<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 1998
REGISTRATION NO. 333-41909
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
NUTRACEUTICAL INTERNATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 87-0515089 2833
(I.R.S. EMPLOYER (PRIMARY STANDARD
(STATE OR OTHER IDENTIFICATION NO.) INDUSTRIAL
JURISDICTION OF CLASSIFICATION CODE
INCORPORATION OR 1400 KEARNS BOULEVARD, 2ND FLOOR NUMBER)
ORGANIZATION) PARK CITY, UTAH 84060
TELEPHONE: 435-655-6000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
STANLEY E. SOPER, ESQ.
VICE PRESIDENT LEGAL AFFAIRS
NUTRACEUTICAL INTERNATIONAL CORPORATION
1400 KEARNS BOULEVARD, 2ND FLOOR
PARK CITY, UTAH 84060
TELEPHONE: 435-655-6000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
MARK B. TRESNOWSKI, ESQ. EMANUEL S. CHERNEY, ESQ.
KIRKLAND & ELLIS KAYE, SCHOLER, FIERMAN, HAYS &
200 EAST RANDOLPH DRIVE HANDLER, LLP
CHICAGO, ILLINOIS 60601 425 PARK AVENUE
TELEPHONE: 312-861-2000 NEW YORK, NEW YORK 10022-3598
--------------- TELEPHONE: 212-863-8000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
AMOUNT MAXIMUM PROPOSED AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE MAXIMUM AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE(3)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $0.01 per 3,829,500
share............................... shares $16.00 $61,272,000 $18,075.24
- ---------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) Includes 499,500 shares that the Underwriters have the option to purchase
from certain stockholders to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a).
(3) Calculated pursuant to Rule 457(a) based on an estimate of the proposed
maximum offering price. Of this amount, $16,962.50 was paid by the
Registrant in connection with the initial filing of this Registration
Statement on December 10, 1997.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED FEBRUARY 11, 1998
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS
, 1998
3,330,000 SHARES
NUTRACEUTICAL INTERNATIONAL CORPORATION
COMMON STOCK
Of the 3,330,000 shares of Common Stock, par value $.01 per share ("Common
Stock"), of Nutraceutical International Corporation ("Nutraceutical" or the
"Company") offered hereby (the "Offering"), 2,000,000 shares are being offered
by Nutraceutical and 1,330,000 shares are being offered by certain stockholders
(the "Selling Stockholders"). See "Principal and Selling Stockholders." The
Company will not receive any of the proceeds from the sale of the shares of
Common Stock by the Selling Stockholders.
Prior to the Offering, there has been no public market for the Common Stock.
It is currently anticipated that the initial public offering price will be
between $14.00 and $16.00 per share. For a discussion relating to the factors
to be considered in determining the initial public offering price, see
"Underwriting."
An aggregate of 166,500 shares of Common Stock, or approximately 5.0% of the
shares offered hereby, have been reserved for sale to certain employees,
customers, independent sales representatives and affiliates of the Company. The
price per share of Common Stock to be sold to these persons is equal to the
initial public offering price. See "Underwriting."
The Common Stock has been approved for listing on the Nasdaq National Market
under the symbol "NUTR, subject to official notice of issuance."
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR CERTAIN INFORMATION THAT SHOULD
BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO THE DISCOUNTS AND TO THE THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS(3)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share........................ $ $ $ $
Total(3)......................... $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
(1) See "Underwriting" for indemnification arrangements with the Underwriters.
(2) Before deducting estimated expenses of $1,400,000, which will be paid by
the Company.
(3) The Selling Stockholders have granted the Underwriters options, exercisable
within 30 days after the date of this Prospectus, to purchase up to an
additional 499,500 shares of Common Stock solely to cover over-allotments,
if any. If such options are exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to Selling Stockholders will be $ ,
$ and $ , respectively. See "Underwriting."
The shares of Common Stock are offered by the several Underwriters, when, as
and if delivered to and accepted by the Underwriters and subject to various
prior conditions, including their right to reject orders in whole or in part.
It is expected that delivery of the shares of Common Stock will be made in New
York, New York on or about , 1998.
DONALDSON, LUFKIN & JENRETTE SALOMON SMITH BARNEY
SECURITIES CORPORATION
<PAGE>
[PHOTOGRAPH DEPICTING CERTAIN OF THE COMPANY'S PRODUCTS]
Beefense(TM), Beyond Garlic(TM), CranActin(R), KAL(R), NaturalMax(TM),
Peaceful Planet(TM), Premier One(R), Raw Energy(R), Solar Green(R),
Solaray(TM), Spectro(TM), Super Diet Max(R), Thin-Thin(TM) and VegLife(TM) are
trademarks of the Company.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS AND THE IMPOSITION
OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise noted or where the context otherwise requires, all information herein
(i) assumes the Underwriters' over-allotment option is not exercised and (ii)
reflects the reclassification of all classes of the Company's capital stock
into Common Stock and a 7.5291-for-one Common Stock split to be effected
immediately after such reclassification (the "Reclassification"). References to
the "Company" and "Nutraceutical" refer to Nutraceutical International
Corporation and its direct and indirect subsidiaries unless otherwise stated or
the context otherwise requires. References to fiscal years refer to the
Company's fiscal year ended September 30 of the year indicated.
THE COMPANY
Nutraceutical is one of the nation's largest manufacturers and marketers of
quality branded nutritional supplements sold to health food stores. The Company
sells its branded products under the Solaray, KAL, NaturalMax, VegLife, Premier
One and Solar Green brand names directly and exclusively to health food stores
in the United States and internationally primarily to distributors and
retailers. In addition to branded products, the Company manufactures premium
bulk formulations for sale to other manufacturers and marketers in the
nutritional supplement industry. Since its formation in 1993, the Company has
achieved rapid growth. See "Summary Historical and Pro Forma Consolidated
Financial Data."
The Company's strategy of selling its branded products directly and
exclusively to the approximately 9,700 health food stores in the United States
(the "Healthy Foods Channel") has enabled it to benefit from the rapid growth
of the Healthy Foods Channel. The Company believes that it is among the largest
suppliers of nutritional supplements to the Healthy Foods Channel that
develops, manufactures, markets and directly distributes a majority of its own
products. The Company offers one of the broadest branded product lines in the
industry with approximately 800 products and 1,400 stock keeping units
("SKUs"), including approximately 200 SKUs exclusively sold internationally.
None of the Company's products represented more than 2% of fiscal 1997 net
sales. The Company markets its branded products through the industry's largest
sales force dedicated to the Healthy Foods Channel. The Company seeks to be the
market leader in the development of new and innovative products, introducing
172 new SKUs (including 147 new formulations) in fiscal 1997. The Company
manufactured over 90% of its products in fiscal 1997 and believes that the
quality of its products is among the highest in the industry.
The total U.S. retail market for nutritional supplements (the "VMS Market")
is highly fragmented and rapidly growing, generating $6.5 billion in 1996
sales, as compared to $5.0 billion in 1994. The Company believes that this
rapid growth is due to a number of factors, including (i) increased interest in
healthier lifestyles, (ii) the publication of research findings supporting the
positive health effects of certain nutritional supplements and (iii) the aging
of the "Baby Boom" generation combined with the tendency of consumers to
purchase more nutritional supplements as they age.
The Healthy Foods Channel consists of approximately 9,700 retailers including
(i) independent health food stores, (ii) health food stores affiliated with
local, regional and national health food chains (including healthy food
supermarket chains, such as Whole Foods Market and Wild Oats Markets) and (iii)
General Nutrition Center ("GNC") stores. The Company believes that the Healthy
Foods Channel will continue to experience strong growth based on the continued
expansion of independent health food stores and local, regional and national
health food chains in response to strong demand from consumers who desire
product education, service and high quality natural ingredients. The Company
believes there are significant differences between mass market retailers (such
as drugstores, warehouse clubs and supermarkets), which typically offer a
limited selection of discounted and lower potency items, and the Healthy Foods
Channel, where natural ingredients, quality, potency, selection
3
<PAGE>
and customer support are more important. The Company benefits from
substantially greater customer diversification than most of its larger
competitors, with no single customer representing more than 5.5% of fiscal 1997
net sales.
Based in part on data contained in a widely disseminated report of
significance within the VMS Industry (as defined below) prepared by Packaged
Facts, Inc., an independent market research firm (the "Packaged Facts Report"),
the Company believes that the VMS Market and the Healthy Foods Channel are
large and growing rapidly and that the Company is well positioned to capitalize
on such growth. According to the Packaged Facts Report:
. The VMS Market grew at a 14.2% compound annual rate from 1994 to 1996
and is projected to grow at a 13.6% compound annual rate from 1996 to
2001, to $12.3 billion;
. The Healthy Foods Channel generated $2.5 billion of retail sales in
1996, or 38.2% of the total VMS Market, representing the largest single
channel;
. The Healthy Foods Channel has been growing faster than the total VMS
Market, achieving a 16.7% compound annual growth rate from 1994 to 1996;
and
. Sales of supplements (as defined in the Packaged Facts Report) in the
VMS Market grew at a 35.6% compound annual rate from 1994 to 1996 and
are expected to grow at a 25.0% compound annual rate from 1996 to 2001.
Sales of supplements, the fastest growing segment of the VMS Market,
represented 61.7% of the Company's fiscal 1997 net sales of branded
products, as compared to 35.2% of the total VMS Market.
The Company was formed in 1993 by senior management and Bain Capital, Inc.
("Bain Capital") to effect a consolidation strategy in the highly fragmented
vitamin, mineral, herbal and other nutritional supplements industry (the "VMS
Industry"), which consists of over 400 manufacturers and marketers
domestically. Since its formation, the Company has successfully completed four
acquisitions, including Solaray, Premier One, KAL and Monarch (each as defined
herein). As a result of these acquisitions and internal growth, the Company has
achieved rapid growth in net sales and operating income. Management believes
that the Company is well positioned to continue to capitalize on the
consolidation occurring in the VMS Industry. To increase the Company's
operating efficiency and provide capacity for additional expansion, the Company
is in the process of negotiating a lease for a 250,000 square foot facility
into which the Company intends to consolidate seven of its current facilities.
4
<PAGE>
BUSINESS STRATEGY
The Company's strategy is to enhance its position as a leader in supplying
quality branded products to the Healthy Foods Channel while continuing to
generate rapid growth in sales and profitability. Unlike many of its
competitors, the Company has chosen to focus exclusively on the Healthy Foods
Channel. Specifically, the Company seeks to:
. INCREASE MARKET SHARE IN THE RAPIDLY GROWING HEALTHY FOODS CHANNEL. The
Company's strategy is to increase its share in the rapidly growing
Healthy Foods Channel by (i) continuing to emphasize exclusive sales of
its existing branded products to the Healthy Foods Channel, (ii)
utilizing multiple brands and (iii) expanding its salesforce and its
geographic coverage:
--Exclusivity to the Healthy Foods Channel. The Company believes that
retailers in the Healthy Foods Channel favor brands that are sold
exclusively to the Healthy Foods Channel (i.e., that are not available
through mass marketers) and that, as a result, retailers will continue
to allocate additional shelf space to the Company's products.
--Multiple Brand Strategy. The Company currently markets its products
through a multiple brand strategy that the Company believes has been
successful in encouraging retailers to allocate additional shelf space
to the Company's brands. The Company intends to continue expanding its
brands by extending existing product lines and developing new product
lines. See "Business--Products."
--Largest Sales Force Targeting the Healthy Foods Channel. The Company
markets its products through a substantially larger direct sales force
dedicated to the Healthy Foods Channel than that of any competitor. The
Company currently anticipates adding additional individuals to its
sales force to increase its sales efforts in certain highly populated
areas that are currently underpenetrated by the Company. In particular,
the Company seeks to increase its presence in the Northeast and Mid-
Atlantic states including such markets as New York City, Long Island,
Boston, Philadelphia and Washington D.C. In 1997, the Company
implemented a new payment structure for its sales force that provides
additional incentives for sales growth.
. CONTINUE TO MAKE STRATEGIC ACQUISITIONS. The Company was founded in 1993
to effect a consolidation strategy in the fragmented VMS Industry. The
Company plans to continue to capitalize on the significant opportunities
for consolidation available in the VMS Industry. To date, the Company
has successfully completed four acquisitions and will seek additional
acquisitions that serve to expand the Company's brand names, broaden its
product offerings or facilitate entry into complementary distribution
channels.
. CONTINUE TO DEVELOP NEW PRODUCTS AND PRODUCT EXTENSIONS. The Company is
a market leader in the development of new and innovative products.
During fiscal 1997, the Company introduced 147 new formulations of
branded products compared to 46 in fiscal 1996. Branded products
introduced in 1996 and 1997 represented 16.8% of fiscal 1997 net sales
of branded products. The Company plans to continue developing new
products as a significant element of its future growth.
. CAPITALIZE ON STRONG INTERNATIONAL GROWTH. The Company believes that
international sales represent a significant growth opportunity.
Currently, the Company markets its products in over 30 countries,
principally through international distributors. Net sales by Au Naturel,
Inc., the Company's international subsidiary, grew 21.4% from 1996 to
1997 and represented 6.5% of the Company's fiscal 1997 net sales. The
Company plans to continue to aggressively pursue international sales by
adding additional salespeople, expanding its distribution and retailer
network in high growth regions and continuing its efforts to register
products and trademarks in attractive foreign markets.
5
<PAGE>
The Company's implementation of the foregoing business strategy is subject to
a number of risks and may cause the Company to incur additional expenses in
future periods. See "Risk Factors--Risks Associated with Implementation of
Business Strategy," "Risk Factors--Risks Associated with Acquisitions," "Risk
Factors--Risks Associated with International Markets" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
RECENT DEVELOPMENTS
For the three months ended December 31, 1997, the Company's net sales
increased approximately 15.6% to $25.9 million compared to $22.4 million in the
corresponding period in 1996. Adjusted EBITDA for the three months ended
December 31, 1997 was $5.1 million or approximately 15.9% higher than $4.4
million for the corresponding period in 1996. Operating income for the three
months ended December 31, 1997 was $3.9 million, a 14.7% increase from $3.4
million for the corresponding period in 1996.
For the twelve months ended December 31, 1997, the Company's net sales
increased approximately 17.3% to $101.6 million compared to $86.6 million in
the corresponding period in 1996. Adjusted EBITDA for the twelve months ended
December 31, 1997 was $20.3 million or approximately 40.4% higher than $14.4
million for the corresponding period in 1996. Adjusted EBITDA as a percent of
sales increased to 19.9% in the twelve months ended December 31, 1997 from
16.7% in the corresponding period in 1996. Operating income for the twelve
months ended December 31, 1997 was $14.1 million or approximately 29.7% higher
than $10.9 million for the corresponding period in 1996. Operating income as a
percent of sales increased to 13.9% in the twelve months ended December 31,
1997 from 12.5% in the corresponding period in 1996.
The principal executive offices of the Company are located at 1400 Kearns
Boulevard, 2nd Floor, Park City, Utah 84060 and its telephone number is (435)
655-6000.
6
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by
the Company............. 2,000,000 shares
Common Stock Offered by
the Selling Stockhold-
ers..................... 1,330,000 shares
-----------
Total.................... 3,330,000 shares
Common Stock To Be Out-
standing After the Of-
fering (1).............. 11,496,692 shares
Use of Proceeds.......... The net proceeds to be received by the Company from
the Offering, estimated to be approximately $26.5
million (assuming an initial public offering price
of $15.00 per share, the midpoint of the estimated
price range of the Offering), together with
borrowings under the New Credit Agreement (as
defined below) and available cash resources of the
Company, will be used to repay the outstanding
indebtedness under the Existing Credit Agreement (as
defined below). The Company will not receive any
proceeds from the sale of shares by the Selling
Stockholders. See "Use of Proceeds."
Proposed Nasdaq National
Market Symbol........... "NUTR"
</TABLE>
- --------------------
(1) Excludes 175,804 shares reserved for issuance upon the exercise of options
outstanding pursuant to the Company's 1995 Stock Plan (as defined below)
and 1,302,222 shares reserved for issuance upon the exercise of other
outstanding warrants and options. Also excludes 1,050,000 shares and
750,000 shares which, prior to the consummation of the Offering, will be
reserved for issuance under the Company's Stock Incentive Plans and
Employee Stock Purchase Plan (each as defined below), respectively. See
"Management--Stock Plans." The number of shares to be outstanding after the
Offering is subject to change. See "Reclassification."
7
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Set forth below are summary historical and pro forma consolidated financial
data of the Company and of Solaray, Inc. ("Solaray" or the "Predecessor") for
the periods and dates indicated. The summary historical consolidated financial
data for the year ended September 30, 1993 were derived from the audited
financial statements of the Predecessor. The summary historical consolidated
financial data for the year ended September 30, 1994 were determined by
combining information derived from the unaudited financial statements of the
Predecessor for the period from October 1, 1993 through October 27, 1993 with
information derived from the audited financial statements of the Company for
the year ended September 30, 1994. The summary historical consolidated
financial data as of September 30, 1997 and for the years ended September 30,
1995, 1996 and 1997 were derived from the audited financial statements of the
Company. Combined and pro forma data are not audited. The following summary
historical and pro forma consolidated financial data should be read in
conjunction with, and are qualified by reference to, "Unaudited Pro Forma
Consolidated Financial Data," "Selected Historical Consolidated Financial
Statements," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the audited consolidated financial statements and
accompanying notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR COMBINED(A) COMPANY(B)
------------- ------------- -----------------------------------------
PRO FORMA
YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, -------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997 1997(C)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net sales............... $20,541 $ 28,095 $ 62,932 $83,923 $98,096 $98,096
Gross profit............ 9,439 13,673 27,047 38,824 45,819 45,819
Selling, general and
administrative......... 7,486 8,961 21,409 27,608 29,179 28,879
Amortization of
intangibles............ -- 394 1,059 1,483 1,346 1,346
One-time payment to
executive officer...... -- -- -- -- 1,700 1,700
Income from operations.. 1,953 4,318 4,579 9,733 13,594 13,894
Interest expense, net... 116 1,804 4,478 7,126 6,572 2,693
Net income before
extraordinary loss..... 1,164 1,532 78 1,551 4,248 6,777
Net income (loss)....... 1,164 1,532 (400) 1,551 4,248 N/A
Pro forma net income per
share(d)............... $ 0.39
Pro forma weighted
average shares
outstanding(d)......... 10,785
Supplemental pro forma
net income per
share(d)............... $ 0.44
Supplemental pro forma
weighted average shares
outstanding(d)......... 12,785
Pro forma as adjusted
net income per share... $ 0.53
Pro forma as adjusted
weighted average shares
outstanding............ 12,785
OTHER FINANCIAL DATA:
Adjusted EBITDA(e)...... $ 2,188 $ 6,088 $ 11,831 $13,118 $19,563 $19,563
Capital expenditures
(excluding
acquisitions).......... 217 465 2,837 5,498 3,652 3,652
Cash flows provided by
(used in):
Operating activities... 1,286 2,152 (64) 4,559 9,363 11,892
Investing activities... (214) (10,078) (49,155) (5,498) (3,652) (f)
Financing activities... (802) 8,173 49,645 2,600 (3,617) (f)
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
-------------------------
ACTUAL AS ADJUSTED(G)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 4,415 $ --
Working capital....................................... 15,616 20,723
Total assets.......................................... 90,110 86,998
Total debt............................................ 60,259(b) 34,379
Stockholders' equity.................................. 16,354 39,122
</TABLE>
- --------------------
(a) The summary historical consolidated financial data for the year ended
September 30, 1994 were determined by combining information derived from
the unaudited financial statements of the Predecessor for the period from
October 1, 1993 through October 27, 1993 with information derived from the
audited financial statements of the Company for the year ended September
30, 1994 as presented in "Selected Historical Consolidated Financial Data."
Such information was determined by adding the amount in each line item of
the unaudited financial statements of the
8
<PAGE>
Predecessor to the respective amount in the corresponding line item of the
audited financial statements of the Company. Such computations do not give
effect to any pro forma adjustments that may be required to reflect pro
forma consolidated financial data of the Company as if the acquisition of
all the capital stock of the Predecessor by the Company (the "Solaray
Acquisition") had been consummated on October 1, 1993. The Company's
audited financial statements for the year ended September 30, 1994
primarily reflect operations from the date of the Solaray Acquisition. The
Company's operations prior to such date were immaterial.
(b) The Company was formed in 1993 for the purpose of completing the Solaray
Acquisition, which was consummated on October 28, 1993. In October 1994,
the Company, through its wholly-owned subsidiary Premier One Products,
Inc., a Delaware corporation ("Premier"), acquired substantially all the
assets and assumed certain liabilities of Premier One Products, Inc., a
Nebraska corporation ("Old Premier") (the "Premier Acquisition"). In
January 1995, the Company, through its wholly-owned subsidiaries Makers of
KAL, Inc., a Delaware corporation ("KAL"), and NaturalMax, Inc., a
Delaware corporation ("NaturalMax"), acquired substantially all the assets
and assumed certain liabilities of Makers of KAL, Inc., a California
corporation ("Old KAL") (the "KAL/Max Acquisition"). In September 1995,
the Company, through its wholly-owned subsidiary Monarch Nutritional
Laboratories, Inc., a Delaware corporation ("Monarch"), acquired
substantially all the assets and assumed certain liabilities of Monarch
Nutritional Laboratories, a Utah corporation ("Old Monarch") (the "Monarch
Acquisition"). The Solaray Acquisition was accounted for as a purchase,
resulting in a new accounting basis for the Predecessor's assets. As a
result, financial information for the periods prior to October 28, 1993 is
not directly comparable to information for subsequent periods.
(c) Gives effect to (i) the Reclassification, (ii) the consummation of the
Offering (assuming an initial public offering price of $15.00 per share,
the midpoint of the estimated price range of the Offering) and the
application of the estimated net proceeds therefrom, together with
borrowings under a new senior credit agreement, which the Company
anticipates executing in connection with the Offering (the "New Credit
Agreement"), and available cash resources to repay indebtedness, as
described under "Use of Proceeds," and (iii) the elimination of annual
fees paid pursuant to the Restated Advisory Agreement (as defined below),
as if each such event had occurred on October 1, 1996. See "Unaudited Pro
Forma Financial Data."
(d) For the year-ended September 30, 1997, gives effect to the
Reclassification. Historical earnings per common share amounts are not
presented as they are not considered to be meaningful. Pro forma net
income per share was determined by dividing net income by the pro forma
weighted average number of common and common stock equivalent shares which
the Company estimates will be outstanding after giving effect to the
Reclassification. Common stock equivalents consist of the Company's Common
Stock issuable upon the exercise of stock options and warrants (using the
treasury stock method). In addition, in accordance with the Securities and
Exchange Commissions' Staff Accounting Bulletin No. 83, shares issued and
stock options granted within one year of the Offering have been included
in the calculation of weighted average shares outstanding as if they were
outstanding from inception of the Company (using the treasury stock method
and an assumed initial public offering price for the shares sold in the
Offering of $15.00 per share).
Supplemental pro forma net income per share was determined in the same
manner as that used to determine pro forma net income per share, except the
pro forma weighted average number of common and common equivalent shares
which the Company estimates will be outstanding after giving effect to the
Reclassification was increased by the number of shares of common stock
(2,000,000) to be issued to generate the net proceeds necessary to retire
$26,500 of the Company's borrowings under the Existing Credit Agreement (as
defined below) (assuming an initial public offering price of $15.00 per
share, the midpoint of the estimated price range of the Offering), and
historical net income was increased by $2,360 related to the elimination of
interest resulting from the assumed reduction of $26,500 of indebtedness,
net of tax of $932.
(e) "Adjusted EBITDA" is defined herein as net income (as presented) plus
provision for income taxes, net interest expense, depreciation and
amortization and other non-recurring items. Management believes that
Adjusted EBITDA, as presented, represents a useful measure of assessing
the performance of the Company's ongoing operating activities as it
reflects the earnings trends of the Company without the impact of the
purchase accounting applied in connection with the Company's history of
acquisitions, the financing required to consummate such transactions or
other non-recurring items. Targets and positive trends in Adjusted EBITDA
are used as the performance measure for determining management's bonus
compensation and are also used by the Company's creditors in assessing
debt covenant compliance. The Company understands that while Adjusted
EBITDA is frequently used by securities analysts in the evaluation of
nutritional supplement companies, it is not necessarily comparable to
other similarly titled captions of other companies due to potential
inconsistencies in the method of calculation. Adjusted EBITDA is not
intended as an alternative to cash flow from operating activities as a
measure of liquidity or as an alternative to net income as an indicator of
the Company's operating performance or any other measure of performance in
accordance with generally accepted accounting principles.
9
<PAGE>
The following table sets forth a reconciliation of net income before
extraordinary loss to Adjusted EBITDA for each period included herein:
<TABLE>
<CAPTION>
PREDECESSOR COMBINED COMPANY
------------- ------------- -------------------------------------
YEAR ENDED SEPTEMBER PRO FORMA
YEAR ENDED YEAR ENDED 30, YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, ----------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997 1997
<S> <C> <C> <C> <C> <C> <C>
Net income before
extraordinary
loss (1).............. $1,164 $1,532 $ 78 $ 1,551 $ 4,248 $ 6,777
Provision for income
taxes................. 673 982 23 1,056 2,774 4,424
Interest expense, net
(2)................... 116 1,804 4,478 7,126 6,572 2,693
Depreciation and
amortization (3)...... 235 1,583 6,983 3,085 3,969 3,969
Certain non-recurring
items (4)............. -- 187 269 300 300 --
One-time payment to
executive officer(5).. -- -- -- -- 1,700 1,700
------ ------ ------- ------- ------- -------
Adjusted EBITDA........ $2,188 $6,088 $11,831 $13,118 $19,563 $19,563
====== ====== ======= ======= ======= =======
</TABLE>
--------------------
(1) Net income before extraordinary loss is equivalent to net income for
all periods presented except the year ended September 30, 1995,
during which the Company incurred an extraordinary loss on early
extinguishment of debt of $478, net of tax benefit. Actual net loss
for the year ended September 30, 1995 was $400.
(2)Includes amortization of capitalized debt issuance costs.
(3)Includes non-recurring amortization of inventory write up.
(4) Represents management fees paid to Bain Capital and F.W. Gay & Sons
pursuant to the Restated Advisory Agreement, which will be terminated
in connection with the Offering. As is often the case in stand-alone
acquisition scenarios such as the Company's original acquisition of
Solaray, during the early stages of the Company's development it
relied heavily on an affiliate of its equity sponsors, Bain Capital,
to provide certain management services, paying a recurring annual fee
pursuant to the Restated Advisory Agreement in respect of such
services. Over time, the Company has developed the infrastructure to
provide these services internally and, as a result, will terminate
the Restated Advisory Agreement (and the recurring management fees
payable thereunder) upon consummation of the Offering. See "Certain
Relationships and Related Transactions."
(5) Reflects a one-time payment to the Company's Chief Executive Officer
for successfully positioning the Company for the Offering. Such
payment is in excess of the Chief Executive Officer's annual
compensation (salary and bonus), and the Company does not expect to
make any further payments of this nature or magnitude in the future.
(f) Because of the subjectivity inherent in the assumptions concerning the
timing and nature of the uses of cash provided by the pro forma
operating activities, cash flows from investing and financing
activities are not presented for the pro forma period.
(g) Gives effect to (i) the consummation of the Offering (assuming an
initial public offering price of $15.00 per share, the midpoint of the
price range of the Offering) and the application of the estimated net
proceeds therefrom, together with borrowings under the New Credit
Agreement and available cash resources, as described under "Use of
Proceeds," and (ii) the termination of the Restated Advisory Agreement
and the payment of fees for services performed in connection with the
Offering, as if each such event had occurred on September 30, 1997. See
"Unaudited Pro Forma Financial Data."
(h) Total debt is presented net of $2,560 of unamortized debt issuance
discount.
10
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be considered in evaluating an investment in the
Common Stock offered hereby.
GOVERNMENT REGULATION
The formulation, manufacturing, processing, packaging, labeling,
advertising, distribution and sale of nutritional supplements such as those
sold by the Company are subject to regulation by a number of federal, state
and foreign agencies, principally, the Food and Drug Administration ("FDA")
and the Federal Trade Commission ("FTC"). Among other matters, such regulation
is concerned with health claims made with respect to a product that assert the
healing or nutritional value of such product. Such agencies have a variety of
remedies and processes available to them, including initiating investigations,
issuing warning letters and cease and desist orders, requiring corrective
labels or advertising, requiring consumer redress (for example, by requiring
that a company offer to repurchase products previously sold to consumers),
seeking injunctive relief or product seizure, imposing civil penalties, or
commencing criminal prosecution. Federal and state agencies have in the past
used these remedies in regulating participants in the nutritional supplements
industry, including the imposition by federal agencies of civil penalties in
the millions of dollars against a few industry participants. In addition,
increased sales and publicity of nutritional supplements may result in
increased regulatory scrutiny of the nutritional supplements industry. There
can be no assurance that the regulatory environment in which the Company
operates will not change or that such regulatory environment, or any specific
action taken against the Company, will not result in a material adverse effect
on the Company's business, financial condition or results of operations.
The FDA is currently proposing to regulate the sale of nonprescription
products containing ephedra, a natural product that contains a small
percentage of ephedrine alkaloids, which are used in some prescription and
over the counter stimulants and antihistamines. Less than 4% of the Company's
fiscal 1997 net sales were derived from products that contain ephedra. Various
state legislatures and agencies have also expressed concern, and in some cases
have proposed or passed legislation or regulations regarding ephedra-based
products. The loss of sales of these products or further limitations in the
states and other jurisdictions where these products now may be sold could have
an adverse effect on the Company.
In October 1997, the Company and a number of other suppliers, processors and
marketers of nutritional supplements received warning letters from the FDA
relating to an allegedly contaminated batch of an herb called plantain. These
letters claimed that the plantain, which had been shipped to the United States
from Europe, had been contaminated with another botanical product with
potentially harmful side effects. The letter that the Company received alleged
that some of this plantain had been included in a shipment of products that
Great Basin had processed for a third party on a contract basis. The Company
has replied to the FDA, explaining that, among other things, it did not own
the products or market them for human consumption but simply provided grinding
services for the owner of the herbs. The Company further noted to the FDA that
it did not process any plantain that could have been incorporated into any
products that were actually consumed as the only batch it processed was
returned to the supplier/owner following the FDA's initial press releases on
this matter. The Company has denied responsibility for any adverse effects and
affirmed its commitment to good manufacturing practices. The Company has
received a notice that it may be a defendant along with a number of other
participants in the VMS Industry in a threatened action by certain private
litigants or the Attorney General of the State of California, which alleges
that the sale in California of certain products containing fish and salmon
oils may be in violation of a California law known as "Proposition 65" for
failure to include required warning labels. The Company has also received
notice from another private litigant that the Company's sale of bulk
quantities of copper gluconate was in violation of Proposition 65 for failure
to provide warning statements with respect to the level of lead contained in
such product. In March 1993, the staff of the Cleveland Regional Office of the
FTC began an investigation into advertising claims made by the seller in the
KAL/Max Acquisition, and made a follow up inquiry to the Company in August
1995 concerning certain products and claims associated with the
11
<PAGE>
KAL and NaturalMax product lines. The Company has responded to the FTC and, to
the Company's knowledge, the FTC has taken no further action. There can be no
assurance that such proceedings or investigations or any future proceedings or
investigations will not have a material adverse effect on the Company. See
"Business--Government Regulation."
PRODUCT LIABILITY; POTENTIAL ADVERSE PRODUCT PUBLICITY
The Company, like any other retailer, distributor or manufacturer of
products that are designed to be ingested, faces an inherent risk of exposure
to product liability claims in the event that the use of its products results
in injury. In the event that the Company does not have adequate insurance or
contractual indemnification, product liability claims could have a material
adverse effect on the Company. The Company is not currently a named defendant
in any product liability lawsuit; however, Old KAL, Old Premier and Old
Monarch, like other manufacturers and distributors of nutritional supplements,
currently are or have been named as defendants in such lawsuits. The
successful assertion or settlement of any uninsured claim, a significant
number of insured claims, or a claim exceeding the Company's insurance
coverage could have a material adverse effect on the Company.
The Company is highly dependent upon consumers' perception of the safety and
quality of its products as well as similar products distributed by other
companies. Thus, the mere publication of reports asserting that such products
may be harmful could have a material adverse effect on the Company, regardless
of whether such reports are scientifically supported and regardless of whether
the harmful effects would be present at the dosages recommended for such
products.
LIMITED AVAILABILITY OF CONCLUSIVE CLINICAL STUDIES
Although many of the ingredients in the Company's products are vitamins,
minerals, herbs and other substances for which there is a long history of
human consumption, some of the Company's products contain innovative
ingredients or combinations of ingredients. Although the Company believes all
of its products to be safe when taken as directed by the Company, there is
little long-term experience with human consumption of certain of these
innovative product ingredients or combinations thereof in concentrated form.
Although the Company performs research and/or tests the formulation and
production of its products, it has only sponsored limited clinical studies.
See "--Product Liability; Potential Adverse Product Publicity."
COMPETITION
The VMS Industry is highly competitive. The Company's principal competitors
in the Healthy Foods Channel include a number of large nationally known
manufacturers (such as Twinlab Corporation, Solgar Vitamin and Herb Company,
Inc. and Nature's Way Products, Inc.) and many smaller manufacturers and
marketers of nutritional supplements. Certain of the Company's principal
competitors are larger than the Company, have greater access to capital and
may be better able to withstand volatile market conditions. Moreover, because
the VMS Industry generally has low barriers to entry, additional competitors
could enter the market at any time. In that regard, although the VMS Industry
to date has been characterized by many relatively small participants, there
can be no assurance that national or international companies (which may
include pharmaceutical companies or other suppliers to mass merchandisers)
will not seek to enter or to increase their presence in this industry.
Increased competition in the industry could have a material adverse effect on
the Company.
RISK OF LIMITED SUPPLY SOURCES; DEPENDENCE ON FOREIGN SUPPLIERS
The Company believes that its continued success will depend upon the
availability of raw materials that permit the Company to meet its labeling
claims, quality control standards and desire for unique ingredients. Due to
issues relating to quality or third party intellectual property rights, a
number of the Company's branded products (which accounted for approximately
31% of the Company's fiscal 1997 net sales) contain one or more of
approximately 72 ingredients that may only be available from a single source
or supplier. In addition, the supply of herbal products is subject to the same
risks normally associated with agricultural production, such as climactic
conditions, insect infestations and availability of manual labor or equipment
for harvesting. Any significant delay in or disruption of the supply of raw
materials could substantially increase the cost of such materials, could
require product reformulations, the qualification of new suppliers and
repackaging and could result in a substantial reduction or termination by the
Company of its sales of certain products, any of which could have a material
adverse effect upon the Company. Accordingly, while no single product
accounted for
12
<PAGE>
more than 2% of the Company's net sales in fiscal 1997, there can be no
assurance that the disruption of the Company's supply sources will not have a
material adverse effect on the Company.
Although the Company acquires the majority of its raw materials from U.S.
suppliers, the ingredients of a number of the Company's products (which
accounted for approximately 38% of the Company's fiscal 1997 net sales)
include one or more of approximately 188 ingredients that originate outside of
the United States. The Company's business is therefore subject to the risks
generally associated with doing business outside the United States, such as
delays in shipments, embargoes, changes in economic and political conditions,
tariffs, foreign exchange rates and trade disputes. The Company's business is
also subject to the risks associated with the enactment of United States and
foreign legislation and regulations relating to imports and exports, including
quotas, duties, taxes or other charges or restrictions that could be imposed
upon the importation of products into the United States. See "Business--
Materials and Suppliers." These factors could result in a delay in or
disruption of the supply of certain raw materials and could have the
consequences described in the preceding paragraph, any of which could have a
material adverse effect on the Company.
RELIANCE ON KEY MANAGEMENT
The operation of the Company requires managerial and operational expertise.
In particular, the Company is dependent upon the management and leadership
skills of a number of its senior managers, including Frank W. Gay II, Bruce R.
Hough, Jeffrey A. Hinrichs, William T. Logan and Leslie M. Brown, Jr.
Substantially all of the Company's employees are employed "at will." None of
the key management employees has a long-term employment contract with the
Company and there can be no assurance that such individuals will remain with
the Company. The failure of such key personnel to continue to be active in
management could have a material adverse effect on the Company. After the
consummation of the Offering, the Company's executive officers, including key
management employees, will beneficially own 2,616,330 shares of Common Stock,
representing approximately 21.9% of the outstanding Common Stock on a fully
diluted basis, excluding shares purchased in the Offering pursuant to the
reserved share program and options to be granted under the 1998 Stock Plan in
connection with the Offering. See "Management."
RISKS ASSOCIATED WITH IMPLEMENTATION OF BUSINESS STRATEGY
Implementation of the Company's business strategy is subject to risks and
uncertainties, including certain factors that are within the Company's control
and other factors that are outside of the Company's control. In addition,
certain elements of the Company's business strategy, notably the acquisition
of complementary businesses or product lines, could result in significant
expenditures of cash and management resources. See "--Risks Associated with
Acquisitions." Finally, implementation of the Company's business strategy is
subject to risks associated with market and competitive conditions. See "--
Competition" and "--No Assurance of Future Industry Growth."
RISKS ASSOCIATED WITH ACQUISITIONS
The Company has completed four acquisitions, including the Solaray
Acquisition, since 1993 and expects to pursue additional acquisitions in the
future as a key component of the Company's business strategy. See "Business--
Business Strategy." There can be no assurances that attractive acquisition
opportunities will be available to the Company, that the Company will be able
to obtain financing for or otherwise consummate any future acquisitions or
that any acquisitions which are consummated will prove to be successful.
Moreover, acquisitions involve numerous risks, including the risk that the
acquired business will not perform in accordance with expectations,
difficulties in the integration of the operations and products of the acquired
businesses with the Company's other businesses, the diversion of management's
attention from other aspects of the Company's business, the risks associated
with entering geographic and product markets in which the Company has limited
or no direct prior experience and the potential loss of key employees of the
acquired business. The acquisition of another business can also subject the
Company to liabilities and claims arising out of such business. In addition,
future acquisitions would likely require additional financing, which would
likely result in an increase in the Company's indebtedness or the issuance of
additional capital stock which could be dilutive to holders of shares issued
in the Offering. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
13
<PAGE>
NO ASSURANCE OF FUTURE INDUSTRY GROWTH
Although market data referred to in this Prospectus and otherwise available
to prospective investors regarding the size and projected growth rates of the
VMS Market and the Healthy Foods Channel indicate that such markets are large
and rapidly growing, there can be no assurance that such markets are as large
as reported or that such projected growth will occur or continue. Market data
and projections, such as those presented in this Prospectus, are inherently
uncertain and subject to change. In addition, the underlying market conditions
are subject to change based on economic conditions, consumer preferences and
other factors that are beyond the Company's control. There can be no assurance
that an adverse change in size or growth rate of the VMS Market or the Healthy
Foods Channel will not have a material adverse effect on the Company.
