and 1994 was approximately $4,974,000, $4,064,000 and $3,190,000, respectively. Property, plant and equipment includes approximately $4,052,000 and $1,416,000 for assets recorded under capital leases for fiscal 1996 and 1995, respectively. 5. Intangible Assets: Intangible assets, at cost, acquired at various dates are as follows:
September 30, ------------------------- Amortization 1996 1995 period Goodwill $ 469,400 $ 469,400 20-40 Customer lists 8,783,475 10,540,017 6-15 Trademark and licenses 1,201,205 1,134,514 2-3 Covenants not to compete 1,304,538 1,304,538 5-7 ----------- ----------- 11,758,618 13,448,469 Less accumulated amortization 7,784,045 7,635,438 ----------- ----------- $ 3,974,573 $ 5,813,031 =========== ===========
Amortization included in the consolidated statements of income under the caption "selling, general and administrative expenses" in 1996, 1995 and 1994 was approximately $649,000, $776,000 and $1,054,000, respectively. Effective October 1, 1993, the Company changed its estimates of the lives of certain customer lists. Customer list amortization lives that previously averaged 6 years were increased to an average of 15 years. This change was made to better reflect the estimated periods during which an individual will remain a customer of the Company. The change had the effect of reducing amortization expense by approximately $500,000 and increasing the net income by $310,000 in 1994. 6. Accrued Expenses:
September 30, ------------------------- 1996 1995 Payroll and related payroll taxes $ 2,730,453 $ 2,166,355 Customer deposits 1,862,837 2,034,175 Accrued purchases 1,765,420 1,734,844 Income taxes payable 2,670,270 39,815 Other 5,675,527 4,312,800 ----------- ----------- $14,704,507 $10,287,989 =========== ===========
7. Long-Term Debt:
September 30, ------------------------- 1996 1995 Mortgages: First mortgage, payable in monthly principal and interest (10.375%) installments (a) $ 7,447,859 $ 7,566,144 First mortgage payable in monthly principal and interest (9.73%) installments of $25,396 (b) 2,257,729 2,338,432 First mortgage, payable in monthly principal and interest (7.375%) installments of $55,196 (c) 5,926,038 ----------- ----------- 15,631,626 9,904,576 Less current portion 453,214 199,042 ----------- ----------- $15,178,412 $ 9,705,534 =========== =========== In September 1990, the Company obtained an $8,000,000 first mortgage, collateralized by the underlying building, issued through the Town of Islip, New York Industrial Development Agency. The taxable bond, held by an insurance company, has monthly principal and interest payments of $74,821 for ten years through 2000, with a final payment of $6,891,258 in September 2000. In November 1994, the Company purchased a building which it previously occupied under a long-term lease. The purchase price of approximately $3,090,000 was funded with $690,000 in cash and the balance through a 15-year mortgage note payable. This agreement contains restrictive covenants identical to the covenants noted under the revolving credit facility described below. In April 1996, the Company obtained a $6,000,000 first mortgage with a fixed interest rate of 7.375%, collateralized by the underlying real estate. The mortgage has monthly principal and interest payments of $55,196 for fifteen years through 2011.
On April 3, 1996, the Company renewed a revolving credit agreement (the "Agreement") with two banks that provides for unsecured borrowings up to $15,000,000 which expires March 31, 1999. As of September 30, 1996, there were no borrowings under this Agreement. Under the most restrictive covenants of the Agreement, the Company is required to maintain tangible net worth of at least $84,000,000, a current ratio of at least 1.75 to 1.00 and has a limitation on the amount of capital expenditures. Required principal payments of long-term debt are as follows:
Years ended September 30, 1997 $ 453,214 1998 494,324 1999 539,266 2000 7,419,600 2001 443,875 Thereafter 6,281,347 ----------- $15,631,626 ===========
8. Capital Lease Obligations: The Company entered into six capital leases for machinery and equipment aggregating $2,635,412 during fiscal 1996 and two capital leases for machinery and equipment aggregating $1,416,472 in fiscal 1995. The leases 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, 1996 are as follows: 1997 $ 758,872 1998 758,872 1999 758,872 2000 758,872 2001 758,872 Thereafter 870,186 ---------- 4,664,546 Less, amount representing interest 963,746 ---------- Present value of minimum lease payments (including $481,673 due within one year) $3,700,800 ==========
9. Income Taxes: Provision for income taxes consists of the following:
Year ended September 30, ----------------------------------- 1996 1995 1994 Federal Current $7,551,755 $2,224,935 $ 856,774 Deferred (501,249) 636,516 3,156,289 State Current 2,111,926 336,156 515,893 Deferred (141,378) 47,910 237,570 ---------- ---------- ---------- Total provision $9,021,054 $3,245,517 $4,766,526 ========== ========== ==========
The following is a reconciliation of the income tax expense computed using the statutory federal income tax rate to the actual income tax expense and its effective income tax rate.
