<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
April 20, 1998
NBTY, INC.
----------
(Exact name of registrant as specified in charter)
DELAWARE 0-10666 11-2228617
-------- ------- ----------
(State or other (Commission (IRS Employer
jurisdiction of File No.) identification
incorporation) number)
90 Orville Drive, Bohemia, New York 11716
-----------------------------------------
(Address of principal executive office and zip code)
Registrant's telephone number (516) 567-9500
--------------
<PAGE>
ITEM 7. Financial Statements and Exhibits.
1. NBTY, Inc. and subsidiaries Supplemental Consolidated Financial Statements
(audited) for the three years ended September 30, 1997.
2. Nutro Laboratories, Inc. Financial Statements (audited) for the three
years ended September 30, 1997.
3. Nutrition Headquarters, Inc. and Lee Nutrition, Inc. Combined Financial
Statements (audited) for the three years ended September 30, 1997.
4. NBTY, Inc. and subsidiaries Supplemental Condensed Consolidated Financial
Statements (unaudited) as of March 31, 1998 and for the six months ended
March 31, 1997 and 1998.
<PAGE>
NBTY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of NBTY, Inc.:
We have audited the accompanying supplemental consolidated balance sheets of
NBTY, Inc. and Subsidiaries as of September 30, 1996 and 1997 and the related
supplemental consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended September 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The supplemental consolidated financial statements give retroactive effect to
the merger of NBTY, Inc. and Subsidiaries and Nutrition Headquarters, Inc., Lee
Nutrition, Inc. and Nutro Laboratories, Inc. on April 20, 1998, which has been
accounted for as a pooling of interests as described in Note 1 to the
supplemental consolidated financial statements. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling of interests methods in financial statements that
do not include the date of consummation. These financial statements do not
extend through the date of consummation; however, they will become the
historical consolidated financial statements of NBTY, Inc. and Subsidiaries
after financial statements covering the date of consummation of the business
combination are issued.
In our opinion, the supplemental consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of NBTY, Inc. and Subsidiaries at September 30, 1996 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1997, in conformity with generally
accepted accounting principles applicable after financial statements are issued
for a period which includes the date of consummation of the business
combination.
Coopers & Lybrand L.L.P.
Melville, New York
April 24, 1998
2
<PAGE>
NBTY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1997
(DOLLARS AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 12,814 $ 20,262
Short-term investments.................................................................. 11,024 8,362
Accounts receivable, less allowance for doubtful accounts of $919 in 1996 and
$1,116 in 1997....................................................................... 14,580 19,603
Inventories............................................................................... 47,241 86,440
Deferred income taxes..................................................................... 3,155 6,032
Prepaid catalog costs and other current assets............................................ 5,857 19,111
-------- --------
Total current assets............................................................ 94,671 159,810
Cash held in escrow....................................................................... 144,262
Property, plant and equipment, net........................................................ 70,423 118,184
Intangible assets, net.................................................................... 5,376 141,303
Other assets.............................................................................. 1,478 7,618
-------- --------
Total assets.................................................................... $171,948 $571,177
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations......................... $ 2,767 $ 1,519
Demand note payable..................................................................... 2,633 1,873
Accounts payable........................................................................ 15,584 49,857
Accrued expenses........................................................................ 16,128 35,711
-------- --------
Total current liabilities....................................................... 37,112 88,960
Long-term debt............................................................................ 20,298 168,550
Obligations under capital leases.......................................................... 3,272 2,700
Promissory note payable................................................................... 169,909
Deferred income taxes..................................................................... 2,827 7,474
Other liabilities......................................................................... 794 2,293
-------- --------
Total liabilities............................................................... 64,303 439,886
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $.008 par; authorized 25,000 shares in 1996 and 75,000 shares in 1997;
issued 23,004 shares in 1996 and 69,123 shares in 1997 and outstanding 21,517 shares
in 1996 and 64,614 shares in 1997.................................................... 184 553
Capital in excess of par................................................................ 56,260 56,182
Retained earnings....................................................................... 54,433 75,199
-------- --------
110,877 131,934
Less 1,487 and 4,509 treasury shares at cost, in 1996 and 1997, respectively............ (2,648) (3,206)
Stock subscriptions receivable.......................................................... (584)
Cumulative translation adjustment....................................................... 2,563
-------- --------
Total stockholders' equity...................................................... 107,645 131,291
-------- --------
Total liabilities and stockholders' equity...................................... $171,948 $571,177
-------- --------
-------- --------
</TABLE>
See notes to supplemental consolidated financial statements.
3
<PAGE>
NBTY INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales.................................................................... $250,351 $265,670 $355,336
-------- -------- --------
Costs and expenses:
Cost of sales.............................................................. 137,254 138,186 177,909
Catalog printing, postage and promotion.................................... 28,307 26,695 27,932
Selling, general and administrative........................................ 67,032 68,414 96,653
Litigation settlement costs................................................ 6,368
-------- -------- --------
232,593 233,295 308,862
-------- -------- --------
Income from operations....................................................... 17,758 32,375 46,474
-------- -------- --------
Other income (expense):
Interest, net.............................................................. (2,284) (2,431) (7,471)
Miscellaneous, net......................................................... 822 1,430 1,817
-------- -------- --------
(1,462) (1,001) (5,654)
-------- -------- --------
Income before income taxes................................................... 16,296 31,374 40,820
Income taxes................................................................. 3,374 9,168 11,694
-------- -------- --------
Net income.............................................................. $ 12,922 $ 22,206 $ 29,126
-------- -------- --------
-------- -------- --------
Net income per share:
Basic...................................................................... $ 0.21 $ 0.35 $ 0.45
Diluted.................................................................... 0.19 0.32 0.42
Weighted average common shares outstanding:
Basic...................................................................... 62,159 64,197 64,611
Diluted.................................................................... 68,695 68,699 68,935
</TABLE>
See notes to supplemental consolidated financial statements.
4
<PAGE>
NBTY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
(DOLLARS AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
------------------ -------------------
NUMBER OF CAPITAL IN RETAINED NUMBER OF
SHARES AMOUNT EXCESS OF PAR EARNINGS SHARES AMOUNT
--------- ------ ------------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1994................................ 21,702 $174 $53,455 $ 32,990 1,213 $ (863)
Net income for year ended September 30, 1995............. 12,922
S corporation distributions.............................. (6,750)
Exercise of stock options................................ 430 3 212
Tax benefit from exercise of stock options............... 731
Purchase of treasury stock, at cost...................... 228 (1,483)
--------- ------ ------------- -------- --------- -------
Balance, September 30, 1995................................ 22,132 177 54,398 39,162 1,441 (2,346)
Net income for year ended September 30, 1996............. 22,206
S corporation distributions.............................. (6,935)
Exercise of stock options................................ 872 7 588
Tax benefit from exercise of stock options............... 1,274
Purchase of treasury stock, at cost...................... 46 (302)
--------- ------ ------------- -------- --------- -------
Balance, September 30, 1996................................ 23,004 184 56,260 54,433 1,487 (2,648)
Net income for year ended September 30, 1997............. 29,126
S corporation distributions.............................. (8,360)
Gain on foreign currency translation.....................
Exercise of stock options................................ 37 1 33
Tax benefit from exercise of stock options............... 257
Repayment of stock subscriptions receivable for options
exercised.............................................
Stock tendered as payment for options exercised.......... 16 (558)
April 3, 1998 three-for-one stock split effected in the
form of a 200% stock dividend......................... 46,082 368 (368) 3,006
--------- ------ ------------- -------- --------- -------
Balance, September 30, 1997................................ 69,123 $553 $56,182 $ 75,199 4,509 $(3,206)
--------- ------ ------------- -------- --------- -------
--------- ------ ------------- -------- --------- -------
<CAPTION>
STOCK CUMULATIVE
SUBSCRIPTIONS TRANSLATION
RECEIVABLE ADJUSTMENT TOTAL
------------- ---------- --------
<S> <C> <C> <C>
Balance, September 30, 1994................................ $ 85,756
Net income for year ended September 30, 1995............. 12,922
S corporation distributions.............................. (6,750)
Exercise of stock options................................ 215
Tax benefit from exercise of stock options............... 731
Purchase of treasury stock, at cost...................... (1,483)
------ ---------- --------
Balance, September 30, 1995................................ 91,391
Net income for year ended September 30, 1996............. 22,206
S corporation distributions.............................. (6,935)
Exercise of stock options................................ $(584) 11
Tax benefit from exercise of stock options............... 1,274
Purchase of treasury stock, at cost...................... (302)
------ ---------- --------
Balance, September 30, 1996................................ (584) 107,645
Net income for year ended September 30, 1997............. 29,126
S corporation distributions.............................. (8,360)
Gain on foreign currency translation..................... $2,563 2,563
Exercise of stock options................................ 34
Tax benefit from exercise of stock options............... 257
Repayment of stock subscriptions receivable for options
exercised............................................. 96 96
Stock tendered as payment for options exercised.......... 488 (70)
April 3, 1998 three-for-one stock split effected in the
form of a 200% stock dividend.........................
------ ---------- --------
Balance, September 30, 1997................................ $ -- $2,563 $131,291
------ ---------- --------
------ ---------- --------
</TABLE>
See notes to supplemental consolidated financial statements.
5
<PAGE>
NBTY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income..................................................................... $12,922 $22,206 $ 29,126
Adjustments to reconcile net income to cash provided by operating activities:
(Gain) loss on disposal/sale of property, plant and equipment................ 374 (43) (194)
Depreciation and amortization................................................ 6,171 7,091 9,627
Provision (recovery) for allowance for doubtful accounts..................... (18) 283 197
Deferred income taxes........................................................ 685 (642) (2,750)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable....................................................... (2,207) 1,441 (4,841)
Inventories............................................................... 4,657 (1,054) (20,877)
Prepaid catalog costs and other current assets............................ (527) 665 (4,461)
Other assets.............................................................. 1,175 603 36
Accounts payable.......................................................... 2,857 (6,399) 14,586
Accrued expenses.......................................................... 3,063 5,565 14,553
Other liabilities......................................................... 275 24 1,500
Income tax receivable..................................................... 1,300
------- ------- --------
Net cash provided by operating activities............................... 30,727 29,740 36,502
------- ------- --------
Cash flows from investment activities:
Increase in intangible assets.................................................. (1,064) (67) (1,843)
Purchase of property, plant and equipment...................................... (12,707) (16,809) (23,712)
Proceeds from sale of property, plant and equipment............................ 155 293
Proceeds from sale of short-term investments................................... 2,662
Purchase of short-term investments............................................. (11,024)
Receipt of payments on notes from sale of direct mail cosmetics business....... 741 1,047
Proceeds from sale of direct mail cosmetics business........................... 350
Other.......................................................................... (85) 181 (263)
Cash from acquisition.......................................................... 5,580
------- ------- --------
Net cash used in investing activities................................... (13,856) (26,473) (16,236)
------- ------- --------
Cash flows from financing activities:
Net payments under line of credit agreement.................................... (5,000)
Proceeds from bond offering, net of discount................................... 148,763
Cash held in escrow............................................................ (144,262)
Bond issue costs............................................................... (5,575)
Borrowings under long-term debt agreements..................................... 3,197 6,000 99
Principal payments under long-term debt agreements and capital leases.......... (2,768) (2,802) (3,628)
Purchase of treasury stock..................................................... (1,292) (302) (70)
Proceeds from stock options exercised.......................................... 24 11 34
Distributions to stockholders.................................................. (6,750) (6,935) (8,360)
Repayment of stock subscription receivable..................................... 96
------- ------- --------
Net cash used in financing activities................................... (12,589) (4,028) (12,903)
------- ------- --------
Effect of exchange rate changes on cash and cash equivalents..................... 85
------- ------- --------
Net increase (decrease) in cash and cash equivalents............................. 4,282 (761) 7,448
Cash and cash equivalents at beginning of year................................... 9,293 13,575 12,814
------- ------- --------
Cash and cash equivalents at end of year......................................... $13,575 $12,814 $ 20,262
------- ------- --------
------- ------- --------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest....................................... $ 2,211 $ 2,493 $ 3,568
Cash paid during the period for income taxes................................... $ 1,763 $ 5,496 $ 14,206
</TABLE>
See notes to supplemental consolidated financial statements.
