<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 1, 1998
REGISTRATION NO. 333-52251
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
NBTY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 90 ORVILLE DRIVE 11-2228617
(STATE OR OTHER JURISDICTION OF BOHEMIA, NEW YORK 11716 (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION) TELEPHONE: (516) 567-9500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
------------------------
SCOTT RUDOLPH, CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER AND PRESIDENT
NBTY, INC.
90 ORVILLE DRIVE
BOHEMIA, NEW YORK 11716
TELEPHONE: (516) 567-9500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Copies to:
<TABLE>
<S> <C>
MICHAEL C. DUBAN, ESQ. MICHAEL A. BECKER, ESQ.
MICHAEL C. DUBAN, P.C. CAHILL GORDON & REINDEL
81 MAIN STREET 80 PINE STREET
WHITE PLAINS, NEW YORK 10601 NEW YORK, NEW YORK 10005
TELEPHONE: 914-681-0606 TELEPHONE: 212-701-3412
TELECOPY: 914-948-0462 TELECOPY: 212-269-5420
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date hereof.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
8,600,000 SHARES
[LOGO]
COMMON STOCK
------------------------
Of the 8,600,000 shares of Common Stock, $.008 par value per share (the
'Common Stock') being offered hereby (the 'Offering'), 3,000,000 shares are
being sold by NBTY, Inc. (the 'Company') and 5,600,000 shares are being sold by
the Selling Stockholders (as defined herein). See 'Principal and Selling
Stockholders.' The Company will not receive any of the proceeds from the sale of
the shares being offered by the Selling Stockholders.
The Common Stock is traded on the Nasdaq National Market under the symbol
'NBTY.' The reported last sale price of the Company's Common Stock on the Nasdaq
National Market on June 30, 1998 was $18.38 per share. See 'Price Range of
Common Stock.'
------------------------
SEE 'RISK FACTORS' BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
DISCOUNTS AND PROCEEDS TO SELLING
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS(2)
<S> <C> <C> <C> <C>
Per Share $18.00 $.738 $17.262 $17.262
Total(3) $154,800,000 $6,346,800 $51,786,000 $96,667,200
</TABLE>
(1) For information regarding indemnification of the Underwriters, see
'Underwriting.'
(2) Before deducting expenses related to the Offering estimated at $700,000
payable by the Company (including certain expenses payable on behalf of
the Selling Stockholders).
(3) The Company and the Selling Stockholders have granted the Underwriters a
30-day option to purchase up to an additional 1,290,000 shares of Common
Stock, solely to cover over-allotments, if any. See 'Underwriting.' If
such option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions, Proceeds to Company and Proceeds to Selling
Stockholders will be $178,020,000, $7,298,820, $59,553,900 and
$111,167,280, respectively.
------------------------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them subject to
certain conditions. It is expected that certificates for the shares of Common
Stock offered hereby will be available for delivery on or about July 7, 1998 at
the offices of Smith Barney Inc., 333 West 34th Street, New York, New York
10001.
------------------------
SALOMON SMITH BARNEY
LEHMAN BROTHERS
ADAMS, HARKNESS & HILL, INC.
RAYMOND JAMES & ASSOCIATES, INC.
PIPER JAFFRAY INC.
July 1, 1998
<PAGE>
[COMPANY ARTWORK FOR INSIDE FRONT COVER]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENTS, STABILIZING AND SHORT-COVERING TRANSACTIONS AND THE
IMPOSITION OF PENALTY BIDS. SUCH TRANSACTIONS IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE 'UNDERWRITING.'
THE UNDERWRITERS HAVE ADVISED THE COMPANY AND THE SELLING STOCKHOLDERS THAT
CERTAIN OF THE UNDERWRITERS CURRENTLY ACT AS MARKET MAKERS FOR THE COMMON STOCK
AND CURRENTLY INTEND TO CONTINUE TO ACT AS MARKET MAKERS FOLLOWING THE OFFERING.
SINCE THE AVERAGE DAILY TRADING VOLUME OF THE COMMON STOCK EXCEEDS $1 MILLION
AND THE COMPANY'S PUBLIC FLOAT EXCEEDS $150 MILLION, THE PROVISIONS OF
REGULATION M PERMIT SUCH UNDERWRITERS TO CONTINUE MARKET MAKING ACTIVITIES
DURING THE PERIOD OF THE OFFERING. HOWEVER, THE UNDERWRITERS ARE NOT OBLIGATED
TO DO SO AND MAY DISCONTINUE ANY MARKET MAKING AT THAT TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus or incorporated herein by
reference. Except as otherwise specified, all information in this Prospectus (i)
assumes no exercise of the Underwriters' over-allotment option and (ii) gives
effect to the recent three-for-one stock split of the Company's Common Stock on
April 3, 1998. Unless otherwise indicated, references herein to 'NBTY' or 'the
Company' refer to NBTY, Inc. and its subsidiaries. On August 7, 1997, NBTY
acquired Holland & Barrett Holdings Ltd. ('Holland & Barrett' or 'H&B') in a
transaction accounted for as a purchase and on April 20, 1998, NBTY merged
Nutrition Headquarters, Inc., Lee Nutrition, Inc. and Nutro Laboratories, Inc.
(collectively 'Nutrition Headquarters Group') into the Company in a transaction
accounted for as a pooling of interests. Unless otherwise indicated, the
financial information contained herein includes results of Holland & Barrett
from the date of acquisition and Nutrition Headquarters Group for all reported
periods. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations.' Fiscal year references are to the fiscal year ended
September 30. This Prospectus contains forward-looking statements which involve
risks and uncertainties. See 'Risk Factors--Forward Looking Statements' for a
discussion of certain risks and their potential impact on the forward-looking
statements contained herein.
THE COMPANY
NBTY is a leading vertically integrated manufacturer, marketer and retailer
of a broad line of high quality, value-priced nutritional supplements in the
United States and the United Kingdom. The Company offers approximately 900
products under a number of brands, including vitamins, minerals, herbs, amino
acids, sports nutrition products, diet aids and other nutritional supplements.
NBTY targets the growing value-conscious consumer segment by offering high
quality products at a value price point, direct to the consumer. NBTY markets
its multi-branded products through a four channel distribution system: (i) the
leading U.S. nutritional supplement mail order program under the Company-owned
Puritan's Pride and Nutrition Headquarters brands and catalogs; (ii)
Company-owned Vitamin World retail stores, of which there are currently
approximately 150, located strategically throughout the United States; (iii)
Company-owned Holland & Barrett retail stores, of which there are currently 417,
located strategically throughout the United Kingdom; and (iv) wholesale
distribution to drug store chains, supermarkets, independent pharmacies and
health food stores primarily under the Nature's Bounty brand. NBTY currently
manufactures approximately 70% of the nutritional supplements it sells and upon
completion of a new state-of-the-art manufacturing facility in 1998, the Company
expects to manufacture approximately 90%.
The Company believes that it is well positioned to capitalize on the
continued growth in the vitamin, mineral and nutritional supplement ('VMS')
industry. The VMS market in the United States has grown at a compound annual
rate of approximately 15%, from $3.7 billion in 1992 to $6.5 billion in 1996,
according to the 1997 Packaged Facts ('Packaged Facts') survey. Increasing VMS
usage has been linked to a number of factors, including: (i) scientific and
popular reports on the positive benefits of VMS products; (ii) awareness of
healthier lifestyles; (iii) favorable regulatory environment; (iv) new VMS
product introductions and (v) wider distribution of VMS products. Vitamins,
minerals and nutritional supplements are sold through drug stores, supermarkets
and discount stores, health food stores, direct sales organizations and mail
order. According to Packaged Facts, drug stores, supermarkets and discount
stores, on a combined basis, accounted for approximately 46%, health food stores
for approximately 38% and direct and mail order sales for approximately 16% of
total industry sales in 1996.
Since its formation in 1971, the Company has increased sales and operating
performance as a result of its well-recognized, value-oriented products;
efficient, state-of-the-art production facilities; multiple distribution
channels; and strategic acquisitions, as well as from the continuing growth in
the VMS market. For the fiscal year ended September 1997, net sales and income
from operations increased 34% and 63%, respectively over the prior year, to $355
million and $53 million (excluding $6.4 million of legal settlement costs in
fiscal 1997), respectively. For the six months ended March 1998, net sales and
income from operations increased 80% and 70%, respectively over the prior year
period, to $287 million and $42 million, respectively. NBTY's net sales
3
<PAGE>
from mail order, retail-U.S., retail-U.K. and wholesale operations were
approximately 32%, 11%, 33% and 24%, respectively, for the six months ended
March 1998.
The Company's position as a leading vertically integrated manufacturer,
marketer and retailer of a broad line of high quality, value-priced nutritional
supplements enables it to successfully operate a four channel distribution
system:
Mail Order. Through its Puritan's Pride and Nutrition Headquarters brands,
NBTY is the leader in the U.S. mail order nutritional supplement industry with
over 4.0 million active customers and with response rates which management
believes to be in excess of the mail order industry average. Through its
catalogs, the Company offers a full line of vitamins and other nutritional
supplements at prices which are normally at a discount to retail stores. The
Company mails its catalogs approximately eight times a year. NBTY intends to
continue to add new customers to its mail order operation through aggressive
marketing techniques and selective acquisitions. In addition, in 1996 the
Company expanded its mail order operations into the United Kingdom.
Retail Stores, U.S. The Company currently operates approximately 150
stores in 40 states under the Vitamin World name, primarily in factory outlet
malls, and more recently in regional malls. Such stores carry a full line of
value-priced products under the Vitamin World brand as well as a limited
selection of other brands. The stores generally average 1,200 square feet and
offer 1,200 SKUs of vitamins, minerals and nutritional supplements. During
calendar 1998, the Company plans to open a total of 120 Vitamin World stores, of
which approximately 20 stores have recently been opened and leases have been
signed for an additional 26 stores. Vitamin World stores typically turn
profitable within the first nine months of operation. Through direct interaction
with the retail customer, the Company is better able to identify customer
preferences, retail buying trends and pricing than by analyzing sales reports
from wholesalers and independent retailers. As a result, the Company is better
able to merchandise its products and more quickly respond to changing customer
trends.
Retail Stores, U.K. In August 1997, the Company acquired Holland &
Barrett, the largest chain of nutritional supplement and health food stores in
the United Kingdom. Holland & Barrett, which has been in business since 1920, is
a well known and respected retailer and brand, currently operating 417 stores in
prime shopping areas in over 300 cities in the U.K. The stores generally have an
average selling area of 1,200 square feet and offer a total of 2,800 SKUs,
approximately 56% within the VMS categories and 44% within the health food
category. Since the acquisition, NBTY has gradually replaced VMS products
manufactured by outside suppliers with lower priced NBTY manufactured products
under the Holland & Barrett brand. As of March 31, 1998, NBTY manufactured
products comprised approximately 40% of H&B's VMS sales (approximately 21% of
total H&B sales) with the goal of reaching 75% of such sales (approximately 40%
of total H&B sales) by the end of calendar 1998.
Wholesale. The Company markets its products under multiple brands to drug
stores, supermarkets and discounters as well as independent pharmacies, health
food stores and wholesalers. The Company markets products under Nature's Bounty,
the Company's signature brand, to chain stores such as Albertsons, CVS, Eckerd
Drugs, Genovese, Osco and Target. The Company also sells a full line of products
under the Natural Wealth brand to supermarkets and wholesalers, such as Bergen
Brunswig Co., Cardinal Health Co. and McKesson Drug Co., a line of products
under the Good 'N Natural brand directly to independent health food stores and a
specialty line of vitamins under the American Health brand to health food
wholesalers.
BUSINESS STRATEGY
The Company's objective is to increase sales, improve profitability and
strengthen its industry leading position through the following key strategies:
Enhance Vertical Integration. Management believes that vertical
integration creates a significant competitive advantage by allowing the Company
to: (i) maintain higher quality standards while lowering product costs, a
portion of which are passed on to the customer as lower prices; (ii) more
quickly respond to scientific and popular reports and consumer buying trends;
(iii) assure delivery schedules; (iv) reduce dependence on outside suppliers;
and (v) improve overall operating margins. The Company continually evaluates
ways to further enhance its vertical integration. For example, as NBTY becomes
the primary supplier of nutritional supplements to the H&B stores by replacing
outside suppliers, it will effectively lower the costs of such products sold by
H&B
4
<PAGE>
stores. Management believes this should increase overall profit margins while
improving productivity for NBTY's manufacturing facilities.
Introduce New Products and Product Innovations. The Company has
consistently been among the first in the industry to introduce new products in
response to recent scientific and popular reports. Given the changing nature of
consumer demands for new products and the growing publicity over the importance
of vitamins, minerals and nutritional supplements in the promotion of general
health, management believes that NBTY will continue to attract new customers
based upon its ability to rapidly respond to consumer demands with high quality,
value-oriented products. During fiscal 1997, NBTY introduced more than 100 new
products. In addition to expanding the Company's product lines, many of these
new specialty products, such as St. John's Wort and glucosamine sulfate,
typically provide higher margins.
Expand Existing Channels of Distribution. In order to increase sales and
profitability, enhance overall market share, and leverage manufacturing,
distribution, purchasing and marketing capabilities, the Company will continue
to expand its existing channels of distribution.
o Increase mail order sales. NBTY expects to continue to strengthen its
mail order sales through a number of initiatives, including: (i)
automated picking and packing to fulfill mail order requests with greater
speed and accuracy; (ii) increased manufacturing capability to quickly
introduce and deliver new products in response to customer demand; and
(iii) more frequent promotions to further improve response rates. In
addition, the Company intends to continue its strategy of acquiring the
customer lists, brand names and inventory of other mail order companies
which have similar or complementary products and which the Company
believes it can integrate into its own operations without adding
substantial overhead expenses, such as the recent merger of Nutrition
Headquarters Group into the Company.
o Increase retail sales in the U.S. and U.K. In order to increase retail
sales, NBTY is actively expanding its base of Vitamin World stores in the
U.S. and selectively expanding its Holland & Barrett stores in the U.K.
During calendar 1998, the Company plans to open a total of 120 Vitamin
World stores to increase its penetration into factory outlet and regional
malls. The Company has recently opened approximately 20 stores and signed
leases for an additional 26 stores.
Integrate Strategic Acquisitions. Since 1986, NBTY has successfully
acquired and integrated 12 VMS companies, including Holland & Barrett in August
1997. Most recently NBTY merged Nutrition Headquarters Group into the Company.
NBTY is currently in the process of integrating Nutrition Headquarters Group's
mail order operations by: (i) merging customer lists into the Company's
computerized mailing list; (ii) expanding product lines; (iii) redesigning mail
order catalogs; (iv) repricing certain products; and (v) implementing proven
marketing techniques. NBTY will continue to manufacture select products in
Nutrition Headquarters Group's manufacturing facilities. The Company intends to
continue to pursue acquisition opportunities in the VMS sector, both in the U.S.
and internationally, that complement or extend its existing product lines,
expand its distribution channels or are compatible with its business philosophy
and strategic goals.
Build Infrastructure to Support Growth. NBTY has technologically advanced,
state-of-the-art manufacturing and production facilities, with total production
capacity of approximately five billion tablets and capsules per year. The
Company recently completed construction of a 131,000 square foot
state-of-the-art soft gelatin encapsulation manufacturing facility on 62 acres,
capable of producing five billion soft gel capsules per year, to enhance its
vertical integration, reduce its dependence on outside suppliers and further
improve profit margins. NBTY expects to increase its manufacturing capacity to
90% from 70% of the VMS products it sells. The Company regularly evaluates its
operations and makes investments in building infrastructure, as necessary to
support its continuing growth.
Experienced Management Team with Significant Equity Stake. The Company's
management team has extensive experience in the VMS industry and has developed
long-standing relationships with its suppliers and its customers. The executive
officers and directors have an average of approximately 17 years with the
Company. After giving effect to the Offering, executive officers and directors
will own approximately 21.9% of the Company's common stock and employees in the
aggregate will own approximately 4.6% through the Company's employee stock
ownership plan.
5
<PAGE>
RECENT ACQUISITION
On April 20, 1998, NBTY merged a group of affiliated, privately held
companies, referred to collectively as Nutrition Headquarters Group, into the
Company. In connection with such transaction, the Company issued approximately
8.8 million shares of Common Stock and is expected to incur merger related
transaction costs of approximately $3.3 million. Nutrition Headquarters Group
includes a well known value-oriented catalog offering private label and branded
vitamins and nutritional supplements primarily under the Nutrition Headquarters
brand. Nutrition Headquarters Group's catalog has been operating for over 20
years and has a customer list including more than 1.5 million active names.
Through its manufacturing operations, Nutrition Headquarters Group produces
national brand equivalent vitamins and nutritional supplement tablets and
capsules, approximately 25% of which are sold under the Nutrition Headquarters
brands and the balance are contract manufactured for other nutritional
supplement suppliers. Management believes Nutrition Headquarters Group mail
order and manufacturing operations will supplement NBTY's operations. Nutrition
Headquarters Group reported aggregate sales of approximately $77 million
(including $3 million of sales to NBTY) for its fiscal year ended September
1997, of which approximately $50 million was attributable to mail order. The
merger was accounted for as a pooling of interests.
NBTY was incorporated under the laws of the State of Delaware in 1971 and
maintains its principal executive offices at 90 Orville Drive, Bohemia, New York
11716. Its telephone number is (516) 567-9500.
'American Health(Registered),' 'Good 'N Natural(Registered),' 'Holland &
Barrett(Registered),' 'Natural Wealth(Registered),' 'Nature's
Bounty(Registered),' 'Nutrition Headquarters(Registered),' 'Puritan's
Pride(Registered),' and 'Vitamin World(Registered),' are registered trademarks
and service marks of NBTY, Inc.
6
<PAGE>
THE OFFERINGS
<TABLE>
<S> <C>
Common Stock Offered:
Company............................................................ 3,000,000 shares
Selling Stockholders............................................... 5,600,000 shares
Total........................................................... 8,600,000 shares
Common Stock to be outstanding after the Offering.................... 67,810,221 shares(1)
Use of Proceeds...................................................... The net proceeds to the Company will be
used to reduce borrowings under the
Company's bank revolving credit facility
(the 'Revolving Credit Facility') and for
working capital. The Company will not
receive any of the proceeds from the sale
of shares by the Selling Stockholders. See
'Use of Proceeds' and 'Principal and
Selling Stockholders.'
Nasdaq National Market symbol........................................ NBTY
</TABLE>
- ------------------
(1) Excludes 4,326,000 shares of Common Stock which are issuable by the Company
upon exercise of options, all of which are held by management, and 450,000
shares of Common Stock issuable by the Company, pursuant to the
Underwriters' over-allotment option.
7
<PAGE>
SUMMARY SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA(1)(2)
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
---------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.......................... $198,206 $220,821 $250,351 $265,670 $355,336 $159,105 $286,820
Costs & expenses(3)................ 175,868 200,671 232,593 233,295 308,862(4) 134,386 244,801
Income from operations............. 22,338 20,150 17,758 32,375 46,474 24,719 42,019
Interest expense, net.............. (2,177) (1,950) (2,284) (2,431) (7,471) (1,315) (9,221)
Income before income taxes......... 20,774 19,615 16,296 31,374 40,820 23,233 34,198
Income taxes....................... 6,072 4,872 3,374 9,168 11,694 7,391 10,565
Net income......................... 14,702 14,743 12,922 22,206 29,126 15,842 23,633
PRO FORMA RELATING TO INCOME
TAXES:(5)
Income taxes..................... 7,853 7,454 6,307 12,644 16,328 9,293 13,406
Net income....................... 12,921 12,161 9,989 18,730 24,492 13,940 20,792
PER SHARE DATA:
Net income per diluted share....... $ 0.23 $ 0.21 $ 0.19 $ 0.32 $ 0.42 $ 0.23 $ 0.34
Pro forma net income per diluted
share(5)......................... $ 0.20 $ 0.17 $ 0.15 $ 0.27 $ 0.36 $ 0.20 $ 0.30(6)
Weighted average diluted shares
outstanding (000)................ 63,935 69,544 68,695 68,699 68,935 68,919 68,967
OTHER DATA:
Vitamin World
Number of stores.............. 31 31 40 68 117 89 143
Same store sales growth(7).... 8.8% 7.5% 19.5% 18.4% 22.9% 19.4% 25.6%
Holland & Barrett
Number of stores(2)........... -- -- -- -- 410 -- 417
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
--------------------------------
ACTUAL AS ADJUSTED(8)
-------------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital................................................................... $ 77,902 $ 83,988
Total assets...................................................................... 460,557 466,643
Long-term debt and capital lease obligations, less current portion................ 215,561 170,561
Total stockholders' equity........................................................ 156,421 207,507
</TABLE>
- ------------------
(1) In April 1998, the Company merged Nutrition Headquarters Group into NBTY in
a transaction accounted for as a pooling of interests. All financial
information has been restated to include the financial position and results
of operations of Nutrition Headquarters Group for all periods presented. See
Note 1 of Notes to the Company's Supplemental Consolidated Financial
Statements.
(2) In August 1997, the Company acquired Holland & Barrett which was accounted
for under the purchase method of accounting and, accordingly, all financial
information of Holland & Barrett has been included since its acquisition
date. See Note 3 of Notes to the Company's Supplemental Consolidated
Financial Statements.
(3) The Company estimates that Nutrition Headquarters Group incurred expenses of
approximately $1.5 million per fiscal year (primarily relating to executive
compensation, consulting services and certain related items) that will not
be incurred in the future.
(4) In fiscal 1997, the Company agreed to settle a class action lawsuit for
approximately $5,600, net of insurance recoveries and also recorded a charge
to operations for related legal fees of $768.
(5) Pro forma net income and pro forma net income per Common Share reflect a
provision for taxes on the income of Nutrition Headquarters Group, which was
an S corporation prior to its merger into NBTY, as if Nutrition Headquarters
Group had been subject to corporate income taxes as a C corporation for all
periods presented.
(6) Pro forma net income per diluted share, as adjusted for the Offering, is
$0.30 for the six months ended March 31, 1998.
(7) Same store sales data for the period reflect stores open throughout that
period and the corresponding period of the prior fiscal year.
(8) As adjusted to give effect to the sale by the Company of 3,000 shares of
Common Stock offered hereby at $18.00 per share and after deducting the
estimated underwriting discounts and commissions and offering expenses and
the application of the net proceeds therefrom. See 'Use of Proceeds' and
'Capitalization.'
8
<PAGE>
RISK FACTORS
Investment in the Common Stock offered hereby involves certain risks.
Investors should carefully consider the following risk factors in addition to
the other information contained, and incorporated by reference, in this
Prospectus before making any investment in the Common Stock.
EFFECT OF UNFAVORABLE PUBLICITY; ABSENCE OF CLINICAL STUDIES
The Company believes the VMS market is affected by national media attention
regarding the consumption of nutritional supplements. Future research reports or
publicity that are perceived as less favorable or that question such earlier
research or publicity could have a material adverse effect on the Company.
Because of the Company's dependence upon consumer perceptions, adverse
publicity, whether or not accurate, associated with illness or other adverse
effects resulting from the consumption of the Company's products or any similar
products distributed by other companies could have a material adverse effect on
the Company. Such adverse publicity could arise even if the adverse effects
associated with such products resulted from consumers' failure to consume such
products appropriately.
While the Company conducts extensive quality control testing on its
products, the Company generally does not conduct or sponsor clinical studies on
its products. Concerns or public reports about the quality of VMS products
generally, or of the Company's products in particular, could also have a
material adverse effect on the Company. In addition, the scientific research to
date is preliminary and there can be no assurance that future scientific
research or publicity will be favorable to the nutritional supplement market or
any particular product or consistent with earlier favorable research or
publicity.
GOVERNMENT REGULATION
United States. The manufacturing, packaging, labeling, advertising,
distribution and sale of the Company's products are subject to regulation by
Federal, state and local agencies, the most active of which is the U.S. Food and
Drug Administration ('FDA'). The FDA regulates the Company's dietary
supplements, principally under amendments to the Federal Food, Drug and Cosmetic
Act embodied in the Dietary Supplement Health and Education Act ('DSHEA'). Under
DSHEA, new dietary ingredients (those not used in dietary supplements marketed
before October 15, 1994) require premarket submission to the FDA of evidence of
a history of their safe use, or other evidence establishing that they are
reasonably expected to be safe. There can be no assurance that the FDA will
accept the evidence of safety for any new dietary ingredient that the Company
may decide to use, and the FDA's refusal to accept such evidence could result in
regulation of such dietary ingredients as food additives, requiring the FDA
pre-approval based on newly conducted, costly safety testing. Also, while DSHEA
authorizes the use of statements of nutritional support in the labeling of
dietary supplements, the FDA is required to be notified of such statements, and
there can be no assurance that the FDA will not consider particular labeling
statements used by the Company to be drug claims rather than acceptable
statements of nutritional support, necessitating approval of a costly new drug
application, or relabeling to delete such statements. In addition, the FDA
recently has commenced a case against a vitamin and herbal products manufacturer
in which the FDA is challenging the categorization of a certain product as a
dietary supplement rather than as a drug. Drugs, but not dietary supplements,
are subject to full FDA regulation. No assurance can be given that the FDA will
not take a similar position with respect to any of the Company's products.
DSHEA also authorizes the FDA to promulgate good manufacturing practice
('GMP') regulations for dietary supplements, which would require special quality
controls for the manufacture, packaging, storage and distribution of
supplements. There can be no assurance, if such GMP rules are issued, that the
Company will be able to comply with them without incurring material expense to
do so. DSHEA further authorizes the FDA to promulgate regulations governing the
labeling of dietary supplements, including claims for supplements pursuant to
recommendations made by the Presidential Commission on Dietary Supplement
Labels. Such rules are expected to be issued, which will require relabeling of
the Company's dietary supplements, and may require additional record keeping and
claim substantiation testing, and even reformulation, recall or discontinuance
of certain of the Company's supplements, and there can be no assurance that such
requirements will not involve material expenses to the Company. Moreover, there
can be no assurance that new laws or regulations imposing more stringent
regulatory requirements on the dietary supplement industry will not be enacted
or issued.
9
<PAGE>
NBTY is subject to a Federal Trade Commission ('FTC') consent decree and a
U.S. Postal Service consent order, prohibiting certain advertising claims for
certain of the Company's products. Violations of these orders could result in
substantial monetary penalties, which could have a material effect on the
Company's business.
United Kingdom. In the U.K., the manufacture, advertising, sale and
marketing of food products is regulated by a number of government agencies
including the Ministry of Agriculture, Fisheries and Food ('MAFF') and the
Department of Health. In addition, there are various independent committees and
agencies that report to the government, such as the Food Advisory Committee,
which reports to MAFF and suggests appropriate courses of action by the relevant
government department where there are areas of concern relating to food, and the
Committee on Toxicity, which reports to the Department of Health. The relevant
legislation governing the sale of food includes the Food Safety Act of 1990,
which sets out general provisions relating to the sale of food; for example,
this law makes it unlawful to sell food that is harmful to human health. In
addition, there are various statutory instruments and European Commission
('E.C.') regulations governing specific areas such as the use of sweeteners,
coloring and additives in food. Trading standards officers under the control of
the U.K. Department of Trade and Industry also regulate matters such as the
cleanliness of the properties on which food is produced and sold. There can be
no assurance that more stringent regulations will not be promulgated or that, if
more stringent regulations are promulgated, the Company will be able to meet
such regulations without incurring material expense to do so.
Food that has medicinal properties may fall under the jurisdiction of the
Medicines Control Agency ('MCA'), a regulatory authority whose responsibility is
to ensure that all medicines sold or supplied for human use in the U.K. meet
acceptable standards of safety, quality and efficacy. These standards are
determined by the 1968 Medicines Act together with an increasing number of E.C.
regulations and directives laid down by the European Union ('E.U.'). The latter
take precedence over national law. The MCA has a 'borderline department' that
determines when food should be treated as a medicine and should therefore fall
under the relevant legislation relating to medicines. The MCA operates as the
agent of the licensing authority (the United Kingdom Health Ministers) and its
activities cover every facet of medicines controlled in the U.K., including
involvement in the development of common standards of medicines controlled in
Europe. The MCA is responsible, for example, for licensing, inspection and
enforcement to ensure that legal requirements concerning manufacture,
distribution, sale, labeling, advertising and promotion are upheld. Although the
general tendency has been to liberalize restrictions on nutritional products and
consider them food supplements rather than medicines, there can be no assurance
that all new U.K. or E.U. regulations will be favorable for the Company. Any
move by the U.K. or E.U. to restrict existing products or potencies, as well as
the development of new products or potencies, could have a material adverse
effect on the Company. Further, the Company is unable to predict what effect the
formation of the E.U. will have on the Company.
On April 2, 1998, the U.K. Government introduced proposals to limit the
free sale of Vitamin B6 products with a daily dose under 10mg. A Parliamentary
Select Committee will be carrying out an inquiry and submitting its report. This
is expected to involve a consultation period of up to three months, during which
time the proposals will also be considered by the European commission. The U.K.
Government is expected to review the position before any legislation is
introduced. See 'Business--Government Regulation.'
MANAGEMENT OF GROWTH
The Company has in the past, and intends to continue to actively pursue
acquisition opportunities that complement or extend its existing product lines,
expand its distribution channels or are compatible with its business philosophy
and strategic goals. Acquisitions involve a number of risks that could adversely
affect the Company's operating results, including the diversion of management's
attention, the assimilation of operations and personnel of the acquired
companies, the amortization of acquired intangible assets and the potential loss
of key employees of the acquired companies. There can be no assurance that the
Company will consummate acquisitions on satisfactory terms, if at all, that
adequate financing will be available on terms acceptable to the Company, if at
all, or be permitted under the Company's financing instruments, that any
acquired product lines or businesses, or newly built facilities will be
successfully integrated or operated (including the recent acquisition of
Nutrition Headquarters Group or the start-up of the Company's new soft gel
manufacturing facility) or that such product lines or businesses or newly built
facilities will ultimately have a positive impact on the Company, its financial
condition or results of operations. In addition, acquisitions could result in
substantial equity dilution to
10
<PAGE>
existing stockholders. In this regard, the Company will seek approval to
increase its authorized capital stock at its next meeting of stockholders. The
Company's growth is partially dependent upon its ability to open new stores and
to operate them profitably. The Company plans to open additional stores in the
United States, as well as selectively open stores in the United Kingdom. The
Company's planned expansion is dependent on a number of factors, including the
availability of suitable store locations, the negotiation of acceptable lease
terms, the Company's financial resources and its ability to control the
operational aspects of its growth. The Company competes with other national
specialty retailers which seek the same demographics and location
characteristics as the Company. Although the Company believes that it can obtain
suitable sites for its projected expansion and that its control systems and
management are adequate to support this growth, there can be no assurance that
the Company's expansion plans will be achieved or that such expansion will be
profitable. See 'Business--Business Strategy.'
DEPENDENCE ON KEY PERSONNEL
The Company's continued success will largely depend on the efforts and
abilities of its executive officers including Messrs. Scott Rudolph, Chairman of
the Board, Chief Executive Officer and President, and Harvey Kamil, Executive
Vice President and Chief Financial Officer, respectively, and certain other key
employees. The Company's operations could be adversely affected if, for any
reason, such officers or employees did not remain with NBTY. See 'Management.'
COMPETITION
The market for vitamins and other nutritional supplements is highly
competitive in all of the Company's channels of distribution. Numerous companies
compete with the Company in the development, manufacture and marketing of
vitamins and nutritional supplements. See 'Business--Competition.'
United States. In the U.S., the Company's Nature's Bounty and Natural
Wealth brands compete for sales to drug store chains and supermarkets with
heavily advertised national brands manufactured by large pharmaceutical
companies, as well as Your Life, Nature Made and Sundown, sold by Leiner Health
Products, Inc., Pharmavite Corp. and Rexall Sundown, Inc., respectively. The
Vitamin World stores compete with specialty vitamin stores, such as General
Nutrition Centers ('GNC') stores, health food stores and other retail stores.
With respect to mail order sales, management believes the Company is the largest
mail order supplier of vitamins and other nutritional supplements in the U.S.
and competes with a large number of smaller, usually less geographically
diverse, mail order companies, some of which manufacture their own products and
some of which sell products manufactured by others. Increased competition from
companies that distribute through the wholesale channel could have a material
adverse effect on the Company as they may have greater financial and other
resources available to them and possess extensive manufacturing, distribution
and marketing capabilities far greater than those of the Company.
United Kingdom. The market for sales of vitamins, minerals and other
nutritional supplements in the U.K. is also highly competitive. H&B's principal
competitors are large pharmacy chains, including Boots, Lloyds and Superdrug,
and major supermarket chains such as ASDA, Sainsbury and Tesco. There are also
approximately 1,300 independent retailers of health foods and nutritional
supplements in the U.K. market. In addition, GNC has recently entered the U.K.
market and currently operates approximately 30 stores in the U.K. The Company
expects other large U.S.-based companies to enter the U.K. market as well. There
can be no assurance that H&B will be able to effectively compete with such other
companies, nor can there be any assurance that unfavorable market trends in the
U.K. will not develop.
AVAILABILITY OF RAW MATERIALS; RELIANCE ON CERTAIN SUPPLIERS
The principal raw materials used in the manufacturing process are natural
and synthetic vitamins purchased from bulk manufacturers in the United States,
Japan and Europe. One supplier currently supplies approximately 10% of the
Company's purchases of raw materials. An unexpected interruption of supply, such
as a harvest failure or the loss of a material supplier, could cause the
Company's results of operations derived from such products to be adversely
affected. Although the Company has generally been able to raise its prices in
response to significant increases in the cost of such ingredients, the Company
has not always in the past been, and may not in
11
<PAGE>
the future always be, able to raise prices quickly enough to offset the effects
of such increased raw material costs. See 'Business--Manufacturing and Quality
Control.'
CONTROL BY PRINCIPAL STOCKHOLDERS
Upon completion of the Offering, Messrs. Scott Rudolph and Arthur Rudolph
will beneficially own an aggregate of 19.8% of the Common Stock and will have
significant influence over all matters requiring approval by the Company's
stockholders without the approval of minority stockholders. Such influence could
adversely affect the market price of the Common Stock or delay or prevent a
change in control of the Company. See 'Principal and Selling Stockholders.'
RISKS RELATING TO INTERNATIONAL OPERATIONS
The Company has substantial operations and assets located outside the
United States, primarily in the United Kingdom. With respect to international
operations, principally all of the Company's revenues and a substantial portion
of its costs (including borrowing costs) are incurred in the local currency. The
Company's financial performance on a U.S. dollar-denominated basis may be
affected by changes in currency exchange rates. The Company believes that the
matching of revenues and expenses in local currency mitigate the effect of
fluctuating currency exchange rates. Nonetheless, changes in certain exchange
rates could adversely affect the Company's business, financial condition and
results of operations. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations.'
LEVERAGE; RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
As of March 31, 1998, the Company had outstanding long term debt (including
capitalized leases) of approximately $216 million and stockholders' equity of
approximately $156 million. The degree to which the Company is leveraged could
have important consequences to the holders of the Common Stock, including: (i)
the Company's ability to obtain additional financing for working capital,
capital expenditures or acquisitions may be limited; (ii) a portion of the
Company's cash flow from operations will be dedicated to the payment of the debt
service and interest on its indebtedness, thereby reducing funds available for
investments; (iii) certain of the Company's borrowings will be at variable rates
of interest, which exposes the Company to the risk of increased interest rates;
and (iv) the Company may be more vulnerable to economic downturns and be limited
in its ability to withstand competitive pressures. Certain of the Company's
competitors may currently operate on a less leveraged basis and therefore could
have significantly greater operating and financing flexibility than the Company.
The Company's debt instruments contain numerous restrictive covenants that
limit the discretion of the Company's management with respect to certain
business matters. These covenants place significant restrictions on, among other
things, the ability of the Company to incur additional indebtedness, to create
liens or other encumbrances, to pay dividends or make certain other payments,
investments, loans and guarantees, repay other indebtedness and amend debt
instruments and to sell or otherwise dispose of assets and merge or consolidate
with another entity. In addition, the Company's Revolving Credit Facility
contains a number of financial covenants that require the Company to meet
certain financial ratios and certain financial tests. See 'Description of
Certain Indebtedness.'
PROTECTION OF TRADEMARKS
The Company owns trademarks registered with the United States Patent and
Trademark Office and many foreign jurisdictions for its Nature's Bounty,
Puritan's Pride, Vitamin World, Good 'N Natural, Hudson, American Health, and
Natural Wealth brands, among others, and with the appropriate U.K. authorities
for its Holland & Barrett trademark, among others, and has rights to use other
names essential to its business. The Company's policy is to pursue registrations
for all trademarks associated with its key products. U.S. registered trademarks
have a perpetual life, as long as they are renewed on a timely basis and used
properly as trademarks, subject to the rights of third parties to seek
cancellation of the trademarks if they claim priority or confusion of usage. The
Company regards its trademarks and other proprietary rights as valuable assets
and believes they have significant value in the marketing of its products. The
Company vigorously protects its trademarks against
12
<PAGE>
infringement. There can be no assurance that, to the extent the Company does not
have patents or trademarks on its products, another company will not replicate
one or more of the Company's products. Further, there can be no assurance that
in those foreign jurisdictions in which the Company conducts business the
protection available to the Company will be as extensive as the protection
available to the Company in the U.S. See 'Business-- Trademarks.'
LEGAL MATTERS
The Company, like other retailers, distributors and manufacturers of
products that are ingested, faces an inherent risk of exposure to product
liability claims in the event that the use of its products results in injury.
The Company may be subjected to various product liability claims, including
among others, that its products contain contaminants or include inadequate
instructions as to use or inadequate warnings concerning side effects and
interactions with other substances. While such claims to date have not been
material to the Company and the Company maintains product liability insurance,
there can be no assurance that product liability claims and the resulting
adverse publicity will not have a material adverse effect on the Company. The
Company carries insurance in the types and amounts that management considers
reasonably adequate to cover the risks associated with its business. There can
be no assurance that such insurance will continue to be available at a
reasonable cost, or if available will be adequate to cover liabilities.
The State of California and the National Resources Defense Council (the
'NRDC') filed lawsuits against a large number of manufacturers of dietary
supplements containing calcium, claiming that naturally-occurring lead levels in
these supplements exceed acceptable levels under California law ('Proposition
65'). Although the Company is not named in this lawsuit, there can be no
assurance that it will not be the subject of future Proposition 65 claims
asserted by the State of California or private parties or that any such claim or
the existing California lawsuit, if successful, might not have a material
adverse effect on the Company's operations.
The Company is presently engaged in various other legal actions, and,
although ultimate liability cannot be determined at the present time, the
Company believes that the amount of any such liability, if any, from these other
actions, after taking into consideration the Company's insurance coverage, will
not have a material adverse effect on its results of operations and financial
condition.
SHARES ELIGIBLE FOR FUTURE SALE
After the Offering, approximately 67,810,221 shares of Common Stock will be
outstanding. The shares of Common Stock offered hereby will be freely tradable
by persons who are not affiliates of the Company without restriction or further
registration under the Securities Act. Substantially all of the other
outstanding shares of Common Stock, other than shares held by officers,
directors and other affiliates of the Company, are freely tradable. Pursuant to
Rule 144 of the Securities Act ('Rule 144'), shares of Common Stock held by
affiliates of the Company are subject to limitations on volume that may be sold
other than sales pursuant to a registration statement under the Securities Act
or another applicable exemption from registration thereunder.
Scott Rudolph, Harvey Kamil, and certain other officers are eligible to
sell their shares of Common Stock pursuant to Rule 144 under the Securities Act
at prescribed times and subject to the manner of sale, volume, notice and
information restrictions of Rule 144. The Company has granted Michael C. Slade
and former shareholders of the Nutrition Headquarters Group certain demand and
piggyback registration rights covering an aggregate of 8,772,084 shares of
Common Stock (3,172,084 shares after the consummation of the Offering). The
executive officers, directors and the Selling Stockholders, who collectively are
the beneficial owners of an aggregate of 24,586,046 shares of Common Stock
(18,986,046 shares after the consummation of the Offering), and the Company have
agreed with the Underwriters, subject to certain exceptions, not to directly or
indirectly, (and, except as may be disclosed herein, will not announce or
disclose any intention to) sell, contract to sell, grant any option or warrant
for the sale of, register, loan, pledge, grant any rights with respect to or
otherwise dispose of, without the prior written consent of Smith Barney Inc.,
any Common Stock, or any securities convertible into or exchangeable or
exercisable for Common Stock (including without limitation any of the economic
attributes thereof) for a period of 270 days, in the case of the Company and the
Selling Stockholders, and for a period of 120 days, in the case of the executive
officers and directors who are not Selling Stockholders, after the date of this
Prospectus. Upon the expiration or termination of such restrictive period, such
holders will, in general, be
13
<PAGE>
entitled to dispose of their shares of Common Stock, although the shares of
Common Stock held by affiliates of the Company will continue to be subject to
the restrictions of Rule 144 under the Securities Act. See 'Shares Eligible for
Future Sale' and 'Underwriting.'
ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation (the 'Certificate of
Incorporation') and its By-laws (the 'By-laws'), as well as Delaware corporate
law, contain certain provisions that could have the effect of making it more
difficult for a third party to acquire, or discouraging a third party from
attempting to acquire, control of the Company. Certain of these provisions
impose various procedural and other requirements, including advance notice and
other provisions, that could make it more difficult for stockholders to effect
certain corporate actions. These provisions could limit the price that certain
investors might be willing to pay in the future for shares of Common Stock.
Furthermore, certain of the Company's debt instruments provide for the
acceleration of the indebtedness evidenced thereby upon the occurrence of
certain change in control events (as defined in such debt instruments), which
provisions could also tend to prevent or discourage the acquisition of the
Company by a third party. See 'Description of Capital Stock' and 'Description of
Certain Indebtedness.'
YEAR 2000
At the present time, the Company believes that its systems are
substantially Year 2000 compliant and does not expect Year 2000 issues to
materially affect its products, services, competitive position or financial
performance. However, there can be no assurance that this will be the case. The
ability of third parties with whom the Company transacts business to adequately
address their Year 2000 issues is outside the Company's control. There can be no
assurance that the failure of such third parties to adequately address their
respective Year 2000 issues will not have a material adverse effect on the
Company's business, financial condition, cash flows and results of operations.
FORWARD LOOKING STATEMENTS
This Prospectus contains certain forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 with respect to
the financial condition, results of operations and business of the Company,
including statements under the captions 'Summary,' 'Management's Discussion and
Analysis of Financial Condition and Results of Operations' and 'Business.' All
of these forward looking statements are based on estimates and assumptions made
by management of the Company which, although believed to be reasonable, are
inherently uncertain. Therefore, undue reliance should not be placed upon such
estimates and statements. Factors that may affect such differences include: (i)
adverse publicity regarding the consumption of nutritional supplements; (ii)
adverse federal, state or foreign legislation or regulation or adverse
determinations by regulators; (iii) slow or negative growth in the nutritional
supplement industry; (iv) inability of the Company to successfully implement its
business strategy; (v) increased competition; (vi) increased costs; (vii) loss
or retirement of key members of management; (viii) increases in the Company's
cost of borrowings or inability or unavailability of additional debt or equity
capital; and (ix) changes in general economic conditions in the markets in which
the Company may, from time to time, compete. Many of such factors will be beyond
the control of the Company and its management. For further information or other
factors which could affect the financial results of the Company and such forward
looking statements, see the preceding Risk Factors.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
3,000,000 shares of Common Stock offered hereby at $18.00 per share are
approximately $51 million (approximately $59 million if the Underwriter's
over-allotment option is exercised in full). The Company expects to use such net
proceeds to reduce borrowings outstanding under the Company's Revolving Credit
Facility and for working capital.
The Company entered into the Revolving Credit Facility with a syndicate of
banks and other financial institutions. The Revolving Credit Facility has a
maximum availability of $60 million. As of the date of this Prospectus, the
Company had outstanding borrowings of $50 million under the Revolving Credit
Facility, at interest rates approximating 7.2%, which it intends to reduce with
a portion of the net proceeds. The Company may reborrow under its Revolving
Credit Facility from time to time. See 'Description of Certain Indebtedness.'
The Company will not receive any proceeds from the sale of the shares of
Common Stock offered by the Selling Stockholders. See 'Principal and Selling
Stockholders.'
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is presently traded on the Nasdaq National
Market under the symbol 'NBTY.' The following table sets forth the high and low
closing sale prices for the Common Stock as quoted on the Nasdaq National Market
for the periods indicated. Such prices have been rounded to the nearest decimal
adjusted to reflect the three-for-one stock split of the Company's Common Stock:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL YEAR ENDED SEPTEMBER 30, 1996
First Quarter.............................................................. $ 1.88 $ 1.48
Second Quarter............................................................. 2.54 1.54
Third Quarter.............................................................. 3.50 2.54
Fourth Quarter............................................................. 5.75 3.42
FISCAL YEAR ENDED SEPTEMBER 30, 1997
First Quarter.............................................................. 6.67 4.63
Second Quarter............................................................. 7.79 5.04
Third Quarter.............................................................. 9.33 5.00
Fourth Quarter............................................................. 11.50 6.29
FISCAL YEAR ENDED SEPTEMBER 30, 1998
First Quarter.............................................................. 11.13 6.88
Second Quarter............................................................. 20.25 10.83
Third Quarter.............................................................. 23.44 14.81
</TABLE>
As of April 30, 1998 there were approximately 684 record holders of Common
Stock. The Company believes that there were in excess of 10,000 beneficial
holders of Common Stock as of such date. On June 30, 1998, the last reported
sale price for the Company's Common Stock on the Nasdaq National Market was
$18.38 per share.
15
<PAGE>
DIVIDEND POLICY
Since 1973, the Company has not paid cash dividends on its Common Stock.
The Company's outstanding Senior Subordinated Notes and its Revolving Credit
Facility restrict the payment of cash dividends. See 'Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources' and 'Description of Certain Indebtedness.' On April 24, 1992,
the Company effected a two-for-one stock split in the form of a 100% stock
dividend to stockholders of record on May 8, 1992. In September 1992, the
Company effected a three-for-one stock split in the form of a 200% stock
dividend to stockholders of record on November 2, 1992. On April 3, 1998, the
Company effected a three-for-one stock split in the form of a 200% stock
dividend to stockholders of record on March 23, 1998. Any future determination
as to the payment of cash or stock dividends will depend upon the Company's
results of operations, financial condition and capital requirements and such
other factors as the Company's Board of Directors may consider.
CAPITALIZATION
The following table sets forth the Company's actual capitalization as of
March 31, 1998 and as adjusted to reflect the sale of the 3,000,000 shares of
Common Stock offered by the Company hereby and the application of the estimated
net proceeds to the Company therefrom as described in 'Use of Proceeds.' The
information below should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations and the Company's
Consolidated Financial Statements and related notes included elsewhere in this
Prospectus or incorporated herein by reference.
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------
(IN THOUSANDS)
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Current portion of long-term debt and capital lease obligations.................... $ 3,034 $ 3,034
----------- -----------
----------- -----------
Long-term debt:
Revolving Credit Facility........................................................ $ 45,000 $ --
Mortgages and other debt......................................................... 16,833 16,833
8 5/8% Senior Subordinated Notes due 2007........................................ 148,825 148,825
Promissory Note Payable.......................................................... 2,457 2,457
Capital lease obligations........................................................ 2,446 2,446
----------- -----------
Total long-term debt.......................................................... 215,561 170,561
----------- -----------
Stockholders' equity:(1)
Common Stock, $.008 par value, 75,000 shares authorized, 69,255 shares issued,
64,746 shares outstanding, 72,255 shares issued as adjusted, 67,746 shares
outstanding as adjusted....................................................... 554 578
Capital in excess of par......................................................... 56,789 107,851
Retained earnings................................................................ 92,884 92,884
Less 4,509 treasury shares, at cost.............................................. (3,206) (3,206)
Cumulative translation adjustment................................................ 9,400 9,400
----------- -----------
Total stockholders' equity.................................................... 156,421 207,507
----------- -----------
Total capitalization.......................................................... $ 371,982 $ 378,068
----------- -----------
----------- -----------
</TABLE>
- ------------------
(1) Excludes 4,326 shares of Common Stock which are issuable by the Company upon
exercise of options, all of which are held by management, and 450 shares of
Common Stock issuable by the Company pursuant to the Underwriters'
over-allotment option.
16
<PAGE>
SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA(1)(2)
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
The selected supplemental consolidated financial data in the table for the
three years in the period ended September 30, 1997 are derived from the
Company's Supplemental Consolidated Financial Statements which have been audited
by Coopers & Lybrand L.L.P., independent accountants, and are included elsewhere
in this Prospectus. The selected supplemental financial data in the table for
the two years in the period ended September 30, 1994 are derived from the
audited financial statements of NBTY and the separate entity audited financial
statements of Nutrition Headquarters Group. The selected supplemental
consolidated financial data in the table for the six months ended March 31, 1997
and 1998 are derived from the Company's interim unaudited supplemental
consolidated financial statements included elsewhere in this Prospectus and, in
the Company's opinion, contains all adjustments consisting of normal recurring
accruals necessary to present fairly its financial position as of March 31, 1998
and the results of its operations for the six month periods ended March 31, 1997
and 1998. The results of these interim periods are not necessarily indicative of
the results to be expected for the full year. The following information should
be read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Company's Supplemental Consolidated
Financial Statements and related notes and other supplemental consolidated
financial information included herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
---------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT DATA:
Net sales............................. $198,206 $220,821 $250,351 $265,670 $355,336 $159,105 $286,820
Costs & expenses:
Cost of sales....................... 95,659 118,217 137,254 138,186 177,909 79,819 140,414
Catalog printing, postage &
promotion........................ 20,093 23,297 28,307 26,695 27,932 13,996 13,935
Selling, general &
administrative(3)................ 60,116 59,157 67,032 68,414 96,653 40,571 90,452
Litigation settlement costs(4)...... 6,368
-------- -------- -------- -------- -------- -------- --------
Income from operations................ 22,338 20,150 17,758 32,375 46,474 24,719 42,019
Interest expense, net................. (2,177) (1,950) (2,284) (2,431) (7,471) (1,315) (9,221)
Other, net............................ 613 1,415 822 1,430 1,817 (171) 1,400
-------- -------- -------- -------- -------- -------- --------
Income before income taxes............ 20,774 19,615 16,296 31,374 40,820 23,233 34,198
Income taxes(5)....................... 6,072 4,872 3,374 9,168 11,694 7,391 10,565
-------- -------- -------- -------- -------- -------- --------
Net income............................ $ 14,702 $ 14,743 $ 12,922 $ 22,206 $ 29,126 $ 15,842 $ 23,633
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
PRO FORMA RELATING TO INCOME TAXES:(6)
Income taxes........................ 7,853 7,454 6,307 12,644 16,328 9,293 13,406
-------- -------- -------- -------- -------- -------- --------
Net income.......................... $ 12,921 $ 12,161 $ 9,989 $ 18,730 $ 24,492 $ 13,940 $ 20,792
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
PER SHARE DATA:
Net income per common share:
Basic............................... $ 0.29 $ 0.24 $ 0.21 $ 0.35 $ 0.45 $ 0.25 $ 0.37
Diluted............................. $ 0.23 $ 0.21 $ 0.19 $ 0.32 $ 0.42 $ 0.23 $ 0.34
Pro forma net income per common share:
Basic............................... $ 0.25 $ 0.20 $ 0.16 $ 0.29 $ 0.38 $ 0.22 $ 0.32
Diluted............................. $ 0.20 $ 0.17 $ 0.15 $ 0.27 $ 0.36 $ 0.20 $ 0.30
Weighted average common shares
outstanding (000):
Basic............................... 51,273 61,428 62,159 64,197 64,611 64,578 64,662
Diluted............................. 63,935 69,544 68,695 68,699 68,935 68,919 68,967
OTHER DATA:
Vitamin World
Number of stores................. 31 31 40 68 117 89 143
Same store sales growth(7)....... 8.8% 7.5% 19.5% 18.4% 22.9% 19.4% 25.6%
Holland & Barrett
Number of stores(2).............. -- -- -- -- 410 -- 417
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
AS OF
MARCH
AS OF YEAR ENDED SEPTEMBER 30, 31,
---------------------------------------------------- --------
1993 1994 1995 1996 1997 1998
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Working capital................................... $ 47,973 $ 44,945 $ 45,556 $ 57,559 $ 70,850 $ 77,902
Total assets(8)................................... 125,485 140,097 148,187 171,948 426,915 460,557
Long-term debt, capital lease obligations and
promissory note payable, less current
portion(8)...................................... 15,658 13,865 15,683 23,570 171,250 215,561
Total stockholders' equity........................ 76,272 85,759 91,393 107,645 131,291 156,421
</TABLE>
- ------------------
(1) In April 1998, the Company merged Nutrition Headquarters Group into NBTY in
a transaction accounted for as a pooling of interests. All financial
information has been restated to include the financial position and results
of operations of Nutrition Headquarters Group for all periods presented. See
Note 1 of Notes to the Company's Supplemental Consolidated Financial
Statements.
(2) In August 1997, the Company acquired Holland & Barrett which was accounted
for under the purchase method of accounting and, accordingly, all financial
information of Holland & Barrett has been included since its acquisition
date. See Note 3 of Notes to the Company's Supplemental Consolidated
Financial Statements.
(3) The Company estimates that Nutrition Headquarters Group incurred expenses of
approximately $1.5 million per fiscal year (primarily relating to executive
compensation, consulting services and certain related items) that will not
be incurred in the future.
(4) In fiscal 1997, the Company agreed to settle a class action lawsuit for
approximately $5,600, net of insurance recoveries and also recorded a charge
to operations for related legal fees of $768.
(5) Prior to the merger, Nutrition Headquarters Group had been treated as an S
corporation for federal and state tax purposes. Accordingly, taxable income
has been reported to the individual stockholders for their inclusion in
their respective income tax returns with no provision for these taxes, other
than certain minimum taxes, included in the Company's Supplemental
Consolidated Financial Statements.
(6) Pro forma net income and pro forma net income per Common Share reflect a
provision for taxes on the income of Nutrition Headquarters Group, which was
an S corporation prior to its merger into NBTY, as if Nutrition Headquarters
Group had been subject to corporate income taxes as a C corporation for all
periods presented.
(7) Same store sales data for the period reflect stores open throughout that
period and the corresponding period of the prior fiscal year.
(8) On August 7, 1997, the Company acquired Holland & Barrett. Consideration for
such acquisition included the issuance of promissory notes of the Company,
due in October 1997, aggregating $170 million (the 'Promissory Notes'). On
September 23, 1997, the Company issued $150 million of Senior Subordinated
Notes, the cash proceeds of which were placed in escrow to secure the
payment of the Promissory Notes. In October 1997, the Promissory Notes were
paid with such escrowed cash plus borrowings under the Revolving Credit
Facility. Total assets and long-term debt at September 30, 1997, exclude the
escrowed cash and the Promissory Notes, respectively.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected consolidated financial data in the table for the five years in
the period ended September 30, 1997 are derived from the Company's Consolidated
Financial Statements which have been audited by Coopers & Lybrand L.L.P.,
independent accountants. The Consolidated Financial Statements as of September
30, 1996 and 1997 and for the three years in the period ended September 30, 1997
and the reports thereon are included elsewhere in this Prospectus. The selected
consolidated financial data in the table for the six months ended March 31, 1997
and 1998 are derived from the Company's Interim Unaudited Consolidated Financial
Statements included elsewhere in this Prospectus and, in the Company's opinion,
contains all adjustments consisting only of normal recurring accruals necessary
to present fairly its financial position as of March 31, 1998 and the results of
its operations for the six month periods ended March 31, 1997 and 1998. The
results of these interim periods are not necessarily indicative of the results
to be expected for the full year. The following information should be read in
conjunction with the Company's Consolidated Financial Statements and related
notes and other consolidated financial information included or incorporated by
reference herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
---------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT DATA:
Net sales.............................. $138,430 $156,057 $178,760 $194,403 $281,407 $122,347 $244,404
Costs & expenses:
Cost of sales........................ 67,951 79,891 93,875 95,638 135,886 58,247 116,227
Catalog printing, postage &
promotion......................... 11,507 14,786 19,262 17,635 19,227 9,942 9,444
Selling, general & administrative.... 42,776 49,208 56,728 58,515 86,588 35,409 84,517
Litigation settlement costs(2)....... 6,368
-------- -------- -------- -------- -------- -------- --------
Income from operations................. 16,196 12,172 8,895 22,615 33,338 18,749 34,216
Interest expense, net.................. (1,227) (914) (1,084) (1,445) (6,655) (869) (8,850)
Other, net............................. 743 1,285 571 1,203 2,033 327 1,312
-------- -------- -------- -------- -------- -------- --------
Income before income taxes............. 15,712 12,543 8,382 22,373 28,716 18,207 26,678
Income taxes........................... 5,939 4,767 3,246 9,021 11,486 7,283 10,453
-------- -------- -------- -------- -------- -------- --------
Net income............................. $ 9,773 $ 7,776 $ 5,136 $ 13,352 $ 17,230 $ 10,924 $ 16,225
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
PER SHARE DATA:
Net income per common share:
Basic................................ $ 0.23 $ 0.15 $ 0.10 $ 0.24 $ 0.31 $ 0.20 $ 0.29
Diluted.............................. $ 0.18 $ 0.13 $ 0.09 $ 0.22 $ 0.29 $ 0.18 $ 0.27
Weighted average common shares
outstanding (000):
Basic................................ 42,501 52,656 53,387 55,425 55,839 55,806 55,890
Diluted.............................. 55,163 60,772 59,923 59,927 60,163 60,147 60,195
</TABLE>
<TABLE>
<CAPTION>
AS OF YEAR ENDED SEPTEMBER 30,
---------------------------------------------------- AS OF MARCH 31,
1993 1994 1995 1996 1997 1998
-------- -------- -------- -------- -------- --------------------
<S> <C> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Working capital......................... $ 42,869 $ 39,462 $ 40,665 $ 52,268 $ 63,480 $ 69,747
Total assets(3)......................... 102,647 115,112 123,529 145,550 398,476 429,263
Long-term debt, capital lease
obligations and promissory note
payable, less current portion(3)...... 8,265 7,566 10,924 18,397 166,147 210,664
Total stockholders' equity.............. 70,002 78,017 82,615 96,950 117,060 140,731
</TABLE>
- ------------------
(1) In August 1997, the Company acquired Holland & Barrett which was accounted
for under the purchase method of accounting and, accordingly, all financial
information for Holland & Barrett has been included since its acquisition.
See Note 2 of Notes to the Company's Consolidated Financial Statements.
(2) In fiscal 1997 the Company agreed to settle a class action lawsuit for
approximately $5,600, net of insurance recoveries and also recorded a charge
to operations for related legal fees of $768.
(3) On August 7, 1997, the Company acquired Holland & Barrett. Consideration for
such acquisition included the issuance of Promissory Notes of the Company,
due in October 1997, aggregating $170 million. On September 23, 1997, the
Company issued $150 million of Senior Subordinated Notes, the cash proceeds
of which were placed in escrow to secure the payment of the Promissory
Notes. In October 1997, the Promissory Notes were paid with such escrowed
cash plus borrowings under the Revolving Credit Facility. Total assets and
long-term debt at September 30, 1997, exclude the escrowed cash and the
Promissory Notes, respectively.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
'Summary Supplemental Consolidated Financial Data' and the audited Supplemental
Consolidated Financial Statements of the Company and the notes thereto included
elsewhere in this Prospectus. The Supplemental Consolidated Financial Statements
give retroactive effect (for all periods) to the merger of Nutrition
Headquarters Group into the Company which has been accounted for as a pooling of
interests.
NBTY, founded in 1971, is a leading vertically integrated manufacturer,
marketer and retailer of a broad line of high quality, value-priced nutritional
supplements. NBTY has continued to grow through its aggressive marketing
practices and through a series of strategic acquisitions. Since 1986, the
Company has successfully acquired and integrated 12 companies participating in
the mail order, retail and manufacturing segments of the VMS sector, including
Holland & Barrett in August 1997. In April 1998, NBTY merged Nutrition
Headquarters Group into the Company.
In August 1997, NBTY acquired Holland & Barrett, one of the leading
nutritional supplement retailers in the U.K., for an aggregate purchase price of
approximately $169 million. The acquisition of H&B has been accounted for under
the purchase method of accounting and accordingly, the results of its operations
are included in the financial statements of the Company from the date of
acquisition. The excess of the cost of the acquisition over the fair value of
H&B at the date of the acquisition resulted in goodwill of approximately $134
million which is being amortized over 25 years. The Company financed the
acquisition of Holland & Barrett through a $150 million offering of Senior
Subordinated Notes due in 2007 and borrowings under the Revolving Credit
Facility. Additional finance-related costs associated with the H&B acquisition
of approximately $6 million are being amortized over ten years. Since the
acquisition of H&B, NBTY has gradually replaced products manufactured by outside
suppliers, with lower priced NBTY manufactured products under the Holland &
Barrett brand. As NBTY becomes the primary supplier of nutritional supplements
to the H&B stores, it will effectively lower the cost of such products sold by
H&B stores, thereby increasing gross profit margins (to the extent such cost
savings are not passed on to the consumer) while improving productivity for the
NBTY manufacturing facilities. As of March 31, 1998, NBTY manufactured products
comprised approximately 40% of H&B's VMS sales (approximately 21% of total H&B
sales), with a goal of reaching 75% of such sales (approximately 40% of total
H&B sales).
In April 1998, NBTY merged a group of affiliated, privately held companies,
referred to collectively as Nutrition Headquarters Group, into the Company. In
connection with such transaction, the Company issued approximately 8.8 million
shares of its Common Stock and is expected to incur merger related transaction
costs of approximately $3.3 million. Nutrition Headquarters Group includes
Nutrition Headquarters, Inc., a mail order vitamin and nutritional supplement
company in Carbondale, Illinois; Lee Nutrition, Inc., a mail order VMS company
in Cambridge, Massachusetts and Nutro Laboratories, Inc., a South Plainfield,
New Jersey-based vitamin manufacturer. The merger of Nutrition Headquarters
Group into the Company was accounted for as a pooling of interests and,
accordingly, no goodwill was recorded in this transaction. Financial information
has been restated to include the results of operations of Nutrition Headquarters
Group for all periods presented. Nutrition Headquarters Group reported aggregate
sales of approximately $77 million (including $3 million of sales from the
Company) for the fiscal year ended September 30, 1997, of which approximately
$50 million was attributable to mail order. The Company is in the process of
integrating Nutrition Headquarters Group's mail order operations by: (i) merging
customer lists into the Company's computerized mailing list; (ii) expanding
product lines; (iii) redesigning mail order catalogs; (iv) repricing certain
products; and (v) implementing proven marketing techniques.
In April 1998, the Company sold certain assets of its cosmetic pencil
operation for approximately $6 million, of which $4.5 million was in cash with
additional payments of $1.5 million over the next three years. In connection
with such sale, the Company realized a pre-tax gain of approximately $1.6
million. The cosmetic pencil operation had sales of approximately $1.9 million
and operating losses of approximately $800,000 in fiscal 1997.
NBTY markets its multi-branded products through four distribution channels:
(i) mail order, (ii) Company-owned Vitamin World retail stores in the U.S.;
(iii) Company-owned Holland & Barrett retail stores in the U.K.;
20
<PAGE>
and (iv) wholesale distribution to drug store chains, supermarkets, discounters,
independent pharmacies and health food stores. Management believes that this
four channel distribution system enables NBTY to most effectively market its
products and lend stability when compared to certain of its competitors. NBTY's
net sales from mail order, retail-U.S., retail-U.K. and wholesale operations
were approximately 32%, 11%, 33% and 24%, respectively, for the six months ended
March 1998. As a result of the Company's efforts to expand its direct to
consumer business, wholesale sales as a percentage of total net sales went from
approximately 44% in fiscal 1995 to approximately 24% for the six months ended
March 31, 1998.
The Company recognizes revenue upon shipment or, with respect to its own
retail stores, upon the sale of products. Net sales are net of all discounts,
allowances, returns and credits. Cost of sales includes the cost of raw
materials and all labor and overhead associated with the manufacturing and
packaging of the products, other than the catalog printing, postage and other
costs. The majority of the Company's products are in tablet, soft gel and
two-piece capsule forms. The Company currently manufactures 70% of the VMS
products it sells. Management believes Company-owned manufacturing typically
results in lower product costs than contract manufacturing with outside
suppliers. Upon completion of a state-of-the-art soft gel manufacturing facility
in 1998, NBTY expects to increase its manufacturing capacity to 90% of the VMS
products it sells. Gross margins are affected by, among other things, changes in
the relative sales mix among the Company's four distribution channels.
Historically, gross margins from the Company's mail order and retail sales have
typically been higher than gross margins from wholesale sales. While the Company
believes it should be able to raise prices in response to significant increases
in the cost of its ingredients, the Company may not always be able to offset the
effects of increased raw material or other costs.
RESULTS OF OPERATIONS
The following table sets forth income statement data of the Company as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER SIX MONTHS
30, ENDED MARCH 31,
----------------------- ---------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales......................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost and expenses:
Cost of sales................................................... 54.8 52.0 50.0 50.2 49.0
Catalog printing, postage & promotion........................... 11.3 10.0 7.9 8.8 4.9
Selling, general & administrative............................... 26.8 25.8 27.2 25.5 31.5
Litigation...................................................... 0.0 0.0 1.8 0.0 0.0
----- ----- ----- ----- -----
92.9 87.8 86.9 84.5 85.4
----- ----- ----- ----- -----
Income from operations............................................ 7.1 12.2 13.1 15.5 14.6
Interest expense & other, net..................................... (0.6) (0.4) (1.6) (0.9) (2.7)
----- ----- ----- ----- -----
Income before income taxes........................................ 6.5 11.8 11.5 14.6 11.9
Income taxes...................................................... 1.3 3.4 3.3 4.6 3.7
----- ----- ----- ----- -----
Net income........................................................ 5.2% 8.4% 8.2% 10.0% 8.2%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
SIX MONTHS ENDED MARCH 31, 1998 COMPARED TO SIX MONTHS ENDED MARCH 31, 1997
Net Sales. Net sales for the six months ended March 31, 1998 were $287
million, an increase of $128 million or 81% compared with net sales of $159
million in the same period in 1997. Of the $128 million increase, $15 million
was attributable to mail order, $14 million to retail-U.S. sales, $95 million to
retail-U.K. sales and $4 million to wholesale sales. Over this period, the
Company's (i) mail order operations grew 20% as a result of a growing number of
names in the Company's mailing list and greater consumer recognition of
Puritan's Pride's quality and value; (ii) retail-U.S. operations grew 75% as a
result of 26% growth in same store sales, and continued new store openings;
(iii) retail-U.K. operations were presented for the six months ended March 31,
1998 as a result of the acquisition of H&B in August 1997; and (iv) wholesale
operations grew moderately at 4% as a result of the Company's objective to focus
its efforts on expanding its direct to consumer business. The
21
<PAGE>
acquisition of H&B has been accounted for under the purchase method of
accounting and accordingly, the results of operations are included in the
financial statements from August 1997, the date of the acquisition. Without H&B,
sales would have increased approximately 21%.
Cost of Sales. Cost of sales for the six months ended March 31, 1998 was
$140 million, an increase of $60 million or 75% compared with cost of sales of
$80 million for the same period in 1997. Gross profit for this period in 1998
was $146 million, an increase of $67 million or 85% compared with $79 million in
the same period in 1997. As a percentage of net sales, gross profit increased to
51% in the six months ended March 31, 1998 from 50% for the same period in 1997.
Such increase was due to various factors, including (i) generally higher margins
on products manufactured by NBTY and sold in H&B stores; (ii) lower
manufacturing costs resulting from increased productivity at the Company's
manufacturing facilities; (iii) higher percentage of sales direct to the
consumer; and (iv) increased sales of new products, which typically have higher
gross margins. The Company's strategy is to continue to increase in-house
manufacturing while decreasing the use of outside suppliers in both the U.S. and
the U.K.
Catalog Printing, Postage and Promotion. Catalog printing, postage and
promotion remained stable at $14 million for the six months ended March 31, in
1998 and 1997. Such costs as a percentage of net sales were 5% in the 1998
period and 9% in the 1997 period. The decrease as a percentage of net sales was
due to the increase in retail sales from H&B as well as more efficient printing
and mailing methods of the Company's catalog operations.
Selling, General and Administrative. Selling, general and administrative
expenses for the six months ended March 31, 1998 were $90 million, an increase
of $50 million compared with $40 million for the same period in 1997. As a
percentage of net sales, selling, general and administrative expenses were 32%
and 26% in the six months ended March 31, 1998 and 1997, respectively. Of the
$50 million increase, $20 million was attributable to rent expense associated
with H&B retail locations and additional Vitamin World retail stores, $16
million was attributable to payroll costs for H&B and $14 million was
attributable to an increase in depreciation and amortization, including $3
million in goodwill resulting from the acquisition of H&B.
Interest Expense, Net. Interest expense, net, was $9 million in the six
months ended March 31, 1998, an increase of $8 million compared with interest
expense, net, of $1 million in the same period in 1997. Such interest expense,
net, primarily resulted from the issuance of $150 million of 8 5/8% Senior
Subordinated Notes due 2007 to fund the acquisition of H&B.
Income Taxes. The Company's effective tax rate was 30.9% in the six months
ended March 31, 1998 and 31.8% in the same period in 1997. Nutrition
Headquarters Group was privately held and had subchapter S status and
accordingly, recorded no income tax provision except for certain minimum taxes.
It is anticipated that the Company's effective tax rate on an on-going basis
will be approximately 40%.
Net Income. Net income for the six months ended March 31, 1998 was $24
million, an increase of $8 million or 50% compared with $16 million in the same
period in 1997. Assuming Nutrition Headquarters Group was taxed at the Company's
effective rate, net income would have been $21 million for the six months ended
March 31, 1998, an increase of $7 million or 50% compared with $14 million in
the same period in 1997.
FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1996
Net Sales. Net sales for fiscal 1997 were $355 million, an increase of $89
million or 33% compared with net sales of $266 million in fiscal 1996. Of the
$89 million increase, $28 million was attributable to mail order, $44 million to
retail sales in the U.S. and the U.K. and $17 million to wholesale sales. Over
this period, the Company's (i) mail order operations grew 21% as a result of a
growing number of names in the Company's mailing list and greater consumer
recognition of Puritan's Pride quality and value; (ii) retail-U.S. operations
grew 93% as a result of 23% growth in same store sales and 49 net new store
openings; (iii) retail-U.K. operations recorded sales of $24 million as a result
of the acquisition of Holland & Barrett in August 1997; and (iv) wholesale
operations grew 16%. Without Holland & Barrett, sales would have increased 25%.
Cost of Sales. Cost of sales for fiscal 1997 was $178 million, an increase
of $40 million or 29% compared with $138 million for fiscal 1996. Gross profit
for fiscal 1997 was $177 million, an increase of $50 million or 39% compared
with $127 million in fiscal 1996. As a percentage of net sales, gross profit
increased to 50% in
22
<PAGE>
fiscal 1997 from 48% in fiscal 1996. Such increase was due to various factors,
including increased sales of new products and generally higher margins on
products as well as lower manufacturing costs resulting from increased
productivity. The Company's strategy is to continue to increase in-house
manufacturing while decreasing the use of outside suppliers in both the U.S. and
the U.K.
Catalog Printing, Postage and Promotion. Catalog printing, postage and
promotion for fiscal 1997 was $28 million, an increase of $1 million or 4%
compared with $27 million in fiscal 1996. Such costs as a percentage of net
sales were 8% in fiscal 1997 and 10% in fiscal 1996. The decrease as a
percentage of net sales was mainly due to more efficient printing and mailing
methods of the Company's catalog operations and increased Company-wide sales.
Selling, General and Administrative. Selling, general and administrative
expenses for fiscal 1997 were $97 million, an increase of $29 million or 43%
compared with $68 million in fiscal 1996. As a percentage of net sales, these
expenses were 27% and 26% for fiscal 1997 and 1996, respectively. This increase
was attributable to increased payroll costs and building costs including rent
expense resulting from the acquisition of Holland & Barrett.
Litigation. In fiscal 1997, the Company agreed to settle a class action
lawsuit for approximately $5.6 million, net of insurance recoveries and also
recorded a charge to operations for related fees of $768,000. See Note 15 of
Notes to Supplemental Consolidated Financial Statements.
Interest Expense, Net. Interest expense, net, was $7 million in fiscal
1997, an increase of $5 million compared with interest expense, net, of $2
million in fiscal 1996. Increased interest expense, net, associated with the
Holland & Barrett acquisition totaled $2 million in fiscal 1997. In addition,
the Company recorded a loss of approximately $2 million in connection with the
settlement of a treasury-lock instrument.
Income Taxes. The Company's effective tax rate was 28.7% in fiscal 1997
and 29.2% in fiscal 1996. Nutrition Headquarters Group was privately held and
had subchapter S status and accordingly, recorded no income tax provision,
except for certain minimum taxes.
Net Income. Net income for fiscal 1997 was $29 million, an increase of $7
million or 32% compared with $22 million in fiscal 1996. Assuming Nutrition
Headquarters Group was taxed at the Company's effective rate, net income would
have been $24 million for fiscal 1997, an increase of $5 million or 26% compared
with $19 million in fiscal 1996.
FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1995
Net Sales. Net sales for fiscal 1996 were $266 million, an increase of $16
million or 6% compared with net sales of $250 million in fiscal 1995. Of the $16
million increase, $11 million was attributable to increases in wholesale and
retail sales and $13 million was attributable to mail order sales, offset by a
decrease of $8 million from Beautiful Visions, a cosmetic mail order catalog
which was sold in 1995.
Cost of Sales. Cost of sales for fiscal 1996 was $138 million, an increase
of $1 million or 1% compared with $137 million in fiscal 1995. Gross profit for
fiscal 1996 was $127 million, an increase of $14 million or 12% compared with
$113 million in fiscal 1995. As a percentage of net sales, gross profit
increased to 48% in fiscal 1996 from 45% in fiscal 1995. Such increase was due
to various factors, including increased sales of higher margin products,
long-term purchase commitments of raw materials resulting in lower costs and
manufacturing efficiencies.
Catalog Printing, Postage and Promotion. Catalog printing, postage and
promotion for fiscal 1996 was $27 million, a decrease of $1 million compared
with $28 million in fiscal 1995. Such costs as a percentage of net sales were
10% in fiscal 1996 compared with 11% in fiscal 1995. This decrease was mainly
due to the discontinuation of the Beautiful Visions mail order catalog.
Selling, General and Administrative. Selling, general and administrative
expenses for fiscal 1996 were $68 million, an increase of $1 million or 1%
compared with $67 million in fiscal 1995. As a percentage of net sales, these
costs were 26% in fiscal 1996 and 27% in fiscal 1995. This decrease was
attributable to decreases in payroll fringe benefits and other miscellaneous
costs which were offset by increases in outlet store rentals and professional
fees.
23
<PAGE>
Interest Expense, Net. Interest expense, net, in fiscal 1996 and fiscal
1995 remained stable at $2 million.
Income Taxes. The Company's effective tax rate was 29.2% in fiscal 1996
and 20.7% in fiscal 1995. Nutrition Headquarters Group was privately held and
had sub-chapter S status and accordingly, recorded no income tax provision,
except for certain minimum taxes.
Net Income. Net income for fiscal 1996 was $22 million, an increase of $9
million or 69% compared with $13 million in fiscal 1995. Assuming Nutrition
Headquarters Group was taxed at the Company's effective rate, net income would
have been $19 million for fiscal 1996, an increase of $9 million or 90% compared
with $10 million in fiscal 1995.
SEASONALITY
The Company believes that its business is slightly seasonal. Historically,
the Company has slightly lower net sales in its first and third fiscal quarters,
slightly higher net sales in its second and fourth fiscal quarters. The Company
may have higher net sales in a quarter depending upon when it has engaged in
significant promotional activities.
LIQUIDITY AND CAPITAL RESOURCES
The Company will require liquidity for capital expenditures and working
capital needs, including debt service requirements. Total anticipated capital
expenditures for the Company are expected to be approximately $55 million for
fiscal year 1998, of which $39 million has been spent through March 31, 1998.
The Company has recently completed construction of a soft gel manufacturing
facility for a total cost of $35 million. For information as to the Company's
commitments and contingencies, including future minimal rent payments and other
commitments, see Note 12 to Supplemental Consolidated Financial Statements.
The Company believes that the cash flow generated from its operations and
amounts available under the Revolving Credit Facility, after giving effect to
the Offering, should be sufficient to fund its debt service requirements,
working capital needs, anticipated capital expenditures and other operating
expenses for the foreseeable future. The Revolving Credit Facility provides the
Company with available borrowings up to an aggregate principal amount of $60
million. The Company's future operating performance will be subject to future
economic conditions and to financial, business and other factors, many of which
are beyond the Company's control. See 'Risk Factors.'
The Company's debt instruments impose certain restrictions on the Company's
ability to make capital expenditures, limit the Company's ability to incur
additional indebtedness, dispose of assets, repay indebtedness or amend other
debt instruments, pay distributions, create liens on assets, enter into sale and
leaseback transactions, make investments, loans or advances and make
acquisitions. Such restrictions could limit the Company's ability to respond to
market conditions, to provide for unanticipated capital investments or to take
advantage of business or acquisition opportunities. See 'Description of Certain
Indebtedness.'
24
<PAGE>
BUSINESS
NBTY is a leading vertically integrated manufacturer, marketer and retailer
of a broad line of high quality, value-priced nutritional supplements in the
United States and the United Kingdom. The Company offers approximately 900
products under a number of brands, including vitamins, minerals, herbs, amino
acids, sports nutrition products, diet aids and other nutritional supplements.
NBTY targets the growing value-conscious consumer segment by offering high
quality products at a value price point, direct to the consumer. NBTY markets
its multi-branded products through a four channel distribution system: (i) the
leading U.S. nutritional supplement mail order program under the Company-owned
Puritan's Pride and Nutrition Headquarters brands and catalogs; (ii)
Company-owned Vitamin World retail stores, of which there are currently
approximately 150, located strategically throughout the United States; (iii)
Company-owned Holland & Barrett retail stores, of which there are currently 417,
located strategically throughout the United Kingdom; and (iv) wholesale
distribution to drug store chains, supermarkets, independent pharmacies and
health food stores primarily under the Nature's Bounty brand. NBTY currently
manufactures approximately 70% of the nutritional supplements it sells and with
the completion of a new state-of-the-art manufacturing facility in 1998, the
Company expects to manufacture approximately 90%.
BACKGROUND
Arthur Rudolph, NBTY's former chairman, founded the Company in 1971, as a
direct marketer of nutritional supplements under the name Nature's Bounty, Inc.
NBTY completed its initial public offering of stock in that same year. NBTY
first developed its manufacturing capabilities and began its mail order
operation in 1974 and opened its first retail store in 1979. NBTY has continued
to grow through its aggressive marketing practices and through a series of
strategic acquisitions. Since 1986, the Company has successfully acquired and
integrated 12 VMS companies participating in the mail order, retail and
manufacturing segments, including Holland & Barrett in August 1997. See
'Prospectus Summary--Recent Acquisition.' The Company changed its name to NBTY,
Inc. in 1995.
In 1986, as part of its acquisition strategy, the Company acquired U.S.
Nutrition Co. Inc., ('U.S. Nutrition') a nutritional supplement mail order
company which was founded in 1976 by Scott Rudolph, son of Arthur Rudolph. After
the acquisition of U.S. Nutrition, Scott Rudolph joined the Company and later
was elected Chairman, Chief Executive Officer and President of NBTY. The
Company, under the leadership of Scott Rudolph, has achieved record sales and
earnings, developed state-of-the-art production facilities, diversified its
operations into four distribution channels and completed a number of strategic
acquisitions. For the fiscal year ended September 1997, net sales and income
from operations increased 34% and 63%, respectively over the prior year, to $355
million and $53 million (excluding $6.4 million of legal settlement costs in
fiscal 1997), respectively. For the six months ended March 1998, net sales and
income from operations increased 80% and 70%, respectively over the prior year
period, to $287 million and $42 million, respectively. NBTY's net sales from
mail order, retail-U.S., retail-U.K. and wholesale operations were approximately
32%, 11%, 33% and 24%, respectively, for the six months ended March 1998.
INDUSTRY OVERVIEW
The vitamin, mineral and nutritional supplement market in the United States
has grown at a compound annual rate of approximately 15%, from $3.7 billion in
1992 to $6.5 billion in 1996, according to 1997 Packaged Facts. Increasing VMS
usage has been linked to a number of factors, including: (i) scientific and
popular reports on the positive benefits of VMS products; (ii) awareness of
healthier lifestyles; (iii) favorable regulatory environment; (iv) new VMS
product introductions and (v) wider distribution of VMS products. A primary
driver in the continuing increase in demand for nutritional supplement products
is the aging of the U.S. population, together with an increased focus by this
segment on preventative health measures. According to the Simmons Market
Research Bureau, only 54% of this U.S. adult population regularly uses vitamins,
minerals or supplements. Further, based on the U.S. Bureau of the Census data,
the 45-and-older age group, which accounted for approximately 32% of the U.S.
population in 1990, is expected to grow to 40% of the U.S. population by 2010.
Vitamins, minerals and nutritional supplements are sold through drug stores,
supermarkets and discount stores, health food stores, direct sales organizations
and mail order. According to the Packaged Facts, drug stores,
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supermarkets and discount stores, on a combined basis, accounted for
approximately 46%, health food stores for approximately 38% and direct and mail
order sales for approximately 16% of total industry sales in 1996.
