-----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, W17Z1UEOVNbl01Vr27lAtP1sKSkNofFNhh46VSJ0sitBlVQXJ7miWug2FvvEZ4me gWkTPFqcBrUPxqJHzs6eiw== 0000889812-98-001663.txt : 19980702 0000889812-98-001663.hdr.sgml : 19980702 ACCESSION NUMBER: 0000889812-98-001663 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19980701 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: POS AM SEC ACT: SEC FILE NUMBER: 333-52251 FILM NUMBER: 98659194 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 POS AM 1 POST-EFFECTIVE AMENDMENT NO. 1 TO REGISTRATION STATEMENT AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 1, 1998 REGISTRATION NO. 333-52251 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ POST-EFFECTIVE AMENDMENT NO. 1 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ NBTY, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 90 ORVILLE DRIVE 11-2228617 (STATE OR OTHER JURISDICTION OF BOHEMIA, NEW YORK 11716 (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) TELEPHONE: (516) 567-9500 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------ SCOTT RUDOLPH, CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER AND PRESIDENT NBTY, INC. 90 ORVILLE DRIVE BOHEMIA, NEW YORK 11716 TELEPHONE: (516) 567-9500 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ Copies to: MICHAEL C. DUBAN, ESQ. MICHAEL A. BECKER, ESQ. MICHAEL C. DUBAN, P.C. CAHILL GORDON & REINDEL 81 MAIN STREET 80 PINE STREET WHITE PLAINS, NEW YORK 10601 NEW YORK, NEW YORK 10005 TELEPHONE: 914-681-0606 TELEPHONE: 212-701-3412 TELECOPY: 914-948-0462 TELECOPY: 212-269-5420
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date hereof. If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. / / If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. / / If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROSPECTUS 8,600,000 SHARES [LOGO] COMMON STOCK ------------------------ Of the 8,600,000 shares of Common Stock, $.008 par value per share (the 'Common Stock') being offered hereby (the 'Offering'), 3,000,000 shares are being sold by NBTY, Inc. (the 'Company') and 5,600,000 shares are being sold by the Selling Stockholders (as defined herein). See 'Principal and Selling Stockholders.' The Company will not receive any of the proceeds from the sale of the shares being offered by the Selling Stockholders. The Common Stock is traded on the Nasdaq National Market under the symbol 'NBTY.' The reported last sale price of the Company's Common Stock on the Nasdaq National Market on June 30, 1998 was $18.38 per share. See 'Price Range of Common Stock.' ------------------------ SEE 'RISK FACTORS' BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING PROCEEDS TO DISCOUNTS AND PROCEEDS TO SELLING PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS(2) Per Share $18.00 $.738 $17.262 $17.262 Total(3) $154,800,000 $6,346,800 $51,786,000 $96,667,200
(1) For information regarding indemnification of the Underwriters, see 'Underwriting.' (2) Before deducting expenses related to the Offering estimated at $700,000 payable by the Company (including certain expenses payable on behalf of the Selling Stockholders). (3) The Company and the Selling Stockholders have granted the Underwriters a 30-day option to purchase up to an additional 1,290,000 shares of Common Stock, solely to cover over-allotments, if any. See 'Underwriting.' If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to Selling Stockholders will be $178,020,000, $7,298,820, $59,553,900 and $111,167,280, respectively. ------------------------ The shares of Common Stock are being offered by the several Underwriters named herein, subject to prior sale, when, as and if accepted by them subject to certain conditions. It is expected that certificates for the shares of Common Stock offered hereby will be available for delivery on or about July 7, 1998 at the offices of Smith Barney Inc., 333 West 34th Street, New York, New York 10001. ------------------------ SALOMON SMITH BARNEY LEHMAN BROTHERS ADAMS, HARKNESS & HILL, INC. RAYMOND JAMES & ASSOCIATES, INC. PIPER JAFFRAY INC. July 1, 1998 [COMPANY ARTWORK FOR INSIDE FRONT COVER] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING OVER-ALLOTMENTS, STABILIZING AND SHORT-COVERING TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. SUCH TRANSACTIONS IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE 'UNDERWRITING.' THE UNDERWRITERS HAVE ADVISED THE COMPANY AND THE SELLING STOCKHOLDERS THAT CERTAIN OF THE UNDERWRITERS CURRENTLY ACT AS MARKET MAKERS FOR THE COMMON STOCK AND CURRENTLY INTEND TO CONTINUE TO ACT AS MARKET MAKERS FOLLOWING THE OFFERING. SINCE THE AVERAGE DAILY TRADING VOLUME OF THE COMMON STOCK EXCEEDS $1 MILLION AND THE COMPANY'S PUBLIC FLOAT EXCEEDS $150 MILLION, THE PROVISIONS OF REGULATION M PERMIT SUCH UNDERWRITERS TO CONTINUE MARKET MAKING ACTIVITIES DURING THE PERIOD OF THE OFFERING. HOWEVER, THE UNDERWRITERS ARE NOT OBLIGATED TO DO SO AND MAY DISCONTINUE ANY MARKET MAKING AT THAT TIME. 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information appearing elsewhere in this Prospectus or incorporated herein by reference. Except as otherwise specified, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option and (ii) gives effect to the recent three-for-one stock split of the Company's Common Stock on April 3, 1998. Unless otherwise indicated, references herein to 'NBTY' or 'the Company' refer to NBTY, Inc. and its subsidiaries. On August 7, 1997, NBTY acquired Holland & Barrett Holdings Ltd. ('Holland & Barrett' or 'H&B') in a transaction accounted for as a purchase and on April 20, 1998, NBTY merged Nutrition Headquarters, Inc., Lee Nutrition, Inc. and Nutro Laboratories, Inc. (collectively 'Nutrition Headquarters Group') into the Company in a transaction accounted for as a pooling of interests. Unless otherwise indicated, the financial information contained herein includes results of Holland & Barrett from the date of acquisition and Nutrition Headquarters Group for all reported periods. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations.' Fiscal year references are to the fiscal year ended September 30. This Prospectus contains forward-looking statements which involve risks and uncertainties. See 'Risk Factors--Forward Looking Statements' for a discussion of certain risks and their potential impact on the forward-looking statements contained herein. THE COMPANY NBTY is a leading vertically integrated manufacturer, marketer and retailer of a broad line of high quality, value-priced nutritional supplements in the United States and the United Kingdom. The Company offers approximately 900 products under a number of brands, including vitamins, minerals, herbs, amino acids, sports nutrition products, diet aids and other nutritional supplements. NBTY targets the growing value-conscious consumer segment by offering high quality products at a value price point, direct to the consumer. NBTY markets its multi-branded products through a four channel distribution system: (i) the leading U.S. nutritional supplement mail order program under the Company-owned Puritan's Pride and Nutrition Headquarters brands and catalogs; (ii) Company-owned Vitamin World retail stores, of which there are currently approximately 150, located strategically throughout the United States; (iii) Company-owned Holland & Barrett retail stores, of which there are currently 417, located strategically throughout the United Kingdom; and (iv) wholesale distribution to drug store chains, supermarkets, independent pharmacies and health food stores primarily under the Nature's Bounty brand. NBTY currently manufactures approximately 70% of the nutritional supplements it sells and upon completion of a new state-of-the-art manufacturing facility in 1998, the Company expects to manufacture approximately 90%. The Company believes that it is well positioned to capitalize on the continued growth in the vitamin, mineral and nutritional supplement ('VMS') industry. The VMS market in the United States has grown at a compound annual rate of approximately 15%, from $3.7 billion in 1992 to $6.5 billion in 1996, according to the 1997 Packaged Facts ('Packaged Facts') survey. Increasing VMS usage has been linked to a number of factors, including: (i) scientific and popular reports on the positive benefits of VMS products; (ii) awareness of healthier lifestyles; (iii) favorable regulatory environment; (iv) new VMS product introductions and (v) wider distribution of VMS products. Vitamins, minerals and nutritional supplements are sold through drug stores, supermarkets and discount stores, health food stores, direct sales organizations and mail order. According to Packaged Facts, drug stores, supermarkets and discount stores, on a combined basis, accounted for approximately 46%, health food stores for approximately 38% and direct and mail order sales for approximately 16% of total industry sales in 1996. Since its formation in 1971, the Company has increased sales and operating performance as a result of its well-recognized, value-oriented products; efficient, state-of-the-art production facilities; multiple distribution channels; and strategic acquisitions, as well as from the continuing growth in the VMS market. For the fiscal year ended September 1997, net sales and income from operations increased 34% and 63%, respectively over the prior year, to $355 million and $53 million (excluding $6.4 million of legal settlement costs in fiscal 1997), respectively. For the six months ended March 1998, net sales and income from operations increased 80% and 70%, respectively over the prior year period, to $287 million and $42 million, respectively. NBTY's net sales 3 from mail order, retail-U.S., retail-U.K. and wholesale operations were approximately 32%, 11%, 33% and 24%, respectively, for the six months ended March 1998. The Company's position as a leading vertically integrated manufacturer, marketer and retailer of a broad line of high quality, value-priced nutritional supplements enables it to successfully operate a four channel distribution system: Mail Order. Through its Puritan's Pride and Nutrition Headquarters brands, NBTY is the leader in the U.S. mail order nutritional supplement industry with over 4.0 million active customers and with response rates which management believes to be in excess of the mail order industry average. Through its catalogs, the Company offers a full line of vitamins and other nutritional supplements at prices which are normally at a discount to retail stores. The Company mails its catalogs approximately eight times a year. NBTY intends to continue to add new customers to its mail order operation through aggressive marketing techniques and selective acquisitions. In addition, in 1996 the Company expanded its mail order operations into the United Kingdom. Retail Stores, U.S. The Company currently operates approximately 150 stores in 40 states under the Vitamin World name, primarily in factory outlet malls, and more recently in regional malls. Such stores carry a full line of value-priced products under the Vitamin World brand as well as a limited selection of other brands. The stores generally average 1,200 square feet and offer 1,200 SKUs of vitamins, minerals and nutritional supplements. During calendar 1998, the Company plans to open a total of 120 Vitamin World stores, of which approximately 20 stores have recently been opened and leases have been signed for an additional 26 stores. Vitamin World stores typically turn profitable within the first nine months of operation. Through direct interaction with the retail customer, the Company is better able to identify customer preferences, retail buying trends and pricing than by analyzing sales reports from wholesalers and independent retailers. As a result, the Company is better able to merchandise its products and more quickly respond to changing customer trends. Retail Stores, U.K. In August 1997, the Company acquired Holland & Barrett, the largest chain of nutritional supplement and health food stores in the United Kingdom. Holland & Barrett, which has been in business since 1920, is a well known and respected retailer and brand, currently operating 417 stores in prime shopping areas in over 300 cities in the U.K. The stores generally have an average selling area of 1,200 square feet and offer a total of 2,800 SKUs, approximately 56% within the VMS categories and 44% within the health food category. Since the acquisition, NBTY has gradually replaced VMS products manufactured by outside suppliers with lower priced NBTY manufactured products under the Holland & Barrett brand. As of March 31, 1998, NBTY manufactured products comprised approximately 40% of H&B's VMS sales (approximately 21% of total H&B sales) with the goal of reaching 75% of such sales (approximately 40% of total H&B sales) by the end of calendar 1998. Wholesale. The Company markets its products under multiple brands to drug stores, supermarkets and discounters as well as independent pharmacies, health food stores and wholesalers. The Company markets products under Nature's Bounty, the Company's signature brand, to chain stores such as Albertsons, CVS, Eckerd Drugs, Genovese, Osco and Target. The Company also sells a full line of products under the Natural Wealth brand to supermarkets and wholesalers, such as Bergen Brunswig Co., Cardinal Health Co. and McKesson Drug Co., a line of products under the Good 'N Natural brand directly to independent health food stores and a specialty line of vitamins under the American Health brand to health food wholesalers. BUSINESS STRATEGY The Company's objective is to increase sales, improve profitability and strengthen its industry leading position through the following key strategies: Enhance Vertical Integration. Management believes that vertical integration creates a significant competitive advantage by allowing the Company to: (i) maintain higher quality standards while lowering product costs, a portion of which are passed on to the customer as lower prices; (ii) more quickly respond to scientific and popular reports and consumer buying trends; (iii) assure delivery schedules; (iv) reduce dependence on outside suppliers; and (v) improve overall operating margins. The Company continually evaluates ways to further enhance its vertical integration. For example, as NBTY becomes the primary supplier of nutritional supplements to the H&B stores by replacing outside suppliers, it will effectively lower the costs of such products sold by H&B 4 stores. Management believes this should increase overall profit margins while improving productivity for NBTY's manufacturing facilities. Introduce New Products and Product Innovations. The Company has consistently been among the first in the industry to introduce new products in response to recent scientific and popular reports. Given the changing nature of consumer demands for new products and the growing publicity over the importance of vitamins, minerals and nutritional supplements in the promotion of general health, management believes that NBTY will continue to attract new customers based upon its ability to rapidly respond to consumer demands with high quality, value-oriented products. During fiscal 1997, NBTY introduced more than 100 new products. In addition to expanding the Company's product lines, many of these new specialty products, such as St. John's Wort and glucosamine sulfate, typically provide higher margins. Expand Existing Channels of Distribution. In order to increase sales and profitability, enhance overall market share, and leverage manufacturing, distribution, purchasing and marketing capabilities, the Company will continue to expand its existing channels of distribution. o Increase mail order sales. NBTY expects to continue to strengthen its mail order sales through a number of initiatives, including: (i) automated picking and packing to fulfill mail order requests with greater speed and accuracy; (ii) increased manufacturing capability to quickly introduce and deliver new products in response to customer demand; and (iii) more frequent promotions to further improve response rates. In addition, the Company intends to continue its strategy of acquiring the customer lists, brand names and inventory of other mail order companies which have similar or complementary products and which the Company believes it can integrate into its own operations without adding substantial overhead expenses, such as the recent merger of Nutrition Headquarters Group into the Company. o Increase retail sales in the U.S. and U.K. In order to increase retail sales, NBTY is actively expanding its base of Vitamin World stores in the U.S. and selectively expanding its Holland & Barrett stores in the U.K. During calendar 1998, the Company plans to open a total of 120 Vitamin World stores to increase its penetration into factory outlet and regional malls. The Company has recently opened approximately 20 stores and signed leases for an additional 26 stores. Integrate Strategic Acquisitions. Since 1986, NBTY has successfully acquired and integrated 12 VMS companies, including Holland & Barrett in August 1997. Most recently NBTY merged Nutrition Headquarters Group into the Company. NBTY is currently in the process of integrating 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) repricing certain products; and (v) implementing proven marketing techniques. NBTY will continue to manufacture select products in Nutrition Headquarters Group's manufacturing facilities. The Company intends to continue to pursue acquisition opportunities in the VMS sector, both in the U.S. and internationally, that complement or extend its existing product lines, expand its distribution channels or are compatible with its business philosophy and strategic goals. Build Infrastructure to Support Growth. NBTY has technologically advanced, state-of-the-art manufacturing and production facilities, with total production capacity of approximately five billion tablets and capsules per year. The Company recently completed construction of a 131,000 square foot state-of-the-art soft gelatin encapsulation manufacturing facility on 62 acres, capable of producing five billion soft gel capsules per year, to enhance its vertical integration, reduce its dependence on outside suppliers and further improve profit margins. NBTY expects to increase its manufacturing capacity to 90% from 70% of the VMS products it sells. The Company regularly evaluates its operations and makes investments in building infrastructure, as necessary to support its continuing growth. Experienced Management Team with Significant Equity Stake. The Company's management team has extensive experience in the VMS industry and has developed long-standing relationships with its suppliers and its customers. The executive officers and directors have an average of approximately 17 years with the Company. After giving effect to the Offering, executive officers and directors will own approximately 21.9% of the Company's common stock and employees in the aggregate will own approximately 4.6% through the Company's employee stock ownership plan. 5 RECENT ACQUISITION On April 20, 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 Common Stock and is expected to incur merger related transaction costs of approximately $3.3 million. Nutrition Headquarters Group includes a well known value-oriented catalog offering private label and branded vitamins and nutritional supplements primarily under the Nutrition Headquarters brand. Nutrition Headquarters Group's catalog has been operating for over 20 years and has a customer list including more than 1.5 million active names. Through its manufacturing operations, Nutrition Headquarters Group produces national brand equivalent vitamins and nutritional supplement tablets and capsules, approximately 25% of which are sold under the Nutrition Headquarters brands and the balance are contract manufactured for other nutritional supplement suppliers. Management believes Nutrition Headquarters Group mail order and manufacturing operations will supplement NBTY's operations. Nutrition Headquarters Group reported aggregate sales of approximately $77 million (including $3 million of sales to NBTY) for its fiscal year ended September 1997, of which approximately $50 million was attributable to mail order. The merger was accounted for as a pooling of interests. NBTY was incorporated under the laws of the State of Delaware in 1971 and maintains its principal executive offices at 90 Orville Drive, Bohemia, New York 11716. Its telephone number is (516) 567-9500. 'American Health(Registered),' 'Good 'N Natural(Registered),' 'Holland & Barrett(Registered),' 'Natural Wealth(Registered),' 'Nature's Bounty(Registered),' 'Nutrition Headquarters(Registered),' 'Puritan's Pride(Registered),' and 'Vitamin World(Registered),' are registered trademarks and service marks of NBTY, Inc. 6 THE OFFERINGS Common Stock Offered: Company............................................................ 3,000,000 shares Selling Stockholders............................................... 5,600,000 shares Total........................................................... 8,600,000 shares Common Stock to be outstanding after the Offering.................... 67,810,221 shares(1) Use of Proceeds...................................................... The net proceeds to the Company will be used to reduce borrowings under the Company's bank revolving credit facility (the 'Revolving Credit Facility') and for working capital. The Company will not receive any of the proceeds from the sale of shares by the Selling Stockholders. See 'Use of Proceeds' and 'Principal and Selling Stockholders.' Nasdaq National Market symbol........................................ NBTY
- ------------------ (1) Excludes 4,326,000 shares of Common Stock which are issuable by the Company upon exercise of options, all of which are held by management, and 450,000 shares of Common Stock issuable by the Company, pursuant to the Underwriters' over-allotment option. 7 SUMMARY SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA(1)(2) (IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, ---------------------------------------------------- ------------------- 1993 1994 1995 1996 1997 1997 1998 -------- -------- -------- -------- -------- -------- -------- (UNAUDITED) INCOME STATEMENT DATA: Net sales.......................... $198,206 $220,821 $250,351 $265,670 $355,336 $159,105 $286,820 Costs & expenses(3)................ 175,868 200,671 232,593 233,295 308,862(4) 134,386 244,801 Income from operations............. 22,338 20,150 17,758 32,375 46,474 24,719 42,019 Interest expense, net.............. (2,177) (1,950) (2,284) (2,431) (7,471) (1,315) (9,221) Income before income taxes......... 20,774 19,615 16,296 31,374 40,820 23,233 34,198 Income taxes....................... 6,072 4,872 3,374 9,168 11,694 7,391 10,565 Net income......................... 14,702 14,743 12,922 22,206 29,126 15,842 23,633 PRO FORMA RELATING TO INCOME TAXES:(5) Income taxes..................... 7,853 7,454 6,307 12,644 16,328 9,293 13,406 Net income....................... 12,921 12,161 9,989 18,730 24,492 13,940 20,792 PER SHARE DATA: Net income per diluted share....... $ 0.23 $ 0.21 $ 0.19 $ 0.32 $ 0.42 $ 0.23 $ 0.34 Pro forma net income per diluted share(5)......................... $ 0.20 $ 0.17 $ 0.15 $ 0.27 $ 0.36 $ 0.20 $ 0.30(6) Weighted average diluted shares outstanding (000)................ 63,935 69,544 68,695 68,699 68,935 68,919 68,967 OTHER DATA: Vitamin World Number of stores.............. 31 31 40 68 117 89 143 Same store sales growth(7).... 8.8% 7.5% 19.5% 18.4% 22.9% 19.4% 25.6% Holland & Barrett Number of stores(2)........... -- -- -- -- 410 -- 417
AS OF MARCH 31, 1998 -------------------------------- ACTUAL AS ADJUSTED(8) -------------- -------------- BALANCE SHEET DATA: Working capital................................................................... $ 77,902 $ 83,988 Total assets...................................................................... 460,557 466,643 Long-term debt and capital lease obligations, less current portion................ 215,561 170,561 Total stockholders' equity........................................................ 156,421 207,507
- ------------------ (1) In April 1998, the Company merged Nutrition Headquarters Group into NBTY in a transaction accounted for as a pooling of interests. All financial information has been restated to include the financial position and results of operations of Nutrition Headquarters Group for all periods presented. See Note 1 of Notes to the Company's Supplemental Consolidated Financial Statements. (2) In August 1997, the Company acquired Holland & Barrett which was accounted for under the purchase method of accounting and, accordingly, all financial information of Holland & Barrett has been included since its acquisition date. See Note 3 of Notes to the Company's Supplemental Consolidated Financial Statements. (3) The Company estimates that Nutrition Headquarters Group incurred expenses of approximately $1.5 million per fiscal year (primarily relating to executive compensation, consulting services and certain related items) that will not be incurred in the future. (4) In fiscal 1997, the Company agreed to settle a class action lawsuit for approximately $5,600, net of insurance recoveries and also recorded a charge to operations for related legal fees of $768. (5) Pro forma net income and pro forma net income per Common Share reflect a provision for taxes on the income of Nutrition Headquarters Group, which was an S corporation prior to its merger into NBTY, as if Nutrition Headquarters Group had been subject to corporate income taxes as a C corporation for all periods presented. (6) Pro forma net income per diluted share, as adjusted for the Offering, is $0.30 for the six months ended March 31, 1998. (7) Same store sales data for the period reflect stores open throughout that period and the corresponding period of the prior fiscal year. (8) As adjusted to give effect to the sale by the Company of 3,000 shares of Common Stock offered hereby at $18.00 per share and after deducting the estimated underwriting discounts and commissions and offering expenses and the application of the net proceeds therefrom. See 'Use of Proceeds' and 'Capitalization.' 8 RISK FACTORS Investment in the Common Stock offered hereby involves certain risks. Investors should carefully consider the following risk factors in addition to the other information contained, and incorporated by reference, in this Prospectus before making any investment in the Common Stock. EFFECT OF UNFAVORABLE PUBLICITY; ABSENCE OF CLINICAL STUDIES The Company believes the VMS market is affected by national media attention regarding the consumption of nutritional supplements. Future research reports or publicity that are perceived as less favorable or that question such earlier research or publicity could have a material adverse effect on the Company. Because of the Company's dependence upon consumer perceptions, adverse publicity, whether or not accurate, associated with illness or other adverse effects resulting from the consumption of the Company's products or any similar products distributed by other companies could have a material adverse effect on the Company. Such adverse publicity could arise even if the adverse effects associated with such products resulted from consumers' failure to consume such products appropriately. While the Company conducts extensive quality control testing on its products, the Company generally does not conduct or sponsor clinical studies on its products. Concerns or public reports about the quality of VMS products generally, or of the Company's products in particular, could also have a material adverse effect on the Company. In addition, the scientific research to date is preliminary and there can be no assurance that future scientific research or publicity will be favorable to the nutritional supplement market or any particular product or consistent with earlier favorable research or publicity. GOVERNMENT REGULATION United States. The manufacturing, packaging, labeling, advertising, distribution and sale of the Company's products are subject to regulation by Federal, state and local agencies, the most active of which is the U.S. Food and Drug Administration ('FDA'). The FDA regulates the Company's dietary supplements, principally under amendments to the Federal Food, Drug and Cosmetic Act embodied in the Dietary Supplement Health and Education Act ('DSHEA'). Under DSHEA, new dietary ingredients (those not used in dietary supplements marketed before October 15, 1994) require premarket submission to the FDA of evidence of a history of their safe use, or other evidence establishing that they are reasonably expected to be safe. There can be no assurance that the FDA will accept the evidence of safety for any new dietary ingredient 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 the FDA pre-approval based on newly conducted, costly safety testing. Also, while DSHEA authorizes the use of statements of nutritional support in the labeling of dietary supplements, the FDA is required to be notified of such statements, and there can be no assurance that the FDA will not consider particular labeling statements used by the Company to be drug claims rather than acceptable statements of nutritional support, necessitating approval of a costly new drug application, or relabeling to delete such statements. In addition, the FDA recently has commenced a case against a vitamin and herbal products manufacturer in which the FDA is challenging the categorization of a certain product as a dietary supplement rather than as a drug. Drugs, but not dietary supplements, are subject to full FDA regulation. No assurance can be given that the FDA will not take a similar position with respect to any of the Company's products. DSHEA also authorizes the FDA to promulgate good manufacturing practice ('GMP') regulations for dietary supplements, which would require special quality controls for the manufacture, packaging, storage and distribution of supplements. There can be no assurance, if such GMP rules are issued, that the Company will be able to comply with them without incurring material expense to do so. DSHEA further authorizes the FDA to promulgate regulations governing the labeling of dietary supplements, including claims for supplements pursuant to recommendations made by the Presidential Commission on Dietary Supplement Labels. Such rules are expected to be issued, which will require relabeling of the Company's dietary supplements, and may require additional record keeping and claim substantiation testing, and even reformulation, recall or discontinuance of certain of the Company's supplements, and there can be no assurance that such requirements will not involve material expenses to the Company. Moreover, there can be no assurance that new laws or regulations imposing more stringent regulatory requirements on the dietary supplement industry will not be enacted or issued. 9 NBTY is subject to a Federal Trade Commission ('FTC') consent decree and a U.S. Postal Service consent order, prohibiting certain advertising claims for certain of the Company's products. Violations of these orders could result in substantial monetary penalties, which could have a material effect on the Company's business. 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 ('MAFF') 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 reports to MAFF and suggests appropriate courses of action by the relevant government department where there are areas of concern relating to food, and the Committee on Toxicity, which reports to the Department of Health. The relevant legislation governing the sale of food includes the Food Safety Act 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 Commission ('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 U.K. Department of Trade and Industry also regulate matters such as the cleanliness of the properties on which food is produced and sold. There can be no assurance that more stringent regulations will not be promulgated or that, if more stringent regulations are promulgated, the Company will be able to meet such regulations without incurring material expense to do so. Food that has medicinal properties may fall under the jurisdiction of the Medicines Control Agency ('MCA'), a regulatory authority whose responsibility is to ensure that all medicines sold or supplied for human use in the U.K. meet acceptable standards of safety, quality and efficacy. These standards are determined by the 1968 Medicines Act together with an increasing number of E.C. regulations and directives laid down by the European Union ('E.U.'). The latter take precedence over national law. The MCA has a 'borderline department' that determines when food should be treated as a medicine and should therefore fall under the relevant legislation relating to medicines. The MCA operates as the agent of the licensing authority (the United Kingdom Health Ministers) and its activities cover every facet of medicines controlled in the U.K., including involvement in the development of common standards of medicines 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. Although the general tendency has been to liberalize restrictions on nutritional products and consider them food supplements rather than medicines, there can be no assurance that all new U.K. or E.U. regulations will be favorable for the Company. Any move by the U.K. or E.U. to restrict existing products or potencies, as well as the development of new products or potencies, could have a material adverse effect on the Company. Further, the Company is unable to predict what effect the formation of the E.U. will have on the Company. On April 2, 1998, the U.K. Government introduced proposals to limit the free sale of Vitamin B6 products with a daily dose under 10mg. A Parliamentary Select Committee will be carrying out an inquiry and submitting its report. This is expected to involve a consultation period of up to three months, during which time the proposals will also be considered by the European commission. The U.K. Government is expected to review the position before any legislation is introduced. See 'Business--Government Regulation.' MANAGEMENT OF GROWTH The Company has in the past, and intends to continue to actively pursue acquisition opportunities that complement or extend its existing product lines, expand its distribution channels or are compatible with its business philosophy and strategic goals. Acquisitions involve a number of risks that could adversely affect the Company's operating results, including the diversion of management's attention, the assimilation of operations and personnel of the acquired companies, the amortization of acquired intangible assets and the potential loss of key employees of the acquired companies. There can be no assurance that the Company will consummate acquisitions on satisfactory terms, if at all, that adequate financing will be available on terms acceptable to the Company, if at all, or be permitted under the Company's financing instruments, that any acquired product lines or businesses, or newly built facilities will be successfully integrated or operated (including the recent acquisition of Nutrition Headquarters Group or the start-up of the Company's new soft gel manufacturing facility) or that such product lines or businesses or newly built facilities will ultimately have a positive impact on the Company, its financial condition or results of operations. In addition, acquisitions could result in substantial equity dilution to 10 existing stockholders. In this regard, the Company will seek approval to increase its authorized capital stock at its next meeting of stockholders. The Company's growth is partially dependent upon its ability to open new stores and to operate them profitably. The Company plans to open additional stores in the United States, as well as selectively open stores in the United Kingdom. The Company's planned expansion is dependent on a number of factors, including the availability of suitable store locations, the negotiation of acceptable lease terms, the Company's financial resources and its ability to control the operational aspects of its growth. The Company competes with other national specialty retailers which seek the same demographics and location characteristics as the Company. Although the Company believes that it can obtain suitable sites for its projected expansion and that its control systems and management are adequate to support this growth, there can be no assurance that the Company's expansion plans will be achieved or that such expansion will be profitable. See 'Business--Business Strategy.' DEPENDENCE ON KEY PERSONNEL The Company's continued success will largely depend on the efforts and abilities of its executive officers including Messrs. Scott Rudolph, Chairman of the Board, Chief Executive Officer and President, and Harvey Kamil, Executive Vice President and Chief Financial Officer, respectively, and certain other key employees. The Company's operations could be adversely affected if, for any reason, such officers or employees did not remain with NBTY. See 'Management.' COMPETITION The market for vitamins and other nutritional supplements is highly competitive in all of the Company's channels of distribution. Numerous companies compete with the Company in the development, manufacture and marketing of vitamins and nutritional supplements. See 'Business--Competition.' United States. In the U.S., 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, Nature Made and Sundown, sold by Leiner Health Products, Inc., Pharmavite Corp. and Rexall Sundown, Inc., respectively. The Vitamin World stores compete with specialty vitamin stores, such as General Nutrition Centers ('GNC') stores, health food stores and other retail stores. With respect to mail order sales, management believes the Company is the largest mail order supplier of vitamins and other nutritional supplements in the U.S. and competes with a large number of smaller, usually less geographically diverse, mail order companies, some of which manufacture their own products and some of which sell products manufactured by others. Increased competition from companies that distribute through the wholesale channel could have a material adverse effect on the Company as they may have greater financial and other resources available to them and possess extensive manufacturing, distribution and marketing capabilities far greater than those of the Company. United Kingdom. The market for sales of vitamins, minerals and other nutritional supplements in the U.K. is also highly competitive. H&B's principal competitors are large pharmacy chains, including Boots, Lloyds and Superdrug, and major supermarket chains such as ASDA, Sainsbury and Tesco. There are also approximately 1,300 independent retailers of health foods and nutritional supplements in the U.K. market. In addition, GNC has recently entered the U.K. market and currently operates approximately 30 stores in the U.K. The Company expects other large U.S.-based companies to enter the U.K. market as well. There can be no assurance that H&B will be able to effectively compete with such other companies, nor can there be any assurance that unfavorable market trends in the U.K. will not develop. AVAILABILITY OF RAW MATERIALS; RELIANCE ON CERTAIN SUPPLIERS 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. One supplier currently supplies approximately 10% of the Company's purchases of raw materials. An unexpected interruption of supply, such as a harvest failure or the loss of a material supplier, could cause the Company's results of operations derived from such products to be adversely affected. Although the Company has generally been able to raise its prices in response to significant increases in the cost of such ingredients, the Company has not always in the past been, and may not in 11 the future always be, able to raise prices quickly enough to offset the effects of such increased raw material costs. See 'Business--Manufacturing and Quality Control.' CONTROL BY PRINCIPAL STOCKHOLDERS Upon completion of the Offering, Messrs. Scott Rudolph and Arthur Rudolph will beneficially own an aggregate of 19.8% of the Common Stock and will have significant influence over all matters requiring approval by the Company's stockholders without the approval of minority stockholders. Such influence could adversely affect the market price of the Common Stock or delay or prevent a change in control of the Company. See 'Principal and Selling Stockholders.' RISKS RELATING TO INTERNATIONAL OPERATIONS The Company has substantial operations and assets located outside the United States, primarily in the United Kingdom. With respect to international operations, principally all of the Company's revenues and a substantial portion of its costs (including borrowing costs) are incurred in the local currency. The Company's financial performance on a U.S. dollar-denominated basis may be affected by changes in currency exchange rates. The Company believes that the matching of revenues and expenses in local currency mitigate the effect of fluctuating currency exchange rates. Nonetheless, changes in certain exchange rates could adversely affect the Company's business, financial condition and results of operations. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations.' LEVERAGE; RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS As of March 31, 1998, the Company had outstanding long term debt (including capitalized leases) of approximately $216 million and stockholders' equity of approximately $156 million. The degree to which the Company is leveraged could have important consequences to the holders of the Common Stock, including: (i) the Company's ability to obtain additional financing for working capital, capital expenditures or acquisitions may be limited; (ii) a portion of the Company's cash flow from operations will be dedicated to the payment of the debt service and interest on its indebtedness, thereby reducing funds available for investments; (iii) certain of the Company's borrowings will be at variable rates of interest, which exposes the Company to the risk of increased interest rates; and (iv) the Company may be more vulnerable to economic downturns and be limited in its ability to withstand competitive pressures. Certain of the Company's competitors may currently operate on a less leveraged basis and therefore could have significantly greater operating and financing flexibility than the Company. The Company's debt instruments contain numerous restrictive covenants that limit the discretion of the Company's management with respect to certain business matters. These covenants place significant restrictions on, among other things, the ability of the Company to incur additional indebtedness, to create liens or other encumbrances, to pay dividends or make certain other payments, investments, loans and guarantees, repay other indebtedness and amend debt instruments and to sell or otherwise dispose of assets and merge or consolidate with another entity. In addition, the Company's Revolving Credit Facility contains a number of financial covenants that require the Company to meet certain financial ratios and certain financial tests. See 'Description of Certain Indebtedness.' PROTECTION OF TRADEMARKS The Company owns trademarks registered with the United States Patent and Trademark Office and many foreign jurisdictions for its Nature's Bounty, Puritan's Pride, Vitamin World, Good 'N Natural, Hudson, American Health, and Natural Wealth brands, among others, and with the appropriate U.K. authorities for its Holland & Barrett trademark, among others, and has rights to use other names essential to its business. The Company's policy is to pursue registrations for all trademarks associated with its key products. U.S. registered trademarks have a perpetual life, as long as they are renewed on a timely basis and used properly as trademarks, subject to the rights of third parties to seek cancellation of the trademarks if they claim priority or confusion of usage. The Company regards its trademarks and other proprietary rights as valuable assets and believes they have significant value in the marketing of its products. The Company vigorously protects its trademarks against 12 infringement. There can be no assurance that, to the extent the Company does not have patents or trademarks on its products, another company will not replicate one or more of the Company's products. Further, there can be no assurance that in those foreign jurisdictions in which the Company conducts business the protection available to the Company will be as extensive as the protection available to the Company in the U.S. See 'Business-- Trademarks.' LEGAL MATTERS The Company, like other retailers, distributors and manufacturers of products that are ingested, faces an inherent risk of exposure to product liability claims in the event that the use of its products results in injury. The Company may be subjected to various product liability claims, including among others, that its products contain contaminants or include inadequate instructions as to use or inadequate warnings concerning side effects and interactions with other substances. While such claims to date have not been material to the Company and the Company maintains product liability insurance, there can be no assurance that product liability claims and the resulting adverse publicity will not have a material adverse effect on the Company. The Company carries insurance in the types and amounts that management considers reasonably adequate to cover the risks associated with its business. There can be no assurance that such insurance will continue to be available at a reasonable cost, or if available will be adequate to cover liabilities. The State of California and the National Resources Defense Council (the 'NRDC') filed lawsuits against a large number of manufacturers of dietary supplements containing calcium, claiming that naturally-occurring lead levels in these supplements exceed acceptable levels under California law ('Proposition 65'). Although the Company is not named in this lawsuit, there can be no assurance that it will not be the subject of future Proposition 65 claims asserted by the State of California or private parties or that any such claim or the existing California lawsuit, if successful, might not have a material adverse effect on the Company's operations. The Company is presently engaged in various other legal actions, and, although ultimate liability cannot be determined at the present time, the Company believes that the amount of any such liability, if any, from these other actions, after taking into consideration the Company's insurance coverage, will not have a material adverse effect on its results of operations and financial condition. SHARES ELIGIBLE FOR FUTURE SALE After the Offering, approximately 67,810,221 shares of Common Stock will be outstanding. The shares of Common Stock offered hereby will be freely tradable by persons who are not affiliates of the Company without restriction or further registration under the Securities Act. Substantially all of the other outstanding shares of Common Stock, other than shares held by officers, directors and other affiliates of the Company, are freely tradable. Pursuant to Rule 144 of the Securities Act ('Rule 144'), shares of Common Stock held by affiliates of the Company are subject to limitations on volume that may be sold other than sales pursuant to a registration statement under the Securities Act or another applicable exemption from registration thereunder. Scott Rudolph, Harvey Kamil, and certain other officers are eligible to sell their shares of Common Stock pursuant to Rule 144 under the Securities Act at prescribed times and subject to the manner of sale, volume, notice and information restrictions of Rule 144. The Company has granted Michael C. Slade and former shareholders of the Nutrition Headquarters Group certain demand and piggyback registration rights covering an aggregate of 8,772,084 shares of Common Stock (3,172,084 shares after the consummation of the Offering). The executive officers, directors and the Selling Stockholders, who collectively are the beneficial owners of an aggregate of 24,586,046 shares of Common Stock (18,986,046 shares after the consummation of the Offering), and the Company have agreed with the Underwriters, subject to certain exceptions, not to directly or indirectly, (and, except as may be disclosed herein, will not announce or disclose any intention to) sell, contract to sell, grant any option or warrant for the sale of, register, loan, pledge, grant any rights with respect to or otherwise dispose of, without the prior written consent of Smith Barney Inc., any Common Stock, or any securities convertible into or exchangeable or exercisable for Common Stock (including without limitation any of the economic attributes thereof) for a period of 270 days, in the case of the Company and the Selling Stockholders, and for a period of 120 days, in the case of the executive officers and directors who are not Selling Stockholders, after the date of this Prospectus. Upon the expiration or termination of such restrictive period, such holders will, in general, be 13 entitled to dispose of their shares of Common Stock, although the shares of Common Stock held by affiliates of the Company will continue to be subject to the restrictions of Rule 144 under the Securities Act. See 'Shares Eligible for Future Sale' and 'Underwriting.' ANTI-TAKEOVER PROVISIONS The Company's Certificate of Incorporation (the 'Certificate of Incorporation') and its By-laws (the 'By-laws'), as well as Delaware corporate law, contain certain provisions that could have the effect of making it more difficult for a third party to acquire, or discouraging a third party from attempting to acquire, control of the Company. Certain of these provisions impose various procedural and other requirements, including advance notice and other provisions, that could make it more difficult for stockholders to effect certain corporate actions. These provisions could limit the price that certain investors might be willing to pay in the future for shares of Common Stock. Furthermore, certain of the Company's debt instruments provide for the acceleration of the indebtedness evidenced thereby upon the occurrence of certain change in control events (as defined in such debt instruments), which provisions could also tend to prevent or discourage the acquisition of the Company by a third party. See 'Description of Capital Stock' and 'Description of Certain Indebtedness.' YEAR 2000 At the present time, the Company believes that its systems are substantially Year 2000 compliant and does not expect Year 2000 issues to materially affect its products, services, competitive position or financial performance. However, there can be no assurance that this will be the case. The ability of third parties with whom the Company transacts business to adequately address their Year 2000 issues is outside the Company's control. There can be no assurance that the failure of such third parties to adequately address their respective Year 2000 issues will not have a material adverse effect on the Company's business, financial condition, cash flows and results of operations. FORWARD LOOKING STATEMENTS This Prospectus 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, including statements under the captions 'Summary,' 'Management's Discussion and Analysis of Financial Condition and Results of Operations' and 'Business.' All of these forward looking statements are based on estimates and assumptions made by management of the Company 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 of 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 will be beyond the control of the Company and its management. For further information or other factors which could affect the financial results of the Company and such forward looking statements, see the preceding Risk Factors. 14 USE OF PROCEEDS The net proceeds to be received by the Company from the sale of the 3,000,000 shares of Common Stock offered hereby at $18.00 per share are approximately $51 million (approximately $59 million if the Underwriter's over-allotment option is exercised in full). The Company expects to use such net proceeds to reduce borrowings outstanding under the Company's Revolving Credit Facility and for working capital. The Company entered into the Revolving Credit Facility with a syndicate of banks and other financial institutions. The Revolving Credit Facility has a maximum availability of $60 million. As of the date of this Prospectus, the Company had outstanding borrowings of $50 million under the Revolving Credit Facility, at interest rates approximating 7.2%, which it intends to reduce with a portion of the net proceeds. The Company may reborrow under its Revolving Credit Facility from time to time. See 'Description of Certain Indebtedness.' The Company will not receive any proceeds from the sale of the shares of Common Stock offered by the Selling Stockholders. See 'Principal and Selling Stockholders.' PRICE RANGE OF COMMON STOCK The Company's Common Stock is presently traded on the Nasdaq National Market under the symbol 'NBTY.' The following table sets forth the high and low closing sale prices for the Common Stock as quoted on the Nasdaq National Market for the periods indicated. Such prices have been rounded to the nearest decimal adjusted to reflect the three-for-one stock split of the Company's Common Stock:
HIGH LOW ------ ------ FISCAL YEAR ENDED SEPTEMBER 30, 1996 First Quarter.............................................................. $ 1.88 $ 1.48 Second Quarter............................................................. 2.54 1.54 Third Quarter.............................................................. 3.50 2.54 Fourth Quarter............................................................. 5.75 3.42 FISCAL YEAR ENDED SEPTEMBER 30, 1997 First Quarter.............................................................. 6.67 4.63 Second Quarter............................................................. 7.79 5.04 Third Quarter.............................................................. 9.33 5.00 Fourth Quarter............................................................. 11.50 6.29 FISCAL YEAR ENDED SEPTEMBER 30, 1998 First Quarter.............................................................. 11.13 6.88 Second Quarter............................................................. 20.25 10.83 Third Quarter.............................................................. 23.44 14.81
As of April 30, 1998 there were approximately 684 record holders of Common Stock. The Company believes that there were in excess of 10,000 beneficial holders of Common Stock as of such date. On June 30, 1998, the last reported sale price for the Company's Common Stock on the Nasdaq National Market was $18.38 per share. 15 DIVIDEND POLICY Since 1973, the Company has not paid cash dividends on its Common Stock. The Company's outstanding Senior Subordinated Notes and its Revolving Credit Facility restrict the payment of cash dividends. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources' and 'Description of Certain Indebtedness.' 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. In September 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 April 3, 1998, the Company effected a three-for-one stock split in the form of a 200% stock dividend to stockholders of record on March 23, 1998. Any 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. CAPITALIZATION The following table sets forth the Company's actual capitalization as of March 31, 1998 and as adjusted to reflect the sale of the 3,000,000 shares of Common Stock offered by the Company hereby and the application of the estimated net proceeds to the Company therefrom as described in 'Use of Proceeds.' The information below should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Company's Consolidated Financial Statements and related notes included elsewhere in this Prospectus or incorporated herein by reference.