6
<PAGE>
NBTY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS)
Non-cash investing and financing information
On October 9, 1995, NBTY sold certain assets of its direct-mail cosmetics
business for $2,495. The Company received $350 in cash and non-interest bearing
notes aggregating $2,145 for inventory, a customer list and other intangible
assets. The inventory note was repaid in full in October 1996. In April 1997,
the Company received the final payment of the customer list note. (See Note 4)
During fiscal 1996, the Company entered into capital leases for machinery
and equipment aggregating $2,635.
During fiscal 1995, 1996 and 1997, options were exercised with shares of
common stock issued to certain officers and directors. Accordingly, the tax
benefit of approximately $731, $1,274 and $257 for the years ended September 30,
1995, 1996 and 1997, respectively, was recorded as an increase in capital in
excess of par and a reduction in taxes currently payable. In addition, during
fiscal 1997, common stock was surrendered to the Company in satisfaction of $488
of the stock subscription outstanding at September 30, 1996. (See Note 13)
In connection with the acquisition of Holland & Barrett Holdings Ltd. on
August 7, 1997, NBTY issued two promissory notes aggregating $170,000 as
consideration for the purchase of capital stock. Such notes were paid in October
1997 from the cash held in escrow at September 30, 1997. (See Note 3)
See notes to supplemental consolidated financial statements.
7
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
The supplemental consolidated financial statements of NBTY, Inc. and
Subsidiaries, formerly Nature's Bounty, Inc. ('NBTY'), have been prepared to
give retroactive effect to the merger with Nutrition Headquarters, Inc.,
Lee Nutrition, Inc. and Nutro Laboratories, Inc. (collectively, the 'Nutrition
Headquarters Group' and with NBTY collectively, the 'Company') on April 20,
1998, which has been accounted for as a pooling of interests. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling-of-interests methods in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation; however, they will
become the historical consolidated financial statements of the Company after
financial statements covering the date of consummation of the business
combination are issued.
During 1998, NBTY entered into a definitive agreement to merge with
Nutrition Headquarters Group. On April 20, 1998, Nutrition Headquarters Group
was merged with and into NBTY. Under terms of the merger agreement, each share
of Nutrition Headquarters Group common stock was exchanged for approximately
30,000 shares of NBTY's common stock with approximately 8,772 shares of NBTY's
common stock exchanged for all the outstanding stock of Nutrition Headquarters
Group.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany accounts and transactions
have been eliminated.
In March 1998, the Company's board of directors declared a three-for-one
stock split payable in the form of a 200% stock dividend. This distribution has
been reflected in the fiscal 1997 supplemental consolidated financial statements
and all per common share amounts have been retroactively restated to account for
the stock split. In addition, stock options and the related exercise prices have
been amended to reflect this transaction. Also, in March 1998, the Company's
certificate of incorporation was amended to authorize the issuance of up to
75,000 shares of common stock, par value $.008 per share.
2. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business operations
The Company manufactures and distributes vitamins, food supplements and
health and beauty aids primarily in the United States and the United Kingdom.
The processing, formulation, packaging, labeling and advertising of the
Company's products are subject to regulation by one or more federal agencies,
including the Food and Drug Administration, the Federal Trade Commission, the
Consumer Product Safety Commission, the United States Department of Agriculture,
the United States Environmental Protection Agency and the United States Postal
Service.
Within the United Kingdom ('U.K.'), the manufacturing, advertising, sales
and marketing of food products is regulated by a number of governmental agencies
including the Ministry of Agriculture, Fisheries and Food, the Department of
Health, the Food Advisory Committee and the Committee on Toxicity, among others.
Revenue recognition
The Company recognizes revenue upon shipment or, with respect to its own
retail store operations, upon the sale of products. The Company has no single
customer that represents more than 10% of annual net sales or accounts
receivable as of and for the years ended September 30, 1995, 1996 and 1997.
8
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
on the weighted average method which approximates first-in, first-out basis. The
cost elements of inventory include materials, labor and overhead. In fiscal
1995, no one supplier provided more than 10% of purchases. One supplier provided
approximately 12% of the Company's purchases in 1996 and 1997.
Prepaid catalog costs
Mail order production and mailing costs are capitalized as prepaid catalog
costs and charged to expense over the catalog period, which typically
approximates three months.
Advertising expense
All media (television, radio, magazine) and cooperative advertising costs
are generally expensed as incurred. Total expenses relating to advertising and
promotion for fiscal 1995, 1996 and 1997 were $17,409, $17,885 and $19,782,
respectively.
Property, plant and equipment
Property, plant and equipment are carried at cost. Depreciation is provided
on a straight-line basis over the estimated useful lives of the related assets.
Expenditures which significantly improve or extend the life of an asset are
capitalized.
Maintenance and repairs are charged to expense in the year incurred. Cost
and related accumulated depreciation for property, plant and equipment are
removed from the accounts upon sale or disposition and the resulting gain or
loss is reflected in earnings.
Intangible assets
Goodwill represents the excess of purchase price over the fair value of
identifiable net assets of companies acquired. Goodwill and other intangibles
are amortized on a straight-line basis over periods not exceeding 40 years.
Foreign currency translation
The financial statements of international subsidiaries are translated into
U.S. dollars using the exchange rate at each balance sheet date for assets and
liabilities and an average exchange rate for each period for revenues, expenses,
and gains and losses. Where the local currency is the functional currency,
translation adjustments are recorded as a separate component of stockholder's
equity.
9
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
Income taxes
NBTY recognizes deferred tax liabilities and assets for the expected future
tax consequences of events that have been included in the financial statements
or tax returns. Deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Prior to the merger, Nutrition Headquarters
Group had been treated as an S corporation for federal and state tax purposes.
Accordingly, taxable income has been reported to the individual stockholders for
inclusion in their respective income tax returns with no provision for these
taxes, other than certain minimum taxes, included in the consolidated financial
statements.
Cash and cash equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Short-term investments
Short-term interest bearing investments are those with maturities of less
than one year but greater than three months when purchased. These investments
are readily convertible to cash and are stated at market value, which
approximates cost. Realized gains and losses are included in other income on a
specific identification basis in the period they are realized.
Common shares and earnings per share
In February 1997, the Financial Accounting Standards Board ('FASB') issued
Statement of Financial Accounting Standards ("SFAS") No. 128, 'Earnings Per
Share.' The statement requires the presentation of both 'basic' and 'diluted'
earnings per share ('EPS') on the face of the income statement. Basic EPS is
based on the weighted average number of shares of common stock outstanding
during each period while diluted EPS is based on the weighted average number of
shares of common stock and common stock equivalents outstanding during each
period. Common stock equivalents included in diluted EPS, which consisted of
common shares issuable upon the exercise of outstanding stock options, were
6,536, 4,502 and 4,324 for the years ended September 30, 1995, 1996 and 1997,
respectively.
Reclassifications
Certain reclassifications have been made to conform prior year amounts to
the current year presentation.
Accounting changes
Effective October 1, 1996, the Company adopted the disclosure-only
provisions of SFAS No. 123, 'Accounting for Stock-Based Compensation.' As
permitted by SFAS No. 123, the Company continues to measure compensation cost in
accordance with Accounting Principles Board Opinion No. 25, 'Accounting for
Stock Issued to Employees.' As the Company has not granted any options during
fiscal 1996 or 1997, there would not have been any impact on the Company's
financial position or results of operations on a pro forma basis.
Effective October 1, 1996, the Company adopted SFAS No. 121, 'Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of.' This statement requires that certain assets be reviewed for impairment and,
if impaired, be measured at fair value, whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. The adoption of SFAS No. 121 at October 1, 1996 and its application
during fiscal 1997 had no material impact on the Company's financial position or
results of operations.
10
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
New accounting standards
In June 1997, the FASB issued SFAS No. 130, 'Reporting Comprehensive
Income,' which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distribution to owners. Among other disclosures, SFAS No. 130
requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
In addition, in June 1997, the FASB issued SFAS No. 131, 'Disclosures About
Segments of an Enterprise and Related Information,' which establishes standards
for reporting information about operating segments. It also establishes
standards for disclosures regarding products and services, geographic areas and
major customers.
Both of these new standards are effective for periods beginning after
December 15, 1997 and require comparative information for earlier years to be
restated. The implementation of these new standards will not affect the
Company's results of operations and financial position, but may have an impact
on future financial statement disclosures.
3. ACQUISITION OF HOLLAND & BARRETT HOLDINGS LTD.
On August 7, 1997, NBTY acquired all of the issued and outstanding capital
stock of Holland & Barrett Holdings Ltd. ('H&B') from Lloyds Chemist's plc
('Lloyds') for an aggregate purchase price of approximately $169,000 plus
acquisition costs of approximately $811. The acquisition has been accounted for
under the purchase method and, accordingly, the results of operations are
included in the financial statements from the date of acquisition. H&B markets a
broad line of nutritional supplement products, including vitamins, minerals and
other nutritional supplements and food product. At the date of acquisition, H&B
operated approximately 410 retail stores in the United Kingdom.
NBTY issued to Lloyds two promissory notes (the 'Promissory Notes')
totaling approximately $170,000 as consideration for the purchase of capital
stock of H&B. The Promissory Notes, which are collateralized by two letters of
credit issued by a lending institution, were paid in full in October 1997.
In connection with the Acquisition, NBTY (i) entered into a $50,000
revolving credit facility (the 'Revolving Credit Facility'), which provides
borrowings for working capital and general corporate purposes, and (ii) issued
$150,000 in Senior Subordinated Notes due 2007.
Assets acquired and liabilities assumed include cash ($5,580), inventory
($18,045), other current assets ($11,078), property, plant and equipment
($31,554), and current and long-term liabilities ($27,154 and $4,058,
respectively). The excess cost of investment over the net book value of H&B at
the date of acquisition resulted in an increase in goodwill of $133,725 which
will be amortized over 25 years. Additionally, finance related costs of
approximately $5,600 will be amortized over 10 years.
The following unaudited condensed pro forma information presents a summary
of consolidated results of operations of the Company and H&B as if the
acquisition had occurred at the beginning of fiscal 1996, with pro forma
adjustments to give effect to the amortization of goodwill, interest expense on
acquisition debt and certain other adjustments, together with related income tax
effects. The pro forma information, which does not give
11
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. ACQUISITION OF HOLLAND & BARRETT HOLDINGS LTD.--(CONTINUED)
effect to anticipated intercompany product sales, is not necessarily indicative
of the results of operations had H&B been acquired as of the earliest period
presented below.
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
---------------- ----------------
<S> <C> <C>
Net sales....................................................... $421,049 $506,326
Net income...................................................... $ 14,964 $ 24,354
Net income per diluted share.................................... $ 0.22 $ 0.35
</TABLE>
4. SALE OF DIRECT-MAIL COSMETICS BUSINESS
On October 9, 1995, NBTY sold certain assets of its direct-mail cosmetics
business for $2,495. NBTY received $350 in cash and non interest bearing notes
aggregating $2,145 for inventory, a customer list and other intangible assets.
Revenues applicable to this marginally unprofitable business were $8,284 and
$137 for fiscal 1995 and 1996, respectively. The inventory note was repaid in
full in October 1996 and, in April 1997, NBTY received the final payment of the
customer list note.
