-----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, EnI6ycHBOcDP8jNBfmcDh0SIPmqupMi+xhjkIUkFPn79VLKEhKRB9elUXKZxSAG7 RKGGkre5hs0yYVWPLe2Arw== 0000910647-03-000404.txt : 20031216 0000910647-03-000404.hdr.sgml : 20031216 20031216150631 ACCESSION NUMBER: 0000910647-03-000404 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031216 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NBTY INC CENTRAL INDEX KEY: 0000070793 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 112228617 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-31788 FILM NUMBER: 031057233 BUSINESS ADDRESS: STREET 1: 90 ORVILLE DR CITY: BOHEMIA STATE: NY ZIP: 11716 BUSINESS PHONE: 5165679500 MAIL ADDRESS: STREET 1: 90 ORVILLE DRIVE CITY: BOHEMIA STATE: NY ZIP: 11716 FORMER COMPANY: FORMER CONFORMED NAME: NATURES BOUNTY INC DATE OF NAME CHANGE: 19920703 10-K 1 nbty-10k.txt BODY OF 10-K =========================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended September 30, 2003. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from to . Commission file number 0-10666 NBTY, INC. (Exact name of registrant as specified in charter) DELAWARE 11-2228617 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 90 Orville Drive 11716 Bohemia, New York (Zip Code) (Address of principal executive offices) (631) 567-9500 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on which Registered ------------------- --------------------- Common Stock, par value $0.008 per share New York Stock Exchange, Inc. Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ] Indicate by check mark whether the Registrant is an accelerated filer. YES [X] NO [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant on March 31, 2003, was approximately $1,260,000,000. For purposes of the foregoing calculation only, all directors and executive officers of the Registrant have been deemed affiliates. The number of shares of Common Stock of the Registrant outstanding at March 31, 2003 was approximately 66,452,000. The number of shares of Common Stock of the Registrant outstanding at December 8, 2003 was approximately 66,622,000. Documents Incorporated by Reference: None NBTY, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2003 TABLE OF CONTENTS
Caption Page ------- ---- Forward Looking Statements PART I ------ ITEM 1 BUSINESS General 2 Business Strategy 3 Operating Segments 5 Employees and Advertising 7 Manufacturing, Distribution and Quality Control 8 Research and Development 9 Competition; Customers 9 Government Regulation 10 International Operations 16 Trademarks 16 Raw Materials 17 Seasonality 17 ITEM 2 PROPERTIES 17 ITEM 3 LEGAL PROCEEDINGS 21 ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 23 PART II ------- ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 24 Dividend Policy 24 Price Range of Common Stock 24 ITEM 6 SELECTED FINANCIAL DATA 25 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 27 Background 27 Critical Accounting Policies and Estimates 28 Results of Operations 33 Seasonality 40 Liquidity and Capital Resources 40 Related Party Transactions 43 Inflation 44 Financial Covenants and Credit Rating 44 New Accounting Developments 45 i ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 46 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 47 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 47 ITEM 9A CONTROLS AND PROCEDURES 47 PART III -------- ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 49 Compensation of Directors 51 Audit Committee Financial Expert 52 Section 16(a) Beneficial Ownership Reporting Compliance 52 Code of Ethics for Senior Financial Officers 52 ITEM 11 EXECUTIVE COMPENSATION 53 Summary Compensation Table 53 Option Value at the End of Fiscal 2003 54 Employment and Consulting Agreements with Executive Officers and Directors 54 Compensation Committee Interlocks and Insider Participation 56 ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 56 Securities Authorized For Issuance Under Equity Compensation Plans 59 NBTY, Inc. Employees' Stock Ownership Plan 59 Eligibility; Trustee 59 Contributions 59 Vesting 60 Distribution; Voting 60 ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 60 ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES 60 PART IV ------- ITEM 15 EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K 62 Index to Consolidated Financial Statements and Schedules 65 Financial Statements F-1 Financial Statement Schedule S-1 Signatures Certifications Exhibits
ii PART I Forward Looking Statements This Annual Report on Form 10-K (the "Report") contains 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 NBTY, Inc. Discussions containing such forward-looking statements may be found in Items 1, 2, 3, 7 and 7A hereof, as well as within this Report generally. In addition, when used in this Report, the words "subject to," "believe," "expect," "plan," "estimate," "intend," "may," "will," "should," "can," or "anticipate," or the negative thereof, or variations thereon, or similar expressions are intended to identify forward-looking statements, which are inherently uncertain. Similarly, discussions of strategy, although believed to be reasonable, are also forward-looking statements and are inherently uncertain. All forward- looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from projected results. Factors which may materially affect such forward-looking statements include: (i) slow or negative growth in the nutritional supplement industry; (ii) interruption of business or negative impact on sales and earnings due to acts of war, terrorism, bio-terrorism, civil unrest or disruption of mail service; (iii) adverse publicity regarding the consumption of nutritional supplements; (iv) inability to retain customers of companies (or mailing lists) recently acquired; (v) increased competition; (vi) increased costs; (vii) loss or retirement of key members of management; (viii) increases in the cost of borrowings and/or unavailability of additional debt or equity capital; (ix) unavailability of, or inability to consummate, advantageous acquisitions in the future, including those that may be subject to bankruptcy approval or the inability of the Company (as defined below) to integrate acquisitions into the mainstream of its business, or unanticipated fees and expenses associated with the same; (x) changes in general worldwide economic and political conditions in the markets in which the Company may compete from time to time; (xi) the inability of the Company to gain and/or hold market share of its customers; (xii) unavailability of electricity in certain geographical areas; (xiii) exposure to and expenses of defending and resolving product liability claims and other litigation; (xiv) the ability of the Company to successfully implement its business strategy; (xv) the inability of the Company to manage its retail, wholesale, manufacturing and other operations efficiently; (xvi) consumer acceptance of the Company's products; (xvii) the inability of the Company to renew leases on its retail locations; (xviii) inability of the Company's retail stores to attain or maintain profitability; (xix) the absence of clinical trials for many of the Company's products; (xx) sales and earnings volatility and/or trends; (xxi) the efficacy of the Company's Internet and online marketing and sales efforts; (xxii) fluctuations in foreign currencies, especially the British Pound and the Euro; (xxiii) import-export controls on sales to foreign countries; (xxiv) the inability of the Company to secure favorable new sites for, and delays in opening, new retail locations; (xxv) introduction of new federal, state, local or foreign legislation or regulation or adverse determinations by regulators, and more particularly the Food Supplements Directive and the Traditional Herbal Medicinal Products Directive in Europe; (xxvi) the mix of the Company's products and the profit margins thereon; (xxvii) the availability and pricing of raw materials; (xxviii) risk factors discussed in the Company's filings with the U.S. 1 Securities and Exchange Commission (the "SEC"); and (xxix) other factors beyond the Company's control. Consequently, such forward-looking statements should be regarded solely as the Company's current plans, estimates and beliefs. Readers are cautioned not to place undue reliance on forward-looking statements. The Company cannot guarantee future results, events, and levels of activity, performance or achievements. The Company does not undertake and specifically declines any obligation to update, republish or revise forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events. Industry data used throughout this Report was obtained from industry publications and internal Company estimates. While the Company believes such information to be reliable, its accuracy has not been independently verified and cannot be guaranteed. Item 1. BUSINESS General NBTY, Inc. (the "Company", "NBTY", "we" or "us") is a leading vertically integrated manufacturer, marketer and retailer of a broad line of high quality, value-priced nutritional supplements in the United States, the United Kingdom, Ireland, the Netherlands and worldwide. Under a number of the Company's and third-party brands, the Company offers over 9,000 products, including vitamins, minerals, herbs, sports nutrition products, diet aids and other nutritional supplements. The Company is vertically integrated in that it purchases raw materials, formulates and manufactures its products and then markets its products through its four channels of distribution: (i) Direct response/Puritan's Pride, the leading U.S. nutritional supplement e-commerce/direct response program, under the Puritan's Pride(R) brand in catalogs and through the Internet; (ii) 533 Vitamin World(R) and Nutrition Warehouse(R) retail stores, as of September 30, 2003, operating throughout the U.S. in 45 states, Guam and Puerto Rico; (iii) European retail operations, consisting of 524 Holland & Barrett(R), GNC (UK)(R) and Nature's Way(R) retail stores, as of September 30, 2003, operating throughout the United Kingdom and Ireland, and 65 De Tuinen(R) retail stores, operating in the Netherlands; and (iv) wholesale distribution to mass merchandisers, drug store chains, supermarkets, independent pharmacies and health food stores under various brand names, including the Nature's Bounty(R) and Rexall Sundown(R) brands. At September 30, 2003, the Company manufactured over 90% of the nutritional supplements it sold. The Company was incorporated in Delaware in 1979 under the name Nature's Bounty, Inc. On March 26, 1995, the Company changed its name to NBTY, Inc. The Company's principal executive offices are located at 90 Orville Drive, Bohemia, New York 11716 and its telephone number is (631) 567-9500. The Company's Internet address is www.nbty.com. The Company's United Kingdom subsidiary, Holland & Barrett Europe Limited, has its principal executive offices in Nuneaton, United Kingdom. The Company's Dutch subsidiary, De Tuinen, B.V., has its principal executive offices in Beverwijk, Holland. 2 The Company makes available, free of charge, on its web site, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such reports are available as soon as is reasonably practicable after the Company electronically files such materials with the SEC. Business Strategy The Company targets the growing value-conscious consumer segment by offering high-quality products at a value price. The Company's objectives are to increase sales, improve manufacturing efficiencies, increase profitability and strengthen its market position through the following key strategies: Expand Existing Channels of Distribution. The Company plans to continue expanding and improving its existing channels of distribution through aggressive marketing and synergistic acquisitions in order to increase sales and profitability and enhance overall market share. Specific plans to expand channels of distribution include: * Increase Wholesale Sales in the U.S. and in Foreign Markets. The Company expects to strengthen its wholesale business by continuing to increase its sales in food, drug and mass merchandising channels by (i) increasing revenues derived from existing customers through strong promotional activities and the aggressive introduction of new and innovative products; (ii) increasing shelf space in major retailers; (iii) leveraging the advertising and promotion of its major specialty brands, such as Osteo Bi-Flex(R), Carb Solutions(R), Flex-A-Min(R) and Knox(R); and (iv) continuing to grow its private label revenue with new customers and timely product introductions. In addition, the Company continues to form new distribution alliances throughout the world for its products. A new sales division in the U.K., Nutrition Warehouse Limited, was established to take advantage of wholesale sales opportunities in the U.K. and the European continent and in March 2003, the Company purchased Food Supplement Company ("FSC"), a wholesale distributor in Manchester, England. In July 2003, the Company acquired Rexall Sundown, Inc. ("Rexall"). The transaction will complement NBTY's existing wholesale products and provide NBTY with an enhanced sales infrastructure and additional manufacturing capacity. Rexall's portfolio of nutritional supplement brands includes Rexall(R), Sundown(R), Osteo Bi-Flex(R), Carb Solutions(R), MET-Rx(R) and Worldwide Sport Nutrition(R). * Increase Puritan's Pride direct response sales. The Company expects to continue to strengthen its leading position in the e- commerce/direct response business by: (i) improving automated picking and packing to fulfill sales order requests with greater speed and accuracy; (ii) increasing manufacturing capability to quickly introduce and deliver new products in response to customer demand; (iii) testing new and more frequent promotions to further improve response rates; and (iv) promoting its Internet web sites. The Company also 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 which the Company believes can be efficiently integrated into its own operations without adding substantial overhead expenses. 3 * Increase Retail Sales in the U.S. Over the last several years, the Company's strategy has focused on the development of a nationwide chain of retail stores in the United States. To that end, at September 30, 2003, the Company operated 533 Vitamin World(R) and Nutrition Warehouse(R) retail stores located in regional and outlet malls. The Company has added approximately 107 retail stores in the past three fiscal years or approximately 20% of the total number of stores in operation at September 30, 2003. New stores historically do not have the same high customer traffic as more mature stores. During the fiscal year ended September 30, 2003 ("fiscal 2003"), the Company operated 7 fewer Vitamin World stores than in fiscal 2002. The Company plans, from time to time, to open new stores in the next fiscal year. In June 2000, the Company successfully introduced its Savings Passport Card, a customer loyalty program, which increases customer traffic and provides incentives to purchase at Vitamin World(R). It is an additional tool for the Company to track customer preferences and purchasing trends. At the end of fiscal 2003, there were over 4.2 million Savings Passport Card members. * Increase Retail Sales in the U.K., Ireland and Europe. The Company continues its strategy of selectively expanding the number of its Holland & Barrett stores located throughout the U.K. At September 30, 2003, there were 462 Holland & Barrett(R) and 12 Nature's Way(R) stores operating in the U.K. and Ireland. In fiscal 2003, Holland & Barrett opened 15 new stores in the U.K. and Ireland. The Company projects that, during the next fiscal year, it will open 29 new retail stores in the U.K. and Ireland. In order to expand retail sales in the U.K., in March 2003 the Company (through its acquisition of GNC (UK)) acquired 50 GNC retail stores in the U.K. In addition, in May 2003 the Company acquired the De Tuinen retail chain in the Netherlands which, at September 30, 2003 operated 65 retail stores. The Company continues to evaluate opportunities to open additional GNC (UK) stores in the U.K. and De Tuinen stores in Europe. Introduce New Products. The Company has consistently been among the first in the industry to introduce innovative products in response to new studies, research and consumer preferences. Given the changing nature of consumer demand for new products and the continued publicity about the importance of vitamins, minerals and nutritional supplements in the promotion of general health as well as the growing number of overweight consumers, management believes that NBTY will continue to maintain its core customer base and attract new customers based upon its ability to rapidly respond to consumer demand with high quality, value-oriented products. Enhance Vertical Integration. The Company believes that its vertical integration gives it a significant competitive advantage by allowing it to: (i) maintain higher quality standards while lowering product costs, which can be passed on to the customer as lower prices; (ii) more quickly respond to scientific and popular reports and consumer buying trends; (iii) more effectively meet customer delivery schedules; (iv) reduce dependence upon outside suppliers; and (v) improve overall operating margins. The Company 4 continually evaluates ways to further enhance its vertical integration by leveraging manufacturing, distribution, purchasing and marketing capabilities, and otherwise improving the efficacy of its operations. Build Infrastructure to Support Growth. NBTY has technologically advanced, state-of-the-art manufacturing and production facilities, with total production capacity of approximately 36 billion tablets, capsules and softgels per year. The Company regularly evaluates its operations and makes investments in building infrastructure, as necessary, to support its continuing growth. Strategic Acquisitions. In the normal course of its business, the Company seeks acquisition opportunities, both in the U.S. and internationally, of companies which complement or extend the Company's existing product lines, increase its market presence, expand its distribution channels, and/or are compatible with its business philosophy. In fiscal 2003, NBTY completed three such acquisitions: (i) the GNC retail stores and FSC wholesale operations in the U.K.; (ii) the De Tuinen chain of retail stores in the Netherlands; and (iii) Rexall Sundown, Inc., including the MET-Rx(R) and Worldwide Sport Nutrition(R) operations. For additional information regarding the Company's acquisitions, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Experienced Management Team. The Company's management team has extensive experience in the nutritional supplement industry and has developed long-standing relationships with its suppliers and its customers. The executive officers of the Company have an average of approximately 20 years with the Company. Operating Segments NBTY and its subsidiaries operate in the nutritional supplement industry, focusing their products and services on four segments of this industry: Wholesale, Direct Response, Retail U.S. and Retail Europe. The following table sets forth the percentage of net sales for each of the Company's operating segments:
Fiscal Year Ended September 30, ------------------------------- 2003 2002 2001 ---- ---- ---- Wholesale 35% 30% 24% Direct Response 17% 19% 21% Retail: U.S. 18% 21% 22% Europe 30% 30% 33% ----------------------- 100% 100% 100%
Further information about the financial results of each of these segments is found in Note 18 to the Consolidated Financial Statements in this Report. 5 Wholesale/Mass Marketing. The Company markets its products under various brand names to many stores, including leading drug store chains and supermarkets, independent pharmacies, health food stores, health food store wholesalers and other retailers such as mass merchandisers. The Nature's Bounty(R), Rexall(R) and Sundown(R) brands are sold to drug store chains and drug wholesalers. The Company sells a full line of products to supermarket chains and wholesalers under the brand name Natural Wealth(R) at prices designed for the "price conscious" consumer. The Company sells directly to health food stores under the brand name Good 'N Natural(R) and sells products, including a specialty line of vitamins, to health food wholesalers under the brand name American Health(R). The Company has expanded sales of various products to many countries throughout Europe, Asia and Latin America. Direct Response. The Company offers, through mail order and Internet e-commerce, a full line of vitamins and other nutritional supplement products as well as selected personal care items under its Puritan's Pride(R) brand names at prices which are usually at a discount from those of similar products sold in retail stores. Through its Puritan's Pride(R) brand, NBTY is the leader in the U.S. direct response nutritional supplement industry with more than 4 million customers on our customer list, with response rates which management believes to be above the industry average. NBTY intends to continue to appeal to new customers in its direct response operation through aggressive marketing techniques both in the U.S. and the U.K., and through selective acquisitions. 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 web sites and to increase average order sizes, the Company places advertisements in newspaper supplements and conducts insert programs with other mail order companies. The Company's use of state-of-the-art equipment in its direct response operations, such as computerized mailing, bar-coded addresses and automated picking and packing systems enables the Company to fill each order typically within 24 hours of its receipt. This 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. The Company's www.puritan.com and www.vitamins.com web sites provide a practical and convenient method for consumers wishing to purchase products that promote healthy living. By using these web sites, consumers have access to the full line of more than 1,000 products which are offered through the Company's Puritan's Pride(R) mail order catalog. Consumer orders are processed with the speed, economy and efficiency of the Company's automated picking and packing system. Retail U.S. At the end of fiscal 2003, the Company operated 533 retail stores located in 45 states, Guam and Puerto Rico, under the Vitamin World(R) and Nutrition Warehouse(R) names. Each location carries a full line of the Company's products under the Company's brand names as well as products manufactured by others. Through direct interaction between the Company's personnel and the public, the Company is able to 6 identify buying trends, customer preferences or dislikes, acceptances of new products and price trends in various regions of the country. This information is useful in initiating sales programs and new product introductions for all divisions of the Company. In addition to www.puritan.com and www.vitamins.com, the Company also maintains another web site, www.vitaminworld.com, to accommodate customers who wish to purchase nutritional supplements on the Internet, or to find a conveniently located store to make purchases in person. This web site provides the consumer with information concerning the products offered in the Company's retail stores and with information about store locations. Retail Europe. The Company's Retail European sales are generated by Holland & Barrett and GNC in the U.K., Nature's Way in Ireland and De Tuinen in the Netherlands. Holland & Barrett is one of the leading nutritional supplement retailers in the U.K., with 462 locations in the U.K. at September 30, 2003. Holland & Barrett markets a broad line of nutritional supplement products, including vitamins, minerals and other nutritional supplements, as well as food products, including fruits and nuts, confectionery and other items. GNC (UK) operated 50 locations in the U.K. at September 30, 2003, specializing in the sale of vitamins, minerals and sports nutrition products. At September 30, 2003 there were 12 Nature's Way locations in Ireland selling a range of products similar to those offered by Holland & Barrett. With 65 locations in Holland at September 30, 2003, De Tuinen is a leading retailer of health food products, selected confectionery, and lifestyle giftware. Nutritional supplement products manufactured by NBTY accounted for approximately 52% of European Retail's total sales in fiscal 2003. For additional information regarding financial information about the geographic areas in which the Company and its subsidiaries conduct their business, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Notes to the Company's Consolidated Financial Statements contained in this Report. Employees and Advertising As of September 30, 2003, the Company employed approximately 10,000 persons, which included: (i) 2,571 sales associates located throughout the U.S. in its Vitamin World(R) and Nutrition Warehouse(R) retail stores; (ii) 2,339 manufacturing, shipping and packaging associates throughout the U.S.; (iii) 898 associates in administration throughout the U.S.; (iv) 260 associates who sell to NBTY's wholesale distributors and customers; (v) 36 in-house advertising associates; (vi) 3,105 associates in its Holland & Barrett operations, including: (A) 2,779 retail associates, (B) 172 associates in distribution, and 7 (C) 154 associates in administration; (vii) 324 associates in its De Tuinen operations, including: (A) 296 retail associates, and (B) 28 associates in administration and warehousing; (viii) 319 associates in GNC (UK) retail stores; (ix) 75 associates in Nature's Way retail stores; and (x) 78 associates in FSC wholesale administration, production and warehousing. In addition, NBTY sells through commissioned sales representative organizations. The Company believes it has satisfactory employee and labor relations. For the fiscal years ended September 30, 2001, 2002 and 2003, NBTY spent approximately $49 million, $48 million and $66 million, respectively, on advertising and promotions, including print, media and cooperative advertising. A significant portion of the increased advertising relates to additional promotions at the recently acquired Rexall Sundown operations. NBTY creates its own advertising materials through its in-house staff of associates. In the U.K. and Ireland, both Holland & Barrett and Nature's Way have run advertisements on television and in national newspapers, and conducted sales promotions. GNC (UK) and De Tuinen in Holland also advertise in national newspapers and conduct sales promotions. In addition, Holland & Barrett and De Tuinen each publish their own magazines with articles and promotional materials. Manufacturing, Distribution and Quality Control At September 30, 2003, the Company employed approximately 2,340 manufacturing, shipping and packaging associates throughout the United States. The Company's manufacturing activities are conducted in New York, California, Colorado, Florida, New Jersey and Illinois. All of the Company's manufacturing operations are subject to good manufacturing practice regulations ("GMPs") promulgated by the United States Food and Drug Administration ("the FDA") and other applicable regulatory standards. The Company manufactures products for its four operating segments as well as for third parties. The Company believes that, generally, the capacity of its manufacturing and distribution facilities is adequate to meet the requirements of its current business and will be adequate to meet the requirements of anticipated increases in sales. The Company places special emphasis on quality control. All raw materials used in production are assigned a unique lot number and are initially held in quarantine, during which time the Company's laboratory chemists assay the raw materials for compliance with established specifications. Once released, samples are retained and the material is processed according to approved formulas by mixing, granulating, compressing, encapsulating and sometimes coating operations. After the tablet or capsule is manufactured, laboratory technicians test its weight, purity, potency, disintegration and dissolution. When products such as vitamin tablets are ready for bottling, the Company's automated equipment counts the tablets, inserts them into bottles, adds a tamper-resistant 8 cap with an inner safety seal and affixes a label. The Company uses computer-generated documentation for picking and packing for order fulfillment. The Company's manufacturing operations are designed to allow low cost production of a wide variety of products of different quantities, sizes and packaging while maintaining a high level of customer service and quality. Flexible production line changeover capabilities and reduced cycle times allow the Company to respond quickly to changes in manufacturing schedules. Inventory Control. The Company has installed inventory 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. 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 automated reorder system to maintain in-stock positions on key items. These systems provide management with the information needed to determine the proper timing and quantity of reorders. Financial Reporting. The Company's financial reporting systems provide management with detailed financial reporting to support management's operating decisions and cost control efforts. These systems provide functions such as scheduling of payments, receiving of payments, general ledger interface, vendor tracking and flexible reporting options. Research and Development In the last three fiscal years, the Company did not expend any significant amounts for basic research and development of new products. Competition; Customers The market for nutritional supplement products is highly competitive. Competition is based primarily on price, quality and assortment of products, customer service, marketing support, and availability of new products. The Company believes it competes favorably in all of these areas. The Company's direct competition consists primarily of publicly and privately owned companies, which tend to be highly fragmented in terms of both geographical market coverage and product categories. The Company also competes in the nutritional supplement area with companies which may have broader product lines and/or larger sales volumes. The Company's products also compete with nationally advertised brand 9 name products. Most of the national brand companies have resources substantially greater than those of the Company. There are numerous companies in the vitamin and nutritional supplement industry selling products to retailers, including mass merchandisers, drug store chains, independent drug stores, supermarkets and health food stores. Many companies within the industry are privately held. Therefore, the Company is unable to precisely assess the size of all of its competitors or where the Company ranks in comparison to such privately held competitors with respect to sales to retailers. One customer of the wholesale division represented, individually, more than 10% of this division's sales in fiscal 2003 and accounted for 20% of the Company's accounts receivable at September 30, 2003. Additionally, a new customer accounted for 10% of the Company's accounts receivable at September 30, 2003. The loss of one or more of these customers is not expected to have a material impact on the Company's consolidated financial position or results of operations. Government Regulation United States. The formulation, manufacturing, packaging, labeling, advertising, distribution and sale of NBTY's products are subject to regulation by one or more federal agencies, including the Food and Drug Administration ("FDA"), the Federal Trade Commission ("FTC"), the Postal Service, the Consumer Product Safety Commission, the Department of Agriculture, the Environmental Protection Agency, and also by various agencies of the states, localities and foreign countries in which NBTY's products are sold. In particular, the FDA, pursuant to the Federal Food, Drug, and Cosmetic Act ("FDCA"), regulates the formulation, manufacturing, packaging, labeling, distribution and sale of dietary supplements, including vitamins, minerals and herbs, and of over-the-counter ("OTC") drugs, while the FTC has jurisdiction to regulate advertising of these products, and the 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, in particular by the Dietary Supplement Health and Education Act of 1994 ("DSHEA"). DSHEA established a new framework governing the composition and labeling of dietary supplements. With respect to composition, DSHEA defined "dietary supplements" as vitamins, minerals, herbs, other botanicals, amino acids and other dietary substances for human use to supplement the diet, as well as concentrates, constituents, extracts or combinations of such dietary ingredients. Generally, under DSHEA, dietary ingredients that were on the market before October 15, 1994 may be used in dietary supplements without notifying the FDA. However, a "new" dietary ingredient (i.e., a dietary ingredient that was "not marketed in the United States before October 15, 1994") must be the subject of a new dietary ingredient notification submitted to the FDA unless the ingredient has been "present in the food supply as an article used for food" without being "chemically altered." A new dietary ingredient notification must provide the FDA 10 evidence of a "history of use or other evidence of safety" establishing that use of the dietary ingredient "will reasonably be expected to be safe." A new dietary ingredient notification must be submitted to the FDA at least 75 days before the initial marketing of the 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 want to market, and the FDA's refusal to accept such evidence could prevent the marketing of such dietary ingredients. DSHEA permits "statements of nutritional support" to be included in labeling for dietary supplements without FDA pre-approval. Such statements may describe how a particular dietary ingredient affects the structure, function or general well-being of the body, or the mechanism of action by which a dietary ingredient may affect body structure, function or well- being (but may not state that a dietary supplement will diagnose, cure, mitigate, treat, or prevent a disease unless such claim has been reviewed and approved by the FDA). A company that uses a statement of nutritional support in labeling must possess evidence substantiating that the statement is truthful and not misleading. In some circumstances it is necessary to disclose on the label that the FDA has not "evaluated" the statement, to disclose the product is not intended for use for a disease, and to notify the FDA about the Company's use of the statement within 30 days of marketing the product. However, there can be no assurance that the FDA will not determine that a particular statement of nutritional support that a company wants to use is an unacceptable drug claim or an unauthorized version of a "health claim." Such a determination might prevent a company from using the claim. In addition, DSHEA provides that certain so-called "third party literature," e.g., a reprint of a peer-reviewed scientific publication linking a particular dietary ingredient with health benefits, may be used "in connection with the sale of a dietary supplement to consumers" without the literature being subject to regulation as labeling. Such literature must not be false or misleading; the literature may not "promote" a particular manufacturer or brand of dietary supplement; and a balanced view of the available scientific information on the subject matter must be presented. There can be no assurance, however, that all third party literature that NBTY would like to disseminate in connection with its products will satisfy each of these requirements, and failure to satisfy all requirements could prevent use of the literature or subject the product involved to regulation as an unapproved drug. Recently, the FDA, as authorized by DSHEA, proposed GMPs specifically for dietary supplements. These new GMP regulations, if finalized, would be more detailed than the GMPs that currently apply to dietary supplements and may, among other things, require dietary supplements to be prepared, packaged and held in compliance with certain rules, and might require quality control provisions similar to those in the GMP regulations for drugs. There can be no assurance that, if the FDA adopts GMP regulations for dietary supplements, NBTY will be able to comply with the new rules without incurring substantial expenses. The FDA generally prohibits the use in labeling for a dietary supplement of any "health claim" (that is not authorized as a "statement of nutritional support" permitted by DSHEA) unless the claim is pre-approved by the FDA. There can be no assurance that 11 some of the labeling statements that NBTY would like to use will not be deemed by the FDA to be "unauthorized health or disease claims" that are not permitted to be used. Although the regulation of dietary supplements is in some respects less restrictive than the regulation of drugs, there can be no assurance that dietary supplements will continue to be subject to less restrictive regulation. The FDA regulates the formulation, manufacturing, packaging, labeling and distribution of over-the-counter ("OTC") drug products pursuant to a "monograph" system that specifies active drug ingredients that are generally recognized as safe and effective for particular uses. If an OTC drug is not in compliance with the applicable FDA monograph, the product generally cannot be sold without first obtaining the FDA approval of a new drug application, a long and expensive procedure. There can be no assurance that, if more stringent statutes are enacted for dietary supplements, or if more stringent regulations are promulgated, NBTY will be able to comply with such statutes or regulations without incurring substantial expense. The FDA has broad authority to enforce the provisions of the FDCA applicable to dietary supplements and OTC drugs, including powers to issue a public "warning letter" to a company, to publicize information about illegal products, to request a voluntary recall of illegal products from the market, and to request the Department of Justice to initiate a seizure action, an injunction action, or a criminal prosecution in the United States courts. The FTC exercises jurisdiction over the advertising of dietary supplements. In recent years, the FTC has instituted numerous enforcement actions against dietary supplement companies for failure to adequately substantiate claims made in advertising or for the use of false or misleading advertising claims. These enforcement actions have often resulted in consent decrees and the payment of civil penalties and/or restitution by the companies involved. NBTY and Rexall Sundown, respectively, are each currently subject to an FTC consent decree resulting from past advertising claims for certain of their respective products, and are required to maintain compliance with these decrees and are subject to an injunction and substantial civil monetary penalties if there should be any failure to comply. 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 the order applicable to it, subject to civil monetary penalties for any noncompliance. Violations of these orders could result in substantial monetary penalties. Civil penalty actions could have a material adverse effect on NBTY's consolidated financial position or results of operations. In June 2003, the Company received a letter of inquiry from the FTC concerning the Company's marketing of a certain weight loss product, as well as the marketing of Royal Tongan Limu by a subsidiary of the Company, Dynamic Essentials (DE), Inc. ("DEI"). Subsequent to the receipt of this letter, the Company voluntarily stopped all sales and promotions of the weight loss product in question and of Royal Tongan Limu. The Company also ceased all operations of DEI and terminated all DEI employees. The Company has had follow-up meetings and correspondence with the FTC. At this time, it is not possible to estimate, if the FTC were to assert a claim, what the outcome or amount of such claim would be. 12 In March 2003 the Company ceased selling products that contain ephedra. Though the Company continues to believe that the ephedra products it sold are safe to use as directed, the adverse publicity surrounding ephedra products and the regulatory environment in the U.S. led management to the decision to cease selling ephedra products, in the best interests of the Company and its shareholders. Overall, sales of ephedra products represented an insignificant portion of the Company's business. Subsequent to the decision to cease selling ephedra products, the Company was named as a defendant or a third-party defendant in a handful of actions, alleging liability (under various theories, including negligence, false advertising, strict liability in tort and failure to warn) as well as personal injury with respect to the Company's sales, manufacturing and distribution of products containing ephedra. The Company has notified its insurance carriers and third party vendors with regard to each suit and vigorously contests the allegations in these actions. The Company did not acquire any ephedra assets, liabilities or operations in connection with its purchase of Rexall Sundown. All such operations were retained by Royal Numico N.V., the prior owner of Rexall Sundown. NBTY is also subject to regulation under various state, local, and international laws that include provisions governing, among other things, the formulation, manufacturing, packaging, labeling, advertising and distribution of dietary supplements and OTC drugs. Government regulations in foreign countries may prevent or delay the introduction, or require the reformulation, of certain of NBTY's products. Compliance with such foreign governmental regulations is generally the responsibility of NBTY's distributors in those countries. These distributors are independent contractors over whom the Company has only limited or minimal control. In addition, from time to time in the future, NBTY may become subject to additional laws or regulations administered by the FDA or by other federal, state, local or foreign regulatory authorities, to the repeal of laws or regulations that the Company considers favorable, such as DSHEA, or to more stringent interpretations of current laws or regulations. The Company is not able to predict the nature of such future laws, regulations, repeals or interpretations, and it cannot predict what effect additional governmental regulation, when and if it occurs, would have on its business in the future. Such developments could, however, require reformulation of certain products to meet new standards, recalls or discontinuance of certain products not able to be reformulated, additional record-keeping requirements, increased documentation of the properties of certain products, additional or different labeling, additional scientific substantiation, or other new requirements. Any such developments could have a material adverse effect on NBTY. United Kingdom. In the United Kingdom, the two main pieces of legislation that affect the operations of Holland & Barrett and GNC (UK) are the Medicines Act 1968, which regulates the licensing and sale of medicines, and the Food Safety Act 1990, which provides for the safety of food products. A large volume of secondary legislation in the form of Statutory Instruments adds detail to the main provisions of the above Acts. In the U.K. regulatory system a product intended to be taken orally will fall within either the category of food or the category of medicine. There is no special category of 13 dietary supplement as provided for in the U.S. by DSHEA. Some products which are intended to be applied externally, for example creams and ointments, may be classified as medicines and others as cosmetics. The Medicines and Healthcare products Regulatory Agency ("MHRA") now has responsibility for the implementation and enforcement of the Medicines Act, and is the licensing authority for medicinal products. The MHRA directly employs enforcement officers from a wide range of backgrounds, including the police, and with a wide range of skills, including information technology. The MHRA is an Executive Agency of the Department of Health. The MHRA decides whether a product is a medicine or not and, if so, considers whether it can be licensed. It determines the status of a product by considering whether it is medicinal by "presentation" or by "function". Many, though not all, herbal remedies are considered "medicinal" by virtue of these two tests. The Food Standards Agency ("FSA") deals with legislation, policy and oversight of food products, with enforcement action in most situations being handled by local authority Trading Standards Officers. The FSA answers primarily to Ministers at the Department of Health and the Department of Environment Food and Rural Affairs. Most vitamin and mineral supplements, and some products with herbal ingredients, are considered to be food supplements and fall under general food law which requires them to be safe. In July 2002, the European Union ("EU") published in its Official Journal the final text of a Food Supplements Directive which came into EU law on that date, and which sets out a process and timetable by which the Member States of Europe must bring their domestic legislation in line with its provisions. It seeks to harmonize the regulation of the composition, labeling and marketing of food supplements (at this stage only vitamins and minerals) throughout the EU. It does this by specifying what nutrients and nutrient sources may be used (and by interpretation the rest which may not), the level at which those nutrients may be present in a supplement, and the labeling and other information which must be provided on packaging. By harmonizing the legislation, the Food Supplements Directive should provide opportunities for businesses to market one product or range of products to a larger number of potential customers without having to reformulate or repackage it. This development may lead to some liberalizing of the more restrictive regimes in France and Germany, providing new business opportunities. Conversely, however, it may substantially limit the range of nutrients and nutrient sources, and the potencies at which some nutrients may be marketed by the Company in the more liberal countries, such as the U.K., which may lead to some reformulation costs and loss of some specialist products. The provisions of the Food Supplements Directive were incorporated into U.K. domestic law by Statutory Instrument in July 2003. The first phase of compliance relates to the composition of food supplements and must be attained by August 2005. The EU is also considering a Traditional Herbal Medicinal Products Directive ("THMPD") which would allow a traditional herbal medicine to be licensed without 14 having to demonstrate its efficacy in the way that pharmaceutical products have to do, provided that it is safe, is manufactured to high standards, and has been on the market for 30 years. The THMPD is intended to provide a safe home in EU law for a number of categories of herbal remedies, which may otherwise be found to fall outside EU law. It does not, however, provide a mechanism for new product development, and would entail some compliance costs in registering the many herbal products already on the market. The THMPD is currently anticipated to go into effect in the spring of 2004. The THMPD will be implemented in stages, with full compliance required by 2011. Additional EU legislation is anticipated to further regulate the composition, labeling and marketing of other products including sports nutrition products, fortified foods, very low calorie diets, and foods for particular nutritional purposes. Further progress is expected with legislative initiatives to permit, but closely regulate, the use of health claims made for products. The EU has established a European Food Safety Authority, which will have an important role to play in focusing attention on food standards in Europe. Its Executive Director is Mr. Geoffrey Podger, who until 2003 was the Chief Executive of the U.K.'s Food Standards Agency. Other members are still being recruited. Ireland. The legislative and regulatory situation in the Republic of Ireland is similar, but not identical to that in the U.K. The Irish Medicines Board has a similar role to that of the U.K.'s MHRA and the Food Safety Authority of Ireland is analogous to the U.K.'s FSA. Like the U.K., Ireland will be required to bring its domestic legislation into line with the provisions of the Food Supplements Directive and the THMPD when the latter is finalized, and, indeed, with the other forthcoming EU legislation mentioned above. Thus the market prospects for Ireland are, in general, similar to those outlined in the U.K. Holland. The regulatory environment in Holland is similar to the U.K. in terms of availability of products. Holland currently has the same liberal market, with no restrictions on potency of nutrients. Licensed herbal medicines are available. However, there are some herbal medicines which are sold freely as in the U.K. without the need to be licensed, depending on the claims made for them. Holland is also more liberal regarding certain substances, for which unlicensed sales are allowed. The Government department dealing with this sector is the Ministry for Health, Welfare and Sport. Responsibility for food safety falls to the Keuringsdienst van Waren (Inspectorate for Health Protection and Veterinary Public Health). This authority deals with all nutritional products. The Medicines Evaluation Board, which is the equivalent of the U.K.'s MHRA, is charged with the responsibility for the safety of medicines which are regulated under the Supply of Medicines Act. The overall market prospects for Holland are, in general, similar to those outlined for the U.K. above. 15 International Operations In addition to the U.K., Ireland and Holland, the Company markets its nutritional supplement products through distributors, retailers and direct mail in more than 85 countries throughout Europe, North America, South America, Asia, the Pacific Rim countries, Africa and the Caribbean Islands. The Company's international operations are conducted in a manner to conform to local variations, economic realities, market customs, consumer habits and regulatory environments. The Company's products (including labeling of such products) and the distribution and marketing programs of the Company are modified in response to local and foreign legal requirements and customer preferences. The Company's international operations are subject to many of the same risks faced by the Company's domestic operations. These include competition and the strength of the relevant economy. In addition, international operations are subject to certain risks inherent in conducting business abroad, including foreign regulatory restrictions, fluctuations in monetary exchange rates, import-export controls and the economic and political policies of foreign governments. The importance of these risks increases as the Company's international operations grow and expand. Virtually all of the Company's international operations are affected by foreign currency fluctuations, and, more particularly, changes in the value of the British Pound and the Euro as compared to the U.S. Dollar. For additional information regarding financial information about the geographic areas in which the Company and its subsidiaries conduct their business, see Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Notes to the Company's Consolidated Financial Statements contained in this Report. Trademarks U.S. The Company and its subsidiaries have applied for or registered more than 2,100 trademarks with the United States Patent and Trademark Office and many other major jurisdictions throughout the world for its Nature's Bounty(R), Holland & Barrett(R), Good 'N Natural(R), American Health(R), Puritan's Pride(R), Vitamin World(R), Natural Wealth(R), Nutrition Headquarters(R), Rexall(R), Sundown(R), MET-Rx(R), Worldwide Sport Nutrition(R) and Nutrition Warehouse(R) trademarks, among others, and has rights to use other names essential to its business. Federally registered trademarks have a perpetual life, as long as they are maintained and 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 infringement. 16 U.K./Ireland. Holland & Barrett owns trademarks registered in the United Kingdom and/or throughout the European Community for its Holland & Barrett and Nature's Way trademarks and has rights to use other names essential to its business. Holland & Barrett is the exclusive licensee of the trademarks essential to the GNC (UK) business in the U.K. Holland. De Tuinen owns trademarks registered in Holland and/or throughout the European Community for its DeTuinen trademarks and has rights to use other names essential to its business. Raw Materials In fiscal 2003, the Company spent approximately $290 million on raw materials. The principal raw materials required in the Company's operations are vitamins, minerals, herbs, gel caps, and bottling materials. The Company purchases its vitamins, minerals and herbs from bulk manufacturers and distributors in the United States, Japan, China and Europe. The Company believes that there are adequate sources of supply for all of its principal raw materials, and that the Company's relationships with its suppliers yield improved quality, pricing and overall service to its customers. Although there can be no assurance that the Company's sources of supply for its principal raw materials will be adequate in all circumstances, in the event that such sources are not adequate, the Company believes that alternate sources can be developed in a timely manner. During fiscal 2003, no one supplier accounted for more than 9% of the Company's raw material purchases. The Company does not believe that the loss of any single supplier would have a material adverse effect on the Company's consolidated financial condition or results of operations. Seasonality While the Company believes that its business is not seasonal in nature, the Company may have higher net sales in a particular quarter depending upon when it has engaged in significant promotional activities. Item 2. PROPERTIES U.S. At September 30, 2003, the Company owned a total of approximately 1.55 million square feet of plant and administrative facilities. The Company also leased approximately 1.25 million square feet of administrative, manufacturing, warehouse and distribution space in various locations at the end of fiscal 2003. At September 30, 2003 the Company leased and operated approximately 533 retail locations under the name Vitamin World(R) and Nutrition Warehouse(R) in 45 states in the U.S., Guam and Puerto Rico. Generally, the Company leases the properties for three to ten years at varying annual base rents and percentage rents in the event sales exceed a specified amount. The retail stores have an average selling area of approximately 940 square feet. U.K./Ireland. Holland & Barrett owns a 178,000 square foot administrative, manufacturing and distribution facility (which includes a 42,500 square foot mezzanine) in Burton. It is currently building an extension for this facility which it expects will be 17 completed in January 2004, providing an additional 99,350 square feet (including 13,200 square feet of mezzanines). Holland & Barrett leases all but four of its 524 Holland & Barrett, GNC (UK), and Nature's Way retail stores for terms varying between 10 and 35 years at varying annual base rents. Nine Holland & Barrett stores are subject to percentage rents in the event sales exceed a specified amount. Holland & Barrett and Nature's Way stores each have an average selling area of approximately 945 square feet, and the GNC (UK) stores have an average selling area of approximately 980 square feet. Holland. In 2003, De Tuinen leased a 71,400 square foot administrative and distribution facility in Beverwijk. De Tuinen leases locations for 65 retail stores on renewable 5 year terms at varying annual base rents. Of these, 41 are operated as company stores; the remaining 24 are sub-leased to, and operated by, franchisees. None of De Tuinen's stores are subject to percentage rent. The following is a listing of all material properties (excluding retail locations and de minimis sales office locations) owned or leased by the Company, which are used in all four of the Company's business segments:
Type of Approx. Leased Location Facility Sq. Feet or Owned -------- -------- -------- -------- UNITED STATES: - -------------- Bohemia, NY Administration & Manufacturing 169,000 Owned Bohemia, NY Manufacturing 80,000 Owned Bohemia, NY(1) Manufacturing 75,000 Owned Bohemia, NY Manufacturing & Warehousing 62,000 Owned Bohemia, NY Administration & Warehousing 110,000 Leased (term - 2009) Bohemia, NY Administration & Warehousing 130,000 Leased (term - 2009) Holbrook, NY(1) Distribution 230,000 Owned Holbrook, NY Distribution 108,000 Owned Ronkonkoma, NY Administration & Distribution 110,000 Owned Ronkonkoma, NY Warehousing 75,000 Leased (term - September 2004) Bayport, NY IT Services 12,000 Owned Bayport, NY Manufacturing 131,000 Owned Mineola, NY Administrative 13,000 Owned Mineola, NY Administration & Warehousing 4,000 Owned Reno, NV Distribution 40,000 Leased (term - 2006) Carbondale, IL Administration, Manufacturing 77,000 Owned and Distribution 18 Type of Approx. Leased Location Facility Sq. Feet or Owned -------- -------- -------- -------- Carbondale, IL Administration 15,000 Owned Murphysboro, IL(2) Manufacturing 62,000 Owned Murphysboro, IL(2) Warehousing 30,000 Leased (term - 2008) South Plainfield, NJ Manufacturing 68,000 Owned South Plainfield, NJ Manufacturing & Distribution 60,000 Leased (term - 2006) North Glenn, CO Administration 4,900 Leased (term - June 2004) Thornton, CO Manufacturing 72,000 Leased (term - 2006) Anaheim, CA Manufacturing & Distribution 286,140 Leased (term - 2006) Anaheim, CA Manufacturing 64,000 Leased (term - 2008) Anaheim, CA Administration & Manufacturing 20,000 Owned Lake Mary, FL Administration (term - 2008) 12,250 Leased Boca Raton, FL Administration 92,000 Owned Boca Raton, FL Administration 58,000 Owned Boca Raton, FL Manufacturing 84,000 Owned Deerfield Beach, FL Manufacturing 157,000 Owned Boca Raton, FL Warehousing 100,000 Owned Sparks, NV Distribution (term - 2005) 100,647 Leased Harrisburg, PA Distribution (term - 2005) 140,000 Leased Bentonville, AR Sales Office 4,200 Leased UNITED KINGDOM: - -------------- Nuneaton Administration 8,300 Leased (term - 2012) Nuneaton Administration & Distribution 7,200 Leased (term - 2010) Burton Administration, Manufacturing 178,000 Owned and Distribution Manchester(3) Administration, Manufacturing 58,500 Leased and Distribution (term - 2003) Guildford Administration (term - 2005) 3,600 Leased HOLLAND: - ------- Beverwijk Administration & Distribution 71,400 Leased (term - 2008) - -------------------- The property is subject to a first mortgage. For additional information regarding the mortgage, see the Company's Consolidated Financial Statements contained in this Report. 19 On December 5, 2003, the Company ceased its operations at its Murphysboro, IL facility. Holland & Barrett's lease for this property expired in October, 2003. Holland & Barrett will continue to occupy these premises until February 2004 when it will relocate the Manchester operations to the Burton facility.