RISKS ASSOCIATED WITH INTERNATIONAL MARKETS
The Company's continued growth is dependent in part upon its ability to
expand its operations into new markets, including international markets. The
Company may experience difficulty entering new international markets due to
greater regulatory barriers, the necessity of adapting to new regulatory
systems and problems related to entering new markets with different cultural
bases and political systems. 6.5% of the Company's net sales for fiscal 1997
were generated outside the United States. Operating in international markets
exposes the Company to certain risks, including, among other things: (i)
changes in or interpretations of foreign regulations that may limit the
Company's ability to sell certain products or repatriate profits to the United
States, (ii) exposure to currency fluctuations, (iii) the potential imposition
of trade or foreign exchange restrictions or increased tariffs and (iv)
political instability. As the Company continues to expand its international
operations, these and other risks associated with international operations are
likely to increase. See "Business--Business Strategy."
RELIANCE ON INDEPENDENT CONTRACTORS
The Company places significant reliance on a network of 56 independent
contractors to act as its primary sales force and sell its products to health
food retailers. As with any independent contractor, such contractors are not
employed or otherwise controlled by the Company and are generally free to
conduct their businesses at their own discretion. Although these contractors
enter into contracts with the Company, such contracts typically can be
terminated at any time by the Company or the independent contractor. The
simultaneous loss of the services of a number of these independent contractors
could have a material adverse effect on the Company.
CONTROL BY EXISTING STOCKHOLDERS
Upon completion of the Offering, investment funds (the "Bain Capital Funds")
controlled by Bain Capital will beneficially own approximately 43.1% of the
outstanding Common Stock (40.0% if the Underwriters' over-allotment option is
exercised in full). By virtue of such stock ownership, Bain Capital will be
able to control the election of the members of the Company's Board of
Directors and to generally exercise control over the affairs of the Company.
Such concentration of ownership could also have the effect of delaying,
deterring or preventing a change in control of the Company that might
otherwise be beneficial to stockholders. In addition, three representatives of
Bain Capital currently serve on the Company's Board of Directors. There can be
no assurance that conflicts of interest will not arise with respect to such
Directors or that such conflicts will be resolved in a manner favorable to the
Company. See "Principal and Selling Stockholders."
COMPUTER SYSTEMS AND YEAR 2000 ISSUES
The "Year 2000" issue concerns the potential exposures related to the
automated generation of business and financial misinformation resulting from
the application of computer programs which have been written using two digits,
rather than four, to define the applicable year of business transactions. The
Company does not anticipate any significant costs, problems or uncertainties
associated with becoming Year 2000 compliant and is currently developing a
plan to ensure that its computer systems are modified to be compliant on a
timely basis. Failure of the Company or its software providers to adequately
address the Year 2000 issue could result in misstatement of reported financial
information or otherwise adversely affect the Company's business operations.
14
<PAGE>
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock may fluctuate significantly. These
fluctuations could result from, among other things, variations in the
Company's results of operations, which could be adversely affected by a number
of factors (some of which are beyond the Company's control), including
economic downturns, variations in demand for nutritional supplements, changes
in the mix of products sold, price changes in response to competition,
increases in the cost of raw materials and possible supply shortages. In
particular, the market price of the Common Stock could be materially adversely
affected by reports by official or unofficial health and medical authorities
and the general media regarding the potential health benefits or detriments of
products sold by the Company or of similar products distributed by other
companies regardless of whether such reports are scientifically supported and
regardless of whether the Company's operating results are likely to be
affected by such reports, as well as by consumer perceptions regarding the
safety and efficacy of nutritional supplements and consumer preferences
generally. In addition, the stock market in general has experienced wide price
and volume fluctuations in recent periods, and these fluctuations are often
unrelated to the operating performance of the specific issuers whose stock is
affected.
ABSENCE OF PUBLIC MARKET; SUBSTANTIAL DILUTION
Prior to the Offering, there has been no public market for the Common Stock.
Although the Company has applied to list the Common Stock on the Nasdaq
National Market, there can be no assurance that an active trading market for
the Common Stock will develop or be sustained. The initial public offering
price of the Common Stock offered hereby will be determined by negotiations
among the Company, the Selling Stockholders and the Underwriters and should
not be considered as an indication of the market price for the Common Stock
after the Offering. See "--Possible Volatility of Stock Price" and
"Underwriting." Purchasers of the Common Stock in the Offering will be subject
to immediate and substantial dilution. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have 11,496,692 shares
of Common Stock outstanding. The 3,330,000 shares of Common Stock sold in the
Offering will be freely tradeable without restriction or further registration
under the Securities Act of 1933 (the "Securities Act"), unless held by an
"affiliate" of the Company, as that term is defined in the Securities Act. The
Company, and all persons holding Common Stock, or warrants or options to
purchase Common Stock, prior to the Offering, have agreed not to sell, offer
to sell, grant any option for the sale of or otherwise dispose of any shares
of Common Stock or securities convertible into or exchangeable or exercisable
for Common Stock, without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ") on behalf of the Underwriters, for a
period of 180 days after the date of this Prospectus, other than shares sold
in the Offering; in addition, the Company will be permitted to issue shares of
Common Stock upon the exercise of outstanding options or warrants and to issue
stock options to employees pursuant to employee stock option plans. Commencing
180 days after the date of this Prospectus, upon the expiration of certain
lock-up agreements with DLJ, approximately 7,994,797 shares of Common Stock
(7,551,524 shares if the Underwriters' over-allotment options are exercised in
full) issued and outstanding as of the date of this Prospectus will be
eligible for immediate sale in the public market subject in certain cases to
compliance with certain volume and other limitations under Rule 144 of the
Securities Act ("Rule 144"). In addition, pursuant to the Company's
registration agreement (the "Registration Agreement"), holders of 9,468,914
shares of Common Stock and options to purchase shares of Common Stock
(8,969,415 shares if the Underwriters' over-allotment options are exercised in
full) will have the right to require the Company to register their shares
under the Securities Act. See "Shares Eligible for Future Sale--Registration
Rights." No prediction can be made as to the effect, if any, that sales of
shares of Common Stock or the availability of shares of Common Stock for sale
will have on the market price of the Common Stock from time to time. The sale
of a substantial number of shares held by existing stockholders, whether
pursuant to subsequent public offerings or otherwise, or the perception that
such sales could occur, could adversely affect the market price of the Common
Stock and could materially impair the Company's future ability to raise
capital through an offering of equity securities. See "Shares Eligible For
Future Sale" and "Underwriting."
15
<PAGE>
CERTAIN ANTI-TAKEOVER EFFECTS
Certain provisions of the Company's Restated Certificate of Incorporation
(the "Restated Certificate") and Amended and Restated By-laws (the "By-laws")
may inhibit changes in control of the Company not approved by the Company's
Board of Directors. These provisions include (i) a classified Board of
Directors, (ii) a prohibition on stockholder action through written consents,
(iii) a requirement that special meetings of stockholders be called only by
the Board of Directors, (iv) advance notice requirements for stockholder
proposals and nominations, (v) limitations on the ability of stockholders to
amend, alter or repeal the By-laws and (vi) the authority of the Board to
issue without stockholder approval preferred stock with such terms as the
Board may determine. The Company will also be afforded the protections of
Section 203 of the Delaware General Corporation Law, which could have similar
effects. See "Description of Capital Stock."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein under "Prospectus Summary," "Risk
Factors," "Business," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," including statements concerning (i) the
Company's strategy, (ii) the Company's expansion plans, (iii) the market for
the Company's products, (iv) the effects of government regulation of the
Company's products and (v) the effects on the Company of certain legal
proceedings, contain certain forward-looking statements concerning the
Company's operations, economic performance and financial condition. Because
such statements involve risks and uncertainties, actual results may differ
materially from those expressed or implied by such forward-looking statements.
Factors that could cause such differences include, but are not limited to,
those discussed under "Risk Factors."
RECLASSIFICATION
Prior to the consummation of the Offering, the Company will reclassify all
of its outstanding shares of capital stock into a single class of common stock
("Common Stock") and will authorize a single class of undesignated preferred
stock ("Preferred Stock"). The Company currently has five classes of
authorized capital stock: Common Stock, Non-Voting Common Stock, Class A
Common Stock, Class A Non-Voting Common Stock and Class P Common Stock. Prior
to consummation of the Offering, the Non-Voting Common Stock, Class P Common
Stock, Class A Non-Voting Common Stock and Class A Common Stock will cease to
be authorized and all outstanding shares of such classes of capital stock (or
rights to purchase such shares) will be reclassified into shares of Common
Stock (or rights to purchase such shares). After giving effect to the
foregoing transactions, a 7.5291-for-one stock split will be effected as to
all of the outstanding shares of Common Stock and a corresponding adjustment
to the number of shares issuable upon exercise of all outstanding warrants and
options will be made. Such reclassification and the subsequent stock split are
referred to herein collectively as the "Reclassification."
The following discussion describes the transactions pursuant to which all
existing classes of the Company's capital stock will be reclassified into
Common Stock. Each share of Class P Common Stock, Class A Common Stock and
Class A Non-Voting Common Stock is entitled to a preferential payment (the
"Preference Amount") upon any distribution by the Company to holders of its
capital stock (whether by dividend, liquidating distribution or otherwise)
equal to the original cost of such share plus an amount which accrues on a
daily basis at a rate of 10% per annum on such cost, compounded quarterly. As
of September 30, 1997, the Preference Amount of the outstanding Class P Common
Stock was $29.82 per share, based on an original cost per share of $20.25. In
connection with the Reclassification, each outstanding share of such classes
of capital stock will be reclassified into one share of Common Stock plus an
additional number of shares of Common Stock determined by dividing the
applicable Preference Amount for such share by the value of a share of Common
Stock based on the estimated initial public offering price in the Offering.
The number of shares of Common Stock that will be issued upon such
Reclassification cannot be determined with certainty until the initial public
offering price and the closing date for the Offering have been determined.
Assuming an initial public offering price of $15.00 per share and an assumed
closing date of February 9, 1998 and giving effect to the stock split referred
to above, an aggregate of 978,251 shares of Common Stock would be issued upon
the conversion of all shares of Class P Common Stock and 115,378 shares of
Common Stock would be reserved for issuance upon the conversion of all
outstanding warrants to purchase shares of Class A Non-Voting Common Stock.
There are no shares of Class A Non-Voting
16
<PAGE>
Common Stock or shares (or rights to purchase shares) of Class A Common Stock
outstanding. Fractional shares otherwise issuable will be rounded to the
nearest whole number. See "Description of Capital Stock."
DILUTION
The deficit in net tangible book value of the Company as of September 30,
1997 was approximately $27.9 million, or $2.99 per share of Common Stock. Net
tangible book value per share represents the amount of the Company's total
tangible assets less its total liabilities, divided by the number of shares of
Common Stock outstanding (after giving effect to the Reclassification). After
giving effect to (i) the receipt of $26.5 million of estimated net proceeds
from the sale by the Company of shares of Common Stock in the Offering
(assuming an initial public offering price of $15.00 per share) and (ii) the
use of such net proceeds to repay indebtedness as described under "Use of
Proceeds," the deficit in pro forma net tangible book value of the Company at
September 30, 1997 would have been approximately $4.0 million, or $0.35 per
share of Common Stock. This represents an immediate dilution in net tangible
book value of $15.35 per share to new investors purchasing shares in the
Offering. The following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $15.00
Deficit in net tangible book value per share at September
30, 1997................................................... (2.99)
Increase in net tangible book value per share attributable
to the Offering............................................ 2.64
-----
Deficit in pro forma net tangible book value per share after
the Offering............................................... (0.35)
------
Dilution of net tangible book value per share to purchasers
of shares in the Offering.................................. $15.35
======
</TABLE>
The foregoing computations assume no exercise of any stock options or
warrants after September 30, 1997. As of September 30, 1997, there were
outstanding options and warrants to purchase an aggregate of 1,636,844 shares
of Common Stock (after giving effect to the Reclassification) at exercise
prices from $0.001 to $9.30 per share. If all of the foregoing options and
warrants had been exercised at September 30, 1997, the deficit in net tangible
book value per share of Common Stock at such date would have been $2.29, and
the deficit in pro forma net tangible book value per share after giving effect
to the Offering would have been $0.09, representing an immediate dilution to
purchasers of shares in the Offering of $15.09 per share and an immediate
increase in net tangible book value of $2.20 per share to existing
stockholders.
The following table summarizes, on a pro forma basis as of September 30,
1997, the number of shares of Common Stock purchased from the Company, the
total consideration paid and the average price per share paid by the existing
stockholders and new investors purchasing shares in the Offering, adjusted to
give effect to the sale of the shares of Common Stock offered hereby at an
assumed initial public offering price of $15.00 per share and before deducting
the underwriting discount and the estimated expenses of the Offering payable
by the Company:
<TABLE>
<CAPTION>
AVERAGE PRICE
SHARES PURCHASED TOTAL CONSIDERATION PER SHARE
------------------ ------------------- -------------
NUMBER PERCENT AMOUNT PERCENT
<S> <C> <C> <C> <C> <C>
Existing
stockholders(a)........ 8,166,692 71% $ 8,281,537 14% $ 1.01
Investors purchasing
shares in the
Offering(b)............ 3,330,000 29% 49,950,000 86% 15.00
---------- --- ----------- --- ------
Total................... 11,496,692 100% $58,231,537 100% $ 5.07
========== === =========== === ======
</TABLE>
The foregoing data has been computed based upon the estimated number of
shares to be outstanding after the Offering. See "Reclassification."
- ---------------------
(a) Includes 158,817 shares of Common Stock (after giving effect to the
Reclassification) issued pursuant to the exercise of warrants to purchase
such shares and the aggregate consideration to the Company of $46,646.
Does not include 1,330,000 shares of Common Stock (after giving effect to
the Reclassification) offered for sale hereby by the Selling Stockholders
and the aggregate consideration to the Company for the original purchase
of such shares of $1,175,541.
(b) Includes (i) 2,000,000 shares of Common Stock (after giving effect to the
Reclassification) offered hereby and gross consideration to the Company of
$30,000,000 for such shares and (ii) 1,330,000 shares of Common Stock
(after giving effect to the Reclassification) offered hereby and gross
consideration to the Selling Stockholders of $19,950,000 for such shares.
17
<PAGE>
DIVIDEND POLICY
The Company has never paid any dividends on its capital stock. The Company
presently intends to retain all available funds for use in the business and
therefore does not anticipate paying cash dividends in the foreseeable future.
Payment of future dividends, if any, will be at the discretion of the
Company's Board of Directors after taking into account various factors,
including the Company's financial condition, operating results, current and
anticipated cash needs and plans for expansion. As a holding company, the
ability of the Company to pay dividends is dependent upon the receipt of
dividends or other payments from its operating subsidiaries. In addition, the
Company is currently prohibited from paying dividends on its capital stock
under its senior credit agreement (the "Existing Credit Agreement") with
Jackson National Life Insurance Company ("Jackson National"). The Company
expects that the New Credit Agreement will contain similar restrictions. See
"Management's Discussions and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
USE OF PROCEEDS
The net proceeds to the Company from the sale of shares of Common Stock
offered by the Company are estimated to be $26.5 million, assuming an initial
public offering price of $15.00 per share (which represents the midpoint of
the estimated price range of the Offering). The Company expects to replace the
Existing Credit Agreement, under which the Company had outstanding borrowings
of $61.2 million (not including unamortized discount of $2.6 million) at
September 30, 1997, with the New Credit Agreement, which will make $70.0
million of revolving credit borrowings available to the Company, in connection
with the consummation of the Offering. The Company intends to use the net
proceeds of the Offering, together with borrowings under the New Credit
Agreement and all available cash resources of the Company ($4.4 million at
September 30, 1997), to repay all existing indebtedness under the Existing
Credit Agreement as well as fees totaling $2.5 million in connection with (i)
the termination of the Restated Advisory Agreement and services rendered in
connection with the Offering, (ii) prepayment penalties on the Term B Loan (as
defined below) resulting from replacing the Existing Credit Agreement and
(iii) origination fees arising from the establishment of the New Credit
Agreement. On a pro forma basis, the Company will have outstanding borrowings
of $34.1 million under the New Credit Agreement after the use of proceeds as
discussed above. The Company will not receive any proceeds from the sale of
shares by the Selling Stockholders in the Offering. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
At September 30, 1997, the outstanding indebtedness under the Existing
Credit Agreement consisted of (i) a $37.0 million term "A" loan (the "Term A
Loan"), which currently bears interest at a rate equal to the London Inter-
Bank Offered Rate ("LIBOR") plus 3.25% (8.88% per annum at September 30,
1997), (ii) a $15.0 million term "B" loan (the "Term B Loan"), which currently
bears interest at a rate equal to LIBOR plus 4.0% (9.63% per annum at
September 30, 1997) and (iii) $9.2 million of outstanding borrowings under a
revolving credit facility (the "Revolving Credit Facility"), which currently
bears interest at a rate equal to LIBOR plus 3.0% (8.63% per annum at
September 30, 1997).
18
<PAGE>
CAPITALIZATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth the consolidated capitalization of the
Company at September 30, 1997 and as adjusted to give effect to the
Reclassification and the sale by the Company of the 2,000,000 shares of Common
Stock offered hereby (assuming an initial public offering price of $15.00 per
share, the midpoint of the estimated price range of the Offering) and the
application of the estimated net proceeds therefrom, together with borrowings
under the New Credit Agreement and available cash resources of the Company, to
repay indebtedness and pay certain other fees. See "Use of Proceeds" and
"Unaudited Pro Forma Financial Data."
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
--------------------------------
ACTUAL AS ADJUSTED(A)
<S> <C> <C>
Cash and cash equivalents........................................ $ 4,415 $ --
============ ============
Total debt:
Senior bank debt................................................ $58,680(b) $34,065(c)
Capital leases and other obligations............................ 1,579 314
------------ ------------
Total debt..................................................... 60,259 34,379
------------ ------------
Stockholders' equity:
Common stock prior to the Reclassification...................... 12 -- (d)
Preferred stock, $.01 par value, 5,000,000 shares authorized, no
shares issued and outstanding.................................. -- --
Common stock, $.01 par value, 50,000,000 shares authorized,
11,496,692 shares issued and outstanding(e).................... -- 115(d)
Additional paid-in capital...................................... 9,690 36,087(d)
Subscriptions receivable........................................ (55) (55)
Retained earnings............................................... 6,707 2,975(f)
------------ ------------
Total stockholders' equity..................................... 16,354 39,122
------------ ------------
Total capitalization......................................... $ 76,613 $ 73,501
============ ============
</TABLE>
- ---------------------
(a) Amounts give effect to the Reclassification and the sale by the Company of
the 2,000,000 shares of Common Stock offered hereby (assuming an initial
public offering price of $15.00 per share, the midpoint of the estimated
price range of the Offering), the exercise of warrants to purchase 158,817
shares of Common Stock (after giving effect to the Reclassification) by a
Selling Stockholder and the application of the estimated net proceeds from
the Offering, together with borrowings under the New Credit Agreement and
available cash resources of the Company, to repay indebtedness and pay
certain other fees, including (i) fees of $1,000 in connection with the
termination of the Restated Advisory Agreement and for other services
rendered, (ii) prepayment penalties of $525 on the Term B Loan resulting
from the early retirement of indebtedness and (iii) loan origination fees
and other fees of $950 in conjunction with the establishment of the New
Credit Agreement. See "Use of Proceeds" and "Unaudited Pro Forma Financial
Data."
(b) Includes indebtedness under the Revolving Credit Facility of $9,240, the
Term A Loan of $37,000 and the Term B Loan of $12,440 (net of unamortized
discount of $2,560).
(c) The Company intends to replace the Existing Credit Agreement with the New
Credit Agreement in connection with the consummation of the Offering. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
(d) Amounts give effect to the Reclassification through which, assuming an
initial public offering price of $15.00 per share and a closing date of
February 9, 1998, (i) 102,000 outstanding shares of Class P Common Stock
with a Preference Amount of $30.92 per share will be reclassified into
129,929 shares of Common Stock using a factor of 1.2738 shares of Common
Stock to one share of Class P Common Stock, outstanding warrants to
purchase 12,994 shares of Class A Non-Voting Common Stock with a
Preference Amount of $20.25 per share will be reclassified into warrants
to purchase 15,324 shares of Common Stock using a factor of 1.1793 shares
of Common Stock to one share of Class A Non-Voting Common Stock, 84,309
19
<PAGE>
outstanding shares of Non-Voting Common Stock will be reclassified into
84,309 shares of Common Stock and warrants to purchase 116,949 shares of
Non-Voting Common Stock will be reclassified into warrants to purchase
116,949 shares of Common Stock; and, after giving effect to the foregoing,
(ii) a 7.5291-for-one stock split will be effected as to all of the
outstanding shares of Common Stock and options and warrants to purchase
Common Stock, Common Stock outstanding subsequent to the Reclassification
has been reflected at par value and additional paid-in capital has been
reduced by $81, the difference between the par value of Common Stock prior
to the Reclassification and the par value of Common Stock subsequent
thereto.
(e) Excludes 175,804 shares reserved for issuance upon the exercise of options
granted pursuant to the Company's 1995 Stock Plan and 1,302,222 shares
reserved for issuance upon the exercise of other outstanding options and
warrants. Also excludes 1,050,000 shares and 750,000 shares which, prior
to the consummation of the Offering, will be reserved for issuance under
the Company's Stock Incentive Plans and Stock Purchase Plan, respectively.
See "Management--Stock Plans." The number of shares to be outstanding
after the Offering is subject to change. See "Reclassification."
(f) Reflects a nonrecurring charge for retirement of debt (write-off of debt
issuance costs and prepayment penalties) of $5,169, net of a tax benefit
of $2,042, and payment of fees upon the termination of the Restated
Advisory Agreement and for services rendered in connection with the
Offering of $1,000, net of a tax benefit of $395.
20
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The Unaudited Pro Forma Consolidated Statements of Operations for the year
ended September 30, 1997 give pro forma effect to (i) the Reclassification,
(ii) the consummation of the Offering (assuming an initial public offering
price of $15.00 per share, the midpoint of the estimated price range of the
Offering) and the application of the net proceeds therefrom, together with
borrowings under the New Credit Agreement and available cash resources, to
repay indebtedness as described under "Use of Proceeds" and (iii) the
elimination of annual fees paid pursuant to the Restated Advisory Agreement,
as if each such event had occurred on October 1, 1996.
The Unaudited Pro Forma Consolidated Balance Sheet at September 30, 1997
gives pro forma effect to (i) the Reclassification, (ii) the consummation of
the Offering (assuming an initial public offering price of $15.00 per share,
the midpoint of the estimated price range of the Offering) and the application
of the net proceeds therefrom, together with borrowings under the New Credit
Agreement and available cash resources, to repay indebtedness, as described
under "Use of Proceeds," and (iii) the payment of fees in connection with the
termination of the Restated Advisory Agreement and for services rendered in
connection with the Offering, as if each such event had occurred on such date.
The Unaudited Pro Forma Financial Data are provided for informational
purposes only and are not necessarily indicative of the results of operations
or financial position of the Company had the transactions assumed therein
occurred, nor are they necessarily indicative of the results of operations
which may be expected to occur in the future. Furthermore, the unaudited pro
forma financial data are based upon assumptions that the Company believes are
reasonable and should be read in conjunction with the financial statements and
the accompanying notes thereto included elsewhere in this Prospectus.
The Unaudited Pro Forma Consolidated Statement of Operations does not
reflect an extraordinary loss on the early extinguishment of debt estimated at
$5.2 million resulting from the write off of debt issuance costs in connection
with the pay down of debt upon completion of the Offering or the payment of
$1.0 million in fees in connection with the termination of the Restated
Advisory Agreement and for services rendered in connection with the Offering.
The Unaudited Pro Forma Consolidated Balance Sheet, however, does reflect such
charges and the related tax benefit of $2.4 million.
21
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO
HISTORICAL ADJUSTMENTS FORMA
<S> <C> <C> <C>
Net sales............................... $98,096 $ -- $98,096
Cost of sales........................... 52,277 -- 52,277
------- ------- -------
Gross profit.......................... 45,819 -- 45,819
------- ------- -------
Operating expenses:
Selling, general and administrative... 29,179 (300)(a) 28,879
Amortization of intangibles........... 1,346 -- 1,346
One-time payment to executive
officer.............................. 1,700 -- 1,700
------- ------- -------
32,225 (300) 31,925
------- ------- -------
Income from operations.................. 13,594 300 13,894
------- ------- -------
Interest expense, net................... 6,572 (3,879)(b) 2,693
Income before provision for income
taxes.................................. 7,022 4,179 11,201
Provision for income taxes.............. 2,774 1,650 (c) 4,424
------- ------- -------
Net income.............................. $ 4,248 $ 2,529 $ 6,777
======= ======= =======
Net income per share.................... $ 0.39(d)
Weighted average shares outstanding..... 10,785(d)
Supplemental pro forma net income per
share.................................. $ 0.44(d)
Supplemental pro forma weighted average
shares outstanding..................... 12,785(d)
Pro forma as adjusted net income per
share.................................. $ 0.53(d)
Pro forma as adjusted weighted average
shares outstanding..................... 12,785(d)
</TABLE>
22
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The Unaudited Pro Forma Consolidated Statement of Operations gives effect to
the following unaudited pro forma adjustments:
(a) Reflects the permanent elimination of recurring external management fees
(other than out-of-pocket expenses) resulting from the termination of the
Restated Advisory Agreement in connection with the Offering. As is often
the case in stand-alone acquisitions such as the Company's original
acquisition of Solaray, during the early stages of the Company's
development it relied heavily on an affiliate of its equity sponsors, Bain
Capital, to provide certain management services, paying a recurring annual
fee pursuant to the Restated Advisory Agreement in respect of such
services. Over time, the Company has developed the infrastructure to
provide these services internally and, as a result, will terminate the
Restated Advisory Agreement (and the recurring management fees payable
thereunder) upon consummation of the Offering.
(b) Reflects the decrease in interest expense in connection with the
refinancing of the Existing Credit Agreement and the use of net proceeds
from the Offering and available cash to repay $28,440 of outstanding debt
as follows:
<TABLE>
<CAPTION>
PRO
FORMA
-------
<S> <C>
Elimination of interest under the Existing Credit Agreement... $(5,731)
Elimination of penalty on unused Revolving Credit Facility.... (21)
Elimination of interest on note payable....................... (110)
Elimination of amortization of debt issuance costs............ (817)
Interest on debt under the New Credit Agreement:
Revolving credit facility at LIBOR plus a variable margin
based on Adjusted EBITDA and outstanding borrowings (average
rate of 6.78% on an assumed average balance of $35,900)..... 2,434
Interest on unutilized revolving credit facility commitment
(average rate of .37% on an assumed average unused balance
of $34,100)................................................. 126
Annual Syndicate Fee......................................... 50
Amortization of deferred financing fees related to the New
Credit Agreement ($950 over five years)..................... 190
-------
Net decrease in pro forma interest expense.................... $(3,879)
=======
</TABLE>
The above calculation assumes an average rate of 6.78% for fiscal 1997
based on historical Adjusted EBITDA and average borrowing levels. At the
consummation of the Offering, the Company expects the interest rate under
the New Credit Agreement to be LIBOR plus 0.875% (6.51%, assuming a 5.63%
LIBOR rate). See "Use of Proceeds."
(c) Reflects the increase in the provision for income taxes resulting from the
pro forma adjustments to pro forma income before provision for income
taxes, applying an estimated effective tax rate of 39.5%.
(d) Pro forma net income per share is computed using historical net income and
10,785,333 common and common equivalent shares outstanding after giving
effect to the Reclassification through which (i) 102,000 outstanding
shares of Class P Common Stock will be reclassified into 129,929 shares of
Common Stock using a factor of 1.2738 shares of Common Stock to one share
of Class P Common Stock, outstanding warrants to purchase 12,994 shares of
Class A Non-Voting Common Stock will be reclassified into warrants to
purchase 15,324 shares of Common Stock using a factor of 1.1793 shares of
Common Stock to one share of Class A Non-Voting Common Stock, 84,309
outstanding shares of Non-Voting Common Stock will be
23
<PAGE>
reclassified in 84,309 shares of Common Stock, and warrants to purchase
116,949 shares of Non-Voting Common Stock will be reclassified into
warrants to purchase 116,949 shares of Common Stock; and, after giving
effect to the foregoing, (ii) a 7.5291-for-one stock split will be effected
as to all 1,240,238 of the outstanding shares of Common Stock and 192,248
of the outstanding common equivalent shares. Common equivalent shares
consist of the Company's Common Stock issuable upon the exercise of stock
options and warrants (using the treasury stock method). In addition, in
accordance with the Securities and Exchange Commissions's Staff Accounting
Bulletin No. 83, shares issued and stock options granted within one year of
the Offering have been included in the calculation of weighted average
shares outstanding as if they were outstanding from inception of the
Company (using the treasury stock method and an assumed initial public
offering price for shares sold in the offering of $15.00 per share).
Supplemental net income per share is determined in the same manner as that
used to determine pro forma net income per share, except the pro forma
weighted average number of common and common equivalent shares which the
Company estimates will be outstanding after giving effect to the
Reclassification has been increased by 2,000,000, the number of shares of
Common Stock to be issued to generate the proceeds necessary to retire
$26,500 of the Company's borrowings under the Existing Credit Agreement
(assuming an initial public offering price of $15.00 per share, the
midpoint of the estimated price range of the Offering), and historical net
income has been increased by $2,360 related to the elimination of interest
resulting from the assumed reduction of $26,500 of indebtedness, net of tax
of $932.
Pro forma as adjusted net income per share is determined using pro forma
net income and common and common equivalent shares considered to be
outstanding after giving effect to the Reclassification and the Offering
(at an assumed initial public offering price of $15.00 per share).
24
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AT SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................... $ 4,415 $ 26,500 (a) $ --
(28,440)(b)
(1,525)(c)
(950)(d)
Accounts receivable, net.................. 8,001 -- 8,001
Inventories, net.......................... 20,753 -- 20,753
Prepaid expenses and other assets......... 1,018 603 (c) 3,455
1,834 (d)
Deferred income taxes..................... 897 -- 897
------- -------- -------
Total current assets.................... 35,084 (1,978) 33,106
Property plant and equipment, net........... 10,711 -- 10,711
Goodwill, net............................... 42,008 -- 42,008
Other assets, net........................... 2,307 (1,134)(d) 1,173
------- -------- -------
$90,110 $ (3,112) $86,998
======= ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......... $ 7,085 $ (7,085)(b) $ --
Current portion of capital lease
obligations.............................. 181 -- 181
Accounts payable.......................... 6,932 -- 6,932
Accrued expenses.......................... 5,270 -- 5,270
------- -------- -------
Total current liabilities............... 19,468 (7,085) 12,383
Long-term debt.............................. 52,860 (21,355)(b) 34,065
2,560 (d)
Capital lease obligations................... 133 -- 133
Deferred income taxes, net.................. 1,295 -- 1,295
------- -------- -------
Total liabilities....................... 73,756 (25,880) 47,876
------- -------- -------
Stockholders' equity:
Preferred Stock........................... -- -- --
Class P Common Stock...................... 1 (1)(a) --
Common Stock.............................. 11 104 (a) 115
Additional paid-in capital................ 9,690 26,397 (a) 36,087
Subscriptions receivable.................. (55) -- (55)
Retained earnings......................... 6,707 (922)(c) 2,975
(2,810)(d)
------- -------- -------
Total stockholders' equity.............. 16,354 22,768 39,122
------- -------- -------
$90,110 $ (3,112) $86,998
======= ======== =======
</TABLE>
25
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The Unaudited Pro Forma Consolidated Balance Sheet gives effect to the
following unaudited pro forma adjustments:
(a) Reflects (i) the Reclassification, (ii) the exercise of warrants to
purchase 158,817 shares of Common Stock (after giving effect to the
Reclassification) by a Selling Stockholder and (iii) the sale by the
Company of 2,000,000 shares of Common Stock and the receipt of the net
proceeds therefrom of $26,500.
(b) Reflects the use of the net proceeds to the Company from the Offering of
$26,500 to repay outstanding debt. Also reflects the estimated use of
available cash to pay an additional $1,940 of outstanding debt for a total
debt reduction of $28,440, net of the elimination of the unamortized
discount on the Term B Loan of $2,560.
(c) Reflects (i) fees of $1,000 paid in connection with the termination of the
Restated Advisory Agreement and for other services and (ii) $525 of
prepayment penalties on the Term B Loan resulting from the refinancing of
the debt outstanding under the Existing Credit Agreement and the increase
in the income tax receivable arising from the respective tax benefits
thereof (each computed assuming an effective rate of 39.5%).
(d) Reflects the write-off of deferred financing fees of $2,084, offset by
$950 of estimated loan origination and other fees, and the unamortized
discount on the Term B Loan of $2,560 in connection with the refinancing
of debt under the Existing Credit Agreement and the establishment of the
New Credit Agreement and the increase in the income tax receivable arising
from the respective tax benefits thereof (each computed using an effective
rate of 39.5%).
26
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Set forth below are selected historical consolidated financial data of the
Company and the Predecessor for the periods and dates indicated. The selected
historical consolidated financial data for the year ended September 30, 1993
were derived from the audited financial statements of the Predecessor. Data
for the period from October 1 through October 27, 1993 are not audited. The
selected historical consolidated financial data as of and for the years ended
September 30, 1994, 1995, 1996 and 1997 were derived from the audited
financial statements of the Company. The following selected historical
consolidated financial data should be read in conjunction with, and are
qualified by reference to, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the audited consolidated financial
statements and accompanying notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY(A)
------------------------- ----------------------------------
OCTOBER 1
YEAR ENDED THROUGH YEAR ENDED SEPTEMBER 30,
SEPTEMBER 30, OCTOBER 27, ----------------------------------
1993 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net sales............... $20,541 $2,012 $26,083 $62,932 $83,923 $98,096
Cost of sales........... 11,102 1,012 13,410 35,885 45,099 52,277
------- ------ ------- ------- ------- -------
Gross profit........... 9,439 1,000 12,673 27,047 38,824 45,819
Operating expenses:
Selling, general and
administrative........ 7,486 658 8,303 21,409 27,608 29,179
Amortization of
intangibles........... -- -- 394 1,059 1,483 1,346
One-time payment to
executive officer..... -- -- -- -- -- 1,700
------- ------ ------- ------- ------- -------
Income from operations.. 1,953 342 3,976 4,579 9,733 13,594
Interest expense, net... 116 (16) 1,820 4,478 7,126 6,572
------- ------ ------- ------- ------- -------
Income before provision
for income taxes....... 1,837 358 2,156 101 2,607 7,022
Provision for income
taxes.................. 673 134 848 23 1,056 2,774
------- ------ ------- ------- ------- -------
Net income before
extraordinary loss..... 1,164 224 1,308 78 1,551 4,248
Extraordinary loss on
early extinguishment of
debt, net of tax....... -- -- -- (478) -- --
------- ------ ------- ------- ------- -------
Net income (loss)....... $ 1,164 $ 224 $ 1,308 $ (400) $ 1,551 $ 4,248
======= ====== ======= ======= ======= =======
Pro forma net income per
share(b)............... $ 0.39
Pro forma weighted
average shares
outstanding(b)......... 10,785
Supplemental pro forma
net income per
share(b)............... $ 0.44
Supplemental pro forma
weighted average shares
outstanding(b)......... 12,785
OTHER FINANCIAL DATA:
Adjusted EBITDA(c)...... $ 2,188 $ 364 $ 5,724 $11,831 $13,118 $19,563
Capital expenditures
(excluding
acquisitions).......... 217 13 452 2,837 5,498 3,652
Cash flows provided by
(used in):
Operating activities... 1,286 194 1,958 (64) 4,559 9,363
Investing activities... (214) (13) (10,065) (49,155) (5,498) (3,652)
Financing activities... (802) (168) 8,341 49,645 2,600 (3,617)
BALANCE SHEET DATA (AT
PERIOD END):
Cash and cash
equivalents............ $ 278 $ 291 $ 234 $ 660 $ 2,321 $ 4,415
Working capital......... 2,350 2,416 2,814 17,165 19,727 15,616
Total assets............ 6,422 6,465 16,076 83,498 84,755 90,110
Total debt(d)........... 849 662 8,769 60,881 63,657 60,259
Stockholders' equity.... 2,970 3,194 3,738 10,512 12,091 16,354
</TABLE>
- ---------------------
(a) The Company's audited financial statements for the year ended September
30, 1994 primarily reflect operations after October 27, 1993, the date of
the Solaray Acquisition. The Company's operations prior to such date were
immaterial. The Solaray Acquisition was accounted for as a purchase,
resulting in a new accounting basis for the Predecessor's assets. As a
result, financial information for the periods prior to October 28, 1993 is
not directly comparable to information for subsequent periods.
27
<PAGE>
(b) Gives effect to the Reclassification. Historical earnings per common share
amounts are not presented as they are not considered to be meaningful. Net
income per share was determined by dividing the net income by the weighted
average number of common and common stock equivalent shares which the
Company estimates will be outstanding after giving effect to the
Reclassification. Common stock equivalents consist of the Company's Common
Stock issuable upon the exercise of stock options and warrants (using the
treasury stock method). In addition, in accordance with the Securities and
Exchange Commissions' Staff Accounting Bulletin No. 83, shares issued and
stock options granted within one year of the Offering have been included
in the calculation of weighted average shares outstanding as if they were
outstanding from inception of the Company (using the treasury stock method
and an assumed initial public offering price for the shares sold in the
Offering of $15.00 per share). Supplemental net income per share was
determined in the same manner as that used to determine pro forma net
income per share, except the pro forma weighted average number of common
and common equivalent shares which the Company estimates will be
outstanding after giving effect to the Reclassification was increased by
the number of shares of common stock (2,000,000) to be issued to generate
the proceeds necessary to retire $26,500 of the Company's borrowings under
the Existing Credit Agreement (assuming an initial public offering price
of $15.00 per share, the midpoint of the estimated price range of the
Offering), and historical net income was increased by $2,360 related to
the elimination of interest resulting from the assumed reduction of
$26,500 of indebtedness, net of tax of $932.
(c) "Adjusted EBITDA" is defined herein as net income before extraordinary
loss plus provision for income taxes, net interest expense, depreciation
and amortization and other non-recurring items. Management believes that
Adjusted EBITDA, as presented, represents a useful measure of assessing
the performance of the Company's ongoing operating activities as it
reflects the earnings trends of the Company without the impact of the
purchase accounting applied in connection with the Company's history of
acquisitions, the financing required to consummate such transactions or
other non-recurring items. Targets and positive trends in Adjusted EBITDA
are used as the performance measure for determining management's bonus
compensation, and are also used by the Company's creditors in assessing
debt covenant compliance. The Company understands that while Adjusted
EBITDA is frequently used by securities analysts in the evaluation of
nutritional supplement companies, it is not necessarily comparable to
other similarly titled captions of other companies due to potential
inconsistencies in the method of calculation. Adjusted EBITDA is not
intended as an alternative to cash flow from operating activities as a
measure of liquidity or as an alternative to net income as an indicator of
the Company's operating performance or any other measure of performance in
accordance with generally accepted accounting principles.
The following table sets forth a reconciliation of net income from
operations before extraordinary loss to Adjusted EBITDA for each period
included herein:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------------------- ------------------------------
OCTOBER 1
YEAR ENDED THROUGH YEAR ENDED SEPTEMBER 30,
SEPTEMBER 30, OCTOBER 27, ------------------------------
1993 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C>
Net income before
extraordinary loss..... $1,164 $224 $1,308 $ 78 $ 1,551 $ 4,248
Provision for income
taxes.................. 673 134 848 23 1,056 2,774
Interest expense
(income), net (1)...... 116 (16) 1,820 4,478 7,126 6,572
Depreciation and
amortization (2)....... 235 22 1,561 6,983 3,085 3,969
Certain non-recurring
items (3).............. -- -- 187 269 300 300
One-time payment to
executive officer(4)... -- -- -- -- -- 1,700
------ ---- ------ ------- ------- -------
Adjusted EBITDA......... $2,188 $364 $5,724 $11,831 $13,118 $19,563
====== ==== ====== ======= ======= =======
</TABLE>
--------
(1) Includes amortization of capitalized debt issuance costs.