5. INVENTORIES
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1996 1997
------- -------
<S> <C> <C>
Raw materials........................................................... $19,482 $32,712
Work-in-process......................................................... 2,484 4,635
Finished goods.......................................................... 25,275 49,093
------- -------
$47,241 $86,440
------- -------
------- -------
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Land.................................................................. $ 5,641 $ 5,836
Buildings and leasehold improvements.................................. 45,527 51,423
Machinery and equipment............................................... 36,938 43,858
Furniture and fixtures................................................ 9,241 54,385
Transportation equipment.............................................. 737 2,511
Computer equipment.................................................... 9,320 15,434
-------- --------
104,404 173,447
Less accumulated depreciation and amortization...................... 33,981 55,263
-------- --------
$ 70,423 $118,184
-------- --------
-------- --------
</TABLE>
Depreciation and amortization of property, plant and equipment for the
years ended September 30, 1995, 1996 and 1997 was approximately $4,216, $6,205
and $8,363, respectively.
Property, plant and equipment includes approximately $4,293 and $4,392 for
assets recorded under capital leases for fiscal 1996 and 1997, respectively.
12
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. INTANGIBLE ASSETS
Intangible assets, at cost, acquired at various dates are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------- AMORTIZATION
1996 1997 PERIOD
------- -------- ------------
<S> <C> <C> <C>
Goodwill........................................................... $ 469 $136,972 20-40
Customer lists..................................................... 12,044 12,732 6-15
Trademark and licenses............................................. 1,201 1,201 2-3
Covenants not to compete........................................... 1,305 1,305 5-7
------- --------
15,019 152,210
Less accumulated amortization.................................... 9,643 10,907
------- --------
$ 5,376 $141,303
------- --------
------- --------
</TABLE>
Amortization included in the supplemental consolidated statements of income
under the caption 'selling, general and administrative expenses' in 1995, 1996
and 1997 was approximately $1,056, $886 and $1,264, respectively.
8. ACCRUED EXPENSES
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Litigation settlement costs........................................... $ 5,600
Payroll and related payroll taxes..................................... $ 3,090 4,622
Customer deposits..................................................... 2,199 2,568
Accrued purchases and interest........................................ 2,800
Income taxes payable.................................................. 2,801 7,597
Other................................................................. 8,038 12,524
-------- --------
$ 16,128 $ 35,711
-------- --------
-------- --------
</TABLE>
13
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
9. DEBT
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1996 1997
------- --------
<S> <C> <C>
Senior debt:
8-5/8% Senior subordinated notes due 2007, net of unamortized
discount of $1,237 (a)............................................ $148,763
Senior bank debt (b)................................................... $ 576 44
First subordinated promissory notes; payable in 8 monthly installments
of $108 (c).......................................................... 867
Second subordinated promissory notes, principal payable on April 1,
2011 (d)............................................................. 2,245 2,245
Note payable to a bank due in monthly payments of $16, including
interest, maturing April 2016 (e).................................... 1,852 1,814
Note payable due in monthly payments of $9, including interest at 8%,
maturing March 2001.................................................. 422 341
Mortgages:
First mortgage, payable in monthly principal and interest (10.375%)
installments (f).................................................. 7,447 7,317
First mortgage payable in monthly principal and interest (9.73%)
installments of $25 (g)........................................... 2,258 2,169
First mortgage, payable in monthly principal and interest (7.375%)
installments of $55 (h)........................................... 5,926 5,693
Other (i).............................................................. 928 1,107
Revolving credit agreement (j).........................................
------- --------
22,521 169,493
Less current portion................................................. 2,223 943
------- --------
$20,298 $168,550
------- --------
------- --------
</TABLE>
- ------------------
(a) In September 1997, the Company issued 10-year Senior Subordinated Notes due
2007. The Notes are unsecured and subordinated in right of payment for all
existing and future indebtedness of the Company. The Company has registered
these Notes under the Securities Act of 1933 through an exchange offer with
terms substantially identical to the original Notes.
(b) Interest on the senior bank debt was payable monthly at the prime rate which
was 8.5% at September 30, 1997. The balance of $44 was paid on October 1,
1997. On April 30, 1997, an agreement for an additional term loan for $1,100
was executed. The terms of the loan agreement provide for repayment in sixty
monthly installments with interest at 8.5% per annum. As of September 30,
1997, no funds were advanced under this agreement.
(c) The promissory notes were entered into on October 31, 1996 and ended on May
31, 1997. Interest is payable per annum at the lower of 10% or the prime
rate plus 2% (prime at September 30, 1997 was 8.5% per annum). These
promissory notes are collateralized by a first subordinated pledge of the
capital stock of the Company and are guaranteed by certain stockholders.
(d) Interest on the second promissory notes is payable per annum at the lower of
10% or the prime rate plus 2%. These promissory notes, payable to a relative
of a stockholder, are collateralized by a second subordinated pledge of
capital stock of the Company and are guaranteed by certain stockholders.
14
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
9. DEBT--(CONTINUED)
(e) Interest on this note payable to a bank is fixed at 8.15% per annum through
April 2001. Thereafter, interest will be adjusted every five years. The note
is collateralized by a building and land.
(f) In September 1990, the Company obtained an $8,000 first mortgage,
collateralized by the underlying building, issued through the Town of Islip,
New York Industrial Development Agency. The taxable bond, held by an
insurance company, has monthly principal and interest payments of $75 for
ten years through 2000, with a final payment of $6,891 in September 2000.
(g) In November 1994, the Company purchased a building which it previously
occupied under a long-term lease. The purchase price of approximately $3,090
was funded with $690 in cash and the balance through a 15-year mortgage note
payable. This agreement contains various restrictive covenants which require
the maintenance of certain financial ratios and limits capital expenditures.
(h) In April 1996, the Company obtained a $6,000 first mortgage with a fixed
interest rate of 7.375%, collateralized by the underlying real estate. The
mortgage has monthly principal and interest payments of $55 for fifteen
years through 2011.
(i) Included in other is approximately $301 and $617 as of September 30, 1996
and 1997, respectively, relating to loans made to a stockholder. These notes
are at fixed interest rates ranging from 8.0% to 10.0% and mature at various
dates through June 2017.
(j) In September 1997, the Company entered into a Revolving Credit Agreement
(the 'Agreement') with five banks that provides for borrowings up to
$50,000, which expires September 23, 2003. Virtually all of the Company's
assets serve as collateral under the Agreement, which is subject to normal
banking terms and conditions. The Agreement provides that loans may be made
under a selection of rate formulas, including Prime or Euro currency rates.
The Agreement provides for the maintenance of various financial ratios and
covenants. As of September 30, 1997, there were no outstanding borrowings
under the Agreement.
Required principal payments of long-term debt are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
- --------------------------------------------------------------
<S> <C>
1998....................................................... $ 943
1999....................................................... 1,196
2000....................................................... 7,687
2001....................................................... 602
2002....................................................... 567
Thereafter................................................. 158,498
--------
$169,493
--------
--------
</TABLE>
The Company also has outstanding a demand note payable, bearing interest at
prime plus 0.75%, in the amount of $2,633 and $1,873 at September 30, 1996 and
1997, respectively. The loan agreement has a maximum borrowing limit of 85% of
qualified accounts receivable and 35% of qualified inventory, with an overall
borrowing limit of $5,000.
In August 1997, in connection with the promissory notes issued as
consideration for the purchase of H&B, NBTY was issued two standby letters of
credit aggregating $170,000. At September 30, 1997, there were no borrowings
outstanding under the letters of credit. As of October 17, 1997, upon payment of
the promissory notes, the letters of credit were cancelled.
15
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
9. DEBT--(CONTINUED)
In 1997, the Company recorded a loss of $2,265 in connection with an
interest rate lock which was settled on October 28, 1997.
10. CAPITAL LEASE OBLIGATIONS
The Company enters into various capital leases for machinery and equipment
which provide the Company with bargain purchase options at the end of such lease
terms. Future minimum payments under capital lease obligations as of September
30, 1997 are as follows:
<TABLE>
<S> <C>
1998............................................................. $ 814
1999............................................................. 759
2000............................................................. 759
2001............................................................. 759
2002............................................................. 692
Thereafter....................................................... 174
------
3,957
Less, amount representing interest............................... 681
------
Present value of minimum lease payments (including $576 due
within one year)............................................... $3,276
------
------
</TABLE>
11. INCOME TAXES
Provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------
1995 1996 1997
------ ------ -------
<S> <C> <C> <C>
Federal
Current................................................................. $2,225 $7,551 $14,207
Deferred................................................................ 637 (501) (2,530)
State
Current................................................................. 464 2,259 1,426
Deferred................................................................ 48 (141) (220)
Foreign benefit........................................................... (1,189)
------ ------ -------
Total provision........................................................... $3,374 $9,168 $11,694
------ ------ -------
</TABLE>
16
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11. INCOME TAXES--(CONTINUED)
The following is a reconciliation of the income tax expense computed using
the statutory federal income tax rate to the actual income tax expense and its
effective income tax rate.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------
1995 1996 1997
-------------------- --------------------- ---------------------
PERCENT OF PERCENT OF PERCENT OF
PRETAX PRETAX PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
------ ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income tax expense at statutory
rate............................... $5,541 34.0 $10,981 35.0 $14,287 35.0
State income taxes, net of federal
income tax benefit................. 382 2.3 1,428 4.6 857 2.1
S corporation earnings not subject to
income taxes (a)................... (2,691) (16.5) (3,150) (10.0) (4,236) (10.4)
Other, individually less than 5%..... 142 0.9 (91) (0.2) 786 1.9
------ ---------- ------- ---------- ------- ----------
Actual income tax provision.......... $3,374 20.7 $ 9,168 29.2 $11,694 28.6
------ ---------- ------- ---------- ------- ----------
------ ---------- ------- ---------- ------- ----------
</TABLE>
- ------------------
(a) Prior to the merger, Nutrition Headquarters Group had been treated as an S
corporation for federal and state tax purposes. Accordingly, taxable income
has been reported to the individual stockholders for inclusion in their
respective income tax returns with no provision for these taxes, other than
certain minimum taxes, included in the supplemental consolidated financial
statements.
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Deferred tax assets:
Current:
Inventory capitalization.............................................. $ 243 $ 351
Accrued expenses and reserves not currently deductible................ 2,591 5,350
Tax credits........................................................... 321 331
------ ------
Current deferred tax assets...................................... 3,155 6,032
------ ------
Noncurrent:
Intangibles........................................................... 335 333
Reserves not currently deductible..................................... 200 188
------ ------
Total noncurrent................................................. 535 521
------ ------
Deferred tax liabilities:
Property, plant and equipment............................................ (3,362) (7,995)
------ ------
Net deferred tax (liability) asset............................... $ 328 $(1,442)
------ ------
------ ------
</TABLE>
Available state tax credits of $321 and $331 in 1996 and 1997,
respectively, are scheduled to expire through fiscal 2002. Federal net operating
loss carryforwards of $177 will expire in 2004 and available investment tax
credits of $58 are scheduled to expire in 2001.
17
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
12. COMMITMENTS
Leases
The Company conducts retail operations under operating leases which expire
at various dates through 2020. Some of the leases contain renewal options and
provide for additional rentals based upon sales plus certain tax and maintenance
costs.
Future minimal rental payments under the retail location and other leases
that have initial or noncancelable lease terms in excess of one year at
September 30, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
SEPTEMBER 30,
- --------------------------------------------------------------
<S> <C>
1998....................................................... $ 25,322
1999....................................................... 24,501
2000....................................................... 23,522
2001....................................................... 22,176
2002....................................................... 20,804
Thereafter................................................. 161,623
--------
$277,948
--------
--------
</TABLE>
Operating lease rental expense, including real estate tax and maintenance
costs, and leases on a month to month basis were approximately $1,358, $2,092
and $7,852 for the years ended September 30, 1995, 1996 and 1997, respectively.