Warehousing and Distribution The Company has dedicated approximately 1.5 million square feet to warehousing and distribution in its Long Island, NY; Carbondale, IL; Reno, NV; Anaheim, CA; Thornton, CO; South Plainfield, NJ; Boca Raton, FL; Sparks, NV; Harrisburg, PA; Burton, Manchester and Radcliffe, U.K. facilities; and Beverwijk, Holland. The Company's warehouse and distribution centers are integrated with the Company's order entry systems to enable the Company to ship out mail orders typically within 24 hours of their receipt. Once a customer's telephone, mail or Internet order is completed, the Company's computer system forwards the order to its distribution center, where all necessary distribution and shipping documents are printed to facilitate processing. Thereafter, the orders are prepared, picked, packed and shipped continually throughout 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 15,000 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 currently ships its U.S. orders primarily through the United Parcel Service, Inc. (UPS), serving domestic and international markets. Holland & Barrett and GNC (UK) use Parcelforce and ANC for deliveries in the U.K., and Nature's Way uses the Irish postal service for deliveries in Ireland. The Company currently distributes its products from its distribution centers through contract and common carriers in the U.S. and the Netherlands and by Company-owned trucks in both the U.S. and the U.K. Deliveries are made directly to the Vitamin World(R) and Nutrition Warehouse(R) stores once per week. In addition, the Company ships products overseas by container loads. The Company also operates additional distribution centers in Burton, U.K. and Beverwijk, Holland. Deliveries are made directly to Company owned and operated Holland & Barrett, GNC (UK), Nature's Way, and De Tuinen stores once or twice per week, depending on each store's inventory requirements. All of the Company's properties are covered by all-risk and liability insurance, which the Company believes is customary for the industry. Management believes that these properties, taken as a whole, are generally well-maintained, and are adequate for current and reasonably foreseeable business needs. Management also believes that substantially all of the Company's properties are being utilized to a significant degree. 20 Item 3. LEGAL PROCEEDINGS Pseudoephedrine Products On April 14, 2003, a complaint was filed by the United States of America against the Company arising from certain pseudoephedrine sales by the Company from November 2000 through December 2002. The complaint, filed in U.S. District Court for the Eastern District of New York, alleges technical recordkeeping and reporting violations of the Controlled Substances Act, 21 U.S.C. Sections 801-904, and Controlled Substances Import and Export Act, 21 U.S.C. Sections 951-971, in a small fraction of the Company's sales of over-the-counter antihistamine and decongestant products containing pseudoephedrine. Total sales of such products generated approximately $160,000, or only 0.0002 percent, of the Company's total sales for the fiscal years ended September 30, 2001 and September 30, 2002. The Company has cooperated in all respects with the Drug Enforcement Administration in its investigation of sales identified in the complaint. Accordingly, the Company believes that there is no valid basis nor precedent for the penalties sought (which consist of monetary fines), and has launched a vigorous defense. However, because this action is in its early stages, no determination can be made at this time as to the final outcome of this action, nor can its materiality be accurately ascertained. Prohormone Products On July 25, 2002, a putative consumer class action was filed in New York state court against several manufacturers and retailers of so-called prohormone supplements naming Vitamin World as a defendant. Prohormones are substances such as androstenedione that plaintiffs allege are hormone precursors ingested to promote muscle growth. Plaintiffs allege that the advertising and labeling of certain prohormone supplements overstate their efficacy and do not fully disclose their risks, and seek class certification and injunctive and monetary relief. The action was severed into separate class actions against each of the defendants. On December 6, 2002, an amended class action complaint was filed against Vitamin World that purported to elaborate on the claims initially alleged. The court has not yet certified a class and the matter is currently in discovery. The Company believes that this action is without merit and intends to vigorously defend against the claims asserted. However, because this action is in its early stages, no determination can be made at this time as to the final outcome of this action, nor can its materiality be accurately ascertained. In addition to the foregoing prohormone case in which the Company is a defendant, there are two other cases filed in 2002 naming MET-Rx as a defendant. On July 25, 2002, one putative consumer class action was filed in California state court and one putative consumer class action was filed in Florida state court. Plaintiffs in each of these cases allege that the advertising and labeling of certain prohormone supplements overstate their efficacy and do not fully disclose their risks, and seek class certification, injunctive and monetary relief. In the Florida action, plaintiffs allege in the alternative that if the prohormone products were effective as advertised, they were anabolic steroids, controlled substances under Florida law. On this alternative theory, plaintiffs seek treble damages under the Florida Civil RICO statute. The cases are currently in the discovery 21 phase. The Company believes that these actions are without merit and intends to vigorously defend against the claims asserted. However, because these actions are in their early stages, no determination can be made at this time as to their final outcome, nor can their materiality be accurately ascertained. Nutrition Bars On August 28, 2001, the Company was also named as a defendant, along with other companies, in a putative class action commenced in an Alabama state court. Plaintiffs allege that NBTY manufactured and marketed misbranded nutrition bars which understated carbohydrate content. Plaintiffs seek class certification, injunctive, declaratory, and monetary relief. Class discovery is being taken, and no class has been certified. NBTY is vigorously opposing class certification on the basis that the plaintiffs were not damaged as alleged as a result of any action by NBTY. On October 3, 2002, the Company was named as a defendant in a second putative class action commenced in the same Alabama state court as the above-identified litigation. Plaintiffs, in an attempt to pursue several retailers, including Vitamin World, and not manufacturers of nutrition bars, allege that NBTY marketed misbranded nutrition bars. In November 2002, NBTY filed a motion to dismiss or abate the lawsuit based on the principle that the court lacks subject-matter jurisdiction because the earlier-filed lawsuit, which seeks identical relief for the same purported class action against the manufacturers, preempts this second attempt to certify a class against NBTY. In addition to the foregoing nutrition bar cases in which the Company is a defendant, there are six other cases filed in 2002 naming Rexall or a subsidiary of Rexall as a defendant, each making substantially the same allegations. NBTY acquired these cases with the purchase of Rexall. Three cases were brought in California state court, on August 8, 2002, June 21, 2002 and August 29, 2002, respectively. One case was brought in Florida state court on December 23, 2002, one case in Oklahoma state court on December 31, 2002 and one case in Arkansas state court on December 31, 2002. Plaintiffs allege misbranding of nutrition bars and violations of state unfair trade and practices statutes, unjust enrichment, misleading advertising, unfair competition and other similar causes of action. Plaintiffs seek disgorgement of profits, restitution, declaratory and injunctive relief. NBTY contends that the California action is not appropriate for class certification because the named plaintiffs are inadequate class representatives and not typical of persons who purchased the nutrition bars. The Company believes that all of the above described nutrition bar suits are without merit and intends to vigorously defend against the claims asserted. Based upon the information available at this time, the Company believes that its accrual is adequate for the exposure in the nutrition bar litigation. However, because these actions are in their early stages, no determination can be made at this time as to their final outcome, nor can their materiality or the adequacy of the accrual be accurately ascertained. In addition to the foregoing, other regulatory inquiries, claims, suits and complaints (including product liability claims) arise in the ordinary course of the Company's business. See Item 1. "Government Regulation". The Company believes 22 that such other inquiries, claims, suits and complaints would not have a material adverse effect on the Company's consolidated financial condition or results of operations, if adversely determined against the Company. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 23 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS DIVIDEND POLICY Since its incorporation in 1979, the Company has not paid any cash dividends on its Common Stock. On April 24, 1992, the Company effected a two-for-one stock split in the form of a 100% stock dividend to stockholders of record on May 8, 1992. On September 25, 1992, the Company effected a three-for-one stock split in the form of a 200% stock dividend to stockholders of record on November 2, 1992. On August 3, 1993, the Company effected a two-for-one stock split in the form of a 100% stock dividend to stockholders of record on August 13, 1993. In addition, in March 1998, the Company effected a three-for-one stock split in the form of a 200% stock dividend. Future determination as to the payment of cash or stock dividends will depend upon the Company's results of operations, financial condition, capital requirements, restrictions contained in the Company's Credit Agreement and Guarantee and Collateral Agreement (collectively, the "CGA"), limitations contained in the indenture governing the 8 5/8% Senior Subordinated Notes due 2007 of the Company, and such other factors as the Company's Board of Directors considers appropriate. The CGA prohibits the Company from paying dividends or making any other distributions (other than dividends payable solely in shares of the Company's common stock) to its stockholders. The Company's Indenture governing its 8 5/8% Senior Subordinated Notes due 2007 similarly prohibits the Company from paying dividends or making any other distributions to its stockholders. In addition, except as specifically permitted in the CGA, the CGA does not allow the Company's subsidiaries to advance or loan money to, or make a capital contribution to or invest in, the Company. Furthermore, except as expressly permitted in the Indenture, the Company's subsidiaries are not permitted to invest in the Company. However, the CGA and the Indenture do permit the Company's subsidiaries to pay dividends to the Company. For additional information regarding these lending arrangements and securities, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources" and the Notes to the Consolidated Financial Statements in this Report. PRICE RANGE OF COMMON STOCK Since September 19, 2003, the Common Stock has traded on the New York Stock Exchange (the "NYSE") under the trading symbol "NTY". Prior to that date, the Common Stock was included for quotation on the National Association of Securities Dealers National Market System ("NASDAQ/NMS") under the trading symbol "NBTY". The following table sets forth, for the periods indicated, the high and low sale prices for 24 the Common Stock, as reported on NASDAQ/NMS until September 19, 2003 and thereafter on the NYSE:
Fiscal Year Ended September 30, 2003 ------------------------------------ High Low ---- --- First Quarter ended December 31, 2002 $18.63 $11.48 Second Quarter ended March 31, 2003 $20.00 $16.10 Third Quarter ended June 30, 2003 $21.75 $14.75 Fourth Quarter ended September 30, 2003 $27.45 $20.25 Fiscal Year Ended September 30, 2002 ------------------------------------ High Low ---- --- First Quarter ended December 31, 2001 $14.07 $ 6.70 Second Quarter ended March 31, 2002 $18.00 $10.61 Third Quarter ended June 30, 2002 $19.55 $14.37 Fourth Quarter ended September 30, 2002 $17.32 $12.35
On December 8, 2003, there were approximately 650 record holders of Common Stock. The Company believes that there were approximately 12,275 beneficial holders of Common Stock as of December 8, 2003. For additional information regarding the Company's securities authorized for issuance under the Company's equity compensation plans, see Item 12. "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters." Item 6. SELECTED FINANCIAL DATA The following table sets forth the selected financial data derived from the audited financial statements of the Company. For additional information, see the consolidated financial statements of the Company and the notes thereto. The selected historical financial data of the Company should also be read in conjunction with Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations". 25 (Dollars and shares in thousands, except per share amounts)
Fiscal Years Ended September 30, 2003 2002 2001 2000 1999 - --------------------------------------------------------------------------------------------------------------- Selected Income Statement Data: Net sales $1,192,548 $964,083 $806,898 $720,856 $630,894 Costs & expenses: Cost of sales 554,804 433,611 355,167 312,960 293,521 Discontinued product charge 4,500 Catalog printing, postage & promotion 66,455 47,846 49,410 33,709 32,895 Selling, general & administrative 435,748 348,334 315,228 279,379 236,367 Litigation recovery of raw material costs - (21,354) - (2,511) - Litigation settlement costs - - - - 4,952 -------------------------------------------------------------- Income from operations 131,041 155,646 87,093 97,319 63,159 Interest expense (17,384) (18,499) (21,958) (18,858) (18,945) Investment write down (4,084) - - - - Miscellaneous, net 5,424 1,560 2,748 4,491 1,388 -------------------------------------------------------------- Income before income taxes 114,997 138,707 67,883 82,952 45,602 Provision for income taxes 33,412 42,916 25,958 31,444 18,323 -------------------------------------------------------------- Net income $ 81,585 $ 95,791 $ 41,925 $ 51,508 $ 27,279 ============================================================== Per Share Data: Net income per share: Basic $ 1.23 $ 1.45 $ 0.64 $ 0.77 $ 0.39 Diluted $ 1.19 $ 1.41 $ 0.62 $ 0.74 $ 0.39 Weighted average common shares outstanding: Basic 66,452 65,952 65,774 67,327 69,640 Diluted 68,538 67,829 67,125 69,318 70,826 Selected Balance Sheet Data: Working capital $ 314,275 $185,710 $131,108 $100,114 $121,103 Total assets 1,204,383 730,140 708,462 603,613 539,384 Long-term debt, capital lease obligations and promissory notes payable, less current portion 413,989 163,874 237,236 200,478 219,508 Total stockholders' equity 514,799 419,257 302,406 272,443 223,949
26 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Readers are cautioned that forward-looking statements contained herein should be read in conjunction with the Company's disclosures under the heading "Forward Looking Statements" on page 1. This discussion should also be read in conjunction with the Notes to the Company's Consolidated Financial Statements contained in this Report. Dollar amounts are in thousands, unless otherwise noted. Background NBTY is a leading vertically integrated manufacturer, marketer and retailer of a broad line of high quality, value-priced nutritional supplements. NBTY has continued to grow through its marketing practices and through a series of strategic acquisitions. Since 1986, the Company has acquired and integrated approximately 34 companies and/or businesses engaged in the manufacturing, retail and direct response sale of nutritional supplements, including: * Fiscal 1997: Holland & Barrett; * Fiscal 1998: Nutrition Headquarters Group; * Fiscal 2000: Nutrition Warehouse Group; * Fiscal 2001: Global Health Sciences (the "Global Group"), NatureSmart, and Nature's Way; * Fiscal 2002: Healthcentral.com, Knox NutraJoint (R), and Synergy Plus(R) product lines/operations; and * Fiscal 2003: Rexall Sundown Inc., Health and Diet Group Ltd. ("GNC (UK)") and FSC Wholesale, and the DeTuinen chain of retail stores. NBTY markets its products through four distribution channels: (i) Wholesale: wholesale distribution to drug store chains, supermarkets, discounters, independent pharmacies, and health food stores, (ii) U.S. Retail: Vitamin World and Nutrition Warehouse retail stores in the U.S., (iii) European Retail: Holland & Barrett, Nature's Way, GNC (UK), and DeTuinen retail stores in the U.K., Ireland, and Netherlands, and (iv) Direct Response: Puritan's Pride. NBTY's net sales from wholesale operations, U.S. Retail, European Retail, and Direct Response were approximately 35%, 18%, 30% and 17%, respectively, of total sales for the fiscal year ended September 30, 2003. The Company recognizes revenues from products shipped when risk of loss and title transfers to its customers, and 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. 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 direct response/e-commerce and retail sales have typically been higher than gross margins from wholesale sales. 27 Critical Accounting Policies and Estimates The preparation of financial statements in conformity with generally accepted accounting principles ( "GAAP") in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. The most significant estimates include: * revenue recognition and estimating allowance for doubtful accounts; * inventory valuation and obsolescence; * valuation of long-lived and intangible assets and goodwill including the values assigned to acquired intangible assets; * income tax valuation allowance; * foreign currency; and * estimating accruals for, and probability of, the outcome of current litigation. The Company continually evaluates its accounting policies and the estimates it uses to prepare the consolidated financial statements. In general, the estimates are based on historical experience, on information from third party professionals and on various other sources and assumptions that are believed to be reasonable under the facts and circumstances at the time such estimates are made. Management considers an accounting estimate to be critical if: * it requires assumptions to be made that were uncertain at the time the estimate was made; and * changes in the estimate, or the use of different estimating methods, could have a material impact on the Company's consolidated results of operations or financial condition. Actual results could differ from those estimates. Significant accounting policies are described in Note 1 to the consolidated financial statements, which are included in Item 8 in this Form 10-K filing. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP. There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result. Certain of the Company's accounting policies are deemed "critical", as they require management's highest degree of judgment, estimates and assumptions. The following critical accounting policies are not intended to be a comprehensive list of all of the Company's accounting policies or estimates. Revenue Recognition The Company applies the provisions of Staff Accounting Bulletin 101 "Revenue Recognition". The Company recognizes revenue from products shipped when title and 28 risk of loss has passed to its customers, and with respect to its own retail store operations, upon the sale of its products. The Company's net sales represent gross sales invoiced to customers, less certain related charges, including discounts, returns, rebates and other allowances. Most of the Company's sales require judgments principally in the areas of returns, rebates and other allowances. The provision for estimated sales returns and other allowances and deferrals require significant judgment whereby the Company must estimate, based on historical trends and individual agreements with customers, the reduction of revenue at the time of revenue recognition. If these estimates, which are based on historical experience, are significantly below the actual amounts, revenue could be adversely affected. The Company has no single customer that represents more than ten percent of annual net sales of the Company for the fiscal years ended September 30, 2003, 2002 and 2001. For the fiscal years ended 2003, 2002 and 2001, one customer, two customers and one customer, respectively, represented, individually, more than 10% of the wholesale division net sales. Accounts Receivable The Company performs on-going credit evaluations of its customers and adjusts credit limits based upon payment history and the customer's current credit worthiness, as determined by the review of their current credit information. Collections and payments from customers are continuously monitored. The Company also maintains an allowance for doubtful accounts, which is estimated based upon historical experience as well as specific customer collection issues that have been identified. While such bad debt expenses have historically been within expectations and allowances established, the Company cannot guarantee that it will continue to experience the same credit loss rates that it has in the past. One customer accounted for 20% and 24% of the Company's accounts receivable at September 30, 2003 and 2002, respectively. Additionally, a new customer accounted for 10% of the Company's accounts receivable at September 30, 2003. The loss of either or both of these customers is not expected to have a material impact on the Company's consolidated financial position or results of operations. Inventories Inventories are stated at the lower of cost or market. The cost elements of inventory include materials, labor and overhead. The Company regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on estimated forecasts of product demand and production requirements for the next twelve months. In assessing the realization of inventories, the Company is required to make judgments as to future demand requirements and compare that with inventory levels. It is possible that changes in consumer demand could cause a reduction in the net realizable value of inventory. Goodwill and Intangible Assets Goodwill and indefinite-lived intangibles are tested for impairment annually or more frequently if impairment indicators arise in accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". These evaluations require the use of judgment as to the effects of external factors and market conditions on the Company's conduct of its operations, and they require the use of estimates in projecting future operating results. If actual external conditions or future operating results differ from the Company's judgments, impairment charges may be necessary to reduce the carrying value of the subject assets. 29 Pursuant to SFAS No. 142, the Company performs an annual goodwill impairment review for each business segment, as defined in Note 6, "Goodwill and Intangible Assets" to the Consolidated Financial Statements, or when events or changes in circumstances indicate the carrying value may not be recoverable. The Company considers the following to be some examples of important indicators that may trigger an impairment review: (i) significant under-performance or loss of key contracts acquired in an acquisition relative to expected historical or projected future operating results; (ii) significant changes in the manner or use of the acquired assets or in the Company's overall strategy with respect to the manner or use of the acquired assets or changes in the Company's overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a significant decline in the Company's stock price for a sustained period of time; and (vi) regulatory changes. In assessing the recoverability of the Company's goodwill and intangibles, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. The fair value of an asset could vary, depending upon the estimating method employed, as well as assumptions made. This may result in a possible impairment of the intangible assets and/or goodwill, or alternatively an acceleration in amortization expense. An impairment charge would reduce operating income in the period it was determined that the charge was needed. As a result of the September 30, 2003 impairment testing, no impairment adjustments were deemed necessary. Purchase Price Allocation During fiscal 2003, the Company acquired all of the issued and outstanding capital stock of Rexall for $250,000 in cash (subject to adjustment based upon finalization of working capital balances on the closing date). Prior to this acquisition, Rexall was owned by Numico USA, Inc., an indirect subsidiary of Royal Numico N.V. This acquisition was accomplished through purchase by the Company of certain partnership and limited liability company interests. The Company also incurred approximately $6,000 of direct transaction costs as well as approximately $5,000 in insurance and other indirect costs for a total purchase price of approximately $261,000. Additionally, finance related costs of approximately $7,500 were paid to secure the financing for this acquisition, which costs will be amortized until its approximate 6 year maturity. The total purchase price was allocated to the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair value. The excess of the purchase price over the fair value was recorded as goodwill. The fair value assigned to the tangible and intangible assets acquired and liabilities assumed was based upon estimates and assumptions developed by management and other information compiled by management, including a valuation, prepared by an independent valuation specialist that utilized established valuation techniques appropriate for the industry. Upon completion of the valuation of the fair value of the net assets acquired (which the Company expects to finalize by end of fiscal 2004), actual results may differ from those presented herein. 30 Impairment of Long-Lived Assets The Company follows the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement requires that certain assets be reviewed for impairment and, if impaired, remeasured at fair value whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Impairment loss estimates are primarily based upon management's analysis and review of the carrying value of long-lived assets at each balance sheet date, utilizing an undiscounted future cash flow calculation. During fiscal years 2003, 2002 and 2001, the Company recognized impairment losses of $1,117, $700 and $500, respectively, on assets to be held and used. The impairment losses related primarily to leasehold improvements and furniture and fixtures for U.S. Retail operations and were recorded in selling, general and administrative expense. Income Taxes The Company estimates the degree to which tax assets and loss carryforwards will result in a benefit based on expected profitability by tax jurisdiction. A valuation allowance for such tax assets and loss carryforwards is provided when it is determined that such assets will more likely than not go unused. If it becomes more likely than not that a tax asset or loss carryforward will be used, the related valuation allowance on such assets is reversed. If actual future taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary. Foreign Currency Foreign subsidiaries account for approximately 31% of net revenues, 27% of assets and 11% of total liabilities of the Company as of September 30, 2003. In preparing the consolidated financial statements, the financial statements of the foreign subsidiaries are translated from the currency in which they keep their accounting records, generally the local currency, into U.S. Dollars. This process results in exchange gains and losses, which, under the relevant accounting guidance, are either included within the statement of operations or as a separate component of stockholders' equity under the caption "Accumulated other comprehensive income." Under the relevant accounting guidance, the treatment of these translation gains or losses is dependent upon management's determination of the functional currency of each subsidiary. The functional currency is determined based on management's judgment and involves consideration of all relevant economic facts and circumstances affecting the subsidiary. Generally, the currency in which the subsidiary transacts a majority of its transactions, including billings, financing, payroll and other expenditures would be considered the functional currency but any dependency upon the parent and the nature of the subsidiary's operations must also be considered. If a subsidiary's functional currency is deemed to be the local currency, then any gain or loss associated with the translation of that subsidiary's financial statements is 31 included in accumulated other comprehensive income. However, if the functional currency is deemed to be the U.S. Dollar, then any gain or loss associated with the translation of these financial statements would be included within the statement of operations. If the Company disposes of subsidiaries, then any cumulative translation gains or losses would be recorded into the statement of operations. If the Company determines that there has been a change in the functional currency of a subsidiary to the U.S. Dollar, any translation gains or losses arising after the date of change would be included within the statement of operations. Based on an assessment of the factors discussed above, the Company considers the relevant subsidiary's local currency to be the functional currency for each of its foreign subsidiaries. During fiscal years 2003, 2002 and 2001, translation gains (losses) of $9,980, $17,603 and ($126), respectively, were included under accumulated other comprehensive income (loss). Accordingly, cumulative translation gains of approximately $14,605 and $4,625 were included as part of accumulated other comprehensive income within the balance sheet at September 30, 2003 and September 30, 2002, respectively. Had the Company determined that the functional currency of its subsidiaries was the U.S. Dollar, these gains (losses) would have increased (reduced) net income for each of the periods presented. The magnitude of these gains or losses is dependent upon movements in the exchange rates of the foreign currencies against the U.S. Dollar. These currencies include the Euro and the British Pound. Any future translation gains or losses could be significantly higher than those noted in each of these years. In addition, if a change in the functional currency of a foreign subsidiary has occurred at any point in time, the Company would be required to include any translation gains or losses from the date of such change in the statement of operations. Contingencies As discussed in Note 17 of the Notes to the Consolidated Financial Statements, NBTY is unable to make a reasonable estimate of the liabilities that may result from the final resolution of certain contingencies disclosed. Assessments of each potential liability will be made as additional information becomes available. NBTY currently does not believe that these matters will have a material adverse affect on its consolidated financial position or results of operations. General Operating results in all periods presented reflect the impact of acquisitions, beginning with the date acquired. The timing of those acquisitions and the changing mix of businesses as acquired companies are integrated into the Company impacts the comparability of results from one period to another. 32 Results of Operations The following table sets forth income statement data of the Company as a percentage of net sales for the periods indicated:
Fiscal Year Ended September 30, Increase/(Decrease) ----------------------- -------------------- 2003 vs. 2002 vs. 2003 2002 2001 2002 2001 ---- ---- ---- -------- -------- Net sales 100% 100% 100% 23.7% 19.5% Costs and expenses: Cost of sales 46.5% 45.0% 44.0% 27.9% 22.1% Discontinued product charge 0.4% - - 100.0% - Catalog printing, postage and promotion 5.6% 5.0% 6.1% 38.9% -3.2% Selling, general and administrative 36.5% 36.1% 39.1% 25.1% 10.5% Litigation recovery of raw material costs - -2.2% - -100.0% 100.0% ---- ---- ---- ------ ----- 89.0% 83.9% 89.2% 31.3% 12.3% ---- ---- ---- ------ ----- Income from operations 11.0% 16.1% 10.8% -15.8% 78.7% ---- ---- ---- ------ ----- Other income (expense): Interest -1.5% -1.9% -2.7% -6.0% -15.8% Investment write down -0.3% - - 100.0% - Miscellaneous, net 0.5% 0.2% 0.3% 247.7% -43.2% ---- ---- ---- ------ ----- -1.3% -1.7% -2.4% -5.3% -11.8% ---- ---- ---- ------ ----- Income before income taxes 9.7% 14.4% 8.4% -17.1% 104.3% Provision for income taxes 2.8% 4.5% 3.2% -22.2% 65.3% ---- ---- ---- ------ ----- Net income 6.9% 9.9% 5.2% -14.8% 128.5% ==== ==== ==== ====== =====
33 Fiscal Year Ended September 30, 2003 Compared to Fiscal Year Ended September 30, 2002 Net Sales. Net sales for fiscal 2003 were $1,192,548, an increase of $228,465, or 23.7%, compared with net sales of $964,083 in fiscal 2002. The $228,465 increase is comprised of the following:
Fiscal Year Dollar Percent Ended September 30, Increase Increase ---------------------- -------- -------- 2003 vs. 2003 vs. 2003 2002 2002 2002 ---- ---- -------- -------- Wholesale $ 416,627 $291,287 $125,340 43.0% U.S. Retail / Vitamin World 212,380 198,602 13,778 6.9% European Retail / Holland & Barrett / GNC 363,597 290,881 72,716 25.0% Direct Response / Puritan's Pride 199,944 183,313 16,631 9.1% ---------- -------- -------- ---- Total $1,192,548 $964,083 $228,465 23.7% ========== ======== ======== ====
Wholesale sales were $416,627, compared to $291,287 in the prior year, an increase of $125,340, or 43%. Such increase in the wholesale segment's sales was primarily due to the acquisition of Rexall ($72,815), an increase in sales to the mass market, drug chains and supermarkets ($46,646), and sales contributed by the FSC acquisition ($5,879). Products such as Coral Calcium, Flex-a-min(R), and the Knox NutraJoint(R) products continue to help the Company strengthen its leading market position. In addition, increases in the wholesale segment can be attributed to the Company expanding its distribution channel with new customer accounts. U.S. Retail sales were $212,380, compared to $198,602 in the prior year, an increase of $13,778, or 6.9%. Such increase was a direct result of the Savings Passport Program, a customer loyalty program. Same store sales for stores open more than one year increased 5.4% or $10,192. European Retail sales were $363,597, compared to $290,881, an increase of $72,716, or 25%. Such increase was attributable to an increase in same store sales for stores open more than one year of 11.8% (or $34,018) and sales contributed by the GNC (UK) and De Tuinen acquisitions ($21,589 and $13,245, respectively). These results include the positive effect of a strong British Pound ($25,887 or 8.9%). There were 533 retail stores located within the U.S. and 589 retail stores located within Europe as of September 30, 2003, compared to 544 stores in the U.S. and 468 in the U.K./Ireland as of September 30, 2002. Direct Response/Puritan's Pride sales were $199,944, compared to $183,313, an increase of $16,631, or 9.1%. Such increase was a result of the Company's catalog promotion strategy, enhancement of the appearance of the catalog, and improved customer service. Cost of Sales/Discontinued product charge. Cost of sales (including the discontinued product charge) for fiscal 2003 was $559,304, an increase of $125,693, 34 compared with the cost of sales of $433,611 for fiscal 2002. Overall, gross profit, as a percentage of sales, decreased 1.9% to 53.1% during the fiscal year ended September 30, 2003 as compared to 55% for the prior comparable period. Included in the current period's cost of sales is a $4,500 charge (or 0.4% as a percentage of sales) for the Company's voluntary discontinuance of sales of products containing ephedra. Without this charge, as a percentage of sales, gross profit would have decreased 1.5% to 53.5% during fiscal 2003 as compared to 55% for the prior comparable period. The Company's belief that its ephedra products were safe when used as directed has been supported by credible scientific evidence. However, in light of adverse publicity surrounding ephedra and the current environment in the U.S., the Company believed it was in its best interest to voluntarily cease selling ephedra products, effective March 15, 2003. Historically, ephedra products represented an insignificant portion of the Company's overall business. The Wholesale segment's gross profit, as a percentage of sales, for fiscal 2003 was 40% as compared to 41% for fiscal 2002. Such gross profit was impacted by the product sales mix of existing product lines, such as the increase in Private Label sales (at a 34% gross margin level), and lower gross margins contributed by the FSC (European wholesale) acquisition. These factors were partially offset by higher gross margins on new product introductions and improvements in manufacturing efficiencies. Direct Response/Puritan's Pride's gross profit, as a percentage of sales, was 62% for fiscal 2003 as compared to 61% for fiscal 2002. The gross profit was affected by varied catalog pricing promotions the Company ran during fiscal 2003. The U.S. Retail gross profit, as a percentage of sales, for fiscal 2003 was 60% as compared to 59% for fiscal 2002. Margin improvement was primarily due to the Company's introduction of new higher gross margin items in such segment. The European Retail gross profit decreased 2%, as a percentage of sales, to 61% from 63% primarily as a result of the recent acquisitions of GNC (UK) and De Tuinen. These operations reported gross profit of 43% and 38%, respectively, thereby affecting the total European Retail gross profit margin during fiscal 2003. Without these newly acquired operations, gross profit as a percentage of sales would have remained unchanged from the prior period. The Company's overall strategy is to improve margins by introducing new products which traditionally have a higher gross profit and by continuing to increase in-house manufacturing while decreasing the use of outside suppliers. During fiscal 2003 and 2002, cost of sales included charges for under-absorbed factory overhead relating to certain underutilized manufacturing facilities of $8,261 and $11,375, respectively. Catalog, Printing, Postage and Promotion. Catalog printing, postage, and promotion expenses were $66,455 for fiscal 2003, compared with $47,846 for fiscal 2002, an increase of $18,609. Such advertising expenses as a percentage of sales were 5.6% during fiscal 2003 and 5% for the prior comparable period. Of the $18,609 increase, $19,367 was attributable to the increase in promotions for products, mainly via television, magazines, newspapers and mailing programs, offset by a decrease in catalog printing costs of $758. Direct Response/Puritan's Pride's promotion and media expenses increased $6,263; Wholesale's advertising expenses increased $10,919 (of which $6,438 related to Rexall product related advertising); and European Retail promotion and media increased $2,156. Such increase was offset by a $729 decrease in the U.S. Retail's advertising costs. Increased advertising costs primarily related to promoting new products recently 35 introduced as well as existing core products. Investments in additional advertising and sales promotions are part of the Company's strategic effort to increase long-term growth. Selling, General and Administrative. Selling, general and administrative expenses were $435,748 during fiscal 2003, an increase of $87,414, as compared with $348,334 for the prior comparable period. As a percentage of sales, selling, general and administrative expenses were 36.5% and 36.1% in fiscal 2003 and fiscal 2002, respectively. Of the $87,414 increase, $36,671 was attributable to increased payroll costs mainly associated with new business acquisitions and general salary increases, $16,639 to increased rent expense and additional U.S. Retail and European Retail stores, $8,876 to increased freight costs mainly resulting from the Company's efforts to generate faster product delivery to customers, $5,961 to increased insurance costs mainly associated with an increase in general insurance rates, $3,603 was attributable to increased depreciation and amortization expense as a result of acquisitions and an increase in capital expenditures, $2,520 to broker commissions, which was directly associated with the increase in wholesale sales, and $2,517 to increased professional fees for the implementation and integration of new software purchased. Of the $87,414 increase in selling, general and administrative cost, $8,859 is attributed to the foreign exchange translation of the British Pound. Litigation Recovery of Raw Materials Costs. In fiscal 2002, the Company received $21,354 for the settlement of price fixing litigation brought by the Company against certain raw material vitamin suppliers. Interest Expense. Interest expense was $17,384 in fiscal 2003, a decrease of $1,115, compared with interest expense of $18,499 in fiscal 2002. Interest expense decreased due to the Company's continued repayment of bank debt, offset in part by interest rate increases associated with the new financing completed by the Company on July 25, 2003. The major components of interest expense are interest on Senior Subordinated Notes, and interest on the Credit and Guarantee Agreement used for acquisitions, capital expenditures, and other working capital needs. On July 25, 2003, the Company entered into a new Credit and Guarantee Agreement ("CGA") comprised of $375,000 Senior Secured Credit Facilities. The new CGA consists of a $100,000 Revolving Credit Facility, a $50,000 Term Loan A and a $225,000 Term Loan B. Terms of the new CGA are generally similar to the previous one. Interest rates charged on borrowings can vary depending on the interest rate option utilized. Options for the rate can either be the Alternate Base Rate or LIBOR plus applicable margin. Investment Write Down. During fiscal 2003 other-than-temporary impairment write downs of $4,084 were charged against income and related to the Company's investment in high yield, less than investment grade corporate debt securities. On September 4, 2003, the bond issuer declared bankruptcy and the Company determined that the decline in fair value was permanent. Miscellaneous, net. Miscellaneous, net was $5,424 and $1,560 for fiscal 2003 and fiscal 2002, respectively. The $3,864 increase was primarily attributable to exchange rate fluctuations ($1,889), increases in investment income ($1,418), increases in net gains 36 on sale of property plant and equipment ($885), offset by other miscellaneous decreases ($328). Income Taxes. The Company's income tax expense is impacted by a number of factors, including state tax rates in the jurisdictions where the Company conducts business, and the Company's ability to utilize tax credits that will begin to expire in 2013. The effective income tax rate for fiscal 2003 was 29.1%, compared to 30.9% for fiscal 2002. The effective tax rates were less than the U.S. federal statutory tax rates primarily because the Company recorded $8,275 in fiscal 2003 and $7,800 in fiscal 2002 for after- tax benefits related to foreign tax credits. Such benefits resulted from certain tax saving strategies implemented in fiscal 2002. These tax planning activities may also benefit future fiscal years and therefore may further reduce the Company's overall effective income tax rate. Net Income. Net income for fiscal 2003 was $81,585 (or basic and diluted earnings per share of $1.23 and $1.19, respectively), compared with $95,791(or basic and diluted earnings per share of $1.45 and $1.41, respectively), a decrease of $14,206. Excluding the one-time investment write down in fiscal 2003 (as noted above), net income would have been $84,481 for fiscal year 2003, or $1.23 per diluted share. Excluding the one-time litigation recovery of raw material costs payment received in fiscal 2002 (resulting from price fixing litigation noted above), net income would have been $81,035 for fiscal 2002 or $1.19 per diluted share. Fiscal Year Ended September 30, 2002 Compared to Fiscal Year Ended September 30, 2001 Net Sales. Net sales for fiscal 2002 were $964,083, an increase of $157,185 or 19.5% compared with net sales of $806,898 in fiscal 2001. The $157,185 increase is comprised of the following:
Fiscal Year Dollar Percent Ended September 30, Increase Increase ---------------------- -------- -------- 2002 vs. 2002 vs. 2002 2001 2001 2001 ---- ---- -------- -------- Wholesale $291,287 $196,832 $ 94,455 48.0% U.S. Retail / Vitamin World 198,602 174,987 23,615 13.5% U.K. Retail/ Holland & Barrett 290,881 262,876 28,005 10.7% Direct Response / Puritan's Pride 183,313 172,203 11,110 6.5% -------- -------- -------- ---- Total $964,083 $806,898 $157,185 19.5% ======== ======== ======== ====
37 The increase in wholesale segment sales was primarily due to an increase in sales of its core products to the mass market, drug chains and supermarkets and sales generated by the newly acquired businesses ($39,489, of which $35,522 was attributable to Global Health Sciences). Products such as Apple Cider Vinegar, Flex-a-min(R), and the Knox NutraJoint(R) continued to help the Company strengthen its leading market position. By obtaining new customer accounts, the Company expanded its distribution channel for its products. Sales growth in the U.S. Retail channel in fiscal 2002 reflected an increase in same store sales for stores open more than one year (8.5% or $13,485) and the greater number of stores compared to the prior year (24 new stores contributed $4,001). U.K./Ireland retail sales increases were attributable to an increase in same store sales for stores open more than one year (7% or $18,035) and the opening of 7 new U.K. stores (contributed $1,056) in fiscal 2002. Direct Response/Puritan's Pride/e-commerce sales increased as a result of increased mailing distribution from customer lists acquired and as a result of an increase in the number of products available via catalog and website. At September 30, 2002, 544 retail stores in the U.S. and 468 retail stores in the U.K./Ireland were operated under the NBTY/Holland & Barrett banner, compared to 525 stores in the U.S. and 461 in the U.K./Ireland as of September 30, 2001. Cost of Sales. Cost of sales for fiscal 2002 was $433,611, an increase of $78,444 compared with the cost of sales of $355,167 for fiscal 2001. Overall, gross profit, as a percentage of sales, decreased 1% to 55% during fiscal 2002 as compared to 56% for fiscal 2001. Such decrease was primarily due to the Direct Response/Puritan's Pride segment's gross profit, which decreased 4.8%, as a percentage of sales (from 66.3% to 61.5%). These reduced gross margins resulted primarily from price reductions on certain products and the type of catalog pricing promotions the Company ran in fiscal 2002 versus fiscal 2001. This gross profit decrease was mitigated by gross profit increases in the Company's other segments. The wholesale segment's gross profit increased 2.1%, as a percentage of sales (from 38.7% to 40.8%) primarily due to higher gross margins on new product introductions. The U.S. Retail gross profit increased 0.5%, as a percentage of sales (from 58% to 58.5%). The U.K./Ireland retail gross profit increased 2.1%, as a percentage of sales (from 60.8% to 62.9%). The Company's strategy is to improve margins by continuing to increase in-house manufacturing while decreasing the use of outside suppliers in both the U.S. and the U.K. In fiscal 2001, cost of sales included a year end adjustment to inventory of approximately $3,900, which was principally the result of the Company utilizing the gross profit method for interim reporting, and the year-end valuation of the Company's annual physical inventory. Included in fiscal 2002 and fiscal 2001 costs of sales was under-absorbed factory overhead relating to certain underutilized manufacturing facilities of $11,375 and $5,752, respectively. Catalog, Printing, Postage and Promotion. Catalog, printing, postage and promotion expenses were $47,846 and $49,410 for fiscal 2002 and 2001, respectively. Such costs as a percentage of net sales were 5% for 2002 and 6.1% for 2001. The $1,564 decrease was primarily attributable to a decrease in direct response advertising promotion and media ($1,080) and catalog printing ($1,183). Such decrease was offset by an increase in wholesale advertising for new products introduced and existing core products ($603). The Company also had a small increase in retail advertising and promotion ($51). 38 Selling, General and Administrative. Selling, general and administrative expenses for fiscal 2002 were $348,334, an increase of $33,106, compared with $315,228 for fiscal 2001. As a percentage of sales, selling, general and administrative expenses were 36.1% and 39.1% in 2002 and 2001, respectively. Of the $33,106 increase, $4,489 was attributable to increase in rent expense, $14,880 to increase in payroll costs mainly associated with business acquisitions and the Vitamin World expansion program, $5,871 to increased insurance costs mainly associated with an increase in general insurance rates, $4,186 to increased freight and $3,418 to increased broker commissions, which was directly associated with the increase in wholesale sales, and $1,259 was attributable to increased depreciation expense as a result of an increase in capital expenditures. Such expenses were offset by a $5,624 decrease in selling, general, and administrative goodwill amortization expense resulting from the Company's adoption of SFAS 142, effective October 1, 2001. Litigation Recovery of Raw Materials Costs. In fiscal 2002, the Company received $21,354 for the settlement of price fixing litigation brought by the Company against certain raw material vitamin suppliers. Interest Expense. Interest expense was $18,499 in fiscal 2002, a decrease of $3,459, compared with interest expense of $21,958 in fiscal 2001. Interest expense decreased due to the Company's continued repayment of bank debt. The major components are interest on Senior Subordinated Notes associated with the Holland & Barrett acquisition, and the CGA used for acquisitions and capital expenditures. Miscellaneous, Net. Miscellaneous, net was $1,560 and $2,748 for fiscal 2002 and 2001, respectively. The $1,188 decrease was primarily attributable to exchange rate fluctuations ($1,074). Income Taxes. The Company's income tax expense is impacted by a number of factors, including state tax rates in the jurisdictions where the Company conducts business, and the Company's ability to utilize various tax credits that will begin to expire in 2013. The effective income tax rate for fiscal 2002 was 30.9%, compared to 38.2% for fiscal 2001. The change in the effective rate was due to tax saving strategies implemented in fiscal 2002, primarily the decrease in the valuation allowance on after tax benefits related to foreign tax credit. These tax planning activities may also benefit future fiscal years and therefore may further reduce the Company's overall effective income tax rate. In addition, the effective rate decreased due to ceasing the amortization of goodwill in fiscal 2002, most of which was not deductible for income tax purposes. Net Income. Net income for fiscal 2002 was $95,791, compared with $41,925 in fiscal 2001, an increase of $53,866, of which $14,756 was attributable to the partial settlement of ongoing price fixing litigation against certain raw material vitamin suppliers. 39 Seasonality The Company believes that its business is not seasonal in nature. 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's primary sources of liquidity and capital resources are cash generated from operations and availability of borrowings under its new CGA. Cash and cash equivalents totaled $49,349 and $26,229 at September 30, 2003 and 2002, respectively. The Company generated cash from operating activities of $111,532, $105,087, and $63,267 in fiscal 2003, 2002 and 2001, respectively. The overall increase in cash from operating activities during fiscal 2003 was mainly attributable to increased non-cash charges for depreciation and amortization, deferred taxes, the investment write down, the discontinued product charge, and an increase in accrued expenses, partially offset by investments in inventories, increases in accounts receivable and prepaid expenses. Inventory levels increased over the prior comparable period in order to maintain high fulfillment shipment levels and to assure quick response to customer orders and anticipated increased demand. Increases in inventory are also attributable to the new CVS supply contract and the recent addition of the Marc's store chain to the wholesale segment. The increase in prepaid expenses and other current assets is mainly attributable to a change in insurance carriers (dates of coverage do not correspond with the prior like period, increasing the prepaid cost) and increases in general insurance rates. Increases in rent deposits and the timing of advertising promotions also contributed to such increase. Cash used in investing activities was $323,285, $31,776, and $106,134 in fiscal 2003, 2002 and 2001, respectively. Fiscal 2003 cash used in investing activities consisted primarily of net cash paid for the Rexall, De Tuinen, FSC and GNC (UK) businesses ($289,676), as well as the purchase of property, plant and equipment ($37,510), partially offset by proceeds from the sale of property, plant and equipment ($1,498), and cash received that was previously held in escrow from the fiscal 2001 acquisitions of Global Health Sciences ($1,850) and NatureSmart ($553). Fiscal 2002 cash flows used in investing activities consisted primarily of the purchase of property, plant and equipment ($21,489) and cash paid for asset acquisitions ($7,702), offset by cash received that was previously held in escrow for the acquisition of Global Health Sciences ($4,600), and proceeds from the sale of property, plant and equipment and intangibles ($1,057). In addition, the Company made a strategic investment in high yield, less-than-investment-grade corporate bonds ($8,242), which became impaired in 2003. Cash used in investing activities in fiscal 2001 primarily related to cash paid for the business acquisitions of Global Health Sciences and NatureSmart ($63,010), cash held in escrow for the acquisition of Global Health Sciences ($10,000) and the purchase of property, plant and equipment ($37,197), partially offset by proceeds from the sale of property, plant and equipment ($4,232). 40 Net cash provided by (used in) financing activities was $233,435, ($83,454) and $45,627 in fiscal 2003, 2002 and 2001, respectively. Fiscal 2003 net cash flows provided by financing activities included proceeds from borrowing under long-term debt agreements ($275,000) and proceeds from the exercise of stock options ($1,146), partially offset by principal payments under long-term debt agreements ($35,211), and payments for debt issuance costs ($7,500). Net cash used in financing activities during fiscal 2002 included principal payments under long-term debt agreements ($85,353), offset by proceeds from the exercise of stock options ($1,899). Net cash provided by financing activities during fiscal 2001 included borrowings under the CGA ($71,502) and proceeds from the exercise of stock options ($2,604), which were partially offset by principal payments under long-term debt agreements ($12,780) and the purchase of treasury stock ($15,699). Working capital increased $128,565 to $314,275 at the end of fiscal 2003. This increase was primarily attributable to the Company increasing its current assets, specifically cash, accounts receivable, inventory, and prepaid expenses and other current assets. Acquisitions and continued growth in sales of the Company's principal promoted products during the period, as noted above, contributed to such increases in cash, accounts receivable and inventory. The Company continues to respond to consumer preferences and to monitor the market for trends and ideas, and these efforts have translated into increased sales. The number of average days' sales outstanding (on wholesale sales) at September 30, 2003, was 49 days, compared with 46 days at September 30, 2002. The inventory turnover rate was approximately 2.25 times during fiscal 2003 compared with 2.23 times during fiscal 2002. On July 25, 2003, the Company entered into the new Credit Agreement (the "CGA") which is comprised of $375,000 in Senior Secured Credit Facilities. The new CGA consists of a $100,000 Revolving Credit Facility, a $50,000 Term Loan A and a $225,000 Term Loan B. Interest rates charged on borrowings can vary depending on the interest rate option utilized. Options for the rate can either be the Alternate Base Rate or LIBOR plus applicable margin. The revolving credit facility and term loans are scheduled to mature on the earlier of (i) fifth anniversary of the closing date for the Revolving Credit Facility and Term Loan A, and the sixth anniversary date for Term Loan B; or (ii) March 15, 2007 if the Company's 8-5/8% senior subordinated Notes due September 15, 2007 are still outstanding. The proceeds were used to fund the Rexall acquisition, to refinance the existing CGA, and to pay fees, commissions, and expenses therewith. Following the closing date, the proceeds of loans borrowed under the new Revolving Facility shall be used for general corporate purposes. Virtually all of the company's assets are collateralized under the new CGA and are subject to normal banking terms and conditions and the maintenance of various financial ratios and covenants. The Company's ability to comply with covenants contained in the CGA and the Indenture may be affected by events beyond the Company's control, including (without limitation) prevailing economic, financial and industry conditions. Failure to comply with such debt-related covenants could result in an acceleration of payment obligations under that debt and, under certain circumstances, in cross- defaults under other debt obligations of the Company, which may have a negative effect on the Company's liquidity. The Company is currently in compliance with all of its covenants set forth in the CGA and 41 the Indenture. For additional information regarding the ability of the Company's subsidiaries to transfer funds or assets to the Company, see Item 5, "Market for Registrant's Common Equity and Related Stockholders Matters." At September 30, 2003, amounts outstanding under such term loans were as follows: $47,500 and $224,438 under Term Loan A and Term Loan B, respectively. At September 30, 2003 the annual borrowing rates for Term Loan A and Term Loan B approximated 3.375 and 3.625 percent, respectively. Commencing September 30, 2003, the Company is required to make quarterly principal installments under Term Loan A and Term Loan B of approximately $2,500 and $563, respectively. The Term Loan B also requires the last four quarterly principal installments to be balloon payments of approximately $53,435 beginning September 30, 2008. The current portion of Term Loan A and Term Loan B at September 30, 2003 was $10,000 and $2,250, respectively. The $100,000 revolving credit facility expires on July 25, 2008 and was unused at September 30, 2003. In 1997, the Company issued $150,000 of 8-5/8% senior subordinated Notes ("Notes") due in 2007. The Notes are unsecured and subordinated in right of payment for all existing and future indebtedness of the Company. A summary of contractual cash obligations as of September 30, 2003 is as follows:
Payments Due By Period -------------------------------------------------------- Less Than 1-3 4-5 After 5 Total 1 Year Years Years Years -------------------------------------------------------- Long-term debt and capital leases $426,830 $ 12,840 $ 25,826 $225,927 $162,237 Operating leases 445,788 68,409 119,718 98,189 159,472 Purchase commitments 22,287 22,287 - - - Capital commitments 14,975 10,565 4,410 - - Employment & consulting agreements 6,210 2,700 2,340 1,170 - -------------------------------------------------------- Total contractual Cash obligations $916,090 $116,801 $152,294 $325,286 $321,709 ========================================================
The Company conducts retail operations under operating leases, which expire at various dates through 2029. Some of the leases contain renewal options and provide for contingent rent based upon sales plus certain tax and maintenance costs. Future minimum rental payments (excluding real estate tax and maintenance costs) for retail locations and other leases that have initial or noncancelable lease terms in excess of one year at September 30, 2003 are noted in the above table. The Company was committed to make future purchases under various purchase arrangements with fixed price provisions aggregating approximately $22,287 at September 30, 2003. 42 The Company had approximately $1,665 in open capital commitments at September 30, 2003, primarily related to manufacturing equipment as well as to computer hardware and software. Also, the Company has a $13,310 commitment for the construction of an automated warehouse over the next 18 months. The Company has employment agreements with two of its executive officers. The agreements, effective October 1, 2002, have a term of 5 years and are automatically renewed each year thereafter unless either party notifies the other to the contrary. These agreements provide for minimum salary levels and contain provisions regarding severance and changes in control of the Company. The annual commitment for salaries to these two officers as of September 30, 2003 was approximately $1,170. In addition, five members of Holland & Barrett's senior executive staff have service contracts terminable by the Company upon twelve months notice. The annual aggregate commitment for such H&B executive staff as of September 30, 2003 was approximately $1,080. The Company maintains a consulting agreement with Rudolph Management Associates, Inc. for the services of Arthur Rudolph, a director of the Company and father of Scott Rudolph. The consulting fee (which is paid monthly) is fixed by the Board of Directors of the Company, provided that in no event will the consulting fee be at a rate lower than $450 per year. In addition, Mr. Arthur Rudolph receives certain fringe benefits accorded to other executives of the Company. The Company believes that existing cash balances, internally- generated funds from operations, and amounts available under the new CGA will provide sufficient liquidity to satisfy the Company's required interest payments, working capital needs for the next 12 months and to finance anticipated capital expenditures incurred in the normal course of business and potential acquisitions. NBTY has grown through acquisitions, and expects to continue seeking to acquire entities in similar or complementary businesses. Such acquisitions are likely to require the incurrence and/or assumption of indebtedness and/or obligations, the issuance of equity securities or some combination thereof. In addition, NBTY may from time to time determine to sell or otherwise dispose of certain of its existing businesses. NBTY cannot predict if any such transactions will be consummated, nor the terms or forms of consideration which might be required in any such transactions. Related Party Transactions The Company has had, and in the future may continue to have, business transactions with individuals and firms affiliated with certain of the Company's directors. Each such transaction has been in the ordinary course of the Company's business. During fiscal 2003, the following transactions occurred: A. Gail Radvin, Inc., a corporation wholly-owned by Gail Radvin, received commissions from the Company totaling $643 on account of sales in certain foreign countries and had trade receivable balances of 43 approximately $3,598 as of September 30, 2003. Gail Radvin is the sister of Arthur Rudolph (a director of the Company) and the aunt of Scott Rudolph (Chairman and Chief Executive Officer). B. The Company paid approximately $453 to Rudolph Management Associates, Inc., pursuant to the Consulting Agreement between the Company and Rudolph Management Associates, Inc. Mr. Arthur Rudolph, a director of the Company, is the President of Rudolph Management Associates, Inc. See "Employment and Consulting Agreements with Executive Officers and Directors" below. C. Glenn-Scott Landscaping & Design, a company owned by the brother of Glenn Cohen, a director of the Company, performed landscaping and maintenance on the Company's properties and received approximately $83 in compensation during fiscal 2003. D. Certain members of the immediate families (as defined in Rule 404 of Regulation S-K) of Arthur Rudolph, Scott Rudolph and Michael Slade (each a director of the Company) are employed by the Company. During fiscal 2003, these immediate family members received aggregate compensation from the Company totaling approximately $1,068 for services rendered by them as employees of the Company. Inflation Inflation affects the cost of raw materials, goods and services used by the Company. In recent years, inflation has been modest. The competitive environment somewhat limits the ability of the Company to recover higher costs resulting from inflation by raising prices. Overall, product prices have generally been stable. The Company seeks to mitigate the adverse effects of inflation primarily through improved productivity and cost containment programs. The Company does not believe that inflation has had a material impact on its results of operations for the periods presented, except with respect to payroll-related costs, insurance premiums, and other costs arising from or related to government imposed regulations. Financial Covenants and Credit Rating The Company's credit arrangements, namely the indenture governing the Notes and the new CGA, impose certain restrictions on the Company regarding capital expenditures and limit the Company's ability to do any of the following: incur additional indebtedness, dispose of assets, make repayments of indebtedness or amendments of debt instruments, pay distributions, create liens on assets and enter into sale and leaseback transactions, investments, loans or advances and acquisitions. Such restrictions are subject to certain limitations and exclusions. Such provisions 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. 44 At September 30, 2003, Moody's Investors Service, Inc. rated the Company's Notes as a B1; Standard & Poor's rated the Notes as a B+ and gave the Company an overall corporate credit rating as BB. Both credit agencies' ratings related to the aforementioned debt remained unchanged from the prior period. Standard & Poor's assigned a BB rating to the new CGA and Moody's Investors Service, Inc. rated the new CGA as a Ba2. New Accounting Developments In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and must be applied to the Company's existing financial instruments effective July 1, 2003, the beginning of the first fiscal period after June 15, 2003. The Company has not entered into any financial instruments within the scope of SFAS No. 150 since May 31, 2003, nor does it currently hold any financial instruments within its scope. In May 2003, the Emerging Issues Task Force ("EITF") reached a consensus on EITF Issue 01-8, Determining Whether an Arrangement is a Lease, which provides guidance on identifying leases that may be embedded in contracts or other arrangements that sell or purchase products or services. The evaluation of whether an arrangement contains a lease within the scope of SFAS No. 13, Accounting for Leases, should be based on an evaluation of whether the arrangement conveys the right to use and control specific property or equipment. The consensus requires sellers to report revenues from the leasing component of these arrangements as leasing or rental income rather than revenues from product sales or services, and requires purchasers to report the costs from these arrangements as costs under capital leases. This could affect the timing and amount of recognition of revenues and expenses and the classification of assets and liabilities on the balance sheet, and it could require additional footnote disclosure of lease terms and future minimum lease commitments. This consensus is effective for contracts entered into or significantly modified after July 1, 2003. The Company does not have relationships with customers that meet the EITF 01-8 definition of a lease arrangement. As such, the adoption of this issue did not impact the Company's consolidated financial position, results of operations, or disclosure requirements. In January 2003, the FASB issued Interpretation No. 46, ("FIN") Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin ("ARB") No. 51. FIN 46 addresses consolidation by business enterprises of variable interest entities. FIN 46 applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first reporting period ending after December 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before 45 February 1, 2003. The Company believes that the provisions of FIN 46 will not have any impact on the Company's consolidated financial position or results of operations. In November 2002, the FASB issued FIN No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, which addresses the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. FIN 45 also requires the guarantor to recognize a liability for the non-contingent component of the guarantee, which is the obligation to stand ready to perform in the event that specified triggering events or conditions occur. The recognition and measurement provisions of FIN 45 are effective for all guarantees entered into or modified after December 31, 2002. The Company does not enter into such transactions. Therefore the adoption of this standard did not impact its consolidated financial position, results of operations, or disclosure requirements. In November 2002, the EITF issued EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF No. 00-21 addresses certain aspects of the accounting by a company for arrangements under which it will perform multiple revenue-generating activities. EITF No. 00-21 addresses when and how an arrangement involving multiple deliverables should be divided into separate units of accounting. EITF No. 00-21 provides guidance with respect to the effect of certain customer rights due to company nonperformance on the recognition of revenue allocated to delivered units of accounting. EITF No. 00-21 also addresses the impact on the measurement and/or allocation of arrangement consideration of customer cancellation provisions and consideration that varies as a result of future actions of the customer or the company. Finally, EITF No. 00-21 provides guidance with respect to the recognition of the cost of certain deliverables that are excluded from the revenue accounting arrangement. The provisions of EITF No. 00-21 apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF No. 00-21 did not have a material effect on its consolidated financial position or results of operations. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to currency fluctuations, primarily with respect to the British Pound and the Euro, and interest rate risks that arise from normal business operations. The Company regularly assesses these risks. As of September 30, 2003, the Company had not entered into any hedging transactions. To manage the potential loss arising from changing interest rates and its impact on long-term debt, the Company's policy is to manage interest rate risks by maintaining a combination of fixed and variable rate financial instruments. 46 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements, notes thereto, supplementary schedule, and the related independent auditors' report contained on page F-1 to NBTY's consolidated financial statements, are herein incorporated: Report of Independent Auditors Consolidated Balance Sheets - As of September 30, 2003 and 2002 Consolidated Statements of Income - Fiscal years ended September 30, 2003, 2002 and 2001 Consolidated Statements of Stockholders' Equity and Comprehensive Income - Fiscal years ended September 30, 2003, 2002 and 2001. Consolidated Statements of Cash Flows - Fiscal years ended September 30, 2003, 2002 and 2001. Notes to Consolidated Financial Statements. Schedules II, Valuation and Qualifying Accounts All other schedules have been omitted as not required or not applicable or because the information required to be presented are included in the consolidated financial statements and related notes. For more information, see Part IV, Item 15, Exhibits, below. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. Item 9A. CONTROLS AND PROCEDURES The Company's chief executive officer and chief financial officer have concluded, based on their respective evaluations at the end of the period covered by this Report, that the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are effective for recording, processing, summarizing and reporting, within the time periods specified in the SEC's rules and forms, the information required to be disclosed in the reports filed by the Company under the Exchange Act. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of the previously mentioned evaluation. The Company's management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the Company's disclosure controls or internal 47 controls over financial reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitation of a cost- effective control system, misstatements due to error or fraud may occur and not be detected. 48 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors and executive officers of NBTY, all of whom are U.S. citizens, and their ages as of December 8, 2003, are as follows:
Year Commenced first term of elected office as Name Age Position Director Officer ---- --- -------- -------- --------- Scott Rudolph 46 Chairman of the Board and Chief Executive Officer 1986 1986 Harvey Kamil 59 President and Chief Financial Officer - 1982 Michael C. Slade 54 Senior Vice President, Director and Corporate Secretary 1998 1999 James P. Flaherty 46 Senior Vice President-Marketing - 1988 and Advertising William J. Shanahan 45 Vice President-Information - 1988 Systems Arthur Rudolph 75 Director 1979 - Aram G. Garabedian 68 Director 1979 - Bernard G. Owen 75 Director 1979 - Alfred Sacks 76 Director 1979 - Murray Daly 76 Director 1979 - Glenn Cohen 44 Director 1988 - Nathan Rosenblatt 47 Director 1994 - Michael L. Ashner 51 Director 1998 - Peter J. White 49 Director 2001 -
Certain information regarding each person listed above, including such person's principal occupation during the past five years and current directorships, is set forth below. Unless indicated otherwise, all directors and executive officers have had the indicated principal occupations for the past five years. Scott Rudolph is the Chairman of the Board of Directors, Chief Executive Officer and a more than 5% stockholder of the Company. He served as the Chairman of the 49 Board of Directors of Dowling College, Long Island, New York, from 1997 through 2000, and is currently the Vice Chairman of Dowling College Board. He joined the Company in 1986. He is the son of Arthur Rudolph who founded the Company. Harvey Kamil is the President and Chief Financial Officer of the Company. He serves on the Board of Directors of the Council for Responsible Nutrition and on the Board of Directors of the National Nutritional Food Association. He joined the Company in 1982. Michael C. Slade is the Senior Vice President, Director and Secretary of the Company. He was the President and owner of Nutrition Headquarters, Inc. and Nutro Laboratories, Inc. before their acquisition by the Company in 1998. He is a member of the Board of Trustees of North Shore - LIJ Health System. He is also a member of the Board of Directors of North Shore - - LIJ Research Institute. James P. Flaherty is the Senior Vice President-Marketing and Advertising. He joined the Company in 1979. William J. Shanahan is the Vice President-Information Systems. He joined the Company in 1980. Arthur Rudolph founded Arco Pharmaceuticals, Inc., the Company's predecessor, in 1960 and founded the Company upon its incorporation in 1979. He served as the Company's Chief Executive Officer and Chairman of the Board of Directors until his resignation in September 1993. He is the father of Scott Rudolph. Aram G. Garabedian was elected a State Senator of the State of Rhode Island in 2000 and had been a representative in that State's legislature from 1972 through 1978, and 1998 through 2000. Since 1986, he has been a real estate property manager and developer in Rhode Island and is the President of Bliss Properties, Inc. He was associated with the Company and its predecessor, Arco Pharmaceuticals, Inc., for more than 20 years in a sales capacity and as an officer. Bernard G. Owen is retired, having been previously associated with Cafiero, Cuchel and Owen Insurance Agency, Pitkin, Owen Insurance Agency and Wood-HEW Travel Agency. Alfred Sacks has been President of Al Sacks, Inc., an insurance consulting firm, for the past 40 years. Murray Daly, formerly a Vice President of J. P. Egan Office Equipment Co., is a consultant to the office equipment industry. Glenn Cohen is the President of Save-On Sprinkler Co., a sprinkler company. Nathan Rosenblatt is the President and Chief Executive Officer of Ashland Maintenance Corp., a commercial maintenance organization located in Long Island City, New York. 50 Michael L. Ashner is President and Chief Executive Officer of Winthrop Financial Associates, a real estate investment banking firm affiliated with Apollo Real Estate, since 1995. Mr. Ashner serves on the Board of Directors of Shelbourne Properties I, Shelbourne Properties II, Shelbourne Properties III and Greate Bay Hotel and Casino, Inc. Peter J. White is President and Chief Executive Officer of I.J. White Corporation, a company based in Farmingdale, New York, engaged in the worldwide engineering and manufacturing of conveying systems for the food industry. The directors of the Company are divided into three classes, designated as Class I, Class II and Class III. Each class consists, as nearly as possible, of one third of the total number of directors constituting the entire Board of Directors. After their initial term, the directors of each class serve for a term of three years and until their successors are elected and qualified and subject to prior death, resignation, retirement, disqualification or removal. Currently, the Class I directors are Messrs. Garabedian, Owen and Sacks; the Class II directors are Messrs. Scott Rudolph, Daly, Rosenblatt and White; and the Class III directors are Messrs. Arthur Rudolph, Cohen, Ashner and Slade. The current terms of the Class I, Class II and Class III directors expire at the annual meetings of the Company's stockholders in 2006, 2005, and 2004, respectively. At each annual meeting of stockholders, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional directors of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. The term of office of each executive officer is until the organizational meeting of the Board of Directors of the Company following the next annual meeting of the Company's stockholders and until such officer's successor is elected and qualified or until such officer's prior death, resignation, retirement, disqualification or removal. Compensation of Directors Directors of the Company who are also executive officers of the Company or its subsidiaries do not receive any additional compensation for service as a member of the Board of Directors of the Company or any of its committees. For information relating to compensation of the Company's management directors, see "Employment and Consulting Agreements with Executive Officers and Directors" below. All other directors of the Company are paid an annual fee of $40,000 for serving on the Board of Directors. See also "Employment and Consulting Agreements with Executive Officers and Directors" and "Compensation Committee Interlocks and Insider Participation" below for a discussion of the Company's consulting agreement with Rudolph Management Associates, Inc. for the services of Arthur Rudolph. 51 Audit Committee Financial Expert The SEC has adopted rules implementing Section 407 of the Sarbanes- Oxley Act of 2002 requiring public companies to disclose information about "audit committee financial experts." The Board of Directors of the Company has concluded that none of the three independent audit committee members meet the narrow SEC definition of "audit committee financial expert" as none have served as a principal accounting officer or public accountant, or have been responsible for actively supervising a principal accounting officer. Neither SEC regulations nor the New York Stock Exchange listing standards require the Company to have a financial expert on its Audit Committee; however, SEC regulations require that the Company disclose whether it has a "financial expert" on its Audit Committee. The Company continues to review the credentials of, and interview, candidates to join the Board as an audit committee financial expert. To date, however, the Company has not found a candidate it believes has both the requisite financial expertise and appropriate experience in the nutritional supplement industry. The Company is currently in compliance with the listing requirements of the New York Stock Exchange relating to audit committee qualification, and the Board has determined that its Audit Committee possesses sufficient financial expertise to effectively discharge its obligations. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange Act requires NBTY's directors, executive officers, and persons who own more than ten percent of NBTY's Common Stock, to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the SEC. Directors, executive officers and greater than ten percent stockholders are required by the SEC regulations to furnish NBTY with copies of all Forms 3, 4 and 5 they file with the SEC. Based solely on NBTY's review of the copies of the SEC filings it has received, or written representations from certain reporting person that no Form 5's were required for these persons, NBTY believes that, except as indicated below, all its directors, executive officers and greater than ten percent beneficial owners complied with all filing requirements applicable to them with respect to fiscal 2003. Mr. James Flaherty was late in filing Forms 4 on five occasions, relating to an aggregate of 14 transactions in Company securities. Messrs. Alfred Sacks, Bernard Owen and Murray Daly each filed late one Form 4, in each case relating to one transaction in Company securities. Code of Ethics for Senior Financial Officers The Company has adopted a Code of Ethics for its senior financial officers and Chief Executive Officer. The Company will provide a copy of such Code of Ethics to any person upon written request made to the Company's General Counsel at 90 Orville Drive, Bohemia, NY 11716. It is the Company's intention to disclose any waivers of, or amendments to, such Code of Ethics on its web site: www.nbty.com. 52 Item 11. EXECUTIVE COMPENSATION The following table sets forth information concerning compensation paid by the Company in respect of fiscal years ended September 30, 2001, 2002 and 2003 to the Company's Chairman and Chief Executive Officer and to each of the other four (4) most highly paid executive officers of the Company (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
Long Term Compensation Annual Compensation Awards ---------------------------------- ------------ Other Securities Annual Underlying Name and Fiscal Compen- Options All Other Principal Position Year Salary($) Bonus($) sation($) (#)(1) Compensation($)(2) ------------------ ------ --------- -------- --------- ------------ ------------------ Scott Rudolph 2003 750,000 600,000 (3) - 8,963 Chairman 2002 710,197 600,000 (3) - 6,428 and Chief Executive Officer 2001 634,024 500,000 (3) 500,000 6,748 Harvey Kamil 2003 420,000 300,000 (3) - 9,589 President and 2002 383,656 250,000 (3) - 6,440 Chief Financial Officer 2001 317,012 225,000 (3) 125,000 6,741 Michael C. Slade 2003 341,994 90,000 (3) - 9,575 Senior Vice President and 2002 322,692 70,000 (3) - 6,428 Secretary 2001 306,346 50,000 (3) 70,000 6,741 James Flaherty - 2003 228,365 65,000 (3) - 9,589 Senior Vice President 2002 212,692 65,000 (3) - 3,740 Marketing and Advertising 2001 194,519 75,000 (3) - 4,841 William Shanahan 2003 191,972 75,000 (3) - 9,589 Vice President - 2002 181,711 75,000 (3) - 6,428 Information Systems 2001 171,981 75,000 (3) - 6,748 - -------------------- All stock option grants were made pursuant to the NBTY, Inc. Year 2000 Incentive Stock Option Plan (the "2000 Plan"). As of the end of fiscal 2003, no grants had been made under the NBTY, Inc. Year 2002 Stock Option Plan. Represents amounts contributed by the Company to 401(k) plan and the NBTY, Inc. Employees' Stock Ownership Plan on behalf of the Named Executive Officer. Perquisites and other personal benefits did not exceed the lesser of $50,000 or 10% of the total annual salary and bonus reported under the headings of "Salary" and "Bonus".
The Company did not grant any stock appreciation rights or stock options during fiscal 2003. 53 Option Value at the End of Fiscal 2003 The following table sets forth certain information concerning the number and the value at the end of fiscal 2003 of unexercised in-the-money options to purchase Common Stock granted to the Named Executive Officers as of the end of fiscal 2003. No stock appreciation rights have been granted to any of the Named Executive Officers. Aggregated Option Exercises in Last Fiscal Year And Fiscal Year-End Option Values
Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options at Options at Fiscal 2003 End(#) Fiscal 2003 End($) Shares ------------------ ------------------ Acquired on Value Exercisable/ Exercisable/ Name Exercise(#) Realized($) Unexercisable Unexercisable(1) ---- ----------- ----------- ------------- ---------------- Scott Rudolph 0 0 2,810,000/0 49,273,850/0 Harvey Kamil 0 0 525,000/0 9,262,663/0 Michael C. Slade 0 0 100,000/0 1,775,941/0 James Flaherty 0 0 0/0 0/0 William Shanahan 0 0 70,000/0 1,251,390/0 - -------------------- Based on the closing price of $23.35 of NBTY's Common Stock on September 30, 2003, the last trading day of fiscal 2003, less the exercise price payable for such Common Stock.
Employment and Consulting Agreements with Executive Officers and Directors Scott Rudolph Employment Agreement. The Company has entered into an employment agreement with Mr. Scott Rudolph (the "Rudolph Agreement"), superseding Mr. Scott Rudolph's prior employment agreement with the Company. The Rudolph Agreement was effective October 1, 2002. Pursuant to the Rudolph Agreement, Mr. Scott Rudolph currently serves as Chairman of the Board and Chief Executive Officer of the Company. The initial term of the Rudolph Agreement is five years, subject to automatic one-year extensions, unless either the Company or Mr. Rudolph provides specified notice to the contrary. Mr. Rudolph is required to devote to the Company substantially all of his working time, attention and efforts. Under the Rudolph Agreement, in fiscal 2003 Mr. Rudolph received a base salary of $750,000 and certain fringe benefits accorded to the other senior executives of NBTY. Mr. Rudolph is also eligible to earn an annual bonus targeted at not less than 50% of his base salary, as determined by the Compensation Committee of the Board, taking into account the achievement by the Company of certain performance goals. Mr. Rudolph has the right to terminate the Rudolph Agreement in the event of a material breach by the Company or for other "good reason" (as defined in the Rudolph 54 Agreement). In such event, or if the Company terminates Mr. Rudolph's employment without cause (as defined in the Rudolph Agreement), (i) Mr. Rudolph will be entitled to receive a lump sum amount equal to the greater of: (1) the base salary, automobile allowance and annual bonus (in the amount of 50% of his then base salary) that would be payable for the remaining term of the Rudolph Agreement had such termination not taken place, and (2) three times the sum of (x) his then base salary plus (y) the annual bonus Mr. Rudolph received in the year preceding such termination, (ii) all outstanding equity incentive awards (including stock options) will immediately vest and remain exercisable for a period of one year following the date of such termination (or, if earlier, until the end of the option term), and (iii) Mr. Rudolph would be entitled to receive a payment sufficient to offset the effects of any excise tax ("Excise Tax") imposed under Section 4999 of the Internal Revenue Code of 1986, as amended, if a Change of Control (as defined in the Rudolph Agreement) of the Company occurs after such termination of employment. Upon termination of Mr. Rudolph's employment with the Company, following a "Change of Control" of the Company, Mr. Rudolph would (i) be entitled to receive a lump sum amount equal to 2.99 times the average compensation received by Mr. Rudolph during the five years immediately preceding such termination, (ii) become vested in all outstanding equity incentive awards (including stock options), (iii) have the right to receive a cash payment equal to the "spread" on all outstanding stock options, and (iv) be entitled to a payment sufficient to offset the effects of any Excise Tax. During the term of the Rudolph Agreement (and, in the event Mr. Rudolph terminates his employment other than for good reason or the Company terminates Mr. Rudolph's employment for cause, for a period of one year beyond the expiration of the employment term), Mr. Rudolph will be subject to certain non-competition requirements. Harvey Kamil Employment Agreement. The Company has entered into an employment agreement with Mr. Harvey Kamil (the "Kamil Agreement"), superseding Mr. Kamil's prior employment agreement with the Company. The Kamil Agreement was effective October 1, 2002. Pursuant to the Kamil Agreement, Mr. Kamil currently serves as President and Chief Financial Officer of the Company. The initial term of the Kamil Agreement is five years, subject to automatic one-year extensions, unless either the Company or Mr. Kamil provides specified notice to the contrary. Mr. Kamil is required to devote to the Company substantially all of his working time, attention and efforts. Under the Kamil Agreement, in fiscal 2003 Mr. Kamil received a base salary of $420,000 and certain fringe benefits accorded to the other senior executives of NBTY. Mr. Kamil is also eligible to earn an annual bonus targeted at not less than 50% of his base salary, as determined by the Compensation Committee of the Board, taking into account the achievement by the Company of certain performance goals. Mr. Kamil has the right to terminate the Kamil Agreement in the event of a material breach by the Company or for other "good reason" (as defined in the Kamil Agreement). In such event, or if the Company terminates Mr. Kamil's employment without cause (as defined in the Kamil Agreement), (i) Mr. Kamil will be entitled to receive a lump sum amount equal to the greater of: (1) the base salary, automobile allowance and annual bonus (in the amount of 50% of his then base salary) that would be 55 payable for the remaining term of the Kamil Agreement had such termination not taken place, and (2) three times the sum of (x) his then base salary plus (y) the annual bonus Mr. Kamil received in the year preceding such termination, (ii) all outstanding equity incentive awards (including stock options) will immediately vest and remain exercisable for a period of one year following the date of such termination (or, if earlier, until the end of the option term), and (iii) Mr. Kamil would be entitled to receive a payment sufficient to offset the effects of any Excise Tax, if a Change of Control (as defined in the Kamil Agreement) of the Company occurs after such termination of employment. Upon termination of Mr. Kamil's employment with the Company, following a "Change of Control" of the Company, Mr. Kamil would (i) be entitled to receive a lump sum amount equal to 2.99 times the average compensation received by Mr. Kamil during the five years immediately preceding such termination, (ii) become vested in all outstanding equity incentive awards (including stock options), (iii) have the right to receive a cash payment equal to the "spread" on all outstanding stock options, and (iv) be entitled to a payment sufficient to offset the effects of any Excise Tax. During the term of the Kamil Agreement (and, in the event Mr. Kamil terminates his employment other than for good reason or the Company terminates Mr. Kamil's employment for cause, for a period of one year beyond the expiration of the employment term), Mr. Kamil will be subject to certain non-competition requirements. Arthur Rudolph Consulting Agreement. For the details of Mr. Arthur Rudolph's Consulting Agreement, see "Compensation Committee Interlocks and Insider Participation," below. Holland & Barrett Management Team. Five members of Holland & Barrett's senior executive staff have service contracts, terminable by the Company upon twelve months' notice. The aggregate commitment for these salaries as of September 30, 2003, was approximately $1,080,000 per year. Compensation Committee Interlocks and Insider Participation Mr. Arthur Rudolph was Chief Executive Officer and Chairman of the Company until his resignation in September, 1993. Effective January 1, 1997, the Company entered into a consulting agreement with Rudolph Management Associates, Inc. for the services of Arthur Rudolph, a Director and founder of the Company. The agreement has been renewed for a successive two-year term, ending December 31, 2005. The Agreement provides for a consulting fee in the annual amount of $450,000, payable in monthly installments. Pursuant to the consulting agreement, Mr. Rudolph will receive certain fringe benefits accorded to other executives of the Company. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth the beneficial ownership as of December 8, 2003 by each person known by the Company to be the beneficial owner of more than 5% of the 56 outstanding shares of Common Stock (constituting the only class of voting stock of the Company), each director of the Company, each Named Executive Officer, and all directors and executive officers as a group. Unless otherwise indicated, the address for each party listed below is c/o NBTY, Inc., 90 Orville Drive, Bohemia, New York 11716.
Number of Shares Beneficially Percent Directors Owned (a) of Class (a) --------- ---------------- ------------ Scott Rudolph(b) 8,561,929 12.3 Arthur Rudolph(c)(d) 1,906,893 2.9 Aram G. Garabedian 3,000 * Bernard G. Owen 35,000 * Alfred Sacks 15,500 * Murray Daly(e) 7,500 * Glenn Cohen -- -- Nathan Rosenblatt(f) 75,000 * Michael L. Ashner 25,000 * Michael C. Slade(g) 2,030,698 3.0 Peter J. White(h) 3,000 * Other Named Executive Officers ------------------------------ Harvey Kamil(i) 1,817,344 2.7 William J. Shanahan(j) 152,000 * James P. Flaherty 41,357 * Directors and Executive Officers -------------------------------- All Directors and Executive Officers as a group (14 persons) 14,674,221 20.9 Other ----- NBTY, Inc. Employees' Stock Ownership Plan 2,832,921 4.3 - -------------------- An asterisk (*) in the above table means percentage ownership of less than one percent. (a) This column includes shares which directors, executive officers and certain other holders have the right to acquire within 60 days. Except as otherwise indicated, each person and entity has the sole voting and investment power with respect to the shares set forth in the table. (b) Includes options to purchase 2,810,000 shares of Common Stock which are presently exercisable. (c) Includes 40,000 shares of Common Stock owned by Mr. Arthur Rudolph's wife, as to which Mr. Arthur Rudolph disclaims beneficial ownership. 57 (d) Includes options to purchase 60,000 shares of Common Stock which are presently exercisable. (e) Represents options to purchase 7,500 shares of Common Stock which are presently exercisable. (f) Represents options to purchase 30,000 shares of Common Stock which are presently exercisable and 45,000 shares owned by Mr. Rosenblatt's wife, as to which Mr. Rosenblatt disclaims beneficial ownership. (g) Includes (i) options to purchase 100,000 shares of Common Stock which are presently exercisable and (ii) 530,847 shares held in a trust for the benefit of Mr. Slade's wife, as to which Mr. Slade disclaims beneficial ownership. (h) Includes 1,000 shares of Common Stock owned by Mr. White's wife, as to which Mr. White disclaims beneficial ownership. (i) Includes options to purchase 525,000 shares of Common Stock which are presently exercisable. (j) Includes options to purchase 70,000 shares of Common Stock which are presently exercisable.