Drug stores, supermarkets and discount stores traditionally offer more
mainstream products, such as multivitamins, individual vitamins (such as
Vitamins A, C and E), and minerals (such as calcium, potassium and magnesium).
This market has traditionally grown in line with industry sector growth. Health
food stores, as well as direct sales and mail order retailers traditionally
offer greater product breadth, including more sophisticated supplement products.
The health food market is highly fragmented with approximately 11,000 health
food and vitamin chain stores in the U.S., of which approximately 70% are
independently owned and operated and approximately 30% are associated with one
of several regional or national chains. This market has continued to grow as
industry participants continue to add stores in new and existing markets.
DISTRIBUTION CHANNELS
The following table sets forth the percentage of net sales for each of the
Company's distribution channels:
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEARS ENDED ENDED
SEPTEMBER 30, MARCH 31,
-------------------- ------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Mail order........................................................ 51 % 51 % 46 % 49 % 32 %
Retail--U.S....................................................... 5 8 11 11 11
Retail--U.K.(1)................................................... -- -- 7 -- 33
Wholesale......................................................... 44 41 36 40 24
---- ---- ---- ---- ----
100 % 100 % 100 % 100 % 100 %
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
- ------------------
(1) Holland & Barrett was acquired in August 1997.
The Company's position as a leading vertically integrated manufacturer,
marketer and retailer of a broad line of high quality, value-priced nutritional
supplements enables it to successfully operate a four channel distribution
system:
Mail Order. Through its Puritan's Pride and Nutrition Headquarters brands,
NBTY is the leader in the U.S. mail order nutritional supplement industry with
over 4.0 million active customers and with response rates which management
believes to be in excess of the mail order industry average. Through its
catalogs, the Company offers a full line of vitamins and other nutritional
supplements at prices which are normally at a discount to retail stores. The
Company mails its catalogs approximately eight times a year. NBTY intends to
continue to add new customers to its mail order operation through aggressive
marketing techniques and selective acquisitions. In addition, in 1996 the
Company expanded its mail order operations into the United Kingdom.
In order to maximize sales per catalog and reduce mailing and printing
costs, the Company regularly updates its mail order list to include new
customers and to eliminate those who have not placed an order within a
designated period of time. In addition, in order to add new customers to its
mailing lists and increase average order sizes, the Company places
advertisements in Sunday newspaper supplements, conducts insert programs with
other mail order companies and has special promotions on a quarterly basis which
offer customers combinations of products and quantities at promotional prices.
NBTY's use of state-of-the-art equipment in its catalog operations, such as
computerized co-mailing, address bar coding and automated picking and packing
systems, enables the Company to fill mail orders typically within 48 hours of
their receipt. The Company's position as a leading mail order nutritional
supplement distributor and its utilization of state-of-the-art systems allows
the Company to lower its per customer distribution costs, thereby enhancing
margins and enabling the Company to offer its products at lower prices than its
competitors.
Retail Stores, U.S. The Company currently operates approximately 150
stores in 40 states under the Vitamin World name, primarily in factory outlet
malls, and more recently in regional malls. Such stores carry a full line of
value-priced products under the Vitamin World brand as well as a limited
selection of other brands. The stores generally average 1,200 square feet and
offer 1,200 SKUs of vitamins, minerals and nutritional supplements. During
calendar 1998, the Company plans to open a total of 120 Vitamin World stores, of
which
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<PAGE>
approximately 20 stores have recently been opened and leases have been signed
for an additional 26 stores. Vitamin World stores typically turn profitable
within the first nine months of operation. Through direct interaction with the
retail customer, the Company is better able to identify customer preferences,
retail buying trends and pricing than by analyzing sales reports from
wholesalers and independent retailers. As a result, the Company is better able
to merchandise its products and more quickly respond to changing customer
trends.
Retail Stores, U.K. In August 1997, the Company acquired Holland &
Barrett, the largest chain of nutritional supplement and health food stores in
the United Kingdom. Holland & Barrett, which has been in business since 1920, is
a well known and respected retailer and brand, currently operating 417 stores in
prime shopping areas in over 300 cities in the U.K. The stores generally have an
average selling area of 1,200 square feet and offer a total of 2,800 SKUs,
approximately 56% within the VMS categories and 44% within the health food
category. Since the acquisition, NBTY has gradually replaced VMS products
manufactured by outside suppliers with lower priced NBTY manufactured products
under the Holland & Barrett brand. As of March 31, 1998, NBTY manufactured
products comprised approximately 40% of H&B's VMS sales (approximately 21% of
total H&B sales) with the goal of reaching 75% of such sales (approximately
40%of total H&B sales) by the end of calendar 1998.
Wholesale. The Company markets its products under multiple brands to drug
stores, supermarkets and discounters as well as independent pharmacies, health
food stores and wholesalers. The Company markets products under Nature's Bounty,
the Company's signature brand, to chain stores such as Albertsons, CVS, Eckerd
Drugs, Genovese, Osco and Target. The Company also sells a full line of products
under the Natural Wealth brand to supermarkets and wholesalers, such as Bergen
Brunswig Co., Cardinal Health Co. and McKesson Drug Co., a line of products
under the Good 'N Natural brand directly to independent health food stores and a
specialty line of vitamins under the American Health brand to health food
wholesalers.
BUSINESS STRATEGY
The Company's objective is to increase sales, improve profitability and
strengthen its industry leading position through the following key strategies:
Enhance Vertical Integration. Management believes that vertical
integration creates a significant competitive advantage by allowing the Company
to: (i) maintain higher quality standards while lowering product costs, a
portion of which are passed on to the customer as lower prices; (ii) more
quickly respond to scientific and popular reports and consumer buying trends;
(iii) assure delivery schedules; (iv) reduce dependence on outside suppliers;
and (v) improve overall operating margins. The Company continually evaluates
ways to further enhance its vertical integration. For example, as NBTY becomes
the primary supplier of nutritional supplements to the H&B stores by replacing
outside suppliers, it will effectively lower the costs of such products sold by
H&B stores. Management believes this should increase overall profit margins
while improving productivity for NBTY's manufacturing facilities.
Introduce New Products and Product Innovations. The Company has
consistently been among the first in the industry to introduce new products in
response to recent scientific and popular reports. Given the changing nature of
consumer demands for new products and the growing publicity over the importance
of vitamins, minerals and nutritional supplements in the promotion of general
health, management believes that NBTY will continue to attract new customers
based upon its ability to rapidly respond to consumer demands with high quality,
value-oriented products. During fiscal 1997, NBTY introduced more than 100 new
products. In addition to expanding the Company's product lines, many of these
new specialty products, such as St. John's Wort and glucosamine sulfate,
typically provide higher margins.
Expand Existing Channels of Distribution. In order to increase sales and
profitability, enhance overall market share, and leverage manufacturing,
distribution, purchasing and marketing capabilities, the Company will continue
to expand its existing channels of distribution.
o Increase mail order sales. NBTY expects to continue to strengthen
its mail order sales through a number of initiatives, including: (i)
automated picking and packing to fulfill mail order requests with
greater speed and accuracy; (ii) increased manufacturing capability
to quickly introduce and deliver new products in response to
customer demand; and (iii) more frequent promotions to further
27
<PAGE>
improve response rates. In addition, the Company intends to continue
its strategy of acquiring the customer lists, brand names and
inventory of other mail order companies which have similar or
complementary products and which the Company believes it can
integrate into its own operations without adding substantial
overhead expenses, such as the recent merger of Nutrition
Headquarters Group into the Company.
o Increase retail sales in the U.S. and U.K. In order to increase
retail sales, NBTY is actively expanding its base of Vitamin World
stores in the U.S. and selectively expanding its Holland & Barrett
stores in the U.K. During calendar 1998, the Company plans to open a
total of 120 Vitamin World stores to increase its penetration into
factory outlet and regional malls. The Company has recently opened
approximately 20 stores and signed leases for an additional 26
stores.
Integrate Strategic Acquisitions. Since 1986, NBTY has successfully
acquired and integrated 12 VMS companies, including Holland & Barrett in August
1997. Most recently NBTY merged Nutrition Headquarters Group into the Company.
NBTY is currently in the process of integrating Nutrition Headquarters Group's
mail order operations by: (i) merging customer lists into the Company's
computerized mailing list; (ii) expanding product lines; (iii) redesigning mail
order catalogs; (iv) repricing certain products; and (v) implementing proven
marketing techniques. NBTY will continue to manufacture select products in
Nutrition Headquarters Group's manufacturing faculties. The Company intends to
continue to pursue acquisition opportunities in the VMS sector, both in the U.S.
and internationally, that complement or extend its existing product lines,
expand its distribution channels or are compatible with its business philosophy
and strategic goals.
Build Infrastructure to Support Growth. NBTY has technologically advanced,
state-of-the-art manufacturing and production facilities, with total production
capacity of approximately five billion tablets and capsules per year. The
Company recently completed construction of a 131,000 square foot
state-of-the-art soft gelatin encapsulation manufacturing facility on 62 acres,
capable of producing five billion soft gel capsules per year, to enhance its
vertical integration, reduce its dependence on outside suppliers and further
improve profit margins. NBTY expects to increase its manufacturing capacity to
90% from 70% of the VMS products it sells. The Company regularly evaluates its
operations and makes investments in building infrastructure, as necessary to
support its continuing growth.
Experienced Management Team with Significant Equity Stake. The Company's
management team has extensive experience in the VMS industry and has developed
long-standing relationships with its suppliers and its customers. The executive
officers and directors have an average of approximately 17 years with the
Company. After giving effect to the Offerings, executive officers and directors
will own approximately 18.1% of the Company's common stock and employees in the
aggregate will own approximately 4.5% through the Company's profit sharing plan.
PRODUCTS
The Company manufactures and markets approximately 900 products including
vitamins, minerals, herbs, amino acids, sports nutrition products, diet aids and
other nutritional supplements such as minerals, amino acids and herbs. The
Company's products are available in single vitamins and multi-vitamin
combinations, and in varying potency levels, sizes, formulations and delivery
forms, including tablets, soft gel and hard shell capsules, chewables, powders
and liquids. The Company also offers a selection of personal care products by
direct mail and in its retail stores including creams, shampoos and lotions. The
Company offers its products under its brands through each of its four
distribution channels.
Mail Order. The Company offers a full line of vitamins and nutritional
supplements through its mail order channel in the U.S. under the Puritan's Pride
and Nutrition Headquarters brands. The Company began manufacturing and selling
VMS products under its Puritan's Pride brand in 1974, originally focusing on
single vitamin and multi-vitamin combinations. Puritan's Pride has become the
leading domestic mail order brand and has developed a reputation for quality,
consistency, innovation and value to the consumer. Through its mail order
channel in the U.K. the Company offers similar products under the Vitamin World
brand. In April 1998, Nutrition Headquarters Group was merged into the Company.
Nutrition Headquarters Group's mail order brands were introduced in 1975 and
have reputations for high quality products.
28
<PAGE>
Retail Stores, U.S. NBTY's Company-owned retail stores in the U.S. offer a
full line of VMS products under the Vitamin World brand. The Company began
selling vitamins, minerals and nutritional supplements under its Vitamin World
brand in 1979. In addition, the Company offers a selection of personal care
products including creams, lotions and shampoos under the Vitamin World brand.
Vitamin World has become a well known retail brand for vitamins and nutritional
supplements and has developed a reputation for a broad selection of high quality
products at discount prices.
Retail Stores, U.K. NBTY's Company-owned retail stores in the U.K. offer a
full line of VMS products under the Holland & Barrett brand. Holland & Barrett,
which has been in business since 1920, is a well known and respected retailer
and brand. NBTY acquired Holland & Barrett in August 1997. Since the
acquisition, NBTY has gradually replaced VMS products manufactured by outside
suppliers with lower priced NBTY manufactured products under the Holland &
Barrett brand. Such products constitute approximately 56% of aggregate sales.
The remaining 44% of sales are made up of health food products including dried
fruit and nuts. As of March 31, 1998, NBTY manufactured products comprised
approximately 40% of H&B's VMS sales (approximately 21% of total H&B sales) with
the goal of reaching 75% of such sales (approximately 40% of total H&B sales) by
the end of calendar 1998. Since its introduction of NBTY manufactured product
under the Holland & Barrett brand the Company has continued to post increasing
sales of VMS products in its Holland & Barrett stores.
Wholesale. The Company markets a selection of VMS products under Nature's
Bounty, the Company's signature brand, to drug stores, supermarkets and
discounters such as Albertsons, CVS, Eckerd Drugs, Genovese, Osco and Target.
The Company began selling select VMS products under its Nature's Bounty brand in
1971 and over time, has expanded its product offerings to include a full line of
VMS products. Nature's Bounty has become a leading brand and has developed a
reputation for quality, consistency, innovation and value to the consumer. The
Company also sells select products under the Natural Wealth brand to
supermarkets and wholesalers, such as Bergen Brunswig Co., Cardinal Health Co.
and McKesson Drug Co. The Company also sells products under the Good 'N Natural
and American Health brands to independent health food stores and health food
wholesalers.
Product Development. The Company introduces new and innovative products on
a consistent and timely basis. New product ideas are generated in response to
consumer trends and scientific and popular reports. The Company works with both
its retail and wholesale customers as well as its vendors to more quickly
respond to such changes in consumer buying trends. New products are developed by
members of the Company's sales and marketing and purchasing departments working
in conjunction with senior management. After a product has been approved for
manufacture, the Company produces a sample and conducts quality control studies
to ensure that the product meets the Company's standards of quality assurance.
Based upon the outcome of these tests, the product becomes available for
production. During fiscal 1997, the Company introduced more than 100 new
products.
MANUFACTURING AND QUALITY CONTROL
By manufacturing the majority of its own products, the Company believes it
maintains better control over product quality and availability while also
reducing production costs. The Company's manufacturing process consists of a
number of steps, as follows: (i) purchase high quality bulk raw materials; (ii)
mix, blend and granulate the measured ingredients into a mixture with a
homogenous consistency; (iii) encapsulate or tablet the blended mixture
according to the appropriate dosage; and (iv) coat the completed tablet. When a
product is ready for bottling, the automated equipment counts the tablets,
inserts them into recyclable plastic bottles, adds a tamper-evident hinged cap
with an inner safety seal and affixes a label. Management believes NBTY's
products appeal to the needs of today's environmentally and safety conscious
consumer. In addition, NBTY assures customer satisfaction by employing rigorous
quality assurance programs in its state-of-the-art production facilities.
During the past five years NBTY has invested approximately $100 million in
building state-of-the-art production facilities. NBTY currently manufactures
approximately 70% of the nutritional supplements it sells and with the
completion of a new state-of-the-art manufacturing facility in 1998, the Company
expects to manufacture approximately 90%. As a result of its ongoing
manufacturing expansion, NBTY operates
29
<PAGE>
technologically advanced manufacturing and production facilities, located on
Long Island, New York, consisting of approximately 830,000 square feet in eight
modern buildings, of which approximately 290,000 square feet is devoted to
manufacturing, approximately 340,000 square feet to warehousing and
distribution, and the remaining approximately 200,000 square feet to office
space, production, quality assurance and a testing laboratory. NBTY has
manufacturing capacity of 1.2 billion tablets, 400 million capsules and 14
million bottles per month. Upon completion of its new soft gel manufacturing
plant, the Company will be able to manufacture an additional 420 million
capsules per month. The Company's current capacity levels can be expanded by
50%, as necessary, at a small incremental cost. The Company regularly evaluates
its operations and makes strategic investments in building manufacturing and
distribution capacity, as necessary, to support its continuing growth. NBTY
believes that the capacity of its manufacturing and distribution facilities is
adequate to meet the requirements of its current business.
Soft Gelatin Manufacturing Facility. The Company has completed
construction of a $35 million, state-of-the-art, 131,000 square foot soft
gelatin encapsulation manufacturing facility on 62 acres owned by the Company.
The soft gelatin process is the only widely accepted process which facilitates
the encapsulation of oils, other liquids and solids in a suspended state, in an
oral dose form. With the Company's current mix of products, the facility is
capable of producing approximately five billion soft gel capsules per year. This
proprietary equipment is designed to allow flexibility in producing different
shape and size capsules. The plant can be expanded to double the current
capacity, at a small incremental cost, if demand requires.
Raw Materials. The principal raw materials used in the manufacturing
process are natural and synthetic vitamins, purchased from bulk manufacturers in
the United States, Japan and Europe. NBTY purchases its raw materials from
multiple sources including some of the largest pharmaceutical and chemical
companies in the world. Although the Company's raw materials and packaging
supplies are readily available from multiple suppliers, one supplier currently
provides approximately 10% of NBTY's purchases. NBTY believes that the loss of
its largest supplier could have a temporary adverse effect upon its operations
but that, over time, NBTY would be able to replace such source of supply. No
other supplier accounts for 10% or more of NBTY's raw material purchases.
Quality Control. NBTY's manufacturing process places significant emphasis
on quality control. All raw materials used in production are initially held in
quarantine during which time NBTY's laboratory employees assay the product
against the manufacturer's certificate of analysis. Once cleared, a lot number
is assigned, samples are retained and the material is processed by formulating,
mixing and granulating, compression and sometimes coating operations. Such
manufacturing operations are conducted in accordance with the good manufacturing
practices of the FDA and other applicable regulatory standards. After the tablet
is manufactured, laboratory employees test its weight, purity, potency,
dissolution and stability.
SALES AND CUSTOMER SERVICE
The Company's established customer relationships at the mail order, retail
and wholesale levels are based upon the Company's long-standing commitment to a
high level of customer service. NBTY has approximately 400 employees in its mail
order operations, 700 sales employees located throughout the U.S. in its Vitamin
World stores, 2,000 sales employees located throughout the U.K. in its Holland &
Barrett stores, and 60 commissioned sales associates and brokers who sell to
wholesale distributors.
Mail Order. The Company maintains a highly efficient, state-of-the-art
call center at the Company's headquarters in Long Island, New York. The Company
offers prompt order entry services through the use of toll-free telephone
numbers, which may be called six days a week to place orders, request a catalog
or make product inquiries. The Company has 100 customer service stations
installed in its call center. Once a call is received by the Company, it is
automatically routed to the next available customer service representative. The
Company closely tracks forecasted demand and hires and trains new customer
service representatives to maintain its service standards. The Company's call
center can efficiently handle up to 10,000 calls per day.
The Company uses an integrated management information system that allows
telephone orders to be captured on-line and mail orders to be efficiently
entered. As the Company's sales representative processes the order, the
Company's on-line data processing system provides, among other things, customer
history information, product availability information, expected shipping date
and order number. Customers can pay with major credit
30
<PAGE>
cards, checks or money orders. All credit charges are pre-authorized prior to
shipping the order and credit authorization occurs concurrently with order
processing.
Retail Stores, U.S. The Company's store management structure at its
Vitamin World stores consists of one regional manager for approximately every 11
district managers, one district manager for approximately every 11 stores, and
at the store level, on average, one store manager, one assistant store manager
and two sales personnel. Store managers are expected to customize stores to the
demographics of particular markets and to have responsibility for merchandise
assortment, promotion and certain advertising and product pricing. Store
managers are also responsible for the operations of individual stores including
recruiting and hiring store personnel. The Company offers continuing sales and
product training for its store personnel. Store personnel are compensated on a
salary plus commission basis.
Retail Stores, U.K. The Company's store management structure, training
program and compensation program at its Holland & Barrett stores is very similar
to that of its Vitamin World stores. Store management at Holland & Barrett
consists of one regional manager for approximately every 20 district managers,
one district manager for approximately every 20 stores, and at the store level,
on average, one store manager, one assistant store manager and two sales
personnel.
Wholesale. The Company's sales force currently consists of 60 dedicated
professionals responsible for accounts located throughout the United States, who
are paid on a salary plus commission basis. These personnel work with direct
accounts, distributors and individual retailers to enhance knowledge of the
Company's products and brands.
Customer Service. The Company operates an in-house customer service and
information department to respond to inquiries requesting information concerning
product applications, background data, ingredient compositions and the efficacy
of products. The Company maintains a toll-free customer service phone line to
answer product questions.
MARKETING
The Company's marketing strategies are supported by extensive advertising
and promotional programs ranging from national television advertising to
in-store sales promotions. At the heart of every effort is the Company's mission
statement which remains 'to deliver the highest quality nutritional supplements
with the best value to the customer.' These advertising and promotional programs
are also designed to achieve the specific objectives of each brand that the
Company markets.
The advertising objective of the Company's mail order brands in the U.S.
and the U.K. is to increase the mailing list by attracting new customers through
special offers on television, radio and in magazines, newspapers and through
in-home mailings. National advertising in Sunday newspaper supplements, for
example, introduce vitamin users to a smart way to save on their purchases by
buying direct from the manufacturer. Television advertising on national cable
networks invite viewers to call a toll free number to obtain a free copy of the
Puritan's Pride vitamin catalog. Another objective for the mail order division
is to increase the average order size through merchandising within the catalog
itself. The Company has also introduced a Puritan's Pride web site
(www.puritanspride.com) to provide yet another source of lead generation and
sales.
The Company-owned retail outlets in the U.S. and U.K. are supported
primarily through consumer print advertising, radio advertising and in-store
promotions. The objective for these retail advertising campaigns is to build
store traffic and sales. In the U.S., regional advertising in local newspapers
and on the radio position Vitamin World as the low price leader on a variety of
top quality nutritional supplements. An extensive print campaign in the U.K. is
designed to re-position the Company's chain of Holland & Barrett stores as the
source for 'everyday low prices' for a broad range of quality supplements.
In-store point-of-purchase merchandising materials in the U.S. and the U.K.
promote specific products and product groups at special 'direct from the
manufacturer prices.' These materials also help to educate the consumer as to
the benefits of the Company's products.
Within the wholesale brands of Nature's Bounty, Natural Wealth, Good 'N
Natural and American Health the objectives are to increase brand awareness among
the trade and consumers and to introduce and promote the use of new products
within the brand. With the rise in demand for high quality nutritional
supplements, the Company
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uses print and broadcast advertising to position its wholesale brands as the
leaders in the category. Trade advertising in industry magazines support the
'sell-in' of the Company's products to the drug stores, supermarkets,
discounters and health food stores. Print advertising in consumer magazines and
newspapers support the 'sell-through' of the new products to the consumer.
The advertising materials for each brand including point-of-purchase
materials, catalogs, nutrition information brochures, in-store signs, product
displays and price lists are all produced by the Company's wholly owned in-house
advertising agency. With the help of the latest computer design equipment, the
25 graphic art professionals which make up this in-house agency, also design the
packaging for the Company's over 900 products. NBTY's in-house graphics
capability allows the Company to react quickly to the changing demands of the
marketplace with promotional pieces and new products designed to increase sales
and profits.
WAREHOUSING AND DISTRIBUTION
The Company dedicates approximately 440,000 square feet to warehousing and
distribution in its Long Island, NY; Carbondale, IL; Reno, NV; and Southampton
and Hinckley, U.K. facilities.
The Company's warehouse and distribution centers are efficiently integrated
with the Company's order entry systems to enable the Company to ship out mail
orders typically within 48 hours of their receipt. Once a customer's telephone
order is completed, the Company's computer system forwards the order to the
Company's distribution center, where all necessary distribution and shipping
documents are printed to facilitate processing. Thereafter, the orders are
prepared, picked, packed and shipped continually through the day. The Company
operates a proprietary, state-of-the-art, automated picking and packing system
for frequently shipped items. The Company is capable of fulfilling 25,000 orders
daily. A system of conveyors automatically routes boxes carrying merchandise
throughout the distribution center for fulfillment of orders. Completed orders
are bar-coded and scanned and the merchandise and ship date are verified and
entered automatically into the customer order file for access by sales
associates prior to being shipped. The Company ships its orders primarily
through the U.S. Postal Service, serving domestic and international markets.
The Company currently distributes its products from its distribution
centers through contract and common carriers in the U.S. and by Company-owned
trucks in the U.K. Deliveries are made directly to Company-owned Vitamin World
stores once per week. In addition, the Company ships products overseas by
container loads. The Company also operates additional distribution centers in
Southampton and Hinckley, U.K. Deliveries are made directly to Company-owned
Holland & Barrett stores twice per week. The Company is currently in the process
of expanding its distribution capacity in the U.K. The Company delivers products
to distribution points in the U.S. through contract and common carriers as
directed by its retail customers.
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PROPERTIES
The following is a listing of all properties owned or leased by the
Company:
<TABLE>
<CAPTION>
APPROXIMATE LEASED OR EXPIRATION OF
LOCATION TYPE OF FACILITY SQUARE FEET OWNED LEASE
- ------------------------------------ --------------------------- ----------- --------- ---------------
<S> <C> <C> <C> <C>
UNITED STATES
Bohemia, New York................... Administration & production 169,000 owned
Bohemia, New York................... Manufacturing 80,000 owned
Bohemia, New York................... Manufacturing 75,000 owned
Holbrook, New York.................. Warehouse & distribution 230,000 owned
Holbrook, New York.................. Engineering 17,000 leased December 1998
Ronkonkoma, New York................ Warehouse & distribution 110,000 owned
Bayport, New York................... Production 17,500 owned
Bayport, New York*.................. Manufacturing 131,000 owned
Reno, Nevada........................ Warehouse 25,000 leased June 2001
Carbondale, Illinois................ Administration & production 80,000 owned
Carbondale, Illinois................ Warehousing 15,000 owned
South Plainfield, New Jersey........ Manufacturing 66,000 owned
Murphysboro, Illinois............... Manufacturing 65,000 owned
Cambridge, Massachusetts............ Administration 900 leased August 2020
UNITED KINGDOM
Southampton......................... Warehouse 9,000 leased September 2011
Hinckley............................ Warehouse & administration 50,000 leased October 2016
Nuneaton............................ Administration 9,000 leased June 2012
</TABLE>
NBTY currently operates approximately 150 retail stores under the Vitamin
World name. The stores have an average selling area of 1,200 square feet.
Generally, NBTY leases the stores for three to five years at annual base rents
ranging from $12,000 to $94,000 and percentage rents in the event sales exceed a
specified amount. Holland & Barrett leases all of the locations of its 417
retail stores for terms varying between 10 and 25 years at varying rents. The
stores have an average selling area of 1,200 square feet. No percentage rents
are payable.
* Situated on 62 acres owned by the Company which allows for construction of
additional facilities, if required.
COMPETITION
United States. The market for vitamins and other nutritional supplements
is highly competitive in all of NBTY's channels of distribution. With respect to
mail order sales, management believes that Puritan's Pride is the largest mail
order supplier of vitamins and other nutritional supplements and competes with a
large number of smaller, usually less geographically diverse, mail order
companies, some of which manufacture their own products and some of which sell
products manufactured by other companies. In its retail Vitamin World stores,
the Company competes regionally with specialty vitamin stores such as GNC and
local drug stores, health food stores, supermarkets, department stores and mass
merchandisers. NBTY's Nature's Bounty and Natural Wealth brands compete with
numerous vitamin marketers and manufacturers for sales to drug store chains and
supermarkets with heavily advertised national brands manufactured by large
pharmaceutical companies, as well as Your Life, Nature Made and Sundown,
marketed by Leiner Health Products, Inc., Pharmavite Corp. and Rexall Sundown,
Inc., respectively. It is not possible to accurately estimate the number of
competitors since the nutritional supplement industry is highly fragmented.
Management believes that NBTY competes favorably with other mail order
sellers of similar products on the basis of price and customer service,
including speed of delivery and new product offerings. Management believes that
NBTY competes favorably with the large pharmaceutical companies and other
companies that sell to wholesalers, on the basis of price, breadth of product
line, reputation and customer service, including innovative packaging and
displays and other services. Management believes that NBTY derives a competitive
advantage from its ability to manufacture and package its own vitamin and
nutritional supplement products, which affords it the flexibility to respond to
the shifting demands of each channel of distribution and,
33
<PAGE>
consequently, the ability to achieve the manufacturing and operating
efficiencies resulting from larger production runs of products that can be
packaged for sale in one or more such channels.
United Kingdom. As in the U.S., the market for sales of vitamins, minerals
and other nutritional supplements is highly competitive. H&B's principal
competitors are large pharmacy chains, including Boots, Lloyds and Superdrug and
major supermarket chains such as ASDA, Sainsbury and Tesco. There are also
approximately 1,300 independent retailers of health foods and nutritional
supplements in the U.K. market. In addition, GNC has recently entered the U.K.
market where it currently operates approximately 30 stores. As a result of the
acquisition, H&B tends to compete more effectively through improved store
formats, greater product offerings and value pricing.
MANAGEMENT INFORMATION SYSTEMS
Inventory Control. The Company has installed inventory and control systems
at its facilities that enable it to track each product as it is received from
its supply sources, through manufacturing and shipment to its customers. To
facilitate this tracking, a significant number of products sold by the Company
are bar coded. The Company's inventory control systems report shipping, sales
and individual SKU level inventory information. The Company manages the retail
sales process by monitoring customer sales and inventory levels by product
category. The Company believes that its distribution capabilities enable it to
increase flexibility in responding to the delivery requirements of its
customers.
The Company's inventory control systems report purchasing, receiving,
shipping, sales and individual SKU level inventory stocking information.
Information from the Company's point-of-sale computer system is regularly
reviewed and analyzed by the purchasing staff to assist in making merchandise
allocation and markdown decisions. The Company uses an automatic reorder system
to maintain in-stock positions on key items. This system provides management
with the information needed to determine the proper timing and quantity of
reorders.
Year 2000. At the present time, the Company believes that its systems are
substantially Year 2000 compliant and does not expect Year 2000 issues to
materially affect its products, services, competitive position or financial
performance. However, there can be no assurance that this will be the case.
Since the ability of third parties with whom the Company transacts business to
adequately address their Year 2000 issues is outside the Company's control,
there can be no assurance that the failure of such third parties to adequately
address their respective Year 2000 issues will not have a material adverse
effect on the Company's business, financial condition, cash flows and results of
operations.
Financial Reporting. The Company's financial reporting systems provide
management with detailed financial reporting to support management's operating
decisions and cost control efforts. This system provides functions such as
scheduling of payments, receiving of payments, general ledger interface, vendor
tracking and flexible reporting options.
GOVERNMENT REGULATION
United States. The manufacturing, packaging, labeling, advertising,
distribution and sale of NBTY's products are subject to regulation by one or
more federal agencies, the most active of which is the FDA. The Company's
products are also subject to regulation by the FTC, the Consumer Product Safety
Commission, the U.S. Department of Agriculture and the Environmental Protection
Agency, and by various agencies of the states and localities and foreign
countries in which NBTY's products are sold. In particular, the FDA, pursuant to
the Federal Food, Drug, and Cosmetic Act ('FDCA'), regulates production,
packaging, labeling and distribution of dietary supplements, including vitamins,
minerals and herbs, and over-the-counter ('OTC') drugs. In addition, the FTC has
jurisdiction to regulate advertising of dietary supplements and OTC drugs, while
the U.S. Postal Service regulates advertising claims with respect to such
products sold by mail order.
The FDCA has been amended several times with respect to dietary
supplements, most recently by the DSHEA and the Nutrition Labeling and Education
Act of 1990 ('NLEA'). DSHEA, enacted on October 15, 1994, introduced a new
statutory framework governing the composition and labeling of dietary
supplements. With respect to composition, DSHEA creates a new class of 'dietary
supplements,' dietary ingredients
34
<PAGE>
consisting of vitamins, minerals, herbs, amino acids and other dietary
substances for human use to supplement
the diet, as well as concentrates, metabolites, extracts or combinations of such
dietary ingredients. Generally, under DSHEA, dietary ingredients that were on
the market before October 15, 1994 may be sold without FDA preapproval and
without notifying the FDA. On the other hand, a new dietary ingredient (one not
on the market before October 15, 1994) requires proof that it has been used as
an article of food without being chemically altered or evidence of a history of
use or other evidence of safely establishing that it is reasonably expected to
be safe. The FDA must be supplied with such evidence at least 75 days before the
initial use of a new dietary ingredient. There can be no assurance that the FDA
will accept the evidence of safety for any new dietary ingredients that the
Company may decide to use, and the FDA's refusal to accept such evidence could
result in regulation of such dietary ingredients as food additives requiring FDA
pre-approval prior to marketing. In addition, the FDA recently has commenced a
case against a vitamin and herbal products manufacturer in which the FDA is
challenging the categorization of a certain product as a dietary supplement
rather than as a drug. Drugs, but not dietary supplements, are subject to full
FDA regulation. No assurance can be given that the FDA will not take a similar
position with respect to any of the Company's products.
As for labeling, DSHEA permits 'statements of nutritional support' for
dietary supplements without FDA pre-approval. Such statements may describe how
particular dietary ingredients affect the structure, function or general
well-being of the body, or the mechanism of action by which dietary ingredient
may affect body structure, function or well-being (but may not state that a
dietary supplement will diagnose, mitigate, treat, cure or prevent a disease). A
company making a statement of nutritional support must possess substantiating
evidence for the statement, disclose on the label that the FDA has not reviewed
that statement and indicate that the product is not intended for use for a
disease, and notify the FDA of the statement within 30 days after its initial
use. However, there can be no assurance that the FDA will not determine that a
given statement of nutritional support that the Company makes is not adequately
substantiated as required by DSHEA, or is a drug claim rather than a nutritional
support statement requiring the Company's submission, and the FDA's approval, of
a new drug application ('NDA'). Either determination could entail costly and
time-consuming clinical studies and in either situation, the Company may have to
delete or modify the statement or claim involved. In addition, DSHEA allows the
dissemination of 'third party literature' publications such as reprints of
scientific articles linking particular dietary ingredients with health benefits.
Third party literature may be used in connection with the sale of dietary
supplements to consumers at retail or by mail order. Such a publication may be
so distributed if, among other things, it is not false or misleading, no
particular manufacturer or brand of dietary supplement is mentioned, and a
balanced view of available scientific information on the subject matter is
presented. There can be no assurance, however, that all pieces of third party
literature that may be disseminated in connection with the Company's products
will be determined by the FDA to satisfy each of these requirements, and any
such failure could subject the product involved to regulation as a new drug.
Management anticipates that the FDA may promulgate GMP regulations
authorized by DSHEA, which are specific to dietary supplements. GMP regulations
would require supplements to be prepared, packaged and held in compliance with
such rules, and may require similar quality control provisions contained in the
GMP regulations for drugs. There can be no assurance that, if the FDA adopts GMP
regulations specific to dietary supplements, NBTY will be able to comply with
such GMP rules upon promulgation or without incurring material expense to do so.
The FDA has finalized regulations to implement certain labeling provisions
of DSHEA. In addition, further DSHEA labeling regulations are expected to be
proposed by the FDA once the agency receives the final report of the expert
Commission on Dietary Supplement Labels, established by DSHEA to provide
recommendations on labeling claims for supplements. The Commission on Dietary
Supplements issued its draft report in June 1997. It is uncertain when the final
report will be issued or when the FDA will propose further regulations. NBTY
cannot determine what effect such regulations, when promulgated, will have on
its business in the future. There can be no assurance that such regulations will
not require expanded or different labeling for NBTY's vitamins and nutritional
products or, among other things, require the recall, reformation or
discontinuance of certain products, additional record keeping, warnings,
notification procedures and expanded documentation of the properties of certain
products and scientific substantiation regarding ingredients, product claims,
safety or efficacy.
NLEA prohibits the use of any health claim (as distinguished from
'statements of nutritional support' permitted by DSHEA) for foods, including
dietary supplements, unless the health claim is supported by
35
<PAGE>
significant scientific agreement and is pre-approved by the FDA. To date, the
FDA has approved the use of health claims for dietary supplements only in
connection with the use of calcium for osteoporosis and the use of folic acid
for neural tube defects.
The FDA has broad authority to enforce the provisions of the FDCA
applicable to dietary supplements, including the power to seize adulterated or
misbranded products or unapproved new drugs, to request their recall from the
market, to enjoin their further manufacture or sale, to publicize information
about a hazardous product, to issue warning letters and to institute criminal
proceedings. Although the regulation of dietary supplements is less restrictive
than that imposed upon drugs and food additives, there can be no assurance that
dietary supplements will continue to be subject to the less restrictive
statutory scheme and regulations currently in effect. Further, there can be no
assurance that, if more stringent statutes are enacted or regulations are
promulgated, the Company will be able to comply with such statutes and
regulations without incurring material expense to do so.
The OTC pharmaceutical products distributed by the Company are subject to
regulation by a number of Federal and State governmental agencies. In
particular, the FDA regulates the formulation, manufacture, packaging and
labeling of all OTC pharmaceutical products pursuant to a monograph system
specifying OTC active drug ingredients that are generally recognized as safe and
effective for particular therapeutic conditions. Compliance with applicable FDA
monographs is required for the lawful interstate sale of OTC drugs. The FDA has
the same above-noted enforcement powers for violations of the FDCA by drug
manufactures as it does for such violations by dietary supplement producers.
The FTC, which exercises jurisdiction over the advertising of dietary
supplements, has, in the past several years instituted enforcement action
against several dietary supplement companies for false and misleading
advertising of certain products. These enforcement actions have resulted in
consent decrees and the payment of fines by the companies involved. In addition,
the FTC has increased its scrutiny of infomercials. The Company is currently
subject to an FTC consent decree for past advertising claims for certain of its
products, and the Company is required to maintain compliance with this decree
under pain of civil monetary penalties. Further, the U.S. Postal Service has
issued cease and desist orders against certain mail order advertising claims
made by dietary supplement manufacturers, including NBTY, and NBTY is required
to maintain compliance with this order, also under pain of civil monetary
penalties.
The Company is also subject to regulation under various international,
state and local laws that include provisions regulating, among other things, the
marketing of dietary supplements and the operations of direct sales programs.
The Company may be subject to additional laws or regulations administered by the
FDA or other federal, state, or foreign regulatory authorities, the repeal of
laws or regulations that it considers favorable, such as DSHEA, or more
stringent interpretations of current laws or regulations, from time to time in
the future. The Company is unable to predict the nature of such future laws,
regulations, interpretations or applications, nor can it predict what effect
additional governmental regulations or administrative orders, when and if
promulgated, would have on its business in the future. These regulations could,
however, require the reformation of certain products to meet new standards, the
recall or discontinuance of certain products not able to be reformulated,
imposition of additional record keeping requirements, expanded documentation of
the properties of certain products, expanded or different labeling, and/or
scientific substantiation. Any or all such requirements could have a material
adverse effect on the Company's results of operations and financial condition.
See 'Risk Factors--Government Regulation.'
United Kingdom. In the U.K., the manufacture, advertising, sale and
marketing of food products is regulated by a number of government agencies
including the MAFF and the Department of Health. In addition, there are various
independent committees and agencies that report to the government, such as the
Food Advisory Committee, which reports to MAFF and suggests appropriate courses
of action by the relevant government department where there are areas of concern
relating to food, and the Committee on Toxicity, which reports to the Department
of Health. The relevant legislation governing the sale of food includes the Food
Safety Act of 1990, which sets out general provisions relating to the sale of
food; for example, this law makes it unlawful to sell food that is harmful to
human health. In addition, there are various statutory instruments and E.C.
regulations governing specific areas such as the use of sweeteners, coloring and
additives in food. Trading standards officers under the control of the
Department of Trade and Industry also regulate matters such as the cleanliness
of the properties on which food is produced and sold.
36
<PAGE>
Food that has medicinal properties may fall under the jurisdiction of the
MCA, a regulatory authority whose responsibility is to ensure that all medicines
sold or supplied for human use in the U.K. meet acceptable standards of safety,
quality and efficacy. These standards are determined by the 1968 Medicines Act
together with an increasing number of E.C. regulations and directives laid down
by the European Union. The latter take precedence over national law. The MCA has
a 'borderline department' which determines when food should be treated as a
medicine and should therefore fall under the relevant legislation relating to
medicines. The MCA operates as the agent of the licensing authority (the United
Kingdom Health Ministers) and its activities cover every facet of medicines
controlled in the U.K. including involvement in the development of common
standards or medicines controlled in Europe. The MCA is responsible, for
example, for licensing, inspection and enforcement to ensure that legal
requirements concerning manufacture, distribution, sale, labeling, advertising
and promotion are upheld.
On April 2, 1998, the U.K. Government introduced proposals to limit the
free sale of Vitamin B6 products with a daily dose under 10 mg. A Parliamentary
Select Committee will be carrying out an inquiry and submitting its report. This
will involve a consultation period of up to three months, during which time the
proposals will also be considered by the European commission. The U.K.
Government will then review the position before any legislation is introduced.
TRADEMARKS
NBTY owns more than 300 trademarks registered or pending with the United
States Patent and Trademark Office and many foreign jurisdictions for its
Nature's Bounty, Puritan's Pride, Vitamin World, Holland & Barrett, Good 'N
Natural, Hudson, American Health and Natural Wealth brands and has rights to use
other names essential to its business. U.S. registered trademarks have a
perpetual life, as long as they are renewed on a timely basis and used properly
as trademarks, subject to the rights of third parties to seek cancellation of
the marks. NBTY regards its trademarks and other proprietary rights as valuable
assets and believes they have significant value in the marketing of its
products. NBTY vigorously protects its trademarks against infringement.