Purchase commitments
The Company was committed to make future purchases under various purchase
order arrangements with fixed price provisions aggregating approximately $12,923
and $26,152 at September 30, 1996 and 1997, respectively.
Capital commitments
The Company had approximately $15,800 in open capital commitments related
to a manufacturing facility and computer hardware and software at September 30,
1997.
Employment and consulting agreements
NBTY has employment agreements with two of its officers. The agreements,
which expire in January 2004, provide for minimum salary levels, including cost
of living adjustments, and also contain provisions regarding severance and
changes in control of the Company. The commitment for salaries as of September
30, 1997 was approximately $749 per year.
Effective April 20, 1998, the Company entered into an employment agreement
with a former stockholder and officer of Nutrition Headquarters Group who is
currently an employee of the Company. Such agreement is for a one-year term,
subject to extension at the sole option of the officer for two additional
one-year terms, and requires an annual payment of $275.
The Company also has a two-year consulting agreement with its former
chairman and current director which expired on December 31, 1997. Such agreement
required annual payments of approximately $350. The parties have renewed the
agreement to provide services from January 1, 1998 through December 31, 2000.
During this period, the consulting fee payable shall be fixed by the Board of
Directors of the Company, provided that in no event will the consulting fee be
at a rate lower than $400 per year with certain fringe benefits accorded other
18
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
12. COMMITMENTS--(CONTINUED)
executives of NBTY. In addition, an entity owned by a relative of an officer
received sales commissions of $510, $417 and $541 in 1995, 1996 and 1997,
respectively.
13. STOCK OPTION PLANS
The Board of Directors approved the issuance of 6,660 non-qualified options
on September 23, 1990, exercisable at $0.21 per share, which options terminate
on September 23, 2000. In addition, on March 11, 1992, the Board approved the
issuance of an aggregate of 5,400 non-qualified stock options to directors and
officers, exercisable at $0.31 per share, and expiring on March 10, 2002. The
exercise price of each of the aforementioned issuances was in excess of the
market price at the date such options were granted.
During fiscal 1997, options were exercised with 37 shares of common stock
issued (prior to the aforementioned stock split) to certain officers and a
director for $23. As a result of the exercise of those options, the Company
received a compensation deduction for tax purposes of approximately $643 and a
tax benefit of approximately $257 which was credited to capital in excess of
par.
During fiscal 1996, options were exercised with 872 shares of common stock
issued (prior to the aforementioned stock split) to certain officers and
directors for $11 and interest bearing notes in the amount of $584. As a result
of the exercise of these options, the Company was entitled to a compensation
deduction for tax purposes of approximately $3,145 and a tax benefit of
approximately $1,274 which was credited to capital in excess of par.
During fiscal 1995, options were exercised with 430 shares of common stock
issued (prior to the aforementioned stock split) to certain officers and
directors for $24 and an interest bearing note in the amount of $191. The
promissory note, including interest, was paid by the surrender of 23 NBTY common
shares to the Company at the prevailing market price. As a result of the
exercise of these options, the Company was entitled to a compensation deduction
of approximately $1,828 which resulted in a tax benefit of approximately $731
which was credited to capital in excess of par.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year..... 8,475 $.24 7,185 $.25 4,569 $.25
Exercised............................ 1,290 .17 2,616 .23 111 .31
--------- -------- --------- -------- --------- --------
Outstanding at end of year........... 7,185 $.25 4,569 $.25 4,458 $.25
--------- -------- --------- -------- --------- --------
--------- -------- --------- -------- --------- --------
Exercisable at end of year........... 7,185 $.25 4,569 $.25 4,458 $.25
--------- -------- --------- -------- --------- --------
--------- -------- --------- -------- --------- --------
</TABLE>
As of September 30, 1997, the weighted average remaining contractual life
of outstanding options was 4 years. In addition, there were no options available
for grant at September 30, 1995, 1996 or 1997.
14. EMPLOYEE BENEFIT PLANS
The Company maintains defined contribution savings plans and an employee
stock ownership plan. The accompanying financial statements reflect
contributions to these plans in the approximate amount of $498, $489 and $1,209
for the years ended September 30, 1995, 1996 and 1997, respectively.
19
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15. LITIGATION
L-tryptophan
The Company and certain other companies in the industry have been named as
defendants in cases arising out of the ingestion of products containing
L-tryptophan. The Company had been named in more than 265 lawsuits, of which
four are still pending against the Company. The other 261 lawsuits have been
settled at no cost to the Company. The Company's supplier of L-tryptophan agreed
to indemnify the Company and the other companies named in the lawsuits through
the final resolution of all cases involving L-tryptophan. In addition, the
supplier has posted, for the benefit of the Company and the other companies
named in the lawsuits, a revolving, irrevocable letter of credit of $20,000 to
be used in the event that the supplier is unable or unwilling to satisfy any
claims or judgments. While not all of these suits quantify the amount demanded,
the Company believes that the amount required to either settle these cases or to
pay judgments rendered therein will be paid by the supplier or by the Company's
product liability insurance carrier.
While the outcome of any litigation is uncertain, it is the opinion of
management and legal counsel of the Company that it is remote that the Company
will incur a material loss as a result of the L-tryptophan litigation and
claims. Accordingly, no provision for liability, if any, that may result
therefrom has been made in the Company's financial statements.
Shareholder litigation
In October 1994, two lawsuits were commenced in the U.S. District Court,
Eastern District of New York, against the Company and two of its officers. On
October 17, 1997, a Memorandum of Understanding was entered into between the
Company and the attorneys representing the Plaintiff class agreeing to an $8,000
($4,400 cash, $3,600 stock) settlement of the lawsuit. Subsequently, the Company
entered into a Capital Stipulation of Settlement calling for, among other
things, a total cash payment of $8,000. The Company has been notified by its
insurance carrier that it is willing to reimburse the Company to the extent of
$2,400. Accordingly, as of September 30, 1997, the Company recorded a $5,600
provision for its portion of the settlement which, along with related legal fees
of approximately $768, has been reflected separately in the statement of income.
Other litigation
The Company is also involved in miscellaneous claims and litigation which
management believes, taken individually or in the aggregate, would not have a
material adverse effect on the Company's financial position or its business.
16. FOREIGN OPERATIONS
In connection with NBTY's recent acquisition of H&B which operates
primarily in the United Kingdom, the Company has significantly expanded its
operations outside of the United States. The following information has been
summarized by geographic area as of September 30, 1997 and for the year then
ended.
<TABLE>
<CAPTION>
IDENTIFIABLE OPERATING
ASSETS SALES INCOME
------------ -------- ---------
<S> <C> <C> <C>
United States...................................................... $356,987 $328,839 $49,755
United Kingdom..................................................... 214,190 26,497 (3,281)
------------ -------- ---------
$571,177 $355,336 $46,474
------------ -------- ---------
------------ -------- ---------
</TABLE>
20
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
17. RELATED PARTY TRANSACTIONS
Nutrition Headquarters Group has outstanding promissory notes of $2,245, as
described in Note 9, which are payable to a relative of a stockholder. Interest
on the obligation amounted to approximately $224 for each of the three years
ended September 30, 1995, 1996 and 1997.
Nutrition Headquarters Group has outstanding loans to a stockholder in the
aggregate amount of $301 and $617, as described in Note 9, as of September 30,
1996 and 1997, respectively. Interest on these loans amounted to approximately
$29, $30 and $56 for the years ended September 30, 1995, 1996 and 1997,
respectively.
For the years ended September 30, 1995, 1996 and 1997, Nutrition
Headquarters Group provided distributions to its stockholders in the aggregate
amount of $6,750, $6,935 and $8,360, respectively.
18. SUBSEQUENT EVENTS
In April 1998, the Company agreed to sell certain assets of its cosmetic
pencil operation for approximately $6,000. The Company will receive $4,500 in
cash with additional payments of $1,500 over the next three years. Revenues
applicable to this business were $581, $577 and $1,875 for fiscal 1995, 1996 and
1997, respectively, and the related results of operations were insignificant.
21
<PAGE>
NUTRO LABORATORIES, INC.
For the Years Ended
September 30, 1997, 1996 and 1995
22
<PAGE>
Independent Auditors' Report
Board of Directors
Nutro Laboratories, Inc.
We have audited the accompanying balance sheets of Nutro Laboratories, Inc. as
of September 30, 1997 and 1996, and the related statements of operations,
stockholders' equity, and cash flows for the years ended September 30, 1997,
1996 and 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nutro Laboratories, Inc. as
of September 30, 1997 and 1996, and the results of its operations and its cash
flows for the years ended September 30, 1997, 1996 and 1995 in conformity with
generally accepted accounting principles.
AMPER, POLITZINER & MATTIA P.A.
November 7, 1997,
except for Note 12, dated April 20, 1998
Princeton, New Jersey
23
<PAGE>
NUTRO LABORATORIES, INC.
Balance Sheets
September 30,
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
Assets
Current assets
Cash $ 33,244 $ 38,629
Accounts receivable - less allowance for doubtful
accounts of $125,000 3,951,960 3,189,329
Inventory 4,625,167 3,658,684
Prepaid expenses and other current assets 145,527 63,190
---------------- ----------------
8,755,898 6,949,832
Property and equipment, net of accumulated depreciation 5,656,675 5,564,626
Loans receivable - officer 85,707 37,896
Deposits and other assets 685,057 74,389
---------------- ----------------
$ 15,183,337 $ 12,626,743
================ ================
Liabilities and Stockholders' Equity
Current liabilities
Demand note payable $ 1,873,489 $ 2,632,590
Current maturities of long-term debt 504,891 471,651
Accounts payable - trade 3,066,428 2,401,708
Accrued expenses and other current liabilities 742,370 639,289
---------------- ----------------
6,187,178 6,145,238
---------------- ----------------
Other liabilities
Long-term debt, net of current maturities 2,821,071 2,893,785
Notes payable - officer 195,000 195,000
---------------- ----------------
3,016,071 3,088,785
---------------- ----------------
Commitments and contingent liabilities - -
Stockholders' equity
Common stock; no par value, 1,000 shares authorized,
100 shares issued and outstanding 1,000 1,000
Paid-in capital 249,000 249,000
Retained earnings 5,730,088 3,142,720
---------------- ----------------
5,980,088 3,392,720
---------------- ----------------
$ 15,183,337 $ 12,626,743
================ ================
</TABLE>
See accompanying notes to financial statements.
24
<PAGE>
NUTRO LABORATORIES, INC.
Statements of Operations
For the Years Ended September 30,
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net sales $ 28,949,635 $ 27,603,460 $ 27,653,165
Cost of goods sold 21,030,026 22,078,619 22,344,068
----------------- ----------------- -----------------
Gross profit 7,919,609 5,524,841 5,309,097
Selling, general and administrative
expenses 3,988,864 3,961,854 4,332,357
----------------- ----------------- -----------------
Earnings from operations 3,930,745 1,562,987 976,740
----------------- ----------------- -----------------
Other income (expense)
Gain on sale of property and
equipment 4,000 42,754 -
Interest expense (546,712) (583,352) (549,223)
Litigation expense (625,583) - -
----------------- ----------------- -----------------
(1,168,295) (540,598) (549,223)
----------------- ----------------- -----------------
Earnings before provision for state
income tax 2,762,450 1,022,389 427,517
Provision for state income tax 50,082 11,200 9,400
----------------- ----------------- -----------------
Net income $ 2,712,368 $ 1,011,189 $ 418,117
================= ================= =================
</TABLE>
See accompanying notes to financial statements.
