-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, It8RHsFqkTjD1e12KH40cjevk+40YfsO87+nAK9PRnDIUtjiOAMP9j9xO+G5tVNb 6P/pgZVN8/0jJgIxfoJXcQ== 0000889812-98-001137.txt : 19980508 0000889812-98-001137.hdr.sgml : 19980508 ACCESSION NUMBER: 0000889812-98-001137 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980420 ITEM INFORMATION: FILED AS OF DATE: 19980507 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NBTY INC CENTRAL INDEX KEY: 0000070793 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 112228617 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-10666 FILM NUMBER: 98612541 BUSINESS ADDRESS: STREET 1: 90 ORVILLE DR CITY: BOHEMIA STATE: NY ZIP: 11716 BUSINESS PHONE: 5165679500 MAIL ADDRESS: STREET 1: 90 ORVILLE DRIVE CITY: BOHEMIA STATE: NY ZIP: 11716 FORMER COMPANY: FORMER CONFORMED NAME: NATURES BOUNTY INC DATE OF NAME CHANGE: 19920703 8-K/A 1 AMENDED CURRENT REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): April 20, 1998 NBTY, INC. ---------- (Exact name of registrant as specified in charter) DELAWARE 0-10666 11-2228617 -------- ------- ---------- (State or other (Commission (IRS Employer jurisdiction of File No.) identification incorporation) number) 90 Orville Drive, Bohemia, New York 11716 ----------------------------------------- (Address of principal executive office and zip code) Registrant's telephone number (516) 567-9500 -------------- ITEM 7. Financial Statements and Exhibits. 1. NBTY, Inc. and subsidiaries Supplemental Consolidated Financial Statements (audited) for the three years ended September 30, 1997. 2. Nutro Laboratories, Inc. Financial Statements (audited) for the three years ended September 30, 1997. 3. Nutrition Headquarters, Inc. and Lee Nutrition, Inc. Combined Financial Statements (audited) for the three years ended September 30, 1997. 4. NBTY, Inc. and subsidiaries Supplemental Condensed Consolidated Financial Statements (unaudited) as of March 31, 1998 and for the six months ended March 31, 1997 and 1998. NBTY, INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997 1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of NBTY, Inc.: We have audited the accompanying supplemental consolidated balance sheets of NBTY, Inc. and Subsidiaries as of September 30, 1996 and 1997 and the related supplemental consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The supplemental consolidated financial statements give retroactive effect to the merger of NBTY, Inc. and Subsidiaries and Nutrition Headquarters, Inc., Lee Nutrition, Inc. and Nutro Laboratories, Inc. on April 20, 1998, which has been accounted for as a pooling of interests as described in Note 1 to the supplemental consolidated financial statements. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling of interests methods in financial statements that do not include the date of consummation. These financial statements do not extend through the date of consummation; however, they will become the historical consolidated financial statements of NBTY, Inc. and Subsidiaries after financial statements covering the date of consummation of the business combination are issued. In our opinion, the supplemental consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of NBTY, Inc. and Subsidiaries at September 30, 1996 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1997, in conformity with generally accepted accounting principles applicable after financial statements are issued for a period which includes the date of consummation of the business combination. Coopers & Lybrand L.L.P. Melville, New York April 24, 1998 2 NBTY, INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1996 AND 1997 (DOLLARS AND SHARES IN THOUSANDS)
1996 1997 -------- -------- ASSETS Current assets: Cash and cash equivalents............................................................... $ 12,814 $ 20,262 Short-term investments.................................................................. 11,024 8,362 Accounts receivable, less allowance for doubtful accounts of $919 in 1996 and $1,116 in 1997....................................................................... 14,580 19,603 Inventories............................................................................... 47,241 86,440 Deferred income taxes..................................................................... 3,155 6,032 Prepaid catalog costs and other current assets............................................ 5,857 19,111 -------- -------- Total current assets............................................................ 94,671 159,810 Cash held in escrow....................................................................... 144,262 Property, plant and equipment, net........................................................ 70,423 118,184 Intangible assets, net.................................................................... 5,376 141,303 Other assets.............................................................................. 1,478 7,618 -------- -------- Total assets.................................................................... $171,948 $571,177 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt and capital lease obligations......................... $ 2,767 $ 1,519 Demand note payable..................................................................... 2,633 1,873 Accounts payable........................................................................ 15,584 49,857 Accrued expenses........................................................................ 16,128 35,711 -------- -------- Total current liabilities....................................................... 37,112 88,960 Long-term debt............................................................................ 20,298 168,550 Obligations under capital leases.......................................................... 3,272 2,700 Promissory note payable................................................................... 169,909 Deferred income taxes..................................................................... 2,827 7,474 Other liabilities......................................................................... 794 2,293 -------- -------- Total liabilities............................................................... 64,303 439,886 -------- -------- Commitments and contingencies Stockholders' equity: Common stock, $.008 par; authorized 25,000 shares in 1996 and 75,000 shares in 1997; issued 23,004 shares in 1996 and 69,123 shares in 1997 and outstanding 21,517 shares in 1996 and 64,614 shares in 1997.................................................... 184 553 Capital in excess of par................................................................ 56,260 56,182 Retained earnings....................................................................... 54,433 75,199 -------- -------- 110,877 131,934 Less 1,487 and 4,509 treasury shares at cost, in 1996 and 1997, respectively............ (2,648) (3,206) Stock subscriptions receivable.......................................................... (584) Cumulative translation adjustment....................................................... 2,563 -------- -------- Total stockholders' equity...................................................... 107,645 131,291 -------- -------- Total liabilities and stockholders' equity...................................... $171,948 $571,177 -------- -------- -------- --------
See notes to supplemental consolidated financial statements. 3 NBTY INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997 (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1995 1996 1997 -------- -------- -------- Net sales.................................................................... $250,351 $265,670 $355,336 -------- -------- -------- Costs and expenses: Cost of sales.............................................................. 137,254 138,186 177,909 Catalog printing, postage and promotion.................................... 28,307 26,695 27,932 Selling, general and administrative........................................ 67,032 68,414 96,653 Litigation settlement costs................................................ 6,368 -------- -------- -------- 232,593 233,295 308,862 -------- -------- -------- Income from operations....................................................... 17,758 32,375 46,474 -------- -------- -------- Other income (expense): Interest, net.............................................................. (2,284) (2,431) (7,471) Miscellaneous, net......................................................... 822 1,430 1,817 -------- -------- -------- (1,462) (1,001) (5,654) -------- -------- -------- Income before income taxes................................................... 16,296 31,374 40,820 Income taxes................................................................. 3,374 9,168 11,694 -------- -------- -------- Net income.............................................................. $ 12,922 $ 22,206 $ 29,126 -------- -------- -------- -------- -------- -------- Net income per share: Basic...................................................................... $ 0.21 $ 0.35 $ 0.45 Diluted.................................................................... 0.19 0.32 0.42 Weighted average common shares outstanding: Basic...................................................................... 62,159 64,197 64,611 Diluted.................................................................... 68,695 68,699 68,935
See notes to supplemental consolidated financial statements. 4 NBTY, INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997 (DOLLARS AND SHARES IN THOUSANDS)
COMMON STOCK TREASURY STOCK ------------------ ------------------- NUMBER OF CAPITAL IN RETAINED NUMBER OF SHARES AMOUNT EXCESS OF PAR EARNINGS SHARES AMOUNT --------- ------ ------------- -------- --------- ------- Balance, September 30, 1994................................ 21,702 $174 $53,455 $ 32,990 1,213 $ (863) Net income for year ended September 30, 1995............. 12,922 S corporation distributions.............................. (6,750) Exercise of stock options................................ 430 3 212 Tax benefit from exercise of stock options............... 731 Purchase of treasury stock, at cost...................... 228 (1,483) --------- ------ ------------- -------- --------- ------- Balance, September 30, 1995................................ 22,132 177 54,398 39,162 1,441 (2,346) Net income for year ended September 30, 1996............. 22,206 S corporation distributions.............................. (6,935) Exercise of stock options................................ 872 7 588 Tax benefit from exercise of stock options............... 1,274 Purchase of treasury stock, at cost...................... 46 (302) --------- ------ ------------- -------- --------- ------- Balance, September 30, 1996................................ 23,004 184 56,260 54,433 1,487 (2,648) Net income for year ended September 30, 1997............. 29,126 S corporation distributions.............................. (8,360) Gain on foreign currency translation..................... Exercise of stock options................................ 37 1 33 Tax benefit from exercise of stock options............... 257 Repayment of stock subscriptions receivable for options exercised............................................. Stock tendered as payment for options exercised.......... 16 (558) April 3, 1998 three-for-one stock split effected in the form of a 200% stock dividend......................... 46,082 368 (368) 3,006 --------- ------ ------------- -------- --------- ------- Balance, September 30, 1997................................ 69,123 $553 $56,182 $ 75,199 4,509 $(3,206) --------- ------ ------------- -------- --------- ------- --------- ------ ------------- -------- --------- ------- STOCK CUMULATIVE SUBSCRIPTIONS TRANSLATION RECEIVABLE ADJUSTMENT TOTAL ------------- ---------- -------- Balance, September 30, 1994................................ $ 85,756 Net income for year ended September 30, 1995............. 12,922 S corporation distributions.............................. (6,750) Exercise of stock options................................ 215 Tax benefit from exercise of stock options............... 731 Purchase of treasury stock, at cost...................... (1,483) ------ ---------- -------- Balance, September 30, 1995................................ 91,391 Net income for year ended September 30, 1996............. 22,206 S corporation distributions.............................. (6,935) Exercise of stock options................................ $(584) 11 Tax benefit from exercise of stock options............... 1,274 Purchase of treasury stock, at cost...................... (302) ------ ---------- -------- Balance, September 30, 1996................................ (584) 107,645 Net income for year ended September 30, 1997............. 29,126 S corporation distributions.............................. (8,360) Gain on foreign currency translation..................... $2,563 2,563 Exercise of stock options................................ 34 Tax benefit from exercise of stock options............... 257 Repayment of stock subscriptions receivable for options exercised............................................. 96 96 Stock tendered as payment for options exercised.......... 488 (70) April 3, 1998 three-for-one stock split effected in the form of a 200% stock dividend......................... ------ ---------- -------- Balance, September 30, 1997................................ $ -- $2,563 $131,291 ------ ---------- -------- ------ ---------- --------
See notes to supplemental consolidated financial statements. 5 NBTY, INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997 (DOLLARS IN THOUSANDS)