(2) Includes non-recurring amortization of inventory write up.
(3) Represents management fees paid to Bain Capital and F.W. Gay & Sons
pursuant to the Restated Advisory Agreement, which will be terminated
in connection with the Offering. As is often the case in stand-alone
acquisition scenarios such as the Company's original acquisition of
Solaray, during the early stages of the Company's development it relied
heavily on its equity sponsor, Bain Capital, to provide certain
management services, paying a recurring annual fee pursuant to the
Restated Advisory Agreement in respect of such services. Over time, the
Company has developed the infrastructure to provide these services
internally and, as a result, will terminate the Restated Advisory
Agreement (and the recurring management fees payable thereunder) upon
consummation of the Offering. See "Certain Relationships and Related
Transactions."
(4) Reflects a one-time payment to the Company's Chief Executive Officer
for successfully positioning the Company for the Offering. Such payment
is in excess of the Chief Executive Officer's annual compensation
(salary and bonus), and the Company does not expect to make any further
payments of this nature or magnitude in the future.
(d) Total debt for the Company is presented net of unamortized debt issuance
discount.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Company's
audited consolidated financial statements and accompanying notes thereto
included elsewhere in this Prospectus.
OVERVIEW
The Company was formed in 1993 by key members of the current management team
and Bain Capital to effect a consolidation strategy in the fragmented VMS
Industry. The Company purchased Solaray in October 1993 with a view toward
using it as a platform for future acquisitions of businesses in the VMS
Industry. In fiscal 1995, the Company completed three additional significant
acquisitions, the Premier Acquisition in October 1994, the KAL/Max Acquisition
in January 1995 and the Monarch Acquisition in September 1995, collectively
referred to as the "Fiscal 1995 Acquisitions."
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of operations
data as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
1995 1996 1997
<S> <C> <C> <C>
Net sales................................... 100.0% 100.0% 100.0%
Cost of sales............................... 57.0 53.7 53.3
-------- -------- --------
Gross profit................................ 43.0 46.3 46.7
Selling, general and administrative ........ 34.0 32.9 29.7
Amortization of intangibles................. 1.7 1.8 1.4
One-time payment to executive officer....... -- -- 1.7
-------- -------- --------
Income from operations...................... 7.3 11.6 13.9
Interest expense, net....................... 7.1 8.5 6.7
-------- -------- --------
Income before provision for income taxes.... 0.2 3.1 7.2
Provision for income taxes.................. 0.0 1.3 2.8
-------- -------- --------
Net income from operations before
extraordinary loss......................... 0.2 1.8 4.4
Extraordinary loss on early extinguishment
of debt, net of tax........................ (0.8) -- --
-------- -------- --------
Net income (loss)........................... (0.6)% 1.8% 4.4%
======== ======== ========
</TABLE>
COMPARISON OF FISCAL 1997 TO FISCAL 1996
Net Sales. Net sales increased by $14.2 million, or 16.9%, to $98.1 million
for fiscal 1997 from $83.9 million for fiscal 1996. The increase in net sales
was primarily the result of increased sales volume and, to a lesser extent,
minimal increases in the prices of the Company's products. Such price
increases were immaterial to revenue growth. The Company believes that the
increased volume was primarily attributable to industry growth as well as to
the success of the Company's new growth-based incentive compensation structure
for independent sales representatives and the success of new product
introductions.
Gross Profit. Gross profit increased by $7.0 million, or 18.0%, to $45.8
million for fiscal 1997 from $38.8 million for fiscal 1996. This increase in
gross profit was primarily attributable to growth in sales volume. As a
percentage of net sales, gross profit increased to 46.7% for fiscal 1997 from
46.3% for fiscal 1996. This increase in gross profit as a percentage of net
sales was primarily attributable to decreased material costs associated with
new vendor sourcing.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $1.6 million, or 5.7%, to $29.2 million
for fiscal 1997 from $27.6 million for fiscal 1996. As a percentage of net
29
<PAGE>
sales, selling, general and administrative expenses decreased to 29.7% for
fiscal 1997 from 32.9% for fiscal 1996. This decrease in selling, general and
administrative expenses as a percentage of net sales was primarily
attributable to the Company's efforts to implement new incentive and cost
control programs.
Amortization of Intangibles. Amortization of intangibles decreased by $0.2
million, or 9.2%, to $1.3 million for fiscal 1997 from $1.5 million for fiscal
1996. As a percentage of net sales, amortization of intangibles decreased to
1.4% for fiscal 1997 from 1.8% for fiscal 1996. This decrease in amortization
of intangibles was primarily attributable to the use of the declining balance
method of amortization associated with certain non-compete covenants arising
from the Fiscal 1995 Acquisitions.
One-Time Payment to Executive Officer. One-time payment to executive officer
of $1.7 million for fiscal 1997 represents a payment to the Company's Chief
Executive Officer for successfully positioning the Company for the Offering.
Interest Expense, Net. Interest expense decreased by $0.5 million, or 7.8%,
to $6.6 million for fiscal 1997 from $7.1 million for fiscal 1996. As a
percentage of net sales, interest expense decreased to 6.7% for fiscal 1997
from 8.5% for fiscal 1996. This decrease in interest expense was primarily
attributable to decreased indebtedness associated with the Revolving Credit
Facility.
Provision for Income Taxes. The Company's effective tax rate decreased to
39.5% for fiscal 1997 from 40.5% for fiscal 1996. In each fiscal year, the
effective tax rate is higher than statutory rates primarily due to the non-
deductibility for tax purposes of goodwill amortization arising from the
Solaray Acquisition. The impact of Solaray goodwill on the effective tax rate
for 1997 decreased compared to fiscal 1996 as a result of the Company's higher
income before provision for taxes.
COMPARISON OF FISCAL 1996 TO FISCAL 1995
Net Sales. Net sales increased by $21.0 million, or 33.4%, to $83.9 million
for fiscal 1996 from $62.9 million for fiscal 1995. The increase in net sales
was primarily the result of increased sales volume. The Company believes that
the increased volume was primarily attributable to the Fiscal 1995
Acquisitions as well as to industry growth and the success of new product
introductions. The Company is unable to quantify the increase in revenues
attributable to acquisitions because it has fully integrated the acquired
businesses and does not maintain data that would allow it to separately report
growth from acquisitions.
Gross Profit. Gross profit increased by $11.8 million, or 43.5%, to $38.8
million for fiscal 1996 from $27.0 million for fiscal 1995. This increase in
gross profit was primarily attributable to growth in sales volume. As a
percentage of net sales, gross profit increased to 46.3% for fiscal 1996 from
43.0% for fiscal 1995. This increase in gross profit as a percentage of net
sales was primarily attributable to the negative impact on fiscal 1995 gross
profit of the one-time step-up in inventory value related to the Solaray and
Premier acquisitions, offset somewhat by a shift in sales mix attributable to
the Fiscal 1995 Acquisitions.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $6.2 million, or 29.0%, to $27.6 million
for fiscal 1996 from $21.4 million for fiscal 1995. As a percentage of net
sales, selling, general and administrative expenses decreased to 32.9% for
fiscal 1996 from 34.0% for fiscal 1995. This decrease in selling, general and
administrative expenses as a percentage of net sales was primarily
attributable to the Company's efforts related to the consolidation of the
Fiscal 1995 Acquisitions.
Amortization of Intangibles. Amortization of intangibles increased by $0.4
million, or 40.0%, to $1.5 million for fiscal 1996 from $1.1 million for
fiscal 1995. As a percentage of net sales, amortization of intangibles
increased to 1.8% for fiscal 1996 from 1.7% for fiscal 1995. This increase in
amortization of intangibles was primarily attributable to the Fiscal 1995
Acquisitions. During fiscal 1996, twelve months of amortization expense
related to these acquisitions was incurred compared to less than twelve months
for fiscal 1995.
Interest Expense, Net. Interest expense increased by $2.6 million, or 59.1%,
to $7.1 million for fiscal 1996 from $4.5 million for fiscal 1995. As a
percentage of net sales, interest expense increased to 8.5% for fiscal 1996
30
<PAGE>
from 7.1% for fiscal 1995. This increase in interest expense was primarily
attributable to increased term debt arising from the Fiscal 1995 Acquisitions.
During fiscal 1996, twelve months of interest expense related to this debt was
incurred compared to less than twelve months for fiscal 1995. The Company also
incurred increased interest expense for additional borrowings under the
Revolving Credit Facility used to finance the Monarch Acquisition and the
Company's operating needs.
Provision for Income Taxes. The Company's effective tax rate was 40.5% for
fiscal 1996 as compared to a benefit rate of 22.5% for fiscal 1995. In each
fiscal year, the effective tax rate varied from the statutory rate primarily
due to the non-deductibility for tax purposes of amortization arising from the
Solaray Acquisition.
Extraordinary Loss on Early Extinguishment of Debt. An extraordinary loss on
early extinguishment of debt of $0.5 million, net of tax, was recognized in
fiscal 1995. This loss was incurred in connection with the Fiscal 1995
Acquisitions when new financing under the Existing Credit Agreement was used
to extinguish previous debt arising from the Solaray Acquisition.
SEASONALITY
The Company believes that its business is characterized by minor
seasonality. Historically, the Company has recorded higher sales volume during
the second and third quarters due to increased interest in health-related
products among consumers following the holiday season and in anticipation of
the summer months. The Company does not believe that the impact of seasonality
on its results of operations is material. In addition, the Company's sales of
premium bulk formulations are characterized by periodic shipments to certain
customers and can vary from quarter to quarter.
LIQUIDITY AND CAPITAL RESOURCES
For the fiscal year ended September 30, 1997, net cash provided by (used in)
operations was $9.4 million compared to $4.6 million for the year ended
September 30, 1996 and $(0.1 million) for the year ended September 30, 1995.
The increase in fiscal 1997 was primarily attributable to higher net income
and reflects higher levels of accounts payable and deferred income taxes,
offset by higher accounts receivable and inventory balances arising from
higher sales volume. The increase in fiscal 1996 from fiscal 1995 was
primarily attributable to higher net income and reflects a lower level of
accounts receivable combined with a higher level of deferred income taxes,
offset by lower levels of accounts payable and accrued expenses and a higher
level of inventory.
Net cash used in investing activities was $3.7 million, $5.5 million and
$49.2 million for the years ended September 30, 1997, 1996 and 1995,
respectively. The Company's investing activities consist primarily of
acquisitions and, to a lesser extent, costs associated with capital
expenditures. The higher level of cash used in investing activities for fiscal
1995 reflects the Company's purchase of net assets related to the Fiscal 1995
Acquisitions. Capital expenditures during fiscal 1997 and fiscal 1996 related
primarily to manufacturing equipment and information systems required to
expand capacity and improve overall operating efficiency. The Company
anticipates additional capital expenditures during fiscal 1998 of
approximately $4.0 million to purchase additional manufacturing equipment and
information systems in connection with the Company's consolidation of the
existing facilities into the new facility. The Company intends to finance
these anticipated capital expenditures through internally generated cash flow
and, if necessary, through funds provided under the Existing Credit Agreement
or the New Credit Agreement.
Net cash provided by (used in) financing activities was $(3.6) million, $2.6
million and $49.6 million for the years ended September 30, 1997, 1996 and
1995, respectively. The Company's financing activities consist primarily of
the borrowings incurred in connection with the Fiscal 1995 Acquisitions and,
to a lesser extent, borrowings and repayments on the Revolving Credit Facility
related to operating needs.
The Existing Credit Agreement currently consists of three components: the
Term A Loan, the Term B Loan and the Revolving Credit Facility. The Company
had borrowings of $37.0 million, $15.0 million (before unamortized discount of
$2.6 million) and $9.2 million outstanding under the Term A Loan, the Term B
Loan
31
<PAGE>
and the Revolving Credit Facility, respectively, at September 30, 1997. The
Revolving Credit Facility permits the Company to make borrowings in a
principal amount not to exceed $15.0 million at any time outstanding. The
Revolving Credit Facility is to be repaid not later than January 31, 2003. The
Term A Loan is required to be repaid in quarterly installments beginning April
30, 1998 with final maturity of January 31, 2003. The Term B Loan is to be
repaid not later than January 31, 2004.
Borrowings under the Existing Credit Agreement for the Revolving Credit
Facility may, at the Company's option, bear interest at either LIBOR plus
3.00% or the lenders base rate plus 1.50%. With respect to borrowings under
the Term A Loan, the Company may select either LIBOR plus 3.25% or the
lender's base rate plus 1.75%. For the Term B Loan, the Company may select
either LIBOR plus 4.00% or the lender's base rate plus 2.50%.
Borrowings under the Existing Credit Agreement are secured by a perfected
first priority security interest in substantially all of the assets of the
Company and its subsidiaries. The Existing Credit Agreement contains
restrictive covenants, including restrictions on the incurrence of other
indebtedness, limitations on capital expenditures, requirements that the
Company maintain a minimum level of consolidated net worth, a minimum ratio of
cash flow to fixed charges, a minimum level of Adjusted EBITDA, and a maximum
ratio of debt to Adjusted EBITDA. Upon the occurrence of an event of default
under the Existing Credit Agreement, the lender may require the Company to
repay all amounts borrowed thereunder and may proceed against the collateral.
The Existing Credit Agreement also restricts the Company's ability to make
certain payments, including the payment of dividends on its Common Stock and
payments with respect to certain capital expenditures, without the approval of
its lenders.
The Company has negotiated a commitment letter with respect to the proposed
execution of the New Credit Agreement, with which it expects to refinance its
existing indebtedness under the Existing Credit Agreement in connection with
the Offering. The Company expects that the New Credit Agreement will provide
for revolving credit borrowings of up to $70.0 million and have a scheduled
maturity in 2003. Borrowings under the New Credit Agreement are expected to
bear interest at rates equal to LIBOR plus a margin ranging from 0.5% to 2.0%,
based on the Company's then-current leverage ratio. At the consummation of the
Offering, the Company expects the interest rate under the New Credit Agreement
to be LIBOR plus 0.875%. The New Credit Agreement is also expected to provide
for alternate rates based upon prime. The Company anticipates that the New
Credit Agreement will be secured by substantially all of the assets of the
Company and generally will contain restrictive covenants, financial tests and
events of default similar to those in the Existing Credit Agreement. To date,
no definitive agreements have been executed and, as a result, no assurance can
be given that the New Credit Agreement will be executed on such terms or
entered into at all. In the event the Company does not renegotiate, amend or
replace the Existing Credit Agreement prior to the consummation of the
Offering, net proceeds of the Offering will be used to repay $26.5 million of
the outstanding indebtedness under the Term A Loan.
A key component of the Company's business strategy is to seek to make
additional acquisitions, which will likely require that the Company obtain
additional financing, which could include the incurrence of substantial
additional indebtedness. The Company believes that following the Offering,
based on current levels of operations and anticipated growth, borrowings under
the Existing Credit Agreement or a replacement credit facility, together with
cash flow from operations, will be sufficient to make required payments under
the Existing Credit Agreement or any such replacement facility, make its
anticipated capital expenditures and fund working capital needs for fiscal
1998.
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 and 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.
32
<PAGE>
BUSINESS
GENERAL
Nutraceutical is one of the nation's largest manufacturers and marketers of
quality branded nutritional supplements sold to health food stores. The
Company sells its branded products under the Solaray, KAL, NaturalMax,
VegLife, Premier One and Solar Green brand names directly and exclusively to
health food stores in the United States and internationally primarily to
distributors and retailers. In addition to branded products, the Company
manufactures premium bulk formulations for sale to other manufacturers and
marketers in the nutritional supplement industry. Since its formation in 1993,
the Company has achieved rapid growth. See "Selected Historical Financial
Information."
The Company's strategy of selling its branded products directly and
exclusively to the approximately 9,700 stores in the Healthy Foods Channel has
enabled it to benefit from the rapid growth of the Healthy Foods Channel. The
Company believes that it is among the largest suppliers of nutritional
supplements to the Healthy Foods Channel that develops, manufactures, markets
and directly distributes a majority of its own products. The Company offers
one of the broadest branded product lines in the industry with approximately
800 products and 1,400 SKUs, including approximately 200 SKUs exclusively sold
internationally. None of the Company's products represented more than 2% of
fiscal 1997 net sales. The Company markets its branded products through the
industry's largest sales force dedicated to the Healthy Foods Channel. The
Company seeks to be the market leader in the development of new and innovative
products, introducing 172 new SKUs (including 147 new formulations) in fiscal
1997. The Company manufactured over 90% of its products in fiscal 1997 and
believes that the quality of its products is among the highest in the
industry.
The VMS Market is highly fragmented and rapidly growing, generating $6.5
billion in 1996 sales, as compared to $5.0 billion in 1994. The Company
believes that this rapid growth is due to a number of factors, including (i)
increased interest in healthier lifestyles, (ii) the publication of research
findings supporting the positive health effects of certain nutritional
supplements and (iii) the aging of the "Baby Boom" generation combined with
the tendency of consumers to purchase more nutritional supplements as they
age.
The Healthy Foods Channel consists of approximately 9,700 retailers
including (i) independent health food stores, (ii) health food stores
affiliated with local, regional and national health food chains (including
healthy food supermarket chains, such as Whole Foods Market and Wild Oats
Markets) and (iii) GNC stores. The Company believes that the Healthy Foods
Channel will continue to experience strong growth based on the continued
expansion of independent health food stores and local, regional and national
health food chains in response to strong demand from consumers who desire
product education, service and high quality natural ingredients. The Company
believes there are significant differences between mass market retailers (such
as drugstores, warehouse clubs and supermarkets), which typically offer a
limited selection of discounted and lower potency items, and the Healthy Foods
Channel, where natural ingredients, quality, potency, selection and customer
support are more important. The Company benefits from substantially greater
customer diversification than most of its larger competitors, with no single
customer representing more than 5.5% of fiscal 1997 net sales.
The Company believes that the VMS Market and the Healthy Foods Channel are
large and growing rapidly and that the Company is well positioned to
capitalize on such growth. According to the Packaged Facts Report:
. The VMS Market grew at a 14.2% compound annual rate from 1994 to 1996
and is projected to grow at a 13.6% compound annual rate from 1996 to
2001, to $12.3 billion;
. The Healthy Foods Channel generated $2.5 billion of retail sales in
1996, or 38.2% of the total VMS Market, representing the largest single
channel;
. The Healthy Foods Channel has been growing faster than the total VMS
Market, achieving a 16.7% compound annual growth rate from 1994 to 1996;
and
33
<PAGE>
. Sales of supplements (as defined in the Packaged Facts Report) in the
VMS Market grew at a 35.6% compound annual rate from 1994 to 1996 and
are expected to grow at a 25.0% compound annual rate from 1996 to 2001.
Sales of supplements, the fastest growing segment of the VMS Market,
represented 61.7% of the Company's fiscal 1997 net sales of branded
products, as compared to 35.2% of the total VMS Market.
The Company was formed in 1993 by senior management and Bain Capital to
effect a consolidation strategy in the highly fragmented VMS Industry, which
consists of over 400 manufacturers and marketers domestically. Since its
formation, the Company has successfully completed four acquisitions, including
Solaray, Premier One, KAL and Monarch. As a result of these acquisitions and
internal growth, the Company has achieved rapid growth in net sales and
operating income. Management believes that the Company is well positioned to
continue to capitalize on the consolidation occurring in the VMS Industry. To
increase the Company's operating efficiency and provide capacity for
additional expansion, the Company is in the process of negotiating a lease for
a 250,000 square foot facility into which the Company intends to consolidate
seven of its current facilities.
BUSINESS STRATEGY
The Company's strategy is to enhance its position as a leader in supplying
quality branded products to the Healthy Foods Channel while continuing to
generate rapid growth in sales and profitability. Unlike many of its
competitors, the Company has chosen to focus exclusively on the Healthy Foods
Channel. Specifically, the Company seeks to:
. INCREASE MARKET SHARE IN THE RAPIDLY GROWING HEALTHY FOODS CHANNEL. The
Company's strategy is to increase its share in the rapidly growing
Healthy Foods Channel by (i) continuing to emphasize exclusive sales of
its existing branded products to the Healthy Foods Channel, (ii)
utilizing multiple brands and (iii) expanding its salesforce and its
geographic coverage:
--Exclusivity to the Healthy Foods Channel. The Company believes that
retailers in the Healthy Foods Channel favor brands that are sold
exclusively to the Healthy Foods Channel (i.e., that are not available
through mass marketers) and that, as a result, retailers will continue
to allocate additional shelf space to the Company's products.
--Multiple Brand Strategy. The Company currently markets its products
through a multiple brand strategy that the Company believes has been
successful in encouraging retailers to allocate additional shelf space
to the Company's brands. The Company intends to continue expanding its
brands by extending existing product lines and developing new product
lines. See "--Products."
--Largest Sales Force Targeting the Healthy Foods Channel. The Company
markets its products through a substantially larger direct sales force
dedicated to the Healthy Foods Channel than that of any competitor.
The Company currently anticipates adding additional individuals to its
sales force to increase its sales efforts in certain highly populated
areas that are currently underpenetrated by the Company. In
particular, the Company seeks to increase its presence in the
Northeast and Mid-Atlantic states including such markets as New York
City, Long Island, Boston, Philadelphia and Washington D.C. In 1997,
the Company implemented a new payment structure for its sales force
that provides additional incentives for sales growth.
. CONTINUE TO MAKE STRATEGIC ACQUISITIONS. The Company was founded in 1993
to effect a consolidation strategy in the fragmented VMS Industry. The
Company plans to continue to capitalize on the significant opportunities
for consolidation available in the VMS Industry. To date, the Company
has successfully completed four acquisitions and will seek additional
acquisitions that serve to expand the Company's brand names, broaden its
product offerings or facilitate entry into complementary distribution
channels.
. CONTINUE TO DEVELOP NEW PRODUCTS AND PRODUCT EXTENSIONS. The Company is
a market leader in the development of new and innovative products.
During fiscal 1997, the Company introduced 147 new
34
<PAGE>
formulations of branded products compared to 46 in fiscal 1996. Branded
products introduced in 1996 and 1997 represented 16.8% of fiscal 1997
net sales of branded products. The Company plans to continue developing
new products as a significant element of its future growth.
. CAPITALIZE ON STRONG INTERNATIONAL GROWTH. The Company believes that
international sales represent a significant growth opportunity.
Currently, the Company markets its products in over 30 countries,
principally through international distributors. Net sales by Au Naturel,
Inc., the Company's international subsidiary, grew 21.4% from 1996 to
1997 and represented 6.5% of the Company's fiscal 1997 net sales. The
Company plans to continue to aggressively pursue international sales by
adding additional salespeople, expanding its distribution and retailer
network in high growth regions and continuing its efforts to register
products and trademarks in attractive foreign markets.
The Company's implementation of the foregoing business strategy is subject
to a number of risks and may cause the Company to incur additional expenses in
future periods. See "Risk Factors--Risks Associated with Implementation of
Business Strategy," "--Risks Associated with Acquisitions" and "--Risks
Associated with International Markets."
PRODUCTS
The Company currently sells approximately 800 different branded products and
1,400 SKUs, including approximately 200 SKUs exclusively sold internationally.
The Company's products generally fall into one of three categories: (i)
supplements, (ii) vitamins and minerals and (iii) diet, energy and other,
representing approximately 820, 510 and 70 SKUs, respectively. The Company's
products come in various formulations and delivery forms, including tablets,
capsules, softgels, liquids, powders and whole herbs. Many of the Company's
products are marketed under two or more brand names. For example, saw palmetto
berry and coenzyme Q-10 are both sold through the KAL and Solaray product
lines, as are many of the Company's other popular items such as gingko biloba,
various minerals, single vitamins and digestive supplements. The Company's
most popular products include the following: CranActin, Echinacea, Gingko
Biloba, Pygeum/Saw Palmetto, Royal Jelly, St. John's Wort, Super DietMax and
multivitamin/mineral formulas, such as Spectro.
The Company currently markets its products through a multiple brand strategy
that the Company believes has been successful in encouraging retailers to
allocate additional shelf space to the Company's brands. The Company has
enhanced the strength of all of its brands since their respective acquisitions
by (i) consolidating sales forces and increasing the brands' geographic
coverage through an expanded sales force, (ii) instituting performance and
growth based incentives for brand managers and sales representatives, (iii)
introducing more sophisticated management information systems and (iv)
updating the brand's packaging.
The Company's portfolio of established brand names consists of the
following:
Solaray. Solaray began manufacturing and selling herbal products in 1973,
originally as a pioneer in formulating and marketing blended herbal products,
which contain two or more herbs with complementary effects. From its
inception, Solaray focused on encapsulated products, which offer rapid
disintegration and are easy to swallow, and for over ten years has sold its
products through independent sales representatives to the Healthy Foods
Channel. By 1984, Solaray had become a full line manufacturer, carrying not
only herbs, but also a full line of vitamins and minerals. Solaray has become
one of the most popular and well-known brands of nutritional supplements in
the Healthy Foods Channel, and has developed a reputation for quality,
consistency and innovation. Three of the most popular products developed by
Solaray include (i) Spectro, considered by many to be the premier
multivitamin/mineral supplement, (ii) CranActin, which the Company believes is
the best-selling cranberry supplement in the Healthy Foods Channel, and (iii)
Pygeum/Saw Palmetto, two ingredients intended to help maintain a healthy
prostate. As of September 30, 1997, the Solaray line consisted of 629 SKUs.
Solaray's brand packaging is consistently distinguished by white bottles with
a rainbow of seven colors across the top of the label as a backdrop to the
distinctive Solaray logo.
35
<PAGE>
KAL. The KAL product line was established in Southern California in 1932 as
one of the first nutritional supplement lines in the United States. Although
KAL's first products were in powdered form, KAL soon shifted its focus to
tableted products, which are more economical than capsules as a delivery form
and which allow for fewer units per dose than encapsulated products. KAL has
been a pioneer in the introduction of new and innovative products, as well as
new and unique delivery forms. Among its innovative product introductions was
Beyond Garlic, which remains a popular garlic product in the Healthy Foods
Channel and was the first "enteric coated softgel" garlic product. This unique
delivery form allowed for fresh garlic oil inside of a softgel to pass through
the stomach into the intestine before being digested, thereby virtually
eliminating any potential garlic odor. KAL was also the first nutritional
supplement marketer in the Healthy Foods Channel to introduce pycnogenol and
melatonin. More recently, KAL has been an innovator in introducing lipospray
products, a new delivery form that allows for quick absorption through a
liquid spray. As of September 30, 1997, the KAL line consisted of 593 SKUs.
KAL's brand packaging consists of a white bottle with a red and platinum label
distinguished by a diagonal white stripe, platinum borders and a circular red
and black KAL logo.
NaturalMax. The NaturalMax brand began as a product line of the KAL brand in
approximately 1993, with a focus on diet products (with diet plans) as well as
energy and rest products. The NaturalMax brand uses tablets, softgels,
capsules and liquids, depending on the most desired form for the particular
product. After the KAL/Max Acquisition, the Company established NaturalMax as
a separate brand in order to bring special focus to the NaturalMax product
line. The product line includes such innovative and popular products as Super
DietMax (which recently received the Vity Award as the number one diet product
in the Healthy Foods Channel) and Thin-Thin, a nutritional supplement and diet
plan with natural 5-HTP derived from griffonia beans. As of September 30,
1997, the NaturalMax line consisted of 85 SKUs. The packaging of NaturalMax
products always includes the distinctive NaturalMax logo.
Premier One. The Premier One brand was founded in July 1984 in Omaha,
Nebraska as one of the first product lines devoted entirely to natural,
nutritional supplements derived from bee products. The Premier One brand uses
various delivery forms, each chosen for its particular benefits, including
capsules, chewable wafers, granules, energy bars, tinctures and products in a
honey base. The Company believes that by 1995 the Premier One Royal Jelly
products had become the best-selling royal jelly products in the Healthy Foods
Channel. As of September 30, 1997, the Premier One line consisted of 42 SKUs.
Aside from Royal Jelly in Honey, some of Premier One's other popular products
include Raw Energy, an energy product that includes royal jelly, bee pollen
and a variety of herbs, and Beefense, a popular product which includes bee
propolis and echinacea. Premier One's brand packaging includes a distinctive
logo of a bee harvesting scene in a mountain setting, with gold highlights on
the label.
VegLife. VegLife is relatively new brand which began in 1992 as a product
line under the Solaray brand. The goal was to create a line of products that
would be suitable for strict vegetarians, who will not consume any products
which include any animal-derived ingredients, including gelatin capsules.
VegLife was among the first to introduce a line of nutritional supplements
using a cellulose-based capsule with substantially equivalent characteristics
to traditional gelatin capsules. Vegetarian consumers showed substantial
interest in this product line, and the Company established it as a separate
brand in 1995 in order to allow a management team to focus on the development
of a full line of vegetarian products. This team scrutinizes every element of
each product developed, as well as the materials used in formulation, to
ensure that strict vegetarian standards are met. The VegLife brand focuses
primarily on encapsulated products, but also now includes a popular soy-based
protein drink supplement sold under the trademark Peaceful Planet. As of
September 30, 1997, the VegLife brand included 38 SKUs. VegLife's brand
packaging includes a distinctive green and blue label, as well as a logo with
an attractive depiction of a budding plant.
Solar Green. Solar Green was launched in April of 1997 as the Company's
newest brand. The Solar Green brand is focused on chlorophyll-laden "green
foods," such as algaes (including chlorella, spirulina and blue green algae)
and cereal grasses (such as barley and wheat grass). These products are
currently offered in tablet forms. Solar Green also recently introduced three
separate "green food" drink mixes which can be
36
<PAGE>
combined with juice or water to create a nutritious beverage supplement. As of
September 30, 1997, the Solar Green brand included five tableted products and
three green drink mixes. Solar Green's brand packaging includes a distinctive
Solar Green logo and a label with green borders and accents.
SALES AND MARKETING
The Company promotes demand for its products by educating retailers, who in
turn educate consumers, as to the qualities of its natural vitamin, mineral
and herbal nutritional supplements and the wide range of its products. The
Company's branded products are currently sold in the United States exclusively
to retailers in the Healthy Foods Channel, which consists of approximately
9,700 stores, including approximately (i) 5,700 independent health food
stores, (ii) 1,000 health food stores affiliated with local, regional and
national health food chains (including healthy food supermarket chains such as
Whole Foods Market and Wild Oats Markets) and (iii) 3,000 GNC stores. Unlike
many of its competitors, the Company sells its branded products in the United
States exclusively to the Healthy Foods Channel. The Company believes that its
products are attractive to retailers due to factors such as the strength of
its brand names, the quality and potency of its products, service and the
availability of sales support and educational materials regarding the
products.
The Company markets its products through a substantially larger direct sales
force dedicated to the Healthy Foods Channel than that of any competitor. The
Company's 56 independent sales representatives regularly visit each assigned
health food store in their respective territories to provide product sales
assistance. In addition, to service its largest customers, the Company employs
nine key account representatives to provide sales and product support. The
Company's sales force educates retailers regarding the Company's products,
communicates special promotions, monitors inventory levels, performs in-store
demonstrations and assists retailers in other ways to promote sales of the
Company's products. In 1997, the Company implemented a new payment structure
for its sales force that provides additional incentives for sales growth. The
Company believes that this structure has resulted in improved customer service
and increased sales. The Company currently anticipates adding additional
individuals to its sales force to increase its sales efforts in certain highly
populated areas that are currently underpenetrated by the Company. In
particular, the Company seeks to increase its presence in the Northeast and
Mid-Atlantic states including such markets as New York City, Long Island,
Boston, Philadelphia and Washington D.C.
The Company also sells products directly to certain retailers through its
telephone marketing organization. The telephone marketing organization is
generally assigned accounts not covered by a sales representative or the key
accounts department and provides the retailer with information regarding
special promotions or pricing on certain products. The telephone marketing
organization is particularly well-suited for the rapid dissemination of
information regarding new products or programs.
The Company's marketing efforts are focused on educating retailers to enable
them to then educate the ultimate consumer about the Company's products. The
Company sponsors a retailer seminar program, which the Company believes has
made an important contribution to the growth of its brands. These seminars are
held both in Utah and in the field, on a regional and state by state basis.
The Company also sponsors seminars for consumers. Participants receive product
education presentations with background information relating to existing
products and with special emphasis given to new products. The Company's
seminars are designed to foster relationships with the Company's customers in
the Healthy Foods Channel and to increase retailer and consumer awareness of
the Company's products.
Au Naturel, Inc. ("Au Naturel") is a wholly-owned subsidiary of the Company
which was formed in fiscal 1995 for the purpose of marketing the Company's
branded products internationally. During fiscal 1997, Au Naturel marketed
products to distributors and customers in approximately 30 foreign countries.
As of September 30, 1997, it had approximately 200 branded formulations
labeled and designed for various foreign customers. Although Au Naturel is not
a product brand, it functions as a separate business unit. Au Naturel markets
standard and unique formulations that must meet specific requirements of
certain foreign countries, including minor product formulation and labeling
changes for Au Naturel's international customers. Au Naturel uses specialized
37
<PAGE>
labels to meet the specific requirements of each country. The Company believes
that international sales represent a significant growth opportunity. Net sales
by Au Naturel grew 21.4% from 1996 to 1997 and represented 6.3% and 6.5% of
the Company's fiscal 1996 and 1997 net sales, respectively.
RESEARCH AND DEVELOPMENT; QUALITY CONTROL
The Company has a strong commitment to research and development. The Company
believes that product quality and innovation are fundamental to its long-term
growth and success. Through its research and development efforts, the Company
seeks to (i) identify the active ingredients in current and potential new
products, (ii) test the safety, potency and efficacy of products, (iii)
develop more effective and efficient means of extracting ingredients for use
in products, (iv) develop testing methods for ensuring and verifying the
consistency of the dosage of ingredients included in the Company's products,
(v) develop new, more effective product delivery forms and (vi) develop new
products either by combining existing ingredients used in nutritional
supplements or identifying new ingredients that can be used in nutritional
supplements. The Company's efforts are designed to lead not only to the
development of new and improved products, but also to ensure effective
manufacturing quality control measures.
The Company has entered into a cooperative arrangement with Weber State
University in Ogden, Utah through which, among other things, the University
provides the Company with access to certain laboratory space and equipment.
The University has assigned one faculty member as a project director to
coordinate the use of any projects undertaken at the University facility. The
Company also conducts research and development in Company-owned laboratories.
The Company currently employs 13 professionals in its research and development
and quality control departments, including three with post-graduate degrees,
of which two are Ph.D.'s. These 13 professionals have degrees in chemistry,
botany, microbiology, nutrition and engineering and, in many cases, have
received training in natural health food products. In addition, the Company
retains the services of outside laboratories from time to time to validate its
product standards and manufacturing protocols.
The Company's quality control program seeks to ensure the superior quality
of the Company's products and that they are manufactured in accordance with
current Good Manufacturing Practices. The Company's processing methods are
monitored closely to ensure that only quality ingredients are used and to
ensure product purity. The Company has been a leader in establishing industry
product quality guidelines.
MANUFACTURING
The Company's manufacturing process generally consists of the following
operations (i) extracting the ingredients contained in a particular product
from a bulk source of such ingredient and measuring the ingredient for
inclusion in such product, (ii) blending the measured ingredients into a
mixture with a homogeneous consistency and (iii) encapsulating or tableting
the blended mixture into the appropriate dosage form using either automatic or
semiautomatic equipment. The next step, bottling and packaging, involves
placing the encapsulated or tableted product in packaging with appropriate
tamper-evident features and sending the packaged product to the distribution
point for delivery to retailers. The Company places special emphasis on
quality control and conducts inspections throughout the manufacturing process,
including raw material verification, homogeneity tests, weight deviation
measurements and package quality sampling. See "--Research and Development;
Quality Control."
The Company manufactured over 90% of its products in fiscal 1997, based on
net sales. By manufacturing the majority of its own products, the Company
believes it maintains better control over product quality and availability
while also reducing production costs. The Company's manufacturing operations
are performed in its facilities located in the greater Ogden, Utah area. Total
manufacturing square footage is approximately 60,000 square feet. In addition,
the Company currently performs more than 90% of all packaging of its branded
products, based on SKUs. The Company also has a working relationship with
numerous outside manufacturers and packagers and utilizes these outside
sources from time to time. The Company does not have a material amount of
backlogged orders for its products.
38
<PAGE>
Monarch Nutritional Laboratories and Great Basin Botanicals source raw
material components, provide contract grinding and milling services,
manufacture premium bulk formulations and supply these to the Company and
other marketers of nutritional supplements, including, in certain cases,
competitors of the Company. Monarch was acquired in September 1995, and
certain assets of Great Basin were purchased in March 1997. As of September
30, 1997, Monarch/Great Basin manufactured and sold 789 different products and
combinations.
MANAGEMENT INFORMATION AND COMMUNICATION SYSTEMS
Beginning in November 1995, the Company installed an upgraded client server
computer system for handling order entry and invoicing, shipping, warehouse
operations and customer service inquiries. The new system provides more
efficient product delivery and more detailed order information and allows for
better inventory management. The Company believes that this system has
improved operating efficiencies and customer service. In addition, the Company
has installed a state-of-the-art telephone communication system which provides
the platform for computer-telephone integration and facilitates intra-company
communication.
The "Year 2000" issue concerns the potential exposures related to the
automated generation of business and financial misinformation resulting from
the application of computer programs which have been written using two digits,
rather than four, to define the applicable year of business transactions. The
Company does not anticipate any significant costs, problems or uncertainties
associated with becoming Year 2000 compliant and is currently developing a
plan to ensure that its computer systems are modified to be compliant on a
timely basis.
MATERIALS AND SUPPLIERS
The Company utilizes a centralized purchasing staff, employing individuals
with extensive product knowledge and experience related to herbs, minerals,
bulk products, bottles, caps, labels, packaging and advertising, marketing and
selling material and merchandise. The purchasing department, in cooperation
with the quality control department, maintains supplier relationships and
gathers market information to inform management of issues that might adversely
impact the Company's ability to acquire sufficient quantities of raw materials
to meet customer demand. The Company engages in extensive sample testing of
raw materials to be incorporated in the Company's products.
The Company believes that its continued success will depend upon the
availability of raw materials that permit the Company to meet its labeling
claims, quality control standards and demand for unique ingredients. Due to
issues related to quality, efficacy, safety or third-party intellectual
property protection, a number of the Company's branded products (which
accounted for approximately 31% of the Company's fiscal 1997 net sales)
contain one or more of approximately 72 ingredients that may only be available
from a single source or supplier. In addition, the supply of herbal products
is subject to the same risks normally associated with agricultural production,
such as climatic conditions, insect infestations and availability of manual
labor for harvesting. Any significant delay in or disruption of the supply of
raw materials could substantially increase the cost of such materials and
could require product reformulations, as well as the qualification of new
suppliers and repackaging. Accordingly, while no single product accounted for
more than 2% of the Company's net sales in fiscal 1997, there can be no
assurance that the disruption of the Company's supply sources will not have a
material adverse effect on the Company.