MARCH 31, 1998 -------------------------- (IN THOUSANDS) ACTUAL AS ADJUSTED ----------- ----------- Current portion of long-term debt and capital lease obligations.................... $ 3,034 $ 3,034 ----------- ----------- ----------- ----------- Long-term debt: Revolving Credit Facility........................................................ $ 45,000 $ -- Mortgages and other debt......................................................... 16,833 16,833 8 5/8% Senior Subordinated Notes due 2007........................................ 148,825 148,825 Promissory Note Payable.......................................................... 2,457 2,457 Capital lease obligations........................................................ 2,446 2,446 ----------- ----------- Total long-term debt.......................................................... 215,561 170,561 ----------- ----------- Stockholders' equity:(1) Common Stock, $.008 par value, 75,000 shares authorized, 69,255 shares issued, 64,746 shares outstanding, 72,255 shares issued as adjusted, 67,746 shares outstanding as adjusted....................................................... 554 578 Capital in excess of par......................................................... 56,789 107,851 Retained earnings................................................................ 92,884 92,884 Less 4,509 treasury shares, at cost.............................................. (3,206) (3,206) Cumulative translation adjustment................................................ 9,400 9,400 ----------- ----------- Total stockholders' equity.................................................... 156,421 207,507 ----------- ----------- Total capitalization.......................................................... $ 371,982 $ 378,068 ----------- ----------- ----------- -----------
- ------------------ (1) Excludes 4,326 shares of Common Stock which are issuable by the Company upon exercise of options, all of which are held by management, and 450 shares of Common Stock issuable by the Company pursuant to the Underwriters' over-allotment option. 16 SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA(1)(2) (IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA) The selected supplemental consolidated financial data in the table for the three years in the period ended September 30, 1997 are derived from the Company's Supplemental Consolidated Financial Statements which have been audited by Coopers & Lybrand L.L.P., independent accountants, and are included elsewhere in this Prospectus. The selected supplemental financial data in the table for the two years in the period ended September 30, 1994 are derived from the audited financial statements of NBTY and the separate entity audited financial statements of Nutrition Headquarters Group. The selected supplemental consolidated financial data in the table for the six months ended March 31, 1997 and 1998 are derived from the Company's interim unaudited supplemental consolidated financial statements included elsewhere in this Prospectus and, in the Company's opinion, contains all adjustments consisting of normal recurring accruals necessary to present fairly its financial position as of March 31, 1998 and the results of its operations for the six month periods ended March 31, 1997 and 1998. The results of these interim periods are not necessarily indicative of the results to be expected for the full year. The following information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Company's Supplemental Consolidated Financial Statements and related notes and other supplemental consolidated financial information included herein.
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, ---------------------------------------------------- ------------------- 1993 1994 1995 1996 1997 1997 1998 -------- -------- -------- -------- -------- -------- -------- (UNAUDITED) SELECTED INCOME STATEMENT DATA: Net sales............................. $198,206 $220,821 $250,351 $265,670 $355,336 $159,105 $286,820 Costs & expenses: Cost of sales....................... 95,659 118,217 137,254 138,186 177,909 79,819 140,414 Catalog printing, postage & promotion........................ 20,093 23,297 28,307 26,695 27,932 13,996 13,935 Selling, general & administrative(3)................ 60,116 59,157 67,032 68,414 96,653 40,571 90,452 Litigation settlement costs(4)...... 6,368 -------- -------- -------- -------- -------- -------- -------- Income from operations................ 22,338 20,150 17,758 32,375 46,474 24,719 42,019 Interest expense, net................. (2,177) (1,950) (2,284) (2,431) (7,471) (1,315) (9,221) Other, net............................ 613 1,415 822 1,430 1,817 (171) 1,400 -------- -------- -------- -------- -------- -------- -------- Income before income taxes............ 20,774 19,615 16,296 31,374 40,820 23,233 34,198 Income taxes(5)....................... 6,072 4,872 3,374 9,168 11,694 7,391 10,565 -------- -------- -------- -------- -------- -------- -------- Net income............................ $ 14,702 $ 14,743 $ 12,922 $ 22,206 $ 29,126 $ 15,842 $ 23,633 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- PRO FORMA RELATING TO INCOME TAXES:(6) Income taxes........................ 7,853 7,454 6,307 12,644 16,328 9,293 13,406 -------- -------- -------- -------- -------- -------- -------- Net income.......................... $ 12,921 $ 12,161 $ 9,989 $ 18,730 $ 24,492 $ 13,940 $ 20,792 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- PER SHARE DATA: Net income per common share: Basic............................... $ 0.29 $ 0.24 $ 0.21 $ 0.35 $ 0.45 $ 0.25 $ 0.37 Diluted............................. $ 0.23 $ 0.21 $ 0.19 $ 0.32 $ 0.42 $ 0.23 $ 0.34 Pro forma net income per common share: Basic............................... $ 0.25 $ 0.20 $ 0.16 $ 0.29 $ 0.38 $ 0.22 $ 0.32 Diluted............................. $ 0.20 $ 0.17 $ 0.15 $ 0.27 $ 0.36 $ 0.20 $ 0.30 Weighted average common shares outstanding (000): Basic............................... 51,273 61,428 62,159 64,197 64,611 64,578 64,662 Diluted............................. 63,935 69,544 68,695 68,699 68,935 68,919 68,967 OTHER DATA: Vitamin World Number of stores................. 31 31 40 68 117 89 143 Same store sales growth(7)....... 8.8% 7.5% 19.5% 18.4% 22.9% 19.4% 25.6% Holland & Barrett Number of stores(2).............. -- -- -- -- 410 -- 417
17
AS OF MARCH AS OF YEAR ENDED SEPTEMBER 30, 31, ---------------------------------------------------- -------- 1993 1994 1995 1996 1997 1998 -------- -------- -------- -------- -------- -------- SELECTED BALANCE SHEET DATA: Working capital................................... $ 47,973 $ 44,945 $ 45,556 $ 57,559 $ 70,850 $ 77,902 Total assets(8)................................... 125,485 140,097 148,187 171,948 426,915 460,557 Long-term debt, capital lease obligations and promissory note payable, less current portion(8)...................................... 15,658 13,865 15,683 23,570 171,250 215,561 Total stockholders' equity........................ 76,272 85,759 91,393 107,645 131,291 156,421
- ------------------ (1) In April 1998, the Company merged Nutrition Headquarters Group into NBTY in a transaction accounted for as a pooling of interests. All financial information has been restated to include the financial position and results of operations of Nutrition Headquarters Group for all periods presented. See Note 1 of Notes to the Company's Supplemental Consolidated Financial Statements. (2) In August 1997, the Company acquired Holland & Barrett which was accounted for under the purchase method of accounting and, accordingly, all financial information of Holland & Barrett has been included since its acquisition date. See Note 3 of Notes to the Company's Supplemental Consolidated Financial Statements. (3) The Company estimates that Nutrition Headquarters Group incurred expenses of approximately $1.5 million per fiscal year (primarily relating to executive compensation, consulting services and certain related items) that will not be incurred in the future. (4) In fiscal 1997, the Company agreed to settle a class action lawsuit for approximately $5,600, net of insurance recoveries and also recorded a charge to operations for related legal fees of $768. (5) Prior to the merger, Nutrition Headquarters Group had been treated as an S corporation for federal and state tax purposes. Accordingly, taxable income has been reported to the individual stockholders for their inclusion in their respective income tax returns with no provision for these taxes, other than certain minimum taxes, included in the Company's Supplemental Consolidated Financial Statements. (6) Pro forma net income and pro forma net income per Common Share reflect a provision for taxes on the income of Nutrition Headquarters Group, which was an S corporation prior to its merger into NBTY, as if Nutrition Headquarters Group had been subject to corporate income taxes as a C corporation for all periods presented. (7) Same store sales data for the period reflect stores open throughout that period and the corresponding period of the prior fiscal year. (8) On August 7, 1997, the Company acquired Holland & Barrett. Consideration for such acquisition included the issuance of promissory notes of the Company, due in October 1997, aggregating $170 million (the 'Promissory Notes'). On September 23, 1997, the Company issued $150 million of Senior Subordinated Notes, the cash proceeds of which were placed in escrow to secure the payment of the Promissory Notes. In October 1997, the Promissory Notes were paid with such escrowed cash plus borrowings under the Revolving Credit Facility. Total assets and long-term debt at September 30, 1997, exclude the escrowed cash and the Promissory Notes, respectively. 18 SELECTED CONSOLIDATED FINANCIAL DATA(1) (IN THOUSANDS, EXCEPT PER SHARE DATA) The selected consolidated financial data in the table for the five years in the period ended September 30, 1997 are derived from the Company's Consolidated Financial Statements which have been audited by Coopers & Lybrand L.L.P., independent accountants. The Consolidated Financial Statements as of September 30, 1996 and 1997 and for the three years in the period ended September 30, 1997 and the reports thereon are included elsewhere in this Prospectus. The selected consolidated financial data in the table for the six months ended March 31, 1997 and 1998 are derived from the Company's Interim Unaudited Consolidated Financial Statements included elsewhere in this Prospectus and, in the Company's opinion, contains all adjustments consisting only of normal recurring accruals necessary to present fairly its financial position as of March 31, 1998 and the results of its operations for the six month periods ended March 31, 1997 and 1998. The results of these interim periods are not necessarily indicative of the results to be expected for the full year. The following information should be read in conjunction with the Company's Consolidated Financial Statements and related notes and other consolidated financial information included or incorporated by reference herein.
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, ---------------------------------------------------- ------------------- 1993 1994 1995 1996 1997 1997 1998 -------- -------- -------- -------- -------- -------- -------- (UNAUDITED) SELECTED INCOME STATEMENT DATA: Net sales.............................. $138,430 $156,057 $178,760 $194,403 $281,407 $122,347 $244,404 Costs & expenses: Cost of sales........................ 67,951 79,891 93,875 95,638 135,886 58,247 116,227 Catalog printing, postage & promotion......................... 11,507 14,786 19,262 17,635 19,227 9,942 9,444 Selling, general & administrative.... 42,776 49,208 56,728 58,515 86,588 35,409 84,517 Litigation settlement costs(2)....... 6,368 -------- -------- -------- -------- -------- -------- -------- Income from operations................. 16,196 12,172 8,895 22,615 33,338 18,749 34,216 Interest expense, net.................. (1,227) (914) (1,084) (1,445) (6,655) (869) (8,850) Other, net............................. 743 1,285 571 1,203 2,033 327 1,312 -------- -------- -------- -------- -------- -------- -------- Income before income taxes............. 15,712 12,543 8,382 22,373 28,716 18,207 26,678 Income taxes........................... 5,939 4,767 3,246 9,021 11,486 7,283 10,453 -------- -------- -------- -------- -------- -------- -------- Net income............................. $ 9,773 $ 7,776 $ 5,136 $ 13,352 $ 17,230 $ 10,924 $ 16,225 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- PER SHARE DATA: Net income per common share: Basic................................ $ 0.23 $ 0.15 $ 0.10 $ 0.24 $ 0.31 $ 0.20 $ 0.29 Diluted.............................. $ 0.18 $ 0.13 $ 0.09 $ 0.22 $ 0.29 $ 0.18 $ 0.27 Weighted average common shares outstanding (000): Basic................................ 42,501 52,656 53,387 55,425 55,839 55,806 55,890 Diluted.............................. 55,163 60,772 59,923 59,927 60,163 60,147 60,195
AS OF YEAR ENDED SEPTEMBER 30, ---------------------------------------------------- AS OF MARCH 31, 1993 1994 1995 1996 1997 1998 -------- -------- -------- -------- -------- -------------------- SELECTED BALANCE SHEET DATA: Working capital......................... $ 42,869 $ 39,462 $ 40,665 $ 52,268 $ 63,480 $ 69,747 Total assets(3)......................... 102,647 115,112 123,529 145,550 398,476 429,263 Long-term debt, capital lease obligations and promissory note payable, less current portion(3)...... 8,265 7,566 10,924 18,397 166,147 210,664 Total stockholders' equity.............. 70,002 78,017 82,615 96,950 117,060 140,731
- ------------------ (1) In August 1997, the Company acquired Holland & Barrett which was accounted for under the purchase method of accounting and, accordingly, all financial information for Holland & Barrett has been included since its acquisition. See Note 2 of Notes to the Company's Consolidated Financial Statements. (2) In fiscal 1997 the Company agreed to settle a class action lawsuit for approximately $5,600, net of insurance recoveries and also recorded a charge to operations for related legal fees of $768. (3) On August 7, 1997, the Company acquired Holland & Barrett. Consideration for such acquisition included the issuance of Promissory Notes of the Company, due in October 1997, aggregating $170 million. On September 23, 1997, the Company issued $150 million of Senior Subordinated Notes, the cash proceeds of which were placed in escrow to secure the payment of the Promissory Notes. In October 1997, the Promissory Notes were paid with such escrowed cash plus borrowings under the Revolving Credit Facility. Total assets and long-term debt at September 30, 1997, exclude the escrowed cash and the Promissory Notes, respectively. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with 'Summary Supplemental Consolidated Financial Data' and the audited Supplemental Consolidated Financial Statements of the Company and the notes thereto included elsewhere in this Prospectus. The Supplemental Consolidated Financial Statements give retroactive effect (for all periods) to the merger of Nutrition Headquarters Group into the Company which has been accounted for as a pooling of interests. 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 aggressive marketing practices and through a series of strategic acquisitions. Since 1986, the Company has successfully acquired and integrated 12 companies participating in the mail order, retail and manufacturing segments of the VMS 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 purchase 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 the acquisition over the fair value of H&B at the date of the acquisition resulted in goodwill of approximately $134 million which 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. Additional finance-related costs associated with the H&B acquisition of approximately $6 million are being amortized over ten years. Since the acquisition of H&B, NBTY has gradually replaced products manufactured by outside suppliers, with lower priced NBTY manufactured products under the Holland & Barrett brand. As NBTY becomes the primary supplier of nutritional supplements to the H&B stores, it will effectively lower the cost of such products sold by H&B stores, thereby increasing gross profit margins (to the extent such cost savings are not passed on to the consumer) while improving productivity for the NBTY manufacturing facilities. As of March 31, 1998, NBTY manufactured products comprised approximately 40% of H&B's VMS sales (approximately 21% of total H&B sales), with a goal of reaching 75% of such sales (approximately 40% 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 is expected to incur merger related transaction costs of approximately $3.3 million. Nutrition Headquarters Group includes Nutrition Headquarters, Inc., a mail order vitamin and nutritional supplement company in Carbondale, Illinois; Lee Nutrition, 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 from the Company) for the fiscal year ended September 30, 1997, of which approximately $50 million was attributable to mail order. The Company is in the process of integrating 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) repricing certain products; and (v) implementing proven marketing techniques. 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 of $1.5 million over the next three years. In connection with such sale, the Company realized a pre-tax gain of approximately $1.6 million. The cosmetic pencil operation had sales of approximately $1.9 million and operating losses of approximately $800,000 in fiscal 1997. 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.; 20 and (iv) wholesale distribution to drug store chains, supermarkets, discounters, independent pharmacies and health food stores. Management believes that this four channel distribution system enables NBTY to most effectively market its products and lend stability when compared to certain of its competitors. NBTY's net sales from mail order, retail-U.S., retail-U.K. and wholesale operations were approximately 32%, 11%, 33% and 24%, respectively, for the six months ended March 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 went from approximately 44% in fiscal 1995 to approximately 24% for the six months ended March 31, 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 the catalog printing, postage and other costs. The majority of the Company's products are in tablet, soft gel and two-piece capsule forms. The Company currently manufactures 70% of the VMS products it sells. Management believes Company-owned manufacturing typically results in lower product costs than contract manufacturing with outside suppliers. Upon completion of a state-of-the-art soft gel manufacturing facility in 1998, NBTY expects to increase its manufacturing capacity to 90% of the VMS products it sells. 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. While the Company believes it should be able to raise prices in response to significant increases in the cost of its ingredients, the Company may not always be able to offset the effects of increased raw material or other costs. 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 SIX MONTHS 30, ENDED MARCH 31, ----------------------- --------------- 1995 1996 1997 1997 1998 ----- ----- ----- ----- ----- Net sales......................................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost and expenses: Cost of sales................................................... 54.8 52.0 50.0 50.2 49.0 Catalog printing, postage & promotion........................... 11.3 10.0 7.9 8.8 4.9 Selling, general & administrative............................... 26.8 25.8 27.2 25.5 31.5 Litigation...................................................... 0.0 0.0 1.8 0.0 0.0 ----- ----- ----- ----- ----- 92.9 87.8 86.9 84.5 85.4 ----- ----- ----- ----- ----- Income from operations............................................ 7.1 12.2 13.1 15.5 14.6 Interest expense & other, net..................................... (0.6) (0.4) (1.6) (0.9) (2.7) ----- ----- ----- ----- ----- Income before income taxes........................................ 6.5 11.8 11.5 14.6 11.9 Income taxes...................................................... 1.3 3.4 3.3 4.6 3.7 ----- ----- ----- ----- ----- Net income........................................................ 5.2% 8.4% 8.2% 10.0% 8.2% ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
SIX MONTHS ENDED MARCH 31, 1998 COMPARED TO SIX MONTHS ENDED MARCH 31, 1997 Net Sales. Net sales for the six months ended March 31, 1998 were $287 million, an increase of $128 million or 81% compared with net sales of $159 million in the same period in 1997. Of the $128 million increase, $15 million was attributable to mail order, $14 million to retail-U.S. sales, $95 million to retail-U.K. sales and $4 million to wholesale sales. Over this period, the Company's (i) mail order operations grew 20% as a result of a growing number of names in the Company's mailing list and greater consumer recognition of Puritan's Pride's quality and value; (ii) retail-U.S. operations grew 75% as a result of 26% growth in same store sales, and continued new store openings; (iii) retail-U.K. operations were presented for the six months ended March 31, 1998 as a result of the acquisition of H&B in August 1997; and (iv) wholesale operations grew moderately at 4% as a result of the Company's objective to focus its efforts on expanding its direct to consumer business. The 21 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 21%. Cost of Sales. Cost of sales for the six months ended March 31, 1998 was $140 million, an increase of $60 million or 75% compared with cost of sales of $80 million for the same period in 1997. Gross profit for this period in 1998 was $146 million, an increase of $67 million or 85% compared with $79 million in the same period in 1997. As a percentage of net sales, gross profit increased to 51% in the six months ended March 31, 1998 from 50% for the same period in 1997. Such increase was due to various factors, including (i) generally higher margins on products manufactured by NBTY and sold in H&B stores; (ii) lower manufacturing costs resulting from increased productivity at the Company's manufacturing facilities; (iii) higher percentage of sales direct to the consumer; and (iv) increased sales of new products, which typically have higher gross margins. 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 remained stable at $14 million for the six months ended March 31, in 1998 and 1997. Such costs as a percentage of net sales were 5% in the 1998 period and 9% in the 1997 period. 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 the six months ended March 31, 1998 were $90 million, an increase of $50 million compared with $40 million for the same period in 1997. As a percentage of net sales, selling, general and administrative expenses were 32% and 26% in the six months ended March 31, 1998 and 1997, respectively. Of the $50 million increase, $20 million was attributable to rent expense associated with H&B retail locations and additional Vitamin World retail stores, $16 million was attributable to payroll costs for H&B and $14 million was attributable to an increase in depreciation and amortization, including $3 million in goodwill resulting from the acquisition of H&B. Interest Expense, Net. Interest expense, net, was $9 million in the six months ended March 31, 1998, an increase of $8 million compared with interest expense, net, of $1 million in the same period in 1997. Such interest expense, net, primarily resulted from the issuance of $150 million of 8 5/8% Senior Subordinated Notes due 2007 to fund the acquisition of H&B. Income Taxes. The Company's effective tax rate was 30.9% in the six months ended March 31, 1998 and 31.8% in the same period in 1997. 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 the six months ended March 31, 1998 was $24 million, an increase of $8 million or 50% compared with $16 million in the same period in 1997. Assuming Nutrition Headquarters Group was taxed at the Company's effective rate, net income would have been $21 million for the six months ended March 31, 1998, an increase of $7 million or 50% compared with $14 million in the same period in 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. Over 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 22 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 operations 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 costs 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. See Note 15 of Notes to Supplemental Consolidated Financial Statements. Interest Expense, Net. Interest expense, net, was $7 million in fiscal 1997, an increase of $5 million compared with interest expense, net, 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 by 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 costs as a percentage of net sales were 10% in fiscal 1996 compared with 11% in fiscal 1995. This decrease was mainly due to the discontinuation of the Beautiful Visions mail order catalog. Selling, General and Administrative. 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 fiscal 1995. 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. 23 Interest Expense, Net. Interest expense, net, in fiscal 1996 and fiscal 1995 remained stable 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 slightly seasonal. Historically, the Company has slightly lower net sales in its first and third fiscal quarters, slightly higher net sales in its second and fourth fiscal quarters. The Company may have higher net sales in a quarter depending upon when it has engaged in significant promotional activities. LIQUIDITY AND CAPITAL RESOURCES The Company will require liquidity for capital expenditures and working capital needs, including debt service requirements. Total anticipated capital expenditures for the Company are expected to be approximately $55 million for fiscal year 1998, of which $39 million has been spent through March 31, 1998. The Company has recently completed construction of a soft gel manufacturing facility for a total cost of $35 million. For information as to the Company's commitments and contingencies, including future minimal rent payments and other commitments, see Note 12 to Supplemental Consolidated Financial Statements. The Company believes that the cash flow generated from its operations and amounts available under the Revolving Credit Facility, after giving effect to the Offering, 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 future operating performance will be subject to future economic conditions and to financial, business and other factors, many of which are beyond the Company's control. See 'Risk Factors.' The Company's debt instruments impose certain restrictions on the Company's ability to make capital expenditures, limit the Company's ability to incur additional indebtedness, dispose of assets, repay indebtedness or amend other debt instruments, pay distributions, create liens on assets, enter into sale and leaseback transactions, make investments, loans or advances and make 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. See 'Description of Certain Indebtedness.' 24 BUSINESS NBTY is a leading vertically integrated manufacturer, marketer and retailer of a broad line of high quality, value-priced nutritional supplements in the United States and the United Kingdom. The Company offers approximately 900 products under a number of brands, including vitamins, minerals, herbs, amino acids, sports nutrition products, diet aids and other nutritional supplements. NBTY targets the growing value-conscious consumer segment by offering high quality products at a value price point, direct to the consumer. NBTY markets its multi-branded products through a four channel distribution system: (i) the leading U.S. nutritional supplement mail order program under the Company-owned Puritan's Pride and Nutrition Headquarters brands and catalogs; (ii) Company-owned Vitamin World retail stores, of which there are currently approximately 150, located strategically throughout the United States; (iii) Company-owned Holland & Barrett retail stores, of which there are currently 417, located strategically throughout the United Kingdom; and (iv) wholesale distribution to drug store chains, supermarkets, independent pharmacies and health food stores primarily under the Nature's Bounty brand. NBTY currently manufactures approximately 70% of the nutritional supplements it sells and with the completion of a new state-of-the-art manufacturing facility in 1998, the Company expects to manufacture approximately 90%. BACKGROUND Arthur Rudolph, NBTY's former chairman, founded the Company in 1971, as a direct marketer of nutritional supplements under the name Nature's Bounty, Inc. NBTY completed its initial public offering of stock in that same year. NBTY first developed its manufacturing capabilities and began its mail order operation in 1974 and opened its first retail store in 1979. NBTY has continued to grow through its aggressive marketing practices and through a series of strategic acquisitions. Since 1986, the Company has successfully acquired and integrated 12 VMS companies participating in the mail order, retail and manufacturing segments, including Holland & Barrett in August 1997. See 'Prospectus Summary--Recent Acquisition.' The Company changed its name to NBTY, Inc. in 1995. In 1986, as part of its acquisition strategy, the Company acquired U.S. Nutrition Co. Inc., ('U.S. Nutrition') a nutritional supplement mail order company which was founded in 1976 by Scott Rudolph, son of Arthur Rudolph. After the acquisition of U.S. Nutrition, Scott Rudolph joined the Company and later was elected Chairman, Chief Executive Officer and President of NBTY. The Company, under the leadership of Scott Rudolph, has achieved record sales and earnings, developed state-of-the-art production facilities, diversified its operations into four distribution channels and completed a number of strategic acquisitions. For the fiscal year ended September 1997, net sales and income from operations increased 34% and 63%, respectively over the prior year, to $355 million and $53 million (excluding $6.4 million of legal settlement costs in fiscal 1997), respectively. For the six months ended March 1998, net sales and income from operations increased 80% and 70%, respectively over the prior year period, to $287 million and $42 million, respectively. NBTY's net sales from mail order, retail-U.S., retail-U.K. and wholesale operations were approximately 32%, 11%, 33% and 24%, respectively, for the six months ended March 1998. INDUSTRY OVERVIEW The vitamin, mineral and nutritional supplement market in the United States has grown at a compound annual rate of approximately 15%, from $3.7 billion in 1992 to $6.5 billion in 1996, according to 1997 Packaged Facts. Increasing VMS usage has been linked to a number of factors, including: (i) scientific and popular reports on the positive benefits of VMS products; (ii) awareness of healthier lifestyles; (iii) favorable regulatory environment; (iv) new VMS product introductions and (v) wider distribution of VMS products. A primary driver in the continuing increase in demand for nutritional supplement products is the aging of the U.S. population, together with an increased focus by this segment on preventative health measures. According to the Simmons Market Research Bureau, only 54% of this U.S. adult population regularly uses vitamins, minerals or supplements. Further, based on the U.S. Bureau of the Census data, the 45-and-older age group, which accounted for approximately 32% of the U.S. population in 1990, is expected to grow to 40% of the U.S. population by 2010. Vitamins, minerals and nutritional supplements are sold through drug stores, supermarkets and discount stores, health food stores, direct sales organizations and mail order. According to the Packaged Facts, drug stores, 25 supermarkets and discount stores, on a combined basis, accounted for approximately 46%, health food stores for approximately 38% and direct and mail order sales for approximately 16% of total industry sales in 1996. Drug stores, supermarkets and discount stores traditionally offer more mainstream products, such as multivitamins, individual vitamins (such as Vitamins A, C and E), and minerals (such as calcium, potassium and magnesium). This market has traditionally grown in line with industry sector growth. Health food stores, as well as direct sales and mail order retailers traditionally offer greater product breadth, including more sophisticated supplement products. The health food market is highly fragmented with approximately 11,000 health food and vitamin chain stores in the U.S., of which approximately 70% are independently owned and operated and approximately 30% are associated with one of several regional or national chains. This market has continued to grow as industry participants continue to add stores in new and existing markets. DISTRIBUTION CHANNELS The following table sets forth the percentage of net sales for each of the Company's distribution channels:
SIX MONTHS FISCAL YEARS ENDED ENDED SEPTEMBER 30, MARCH 31, -------------------- ------------ 1995 1996 1997 1997 1998 ---- ---- ---- ---- ---- Mail order........................................................ 51 % 51 % 46 % 49 % 32 % Retail--U.S....................................................... 5 8 11 11 11 Retail--U.K.(1)................................................... -- -- 7 -- 33 Wholesale......................................................... 44 41 36 40 24 ---- ---- ---- ---- ---- 100 % 100 % 100 % 100 % 100 % ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
- ------------------ (1) Holland & Barrett was acquired in August 1997. The Company's position as a leading vertically integrated manufacturer, marketer and retailer of a broad line of high quality, value-priced nutritional supplements enables it to successfully operate a four channel distribution system: Mail Order. Through its Puritan's Pride and Nutrition Headquarters brands, NBTY is the leader in the U.S. mail order nutritional supplement industry with over 4.0 million active customers and with response rates which management believes to be in excess of the mail order industry average. Through its catalogs, the Company offers a full line of vitamins and other nutritional supplements at prices which are normally at a discount to retail stores. The Company mails its catalogs approximately eight times a year. NBTY intends to continue to add new customers to its mail order operation through aggressive marketing techniques and selective acquisitions. In addition, in 1996 the Company expanded its mail order operations into the United Kingdom. In order to maximize sales per catalog and reduce mailing and printing costs, the Company regularly updates its mail order list to include new customers and to eliminate those who have not placed an order within a designated period of time. In addition, in order to add new customers to its mailing lists and increase average order sizes, the Company places advertisements in Sunday newspaper supplements, conducts insert programs with other mail order companies and has special promotions on a quarterly basis which offer customers combinations of products and quantities at promotional prices. NBTY's use of state-of-the-art equipment in its catalog operations, such as computerized co-mailing, address bar coding and automated picking and packing systems, enables the Company to fill mail orders typically within 48 hours of their receipt. The Company's position as a leading mail order nutritional supplement distributor and its utilization of state-of-the-art systems allows the Company to lower its per customer distribution costs, thereby enhancing margins and enabling the Company to offer its products at lower prices than its competitors. Retail Stores, U.S. The Company currently operates approximately 150 stores in 40 states under the Vitamin World name, primarily in factory outlet malls, and more recently in regional malls. Such stores carry a full line of value-priced products under the Vitamin World brand as well as a limited selection of other brands. The stores generally average 1,200 square feet and offer 1,200 SKUs of vitamins, minerals and nutritional supplements. During calendar 1998, the Company plans to open a total of 120 Vitamin World stores, of which 26 approximately 20 stores have recently been opened and leases have been signed for an additional 26 stores. Vitamin World stores typically turn profitable within the first nine months of operation. Through direct interaction with the retail customer, the Company is better able to identify customer preferences, retail buying trends and pricing than by analyzing sales reports from wholesalers and independent retailers. As a result, the Company is better able to merchandise its products and more quickly respond to changing customer trends. Retail Stores, U.K. In August 1997, the Company acquired Holland & Barrett, the largest chain of nutritional supplement and health food stores in the United Kingdom. Holland & Barrett, which has been in business since 1920, is a well known and respected retailer and brand, currently operating 417 stores in prime shopping areas in over 300 cities in the U.K. The stores generally have an average selling area of 1,200 square feet and offer a total of 2,800 SKUs, approximately 56% within the VMS categories and 44% within the health food category. Since the acquisition, NBTY has gradually replaced VMS products manufactured by outside suppliers with lower priced NBTY manufactured products under the Holland & Barrett brand. As of March 31, 1998, NBTY manufactured products comprised approximately 40% of H&B's VMS sales (approximately 21% of total H&B sales) with the goal of reaching 75% of such sales (approximately 40%of total H&B sales) by the end of calendar 1998. Wholesale. The Company markets its products under multiple brands to drug stores, supermarkets and discounters as well as independent pharmacies, health food stores and wholesalers. The Company markets products under Nature's Bounty, the Company's signature brand, to chain stores such as Albertsons, CVS, Eckerd Drugs, Genovese, Osco and Target. The Company also sells a full line of products under the Natural Wealth brand to supermarkets and wholesalers, such as Bergen Brunswig Co., Cardinal Health Co. and McKesson Drug Co., a line of products under the Good 'N Natural brand directly to independent health food stores and a specialty line of vitamins under the American Health brand to health food wholesalers. BUSINESS STRATEGY The Company's objective is to increase sales, improve profitability and strengthen its industry leading position through the following key strategies: Enhance Vertical Integration. Management believes that vertical integration creates a significant competitive advantage by allowing the Company to: (i) maintain higher quality standards while lowering product costs, a portion of which are passed on to the customer as lower prices; (ii) more quickly respond to scientific and popular reports and consumer buying trends; (iii) assure delivery schedules; (iv) reduce dependence on outside suppliers; and (v) improve overall operating margins. The Company continually evaluates ways to further enhance its vertical integration. For example, as NBTY becomes the primary supplier of nutritional supplements to the H&B stores by replacing outside suppliers, it will effectively lower the costs of such products sold by H&B stores. Management believes this should increase overall profit margins while improving productivity for NBTY's manufacturing facilities. Introduce New Products and Product Innovations. The Company has consistently been among the first in the industry to introduce new products in response to recent scientific and popular reports. Given the changing nature of consumer demands for new products and the growing publicity over the importance of vitamins, minerals and nutritional supplements in the promotion of general health, management believes that NBTY will continue to attract new customers based upon its ability to rapidly respond to consumer demands with high quality, value-oriented products. During fiscal 1997, NBTY introduced more than 100 new products. In addition to expanding the Company's product lines, many of these new specialty products, such as St. John's Wort and glucosamine sulfate, typically provide higher margins. Expand Existing Channels of Distribution. In order to increase sales and profitability, enhance overall market share, and leverage manufacturing, distribution, purchasing and marketing capabilities, the Company will continue to expand its existing channels of distribution. o Increase mail order sales. NBTY expects to continue to strengthen its mail order sales through a number of initiatives, including: (i) automated picking and packing to fulfill mail order requests with greater speed and accuracy; (ii) increased manufacturing capability to quickly introduce and deliver new products in response to customer demand; and (iii) more frequent promotions to further 27 improve response rates. In addition, the Company intends to continue its strategy of acquiring the customer lists, brand names and inventory of other mail order companies which have similar or complementary products and which the Company believes it can integrate into its own operations without adding substantial overhead expenses, such as the recent merger of Nutrition Headquarters Group into the Company. o Increase retail sales in the U.S. and U.K. In order to increase retail sales, NBTY is actively expanding its base of Vitamin World stores in the U.S. and selectively expanding its Holland & Barrett stores in the U.K. During calendar 1998, the Company plans to open a total of 120 Vitamin World stores to increase its penetration into factory outlet and regional malls. The Company has recently opened approximately 20 stores and signed leases for an additional 26 stores. Integrate Strategic Acquisitions. Since 1986, NBTY has successfully acquired and integrated 12 VMS companies, including Holland & Barrett in August 1997. Most recently NBTY merged Nutrition Headquarters Group into the Company. NBTY is currently in the process of integrating 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) repricing certain products; and (v) implementing proven marketing techniques. NBTY will continue to manufacture select products in Nutrition Headquarters Group's manufacturing faculties. The Company intends to continue to pursue acquisition opportunities in the VMS sector, both in the U.S. and internationally, that complement or extend its existing product lines, expand its distribution channels or are compatible with its business philosophy and strategic goals. Build Infrastructure to Support Growth. NBTY has technologically advanced, state-of-the-art manufacturing and production facilities, with total production capacity of approximately five billion tablets and capsules per year. The Company recently completed construction of a 131,000 square foot state-of-the-art soft gelatin encapsulation manufacturing facility on 62 acres, capable of producing five billion soft gel capsules per year, to enhance its vertical integration, reduce its dependence on outside suppliers and further improve profit margins. NBTY expects to increase its manufacturing capacity to 90% from 70% of the VMS products it sells. The Company regularly evaluates its operations and makes investments in building infrastructure, as necessary to support its continuing growth. Experienced Management Team with Significant Equity Stake. The Company's management team has extensive experience in the VMS industry and has developed long-standing relationships with its suppliers and its customers. The executive officers and directors have an average of approximately 17 years with the Company. After giving effect to the Offerings, executive officers and directors will own approximately 18.1% of the Company's common stock and employees in the aggregate will own approximately 4.5% through the Company's profit sharing plan. PRODUCTS The Company manufactures and markets approximately 900 products including vitamins, minerals, herbs, amino acids, sports nutrition products, diet aids and other nutritional supplements such as minerals, amino acids and herbs. The Company's products are available in single vitamins and multi-vitamin combinations, and in varying potency levels, sizes, formulations and delivery forms, including tablets, soft gel and hard shell capsules, chewables, powders and liquids. The Company also offers a selection of personal care products by direct mail and in its retail stores including creams, shampoos and lotions. The Company offers its products under its brands through each of its four distribution channels. Mail Order. The Company offers a full line of vitamins and nutritional supplements through its mail order channel in the U.S. under the Puritan's Pride and Nutrition Headquarters brands. The Company began manufacturing and selling VMS products under its Puritan's Pride brand in 1974, originally focusing on single vitamin and multi-vitamin combinations. Puritan's Pride has become the leading domestic mail order brand and has developed a reputation for quality, consistency, innovation and value to the consumer. Through its mail order channel in the U.K. the Company offers similar products under the Vitamin World brand. In April 1998, Nutrition Headquarters Group was merged into the Company. Nutrition Headquarters Group's mail order brands were introduced in 1975 and have reputations for high quality products. 