Year ended September 30, ----------------------------------------------------------------------- 1996 1995 1994 ----------------------- ---------------------- ---------------------- Percent of Percent of Percent of pretax pretax pretax Amount income Amount income Amount income Income tax expense at statutory rate $7,830,527 35.0% $2,849,668 34.0% $4,390,037 35.0% State income taxes, net of federal income tax benefit 1,280,856 5.7% 253,483 3.0% 489,751 3.9% Other, individually less than 5% (90,329) (0.4%) 142,366 1.7% (113,262) (0.9%) ---------- ----- ---------- ----- ---------- ----- Actual income tax provision $9,021,054 40.3% $3,245,517 38.7% $4,766,526 38.0% ========== ===== ========== ===== ========== =====
The components of deferred tax assets and liabilities are as follows:
1996 1995 ----------------------- Deferred tax assets: Current: Inventory capitalization $ 243,000 $ 178,034 Accrued expenses and reserves not currently deductible 2,591,137 1,049,584 Tax credits 321,026 555,822 Miscellaneous 63,435 ---------- ---------- Current deferred tax assets 3,155,163 1,846,875 ---------- ---------- Noncurrent: Intangibles 334,820 231,701 Reserves not currently deductible 200,070 342,910 ---------- ---------- Total noncurrent 534,890 574,611 ---------- ---------- Deferred tax liabilities: Property, plant and equipment (3,362,088) (2,736,148) ---------- ---------- Net deferred tax asset (liability) $ 327,965 $ (314,662) ========== ==========
Available state tax credits of $321,026 and $555,822 in 1996 and 1995, respectively, are scheduled to expire through fiscal 2002. 10. Commitments: Leases The Company conducts retail operations under operating leases which expire at various dates through 2011. Some of the leases contain renewal options and provide for additional rentals based upon sales plus certain tax and maintenance costs. Future minimal rental payments under the retail location and automotive leases that have initial or noncancelable lease terms in excess of one year at September 30, 1996 are as follows:
Year ending September 30, 1997 $ 3,319,803 1998 3,010,636 1999 2,807,311 2000 2,375,884 2001 1,660,407 Thereafter 811,796 ----------- $13,985,837 ===========
Operating lease rental expense, including real estate tax and maintenance costs and leases on a month to month basis, was approximately $1,979,000, $1,248,000 and $1,200,000 for the years ended September 30, 1996, 1995 and 1994, respectively. Purchase commitments The Company was committed to make future purchases under various purchase order arrangements with fixed price provisions aggregating approximately $12,923,000 and $972,000 at September 30, 1996 and 1995, respectively. Employment and consulting agreement agreements The Company has employment agreements with two of its officers. The agreements, which expire in January 2004, provide for minimum salary levels, as adjusted for cost of living changes, as well as contain provisions regarding severance and changes in control of the Company. The commitment for salaries as of September 30, 1996 was approximately $749,000 per year. The Company also has a two-year consulting agreement with its former chairman and current director which expires on December 31, 1996. Such agreement required annual payments of approximately $300,000. The parties are presently negotiating a renewal of the agreement under substantially comparable terms. In addition, an entity owned by a relative of an officer received sales commissions of $417,000, $510,000 and $351,000 in 1996, 1995 and 1994, respectively. 11. Stock Option Plans: The Board of Directors approved the issuance of 1,608,000 non- qualified stock options on December 11, 1989, exercisable at $0.50 per share, which options terminated on December 10, 1994. The Board also approved the issuance of 2,220,000 non-qualified options on September 23, 1990, exercisable at $0.63 per share, which options terminate on September 23, 2000. In addition, on March 11, 1992, the Board of Directors approved the issuance of an aggregate of 1,800,000 non- qualified stock options to directors and officers, exercisable at $0.92 per share, and expiring on March 10, 2002. The exercise price of each of the aforementioned issuances was in excess of the market price at the date such options were