Although the Company acquires the majority of its raw materials from U.S.
suppliers, the ingredients of a number of the Company's products (which
accounted for approximately 38% of the Company's fiscal 1997 net sales)
include one or more of approximately 188 ingredients that originate outside of
the United States. The Company's business is therefore subject to the risks
generally associated with doing business outside the United States, such as
delays in shipments, embargoes, changes in economic and political conditions,
tariffs, foreign exchange rates and trade disputes. The Company's business is
also subject to the risks associated with the enactment of United States and
foreign legislation and regulations relating to imports and exports, including
quotas, duties, taxes or other charges or restrictions that could be imposed
upon the importation of products into the United States.
39
<PAGE>
The Company seeks to mitigate the risk of the shortage of certain raw
materials through its relationships with approximately 100 principal
suppliers. To help reduce the possibility of shortages, the Company acquired
Monarch, a manufacturer of premium bulk formulations, in fiscal 1995 and in
fiscal 1997 purchased manufacturing equipment and hired personnel to allow
more extensive vertical integration and to improve the quality and consistency
of ingredients.
DISTRIBUTION
The Company ships the majority of its products directly to retailers via
Federal Express. Shipments are generally made from the Company's primary
distribution facilities in Clearfield, Utah and Memphis, Tennessee. These
distribution facilities have been strategically located to reduce the
Company's expenses relating to outbound freight charges without sacrificing
delivery times. Each facility has approximately 25,000 square feet of floor
space. Certain of the Company's largest customers receive shipments directly
from the Company's central warehouse, located in a separate facility in
Clearfield, Utah, which also services the Company's two primary distribution
centers.
The Company is in the process of negotiating a lease for a 250,000 square
foot facility in the Ogden, Utah area in which it intends to consolidate
distribution and certain other operations which are currently being performed
in seven different buildings and locations. This facility will be designed to
respond quickly to customer demands for the Company's products with a minimum
of out-of-stocks and a minimum of finished goods inventory. By integrating the
bulk product inventory distribution operation with the bottling and packaging
operation, the Company believes it will be able to bottle and package finished
goods on a more selective customer demand basis. The Company expects that its
Memphis, Tennessee facility will continue to operate for Eastern distribution.
GOVERNMENT REGULATION
The formulation, manufacturing, processing, packaging, labeling,
advertising, distribution and sale of nutritional supplements such as those
sold by the Company are subject to regulation by one or more federal agencies,
principally the FDA and the FTC, and to a lesser extent the Consumer Product
Safety Commission and United States Department of Agriculture. These
activities are also regulated by various governmental agencies for the states
and localities in which the Company's products are sold, as well as by
governmental agencies in certain foreign countries in which the Company's
products are sold. Among other matters, regulation of the Company by the FDA
and FTC is concerned with claims made with respect to a product which refer to
the value of the product in treating or preventing disease or other adverse
health conditions.
Federal agencies, primarily the FDA and FTC, have a variety of remedies and
processes available to them, including initiating investigations, issuing
warning letters and cease and desist orders, requiring corrective labels or
advertising, requiring consumer redress (for example, requiring that a company
offer to repurchase products previously sold to consumers), seeking injunctive
relief or product seizure and imposing civil penalties or commencing criminal
prosecution. In addition, certain state agencies have similar authority, as
well as the authority to prohibit or restrict the manufacture or sale of
products within their jurisdiction. These federal and state agencies have in
the past used these remedies in regulating participants in the nutritional
supplements industry, including the imposition by federal agencies of civil
penalties in the millions of dollars against a few industry participants. In
addition, certain product lines now manufactured by the Company had been the
subject of investigations prior to the acquisition of those product lines by
the Company. Although none of these investigations has had a material adverse
effect on the Company, there can be no assurance that future regulatory action
will not have such an effect. There can be no assurance that the regulatory
environment in which the Company operates will not change or that such
regulatory environment, or any specific action taken against the Company, will
not result in a material adverse effect on the Company's business, financial
condition or results of operations. In addition, increased sales and publicity
of nutritional supplements may result in increased regulatory scrutiny of the
nutritional supplements industry.
40
<PAGE>
The Dietary Supplement Health and Education Act of 1994 (the "Act") was
enacted in October 1994, amending the Food, Drug and Cosmetic Act. The Company
believes this law is generally favorable to the dietary supplement industry.
The Act establishes a new statutory class of "dietary supplements," which
provide vitamins, minerals, herbs, amino acids and other dietary ingredients
for human use to supplement the diet. Dietary ingredients on the market as of
October 15, 1994 will not require the submission by the manufacturer or
distributor of evidence of a history of use or other evidence of safety
establishing that the supplement will reasonably be expected to be safe, but a
dietary supplement which contains a dietary ingredient which was not on the
market as of October 15, 1994 does require such submission of evidence of a
history of use or other evidence of safety. Among other things, this law
prevents the further regulation of dietary ingredients as "food additives" and
allows the use of statements of nutritional support on product labels.
The FDA is currently proposing to regulate the sale of nonprescription
products containing ephedra, a natural product that contains a small
percentage of ephedrine alkaloids which are used in some prescriptions and
over the counter stimulants and antihistamines. Approximately 3.9% of the
Company's fiscal 1997 net sales were derived from products that contain
ephedra. Various state legislatures and agencies have also expressed concern
regarding ephedra-based products. For example, Arkansas, Hawaii, Missouri,
Ohio, Florida and Texas have passed legislation or adopted regulations
regulating the over-the-counter sale of certain ephedra products or are
considering doing so. The Company believes that other states are considering
or will consider taking similar action and may take such action in the future.
The loss of sales of these products or a further limitation in the states and
other jurisdictions where these products may be sold could have a material
adverse effect on the Company.
In October 1997, the Company and a number of other suppliers, processors and
marketers of nutritional supplements received warning letters from the FDA
relating to an allegedly contaminated batch of an herb called plantain. These
letters claimed that the plantain, which had been shipped to the United States
from Europe, had been contaminated with another botanical product with
potentially harmful side effects. The letter that the Company received alleged
that some of this plantain had been included in a shipment of products that
Great Basin had processed for a third party on a contract basis. The Company
has replied to the FDA, explaining that, among other things, it did not own
the products or market them for human consumption but simply provided grinding
services for the owner of the herbs. The Company further noted to the FDA that
it did not process any plantain that could have been incorporated into any
products that were actually consumed as the only batch it processed was
returned to the supplier/owner following the FDA's initial press releases on
this matter. The Company has denied responsibility for any adverse effects and
affirmed its commitment to good manufacturing practices. There can be no
assurances that the FDA will not take further action and that, if taken, such
action will not result in a material adverse effect on the Company.
The Company has received a notice that it may be a defendant along with a
number of other participants in the dietary supplement industry in a
threatened action by certain private litigants or the Attorney General of the
State of California, which alleges that certain products containing fish and
salmon oils also may be in violation of a California law known as "Proposition
65" for failure to include required warning labels. Proposition 65 allows
private litigants or the California Attorney General to recover monetary
penalties or injunctive relief under certain circumstances. The Company
intends to dispute the allegations, and is considering joining a joint defense
group with other participants in the nutritional supplements industry who have
been named as defendants in such action. The Company also intends to explore
the possibility of seeking indemnification from the suppliers of the products
in question, which are simply bottled and distributed by the Company, as well
as from Old KAL (the seller in the KAL/Max Acquisition) with respect to sales
that occurred prior to the KAL/Max Acquisition.
On January 20, 1998, the Company received a written notice from an attorney
representing a private party that alleges that the Company violated
Proposition 65 by not providing appropriate warning statements with respect to
the level of lead contained in copper gluconate. This notice alleges that the
violation arises from the sale of bulk quantities of copper gluconate to a
wholesale customer. The private party that initiated this notice alleges that
it purchased some of these bulk products from the Company's customer. The
Company intends to
41
<PAGE>
dispute the notice and any potential claim arising therefrom. Both of the
foregoing Proposition 65 proceedings may result in monetary penalties, adverse
publicity, lost sales or a change in the Company's labeling as to the products
in question and could have a material adverse effect on the Company.
In March 1993, the staff of the Cleveland Regional Office of the FTC began
an investigation into advertising claims made by the seller in the KAL/Max
Acquisition, and made an inquiry to the Company in August 1995 concerning
certain products and claims associated with the KAL and NaturalMax product
lines. The Company has responded to the FTC and, to the Company's knowledge,
the FTC has taken no further action.
There can be no assurance that the foregoing proceedings or investigations
or any future proceedings or investigations will not have a material adverse
effect on the Company.
COMPETITION
The nutritional supplements segment of the natural health food products
industry is highly competitive. The Company's principal competitors in the
Healthy Foods Channel include a limited number of large nationally known
manufacturers (such as Twinlab Corporation, Solgar Vitamin and Herb Company,
Inc. and Nature's Way Products, Inc.) and many smaller manufacturers and
distributors of nutritional supplements. Certain of the Company's principal
competitors are larger than the Company, have greater access to capital and
may be better able to withstand volatile market conditions within the VMS
Industry. Moreover, because this industry generally has low barriers to entry,
additional competitors could enter the market at any time. In that regard,
although the VMS Industry to date has been characterized by many relatively
small participants, there can be no assurance that national or international
companies (which may include pharmaceutical companies or other suppliers to
mass merchandisers) will not seek in the future to enter or to increase their
presence in this industry. Increased competition in the industry could have a
material adverse effect on the Company.
INTELLECTUAL PROPERTY
As of September 30, 1997, the Company owned 34 trademarks which have been
registered with the United States Patent and Trademark Office and had filed
applications to register an additional 27 trademarks. In addition, the Company
claims domestic trademark and servicemark rights in numerous additional marks
used by the Company. The Company owns a number of trademark registrations in
foreign countries and is in the process of filing additional registration
applications in various countries. The Company regards its trademarks and
other proprietary rights as valuable assets and believes they make a
significant positive contribution to the marketing of its products.
The Company protects its legal rights concerning its trademarks by
appropriate legal action. The Company relies on common law trademark rights to
protect its unregistered trademarks. Common law trademark rights do not
provide the company with the same level of protection as afforded by a United
States federal registration of a trademark. In addition, common law trademark
rights are limited to the geographic area in which the trademark is actually
used, while a United States federal registration of a trademark enables the
registrant to stop the unauthorized use of the trademark by any third party
anywhere in the United States, even if the registrant has never used the
trademark in the geographic area wherein the unauthorized use is being made
(provided, however, that an unauthorized third party user has not, prior to
the registration date, perfected its common law rights in the trademark in
that geographic area). The Company has registered and intends to register its
trademarks in certain foreign jurisdictions where the Company's products are
sold. However, the protection available in such jurisdictions may not be as
extensive as the protection available to the Company in the United States.
The Company is currently involved in trademark infringement litigation
relating to the Solaray rainbow logo. The Company is vigorously defending the
suit and believes that its use of such logo does not infringe on the
plaintiff's registered trademark. See "Legal Proceedings."
42
<PAGE>
EMPLOYEES
At September 30, 1997, the Company and its subsidiaries employed over 400
full-time and over 30 part-time employees. None of the Company's employees is
represented by a collective bargaining unit. The Company believes that it has
a good relationship with its employees.
FACILITIES
The Company owns a manufacturing facility located in Ogden, Utah which
produces branded products for Solaray, KAL, NaturalMax, Premier One, VegLife
and Solar Green. The Company leases all other facilities, which lease terms
expire between 1997 and 2003. The following is a list of all facilities
utilized by the Company:
<TABLE>
<CAPTION>
PURPOSE LOCATION SQUARE FOOTAGE
<S> <C> <C>
Raw material and bulk distribution*......... Ogden, Utah 40,000
Brand manufacturing......................... Ogden, Utah 31,230
Finished goods warehouse*................... Clearfield, Utah 28,000
International and custom manufacturing*..... Clearfield, Utah 28,000
Western distribution*....................... Clearfield, Utah 25,200
Great Basin manufacturing*.................. Clearfield, Utah 24,700
Eastern distribution........................ Memphis, Tennessee 22,400
Monarch manufacturing*...................... Ogden, Utah 21,100
Brand marketing and product development..... Park City, Utah 8,480
Printing facility*.......................... Las Vegas, Nevada 7,974
Administrative offices and customer
service.................................... Ogden, Utah 7,830
Executive offices and corporate sales and
marketing.................................. Park City, Utah 6,103
Research, development and quality control... Ogden, Utah 1,813
</TABLE>
- ---------------------
* The operations currently housed in these facilities are expected to be
moved to the Company's proposed 250,000 square foot facility, a lease for
which is currently under negotiation.
The Company believes that each of its facilities is suitable for its current
use, however, the Company's new facilities are expected to improve upon the
suitability of its current facilities. Pending completion of the move to its
new facilities, the Company has negotiated lease extensions for those
facilities whose lease terms have expired or will expire prior to such move.
LEGAL PROCEEDINGS
The Company is currently a party to various claims and legal actions which
arise in the ordinary course of business. The Company believes such claims and
legal actions, individually or in the aggregate, will not have a material
adverse effect on the business, financial condition or results of operations
of the Company. The Company carries insurance coverage in the types and
amounts that management considers reasonably adequate to cover the risks it
faces in the industry in which it competes. There can be no assurance,
however, that such insurance coverage will be adequate to cover all losses
which the Company may incur in future periods.
The Company is also currently involved in a lawsuit relating to a former
international distributor of Old Premier in which the plaintiff alleges
damages as a result of the breach of the distribution agreement between Old
Premier and such person relating to the supply of products. The plaintiff
alleges that the Company assumed the contract. The Company does not believe
such claim, if successful, would have a material adverse effect on the
business, financial condition or results of operations of the Company.
The Company has been sued by American Cyanimid, the manufacturer of the
Centrum line of vitamin/mineral supplements. American Cyanimid alleges that
the Solaray rainbow logo, as well as the KAL rainbow logo (since abandoned)
infringes, or has infringed, on the Centrum color spectrum logo. The Company
believes the claim is without merit and is vigorously defending the lawsuit.
The case appears to be proceeding to trial, and although the Company expects
to prevail, there can be no assurance of this, nor any assurance that the
Company may not be required to pay damages or attorney fees and costs, and
change or abandon the Solaray rainbow logo.
43
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
The following table sets forth certain information concerning the directors,
executive officers and certain other key employees of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Frank W. Gay II............. 52 Director, Chairman of the Board and Chief
Executive Officer
Bruce R. Hough.............. 43 Director, President
Jeffrey A. Hinrichs......... 40 Director, Chief Operating Officer and Executive
Vice President
William T. Logan............ 55 Senior Vice President, Marketing and Sales
Leslie M. Brown, Jr......... 33 Senior Vice President, Finance and Chief
Financial Officer
Stanley E. Soper............ 34 Vice President, Legal Affairs
David M. Vance.............. 56 President, Au Naturel
Robert C. Gay............... 46 Director
Geoffrey S. Rehnert......... 40 Director
Matthew S. Levin............ 31 Director
</TABLE>
Frank W. Gay II has served as the Chairman of the Board of Directors of the
Company since its inception and as Chief Executive Officer since 1994. Mr. Gay
has been a partner of F.W. Gay & Sons, a private equity investment group, from
1967 to present.
Bruce R. Hough has served as a member of the Board of Directors of the
Company since its inception and was made its President in 1994. Prior to
joining the Company, Mr. Hough acted as a consultant from 1991 to 1992 and as
President of Keystone Communications, a telecommunications firm, from 1978 to
1991.
Jeffrey A. Hinrichs has served as the Chief Operating Officer and Executive
Vice President of the Company since 1994. Prior to joining the Company, Mr.
Hinrichs served as President of Solaray, now a subsidiary of the Company, from
1993 to 1994 and as Chief Financial Officer and in other management positions
with Solaray from 1984 to 1993.
William T. Logan has served as Senior Vice President, Marketing and Sales
since February 1995. Mr. Logan served as Senior Vice President of Old Kal from
1978 to January 1995. Prior to joining Old Kal, he held several sales and
marketing positions with Gillette.
Leslie M. Brown, Jr. joined the Company in January 1995 as Vice President
and Controller. Mr. Brown became Senior Vice President, Finance and Chief
Financial Officer in October 1997. Prior to joining the Company, he was
employed by Price Waterhouse LLP. Mr. Brown is a Certified Public Accountant.
Stanley E. Soper has been Vice President, Legal Affairs for the Company
since July 1997. Mr. Soper graduated from Yale Law School in 1991, and was in
private law practice from 1991 to 1997, most recently with Holland & Hart LLP.
David M. Vance served as the Senior Vice President--Administration and Chief
Financial Officer of the Company from May 1995 to July 1997. In July 1997, he
become President of Au Naturel. Prior to joining the Company, Mr. Vance was
Assistant Treasurer--International of Cooper Industries, a diversified
manufacturing company, from 1985 to 1995.
Robert C. Gay has served as a Director of the Company since its inception.
He has been a Managing Director of Bain Capital, Inc., a private equity firm,
since 1993, and has been a general partner of Bain Capital Venture Capital
since 1989. He is also Vice Chairman of the Board of Directors of IHF Capital,
parent of ICON Health and Fitness Inc., a manufacturer and distributor of home
health equipment. In addition, Mr. Gay serves as
44
<PAGE>
a director of American Pad & Paper Company, an office supply manufacturer;
Cambridge Industries, Inc., a manufacturer of automotive parts; GS
Technologies Corporation, a manufacturer of specialty steel products; Physio-
Control International Corporation, a manufacturer of defibrillators and vital
sign assessment devices; and GT Bicycles Inc., a manufacturer and distributor
of bicycles.
Geoffrey S. Rehnert has served as a Director of the Company since its
inception. He has been a Managing Director of Bain Capital since 1993, a
general partner of Bain Capital Venture Capital since 1987 and a general
partner of Bain Capital Partners since 1986. Mr. Rehnert serves as a director
of Kollmorgen Corp., a manufacturer of electric motors; ICON Health and
Fitness, Inc., a manufacturer and distributor of home health equipment; FTD,
Inc., a floral services company; and is Chairman of GT Bicycles, Inc., a
manufacturer and distributor of bicycles.
Matthew S. Levin served as a Director of the Company from its inception
through January 1995 and also from December 1996 to the present. Mr. Levin is
an associate with Bain Capital. Mr. Levin joined Bain Capital in 1992, and
attended the Harvard Business School from 1994 to 1996. From 1988 to 1991, Mr.
Levin was a consultant with Bain & Company, Inc.
At present, all directors are elected annually and serve until the next
annual meeting of stockholders or until the election and qualification of
their successors. Effective upon the consummation of the Offering, the Board
of Directors will be divided into three classes, as nearly equal in number as
possible, with each Director serving a three year term and one class being
elected at each year's annual meeting of stockholders. Messrs. Levin and Hough
will be in the class of directors whose term expires at the 1998 annual
meeting of the Company's stockholders. Messrs. Rehnert and Hinrichs will be in
the class of directors whose term expires at the 1999 annual meeting of the
Company's stockholders. Messrs. Robert C. Gay and Frank W. Gay II will be in
the class of directors whose term expires at the 2000 annual meeting of the
Company's stockholders. At each annual meeting of the Company's stockholders,
successors to the class of directors whose term expires at such meeting will
be elected to serve for three-year terms and until their successors are
elected and qualified. Following the consummation of the Offering, the Company
will establish an Audit Committee consisting of at least two independent
directors and a Compensation Committee consisting of at least two independent
directors.
EXECUTIVE COMPENSATION
Prior to the Offering, the Board did not have a Compensation Committee.
Decisions concerning the compensation of executive officers and senior
management during fiscal 1997 were made by Messrs. Frank W. Gay II and Matthew
S. Levin with the advice of the Board. The one time payment to the Company's
Chief Executive Officer in 1997 was approved by the Board with Messrs. Frank
W. Gay II and Robert C. Gay abstaining. Following the consummation of the
Offering, the Board will establish a Compensation Committee, which will
include two or more independent directors to make decisions regarding
salaries, incentive compensation, stock option grants and other matters with
respect to executive officers and other key employees of the Company.
The following table sets forth in summary form information concerning the
compensation for all services rendered in all capacities to the Company and
its subsidiaries for the fiscal year ended September 30, 1997 for Mr. Frank W.
Gay II and the four other most highly compensated executive officers of the
Company during the fiscal year ended September 30, 1997 (collectively, the
"named executive officers").
45
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------------------
SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY (A) BONUS COMPENSATION (B) OPTIONS
<S> <C> <C> <C> <C> <C>
Frank W. Gay II, Chief
Executive Officer........ 1997 $181,000 $303,752 $1,707,615(c) --
Bruce R. Hough,
President................ 1997 161,346 78,000 7,933 --
Jeffrey A. Hinrichs, Chief
Operating Officer........ 1997 151,538 136,409 7,481 --
William T. Logan, Senior
Vice President, Marketing
and Sales................ 1997 121,154 35,500 5,981 --
David M. Vance, President,
Au Naturel, Inc.......... 1997 135,577 48,750 6,721 --
</TABLE>
- ---------------------
(a) Includes amounts earned in fiscal 1997, but deferred at each named
executive officer's election pursuant to the Company's 401(k) Plan.
(b) Includes matching contributions made by the Company under its 401(k) Plan.
(c) Includes the one-time payment of $1.7 million.
COMPENSATION PURSUANT TO BENEFIT PLANS AND ARRANGEMENTS
STOCK OPTIONS
No grants of stock options were made to any of the named executive officers
during fiscal 1997. No stock appreciation rights ("SARs") were granted during
fiscal 1997.
OPTION EXERCISES AND HOLDINGS
No stock options or SARs were exercised by the named executive officers
during fiscal 1997. The following table sets forth information with respect to
the aggregate number of unexercised options to purchase Common Stock and SARs
granted in all years to the named executive officers and held by them as of
September 30, 1997, and the value of unexercised in-the-money options (i.e.,
options that had a positive spread between the exercise price and the initial
public offering price of the Common Stock) as of September 30, 1997:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS/SARS AT THE-MONEY OPTIONS/SARS
FISCAL YEAR END AT FISCAL YEAR END(A)
SHARES ACQUIRED ------------------------- -------------------------
NAME UPON EXERCISE (#) VALUE REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
<S> <C> <C> <C> <C>
Frank W. Gay II......... -- -- 150,582/37,645 $1,738,729/434,682
Bruce R. Hough.......... -- -- 40,657/27,105 469,457/312,971
Jeffrey A. Hinrichs..... -- -- 22,587/22,587 260,809/260,809
William T. Logan........ -- -- -- /-- -- /--
David M. Vance.......... -- -- 37,646/37,645 379,682/379,682
</TABLE>
- ---------------------
(a) At an assumed initial public offering price of $15.00 per share, minus the
exercise price.
STOCK PLANS
1995 STOCK PLAN
The Company's 1995 Stock Option Plan (the "1995 Stock Plan") authorizes
grants of stock options, including options that are intended to qualify as
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code, and sales of any class or classes of common stock to current or
future employees, directors, consultants or advisors of the Company or its
subsidiaries. The 1995 Stock Plan authorizes the granting of stock options for
up to an aggregate of 225,873 shares of Common Stock (after giving effect to
the
46
<PAGE>
Reclassification), subject to adjustment upon the occurrence of certain events
to prevent any dilution or expansion of the rights of participants that might
otherwise result from the occurrence of such events. Under the 1995 Stock
Plan, the Board is authorized to grant options at any time prior to the
termination of the 1995 Stock Plan in such quantity, at such price, on such
terms and subject to such conditions as established by the Board. Nonqualified
options to purchase an aggregate of 175,804 shares (after giving effect to the
Reclassification) of Common Stock are outstanding under the 1995 Stock Plan.
Of the options to purchase an aggregate of 175,804 shares of Common Stock
(after giving effect to the Reclassification) that are outstanding to date,
options to purchase an aggregate of 80,749 shares of Common Stock (after
giving effect to the Reclassification) will be exercisable at the consummation
the Offering and the remaining options to purchase an aggregate of 95,055
shares of Common Stock (after giving effect to the Reclassification) will vest
over a four-year period. The exercise prices of the options granted under the
1995 Stock Plan range from approximately $4.91 per share to $9.30 per share
(such dollar amounts giving effect to the Reclassification).
1998 STOCK PLAN
The Board and stockholders of the Company have approved the Nutraceutical
International Corporation 1998 Stock Incentive Plan (the "1998 Stock Plan").
The 1998 Stock Plan will be administered by a Compensation Committee (the
"Committee"), composed of at least two Directors who are Non-Employee
Directors (as defined in Rule 16b-3 under the Exchange Act) and who are
"outside directors" (as defined in Section 162(m) of the Internal Revenue Code
of 1986, as amended (the "Code")), who will be appointed by the Board. Certain
employees, advisors and consultants of the Company will be eligible to
participate in the 1998 Stock Plan (a "Participant"). The Committee will be
authorized under the 1998 Stock Plan to select the Participants and determine
the terms and conditions of the awards under the 1998 Stock Plan. The 1998
Stock Plan provides for the issuance of the following types of incentive
awards: stock options, stock appreciation rights, restricted stock,
performance grants and other types of awards that the Compensation Committee
deems consistent with the purposes of the 1998 Stock Plan. An aggregate of
1,050,000 shares of Common Stock of the Company will be reserved for issuance
under the 1998 Stock Plan, subject to certain adjustments reflecting changes
in the Company's capitalization. The 1998 Stock Plan provides that each
Participant will be limited to receiving awards relating to no more than
100,000 shares of Common Stock per year.
Options granted under the 1998 Stock Plan may be either incentive stock
options ("ISOs") or such forms of non-qualified stock options ("NQOs") as the
Committee may determine. ISOs are intended to qualify as "incentive stock
options" within the meaning of Section 422 of the Code. The exercise price of
(i) an ISO granted to an individual who owns shares possessing more than 10%
of the total combined voting power of all classes of stock of the Company (a
"10% Owner") will be at least 110% of the fair market value of a share of
common stock on the date of grant and (ii) an ISO granted to an individual
other than a 10% Owner and an NQO will be at least 100% of the fair market
value of a share of Common Stock on the date of grant.
Options granted under the 1998 Stock Plan may be subject to time vesting and
certain other restrictions at the sole discretion of the Committee. The Board
generally will have the power and authority to amend the 1998 Stock Plan at
any time without approval of the Company's stockholders, subject to applicable
federal securities and tax law limitations (including regulations of the
Nasdaq National Market).
The Company currently intends to grant options under the 1998 Stock Plan to
purchase an aggregate of 250,000 shares of Common Stock to certain of its
employees contemporaneously with the consummation of the Offering, at an
exercise price equal to the initial public offering price. The following
individuals are expected to receive such grants in the following amounts:
Bruce R. Hough--10,000; Jeffrey A. Hinrichs--30,000; William T. Logan--10,000;
Leslie M. Brown, Jr.--25,000; Stanley E. Soper--7,500; and other key
employees--167,500.
EMPLOYEE STOCK PURCHASE PLAN
The Nutraceutical International Corporation Employee Stock Discount Purchase
Plan (the "Stock Purchase Plan") will be approved by the Board and
stockholders prior to the consummation of the Offering. The Stock Purchase
Plan is intended to give employees desiring to do so a convenient means of
purchasing shares of
47
<PAGE>
Common Stock through payroll deductions. The Stock Purchase Plan is intended
to provide an incentive to participate by permitting purchases at a discounted
price. The Company believes that ownership of stock by employees will foster
greater employee interest in the success, growth and development of the
Company.
Subject to certain restrictions, each employee of the Company who is a U.S.
resident or a U.S. citizen temporarily on location at a facility outside of
the United States will be eligible to participate in the Stock Purchase Plan
if he or she has been employed by the Company for more than one year.
Participation will be discretionary with each eligible employee. The Company
will reserve 750,000 shares of Common Stock for issuance in connection with
the Stock Purchase Plan. Each eligible employee will be entitled to purchase a
maximum number of shares per quarter equal to 15% of such employee's gross pay
for the immediately prior quarter divided by the purchase price per share.
Elections to participate and purchases of stock will be made on a quarterly
basis. Each participating employee contributes to the Stock Purchase Plan by
choosing a payroll deduction in any specified amount, with a minimum deduction
of $25 per payroll period. A participating employee may increase or decrease
the amount of such employee's payroll deduction, including a change to a zero
deduction as of the beginning of any calendar quarter. Elected contributions
will be credited to participants' accounts at the end of each calendar
quarter. In addition, employees may make lump sum contributions during a
quarter to enable them to purchase the maximum number of shares available for
purchase during such quarter.
Each participating employee's contributions will be used to purchase shares
for the employee's share account within 15 days after the last day of each
calendar quarter. The cost per share will be 90% of the lower of the closing
price of the Company's Common Stock on the Nasdaq National Market on the first
or the last trading day of the calendar quarter. The number of shares
purchased on each employee's behalf and deposited in his/her share account
will be based on the amount accumulated in such participant's cash account and
the purchase price for shares with respect to any calendar quarter. Shares
purchased under the Stock Purchase Plan carry full rights to receive dividends
declared from time to time. Under the Stock Purchase Plan, any dividends
attributable to shares in the employee's share account will be automatically
used to purchase additional shares for such employee's share account. Share
distributions and share splits will be credited to the participating
employee's share account as of the record date and effective date,
respectively. A participating employee will have full ownership of all shares
in such employee's share account and may withdraw them for sale or otherwise
by written request to the Committee. Subject to applicable federal securities
and tax laws, the Board of Directors will have the right to amend or to
terminate the Stock Purchase Plan. Amendments to the Stock Purchase Plan will
not affect a participating employee's right to the benefit of the
contributions made by such employee prior to the date of any such amendment.
In the event the Stock Purchase Plan is terminated, the Committee will be
required to distribute all shares held in each participating employee's share
account plus an amount of cash equal to the balance in each participating
employee's cash account.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
The 1998 Non-Employee Director Stock Option Plan (the "Director Option
Plan," and together with the 1998 Stock Plan, the "Stock Incentive Plans")
will be adopted and approved by the Board and stockholders prior to the
consummation of the Offering. The Director Option Plan is intended to
encourage stock ownership by certain Directors of the Company and to provide
those individuals with an additional incentive to manage the Company in the
shareholders' best interests and to provide a form of compensation that will
attract and retain highly qualified individuals as members of the Board. The
Director Option Plan will provide for the granting of options to non-employee
Directors, as defined, covering an aggregate of 150,000 shares of Common Stock
of the Company, subject to certain adjustments reflecting changes in the
Company's capitalization. The Committee or the full Board will be authorized
under the Director Option Plan to make discretionary grants of options and
determine the terms and conditions of such options. Each member of the
Committee is eligible to participate in the Director Option Plan; however,
grants made to a member of the Committee must be approved by the full Board
with such member abstaining. The Director Option Plan requires that the
exercise price for each option granted under the plan must equal 100% of the
fair market value of the Company's Common Stock on the date the option is
granted. Nothing contained in the Director Option Plan or any agreement to be
executed pursuant to the Director Option Plan will obligate the Company, its
Board or its stockholders to retain an optionee as a Director of the Company.
48
<PAGE>
401(K) PLAN
The Company has a tax-qualified employee savings and retirement plan (the
"401(k) Plan") covering all of the Company's full-time employees. Pursuant to
the 401(k) Plan, employees may elect to reduce their current compensation up
to the statutorily prescribed annual limit ($9,500 in 1997) and have the
amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan
provides for contributions to the 401(k) Plan by the Company on behalf of all
participants. The Company contributes an amount up to 5% of an eligible
employee's base monthly earnings. The 401(k) Plan is intended to qualify under
Section 401 of the Code so that contributions by employees or by the Company
to the 401(k) Plan and income earned on plan contributions, are not taxable to
employees until withdrawn from the 401(k) Plan so that contributions by the
Company will be deductible by the Company when made. The trustees under the
401(k) Plan, at the direction of each participant, invest such participant's
assets in the 401(k) Plan in selected investment options.
COMPENSATION OF BOARD OF DIRECTORS
The Company will determine the compensation to be paid to its independent
Directors at the time of their initial appointments. Non-employee Directors
are reimbursed for their out-of-pocket expenses incurred in connection with
attending meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Robert C. Gay, Rehnert and Levin, directors of the Company, have
professional affiliations with Bain Capital. Messrs. Robert C. Gay and Frank
W. Gay II are brothers. See "Management."
49
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT AGREEMENT
Pursuant to an advisory agreement (the "Advisory Agreement") dated October
28, 1993, among the Company, Bain Capital and F.W. Gay & Sons, Bain Capital
and F.W. Gay & Sons agreed to provide general executive management, consulting
and financial services to Solaray in consideration for which Bain Capital and
F.W. Gay & Sons each were entitled to receive annual fees of $100,000 plus
reimbursement for expenses, and one-time fees of $150,000 plus expenses with
respect to work performed on the Solaray Acquisition. On October 31, 1994, the
Advisory Agreement was amended to increase the annual fees payable to each of
Bain Capital and F.W. Gay & Sons to $125,000. On January 31, 1995, the
Advisory Agreement was amended and restated (the "Restated Advisory
Agreement") as follows: (i) annual fees (from the Company) to Bain Capital
were increased to $300,000, (ii) Bain Capital and F.W. Gay & Sons received
one-time payments of $700,000 and $500,000, respectively, plus expenses, for
certain services provided and (iii) upon payment of the one-time fees plus
expenses to Bain Capital and F.W. Gay & Sons, F.W. Gay & Sons and Solaray
ceased to be parties to the Restated Advisory Agreement. For the years ended
September 30, 1996 and 1997, fees and expenses incurred by the Company or its
affiliates to Bain Capital totaled $338,641 and $360,000, respectively. Prior
to the consummation of the Offering, the Company and Bain Capital will
terminate the Restated Advisory Agreement and Bain Capital will receive a
payment of $1.0 million in exchange for such termination and services.Included
in this payment of $1.0 million is approximately $375,000 that will be paid to
Bain Capital for services provided to the Company in connection with the
Offering and other financing matters. See "Underwriting." Robert C. Gay,
Rehnert and Levin are directors of the Company and are also affiliated with
Bain Capital. Mr. Frank W. Gay II is the Chairman of the Board, Chief
Executive Officer and a Director of the Company as well as a partner of F.W.
Gay & Sons.
Prior to the completion of the Offering, the Company expects to enter into a
transaction services agreement with Bain Capital pursuant to which Bain
Capital will agree to provide advisory services in connection with any
potential acquisitions, dispositions or other financing transactions (whether
debt or equity) of the Company or any of its subsidiaries in exchange for a
transaction fee equal to 1.0% of the aggregate value of any such transaction.
Such agreement will not provide for recurring annual management fees. Pursuant
to the new agreement, Bain Capital will provide advisory services and
personnel support to the Company relating to the identification, structuring,
negotiating and financing analysis of potential acquisitions, dispositions or
other financing transactions. The Company believes that the terms of such
agreement are at least as favorable to the Company as those which could be
negotiated with a third party.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Prior to the consummation of the Offering, the Company expects to enter into
agreements to provide indemnification for its directors and executive officers
in addition to the indemnification provided for in the Company's Amended and
Restated Certificate of Incorporation and By-laws (as described under
"Description of Capital Stock").
AGREEMENTS AMONG SECURITYHOLDERS
The Company, the Bain Capital Funds, Jackson National, Heller Financial,
Inc., F.W. Gay & Sons and certain other stockholders are parties to a
stockholders agreement, dated as of January 31, 1995 (the "Stockholders
Agreement"). The Stockholders Agreement amends, restates and supersedes a
prior stockholders agreement, dated as of October 28, 1993. The Stockholders
Agreement contains provisions relating to the composition of the Board of
Directors, restricting the transferability of the shares subject to such
agreement and granting preemptive rights in certain circumstances to the
parties thereto. The Stockholders Agreement, apart from certain provisions
thereof, will be automatically terminated upon consummation of the Offering
contemplated hereby.
The Company and certain of its stockholders are parties to a Registration
Agreement providing for the registration of certain shares of Common Stock in
future periods. See "Shares Eligible for Future Sale-- Registration Rights."
50
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The table below sets forth certain information regarding the equity
ownership of the Company (a) as of September 30, 1997 and (b) immediately
following the Offering by: (i) each person or entity who beneficially owns
five percent or more of a class of capital stock; (ii) each Director and each
of the named executive officers; (iii) each Selling Stockholder; and (iv) all
directors and executive officers of the Company as a group. Unless otherwise
stated, each of the persons named in the table has sole or shared voting and
investment power with respect to the securities beneficially owned by it or
him as set forth opposite its or his name.
<TABLE>
<CAPTION>
SHARES OWNED
PRIOR TO THE SHARES OWNED AFTER
OFFERING (A) THE OFFERING
----------------- SHARES ------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
<S> <C> <C> <C> <C> <C>
5% STOCKHOLDERS
Bain Capital Funds (b)(c)(d)... 5,896,470 63.2% 940,315 4,956,155 43.1%
The Stephen and Helene Weldon
Trust (e)..................... 665,298 7.1% 62,973 602,325 5.2%
Jackson National Life Insurance
Company (e)................... 634,771 6.8% 101,227 533,543 4.6%
Heller Financial, Inc. (e)(f).. 995,900 9.6% 158,817 837,083 6.8%
Frank W. Gay (g)............... 573,934 6.2% 66,667 507,267 4.4%
DIRECTORS AND OFFICERS
Frank W. Gay II................ 1,049,128 11.0% -- 1,049,128 9.0%
Bruce R. Hough................. 261,143 2.8% -- 261,143 2.3%
Jeffrey A. Hinrichs............ 238,556 2.5% -- 238,556 2.1%
William T. Logan............... 147,844 1.6% -- 147,844 1.3%
David M. Vance................. 75,291 * -- 75,291 *
Robert C. Gay (c)(h)........... 5,896,470 63.2% 940,315 4,956,155 43.1%
Geoffrey S. Rehnert (c)(h)..... 5,896,470 63.2% 940,315 4,956,155 43.1%
Matthew S. Levin (c)(h)........ 400,187 4.3% 63,818 336,438 2.9%
All executive officers and
directors as a group (six
persons)...................... 7,706,078 79.0% 940,315 6,765,762 56.8%
</TABLE>
- -------------------
* represents less than 1% of the total.
(a) Calculation of percentage of beneficial ownership assumes the exercise of
all warrants and options exercisable within 60 days of the date hereof
only by the respective named stockholder.
(b) Includes 2,563,081 shares of Common Stock held by Bain Capital Fund IV,
L.P. ("Fund IV"); 2,933,202 shares of Common Stock held by Bain Capital
Fund IV-B, L.P. ("Fund IV-B"); 193,267 shares of Common Stock held by BCIP
Associates ("BCIP"); and 206,920 shares of Common stock held by BCIP Trust
Associates, L.P. ("BCIP Trust" and collectively with Fund IV, Fund IV-B
and BCIP, the "Bain Capital Funds").
(c) The address of such person is Two Copley Place, Boston, Massachusetts
02116.
(d) Selling Stockholders have granted to the Underwriters options to purchase
up to 499,500 shares of Common Stock solely to cover over-allotments, if
any. See "Underwriting." In the event the Underwriters' over-allotment
options are exercised in full, the above Selling Stockholders would own
4,623,250, 561,867, 497,705, 780,856 and 473,194 shares of Common Stock
(or 40.0%, 4.9%, 4.3%, 6.3% and 4.1% of the total outstanding shares of
Common Stock), respectively, after giving effect to the Offering.