EMPLOYEES
As of March 31, 1998, NBTY employed approximately 4,200 persons worldwide,
with approximately 2,000 in the U.S. and 2,200 in the U.K. None of NBTY's
employees are represented by a labor union. NBTY believes that its relationship
with its employees is excellent. For information regarding employment agreements
with certain executive officers and other key employees, see
'Management--Employment Agreements.'
LITIGATION
From time to time, the Company is engaged in various legal actions and
proceedings in the ordinary course of its business. These matters relate, among
other things, to product liability. The Company does not believe that it is
currently a party to any litigation that will have a material adverse effect on
its business, results of operations or financial condition. See 'Risk
Factors--Legal Matters.'
37
<PAGE>
MANAGEMENT
Set forth below are the names and other relevant information regarding
executive officers and directors of the Company.
<TABLE>
<CAPTION>
YEARS
WITH THE
NAME AGE POSITION COMPANY
- ----------------------------------------------- --- ----------------------------------------------- ---------
<S> <C> <C> <C>
Scott Rudolph.................................. 40 Chairman of the Board, Chief Executive Officer 12
and President
Harvey Kamil................................... 54 Executive Vice President, Chief Financial 16
Officer and Secretary
Barry Drucker.................................. 49 Senior Vice President--Sales 22
James P. Flaherty.............................. 41 Vice President, Marketing & Advertising 19
James A. Taylor................................ 57 Vice President--Production 17
Arthur Rudolph................................. 70 Director 27
Aram Garabedian................................ 62 Director 27
Bernard G. Owen................................ 69 Director 27
Alfred Sacks................................... 70 Director 27
Murray Daly.................................... 71 Director 27
Glenn Cohen.................................... 38 Director 10
Bud Solk....................................... 64 Director 4
Nathan Rosenblatt.............................. 41 Director 4
Michael L. Ashner.............................. 45 Director 1
</TABLE>
The Directors of the Company are divided into three classes and are elected
to serve a three year term or until their respective successors are elected and
qualified. Officers of the Company hold office until the meeting of the Board of
Directors immediately following the next annual stockholders' meeting or until
removal by the Board, with or without cause.
Scott Rudolph is the Chairman of the Board of Directors, Chief Executive
Officer and President. Mr. Rudolph founded U.S. Nutrition, a mail order vitamin
company in 1976, which was purchased by the Company in 1986. He is the Chairman
of Dowling College, Long Island, New York. He joined the Company in 1986. He is
the son of Arthur Rudolph.
Harvey Kamil is Executive Vice President, Chief Financial Officer and
Secretary. He is on the Board of Directors of the Council for Responsible
Nutrition. He joined the Company in 1982. He is a Certified Public Accountant
and a Certified Management Accountant.
Barry Drucker is Senior Vice President--Sales. He joined the Company in
1976.
James P. Flaherty is Vice President, Marketing & Advertising. He joined the
Company in 1979.
James E. Taylor is Vice President--Production. He joined the Company in
1981.
Arthur Rudolph founded Arco Pharmaceuticals, Inc., the Company's
predecessor, in 1960 and served as the Company's Chief Executive Officer and
Chairman of the Board of Directors since that date until his resignation in
September 1993. He remains a member of the Board of Directors and was
responsible for the formation of the Company in 1971. He is the father of Scott
Rudolph.
Aram Garabedian has been, since 1988, a real estate developer in Rhode
Island. He was associated with the Company and its predecessor, Arco
Pharmaceuticals, Inc., for 20 years in a sales capacity and as an officer. He
has served as a director since 1971.
Bernard G. Owen has been associated with Cafiero, Cuchel and Owen Insurance
Agency, Pitkin, Owen Insurance Agency and Wood-HEW Travel Agency. He currently
serves as Chairman of these firms.
Alfred Sacks has been engaged as President of Al Sacks, Inc., an insurance
agency for the past thirty years.
Murray Daly, formerly a Vice President of J. P. Egan Office Equipment Co.,
is currently a consultant to the office equipment industry.
38
<PAGE>
Glenn Cohen has been the President of Glenn-Scott Landscaping and Design
for more than five years.
Bud Solk has been President of Chase/Ehrenberg & Rosene, Inc., an
advertising and marketing agency located in Chicago, Illinois since 1995.
Previously, Mr. Solk had been President of Bud Solk Associates, Inc., which he
founded in 1958.
Nathan Rosenblatt is the President and Chief Executive Officer of Ashland
Maintenance Corp., a commercial maintenance organization located in Long Island,
New York.
Michael L. Ashner is the President and Chief Executive Officer of Winthrop
Financial Associates, a firm engaged in the organization and administration of
real estate limited partnerships.
EMPLOYMENT AGREEMENTS
Scott Rudolph, Chairman of the Board, President and Chief Executive Officer
of the Company, entered into an employment agreement effective February 1, 1994,
as amended, to terminate January 31, 2004. During the period of the employment
agreement, the salary payable to Scott Rudolph shall be fixed by the Board of
Directors of the Company, provided that in no event will the executive salary be
at a rate lower than $600,000 per year, with bonuses, certain fringe benefits
accorded other executives of NBTY, and with annual cost of living index
increases.
Harvey Kamil, Executive Vice President, Chief Financial Officer and
Secretary of the Company, entered into an employment agreement effective
February 1, 1994, as amended, to terminate January 31, 2004. During the period
of the employment agreement, the salary payable to Harvey Kamil shall be fixed
by the Board of Directors of the Company, provided that in no event will the
executive salary be at a rate lower than $300,000 per year, with bonuses,
certain fringe benefits accorded other executives of NBTY, and with annual cost
of living index increases.
Each of the above agreements also provides for the immediate acceleration
of the payment of all compensation for the term of the contract and the
registration and sale of all issued stock, stock options and shares underlying
options in the event of certain changes of control, or involuntary (i)
termination of employment, (ii) reduction of compensation, or (iii) diminution
of responsibilities or authority.
Effective January 1, 1997, the Company entered into a consulting agreement
with Rudolph Management Associates, Inc. for the services of Arthur Rudolph, a
director of the Company. The agreement has been renewed to provide services from
January 1, 1998 through December 31, 2000 with the consulting fee fixed by the
Board of Directors of the Company, provided that in no event will the consulting
fee be at a rate lower than $400,000 per year, payable monthly, with certain
fringe benefits accorded to other executives of NBTY.
On April 20, 1998, the Company entered into a one year consulting agreement
with Michael C. Slade, one of the former shareholders of Nutrition Headquarters
Group. Under the terms of the agreement, Mr. Slade will be the President of
Nutrition Headquarters Group subsidiary and will receive an annual compensation
of $275,000, renewable at Mr. Slade's option, for up to two additional one-year
periods. The agreement also provides for fringe benefits accorded other
executives of NBTY.
Four members of Holland & Barrett's senior executive staff have service
contracts, terminable by the Company upon twelve months notice, at salaries
ranging between approximately $75,000 per year and $200,000 per year.
39
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The information in the following table sets forth certain information with
respect to the beneficial ownership of the Common Stock of the Company as of the
date of this Prospectus, by (i) each executive officer of the Company, (ii) each
director of the Company, (iii) each person who beneficially owns more than 5% of
the outstanding shares of the Company's Common Stock, (iv) all directors and
executive officers of the Company as a group, and (v) the Selling Stockholders,
and as adjusted at that date to reflect the sale by the Company and the Selling
Stockholders of the shares of Common Stock offered hereby and assuming the
Underwriters' over-allotment option is not exercised. Except as noted below,
each person or entity has sole voting and investment power with respect to the
shares shown.
<TABLE>
<CAPTION>
COMMON STOCK OWNED
BEFORE THE NUMBER OF COMMON STOCK OWNED
OFFERING(1) SHARES AFTER THE OFFERING(1)
--------------------- BEING ---------------------
NAME NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------------------------------ ---------- ------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
Scott Rudolph(2)(3) .................................. 11,901,663 17.6% -- 11,901,663 16.8%
c/o NBTY, Inc.
90 Orville Drive
Bohemia, NY 11716
Harvey Kamil ......................................... 1,611,906 2.5% -- 1,611,906 2.3%
c/o NBTY, Inc.
90 Orville Drive
Bohemia, NY 11716
Michael C. Slade ..................................... 4,093,639 6.3% 2,100,000 1,993,639 2.9%
c/o Herrick, Feinstein
2 Park Avenue
New York, NY 10016
Abraham Feldman Trust F/B/O .......................... 2,339,222 3.6% 1,750,000 589,222 0.9%
Ruth Slade
c/o Herrick, Feinstein
2 Park Avenue
New York, NY 10016
Abraham Feldman Trust F/B/O .......................... 2,339,223 3.6% 1,750,000 589,223 0.9%
Steven Lenger
c/o Herrick, Feinstein
2 Park Avenue
New York, NY 10016
NBTY Employee Stock Ownership Plan.................... 3,117,204 4.8% -- 3,117,204 4.6%
Nicholas-Applegate Capital Mgmt.(4) .................. 3,872,400 6.0% -- 3,872,400 5.7%
600 West Broadway, 29th Floor
San Diego, California 92101
Pilgrim Baxter & Associates, Ltd.(5) ................. 4,713,900 7.3% -- 4,713,900 7.0%
825 Duportail Road
Wayne, Pennsylvania 19087
Directors:
Arthur Rudolph...................................... 2,056,893 3.2% -- 2,056,893 3.0%
Aram Garabedian..................................... 42,000 * -- 42,000 *
Bernard G. Owen..................................... 82,500 * -- 82,500 *
Alfred Sacks........................................ 0 * -- 0 *
Murray Daly......................................... 32,000 * -- 32,000 *
Glenn Cohen......................................... 87,000 * -- 87,000 *
Bud Solk............................................ 0 * -- 0 *
Nathan Rosenblatt................................... 0 * -- 0 *
Michael Ashner...................................... 0 * -- 0 *
All Directors and Executive Officers as a group (11 15,813,962 22.9% -- 15,813,962 21.9%
persons)............................................
</TABLE>
(Footnotes on next page)
40
<PAGE>
(Footnotes on next page)
- ------------------
(1) Each named person or group is deemed to be the beneficial owner of
securities which may be acquired within 60 days through the exercise or
conversion of options, if any, and such securities are deemed to be
outstanding for the purpose of computing the percentage beneficially owned
by such person or group. Such securities are not deemed to be outstanding
for the purposes of computing the percentage of securitiesbeneficially owned
by any other person or group. Accordingly, the indicated number of shares
includes shares issuable upon exercise of options (including employees stock
options) and any other beneficial ownership of securities held by such
person or group.
(2) Includes shares held in a Trust created by Arthur Rudolph for the benefit of
Scott Rudolph and other family members.
(3) Included in the shares beneficially owned by Messrs. Scott Rudolph, Kamil
and certain other executive officers and directors, are presently
exercisable options with respect to 3,000,000, 840,000 and 486,000 shares,
respectively.
(4) As reported in a Schedule 13G dated February 3, 1998.
(5) As reported in a Schedule 13G dated February 12, 1998.
* Denotes less than one percent.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 75,000,000 shares of
Common Stock, $.008 par value per share. As of April 30, 1998, there were
approximately 64,810,221 shares of Common Stock issued and outstanding, held of
record by approximately 684 stockholders. After giving effect to the Offering,
there will be 67,810,221 shares of Common Stock issued and outstanding (which
excludes 4,326,000 shares of Common Stock which are issuable by the Company upon
exercise of outstanding options, all of which are held by Management, and
450,000 shares of Common Stock pursuant to the Underwriters' over-allotment
option). The Company will seek approval to increase its authorized capital stock
at its next meeting of stockholders.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters
submitted to a vote of stockholders, including the election of directors. The
Common Stock does not permit cumulative voting in the election of directors,
which means that the holders of a majority of the shares voting for election of
directors can elect all members of the Board of Directors. A plurality voice is
sufficient for the election of directors, and a majority vote is required for
other actions that require the vote or concurrence of stockholders. Dividends
may be paid to holders of Common Stock when and if declared by the Board of
Directors out of funds legally available therefor. In the event of dissolution
or liquidation of the Company, holders of Common Stock would be entitled to
share ratably in the assets of the Company remaining after payment to all
creditors.
The holders of Common Stock have no preemptive or conversion rights, and
there are no redemption or sinking fund provisions applicable to the Common
Stock. All of the outstanding shares of Common Stock are, and the shares being
offered by the Company hereunder will be, upon issuance and sale, fully paid and
nonassessable.
TRANSFER AGENT
The transfer agent of the Common Stock is American Stock Transfer and Trust
Company, New York, New York.
CERTAIN PROVISIONS OF THE DELAWARE GENERAL CORPORATION LAW ('DGCL')
Section 228 of the DGCL allows any action which is required to be or may be
taken at a special or annual meeting of the stockholders of a corporation to be
taken without a meeting with the written consent of holders of outstanding stock
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares entitled to vote
thereon were present and voted, provided that the certificate of incorporation
of such corporation does not contain a provision to the contrary. The
Certificate of Incorporation of the Company contains no such provision, and
therefore, pursuant to Section 228 and the By-
41
<PAGE>
laws, stockholders holding a majority of the voting power of the Common Stock
will be able to effect most corporate matters requiring stockholder approval by
written consent, without the need for a duly-noticed and duly-held meeting of
stockholders. See 'Risk Factors--Control by Principal Stockholders.'
ANTI-TAKEOVER CONSIDERATIONS
The Company's Certificate of Incorporation and By-Laws include certain
provisions which could be described as anti-takeover provisions.
The Certificate of Incorporation and By-Laws provide that the Company's
Board of Directors, currently compromised of ten members, be divided into three
classes, with staggered terms. Each director serves a three year term and holds
office until his successor is elected and qualified. Classification of the Board
of Directors may have the effect of making the removal of incumbent directors
more time-consuming and difficult, and, therefore, may have the effect of
discouraging an unsolicited takeover attempt to gain control of the Board
through a proxy solicitation.
The Certificate of Incorporation provides that, unless certain conditions
are satisfied, the affirmative vote of not less than 75% of the outstanding
shares of Common Stock of the Company entitled to vote, as a class, in elections
of directors is required for the adoption or authorization of certain
extraordinary corporation actions with Related Persons (as defined in the
Certificate of Incorporation). Such extraordinary corporate actions include, but
are not limited to, any merger or consolidation of the Company with or into any
Related Person or the adoption of any proposal or plan for the liquidation or
dissolution of the Company proposed by or on behalf of any Related Person.
The Certificate of Incorporation provides that no amendment may be made
which amends, alters, changes or repeals the provisions mentioned in the above
paragraph without the affirmative vote of not less than 75% of the shares of
Common Stock of the Company entitled to vote, considered as a class, in
elections of directors; provided, however, that such 75% vote is not required
for any amendment, alteration, change or repeal recommended to the stockholders
by a majority of the Continuing Directors (as defined in the Certificate of
Incorporation).
The above provisions, among others, may have the effect of delaying,
deferring or preventing a change in control of the Company, may discourage bids
for the Common Stock at a premium over the market price of the Common Stock and
may adversely affect the market price of the Common Stock and the voting and
other rights of the holders of the Common Stock.
The Company expects that the Board of Directors may in the future review
the advisability of adopting other measures which may affect takeovers in the
context of applicable law and judicial decisions.
DESCRIPTION OF CERTAIN INDEBTEDNESS
SENIOR SUBORDINATED NOTES DUE 2007
On September 23, 1997, the Company issued an aggregate of $150,000,000
principal amount of 8 5/8% Senior Subordinated Notes due 2007 (the 'Notes').
The Notes are not redeemable, in whole or in part, prior to September 15,
2002. Notwithstanding the foregoing, at any time on or before September 15,
2000, the Company may redeem up to 33 1/3% of the aggregate principal amount of
the Notes, in whole or in part, with the net cash proceeds of one or more public
equity offerings at a redemption price equal to 108.625% of the principal amount
thereof, plus accrued and unpaid interest, if any, to the date of redemption.
Upon the occurrence of a change of control, the Company will be required to make
an offer to repurchase all outstanding Notes at 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest, if any, to the date of
repurchase.
The indenture governing the Notes contains certain covenants with respect
to the Company that limit the ability of the Company to, among other things, (i)
incur additional indebtedness, (ii) pay dividends on, or redeem capital stock of
the Company, or make certain other distributions, (iii) make certain
investments, (iv) create certain liens, (v) sell certain assets, (vi) enter into
certain transactions with affiliates, or (vii) enter into certain mergers or
consolidations involving the Company.
42
<PAGE>
DESCRIPTION OF THE REVOLVING CREDIT FACILITY
The Revolving Credit Facility is provided by a syndicate of banks and other
financial institutions led by The Chase Manhattan Bank, as administrative agent
(the 'Agent'), and provides for borrowings in an aggregate principal amount of
up to $60.0 million. The following summary of the Revolving Credit Facility does
not purport to be complete and is subject to, and qualified in its entirety by
reference to, the Revolving Credit Facility.
Security Guarantees. The obligations of the Company under the Revolving
Credit Facility are unconditionally and irrevocably guaranteed, jointly and
severally, by each direct and indirect domestic subsidiary of the Company and
each subsequently acquired or organized subsidiary of the Company. In addition,
the obligations of the Company under the Revolving Credit Facility and the
guarantees thereunder are secured by substantially all of the non-real estate
assets of the Company and the guarantors.
Interest. The Revolving Credit Facility is a six-year facility and bears
interest at a rate per annum equal (at the Company's option) to: (i) the Agent's
Eurodollar rate plus an applicable margin, (ii) an alternate base rate plus an
applicable margin or (iii) the Agent's Eurocurrency rate plus an applicable
margin. Principal amounts under the revolving Credit Facility not paid when due
shall bear interest at a default rate equal to 2.00% per annum above the
otherwise applicable rate. Other amounts not paid when due under the Revolving
Credit Facility shall bear interest at the rate then applicable to alternate
base rate loans under the Revolving Credit Facility plus 2.00% per annum.
Prepayments. Voluntary prepayments of borrowings under the Revolving
Credit Facility and voluntary reductions of the unutilized portions of the
Revolving Credit Facility are permitted at any time in minimum principal amounts
to be agreed upon.
Covenants. The Revolving Credit Facility contains a number of covenants,
that, among other things, restrict the ability of the Company and its
subsidiaries, subject to certain exceptions, to dispose of assets, incur
additional indebtedness, incur guarantee obligations, repay other indebtedness
or amend other debt instruments, make distributions or pay dividends on
partnership interest or capital stock, redeem and repurchase partnership
interests or capital stock, create liens on assets, enter into sale and
leaseback transactions, make investments, loans or advances, make acquisitions,
engage in mergers or consolidations, change the business conducted by the
Company or its subsidiaries, make capital expenditures or engage in certain
transactions with affiliates and otherwise restrict certain business activities.
In addition, the Company is required to comply with specified financial ratios
and tests, including minimum fixed charge coverage ratios, maximum leverage
ratios and minimum net worth tests.
The Revolving Credit Facility also contains provisions that prohibit any
modification of the indenture in any manner adverse to the lenders and that
limit the Company's ability to refinance or otherwise prepay the Exchange Notes
without the consent of such lenders.
Events of Default. The Revolving Credit Facility contains customary events
of default, including payment defaults, breach of representations and
warranties, covenant defaults, cross-defaults and cross-acceleration to certain
other indebtedness, certain events of bankruptcy and insolvency, Employee
Retirement Income Security Act of 1974 events, judgment defaults, actual or
asserted invalidity of any security documents or guarantees, change of control,
the voluntary creation of security interest relating to partnership interests in
the Company or the voluntary creation of any prohibition on the creation of such
security interests.
SHARES ELIGIBLE FOR FUTURE SALE
After the Offering, approximately 67,810,221 shares of Common Stock will be
issued and outstanding (which excludes 4,326,000 shares of Common Stock which
are issuable by the Company upon exercise of outstanding options, all of which
are held by management, and 450,000 shares of Common Stock, pursuant to the
Underwriters' over-allotment option). The shares of Common Stock offered hereby
will be freely tradable by persons who are not affiliates of the Company without
restriction or further registration under the Securities Act. Substantially all
of the other outstanding shares of Common Stock, other than shares held by
officers, directors and other affiliates of the Company, are freely tradable.
Pursuant to Rule 144 of the Securities Act ('Rule 144'), shares of Common Stock
held by affiliates of the Company are subject to limitations on volume that may
be sold
43
<PAGE>
other than sales pursuant to a registration statement under the Securities Act
or another applicable exemption from registration thereunder.
Scott Rudolph, Harvey Kamil, and certain other officers are eligible to
sell their shares of Common Stock pursuant to Rule 144 under the Securities Act
at prescribed times and subject to the manner of sale, volume, notice and
information restrictions of Rule 144. The Company has granted Michael C. Slade
and former shareholders of the Nutrition Headquarters Group certain demand and
piggyback registration rights covering an aggregate of 8,772,084 shares of
Common Stock (3,172,084 shares after the consummation of the Offering). The
executive officers, directors and the Selling Stockholders, who collectively are
the beneficial owners of an aggregate of 24,586,046 shares of Common Stock
(18,986,046 shares after the consummation of the Offering), and the Company have
agreed with the Underwriters, subject to certain exceptions, not to directly or
indirectly, (and, except as may be disclosed herein, will not announce or
disclose any intention to) sell, contract to sell, grant any option or warrant
for the sale of, register, loan, pledge, grant any rights with respect to or
otherwise dispose of, without the prior written consent of Smith Barney Inc.,
any Common Stock, or any securities convertible into or exchangeable or
exercisable for Common Stock (including, without limitation, any of the economic
attributes thereof) for a period of 270 days, in the case of the Company and the
Selling Stockholders, and for a period of 120 days, in the case of the executive
officers and directors who are not Selling Stockholders, after the date of this
Prospectus. Upon the expiration or termination of such restrictive period, such
holders, will, in general be entitled to dispose of their shares of Common
Stock, although the shares of Common Stock held by affiliates of the Company
will continue to be subject to the restrictions of Rule 144 under the Securities
Act. See 'Shares Eligible for Future Sale' and 'Underwriting.'
44
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
among the Company, the Selling Stockholders and the Underwriters (the
'Underwriting Agreement'), the Company and the Selling Stockholders have agreed
to sell to each of the Underwriters named below, and each of the Underwriters,
for whom Smith Barney Inc., Lehman Brothers Inc., Adams, Harkness & Hill, Inc.,
Raymond James & Associates, Inc. and Piper Jaffray Inc. are acting as the
representatives (the 'Representatives'), has severally agreed to purchase the
number of shares of Common Stock (the 'Shares') set forth opposite its name
below:
<TABLE>
<CAPTION>
UNDERWRITING
UNDERWRITER COMMITMENT
- ------------------------------------------------------------------------------------------ ------------
<S> <C>
Smith Barney Inc.......................................................................... 1,720,000
Lehman Brothers Inc....................................................................... 1,720,000
Adams, Harkness & Hill, Inc............................................................... 1,720,000
Raymond James & Associates, Inc........................................................... 1,720,000
Piper Jaffray Inc......................................................................... 1,720,000
------------
Total................................................................................ 8,600,000
------------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters (the 'Underwriters') to pay for and accept delivery of the Shares
are subject to approval of certain legal matters by counsel and to certain other
conditions. The Underwriting Agreement provides that the obligations of the
Underwriters are such that if any of the Shares are purchased by the
Underwriters pursuant to the Underwriting Agreement, all the Shares (not
including the Shares subject to the Underwriters' over-allotment options) agreed
to be purchased by the Underwriters must be so purchased.
The Company has been advised by the Representatives that the several
Underwriters initially propose to offer such shares to the public at the price
to public set forth on the cover page of this Prospectus and to certain dealers
at a price that represents a concession not in excess of $.44 per share below
the price to public. The Underwriters may allow, and such dealers may re-allow,
a concession not in excess of $.10 per share to the other Underwriters or to
certain other dealers. After the Offering, the price to public and such
concessions may be changed by the Underwriters.
The Company and the Selling Stockholders have granted to the Underwriters
an option excercisable during the 30-day period after the date of this
Prospectus, to purchase up to an aggregate 1,290,000 additional shares of Common
Stock at the price to public set forth on the cover page of this Prospectus less
the underwriting discount, solely to cover the over-allotment, if any, in
connection with the sale of the shares offered hereby. To the extent that the
Underwriters exercise such option, the Underwriters will be committed, subject
to certain conditions, to purchase a number of option shares proportionate to
such Underwriter's initial commitment. The Underwriting Agreement provides that,
in the event of a default by an Underwriter, in certain circumstances the
purchase commitments of non-defaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.
Each Underwriter has severally agreed that, as part of the distribution of
the Shares offered by the Underwriters, (i) it is not purchasing any Shares for
the account of anyone other than a United States or Canadian Person, (ii) it has
not offered or sold, and will not offer or sell, directly or indirectly, any
Shares or distribute this Prospectus to any person outside of the United States
or Canada, or to anyone other than a United States or Canadian Person and (iii)
any dealer to whom it may sell any Shares will represent that it is not
purchasing for the account of anyone other than a United States or Canadian
Person and agree that it will not offer or resell, directly or indirectly, any
Shares outside of the United States or Canada, or to anyone other than a United
States or Canadian Person or to any other dealer who does not so represent and
agree.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the Underwriting Agreement, including:
(i) certain purchases and sales between the Underwriters, (ii) certain offers,
sales, resales, deliveries or distributions to or through investment advisors or
other persons exercising investment discretion and (iii) other transactions
specifically approved by the Representatives. 'United States or Canadian Person'
means any person who is a national or resident of the United States or Canada,
any corporation, partnership or other entity created or organized in or under
the laws of the United States or Canada or of any political subdivision thereof,
and any estate or trust the income of which is subject to United States or
45
<PAGE>
Canadian federal income taxation, regardless of its source (other than any
non-United States or non-Canadian branch of any United States or Canadian
Person), and includes any United States or Canadian branch of a person other
than a United States or Canadian Person.
Any offer of the Shares in Canada will be made only pursuant to an
exemption from the prospectus filing requirement and an exemption from the
dealer registration requirement (where such an exemption is not available,
offers shall be made only by a registered dealer) in the relevant Canadian
jurisdiction where such offer is made. Purchasers of the Shares offered hereby
may be required to pay stamp taxes and other charges in accordance with the laws
and practices of the country of purchase, in addition to the offering price set
forth on the cover page hereof.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will jointly and severally indemnify the Underwriters against
certain liabilities and expenses, including liabilities under the Securities
Act, or contribute to payments the Underwriters may be required to make in
respect thereof.
Each Underwriter agrees that (i) it will not offer or sell any shares to
persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances which will not involve an offer to the public in the United
Kingdom within the meaning of the Public Offers of Securities Regulations 1995
('the Regulations'); (ii) it will comply with all applicable provisions of the
Financial Services Act of 1986 and the Regulations with respect to anything done
by it in relation to the shares in, from or otherwise involving the United
Kingdom; and (iii) it will only issue or pass on to any person in the United
Kingdom any document received by it in connection with the offer of the shares
if that person is of a kind described in Article 11(3) of the Financial Services
Act of 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a person
to whom such document may otherwise lawfully be issued or passed on.
No action has been or will be taken in any jurisdiction by the Company, the
Selling Stockholders or the Underwriters that would permit an offering to the
general public of the shares offered hereby in any jurisdiction other than the
United States.
The executive officers, directors and the Selling Stockholders, who
collectively are the beneficial owners of an aggregate of 24,586,086 shares of
Common Stock (17,800,004 shares after the consummation of the Offering), and the
Company have agreed with the Underwriters, subject to certain exceptions, not to
directly or indirectly, (and, except as may be disclosed herein, will not
announce or disclose any intention to) sell, contract to sell, grant any option
or warrant for the sale of, register, loan, pledge, grant any rights with
respect to or otherwise dispose of, without the prior written consent of Smith
Barney Inc., any Common Stock, or any securities convertible into or
exchangeable or exercisable for Common Stock (including, without limitation, any
of the economic attributes thereof) for a period of 270 days, in the case of the
Company and the Selling Stockholders, and for a period of 120 days, in the case
of the executive officers and directors of the Company after the date of this
Prospectus. Upon the expiration of such restrictive period, such holders, will,
in general be entitled to dispose of their shares of Common Stock, although the
shares of Common Stock held by affiliates of the Company will continue to be
subject to the restrictions of Rule 144 under the Securities Act. See 'Shares
Eligible for Future Sale.'
During and after the Offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include overallotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with the Offering. The Underwriters also may impose a
penalty bid, whereby selling concessions allowed to syndicate members of other
broker-dealers in respect of the Shares of Common Stock sold in the Offering for
their account may be reclaimed by the syndicate if such Shares are repurchased
by the syndicate in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Common Stock
which may be higher than the price that might otherwise prevail in the open
market. The Underwriters are not required to engage in any of these activities
and any such activities, if commenced, may be discontinued at any time.
Smith Barney Inc. and certain of the other Representatives and their
affiliates have provided and may continue to provide investment banking or other
services to the Company and its affiliates.
46
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Michael C. Duban, Esq., White Plains, New York, a shareholder of the
Company's Common Stock. Certain legal matters relating to this Offering will be
passed upon for the Underwriters by Cahill Gordon & Reindel (a partnership
including a professional corporation), New York, New York.
EXPERTS
The supplemental consolidated balance sheets of NBTY, Inc. and Subsidiaries
(the 'Company') as of September 30, 1997 and 1996 and the supplemental
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended September 30, 1997, and the consolidated
balance sheets of the Company as of September 30, 1997 and 1996 and the
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended September 30, 1997 included in this
Registration Statement and the combined balance sheets of Nutrition
Headquarters, Inc. and Lee Nutrition, Inc. as of September 30, 1997 and 1996 and
the combined statements of operations, stockholders equity and cash flows for
each of the three years in the period ended September 30, 1997 included in the
Company's Current Report on Form 8-K/A incorporated by reference in this
Registration Statement have been included or incorporated herein in reliance on
the reports of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in auditing and accounting.
The balance sheets of Nutro Laboratories, Inc. as of September 30, 1997 and
1996 and the statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 1997 included in the
Company's Current Report on Form 8-K/A incorporated by reference in this
Registration Statement have been incorporated herein in reliance on the report
of Amper, Politziner & Mattia P.A., independent accountants, given on the
authority of that firm as experts in auditing and accounting.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
'Commission') in Washington, D.C. a Registration Statement on Form S-3 (the
'Registration Statement') under the Securities Act with respect to the Common
Stock offered hereby. As used herein, the term 'Registration Statement' means
the initial Registration Statement and any and all amendments thereto. This
Prospectus omits certain information contained in the Registration Statement as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement, including the exhibits thereto.
Statements herein concerning the contents of any contract or other document are
not necessarily complete and in each instance reference is made to such contract
or other document filed with the Commission as an exhibit to the Registration
Statement, each such statement being qualified by and subject to such reference
in all respects.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the '1934 Act'), and in accordance therewith
files reports and other information with the Commission. Reports, registration
statements, proxy statements and other information filed by the Company with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, and at the Commission's Regional Offices: 500 West
Madison Avenue, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center,
Suite 1300, New York, New York 10048. Copies of such materials can be obtained
at prescribed rates from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The Commission also
maintains a site on the World Wide Web, the address of which is
http://www.sec.gov, that contains reports, proxy and information statements and
other information regarding issuers, such as the Company, that file
electronically with the Commission. The Company has been an electronic filer
since September 1996.
The Common Stock is quoted for trading on the Nasdaq National Market, and
the Registration Statement and such reports and other information concerning the
Company may also be inspected at the offices of the Nasdaq National Market
located at 1735 K Street, N.W., Washington, D.C. 20006.
47
<PAGE>
The Company will furnish holders of the Common Stock with annual reports
containing among other information, audited financial statements certified by an
independent public accounting firm and quarterly reports containing unaudited
condensed financial information for the first three quarters of each fiscal
year. The Company also intends to furnish such other reports as it may determine
or as may be required by law.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents heretofore filed by the Company with the Commission
pursuant to the 1934 Act, are hereby incorporated and made a part of this
Prospectus by reference, except as superseded or modified herein:
1. The Company's Annual Report on Form 10-K and Form 10-K/A for the fiscal
year ended September 30, 1997.
2. The Company's Quarterly Reports on Form 10-Q for the quarters ended
December 31, 1997 and March 31, 1998.
3. The Company's Proxy Statement on Schedule 14A, dated February 10, 1998.
4. The Company's Current Reports on Form 8-K dated August 20, 1997, April
7, 1998, April 28, 1998, June 22, 1998 and Form 8-K/A May 7, 1998.
5. Pages F-24 through F-37 of the Company's Registration Statement on Form
S-4 (Reg. No. 333-39527).
All documents subsequently filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the 1934 Act prior to the termination of the Offerings to
which this Prospectus relates shall be deemed to be incorporated by reference
into this Prospectus and to be part of this Prospectus from the date of filing
thereof. Any statement incorporated herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus.
The Company will furnish without charge to each person to whom this
Prospectus is delivered, upon written or oral request, a copy of any or all of
the documents which have been incorporated by reference in this Prospectus,
other than exhibits to such documents (unless the exhibits are specifically
incorporated by reference into such documents). Requests should be directed to:
NBTY, Inc., 90 Orville Drive, Bohemia, New York 11716, Attn: Harvey Kamil,
Executive Vice President and Secretary, telephone (516) 567-9500.
48
<PAGE>
NBTY, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
NBTY, Inc. Supplemental Consolidated Financial Statements: (a)
Unaudited Supplemental Condensed Consolidated Balance Sheets--September 30, 1997 and March 31,
1998............................................................................................ F-2
Unaudited Supplemental Condensed Consolidated Statements of Income--Six Months Ended March 31, 1997
and 1998........................................................................................ F-3
Unaudited Supplemental Condensed Consolidated Statements of Cash Flows--Six Months Ended March 31,
1997 and 1998................................................................................... F-4
Notes to Unaudited Supplemental Condensed Consolidated Financial Statements........................ F-5 to F-8
Report of Independent Accountants.................................................................. F-9
Supplemental Consolidated Balance Sheets--September 30, 1996 and 1997.............................. F-10
Supplemental Consolidated Statements of Income--Years Ended
September 30, 1995, 1996 and 1997............................................................... F-11
Supplemental Consolidated Statements of Stockholders' Equity--Years Ended
September 30, 1995, 1996 and 1997............................................................... F-12
Supplemental Consolidated Statements of Cash Flows--Years Ended
September 30, 1995, 1996 and 1997............................................................... F-13 to F-14
Notes to Supplemental Consolidated Financial Statements............................................ F-15 to F-27
NBTY, Inc. Consolidated Financial Statements: (b)
Unaudited Condensed Consolidated Balance Sheets--September 30, 1997
and March 31, 1998.............................................................................. F-28
Unaudited Condensed Consolidated Statements of Income--Six Months Ended March 31, 1997 and 1998.... F-29
Unaudited Condensed Consolidated Statements of Cash Flows--Six Months Ended March 31, 1997 and
1998............................................................................................ F-30
Notes to Unaudited Condensed Consolidated Financial Statements..................................... F-31 to F-35
Report of Independent Accountants.................................................................. F-36
Consolidated Balance Sheets--September 30, 1996 and 1997........................................... F-37
Consolidated Statements of Income--Years Ended September 30, 1995, 1996 and 1997................... F-38
Consolidated Statements of Stockholders Equity--Years Ended September 30, 1995,
1996 and 1997................................................................................... F-39
Consolidated Statements of Cash Flows--Years Ended September 30, 1995, 1996 and 1997............... F-40 to F-41
Notes to Consolidated Financial Statements......................................................... F-42 to F-53
</TABLE>
- ------------------
(a) The supplemental consolidated financial statements give effect to the merger
of Nutrition Headquarters Group into NBTY, Inc. through a business
combination accounted for by the pooling of interest method.
(b) The consolidated financial statements represent the historical financial
statements of NBTY, Inc. prior to the merger with Nutrition Headquarters
Group.
F-1
<PAGE>
NBTY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS AND SHARES IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
1998
SEPTEMBER 30, -----------
1997
------------- (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
------------- -----------
------------- -----------
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<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.
F-2
<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
</TABLE>
See notes to supplemental condensed consolidated financial statements.
F-3
<PAGE>
NBTY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED MARCH 31,
--------------------
1997 1998
------- ---------
<S> <C> <C>
Net income................................................................................ $15,842 $ 23,633
Adjustments to reconcile net income to cash provided by operating activities:
Loss on sale of property, plant and equipment........................................... 26
Depreciation and amortization........................................................... 3,664 10,032
Provision (recovery) for allowance for doubtful accounts................................ 206 (5)
Increase in deferred taxes.............................................................. 7
Changes in assets and liabilities, net of acquistions:
Accounts receivable.................................................................. (5,170) (199)
Inventories.......................................................................... (8,262) (11,698)
Prepaid catalog costs and other current assets....................................... (1,295) 8,683
Other assets......................................................................... 288 535
Accounts payable..................................................................... 10,381 (3,201)
Accrued expenses..................................................................... 5,112 (12,428)
------- ---------
Net cash provided by operating activities.......................................... 20,792 15,359
------- ---------
Cash flow from investing activities:
Purchase of property, plant and equipment............................................... (9,488) (38,942)
Proceeds from sale of property, plant and equipment..................................... 20
Proceeds from sale of short-term investments............................................ 8,362
Purchase of short-term investments...................................................... (4,651)
Receipt of payments from direct-mail cosmetics business................................. 322
------- ---------
Net cash used in investing activities.............................................. (13,797) (30,580)
------- ---------
Cash flows from financing activities:
Dividends paid.......................................................................... (2,610) (5,950)
Borrowings under long-term debt agreements.............................................. 45,000
Cash held in escrow..................................................................... 144,730
Principal payments under long-term debt agreements and capital leases................... (2,079) (1,153)
Purchase of treasury stock.............................................................. (15)
Proceeds from stock options exercised................................................... 23 40
Repayment of promissory note............................................................ (168,770)
------- ---------
Net cash provided by (used in) financing activities................................ (4,681) 13,897
------- ---------
Effect of Exchange Rate Changes on Cash and Cash Equivalents.............................. 159
------- ---------
Net (decrease) increase in cash and cash equivalents...................................... 2,314 (1,165)
Cash and cash equivalents at beginning of quarter......................................... 12,814 20,262
------- ---------
Cash and cash equivalents at end of quarter............................................... $15,128 $ 19,097
------- ---------
------- ---------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest................................................ $ 1,295 $ 12,129
Cash paid during the period for taxes................................................... $ 4,817 $ 10,243
</TABLE>
See notes to supplemental condensed consolidated financial statements.
F-4
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
The supplemental consolidated financial statements of NBTY, Inc. and
Subsidiaries, formerly Nature's Bounty, Inc. ('NBTY'), have been prepared to
give retroactive effect to the merger with Nutrition Headquarters Group, Inc.,
Lee Nutrition, Inc. and Nutro Laboratories, Inc. (collectively, the 'Nutrition
Headquarters Group' and with NBTY collectively, the 'Company') on April 20,
1998, which has been accounted for as a pooling of interests. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling- of-interest methods in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation; however, they will
become the historical consolidated financial statements of the Company after
financial statements covering the date of consummation of the business
combination are issued.
During 1998, NBTY entered into a definitive agreement to merge with
Nutrition Headquarters Group. On April 20, 1998, Nutrition Headquarters Group
was merged with and into NBTY. Under terms of the merger agreement, each share
of Nutrition Headquarters Group common stock was exchanged for one share of
NBTY's common stock with approximately 8,722 shares of NBTY's common stock
exchanged for all the outstanding stock of Nutrition Headquarters Group.
2. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to present
fairly its financial position as of March 31, 1998 and results of operations for
the six months ended March 31, 1998 and 1997 and statements of cash flows for
the six months ended March 31, 1998 and 1997. The consolidated condensed balance
sheet as of September 30, 1997 has been derived from the audited balance sheet
as of that date. This report should be read in conjunction with the Company's
supplemental consolidated financial statements for the fiscal years end
September 30, 1995, 1996 and 1997 included elsewhere in this Prospectus and Form
S-3.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Foreign currency translation
The financial statements of international subsidiaries are translated into
U.S. dollars using the exchange rate at each balance sheet date for assets and
liabilities and an average exchange rate for each period for revenues, expenses,
and gains and losses. Where the local currency is the functional currency,
translation adjustments are recorded as a separate component of stockholder's
equity.
Common shares and earnings per share
On March 9, 1998, the Company's Board of Directors declared a three-for-one
stock split in the form of a 200% stock dividend effective March 23, 1998. In
addition, the Company's Certificate of Incorporation was amended to authorize
the issuance of up to 75,000 shares of common stock, par value $.008 per share.
All per common share amounts have been retroactively restated to account
for the above stock split. In addition, stock options and respective exercise
prices have been amended to reflect these transactions (see Note 8).