granted. During fiscal 1996, options were exercised with 872,000 shares of common stock issued to certain officers and directors for $10,980 and interest bearing notes in the amount of $583,900. As a result of the exercise of these options, the Company is entitled to a compensation deduction for tax purposes of approximately $3,145,000 which should ultimately result in a tax benefit to the Company of approximately $1,273,800. Accordingly, the Company has recorded an increase in capital in excess of par and has adjusted its current liability to recognize the effect of this tax benefit. During fiscal 1995, options were exercised with 430,000 shares of common stock issued to certain officers and directors for $24,000 and an interest bearing note in the amount of $191,000. The promissory note, including interest, was paid by the surrender of 23,153 NBTY common shares to the Company at the prevailing market price. As a result of the exercise of these options, the Company was entitled to a compensation deduction of approximately $1,827,500 which resulted in a tax benefit of approximately $731,000. Such benefit was recorded as an increase in capital in excess of par and a reduction to taxes currently payable. During fiscal 1994, options were exercised with 60,000 shares of common stock issued to certain directors for $30,000. As a result of the exercise of these options, the Company was entitled to a compensation deduction for tax purposes of approximately $1,140,000 which resulted in a tax benefit of approximately $433,200. Such benefit was recorded as an increase to capital in excess of par and a reduction to taxes currently payable. A summary of stock option activity is as follows:
Common Exercise price shares per share --------- -------------- Shares under option, September 30, 1994 (fully exercisable) 2,825,000 $.50 - $.92 Exercised in 1995 430,000 $.50 --------- -------------- 2,395,000 $.63 - $.92 Shares under option, September 30, 1995 (fully exercisable) Exercised in 1996 872,000 $.63 - $.92 --------- -------------- Shares under option, September 30, 1996 (fully exercisable) 1,523,000 $.63 - $.92 ========= ==============
12. Employee Benefit Plans: The Company maintains a defined contribution savings plan, which qualifies under Section 401(k) of the Internal Revenue Code, and an employee stock ownership plan. The accompanying financial statements reflect contributions to these plans in the approximate amount of $489,000, $498,000 and $103,000 for the years ended September 30, 1996, 1995 and 1994, respectively. 13. Litigation: L-tryptophan: The Company and certain other companies in the industry, including distributors, wholesalers and retailers (the "Indemnified Group") had been named as defendants in cases arising out of the ingestion of products containing L-tryptophan. The Company had been named in more than 265 lawsuits, 4 of which are still pending against the Company. The Indemnified Group has entered into an agreement with the Company's supplier of bulk L-tryptophan, Showa Denko America, Inc. (the "Supplier"), under which the Supplier, a U.S. subsidiary of a major Japanese corporation, Showa Denko K.K., has assumed the defense of all claims against the Indemnified Group and has agreed to pay the legal fees and expenses in that defense. The Supplier and Showa Denko K.K. has agreed to indemnify the Indemnified Group against any judgments and to fund settlements arising out of those actions and claims. The Supplier has posted a revolving, irrevocable letter of credit of $20 million to be used for the benefit of the Indemnified Group in the event that the Supplier is unable or unwilling to satisfy any claims or judgments. While not all of these suits quantify the amount demanded, it can reasonably be assumed that the amount required to either settle these cases or to pay judgments rendered therein will be paid by the Supplier or by the Company's product liability insurance carrier. To date, no cases in which the Company is a party have reached trial. While the outcome of any litigation is uncertain, it is the opinion of management and legal counsel of the Company that it is remote that the Company will incur a material loss as a result of the L-tryptophan litigation and claims. Accordingly, no provision for