(e) The address of the Stephen and Helene Weldon Trust is 2680 Aspen Springs
Drive, Park City, Utah 84060. The address of Jackson National Life
Insurance Company is c/o PPM America, Inc., 225 West Wacker Drive, Suite
1200, Chicago, Illinois 60606. The address of Heller Financial, Inc. is
500 West Monroe, Suite 1200, Chicago, Illinois 60661.
(f) Represents warrants to purchase shares of Common Stock.
(g) Mr. Gay's address is c/o Nutraceutical International Corporation, 1400
Kearns Boulevard, 2nd Floor, Park City, Utah 84060. Mr. Gay is the father
of Frank W. Gay II and Robert C. Gay.
(h) All of the shares shown are held by the Bain Capital Funds.
51
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL MATTERS
At the time of the Offering, the total amount of authorized capital stock of
the Company will consist of 50,000,000 shares of Common Stock, par value $0.01
per share, and 5,000,000 shares of preferred stock, par value $0.01 per share
(the "Serial Preferred Stock"). Upon completion of the Offering, 11,496,692
shares of Common Stock will be issued and outstanding, no shares of Serial
Preferred Stock will be issued and outstanding and no other class of capital
stock will be authorized, issued or outstanding. As of September 30, 1997 and
without giving effect to the Reclassification, there were 1,026,000 shares of
Common Stock, 102,000 shares of Class P Common Stock, 84,309 shares of Non-
Voting Common Stock, warrants to purchase 12,994.35 shares of Class A Non-
Voting Common Stock, warrants to purchase 116,949.15 shares of Non-Voting
Common Stock and warrants to purchase 21,779 shares of Common Stock, held by
14, 12, 1, 1, 1 and 3 stockholder(s) of record, respectively. All outstanding
shares of Class P Common Stock and warrants to purchase Class A Non-Voting
Common Stock will be converted into shares of Common Stock and warrants to
purchase Common Stock, respectively, in the Reclassification. The following
discussion describes the Company's capital stock, the Restated Certificate and
By-laws as anticipated to be in effect upon consummation of the Offering. The
following summary of certain provisions of the Company's capital stock and
describes all material provisions of, but does not purport to be complete and
is subject to, and qualified in its entirety by, the Restated Certificate and
the By-laws, which are included as exhibits to the Registration Statement of
which this Prospectus forms a part and by the provisions of applicable law.
The Restated Certificate and By-laws will contain certain provisions that
are intended to enhance the likelihood of continuity and stability in the
composition of the Board of Directors and which may have the effect of
delaying, deferring or preventing a future takeover or change in control of
the Company unless such takeover or change in control is approved by the Board
of Directors.
COMMON STOCK
The issued and outstanding shares of Common Stock are, and the shares of
Common Stock to be issued by the Company in connection with the Offering will
be, validly issued, fully paid and nonassessable. Subject to the prior rights
of the holders of any Serial Preferred Stock, the holders of outstanding
shares of Common Stock are entitled to receive dividends out of assets legally
available therefor at such time and in such amounts as the Board of Directors
may from time to time determine. See "Dividend Policy." The shares of Common
Stock are not convertible and the holders thereof have no preemptive or
subscription rights to purchase any securities of the Company. Upon
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to receive pro rata the assets of the Company which are
legally available for distribution, after payment of all debts and other
liabilities and subject to the prior rights of any holders of Serial Preferred
Stock then outstanding. Each outstanding share of Common Stock is entitled to
one vote on all matters submitted to a vote of stockholders. There is no
cumulative voting.
The Common Stock has been approved for listing on the Nasdaq National Market
under the symbol "NUTR, subject to official notice of issuance."
SERIAL PREFERRED STOCK
The Company's Board of Directors may, without further action by the
Company's stockholders, from time to time, direct the issuance of shares of
Serial Preferred Stock in series and may, at the time of issuance, determine
the rights, preferences and limitations of each series. Satisfaction of any
dividend preferences of outstanding shares of Serial Preferred Stock would
reduce the amount of funds available for the payment of dividends on shares of
Common Stock. Holders of shares of Serial Preferred Stock may be entitled to
receive a preference payment in the event of any liquidation, dissolution or
winding-up of the Company before any payment is made to the holders of shares
of Common Stock. Under certain circumstances, the issuance of shares of Serial
Preferred Stock may render more difficult or tend to discourage a merger,
tender offer or proxy contest, the assumption of control by a holder of a
large block of the Company's securities or the removal of incumbent
52
<PAGE>
management. Upon the affirmative vote of a majority of the total number of
directors then in office, the Board of Directors of the Company, without
stockholder approval, may issue shares of Serial Preferred Stock with voting
and conversion rights which could adversely affect the holders of shares of
Common Stock. There are no shares of Serial Preferred Stock outstanding, and
the Company has no present intention to issue any shares of Serial Preferred
Stock.
CERTAIN PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS
The Restated Certificate provides for the Board to be divided into three
classes, as nearly equal in number as possible, serving staggered terms.
Approximately one-third of the Board will be elected each year. See
"Management." Under the Delaware General Corporation Law, directors serving on
a classified board can only be removed for cause. The provision for a
classified board could prevent a party who acquires control of a majority of
the outstanding voting stock from obtaining control of the Board until the
second annual stockholders meeting following the date the acquiror obtains the
controlling stock interest. The classified board provision could have the
effect of discouraging a potential acquiror from making a tender offer or
otherwise attempting to obtain control of the Company and could increase the
likelihood that incumbent directors will retain their positions.
The Restated Certificate provides that stockholder action can be taken only
at an annual or special meeting of stockholders and cannot be taken by written
consent in lieu of a meeting. The Restated Certificate and the By-laws provide
that, except as otherwise required by law, special meetings of the
stockholders can only be called pursuant to a resolution adopted by a majority
of the Board of Directors or by the Chief Executive Officer of the Company.
Stockholders will not be permitted to call a special meeting or to require the
Board to call a special meeting.
The By-laws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of stockholders of the Company,
including proposed nominations of persons for election to the Board.
Stockholders at an annual meeting may only consider proposals or nominations
specified in the notice of meeting or brought before the meeting by or at the
direction of the Board or by a stockholder who was a stockholder of record on
the record date for the meeting, who is entitled to vote at the meeting and
who has given to the Company's Secretary timely written notice, in proper
form, of the stockholder's intention to bring that business before the
meeting. Although the By-laws do not give the Board the power to approve or
disapprove stockholder nominations of candidates or proposals regarding other
business to be conducted at a special or annual meeting, the By-laws may have
the effect of precluding the conduct of certain business at a meeting if the
proper procedures are not followed or may discourage or defer a potential
acquiror from conducting a solicitation of proxies to elect its own slate of
directors or otherwise attempting to obtain control of the Company.
The Restated Certificate and By-laws provide that the affirmative vote of
holders of at least 66 2/3% of the then outstanding shares of Common Stock is
required to amend, alter, change or repeal certain of their respective
provisions. This requirement of a super-majority vote to approve amendments to
the Restated Certificate and By-laws could enable a minority of the Company's
stockholders to exercise veto power over any such amendments.
CERTAIN PROVISIONS OF DELAWARE LAW
Following the consummation of the Offering, the Company will be subject to
the "Business Combination" provisions of the Delaware General Corporation Law.
In general, such provisions prohibit a publicly held Delaware corporation from
engaging in various "business combination" transactions with any "interested
stockholder" for a period of three years after the date of the transaction
which the person became an "interested stockholder," unless (i) the
transaction is approved by the Board of Directors prior to the date the
"interested stockholder" obtained such status, (ii) upon consummation of the
transaction which resulted in the stockholder becoming an "interested
stockholder," the "interested stockholder," owned at least 85% of the voting
stock of
53
<PAGE>
the corporation outstanding at the time the transaction commenced, excluding
for purposes of determining the number of shares outstanding those shares
owned by (a) persons who are directors and also officers and (b) employee
stock plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer or (iii) on or subsequent to such date the "business
combination" is approved by the Board of Directors and authorized at an annual
or special meeting of stockholders by the affirmative vote of at least 66 2/3%
of the outstanding voting stock which is not owned by the "interested
stockholder." A "business combination" is defined to include mergers, asset
sales and other transactions resulting in financial benefit to a stockholder.
In general, an "interested stockholder" is a Person who, together with
affiliates and associates, owns (or within three years, did own) 15% or more
of a corporation's voting stock. The statute could prohibit or delay mergers
or other takeover or change in control attempts with respect to the Company
and, accordingly, may discourage attempts to acquire the Company.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Restated Certificate limits the liability of directors to the fullest
extent permitted by the Delaware General Corporation Law. In addition, the
Restated Certificate provides that the Company shall indemnify directors and
officers of the Company to the fullest extent permitted by such law. The
Company anticipates entering into indemnification agreements with its current
directors and executive officers prior to the completion of the Offering and
expects to enter into a similar agreement with any new directors or executive
officers. In addition, the Company anticipates obtaining directors' and
officers' insurance prior to the completion of the Offering.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of the Offering, the Company will have outstanding
11,496,692 shares of Common Stock (assuming no exercise of the Underwriters'
over-allotment option). All of the shares of Common Stock sold in the Offering
will be freely tradeable under the Securities Act, unless purchased by
"affiliates" of the Company as that term is defined under the Securities Act.
Upon the expiration of lock-up agreements between the Company, certain
stockholders and the Underwriters, which will occur 180 days after the date of
this Prospectus (the "Effective Date"), 7,994,797 shares of Common Stock
(7,551,524 shares if the Underwriters' over-allotment option is exercised in
full) (the "Restricted Shares") will become eligible for sale, subject to
compliance with Rule 144 of the Securities Act as described below.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for
at least one year, will be entitled to sell in any three-month period a number
of shares that does not exceed the greater of (i) 1% of the number of shares
of Common Stock then outstanding (approximately 114,966 shares immediately
after the Offering) or (ii) the average weekly trading volume of the Common
Stock on the Nasdaq National Market during the four calendar weeks immediately
preceding the date on which the notice of sale is filed with the Securities
and Exchange Commission. Sales pursuant to Rule 144 are subject to certain
requirements relating to manner of sale, notice and availability of current
public information about the Company. A person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the 90 days immediately preceding the sale and who has
beneficially owned Restricted Shares for at least two years is entitled to
sell such shares pursuant to Rule 144(k) without regard to the limitations and
requirements described above.
Certain stockholders have agreed with the Underwriters that until 180 days
after the Effective Date not to directly or indirectly, offer, sell, contract
to sell, grant any option to purchase or otherwise dispose of any Common Stock
or any securities convertible into or exercisable or exchangeable for Common
Stock, or in any
54
<PAGE>
manner transfer all or a portion of the economic consequences associated with
the ownership of the Common Stock, or cause a registration statement covering
any shares of Common Stock to be filed, without the prior written consent of
DLJ, subject to certain limited exceptions. The Company has also agreed not to
directly or indirectly, offer, sell, contract to sell, grant any option to
purchase or otherwise dispose of any Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or, in any
manner, transfer all or a portion of the economic consequences associated with
the ownership of the Common Stock or cause a registration statement covering
any shares of Common Stock to be filed, for a period of 180 days after the
Effective Date, without the prior written consent of DLJ, subject to certain
limited exceptions including grants of options pursuant to, and issuance of
shares of Common Stock upon exercise of options under, the 1998 Stock Plan.
The lock-up agreements may be released at any time as to all or any portion of
the shares subject to such agreements at the sole discretion of DLJ. See "Risk
Factors--Shares Eligible for Future Sale."
The Company intends to file a registration statement covering the sale of
175,804 shares of Common Stock reserved for issuance under the 1995 Stock
Plan, 1998 Stock Plan, Director Option Plan and Stock Purchase Plan. See
"Management--Stock Plans." Such registration statement is expected to be filed
as soon as practicable after the date of this Prospectus and will
automatically become effective upon the filing. Accordingly, shares registered
under such registration statement will be available for sale in the public
market unless such shares are subject to vesting restrictions and subject to
limitations on resale by "affiliates" pursuant to Rule 144. It is anticipated
that approximately 80,749 shares of Common Stock issuable upon exercise of
currently outstanding options will become eligible for sale in the public
market without restrictions 180 days after the date of this Prospectus upon
expiration of the lock-up agreements, pursuant to registration under such
registration statement and subject to volume limitations and other
restrictions under Rule 144.
REGISTRATION RIGHTS
Pursuant to the Registration Agreement, the Bain Capital Funds (who in the
aggregate will hold 6,529,739 shares (6,162,762 shares if the Underwriters'
over-allotment options are exercised in full) upon consummation of the
Offering) have the right, subject to certain terms and conditions, to require
the Company to register their shares under the Securities Act for offer and
sale to the public (including by way of underwritten public offering) on three
Long-Form Registrations or an unlimited number of Short-Form Registrations
(each as defined in the Registration Agreement). Upon such demand, all holders
of Registrable Securities (as defined in the Registration Agreement) may sell
in such public offering, pro rata according to the amount of Registrable
Securities owned by such holder. Upon consummation of the Offering, Heller
(which will hold Warrants to purchase 837,083 shares of Common Stock (780,856
shares if the Underwriters' over-allotment options are exercised in full) upon
consummation of the Offering) will have the right, subject to certain terms
and conditions, to require the Company to register its Registrable Securities
for offer and sale to the public (including by way of an underwritten public
offering) on one Long-Form Registration or one Short-Form Registration. See
"Certain Relationships and Related Transactions--Agreements Among
Securityholders." Exercise by the Bain Capital Funds or Heller of their rights
under such agreement could result in the distribution of substantial amounts
of Common Stock, including distributions in underwritten public offerings. See
"Risk Factors--Shares Eligible for Future Sale."
In addition, certain other holders of Common Stock and options to purchase
Common Stock (who in the aggregate will hold 2,102,093 shares (2,025,797
shares if the Underwriters' over-allotment options are exercised in full)
after the Offering), as well as the Bain Capital Funds and Heller, will have
unlimited "piggyback" registration rights, which, subject to certain terms and
restrictions, entitle them to join in any registration of securities by the
Company. See "Certain Relationships and Related Transactions--Agreements Among
Securityholders." Exercise of such "piggyback" rights could also result in the
distribution of substantial amounts of Common Stock, including distributions
in underwritten public offerings. See "Risk Factors--Shares Eligible for
Future Sale."
55
<PAGE>
UNDERWRITING
Subject to certain terms and conditions contained in an underwriting
agreement (the "Underwriting Agreement"), the Underwriters named below for
whom DLJ and Smith Barney Inc. are acting as representatives (the
"Representatives") have severally agreed to purchase from the Company the
number of shares of Common Stock set forth opposite their names below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation................
Smith Barney Inc. .................................................
---------
Total............................................................ 3,330,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase shares of Common Stock are subject to the approval of
certain legal matters by counsel and to certain other conditions. If any of
the shares of Common Stock are purchased by the Underwriters pursuant to the
Underwriting Agreement, all such shares of Common Stock (other than the shares
of Common Stock covered by the over-allotment option described below) must be
so purchased.
Prior to the Offering, there has been no established trading market for the
Common Stock. The initial price to the public for the Common Stock offered
hereby will be determined by negotiation between the Company and the
Representatives. The principal factors to be considered in determining the
initial price to the public include the information set forth in the
Prospectus and otherwise made available to the Representatives, the history of
and the prospects for the industry in which the Company competes, the ability
of the Company's management, the past and present operations of the Company,
the historical results of operations of the Company, the prospects for future
earnings of the Company, the general condition of the securities markets at
the time of the Offering and the recent market prices of securities of
generally comparable companies.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public initially at the
price to the public set forth on the cover page of this Prospectus and to
certain dealers (who may include the Underwriters) at such price less a
concession not to exceed $ per share. The Underwriters may allow, and such
dealers may reallow, discounts not in excess of $ per share to any other
Underwriter and certain other dealers. After the initial public offering, the
price to the public, the concession and the discount to dealers may be changed
by the Representatives.
The Selling Stockholders have granted to the Underwriters an option to
purchase up to an aggregate of 499,500 additional shares of Common Stock at
the initial public offering price less underwriting discounts and commissions
solely to cover over-allotments. Such option may be exercised in whole or in
part from time to time during the 30-day period after the date of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will be committed, subject to certain conditions, to purchase
a number of option shares proportionate to such Underwriter's initial
commitment as indicated in the preceding table.
The Company and common stockholders have agreed not to directly or
indirectly offer, sell, contract to sell or otherwise dispose of any shares of
Common Stock or any securities convertible into or exercisable or
56
<PAGE>
exchangeable for Common Stock, or in any manner transfer all or a portion of
the economic consequences associated with the ownership of such Common Stock,
or to cause a registration statement covering any shares of Common Stock to be
filed, for 180 days after the date of this Prospectus without the prior
written consent of DLJ, subject to certain limited exceptions, and provided
that the Company may grant options pursuant to, and issue shares of Common
Stock upon the exercise of options under, the 1998 Stock Plan. See "Shares
Eligible for Future Sale."
Approximately $375,000 will be paid to Bain Capital for services provided to
the Company in connection with the Offering and other financing matters.
The Representatives have informed the Company that they do not expect to
make sales to accounts over which they exercise discretionary authority in
excess of 5% of the number of shares of Common Stock offered hereby.
At the request of the Company, the Underwriters have reserved a portion of
the Common Stock for sale to certain employees of the Company and other
persons designated by the Company. The aggregate number of shares of Common
Stock available for sale to the public in the Offering will be reduced to the
extent such persons purchase such shares of Common Stock. The price per share
of Common Stock to be sold to these persons is equal to the initial public
offering price. Any reserved shares of Common Stock not so purchased will be
offered by the Underwriters to the public on the same basis as the other
shares of Common Stock offered hereby.
In connection with the Offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock.
Specifically, the Underwriters may over-allot the Offering, creating a
syndicate short position. In addition, the Underwriters may bid for and
purchase Common Stock in the open market to cover syndicate short positions or
to stabilize the price of the Common Stock. Finally, the underwriting
syndicate may reclaim selling concessions from syndicate members in the
Offering, if the syndicate repurchases previously distributed Common Stock in
syndicate covering transactions, in stabilization transactions or otherwise.
Any of these activites may stabilize or maintain the market price of the
Common Stock above independent market levels. The Underwriters are not
required to engage in these activities, and may end any of these activities at
any time.
LEGAL MATTERS
The validity of the Common Stock being offered hereby and certain other
legal matters relating to the Offering will be passed upon for the Company by
Kirkland & Ellis (a partnership which includes professional corporations),
Chicago, Illinois. A partner of Kirkland & Ellis owns 17,189 shares of Common
Stock after giving effect to the Reclassification. Kaye, Scholer, Fierman,
Hays & Handler, LLP, New York, New York, will act as counsel for the
Underwriters.
EXPERTS
The financial statements included in this Prospectus have been audited by
Price Waterhouse LLP. The companies and periods covered by these audits are
indicated in the report of independent accountants. Such financial statements
have been so included in reliance on the reports of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-1 with respect to
the Common Stock being offered hereby with the Securities and Exchange
Commission (the "Commission") under the Securities Act. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all the
information set
57
<PAGE>
forth in the Registration Statement, certain items of which are omitted in
accordance with the rules and regulations of the Commission. Statements
contained in this Prospectus concerning the provisions of documents filed with
the Registration Statement as exhibits are necessarily summaries of such
documents, and each such statement is qualified in its entirety by reference
to the copy of the applicable document filed as an exhibit to the Registration
Statement. The Registration Statement may be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; at its
Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511; and at its New York Regional Office, Seven World Trade
Center, 13th Floor, New York, New York 10048. Copies of such material can be
obtained from the public reference section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates or accessed
electronically by means of the Commission's home page on the Internet at
http://www.sec.gov. For further information pertaining to the Company and the
Common Stock being offered hereby, reference is made to the Registration
Statement, including the exhibits thereto and the financial statements, notes
and schedules filed as a part thereof.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and quarterly reports containing
unaudited summary financial information for the first three fiscal quarters of
each fiscal year.
58
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheets at September 30, 1996 and 1997............... F-3
Consolidated Statements of Operations for the years ended September 30,
1995, 1996 and 1997..................................................... F-4
Consolidated Statements of Cash Flows for the years ended September 30,
1995, 1996 and 1997..................................................... F-5
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1995, 1996 and 1997....................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Nutraceutical International Corporation:
In our opinion, the consolidated financial statements of Nutraceutical
International Corporation listed in the accompanying index present fairly, in
all material respects, the financial position of Nutraceutical International
Corporation and its subsidiaries at September 30, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years
in the period ended September 30, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards 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 the opinion expressed above.
Price Waterhouse LLP
Salt Lake City, Utah
October 21, 1997
F-2
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
AS ADJUSTED
SEPTEMBER 30, EQUITY (NOTE 2)
---------------- SEPTEMBER 30,
1996 1997 1997
<S> <C> <C> <C>
ASSETS
Current assets:
Cash....................................... $ 2,321 $ 4,415
Accounts receivable, net................... 7,207 8,001
Inventories, net........................... 17,424 20,753
Prepaid expenses and other assets.......... 1,208 1,018
Deferred income taxes...................... 733 897
------- -------
Total current assets..................... 28,893 35,084
Property, plant and equipment, net........... 9,620 10,711
Goodwill, net................................ 43,227 42,008
Other assets, net............................ 3,015 2,307
------- -------
$84,755 $90,110
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.......... $ 500 $ 7,085
Current portion of capital lease
obligations............................... 182 181
Accounts payable........................... 4,993 6,932
Accrued expenses........................... 3,491 5,270
------- -------
Total current liabilities................ 9,166 19,468
Long-term debt............................... 62,661 52,860
Capital lease obligations.................... 314 133
Deferred income taxes, net................... 523 1,295
------- -------
Total liabilities........................ 72,664 73,756
------- -------
Commitments and contingencies (Notes 10, 13
and 16)
Stockholders' equity:
Class P Common Stock, $.01 par value,
cumulative yield of 10% per annum
compounded quarterly, 200,000 shares
authorized, 102,000 shares issued and
outstanding at September 30, 1996 and
1997, no shares issued and outstanding at
September 30, 1997 after giving effect to
the conversion and split on an as adjusted
basis..................................... 1 1 --
Class A Common Stock, $.01 par value,
cumulative yield of 10% per annum
compounded quarterly, 13,000 shares
authorized, no shares issued at September
30, 1996 and 1997, no shares issued and
outstanding at September 30, 1997 after
giving effect to the conversion and split
on an as adjusted basis................... -- -- --
Class A Non-Voting Common Stock, $.01 par
value, cumulative yield of 10% per annum
compounded quarterly, 13,000 shares
authorized, no shares issued at September
30, 1996 and 1997, no shares issued and
outstanding at September 30, 1997 after
giving effect to the conversion and split
on an as adjusted basis................... -- -- --
Common Stock, $.01 par value, 2,000,000
shares authorized, 1,026,000 shares issued
and outstanding at September 30, 1996 and
1997, 9,337,875 shares issued and
outstanding at September 30, 1997 after
giving effect to the conversion and split
on an as adjusted basis................... 10 10 93
Non-Voting Common Stock, $.01 par value,
620,000 shares authorized, 84,309 shares
issued and outstanding at September 30,
1996 and 1997, no shares issued and
outstanding at September 30, 1997 after
giving effect to the conversion and split
on an as adjusted basis................... 1 1 --
Additional paid-in capital................. 9,690 9,690 9,609
Subscriptions receivable................... (70) (55) (55)
Retained earnings.......................... 2,459 6,707 6,707
------- ------- ------
Total stockholders' equity............... 12,091 16,354 16,354
------- ------- ------
$84,755 $90,110
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------
1995 1996 1997
<S> <C> <C> <C>
Net sales.......................................... $62,932 $83,923 $ 98,096
Cost of sales...................................... 35,885 45,099 52,277
------- ------- ----------
Gross profit..................................... 27,047 38,824 45,819
------- ------- ----------
Operating expenses:
Selling, general and administrative.............. 21,409 27,608 29,179
Amortization of intangibles...................... 1,059 1,483 1,346
One-time payment to executive officer............ -- -- 1,700
------- ------- ----------
22,468 29,091 32,225
------- ------- ----------
Income from operations............................. 4,579 9,733 13,594
Interest expense, net.............................. 4,478 7,126 6,572
------- ------- ----------
Income before provision for income taxes........... 101 2,607 7,022
Provision for income taxes......................... 23 1,056 2,774
------- ------- ----------
Net income before extraordinary loss............... 78 1,551 4,248
Extraordinary loss on early extinguishment of debt,
net of tax........................................ (478) -- --
------- ------- ----------
Net income (loss).................................. $ (400) $ 1,551 $ 4,248
======= ======= ==========
Pro forma income per common share (unaudited)...... $ 0.39
==========
Weighted average shares used in computation of pro
forma income per common share (unaudited)......... 10,785,333
==========
Supplemental pro forma income per common share
(unaudited)....................................... $ 0.44
==========
Weighted average shares used in computation of
supplemental pro forma income per common share
(unaudited)....................................... 12,785,333
==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1995 1996 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................. $ (400) $ 1,551 $ 4,248
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization (includes
amortization of inventory write-up of $5,285
during 1995).................................... 6,983 3,085 3,969
Amortization of debt issuance costs.............. 1,006 785 817
Changes in assets and liabilities, net of effects
from acquisitions:
Accounts receivable............................ (4,478) 3,932 (794)
Inventories.................................... (4,811) (1,491) (3,390)
Prepaid expenses and other assets.............. (253) (358) 190
Deferred income taxes.......................... 215 909 608
Other assets................................... (68) (1) (3)
Accounts payable............................... 1,506 (2,838) 1,939
Accrued expenses............................... 236 (1,015) 1,779
-------- ------- -------
Net cash provided by (used in) operating
activities.................................. (64) 4,559 9,363
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................ (2,837) (5,498) (3,652)
Acquisitions, net of cash acquired................. (44,560) -- --
Payments of exit and other costs associated with
acquisitions...................................... (1,758) -- --
-------- ------- -------
Net cash used in investing activities........ (49,155) (5,498) (3,652)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facility............ 12,890 4,250 --
Payments on revolving credit facility.............. (3,450) (1,500) (2,950)
Proceeds from long-term debt....................... 52,000 -- --
Payments on long-term debt......................... (8,020) -- (500)
Principal payments on capital lease obligations.... (178) (178) (182)
Payment of deferred financing fees................. (3,656) -- --
Receipt of subscriptions receivable................ 59 28 15
-------- ------- -------
Net cash provided by (used in) financing
activities.................................. 49,645 2,600 (3,617)
-------- ------- -------
Net increase in cash............................... 426 1,661 2,094
Cash at beginning of period........................ 234 660 2,321
-------- ------- -------
Cash at end of period.............................. $ 660 $ 2,321 $ 4,415
======== ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest......................................... $ 4,156 $ 6,164 $ 5,924
Income taxes..................................... $ 3 $ 513 $ 2,432
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CLASS P NON-VOTING
COMMON STOCK COMMON STOCK COMMON STOCK ADDITIONAL TOTAL
-------------- ---------------- ------------- PAID-IN SUBSCRIPTIONS RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE EARNINGS EQUITY
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1,
1994................... 102,000 $ 1 918,000 $ 9 -- $-- $2,577 $(157) $1,308 $ 3,738
Issuance of common
stock.................. -- -- 108,000 1 84,309 1 7,113 -- -- 7,115
Receipt of subscriptions
receivable............. -- -- -- -- -- -- -- 59 -- 59
Net loss................ -- -- -- -- -- -- -- -- (400) (400)
------- ---- --------- --- ------ ---- ------ ----- ------ -------
Balance at September 30,
1995................... 102,000 1 1,026,000 10 84,309 1 9,690 (98) 908 10,512
Receipt of subscriptions
receivable............. -- -- -- -- -- -- -- 28 -- 28
Net income.............. -- -- -- -- -- -- -- -- 1,551 1,551
------- ---- --------- --- ------ ---- ------ ----- ------ -------
Balance at September 30,
1996................... 102,000 1 1,026,000 10 84,309 1 9,690 (70) 2,459 12,091
------- ---- --------- --- ------ ---- ------ ----- ------ -------
Receipt of subscriptions
receivable............. -- -- -- -- -- -- -- 15 -- 15
Net income.............. -- -- -- -- -- -- -- -- 4,248 4,248
------- ---- --------- --- ------ ---- ------ ----- ------ -------
Balance at September 30,
1997................... 102,000 $ 1 1,026,000 $10 84,309 $ 1 $9,690 $ (55) $6,707 $16,354
======= ==== ========= === ====== ==== ====== ===== ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. DESCRIPTION OF BUSINESS
Nutraceutical International Corporation (the Company) develops, manufactures
and sells high quality branded vitamin, mineral, herbal and specialty dietary
supplements to domestic health food stores and international distributors
under the Solaray, KAL, NaturalMax, VegLife, Premier One and Solar Green brand
names. The Company also produces chelated minerals and processed herbs for its
own use and sells these items to other manufacturers and marketers in the
dietary supplement industry. The Company's wholly-owned subsidiaries consist
of Nutraceutical Corporation; Solaray, Inc. (Solaray); Premier One Products,
Inc. (Premier); Makers of KAL, Inc. (KAL); NaturalMax, Inc. (Max); Monarch
Nutritional Laboratories, Inc. (Monarch); Au Naturel, Inc.; VegLife, Inc.; and
Makers of KAL B.V.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and its subsidiaries (Note 1). The acquired
operations of Solaray, Premier, KAL, Max and Monarch have been consolidated
from their respective dates of acquisition (Note 3). All significant
intercompany transactions and balances have been eliminated.
Use of Estimates--The preparation of these financial statements in
conformity with generally accepted accounting principles required management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
dates of the financial statements and the reported amounts of net sales and
expenses during the reporting periods. Estimates include reserves for obsolete
and slow moving inventory, customer returns and allowances and uncollectible
accounts receivable. Actual results could differ from these estimates.
Unaudited Pro Forma Income Per Share--Given the changes in the Company's
capital structure to be effected in conjunction with the anticipated initial
public offering, historical income (loss) per common share amounts are not
presented in the consolidated financial statements as they are not considered
to be meaningful.
The calculation of pro forma primary income per share was determined by
dividing net income by the pro forma weighted average common and common
equivalent shares outstanding after giving retroactive effect to the
conversion of Class P Common Stock into 129,929 shares of Common Stock and the
conversion of Non-Voting Common Stock into 84,309 shares of Common Stock and
the 7.5291-to-one stock split of Common Stock upon the anticipated
effectiveness of the Registration Statement (collectively, the
Reclassification). In addition, in accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 83, shares issued and share options
granted within one year of the anticipated public offering have been included
in the calculation of common share equivalents for the primary income per
share, using the treasury stock method to determine the dilutive effect of the
issuances, as if they were outstanding for all periods presented.
Some of the proceeds from the Company's anticipated public offering will be
used to retire indebtedness existing under its Senior Credit Agreement (Note
9). Accordingly, supplemental pro forma income per share is $0.44 for the year
ended September 30, 1997; the number of shares of Common Stock whose net
proceeds are to be used to retire debt is 2,000,000. This calculation assumes
the debt retirement had taken place at the beginning of the period. The amount
of interest expense eliminated, net of tax effects, is $1,428 for the year
ended September 30, 1997.
As Adjusted Equity--The as adjusted equity at September 30, 1997 adjusts the
historical September 30, 1997 equity to give effect to the anticipated
Reclassification based on an initial public offering price of $15.00 per share
to be effective prior to the closing of the anticipated initial public
offering.
F-7
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Cash--Substantially all of the Company's cash is held by one bank at
September 30, 1997. The Company does not believe that, as a result of this
concentration, it is subject to any unusual financial risk beyond the normal
risk associated with commercial banking relationships.
Inventories--Inventories include freight-in, materials, labor and overhead
costs and are stated at the lower of cost or market, cost being determined by
a moving weighted average under the first-in, first-out method.
Property, Plant and Equipment--Property, plant and equipment are stated at
cost, less accumulated depreciation and amortization. Depreciation and
amortization are provided using the straight-line method over the estimated
useful lives of the respective assets. Expenditures for renewals and
betterments are capitalized while maintenance and repairs are charged to
operations in the period incurred.
Goodwill--The excess of the purchase price over the fair market value of the
net assets acquired and liabilities assumed is classified as goodwill and is
being amortized using the straight-line method over periods ranging from 25 to
40 years. The Company periodically evaluates the recoverability of goodwill
based on undiscounted future cash flows. No impairments of goodwill have been
recorded as a result of these evaluations.
Non-Compete Agreements--Included in long-term other assets are capitalized
costs associated with non-compete agreements the Company entered into with
certain key executives of the Acquired Businesses (Note 3). These capitalized
costs are being amortized using the declining balance method over the lives of
the agreements which expire during fiscal 2000.
Deferred Financing Fees--As part of the Fiscal 1995 Acquisitions (Note 3),
the Company deferred certain debt issuance costs related to the establishment
of new financing loans (Note 9). These costs are capitalized in long-term
other assets and are being amortized using the effective interest rate method
over the life of the loans.
Interest Rate Cap Agreement--The Company entered into an interest rate cap
agreement to hedge against the interest rate risk associated with its variable
rate debt obligations (Note 9). The effect of this interest rate cap is to
minimize the impact of interest rate fluctuations on the Company's operating
results. Because the Company's losses are limited to the premium paid as part
of entering into this agreement, the Company is not subject to additional
interest rate risk. At September 30, 1997, the Company had an outstanding
interest rate cap agreement with a notional principal amount of $26,000. The
fair value of the interest rate cap agreement approximated its book value as
market interest rates have not exceeded the interest rate cap during the year.
The premium paid of $226 is being amortized over the life of the interest rate
cap which expires during fiscal 1998.
Revenue Recognition--Sales are recognized upon shipment of merchandise to a
customer. Provision is made for estimated customer returns, discounts and
allowances at the time of sale.
Research and Development--The Company expenses research and development
costs as incurred. For the years ended September 30, 1995, 1996 and 1997, the
Company incurred $472, $837 and $850, respectively, in research and
development expenditures. These costs are included in selling, general and
administrative expenses for the respective periods.
Advertising--The Company expenses advertising costs as incurred. These costs
are included in selling, general and administrative expenses for the
respective periods in the statements of operations.
Income Taxes--The Company accounts for income taxes using the asset and
liability method as prescribed by Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes (SFAS 109). SFAS 109 requires the Company
to record deferred tax assets and liabilities for expected future tax
consequences of events that have been recognized in different periods for
financial statements versus tax returns.
F-8
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Accounting for Stock-Based Compensation--The Company has adopted Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123). The Company measures compensation expense for its
stock-based employee compensation plans using the intrinsic value method
prescribed by the Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and will, when material, provide pro forma
disclosures of net income and net income per share as if the fair value-based
method prescribed by SFAS 123 had been applied in measuring compensation
expense.
Fair Value of Financial Instruments--The fair values of financial
instruments, including cash, accounts receivable, other current assets,
accounts payable, accrued expenses and debt, approximates their respective
book values.
Concentrations of Credit Risk--In the normal course of business, the Company
provides credit terms to its customers; however, collateral is not required.
Accordingly, the Company performs ongoing credit evaluations of its customers
and maintains allowances for possible losses which, when realized, have been
within the range of management's expectations. From time to time, a higher
concentration of credit risk may exist on outstanding accounts receivable for
a select number of customers depending on individual buying patterns. At
September 30, 1996 and 1997, no customer accounted for more than 10 percent of
trade accounts receivable. Furthermore, no customer accounted for more than 10
percent of net sales in any of the three years ended September 30, 1997.
3. ACQUISITIONS
Acquisitions--On October 28, 1993, the Company acquired all of the
outstanding stock of Solaray, a manufacturer and marketer of encapsulated
vitamin, mineral and herbal products (the Solaray Acquisition). On October 31,
1994, January 31, 1995 and September 29, 1995, the Company acquired
substantially all of the assets and assumed certain liabilities of each of
Premier, a manufacturer and marketer of nutritional supplements derived from
bee products (the Premier Acquisition), KAL, a manufacturer and marketer of
tableted vitamins and minerals as well as diet, energy and rest products (the
KAL Acquisition), and Monarch, a manufacturer of premium bulk formulations and
provider of contract grinding services (the Monarch Acquisition), respectively
(collectively referred to as the Acquired Businesses or the Fiscal 1995
Acquisitions). These acquisitions were accounted for using the purchase method
of accounting. Accordingly, the portion of the purchase price assigned to the
assets acquired and liabilities assumed was equivalent to their respective
fair market values at the respective dates of acquisition, as determined by
valuations and studies conducted by the Company and independent third parties.
The excess of the purchase price over the fair market value of the net assets
acquired and liabilities assumed is classified as goodwill and is being
amortized using the straight-line method over periods ranging from 25 to 40
years. The consolidated statements of operations and statements of cash flows
presented herein include the activities of the Acquired Businesses from their
respective dates of acquisition.
F-9
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The aggregate purchase price for the Fiscal 1995 Acquisitions totaled
$50,821, consisting of cash of $44,560, Common Stock of $3,996 and a note
payable to a seller of $2,265. The following reflects the allocation of the
aggregate purchase price for the Fiscal 1995 Acquisitions to the aggregate
assets acquired and the liabilities assumed:
<TABLE>
<CAPTION>
FISCAL 1995
ACQUISITIONS
------------
<S> <C>
Aggregate purchase price for Fiscal 1995 Acquisitions.............. $50,821
-------
Aggregate assets acquired and liabilities assumed:
Current assets.................................................... 17,413
Fixed assets...................................................... 567
Non-compete agreements............................................ 700
Other assets...................................................... 592
Goodwill.......................................................... 39,521
Current liabilities............................................... (6,651)
Long-term liabilities............................................. (40)
Exit costs........................................................ (1,281)
-------
Total.............................................................. $50,821
-------
</TABLE>
Exit Costs--As part of the Fiscal 1995 Acquisitions, the Company developed a
plan to close certain of the Acquired Businesses' existing facilities and
integrate their activities into the Company's operations. Pursuant to this
plan, the Company made severance payments to approximately 72 employees and
incurred certain expenditures related to non-cancelable contractual
obligations arising from the Fiscal 1995 Acquisitions. The Company accrued
$1,281 for exit costs related to the Fiscal 1995 Acquisitions. During the
years ended September 30, 1995, 1996 and 1997, approximately $850, $150 and
$39 were expended related to these exit costs. It is anticipated that the
remaining $242 will be expended over the next several years as a result of
non-cancelable contractual obligations.
4. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------
1996 1997
<S> <C> <C>
Accounts receivable.......................................... $8,018 $8,811
Less allowances.............................................. (811) (810)
------ ------
$7,207 $8,001
====== ======
</TABLE>
5. INVENTORIES, NET
Inventories, net of reserves for obsolete and slow moving inventory, are
comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------
1996 1997
<S> <C> <C>
Raw materials................................................ $ 9,086 $10,090
Work-in-process.............................................. 1,201 3,064
Finished goods............................................... 7,137 7,599
------- -------
$17,424 $20,753
======= =======
</TABLE>
F-10
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
In connection with the Fiscal 1995 Acquisitions (Note 3), the inventories of
the Acquired Businesses were valued at fair market value to reflect the net
realizable value of these inventories as of their respective acquisition
dates. The amount ascribed in excess of historical cost (write-up) was $5,285
for the year ended September 30, 1995 and was charged to cost of sales in the
accompanying statements of operations as the inventories were sold.
6. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net, are comprised of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL SEPTEMBER 30,
LIFE ----------------
(YEARS) 1996 1997
<S> <C> <C> <C>
Land.................... -- $ 340 $ 422
Building and
improvements........... 30 2,208 2,576
Furniture, fixtures and
equipment.............. 3-10 9,526 12,708
------- -------
12,074 15,706
Less accumulated
depreciation and
amortization........... (2,454) (4,995)
------- -------
$ 9,620 $10,711
======= =======
</TABLE>
At September 30, 1996 and 1997, furniture, fixtures and equipment includes
$522 and $474, respectively, of leased equipment with an accumulated
amortization balance of $275 and $304, respectively. Certain property and
equipment collateralize debt obligations (Note 9).
Depreciation and amortization of property, plant and equipment totaled $639,
$1,541 and $2,561 for the years ended September 30, 1995, 1996 and 1997,
respectively.
7. GOODWILL, NET
Goodwill, net, is comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------
1996 1997
<S> <C> <C>
Goodwill................................................. $45,237 $45,237
Less accumulated amortization............................ (2,010) (3,229)
------- -------
$43,227 $42,008
======= =======
8. ACCRUED EXPENSES
Accrued expenses are comprised of the following:
<CAPTION>
SEPTEMBER 30,
----------------
1996 1997
<S> <C> <C>
Employee payroll, benefits, taxes and performance
incentives.............................................. $ 1,186 $ 2,009
One-time payment to executive officer.................... -- 1,700
Other.................................................... 2,305 1,561
------- -------
$ 3,491 $ 5,270
======= =======
</TABLE>
F-11
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The one-time payment to executive officer represents a payment to the
Company's Chief Executive Officer for successfully positioning the Company for
an initial public offering. Such payment is in excess of the Chief Executive
Officer's annual compensation (salary and bonus), and the Company does not
expect to make any further payments of this nature or magnitude in the future.
9. LONG-TERM DEBT
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------
1996 1997
<S> <C> <C>
Note payable, payable in three installments as follows:
$500 in December 1996, $500 in October 1997 and $765 in
January 1998; interest is payable with principal
installments and accrues at 8% per annum................. $ 1,765 $ 1,265
Senior Credit Agreement:
Revolving Credit Facility............................... 12,190 9,240
Term A Loan............................................. 37,000 37,000
Term B Loan, net of unamortized discount of $2,794 and
$2,560................................................. 12,206 12,440
------- -------
Total long-term debt...................................... 63,161 59,945
Less current portion...................................... (500) (7,085)
------- -------
$62,661 $52,860
======= =======
</TABLE>
SENIOR CREDIT AGREEMENT
In connection with the KAL Acquisition (Note 3), the Company and its
subsidiaries entered into a Senior Credit Agreement with a lender, which was
subsequently amended at closing of the Monarch Acquisition. The Company's
borrowings under the Senior Credit Agreement, consisting of the Revolving
Credit Facility, the Term A Loan and the Term B Loan, are secured by a
perfected first priority security interest in the assets of the Company and
its subsidiaries. The Company deferred certain debt issuance costs as part of
entering into the Senior Credit Agreement. These costs have been capitalized
in long-term other assets and are being amortized using the effective interest
rate method over the life of the loans. A portion of the proceeds from the
Senior Credit Agreement were used to repay the long-term debt outstanding
related to the Solaray and Premier Acquisitions. In connection with the
repayment of this debt, unamortized deferred financing fees of $554 were
written off as an extraordinary expense in determining net loss for the year
ended September 30, 1995.
Under the terms of the Senior Credit Agreement, the Company must comply with
certain restrictive covenants which include the requirement that the Company
maintain minimum amounts of profitability, solvency and liquidity. In
addition, the Senior Credit Agreement restricts the Company from making
certain payments. The Senior Credit Agreement provides that upon a change in
control of the Company, the lender could require immediate payment of the
Revolving Credit Facility, Term A Loan and Term B Loan.
Revolving Credit Facility--The agreement provides for borrowings of up to
$15,000 based upon a percentage of eligible accounts receivable and
inventories and expires on January 31, 2003. Advances under the Revolving
Credit Facility bear interest at the London Inter-Bank Offered Rate (LIBOR)
plus 3% or the lender's base rate plus 1.5% (8.63% at September 30, 1997). The
Company is required to pay a monthly fee of 0.5% per annum on the average
unused balance under the Revolving Credit Facility. As of September 30, 1997,
$5,760 was available to be borrowed under the Revolving Credit Facility.
Accrued interest on the facility is payable monthly.
F-12
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Term A Loan--Under the Term A Loan, $37,000 was advanced on January 31,
1995. Principal payments of $1,629 are due quarterly beginning April 30, 1998.
Quarterly principal payments increase to $2,094 beginning April 30, 2002 and
continue through maturity on January 31, 2003. In addition, pursuant to the
Senior Credit Agreement, the Company is required to make payments on the Term
A Loan for excess cash flow as calculated at each fiscal year end. As of
September 30, 1997, the total amount due related to excess cash flow is
$2,562. Advances under the Term A Loan bear interest at a rate equal to the
LIBOR plus 3.25% or the lender's base rate plus 1.75% (8.88% at September 30,
1997). Accrued interest on the Term A Loan is payable monthly. In addition,
the Senior Credit Agreement permits the Company to borrow up to an additional
$6,000 related to the Term A Loan for construction of a new facility. As of
September 30, 1997, the Company had not made any borrowings related to this
additional $6,000 under the Term A Loan.
Term B Loan--Under the Term B Loan, $15,000 was advanced on January 31, 1995
and the entire amount is due on January 31, 2004. In connection with this
loan, the Company issued 84,309 shares of Non-Voting Common Stock at $37.00
per share, the estimated fair market value. The Term B Loan was recorded with
an original discount of $3,119, equivalent to the estimated fair value of the
Common Stock issued. This discount is being amortized using the effective
interest method over the life of the loan. Advances under the Term B Loan bear
interest at a rate equal to the LIBOR plus 4%, or the lender's base rate plus
2.5% (9.63% at September 30, 1997). Accrued interest on the Term B Loan is
payable quarterly.
FUTURE PAYMENTS
At September 30, 1997, the scheduled future principal payments are as
follows:
<TABLE>
<CAPTION>
YEAR
ENDING
SEPTEMBER
30,
<S> <C>
1998............................................................... $ 7,085
1999............................................................... 6,515
2000............................................................... 6,515
2001............................................................... 6,515
2002............................................................... 7,446
Thereafter......................................................... 25,869
-------
$59,945
=======
</TABLE>
F-13
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
10. LEASE COMMITMENTS AND OBLIGATIONS
The Company leases office and warehouse facilities under non-cancelable
operating leases expiring June of 2003. These operating leases require the
Company to pay all taxes, insurance and maintenance. The Company also leases
certain computer, manufacturing and laboratory equipment under capital leases.
The following summarizes future minimum lease payments required under
capital and operating leases:
<TABLE>
<CAPTION>
YEAR
ENDING
SEPTEMBER CAPITALIZED OPERATING
30, LEASES LEASES
<S> <C> <C>
1998................................................. $ 206 $ 779
1999................................................. 63 539
2000................................................. 63 319
2001................................................. 23 66
2002................................................. -- 66
Thereafter........................................... -- 50
----- ------
Future minimum lease payments......................... 355 $1,819
======
Less amounts representing interest.................... (41)
-----
Present value of future minimum lease payments........ 314
Less amounts due within one year...................... (181)
-----
Amounts due after one year............................ $ 133
=====
</TABLE>
Total rent expense incurred by the Company under non-cancelable operating
leases for the years ended September 30, 1995, 1996 and 1997 was $715, $898
and $950, respectively.
11. INCOME TAXES
The provision (benefit) for income taxes is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
--------------------
1995 1996 1997
<S> <C> <C> <C>
Current:
Federal............................................... $(302) $ 134 $2,058
State................................................. (29) 13 197
Deferred:
Federal............................................... 194 830 508
State................................................. 21 79 11
----- ------ ------
$(116) $1,056 $2,774
===== ====== ======
</TABLE>
The net benefit for income taxes consists of a provision of $23 resulting
from income before provision for income taxes and a benefit of $139 resulting
from the extraordinary loss on early extinguishment of debt.
F-14
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
A summary of the composition of net deferred income tax assets and
liabilities is as follows:
<TABLE>
<CAPTION>
SEPTEMBER
30,
-----------
1996 1997
<S> <C> <C>
ASSETS
Accrued liabilities............................................. $329 $ 748
Inventory differences........................................... 348 108
Accounts receivable reserves.................................... 28 41
Other........................................................... 28 --
---- ------
Current deferred income tax assets.............................. $733 $ 897
==== ======
LIABILITIES
Amortization of intangibles..................................... $521 $1,131
Depreciation.................................................... 2 164
---- ------
Long-term deferred income tax liabilities, net.................. $523 $1,295
==== ======
</TABLE>
The differences between income taxes at the statutory federal income tax
rate and income taxes reported in the statements of operations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
---------------------
1995 1996 1997
<S> <C> <C> <C>
Tax at federal statutory rate......................... $(176) $ 886 $2,387
State tax, net of federal benefit..................... (5) 94 249
Non-deductible expenses............................... 76 86 102
Other................................................. (11) (10) 36
----- ------ ------
$(116) $1,056 $2,774
===== ====== ======
</TABLE>
12. CAPITAL STOCK
Description of Capital Stock--The Company has five classes of authorized
capital stock: Class P Common Stock, Class A Common Stock, Class A Non-Voting
Common Stock, Common Stock and Non-Voting Common Stock. Each share of Class P
Common Stock, Class A Common Stock and Class A Non-Voting Common Stock is
entitled to a preferential payment (the Preference Amount) upon any
distribution by the Company to holders of its capital stock (whether by
dividend, liquidating distribution or otherwise) equal to the original cost of
such share plus an amount which accrues on a daily basis at a rate of 10% per
annum on such cost, compounded quarterly. As of September 30, 1997, the
aggregate Preference Amount of the outstanding Class P Common Stock was
$3,041, based on an aggregate original cost of $2,066. Upon the occurrence of
an initial public offering of the Company's Common Stock, each outstanding
share of such classes of capital stock will be reclassified into one share of
Common Stock plus an additional number of shares of Common Stock determined by
dividing the applicable Preference Amount for such share by the value of a
share of Common Stock based on the estimated initial public offering price.
Holders of Class P Common Stock are entitled to receive their respective
Preference Amounts before any distributions can be made to the holders of
Class A Common Stock, Class A Non-Voting Common Stock, Common Stock and Non-
Voting Common Stock. Similarly, holders of Class A Common Stock and Class A
Non-Voting Common Stock are entitled to receive their respective Preference
Amounts before any distributions can be made to the holders of Common Stock
and Non-Voting Common Stock. Once holders of Class P Common Stock, Class A
Common Stock and Class A Non-Voting Common Stock have received their
respective
F-15
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Preference Amounts, additional distributions will be divided ratably among all
classes of Common Stockholders based upon the total number of shares
outstanding.
Holders of Class P Common Stock, Class A Common Stock and Common Stock are
entitled to one vote per share on all matters to be voted on by the Company's
stockholders, and the holders of these classes of stock vote together as a
single class. The outstanding shares of one class of stock cannot be the
subject of a stock split or a stock dividend unless the outstanding shares of
the other class are similarly affected.
Executive Stock Purchase Agreements--On October 28, 1993, the Company
entered into stock purchase agreements with certain executives whereby each
executive purchased 500 shares of Class P Common Stock and 4,500 shares of
Common Stock at their estimated fair market values of $20.25 and $0.25 per
share, respectively. Ten percent of the shares purchased vested upon execution
of the agreements and the remaining shares vest between 20% and 30% at the end
of each calendar year through December 31, 1997. Upon a sale or public
offering of the stock of the Company, all unvested shares vest immediately.
Each agreement includes an option for the Company to repurchase the
executive's shares upon the executive's termination of employment. This option
provides for vested shares to be repurchased at fair market value and unvested
shares to be repurchased at the executive's original per share cost.
Stock Warrants--The debt financing obtained as part of the Solaray
Acquisition on October 28, 1993 has detachable stock warrants that entitle the
holder to purchase 12,994.35 shares of Class A Non-Voting Common Stock and
116,949.15 shares of Non-Voting Common Stock of the Company at an exercise
price of $0.01 per share. The stock warrants, which expire October 28, 2003,
were valued at their estimated fair market value of $292 on the date of
issuance, as benchmarked against comparable transactions. This amount has been
recorded in additional paid-in capital. As part of entering into the Senior
Credit Agreement (Note 9), the debt financing obtained as part of the Solaray
Acquisition was retired and the $63 unamortized portion of the discount
arising from the detachable stock warrants was recognized as an extraordinary
expense in determining net loss for the year ended September 30, 1995.
Stock Options--During November 1994, the Company issued 40,000 common stock
options to certain key executives at an exercise price of $26.00, management's
estimate of the fair market value of the common stock at the date of grant.
These options vest over a period of five years and expire on the tenth
anniversary of the date of grant.
Pursuant to certain broker agreements entered into in connection with the
Premier Acquisition and the KAL Acquisition (Note 3), the Company issued
warrants during January 1995 to purchase 21,779 shares of Common Stock at
exercise prices ranging from $36.58 to $37.00 per share, which were considered
to be the estimated fair market value of the Company's stock at the date of
grant. These warrants vested immediately and expire in January 2005.
F-16
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Stock Option Plan--During the year ended September 30, 1995, the Company's
Board of Directors adopted the 1995 Stock Option Plan (the 1995 Option Plan).
The 1995 Option Plan provides for granting options to executives and key
employees of the Company and its subsidiaries to purchase common stock. In
aggregate, 30,000 shares have been reserved for issuance under the 1995 Option
Plan. The following grants have been made under this plan:
<TABLE>
<CAPTION>
NUMBER OF AVERAGE PRICE AGGREGATE
OPTIONS PER SHARE OPTION PRICE
<S> <C> <C> <C>
Outstanding at October 1, 1994......... -- $-- $ --
Granted................................ 25,300 37 936
Exercised.............................. -- -- --
Canceled............................... -- -- --
------ ---- -----
Outstanding at September 30, 1995...... 25,300 37 936
------ ---- -----
Granted................................ -- -- --
Exercised.............................. -- -- --
Canceled............................... (2,025) (37) (75)
------ ---- -----
Outstanding at September 30, 1996...... 23,275 37 861
------ ---- -----
Granted................................ 3,500 65 228
Exercised.............................. -- -- --
Canceled............................... (4,425) (37) (164)
------ ---- -----
Outstanding at September 30, 1997...... 22,350 $ 41 $ 925
====== ==== =====
</TABLE>
These options were issued at exercise prices which represent management's
estimate of the fair market value at the date of grant. The options vest over
a period of four years and expire on the tenth anniversary of the date of
grant.
The Company's pro forma net income for the years ended September 30, 1996
and 1997 would have been $1,551 and $4,239, respectively, if compensation cost
had been measured under the fair value method of SFAS 123.
The fair value of the options granted during 1997 was estimated as of the
date of grant using a Black-Scholes option pricing model with the following
assumptions: risk free interest rate of 6.15%; expected life of 5 years;
expected volatility of 1%; and expected dividend yield of 0%. Because the
Company's stock options have characteristics significantly different from
traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, management's opinion is that the
existing valuation models do not necessarily provide a reliable single measure
of the fair value of its employee stock options. The Company's pro forma net
income, computed as if compensation cost had been measured under the fair
value method of SFAS 123, does not reflect the value of options granted prior
to September 30, 1995. As a result, the initial impact of applying the fair
value method of SFAS 123 on pro forma net income may not be representative of
the impact of applying such method in future years, depending upon the amount
of stock options awarded in the future and their related vesting periods.
13. EMPLOYEE BENEFIT PLANS
401(k) Plan--The Company has a 401(k) defined contribution profit sharing
plan which covers substantially all employees. Under the plan, employees can
contribute up to 15% of their compensation, not to exceed the prescribed
annual statutory limit ($9,500 for calendar 1997). The Company makes matching
and discretionary contributions to the plan which approximate 5% of all
eligible employees' salaries. The amounts contributed to the plan by the
Company during the years ended September 30, 1995, 1996 and 1997 were $174,
$254 and $317, respectively.
F-17
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Self-Funded Health Insurance Plan--The Company has a self-insured health
care program for its employees and their dependents. Under the program, the
Company pays claims up to $30 per year for each individual, while claims
exceeding $30 per individual, or $498 in the aggregate as of September 30,
1997, are covered by a third party stop-loss insurance policy. The stop-loss
insurance amounts are determined by the Company based on the number of
employees, prior claim history and insurance premium pricing. The Company
accrues for anticipated health care expenses which have been incurred but not
yet reported based on historical claim experience. Total health insurance
expense incurred by the Company, which includes claims, third party insurance
premiums and other related costs, for the years ended September 30, 1995, 1996
and 1997 was $240, $526 and $770, respectively. At September 30, 1997, the
Company had accrued $105 for claims incurred but not reported and claims
reported but not paid.
14. RELATED PARTY TRANSACTIONS
On January 31, 1995, the Company entered into a five year management
agreement (the Agreement) with certain stockholders of the Company. The
Agreement is automatically extended on a year-to-year basis unless written
notice is provided by one of the parties. The Agreement requires the Company
to pay a monthly management fee of $25 plus out-of-pocket expenses payable on
a quarterly basis in arrears commencing March 31, 1995. For the years ended
September 30, 1995, 1996, and 1997, the Company incurred $341, $339 and $360,
respectively, in fees and out-of-pocket expenses for these stockholders. The
balances due at September 30, 1996 and 1997 under the Agreement were $86 and
$89, respectively.
In addition to the management fees described above, certain stockholders
also received payouts of $300, $100 and $1,200 for services rendered related
to the Solaray, Premier and KAL Acquisitions, respectively.
During fiscal 1994, the Company loaned a total of $157 to certain
stockholders for the purchase of the Company's Common Stock. Loans in the
aggregate amount of $45 were non-interest bearing and were repaid in full
during fiscal 1995. The remaining loans in the aggregate of $112 bear interest
at 6% per annum and are payable in four annual installments commencing October
28, 1994 and ending October 28, 1997. The amounts outstanding under these
loans at September 30, 1996 and 1997 were $70 and $55, respectively.
The Company, certain stockholders, the Company's lender under the Senior
Credit Agreement and the Company's lender in connection with the Solaray and
Premier acquisitions are parties to a stockholders agreement, dated as of
January 31, 1995 (the Stockholders Agreement). The Stockholders Agreement
amends, restates and supersedes a prior stockholders agreement, dated as of
October 28, 1993. The Stockholders Agreement contains provisions relating to
the composition of the Board of directors, restricting the transferability of
the shares subject to such agreement and granting preemptive rights in certain
circumstances to the parties thereto. The Stockholders Agreement, apart from
certain provisions thereof, will be automatically terminated upon consummation
of the anticipated initial public offering.
The Company and certain of its stockholders are parties to a Registration
Agreement providing for the registration of certain shares of Common Stock in
future periods.
15. SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the year ended September 30, 1995, the Company issued 108,000 shares
of Common Stock at $37.00 per share and a $2,265 note payable for the
purchases of KAL and Monarch (Note 3), respectively. Additionally, warrants
were issued pursuant to certain broker agreements entered into in connection
with the KAL and Premier Acquisitions (Note 12).
F-18
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
As part of entering into the Senior Credit Agreement pursuant to the KAL
Acquisition (Note 9), the Company issued 84,309 shares of Non-Voting Common
Stock at $37.00 per share. These shares were recorded as a discount of $3,119
on the Term B Loan.
16. COMMITMENTS AND CONTINGENCIES
The formulation, manufacturing, processing, packaging, labeling,
advertising, distribution and sale of dietary supplements (consisting of
vitamins, amino acids, minerals, herbs, other botanicals and other dietary
ingredients) such as those sold by the Company are subject to regulation by
one or more federal agencies, principally the Food and Drug Administration and
the Federal Trade Commission and, to a lesser extent, the Consumer Product
Safety Commission and United States Department of Agriculture. These
activities are also regulated by various governmental agencies for the states
and localities in which the Company's products are sold, as well as by
governmental agencies in certain foreign countries in which the Company's
products are sold.
Although management believes that the Company is in compliance, in all
material respects, with the statutes, laws, rules and regulations of every
jurisdiction in which it operates, no assurance can be given that the
Company's compliance with applicable statutes, laws, rules and regulations
will not be challenged by governing authorities or that such challenges will
not have a material adverse effect on the Company's financial position or
results of operations or cash flows.
The Company, like any other retailer, distributor and manufacturer of
products that are designed to be ingested, also faces an inherent risk of
exposure to product liability claims in the event that the use of its products
results in injury. With respect to product liability claims, the Company has
liability insurance; however, there can be no assurance that such insurance
will be adequate to cover potential liabilities. In the event that the Company
does not have adequate insurance or contractual indemnification from parties
supplying raw materials or marketing its products, product liabilities
relating to defective products could have a material adverse effect on the
Company.
The Company has been sued by American Cyanimid, the manufacturer of the
Centrum line of vitamin/mineral supplements. American Cyanimid alleges that
the Solaray rainbow logo, as well as the KAL rainbow logo (since abandoned)
infringes, or has infringed, on the Centrum color spectrum logo. The Company
believes the claim is without merit and is vigorously defending the lawsuit.
There can be no assurance that the Company may not be required to pay damages
or attorney fees and costs, and change or abandon the Solaray rainbow logo.
The Company is unable to estimate a possible loss or range of loss which could
result from this contingency.
The Company is not currently a named defendant in any product liability
lawsuit. However, the Company is involved in various legal matters arising in
the normal course of business. In the opinion of management, the Company's
liability, if any, arising from legal proceedings related to these matters is
not expected to have a material adverse impact on the Company's financial
position, results of operations or cash flows.
F-19
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPEC-
TUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, THE COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO
WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET
FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HERE-
OF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 11
Reclassification......................................................... 16
Dilution................................................................. 17
Dividend Policy.......................................................... 18
Use of Proceeds.......................................................... 18
Capitalization........................................................... 19
Unaudited Pro Forma Financial Statements................................. 20
Selected Historical Consolidated Financial Data......................... 25
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 27
Business................................................................. 31
Management............................................................... 42
Certain Relationships and Related Transactions........................... 48
Principal and Selling Stockholders....................................... 49
Description of Capital Stock............................................. 50
Shares Eligible for Future Sale.......................................... 52
Underwriting............................................................. 54
Legal Matters............................................................ 55
Experts.................................................................. 55
Available Information.................................................... 55
Index to Financial Statements............................................ F-1
</TABLE>
----------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIRE-
MENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,330,000 SHARES
NUTRACEUTICAL
INTERNATIONAL
CORPORATION
COMMON STOCK
----------------
PROSPECTUS
----------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SALOMON SMITH BARNEY
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II--INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a statement of estimated expenses of the issuance and
distribution of the securities being registered other than underwriting
compensation:
<TABLE>
<S> <C>
SEC registration fee............................................ $ 16,963
NASD filing fee................................................. 6,250
Nasdaq National Market fees..................................... 50,000
Blue sky fees and expenses (including attorneys' fees and ex-
penses)........................................................ 10,000
Printing and engraving expenses................................. 120,000
Transfer agent's fees and expenses.............................. 15,000
Accounting fees and expenses.................................... 600,000
Legal fees and expenses......................................... 500,000
Miscellaneous expenses.......................................... 81,787
----------
Total....................................................... $1,400,000
==========
</TABLE>
All amounts are estimated except for the SEC registration fee and the NASD
filing fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is incorporated under the laws of the State of Delaware. Section
145 of the General Corporation Law of the State of Delaware ("Section 145")
provides that a Delaware corporation may indemnify any person who is, or is
threatened to be made, a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of such corporation), by reason of
the fact that such person was or is an officer, director, employee or agent of
such corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding, provided such person acted
in good faith and in a manner he reasonably believed to be in or not opposed
to the corporation's best interests and, with respect to any criminal action
or proceeding, had no reasonable cause to believe that his conduct was
illegal. A Delaware corporation may indemnify any person who is, or is
threatened to be made, a party to any threatened, pending or completed action
or suit by or in the right of the corporation by reason of the fact that such
person was a director, officer, employee or agent of such corporation, or is
or was serving at the request of such corporation as a director, officer,
employee or agent of another corporation or enterprise. The indemnity may
include expenses (including attorneys' fees) actually and reasonably incurred
by such person in connection with the defense or settlement of such action or
suit, provided such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the corporation's best interests except
that no indemnification is permitted without judicial approval if the officer
or director is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him against the expenses
which such officer or director has actually and reasonably incurred.
The Company's Restated Certificate of Incorporation will provide for the
indemnification of directors and officers of the Company to the fullest extent
permitted by Section 145.
In that regard, the Restated Certificate of Incorporation will provide that
the Company shall indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action,
II-1
<PAGE>
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director or officer of such corporation, or is or was
serving at the request of such corporation as a director, officer or member of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in connection with
such action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of such
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Indemnification in
connection with an action or suit by or in the right of such corporation to
procure a judgment in its favor will be limited to payment of settlement of
such an action or suit except that no such indemnification may be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable for negligence or misconduct in the performance of his
duty to the indemnifying corporation unless and only to the extent that the
Court of Chancery of Delaware or the court in which such action or suit was
brought shall determine that, despite the adjudication of liability but in
consideration of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper.
Prior to the consummation of the Offering, the Company expects to enter into
agreements to provide indemnification for its directors and executive officers
in addition to the indemnification provided for in the Company's Restated
Certificate of Incorporation and By-laws.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The number of shares set forth below, and the exercise price of certain
options and warrants per share set forth below, do not give effect to the
proposed stock split and other transactions referred to in the Prospectus
under "Reclassification."
(1) On January 31, 1995, the Company issued to Jackson National 84,309
shares of the Non-Voting Common Stock of the Company, par value $.01 per
share. These shares were issued to Jackson National as part of the
consideration furnished to Jackson National in return for the credit facility
and term loans provided by Jackson National to certain subsidiaries of the
Company.
(2) On January 31, 1995, the Company issued to Old Kal 108,000 shares of the
Common Stock of the Company, par value $.01 per share. The Company issued
these shares as part of the consideration furnished to Old Kal in return for
assets sold by Old Kal to the Company.
(3) On January 31, 1995, as partial consideration for certain advisory
services, the Company sold the following warrants to purchase its Common
Stock: (a) (i) to William E. Myers, Jr., for an aggregate purchase price of
$773.34, warrants to purchase 2,374.14 shares; (ii) to Brian E. Sanderson, for
an aggregate purchase price of $193.33, warrants to purchase 593.53 shares;
and (iii) to David Harvey, for an aggregate purchase price of $33.33, warrants
to purchase 102.33 shares and (b) (i) to William E. Myers, Jr., for an
aggregate purchase price of $773.34, warrants to purchase 14,468.30 shares;
(ii) to Brian E. Sanderson, for an aggregate purchase price of $193.33,
warrants to purchase 3,617.07 shares; and (iii) to David Harvey, for an
aggregate purchase price of $33.33, warrants to purchase 623.63 shares. The
warrants listed under (a) above had an exercise price of $36.58 per share, and
the warrants listed under (b) above had an exercise price of $37.00 per share
(in each case before giving effect to the stock split described under
"Reclassification" in the Prospectus).
(4) The Company has outstanding options to purchase an aggregate of 23,350
(before adjusting for the stock split accomplished in connection with the
Offering) shares of Common Stock pursuant to its 1995 Stock Option Plan, none
of which have been exercised as of January 27, 1998.
The Company has not sold any unregistered securities, other than those
described above, in the last three years. The sales and issuances described in
paragraphs (1)-(3) above were deemed to be exempted from registration under
the Securities Act by virtue of Section 4(2) as transactions not involving a
public offering. The sales and issuances described above in paragraph (4) were
deemed to be exempted from registration under the Securities Act by virtue of
Section 3(b) thereof and Rule 701 promulgated thereunder.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
<C> <S> <C>
1.1 Form of Underwriting Agreement
**3.1 Form of Amended and Restated Certificate of Incorporation
of the Registrant
**3.2 Form of By-laws of the Registrant
**4.1 Form of certificate representing Common Stock
5.1 Opinion of Kirkland & Ellis
**10.1 Revolving Credit and Term Loan Agreement dated as of Janu-
ary 31, 1995 among Nutraceutical Corporation, Solaray,
Kal, Natural Max, Premier, the Company and Jackson Nation-
al+
**10.2 Waiver and Amendment to Revolving Credit and Term Loan
Agreement dated as of September 29, 1995 among
Nutraceutical Corporation, Solaray, Kal, Natural Max, Pre-
mier, Monarch, Au Naturel, Inc., the Company and Jackson
National
**10.3 Amended and Restated Stockholders Agreement dated as of
January 31, 1995 among the Company and certain of its
stockholders
**10.4 Amended and Restated Registration Agreement dated as of
January 31, 1995 among the Company and certain of its
stockholders
**10.5 Investor Agreement dated as of January 31, 1995 among the
Company, Old Kal and the Bain Capital Funds
**10.6 Consultant Stock Agreement dated as of October 28, 1993
between the Company and Bruce R. Hough
**10.7 Executive Stock Agreement dated as of October 28, 1993 be-
tween the Company and Jeffrey H. Hinrichs
**10.8 Warrants dated October 28, 1993 issued by the Company to
Heller Financial, Inc. for the right to purchase 12,994.35
shares of Class A Non-Voting Common Stock and 116,949.15
shares of Non-Voting Common Stock
**10.9 First Amendment to Warrants dated as of October 31, 1994
between the Company and Heller
**10.10 Second Amendment to Warrants dated as of January 31, 1995
between the Company and Heller
**10.11 Stock Option Agreement dated as of November 15, 1994 be-
tween the Company and Jeffrey A. Hinrichs
**10.12 Stock Option Agreement dated as of November 15, 1994 be-
tween the Company and Bruce R. Hough
**10.13 Stock Option Agreement dated as of November 15, 1994 be-
tween the Company and Frank W. Gay, II
**10.14 Form of Area Sales Consultant Agreement
10.15 Form of Transaction Services Agreement between the Company
and Bain Capital, Inc.
10.16 Form of Termination Agreement between the Company and Bain
Capital, Inc.
**10.17 Form of Indemnification Agreement
**10.18 Stock Incentive Plan
**10.19 Non-Employee Director Stock Option Plan
**10.20 Employee Stock Discount Purchase Plan
**11.1 Computation of Pro Forma Earnings Per Share
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
<C> <S> <C>
21.1 Subsidiaries of the Company
23.1 Consent of Price Waterhouse LLP
23.2 Consent of Kirkland & Ellis (included in opinion to be
filed as Exhibit 5.1)
**24.1 Powers of attorney
**27 Financial Data Schedule
</TABLE>
- ---------------------
*To be filed by amendment.
**Previously filed.
+The Company agrees to submit any omitted schedule or exhibit to such item
upon request by the Commission.
(b) Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 2 TO REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
BOSTON, STATE OF MASSACHUSETTS ON FEBRUARY 11, 1998.
Nutraceutical International
Corporation
*
By: _________________________________
NAME:FRANK W. GAY II
TITLE: CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
* * * *
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO REGISTRATION STATEMENT HAS BEEN SIGNED ON FEBRUARY 11, 1998, BY THE
FOLLOWING PERSONS IN THE CAPACITIES INDICATED WITH RESPECT TO NUTRACEUTICAL
INTERNATIONAL CORPORATION:
SIGNATURE CAPACITY
* Director, Chairman
- ------------------------------------- of the Board and
FRANK W. GAY II Chief Executive
Officer
* Director and
- ------------------------------------- President
BRUCE R. HOUGH
* Director, Chief
- ------------------------------------- Operating Officer
JEFFREY A. HINRICHS and Executive Vice
President
* Senior Vice
- ------------------------------------- President, Finance
LESLIE M. BROWN, JR. and Chief Financial
Officer
* Director
- -------------------------------------
ROBERT C. GAY
* Director
- -------------------------------------
GEOFFREY S. REHNERT
II-5
<PAGE>
SIGNATURE CAPACITY
* Director
- -------------------------------------
MATTHEW S. LEVIN
* The undersigned, by signing his name hereto, does hereby sign and execute
this Amendment No. 2 to Registration Statement on behalf of the above named
officers and directors of the Company pursuant to the Power of Attorney
executed by such officers and directors and previously filed with the
Securities and Exchange Commission.
/s/ Stanley E. Soper
- -------------------------------------
STANLEY E. SOPER
Attorney-in-fact
II-6
<PAGE>
NUTRACEUTICAL INTERNATIONAL CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED CHARGED BALANCE AT
BEGINNING TO COSTS AND TO OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ---------- ------------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
SEPTEMBER 30, 1997
Deducted from related
asset account:
Allowance for sales
returns.............. $456 $207 $ -- $243 $ 420
Allowance for doubtful
accounts............. $355 $ 35 $ -- $ -- $ 390
Provision for
inventory............ $675 $492 $ -- $ -- $1,167
SEPTEMBER 30, 1996
Deducted from related
asset account:
Allowance for sales
returns.............. $412 $601 $ -- $557 $ 456
Allowance for doubtful
accounts............. $420 $ -- $ -- $ 65 $ 355
Provision for
inventory............ $625 $ 50 $ -- $ -- $ 675
SEPTEMBER 30, 1995
Deducted from related
asset account:
Allowance for sales
returns.............. $ 20 $ -- $394 $ 2 $ 412
Allowance for doubtful
accounts............. $ 21 $100 $303 $ 4 $ 420
Provision for
inventory............ $ -- $400 $225 $ -- $ 625
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION PAGE
<C> <S> <C>
1.1 Form of Underwriting Agreement
**3.1 Form of Amended and Restated Certificate of Incorporation of
the Registrant
**3.2 Form of By-laws of the Registrant
**4.1 Form of certificate representing Common Stock
5.1 Opinion of Kirkland & Ellis
**10.1 Revolving Credit and Term Loan Agreement dated as of January
31, 1995 among Nutraceutical Corporation, Solaray, Kal, Natu-
ral Max, Premier, the Company and Jackson National+
**10.2 Waiver and Amendment to Revolving Credit and Term Loan Agree-
ment dated as of September 29, 1995 among Nutraceutical Cor-
poration, Solaray, Kal, Natural Max, Premier, Monarch, Au
Naturel, Inc., the Company and Jackson National
**10.3 Amended and Restated Stockholders Agreement dated as of Janu-
ary 31, 1995 among the Company and certain of its stockhold-
ers
**10.4 Amended and Restated Registration Agreement dated as of Janu-
ary 31, 1995 among the Company and certain of its stockhold-
ers
**10.5 Investor Agreement dated as of January 31, 1995 among the
Company, Old Kal and the Bain Capital Funds
**10.6 Consultant Stock Agreement dated as of October 28, 1993 be-
tween the Company and Bruce R. Hough
**10.7 Executive Stock Agreement dated as of October 28, 1993 be-
tween the Company and Jeffrey H. Hinrichs
**10.8 Warrants dated October 28, 1993 issued by the Company to
Heller Financial, Inc. for the right to purchase 12,994.35
shares of Class A Non-Voting Common Stock and 116,949.15
shares of Non-Voting Common Stock
**10.9 First Amendment to Warrants dated as of October 31, 1994 be-
tween the Company and Heller
**10.10 Second Amendment to Warrants dated as of January 31, 1995 be-
tween the Company and Heller
**10.11 Stock Option Agreement dated as of November 15, 1994 between
the Company and Jeffrey A. Hinrichs
**10.12 Stock Option Agreement dated as of November 15, 1994 between
the Company and Bruce R. Hough
**10.13 Stock Option Agreement dated as of November 15, 1994 between
the Company and Frank W. Gay, II
**10.14 Form of Area Sales Consultant Agreement
10.15 Form of Transaction Services Agreement between the Company
and Bain Capital, Inc.
10.16 Form of Termination Agreement between the Company and Bain
Capital, Inc.
**10.17 Form of Indemnification Agreement
**10.18 Stock Incentive Plan
**10.19 Non-Employee Director Stock Option Plan
**10.20 Employee Stock Discount Purchase Plan
**11.1 Computation of Pro Forma Earnings Per Share
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION PAGE
<C> <S> <C>
21.1 Subsidiaries of the Company
23.1 Consent of Price Waterhouse LLP
23.2 Consent of Kirkland & Ellis (included in opinion to be filed
as Exhibit 5.1)
**24.1 Powers of attorney
**27 Financial Data Schedule
</TABLE>
*To be filed by amendment.
**Previously filed.
+The Company agrees to submit any omitted schedule or exhibit to such item
upon request by the Commission.
<PAGE>
3,330,000 Shares
NUTRACEUTICAL INTERNATIONAL CORPORATION
Common Stock
FORM OF UNDERWRITING AGREEMENT
------------------------------
_________ __, 199_
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SMITH BARNEY INC.
As representatives of the several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Ladies and Gentlemen:
Nutraceutical International Corporation, a Delaware corporation (the
"Company"), proposes to issue and sell to the several underwriters named in
Schedule I hereto (the "Underwriters"), and certain stockholders of the Company
named in Schedule II hereto (the "Selling Stockholders") severally propose to
sell to the several Underwriters, an aggregate of 3,330,000 shares of the Common
Stock, par value $0.01 per share of the Company (the "Firm Shares"), of which
2,000,000 shares are to be issued and sold by the Company and 1,330,000 shares
are to be sold by the Selling Stockholders, each Selling Stockholder selling the
amount set forth opposite such Selling Stockholder's name in Schedule II hereto.
The Selling Stockholders also propose to sell to the several Underwriters not
more than an additional 499,500 shares of its Common Stock, par value $0.01 per
share (the "Additional Shares") if requested by the Underwriters as provided in
Section 2 hereof. The Firm Shares and the Additional Shares are hereinafter
referred to collectively as the "Shares". The shares of common stock of the
Company to be outstanding after giving effect to the sales contemplated hereby
are hereinafter referred to as the "Common Stock". The Company and the
1
<PAGE>
Selling Stockholders are hereinafter sometimes referred to collectively as the
"Sellers."
An aggregate of 166,500 Shares, or approximately 5.0% of the Shares, have
been reserved for sale to certain employees, customers, independent sales
representatives and affiliates of the Company. The price per Share to be sold to
these persons shall be equal to the Purchase Price (as defined below).
The Company currently has five classes of authorized capital stock: Common
Stock, Non-Voting Common Stock, Class A Common Stock, Class A Non-Voting Common
Stock and Class P Common Stock. Prior to the Closing date (as defined below),
the Non-Voting Common Stock, Class P Common Stock, Class A Non-Voting Common
Stock and Class A Common Stock will cease to be authorized and all outstanding
shares of such classes of capital stock (or rights to purchase such shares) will
be reclassified into shares of Common Stock (or rights to purchase such shares).
After giving effect to the foregoing transactions, a [7.5291]-for-one stock
split will be effected as to all of the outstanding shares of Common Stock and a
corresponding adjustment to the number of shares issuable upon exercise of all
outstanding warrants and options will be made. Such reclassification and the
subsequent stock split are referred to herein collectively as the
"Reclassification."
