-----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, J0tYpdwv9FGNvG6wJ52uGqwdsCvORu+JWcIa/tUvAZ64W3tI8a1ppBX9CfnVzqFQ kWuGklxklUWSCZUBhgxQaQ== 0000910647-03-000402.txt : 20031215 0000910647-03-000402.hdr.sgml : 20031215 20031215143109 ACCESSION NUMBER: 0000910647-03-000402 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030725 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20031215 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: 1934 Act SEC FILE NUMBER: 001-31788 FILM NUMBER: 031054130 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 nbty-8ka.txt BODY OF FORM 8-K/A UNITED STATES 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. JULY 25, 2003 ____________________ Date of Report (Date of Earliest Event Reported) Commission File Number 0-10666 NBTY, INC. (Exact Name of Registrant as Specified in Its Charter) DELAWARE 11-2228617 (State or Other Jurisdiction of (IRS Employer Identification No.) Incorporation or Organization) 90 Orville Drive Bohemia, New York 11716 (Address of Principal Executive Offices, Including Zip Code) (631) 567-9500 (Registrant's Telephone Number, Including Area Code) ____________________ NBTY, INC. and SUBSIDIARIES Table of Contents Page Number ----------- Item 7. Financial Statements and Exhibits 1 Unaudited Pro Forma Condensed Consolidated Balance Sheet Data as of March 31, 2003 4 Unaudited Pro Forma Condensed Consolidated Statements of Operations Data for the six months ended March 31, 2003 5 Unaudited Pro Forma Condensed Consolidated Statements of Operations Data for the year ended September 30, 2002 6 NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7 SIGNATURES 15 EXHIBIT INDEX 99.1 Audited consolidated financial statements of Rexall Sundown, Inc. for the years ended December 31, 2002 and December 31, 2001 and the seven months ended December 31, 2000. 99.2 Unaudited consolidated financial statements of Rexall Sundown, Inc. for the six months ended June 30, 2003 and 2002. PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF NBTY, INC. and SUBSIDIARIES & REXALL SUNDOWN, INC. and SUBSIDIARIES Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS - -------------------------------------------------------------------------- NBTY Inc., a Delaware corporation ("NBTY" or "the Company") original Form 8- K, dated August 5, 2003, was filed to announce the acquisition of Rexall Sundown, Inc. ("Rexall"). (a) Financial statements of business acquired The following consolidated financial statements of Rexall are included in the corresponding exhibits: Exhibit 99.1 Report of Independent Auditors Consolidated Balance Sheets as of December 31, 2002 and 2001 Consolidated Statements of Operations, Changes in Shareholder's Equity (Deficit) and Cash Flows for the years ended December 31, 2002 and 2001 and the seven months ended December 31, 2000 Notes to Consolidated Financial Statements Exhibit 99.2 Unaudited Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002 Unaudited Consolidated Statements of Operations, Changes in Shareholder's Equity and Cash Flows for the six months ended June 30, 2003 and 2002. Notes to Unaudited Consolidated Financial Statements (b) Pro forma financial information The following unaudited pro forma condensed consolidated financial information of NBTY and Rexall is submitted herewith: Unaudited Pro Forma Condensed Consolidated Balance Sheet Data as of March 31, 2003 Unaudited Pro Forma Condensed Consolidated Statements of Operations Data for the six months ended March 31, 2003 and the year ended September 30, 2002 Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements 1 PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF NBTY, INC. and SUBSIDIARIES & REXALL SUNDOWN, INC. and SUBSIDIARIES Effective July 25, 2003, NBTY, Inc. and Subsidiaries ("NBTY" or "the Company") acquired all of the issued and outstanding capital stock of Rexall Sundown, Inc. ("Rexall") from Numico USA, Inc., an indirect subsidiary of Royal Numico N.V., for $250 million plus transaction costs of approximately $18 million (subject to adjustment based upon finalization of working capital balances acquired at date of closing). The acquisition was financed by a new senior credit facility ("CGA") which provides for borrowings up to $275 million in term loans and $100 million in revolving credit. The following unaudited pro forma condensed consolidated financial statements give effect to NBTY's acquisition of Rexall. The pro forma adjustments are