25
<PAGE>
NUTRO LABORATORIES, INC.
Statements of Stockholders' Equity
For the Years Ended September 30,
<TABLE>
<CAPTION>
Common Stock
--------------------------- Additional
Shares Paid in Retained
Outstanding Amount Capital Earnings Total
----------- ----------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, October 1, 1994 100 $ 1,000 $ 249,000 $ 1,940,914 $ 2,190,914
Net income - - - 418,117 418,117
------- ----------- -------------- -------------- ---------------
Balance, September 30, 1995 100 1,000 249,000 2,359,031 2,609,031
Net income - - - 1,011,189 1,011,189
Dividends - - - (227,500) (227,500)
------- ----------- -------------- -------------- ---------------
Balance, September 30, 1996 100 1,000 249,000 3,142,720 3,392,720
Net income - - - 2,712,368 2,712,368
Dividends - - - (125,000) (125,000)
------- ----------- -------------- -------------- ---------------
Balance, September 30, 1997 100 $ 1,000 $ 249,000 $ 5,730,088 $ 5,980,088
======= =========== ============== ============== ===============
</TABLE>
See accompanying notes to financial statements.
26
<PAGE>
NUTRO LABORATORIES, INC.
Statements of Cash Flows
For the Years Ended September 30,
<TABLE>
<CAPTION>
1997 1996 1995
---------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 2,712,368 $ 1,011,189 $ 418,117
---------------- --------------- ---------------
Adjustments to reconcile net income to
net cash from operating activities
Depreciation 615,065 604,714 523,049
Bad debt expense - 67,009 180
Gain on sale of property and equipment (4,000) (42,754) -
Deferred tax expense - - 1,995
(Increase) decrease in
Accounts receivable (762,631) (122,557) (383,616)
Inventory (966,483) 868,695 330,159
Prepaid expenses and other current assets (82,337) 34,983 10,220
Deposits and other assets (10,668) (71,989) 50,790
Increase (decrease) in
Accounts payable - trade 664,720 (947,078) (982,855)
Accrued expenses and other current
liabilities 103,081 (47,531) 209,172
---------------- --------------- ---------------
Total adjustments (443,253) 343,492 (240,906)
---------------- --------------- ---------------
2,269,115 1,354,681 177,211
---------------- --------------- ---------------
Cash flows from investing activities
Payments for purchase of property and equipment (707,114) (425,149) (545,633)
Proceeds from sale of property and equipment 4,000 55,880 -
Payment for other assets (263,645) - -
Increase in loans receivable - officer (47,811) (36,192) (30,951)
Proceeds from loans receivable - officer - 75,441 5,200
---------------- --------------- ---------------
(1,014,570) (330,020) (571,384)
---------------- --------------- ---------------
Cash flows from financing activities
Net (payments) proceeds under demand note
payable (759,101) (352,902) 777,702
Proceeds from long-term debt 99,800 - 19,764
Principal payments of long-term debt (475,629) (406,630) (410,000)
Dividends (125,000) (227,500) -
---------------- --------------- ---------------
(1,259,930) (987,032) 387,466
---------------- --------------- ---------------
Net change in cash (5,385) 37,629 (6,707)
Cash - beginning 38,629 1,000 7,707
---------------- --------------- ---------------
Cash - ending $ 33,244 $ 38,629 $ 1,000
================ =============== ===============
Supplemental disclosure of cash paid
Interest $ 558,898 $ 591,356 $ 540,163
Income taxes 50,082 - 14,280
</TABLE>
See accompanying notes to financial statements.
27
<PAGE>
NUTRO LABORATORIES, INC.
Notes to Financial Statements
Note 1 - Summary of Significant Accounting Policies
Business Activity
The operations of Nutro Laboratories, Inc., (the "Company"), are
primarily manufacturing private label and contract pharmaceutical
vitamins and related products in New Jersey which are sold in bulk
to distributors or are further packaged and sold to retailers
throughout the United States.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Inventory
Inventory is valued at the lower of cost (first-in, first-out
basis) or market.
Property and Equipment
Property and equipment is stated at cost less accumulated
depreciation. Capitalized leases are included in equipment at the
present value of future minimum lease payments at the date of
acquisition. Depreciation is provided using the straight-line
method as follows:
Estimated Useful Life
---------------------
Building 40 years
Machinery and equipment 3 - 10 years
Furniture and office equipment 10 years
Leasehold improvements 8 - 20 years
Income Taxes
The Company has elected to be taxed as an S-Corporation for federal
and state tax purposes. Under this election, the profits, losses,
credits and deductions of the Company are passed through to the
individual stockholders. New Jersey taxes the Company at
approximately 2% of taxable income.
Note 2 - Inventory
September 30,
1997 1996
---------------- ---------------
Raw materials $ 2,117,814 $ 1,626,173
Work-in-process 884,684 669,334
Finished goods 1,622,669 1,363,177
---------------- ---------------
$ 4,625,167 $ 3,658,684
================ ===============
28
<PAGE>
NUTRO LABORATORIES, INC.
Notes to Financial Statements
Note 3 - Property and Equipment
September 30,
1997 1996
-------------- -------------
Building $ 1,987,090 $ 1,987,090
Land 591,100 591,100
Machinery and equipment 6,262,411 5,617,731
Furniture and office equipment 375,889 366,579
Leasehold improvements 1,138,756 1,085,632
-------------- -------------
10,355,246 9,648,132
Accumulated depreciation 4,698,571 4,083,506
-------------- -------------
$ 5,656,675 $ 5,564,626
============== =============
Depreciation expense (including amortization of leasehold
improvements and capitalized leases) for the years ended September
30, 1997, 1996 and 1995 was $615,065, $604,714 and $523,049,
respectively.
Equipment costs subject to capitalized leases at September 30, 1997
and 1996 totaled $122,368 and $22,568, with related accumulated
depreciation of $25,895 and $21,065, respectively.
Note 4 - Demand Note Payable
<TABLE>
<CAPTION>
September 30,
1997 1996
-------------- ---------------
<S> <C> <C>
Revolving loan agreement payable on demand,
bearing interest (payable monthly) at prime
plus .75%, collateralized by accounts
receivable, inventory and equipment. This
agreement has a maximum borrowing limit of
85% of qualified accounts receivable and 35%
of qualified inventory, with an overall
borrowing limit of $5,000,000. $ 1,873,489 $ 2,632,590
============== ===============
</TABLE>
The prime rate of interest as of September 30, 1997 and 1996 was
8.5% and 8.25%, respectively.
The note agreement places restrictions on dividend payments,
capital expenditures and contains requirements for maintaining
defined levels of working capital, capital funds, as well as
various financial ratios including debt to equity.
29
<PAGE>
NUTRO LABORATORIES, INC.
Notes to Financial Statements
Note 5 - Accrued Expenses and Other Current Liabilities
Included in accrued expenses and other current liabilities is as
follows:
September 30,
1997 1996
-------------- ---------------
Accrued customer rebates $ 327,000 $ 330,200
Accured expenses 208,500 231,300
Other 206,870 77,789
-------------- ---------------
$ 742,370 $ 639,289
============== ===============
Note 6 - Long-term Debt
<TABLE>
<CAPTION>
September 30,
1997 1996
-------------- ---------------
<S> <C> <C>
Installment note payable to a bank due in monthly
payments of $18,264 plus interest at prime plus .75%,
maturing May 1999, collateralized by accounts
receivable, inventory and equipment. $ 383,543 $ 602,711
Note payable to an affiliate (see Note 9) due in
monthly payments of $8,333 plus interest at
prime, maturing May 2000. 258,343 358,339
Note payable to a bank due in monthly payments of
$15,816, including interest, maturing April 2016.
Interest is fixed at 8.15% per annum through April
2001. Thereafter interest will be adjusted every five
years. The note is collateralized by the building and
land. 1,814,135 1,852,280
Note payable to the stockholder due in monthly
payments of $2,332, including interest at 8%,
maturing March 2001. 85,361 105,530
Note payable due in monthly payments of $9,330,
including interest at 8%, maturing March 2001. 341,430 422,112
Note payable to the stockholder due in quarterly pay-
ments of $8,780, including interest at 8.5% maturing
June 2017. 336,355 -
Other 106,795 24,464
-------------- ---------------
3,325,962 3,365,436
Less current maturities 504,891 471,651
-------------- ---------------
Long-term debt, net of current maturities $ 2,821,071 $ 2,893,785
============== ===============
</TABLE>
30
<PAGE>
NUTRO LABORATORIES, INC.
Notes to Financial Statements
Note 6 - Long-term Debt (continued)
The approximate aggregate amount of long-term debt maturing in
each of the subsequent years ending September 30 is as follows:
1998 $ 504,900
1999 462,700
2000 266,800
2001 157,500
2002 85,800
The prime rate of interest as of September 30, 1997 and 1996 was
8.5% and 8.25%, respectively.
Note 7 - Retained Earnings
<TABLE>
<CAPTION>
September 30,
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Accumulated adjustments account $ 5,174,247 $ 2,586,879 $ 1,803,190
Other retained earnings 555,841 555,841 555,841
-------------- -------------- --------------
$ 5,730,088 $ 3,142,720 $ 2,359,031
============== ============== ==============
</TABLE>
Note 8 - Income Taxes
The Company has the following carryforwards available for
federal tax purposes: investment tax credits of $57,500,
expiring through March 2001, and federal net operating losses of
$176,500, expiring through March 2004. These carryforwards will
not be available for use by the Company as long as it maintains
its election to be taxed as an S-Corporation.
Note 9 - Employee Retirement Plans
The Company's profit sharing plan calls for discretionary
contributions up to a maximum of 15% of the payroll of qualified
employees. The plan defines qualified employees as those over
age 21, with one year of service with the Company.
The Company has a 401(k) pension plan whereby qualified
employees can make voluntary contributions to the plan. The plan
does not require the Company to match any portion of the
employees' contributions.
There was no retirement plan expense for the years ended
September 30, 1997, 1996 and 1995.
31
<PAGE>
NUTRO LABORATORIES, INC.
Notes to Financial Statements
Note 10 - Related Party Transactions
Loans Receivable - Officer
Loans to officer, non-interest bearing, payable in weekly
installments of at least $100.
Notes Payable - Officer
Notes payable - officer, represents $195,000 loaned to the
Company by the stockholder. The note is a two year term note due
in September 1998, bearing interest at 10%. The note is
subordinated to the bank debt described in Notes 4 and 5.
Interest expense to related parties, which include notes payable
- officer, notes payable stockholder (see Note 5) and note
payable - affiliate (see Note 5), for the years ended September
30, 1997, 1996 and 1995 totaled $65,790, $56,523 and $62,200,
respectively.
Sales and Purchases
The stockholder of the Company directly owns a one-third
interest and indirectly owns an additional one-third interest in
an affiliated company. All transactions between the companies
are summarized as follows for the years ended September 30:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Sales $ 2,493,660 $ 2,189,765 $ 2,405,736
Purchases 151,786 101,780 -
Accounts receivable 115,778 25,769 -
</TABLE>
Rent Expense
The Company leased its location from a partnership in which the
principal stockholder had a 20% interest until March 1996 when
the Company purchased the facility from the partnership. (See
Note 10.)
Rent expense for the year ended September 30, 1996 and 1995 was
$166,105 and $366,583, respectively.
Other Assets
Included in other assets is investment property purchased from
the stockholder of the Company for $600,000. The Company plans
to sell this property.
32
<PAGE>
NUTRO LABORATORIES, INC.