58 Securities Authorized for Issuance Under Equity Compensation Plans - ------------------------------------------------------------------ The following table summarizes the Company's equity compensation plans as of September 30, 2003.
Number of securities to be Weighted- Number of securities issued upon average exercise remaining available for exercise of price of future issuance under outstanding outstanding equity compensation options, options, plans (excluding warrants and warrants and securities reflected in rights rights column (a)) Plan Category (a) (b) (c) ------------- ---------------- ---------------- ----------------------- Equity compensation plans approved by security holders 4,174,343 $5.77 2,457,500 Equity compensation plans not approved by security holders -- -- -- Total: 4,174,343 $5.77 2,457,500
NBTY, Inc. Employees' Stock Ownership Plan (the "ESOP") - ------------------------------------------------------- The ESOP provides as follows: Eligibility; Trustee All associates of the Company, including officers, over the age of 20 1/2 and who have been employed by the Company for at least one year and completed at least 1,000 hours of employment are eligible to participate in the ESOP. Mr. Arthur Rudolph is the Trustee of the ESOP. Contributions Contributions of either cash or Company common stock are made on a voluntary basis by the Company, as authorized and directed by the Board of Directors. There is no contribution required to be made by the Company in any one year. The ESOP is maintained on a calendar year basis. There are no contributions required or permitted to be made by an associate of the Company. All contributions, if any, made by the Company in any plan year may not exceed 15% of the aggregate compensation of all participants during such plan year. Each eligible associate receives an account or share in the ESOP, and the cash and/or shares of stock contributed to the ESOP each year are credited to his or her account. 59 Vesting Once an associate is eligible, a portion of the stock in his or her account becomes "vested", as follows:
Number of Years Percentage of Shares of Service earned each year --------------- -------------------- Less than 5 0% 5 or more 100%
Distribution; Voting If an associate retires, is disabled, dies or his or her employment is otherwise terminated, that associate or that associate's estate will receive the vested portion of such associate's account. Each participant directs the Trustee as to the manner in which the Company's common stock represented by such participant's account is to be voted and as to the manner in which rights other than voting rights are to be exercised. Distribution is to be made only upon a participant's retirement, termination of employment, death or disability (as defined in the ESOP). All distributions are made only in the shares of the Company's common stock. Distributions of shares of the Company's common stock are not taxable to a participant at the time of distribution. Instead, a participant is taxed at the time the participant sells such shares. If the distribution is a lump sum distribution, the amount of gain subject to tax is equal to the amount received upon the sale of the stock less the amount contributed to the plan in exchange for such stock. Any unrealized appreciation inherent in the stock at the time of distribution will be taxed at long-term capital gains rates. Any subsequent appreciation in the stock will be capital gains, and will be long-term capital gains if the participant owns the stock for at least one year at the time of sale. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See Item 7, "Management's Discussion and Analysis of Financial Conditions and Results of Operations - Related Party Transactions." Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Aggregate fees for professional services rendered for the Company by PricewaterhouseCoopers LLP ("PricewaterhouseCoopers") as of or for the years ended September 30, 2003 and 2002, were: 60
Fiscal Fiscal Type of Fee 2003 2002 Audit Fees $ 766,000 $ 472,000 Audit Related Fees 2,022,000 - Tax Fees 672,000 511,000 All Other Fees - 893,000 ---------- ---------- Total $3,460,000 $1,876,000 ========== ==========
The Audit fees for the years ended September 30, 2003 and 2002, respectively, were for professional services rendered for the audits of the consolidated financial statements of the Company and statutory audits. The Audit Related fees as of the year ended September 30, 2003 were for services related to due diligence and audits in connection with acquisitions, internal control reviews, and an employee benefit plan audit. Tax fees as of the years ended September 30, 2003 and 2002, respectively, were for services related to: tax compliance, international tax planning and strategies, and state and local tax advice. All Other fees as of the year ended September 30, 2002 were for services rendered for assistance in connection with the implementation of an information systems module. Procedures for Audit Committee Pre-Approval of Audit and Permissible Non- Audit Services of Independent Auditor The Charter for the Audit Committee of the Company's Board of Directors provides that the Audit Committee pre-approve, on an annual basis, the audit, audit-related, tax and other non-audit services to be rendered by the Company's accountants based on historical information and anticipated requirements for the following fiscal year. The Audit Committee must pre-approve specific types or categories of engagements constituting audit, audit-related, tax and other non-audit services as well as the range of fee amounts corresponding to each such engagement. 61 PART IV Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements. Reference is made to the financial statements listed in Section 1 of the Index to Consolidated Financial Statements and Schedules in this Report. (a)(2) Financial Statement Schedule. Reference is made to the financial statement schedule listed in Section 2 of the Index to Consolidated Financial Statements and Schedules in this Report. All other schedules have been omitted as not required, not applicable or because the information required to be presented is included in the financial statements and related notes. (a)(3) Exhibits. The following exhibits are filed as a part of this Report or incorporated by reference and will be furnished to any security holder upon request for such exhibit and payment of any reasonable expenses incurred by the Company. A security holder should send requests for any of the exhibits set forth below to the Company, 90 Orville Drive, Bohemia, New York, 11716; Attention: General Counsel.
Exhibit No. Description ----------- ----------------------------------------------- 3.1 Restated Certificate of Incorporation of NBTY, Inc., as amended(1) 3.2 Amended and Restated By-Laws of NBTY, Inc.* 4.1 Indenture, dated as of September 23, 1997, between NBTY, Inc. and IBJ Schroder Bank & Trust Company, as Trustee, relating to $150,000,000 in aggregate principal amount of 8 5/8% Senior Subordinated Notes due 2007, Series A and Series B(1) 10.1 Employment Agreement, effective October 1, 2002, by and between NBTY, Inc. and Scott Rudolph(2) 10.2 Employment Agreement, effective October 1, 2002, by and between NBTY, Inc. and Harvey Kamil(2) 10.3 First Amendment to Consulting Agreement, effective January 1, 2003, by and between NBTY, Inc. and Rudolph Management Associates, Inc.* 62 10.4 NBTY, Inc. Employees' Stock Ownership Plan, dated December 28, 1999(2) 10.5 Amendment to the NBTY, Inc. Employees' Stock Ownership Plan, effective January 1, 2000(2) 10.6 NBTY, Inc. Year 2002 Stock Option Plan(3) 10.7 Credit Agreement dated as of July 24, 2003 among NBTY, INC., as Borrower, The Several Lenders from Time to Time Parties Hereto, JPMORGAN CHASE BANK, as Administrative Agent and Collateral Agent, and FLEET NATIONAL BANK, as Syndication Agent* 10.8 Guarantee and Collateral Agreement made by NBTY, INC. and the other Grantors party hereto in favor of JPMORGAN CHASE BANK, as Administrative Agent dated as of July 24, 2003* 10.9 Rexall Sundown, Inc. Purchase Agreement, dated as of June 9, 2003, among Royal Numico N.V., Numico USA and NBTY, Inc.(4) 21.1 Subsidiaries of NBTY, Inc.* 23.1 Consent of Independent Accountants* 31.1 Rule 13a-14(a) Certification of Chief Executive Officer* 31.2 Rule 13a-14(a) Certification of Chief Financial Officer* 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* - -------------------- * Filed herewith Incorporated by reference to NBTY, Inc.'s Registration Statement on Form S-4, filed on November 5, 1997 (Registration No. 333-39527). 63 Incorporated by reference to NBTY, Inc.'s Form 10-K filed on December 20, 2002 (File #0-10666) Incorporated by reference to NBTY, Inc. Proxy Statement, dated March 25, 2002 (File # 0-10666). Incorporated by reference to NBTY, Inc. Form 8-K filed on August 5, 2003 (File #0-10666).
(b) Reports on Form 8-K. The Company filed the following reports on Form 8-K during the fourth quarter of the fiscal year ended September 30, 2003: * July 29, 2003, announcing the completion of the purchase of Rexall Sundown, Inc. * August 5, 2003, attaching the Purchase Agreement, dated as of June 9, 2003, among Royal Numico, N.V., Numico USA, Inc. and NBTY, Inc. * December 15, 2003, amending the Form 8-K filed on August 5, 2003, to incorporate pro forma consolidated financial information relating to the acquisition of Rexall Sundown, Inc. The exhibits required by Item 601 of Regulation S-K to be filed as part of this Report or incorporated herein by reference are listed in Item 15(a)(3) above. (d) See Item 15(a)(2) of this Report. 64 NBTY, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE Page Number ------ 1. Financial Statements Report of Independent Auditors F-1 Consolidated Balance Sheets as of September 30, 2003 and 2002 F-2 Consolidated Statements of Income for the years ended September 30, 2003, 2002 and 2001 F-3 Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended September 30, 2003, 2002 and 2001 F-4 Consolidated Statements of Cash Flows for the years ended September 30, 2003, 2002 and 2001 F-5 Notes to Consolidated Financial Statements F-7 2. Financial Statement Schedule Schedule II S-1 65 NBTY, Inc. and Subsidiaries Consolidated Financial Statements September 30, 2003, 2002 and 2001 NBTY, Inc. and Subsidiaries Consolidated Financial Statements Index September 30, 2003, 2002 and 2001 - --------------------------------------------------------------------------- Page(s) Report of Independent Auditors 1 Consolidated Financial Statements Balance Sheets 2 Statements of Income 3 Statements of Stockholders' Equity and Comprehensive Income 4 Statements of Cash Flows 5-6 Notes to Financial Statements 7 [PRICEWATERHOUSECOOPERS LETTERHEAD] - --------------------------------------------------------------------------- PricewaterhouseCoopers LLP 401 Broad Hollow Rd. Melville NY 11747 Telephone (631) 753 2700 Facsimile (631) 753 2800 Report of Independent Auditors To the Board of Directors and Stockholders of NBTY, Inc. and Subsidiaries: In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of NBTY, Inc. and its subsidiaries at September 30, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 1, the Company changed the manner in which it accounts for goodwill and other intangible assets upon adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", on October 1, 2001. PricewaterhouseCoopers LLP November 11, 2003 F-1 NBTY, Inc. and Subsidiaries Consolidated Balance Sheets September 30, 2003 and 2002 (dollars and shares in thousands) - ---------------------------------------------------------------------------
2003 2002 Assets Current assets Cash and cash equivalents $ 49,349 $ 26,229 Investments in bonds 4,158 8,194 Accounts receivable, less allowance for doubtful accounts of $7,100 in 2003 and $4,194 in 2002 89,430 36,825 Inventories 314,091 204,402 Deferred income taxes 37,021 11,206 Prepaid expenses and other current assets 44,736 24,691 ---------- -------- Total current assets 538,785 311,547 Property, plant and equipment, net 298,344 216,245 Goodwill 213,362 144,999 Intangible assets, net 137,469 48,413 Other assets 16,423 8,936 ---------- -------- Total assets $1,204,383 $730,140 ========== ======== Liabilities and Stockholders' Equity Current liabilities Current portion of long-term debt and capital lease obligations $ 12,841 $ 23,044 Accounts payable 87,039 48,616 Accrued expenses and other current liabilities 124,630 54,177 ---------- -------- Total current liabilities 224,510 125,837 Long-term debt 413,989 163,874 Deferred income taxes 40,213 16,928 Other liabilities 10,872 4,244 ---------- -------- Total liabilities 689,584 310,883 ---------- -------- Commitments and contingencies (Notes 11 and 17) Stockholders' equity Common stock, $.008 par; authorized 175,000 shares in 2003 and 2002; issued and outstanding 66,620 shares in 2003 and 66,322 shares in 2002 533 529 Capital in excess of par 130,208 126,283 Retained earnings 369,453 287,868 ---------- -------- 500,194 414,680 Accumulated other comprehensive income 14,605 4,577 ---------- -------- Total stockholders' equity 514,799 419,257 ---------- -------- Total liabilities and stockholders' equity $1,204,383 $730,140 ========== ========
The accompanying notes are an integral part of these consolidated financial statements. F-2 NBTY, Inc. and Subsidiaries Consolidated Statements of Income Years Ended September 30, 2003, 2002 and 2001 (dollars and shares in thousands, except per share amounts) - ---------------------------------------------------------------------------
2003 2002 2001 Net sales $1,192,548 $964,083 $806,898 ---------- -------- -------- Costs and expenses Cost of sales 554,804 433,611 355,167 Discontinued product charge 4,500 - - Catalog printing, postage and promotion 66,455 47,846 49,410 Selling, general and administrative 435,748 348,334 315,228 Litigation recovery of raw material costs - (21,354) ---------- -------- -------- 1,061,507 808,437 719,805 ---------- -------- -------- Income from operations 131,041 155,646 87,093 ---------- -------- -------- Other income (expense) Interest (17,384) (18,499) (21,958) Investment write down (4,084) Miscellaneous, net 5,424 1,560 2,748 ---------- -------- -------- (16,044) (16,939) (19,210) ---------- -------- -------- Income before income taxes 114,997 138,707 67,883 Provision for income taxes 33,412 42,916 25,958 ---------- -------- -------- Net income $ 81,585 $ 95,791 $ 41,925 ========== ======== ======== Net income per share Basic $ 1.23 $ 1.45 $ 0.64 Diluted $ 1.19 $ 1.41 $ 0.62 Weighted average common shares outstanding Basic 66,452 65,952 65,774 Diluted 68,538 67,829 67,125
The accompanying notes are an integral part of these consolidated financial statements. F-3 NBTY, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity and Comprehensive Income Years ended September 30, 2003, 2002 and 2001 (dollars and shares in thousands) - ---------------------------------------------------------------------------
Accumulated Other Common Stock Treasury Stock Compre- Total ----------------- Capital ----------------- Stock hensive Total Compre- Number of in Excess Retained Number of Subscriptions Income Stockholders' hensive Shares Amount of Par Earnings Shares Amount Receivable (Loss) Equity Income --------- ------ --------- -------- --------- ------ ------------- ----------- ------------- ------- Balance, September 30, 2000 68,713 $548 $123,798 $163,300 235 $ (1,512) $(839) $(12,852) $272,443 Components of com- prehensive income Net income 41,925 41,925 $ 41,925 Foreign currency translation adjustment (126) (126) (126) -------- Purchase of treasury shares, at cost 3,023 (15,699) (15,699) $ 41,799 ======== Treasury stock retired (3,258) (26) (5,144) (12,041) (3,258) 17,211 - Exercise of stock options 458 4 2,600 2,604 Tax benefit from exercise of stock options 1,259 1,259 ------ ---- -------- -------- ------ -------- ----- -------- -------- Balance, September 30, 2001 65,913 526 122,513 193,184 - - (839) (12,978) 302,406 Components of com- prehensive income Net income 95,791 95,791 $ 95,791 Foreign currency translation adjustment 17,603 17,603 17,603 Change in net un- realized gain on available-for- sale investments (48) (48) (48) -------- Treasury stock retired (71) (1) (113) (1,107) (1,221) $113,346 ======== Exercise of stock options 480 4 2,068 2,072 Repayment of stock subscriptions receivable 839 839 Tax benefit from exercise of stock options 1,815 1,815 ------ ---- -------- -------- ------ -------- ----- -------- -------- Balance, September 30, 2002 66,322 529 126,283 287,868 - - - 4,577 419,257 Components of com- prehensive income Net income 81,585 81,585 $ 81,585 Foreign currency translation adjustment 9,980 9,980 9,980 Change in net un- realized gain on available-for- sale investments 48 48 48 -------- Shares issued and contributed to ESOP 100 1 1,710 1,711 $ 91,613 ======== Exercise of stock options 198 3 1,143 1,146 Tax benefit from exercise of stock options 1,072 1,072 ------ ---- -------- -------- ------ -------- ----- -------- -------- Balance, September 30, 2003 66,620 $533 $130,208 $369,453 - $ - $ - $ 14,605 $514,799 ====== ==== ======== ======== ====== ======== ===== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-4 NBTY, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years ended September 30, 2003, 2002 and 2001 (dollars in thousands) - ---------------------------------------------------------------------------
2003 2002 2001 Cash flows from operating activities Net income $ 81,585 $ 95,791 $ 41,925 Adjustments to reconcile net income to net cash provided by operating activities (Gain) loss on disposal/sale of property, plant and equipment (711) 102 385 Depreciation and amortization 46,884 42,192 44,946 Foreign currency exchange rate (gain) loss (334) 1,556 482 Amortization of deferred financing costs 1,003 782 782 Amortization of bond discount 124 124 124 Investment write down 4,084 - - Discontinued product charge 4,500 - - Allowance for doubtful accounts (2,906) 972 1,995 Deferred income taxes 6,033 (5,829) (2,036) Compensation expense for ESOP 1,711 - - Tax benefit from exercise of stock options 1,072 1,815 1,259 Changes in assets and liabilities, net of acquisitions Accounts receivable (1,466) (7,011) (3,652) Inventories (28,379) (14,277) (34,723) Prepaid expenses and other current assets (15,855) (3,432) 343 Other assets 616 (586) 119 Accounts payable (2,773) (3,442) (11,959) Accrued expenses and other current liabilities 16,344 (3,670) 23,277 --------- -------- --------- Net cash provided by operating activities 111,532 105,087 63,267 --------- -------- --------- Cash flows from investing activities Cash paid for acquisitions, net of cash acquired (289,676) (7,702) (63,010) Purchase of property, plant and equipment (37,510) (21,489) (37,197) Purchase of short-term investments - (8,242) - Cash held in escrow - - (10,000) Release of cash held in escrow 2,403 4,600 - Proceeds from sale of property, plant and equipment 1,498 1,004 4,232 Proceeds from sale of intangibles - 53 - Increase in intangible assets - - (159) --------- -------- --------- Net cash used in investing activities (323,285) (31,776) (106,134) --------- -------- --------- Continued The accompanying notes are an integral part of these consolidated financial statements. F-5 NBTY, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years ended September 30, 2003, 2002 and 2001 (dollars and shares in thousands) - --------------------------------------------------------------------------- 2003 2002 2001 Cash flows from financing activities Proceeds from borrowings under long-term agreements 275,000 - - Payments for debt issuance costs (7,500) - - Principal payments under long-term debt agreements and capital leases (35,211) (85,353) (12,780) Net borrowings under Credit & Guarantee Agreement - - 71,502 Purchase of treasury stock - - (15,699) Proceeds from stock options exercised 1,146 1,899 2,604 --------- -------- --------- Net cash provided by (used in) financing activities 233,435 (83,454) 45,627 --------- -------- --------- Effect of exchange rate changes on cash and cash equivalents 1,438 1,938 210 --------- -------- --------- Net increase (decrease) in cash and cash equivalents 23,120 (8,205) 2,970 Cash and cash equivalents Beginning of year 26,229 34,434 31,464 --------- -------- --------- End of year $ 49,349 $ 26,229 $ 34,434 ========= ======== ========= Supplemental disclosure of cash flow information Cash paid during the period for interest $ 17,709 $ 18,513 $ 23,019 Cash paid during the period for income taxes $ 34,698 $ 55,101 $ 22,269 Non-cash investing and financing information Acquisitions accounted for under the purchase method are summarized as follows: 2003 2002 2001 Fair value of assets acquired $ 411,981 $ 7,702 $ 69,165 Liabilities assumed (119,479) - (4,728) Less: Cash acquired (2,826) - (1,427) --------- -------- --------- Net cash paid $ 289,676 $ 7,702 $ 63,010 ========= ======== =========
During fiscal 2003, the Company issued 100 shares of NBTY stock (having a total then market value of approximately $1,711) as a contribution to the ESOP plan. During fiscal 2002, certain officers surrendered 61 shares as consideration for stock subscriptions receivable plus interest, aggregating $1,048. Such shares were retired by the Company during 2002. The accompanying notes are an integral part of these consolidated financial statements. F-6 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 2003, 2002 and 2001 (in thousands, except per share amounts and number of locations) - --------------------------------------------------------------------------- 1. Business Operations and Summary of Significant Accounting Policies Business Operations The Company (as defined below) manufactures and sells vitamins, food supplements, and health and beauty aids primarily in the United States ("U.S."), the United Kingdom ("U.K."), Ireland and Holland. The processing, formulation, packaging, labeling and advertising of the Company's products domestically 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 and Ireland, 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. In addition, there are various statutory instruments and European Community ("E.C.") regulations governing specific areas such as the use of sweeteners, coloring and additives in food. Trading standards officers under the control of the Department of Trade and Industry also regulate matters such as the cleanliness of the properties where food is produced and sold. In the U.K., the Medicines and Healthcare Products Regulatory Agency ("MHRA") now has responsibility for the implementation and enforcement of the 1968 Medicines Act, and is the licensing authority for medicinal products. The MHRA directly employs enforcement officers from a wide range of backgrounds, including the police, and with a wide range of skills, including information technology. The MHRA is an Executive Agency of the Department of Health and is responsible for the safety of herbal medicines. The MHRA decides whether a product is a medicine or not and, if so, considers whether it can be licensed. It determines the status of a product by considering whether it is medicinal by "presentation" or by "function." Many, though not all, herbal remedies are considered "medicinal" by virtue of these two tests. In Ireland, the sale of nutritional supplements and herbal products falls under the jurisdiction of the Irish Medicines Board ("IMB"). Its role is similar in nature, but not identical to that of the MHRA in the U.K. as described above. In Holland, the regulatory environment is similar to the U.K. in terms of availability of products. Holland currently has the same liberal market, with no restrictions on potency of nutrients. Licensed herbal medicines are available. However, there are some herbal medicines which are sold freely as in the U.K. without the need to be licensed, depending on the claims made for them. Holland is also more liberal regarding certain substances, for which unlicensed sales are allowed. The Government department dealing with this sector is the Ministry for Health, Welfare and Sport. Responsibility for food safety falls to the Keuringsdienst van Waren (Inspectorate for Health Protection and Veterinary Public Health). This authority deals with all nutritional products. The Medicines Evaluation Board, which is the equivalent of the U.K.'s MHRA, is charged with the responsibility for the safety of medicines which are regulated under the Supply of Medicines Act. Overall, the market prospects for Holland are, in general, similar to those outlined for the U.K. above. F-7 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 2003, 2002 and 2001 (in thousands, except per share amounts and number of locations) - --------------------------------------------------------------------------- Principles of Consolidation and Basis of Presentation The consolidated financial statements of NBTY, Inc. and Subsidiaries (the "Company" or "NBTY") include the accounts of the Company and its wholly owned subsidiaries. The Company's fiscal year ends on September 30. All intercompany accounts and transactions have been eliminated. Revenue Recognition The Company applies the provisions of Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements, ("SAB 101"). The Company recognizes revenue from products shipped when title and risk of loss has passed to its customers, and with respect to its own retail store operations, upon the sale of its products. The Company's net sales represent gross sales invoiced to customers, less certain related charges, including discounts, returns, rebates and other allowances. The Company has no single customer that represents more than 10 percent of annual net sales of the Company for each of the fiscal years ended September 30, 2003, 2002 and 2001. For the fiscal years ended September 30, 2003, 2002 and 2001, one customer, two customers and one customer, respectively, represented, individually, more than 10 percent of the wholesale division's net sales. Upon adoption of SAB 101, effective October 1, 2000, the impact for the year ended September 30, 2001 were reductions to sales of approximately $4,000 and to net income of approximately $1,400. Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. The most significant estimates include the valuation of inventories, the allowance for doubtful accounts receivable and returns and discounts, income taxes, litigation reserves and the recoverability of long-lived assets. Actual results could differ from those estimates. Concentration of Credit Risk Financial instruments which potentially subject the Company to credit risk consist primarily of cash and cash equivalents and accounts receivable. Cash balances may, at times, exceed FDIC limits on insurable amounts. The Company mitigates its risk by investing in or through major financial institutions. The Company performs on-going credit evaluations of its customers and adjusts credit limits based upon payment history and the customer's current credit worthiness, as determined by the review of their current credit information. Collections and payments from customers are continuously monitored. The Company also maintains an allowance for doubtful accounts, which is based upon historical experience as well as specific customer collection issues that have been identified. While such bad debt expenses have historically been within expectations and allowances established, the Company cannot guarantee that it will continue to experience the same credit loss rates that it has in the past. One customer accounted for 20 percent and 24 percent of the Company's accounts receivable at September 30, 2003 and 2002, respectively. Additionally, a new customer for fiscal 2003 accounted for 10 percent of the Company's accounts F-8 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 2003, 2002 and 2001 (in thousands, except per share amounts and number of locations) - --------------------------------------------------------------------------- receivable at September 30, 2003. The loss of one or more of these customers is not expected to have a material impact on the Company's consolidated financial position or results of operations. Inventories Inventories are stated at the lower of cost or market. Cost is primarily determined on the first-in, first-out (FIFO) method. The cost elements of inventory include materials, labor and overhead. In fiscal 2003, 2002 and 2001, no one supplier provided more than ten percent of the Company's overall purchases. In fiscal 2002, one supplier provided more than ten percent of the Company's raw material purchases. No one supplier provided more than ten percent of the Company's raw material purchases in the other fiscal years presented. Prepaid Catalog Costs Mail order production and mailing costs are capitalized as prepaid catalog costs within other assets and charged to expense over the catalog period, which typically approximates two months. Advertising All media and advertising costs are generally expensed as incurred. Total expenses relating to advertising and promotion for fiscal 2003, 2002 and 2001 were $40,832, $26,019 and $28,747, respectively. Included in prepaid expenses and other current assets is approximately $3,409 and $1,044 relating to prepaid advertising at September 30, 2003 and 2002, 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. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the estimated useful lives of the related assets or lease term. 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. Goodwill and Intangible Assets Goodwill represents the excess of purchase price over the fair value of identifiable net assets of companies acquired. The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Intangible Assets as of October 1, 2001. This statement requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. The Company measures impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in its current business model or another valuation technique. Prior to fiscal 2002, goodwill was amortized over periods not exceeding 40 years. Other definite lived intangibles are amortized on a straight-line basis over periods not exceeding 20 years. Impairment of Long-Lived Assets The Company follows the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 requires recognition of impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment charge is recognized in the event the net book value of F-9 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 2003, 2002 and 2001 (in thousands, except per share amounts and number of locations) - --------------------------------------------------------------------------- such assets exceeds the future undiscounted cash flows attributable to such assets. During fiscal 2003, 2002 and 2001, the Company recognized impairment losses of $1,117, $700 and $500 respectively, on assets to be held and used. The impairment losses related primarily to leasehold improvements and furniture and fixtures for U.S. retail operations and were included in the Consolidated Statements of Income under the caption "selling, general and administrative" expenses. Stock-Based Compensation In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB Statement No. 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for annual and interim periods beginning after December 15, 2002. The Company has adopted the disclosure requirements of SFAS No. 123 and SFAS No. 148. The adoption of SFAS No. 148 did not have a material impact on the Company's consolidated financial position or results of operations. The Company has elected to continue to measure compensation for stock options issued to its employees and outside directors pursuant to APB No. 25 under the intrinsic value method. All stock options are granted with an exercise price at or above fair market value at date of grant. Accordingly, no compensation expense has been recognized in connection with the issuance of stock options. Had compensation cost been determined based upon the fair value of the stock options at grant date, consistent with the method under SFAS No. 123, the Company's net income and earnings per share for fiscal 2001 would have been reduced to the following pro forma amounts indicated. There were no grants during fiscal 2003 or 2002. Therefore, the pro forma and actual net income and related EPS are the same as amounts reported. F-10 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 2003, 2002 and 2001 (in thousands, except per share amounts and number of locations) - ---------------------------------------------------------------------------
2003 2002 2001 Net income, as reported $81,585 $95,791 $41,925 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects - - (1,891) ------- ------- ------- Pro forma net income $81,585 $95,791 $40,034 ======= ======= ======= Basic earnings per share Basic - as reported $ 1.23 $ 1.45 $ 0.64 ------- ------- ------- Basic - pro forma $ 1.23 $ 1.45 $ 0.61 ------- ------- ------- Diluted earnings per share Diluted - as reported $ 1.19 $ 1.41 $ 0.62 ------- ------- ------- Diluted - pro forma $ 1.19 $ 1.41 $ 0.60 ------- ------- -------
The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants in 2001: (a) expected life of option of 6.7 years; (b) dividend yield of zero percent; (c) expected volatility of 70 percent; and (d) risk- free interest rate of 5 percent. Foreign Currency The financial statements of international subsidiaries are translated into U.S. Dollars using the exchange rate at each balance sheet date for assets and liabilities and an average exchange rate for each period for revenues, expenses, gains and losses. Where the local currency is the functional currency, translation adjustments are recorded as a separate component of stockholders' equity. During fiscal 2003, 2002 and 2001, the Company recognized foreign currency transaction gains (losses) of $334, $(1,556) and $(482), respectively. Comprehensive Income In accordance with SFAS No. 130, Reporting Comprehensive Income, the Company is required to display comprehensive income and its components as part of its complete set of financial statements. Comprehensive income represents the change in stockholders' equity resulting from transactions other than stockholder investments and distributions. Other comprehensive income includes certain changes in equity that are excluded from the Company's net income, specifically, the unrealized gains and losses on foreign currency translation adjustments. 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 basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company estimates the degree to which tax assets and loss carryforwards will result in a benefit based on expected profitability by tax jurisdiction. A valuation allowance for such tax assets and loss carryforwards is provided when it is determined that such assets will more likely than not go unused. If it becomes more likely than F-11 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 2003, 2002 and 2001 (in thousands, except per share amounts and number of locations) - --------------------------------------------------------------------------- not that a tax asset or loss carryforward will be used, the related valuation allowance on such assets would be reversed. If actual future taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary. 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. Shipping and Handling Costs The Company incurs shipping and handling costs in all divisions of its operations. These costs are included in selling, general and administrative costs and are $32,860, $23,985 and $19,799 for the fiscal years ended September 30, 2003, 2002 and 2001, respectively. Change in Accounting Estimate During fiscal 2001, the Company changed its accounting estimate for the useful lives of certain long-lived assets, primarily leasehold improvements and furniture and fixtures, based upon the terms of the lease agreements which approximate the useful lives of the assets. The effect of this change in estimate has been accounted for on a prospective basis and resulted in a decrease in depreciation and amortization expense of approximately $1,248 for the year ended September 30, 2001. Reclassifications Certain reclassifications have been made to conform prior year amounts to the current year presentation. New Accounting Developments In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and must be applied to the Company's existing financial instruments effective July 1, 2003, the beginning of the first fiscal period after June 15, 2003. The Company has not entered into any financial instruments within the scope of SFAS No. 150 since May 31, 2003, nor does it currently hold any financial instruments within its scope. In May 2003, the Emerging Issues Task Force ("EITF") reached a consensus on EITF Issue 01-8, Determining Whether an Arrangement is a Lease, which provides guidance on identifying leases that may be embedded in contracts or other arrangements that sell or purchase products or services. The evaluation of whether an arrangement contains a lease within the scope of SFAS No. 13, Accounting for Leases, should be based on an evaluation of whether the arrangement conveys the right to use and control specific property or equipment. The consensus requires sellers to report revenues from the leasing component of these arrangements as leasing or rental income rather than revenues from product sales or services, and requires purchasers to report the costs from these arrangements as costs under capital leases. This could affect the timing and amount of recognition of revenues and expenses and the classification of assets and liabilities on F-12 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 2003, 2002 and 2001 (in thousands, except per share amounts and number of locations) - --------------------------------------------------------------------------- the balance sheet, and it could require additional footnote disclosure of lease terms and future minimum lease commitments. This consensus is effective for contracts entered into or significantly modified after July 1, 2003. The Company does not have relationships with customers that meet the EITF 01-8 definition of a lease arrangement. As such, the adoption of this issue did not impact the Company's consolidated financial position, results of operations, or disclosure requirements. In January 2003, the FASB issued Interpretation No. 46, ("FIN") Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin ("ARB") No. 51. FIN 46 addresses consolidation by business enterprises of variable interest entities. FIN 46 applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first reporting period ending after December 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company believes that the provisions of FIN 46 will not have any impact on the Company's consolidated financial position or results of operations. In November 2002, the FASB issued FIN No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, which addresses the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. FIN 45 also requires the guarantor to recognize a liability for the non-contingent component of the guarantee, which is the obligation to stand ready to perform in the event that specified triggering events or conditions occur. The recognition and measurement provisions of FIN 45 are effective for all guarantees entered into or modified after December 31, 2002. The Company does not enter into such transactions. Therefore the adoption of this standard did not impact its consolidated financial position, results of operations, or disclosure requirements. In November 2002, the EITF issued EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF No. 00-21 addresses certain aspects of the accounting by a company for arrangements under which it will perform multiple revenue-generating activities. EITF No. 00-21 addresses when and how an arrangement involving multiple deliverables should be divided into separate units of accounting. EITF No. 00-21 provides guidance with respect to the effect of certain customer rights due to company nonperformance on the recognition of revenue allocated to delivered units of accounting. EITF No. 00-21 also addresses the impact on the measurement and/or allocation of arrangement consideration of customer cancellation provisions and consideration that varies as a result of future actions of the customer or the company. Finally, EITF No. 00-21 provides guidance with respect to the recognition of the cost of certain deliverables that are excluded from the revenue accounting arrangement. The provisions of EITF No. 00-21 apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF No. 00-21 did not have a material effect on its consolidated financial position or results of operations. F-13 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 2003, 2002 and 2001 (in thousands, except per share amounts and number of locations) - --------------------------------------------------------------------------- 2. Acquisitions Fiscal 2003 Acquisitions Rexall On July 25, 2003, NBTY acquired all of the issued and outstanding capital stock of Rexall Sundown, Inc. ("Rexall") for $250,000 in cash (subject to adjustment based upon finalization of working capital balances at date of closing) from Numico USA, Inc., an indirect subsidiary of Royal Numico N.V., through the acquisition of certain partnership and limited liability company interests. The acquisition was financed by a new senior credit facility (see Note 8). The Company also incurred approximately $6,000 of direct transaction costs as well as approximately $5,000 in insurance and other indirect costs for a total purchase price of approximately $261,000. Additionally, finance related costs of approximately $7,500 were paid to secure the financing for this acquisition which will be amortized until its maturity, which approximates six years. The Company has retained essential Rexall employees consisting of product development, sales and service personnel. The transaction will complement NBTY's existing wholesale products and provide NBTY with an enhanced sales infrastructure and additional manufacturing capacity. Rexall's portfolio of nutritional supplement brands includes Rexall(R), Sundown(R), Osteo Bi- Flex(R), Carb Solutions(R), MET-Rx(R) and WORLDWIDE Sport Nutrition(R). This acquisition contributed $72,815 in sales and an operating profit of $7,796 to NBTY's wholesale segment for the fiscal year 2003. The Company accounted for the acquisition under the purchase method of accounting in accordance with SFAS No. 141, Business Combinations. Under the purchase method of accounting, the total purchase price was allocated to the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values. The excess of the purchase price over those fair values was recorded as goodwill. The fair value assigned to the tangible and intangible assets acquired and liabilities assumed were based on estimates and assumptions provided by management, and other information compiled by management, including a valuation, prepared by an independent valuation specialist that utilized established valuation techniques appropriate for the industry. Upon completion of the valuation of the fair value of the net assets acquired (which the Company expects to finalize by the end of fiscal 2004), actual results may differ from those presented herein. The total goodwill recognized in connection with this acquisition was $34,037, all of which relates to the wholesale segment. None of this goodwill is expected to be deductible for tax purposes. Although management believes that the preliminary fair values and allocation of the estimated purchase price are reasonable, final valuations and appraisals may differ significantly from the amounts reflected in the unaudited pro forma condensed consolidated financial information. F-14 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 2003, 2002 and 2001 (in thousands, except per share amounts and number of locations) - --------------------------------------------------------------------------- The preliminary purchase price allocation is as follows: Assets acquired Cash $ 906 Accounts receivable, net 41,821 Inventories 71,781 Other current assets 3,220 Property, plant and equipment 76,115 Deferred tax assets 32,501 Other assets 2,638 Goodwill 34,037 Intangibles 94,500 -------- Total assets acquired 357,519 -------- Liabilities assumed Accounts payable 18,358 Accrued liabilities 47,890 Deferred tax liabilities 24,679 Other liabilities 5,400 -------- Total liabilities assumed 96,327 -------- Net assets acquired $261,192 ========
The estimated fair value of property, plant and equipment is as follows:
Fair Useful Life Value (Years) Land $10,137 Buildings 32,620 39 Machinery and equipment 22,232 3 - 10 Leasehold improvements 1,765 5 Furniture and fixtures 3,510 3 - 15 Computer equipment 5,851 3 ------- Total property, plant and equipment $76,115 =======
The estimated fair value of identifiable intangible assets acquired is as follows:
Fair Useful Life Value (Years) Brands $78,000 20 Private label relationships 11,500 20 Small tablet patent 5,000 19 ------- Total intangible assets $94,500 =======
F-15 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 2003, 2002 and 2001 (in thousands, except per share amounts and number of locations) - --------------------------------------------------------------------------- The acquisition gave rise to the consolidation and elimination of certain Rexall personnel positions and the Company provided certain balance sheet adjustments for the same in accordance with EITF No. 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination. At the closing of the acquisition, the Company anticipated headcount reductions across all areas of Rexall and, as such, included an estimated accrual for workforce reductions of approximately $12,000 comprised of severance, employee benefits and outplacement support. The Company's statements of income include Rexall's results from the acquisition date. The following unaudited condensed pro forma information presents a summary of consolidated results of operations of the Company and Rexall as if the acquisition had occurred at the beginning of fiscal 2002, with pro forma adjustments to give effect to the amortization of definite lived intangibles, adjustments in depreciation, interest expense on acquisition debt, elimination of impairment charges on intangibles recorded by Rexall, as well as the elimination of the cumulative effect of accounting change resulting from the adoption of SFAS No. 142, elimination of trademark fees, and certain other adjustments, together with related income tax effects. The pro forma information does not give effect to anticipated intercompany product sales, or any incremental direct costs or adjustments for liabilities resulting from integration plans that may be recorded in connection with the acquisition, or potential cost savings, which may result from the consolidation of certain operations of NBTY and Rexall. The unaudited pro forma condensed consolidated financial information is based on estimates and assumptions and includes intercompany charges paid to Rexall's former parent company, Royal Numico N.V. These estimates and assumptions have been made solely for purposes of developing this pro forma information, which is presented for illustrative purposes only and is not necessarily indicative of the consolidated financial position or results of operations of future periods or the results that actually would have been realized had the entities been a single entity during these periods. The unaudited pro forma condensed consolidated financial information does not reflect future events that may occur after the acquisition has been completed. The unaudited pro forma condensed consolidated statement of operations data for the fiscal year ended September 30, 2003 has been derived by combining the audited historical consolidated statement of operations of NBTY for the year ended September 30, 2003 with the unaudited historical consolidated statement of operations of Rexall (a subsidiary of the Dutch company, Royal Numico N.V.) for the period October 1, 2002 through July 24, 2003. The unaudited pro forma condensed consolidated statement of operations data for the year ended September 30, 2002 has been derived by combining the audited historical consolidated statement of operations of NBTY for the year ended September 30, 2002 with the audited historical consolidated statement of operations of Rexall for the year ended December 31, 2002. F-16 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 2003, 2002 and 2001 (in thousands, except per share amounts and number of locations) - ---------------------------------------------------------------------------
Fiscal year ended Fiscal year ended September 30, September 30, 2003 2002 Pro Forma Pro Forma Consolidated Consolidated Net sales $1,534,154 $1,414,494 ---------- ---------- Net income before the cumulative effect of accounting change $ 32,528 $ 73,328 ========== ========== Net income $ 32,528 $ 73,328 ========== ========== Net income per share before the cumulative effect of accounting change Basic $ 0.49 $ 1.11 Diluted $ 0.47 $ 1.08 Net income per share Basic $ 0.49 $ 1.11 Diluted $ 0.47 $ 1.08 Weighted average common shares outstanding Basic 66,452 65,952 Diluted 68,538 67,829
Included in Rexall's loss from operations for the fiscal years 2003 and 2002 were non-recurring pre-tax expenses of $51,027 ($36,178 after-tax or $0.53 per diluted share) and $37,872 ($26,170 after-tax or $0.39 per diluted share), respectively. These expenses relate to charges incurred for inter-company expenses for such items as product mark-ups, litigation settlements, management stock purchase plan expenses and discontinued product charges related to ephedra. Excluding these non-recurring expenses, pro forma condensed consolidated net income for the fiscal years ended September 30, 2003 and 2002 would have been $68,706 (or $1.00 diluted earnings per share) and $99,498 (or $1.47 diluted earnings per share), respectively. De Tuinen On May 20, 2003, the Company acquired the De Tuinen chain of retail stores from Royal Ahold N.V. The De Tuinen chain operates 41 company owned stores and 24 franchised stores located throughout the Netherlands. This operation had total revenue of approximately 30,000 Euro ($30,200 U.S. Dollars) during 2002 and has been a wholly owned subsidiary of the Ahold group of companies since 1991. The purchase price for this business was approximately $14,551 in cash. Assets acquired and liabilities assumed include cash ($622), accounts receivable ($1,629), inventories ($3,103), property, plant and equipment ($4,991) and current liabilities ($1,513). The excess cost of investment over the net book value amounted to $5,719 and is classified as goodwill. None of this goodwill is expected to be deductible for tax purposes. This acquisition contributed $13,245 in sales and an insignificant operating loss for the fiscal year 2003. Health & Diet Group ("GNC (UK)") and FSC Wholesale ("FSC") On March 10, 2003, the Company acquired Health & Diet Group Ltd. and the FSC wholesale business from Royal Numico N.V. At the time of the acquisition, Health & Diet Group owned and operated 49 GNC stores in the U.K. FSC is a Manchester, U.K.-based wholesale operation F-17 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 2003, 2002 and 2001 (in thousands, except per share amounts and number of locations) - --------------------------------------------------------------------------- whose products are sold to health food stores and pharmacies. The FSC branded products include comprehensive ranges of multivitamins, single vitamins and minerals, herbal formulas, and tinctures. These consolidated operations had total sales of approximately $57,000 during 2002. The purchase price for these businesses was approximately $16,759 in cash. Assets acquired and liabilities assumed include cash ($1,298), accounts receivable ($3,691), inventories ($8,081), property, plant and equipment ($4,121), and current liabilities ($21,639). The excess cost of investment over the net book value amounted to $21,207 and is classified as goodwill. None of this goodwill is expected to be deductible for tax purposes. This transaction stipulates adjustments to the purchase price for agreed upon working capital requirements and inventory valuation procedures to be performed. The Company is still in the process of finalizing its purchase price allocation and therefore the assets and liabilities allocated above are subject to change. Upon completion of the valuation of the fair value of the net assets acquired which the Company expects to finalize by the end of fiscal 2004, actual results may differ from those presented herein. This acquisition contributed $27,468 in sales and an insignificant operating loss for the fiscal year 2003. Pro forma financial information related to De Tuinen, GNC (UK) and FSC are not provided as their operations were not significant individually or in the aggregate to NBTY as a whole. Such acquisitions were funded with internally generated cash. Fiscal 2002 Acquisitions Healthcentral.com On December 6, 2001, the Company acquired out of bankruptcy certain assets of HealthCentral.com for approximately $2,800 in cash. The assets include the customer list of the mail order operation, L&H Vitamins, and the customer list and URLs of Vitamins.com and WebRx.com. Assets acquired were classified as intangibles, specifically as a customer list ($2,800) which is being amortized over 15 years. These operations had sales for the 12 month period ended November 2001 of approximately $15,000 and a combined customer list of approximately 1,800 names, which has been merged into the existing customer base of the Puritan's Pride/Direct Response business. Knox NutraJoint(R) On December 13, 2001, the Company acquired certain assets of the Knox NutraJoint(R) and Knox for Nails nutritional supplement business from Kraft Foods North America, Inc. for approximately $4,456 in cash. Assets acquired include inventory ($2,456) and intangibles ($2,000). Approximately $1,800 of the $2,000 has been classified as a trademark with an indefinite life. Kraft's revenues for these brands were approximately $15,000 in 2001. NBTY has licensed the Knox trademark at no charge to Kraft Foods North America, Inc. for use in the Knox gelatine business, which was not part of the acquisition. All 2002 acquisitions were funded with internally generated cash. F-18 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 2003, 2002 and 2001 (in thousands, except per share amounts and number of locations) - --------------------------------------------------------------------------- Fiscal 2001 Acquisitions Global Group On May 25, 2001, the Company acquired certain assets and liabilities of the business of Global Health Sciences, Inc. and certain of its affiliated companies ("Global Group"). NBTY was the successful bidder in an auction ordered by a bankruptcy court in California. The purchase price was approximately $40,000 in cash, less adjustments. The Global Group is located in Anaheim, California and is a leading manufacturer of nutritional powders used for meal replacements, weight control and protein powders formulated to improve physical performance. Global Group also produces formulations for herbal, vitamin and mineral tablets. Assets acquired and liabilities assumed include cash ($1,427), accounts receivable ($8,569), inventory ($7,894), other current assets ($1,663), property, plant and equipment ($14,000) and current liabilities ($241). Global Group had sales of $171,000 for the 12-month period ended April 2001. The excess cost of investment over the net book value of Global Group at the date of acquisition amounted to $6,923, of which $6,681 was classified by the Company as other long-term assets in 2001. In fiscal 2003 and 2002, the Company received $4,600 and $1,850, respectively, from an escrow account relating to this acquisition. The remaining excess has been classified as goodwill. NatureSmart On May 15, 2001, the Company acquired certain assets and liabilities of WFM NatureSmart, LLC from Whole Foods Market, Inc. for approximately $29,000 in cash. NatureSmart, through its four divisions, manufactures and markets nutritional supplements, including vitamins, minerals, herbs and personal care products through mail order operations having approximately 350 active customers. It also manufactures private label vitamins for mass market, specialty retailers and healthcare professionals. Assets acquired and liabilities assumed include accounts receivable ($607), inventory ($10,882), other current assets ($618), property, plant and equipment ($3,462), intangibles ($1,893), and current liabilities ($4,487). The excess cost of investment over the net book value of NatureSmart at the date of acquisition resulted in an increase in goodwill of $16,395. NatureSmart's annual sales for the year ended September 24, 2000 were approximately $59,000. Both 2001 transactions were funded by borrowings under the Company's then existing Credit and Guarantee Agreement ("CGA"). These two acquisitions contributed $29,000 of sales and an insignificant operating profit for the Company's 2001 fiscal year. 3. Investments in Bonds In 2002, the Company purchased $8,242 high yield, less-than-investment- grade corporate debt securities. The Company did not intend to sell the shares in the near term and therefore classified them as available-for-sale securities. The investment was reported at fair value, with unrealized losses reported in accumulated other comprehensive income in stockholders' equity. The Company reviews marketable securities for impairment based on criteria that include the extent to which cost exceeds market value, the duration of the market decline, and the financial F-19 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 2003, 2002 and 2001 (in thousands, except per share amounts and number of locations) - --------------------------------------------------------------------------- condition and near-term prospects for the issuer. Based on this review, the Company determined that the decline in fair value was other-than-temporary. On September 4, 2003, the bond issuer declared bankruptcy. During the fiscal year ended September 30, 2003 other-than-temporary impairment writedowns charged against income were $4,084 and have been included in "Other income (expense)" in the Consolidated Statements of Income. The cost and estimated fair value for these available-for-sale investments in debt securities at September 30, 2003 by contractual maturity was $8,242 and $4,158, respectively, due beyond one year and within five years. 4. Inventories The components of inventories are as follows:
2003 2002 Raw materials $118,371 $ 77,051 Work-in-process 9,555 8,527 Finished goods 186,165 118,824 -------- -------- $314,091 $204,402 ======== ========
5. Property, Plant and Equipment Property, plant and equipment is as follows:
Depreciation and Amortization 2003 2002 Period (Years) Land $ 21,129 $ 10,781 Buildings and leasehold improvements 180,521 94,360 5 - 40 Machinery and equipment 121,556 95,961 3 - 10 Furniture and fixtures 103,287 142,026 3 - 15 Transportation equipment 9,579 5,411 4 Computer equipment 58,944 43,494 3 - 5 -------- -------- 495,016 392,033 Less accumulated depreciation and amortization 196,672 175,788 -------- -------- $298,344 $216,245 ======== ========
Depreciation and amortization of property, plant and equipment for the fiscal years ended September 30, 2003, 2002 and 2001 was approximately $41,406, $37,863 and $34,866, respectively. F-20 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 2003, 2002 and 2001 (in thousands, except per share amounts and number of locations) - --------------------------------------------------------------------------- Property, plant and equipment includes approximately $6,010 for assets recorded under capital leases at September 30, 2003 and 2002. Accumulated amortization of these capital leases at September 30, 2003 and 2002 was approximately $4,273 and $3,541, respectively. 6. Goodwill and Intangible Assets The carrying amount of acquired intangible assets is as follows:
2003 2002 ------------------------ ------------------------ Gross Gross carrying Accumulated carrying Accumulated Amortization amount amortization amount amortization period (years) Definite lived intangible assets Brands $ 78,000 $ 650 $ - $ - 20 Customer lists 61,368 19,843 64,283 18,668 6 - 15 Customer relations 11,500 96 - - 20 Trademark and licenses 2,414 2,399 2,429 2,188 2 - 3 Patents 5,000 44 - - 19 Covenants not to compete 2,605 2,186 2,605 1,848 3 - 5 -------- -------- ------- ------- 160,887 25,218 69,317 22,704 Indefinite lived intangible asset Trademark 1,800 - 1,800 - -------- -------- ------- ------- Total intangible assets $162,687 $25,218 $71,117 $22,704 ======== ======= ======= =======
The changes in the carrying amount of goodwill by segment for the fiscal year ended September 30, 2003 are as follows:
Retail: United Retail: Direct Response/ Wholesale States Europe Puritan's Pride Consolidated Balance at September 30, 2002 $ 4,892 $7,588 $117,322 $15,197 $144,999 Acquisitions during period 34,037 - 26,926 60,963 Foreign currency translation - - 7,400 7,400 ------- ------ -------- ------- -------- Balance at September 30, 2003 $38,929 $7,588 $151,648 $15,197 $213,362 ======= ====== ======== ======= ========
The Company currently has unamortized goodwill remaining from the acquisition of Holland & Barrett ($119,061), Rexall ($34,037), GNC (UK) ($22,019), NatureSmart ($15,164), Nutrition Warehouse ($7,510), De Tuinen ($5,852), Nature's Way ($4,748), Feeling Fine ($3,069), Global Group ($1,640), and other ($262), and the Company currently owns one trademark, Knox ($1,800), all of which are subject to the provisions of SFAS No. 142. The Company did not record any transition intangible asset impairment loss upon adoption of SFAS No. 142. The changes in the carrying amount of goodwill for the year ended September 30, 2003 primarily related to acquisitions. Aggregate amortization expense of definite lived intangible assets included in the Consolidated Statements of Income under the caption "selling, general and administrative" expenses in fiscal 2003, 2002 and 2001 was approximately $5,478, $4,329 and $3,862, respectively. F-21 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 2003, 2002 and 2001 (in thousands, except per share amounts and number of locations) - --------------------------------------------------------------------------- Estimated amortization expense for the next five fiscal years is as follows: For the fiscal year ending September 30, 2004 $7,188 2005 $6,979 2006 $7,220 2007 $8,488 2008 $8,443
As required by SFAS No. 142, the results of prior fiscal years have not been restated. A reconciliation of net income, as if SFAS No. 142 had been adopted, is presented below for the fiscal years ended September 30, 2003, 2002 and 2001, exclusive of amortization expense related to goodwill that is not being amortized:
2003 2002 2001 Reported net income $81,585 $95,791 $41,925 Addback: goodwill amortization - - 6,082 ------- ------- ------- Adjusted net income $81,585 $95,791 $48,007 ======= ======= ======= Basic earnings per share Reported net income $ 1.23 $ 1.45 $ 0.64 Addback: goodwill amortization - - 0.09 ------- ------- ------- Adjusted net income $ 1.23 $ 1.45 $ 0.73 ======= ======= ======= Diluted earnings per share Reported net income $ 1.19 $ 1.41 $ 0.62 ------- ------- ------- Addback: goodwill amortization - - 0.09 Adjusted net income $ 1.19 $ 1.41 $ 0.71 ======= ======= ========
F-22 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 2003, 2002 and 2001 (in thousands, except per share amounts and number of locations) - --------------------------------------------------------------------------- 7. Accrued Expenses and Other Current Liabilities The components of accrued expenses and other current liabilities are as follows:
2003 2002 Payroll and related taxes $ 19,869 $11,117 Accrued purchases 17,644 12,770 Rent 13,912 3,272 Customer deposits 12,951 5,854 Severance 12,049 - Litigation 10,207 - Income taxes payable 8,257 7,525 Co-op/coupons 6,275 949 Accrued interest 644 970 Other 22,822 11,720 -------- ------- $124,630 $54,177 ======== =======
8. Long-Term Debt
2003 2002 Senior debt 8-5/8% Senior subordinated notes due 2007, net of unamortized discount of $500 in 2003 and $624 in 2002 (a) $149,500 $149,376 Note payable due in monthly payments of $2, including interest at 4%, maturing May 2009 121 142 Mortgages First mortgage payable in monthly principal and interest (9.73%) installments of $25, maturing November 2009 1,395 1,555 First mortgage payable in monthly principal and interest (7.375%) installments of $55, maturing May 2011 3,870 4,232 First mortgage payable in monthly principal and interest (9.0%) installments of $3 - 183 Credit and Guarantee Agreement (b) Term loan B payable in quarterly principal and interest installments of $2,738, maturing July 2009 224,438 - Term loan A payable in quarterly principal and interest installments of $2,950, maturing July 2008 47,500 - Credit and Guarantee Agreement (refinanced July 25, 2003) (c) Term loan payable in quarterly principal and interest installments of $5,563 - 31,188 -------- -------- 426,824 186,676 Less current portion 12,837 22,806 -------- -------- $413,987 $163,870 ======== ======== F-23 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 2003, 2002 and 2001 (in thousands, except per share amounts and number of locations) - --------------------------------------------------------------------------- (a) The 8-5/8 percent Senior Subordinated Notes (the "Notes") are unsecured and subordinated in right of payment for all existing and future indebtedness of the Company. The Notes provide for the payment of interest semi-annually at the rate of 8-5/8 percent per annum. (b) In connection with the Rexall acquisition, the Company entered into a new Credit and Guarantee Agreement ("CGA") comprised of $375,000 Senior Secured Credit Facilities. The CGA consists of a $100,000 Revolving Credit Facility, a $50,000 Term Loan A and a $225,000 Term Loan B. The Company utilized term loans aggregating $275,000 to finance the purchase price. At September 30, 2003, the borrowings under the Term Loan A and Term Loan B were $47,500 and $224,438, respectively. At September 30, 2003 there were no borrowings outstanding under the revolving credit facility. The Company is required to make quarterly principal installments under Term Loan A and Term Loan B of approximately $2,500 and $563, respectively, at the end of each quarter beginning on September 30, 2003. The Term Loan B also requires the last four quarterly principal installments to be balloon payments of approximately $53,435 beginning September 30, 2008. The term loans annual borrowing rates vary depending on the interest rate option utilized. Options for the rate can either be the Alternate Base Rate or LIBOR plus applicable margin. At September 30, 2003 the annual borrowing rates for Term Loan A and Term Loan B were 3.375 and 3.625 percent, respectively. The current portion of Term Loan A and Term Loan B at September 30, 2003 was $10,000 and $2,250, respectively. The revolving credit facility and term loans are scheduled to mature on the earlier of (i) fifth anniversary of the closing date for the Revolving Credit Facility and Term Loan A, and the sixth anniversary date for Term Loan B; or (ii) March 15, 2007 if the Company's 8-5/8% senior subordinated Notes due September 15, 2007 are still outstanding. The proceeds were used to fund the Rexall acquisition, to refinance the existing CGA ($14,500), and to pay fees, commissions, and expenses associated therewith. Following the closing date, the proceeds of loans borrowed under the new Revolving Facility shall be used for general corporate purposes. Virtually all of the company's assets are pledged as collateral under the new CGA and are subject to normal banking terms and conditions and the maintenance of various financial ratios and covenants. (c) At September 30, 2002, the prior credit agreement was comprised of two term loans and a revolving credit facility. Borrowings outstanding under that credit agreement were $31,188 and had an annual borrowing rate of 4.422 percent payable in quarterly installments of $5,563. The current portion of this credit agreement at September 30, 2002 was $22,250. The Company refinanced this credit agreement during the third quarter 2003. See (b) above.
The Company's credit arrangements, generally the indenture governing the Notes and the new CGA, impose certain restrictions on the Company regarding capital expenditures and limit the Company's ability to do any of the following: incur additional indebtedness, dispose of assets, make repayments of indebtedness or amendments of debt instruments, pay distributions, create liens on assets and enter into sale and leaseback transactions, investments, loans or advances and acquisitions. Such restrictions are subject to certain limitations and exclusions. In addition, a default under certain covenants in the Indenture and the CGA, respectively, could result in the acceleration of the Company's payment obligations under the CGA and the F-24 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 2003, 2002 and 2001 (in thousands, except per share amounts and number of locations) - --------------------------------------------------------------------------- Indenture, as the case may be, and, under certain circumstances, in cross- defaults under other debt obligations. These defaults may have a negative effect on the Company's liquidity. Required principal payments of long-term debt are as follows: Fiscal year ending September 30, 2004 $ 12,837 2005 12,885 2006 12,938 2007 162,495 2008 63,432 Thereafter 162,237 -------- $426,824 ========
The fair value of the Company's long-term debt at September 30, 2003 and 2002, based upon current market rates, approximates the amounts disclosed above. 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, 2003 are as follows: Fiscal year ending September 30, 2004 $5 2005 2 ---- 7 Less amount representing interest 1 ---- Present value of minimum lease payments (including $4 due within one year) $6 ====
10. Income Taxes Income before income taxes consists of the following components:
2003 2002 2001 United States $ 59,529 $ 74,216 $28,047 Foreign 55,468 64,491 39,836 -------- -------- ------- $114,997 $138,707 $67,883 ======== ======== =======
F-25 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 2003, 2002 and 2001 (in thousands, except per share amounts and number of locations) - --------------------------------------------------------------------------- Provision for income taxes consists of the following:
2003 2002 2001 Federal Current $ 9,358 $26,835 $14,713 Deferred 5,864 (4,386) (1,682) State Current 1,334 2,760 1,513 Deferred 170 (451) (172) Foreign Current 17,493 19,150 11,767 Deferred (807) (992) (181) ------- ------- ------- Total provision $33,412 $42,916 $25,958 ======= ======= =======
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.