28 Retail Stores, U.S. NBTY's Company-owned retail stores in the U.S. offer a full line of VMS products under the Vitamin World brand. The Company began selling vitamins, minerals and nutritional supplements under its Vitamin World brand in 1979. In addition, the Company offers a selection of personal care products including creams, lotions and shampoos under the Vitamin World brand. Vitamin World has become a well known retail brand for vitamins and nutritional supplements and has developed a reputation for a broad selection of high quality products at discount prices. Retail Stores, U.K. NBTY's Company-owned retail stores in the U.K. offer a full line of VMS products under the Holland & Barrett brand. Holland & Barrett, which has been in business since 1920, is a well known and respected retailer and brand. NBTY acquired Holland & Barrett in August 1997. Since the acquisition, NBTY has gradually replaced VMS products manufactured by outside suppliers with lower priced NBTY manufactured products under the Holland & Barrett brand. Such products constitute approximately 56% of aggregate sales. The remaining 44% of sales are made up of health food products including dried fruit and nuts. As of March 31, 1998, NBTY manufactured products comprised approximately 40% of H&B's VMS sales (approximately 21% of total H&B sales) with the goal of reaching 75% of such sales (approximately 40% of total H&B sales) by the end of calendar 1998. Since its introduction of NBTY manufactured product under the Holland & Barrett brand the Company has continued to post increasing sales of VMS products in its Holland & Barrett stores. Wholesale. The Company markets a selection of VMS products under Nature's Bounty, the Company's signature brand, to drug stores, supermarkets and discounters such as Albertsons, CVS, Eckerd Drugs, Genovese, Osco and Target. The Company began selling select VMS products under its Nature's Bounty brand in 1971 and over time, has expanded its product offerings to include a full line of VMS products. Nature's Bounty has become a leading brand and has developed a reputation for quality, consistency, innovation and value to the consumer. The Company also sells select products under the Natural Wealth brand to supermarkets and wholesalers, such as Bergen Brunswig Co., Cardinal Health Co. and McKesson Drug Co. The Company also sells products under the Good 'N Natural and American Health brands to independent health food stores and health food wholesalers. Product Development. The Company introduces new and innovative products on a consistent and timely basis. New product ideas are generated in response to consumer trends and scientific and popular reports. The Company works with both its retail and wholesale customers as well as its vendors to more quickly respond to such changes in consumer buying trends. New products are developed by members of the Company's sales and marketing and purchasing departments working in conjunction with senior management. After a product has been approved for manufacture, the Company produces a sample and conducts quality control studies to ensure that the product meets the Company's standards of quality assurance. Based upon the outcome of these tests, the product becomes available for production. During fiscal 1997, the Company introduced more than 100 new products. MANUFACTURING AND QUALITY CONTROL By manufacturing the majority of its own products, the Company believes it maintains better control over product quality and availability while also reducing production costs. The Company's manufacturing process consists of a number of steps, as follows: (i) purchase high quality bulk raw materials; (ii) mix, blend and granulate the measured ingredients into a mixture with a homogenous consistency; (iii) encapsulate or tablet the blended mixture according to the appropriate dosage; and (iv) coat the completed tablet. When a product is ready for bottling, the automated equipment counts the tablets, inserts them into recyclable plastic bottles, adds a tamper-evident hinged cap with an inner safety seal and affixes a label. Management believes NBTY's products appeal to the needs of today's environmentally and safety conscious consumer. In addition, NBTY assures customer satisfaction by employing rigorous quality assurance programs in its state-of-the-art production facilities. During the past five years NBTY has invested approximately $100 million in building state-of-the-art production facilities. NBTY currently manufactures approximately 70% of the nutritional supplements it sells and with the completion of a new state-of-the-art manufacturing facility in 1998, the Company expects to manufacture approximately 90%. As a result of its ongoing manufacturing expansion, NBTY operates 29 technologically advanced manufacturing and production facilities, located on Long Island, New York, consisting of approximately 830,000 square feet in eight modern buildings, of which approximately 290,000 square feet is devoted to manufacturing, approximately 340,000 square feet to warehousing and distribution, and the remaining approximately 200,000 square feet to office space, production, quality assurance and a testing laboratory. NBTY has manufacturing capacity of 1.2 billion tablets, 400 million capsules and 14 million bottles per month. Upon completion of its new soft gel manufacturing plant, the Company will be able to manufacture an additional 420 million capsules per month. The Company's current capacity levels can be expanded by 50%, as necessary, at a small incremental cost. The Company regularly evaluates its operations and makes strategic investments in building manufacturing and distribution capacity, as necessary, to support its continuing growth. NBTY believes that the capacity of its manufacturing and distribution facilities is adequate to meet the requirements of its current business. Soft Gelatin Manufacturing Facility. The Company has completed construction of a $35 million, state-of-the-art, 131,000 square foot soft gelatin encapsulation manufacturing facility on 62 acres owned by the Company. The soft gelatin process is the only widely accepted process which facilitates the encapsulation of oils, other liquids and solids in a suspended state, in an oral dose form. With the Company's current mix of products, the facility is capable of producing approximately five billion soft gel capsules per year. This proprietary equipment is designed to allow flexibility in producing different shape and size capsules. The plant can be expanded to double the current capacity, at a small incremental cost, if demand requires. Raw Materials. 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. NBTY purchases its raw materials from multiple sources including some of the largest pharmaceutical and chemical companies in the world. Although the Company's raw materials and packaging supplies are readily available from multiple suppliers, one supplier currently provides approximately 10% of NBTY's purchases. NBTY believes that the loss of its largest supplier could have a temporary adverse effect upon its operations but that, over time, NBTY would be able to replace such source of supply. No other supplier accounts for 10% or more of NBTY's raw material purchases. Quality Control. NBTY's manufacturing process places significant emphasis on quality control. All raw materials used in production are initially held in quarantine during which time NBTY's laboratory employees assay the product 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. Such manufacturing operations are conducted in accordance with the good manufacturing practices of the FDA and other applicable regulatory standards. After the tablet is manufactured, laboratory employees test its weight, purity, potency, dissolution and stability. SALES AND CUSTOMER SERVICE The Company's established customer relationships at the mail order, retail and wholesale levels are based upon the Company's long-standing commitment to a high level of customer service. NBTY has approximately 400 employees in its mail order operations, 700 sales employees located throughout the U.S. in its Vitamin World stores, 2,000 sales employees located throughout the U.K. in its Holland & Barrett stores, and 60 commissioned sales associates and brokers who sell to wholesale distributors. Mail Order. The Company maintains a highly efficient, state-of-the-art call center at the Company's headquarters in Long Island, New York. The Company offers prompt order entry services through the use of toll-free telephone numbers, which may be called six days a week to place orders, request a catalog or make product inquiries. The Company has 100 customer service stations installed in its call center. Once a call is received by the Company, it is automatically routed to the next available customer service representative. The Company closely tracks forecasted demand and hires and trains new customer service representatives to maintain its service standards. The Company's call center can efficiently handle up to 10,000 calls per day. The Company uses an integrated management information system that allows telephone orders to be captured on-line and mail orders to be efficiently entered. As the Company's sales representative processes the order, the Company's on-line data processing system provides, among other things, customer history information, product availability information, expected shipping date and order number. Customers can pay with major credit 30 cards, checks or money orders. All credit charges are pre-authorized prior to shipping the order and credit authorization occurs concurrently with order processing. Retail Stores, U.S. The Company's store management structure at its Vitamin World stores consists of one regional manager for approximately every 11 district managers, one district manager for approximately every 11 stores, and at the store level, on average, one store manager, one assistant store manager and two sales personnel. Store managers are expected to customize stores to the demographics of particular markets and to have responsibility for merchandise assortment, promotion and certain advertising and product pricing. Store managers are also responsible for the operations of individual stores including recruiting and hiring store personnel. The Company offers continuing sales and product training for its store personnel. Store personnel are compensated on a salary plus commission basis. Retail Stores, U.K. The Company's store management structure, training program and compensation program at its Holland & Barrett stores is very similar to that of its Vitamin World stores. Store management at Holland & Barrett consists of one regional manager for approximately every 20 district managers, one district manager for approximately every 20 stores, and at the store level, on average, one store manager, one assistant store manager and two sales personnel. Wholesale. The Company's sales force currently consists of 60 dedicated professionals responsible for accounts located throughout the United States, who are paid on a salary plus commission basis. These personnel work with direct accounts, distributors and individual retailers to enhance knowledge of the Company's products and brands. Customer Service. The Company operates an in-house customer service and information department to respond to inquiries requesting information concerning product applications, background data, ingredient compositions and the efficacy of products. The Company maintains a toll-free customer service phone line to answer product questions. MARKETING The Company's marketing strategies are supported by extensive advertising and promotional programs ranging from national television advertising to in-store sales promotions. At the heart of every effort is the Company's mission statement which remains 'to deliver the highest quality nutritional supplements with the best value to the customer.' These advertising and promotional programs are also designed to achieve the specific objectives of each brand that the Company markets. The advertising objective of the Company's mail order brands in the U.S. and the U.K. is to increase the mailing list by attracting new customers through special offers on television, radio and in magazines, newspapers and through in-home mailings. National advertising in Sunday newspaper supplements, for example, introduce vitamin users to a smart way to save on their purchases by buying direct from the manufacturer. Television advertising on national cable networks invite viewers to call a toll free number to obtain a free copy of the Puritan's Pride vitamin catalog. Another objective for the mail order division is to increase the average order size through merchandising within the catalog itself. The Company has also introduced a Puritan's Pride web site (www.puritanspride.com) to provide yet another source of lead generation and sales. The Company-owned retail outlets in the U.S. and U.K. are supported primarily through consumer print advertising, radio advertising and in-store promotions. The objective for these retail advertising campaigns is to build store traffic and sales. In the U.S., regional advertising in local newspapers and on the radio position Vitamin World as the low price leader on a variety of top quality nutritional supplements. An extensive print campaign in the U.K. is designed to re-position the Company's chain of Holland & Barrett stores as the source for 'everyday low prices' for a broad range of quality supplements. In-store point-of-purchase merchandising materials in the U.S. and the U.K. promote specific products and product groups at special 'direct from the manufacturer prices.' These materials also help to educate the consumer as to the benefits of the Company's products. Within the wholesale brands of Nature's Bounty, Natural Wealth, Good 'N Natural and American Health the objectives are to increase brand awareness among the trade and consumers and to introduce and promote the use of new products within the brand. With the rise in demand for high quality nutritional supplements, the Company 31 uses print and broadcast advertising to position its wholesale brands as the leaders in the category. Trade advertising in industry magazines support the 'sell-in' of the Company's products to the drug stores, supermarkets, discounters and health food stores. Print advertising in consumer magazines and newspapers support the 'sell-through' of the new products to the consumer. The advertising materials for each brand including point-of-purchase materials, catalogs, nutrition information brochures, in-store signs, product displays and price lists are all produced by the Company's wholly owned in-house advertising agency. With the help of the latest computer design equipment, the 25 graphic art professionals which make up this in-house agency, also design the packaging for the Company's over 900 products. NBTY's in-house graphics capability allows the Company to react quickly to the changing demands of the marketplace with promotional pieces and new products designed to increase sales and profits. WAREHOUSING AND DISTRIBUTION The Company dedicates approximately 440,000 square feet to warehousing and distribution in its Long Island, NY; Carbondale, IL; Reno, NV; and Southampton and Hinckley, U.K. facilities. The Company's warehouse and distribution centers are efficiently integrated with the Company's order entry systems to enable the Company to ship out mail orders typically within 48 hours of their receipt. Once a customer's telephone order is completed, the Company's computer system forwards the order to the Company's distribution center, where all necessary distribution and shipping documents are printed to facilitate processing. Thereafter, the orders are prepared, picked, packed and shipped continually through the day. The Company operates a proprietary, state-of-the-art, automated picking and packing system for frequently shipped items. The Company is capable of fulfilling 25,000 orders daily. A system of conveyors automatically routes boxes carrying merchandise throughout the distribution center for fulfillment of orders. Completed orders are bar-coded and scanned and the merchandise and ship date are verified and entered automatically into the customer order file for access by sales associates prior to being shipped. The Company ships its orders primarily through the U.S. Postal Service, serving domestic and international markets. The Company currently distributes its products from its distribution centers through contract and common carriers in the U.S. and by Company-owned trucks in the U.K. Deliveries are made directly to Company-owned Vitamin World stores once per week. In addition, the Company ships products overseas by container loads. The Company also operates additional distribution centers in Southampton and Hinckley, U.K. Deliveries are made directly to Company-owned Holland & Barrett stores twice per week. The Company is currently in the process of expanding its distribution capacity in the U.K. The Company delivers products to distribution points in the U.S. through contract and common carriers as directed by its retail customers. 32 PROPERTIES The following is a listing of all properties owned or leased by the Company:
APPROXIMATE LEASED OR EXPIRATION OF LOCATION TYPE OF FACILITY SQUARE FEET OWNED LEASE - ------------------------------------ --------------------------- ----------- --------- --------------- UNITED STATES Bohemia, New York................... Administration & production 169,000 owned Bohemia, New York................... Manufacturing 80,000 owned Bohemia, New York................... Manufacturing 75,000 owned Holbrook, New York.................. Warehouse & distribution 230,000 owned Holbrook, New York.................. Engineering 17,000 leased December 1998 Ronkonkoma, New York................ Warehouse & distribution 110,000 owned Bayport, New York................... Production 17,500 owned Bayport, New York*.................. Manufacturing 131,000 owned Reno, Nevada........................ Warehouse 25,000 leased June 2001 Carbondale, Illinois................ Administration & production 80,000 owned Carbondale, Illinois................ Warehousing 15,000 owned South Plainfield, New Jersey........ Manufacturing 66,000 owned Murphysboro, Illinois............... Manufacturing 65,000 owned Cambridge, Massachusetts............ Administration 900 leased August 2020 UNITED KINGDOM Southampton......................... Warehouse 9,000 leased September 2011 Hinckley............................ Warehouse & administration 50,000 leased October 2016 Nuneaton............................ Administration 9,000 leased June 2012
NBTY currently operates approximately 150 retail stores under the Vitamin World name. The stores have an average selling area of 1,200 square feet. Generally, NBTY leases the stores 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. Holland & Barrett leases all of the locations of its 417 retail stores for terms varying between 10 and 25 years at varying rents. The stores have an average selling area of 1,200 square feet. No percentage rents are payable. * Situated on 62 acres owned by the Company which allows for construction of additional facilities, if required. COMPETITION United States. The market for vitamins and other nutritional supplements is highly competitive in all of NBTY's channels of distribution. With respect to mail order sales, management believes that Puritan's Pride is the largest mail order supplier of vitamins and other nutritional supplements and competes with a large number of smaller, usually less geographically diverse, mail order companies, some of which manufacture their own products and some of which sell products manufactured by other companies. In its retail Vitamin World stores, the Company competes regionally with specialty vitamin stores such as GNC and local drug stores, health food stores, supermarkets, department stores and mass merchandisers. NBTY's Nature's Bounty and Natural Wealth brands compete with numerous vitamin marketers and manufacturers for sales to drug store chains and supermarkets with heavily advertised national brands manufactured by large pharmaceutical companies, as well as Your Life, Nature Made and Sundown, marketed by Leiner Health Products, Inc., Pharmavite Corp. and Rexall Sundown, Inc., respectively. It is not possible to accurately estimate the number of competitors since the nutritional supplement industry is highly fragmented. Management believes that NBTY competes favorably with other mail order sellers of similar products on the basis of price and customer service, including speed of delivery and new product offerings. Management believes that NBTY competes favorably with the large pharmaceutical companies and other companies that sell to wholesalers, on the basis of price, breadth of product line, reputation and customer service, including innovative packaging and displays and other services. Management believes that NBTY 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, 33 consequently, the ability to achieve the manufacturing and operating efficiencies resulting from larger production runs of products that can be packaged for sale in one or more such channels. United Kingdom. As in the U.S., the market for sales of vitamins, minerals and other nutritional supplements is highly competitive. H&B's principal competitors are large pharmacy chains, including Boots, Lloyds and Superdrug and major supermarket chains such as ASDA, Sainsbury and Tesco. There are also approximately 1,300 independent retailers of health foods and nutritional supplements in the U.K. market. In addition, GNC has recently entered the U.K. market where it currently operates approximately 30 stores. As a result of the acquisition, H&B tends to compete more effectively through improved store formats, greater product offerings and value pricing. MANAGEMENT INFORMATION SYSTEMS Inventory Control. The Company has installed inventory and control systems at its facilities that enable it to track each product as it is received from its supply sources, through manufacturing and shipment to its customers. To facilitate this tracking, a significant number of products sold by the Company are bar coded. The Company's inventory control systems report shipping, sales and individual SKU level inventory information. The Company manages the retail sales process by monitoring customer sales and inventory levels by product category. The Company believes that its distribution capabilities enable it to increase flexibility in responding to the delivery requirements of its customers. The Company's inventory control systems report purchasing, receiving, shipping, sales and individual SKU level inventory stocking information. Information from the Company's point-of-sale computer system is regularly reviewed and analyzed by the purchasing staff to assist in making merchandise allocation and markdown decisions. The Company uses an automatic reorder system to maintain in-stock positions on key items. This system provides management with the information needed to determine the proper timing and quantity of reorders. Year 2000. At the present time, the Company believes that its systems are substantially Year 2000 compliant and does not expect Year 2000 issues to materially affect its products, services, competitive position or financial performance. However, there can be no assurance that this will be the case. Since the ability of third parties with whom the Company transacts business to adequately address their Year 2000 issues is outside the Company's control, there can be no assurance that the failure of such third parties to adequately address their respective Year 2000 issues will not have a material adverse effect on the Company's business, financial condition, cash flows and results of operations. Financial Reporting. The Company's financial reporting systems provide management with detailed financial reporting to support management's operating decisions and cost control efforts. This system provides functions such as scheduling of payments, receiving of payments, general ledger interface, vendor tracking and flexible reporting options. 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 FDA. The Company's products are also subject to regulation by the 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 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 DSHEA and the Nutrition Labeling and Education Act of 1990 ('NLEA'). DSHEA, enacted on October 15, 1994, introduced a new statutory framework governing the composition and labeling of dietary supplements. With respect to composition, DSHEA creates a new class of 'dietary supplements,' dietary ingredients 34 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 safely 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. In addition, the FDA recently has commenced a case against a vitamin and herbal products manufacturer in which the FDA is challenging the categorization of a certain product as a dietary supplement rather than as a drug. Drugs, but not dietary supplements, are subject to full FDA regulation. No assurance can be given that the FDA will not take a similar position with respect to any of the Company's products. 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 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 indicate 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 makes is not adequately substantiated as required by DSHEA, or is a drug claim rather than a nutritional support statement requiring the Company's submission, and the FDA's approval, of a new drug application ('NDA'). Either determination could entail costly and time-consuming clinical studies and in either situation, the Company may have to delete or modify the statement or claim involved. 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 so distributed if, among other things, it is not false or misleading, no particular manufacturer or brand of dietary supplement is mentioned, and a balanced view of available scientific information on the subject matter is presented. There can be no assurance, however, that all pieces of third party literature that may be disseminated in connection with the Company's products will be determined by the FDA to satisfy each of these requirements, and any such failure could subject the product involved to regulation as a new drug. Management anticipates that the FDA may promulgate GMP regulations authorized by DSHEA, which are specific to dietary supplements. GMP regulations would require supplements to be prepared, packaged and held in compliance with such rules, and may require similar quality control provisions contained in the GMP regulations for drugs. 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 expense to do so. The FDA has finalized regulations to implement certain labeling provisions of DSHEA. In addition, further DSHEA labeling regulations are expected to be proposed by the FDA once the agency receives the final report of the expert Commission on Dietary Supplement Labels, established by DSHEA to provide recommendations on labeling claims for supplements. The Commission on Dietary Supplements issued its draft report in June 1997. It is uncertain when the final report will be issued or when the FDA will propose further regulations. NBTY cannot determine what effect such regulations, when promulgated, will have on its business in the future. There can be no assurance that such regulations will not require expanded or different labeling for NBTY's vitamins and nutritional products or, among other things, require the recall, reformation or discontinuance of certain products, additional record keeping, warnings, notification procedures and expanded documentation of the properties of certain products and scientific substantiation regarding ingredients, product claims, safety or efficacy. NLEA prohibits the use of any health claim (as distinguished from 'statements of nutritional support' permitted by DSHEA) for foods, including dietary supplements, unless the health claim is supported by 35 significant scientific agreement and is pre-approved by the FDA. To date, the FDA has approved the use of health claims for dietary supplements only in connection with the use of calcium for osteoporosis and the use of folic acid for neural tube defects. The FDA has broad authority to enforce the provisions of the FDCA applicable to dietary supplements, including the power to seize adulterated or misbranded products or unapproved new drugs, to request their recall from the market, to enjoin their further manufacture or sale, to publicize information about a hazardous product, to issue warning letters and to institute criminal proceedings. Although the regulation of dietary supplements is less restrictive than that imposed upon drugs and food additives, there can be no assurance that dietary supplements will continue to be subject to the less restrictive statutory scheme and regulations currently in effect. Further, there can be no assurance that, if more stringent statutes are enacted or regulations are promulgated, the Company will be able to comply with such statutes and regulations without incurring material expense to do so. 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 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 manufactures 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 action against several dietary supplement companies for false and misleading advertising of certain products. These enforcement actions have resulted in consent decrees and the payment of fines by the companies involved. In addition, the FTC has increased its scrutiny of infomercials. The Company is currently subject to an FTC consent decree for past advertising claims for certain of its products, and the Company is required to maintain compliance with this decree under pain of civil monetary penalties. Further, the U.S. Postal Service has issued cease and desist orders against certain mail order advertising claims made by dietary supplement manufacturers, including NBTY, and NBTY is required to maintain compliance with this order, also under pain of civil monetary penalties. The Company is also subject to regulation under various international, state and local laws that include provisions regulating, among other things, the marketing of dietary supplements and the operations of direct sales programs. The Company may be subject to additional laws or regulations administered by the FDA or other federal, state, or foreign regulatory authorities, the repeal of laws or regulations that it 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 record keeping requirements, expanded documentation of the properties of certain products, expanded or different labeling, and/or scientific substantiation. Any or all such requirements could have a material adverse effect on the Company's results of operations and financial condition. See 'Risk Factors--Government Regulation.' 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 MAFF 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 reports to MAFF and suggests appropriate courses of action by the relevant government department where there are areas of concern relating to food, and the Committee on Toxicity, which reports to the Department of Health. The relevant legislation governing the sale of food includes the Food Safety Act 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 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. 36 Food that has medicinal properties may fall under the jurisdiction of the MCA, a regulatory authority whose responsibility is to ensure that all medicines sold or supplied for human use in the U.K. meet acceptable standards of safety, quality and efficacy. These standards are determined by the 1968 Medicines Act together with an increasing number of E.C. regulations and directives laid down by the European Union. The latter take precedence over national law. The MCA has a 'borderline department' which determines when food should be treated as a medicine and should therefore fall under the relevant legislation relating to medicines. The MCA operates as the agent of the licensing authority (the United Kingdom Health Ministers) and its activities cover every facet of medicines controlled in the U.K. including involvement in the development of common standards or medicines 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. On April 2, 1998, the U.K. Government introduced proposals to limit the free sale of Vitamin B6 products with a daily dose under 10 mg. A Parliamentary Select Committee will be carrying out an inquiry and submitting its report. This will involve a consultation period of up to three months, during which time the proposals will also be considered by the European commission. The U.K. Government will then review the position before any legislation is introduced. TRADEMARKS NBTY owns more than 300 trademarks registered or pending with the United States Patent and Trademark Office and many foreign jurisdictions for its Nature's Bounty, Puritan's Pride, Vitamin World, Holland & Barrett, Good 'N Natural, Hudson, American Health and Natural Wealth brands and has rights to use other names essential to its business. U.S. registered trademarks have a perpetual life, as long as they are renewed on a timely basis and used properly as trademarks, subject to the rights of third parties to seek cancellation of the marks. NBTY regards its trademarks and other proprietary rights as valuable assets and believes they have significant value in the marketing of its products. NBTY vigorously protects its trademarks against infringement. EMPLOYEES As of March 31, 1998, NBTY employed approximately 4,200 persons worldwide, with approximately 2,000 in the U.S. and 2,200 in the U.K. None of NBTY's employees are represented by a labor union. NBTY believes that its relationship with its employees is excellent. For information regarding employment agreements with certain executive officers and other key employees, see 'Management--Employment Agreements.' LITIGATION From time to time, the Company is engaged in various legal actions and proceedings in the ordinary course of its business. These matters relate, among other things, to product liability. The Company does not believe that it is currently a party to any litigation that will have a material adverse effect on its business, results of operations or financial condition. See 'Risk Factors--Legal Matters.' 37 MANAGEMENT Set forth below are the names and other relevant information regarding executive officers and directors of the Company.
YEARS WITH THE NAME AGE POSITION COMPANY - ----------------------------------------------- --- ----------------------------------------------- --------- Scott Rudolph.................................. 40 Chairman of the Board, Chief Executive Officer 12 and President Harvey Kamil................................... 54 Executive Vice President, Chief Financial 16 Officer and Secretary Barry Drucker.................................. 49 Senior Vice President--Sales 22 James P. Flaherty.............................. 41 Vice President, Marketing & Advertising 19 James A. Taylor................................ 57 Vice President--Production 17 Arthur Rudolph................................. 70 Director 27 Aram Garabedian................................ 62 Director 27 Bernard G. Owen................................ 69 Director 27 Alfred Sacks................................... 70 Director 27 Murray Daly.................................... 71 Director 27 Glenn Cohen.................................... 38 Director 10 Bud Solk....................................... 64 Director 4 Nathan Rosenblatt.............................. 41 Director 4 Michael L. Ashner.............................. 45 Director 1
The Directors of the Company are divided into three classes and 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 stockholders' meeting or until removal by the Board, with or without cause. Scott Rudolph is the Chairman of the Board of Directors, Chief Executive Officer and President. Mr. Rudolph founded U.S. Nutrition, a mail order vitamin company in 1976, which was purchased by the Company in 1986. He is the Chairman of Dowling College, Long Island, New York. He joined the Company 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 the Company in 1982. He is a Certified Public Accountant and a Certified Management Accountant. Barry Drucker is Senior Vice President--Sales. He joined the Company in 1976. James P. Flaherty is Vice President, Marketing & Advertising. He joined the Company in 1979. James E. Taylor is Vice President--Production. He joined the Company in 1981. Arthur Rudolph founded Arco Pharmaceuticals, Inc., the Company's predecessor, in 1960 and served as the Company'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 the Company in 1971. He is the father of Scott Rudolph. Aram Garabedian has been, since 1988, a real estate developer in Rhode Island. He was associated with 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 associated with Cafiero, Cuchel and Owen Insurance Agency, Pitkin, Owen Insurance Agency and Wood-HEW Travel Agency. 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. 38 Glenn Cohen has been the President of Glenn-Scott Landscaping and Design for more than five years. Bud Solk has been President of Chase/Ehrenberg & Rosene, Inc., an advertising and marketing agency located in Chicago, Illinois since 1995. Previously, Mr. Solk had been President of Bud Solk Associates, Inc., which he founded in 1958. Nathan Rosenblatt is the President and Chief Executive Officer of Ashland Maintenance Corp., a commercial maintenance organization located in Long Island, New York. Michael L. Ashner is the President and Chief Executive Officer of Winthrop Financial Associates, a firm engaged in the organization and administration of real estate limited partnerships. 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, one of the former shareholders of Nutrition Headquarters Group. Under the terms of the agreement, Mr. Slade will be 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 salaries ranging between approximately $75,000 per year and $200,000 per year. 39 PRINCIPAL AND SELLING STOCKHOLDERS The information in the following table sets forth certain information with respect to the beneficial ownership of the Common Stock of the Company as of the date of this Prospectus, by (i) each executive officer of the Company, (ii) each director of the Company, (iii) each person who beneficially owns more than 5% of the outstanding shares of the Company's Common Stock, (iv) all directors and executive officers of the Company as a group, and (v) the Selling Stockholders, and as adjusted at that date to reflect the sale by the Company and the Selling Stockholders of the shares of Common Stock offered hereby and assuming the Underwriters' over-allotment option is not exercised. Except as noted below, each person or entity has sole voting and investment power with respect to the shares shown.
COMMON STOCK OWNED BEFORE THE NUMBER OF COMMON STOCK OWNED OFFERING(1) SHARES AFTER THE OFFERING(1) --------------------- BEING --------------------- NAME NUMBER PERCENT OFFERED NUMBER PERCENT - ------------------------------------------------------ ---------- ------- --------- ---------- ------- Scott Rudolph(2)(3) .................................. 11,901,663 17.6% -- 11,901,663 16.8% c/o NBTY, Inc. 90 Orville Drive Bohemia, NY 11716 Harvey Kamil ......................................... 1,611,906 2.5% -- 1,611,906 2.3% c/o NBTY, Inc. 90 Orville Drive Bohemia, NY 11716 Michael C. Slade ..................................... 4,093,639 6.3% 2,100,000 1,993,639 2.9% c/o Herrick, Feinstein 2 Park Avenue New York, NY 10016 Abraham Feldman Trust F/B/O .......................... 2,339,222 3.6% 1,750,000 589,222 0.9% Ruth Slade c/o Herrick, Feinstein 2 Park Avenue New York, NY 10016 Abraham Feldman Trust F/B/O .......................... 2,339,223 3.6% 1,750,000 589,223 0.9% Steven Lenger c/o Herrick, Feinstein 2 Park Avenue New York, NY 10016 NBTY Employee Stock Ownership Plan.................... 3,117,204 4.8% -- 3,117,204 4.6% Nicholas-Applegate Capital Mgmt.(4) .................. 3,872,400 6.0% -- 3,872,400 5.7% 600 West Broadway, 29th Floor San Diego, California 92101 Pilgrim Baxter & Associates, Ltd.(5) ................. 4,713,900 7.3% -- 4,713,900 7.0% 825 Duportail Road Wayne, Pennsylvania 19087 Directors: Arthur Rudolph...................................... 2,056,893 3.2% -- 2,056,893 3.0% Aram Garabedian..................................... 42,000 * -- 42,000 * Bernard G. Owen..................................... 82,500 * -- 82,500 * Alfred Sacks........................................ 0 * -- 0 * Murray Daly......................................... 32,000 * -- 32,000 * Glenn Cohen......................................... 87,000 * -- 87,000 * Bud Solk............................................ 0 * -- 0 * Nathan Rosenblatt................................... 0 * -- 0 * Michael Ashner...................................... 0 * -- 0 * All Directors and Executive Officers as a group (11 15,813,962 22.9% -- 15,813,962 21.9% persons)............................................