based on NBTY's preliminary estimates and appraisals of fair values of assets and liabilities acquired based on available information and certain assumptions as described in the notes to the unaudited pro forma condensed consolidated financial statements. NBTY's management believes that the pro forma assumptions are reasonable under the circumstances. The unaudited pro forma condensed consolidated balance sheet data as of March 31, 2003 has been prepared as if the acquisition of Rexall had been consummated as of that date. The unaudited pro forma condensed consolidated balance sheet data as of March 31, 2003 has been derived by combining the unaudited historical consolidated balance sheet of NBTY as of March 31, 2003 and the unaudited historical consolidated balance sheet of Rexall as of June 30, 2003. The unaudited pro forma condensed consolidated statements of operations data for the year ended September 30, 2002 and the six months ended March 31, 2003 give effect to the acquisition of Rexall as if it had occurred on October 1, 2001. The unaudited pro forma condensed consolidated statement of operations data for the year ended September 30, 2002 has been derived by combining the audited historical consolidated statement of operations of NBTY for the year ended September 30, 2002 with the audited historical consolidated statement of operations of Rexall (a subsidiary of the Dutch company, Royal Numico N.V.) for the year ended December 31, 2002. The unaudited pro forma condensed consolidated statement of operations data for the six months ended March 31, 2003 has been derived by combining the unaudited historical consolidated statement of operations of NBTY for the six months ended March 31, 2003 with the unaudited historical consolidated statement of operations of Rexall for the six months ended June 30, 2003. The acquisition of Rexall will be accounted for using the purchase method of accounting and, accordingly, the unaudited condensed consolidated pro forma financial information reflects the allocation of the purchase price to assets acquired and liabilities assumed and are based on a preliminary valuation of the assets and liabilities acquired at the date of acquisition. The unaudited pro forma condensed consolidated financial information is based on estimates and assumptions and includes intercompany charges paid to the parent company, Royal Numico N.V. These estimates and assumptions have been made solely for purposes of developing this pro forma information, which is presented for illustrative purposes only and is not necessarily indicative of the consolidated financial position or results of operations of future periods or the results that actually would have been realized had the entities been a single entity during these periods. The unaudited pro forma condensed consolidated financial information does not reflect future events that may occur after the acquisition has been completed. Although management believes that the preliminary fair values and allocation of the estimated purchase price are reasonable, final valuations and appraisals may differ significantly from the amounts reflected in the unaudited pro forma condensed consolidated financial information. The unaudited pro forma condensed consolidated financial statements do not reflect any incremental direct costs (other than estimated severance costs) or any adjustments for liabilities resulting from integration plans 2 PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF NBTY, INC. and SUBSIDIARIES & REXALL SUNDOWN, INC. and SUBSIDIARIES that may be recorded in connection with the acquisition, or potential cost savings, which may result from the consolidation of certain operations of NBTY and Rexall. Assumptions underlying the pro forma adjustments are described in the accompanying notes and should be read in conjunction with the historical financial statement information of the Company's most recent filings on Form 10-K and Form 10-Q's and Rexall's historical financial statement information included in the exhibits contained in this Form 8-K/A. 3 NBTY, INC. and SUBSIDIARIES & REXALL SUNDOWN, INC. and SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET DATA MARCH 31, 2003 (Dollars and shares in thousands)