SECTION 1. Registration Statement and Prospectus. The Company has prepared
and filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-1, including a prospectus, relating
to the Shares. The registration statement, as amended at the time it became
effective, including the information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A under
the Act, is hereinafter referred to as the "Registration Statement;" and the
prospectus (including any prospectus subject to completion and any term sheet
meeting the requirements of Rule 434(b) under the Act, taken together as the
prospectus provided by the Company to meet the requirements of Section 10(a) of
the Act) in the form first used to confirm sales of Shares is hereinafter
referred to as the "Prospectus." If the Company has filed or is required
pursuant to the terms hereof to file a registration statement pursuant to Rule
462(b) under the Act registering additional shares of Common Stock (a "Rule
462(b) Registration Statement"), then, unless otherwise specified, any reference
herein to the term "Registration Statement" shall be deemed to include such Rule
462(b) Registration Statement. For purposes of this Agreement, all references to
the Registration Statement, any preliminary prospectus, the Prospectus or any
term sheet or any amendment or supplement to any of the foregoing shall be
deemed to
2
<PAGE>
include the copy filed with the Commission pursuant to its Electronic Data
Gathering, Analysis and Retrieval System ("EDGAR").
SECTION 2. Agreements to Sell and Purchase and Lock-Up Agreements. On the
basis of the representations and warranties contained in this Agreement, and
subject to its terms and conditions, (i) the Company agrees to issue and sell
2,000,000 Firm Shares, (ii) each Selling Stockholder agrees, severally and not
jointly, to sell the number of Firm Shares set forth opposite such Selling
Stockholder's name in Schedule II hereto and (iii) each Underwriter agrees,
severally and not jointly, to purchase from each Seller at a price per Share of
$______ (the "Purchase Price") the number of Firm Shares (subject to such
adjustments to eliminate fractional shares as you may determine) that bears the
same proportion to the total number of Firm Shares to be sold by such Seller as
the number of Firm Shares set forth opposite the name of such Underwriter in
Schedules I hereto bears to the total number of Firm Shares.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, each Selling Stockholder
agrees to sell the number of Additional Shares set forth opposite such Selling
Stockholder's name in Schedule II hereto and the Underwriters shall have the
right to purchase, severally and not jointly, up to an aggregate of 499,500
Additional Shares from the Selling Stockholders at the Purchase Price.
Additional Shares may be purchased solely for the purpose of covering over-
allotments made in connection with the offering of the Firm Shares. The
Underwriters may exercise their right to purchase Additional Shares in whole or
in part from time to time by giving written notice thereof to the Selling
Stockholders within 30 days after the date of this Agreement. Donaldson, Lufkin
& Jenrette Securities Corporation shall give any such notice on behalf of the
Underwriters and such notice shall specify the aggregate number of Additional
Shares to be purchased pursuant to such exercise and the date for payment and
delivery thereof, which date shall be a business day (i) no earlier than two
business days after such notice has been given (and, in any event, no earlier
than the Closing Date (as hereinafter defined)) and (ii) no later than ten
business days after such notice has been given. If any Additional Shares are to
be purchased, each Underwriter, severally and not jointly, agrees to purchase
from the Selling Stockholders the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as you may determine) which bears the
same proportion to the total number of Additional Shares to be purchased from
the Selling Stockholders as the number of Firm Shares set forth opposite the
name of such Underwriter in Schedule I bears to the total number of Firm Shares.
Each Seller hereby agrees not to (i) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, or otherwise transfer or
dispose of,
3
<PAGE>
directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or (ii) enter
into any swap or other arrangement that transfers all or a portion of the
economic consequences associated with the ownership of any Common Stock
(regardless of whether any of the transactions described in clause (i) or (ii)
is to be settled by the delivery of Common Stock, or such other securities, in
cash or otherwise), except to the Underwriters pursuant to this Agreement, for a
period of 180 days after the date of the Prospectus without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation. Notwithstanding
the foregoing, during such period (i) the Company may grant stock options
pursuant to the Company's existing stock option plans (as described in the
Prospectus), (ii) the Company may issue shares of Common Stock upon the exercise
of an option or warrant or the conversion of a security outstanding on the date
hereof, and (iii) the Selling Stockholders may transfer shares of Common Stock
in the case of death or disability of the holder of such shares of Common Stock,
as may be necessary to comply with a legal requirement or court order, or to
spouses, heirs or issue for estate planning purposes. The Company also agrees
not to file any registration statement (other than those filed on Form S-8
relating to existing benefit plans of the Company) with respect to any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock for a period of 180 days after the date of the Prospectus
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation. In addition, each Selling Stockholder agrees that, for a period of
180 days after the date of the Prospectus without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation, it will not make any demand
for, or exercise any right with respect to, the registration of any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock. The Company shall, prior to or concurrently with the execution
of this Agreement, deliver an agreement executed by (i) each of the directors
and officers of the Company who is not a Selling Stockholder and (ii) each
stockholder listed on Annex I hereto to the effect that such person will not,
during the period commencing on the date such person signs such agreement and
ending 180 days after the date of the Prospectus, without the prior written
consent of Donaldson, Lufkin & Jenrette Corporation, (A) engage in any of the
transactions described in the first sentence of this paragraph or (B) make any
demand for, or exercise any right with respect to, the registration of any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock.
SECTION 3. Terms of Public Offering. The Sellers are advised by you that
the Underwriters propose (i) to make a public offering of their respective
portions of the Shares as soon after the execution and delivery of this
Agreement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
4
<PAGE>
SECTION 4. Delivery and Payment. Delivery to the Underwriters of and
payment for the Firm Shares shall be made at [9]:00 A.M., New York City time, on
_________ __, 1998 (the "Closing Date") unless otherwise permitted pursuant to
Rule 15c6-1 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), at such place as you shall designate. The Closing Date and the location
of delivery of and payment for the Firm Shares may be varied by agreement
between you and the Sellers.
Delivery to the Underwriters of and payment for any Additional Shares to be
purchased by the Underwriters shall be made at such place as you shall designate
on the date specified in the applicable exercise notice given by you pursuant to
Section 2 (an "Option Closing Date") at 9:00 A.M., New York City time. Any
such Option Closing Date and the location of delivery of and payment for such
Additional Shares may be varied by agreement between you and the Company.
Certificates for the Shares shall be registered in such names and issued in
such denominations as you shall request in writing not later than two full
business days prior to the Closing Date or an Option Closing Date, as the case
may be. Such certificates shall be made available to you for inspection not
later than 9:30 A.M., New York City time, on the business day prior to the
Closing Date or the applicable Option Closing Date, as the case may be.
Certificates in definitive form evidencing the Shares shall be delivered to you
on the Closing Date or the applicable Option Closing Date, as the case may be,
with any transfer taxes thereon duly paid by the respective Sellers, for the
respective accounts of the several Underwriters, against payment to the Sellers
of the Purchase Price therefor by wire transfer of Federal or other funds
immediately available in New York City.
SECTION 5. Agreements of the Company. The Company agrees with you:
(a) The Company will comply fully and in a timely manner with the
applicable provisions of Rule 424 and Rule 430A under the Act.
(b) To advise you promptly and, if requested by you, to confirm such
advice in writing, (i) of the receipt of any comments from the Commission that
relate to the Registration Statement or of any request by the Commission for
amendments to the Registration Statement or amendments or supplements to the
Prospectus or for additional information, (ii) of the issuance by the Commission
of any stop order suspending the effectiveness of the Registration Statement or
of the suspension of qualification of the Shares for offering or sale in any
jurisdiction, or the initiation of any proceeding for such purposes, (iii) if
and when the Prospectus is sent for filing pursuant to Rule 424 under the Act,
when the
5
<PAGE>
Registration Statement has become effective, when any Rule 462 Registration
Statement is filed and becomes effective and when any post-effective amendment
to it becomes effective and (iv) of the happening of any event during the period
referred to in Section 5(e) below which makes any statement of a material fact
made in the Registration Statement or the Prospectus untrue or which requires
any additions to or changes in the Registration Statement or the Prospectus in
order to make the statements therein not misleading. If at any time the
Commission shall issue any stop order suspending the effectiveness of the
Registration Statement, the Company will use its best efforts to obtain the
withdrawal or lifting of such order at the earliest possible time.
(c) Upon your request, to furnish to you three signed copies of the
Registration Statement as first filed with the Commission and of each amendment
to it, including all exhibits, and to furnish to you and each Underwriter
designated by you such number of conformed copies of the Registration Statement
as so filed and of each amendment to it, without exhibits, as you may reasonably
request.
(d) To prepare the Prospectus, the form and substance of which shall be
satisfactory to you, and to file the Prospectus in such form with the Commission
within the applicable period specified in Rule 424(b) under the Act; during the
period specified in Section 5(d) below, not to file any further amendment to the
Registration Statement and not to make any amendment or supplement to the
Prospectus of which you shall not previously have been advised or to which you
shall reasonably object after being so advised; and, during such period, to
prepare and file with the Commission, promptly upon your reasonable request, any
amendment to the Registration Statement or amendment or supplement to the
Prospectus which may be necessary or advisable in connection with the
distribution of the Shares by you, and to use its best efforts to cause any such
amendment to the Registration Statement to become promptly effective.
(e) Prior to 10:00 A.M., New York City time, on the first business day
after the date of this Agreement and from time to time thereafter for such
period as in the opinion of counsel for the Underwriters a prospectus is
required by law to be delivered in connection with sales by an Underwriter or a
dealer, to furnish in New York City to each Underwriter and any dealer as many
copies of the Prospectus (and of any amendment or supplement to the Prospectus)
as such Underwriter or dealer may reasonably request.
(f) If during the period specified in Section 5(e), any event shall occur
or condition shall exist as a result of which, in the opinion of counsel for the
Underwriters, it becomes necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances when the
Prospectus is delivered to a purchaser, not misleading, or if, in the opinion of
counsel for the Underwriters, it is necessary to amend or supplement the
6
<PAGE>
Prospectus to comply with applicable law, forthwith to prepare and file with the
Commission an appropriate amendment or supplement to the Prospectus so that the
statements in the Prospectus, as so amended or supplemented, will not in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with applicable law, and to furnish to each
Underwriter and to any dealer as many copies thereof as such Underwriter or
dealer may reasonably request.
(g) Prior to any public offering of the Shares, to cooperate with you and
counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters and
by dealers under the state securities or Blue Sky laws of such jurisdictions as
you may request, to continue such registration or qualification in effect so
long as required for distribution of the Shares and to file such consents to
service of process or other documents as may be necessary in order to effect
such registration or qualification; provided, however, that the Company shall
not be required in connection therewith to qualify as a foreign corporation in
any jurisdiction in which it is not now so qualified or to take any action that
would subject it to general consent to service of process or taxation other than
as to matters and transactions relating to the Prospectus, the Registration
Statement, any preliminary prospectus or the offering or sale of the Shares, in
any jurisdiction in which it is not now so subject.
(h) To mail and make generally available to its stockholders as soon as
practicable an earnings statement covering a period of at least twelve months
after the effective date of the Registration Statement (but in no event
commencing later than 90 days after such date) that shall satisfy the provisions
of Section 11(a) of the Act and Rule 158 promulgated thereunder, and to advise
you in writing when such statement has been so made available.
(i) During the period of three years after the date of this Agreement, to
furnish to you as soon as available copies of all reports or other
communications furnished to the record holders of Common Stock or furnished to
or filed with the Commission or any national securities exchange on which any
class of securities of the Company is listed and such other publicly available
information concerning the Company and its subsidiaries as you may reasonably
request.
(j) To timely complete all required filings and otherwise comply in all
material respects in a timely manner with all provisions of the Exchange Act in
connection with the registration of the Shares thereunder.
(k) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of the Sellers' obligations under this
7
<PAGE>
Agreement, including: (i) the fees, disbursements and expenses of the Company's
counsel, the Company's accountants and any Selling Stockholder's counsel (in
addition to the Company's counsel) in connection with the registration and
delivery of the Shares under the Act and all other fees and expenses in
connection with the preparation, printing, filing and distribution of the
Registration Statement (including financial statements and exhibits), any
preliminary prospectus, the Prospectus and all amendments and supplements to any
of the foregoing, including the mailing and delivering of copies thereof to the
Underwriters and dealers in the quantities specified herein, (ii) all costs and
expenses related to the transfer and delivery of the Shares to the Underwriters,
including any transfer or other taxes payable thereon, (iii) all costs of
printing or producing this Agreement and any other agreements or documents in
connection with the offering, purchase, sale or delivery of the Shares, (iv) all
expenses in connection with the registration or qualification of the Shares for
offer and sale under the securities or Blue Sky laws of the several states and
all costs of printing or producing any Preliminary and Supplemental Blue Sky
Memoranda in connection therewith (including, subject to the limits set forth in
clause (v), the filing fees and fees and disbursements of counsel for the
Underwriters in connection with such registration or qualification and memoranda
relating thereto, (v) the filing fees and disbursements of counsel for the
Underwriters in connection with the review and clearance of the offering of the
Shares by the National Association of Securities Dealers, Inc., which, together
with fees and disbursements of counsel pursuant to clause (iv), shall be limited
to $25,000 in the aggregate, (vi) all fees and expenses in connection with the
preparation and filing of the registration statement on Form 8-A relating to the
Common Stock and all costs and expenses incident to the listing of the Shares on
the Nasdaq National Market, (vii) the cost of printing certificates representing
the Shares, (viii) the costs and charges of any transfer agent, registrar and/or
depositary, and (ix) all other costs and expenses incident to the performance of
the obligations of the Company and the Selling Stockholders hereunder for which
provision is not otherwise made in this Section. The provisions of this Section
shall not supersede or otherwise affect any agreement that the Company and the
Selling Stockholders may otherwise have for allocation of such expenses among
themselves. Except as specifically set forth in this Agreement, it is understood
that Underwriters pay their own expenses, including fees and disbursement of
their counsel.
(l) To use its best efforts to list for quotation the Shares on the Nasdaq
National Market and to maintain the listing of the Shares on the Nasdaq National
Market for a period of three years after the date of this Agreement.
(m) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company prior to
the Closing Date or any Option Closing Date, as the case may be, and to satisfy
all conditions precedent to the delivery of the Shares.
8
<PAGE>
(n) If the Registration Statement at the time of the effectiveness of this
Agreement does not cover all of the Shares, to file a Rule 462(b) Registration
Statement with the Commission registering the Shares not so covered in
compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of
this Agreement and to pay to the Commission the filing fee for such Rule 462(b)
Registration Statement at the time of the filing thereof or to give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.
(o) The Company shall pay or cause to be paid all transfer taxes payable
in connection with the transfer of the Shares to be sold by such Selling
Stockholder to the Underwriters.
SECTION 6. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective (other than any Rule
462(b) Registration Statement to be filed by the Company after the effectiveness
of this Agreement); any Rule 462(b) Registration Statement filed after the
effectiveness of this Agreement will become effective no later than 10:00 P.M.,
New York City time, on the date of this Agreement; and no stop order suspending
the effectiveness of the Registration Statement is in effect, and no proceedings
for such purpose are pending before or threatened by the Commission.
(b) (i) The Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement), when it became effective, did not contain and, as amended, if
applicable, will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement (other than
any Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement) and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the Act,
(iii) if the Company is required to file a Rule 462(b) Registration Statement
after the effectiveness of this Agreement, such Rule 462(b) Registration
Statement and any amendments thereto, when they become effective (A) will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading and (B) will comply in all material respects with the Act and (iv)
the Prospectus does not contain and, as amended or supplemented, if applicable,
will not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that the
representations and warranties set forth in this paragraph do not apply to
statements or omissions in the Registration Statement
9
<PAGE>
or the Prospectus based upon information relating to any Underwriter furnished
to the Company in writing by such Underwriter through you expressly for use
therein.
(c) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, complied when so filed in all material
respects with the Act, and did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and warranties
set forth in this paragraph do not apply to statements or omissions in any
preliminary prospectus based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you expressly
for use therein.
(d) Each of the Company and its subsidiaries has been duly incorporated,
is validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation and has the corporate power and authority to carry
on its business as described in the Prospectus and to own, lease and operate its
properties, and each is duly qualified and is in good standing as a foreign
corporation authorized to do business in each jurisdiction in which the nature
of its business or its ownership or leasing of property requires such
qualification, except where the failure to be so qualified would not have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole
("Material Adverse Effect").
(e) There are no outstanding subscriptions, rights, warrants, options,
calls, convertible securities, commitments of sale or liens granted or issued by
the Company or any of its subsidiaries relating to or entitling any person to
purchase or otherwise to acquire any shares of the capital stock of the Company
or any of its subsidiaries, except as otherwise disclosed in the Registration
Statement.
(f) All the outstanding shares of capital stock of the Company (including
the Shares to be sold by the Selling Stockholders) have been duly authorized and
validly issued and are fully paid, non-assessable and not subject to any
preemptive or similar rights; the Reclassification has been duly authorized by
all requisite corporate action; and the Shares to be issued and sold by the
Company have been duly authorized and, when issued and delivered to the
Underwriters against payment therefor as provided by this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of such Shares
will not be subject to any preemptive or similar rights.
(g) All of the outstanding shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued and are
10
<PAGE>
fully paid and non-assessable, and are owned by the Company, directly or
indirectly through one or more subsidiaries, free and clear of any security
interest, claim, lien, encumbrance or adverse interest of any nature.
(h) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(i) Neither the Company nor any of its subsidiaries is in violation of its
respective charter or by-laws or in default in the performance of any
obligation, agreement, covenant or condition contained in any indenture, loan
agreement, mortgage, lease or other agreement or instrument that is material to
the Company and its subsidiaries, taken as a whole, to which the Company or any
of its subsidiaries is a party or by which the Company or any of its
subsidiaries or their respective property is bound except for such defaults
which, individually or in the aggregate, would not result in a Material Adverse
Effect.
(j) The execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not (i) require any
consent, approval, authorization or other order of, or qualification with, any
court or governmental body or agency (except such as may be required under the
securities or Blue Sky laws of the various states), (ii) conflict with or
constitute a breach of any of the terms or provisions of, or a default under,
the charter or by-laws of the Company or any of its subsidiaries or any
indenture, loan agreement, mortgage, lease or other agreement or instrument that
is material to the Company and its subsidiaries, taken as a whole, to which the
Company or any of its subsidiaries is a party or by which the Company or any of
its subsidiaries or their respective property is bound, (iii) violate or
conflict with any applicable law or any rule, regulation, judgment, order or
decree of any court or any governmental body or agency having jurisdiction over
the Company, any of its subsidiaries or their respective property or (iv) result
in the suspension, termination or revocation of any Authorization (as defined
below) of the Company or any of its subsidiaries or any other impairment of the
rights of the holder of any such Authorization.
(k) There are no legal or governmental proceedings pending or threatened
to which the Company or any of its subsidiaries is or could be a party or to
which any of their respective property is or could be subject that are required
to be described in the Registration Statement or the Prospectus and are not so
described; nor are there any statutes, regulations, contracts or other documents
that are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement that are not
so described or filed as required.
11
<PAGE>
(l) Except for any such violation which, individually or in the aggregate,
would not reasonably be expected to result in a Material Adverse Effect, the
Company's operations, manufacturing, labeling and distribution have been
conducted in accordance with all applicable laws, regulations and other
requirements of all governmental bodies having jurisdiction over the Company,
including but not limited to the Food and Drug Administration ("FDA"). Except
as disclosed in the Prospectus, neither the Company nor any of its subsidiaries
has received any notification of any asserted present or past failure by the
Company or its subsidiaries of any asserted present or past failure by the
Company or its subsidiaries to comply with any such laws, rules or regulations
to the extent such notice would reasonably be expected to result in a Material
Adverse Effect.
(m) Neither the Company nor any of its subsidiaries has violated any
foreign, federal, state or local law or regulation relating to the protection of
human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("Environmental Laws") or any provisions of
the Employee Retirement Income Security Act of 1974, as amended, or the rules
and regulations promulgated thereunder, except for such violations which, singly
or in the aggregate, would not have a Material Adverse Effect.
(n) Each of the Company and its subsidiaries has such permits, licenses,
consents, exemptions, franchises, authorizations and other approvals (each, an
"Authorization") of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory organizations and all
courts and other tribunals, including, without limitation, under any applicable
Environmental Laws, as are necessary to own, lease, license and operate its
respective properties and to conduct its business, except where the failure to
have any such Authorization or to make any such filing or notice would not,
singly or in the aggregate, have a Material Adverse Effect. Each such
Authorization is valid and in full force and effect and each of the Company and
its subsidiaries is in compliance with all the terms and conditions thereof and
with the rules and regulations of the authorities and governing bodies having
jurisdiction with respect thereto; and no event has occurred (including, without
limitation, the receipt of any notice from any authority or governing body)
which allows or, after notice or lapse of time or both, would allow, revocation,
suspension or termination of any such Authorization or results or, after notice
or lapse of time or both, would result in any other impairment of the rights of
the holder of any such Authorization except where such failure to be valid and
in full force and effect or to be in compliance, the occurrence of any such
event or the presence of any such restriction would not, singly or in the
aggregate, have a Material Adverse Effect.
(o) There are no costs or liabilities associated with Environmental Laws
(including, without limitation, any capital or operating expenditures required
for clean-up, closure of properties or compliance with Environmental Laws or any
12
<PAGE>
Authorization, any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate, have a
Material Adverse Effect.
(p) The Company has no knowledge of any actionable violation of any
Federal, state or local law relating to employment and employment practices,
discrimination in the hiring, promotion or pay of employees nor any applicable
wage or hour laws, except for any such violation which, individually or in the
aggregate, would not reasonably be expected to result in a Material Adverse
Effect. There is (A) no significant unfair labor practice complaint pending
against the Company or any of its subsidiaries or, to the knowledge of the
Company, threatened against any of them, before the National Labor Relations
Board or any state or local labor relations board, and no significant grievance
or significant arbitration proceeding arising out of or under any collective
bargaining agreement is pending against the Company or any of its subsidiaries
or, to the knowledge of the Company, threatened against any of them, (B) no
labor strike, dispute, slowdown or stoppage ("Labor Dispute") in which the
Company or any of its subsidiaries is involved nor, to the knowledge of the
Company, is any Labor Dispute imminent, other than routine disciplinary and
grievance matters, the Company is not aware of any existing or imminent Labor
Dispute by the employees of any of its principal suppliers, manufacturers or
contractors and (C) no question concerning union representation within the
meaning of the National Labor Relations Act existing with respect to the
employees of the Company and, to the knowledge of the Company, no union
organizing activities are taking place, except (with respect to any matter
specified in clause (A), (B) or (C) above, singly or in the aggregate) such as
would not have a Material Adverse Effect.
(q) Except as otherwise set forth in the Prospectus, the Company and each
of its subsidiaries has good and marketable title, free and clear of all liens,
claims, encumbrances and restrictions except liens for taxes not yet due and
payable, to all property and assets described in the Prospectus as being owned
by it excluding any liens, claims, encumbrances and restrictions that would not
have a Material Adverse Effect. All leases to which the Company or any of its
subsidiaries is a party are valid and binding and no default by the Company or
any subsidiary or, to the Company's knowledge, any other party has occurred or
is continuing thereunder, except for any such defaults which, individually or in
the aggregate, would not result in a Material Adverse Effect, and the Company
and its subsidiaries enjoy peaceful and undisturbed possession under all such
leases to which any of them is a party as lessee with such exceptions as do not
materially interfere with the use made by the Company or such subsidiary.
(r) The Company and its subsidiaries maintain reasonably adequate
insurance covering their properties, operations, personnel and businesses,
13
<PAGE>
including without limitation product liability insurance, and the Company has
not received written notice from any insurer or agent of such insurer that
substantial capital improvements or other similar expenditures will have to be
made in order to continue such insurance.
(s) All tax returns required to be filed by the Company and its
subsidiaries in any jurisdiction have been filed, other than those filings that
are being contested in good faith, except where failure to so file would not
have a Material Adverse Effect, and all taxes, including withholding taxes,
penalties and interest, assessments, fees and other governmental charges due or
claimed to be due from such entities have been paid other than those being
contested in good faith and for which adequate reserves have been provided,
except where failure to so pay would not have a Material Adverse Effect.
(t) The Company and each of its subsidiaries own or possess or have a
license with respect to all patents, patent rights, licenses, inventions,
copyrights, know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or procedures),
trademarks, service marks and trade names (collectively, the "Intellectual
Property") presently employed by it in connection with the businesses now
operated by them, except as disclosed in the Prospectus or where the failure to
so own or possess would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect, and neither the Company nor any of
its subsidiaries have received any notice of infringement of or conflict with
asserted rights of others with respect to any of the foregoing, except as
disclosed in the Prospectus or where such infringement or conflict would not
individually, or in the aggregate, have a Material Adverse Effect. To the
Company's knowledge, the use of the Intellectual Property in connection with the
business and operations of the Company and its subsidiaries does not infringe on
the rights of any person, except where such infringement does not individually
or in the aggregate have a Material Adverse Effect.
(u) The Company and each of its subsidiaries maintains a system of
internal accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for inventory assets is
compared with the existing inventory assets at reasonable intervals and
appropriate action is taken with respect to any differences.
14
<PAGE>
(v) The Company and its subsidiaries have not, directly or indirectly,
paid or delivered any fee, commission or other sum of money or item of property,
however characterized, to any finder, agent, government official or other party,
in the United States or any other country, which is in any manner related to the
business or operations of the Company or its subsidiaries which the Company or
any of its subsidiaries knows or has reason to believe to have been illegal
under any Federal, state or local laws of the United States or any other country
having jurisdiction; the Company and its subsidiaries, have not participated,
directly or indirectly, in any boycotts or other similar practices in
contravention of law affecting any of its actual or potential customers.
(w) This Agreement has been duly authorized, executed and delivered by the
Company.
(x) The respective firm of accountants that has certified or shall certify
the applicable consolidated financial statements and supporting schedules of the
Company filed or to be filed with the Commission as part of the Registration
Statement and the Prospectus are independent public accountants as required by
the Act.
(y) The consolidated historical and pro forma financial statements,
together with related schedules and notes, set forth in the Prospectus and the
Registration Statement comply as to form in all material respects with the
requirements of the Act. Such historical financial statements fairly present
the consolidated financial position of the Company and its subsidiaries at the
respective dates indicated and the results of their operations and their cash
flows for the respective periods indicated, in accordance with generally
accepted accounting principles consistently applied throughout such periods.
Such pro forma financial statements have been prepared on a basis consistent
with such historical statements, except for the pro forma adjustments specified
therein, and give effect to assumptions made on a reasonable basis and present
fairly the transactions described in the Prospectus. The other financial
information and data included in the Prospectus and in the Registration
Statement, historical and pro forma, are, in all material respects, accurately
presented and prepared on a basis consistent with such financial statements and
the books and records of the Company.
(z) The Company is not and, after giving effect to the offering and sale
of the Shares and the application of the proceeds thereof as described in the
Prospectus, will not be, an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended.
(aa) Except as disclosed in the Prospectus there are no contracts,
agreements or understandings between the Company and any person granting
15
<PAGE>
such person the right to require the Company to file a registration statement
under the Act with respect to any securities of the Company or to require the
Company to include such securities with the Shares registered pursuant to the
Registration Statement.
(bb) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
to the best of the Company's knowledge there has not occurred any event, change
or development or series of events, changes or developments that, singly or in
the aggregate, would have a Material Adverse Effect, (ii) there has not been any
material adverse change or any development reasonably likely to cause a
prospective material adverse change in the capital stock or in the long-term
debt of the Company or any of its subsidiaries and (iii) neither the Company nor
any of its subsidiaries has incurred any material liability or obligation,
direct or, to the best of the Company's knowledge, contingent.
(cc) Each certificate signed by any officer of the Company and delivered to
the Underwriters or counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to the Underwriters as to the matters
covered thereby.
(dd) Except as disclosed in the Prospectus, there are no business
relationships or related party transactions required to be disclosed therein by
Item 404 of Regulation S-K of the Commission.
(ee) The Company has filed a registration statement pursuant to Section
12(g) of the Exchange Act to register the Common Stock, has filed an application
to list the Shares on the Nasdaq National Market, and has received notification
that the listing has been approved, subject to notice of issuance.
SECTION 7. Representations and Warranties of the Selling Stockholders. Each
Selling Stockholder represents and warrants to each Underwriter that:
(a) Such Selling Stockholder is the lawful owner of the Shares to be sold
by such Selling Stockholder pursuant to this Agreement and has, and on the
Closing Date (and Option Closing Date, if applicable) will have, good and clear
title to such Shares, free of all restrictions on transfer, liens, encumbrances,
security interests, equities and claims whatsoever.
(b) The Shares to be sold by such Selling Stockholder have been duly
authorized and are validly issued, fully paid and non-assessable.
16
<PAGE>
(c) Such Selling Stockholder has, and on the Closing Date will have, full
legal right, power and authority, and all authorization and approval required by
law, to enter into this Agreement, the Custody Agreement signed by such Selling
Stockholder and the Company as Custodian, relating to the deposit of the Shares
to be sold by such Selling Stockholder (the "Custody Agreement") and the Power
of Attorney of such Selling Stockholder appointing certain individuals as such
Selling Stockholder's attorneys-in-fact (the "Attorneys") to the extent set
forth therein, relating to the transactions contemplated hereby and by the
Registration Statement and the Custody Agreement (the "Power of Attorney") and
to sell, assign, transfer and deliver the Shares to be sold by such Selling
Stockholder in the manner provided herein and therein.
(d) This Agreement has been duly authorized, executed and delivered by or
on behalf of such Selling Stockholder.
(e) The Custody Agreement of such Selling Stockholder has been duly
authorized, executed and delivered by such Selling Stockholder and is a valid
and binding agreement of such Selling Stockholder, enforceable in accordance
with its terms.
(f) The Power of Attorney of such Selling Stockholder has been duly
authorized, executed and delivered by such Selling Stockholder and is a valid
and binding instrument of such Selling Stockholder, enforceable in accordance
with its terms, and, pursuant to such Power of Attorney, such Selling
Stockholder has, among other things, authorized the Attorneys, or any one of
them, to execute and deliver on such Selling Stockholder's behalf this Agreement
and any other document that they, or any one of them, may deem necessary or
desirable in connection with the transactions contemplated hereby and thereby
and to deliver the Shares to be sold by such Selling Stockholder pursuant to
this Agreement.
(g) Upon delivery of and payment for the Shares to be sold by such Selling
Stockholder pursuant to this Agreement, good and clear title to such Shares will
pass to the Underwriters, free of all restrictions on transfer, liens,
encumbrances, security interests, equities and claims whatsoever.
(h) The execution, delivery and performance of this Agreement and the
Custody Agreement and Power of Attorney of such Selling Stockholder by or on
behalf of such Selling Stockholder, the compliance by such Selling Stockholder
with all the provisions hereof and thereof and the consummation of the
transactions contemplated hereby and thereby will not (1) require any consent,
approval, authorization or other order of, or qualification with, any court or
governmental body or agency (except such as may be required under the securities
or Blue Sky laws of the various states), (2) conflict with or constitute a
breach of any of the terms or provisions of, or a default under, the
organizational documents
17
<PAGE>
of such Selling Stockholder, if such Selling Stockholder is not an individual,
or any indenture, loan agreement, mortgage, lease or other agreement or
instrument to which such Selling Stockholder is a party or by which such Selling
Stockholder or any property of such Selling Stockholder is bound or (3) violate
or conflict with any applicable law or any rule, regulation, judgment, order or
decree of any court or any governmental body or agency having jurisdiction over
such Selling Stockholder or any property of such Selling Stockholder.
(i) The information in the Registration Statement under the caption
"Principal and Selling Stockholders" which specifically relates to such Selling
Stockholder does not, and will not on the Closing Date, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(j) At any time during the period described in Section 5(d), if there is
any change in the information referred to in Section 7(i), such Selling
Stockholder will immediately notify you of such change.
(k) Each certificate signed by or on behalf of such Selling Stockholder and
delivered to the Underwriters or counsel for the Underwriters shall be deemed to
be a representation and warranty by such Selling Stockholder to the Underwriters
as to the matters covered thereby.
SECTION 8. Indemnification. (a) The Sellers, jointly and severally, agree
to indemnify and hold harmless each Underwriter, its directors, its officers and
each person, if any, who controls any Underwriter within the meaning of Section
15 of the Act or Section 20 of the Exchange Act, from and against any and all
losses, claims, damages, liabilities and judgments (including, without
limitation, any legal or other expenses incurred in connection with
investigating or defending any matter, including any action, that could give
rise to any such losses, claims, damages, liabilities or judgments) caused by
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement (or any amendment thereto), the Prospectus (or any
amendment or supplement thereto) or any preliminary prospectus used in
connection with the Offering, or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or judgments are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information relating
to any Underwriter furnished in writing to the Company by such Underwriter
through you expressly for use therein; provided, however, that the foregoing
indemnity agreement with respect to any preliminary prospectus shall not inure
to the benefit of any Underwriter whom the person asserting such losses, claims,
damages liabilities
18
<PAGE>
purchased Shares, or any person controlling such Underwriter, if a copy of the
Prospectus (as then amended or supplemented if the Company shall have furnished
the amendments or supplements thereto) was not sent or given by or on behalf of
such Underwriter to such person, if required by law so to have been delivered,
at or prior to the written confirmation of the sale of the Shares to such
person, and if the Prospectus (as so amended or supplemented) would have cured
the defect giving rise to the losses, claims, damages or liabilities and the
failure to deliver such Prospectus was not a result of the Company's failure to
timely provide copies of such Prospectus to such Underwriter. Notwithstanding
the foregoing, (A) the liability of any Selling Stockholder shall be limited to
liabilities arising from information regarding such Selling Stockholder set
forth in the Prospectus under the caption "Principal and Selling Stockholders"
and (B) the aggregate liability of any Selling Stockholder pursuant to this
Section 8(a) shall be limited to an amount equal to the total proceeds (before
deducting expenses) received by such Selling Stockholder from the Underwriters
for the sale of the Shares sold by such Selling Stockholder hereunder.
(b) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement, each person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, each Selling
Stockholder and each person, if any, who controls such Selling Stockholder
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act to
the same extent as the foregoing indemnity from the Sellers to such Underwriter
but only with reference to information relating to such Underwriter furnished in
writing to the Company by such Underwriter through you expressly for use in the
Registration Statement (or any amendment thereto), the Prospectus (or any
amendment or supplement thereto) or any preliminary prospectus.
(c) In case any action shall be commenced involving any person in respect
of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the
"Indemnified Party"), the Indemnified Party shall promptly notify the person
against whom such indemnity may be sought (the "Indemnifying Party") in writing
and the Indemnifying Party shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the Indemnified Party and
the payment of all fees and expenses of such counsel, as incurred (except that
in the case of any action in respect of which indemnity may be sought pursuant
to both Sections 8(a) and 8(b), the Underwriter shall not be required to assume
the defense of such action pursuant to this Section 8(c), but may employ
separate counsel and participate in the defense thereof, but the fees and
expenses of such counsel, except as provided below, shall be at the expense of
such Underwriter). Any Indemnified Party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of the Indemnified Party
unless
19
<PAGE>
(i) the employment of such counsel shall have been specifically authorized in
writing by the indemnifying party, (ii) the Indemnifying Party shall have failed
to assume the defense of such action or employ counsel reasonably satisfactory
to the Indemnified Party or (iii) the named parties to any such action
(including any impleaded parties) include both the Indemnified Party and the
Indemnifying Party, and the Indemnified Party shall have been advised by such
counsel that there may be one or more legal defenses available to it which are
different from or additional to those available to the Indemnifying Party (in
which case the Indemnifying Party shall not have the right to assume the defense
of such action on behalf of the Indemnified Party). In any such case, the
Indemnifying Party shall not, in connection with any one action or separate but
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for (i) the fees and
expenses of more than one separate firm of attorneys (in addition to any local
counsel) for all Underwriters, their officers and directors and all persons, if
any, who control any Underwriter within the meaning of either Section 15 of the
Act or Section 20 of the Exchange Act, (ii) the fees and expenses of more than
one separate firm of attorneys (in addition to any local counsel) for the
Company, its directors, its officers who sign the Registration Statement and all
persons, if any, who control the Company within the meaning of either such
Section and (iii) the fees and expenses of more than one separate firm of
attorneys (in addition to any local counsel) for all Selling Stockholders and
all persons, if any, who control any Selling Stockholder within the meaning of
either such Section, and all such fees and expenses shall be reimbursed as they
are incurred. In the case of any such separate firm for the Underwriters, their
officers and directors and such control persons of any Underwriters, such firm
shall be designated in writing by Donaldson, Lufkin & Jenrette Securities
Corporation. In the case of any such separate firm for the Company and such
directors, officers and control persons of the Company, such firm shall be
designated in writing by the Company. In the case of any such separate firm for
the Selling Stockholders and such control persons of any Selling Stockholders,
such firm shall be designated in writing by the Attorneys. The indemnifying
party shall indemnify and hold harmless the Indemnified Party from and against
any and all losses, claims, damages, liabilities and judgments by reason of any
settlement of any action (i) effected with its written consent or (ii) effected
without its written consent if the settlement is entered into more than twenty
business days after the Indemnifying Party shall have received a request from
the Indemnified Party for reimbursement for the fees and expenses of counsel (in
any case where such fees and expenses are at the expense of the Indemnifying
Party) and, prior to the date of such settlement, the Indemnifying Party shall
have failed to comply with such reimbursement request. No Indemnifying Party
shall, without the prior written consent of the Indemnified Party, effect any
settlement or compromise of, or consent to the entry of judgment with respect
to, any pending or threatened action in respect of which the Indemnified Party
is or could have been a party and indemnity or contribution
20
<PAGE>
may be or could have been sought hereunder by the Indemnified Party, unless such
settlement, compromise or judgment (i) includes an unconditional release of the
Indemnified Party from all liability on claims that are or could have been the
subject matter of such action and (ii) does not include a statement as to or an
admission of fault, culpability or a failure to act, by or on behalf of the
Indemnified Party.
(d) To the extent the indemnification provided for in this Section 8 is
unavailable to an Indemnified Party or insufficient in respect of any losses,
claims, damages, liabilities or judgments referred to therein, then each
Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Sellers on the one hand and the Underwriters on the other hand from the offering
of the Shares or (ii) if the allocation provided by clause 8(d)(i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause 8(d)(i) above but also the
relative fault of the Sellers on the one hand and the Underwriters on the other
hand in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by the Sellers on the
one hand and the Underwriters on the other hand shall be deemed to be in the
same proportion as the total net proceeds from the offering (before deducting
expenses) received by the Sellers, and the total underwriting discounts and
commissions received by the Underwriters, bear to the total price to the public
of the Shares, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault of the Sellers on the one hand and the
Underwriters on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Selling Stockholders on the one hand or the
Underwriters on the other hand and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
The Sellers and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 8(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an Indemnified Party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses incurred by such Indemnified Party in
connection with investigating or defending any matter, including any action,
that could have given rise to such
21
<PAGE>
losses, claims, damages, liabilities or judgments. Notwithstanding the
provisions of this Section 8, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages which such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to this Section 8(d) are
several in proportion to the respective number of Shares purchased by each of
the Underwriters hereunder and not joint. In no event shall the liability of a
Selling Stockholder under this Section 8(d) exceed the limits set forth in
Section 8(a).
(e) The remedies provided for in this Section 8 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
(f) Each Selling Stockholder hereby designates Nutraceutical International
Corporation, 1400 Kearns Boulevard, 2nd Floor, Park City, Utah 84060, as its
authorized agent, upon which process may be served in any action which may be
instituted in any state or federal court in the State of New York by any
Underwriter, any director or officer of any Underwriter or any person
controlling any Underwriter asserting a claim for indemnification or
contribution under or pursuant to this Section 8, and each Selling Stockholder
will accept the jurisdiction of such court in such action, and waives, to the
fullest extent permitted by applicable law, any defense based upon lack of
personal jurisdiction or venue. A copy of any such process shall be sent or
given to such Selling Stockholder, at the address for notices specified in
Section 12 hereof.