1995 1996 1997 ------- ------- -------- Cash flows from operating activities: Net income..................................................................... $12,922 $22,206 $ 29,126 Adjustments to reconcile net income to cash provided by operating activities: (Gain) loss on disposal/sale of property, plant and equipment................ 374 (43) (194) Depreciation and amortization................................................ 6,171 7,091 9,627 Provision (recovery) for allowance for doubtful accounts..................... (18) 283 197 Deferred income taxes........................................................ 685 (642) (2,750) Changes in assets and liabilities, net of acquisitions: Accounts receivable....................................................... (2,207) 1,441 (4,841) Inventories............................................................... 4,657 (1,054) (20,877) Prepaid catalog costs and other current assets............................ (527) 665 (4,461) Other assets.............................................................. 1,175 603 36 Accounts payable.......................................................... 2,857 (6,399) 14,586 Accrued expenses.......................................................... 3,063 5,565 14,553 Other liabilities......................................................... 275 24 1,500 Income tax receivable..................................................... 1,300 ------- ------- -------- Net cash provided by operating activities............................... 30,727 29,740 36,502 ------- ------- -------- Cash flows from investment activities: Increase in intangible assets.................................................. (1,064) (67) (1,843) Purchase of property, plant and equipment...................................... (12,707) (16,809) (23,712) Proceeds from sale of property, plant and equipment............................ 155 293 Proceeds from sale of short-term investments................................... 2,662 Purchase of short-term investments............................................. (11,024) Receipt of payments on notes from sale of direct mail cosmetics business....... 741 1,047 Proceeds from sale of direct mail cosmetics business........................... 350 Other.......................................................................... (85) 181 (263) Cash from acquisition.......................................................... 5,580 ------- ------- -------- Net cash used in investing activities................................... (13,856) (26,473) (16,236) ------- ------- -------- Cash flows from financing activities: Net payments under line of credit agreement.................................... (5,000) Proceeds from bond offering, net of discount................................... 148,763 Cash held in escrow............................................................ (144,262) Bond issue costs............................................................... (5,575) Borrowings under long-term debt agreements..................................... 3,197 6,000 99 Principal payments under long-term debt agreements and capital leases.......... (2,768) (2,802) (3,628) Purchase of treasury stock..................................................... (1,292) (302) (70) Proceeds from stock options exercised.......................................... 24 11 34 Distributions to stockholders.................................................. (6,750) (6,935) (8,360) Repayment of stock subscription receivable..................................... 96 ------- ------- -------- Net cash used in financing activities................................... (12,589) (4,028) (12,903) ------- ------- -------- Effect of exchange rate changes on cash and cash equivalents..................... 85 ------- ------- -------- Net increase (decrease) in cash and cash equivalents............................. 4,282 (761) 7,448 Cash and cash equivalents at beginning of year................................... 9,293 13,575 12,814 ------- ------- -------- Cash and cash equivalents at end of year......................................... $13,575 $12,814 $ 20,262 ------- ------- -------- ------- ------- -------- Supplemental disclosure of cash flow information: Cash paid during the period for interest....................................... $ 2,211 $ 2,493 $ 3,568 Cash paid during the period for income taxes................................... $ 1,763 $ 5,496 $ 14,206
See notes to supplemental consolidated financial statements. 6 NBTY, INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED) YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997 (DOLLARS IN THOUSANDS) Non-cash investing and financing information On October 9, 1995, NBTY sold certain assets of its direct-mail cosmetics business for $2,495. The Company received $350 in cash and non-interest bearing notes aggregating $2,145 for inventory, a customer list and other intangible assets. The inventory note was repaid in full in October 1996. In April 1997, the Company received the final payment of the customer list note. (See Note 4) During fiscal 1996, the Company entered into capital leases for machinery and equipment aggregating $2,635. During fiscal 1995, 1996 and 1997, options were exercised with shares of common stock issued to certain officers and directors. Accordingly, the tax benefit of approximately $731, $1,274 and $257 for the years ended September 30, 1995, 1996 and 1997, respectively, was recorded as an increase in capital in excess of par and a reduction in taxes currently payable. In addition, during fiscal 1997, common stock was surrendered to the Company in satisfaction of $488 of the stock subscription outstanding at September 30, 1996. (See Note 13) In connection with the acquisition of Holland & Barrett Holdings Ltd. on August 7, 1997, NBTY issued two promissory notes aggregating $170,000 as consideration for the purchase of capital stock. Such notes were paid in October 1997 from the cash held in escrow at September 30, 1997. (See Note 3) See notes to supplemental consolidated financial statements. 7 NBTY, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1. BASIS OF PRESENTATION The supplemental consolidated financial statements of NBTY, Inc. and Subsidiaries, formerly Nature's Bounty, Inc. ('NBTY'), have been prepared to give retroactive effect to the merger with Nutrition Headquarters, Inc., Lee Nutrition, Inc. and Nutro Laboratories, Inc. (collectively, the 'Nutrition Headquarters Group' and with NBTY collectively, the 'Company') on April 20, 1998, which has been accounted for as a pooling of interests. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling-of-interests methods in financial statements that do not include the date of consummation. These financial statements do not extend through the date of consummation; however, they will become the historical consolidated financial statements of the Company after financial statements covering the date of consummation of the business combination are issued. During 1998, NBTY entered into a definitive agreement to merge with Nutrition Headquarters Group. On April 20, 1998, Nutrition Headquarters Group was merged with and into NBTY. Under terms of the merger agreement, each share of Nutrition Headquarters Group common stock was exchanged for approximately 30,000 shares of NBTY's common stock with approximately 8,772 shares of NBTY's common stock exchanged for all the outstanding stock of Nutrition Headquarters Group. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. In March 1998, the Company's board of directors declared a three-for-one stock split payable in the form of a 200% stock dividend. This distribution has been reflected in the fiscal 1997 supplemental consolidated financial statements and all per common share amounts have been retroactively restated to account for the stock split. In addition, stock options and the related exercise prices have been amended to reflect this transaction. Also, in March 1998, the Company's certificate of incorporation was amended to authorize the issuance of up to 75,000 shares of common stock, par value $.008 per share. 2. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business operations The Company manufactures and distributes vitamins, food supplements and health and beauty aids primarily in the United States and the United Kingdom. The processing, formulation, packaging, labeling and advertising of the Company's products are subject to regulation by one or more federal agencies, including the Food and Drug Administration, the Federal Trade Commission, the Consumer Product Safety Commission, the United States Department of Agriculture, the United States Environmental Protection Agency and the United States Postal Service. Within the United Kingdom ('U.K.'), the manufacturing, advertising, sales and marketing of food products is regulated by a number of governmental agencies including the Ministry of Agriculture, Fisheries and Food, the Department of Health, the Food Advisory Committee and the Committee on Toxicity, among others. Revenue recognition The Company recognizes revenue upon shipment or, with respect to its own retail store operations, upon the sale of products. The Company has no single customer that represents more than 10% of annual net sales or accounts receivable as of and for the years ended September 30, 1995, 1996 and 1997. 8 NBTY, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Inventories Inventories are stated at the lower of cost or market. Cost is determined on the weighted average method which approximates first-in, first-out basis. The cost elements of inventory include materials, labor and overhead. In fiscal 1995, no one supplier provided more than 10% of purchases. One supplier provided approximately 12% of the Company's purchases in 1996 and 1997. Prepaid catalog costs Mail order production and mailing costs are capitalized as prepaid catalog costs and charged to expense over the catalog period, which typically approximates three months. Advertising expense All media (television, radio, magazine) and cooperative advertising costs are generally expensed as incurred. Total expenses relating to advertising and promotion for fiscal 1995, 1996 and 1997 were $17,409, $17,885 and $19,782, respectively. Property, plant and equipment Property, plant and equipment are carried at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the related assets. Expenditures which significantly improve or extend the life of an asset are capitalized. Maintenance and repairs are charged to expense in the year incurred. Cost and related accumulated depreciation for property, plant and equipment are removed from the accounts upon sale or disposition and the resulting gain or loss is reflected in earnings. Intangible assets Goodwill represents the excess of purchase price over the fair value of identifiable net assets of companies acquired. Goodwill and other intangibles are amortized on a straight-line basis over periods not exceeding 40 years. Foreign currency translation The financial statements of international subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and an average exchange rate for each period for revenues, expenses, and gains and losses. Where the local currency is the functional currency, translation adjustments are recorded as a separate component of stockholder's equity. 9 NBTY, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) Income taxes NBTY recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Prior to the merger, Nutrition Headquarters Group had been treated as an S corporation for federal and state tax purposes. Accordingly, taxable income has been reported to the individual stockholders for inclusion in their respective income tax returns with no provision for these taxes, other than certain minimum taxes, included in the consolidated financial statements. Cash and cash equivalents The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Short-term investments Short-term interest bearing investments are those with maturities of less than one year but greater than three months when purchased. These investments are readily convertible to cash and are stated at market value, which approximates cost. Realized gains and losses are included in other income on a specific identification basis in the period they are realized. Common shares and earnings per share In February 1997, the Financial Accounting Standards Board ('FASB') issued Statement of Financial Accounting Standards ("SFAS") No. 128, 'Earnings Per Share.' The statement requires the presentation of both 'basic' and 'diluted' earnings per share ('EPS') on the face of the income statement. Basic EPS is based on the weighted average number of shares of common stock outstanding during each period while diluted EPS is based on the weighted average number of shares of common stock and common stock equivalents outstanding during each period. Common stock equivalents included in diluted EPS, which consisted of common shares issuable upon the exercise of outstanding stock options, were 6,536, 4,502 and 4,324 for the years ended September 30, 1995, 1996 and 1997, respectively. Reclassifications Certain reclassifications have been made to conform prior year amounts to the current year presentation. Accounting changes Effective October 1, 1996, the Company adopted the disclosure-only provisions of SFAS No. 123, 'Accounting for Stock-Based Compensation.' As permitted by SFAS No. 123, the Company continues to measure compensation cost in accordance with Accounting Principles Board Opinion No. 25, 'Accounting for Stock Issued to Employees.' As the Company has not granted any options during fiscal 1996 or 1997, there would not have been any impact on the Company's financial position or results of operations on a pro forma basis. Effective October 1, 1996, the Company adopted SFAS No. 121, 'Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.' This statement requires that certain assets be reviewed for impairment and, if impaired, be measured at fair value, whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The adoption of SFAS No. 121 at October 1, 1996 and its application during fiscal 1997 had no material impact on the Company's financial position or results of operations. 10 NBTY, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) New accounting standards In June 1997, the FASB issued SFAS No. 130, 'Reporting Comprehensive Income,' which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distribution to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. In addition, in June 1997, the FASB issued SFAS No. 131, 'Disclosures About Segments of an Enterprise and Related Information,' which establishes standards for reporting information about operating segments. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. Both of these new standards are effective for periods beginning after December 15, 1997 and require comparative information for earlier years to be restated. The implementation of these new standards will not affect the Company's results of operations and financial position, but may have an impact on future financial statement disclosures. 3. ACQUISITION OF HOLLAND & BARRETT HOLDINGS LTD. On August 7, 1997, NBTY acquired all of the issued and outstanding capital stock of Holland & Barrett Holdings Ltd. ('H&B') from Lloyds Chemist's plc ('Lloyds') for an aggregate purchase price of approximately $169,000 plus acquisition costs of approximately $811. The acquisition has been accounted for under the purchase method and, accordingly, the results of operations are included in the financial statements from the date of acquisition. H&B markets a broad line of nutritional supplement products, including vitamins, minerals and other nutritional supplements and food product. At the date of acquisition, H&B operated approximately 410 retail stores in the United Kingdom. NBTY issued to Lloyds two promissory notes (the 'Promissory Notes') totaling approximately $170,000 as consideration for the purchase of capital stock of H&B. The Promissory Notes, which are collateralized by two letters of credit issued by a lending institution, were paid in full in October 1997. In connection with the Acquisition, NBTY (i) entered into a $50,000 revolving credit facility (the 'Revolving Credit Facility'), which provides borrowings for working capital and general corporate purposes, and (ii) issued $150,000 in Senior Subordinated Notes due 2007. Assets acquired and liabilities assumed include cash ($5,580), inventory ($18,045), other current assets ($11,078), property, plant and equipment ($31,554), and current and long-term liabilities ($27,154 and $4,058, respectively). The excess cost of investment over the net book value of H&B at the date of acquisition resulted in an increase in goodwill of $133,725 which will be amortized over 25 years. Additionally, finance related costs of approximately $5,600 will be amortized over 10 years. The following unaudited condensed pro forma information presents a summary of consolidated results of operations of the Company and H&B as if the acquisition had occurred at the beginning of fiscal 1996, with pro forma adjustments to give effect to the amortization of goodwill, interest expense on acquisition debt and certain other adjustments, together with related income tax effects. The pro forma information, which does not give 11 NBTY, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 3. ACQUISITION OF HOLLAND & BARRETT HOLDINGS LTD.--(CONTINUED) effect to anticipated intercompany product sales, is not necessarily indicative of the results of operations had H&B been acquired as of the earliest period presented below.