NBTY Rexall ---------- --------- Pro Forma Assets (March 31, (June 30, Adjustments Pro Forma 2003) 2003) (Note 3) Consolidated ---------- --------- ----------- ------------- Current assets: Cash and cash equivalents $ 33,774 $ 6,261 $ (20,271) A1 $ 19,764 Investments in bonds, at fair value 8,012 8,012 Accounts receivable, net 46,649 43,989 90,638 Inventories, net 220,894 69,960 13,040 A2 303,894 Deferred income taxes 11,206 60,138 71,344 Due from affiliates 90,078 (90,078) A3 - Prepaid expenses and other current assets 35,285 12,164 (2,704) A4 44,745 -------- ----------- ----------- ---------- Total current assets 355,820 282,590 (100,013) 538,397 Property, plant and equipment, net 219,410 67,797 8,303 A5 295,510 Goodwill 163,911 22,822 27,749 A6 214,482 Intangible assets, net 46,000 41,551 47,549 A7 135,100 Other assets 6,634 6,200 4,691 A8 17,525 -------- ----------- ----------- ---------- Total assets $791,775 $ 420,960 $ (11,721) $1,201,014 ======== =========== =========== ========== Liabilities and Stockholders' Equity (Deficit) Current liabilities: Current portion of long-term debt and capital lease obligations $ 20,665 $ 1,334,357 $(1,342,845) A9 $ 12,177 Accounts payable 72,856 13,753 86,609 Accrued expenses and other current liabilities 68,498 91,713 11,063 A10 171,274 Due to affiliates - 204,752 (204,752) A3 - -------- ----------- ----------- ---------- Total current liabilities 162,019 1,644,575 (1,536,534) 270,060 Long-term debt 154,700 - 262,823 A9 417,523 Deferred income taxes 16,612 28,460 45,072 Other liabilities 3,006 9,915 12,921 -------- ----------- ----------- ---------- Total liabilities 336,337 1,682,950 (1,273,711) 745,576 -------- ----------- ----------- ---------- Commitments and contingencies Stockholders' equity (deficit): Common stock, $.008 par; authorized 175,000 shares; issued and outstanding 66,263 shares at March 31, 2003 530 - - 530 Capital in excess of par 128,282 433,894 (433,894) A11 128,282 Retained earnings (Accumulated deficit) 324,102 (1,695,884) 1,695,884 A11 324,102 -------- ----------- ----------- ---------- 452,914 (1,261,990) 1,261,990 452,914 Accumulated other comprehensive income 2,524 - 2,524 -------- ----------- ----------- ---------- Total stockholders' equity (deficit) 455,438 (1,261,990) 1,261,990 455,438 -------- ----------- ----------- ---------- Total liabilities and stockholders' equity $791,775 $ 420,960 $ (11,721) $1,201,014 ======== =========== =========== ==========
See accompanying notes to unaudited pro forma condensed consolidated financial statements. 4 NBTY, INC. and SUBSIDIARIES & REXALL SUNDOWN, INC. and SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS DATA SIX MONTHS ENDED MARCH 31, 2003 (Dollars and shares in thousands, except per share amounts)
NBTY Rexall ----------- ----------- (six months (six months ended ended Pro Forma March 31, June 30, Adjustments Pro Forma 2003) 2003) (Note 3) Consolidated ----------- ----------- ----------- ------------ Net sales $519,228 $ 203,583 $ 2,630 A12 $725,441 -------- --------- -------- -------- Costs and expenses: Cost of sales 231,359 149,745 (9,394) A13 371,710 Discontinued product charge 6,000 6,000 Catalog printing, postage and promotion 30,637 23,137 53,774 Selling, general and administrative 192,546 92,596 1,149 A14 286,291 -------- --------- -------- -------- 460,542 265,478 (8,245) 717,775 -------- --------- -------- -------- Income (loss) from operations 58,686 (61,895) 10,875 7,666 -------- --------- -------- -------- Other income (expense): Interest (7,820) (54,983) 50,223 A16 (12,580) Miscellaneous, net 3,513 (156) (165) A17 3,192 -------- --------- -------- -------- (4,307) (55,139) 50,058 (9,388) -------- --------- -------- -------- Income (loss) before income taxes 54,379 (117,034) 60,933 (1,722) Provision (benefit) for income taxes 18,145 (23,889) 5,141 A18 (603) -------- --------- -------- -------- Net income (loss) $ 36,234 $ (93,145) $ 55,792 $ (1,119) ======== ========= ======== ======== Net income (loss) per share: Basic $ 0.55 $ (0.02) Diluted $ 0.53 $ (0.02) Weighted average common shares outstanding: Basic 66,216 66,216 Diluted 68,205 66,216
See accompanying notes to unaudited pro forma condensed consolidated financial statements. 5 NBTY, INC. and SUBSIDIARIES & REXALL SUNDOWN, INC. and SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS DATA YEAR ENDED SEPTEMBER 30, 2002 (Dollars and shares in thousands, except per share amounts)