Accounting changes
Effective October 1, 1996, the Company adopted the disclosure-only
provisions of Statement of Financial Accounting Standards ('SFAS') No. 123,
'Accounting for Stock-Based Compensation.' As permitted by SFAS No. 123, the
Company continues to measure compensation cost in accordance with Accounting
Principles
F-5
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Board Opinion ('APB') No. 25, 'Accounting for Stock Issued to Employees.' As the
Company has not granted any options during the six months ended March 31, 1998,
nor fiscal 1997 or 1996, there would not have been any impact on the Company's
financial position or results of operations on a pro forma basis.
Effective October 1, 1996, the Company adopted SFAS No. 121,'Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of.' This statement requires that certain assets be reviewed for impairment and,
if impaired, be measured at fair value, whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. The adoption of SFAS No. 121 at October 1, 1996 and its application
during fiscal 1997 and the six months ended March 31, 1998 had no material
impact on the Company's financial position or results of operations.
New accounting standards
In February 1997, the Financial Accounting Standards Board ('FASB') issued
SFAS No. 128, 'Earnings Per Share.' The statement simplifies the standards for
computing earnings per share ('EPS') and makes them comparable to international
EPS standards. The statement requires the presentation of both 'basic' and
'diluted' EPS on the face of the income statement with a supplementary
reconciliation of the amounts used in the calculations (see note 8).
In June 1997, the FASB issued SFAS No. 130, 'Reporting Comprehensive
Income,' which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distribution to owners. Among other disclosures, SFAS No. 130
requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
In addition, in June 1997, the FASB issued SFAS No. 131, 'Disclosures About
Segments of an Enterprise and Related Information,' which establishes standards
for reporting information about operating segments. It also establishes
standards for disclosures regarding products and services, geographic areas and
major customers.
Both of these new standards are effective for fiscal years beginning after
December 15, 1997 and require comparative information for earlier years to be
restated. The implementation of these new standards will not affect the
Company's results of operations and financial position, but may have an impact
on future financial statement disclosures.
Year 2000 Software Compatibility
The Company is continually updating its information systems, and has
evaluated significant computer software applications for compatibility with the
year 2000. With the system changes implemented to date and other planned
changes, the Company anticipates that its computer software applications will be
compatible with the year 2000. Expenditures specifically related to software
modifications for year 2000 compatibility are not expected to be material.
3. The results of operations and statements of cash flows for the six
months ended March 31, 1998 are not necessarily indicative of the results to be
expected for the full year.
4. ACQUISITION OF HOLLAND & BARRETT HOLDINGS LTD.
On August 7, 1997, the Company acquired all of the issued and outstanding
capital stock of Holland & Barrett Holdings Ltd. ('H&B') from Lloyds Chemist's
plc ('Lloyds') for an aggregate purchase price of approximately $169,000 plus
acquisition costs of approximately $811. The acquisition has been accounted for
under the purchase method and, accordingly, the results of operations are
included in the financial statements from the date of acquisition. H&B markets a
broad line of nutritional supplement products, including vitamins,
F-6
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
minerals and other nutritional supplements and food products. At the date of
acquisition, H&B operated approximately 410 retail stores in the United Kingdom.
The Company issued to Lloyds two promissory notes (the 'Promissory Notes')
totaling approximately $170,000 as consideration for the purchase of capital
stock of H&B. The Promissory Notes, which are collateralized by two letters of
credit issued by a lending institution, were paid in full in October 1997.
In connection with the Acquisition, the Company (i) entered into a $50,000
credit and guarantee agreement (the 'Credit and Guarantee Agreement'), which
provides borrowings for working capital and general corporate purposes, and (ii)
issued $150,000 in Senior Subordinated Notes due 2007.
Assets acquired and liabilities assumed included cash ($5,580), inventory
($18,045), other current assets ($11,078), property, plant and equipment
($31,554), and current and long-term liabilities ($27,154 and $4,058,
respectively). The excess cost of investment over the net book value of H&B at
the date of acquisition resulted in an increase in goodwill of $133,725 which
will be amortized over 25 years. Additionally, finance related costs of
approximately $5,600 will be amortized over 10 years.
5. Inventories have been estimated by using the gross profit method for the
interim periods. The components of the inventories are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1997 1998
------------- -----------
(UNAUDITED)
<S> <C> <C>
Raw materials and Work-in-process................................. $ 37,347 $ 42,714
Finished goods.................................................... 49,093 56,138
------------- -----------
$ 86,440 $ 98,852
------------- -----------
------------- -----------
</TABLE>
6. Intangible assets, at cost, acquired at various dates are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1997 1998
------------- -----------
(UNAUDITED)
<S> <C> <C>
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
------------- -----------
------------- -----------
</TABLE>
7. ACCRUED EXPENSES
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1997 1998
------------- -----------
(UNAUDITED)
<S> <C> <C>
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
------------- -----------
------------- -----------
</TABLE>
F-7
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. Basic earnings per share are based on the weighted average number of
common shares outstanding during the six month periods ended March 31, 1998 and
1997. Diluted earnings per share include the effect of outstanding stock
options, if exercised. The following is a reconciliation between the basic and
diluted earnings per share:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
MARCH 31,
------------------
1997 1998
------- -------
(UNAUDITED)
<S> <C> <C>
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
------- -------
------- -------
</TABLE>
9. SHAREHOLDER LITIGATION
In October 1994, two lawsuits were commenced in the U.S. District Court,
Eastern District of New York, against the Company and two of its officers. On
October 17, 1997, a Memorandum of Understanding was entered into between the
Company and the attorneys representing the Plaintiff class agreeing to an $8,000
($4,400 cash, $3,600 stock) settlement of the lawsuit. Subsequently, the Company
entered into a Capital Stipulation of Settlement calling for, among other
things, a total cash payment of $8,000. Cash payments aggregating $8,000 were
made in November and December 1997. The Company had been notified by its
insurance carrier that it was willing to reimburse the Company to the extent of
$2,400. The Company recorded a $5,600 provision for its portion of the
settlement in fiscal 1997, which, along with related legal fees of approximately
$768, has been reflected separately in the fiscal 1997 statements of income
(refer to the Company's 10-K). In January 1998, an insurance carrier paid the
Company $2,650.
F-8
<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
F-9
<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.
F-10
<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.
F-11
<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
----------------- ------------------ STOCK CUMULATIVE
NUMBER OF CAPITAL IN RETAINED NUMBER OF SUBSCRIPTIONS TRANSLATION
SHARES AMOUNT EXCESS OF PAR EARNINGS SHARES AMOUNT RECEIVABLE ADJUSTMENT
--------- ------ ------------- -------- --------- ------- ------------- ----------
<S> <C> <C> <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 $(584)
Tax benefit from exercise of
stock options................ 1,274
Purchase of treasury stock,
at cost...................... 46 (302 )
--------- ------ ------------- -------- --------- ------- ------ ----------
Balance, September 30, 1996...... 23,004 184 56,260 54,433 1,487 (2,648 ) (584)
Net income for year ended
September 30, 1997........... 29,126
S corporation distributions.... (8,360 )
Gain on foreign currency
translation.................. $2,563
Exercise of stock options...... 37 1 33
Tax benefit from exercise of
stock options................ 257
Repayment of stock
subscriptions receivable for
options exercised............ 96
Stock tendered as payment for
options exercised............ 16 (558 ) 488
April 3, 1998 three-for-one
stock split effected in the
form of a 200% stock
dividend..................... 46,082 368 (368) 3,006
--------- ------ ------------- -------- --------- ------- ------ ----------
Balance, September 30, 1997...... 69,123 $553 $56,182 $75,199 4,509 $(3,206) $ -- $2,563
--------- ------ ------------- -------- --------- ------- ------ ----------
--------- ------ ------------- -------- --------- ------- ------ ----------
<CAPTION>
TOTAL
--------
<S> <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...... 11
Tax benefit from exercise of
stock options................ 1,274
Purchase of treasury stock,
at cost...................... (302)
--------
Balance, September 30, 1996...... 107,645
Net income for year ended
September 30, 1997........... 29,126
S corporation distributions.... (8,360)
Gain on foreign currency
translation.................. 2,563
Exercise of stock options...... 34
Tax benefit from exercise of
stock options................ 257
Repayment of stock
subscriptions receivable for
options exercised............ 96
Stock tendered as payment for
options exercised............ (70)
April 3, 1998 three-for-one
stock split effected in the
form of a 200% stock
dividend.....................
--------
Balance, September 30, 1997...... $131,291
--------
--------
</TABLE>
See notes to supplemental consolidated financial statements.
F-12
<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.
F-13
<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.
F-14
<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, the manufacturing, advertising, sales and
marketing of food products is regulated by a number of governmental agencies
including the Ministry of Agriculture, Fisheries and Food, the Department of
Health, the Food Advisory Committee and the Committee on Toxicity, among others.
Revenue recognition
The Company recognizes revenue upon shipment or, with respect to its own
retail store operations, upon the sale of products. The Company has no single
customer that represents more than 10% of annual net sales or accounts
receivable as of and for the years ended September 30, 1995, 1996 and 1997.
F-15
<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.
F-16
<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 supplemental
consolidated financial statements.
Cash and cash equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Short-term investments
Short-term interest bearing investments are those with maturities of less
than one year but greater than three months when purchased. These investments
are readily convertible to cash and are stated at market value, which
approximates cost. Realized gains and losses are included in other income on a
specific identification basis in the period they are realized.
Common shares and earnings per share
In February 1997, the Financial Accounting Standards Board ('FASB') issued
Statement of Financial Accounting Standards ('SFAS') No. 128, 'Earnings Per
Share.' The statement requires the presentation of both 'basic' and 'diluted'
earnings per share ('EPS') on the face of the income statement. Basic EPS is
based on the weighted average number of shares of common stock outstanding
during each period while diluted EPS is based on the weighted average number of
shares of common stock and common stock equivalents outstanding during each
period. Common stock equivalents included in diluted EPS, which consisted of
common shares issuable upon the exercise of outstanding stock options, were
6,536, 4,502 and 4,324 for the years ended September 30, 1995, 1996 and 1997,
respectively.
Reclassifications
Certain reclassifications have been made to conform prior year amounts to
the current year presentation.
Accounting changes
Effective October 1, 1996, the Company adopted the disclosure-only
provisions of SFAS No. 123, 'Accounting for Stock-Based Compensation.' As
permitted by SFAS No. 123, the Company continues to measure compensation cost in
accordance with Accounting Principles Board Opinion No. 25, 'Accounting for
Stock Issued to Employees.' As the Company has not granted any options during
fiscal 1996 or 1997, there would not have been any impact on the Company's
financial position or results of operations on a pro forma basis.
Effective October 1, 1996, the Company adopted SFAS No. 121, 'Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of.' This statement requires that certain assets be reviewed for impairment and,
if impaired, be measured at fair value, whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. The adoption of SFAS
F-17
<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)
No. 121 at October 1, 1996 and its application during fiscal 1997 had no
material impact on the Company's financial position or results of operations.
New accounting standards
In June 1997, the FASB issued SFAS No. 130, 'Reporting Comprehensive
Income,' which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distribution to owners. Among other disclosures, SFAS No. 130
requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
In addition, in June 1997, the FASB issued SFAS No. 131, 'Disclosures About
Segments of an Enterprise and Related Information,' which establishes standards
for reporting information about operating segments. It also establishes
standards for disclosures regarding products and services, geographic areas and
major customers.
Both of these new standards are effective for periods beginning after
December 15, 1997 and require comparative information for earlier years to be
restated. The implementation of these new standards will not affect the
Company's results of operations and financial position, but may have an impact
on future financial statement disclosures.
3. ACQUISITION OF HOLLAND & BARRETT HOLDINGS LTD.
On August 7, 1997, NBTY acquired all of the issued and outstanding capital
stock of Holland & Barrett Holdings Ltd. ('H&B') from Lloyds Chemist's plc
('Lloyds') for an aggregate purchase price of approximately $169,000 plus
acquisition costs of approximately $811. The acquisition has been accounted for
under the purchase method and, accordingly, the results of operations are
included in the financial statements from the date of acquisition. H&B markets a
broad line of nutritional supplement products, including vitamins, minerals and
other nutritional supplements and food product. At the date of acquisition, H&B
operated approximately 410 retail stores in the United Kingdom.
NBTY issued to Lloyds two promissory notes (the 'Promissory Notes')
totaling approximately $170,000 as consideration for the purchase of capital
stock of H&B. The Promissory Notes, which are collateralized by two letters of
credit issued by a lending institution, were paid in full in October 1997.
In connection with the Acquisition, NBTY (i) entered into a $50,000
revolving credit facility (the 'Revolving Credit Facility'), which provides
borrowings for working capital and general corporate purposes, and (ii) issued
$150,000 in Senior Subordinated Notes due 2007.
Assets acquired and liabilities assumed include cash ($5,580), inventory
($18,045), other current assets ($11,078), property, plant and equipment
($31,554), and current and long-term liabilities ($27,154 and $4,058,
respectively). The excess cost of investment over the net book value of H&B at
the date of acquisition resulted in an increase in goodwill of $133,725 which
will be amortized over 25 years. Additionally, finance related costs of
approximately $5,600 will be amortized over 10 years.
The following unaudited condensed pro forma information presents a summary
of consolidated results of operations of the Company and H&B as if the
acquisition had occurred at the beginning of fiscal 1996, with pro forma
adjustments to give effect to the amortization of goodwill, interest expense on
acquisition debt and certain other adjustments, together with related income tax
effects. The pro forma information, which does not give
F-18
<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.................................. 42,527 51,423
Machinery and equipment............................................... 36,938 43,858
Furniture and fixtures................................................ 9,241 54,385
Transportation equipment.............................................. 737 2,511
Computer equipment.................................................... 9,320 15,434
-------- --------
104,404 173,447
Less accumulated depreciation and amortization...................... 33,981 55,263
-------- --------
$ 70,423 $118,184
-------- --------
-------- --------
</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.
F-19
<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>
F-20
<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.
F-21
<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.
In 1997, the Company recorded a loss of $2,265 in connection with an
interest rate lock which was settled on October 28, 1997.
F-22
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. CAPITAL LEASE OBLIGATIONS
The Company enters into various capital leases for machinery and equipment
which provide the Company with bargain purchase options at the end of such lease
terms. Future minimum payments under capital lease obligations as of September
30, 1997 are as follows:
<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>
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.
F-23
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11. INCOME TAXES--(CONTINUED)
The components of deferred tax assets and liabilities are as follows:
<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.
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.
F-24
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
12. COMMITMENTS--(CONTINUED)
Purchase commitments
The Company was committed to make future purchases under various purchase
order arrangements with fixed price provisions aggregating approximately $12,923
and $26,152 at September 30, 1996 and 1997, respectively.
Capital commitments
The Company had approximately $15,800 in open capital commitments related
to a manufacturing facility and computer hardware and software at September 30,
1997.
Employment and consulting agreements
NBTY has employment agreements with two of its officers. The agreements,
which expire in January 2004, provide for minimum salary levels, including cost
of living adjustments, and also contain provisions regarding severance and
changes in control of the Company. The commitment for salaries as of September
30, 1997 was approximately $749 per year.
Effective April 20, 1998, the Company entered into an employment agreement
with a former stockholder and officer of Nutrition Headquarters Group who is
currently an employee of the Company. Such agreement is for a one-year term,
subject to extension at the sole option of the officer for two additional
one-year terms, and requires an annual payment of $275.
The Company also has a two-year consulting agreement with its former
chairman and current director which expired on December 31, 1997. Such agreement
required annual payments of approximately $350. The parties have renewed the
agreement to provide services from January 1, 1998 through December 31, 2000.
During this period, the consulting fee payable shall be fixed by the Board of
Directors of the Company, provided that in no event will the consulting fee be
at a rate lower than $400 per year with certain fringe benefits accorded other
executives of NBTY. In addition, an entity owned by a relative of an officer
received sales commissions of $510, $417 and $541 in 1995, 1996 and 1997,
respectively.
13. STOCK OPTION PLANS
The Board of Directors approved the issuance of 6,660 non-qualified options
on September 23, 1990, exercisable at $0.21 per share, which options terminate
on September 23, 2000. In addition, on March 11, 1992, the Board approved the
issuance of an aggregate of 5,400 non-qualified stock options to directors and
officers, exercisable at $0.31 per share, and expiring on March 10, 2002. The
exercise price of each of the aforementioned issuances was in excess of the
market price at the date such options were granted.
During fiscal 1997, options were exercised with 37 shares of common stock
issued (prior to the aforementioned stock split) to certain officers and a
director for $23. As a result of the exercise of those options, the Company
received a compensation deduction for tax purposes of approximately $643 and a
tax benefit of approximately $257 which was credited to capital in excess of
par.
During fiscal 1996, options were exercised with 872 shares of common stock
issued (prior to the aforementioned stock split) to certain officers and
directors for $11 and interest bearing notes in the amount of $584. As a result
of the exercise of these options, the Company was entitled to a compensation
deduction for tax purposes of approximately $3,145 and a tax benefit of
approximately $1,274 which was credited to capital in excess of par.
During fiscal 1995, options were exercised with 430 shares of common stock
issued (prior to the aforementioned stock split) to certain officers and
directors for $24 and an interest bearing note in the amount of
F-25
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
13. STOCK OPTION PLANS--(CONTINUED)
$191. The promissory note, including interest, was paid by the surrender of 23
NBTY common shares to the Company at the prevailing market price. As a result of
the exercise of these options, the Company was entitled to a compensation
deduction of approximately $1,828 which resulted in a tax benefit of
approximately $731 which was credited to capital in excess of par.
A summary of stock option activity is as follows:
<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.
15. LITIGATION
L-tryptophan
The Company and certain other companies in the industry have been named as
defendants in cases arising out of the ingestion of products containing
L-tryptophan. The Company had been named in more than 265 lawsuits, of which
four are still pending against the Company. The other 261 lawsuits have been
settled at no cost to the Company. The Company's supplier of L-tryptophan agreed
to indemnify the Company and the other companies named in the lawsuits through
the final resolution of all cases involving L-tryptophan. In addition, the
supplier has posted, for the benefit of the Company and the other companies
named in the lawsuits, a revolving, irrevocable letter of credit of $20,000 to
be used in the event that the supplier is unable or unwilling to satisfy any
claims or judgments. While not all of these suits quantify the amount demanded,
the Company believes that the amount required to either settle these cases or to
pay judgments rendered therein will be paid by the supplier or by the Company's
product liability insurance carrier.
While the outcome of any litigation is uncertain, it is the opinion of
management and legal counsel of the Company that it is remote that the Company
will incur a material loss as a result of the L-tryptophan litigation and
claims. Accordingly, no provision for liability, if any, that may result
therefrom has been made in the Company's financial statements.
F-26
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15. LITIGATION--(CONTINUED)
Shareholder litigation
In October 1994, two lawsuits were commenced in the U.S. District Court,
Eastern District of New York, against the Company and two of its officers. On
October 17, 1997, a Memorandum of Understanding was entered into between the
Company and the attorneys representing the Plaintiff class agreeing to an $8,000
($4,400 cash, $3,600 stock) settlement of the lawsuit. Subsequently, the Company
entered into a Capital Stipulation of Settlement calling for, among other
things, a total cash payment of $8,000. The Company has been notified by its
insurance carrier that it is willing to reimburse the Company to the extent of
$2,400. Accordingly, as of September 30, 1997, the Company recorded a $5,600
provision for its portion of the settlement which, along with related legal fees
of approximately $768, has been reflected separately in the statement of income.
Other litigation
The Company is also involved in miscellaneous claims and litigation which
management believes, taken individually or in the aggregate, would not have a
material adverse effect on the Company's financial position or its business.
16. FOREIGN OPERATIONS
In connection with NBTY's recent acquisition of H&B which operates
primarily in the United Kingdom, the Company has significantly expanded its
operations outside of the United States. The following information has been
summarized by geographic area as of September 30, 1997 and for the year then
ended.
<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>
17. RELATED PARTY TRANSACTIONS
Nutrition Headquarters Group has outstanding promissory notes of $2,245, as
described in Note 9, which are payable to a relative of a stockholder. Interest
on the obligation amounted to approximately $224 for each of the three years
ended September 30, 1995, 1996 and 1997.
Nutrition Headquarters Group has outstanding loans to a stockholder in the
aggregate amount of $301 and $617, as described in Note 9 as of September 30,
1996 and 1997, respectively. Interest on these loans amounted to approximately
$29, $30 and $56 for the years ended September 30, 1995, 1996 and 1997,
respectively.
For the years ended September 30, 1995, 1996 and 1997, Nutrition
Headquarters Group provided distributions to its stockholders in the aggregate
amount of $6,750, $6,935 and $8,360, respectively.
18. SUBSEQUENT EVENTS
In April 1998, the Company sold certain assets of its cosmetic pencil
operation for approximately $6,000. The Company will receive $4,500 in cash with
additional payments of $1,500 over the next three years. In connection with such
sale, the Company realized a pre-tax gain of approximately $1.6 million.
Revenues applicable to this business were $581, $577 and $1,875 for fiscal 1995,
1996 and 1997, respectively, and the related results of operations were
insignificant.
F-27
<PAGE>
NBTY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1997 1998
------------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 18,419 $ 16,350
Short-term investments.............................................................. 8,362 --
Accounts receivable, less allowance for doubtful accounts of $991 in 1997 and $985
in 1998.......................................................................... 15,701 15,623
Inventories......................................................................... 75,936 87,762
Deferred income taxes............................................................... 6,032 6,032
Prepaid catalog costs and other current assets...................................... 18,885 11,913
------------- -----------
Total current assets........................................................... 143,335 137,680
Cash held in escrow................................................................... 144,262 --
Property, plant and equipment......................................................... 155,611 194,760
Less accumulated depreciation and amortization...................................... 47,438 53,651
------------- -----------
108,173 141,109
Intangible assets, net................................................................ 140,447 142,959
Other assets.......................................................................... 6,521 7,515
------------- -----------
Total assets................................................................... $ 542,738 $ 429,263
------------- -----------
------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations..................... $ 1,016 $ 1,060
Accounts payable.................................................................... 44,514 40,445
Accrued expenses.................................................................... 34,325 26,428
------------- -----------
Total current liabilities...................................................... 79,855 67,933
Long-term debt........................................................................ 163,447 208,218
Obligations under capital leases...................................................... 2,700 2,446
Promissory note payable............................................................... 169,909 --
Deferred income taxes................................................................. 7,474 7,642
Other liabilities..................................................................... 2,293 2,293
------------- -----------
Total liabilities.............................................................. 425,678 288,532
------------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.008 par; authorized 25,000 in 1997 and 75,000 shares in 1998;
issued 60,351 in 1997 and 60,483 in 1998 and outstanding 55,842 shares in 1997
and 55,974 shares in 1998........................................................ 483 484
Capital in excess of par............................................................ 55,982 56,589
Retained earnings................................................................... 61,238 77,464
------------- -----------
117,703 134,537
Less 4,509 treasury shares at cost, in 1997 and 1998................................ (3,206) (3,206)
Cumulative translation adjustment................................................... 2,563 9,400
------------- -----------
Total stockholders' equity..................................................... 117,060 140,731
------------- -----------
Total liabilities and stockholders' equity..................................... $ 542,738 $ 429,263
------------- -----------
------------- -----------
</TABLE>
See notes to condensed consolidated financial statements.
F-28
<PAGE>
NBTY, INC. AND SUBSIDIARIES
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................................................................................. $122,347 $244,404
-------- --------
Costs and expenses:
Cost of sales........................................................................... 58,247 116,227
Catalog printing, postage and promotion................................................. 9,942 9,444
Selling, general and administrative..................................................... 35,409 84,517
-------- --------
103,598 210,188
-------- --------
Income from operations.................................................................... 18,749 34,216
-------- --------
Other income (expenses):
Interest, net........................................................................... (869) (8,850)
Miscellaneous, net...................................................................... 327 1,312
-------- --------
(542) (7,538)
-------- --------
Income before income taxes................................................................ 18,207 26,678
Income taxes.............................................................................. 7,283 10,453
-------- --------
Net income.............................................................................. $ 10,924 $ 16,225
-------- --------
-------- --------
Net income per share:
Basic................................................................................... $ 0.20 $ 0.29
Diluted................................................................................. $ 0.18 $ 0.27
Weighted average common shares outstanding:
Basic................................................................................... 55,806 55,890
Diluted................................................................................. 60,147 60,195
</TABLE>
See notes to condensed consolidated financial statements.
F-29
<PAGE>
NBTY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED MARCH 31,
---------------------
1997 1998
-------- ---------
<S> <C> <C>
Net income............................................................................... $ 10,924 $ 16,225
Adjustments to reconcile net income to cash provided by operating activities:
Loss on sale of property, plant and equipment.......................................... 26
Depreciation and amortization.......................................................... 2,966 9,366
Provision (recovery) for allowance for doubtful accounts............................... 206 (5)
Increase in deferred taxes............................................................. 7
Changes in assets and liabilities, net of acquisitions:
Decrease (increase) in accounts receivable.......................................... (4,155) 685
Increase in inventories............................................................. (8,331) (11,111)
Decrease (increase) in prepaid catalog costs and other current assets............... (948) 9,104
Decrease in other assets............................................................ 288 535
(Decrease) increase in accounts payable............................................. 8,680 (4,976)
(Decrease) increase in accrued expenses............................................. 4,904 (12,791)
-------- ---------
Net cash provided by operating activities........................................... 14,560 7,039
-------- ---------
Cash flow from investing activities:
Purchase of property, plant and equipment.............................................. (9,328) (38,133)
Proceeds from sale of property, plant and equipment.................................... 20
Proceeds from sale of short-term investments........................................... 8,362
Purchase of short-term investments..................................................... (4,651)
Receipt of payments from direct-mail cosmetics business................................ 322
-------- ---------
Net cash used in investing activities............................................... (13,637) (29,771)
-------- ---------
Cash flows from financing activities:
Borrowings under long term debt agreements............................................. 45,000
Cash held in escrow.................................................................... 144,730
Principal payments under long-term debt agreements and capital leases.................. (456) (496)
Purchase of treasury stock............................................................. (15)
Proceeds from stock options exercised.................................................. 23 40
Repayment of promissory note........................................................ (168,770)
-------- ---------
Net cash provided by (used in) financing activities................................. (448) 20,504
-------- ---------
Effect of Exchange Rate Changes on Cash and Cash Equivalents............................. 159
-------- ---------
Net (decrease) increase in cash and cash equivalents..................................... 475 (2,069)
Cash and cash equivalents at beginning of quarter........................................ 9,292 18,419
-------- ---------
Cash and cash equivalents at end of quarter.............................................. $ 9,767 $ 16,350
-------- ---------
-------- ---------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest............................................... $ 869 $ 11,777
Cash paid during the period for taxes.................................................. $ 4,677 $ 10,082
</TABLE>
See notes to condensed consolidated financial statements.
F-30
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to present
fairly its financial position as of March 31, 1998 and results of operations and
statements of cash flows for the six months ended March 31, 1997 and 1998. The
consolidated condensed balance sheet as of September 30, 1997 has been derived
from the audited balance sheet as of that date. This report should be read in
conjunction with the Company's annual report filed on Form 10-K for the fiscal
year ended September 30, 1997.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Foreign currency translation
The financial statements of international subsidiaries are translated into
U.S. dollars using the exchange rate at each balance sheet date for assets and
liabilities and an average exchange rate for each period for revenues, expenses,
and gains and losses. Where the local currency is the functional currency,
translation adjustments are recorded as a separate component of stockholder's
equity.
Common shares and earnings per share
On March 9, 1998, the Company's Board of Directors declared a three-for-one
stock split in the form of a 200% stock dividend effective March 23, 1998. In
addition, the Company's Certificate of Incorporation was amended to authorize
the issuance of up to 75,000 shares of common stock, par value $.008 per share.
All per common share amounts have been retroactively restated to account
for the above stock split. In addition, stock options and respective exercise
prices have been amended to reflect these transactions (see Note 7).
Accounting changes
Effective October 1, 1996, the Company adopted the disclosure-only
provisions of Statement of Financial Accounting Standards ('SFAS') No. 123,
'Accounting for Stock-Based Compensation.' As permitted by SFAS No. 123, the
Company continues to measure compensation cost in accordance with Accounting
Principles Board Opinion ('APB') No. 25, 'Accounting for Stock Issued to
Employees.' As the Company has not granted any options during the six months
ended March 31, 1998, nor fiscal 1997 or 1996, there would not have been any
impact on the Company's financial position or results of operations on a pro
forma basis.
Effective October 1, 1996, the Company adopted SFAS No. 121,'Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of.' This statement requires that certain assets be reviewed for impairment and,
if impaired, be measured at fair value, whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. The adoption of SFAS No. 121 at October 1, 1996 and its application
during fiscal 1997 and the six months ended March 31, 1998 had no material
impact on the Company's financial position or results of operations.
F-31
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
New accounting standards
In February 1997, the Financial Accounting Standards Board ('FASB') issued
SFAS No. 128, 'Earnings Per Share.' The statement simplifies the standards for
computing earnings per share ('EPS') and makes them comparable to international
EPS standards. The statement requires the presentation of both 'basic' and
'diluted' EPS on the face of the income statement with a supplementary
reconciliation of the amounts used in the calculations (see note 7).
In June 1997, the FASB issued SFAS No. 130, 'Reporting Comprehensive
Income,' which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distribution to owners. Among other disclosures, SFAS No. 130
requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
In addition, in June 1997, the FASB issued SFAS No. 131, 'Disclosures About
Segments of an Enterprise and Related Information,' which establishes standards
for reporting information about operating segments. It also establishes
standards for disclosures regarding products and services, geographic areas and
major customers.
Both of these new standards are effective for fiscal years beginning after
December 15, 1997 and require comparative information for earlier years to be
restated. The implementation of these new standards will not affect the
Company's results of operations and financial position, but may have an impact
on future financial statement disclosures.
Year 2000 Software Compatibility
The Company is continually updating its information systems, and has
evaluated significant computer software applications for compatibility with the
year 2000. With the system changes implemented to date and other planned
changes, the Company anticipates that its computer software applications will be
compatible with the year 2000. Expenditures specifically related to software
modifications for year 2000 compatibility are not expected to be material.
2. The results of operations and statements of cash flows for the six
months ended March 31, 1998 are not necessarily indicative of the results to be
expected for the full year.
3. ACQUISITION OF HOLLAND & BARRETT HOLDINGS LTD.
On August 7, 1997, the Company acquired all of the issued and outstanding
capital stock of Holland & Barrett Holdings Ltd. ('H&B') from Lloyds Chemist's
plc ('Lloyds') for an aggregate purchase price of approximately $169,000 plus
acquisition costs of approximately $811. The acquisition has been accounted for
under the purchase method and, accordingly, the results of operations are
included in the financial statements from the date of acquisition. H&B markets a
broad line of nutritional supplement products, including vitamins, minerals and
other nutritional supplements and food products. At the date of acquisition, H&B
operated approximately 410 retail stores in the United Kingdom.
The Company issued to Lloyds two promissory notes (the 'Promissory Notes')
totaling approximately $170,000 as consideration for the purchase of capital
stock of H&B. The Promissory Notes, which are collateralized by two letters of
credit issued by a lending institution, were paid in full in October 1997.
In connection with the Acquisition, the Company (i) entered into a $50,000
credit and guarantee agreement (the 'Credit and Guarantee Agreement'), which
provides borrowings for working capital and general corporate purposes, and (ii)
issued $150,000 in Senior Subordinated Notes due 2007.
F-32
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Assets acquired and liabilities assumed included cash ($5,580), inventory
($18,045), other current assets ($11,078), property, plant and equipment
($31,554), and current and long-term liabilities ($27,154 and $4,058,
respectively). The excess cost of investment over the net book value of H&B at
the date of acquisition resulted in an increase in goodwill of $133,725 which
will be amortized over 25 years. Additionally, finance related costs of
approximately $5,600 will be amortized over 10 years.
4. Inventories have been estimated by using the gross profit method for the
interim periods. The components of the inventories are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1997 1998
---------------- -----------
(UNAUDITED)
<S> <C> <C>
Raw materials and work-in-process................................. $ 33,408 $32,367
Finished goods.................................................... 42,528 55,395
---------------- -----------
$ 75,936 $87,762
---------------- -----------
---------------- -----------
</TABLE>
5. Intangible assets, at cost, acquired at various dates are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1997 1998
---------------- ------------
(UNAUDITED)
<S> <C> <C>
Goodwill......................................................... $136,972 $142,510
Customer lists................................................... 9,816 9,816
Trademark and licenses........................................... 1,201 1,201
Covenants not to compete......................................... 1,305 1,305
---------------- ------------
149,294 154,832
Less, accumulated amortization................................... 8,847 11,873
---------------- ------------
$140,447 $142,959
---------------- ------------
---------------- ------------
</TABLE>
6. ACCRUED EXPENSES:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1997 1998
---------------- ------------
(UNAUDITED)
<S> <C> <C>
Litigation settlement costs....................................... $ 5,600
Payroll and related payroll taxes................................. 4,185 $ 3,149
Customer deposits................................................. 2,363 885
Accrued purchases................................................. 2,800 5,639
Income taxes payable.............................................. 7,456 7,431
Other............................................................. 11,921 9,324
---------------- -----------
$ 34,325 $ 26,428
---------------- -----------
---------------- -----------
</TABLE>
F-33
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. Basic earnings per share are based on the weighted average number of
common shares outstanding during the six month periods ended March 31, 1997 and
1998. Diluted earnings per share include the effect of outstanding stock
options, if exercised. The following is a reconciliation between the basic and
diluted earnings per share:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
MARCH 31,
------------------
1997 1998
------- -------
(UNAUDITED)
<S> <C> <C>
Numerator:
Numerator for basic earnings per share--income available to common
stockholders....................................................... $10,924 $16,225
------- -------
------- -------
Numerator for dilutive earnings per share--income available to common
stockholders....................................................... $10,924 $16,225
------- -------
------- -------
Denominator:
Denominator for basic earnings per share--weighted-average shares..... 55,806 55,890
Effective of dilutive securities:
Stock options...................................................... 4,341 4,305
------- -------
Denominator for diluted earnings per share--weighted-average shares... 60,147 60,195
------- -------
------- -------
Basic earnings per share................................................ $ 0.20 $ 0.29
------- -------
------- -------
Diluted earnings per share.............................................. $ 0.18 $ 0.27
------- -------
------- -------
</TABLE>
8. SHAREHOLDER LITIGATION
In October 1994, two lawsuits were commenced in the U.S. District Court,
Eastern District of New York, against the Company and two of its officers. On
October 17, 1997, a Memorandum of Understanding was entered into between the
Company and the attorneys representing the Plaintiff class agreeing to an $8,000
($4,400 cash, $3,600 stock) settlement of the lawsuit. Subsequently, the Company
entered into a Capital Stipulation of Settlement calling for, among other
things, a total cash payment of $8,000. Cash payments aggregating $8,000 were
made in November and December 1997. The Company had been notified by its
insurance carrier that it was willing to reimburse the Company to the extent of
$2,400. The Company recorded a $5,600 provision for its portion of the
settlement in fiscal 1997, which, along with related legal fees of approximately
$768, has been reflected separately in the fiscal 1997 statements of income
(refer to the Company's 10-K). In January 1998, an insurance carrier paid the
Company $2,650.
9. SUBSEQUENT EVENT
In April 1998, the Company acquired Nutrition Headquarters, Inc., Lee
Nutrition, Inc., Nutro Laboratories, Inc. and Brunswick Laboratories, Inc. in an
exchange of approximately 8,772 shares of NBTY common stock, $0.008 par value,
fair market value approximates $185 million. The merger constituted a tax-free
reorganization in accordance with Section 368(a)(1)(A) of the Internal Revenue
Service and has been accounted for as a pooling
F-34
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
of interests under APB No. 16. The financial statements presented, herein, have
not been restated to include the combined results of operations, financial
position and cash flows.
Nutrition Headquarters, Inc. and Lee Nutrition, Inc. are mail order vitamin
and nutritional supplement companies and Nutro Laboratories, Inc. and Brunswick
Laboratories, Inc. are vitamin and nutritional supplement manufacturers.
The following table, represents the combined results of operations for the
six month periods ended March 31, 1997 and 1998 as if the companies had been
pooled:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED MARCH 31,
--------------------
1997 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenues:
NBTY................................................................ $122,347 $244,404
Nutrition Headquarters, Lee Nutrition, Brunswick Laboratories and
Nutro Laboratories............................................... 36,758 42,416
-------- --------
Combined.................................................... $159,105 $286,820
-------- --------
-------- --------
Net income
NBTY................................................................ $ 10,924 $ 16,225
Nutrition Headquarters, Lee Nutrition, Brunswick Laboratories and
Nutro Laboratories............................................... 4,918 7,408
-------- --------
Combined.................................................... $ 15,842 $ 23,633
-------- --------
-------- --------
</TABLE>
F-35
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of NBTY, Inc.:
We have audited the accompanying consolidated balance sheets of NBTY, Inc. and
Subsidiaries as of September 30, 1996 and 1997 and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of NBTY,
Inc. and Subsidiaries as of September 30, 1996 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1997, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Melville, New York
November 6, 1997,
except as to Note 1
the date of which is
April 3, 1998
F-36
<PAGE>
NBTY, INC. AND SUBSIDIARIES
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............................................................... $ 9,292 $ 18,419
Short-term investments.................................................................. 11,024 8,362
Accounts receivable, less allowance for doubtful accounts of $794 in 1996 and $991 in
1997................................................................................. 11,625 15,701
Inventories............................................................................. 38,070 75,936
Deferred income taxes................................................................... 3,155 6,032
Prepaid catalog costs and other current assets.......................................... 5,683 18,885
-------- --------
Total current assets............................................................... 78,849 143,335
Cash held in escrow....................................................................... 144,262
Property, plant and equipment, net........................................................ 61,732 108,173
Intangible assets, net.................................................................... 3,975 140,447
Other assets.............................................................................. 994 6,521
-------- --------
Total assets....................................................................... $145,550 $542,738
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations......................... $ 935 $ 1,016
Accounts payable........................................................................ 10,943 44,514
Accrued expenses........................................................................ 14,705 34,325
-------- --------
Total current liabilities.......................................................... 26,583 79,855
Long-term debt............................................................................ 15,178 163,447
Obligations under capital leases.......................................................... 3,219 2,700
Promissory note payable................................................................... 169,909
Deferred income taxes..................................................................... 2,827 7,474
Other liabilities......................................................................... 793 2,293
-------- --------
Total liabilities.................................................................. 48,600 425,678
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $.008 par; authorized 25,000 shares in 1996 and 75,000 in 1997; issued
20,080 shares in 1996 and 60,351 shares in 1997 and outstanding 18,593 shares in 1996
and 55,842 shares in 1997............................................................ 160 483
Capital in excess of par................................................................ 56,014 55,982
Retained earnings....................................................................... 44,008 61,238
-------- --------
100,182 117,703
Less 1,487 and 4,509 treasury shares at cost, in 1996 and 1997, respectively............ (2,648) (3,206)
Stock subscriptions receivable.......................................................... (584)
Cumulative translation adjustment....................................................... 2,563
-------- --------
Total stockholders' equity......................................................... 96,950 117,060
-------- --------
Total liabilities and stockholders' equity......................................... $145,550 $542,738
-------- --------
-------- --------
</TABLE>
See notes to consolidated financial statements.
F-37
<PAGE>
NBTY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales.................................................................... $178,760 $194,403 $281,407
-------- -------- --------
Costs and expenses:
Cost of sales.............................................................. 93,875 95,638 135,886
Catalog printing, postage and promotion.................................... 19,262 17,635 19,227
Selling, general and administrative........................................ 56,728 58,515 86,588
Litigation settlement costs................................................ 6,368
-------- -------- --------
169,865 171,788 248,069
-------- -------- --------
Income from operations....................................................... 8,895 22,615 33,338
-------- -------- --------
Other income (expense):
Interest, net.............................................................. (1,084) (1,445) (6,655)
Miscellaneous, net......................................................... 571 1,203 2,033
-------- -------- --------
(513) (242) (4,622)
-------- -------- --------
Income before income taxes................................................... 8,382 22,373 28,716
Income taxes................................................................. 3,246 9,021 11,486
-------- -------- --------
Net income.............................................................. $ 5,136 $ 13,352 $ 17,230
-------- -------- --------
-------- -------- --------
Net income per share:
Basic...................................................................... $ 0.10 $ 0.24 $ 0.31
Diluted.................................................................... $ 0.09 $ 0.22 $ 0.29
Weighted average common shares outstanding:
Basic...................................................................... 53,387 55,425 55,839
Diluted.................................................................... 59,923 59,927 60,163
</TABLE>
See notes to consolidated financial statements.