Notes to Financial Statements
Note 11 - Non-cash Investing and Financing Activities
During the year ended September 30, 1997, the Company purchased
property from the stockholder of the Company. In conjunction
with the acquisition, the liability was assumed as follows:
Cost of property acquired $ 600,000
Cash paid 263,645
-----------
Liability assumed - note payable to stockholder $ 336,355
===========
During the year ended September 30, 1996, the Company purchased
a building and land for $2,578,190. In conjunction with the
acquisition, liabilities were assumed as follows:
Cost of building and land acquired $ 2,578,190
Cash paid 34,657
-----------
Liabilities assumed $ 2,543,533
===========
Liabilities assumed:
Note payable to bank $ 1,870,000
Note payable to related partnership 583,333
Accounts payable to related partnership 90,200
-----------
$ 2,543,533
===========
Note 12 - Subsequent Event
On April 20, 1998, the stockholders of the Company completed the
sale of all their shareholdings in exchange for shares in NBTY,
Inc. in a transaction accounted for as a pooling of interests.
The accompanying financial statements do not include any
adjustments which may arise as a result of this transaction.
33
<PAGE>
NUTRITION HEADQUARTERS, INC. AND
LEE NUTRITION, INC.
COMBINED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1997
34
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders
of Nutrition Headquarters, Inc. and
Lee Nutrition, Inc.:
We have audited the accompanying combined balance sheets of Nutrition
Headquarters, Inc. and Lee Nutrition, Inc. (both S Corporations) (collectively,
the "Companies") as of September 30, 1997 and 1996, and the related combined
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended September 30, 1997. These combined financial
statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Nutrition
Headquarters, Inc. and Lee Nutrition, Inc. as of September 30, 1997 and 1996,
and the combined results of their operations and their combined cash flows for
the each of the three years in the period ended September 30, 1997 in conformity
with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
St. Louis, Missouri
November 21, 1997, except for Note 7,
as to which the date is April 20,
1998
35
<PAGE>
Nutrition Headquarters, Inc. and
Lee Nutrition, Inc.
Combined Balance Sheets
September 30, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,810,171 $ 3,483,117
Accounts receivable, net of allowance of approximately 298,019 268,083
$6,000
Inventories 6,055,925 5,630,524
Prepaid expenses 80,559 109,906
---------------- ----------------
Total current assets 8,244,674 9,491,630
---------------- ----------------
Property, plant and equipment, net 4,353,867 3,126,655
---------------- ----------------
Other assets:
Deferred advertising 146,443 237,199
Due from affiliated company 258,343 358,339
Deposits and other assets 180,353 134,957
Mailing list, net 855,572 1,400,672
---------------- ----------------
Total other assets 1,440,711 2,131,167
---------------- ----------------
Total assets $ 14,039,252 $ 14,749,452
================ ================
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 97,558 $ 1,460,427
Accounts payable 2,624,043 2,742,280
Deferred revenue on unfilled orders 205,484 336,219
Accrued expenses and other current liabilities 438,112 447,403
---------------- ----------------
Total current liabilities 3,365,197 4,986,329
---------------- ----------------
Long-term liabilities:
Long-term debt, net of current portion 2,244,992 2,342,550
---------------- ----------------
Shareholders' equity:
Nutrition Headquarters, Inc.:
Common stock, $1 par value; authorized, 200 shares;
issued, 99 shares 99 99
Additional paid-in capital 17,499 17,499
Lee Nutrition, Inc.:
Common stock, $1 par value; authorized, 200 shares;
issued, 99 shares 99 99
Additional paid-in capital 2,301 2,301
Retained earnings 8,409,065 7,400,575
---------------- ----------------
Total shareholders' equity 8,429,063 7,420,573
---------------- ----------------
Total liabilities and shareholders' equity $ 14,039,252 $ 14,749,452
================ ================
</TABLE>
The accompanying notes are an integral part of the combined
financial statements.
37
<PAGE>
Nutrition Headquarters, Inc. and
Lee Nutrition, Inc.
Combined Statements of Operations
for the years ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net sales $ 50,917,176 $ 50,431,869 $ 50,428,916
Cost of sales 26,534,829 26,924,429 27,269,553
---------------- ---------------- ---------------
Gross profit 24,382,347 23,507,440 23,159,363
Operating expenses:
Selling, general and administrative 14,279,320 14,465,669 14,507,719
Depreciation and amortization 838,497 844,630 782,605
---------------- ---------------- ---------------
Income from operations 9,264,530 8,197,141 7,869,039
Other income (expense):
Interest expense (295,602) (437,384) (607,917)
Other income, principally interest 211,667 218,781 208,555
Gain on sale of property and equipment 220,895
---------------- ---------------- ---------------
Total other income (expense), net 136,960 (218,603) (399,362)
---------------- ---------------- ---------------
Income before provision
for state income taxes 9,401,490 7,978,538 7,469,677
Provision for state income taxes 158,000 136,000 118,892
---------------- ---------------- ---------------
Net income $ 9,243,490 $ 7,842,538 $ 7,350,785
================ ================ ===============
</TABLE>
The accompanying notes are an integral part of the combined
financial statements.
38
<PAGE>
Nutrition Headquarters, Inc. and
Lee Nutrition, Inc.
Combined Statements of Shareholders' Equity
for the years ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Nutrition Headquarters, Lee Nutrition, Inc.
Inc.
--------------------------- ----------------------------
Additional Additional
Common Paid-in Common Paid-in Retained
Stock Capital Stock Capital Earnings Total
<S> <C> <C> <C> <C> <C> <C>
Balance October 1, 1994 $ 99 $ 17,499 $ 99 $ 2,301 $ 5,665,252 $ 5,685,250
Net income 7,350,785 7,350,785
Dividends paid (6,750,000) (6,750,000)
------------ ------------ ------------- ------------- ------------- -------------
Balance, September 30, 1995 99 17,499 99 2,301 6,266,037 6,286,035
Net income 7,842,538 7,842,538
Dividends paid (6,708,000) (6,708,000)
------------ ------------ ------------- ------------- ------------- -------------
Balance, September 30, 1996 99 17,499 99 2,301 7,400,575 7,420,573
Net income 9,243,490 9,243,490
Dividends paid (8,235,000) (8,235,000)
------------ ------------ ------------- ------------- ------------- -------------
Balance, September 30, 1997 $ 99 $ 17,499 $ 99 $ 2,301 $ 8,409,065 $ 8,429,063
============ ============ ============= ============= ============= =============
</TABLE>
The accompanying notes are an integral
part of the combined financial statements.
39
<PAGE>
Nutrition Headquarters, Inc. and
Lee Nutrition, Inc.
Combined Statements of Cash Flows
for the years ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 9,243,490 $ 7,842,538 $ 7,350,785
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 845,327 862,714 808,261
Net gain on sale of property (220,895)
Changes in assets and liabilities:
Accounts receivable (29,936) (52,170) 295,818
Inventories (425,401) 112,911 (110,352)
Prepaid expenses and other assets 120,103 142,954 (272,965)
Accounts payable 226,763 16,660 677,908
Accrued expenses and other liabilities (140,026) (77,261) 44,083
------------- ------------- -------------
Net cash provided by operating activities 9,619,425 8,848,346 8,793,538
------------- ------------- -------------
Cash flows from investing activities:
Purchases of property, plant and equipment (1,912,837) (634,173) (612,957)
Proceeds from sale of property 268,540 94,932
Repayments of loans to affiliated company 99,996 99,996 41,665
Other (52,643) 42,251 (102,189)
------------- ------------- -------------
Net cash used in investing activities (1,596,944) (396,994) (673,481)
------------- ------------- -------------
Cash flows from financing activities:
Dividends paid (8,235,000) (6,708,000) (6,750,000)
Repayment of long-term debt (1,460,427) (1,457,026) (1,559,785)
------------- ------------- -------------
Net cash used in financing activities (9,695,427) (8,165,026) (8,309,785)
------------- ------------- -------------
(Decrease) increase in cash and cash equivalents (1,672,946) 286,326 (189,728)
Cash and cash equivalents, beginning of year 3,483,117 3,196,791 3,386,519
------------- ------------- -------------
Cash and cash equivalents, end of year $ 1,810,171 $ 3,483,117 $ 3,196,791
============= ============= =============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 292,013 $ 448,336 $ 584,761
============= ============= =============
Cash paid for state income taxes $ 147,916 $ 108,969 $ 99,979
============= ============= =============
</TABLE>
The accompanying notes are an integral
part of the combined financial statements.
40
<PAGE>
1. Basis of Presentation, Organization and Accounting Policies:
Basis of Presentation: The financial statements of Nutrition
Headquarters, Inc. ("Nutrition Headquarters") and Lee Nutrition, Inc.
("Lee Nutrition") (the "Companies") are presented on a combined basis as
the Companies have common stockholders, management, operating facilities,
bank borrowing agreements and business purpose. Intercompany balances and
transactions have been eliminated in the combination.
Nature of Business: The Companies are primarily engaged in the national
mail order marketing of vitamins and health foods. Brunswick
Laboratories, a manufacturing division of Nutrition Headquarters,
supplies mail order products to the Companies, as well as to unrelated
customers and a related party as described in Note 7. Brunswick
Laboratories extends unsecured credit to customers throughout the United
States.
Cash and Cash Equivalents: Cash and cash equivalents include cash and
deposits with financial institutions which are readily convertible to
known amounts of cash with original maturities of three months or less.
A substantial portion of the Companies' cash is deposited in two
financial institutions. The balances maintained at one of these financial
institutions, amounting to $2,153,530 and $3,085,823 at September 30,
1997 and 1996, respectively, are invested nightly in one day Treasury
Fund Dollar deposits.
Inventories: Inventories are stated at the lower of cost or market. Cost
is determined on a FIFO (first-in, first-out) method of valuation.
Property, Plant and Equipment: Property, plant and equipment are recorded
at cost. Capital leases are recorded at the lower of fair market value or
the present value of future lease payments. Buildings and building
improvements are depreciated over 31.5 or 39 years using the
straight-line method. Equipment is depreciated on the straight-line
method over the estimated useful lives of the assets (three to seven
years).
Expenditures for repairs and maintenance are charged to expense as
incurred; expenditures for betterments and major renewals which
substantially increase the useful life of the asset are capitalized. At
retirement or sale, the cost of the assets and related accumulated
depreciation are removed from the accounts and any resulting gain or loss
is included in the combined statements of income.
Mailing List: The mailing list is recorded at cost and is being amortized
on the double-declining-balance method over a life of fourteen years.
Amortization expense amounted to approximately $200,100, $233,400 and
$272,400 for the years ended September 30, 1997, 1996 and 1995,
respectively.
Fair Values of Instruments: The recorded amounts of cash and cash
equivalents, accounts receivable, accounts payable and long-term debt
approximate their fair values. Fair values for long-term debt are
estimated using current interest rates at September 30, 1997.
41
<PAGE>
Nutrition Headquarters, Inc. and
Lee Nutrition, Inc.
Notes to Combined Financial Statements, Continued
1. Basis of Presentation, Organization and Accounting Policies, continued:
Revenue Recognition: Substantially all mail order sales are received with
payments accompanying the order. Sales and related cost of sales are
recognized as the merchandise is shipped. Amounts received from customers
for unfilled orders, amounting to $205,484 and $336,219 at September 30,
1997 and 1996, respectively, are reflected as deferred revenue on the
balance sheet.
Advertising: The cost of direct-response advertising in magazines and
periodicals which is determined to be recoverable from the gross profit
on related sales is expensed ratably throughout the related response
period (which is less than one year) based upon the amount of sales
revenue received compared to the estimated total sales response for the
respective advertisement. Advertising costs amounting to $146,443 and
$237,199 at September 30, 1997 and 1996, respectively, which relate to a
response period in the subsequent fiscal year, and are presented as
deferred advertising in the balance sheet.
The direct costs of catalogs and postage for catalog mailings are
expensed as the catalogs are mailed.