2003 2002 2001 -------------------- -------------------- ------------------- Percent Percent Percent of pretax of pretax of pretax Amount income Amount income Amount income ------ --------- ------ --------- ------ --------- Income tax expense at statutory rate $40,249 35.0% $48,548 35.0% $23,759 35.0% State income taxes, net of federal income tax benefit 1,504 1.3% 1,501 1.1% 2,444 3.6% Amortization of goodwill - - 2,277 3.3% Change in valuation allowance (8,275) (7.1%) (4,700) (3.4%) - - Other, individually less than 5% (66) (0.1%) (2,433) (1.8%) (2,522) (3.7%) ------- ---- ------- ---- ------- ---- $33,412 29.1% $42,916 30.9% $25,958 38.2% ======= ==== ======= ==== ======= ====
F-26 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 2003, 2002 and 2001 (in thousands, except per share amounts and number of locations) - --------------------------------------------------------------------------- The components of deferred tax assets and liabilities are as follows as of September 30:
2003 2002 Deferred tax assets Inventory reserves $ 8,684 $ 1,935 Accrued expenses and reserves not currently deductible 33,957 5,335 Tax credits 9,876 18,827 Valuation allowance (5,452) (13,727) -------- -------- Total deferred income tax assets, net of valuation allowance 47,065 12,370 -------- -------- Deferred tax liabilities Property, plant and equipment (17,079) (17,731) Intangibles (26,552) (361) Undistributed foreign earnings (6,340) - Other (286) - -------- -------- Total deferred income tax liabilities (50,257) (18,092) -------- -------- Total net deferred income tax liabilities (3,192) (5,722) Less current deferred income tax assets (37,021) (11,206) -------- -------- Long-term deferred income taxes $(40,213) $(16,928) ======== ========
Deferred tax assets have been recognized to the extent that it is more likely than not that they will be realized. For the year ended September 30, 2003, the Company has foreign tax credit and NYS Investment tax credit carryforwards of $4,424 and $5,452, respectively. During 2003, the Company determined that sufficient evidence existed to allow for a release of $8,275 of valuation allowance with regards to the foreign tax credit carryforwards. A valuation allowance of $5,452 is still maintained against the NYS investment tax credits that will begin to expire in 2013. The amount of deferred tax assets considered realizable could be adjusted in the future as the Company continues to monitor the future realization of such deferred tax assets in addition to identifying additional tax planning strategies. The change in the valuation allowance for the fiscal years ended September 30, 2003 and 2002 is as follows:
2003 2002 Balance at October 1 $(13,727) $(18,427) Utilization of foreign tax credit carryforwards 8,275 4,700 -------- -------- Balance at September 30 $ (5,452) $(13,727) ======== ========
F-27 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 2003, 2002 and 2001 (in thousands, except per share amounts and number of locations) - --------------------------------------------------------------------------- 11. Commitments Operating Leases The Company conducts retail operations under operating leases, which expire at various dates through 2027. Some of the leases contain renewal options and provide for contingent rent based upon sales plus certain tax and maintenance costs. Future minimum rental payments (excluding real estate tax and maintenance costs) for retail locations and other leases that have initial or noncancelable lease terms in excess of one year at September 30, 2003 are as follows: Fiscal year ending September 30, 2004 $ 68,409 2005 62,638 2006 57,080 2007 52,029 2008 46,160 Thereafter 159,472 -------- $445,788 ========
Operating lease rental expense (including real estate taxes and maintenance costs) and leases on a month to month basis were approximately $83,559, $68,104 and $62,355 during fiscal 2003, 2002 and 2001, respectively. Purchase Commitments The Company was committed to make future purchases under various purchase arrangements with fixed price provisions aggregating approximately $22,287 at September 30, 2003. Capital Commitments The Company had approximately $1,665 in open capital commitments at September 30, 2003, primarily related to manufacturing equipment as well as to computer hardware and software. Also, the Company has a $13,310 commitment for the construction of an automated warehouse over the next 18 months. Employment and Consulting Agreements The Company has employment agreements with two of its executive officers. The agreements, effective October 1, 2002, have a term of five years and are automatically renewed each year thereafter unless either party notifies the other to the contrary. These agreements provide for minimum salary levels and contain provisions regarding severance and changes in control of the Company. The annual commitment for salaries to these two officers as of September 30, 2003 was approximately $1,170. F-28 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 2003, 2002 and 2001 (in thousands, except per share amounts and number of locations) - --------------------------------------------------------------------------- The Company maintains a consulting agreement with Rudolph Management Associates, Inc. for the services of Arthur Rudolph, a director of the Company. The agreement requires Mr. Rudolph to provide consulting services to the Company through December 31, 2003, in exchange for a consulting fee of $450 per year, payable monthly. In addition, Mr. Rudolph receives certain fringe benefits accorded to other executives of the Company. The Company currently intends to renew this consulting agreement for a period of one year on substantially similar terms. Five members of the Company's European senior executive staff have service contracts terminable by the Company upon twelve months notice. The annual aggregate commitment for such executive staff as of September 30, 2003 was approximately $1,080. 12. Earnings Per Share Basic earnings per share ("EPS") computations are calculated utilizing the weighted average number of common shares outstanding during the fiscal years. Diluted EPS include the weighted average number of common shares outstanding and the effect of common stock equivalents. The following is a reconciliation between basic and diluted EPS:
2003 2002 2001 Numerator Numerator for basic and diluted EPS - income available to common stockholders $81,585 $95,791 $41,925 ======= ======= ======= Denominator Denominator for basic EPS - weighted-average shares 66,452 65,952 65,774 Effect of dilutive securities Stock options 2,086 1,877 1,351 ------- ------- ------- Denominator for diluted EPS - weighted-average shares 68,538 67,829 67,125 ======= ======= ======= Net EPS Basic EPS $ 1.23 $ 1.45 $ 0.64 ======= ======= ======= Diluted EPS $ 1.19 $ 1.41 $ 0.62 ======= ======= =======
13. Stock Option Plans During fiscal 1999, the Board of Directors (the "Board") approved the issuance of 3,000 options expiring at varying dates in 2008 and 2009 with exercise prices ranging from $4.75 to $6.19 per share. During fiscal 2000, the Board approved the issuance of 2,288 options expiring in 2010 with an exercise price of $5.88 per share. During fiscal 2001, the Board approved the issuance of 805 options expiring in 2011 with an exercise price of $5.47 per share. The exercise price of each of the aforementioned issuances was at or in excess of the market closing price at the date such options were granted. Since September 19, 2003, the Common Stock has traded on the New York Stock Exchange (the "NYSE"). Prior to that date, the Common Stock was included for quotation on the National Association of Securities Dealers National Market System ("NASDAQ/NMS"). Stock options granted under the plans generally become exercisable on F-29 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 2003, 2002 and 2001 (in thousands, except per share amounts and number of locations) - --------------------------------------------------------------------------- grant date and have a maximum term of ten years. The Company did not grant any stock options during fiscal 2003 or 2002. During fiscal 2003, options for 198 shares of common stock were exercised, with an aggregate exercise price of $1,146. As a result of the exercise of those options, the Company received a compensation deduction for tax purposes of approximately $2,650. Accordingly, a tax benefit of approximately $928 was credited to capital in excess of par. Also during fiscal 2003, the Company received an additional compensation deduction of approximately $412 due to the early disposition of certain incentive stock options exercised by employees. Accordingly, a tax benefit of approximately $144 was credited to capital in excess of par. During fiscal 2002, options for 480 shares of common stock were exercised, with an aggregate exercise price of $2,072 for which the Company received cash proceeds of $1,899 and surrendered shares with a fair value of $173. As a result of the exercise of those options, the Company received a compensation deduction for tax purposes of approximately $3,882. Accordingly, a tax benefit of approximately $1,409 was credited to capital in excess of par. Also during fiscal 2002, the Company received an additional compensation deduction of approximately $1,118 due to the early disposition of certain incentive stock options exercised by employees. Accordingly, a tax benefit of approximately $406 was credited to capital in excess of par. During fiscal 2001, options for 458 shares of common stock were exercised, with an aggregate exercise price of $2,604. As a result of the exercise of those options, the Company received a compensation deduction for tax purposes of approximately $1,990. Accordingly, a tax benefit of approximately $759 was credited to capital in excess of par. Also during fiscal 2001, the Company received an additional compensation deduction of approximately $1,299 due to the early disposition of certain incentive stock options exercised by employees. Accordingly, a tax benefit of approximately $500 was credited to capital in excess of par. A summary of stock option activity is as follows:
2003 2002 2001 --------------------- --------------------- --------------------- 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 4,373 $5.77 4,853 $5.62 4,536 $5.71 Exercised (198) $5.79 (480) $4.32 (458) $5.67 Forfeited (30) $5.13 Granted 805 $5.47 Outstanding at end of year 4,175 $5.77 4,373 $5.77 4,853 $5.62 Exercisable at end of year 4,175 $5.77 4,373 $5.77 4,853 $5.62 Fair value of options granted during year $3.80
F-30 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 2003, 2002 and 2001 (in thousands, except per share amounts and number of locations) - --------------------------------------------------------------------------- The following table summarizes information about stock options outstanding at September 30, 2003:
Options Outstanding Options Exercisable ------------------------------------- ----------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Shares Contractual Exercise Shares Exercise Exercise Prices Outstanding Life Price Exercisable Price $4.75 - $6.19 4,175 6.2 years $5.77 4,175 $5.77
14. Employee Benefit Plans The Company sponsors a 401(k) plan covering substantially all employees with more than six months of service. As allowed under Section 401(k) of the Internal Revenue Code, the Plan provides tax-deferred salary deductions for eligible employees. Employees may contribute from one percent to 50 percent of their annual compensation to the Plan, limited to a maximum annual amount as set periodically by the Internal Revenue Service. Company contributions are two percent of the participant's gross earnings to an annual maximum contribution of $4 per participant. Employees become fully vested in employer contributions after three years of service. The Company also sponsors an Employee Stock Ownership Plan and Trust (ESOP) which covers substantially all employees who are employed at calendar year end and have completed one year of service (providing they worked at least the minimum number of hours as required by the terms of the plan during such plan year). The ESOP is designed to comply with Section 4975(e)(7) and the regulations thereunder of the Internal Revenue Code of 1986, as amended (Code) and is subject to the applicable provisions of the Employee Retirement Income Security Act of 1974 (ERISA). Contributions are made on a voluntary basis by the Company. There is no minimum contribution required in any one year. There are no contributions required or permitted to be made by an employee. All contributions are allocated to participant accounts as defined. Employees become vested in their respective accounts after five years of service, provided the ESOP is not considered top-heavy. If the ESOP is considered top-heavy, employees will become vested after three years of service. The accompanying financial statements reflect contributions to these plans in the approximate amount of $3,111, $1,429 and $1,480 during fiscal 2003, 2002 and 2001, respectively. Certain international subsidiaries of the Company (mainly in the U.K.) have company sponsored defined contribution plans to comply with local statutes and practices. The accompanying financial statements reflect contributions to these plans by such subsidiaries in the approximate amount of $464, $461 and $462 during fiscal 2003, 2002 and 2001, respectively. F-31 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 2003, 2002 and 2001 (in thousands, except per share amounts and number of locations) - --------------------------------------------------------------------------- 15. Discontinued Product Charge Effective March 15, 2003, the Company voluntarily discontinued sales of products that contain ephedra. Income from operations for the fiscal year ended September 30, 2003 includes a charge of approximately $4,500 ($3,191 or $0.05 diluted earnings per share, after tax) associated with such discontinued product sales. The Company's belief that its ephedra products were safe when used as directed has been supported by credible scientific evidence. However, in light of adverse publicity surrounding ephedra and the current environment in the U.S., the Company believed it was in its best interest to voluntarily cease selling ephedra products, which represented an insignificant portion of the Company's overall business. 16. Litigation Recovery of Raw Material Costs The Company was a plaintiff in a vitamin antitrust litigation matter brought in the United States District Court in the District of Columbia against F. Hoffmann-La Roche Ltd. and others for alleged price fixing. Settlements with certain defendants were made, and the Company received $21,354 ($14,756 or $0.22 diluted earnings per share, after tax) in settlement of price fixing litigation during fiscal 2002. 17. Litigation Pseudoephedrine Products On April 14, 2003, a complaint was filed by the United States of America against the Company arising from certain pseudoephedrine sales by the Company from November 2000 through December 2002. The complaint, filed in U.S. District Court for the Eastern District of New York, alleges technical recordkeeping and reporting violations of the Controlled Substances Act, 21 U.S.C. Sections 801-904, and Controlled Substances Import and Export Act, 21 U.S.C. Sections 951-971, in a small fraction of the Company's sales of over-the-counter antihistamine and decongestant products containing pseudoephedrine. Total sales of such products generated approximately $160, or only 0.0002 percent, of the Company's total sales for the fiscal years ended September 30, 2002 and 2001, respectively. The Company has cooperated in all respects with the Drug Enforcement Administration in its investigation of sales identified in the complaint. Accordingly, the Company believes that there is no valid basis nor precedent for the penalties sought (which consist of monetary fines), and has launched a vigorous defense. However, because this action is in its early stages, no determination can be made at this time as to the final outcome of this action, nor can its materiality be accurately ascertained. Prohormone Products On July 25, 2002, a putative consumer class action was filed in New York state court against several manufacturers and retailers of so-called prohormone supplements naming Vitamin World as a defendant. Prohormones are substances such as androstenedione that plaintiffs allege are hormone precursors ingested to promote muscle growth. Plaintiffs allege that the advertising and labeling of certain prohormone supplements overstate their efficacy and do not fully disclose their risks, and seek class certification and injunctive and monetary relief. The action was severed into separate class actions against each of the defendants. On December 6, 2002, an amended class action complaint was filed against Vitamin World that purported to elaborate on the claims initially alleged. The court has not yet certified a class and the matter is currently in discovery. The Company believes that this action is without merit and intends to vigorously defend against F-32 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 2003, 2002 and 2001 (in thousands, except per share amounts and number of locations) - --------------------------------------------------------------------------- the claims asserted. However, because this action is in its early stages, no determination can be made at this time as to the final outcome of this action, nor can its materiality be accurately ascertained. In addition to the foregoing prohormone case in which the Company is a defendant, there are two other cases filed in 2002 naming MET-Rx as a defendant. On July 25, 2002, one putative consumer class action was filed in California state court and one putative consumer class action was filed in Florida state court. Plaintiffs in each of these cases allege that the advertising and labeling of certain prohormone supplements overstate their efficacy and do not fully disclose their risks, and seek class certification, injunctive and monetary relief. In the Florida action, plaintiffs allege in the alternative that if the prohormone products were effective as advertised, they were anabolic steroids, controlled substances under Florida law. On this alternative theory, plaintiffs seek treble damages under the Florida Civil RICO statute. The cases are currently in the discovery phase. The Company believes that these actions are without merit and intends to vigorously defend against the claims asserted. However, because these actions are in their early stages, no determination can be made at this time as to their final outcome, nor can their materiality be accurately ascertained. Nutrition Bars On August 28, 2001, the Company was also named as a defendant, along with other companies, in a putative class action commenced in an Alabama state court. Plaintiffs allege that NBTY manufactured and marketed misbranded nutrition bars which understated carbohydrate content. Plaintiffs seek class certification, injunctive, declaratory, and monetary relief. Class discovery is being taken, and no class has been certified. NBTY is vigorously opposing class certification on the basis that the plaintiffs were not damaged as alleged as a result of any action by NBTY. On October 3, 2002, the Company was named as a defendant in a second putative class action commenced in the same Alabama state court as the above-identified litigation. Plaintiffs, in an attempt to pursue several retailers, including Vitamin World, and not manufacturers of nutrition bars, allege that NBTY marketed misbranded nutrition bars. In November 2002, NBTY filed a motion to dismiss or abate the lawsuit based on the principle that the court lacks subject-matter jurisdiction because the earlier-filed lawsuit, which seeks identical relief for the same purported class action against the manufacturers, preempts this second attempt to certify a class against NBTY. In addition to the foregoing nutrition bar cases in which the Company is a defendant, there are six other cases filed in 2002 naming Rexall or a subsidiary of Rexall as a defendant, each making substantially the same allegations. NBTY acquired these cases with the purchase of Rexall. Three cases were brought in California state court, on August 8, 2002, June 21, 2002 and August 29, 2002, respectively. One case was brought in Florida state court on December 23, 2002, one case in Oklahoma state court on December 31, 2002 and one case in Arkansas state court on December 31, 2002. Plaintiffs allege misbranding of nutrition bars and violations of state unfair trade and practices statutes, unjust enrichment, misleading advertising, unfair competition and other similar causes of action. Plaintiffs seek disgorgement of profits, restitution, declaratory and injunctive relief. NBTY contends that the California action is not appropriate for class certification because the named plaintiffs are inadequate class representatives and not typical of persons who purchased the nutrition bars. F-33 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 2003, 2002 and 2001 (in thousands, except per share amounts and number of locations) - --------------------------------------------------------------------------- The Company believes that all of the above described nutrition bar suits are without merit and intends to vigorously defend against the claims asserted. Based upon the information available at this time, the Company believes that its accrual is adequate for the exposure in the nutrition bar litigation. However, because these actions are in their early stages, no determination can be made at this time as to their final outcome, nor can their materiality or the adequacy of the accrual be accurately ascertained. In addition to the foregoing, other claims, suits, complaints and regulatory inquiries (including product liability claims) arise in the ordinary course of the Company's business. The Company believes that such other claims, suits, complaints and inquiries would not have a material adverse effect on the Company's consolidated financial condition or results of operations, if adversely determined against the Company. 18. Segment Information The Company is organized by sales segments on a worldwide basis. The Company's management reporting system evaluates performance based on a number of factors; however, the primary measures of performance are the sales and pretax operating income or loss (prior to corporate allocations) of each segment, as this is the key performance indicator reviewed by management. Operating income or loss for each segment does not include corporate general and administrative expenses, interest expense and other miscellaneous income/expense items. Such unallocated expenses remain within corporate. Corporate also includes the manufacturing assets of the Company and, accordingly, items associated with these activities, such as the discontinued product charge and the litigation recovery of raw material costs, remain unallocated in the corporate segment. The Company's segment reporting disclosures for the prior periods presented have been reclassified to conform to the current year presentation. The European Retail operations does not include the impact of any intercompany transfer pricing. The accounting policies of all of the operating segments are the same as those described in the summary of significant accounting policies in Note 1. The Company reports four worldwide segments: Wholesale; Retail: United States; Retail: Europe; and Direct Response/Puritan's Pride. All of the Company's products fall into one of these four segments. The Wholesale segment is comprised of several divisions each targeting specific market groups which include wholesalers, distributors, chains, pharmacies, health food stores, bulk and international customers. The Retail: United States segment generates revenue through its 533 Company-operated stores of proprietary brand and third-party products. The Retail: Europe segment generates revenue through its 563 Company-operated stores and 26 franchise stores. Such revenue consists of sales of proprietary brand and third-party products as well as franchise fees. The Direct Response/Puritan's Pride segment generates revenue through the sale of its products primarily through mail order catalog and the Internet. Catalogs are strategically mailed to customers who order by mail or by phoning customer service representatives in New York, Illinois and the United Kingdom. F-34 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 2003, 2002 and 2001 (in thousands, except per share amounts and number of locations) - --------------------------------------------------------------------------- The following table represents key financial information of the Company's business segments:
2003 2002 2001 Wholesale Revenue $416,627 $291,287 $196,832 Operating income 76,933 60,197 27,234 Depreciation and amortization 2,184 1,155 1,434 Identifiable assets 400,429 31,586 51,451 Capital expenditures 288 1,370 1,310 Retail United States Revenue $212,380 $198,602 $174,987 Operating loss (1,643) (4,975) (12,737) Depreciation and amortization 12,733 13,235 13,820 Identifiable assets 62,577 73,278 79,401 Capital expenditures 3,335 4,633 9,118 Locations open at end of year 533 544 525 Europe Revenue $363,597 $290,881 $262,876 Operating income 83,345 79,420 59,654 Depreciation and amortization 9,872 8,295 12,564 Identifiable assets 330,028 225,471 220,662 Capital expenditures 13,009 3,773 7,829 Locations open at end of year 589 468 461 Direct Response/Puritan's Pride Revenue $199,944 $183,313 $172,203 Operating income 62,184 66,273 67,264 Depreciation and amortization 5,779 5,347 4,991 Identifiable assets 77,848 67,337 71,821 Capital expenditures 1,050 925 407 Corporate Corporate expenses $(85,278) $(66,623) $(54,322) Discontinued product charge (4,500) - - Litigation recovery of raw material costs - 21,354 - Depreciation and amortization - manufacturing 10,966 9,909 8,291 Depreciation and amortization - other 5,350 4,251 3,846 Corporate manufacturing identifiable assets 333,501 332,468 285,127 Capital expenditures - manufacturing 3,693 5,677 9,916 Capital expenditures - other 16,135 5,111 8,617
F-35 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 2003, 2002 and 2001 (in thousands, except per share amounts and number of locations) - ---------------------------------------------------------------------------
2003 2002 2001 Consolidated totals Revenue $1,192,548 $964,083 $806,898 Operating income 131,041 155,646 87,093 Depreciation and amortization 46,884 42,192 44,946 Identifiable assets 1,204,383 730,140 708,462 Capital expenditures 37,510 21,489 37,197 Revenue by location of customer United States $ 788,645 $633,911 $530,361 United Kingdom/Holland/Ireland 369,476 290,881 262,876 Other foreign countries 34,427 39,291 13,661 ---------- -------- -------- Consolidated totals $1,192,548 $964,083 $806,898 ========== ======== ======== Long-lived assets United States $ 447,715 $257,308 $267,690 United Kingdom/Holland/Ireland 201,460 152,349 147,254 ---------- -------- -------- Consolidated totals $ 649,175 $409,657 $414,944 ========== ======== ========
19. Related Party Transactions An entity owned by a relative of a director received sales commissions of $643, $585 and $501 in fiscal 2003, 2002 and 2001, respectively, and had trade receivable balances approximating $3,598 and $3,632 at September 30, 2003 and 2002, respectively. An entity owned by a relative of a director performed landscaping and maintenance on the Company's properties and received compensation of $83, $93 and $128 in 2003, 2002 and 2001, respectively. F-36 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 2003, 2002 and 2001 (in thousands, except per share amounts and number of locations) - --------------------------------------------------------------------------- 20. Quarterly Results of Operations (Unaudited) The following is a summary of the unaudited quarterly results of operations for fiscal 2003 and 2002:
Quarter ended ------------------------------------------------------ December 31, March 31, June 30, September 30, 2002 2003 2003 2003 2003 Net sales $241,403 $277,824 $308,474 $364,847 Gross profit 134,723 147,145 167,278 184,098 Income before income taxes 24,687 29,693 39,109 21,508 Net income 16,624 19,611 29,468 15,882 Net income per diluted share $ .24 $ .29 $ .43 $ .23(a) 2002 Net sales $215,090 $251,544 $251,987 $245,462 Gross profit 114,180 138,555 140,080 137,657 Income before income taxes 18,153 41,581 49,286 29,687 Net income 11,164 25,571 29,707 29,349 Net income per diluted share $ .17 $ .38 $ .44 $ .43(a) (a) Amounts may not equal fiscal year totals due to rounding.
F-37 SCHEDULE II NBTY, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts For the years ended September 30, 2003, 2002 and 2001 (Dollars in thousands)
Column A Column B Column C Column D Column E Additions Balance at Charged to Charged to Balance at beginning costs and Other end of Description of period expenses Accounts Deductions period - ----------- ---------- ---------- ---------- ---------- ---------- Fiscal year ended September 30, 2003: Allowance for doubtful accounts $ 4,194 $2,970 $ (163)(a) $ 7,001 Valuation allowance for deferred tax assets $13,727 $(8,275)(b) $ 5,452 Fiscal year ended September 30, 2002: Allowance for doubtful accounts $ 3,222 $1,064 $ (92)(a) $ 4,194 Valuation allowance for deferred tax assets $18,427 $(4,700)(b) $13,727 Fiscal year ended September 30, 2001: Allowance for doubtful accounts $ 1,227 $2,014 $ (19)(a) $ 3,222 Valuation allowance for deferred tax assets $18,427 $18,427 (a) Uncollectible accounts written off. (b) Utilization of foreign tax credits.
S-1 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NBTY, Inc. (Registrant) By: /s/ Scott Rudolph ------------------------------------ Scott Rudolph Chairman and Chief Executive Officer Dated: December 16, 2003 Pursuant to the requirements of the Exchange Act, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ Scott Rudolph Chairman and December 16, 2003 - ---------------------- Chief Executive Officer Scott Rudolph (Principal Executive Officer) /s/ Harvey Kamil President and Chief December 16, 2003 - ---------------------- Financial Officer Harvey Kamil (Principal Operating Officer, Principal Financial and Accounting Officer) /s/ Arthur Rudolph Director December 16, 2003 - ---------------------- Arthur Rudolph /s/ Aram G. Garabedian Director December 16, 2003 - ---------------------- Aram G. Garabedian /s/ Bernard G. Owen Director December 16, 2003 - ---------------------- Bernard G. Owen Signature Title Date --------- ----- ---- /s/ Alfred Sacks Director December 16, 2003 - ---------------------- Alfred Sacks /s/ Murray Daly Director December 16, 2003 - ---------------------- Murray Daly /s/ Glenn Cohen Director December 16, 2003 - ---------------------- Glenn Cohen /s/ Nathan Rosenblatt Director December 16, 2003 - ---------------------- Nathan Rosenblatt /s/ Michael L. Ashner Director December 16, 2003 - ---------------------- Michael L. Ashner /s/ Michael C. Slade Director December 16, 2003 - ---------------------- Michael C. Slade /s/ Peter White Director December 16, 2003 - ---------------------- Peter White EX-3 3 nbty-32.txt EXHIBIT 3.2 Exhibit 3.2 AMENDED AND RESTATED BY-LAWS OF NBTY, INC. ARTICLE I - OFFICES SECTION 1. REGISTERED OFFICE. - The registered office shall be established and maintained at 2711 Centerville Road, Suite 400, Wilmington, County of New Castle in the State of Delaware. SECTION 2. OTHER OFFICES. - The corporation may have other offices, either within or without the State of Delaware, at such place or places as the Board of Directors may from time to time appoint or the business of the corporation may require. ARTICLE II - MEETING OF STOCKHOLDERS SECTION 1. ANNUAL MEETINGS. - Annual meetings of stockholders for the election of directors, and for such other business as may be stated in the notice of the meeting, shall be held at such place, either within or without the State of Delaware, and at such times and date as the Board of Directors, by resolution, shall determine and as set forth in the notice of the meeting. At an annual meeting of stockholders, only such business shall be conducted, and only such proposals shall be acted upon, as shall have been brought before the annual meeting (a) by, or at the direction of, the presiding officer of the annual meeting or (b) by any stockholder of the corporation who complies with the notice procedures set forth in this Section. For a proposal to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof, in writing to the Secretary of the corporation. To be timely, stockholder's notice must be delivered to, or mailed by registered or certified mail, return receipt requested, and received at, the principal executive offices of the corporation not less than 60 days nor more than 90 days prior to the scheduled annual meeting, regardless of any postponements, deferrals or adjournments of that meeting to a later date; provided, however, that, if less than 70 days' notice or prior public disclosure of the date of the scheduled annual meeting is given or made, notice by the stockholder, to be timely, must be so delivered or received not later than the close of business on the tenth day following the earlier of the day on which such notice of the date of the scheduled annual meeting was mailed or the day on which such public disclosure was made. A stockholder's notice to the Secretary shall set forth, as to each matter the stockholder proposes to bring before the annual meeting, (a) a brief description of the proposal desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the corporation's books, of the stockholder proposing such business and any other stockholders known by such stockholder to be supporting such proposal, (c) the class and number of shares of the corporation's stock that are beneficially owned by the stockholder on the date of such stockholder notice and by any other stockholders known by such stockholder to be supporting such proposal on the date of such stockholder notice, and (d) any financial interest of the stockholder in such proposal. The presiding officer of the annual meeting shall determine and declare at the annual meeting whether a stockholder proposal was made in accordance with the terms of this Section. If the presiding officer determines that a stockholder proposal was not made in accordance with the terms of this Section, he or she shall so declare at the annual meeting and any such proposal shall not be acted upon at the annual meeting. No business shall be conducted at an annual meeting, except in accordance with the procedures set forth in this Section. Nothing contained in this Section shall preclude the corporation from excluding from any proxy materials, to the extent permitted by the laws of the State of Delaware, any stockholder proposal of a type described in Rule 14a-8(c) under the Securities Exchange Act of 1934, as amended, or any successor or similar provision. SECTION 2. SPECIAL MEETINGS. - Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by law or by the Certificate of Incorporation, may be called at any time by a majority of the entire Board of Directors, the Chairman of the Board of Directors or the President of the corporation. Special meetings of the stockholders of the corporation may not be called by any other person or persons. Special meetings may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting. No business may be transacted at such meeting except that referred to in the notice thereof. SECTION 3. CONDUCT OF MEETINGS. - The Board of Directors may adopt by resolution such rules and regulations for the conduct of meetings of stockholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as adopted by the Board of Directors, the presiding officer of any meeting of the stockholders shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such presiding officer, are appropriate for the proper conduct of the meeting. Such rules, regulations and procedures, whether adopted by the Board of Directors or prescribed by the presiding officer of the meeting, may include, without limitation, the following: (a) the establishment of an agenda or order of business for the meeting; (b) rules and procedures for maintaining order at the meeting and the safety of those present; (c) limitations on attendance at or participation in the meeting to stockholders of record of the corporation, their duly authorized and constituted proxies or such other persons as the presiding officer of the meeting shall determine; (d) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (e) limitations on the time allotted to questions and/or comments by participants. Unless and to the extent determined by the Board of Directors or the presiding officer of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure. SECTION 4. VOTING. - Each stockholder entitled to vote in accordance with the terms and provisions of the Certificate of Incorporation and these By-Laws shall be entitled to one vote, in person or by proxy, for each share of stock entitled to vote held by such stockholder. The vote for directors and upon any question before the meeting shall be by ballot. All elections for directors shall be deiced by plurality vote; all other questions shall be decided by majority affirmative vote, except as otherwise provided by the Certificate of Incorporation or required by the laws of the State of Delaware. SECTION 5. PROXIES. - Any stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for him, her or it by proxy, but no such proxy shall be voted after three years from its date, unless the proxy provides for a longer period. Without limiting the manner in which a stockholder may authorize another person or persons to act for him, her or it as proxy, the foregoing shall constitute a valid means by which a stockholder may grant such authority; (a) a stockholder may execute a writing authorizing another person or persons to act for him, her or it as proxy; execution may be accomplished by the stockholder or his, her or its authorized officer, director, employee or agent signing such writing or causing his or her signature to be affixed to such writing by any reasonable means, including, but not limited to, by facsimile signature; and (b) a stockholder may authorize another person or persons to act for him, her or it as proxy by transmitting or authorizing the transmission of a telegram, cablegram or other means of electronic transmission to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or like agent duly authorized by the person who will be the holder of the proxy to receive such transmission, provided that such telegram, cablegram or other means of electronic transmission must either set forth or be submitted with information from which it can be determined that the telegram, cablegram or other electronic transmission was authorized by the stockholder. It if is determined that such telegrams, cablegrams or other electronic transmissions are valid, the inspectors or, if there are no inspectors, such other persons making that determination shall specify the information upon which they relied. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission required by the above may be submitted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction is a complete reproduction of the entire original writing or transmission. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the corporation generally. SECTION 6. STOCKHOLDER LIST. - The officer who has charge of the stock ledger of the corporation shall at least 10 days before each meeting of the stockholders prepare a complete alphabetical addressed list of the stockholders entitled to vote at the ensuing election, with the number of shares held by each. Said list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall be available for inspection at the meeting. SECTION 7. QUORUM; ADJOURNMENT. - Except as otherwise required by law, by the Certificate of Incorporation or by these By-Laws, the presence, in person or by proxy, of stockholders holding a majority of the stock of the corporation entitled to vote shall constitute a quorum at all meetings of the stockholders. In case a quorum shall not be present at any meeting, the presiding officer of the meeting or a majority in interest of the stockholders entitled to vote thereat present in person or by proxy shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until the requisite amount of stock entitled to vote shall be present. At any such adjourned meeting at which the requisite amount of stock entitled to vote shall be represented, any business may be transacted which might have been transacted at the meeting as originally noticed; but only those stockholders entitled to vote at the meeting as originally noticed shall be entitled to vote at any adjournment or adjournments thereof. In addition, the Board of Directors may adjourn a meeting of the stockholders if the Board of Directors determines that adjournment is necessary or appropriate in order to enable the stockholders (a) to consider fully information that the Board of Directors determine has not been made sufficiently or timely available to stockholders or (b) to otherwise effectively exercise their voting rights. SECTION 8. NOTICE OF MEETINGS. - Written notice, stating the place, date and time of the meeting, and the general nature of the business to be considered, shall be given to each stockholder entitled to vote thereat at his, her or its address as it appears on the records of the corporation, not less than 10 nor more than 60 days before the date of the meeting. SECTION 9. ACTION WITHOUT MEETING. - Except as otherwise provided by the Certificate of Incorporation, whenever the vote of stockholders at a meeting thereof is required or permitted to be taken in connection with any corporate action by any provisions of the statutes or the Certificate of Incorporation or of these By-Laws, the meeting and vote of stockholders may be dispensed with if all the stockholders who would have been entitled to vote upon the action if such meeting were held shall consent in writing to such corporate action being taken. ARTICLE III - DIRECTORS SECTION 1. NUMBER AND TERM. - The number of directors shall be at least three and not more than eleven, unless otherwise set by a resolution passed by a vote of Directors comprising seventy-five (75%) percent of the Board of Directors. The Board of Directors of the Company shall be divided into three classes of directors, in such manner as the Board of Directors in its sole discretion may determine, each class to be elected in annual sequences for terms of three years each after the implementation of the classes (or until their successors are duly elected and qualified). Until fully implemented, the term of the office of the first class shall expire at the annual meeting next ensuing; of the second class one year thereafter; of the third class two years thereafter; and at each annual election held after such classification and election, directors shall be chosen for a full term of three years. Vacancies which occur during the year may be filled by a majority of the Board of Directors in accordance with Section 6 of this Article III. SECTION 2. NOMINATIONS. - Nominations of persons for election to the Board of Directors may be made at an annual meeting of stockholders (a) by or at the direction of the Board of Directors by any nominating committee or person appointed by the Board of Directors or (b) by any stockholder of the Corporation entitled to vote for the election of directors at the annual meeting who complies with the notice procedures set forth in this Section. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to, or mailed, by registered or certified mail, return receipt requested, and received at, the principal executive offices of the corporation not less than 60 days nor more than 90 days prior to the scheduled annual meeting, regardless of any postponements, deferrals or adjournments of the annual meeting to a later date; provided, however, that, if less than 70 days' notice or prior public disclosure of the date of the scheduled annual meeting is given or made, notice by the stockholder, to be timely, must be so delivered or received not later than the close of business on the tenth day following the earlier of the day on which such notice of the date of the scheduled annual meeting was mailed or the day on which such public disclosure was made. A stockholder's notice to the Secretary shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of capital stock of the corporation that are beneficially owned by the person and (iv) any other information relating to the person that is required to be disclosed in solicitations for proxies for the election of directors pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, or any successor or similar provision, and (b) as to the stockholder giving notice, (i) the name and address, as they appear on the corporation's books, of the stockholder, and (ii) the class and number of shares of the corporation's stock that are beneficially owned by the stockholder on the date of such stockholder notice. The corporation may require any proposed nominee to furnish such other information as may reasonably be required by the corporation to determine the eligibility of such proposed nominee to serve as a director of the corporation. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this Section. The presiding officer of the annual meeting shall determine, in his sole discretion, and declare at the annual meeting whether the nomination was made in accordance with the terms of this Section. If the presiding officer determines that a nomination was not made in accordance with the terms of this Section, he or she shall so declare at the annual meeting and any such defective nomination shall be disregarded. SECTION 3. RESIGNATIONS. - Any director, member of a committee or other officer may resign at any time. Such resignation shall be made in writing, and shall take effect at the time specified therein, and if no time be specified, at the time of its receipt by the President or Secretary. The acceptance of a resignation shall not be necessary to make it effective. SECTION 4. REMOVAL. - Any director or directors may be removed for cause at any time by the affirmative vote of the holders of a majority of all the shares of stock outstanding and entitled to vote, at a special meeting of the stockholders called for the purpose. SECTION 5. INCREASE OF NUMBER. - The number of directors may be increased by amendment of these By-Laws by the affirmative vote of seventy- five (75%) percent of the entire Board of Directors. SECTION 6. NEWLY CREATED DIRECTORSHIPS AND VACANCIES. - Newly created directorships resulting from any increase in the authorized number of directors or any vacancies on the Board of Directors resulting from death, resignation, retirement, disqualification or removal from office for cause shall be filled only by the affirmative vote of seventy-five (75%) percent of the directors then in office, and directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which time the term of office of the class to which they have been elected expires and until such director's successor shall have been duly elected and qualified. If the office of any member of a committee becomes vacant, the remaining directors in office, though less than a quorum, by the affirmative vote of at least a majority of such directors, may appoint any qualified person to fill such vacancy. SECTION 7. COMPENSATION. - Unless otherwise restricted by the Certificate of Incorporation, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors any may be paid a fixed sum for attendance at each meeting of the Board of Directors and/or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. SECTION 8. ACTION WITHOUT MEETING. - Any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting, if, prior to such action, a written consent thereto is signed by all members of the Board of Directors, or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board of Directors or such committee. ARTICLE IV -- OFFICERS SECTION 1. OFFICERS -- The officers of the Corporation shall consist of a Chief Executive Officer and a Secretary, to be appointed by the Board of Directors. In addition, the Board of Directors, in its sole discretion, may elect a Chairman, appoint a President, a Chief Financial Officer, one or more Vice Presidents and such Treasurers, Assistant Secretaries and/or other officers. None of the officers of the Corporation need be directors. The officers shall be appointed at the first meeting of the Board of Directors after each annual meeting of stockholders of the Corporation and shall hold office until their respective successors are appointed and qualified, or until their earlier death, resignation, retirement, disqualification or removal. More than one office may be held by the same person at the same time. SECTION 2. OTHER OFFICERS AND AGENTS -- The Board of Directors may appoint such officers and agents as it may deem advisable, who shall hold their offices for such terms and shall exercise such power and perform such duties as shall be determined from time to time by the Board of Directors. SECTION 3. CHAIRMAN -- The Chairman of the Board of Directors, if one be elected, shall preside at all meetings of the Board of Directors. The Chairman shall have and perform such other duties as from time to time may be assigned to him by the Board of Directors. SECTION 4. CHIEF EXECUTIVE OFFICER -- The Chief Executive Officer shall have general supervision, direction and control of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. He shall preside at all meetings of the stockholders if present thereat, and in the absence or non-election of the Chairman of the Board of Directors, at all meetings of the Board of Directors. Except as the Board of Directors shall authorize the execution thereof in some other manner, the Chief Executive Officer shall execute bonds, mortgages, and other contracts on behalf of the Corporation, and shall cause the seal to be affixed to any instrument requiring it and when so affixed the seal shall be attested by the signature of the Secretary, a Treasurer or an Assistant Secretary, if so required. SECTION 5. PRESIDENT -- The President shall have the general powers and duties of supervision and management usually vested in the office of President of a Corporation. In the absence of the Chief Executive Officer, he shall preside at all meetings of the stockholders if present thereat. He shall possess the same authority as the Chief Executive Officer to execute bonds, mortgages, and other contracts on behalf of the Corporation, and shall cause the seal to be affixed to any instrument requiring it and when so affixed the seal shall be attested by the signature of the Secretary, a Treasurer or an Assistant Secretary, if so required. SECTION 6. CHIEF FINANCIAL OFFICER -- The Chief Financial Officer shall have the custody of the corporate funds and securities and shall keep full and accurate account of receipts and disbursements in books belonging to the Corporation. He shall deposit all moneys and other valuables in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Chief Financial Officer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, the Chief Executive Officer or the President, taking proper vouchers for such disbursements. He shall render to the Chief Executive Officer, the President and the Board of Directors at the regular meetings of the Board of Directors, or whenever they may request it, an account of all his transactions as Chief Financial Officer and of the financial condition of the Corporation. If required by the Board of Directors, he shall give the Corporation a bond for the faithful discharge of his duties in such amount and with such surety as the Board of Directors shall prescribe. SECTION 7. VICE-PRESIDENT -- Each Vice-President shall have such power and shall perform such duties as shall be assigned to him by the Board of Directors. SECTION 8. SECRETARY -- The Secretary shall give, or cause to be given, notice of all meetings of stockholders and directors, and all other notices required by law or by these By-Laws, and in case of his absence or refusal or neglect so to do, any such notice may be given by any person thereunto directed by the President, or by the Board of Directors, or stockholders, upon whose requisition the meeting is called as provided in these By-Laws. He shall record all the proceedings of the meeting of the Corporation and of directors in a book to be kept for that purpose. He shall keep in safe custody the seal of the Corporation, and when authorized by the Board of Directors, affix the same to any instrument requiring it, and when so affixed, it shall be attested by his signature or by the signature of any Assistant Secretary, if so required. SECTION 9. TREASURERS, ASSISTANT TREASURERS & ASSISTANT SECRETARIES.- Treasurers, Assistant Treasurers and Assistant Secretaries shall have such powers and shall perform such duties as shall be assigned to them, respectively, by the Board of Directors. ARTICLE V - MISCELLANEOUS SECTION 1. CERTIFICATES OF STOCK. - Every holder of stock in the corporation shall be entitled to have a certificate, signed by, or in the name of the corporation by, the Chairman or Vice-Chairman of the Board of Directors, or the President or a Vice-President and the Treasurer or an Assistant Treasurer, or the Secretary of the corporation, certifying the number of shares owned by him, her or it in the corporation. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations, or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class of series of stock, provided that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Where a certificate is countersigned (a) by a transfer agent other than the corporation or its employee or (b) by a registrar other than the corporation or its employee, the signature of such officers may be facsimiles. SECTION 2. LOST CERTIFICATES. - New certificates of stock may be issued in the place of any certificate previously issued by the corporation, alleged to have been lost or destroyed, and the directors may, in their discretion, require the owner of the lost or destroyed certificate, or his legal representatives, to give the corporation a bond, in such sum as they may direct, not exceeding double the value of the stock, to indemnify the corporation against it on account of the alleged loss of any such new certificate. SECTION 3. TRANSFER OF SHARES. - The shares of stock of the corporation shall be transferable only upon its books by the holders thereof in person or by their duly authorized attorneys or legal representatives, and upon such transfer the old certificates shall be surrendered to the corporation by the delivery thereof to the person in charge of the stock and transfer books and ledgers, or to such other persons as the directors may designate, by who they shall be canceled, and new certificates shall thereupon be issued. A record shall be made of each transfer and whenever a transfer shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the transfer. SECTION 4. STOCKHOLDERS RECORD DATE. - In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than 60 days nor less than 10 days before the day of such meeting, nor more than 60 days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. SECTION 5. DIVIDENDS. - Subject to the provisions of the Certificate of Incorporation, the Board of Directors may, out of funds legally available therefor at any regular or special meeting, declare dividends upon the capital stock of the corporation as and when they deem expedient. Before declaring any dividends there may be set apart out of any funds of the corporation available for dividends, such sum or sums as directors from time to time in their discretion deem proper working capital or as a reserve fund to meet contingencies or for equalizing dividends or for such other purposes as the directors shall deem conducive to the interest of the corporation. SECTION 6. SEAL. - The corporate seal shall be circular in form and shall contain the name of the corporation, the year of its creation and the words "CORPORATE SEAL DELAWARE." Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or otherwise reproduced. SECTION 7. FISCAL YEAR. - The fiscal year of the corporation shall be determined by resolution of the Board of Directors. SECTION 8. CHECKS. - All checks, drafts, or other orders for the payment of money, notes or other evidence of indebtedness issued in the name of the corporation shall be signed by the officer or officers, agent or agents of the corporation, and in such manner as shall be determined from time to time by resolution of the Board of Directors. SECTION 9. NOTICE AND WAIVER OF NOTICE. - Whenever, under applicable law or the Certificate of Incorporation or these By-Laws, notice is required to be given to any director or stockholder, such notice may be given by person, in writing, or by mail, telegram, facsimile, telecommunication or other electronic transmission, addressed to such director or stockholder, at his, her or its address as it appears on the records of the corporation. Notice shall be deemed to be given at the time when the same shall be (a) personally delivered, (b) guaranteed to be delivered, if transmitted timely to a third party company or governmental entity providing delivery services in the ordinary course of business, (c) deposited in the United States mail, postage prepaid, or (d) when electronically telecommunicated, each as the case may be. Notice to directors also may be given by telegram, telephone or mailgram. Whenever any notice is required to be given under applicable law or the Certificate of Incorporation or these By-Laws, a waiver thereof, in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Stockholders not entitled to vote shall not be entitled to receive notice of any meetings except as otherwise provided by statute. SECTION 10. INVALID PROVISIONS. - If any part of these By-Laws shall be held invalid or inoperative for any reason, the remaining parts, so far as it is possible and reasonable, shall remain valid and operative. ARTICLE VI - AMENDMENTS These By-Laws may be altered and repealed and By-Laws may be made at any annual meeting of the stockholders, or at any special meeting thereof if notice thereof is contained in the notice of such special meeting, by the affirmative vote of seventy-five (75%) percent of the stock issued and outstanding or entitled to vote thereat. These By-Laws may be altered and repealed and By-Laws may be made at any regular meeting of the Board of Directors, or at any special meeting thereof of notice thereof is contained in the notice of such special meeting, by the affirmative vote of seventy- five (75%) percent of the entire Board of Directors. EX-10 4 nbty-103.txt EXHIBIT 10.3 Exhibit 10.3 FIRST AMENDMENT TO EXECUTIVE CONSULTING AGREEMENT This AMENDMENT is made as of the 31st day of December, 2002, by and between NBTY, Inc. (the "Company") and RUDOLPH MANAGEMENT ASSOCIATES, INC., a Florida corporation ("RMA"). WITNESSETH: WHEREAS, the Company and RMA entered into that certain Executive Consulting Agreement, dated as of January 1, 2002 (the "Agreement"); WHEREAS, the term of the Agreement expires December 31, 2002 (the "Term"); WHEREAS, the Compensation Committee of the Company (the "Committee") met on December 31, 2002, with all members present to consider whether to continue to retain RMA as an Executive Consultant to the Company. WHEREAS, the Committee (with ARTHUR RUDOLPH recusing himself from the deliberation of, and decision on, this matter) decided to continue to retain RMA and ARTHUR RUDOLPH as an Executive Consultant; and WHEREAS, ARTHUR RUDOLPH desires to continue to make his services available to the Company through RMA. NOW, THEREFORE, in consideration of the mutual promises hereafter contained and for other good and valuable consideration, the parties agree as follows: 1. Term. The Term of the Agreement shall be extended through December 31, 2003. 2. Consulting Fee. From January 1, 2003 through December 31, 2003, the amount of the Consulting Fee shall be Thirty Seven Thousand Five Hundred Dollars ($37,500). 3. Continuity. All terms and conditions of the Agreement not herein modified shall continue in full force and effect throughout the Extended Term and are incorporated herein by reference. 4. Definitions. All defined terms not expressly defined herein shall have the meanings ascribed to them in the Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Amendment the day and year first above written. RUDOLPH MANAGEMENT NBTY, INC. ASSOCIATES, INC. By: /s/Arthur Rudolph By: /s/ Harvey Kamil ------------------------------ ------------------------------- Arthur Rudolph Harvey Kamil President President Agreed and Consented: /s/ Arthur Rudolph - ----------------------------------- ARTHUR RUDOLPH, individually EX-10 5 nbty-107.txt EXHIBIT 10.7 Exhibit 10.7 ========================================================================== CREDIT AGREEMENT Dated as of July 24, 2003 among NBTY, INC., the Borrower, The Several Lenders from Time to Time Parties Hereto, JPMORGAN CHASE BANK, as Administrative Agent and Collateral Agent, and FLEET NATIONAL BANK, as Syndication Agent ---------------------------- J.P. MORGAN SECURITIES INC., as Joint Lead Bookrunner and Joint Lead Arranger FLEET SECURITIES, INC., as Joint Lead Bookrunner and Joint Lead Arranger ========================================================================== TABLE OF CONTENTS Page ---- SECTION 1. DEFINITIONS 2 1.1. Defined Terms 2 1.2. Other Definitional Provisions 24 SECTION 2. AMOUNT AND TERMS OF COMMITMENTS 25 2.1. Revolving Credit Commitments 25 2.2. Procedure for Revolving Credit Borrowing 25 2.3. Repayment of Revolving Credit Loans; Evidence of Debt 26 2.4. Termination or Reduction of Revolving Credit Commitments 27 2.5. Swing Line Commitment 27 2.6. Term Loan Commitments 29 2.7. Procedure for Term Loan Borrowing 29 2.8. Repayment of Term Loans; Evidence of Debt 30 SECTION 3. LETTERS OF CREDIT 32 3.1. Letters of Credit 32 3.2. Procedure for Issuance of Letters of Credit 33 3.3. Participating Interests 33 3.4. Payments 33 3.5. Further Assurances 34 3.6. Obligations Absolute 34 3.7. Letter of Credit Application 35 3.8. Purpose of Letters of Credit 35 SECTION 4. GENERAL PROVISIONS 35 4.1. Interest Rates and Payment Dates 35 4.2. Conversion and Continuation Options 36 4.3. Minimum Amounts of Tranches 37 4.4. Optional and Mandatory Prepayments 37 4.5. Commitment Fees; Other Fees 39 4.6. Computation of Interest and Fees 40 4.7. Inability to Determine Interest Rate 40 4.8. Pro rata Treatment and Payments 41 4.9. Illegality 43 4.10. Increased Costs 43 4.11. Indemnity 45 4.12. Taxes 45 i 4.13. Use of Proceeds 47 4.14. Change in Lending Office; Replacement of Lender 47 4.15. Break Funding Payments 48 SECTION 5. REPRESENTATIONS AND WARRANTIES 48 5.1. Financial Condition; Accuracy of Public Information 48 5.2. No Change 49 5.3. Corporate Existence; Compliance with Law 49 5.4. Corporate Power; Authorization; Enforceable Obligations 50 5.5. No Legal Bar 50 5.6. No Material Litigation 51 5.7. No Default 51 5.8. Ownership of Property; Liens 51 5.9. Intellectual Property 52 5.10. Taxes 52 5.11. Federal Regulations 52 5.12. ERISA 52 5.13. Investment Company Act; Public Utility Holding Company Act; Other Regulations 53 5.14. Subsidiaries 53 5.15. Environmental Matters 53 5.16. Solvency 54 5.17. Security Documents 54 5.18. Insurance 55 5.19. Affiliate Transactions 55 5.20. Accuracy of Information 55 SECTION 6. CONDITIONS PRECEDENT 56 6.1. Conditions to Closing Date 56 6.2. Conditions to Each Extension of Credit 60 SECTION 7. AFFIRMATIVE COVENANTS 60 7.1. Financial Statements 61 7.2. Certificates; Other Information 61 7.3. Payment of Obligations 62 7.4. Maintenance of Existence 62 7.5. Maintenance of Property; Insurance 63 7.6. Inspection of Property; Books and Records; Discussions 63 7.7. Notices 63 7.8. Environmental Laws 64 7.9. Additional Subsidiaries; Additional Collateral 64 7.10. Rexall Purchase Agreement Remedies 65 7.11. Post-Closing Obligations 65 ii SECTION 8. NEGATIVE COVENANTS 66 8.1. Financial Condition Covenants 66 8.2. Limitation on Indebtedness 67 8.3. Limitation on Liens 68 8.4. Limitation on Guarantee Obligations 70 8.5. Limitation on Fundamental Changes 70 8.6. Limitation on Sale of Assets 71 8.7. Limitation on Dividends and Other Restricted Payments 71 8.8. Limitation on Capital Expenditures 72 8.9. Limitation on Investments, Loans and Advances 72 8.10. Limitation on Optional Payments and Modifications of Debt Instruments 73 8.11. Limitation on Transactions with Affiliates 73 8.12. Limitation on Sales and Leasebacks 73 8.13. Limitation on Changes in Fiscal Year 73 8.14. Limitation on Negative Pledge Clauses 74 8.15. Limitation on Lines of Business 74 8.16. Hedging Agreements 74 8.17. Rexall Acquisition 74 SECTION 9. EVENTS OF DEFAULT 74 SECTION 10. THE AGENTS AND THE ARRANGERS 78 10.1. Appointment 78 10.2. Delegation of Duties 78 10.3. Exculpatory Provisions 78 10.4. Reliance by Agents 79 10.5. Notice of Default 79 10.6. Non-Reliance on Agents and Other Lenders 80 10.7. Indemnification 80 10.8. Agent in Its Individual Capacity 81 10.9. Successor Agents 81 10.10. Issuing Lender 81 SECTION 11. MISCELLANEOUS 81 11.1. Amendments and Waivers 81 11.2. Notices 83 11.3. No Waiver; Cumulative Remedies 84 11.4. Survival 85 11.5. Payment of Expenses and Taxes 85 11.6. Successors and Assigns; Participation and Assignments 86 11.7. Adjustments; Set-off 89 iii 11.8. Counterparts 89 11.9. Severability 90 11.10. Integration 90 11.11. GOVERNING LAW 90 11.12. Submission to Jurisdiction; Waivers 90 11.13. Acknowledgements 91 11.14. WAIVERS OF JURY TRIAL 91 11.15. Confidentiality 91 11.16. Designation of Senior Indebtedness 92 SCHEDULES: - ---------- I Commitments; Addresses II Domestic Subsidiaries; Foreign Subsidiaries 5.1 Contingent Liabilities 5.4 Consents 5.6 Litigation 5.8 Real Property Owned and Leased 5.10 Tax Filings and Payments 5.18 Insurance 5.19 Certain Affiliate Transactions 6.1(u) Indebtedness 7.11 Accounts Subject to Control Agreements 8.2 Existing Indebtedness 8.3 Existing Liens 8.4 Existing Guarantee Obligations 8.6(d) Property To Be Sold 8.9(e) Existing Investments EXHIBITS: A-1 Form of Revolving Credit Note A-2 Form of Swing Line Note A-3 Form of Term A Note A-4 Form of Term B Note B Form of Guarantee and Collateral Agreement C Form of Swing Line Loan Participation Certificate D Form of Assignment and Acceptance E-1 Form of Opinion of Milbank, Tweed, Hadley & McCloy LLP E-2 Form of Opinion of Irene Fisher, General Counsel to the Borrower F Form of Closing Certificate G Form of Administrative Questionnaire H Form of Landlord's Lien Waiver, Access Agreement and Consent iv CREDIT AGREEMENT, dated as of July 24, 2003, among NBTY, INC., a Delaware corporation (the "Borrower"), the several banks and other financial institutions from time to time parties hereto as lenders (the "Lenders"), JPMORGAN CHASE BANK, a New York banking corporation, as administrative agent and collateral agent for the Lenders hereunder (in such capacities, the "Administrative Agent" and the "Collateral Agent," respectively), and FLEET NATIONAL BANK, a national banking association organized and existing under the laws of the United States of America, as syndication agent for the Lenders hereunder (in such capacity, the "Syndication Agent" and, together with the Administrative Agent and the Collateral Agent, the "Agents"). W I T N E S S E T H : --------------------- WHEREAS, the Borrower, Holland & Barrett Holdings Limited ("Holland & Barrett"), certain lenders and the Administrative Agent are parties to that certain Third Amended and Restated Credit and Guarantee Agreement, dated as of April 27, 2001 (as amended through the date hereof, the "Existing Credit Agreement"); WHEREAS, the Borrower intends to acquire (the "Rexall Acquisition") from Royal Numico N.V. ("Royal Numico") and from its wholly owned subsidiary, Numico USA, Inc. (the "Seller"), all of the membership interests in Rexall US Newco 1 LLC ("Rexall 1") and all of the partnership interests in Rexall Newco DGP 1 ("Rexall DGP" and, collectively with Rexall 1, "Rexall") and certain intellectual property owned by Numico Financial Services, S.A, as set forth in the purchase agreement among Royal Numico, the Seller and the Borrower dated as of June 9, 2003 and related disclosure schedules and other documents (as in effect on the date thereof, collectively, the "Rexall Purchase Agreement"); WHEREAS, the Borrower has entered into this Agreement (i) to provide for the financing of the Rexall Acquisition, the refinancing of outstanding indebtedness of the Borrower and Holland & Barrett of up to $15,000,000 under the Existing Credit Agreement (the "Refinancing") and the payment of fees, commissions and expenses in connection therewith and (ii) following the Closing Date (as defined below), to continue to provide financing for the general corporate purposes of the Borrower and its Subsidiaries; and WHEREAS, the Lenders are willing to enter into this Agreement on the terms and conditions hereof, including the condition precedent that this Agreement be executed and delivered by each Lender hereunder; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein set forth, the parties hereto agree as follows: 2 SECTION 1. DEFINITIONS 1.1.Defined Terms As used in this Agreement, the following terms shall have the following meanings: "ABR Loans": Loans the rate of interest applicable to which is based upon the Alternate Base Rate. "Acquisition": any transaction or series of related transactions by which the Borrower or any of its Subsidiaries (a) acquires any going business or all or substantially all of the assets of any Person, whether through purchase of assets, merger or otherwise or (b) directly or indirectly acquires (in one transaction or in a series of related transactions) at least (i) a majority (in number of votes) of the Capital Stock having ordinary voting power for the election of directors (or other managers) of any Person or (ii) a majority of the ownership interests in any Person. "Administrative Agent": as defined in the preamble hereto, and shall include any successor appointed in accordance with subsection 10.9. "Administrative Questionnaire": an administrative questionnaire substantially in the form attached hereto as Exhibit G. "Affiliate": of any Person, (a) any other Person (other than a wholly owned Subsidiary of such Person) which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person or (b) any other Person who is a director or officer of (i) such Person, (ii) any Subsidiary of such Person or (iii) any Person described in clause (a) above. For purposes of this definition, a Person shall be deemed to be "controlled by" such other Person if such other Person possesses, directly or indirectly, power either to (A) vote 10% or more of the securities having ordinary voting power for the election of directors of such first Person or (B) direct or cause the direction of the management and policies of such first Person whether by contract or otherwise. "Agents": as defined in the preamble hereto. "Aggregate Available Revolving Credit Commitments": as at any date of determination with respect to all Lenders, the Available Revolving Credit Commitments of all Lenders on such date. "Aggregate Available Term Loan Commitments": as at any date of determination with respect to all Lenders, the Available Term Loan Commitments of all Lenders on such date. "Aggregate Revolving Credit Commitments": the aggregate amount of the Revolving Credit Commitments of all the Lenders. 3 "Aggregate Revolving Credit Outstanding": as at any date of determination with respect to any Lender, the sum of (a) the aggregate unpaid principal amount of such Lender's Revolving Credit Loans on such date and (b) such Lender's Revolving Credit Commitment Percentage of the aggregate Letter of Credit Obligations and Swing Line Loans on such date. "Agreement": this Credit Agreement, as the same may be amended, supplemented or otherwise modified from time to time. "Alternate Base Rate": for any day, a rate per annum equal to the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective from and including the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, respectively. "Applicable Margin": for Revolving Credit Loans and Term A Loans and for purposes of subsection 4.5(a), the rate per annum set forth under the relevant column heading below based on the ratio of Consolidated Indebtedness of the Borrower and its Subsidiaries to Consolidated EBITDA of the Borrower and its Subsidiaries, as most recently determined in accordance with subsection 7.2(b), for any fiscal quarter of the Borrower:
Relevant Ratio of Consolidated Indebtedness to Applicable Applicable Consolidated Margin for Margin for EBITDA Eurodollar Loans ABR Loans Commitment Fee - ----------------- ---------------- ---------- -------------- Greater than or equal to 2.5x 2.50% 1.50% 0.50% Less than 2.5x but greater than or equal to 2.0x 2.25% 1.25% 0.50% Less than 2.0x but greater than or equal to 1.5x 2.00% 1.00% 0.50% Less than 1.5x but greater than or equal to 1.0x 1.75% 0.75% 0.375% Less than 1.0x 1.50% 0.50% 0.25%