F-38
<PAGE>
NBTY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
(DOLLARS AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
------------------ ------------------- STOCK CUMULATIVE
NUMBER OF CAPITAL IN RETAINED NUMBER OF SUBSCRIPTIONS TRANSLATION
SHARES AMOUNT EXCESS OF PAR EARNINGS SHARES AMOUNT RECEIVABLE ADJUSTMENT
--------- ------ ------------- -------- --------- ------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1994... 18,778 $150 $53,209 $25,520 1,213 $ (863 )
Net income for year ended
September 30, 1995........ 5,136
Exercise of stock options... 430 3 212
Tax benefit from exercise of
stock options............. 731
Purchase of treasury stock,
at cost................... 228 (1,483 )
--------- ------ ------------- -------- --------- ------- ------------- ----------
Balance, September 30, 1995... 19,208 153 54,152 30,656 1,441 (2,346 )
Net income for year ended
September 30, 1996........ 13,352
Exercise of stock options... 872 7 588 $ (584)
Tax benefit from exercise of
stock options............. 1,274
Purchase of treasury stock,
at cost................... 46 (302 )
--------- ------ ------------- -------- --------- ------- ------------- ----------
Balance, September 30, 1996... 20,080 160 56,014 44,008 1,487 (2,648 ) (584)
Net income for year ended
September 30, 1997........ 17,230
Gain on foreign currency
translation............... $2,563
Exercise of stock options... 37 1 33
Tax benefit from exercise of
stock options............. 257
Repayment of stock
subscriptions receivable
for options exercised..... 96
Stock tendered as payment
for options exercised..... 16 (558 ) 488
April 3, 1998 three-for-one
stock split effected in
the form of a 200% stock
dividend.................. 40,234 322 (322) 3,006
--------- ------ ------------- -------- --------- ------- ------------- ----------
Balance, September 30, 1997... 60,351 $483 $55,982 $61,238 4,509 $(3,206) $ -- $2,563
--------- ------ ------------- -------- --------- ------- ------------- ----------
--------- ------ ------------- -------- --------- ------- ------------- ----------
<CAPTION>
TOTAL
--------
<S> <C>
Balance, September 30, 1994... $ 78,016
Net income for year ended
September 30, 1995........ 5,136
Exercise of stock options... 215
Tax benefit from exercise of
stock options............. 731
Purchase of treasury stock,
at cost................... (1,483)
--------
Balance, September 30, 1995... 82,615
Net income for year ended
September 30, 1996........ 13,352
Exercise of stock options... 11
Tax benefit from exercise of
stock options............. 1,274
Purchase of treasury stock,
at cost................... (302)
--------
Balance, September 30, 1996... 96,950
Net income for year ended
September 30, 1997........ 17,230
Gain on foreign currency
translation............... 2,563
Exercise of stock options... 34
Tax benefit from exercise of
stock options............. 257
Repayment of stock
subscriptions receivable
for options exercised..... 96
Stock tendered as payment
for options exercised..... (70)
April 3, 1998 three-for-one
stock split effected in
the form of a 200% stock
dividend..................
--------
Balance, September 30, 1997... $117,060
--------
--------
</TABLE>
See notes to consolidated financial statements.
F-39
<PAGE>
NBTY, INC. AND SUBSIDIARIES
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................................................................... $ 5,136 $13,352 $ 17,230
Adjustments to reconcile net income to cash provided by operating activities:
Loss on disposal/sale of property, plant and equipment.................... 374 31
Depreciation and amortization............................................. 4,840 5,623 8,167
Provision (recovery) for allowance for doubtful accounts.................. (18) 216 197
Deferred income taxes..................................................... 685 (642) (2,750)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable..................................................... (2,120) 1,616 (4,048)
Inventories............................................................. 4,454 (2,036) (19,545)
Prepaid catalog costs and other current assets.......................... (264) 487 (4,499)
Other assets............................................................ 1,124 675 47
Accounts payable........................................................ 3,160 (5,468) 13,694
Accrued expenses........................................................ 2,810 5,690 14,590
Other liabilities....................................................... 275 24 1,500
Income tax receivable................................................... 1,300
------- ------- ---------
Net cash provided by operating activities............................ 21,756 19,537 24,614
------- ------- ---------
Cash flows from investment activities:
Increase in intangible assets................................................ (1,064) (67) (1,843)
Purchase of property, plant and equipment.................................... (11,548) (15,750) (21,092)
Proceeds from sale of property, plant and equipment.......................... 4 20
Proceeds from sale of short-term investments................................. 2,662
Purchase of short-term investments........................................... (11,024)
Receipt of payments on notes from sale of direct mail cosmetics business..... 741 1,047
Proceeds from sale of direct mail cosmetics business......................... 350
Cash from acquisition........................................................ 5,580
------- ------- ---------
Net cash used in investing activities................................ (12,612) (25,746) (13,626)
------- ------- ---------
Cash flows from financing activities:
Net payments under line of credit agreement.................................. (5,000)
Proceeds from bond offering, net of discount................................. 148,763
Cash held in escrow.......................................................... (144,262)
Bond issue costs............................................................. (5,575)
Borrowings under long-term debt agreements................................... 2,400 6,000
Principal payments under long-term debt agreements and capital leases........ (798) (586) (932)
Purchase of treasury stock................................................... (1,292) (302) (70)
Proceeds from stock options exercised........................................ 24 11 34
Repayment of stock subscription receivable................................... 96
------- ------- ---------
Net cash (used in) provided by financing activities.................. (4,666) 5,123 (1,946)
------- ------- ---------
Effect of exchange rate changes on cash and cash equivalents................... 85
------- ------- ---------
Net increase (decrease) in cash and cash equivalents........................... 4,478 (1,086) 9,127
Cash and cash equivalents at beginning of year................................. 5,900 10,378 9,292
------- ------- ---------
Cash and cash equivalents at end of year....................................... $10,378 $ 9,292 $ 18,419
------- ------- ---------
------- ------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest..................................... $ 1,086 $ 1,454 $ 2,717
Cash paid during the period for income taxes................................. $ 1,649 $ 5,387 $ 14,008
</TABLE>
See notes to consolidated financial statements.
F-40
<PAGE>
NBTY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS)
Non-cash investing and financing information
On October 9, 1995, the Company sold certain assets of its direct-mail
cosmetics business for $2,495. The Company received $350 in cash and
non-interest bearing notes aggregating $2,145 for inventory, a customer list and
other intangible assets. The inventory note was repaid in full in October 1996.
In April 1997, the Company received the final payment of the customer list note.
(See Note 3)
During fiscal 1996, the Company entered into capital leases for machinery
and equipment aggregating $2,635.
During fiscal 1995, 1996 and 1997, options were exercised with shares of
common stock issued to certain officers and directors. Accordingly, the tax
benefit of approximately $731, $1,274 and $257 for the years ended September 30,
1995, 1996 and 1997, respectively, was recorded as an increase in capital in
excess of par and a reduction in taxes currently payable. In addition, during
fiscal 1997, common stock was surrendered to the Company in satisfaction of $488
of the stock subscription outstanding at September 30, 1996. (See Note 12)
In connection with the acquisition of Holland & Barrett Holdings Ltd. on
August 7, 1997, the Company issued two promissory notes aggregating $170,000 as
consideration for the purchase of capital stock. Such notes were paid in October
1997 from the cash held in escrow at September 30, 1997. (See Note 2)
See notes to consolidated financial statements.
F-41
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business operations
NBTY, Inc., formerly Nature's Bounty, Inc. (the 'Company'), manufactures
and distributes vitamins, food supplements and health and beauty aids primarily
in the United States and the United Kingdom. The processing, formulation,
packaging, labeling and advertising of the Company's products are subject to
regulation by one or more federal agencies, including the Food and Drug
Administration, the Federal Trade Commission, the Consumer Product Safety
Commission, the United States Department of Agriculture, the United States
Environmental Protection Agency and the United States Postal Service.
Within the United Kingdom, the manufacturing, advertising, sales and
marketing of food products is regulated by a number of governmental agencies
including the Ministry of Agriculture, Fisheries and Food, the Department of
Health, the Food Advisory Committee and the Committee on Toxicity, among others.
Principles of consolidation and basis of presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany accounts and transactions
have been eliminated.
Revenue recognition
The Company recognizes revenue upon shipment or, with respect to its own
retail store operations, upon the sale of products. The Company has no single
customer that represents more than 10% of annual net sales or accounts
receivable as of and for the years ended September 30, 1995, 1996 and 1997.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
on the weighted average method which approximates first-in, first-out basis. The
cost elements of inventory include materials, labor and overhead. In fiscal
1995, no one supplier provided more than 10% of purchases. One supplier provided
approximately 12% of the Company's purchases in 1996 and 1997.
Prepaid catalog costs
Mail order production and mailing costs are capitalized as prepaid catalog
costs and charged to expense over the catalog period, which typically
approximates three months.
Advertising expense
All media (television, radio, magazine) and cooperative advertising costs
are generally expensed as incurred. Total expenses relating to advertising and
promotion for fiscal 1995, 1996 and 1997 were $8,823, $9,098 and $11,338,
respectively.
F-42
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
Property, plant and equipment
Property, plant and equipment are carried at cost. Depreciation is provided
on a straight-line basis over the estimated useful lives of the related assets.
Expenditures which significantly improve or extend the life of an asset are
capitalized.
Maintenance and repairs are charged to expense in the year incurred. Cost
and related accumulated depreciation for property, plant and equipment are
removed from the accounts upon sale or disposition and the resulting gain or
loss is reflected in earnings.
Intangible assets
Goodwill represents the excess of purchase price over the fair value of
identifiable net assets of companies acquired. Goodwill and other intangibles
are amortized on a straight-line basis over appropriate periods not exceeding 40
years.
Foreign currency translation
The financial statements of international subsidiaries are translated into
U.S. dollars using the exchange rate at each balance sheet date for assets and
liabilities and an average exchange rate for each period for revenues, expenses,
and gains and losses. Where the local currency is the functional currency,
translation adjustments are recorded as a separate component of stockholder's
equity.
Income taxes
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax liabilities and assets are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Cash and cash equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Short-term investments
Short-term interest bearing investments are those with maturities of less
than one year but greater than three months when purchased. These investments
are readily convertible to cash and are stated at market value, which
approximates cost. Realized gains and losses are included in other income on a
specific identification basis in the period they are realized.
Common shares and earnings per share
In February 1997, the Financial Accounting Standards Board ('FASB') issued
Statement of Financial Accounting Standards ('SFAS') No. 128, 'Earnings Per
Share.' The statement requires the presentation of both 'basic' and 'diluted'
earnings per share ('EPS') on the face of the income statement. Basic EPS is
based on the weighted average number of shares of common stock outstanding
during each period while diluted EPS is based on the weighted average number of
shares of common stock and common stock equivalents outstanding during each
period. Common stock equivalents included in diluted EPS, which consisted of
common shares issuable upon the exercise of outstanding stock options, were
6,536, 4,502 and 4,324 for the years ended
F-43
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
September 30, 1995, 1996 and 1997, respectively. The financial statements and
related footnotes have been restated to reflect the adoption of SFAS No. 128.
In March 1998, the Company's board of directors declared a three-for-one
stock split payable in the form of a 200% stock dividend. This distribution has
been reflected in the fiscal 1997 consolidated financial statements and all per
common share amounts have been retroactively restated to account for the stock
split. In addition, stock options and the related exercise prices have been
amended to reflect this transaction. Also, in March 1998, the Company's
certificate of incorporation was amended to authorize the issuance of up to
75,000 shares of common stock, par value $.008 per share.
Reclassifications
Certain reclassifications have been made to conform prior year amounts to
the current year presentation.
Accounting changes
Effective October 1, 1996, the Company adopted the disclosure-only
provisions of SFAS No. 123, 'Accounting for Stock-Based Compensation'. As
permitted by SFAS No. 123, the Company continues to measure compensation cost in
accordance with Accounting Principles Board Opinion No. 25, 'Accounting for
Stock Issued to Employees.' As the Company has not granted any options during
fiscal 1996 or 1997, there would not have been any impact on the Company's
financial position or results of operations on a pro forma basis.
Effective October 1, 1996, the Company adopted SFAS No. 121, 'Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of.' This statement requires that certain assets be reviewed for impairment and,
if impaired, be measured at fair value, whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. The adoption of SFAS No. 121 at October 1, 1996 and its application
during fiscal 1997 had no material impact on the Company's financial position or
results of operations.
New accounting standards
In June 1997, the FASB issued SFAS No. 130, 'Reporting Comprehensive
Income,' which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distribution to owners. Among other disclosures, SFAS No. 130
requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
In addition, in June 1997, the FASB issued SFAS No. 131, 'Disclosures About
Segments of an Enterprise and Related Information,' which establishes standards
for reporting information about operating segments. It also establishes
standards for disclosures regarding products and services, geographic areas and
major customers.
Both of these new standards are effective for periods beginning after
December 15, 1997 and require comparative information for earlier years to be
restated. The implementation of these new standards will not affect the
Company's results of operations and financial position, but may have an impact
on future financial statement disclosures.
F-44
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. ACQUISITION OF HOLLAND & BARRETT HOLDINGS LTD.
On August 7, 1997, the Company acquired all of the issued and outstanding
capital stock of Holland & Barrett Holdings Ltd. ('H&B') from Lloyds Chemist's
plc ('Lloyds') for an aggregate purchase price of approximately $169,000 plus
acquisition costs of approximately $811. The acquisition has been accounted for
under the purchase method and, accordingly, the results of operations are
included in the financial statements from the date of acquisition. H&B markets a
broad line of nutritional supplement products, including vitamins, minerals and
other nutritional supplements and food product. At the date of acquisition, H&B
operated approximately 410 retail stores in the United Kingdom.
The Company issued to Lloyds two promissory notes (the 'Promissory Notes')
totaling approximately $170,000 as consideration for the purchase of capital
stock of H&B. The Promissory Notes, which are collateralized by two letters of
credit issued by a lending institution, were paid in full in October 1997.
In connection with the Acquisition, the Company (i) entered into a $50,000
revolving credit facility (the 'Revolving Credit Facility'), which provides
borrowings for working capital and general corporate purposes, and (ii) issued
$150,000 in Senior Subordinated Notes due 2007.
Assets acquired and liabilities assumed include cash ($5,580), inventory
($18,045), other current assets ($11,078), property, plant and equipment
($31,554), and current and long-term liabilities ($27,154 and $4,058,
respectively). The excess cost of investment over the net book value of H&B at
the date of acquisition resulted in an increase in goodwill of $133,725 which
will be amortized over 25 years. Additionally, finance related costs of
approximately $5,600 will be amortized over 10 years.
The following unaudited condensed pro forma information presents a summary
of consolidated results of operations of the Company and H&B as if the
acquisition had occurred at the beginning of fiscal 1996, with pro forma
adjustments to give effect to the amortization of goodwill, interest expense on
acquisition debt and certain other adjustments, together with related income tax
effects.
The pro forma information, which does not give effect to anticipated
intercompany product sales, is not necessarily indicative of the results of
operations had H&B been acquired as of the earliest period presented below.
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
------------- -------------
<S> <C> <C>
Net sales....................................................... $ 345,305 $ 428,953
Net income...................................................... $ 6,110 $ 12,458
Net income per diluted share.................................... $ 0.10 $ 0.21
</TABLE>
3. SALE OF DIRECT-MAIL COSMETICS BUSINESS
On October 9, 1995, the Company sold certain assets of its direct-mail
cosmetics business for $2,495. The Company received $350 in cash and non
interest bearing notes aggregating $2,145 for inventory, a customer list and
other intangible assets. Revenues applicable to this marginally unprofitable
business were $8,284 and $137 for fiscal 1995 and 1996, respectively. The
inventory note was repaid in full in October 1996 and, in April 1997, the
Company received the final payment of the customer list note.
F-45
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. INVENTORIES
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1996 1997
------- -------
<S> <C> <C>
Raw materials........................................................... $17,132 $29,892
Work-in-process......................................................... 1,523 3,516
Finished goods.......................................................... 19,415 42,528
------- -------
$38,070 $75,936
------- -------
------- -------
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1996 1997
------- --------
<S> <C> <C>
Land................................................................... $ 4,765 $ 5,050
Buildings and leasehold improvements................................... 38,088 47,819
Machinery and equipment................................................ 28,560 33,540
Furniture and fixtures................................................. 8,484 53,552
Transportation equipment............................................... 641 1,015
Computer equipment..................................................... 8,545 14,635
------- --------
89,083 155,611
Less accumulated depreciation and amortization....................... 27,351 47,438
------- --------
$61,732 $108,173
------- --------
------- --------
</TABLE>
Depreciation and amortization of property, plant and equipment for the
years ended September 30, 1995, 1996 and 1997 was approximately $3,190, $4,974
and $7,104, respectively.
Property, plant and equipment includes approximately $4,051 for assets
recorded under capital leases for fiscal 1996 and 1997.
6. INTANGIBLE ASSETS
Intangible assets, at cost, acquired at various dates are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------- AMORTIZATION
1996 1997 PERIOD
------- -------- ------------
<S> <C> <C> <C>
Goodwill........................................................... $ 469 $136,972 20-40
Customer lists..................................................... 8,784 9,816 6-15
Trademark and licenses............................................. 1,201 1,201 2-3
Covenants not to compete........................................... 1,305 1,305 5-7
------- --------
11,759 149,294
Less accumulated amortization.................................... 7,784 8,847
------- --------
$ 3,975 $140,447
------- --------
------- --------
</TABLE>
Amortization included in the consolidated statements of income under the
caption 'selling, general and administrative expenses' in 1995, 1996 and 1997
was approximately $776, $649 and $1,063, respectively.
F-46
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. ACCRUED EXPENSES
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1996 1997
------- -------
<S> <C> <C>
Litigation settlement costs............................................. $ 5,600
Payroll and related payroll taxes....................................... $ 2,731 4,185
Customer deposits....................................................... 1,863 2,363
Accrued purchases and interest.......................................... 2,800
Income taxes payable.................................................... 2,670 7,456
Other................................................................... 7,441 11,921
------- -------
$14,705 $34,325
------- -------
------- -------
</TABLE>
8. LONG-TERM 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
Mortgages:
First mortgage, payable in monthly principal and interest (10.375%)
installments (b).................................................. $ 7,447 7,317
First mortgage payable in monthly principal and interest (9.73%)
installments of $25 (c)........................................... 2,258 2,169
First mortgage, payable in monthly principal and interest (7.375%)
installments of $55 (d)........................................... 5,926 5,693
Revolving credit agreement (e).........................................
------- --------
15,631 163,942
Less current portion................................................. 453 495
------- --------
$15,178 $163,447
------- --------
------- --------
</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 is in the
process of registering these Notes under the Securities Act of 1933 through
an exchange offer. Such Exchange Notes, once issued, will have terms
substantially identical to the original Notes.
(b) In September 1990, the Company obtained an $8,000 first mortgage,
collateralized by the underlying building, issued through the Town of Islip,
New York Industrial Development Agency. The taxable bond, held by an
insurance company, has monthly principal and interest payments of $75 for
ten years through 2000, with a final payment of $6,891 in September 2000.
(c) In November 1994, the Company purchased a building which it previously
occupied under a long-term lease. The purchase price of approximately $3,090
was funded with $690 in cash and the balance through a 15-year mortgage note
payable. This agreement contains various restrictive covenants which require
the maintenance of certain financial ratios and limits capital expenditures.
(d) In April 1996, the Company obtained a $6,000 first mortgage with a fixed
interest rate of 7.375%, collateralized by the underlying real estate. The
mortgage has monthly principal and interest payments of $55 for fifteen
years through 2011.
F-47
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. LONG-TERM DEBT--(CONTINUED)
(e) In September 1997, the Company entered into a Revolving Credit Agreement
(the 'Agreement') with five banks that provides for borrowings up to
$50,000, which expires September 23, 2003. Virtually all of the Company's
assets serve as collateral under the Agreement, which is subject to normal
banking terms and conditions. The Agreement provides that loans may be made
under a selection of rate formulas including Prime or Euro currency rates.
The Agreement provides for the maintenance of various financial ratios and
covenants. As of September 30, 1997, there were no outstanding borrowings
under the Agreement.
Required principal payments of long-term debt are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
- --------------------------------------------------------------
<S> <C>
1998........................................................ $ 495
1999........................................................ 539
2000........................................................ 7,420
2001........................................................ 444
2002........................................................ 481
Thereafter.................................................. 154,563
--------
$163,942
--------
--------
</TABLE>
In August 1997, in connection with the promissory notes issued as
consideration for the purchase of H&B, the Company was issued two standby
letters of credit aggregating $170,000. At September 30, 1997, there were no
borrowings outstanding under the letters of credit. As of October 17, 1997, upon
payment of the promissory notes, the letters of credit were cancelled.
In 1997, the Company recorded a loss of $2,265 in connection with an
interest rate lock which was settled on October 28, 1997.
9. CAPITAL LEASE OBLIGATIONS
The Company enters into various capital leases for machinery and equipment
which provide the Company with bargain purchase options at the end of such lease
terms. Future minimum payments under capital lease obligations as of September
30, 1997 are as follows:
<TABLE>
<S> <C>
1998........................................................... $ 759
1999........................................................... 759
2000........................................................... 759
2001........................................................... 759
2002........................................................... 692
Thereafter..................................................... 172
------
3,900
Less, amount representing interest............................. 679
------
Present value of minimum lease payments (including $521 due
within one year)............................................ $3,221
------
------
</TABLE>
F-48
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. INCOME TAXES
Provision (benefit) for income taxes consists of the following:
<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................................................................. 336 2,112 1,218
Deferred................................................................ 48 (141) (220)
Foreign benefit........................................................... (1,189)
------ ------ -------
Total provision........................................................... $3,246 $9,021 $11,486
------ ------ -------
------ ------ -------
</TABLE>
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................................ $2,850 34.0% $7,831 35.0% $10,051 35.0%
State income taxes, net of federal
income tax benefit.................. 254 3.0% 1,281 5.7% 649 2.3%
Other, individually less than 5%...... 142 1.7% (91 ) (0.4%) 786 2.7%
------ ---------- ------ ---------- ------- ----------
Actual income tax provision........... $3,246 38.7% $9,021 40.3% $11,486 40.0%
------ ---------- ------ ---------- ------- ----------
------ ---------- ------ ---------- ------- ----------
</TABLE>
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.
F-49
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11. COMMITMENTS
Leases
The Company conducts retail operations under operating leases which expire
at various dates through 2020. Some of the leases contain renewal options and
provide for additional rentals based upon sales plus certain tax and maintenance
costs.
Future minimal rental payments under the retail location and other leases
that have initial or noncancelable lease terms in excess of one year at
September 30, 1997 are as follows:
<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 $1,248, $1,979
and $7,750 for the years ended September 30, 1995, 1996 and 1997, respectively.
Purchase commitments
The Company was committed to make future purchases under various purchase
order arrangements with fixed price provisions aggregating approximately $12,923
and $26,102 at September 30, 1996 and 1997, respectively.
Capital commitments
The Company had approximately $15,800 in open capital commitments related
to a manufacturing facility and computer hardware and software at September 30,
1997.
Employment and consulting agreements
The Company has employment agreements with two of its officers. The
agreements, which expire in January 2004, provide for minimum salary levels,
including cost of living adjustments, and also contain provisions regarding
severance and changes in control of the Company. The commitment for salaries as
of September 30, 1997 was approximately $749 per year.
The Company also has a two-year consulting agreement with its former
chairman and current director which expires on December 31, 1997. Such agreement
requires annual payments of approximately $350. The parties are presently
negotiating a renewal of the agreement under substantially comparable terms. In
addition, an entity owned by a relative of an officer received sales commissions
of $510, $417 and $541 in 1995, 1996 and 1997, respectively.
F-50
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
12. STOCK OPTION PLANS
The Board of Directors approved the issuance of 6,660 non-qualified options
on September 23, 1990, exercisable at $0.21 per share, which options terminate
on September 23, 2000. In addition, on March 11, 1992, the Board approved the
issuance of an aggregate of 5,400 non-qualified stock options to directors and
officers, exercisable at $0.31 per share, and expiring on March 10, 2002. The
exercise price of each of the aforementioned issuances was in excess of the
market price at the date such options were granted.
During fiscal 1997, options were exercised with 37 shares of common stock
issued (prior to the aforementioned stock split) to certain officers and a
director for $23. As a result of the exercise of those options, the Company
received a compensation deduction for tax purposes of approximately $643 and a
tax benefit of approximately $257 which was credited to capital in excess of
par.
During fiscal 1996, options were exercised with 872 shares of common stock
issued (prior to the aforementioned stock split) to certain officers and
directors for $11 and interest bearing notes in the amount of $584. As a result
of the exercise of these options, the Company was entitled to a compensation
deduction for tax purposes of approximately $3,145 and a tax benefit of
approximately $1,274 which was credited to capital in excess of par.
During fiscal 1995, options were exercised with 430 shares of common stock
issued (prior to the aforementioned stock split) to certain officers and
directors for $24 and an interest bearing note in the amount of $191. The
promissory note, including interest, was paid by the surrender of 23 NBTY common
shares to the Company at the prevailing market price. As a result of the
exercise of these options, the Company was entitled to a compensation deduction
of approximately $1,828 which resulted in a tax benefit of approximately $731
which was credited to capital in excess of par.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE 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.
13. EMPLOYEE BENEFIT PLANS
The Company maintains defined contribution savings plans and an employee
stock ownership plan. The accompanying financial statements reflect
contributions to these plans in the approximate amount of $498, $489 and $1,209
for the years ended September 30, 1995, 1996 and 1997, respectively.
F-51
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
14. LITIGATION
L-tryptophan
The Company and certain other companies in the industry have been named as
defendants in cases arising out of the ingestion of products containing
L-tryptophan. The Company had been named in more than 265 lawsuits, of which
four are still pending against the Company. The other 261 lawsuits have been
settled at no cost to the Company. The Company's supplier of L-tryptophan agreed
to indemnify the Company and the other companies named in the lawsuits through
the final resolution of all cases involving L-tryptophan. In addition, the
supplier has posted, for the benefit of the Company and the other companies
named in the lawsuits, a revolving, irrevocable letter of credit of $20,000 to
be used in the event that the supplier is unable or unwilling to satisfy any
claims or judgments. While not all of these suits quantify the amount demanded,
the Company believes that the amount required to either settle these cases or to
pay judgments rendered therein will be paid by the supplier or by the Company's
product liability insurance carrier.
While the outcome of any litigation is uncertain, it is the opinion of
management and legal counsel of the Company that it is remote that the Company
will incur a material loss as a result of the L-tryptophan litigation and
claims. Accordingly, no provision for liability, if any, that may result
therefrom has been made in the Company's financial statements.
Shareholder litigation
In October 1994, two lawsuits were commenced in the U.S. District Court,
Eastern District of New York, against the Company and two of its officers. On
October 17, 1997, a Memorandum of Understanding was entered into between the
Company and the attorneys representing the Plaintiff class agreeing to an $8,000
($4,400 cash, $3,600 stock) settlement of the lawsuit. Subsequently, the Company
entered into a Capital Stipulation of Settlement calling for, among other
things, a total cash payment of $8,000. The Company has been notified by its
insurance carrier that it is willing to reimburse the Company to the extent of
$2,400. Accordingly, as of September 30, 1997, the Company recorded a $5,600
provision for its portion of the settlement which, along with related legal fees
of approximately $768, has been reflected separately in the statement of income.
Other litigation
The Company is also involved in miscellaneous claims and litigation which
management believes, taken individually or in the aggregate, would not have a
material adverse effect on the Company's financial position or its business.
15. FOREIGN OPERATIONS
In connection with the Company's recent acquisition of H&B which operates
primarily in the United Kingdom, the Company has significantly expanded its
operations outside of the United States. The following information has been
summarized by geographic area as of September 30, 1997 and for the year then
ended.
<TABLE>
<CAPTION>
IDENTIFIABLE OPERATING
ASSETS SALES INCOME
------------ -------- ---------
<S> <C> <C> <C>
United States...................................................... $328,548 $254,910 $ 36,619
United Kingdom..................................................... 214,190 26,497 (3,281)
------------ -------- ---------
$542,738 $281,407 $ 33,338
------------ -------- ---------
------------ -------- ---------
</TABLE>
F-52
<PAGE>
NBTY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for fiscal 1996 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
------------ --------- -------- -------------
<S> <C> <C> <C> <C>
1996:
Net sales........................................ $ 38,589 $55,605 $ 47,900 $52,309
Gross profit..................................... 17,779 27,760 24,453 28,773
Income before income taxes....................... (412) 7,502 6,503 8,780(a)
Net income....................................... (251) 4,576 3,763 5,264
Net income per diluted share..................... $ -- $ 0.07 $ 0.06 $ 0.09
1997:
Net sales........................................ $ 47,327 $75,019 $ 61,761 $97,300
Gross profit..................................... 24,757 39,342 31,803 49,619
Income before income taxes....................... 5,484 12,723 8,548 1,961(a)
Net income....................................... 3,290 7,634 5,129 1,177
Net income per diluted share..................... $ 0.06 $ 0.13 $ 0.08 $ 0.02
</TABLE>
- ------------------
(a) Year-end adjustments resulting in an increase to pre-tax income of
approximately $2 million and $2.1 million primarily related to adjustments
of inventory amounts in 1996 and 1997, respectively.
F-53
<PAGE>
[COMPANY ARTWORK FOR INSIDE BACK COVER]
<PAGE>
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR BY THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THOSE
TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE
SUCH AN OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES
NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 9
Use of Proceeds................................ 15
Price Range of Common Stock.................... 15
Dividend Policy................................ 16
Capitalization................................. 16
Selected Supplemental Consolidated Financial
Data......................................... 17
Selected Consolidated Financial Data........... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 20
Business....................................... 25
Management..................................... 38
Principal and Selling Stockholders............. 40
Description of Capital Stock................... 41
Description of Certain Indebtedness............ 42
Shares Eligible for Future Sale................ 43
Underwriting................................... 45
Legal Matters.................................. 47
Experts........................................ 47
Available Information.......................... 47
Incorporation of Certain Information by
Reference.................................... 48
Index to Consolidated Financial Statements..... F-1
</TABLE>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
8,600,000 SHARES
COMMON STOCK
----------
PROSPECTUS
JULY 1, 1998
----------
SALOMON SMITH BARNEY
LEHMAN BROTHERS
ADAMS, HARKNESS & HILL, INC.
RAYMOND JAMES &
ASSOCIATES, INC.
PIPER JAFFRAY INC.
------------------------------------------------------
------------------------------------------------------
<PAGE>
PART II
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Company estimates that expenses payable by the Company in connection
with the offering described in this Registration Statement (other than the
underwriting discounts and commissions) will be as follows:
<TABLE>
<CAPTION>
TOTAL
- -----------------------------------------------------------
<S> <C>
SEC registration fee (actual).............................. $ 69,692.37
NASD filing fee (actual)................................... 24,124.53
Blue Sky fees and expenses (including counsel fees)........ 50,000.00
Accounting fees and expenses............................... 175,000.00
Legal fees and expenses.................................... 200,000.00
Printing and engraving expense............................. 175,000.00
Transfer Agent and Registrar fees and expenses............. 5,000.00
Miscellaneous expenses..................................... 1,183.10
Total................................................. $700,000.00
</TABLE>
- ------------------
* To be completed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Reference is made to Section 102(b)(7) of the Delaware General Corporation
Law (the 'DGCL'), which permits a corporation in its certificate of
incorporation or an amendment thereto to eliminate or limit the personal
liability of a director for violations of the director's fiduciary duty, except
(i) for any breach of the director's fiduciary duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
pursuant to Section 174 of the DGCL (providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions), or
(iv) for any transaction from which the director derived an improper personal
benefit. The Company's Second Amended and Restated Certificate of Incorporation
contains provisions permitted by Section 102(b)(7) of the DGCL.
Reference is made to Section 145 of the DGCL which provides that a
corporation may indemnify any persons, including directors and officers, who
are, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of such
corporation), by reason of the fact that such person is or was a director,
officer, employee or agent of such corporation, or is or was serving at the
request of such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such director, officer, employee or agent acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
corporation's best interests and, with respect to any criminal actions or
proceedings, had no reasonable cause to believe that his conduct was unlawful. A
Delaware corporation may indemnify directors and/or officers in an action or
suit by or in the right of the corporation under the same conditions, except
that no indemnification is permitted without judicial approval if the director
or officer is adjudged to be liable to the corporation. Where a director or
officer is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him or her against the
expenses which such director or officer actually and reasonably incurred.
The Company's Second Amended and Restated Certificate of Incorporation and
Amended and Restated By-laws provide for the indemnification of directors and
officers of the Company to the fullest extent permitted by the DGCL.
Pursuant to the Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement, the Underwriters have agreed to indemnify the directors,
officers and controlling persons of the Company against certain civil
liabilities that may be incurred in connection with the Offering, including
certain liabilities under the Securities Act.
II-1
<PAGE>
The Company provides liability insurance for each director and officer for
certain losses arising from claims or charges made against them while acting in
their capacities as directors or officers of the Company.
ITEM 16. EXHIBITS.
(a) The following is a complete list of exhibits filed as part of this
Registration Statement, which are incorporated herein.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1.1 -- Form of Underwriting Agreement.
3.1 -- Certificate of Incorporation of NBTY, Inc. as amended. Filed as Exhibit 3.1 to the Company's
Registration Statement (No. 333-39527) on Form S-4 and incorporated herein by reference.
3.2 -- Certificate of Amendment of Certificate of Incorporation Amended and Restated By-Laws of NBTY, Inc.
Filed as Exhibit 3.2 to the Company's Registration Statement (No. 333-39527) on Form S-4 and
incorporated herein by reference.
4.1 -- Indenture, dated as of September 23, 1997, between NBTY, Inc. and IBJ Schroder Bank & Trust Company,
as Trustee, relating to $150,000 in aggregate principal amount of 8- 5/8% Senior Subordinated Notes
due 2007, Series A and Series B. Filed as Exhibit 4.1 to the Company's Registration Statement (No.
333-39527) on Form S-4 and incorporated herein by reference.
5.1 -- Opinion of Michael C. Duban, P.C.****
10.1 -- Credit and Guarantee Agreement ('Revolving Credit Agreement'), dated September 23, 1997, as amended
April 20, 1998, between the Company and The Chase Manhattan Bank. Filed as Exhibit 10.1 to the
Company's Registration Statement (No. 333-39527) on Form S-4 and incorporated herein by reference.
10.2 -- Third Amendment, dated May 1, 1998, to Credit and Guarantee Agreement between the Company and The
Chase Manhattan Bank.
23.1 -- Consent of Michael C. Duban, P.C.**
23.3 -- Consent of Coopers & Lybrand L.L.P. (Melville, New York)****
23.4 -- Consent of Coopers & Lybrand L.L.P. (St. Louis, Missouri)****
23.5 -- Consent of Amper, Politziner & Mattia P.A.****
24.1 -- Power of Attorney of NBTY, Inc. (included on signature page to this Registration Statement on Form
S-3).****
</TABLE>
- ------------------
* To be filed by amendment.
** Included in the opinion filed as exhibit 5.1.
*** Included in the signature page to this Registration Statement.
**** Previously filed.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to provisions described in Item 15 above, or otherwise, the Company has
been advised that, in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the Common Stock covered hereby, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-2
<PAGE>
The Company hereby undertakes that:
(a) For purposes of determining any liability under the Securities
Act, each filing of the Company's annual report pursuant to Section 13(a)
or 15(d) of the 1934 Act (and, where applicable, each filing of an employee
benefit plan's annual report pursuant to Section 15(d) of the 1934 Act)
that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the Common Stock
therein, and the offering of such Common Stock at that time shall be deemed
to be the initial bona fide offering thereof.
(b) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(c) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The Company hereby undertakes to deliver or cause to be delivered with the
Prospectus, to each person to whom the Prospectus is sent or given, the latest
annual report to security holders that is incorporated by reference in the
Prospectus and furnished pursuant to and meeting the requirements of Rule 14a-3
or Rule 14c-3 under the 1934 Act.
The Company hereby undertakes to provide to the Underwriters at the closing
specified in the Underwriting Agreement, certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE COMPANY
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS POST-EFFECTIVE
AMENDMENT NO. 1 TO THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW
YORK, ON JUNE 30, 1998.
NBTY, INC.
By: /s/ SCOTT RUDOLPH
-------------------------------
Scott Rudolph
Chairman of the Board,
Chief Executive Officer and
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
POST-EFFECTIVE AMENDMENT NO. 1 TO THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY
THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
- ------------------------------------------ ------------------------------------------- -------------------
<S> <C> <C>
/s/ SCOTT RUDOLPH Chairman of the Board, Chief Executive June 30, 1998
- ------------------------------------------ Officer and President
Scott Rudolph
/s/ HARVEY KAMIL Executive Vice President, Secretary June 30, 1998
- ------------------------------------------
Harvey Kamil
ARTHUR RUDOLPH* Director June 30, 1998
- ------------------------------------------
Arthur Rudolph
ARAM GARABEDIAN* Director June 30, 1998
- ------------------------------------------
Aram Garabedian
BERNARD G. OWEN* Director June 30, 1998
- ------------------------------------------
Bernard G. Owen
ALFRED SACKS* Director June 30, 1998
- ------------------------------------------
Alfred Sacks
MURRAY DALY* Director June 30, 1998
- ------------------------------------------
Murray Daly
GLENN COHEN* Director June 30, 1998
- ------------------------------------------
Glenn Cohen
BUD SOLK* Director June 30, 1998
- ------------------------------------------
Bud Solk
NATHAN ROSENBLATT* Director June 30, 1998
- ------------------------------------------
Nathan Rosenblatt
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
- ------------------------------------------ ------------------------------------------- -------------------
<S> <C> <C>
MICHAEL L. ASHNER* Director June 30, 1998
- ------------------------------------------
Michael L. Ashner
*By /s/ SCOTT RUDOLPH
---------------------------------------
Scott Rudolph
/s/ HARVEY KAMIL
- ------------------------------------------
Harvey Kamil
Attorneys-in-Fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1.1 -- Form of Underwriting Agreement.
3.1 -- Certificate of Incorporation of NBTY, Inc. as amended. Filed as Exhibit 3.1 to the Company's
Registration Statement (No. 333-39527) on Form S-4 and incorporated herein by reference.
3.2 -- Certificate of Amendment of Certificate of Incorporation Amended and Restated By-Laws of NBTY, Inc.
Filed as Exhibit 3.2 to the Company's Registration Statement (No. 333-39527) on Form S-4 and
incorporated herein by reference.
4.1 -- Indenture, dated as of September 23, 1997, between NBTY, Inc. and IBJ Schroder Bank & Trust Company,
as Trustee, relating to $150,000 in aggregate principal amount of 8- 5/8% Senior Subordinated Notes
due 2007, Series A and Series B. Filed as Exhibit 4.1 to the Company's Registration Statement (No.
333-39527) on Form S-4 and incorporated herein by reference.
5.1 -- Opinion of Michael C. Duban, P.C.****
10.1 -- Credit and Guarantee Agreement ('Revolving Credit Agreement'), dated September 23, 1997, as amended
April 20, 1998, between the Company and The Chase Manhattan Bank. Filed as Exhibit 10.1 to the
Company's Registration Statement (No. 333-39527) on Form S-4 and incorporated herein by reference.
10.2 -- Third Amendment, dated May 1, 1998, to Credit and Guarantee Agreement between the Company and The
Chase Manhattan Bank.
23.1 -- Consent of Michael C. Duban, P.C.**
23.3 -- Consent of Coopers & Lybrand L.L.P. (Melville, New York)****
23.4 -- Consent of Coopers & Lybrand L.L.P. (St. Louis, Missouri)****
23.5 -- Consent of Amper, Politziner & Mattia P.A.****
24.1 -- Power of Attorney of NBTY, Inc. (included on signature page to this Registration Statement on Form
S-3).****
</TABLE>
- ------------------
* To be filed by amendment.
** Included in the opinion filed as exhibit 5.1.
*** Included in the signature page to this Registration Statement.
**** Previously filed.
<PAGE>
8,600,000 Shares
NBTY, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
June 30, 1998
SMITH BARNEY INC.
LEHMAN BROTHERS INC.
ADAMS, HARKNESS & HILL, INC.
RAYMOND JAMES & ASSOCIATES, INC.
PIPER JAFFRAY INC.
c/o SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Dear Sirs:
NBTY, Inc., a Delaware corporation (the "Company"), and the
Persons named in Schedule II hereto (the "Selling Stockholders"), propose to
sell to the underwriters named in Schedule I hereto (the "Underwriters"), for
whom you (the "Representatives") are acting as representatives, 8,600,000 shares
of Common Stock, par value $.008 per share ("Common Stock"), of the Company
(said shares to be issued and sold by the Company and shares to be sold by the
Selling Stockholders collectively being hereinafter called the "Firm Shares").