SEPTEMBER 30, SEPTEMBER 30, 1996 1997 ---------------- ---------------- Net sales....................................................... $421,049 $506,326 Net income...................................................... $ 14,964 $ 24,354 Net income per diluted share.................................... $ 0.22 $ 0.35
4. SALE OF DIRECT-MAIL COSMETICS BUSINESS On October 9, 1995, NBTY sold certain assets of its direct-mail cosmetics business for $2,495. NBTY received $350 in cash and non interest bearing notes aggregating $2,145 for inventory, a customer list and other intangible assets. Revenues applicable to this marginally unprofitable business were $8,284 and $137 for fiscal 1995 and 1996, respectively. The inventory note was repaid in full in October 1996 and, in April 1997, NBTY received the final payment of the customer list note. 5. INVENTORIES
SEPTEMBER 30, ------------------ 1996 1997 ------- ------- Raw materials........................................................... $19,482 $32,712 Work-in-process......................................................... 2,484 4,635 Finished goods.......................................................... 25,275 49,093 ------- ------- $47,241 $86,440 ------- ------- ------- -------
6. PROPERTY, PLANT AND EQUIPMENT
SEPTEMBER 30, -------------------- 1996 1997 -------- -------- Land.................................................................. $ 5,641 $ 5,836 Buildings and leasehold improvements.................................. 45,527 51,423 Machinery and equipment............................................... 36,938 43,858 Furniture and fixtures................................................ 9,241 54,385 Transportation equipment.............................................. 737 2,511 Computer equipment.................................................... 9,320 15,434 -------- -------- 104,404 173,447 Less accumulated depreciation and amortization...................... 33,981 55,263 -------- -------- $ 70,423 $118,184 -------- -------- -------- --------
Depreciation and amortization of property, plant and equipment for the years ended September 30, 1995, 1996 and 1997 was approximately $4,216, $6,205 and $8,363, respectively. Property, plant and equipment includes approximately $4,293 and $4,392 for assets recorded under capital leases for fiscal 1996 and 1997, respectively. 12 NBTY, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 7. INTANGIBLE ASSETS Intangible assets, at cost, acquired at various dates are as follows:
SEPTEMBER 30, ------------------- AMORTIZATION 1996 1997 PERIOD ------- -------- ------------ Goodwill........................................................... $ 469 $136,972 20-40 Customer lists..................................................... 12,044 12,732 6-15 Trademark and licenses............................................. 1,201 1,201 2-3 Covenants not to compete........................................... 1,305 1,305 5-7 ------- -------- 15,019 152,210 Less accumulated amortization.................................... 9,643 10,907 ------- -------- $ 5,376 $141,303 ------- -------- ------- --------
Amortization included in the supplemental consolidated statements of income under the caption 'selling, general and administrative expenses' in 1995, 1996 and 1997 was approximately $1,056, $886 and $1,264, respectively. 8. ACCRUED EXPENSES
SEPTEMBER 30, -------------------- 1996 1997 -------- -------- Litigation settlement costs........................................... $ 5,600 Payroll and related payroll taxes..................................... $ 3,090 4,622 Customer deposits..................................................... 2,199 2,568 Accrued purchases and interest........................................ 2,800 Income taxes payable.................................................. 2,801 7,597 Other................................................................. 8,038 12,524 -------- -------- $ 16,128 $ 35,711 -------- -------- -------- --------
13 NBTY, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 9. DEBT
SEPTEMBER 30, ------------------- 1996 1997 ------- -------- Senior debt: 8-5/8% Senior subordinated notes due 2007, net of unamortized discount of $1,237 (a)............................................ $148,763 Senior bank debt (b)................................................... $ 576 44 First subordinated promissory notes; payable in 8 monthly installments of $108 (c).......................................................... 867 Second subordinated promissory notes, principal payable on April 1, 2011 (d)............................................................. 2,245 2,245 Note payable to a bank due in monthly payments of $16, including interest, maturing April 2016 (e).................................... 1,852 1,814 Note payable due in monthly payments of $9, including interest at 8%, maturing March 2001.................................................. 422 341 Mortgages: First mortgage, payable in monthly principal and interest (10.375%) installments (f).................................................. 7,447 7,317 First mortgage payable in monthly principal and interest (9.73%) installments of $25 (g)........................................... 2,258 2,169 First mortgage, payable in monthly principal and interest (7.375%) installments of $55 (h)........................................... 5,926 5,693 Other (i).............................................................. 928 1,107 Revolving credit agreement (j)......................................... ------- -------- 22,521 169,493 Less current portion................................................. 2,223 943 ------- -------- $20,298 $168,550 ------- -------- ------- --------
- ------------------ (a) In September 1997, the Company issued 10-year Senior Subordinated Notes due 2007. The Notes are unsecured and subordinated in right of payment for all existing and future indebtedness of the Company. The Company has registered these Notes under the Securities Act of 1933 through an exchange offer with terms substantially identical to the original Notes. (b) Interest on the senior bank debt was payable monthly at the prime rate which was 8.5% at September 30, 1997. The balance of $44 was paid on October 1, 1997. On April 30, 1997, an agreement for an additional term loan for $1,100 was executed. The terms of the loan agreement provide for repayment in sixty monthly installments with interest at 8.5% per annum. As of September 30, 1997, no funds were advanced under this agreement. (c) The promissory notes were entered into on October 31, 1996 and ended on May 31, 1997. Interest is payable per annum at the lower of 10% or the prime rate plus 2% (prime at September 30, 1997 was 8.5% per annum). These promissory notes are collateralized by a first subordinated pledge of the capital stock of the Company and are guaranteed by certain stockholders. (d) Interest on the second promissory notes is payable per annum at the lower of 10% or the prime rate plus 2%. These promissory notes, payable to a relative of a stockholder, are collateralized by a second subordinated pledge of capital stock of the Company and are guaranteed by certain stockholders. 14 NBTY, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 9. DEBT--(CONTINUED) (e) Interest on this note payable to a bank is fixed at 8.15% per annum through April 2001. Thereafter, interest will be adjusted every five years. The note is collateralized by a building and land. (f) In September 1990, the Company obtained an $8,000 first mortgage, collateralized by the underlying building, issued through the Town of Islip, New York Industrial Development Agency. The taxable bond, held by an insurance company, has monthly principal and interest payments of $75 for ten years through 2000, with a final payment of $6,891 in September 2000. (g) In November 1994, the Company purchased a building which it previously occupied under a long-term lease. The purchase price of approximately $3,090 was funded with $690 in cash and the balance through a 15-year mortgage note payable. This agreement contains various restrictive covenants which require the maintenance of certain financial ratios and limits capital expenditures. (h) In April 1996, the Company obtained a $6,000 first mortgage with a fixed interest rate of 7.375%, collateralized by the underlying real estate. The mortgage has monthly principal and interest payments of $55 for fifteen years through 2011. (i) Included in other is approximately $301 and $617 as of September 30, 1996 and 1997, respectively, relating to loans made to a stockholder. These notes are at fixed interest rates ranging from 8.0% to 10.0% and mature at various dates through June 2017. (j) In September 1997, the Company entered into a Revolving Credit Agreement (the 'Agreement') with five banks that provides for borrowings up to $50,000, which expires September 23, 2003. Virtually all of the Company's assets serve as collateral under the Agreement, which is subject to normal banking terms and conditions. The Agreement provides that loans may be made under a selection of rate formulas, including Prime or Euro currency rates. The Agreement provides for the maintenance of various financial ratios and covenants. As of September 30, 1997, there were no outstanding borrowings under the Agreement. Required principal payments of long-term debt are as follows:
YEARS ENDED SEPTEMBER 30, - -------------------------------------------------------------- 1998....................................................... $ 943 1999....................................................... 1,196 2000....................................................... 7,687 2001....................................................... 602 2002....................................................... 567 Thereafter................................................. 158,498 -------- $169,493 -------- --------
The Company also has outstanding a demand note payable, bearing interest at prime plus 0.75%, in the amount of $2,633 and $1,873 at September 30, 1996 and 1997, respectively. The loan agreement has a maximum borrowing limit of 85% of qualified accounts receivable and 35% of qualified inventory, with an overall borrowing limit of $5,000. In August 1997, in connection with the promissory notes issued as consideration for the purchase of H&B, NBTY was issued two standby letters of credit aggregating $170,000. At September 30, 1997, there were no borrowings outstanding under the letters of credit. As of October 17, 1997, upon payment of the promissory notes, the letters of credit were cancelled. 15 NBTY, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 9. DEBT--(CONTINUED) In 1997, the Company recorded a loss of $2,265 in connection with an interest rate lock which was settled on October 28, 1997. 10. CAPITAL LEASE OBLIGATIONS The Company enters into various capital leases for machinery and equipment which provide the Company with bargain purchase options at the end of such lease terms. Future minimum payments under capital lease obligations as of September 30, 1997 are as follows: 1998............................................................. $ 814 1999............................................................. 759 2000............................................................. 759 2001............................................................. 759 2002............................................................. 692 Thereafter....................................................... 174 ------ 3,957 Less, amount representing interest............................... 681 ------ Present value of minimum lease payments (including $576 due within one year)............................................... $3,276 ------ ------
11. INCOME TAXES Provision (benefit) for income taxes consists of the following:
YEAR ENDED SEPTEMBER 30, --------------------------- 1995 1996 1997 ------ ------ ------- Federal Current................................................................. $2,225 $7,551 $14,207 Deferred................................................................ 637 (501) (2,530) State Current................................................................. 464 2,259 1,426 Deferred................................................................ 48 (141) (220) Foreign benefit........................................................... (1,189) ------ ------ ------- Total provision........................................................... $3,374 $9,168 $11,694 ------ ------ -------
16 NBTY, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 11. INCOME TAXES--(CONTINUED) The following is a reconciliation of the income tax expense computed using the statutory federal income tax rate to the actual income tax expense and its effective income tax rate.