(Footnotes on next page) 40 (Footnotes on next page) - ------------------ (1) 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 purposes of computing the percentage of securitiesbeneficially owned by any other person or group. Accordingly, the indicated number of shares includes shares issuable upon exercise of options (including employees stock options) and any other beneficial ownership of securities held by such person or group. (2) Includes shares held in a Trust created by Arthur Rudolph for the benefit of Scott Rudolph and other family members. (3) Included in the shares beneficially owned by Messrs. Scott Rudolph, Kamil and certain other executive officers and directors, are presently exercisable options with respect to 3,000,000, 840,000 and 486,000 shares, respectively. (4) As reported in a Schedule 13G dated February 3, 1998. (5) As reported in a Schedule 13G dated February 12, 1998. * Denotes less than one percent. DESCRIPTION OF CAPITAL STOCK The Company's authorized capital stock consists of 75,000,000 shares of Common Stock, $.008 par value per share. As of April 30, 1998, there were approximately 64,810,221 shares of Common Stock issued and outstanding, held of record by approximately 684 stockholders. After giving effect to the Offering, there will be 67,810,221 shares of Common Stock issued and outstanding (which excludes 4,326,000 shares of Common Stock which are issuable by the Company upon exercise of outstanding options, all of which are held by Management, and 450,000 shares of Common Stock pursuant to the Underwriters' over-allotment option). The Company will seek approval to increase its authorized capital stock at its next meeting of stockholders. COMMON STOCK Holders of Common Stock are entitled to one vote per share on all matters submitted to a vote of stockholders, including the election of directors. The Common Stock does not permit cumulative voting in the election of directors, which means that the holders of a majority of the shares voting for election of directors can elect all members of the Board of Directors. A plurality voice is sufficient for the election of directors, and a majority vote is required for other actions that require the vote or concurrence of stockholders. Dividends may be paid to holders of Common Stock when and if declared by the Board of Directors out of funds legally available therefor. In the event of dissolution or liquidation of the Company, holders of Common Stock would be entitled to share ratably in the assets of the Company remaining after payment to all creditors. The holders of Common Stock have no preemptive or conversion rights, and there are no redemption or sinking fund provisions applicable to the Common Stock. All of the outstanding shares of Common Stock are, and the shares being offered by the Company hereunder will be, upon issuance and sale, fully paid and nonassessable. TRANSFER AGENT The transfer agent of the Common Stock is American Stock Transfer and Trust Company, New York, New York. CERTAIN PROVISIONS OF THE DELAWARE GENERAL CORPORATION LAW ('DGCL') Section 228 of the DGCL allows any action which is required to be or may be taken at a special or annual meeting of the stockholders of a corporation to be taken without a meeting with the written consent of holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted, provided that the certificate of incorporation of such corporation does not contain a provision to the contrary. The Certificate of Incorporation of the Company contains no such provision, and therefore, pursuant to Section 228 and the By- 41 laws, stockholders holding a majority of the voting power of the Common Stock will be able to effect most corporate matters requiring stockholder approval by written consent, without the need for a duly-noticed and duly-held meeting of stockholders. See 'Risk Factors--Control by Principal Stockholders.' ANTI-TAKEOVER CONSIDERATIONS The Company's Certificate of Incorporation and By-Laws include certain provisions which could be described as anti-takeover provisions. The Certificate of Incorporation and By-Laws provide that the Company's Board of Directors, currently compromised of ten members, be divided into three classes, with staggered terms. Each director serves a three year term and holds office until his successor is elected and qualified. Classification of the Board of Directors may have the effect of making the removal of incumbent directors more time-consuming and difficult, and, therefore, may have the effect of discouraging an unsolicited takeover attempt to gain control of the Board through a proxy solicitation. The Certificate of Incorporation provides that, unless certain conditions are satisfied, the affirmative vote of not less than 75% of the outstanding shares of Common Stock of the Company entitled to vote, as a class, in elections of directors is required for the adoption or authorization of certain extraordinary corporation actions with Related Persons (as defined in the Certificate of Incorporation). Such extraordinary corporate actions include, but are not limited to, any merger or consolidation of the Company with or into any Related Person or the adoption of any proposal or plan for the liquidation or dissolution of the Company proposed by or on behalf of any Related Person. The Certificate of Incorporation provides that no amendment may be made which amends, alters, changes or repeals the provisions mentioned in the above paragraph without the affirmative vote of not less than 75% of the shares of Common Stock of the Company entitled to vote, considered as a class, in elections of directors; provided, however, that such 75% vote is not required for any amendment, alteration, change or repeal recommended to the stockholders by a majority of the Continuing Directors (as defined in the Certificate of Incorporation). The above provisions, among others, may have the effect of delaying, deferring or preventing a change in control of the Company, may discourage bids for the Common Stock at a premium over the market price of the Common Stock and may adversely affect the market price of the Common Stock and the voting and other rights of the holders of the Common Stock. The Company expects that the Board of Directors may in the future review the advisability of adopting other measures which may affect takeovers in the context of applicable law and judicial decisions. DESCRIPTION OF CERTAIN INDEBTEDNESS SENIOR SUBORDINATED NOTES DUE 2007 On September 23, 1997, the Company issued an aggregate of $150,000,000 principal amount of 8 5/8% Senior Subordinated Notes due 2007 (the 'Notes'). The Notes are not redeemable, in whole or in part, prior to September 15, 2002. Notwithstanding the foregoing, at any time on or before September 15, 2000, the Company may redeem up to 33 1/3% of the aggregate principal amount of the Notes, in whole or in part, with the net cash proceeds of one or more public equity offerings at a redemption price equal to 108.625% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of redemption. Upon the occurrence of a change of control, the Company will be required to make an offer to repurchase all outstanding Notes at 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase. The indenture governing the Notes contains certain covenants with respect to the Company that limit the ability of the Company to, among other things, (i) incur additional indebtedness, (ii) pay dividends on, or redeem capital stock of the Company, or make certain other distributions, (iii) make certain investments, (iv) create certain liens, (v) sell certain assets, (vi) enter into certain transactions with affiliates, or (vii) enter into certain mergers or consolidations involving the Company. 42 DESCRIPTION OF THE REVOLVING CREDIT FACILITY The Revolving Credit Facility is provided by a syndicate of banks and other financial institutions led by The Chase Manhattan Bank, as administrative agent (the 'Agent'), and provides for borrowings in an aggregate principal amount of up to $60.0 million. The following summary of the Revolving Credit Facility does not purport to be complete and is subject to, and qualified in its entirety by reference to, the Revolving Credit Facility. Security Guarantees. The obligations of the Company under the Revolving Credit Facility are unconditionally and irrevocably guaranteed, jointly and severally, by each direct and indirect domestic subsidiary of the Company and each subsequently acquired or organized subsidiary of the Company. In addition, the obligations of the Company under the Revolving Credit Facility and the guarantees thereunder are secured by substantially all of the non-real estate assets of the Company and the guarantors. Interest. The Revolving Credit Facility is a six-year facility and bears interest at a rate per annum equal (at the Company's option) to: (i) the Agent's Eurodollar rate plus an applicable margin, (ii) an alternate base rate plus an applicable margin or (iii) the Agent's Eurocurrency rate plus an applicable margin. Principal amounts under the revolving Credit Facility not paid when due shall bear interest at a default rate equal to 2.00% per annum above the otherwise applicable rate. Other amounts not paid when due under the Revolving Credit Facility shall bear interest at the rate then applicable to alternate base rate loans under the Revolving Credit Facility plus 2.00% per annum. Prepayments. Voluntary prepayments of borrowings under the Revolving Credit Facility and voluntary reductions of the unutilized portions of the Revolving Credit Facility are permitted at any time in minimum principal amounts to be agreed upon. Covenants. The Revolving Credit Facility contains a number of covenants, that, among other things, restrict the ability of the Company and its subsidiaries, subject to certain exceptions, to dispose of assets, incur additional indebtedness, incur guarantee obligations, repay other indebtedness or amend other debt instruments, make distributions or pay dividends on partnership interest or capital stock, redeem and repurchase partnership interests or capital stock, create liens on assets, enter into sale and leaseback transactions, make investments, loans or advances, make acquisitions, engage in mergers or consolidations, change the business conducted by the Company or its subsidiaries, make capital expenditures or engage in certain transactions with affiliates and otherwise restrict certain business activities. In addition, the Company is required to comply with specified financial ratios and tests, including minimum fixed charge coverage ratios, maximum leverage ratios and minimum net worth tests. The Revolving Credit Facility also contains provisions that prohibit any modification of the indenture in any manner adverse to the lenders and that limit the Company's ability to refinance or otherwise prepay the Exchange Notes without the consent of such lenders. Events of Default. The Revolving Credit Facility contains customary events of default, including payment defaults, breach of representations and warranties, covenant defaults, cross-defaults and cross-acceleration to certain other indebtedness, certain events of bankruptcy and insolvency, Employee Retirement Income Security Act of 1974 events, judgment defaults, actual or asserted invalidity of any security documents or guarantees, change of control, the voluntary creation of security interest relating to partnership interests in the Company or the voluntary creation of any prohibition on the creation of such security interests. SHARES ELIGIBLE FOR FUTURE SALE After the Offering, approximately 67,810,221 shares of Common Stock will be issued and outstanding (which excludes 4,326,000 shares of Common Stock which are issuable by the Company upon exercise of outstanding options, all of which are held by management, and 450,000 shares of Common Stock, pursuant to the Underwriters' over-allotment option). The shares of Common Stock offered hereby will be freely tradable by persons who are not affiliates of the Company without restriction or further registration under the Securities Act. Substantially all of the other outstanding shares of Common Stock, other than shares held by officers, directors and other affiliates of the Company, are freely tradable. Pursuant to Rule 144 of the Securities Act ('Rule 144'), shares of Common Stock held by affiliates of the Company are subject to limitations on volume that may be sold 43 other than sales pursuant to a registration statement under the Securities Act or another applicable exemption from registration thereunder. Scott Rudolph, Harvey Kamil, and certain other officers are eligible to sell their shares of Common Stock pursuant to Rule 144 under the Securities Act at prescribed times and subject to the manner of sale, volume, notice and information restrictions of Rule 144. The Company has granted Michael C. Slade and former shareholders of the Nutrition Headquarters Group certain demand and piggyback registration rights covering an aggregate of 8,772,084 shares of Common Stock (3,172,084 shares after the consummation of the Offering). The executive officers, directors and the Selling Stockholders, who collectively are the beneficial owners of an aggregate of 24,586,046 shares of Common Stock (18,986,046 shares after the consummation of the Offering), and the Company have agreed with the Underwriters, subject to certain exceptions, not to directly or indirectly, (and, except as may be disclosed herein, will not announce or disclose any intention to) sell, contract to sell, grant any option or warrant for the sale of, register, loan, pledge, grant any rights with respect to or otherwise dispose of, without the prior written consent of Smith Barney Inc., any Common Stock, or any securities convertible into or exchangeable or exercisable for Common Stock (including, without limitation, any of the economic attributes thereof) for a period of 270 days, in the case of the Company and the Selling Stockholders, and for a period of 120 days, in the case of the executive officers and directors who are not Selling Stockholders, after the date of this Prospectus. Upon the expiration or termination of such restrictive period, such holders, will, in general be entitled to dispose of their shares of Common Stock, although the shares of Common Stock held by affiliates of the Company will continue to be subject to the restrictions of Rule 144 under the Securities Act. See 'Shares Eligible for Future Sale' and 'Underwriting.' 44 UNDERWRITING Subject to the terms and conditions set forth in an underwriting agreement among the Company, the Selling Stockholders and the Underwriters (the 'Underwriting Agreement'), the Company and the Selling Stockholders have agreed to sell to each of the Underwriters named below, and each of the Underwriters, for whom Smith Barney Inc., Lehman Brothers Inc., Adams, Harkness & Hill, Inc., Raymond James & Associates, Inc. and Piper Jaffray Inc. are acting as the representatives (the 'Representatives'), has severally agreed to purchase the number of shares of Common Stock (the 'Shares') set forth opposite its name below:
UNDERWRITING UNDERWRITER COMMITMENT - ------------------------------------------------------------------------------------------ ------------ Smith Barney Inc.......................................................................... 1,720,000 Lehman Brothers Inc....................................................................... 1,720,000 Adams, Harkness & Hill, Inc............................................................... 1,720,000 Raymond James & Associates, Inc........................................................... 1,720,000 Piper Jaffray Inc......................................................................... 1,720,000 ------------ Total................................................................................ 8,600,000 ------------
The Underwriting Agreement provides that the obligations of the several Underwriters (the 'Underwriters') to pay for and accept delivery of the Shares are subject to approval of certain legal matters by counsel and to certain other conditions. The Underwriting Agreement provides that the obligations of the Underwriters are such that if any of the Shares are purchased by the Underwriters pursuant to the Underwriting Agreement, all the Shares (not including the Shares subject to the Underwriters' over-allotment options) agreed to be purchased by the Underwriters must be so purchased. The Company has been advised by the Representatives that the several Underwriters initially propose to offer such shares to the public at the price to public set forth on the cover page of this Prospectus and to certain dealers at a price that represents a concession not in excess of $.44 per share below the price to public. The Underwriters may allow, and such dealers may re-allow, a concession not in excess of $.10 per share to the other Underwriters or to certain other dealers. After the Offering, the price to public and such concessions may be changed by the Underwriters. The Company and the Selling Stockholders have granted to the Underwriters an option excercisable during the 30-day period after the date of this Prospectus, to purchase up to an aggregate 1,290,000 additional shares of Common Stock at the price to public set forth on the cover page of this Prospectus less the underwriting discount, solely to cover the over-allotment, if any, in connection with the sale of the shares offered hereby. To the extent that the Underwriters exercise such option, the Underwriters will be committed, subject to certain conditions, to purchase a number of option shares proportionate to such Underwriter's initial commitment. The Underwriting Agreement provides that, in the event of a default by an Underwriter, in certain circumstances the purchase commitments of non-defaulting Underwriters may be increased or the Underwriting Agreement may be terminated. Each Underwriter has severally agreed that, as part of the distribution of the Shares offered by the Underwriters, (i) it is not purchasing any Shares for the account of anyone other than a United States or Canadian Person, (ii) it has not offered or sold, and will not offer or sell, directly or indirectly, any Shares or distribute this Prospectus to any person outside of the United States or Canada, or to anyone other than a United States or Canadian Person and (iii) any dealer to whom it may sell any Shares will represent that it is not purchasing for the account of anyone other than a United States or Canadian Person and agree that it will not offer or resell, directly or indirectly, any Shares outside of the United States or Canada, or to anyone other than a United States or Canadian Person or to any other dealer who does not so represent and agree. The foregoing limitations do not apply to stabilization transactions or to certain other transactions specified in the Underwriting Agreement, including: (i) certain purchases and sales between the Underwriters, (ii) certain offers, sales, resales, deliveries or distributions to or through investment advisors or other persons exercising investment discretion and (iii) other transactions specifically approved by the Representatives. 'United States or Canadian Person' means any person who is a national or resident of the United States or Canada, any corporation, partnership or other entity created or organized in or under the laws of the United States or Canada or of any political subdivision thereof, and any estate or trust the income of which is subject to United States or 45 Canadian federal income taxation, regardless of its source (other than any non-United States or non-Canadian branch of any United States or Canadian Person), and includes any United States or Canadian branch of a person other than a United States or Canadian Person. Any offer of the Shares in Canada will be made only pursuant to an exemption from the prospectus filing requirement and an exemption from the dealer registration requirement (where such an exemption is not available, offers shall be made only by a registered dealer) in the relevant Canadian jurisdiction where such offer is made. Purchasers of the Shares offered hereby may be required to pay stamp taxes and other charges in accordance with the laws and practices of the country of purchase, in addition to the offering price set forth on the cover page hereof. The Underwriting Agreement provides that the Company and the Selling Stockholders will jointly and severally indemnify the Underwriters against certain liabilities and expenses, including liabilities under the Securities Act, or contribute to payments the Underwriters may be required to make in respect thereof. Each Underwriter agrees that (i) it will not offer or sell any shares to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which will not involve an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995 ('the Regulations'); (ii) it will comply with all applicable provisions of the Financial Services Act of 1986 and the Regulations with respect to anything done by it in relation to the shares in, from or otherwise involving the United Kingdom; and (iii) it will only issue or pass on to any person in the United Kingdom any document received by it in connection with the offer of the shares if that person is of a kind described in Article 11(3) of the Financial Services Act of 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a person to whom such document may otherwise lawfully be issued or passed on. No action has been or will be taken in any jurisdiction by the Company, the Selling Stockholders or the Underwriters that would permit an offering to the general public of the shares offered hereby in any jurisdiction other than the United States. The executive officers, directors and the Selling Stockholders, who collectively are the beneficial owners of an aggregate of 24,586,086 shares of Common Stock (17,800,004 shares after the consummation of the Offering), and the Company have agreed with the Underwriters, subject to certain exceptions, not to directly or indirectly, (and, except as may be disclosed herein, will not announce or disclose any intention to) sell, contract to sell, grant any option or warrant for the sale of, register, loan, pledge, grant any rights with respect to or otherwise dispose of, without the prior written consent of Smith Barney Inc., any Common Stock, or any securities convertible into or exchangeable or exercisable for Common Stock (including, without limitation, any of the economic attributes thereof) for a period of 270 days, in the case of the Company and the Selling Stockholders, and for a period of 120 days, in the case of the executive officers and directors of the Company after the date of this Prospectus. Upon the expiration of such restrictive period, such holders, will, in general be entitled to dispose of their shares of Common Stock, although the shares of Common Stock held by affiliates of the Company will continue to be subject to the restrictions of Rule 144 under the Securities Act. See 'Shares Eligible for Future Sale.' During and after the Offering, the Underwriters may purchase and sell the Common Stock in the open market. These transactions may include overallotment and stabilizing transactions and purchases to cover syndicate short positions created in connection with the Offering. The Underwriters also may impose a penalty bid, whereby selling concessions allowed to syndicate members of other broker-dealers in respect of the Shares of Common Stock sold in the Offering for their account may be reclaimed by the syndicate if such Shares are repurchased by the syndicate in stabilizing or covering transactions. These activities may stabilize, maintain or otherwise affect the market price of the Common Stock which may be higher than the price that might otherwise prevail in the open market. The Underwriters are not required to engage in any of these activities and any such activities, if commenced, may be discontinued at any time. Smith Barney Inc. and certain of the other Representatives and their affiliates have provided and may continue to provide investment banking or other services to the Company and its affiliates. 46 LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Michael C. Duban, Esq., White Plains, New York, a shareholder of the Company's Common Stock. Certain legal matters relating to this Offering will be passed upon for the Underwriters by Cahill Gordon & Reindel (a partnership including a professional corporation), New York, New York. EXPERTS The supplemental consolidated balance sheets of NBTY, Inc. and Subsidiaries (the 'Company') as of September 30, 1997 and 1996 and the supplemental consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1997, and the consolidated balance sheets of the Company as of September 30, 1997 and 1996 and the consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1997 included in this Registration Statement and the combined balance sheets of Nutrition Headquarters, Inc. and Lee Nutrition, Inc. as of September 30, 1997 and 1996 and the combined statements of operations, stockholders equity and cash flows for each of the three years in the period ended September 30, 1997 included in the Company's Current Report on Form 8-K/A incorporated by reference in this Registration Statement have been included or incorporated herein in reliance on the reports of Coopers & Lybrand L.L.P., independent accountants, given on the authority of that firm as experts in auditing and accounting. The balance sheets of Nutro Laboratories, Inc. as of September 30, 1997 and 1996 and the statements of operations, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1997 included in the Company's Current Report on Form 8-K/A incorporated by reference in this Registration Statement have been incorporated herein in reliance on the report of Amper, Politziner & Mattia P.A., independent accountants, given on the authority of that firm as experts in auditing and accounting. AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the 'Commission') in Washington, D.C. a Registration Statement on Form S-3 (the 'Registration Statement') under the Securities Act with respect to the Common Stock offered hereby. As used herein, the term 'Registration Statement' means the initial Registration Statement and any and all amendments thereto. This Prospectus omits certain information contained in the Registration Statement as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement, including the exhibits thereto. Statements herein concerning the contents of any contract or other document are not necessarily complete and in each instance reference is made to such contract or other document filed with the Commission as an exhibit to the Registration Statement, each such statement being qualified by and subject to such reference in all respects. The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the '1934 Act'), and in accordance therewith files reports and other information with the Commission. Reports, registration statements, proxy statements and other information filed by the Company with the Commission can be inspected and copied at the public reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the Commission's Regional Offices: 500 West Madison Avenue, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such materials can be obtained at prescribed rates from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The Commission also maintains a site on the World Wide Web, the address of which is http://www.sec.gov, that contains reports, proxy and information statements and other information regarding issuers, such as the Company, that file electronically with the Commission. The Company has been an electronic filer since September 1996. The Common Stock is quoted for trading on the Nasdaq National Market, and the Registration Statement and such reports and other information concerning the Company may also be inspected at the offices of the Nasdaq National Market located at 1735 K Street, N.W., Washington, D.C. 20006. 47 The Company will furnish holders of the Common Stock with annual reports containing among other information, audited financial statements certified by an independent public accounting firm and quarterly reports containing unaudited condensed financial information for the first three quarters of each fiscal year. The Company also intends to furnish such other reports as it may determine or as may be required by law. INCORPORATION OF CERTAIN INFORMATION BY REFERENCE The following documents heretofore filed by the Company with the Commission pursuant to the 1934 Act, are hereby incorporated and made a part of this Prospectus by reference, except as superseded or modified herein: 1. The Company's Annual Report on Form 10-K and Form 10-K/A for the fiscal year ended September 30, 1997. 2. The Company's Quarterly Reports on Form 10-Q for the quarters ended December 31, 1997 and March 31, 1998. 3. The Company's Proxy Statement on Schedule 14A, dated February 10, 1998. 4. The Company's Current Reports on Form 8-K dated August 20, 1997, April 7, 1998, April 28, 1998, June 22, 1998 and Form 8-K/A May 7, 1998. 5. Pages F-24 through F-37 of the Company's Registration Statement on Form S-4 (Reg. No. 333-39527). All documents subsequently filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the 1934 Act prior to the termination of the Offerings to which this Prospectus relates shall be deemed to be incorporated by reference into this Prospectus and to be part of this Prospectus from the date of filing thereof. Any statement incorporated herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will furnish without charge to each person to whom this Prospectus is delivered, upon written or oral request, a copy of any or all of the documents which have been incorporated by reference in this Prospectus, other than exhibits to such documents (unless the exhibits are specifically incorporated by reference into such documents). Requests should be directed to: NBTY, Inc., 90 Orville Drive, Bohemia, New York 11716, Attn: Harvey Kamil, Executive Vice President and Secretary, telephone (516) 567-9500. 48 NBTY, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS
PAGE ------------ NBTY, Inc. Supplemental Consolidated Financial Statements: (a) Unaudited Supplemental Condensed Consolidated Balance Sheets--September 30, 1997 and March 31, 1998............................................................................................ F-2 Unaudited Supplemental Condensed Consolidated Statements of Income--Six Months Ended March 31, 1997 and 1998........................................................................................ F-3 Unaudited Supplemental Condensed Consolidated Statements of Cash Flows--Six Months Ended March 31, 1997 and 1998................................................................................... F-4 Notes to Unaudited Supplemental Condensed Consolidated Financial Statements........................ F-5 to F-8 Report of Independent Accountants.................................................................. F-9 Supplemental Consolidated Balance Sheets--September 30, 1996 and 1997.............................. F-10 Supplemental Consolidated Statements of Income--Years Ended September 30, 1995, 1996 and 1997............................................................... F-11 Supplemental Consolidated Statements of Stockholders' Equity--Years Ended September 30, 1995, 1996 and 1997............................................................... F-12 Supplemental Consolidated Statements of Cash Flows--Years Ended September 30, 1995, 1996 and 1997............................................................... F-13 to F-14 Notes to Supplemental Consolidated Financial Statements............................................ F-15 to F-27 NBTY, Inc. Consolidated Financial Statements: (b) Unaudited Condensed Consolidated Balance Sheets--September 30, 1997 and March 31, 1998.............................................................................. F-28 Unaudited Condensed Consolidated Statements of Income--Six Months Ended March 31, 1997 and 1998.... F-29 Unaudited Condensed Consolidated Statements of Cash Flows--Six Months Ended March 31, 1997 and 1998............................................................................................ F-30 Notes to Unaudited Condensed Consolidated Financial Statements..................................... F-31 to F-35 Report of Independent Accountants.................................................................. F-36 Consolidated Balance Sheets--September 30, 1996 and 1997........................................... F-37 Consolidated Statements of Income--Years Ended September 30, 1995, 1996 and 1997................... F-38 Consolidated Statements of Stockholders Equity--Years Ended September 30, 1995, 1996 and 1997................................................................................... F-39 Consolidated Statements of Cash Flows--Years Ended September 30, 1995, 1996 and 1997............... F-40 to F-41 Notes to Consolidated Financial Statements......................................................... F-42 to F-53
- ------------------ (a) The supplemental consolidated financial statements give effect to the merger of Nutrition Headquarters Group into NBTY, Inc. through a business combination accounted for by the pooling of interest method. (b) The consolidated financial statements represent the historical financial statements of NBTY, Inc. prior to the merger with Nutrition Headquarters Group. F-1 NBTY, INC. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS AND SHARES IN THOUSANDS) ASSETS
MARCH 31, 1998 SEPTEMBER 30, ----------- 1997 ------------- (UNAUDITED) Current assets: Cash and cash equivalents........................................................... $ 20,262 $ 19,097 Short-term investments.............................................................. 8,362 Accounts receivable, less allowance for doubtful accounts of $1,116 in 1997 and $1,110 in 1998................................................................... 19,603 20,275 Inventories......................................................................... 86,440 98,852 Deferred income taxes............................................................... 6,032 6,032 Prepaid catalog costs and other current assets...................................... 19,111 12,286 ------------- ----------- Total current assets........................................................... 159,810 156,542 Cash held in escrow................................................................... 144,262 Property, plant and equipment......................................................... 118,184 150,712 Intangible assets, net................................................................ 141,303 143,753 Other assets.......................................................................... 7,618 9,550 ------------- ----------- Total assets................................................................... $ 571,177 $ 460,557 ------------- ----------- ------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt and capital lease obligations..................... $ 1,519 $ 3,034 Demand note payable................................................................. 1,873 Accounts payable.................................................................... 49,857 47,429 Accrued expenses.................................................................... 35,711 28,177 ------------- ----------- Total current liabilities...................................................... 88,960 78,640 Long-term debt........................................................................ 168,550 210,658 Obligations under capital leases...................................................... 2,700 2,446 Promissory note payable............................................................... 169,909 2,457 Deferred income taxes................................................................. 7,474 7,642 Other liabilities..................................................................... 2,293 2,293 ------------- ----------- Total liabilities.............................................................. 439,886 304,136 ------------- ----------- Commitments and contingencies Stockholders' equity: Common stock, $.008 par; authorized 75,000 shares in 1997 and 1998, respectively; issued 69,123 shares in 1997 and 69,255 shares in 1998 and outstanding 64,614 shares in 1997 and 64,746 shares in 1998......................................... 553 554 Capital in excess of par............................................................ 56,182 56,789 Retained earnings................................................................... 75,199 92,884 ------------- ----------- 131,934 150,227 Less 4,509 treasury shares at cost, in 1997 and 1998, respectively.................. (3,206) (3,206) Cumulative translation adjustment................................................... 2,563 9,400 ------------- ----------- Total stockholders' equity..................................................... 131,291 156,421 ------------- ----------- Total liabilities and stockholders' equity..................................... $ 571,177 $ 460,557 ------------- ----------- ------------- -----------
See notes to supplemental condensed consolidated financial statements. F-2 NBTY, INC. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE SIX MONTHS ENDED MARCH 31, -------------------- 1997 1998 -------- -------- Net sales $159,105 $286,820 -------- -------- Costs and expenses: Cost of sales........................................................................... 79,819 140,414 Catalog printing, postage and promotion................................................. 13,996 13,935 Selling, general and administrative..................................................... 40,571 90,452 -------- -------- 134,386 244,801 -------- -------- Income from operations.................................................................... 24,719 42,019 -------- -------- Other income (expenses): Interest, net........................................................................... (1,315) (9,221) Miscellaneous, net...................................................................... (171) 1,400 -------- -------- (1,486) (7,821) -------- -------- Income before income taxes................................................................ 23,233 34,198 Income taxes.............................................................................. 7,391 10,565 -------- -------- Net income.............................................................................. $ 15,842 $ 23,633 -------- -------- -------- -------- Net income per share: Basic................................................................................... $ 0.25 $ 0.37 Diluted................................................................................. $ 0.23 $ 0.34 Weighted average common shares outstanding: Basic................................................................................... 64,578 64,662 Diluted................................................................................. 68,919 68,967
See notes to supplemental condensed consolidated financial statements. F-3 NBTY, INC. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
FOR THE SIX MONTHS ENDED MARCH 31, -------------------- 1997 1998 ------- --------- Net income................................................................................ $15,842 $ 23,633 Adjustments to reconcile net income to cash provided by operating activities: Loss on sale of property, plant and equipment........................................... 26 Depreciation and amortization........................................................... 3,664 10,032 Provision (recovery) for allowance for doubtful accounts................................ 206 (5) Increase in deferred taxes.............................................................. 7 Changes in assets and liabilities, net of acquistions: Accounts receivable.................................................................. (5,170) (199) Inventories.......................................................................... (8,262) (11,698) Prepaid catalog costs and other current assets....................................... (1,295) 8,683 Other assets......................................................................... 288 535 Accounts payable..................................................................... 10,381 (3,201) Accrued expenses..................................................................... 5,112 (12,428) ------- --------- Net cash provided by operating activities.......................................... 20,792 15,359 ------- --------- Cash flow from investing activities: Purchase of property, plant and equipment............................................... (9,488) (38,942) Proceeds from sale of property, plant and equipment..................................... 20 Proceeds from sale of short-term investments............................................ 8,362 Purchase of short-term investments...................................................... (4,651) Receipt of payments from direct-mail cosmetics business................................. 322 ------- --------- Net cash used in investing activities.............................................. (13,797) (30,580) ------- --------- Cash flows from financing activities: Dividends paid.......................................................................... (2,610) (5,950) Borrowings under long-term debt agreements.............................................. 45,000 Cash held in escrow..................................................................... 144,730 Principal payments under long-term debt agreements and capital leases................... (2,079) (1,153) Purchase of treasury stock.............................................................. (15) Proceeds from stock options exercised................................................... 23 40 Repayment of promissory note............................................................ (168,770) ------- --------- Net cash provided by (used in) financing activities................................ (4,681) 13,897 ------- --------- Effect of Exchange Rate Changes on Cash and Cash Equivalents.............................. 159 ------- --------- Net (decrease) increase in cash and cash equivalents...................................... 2,314 (1,165) Cash and cash equivalents at beginning of quarter......................................... 12,814 20,262 ------- --------- Cash and cash equivalents at end of quarter............................................... $15,128 $ 19,097 ------- --------- ------- --------- Supplemental Disclosure of Cash Flow Information: Cash paid during the period for interest................................................ $ 1,295 $ 12,129 Cash paid during the period for taxes................................................... $ 4,817 $ 10,243
See notes to supplemental condensed consolidated financial statements. F-4 NBTY, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1. BASIS OF PRESENTATION The supplemental consolidated financial statements of NBTY, Inc. and Subsidiaries, formerly Nature's Bounty, Inc. ('NBTY'), have been prepared to give retroactive effect to the merger with Nutrition Headquarters Group, Inc., Lee Nutrition, Inc. and Nutro Laboratories, Inc. (collectively, the 'Nutrition Headquarters Group' and with NBTY collectively, the 'Company') on April 20, 1998, which has been accounted for as a pooling of interests. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling- of-interest methods in financial statements that do not include the date of consummation. These financial statements do not extend through the date of consummation; however, they will become the historical consolidated financial statements of the Company after financial statements covering the date of consummation of the business combination are issued. During 1998, NBTY entered into a definitive agreement to merge with Nutrition Headquarters Group. 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 one share of NBTY's common stock with approximately 8,722 shares of NBTY's common stock exchanged for all the outstanding stock of Nutrition Headquarters Group. 2. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly its financial position as of March 31, 1998 and results of operations for the six months ended March 31, 1998 and 1997 and statements of cash flows for the six months ended March 31, 1998 and 1997. The consolidated condensed balance sheet as of September 30, 1997 has been derived from the audited balance sheet as of that date. This report should be read in conjunction with the Company's supplemental consolidated financial statements for the fiscal years end September 30, 1995, 1996 and 1997 included elsewhere in this Prospectus and Form S-3. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Foreign currency translation The financial statements of international subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and an average exchange rate for each period for revenues, expenses, and gains and losses. Where the local currency is the functional currency, translation adjustments are recorded as a separate component of stockholder's equity. Common shares and earnings per share On March 9, 1998, the Company's Board of Directors declared a three-for-one stock split in the form of a 200% stock dividend effective March 23, 1998. In addition, 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. All per common share amounts have been retroactively restated to account for the above stock split. In addition, stock options and respective exercise prices have been amended to reflect these transactions (see Note 8). Accounting changes Effective October 1, 1996, the Company adopted the disclosure-only provisions of Statement of Financial Accounting Standards ('SFAS') No. 123, 'Accounting for Stock-Based Compensation.' As permitted by SFAS No. 123, the Company continues to measure compensation cost in accordance with Accounting Principles F-5 NBTY, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Board Opinion ('APB') No. 25, 'Accounting for Stock Issued to Employees.' As the Company has not granted any options during the six months ended March 31, 1998, nor fiscal 1997 or 1996, there would not have been any impact on the Company's financial position or results of operations on a pro forma basis. Effective October 1, 1996, the Company adopted SFAS No. 121,'Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.' This statement requires that certain assets be reviewed for impairment and, if impaired, be measured at fair value, whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The adoption of SFAS No. 121 at October 1, 1996 and its application during fiscal 1997 and the six months ended March 31, 1998 had no material impact on the Company's financial position or results of operations. New accounting standards In February 1997, the Financial Accounting Standards Board ('FASB') issued SFAS No. 128, 'Earnings Per Share.' The statement simplifies the standards for computing earnings per share ('EPS') and makes them comparable to international EPS standards. The statement requires the presentation of both 'basic' and 'diluted' EPS on the face of the income statement with a supplementary reconciliation of the amounts used in the calculations (see note 8). In June 1997, the FASB issued SFAS No. 130, 'Reporting Comprehensive Income,' which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distribution to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. In addition, in June 1997, the FASB issued SFAS No. 131, 'Disclosures About Segments of an Enterprise and Related Information,' which establishes standards for reporting information about operating segments. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. Both of these new standards are effective for fiscal years beginning after December 15, 1997 and require comparative information for earlier years to be restated. The implementation of these new standards will not affect the Company's results of operations and financial position, but may have an impact on future financial statement disclosures. Year 2000 Software Compatibility The Company is continually updating its information systems, and has evaluated significant computer software applications for compatibility with the year 2000. With the system changes implemented to date and other planned changes, the Company anticipates that its computer software applications will be compatible with the year 2000. Expenditures specifically related to software modifications for year 2000 compatibility are not expected to be material. 3. The results of operations and statements of cash flows for the six months ended March 31, 1998 are not necessarily indicative of the results to be expected for the full year. 4. ACQUISITION OF HOLLAND & BARRETT HOLDINGS LTD. On August 7, 1997, the Company acquired all of the issued and outstanding capital stock of Holland & Barrett Holdings Ltd. ('H&B') from Lloyds Chemist's plc ('Lloyds') for an aggregate purchase price of approximately $169,000 plus acquisition costs of approximately $811. The acquisition has been accounted for under the purchase method and, accordingly, the results of operations are included in the financial statements from the date of acquisition. H&B markets a broad line of nutritional supplement products, including vitamins, F-6 NBTY, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) minerals and other nutritional supplements and food products. At the date of acquisition, H&B operated approximately 410 retail stores in the United Kingdom. The Company issued to Lloyds two promissory notes (the 'Promissory Notes') totaling approximately $170,000 as consideration for the purchase of capital stock of H&B. The Promissory Notes, which are collateralized by two letters of credit issued by a lending institution, were paid in full in October 1997. In connection with the Acquisition, the Company (i) entered into a $50,000 credit and guarantee agreement (the 'Credit and Guarantee Agreement'), 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 will be amortized over 25 years. Additionally, finance related costs of approximately $5,600 will be amortized over 10 years. 5. Inventories have been estimated by using the gross profit method for the interim periods. The components of the inventories are as follows:
SEPTEMBER 30, MARCH 31, 1997 1998 ------------- ----------- (UNAUDITED) Raw materials and Work-in-process................................. $ 37,347 $ 42,714 Finished goods.................................................... 49,093 56,138 ------------- ----------- $ 86,440 $ 98,852 ------------- ----------- ------------- -----------
6. Intangible assets, at cost, acquired at various dates are as follows:
SEPTEMBER 30, MARCH 31, 1997 1998 ------------- ----------- (UNAUDITED) Goodwill.......................................................... $ 136,972 $ 142,510 Customer lists.................................................... 12,732 12,731 Trademark and licenses............................................ 1,201 1,201 Covenants not to compete.......................................... 1,305 1,305 ------------- ----------- 152,210 157,747 Less, accumulated Amortization.................................... 10,907 13,994 ------------- ----------- $ 141,303 $ 143,753 ------------- ----------- ------------- -----------
7. ACCRUED EXPENSES
SEPTEMBER 30, MARCH 31, 1997 1998 ------------- ----------- (UNAUDITED) Litigation settlement costs....................................... $ 5,600 Payroll and related payroll taxes................................. 4,622 $ 4,285 Customer deposits................................................. 2,568 885 Accrued purchases................................................. 2,800 5,639 Income taxes payable.............................................. 7,597 7,476 Other............................................................. 12,524 9,892 ------------- ----------- $35,711 $28,177 ------------- ----------- ------------- -----------
F-7 NBTY, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 8. Basic earnings per share are based on the weighted average number of common shares outstanding during the six month periods ended March 31, 1998 and 1997. Diluted earnings per share include the effect of outstanding stock options, if exercised. The following is a reconciliation between the basic and diluted earnings per share:
FOR THE SIX MONTHS MARCH 31, ------------------ 1997 1998 ------- ------- (UNAUDITED) Numerator: Numerator for basic earnings per share--income available to common stockholders....................................................... $15,842 $23,633 ------- ------- ------- ------- Numerator for dilutive earnings per share--income available to common stockholders....................................................... $15,842 $23,633 ------- ------- ------- ------- Denominator: Denominator for basic earnings per share--weighted-average Shares..... 64,578 64,662 Effective of dilutive securities: Stock options...................................................... 4,341 4,305 ------- ------- Denominator for diluted earnings per share--weighted-average Shares... 68,919 68,967 ------- ------- ------- ------- Basic earnings per share................................................ $ 0.25 $ 0.37 ------- ------- ------- ------- Diluted earnings per share.............................................. $ 0.23 $ 0.34 ------- ------- ------- -------
9. SHAREHOLDER LITIGATION In October 1994, two lawsuits were commenced in the U.S. District Court, Eastern District of New York, against the Company and two of its officers. On October 17, 1997, a Memorandum of Understanding was entered into between the Company and the attorneys representing the Plaintiff class agreeing to an $8,000 ($4,400 cash, $3,600 stock) settlement of the lawsuit. Subsequently, the Company entered into a Capital Stipulation of Settlement calling for, among other things, a total cash payment of $8,000. Cash payments aggregating $8,000 were made in November and December 1997. The Company had been notified by its insurance carrier that it was willing to reimburse the Company to the extent of $2,400. The Company recorded a $5,600 provision for its portion of the settlement in fiscal 1997, which, along with related legal fees of approximately $768, has been reflected separately in the fiscal 1997 statements of income (refer to the Company's 10-K). In January 1998, an insurance carrier paid the Company $2,650. F-8 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of NBTY, Inc.: We have audited the accompanying supplemental consolidated balance sheets of NBTY, Inc. and Subsidiaries as of September 30, 1996 and 1997 and the related supplemental consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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. The supplemental consolidated financial statements give retroactive effect to the merger of NBTY, Inc. and Subsidiaries and Nutrition Headquarters, Inc., Lee Nutrition, Inc. and Nutro Laboratories, Inc. on April 20, 1998, which has been accounted for as a pooling of interests as described in Note 1 to the supplemental consolidated financial statements. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling of interests methods in financial statements that do not include the date of consummation. These financial statements do not extend through the date of consummation; however, they will become the historical consolidated financial statements of NBTY, Inc. and Subsidiaries after financial statements covering the date of consummation of the business combination are issued. In our opinion, the supplemental consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of NBTY, Inc. and Subsidiaries at September 30, 1996 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, 1997, in conformity with generally accepted accounting principles applicable after financial statements are issued for a period which includes the date of consummation of the business combination. COOPERS & LYBRAND L.L.P. Melville, New York April 24, 1998 F-9 NBTY, INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1996 AND 1997 (DOLLARS AND SHARES IN THOUSANDS)
1996 1997 -------- -------- ASSETS Current assets: Cash and cash equivalents............................................................... $ 12,814 $ 20,262 Short-term investments.................................................................. 11,024 8,362 Accounts receivable, less allowance for doubtful accounts of $919 in 1996 and $1,116 in 1997....................................................................... 14,580 19,603 Inventories............................................................................... 47,241 86,440 Deferred income taxes..................................................................... 3,155 6,032 Prepaid catalog costs and other current assets............................................ 5,857 19,111 -------- -------- Total current assets............................................................... 94,671 159,810 Cash held in escrow....................................................................... 144,262 Property, plant and equipment, net........................................................ 70,423 118,184 Intangible assets, net.................................................................... 5,376 141,303 Other assets.............................................................................. 1,478 7,618 -------- -------- Total assets....................................................................... $171,948 $571,177 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt and capital lease obligations......................... $ 2,767 $ 1,519 Demand note payable..................................................................... 2,633 1,873 Accounts payable........................................................................ 15,584 49,857 Accrued expenses........................................................................ 16,128 35,711 -------- -------- Total current liabilities.......................................................... 37,112 88,960 Long-term debt............................................................................ 20,298 168,550 Obligations under capital leases.......................................................... 3,272 2,700 Promissory note payable................................................................... 169,909 Deferred income taxes..................................................................... 2,827 7,474 Other liabilities......................................................................... 794 2,293 -------- -------- Total liabilities.................................................................. 64,303 439,886 -------- -------- Commitments and contingencies Stockholders' equity: Common stock, $.008 par; authorized 25,000 shares in 1996 and 75,000 shares in 1997; issued 23,004 shares in 1996 and 69,123 shares in 1997 and outstanding 21,517 shares in 1996 and 64,614 shares in 1997.................................................... 184 553 Capital in excess of par................................................................ 56,260 56,182 Retained earnings....................................................................... 54,433 75,199 -------- -------- 110,877 131,934 Less 1,487 and 4,509 treasury shares at cost, in 1996 and 1997, respectively............ (2,648) (3,206) Stock subscriptions receivable.......................................................... (584) Cumulative translation adjustment....................................................... 2,563 -------- -------- Total stockholders' equity......................................................... 107,645 131,291 -------- -------- Total liabilities and stockholders' equity......................................... $171,948 $571,177 -------- -------- -------- --------
See notes to supplemental consolidated financial statements. F-10 NBTY INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997 (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1995 1996 1997 -------- -------- -------- Net sales.................................................................... $250,351 $265,670 $355,336 -------- -------- -------- Costs and expenses: Cost of sales.............................................................. 137,254 138,186 177,909 Catalog printing, postage and promotion.................................... 28,307 26,695 27,932 Selling, general and administrative........................................ 67,032 68,414 96,653 Litigation settlement costs................................................ 6,368 -------- -------- -------- 232,593 233,295 308,862 -------- -------- -------- Income from operations....................................................... 17,758 32,375 46,474 -------- -------- -------- Other income (expense): Interest, net.............................................................. (2,284) (2,431) (7,471) Miscellaneous, net......................................................... 822 1,430 1,817 -------- -------- -------- (1,462) (1,001) (5,654) -------- -------- -------- Income before income taxes................................................... 16,296 31,374 40,820 Income taxes................................................................. 3,374 9,168 11,694 -------- -------- -------- Net income.............................................................. $ 12,922 $ 22,206 $ 29,126 -------- -------- -------- -------- -------- -------- Net income per share: Basic...................................................................... $ 0.21 $ 0.35 $ 0.45 Diluted.................................................................... $ 0.19 $ 0.32 $ 0.42 Weighted average common shares outstanding: Basic...................................................................... 62,159 64,197 64,611 Diluted.................................................................... 68,695 68,699 68,935
See notes to supplemental consolidated financial statements. F-11 NBTY, INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997 (DOLLARS AND SHARES IN THOUSANDS)
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 --------- ------ ------------- -------- --------- ------- ------------- ---------- Balance, September 30, 1994...... 21,702 $174 $53,455 $32,990 1,213 $ (863 ) Net income for year ended September 30, 1995........... 12,922 S corporation distributions.... (6,750 ) Exercise of stock options...... 430 3 212 Tax benefit from exercise of stock options................ 731 Purchase of treasury stock, at cost...................... 228 (1,483 ) --------- ------ ------------- -------- --------- ------- ------ ---------- Balance, September 30, 1995...... 22,132 177 54,398 39,162 1,441 (2,346 ) Net income for year ended September 30, 1996........... 22,206 S corporation distributions.... (6,935 ) Exercise of stock options...... 872 7 588 $(584) Tax benefit from exercise of stock options................ 1,274 Purchase of treasury stock, at cost...................... 46 (302 ) --------- ------ ------------- -------- --------- ------- ------ ---------- Balance, September 30, 1996...... 23,004 184 56,260 54,433 1,487 (2,648 ) (584) Net income for year ended September 30, 1997........... 29,126 S corporation distributions.... (8,360 ) Gain on foreign currency translation.................. $2,563 Exercise of stock options...... 37 1 33 Tax benefit from exercise of stock options................ 257 Repayment of stock subscriptions receivable for options exercised............ 96 Stock tendered as payment for options exercised............ 16 (558 ) 488 April 3, 1998 three-for-one stock split effected in the form of a 200% stock dividend..................... 46,082 368 (368) 3,006 --------- ------ ------------- -------- --------- ------- ------ ---------- Balance, September 30, 1997...... 69,123 $553 $56,182 $75,199 4,509 $(3,206) $ -- $2,563 --------- ------ ------------- -------- --------- ------- ------ ---------- --------- ------ ------------- -------- --------- ------- ------ ---------- TOTAL -------- Balance, September 30, 1994...... $ 85,756 Net income for year ended September 30, 1995........... 12,922 S corporation distributions.... (6,750) Exercise of stock options...... 215 Tax benefit from exercise of stock options................ 731 Purchase of treasury stock, at cost...................... (1,483) -------- Balance, September 30, 1995...... 91,391 Net income for year ended September 30, 1996........... 22,206 S corporation distributions.... (6,935) Exercise of stock options...... 11 Tax benefit from exercise of stock options................ 1,274 Purchase of treasury stock, at cost...................... (302) -------- Balance, September 30, 1996...... 107,645 Net income for year ended September 30, 1997........... 29,126 S corporation distributions.... (8,360) Gain on foreign currency translation.................. 2,563 Exercise of stock options...... 34 Tax benefit from exercise of stock options................ 257 Repayment of stock subscriptions receivable for options exercised............ 96 Stock tendered as payment for options exercised............ (70) April 3, 1998 three-for-one stock split effected in the form of a 200% stock dividend..................... -------- Balance, September 30, 1997...... $131,291 -------- --------
See notes to supplemental consolidated financial statements. F-12 NBTY, INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997 (DOLLARS IN THOUSANDS)
1995 1996 1997 -------- -------- --------- Cash flows from operating activities: Net income................................................................... $ 12,922 $ 22,206 $ 29,126 Adjustments to reconcile net income to cash provided by operating activities: (Gain) loss on disposal/sale of property, plant and equipment.............. 374 (43) (194) Depreciation and amortization.............................................. 6,171 7,091 9,627 Provision (recovery) for allowance for doubtful accounts................... (18) 283 197 Deferred income taxes...................................................... 685 (642) (2,750) Changes in assets and liabilities, net of acquisitions: Accounts receivable..................................................... (2,207) 1,441 (4,841) Inventories............................................................. 4,657 (1,054) (20,877) Prepaid catalog costs and other current assets.......................... (527) 665 (4,461) Other assets............................................................ 1,175 603 36 Accounts payable........................................................ 2,857 (6,399) 14,586 Accrued expenses........................................................ 3,063 5,565 14,553 Other liabilities....................................................... 275 24 1,500 Income tax receivable................................................... 1,300 -------- -------- --------- Net cash provided by operating activities............................. 30,727 29,740 36,502 -------- -------- --------- Cash flows from investment activities: Increase in intangible assets................................................ (1,064) (67) (1,843) Purchase of property, plant and equipment.................................... (12,707) (16,809) (23,712) Proceeds from sale of property, plant and equipment.......................... 155 293 Proceeds from sale of short-term investments................................. 2,662 Purchase of short-term investments........................................... (11,024) Receipt of payments on notes from sale of direct mail cosmetics business..... 741 1,047 Proceeds from sale of direct mail cosmetics business......................... 350 Other........................................................................ (85) 181 (263) Cash from acquisition........................................................ 5,580 -------- -------- --------- Net cash used in investing activities................................. (13,856) (26,473) (16,236) -------- -------- --------- Cash flows from financing activities: Net payments under line of credit agreement.................................. (5,000) Proceeds from bond offering, net of discount................................. 148,763 Cash held in escrow.......................................................... (144,262) Bond issue costs............................................................. (5,575) Borrowings under long-term debt agreements................................... 3,197 6,000 99 Principal payments under long-term debt agreements and capital leases........ (2,768) (2,802) (3,628) Purchase of treasury stock................................................... (1,292) (302) (70) Proceeds from stock options exercised........................................ 24 11 34 Distributions to stockholders................................................ (6,750) (6,935) (8,360) Repayment of stock subscription receivable................................... 96 -------- -------- --------- Net cash used in financing activities................................. (12,589) (4,028) (12,903) -------- -------- --------- Effect of exchange rate changes on cash and cash equivalents................... 85 -------- -------- --------- Net increase (decrease) in cash and cash equivalents........................... 4,282 (761) 7,448 Cash and cash equivalents at beginning of year................................. 9,293 13,575 12,814 -------- -------- --------- Cash and cash equivalents at end of year....................................... $ 13,575 $ 12,814 $ 20,262 -------- -------- --------- -------- -------- --------- Supplemental disclosure of cash flow information: Cash paid during the period for interest..................................... $ 2,211 $ 2,493 $ 3,568 Cash paid during the period for income taxes................................. $ 1,763 $ 5,496 $ 14,206
See notes to supplemental consolidated financial statements. F-13 NBTY, INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED) YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997 (DOLLARS IN THOUSANDS) Non-cash investing and financing information On October 9, 1995, NBTY 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 4) During fiscal 1996, the Company entered into capital leases for machinery and equipment aggregating $2,635. During fiscal 1995, 1996 and 1997, options were exercised with shares of common stock issued to certain officers and directors. Accordingly, the tax benefit of approximately $731, $1,274 and $257 for the years ended September 30, 1995, 1996 and 1997, 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) In connection with the acquisition of Holland & Barrett Holdings Ltd. on August 7, 1997, NBTY 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 3) See notes to supplemental consolidated financial statements. F-14 NBTY, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1. BASIS OF PRESENTATION The supplemental consolidated financial statements of NBTY, Inc. and Subsidiaries, formerly Nature's Bounty, Inc. ('NBTY'), have been prepared to give retroactive effect to the merger with Nutrition Headquarters, Inc., Lee Nutrition, Inc. and Nutro Laboratories, Inc. (collectively, the 'Nutrition Headquarters Group' and with NBTY collectively, the 'Company') on April 20, 1998, which has been accounted for as a pooling of interests. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling-of-interests methods in financial statements that do not include the date of consummation. These financial statements do not extend through the date of consummation; however, they will become the historical consolidated financial statements of the Company after financial statements covering the date of consummation of the business combination are issued. During 1998, NBTY entered into a definitive agreement to merge with Nutrition Headquarters Group. 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 30,000 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. This distribution has been reflected in the fiscal 1997 supplemental consolidated financial statements and all 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. 2. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business operations The Company manufactures and distributes vitamins, food supplements and health and beauty aids primarily in the United States and the United Kingdom. The processing, formulation, packaging, labeling and advertising of the Company's products are subject to regulation by one or more federal agencies, including the Food and Drug Administration, the Federal Trade Commission, the Consumer Product Safety Commission, the United States Department of Agriculture, the United States Environmental Protection Agency and the United States Postal Service. Within the United Kingdom, 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. 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, 1995, 1996 and 1997. F-15 NBTY, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Inventories Inventories are stated at the lower of cost or market. Cost is determined on the weighted average method which approximates first-in, first-out basis. The cost elements of inventory include materials, labor and overhead. In fiscal 1995, no one supplier provided more than 10% of purchases. One supplier provided approximately 12% of the Company's purchases in 1996 and 1997. Prepaid catalog costs Mail order production and mailing costs are capitalized as prepaid catalog costs and charged to expense over the catalog period, which typically approximates three months. Advertising expense All media (television, radio, magazine) and cooperative advertising costs are generally expensed as incurred. Total expenses relating to advertising and promotion for fiscal 1995, 1996 and 1997 were $17,409, $17,885 and $19,782, 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 translation The financial statements of international subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and an average exchange rate for each period for revenues, expenses, and gains and losses. Where the local currency is the functional currency, translation adjustments are recorded as a separate component of stockholder's equity. F-16 NBTY, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) Income taxes NBTY 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. Prior to the merger, Nutrition Headquarters Group had been treated as an S corporation for federal and state tax purposes. Accordingly, taxable income has 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 the supplemental consolidated financial statements. Cash and cash equivalents The Company considers all highly liquid debt instruments purchased with a 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. Common stock equivalents included in diluted EPS, which consisted of common shares issuable upon the exercise of outstanding stock options, were 6,536, 4,502 and 4,324 for the years ended September 30, 1995, 1996 and 1997, respectively. 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 1996 or 1997, 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 F-17 NBTY, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) No. 121 at October 1, 1996 and its application during fiscal 1997 had no material impact on the Company's financial position or results of operations. New accounting standards In June 1997, the FASB issued SFAS No. 130, 'Reporting Comprehensive Income,' which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distribution to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. In addition, in June 1997, the FASB issued SFAS No. 131, 'Disclosures About Segments of an Enterprise and Related Information,' which establishes standards for reporting information about operating segments. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. Both of these new standards are effective for periods beginning after December 15, 1997 and require comparative information for earlier years to be restated. The implementation of these new standards will not affect the Company's results of operations and financial position, but may have an impact on future financial statement disclosures. 3. ACQUISITION OF HOLLAND & BARRETT HOLDINGS LTD. On August 7, 1997, NBTY acquired all of the issued and outstanding capital stock of Holland & Barrett Holdings Ltd. ('H&B') from Lloyds Chemist's plc ('Lloyds') for an aggregate purchase price of approximately $169,000 plus acquisition costs of approximately $811. The acquisition has been accounted for under the purchase method and, accordingly, the results of operations are included in the financial statements from the date of acquisition. H&B markets a broad line of nutritional supplement products, including vitamins, minerals and other nutritional supplements and food product. At the date of acquisition, H&B operated approximately 410 retail stores in the United Kingdom. NBTY issued to Lloyds two promissory notes (the 'Promissory Notes') totaling approximately $170,000 as consideration for the purchase of capital stock of H&B. The Promissory Notes, which are collateralized by two letters of credit issued by a lending institution, were paid in full in October 1997. In connection with the Acquisition, NBTY (i) entered into a $50,000 revolving credit facility (the 'Revolving Credit Facility'), which provides borrowings for working capital and general corporate purposes, and (ii) issued $150,000 in Senior Subordinated Notes due 2007. Assets acquired and liabilities assumed include cash ($5,580), inventory ($18,045), other current assets ($11,078), property, plant and equipment ($31,554), and current and long-term liabilities ($27,154 and $4,058, respectively). The excess cost of investment over the net book value of H&B at the date of acquisition resulted in an increase in goodwill of $133,725 which will be amortized over 25 years. Additionally, finance related costs of approximately $5,600 will be amortized over 10 years. The following unaudited condensed pro forma information presents a summary of consolidated results of operations of the Company and H&B as if the acquisition had occurred at the beginning of fiscal 1996, with pro forma adjustments to give effect to the amortization of goodwill, interest expense on acquisition debt and certain other adjustments, together with related income tax effects. The pro forma information, which does not give F-18 NBTY, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 3. ACQUISITION OF HOLLAND & BARRETT HOLDINGS LTD.--(CONTINUED) 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.