The Company and the Selling Stockholders also propose to grant to the
Underwriters an option to purchase up to 1,290,000 additional shares of Common
Stock (the "Additional Shares"; the Additional Shares, together with the Firm
Shares, being hereinafter called the "Shares"). To the extent there are no
additional Underwriters listed on Schedule I other than you, the term
Representatives as used herein shall mean you, as Underwriters, and the terms
Representatives and Underwriters shall mean either the singular or plural as the
context requires.
1. Registration Statement and Prospectus. The Company has
filed with the Securities and Exchange Commission (the "Commission") a
registration statement (file number 333-52251) on Form S-3, including related
preliminary Prospectus, for the registration under the Securities Act of 1933,
as amended (the" Act") of the offering and sale of the Shares. The Company may
have filed one or more amendments thereto, including the related preliminary
Prospectus, each of which has previously been furnished to you. The Company will
next file with the Commission either (A) prior to the Effective Date of such
registration statement, a further amendment to such registration statement
(including the form of final prospectus) or (B) after the Effective Date of such
registration statement, the final Prospectus in accordance with Rules 430A and
424(b)(1), (3) or (4). In the case of clause (B), the Company has included in
such registration statement, as amended at the Effective Date, all information
(other than, at the option of the Company, information permitted to be omitted
pursuant to Rule 430A Information) required by the Act and the rules thereunder
to be included in such
<PAGE>
-2-
registration statement and the Prospectus. As filed, such amendment and form of
final prospectus, or such final prospectus (the "Registration Statement"), shall
contain all Rule 430A information, together with all other such required
information, and, except to the extent the Representatives shall agree in
writing to a modification, shall be in all substantive respects in the form
furnished to you prior to the date and time that this Agreement is executed and
delivered by the parties hereto (the "Execution Time") or, to the extent not
completed at the Execution Time, shall contain only such specific additional
information and other changes (beyond that contained in the latest Prepricing
Prospectus) as the Company has advised you, prior to the Execution Time, will be
included or made therein. For the purposes of this Agreement, "Effective Date"
means each date and time that the Registration Statement, any post-effective
amendment or amendments thereto and any registration statement filed pursuant to
Rule 462(b) relating to the offering covered by the initial registration
statement became or become effective. The term "Prospectus" as used in this
Agreement means the prospectus in the form included in the Registration
Statement, or, if the prospectus included in the Registration Statement omits
information in reliance on Rule 430A under the Act and such information is
included in a prospectus filed with the Commission pursuant to Rule 424(b) under
the Act, the term "Prospectus" as used in this Agreement means the prospectus in
the form included in the Registration Statement as supplemented by the addition
of the Rule 430A information contained in the prospectus filed with the
Commission pursuant to Rule 424(b). As used herein, the "Prepricing Prospectus"
shall mean any preliminary prospectus with respect to the offering of the Shares
referred to herein and any preliminary prospectus with respect to the offering
of the Shares included in the Registration Statement at the Effective Date that
omits information permitted to be omitted pursuant to Rule 430A; and the
Prepricing Prospectus. Any reference in this Agreement to the registration
statement, the Registration Statement, any Prepricing Prospectus or the
Prospectus shall be deemed to refer to and include the documents incorporated by
reference therein pursuant to Item 12 of Form S-3 under the Act. As used herein,
the term "Incorporated Documents" means the documents which are incorporated by
reference into the registration statement, the Registration Statement, any
Prepricing Prospectus, the Prospectus, or any amendment or supplement thereto.
For the purposes of this Agreement, "Rule 424," "Rule 430A" and "Rule 462" refer
to such rules under the Act.
2. Agreements to Sell and Purchase. Subject to such
adjustments as the Underwriters may determine in order to avoid fractional
shares, the Company hereby agrees, subject to all the terms and conditions set
forth herein, to issue and sell to each Underwriter and, upon the basis of the
representations, warranties and agreements of the Company and the Selling
Stockholders herein contained and subject to all the terms and conditions set
forth herein, each Underwriter agrees, severally and not jointly, to purchase
from the Company, at a purchase price of $18.00 per share (the "purchase price
per share"), the number of Firm Shares which bears the same proportion to the
aggregate number of Firm Shares to be issued and sold by the Company as the
number of Firm Shares set forth opposite the name of such Underwriter in
Schedule I hereto (or such number of Firm Shares increased as set forth in
Section 13 hereof) bears to the aggregate number of Firm Shares to be sold by
the Company and the Selling Stockholders.
Subject to such adjustments as you may determine in order to
avoid fractional shares, each Selling Stockholder agrees, subject to all the
terms and conditions set forth herein, to sell to each Underwriter and, upon the
basis of the representations, warranties and agreements of the Company and the
Selling Stockholders herein contained and subject to all the terms and
conditions set forth herein, each Underwriter, severally and not jointly, agrees
to purchase from each Selling Stockholder at the purchase price per share that
number of Firm Shares which bears the same proportion to the number of Firm
Shares to be sold by such Selling Stockholder as the number of Firm Shares set
forth opposite the name of such Underwriter in Schedule I hereto (or such number
of Firm Shares increased as set forth in Section 13 hereof) bears to the
aggregate number of Firm Shares to be sold by the Company and the Selling
Stockholders.
<PAGE>
-3-
The Company also agrees, subject to all the terms and
conditions set forth herein, to sell to each Underwriter, and, upon the basis of
the representations, warranties and agreements of the Company and the Selling
Stockholders herein contained and subject to all the terms and conditions set
forth herein, each Underwriter shall have the right to purchase from the
Company, at the purchase price per share, pursuant to an option (the
"over-allotment option") which may be exercised at any time and from time to
time prior to 9:00 P.M., New York City time, on the 30th day after the date of
the Prospectus (or, if such 30th day shall be a Saturday or Sunday or a holiday,
on the next business day thereafter when the NASDAQ National Market is open for
trading), up to an aggregate of 450,000 Additional Shares from the Company.
Additional Shares may be purchased only for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. Upon
any exercise of the over-allotment option, each Underwriter, severally and not
jointly, agrees to purchase from the Company the number of Additional Shares
(subject to such adjustments as the Underwriter may determine in order to avoid
fractional shares) which bears the same proportion to the number of Additional
Shares to be sold by the Company as the number of Firm Shares set forth opposite
the name of such Underwriter in Schedule I hereto (or such number of Firm Shares
increased as set forth in Section 14 hereof) bears to the aggregate number of
Firm Shares to be sold by the Company and the Selling Stockholders.
The Selling Stockholders also agree, subject to all the terms
and conditions set forth herein, to sell to each Underwriter, and, upon the
basis of the representations, warranties and agreements of the Company and the
Selling Stockholders herein contained and subject to all the terms and
conditions set forth herein, each Underwriter shall have the right to purchase
from the Selling Stockholders, at the purchase price per share, pursuant to an
option (the "over-allotment option") which may be exercised at any time and from
time to time prior to 9:00 P.M., New York City time, on the 30th day after the
date of the Prospectus (or, if such 30th day shall be a Saturday or Sunday or a
holiday, on the next business day thereafter when the NASDAQ National Market is
open for trading), up to an aggregate of 840,000 Additional Shares from the
Selling Stockholders. Additional Shares may be purchased only for the purpose of
covering over-allotments made in connection with the offering of the Firm
Shares. Upon any exercise of the over-allotment option, each Underwriter,
severally and not jointly, agrees to purchase from the Selling Stockholders the
number of Additional Shares (subject to such adjustments as the Underwriter may
determine in order to avoid fractional shares) which bears the same proportion
to the number of Additional Shares to be sold by such Selling Stockholder as the
number of Firm Shares set forth opposite the name of such Underwriter in
Schedule I hereto (or such number of Firm Shares increased as set forth in
Section 13 hereof) bears to the aggregate number of Firm Shares to be sold by
the Company and the Selling Stockholders.
Certificates in transferable form for the Shares (including
any Additional Shares) that each of the Selling Stockholders agrees to sell
pursuant to this Agreement have been placed in custody with the Company as
custodian (the "Custodian") for delivery under this Agreement pursuant to the
custody agreement (the "Custody Agreement") executed by each of the Selling
Stockholders. Each Selling Stockholder agrees that (i) the Shares represented by
the certificates held in custody pursuant to the Custody Agreement are subject
to the interests of the Underwriters, the Company and each other Selling
Stockholder, (ii) the arrangements made by the Selling Stockholders for such
custody are, except as specifically provided in the Custody Agreement,
irrevocable, and (iii) the obligations of the Selling Stockholders hereunder and
under the Custody Agreement shall not be terminated by any act of such Selling
Stockholder or by operation of law, whether by the death or incapacity of any
Selling Stockholder or the occurrence of any other event or, if the Selling
Stockholder is not a natural person, upon any dissolution, winding up,
distribution of assets or other event affecting the legal existence of such
Selling Stockholder. If any Selling Stockholder shall die or be incapacitated or
if any other event shall occur before the delivery of the Shares hereunder or if
the Selling Stockholder is not a natural person, shall dissolve, wind up,
distribute assets or if any other event affecting the legal existence of such
Selling Stockholder shall occur before the delivery of the Shares hereunder,
certificates for the Shares of such Selling Stockholder
<PAGE>
-4-
shall be delivered to the Underwriters by the Custodian in accordance with the
terms and condition of this Agreement and the Custody Agreement as if such death
or incapacity, dissolution, winding, distribution of assets or other event had
not occurred, regardless of whether or not the Custodian or any Underwriter
shall have received notice of such death, incapacity, dissolution, winding up or
distribution of assets or other event. The Custodian is authorized, on behalf of
each of the respective Selling Stockholders, to make delivery of the
certificates for such Shares and to take such other action as may be necessary
or desirable in connection with the transactions contemplated by this Agreement.
The Custodian agrees to perform its duties under the Custody Agreement.
3. Terms of Public Offering. The Company and the Selling
Stockholders have been advised by you that the Underwriters propose to make a
public offering of their respective portions of the Shares as soon after the
Registration Statement and this Agreement have become effective as in your
judgment is advisable and initially to offer the Shares upon the terms set forth
in the Prospectus.
4. Delivery of the Shares and Payment Therefor. Delivery to
the Underwriters of and payment for the Firm Shares shall be made at the office
of Smith Barney Inc., 388 Greenwich Street, New York, NY 10013, at 10:00 A.M.,
New York City time, on July 7, 1998 (the "Closing Date"). The place of closing
for the Firm Shares and the Closing Date may be varied by agreement among the
Representatives, the Company and the Selling Stockholders.
Each Selling Stockholder will pay all applicable state
transfer taxes, if any, involved in the transfer to the several Underwriters of
the Shares to be purchased by them from such Selling Stockholder and the
respective Underwriters will pay any additional stock transfer taxes involved in
further transfers.
Delivery to the Underwriters of and payment for any
Additional Shares to be purchased by the Underwriters shall be made at the
aforementioned office of Smith Barney Inc. at such time on such date (the
"Option Closing Date"), which may be the same as the Closing Date but shall in
no event be earlier than the Closing Date nor earlier than two nor later than
ten business days after the giving of the notice hereinafter referred to, as
shall be specified in a written notice from you on behalf of the Underwriters to
the Company and the Selling Stockholders of the Underwriters' determination to
purchase a number, specified in such notice, of Additional Shares. The place of
closing for any Additional Shares and the Option Closing Date for such Shares
may be varied by agreement among you, the Company and the Selling Stockholders.
Certificates for the Firm Shares and for any Additional
Shares to be purchased hereunder shall be registered in such names and in such
denominations as you shall request prior to 9:30 A.M., New York City time, on
the second business day preceding the Closing Date or any Option Closing Date,
as the case may be. Such certificates shall be made available to you in New York
City for inspection and packaging not later than 9:30 A.M., New York City time,
on the business day next preceding the Closing Date or the Option Closing Date,
as the case may be. The certificates evidencing the Firm Shares and any
Additional Shares to be purchased hereunder shall be delivered to you on the
Closing Date or the Option Closing Date, as the case may be, against payment of
the purchase price therefor in immediately available funds.
5. Offering by the Underwriters. It is understood that the
several Underwriters propose to offer the Shares for sale to the public as set
forth in the Prospectus.
6. Agreements of the Company. The Company agrees with the
several Underwriters as follows:
<PAGE>
-5-
(a) If, at the time this Agreement is executed and delivered, it
is necessary for the Registration Statement or a post-effective amendment
thereto to be declared effective before the offering of the Shares may
commence, the Company will endeavor to cause the Registration Statement or
such post-effective amendment to become effective as soon as possible and
will advise you promptly and, if requested by you, will confirm such advice
in writing, when it receives notice that the Registration Statement or such
post-effective amendment has become effective.
(b) The Company will advise you promptly and, if requested by you,
will confirm such advice in writing: (i) of any request by the Commission
for amendment of or a supplement to the Registration Statement, any
Prepricing Prospectus or the Prospectus or for additional information; (ii)
of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of the suspension of
qualification of the Shares for offering or sale in any jurisdiction or the
initiation of any proceeding for such purpose; and (iii) within the period
of time referred to in paragraph (f) below, of any change in the Company's
condition (financial or other), business, prospects, properties, net worth
or results of operations, or of the happening of any event, which makes any
statement of a material fact made in the Registration Statement or the
Prospectus (as then amended or supplemented) untrue or which requires the
making of any additions to or changes in the Registration Statement or the
Prospectus (as then amended or supplemented) in order to state a material
fact required by the Act or the regulations thereunder to be stated therein
or necessary in order to make the statements therein not misleading, or of
the necessity to amend or supplement the Prospectus (as then amended or
supplemented) to comply with the Act or any other law. If at any time the
Commission shall issue any stop order suspending the effectiveness of the
Registration Statement, the Company will make every reasonable effort to
obtain the withdrawal of such order at the earliest possible time.
(c) The Company will furnish to you, without charge, (i) six
signed copies of the registration statement as originally filed with the
Commission and of each amendment thereto, including financial statements and
all exhibits to the registration statement, (ii) such number of conformed
copies of the registration statement as originally filed and of each
amendment thereto, but without exhibits, as you may request, (iii) such
number of copies of the Incorporated Documents, without exhibits, as you may
request, and (iv) six copies of the exhibits to the Incorporated Documents.
(d) The Company will not (i) file any amendment to the
Registration Statement or make any amendment or supplement to the Prospectus
of which you shall not previously have been advised or to which you shall
object after being so advised or (ii) so long as, in the opinion of counsel
for the Underwriters, a Prospectus is required to be delivered in connection
with sales by any Underwriter or dealer, file any information, documents or
reports pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act") without delivering a copy of such information, documents or
reports to you as representatives of the Underwriters, prior to or
concurrently with such filing.
(e) Prior to the execution and delivery of this Agreement, the
Company has delivered to you, without charge, in such quantities as you have
requested, copies of the form of the Prepricing Prospectus. The Company
consents to the use, in accordance with the provisions of the Act and with
the securities or Blue Sky laws of the jurisdictions in which the Shares are
offered by the several Underwriters and by dealers, prior to the date of the
Prospectus, of each Prepricing Prospectus so furnished by the Company.
(f) As soon after the execution and delivery of this Agreement as
possible and thereafter from time to time for such period as in the opinion
of counsel for the Underwriters a prospectus is re-
<PAGE>
-6-
quired by the Act to be delivered in connection with sales by any
Underwriter or dealer, the Company will expeditiously deliver to each
Underwriter and each dealer, without charge, as many copies of the
Prospectus (and of any amendment or supplement thereto) as you may request.
The Company consents to the use of the Prospectus (and of any amendment or
supplement thereto) in accordance with the provisions of the Act and with
the securities or Blue Sky laws of the jurisdictions in which the Shares are
offered by the several Underwriters and by all dealers to whom Shares may be
sold, both in connection with the offering and sale of the Shares and for
such period of time thereafter as the Prospectus is required by the Act to
be delivered in connection with sales by any Underwriter or dealer. If
during such period of time any event shall occur that in the judgment of the
Company or in the opinion of counsel for the Underwriters is required to be
set forth in the Prospectus (as then amended or supplemented) or should be
set forth therein in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading, or if it is
necessary to supplement or amend the Prospectus to comply with the Act or
any other law, the Company will forthwith prepare and, subject to the
provisions of paragraph (d) above, file with the Commission an appropriate
supplement or amendment thereto, and will expeditiously furnish to the
Underwriters and dealers a reasonable number of copies thereof. In the
event that the Company and you, as Representatives of the several
Underwriters, agree that the Prospectus should be amended or supplemented,
the Company, if requested by you, will promptly issue a press release
announcing or disclosing the matters to be covered by the proposed amendment
or supplement.
(g) The Company will cooperate with you and with counsel for the
Underwriters in connection with the registration or qualification of the
Shares for offering and sale by the several Underwriters and by dealers
under the securities or Blue Sky laws of such jurisdictions as you may
designate and will file such consents to service of process or other
documents necessary or appropriate in order to effect such registration or
qualification; provided that in no event shall the Company be obligated to
qualify to do business in any jurisdiction where it is not now so qualified
or to take any action which would subject it to service of process in suits,
other than those arising out of the offering or sale of the Shares, in any
jurisdiction where it is not now so subject.
(h) The Company will make generally available to its security
holders a consolidated earnings statement, which need not be audited,
covering a twelve-month period commencing after the effective date of the
Registration Statement and ending not later than 15 months thereafter, as
soon as practicable after the end of such period, which consolidated
earnings statement shall satisfy the provisions of Section ll(a) of the Act.
(i) During the period of three years hereafter, the Company will
furnish to you (i) as soon as available, a copy of each report of the
Company mailed to stockholders or filed with the Commission and (ii) from
time to time such other information concerning the Company as you may
request.
(j) If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than by notice given
by you terminating this Agreement pursuant to Section 13 or Section 14
hereof) or if this Agreement shall be terminated by the Underwriters because
of any failure or refusal on the part of the Company or the Selling
Stockholders to comply with the terms or fulfill any of the conditions of
this Agreement, the defaulting party (the Company and/or the Selling
Stockholders, as the case may be) agrees to reimburse the Representatives
for all out-of-pocket expenses (including reasonable fees and expenses of
counsel for the Underwriters) incurred by you in connection herewith.
<PAGE>
-7-
(k) The Company will apply the net proceeds from the sale of the
Shares substantially in accordance with the description set forth in the
Prospectus.
(l) If Rule 430A of the Act is employed, the Company will timely
file the Prospectus pursuant to Rule 424(b) under the Act and will advise
you of the time and manner of such filing.
(m) The Company will not, directly or indirectly, sell, grant any
option or warrant for the sale of, register, loan, pledge, grant any rights
with respect to contract to sell or otherwise dispose of any Common Stock,
or any securities convertible into or exercisable or exchangeable for Common
Stock (including, without limitations, any of the economic attributes
thereof), for a period of 270 days after the date of the Prospectus, without
the prior written consent of Smith Barney Inc., except for sales to the
Underwriters pursuant to this Agreement; provided, however, that the
Company may issue and sell Common Stock pursuant to the Company's Employee
Stock Ownership Plan as in effect at the Execution Time.
(n) The Company has furnished or will furnish to the Underwriters
"lock-up" letters, in form and substance satisfactory to you, signed by each
of its current officers and directors and by each of the Selling
Stockholders to the effect that they will not, for a period of 120 days, in
the case of the current officers and directors, and 270 days, in the case of
the Selling Stockholders, following the Execution Time, without the prior
written consent of Smith Barney Inc., offer, sell or contract to sell, or
otherwise dispose of (or enter into any transaction which is designed to, or
could be expected to, result in the disposition (whether by actual
disposition or effective economic disposition due to cash settlement or
otherwise), directly or indirectly or announce the offering of) any other
shares of Common Stock or any securities convertible into, or exchangeable
for, shares of Common Stock.
(o) For a period of 270 days following the Execution Time, the
Company will not, without your prior written consent, as Representatives to
the Underwriters, release or waive any of the obligations of its
stockholders pursuant to any agreements between the Company and its
stockholders which restrict the transfer, encumbrance, offer or disposal of
the Company's securities.
(p) Except as stated in this Agreement and in the Prepricing
Prospectus and Prospectus, the Company has not taken, nor will it take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price of
the Common Stock to facilitate the sale or resale of the Shares.
(q) The Company will use its best efforts to have the shares of
Common Stock which it agrees to sell under this Agreement approved for
inclusion on the NASDAQ National Market on or before the Closing Date.
7. Agreements of the Selling Stockholders. Each Selling
Stockholder agrees with the Underwriters as follows:
(a) Such Selling Stockholder (in his capacity as such) will
reasonably cooperate to the extent necessary to cause the registration
statement or any post-effective amendment thereto to become effective.
(b) Such Selling Stockholder will pay all Federal and other taxes,
if any on the transfer or sale of the Shares being sold by such Selling
Stockholder to the Underwriters.
<PAGE>
-8-
(c) Such Selling Stockholder in his capacity as such will do or
perform all things required to be done or performed by such Selling
Stockholder prior to the Closing Date in accordance with the express terms
hereof to satisfy all conditions precedent to the delivery of the Shares to
be sold by such Selling Stockholder pursuant to this Agreement.
(d) Except as stated in this Agreement and in the Prepricing
Prospectus and the Prospectus, such Selling Stockholder has not taken, nor
will it take, directly or indirectly, any action designed to or that might
reasonably be expected to cause or result in stabilization or manipulation
of the price of the Common Stock to facilitate the sale or resale of the
Shares.
(e) Such Selling Stockholder will advise you promptly, and if
requested by you, will confirm such advice in writing, within the period of
time referred to in Section 6(f) hereof, of any change in information
relating to such Selling Stockholder that suggests that any statement made
in the Registration Statement or the Prospectus (as then amended or
supplemented, if amended or supplemented) relating to such Selling
Stockholder is or may be untrue or that the statements in the Registration
Statement or Prospectus (as then amended or supplemented, if amended or
supplemented) relating to such Selling Stockholder omits or may omit to
state a material fact or a fact necessary to be stated therein in order to
make the statements therein not misleading.
(f) Such Selling Stockholder has furnished or will furnish to the
Underwriters a "lock-up" letter, in form and substance satisfactory to you,
to the effect that such Selling Stockholder agrees that, until such date
which is 270 days after the Closing Date, without the prior written consent
of Smith Barney Inc., as Representative to the Underwriters, such Selling
Stockholder will not, directly or indirectly, offer, sell, contract to sell,
grant any option or warrant for the sale of, register, loan, pledge, grant
any rights with respect to, or otherwise transfer or dispose of any shares
of capital stock, including, without limitation, Common Stock which now or
hereafter may be deemed to be beneficially owned by such Selling
Stockholder.
8. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:
(a) Each Prepricing Prospectus included as part of the
registration statement as originally filed or as part of any amendment or
supplement thereto, or filed pursuant to Rule 424 under the Act, complied
when so filed in all material respects with the provisions of the Act;
except that this representation and warranty does not apply to statements in
or omissions from such Prepricing Prospectus (or any amendment or supplement
thereto) made in reliance upon and in conformity with information relating
to any Selling Stockholder or to any Underwriter furnished to the Company in
writing by an Underwriter through the Representatives expressly for use
therein. The Commission has not issued any order preventing or suspending
the use of any Prepricing Prospectus.
(b) The Company meets the requirements for the use of Form S-3
under the Act. The registration statement in the form in which it became or
becomes effective and also in such form as it may be when any post-effective
amendment thereto shall become effective and the prospectus and any
supplement or amendment thereto when filed with the Commission under Rule
424(b) under the Act, complied or will comply in all material respects with
the provisions of the Act and did not or will not at any such times contain
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading; except that this representation and warranty does not apply
to statements in or omissions from the registration statement or the
<PAGE>
-9-
prospectus made in reliance upon and in conformity with information relating
to any Underwriter furnished to the Company in writing by or on behalf of
any Underwriter expressly for use therein.
(c) The Incorporated Documents, when they were filed (or, if any
amendment with respect to any such document was filed, when such amendment
was filed), complied in all material respects with the requirements of the
Exchange Act and the rules and regulations thereunder.
(d) All the outstanding shares of Common Stock of the Company have
been duly authorized and validly issued, are fully paid and nonassessable
and are free of any preemptive or similar rights; the Shares to be issued
and sold by the Company have been duly authorized and, when issued and
delivered to the Underwriters against payment therefor in accordance with
the terms hereof, will be validly issued, fully paid and nonassessable and
free of any preemptive or similar rights; and the capital stock of the
Company conforms to the description thereof in the Registration Statement
and the Prospectus.
(e) The Company is a corporation duly organized and validly
existing in good standing under the laws of the State of Delaware with full
corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Registration Statement and the
Prospectus, and is duly registered and qualified to conduct its business and
is in good standing in each jurisdiction or place where the nature of its
properties or the conduct of its business requires such registration or
qualification, except where the failure so to register or qualify does not
have a material adverse effect on the condition (financial or other),
business, properties, net worth or results of operations of the Company and
the Subsidiaries (as hereinafter defined) taken as a whole (a "Material
Adverse Effect").
(f) All the Company's subsidiaries (collectively, the
"Subsidiaries") are listed in an exhibit to the Registration Statement.
Each Subsidiary is a corporation duly organized, validly existing and in
good standing in the jurisdiction of its incorporation, with full corporate
power and authority to own, lease and operate its properties and to conduct
its business as described in the Registration Statement and the Prospectus,
and is duly registered and qualified to conduct its business and is in good
standing in each jurisdiction or place where the nature of its properties or
the conduct of its business requires such registration or qualification,
except where the failure so to register or qualify does not have a material
adverse effect on the condition (financial or other), business, properties,
net worth or results of operations of such Subsidiary; all the outstanding
shares of capital stock of each of the Subsidiaries have been duly
authorized and validly issued, are fully paid and nonassessable, and are
owned by the Company directly, or indirectly through one of the other
Subsidiaries, free and clear of any lien, adverse claim, security interest,
equity or other encumbrance.
(g) There are no legal or governmental proceedings pending or, to
the knowledge of the Company, threatened, against the Company or any of the
Subsidiaries, or to which the Company or any of the Subsidiaries, or to
which any of their respective properties is subject, that are required to be
described in the Registration Statement or the Prospectus but are not
described as required, and there are no agreements, contracts, indentures,
leases or other instruments that are required to be described in the
Registration Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement or any Incorporated Document that are not described
or filed as required by the Act or the Exchange Act. The descriptions of
the terms of any such contracts or documents contained in the Registration
Statement or the Prospectus are correct in all material respects.
<PAGE>
-10-
(h) Neither the Company nor any of the Subsidiaries is (i) in
violation of its certificate or articles of incorporation or by-laws, or
other organizational documents, (ii) in violation of any law, ordinance,
administrative or governmental rule or regulation applicable to the Company
or any of the Subsidiaries or of any decree of any court or governmental
agency or body having jurisdiction over the Company or any of the
Subsidiaries, or (iii) in default in any material respect in the performance
of any obligation, agreement or condition contained in any bond, debenture,
note or any other evidence of indebtedness or in any material agreement,
indenture, lease or other instrument to which the Company or any of the
Subsidiaries is a party or by which any of them or any of their respective
properties may be bound; except, in the case of clauses (ii) and (iii)
above, for any such violation or default which, together with all other such
violations and defaults then existing, would not have a Material Adverse
Effect.
(i) Neither the issuance and sale of the Shares, the execution,
delivery or performance of this Agreement by the Company nor the
consummation by the Company of the transactions contemplated hereby and
thereby (i) requires any consent, approval, authorization or other order of
or registration or filing with, any court, regulatory body, administrative
agency or other governmental body, agency or official (except such as may be
required for the registration of the Shares under the Act and the Exchange
Act and compliance with the securities or Blue Sky laws of various
jurisdictions, all of which have been or will be effected in accordance with
this Agreement) or conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, the certificate or articles of
incorporation or bylaws, of the Company or any of the Subsidiaries or (ii)
conflicts or will conflict with or constitutes or will constitute a breach
of, or a default under, any agreement, indenture, lease or other instrument
to which the Company or any of the Subsidiaries is a party or by which any
of them or any of their respective properties may be bound, or violates or
will violate any statute, law, regulation or filing or judgment, injunction,
order or decree applicable to the Company or any of the Subsidiaries or any
of their respective properties, or will result in the creation or imposition
of any lien, charge or encumbrance upon any property or assets of the
Company or any of the Subsidiaries pursuant to the terms of any agreement or
instrument to which any of them is a party or by which any of them may be
bound or to which any of the property or assets of any of them is subject.
(j) The accountants, Coopers & Lybrand, L.L.P., who have certified
or shall certify the financial statements included or incorporated by
reference in the Registration Statement and the Prospectus (or any amendment
or supplement thereto) are independent public accountants as required by the
Act.
(k) The financial statements, together with related schedules and
notes, included or incorporated by reference in the Registration Statement
and the Prospectus (and any amendment or supplement thereto), present fairly
the consolidated financial position, results of operations, cash flows and
changes in financial position of the Company and the Subsidiaries on the
basis stated in the Registration Statement at the respective dates or for
the respective periods to which they apply; such statements and related
schedules and notes have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved,
except as disclosed therein; and the other financial and statistical
information and data included or incorporated by reference in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto) are accurately presented and prepared on a basis consistent with
such financial statements and the books and records of the Company and the
Subsidiaries.
<PAGE>
-11-
(l) The execution and delivery of, and the performance by the
Company of its obligations under, this Agreement have been duly and validly
authorized by the Company, and this Agreement has been duly executed and
delivered by the Company and constitutes the valid and legally binding
agreement of the Company, enforceable against the Company in accordance with
its terms, except (i) the enforceability hereof or thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws now
or hereafter in effect relating to creditors' rights generally, (ii) the
remedy of specific performance and other forms of equitable relief may be
subject to certain equitable defenses and to the discretion of the court
before which the proceedings may be brought and (iii) rights to indemnity
and contribution hereunder or thereunder may be limited by federal or state
securities laws or the public policy underlying such laws.
(m) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement thereto), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement thereto),
neither the Company nor any of the Subsidiaries has incurred any liability
or obligation, direct or contingent, or entered into any transaction, not in
the ordinary course of business, that is material to the Company and the
Subsidiaries taken as a whole, and there has not been any change in the
capital stock, or material increase in the short-term debt or long-term
debt, of the Company or any of the Subsidiaries, or any development having
or which may reasonably be expected to have, a Material Adverse Effect.
(n) Each of the Company and the Subsidiaries has good and
marketable title to all property (real and personal) described in the
Prospectus as being owned by it, free and clear of all liens, claims,
security interests or other encumbrances except such as are described in the
Registration Statement and the Prospectus or in a document included as an
exhibit to the Registration Statement and all the property described in the
Prospectus as being held under lease by each of the Company and the
Subsidiaries is held by it under valid, subsisting and enforceable leases
with only such exceptions as in the aggregate are not materially burdensome
and do not interfere in any material respect with the conduct of the
business of the Company and the Subsidiaries, taken as a whole.
(o) The Company has not distributed and, prior to the later to
occur of (i) the Closing Date or the Option Closing Date, as the case may
be, and (ii) completion of the distribution of the Shares, will not
distribute any offering material in connection with the offering and sale of
the Shares other than the Registration Statement, the Prepricing Prospectus,
the Prospectus or other materials, if any, permitted by the Act.
(p) The Company and each of the Subsidiaries has such permits,
licenses, franchises and authorizations of governmental or regulatory
authorities ("permits") as are necessary to own its respective properties
and to conduct its business in the manner described in the Prospectus,
subject to such qualifications as may be set forth in the Prospectus; the
Company has fulfilled and performed all its material obligations with
respect to such permits and no event has occurred which allows, or after
notice or lapse of time would allow, revocation or termination thereof or
results in any other material impairment of the rights of the holder of any
such permit, subject in each case to such qualification as may be set forth
in the Prospectus; and, except as described in the Prospectus, none of such
permits contains any restriction that is materially burdensome to the
Company or any of its Subsidiaries.
(q) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary to permit preparation of
financial
<PAGE>
-12-
statements in conformity with generally accepted accounting principles and
to maintain accountability for assets; (iii) access to assets is permitted
only in accordance with management's general or specific authorization; and
(iv) the recorded accountability for assets is compared with existing assets
at reasonable intervals and appropriate action is taken with respect to any
differences.
(r) To the Company's knowledge, neither the Company nor any of its
Subsidiaries nor any employee or agent of the Company or any Subsidiary has
made any payment of funds of the Company or any Subsidiary or received or
retained any funds in violation of any law, rule or regulation, which
payment, receipt or retention of funds is of a character required to be
disclosed in the Prospectus.
(s) The Company and each of the Subsidiaries have filed all
foreign, federal, state and local tax returns required to be filed, which
returns are complete and correct, and neither the Company nor any Subsidiary
is in default in the payment of any taxes which were payable pursuant to
said returns or any assessments with respect thereto.
(t) Except as disclosed in the Registration Statement and the
Prospectus, no holder of any security of the Company (other than the Selling
Stockholders) has any right to require registration of shares of Common
Stock or any other security of the Company because of the filing of the
registration statement or consummation of the transactions contemplated by
this Agreement.
(u) The Company and the Subsidiaries own or possess all patents,
trademarks, trademark registration, service marks, service mark
registrations, trade names, copyrights, licenses, inventions, trade secrets
and rights described in the Prospectus as being owned by them or any of the
them or necessary for the conduct of their respective businesses, and the
Company is not aware of any claim to the contrary or any challenge by any
other person to the rights of the Company and the Subsidiaries with respect
to the foregoing.
(v) The Company is not now, and after sale of the Shares and
application of the net proceeds from such sale as described in the
Prospectus under the caption "Use of Proceeds" will not be, an "investment
company" within the meaning of the Investment Company Act of 1940, as
amended.
(w) The Company has complied with all provisions of Florida
Statutes, 517.075, relating to issuers doing business with Cuba.
9. Representations and Warranties of the Selling
Stockholders. Each Selling Stockholder represents and warrants to each
Underwriter that:
(a) Such Selling Stockholder now has, and on the Closing Date and
any Option Closing Date will have, valid and marketable title to the Shares
to be sold by such Selling Stockholder hereunder, free and clear of any
lien, claim, security interest or other encumbrance, including, without
limitation, any restriction on transfer, except as otherwise described in
the Prospectus.
(b) Such Selling Stockholder now has, and on the Closing Date and
any Option Closing Date will have, full legal right, power and
authorization, and any approval required by law, to sell, assign transfer
and deliver such Shares in the manner provided in this Agreement, and upon
delivery of and payment for such Shares hereunder, the several Underwriters
will acquire valid and marketable title to such Shares free and clear of any
lien, claim, security interest, or other encumbrance.
<PAGE>
-13-
(c) This Agreement and the Custody Agreement have each been duly
authorized, executed and delivered by or on behalf of such Selling
Stockholder and is the valid and binding agreement of such Selling
Stockholder enforceable against such Selling Stockholder in accordance with
their respective terms, except that (i) the enforceability hereof or thereof
may be limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws now or hereafter in effect relating to creditors' rights
generally, (ii) the remedy of specific performance and other forms of
equitable relief may be subject to certain equitable defenses and to the
discretion of the court before which the proceedings may be brought and
(iii) rights to indemnity and contribution hereunder or thereunder may be
limited by federal or state securities laws or the public policy underlying
such laws.
(d) Neither the sale of the Shares, the execution and delivery of
this Agreement or the Custody Agreement by or on behalf of such Selling
Stockholder nor the consummation of the transactions contemplated hereby and
thereby by such Selling Stockholder (i) requires any consent, approval,
authorization or order of, or filing or registration with, any court,
regulatory body, administrative agency or other governmental body, agency or
official (except such as may be required under the Act or such as may be
required under state securities or Blue Sky laws governing the purchase and
distribution of the Shares) or (ii) conflicts or will conflict with or
constitutes or will constitute a breach of, or default under, or violates or
will violate, any agreement, indenture or other instrument to which such
Selling Stockholder is a party in his individual capacity or by which such
Selling Stockholder is or may be bound or to which any of such Selling
Stockholder's property or assets is subject, or any statute, law, rule,
regulation, ruling, judgment, injunction, order or decree applicable to such
Selling Stockholder in his individual capacity or to any property or assets
of such Selling Stockholder.
(e) The Registration Statement and the Prospectus, insofar as they
relate to such Selling Stockholder in his individual capacity, do not and
will not contain an untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading.
(f) The representations and warranties of such Selling Stockholder
in the Custody Agreement are, and on the Closing Date and any Option Closing
Date will be, true and correct.
(g) Such Selling Stockholder has not taken, directly or
indirectly, any action in his individual capacity designed to or that might
reasonably be expected to cause or result in stabilization or manipulation
of the price of the Common Stock to facilitate the sale or resale of the
Shares, except for the lock-up arrangements referred to in the Prospectus.
(h) Such Selling Stockholder does not have any knowledge or any
reason to believe that the Registration Statement or the Prospectus (or any
amendment or supplement thereto) contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading.
(i) Such Selling Stockholder has no reason to believe that the
discussion contained under the caption "Principal and Selling Stockholders"
contained in the Registration Statement and Prospectus is not true and
correct.
(j) No consent, approval, authorization, filing with or order of
any court or governmental agency or body is required in connection with the
transactions contemplated herein, except such as have been obtained under
the Act and such as may be required under the blue sky laws of any jurisdic-
<PAGE>
-14-
tion inside or outside of the United States in connection with the purchase
and distribution of the Shares by the Underwriters in the manner
contemplated herein and in the Prospectus.
(k) There are no contracts, agreements or understandings between
the Selling Stockholders and any person, including the Company, that would
give rise to a valid claim against the Selling Stockholder, the Company or
any Underwriter for a brokerage commission, finder's fee or other like
payment in connection with the offerings.
(l) Such Selling Stockholder has not distributed and will not
distribute any prospectus or other offering material in connection with the
offering and sale of the Shares.
(m) Such Selling Stockholder (i) does not have, or has waived
prior to the date hereof, any preemptive right, co-sale right or right of
first refusal or other similar right to purchase any of the Shares that are
to be sold by the Company or any of the other Selling Stockholders to the
Underwriters pursuant to this Agreement, (ii) does not have, or has waived
prior to the date hereof, any registration right or other similar right to
participate in the offering made by the Prospectus, other than such rights
of participation as have been satisfied by the participation of such Selling
Stockholder in the transactions to which this Agreement relates in
accordance with the terms of this Agreement, and (iii) does not own any
warrants, options or similar rights to acquire, and does not have any right
or arrangement to acquire, any capital stock, rights, warrants, options or
other securities from the Company, other than those described in the
Registration Statement and the Prospectus and, in the case of clause (iii)
above, other than additional shares of the Company that may be issuable to
them pursuant to "working capital adjustments" provisions of Section 5.01 of
the Agreement and Plan of Merger, dated as of April 1, 1998 among Nutrition
Headquarters, Inc., et al., the Selling Stockholders and the Company.
10. Indemnification and Contribution. (a) The Company and
each Selling Stockholder, jointly and severally, agree to indemnify and hold
harmless each of you and each other Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act from and against any and all losses, claims, damages,
liabilities and expenses (including reasonable costs of investigation) arising
out of or based upon any untrue statement or alleged untrue statement of a
material fact contained in any Prepricing Prospectus or in the Registration
Statement or the Prospectus or in any amendment or supplement thereto, or
arising out of or based upon any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims, damages,
liabilities or expenses arise out of or are based upon any untrue statement or
omission or alleged untrue statement or omission which has been made therein or
omitted therefrom in reliance upon and in conformity with the information
relating to such Underwriter furnished in writing to the Company by or on behalf
of any Underwriter through you expressly for use in connection therewith;
provided, however, that (i) the indemnification contained in this paragraph (a)
with respect to any Prepricing Prospectus shall not inure to the benefit of any
Underwriter (or to the benefit of any person controlling such Underwriter) on
account of any such loss, claim, damage, liability or expense arising from the
sale of the Shares by such Underwriter to any person if a copy of the Prospectus
shall not have been delivered or sent to such person within the time required by
the Act and the regulations thereunder, and the untrue statement or alleged
untrue statement or omission or alleged omission of a material fact contained in
such Prepricing Prospectus was corrected in the Prospectus; provided that the
Company has delivered the Prospectus to the several Underwriters in requisite
quantity on a timely basis to permit such delivery or sending and (ii) the
liability of a Selling Stockholder under Sections 9 and 10 shall not exceed an
amount equal to the net proceeds received by such Selling Stockholder from the
sale hereunder of the Shares sold by such Selling Stockholder to the
Underwriters. The foregoing indemnity agreement shall be in addition to any
liability which the Company may otherwise have.