NBTY Rexall ------------- ------------ (year ended (year ended Pro Forma September 30, December 31, Adjustments Pro Forma 2002) 2002) (Note 3) Consolidated ------------- ------------ ----------- ------------ Net sales $964,083 $ 455,128 $ (4,717) A12 $1,414,494 -------- --------- -------- ---------- Costs and expenses: Cost of sales 433,611 319,376 (20,005) A13 732,982 Catalog printing, postage and promotion 47,846 34,381 82,227 Selling, general and administrative 348,334 140,491 1,666 A14 490,491 Litigation recovery of raw material costs (21,354) (6,026) (27,380) Impairment of goodwill and other intangibles 59,040 (59,040) A15 - -------- --------- -------- ---------- 808,437 547,262 (77,379) 1,278,320 -------- --------- -------- ---------- Income (loss) from operations 155,646 (92,134) 72,662 136,174 -------- --------- -------- ---------- Other income (expense): Interest (18,499) (109,965) 102,918 A16 (25,546) Miscellaneous, net 1,560 992 (367) A17 2,185 -------- --------- -------- ---------- (16,939) (108,973) 102,551 (23,361) -------- --------- -------- ---------- Income (loss) before income taxes 138,707 (201,107) 175,213 112,813 Provision (benefit) for income taxes 42,916 (18,752) 15,321 A18 39,485 -------- --------- -------- ---------- Income (loss) before the cumulative effect of accounting change $ 95,791 $(182,355) $159,892 $ 73,328 ======== ========= ======== ========== Net income per share: Basic $ 1.45 $ 1.11 Diluted $ 1.41 $ 1.08 Weighted average common shares outstanding: Basic 65,952 65,952 Diluted 67,829 67,829
See accompanying notes to unaudited pro forma condensed consolidated financial statements. 6 NBTY, INC. and SUBSIDIARIES & REXALL SUNDOWN, INC. and SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars and shares in thousands) 1. Basis of Unaudited Pro Forma Presentation On July 25, 2003, NBTY acquired for $250 million in cash (subject to adjustment based upon finalization of working capital balances acquired at date of closing) from Numico USA, Inc., an indirect subsidiary of Royal Numico N.V., all of the issued and outstanding capital stock of Rexall through the acquisition of certain partnership and limited liability company interests. The consideration payable by NBTY was determined by arms'-length negotiations between the parties. The acquisition was financed by a new senior credit facility which provides for borrowings up to $275 million in term loans and $100 million in revolving credit, provided to NBTY by a syndicated group of lenders led by JPMorgan Chase Bank and Fleet National Bank. The Company also incurred approximately $18 million of direct transaction costs for a total purchase price of approximately $268 million. The Company has retained essential Rexall employees consisting of product development, sales and service personnel. The transaction will complement NBTY's existing wholesale products and provide NBTY with an enhanced sales infrastructure and additional manufacturing capacity. Rexall's portfolio of nutritional supplement brands includes Rexall(R), Sundown(R), Osteo Bi-Flex(R), Carb Solutions(R), MET-Rx(R) and WORLDWIDE Sport Nutrition(R). The unaudited pro forma condensed consolidated financial information has been prepared to give effect to the acquisition, accounted for using the purchase method of accounting in accordance with Statement of Financial Accounting Standards No. 141 "Business Combinations" (SFAS No. 141). The purchase price allocation reflects management's best preliminary valuation and appraisals of the fair value of the assets acquired and liabilities assumed, which are subject to change. Upon completion of the evaluation of the fair value of the net assets acquired, actual results may differ materially from those presented herein. As a result of different fiscal year ends of NBTY and Rexall, financial information has been combined for different periods in the pro forma financial information. The unaudited pro forma condensed consolidated balance sheet data has been prepared to reflect the acquisition as if it had occurred on March 31, 2003. The unaudited pro forma condensed consolidated statements of operations data for the year ended September 30, 2002 and for the six months ended March 31, 2003 have been prepared to reflect the acquisition as if it had occurred on October 1, 2001. 