liability, if any, that may result therefrom has been made in the Company's financial statements. Shareholder litigation: In October 1994, litigation was commenced in the U.S. District Court, Eastern District of New York, against the Company and two of its officers. The complaint alleges that false and misleading statements and representations were made concerning the Company's sales and earnings estimates for the fourth fiscal quarter and the year ended September 30, 1994. The allegations are that: (a) sales were artificially inflated; (b) costs were improperly capitalized; (c) sales and profit margins were materially declining; (d) inventory and accounts receivable were overstated; and (e) that because of the foregoing, the Company would incur a loss in its fourth fiscal quarter. The Plaintiffs seek Class Action certification and an unspecified amount of monetary damages. The Company and its officers deny the allegations of the complaints and intend to vigorously contest the litigation. In 1994, prior to commencement of these lawsuits, the Company purchased a directors and officers Indemnity Policy. Special counsel has been retained to represent the Company and its officers. Since the outcome of any litigation is uncertain, the Company is unable to predict (i) whether it will ultimately prevail; (ii) whether it will be fully or partially indemnified, if at all; (iii) the amount of loss, if any, that may be attributable to the above, and (iv) the amount of expense which may be incurred in the defense of these actions. Other litigation: The Company is also involved in miscellaneous claims and litigation which, taken individually or in the aggregate, would not have a material adverse effect on the Company's financial position or its business. 14. Quarterly Results of Operations (Unaudited): The following is a summary of the unaudited quarterly results of operations for fiscal 1996 and 1995 (dollars in thousands, except per share data):
Quarter ended ------------------------------------------------ December 31, March 31, June 30, September 30, ------------ --------- -------- ------------- 1996: Net sales $38,589 $55,605 $47,900 $52,309 Gross profit 17,779 27,760 24,453 28,773 Income (loss) before income taxes (412) 7,502 6,503 8,780(a) Net income (loss) (251) 4,576 3,763 5,264 Earnings (loss) per share $(0.01) $0.23 $0.19 $0.26 1995: Net sales $37,478 $50,945 $41,650 $48,687 Gross profit 18,380 25,220 20,564 20,720 Income before income taxes 1,648 4,336 2,004 394(b) Net income 939 2,552 1,152 493 Earnings per share $0.05 $0.13 $0.06 $0.02 1996 year-end adjustments resulting in an increase to pre-tax income of approximately $2 million related to adjustments of inventory amounts. 1995 year-end adjustments resulting in a charge to operations included approximately $1,475,000 for various accruals and for the write-off of certain equipment associated with the Company's cosmetic pencil operation, and $900,000 pertaining to the identification of obsolete inventory.
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 9, 1996 By: /s/ Scott Rudolph Scott Rudolph President, Chief Executive Officer Dated: December 9, 1996 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 9, 1996 By: /s/ Scott Rudolph Scott Rudolph Chairman, President and Chief Executive Officer Dated: December 9, 1996 By: /s/ Arthur Rudolph Arthur Rudolph, Director Dated: December 9, 1996 By: /s/ Aram Garabedian Aram Garabedian, Director Dated: December 9, 1996 By: /s/ Bernard G. Owen Bernard G. Owen, Director Dated: December 9, 1996 By: /s/ Alfred Sacks Alfred Sacks, Director Dated: December 9, 1996 By: /s/ Murray Daly Murray Daly, Director Dated: December 9, 1996 By: /s/ Glenn Cohen Glenn Cohen, Director Dated: December 9, 1996 By: /s/ Bud Solk Bud Solk, Director Dated: December 9, 1996 By: /s/ Nathan Rosenblatt Nathan Rosenblatt, Director EX-27 2 ART. 5 FINANCIAL DATA SCHEDULE FOR FISCAL YEAR 10-K
5 YEAR SEP-30-1996 OCT-01-1995 SEP-30-1996 20,316,998 0 12,418,781 793,669 38,070,071 78,850,218 89,082,883 27,351,258 145,550,201 26,582,622 16,113,299 0 0 160,638 96,789,219 145,550,201 194,403,040 194,403,040 95,638,272 95,638,272 0 0 1,445,036 22,372,933 9,021,054 13,351,879 0 0 0 13,351,879 0.67 0.67
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