<PAGE>
-15-
(b) If any action, suit or proceeding shall be brought
against any Underwriter or any person controlling any Underwriter in respect
of which indemnity may be sought against the Company or the Selling
Stockholders, such Underwriter or such controlling person shall promptly
notify the parties against whom indemnification is being sought (the
"indemnifying parties"), and such indemnifying parties shall assume the
defense thereof, including the employment of counsel and payment of all fees
and expenses. Such Underwriter or any such controlling person shall have the
right to employ separate counsel in any such action, suit or proceeding and to
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of such Underwriter or such controlling person unless
(i) the indemnifying parties have agreed in writing to pay such fees and
expenses, (ii) the indemnifying parties have failed to assume the defense and
employ counsel, or (iii) the named parties to any such action, suit or
proceeding (including any impleaded parties) include both such Underwriter or
such controlling person and the indemnifying parties and the Underwriter or
such controlling person shall have been advised by its counsel that
representation of such indemnified party and any indemnifying party by the
same counsel would be inappropriate under applicable standards of professional
conduct (whether or not such representation by the same counsel has been
proposed) due to actual or potential differing interests between them (in
which case the indemnifying party shall not have the right to assume the
defense of such action, suit or proceeding on behalf of such Underwriter or
such controlling person). It is understood, however, that the indemnifying
parties shall, in connection with any one such action, suit or proceeding or
separate but substantially similar or related actions, suits or proceedings in
the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of only one
separate firm of attorneys (in addition to any local counsel) at any time for
all such Underwriter and controlling Persons not having actual or potential
differing interests with the Underwriter or among themselves, which firm shall
be designated in writing by Smith Barney Inc., and that all such fees and
expenses shall be reimbursed as they are incurred. The indemnifying parties
shall not be liable for any settlement of any such action, suit or proceeding
effected without their written consent, but if settled with such written
consent, or if there be a final judgment for the plaintiff in any such action,
suit or proceeding, the indemnifying parties agree to indemnify and hold
harmless any Underwriter and any such controlling person, to the extent
provided in the preceding paragraph, and any such controlling person from and
against any loss, claim, damage, liability or expense by reason of such
settlement or judgment.
(c) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who sign
the Registration Statement, the Selling Stockholders, and any person who
controls the Company within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, to the same extent as the foregoing indemnity from
the Company to each Underwriter, but only with respect to information relating
to such Underwriter furnished in writing by or on behalf of such Underwriter
through you expressly for use in the Registration Statement, the Prospectus or
any Prepricing Prospectus, or any amendment or supplement thereto. If any
action, suit or proceeding shall be brought against the Company, any of its
directors, any such officer, the Selling Stockholders, or any such controlling
person based on the Registration Statement, the Prospectus or any Prepricing
Prospectus, or any amendment or supplement thereto, and in respect of which
indemnity may be sought against any Underwriter pursuant to this paragraph
(c), such Underwriter shall have the rights and duties given to the Company by
paragraph (b) above (except that if the Company shall have assumed the defense
thereof such Underwriter shall not be required to do so, but may employ
separate counsel therein and participate in the defense thereof, but the fees
and expenses of such counsel shall be at the Underwriter's expense), and the
Company, its directors, any such officer, the Selling Stockholders, and any
such controlling person shall have the rights and duties given to the
Underwriter by paragraph (b) above. The foregoing indemnity agreement shall be
in addition to any liability which any Underwriter may otherwise have.
(d) If the indemnification provided for in this Section 10
is unavailable to an indemnified party under paragraphs (a) or (c) hereof in
respect of any losses, claims, damages, liabilities or expenses referred
<PAGE>
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to therein, then an indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities or
expenses (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company and the Selling Stockholders on the one hand
and the Underwriters on the other hand from the offering of the Shares, or (ii)
if the allocation provided by clause (i) above is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of the
Company and the Selling Stockholders on the one hand and the Underwriters on the
other in connection with the statements or omissions that resulted in such
losses, claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Selling Stockholders on the one hand and the Underwriters on the other shall be
deemed to be in the same proportion as the total net proceeds from the offering
(before deducting expenses) received by the Company and the Selling Stockholders
bear to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault of the Company and the Selling Stockholders on
the one hand and the Underwriters on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Selling Stockholders on
the one hand or by the Underwriters on the other hand and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
(e) The Company, the Selling Stockholders and the
Underwriters agree that it would not be just and equitable if contribution
pursuant to this Section 10 were determined by a pro rata allocation (even if
the Underwriters were treated as one entity for such purpose) or by any other
method of allocation that does not take account of the equitable
considerations referred to in paragraph (d) above. The amount paid or payable
by an indemnified party as a result of the losses, claims, damages,
liabilities and expenses referred to in paragraph (d) above shall be deemed to
include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating any claim or defending any such action, suit or proceeding.
Notwithstanding the provisions of this Section 10, (x) no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price of the Shares underwritten by it and distributed to the public exceeds
the amount of any damages which such Underwriter has otherwise been required
to pay by reason of such untrue or alleged untrue statement or omission or
alleged omission and (y) no Selling Stockholder shall be required to
contribute any amount in excess of the amount by which the net proceeds
received by such Selling Stockholder from the sale hereunder of the Shares
sold by Selling Stockholder to the Underwriters exceeds the aggregate amount
which such Selling Stockholder has otherwise been required to pay pursuant to
this Section 10. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to this Section 10 are
several in proportion to the respective numbers of Firm Shares set forth
opposite their names in Schedule I hereto (or such numbers of Firm Shares
increased as set forth in Section 13 hereof) and not joint.
(f) No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending or
threatened action, suit or proceeding in respect of which any indemnified
party is or could have been a party and indemnity could have been sought
hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such action, suit or proceeding.
(g) Any losses, claims, damages, liabilities or expenses for
which an indemnified party is entitled to indemnification or contribution
under this Section 10 shall be paid by the indemnifying party to the
indemnified party as such losses, claims, damages, liabilities or expenses are
incurred. The indemnity and con-
<PAGE>
-17-
tribution agreements contained in this Section 10 and the representations and
warranties of the Company and the Selling Stockholders set forth in this
Agreement shall remain operative and in full force and effect, regardless of (i)
any investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Company, its directors or officers or the
Selling Stockholders or any person controlling the Company, (ii) acceptance of
any Shares and payment therefor hereunder, and (iii) any termination of this
Agreement. A successor to any Underwriter or any person controlling any
Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 10.
11. Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase the Firm Shares hereunder are
subject to the following conditions:
(a) If, at the time this Agreement is executed and delivered, it
is necessary for the registration statement or a post-effective amendment
thereto to be declared effective before the offering of the Shares may
commence, the registration statement or such post-effective amendment shall
have become effective not later than 5:30 P.M., New York City time, on the
date hereof, or at such later date and time as shall be consented to in
writing by you, and all filings, if any, required by Rules 424 and 430A
under the Act shall have been timely made; no stop order suspending the
effectiveness of the registration statement shall have been issued and no
proceeding for that purpose shall have been instituted or, to the knowledge
of the Company or any Underwriter, threatened by the Commission, and any
request of the Commission for additional information (to be included in the
registration statement or the prospectus or otherwise) shall have been
complied with to your satisfaction.
(b) Subsequent to the effective date of this Agreement, there
shall not have occurred (i) any change, or any development involving a
prospective change, that would have a Material Adverse Effect on the Company
and the Subsidiaries, taken as a whole, not contemplated by the Prospectus,
which in your opinion, as Representatives of the several Underwriters, would
materially adversely affect the market for the Shares or (ii) any event or
development relating to or involving the Company or any officer or director
of the Company or any Selling Stockholder which makes any statement made in
the Prospectus untrue or which, in the opinion of the Company and its
counsel or the Underwriters and their counsel, requires the making of any
addition to or change in the Prospectus in order to state a material fact
required by the Act or any law to be stated therein or necessary in order to
make the statements therein not misleading, if amending or supplementing the
Prospectus to reflect such event or development would, in your opinion, as
Representatives of the Underwriters, materially adversely affect the market
for the Shares.
(c) You shall have received on the Closing Date, an opinion of
Michael C. Duban, P.C., counsel for the Company, dated the Closing Date and
addressed to you, as Representatives of the several Underwriters, to the
effect that:
(i) The Company is a corporation duly
incorporated and validly existing in good standing under the
laws of the State of Delaware with full corporate power and
authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement
and the Prospectus (and any amendment or supplement thereto),
and is duly registered and qualified to conduct its business
and is in good standing in each jurisdiction or place where the
nature of the Company's properties or the conduct of its
business requires such registration or qualification, except
where the failure so to register or qualify does not have a
Material Adverse Effect on the Company and the Subsidiaries,
taken as a whole);
<PAGE>
-18-
(ii) Each of the Subsidiaries is a corporation
duly organized and validly existing in good standing under the
laws of the jurisdiction of its organization, with full
corporate power and authority to own, lease, and operate its
properties and to conduct its business as described in the
Registration Statement and the Prospectus (and any amendment or
supplement thereto); and all the outstanding shares of capital
stock of each of the Subsidiaries have been duly authorized and
validly issued, are fully paid and nonassessable, and are owned
by the Company directly, or indirectly through one of the other
Subsidiaries, free and clear of any perfected security
interest, or, to the best knowledge of such counsel after
reasonable inquiry, any other security interest, lien, adverse
claim, equity or other encumbrance;
(iii) The authorized and outstanding capital stock
of the Company is as set forth under the caption "Capitalization" in
the Prospectus; and the authorized capital stock of the Company
conforms in all material respects as to legal matters to the
description thereof contained in the Prospectus under the caption
"Description of Capital Stock";
(iv) All the shares of capital stock of the
Company outstanding prior to the issuance of the Shares have
been duly authorized and validly issued, and are fully paid and
nonassessable;
(v) The Shares have been duly authorized and,
when issued and delivered to the Underwriters against payment
therefor in accordance with the terms hereof, will be validly
issued, fully paid and nonassessable and free of any preemptive
rights or, to the best knowledge of such counsel after
reasonable inquiry, similar rights that entitle or will entitle
any person to acquire any Shares upon the issuance thereof by
the Company;
(vi) The form of certificates for the Shares
conforms to the requirements of the Delaware General
Corporation Law;
(vii) The Registration Statement and all
post-effective amendments, if any, have become effective under
the Act and, to the best knowledge of such counsel, after
reasonable inquiry, no stop order suspending the effectiveness
of the Registration Statement has been issued and no
proceedings for that purpose are pending before or contemplated
by the Commission; and any required filing of the Prospectus
pursuant to Rule 424(b) has been made in accordance with Rule
424(b);
(viii) The Company has corporate power and authority
to enter into this Agreement and to issue, sell and deliver the
Shares to be sold by it to the Underwriters as provided herein,
and this Agreement has been duly authorized, executed and
delivered by the Company and is a valid, legal and binding
agreement of the Company;
(ix) Neither the Company nor any of the
Subsidiaries is (i) in violation of its respective certificate
or articles of incorporation or bylaws, or (ii) to the best
knowledge of such counsel after reasonable inquiry, is in
default in the performance of any material obligation,
agreement or condition contained in any bond, debenture, note
or other evidence of indebtedness, except as may be disclosed
in the Prospectus or where any such default or defaults in the
aggregate would not have Material Adverse Effect;
<PAGE>
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(x) Neither the offer, sale or delivery of the
Shares, the execution, delivery or performance of this
Agreement, compliance by the Company with the provisions of
this Agreement nor consummation by the Company of the
transactions contemplated by this Agreement conflicts or will
conflict with or constitutes or will constitute a breach of, or
a default under, the certificate or articles of incorporation
or bylaws of the Company or any of the Subsidiaries or any
material agreement, indenture, lease or other instrument to
which the Company or any of the Subsidiaries is a party or by
which any of them or any of their respective properties is
bound that is an exhibit to the Registration Statement or to
any Incorporated Document, or is known to such counsel after
reasonable inquiry, or will result in the creation or
imposition of any lien, charge or encumbrance upon any property
or assets of the Company or any of the Subsidiaries, nor will
any such action result in any violation of any existing law,
regulation, ruling (assuming compliance with all applicable
state securities and Blue Sky laws), judgment, injunction,
order or decree known to such counsel after reasonable inquiry,
applicable to the Company, the Subsidiaries or any of their
respective properties, which violation would have a Material
Adverse Effect;
(xi) No consent, approval, authorization or other
order of, or registration or filing with, any court, regulatory
body, administrative agency or other governmental body, agency,
or official is required on the part of the Company (except as
have been obtained under the Act and the Securities Exchange
Act of 1934, as amended (the "Exchange Act") or such as may be
required under state securities or Blue Sky laws governing the
purchase and distribution of the Shares) for the valid issuance
and sale of the Shares to the Underwriters as contemplated by
the Underwriting Agreement;
(xii) The Registration Statement and the Prospectus
and any supplements or amendments thereto (except for the
financial statements and the notes thereto and the schedules
and other financial and statistical data included therein, as
to which such counsel need not express any opinion) comply as
to form in all material respects with the requirements of the
Act; and each of the Incorporated Documents (except for the
financial statements and the notes thereto and the schedules
and other financial and statistical data included therein, as
to which such counsel need not express any opinion) complies as
to form in all material respects with the Exchange Act and the
rules and regulations of the Commission thereunder;
(xiii) To the knowledge of such counsel, after
reasonable inquiry, (A) other than as described or contemplated
in the Prospectus (or any supplement thereto), there are no
legal or governmental proceedings pending or threatened against
the Company or any of the Subsidiaries, or to which the Company
or any of the Subsidiaries, or any of their property, is
subject, which are required to be described in the Registration
Statement or Prospectus (or any amendment or supplement
thereto) and (B) there are no agreements, contracts,
indentures, leases or other instruments, that are required to
be described in the Registration Statement or the Prospectus
(or any amendment or supplement thereto) or to be filed as an
exhibit to the Registration Statement or any Incorporated
Document that are not described or filed as required, as the
case may be;
(xiv) To the knowledge of such counsel, after
reasonable inquiry, neither the Company nor any of the
Subsidiaries is in violation of any law, ordinance,
administrative or governmental rule or regulation applicable to
the Company or any of the Subsidiaries or of any decree of any
court or governmental agency or body having jurisdiction over
the Company or
<PAGE>
-20-
any of the Subsidiaries which violation, individually or in the
aggregate, would have a Material Adverse Effect;
(xv) The statements in the Registration Statement
and Prospectus, insofar as they are descriptions of contracts,
agreements or other legal documents, or refer to statements of
law or legal conclusions, are accurate and present fairly the
information required to be shown;
Such opinion shall also state that, although counsel has not
undertaken, except as otherwise indicated in their opinion, to determine
independently, and does not assume any responsibility for, the accuracy or
completeness of the statements in the Registration Statement, such counsel has
participated in the preparation of the Registration Statement and the
Prospectus, including review and discussion of the contents thereof with
officers and other officials of the Company, representatives of the Independent
Public Accountants for the Company and your representatives, at which meetings
the contents of the Registration Statement and the Prospectus and related
matters were discussed (including review and discussion of the contents of all
Incorporated Documents), and nothing has come to the attention of such counsel
that has caused them to believe that the Registration Statement (including the
Incorporated Documents) at the time the Registration Statement became effective,
or the Prospectus, as of its date and as of the Closing Date or the Option
Closing Date, as the case may be, contained or contains an untrue statement of a
material fact or omitted or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or that any
amendment or supplement to the Prospectus, as of its respective date, and as of
the Closing Date or the Option Closing Date, as the case may be, contained or
contains any untrue statement of a material fact or omitted or omits to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading (it being
understood that such counsel need express no opinion with respect to the
financial statements and the notes thereto and the schedules and other financial
and statistical data included in the Registration Statement or the Prospectus or
any Incorporated Document).
In rendering their opinion as aforesaid, counsel may rely
upon an opinion or opinions, each dated the Closing Date, of other counsel
retained by them or the Company as to laws of any jurisdiction other than the
United States or the States of New York or Delaware, provided that (1) each such
local counsel is acceptable to the Representatives, (2) such reliance is
expressly authorized by each opinion so relied upon and a copy of each such
opinion is delivered to the Representatives and is, in form and substance
satisfactory to them and their counsel, and (3) counsel shall state in their
opinion that they believe that they and the Underwriters are justified in
relying thereon.
(d) You shall receive on the Closing Date an opinion of Herrick,
Feinstein LLP, counsel for the Selling Stockholders, dated the Closing Date
and addressed to you, as Representatives of the Underwriters, to the effect
that:
(i) The Underwriting Agreement has been duly
authorized, executed and delivered by or on behalf of each of
the Selling Stockholders;
(ii) Each Selling Stockholder has full legal
right, power and authority to sell, assign, transfer and
deliver the Shares which such Selling Stockholder has agreed to
sell pursuant to the Underwriting Agreement, and when delivered
to and paid for by the Underwriters in accordance with the
terms thereof, assuming the Underwriters have no knowledge of
any ad-
<PAGE>
-21-
verse claim, the Underwriters will own such Shares free and
clear of all security interests, liens, encumbrances or claims
of any person;
(iii) The execution and delivery of the
Underwriting Agreement by the Selling Stockholders and the
consummation by them in their individual capacities of the
transactions contemplated hereby, to the knowledge of such
counsel, will not conflict with, violate, result in a breach of
or constitute a default under the terms or provisions of any
material agreement, indenture, mortgage or other instrument
known to such counsel to which a Selling Stockholder is a party
in his individual capacity or by which he or any of his assets
or property is bound, or any material court order or decree or
any material law, rule, or regulation applicable to a Selling
Stockholder in his individual capacity or to any of the
property or assets of a Selling Stockholder.
(iv) The Custody Agreement has been duly
authorized, executed and delivered by or on behalf of each of
the Selling Stockholders and is a valid and binding agreement
of each Selling Stockholder enforceable against each Selling
Stockholder in accordance with its terms except that (i)
enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or
hereafter in effect relating to creditors' rights generally,
(ii) the remedy of specific performance and other forms of
equitable relief may be subject to certain equitable defenses
and to the discretion of the court before which the proceedings
may be brought and (iii) rights to indemnity and contribution
thereunder may be limited by Federal or state securities laws
or the public policy underlying such laws.
Such opinion shall also state that, although counsel has not
undertaken, except as otherwise indicated in their opinion, to determine
independently, and does not assume any responsibility for, the accuracy or
completeness of the statements in the Registration Statement, such counsel has
reviewed the information contained or incorporated by reference in the
Registration Statement and the Prospectus, including review and discussion of
the contents thereof, and nothing has come to the attention of such counsel that
has caused them to believe that the Registration Statement (including the
Incorporated Documents) at the time the Registration Statement became effective,
or the Prospectus, as of its date and as of the Closing Date or the Option
Closing Date, as the case may be, contained or contains an untrue statement of a
material fact or omitted or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, solely
insofar as any such misstatement or omission relates to each Selling
Stockholder, in his or its individual capacity, or that any amendment or
supplement to the Prospectus, as of its respective date, and as of the Closing
Date or the Option Closing Date, as the case may be, contained or contains any
untrue statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, solely insofar as any
such misstatement or omission relates to each Selling Stockholder, in his or its
individual capacity, (it being understood that such counsel need express no
opinion with respect to the Company or the financial statements and the notes
thereto and the schedules and other financial and statistical data included in
the Registration Statement or the Prospectus or any Incorporated Document).
(e) You shall have received on the Closing Date an opinion of
Cahill Gordon & Reindel, counsel for the Underwriters, dated the Closing
Date and addressed to you, as Representatives of the Underwriters, with
respect to the matters referred to in clauses (v), (vii), (viii), (xii) and
the penultimate paragraph of the foregoing paragraph (c) and such other
related matters as you may request.
<PAGE>
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(f) You shall have received letters addressed to you, as
Representatives of the Underwriters, and dated the date hereof and the
Closing Date, from Coopers & Lybrand, L.L.P, independent certified public
accountants, substantially in the forms heretofore approved by you.
(g) (i) No stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been taken or, to the knowledge of the Company, shall be
contemplated by the Commission at or prior to the Closing Date; (ii) there
shall not have been any change in the capital stock of the Company nor any
material increase in the short-term or long-term debt of the Company (other
than in the ordinary course of business) from that set forth or contemplated
in the Registration Statement or the Prospectus (or any amendment or
Supplement thereto); (iii) there shall not have been, since the respective
dates as of which information is given in the Registration Statement and the
Prospectus (or any amendment or Supplement thereto), except as otherwise be
stated in the Registration Statement and Prospectus (or any amendment or
supplement thereto), any material adverse change in the condition (financial
or other) , business, prospects, properties, net worth or results of
operations of the Company and the Subsidiaries taken as a whole; (iv) the
Company and the Subsidiaries shall not have any liabilities or obligations,
direct or contingent (whether or not in the ordinary course of business),
that are material to the Company and the Subsidiaries, taken as a whole,
other than those reflected in the Registration Statement or the Prospectus
(or any amendment or supplement thereto); and (v) all the representations
and warranties of the Company contained in this Agreement shall be true and
correct on and as of the date hereof and on and as of the Closing Date as if
made on and as of the Closing Date, and you shall have received a
certificate, dated the Closing Date and signed by the chief executive
officer and the chief financial officer of the Company (or such other
officers as are acceptable to you), to the effect set forth in this Section
11(g) and in Section 11(h) hereof.
(h) The Company shall not have failed at or prior to the Closing
Date to have performed or complied with any of its agreements herein
contained and required to be performed or complied with by it hereunder at
or prior to the Closing Date.
(i) All the representations and warranties of each Selling
Stockholder contained in this Agreement and in the Custody Agreement shall
be true and correct on and as of the date hereof and on and as of the
Closing Date as if made on and as of the Closing Date, and you shall have
received a certificate, dated the Closing Date and signed by such Selling
Stockholder to the effect set forth in this Section 11(i) and in Section
11(j) hereof.
(j) The Selling Stockholders shall not have failed at or prior to
the Closing Date to have performed or complied with any of their agreements
contained herein and required to be performed or complied with by them at or
prior to the Closing Date.
(k) Prior to the Closing Date the Shares which the Company agrees
to sell pursuant to this Agreement shall have been approved for inclusion on
the NASDAQ National Market.
(l) At the Execution Time, unless otherwise agreed to in writing
by the Representatives, the Company shall have furnished to the
Representatives "lock-up" letters signed by each of its current officers and
directors of the Company and by the Selling Stockholders addressed to the
Representatives, in which each such person agreed that, until such date
which is (a) 270 days after the Closing Date if such person is a Selling
Stockholder or (b) 120 days after the Closing Date in the case of the
current officers and directors of the Company, without the prior written
consent of Smith Barney Inc.,
<PAGE>
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as Representative to the Underwriters, such person will not, directly or
indirectly, offer, sell, contract to sell, grant any option or warrant for
the sale of, register, loan, pledge, grant any rights with respect to, or
otherwise transfer or dispose of any shares of capital stock of the Company
or securities convertible into or exchangeable or exercisable for, or any
rights to purchase or acquire, such shares of capital stock, including,
without limitation, Common Stock which now or hereafter may be deemed to be
beneficially owned by such person, subject to certain exceptions set forth
therein.
(m) The Company and each of the Selling Stockholders shall have
furnished or caused to be furnished to you such further certificates and
documents as you shall have requested.
All such opinions, certificates, letters and other documents
will be in compliance with the provisions hereof only if they are satisfactory
in form and substance to you and the Underwriters' counsel.
Any certificate or document signed by any officer of the
Company or a Selling Stockholder and delivered to you, as Representatives of
the Underwriters or to counsel for the Underwriters shall be deemed a
representation and warranty by the Company or such Selling Stockholder, as the
case may be, to each Underwriter as to the statements made therein.
The several obligations of the Underwriters to purchase
Additional Shares hereunder are subject to the satisfaction on and as of any
Option Closing Date of the conditions set forth in this Section 11, except
that, if any Option Closing Date is other than the Closing Date, the
certificates, opinions and letters referred to in paragraphs (c) through (i)
shall be dated the Option Closing Date in question and the opinions called for
by paragraphs (c), (d) and (e) shall be revised to reflect the sale of
Additional Shares.
12. Expenses. The Company agrees to pay the following costs
and expenses and all other costs and expenses incident to the performance by its
and the Selling Stockholders' obligations hereunder: (i) the preparation,
printing or reproduction, and filing with the Commission of the registration
statement (including financial statements and exhibits thereto), each
Prepricing Prospectus, the Prospectus, and each amendment or supplement to any
of them; (ii) the printing (or reproduction) and delivery (including postage,
air freight charges and charges for counting and packaging) of such copies of
the registration statement, each Prepricing Prospectus, the Prospectus, the
Incorporated Documents, and all amendments or supplements to any of them, as may
be requested for use in connection with the offering and sale of the Shares;
(iii) the preparation, printing, authentication, issuance and delivery of
certificates for the Shares, including any stamp taxes in connection with the
original issuance and sale of the Shares; (iv) the printing (or reproduction)
and delivery of this Agreement, the preliminary and supplemental Blue Sky
Memoranda and all other agreements or documents printed (or reproduced) and
delivered in connection with the offering of the Shares; (v) the listing of the
Shares on the NASDAQ National Market; (vi) the registration or qualification of
the Shares for offer and sale under the securities or Blue Sky laws of the
several states as provided in Section 6(g) hereof (including the reasonable
fees, expenses and disbursements of counsel for the Underwriters relating to the
preparation, printing or reproduction, and delivery of the preliminary and
supplemental Blue Sky Memoranda and such registration and qualification); (vii)
the filing fees and the fees and expenses of counsel for the Underwriters in
connection with any filings required to be made with the National Association of
Securities Dealers, Inc.; (viii) the transportation and other expenses incurred
by or on behalf of Company representatives in connection with presentations to
prospective purchasers of the Shares; and (ix) the fees and expenses of the
Company's accountants and the fees and expenses of counsel (including local and
special counsel) for the Company and the Selling Stockholders.
The provisions of this Section 12 shall not affect, as
between the Company and the Selling Stockholders, any agreement between them
regarding allocation of expenses to be paid by them hereunder.
<PAGE>
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13. Effective Date of Agreement. This Agreement shall become
effective: (i) upon the execution and delivery hereof by the parties hereto; or
(ii) if, at the time this Agreement is executed and delivered, it is necessary
for the registration statement or a post-effective amendment thereto to be
declared effective before the offering of the Shares may commence, when
notification of the effectiveness of the registration statement or such
post-effective amendment has been released by the Commission. Until such time as
this Agreement shall have become effective, it may be terminated by the Company,
by notifying you and the Selling Stockholders, by the Selling Stockholders, by
notifying you and the Company, or by you, as Representatives of the several
Underwriters, by notifying the Company and the Selling Stockholders.
If any one or more of the Underwriters shall fail or refuse
to purchase Shares which it or they are obligated to purchase hereunder on the
Closing Date, and the aggregate number of Shares which such defaulting
Underwriter or Underwriters are obligated but fail or refuse to purchase is not
more than one-tenth of the aggregate number of Shares which the Underwriters are
obligated to purchase on the Closing Date, each non-defaulting Underwriter shall
be obligated, severally, in the proportion which the number of Firm Shares set
forth opposite its name in Schedule I hereto bears to the aggregate number of
Firm Shares set forth opposite the names of all non-defaulting Underwriters or
in such other proportion as you may specify in accordance with Section 20 of the
Master Agreement Among Underwriters of Smith Barney Inc., to purchase the Shares
which such defaulting Underwriter or Underwriters are obligated, but fail or
refuse, to purchase. If any one or more of the Underwriters shall fail or refuse
to purchase Shares which it or they are obligated to purchase on the Closing
Date and the aggregate number of Shares with respect to which such default
occurs is more than one-tenth of the aggregate number of Shares which the
Underwriters are obligated to purchase on the Closing Date and arrangements
satisfactory to you, the Selling Stockholders and the Company for the purchase
of such Shares by one or more non-defaulting Underwriters or other party or
parties approved by you, the Selling Stockholders and the Company are not made
within 36 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter, the Selling
Stockholders or the Company. In any such case which does not result in
termination of this Agreement, either you the Selling Stockholders or the
Company shall have the right to postpone the Closing Date, but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and the Prospectus or any other documents or arrangements
may be effected. Any action taken under this paragraph shall not relieve any
defaulting Underwriter from liability in respect of any such default of any such
Underwriter under this Agreement. The term "Underwriter" as used in this
Agreement includes, for all purposes of this Agreement, any party not listed in
Schedule I hereto who, with your approval and the approval of the Company and
the Selling Stockholders, purchases Shares which a defaulting Underwriter is
obligated, but fails or refuses, to purchase.
Any notice under this Section 13 may be given by telecopy or
telephone but shall be subsequently confirmed by letter.
14. Termination of Agreement. This Agreement shall be subject
to termination in your absolute discretion, without liability on the part of any
Underwriter to the Company or the Selling Stockholders, by notice to the Company
and to the Selling Stockholders, if prior to the Closing Date or any Option
Closing Date (if different from the Closing Date and then only as to the
Additional Shares), as the case may be, (i) trading in securities generally on
the New York Stock Exchange, the American Stock Exchange or the Nasdaq National
Market shall have been suspended or materially limited, (ii) a general
moratorium on commercial banking activities in New York shall have been declared
by either federal or state authorities, or (iii) there shall have occurred any
outbreak or escalation of hostilities or other international or domestic
calamity, crisis or change in political, financial or economic conditions, the
effect of which on the financial markets of the United States is such as to make
it, in your judgment, impracticable or inadvisable to commence or continue the
offering of the Shares at the offering price to the public set forth on the
cover page of the Prospectus or to enforce contracts for
<PAGE>
-25-
the resale of the Shares by the Underwriters. Notice of such termination may
be given to the Company and to the Selling Stockholders by telecopy or telephone
and shall be subsequently confirmed by letter.
15. Information Furnished by the Underwriters. The statements
set forth in the last paragraph on the cover page, the stabilization legend on
the inside cover page, and the statements under the caption "Underwriting" in
any Prepricing Prospectus and in the Prospectus, constitute the only information
furnished by or on behalf of the Underwriters through you as such information is
referred to in Sections 8(b) and 10 hereof.
16. Miscellaneous. Except as otherwise provided in Sections
6, 13 and 14 hereof, notice given pursuant to any provision of this Agreement
shall be in writing and shall be delivered (i) if to the Company, at the office
of the Company at 90 Orville Drive, Bohemia, New York 11716, Attention: Harvey
Kamil; or (ii) if to a Selling Stockholder, c/o Herrick, Feinstein, 2 Park
Avenue, New York, New York 10016, Attention: Michael Heitner, or (iii) if to
you, as Representatives of the several Underwriters, c/o Smith Barney Inc., 388
Greenwich Street, New York, New York 10013, Attention: Manager, Investment
Banking Division.
This Agreement has been and is made solely for the benefit of
the several Underwriters, the Selling Stockholders, the Company, its directors
and officers, and the other controlling Persons referred to in Section 11 hereof
and their respective successors and assigns, to the extent provided herein, and
no other person shall acquire or have any right under or by virtue of this
Agreement. Neither the term "successor" nor the term "successors and assigns" as
used in this Agreement shall include a purchaser from any Underwriter of any of
the Shares in his status as such purchaser.
17. Applicable Law; Counterparts. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York
applicable to contracts made and to be performed within the State of New York.
This Agreement may be signed in various counterparts which
together constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
<PAGE>
-26-
Please confirm that the foregoing correctly sets forth the
agreement among the Company, the Selling Stockholders and the Underwriters.
Very truly yours,
NBTY, INC.
By:_______________________
Name:
Title:
MICHAEL C. SLADE
---------------------------
ABRAHAM FELDMAN TRUST F/B/O
RUTH SLADE
By:_______________________
Name:
Title:
ABRAHAM FELDMAN TRUST F/B/O
STEVEN LENGER
By:_______________________
Name:
Title:
<PAGE>
Confirmed as of the date first
above mentioned on behalf of
themselves and the several
Underwriters named in Schedule I
hereto.
SMITH BARNEY INC.
LEHMAN BROTHERS INC.
ADAMS, HARKNESS & HILL, INC.
RAYMOND JAMES & ASSOCIATES, INC.
PIPER JAFFRAY INC.
As Representatives of the
several Underwriters
By: Smith Barney Inc.
By: _______________________
Name:
Title:
<PAGE>
SCHEDULE I
UNDERWRITERS
Number of
Underwriters Firm Shares
- ------------ -----------
SMITH BARNEY INC............................................. 1,720,000
LEHMAN BROTHERS INC.......................................... 1,720,000
ADAMS, HARKNESS & HILL, INC.................................. 1,720,000
RAYMOND JAMES & ASSOCIATES, INC.............................. 1,720,000
PIPER JAFFRAY INC............................................ 1,720,000
-----------
Total 8,600,000
===========
<PAGE>
SCHEDULE II
SELLING STOCKHOLDERS
Number of
Name Firm Shares
- ---- -----------
MICHAEL C. SLADE 2,100,000
ABRAHAM FELDMAN TRUST F/B/O RUTH SLADE 1,750,000
ABRAHAM FELDMAN TRUST F/B/O STEVEN LENGER 1,750,000
-----------
Total 5,600,000
===========
<PAGE>
THIRD AMENDMENT
THIRD AMENDMENT, dated as of May 1, 1998 (this "Third Amendment") to
the Credit and Guarantee Agreement, dated as of September 23, 1997 (as amended
pursuant to the First Amendment and Waiver thereto dated as of December 12, 1998
and the Second Amendment thereto dated as of April 20, 1998, and as may be
further amended, supplemented or otherwise modified from time to time, the
"Credit Agreement"), among NBTY, Inc., a Delaware corporation (the "Company"),
Holland & Barrett Holdings Limited (the "Foreign Subsidiary Borrower") and
together with the Company, the "Borrowers"), the several banks and other
financial institutions from time to time parties thereto (the "Lenders") and The
Chase Manhattan Bank, a New York banking corporation, as administrative agent
for the Lenders thereunder (the "Administrative Agent').
W I T N E S S E T H:
WHEREAS, the Borrowers, the Lenders and the Administrative Agent are
parties to the Credit Agreement; and
WHEREAS, the Borrowers have requested that certain provisions of the
Credit Agreement be amended in the manner provided for in this Third Amendment
and the Lenders are willing to agree to such amendments upon the terms and
subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and mutual agreements
contained herein, and for other good and valuable consideration, the sufficiency
of which is hereby acknowledged, the Borrowers, the Lenders and the
Administrative Agent hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, terms defined in
the Credit Agreement shall have such meanings when used herein.
2. Amendments to Credit Agreement. (a) The second paragraph of the
introductory statement to the Credit Agreement is hereby amended by deleting the
reference to "$50,000,000" and replacing it with "60,000,000".
(b) Schedule I to the Credit Agreement is hereby amended by deleting it
in its entirety and replacing it with Schedule I, attached hereto as Annex A.
(c) Subsection 9.8 of the Credit Agreement is hereby amended by
deleting it in its entirety and replacing it with the following:
"9.8 Limitation on Capital Expenditures. Make any Capital Expenditure
except for Capital Expenditures by the Company and its Subsidiaries in
the ordinary course of business not exceeding, in the aggregate (i)
during the 1998
<PAGE>
2
fiscal year of the Company (a) $50,000,000 and (b) $10,000,000 relating
to point of sale equipment to be used by the Foreign Subsidiary Borrower
and (ii) during each fiscal year of the Company thereafter $40,000,000."
3. Payment of Fees. The Borrowers agree to pay to each Lender a fee in
an amount equal to .15% of the amount by which such Lender's Commitment is
increased by this Third Amendment.
4. Representation and Warranties. To induce the Administrative Agent and
the Lenders parties hereto to enter into this Third Amendment, each Borrower
hereby represents and warrants to the Administrative Agent and the Lenders as of
the Third Amendment Effective Date (as defined below) and after giving effect
thereto that (a) the representations and warranties made by such Borrower in the
Credit Agreement are true and correct in all material respects on and as of the
date hereof (except to the extent that such representations and warranties are
expressly stated to relate to an earlier date, in which case such
representations and warranties shall have been true and correct in all material
respects on and as of such earlier date), provided that references in such
representations and warranties to the Credit Agreement shall be deemed to be
references to (i) the Credit Agreement, as amended hereby and (ii) this Third
Amendment and (b) no Default or Event of Default has occurred and is continuing.
5. Continuing Effect of Credit Agreement. This Third Amendment shall not
constitute a waiver, amendment or modification of any other provision of the
Credit Agreement not expressly referred to herein and shall not be construed as
a waiver or consent to any further or future action on the part of the Borrowers
that would require a waiver or consent of the Lenders or the Administrative
Agent. Except as expressly amended hereby, the provisions of the Credit
Agreement are and shall remain in full force and effect.
6. Counterparts. This Third Amendment may be executed by one or more of
the parties hereto on any number of separate counterparts and all such
counterparts shall be deemed to be one and the same instrument. Each party
hereto confirms that any facsimile copy of such party's executed counterpart of
this Third Amendment (or its signature page thereof) shall be deemed to be an
executed original thereof.
7. Payment of Expenses. The Borrowers agree to pay or reimburse the
Administrative Agent for all of its out-of-pocket costs and reasonable expenses
incurred in connection with this Third Amendment, any other documents prepared
in connection herewith and the transactions contemplated hereby, including,
without limitation, the reasonable fees and disbursements of counsel to the
Administrative Agent.
8. Effective Date. This Third Amendment shall become effective as of the
date hereof upon (i) its execution by the Borrowers, each Guarantor (as defined
in the Guarantee and Collateral Agreement) and the Majority Lenders, (ii)
receipt by the Administrative Agent of a certificate of a Responsible Officer of
the Company certifying as to the matters set forth in Sections 4(a) and (b)
above in form and substance reasonably satisfactory to the Administrative Agent,
and (iii) receipt by the Administrative Agent of
<PAGE>
3
resolutions, in form and substance satisfactory to the Administrative Agent, of
the Board of Directors of each of the Borrowers authorizing this Third Amendment
(the date upon which this Third Amendment shall become effective, the "Third
Amendment Effective Date").
9. Affirmation of Guarantees. Each Guarantor (as defined in the
Guarantee and Collateral Agreement) hereby consents to the execution and
delivery of this Third Amendment and reaffirms its obligations under the
Guarantee and Collateral Agreement executed by such Guarantor.
10. GOVERNING LAW. THIS THIRD AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
<PAGE>
4
IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment
to be duly executed and delivered by their proper and duly authorized officers
as of the day and year first above written.
NBTY, INC.
By: /s/ Harvey Kamil
--------------------------------
Title: Harvey Kamil
Executive Vice President
HOLLAND & BARRETT HOLDINGS LIMITED
By: /s/ Harvey Kamil
--------------------------------
Title: Harvey Kamil
Executive Vice President
THE CHASE MANHATTAN BANK, as
Administrative Agent and as a
Lender, and as Swing Line Lender
and as Issuing Lender
By: /s/ Barbara G. Bertschi
--------------------------------
Title: Barbara G. Bertschi
Vice President
KEYBANK NATIONAL ASSOCIATION
By: /s/ Joseph F. Burn
--------------------------------
Title: Joseph F. Burn
Vice President
THE BANK OF NOVA SCOTIA
By: /s/ J. Alan Edwards
--------------------------------
Title: J. Alan Edwards
Authorized Signatory
<PAGE>
5
EUROPEAN AMERICAN BANK
By: /s/ Anthony E. Pantina
--------------------------------
Title: Assistant Vice President
IBJ SCHRODER BANK & TRUST COMPANY
By: /s/ Mark H. Minter
--------------------------------
Title: Managing Director
Consented to and agreed:
NATURE'S BOUNTY INC.,
NATURE'S BOUNTY, INC.,
VITAMIN WORLD, INC.,
PURITAN'S PRIDE, INC.,
ARCO PHARMACEUTICALS, INC.
NATURAL WEALTH NUTRITION CORPORATION,
FOUNTAIN PUBLISHING, INC.,
OMNI VITAMIN AND NUTRITION CORP.,
UNITED VITAMIN MANUFACTURING CORP.,
THE HUDSON CORPORATION,
GOOD 'N NATURAL MANUFACTURING CORP.,
BEAUTIFUL VISIONS, NEW YORK CORP.,
PRIME NATURAL HEALTH LABORATORIES, INC.,
AMERICAN HEALTH, INC.,
NATURE'S BOUNTY MANUFACTURING CORP.,
NABARCO ADVERTISING ASSOCIATES, INC.,
HERBAL HARVEST, INC.,
NUTRITION HEADQUARTERS (DE), INC.
By:
-----------------------------------
Title:
<PAGE>
Annex A
to Third Amendment
SCHEDULE I
COMMITMENTS; ADDRESSES
Revolving Credit
Lender Commitment
The Chase Manhattan Bank
760 Jericho Turnpike, Suite 306
Woodbury, New York 11797
Telecopy: (516) 364-3307
Attention: Barbara G. Bertschi $15,600,000
KeyBank National Association
1377 Motor Parkway
Islandia, New York 11788
Telecopy: (516) 233-4048
Attention: Joseph F. Burns $12,000,000
Bank of Nova Scotia
One Liberty Plaza
New York, New York 10006
Telecopy: (212) 225-5145
Attention: Tilsa Cora $10,800,000
European American Bank
730 Veterans Memorial Highway
Hauppauge, New York 11788-2780
Telecopy: (516) 360-7112
Attention: Stuart N. Berman $10,800,000
I.B.J. Schroder Bank & Trust Company
1 State Street, 9th Floor
New York, New York 10004
Telecopy: (212) 858-2768
Attention: Mark Weitekamp $10,800,000
TOTAL $60,000,000