4 Notwithstanding the relevant ratio of Consolidated Indebtedness to Consolidated EDITDA, up to and including the date of delivery of financial statements and related compliance certificate of the Borrower for the first fiscal quarter ending at least six months after the Closing Date in accordance with subsection 7.1, (x) the Applicable Margin for Revolving Credit Loans and Term A Loans shall be 2.25% per annum for Eurodollar Loans and 1.50% per annum for ABR Loans, and (y) the commitment fee shall be 0.50% per annum. The Applicable Margin for Term B Loans shall at all times be 2.50% per annum for Eurodollar Loans and 1.50% per annum for ABR Loans. If and in the event the financial statements required to be delivered pursuant to subsection 7.1(a) or 7.1(b), as applicable, and the related compliance certificate required to be delivered pursuant to subsection 7.2(b), are delivered on or prior to the date when due (or, in the case of the fourth quarterly period of each fiscal year of the Borrower, if financial statements which satisfy the requirements of, and are delivered within the time period specified in, subsection 7.1(b) and a related compliance certificate which satisfies the requirements of, and is delivered within the time period specified in, subsection 7.2(b), with respect to any such quarterly period are so delivered within such time periods), then the Applicable Margin for Revolving Credit Loans and Term A Loans during the period from the date that is five Business Days after the date upon which such financial statements were due to be delivered shall be the Applicable Margin as set forth in the relevant column heading above; provided, however, that in the event that the financial statements delivered pursuant to subsection 7.1(a) or 7.1(b), as applicable, and the related compliance certificate required to be delivered pursuant to subsection 7.2(b), are not delivered when due, then: (a) if such financial statements and certificate are Delivered after the date such financial statements and certificate were required to be delivered (without giving effect to any applicable cure period) and the Applicable Margin increases from that previously in effect as a result of the delivery of such financial statements, then the Applicable Margin during the period from the date upon which such financial statements were required to be delivered (without giving effect to any applicable cure period) until the date upon which they actually are delivered shall, except as otherwise provided in clause (c) below, be the Applicable Margin as so increased; (b) if such financial statements and certificate are delivered after the date such financial statements and certificate were required to be delivered and the Applicable Margin decreases from that previously in effect as a result of the delivery of such financial statements, then such decrease in the Applicable Margin shall not become applicable until the date upon which such financial statements and certificate actually are delivered; and (c) if such financial statements and certificate are not delivered prior to the expiration of the applicable cure period, then, effective upon such expiration, for the period from the date upon which such financial statements and certificate were required to 5 be delivered (after the expiration of the applicable cure period) until two Business Days following the date upon which they actually are delivered, the Applicable Margin in respect of Revolving Credit Loans and Term A Loans shall be 2.50% per annum in the case of Eurodollar Loans and 1.50% per annum in the case of ABR Loans and 1/2% per annum, in the case of subsection 4.5(a) (it being understood that the foregoing shall not limit the rights of the Agents and the Lenders set forth in Section 9). "Arrangers": J.P. Morgan Securities Inc. and Fleet Securities, Inc. "Asset Sale": any sale, sale-leaseback or other disposition by the Borrower or any Subsidiary of any of its property or assets, including the stock of any Subsidiary, other than any sale, sale-leaseback or other disposition permitted under subsection 8.6 or subsection 8.12. "Assignee": as defined in subsection 11.6(b)(iii). "Assignment and Acceptance": an assignment and acceptance agreement substantially in the form attached hereto as Exhibit D. "Available Revolving Credit Commitment": as at any date of determination with respect to any Lender, an amount equal to the excess, if any, of (a) the amount of such Lender's Revolving Credit Commitment in effect on such date over (b) the Aggregate Revolving Credit Outstanding of such Lender on such date. "Available Term Loan Commitment": as at any date of determination with respect to any Lender, an amount equal to the excess, if any, of (a) the amount of such Lender's Term Loan Commitment in effect on such date over (b) the aggregate principal amount of Term Loans theretofore made hereunder by such Lender. "Benefited Lender": as defined in subsection 11.7(a). "Board": the Board of Governors of the Federal Reserve System of the United States of America (or any successor thereto). "Borrower": as defined in the preamble hereto. "Borrowing Date": any Business Day specified in a notice pursuant to subsection 2.2, 2.5(a), 2.7 or 3.2 as a date on which the Borrower requests the Lenders to make Loans hereunder or issue a Letter of Credit. "Business": as defined in subsection 5.15(b). "Business Day": (a) for all purposes other than as covered by clause (b) below, a day other than a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to close and (b) with respect to all notices and determinations 6 in connection with, and payments of principal and interest on, Eurodollar Loans, any day which is a Business Day described in clause (a) and which is also a London Banking Day. "Capital Expenditures": direct or indirect (by way of the acquisition of securities of a Person or the expenditure of cash or the incurrence of Indebtedness) expenditures (other than expenditures in connection with Acquisitions permitted hereunder, including, without limitation, the Rexall Acquisition) in respect of the purchase or other acquisition of fixed or capital assets. "Capital Stock": any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation) (collectively, "Underlying Equity Interests"), and any and all warrants or options to purchase any of the foregoing. For purposes of subsections 4.4(e) and 8.7 hereof, the term "Capital Stock" shall exclude options and warrants issued pursuant to employee stock option plans and Underlying Equity Interests issued upon the exercise thereof. "Cash Equivalents": (a) securities with maturities of one year or less from the date of acquisition issued or fully guaranteed or insured by the United States Government or any agency thereof, (b) certificates of deposit and eurodollar time deposits with maturities of one year or less from the date of acquisition and overnight bank deposits of any Lender or of any commercial bank having capital and surplus in excess of $500,000,000, (c) repurchase obligations of any Lender or of any commercial bank satisfying the requirements of clause (b) of this definition, having a term of not more than 30 days with respect to securities issued or fully guaranteed or insured by the United States Government, (d) commercial paper of a domestic issuer rated at least A-2 by S&P or P-2 by Moody's, (e) securities with maturities of one year or less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States, by any political subdivision or taxing authority of any such state, commonwealth or territory or by any foreign government, the securities of which state, commonwealth, territory, political subdivision, taxing authority or foreign government (as the case may be) are rated at least A by S&P or A by Moody's (or the equivalent rating by either such rating agency for such type of securities), (f) securities with maturities of one year or less from the date of acquisition backed by standby letters of credit issued by any commercial bank satisfying the requirements of clause (b) of this definition or (g) shares of money market mutual or similar funds which invest exclusively in assets satisfying the requirements of clauses (a) through (f) of this definition. "Class": the classification of loans as Revolving Credit Loans, Term A Loans, Term B Loans and Swing Line Loans, each of which categories shall be deemed to be a "Class" of Loans. "Closing Date": the date on which all of the conditions precedent set forth in subsection 6.1 shall have been met or waived. "Code": the Internal Revenue Code of 1986, as amended from time to time. 7 "Collateral Agent": as defined in the preamble hereto, and shall include any successor appointed in accordance with subsection 10.9. "Commercial Letters of Credit": as defined in subsection 3.1(ii). "Commitment Letter": the commitment letter dated May 21, 2003 among Borrower, the Agents and the Arrangers. "Commitments": the collective reference to the Revolving Credit Commitments, the Term Loan Commitments and the Swing Line Commitment. "Consolidated Current Assets": with respect to any Person as at any date of determination, the total assets of such Person and its consolidated Subsidiaries which may properly be classified as current assets on a consolidated balance sheet of such Person and its consolidated Subsidiaries in accordance with GAAP. "Consolidated Current Liabilities": with respect to any Person as at any date of determination, the total liabilities of such Person and its consolidated Subsidiaries which may properly be classified as current liabilities (other than the current portion of any Loans) on a consolidated balance sheet of such Person and its consolidated Subsidiaries in accordance with GAAP. "Consolidated Debt Service": for any period of four consecutive fiscal quarters, the sum of (a) the Trailing Consolidated Interest Expense of the Borrower for such period, plus (b) the principal amounts of all long- term indebtedness payable by the Borrower and its Subsidiaries during the next succeeding twelve-month period determined in accordance with GAAP, excluding, however, from such indebtedness the Revolving Credit Loans and the Swing Line Loans during the final twelve months of the Revolving Credit Commitment Period. "Consolidated EBITDA": for any period of four consecutive fiscal quarters, the sum of (i) Trailing Consolidated Net Income for such period, (ii) Trailing Consolidated Interest Expense for such period and (iii) the Trailing amount of taxes, depreciation and amortization deducted from earnings in determining such Consolidated Net Income. "Consolidated Fixed Charge Coverage Ratio": for any period of four consecutive fiscal quarters, the ratio of (i) the result of (A) the Consolidated EBITDA of the Borrower and its Subsidiaries plus (B) Trailing Consolidated Rent Expense minus (C) Trailing Capital Expenditures of the Borrower and its Subsidiaries to (ii) (x) the Consolidated Debt Service of the Borrower and its Subsidiaries plus (y) Trailing Consolidated Rent Expense. "Consolidated Indebtedness": at a particular date, all Indebtedness of the Borrower and its Subsidiaries, determined on a consolidated basis. 8 "Consolidated Interest Coverage Ratio": for any period of four consecutive fiscal quarters, the ratio of (i) Consolidated EBITDA of the Borrower and its Subsidiaries to (ii) Trailing Consolidated Interest Expense. "Consolidated Interest Expense": for any fiscal period, the amount which would, in conformity with GAAP, be set forth opposite the caption "interest expense" (or any like caption) on a consolidated income statement of the Borrower and its Subsidiaries for such period. "Consolidated Net Income": for any fiscal period, the consolidated net income (or deficit) of the Borrower and its Subsidiaries for such period (taken as a cumulative whole), determined on a consolidated basis in accordance with GAAP; provided that any non-cash extraordinary gains and losses shall be excluded in determining Consolidated Net Income. "Consolidated Rent Expense": for any fiscal period, the amount which would, in conformity with GAAP, be set forth opposite the caption "rent expense" (or any like caption) on a consolidated income statement of the Borrower and its Subsidiaries for such period. "Consolidated Senior Indebtedness": all Indebtedness of the Borrower which is not by its terms expressly subordinated to the Loans under this Agreement. "Continuing Directors": the directors of the Borrower on the Closing Date and each other director, if such other director's nomination for election to the Board of Directors of the Borrower is recommended by a majority of the then Continuing Directors. "Contractual Obligation": as to any Person, any provision of any security issued by such Person or of any agreement, instrument or undertaking to which such Person is a party or by which it or any of its property is bound. "Default": any of the events specified in Section 9, whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "Dollars", "U.S. Dollars" and "$": dollars in lawful currency of the United States of America. "Domestic Subsidiary": any Subsidiary other than a Foreign Subsidiary. "Environmental Laws": means the common law and all laws, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by any Governmental Authority, relating in any way to the environment, the preservation or reclamation of natural resources, the management, release or threatened release of any Hazardous Materials or to health and safety matters. 9 "ERISA": the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate": any trade or business (whether or not incorporated) that, together with the Borrower or any of its Subsidiaries, is treated as a single employer under Section 414(b) or (c) of the Code or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code. "ERISA Event": (a) any "reportable event", as defined in Section 4043 of ERISA or the regulations issued thereunder, with respect to a Plan (other than an event for which the 30-day notice period is waived); (b) the existence with respect to any Plan of an "accumulated funding deficiency" (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived, the failure to make by its due date a required installment under Section 412(m) of the Code with respect to any Pension Plan or the failure to make any required contribution to a Multiemployer Plan; (c) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by the Borrower or any of its ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Plan; (e) the receipt by the Borrower or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (f) the incurrence by the Borrower or any of its ERISA Affiliates of any liability with respect to the withdrawal or partial withdrawal from any Plan or Multiemployer Plan; (g) the receipt by the Borrower or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from the Borrower or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA; or (h) the making of any amendment to any Pension Plan which could result in the imposition of a lien or the posting of a bond or other security. "Eurodollar Loans": Loans the rate of interest applicable to which is based upon the Eurodollar Rate. "Eurodollar Rate": with respect to a Eurodollar Loan for the relevant Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate. "Event of Default": any of the events specified in Section 9, provided that any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "Excess Cash Flow": for any fiscal year of the Borrower, the sum, without duplication, of (a) Consolidated EBITDA for such fiscal year, plus 10 (b) gains excluded from Consolidated Net Income, plus (c) reductions to non-cash working capital of the Borrower and its consolidated Subsidiaries for such fiscal year (i.e., the decrease, if any, in Consolidated Current Assets of the Borrower minus Consolidated Current Liabilities of the Borrower from the beginning to the end of such fiscal year), minus (d) the amount of any cash income taxes paid or payable by the Borrower and its consolidated Subsidiaries with respect to such fiscal year, net of any cash tax refunds received by the Borrower or any of its Subsidiaries in such fiscal year, minus (e) cash interest paid by the Borrower and its Consolidated Subsidiaries during such fiscal year, minus (f) Capital Expenditures made in cash in accordance with subsection 8.8 during such fiscal year or Acquisitions made in cash in accordance with subsection 8.9(g) or 8.9(h) during such fiscal year, to the extent such Capital Expenditures or Acquisitions are funded from internally generated funds, minus (g) permanent repayments and prepayments of Loans made by the Borrower during such fiscal year, minus (h) extraordinary cash losses from the sale of assets during such fiscal year and not included in Consolidated Net Income, minus (i) additions to non-cash working capital for such fiscal year (i.e., the increase, if any, in Consolidated Current Assets of the Borrower minus Consolidated Current Liabilities of the Borrower from the beginning to the end of such fiscal year); provided that, to the extent otherwise included therein, the Net Cash Proceeds of Asset Sales and Recovery Events shall be excluded from the calculation of Excess Cash Flow. "Exchange Act": the Securities Exchange Act of 1934, as amended. "Excluded Taxes" means, with respect to the Administrative Agent, any Lender, the Issuing Lender or any other recipient of any payment to be made by or on account of any obligation of the Borrower hereunder, (a) any Taxes imposed by any jurisdiction other than the United States (or any taxing authority thereof or therein), any jurisdiction in which the Borrower conducts business or claims an interest deduction with respect to this Agreement or any other taxing jurisdiction from or through which payments hereunder are made, (b) income or franchise taxes imposed on (or measured by) its net income or net profits by the United States of America, or by the jurisdiction under the laws of which such recipient is organized, in which such recipient conducts business (other than a business that is deemed to arise solely as a result of entering into this Agreement, receipt of payments hereunder or enforcement of its rights hereunder)) or in 11 which its principal office is located or, in the case of any Lender, in which its applicable lending office is located, (c) any branch profits taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction in which the Borrower is located and (d) in the case of a Foreign Lender (other than an assignee pursuant to a request by the Borrower under subsection 4.14(b)), any withholding tax that is imposed on amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party to this Agreement (or designates a new lending office) or is attributable to such Foreign Lender's failure to comply with subsection 4.12(e), except to the extent that such Foreign Lender (or its assignor, if any) was entitled, at the time of designation of a new lending office (or assignment), to receive additional amounts from the Borrower with respect to such withholding tax pursuant to subsection 4.12(a). "Existing Credit Agreement": as defined in the recitals hereto. "Existing Notes": the Borrower's 8-5/8% Senior Subordinated Notes due 2007. "Existing Notes Indenture": as defined in subsection 6.1(p). "Extension of Credit": as to any Lender, the making of a Loan by such Lender and, with respect to any Lender, the issuance of any Letter of Credit. "Federal Funds Effective Rate": for any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for such day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "Fee Property": as defined in subsection 5.8. "Financing Lease": (a) any lease of property, real or personal, the obligations under which are capitalized on a consolidated balance sheet of the Borrower and its Subsidiaries and (b) any other such lease to the extent that the then present value of the minimum rental commitment thereunder should, in accordance with GAAP, be capitalized on a balance sheet of the lessee. "Foreign Plan": any employee benefit plan, program, policy, arrangement or agreement maintained or contributed to by, or entered into with, Borrower or any Subsidiary with respect to employees employed outside the United States. "Foreign Lender": any Lender that is organized under the laws of a jurisdiction other than that in which the Borrower is located. For purposes of this definition, the United States of America, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction. 12 "Foreign Subsidiary": as to any Person, any Subsidiary of such Person which is organized under the laws of any jurisdiction outside of the country of the jurisdiction of organization of such Person. "GAAP": generally accepted accounting principles in the United States of America in effect from time to time. "Gel-Cap Facility": the soft gelatin capsule manufacturing facility located at Cartwright Loop Industrial Park, Church Street, Bayport, New York. "Governmental Authority": any nation or government, any state, province or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guarantee and Collateral Agreement": the Guarantee and Collateral Agreement, substantially in the form attached hereto as Exhibit B, executed and delivered by the Borrower and each of its Domestic Subsidiaries, as the same may be amended, supplemented or otherwise modified. "Guarantee Obligation": as to any Person, any obligation of such Person guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends or other obligations (the "primary obligations") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent (a) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (b) to advance or supply funds (i) for the purchase or payment of any such primary obligation or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (d) otherwise to assure or hold harmless the owner of any such primary obligation against loss in respect thereof; provided, however, that the term Guarantee Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guarantee Obligation shall be deemed to be an amount equal to the value as of any date of determination of the stated or determinable amount of the primary obligation in respect of which such Guarantee Obligation is made (unless such Guarantee Obligation shall be expressly limited to a lesser amount, in which case such lesser amount shall apply) or, if not stated or determinable, the value as of any date of determination of the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith. "Hazardous Materials": any solid wastes, toxic or hazardous substances, materials or wastes, defined, listed, classified or regulated as such in or under any Environmental Laws, including, without limitation, asbestos, petroleum or petroleum products (including gasoline, crude oil or any fraction thereof), polychlorinated biphenyls, and urea-formaldehyde insulation, 13 and any other substance the presence of which may give rise to liability under any Environmental Law. "Hedge Agreement": any interest rate protection agreement, interest rate swap or other interest rate hedge arrangement, or currency swap or other currency hedge arrangement (other than any interest rate cap or other similar agreement or arrangement pursuant to which the Borrower has no credit exposure), to or under which the Borrower or any of its Subsidiaries is a party or a beneficiary. "Hedge Agreement Obligations": all obligations of the Borrower under any one or more Hedge Agreements to make payments to the counterparties thereunder upon the occurrence of a termination event or similar event thereunder. "Holland & Barrett": as defined in the recitals hereto. "Indebtedness": of a Person, at a particular date, the sum (without duplication) at such date of (a) indebtedness for borrowed money or for the deferred purchase price of property or services in respect of which such Person is liable as obligor (other than current trade liabilities incurred in the ordinary course of business and payable in accordance with customary practices of such Person), (b) indebtedness secured by any Lien on any property or asset owned or held by such Person regardless of whether the indebtedness secured thereby shall have been assumed by or is a primary liability of such Person, (c) obligations of such Person under Financing Leases, (d) the face amount of all letters of credit issued for the account of or upon the application of such Person and, without duplication, the unreimbursed amount of all drafts drawn thereunder and (e) obligations (in the nature of principal or interest) of such Person in respect of acceptances or similar obligations issued or created for the account of such Person. "Indemnified Taxes" means Taxes other than Excluded Taxes. "Insolvency": with respect to any Multiemployer Plan, the condition that such Plan is insolvent within the meaning of Section 4245 of ERISA. "Insolvent": pertaining to a condition of Insolvency. "Intellectual Property": as defined in subsection 5.9. "Interest Payment Date": (a) as to any ABR Loan, the last day of each March, June, September and December to occur while such Loan is outstanding, (b) as to any Eurodollar Loan having an Interest Period of three months or less, the last day of such Interest Period and (c) as to any Eurodollar Loan having an Interest Period longer than three months, (i) each day which is three months after the first day of such Interest Period and (ii) the last day of such Interest Period. 14 "Interest Period": with respect to any Eurodollar Loan: (a) initially, the period commencing on the borrowing or conversion date, as the case may be, with respect to such Eurodollar Loan and ending one, two, three or six months (or nine or twelve months, if available to all Lenders) thereafter, as selected by the Borrower in its notice of borrowing or notice of conversion, as the case may be, given with respect thereto; and (b) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Eurodollar Loan and ending one, two, three or six months (or nine or twelve months, if available to all Lenders) thereafter, as selected by the Borrower by irrevocable notice to the Administrative Agent not less than three Business Days prior to the last day of the then current Interest Period with respect thereto; provided that all of the foregoing provisions relating to Interest Periods are subject to the following: (i) if any Interest Period pertaining to a Eurodollar Loan would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the immediately preceding Business Day; (ii) any Interest Period applicable to a Eurodollar Loan that would otherwise extend beyond the date final payment is due on such Loan shall end on such date of final payment; and (iii) any Interest Period pertaining to a Eurodollar Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month. "Issuing Lender": JPMorgan Chase or any of its Affiliates, in its capacity as issuer of the Letters of Credit, and any other Lender which the Borrower, the Administrative Agent and the Majority Lenders shall have approved, in its capacity as issuer of the Letters of Credit. "JPMorgan Chase": JPMorgan Chase Bank. "Landlord's Lien Waiver, Access Agreement and Consent": a lien waiver, access agreement and consent substantially in the form attached hereto as Exhibit H. "Leased Property": as defined in subsection 5.8. 15 "Legal Requirement": as to (a) any Person, any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject, and (b) any property, any law, treaty, rule, regulation, requirement, judgment, decree or determination of any Governmental Authority applicable to or binding upon such property or to which such property is subject. "Lenders": as defined in the preamble hereto. "Letter of Credit Applications": (a) in the case of Standby Letters of Credit, a letter of credit application for a Standby Letter of Credit on the standard form of the applicable Issuing Lender for standby letters of credit, and (b) in the case of Commercial Letters of Credit, a letter of credit application for a Commercial Letter of Credit on the standard form of the applicable Issuing Lender for commercial letters of credit. "Letter of Credit Obligations": at any particular time, all liabilities of the Borrower with respect to Letters of Credit, whether or not any such liability is contingent, including (without duplication) the sum of (a) the aggregate undrawn face amount of all Letters of Credit then outstanding plus (b) the aggregate amount of all unpaid Reimbursement Obligations at such time. "Letters of Credit": as defined in subsection 3.1(ii). "LIBO Rate": with respect to any Eurodollar Loan for any Interest Period, the rate appearing on Page 3750 of the Dow Jones Market Service (or on any successor or substitute page of such Service, or any successor to or substitute for such Service, providing rate quotations comparable to those currently provided on such page of such Service, as determined by the Administrative Agent from time to time for purposes of providing quotations of interest rates applicable to Dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, as the rate for Dollar deposits with a maturity comparable to such Interest Period. In the event that such rate is not available at such time for any reason, then the "LIBO Rate" with respect to such Eurodollar Loan for such Interest Period shall be the rate at which Dollar deposits of $5,000,000 and for a maturity comparable to such Interest Period are offered by the principal London office of the Administrative Agent in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period. "Lien": any mortgage, pledge, hypothecation, assignment, deposit arrangement (other than a bank or similar deposit account), encumbrance, lien (statutory or other), or preference, priority or other security interest or similar preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any Financing Lease having substantially the same economic effect as any of the foregoing, the filing of any financing statement under the Uniform Commercial Code or comparable law of any 16 jurisdiction in respect of any of the foregoing, and, in the case of securities, a third party's right to purchase such securities). "Loan Documents": the collective reference to this Agreement, any Notes, the Security Documents and any documents or instruments evidencing or governing the Security Documents. "Loan Parties": the collective reference to the Borrower and each guarantor or grantor party to any Security Document. "Loans": the collective reference to the Revolving Credit Loans, the Term Loans and the Swing Line Loans. "London Banking Day": any day on which banks in London are open for general banking business, including dealings in foreign currency and exchange. "Majority Lenders": at any time, Lenders, the Total Loan Percentages of which aggregate more than 50%. "Material Adverse Effect": a material adverse change in the business, assets, operations, properties, condition (financial or otherwise), contingent liabilities (including as to products, and whether such liabilities have been or yet may be asserted), prospects or material agreements of the Borrower and its Subsidiaries taken as a whole. "Material Environmental Amount": $500,000. "Material Foreign Subsidiary": any Foreign Subsidiary accounting for 5% or more of the assets or revenues (computed for the most recent fiscal year) of the Borrower and its consolidated Subsidiaries, taken as a whole. "Moody's": Moody's Investors Service, Inc. or any successor thereto. "Multiemployer Plan": a Plan which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "Net Cash Proceeds": (a) in connection with any Asset Sale or any Recovery Event, the proceeds thereof in the form of cash and Cash Equivalents (including any such proceeds received by way of deferred payment of principal pursuant to a note or installment receivable or purchase price adjustment receivable or otherwise, but only as and when received) of such Asset Sale or Recovery Event, net of attorneys' fees, accountants' fees, investment banking fees, amounts required to be applied to the repayment of Indebtedness secured by a Lien expressly permitted hereunder on any asset that is the subject of such Asset Sale or Recovery Event (other than any Lien pursuant to a Security Document) and other customary fees and expenses actually incurred in connection therewith and net of taxes paid or reasonably estimated to be 17 payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements) and (b) in connection with any issuance or sale of Capital Stock or any incurrence of Indebtedness, the cash proceeds received from such issuance or incurrence, net of attorneys' fees, investment banking fees, accountants' fees, underwriting discounts and commissions and other customary fees and expenses actually incurred in connection therewith. "Notes": the collective reference to the Revolving Credit Notes, the Term Notes and the Swing Line Notes. "Obligations": collectively, the unpaid principal of and interest on the Loans, the Reimbursement Obligations and all other obligations and liabilities of the Borrower to any Agent, the Issuing Lender and the Lenders under or in connection with this Agreement, the other Loan Documents and any Hedge Agreement with any Lender or any Affiliate of a Lender (including in each case, without limitation, interest accruing at the then applicable rate provided in this Agreement or any other applicable Loan Document or Hedge Agreement after the maturity of the Loans and interest accruing at the then applicable rate provided in this Agreement or any other applicable Loan Document or Hedge Agreement after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post- petition interest is allowed in such proceeding), whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, this Agreement, the Notes, the Letters of Credit, the Letter of Credit Applications, the other Loan Documents or any Hedge Agreement with a Lender or any Affiliate of a Lender or any other document made, delivered or given in connection therewith, in each case whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel to the Agents or to the Lenders). "Other Taxes" means any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement. "Participants": as defined in subsection 11.6(c). "Participating Interest": with respect to any Letter of Credit (a) in the case of the Issuing Lender, its interest in such Letter of Credit and any Letter of Credit Application relating thereto after giving effect to the granting of any participating interests therein pursuant hereto and (b) in the case of each Participating Lender, its undivided participating interest in such Letter of Credit and any Letter of Credit Application relating thereto. "Participating Lender": any Lender (other than the Issuing Lender) with respect to its Participating Interest in a Letter of Credit. 18 "PBGC": the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA or any successor thereto. "Pension Plan" shall mean an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code or Section 302 of ERISA and is maintained or contributed to by any ERISA Affiliate or with respect to which the Borrower or a Subsidiary could incur liability. "Person": an individual, partnership, corporation, business trust, joint stock company, limited liability company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature. "Plan": any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in respect of which the Borrower, any of its Subsidiaries or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Pledged Stock": as defined in the Guarantee and Collateral Agreement or any other Security Document. "Preferred Stock": with respect to any Person, any and all preferred or preference Capital Stock (however designated) of such Person, whether now outstanding or issued after the Closing Date. "Prime Rate": the rate of interest per annum publicly announced from time to time by JPMorgan Chase as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective from and including the date such change is publicly announced as being effective. "Pro Forma Data": as defined in subsection 5.1(b). "Pro Forma Financial Statements": as defined in subsection 5.1(b). "Properties": as defined in subsection 5.15(a). "Recovery Event": any settlement of or payment in respect of any property or casualty insurance claim or any condemnation proceeding relating to any asset of the Borrower or any of its Subsidiaries. "Refinancing": as defined in the preamble hereto. "Refinancing Indebtedness": Indebtedness that refinances, renews, extends, replaces, defeases or refunds, in whole or in part, any Indebtedness of the Borrower or any of its 19 Subsidiaries; provided that (i) any such Refinancing Indebtedness is in an aggregate principal amount not greater than the aggregate principal amount of the Indebtedness being renewed or refinanced, plus the amount of any premiums required to be paid thereon and reasonable fees and expenses associated therewith; and (ii) such Refinancing Indebtedness has a later or equal final maturity and longer or equal weighted average life than the Indebtedness being renewed or refinanced. "Refunded Swing Line Loans": as defined in subsection 2.5(b). "Register": as defined in subsection 11.6. "Reimbursement Obligation": the obligation of the Borrower to reimburse the Issuing Lender in accordance with the terms of this Agreement and the related Letter of Credit Application for any payment made by the Issuing Lender under any Letter of Credit. "Reinvestment Deferred Amount": with respect to any Reinvestment Event, the aggregate Net Cash Proceeds received by the Borrower or any of its Subsidiaries in connection therewith that are not applied to prepay the Term Loans pursuant to subsection 4.4(d) as a result of the delivery of a Reinvestment Notice. "Reinvestment Event": any Asset Sale or Recovery Event in respect of which the Borrower has delivered a Reinvestment Notice. "Reinvestment Notice": a written notice executed by a Responsible Officer of the Borrower stating that the Borrower (directly or indirectly through a Subsidiary) intends and expects to use all or a specified portion of the Net Cash Proceeds of an Asset Sale or Recovery Event to acquire assets useful in its business. "Reinvestment Prepayment Amount": with respect to any Reinvestment Event, the Reinvestment Deferred Amount relating thereto less any amount expended prior to the relevant Reinvestment Prepayment Date to acquire assets useful in the Borrower's business. "Reinvestment Prepayment Date": with respect to any Reinvestment Event, the earlier of (a) the date occurring six months after such Reinvestment Event and (b) the date on which the Borrower shall have determined not to, or shall have otherwise ceased to, acquire assets useful in the Borrower's business with all or any portion of the relevant Reinvestment Deferred Amount. "Related Parties": with respect to any specified Person, such Person's Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person's Affiliates. 20 "Release": any spilling, leaking, pumping, pouring, emitting, emptying, discharging, escaping, leaking, dumping, disposing, spreading, depositing or dispersing of any Hazardous Materials in, unto or onto the environment. "Reorganization": with respect to any Multiemployer Plan, the condition that such plan is in reorganization within the meaning of Section 4241 of ERISA. "Requirement of Law": as to (a) any Person, the certificate of incorporation and by-laws or the partnership or limited partnership agreement or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject, and (b) any property, any law, treaty, rule, regulation, requirement, judgment, decree or determination of any Governmental Authority applicable to or binding upon such property or to which such property is subject, including, without limitation, any Environmental Laws. "Responsible Officer": with respect to any Loan Party, the chief executive officer, the president, the chief financial officer, any vice president, the treasurer or the assistant treasurer of such Loan Party. "Restricted Payments": as defined in subsection 8.7. "Revolving Credit Commitment": as to any Lender at any time, its obligation to make Revolving Credit Loans, issue or participate in Letters of Credit issued for the account of the Borrower and/or make or participate in Swing Line Loans to the Borrower in an aggregate amount not to exceed at any time outstanding the amount set forth opposite such Lender's name in Schedule I under the heading "Revolving Credit Commitment", as such amount may be changed from time to time pursuant to subsection 2.4 and the other applicable provisions hereof. "Revolving Credit Commitment Percentage": as to any Lender at any time, the percentage which such Lender's Revolving Credit Commitment then constitutes of the Aggregate Revolving Credit Commitments (or, if the Revolving Credit Commitments have terminated or expired at such time, the percentage which (a) the Aggregate Revolving Credit Outstanding of such Lender at such time then constitutes of (b) the Aggregate Revolving Credit Outstanding of all Lenders at such time). "Revolving Credit Commitment Period": the period from and including the Closing Date to but not including the Revolving Credit Termination Date, or such earlier date on which the Revolving Credit Commitments shall terminate as provided herein. "Revolving Credit Loan": as defined in subsection 2.1(a). "Revolving Credit Note": as defined in subsection 2.3(e). 21 "Revolving Credit Termination Date": the earliest to occur of (i) the fifth anniversary of the Closing Date, (ii) March 15, 2007 if any of the Existing Notes shall be outstanding on such date and (iii) the earliest date of maturity of any Indebtedness of the Borrower or any of its Subsidiaries that refinances the Existing Notes. "Rexall": as defined in the recitals hereto. "Rexall Acquisition": as defined in the recitals hereto. "Rexall DGP": as defined in the recitals hereto. "Rexall 1": as defined in the recitals hereto. "Rexall Purchase Agreement": as defined in the recitals hereto. "Royal Numico": as defined in the recitals hereto. "S&P": Standard & Poor's Ratings Services or any successor thereto. "Security Documents": the collective reference to the Guarantee and Collateral Agreement and each other pledge agreement, security document or similar agreement that may be delivered to the Administrative Agent as collateral security for any or all of the Obligations, in each case as amended, supplemented or otherwise modified from time to time. "Seller": as defined in the recitals hereto. "Solvent": with respect to any Person on a particular date, that on such date, (a) the fair value of the property of such Person is greater than the total amount of liabilities, including, without limitation, contingent liabilities, of such Person, (b) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and mature, (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature, (d) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's property would constitute an unreasonably small amount of capital and (e) such Person is able to pay its debts as they become due and payable. "Standby Letters of Credit": as defined in subsection 3.1(i). "Statutory Reserve Rate": a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board to which the Administrative Agent is subject with respect to the Eurodollar Rate, for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of the Board). Such reserve percentages shall in- 22 clude those imposed pursuant to such Regulation D. Eurodollar Loans shall be deemed to constitute eurocurrency funding and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "Subordinated Debt": $150,000,000 in aggregate principal amount of Existing Notes. "Subsidiary": as to any Person, a corporation, partnership or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly, through one or more intermediaries, or both, by such Person (exclusive of any Affiliate in which such Person has a minority ownership interest). Unless otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of the Borrower. "Swing Line Commitment": the Swing Line Lender's obligation to make Swing Line Loans pursuant to subsection 2.5. "Swing Line Lender": JPMorgan Chase, in its capacity as lender of the Swing Line Loans. "Swing Line Loan Participation Certificate": a certificate in substantially the form attached hereto as Exhibit C, as the same may be amended, supplemented or otherwise modified from time to time. "Swing Line Loans": as defined in subsection 2.5(a). "Swing Line Note": as defined in subsection 2.3(e). "Syndication Agent": as defined in the preamble hereto, and shall include any successor appointed in accordance with subsection 10.9. "Target": Rexall Sundown, Inc. "Taxes" means any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority. "Term A Loans": as defined in subsection 2.6. "Term A Note": a Term Note evidencing a Term A Loan. 23 "Term B Loans": as defined in subsection 2.6. "Term B Note": a Term Note evidencing a Term B Loan. "Term Loan A Commitment": as to any Lender at any time, its obligation to make Term A Loans to the Borrower in an aggregate amount equal to the amount set forth opposite such Lender's name in Schedule I under the heading "Term Loan A Commitment" as such amount may be reduced from time to time in accordance with Section 4 and the other applicable provisions hereof. "Term Loan A Termination Date": the earliest to occur of (i) the fifth anniversary of the Closing Date, (ii) March 15, 2007 if the Existing Notes shall be outstanding on such date and (iii) the earliest date of maturity of any Indebtedness of the Borrower or any of its Subsidiaries that refinances the Existing Notes. "Term Loan B Commitment": as to any Lender at any time, its obligation to make Term B Loans to the Borrower in an aggregate amount equal to the amount set forth opposite such Lender's name in Schedule I under the heading "Term Loan B Commitment" as such amount may be reduced from time to time in accordance with Section 4 and the other applicable provisions hereof. "Term Loan B Termination Date": the earliest to occur of (i) the sixth anniversary of the Closing Date, (ii) March 15, 2007 if the Existing Notes shall be outstanding on such date and (iii) the earliest date of maturity of any Indebtedness of the Borrower or any of its Subsidiaries that refinances the Existing Notes. "Term Loan Commitment": as to any Lender at any time, the sum of its Term Loan A Commitment and Term Loan B Commitment. "Term Loans": as defined in subsection 2.6. "Term Note": as defined in subsection 2.8(f). "Total Loan Percentage": as to any Lender at any time, the percentage which (i) the sum of (x) such Lender's Revolving Credit Commitment (or, if the Revolving Credit Commitments have terminated or expired at such time, the Aggregate Revolving Credit Outstanding of such Lender) at such time plus (y) the sum of such Lender's Available Term Loan Commitment and the aggregate principal amount of Term Loans outstanding for such Lender then constitutes of (ii) the sum of (x) the Aggregate Revolving Credit Commitments (or, if the Revolving Credit Commitments have terminated or expired at such time, the Aggregate Revolving Credit Outstanding of all Lenders) plus (y) the sum of the Aggregate Available Term Loan Commitments and the aggregate principal amount of Term Loans outstanding for all Lenders at such time. 24 "Trailing": with respect to the determination of any financial results for any period, the applicable financial result for the four fiscal quarters ended on such date. "Tranche": the collective reference to Eurodollar Loans the then current Interest Periods with respect to which begin on the same date and end on the same later date (whether or not such Loans shall originally have been made on the same day). "Transactions": the Rexall Acquisition, the Refinancing, the Extensions of Credit made hereunder on the Closing Date and the payment of fees, commissions and expenses in connection therewith (including any payment by the Borrower pursuant to the Rexall Purchase Agreement). "Transferee": as defined in subsection 11.15. "Type": as to any Loan, its nature as an ABR Loan or a Eurodollar Loan. "Withdrawal Liability": means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. 1.2. Other Definitional Provisions.(a) Unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings when used in the Notes, the other Loan Documents or any certificate or other document made or delivered pursuant hereto. (b) As used herein and in the Notes and any other Loan Document, and any certificate or other document made or delivered pursuant hereto or thereto, accounting terms relating to the Borrower and its Subsidiaries not defined in subsection 1.1 and accounting terms partly defined in subsection 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP; provided that, if the Borrower notifies the Administrative Agent that the Borrower requests an amendment to any provision hereof to eliminate the effect of any change occurring after the date hereof in GAAP or in the application thereof on the operation of such provision (or if the Administrative Agent notifies the Borrower that the Majority Lenders request an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or in the application thereof, then such provision shall be interpreted on the basis of GAAP as in effect and applied immediately before such change shall have become effective until such notice shall have been withdrawn or such provision amended in accordance herewith. (c) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, subsection, Schedule and Exhibit references are to this Agreement unless otherwise specified. 25 (d) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. SECTION 2. AMOUNT AND TERMS OF COMMITMENTS 2.1. Revolving Credit Commitments Subject to the terms and conditions hereof, each Lender with a Revolving Credit Commitment severally agrees to make revolving credit loans (each, a "Revolving Credit Loan") in U.S. Dollars to the Borrower from time to time during the Revolving Credit Commitment Period so long as after giving effect thereto (i) the Available Revolving Credit Commitment of each Lender with a Revolving Credit Commitment is greater than or equal to zero and (ii) the Aggregate Revolving Credit Outstanding of all Lenders does not exceed the Aggregate Revolving Credit Commitments. During the Revolving Credit Commitment Period the Borrower may use the Revolving Credit Commitments by borrowing, prepaying the Revolving Credit Loans in whole or in part, and reborrowing, all in accordance with the terms and conditions hereof. (b) The Revolving Credit Loans may from time to time be (i) Eurodollar Loans, (ii) ABR Loans or (iii) a combination thereof, as determined by the Borrower and notified to the Administrative Agent in accordance with subsections 2.2 and 4.2, provided that no Revolving Credit Loan shall be made as a Eurodollar Loan after the day that is one month prior to the Revolving Credit Termination Date. 2.2. Procedure for Revolving Credit Borrowing The Borrower may borrow under the Revolving Credit Commitments during the Revolving Credit Commitment Period on any Business Day, provided that the Borrower shall give the Administrative Agent irrevocable notice (which notice must be received by the Administrative Agent prior to 11:00 A.M., (New York City time) at least (a) three Business Days prior to the requested Borrowing Date, if all or any part of the requested Revolving Credit Loans are to be initially Eurodollar Loans, or (b) one Business Day prior to the requested Borrowing Date, otherwise), specifying in each case (i) the amount to be borrowed, (ii) the requested Borrowing Date, (iii) whether the borrowing is to be of Eurodollar Loans, ABR Loans or a combination thereof and (iv) if the borrowing is to be entirely or partly of Eurodollar Loans, the amount of such Type of Loan and the length of the initial Interest Periods therefor; provided that until the date that is one month after the Closing Date, Eurodollar Loans may be made only for one month Interest Periods. Each borrowing under the Revolving Credit Commitments shall be in an amount equal to (A) in the case of ABR Loans, $1,000,000 or a whole multiple of $1,000,000 in excess thereof (or, if the then Aggregate Available Revolving Credit Commitments are less than $1,000,000, such lesser amount) and (B) in the case of Eurodollar Loans, $5,000,000 or a whole multiple of $5,000,000 in excess thereof. Upon receipt of any such notice from the Borrower, the Administrative Agent shall promptly notify each Lender thereof not later than 9:00 A.M., New York City time, on the requested Borrowing Date. Not later than 12:00 Noon, New York City time, on each requested Borrowing Date each Lender shall make an amount equal to its Revolving Credit Commitment Percentage of the principal amount of the Revolving Credit Loans requested to be made on such Borrowing Date 26 available to the Administrative Agent at its office specified in subsection 11.2 in U.S. Dollars and in immediately available funds. The Administrative Agent shall on such date credit the account of the Borrower on the books of such office with the aggregate of the amounts made available to the Administrative Agent by the Lenders and in like funds as received by the Administrative Agent. 2.3. Repayment of Revolving Credit Loans; Evidence of Debt. The Borrower hereby unconditionally promises to pay to the Administrative Agent for the account of each Lender the then unpaid principal amount of each Revolving Credit Loan of such Lender (whether made before or after the termination or expiration of the Revolving Credit Commitments) on the Revolving Credit Termination Date and on such other dates and in such other amounts as may be required from time to time pursuant to this Agreement. The Borrower hereby further agrees to pay interest on the unpaid principal amount of the Revolving Credit Loans from time to time outstanding until payment thereof in full at the rates per annum, and on the dates, set forth in subsection 4.1. (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing indebtedness of the Borrower to such Lender resulting from each Revolving Credit Loan of such Lender from time to time, including the amounts of principal and interest payable thereon and paid to such Lender from time to time under this Agreement. (c) The Administrative Agent shall maintain the Register pursuant to subsection 11.6(b), and a subaccount therein for each Lender, in which shall be recorded (i) the amount of each Revolving Credit Loan made hereunder, the Type thereof and each Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder in respect of the Revolving Credit Loans and (iii) both the amount of any sum received by the Administrative Agent hereunder from the Borrower in respect of the Revolving Credit Loans and each Lender's share thereof. (d) The entries made in the Register and the accounts of each Lender maintained pursuant to subsection 2.3(b) shall, to the extent permitted by applicable law, be prima facie evidence of the existence and amounts of the obligations of the Borrower therein recorded; provided, however, that the failure of any Lender or the Administrative Agent to maintain the Register or any such account, or any error therein, shall not in any manner affect the obligation of the Borrower to repay (with applicable interest) the Revolving Credit Loans made to the Borrower by such Lender in accordance with the terms of this Agreement. (e) The Borrower agrees that it will, upon the request of any Lender, execute and deliver to such Lender (i) a promissory note of the Borrower evidencing the Revolving Credit Loans of such Lender, substantially in the form attached hereto as Exhibit A-1 with appropriate insertions as to date and principal amount (each, a "Revolving Credit Note"), and/or (ii) a promissory note of the Borrower evidencing the Swing Line Loans of such Lender, substantially in the form attached hereto as Exhibit A-2 with appropriate insertions as to date and principal amount (each, a "Swing Line Note"); provided that any Revolving Credit Note or 27 Swing Line Note previously delivered to such Lender (or any predecessor thereof) has been returned to the Borrower and marked cancelled. 2.4. Termination or Reduction of Revolving Credit Commitments .. The Borrower shall have the right, upon not less than three Business Days' notice to the Administrative Agent (which shall promptly notify each Lender thereof), to terminate the Revolving Credit Commitments or, from time to time, to reduce the amount of the Revolving Credit Commitments; provided that no such termination or reduction shall be permitted if, after giving effect thereto and to any prepayments of the Revolving Credit Loans made on the effective date thereof, the Available Revolving Credit Commitment of any Lender would not be greater than or equal to zero. Any such reduction shall be in an amount equal to $2,500,000 or a whole multiple of $1,000,000 in excess thereof and shall reduce permanently the Revolving Credit Commitments then in effect. 2.5. Swing Line Commitment.Subject to the terms and conditions hereof, the Swing Line Lender agrees to make swing line loans (individually, a "Swing Line Loan"; collectively, the "Swing Line Loans") to the Borrower from time to time during the Revolving Credit Commitment Period in an aggregate principal amount at any one time outstanding not to exceed $5,000,000; provided that the Swing Line Lender shall not make any Swing Line Loan if, after giving effect thereto, the sum of the Swing Line Loans, the Revolving Credit Loans and the Letter of Credit Obligations (in each case after giving effect to the Loans requested to be made and the Letters of Credit requested to be issued on such date) exceeds the Aggregate Revolving Credit Commitments. During the Revolving Credit Commitment Period, the Borrower may use the Swing Line Commitment by borrowing, prepaying the Swing Line Loans in whole or in part, and reborrowing, all in accordance with the terms and conditions hereof. All Swing Line Loans shall be made as ABR Loans and shall not be entitled to be converted into Eurodollar Loans. The Borrower shall give the Swing Line Lender irrevocable notice (which notice must be received by the Swing Line Lender prior to 12:00 Noon, New York City time) on the requested Borrowing Date specifying the amount of the requested Swing Line Loan which shall be in a minimum amount of $100,000 or a whole multiple of $100,000 in excess thereof. The proceeds of the Swing Line Loan will be made available by the Swing Line Lender to the Borrower at the Houston office of the Swing Line Lender set forth in subsection 11.2, or at such other address the Swing Line Lender shall designate in writing to the Borrower from time to time in accordance with subsection 11.2, by 3:00 P.M., New York City time, on the Borrowing Date by crediting the account of the Borrower at such office with such proceeds. The Borrower may at any time and from time to time prepay the Swing Line Loans, in whole or in part, without premium or penalty, by notifying the Swing Line Lender prior to 12:00 Noon, New York City time, on any Business Day of the date and amount of prepayment. If any such notice is given, the amount specified in such notice shall be due and payable on the date specified therein. Partial prepayments shall be in an aggregate principal amount of $100,000 or a whole multiple of $100,000 in excess thereof. (b) The Swing Line Lender, at any time in its sole and absolute discretion, may, on behalf of the Borrower (which hereby irrevocably directs the Swing Line Lender to act on its behalf) request each Lender, including the Swing Line Lender, to make a Revolving Credit 28 Loan which is an ABR Loan in an amount equal to such Lender's Revolving Credit Commitment Percentage of the amount of the Swing Line Loans outstanding on the date such notice is given (the "Refunded Swing Line Loans"). Unless any of the events described in paragraph (h) of Section 9 shall have occurred with respect to the Borrower (in which event the procedures of paragraph (d) of this subsection 2.5 shall apply), each Lender shall make the proceeds of such Revolving Credit Loan available to the Administrative Agent for the account of the Swing Line Lender at the office of the Administrative Agent specified in subsection 11.2 prior to 12:00 Noon (New York City time) in funds immediately available on the Business Day next succeeding the date such notice is given. The proceeds of such Revolving Credit Loans shall be immediately applied to repay the Refunded Swing Line Loans. Effective on the day such Revolving Credit Loans are made, the portion of the Swing Line Loans so paid shall no longer be outstanding as Swing Line Loans, shall no longer be due under any Swing Line Note and shall be due as the respective Revolving Credit Loans made by the Lenders in accordance with their respective Revolving Credit Commitment Percentages. The Borrower hereby unconditionally promises to pay to the Administrative Agent for the account of the Swing Line Lender the then unpaid principal amount of each Swing Line Loan of the Swing Line Lender on the Revolving Credit Termination Date (to the extent such Swing Line Loan has not previously been repaid in full with the proceeds of Revolving Credit Loans). (c) Notwithstanding anything herein to the contrary, the Swing Line Lender shall not be obligated to make any Swing Line Loans if the conditions set forth in subsection 6.2 have not been satisfied in respect thereof. (d) If prior to the making of a Revolving Credit Loan pursuant to paragraph (b) of this subsection 2.5 one of the events described in paragraph (h) of Section 9 shall have occurred and be continuing with respect to the Borrower, each Lender with a Revolving Credit Commitment will, on the date such Revolving Credit Loan was to have been made pursuant to the notice in this subsection 2.5, purchase an undivided participating interest in the Refunded Swing Line Loans in an amount equal to (i) its Revolving Credit Commitment Percentage times (ii) the Refunded Swing Line Loans. Each Lender will immediately transfer to the Swing Line Lender, in immediately available funds, the amount of its participation, and upon receipt thereof the Swing Line Lender will deliver to such Lender a Swing Line Loan Participation Certificate dated the date of receipt of such funds and in such amount. (e) Whenever, at any time after any Lender has purchased a participating interest in a Swing Line Loan, the Swing Line Lender receives any payment on account thereof, the Swing Line Lender will distribute to such Lender its participating interest in such amount (appropriately adjusted, in the case of interest payments, to reflect the period of time during which such Lender's participating interest was outstanding and funded); provided, however, that in the event that such payment received by the Swing Line Lender is required to be returned, such Lender will return to the Swing Line Lender any portion thereof previously distributed by the Swing Line Lender to it. 29 (f) Each Lender's obligation to make the Loans referred to in subsection 2.5(b) and to purchase participating interests pursuant to subsection 2.5(d) shall be absolute, irrevocable and unconditional and shall not be affected by any circumstance, including, without limitation, (i) any set-off, counterclaim, recoupment, defense or other right which such Lender or the Borrower may have against the Swing Line Lender, the Borrower or any other Person for any reason whatsoever, (ii) the occurrence or continuance of a Default or an Event of Default; (iii) any adverse change in the condition (financial or otherwise) of the Borrower or any other Loan Party; (iv) any breach of this Agreement or any other Loan Document by the Borrower or any of its Subsidiaries or any other Lender; or (v) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. 2.6. Term Loan Commitments. On the Closing Date, each Lender shall make a term loan to the Borrower (each, a "Term A Loan") in an aggregate principal amount set forth opposite such Lender's name on Schedule I under the heading "Term A Loan Commitment". On the Closing Date, each Lender shall make a term loan to the Borrower (each, a "Term B Loan", and together with the Term A Loans, the "Term Loans") in an aggregate principal amount set forth opposite such Lender's name on Schedule I under the heading "Term B Loan Commitment". The Term Loans may from time to time be (a) Eurodollar Loans, (b) ABR Loans or (c) a combination thereof, as determined by the Borrower and notified to the Administrative Agent in accordance with subsections 2.7 and 4.2. 2.7. Procedure for Term Loan Borrowing. The Borrower may borrow under the Term Loan Commitments only on the Closing Date, provided that the Borrower shall give the Administrative Agent irrevocable notice (which notice must be received by the Administrative Agent prior to 11:00 A.M. (New York City time) at least (a) three Business Days prior to the Closing Date, if all or any part of the requested Term Loans are to be initially Eurodollar Loans, or (b) one Business Day prior to the Closing Date, otherwise), specifying in each case (i) the amount to be borrowed, (ii) the requested Closing Date, (iii) whether the borrowing is to be of Eurodollar Loans, ABR Loans or a combination thereof, (iv) if the borrowing is to be entirely or partly of Eurodollar Loans, the amount of such Type of Loan and the length of the initial Interest Periods therefor; provided that until the date that is one month after the Closing Date, Eurodollar Loans may be made only for one month Interest Periods, and (v) the amount of Term A Loans and Term B Loans. The Term Loan Commitments shall expire at 5:00 P.M., New York City time, on the Closing Date, whether or not the Term Loans thereunder are made. Each borrowing under the Term Loan Commitments shall be in an amount equal to (A) in the case of ABR Loans, $1,000,000 or a whole multiple of $1,000,000 in excess thereof and (B) in the case of Eurodollar Loans, $5,000,000 or a whole multiple of $5,000,000 in excess thereof. Upon receipt of any such notice from the Borrower, the Administrative Agent shall promptly notify each Lender thereof not later than 9:00 A.M., New York City time, on the Closing Date. Not later than 12:00 Noon, New York City time, on the Closing Date, each Lender shall make an amount equal to its Term Loan Commitment available to the Administrative Agent at its office specified in subsection 11.2 in U.S. Dollars and in immediately available funds. The Administrative Agent shall on such date credit the account of the Borrower on the books of such office with the 30 aggregate of the amounts made available to the Administrative Agent by the Lenders and in like funds as received by the Administrative Agent. 2.8. Repayment of Term Loans; Evidence of Debt. The aggregate amount of Term A Loans and Term B Loans, as the case may be, of all the Lenders outstanding on the Term Loan A Termination Date and the Term Loan B Termination Date, as the case may be, shall be paid on such date. Prior to such Term Loan A Termination Date or Term Loan B Termination Date, the Borrower shall pay quarterly installments on the dates set forth below in a principal amount equal to the percentage set forth opposite such date multiplied by the aggregate amount of the Term A Loans or Term B Loans, as the case may be, outstanding as of the Closing Date: Term Term Loan A Loan B Dates Percentage Percentage ----- ---------- ---------- September 30, 2003 5% 0.25% December 31, 2003 5% 0.25% March 31, 2004 5% 0.25% June 30, 2004 5% 0.25% September 30, 2004 5% 0.25% December 31, 2004 5% 0.25% March 31, 2005 5% 0.25% June 30, 2005 5% 0.25% September 30, 2005 5% 0.25% December 31, 2005 5% 0.25% March 31, 2006 5% 0.25% June 30, 2006 5% 0.25% September 30, 2006 5% 0.25% December 31, 2006 5% 0.25% March 31, 2007 5% 0.25% June 30, 2007 5% 0.25% September 30, 2007 5% 0.25% December 31, 2007 5% 0.25% March 31, 2008 5% 0.25% June 30, 2008 5% 0.25% September 30, 2008 - 23.75% December 31, 2008 - 23.75% March 31, 2009 - 23.75% June 30, 2009 - 23.75% The percentages set forth in the table above shall be automatically reduced upon application of any prepayment pursuant to subsection 4.4 in the manner set forth in such subsection. 31 (b) The Borrower hereby unconditionally promises to pay to the Administrative Agent for the account of each Lender the amounts specified in subsection 2.8(a) on the dates specified in subsection 2.8(a) and on such other dates and in such other amounts as may be required from time to time pursuant to this Agreement. The Borrower hereby further agrees to pay interest on the unpaid principal amount of the Term Loans from time to time outstanding until payment thereof in full at the rates per annum, and on the dates, set forth in subsection 4.1. (c) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing indebtedness of the Borrower to such Lender resulting from each Term Loan of such Lender from time to time, including the amounts of principal and interest payable thereon and paid to such Lender from time to time under this Agreement. (d) The Administrative Agent shall maintain the Register pursuant to subsection 11.6(b), and a sub-account therein for each Lender, in which shall be recorded (i) the amount of each Term Loan made hereunder, the Type thereof and each Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder in respect of the Term Loans, (iii) whether such Term Loan is a Term A Loan or a Term B Loan and (iv) both the amount of any sum received by the Administrative Agent hereunder from the Borrower in respect of the Term Loans and each Lender's share thereof. (e) The entries made in the Register and the accounts of each Lender maintained pursuant to subsection 2.8(c) shall, to the extent permitted by applicable law, be prima facie evidence of the existence and amounts of the obligations of the Borrower therein recorded; provided, however, that the failure of any Lender or the Administrative Agent to maintain the Register or any such account, or any error therein, shall not in any manner affect the obligation of the Borrower to repay (with applicable interest) the Term Loans made to the Borrower by such Lender in accordance with the terms of this Agreement. (f) The Borrower agrees that it will, upon the written request of any Lender, execute and deliver to such Lender a promissory note of the Borrower evidencing the Term Loans of such Lender, substantially in the form attached hereto as Exhibit A-3 in the case of Term A Loans and Exhibit A-4 in the case of Term B Loans, with appropriate insertions as to date and principal amount (each, a "Term Note"); provided that any Term Note previously delivered to such Lender (or any predecessor thereof) has been returned to the Borrower and marked cancelled. SECTION 3. LETTERS OF CREDIT 3.1. Letters of Credit. Subject to the terms and conditions of this Agreement, the Issuing Lender agrees, on behalf of the Lenders, and in reliance on the agreement of the Lenders set forth in subsection 3.3, to issue for the account of the Borrower letters of credit in an aggregate face amount, together with any unpaid Reimbursement Obligations, not to exceed $10,000,000 at any time outstanding, as follows: 32 (i) standby letters of credit (collectively, the "Standby Letters of Credit") in a form reasonably satisfactory to the Issuing Lender and in favor of such beneficiaries as the Borrower shall specify from time to time (which shall be reasonably satisfactory to the Issuing Lender); and (ii) commercial letters of credit in the form of the Issuing Lender's standard commercial letters of credit ("Commercial Letters of Credit") in favor of sellers of goods or services to the Borrower or its Subsidiaries (the Standby Letters of Credit and Commercial Letters of Credit being referred to collectively as the "Letters of Credit"); provided that on the date of the issuance of any Letter of Credit, and after giving effect to such issuance, the Aggregate Revolving Credit Outstanding of all Lenders does not exceed the Aggregate Revolving Credit Commitments at such time. Each Standby Letter of Credit shall (i) have an expiry date no later than one year from the date of issuance thereof or, if earlier, five Business Days prior to the Revolving Credit Termination Date, (ii) be denominated in U.S. Dollars and (iii) be in a minimum face amount of $100,000. Each Commercial Letter of Credit shall (i) provide for the payment of sight drafts when presented for honor thereunder, or of time drafts, in each case in accordance with the terms thereof and when accompanied by the documents described or when such documents are presented, as the case may be, (ii) be denominated in U.S. Dollars and (iii) have an expiry date no later than six months from the date of issuance thereof or, if earlier, five Business Days prior to the Revolving Credit Termination Date. Upon the issuance of any Letter of Credit, the Administrative Agent shall promptly notify each Lender thereof. 3.2. Procedure for Issuance of Letters of Credit. The Borrower may from time to time request, upon at least three Business Days' notice, the Issuing Lender to issue a Letter of Credit by delivering to the Issuing Lender at its address specified in subsection 11.2 a Letter of Credit Application, completed to the reasonable satisfaction of such Issuing Lender, together with such other certificates, documents and other papers and information as such Issuing Lender may reasonably request. Upon receipt of any Letter of Credit Application, the Issuing Lender will process such Letter of Credit Application, and the other certificates, documents and other papers delivered in connection therewith, in accordance with its customary procedures and shall promptly issue such Letter of Credit (but in no event earlier than three Business Days after receipt by the Issuing Lender of the Letter of Credit Application relating thereto) by issuing the original of such Letter of Credit to the beneficiary thereof and by furnishing a copy thereof to the Borrower. Prior to the issuance of any Letter of Credit, the Issuing Lender will confirm with the Administrative Agent that the issuance of such Letter of Credit is permitted pursuant to Section 3 and subsection 6.2. Additionally, the Issuing Lender and the Borrower shall inform the Administrative Agent of any modifications made to outstanding Letters of Credit, of any payments made with respect to such Letters of Credit, and of any other information regarding such Letters of Credit as may be reasonably requested by the Administrative Agent, in each case pursuant to procedures established by the Administrative Agent. 33 3.3. Participating Interests. Effective as of the date of the issuance of each Letter of Credit (in the case of a Letter of Credit issued after the date hereof), the Issuing Lender agrees to allot, and does allot, to each other Lender with a Revolving Credit Commitment, and each such Lender severally and irrevocably agrees to take and does take, a Participating Interest in such Letter of Credit and the related Letter of Credit Application in a percentage equal to such Lender's Revolving Credit Commitment Percentage. On the date that any Participating Lender becomes a party to this Agreement in accordance with subsection 11.6, Participating Interests in any outstanding Letter of Credit held by the Lender from which such Participating Lender acquired its interest hereunder shall be proportionately reallocated between such Participating Lender and such transferor Lender. Each Participating Lender hereby agrees that its obligation to participate in each Letter of Credit issued in accordance with the terms hereof and to pay or to reimburse the Issuing Lender in respect of such Letter of Credit for its participating share of the drafts drawn thereunder shall be irrevocable and unconditional; provided that no Participating Lender shall be liable for the payment of any amount under subsection 3.4(b) resulting solely from the Issuing Lender's gross negligence or willful misconduct. 3.4. Payments. The Borrower agrees (i) to reimburse the Administrative Agent for the account of the Issuing Lender, forthwith upon its demand and otherwise in accordance with the terms of the Letter of Credit Application, if any, relating thereto, for any payment made by the Issuing Lender under any Letter of Credit and (ii) to pay to the Administrative Agent for the account of such Issuing Lender, interest on any unreimbursed portion of any such payment from the date of such payment until reimbursement in full thereof at a fluctuating rate per annum equal to the rate then borne by Revolving Credit Loans that are ABR Loans pursuant to subsection 4.1(b) plus 2% per annum. (b) In the event that the Issuing Lender makes a payment under any Letter of Credit and is not reimbursed in full therefor, forthwith upon demand of the Issuing Lender, and otherwise in accordance with the terms hereof or of the Letter of Credit Application, if any, relating to such Letter of Credit, the Issuing Lender will promptly through the Administrative Agent notify each Participating Lender that acquired its Participating Interest in such Letter of Credit from the Issuing Lender or pursuant to an assignment as provided in subsection 11.6(c). No later than the close of business on the date such notice is given, each such Participating Lender will transfer to the Administrative Agent, for the account of the Issuing Lender, in immediately available funds, an amount equal to such Participating Lender's pro rata share of the unreimbursed portion of such payment. (c) Whenever, at any time, after the Issuing Lender has made payment under a Letter of Credit and has received from any Participating Lender such Participating Lender's pro rata share of the unreimbursed portion of such payment, the Issuing Lender receives any reimbursement on account of such unreimbursed portion or any payment of interest on account thereof, the Issuing Lender will distribute to the Administrative Agent, for the account of such Participating Lender, its pro rata share thereof; provided, however, that in the event that the receipt by the Issuing Lender of such reimbursement or such payment of interest (as the case may 34 be) is required to be returned, such Participating Lender will promptly return to the Administrative Agent, for the account of the Issuing Lender, any portion thereof previously distributed by the Issuing Lender to it. 3.5. Further Assurances. The Borrower hereby agrees, from time to time, to do and perform any and all acts and to execute any and all further instruments reasonably requested by the Issuing Lender more fully to effect the purposes of this Agreement and the issuance of the Letters of Credit issued hereunder. 3.6. Obligations Absolute. The payment obligations of the Borrower and each Participating Lender under subsection 3.4 shall be unconditional and irrevocable and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including, without limitation, the following circumstances: (a) the existence of any claim, set-off, defense or other right which the Borrower may have at any time against any beneficiary, or any transferee, of any Letter of Credit (or any Persons for whom any such beneficiary or any such transferee may be acting), the Issuing Lender or any Participating Lender, or any other Person, whether in connection with this Agreement, the transactions contemplated herein, or any unrelated transaction; (b) any statement or any other document presented under any Letter of Credit opened for its account proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (c) payment by the Issuing Lender under any Letter of Credit against presentation of a draft or certificate which does not comply with the terms of such Letter of Credit, except payment resulting solely from the gross negligence or willful misconduct of the Issuing Lender; or (d) any other circumstances or happening whatsoever, whether or not similar to any of the foregoing, except circumstances or happenings resulting from the gross negligence or willful misconduct of the Issuing Lender. 3.7. Letter of Credit Application. To the extent not inconsistent with the terms of this Agreement (in which case the provisions of this Agreement shall prevail), provisions of any Letter of Credit Application related to any Letter of Credit are supplemental to, and not in derogation of, any rights and remedies of the Issuing Lender and the Participating Lenders under this Section 3 and applicable law. The Borrower acknowledges and agrees that all rights of the Issuing Lender under any Letter of Credit Application shall inure to the benefit of each Participating Lender to the extent of its Revolving Credit Commitment Percentage as fully as if such Participating Lender was a party to such Letter of Credit Application. 35 3.8. Purpose of Letters of Credit. Each Standby Letter of Credit shall be used by the Borrower solely (a) to provide credit support for borrowings by the Borrower or its Subsidiaries, or (b) for other working capital purposes of the Borrower and Subsidiaries in the ordinary course of business. Each Commercial Letter of Credit will be used by the Borrower and Subsidiaries solely to provide the primary means of payment in connection with the purchase of goods or services by the Borrower and its Subsidiaries in the ordinary course of business. SECTION 4. GENERAL PROVISIONS 4.1. Interest Rates and Payment Dates. Each Eurodollar Loan shall bear interest for each day during each Interest Period with respect thereto at a rate per annum equal to the Eurodollar Rate determined for such Interest Period plus the Applicable Margin. (b) Each ABR Loan shall bear interest for each day on which it is outstanding at a rate per annum equal to the Alternate Base Rate for such day plus the Applicable Margin. (c) If all or a portion of (i) the principal amount of any Loan, (ii) any interest payable thereon or (iii) any fee or other amount payable hereunder shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such amount shall bear interest for each day after the due date until such amount is paid in full at a rate per annum equal to (x) in the case of principal, the rate that would otherwise be applicable thereto pursuant to the foregoing provisions of this subsection plus 2% per annum or (y) in the case of any such overdue interest, fee or other amount, the rate described in paragraph (b) of this subsection plus 2% per annum. If any Event of Default described in subsections 9(c) (with respect to subsection 8.1 only), (f), (h) or (j) shall occur and be continuing, and the Majority Lenders shall give notice to the Borrower that this sentence shall apply, then, until such Event of Default shall be cured or waived or such notice shall be withdrawn, the outstanding principal amount of all Loans shall bear interest at 2% per annum above the rate that would otherwise be applicable thereto pursuant to the foregoing provisions of this subsection 4.1 (other than the first sentence of this paragraph (c)). (d) Interest shall be payable in arrears on each Interest Payment Date, provided that interest accruing pursuant to paragraph (c) of this subsection 4.1 shall be payable from time to time on demand. 4.2. Conversion and Continuation Options.The Borrower may elect from time to time to convert outstanding Eurodollar Loans (in whole or in part) to ABR Loans by giving the Administrative Agent at least two Business Days' prior irrevocable notice of such election, provided that any such conversion of Eurodollar Loans may only be made on the last day of an Interest Period with respect thereto. The Borrower may elect from time to time to convert outstanding ABR Loans (in whole or in part) to Eurodollar Loans by giving the Administrative Agent at least three Business Days' prior irrevocable notice of such election. Any such notice of conversion to Eurodollar Loans shall specify the length of the initial Interest Period or Interest Periods therefor; provided that until the date that is one month after the Closing Date, Eurodollar Loans may be made only for one month Interest Periods. Upon receipt of any such 36 notice the Administrative Agent shall promptly notify each relevant Lender thereof. All or any part of outstanding Eurodollar Loans and ABR Loans may be converted as provided herein, provided that (i) no ABR Loan may be converted into a Eurodollar Loan when any Default or Event of Default has occurred and is continuing and the Administrative Agent or Lenders holding the majority of the outstanding principal amount of Loans of such Type have determined that such conversion is not appropriate, (ii) any such conversion may only be made if, after giving effect thereto, subsection 4.3 shall not have been violated, and (iii) no ABR Loan may be converted into a Eurodollar Loan after the date that is one month prior to the Revolving Credit Termination Date. (b) Any Eurodollar Loans may be continued as such upon the expiration of the then current Interest Period with respect thereto by the Borrower giving notice to the Administrative Agent of the length of the next Interest Period to be applicable to such Loans determined in accordance with the applicable provisions of the term "Interest Period" set forth in subsection 1.1, provided that no Eurodollar Loan may be continued as such (i) when any Default or Event of Default has occurred and is continuing and the Administrative Agent or Lenders holding the majority of the outstanding principal amount of Loans of such Class have determined that such continuation is not appropriate, (ii) if, after giving effect thereto, subsection 4.3 would be contravened or (iii) after the date that is one month prior to the Revolving Credit Termination Date; and provided, further, that if the Borrower shall fail to give such notice or if such continuation is not permitted pursuant to the preceding proviso, such Eurodollar Loans shall, subject to the preceding proviso, be automatically continued as such, with the length of the next Interest Period to be 30 days. Upon receipt of any notice pursuant to this subsection 4.2(b), the Administrative Agent shall promptly notify each Lender thereof. 4.3. Minimum Amounts of Tranches. All borrowings, conversions and continuations of Loans hereunder and all selections of Interest Periods hereunder shall be in such amounts and be made pursuant to such elections so that, after giving effect thereto, (i) the aggregate principal amount of the Eurodollar Loans comprising each Tranche shall be equal to $5,000,000 or a whole multiple of $5,000,000 in excess thereof and (ii) there shall not be more than (ten) 10 Tranches at any one time outstanding. 