YEAR ENDED SEPTEMBER 30, ---------------------------------------------------------------------- 1995 1996 1997 -------------------- --------------------- --------------------- PERCENT OF PERCENT OF PERCENT OF PRETAX PRETAX PRETAX AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME ------ ---------- ------- ---------- ------- ---------- Income tax expense at statutory rate............................... $5,541 34.0 $10,981 35.0 $14,287 35.0 State income taxes, net of federal income tax benefit................. 382 2.3 1,428 4.6 857 2.1 S corporation earnings not subject to income taxes (a)................... (2,691) (16.5) (3,150) (10.0) (4,236) (10.4) Other, individually less than 5%..... 142 0.9 (91) (0.2) 786 1.9 ------ ---------- ------- ---------- ------- ---------- Actual income tax provision.......... $3,374 20.7 $ 9,168 29.2 $11,694 28.6 ------ ---------- ------- ---------- ------- ---------- ------ ---------- ------- ---------- ------- ----------
- ------------------ (a) Prior to the merger, Nutrition Headquarters Group had been treated as an S corporation for federal and state tax purposes. Accordingly, taxable income has been reported to the individual stockholders for inclusion in their respective income tax returns with no provision for these taxes, other than certain minimum taxes, included in the supplemental consolidated financial statements. The components of deferred tax assets and liabilities are as follows:
1996 1997 ------ ------ Deferred tax assets: Current: Inventory capitalization.............................................. $ 243 $ 351 Accrued expenses and reserves not currently deductible................ 2,591 5,350 Tax credits........................................................... 321 331 ------ ------ Current deferred tax assets...................................... 3,155 6,032 ------ ------ Noncurrent: Intangibles........................................................... 335 333 Reserves not currently deductible..................................... 200 188 ------ ------ Total noncurrent................................................. 535 521 ------ ------ Deferred tax liabilities: Property, plant and equipment............................................ (3,362) (7,995) ------ ------ Net deferred tax (liability) asset............................... $ 328 $(1,442) ------ ------ ------ ------
Available state tax credits of $321 and $331 in 1996 and 1997, respectively, are scheduled to expire through fiscal 2002. Federal net operating loss carryforwards of $177 will expire in 2004 and available investment tax credits of $58 are scheduled to expire in 2001. 17 NBTY, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 12. COMMITMENTS Leases The Company conducts retail operations under operating leases which expire at various dates through 2020. Some of the leases contain renewal options and provide for additional rentals based upon sales plus certain tax and maintenance costs. Future minimal rental payments under the retail location and other leases that have initial or noncancelable lease terms in excess of one year at September 30, 1997 are as follows:
YEAR ENDING SEPTEMBER 30, - -------------------------------------------------------------- 1998....................................................... $ 25,322 1999....................................................... 24,501 2000....................................................... 23,522 2001....................................................... 22,176 2002....................................................... 20,804 Thereafter................................................. 161,623 -------- $277,948 -------- --------
Operating lease rental expense, including real estate tax and maintenance costs, and leases on a month to month basis were approximately $1,358, $2,092 and $7,852 for the years ended September 30, 1995, 1996 and 1997, respectively. Purchase commitments The Company was committed to make future purchases under various purchase order arrangements with fixed price provisions aggregating approximately $12,923 and $26,152 at September 30, 1996 and 1997, respectively. Capital commitments The Company had approximately $15,800 in open capital commitments related to a manufacturing facility and computer hardware and software at September 30, 1997. Employment and consulting agreements NBTY has employment agreements with two of its officers. The agreements, which expire in January 2004, provide for minimum salary levels, including cost of living adjustments, and also contain provisions regarding severance and changes in control of the Company. The commitment for salaries as of September 30, 1997 was approximately $749 per year. Effective April 20, 1998, the Company entered into an employment agreement with a former stockholder and officer of Nutrition Headquarters Group who is currently an employee of the Company. Such agreement is for a one-year term, subject to extension at the sole option of the officer for two additional one-year terms, and requires an annual payment of $275. The Company also has a two-year consulting agreement with its former chairman and current director which expired on December 31, 1997. Such agreement required annual payments of approximately $350. The parties have renewed the agreement to provide services from January 1, 1998 through December 31, 2000. During this period, the consulting fee payable shall be fixed by the Board of Directors of the Company, provided that in no event will the consulting fee be at a rate lower than $400 per year with certain fringe benefits accorded other 18 NBTY, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 12. COMMITMENTS--(CONTINUED) executives of NBTY. In addition, an entity owned by a relative of an officer received sales commissions of $510, $417 and $541 in 1995, 1996 and 1997, respectively. 13. STOCK OPTION PLANS The Board of Directors approved the issuance of 6,660 non-qualified options on September 23, 1990, exercisable at $0.21 per share, which options terminate on September 23, 2000. In addition, on March 11, 1992, the Board approved the issuance of an aggregate of 5,400 non-qualified stock options to directors and officers, exercisable at $0.31 per share, and expiring on March 10, 2002. The exercise price of each of the aforementioned issuances was in excess of the market price at the date such options were granted. During fiscal 1997, options were exercised with 37 shares of common stock issued (prior to the aforementioned stock split) to certain officers and a director for $23. As a result of the exercise of those options, the Company received a compensation deduction for tax purposes of approximately $643 and a tax benefit of approximately $257 which was credited to capital in excess of par. During fiscal 1996, options were exercised with 872 shares of common stock issued (prior to the aforementioned stock split) to certain officers and directors for $11 and interest bearing notes in the amount of $584. As a result of the exercise of these options, the Company was entitled to a compensation deduction for tax purposes of approximately $3,145 and a tax benefit of approximately $1,274 which was credited to capital in excess of par. During fiscal 1995, options were exercised with 430 shares of common stock issued (prior to the aforementioned stock split) to certain officers and directors for $24 and an interest bearing note in the amount of $191. The promissory note, including interest, was paid by the surrender of 23 NBTY common shares to the Company at the prevailing market price. As a result of the exercise of these options, the Company was entitled to a compensation deduction of approximately $1,828 which resulted in a tax benefit of approximately $731 which was credited to capital in excess of par. A summary of stock option activity is as follows:
1995 1996 1997 --------------------- --------------------- --------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE --------- -------- --------- -------- --------- -------- Outstanding at beginning of year..... 8,475 $.24 7,185 $.25 4,569 $.25 Exercised............................ 1,290 .17 2,616 .23 111 .31 --------- -------- --------- -------- --------- -------- Outstanding at end of year........... 7,185 $.25 4,569 $.25 4,458 $.25 --------- -------- --------- -------- --------- -------- --------- -------- --------- -------- --------- -------- Exercisable at end of year........... 7,185 $.25 4,569 $.25 4,458 $.25 --------- -------- --------- -------- --------- -------- --------- -------- --------- -------- --------- --------
As of September 30, 1997, the weighted average remaining contractual life of outstanding options was 4 years. In addition, there were no options available for grant at September 30, 1995, 1996 or 1997. 14. EMPLOYEE BENEFIT PLANS The Company maintains defined contribution savings plans and an employee stock ownership plan. The accompanying financial statements reflect contributions to these plans in the approximate amount of $498, $489 and $1,209 for the years ended September 30, 1995, 1996 and 1997, respectively. 19 NBTY, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 15. LITIGATION L-tryptophan The Company and certain other companies in the industry have been named as defendants in cases arising out of the ingestion of products containing L-tryptophan. The Company had been named in more than 265 lawsuits, of which four are still pending against the Company. The other 261 lawsuits have been settled at no cost to the Company. The Company's supplier of L-tryptophan agreed to indemnify the Company and the other companies named in the lawsuits through the final resolution of all cases involving L-tryptophan. In addition, the supplier has posted, for the benefit of the Company and the other companies named in the lawsuits, a revolving, irrevocable letter of credit of $20,000 to be used in the event that the supplier is unable or unwilling to satisfy any claims or judgments. While not all of these suits quantify the amount demanded, the Company believes that the amount required to either settle these cases or to pay judgments rendered therein will be paid by the supplier or by the Company's product liability insurance carrier. While the outcome of any litigation is uncertain, it is the opinion of management and legal counsel of the Company that it is remote that the Company will incur a material loss as a result of the L-tryptophan litigation and claims. Accordingly, no provision for liability, if any, that may result therefrom has been made in the Company's financial statements. Shareholder litigation In October 1994, two lawsuits were commenced in the U.S. District Court, Eastern District of New York, against the Company and two of its officers. On October 17, 1997, a Memorandum of Understanding was entered into between the Company and the attorneys representing the Plaintiff class agreeing to an $8,000 ($4,400 cash, $3,600 stock) settlement of the lawsuit. Subsequently, the Company entered into a Capital Stipulation of Settlement calling for, among other things, a total cash payment of $8,000. The Company has been notified by its insurance carrier that it is willing to reimburse the Company to the extent of $2,400. Accordingly, as of September 30, 1997, the Company recorded a $5,600 provision for its portion of the settlement which, along with related legal fees of approximately $768, has been reflected separately in the statement of income. Other litigation The Company is also involved in miscellaneous claims and litigation which management believes, taken individually or in the aggregate, would not have a material adverse effect on the Company's financial position or its business. 16. FOREIGN OPERATIONS In connection with NBTY's recent acquisition of H&B which operates primarily in the United Kingdom, the Company has significantly expanded its operations outside of the United States. The following information has been summarized by geographic area as of September 30, 1997 and for the year then ended.
IDENTIFIABLE OPERATING ASSETS SALES INCOME ------------ -------- --------- United States...................................................... $356,987 $328,839 $49,755 United Kingdom..................................................... 214,190 26,497 (3,281) ------------ -------- --------- $571,177 $355,336 $46,474 ------------ -------- --------- ------------ -------- ---------
20 NBTY, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 17. RELATED PARTY TRANSACTIONS Nutrition Headquarters Group has outstanding promissory notes of $2,245, as described in Note 9, which are payable to a relative of a stockholder. Interest on the obligation amounted to approximately $224 for each of the three years ended September 30, 1995, 1996 and 1997. Nutrition Headquarters Group has outstanding loans to a stockholder in the aggregate amount of $301 and $617, as described in Note 9, as of September 30, 1996 and 1997, respectively. Interest on these loans amounted to approximately $29, $30 and $56 for the years ended September 30, 1995, 1996 and 1997, respectively. For the years ended September 30, 1995, 1996 and 1997, Nutrition Headquarters Group provided distributions to its stockholders in the aggregate amount of $6,750, $6,935 and $8,360, respectively. 18. SUBSEQUENT EVENTS In April 1998, the Company agreed to sell certain assets of its cosmetic pencil operation for approximately $6,000. The Company will receive $4,500 in cash with additional payments of $1,500 over the next three years. Revenues applicable to this business were $581, $577 and $1,875 for fiscal 1995, 1996 and 1997, respectively, and the related results of operations were insignificant. 21 NUTRO LABORATORIES, INC. For the Years Ended September 30, 1997, 1996 and 1995 22 Independent Auditors' Report Board of Directors Nutro Laboratories, Inc. We have audited the accompanying balance sheets of Nutro Laboratories, Inc. as of September 30, 1997 and 1996, and the related statements of operations, stockholders' equity, and cash flows for the years ended September 30, 1997, 1996 and 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nutro Laboratories, Inc. as of September 30, 1997 and 1996, and the results of its operations and its cash flows for the years ended September 30, 1997, 1996 and 1995 in conformity with generally accepted accounting principles. AMPER, POLITZINER & MATTIA P.A. November 7, 1997, except for Note 12, dated April 20, 1998 Princeton, New Jersey 23 NUTRO LABORATORIES, INC. Balance Sheets September 30,