Advertising expense amounted to approximately $8,398,100, $8,746,400 and
$8,530,200 for the years ended September 30, 1997, 1996 and 1995,
respectively.
Research and Development: The cost of research and development is
expensed as incurred. Research and development costs for the years ended
September 30, 1997, 1996 and 1995 were not significant.
Tax Status: The Companies have each elected for federal income tax
purposes to be treated as S Corporations under provisions of the Internal
Revenue Code. Accordingly, for federal and certain state income tax
purposes, taxable income or loss of the Companies is reported to the
individual shareholders for inclusion in their respective income tax
returns with no provision for these taxes included in the combined
statements of operations. In certain states, however, the Companies are
subject to corporate income taxes and, accordingly, a related provision
for state income taxes is included in the combined statements of
operations.
The Companies have elected a December 31 year-end for income tax
purposes. Primarily as a result of prior acquisitions, differences exist
in the carrying values and methods of accounting for certain assets and
liabilities for financial reporting and income tax purposes.
42
<PAGE>
Nutrition Headquarters, Inc. and
Lee Nutrition, Inc.
Notes to Combined Financial Statements, Continued
1. Basis of Presentation, Organization and Accounting Policies, continued:
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
2. Inventories:
Inventories consist of the following at September 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Raw materials $ 702,348 $ 723,287
Work in process 234,248 291,309
Finished goods 5,119,329 4,615,928
---------------- ----------------
$ 6,055,925 $ 5,630,524
================ ================
</TABLE>
3. Property, Plant and Equipment:
Property, plant and equipment consist of the following at September 30,
1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Land $ 194,631 $ 194,631
Buildings and building improvements 1,616,058 1,366,057
Machinery and equipment 2,916,679 2,761,622
Office furniture and equipment 457,322 389,901
Computer equipment under capital leases 218,613 218,613
Computer equipment 580,368 555,938
Transportation equipment 1,496,392 96,392
Land and buildings held for sale, net of valuation allowance 90,406
---------------- ----------------
7,480,063 5,673,560
Less accumulated depreciation and amortization (3,126,196) (2,546,905)
---------------- ----------------
$ 4,353,867 $ 3,126,655
================ ================
</TABLE>
43
<PAGE>
Nutrition Headquarters, Inc. and
Lee Nutrition, Inc.
Notes to Combined Financial Statements, Continued
3. Property and Equipment, continued:
Depreciation expense and amortization of capital leases amounted to
approximately $638,000, $607,700 and $503,000 for the years ended
September 30, 1997, 1996 and 1995, respectively.
Accumulated amortization on computer equipment under capital leases
amounted to $137,937 and $106,706 at September 30, 1997 and 1996,
respectively.
In prior years the Companies established a valuation allowance of
$218,000 related to its land and buildings held for sale since the
estimated fair values of the properties were less than their respective
carrying values. In fiscal year 1997, the Companies sold these properties
for a gain of $220,895.
4. Long-Term Debt:
Long-term debt consists of the following at September 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Senior bank debt; interest per annum at the prime rate (prime at
September 30, 1997 was 8.50% per annum); collateralized by
substantially all of the assets of the Companies and a pledge of
the capital stock of the Companies; guaranteed
by the stockholders. Repaid in October 1997 $ 44,338 $ 576,388
First subordinated promissory notes; $866,667 principal payable in 8
monthly installments of $108,333 commencing October 1996 and
ending May 1997; interest per annum at the lower of 10% or the
prime rate plus 2% (prime at September 30, 1997 was 8.50% per
annum); collateralized by a first subordinate pledge of the
capital stock of the Companies and guaranteed by the stockholders 866,667
Second subordinated promissory notes; payable to a relative
of the Companies' shareholders; principal payable in April 2011;
interest per annum at the lower of 10% or the prime rate plus 2%
(prime at September 30, 1997 was 8.50% per annum);
collateralized by a second subordinate pledge of capital stock
of the Companies
and guaranteed by the stockholders 2,244,992 2,244,992
Other 53,220 114,930
---------------- ----------------
2,342,550 3,802,977
Less current portion (97,558) (1,460,427)
---------------- ----------------
$ 2,244,992 $ 2,342,550
================ ================
</TABLE>
44
<PAGE>
Nutrition Headquarters, Inc. and
Lee Nutrition, Inc.
Notes to Combined Financial Statements, Continued
4. Long-Term Debt, continued:
On April 30, 1997 the Companies completed an agreement which will provide
for an additional term loan of $1,100,000. The terms of the loan
agreement provide for repayment in sixty monthly installments with
interest at 8.5% per annum. As of September 30, 1997, no funds were
advanced under this agreement.
The Companies' bank credit agreements, as amended, also provide for
borrowings under a revolving loan arrangement up to the lesser of
$2,500,000 or an amount based on specified percentages of the Companies'
accounts receivable and inventory as defined in the agreement. Interest
is payable monthly at the prime rate per annum. The revolving loan has a
maturity of March 31, 1999. There were no borrowings under this agreement
during the years ended September 30, 1997 or 1996.
The bank term loan and bank credit agreements, as amended, are
cross-collateralized by substantially all of the assets of the Companies
and a pledge of the capital stock of the Companies. In addition, the
Companies' president (a stockholder) and his wife (a beneficiary of a
stockholder trust) have provided personal guarantees.
Interest expense incurred on the Senior bank debt was approximately
$24,400, $70,300 and $117,100 for the years ended September 30, 1997,
1996 and 1995, respectively. Interest expense incurred on subordinated
debt was approximately $256,800, $319,000 and $435,500 for the years
ended September 30, 1997, 1996 and 1995, respectively.
Nutrition Headquarters is the lessee of certain computer equipment under
capital leases expiring in May 1998. The following is a schedule of
future minimum lease payments together with the present value of the
minimum lease payments as of September 30, 1997:
Year ending September 30, 1998 $ 55,085
Less amount representing interest (1,865)
---------------
Present value of future minimum lease payments $ 53,220
===============
45
<PAGE>
Nutrition Headquarters, Inc. and
Lee Nutrition, Inc.
Notes to Combined Financial Statements, Continued
5. Related Party Transactions:
The president of the Companies is also the majority stockholder in Nutro
Laboratories, Inc. ("Nutro"). Transactions with Nutro for the years ended
September 30, 1997, 1996 and 1995 include the following:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Purchases by Nutrition Headquarters from Nutro,
primarily bulk vitamins, net of sales to
Nutro of $151,786, $101,780 and $ -0- in
1997, 1996 and 1995, respectively $ 2,341,874 $ 2,087,985 $ 2,405,736
============ ============= =============
Receipt by Nutrition Headquarters of loan repayment
from Nutro $ 99,996 99,996 $ 41,665
============ ============= =============
</TABLE>
The balances due to and from Nutro were as follows at September 30, 1997
and 1996:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Due to Nutro (included in accounts payable) $ 115,778 $ 25,769
================ ================
Loans to Nutro (included in due from affiliated company) $ 258,343 $ 358,339
================ ================
</TABLE>
Amounts due from Nutro, included in due from affiliated company in the
accompanying combined balance sheets, bear interest at the prime interest
rate per annum as listed in the Wall Street Journal on the first business
day of each month. Principal is payable in monthly installments of $8,333
beginning June 1995 through May 2000. Interest income earned on the loan
amounted to approximately $26,100, $34,800 and $42,700 for the years
ended September 30, 1997, 1996 and 1995, respectively.
The second subordinated promissory notes of $2,244,992 described in Note
4 are payable to a relative of the Companies' shareholders. Interest
expense on the obligations amounted to approximately $224,000, $225,000
and $224,000 for the years ended September 30, 1997, 1996, and 1995,
respectively.
46
<PAGE>
Nutrition Headquarters, Inc. and
Lee Nutrition, Inc.
6. Commitments:
The Companies lease certain property used in operations. Rent expense for
the years ended September 30, 1997, 1996 and 1995 under operating leases
was approximately $101,900, $113,300 and $110,300, respectively.
Future minimum operating lease payments for the years ended September 30
are as follows:
1998 $ 16,428
1999 16,428
2000 13,690
---------------
$ 46,546
===============
7. Subsequent Event:
On April 20, 1998, the shareholders of the Companies and Nutro completed
the sale of all of their respective shareholdings in Nutrition, Lee and
Nutro in exchange for shares in NBTY, Inc. in a transaction accounted for
as a pooling of interests. The accompanying combined financial statements
do not include any adjustments which may arise as a result of this
transaction.
47
<PAGE>
NBTY, INC. and SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars and shares in thousands)
ASSETS
<TABLE>
<CAPTION>
September 30, March 31,
1997 1998
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 20,262 $ 19,097
Short-term investments 8,362 -
Accounts receivable, less
allowance for doubtful accounts
of $1,116 in 1997
and $1,110 in 1998 19,603 20,275
Inventories 86,440 98,852
Deferred income taxes 6,032 6,032
Prepaid catalog costs and other
current assets 19,111 12,286
------------ ----------
Total current assets 159,810 156,542
Cash held in escrow 144,262 -
Property, plant and equipment 118,184 150,712
Intangible assets, net 141,303 143,753
Other assets 7,618 9,550
------------ ----------
Total assets $ 571,177 $ 460,557
============ ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Current portion of long-term debt
and capital lease obligations $ 1,519 $ 3,034
Demand note payable 1,873 -
Accounts payable 49,857 47,429
Accrued expenses 35,711 28,177
------------ ----------
Total current liabilities 88,960 78,640
Long-term debt 168,550 210,658
Obligations under capital leases 2,700 2,446
Promissory note payable 169,909 2,457
Deferred income taxes 7,474 7,642
Other liabilities 2,293 2,293
------------ ----------
Total liabilities 439,886 304,136
------------ ----------
Commitments and contingencies
Stockholders' equity:
Common stock, $.008 par; authorized 75,000 shares in
1997 and 1998, respectively; issued 69,123 shares
in 1997 and 69,255 shares in 1998 and outstanding
64,614 shares in 1997 and 64,746 shares in 1998 553 554
Capital in excess of par 56,182 56,789
Retained earnings 75,199 92,884
------------ ----------
131,934 150,227
Less 4,509 treasury shares at cost, in 1997
and 1998, respectively (3,206) (3,206)
Cumulative translation adjustment 2,563 9,400
------------ ----------
Total stockholders' equity 131,291 156,421
------------ ----------
Total liabilities and stockholders' equity $ 571,177 $ 460,557
============ ==========
</TABLE>
See notes to supplemental condensed consolidated financial statements.
50
<PAGE>
NBTY, INC. and SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Dollars and shares in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the six months
ended March 31,
1997 1998
<S> <C> <C>
Net sales $159,105 $286,820
---------- ----------
Costs and expenses:
Cost of sales 79,819 140,414
Catalog, printing, postage and promotion 13,996 13,935
Selling, general and administrative 40,571 90,452
---------- ----------
134,386 244,801
---------- ----------
Income from operations 24,719 42,019
---------- ----------
Other income (expenses):
Interest, net (1,315) (9,221)
Miscellaneous, net (171) 1,400
---------- ----------
(1,486) (7,821)
---------- ----------
Income before income taxes 23,233 34,198
Income taxes 7,391 10,565
---------- ----------
Net income $ 15,842 $ 23,633
========== ==========
Net income per share:
Basic $0.25 $0.37
Diluted $0.23 $0.34
Weighted average common shares outstanding:
Basic 64,578 64,662
Diluted 68,919 68,967
See notes to supplemental condensed consolidated financial statements.