2. Acquisition NBTY will account for the acquisition under the purchase method of accounting in accordance with SFAS No. 141. Under the purchase method of accounting, the total purchase price is allocated to the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values. The excess of the purchase price over those fair values is recorded as goodwill. The preliminary fair values assigned to the tangible and intangible assets acquired and liabilities assumed are based on preliminary estimates and other information compiled by management, including a preliminary independent valuation, prepared by an independent valuation specialist which utilizes established valuation techniques appropriate for the industry. Upon completion of the valuation of the fair value of the net assets acquired, actual results may differ materially from those presented herein. The preliminary purchase price allocation is as follows: 7 NBTY, INC. and SUBSIDIARIES & REXALL SUNDOWN, INC. and SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars and shares in thousands) Assets acquired: Accounts receivable, net $ 43,989 Inventories 83,000 Other current assets 9,460 Property, plant, and equipment 76,100 Deferred tax assets 60,138 Other assets 10,891 Goodwill 50,571 Intangibles 89,100 -------- Total assets acquired 423,249 ======== Liabilities assumed: Accrued liabilities 116,529 Deferred tax liabilities 28,460 Other liabilities 9,915 -------- Total liabilities assumed 154,904 ======== Net assets acquired $268,345 ========
3. Pro Forma Adjustments The unaudited pro forma adjustments reflect those matters that are a direct result of the transaction, which are factually supportable and, for the unaudited pro forma condensed consolidated statements of operations, are expected to have continuing impact. The unaudited pro forma adjustments are as follows: (A1) NBTY funded costs associated with the acquisition with the payment of cash and cash equivalents of $18,345. Such amount was offset by proceeds relating to refinancing the new CGA (as defined in (A9), below) of $4,335. Additionally, Rexall's cash of $6,261 was retained by the seller and has been eliminated. (A2) To reflect the preliminary fair value adjustment. (A3) Affiliate balances were not acquired and have been eliminated. (A4) The pro forma adjustment reflects the elimination of prepaid customer allowances of $3,999 to conform to NBTY's accounting policy of expensing such costs as incurred. The pro forma adjustment is net of the current portion of deferred financing costs directly associated with the debt assumed in connection with the acquisition $1,295. Total deferred financing costs were $7,500. See pro forma adjustment (A8) for non-current portion 8 NBTY, INC. and SUBSIDIARIES & REXALL SUNDOWN, INC. and SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars and shares in thousands) (A5) The pro forma adjustment of $8,303 reflects the estimated fair value step up of property, plant and equipment. The estimated fair value of property, plant and equipment is as follows:
Fair Value Useful life (years) ---------- ------------------- Land $10,137 Building and improvements 32,605 5-39 years Machinery and equipment 22,232 3-10 years Leasehold improvements 1,765 5 years Furniture and fixtures 9,361 3-15 years ------- Total property, plant and equipment $76,100 =======
(A6) Goodwill represents the residual of purchase cost, including direct costs relating to the acquisition, over the preliminary fair values of net assets acquired. Preliminary goodwill in the Rexall acquisition approximated $50,571. The pro forma adjustment of $27,749 is net of Rexall's recorded goodwill of $22,822 which has been eliminated. (A7) The pro forma adjustment of $47,549 reflects the estimated fair value of identifiable intangible assets acquired of $89,100 offset by Rexall's recorded intangible (retailer relationships) of $41,551. The estimated fair value of identifiable intangible assets acquired is as follows:
Fair Value Useful life (years) ---------- ------------------- Brands $78,000 20 Private Label Relationships 11,500 20 Small Tablet Patent 5,000 19 Soft Gel Manufacturing Contract (5,400) 3 ------- Total intangible assets $89,100 =======