1997 1996 ---------------- ---------------- Assets Current assets Cash $ 33,244 $ 38,629 Accounts receivable - less allowance for doubtful accounts of $125,000 3,951,960 3,189,329 Inventory 4,625,167 3,658,684 Prepaid expenses and other current assets 145,527 63,190 ---------------- ---------------- 8,755,898 6,949,832 Property and equipment, net of accumulated depreciation 5,656,675 5,564,626 Loans receivable - officer 85,707 37,896 Deposits and other assets 685,057 74,389 ---------------- ---------------- $ 15,183,337 $ 12,626,743 ================ ================ Liabilities and Stockholders' Equity Current liabilities Demand note payable $ 1,873,489 $ 2,632,590 Current maturities of long-term debt 504,891 471,651 Accounts payable - trade 3,066,428 2,401,708 Accrued expenses and other current liabilities 742,370 639,289 ---------------- ---------------- 6,187,178 6,145,238 ---------------- ---------------- Other liabilities Long-term debt, net of current maturities 2,821,071 2,893,785 Notes payable - officer 195,000 195,000 ---------------- ---------------- 3,016,071 3,088,785 ---------------- ---------------- Commitments and contingent liabilities - - Stockholders' equity Common stock; no par value, 1,000 shares authorized, 100 shares issued and outstanding 1,000 1,000 Paid-in capital 249,000 249,000 Retained earnings 5,730,088 3,142,720 ---------------- ---------------- 5,980,088 3,392,720 ---------------- ---------------- $ 15,183,337 $ 12,626,743 ================ ================
See accompanying notes to financial statements. 24 NUTRO LABORATORIES, INC. Statements of Operations For the Years Ended September 30,
1997 1996 1995 ----------------- ----------------- ----------------- Net sales $ 28,949,635 $ 27,603,460 $ 27,653,165 Cost of goods sold 21,030,026 22,078,619 22,344,068 ----------------- ----------------- ----------------- Gross profit 7,919,609 5,524,841 5,309,097 Selling, general and administrative expenses 3,988,864 3,961,854 4,332,357 ----------------- ----------------- ----------------- Earnings from operations 3,930,745 1,562,987 976,740 ----------------- ----------------- ----------------- Other income (expense) Gain on sale of property and equipment 4,000 42,754 - Interest expense (546,712) (583,352) (549,223) Litigation expense (625,583) - - ----------------- ----------------- ----------------- (1,168,295) (540,598) (549,223) ----------------- ----------------- ----------------- Earnings before provision for state income tax 2,762,450 1,022,389 427,517 Provision for state income tax 50,082 11,200 9,400 ----------------- ----------------- ----------------- Net income $ 2,712,368 $ 1,011,189 $ 418,117 ================= ================= =================
See accompanying notes to financial statements. 25 NUTRO LABORATORIES, INC. Statements of Stockholders' Equity For the Years Ended September 30,
Common Stock --------------------------- Additional Shares Paid in Retained Outstanding Amount Capital Earnings Total ----------- ----------- -------------- -------------- --------------- Balance, October 1, 1994 100 $ 1,000 $ 249,000 $ 1,940,914 $ 2,190,914 Net income - - - 418,117 418,117 ------- ----------- -------------- -------------- --------------- Balance, September 30, 1995 100 1,000 249,000 2,359,031 2,609,031 Net income - - - 1,011,189 1,011,189 Dividends - - - (227,500) (227,500) ------- ----------- -------------- -------------- --------------- Balance, September 30, 1996 100 1,000 249,000 3,142,720 3,392,720 Net income - - - 2,712,368 2,712,368 Dividends - - - (125,000) (125,000) ------- ----------- -------------- -------------- --------------- Balance, September 30, 1997 100 $ 1,000 $ 249,000 $ 5,730,088 $ 5,980,088 ======= =========== ============== ============== ===============
See accompanying notes to financial statements. 26 NUTRO LABORATORIES, INC. Statements of Cash Flows For the Years Ended September 30,
1997 1996 1995 ---------------- --------------- --------------- Cash flows from operating activities Net income $ 2,712,368 $ 1,011,189 $ 418,117 ---------------- --------------- --------------- Adjustments to reconcile net income to net cash from operating activities Depreciation 615,065 604,714 523,049 Bad debt expense - 67,009 180 Gain on sale of property and equipment (4,000) (42,754) - Deferred tax expense - - 1,995 (Increase) decrease in Accounts receivable (762,631) (122,557) (383,616) Inventory (966,483) 868,695 330,159 Prepaid expenses and other current assets (82,337) 34,983 10,220 Deposits and other assets (10,668) (71,989) 50,790 Increase (decrease) in Accounts payable - trade 664,720 (947,078) (982,855) Accrued expenses and other current liabilities 103,081 (47,531) 209,172 ---------------- --------------- --------------- Total adjustments (443,253) 343,492 (240,906) ---------------- --------------- --------------- 2,269,115 1,354,681 177,211 ---------------- --------------- --------------- Cash flows from investing activities Payments for purchase of property and equipment (707,114) (425,149) (545,633) Proceeds from sale of property and equipment 4,000 55,880 - Payment for other assets (263,645) - - Increase in loans receivable - officer (47,811) (36,192) (30,951) Proceeds from loans receivable - officer - 75,441 5,200 ---------------- --------------- --------------- (1,014,570) (330,020) (571,384) ---------------- --------------- --------------- Cash flows from financing activities Net (payments) proceeds under demand note payable (759,101) (352,902) 777,702 Proceeds from long-term debt 99,800 - 19,764 Principal payments of long-term debt (475,629) (406,630) (410,000) Dividends (125,000) (227,500) - ---------------- --------------- --------------- (1,259,930) (987,032) 387,466 ---------------- --------------- --------------- Net change in cash (5,385) 37,629 (6,707) Cash - beginning 38,629 1,000 7,707 ---------------- --------------- --------------- Cash - ending $ 33,244 $ 38,629 $ 1,000 ================ =============== =============== Supplemental disclosure of cash paid Interest $ 558,898 $ 591,356 $ 540,163 Income taxes 50,082 - 14,280
See accompanying notes to financial statements. 27 NUTRO LABORATORIES, INC. Notes to Financial Statements Note 1 - Summary of Significant Accounting Policies Business Activity The operations of Nutro Laboratories, Inc., (the "Company"), are primarily manufacturing private label and contract pharmaceutical vitamins and related products in New Jersey which are sold in bulk to distributors or are further packaged and sold to retailers throughout the United States. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Inventory Inventory is valued at the lower of cost (first-in, first-out basis) or market. Property and Equipment Property and equipment is stated at cost less accumulated depreciation. Capitalized leases are included in equipment at the present value of future minimum lease payments at the date of acquisition. Depreciation is provided using the straight-line method as follows: Estimated Useful Life --------------------- Building 40 years Machinery and equipment 3 - 10 years Furniture and office equipment 10 years Leasehold improvements 8 - 20 years Income Taxes The Company has elected to be taxed as an S-Corporation for federal and state tax purposes. Under this election, the profits, losses, credits and deductions of the Company are passed through to the individual stockholders. New Jersey taxes the Company at approximately 2% of taxable income. Note 2 - Inventory September 30, 1997 1996 ---------------- --------------- Raw materials $ 2,117,814 $ 1,626,173 Work-in-process 884,684 669,334 Finished goods 1,622,669 1,363,177 ---------------- --------------- $ 4,625,167 $ 3,658,684 ================ =============== 28 NUTRO LABORATORIES, INC. Notes to Financial Statements Note 3 - Property and Equipment September 30, 1997 1996 -------------- ------------- Building $ 1,987,090 $ 1,987,090 Land 591,100 591,100 Machinery and equipment 6,262,411 5,617,731 Furniture and office equipment 375,889 366,579 Leasehold improvements 1,138,756 1,085,632 -------------- ------------- 10,355,246 9,648,132 Accumulated depreciation 4,698,571 4,083,506 -------------- ------------- $ 5,656,675 $ 5,564,626 ============== ============= Depreciation expense (including amortization of leasehold improvements and capitalized leases) for the years ended September 30, 1997, 1996 and 1995 was $615,065, $604,714 and $523,049, respectively. Equipment costs subject to capitalized leases at September 30, 1997 and 1996 totaled $122,368 and $22,568, with related accumulated depreciation of $25,895 and $21,065, respectively. Note 4 - Demand Note Payable
September 30, 1997 1996 -------------- --------------- Revolving loan agreement payable on demand, bearing interest (payable monthly) at prime plus .75%, collateralized by accounts receivable, inventory and equipment. This agreement has a maximum borrowing limit of 85% of qualified accounts receivable and 35% of qualified inventory, with an overall borrowing limit of $5,000,000. $ 1,873,489 $ 2,632,590 ============== ===============
The prime rate of interest as of September 30, 1997 and 1996 was 8.5% and 8.25%, respectively. The note agreement places restrictions on dividend payments, capital expenditures and contains requirements for maintaining defined levels of working capital, capital funds, as well as various financial ratios including debt to equity. 29 NUTRO LABORATORIES, INC. Notes to Financial Statements Note 5 - Accrued Expenses and Other Current Liabilities Included in accrued expenses and other current liabilities is as follows: September 30, 1997 1996 -------------- --------------- Accrued customer rebates $ 327,000 $ 330,200 Accured expenses 208,500 231,300 Other 206,870 77,789 -------------- --------------- $ 742,370 $ 639,289 ============== =============== Note 6 - Long-term Debt
September 30, 1997 1996 -------------- --------------- Installment note payable to a bank due in monthly payments of $18,264 plus interest at prime plus .75%, maturing May 1999, collateralized by accounts receivable, inventory and equipment. $ 383,543 $ 602,711 Note payable to an affiliate (see Note 9) due in monthly payments of $8,333 plus interest at prime, maturing May 2000. 258,343 358,339 Note payable to a bank due in monthly payments of $15,816, including interest, maturing April 2016. Interest is fixed at 8.15% per annum through April 2001. Thereafter interest will be adjusted every five years. The note is collateralized by the building and land. 1,814,135 1,852,280 Note payable to the stockholder due in monthly payments of $2,332, including interest at 8%, maturing March 2001. 85,361 105,530 Note payable due in monthly payments of $9,330, including interest at 8%, maturing March 2001. 341,430 422,112 Note payable to the stockholder due in quarterly pay- ments of $8,780, including interest at 8.5% maturing June 2017. 336,355 - Other 106,795 24,464 -------------- --------------- 3,325,962 3,365,436 Less current maturities 504,891 471,651 -------------- --------------- Long-term debt, net of current maturities $ 2,821,071 $ 2,893,785 ============== ===============
30 NUTRO LABORATORIES, INC. Notes to Financial Statements Note 6 - Long-term Debt (continued) The approximate aggregate amount of long-term debt maturing in each of the subsequent years ending September 30 is as follows: 1998 $ 504,900 1999 462,700 2000 266,800 2001 157,500 2002 85,800 The prime rate of interest as of September 30, 1997 and 1996 was 8.5% and 8.25%, respectively. Note 7 - Retained Earnings
September 30, 1997 1996 1995 -------------- -------------- -------------- Accumulated adjustments account $ 5,174,247 $ 2,586,879 $ 1,803,190 Other retained earnings 555,841 555,841 555,841 -------------- -------------- -------------- $ 5,730,088 $ 3,142,720 $ 2,359,031 ============== ============== ==============
Note 8 - Income Taxes The Company has the following carryforwards available for federal tax purposes: investment tax credits of $57,500, expiring through March 2001, and federal net operating losses of $176,500, expiring through March 2004. These carryforwards will not be available for use by the Company as long as it maintains its election to be taxed as an S-Corporation. Note 9 - Employee Retirement Plans The Company's profit sharing plan calls for discretionary contributions up to a maximum of 15% of the payroll of qualified employees. The plan defines qualified employees as those over age 21, with one year of service with the Company. The Company has a 401(k) pension plan whereby qualified employees can make voluntary contributions to the plan. The plan does not require the Company to match any portion of the employees' contributions. There was no retirement plan expense for the years ended September 30, 1997, 1996 and 1995. 31 NUTRO LABORATORIES, INC. Notes to Financial Statements Note 10 - Related Party Transactions Loans Receivable - Officer Loans to officer, non-interest bearing, payable in weekly installments of at least $100. Notes Payable - Officer Notes payable - officer, represents $195,000 loaned to the Company by the stockholder. The note is a two year term note due in September 1998, bearing interest at 10%. The note is subordinated to the bank debt described in Notes 4 and 5. Interest expense to related parties, which include notes payable - officer, notes payable stockholder (see Note 5) and note payable - affiliate (see Note 5), for the years ended September 30, 1997, 1996 and 1995 totaled $65,790, $56,523 and $62,200, respectively. Sales and Purchases The stockholder of the Company directly owns a one-third interest and indirectly owns an additional one-third interest in an affiliated company. All transactions between the companies are summarized as follows for the years ended September 30:
1997 1996 1995 -------------- -------------- -------------- Sales $ 2,493,660 $ 2,189,765 $ 2,405,736 Purchases 151,786 101,780 - Accounts receivable 115,778 25,769 -
Rent Expense The Company leased its location from a partnership in which the principal stockholder had a 20% interest until March 1996 when the Company purchased the facility from the partnership. (See Note 10.) Rent expense for the year ended September 30, 1996 and 1995 was $166,105 and $366,583, respectively. Other Assets Included in other assets is investment property purchased from the stockholder of the Company for $600,000. The Company plans to sell this property. 32 NUTRO LABORATORIES, INC. Notes to Financial Statements Note 11 - Non-cash Investing and Financing Activities During the year ended September 30, 1997, the Company purchased property from the stockholder of the Company. In conjunction with the acquisition, the liability was assumed as follows: Cost of property acquired $ 600,000 Cash paid 263,645 ----------- Liability assumed - note payable to stockholder $ 336,355 =========== During the year ended September 30, 1996, the Company purchased a building and land for $2,578,190. In conjunction with the acquisition, liabilities were assumed as follows: Cost of building and land acquired $ 2,578,190 Cash paid 34,657 ----------- Liabilities assumed $ 2,543,533 =========== Liabilities assumed: Note payable to bank $ 1,870,000 Note payable to related partnership 583,333 Accounts payable to related partnership 90,200 ----------- $ 2,543,533 =========== Note 12 - Subsequent Event On April 20, 1998, the stockholders of the Company completed the sale of all their shareholdings in exchange for shares in NBTY, Inc. in a transaction accounted for as a pooling of interests. The accompanying financial statements do not include any adjustments which may arise as a result of this transaction. 33 NUTRITION HEADQUARTERS, INC. AND LEE NUTRITION, INC. COMBINED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1997 34 Report of Independent Accountants To the Board of Directors and Stockholders of Nutrition Headquarters, Inc. and Lee Nutrition, Inc.: We have audited the accompanying combined balance sheets of Nutrition Headquarters, Inc. and Lee Nutrition, Inc. (both S Corporations) (collectively, the "Companies") as of September 30, 1997 and 1996, and the related combined statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended September 30, 1997. These combined financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of Nutrition Headquarters, Inc. and Lee Nutrition, Inc. as of September 30, 1997 and 1996, and the combined results of their operations and their combined cash flows for the each of the three years in the period ended September 30, 1997 in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. St. Louis, Missouri November 21, 1997, except for Note 7, as to which the date is April 20, 1998 35 Nutrition Headquarters, Inc. and Lee Nutrition, Inc. Combined Balance Sheets September 30, 1997 and 1996
ASSETS 1997 1996 Current assets: Cash and cash equivalents $ 1,810,171 $ 3,483,117 Accounts receivable, net of allowance of approximately 298,019 268,083 $6,000 Inventories 6,055,925 5,630,524 Prepaid expenses 80,559 109,906 ---------------- ---------------- Total current assets 8,244,674 9,491,630 ---------------- ---------------- Property, plant and equipment, net 4,353,867 3,126,655 ---------------- ---------------- Other assets: Deferred advertising 146,443 237,199 Due from affiliated company 258,343 358,339 Deposits and other assets 180,353 134,957 Mailing list, net 855,572 1,400,672 ---------------- ---------------- Total other assets 1,440,711 2,131,167 ---------------- ---------------- Total assets $ 14,039,252 $ 14,749,452 ================ ================
36
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996 Current liabilities: Current portion of long-term debt $ 97,558 $ 1,460,427 Accounts payable 2,624,043 2,742,280 Deferred revenue on unfilled orders 205,484 336,219 Accrued expenses and other current liabilities 438,112 447,403 ---------------- ---------------- Total current liabilities 3,365,197 4,986,329 ---------------- ---------------- Long-term liabilities: Long-term debt, net of current portion 2,244,992 2,342,550 ---------------- ---------------- Shareholders' equity: Nutrition Headquarters, Inc.: Common stock, $1 par value; authorized, 200 shares; issued, 99 shares 99 99 Additional paid-in capital 17,499 17,499 Lee Nutrition, Inc.: Common stock, $1 par value; authorized, 200 shares; issued, 99 shares 99 99 Additional paid-in capital 2,301 2,301 Retained earnings 8,409,065 7,400,575 ---------------- ---------------- Total shareholders' equity 8,429,063 7,420,573 ---------------- ---------------- Total liabilities and shareholders' equity $ 14,039,252 $ 14,749,452 ================ ================
The accompanying notes are an integral part of the combined financial statements. 37 Nutrition Headquarters, Inc. and Lee Nutrition, Inc. Combined Statements of Operations for the years ended September 30, 1997, 1996 and 1995
1997 1996 1995 Net sales $ 50,917,176 $ 50,431,869 $ 50,428,916 Cost of sales 26,534,829 26,924,429 27,269,553 ---------------- ---------------- --------------- Gross profit 24,382,347 23,507,440 23,159,363 Operating expenses: Selling, general and administrative 14,279,320 14,465,669 14,507,719 Depreciation and amortization 838,497 844,630 782,605 ---------------- ---------------- --------------- Income from operations 9,264,530 8,197,141 7,869,039 Other income (expense): Interest expense (295,602) (437,384) (607,917) Other income, principally interest 211,667 218,781 208,555 Gain on sale of property and equipment 220,895 ---------------- ---------------- --------------- Total other income (expense), net 136,960 (218,603) (399,362) ---------------- ---------------- --------------- Income before provision for state income taxes 9,401,490 7,978,538 7,469,677 Provision for state income taxes 158,000 136,000 118,892 ---------------- ---------------- --------------- Net income $ 9,243,490 $ 7,842,538 $ 7,350,785 ================ ================ ===============
The accompanying notes are an integral part of the combined financial statements. 38 Nutrition Headquarters, Inc. and Lee Nutrition, Inc. Combined Statements of Shareholders' Equity for the years ended September 30, 1997, 1996 and 1995
Nutrition Headquarters, Lee Nutrition, Inc. Inc. --------------------------- ---------------------------- Additional Additional Common Paid-in Common Paid-in Retained Stock Capital Stock Capital Earnings Total Balance October 1, 1994 $ 99 $ 17,499 $ 99 $ 2,301 $ 5,665,252 $ 5,685,250 Net income 7,350,785 7,350,785 Dividends paid (6,750,000) (6,750,000) ------------ ------------ ------------- ------------- ------------- ------------- Balance, September 30, 1995 99 17,499 99 2,301 6,266,037 6,286,035 Net income 7,842,538 7,842,538 Dividends paid (6,708,000) (6,708,000) ------------ ------------ ------------- ------------- ------------- ------------- Balance, September 30, 1996 99 17,499 99 2,301 7,400,575 7,420,573 Net income 9,243,490 9,243,490 Dividends paid (8,235,000) (8,235,000) ------------ ------------ ------------- ------------- ------------- ------------- Balance, September 30, 1997 $ 99 $ 17,499 $ 99 $ 2,301 $ 8,409,065 $ 8,429,063 ============ ============ ============= ============= ============= =============
The accompanying notes are an integral part of the combined financial statements. 39 Nutrition Headquarters, Inc. and Lee Nutrition, Inc. Combined Statements of Cash Flows for the years ended September 30, 1997, 1996 and 1995
1997 1996 1995 Cash flows from operating activities: Net income $ 9,243,490 $ 7,842,538 $ 7,350,785 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 845,327 862,714 808,261 Net gain on sale of property (220,895) Changes in assets and liabilities: Accounts receivable (29,936) (52,170) 295,818 Inventories (425,401) 112,911 (110,352) Prepaid expenses and other assets 120,103 142,954 (272,965) Accounts payable 226,763 16,660 677,908 Accrued expenses and other liabilities (140,026) (77,261) 44,083 ------------- ------------- ------------- Net cash provided by operating activities 9,619,425 8,848,346 8,793,538 ------------- ------------- ------------- Cash flows from investing activities: Purchases of property, plant and equipment (1,912,837) (634,173) (612,957) Proceeds from sale of property 268,540 94,932 Repayments of loans to affiliated company 99,996 99,996 41,665 Other (52,643) 42,251 (102,189) ------------- ------------- ------------- Net cash used in investing activities (1,596,944) (396,994) (673,481) ------------- ------------- ------------- Cash flows from financing activities: Dividends paid (8,235,000) (6,708,000) (6,750,000) Repayment of long-term debt (1,460,427) (1,457,026) (1,559,785) ------------- ------------- ------------- Net cash used in financing activities (9,695,427) (8,165,026) (8,309,785) ------------- ------------- ------------- (Decrease) increase in cash and cash equivalents (1,672,946) 286,326 (189,728) Cash and cash equivalents, beginning of year 3,483,117 3,196,791 3,386,519 ------------- ------------- ------------- Cash and cash equivalents, end of year $ 1,810,171 $ 3,483,117 $ 3,196,791 ============= ============= ============= Supplemental disclosure of cash flow information: Cash paid for interest $ 292,013 $ 448,336 $ 584,761 ============= ============= ============= Cash paid for state income taxes $ 147,916 $ 108,969 $ 99,979 ============= ============= =============
The accompanying notes are an integral part of the combined financial statements. 40 1. Basis of Presentation, Organization and Accounting Policies: Basis of Presentation: The financial statements of Nutrition Headquarters, Inc. ("Nutrition Headquarters") and Lee Nutrition, Inc. ("Lee Nutrition") (the "Companies") are presented on a combined basis as the Companies have common stockholders, management, operating facilities, bank borrowing agreements and business purpose. Intercompany balances and transactions have been eliminated in the combination. Nature of Business: The Companies are primarily engaged in the national mail order marketing of vitamins and health foods. Brunswick Laboratories, a manufacturing division of Nutrition Headquarters, supplies mail order products to the Companies, as well as to unrelated customers and a related party as described in Note 7. Brunswick Laboratories extends unsecured credit to customers throughout the United States. Cash and Cash Equivalents: Cash and cash equivalents include cash and deposits with financial institutions which are readily convertible to known amounts of cash with original maturities of three months or less. A substantial portion of the Companies' cash is deposited in two financial institutions. The balances maintained at one of these financial institutions, amounting to $2,153,530 and $3,085,823 at September 30, 1997 and 1996, respectively, are invested nightly in one day Treasury Fund Dollar deposits. Inventories: Inventories are stated at the lower of cost or market. Cost is determined on a FIFO (first-in, first-out) method of valuation. Property, Plant and Equipment: Property, plant and equipment are recorded at cost. Capital leases are recorded at the lower of fair market value or the present value of future lease payments. Buildings and building improvements are depreciated over 31.5 or 39 years using the straight-line method. Equipment is depreciated on the straight-line method over the estimated useful lives of the assets (three to seven years). Expenditures for repairs and maintenance are charged to expense as incurred; expenditures for betterments and major renewals which substantially increase the useful life of the asset are capitalized. At retirement or sale, the cost of the assets and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the combined statements of income. Mailing List: The mailing list is recorded at cost and is being amortized on the double-declining-balance method over a life of fourteen years. Amortization expense amounted to approximately $200,100, $233,400 and $272,400 for the years ended September 30, 1997, 1996 and 1995, respectively. Fair Values of Instruments: The recorded amounts of cash and cash equivalents, accounts receivable, accounts payable and long-term debt approximate their fair values. Fair values for long-term debt are estimated using current interest rates at September 30, 1997. 