SECTION 9. Conditions of Underwriters' Obligations'. The several
obligations of the Underwriters to purchase the Firm Shares under this Agreement
are subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained in
this Agreement shall be true and correct on the Closing Date with the same force
and effect as if made on and as of the Closing Date.
(b) If the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, such Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., New York City
time, on the date of this Agreement; and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose
22
<PAGE>
shall have been commenced or shall be pending before or contemplated by the
Commission.
(c) You shall have received on the Closing Date a certificate dated the
Closing Date, signed by Frank W. Gay, II and Bruce Hough, in their capacities as
the Chief Executive Officer and President of the Company, confirming the matters
set forth in Sections 6(t), 9(a), 9(b) and 9(d) and that the Company has
complied with all of the agreements and satisfied all of the conditions herein
contained and required to be complied with or satisfied by the Company on or
prior to the Closing Date.
(d) To the best of the Company's knowledge since the respective dates as
of which information is given in the Prospectus other than as set forth in the
Prospectus (exclusive of any amendments or supplements thereto subsequent to the
date of this Agreement), (i) there shall not have occurred any change or any
development involving a prospective change in the condition, financial or
otherwise, or the earnings, business, management or operations of the Company
and its subsidiaries, taken as a whole, (ii) there shall not have been any
change or any development reasonably likely to cause a prospective change in the
capital stock or in the long-term debt of the Company or any of its subsidiaries
and (iii) neither the Company nor any of its subsidiaries shall have incurred
any liability or obligation, direct or contingent, the effect of which, in any
such case described in clause 9(d)(i), 9(d)(ii) or 9(d)(iii), in your judgment,
is material and adverse and, in your judgment, makes it impracticable to market
the Shares on the terms and in the manner contemplated in the Prospectus.
(e) All the representations and warranties of each Selling Stockholder
contained in this Agreement shall be true and correct on the Closing Date with
the same force and effect as if made on and as of the Closing Date and [you
shall have received on the Closing Date a certificate dated the Closing Date
from each Selling Stockholder to such effect and to the effect that such Selling
Stockholder has] complied with all of the agreements and satisfied all of the
conditions herein contained and required to be complied with or satisfied by
such Selling Stockholder on or prior to the Closing Date.
(f) You shall have received on the Closing Date an opinion (satisfactory
to you and counsel for the Underwriters), dated the Closing Date, of Kirkland &
Ellis, counsel for the Company and the Selling Stockholders and/or Stanley E.
Soper, Vice President of Legal Affairs of the Company, as appropriate,
substantially to the effect that:
(i) each of the Company and its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing under
the laws of its jurisdiction of incorporation and has the corporate power
23
<PAGE>
and authority to carry on its business as described in the Prospectus and
to own, lease and operate its properties;
(ii) each of the Company and its subsidiaries is duly qualified and
is in good standing as a foreign corporation authorized to do business in
each jurisdiction in which the nature of its business or its ownership or
leasing of property requires such qualification, except where the failure
to be so qualified would not have a Material Adverse Effect;
(iii) all the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Selling Stockholders) have been
duly authorized and validly issued and are fully paid, non-assessable and
not subject to any preemptive or similar rights;
(iv) the Shares to be issued and sold by the Company hereunder have
been duly authorized and, when issued and delivered to the Underwriters
against payment therefor as provided by this Agreement, will be validly
issued, fully paid and non-assessable, and the issuance of such Shares will
not be subject to any preemptive or similar rights;
(v) all of the outstanding shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued and are
fully paid and non-assessable, and are owned by the Company, directly or
indirectly through one or more subsidiaries, free and clear of any security
interest, claim, lien, encumbrance or adverse interest of any nature;
(vi) this Agreement has been duly authorized, executed and delivered
by the Company and by or on behalf of each Selling Stockholder;
(vii) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus;
(viii) the Registration Statement has become effective under the Act,
no stop order suspending its effectiveness has been issued and no
proceedings for that purpose are, to the best of such counsel's knowledge
after due inquiry, pending before or contemplated by the Commission;
(ix) the statements under the captions "Risk Factors - Government
Regulation", "Risk Factors - Product Liability; Potential Adverse Product
Publicity", "Risk Factors - Certain Anti-Takeover Effects",
"Reclassification", "Business - Government Regulation", "Business -
Trademarks", "Business - Intellectual Property Protection", "Business -
24
<PAGE>
Legal Proceedings", "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources",
"Management - Compensation Pursuant to Benefit Plans and Arrangements",
"Certain Relationships and Related Transactions", "Description of Capital
Stock", "Shares Available for Future Sale" and "Underwriting" in the
Prospectus and Items 14 and 15 of Part II of the Registration Statement,
insofar as such statements constitute a summary of the legal matters,
documents or proceedings referred to therein, fairly present the
information called for with respect to such legal matters, documents and
proceedings;
(x) neither the Company nor any of its subsidiaries is in violation
of its respective charter or by-laws and, to the best of such counsel's
knowledge after due inquiry, neither the Company nor any of its
subsidiaries is in default in the performance of any obligation, agreement,
covenant or condition contained in any indenture, loan agreement, mortgage,
lease or other agreement or instrument that is material to the Company and
its subsidiaries, taken as a whole, to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries
or their respective property is bound;
(xi) the execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and
the consummation of the transactions contemplated hereby will not (A)
require any consent, approval, authorization or other order of, or
qualification with, any court or governmental body or agency (except such
as may be required under the securities or Blue Sky laws of the various
states), (B) conflict with or constitute a breach of any of the terms or
provisions of, or a default under, the charter or by-laws of the Company or
any of its subsidiaries or any indenture, loan agreement, mortgage, lease
or other agreement or instrument that is material to the Company and its
subsidiaries, taken as a whole, to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries
or their respective property is bound, (C) violate or conflict with any
applicable law or any rule, regulation, judgment, order or decree of any
court or any governmental body or agency having jurisdiction over the
Company, any of its subsidiaries or their respective property or (D) result
in the suspension, termination or revocation of any Authorization of the
Company or any of its subsidiaries or any other impairment of the rights of
the holder of any such Authorization;
(xii) after due inquiry, such counsel does not know of any legal or
governmental proceedings pending or threatened to which the Company or any
of its subsidiaries is or could be a party or to which any of their
25
<PAGE>
respective property is or could be subject that are required to be
described in the Registration Statement or the Prospectus and are not so
described, or of any statutes, regulations, contracts or other documents
that are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement that
are not so described or filed as required;
(xiii) to the best of counsel's knowledge, after due inquiry, neither
the Company nor any of its subsidiaries has violated any Environmental Law
or any provisions of the Employee Retirement Income Security Act of 1974,
as amended, or the rules and regulations promulgated thereunder, except for
such violations which, singly or in the aggregate, would not have a
Material Adverse Effect;
(xiv) each of the Company and its subsidiaries has such
Authorizations of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory organizations
and all courts and other tribunals, including, without limitation, under
any applicable Environmental Laws, as are necessary to own, lease, license
and operate its respective properties and to conduct its business, except
where the failure to have any such Authorization or to make any such filing
or notice would not, singly or in the aggregate, have a Material Adverse
Effect; each such Authorization is valid and in full force and effect and
each of the Company and its subsidiaries is in compliance with all the
terms and conditions thereof and with the rules and regulations of the
authorities and governing bodies having jurisdiction with respect thereto;
and no event has occurred (including, without limitation, the receipt of
any notice from any authority or governing body) which allows or, after
notice or lapse of time or both, would allow, revocation, suspension or
termination of any such Authorization or results or, after notice or lapse
of time or both, would result in any other impairment of the rights of the
holder of any such Authorization; and such Authorizations contain no
restrictions that are burdensome to the Company or any of its subsidiaries;
except where such failure to be valid and in full force and effect or to be
in compliance, the occurrence of any such event or the presence of any such
restriction would not, singly or in the aggregate, have a Material Adverse
Effect;
(xv) the Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described
in the Prospectus, will not be, an "investment company" as such term is
defined in the Investment Company Act of 1940, as amended;
26
<PAGE>
(xvi) to the best of such counsel's knowledge after due inquiry,
there are no contracts, agreements or understandings between the Company
and any person granting such person the right to require the Company to
file a registration statement under the Act with respect to any securities
of the Company or to require the Company to include such securities with
the Shares registered pursuant to the Registration Statement;
(xvii) (A) the Registration Statement and the Prospectus and any
supplement or amendment thereto (except for the financial statements and
other financial data included therein as to which no opinion need be
expressed) comply as to form with the Act, (B) such counsel has no reason
to believe that at the time the Registration Statement became effective or
on the date of this Agreement, the Registration Statement and the
prospectus included therein (except for the financial statements and other
financial data as to which such counsel need not express any belief)
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading and (C) such counsel has no reason to
believe that the Prospectus, as amended or supplemented, if applicable
(except for the financial statements and other financial data, as
aforesaid) contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
(xviii) each Selling Stockholder is the lawful owner of the Shares to
be sold by such Selling Stockholder pursuant to this Agreement and has good
and clear title to such Shares, free of all restrictions on transfer,
liens, encumbrances, security interests, equities and claims whatsoever;
(xix) each Selling Stockholder has full legal right, power and
authority, and all authorization and approval required by law, to enter
into this Agreement and the Custody Agreement and the Power of Attorney of
such Selling Stockholder and to sell, assign, transfer and deliver the
Shares to be sold by such Selling Stockholder in the manner provided herein
and therein;
(xx) the Custody Agreement of each Selling Stockholder has been duly
authorized, executed and delivered by such Selling Stockholder and is a
valid and binding agreement of such Selling Stockholder, enforceable in
accordance with its terms;
(xxi) the Power of Attorney of each Selling Stockholder has been duly
authorized, executed and delivered by such Selling Stockholder and
27
<PAGE>
is a valid and binding instrument of such Selling Stockholder, enforceable
in accordance with its terms, and, pursuant to such Power of Attorney, such
Selling Stockholder has, among other things, authorized the Attorneys, or
any one of them, to execute and deliver on such Selling Stockholder's
behalf this Agreement and any other document they, or any one of them, may
deem necessary or desirable in connection with the transactions
contemplated hereby and thereby and to deliver the Shares to be sold by
such Selling Stockholder pursuant to this Agreement;
(xxii) upon delivery of and payment for the Shares to be sold by each
Selling Stockholder pursuant to this Agreement, good and clear title to
such Shares will pass to the Underwriters, free of all restrictions on
transfer, liens, encumbrances, security interests, equities and claims
whatsoever; and
(xxiii) the execution, delivery and performance of this Agreement and
the Custody Agreement and Power of Attorney of each Selling Stockholder by
such Selling Stockholder, the compliance by such Selling Stockholder with
all the provisions hereof and thereof and the consummation of the
transactions contemplated hereby and thereby will not (a) require any
consent, approval, authorization or other order of, or qualification with,
any court or governmental body or agency (except such as may be required
under the securities or Blue Sky laws of the various states), (b) conflict
with or constitute a breach of any of the terms or provisions of, or a
default under, the organizational documents of such Selling Stockholder, if
such Selling Stockholder is not an individual, or any indenture, loan
agreement, mortgage, lease or other agreement or instrument to which such
Selling Stockholder is a party or by which any property of such Selling
Stockholder is bound or (c) violate or conflict with any applicable law or
any rule, regulation, judgment, order or decree of any court or any
governmental body or agency having jurisdiction over such Selling
Stockholder or any property of such Selling Stockholder.
The opinion of Kirkland & Ellis described in Section 9(f) above shall be
rendered to you at the request of the Company and the Selling Stockholders and
shall so state therein.
(g) an opinion (in a form reasonably satisfactory to you and your
counsel), dated the Closing Date, of Hyman, Phelps & McNamara, regulatory
counsel for the Company, to the effect that:
(i) to such counsel's knowledge, there are no material legal or
governmental proceedings by the FDA or similar federal or state
28
<PAGE>
regulatory officials and bodies pending that are not described or referred
to in the Prospectus;
(ii) to such counsel's knowledge, the Company has, and maintains in
full force and effect, all necessary licenses, permits, approvals,
certificates, consents, orders and other authorizations of and from the FDA
and similar federal or state governmental regulatory officials and bodies
necessary to conduct its business as described in the Prospectus;
(iii) to the best of such counsel's knowledge, the statements in the
Prospectus under the captions "Risk Factors -- Governmental Regulation" and
"Business -- Regulatory Matters" that relate to matters of food and drug
law insofar as such statements a summary of legal matters, documents or
proceedings referred to therein, are accurate in all material respects and
provide a fair summary of such matters;
(iv) the Company has certified to such counsel that it is in
substantial compliance with applicable decrees of the FDA, the Federal
Trade Commission and other state or local regulatory agencies that have
been brought to such counsel's attention and such counsel does not know of
any facts that contradict such representation; and
(v) the product labeling, advertising and other promotional materials
that the Company has submitted to such counsel for review do not give rise
to a substantial expectation that enforcement action would be initiated
against those products.
(h) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Kaye, Scholer, Fierman, Hays & Handler, LLP, counsel for the
Underwriters, as to the matters referred to in Sections 9(f)(iv), 9(f)(vi) (but
only with respect to the Company), 9(f)(ix) (but only with respect to the
statements under the caption "Description of Capital Stock" and "Underwriting")
and 9(f)(xvii).
In giving such opinions with respect to the matters covered by Section
9(f)(xvii), Kirkland & Ellis and Kaye, Scholer, Fierman, Hays & Handler, LLP may
state that their opinion and belief are based upon their participation in the
preparation of the Registration Statement and Prospectus and any amendments or
supplements thereto and review and discussion of the contents thereof, but are
without independent check or verification except as specified.
(i) You shall have received, on each of the date hereof and the Closing
Date, letters dated the date hereof or the Closing Date, as the case may be, in
form
29
<PAGE>
and substance satisfactory to you, from Price Waterhouse LLP, independent
public accountants, containing the information and statements of the type
ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectus for the Company, respectively.
(j) The Company shall have delivered to you the agreements specified in
Section 2 hereof which agreements shall be in full force and effect on the
Closing Date.
(k) The Reclassification shall have been consummated prior to or
contemporaneously with the issuance and sale of the Firm Shares hereunder.
(l) The Shares shall have been duly listed for quotation on the Nasdaq
National Market.
(m) The Company and the Selling Stockholders shall not have failed on or
prior to the Closing Date to perform or comply with any of the agreements herein
contained and required to be performed or complied with by the Company or the
Selling Stockholders, as the case may be, on or prior to the Closing Date.
(n) You shall have received on the Closing Date, a certificate of each
Selling Stockholder who is not a U.S. Person (as defined under applicable U.S.
federal tax legislation) to the effect that such Selling Stockholder is not a
U.S. Person, which certificate may be in the form of a properly completed and
executed United States Treasury Department Form W-8 (or other applicable form or
statement specified by Treasury Department regulations in lieu thereof).
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents as you may reasonably request with respect to the
good standing of the Company, the due authorization and issuance of such
Additional Shares and other matters related to the issuance of such Additional
Shares.
SECTION 10. Effectiveness of Agreement and Termination. This Agreement
shall become effective upon the execution and delivery of this Agreement by the
parties hereto.
This Agreement may be terminated at any time on or prior to the Closing
Date by you by written notice to the Sellers if any of the following has
occurred: (1) any outbreak or escalation of hostilities or other national or
international calamity or crisis or change in economic conditions or in the
financial markets of the United States or elsewhere that, in your judgment, is
material and adverse and,
30
<PAGE>
in your judgment, makes it impracticable to market the Shares on the terms and
in the manner contemplated in the Prospectus, (2) the suspension or material
limitation of trading in securities or other instruments on the New York Stock
Exchange, the American Stock Exchange, the Chicago Board of Options Exchange,
the Chicago Mercantile Exchange, the Chicago Board of Trade or the Nasdaq
National Market or limitation on prices for securities or other instruments on
any such exchange or the Nasdaq National Market, is material and adverse and, in
your judgment, makes it impracticable to market the Shares on the terms and in
the manner contemplated in the Prospectus, (3) the suspension of trading of any
securities of the Company on any exchange or in the over-the-counter market, is
material and adverse and, in your judgment, makes it impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus, (4) the
enactment, publication, decree or other promulgation of any federal or state
statute, regulation, rule or order of any court or other governmental authority
which in your opinion materially and adversely affects, or will materially and
adversely affect, the business, prospects, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole, (5) the
declaration of a banking moratorium by either federal or New York State
authorities or (6) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in your
opinion has a material adverse effect on the financial markets in the United
States.
If on the Closing Date or on an Option Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase the Firm
Shares or Additional Shares, as the case may be, which it has or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase is not more
than one-tenth of the total number of Firm Shares or Additional Shares, as the
case may be, to be purchased on such date by all Underwriters, each non-
defaulting Underwriter shall be obligated severally, in the proportion which the
number of Firm Shares set forth opposite its name in Schedule I bears to the
total number of Firm Shares which all the non-defaulting Underwriters have
agreed to purchase, or in such other proportion as you may specify, to purchase
the Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date; provided that in no event shall the number of Firm Shares or Additional
Shares, as the case may be, which any Underwriter has agreed to purchase
pursuant to Section 2 hereof be increased pursuant to this Section 10 by an
amount in excess of one-ninth of such number of Firm Shares or Additional
Shares, as the case may be, without the written consent of such Underwriter. If
on the Closing Date any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of Firm
Shares to be purchased by all Underwriters and
31
<PAGE>
arrangements satisfactory to you, the Company and the Selling Stockholders for
purchase of such Firm Shares are not made within 48 hours after such default,
this Agreement will terminate without liability on the part of any non-
defaulting Underwriter, the Company or the Selling Stockholders. In any such
case which does not result in termination of this Agreement, either you or the
Sellers shall have the right to postpone the Closing Date, but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and the Prospectus or any other documents or arrangements
may be effected. If, on an Option Closing Date, any Underwriter or Underwriters
shall fail or refuse to purchase Additional Shares and the aggregate number of
Additional Shares with respect to which such default occurs is more than one-
tenth of the aggregate number of Additional Shares to be purchased on such date,
the non-defaulting Underwriters shall have the option to (i) terminate their
obligation hereunder to purchase such Additional Shares or (ii) purchase not
less than the number of Additional Shares that such non-defaulting Underwriters
would have been obligated to purchase on such date in the absence of such
default. Any action taken under this paragraph shall not relieve any defaulting
Underwriter from liability in respect of any default of any such Underwriter
under this Agreement.
SECTION 11. Agreements of the Selling Stockholders. Each Selling
Stockholder agrees with you and the Company:
(a) To do and perform all things to be done and performed by such Selling
Stockholder under this Agreement prior to the Closing Date and to satisfy all
conditions precedent to the delivery of the Shares to be sold by such Selling
Stockholder pursuant to this Agreement.
SECTION 12. Miscellaneous. Notices given pursuant to any provision of
this Agreement shall be addressed as follows: (i) if to the Company, to
Nutraceutical International Corporation, 1400 Kearns Boulevard, 2nd Floor, Park
City, Utah 84060, (ii) if to the Selling Stockholders, to William F. Gay II c/o
1400 Kearns Boulevard, 2nd Floor, Park City, Utah 84060 and (iii) if to any
Underwriter or to you, to you c/o Donaldson, Lufkin & Jenrette Securities
Corporation, 277 Park Avenue, New York, New York 10172, Attention: Syndicate
Department, or in any case to such other address as the person to be notified
may have requested in writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company, the Selling Stockholders and the
several Underwriters set forth in or made pursuant to this Agreement shall
remain operative and in full force and effect, and will survive delivery of and
payment for the Shares, regardless of (1) any investigation, or statement as to
the results thereof, made by or on behalf of any Underwriter, the officers or
directors of any Underwriter, any person controlling any Underwriter, the
Company, the officers
32
<PAGE>
or directors of the Company, any person controlling the Company, any Selling
Stockholder or any person controlling such Selling Stockholder, (2) acceptance
of the Shares and payment for them hereunder and (3) termination of this
Agreement.
If for any reason the Shares are not delivered by or on behalf of any
Seller as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 10), the Sellers agree, jointly and severally, to
reimburse the several Underwriters for all out-of-pocket expenses (including the
fees and disbursements of counsel) incurred by them. Notwithstanding any
termination of this Agreement, the Company shall be liable for all expenses
which it has agreed to pay pursuant to Section 5(i) hereof. The Sellers also
agree, jointly and severally, to reimburse the several Underwriters, their
directors and officers and any persons controlling any of the Underwriters for
any and all fees and expenses (including, without limitation, the fees
disbursements of counsel) incurred by them in connection with enforcing their
rights hereunder (including, without limitation, pursuant to Section 8 hereof).
Except as otherwise provided, this Agreement has been and is made solely
for the benefit of and shall be binding upon the Company, the Selling
Stockholders, the Underwriters, the Underwriters' directors and officers, any
controlling persons referred to herein, the Company's directors and the
Company's officers who sign the Registration Statement and their respective
successors and assigns, all as and to the extent provided in this Agreement, and
no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include a purchaser of
any of the Shares from any of the several Underwriters merely because of such
purchase.
This Agreement shall be governed and construed in accordance with the laws
of the State of New York.
This Agreement may be signed in various counterparts which together shall
constitute one and the same instrument.
33
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement among
the Company, the Selling Stockholders and the several Underwriters.
Very truly yours,
NUTRACEUTICAL INTERNATIONAL
CORPORATION
By:
--------------------------------
Name:
Title:
THE SELLING STOCKHOLDERS
NAMED IN SCHEDULE II HERETO,
ACTING SEVERALLY
By:
--------------------------------
Name:
Title:
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SMITH BARNEY INC.
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By
-------------------------------
Name:
Title:
34
<PAGE>
SCHEDULE I
----------
<TABLE>
<CAPTION>
Number of Firm Shares
Underwriters to be Purchased
- ------------ ---------------------
<S> <C>
Donaldson, Lufkin & Jenrette Securities
Corporation
Smith Barney Inc.
-------
Total
</TABLE>
<PAGE>
SCHEDULE II
-----------
Selling Stockholders
--------------------
<TABLE>
<CAPTION>
Number of Firm Number of Additional
Name Shares Being Sold Shares Being Sold
- ---- ----------------- --------------------
<S> <C> <C>
Bain Capital Fund IV, L.P.
Bain Capital Fund IV - B, L.P.
BCIP Associates
BCIP Trust Associates, L.P.
The Stephen and Helene Weldon Trust
Jackson National Life Insurance Company
Heller Financial, Inc.
Frank W. Gay
</TABLE>
<PAGE>
Annex I
Bain Capital Funds
The Stephen and Helene Weldon Trust
Jackson National Life Insurance Company
Heller Financial, Inc.
Frank W. Gay
Frank W. Gay II
Bruce R. Hough
Jeffrey A. Hinrichs
William T. Logan
Stanley E. Soper
Les Brown
David M. Vance
Robert C. Gay
Geoffrey S. Rehnert
Matthew S. Levin
<PAGE>
EXHIBIT 5.1
Kirkland & Ellis
200 East Randolph Street
Chicago, IL 60601
February 10, 1998
Nutraceutical International Corporation
1400 Kearns Blvd., 2nd Floor
Park City, Utah 84060
Re: Nutraceutical International Corporation
Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
We are acting as special counsel to Nutraceutical International
Corporation, a Delaware corporation (the "Company"), in connection with the
proposed registration by the Company of 3,829,500 shares of its Common Stock,
par value $.01 per share (the "Common Stock"), including 499,500 shares of its
Common Stock to cover over-allotments, if any, pursuant to a Registration
Statement on Form S-1, originally filed with the Securities and Exchange
Commission (the "Commission") on December 10, 1997 under the Securities Act of
1933, as amended (the "Act") (such Registration Statement, as amended or
supplemented, is hereinafter referred to as the "Registration Statement"). Of
the shares of Common Stock to be registered pursuant to the Registration
Statement, 2,000,000 are being offered by the Company (the "Primary Shares") and
up to 1,829,500 shares are being offered by certain selling stockholders (the
"Secondary Shares").
For purposes of this opinion, we have assumed the authenticity of all
documents submitted to us as originals, the conformity to the originals of all
documents submitted to us as copies and the authenticity of the originals of all
documents submitted to us as copies. We have also assumed the legal capacity of
all natural persons, the genuineness of the signatures of persons signing all
documents in connection with which this opinion is rendered, the authority of
such persons signing on behalf of the parties thereto other than the Company and
the due authorization, execution and delivery of all documents by the parties
thereto other than the Company. As to any facts material to the opinions
expressed herein, we have relied upon the statements and representations of
officers and other representations of the Company and others.
Our opinion expressed below is subject to the qualifications that we
express no opinion as to the applicability of, compliance with, or effect of (i)
any bankruptcy, insolvency, reorganization, fraudulent transfer, fraudulent
conveyance, moratorium or other similar law affecting the enforcement of
creditors' rights generally, (ii) general principles of equity (regardless of
whether enforcement is considered in a proceeding in equity or at law), (iii)
public policy considerations which may limit the rights of parties to obtain
certain remedies and (iv) any laws except the internal laws of the State of
Illinois, the General Corporation law of the State of Delaware and the federal
law of the United States of America.
<PAGE>
Based upon and subject to the foregoing qualifications, assumptions and
limitations and the further limitations set forth below, we hereby advise you
that in our opinion:
(1) The Company is a corporation validly existing and in good standing
under the laws of the State of Delaware.
(2) The Primary Shares have been duly authorized, and, when the
Registration Statement becomes effective under the Act, the Board of Directors
of the Company has taken all necessary action to approve the issuance and sale
of the Primary Shares, the Primary Shares have been issued in accordance with
the terms of the Underwriting Agreement, upon receipt of the consideration
contemplated thereby, and certificates representing the Primary Shares have been
duly executed and delivered on behalf of the Company and duly registered by the
Company's Registrar, the Primary Shares will be validly issued, fully paid and
nonassessable.
(3) The Secondary Shares are validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion with the Commission as
Exhibit 5.1 to the Registration Statement. We also consent to the reference to
our firm under the heading "Legal Matters" in the Registration Statement. In
giving this consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the Act or the rules and
regulations of the Commission. This opinion and consent may be incorporated by
reference in a subsequent registration statement on Form S-1 filed pursuant to
Rule 462(b) under the Act with respect to the registration of additional
securities for sale in the offering contemplated by the Registration Statement.
We do not find it necessary for the purposes of this opinion, and
accordingly we do not purport to cover herein, the application of the securities
or "Blue Sky" laws of the various states to the issuance and sale of the Primary
Shares and the sale of the Secondary Shares.
This opinion is limited to the specific issues addressed herein, and no
opinion may be inferred or implied beyond that expressly stated herein. We
assume no obligation to revise or supplement this opinion should the present
statutes be changed by legislative action, judicial decision or otherwise.
Very truly yours,
/s/ Kirkland & Ellis
KIRKLAND & ELLIS
<PAGE>
EXHIBIT 10.15
TRANSACTION SERVICES AGREEMENT
------------------------------
This Transaction Services Agreement (this "Agreement") is made and
entered into as of February __, 1998, by and between Nutraceutical International
Corporation, a Delaware corporation (the "Company"), and Bain Capital, Inc., a
Delaware corporation ("Bain").
WHEREAS, the Company desires to retain Bain and Bain desires to
perform for the Company and its subsidiaries and parent certain services;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the parties agree as follows:
1. Term. This Agreement shall be in effect for an initial term
commencing on the date hereof and ending on the earlier to occur of (a) February
15, 2001 and (b) the first day on which Bain and its affiliates cease to own at
least 5% of the Company's Common Stock (the "Term"). The Term shall be
automatically extended thereafter on a year to year basis unless the Company or
Bain provides written notice of its desire to terminate this Agreement to the
other party 90 days prior to the expiration of the Term or any extension
thereof.
2. Services. Bain shall perform or cause to be performed such services
for the Company and its subsidiaries and parent as directed by the Company,
which may include, without limitation, the following:
(a) identification, support, negotiation and analysis of acquisitions
and dispositions by the Company or its subsidiaries or parent;
(b) support, negotiation and analysis of financing alternatives,
including, without limitation, in connection with acquisitions, capital
expenditures and refinancing of existing indebtedness; and
(c) finance functions, including assistance in the preparation of
financial projections, and monitoring of compliance with financing
agreements.
4. Transaction Fees.
(a) The Company hereby agrees to pay to Bain or its designees on the
closing date of the consummation of the Company's initial public offering
for services rendered in connection therewith and certain other management
services. Such fees shall be payable by wire transfer in an amount equal to
$375,000 to Bain or its designees plus reasonable and documented out-of-
pocket expenses.
<PAGE>
(b) In addition, during the term of this Agreement, the Company shall
pay to Bain or its designees a transaction fee in connection with the
consummation of each acquisition, divestiture or financing (without
duplication) by the Company or its subsidiaries or parent that is generated
by Bain or for which the Company requests Bain to perform services pursuant
hereto, in an amount equal to 1.0% of the aggregate value of such
transaction, plus reasonable and documented out-of-pocket expenses incurred
in connection with performing services for the Company, when and as
incurred.
5. Personnel. Bain shall provide and devote to the performance of this
Agreement such partners, employees and agents of Bain as Bain shall deem
appropriate to the furnishing of the services required.
6. Liability. Neither Bain nor any of its affiliates, partners,
employees or agents shall be liable to the Company or its subsidiaries or
affiliates for any loss, liability, damage or expense arising out of or in
connection with the performance of services contemplated by this Agreement,
unless such loss, liability, damage or expense shall be proven to result
directly from gross negligence, willful misconduct or bad faith on the part of
Bain, its affiliates, partners, employees or agents acting within the scope of
their employment or authority.
7. Indemnity. The Company and its subsidiaries and parent shall
defend, indemnify and hold harmless each of Bain, its affiliates, partners,
employees and agents from and against any and all loss, liability, damage or
expenses arising from any claim by any person with respect to, or in any way
related to, the performance of services contemplated by this Agreement
(including attorneys' fees) (collectively, "Claims") resulting from any act or
omission of Bain, its affiliates, partners, employees or agents, other than for
Claims which shall be proven to be the direct result of gross negligence, bad
faith or willful misconduct by Bain, its affiliates, partners, employees or
agents. The Company and its subsidiaries and parent shall defend at its own cost
and expense any and all suits or actions (just or unjust) which may be brought
against the Company, its subsidiaries and parent and Bain, its officers,
directors, affiliates, partners, employees or agents or in which Bain, its
affiliates, partners, employees or agents may be impleaded with others upon any
Claims, or upon any matter, directly or indirectly, related to or arising out of
this Agreement or the performance hereof by Bain, its affiliates, partners,
employees or agents, except that if such damage shall be proven to be the direct
result of gross negligence, bad faith or willful misconduct by Bain, its
affiliates, partners, employees or agents, then Bain shall reimburse the Company
and its subsidiaries and parent for the costs of defense and other costs
incurred by the Company and its subsidiaries and parent.
8. Notices. All notices hereunder shall be in writing and shall be
delivered personally or mailed by United States mail, postage prepaid, addressed
to the parties as follows:
2
<PAGE>
To the Company:
Nutraceutical International Corporation
1400 Kearns Boulevard, 2nd Floor
Park City, Utah 84060
Attention: Chief Executive Officer
To Bain:
Bain Capital, Inc.
Two Copley Place
Boston, Massachusetts 02116
Attention: Robert C. Gay
9. Assignment. Neither party may assign any obligations hereunder to
any other party without the prior written consent of the other party (which
consent shall not be unreasonably withheld); provided that Bain may, without
consent of the Company, assign its rights and obligations under this Agreement
to any of its affiliates (but only if such affiliate is a person or entity
(excluding any Bain portfolio companies) controlled by Bain, or in the case of
an affiliate which is a partnership, Bain is the ultimate general partner of
such partnership). The assignor shall remain liable for the performance of any
assignee.
10. Successors. This Agreement and all the obligations and benefits
hereunder shall inure to the successors and assigns of the parties.
11. Counterparts. This Agreement may be executed and delivered by each
party hereto in separate counterparts, each of which when so executed and
delivered shall be deemed an original and all of which taken together shall
constitute but one and the same agreement.
12. Entire Agreement; Modification; Governing Law. The terms and
conditions hereof constitute the entire agreement between the parties hereto
with respect to the subject matter of this Agreement and supersede all previous
communications, either oral or written, representations or warranties of any
kind whatsoever, except as expressly set forth herein. No modifications of this
Agreement nor waiver of the terms or conditions thereof shall be binding upon
either party unless approved in writing by an authorized representative of such
party. All issues concerning this agreement shall be governed by and construed
in accordance with the laws of the State of Illinois, without giving effect to
any choice of law or conflict of law provision or rule (whether of the State of
Illinois or any other jurisdiction) that would cause the application of the law
of any jurisdiction other than the State of Illinois.
* * * * *
3
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
NUTRACEUTICAL INTERNATIONAL CORPORATION
By:
-----------------------------------
Its:
----------------------------------
BAIN CAPITAL, INC.
By:
-----------------------------------
Its:
----------------------------------
4
<PAGE>
Exhibit 10.16
TERMINATION AGREEMENT
This Termination Agreement (this "Agreement") is made and entered into
as of February __, 1998, by and between Nutraceutical International Corporation,
a Delaware corporation (the "Company"), and Bain Capital, Inc., a Delaware
corporation ("Bain"), and terminates that certain Advisory Agreement dated as of
January 31, 1995, by and between the Company and Bain (the "Advisory
Agreement").
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the parties agree as follows:
1. Termination. The Company and Bain hereby agree to terminate the
Advisory Agreement and that no further consideration or services are to be
tendered pursuant thereto, other than as set forth herein.
2. Termination Fee. The Company hereby agrees to pay to Bain or its
designees on the date hereof a fee for agreeing to terminate the Advisory
Agreement in consideration of foregone revenues to Bain thereunder. Such fees
shall be payable by wire transfer in an amount equal to $625,000 to Bain or its
designees.
3. Liability. Neither Bain nor any of its affiliates, partners,
employees or agents shall be liable to the Company or its subsidiaries or
affiliates for any loss, liability, damage or expense arising out of or in
connection with the performance of services under the Advisory Agreement, unless
such loss, liability, damage or expense shall be proven to result directly from
gross negligence, willful misconduct or bad faith on the part of Bain, its
affiliates, partners, employees or agents acting within the scope of their
employment or authority.
4. Indemnity. The Company and its subsidiaries and parent shall
defend, indemnify and hold harmless each of Bain, its affiliates, partners,
employees and agents from and against any and all loss, liability, damage or
expenses arising from any claim by any person with respect to, or in any way
related to, the performance of services under the Advisory Agreement (including
attorneys' fees) (collectively, "Claims") resulting from any act or omission of
Bain, its affiliates, partners, employees or agents, other than for Claims which
shall be proven to be the direct result of gross negligence, bad faith or
willful misconduct by Bain, its affiliates, partners, employees or agents. The
Company and its subsidiaries and parent shall defend at its own cost and expense
any and all suits or actions (just or unjust) which may be brought against the
Company, its subsidiaries and parent and Bain, its officers, directors,
affiliates, partners, employees or agents or in which Bain, its affiliates,
partners, employees or agents may be impleaded with others upon any Claims, or
upon any matter, directly or indirectly, related to or arising out of the
Advisory Agreement or the performance thereof by Bain, its affiliates, partners,
employees or agents, except that if such damage shall be proven to be the direct
result of gross negligence, bad faith or willful misconduct by Bain, its
affiliates, partners, employees or agents, then Bain shall reimburse the Company
and its
<PAGE>
subsidiaries and parent for the costs of defense and other costs incurred by the
Company and its subsidiaries and parent.
5. Notices. All notices hereunder shall be in writing and shall be
delivered personally or mailed by United States mail, postage prepaid, addressed
to the parties as follows:
To the Company:
Nutraceutical International Corporation
1400 Kearns Boulevard, 2nd Floor
Park City, Utah 84060
Attention: Chief Executive Officer
To Bain:
Bain Capital, Inc.
Two Copley Place
Boston, Massachusetts 02116
Attention: Robert C. Gay
6. Assignment. Neither party may assign any obligations hereunder to
any other party without the prior written consent of the other party (which
consent shall not be unreasonably withheld); provided that Bain may, without
consent of the Company, assign its rights and obligations under this Agreement
to any of its affiliates (but only if such affiliate is a person or entity
(excluding any Bain portfolio companies) controlled by Bain, or in the case of
an affiliate which is a partnership, Bain is the ultimate general partner of
such partnership). The assignor shall remain liable for the performance of any
assignee.
7. Successors. This Agreement and all the obligations and benefits
hereunder shall inure to the successors and assigns of the parties.
8. Counterparts. This Agreement may be executed and delivered by
each party hereto in separate counterparts, each of which when so executed and
delivered shall be deemed an original and all of which taken together shall
constitute but one and the same agreement.
9. Entire Agreement; Modification; Governing Law. The terms and
conditions hereof constitute the entire agreement between the parties hereto
with respect to the subject matter of this Agreement and supersede all previous
communications, either oral or written, representations or warranties of any
kind whatsoever, except as expressly set forth herein. No modifications of this
Agreement nor waiver of the terms or conditions thereof shall be binding upon
either party unless approved in writing by an authorized representative of such
party. All issues concerning this agreement shall be governed by and construed
in accordance with the laws of the State of Illinois, without giving effect to
any choice of law or conflict of law provision or rule (whether of the State
2
<PAGE>
of Illinois or any other jurisdiction) that would cause the application of the
law of any jurisdiction other than the State of Illinois.
* * * * *
3
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Termination
Agreement as of the date first written above.
NUTRACEUTICAL INTERNATIONAL
CORPORATION
By:__________________________________
Its:__________________________________
BAIN CAPITAL, INC.
By:__________________________________
Its:__________________________________
4
<PAGE>
Exhibit 21.1
------------
List of Subsidiaries of Nutraceutical International Corporation
The following is a list of the corporations that will be subsidiaries of
Nutraceutical International Corporation (the "Company") upon completion of the
initial public offering as contemplated hereby. The common stock of all the
corporations listed below will be wholly owned, directly or indirectly, by the
corporation. If indented, the corporation is a wholly-owned subsidiary of the
corporation under which it is listed unless otherwise noted.
<TABLE>
<CAPTION>
Name of Corporation Jurisdiction of Incorporation
- ------------------- -----------------------------
<S> <C>
Nutraceutical International Corporation Delaware
Nutraceutical Corporation Delaware
(f/k/a Nutraceutical Newco, Inc.)
Au Naturel, Inc. Delaware
Makers of KAL, Inc. Delaware
Monarch Nutritional Laboratories, Delaware
Inc.
Natural Max, Inc. Delaware
Premier One Products, Inc. Delaware
Solaray, Inc. Utah
Veglife, Inc. Delaware
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement (Amendment No. 2) on Form S-1 (No. 333-41909) of our
report dated October 21, 1997 relating to the financial statements of
Nutraceutical International Corporation, which appears in such Prospectus. We
also consent to the application of such report to the Financial Statement
Schedule for the three years ended September 30, 1997 listed under Item 16(b)
of this Registration Statement when such schedule is read in conjunction with
the financial statements referred to in our report. The audits referred to in
such report also included this schedule. We also consent to the reference to
us under the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Salt Lake City, Utah
February 11, 1998