4.4. Optional and Mandatory Prepayments.The Borrower may at any time and from time to time prepay Revolving Credit Loans or Term Loans, in whole or in part, upon at least three Business Days' irrevocable notice to the Administrative Agent (in the case of Eurodollar Loans) and at least one Business Day's irrevocable notice to the Administrative Agent (in the case of ABR Loans), specifying the date and amount of prepayment and whether the prepayment is (i) of Revolving Credit Loans or Term A Loans or Term B Loans and (ii) of Eurodollar Loans, ABR Loans or a combination thereof, and, in each case if a combination thereof, the amount allocable to each. Upon the receipt of any such notice the Administrative Agent shall promptly notify each Lender thereof. If any such notice is given, the amount specified in such notice shall be due and payable on the date specified therein. Partial prepayments of the Loans 37 shall be in an aggregate principal amount of $2,500,000 or a whole multiple of $1,000,000 in excess thereof. (b) If, at any time during the Revolving Credit Commitment Period, for any reason the Aggregate Revolving Credit Outstanding of all Lenders exceeds the Aggregate Revolving Credit Commitments then in effect, or the Aggregate Revolving Credit Outstanding of any Lender exceeds the Revolving Credit Commitment of such Lender then in effect, the Borrower shall, without notice or demand, immediately prepay the Revolving Credit Loans in an aggregate principal amount at least sufficient to eliminate any such excess. (c) If any Preferred Stock (other than Preferred Stock of the Borrower issued in connection with the formation or acquisition of a joint venture so long as such Preferred Stock does not mature or provide for redemption prior to the Term Loan B Termination Date and does not provide for the payment of any dividends) or Indebtedness shall be issued or incurred by the Borrower or any of its Subsidiaries (excluding any Indebtedness permitted in accordance with subsection 8.2 as such subsection is in effect on the date of this Agreement), an amount equal to 100% of the Net Cash Proceeds thereof shall be applied on the date of such issuance or incurrence in accordance with subsection 4.8. This subsection 4.4(c) shall not affect any rights and remedies that the Administrative Agent or the Lenders may otherwise have under Section 9. (d) If on any date the Borrower or any of its Subsidiaries shall receive Net Cash Proceeds from any Asset Sale or Recovery Event, then, unless a Reinvestment Notice shall be delivered in respect thereof, 100% of such Net Cash Proceeds shall be applied on such date, to prepay the Term Loans in accordance with subsection 4.8(a); provided that, notwithstanding the foregoing, (i) the aggregate Net Cash Proceeds of Asset Sales that may be excluded from the foregoing requirement pursuant to a Reinvestment Notice shall not exceed $2,000,000 in any fiscal year of the Borrower and (ii) on each Reinvestment Prepayment Date, an amount equal to the Reinvestment Prepayment Amount with respect to the relevant Reinvestment Event shall be applied to prepay the Term Loans in accordance with subsection 4.8. (e) If Capital Stock (other than Preferred Stock) shall be issued by the Borrower or any of its Subsidiaries, an amount equal to 75% of the Net Cash Proceeds thereof shall be applied on the date of such issuance to prepay the Term Loans in accordance with subsection 4.8. This subsection 4.4(e) shall not affect any rights and remedies that the Administrative Agent or the Lenders may otherwise have under Section 9. (f) If any amount is received by the Borrower or any of its Subsidiaries from Royal Numico or its Affiliates in connection with the Rexall Purchase Agreement (other than any amount representing a purchase price adjustment) or as a direct or indirect result of any breach of any term or provision of the Rexall Purchase Agreement or otherwise in respect of any claim by the Borrower or any of its Subsidiaries arising out of the Rexall Acquisition (other than to the extent relating to indemnification or reimbursements of amounts paid or to be paid by the Borrower or any of its Subsidiaries to Persons other than the Borrower or any of its Subsidiar 38 39 (d) In lieu of any letter of credit commissions and fees provided for in any Letter of Credit Application relating to a Commercial Letter of Credit (other than any standard issuance, amendment and negotiation fees), the Borrower will pay the Administrative Agent, (i) for the account of the Issuing Lender, a non-refundable fronting fee equal to 1/16 of 1% of the amount of such Commercial Letter of Credit, (ii) for the account of the Issuing Lender (with respect to its Participating Interest) and the Participating Lenders, a non-refundable Commercial Letter of Credit fee equal to 1/4 of 1% of the amount of such Letter of Credit. Such fees shall be payable to the Administrative Agent on the date of issuance and shall be distributed by the Administrative Agent to the Issuing Lender or the Participating Lenders, as applicable, promptly thereafter and (iii) for the account of the Administrative Agent, the normal and customary Letter of Credit application and processing fees. (e) The Borrower agrees to pay the Issuing Lender for its own account the customary administration, amendment, transfer and negotiation fees charged by the Issuing Lender in connection with its issuance and administration of Letters of Credit. 4.6. Computation of Interest and Fees. Interest and fees shall be calculated on the basis of a 360-day year for the actual days elapsed (including the first day but excluding the last day); provided that interest calculated at the Alternate Base Rate (based on the Prime Rate included therein) shall be calculated on the basis of a 365- (or 366-, as the case may be) day year for the actual days elapsed (including the first day but excluding the last day). The Administrative Agent shall as soon as practicable notify the Borrower and the relevant Lenders of each determination of a Eurodollar Rate. Any change in the interest rate on a Loan resulting from a change in the Alternate Base Rate shall become effective as of the opening of business on the day on which such change becomes effective. The Administrative Agent shall as soon as practicable notify the Borrower and the relevant Lenders of the effective date and the amount of each such change in the Alternate Base Rate. (b) Each determination of an interest rate by the Administrative Agent pursuant to any provision of this Agreement shall be conclusive and binding on the Borrower and the Lenders in the absence of manifest error. The Administrative Agent shall, at the request of the Borrower, deliver to the Borrower a statement showing in reasonable detail the calculations used by the Administrative Agent in determining any interest rate pursuant to subsection 4.1. 4.7. Inability to Determine Interest Rate. If prior to the first day of any Interest Period: (a) the Administrative Agent shall have determined (which determination shall be conclusive and binding upon the Borrower) that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for such Interest Period, or (b) the Administrative Agent has received notice from the Majority Lenders that the Eurodollar Rate determined or to be determined for such Interest Period will not 40 adequately and fairly reflect the cost to such Lenders of making or maintaining their Eurodollar Loans during such Interest Period, the Administrative Agent shall give telecopy or telephonic notice thereof to the Borrower and the Lenders as soon as practicable thereafter. If such notice is given (i) any Eurodollar Loans requested to be made on the first day of such Interest Period shall be made as ABR Loans in U.S. Dollars, (ii) any Revolving Credit Loans or Term Loans that were to have been converted on the first day of such Interest Period to or continued as Eurodollar Loans shall be converted to or continued as ABR Loans and (iii) any outstanding Eurodollar Loans shall be converted on the last day of such Interest Period to ABR Loans. Until such notice has been withdrawn by the Administrative Agent, no further Eurodollar Loans shall be made or continued as such, nor shall the Borrower have the right to convert ABR Loans to Eurodollar Loans. 4.8. Pro rata Treatment and Payments. Each borrowing of Revolving Credit Loans by the Borrower from the Lenders hereunder shall be made pro rata according to the Revolving Credit Commitment Percentages of the Lenders in effect on the date of such borrowing. (ii) Each payment by the Borrower on account of any commitment fee or letter of credit fee hereunder shall be allocated by the Administrative Agent among the Lenders in accordance with the respective amounts which such Lenders are entitled to receive pursuant to subsection 4.5. (iii) Any reduction of the Revolving Credit Commitments of the Lenders shall be allocated by the Administrative Agent among the Lenders pro rata according to the Revolving Credit Commitment Percentages of the Lenders on the date of such reduction. (iv) In the event of any mandatory prepayment of Term Loans made at a time when Term Loans of more than one Class remain outstanding, the Borrower shall select Term Loans to be prepaid so that the aggregate amount of such prepayment is allocated between the Term A Loans and the Term B Loans pro rata based on the aggregate principal amount of outstanding Loans of each such Class; provided that until all Term A Loans have been repaid in full, any Lender of Term B Loans may elect, by notice to the Administrative Agent by telephone (confirmed by telecopy) at least one Business Day prior to the prepayment date, to decline (but only to the extent the such declined Term B Loan prepayment would not reduce the outstanding principal of such Lender's Term A Loan below zero) all or any portion of any prepayment of its Term B Loans pursuant to this subsection 4.8(a), in which case the aggregate amount of the prepayment that would have been applied to prepay Term B Loans but was so declined shall be applied to prepay Term A Loans. Each payment by the Borrower on account of principal of or interest in respect of Revolving Credit Loans or Term Loans shall be allocated by the Administrative Agent within the Applicable Class pro rata according to the respective amounts thereof then due and owing to each Lender. Prepayments of Term Loans pursuant to subsection 4.4(a), 4.4(c), 4.4(d), 4.4(e), 4.4(f) or 4.4(g) shall be applied (x) pro rata according to the respective 41 principal amounts thereof then due and owing to each Lender within the applicable Class and (y) pro rata to the respective installments of principal thereof. (v) All payments (including prepayments) to be made by the Borrower in respect of Revolving Credit Loans or Term Loans hereunder, whether on account of principal, interest, fees or otherwise, shall be made without set-off or counterclaim and shall be made prior to 12:00 Noon, New York City time, on the due date thereof to the Administrative Agent, for the account of the Lenders entitled thereto, at the Administrative Agent's office specified in subsection 11.2, in U.S. Dollars and in immediately available funds. The Administrative Agent shall distribute such payments to the Lenders entitled to receive the same promptly upon receipt in like funds as received. (vi) If any payment hereunder (other than payments on the Eurodollar Loans) becomes due and payable on a day other than a Business Day, the maturity of such payment shall be extended to the next succeeding Business Day, and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. If any payment on a Eurodollar Loan becomes due and payable on a day other than a Business Day, the maturity of such payment shall be extended to the next succeeding Business Day (and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension) unless the result of such extension would be to extend such payment into another calendar month, in which event such payment shall be made on the immediately preceding Business Day. (b) Unless the Administrative Agent shall have been notified in writing by any Lender prior to a Borrowing Date that such Lender will not make the amount that would constitute its share of such borrowing available to the Administrative Agent, the Administrative Agent may assume that such Lender is making such amount available to the Administrative Agent, and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower a corresponding amount. If such amount is not made available to the Administrative Agent by the required time on the Borrowing Date therefor, such Lender shall pay to the Administrative Agent, on demand, such amount with interest thereon at a rate per annum equal to the daily average Federal Funds Effective Rate for the period until such Lender makes such amount immediately available to the Administrative Agent. A certificate of the Administrative Agent submitted to any Lender with respect to any amounts owing under this subsection shall be conclusive in the absence of manifest error. If such Lender's share of such borrowing is not made available to the Administrative Agent by such Lender within three Business Days of such Borrowing Date, the Borrower shall repay such Lender's share of such borrowing (together with interest thereon from the date such amount was made available to the Borrower at the rate per annum applicable to ABR Loans hereunder to the Administrative Agent not later than three Business Days after receipt of written notice from the Administrative Agent specifying such Lender's share of such borrowing that was not made available to such Administrative Agent, and the Borrower shall have the right to pursue any remedies against such Lender for its failure to make its portion of such borrowing available. 42 (c) Unless the Administrative Agent shall have been notified in writing by the Borrower prior to a date on which a payment is due from the Borrower hereunder that the Borrower will not make such payment available to the Administrative Agent, the Administrative Agent may assume that the Borrower is making such amount available to the Administrative Agent, and the Administrative Agent may, in reliance upon such assumption, make available to the applicable Lenders a corresponding amount. If such amount is not made available to the Administrative Agent by the required time on the due date therefor, each applicable Lender shall pay to the Administrative Agent, on demand, such amount with interest thereon at a rate per annum equal to the daily average Federal Funds Effective Rate for the period until such Lender makes such amount immediately available to the Administrative Agent. A certificate of the Administrative Agent submitted to any Lender with respect to any amounts owing under this subsection shall be conclusive in the absence of manifest error. 4.9. Illegality. Notwithstanding any other provision herein, if the adoption of or any change in any Legal Requirement or in the interpretation or application thereof shall make it unlawful for any Lender to make or maintain Eurodollar Loans as contemplated by this Agreement, (a) the commitment of such Lender hereunder to make Eurodollar Loans, continue Eurodollar Loans as such and convert ABR Loans to Eurodollar Loans shall forthwith be cancelled until such time as it shall no longer be unlawful for such Lender to make or maintain the affected Loans and (b) such Lender's Loans then outstanding as Eurodollar Loans, if any, shall be converted automatically to ABR Loans on the respective last days of the then current Interest Periods with respect to such Eurodollar Loans or within such earlier period as may be required by law. If any such conversion of a Eurodollar Loan occurs on a day which is not the last day of the then current Interest Period with respect thereto, the Borrower shall pay to such Lender such amounts, if any, as may be required pursuant to subsection 4.11. 4.10. Increased Costs. In the event that the adoption of or any change in any Legal Requirement (or in the interpretation or application thereof) or compliance by any Lender with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority: (i) does or shall subject any Lender to any tax of any kind whatsoever with respect to this Agreement, any Note, any Loans made by it or any Letter of Credit, or change the basis of taxation of payments to such Lender of principal, fees, interest or any other amount payable hereunder (except for (i) changes in the rate of tax on the overall net income or profits of such Lender, (ii) any tax to the extent that the Borrower is or would be required to pay an additional amount with respect to such tax under subsection 4.12 or (iii) any tax with respect to which the Borrower would not be required to pay an additional amount under subsection 4.12 because payment of such additional amount with respect to such tax would be specifically excluded thereunder); (ii) does or shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, or deposits or other 43 liabilities in or for the account of, advances or loans by, or other credit extended by, or any other acquisition of funds by, any office of such Lender which are not otherwise included in the determination of the Eurodollar Rate; or (iii) does or shall impose on such Lender any other condition affecting this Agreement or the Loans made by any Lender or any Letter of Credit participation therein; and the result of any of the foregoing is to increase the cost to such Lender, by any amount which such Lender deems to be material, of making, renewing, maintaining or participating in advances or extensions of credit or to reduce any amount receivable hereunder, in each case in respect of its Loans or Letters of Credit which it issues or in which it holds Participating Interests, then, in any such case, the Borrower shall promptly pay such Lender, upon receipt of its demand setting forth in reasonable detail, any additional amounts necessary to compensate such Lender for such additional cost or reduced amount receivable, together with interest on each such amount from the date two Business Days after the date demanded until payment in full thereof at the Alternate Base Rate. A certificate as to any additional amounts payable pursuant to the foregoing sentence submitted by such Lender, through the Administrative Agent, to the Borrower shall be conclusive in the absence of manifest error. This covenant shall survive the termination of this Agreement and payment of all amounts outstanding hereunder for a period of one year. (b) In the event that any Lender shall have determined that the adoption of any law, rule, regulation or guideline regarding capital adequacy (or any change therein or in the interpretation or application thereof) or compliance by any Lender or any corporation controlling such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) from any central bank or Governmental Authority, including, without limitation, the issuance of any final rule, regulation or guideline, does or shall have the effect of reducing the rate of return on such Lender's or such corporation's capital as a consequence of its obligations hereunder to a level below that which such Lender or such corporation could have achieved but for such adoption, change or compliance (taking into consideration such Lender's or such corporation's policies with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time, after submission by such Lender to the Borrower (with a copy to the Administrative Agent) of a written request therefor, the Borrower shall promptly pay to such Lender such additional amount or amounts as will compensate such Lender or such corporation for such reduction. A certificate as to any additional amounts payable pursuant to this subsection 4.10(b), submitted by a Lender to the Borrower, shall be conclusive in the absence of manifest error. The provisions of this subsection 4.10(b) shall survive the termination of this Agreement and the payment of all amounts outstanding hereunder. (c) Any request by any Lender for compensation under this subsection 4.10 shall be accompanied by a certificate of a duly authorized officer of such Lender setting for such information and calculations supporting such request as such Lender shall customarily provide in similar situations. 44 (d) Failure or delay on the part of any Lender to demand compensation pursuant to this subsection 4.10 shall not constitute a waiver of such Lender's right to demand such compensation; provided that the Borrower shall not be required to compensate a Lender pursuant to this subsection 4.10 for any increased costs or reductions incurred more than 180 days prior to the date that such Lender notifies the Borrower of the circumstance giving rise to such increased costs or reductions and of such Lender's intention to claim compensation therefor; provided, further, that, if the circumstance giving rise to such increased costs or reductions is retroactive in effect, then the 180-day period referred to above shall be extended to include the period of retroactive effect thereof. 4.11. Indemnity. Without duplication of the provisions of subsection 4.15, the Borrower agrees to indemnify each Lender and to hold each Lender harmless from any loss or expense which such Lender may sustain or incur as a consequence of (a) default by the Borrower in payment when due of the principal amount of or interest on any Loans of such Lender, (b) default by the Borrower in making a borrowing, continuation or conversion after the Borrower has given a notice of borrowing, a notice of continuation or a notice of conversion in accordance with this Agreement, (c) default by the Borrower in making any prepayment after the Borrower has given a notice in accordance with this Agreement or (d) the making of a prepayment, continuation or conversion of a Eurodollar Loan on a day which is not the last day of an Interest Period with respect thereto, including, without limitation, in each case, any such loss or expense arising from the reemployment of funds obtained by it to maintain its Eurodollar Loans hereunder or from fees payable to terminate the deposits from which such funds were obtained, but excluding, in each case, lost profit. A certificate as to any amounts payable pursuant to this subsection 4.11, submitted by a Lender to the Borrower, shall be conclusive in the absence of manifest error. This covenant shall survive termination of this Agreement and payment of all amounts outstanding hereunder. 4.12. Taxes. Any and all payments by or on account of any obligation of the Borrower hereunder shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; provided that if the Borrower shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this subsection) the Administrative Agent, Lender or Issuing Lender (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law. (b) In addition, the Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law. (c) The Borrower shall indemnify the Administrative Agent, each Lender and the Issuing Lender, within 10 days after written demand therefor, for the full amount of any In 45 demnified Taxes or Other Taxes paid by the Administrative Agent, such Lender or the Issuing Lender, as the case may be, on or with respect to any payment by or on account of any obligation of the Borrower hereunder (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this subsection) and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Borrower by a Lender or the Issuing Lender, or by the Administrative Agent on its own behalf or on behalf of a Lender or the Issuing Lender, shall be conclusive absent manifest error. (d) As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Borrower to a Governmental Authority, the Borrower shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent. (e) Any Foreign Lender that is entitled to an exemption from or reduction of withholding tax under the law of the jurisdiction in which the Borrower is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to the Borrower (with a copy to the Administrative Agent), at the time or times prescribed by applicable law, such properly completed and executed documentation prescribed by applicable law or reasonably requested by the Borrower as will permit such payments to be made without withholding or at a reduced rate. Without limiting the foregoing, at the request of the Borrower each Foreign Lender, on or prior to the date on which such Foreign Lender becomes a Lender hereunder (and from time to time thereafter upon the request of the Borrower or the Administrative Agent), shall deliver to the Borrower and the Administrative Agent either (i) two duly completed copies of either (x) Internal Revenue Service Form W-8BEN claiming eligibility of the Foreign Lender for benefits of an income tax treaty to which the United States is a party, or (y) Internal Revenue Service Form W-8ECI, or in either case an applicable successor form; (ii) in the case of a Foreign Lender that is not legally entitled to deliver any form listed in clause (e)(i), (x) a certificate to the effect that such Foreign Lender is not (A) a "bank" within the meaning of Section 881(c)(3)(A) of the Code, (B) a "10 percent shareholder" of the Borrower within the meaning of Section 881(c)(3)(B) of the Code, or (C) a controlled foreign corporation receiving interest from a related person within the meaning of Section 881(c)(3)(C) of the Code and (y) two duly completed copies of Internal Revenue Service Form W-8BEN or applicable successor form or (iii) any other form prescribed by law reasonably satisfactory to the Borrower and the Administrative Agent entitling each Lender to a complete exemption from or reduction in withholding tax. (f) If the Administrative Agent or a Lender determines, in its reasonable discretion, that it has received a refund of any Taxes or Other Taxes as to which it has been indemnified by the Borrower or with respect to which the Borrower has paid additional amounts pursuant to this subsection 4.12, it shall pay over such refund to the Borrower as determined in good 46 faith by the Administrative Agent or such Lender in its sole discretion (but only to the extent of indemnity payments made, or additional amounts paid, by the Borrower under this subsection 4.12 with respect to the Taxes or Other Taxes giving rise to such refund), net of all out-of-pocket expenses of the Administrative Agent or such Lender and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund); provided that the Borrower, upon the request of the Administrative Agent or such Lender, agrees to repay the amount paid over to the Borrower (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) to the Administrative Agent or such Lender in the event the Administrative Agent or such Lender is required to repay such refund to such Governmental Authority. This subsection 4.12 shall not be construed to require the Administrative Agent or any Lender to make available its tax returns (or any other information relating to its taxes which it deems confidential) to the Borrower or any other Person. 4.13. Use of Proceeds.The proceeds of the Revolving Credit Loans shall be used for the general working capital and general corporate purposes of the Borrower and its Subsidiaries. The Letters of Credit shall be used for the purposes specified in subsection 3.8. The proceeds of the Term Loans shall be used to finance the Transactions. 4.14. Change in Lending Office; Replacement of Lender.Each Lender agrees that if it makes any demand for payment under subsection 4.10 or 4.12, or if any adoption or change of the type described in subsection 4.9 shall occur with respect to it, it will use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions and so long as such efforts would not be disadvantageous to it, as determined in its sole discretion) to designate a different lending office or to assign its rights and obligations hereunder to another of its offices, branches or affiliates if such designation or assignment would reduce or obviate the need for the Borrower to make payments under subsection 4.10 or 4.12, or would eliminate or reduce the effect of any adoption or change described in subsection 4.9. (b) If any Lender requests any payment under subsection 4.10 or 4.12, the Borrower shall have the right to replace such Lender with one or more replacement lenders, each of which shall be reasonably acceptable to the Administrative Agent; provided that (i) the Borrower shall repay (or the replacement lender shall purchase) all Loans and other amounts owing hereunder to such replaced Lender prior to the date of replacement, (ii) until such time as such replacement shall be consummated, the Borrower shall pay additional amounts (if any) required pursuant to subsection 4.10 or 4.12 for the period prior to replacement and (iii) any such replacement shall not be deemed to be a waiver of any rights which the Borrower, the Administrative Agent or any other Lender shall have against the replaced Lender. 4.15. Break Funding Payments.In the event of (a) the payment of any principal of any Eurodollar Loan other than on the last day of an Interest Period applicable thereto (including, without limitation, as a result of an Event of Default), (b) the conversion of any Eurodollar other than on the last day of an Interest Period applicable thereto, or (c) the failure to borrow, convert, continue or prepay any Eurodollar Loan on the date specified in any notice deliv 47 ered pursuant hereto, then, in any such event, the Borrower shall compensate each Lender for the loss, cost and expense attributable to such event. Such loss, cost or expense to any Lender shall be the amount determined by such Lender to be the excess, if any, of (i) the amount of interest that would have accrued on the principal amount of such Loan had such event not occurred, at the Eurodollar Rate that would have been applicable to such Loan (excluding, for the avoidance of doubt, any Applicable Margin), for the period from the date of such event to the last day of the then current Interest Period therefor (or, in the case of a failure to borrow, convert or continue, for the period that would have been the Interest Period for such Loan) over (ii) the amount of interest that would accrue on such principal amount for such period at the interest rate such Lender would bid were it to bid, at the commencement of such period, for dollar deposits of a comparable amount and period from other banks in the eurodollar market. A certificate of any Lender setting forth any amount or amounts that such Lender is entitled to receive pursuant to this subsection 4.15 shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such lender the amount shown as due on any such certificate within 10 days after receipt thereof. SECTION 5. REPRESENTATIONS AND WARRANTIES To induce the Lenders to enter into this Agreement and to make the Loans, and to induce the Issuing Lender to issue Letters of Credit, the Borrower hereby represents and warrants to each Agent and to each Lender that: 5.1. Financial Condition; Accuracy of Public Information. The consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at September 30, 2002 and the related consolidated statements of income, stockholders' equity and cash flows for the fiscal year ended on such date, reported on by PricewaterhouseCoopers LLP, copies of which have heretofore been furnished to each Lender, present fairly in all material respects in accordance with GAAP the consolidated financial condition of the Borrower and its consolidated Subsidiaries as at such date, and the consolidated results of their operations and their consolidated cash flows for the fiscal year then ended. The unaudited consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at March 31, 2002 and March 31, 2003 and the related unaudited consolidated statements of income, stockholders' equity and cash flows for the three-month periods ended on such dates, certified by the chief financial officer of the Borrower and as to which PricewaterhouseCoopers LLP have performed a review in accordance with SAS 100, copies of which have heretofore been furnished to each Lender present fairly in all material respects in accordance with GAAP the consolidated financial condition of the Borrower and its consolidated Subsidiaries as at such dates, and the consolidated results of their operations and their consolidated cash flows for the three-month periods then ended (subject to normal year-end audit adjustments). All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved. Except as set forth on Schedule 5.1, neither the Borrower nor any of its consolidated Subsidiaries had, at the date of the most recent balance sheet referred to above, any material Guarantee Obligation, contingent liability or liability for taxes, or any 48 long-term lease or unusual forward or long-term commitment, including, without limitation, any interest rate or foreign currency swap or exchange transaction, which is not reflected in the foregoing statements or in the notes thereto to the extent required by GAAP. During the period from September 30, 2002 to and including the date hereof, there has been no sale, transfer or other disposition by the Borrower or any of its consolidated Subsidiaries of any material part of its business or property and no purchase or other acquisition of any business or property (including any capital stock of any other Person) material in relation to the consolidated financial condition of the Borrower and its consolidated Subsidiaries at September 30, 2002, other than (i) the sale of inventory in the ordinary course of business, (ii) the Rexall Acquisition, (iii) any such activity prior to the Closing Date by Subsidiaries acquired in the Rexall Acquisition and (iv) as otherwise permitted hereunder. (b) The consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at September 30, 2002, March 31, 2002 and March 31, 2003 prepared on a pro forma basis giving effect to the Transactions, and the related consolidated statements of income and cash flows (including, without limitation, calculations of Consolidated EBITDA and other operating data necessary for evaluating the covenants in subsection 8.1 (such calculations, the "Pro Forma Data")) for the fiscal year ended September 30, 2002, the three-month periods ended March 31, 2002 and March 31, 2003 and the twelve-month period ended March 31, 2003 (together, the "Pro Forma Financial Statements"), copies of which have heretofore been furnished to each Lender, have been prepared on a basis consistent with pro forma financial statement requirements of Regulation S-X under the Exchange Act. (c) The financial projections of the Borrower and its Subsidiaries described in subsection 6.1(k), copies of which have been furnished to each Lender, have been prepared in good faith based upon assumptions believed by the Borrower to be reasonable. 5.2. No Change. Since September 30, 2002, there has been no development or event which has had or would reasonably be expected to have a Material Adverse Effect, except as disclosed in filings with the U.S. Securities and Exchange Commission pursuant to the Exchange Act made on or prior to July 15, 2003. 5.3. Corporate Existence; Compliance with Law. Each Loan Party and its Subsidiaries (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has the power and authority, and the legal right, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, (c) is duly qualified as a foreign entity and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification except to the extent that the failure to be so qualified in any such jurisdiction could not, in the aggregate, reasonably be expected to have a Material Adverse Effect, and (d) is in compliance with all Requirements of Law except to the extent that the failure to comply therewith would not, in the aggregate, reasonably be expected to have a Material Adverse Effect. 49 5.4. Corporate Power; Authorization; Enforceable Obligations. Each Loan Party has the power and authority, and the legal right, to make, deliver and perform the Loan Documents to which it is a party and to borrow and obtain other extensions of credit hereunder and has taken all necessary action to authorize the borrowings and other extensions of credit hereunder on the terms and conditions of this Agreement and any Notes and to authorize the execution, delivery and performance of the Loan Documents to which it is a party. The Borrower has the power and authority, and the legal right, to make, deliver and perform the Rexall Purchase Agreement and to complete the Rexall Acquisition and the other Transactions. Except as set forth on Schedule 5.4, no consent or authorization of, filing with, notice to or other act by or in respect of, any Governmental Authority or any other Person is required as a condition precedent to the Borrower's obligation to consummate the Rexall Acquisition or in connection with the borrowings or other extensions of credit hereunder or the execution, delivery, performance, validity or enforceability of the Loan Documents. This Agreement has been, and each other Loan Document to which it is a party will be, duly executed and delivered on behalf of each Loan Party that is a party hereto or thereto. The Rexall Purchase Agreement has been duly executed and delivered on behalf of the Borrower. This Agreement constitutes, and each other Loan Document to which it is a party when executed and delivered will constitute, a legal, valid and binding obligation of each Loan Party that is a party hereto or thereto, enforceable against such Loan Party in accordance with its terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. The Rexall Purchase Agreement constitutes a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. 5.5. No Legal Bar.The execution, delivery and performance by the Borrower of the Rexall Purchase Agreement, the Loan Documents, the borrowings and other extensions of credit hereunder and the use of the proceeds thereof and the consummation of the Rexall Acquisition and the other Transactions will not (a) violate any Requirement of Law or Contractual Obligation of any Loan Party or of any of its Subsidiaries except (other than with respect to Security Documents or the organizational and governing documents of such Loan Party or Subsidiaries), as would not, in the aggregate, reasonably be expected to result in a Material Adverse Effect, or (b) result in, or require, the creation or imposition of any Lien on any of its or their respective properties or revenues pursuant to any such Requirement of Law or Contractual Obligation (other than those Liens created by the Loan Documents). 5.6. No Material Litigation. Except as set forth on Schedule 5.6, no litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of the Loan Parties, threatened by or against any Loan Party or any of its Subsidiaries or against any of its or their respective properties or revenues (a) with respect to any of 50 the Loan Documents or the Rexall Acquisition and the other transactions contemplated hereby or thereby, or (b) which would reasonably be expected to have a Material Adverse Effect. 5.7. No Default. No Loan Party or any of its Subsidiaries is in default under or with respect to any of its Contractual Obligations in any respect which could reasonably be expected to have a Material Adverse Effect. No Default or Event of Default (under and as defined in the indenture governing the Existing Notes) has occurred and is continuing. No Default or Event of Default has occurred and is continuing. 5.8. Ownership of Property; Liens. Each of the Loan Parties and its Subsidiaries has good record and marketable title in fee simple to, or a valid leasehold interest in, all its real property, and good title to, or a valid leasehold interest in, all its other property, except to the extent that the failure to have such title would not have a Material Adverse Effect. None of such property is subject to any Lien except as permitted by subsection 8.3. With respect to real property or interests in real property, as of the Closing Date, the Borrower or its Subsidiaries have (i) fee title to all of the real property listed on Schedule 5.8 under the heading "Fee Properties" (each, a "Fee Property"), and (ii) good and valid title to the leasehold estates in all of the real property leased by it and listed on Schedule 5.8 under the heading "Leased Properties" (each, a "Leased Property"), in each case free and clear of all mortgages, liens, security interests, easements, covenants, rights-of-way and other similar restrictions of any nature whatsoever, except (A) Liens permitted pursuant to subsection 8.3, (B) as to Leased Property, the terms and provisions of the respective lease therefor and any matters affecting the fee title and any estate superior to the leasehold estate related thereto, and (C) title or lease defects, or leases or subleases granted to others, which are not material to the Fee Properties or the Leased Properties, as the case may be, taken as a whole. The Fee Properties constitute, as of the Closing Date, substantially all of the real property owned in fee by the Borrower and its Subsidiaries. 5.9. Intellectual Property. Each Loan Party, and each of its Subsidiaries, owns, or is licensed to use or otherwise has the right to use, all trademarks, trade names, copyrights, patents, domain names, trade secrets and other proprietary information that it uses in the conduct of its business as currently conducted except for those for which the failure to own or license which would not reasonably be expected to have a Material Adverse Effect (the "Intellectual Property"). To the knowledge of each Loan Party, no claim has been asserted and is pending or is threatened to be asserted by any Person challenging or questioning the use of any material Intellectual Property or the validity or enforceability of any such Intellectual Property, nor does any Loan Party know of any valid basis for any such claim. The use of such Intellectual Property by each Loan Party and its Subsidiaries does not infringe on the rights of any Person, except for such claims and infringements that, in the aggregate, would not reasonably be expected to have a Material Adverse Effect. 5.10. Taxes. Except as disclosed in Schedule 5.10, each Loan Party, and each of its Subsidiaries, has filed or caused to be filed all material tax returns which are required to be filed (and each such tax return is true and correct in all material respects) and has paid all taxes 51 shown to be due and payable on said returns or on any assessments made against it or any of its property and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority (other than any the amount or validity of which are currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on the books of such Loan Party or its Subsidiaries, as the case may be), and no tax Lien has been filed, and, to the knowledge of the Loan Parties, no claim is being asserted, with respect to any such tax, fee or other charge, in each case other than to the extent that any such failure to act or existence of claim would not, in the aggregate, reasonably be expected to have a Material Adverse Effect. 5.11. Federal Regulations. No part of the proceeds of any Loans, and no Letter of Credit, will be used for "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulation U of the Board as now and from time to time hereafter in effect. If requested by any Lender or the Administrative Agent, the Borrower will furnish to the Administrative Agent and each Lender a statement to the foregoing effect in conformity with the requirements of FR Form G-3 or FR Form U-1 referred to in said Regulation U, as the case may be. 5.12. ERISA. No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events for which liability is reasonably expected to occur, would reasonably be expected to result in a Material Adverse Effect. The present value of all accumulated benefit obligations under each Plan (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed the fair market value of the assets of such Plan by more than $10,000,000, and the present value of all accumulated benefit obligations of all underfunded Plans (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed the fair market value of the assets of all such underfunded Plans by more than $10,000,000. (ii) Except as would not reasonably be expected to result in a Material Adverse Effect, (i) each Foreign Plan has been maintained in compliance with its terms and with the requirements of any and all applicable laws, statutes, rules, regulations and orders and has been maintained, where required, in good standing with applicable regulatory authorities, and (ii) neither the Borrower nor any Subsidiary have incurred any obligation in connection with the termination of or withdrawal from any Foreign Plan. 5.13. Investment Company Act; Public Utility Holding Company Act; Other Regulations. The Borrower is not an "investment company," or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended, or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935, as amended. The Borrower is not subject to regulation 52 under any Federal or State statute or regulation (other than Regulation X of the Board) which limits its ability to incur Indebtedness. 5.14. Subsidiaries. Schedule II sets forth all Subsidiaries of the Borrower as of the Closing Date. 5.15. Environmental Matters. Except to the extent that all of the following, in the aggregate, could not reasonably be expected to result in a Material Adverse Effect: (a) The facilities and properties owned, leased or operated by each Loan Party or any of its Subsidiaries (the "Properties") do not contain any Hazardous Materials in amounts or concentrations which (i) constitute a violation of, or (ii) could reasonably be expected to give rise to liability under, any Environmental Law. (b) The Properties and all operations at the Properties are in compliance in all material respects with all applicable Environmental Laws, and there is no contamination at, under or about the Properties or violation of any Environmental Law with respect to the Properties or the business operated by any Loan Party or any of its Subsidiaries (the "Business") which could materially interfere with the continued operation of the Properties. (c) Neither any Loan Party nor any of its Subsidiaries has received any written notice of violation, alleged violation, non- compliance, liability or potential liability regarding any Environmental Laws with regard to any of the Properties or the Business, nor does any Loan Party have knowledge that any such notice will be received or is being threatened. (d) No Hazardous Materials have been transported or disposed of from the Properties in violation of, or in a manner or to a location which could reasonably be expected to give rise to liability under, any Environmental Law, nor have any Hazardous Materials been generated, treated, stored or disposed of at, on or under any of the Properties in violation of, or in a manner that could reasonably be expected to give rise to liability under, any applicable Environmental Law. (e) No judicial proceeding or governmental or administrative action is pending or, to the knowledge of any Loan Party, threatened, under any Environmental Law to which any Loan Party or any Subsidiary thereof is or will be named as a party with respect to the Properties or the Business, nor are there any decrees, orders or agreements which impose obligations, or other administrative or judicial requirements outstanding under any Environmental Law with respect to the Properties or the Business. (f) There has been no release or threat of release of Hazardous Materials at, under or from the Properties, or arising from or related to the operations of any Loan Party or any Subsidiary thereof in connec 53 tion with the Properties or otherwise in connection with the Business, in violation of or in amounts or in a manner that could reasonably be expected to give rise to liability under Environmental Laws. 5.16. Solvency. Each Loan Party is, and after giving effect to the consummation of any Acquisition (including, without limitation, the Rexall Acquisition) and to the incurrence of all Indebtedness and obligations being incurred in connection herewith and therewith will be Solvent. 5.17. Security Documents (a) The Guarantee and Collateral Agreement is effective to create in favor of the Administrative Agent, for the benefit of the Lenders, a legal, valid and enforceable security interest in the Collateral described, and as defined, therein and proceeds thereof, and, after taking the actions described in Schedule 3 thereto, the Liens created under the Guarantee and Collateral Agreement shall at all times constitute fully perfected Liens on, and security interests in, all right, title and interest of the Loan Parties in such Collateral and the proceeds thereof, as security for the Obligations (as defined in the Guarantee and Collateral Agreement) intended to be secured thereby, in each case prior and superior in right to any other Person, other than with respect to Liens expressly permitted by subsection 8.3. 5.18. Insurance. Schedule 5.18 sets forth a true, complete and correct summary description of all material insurance maintained by each Loan Party. Such insurance is in full force and effect and all premiums have been duly paid. Each Loan Party has insurance through insurers it reasonably believes to be of recognized financial responsibility covering its properties, operations, personnel and businesses, including business interruption insurance, which insurance is in amounts and insures against such losses and risks as it reasonably believes are adequate to protect it and its Subsidiaries and their respective businesses; and neither the Borrower nor any of its Subsidiaries has received notice from any insurer or agent of such insurer that capital improvements or other expenditures are required or necessary to be made in order to continue such insurance. 5.19. Affiliate Transactions. All Contractual Obligations between the Borrower and any of its Subsidiaries (other than those Subsidiaries acquired as part of the Rexall Acquisition) on the one hand, and their respective Affiliates, on the other hand, are disclosed in the Borrower's most recent proxy statement filed on Form 14A with the Securities and Exchange Commission to the extent required under its regulations. All material Contractual Obligations between any Subsidiary of the Borrower acquired as part of the Rexall Acquisition, on the one hand, and their respective Affiliates, on the other hand, are set forth on Schedule 5.19. 5.20. Accuracy of Information.No statement or information contained in this Agreement, any other Loan Document or any other document, certificate or statement furnished in writing to the Administrative Agent or the Lenders or any of them (including, without limitation, filings made by the Borrower under the Exchange Act and the regulations promulgated thereunder), by or on behalf of any Loan Party for use in connection with the transactions contemplated by this Agreement or the other Loan Documents, taken as a whole together with all other information provided in this Agreement, the other Loan Documents or any other such 54 document, certificate or statement, contained as of the date such statement, information, document or certificate was so furnished any untrue statement of any fact material to the interests of the Administrative Agent or any Lender, or omitted to state a fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which they were made, not misleading in any respect material to the interests of the Administrative Agent or any Lender; provided that, with respect to projected financial information, the Borrower represents only that such information was prepared in good faith based upon assumptions believed by the Borrower to be reasonable at the time. There is no fact known to any Loan Party that would reasonably be expected to have a Material Adverse Effect that has not been expressly disclosed herein, in the other Loan Documents or in such other documents, certificates and statements furnished to the Administrative Agent and the Lenders for use in connection with the transactions contemplated hereby and by the other Loan Documents. SECTION 6. CONDITIONS PRECEDENT 6.1. Conditions to Closing Date. The Closing Date shall occur on the date of satisfaction of the following conditions precedent: (a) Loan Documents. The Administrative Agent shall have received (i) this Agreement, executed and delivered by a duly authorized officer of the Borrower, with a counterpart for each Lender, (ii) the Guarantee and Collateral Agreement, executed and delivered by a duly authorized officer of each party thereto, with a counterpart or a conformed copy for each Lender and (iii) signed Notes for the account of each Lender that shall so request, executed and delivered by a duly authorized officer of the Borrower. (b) Closing Certificate. The Administrative Agent shall have received, with a copy for each Lender, a certificate of the Borrower and the other Loan Parties, dated the Closing Date, substantially in the form attached hereto as Exhibit F, with appropriate insertions and attachments satisfactory in form and substance to the Administrative Agent, executed by the President or any Vice President and the Secretary or any Assistant Secretary of the Borrower or the relevant Loan Party. (c) Corporate Proceedings of the Borrower. The Administrative Agent shall have received, with a counterpart for each Lender, a copy of the resolutions, in form and substance satisfactory to the Administrative Agent, of the Board of Directors of the Borrower authorizing (i) the execution, delivery and performance of this Agreement and the other Loan Documents to which it is a party, (ii) the borrowings contemplated hereunder, (iii) the granting by it of the Liens created pursuant to the Security Documents to which the Borrower is a party and (iv) the Transactions, certified by the Secretary or an Assistant Secretary of the Borrower as of the Closing Date, which certificate shall be in form and substance satisfactory to the Administrative Agent and shall state that the resolutions thereby certified have not been amended, modified, revoked or rescinded. 55 (d) Borrower Incumbency Certificate. The Administrative Agent shall have received, with a counterpart for each Lender, a certificate of the Borrower, dated the Closing Date, as to the incumbency and signature of the officers of the Borrower executing any Loan Document satisfactory in form and substance to the Administrative Agent, executed by the President or any Vice President and the Secretary or any Assistant Secretary of the Borrower. (e) Corporate Proceedings of Subsidiaries. The Administrative Agent shall have received, with a counterpart for each Lender, a copy of the resolutions, in form and substance satisfactory to the Administrative Agent, of the Board of Directors of each Subsidiary of the Borrower which is a party to a Loan Document authorizing (i) the execution, delivery and performance of the Loan Documents to which it is a party and (ii) the granting by it of the Liens created pursuant to the Security Documents to which it is a party, certified by the Secretary or an Assistant Secretary of each such Subsidiary as of the Closing Date, which certificate shall be in form and substance satisfactory to the Administrative Agent and shall state that the resolutions thereby certified have not been amended, modified, revoked or rescinded. (f) Subsidiary Incumbency Certificates. The Administrative Agent shall have received, with a counterpart for each Lender, a certificate of each Domestic Subsidiary of the Borrower which is a party to a Loan Document, dated the Closing Date, as to the incumbency and signature of the officers of such Subsidiary, satisfactory in form and substance to the Administrative Agent, executed by the President or any Vice President and the Secretary or any Assistant Secretary of each such Subsidiary. (g) Corporate Documents. The Administrative Agent shall have received, with a counterpart for each Lender, true and complete copies of the certificate of incorporation and by-laws of each Loan Party, certified as of the Closing Date as complete and correct copies thereof by the Secretary or an Assistant Secretary of such Loan Party. (h) Fees. The Arrangers, each Agent and the Lenders shall have received all invoiced fees, costs, expenses and compensation required to be paid on the Closing Date (including reasonable fees, disbursements and other charges of legal counsel to the Arrangers and the Lenders and expenses of appraisers, consultants and other advisors to the Arrangers and the Lenders and who have been approved by the Borrower). (i) Legal Opinions. The Administrative Agent shall have received, with a counterpart for each Lender, (i) the executed legal opinion of Milbank, Tweed, Hadley & McCloy LLP, special counsel to the Borrower and the other Loan Parties, substantially in the form attached hereto as Exhibit E-1 and (ii) the executed legal opinion of Irene Fisher, General Counsel of the Borrower and the other Loan Parties, substantially in the form attached hereto as Exhibit E-2. 56 (j) Financial Statements. The Administrative Agent shall have received, with a copy for each Lender, and each Lender shall have reviewed, and shall be satisfied with the financial statements set forth in subsections 5.1(a) and (b). The Pro Forma Financial Statements and the Pro Forma Data shall be consistent in all material respects with the sources and uses described in the Commitment Letter and the financial projections provided to the Lenders described in paragraph (k) below. (k) Projections. The Administrative Agent shall have received, with a copy for each Arranger, projected balance sheets and related statements of income and cash flows (including any and all supporting schedules and assumptions) of the Borrower and its Subsidiaries after giving effect to the Transactions on an annual basis for three years, commencing with the fiscal year ending September 30, 2003. (l) Pledged Stock; Stock Powers. The Administrative Agent shall have received (i) with respect to shares that are certificated, the certificates representing the shares of each Loan Party and Subsidiary pledged pursuant to the Guarantee and Collateral Agreement, together with an undated stock power for each such certificate executed in blank by a duly authorized officer of the pledgor thereof, and (ii) with respect to all other shares of each Loan Party and Subsidiary pledged pursuant to the Guarantee and Collateral Agreement a duly completed acknowledgment in the form set forth in Annex 2 to the Guarantee and Collateral Agreement. (m) Actions to Perfect Liens. The Administrative Agent shall have received evidence in form and substance satisfactory to it that all filings, recordings, registrations and other actions, including, without limitation, the filing of duly executed financing statements on form UCC-1 necessary or, in the opinion of the Administrative Agent, desirable to perfect the Liens created by the Security Documents shall have been completed. (n) Lien Searches. The Administrative Agent shall have received the results of a recent search by a Person satisfactory to the Administrative Agent of the Uniform Commercial Code, judgment and tax lien filings which may have been filed with respect to personal property of each Loan Party in each of the jurisdictions and offices where assets of such Loan Party are located or recorded as the Administrative Agent shall reasonably request, and such search shall reveal no material liens on any of the assets of such Loan Party except for liens permitted by the Loan Documents. (o) Consents, Licenses and Approvals. (i) All governmental and material third party approvals (including material landlords' and other consents) necessary in connection with the execution, delivery and performance of the Loan Documents and the continuing operation of the business of the Loan Parties shall have been obtained and be in full force and effect, and (ii) all applicable waiting periods shall have expired without any action being taken or threatened by any competent Governmental Authority which would restrain, prevent or otherwise impose material adverse conditions upon the Transactions. The Administrative Agent shall have received copies of all approvals referenced 57 in clause (ii) above (certified by the Secretary or Assistant Secretary of the Borrower as true and correct). (p) Designated Senior Indebtedness. (i) The Indebtedness under this Agreement shall be designated by the Borrower as "Designated Senior Indebtedness" pursuant to, and as defined under, the Indenture, dated as of September 23, 1997, among the Company, as issuer, and The Bank of New York, as trustee, relating to the Existing Notes (the "Existing Notes Indenture"), and (ii) the Administrative Agent shall have received a certificate of the Borrower executed by the Secretary of the Borrower satisfactory to the Administrative Agent reaffirming such designation. (q) Rexall Acquisition. The Rexall Purchase Agreement shall be in full force and effect and the Arrangers shall have received copies thereof, as amended to the date hereof. The Arrangers shall have received copies, certified by the Secretary or an Assistant Secretary of the Borrower as of the Closing Date, of all filings made with any Governmental Authority in connection with the Transactions. Each of the Transactions (other than the extensions of credit hereunder) shall have been (or shall be contemporaneously) consummated in accordance with the terms hereof and the terms of documentation therefor (without waiver or amendment of any condition (other than any immaterial condition the waiver or amendment of which is not adverse to the Lenders) unless consented to in writing by the Arrangers) that are in form and substance reasonably satisfactory to the Arrangers (with any material condition therein requiring the satisfaction or consent of any Person other than the Arrangers or the Lenders being deemed to require the reasonable satisfaction or consent of the Arrangers). Each of the parties thereto shall have complied in all material respects with all covenants set forth in the Rexall Purchase Agreement (without the waiver of performance under or amendment of any of the terms thereof unless consented to in writing by the Arrangers). (r) Adequate Working Capital. The Lenders shall be satisfied that the Borrower and its Subsidiaries will have adequate working capital and capital expenditure funds and availability immediately after the Closing Date after giving effect to the Transactions. (s) Litigation. There shall be no litigation or administrative proceeding (pending or threatened, other than threatened litigation against Target that is subject to indemnity under the Rexall Purchase Agreement), or proposed or pending regulatory changes in law or regulations applicable to the Borrower or its Subsidiaries, that would reasonably be expected to have a Material Adverse Effect or a material adverse effect on the ability of the parties to consummate the Rexall Acquisition or the other Transactions. (t) Existing Credit Agreement. The Administrative Agent shall have received evidence satisfactory to it that all amounts outstanding under the Existing Credit Agreement have been paid in full, all commitments thereunder have been terminated, and all Liens in respect thereof shall have been released (or arrangement for such releases satisfactory to the Administrative Agent shall have been made). (u) Indebtedness. Immediately after giving effect to the Transactions, the Borrower and its Subsidiaries shall not have outstanding Indebtedness for borrowed money or preferred stock other than (w) Indebtedness under the Loan Documents not to exceed $275,000,000, (x) the Existing Notes, (y) Indebtedness permitted under subsection 8.2(c) or 8.2(i) and the promissory note made by Holland & Barrett Europe Limited to the Borrower and described on Schedule 8.2, and (z) other Indebtedness for borrowed money, not to exceed $10,000,000 and as set forth on Schedule 6.1(u). (v) Documentation. The Lenders have received such other legal opinions, corporate documents and other instruments and/or certificates as they may reasonably request. 6.2. Conditions to Each Extension of Credit. The agreement of each Lender to make any Extension of Credit requested to be made by it on any date (including, without limitation, the Closing Date), is subject to the satisfaction of the following conditions precedent as of the date such Extension of Credit is requested to be made: (a) Representations and Warranties. Each of the representations and warranties made by each of the Loan Parties in or pursuant to the Loan Documents shall be true and correct in all material respects on and as of such date as if made on and as of such date, other than any such representations and warranties that, by their terms, refer to a specific date other than such date, in which case as of such specific date. (b) No Default. No Default or Event of Default shall have occurred and be continuing on such date or after giving effect to the Extension of Credit requested to be made on such date. Each Extension of Credit made to the Borrower hereunder shall constitute a representation and warranty by the Borrower as of the date of such Extension of Credit that the conditions contained in this subsection 6.2 have been satisfied. SECTION 7. AFFIRMATIVE COVENANTS The Borrower hereby agrees that, so long as the Commitments (or any of them) remain in effect, any Loan or Reimbursement Obligation remains outstanding and unpaid or any other amount is owing to any Lender or the Administrative Agent hereunder or under any other Loan Document, the Borrower shall and shall cause each of its Subsidiaries to: 58 7.1. Financial Statements. Furnish to each Lender: (a) as soon as available, but in any event within 90 days after the end of each fiscal year of the Borrower, copies of the consolidated and consolidating balance sheets of the Borrower and its consolidated Subsidiaries as at the end of such year and the related consolidated and consolidating statements of income and retained earnings and of cash flows for such year, setting forth in each case in comparative form the figures as of the end of and for the previous year, reported on without a "going concern" or like qualification, assumption or exception, or qualification arising out of the scope of the audit, by PricewaterhouseCoopers LLP or other independent certified public accountants of nationally recognized standing; and (b) as soon as available, but in any event not later than 45 days after the end of each of the first three quarterly periods of each fiscal year of the Borrower, the unaudited consolidated and consolidating balance sheets of the Borrower and its consolidated Subsidiaries as at the end of such quarter and the related unaudited consolidated and consolidating statements of income and retained earnings and of cash flows of the Borrower and its consolidated Subsidiaries for such quarter and the portion of the fiscal year through the end of such quarter, setting forth in each case in comparative form the figures as of the end of and for the corresponding period in the previous year, certified by a Responsible Officer of the Borrower as being fairly stated in all material respects (subject to normal year-end audit adjustments). All such financial statements shall be complete and correct in all material respects and shall be prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods (except that interim statements may exclude detailed footnote disclosure in accordance with standard practice). For purposes of this subsection 7.1, information posted on Intralinks shall be deemed distributed to all Lenders. 7.2. Certificates; Other Information. Furnish to each Lender: (a) concurrently with the delivery of the financial statements referred to in subsection 7.1(a), a certificate of the independent certified public accountants reporting on such financial statements stating that in making the examination necessary therefor no knowledge was obtained of any Default or Event of Default, except as specified in such certificate; (b) concurrently with the delivery of the financial statements referred to in subsections 7.1(a) and 7.1(b), a certificate of a Responsible Officer of the Borrower stating that, to the best of such officer's knowledge, each Loan Party during such period has observed or performed all of its covenants and other agreements, and satisfied every condition, contained in this Agreement and the other Loan Documents to be observed, performed or satisfied by it, and that such officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate; and in the case of financial 59 statements referred to in subsections 7.1(a) and 7.1(b), including calculations and information demonstrating in reasonable detail compliance with the requirements of subsection 8.1 and determining the Applicable Margins; (c) not later than 90 days following the end of each fiscal year of the Borrower, a copy of the projections by the Borrower of the operating budget of the Borrower and its Subsidiaries for the succeeding fiscal year, such projections to be accompanied by a certificate of a Responsible Officer of the Borrower to the effect that such projections have been prepared on the basis of assumptions believed by the Borrower to be reasonable at the time and that such officer has no reason to believe they are incorrect or misleading in any material respect; (d) within five Business Days after the same are filed, copies of all financial statements and reports which the Borrower may make to, or file with, the Securities and Exchange Commission or any successor or analogous Governmental Authority; (e) concurrently with the delivery of the financial statements referred to in subsections 7.1(a) and 7.1(b), to the extent not included in the financial statements and reports referred to in subsection 7.2(d), a management narrative report explaining all significant variances from forecasts, projections and previous results and all significant current developments in staffing, marketing, sales and operations; and (f) promptly, such additional financial and other information as any Lender may from time to time reasonably request. 7.3. Payment of Obligations. Pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all its obligations of whatever nature (including taxes), except where the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of the Borrower or its Subsidiaries, as the case may be. 7.4. Maintenance of Existence. Preserve, renew and keep in full force and effect its corporate existence and take all reasonable action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its business except as otherwise permitted pursuant to subsection 8.5; and comply with all Contractual Obligations and Requirements of Law except to the extent that failure to comply therewith would not, in the aggregate, be reasonably expected to have a Material Adverse Effect. 7.5. Maintenance of Property; Insurance. Keep all property material to the conduct of the business of the Borrower and its Subsidiaries, taken as a whole, in good working order and condition; maintain with financially sound and reputable insurance companies insurance on all its property in at least such amounts and against at least such risks (but including in any event public liability, product liability and business interruption) as are usually insured 60 against in the same general area by companies engaged in the same or a similar business; and furnish to each Lender, upon written request, full information as to the insurance carried. 7.6. Inspection of Property; Books and Records; Discussions. Keep proper books of records and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities; and, upon prior written notice, permit representatives of any Lender to visit and inspect any of its properties and examine and make abstracts from any of its books and records during normal business hours and as often as may reasonably be desired and to discuss the business, operations, properties and financial and other condition of the Borrower and its Subsidiaries with officers and employees of the Borrower and its Subsidiaries and, in the presence of an officer of the Borrower, with its independent certified public accountants. 7.7. Notices. Promptly give notice to the Administrative Agent (who shall promptly notify each Lender) of: (a) the occurrence of any Default or Event of Default; (b) any (i) default or event of default under any Contractual Obligation of the Borrower or any of its Subsidiaries or (ii) litigation, investigation or proceeding which may exist at any time between the Borrower or any of its Subsidiaries and any Governmental Authority, which in either case, if not cured or if adversely determined, as the case may be, would reasonably be expected to have a Material Adverse Effect; (c) any litigation or proceeding (including without limitation any notice of violation, alleged violation, liability or potential liability under any Environmental Law) that is filed or commenced (in each case after the Closing Date) affecting the Borrower or any of its Subsidiaries in which the amount claimed by the plaintiff is $1,000,000 or more and not covered by insurance or in which injunctive or similar relief is sought; (d) any ERISA Event, that alone or together with any other ERISA Events that have occurred, would reasonably be expected to result in a liability of the Borrower and its Subsidiaries in an amount exceeding $1,000,000 (as soon as possible and in any event within 30 days after any Loan Party knows or has reason to know thereof); and (e) any development or event which has had or would reasonably be expected to have a Material Adverse Effect. Each notice pursuant to this subsection shall be accompanied by a statement of a Responsible Officer of the Borrower setting forth details of the occurrence referred to therein and stating what action the Borrower proposes to take with respect thereto. 7.8. Environmental Laws. (a) Comply with, and ensure compliance by all tenants and subtenants, if any, with, all applicable Environmental Laws and obtain and comply in 61 all respects with and maintain, and ensure that all tenants and subtenants obtain and comply in all respects with and maintain, any and all licenses, approvals, notifications, registrations or permits required by applicable Environmental Laws, except to the extent that any failures could not, in the aggregate, reasonably be expected to have a Material Adverse Effect or to result in the payment of a Material Environmental Amount. (b) Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Laws and promptly comply in all material respects with all lawful orders and directives of all Governmental Authorities regarding Environmental Laws except to the extent that the same are being contested in good faith by appropriate proceedings and the pendency of such proceedings could not be reasonably expected to have a Material Adverse Effect. 7.9. Additional Subsidiaries; Additional Collateral. (a) With respect to any Domestic Subsidiary created or acquired after the Closing Date by the Borrower, promptly cause such Subsidiary to become a party to the Guarantee and Collateral Agreement, deliver to the Administrative Agent the certificates representing the Capital Stock of such Subsidiary, together with undated stock powers, executed in blank, securing the Obligations as described in the Guarantee and Collateral Agreement and covering the types of assets covered by the Guarantee and Collateral Agreement, take all required actions to perfect the security interests created by the Guarantee and Collateral Agreement in the assets of such Subsidiary and if requested by the Administrative Agent, deliver to the Administrative Agent legal opinions relating to the preceding matters, which opinions shall be in form and substance, and from counsel, reasonably satisfactory to the Administrative Agent. (b) With respect to each direct Material Foreign Subsidiary of the Borrower or of any Domestic Subsidiary acquired or formed after the Closing Date or a Foreign Subsidiary that otherwise becomes a direct Material Foreign Subsidiary after the Closing Date (or with respect to such other direct Foreign Subsidiaries as, together with all direct Material Foreign Subsidiaries, constitute 80% or more of the assets or revenues (computed for the most recent fiscal year) of the Foreign Subsidiaries, taken as a whole), promptly after the acquisition or formation thereof or such other Foreign Subsidiary becoming a direct Material Foreign Subsidiary, execute and deliver and cause each such Foreign Subsidiary to execute and deliver to the Administrative Agent, in form and substance reasonably satisfactory to the Administrative Agent, such documents and instruments (including, without limitation, pledge agreements) and take such action (including, without limitation, the delivery of stock certificates and instruments) as the Administrative Agent may reasonably request in order to grant to the Administrative Agent, for the ratable benefit of the Lenders, as collateral security for the Obligations, a first priority perfected security interest in 65% of the voting Capital Stock and 100% of the non-voting Capital Stock of, or equivalent ownership interests in, such direct Foreign Subsidiary, along with any warrants, options, or other rights to acquire the same, in all cases to the extent legally permissible and practicable and deliver to the Administrative Agent such legal opinions as it shall reasonably re- 62 quest with respect thereto. For purposes of this subsection 7.9(b), "direct" means directly held by the Borrower or any Domestic Subsidiary. (c) If requested by the Administrative Agent, grant in favor of the Administrative Agent, for the benefit of the Lenders, Liens on any other assets other than real property (owned or leased) hereafter acquired by the Borrower or any Domestic Subsidiary and on previously encumbered assets which become unencumbered, to the extent such Liens are then permissible under applicable law and pursuant to any agreements to which the Borrower or its Subsidiaries are a party, pursuant to documentation in form and substance reasonably satisfactory to the Administrative Agent. (d) In connection with any Acquisition, to the extent not otherwise provided for in this subsection 7.9, take all action necessary to assure that security interests and Liens for the benefit of the Lenders are granted and perfected in all material assets acquired in such Acquisition (including assets of Subsidiaries acquired in such Acquisition), subject in each case to Liens permitted under subsection 8.3. 7.10. Rexall Purchase Agreement Remedies. Enforce and pursue all remedies available to it under the Rexall Purchase Agreement, including, without limitation, indemnification rights, which enforcement and pursuit are reasonable and practicable in the Borrower's good faith and reasonable business judgment. 