41 Nutrition Headquarters, Inc. and Lee Nutrition, Inc. Notes to Combined Financial Statements, Continued 1. Basis of Presentation, Organization and Accounting Policies, continued: Revenue Recognition: Substantially all mail order sales are received with payments accompanying the order. Sales and related cost of sales are recognized as the merchandise is shipped. Amounts received from customers for unfilled orders, amounting to $205,484 and $336,219 at September 30, 1997 and 1996, respectively, are reflected as deferred revenue on the balance sheet. Advertising: The cost of direct-response advertising in magazines and periodicals which is determined to be recoverable from the gross profit on related sales is expensed ratably throughout the related response period (which is less than one year) based upon the amount of sales revenue received compared to the estimated total sales response for the respective advertisement. Advertising costs amounting to $146,443 and $237,199 at September 30, 1997 and 1996, respectively, which relate to a response period in the subsequent fiscal year, and are presented as deferred advertising in the balance sheet. The direct costs of catalogs and postage for catalog mailings are expensed as the catalogs are mailed. Advertising expense amounted to approximately $8,398,100, $8,746,400 and $8,530,200 for the years ended September 30, 1997, 1996 and 1995, respectively. Research and Development: The cost of research and development is expensed as incurred. Research and development costs for the years ended September 30, 1997, 1996 and 1995 were not significant. Tax Status: The Companies have each elected for federal income tax purposes to be treated as S Corporations under provisions of the Internal Revenue Code. Accordingly, for federal and certain state income tax purposes, taxable income or loss of the Companies is reported to the individual shareholders for inclusion in their respective income tax returns with no provision for these taxes included in the combined statements of operations. In certain states, however, the Companies are subject to corporate income taxes and, accordingly, a related provision for state income taxes is included in the combined statements of operations. The Companies have elected a December 31 year-end for income tax purposes. Primarily as a result of prior acquisitions, differences exist in the carrying values and methods of accounting for certain assets and liabilities for financial reporting and income tax purposes. 42 Nutrition Headquarters, Inc. and Lee Nutrition, Inc. Notes to Combined Financial Statements, Continued 1. Basis of Presentation, Organization and Accounting Policies, continued: Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. Inventories: Inventories consist of the following at September 30, 1997 and 1996:
1997 1996 Raw materials $ 702,348 $ 723,287 Work in process 234,248 291,309 Finished goods 5,119,329 4,615,928 ---------------- ---------------- $ 6,055,925 $ 5,630,524 ================ ================
3. Property, Plant and Equipment: Property, plant and equipment consist of the following at September 30, 1997 and 1996:
1997 1996 Land $ 194,631 $ 194,631 Buildings and building improvements 1,616,058 1,366,057 Machinery and equipment 2,916,679 2,761,622 Office furniture and equipment 457,322 389,901 Computer equipment under capital leases 218,613 218,613 Computer equipment 580,368 555,938 Transportation equipment 1,496,392 96,392 Land and buildings held for sale, net of valuation allowance 90,406 ---------------- ---------------- 7,480,063 5,673,560 Less accumulated depreciation and amortization (3,126,196) (2,546,905) ---------------- ---------------- $ 4,353,867 $ 3,126,655 ================ ================
43 Nutrition Headquarters, Inc. and Lee Nutrition, Inc. Notes to Combined Financial Statements, Continued 3. Property and Equipment, continued: Depreciation expense and amortization of capital leases amounted to approximately $638,000, $607,700 and $503,000 for the years ended September 30, 1997, 1996 and 1995, respectively. Accumulated amortization on computer equipment under capital leases amounted to $137,937 and $106,706 at September 30, 1997 and 1996, respectively. In prior years the Companies established a valuation allowance of $218,000 related to its land and buildings held for sale since the estimated fair values of the properties were less than their respective carrying values. In fiscal year 1997, the Companies sold these properties for a gain of $220,895. 4. Long-Term Debt: Long-term debt consists of the following at September 30, 1997 and 1996:
1997 1996 Senior bank debt; interest per annum at the prime rate (prime at September 30, 1997 was 8.50% per annum); collateralized by substantially all of the assets of the Companies and a pledge of the capital stock of the Companies; guaranteed by the stockholders. Repaid in October 1997 $ 44,338 $ 576,388 First subordinated promissory notes; $866,667 principal payable in 8 monthly installments of $108,333 commencing October 1996 and ending May 1997; interest per annum at the lower of 10% or the prime rate plus 2% (prime at September 30, 1997 was 8.50% per annum); collateralized by a first subordinate pledge of the capital stock of the Companies and guaranteed by the stockholders 866,667 Second subordinated promissory notes; payable to a relative of the Companies' shareholders; principal payable in April 2011; interest per annum at the lower of 10% or the prime rate plus 2% (prime at September 30, 1997 was 8.50% per annum); collateralized by a second subordinate pledge of capital stock of the Companies and guaranteed by the stockholders 2,244,992 2,244,992 Other 53,220 114,930 ---------------- ---------------- 2,342,550 3,802,977 Less current portion (97,558) (1,460,427) ---------------- ---------------- $ 2,244,992 $ 2,342,550 ================ ================
44 Nutrition Headquarters, Inc. and Lee Nutrition, Inc. Notes to Combined Financial Statements, Continued 4. Long-Term Debt, continued: On April 30, 1997 the Companies completed an agreement which will provide for an additional term loan of $1,100,000. The terms of the loan agreement provide for repayment in sixty monthly installments with interest at 8.5% per annum. As of September 30, 1997, no funds were advanced under this agreement. The Companies' bank credit agreements, as amended, also provide for borrowings under a revolving loan arrangement up to the lesser of $2,500,000 or an amount based on specified percentages of the Companies' accounts receivable and inventory as defined in the agreement. Interest is payable monthly at the prime rate per annum. The revolving loan has a maturity of March 31, 1999. There were no borrowings under this agreement during the years ended September 30, 1997 or 1996. The bank term loan and bank credit agreements, as amended, are cross-collateralized by substantially all of the assets of the Companies and a pledge of the capital stock of the Companies. In addition, the Companies' president (a stockholder) and his wife (a beneficiary of a stockholder trust) have provided personal guarantees. Interest expense incurred on the Senior bank debt was approximately $24,400, $70,300 and $117,100 for the years ended September 30, 1997, 1996 and 1995, respectively. Interest expense incurred on subordinated debt was approximately $256,800, $319,000 and $435,500 for the years ended September 30, 1997, 1996 and 1995, respectively. Nutrition Headquarters is the lessee of certain computer equipment under capital leases expiring in May 1998. The following is a schedule of future minimum lease payments together with the present value of the minimum lease payments as of September 30, 1997: Year ending September 30, 1998 $ 55,085 Less amount representing interest (1,865) --------------- Present value of future minimum lease payments $ 53,220 =============== 45 Nutrition Headquarters, Inc. and Lee Nutrition, Inc. Notes to Combined Financial Statements, Continued 5. Related Party Transactions: The president of the Companies is also the majority stockholder in Nutro Laboratories, Inc. ("Nutro"). Transactions with Nutro for the years ended September 30, 1997, 1996 and 1995 include the following:
1997 1996 1995 Purchases by Nutrition Headquarters from Nutro, primarily bulk vitamins, net of sales to Nutro of $151,786, $101,780 and $ -0- in 1997, 1996 and 1995, respectively $ 2,341,874 $ 2,087,985 $ 2,405,736 ============ ============= ============= Receipt by Nutrition Headquarters of loan repayment from Nutro $ 99,996 99,996 $ 41,665 ============ ============= =============
The balances due to and from Nutro were as follows at September 30, 1997 and 1996:
1997 1996 Due to Nutro (included in accounts payable) $ 115,778 $ 25,769 ================ ================ Loans to Nutro (included in due from affiliated company) $ 258,343 $ 358,339 ================ ================
Amounts due from Nutro, included in due from affiliated company in the accompanying combined balance sheets, bear interest at the prime interest rate per annum as listed in the Wall Street Journal on the first business day of each month. Principal is payable in monthly installments of $8,333 beginning June 1995 through May 2000. Interest income earned on the loan amounted to approximately $26,100, $34,800 and $42,700 for the years ended September 30, 1997, 1996 and 1995, respectively. The second subordinated promissory notes of $2,244,992 described in Note 4 are payable to a relative of the Companies' shareholders. Interest expense on the obligations amounted to approximately $224,000, $225,000 and $224,000 for the years ended September 30, 1997, 1996, and 1995, respectively. 46 Nutrition Headquarters, Inc. and Lee Nutrition, Inc. 6. Commitments: The Companies lease certain property used in operations. Rent expense for the years ended September 30, 1997, 1996 and 1995 under operating leases was approximately $101,900, $113,300 and $110,300, respectively. Future minimum operating lease payments for the years ended September 30 are as follows: 1998 $ 16,428 1999 16,428 2000 13,690 --------------- $ 46,546 =============== 7. Subsequent Event: On April 20, 1998, the shareholders of the Companies and Nutro completed the sale of all of their respective shareholdings in Nutrition, Lee and Nutro in exchange for shares in NBTY, Inc. in a transaction accounted for as a pooling of interests. The accompanying combined financial statements do not include any adjustments which may arise as a result of this transaction. 47 NBTY, INC. and SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars and shares in thousands) ASSETS
September 30, March 31, 1997 1998 (unaudited) Current assets: Cash and cash equivalents $ 20,262 $ 19,097 Short-term investments 8,362 - Accounts receivable, less allowance for doubtful accounts of $1,116 in 1997 and $1,110 in 1998 19,603 20,275 Inventories 86,440 98,852 Deferred income taxes 6,032 6,032 Prepaid catalog costs and other current assets 19,111 12,286 ------------ ---------- Total current assets 159,810 156,542 Cash held in escrow 144,262 - Property, plant and equipment 118,184 150,712 Intangible assets, net 141,303 143,753 Other assets 7,618 9,550 ------------ ---------- Total assets $ 571,177 $ 460,557 ============ ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt and capital lease obligations $ 1,519 $ 3,034 Demand note payable 1,873 - Accounts payable 49,857 47,429 Accrued expenses 35,711 28,177 ------------ ---------- Total current liabilities 88,960 78,640 Long-term debt 168,550 210,658 Obligations under capital leases 2,700 2,446 Promissory note payable 169,909 2,457 Deferred income taxes 7,474 7,642 Other liabilities 2,293 2,293 ------------ ---------- Total liabilities 439,886 304,136 ------------ ---------- Commitments and contingencies Stockholders' equity: Common stock, $.008 par; authorized 75,000 shares in 1997 and 1998, respectively; issued 69,123 shares in 1997 and 69,255 shares in 1998 and outstanding 64,614 shares in 1997 and 64,746 shares in 1998 553 554 Capital in excess of par 56,182 56,789 Retained earnings 75,199 92,884 ------------ ---------- 131,934 150,227 Less 4,509 treasury shares at cost, in 1997 and 1998, respectively (3,206) (3,206) Cumulative translation adjustment 2,563 9,400 ------------ ---------- Total stockholders' equity 131,291 156,421 ------------ ---------- Total liabilities and stockholders' equity $ 571,177 $ 460,557 ============ ==========
See notes to supplemental condensed consolidated financial statements. 50 NBTY, INC. and SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) (Dollars and shares in thousands, except per share amounts)