51
<PAGE>
NBTY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
For the six months
ended March 31,
1997 1998
----------------------
Net income $15,842 $23,633
Adjustments to reconcile net income to
cash provided by operating activities:
Loss on sale of property, plant and equipment 26
Depreciation and amortization 3,664 10,032
Provision(recovery)for allowance for
doubtful accounts 206 (5)
Increase in deferred taxes 7
Changes in assets and liabilities,
net of acquistions:
Increase in
accounts receivable (5,170) (199)
Increase in inventories (8,262) (11,698)
Decrease(increase) in prepaid catalog
costs and other current assets (1,295) 8,683
Decrease in other assets 288 535
(Decrease)increase in accounts payable 10,381 (3,201)
(Decrease) increase in accrued expenses 5,112 (12,428)
----------------------
Net cash provided by
operating activities 20,792 15,359
----------------------
Cash flow from investing activities:
Purchase of property, plant and equipment (9,488) (38,942)
Proceeds from sale of property, plant
and equipment 20
Proceeds from sale of
short-term investments 8,362
Purchase of short-term investments (4,651)
Receipt of payments from direct-mail
cosmetics business 322
----------------------
Net cash used in investing activities (13,797) (30,580)
----------------------
Cash flows from financing activities:
Dividends paid (2,610) (5,950)
Borrowings under long term debt agreements 45,000
Cash held in escrow 144,730
Principal payments under long-term
debt agreements and capital leases (2,079) (1,153)
Purchase of treasury stock (15)
Proceeds from stock options exercised 23 40
Repayment of promissory note (168,770)
----------------------
Net cash provided by (used in)
financing activities (4,681) 13,897
----------------------
Effect of Exchange Rate Changes on Cash
and Cash Equivalents 159
----------------------
Net (decrease) increase in cash and cash
equivalents 2,314 (1,165)
Cash and cash equivalents at beginning of
quarter 12,814 20,262
----------------------
Cash and cash equivalents at end of quarter $15,128 $19,097
======================
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period for interest $1,295 $12,129
Cash paid during the period for taxes $4,817 $10,243
======================
See notes to supplemental condensed consolidated financial statements.
52
<PAGE>
NBTY, INC. and SUBSIDIARIES
NOTES to FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share amounts)
1. Basis of presentation
The supplemental consolidated financial statements of NBTY, Inc. and
Subsidiaries, formerly Nature's Bounty, Inc. ("NBTY"), have been prepared to
give retroactive effect to the merger with Nutrition Headquarters Group, Inc.,
Lee Nutrition, Inc. and Nutro Laboratories, Inc. (collectively, the "Nutrition
Headquarters Group" and with NBTY collectively, the "Company") on April 20,
1998, which has been accounted for as a pooling of interests. Generally
accepted accounting principles proscribe giving effect to a consummated
business combination accounted for by the pooling- of-interest methods in
financial statements that do not include the date of consummation. These
financial statements do not extend through the date of consummation; however,
they well become the historical consolidated financial statements of the
Company after financial statements covering the date of consummation of the
business combination are issued.
During 1998, NBTY entered into a definitive agreement to merge with Nutrition
Headquarters Group. On April 20, 1998, Nutrition Headquarters Group was merged
with and into NBTY. Under terms of the merger agreement, each share of
Nutrition Headquarters Group common stock was exchanged for one share of
NBTY's common stock with approximately 8,722 shares of NBTY's common stock
exchanged for all the outstanding stock of Nutrition Headquarters Group.
2. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to present
fairly its financial position as of March 31, 1998 and results of operations
for the six months ended March 31, 1998 and 1997 and statements of cash flows
for the six months ended March 31, 1998 and 1997. The consolidated condensed
balance sheet as of September 30, 1997 has been derived from the audited
balance sheet as of that date. This report should be read in conjunction with
the Company's supplemental consolidated financial statements for the fiscal
years end September 30, 1995, 1996 and 1997 included in this current report on
Form 8-K.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Foreign currency translation
The financial statements of international subsidiaries are translated into
U.S. dollars using the exchange rate at each balance sheet date for assets and
liabilities and an average exchange rate for each period for revenues,
expenses, and gains and losses. Where the local currency is the functional
currency, translation adjustments are recorded as a separate component of
stockholder's equity.
Common shares and earnings per share:
On March 9, 1998, the Company's Board of Directors declared a three-for-one
stock split in the form of a 200% stock dividend effective March 23, 1998. In
addition, the Company's Certificate of Incorporation was
53
<PAGE>
NBTY, INC. and SUBSIDIARIES
NOTES to FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share amounts)
amended to authorize the issuance of up to 75 million shares of common stock,
par value $.008 per share.
All per common share amounts have been retroactively restated to account for
the above stock split. In addition, stock options and respective exercise
prices have been amended to reflect these transactions (see Note 8).
Accounting changes:
Effective October 1, 1996, the Company adopted the disclosure-only provisions
of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation." As permitted by SFAS No. 123, the Company
continues to measure compensation cost in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees." As the Company has not granted any options during the six months
ended March 31, 1998, nor fiscal 1997 or 1996, there would not have been any
impact on the Company's financial position or results of operations on a pro
forma basis.
Effective October 1, 1996, the Company adopted SFAS No. 121,"Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." This statement requires that certain assets be reviewed for impairment
and, if impaired, be measured at fair value, whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. The adoption of SFAS No. 121 at October 1, 1996 and its
application during fiscal 1997 and the six months ended March 31, 1998 had no
material impact on the Company's financial position or results of operations.
New accounting standards
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share." The statement simplifies the standards for
computing earnings per share ("EPS") and makes them comparable to
international EPS standards. The statement requires the presentation of both
"basic" and "diluted" EPS on the face of the income statement with a
supplementary reconciliation of the amounts used in the calculations (see note
8).
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and display of comprehensive income,
its components and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from investments by
owners and distribution to owners. Among other disclosures, SFAS No. 130
requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
In addition, in June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which establishes
standards for reporting information about operating segments. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers.
Both of these new standards are effective for fiscal years beginning after
December 15, 1997 and require comparative information for earlier
54
<PAGE>
NBTY, INC. and SUBSIDIARIES
NOTES to FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share amounts)
years to be restated. The implementation of these new standards will not
affect the Company's results of operations and financial position, but may
have an impact on future financial statement disclosures.
Year 2000 Software Compatibility
The Company is continually updating its information systems, and has evaluated
significant computer software applications for compatibility with the year
2000. With the system changes implemented to date and other planned changes,
the Company anticipates that its computer software applications will be
compatible with the year 2000. Expenditures specifically related to software
modifications for year 2000 compatibility are not expected to be material.
3. The results of operations and statements of cash flows for the six months
ended March 31, 1998 are not necessarily indicative of the results to be
expected for the full year.
4. Acquisition of Holland & Barrett Holdings Ltd.:
On August 7, 1997, the Company acquired all of the issued and outstanding
capital stock of Holland & Barrett Holdings Ltd.("H&B") from Lloyds Chemist's
plc ("Lloyds") for an aggregate purchase price of approximately $169,000 plus
acquisition costs of approximately $811. The acquisition has been accounted
for under the purchase method and, accordingly, the results of operations are
included in the financial statements from the date of acquisition. H&B markets
a broad line of nutritional supplement products, including vitamins, minerals
and other nutritional supplements and food products. At the date of
acquisition, H&B operated approximately 410 retail stores in the United
Kingdom.
The Company issued to Lloyds two promissory notes (the "Promissory Notes")
totaling approximately $170,000 as consideration for the purchase of capital
stock of H&B. The Promissory Notes, which are collateralized by two letters of
credit issued by a lending institution, were paid in full in October 1997.
In connection with the Acquisition, the Company (i) entered into a $50,000
credit and guarantee agreement (the "Credit and Guarantee Agreement"), which
provides borrowings for working capital and general corporate purposes, and
(ii) issued $150,000 in Senior Subordinated Notes due 2007.
Assets acquired and liabilities assumed included cash ($5,580), inventory
($18,045), other current assets ($11,078), property, plant and equipment
($31,554), and current and long-term liabilities ($27,154 and $4,058,
respectively). The excess cost of investment over the net book value of H&B at
the date of acquisition resulted in an increase in goodwill of $133,725 which
will be amortized over 25 years. Additionally, finance related costs of
approximately $5,600 will be amortized over 10 years.
55
<PAGE>
NBTY, INC. and SUBSIDIARIES
NOTES to FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share amounts)
5. Inventories have been estimated by using the gross profit method for the
interim periods. The components of the inventories are as follows:
September 30, March 31,
1997 1998
------------- ---------
(unaudited)
Raw materials and
Work-in-process $ 37,347 $ 42,714
Finished goods 49,093 56,138
------------- ---------
$ 86,440 $ 98,852
------------- ---------
------------- ---------
6. Intangible assets, at cost, acquired at various dates are as follows:
September 30, March 31,
1997 1998
------------- ---------
(unaudited)
Goodwill $136,972 $142,510
Customer lists 12,732 12,731
Trademark and licenses 1,201 1,201
Covenants not to compete 1,305 1,305
------------- ---------
152,210 157,747
Less, accumulated
Amortization 10,907 13,994
------------- ---------
$141,303 $143,753
------------- ---------
------------- ---------
7. Accrued expenses:
September 30, March 31,
1997 1998
------------- ---------
(unaudited)
Litigation settlement costs $ 5,600
Payroll and related
payroll taxes 4,622 $ 4,285
Customer deposits 2,568 885
Accrued purchases 2,800 5,639
Income taxes payable 7,597 7,476
Other 12,524 9,892
------------- ---------
$ 35,711 $ 28,177
------------- ---------
------------- ---------
56
<PAGE>
NBTY, INC. and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands, except per share amounts)
8. Basic earnings per share are based on the weighted average number of common
shares outstanding during the six month periods ended March 31, 1998 and 1997.
Diluted earnings per share include the effect of outstanding stock options, if
exercised. The following is a reconciliation between the basic and diluted
earnings per share:
For the six months
March 31,
1997 1998
------------- ---------
(unaudited)
Numerator:
Numerator for basic earnings
per share -- income available
to common stockholders $15,842 $23,633
--------- ---------
Numerator for dilutive earnings
per share -- income available
to common stockholders $15,842 $23,633
--------- ---------
--------- ---------
Denominator:
Denominator for basic earnings
per share -- weighted-average
Shares 64,578 64,662
Effective of dilutive securities:
Stock options 4,341 4,305
--------- ---------
Denominator for diluted earnings
per share -- weighted-average
Shares 68,919 68,967
--------- ---------
--------- ---------
Basic earnings per share $0.25 $0.37
--------- ---------
--------- ---------
Diluted earnings per share $0.23 $0.34
--------- ---------
--------- ---------
8. Shareholder litigation:
In October 1994, two lawsuits were commenced in the U.S. District Court,
Eastern District of New York, against the Company and two of its officers. On
October 17, 1997, a Memorandum of Understanding was entered into between the
Company and the attorneys representing the Plaintiff class agreeing to an
$8,000 ($4,400 cash, $3,600 stock) settlement of the lawsuit. Subsequently,
the Company entered into a Capital Stipulation of Settlement calling for,
among other things, a total cash payment of $8,000. Cash payments aggregating
$8,000 were made in November and December 1997. The Company had been notified
by its insurance carrier that it was willing to reimburse the Company to the
extent of $2,400. The Company recorded a $5,600 provision for its portion of
the settlement in fiscal 1997, which, along with related legal fees of
approximately $768, has been reflected separately in the fiscal 1997
statements of income (refer to the Company's 10-K). In January 1998, an
insurance carrier paid the Company $2,650.
57
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant has duly caused this Registration Statement or amendment to
be signed on its behalf by the undersigned, thereunto duly authorized.
NBTY, Inc.
By: /s/ Harvey Kamil
-------------------------
Harvey Kamil
Executive Vice President
Dated: May 5, 1998
</TABLE>