7.11. Post-Closing Obligations. (a) As expeditiously as possible, but in no event later than 30 days after the Closing Date (which date may be extended in the sole discretion of the Administrative Agent), execute and deliver Control Agreements (as defined in the Guarantee and Collateral Agreement) with respect to the accounts set forth on Schedule 7.11, and (b) use commercially reasonable efforts to execute and deliver a Landlord's Lien Waiver, Access Agreement and Consent with respect to each Leased Property set forth on Schedule 5.8. SECTION 8. NEGATIVE COVENANTS The Borrower hereby agrees that, so long as the Commitments (or any of them) remain in effect, any Loan or Reimbursement Obligation remains outstanding and unpaid or any other amount is due and payable to any Lender or the Administrative Agent hereunder or under any other Loan Document, the Borrower shall not, and shall not permit any of its Subsidiaries to, directly or indirectly: 8.1. Financial Condition Covenants. (a) Maintenance of Fixed Charge Coverage Ratio. Permit at the end of each fiscal quarter of the Borrower a Consolidated Fixed Charge Coverage Ratio of less than the ratio set forth below opposite the period in which such date occurs: 63 Period Ratio ------ ----- Closing Date - December 30, 2003 1.50x December 31, 2003 - September 29, 2004 1.75x September 30, 2004 - Thereafter 2.00x (b) Maintenance of Consolidated Interest Coverage Ratio. Permit at the end of each fiscal quarter of the Borrower a Consolidated Interest Coverage Ratio of less than 5.00x. (c) Maintenance of Consolidated Indebtedness to Consolidated EBITDA Ratio. Permit the ratio of (i) Consolidated Indebtedness on any date during any test period set forth below to (ii) Consolidated EBITDA for the four fiscal quarters most recently ended prior to such date, to be greater than the amount set forth opposite such test period below: Test Period Ratio ----------- ----- Closing Date - March 30, 2004 3.00x March 31, 2004 - December 30, 2004 2.75x December 31, 2004 - Thereafter 2.50x (d) Maintenance of Consolidated Senior Indebtedness to Consolidated EBITDA Ratio. Permit the ratio of (i) Consolidated Senior Indebtedness on any date during any test period set forth below to (ii) Consolidated EBITDA for the four fiscal quarters most recently ended prior to such date, to be greater than the amount set forth opposite such test period below: Test Period Ratio ----------- ----- Closing Date -March 30, 2004 2.00x March 31, 2004 - December 30, 2004 1.75x December 31, 2004 - Thereafter 1.50x 8.2. Limitation on Indebtedness. Create, incur, assume or suffer to exist any Indebtedness, except: (a) Indebtedness of the Borrower or any Subsidiary under this Agreement or any other Loan Document; 64 (b) existing Indebtedness of the Borrower and its Subsidiaries listed on Schedule 8.2 and any Refinancing Indebtedness in respect thereof; (c) Indebtedness of the Borrower to any Subsidiary of the Borrower and of any Domestic Subsidiary to the Borrower or to any other Subsidiary of the Borrower, provided that such indebtedness is evidenced by a promissory note that is pledged to the Administrative Agent in accordance with the Guarantee and Collateral Agreement; (d) Indebtedness under sale and leaseback transactions permitted by subsection 8.12; (e) Indebtedness of the Borrower under Hedge Agreements entered into solely to hedge interest rate exposure and not for speculative purposes; (f) Indebtedness of the Borrower or any Subsidiary incurred to finance the acquisition, construction or improvement of any fixed or capital assets, including obligations under Financing Leases and any Indebtedness assumed in connection with the acquisition of any such assets or secured by a Lien on any such assets prior to the acquisition thereof which Lien was not created in contemplation of such acquisition and on any extensions, renewals and replacements of any such Indebtedness that do not increase the outstanding principal amount thereof; provided that (A) such Indebtedness is incurred prior to or within 90 days after such acquisition or the completion of such construction or improvement and (B) the aggregate principal amount of Indebtedness permitted by this paragraph (f), and the aggregate amount of sale-leaseback transactions permitted under subsection 8.12 theretofore consummated, shall not exceed $15,000,000 at any time outstanding; (g) Indebtedness of any Person that becomes a Subsidiary after the date hereof; provided that (A) such Indebtedness exists at the time such Person becomes a Subsidiary and is not created in contemplation of or in connection with such Person becoming a Subsidiary and (B) the aggregate principal amount of Indebtedness permitted by this paragraph (g) shall not exceed $5,000,000 at any time outstanding; (h) Indebtedness of any Foreign Subsidiaries, in addition to Indebtedness permitted by paragraph (i), in an aggregate amount not in excess of $5,000,000 at any time outstanding; (i) Indebtedness of any Foreign Subsidiary to the Borrower or any other Subsidiary; provided that (A) the aggregate principal amount of Indebtedness of Holland & Barrett to the Borrower and the Domestic Subsidiaries, taken together with guarantees of obligations of Holland & Barrett permitted under subsection 8.4(g) and investments in Holland & Barrett permitted under subsection 8.9(d), shall not exceed $25,000,000 at any time outstanding, and (B) the aggregate principal amount of Indebtedness of Foreign Subsidiaries other than Holland & Barrett to the Borrower and the Domestic Subsidiaries, 65 taken together with guarantees of obligations of Foreign Subsidiaries other than Holland & Barrett permitted under subsection 8.4(f) and investments in Foreign Subsidiaries other than Holland & Barrett permitted under subsection 8.9(d), shall not exceed $10,000,000 at any time outstanding; (j) Refinancing Indebtedness incurred in order to refinance in whole or in part the Obligations; and (k) other unsecured Indebtedness in an aggregate principal amount not exceed $10,000,000 at any time outstanding. 8.3. Limitation on Liens. Create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired, except for: (a) Liens for taxes not yet due or which are being contested in good faith by appropriate proceedings, provided that adequate reserves with respect thereto are maintained on the books of such Person in conformity with GAAP (or, in the case of Foreign Subsidiaries, generally accepted accounting principles in effect from time to time in their respective jurisdictions of incorporation); (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 60 days or which are being contested in good faith by appropriate proceedings; (c) pledges or deposits in connection with workers' compensation, unemployment insurance and other social security legislation; (d) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (e) easements, zoning restrictions, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business which do not secure any monetary obligations and do not in any case materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of such Person; (f) Liens existing as of the Closing Date and (i) listed on Schedule 8.3 and extensions, renewals and replacements thereof that do not increase the outstanding principal amount thereof, (ii) which are to be terminated pursuant to subsection 6.1(t) or (iii) previously identified in writing to the Administrative Agent, arrangements for the release of which satisfactory to the Administrative Agent have been made; 66 (g) Liens securing Indebtedness of the Borrower permitted by subsection 8.2(f) incurred to finance the acquisition of fixed or capital assets (whether pursuant to a loan, a Financing Lease or otherwise), provided that (i) such Liens shall be created substantially simultaneously with the acquisition of such fixed or capital assets, (ii) such Liens do not at any time encumber any property other than the property financed by such Indebtedness, (iii) the amount of Indebtedness secured thereby is not increased and (iv) the principal amount of Indebtedness secured by any such Lien shall at no time exceed the original purchase price of such property at the time it was acquired; (h) Liens on current assets of any Foreign Subsidiary securing Indebtedness of such Foreign Subsidiary permitted under subsection 8.2(i); (i) Liens (not otherwise permitted hereunder) which secure obligations in aggregate amount at any time outstanding not exceeding (as to the Borrower and all Subsidiaries), and on property with an aggregate value not exceeding, $5,000,000; (j) Liens created pursuant to the Security Documents; (k) Liens securing Indebtedness permitted by subsection 8.2(g) to the extent such Lien is secured at the time that such Person becomes a Subsidiary and was not incurred in contemplation thereof; and (l) judgment Liens in respect of judgments that do not, in the aggregate, constitute an Event of Default under clause (j) of Section 9. 8.4. Limitation on Guarantee Obligations. Create, incur, assume or suffer to exist any Guarantee Obligation except: (a) Guarantee Obligations in existence on the date hereof and listed on Schedule 8.4 and Guarantee Obligations in respect of any Refinancing Indebtedness of the Indebtedness to which such Guarantee Obligations listed on Schedule 8.4 relate; (b) Guarantee Obligations incurred after the date hereof in an aggregate amount not to exceed $5,000,000 at any one time outstanding; (c) guarantees made in the ordinary course of its business by the Borrower of obligations of any of its Domestic Subsidiaries, which obligations are otherwise permitted under this Agreement; (d) the guarantee by the Domestic Subsidiaries under the Guarantee and Collateral Agreement; (e) guarantees of any Foreign Subsidiary of the obligations of any other Foreign Subsidiary; 67 (f) guarantees by the Borrower of obligations of Foreign Subsidiaries other than Holland & Barrett; provided that the aggregate amount of such guarantees, taken together with Indebtedness of Foreign Subsidiaries other than Holland & Barrett permitted under subsection 8.2(i) and investments in Foreign Subsidiaries other than Holland & Barrett permitted under subsection 8.9(d), shall not exceed $10,000,000 at any time outstanding; and (g) guarantees by the Borrower of obligations of Holland & Barrett provided that the aggregate amount of such guarantees, taken together with Indebtedness of Holland & Barrett permitted under subsection 8.2(i) and investments in Holland & Barrett permitted under subsection 8.9(d), shall not exceed $25,000,000 at any time outstanding. 8.5. Limitation on Fundamental Changes. Enter into any merger, consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease, assign, transfer or otherwise dispose of, all or substantially all of its property, business or assets, except: (a) any Subsidiary of the Borrower may be merged or consolidated with or into the Borrower (provided that the Borrower shall be the continuing or surviving corporation) or with or into any one or more wholly owned Subsidiaries of the Borrower (provided that if a Domestic Subsidiary is a party to such transaction, such Domestic Subsidiary shall be the continuing or surviving corporation); (b) any wholly owned Subsidiary may sell, lease, transfer or otherwise dispose of any or all of its assets (upon voluntary liquidation or otherwise) to the Borrower or any other wholly owned Domestic Subsidiary of the Borrower; and (c) any Subsidiary may liquidate or dissolve if the Borrower determines in good faith that such liquidation or dissolution is in the best interests of the Borrower and its Subsidiaries, taken as a whole, and is not materially disadvantageous to the Lenders. 8.6. Limitation on Sale of Assets. Convey, sell, lease, assign, transfer or otherwise dispose of any of its property, business or assets (including, without limitation, receivables and leasehold interests), whether now owned or hereafter acquired, or, in the case of any Subsidiary, issue or sell any shares of such Subsidiary's Capital Stock to any Person other than the Borrower or any wholly owned Domestic Subsidiary, except: (a) the sale or other disposition of obsolete or worn out property in the ordinary course of business; (b) the sale of inventory in the ordinary course of business; (c) as permitted by subsection 8.5(b) or (c); 68 (d) the sale or other disposition of property listed on Schedule 8.6(d); and (e) the sale or other disposition of any other property at fair market value for consideration not in excess of $1,000,000 in the aggregate in any fiscal year. 8.7. Limitation on Dividends and Other Restricted Payments. Declare or pay any dividend (other than dividends payable solely in its common stock) on, or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, defeasance, retirement or other acquisition of, any shares of any class of Capital Stock of the Borrower or any Subsidiary or any warrants or options to purchase any such Capital Stock, whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of the Borrower or any Subsidiary thereof (such declarations, payments, setting apart, purchases, redemptions, defeasances, retirements, acquisitions and distributions being herein called "Restricted Payments") except (a) as permitted by subsections 8.5 or 8.9, (b) any Subsidiary may pay dividends to the Borrower or any other Subsidiary and (c) the Borrower or any Subsidiary may make Restricted Payments pursuant to and in accordance with customary stock option plans or other customary benefit plans for management or employees of the Borrower and its Subsidiaries. 8.8. Limitation on Capital Expenditures. Make any Capital Expenditure except for Capital Expenditures by the Borrower and its Subsidiaries in the ordinary course of business not exceeding $50,000,000 in the aggregate during any fiscal year of the Borrower. 8.9. Limitation on Investments, Loans and Advances. Make any advance, loan, extension of credit or capital contribution to, or purchase any stock, bonds, notes, debentures or other securities of or any assets constituting a business unit of, or make any other investment in, any Person, except: (a) extensions of trade credit in the ordinary course of business; (b) investments in Cash Equivalents; (c) loans and advances to employees of the Borrower or its Subsidiaries for travel, entertainment and relocation expenses in the ordinary course of business in an aggregate amount for the Borrower and its Subsidiaries not to exceed $1,000,000 at any one time outstanding; (d) investments by the Borrower or its Subsidiaries in any wholly owned Subsidiary of the Borrower which has complied with the conditions set forth in subsection 7.9(a) or any wholly owned Foreign Subsidiary which has complied with the conditions set forth in subsection 7.9(b); provided that (A) the aggregate amount of all such advances, loans, investments, transfers or guarantees by the Borrower and the Domestic Subsidiaries made to or on behalf of Holland & Barrett, taken together with loans to Holland & Barrett permitted under subsection 8.2(i) and guarantees of obligations of 69 Holland & Barrett permitted under subsection 8.4(g), shall not exceed $25,000,000 at any time outstanding, and (B) the aggregate amount of all such advances, loans, investments, transfers or guarantees by the Borrowers and the Domestic Subsidiaries made to or on behalf of the Foreign Subsidiaries other than Holland & Barrett, taken together with loans to Foreign Subsidiaries other than Holland & Barrett permitted under subsection 8.2(i) and guarantees of obligations of Foreign Subsidiaries other than Holland & Barrett permitted under subsection 8.4(f), shall not exceed $10,000,000 at any time outstanding. (e) investments by the Borrower and its Subsidiaries existing on the Closing Date and set forth on Schedule 8.9(e); (f) the Rexall Acquisition; (g) other Acquisitions; provided that (i) such Acquisitions permitted pursuant to this paragraph (g) shall be nonhostile acquisitions and (ii) the aggregate amount of investments (whether cash, securities or other consideration) permitted each fiscal year pursuant to this paragraph (g) shall not exceed, in the aggregate in any fiscal year, the sum of $25,000,000; and (h) additional investments not to exceed $10,000,000 in the aggregate while this Agreement is outstanding. 8.10. Limitation on Optional Payments and Modifications of Debt Instruments. (a) Make any optional payment or prepayment on or redemption or purchase of any Indebtedness (other than the Loans) in excess of $5,000,000 per fiscal year, (b) amend, modify or change, or consent or agree to any amendment, modification or change to, any of the terms of any Indebtedness (excluding the Loans) (other than any such amendment, modification or change which would extend the maturity or reduce the amount of any payment of principal thereof or which would reduce the rate or extend the date for payment of interest thereon), or (c) amend, modify or change (i) the subordination provisions of any Subordinated Debt or (ii) the provisions (including, without limitation, definitions and schedules) in the Rexall Purchase Agreement providing the Borrower with indemnification rights, other than, with respect to this clause (ii), any immaterial provision the amendment, modification or change of which would not adversely affect the Borrower. 8.11. Limitation on Transactions with Affiliates. Enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of property or the rendering of any service, with any Affiliate unless such transaction is (a) otherwise permitted under this Agreement and (b) upon fair and reasonable terms no less favorable to the Borrower or such Subsidiary, as the case may be, than it would obtain in a comparable arm's length transaction with a Person which is not an Affiliate. 8.12. Limitation on Sales and Leasebacks. Enter into any arrangement with any Person providing for the leasing by the Borrower or any Subsidiary of real or personal property 70 which has been or is to be sold or transferred by the Borrower or such Subsidiary to such Person or to any other Person to whom funds have been or are to be advanced by such Person on the security of such property or rental obligations of the Borrower or such Subsidiary; provided that such sale leaseback transactions in an amount of, together with the aggregate principal amount of Indebtedness permitted under subsection 8.2(f) then outstanding, up to $10,000,000 in the aggregate while this Agreement is in effect may be consummated by the Borrower; provided that the Borrower will not mortgage any existing Fee Property or Leased Property (including, without limitation, the Gel-Cap Facility) other than any mortgage to which such Fee Property or Leased Property is subject on the Closing Date (or any other mortgage in respect thereof so long as the related Indebtedness constitutes Refinancing Indebtedness). 8.13. Limitation on Changes in Fiscal Year. Permit the fiscal year of the Borrower to end on a day other than September 30. 8.14. Limitation on Negative Pledge Clauses. Enter into with any Person any agreement, other than (a) this Agreement and the other Loan Documents, (b) the Subordinated Debt and (c) any industrial revenue bonds, purchase money mortgages or Financing Leases permitted by this Agreement (in which cases, any prohibition or limitation shall only be effective against the assets financed thereby), which prohibits or limits the ability of the Borrower or any of its Subsidiaries to create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired; provided that the foregoing shall not apply to (i) restrictions and conditions imposed by law, (ii) customary restrictions and conditions contained in agreements relating to the sale of a Subsidiary permitted hereunder pending such sale, provided such restrictions or conditions apply only to the Subsidiary that is to be sold, (iii) restrictions or conditions imposed by any agreement relating to secured Indebtedness permitted hereunder if such restrictions or conditions apply only to the property or assets securing such Indebtedness and (iv) customary provisions in leases and other contracts restricting the assignment thereof. 8.15. Limitation on Lines of Business. Enter into any business, either directly or through any Subsidiary, except for the nutritional supplements and healthfood businesses and business reasonably related thereto. 8.16. Hedging Agreements. Enter into any Hedging Agreement, except (a) Hedging Agreements entered into to hedge or mitigate risks to which the Borrower or any Subsidiary has actual exposure (other than those in respect of Capital Stock of the Borrower or any of its Subsidiaries) and (b) Hedging Agreements entered into in order to effectively cap, collar or exchange interest rates (from fixed to floating rates, from one floating rate to another floating rate or otherwise) with respect to any interest-bearing liability or investment of the Borrower or any Subsidiary. 8.17. Rexall Acquisition. Notwithstanding anything to the contrary herein, the transactions contemplated by the Rexall Purchase Agreement and consummated on the Closing Date shall not be deemed to violate the provisions of this Section 8. 71 SECTION 9. EVENTS OF DEFAULT Upon the occurrence of any of the following events: (a) The Borrower shall fail to pay (i) any principal of any Loans or any Reimbursement Obligations when due (whether at the stated maturity, by acceleration or otherwise) in accordance with the terms thereof or hereof or (ii) any interest on any Loans, or any fee or other amount payable hereunder, within five days after any such interest, fee or other amount becomes due in accordance with the terms hereof; or (b) Any representation or warranty made or deemed made by the Borrower or any other Loan Party herein or in any other Loan Document or which is contained in any certificate, document or financial or other statement furnished at any time under or in connection with this Agreement or any other Loan Document shall prove to have been incorrect in any material respect on or as of the date made or deemed made or furnished; or (c) The Borrower or any other Loan Party shall default in the observance or performance of any covenant contained in Section 8 hereof or in any negative covenant contained in any Security Document to which it is a party; or (d) The Borrower or any other Loan Party shall default in the observance or performance of any other agreement contained in this Agreement or any other Loan Document other than as provided in (a) through (c) above, and such default shall continue unremedied for a period of the greater of (x) 30 days, and (y) 60 days (if the Borrower or such Loan Party is diligently pursuing a remedy of such default) after the earlier to occur of (A) actual knowledge of such default by a Responsible Officer of the Borrower and (B) notice from the Administrative Agent to the Borrower; or (e) Any Loan Document shall cease, for any reason, to be in full force and effect, or the Borrower or any other Loan Party shall so assert; or any security interest created by any of the Security Documents in a material portion of the Collateral (as defined in the Guarantee and Collateral Agreement) shall cease to be enforceable and of the same effect and priority purported to be created thereby and, in each case, shall remain unremedied for a period of 10 days; or (f) The subordination provisions contained in any instrument pursuant to which the Subordinated Debt was created or in any instrument evidencing such Subordinated Debt shall cease, for any reason, to be in full force and effect or enforceable in accordance with their terms; or (g) The Borrower or any of its Subsidiaries shall (i) default in any payment of principal of or interest on any Indebtedness (other than Indebtedness under this Agreement), in the payment of any Guarantee Obligation or in the payment of any Hedge 72 Agreement Obligation, where, in any case or in the aggregate, the principal amount thereof then outstanding exceeds $5,000,000, beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness, Guarantee Obligation or Hedge Agreement Obligation was created; or (ii) default in the observance or performance of any other agreement or condition relating to any such Indebtedness, Guarantee Obligation or Hedge Agreement Obligation or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Indebtedness or Hedge Agreement Obligation or, beneficiary or beneficiaries of such Guarantee Obligation (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause, with the giving of notice if required, such Indebtedness to become due prior to its stated maturity or such Guarantee Obligation to become payable; or (h) (i) The Borrower, any Domestic Subsidiary or any Material Foreign Subsidiary shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its assets, or the Borrower, any Domestic Subsidiary or any Material Foreign Subsidiary shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against the Borrower, any Domestic Subsidiary or any Material Foreign Subsidiary any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of 60 days; or (iii) there shall be commenced against the Borrower, any Domestic Subsidiary or any Material Foreign Subsidiary any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (iv) the Borrower, any Domestic Subsidiary or any Material Foreign Subsidiary shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above; or (v) the Borrower, any Domestic Subsidiary or any Material Foreign Subsidiary shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or (i) an ERISA Event shall have occurred that, when taken together with all other ERISA Events that have occurred, could reasonably be expected to result in liability of the Borrower and its Subsidiaries in an aggregate amount exceeding $5,000,000; or 73 (j) One or more judgments or decrees shall be entered against the Borrower or any of its Subsidiaries involving in the aggregate a liability (not paid by insurance or otherwise fully covered by insurance or paid by a third-party indemnitor) of $5,000,000 or more and all such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within 30 days from the entry thereof; or (k) (i) Any Person or "group" (within the meaning of Section 13(d) or 15(d) of the Exchange Act), other than any Person or group owning 10% or more of the Capital Stock of the Borrower on the date hereof (A) shall have acquired, combined with previous holdings, beneficial ownership of 25% or more of any outstanding class of capital stock of the Borrower having ordinary voting power in the election of directors or (B) shall obtain the power (whether or not exercised) to elect a majority of the Borrower's directors or (ii) the Board of Directors of the Borrower shall not consist of a majority of Continuing Directors; then, and in any such event, (A) if such event is an Event of Default specified in clause (i) or (ii) of paragraph (h) above with respect to the Borrower or if such event is an Event of Default specified in clause (g) above resulting from the acceleration of the Subordinated Debt automatically the Commitments shall immediately terminate and the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement (including, without limitation, all Reimbursement Obligations, regardless of whether or not such Reimbursement Obligations are then due and payable) shall immediately become due and payable, and (B) if such event is any other Event of Default, any of the following actions may be taken: (i) with the consent of the Majority Lenders, the Administrative Agent may, or upon the direction of the Majority Lenders, the Administrative Agent shall, by notice to the Borrower declare the Commitments to be terminated forthwith, whereupon the Commitments shall immediately terminate; (ii) with the consent of the Majority Lenders, the Administrative Agent may, or upon the direction of the Majority Lenders, the Administrative Agent shall, by notice of default to the Borrower, declare the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement (including, without limitation, all Reimbursement Obligations, regardless of whether or not such Reimbursement Obligations are then due and payable) to be due and payable forthwith, whereupon the same shall immediately become due and payable and (iii) with the consent of the Majority Lenders the Administrative Agent may, and upon the direction of the Majority Lenders, the Administrative Agent shall, exercise any and all remedies and other rights provided pursuant to this Agreement and/or the other Loan Documents. With respect to all Letters of Credit with respect to which presentment for honor shall not have occurred at the time of an acceleration pursuant to the preceding paragraph, the Borrower shall at such time deposit in a cash collateral account opened by the Administrative Agent an amount equal to the aggregate then undrawn and unexpired amount of such Letters of Credit. The Borrower hereby grants to the Administrative Agent, for the benefit of the Issuing Lender and the Participating Lenders, a security interest in such cash collateral to secure all obligations of the Borrower under this Agreement and the other Loan Documents. Amounts held in 74 such cash collateral account shall be applied by the Administrative Agent to the payment of drafts drawn under such Letters of Credit, and the unused portion thereof after all such Letters of Credit shall have expired or been fully drawn upon, if any, shall be applied to repay other obligations of the Borrower hereunder and under the Notes. After all such Letters of Credit shall have expired or been fully drawn upon, all Reimbursement Obligations shall have been satisfied and all other obligations of the Borrower hereunder and under the Notes shall have been paid in full, the balance, if any, in such cash collateral account shall be returned to the Borrower. The Borrower shall execute and deliver to the Administrative Agent, for the account of the Issuing Lender and the Participating Lenders, such further documents and instruments as the Administrative Agent may request to evidence the creation and perfection of the within security interest in such cash collateral account. Except as expressly provided above in this Section 9, presentment, demand, protest and all other notices of any kind are hereby expressly waived. SECTION 10. THE AGENTS AND THE ARRANGERS 10.1. Appointment. Each Lender hereby irrevocably designates and appoints JPMorgan Chase as the Administrative Agent and as the Collateral Agent of such Lender under this Agreement and the other Loan Documents, and each Lender irrevocably authorizes each of the Administrative Agent and the Collateral Agent, in such respective capacities, to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Administrative Agent and the Collateral Agent, as the case may be, by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. Each Lender hereby irrevocably designates and appoints Fleet National Bank as the Syndication Agent of such Lender under this Agreement and the other Loan Documents, and each Lender irrevocably authorizes the Syndication Agent, in such capacity, to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Syndication Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement, no Agent shall have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against any Agent. 10.2. Delegation of Duties. Each Agent may execute any of its duties under this Agreement and the other Loan Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. No Agent shall be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. 75 10.3. Exculpatory Provisions. No Agent or any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or any other Loan Document (except for its or such Person's own gross negligence or willful misconduct) or (ii) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by the Borrower or any officer thereof contained in this Agreement or any other Loan Document or in any certificate, report, statement or other document referred to or provided for in, or received by such Agent under or in connection with, this Agreement or any other Loan Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document or for any failure of the Borrower to perform its obligations hereunder or thereunder. No Agent shall be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Borrower. 10.4. Reliance by Agents. Each Agent shall be entitled to rely, and shall be fully protected in relying, upon any Note, writing, resolution, notice, consent, certificate, affidavit, letter, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrower), independent accountants and other experts selected by such Agent with reasonable care. Each Agent may deem and treat the Person whose name is recorded in the Register pursuant to the terms hereof as the owner thereof for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Administrative Agent. Each Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Majority Lenders (or, to the extent provided in subsection 11.1, all of the Lenders) as it deems appropriate or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. Each Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Loan Documents in accordance with a request of the Majority Lenders (or, to the extent provided in subsection 11.1, all of the Lenders), and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Loans. 10.5. Notice of Default. No Agent shall be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Administrative Agent has received notice from a Lender or the Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default" (and, in the case of the Collateral Agent and the Syndication Agent, shall have received notice thereof as described in the following sentence). In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give notice thereof to the other Agents and Lenders. The Administrative Agent shall take such action with respect to such Default or Event of Default as 76 shall be reasonably directed by the Majority Lenders; provided that unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders. 10.6. Non-Reliance on Agents and Other Lenders. Each Lender expressly acknowledges that no Agent or any Agent's officers, directors, employees, agents, attorneys-in-fact or Affiliates has made any representations or warranties to it and that no act by any Agent hereafter taken, including any review of the affairs of the Borrower, shall be deemed to constitute any representation or warranty by any Agent to any Lender. Each Lender represents to each Agent that it has, independently and without reliance upon any Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Borrower and into the Transactions, and made its own decision to make its Loans hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Agents, the Arrangers or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Borrower. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Administrative Agent, the Collateral Agent or the Syndication Agent hereunder, no Agent shall have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of the Borrower which may come into the possession of such Agent or any of its officers, directors, employees, agents, attorneys-in- fact or Affiliates. 10.7. Indemnification. The Lenders agree to indemnify each Agent in its capacity as such (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrower to do so), ratably according to their respective Total Loan Percentages in effect on the date on which indemnification is sought (or, if indemnification is sought after the date upon which the Commitments shall have terminated and the Loans shall have been paid in full, ratably in accordance with their Total Loan Percentages immediately prior to such date), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the payment of the Loans) be imposed on, incurred by or asserted against such Agent in any way relating to or arising out of the Commitments, this Agreement, any of the other Loan Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by such Agent under or in connection with any of the foregoing; provided that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting solely from such 77 Agent's gross negligence or willful misconduct. The agreements in this subsection 10.7 shall survive the payment of the Loans and all other amounts payable hereunder. 10.8. Agent in Its Individual Capacity. The entity which is an Agent and its Affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Borrower as though the entity which is such Agent were not such Agent hereunder and under the other Loan Documents. With respect to the Loans made by it, such entity shall have the same rights and powers under this Agreement and the other Loan Documents as any Lender and may exercise the same as though it were not an Agent, and the terms "Lender" and "Lenders" shall include the entity which is such Agent in its individual capacity. 10.9. Successor Agents. Any Agent may resign as Agent upon 45 days' notice to the Lenders. If any Agent shall resign as Agent under this Agreement and the other Loan Documents, then the Majority Lenders shall appoint from among the Lenders a successor agent for the Lenders, which successor agent shall be approved by the Borrower (except during the occurrence and continuation of an Event of Default), such approval not to be unreasonably withheld, whereupon such successor agent shall succeed to the rights, powers and duties of such Agent, and the term "Administrative Agent," "Collateral Agent" or "Syndication Agent," as the case may be, shall mean such successor agent effective upon such appointment and approval, and the former Agent's rights, powers and duties as Agent shall be terminated, without any other or further act or deed on the part of such former Agent or any of the parties to this Agreement or any holders of the Loans. After any retiring Agent's resignation as Agent, the provisions of this Section 10 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement and the other Loan Documents. 10.10. Issuing Lender . Each Lender hereby acknowledges that the provisions of this Section 10 shall apply to the Issuing Lender, in its capacity as issuer of any Letter of Credit, in the same manner as such provisions are expressly stated to apply to the Agents. SECTION 11. MISCELLANEOUS 11.1. Amendments and Waivers. Neither this Agreement nor any other Loan Document, nor any terms hereof or thereof, may be amended, supplemented, waived or modified except in accordance with the provisions of this subsection 11.1. The Majority Lenders may, or, with the written consent of the Majority Lenders, the Administrative Agent may, from time to time, (i) enter into with the applicable Loan Parties written amendments, supplements or modifications hereto and to the other Loan Documents for the purpose of adding any provisions to this Agreement or the other Loan Documents or changing in any manner the rights or obligations of the Lenders or of the Borrower or of any other Loan Party hereunder or thereunder or (ii) waive at the Borrower's request, on such terms and conditions as the Majority Lenders or the Administrative Agent, as the case may be, may specify in such instrument, any of the requirements of this Agreement or the other Loan Documents or any Default or Event of Default and its consequences; provided, however, that no such waiver and no such amendment, supplement or modification shall: 79 (i) increase the Commitment of any Lender without the written consent of such Lender, (ii) reduce the principal amount of any Loan or Reimbursement Obligation or reduce the rate of interest thereon or require any Lender to offer Interest Periods of longer than six months without regard to availability, or reduce any fees payable hereunder, without the written consent of each Lender affected thereby, (iii) postpone the scheduled date of payment of the principal amount of any Loan or Reimbursement Obligation, or any interest thereon, or any fees payable hereunder, or reduce the amount of, waive or excuse any such payment, or postpone the scheduled date of expiration of any Commitment, without the written consent of each Lender affected thereby, (iv) change subsection 4.8 in a manner that would alter the pro rata sharing of payments required thereby, without the written consent of each Lender affected thereby, (v) release the Guarantee and Collateral Agreement or all or a substantial portion of the Collateral under, and as defined in, the Security Documents or any Guarantor under, and as defined in, the Guarantee and Collateral Agreement, without the written consent of each Lender, (vi) change any of the provisions of this subsection 11.1 or the definition of "Majority Lenders" or any other provision hereof specifying the number or percentage of Lenders required to waive, amend or modify any rights hereunder or make any determination or grant any consent hereunder, without the written consent of each Lender, (vii) amend or waive the mandatory prepayment provisions of subsection 4.4 without the written consent of Lenders holding a majority of the Term A Loans, the Term B Loans or the Aggregate Revolving Credit Commitments, in each case to the extent the Lenders in such Class are adversely affected thereby, or (viii) amend or waive any provisions of this Agreement or any other Loan Document for purposes of determining whether the conditions precedent set forth in subsection 6.2 to the making of any Revolving Credit Loan have been satisfied without the written consent of the Lenders holding a majority in interest of the Aggregate Revolving Credit Commitments. In addition to the foregoing, (x) no such amendment, supplement or modification shall amend, modify or otherwise affect the rights or duties of any Agent, the Issuing Bank or the Swing Line Lender hereunder without the prior written consent of such Agent, the Issuing Bank or the Swing Line Lender, as the case may be, and (y) no such amendment, supplement, modification or waiver shall amend, modify or otherwise affect subsection 8.1 at a time when a Default or Event of Default shall have occurred and be continuing unless the Lenders holding a majority in inter- 80 est of the Aggregate Revolving Credit Commitments shall have consented in writing to such amendment, modification or waiver. Any waiver and any amendment, supplement or modification pursuant to this subsection 11.1 shall apply to each of the Lenders and shall be binding upon the Borrower, the applicable other Loan Parties, the Lenders, the Agents and all future holders of the Loans and the Reimbursement Obligations. In the case of any waiver, the Borrower, the Lenders and the Agents shall be restored to their former positions and rights hereunder and under the other Loan Documents, and any Default or Event of Default waived shall be deemed to be cured and not continuing; but no such waiver shall extend to any subsequent or other Default or Event of Default, or impair any right consequent thereon. 11.2. Notices. All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing (including by facsimile transmission) and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made (a) in the case of delivery by hand, when delivered, (b) in the case of delivery by mail, three days after being deposited in the mails, postage prepaid, or (c) in the case of delivery by facsimile transmission, when sent and receipt has been confirmed, addressed as follows in the case of the Borrower, the Issuing Lender and the Administrative Agent, and as set forth in Schedule I in the case of the other parties hereto, or to such other address as may be hereafter notified in writing by the respective parties hereto: The Borrower: c/o NBTY, Inc. 90 Orville Drive Bohemia, New York 11716-2510 Attention: President Fax: (631) 567-7148 The Administrative Agent, the Collateral Agent, the Issuing Lender or Swing Line Lender: JPMorgan Chase Bank 395 North Service Road Melville, New York 11747 Attention: William A. DeMilt, Jr. Fax: (631) 755-5184 With a copy to: JPMorgan Chase Bank Loan and Agency Services Group 1111 Fannin, 10th Floor Houston, Texas 77002 Attention: Glen Hector Fax: (713) 750-2938 81 and Cahill Gordon & Reindel LLP 80 Pine Street New York, New York 10005 Attention: Michael A. Becker, Esq. Fax: (212) 269-5420 The Syndication Agent: Fleet National Bank 300 Broad Hollow Road Melville, New York 11747 Attention: Philip Davi Fax: (631) 547-7815 provided that any notice, request or demand to or upon any Agent, the Issuing Lender or the Lenders pursuant to subsection 2.2, 2.4, 2.5, 2.7, 3.2 or 4.2 shall not be effective until received. 11.3. No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of any Agent or any Lender, any right, remedy, power or privilege hereunder or under the other Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. 11.4. Survival . All representations and warranties made hereunder, in the other Loan Documents and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the making of the Loans hereunder until all obligations hereunder and under the other Loan Documents have been paid in full and the Commitments hereunder have been terminated. The agreements in subsection 4.12 shall survive the termination of this Agreement and the payment of the Notes and all other amounts payable hereunder until the expiration of the applicable statute of limitations for such taxes. 11.5. Payment of Expenses and Taxes. The Borrower agrees (a) to pay or reimburse the Administrative Agent for all its reasonable out-of-pocket costs and expenses incurred in connection with the development, preparation, syndication and execution of, and any amendment, supplement or modification to, this Agreement and the other Loan Documents and any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby and thereby, including, without limitation, the reasonable fees and disbursements of New York counsel to the Administrative Agent, (b) to pay or reimburse each Lender and any Agent for all its costs and expenses incurred during the continuance of any Default or Event of Default in connection with the enforcement or preservation of any rights under this Agreement, the other Loan Documents and any such other documents, in- 82 cluding, without limitation, the fees and disbursements of counsel to each Lender and of counsel to the Agents, (c) to pay, indemnify, and hold harmless each Lender and the Agent from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, Other Taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation or administration of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the other Loan Documents and any such other documents, and (d) to pay, indemnify, and hold harmless each Lender and the Administrative Agent from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement, the other Loan Documents and related documents or the use of the proceeds of the Loans, including, without limitation, any of the foregoing relating to the violation of, noncompliance with or liability under, any Environmental Law applicable to the operations of the Borrower, any of its Subsidiaries or any of the Properties (all the foregoing in this clause (d), collectively, the "indemnified liabilities"), provided that the Borrower shall have no obligation hereunder to the Administrative Agent or any Lender with respect to indemnified liabilities solely arising from the gross negligence or willful misconduct of the Agents or any such Lender, as the case may be. The agreements in this subsection shall survive the termination of this Agreement and the repayment of the Loans and all other amounts payable hereunder. 11.6. Successors and Assigns; Participation and Assignments. This Agreement shall be binding upon and inure to the benefit of the Borrower, the Lenders, the Agents and their respective successors and assigns permitted hereby (including any Affiliate of the Issuing Lender that issues any Letter of Credit), except that (i) the Borrower may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of each Lender (and any attempted assignment or transfer by the Borrower without such consent shall be null and void) and (ii) no Lender may assign or otherwise transfer its rights or obligations hereunder except in accordance with this subsection 11.6. Nothing in this Agreement, express or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby (including any Affiliate of the Issuing Lender that issues any Letter of Credit), Participants (to the extent provided in paragraph (c) of this subsection 11.6) and, to the extent expressly contemplated hereby, the Related Parties of each of the Agents, the Issuing Bank and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement. (b) (i) Subject to the conditions set forth in clause (ii) below, any Lender may assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it) with the prior written consent (such consent not to be unreasonably withheld, delayed or conditioned) of: (A) the Borrower, provided that no consent of the Borrower shall be required at any time for an assignment to a Lender, an Affiliate of a Lender or an Approved Fund, 83 or for any assignment to any assignee prior to completion of primary syndication of the Loans and Commitments hereunder (as determined by JPMorgan Chase in its sole discretion) or if a Default or Event of Default has occurred and is continuing; and (B) the Administrative Agent, provided that no consent of the Administrative Agent shall be required for an assignment of (x) any Revolving Credit Commitment to an assignee that is a Lender with a Revolving Credit Commitment immediately prior to giving effect to such assignment or an Affiliate of such Lender or (y) all or any portion of a Term Loan to a Lender, an Affiliate of a Lender or an Approved Fund. (ii) Assignments shall be subject to the following additional conditions: (A) except in the case of an assignment to a Lender or an Affiliate of a Lender or an assignment of the entire remaining amount of the assigning Lender's Commitment or Loans of any Class, the amount of the Commitment or Loans of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall not be less than $5,000,000 or, in the case of a Term Loan, $1,000,000 unless each of the Borrower and the Administrative Agent otherwise consents, provided that no such consent of the Borrower shall be required prior to completion of primary syndication of the Loans and Commitments hereunder (as determined by JPMorgan Chase in its sole discretion) or if a Default or Event of Default has occurred and is continuing; (B) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender's rights and obligations under this Agreement, provided that this clause shall not be construed to prohibit the assignment of a proportionate part of all the assigning Lender's rights and obligations in respect of one Class of Commitments or Loans; (C) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Acceptance, together with a processing and recordation fee of $3,500, provided that only one such fee shall be payable in the event of simultaneous assignments by a Lender to or from two or more Approved Funds; and (D) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent a completed Administrative Questionnaire. For purposes of the minimum assignment sizes set forth in subsection 11.6(b)(ii)(A), simultaneous assignments to Approved Funds under common management by a Lender shall be aggregated. For the purposes of this subsection 11.6(b), the term "Approved Fund" has the following meaning: "Approved Fund" means any Person (other than a natural person) that is engaged in making, purchasing, holding or investing in bank loans and similar extensions of credit in the 84 ordinary course of its business and that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender. (iii) Subject to acceptance and recording thereof pursuant to paragraph (b)(iv) of this subsection, from and after the effective date specified in each Assignment and Assumption the assignee thereunder ("Assignee") shall be a party hereto and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto). Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this subsection 11.6 shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with paragraph (c) of this subsection. (iv) The Administrative Agent, acting for this purpose as an agent of the Borrower, shall maintain at one of its offices a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans and Letter of Credit disbursements owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive, and the Borrower, the Agents, the Issuing Bank and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower, the Issuing Bank and any Lender, at any reasonable time and from time to time upon reasonable prior notice. (v) Upon its receipt of a duly completed Assignment and Assumption executed by an assigning Lender and an Assignee, the Assignee's completed Administrative Questionnaire (unless the Assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) of this subsection and any written consent to such assignment required by paragraph (b) of this subsection, the Administrative Agent shall accept such Assignment and Assumption and record the information contained therein in the Register. No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph. (c) Any Lender may, without the consent of the Borrower, the Administrative Agent, the Issuing Bank or the Swing Line Lender, sell participations to one or more banks or other entities (a "Participant") in all or a portion of such Lender's rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); provided that (A) such Lender's obligations under this Agreement shall remain unchanged, (B) such Lender shall remain solely responsible to the other parties hereto for the performance of 85 such obligations and (C) the Borrower, the Administrative Agent, the Issuing Bank and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver described in clauses (ii), (iii) and (v) of subsection 11.1 that affects such Participant. Subject to paragraph (c)(ii) of this subsection, the Borrower agrees that each Participant shall be entitled to the benefits of subsections 4.10, 4.11 and 4.12 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this subsection. To the extent permitted by law, each Participant also shall be entitled to the benefits of subsection 11.7 as though it were a Lender, provided that such Participant agrees to be subject to subsection 4.8 as though it were a Lender. (ii) A Participant shall not be entitled to receive any greater payment under subsections 4.10 or 4.12 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower's prior written consent. A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of subsection 4.12 unless the Borrower is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrower, to comply with subsection 4.12(e) as though it were a Lender. (d) Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including without limitation any pledge or assignment to secure obligations to a Federal Reserve Bank, and this subsection shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto. 11.7. Adjustments; Set-off. If any Lender (a "Benefited Lender") shall at any time receive any payment of all or part of its Loans owing to it by the Borrower, or interest thereon, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set-off, pursuant to events or proceedings of the nature referred to in clause (h) of Section 9 or otherwise, except for payments pursuant to the operation of subsections 4.14(b) or 11.6), in a greater proportion than any such payment to or collateral received by any other Lender, if any, in respect of such other Lender's Loans owing to it by the Borrower, or interest thereon, such Benefited Lender shall purchase for cash from the other Lenders a participating interest in such portion of each such other Lender's Loan owing to it by the Borrower, or shall provide such other Lenders with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such Benefited Lender to share the excess payment or benefits of such collateral or proceeds ratably with each of the Lenders; provided, however, that if all or any portion of such excess payment or benefits is thereafter recovered from such Benefited Lender, such purchase shall be 86 rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. (b) In addition to any rights and remedies of the Lenders provided by law, each Lender shall have the right, without prior notice to the Borrower, any such notice being expressly waived by the Borrower to the extent permitted by applicable law, upon any amount becoming due and payable by the Borrower hereunder (whether at the stated maturity, by acceleration or otherwise) to set off and appropriate and apply against such amount any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by such Lender or any branch or agency thereof to or for the credit or the account of the Borrower. Each Lender agrees promptly to notify the Borrower and the Administrative Agent after any such set-off and application made by such Lender, provided that the failure to give such notice shall not affect the validity of such set- off and application. 11.8. Counterparts. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts (including by facsimile transmission), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the copies of this Agreement signed by all the parties shall be delivered to the Borrower and the Administrative Agent. 11.9. Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 11.10.Integration. This Agreement and the other Loan Documents represent the entire agreement of the Borrower, the Agents and the Lenders with respect to the subject matter hereof and thereof, and there are no promises, undertakings, representations or warranties by the Borrower, any Agent or any Lender relative to the subject matter hereof or thereof not expressly set forth or referred to herein or in the other Loan Documents. 11.11. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 11.12. Submission to Jurisdiction; Waivers. The Borrower hereby irrevocably and unconditionally: (i) submits for itself and its property in any legal action or proceeding relating to this Agreement or any other Loan Document to which it is a party, or for recognition 87 and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the courts of the State of New York, the courts of the United States of America for the Southern District of New York, and appellate courts from any thereof; (ii) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (iii) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to the Borrower at its address set forth in subsection 11.2 or at such other address of which the Administrative Agent shall have been notified pursuant thereto; and (iv) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction. 11.13. Acknowledgements. The Borrower hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents; (b) none of the Administrative Agent or any Lender has any fiduciary relationship with or duty to the Borrower arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between the Administrative Agents and the Lenders, on the one hand, and the Borrower, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and (c) no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among the Lenders or among the Borrower and the Lenders. 11.14. WAIVERS OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN. 11.15. Confidentiality. Each Agent and Lender and the Issuing Lender agrees to take normal and reasonable precautions to maintain the confidentiality of information provided to it by the Borrower or any Subsidiary in connection with this Agreement (and, if delivered after the date of this Agreement, designated in writing as confidential); provided, however, that any such Person may disclose such information (a) at the request of any regulatory authority having 88 supervisory jurisdiction over it or in connection with an examination of such Person by any such authority or the request of any rating agency requiring access to a Lender's portfolio, (b) pursuant to subpoena or other court process, (c) when required to do so in accordance with the provisions of any applicable law, (d) at the direction of any other Governmental Authority, (e) to such Person's Affiliates, independent auditors and other professional advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such information and instructed to keep such information confidential), (f) which has become generally available to the public, other than as a result of a disclosure by such Person or agent of such Person or a disclosure known to such Person or agent of such Person to have been made by any person or entity to which such Person or agent has delivered such confidential information, (g) which becomes available to such Person from a source other than the Borrower or any Subsidiary (provided that such source is not known to such Person to be bound by a duty of confidentiality to the Borrower or any Subsidiary) or (h) to any Participant or Assignee or potential Participant or Assignee (each, a "Transferee") or any pledgee (or prospective pledgee) (each, a "Pledgee") of any Lender that is a Person (other than a natural person) that is engaged in making, purchasing, holding or investing in bank loans and similar extensions of credit in the ordinary course of its business; provided that such Transferee or Pledgee agrees in writing to comply with the provisions of this subsection 11.15. Notwithstanding the foregoing paragraphs of this subsection 11.15, any party to this Agreement and the transactions contemplated hereby (and each employee, agent or representative of the foregoing) may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of this Agreement and the transactions contemplated hereby and all materials of any kind (including opinions or other tax analyses) that are provided to such party relating to such tax treatment and tax structure except to the extent maintaining such confidentiality is necessary to comply with any applicable federal or state securities laws. The foregoing language is not intended to waive any confidentiality obligations otherwise applicable under this Agreement except with respect to the information and materials specifically referenced in the preceding sentence. 11.16. Designation of Senior Indebtedness. The Indebtedness of the Borrower under this Agreement shall constitute "Designated Senior Indebtedness" pursuant to, for all purposes of, and under and as defined in, the Existing Notes Indenture. IN WITNESS WHEREOF, the parties hereto have caused this Agreement 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: ------------------------------ Name: Title: S-1 JPMORGAN CHASE BANK, as Administrative Agent and Collateral Agent and as a Lender, and as Swing Line Lender, and as Issuing Lender By: ------------------------------ Name: Title: FLEET NATIONAL BANK, as Syndication Agent and as a Lender By: ------------------------------ Name: Title: SCHEDULE I ---------- COMMITMENTS; ADDRESSES
=============================================================================================== Revolving Credit Term Loan A Term Loan B Lender Commitments Commitment Commitment - ----------------------------------------------------------------------------------------------- JPMorgan Chase Bank 395 North Service Road Melville, New York 11747 Telecopy: (631) 755-5184 Attention: William A. DeMilt, Jr. $[ ] $[ ] $[ ] - ----------------------------------------------------------------------------------------------- Fleet National Bank 300 Broadhollow Road Melville, New York 11747 Telecopy: Philip Davi Attention: (631) 547-7815 $[ ] $[ ] $[ ] - ----------------------------------------------------------------------------------------------- TOTAL $100,000,000.00 $[ ] $[ ] ===============================================================================================
EX-10 6 nbty-108.txt EXHIBIT 10.8 Exhibit 10.8 ========================================================================== GUARANTEE AND COLLATERAL AGREEMENT made by NBTY, INC. and the other Grantors party hereto in favor of JPMORGAN CHASE BANK, as Administrative Agent Dated as of July 24, 2003 ========================================================================== TABLE OF CONTENTS Page ---- SECTION 1. DEFINED TERMS 1 1.1 Definitions 1 1.2 Other Definitional Provisions 5 SECTION 2. GUARANTEE 5 2.1 Guarantee 5 2.2 Right of Contribution 6 2.3 No Subrogation 7 2.4 Amendments, etc. with respect to the Borrower Obligations 7 2.5 Guarantee Absolute, Irrevocable and Unconditional 7 2.6 Reinstatement 8 2.7 Payment 8 SECTION 3. GRANT OF SECURITY INTEREST 8 SECTION 4. REPRESENTATIONS AND WARRANTIES 9 4.1 Representations in Credit Agreement 9 4.2 Title; No Other Liens 10 4.3 Perfected First Priority Lien 10 4.4 Chief Executive Office 10 4.5 Inventory and Equipment 10 4.6 Farm Products 11 4.7 Pledged Securities 11 4.8 Receivables 11 4.9 Intellectual Property 11 4.10 Deposit Accounts; Security Accounts; Commodity Accounts 12 4.11 Commercial Tort Claims 12 SECTION 5. COVENANTS 12 5.1 Covenants in Credit Agreement 12 5.2 Delivery of Instruments and Chattel Paper 12 5.3 Maintenance of Insurance 13 5.4 Payment of Obligations 13 5.5 Maintenance of Perfected Security Interest; Further Documentation 13 5.6 Changes in Jurisdiction of Organization, Locations, Name, etc 14 5.7 Notices 14 5.8 Pledged Securities 14 5.9 Receivables 16 5.10 Intellectual Property 16 5.11 Jurisdiction of Organization 17 5.12 Commercial Tort Claims 17 i Page ---- 5.13 Additional Accounts 18 SECTION 6. REMEDIAL PROVISIONS 18 6.1 Certain Matters Relating to Receivables 18 6.2 Communications with Obligors; Grantors Remain Liable 19 6.3 Pledged Stock 19 6.4 Proceeds To Be Turned Over to Administrative Agent 20 6.5 Application of Proceeds 20 6.6 Code and Other Remedies 21 6.7 Private Sales 21 6.8 Deficiency 22 SECTION 7. THE ADMINISTRATIVE AGENT 22 7.1 Administrative Agent's Appointment as Attorney-in-Fact, etc 22 7.2 Duty of Administrative Agent 24 7.3 Execution of Financing Statement 24 7.4 Authority of Administrative Agent 24 SECTION 8. MISCELLANEOUS 25 8.1 Amendments in Writing 25 8.2 Notices 25 8.3 No Waiver by Course of Conduct; Cumulative Remedies 25 8.4 Enforcement Expenses; Indemnification 25 8.5 Successors and Assigns 26 8.6 Set-Off 26 8.7 Counterparts 26 8.8 Severability 27 8.9 Section Headings 27 8.10 Integration 27 8.11 GOVERNING LAW 27 8.12 Submission to Jurisdiction; Waivers 27 8.13 Acknowledgements 28 8.14 WAIVER OF JURY TRIAL 28 8.15 Additional Grantors 28 8.16 Releases 28 ii SCHEDULES Schedule 1 Notice Addresses of Guarantors Schedule 2 Description of Pledged Securities Schedule 3 Filings and Other Actions Required to Perfect Security Interests Schedule 4 Jurisdictions of Organization; Identification Numbers and Locations of Chief Executive Offices Schedule 5 Locations of Inventory and Equipment Schedule 6 Copyrights and Copyright Licenses; Patents and Patent Licenses;Trademark and Trademark Licenses Schedule 7 Existing Prior Liens Schedule 8 Commercial Tort Claims Schedule 9 Deposit Accounts; Securities Accounts; Commodities Accounts ANNEXES Annex 1 Form of Assumption Agreement Annex 2 Issuer's Acknowledgement iii GUARANTEE AND COLLATERAL AGREEMENT, dated as of July 24, 2003, made by each of the signatories hereto other than the Administrative Agent (together with any other entity that may become a party hereto as a Grantor as provided herein, the "Grantors"), in favor of JPMORGAN CHASE BANK, as Administrative Agent (in such capacity, the "Administrative Agent") for the banks and other financial institutions (the "Lenders") from time to time party to the Credit Agreement, dated as of July 24, 2003 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among NBTY, INC., a Delaware corporation (the "Borrower") FLEET NATIONAL BANK, as Syndication Agent, the Lenders and JP MORGAN CHASE BANK, as Collateral Agent and as the Administrative Agent. W I T N E S S E T H : _ _ _ _ _ _ _ _ _ _ WHEREAS, pursuant to the Credit Agreement, the Lenders have severally agreed to make extensions of credit to the Borrower upon the terms and subject to the conditions set forth therein; WHEREAS, the Borrower is a member of an affiliated group of companies that includes each other Grantor, WHEREAS, the proceeds of the extensions of credit under the Credit Agreement will be used in part to enable the Borrower to make valuable transfers to one or more of the other Grantors in connection with the operation of their respective businesses; WHEREAS, the Borrower and the other Grantors are engaged in related businesses, and each Grantor will derive substantial direct and indirect benefit from the making of the extensions of credit under the Credit Agreement; and WHEREAS, it is a condition precedent to the obligation of the Lenders to make their respective extensions of credit to the Borrower under the Credit Agreement that the Grantors shall have executed and delivered this Agreement to the Administrative Agent for the ratable benefit of the Lenders; NOW, THEREFORE, in consideration of the premises and to induce the Agents and the Lenders to enter into the Credit Agreement and to induce the Lenders to make their respective extensions of credit to the Borrower under the Credit Agreement, each Grantor hereby agrees with the Administrative Agent, for the ratable benefit of the Lenders as follows: SECTION 1. DEFINED TERMS 1.1 Definitions. (a) Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement, and the following terms which are defined in the Uniform Commercial Code in effect in the State of New York on the date hereof are used herein as so defined: Account, Certificated Security, Chattel Paper, Commercial Tort Claim, Commodity Account, Document, Equipment, Farm Product, General Intangibles, Instrument, Inventory, Letter of Credit Right, Proceeds, Securities Account and Supporting Obligations. (b) The following terms shall have the following meanings: 1 "Agreement": this Guarantee and Collateral Agreement, as the same may be amended, supplemented or otherwise modified from time to time. "Borrower Obligations": the collective reference to the unpaid principal of and interest on the Loans, the Reimbursement Obligations and all other obligations and liabilities of the Borrower (including, without limitation, interest accruing at the then applicable rate provided in the Credit Agreement after the maturity of such Loans and Reimbursement Obligations and interest accruing at the then applicable rate provided in the Credit Agreement after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) to any Agent or any Lender (or, in the case of any Hedge Agreement or Cash Management Obligations referred to below, any Affiliate of any Lender), whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, the Credit Agreement, this Agreement, the other Loan Documents, any Letter of Credit, any Hedge Agreement (including any guarantees of the Borrower of any Hedge Agreements made by any Grantor) or Cash Management Obligation entered into by the Borrower with any Lender (or any Affiliate of any Lender) or any other document made, delivered or given in connection therewith, in each case whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel to the Administrative Agent or to the Lenders that are required to be paid by such Borrower pursuant to the terms of any of the foregoing agreements). "Cash Management Obligation": any obligation of the Borrower or any of its Subsidiaries in respect of overdrafts and related liabilities owed to any Lender (or any Affiliate of a Lender) that arise from treasury, depositary or cash management services including in connection with any automated clearing house transfers of funds or any similar transactions. "Collateral": as defined in Section 3. "Collateral Account": any collateral account established by the Administrative Agent as provided in Section 6.1 or 6.4. "Control Agreement" shall mean an agreement in form and substance reasonably acceptable to the Administrative Agent sufficient to establish the Administrative Agent's control (within the meaning of the applicable Uniform Commercial Code as in effect in the applicable jurisdiction) over any applicable Investment Property (including, without limitation, any Securities Account or Commodities Account) or Deposit Account, for the benefit of the Administrative Agent and the ratable benefit of the Lenders. "Copyrights": (i) all copyrights arising under the laws of the United States, any other country or any political subdivision thereof, whether registered or unregistered and whether published or unpublished (including, without limitation, those listed in Schedule 6), all registrations and recordings thereof, and all applications in connection therewith, including, without limitation, all registrations, recordings and applications in the United States Copyright Office, and (ii) the right to obtain all renewals thereof. "Copyright Licenses": any written agreement naming any Grantor as licensor or licensee (including, without limitation, those listed in Schedule 6), granting any right under any Copyright, in- 2 cluding, without limitation, the grant of rights to manufacture, distribute, exploit and sell materials derived from any Copyright, to the extent (after giving effect to the provisions of 9-408(a) of the New York UCC) the grant by such Grantor of a security interest pursuant to this Agreement in its right, title and interest in such Copyright License is not prohibited by such Copyright License without the consent of any other party thereto, would not give any other party to such Copyright License the right to terminate its obligations thereunder, or is permitted with consent if all necessary consents to such grant of a security interest have been obtained from the other parties thereto (it being understood that the foregoing shall not be deemed to obligate such Grantor to obtain such consents); provided that the foregoing limitation shall not affect, limit, restrict or impair the grant by such Grantor of a security interest pursuant to this Agreement in any money or other amounts due or to become due under any such Copyright License. "Deposit Account": the "deposit accounts" as such term is defined in Section 9-102(a)(29) of the New York UCC listed on Schedule 9 hereto under the heading "Deposit Accounts" or required to be disclosed to the Administrative Agent pursuant to Section 5.13 hereof. "Guarantor Obligation": with respect to any Guarantor, the collective reference to (i) the Borrower Obligations and (ii) all obligations and liabilities of such Guarantor which may arise under or in connection with this Agreement or any other Loan Document to which such Guarantor is a party, in each case whether on account of guarantee obligations, reimbursement obligations, fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel to the Administrative Agent or to the Lenders that are required to be paid by such Guarantor pursuant to the terms of this Agreement or any other Loan Document). "Guarantors": the collective reference to each Grantor other than the Borrower. "Intellectual Property": the collective reference to all rights, priorities and privileges relating to intellectual property, whether arising under United States, multinational or foreign laws or otherwise, including, without limitation, the Copyrights, the Copyright Licenses, the Patents, the Patent Licenses, the Trademarks and the Trademark Licenses, and all rights to sue at law or in equity for any infringement or other impairment thereof, including the right to receive all proceeds and damages therefrom. "Intercompany Note": any promissory note evidencing loans made by any Grantor to the Borrower or any of its Subsidiaries (other than the promissory note dated May 12, 2003, evidencing the loan made by the Borrower to Holland & Barrett Europe Limited in the amount of [Pounds] 200,000,000 and any Refinancing Indebtedness in respect thereof permitted by the Credit Agreement. "Investment Property": the collective reference to all "investment property" as such term is defined in Section 9-102(a)(49) of the New York UCC (other than Capital Stock of a Foreign Subsidiary which is not required to be pledged to the Administrative Agent pursuant to the terms of this Agreement and the Credit Agreement). "Issuers": the collective reference to each issuer of any Pledged Security. "material": as the context may reasonably permit or require, material in relation to the Borrower and its Subsidiaries, taken as a whole. 3 "New York UCC": the Uniform Commercial Code as from time to time in effect in the State of New York. "Obligation": (i) in the case of the Borrower, its Borrower Obligations, and (ii) in the case of each Guarantor, its Guarantor Obligations. "Patent": (i) all letters patent of the United States, any other country or any political subdivision thereof, all reissues and extensions thereof and all goodwill associated therewith, including, without limitation, any of the foregoing referred to in Schedule 6, (ii) all applications for letters patent of the United States or any other country and all divisions, continuations and continuations-in-part thereof, including, without limitation, any of the foregoing referred to in Schedule 6, and (iii) all rights to obtain any reissues or extensions of the foregoing. "Patent License": all agreements, whether written or oral, providing for the grant by or to any Grantor of any right to manufacture, use or sell any invention covered in whole or in part by a Patent, including, without limitation, any of the foregoing referred to in Schedule 6, to the extent (after giving effect to the provisions of 9-408(a) of the New York UCC) the grant by such Grantor of a security interest pursuant to this Agreement in its right, title and interest in such Patent License is not prohibited by such Patent License without the consent of any other party thereto, would not give any other party to such Patent License the right to terminate its obligations thereunder, or is permitted with consent if all necessary consents to such grant of a security interest have been obtained from the other parties thereto (it being understood that the foregoing shall not be deemed to obligate such Grantor to obtain such consents); provided that the foregoing limitation shall not affect, limit, restrict or impair the grant by such Grantor of a security interest pursuant to this Agreement in any money or other amounts due or to become due under any such Patent License. "Pledged Note": all Intercompany Notes at any time issued to any Grantor and all other promissory notes issued to or held by any Grantor (other than promissory notes issued in connection with extensions of trade credit by any Grantor in the ordinary course of business and other than the promissory note dated May 12, 2003, evidencing the loan made by the Borrower to Holland & Barrett Europe Limited in the amount of [Pounds] 200,000,000 and any Refinancing Indebtedness in respect thereof permitted by the Credit Agreement.). "Pledged Securities": the collective reference to the Pledged Notes and the Pledged Stock. "Pledged Stock": the shares of Capital Stock listed on Schedule 2 together with any other shares, stock certificates, options or rights of any nature whatsoever pledged pursuant to subsection 7.9 of the Credit Agreement. "Receivable": any right to payment for goods sold or leased or for services rendered, whether or not such right is evidenced by an Instrument or Chattel Paper and whether or not it has been earned by performance (including, without limitation, any Account). "Secured Parties": as defined in Section 2.1 "Securities Act": the Securities Act of 1933, as amended. 4 "Trademarks": (i) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos and other source or business identifiers, and all goodwill associated therewith, now existing or hereafter adopted or acquired, all registrations and recordings thereof, and all applications in connection therewith, whether in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof, or otherwise, and all common-law rights related thereto, including, without limitation, any of the foregoing referred to in Schedule 6, and (ii) the right to obtain all renewals thereof. "Trademark License": any agreement, whether written or oral, providing for the grant by or to any Grantor of any right to use any Trademark, including, without limitation, any of the foregoing referred to in Schedule 6, to the extent (after giving effect to the provisions of 9- 408(a) of the New York UCC) the grant by such Grantor of a security interest pursuant to this Agreement in its right, title and interest in such Trademark License is not prohibited by such Trademark License without the consent of any other party thereto, would not give any other party to such Trademark License the right to terminate its obligations thereunder, or is permitted with consent if all necessary consents to such grant of a security interest have been obtained from the other parties thereto (it being understood that the foregoing shall not be deemed to obligate such Grantor to obtain such consents); provided that the foregoing limitation shall not affect, limit, restrict or impair the grant by such Grantor of a security interest pursuant to this Agreement in any money or other amounts due or to become due under any such Trademark License. "Vehicles": all cars, trucks, trailers, construction and earth moving equipment and other vehicles covered by a certificate of title law of any state. 1.2 Other Definitional Provisions. (a) The words "hereof," "herein," "hereto" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section and Schedule references are to this Agreement unless otherwise specified. (b) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. (c) Where the context requires, terms relating to the Collateral or any part thereof, when used in relation to a Grantor, shall refer to such Grantor's Collateral or the relevant part thereof. SECTION 2. GUARANTEE 2.1 Guarantee. (a) Each of the Guarantors hereby, jointly and severally, absolutely, unconditionally and irrevocably, guarantees to the Administrative Agent, for the ratable benefit of the Lenders and, in the case of any Hedge Agreement or Cash Management Obligations, between the Borrower and any Affiliate of a Lender, such Affiliate of a Lender (together with the Agents and the Lenders, the "Secured Parties") and their respective successors, indorsees, transferees and assigns, the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Borrower Obligations. 