SEPTEMBER 30, SEPTEMBER 30, 1996 1997 ---------------- ---------------- Net sales....................................................... $421,049 $506,326 Net income...................................................... $ 14,964 $ 24,354 Net income per diluted share.................................... $ 0.22 $ 0.35
4. SALE OF DIRECT-MAIL COSMETICS BUSINESS On October 9, 1995, NBTY sold certain assets of its direct-mail cosmetics business for $2,495. NBTY 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 $8,284 and $137 for fiscal 1995 and 1996, respectively. The inventory note was repaid in full in October 1996 and, in April 1997, NBTY received the final payment of the customer list note. 5. INVENTORIES
SEPTEMBER 30, ------------------ 1996 1997 ------- ------- Raw materials........................................................... $19,482 $32,712 Work-in-process......................................................... 2,484 4,635 Finished goods.......................................................... 25,275 49,093 ------- ------- $47,241 $86,440 ------- ------- ------- -------
6. PROPERTY, PLANT AND EQUIPMENT
SEPTEMBER 30, -------------------- 1996 1997 -------- -------- Land.................................................................. $ 5,641 $ 5,836 Buildings and leasehold improvements.................................. 42,527 51,423 Machinery and equipment............................................... 36,938 43,858 Furniture and fixtures................................................ 9,241 54,385 Transportation equipment.............................................. 737 2,511 Computer equipment.................................................... 9,320 15,434 -------- -------- 104,404 173,447 Less accumulated depreciation and amortization...................... 33,981 55,263 -------- -------- $ 70,423 $118,184 -------- -------- -------- --------
Depreciation and amortization of property, plant and equipment for the years ended September 30, 1995, 1996 and 1997 was approximately $4,216, $6,205 and $8,363, respectively. Property, plant and equipment includes approximately $4,293 and $4,392 for assets recorded under capital leases for fiscal 1996 and 1997, respectively. F-19 NBTY, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 7. INTANGIBLE ASSETS Intangible assets, at cost, acquired at various dates are as follows:
SEPTEMBER 30, ------------------- AMORTIZATION 1996 1997 PERIOD ------- -------- ------------ Goodwill........................................................... $ 469 $136,972 20-40 Customer lists..................................................... 12,044 12,732 6-15 Trademark and licenses............................................. 1,201 1,201 2-3 Covenants not to compete........................................... 1,305 1,305 5-7 ------- -------- 15,019 152,210 Less accumulated amortization.................................... 9,643 10,907 ------- -------- $ 5,376 $141,303 ------- -------- ------- --------
Amortization included in the supplemental consolidated statements of income under the caption 'selling, general and administrative expenses' in 1995, 1996 and 1997 was approximately $1,056, $886 and $1,264, respectively. 8. ACCRUED EXPENSES
SEPTEMBER 30, -------------------- 1996 1997 -------- -------- Litigation settlement costs........................................... $ 5,600 Payroll and related payroll taxes..................................... $ 3,090 4,622 Customer deposits..................................................... 2,199 2,568 Accrued purchases and interest........................................ 2,800 Income taxes payable.................................................. 2,801 7,597 Other................................................................. 8,038 12,524 -------- -------- $ 16,128 $ 35,711 -------- -------- -------- --------
F-20 NBTY, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 9. DEBT
SEPTEMBER 30, ------------------- 1996 1997 ------- -------- Senior debt: 8-5/8% Senior subordinated notes due 2007, net of unamortized discount of $1,237 (a)............................................ $148,763 Senior bank debt (b)................................................... $ 576 44 First subordinated promissory notes; payable in 8 monthly installments of $108 (c).......................................................... 867 Second subordinated promissory notes, principal payable on April 1, 2011 (d)............................................................. 2,245 2,245 Note payable to a bank due in monthly payments of $16, including interest, maturing April 2016 (e).................................... 1,852 1,814 Note payable due in monthly payments of $9, including interest at 8%, maturing March 2001.................................................. 422 341 Mortgages: First mortgage, payable in monthly principal and interest (10.375%) installments (f).................................................. 7,447 7,317 First mortgage payable in monthly principal and interest (9.73%) installments of $25 (g)........................................... 2,258 2,169 First mortgage, payable in monthly principal and interest (7.375%) installments of $55 (h)........................................... 5,926 5,693 Other (i).............................................................. 928 1,107 Revolving credit agreement (j)......................................... ------- -------- 22,521 169,493 Less current portion................................................. 2,223 943 ------- -------- $20,298 $168,550 ------- -------- ------- --------
- ------------------ (a) In September 1997, the Company issued 10-year Senior Subordinated Notes due 2007. The Notes are unsecured and subordinated in right of payment for all existing and future indebtedness of the Company. The Company has registered these Notes under the Securities Act of 1933 through an exchange offer with terms substantially identical to the original Notes. (b) Interest on the senior bank debt was payable monthly at the prime rate which was 8.5% at September 30, 1997. The balance of $44 was paid on October 1, 1997. On April 30, 1997, an agreement for an additional term loan for $1,100 was executed. The terms of the loan agreement provide for repayment in sixty monthly installments with interest at 8.5% per annum. As of September 30, 1997, no funds were advanced under this agreement. (c) The promissory notes were entered into on October 31, 1996 and ended on May 31, 1997. Interest is payable per annum at the lower of 10% or the prime rate plus 2% (prime at September 30, 1997 was 8.5% per annum). These promissory notes are collateralized by a first subordinated pledge of the capital stock of the Company and are guaranteed by certain stockholders. (d) Interest on the second promissory notes is payable per annum at the lower of 10% or the prime rate plus 2%. These promissory notes, payable to a relative of a stockholder, are collateralized by a second subordinated pledge of capital stock of the Company and are guaranteed by certain stockholders. F-21 NBTY, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 9. DEBT--(CONTINUED) (e) Interest on this note payable to a bank is fixed at 8.15% per annum through April 2001. Thereafter, interest will be adjusted every five years. The note is collateralized by a building and land. (f) 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. (g) 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. (h) In April 1996, the Company obtained a $6,000 first mortgage with a fixed interest rate of 7.375%, collateralized by the underlying real estate. The mortgage has monthly principal and interest payments of $55 for fifteen years through 2011. (i) Included in other is approximately $301 and $617 as of September 30, 1996 and 1997, respectively, relating to loans made to a stockholder. These notes are at fixed interest rates ranging from 8.0% to 10.0% and mature at various dates through June 2017. (j) In September 1997, the Company entered into a Revolving Credit Agreement (the 'Agreement') with five banks that provides for borrowings up to $50,000, which expires September 23, 2003. Virtually all of the Company's assets serve as collateral under the Agreement, which is subject to normal banking terms and conditions. The Agreement provides that loans may be made under a selection of rate formulas, including Prime or Euro currency rates. The Agreement provides for the maintenance of various financial ratios and covenants. As of September 30, 1997, there were no outstanding borrowings under the Agreement. Required principal payments of long-term debt are as follows:
YEARS ENDED SEPTEMBER 30, - -------------------------------------------------------------- 1998....................................................... $ 943 1999....................................................... 1,196 2000....................................................... 7,687 2001....................................................... 602 2002....................................................... 567 Thereafter................................................. 158,498 -------- $169,493 -------- --------
The Company also has outstanding a demand note payable, bearing interest at prime plus 0.75%, in the amount of $2,633 and $1,873 at September 30, 1996 and 1997, respectively. The loan agreement has a maximum borrowing limit of 85% of qualified accounts receivable and 35% of qualified inventory, with an overall borrowing limit of $5,000. In August 1997, in connection with the promissory notes issued as consideration for the purchase of H&B, NBTY was issued two standby letters of credit aggregating $170,000. At September 30, 1997, there were no borrowings outstanding under the letters of credit. As of October 17, 1997, upon payment of the promissory notes, the letters of credit were cancelled. In 1997, the Company recorded a loss of $2,265 in connection with an interest rate lock which was settled on October 28, 1997. F-22 NBTY, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 10. CAPITAL LEASE OBLIGATIONS The Company enters into various capital leases for machinery and equipment which provide the Company with bargain purchase options at the end of such lease terms. Future minimum payments under capital lease obligations as of September 30, 1997 are as follows: 1998............................................................. $ 814 1999............................................................. 759 2000............................................................. 759 2001............................................................. 759 2002............................................................. 692 Thereafter....................................................... 174 ------ 3,957 Less, amount representing interest............................... 681 ------ Present value of minimum lease payments (including $576 due within one year)............................................... $3,276 ------ ------
11. INCOME TAXES Provision (benefit) for income taxes consists of the following:
YEAR ENDED SEPTEMBER 30, --------------------------- 1995 1996 1997 ------ ------ ------- Federal Current................................................................. $2,225 $7,551 $14,207 Deferred................................................................ 637 (501) (2,530) State Current................................................................. 464 2,259 1,426 Deferred................................................................ 48 (141) (220) Foreign benefit........................................................... (1,189) ------ ------ ------- Total provision........................................................... $3,374 $9,168 $11,694 ------ ------ ------- ------ ------ -------
The following is a reconciliation of the income tax expense computed using the statutory federal income tax rate to the actual income tax expense and its effective income tax rate.
YEAR ENDED SEPTEMBER 30, ---------------------------------------------------------------------- 1995 1996 1997 -------------------- --------------------- --------------------- PERCENT OF PERCENT OF PERCENT OF PRETAX PRETAX PRETAX AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME ------ ---------- ------- ---------- ------- ---------- Income tax expense at statutory rate............................... $5,541 34.0% $10,981 35.0% $14,287 35.0% State income taxes, net of federal income tax benefit................. 382 2.3% 1,428 4.6% 857 2.1% S corporation earnings not subject to income taxes (a)................... (2,691) (16.5)% (3,150) (10.0)% (4,236) (10.4)% Other, individually less than 5%..... 142 0.9% (91) (0.2)% 786 1.9% ------ ---------- ------- ---------- ------- ---------- Actual income tax provision.......... $3,374 20.7% $ 9,168 29.2% $11,694 28.6% ------ ---------- ------- ---------- ------- ---------- ------ ---------- ------- ---------- ------- ----------
- ------------------ (a) Prior to the merger, Nutrition Headquarters Group had been treated as an S corporation for federal and state tax purposes. Accordingly, taxable income has 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 the supplemental consolidated financial statements. F-23 NBTY, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 11. INCOME TAXES--(CONTINUED) The components of deferred tax assets and liabilities are as follows:
1996 1997 ------- ------- Deferred tax assets: Current: Inventory capitalization............................................ $ 243 $ 351 Accrued expenses and reserves not currently deductible.............. 2,591 5,350 Tax credits......................................................... 321 331 ------- ------- Current deferred tax assets.................................... 3,155 6,032 ------- ------- Noncurrent: Intangibles......................................................... 335 333 Reserves not currently deductible................................... 200 188 ------- ------- Total noncurrent............................................... 535 521 ------- ------- Deferred tax liabilities: Property, plant and equipment.......................................... (3,362) (7,995) ------- ------- Net deferred tax (liability) asset............................. $ 328 $(1,442) ------- ------- ------- -------
Available state tax credits of $321 and $331 in 1996 and 1997, respectively, are scheduled to expire through fiscal 2002. Federal net operating loss carryforwards of $177 will expire in 2004 and available investment tax credits of $58 are scheduled to expire in 2001. 12. COMMITMENTS Leases The Company conducts retail operations under operating leases which expire at various dates through 2020. Some of the leases contain renewal options and provide for additional rentals based upon sales plus certain tax and maintenance costs. Future minimal rental payments under the retail location and other leases that have initial or noncancelable lease terms in excess of one year at September 30, 1997 are as follows:
YEAR ENDING SEPTEMBER 30, - -------------------------------------------------------------- 1998....................................................... $ 25,322 1999....................................................... 24,501 2000....................................................... 23,522 2001....................................................... 22,176 2002....................................................... 20,804 Thereafter................................................. 161,623 -------- $277,948 -------- --------
Operating lease rental expense, including real estate tax and maintenance costs, and leases on a month to month basis were approximately $1,358, $2,092 and $7,852 for the years ended September 30, 1995, 1996 and 1997, respectively. F-24 NBTY, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 12. COMMITMENTS--(CONTINUED) Purchase commitments The Company was committed to make future purchases under various purchase order arrangements with fixed price provisions aggregating approximately $12,923 and $26,152 at September 30, 1996 and 1997, respectively. Capital commitments The Company had approximately $15,800 in open capital commitments related to a manufacturing facility and computer hardware and software at September 30, 1997. Employment and consulting agreements NBTY has employment agreements with two of its officers. The agreements, which expire in January 2004, provide for minimum salary levels, including cost of living adjustments, and also contain provisions regarding severance and changes in control of the Company. The commitment for salaries as of September 30, 1997 was approximately $749 per year. 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 employee 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. The Company also has a two-year consulting agreement with its former chairman and current director which expired on December 31, 1997. Such agreement required annual payments of approximately $350. The parties have renewed the agreement to provide services from January 1, 1998 through December 31, 2000. During this period, the consulting fee payable shall be fixed by the Board of Directors of the Company, provided that in no event will the consulting fee be at a rate lower than $400 per year with certain fringe benefits accorded other executives of NBTY. In addition, an entity owned by a relative of an officer received sales commissions of $510, $417 and $541 in 1995, 1996 and 1997, respectively. 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 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 was entitled to a compensation deduction for tax purposes of approximately $3,145 and a tax benefit of approximately $1,274 which was credited to capital in excess of par. During fiscal 1995, options were exercised with 430 shares of common stock issued (prior to the aforementioned stock split) to certain officers and directors for $24 and an interest bearing note in the amount of F-25 NBTY, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 13. STOCK OPTION PLANS--(CONTINUED) $191. The promissory note, including interest, was paid by the surrender of 23 NBTY common shares to the Company at the prevailing market price. As a result of the exercise of these options, the Company was entitled to a compensation deduction of approximately $1,828 which resulted in a tax benefit of approximately $731 which was credited to capital in excess of par. A summary of stock option activity is as follows:
1995 1996 1997 --------------------- --------------------- --------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE --------- -------- --------- -------- --------- -------- Outstanding at beginning of year..... 8,475 $.24 7,185 $.25 4,569 $.25 Exercised............................ 1,290 .17 2,616 .23 111 .31 --------- -------- --------- -------- --------- -------- Outstanding at end of year........... 7,185 $.25 4,569 $.25 4,458 $.25 --------- -------- --------- -------- --------- -------- --------- -------- --------- -------- --------- -------- Exercisable at end of year........... 7,185 $.25 4,569 $.25 4,458 $.25 --------- -------- --------- -------- --------- -------- --------- -------- --------- -------- --------- --------
As of September 30, 1997, the weighted average remaining contractual life of outstanding options was 4 years. In addition, there were no options available for grant at September 30, 1995, 1996 or 1997. 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 $498, $489 and $1,209 for the years ended September 30, 1995, 1996 and 1997, respectively. 15. LITIGATION L-tryptophan The Company and certain other companies in the industry have been named as defendants in cases arising out of the ingestion of products containing L-tryptophan. The Company had been named in more than 265 lawsuits, of which four are still pending against the Company. The other 261 lawsuits have been settled at no cost to the Company. The Company's supplier of L-tryptophan agreed to indemnify the Company and the other companies named in the lawsuits through the final resolution of all cases involving L-tryptophan. In addition, the supplier has posted, for the benefit of the Company and the other companies named in the lawsuits, a revolving, irrevocable letter of credit of $20,000 to be used in the event that the supplier is unable or unwilling to satisfy any claims or judgments. While not all of these suits quantify the amount demanded, the Company believes that the amount required to either settle these cases or to pay judgments rendered therein will be paid by the supplier or by the Company's product liability insurance carrier. While the outcome of any litigation is uncertain, it is the opinion of management and legal counsel of the Company that it is remote that the Company will incur a material loss as a result of the L-tryptophan litigation and claims. Accordingly, no provision for liability, if any, that may result therefrom has been made in the Company's financial statements. F-26 NBTY, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 15. LITIGATION--(CONTINUED) Shareholder litigation In October 1994, two lawsuits were commenced in the U.S. District Court, Eastern District of New York, against the Company and two of its officers. On October 17, 1997, a Memorandum of Understanding was entered into between the Company and the attorneys representing the Plaintiff class agreeing to an $8,000 ($4,400 cash, $3,600 stock) settlement of the lawsuit. Subsequently, the Company entered into a Capital Stipulation of Settlement calling for, among other things, a total cash payment of $8,000. The Company has been notified by its insurance carrier that it is willing to reimburse the Company to the extent of $2,400. Accordingly, as of September 30, 1997, the Company recorded a $5,600 provision for its portion of the settlement which, along with related legal fees of approximately $768, has been reflected separately in the statement of income. Other litigation The Company is also involved in miscellaneous claims and litigation which management believes, taken individually or in the aggregate, would not have a material adverse effect on the Company's financial position or its business. 16. FOREIGN OPERATIONS In connection with NBTY's recent acquisition of H&B which operates primarily in the United Kingdom, the Company has significantly expanded its operations outside of the United States. The following information has been summarized by geographic area as of September 30, 1997 and for the year then ended.
IDENTIFIABLE OPERATING ASSETS SALES INCOME ------------ -------- --------- United States...................................................... $356,987 $328,839 $49,755 United Kingdom..................................................... 214,190 26,497 (3,281) ------------ -------- --------- $571,177 $355,336 $46,474 ------------ -------- --------- ------------ -------- ---------
17. RELATED PARTY TRANSACTIONS Nutrition Headquarters Group has outstanding promissory notes of $2,245, as described in Note 9, which are payable to a relative of a stockholder. Interest on the obligation amounted to approximately $224 for each of the three years ended September 30, 1995, 1996 and 1997. Nutrition Headquarters Group has outstanding loans to a stockholder in the aggregate amount of $301 and $617, as described in Note 9 as of September 30, 1996 and 1997, respectively. Interest on these loans amounted to approximately $29, $30 and $56 for the years ended September 30, 1995, 1996 and 1997, respectively. For the years ended September 30, 1995, 1996 and 1997, Nutrition Headquarters Group provided distributions to its stockholders in the aggregate amount of $6,750, $6,935 and $8,360, respectively. 18. SUBSEQUENT EVENTS In April 1998, the Company sold certain assets of its cosmetic pencil operation for approximately $6,000. The Company will receive $4,500 in cash with additional payments of $1,500 over the next three years. In connection with such sale, the Company realized a pre-tax gain of approximately $1.6 million. Revenues applicable to this business were $581, $577 and $1,875 for fiscal 1995, 1996 and 1997, respectively, and the related results of operations were insignificant. F-27 NBTY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS AND SHARES IN THOUSANDS)
SEPTEMBER 30, MARCH 31, 1997 1998 ------------- ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents........................................................... $ 18,419 $ 16,350 Short-term investments.............................................................. 8,362 -- Accounts receivable, less allowance for doubtful accounts of $991 in 1997 and $985 in 1998.......................................................................... 15,701 15,623 Inventories......................................................................... 75,936 87,762 Deferred income taxes............................................................... 6,032 6,032 Prepaid catalog costs and other current assets...................................... 18,885 11,913 ------------- ----------- Total current assets........................................................... 143,335 137,680 Cash held in escrow................................................................... 144,262 -- Property, plant and equipment......................................................... 155,611 194,760 Less accumulated depreciation and amortization...................................... 47,438 53,651 ------------- ----------- 108,173 141,109 Intangible assets, net................................................................ 140,447 142,959 Other assets.......................................................................... 6,521 7,515 ------------- ----------- Total assets................................................................... $ 542,738 $ 429,263 ------------- ----------- ------------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt and capital lease obligations..................... $ 1,016 $ 1,060 Accounts payable.................................................................... 44,514 40,445 Accrued expenses.................................................................... 34,325 26,428 ------------- ----------- Total current liabilities...................................................... 79,855 67,933 Long-term debt........................................................................ 163,447 208,218 Obligations under capital leases...................................................... 2,700 2,446 Promissory note payable............................................................... 169,909 -- Deferred income taxes................................................................. 7,474 7,642 Other liabilities..................................................................... 2,293 2,293 ------------- ----------- Total liabilities.............................................................. 425,678 288,532 ------------- ----------- Commitments and contingencies Stockholders' equity: Common stock, $0.008 par; authorized 25,000 in 1997 and 75,000 shares in 1998; issued 60,351 in 1997 and 60,483 in 1998 and outstanding 55,842 shares in 1997 and 55,974 shares in 1998........................................................ 483 484 Capital in excess of par............................................................ 55,982 56,589 Retained earnings................................................................... 61,238 77,464 ------------- ----------- 117,703 134,537 Less 4,509 treasury shares at cost, in 1997 and 1998................................ (3,206) (3,206) Cumulative translation adjustment................................................... 2,563 9,400 ------------- ----------- Total stockholders' equity..................................................... 117,060 140,731 ------------- ----------- Total liabilities and stockholders' equity..................................... $ 542,738 $ 429,263 ------------- ----------- ------------- -----------
See notes to condensed consolidated financial statements. F-28 NBTY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE SIX MONTHS ENDED MARCH 31, -------------------- 1997 1998 -------- -------- Net sales................................................................................. $122,347 $244,404 -------- -------- Costs and expenses: Cost of sales........................................................................... 58,247 116,227 Catalog printing, postage and promotion................................................. 9,942 9,444 Selling, general and administrative..................................................... 35,409 84,517 -------- -------- 103,598 210,188 -------- -------- Income from operations.................................................................... 18,749 34,216 -------- -------- Other income (expenses): Interest, net........................................................................... (869) (8,850) Miscellaneous, net...................................................................... 327 1,312 -------- -------- (542) (7,538) -------- -------- Income before income taxes................................................................ 18,207 26,678 Income taxes.............................................................................. 7,283 10,453 -------- -------- Net income.............................................................................. $ 10,924 $ 16,225 -------- -------- -------- -------- Net income per share: Basic................................................................................... $ 0.20 $ 0.29 Diluted................................................................................. $ 0.18 $ 0.27 Weighted average common shares outstanding: Basic................................................................................... 55,806 55,890 Diluted................................................................................. 60,147 60,195
See notes to condensed consolidated financial statements. F-29 NBTY INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
FOR THE SIX MONTHS ENDED MARCH 31, --------------------- 1997 1998 -------- --------- Net income............................................................................... $ 10,924 $ 16,225 Adjustments to reconcile net income to cash provided by operating activities: Loss on sale of property, plant and equipment.......................................... 26 Depreciation and amortization.......................................................... 2,966 9,366 Provision (recovery) for allowance for doubtful accounts............................... 206 (5) Increase in deferred taxes............................................................. 7 Changes in assets and liabilities, net of acquisitions: Decrease (increase) in accounts receivable.......................................... (4,155) 685 Increase in inventories............................................................. (8,331) (11,111) Decrease (increase) in prepaid catalog costs and other current assets............... (948) 9,104 Decrease in other assets............................................................ 288 535 (Decrease) increase in accounts payable............................................. 8,680 (4,976) (Decrease) increase in accrued expenses............................................. 4,904 (12,791) -------- --------- Net cash provided by operating activities........................................... 14,560 7,039 -------- --------- Cash flow from investing activities: Purchase of property, plant and equipment.............................................. (9,328) (38,133) Proceeds from sale of property, plant and equipment.................................... 20 Proceeds from sale of short-term investments........................................... 8,362 Purchase of short-term investments..................................................... (4,651) Receipt of payments from direct-mail cosmetics business................................ 322 -------- --------- Net cash used in investing activities............................................... (13,637) (29,771) -------- --------- Cash flows from financing activities: Borrowings under long term debt agreements............................................. 45,000 Cash held in escrow.................................................................... 144,730 Principal payments under long-term debt agreements and capital leases.................. (456) (496) Purchase of treasury stock............................................................. (15) Proceeds from stock options exercised.................................................. 23 40 Repayment of promissory note........................................................ (168,770) -------- --------- Net cash provided by (used in) financing activities................................. (448) 20,504 -------- --------- Effect of Exchange Rate Changes on Cash and Cash Equivalents............................. 159 -------- --------- Net (decrease) increase in cash and cash equivalents..................................... 475 (2,069) Cash and cash equivalents at beginning of quarter........................................ 9,292 18,419 -------- --------- Cash and cash equivalents at end of quarter.............................................. $ 9,767 $ 16,350 -------- --------- -------- --------- Supplemental Disclosure of Cash Flow Information: Cash paid during the period for interest............................................... $ 869 $ 11,777 Cash paid during the period for taxes.................................................. $ 4,677 $ 10,082
See notes to condensed consolidated financial statements. F-30 NBTY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly its financial position as of March 31, 1998 and results of operations and statements of cash flows for the six months ended March 31, 1997 and 1998. The consolidated condensed balance sheet as of September 30, 1997 has been derived from the audited balance sheet as of that date. This report should be read in conjunction with the Company's annual report filed on Form 10-K for the fiscal year ended September 30, 1997. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Foreign currency translation The financial statements of international subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and an average exchange rate for each period for revenues, expenses, and gains and losses. Where the local currency is the functional currency, translation adjustments are recorded as a separate component of stockholder's equity. Common shares and earnings per share On March 9, 1998, the Company's Board of Directors declared a three-for-one stock split in the form of a 200% stock dividend effective March 23, 1998. In addition, 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. All per common share amounts have been retroactively restated to account for the above stock split. In addition, stock options and respective exercise prices have been amended to reflect these transactions (see Note 7). Accounting changes Effective October 1, 1996, the Company adopted the disclosure-only provisions of Statement of Financial Accounting Standards ('SFAS') No. 123, 'Accounting for Stock-Based Compensation.' As permitted by SFAS No. 123, the Company continues to measure compensation cost in accordance with Accounting Principles Board Opinion ('APB') No. 25, 'Accounting for Stock Issued to Employees.' As the Company has not granted any options during the six months ended March 31, 1998, nor fiscal 1997 or 1996, there would not have been any impact on the Company's financial position or results of operations on a pro forma basis. Effective October 1, 1996, the Company adopted SFAS No. 121,'Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.' This statement requires that certain assets be reviewed for impairment and, if impaired, be measured at fair value, whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The adoption of SFAS No. 121 at October 1, 1996 and its application during fiscal 1997 and the six months ended March 31, 1998 had no material impact on the Company's financial position or results of operations. F-31 NBTY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) New accounting standards In February 1997, the Financial Accounting Standards Board ('FASB') issued SFAS No. 128, 'Earnings Per Share.' The statement simplifies the standards for computing earnings per share ('EPS') and makes them comparable to international EPS standards. The statement requires the presentation of both 'basic' and 'diluted' EPS on the face of the income statement with a supplementary reconciliation of the amounts used in the calculations (see note 7). In June 1997, the FASB issued SFAS No. 130, 'Reporting Comprehensive Income,' which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distribution to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. In addition, in June 1997, the FASB issued SFAS No. 131, 'Disclosures About Segments of an Enterprise and Related Information,' which establishes standards for reporting information about operating segments. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. Both of these new standards are effective for fiscal years beginning after December 15, 1997 and require comparative information for earlier years to be restated. The implementation of these new standards will not affect the Company's results of operations and financial position, but may have an impact on future financial statement disclosures. Year 2000 Software Compatibility The Company is continually updating its information systems, and has evaluated significant computer software applications for compatibility with the year 2000. With the system changes implemented to date and other planned changes, the Company anticipates that its computer software applications will be compatible with the year 2000. Expenditures specifically related to software modifications for year 2000 compatibility are not expected to be material. 2. The results of operations and statements of cash flows for the six months ended March 31, 1998 are not necessarily indicative of the results to be expected for the full year. 3. ACQUISITION OF HOLLAND & BARRETT HOLDINGS LTD. On August 7, 1997, the Company acquired all of the issued and outstanding capital stock of Holland & Barrett Holdings Ltd. ('H&B') from Lloyds Chemist's plc ('Lloyds') for an aggregate purchase price of approximately $169,000 plus acquisition costs of approximately $811. The acquisition has been accounted for under the purchase method and, accordingly, the results of operations are included in the financial statements from the date of acquisition. H&B markets a broad line of nutritional supplement products, including vitamins, minerals and other nutritional supplements and food products. At the date of acquisition, H&B operated approximately 410 retail stores in the United Kingdom. The Company issued to Lloyds two promissory notes (the 'Promissory Notes') totaling approximately $170,000 as consideration for the purchase of capital stock of H&B. The Promissory Notes, which are collateralized by two letters of credit issued by a lending institution, were paid in full in October 1997. In connection with the Acquisition, the Company (i) entered into a $50,000 credit and guarantee agreement (the 'Credit and Guarantee Agreement'), which provides borrowings for working capital and general corporate purposes, and (ii) issued $150,000 in Senior Subordinated Notes due 2007. F-32 NBTY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 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 will be amortized over 25 years. Additionally, finance related costs of approximately $5,600 will be amortized over 10 years. 4. Inventories have been estimated by using the gross profit method for the interim periods. The components of the inventories are as follows:
SEPTEMBER 30, MARCH 31, 1997 1998 ---------------- ----------- (UNAUDITED) Raw materials and work-in-process................................. $ 33,408 $32,367 Finished goods.................................................... 42,528 55,395 ---------------- ----------- $ 75,936 $87,762 ---------------- ----------- ---------------- -----------
5. Intangible assets, at cost, acquired at various dates are as follows:
SEPTEMBER 30, MARCH 31, 1997 1998 ---------------- ------------ (UNAUDITED) Goodwill......................................................... $136,972 $142,510 Customer lists................................................... 9,816 9,816 Trademark and licenses........................................... 1,201 1,201 Covenants not to compete......................................... 1,305 1,305 ---------------- ------------ 149,294 154,832 Less, accumulated amortization................................... 8,847 11,873 ---------------- ------------ $140,447 $142,959 ---------------- ------------ ---------------- ------------
6. ACCRUED EXPENSES:
SEPTEMBER 30, MARCH 31, 1997 1998 ---------------- ------------ (UNAUDITED) Litigation settlement costs....................................... $ 5,600 Payroll and related payroll taxes................................. 4,185 $ 3,149 Customer deposits................................................. 2,363 885 Accrued purchases................................................. 2,800 5,639 Income taxes payable.............................................. 7,456 7,431 Other............................................................. 11,921 9,324 ---------------- ----------- $ 34,325 $ 26,428 ---------------- ----------- ---------------- -----------
F-33 NBTY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 7. Basic earnings per share are based on the weighted average number of common shares outstanding during the six month periods ended March 31, 1997 and 1998. Diluted earnings per share include the effect of outstanding stock options, if exercised. The following is a reconciliation between the basic and diluted earnings per share:
FOR THE SIX MONTHS MARCH 31, ------------------ 1997 1998 ------- ------- (UNAUDITED) Numerator: Numerator for basic earnings per share--income available to common stockholders....................................................... $10,924 $16,225 ------- ------- ------- ------- Numerator for dilutive earnings per share--income available to common stockholders....................................................... $10,924 $16,225 ------- ------- ------- ------- Denominator: Denominator for basic earnings per share--weighted-average shares..... 55,806 55,890 Effective of dilutive securities: Stock options...................................................... 4,341 4,305 ------- ------- Denominator for diluted earnings per share--weighted-average shares... 60,147 60,195 ------- ------- ------- ------- Basic earnings per share................................................ $ 0.20 $ 0.29 ------- ------- ------- ------- Diluted earnings per share.............................................. $ 0.18 $ 0.27 ------- ------- ------- -------
8. SHAREHOLDER LITIGATION In October 1994, two lawsuits were commenced in the U.S. District Court, Eastern District of New York, against the Company and two of its officers. On October 17, 1997, a Memorandum of Understanding was entered into between the Company and the attorneys representing the Plaintiff class agreeing to an $8,000 ($4,400 cash, $3,600 stock) settlement of the lawsuit. Subsequently, the Company entered into a Capital Stipulation of Settlement calling for, among other things, a total cash payment of $8,000. Cash payments aggregating $8,000 were made in November and December 1997. The Company had been notified by its insurance carrier that it was willing to reimburse the Company to the extent of $2,400. The Company recorded a $5,600 provision for its portion of the settlement in fiscal 1997, which, along with related legal fees of approximately $768, has been reflected separately in the fiscal 1997 statements of income (refer to the Company's 10-K). In January 1998, an insurance carrier paid the Company $2,650. 9. SUBSEQUENT EVENT In April 1998, the Company acquired Nutrition Headquarters, Inc., Lee Nutrition, Inc., Nutro Laboratories, Inc. and Brunswick Laboratories, Inc. in an exchange of approximately 8,772 shares of NBTY common stock, $0.008 par value, fair market value approximates $185 million. The merger constituted a tax-free reorganization in accordance with Section 368(a)(1)(A) of the Internal Revenue Service and has been accounted for as a pooling F-34 NBTY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) of interests under APB No. 16. The financial statements presented, herein, have not been restated to include the combined results of operations, financial position and cash flows. Nutrition Headquarters, Inc. and Lee Nutrition, Inc. are mail order vitamin and nutritional supplement companies and Nutro Laboratories, Inc. and Brunswick Laboratories, Inc. are vitamin and nutritional supplement manufacturers. The following table, represents the combined results of operations for the six month periods ended March 31, 1997 and 1998 as if the companies had been pooled:
FOR THE SIX MONTHS ENDED MARCH 31, -------------------- 1997 1998 -------- -------- (UNAUDITED) Revenues: NBTY................................................................ $122,347 $244,404 Nutrition Headquarters, Lee Nutrition, Brunswick Laboratories and Nutro Laboratories............................................... 36,758 42,416 -------- -------- Combined.................................................... $159,105 $286,820 -------- -------- -------- -------- Net income NBTY................................................................ $ 10,924 $ 16,225 Nutrition Headquarters, Lee Nutrition, Brunswick Laboratories and Nutro Laboratories............................................... 4,918 7,408 -------- -------- Combined.................................................... $ 15,842 $ 23,633 -------- -------- -------- --------
F-35 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of NBTY, Inc.: We have audited the accompanying consolidated balance sheets of NBTY, Inc. and Subsidiaries as of September 30, 1996 and 1997 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1997, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Melville, New York November 6, 1997, except as to Note 1 the date of which is April 3, 1998 F-36 NBTY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1996 AND 1997 (DOLLARS AND SHARES IN THOUSANDS)