For the six months ended March 31, 1997 1998 Net sales $159,105 $286,820 ---------- ---------- Costs and expenses: Cost of sales 79,819 140,414 Catalog, printing, postage and promotion 13,996 13,935 Selling, general and administrative 40,571 90,452 ---------- ---------- 134,386 244,801 ---------- ---------- Income from operations 24,719 42,019 ---------- ---------- Other income (expenses): Interest, net (1,315) (9,221) Miscellaneous, net (171) 1,400 ---------- ---------- (1,486) (7,821) ---------- ---------- Income before income taxes 23,233 34,198 Income taxes 7,391 10,565 ---------- ---------- Net income $ 15,842 $ 23,633 ========== ========== Net income per share: Basic $0.25 $0.37 Diluted $0.23 $0.34 Weighted average common shares outstanding: Basic 64,578 64,662 Diluted 68,919 68,967 See notes to supplemental condensed consolidated financial statements. 51 NBTY, INC. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollars in thousands) For the six months ended March 31, 1997 1998 ---------------------- Net income $15,842 $23,633 Adjustments to reconcile net income to cash provided by operating activities: Loss on sale of property, plant and equipment 26 Depreciation and amortization 3,664 10,032 Provision(recovery)for allowance for doubtful accounts 206 (5) Increase in deferred taxes 7 Changes in assets and liabilities, net of acquistions: Increase in accounts receivable (5,170) (199) Increase in inventories (8,262) (11,698) Decrease(increase) in prepaid catalog costs and other current assets (1,295) 8,683 Decrease in other assets 288 535 (Decrease)increase in accounts payable 10,381 (3,201) (Decrease) increase in accrued expenses 5,112 (12,428) ---------------------- Net cash provided by operating activities 20,792 15,359 ---------------------- Cash flow from investing activities: Purchase of property, plant and equipment (9,488) (38,942) Proceeds from sale of property, plant and equipment 20 Proceeds from sale of short-term investments 8,362 Purchase of short-term investments (4,651) Receipt of payments from direct-mail cosmetics business 322 ---------------------- Net cash used in investing activities (13,797) (30,580) ---------------------- Cash flows from financing activities: Dividends paid (2,610) (5,950) Borrowings under long term debt agreements 45,000 Cash held in escrow 144,730 Principal payments under long-term debt agreements and capital leases (2,079) (1,153) Purchase of treasury stock (15) Proceeds from stock options exercised 23 40 Repayment of promissory note (168,770) ---------------------- Net cash provided by (used in) financing activities (4,681) 13,897 ---------------------- Effect of Exchange Rate Changes on Cash and Cash Equivalents 159 ---------------------- Net (decrease) increase in cash and cash equivalents 2,314 (1,165) Cash and cash equivalents at beginning of quarter 12,814 20,262 ---------------------- Cash and cash equivalents at end of quarter $15,128 $19,097 ====================== Supplemental Disclosure of Cash Flow Information: Cash paid during the period for interest $1,295 $12,129 Cash paid during the period for taxes $4,817 $10,243 ====================== See notes to supplemental condensed consolidated financial statements. 52 NBTY, INC. and SUBSIDIARIES NOTES to FINANCIAL STATEMENTS--(Continued) (In thousands, except per share amounts) 1. Basis of presentation The supplemental consolidated financial statements of NBTY, Inc. and Subsidiaries, formerly Nature's Bounty, Inc. ("NBTY"), have been prepared to give retroactive effect to the merger with Nutrition Headquarters Group, Inc., Lee Nutrition, Inc. and Nutro Laboratories, Inc. (collectively, the "Nutrition Headquarters Group" and with NBTY collectively, the "Company") on April 20, 1998, which has been accounted for as a pooling of interests. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling- of-interest methods in financial statements that do not include the date of consummation. These financial statements do not extend through the date of consummation; however, they well become the historical consolidated financial statements of the Company after financial statements covering the date of consummation of the business combination are issued. During 1998, NBTY entered into a definitive agreement to merge with Nutrition Headquarters Group. On April 20, 1998, Nutrition Headquarters Group was merged with and into NBTY. Under terms of the merger agreement, each share of Nutrition Headquarters Group common stock was exchanged for one share of NBTY's common stock with approximately 8,722 shares of NBTY's common stock exchanged for all the outstanding stock of Nutrition Headquarters Group. 2. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly its financial position as of March 31, 1998 and results of operations for the six months ended March 31, 1998 and 1997 and statements of cash flows for the six months ended March 31, 1998 and 1997. The consolidated condensed balance sheet as of September 30, 1997 has been derived from the audited balance sheet as of that date. This report should be read in conjunction with the Company's supplemental consolidated financial statements for the fiscal years end September 30, 1995, 1996 and 1997 included in this current report on Form 8-K. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Foreign currency translation The financial statements of international subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and an average exchange rate for each period for revenues, expenses, and gains and losses. Where the local currency is the functional currency, translation adjustments are recorded as a separate component of stockholder's equity. Common shares and earnings per share: On March 9, 1998, the Company's Board of Directors declared a three-for-one stock split in the form of a 200% stock dividend effective March 23, 1998. In addition, the Company's Certificate of Incorporation was 53 NBTY, INC. and SUBSIDIARIES NOTES to FINANCIAL STATEMENTS--(Continued) (In thousands, except per share amounts) amended to authorize the issuance of up to 75 million shares of common stock, par value $.008 per share. All per common share amounts have been retroactively restated to account for the above stock split. In addition, stock options and respective exercise prices have been amended to reflect these transactions (see Note 8). Accounting changes: Effective October 1, 1996, the Company adopted the disclosure-only provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." As permitted by SFAS No. 123, the Company continues to measure compensation cost in accordance with Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees." As the Company has not granted any options during the six months ended March 31, 1998, nor fiscal 1997 or 1996, there would not have been any impact on the Company's financial position or results of operations on a pro forma basis. Effective October 1, 1996, the Company adopted SFAS No. 121,"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This statement requires that certain assets be reviewed for impairment and, if impaired, be measured at fair value, whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The adoption of SFAS No. 121 at October 1, 1996 and its application during fiscal 1997 and the six months ended March 31, 1998 had no material impact on the Company's financial position or results of operations. New accounting standards In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings Per Share." The statement simplifies the standards for computing earnings per share ("EPS") and makes them comparable to international EPS standards. The statement requires the presentation of both "basic" and "diluted" EPS on the face of the income statement with a supplementary reconciliation of the amounts used in the calculations (see note 8). In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distribution to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. In addition, in June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which establishes standards for reporting information about operating segments. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. Both of these new standards are effective for fiscal years beginning after December 15, 1997 and require comparative information for earlier 54 NBTY, INC. and SUBSIDIARIES NOTES to FINANCIAL STATEMENTS--(Continued) (In thousands, except per share amounts) years to be restated. The implementation of these new standards will not affect the Company's results of operations and financial position, but may have an impact on future financial statement disclosures. Year 2000 Software Compatibility The Company is continually updating its information systems, and has evaluated significant computer software applications for compatibility with the year 2000. With the system changes implemented to date and other planned changes, the Company anticipates that its computer software applications will be compatible with the year 2000. Expenditures specifically related to software modifications for year 2000 compatibility are not expected to be material. 3. The results of operations and statements of cash flows for the six months ended March 31, 1998 are not necessarily indicative of the results to be expected for the full year. 4. Acquisition of Holland & Barrett Holdings Ltd.: On August 7, 1997, the Company acquired all of the issued and outstanding capital stock of Holland & Barrett Holdings Ltd.("H&B") from Lloyds Chemist's plc ("Lloyds") for an aggregate purchase price of approximately $169,000 plus acquisition costs of approximately $811. The acquisition has been accounted for under the purchase method and, accordingly, the results of operations are included in the financial statements from the date of acquisition. H&B markets a broad line of nutritional supplement products, including vitamins, minerals and other nutritional supplements and food products. At the date of acquisition, H&B operated approximately 410 retail stores in the United Kingdom. The Company issued to Lloyds two promissory notes (the "Promissory Notes") totaling approximately $170,000 as consideration for the purchase of capital stock of H&B. The Promissory Notes, which are collateralized by two letters of credit issued by a lending institution, were paid in full in October 1997. In connection with the Acquisition, the Company (i) entered into a $50,000 credit and guarantee agreement (the "Credit and Guarantee Agreement"), which provides borrowings for working capital and general corporate purposes, and (ii) issued $150,000 in Senior Subordinated Notes due 2007. Assets acquired and liabilities assumed included cash ($5,580), inventory ($18,045), other current assets ($11,078), property, plant and equipment ($31,554), and current and long-term liabilities ($27,154 and $4,058, respectively). The excess cost of investment over the net book value of H&B at the date of acquisition resulted in an increase in goodwill of $133,725 which will be amortized over 25 years. Additionally, finance related costs of approximately $5,600 will be amortized over 10 years. 55 NBTY, INC. and SUBSIDIARIES NOTES to FINANCIAL STATEMENTS--(Continued) (In thousands, except per share amounts) 5. Inventories have been estimated by using the gross profit method for the interim periods. The components of the inventories are as follows: September 30, March 31, 1997 1998 ------------- --------- (unaudited) Raw materials and Work-in-process $ 37,347 $ 42,714 Finished goods 49,093 56,138 ------------- --------- $ 86,440 $ 98,852 ------------- --------- ------------- --------- 6. Intangible assets, at cost, acquired at various dates are as follows: September 30, March 31, 1997 1998 ------------- --------- (unaudited) Goodwill $136,972 $142,510 Customer lists 12,732 12,731 Trademark and licenses 1,201 1,201 Covenants not to compete 1,305 1,305 ------------- --------- 152,210 157,747 Less, accumulated Amortization 10,907 13,994 ------------- --------- $141,303 $143,753 ------------- --------- ------------- --------- 7. Accrued expenses: September 30, March 31, 1997 1998 ------------- --------- (unaudited) Litigation settlement costs $ 5,600 Payroll and related payroll taxes 4,622 $ 4,285 Customer deposits 2,568 885 Accrued purchases 2,800 5,639 Income taxes payable 7,597 7,476 Other 12,524 9,892 ------------- --------- $ 35,711 $ 28,177 ------------- --------- ------------- --------- 56 NBTY, INC. and SUBSIDIARIES NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued (In thousands, except per share amounts) 8. Basic earnings per share are based on the weighted average number of common shares outstanding during the six month periods ended March 31, 1998 and 1997. Diluted earnings per share include the effect of outstanding stock options, if exercised. The following is a reconciliation between the basic and diluted earnings per share: For the six months March 31, 1997 1998 ------------- --------- (unaudited) Numerator: Numerator for basic earnings per share -- income available to common stockholders $15,842 $23,633 --------- --------- Numerator for dilutive earnings per share -- income available to common stockholders $15,842 $23,633 --------- --------- --------- --------- Denominator: Denominator for basic earnings per share -- weighted-average Shares 64,578 64,662 Effective of dilutive securities: Stock options 4,341 4,305 --------- --------- Denominator for diluted earnings per share -- weighted-average Shares 68,919 68,967 --------- --------- --------- --------- Basic earnings per share $0.25 $0.37 --------- --------- --------- --------- Diluted earnings per share $0.23 $0.34 --------- --------- --------- --------- 8. Shareholder litigation: In October 1994, two lawsuits were commenced in the U.S. District Court, Eastern District of New York, against the Company and two of its officers. On October 17, 1997, a Memorandum of Understanding was entered into between the Company and the attorneys representing the Plaintiff class agreeing to an $8,000 ($4,400 cash, $3,600 stock) settlement of the lawsuit. Subsequently, the Company entered into a Capital Stipulation of Settlement calling for, among other things, a total cash payment of $8,000. Cash payments aggregating $8,000 were made in November and December 1997. The Company had been notified by its insurance carrier that it was willing to reimburse the Company to the extent of $2,400. The Company recorded a $5,600 provision for its portion of the settlement in fiscal 1997, which, along with related legal fees of approximately $768, has been reflected separately in the fiscal 1997 statements of income (refer to the Company's 10-K). In January 1998, an insurance carrier paid the Company $2,650. 57 SIGNATURE Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Registrant has duly caused this Registration Statement or amendment to be signed on its behalf by the undersigned, thereunto duly authorized. NBTY, Inc. By: /s/ Harvey Kamil ------------------------- Harvey Kamil Executive Vice President Dated: May 5, 1998
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