5 (b) Anything herein or in any other Loan Document to the contrary notwithstanding, the maximum liability of each Guarantor hereunder and under the other Loan Documents shall in no event exceed the amount which can be guaranteed by such Guarantor under applicable federal and state laws relating to the insolvency of debtors (after giving effect to the right of contribution established in Section 2.2). (c) Each Guarantor agrees that the Borrower Obligations may at any time and from time to time exceed the amount of the liability of such Guarantor hereunder without impairing the guarantee contained in this Section 2 or affecting the rights and remedies of the Administrative Agent or any other Secured Party hereunder. (d) Subject to reinstatement as provided in Section 2.6, the guarantee contained in this Section 2 shall remain in full force and effect until all the Borrower Obligations and the obligations of each Guarantor under the guarantee contained in this Section 2 shall have been satisfied by payment in full, no Letter of Credit shall be outstanding and the Commitments shall be terminated, notwithstanding that from time to time during the term of the Credit Agreement the Borrower may be free from the Borrower Obligations. (e) No payment made by the Borrower, any of the Guarantors, any other guarantor or any other Person or received or collected by the Administrative Agent or any other Secured Party from the Borrower, any of the Guarantors, any other guarantor or any other Person by virtue of any action or proceeding or any set-off or appropriation or application at any time or from time to time in reduction of or in payment of the Borrower Obligations shall be deemed to modify, reduce, release or otherwise affect the liability of any Guarantor hereunder which shall, notwithstanding any such payment (other than any payment made by such Guarantor in respect of the Borrower Obligations or any payment received or collected from such Guarantor in respect of the Borrower Obligations), remain liable for the Borrower Obligations up to the maximum liability of such Guarantor hereunder until (subject to reinstatement as provided in Section 2.6) all Borrower Obligations are paid in full, no Letter of Credit shall be outstanding and the Commitments are terminated. 2.2 Right of Contribution. Each Guarantor hereby agrees that to the extent that a Guarantor shall have paid more than its proportionate share of any payment made hereunder, such Guarantor shall be entitled to seek and receive contribution from and against any other Guarantor hereunder which has not paid its proportionate share of such payment. Each Guarantor's right of contribution shall be subject to the terms and conditions of Section 2.3. The provisions of this Section 2.2 shall in no respect limit the obligations and liabilities of any Guarantor to the Secured Parties, and each Guarantor shall remain liable to the Secured Parties for the full amount guaranteed by such Guarantor hereunder. 2.3 No Subrogation. Notwithstanding any payment made by any Guarantor hereunder or any set-off or application of funds of any Guarantor by any Secured Party, no Guarantor shall be entitled to be subrogated to any of the rights of any Secured Party against the Borrower or any other Guarantor or any collateral security or guarantee or right of offset held by the Administrative Agent or any other Secured Party for the payment of the Borrower Obligations, nor shall any Guarantor seek or be entitled to seek any contribution or reimbursement from the Borrower or any other Guarantor in respect of payments made by such Guarantor hereunder, until all Borrower Obligations are paid in full, no Letter of Credit shall be outstanding and the Commitments are terminated. If any amount shall be paid to any Guarantor on account of such subrogation rights at any time when all of the Borrower Obligations shall not have 6 been paid in full, such amount shall be held by such Guarantor in trust for the Secured Parties, segregated from other funds of such Guarantor, and shall, forthwith upon receipt by such Guarantor, be turned over to the Administrative Agent in the exact form received by such Guarantor (duly indorsed by such Guarantor to the Administrative Agent, if required), to be applied against the Borrower Obligations, whether matured or unmatured, as provided by Section 6.5 hereof. 2.4 Amendments, etc. with respect to the Borrower Obligations. Each Guarantor shall remain obligated hereunder notwithstanding that, without any reservation of rights against any Guarantor and without notice to or further assent by any Guarantor, any demand for payment of any of the Borrower Obligations made by any Secured Party may be rescinded by the Administrative Agent or such Secured Party and any of the Borrower Obligations continued, and the Borrower Obligations, or the liability of any other Person upon or for any part thereof, or any collateral security or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by the Administrative Agent or any other Secured Party, and the Credit Agreement and the other Loan Documents and any other documents executed and delivered in connection therewith may be amended, modified, supplemented or terminated, in whole or in part, as the Administrative Agent (or the Majority Lenders or all Lenders, as the case may be) may deem advisable from time to time, and any collateral security, guarantee or right of offset at any time held by the Administrative Agent or any other Secured Party for the payment of the Borrower Obligations may be sold, exchanged, waived, surrendered or released. Neither the Administrative Agent nor any other Secured Party shall have any obligation to protect, secure, perfect or insure any Lien at any time held by it as security for the Borrower Obligations or for the guarantee contained in this Section 2 or any property subject thereto. 2.5 Guarantee Absolute, Irrevocable and Unconditional. Each Guarantor waives any and all notice of the creation, renewal, extension or accrual of any of the Borrower Obligations and notice of or proof of reliance any Secured Party upon the guarantee contained in this Section 2 or acceptance of the guarantee contained in this Section 2; the Borrower Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred, or renewed, extended, amended or waived, in reliance upon the guarantee contained in this Section 2; and all dealings between the Borrower and any of the Guarantors, on the one hand, and the Secured Parties, on the other hand, likewise shall be conclusively presumed to have been had or consummated in reliance upon the guarantee contained in this Section 2. Each Guarantor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon the Borrower or any of the Guarantors with respect to the Borrower Obligations. Each Guarantor understands and agrees that the guarantee contained in this Section 2 shall be construed as a continuing, absolute, irrevocable and unconditional guarantee of payment without regard to (a) the validity or enforceability of the Credit Agreement or any other Loan Document, any of the Borrower Obligations or any other collateral security therefor or guarantee or right of offset with respect thereto at any time or from time to time held by any Secured Party, (b) any defense, set-off or counterclaim (other than a defense of payment or performance) which may at any time be available to or be asserted by the Borrower or any other Person against any Secured Party, or (c) any other circumstance whatsoever (with or without notice to or knowledge of the Borrower or such Guarantor) which constitutes, or might be construed to constitute, an equitable or legal discharge of the Borrower for the Borrower Obligations, or of such Guarantor under the guarantee contained in this Section 2, in bankruptcy or in any other instance (other than payment or performance in full). When making any demand hereunder or otherwise pursuing its rights and remedies hereunder against any Guarantor, the Administrative Agent or any other Secured Party may, but shall be under no obligation to, make a similar demand on or otherwise pursue such rights 7 and remedies as it may have against the Borrower, any other Guarantor or any other Person or against any collateral security or guarantee for the Borrower Obligations or any right of offset with respect thereto, and any failure by the Administrative Agent or any other Secured Party to make any such demand, to pursue such other rights or remedies or to collect any payments from the Borrower, any other Guarantor or any other Person or to realize upon any such collateral security or guarantee or to exercise any such right of offset, or any release of the Borrower, any other Guarantor or any other Person or any such collateral security, guarantee or right of offset, shall not relieve any Guarantor of any obligation or liability hereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of the Administrative Agent or any other Secured Party against any Guarantor. For the purposes hereof "demand" shall include the commencement and continuance of any legal proceedings. 2.6 Reinstatement. The guarantee contained in this Section 2 shall continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Borrower Obligations is rescinded or must otherwise be restored or returned by the Administrative Agent or any Secured Party upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Borrower or any Guarantor, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, the Borrower or any Guarantor or any substantial part of its property, or otherwise, all as though such payments had not been made. 2.7 Payment. Each Guarantor hereby guarantees that payments hereunder will be paid to the Administrative Agent without set-off or counterclaim in Dollars pursuant to the Credit Agreement at the relevant payment office specified in the Credit Agreement. SECTION 3. GRANT OF SECURITY INTEREST Each Grantor hereby assigns and transfers to the Administrative Agent, for the ratable benefit of the Secured Parties, and hereby grants to the Administrative Agent, for the ratable benefit of the Secured Parties, a security interest in all of the following property now owned or at any time hereafter acquired by such Grantor or in which such Grantor now has or at any time in the future may acquire any right, title or interest (collectively, the "Collateral"), as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of such Grantor's Obligations: (a) all Accounts; (b) all Chattel Paper; (c) all Commercial Tort Claims, in which any Grantor has rights, in excess of $1,000,000; (d) all Deposit Accounts; (e) all Documents; (f) all Equipment; 8 (g) all General Intangibles; (h) all Instruments; (i) all Intellectual Property; (j) all Inventory; (k) all Investment Property; (l) all Letter of Credit Rights; (m) all Pledged Securities; (n) all books and records pertaining to the Collateral; (o) to the extent not otherwise included, all Proceeds, Supporting Obligations and products of any and all of the foregoing and all collateral security and guarantees given by any Person with respect to any of the foregoing. SECTION 4. REPRESENTATIONS AND WARRANTIES To induce the Agents and the Lenders to enter into the Credit Agreement and to induce the Lenders and the other Secured Parties to make their respective extensions of credit to the Borrower thereunder, each Grantor hereby represents and warrants to the Administrative Agent and each Lender that: 4.1 Representations in Credit Agreement. In the case of each Guarantor, the representations and warranties set forth in Section 5 of the Credit Agreement as they relate to such Guarantor or to the Loan Documents to which such Guarantor is a party, each of which is hereby incorporated herein by reference, are true and correct, and each Agent and each Lender shall be entitled to rely on each of them as if they were fully set forth herein; provided that each reference in each such representation and warranty to the Borrower's knowledge shall, for the purposes of this Section 4.1, be deemed to be a reference to such Guarantor's knowledge. 4.2 Title; No Other Liens. Except for the security interest granted to the Administrative Agent for the ratable benefit of the Secured Parties pursuant to this Agreement and the other Liens permitted to exist on the Collateral by the Credit Agreement, such Grantor owns each item of the Collateral free and clear of any and all Liens or claims of others. No financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office, except (a) such as have been filed in favor of the Administrative Agent, for the ratable benefit of the Lenders, pursuant to this Agreement, (b) as are permitted by the Credit Agreement, (c) as filed in favor of the Administrative Agent pursuant to the Existing Credit Agreement for the ratable benefit of the lenders (and certain of their affiliates) thereunder (and arrangements for the release of which have been made to the satisfaction of the Administrative Agent), or (d) as previously identified in writing to the Administrative Agent, arrangements for the release of which satisfactory to the Administrative Agent have been made. 9 4.3 Perfected First Priority Lien. The security interests granted pursuant to this Agreement (a) upon completion of the filings and other actions specified on Schedule 3 (which, in the case of all filings and other documents referred to on said Schedule, have been delivered to the Administrative Agent in completed and (to the extent required) duly executed form) will constitute valid perfected security interests in all of the Collateral in favor of the Administrative Agent, for its benefit and the ratable benefit of the Secured Parties, as collateral security for such Grantor's Obligations, enforceable in accordance with the terms hereof against all creditors of such Grantor and any Persons purporting to purchase any Collateral from such Grantor and (b) are prior to all other Liens on the Collateral in existence on the date hereof except for (i) unrecorded Liens permitted by the Credit Agreement which have priority over the Liens on the Collateral by operation of law, (ii) Liens described on Schedule 7, and (ii) Liens previously identified in writing to the Administrative Agent, arrangements for the release of which satisfactory to the Administrative Agent have been made, and except to the extent that filings outside the United States might be required to perfect such security interest in non-U.S. intellectual property. 4.4 Chief Executive Office. On the date hereof, such Grantor's jurisdiction of organization, identification number from such jurisdiction of organization (if any) and the location of such Grantor's chief executive office or principal place of business are specified on Schedule 4. 4.5 Inventory and Equipment. On the date hereof, the Inventory and the Equipment (other than mobile goods) are kept at the locations listed on Schedule 5. 4.6 Farm Products. None of the Collateral constitutes, or is the Proceeds of, Farm Products. 4.7 Pledged Securities. (a) The shares of Pledged Stock pledged by such Grantor hereunder constitute all the issued and outstanding shares of all classes of the Capital Stock of each Issuer owned by such Grantor, except that the shares of Pledged Stock of any Issuer which is a Foreign Subsidiary constitute no more than 65% of all the issued and outstanding Capital Stock of such Issuer and no shares of any Issuer that are owned by a Foreign Subsidiary shall constitute Pledged Stock. (b) All the shares of the Pledged Stock have been duly and validly issued and, to the extent the same are shares of Capital Stock of a corporation, are fully paid and nonassessable. (c) Each of the Pledged Notes that is an Intercompany Note constitutes the legal, valid and binding obligation of the obligor with respect thereto, enforceable in accordance with its terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. No obligor with respect to any such Pledged Note has any defense or counterclaim with respect to such Pledged Note or any payment thereunder. All Pledged Notes with a principal amount in excess of $100,000 are listed on Schedule 2. (d) Such Grantor is the record and beneficial owner of, and has good and marketable title to, the Pledged Securities pledged by it hereunder, free of any and all Liens or options in favor of, or claims of, any other Person, except the security interest created by this Agreement. 10 4.8 Receivables. (a) No amount payable to such Grantor under or in connection with any material Receivable is evidenced by any Instrument or Chattel Paper which has not been delivered to the Administrative Agent. (b) Receivables in respect of which a Governmental Authority is the obligor do not constitute more than 5%, in face amount, of all Receivables. (c) The amounts represented by such Grantor to the Lenders from time to time as owing to such Grantor in respect of the Receivables will at such times be accurate in all material respects. 4.9 Intellectual Property. (a) Schedule 6 lists all material Intellectual Property owned by such Grantor in its own name on the date hereof and all applications to register any such Intellectual Property. (b) On the date hereof, all material Intellectual Property, and to the best of Grantor's knowledge, all other Intellectual Property, is valid, subsisting, unexpired and enforceable, has not been abandoned and does not infringe the intellectual property rights of any other Person. (c) Except as set forth in Schedule 6, on the date hereof, none of the material Intellectual Property, and to the best of Grantor's knowledge, none of the other Intellectual Property, is the subject of any licensing or franchise agreement pursuant to which such Grantor is the licensor or franchisor. (d) No holding, decision or judgment has been rendered by any Governmental Authority which would limit, cancel or question the validity of, or such Grantor's rights in, any Intellectual Property in any respect that could reasonably be expected to have a Material Adverse Effect. (e) No action or proceeding is pending, or, to the knowledge of such Grantor, threatened, on the date hereof (i) seeking to limit, cancel or question the validity of any material Intellectual Property or such Grantor's ownership therein, or to the best of Grantor's knowledge, any other Intellectual Property or such Grantor's ownership interest therein, or (ii) which, if adversely determined, could reasonably be expected to have a Material Adverse Effect. 4.10 Deposit Accounts; Security Accounts; Commodity Accounts. Schedule 9 lists all (i) deposit accounts that are owned by such Grantor in its own name on the date hereof (as such term is defined in Section 9- 102(a)(29) of the New York UCC) (a) that have had an average daily balance in excess of $500,000, or such other amount to be agreed by the Borrower and the Administrative Agent, for twelve months prior to the date hereof and (b) in which the amounts held therein are not deposited into a Deposit Account on a nightly basis and (ii) all Securities Accounts or Commodities Accounts maintained by such Grantor. 4.11 Commercial Tort Claims. Schedule 8 lists all Commercial Tort Claims in which any Grantor has any rights in excess of $1,000,000. 11 SECTION 5. COVENANTS Each Grantor covenants and agrees with the Administrative Agent and the other Secured Parties that, from and after the date of this Agreement until the Obligations shall have been paid in full, no Letter of Credit shall be outstanding and the Commitments shall have terminated: 5.1 Covenants in Credit Agreement. In the case of each Guarantor, such Guarantor shall comply with and perform each covenant set forth in the Credit Agreement applicable thereto as if such Guarantor were a party to the Credit Agreement. 5.2 Delivery of Instruments and Chattel Paper. If any amount payable under or in connection with any of the Collateral in excess of $1,000,000 shall be or become evidenced by any Instrument, Certificated Security or Chattel Paper, such Instrument, Certificated Security (unless such Certificated Security is in a Securities Account subject to a Control Agreement) or Chattel Paper shall be immediately delivered to the Administrative Agent, duly indorsed in a manner satisfactory to the Administrative Agent, to be held as Collateral pursuant to this Agreement. 5.3 Maintenance of Insurance. Such Grantor will maintain, with financially sound and reputable companies, insurance policies (i) insuring the Inventory, Equipment and Vehicles against loss by fire, explosion, theft and such other casualties as may be reasonably satisfactory to the Administrative Agent and (ii) insuring such Grantor, the Administrative Agent and the Lenders against liability for personal injury and property damage relating to such Inventory, Equipment and Vehicles, such policies to be in such form and amounts and having such coverage as may be reasonably satisfactory to the Administrative Agent and the Lenders. (b) All such insurance shall (i) provide that no cancellation, material reduction in amount or material change in coverage thereof shall be effective until at least 30 days after receipt by the Administrative Agent of written notice thereof, (ii) name the Administrative Agent as insured party or additional loss payee, (iii) if reasonably requested by the Administrative Agent, include a breach of warranty clause and (iv) be reasonably satisfactory in all other respects to the Administrative Agent. (c) The Borrower shall deliver to the Administrative Agent and the Lenders a report of a reputable insurance broker with respect to such insurance during the month of February in each calendar year and such supplemental reports with respect thereto as the Administrative Agent may from time to time reasonably request. 5.4 Payment of Obligations. Such Grantor will pay and discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all taxes, assessments and governmental charges or levies imposed upon the Collateral or in respect of income or profits therefrom, as well as all claims of any kind (including, without limitation, claims for labor, materials and supplies) against or with respect to the Collateral, except that no such charge need be paid if the amount or validity thereof is currently being contested in good faith by appropriate proceedings, reserves in conformity with GAAP with respect thereto have been provided on the books of such Grantor and such proceedings could not reasonably be expected to result in the sale, forfeiture or loss of any material portion of the Collateral or any interest therein. 12 5.5 Maintenance of Perfected Security Interest; Further Documentation. (a) Such Grantor shall maintain the security interest created by this Agreement as a perfected security interest having at least the priority described in Section 4.3 and shall defend such security interest against the claims and demands of all Persons whomsoever. (b) Such Grantor will furnish to the Administrative Agent and the Lenders from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Administrative Agent may reasonably request, all in reasonable detail. (c) At any time and from time to time, upon the written request of the Administrative Agent, and at the sole expense of such Grantor, such Grantor will promptly and duly execute and deliver, and have recorded, such further instruments and documents and take such further actions as the Administrative Agent may reasonably request for the purpose of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted, including, without limitation, (i) filing of any financing or continuation statements under the Uniform Commercial Code (or other similar laws) in effect in any jurisdiction with respect to the security interests created hereby and (ii) in the case of Investment Property, Pledged Securities, Deposit Accounts and any other relevant Collateral, taking any actions necessary to enable the Administrative Agent to obtain "control" (within the meaning of the applicable Uniform Commercial Code) with respect thereto. 5.6 Changes in Jurisdiction of Organization, Locations, Name, etc. Such Grantor will not, except upon 15 days' prior written notice to the Administrative Agent and delivery to the Administrative Agent of all additional executed financing statements and other documents (in each case executed to the extent required) reasonably requested by the Administrative Agent to maintain the validity, perfection and priority of the security interests provided for herein: (i) change its jurisdiction of organization, or if such Grantor does not have a jurisdiction of organization for purposes of the New York UCC, the location of its chief executive office or principal place of business from that referred to in Section 4.4; or (ii) change its name, identity or corporate structure to such an extent that any financing statement filed by the Administrative Agent in connection with this Agreement would become misleading. 5.7 Notices. Such Grantor will advise the Administrative Agent and the Lenders promptly, in reasonable detail, of: (a) any Lien (other than security interests created hereby or Liens permitted under the Credit Agreement) on any of the Collateral which would adversely affect the ability of the Administrative Agent to exercise any of its remedies hereunder; and (b) the occurrence of any other event which could reasonably be expected to have a material adverse effect on the aggregate value of the Collateral or on the security interests created hereby. 13 5.8 Pledged Securities. (a) If such Grantor shall become entitled to receive or shall receive any stock certificate (including, without limitation, any certificate representing a stock dividend or a distribution in connection with any reclassification, increase or reduction of capital or any certificate issued in connection with any reorganization), option or rights in respect of the Capital Stock of any Issuer, whether in addition to, in substitution of, as a conversion of, or in exchange for, any shares of the Pledged Stock, or otherwise in respect thereof such Grantor shall accept the same as the agent of the Administrative Agent and the other Secured Parties, hold the same in trust for the Administrative Agent and the other Secured Parties and deliver the same forthwith to the Administrative Agent in the exact form received, duly indorsed by such Grantor to the Administrative Agent, if required, together with an undated stock power covering such certificate duly executed in blank by such Grantor and with, if the Administrative Agent so requests, signature guaranteed, to be held by the Administrative Agent, subject to the terms hereof, as additional collateral security for the Obligations, provided that the foregoing shall not require any Grantor to so deliver any such Capital Stock of any Issuer which is a Foreign Subsidiary if, as a result thereof, the Capital Stock of such Foreign Subsidiary pledged hereunder would exceed 65% of all Capital Stock of such Foreign Subsidiary. Any sums paid upon or in respect of the Pledged Securities upon the liquidation or dissolution of any Issuer shall be paid over to the Administrative Agent to be held by it hereunder as additional collateral security for the Obligations, and in case any distribution of capital shall be made on or in respect of the Pledged Securities or any property shall be distributed upon or with respect to the Pledged Securities pursuant to the recapitalization or reclassification of the capital of any Issuer or pursuant to the reorganization thereof, the property so distributed shall, unless otherwise subject to a perfected security interest in favor of the Administrative Agent, be delivered to the Administrative Agent to be held by it hereunder as additional collateral security for the Obligations. If any sums of money or property so paid or distributed in respect of the Pledged Securities shall be received by such Grantor, such Grantor shall, until such money or property is paid or delivered to the Administrative Agent, hold such money or property in trust for the Secured Parties, segregated from other funds of such Grantor, as additional collateral security for the Obligations. (b) Without the prior written consent of the Administrative Agent (not to be unreasonably withheld or delayed), such Grantor will not (i) vote to enable, or take any other action to permit, any Issuer to issue any stock or other equity securities of any nature or to issue any other securities convertible into or granting the right to purchase or exchange for any stock or other equity securities of any nature of any Issuer, (ii) sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, the Pledged Securities or Proceeds thereof (except pursuant to a transaction expressly permitted by the Credit Agreement), (iii) create, incur or permit to exist any Lien or option in favor of, or any claim of any Person with respect to, any of the Pledged Securities or Proceeds thereof, or any interest therein, except for the security interests created by this Agreement and Liens permitted by the Credit Agreement or (iv) enter into any agreement or undertaking restricting the right or ability of such Grantor or the Administrative Agent to sell, assign or transfer any of the Pledged Securities or Proceeds thereof. (c) In the case of each Grantor which is an Issuer, such Issuer agrees that (i) it will be bound by the terms of this Agreement relating to the Pledged Securities issued by it and will comply with such terms insofar as such terms are applicable to it, (ii) it will notify the Administrative Agent promptly in writing of the occurrence of any of the events described in Section 5.8(a) with respect to the Pledged Securities issued by it and (iii) the terms of Section 6.3(c) shall apply to it, mutatis mutandis, with respect to all actions that may be required of it pursuant to Section 6.3(c) with respect to the Pledged Securities issued by it. 14 (d) Such Grantor hereby agrees that if any Issuer of Pledged Stock is organized in a jurisdiction which does not permit the use of certificates to evidence equity ownership, or if any of the Pledged Stock is at any time not evidenced by certificates of ownership, then such applicable Grantor shall, to the extent permitted by applicable law, record such pledge on the equityholder register or the books of the issuer, cause the issuer to execute and deliver to the Administrative Agent an acknowledgment of the pledge of such Pledged Stock substantially in the form of Annex 2 annexed hereto, execute any customary pledge forms or other documents necessary or appropriate to complete the pledge and give the Administrative Agent the right to transfer such Pledged Stock under the terms hereof. 5.9 Receivables. (a) Other than in the ordinary course of business consistent with its past practice, such Grantor will not (i) grant any extension of the time of payment of any Receivable, (ii) compromise or settle any Receivable for less than the full amount thereof, (iii) release, wholly or partially, any Person liable for the payment of any Receivable, (iv) allow any credit or discount whatsoever on any Receivable or (v) amend, supplement or modify any Receivable in any manner that could adversely affect the value thereof. (b) Such Grantor will deliver to the Administrative Agent a copy of each material demand, notice or document received by it that questions or calls into doubt the validity or enforceability of more than 5% of the aggregate amount of the then outstanding Receivables of the Borrower and its Subsidiaries. 5.10 Intellectual Property. (a) Such Grantor (either itself or through licensees) will (i) continue to use each material Trademark on each and every trademark class of goods applicable to its current line as reflected in its current catalogs, brochures and price lists in order to maintain such Trademark in full force free from any claim of abandonment for non-use, (ii) maintain as in the past the quality of products and services offered under such Trademark, (iii) use such Trademark with any appropriate notice of registration and all other notices and legends required by applicable Requirements of Law, (iv) not adopt or use any mark which is confusingly similar or a colorable imitation of such Trademark unless the Administrative Agent, for the ratable benefit of the Secured Parties, shall obtain a perfected security interest in such mark pursuant to this Agreement, and (v) not (and not permit any licensee or sublicensee thereof to) do any act or knowingly omit to do any act whereby such Trademark may become invalidated or impaired in any way. (b) Such Grantor (either itself or through licensees) will not do any act, or omit to do any act, whereby any material Patent may become forfeited, abandoned or dedicated to the public. (c) Such Grantor (either itself or through licensees) (i) will employ each material Copyright and (ii) will not (and will not permit any licensee or sublicensee thereof to) do any act or knowingly omit to do any act whereby any material portion of such Copyrights may become invalidated or otherwise impaired. Such Grantor will not (either itself or through licensees) do any act whereby any material portion of such Copyrights may fall into the public domain. (d) Such Grantor (either itself or through licensees) will not do any act that knowingly uses any material Intellectual Property to infringe the intellectual property rights of any other Person. 15 (e) Such Grantor will notify the Administrative Agent and the Lenders immediately if it knows, or has reason to know, that any application or registration relating to any material Intellectual Property may become forfeited, abandoned or dedicated to the public, or of any adverse determination or development (including, without limitation, the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office, the United States Copyright Office or any court or tribunal in any country) regarding such Grantor's ownership of, or the validity of, any material Intellectual Property or such Grantor's right to register the same or to own and maintain the same. (f) Whenever such Grantor, either by itself or through any agent, employee, licensee or designee, shall file an application for the registration of any Intellectual Property with the United States Patent and Trademark Office, the United States Copyright Office or any similar office or agency in any State of the United States, such Grantor shall report such filing to the Administrative Agent within five Business Days after the last day of the fiscal quarter in which such filing occurs. Upon request of the Administrative Agent, such Grantor shall execute and deliver, and have recorded, any and all agreements, instruments, documents, and papers as the Administrative Agent may reasonably request to evidence the security interest of the Administrative Agent and the other Secured Parties in any Copyright, Patent or Trademark and the goodwill and general intangibles of such Grantor relating thereto or represented thereby. (g) Such Grantor will take all reasonable and necessary steps, including, without limitation, in any proceeding before the United States Patent and Trademark Office, the United States Copyright Office or any similar office or agency in any State of the United States, to maintain and pursue each application (and to obtain the relevant registration) and to maintain each registration of material Intellectual Property, including, without limitation, filing of applications for renewal, affidavits of use and affidavits of incontestability. (h) In the event that any material Intellectual Property is infringed, misappropriated or diluted by a third party, such Grantor shall (i) take such actions as such Grantor shall reasonably deem appropriate under the circumstances to protect such Intellectual Property and (ii) if such Intellectual Property is of material economic value, promptly notify the Administrative Agent after it learns thereof and sue for infringement, misappropriation or dilution, to seek injunctive relief where appropriate and to recover any and all damages for such infringement, misappropriation or dilution. 5.11 Jurisdiction of Organization. At the Administrative Agent's request, each Grantor will provide its jurisdiction of organization, identification number from the jurisdiction of organization (if any), and the location of such Grantor's chief executive office or sole place of business. In addition, the Administrative Agent may request, and such Grantor shall provide upon such request, a certified charter, certificate of incorporation, or other organizational document and long form good standing certificate from each Grantor. 5.12 Commercial Tort Claims. Such Grantor will advise the Administrative Agent of such Grantor's interest in any Commercial Tort Claim in an amount in excess of $1,000,000 in which such Grantor believes it has rights, and such Grantor shall promptly provide the Administrative Agent with an updated Schedule 8 describing such Commercial Tort Claim or such information with respect thereto as the Administrative Agent may reasonably request in order to attach and perfect a security interest therein in accordance with applicable law. 16 5.13 Additional Accounts. Such Grantor will advise the Administrative Agent of the creation of any new (i) deposit account (as such term is defined in Section 9-102(a)(29) of the New York UCC) which (a) has had an average daily balance in excess of $500,000 for the four most recent fiscal quarters for which financial information is available (measured at the end of each fiscal quarter) and (b) in which the amounts held therein are not deposited into a Deposit Account on a nightly basis (any such deposit account will be a "Deposit Account" with respect to the definition of such term heron), (ii) Securities Account or (iii) Commodity Account, and such Grantor shall promptly provide the Administrative Agent with an updated Schedule 9 describing such Deposit Account, Securities Account or Commodities Account, as the case may be or such information with respect thereto as the Administrative Agent may reasonably request. SECTION 6. REMEDIAL PROVISIONS 6.1 Certain Matters Relating to Receivables. (a) The Administrative Agent shall have the right to make test verifications of the Receivables in any manner and through any medium that it reasonably considers advisable, and each Grantor shall furnish all such assistance and information as the Administrative Agent may require in connection with such test verifications. At any time and from time to time (but not more frequently than once per fiscal quarter), upon the Administrative Agent's request and at the expense of the relevant Grantor, such Grantor shall cause independent public accountants or others satisfactory to the Administrative Agent to furnish to the Administrative Agent reports showing reconciliations, aging and test verifications of, and trial balances for, the Receivables. (b) The Administrative Agent hereby authorizes each Grantor to collect such Grantor's Receivables and the Administrative Agent may curtail or terminate said authority at any time and only at any time after the occurrence and during the continuance of an Event of Default. If required by the Administrative Agent at any time after the occurrence and during the continuance of an Event of Default, any payments of Receivables, when collected by any Grantor, (i) shall be forthwith (and, in any event, within two Business Days) deposited by such Grantor in the exact form received, duly indorsed by such Grantor to the Administrative Agent if required, in a Collateral Account maintained under the sole dominion and control of the Administrative Agent, subject to withdrawal by the Administrative Agent for the account of the Lenders only as provided in Section 6.5, and (ii) until so turned over, shall be held by such Grantor in trust for the Administrative Agent and the Lenders, segregated from other funds of such Grantor. Each such deposit of Proceeds of Receivables shall be accompanied by a report identifying in reasonable detail the nature and source of the payments included in the deposit. (c) At the Administrative Agent's request, at any time after the occurrence and during the continuance of an Event of Default, each Grantor shall deliver to the Administrative Agent all original and other documents evidencing, and relating to, the agreements and transactions which gave rise to the Receivables, including, without limitation, all original orders, invoices and shipping receipts. 6.2 Communications with Obligors; Grantors Remain Liable. (a) The Administrative Agent in its own name or in the name of others may at any time after the occurrence and during the continuance of an Event of Default communicate with obligors under the Receivables to verify with them to the Administrative Agent's satisfaction the existence, amount and terms of any Receivables. 17 (b) Upon the request of the Administrative Agent at any time after the occurrence and during the continuance of an Event of Default, each Grantor shall notify obligors on the Receivables that the Receivables have been assigned to the Administrative Agent for the ratable benefit of the Lenders and that payments in respect thereof shall be made directly to the Administrative Agent. (c) Anything herein to the contrary notwithstanding, each Grantor shall remain liable under each of the Receivables to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreement giving rise thereto. Neither the Administrative Agent nor any Lender shall have any obligation or liability under any Receivable (or any agreement giving rise thereto) by reason of or arising out of this Agreement or the receipt by the Administrative Agent or any Lender of any payment relating thereto, nor shall the Administrative Agent or any Lender be obligated in any manner to perform any of the obligations of any Grantor under or pursuant to any Receivable (or any agreement giving rise thereto), to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party thereunder, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times. 6.3 Pledged Stock. (a) Unless an Event of Default shall have occurred and be continuing and the Administrative Agent shall have given notice to the relevant Grantor of the Administrative Agent's intent to exercise its corresponding rights pursuant to Section 6.3(b), each Grantor shall be permitted to receive all cash dividends paid in respect of the Pledged Stock and all payments made in respect of the Pledged Notes, in each case paid in the normal course of business of the relevant Issuer and consistent with past practice, to the extent permitted in the Credit Agreement, and to exercise all voting and corporate rights with respect to the Investment Property; provided, however, that no vote shall be cast or corporate right exercised or other action taken which would materially impair the Collateral or which would be inconsistent with or result in any violation of any provision of the Credit Agreement, this Agreement or any other Loan Document. (b) If an Event of Default shall occur and be continuing and the Administrative Agent shall give notice of its intent to exercise such rights to the relevant Grantor or Grantors, (i) the Administrative Agent shall have the right to receive any and all cash dividends, payments or other Proceeds paid in respect of the Pledged Securities and make application thereof to the Obligations in such order as the Credit Agreement shall prescribe, and (ii) any or all of the Pledged Securities shall be registered in the name of the Administrative Agent or its nominee, and the Administrative Agent or its nominee may thereafter exercise (x) all voting, corporate and other rights pertaining to such Pledged Securities at any meeting of shareholders of the relevant Issuer or Issuers or otherwise and (y) any and all rights of conversion, exchange and subscription and any other rights, privileges or options pertaining to such Pledged Securities as if it were the absolute owner thereof (including, without limitation, the right to exchange at its discretion any and all of the Pledged Securities upon the merger, consolidation, reorganization, recapitalization or other fundamental change in the corporate structure of any Issuer, or upon the exercise by any Grantor or the Administrative Agent of any right, privilege or option pertaining to such Pledged Securities, and in connection therewith, the right to deposit and deliver any and all of the Pledged Securities with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as the Administrative Agent may determine), all without liability except to account for property actually received by it, but the Administrative Agent shall have no duty to any Grantor to exercise 18 any such right, privilege or option and shall not be responsible for any failure to do so or delay in so doing. (c) Each Grantor hereby authorizes and instructs each Issuer of any Pledged Securities pledged by such Grantor hereunder to comply with any instruction received by it from the Administrative Agent in writing that (i) states that an Event of Default has occurred and is continuing and (ii) is otherwise in accordance with the terms of this Agreement, without any other or further instructions from such Grantor, and each Grantor agrees that each Issuer shall be fully protected in so complying. 6.4 Proceeds To Be Turned Over to Administrative Agent. In addition to the rights of the Administrative Agent and the Lenders specified in Section 6.1 with respect to payments of Receivables, if an Event of Default shall occur and be continuing, and the Administrative Agent has so requested, all Proceeds received by any Grantor in respect of Collateral consisting of cash, checks and other near-cash items shall be held by such Grantor in trust for the Administrative Agent and the Lenders, segregated from other funds of such Grantor, and shall, forthwith upon receipt by such Grantor, be turned over to the Administrative Agent in the exact form received by such Grantor (duly indorsed by such Grantor to the Administrative Agent, if required). All Proceeds received by the Administrative Agent hereunder shall be held by the Administrative Agent in a Collateral Account maintained under its sole dominion and control. All Proceeds while held by the Administrative Agent in a Collateral Account (or by such Grantor in trust for the Administrative Agent and the Lenders) shall continue to be held as collateral security for all the Obligations and shall not constitute payment thereof until applied as provided in Section 6.5. 6.5 Application of Proceeds. At such intervals as may be agreed upon by the Borrower and the Administrative Agent, or, if an Event of Default shall have occurred and be continuing, at any time at the Administrative Agent's election, the Administrative Agent may apply all or any part of Proceeds held in any Collateral Account in payment of the Obligations: (a) first, to the payment of the costs and expenses of such collection, sale or other realization, including out-of-pocket costs and expenses of the Administrative Agent and the fees and expenses of its agents and counsel, and all expenses incurred and advances made by the Administrative Agent in connection therewith; and (b) next, to the payment in full of the Obligations, in each case equally and ratably in accordance with the respective amounts thereof then due and owing or as the Lenders holding the same may otherwise agree, and any part of such funds which are not required to be applied in payment of the Obligations in accordance with the foregoing provisions and which Administrative Agent deems not required as collateral security for the Obligations shall be paid over from time to time by the Administrative Agent to the Borrower or to whomsoever may be lawfully entitled to receive the same. Any balance of such Proceeds remaining after the Obligations shall have been paid in full, no Letters of Credit shall be outstanding and the Commitments shall have terminated shall be paid over to the Borrower or to whomsoever may be lawfully entitled to receive the same. 6.6 Code and Other Remedies. If an Event of Default shall occur and be continuing, the Administrative Agent, on behalf of the Lenders, may exercise, in addition to all other rights and reme- 19 dies granted to them in this Agreement and in any other instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured parry under the New York UCC or any other applicable law. Without limiting the generality of the foregoing, the Administrative Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon any Grantor or any other Person (all and each of which demands, protests, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker's board or office of the Administrative Agent or any Lender or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Administrative Agent or any Lender shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in any Grantor, which right or equity is hereby waived and released. Each Grantor further agrees, at the Administrative Agent's request, to assemble the Collateral and make it available to the Administrative Agent at places which the Administrative Agent shall reasonably select, whether at such Grantor's premises or elsewhere. The Administrative Agent shall apply the proceeds of any action taken by it pursuant to this Section 6.6, after deducting all reasonable costs and expenses of every kind incurred in connection therewith or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Administrative Agent and the Lenders hereunder, including, without limitation, reasonable attorneys' fees and disbursements, to the payment in whole or in part of the Obligations, in the manner set forth in paragraphs (a) and (b) of Section 6.5, and only after such application and after the payment by the Administrative Agent of any other amount required by any provision of law, including, without limitation, Section 9-615(a)(3) of the New York UCC, need the Administrative Agent account for the surplus, if any, to any Grantor. To the extent permitted by applicable law, each Grantor waives all claims, damages and demands it may acquire against the Administrative Agent or any Lender arising out of the exercise by them of any rights hereunder. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 Business Days before such sale or other disposition. 6.7 Private Sales. (a) Each Grantor recognizes that the Administrative Agent may be unable to effect a public sale of any or all the Pledged Stock, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws or otherwise, and may be compelled to resort to one or more private sales thereof to a restricted group of purchasers which will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. Each Grantor acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. The Administrative Agent shall be under no obligation to delay a sale of any of the Pledged Stock for the period of time necessary to permit the Issuer thereof to register such securities for public sale under the Securities Act, or under applicable state securities laws, even if such Issuer would agree to do so. (b) Each Grantor agrees to use its best efforts to do or cause to be done all such other acts as may be necessary to make such sale or sales of all or any portion of the Pledged Stock pursuant to 20 this Section 6.7 valid and binding and in compliance with any and all other applicable Requirements of Law. Each Grantor further agrees that a breach of any of the covenants contained in this Section 6.7 will cause irreparable injury to the Administrative Agent and the other Secured Parties, that the Administrative Agent and the other Secured Parties have no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this Section 6.7 shall be specifically enforceable against such Grantor, and such Grantor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no Event of Default has occurred and is continuing under the Credit Agreement. 6.8 Deficiency. Each Grantor shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay its Obligations and the fees and disbursements of any attorneys employed by the Administrative Agent or any Lender to collect such deficiency. SECTION 7. THE ADMINISTRATIVE AGENT 7.1 Administrative Agent's Appointment as Attorney-in-Fact, etc. (a) Each Grantor hereby irrevocably constitutes and appoints the Administrative Agent and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of such Grantor and in the name of such Grantor or in its own name, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Agreement, and, without limiting the generality of the foregoing, each Grantor hereby gives the Administrative Agent the power and right, on behalf of such Grantor, without notice to or assent by such Grantor, to do any or all of the following: (i) in the name of such Grantor or its own name, or otherwise, take possession of and indorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any Receivable or with respect to any other Collateral and file any claim or take any other action or proceeding in any court of law or equity or otherwise reasonably deemed appropriate by the Administrative Agent for the purpose of collecting any and all such moneys due under any Receivable or with respect to any other Collateral whenever payable; (ii) in the case of any Intellectual Property, execute and deliver, and have recorded, any and all agreements, instruments, documents and papers as the Administrative Agent may reasonably request to evidence the Administrative Agent's and the other Secured Parties' security interest in such Intellectual Property and the goodwill and general intangibles of such Grantor relating thereto or represented thereby; (iii) pay or discharge taxes and Liens levied or placed on or threatened against the Collateral, effect any repairs or any insurance called for by the terms of this Agreement and pay all or any part of the premiums therefor and the costs thereof; (iv) execute, in connection with any sale provided for in Section 6.6 or 6.7, any indorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral; and 21 (v) (i) direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to the Administrative Agent or as the Administrative Agent shall direct; (ii) ask or demand for, collect, and receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (iii) sign and indorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Collateral; (iv) commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any portion thereof and to enforce any other right in respect of any Collateral; (v) defend any suit, action or proceeding brought against such Grantor with respect to any Collateral; (vi) settle, compromise or adjust any such suit, action or proceeding and, in connection therewith, give such discharges or releases as the Administrative Agent may deem appropriate; (vii) assign any Copyright, Patent or Trademark (along with the goodwill of the business to which any such Copyright, Patent or Trademark pertains), throughout the world for such term or terms, on such conditions, and in such manner, as the Administrative Agent shall in its sole discretion determine; and (viii) generally, sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Administrative Agent were the absolute owner thereof for all purposes, and do, at the Administrative Agent's option and such Grantor's expense, at any time, or from time to time, all acts and things which the Administrative Agent reasonably deems necessary to protect, preserve or realize upon the Collateral and the Administrative Agent's and the other Secured Parties' security interests therein and to effect the intent of this Agreement, all as fully and effectively as such Grantor might do. Anything in this Section 7.1(a) to the contrary notwithstanding, the Administrative Agent agrees that it will not exercise any rights under the power of attorney provided for in this Section 7.1(a) unless an Event of Default shall have occurred and be continuing. (b) If any Grantor fails to perform or comply with any of its agreements contained herein, the Administrative Agent, at its option, but without any obligation so to do, may perform or comply, or otherwise cause performance or compliance, with such agreement. (c) The expenses of the Administrative Agent incurred in connection with actions undertaken as provided in this Section 7.1, together with interest thereon at a rate per annum equal to the rate per annum at which interest would then be payable on past due Revolving Credit Loans that are ABR Loans under the Credit Agreement, from the date of payment by the Administrative Agent to the date reimbursed by the relevant Grantor, shall be payable by such Grantor to the Administrative Agent on demand. (d) Each Grantor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. All powers, authorizations and agencies contained in this Agreement are coupled with an interest and are irrevocable until this Agreement is terminated and the security interests created hereby are released. 7.2 Duty of Administrative Agent. The Administrative Agent's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the New York UCC or otherwise, shall be to deal with it in the same manner as the Administrative 22 Agent deals with similar property for its own account. Neither the Administrative Agent, any Lender nor any of their respective officers, directors, employees or agents shall be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of any Grantor or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof, except in each case as regards the disposition of any Collateral permitted under the Credit Agreement. The powers conferred on the Administrative Agent and the Lenders hereunder are solely to protect the Administrative Agent's and the Lenders' interests in the Collateral and shall not impose any duty upon the Administrative Agent or any Lender to exercise any such powers. The Administrative Agent and the Lenders shall be accountable only for amounts that they actually receive as a result of the exercise of such powers, and neither they nor any of their officers, directors, employees or agents shall be responsible to any Grantor for any act or failure to act hereunder, except for their own gross negligence or willful misconduct. 7.3 Execution of Financing Statement. Pursuant to applicable law, each Grantor authorizes the Administrative Agent to file or record financing statements and other filing or recording documents or instruments with respect to the Collateral without the signature of such Grantor in such form and in such offices as the Administrative Agent reasonably determines appropriate to perfect the security interests of the Administrative Agent under this Agreement. Each Grantor authorizes the Administrative Agent to use the collateral description of "all personal property, whether now owned or hereafter acquired" in any such financing statements. A photographic or other reproduction of this Agreement shall be sufficient as a financing statement or other filing or recording document or instrument for filing or recording in any jurisdiction. 7.4 Authority of Administrative Agent. Each Grantor acknowledges that the rights and responsibilities of the Administrative Agent under this Agreement with respect to any action taken by the Administrative Agent or the exercise or non-exercise by the Administrative Agent of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as between the Administrative Agent and the Lenders, be governed by the Credit Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Administrative Agent and the Grantors, the Administrative Agent shall be conclusively presumed to be acting as agent for the Lenders with full and valid authority so to act or refrain from acting, and no Grantor shall be under any obligation, or entitlement, to make any inquiry respecting such authority. SECTION 8. MISCELLANEOUS 8.1 Amendments in Writing. None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except by a written instrument executed by each affected Grantor and the Administrative Agent (acting with the required consent, if any, of the Lenders as provided in the Credit Agreement), provided that any provision of this Agreement imposing obligations on any Grantor may be waived by the Administrative Agent in a written instrument executed by the Administrative Agent (acting with the required consent, if any, of the Lenders as provided in the Credit Agreement) of the Credit Agreement, subject to the terms of the Credit Agreement. 8.2 Notices. All notices, requests and demands to or upon the Administrative Agent or any Grantor hereunder shall be effected in the manner provided for in subsection 11.2 of the Credit 23 Agreement; provided that any such notice, request or demand to or upon any Guarantor shall be addressed to such Guarantor at its notice address set forth on Schedule 1. 8.3 No Waiver by Course of Conduct; Cumulative Remedies. Neither the Administrative Agent nor any Lender shall by any act (except by a written instrument pursuant to Section 8.1), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default. No failure to exercise, nor any delay in exercising, on the part of the Administrative Agent or any Lender, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Administrative Agent or any Lender of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Administrative Agent or such Lender would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law. 8.4 Enforcement Expenses; Indemnification. (a) Each Guarantor agrees to pay or reimburse each Lender and the Administrative Agent for all its costs and expenses incurred in collecting against such Guarantor under the guarantee contained in Section 2 or otherwise enforcing or preserving any rights under this Agreement and the other Loan Documents to which such Guarantor is a party, including, without limitation, the fees and disbursements of counsel to each Lender and of counsel to the Administrative Agent. (b) Each Guarantor agrees to pay, and to save the Administrative Agent and the Secured Parties harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all stamp, excise, sales or other similar taxes which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Agreement to the extent the Borrower would be required to do so pursuant to subsection 11.5 of the Credit Agreement. (c) Each Guarantor agrees to pay, and to save the Administrative Agent and the other Secured Parties harmless from, any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement to the extent the Borrower would be required to do so pursuant to subsection 11.5 of the Credit Agreement. (d) The agreements in this Section 8.4 shall survive termination of the Loan Documents and repayment of the Obligations and all other amounts payable under the Credit Agreement and the other Loan Documents. 8.5 Successors and Assigns. This Agreement shall be binding upon the successors and assigns of each Grantor and shall inure to the benefit of the Administrative Agent and the other Secured Parties and their successors and assigns; provided that no Grantor may assign, transfer or delegate any of its rights or obligations under this Agreement without the prior written consent of each Lender. 8.6 Set-Off. Each Grantor hereby irrevocably authorizes the Administrative Agent and each Lender at any time and from time to time while an Event of Default shall have occurred and be continuing, without notice to such Grantor or any other Grantor, any such notice being expressly waived by 24 each Grantor, to set off and appropriate and apply any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by the Administrative Agent or such Lender to or for the credit or the account of such Grantor, or any part thereof in such amounts as the Administrative Agent or such Lender may elect, against and on account of the obligations and liabilities of such Grantor to the Administrative Agent or such Lender hereunder and claims of every nature and description of the Administrative Agent or such Lender against such Grantor, in any currency, whether arising hereunder, under the Credit Agreement, any other Loan Document or otherwise, as the Administrative Agent or such Lender may elect, whether or not the Administrative Agent or any Lender has made any demand for payment and although such obligations, liabilities and claims may be contingent or unmatured. The Administrative Agent and each Lender shall notify such Grantor promptly of any such set-off and the application made by the Administrative Agent or such Lender of the proceeds thereof, provided that the failure to give such notice shall not affect the validity of such set- off and application. The rights of the Administrative Agent and each Lender under this Section 8.6 are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Administrative Agent or such Lender may have. 8.7 Counterparts. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts (including by telecopy), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 8.8 Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 8.9 Section Headings. The Section headings used in this Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 8.10 Integration. This Agreement and the other Loan Documents represent the entire agreement of the Grantors, the Administrative Agent and the other Secured Parties with respect to the subject matter hereof and thereof; and there are no promises, undertakings, representations or warranties by the Administrative Agent or any Secured Party relative to subject matter hereof and thereof not expressly set forth or referred to herein or in the other Loan Documents. 8.11 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 8.12 Submission to Jurisdiction; Waivers. Each Grantor hereby irrevocably and unconditionally: (a) submits for itself and its property in any legal action or proceeding relating to this Agreement and the other Loan Documents to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the courts of 25 the State of New York, the courts of the United States of America for the Southern District of New York, and appellate courts from any thereof; (b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to such Grantor at its address referred to in Section 8.2 or at such other address of which the Administrative Agent shall have been notified pursuant thereto; (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and (e) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this Section 8.12 any consequential damages. 8.13 Acknowledgements. Each Grantor hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents to which it is a party; (b) neither the Administrative Agent nor any other Secured Party has any fiduciary relationship with or duty to any Grantor arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between the Grantors, on the one hand, and the Administrative Agent and other Secured Parties, on the other hand, in connection herewith or therewith is solely that of debtor and creditor, and (c) no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among the Lenders or among the Grantors and the Secured Parties. 8.14 WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN. 8.15 Additional Grantors. Each Subsidiary of the Borrower that is required to become a party to this Agreement pursuant to subsection 7.9 of the Credit Agreement shall become a Grantor for all purposes of this Agreement upon execution and delivery by such Subsidiary of an Assumption Agreement in the form of Annex 1 hereto. 8.16 Releases. (a) At such time as the Loans, the Reimbursement Obligations and the other Obligations shall have been paid in full, the Commitments have been terminated and no Letters of 26 Credit shall be outstanding, the Collateral shall be released from the Liens created hereby, and this Agreement and all obligations (other than those expressly stated to survive such termination) of the Administrative Agent and each Grantor hereunder shall terminate, all without delivery of any instrument or performance of any act by any party, and all rights to the Collateral shall revert to the Grantors. At the request and sole expense of any Grantor following any such termination, the Administrative Agent shall deliver to such Grantor any Collateral held by the Administrative Agent hereunder, and execute and deliver to such Grantor such documents as such Grantor shall reasonably request to evidence such termination. (b) If any of the Collateral shall be sold, transferred or otherwise disposed of by any Grantor in a transaction permitted by the Credit Agreement, then the Administrative Agent, at the request and sole expense of such Grantor, shall execute and deliver to such Grantor all releases or other documents reasonably necessary or desirable for the release of the Liens created hereby on such Collateral. At the request and sole expense of the Borrower, a Subsidiary Guarantor shall be released from its obligations hereunder in the event that all the Capital Stock of such Subsidiary Guarantor shall be sold, transferred or otherwise disposed of, or such Subsidiary Guarantor shall be liquidated or dissolved, in each case in a transaction permitted by the Credit Agreement, provided that the Borrower shall have delivered to the Administrative Agent, at least ten Business Days prior to the date of the proposed release, a written request for release identifying the relevant Subsidiary Guarantor and the terms of the sale or other disposition in reasonable detail, including the price thereof and any expenses in connection therewith, together with a certification by the Borrower stating that such transaction is in compliance with the Credit Agreement and the other Loan Documents. [Signature Page Follows] 27 IN WITNESS WHEREOF, each of the undersigned has caused this Agreement to be duly executed and delivered as of the date first above written. NBTY, INC. By: _________________________ Name: Title: S-1 AMERICAN HEALTH, INC., ARCO PHARMACEUTICALS, INC., ARTHRITIS RESEARCH CORP., BIOSMART DIRECT SALES, LLC, DE TUINEN LTD., DYNAMIC ESSENTIALS (DE), INC., EUROLEAN RESEARCH, LLC, GOOD N' NATURAL MANUFACTURING CORP., HEALTHWATCHERS (DE), INC., HOLLAND & BARRETT LTD., LIFE'S FINEST, INC., MET-RX NUTRITION, INC., MET-RX SUBSTRATE TECHNOLOGY, INC., MET-RX USA, INC., NABARCO ADVERTISING ASSOCIATES, INC., NATURAL WEALTH NUTRITION CORPORATION, NATURE'S BOUNTY INC., NATURE'S BOUNTY MANUFACTURING CORP., NATURE'S BOUNTY, INC., NATURESMART, LLC, NBTY CAH COMPANY, NBTY CAM COMPANY, NBTY DISTRIBUTION, INC., NBTY MANUFACTURING, LLC, NUTRITION HEADQUARTERS (DE), INC., NUTRITIONAL AUCTION.COM INC. OMNI VITAMIN AND NUTRITION CORP., PHYSIOLOGICS, LLC, PURITAN'S PRIDE, INC., REXALL SUNDOWN, INC., REXALL US DELAWARE, INC., REXALL US NEWCO 1 LLC, REXALL US NEWCO 2 LLC, REXALL US NEWCO DGP1, REXALL US NEWCO DGP2, REXALL, INC., RICHARDSON LABS, INC., RSL HOLDINGS, INC., RXSD, INC., SUNDOWN, INC., THE NON-IRRADIATED HERBAL MANUFACTURERS GROUP, LLC, UNITED VITAMIN MANUFACTURING CORP., VITAMIN WORLD (BOCA), LLC, VITAMIN WORLD OF GUAM, LLC, VITAMIN WORLD ONLINE, INC., VITAMIN WORLD OUTLET STORES, INC., VITAMIN WORLD, INC., WORLDWIDE SPORT NUTRITIONAL SUPPLEMENTS, INC., By: ____________________________ Name: Title: S-2 JPMORGAN CHASE BANK, as Administrative Agent By: _____________________________ Name: Title: S-3 ANNEX 1 [FORM OF ASSUMPTION AGREEMENT] ASSUMPTION AGREEMENT, dated as of [ ]. made by [ ], a [ ] corporation (the "Additional Grantor"), in favor of JP Morgan Chase Bank, as administrative agent (in such capacity, the "Administrative Agent"), for the banks and other financial institutions (the "Lenders") parties to the Credit Agreement referred to below. Unless otherwise indicated, all capitalized terms not defined herein shall have the meaning ascribed to them in such Credit Agreement. W I T N E S S E T H : _ _ _ _ _ _ _ _ _ _ WHEREAS, NBTY, Inc. (the "Borrower"), the Lenders, FLEET NATIONAL BANK, as syndication agent and JPMORGAN CHASE BANK, as Administrative Agent and collateral agent, have entered into a Credit Agreement, dated as of July 24, 2003 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"); WHEREAS, in connection with the Credit Agreement, the Borrower and certain of its Subsidiaries (other than the Additional Grantor) have entered into the Guarantee and Collateral Agreement, dated as of July 24, 2003 (as amended, supplemented or otherwise modified from time to time, the "Guarantee and Collateral Agreement") in favor of the Administrative Agent for the benefit of the Lenders; WHEREAS, the Credit Agreement requires the Additional Grantor to become a party to the Guarantee and Collateral Agreement; and WHEREAS, the Additional Grantor has agreed to execute and deliver this Assumption Agreement in order to become a party to the Guarantee and Collateral Agreement; NOW, THEREFORE, IT IS AGREED: 1. Guarantee and Collateral Agreement. By executing and delivering this Assumption Agreement, the Additional Grantor, as provided in Section 8.15 of the Guarantee and Collateral Agreement, hereby becomes a party to the Guarantee and Collateral Agreement as a Grantor thereunder with the same force and effect as if originally named therein as a Grantor and, without limiting the generality of the foregoing, hereby expressly assumes all obligations and liabilities of a Grantor thereunder. In furtherance of the foregoing, the Additional Grantor hereby assigns and transfers to the Administrative Agent, and hereby grants to the Administrative Agent, for the ratable benefit of the Secured Parties, a security interest in, all of the Collateral (as defined in the Guarantee and Collateral Agreement) now owned or at any time hereafter acquired by the Additional Grantor or in which the Additional Grantor now has or at any time in the future may acquire any right, title or interest, as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Additional Grantor's Obligations (as defined in the Guarantee and Collateral Agreement). The information set forth in Annexes 2 and 4 [and [ ]] hereto is hereby added to the information set 2 forth in Schedules 2 and 4 [and [ ]] to the Guarantee and Collateral Agreement. The Additional Grantor hereby represents and warrants that each of the representations and warranties contained in Section 4 of the Guarantee and Collateral Agreement is true and correct on and as the date hereof (after giving effect to this Assumption Agreement) as if made on and as of such date. 2. GOVERNING LAW. THIS ASSUMPTION AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the undersigned has caused this Assumption Agreement to be duly executed and delivered as of the date first above written. [ ] By: ______________________________ Name: Title: ANNEX 2 FORM OF ISSUER'S ACKNOWLEDGMENT The undersigned hereby (i) acknowledges receipt of a copy of that certain Guarantee and Collateral Agreement, dated as of July 24, 2003, made by NBTY, Inc., a Delaware corporation (the "Borrower") and the other signatories thereto, other than the Administrative Agent (together with any entity that may become a party thereto as a Grantor as provided therein (collectively, with the Borrower, and together with any successors in such capacities, the "Grantors"), as pledgors, assignors and debtors, in favor of JPMorgan Chase Bank, a New York banking corporation, in its capacity as administrative agent pursuant to the Credit Agreement, as pledgee, assignee and secured party (in such capacities and together with any successors in such capacities, the "Administrative Agent") (and as further amended, amended and restated, supplemented or otherwise modified from time to time, the "Guarantee and Collateral Agreement"; capitalized terms used but not otherwise defined herein shall have the meanings assigned to such terms in the Guarantee and Collateral Agreement), (ii) agrees promptly to note on its books the security interests granted to the Administrative Agent in respect of the Pledged Stock of the undersigned and confirmed under the Guarantee and Collateral Agreement, (iii) agrees that it will comply with instructions of the Administrative Agent with respect to such Pledged Stock without further consent by the applicable Grantor, (iv) agrees to notify the Administrative Agent upon obtaining knowledge of any interest in favor of any Person in the such Pledged Stock that is adverse to the interest of the Administrative Agent therein and (v) waives any right or requirement at any time hereafter to receive a copy of the Guarantee and Collateral Agreement in connection with the exercise of voting rights by the Administrative Agent or its nominee. [ ] By: _________________________ Name: Title: EX-21 7 nbty-x21.txt EXHIBIT 21.1 Exhibit 21.1 Subsidiaries of NBTY, Inc. (Delaware) --------------------- De Tuinen, B.V. (Netherlands) Food Supplement Company Limited (United Kingdom) Health & Diet Centres Limited (United Kingdom) Health & Diet Food Company Limited (United Kingdom) Holland & Barrett Europe Limited (United Kingdom) Holland & Barrett Retail Limited (United Kingdom) Met-Rx USA, Inc. (Nevada) Nature's Bounty, Inc. (New York) Nature's Way Limited (Republic of Ireland) NBTY Manufacturing, LLC (Delaware) d/b/a D&F Industries, Omni-Pak Industries and Raven Industries Puritan's Pride, Inc. (Delaware) Rexall Sundown, Inc. (Florida) Sundown, Inc. (Florida) United States Nutrition, Inc. (Delaware) d/b/a US Nutrition Vitamin World Limited (United Kingdom) Vitamin World, Inc. (Delaware) Worldwide Sport Nutritional Supplements, Inc. (New York) EX-23 8 nbty-231.txt EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-46188, 333-71691, 333-47221 and 333-108038) of NBTY, Inc. and Subsidiaries of our report dated November 11, 2003, relating to the financial statements and financial statement schedule, which appears in this Form 10-K. PricewaterhouseCoopers LLP New York, New York December 15, 2003 EX-31 9 nbtk-311.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATIONS I, Scott Rudolph, certify that: 1. I have reviewed this annual report on Form 10-K of NBTY, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in the annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and based on our evaluation as of the evaluation date; (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Dated: December 16, 2003 Signature: /s/ Scott Rudolph ----------------------------------- Scott Rudolph Principal Executive Officer EX-31 10 nbtk-312.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATIONS -------------- I, Harvey Kamil, certify that: 1. I have reviewed this annual report on Form 10-K of NBTY, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in the annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and based on our evaluation as of the evaluation date; (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Dated: December 16, 2003 Signature: /s/ Harvey Kamil ----------------------------------- Harvey Kamil Principal Financial Officer EX-32 11 nbtk-321.txt EXHIBIT 32.1 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of NBTY, Inc. (the "Company") on Form 10-K for the period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Scott Rudolph, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. [SECTION] 1350, as adopted pursuant to [SECTION] 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge and belief: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Scott Rudolph Scott Rudolph Chief Executive Officer December 16, 2003 A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to NBTY, Inc. and will be retained by NBTY, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-32 12 nbtk-322.txt EXHIBIT 32.2 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of NBTY, Inc. (the "Company") on Form 10-K for the period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Harvey Kamil, President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. [SECTION] 1350, as adopted pursuant to [SECTION] 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge and belief: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Harvey Kamil Harvey Kamil President and Chief Financial Officer December 16, 2003 A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to NBTY, Inc. and will be retained by NBTY, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----