1996 1997 -------- -------- ASSETS Current assets: Cash and cash equivalents............................................................... $ 9,292 $ 18,419 Short-term investments.................................................................. 11,024 8,362 Accounts receivable, less allowance for doubtful accounts of $794 in 1996 and $991 in 1997................................................................................. 11,625 15,701 Inventories............................................................................. 38,070 75,936 Deferred income taxes................................................................... 3,155 6,032 Prepaid catalog costs and other current assets.......................................... 5,683 18,885 -------- -------- Total current assets............................................................... 78,849 143,335 Cash held in escrow....................................................................... 144,262 Property, plant and equipment, net........................................................ 61,732 108,173 Intangible assets, net.................................................................... 3,975 140,447 Other assets.............................................................................. 994 6,521 -------- -------- Total assets....................................................................... $145,550 $542,738 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt and capital lease obligations......................... $ 935 $ 1,016 Accounts payable........................................................................ 10,943 44,514 Accrued expenses........................................................................ 14,705 34,325 -------- -------- Total current liabilities.......................................................... 26,583 79,855 Long-term debt............................................................................ 15,178 163,447 Obligations under capital leases.......................................................... 3,219 2,700 Promissory note payable................................................................... 169,909 Deferred income taxes..................................................................... 2,827 7,474 Other liabilities......................................................................... 793 2,293 -------- -------- Total liabilities.................................................................. 48,600 425,678 -------- -------- Commitments and contingencies Stockholders' equity: Common stock, $.008 par; authorized 25,000 shares in 1996 and 75,000 in 1997; issued 20,080 shares in 1996 and 60,351 shares in 1997 and outstanding 18,593 shares in 1996 and 55,842 shares in 1997............................................................ 160 483 Capital in excess of par................................................................ 56,014 55,982 Retained earnings....................................................................... 44,008 61,238 -------- -------- 100,182 117,703 Less 1,487 and 4,509 treasury shares at cost, in 1996 and 1997, respectively............ (2,648) (3,206) Stock subscriptions receivable.......................................................... (584) Cumulative translation adjustment....................................................... 2,563 -------- -------- Total stockholders' equity......................................................... 96,950 117,060 -------- -------- Total liabilities and stockholders' equity......................................... $145,550 $542,738 -------- -------- -------- --------
See notes to consolidated financial statements. F-37 NBTY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997 (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1995 1996 1997 -------- -------- -------- Net sales.................................................................... $178,760 $194,403 $281,407 -------- -------- -------- Costs and expenses: Cost of sales.............................................................. 93,875 95,638 135,886 Catalog printing, postage and promotion.................................... 19,262 17,635 19,227 Selling, general and administrative........................................ 56,728 58,515 86,588 Litigation settlement costs................................................ 6,368 -------- -------- -------- 169,865 171,788 248,069 -------- -------- -------- Income from operations....................................................... 8,895 22,615 33,338 -------- -------- -------- Other income (expense): Interest, net.............................................................. (1,084) (1,445) (6,655) Miscellaneous, net......................................................... 571 1,203 2,033 -------- -------- -------- (513) (242) (4,622) -------- -------- -------- Income before income taxes................................................... 8,382 22,373 28,716 Income taxes................................................................. 3,246 9,021 11,486 -------- -------- -------- Net income.............................................................. $ 5,136 $ 13,352 $ 17,230 -------- -------- -------- -------- -------- -------- Net income per share: Basic...................................................................... $ 0.10 $ 0.24 $ 0.31 Diluted.................................................................... $ 0.09 $ 0.22 $ 0.29 Weighted average common shares outstanding: Basic...................................................................... 53,387 55,425 55,839 Diluted.................................................................... 59,923 59,927 60,163
See notes to consolidated financial statements. F-38 NBTY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997 (DOLLARS AND SHARES IN THOUSANDS)
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 --------- ------ ------------- -------- --------- ------- ------------- ---------- Balance, September 30, 1994... 18,778 $150 $53,209 $25,520 1,213 $ (863 ) Net income for year ended September 30, 1995........ 5,136 Exercise of stock options... 430 3 212 Tax benefit from exercise of stock options............. 731 Purchase of treasury stock, at cost................... 228 (1,483 ) --------- ------ ------------- -------- --------- ------- ------------- ---------- Balance, September 30, 1995... 19,208 153 54,152 30,656 1,441 (2,346 ) Net income for year ended September 30, 1996........ 13,352 Exercise of stock options... 872 7 588 $ (584) Tax benefit from exercise of stock options............. 1,274 Purchase of treasury stock, at cost................... 46 (302 ) --------- ------ ------------- -------- --------- ------- ------------- ---------- Balance, September 30, 1996... 20,080 160 56,014 44,008 1,487 (2,648 ) (584) Net income for year ended September 30, 1997........ 17,230 Gain on foreign currency translation............... $2,563 Exercise of stock options... 37 1 33 Tax benefit from exercise of stock options............. 257 Repayment of stock subscriptions receivable for options exercised..... 96 Stock tendered as payment for options exercised..... 16 (558 ) 488 April 3, 1998 three-for-one stock split effected in the form of a 200% stock dividend.................. 40,234 322 (322) 3,006 --------- ------ ------------- -------- --------- ------- ------------- ---------- Balance, September 30, 1997... 60,351 $483 $55,982 $61,238 4,509 $(3,206) $ -- $2,563 --------- ------ ------------- -------- --------- ------- ------------- ---------- --------- ------ ------------- -------- --------- ------- ------------- ---------- TOTAL -------- Balance, September 30, 1994... $ 78,016 Net income for year ended September 30, 1995........ 5,136 Exercise of stock options... 215 Tax benefit from exercise of stock options............. 731 Purchase of treasury stock, at cost................... (1,483) -------- Balance, September 30, 1995... 82,615 Net income for year ended September 30, 1996........ 13,352 Exercise of stock options... 11 Tax benefit from exercise of stock options............. 1,274 Purchase of treasury stock, at cost................... (302) -------- Balance, September 30, 1996... 96,950 Net income for year ended September 30, 1997........ 17,230 Gain on foreign currency translation............... 2,563 Exercise of stock options... 34 Tax benefit from exercise of stock options............. 257 Repayment of stock subscriptions receivable for options exercised..... 96 Stock tendered as payment for options exercised..... (70) April 3, 1998 three-for-one stock split effected in the form of a 200% stock dividend.................. -------- Balance, September 30, 1997... $117,060 -------- --------
See notes to consolidated financial statements. F-39 NBTY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997 (DOLLARS IN THOUSANDS)
1995 1996 1997 ------- ------- --------- Cash flows from operating activities: Net income................................................................... $ 5,136 $13,352 $ 17,230 Adjustments to reconcile net income to cash provided by operating activities: Loss on disposal/sale of property, plant and equipment.................... 374 31 Depreciation and amortization............................................. 4,840 5,623 8,167 Provision (recovery) for allowance for doubtful accounts.................. (18) 216 197 Deferred income taxes..................................................... 685 (642) (2,750) Changes in assets and liabilities, net of acquisitions: Accounts receivable..................................................... (2,120) 1,616 (4,048) Inventories............................................................. 4,454 (2,036) (19,545) Prepaid catalog costs and other current assets.......................... (264) 487 (4,499) Other assets............................................................ 1,124 675 47 Accounts payable........................................................ 3,160 (5,468) 13,694 Accrued expenses........................................................ 2,810 5,690 14,590 Other liabilities....................................................... 275 24 1,500 Income tax receivable................................................... 1,300 ------- ------- --------- Net cash provided by operating activities............................ 21,756 19,537 24,614 ------- ------- --------- Cash flows from investment activities: Increase in intangible assets................................................ (1,064) (67) (1,843) Purchase of property, plant and equipment.................................... (11,548) (15,750) (21,092) Proceeds from sale of property, plant and equipment.......................... 4 20 Proceeds from sale of short-term investments................................. 2,662 Purchase of short-term investments........................................... (11,024) Receipt of payments on notes from sale of direct mail cosmetics business..... 741 1,047 Proceeds from sale of direct mail cosmetics business......................... 350 Cash from acquisition........................................................ 5,580 ------- ------- --------- Net cash used in investing activities................................ (12,612) (25,746) (13,626) ------- ------- --------- Cash flows from financing activities: Net payments under line of credit agreement.................................. (5,000) Proceeds from bond offering, net of discount................................. 148,763 Cash held in escrow.......................................................... (144,262) Bond issue costs............................................................. (5,575) Borrowings under long-term debt agreements................................... 2,400 6,000 Principal payments under long-term debt agreements and capital leases........ (798) (586) (932) Purchase of treasury stock................................................... (1,292) (302) (70) Proceeds from stock options exercised........................................ 24 11 34 Repayment of stock subscription receivable................................... 96 ------- ------- --------- Net cash (used in) provided by financing activities.................. (4,666) 5,123 (1,946) ------- ------- --------- Effect of exchange rate changes on cash and cash equivalents................... 85 ------- ------- --------- Net increase (decrease) in cash and cash equivalents........................... 4,478 (1,086) 9,127 Cash and cash equivalents at beginning of year................................. 5,900 10,378 9,292 ------- ------- --------- Cash and cash equivalents at end of year....................................... $10,378 $ 9,292 $ 18,419 ------- ------- --------- ------- ------- --------- Supplemental disclosure of cash flow information: Cash paid during the period for interest..................................... $ 1,086 $ 1,454 $ 2,717 Cash paid during the period for income taxes................................. $ 1,649 $ 5,387 $ 14,008
See notes to consolidated financial statements. F-40 NBTY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED) YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997 (DOLLARS IN THOUSANDS) Non-cash investing and financing information 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) During fiscal 1996, the Company entered into capital leases for machinery and equipment aggregating $2,635. During fiscal 1995, 1996 and 1997, options were exercised with shares of common stock issued to certain officers and directors. Accordingly, the tax benefit of approximately $731, $1,274 and $257 for the years ended September 30, 1995, 1996 and 1997, respectively, was recorded as an increase in capital in excess of par and a reduction in taxes currently payable. In addition, during fiscal 1997, common stock was surrendered to the Company in satisfaction of $488 of the stock subscription outstanding at September 30, 1996. (See Note 12) 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) See notes to consolidated financial statements. F-41 NBTY, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business operations NBTY, Inc., formerly Nature's Bounty, Inc. (the 'Company'), manufactures and distributes vitamins, food supplements and health and beauty aids primarily in the United States and the United Kingdom. The processing, formulation, packaging, labeling and advertising of the Company's products are subject to regulation by one or more federal agencies, including the Food and Drug Administration, the Federal Trade Commission, the Consumer Product Safety Commission, the United States Department of Agriculture, the United States Environmental Protection Agency and the United States Postal Service. Within the United Kingdom, the manufacturing, advertising, sales and marketing of food products is regulated by a number of governmental agencies including the Ministry of Agriculture, Fisheries and Food, the Department of Health, the Food Advisory Committee and the Committee on Toxicity, among others. Principles of consolidation and basis of presentation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. Revenue recognition The Company recognizes revenue upon shipment or, with respect to its own retail store operations, upon the sale of products. The Company has no single customer that represents more than 10% of annual net sales or accounts receivable as of and for the years ended September 30, 1995, 1996 and 1997. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Inventories Inventories are stated at the lower of cost or market. Cost is determined on the weighted average method which approximates first-in, first-out basis. The cost elements of inventory include materials, labor and overhead. In fiscal 1995, no one supplier provided more than 10% of purchases. One supplier provided approximately 12% of the Company's purchases in 1996 and 1997. Prepaid catalog costs Mail order production and mailing costs are capitalized as prepaid catalog costs and charged to expense over the catalog period, which typically approximates three months. Advertising expense All media (television, radio, magazine) and cooperative advertising costs are generally expensed as incurred. Total expenses relating to advertising and promotion for fiscal 1995, 1996 and 1997 were $8,823, $9,098 and $11,338, respectively. F-42 NBTY, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) Property, plant and equipment Property, plant and equipment are carried at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the related assets. Expenditures which significantly improve or extend the life of an asset are capitalized. Maintenance and repairs are charged to expense in the year incurred. Cost and related accumulated depreciation for property, plant and equipment are removed from the accounts upon sale or disposition and the resulting gain or loss is reflected in earnings. Intangible assets Goodwill represents the excess of purchase price over the fair value of identifiable net assets of companies acquired. Goodwill and other intangibles are amortized on a straight-line basis over appropriate periods not exceeding 40 years. Foreign currency translation The financial statements of international subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and an average exchange rate for each period for revenues, expenses, and gains and losses. Where the local currency is the functional currency, translation adjustments are recorded as a separate component of stockholder's equity. Income taxes The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Cash and cash equivalents The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Short-term investments Short-term interest bearing investments are those with maturities of less than one year but greater than three months when purchased. These investments are readily convertible to cash and are stated at market value, which approximates cost. Realized gains and losses are included in other income on a specific identification basis in the period they are realized. Common shares and earnings per share 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. Common stock equivalents included in diluted EPS, which consisted of common shares issuable upon the exercise of outstanding stock options, were 6,536, 4,502 and 4,324 for the years ended F-43 NBTY, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) September 30, 1995, 1996 and 1997, respectively. The financial statements and related footnotes have been restated to reflect the adoption of SFAS No. 128. 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. This distribution has been reflected in the fiscal 1997 consolidated financial statements and all 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. 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 1996 or 1997, there would not have been any impact on the Company's financial position or results of operations on a pro forma basis. Effective October 1, 1996, the Company adopted SFAS No. 121, 'Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.' This statement requires that certain assets be reviewed for impairment and, if impaired, be measured at fair value, whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The adoption of SFAS No. 121 at October 1, 1996 and its application during fiscal 1997 had no material impact on the Company's financial position or results of operations. New accounting standards In June 1997, the FASB issued SFAS No. 130, 'Reporting Comprehensive Income,' which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distribution to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. In addition, in June 1997, the FASB issued SFAS No. 131, 'Disclosures About Segments of an Enterprise and Related Information,' which establishes standards for reporting information about operating segments. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. Both of these new standards are effective for periods beginning after December 15, 1997 and require comparative information for earlier years to be restated. The implementation of these new standards will not affect the Company's results of operations and financial position, but may have an impact on future financial statement disclosures. F-44 NBTY, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2. ACQUISITION OF HOLLAND & BARRETT HOLDINGS LTD. On August 7, 1997, the Company acquired all of the issued and outstanding capital stock of Holland & Barrett Holdings Ltd. ('H&B') from Lloyds Chemist's plc ('Lloyds') for an aggregate purchase price of approximately $169,000 plus acquisition costs of approximately $811. The acquisition has been accounted for under the purchase method and, accordingly, the results of operations are included in the financial statements from the date of acquisition. H&B markets a broad line of nutritional supplement products, including vitamins, minerals and other nutritional supplements and food product. At the date of acquisition, H&B operated approximately 410 retail stores in the United Kingdom. The Company issued to Lloyds two promissory notes (the 'Promissory Notes') totaling approximately $170,000 as consideration for the purchase of capital stock of H&B. The Promissory Notes, which are collateralized by two letters of credit issued by a lending institution, were paid in full in October 1997. In connection with the Acquisition, the Company (i) entered into a $50,000 revolving credit facility (the 'Revolving Credit Facility'), which provides borrowings for working capital and general corporate purposes, and (ii) issued $150,000 in Senior Subordinated Notes due 2007. Assets acquired and liabilities assumed include cash ($5,580), inventory ($18,045), other current assets ($11,078), property, plant and equipment ($31,554), and current and long-term liabilities ($27,154 and $4,058, respectively). The excess cost of investment over the net book value of H&B at the date of acquisition resulted in an increase in goodwill of $133,725 which will be amortized over 25 years. Additionally, finance related costs of approximately $5,600 will be amortized over 10 years. The following unaudited condensed pro forma information presents a summary of consolidated results of operations of the Company and H&B as if the acquisition had occurred at the beginning of fiscal 1996, with pro forma adjustments to give effect to the amortization of goodwill, interest expense on acquisition debt and certain other adjustments, together with related income tax effects. The pro forma information, which does not give effect to anticipated intercompany product sales, is not necessarily indicative of the results of operations had H&B been acquired as of the earliest period presented below.
SEPTEMBER 30, SEPTEMBER 30, 1996 1997 ------------- ------------- Net sales....................................................... $ 345,305 $ 428,953 Net income...................................................... $ 6,110 $ 12,458 Net income per diluted share.................................... $ 0.10 $ 0.21
3. SALE OF DIRECT-MAIL COSMETICS BUSINESS On October 9, 1995, the Company sold certain assets of its direct-mail cosmetics business for $2,495. The Company received $350 in cash and non interest bearing notes aggregating $2,145 for inventory, a customer list and other intangible assets. Revenues applicable to this marginally unprofitable business were $8,284 and $137 for fiscal 1995 and 1996, respectively. The inventory note was repaid in full in October 1996 and, in April 1997, the Company received the final payment of the customer list note. F-45 NBTY, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 4. INVENTORIES
SEPTEMBER 30, ------------------ 1996 1997 ------- ------- Raw materials........................................................... $17,132 $29,892 Work-in-process......................................................... 1,523 3,516 Finished goods.......................................................... 19,415 42,528 ------- ------- $38,070 $75,936 ------- ------- ------- -------
5. PROPERTY, PLANT AND EQUIPMENT
SEPTEMBER 30, ------------------- 1996 1997 ------- -------- Land................................................................... $ 4,765 $ 5,050 Buildings and leasehold improvements................................... 38,088 47,819 Machinery and equipment................................................ 28,560 33,540 Furniture and fixtures................................................. 8,484 53,552 Transportation equipment............................................... 641 1,015 Computer equipment..................................................... 8,545 14,635 ------- -------- 89,083 155,611 Less accumulated depreciation and amortization....................... 27,351 47,438 ------- -------- $61,732 $108,173 ------- -------- ------- --------
Depreciation and amortization of property, plant and equipment for the years ended September 30, 1995, 1996 and 1997 was approximately $3,190, $4,974 and $7,104, respectively. Property, plant and equipment includes approximately $4,051 for assets recorded under capital leases for fiscal 1996 and 1997. 6. INTANGIBLE ASSETS Intangible assets, at cost, acquired at various dates are as follows:
SEPTEMBER 30, ------------------- AMORTIZATION 1996 1997 PERIOD ------- -------- ------------ Goodwill........................................................... $ 469 $136,972 20-40 Customer lists..................................................... 8,784 9,816 6-15 Trademark and licenses............................................. 1,201 1,201 2-3 Covenants not to compete........................................... 1,305 1,305 5-7 ------- -------- 11,759 149,294 Less accumulated amortization.................................... 7,784 8,847 ------- -------- $ 3,975 $140,447 ------- -------- ------- --------
Amortization included in the consolidated statements of income under the caption 'selling, general and administrative expenses' in 1995, 1996 and 1997 was approximately $776, $649 and $1,063, respectively. F-46 NBTY, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 7. ACCRUED EXPENSES
SEPTEMBER 30, ------------------ 1996 1997 ------- ------- Litigation settlement costs............................................. $ 5,600 Payroll and related payroll taxes....................................... $ 2,731 4,185 Customer deposits....................................................... 1,863 2,363 Accrued purchases and interest.......................................... 2,800 Income taxes payable.................................................... 2,670 7,456 Other................................................................... 7,441 11,921 ------- ------- $14,705 $34,325 ------- ------- ------- -------
8. LONG-TERM DEBT
SEPTEMBER 30, ------------------- 1996 1997 ------- -------- Senior debt: 8 5/8% Senior subordinated notes due 2007, net of unamortized discount of $1,237 (a)............................................ $148,763 Mortgages: First mortgage, payable in monthly principal and interest (10.375%) installments (b).................................................. $ 7,447 7,317 First mortgage payable in monthly principal and interest (9.73%) installments of $25 (c)........................................... 2,258 2,169 First mortgage, payable in monthly principal and interest (7.375%) installments of $55 (d)........................................... 5,926 5,693 Revolving credit agreement (e)......................................... ------- -------- 15,631 163,942 Less current portion................................................. 453 495 ------- -------- $15,178 $163,447 ------- -------- ------- --------
- ------------------ (a) In September 1997, the Company issued 10-year Senior Subordinated Notes due 2007. The Notes are unsecured and subordinated in right of payment for all existing and future indebtedness of the Company. The Company is in the process of registering these Notes under the Securities Act of 1933 through an exchange offer. Such Exchange Notes, once issued, will have terms substantially identical to the original Notes. (b) In September 1990, the Company obtained an $8,000 first mortgage, collateralized by the underlying building, issued through the Town of Islip, New York Industrial Development Agency. The taxable bond, held by an insurance company, has monthly principal and interest payments of $75 for ten years through 2000, with a final payment of $6,891 in September 2000. (c) In November 1994, the Company purchased a building which it previously occupied under a long-term lease. The purchase price of approximately $3,090 was funded with $690 in cash and the balance through a 15-year mortgage note payable. This agreement contains various restrictive covenants which require the maintenance of certain financial ratios and limits capital expenditures. (d) In April 1996, the Company obtained a $6,000 first mortgage with a fixed interest rate of 7.375%, collateralized by the underlying real estate. The mortgage has monthly principal and interest payments of $55 for fifteen years through 2011. F-47 NBTY, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 8. LONG-TERM DEBT--(CONTINUED) (e) In September 1997, the Company entered into a Revolving Credit Agreement (the 'Agreement') with five banks that provides for borrowings up to $50,000, which expires September 23, 2003. Virtually all of the Company's assets serve as collateral under the Agreement, which is subject to normal banking terms and conditions. The Agreement provides that loans may be made under a selection of rate formulas including Prime or Euro currency rates. The Agreement provides for the maintenance of various financial ratios and covenants. As of September 30, 1997, there were no outstanding borrowings under the Agreement. Required principal payments of long-term debt are as follows:
YEARS ENDED SEPTEMBER 30, - -------------------------------------------------------------- 1998........................................................ $ 495 1999........................................................ 539 2000........................................................ 7,420 2001........................................................ 444 2002........................................................ 481 Thereafter.................................................. 154,563 -------- $163,942 -------- --------
In August 1997, in connection with the promissory notes issued as consideration for the purchase of H&B, the Company was issued two standby letters of credit aggregating $170,000. At September 30, 1997, there were no borrowings outstanding under the letters of credit. As of October 17, 1997, upon payment of the promissory notes, the letters of credit were cancelled. In 1997, the Company recorded a loss of $2,265 in connection with an interest rate lock which was settled on October 28, 1997. 9. CAPITAL LEASE OBLIGATIONS The Company enters into various capital leases for machinery and equipment which provide the Company with bargain purchase options at the end of such lease terms. Future minimum payments under capital lease obligations as of September 30, 1997 are as follows: 1998........................................................... $ 759 1999........................................................... 759 2000........................................................... 759 2001........................................................... 759 2002........................................................... 692 Thereafter..................................................... 172 ------ 3,900 Less, amount representing interest............................. 679 ------ Present value of minimum lease payments (including $521 due within one year)............................................ $3,221 ------ ------
F-48 NBTY, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 10. INCOME TAXES Provision (benefit) for income taxes consists of the following:
YEAR ENDED SEPTEMBER 30, --------------------------- 1995 1996 1997 ------ ------ ------- Federal Current................................................................. $2,225 $7,551 $14,207 Deferred................................................................ 637 (501) (2,530) State Current................................................................. 336 2,112 1,218 Deferred................................................................ 48 (141) (220) Foreign benefit........................................................... (1,189) ------ ------ ------- Total provision........................................................... $3,246 $9,021 $11,486 ------ ------ ------- ------ ------ -------
The following is a reconciliation of the income tax expense computed using the statutory federal income tax rate to the actual income tax expense and its effective income tax rate.
YEAR ENDED SEPTEMBER 30, --------------------------------------------------------------------- 1995 1996 1997 -------------------- -------------------- --------------------- PERCENT OF PERCENT OF PERCENT OF PRETAX PRETAX PRETAX AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME ------ ---------- ------ ---------- ------- ---------- Income tax expense at statutory rate................................ $2,850 34.0% $7,831 35.0% $10,051 35.0% State income taxes, net of federal income tax benefit.................. 254 3.0% 1,281 5.7% 649 2.3% Other, individually less than 5%...... 142 1.7% (91 ) (0.4%) 786 2.7% ------ ---------- ------ ---------- ------- ---------- Actual income tax provision........... $3,246 38.7% $9,021 40.3% $11,486 40.0% ------ ---------- ------ ---------- ------- ---------- ------ ---------- ------ ---------- ------- ----------
The components of deferred tax assets and liabilities are as follows:
1996 1997 ------- ------- Deferred tax assets: Current: Inventory capitalization............................................ $ 243 $ 351 Accrued expenses and reserves not currently deductible.............. 2,591 5,350 Tax credits......................................................... 321 331 ------- ------- Current deferred tax assets....................................... 3,155 6,032 ------- ------- Noncurrent: Intangibles......................................................... 335 333 Reserves not currently deductible................................... 200 188 ------- ------- Total noncurrent.................................................. 535 521 ------- ------- Deferred tax liabilities: Property, plant and equipment.......................................... (3,362) (7,995) ------- ------- Net deferred tax (liability) asset................................ $ 328 $(1,442) ------- ------- ------- -------
Available state tax credits of $321 and $331 in 1996 and 1997, respectively, are scheduled to expire through fiscal 2002. F-49 NBTY, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 11. COMMITMENTS Leases The Company conducts retail operations under operating leases which expire at various dates through 2020. Some of the leases contain renewal options and provide for additional rentals based upon sales plus certain tax and maintenance costs. Future minimal rental payments under the retail location and other leases that have initial or noncancelable lease terms in excess of one year at September 30, 1997 are as follows:
YEAR ENDING SEPTEMBER 30, - -------------------------------------------------------------- 1998........................................................ $ 25,322 1999........................................................ 24,501 2000........................................................ 23,522 2001........................................................ 22,176 2002........................................................ 20,804 Thereafter.................................................. 161,623 -------- $277,948 -------- --------
Operating lease rental expense, including real estate tax and maintenance costs, and leases on a month to month basis were approximately $1,248, $1,979 and $7,750 for the years ended September 30, 1995, 1996 and 1997, respectively. Purchase commitments The Company was committed to make future purchases under various purchase order arrangements with fixed price provisions aggregating approximately $12,923 and $26,102 at September 30, 1996 and 1997, respectively. Capital commitments The Company had approximately $15,800 in open capital commitments related to a manufacturing facility and computer hardware and software at September 30, 1997. Employment and consulting agreements The Company has employment agreements with two of its officers. The agreements, which expire in January 2004, provide for minimum salary levels, including cost of living adjustments, and also contain provisions regarding severance and changes in control of the Company. The commitment for salaries as of September 30, 1997 was approximately $749 per year. The Company also has a two-year consulting agreement with its former chairman and current director which expires on December 31, 1997. Such agreement requires annual payments of approximately $350. The parties are presently negotiating a renewal of the agreement under substantially comparable terms. In addition, an entity owned by a relative of an officer received sales commissions of $510, $417 and $541 in 1995, 1996 and 1997, respectively. F-50 NBTY, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 12. 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 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 was entitled to a compensation deduction for tax purposes of approximately $3,145 and a tax benefit of approximately $1,274 which was credited to capital in excess of par. During fiscal 1995, options were exercised with 430 shares of common stock issued (prior to the aforementioned stock split) to certain officers and directors for $24 and an interest bearing note in the amount of $191. The promissory note, including interest, was paid by the surrender of 23 NBTY common shares to the Company at the prevailing market price. As a result of the exercise of these options, the Company was entitled to a compensation deduction of approximately $1,828 which resulted in a tax benefit of approximately $731 which was credited to capital in excess of par. A summary of stock option activity is as follows:
WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE --------- -------- --------- -------- --------- -------- Outstanding at beginning of year...... 8,475 $ .24 7,185 $ .25 4,569 $ .25 Exercised............................. 1,290 .17 2,616 .23 111 .31 --------- -------- --------- -------- --------- -------- Outstanding at end of year............ 7,185 $ .25 4,569 $ .25 4,458 $ .25 --------- -------- --------- -------- --------- -------- --------- -------- --------- -------- --------- -------- Exercisable at end of year............ 7,185 $ .25 4,569 $ .25 4,458 $ .25 --------- -------- --------- -------- --------- -------- --------- -------- --------- -------- --------- --------
As of September 30, 1997, the weighted average remaining contractual life of outstanding options was 4 years. In addition, there were no options available for grant at September 30, 1995, 1996 or 1997. 13. EMPLOYEE BENEFIT PLANS The Company maintains defined contribution savings plans and an employee stock ownership plan. The accompanying financial statements reflect contributions to these plans in the approximate amount of $498, $489 and $1,209 for the years ended September 30, 1995, 1996 and 1997, respectively. F-51 NBTY, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 14. LITIGATION L-tryptophan The Company and certain other companies in the industry have been named as defendants in cases arising out of the ingestion of products containing L-tryptophan. The Company had been named in more than 265 lawsuits, of which four are still pending against the Company. The other 261 lawsuits have been settled at no cost to the Company. The Company's supplier of L-tryptophan agreed to indemnify the Company and the other companies named in the lawsuits through the final resolution of all cases involving L-tryptophan. In addition, the supplier has posted, for the benefit of the Company and the other companies named in the lawsuits, a revolving, irrevocable letter of credit of $20,000 to be used in the event that the supplier is unable or unwilling to satisfy any claims or judgments. While not all of these suits quantify the amount demanded, the Company believes that the amount required to either settle these cases or to pay judgments rendered therein will be paid by the supplier or by the Company's product liability insurance carrier. While the outcome of any litigation is uncertain, it is the opinion of management and legal counsel of the Company that it is remote that the Company will incur a material loss as a result of the L-tryptophan litigation and claims. Accordingly, no provision for liability, if any, that may result therefrom has been made in the Company's financial statements. Shareholder litigation In October 1994, two lawsuits were commenced in the U.S. District Court, Eastern District of New York, against the Company and two of its officers. On October 17, 1997, a Memorandum of Understanding was entered into between the Company and the attorneys representing the Plaintiff class agreeing to an $8,000 ($4,400 cash, $3,600 stock) settlement of the lawsuit. Subsequently, the Company entered into a Capital Stipulation of Settlement calling for, among other things, a total cash payment of $8,000. The Company has been notified by its insurance carrier that it is willing to reimburse the Company to the extent of $2,400. Accordingly, as of September 30, 1997, the Company recorded a $5,600 provision for its portion of the settlement which, along with related legal fees of approximately $768, has been reflected separately in the statement of income. Other litigation The Company is also involved in miscellaneous claims and litigation which management believes, taken individually or in the aggregate, would not have a material adverse effect on the Company's financial position or its business. 15. FOREIGN OPERATIONS In connection with the Company's recent acquisition of H&B which operates primarily in the United Kingdom, the Company has significantly expanded its operations outside of the United States. The following information has been summarized by geographic area as of September 30, 1997 and for the year then ended.
IDENTIFIABLE OPERATING ASSETS SALES INCOME ------------ -------- --------- United States...................................................... $328,548 $254,910 $ 36,619 United Kingdom..................................................... 214,190 26,497 (3,281) ------------ -------- --------- $542,738 $281,407 $ 33,338 ------------ -------- --------- ------------ -------- ---------
F-52 NBTY, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the unaudited quarterly results of operations for fiscal 1996 and 1997:
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 before income taxes....................... (412) 7,502 6,503 8,780(a) Net income....................................... (251) 4,576 3,763 5,264 Net income per diluted share..................... $ -- $ 0.07 $ 0.06 $ 0.09 1997: Net sales........................................ $ 47,327 $75,019 $ 61,761 $97,300 Gross profit..................................... 24,757 39,342 31,803 49,619 Income before income taxes....................... 5,484 12,723 8,548 1,961(a) Net income....................................... 3,290 7,634 5,129 1,177 Net income per diluted share..................... $ 0.06 $ 0.13 $ 0.08 $ 0.02
- ------------------ (a) Year-end adjustments resulting in an increase to pre-tax income of approximately $2 million and $2.1 million primarily related to adjustments of inventory amounts in 1996 and 1997, respectively. F-53 [COMPANY ARTWORK FOR INSIDE BACK COVER] ------------------------------------------------------ ------------------------------------------------------ NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR BY THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH AN OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary............................. 3 Risk Factors................................... 9 Use of Proceeds................................ 15 Price Range of Common Stock.................... 15 Dividend Policy................................ 16 Capitalization................................. 16 Selected Supplemental Consolidated Financial Data......................................... 17 Selected Consolidated Financial Data........... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 20 Business....................................... 25 Management..................................... 38 Principal and Selling Stockholders............. 40 Description of Capital Stock................... 41 Description of Certain Indebtedness............ 42 Shares Eligible for Future Sale................ 43 Underwriting................................... 45 Legal Matters.................................. 47 Experts........................................ 47 Available Information.......................... 47 Incorporation of Certain Information by Reference.................................... 48 Index to Consolidated Financial Statements..... F-1
------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ 8,600,000 SHARES COMMON STOCK ---------- PROSPECTUS JULY 1, 1998 ---------- SALOMON SMITH BARNEY LEHMAN BROTHERS ADAMS, HARKNESS & HILL, INC. RAYMOND JAMES & ASSOCIATES, INC. PIPER JAFFRAY INC. ------------------------------------------------------ ------------------------------------------------------ PART II ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The Company estimates that expenses payable by the Company in connection with the offering described in this Registration Statement (other than the underwriting discounts and commissions) will be as follows:
TOTAL - ----------------------------------------------------------- SEC registration fee (actual).............................. $ 69,692.37 NASD filing fee (actual)................................... 24,124.53 Blue Sky fees and expenses (including counsel fees)........ 50,000.00 Accounting fees and expenses............................... 175,000.00 Legal fees and expenses.................................... 200,000.00 Printing and engraving expense............................. 175,000.00 Transfer Agent and Registrar fees and expenses............. 5,000.00 Miscellaneous expenses..................................... 1,183.10 Total................................................. $700,000.00
- ------------------ * To be completed by amendment. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Reference is made to Section 102(b)(7) of the Delaware General Corporation Law (the 'DGCL'), which permits a corporation in its certificate of incorporation or an amendment thereto to eliminate or limit the personal liability of a director for violations of the director's fiduciary duty, except (i) for any breach of the director's fiduciary duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the DGCL (providing for liability of directors for unlawful payment of dividends or unlawful stock purchases or redemptions), or (iv) for any transaction from which the director derived an improper personal benefit. The Company's Second Amended and Restated Certificate of Incorporation contains provisions permitted by Section 102(b)(7) of the DGCL. Reference is made to Section 145 of the DGCL which provides that a corporation may indemnify any persons, including directors and officers, who are, or are threatened to be made, parties to any threatened, pending or completed legal action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person is or was a director, officer, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided such director, officer, employee or agent acted in good faith and in a manner he reasonably believed to be in or not opposed to the corporation's best interests and, with respect to any criminal actions or proceedings, had no reasonable cause to believe that his conduct was unlawful. A Delaware corporation may indemnify directors and/or officers in an action or suit by or in the right of the corporation under the same conditions, except that no indemnification is permitted without judicial approval if the director or officer is adjudged to be liable to the corporation. Where a director or officer is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him or her against the expenses which such director or officer actually and reasonably incurred. The Company's Second Amended and Restated Certificate of Incorporation and Amended and Restated By-laws provide for the indemnification of directors and officers of the Company to the fullest extent permitted by the DGCL. Pursuant to the Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement, the Underwriters have agreed to indemnify the directors, officers and controlling persons of the Company against certain civil liabilities that may be incurred in connection with the Offering, including certain liabilities under the Securities Act. II-1 The Company provides liability insurance for each director and officer for certain losses arising from claims or charges made against them while acting in their capacities as directors or officers of the Company. ITEM 16. EXHIBITS. (a) The following is a complete list of exhibits filed as part of this Registration Statement, which are incorporated herein.
EXHIBIT NO. DESCRIPTION - ------- ------------------------------------------------------------------------------------------------------------ 1.1 -- Form of Underwriting Agreement. 3.1 -- Certificate of Incorporation of NBTY, Inc. as amended. Filed as Exhibit 3.1 to the Company's Registration Statement (No. 333-39527) on Form S-4 and incorporated herein by reference. 3.2 -- Certificate of Amendment of Certificate of Incorporation Amended and Restated By-Laws of NBTY, Inc. Filed as Exhibit 3.2 to the Company's Registration Statement (No. 333-39527) on Form S-4 and incorporated herein by reference. 4.1 -- Indenture, dated as of September 23, 1997, between NBTY, Inc. and IBJ Schroder Bank & Trust Company, as Trustee, relating to $150,000 in aggregate principal amount of 8- 5/8% Senior Subordinated Notes due 2007, Series A and Series B. Filed as Exhibit 4.1 to the Company's Registration Statement (No. 333-39527) on Form S-4 and incorporated herein by reference. 5.1 -- Opinion of Michael C. Duban, P.C.**** 10.1 -- Credit and Guarantee Agreement ('Revolving Credit Agreement'), dated September 23, 1997, as amended April 20, 1998, between the Company and The Chase Manhattan Bank. Filed as Exhibit 10.1 to the Company's Registration Statement (No. 333-39527) on Form S-4 and incorporated herein by reference. 10.2 -- Third Amendment, dated May 1, 1998, to Credit and Guarantee Agreement between the Company and The Chase Manhattan Bank. 23.1 -- Consent of Michael C. Duban, P.C.** 23.3 -- Consent of Coopers & Lybrand L.L.P. (Melville, New York)**** 23.4 -- Consent of Coopers & Lybrand L.L.P. (St. Louis, Missouri)**** 23.5 -- Consent of Amper, Politziner & Mattia P.A.**** 24.1 -- Power of Attorney of NBTY, Inc. (included on signature page to this Registration Statement on Form S-3).****
- ------------------ * To be filed by amendment. ** Included in the opinion filed as exhibit 5.1. *** Included in the signature page to this Registration Statement. **** Previously filed. ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to provisions described in Item 15 above, or otherwise, the Company has been advised that, in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the Common Stock covered hereby, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-2 The Company hereby undertakes that: (a) For purposes of determining any liability under the Securities Act, each filing of the Company's annual report pursuant to Section 13(a) or 15(d) of the 1934 Act (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the 1934 Act) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the Common Stock therein, and the offering of such Common Stock at that time shall be deemed to be the initial bona fide offering thereof. (b) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (c) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The Company hereby undertakes to deliver or cause to be delivered with the Prospectus, to each person to whom the Prospectus is sent or given, the latest annual report to security holders that is incorporated by reference in the Prospectus and furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the 1934 Act. The Company hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. II-3 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE COMPANY CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS POST-EFFECTIVE AMENDMENT NO. 1 TO THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW YORK, ON JUNE 30, 1998. NBTY, INC. By: /s/ SCOTT RUDOLPH ------------------------------- Scott Rudolph Chairman of the Board, Chief Executive Officer and President PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS POST-EFFECTIVE AMENDMENT NO. 1 TO THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE(S) DATE - ------------------------------------------ ------------------------------------------- ------------------- /s/ SCOTT RUDOLPH Chairman of the Board, Chief Executive June 30, 1998 - ------------------------------------------ Officer and President Scott Rudolph /s/ HARVEY KAMIL Executive Vice President, Secretary June 30, 1998 - ------------------------------------------ Harvey Kamil ARTHUR RUDOLPH* Director June 30, 1998 - ------------------------------------------ Arthur Rudolph ARAM GARABEDIAN* Director June 30, 1998 - ------------------------------------------ Aram Garabedian BERNARD G. OWEN* Director June 30, 1998 - ------------------------------------------ Bernard G. Owen ALFRED SACKS* Director June 30, 1998 - ------------------------------------------ Alfred Sacks MURRAY DALY* Director June 30, 1998 - ------------------------------------------ Murray Daly GLENN COHEN* Director June 30, 1998 - ------------------------------------------ Glenn Cohen BUD SOLK* Director June 30, 1998 - ------------------------------------------ Bud Solk NATHAN ROSENBLATT* Director June 30, 1998 - ------------------------------------------ Nathan Rosenblatt
II-4
SIGNATURE TITLE(S) DATE - ------------------------------------------ ------------------------------------------- ------------------- MICHAEL L. ASHNER* Director June 30, 1998 - ------------------------------------------ Michael L. Ashner *By /s/ SCOTT RUDOLPH --------------------------------------- Scott Rudolph /s/ HARVEY KAMIL - ------------------------------------------ Harvey Kamil Attorneys-in-Fact
II-5 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ------- ------------------------------------------------------------------------------------------------------------ 1.1 -- Form of Underwriting Agreement. 3.1 -- Certificate of Incorporation of NBTY, Inc. as amended. Filed as Exhibit 3.1 to the Company's Registration Statement (No. 333-39527) on Form S-4 and incorporated herein by reference. 3.2 -- Certificate of Amendment of Certificate of Incorporation Amended and Restated By-Laws of NBTY, Inc. Filed as Exhibit 3.2 to the Company's Registration Statement (No. 333-39527) on Form S-4 and incorporated herein by reference. 4.1 -- Indenture, dated as of September 23, 1997, between NBTY, Inc. and IBJ Schroder Bank & Trust Company, as Trustee, relating to $150,000 in aggregate principal amount of 8- 5/8% Senior Subordinated Notes due 2007, Series A and Series B. Filed as Exhibit 4.1 to the Company's Registration Statement (No. 333-39527) on Form S-4 and incorporated herein by reference. 5.1 -- Opinion of Michael C. Duban, P.C.**** 10.1 -- Credit and Guarantee Agreement ('Revolving Credit Agreement'), dated September 23, 1997, as amended April 20, 1998, between the Company and The Chase Manhattan Bank. Filed as Exhibit 10.1 to the Company's Registration Statement (No. 333-39527) on Form S-4 and incorporated herein by reference. 10.2 -- Third Amendment, dated May 1, 1998, to Credit and Guarantee Agreement between the Company and The Chase Manhattan Bank. 23.1 -- Consent of Michael C. Duban, P.C.** 23.3 -- Consent of Coopers & Lybrand L.L.P. (Melville, New York)**** 23.4 -- Consent of Coopers & Lybrand L.L.P. (St. Louis, Missouri)**** 23.5 -- Consent of Amper, Politziner & Mattia P.A.**** 24.1 -- Power of Attorney of NBTY, Inc. (included on signature page to this Registration Statement on Form S-3).****
- ------------------ * To be filed by amendment. ** Included in the opinion filed as exhibit 5.1. *** Included in the signature page to this Registration Statement. **** Previously filed. EX-1.1 2 UNDERWRITING AGREEMENT 8,600,000 Shares NBTY, INC. Common Stock UNDERWRITING AGREEMENT ---------------------- June 30, 1998 SMITH BARNEY INC. LEHMAN BROTHERS INC. ADAMS, HARKNESS & HILL, INC. RAYMOND JAMES & ASSOCIATES, INC. PIPER JAFFRAY INC. c/o SMITH BARNEY INC. 388 Greenwich Street New York, New York 10013 Dear Sirs: NBTY, Inc., a Delaware corporation (the "Company"), and the Persons named in Schedule II hereto (the "Selling Stockholders"), propose to sell to the underwriters named in Schedule I hereto (the "Underwriters"), for whom you (the "Representatives") are acting as representatives, 8,600,000 shares of Common Stock, par value $.008 per share ("Common Stock"), of the Company (said shares to be issued and sold by the Company and shares to be sold by the Selling Stockholders collectively being hereinafter called the "Firm Shares"). The Company and the Selling Stockholders also propose to grant to the Underwriters an option to purchase up to 1,290,000 additional shares of Common Stock (the "Additional Shares"; the Additional Shares, together with the Firm Shares, being hereinafter called the "Shares"). To the extent there are no additional Underwriters listed on Schedule I other than you, the term Representatives as used herein shall mean you, as Underwriters, and the terms Representatives and Underwriters shall mean either the singular or plural as the context requires. 1. Registration Statement and Prospectus. The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement (file number 333-52251) on Form S-3, including related preliminary Prospectus, for the registration under the Securities Act of 1933, as amended (the" Act") of the offering and sale of the Shares. The Company may have filed one or more amendments thereto, including the related preliminary Prospectus, each of which has previously been furnished to you. The Company will next file with the Commission either (A) prior to the Effective Date of such registration statement, a further amendment to such registration statement (including the form of final prospectus) or (B) after the Effective Date of such registration statement, the final Prospectus in accordance with Rules 430A and 424(b)(1), (3) or (4). In the case of clause (B), the Company has included in such registration statement, as amended at the Effective Date, all information (other than, at the option of the Company, information permitted to be omitted pursuant to Rule 430A Information) required by the Act and the rules thereunder to be included in such -2- registration statement and the Prospectus. As filed, such amendment and form of final prospectus, or such final prospectus (the "Registration Statement"), shall contain all Rule 430A information, together with all other such required information, and, except to the extent the Representatives shall agree in writing to a modification, shall be in all substantive respects in the form furnished to you prior to the date and time that this Agreement is executed and delivered by the parties hereto (the "Execution Time") or, to the extent not completed at the Execution Time, shall contain only such specific additional information and other changes (beyond that contained in the latest Prepricing Prospectus) as the Company has advised you, prior to the Execution Time, will be included or made therein. For the purposes of this Agreement, "Effective Date" means each date and time that the Registration Statement, any post-effective amendment or amendments thereto and any registration statement filed pursuant to Rule 462(b) relating to the offering covered by the initial registration statement became or become effective. The term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement, or, if the prospectus included in the Registration Statement omits information in reliance on Rule 430A under the Act and such information is included in a prospectus filed with the Commission pursuant to Rule 424(b) under the Act, the term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement as supplemented by the addition of the Rule 430A information contained in the prospectus filed with the Commission pursuant to Rule 424(b). As used herein, the "Prepricing Prospectus" shall mean any preliminary prospectus with respect to the offering of the Shares referred to herein and any preliminary prospectus with respect to the offering of the Shares included in the Registration Statement at the Effective Date that omits information permitted to be omitted pursuant to Rule 430A; and the Prepricing Prospectus. Any reference in this Agreement to the registration statement, the Registration Statement, any Prepricing Prospectus or the Prospectus shall be deemed to refer to and include the documents incorporated by reference therein pursuant to Item 12 of Form S-3 under the Act. As used herein, the term "Incorporated Documents" means the documents which are incorporated by reference into the registration statement, the Registration Statement, any Prepricing Prospectus, the Prospectus, or any amendment or supplement thereto. For the purposes of this Agreement, "Rule 424," "Rule 430A" and "Rule 462" refer to such rules under the Act. 2. Agreements to Sell and Purchase. Subject to such adjustments as the Underwriters may determine in order to avoid fractional shares, the Company hereby agrees, subject to all the terms and conditions set forth herein, to issue and sell to each Underwriter and, upon the basis of the representations, warranties and agreements of the Company and the Selling Stockholders herein contained and subject to all the terms and conditions set forth herein, each Underwriter agrees, severally and not jointly, to purchase from the Company, at a purchase price of $18.00 per share (the "purchase price per share"), the number of Firm Shares which bears the same proportion to the aggregate number of Firm Shares to be issued and sold by the Company as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto (or such number of Firm Shares increased as set forth in Section 13 hereof) bears to the aggregate number of Firm Shares to be sold by the Company and the Selling Stockholders. Subject to such adjustments as you may determine in order to avoid fractional shares, each Selling Stockholder agrees, subject to all the terms and conditions set forth herein, to sell to each Underwriter and, upon the basis of the representations, warranties and agreements of the Company and the Selling Stockholders herein contained and subject to all the terms and conditions set forth herein, each Underwriter, severally and not jointly, agrees to purchase from each Selling Stockholder at the purchase price per share that number of Firm Shares which bears the same proportion to the number of Firm Shares to be sold by such Selling Stockholder as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto (or such number of Firm Shares increased as set forth in Section 13 hereof) bears to the aggregate number of Firm Shares to be sold by the Company and the Selling Stockholders. -3- The Company also agrees, subject to all the terms and conditions set forth herein, to sell to each Underwriter, and, upon the basis of the representations, warranties and agreements of the Company and the Selling Stockholders herein contained and subject to all the terms and conditions set forth herein, each Underwriter shall have the right to purchase from the Company, at the purchase price per share, pursuant to an option (the "over-allotment option") which may be exercised at any time and from time to time prior to 9:00 P.M., New York City time, on the 30th day after the date of the Prospectus (or, if such 30th day shall be a Saturday or Sunday or a holiday, on the next business day thereafter when the NASDAQ National Market is open for trading), up to an aggregate of 450,000 Additional Shares from the Company. Additional Shares may be purchased only for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. Upon any exercise of the over-allotment option, each Underwriter, severally and not jointly, agrees to purchase from the Company the number of Additional Shares (subject to such adjustments as the Underwriter may determine in order to avoid fractional shares) which bears the same proportion to the number of Additional Shares to be sold by the Company as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto (or such number of Firm Shares increased as set forth in Section 14 hereof) bears to the aggregate number of Firm Shares to be sold by the Company and the Selling Stockholders. The Selling Stockholders also agree, subject to all the terms and conditions set forth herein, to sell to each Underwriter, and, upon the basis of the representations, warranties and agreements of the Company and the Selling Stockholders herein contained and subject to all the terms and conditions set forth herein, each Underwriter shall have the right to purchase from the Selling Stockholders, at the purchase price per share, pursuant to an option (the "over-allotment option") which may be exercised at any time and from time to time prior to 9:00 P.M., New York City time, on the 30th day after the date of the Prospectus (or, if such 30th day shall be a Saturday or Sunday or a holiday, on the next business day thereafter when the NASDAQ National Market is open for trading), up to an aggregate of 840,000 Additional Shares from the Selling Stockholders. Additional Shares may be purchased only for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. Upon any exercise of the over-allotment option, each Underwriter, severally and not jointly, agrees to purchase from the Selling Stockholders the number of Additional Shares (subject to such adjustments as the Underwriter may determine in order to avoid fractional shares) which bears the same proportion to the number of Additional Shares to be sold by such Selling Stockholder as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto (or such number of Firm Shares increased as set forth in Section 13 hereof) bears to the aggregate number of Firm Shares to be sold by the Company and the Selling Stockholders. Certificates in transferable form for the Shares (including any Additional Shares) that each of the Selling Stockholders agrees to sell pursuant to this Agreement have been placed in custody with the Company as custodian (the "Custodian") for delivery under this Agreement pursuant to the custody agreement (the "Custody Agreement") executed by each of the Selling Stockholders. Each Selling Stockholder agrees that (i) the Shares represented by the certificates held in custody pursuant to the Custody Agreement are subject to the interests of the Underwriters, the Company and each other Selling Stockholder, (ii) the arrangements made by the Selling Stockholders for such custody are, except as specifically provided in the Custody Agreement, irrevocable, and (iii) the obligations of the Selling Stockholders hereunder and under the Custody Agreement shall not be terminated by any act of such Selling Stockholder or by operation of law, whether by the death or incapacity of any Selling Stockholder or the occurrence of any other event or, if the Selling Stockholder is not a natural person, upon any dissolution, winding up, distribution of assets or other event affecting the legal existence of such Selling Stockholder. If any Selling Stockholder shall die or be incapacitated or if any other event shall occur before the delivery of the Shares hereunder or if the Selling Stockholder is not a natural person, shall dissolve, wind up, distribute assets or if any other event affecting the legal existence of such Selling Stockholder shall occur before the delivery of the Shares hereunder, certificates for the Shares of such Selling Stockholder -4- shall be delivered to the Underwriters by the Custodian in accordance with the terms and condition of this Agreement and the Custody Agreement as if such death or incapacity, dissolution, winding, distribution of assets or other event had not occurred, regardless of whether or not the Custodian or any Underwriter shall have received notice of such death, incapacity, dissolution, winding up or distribution of assets or other event. The Custodian is authorized, on behalf of each of the respective Selling Stockholders, to make delivery of the certificates for such Shares and to take such other action as may be necessary or desirable in connection with the transactions contemplated by this Agreement. The Custodian agrees to perform its duties under the Custody Agreement. 3. Terms of Public Offering. The Company and the Selling Stockholders have been advised by you that the Underwriters propose to make a public offering of their respective portions of the Shares as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable and initially to offer the Shares upon the terms set forth in the Prospectus. 4. Delivery of the Shares and Payment Therefor. Delivery to the Underwriters of and payment for the Firm Shares shall be made at the office of Smith Barney Inc., 388 Greenwich Street, New York, NY 10013, at 10:00 A.M., New York City time, on July 7, 1998 (the "Closing Date"). The place of closing for the Firm Shares and the Closing Date may be varied by agreement among the Representatives, the Company and the Selling Stockholders. Each Selling Stockholder will pay all applicable state transfer taxes, if any, involved in the transfer to the several Underwriters of the Shares to be purchased by them from such Selling Stockholder and the respective Underwriters will pay any additional stock transfer taxes involved in further transfers. Delivery to the Underwriters of and payment for any Additional Shares to be purchased by the Underwriters shall be made at the aforementioned office of Smith Barney Inc. at such time on such date (the "Option Closing Date"), which may be the same as the Closing Date but shall in no event be earlier than the Closing Date nor earlier than two nor later than ten business days after the giving of the notice hereinafter referred to, as shall be specified in a written notice from you on behalf of the Underwriters to the Company and the Selling Stockholders of the Underwriters' determination to purchase a number, specified in such notice, of Additional Shares. The place of closing for any Additional Shares and the Option Closing Date for such Shares may be varied by agreement among you, the Company and the Selling Stockholders. Certificates for the Firm Shares and for any Additional Shares to be purchased hereunder shall be registered in such names and in such denominations as you shall request prior to 9:30 A.M., New York City time, on the second business day preceding the Closing Date or any Option Closing Date, as the case may be. Such certificates shall be made available to you in New York City for inspection and packaging not later than 9:30 A.M., New York City time, on the business day next preceding the Closing Date or the Option Closing Date, as the case may be. The certificates evidencing the Firm Shares and any Additional Shares to be purchased hereunder shall be delivered to you on the Closing Date or the Option Closing Date, as the case may be, against payment of the purchase price therefor in immediately available funds. 5. Offering by the Underwriters. It is understood that the several Underwriters propose to offer the Shares for sale to the public as set forth in the Prospectus. 6. Agreements of the Company. The Company agrees with the several Underwriters as follows: -5- (a) If, at the time this Agreement is executed and delivered, it is necessary for the Registration Statement or a post-effective amendment thereto to be declared effective before the offering of the Shares may commence, the Company will endeavor to cause the Registration Statement or such post-effective amendment to become effective as soon as possible and will advise you promptly and, if requested by you, will confirm such advice in writing, when it receives notice that the Registration Statement or such post-effective amendment has become effective. (b) The Company will advise you promptly and, if requested by you, will confirm such advice in writing: (i) of any request by the Commission for amendment of or a supplement to the Registration Statement, any Prepricing Prospectus or the Prospectus or for additional information; (ii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the suspension of qualification of the Shares for offering or sale in any jurisdiction or the initiation of any proceeding for such purpose; and (iii) within the period of time referred to in paragraph (f) below, of any change in the Company's condition (financial or other), business, prospects, properties, net worth or results of operations, or of the happening of any event, which makes any statement of a material fact made in the Registration Statement or the Prospectus (as then amended or supplemented) untrue or which requires the making of any additions to or changes in the Registration Statement or the Prospectus (as then amended or supplemented) in order to state a material fact required by the Act or the regulations thereunder to be stated therein or necessary in order to make the statements therein not misleading, or of the necessity to amend or supplement the Prospectus (as then amended or supplemented) to comply with the Act or any other law. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, the Company will make every reasonable effort to obtain the withdrawal of such order at the earliest possible time. (c) The Company will furnish to you, without charge, (i) six signed copies of the registration statement as originally filed with the Commission and of each amendment thereto, including financial statements and all exhibits to the registration statement, (ii) such number of conformed copies of the registration statement as originally filed and of each amendment thereto, but without exhibits, as you may request, (iii) such number of copies of the Incorporated Documents, without exhibits, as you may request, and (iv) six copies of the exhibits to the Incorporated Documents. (d) The Company will not (i) file any amendment to the Registration Statement or make any amendment or supplement to the Prospectus of which you shall not previously have been advised or to which you shall object after being so advised or (ii) so long as, in the opinion of counsel for the Underwriters, a Prospectus is required to be delivered in connection with sales by any Underwriter or dealer, file any information, documents or reports pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act") without delivering a copy of such information, documents or reports to you as representatives of the Underwriters, prior to or concurrently with such filing. (e) Prior to the execution and delivery of this Agreement, the Company has delivered to you, without charge, in such quantities as you have requested, copies of the form of the Prepricing Prospectus. The Company consents to the use, in accordance with the provisions of the Act and with the securities or Blue Sky laws of the jurisdictions in which the Shares are offered by the several Underwriters and by dealers, prior to the date of the Prospectus, of each Prepricing Prospectus so furnished by the Company. (f) As soon after the execution and delivery of this Agreement as possible and thereafter from time to time for such period as in the opinion of counsel for the Underwriters a prospectus is re- -6- quired by the Act to be delivered in connection with sales by any Underwriter or dealer, the Company will expeditiously deliver to each Underwriter and each dealer, without charge, as many copies of the Prospectus (and of any amendment or supplement thereto) as you may request. The Company consents to the use of the Prospectus (and of any amendment or supplement thereto) in accordance with the provisions of the Act and with the securities or Blue Sky laws of the jurisdictions in which the Shares are offered by the several Underwriters and by all dealers to whom Shares may be sold, both in connection with the offering and sale of the Shares and for such period of time thereafter as the Prospectus is required by the Act to be delivered in connection with sales by any Underwriter or dealer. If during such period of time any event shall occur that in the judgment of the Company or in the opinion of counsel for the Underwriters is required to be set forth in the Prospectus (as then amended or supplemented) or should be set forth therein in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary to supplement or amend the Prospectus to comply with the Act or any other law, the Company will forthwith prepare and, subject to the provisions of paragraph (d) above, file with the Commission an appropriate supplement or amendment thereto, and will expeditiously furnish to the Underwriters and dealers a reasonable number of copies thereof. In the event that the Company and you, as Representatives of the several Underwriters, agree that the Prospectus should be amended or supplemented, the Company, if requested by you, will promptly issue a press release announcing or disclosing the matters to be covered by the proposed amendment or supplement. (g) The Company will cooperate with you and with counsel for the Underwriters in connection with the registration or qualification of the Shares for offering and sale by the several Underwriters and by dealers under the securities or Blue Sky laws of such jurisdictions as you may designate and will file such consents to service of process or other documents necessary or appropriate in order to effect such registration or qualification; provided that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action which would subject it to service of process in suits, other than those arising out of the offering or sale of the Shares, in any jurisdiction where it is not now so subject. (h) The Company will make generally available to its security holders a consolidated earnings statement, which need not be audited, covering a twelve-month period commencing after the effective date of the Registration Statement and ending not later than 15 months thereafter, as soon as practicable after the end of such period, which consolidated earnings statement shall satisfy the provisions of Section ll(a) of the Act. (i) During the period of three years hereafter, the Company will furnish to you (i) as soon as available, a copy of each report of the Company mailed to stockholders or filed with the Commission and (ii) from time to time such other information concerning the Company as you may request. (j) If this Agreement shall terminate or shall be terminated after execution pursuant to any provisions hereof (otherwise than by notice given by you terminating this Agreement pursuant to Section 13 or Section 14 hereof) or if this Agreement shall be terminated by the Underwriters because of any failure or refusal on the part of the Company or the Selling Stockholders to comply with the terms or fulfill any of the conditions of this Agreement, the defaulting party (the Company and/or the Selling Stockholders, as the case may be) agrees to reimburse the Representatives for all out-of-pocket expenses (including reasonable fees and expenses of counsel for the Underwriters) incurred by you in connection herewith. -7- (k) The Company will apply the net proceeds from the sale of the Shares substantially in accordance with the description set forth in the Prospectus. (l) If Rule 430A of the Act is employed, the Company will timely file the Prospectus pursuant to Rule 424(b) under the Act and will advise you of the time and manner of such filing. (m) The Company will not, directly or indirectly, sell, grant any option or warrant for the sale of, register, loan, pledge, grant any rights with respect to contract to sell or otherwise dispose of any Common Stock, or any securities convertible into or exercisable or exchangeable for Common Stock (including, without limitations, any of the economic attributes thereof), for a period of 270 days after the date of the Prospectus, without the prior written consent of Smith Barney Inc., except for sales to the Underwriters pursuant to this Agreement; provided, however, that the Company may issue and sell Common Stock pursuant to the Company's Employee Stock Ownership Plan as in effect at the Execution Time. (n) The Company has furnished or will furnish to the Underwriters "lock-up" letters, in form and substance satisfactory to you, signed by each of its current officers and directors and by each of the Selling Stockholders to the effect that they will not, for a period of 120 days, in the case of the current officers and directors, and 270 days, in the case of the Selling Stockholders, following the Execution Time, without the prior written consent of Smith Barney Inc., offer, sell or contract to sell, or otherwise dispose of (or enter into any transaction which is designed to, or could be expected to, result in the disposition (whether by actual disposition or effective economic disposition due to cash settlement or otherwise), directly or indirectly or announce the offering of) any other shares of Common Stock or any securities convertible into, or exchangeable for, shares of Common Stock. (o) For a period of 270 days following the Execution Time, the Company will not, without your prior written consent, as Representatives to the Underwriters, release or waive any of the obligations of its stockholders pursuant to any agreements between the Company and its stockholders which restrict the transfer, encumbrance, offer or disposal of the Company's securities. (p) Except as stated in this Agreement and in the Prepricing Prospectus and Prospectus, the Company has not taken, nor will it take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (q) The Company will use its best efforts to have the shares of Common Stock which it agrees to sell under this Agreement approved for inclusion on the NASDAQ National Market on or before the Closing Date. 7. Agreements of the Selling Stockholders. Each Selling Stockholder agrees with the Underwriters as follows: (a) Such Selling Stockholder (in his capacity as such) will reasonably cooperate to the extent necessary to cause the registration statement or any post-effective amendment thereto to become effective. (b) Such Selling Stockholder will pay all Federal and other taxes, if any on the transfer or sale of the Shares being sold by such Selling Stockholder to the Underwriters. -8- (c) Such Selling Stockholder in his capacity as such will do or perform all things required to be done or performed by such Selling Stockholder prior to the Closing Date in accordance with the express terms hereof to satisfy all conditions precedent to the delivery of the Shares to be sold by such Selling Stockholder pursuant to this Agreement. (d) Except as stated in this Agreement and in the Prepricing Prospectus and the Prospectus, such Selling Stockholder has not taken, nor will it take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (e) Such Selling Stockholder will advise you promptly, and if requested by you, will confirm such advice in writing, within the period of time referred to in Section 6(f) hereof, of any change in information relating to such Selling Stockholder that suggests that any statement made in the Registration Statement or the Prospectus (as then amended or supplemented, if amended or supplemented) relating to such Selling Stockholder is or may be untrue or that the statements in the Registration Statement or Prospectus (as then amended or supplemented, if amended or supplemented) relating to such Selling Stockholder omits or may omit to state a material fact or a fact necessary to be stated therein in order to make the statements therein not misleading. (f) Such Selling Stockholder has furnished or will furnish to the Underwriters a "lock-up" letter, in form and substance satisfactory to you, to the effect that such Selling Stockholder agrees that, until such date which is 270 days after the Closing Date, without the prior written consent of Smith Barney Inc., as Representative to the Underwriters, such Selling Stockholder will not, directly or indirectly, offer, sell, contract to sell, grant any option or warrant for the sale of, register, loan, pledge, grant any rights with respect to, or otherwise transfer or dispose of any shares of capital stock, including, without limitation, Common Stock which now or hereafter may be deemed to be beneficially owned by such Selling Stockholder. 8. Representations and Warranties of the Company. The Company represents and warrants to each Underwriter that: (a) Each Prepricing Prospectus included as part of the registration statement as originally filed or as part of any amendment or supplement thereto, or filed pursuant to Rule 424 under the Act, complied when so filed in all material respects with the provisions of the Act; except that this representation and warranty does not apply to statements in or omissions from such Prepricing Prospectus (or any amendment or supplement thereto) made in reliance upon and in conformity with information relating to any Selling Stockholder or to any Underwriter furnished to the Company in writing by an Underwriter through the Representatives expressly for use therein. The Commission has not issued any order preventing or suspending the use of any Prepricing Prospectus. (b) The Company meets the requirements for the use of Form S-3 under the Act. The registration statement in the form in which it became or becomes effective and also in such form as it may be when any post-effective amendment thereto shall become effective and the prospectus and any supplement or amendment thereto when filed with the Commission under Rule 424(b) under the Act, complied or will comply in all material respects with the provisions of the Act and did not or will not at any such times contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; except that this representation and warranty does not apply to statements in or omissions from the registration statement or the -9- prospectus made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by or on behalf of any Underwriter expressly for use therein. (c) The Incorporated Documents, when they were filed (or, if any amendment with respect to any such document was filed, when such amendment was filed), complied in all material respects with the requirements of the Exchange Act and the rules and regulations thereunder. (d) All the outstanding shares of Common Stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable and are free of any preemptive or similar rights; the Shares to be issued and sold by the Company have been duly authorized and, when issued and delivered to the Underwriters against payment therefor in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and free of any preemptive or similar rights; and the capital stock of the Company conforms to the description thereof in the Registration Statement and the Prospectus. (e) The Company is a corporation duly organized and validly existing in good standing under the laws of the State of Delaware with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus, and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or qualify does not have a material adverse effect on the condition (financial or other), business, properties, net worth or results of operations of the Company and the Subsidiaries (as hereinafter defined) taken as a whole (a "Material Adverse Effect"). (f) All the Company's subsidiaries (collectively, the "Subsidiaries") are listed in an exhibit to the Registration Statement. Each Subsidiary is a corporation duly organized, validly existing and in good standing in the jurisdiction of its incorporation, with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus, and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or qualify does not have a material adverse effect on the condition (financial or other), business, properties, net worth or results of operations of such Subsidiary; all the outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable, and are owned by the Company directly, or indirectly through one of the other Subsidiaries, free and clear of any lien, adverse claim, security interest, equity or other encumbrance. (g) There are no legal or governmental proceedings pending or, to the knowledge of the Company, threatened, against the Company or any of the Subsidiaries, or to which the Company or any of the Subsidiaries, or to which any of their respective properties is subject, that are required to be described in the Registration Statement or the Prospectus but are not described as required, and there are no agreements, contracts, indentures, leases or other instruments that are required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement or any Incorporated Document that are not described or filed as required by the Act or the Exchange Act. The descriptions of the terms of any such contracts or documents contained in the Registration Statement or the Prospectus are correct in all material respects. -10- (h) Neither the Company nor any of the Subsidiaries is (i) in violation of its certificate or articles of incorporation or by-laws, or other organizational documents, (ii) in violation of any law, ordinance, administrative or governmental rule or regulation applicable to the Company or any of the Subsidiaries or of any decree of any court or governmental agency or body having jurisdiction over the Company or any of the Subsidiaries, or (iii) in default in any material respect in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any material agreement, indenture, lease or other instrument to which the Company or any of the Subsidiaries is a party or by which any of them or any of their respective properties may be bound; except, in the case of clauses (ii) and (iii) above, for any such violation or default which, together with all other such violations and defaults then existing, would not have a Material Adverse Effect. (i) Neither the issuance and sale of the Shares, the execution, delivery or performance of this Agreement by the Company nor the consummation by the Company of the transactions contemplated hereby and thereby (i) requires any consent, approval, authorization or other order of or registration or filing with, any court, regulatory body, administrative agency or other governmental body, agency or official (except such as may be required for the registration of the Shares under the Act and the Exchange Act and compliance with the securities or Blue Sky laws of various jurisdictions, all of which have been or will be effected in accordance with this Agreement) or conflicts or will conflict with or constitutes or will constitute a breach of, or a default under, the certificate or articles of incorporation or bylaws, of the Company or any of the Subsidiaries or (ii) conflicts or will conflict with or constitutes or will constitute a breach of, or a default under, any agreement, indenture, lease or other instrument to which the Company or any of the Subsidiaries is a party or by which any of them or any of their respective properties may be bound, or violates or will violate any statute, law, regulation or filing or judgment, injunction, order or decree applicable to the Company or any of the Subsidiaries or any of their respective properties, or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of the Subsidiaries pursuant to the terms of any agreement or instrument to which any of them is a party or by which any of them may be bound or to which any of the property or assets of any of them is subject. (j) The accountants, Coopers & Lybrand, L.L.P., who have certified or shall certify the financial statements included or incorporated by reference in the Registration Statement and the Prospectus (or any amendment or supplement thereto) are independent public accountants as required by the Act. (k) The financial statements, together with related schedules and notes, included or incorporated by reference in the Registration Statement and the Prospectus (and any amendment or supplement thereto), present fairly the consolidated financial position, results of operations, cash flows and changes in financial position of the Company and the Subsidiaries on the basis stated in the Registration Statement at the respective dates or for the respective periods to which they apply; such statements and related schedules and notes have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as disclosed therein; and the other financial and statistical information and data included or incorporated by reference in the Registration Statement and the Prospectus (and any amendment or supplement thereto) are accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Company and the Subsidiaries. -11- (l) The execution and delivery of, and the performance by the Company of its obligations under, this Agreement have been duly and validly authorized by the Company, and this Agreement has been duly executed and delivered by the Company and constitutes the valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms, except (i) the enforceability hereof or thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally, (ii) the remedy of specific performance and other forms of equitable relief may be subject to certain equitable defenses and to the discretion of the court before which the proceedings may be brought and (iii) rights to indemnity and contribution hereunder or thereunder may be limited by federal or state securities laws or the public policy underlying such laws. (m) Except as disclosed in the Registration Statement and the Prospectus (or any amendment or supplement thereto), subsequent to the respective dates as of which such information is given in the Registration Statement and the Prospectus (or any amendment or supplement thereto), neither the Company nor any of the Subsidiaries has incurred any liability or obligation, direct or contingent, or entered into any transaction, not in the ordinary course of business, that is material to the Company and the Subsidiaries taken as a whole, and there has not been any change in the capital stock, or material increase in the short-term debt or long-term debt, of the Company or any of the Subsidiaries, or any development having or which may reasonably be expected to have, a Material Adverse Effect. (n) Each of the Company and the Subsidiaries has good and marketable title to all property (real and personal) described in the Prospectus as being owned by it, free and clear of all liens, claims, security interests or other encumbrances except such as are described in the Registration Statement and the Prospectus or in a document included as an exhibit to the Registration Statement and all the property described in the Prospectus as being held under lease by each of the Company and the Subsidiaries is held by it under valid, subsisting and enforceable leases with only such exceptions as in the aggregate are not materially burdensome and do not interfere in any material respect with the conduct of the business of the Company and the Subsidiaries, taken as a whole. (o) The Company has not distributed and, prior to the later to occur of (i) the Closing Date or the Option Closing Date, as the case may be, and (ii) completion of the distribution of the Shares, will not distribute any offering material in connection with the offering and sale of the Shares other than the Registration Statement, the Prepricing Prospectus, the Prospectus or other materials, if any, permitted by the Act. (p) The Company and each of the Subsidiaries has such permits, licenses, franchises and authorizations of governmental or regulatory authorities ("permits") as are necessary to own its respective properties and to conduct its business in the manner described in the Prospectus, subject to such qualifications as may be set forth in the Prospectus; the Company has fulfilled and performed all its material obligations with respect to such permits and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of the holder of any such permit, subject in each case to such qualification as may be set forth in the Prospectus; and, except as described in the Prospectus, none of such permits contains any restriction that is materially burdensome to the Company or any of its Subsidiaries. (q) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial -12- statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (r) To the Company's knowledge, neither the Company nor any of its Subsidiaries nor any employee or agent of the Company or any Subsidiary has made any payment of funds of the Company or any Subsidiary or received or retained any funds in violation of any law, rule or regulation, which payment, receipt or retention of funds is of a character required to be disclosed in the Prospectus. (s) The Company and each of the Subsidiaries have filed all foreign, federal, state and local tax returns required to be filed, which returns are complete and correct, and neither the Company nor any Subsidiary is in default in the payment of any taxes which were payable pursuant to said returns or any assessments with respect thereto. (t) Except as disclosed in the Registration Statement and the Prospectus, no holder of any security of the Company (other than the Selling Stockholders) has any right to require registration of shares of Common Stock or any other security of the Company because of the filing of the registration statement or consummation of the transactions contemplated by this Agreement. (u) The Company and the Subsidiaries own or possess all patents, trademarks, trademark registration, service marks, service mark registrations, trade names, copyrights, licenses, inventions, trade secrets and rights described in the Prospectus as being owned by them or any of the them or necessary for the conduct of their respective businesses, and the Company is not aware of any claim to the contrary or any challenge by any other person to the rights of the Company and the Subsidiaries with respect to the foregoing. (v) The Company is not now, and after sale of the Shares and application of the net proceeds from such sale as described in the Prospectus under the caption "Use of Proceeds" will not be, an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (w) The Company has complied with all provisions of Florida Statutes, 517.075, relating to issuers doing business with Cuba. 9. Representations and Warranties of the Selling Stockholders. Each Selling Stockholder represents and warrants to each Underwriter that: (a) Such Selling Stockholder now has, and on the Closing Date and any Option Closing Date will have, valid and marketable title to the Shares to be sold by such Selling Stockholder hereunder, free and clear of any lien, claim, security interest or other encumbrance, including, without limitation, any restriction on transfer, except as otherwise described in the Prospectus. (b) Such Selling Stockholder now has, and on the Closing Date and any Option Closing Date will have, full legal right, power and authorization, and any approval required by law, to sell, assign transfer and deliver such Shares in the manner provided in this Agreement, and upon delivery of and payment for such Shares hereunder, the several Underwriters will acquire valid and marketable title to such Shares free and clear of any lien, claim, security interest, or other encumbrance. -13- (c) This Agreement and the Custody Agreement have each been duly authorized, executed and delivered by or on behalf of such Selling Stockholder and is the valid and binding agreement of such Selling Stockholder enforceable against such Selling Stockholder in accordance with their respective terms, except that (i) the enforceability hereof or thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally, (ii) the remedy of specific performance and other forms of equitable relief may be subject to certain equitable defenses and to the discretion of the court before which the proceedings may be brought and (iii) rights to indemnity and contribution hereunder or thereunder may be limited by federal or state securities laws or the public policy underlying such laws. (d) Neither the sale of the Shares, the execution and delivery of this Agreement or the Custody Agreement by or on behalf of such Selling Stockholder nor the consummation of the transactions contemplated hereby and thereby by such Selling Stockholder (i) requires any consent, approval, authorization or order of, or filing or registration with, any court, regulatory body, administrative agency or other governmental body, agency or official (except such as may be required under the Act or such as may be required under state securities or Blue Sky laws governing the purchase and distribution of the Shares) or (ii) conflicts or will conflict with or constitutes or will constitute a breach of, or default under, or violates or will violate, any agreement, indenture or other instrument to which such Selling Stockholder is a party in his individual capacity or by which such Selling Stockholder is or may be bound or to which any of such Selling Stockholder's property or assets is subject, or any statute, law, rule, regulation, ruling, judgment, injunction, order or decree applicable to such Selling Stockholder in his individual capacity or to any property or assets of such Selling Stockholder. (e) The Registration Statement and the Prospectus, insofar as they relate to such Selling Stockholder in his individual capacity, do not and will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. (f) The representations and warranties of such Selling Stockholder in the Custody Agreement are, and on the Closing Date and any Option Closing Date will be, true and correct. (g) Such Selling Stockholder has not taken, directly or indirectly, any action in his individual capacity designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares, except for the lock-up arrangements referred to in the Prospectus. (h) Such Selling Stockholder does not have any knowledge or any reason to believe that the Registration Statement or the Prospectus (or any amendment or supplement thereto) contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. (i) Such Selling Stockholder has no reason to believe that the discussion contained under the caption "Principal and Selling Stockholders" contained in the Registration Statement and Prospectus is not true and correct. (j) No consent, approval, authorization, filing with or order of any court or governmental agency or body is required in connection with the transactions contemplated herein, except such as have been obtained under the Act and such as may be required under the blue sky laws of any jurisdic- -14- tion inside or outside of the United States in connection with the purchase and distribution of the Shares by the Underwriters in the manner contemplated herein and in the Prospectus. (k) There are no contracts, agreements or understandings between the Selling Stockholders and any person, including the Company, that would give rise to a valid claim against the Selling Stockholder, the Company or any Underwriter for a brokerage commission, finder's fee or other like payment in connection with the offerings. (l) Such Selling Stockholder has not distributed and will not distribute any prospectus or other offering material in connection with the offering and sale of the Shares. (m) Such Selling Stockholder (i) does not have, or has waived prior to the date hereof, any preemptive right, co-sale right or right of first refusal or other similar right to purchase any of the Shares that are to be sold by the Company or any of the other Selling Stockholders to the Underwriters pursuant to this Agreement, (ii) does not have, or has waived prior to the date hereof, any registration right or other similar right to participate in the offering made by the Prospectus, other than such rights of participation as have been satisfied by the participation of such Selling Stockholder in the transactions to which this Agreement relates in accordance with the terms of this Agreement, and (iii) does not own any warrants, options or similar rights to acquire, and does not have any right or arrangement to acquire, any capital stock, rights, warrants, options or other securities from the Company, other than those described in the Registration Statement and the Prospectus and, in the case of clause (iii) above, other than additional shares of the Company that may be issuable to them pursuant to "working capital adjustments" provisions of Section 5.01 of the Agreement and Plan of Merger, dated as of April 1, 1998 among Nutrition Headquarters, Inc., et al., the Selling Stockholders and the Company. 10. Indemnification and Contribution. (a) The Company and each Selling Stockholder, jointly and severally, agree to indemnify and hold harmless each of you and each other Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act from and against any and all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation) arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Prepricing Prospectus or in the Registration Statement or the Prospectus or in any amendment or supplement thereto, or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or expenses arise out of or are based upon any untrue statement or omission or alleged untrue statement or omission which has been made therein or omitted therefrom in reliance upon and in conformity with the information relating to such Underwriter furnished in writing to the Company by or on behalf of any Underwriter through you expressly for use in connection therewith; provided, however, that (i) the indemnification contained in this paragraph (a) with respect to any Prepricing Prospectus shall not inure to the benefit of any Underwriter (or to the benefit of any person controlling such Underwriter) on account of any such loss, claim, damage, liability or expense arising from the sale of the Shares by such Underwriter to any person if a copy of the Prospectus shall not have been delivered or sent to such person within the time required by the Act and the regulations thereunder, and the untrue statement or alleged untrue statement or omission or alleged omission of a material fact contained in such Prepricing Prospectus was corrected in the Prospectus; provided that the Company has delivered the Prospectus to the several Underwriters in requisite quantity on a timely basis to permit such delivery or sending and (ii) the liability of a Selling Stockholder under Sections 9 and 10 shall not exceed an amount equal to the net proceeds received by such Selling Stockholder from the sale hereunder of the Shares sold by such Selling Stockholder to the Underwriters. The foregoing indemnity agreement shall be in addition to any liability which the Company may otherwise have. -15- (b) If any action, suit or proceeding shall be brought against any Underwriter or any person controlling any Underwriter in respect of which indemnity may be sought against the Company or the Selling Stockholders, such Underwriter or such controlling person shall promptly notify the parties against whom indemnification is being sought (the "indemnifying parties"), and such indemnifying parties shall assume the defense thereof, including the employment of counsel and payment of all fees and expenses. Such Underwriter or any such controlling person shall have the right to employ separate counsel in any such action, suit or proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Underwriter or such controlling person unless (i) the indemnifying parties have agreed in writing to pay such fees and expenses, (ii) the indemnifying parties have failed to assume the defense and employ counsel, or (iii) the named parties to any such action, suit or proceeding (including any impleaded parties) include both such Underwriter or such controlling person and the indemnifying parties and the Underwriter or such controlling person shall have been advised by its counsel that representation of such indemnified party and any indemnifying party by the same counsel would be inappropriate under applicable standards of professional conduct (whether or not such representation by the same counsel has been proposed) due to actual or potential differing interests between them (in which case the indemnifying party shall not have the right to assume the defense of such action, suit or proceeding on behalf of such Underwriter or such controlling person). It is understood, however, that the indemnifying parties shall, in connection with any one such action, suit or proceeding or separate but substantially similar or related actions, suits or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of only one separate firm of attorneys (in addition to any local counsel) at any time for all such Underwriter and controlling Persons not having actual or potential differing interests with the Underwriter or among themselves, which firm shall be designated in writing by Smith Barney Inc., and that all such fees and expenses shall be reimbursed as they are incurred. The indemnifying parties shall not be liable for any settlement of any such action, suit or proceeding effected without their written consent, but if settled with such written consent, or if there be a final judgment for the plaintiff in any such action, suit or proceeding, the indemnifying parties agree to indemnify and hold harmless any Underwriter and any such controlling person, to the extent provided in the preceding paragraph, and any such controlling person from and against any loss, claim, damage, liability or expense by reason of such settlement or judgment. (c) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement, the Selling Stockholders, and any person who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, to the same extent as the foregoing indemnity from the Company to each Underwriter, but only with respect to information relating to such Underwriter furnished in writing by or on behalf of such Underwriter through you expressly for use in the Registration Statement, the Prospectus or any Prepricing Prospectus, or any amendment or supplement thereto. If any action, suit or proceeding shall be brought against the Company, any of its directors, any such officer, the Selling Stockholders, or any such controlling person based on the Registration Statement, the Prospectus or any Prepricing Prospectus, or any amendment or supplement thereto, and in respect of which indemnity may be sought against any Underwriter pursuant to this paragraph (c), such Underwriter shall have the rights and duties given to the Company by paragraph (b) above (except that if the Company shall have assumed the defense thereof such Underwriter shall not be required to do so, but may employ separate counsel therein and participate in the defense thereof, but the fees and expenses of such counsel shall be at the Underwriter's expense), and the Company, its directors, any such officer, the Selling Stockholders, and any such controlling person shall have the rights and duties given to the Underwriter by paragraph (b) above. The foregoing indemnity agreement shall be in addition to any liability which any Underwriter may otherwise have. (d) If the indemnification provided for in this Section 10 is unavailable to an indemnified party under paragraphs (a) or (c) hereof in respect of any losses, claims, damages, liabilities or expenses referred -16- to therein, then an indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other hand from the offering of the Shares, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Selling Stockholders on the one hand and the Underwriters on the other in connection with the statements or omissions that resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the Selling Stockholders bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Company and the Selling Stockholders on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Stockholders on the one hand or by the Underwriters on the other hand and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. (e) The Company, the Selling Stockholders and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 10 were determined by a pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in paragraph (d) above. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities and expenses referred to in paragraph (d) above shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating any claim or defending any such action, suit or proceeding. Notwithstanding the provisions of this Section 10, (x) no Underwriter shall be required to contribute any amount in excess of the amount by which the total price of the Shares underwritten by it and distributed to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission and (y) no Selling Stockholder shall be required to contribute any amount in excess of the amount by which the net proceeds received by such Selling Stockholder from the sale hereunder of the Shares sold by Selling Stockholder to the Underwriters exceeds the aggregate amount which such Selling Stockholder has otherwise been required to pay pursuant to this Section 10. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 10 are several in proportion to the respective numbers of Firm Shares set forth opposite their names in Schedule I hereto (or such numbers of Firm Shares increased as set forth in Section 13 hereof) and not joint. (f) No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding. (g) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 10 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The indemnity and con- -17- tribution agreements contained in this Section 10 and the representations and warranties of the Company and the Selling Stockholders set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, its directors or officers or the Selling Stockholders or any person controlling the Company, (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter or any person controlling any Underwriter, or to the Company, its directors or officers, or any person controlling the Company, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 10. 11. Conditions of Underwriters' Obligations. The several obligations of the Underwriters to purchase the Firm Shares hereunder are subject to the following conditions: (a) If, at the time this Agreement is executed and delivered, it is necessary for the registration statement or a post-effective amendment thereto to be declared effective before the offering of the Shares may commence, the registration statement or such post-effective amendment shall have become effective not later than 5:30 P.M., New York City time, on the date hereof, or at such later date and time as shall be consented to in writing by you, and all filings, if any, required by Rules 424 and 430A under the Act shall have been timely made; no stop order suspending the effectiveness of the registration statement shall have been issued and no proceeding for that purpose shall have been instituted or, to the knowledge of the Company or any Underwriter, threatened by the Commission, and any request of the Commission for additional information (to be included in the registration statement or the prospectus or otherwise) shall have been complied with to your satisfaction. (b) Subsequent to the effective date of this Agreement, there shall not have occurred (i) any change, or any development involving a prospective change, that would have a Material Adverse Effect on the Company and the Subsidiaries, taken as a whole, not contemplated by the Prospectus, which in your opinion, as Representatives of the several Underwriters, would materially adversely affect the market for the Shares or (ii) any event or development relating to or involving the Company or any officer or director of the Company or any Selling Stockholder which makes any statement made in the Prospectus untrue or which, in the opinion of the Company and its counsel or the Underwriters and their counsel, requires the making of any addition to or change in the Prospectus in order to state a material fact required by the Act or any law to be stated therein or necessary in order to make the statements therein not misleading, if amending or supplementing the Prospectus to reflect such event or development would, in your opinion, as Representatives of the Underwriters, materially adversely affect the market for the Shares. (c) You shall have received on the Closing Date, an opinion of Michael C. Duban, P.C., counsel for the Company, dated the Closing Date and addressed to you, as Representatives of the several Underwriters, to the effect that: (i) The Company is a corporation duly incorporated and validly existing in good standing under the laws of the State of Delaware with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement thereto), and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of the Company's properties or the conduct of its business requires such registration or qualification, except where the failure so to register or qualify does not have a Material Adverse Effect on the Company and the Subsidiaries, taken as a whole); -18- (ii) Each of the Subsidiaries is a corporation duly organized and validly existing in good standing under the laws of the jurisdiction of its organization, with full corporate power and authority to own, lease, and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement thereto); and all the outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable, and are owned by the Company directly, or indirectly through one of the other Subsidiaries, free and clear of any perfected security interest, or, to the best knowledge of such counsel after reasonable inquiry, any other security interest, lien, adverse claim, equity or other encumbrance; (iii) The authorized and outstanding capital stock of the Company is as set forth under the caption "Capitalization" in the Prospectus; and the authorized capital stock of the Company conforms in all material respects as to legal matters to the description thereof contained in the Prospectus under the caption "Description of Capital Stock"; (iv) All the shares of capital stock of the Company outstanding prior to the issuance of the Shares have been duly authorized and validly issued, and are fully paid and nonassessable; (v) The Shares have been duly authorized and, when issued and delivered to the Underwriters against payment therefor in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and free of any preemptive rights or, to the best knowledge of such counsel after reasonable inquiry, similar rights that entitle or will entitle any person to acquire any Shares upon the issuance thereof by the Company; (vi) The form of certificates for the Shares conforms to the requirements of the Delaware General Corporation Law; (vii) The Registration Statement and all post-effective amendments, if any, have become effective under the Act and, to the best knowledge of such counsel, after reasonable inquiry, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose are pending before or contemplated by the Commission; and any required filing of the Prospectus pursuant to Rule 424(b) has been made in accordance with Rule 424(b); (viii) The Company has corporate power and authority to enter into this Agreement and to issue, sell and deliver the Shares to be sold by it to the Underwriters as provided herein, and this Agreement has been duly authorized, executed and delivered by the Company and is a valid, legal and binding agreement of the Company; (ix) Neither the Company nor any of the Subsidiaries is (i) in violation of its respective certificate or articles of incorporation or bylaws, or (ii) to the best knowledge of such counsel after reasonable inquiry, is in default in the performance of any material obligation, agreement or condition contained in any bond, debenture, note or other evidence of indebtedness, except as may be disclosed in the Prospectus or where any such default or defaults in the aggregate would not have Material Adverse Effect; -19- (x) Neither the offer, sale or delivery of the Shares, the execution, delivery or performance of this Agreement, compliance by the Company with the provisions of this Agreement nor consummation by the Company of the transactions contemplated by this Agreement conflicts or will conflict with or constitutes or will constitute a breach of, or a default under, the certificate or articles of incorporation or bylaws of the Company or any of the Subsidiaries or any material agreement, indenture, lease or other instrument to which the Company or any of the Subsidiaries is a party or by which any of them or any of their respective properties is bound that is an exhibit to the Registration Statement or to any Incorporated Document, or is known to such counsel after reasonable inquiry, or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of the Subsidiaries, nor will any such action result in any violation of any existing law, regulation, ruling (assuming compliance with all applicable state securities and Blue Sky laws), judgment, injunction, order or decree known to such counsel after reasonable inquiry, applicable to the Company, the Subsidiaries or any of their respective properties, which violation would have a Material Adverse Effect; (xi) No consent, approval, authorization or other order of, or registration or filing with, any court, regulatory body, administrative agency or other governmental body, agency, or official is required on the part of the Company (except as have been obtained under the Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act") or such as may be required under state securities or Blue Sky laws governing the purchase and distribution of the Shares) for the valid issuance and sale of the Shares to the Underwriters as contemplated by the Underwriting Agreement; (xii) The Registration Statement and the Prospectus and any supplements or amendments thereto (except for the financial statements and the notes thereto and the schedules and other financial and statistical data included therein, as to which such counsel need not express any opinion) comply as to form in all material respects with the requirements of the Act; and each of the Incorporated Documents (except for the financial statements and the notes thereto and the schedules and other financial and statistical data included therein, as to which such counsel need not express any opinion) complies as to form in all material respects with the Exchange Act and the rules and regulations of the Commission thereunder; (xiii) To the knowledge of such counsel, after reasonable inquiry, (A) other than as described or contemplated in the Prospectus (or any supplement thereto), there are no legal or governmental proceedings pending or threatened against the Company or any of the Subsidiaries, or to which the Company or any of the Subsidiaries, or any of their property, is subject, which are required to be described in the Registration Statement or Prospectus (or any amendment or supplement thereto) and (B) there are no agreements, contracts, indentures, leases or other instruments, that are required to be described in the Registration Statement or the Prospectus (or any amendment or supplement thereto) or to be filed as an exhibit to the Registration Statement or any Incorporated Document that are not described or filed as required, as the case may be; (xiv) To the knowledge of such counsel, after reasonable inquiry, neither the Company nor any of the Subsidiaries is in violation of any law, ordinance, administrative or governmental rule or regulation applicable to the Company or any of the Subsidiaries or of any decree of any court or governmental agency or body having jurisdiction over the Company or -20- any of the Subsidiaries which violation, individually or in the aggregate, would have a Material Adverse Effect; (xv) The statements in the Registration Statement and Prospectus, insofar as they are descriptions of contracts, agreements or other legal documents, or refer to statements of law or legal conclusions, are accurate and present fairly the information required to be shown; Such opinion shall also state that, although counsel has not undertaken, except as otherwise indicated in their opinion, to determine independently, and does not assume any responsibility for, the accuracy or completeness of the statements in the Registration Statement, such counsel has participated in the preparation of the Registration Statement and the Prospectus, including review and discussion of the contents thereof with officers and other officials of the Company, representatives of the Independent Public Accountants for the Company and your representatives, at which meetings the contents of the Registration Statement and the Prospectus and related matters were discussed (including review and discussion of the contents of all Incorporated Documents), and nothing has come to the attention of such counsel that has caused them to believe that the Registration Statement (including the Incorporated Documents) at the time the Registration Statement became effective, or the Prospectus, as of its date and as of the Closing Date or the Option Closing Date, as the case may be, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that any amendment or supplement to the Prospectus, as of its respective date, and as of the Closing Date or the Option Closing Date, as the case may be, contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no opinion with respect to the financial statements and the notes thereto and the schedules and other financial and statistical data included in the Registration Statement or the Prospectus or any Incorporated Document). In rendering their opinion as aforesaid, counsel may rely upon an opinion or opinions, each dated the Closing Date, of other counsel retained by them or the Company as to laws of any jurisdiction other than the United States or the States of New York or Delaware, provided that (1) each such local counsel is acceptable to the Representatives, (2) such reliance is expressly authorized by each opinion so relied upon and a copy of each such opinion is delivered to the Representatives and is, in form and substance satisfactory to them and their counsel, and (3) counsel shall state in their opinion that they believe that they and the Underwriters are justified in relying thereon. (d) You shall receive on the Closing Date an opinion of Herrick, Feinstein LLP, counsel for the Selling Stockholders, dated the Closing Date and addressed to you, as Representatives of the Underwriters, to the effect that: (i) The Underwriting Agreement has been duly authorized, executed and delivered by or on behalf of each of the Selling Stockholders; (ii) Each Selling Stockholder has full legal right, power and authority to sell, assign, transfer and deliver the Shares which such Selling Stockholder has agreed to sell pursuant to the Underwriting Agreement, and when delivered to and paid for by the Underwriters in accordance with the terms thereof, assuming the Underwriters have no knowledge of any ad- -21- verse claim, the Underwriters will own such Shares free and clear of all security interests, liens, encumbrances or claims of any person; (iii) The execution and delivery of the Underwriting Agreement by the Selling Stockholders and the consummation by them in their individual capacities of the transactions contemplated hereby, to the knowledge of such counsel, will not conflict with, violate, result in a breach of or constitute a default under the terms or provisions of any material agreement, indenture, mortgage or other instrument known to such counsel to which a Selling Stockholder is a party in his individual capacity or by which he or any of his assets or property is bound, or any material court order or decree or any material law, rule, or regulation applicable to a Selling Stockholder in his individual capacity or to any of the property or assets of a Selling Stockholder. (iv) The Custody Agreement has been duly authorized, executed and delivered by or on behalf of each of the Selling Stockholders and is a valid and binding agreement of each Selling Stockholder enforceable against each Selling Stockholder in accordance with its terms except that (i) enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally, (ii) the remedy of specific performance and other forms of equitable relief may be subject to certain equitable defenses and to the discretion of the court before which the proceedings may be brought and (iii) rights to indemnity and contribution thereunder may be limited by Federal or state securities laws or the public policy underlying such laws. Such opinion shall also state that, although counsel has not undertaken, except as otherwise indicated in their opinion, to determine independently, and does not assume any responsibility for, the accuracy or completeness of the statements in the Registration Statement, such counsel has reviewed the information contained or incorporated by reference in the Registration Statement and the Prospectus, including review and discussion of the contents thereof, and nothing has come to the attention of such counsel that has caused them to believe that the Registration Statement (including the Incorporated Documents) at the time the Registration Statement became effective, or the Prospectus, as of its date and as of the Closing Date or the Option Closing Date, as the case may be, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading, solely insofar as any such misstatement or omission relates to each Selling Stockholder, in his or its individual capacity, or that any amendment or supplement to the Prospectus, as of its respective date, and as of the Closing Date or the Option Closing Date, as the case may be, contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, solely insofar as any such misstatement or omission relates to each Selling Stockholder, in his or its individual capacity, (it being understood that such counsel need express no opinion with respect to the Company or the financial statements and the notes thereto and the schedules and other financial and statistical data included in the Registration Statement or the Prospectus or any Incorporated Document). (e) You shall have received on the Closing Date an opinion of Cahill Gordon & Reindel, counsel for the Underwriters, dated the Closing Date and addressed to you, as Representatives of the Underwriters, with respect to the matters referred to in clauses (v), (vii), (viii), (xii) and the penultimate paragraph of the foregoing paragraph (c) and such other related matters as you may request. -22- (f) You shall have received letters addressed to you, as Representatives of the Underwriters, and dated the date hereof and the Closing Date, from Coopers & Lybrand, L.L.P, independent certified public accountants, substantially in the forms heretofore approved by you. (g) (i) No stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been taken or, to the knowledge of the Company, shall be contemplated by the Commission at or prior to the Closing Date; (ii) there shall not have been any change in the capital stock of the Company nor any material increase in the short-term or long-term debt of the Company (other than in the ordinary course of business) from that set forth or contemplated in the Registration Statement or the Prospectus (or any amendment or Supplement thereto); (iii) there shall not have been, since the respective dates as of which information is given in the Registration Statement and the Prospectus (or any amendment or Supplement thereto), except as otherwise be stated in the Registration Statement and Prospectus (or any amendment or supplement thereto), any material adverse change in the condition (financial or other) , business, prospects, properties, net worth or results of operations of the Company and the Subsidiaries taken as a whole; (iv) the Company and the Subsidiaries shall not have any liabilities or obligations, direct or contingent (whether or not in the ordinary course of business), that are material to the Company and the Subsidiaries, taken as a whole, other than those reflected in the Registration Statement or the Prospectus (or any amendment or supplement thereto); and (v) all the representations and warranties of the Company contained in this Agreement shall be true and correct on and as of the date hereof and on and as of the Closing Date as if made on and as of the Closing Date, and you shall have received a certificate, dated the Closing Date and signed by the chief executive officer and the chief financial officer of the Company (or such other officers as are acceptable to you), to the effect set forth in this Section 11(g) and in Section 11(h) hereof. (h) The Company shall not have failed at or prior to the Closing Date to have performed or complied with any of its agreements herein contained and required to be performed or complied with by it hereunder at or prior to the Closing Date. (i) All the representations and warranties of each Selling Stockholder contained in this Agreement and in the Custody Agreement shall be true and correct on and as of the date hereof and on and as of the Closing Date as if made on and as of the Closing Date, and you shall have received a certificate, dated the Closing Date and signed by such Selling Stockholder to the effect set forth in this Section 11(i) and in Section 11(j) hereof. (j) The Selling Stockholders shall not have failed at or prior to the Closing Date to have performed or complied with any of their agreements contained herein and required to be performed or complied with by them at or prior to the Closing Date. (k) Prior to the Closing Date the Shares which the Company agrees to sell pursuant to this Agreement shall have been approved for inclusion on the NASDAQ National Market. (l) At the Execution Time, unless otherwise agreed to in writing by the Representatives, the Company shall have furnished to the Representatives "lock-up" letters signed by each of its current officers and directors of the Company and by the Selling Stockholders addressed to the Representatives, in which each such person agreed that, until such date which is (a) 270 days after the Closing Date if such person is a Selling Stockholder or (b) 120 days after the Closing Date in the case of the current officers and directors of the Company, without the prior written consent of Smith Barney Inc., -23- as Representative to the Underwriters, such person will not, directly or indirectly, offer, sell, contract to sell, grant any option or warrant for the sale of, register, loan, pledge, grant any rights with respect to, or otherwise transfer or dispose of any shares of capital stock of the Company or securities convertible into or exchangeable or exercisable for, or any rights to purchase or acquire, such shares of capital stock, including, without limitation, Common Stock which now or hereafter may be deemed to be beneficially owned by such person, subject to certain exceptions set forth therein. (m) The Company and each of the Selling Stockholders shall have furnished or caused to be furnished to you such further certificates and documents as you shall have requested. All such opinions, certificates, letters and other documents will be in compliance with the provisions hereof only if they are satisfactory in form and substance to you and the Underwriters' counsel. Any certificate or document signed by any officer of the Company or a Selling Stockholder and delivered to you, as Representatives of the Underwriters or to counsel for the Underwriters shall be deemed a representation and warranty by the Company or such Selling Stockholder, as the case may be, to each Underwriter as to the statements made therein. The several obligations of the Underwriters to purchase Additional Shares hereunder are subject to the satisfaction on and as of any Option Closing Date of the conditions set forth in this Section 11, except that, if any Option Closing Date is other than the Closing Date, the certificates, opinions and letters referred to in paragraphs (c) through (i) shall be dated the Option Closing Date in question and the opinions called for by paragraphs (c), (d) and (e) shall be revised to reflect the sale of Additional Shares. 12. Expenses. The Company agrees to pay the following costs and expenses and all other costs and expenses incident to the performance by its and the Selling Stockholders' obligations hereunder: (i) the preparation, printing or reproduction, and filing with the Commission of the registration statement (including financial statements and exhibits thereto), each Prepricing Prospectus, the Prospectus, and each amendment or supplement to any of them; (ii) the printing (or reproduction) and delivery (including postage, air freight charges and charges for counting and packaging) of such copies of the registration statement, each Prepricing Prospectus, the Prospectus, the Incorporated Documents, and all amendments or supplements to any of them, as may be requested for use in connection with the offering and sale of the Shares; (iii) the preparation, printing, authentication, issuance and delivery of certificates for the Shares, including any stamp taxes in connection with the original issuance and sale of the Shares; (iv) the printing (or reproduction) and delivery of this Agreement, the preliminary and supplemental Blue Sky Memoranda and all other agreements or documents printed (or reproduced) and delivered in connection with the offering of the Shares; (v) the listing of the Shares on the NASDAQ National Market; (vi) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of the several states as provided in Section 6(g) hereof (including the reasonable fees, expenses and disbursements of counsel for the Underwriters relating to the preparation, printing or reproduction, and delivery of the preliminary and supplemental Blue Sky Memoranda and such registration and qualification); (vii) the filing fees and the fees and expenses of counsel for the Underwriters in connection with any filings required to be made with the National Association of Securities Dealers, Inc.; (viii) the transportation and other expenses incurred by or on behalf of Company representatives in connection with presentations to prospective purchasers of the Shares; and (ix) the fees and expenses of the Company's accountants and the fees and expenses of counsel (including local and special counsel) for the Company and the Selling Stockholders. The provisions of this Section 12 shall not affect, as between the Company and the Selling Stockholders, any agreement between them regarding allocation of expenses to be paid by them hereunder. -24- 13. Effective Date of Agreement. This Agreement shall become effective: (i) upon the execution and delivery hereof by the parties hereto; or (ii) if, at the time this Agreement is executed and delivered, it is necessary for the registration statement or a post-effective amendment thereto to be declared effective before the offering of the Shares may commence, when notification of the effectiveness of the registration statement or such post-effective amendment has been released by the Commission. Until such time as this Agreement shall have become effective, it may be terminated by the Company, by notifying you and the Selling Stockholders, by the Selling Stockholders, by notifying you and the Company, or by you, as Representatives of the several Underwriters, by notifying the Company and the Selling Stockholders. If any one or more of the Underwriters shall fail or refuse to purchase Shares which it or they are obligated to purchase hereunder on the Closing Date, and the aggregate number of Shares which such defaulting Underwriter or Underwriters are obligated but fail or refuse to purchase is not more than one-tenth of the aggregate number of Shares which the Underwriters are obligated to purchase on the Closing Date, each non-defaulting Underwriter shall be obligated, severally, in the proportion which the number of Firm Shares set forth opposite its name in Schedule I hereto bears to the aggregate number of Firm Shares set forth opposite the names of all non-defaulting Underwriters or in such other proportion as you may specify in accordance with Section 20 of the Master Agreement Among Underwriters of Smith Barney Inc., to purchase the Shares which such defaulting Underwriter or Underwriters are obligated, but fail or refuse, to purchase. If any one or more of the Underwriters shall fail or refuse to purchase Shares which it or they are obligated to purchase on the Closing Date and the aggregate number of Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Shares which the Underwriters are obligated to purchase on the Closing Date and arrangements satisfactory to you, the Selling Stockholders and the Company for the purchase of such Shares by one or more non-defaulting Underwriters or other party or parties approved by you, the Selling Stockholders and the Company are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter, the Selling Stockholders or the Company. In any such case which does not result in termination of this Agreement, either you the Selling Stockholders or the Company shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any such default of any such Underwriter under this Agreement. The term "Underwriter" as used in this Agreement includes, for all purposes of this Agreement, any party not listed in Schedule I hereto who, with your approval and the approval of the Company and the Selling Stockholders, purchases Shares which a defaulting Underwriter is obligated, but fails or refuses, to purchase. Any notice under this Section 13 may be given by telecopy or telephone but shall be subsequently confirmed by letter. 14. Termination of Agreement. This Agreement shall be subject to termination in your absolute discretion, without liability on the part of any Underwriter to the Company or the Selling Stockholders, by notice to the Company and to the Selling Stockholders, if prior to the Closing Date or any Option Closing Date (if different from the Closing Date and then only as to the Additional Shares), as the case may be, (i) trading in securities generally on the New York Stock Exchange, the American Stock Exchange or the Nasdaq National Market shall have been suspended or materially limited, (ii) a general moratorium on commercial banking activities in New York shall have been declared by either federal or state authorities, or (iii) there shall have occurred any outbreak or escalation of hostilities or other international or domestic calamity, crisis or change in political, financial or economic conditions, the effect of which on the financial markets of the United States is such as to make it, in your judgment, impracticable or inadvisable to commence or continue the offering of the Shares at the offering price to the public set forth on the cover page of the Prospectus or to enforce contracts for -25- the resale of the Shares by the Underwriters. Notice of such termination may be given to the Company and to the Selling Stockholders by telecopy or telephone and shall be subsequently confirmed by letter. 15. Information Furnished by the Underwriters. The statements set forth in the last paragraph on the cover page, the stabilization legend on the inside cover page, and the statements under the caption "Underwriting" in any Prepricing Prospectus and in the Prospectus, constitute the only information furnished by or on behalf of the Underwriters through you as such information is referred to in Sections 8(b) and 10 hereof. 16. Miscellaneous. Except as otherwise provided in Sections 6, 13 and 14 hereof, notice given pursuant to any provision of this Agreement shall be in writing and shall be delivered (i) if to the Company, at the office of the Company at 90 Orville Drive, Bohemia, New York 11716, Attention: Harvey Kamil; or (ii) if to a Selling Stockholder, c/o Herrick, Feinstein, 2 Park Avenue, New York, New York 10016, Attention: Michael Heitner, or (iii) if to you, as Representatives of the several Underwriters, c/o Smith Barney Inc., 388 Greenwich Street, New York, New York 10013, Attention: Manager, Investment Banking Division. This Agreement has been and is made solely for the benefit of the several Underwriters, the Selling Stockholders, the Company, its directors and officers, and the other controlling Persons referred to in Section 11 hereof and their respective successors and assigns, to the extent provided herein, and no other person shall acquire or have any right under or by virtue of this Agreement. Neither the term "successor" nor the term "successors and assigns" as used in this Agreement shall include a purchaser from any Underwriter of any of the Shares in his status as such purchaser. 17. Applicable Law; Counterparts. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed within the State of New York. This Agreement may be signed in various counterparts which together constitute one and the same instrument. If signed in counterparts, this Agreement shall not become effective unless at least one counterpart hereof shall have been executed and delivered on behalf of each party hereto. -26- Please confirm that the foregoing correctly sets forth the agreement among the Company, the Selling Stockholders and the Underwriters. Very truly yours, NBTY, INC. By:_______________________ Name: Title: MICHAEL C. SLADE --------------------------- ABRAHAM FELDMAN TRUST F/B/O RUTH SLADE By:_______________________ Name: Title: ABRAHAM FELDMAN TRUST F/B/O STEVEN LENGER By:_______________________ Name: Title: Confirmed as of the date first above mentioned on behalf of themselves and the several Underwriters named in Schedule I hereto. SMITH BARNEY INC. LEHMAN BROTHERS INC. ADAMS, HARKNESS & HILL, INC. RAYMOND JAMES & ASSOCIATES, INC. PIPER JAFFRAY INC. As Representatives of the several Underwriters By: Smith Barney Inc. By: _______________________ Name: Title: SCHEDULE I UNDERWRITERS Number of Underwriters Firm Shares - ------------ ----------- SMITH BARNEY INC............................................. 1,720,000 LEHMAN BROTHERS INC.......................................... 1,720,000 ADAMS, HARKNESS & HILL, INC.................................. 1,720,000 RAYMOND JAMES & ASSOCIATES, INC.............................. 1,720,000 PIPER JAFFRAY INC............................................ 1,720,000 ----------- Total 8,600,000 =========== SCHEDULE II SELLING STOCKHOLDERS Number of Name Firm Shares - ---- ----------- MICHAEL C. SLADE 2,100,000 ABRAHAM FELDMAN TRUST F/B/O RUTH SLADE 1,750,000 ABRAHAM FELDMAN TRUST F/B/O STEVEN LENGER 1,750,000 ----------- Total 5,600,000 =========== EX-10.2 3 THIRD AMENDMENT THIRD AMENDMENT THIRD AMENDMENT, dated as of May 1, 1998 (this "Third Amendment") to the Credit and Guarantee Agreement, dated as of September 23, 1997 (as amended pursuant to the First Amendment and Waiver thereto dated as of December 12, 1998 and the Second Amendment thereto dated as of April 20, 1998, and as may be further amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among NBTY, Inc., a Delaware corporation (the "Company"), Holland & Barrett Holdings Limited (the "Foreign Subsidiary Borrower") and together with the Company, the "Borrowers"), the several banks and other financial institutions from time to time parties thereto (the "Lenders") and The Chase Manhattan Bank, a New York banking corporation, as administrative agent for the Lenders thereunder (the "Administrative Agent'). W I T N E S S E T H: WHEREAS, the Borrowers, the Lenders and the Administrative Agent are parties to the Credit Agreement; and WHEREAS, the Borrowers have requested that certain provisions of the Credit Agreement be amended in the manner provided for in this Third Amendment and the Lenders are willing to agree to such amendments upon the terms and subject to the conditions set forth herein; NOW, THEREFORE, in consideration of the premises and mutual agreements contained herein, and for other good and valuable consideration, the sufficiency of which is hereby acknowledged, the Borrowers, the Lenders and the Administrative Agent hereby agree as follows: 1. Defined Terms. Unless otherwise defined herein, terms defined in the Credit Agreement shall have such meanings when used herein. 2. Amendments to Credit Agreement. (a) The second paragraph of the introductory statement to the Credit Agreement is hereby amended by deleting the reference to "$50,000,000" and replacing it with "60,000,000". (b) Schedule I to the Credit Agreement is hereby amended by deleting it in its entirety and replacing it with Schedule I, attached hereto as Annex A. (c) Subsection 9.8 of the Credit Agreement is hereby amended by deleting it in its entirety and replacing it with the following: "9.8 Limitation on Capital Expenditures. Make any Capital Expenditure except for Capital Expenditures by the Company and its Subsidiaries in the ordinary course of business not exceeding, in the aggregate (i) during the 1998 2 fiscal year of the Company (a) $50,000,000 and (b) $10,000,000 relating to point of sale equipment to be used by the Foreign Subsidiary Borrower and (ii) during each fiscal year of the Company thereafter $40,000,000." 3. Payment of Fees. The Borrowers agree to pay to each Lender a fee in an amount equal to .15% of the amount by which such Lender's Commitment is increased by this Third Amendment. 4. Representation and Warranties. To induce the Administrative Agent and the Lenders parties hereto to enter into this Third Amendment, each Borrower hereby represents and warrants to the Administrative Agent and the Lenders as of the Third Amendment Effective Date (as defined below) and after giving effect thereto that (a) the representations and warranties made by such Borrower in the Credit Agreement are true and correct in all material respects on and as of the date hereof (except to the extent that such representations and warranties are expressly stated to relate to an earlier date, in which case such representations and warranties shall have been true and correct in all material respects on and as of such earlier date), provided that references in such representations and warranties to the Credit Agreement shall be deemed to be references to (i) the Credit Agreement, as amended hereby and (ii) this Third Amendment and (b) no Default or Event of Default has occurred and is continuing. 5. Continuing Effect of Credit Agreement. This Third Amendment shall not constitute a waiver, amendment or modification of any other provision of the Credit Agreement not expressly referred to herein and shall not be construed as a waiver or consent to any further or future action on the part of the Borrowers that would require a waiver or consent of the Lenders or the Administrative Agent. Except as expressly amended hereby, the provisions of the Credit Agreement are and shall remain in full force and effect. 6. Counterparts. This Third Amendment may be executed by one or more of the parties hereto on any number of separate counterparts and all such counterparts shall be deemed to be one and the same instrument. Each party hereto confirms that any facsimile copy of such party's executed counterpart of this Third Amendment (or its signature page thereof) shall be deemed to be an executed original thereof. 7. Payment of Expenses. The Borrowers agree to pay or reimburse the Administrative Agent for all of its out-of-pocket costs and reasonable expenses incurred in connection with this Third Amendment, any other documents prepared in connection herewith and the transactions contemplated hereby, including, without limitation, the reasonable fees and disbursements of counsel to the Administrative Agent. 8. Effective Date. This Third Amendment shall become effective as of the date hereof upon (i) its execution by the Borrowers, each Guarantor (as defined in the Guarantee and Collateral Agreement) and the Majority Lenders, (ii) receipt by the Administrative Agent of a certificate of a Responsible Officer of the Company certifying as to the matters set forth in Sections 4(a) and (b) above in form and substance reasonably satisfactory to the Administrative Agent, and (iii) receipt by the Administrative Agent of 3 resolutions, in form and substance satisfactory to the Administrative Agent, of the Board of Directors of each of the Borrowers authorizing this Third Amendment (the date upon which this Third Amendment shall become effective, the "Third Amendment Effective Date"). 9. Affirmation of Guarantees. Each Guarantor (as defined in the Guarantee and Collateral Agreement) hereby consents to the execution and delivery of this Third Amendment and reaffirms its obligations under the Guarantee and Collateral Agreement executed by such Guarantor. 10. GOVERNING LAW. THIS THIRD AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 4 IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. NBTY, INC. By: /s/ Harvey Kamil -------------------------------- Title: Harvey Kamil Executive Vice President HOLLAND & BARRETT HOLDINGS LIMITED By: /s/ Harvey Kamil -------------------------------- Title: Harvey Kamil Executive Vice President THE CHASE MANHATTAN BANK, as Administrative Agent and as a Lender, and as Swing Line Lender and as Issuing Lender By: /s/ Barbara G. Bertschi -------------------------------- Title: Barbara G. Bertschi Vice President KEYBANK NATIONAL ASSOCIATION By: /s/ Joseph F. Burn -------------------------------- Title: Joseph F. Burn Vice President THE BANK OF NOVA SCOTIA By: /s/ J. Alan Edwards -------------------------------- Title: J. Alan Edwards Authorized Signatory 5 EUROPEAN AMERICAN BANK By: /s/ Anthony E. Pantina -------------------------------- Title: Assistant Vice President IBJ SCHRODER BANK & TRUST COMPANY By: /s/ Mark H. Minter -------------------------------- Title: Managing Director Consented to and agreed: NATURE'S BOUNTY INC., NATURE'S BOUNTY, INC., VITAMIN WORLD, INC., PURITAN'S PRIDE, INC., ARCO PHARMACEUTICALS, INC. NATURAL WEALTH NUTRITION CORPORATION, FOUNTAIN PUBLISHING, INC., OMNI VITAMIN AND NUTRITION CORP., UNITED VITAMIN MANUFACTURING CORP., THE HUDSON CORPORATION, GOOD 'N NATURAL MANUFACTURING CORP., BEAUTIFUL VISIONS, NEW YORK CORP., PRIME NATURAL HEALTH LABORATORIES, INC., AMERICAN HEALTH, INC., NATURE'S BOUNTY MANUFACTURING CORP., NABARCO ADVERTISING ASSOCIATES, INC., HERBAL HARVEST, INC., NUTRITION HEADQUARTERS (DE), INC. By: ----------------------------------- Title: Annex A to Third Amendment SCHEDULE I COMMITMENTS; ADDRESSES Revolving Credit Lender Commitment The Chase Manhattan Bank 760 Jericho Turnpike, Suite 306 Woodbury, New York 11797 Telecopy: (516) 364-3307 Attention: Barbara G. Bertschi $15,600,000 KeyBank National Association 1377 Motor Parkway Islandia, New York 11788 Telecopy: (516) 233-4048 Attention: Joseph F. Burns $12,000,000 Bank of Nova Scotia One Liberty Plaza New York, New York 10006 Telecopy: (212) 225-5145 Attention: Tilsa Cora $10,800,000 European American Bank 730 Veterans Memorial Highway Hauppauge, New York 11788-2780 Telecopy: (516) 360-7112 Attention: Stuart N. Berman $10,800,000 I.B.J. Schroder Bank & Trust Company 1 State Street, 9th Floor New York, New York 10004 Telecopy: (212) 858-2768 Attention: Mark Weitekamp $10,800,000 TOTAL $60,000,000 -----END PRIVACY-ENHANCED MESSAGE-----