(A8) The pro forma adjustment of $4,691 reflects the non-current portion of deferred financing costs ($6,205) directly associated with the debt assumed in connection with the acquisition. Total deferred financing costs were $7,500. See pro forma adjustment (A4) for current portion. The pro forma adjustment is net of prepaid customer allowances of $1,514 included in other long term assets which has been eliminated to conform to NBTY's accounting policy of expensing such costs as incurred. (A9) In connection with the acquisition, the Company entered into a new Credit and Guarantee Agreement ("CGA") comprised of $375,000 Senior Secured Credit Facilities. The CGA consists of a $100,000 Revolving Credit Facility, a $50,000 Term Loan A and a $225,000 Term Loan B. The Company utilized term loans aggregating $275,000 to finance the purchase price. The current portion of this debt at March 31, 2003 totaled $12,177. The Company's existing balance of $20,665 was refinanced into the new CGA. Rexall's short- term debt of $1,334,357 was not assumed in the acquisition and has been eliminated. (A10) To record estimated severance costs in connection with the acquisition. 9 NBTY, INC. and SUBSIDIARIES & REXALL SUNDOWN, INC. and SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars and shares in thousands) (A11) Rexall's stockholder's deficit balances have been eliminated. (A12) To eliminate amortization of customer allowances and to expense new contracts as incurred to conform to NBTY's accounting policy. The elimination of amortization of such costs were $3,887 and $7,222 for the six months ended March 31, 2003 and the year ended September 30, 2002, respectively. In addition, new contracts entered into and expensed as incurred were $1,257 and $11,939 for the six months ended March 31, 2003 and the year ended September 30, 2002, respectively. (A13) Cost of goods sold net pro forma adjustments:
Six months ended Year ended March 31, 2003 September 30, 2002 ---------------- ------------------ Trademark fees (a) $(9,029) $(19,278) Soft Gel Manufacturing Contract (b) (900) (1,800) Property, Plant and Equipment (c) 535 1,073 ------- -------- Total Net Adjustment $(9,394) $(20,005) ======= ========
a. Reflects the elimination of trademark fees expensed by Rexall associated with a license agreement entered into on December 31, 2001 with Numico under which Rexall sold and licensed back its trademarks. The agreement was for a 10 year term and granted Rexall the exclusive right to use the licensed marks for a fee of 12.3% of sales. Upon acquisition, this agreement was terminated and the trademarks and trade names were transferred to NBTY. b. Soft gel manufacturing contract entered into as a result of the acquisition and recorded at estimated fair value. See pro forma adjustment (A7). The contract ($5,400) has an estimated useful life of three years. c. Additional depreciation on the estimated fair value step up of property, plant and equipment. See pro forma adjustment (A5). Acquired property, plant and equipment ($76,100) has an estimated useful life ranging from three to thirty nine years.
Additional depreciation expense related to step up in fair value -------------------------------------- Six months ended Year ended March 31, 2003 September 30, 2002 ---------------- ------------------ Building and improvements $ 53 $ 107 Machinery and equipment 272 545 Leasehold improvements 19 38 Furniture and fixtures 191 383 ---- ------ Total $535 $1,073 ==== ======
10 NBTY, INC. and SUBSIDIARIES & REXALL SUNDOWN, INC. and SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars and shares in thousands) (A14) Selling, general and administrative expense pro forma adjustment to reflect the amortization and depreciation on fair value adjustments on intangible assets and property, plant and equipment over their respective useful life as described in (A7) and (A5).
Six months ended Year ended March 31, 2003 September 30, 2002 ---------------- ------------------ Brands (a) $ 1,950 3,900 Private Label Relationships (b) 288 575 Small Tablet Patent (c) 131 263 Retailer Relationships (d) (1,579) (3,788) Property, Plant and Equipment (e) 359 716 ------- ------ Total Net Adjustment $ 1,149 $1,666 ======= ======
a. Brands acquired as a result of the acquisition and recorded at fair value. See pro forma adjustment (A7). The brands ($78,000) have an estimated useful life of twenty years. b. Private label relationships acquired as a result of the acquisition and recorded at fair value. See pro forma adjustment (A7). The private label relationships ($11,500) have an estimated useful life of twenty years. c. Small tablet patent acquired as a result of the acquisition and recorded at fair value. See pro forma adjustment (A7). The patent ($5,000) has an estimated useful life of nineteen years. d. Represents the elimination of amortization for retailer relationships originally recorded when Numico acquired Rexall. See pro forma adjustment (A7). These relationships had a net book value of $41,551 on June 30, 2003. e. Additional depreciation on the estimated fair value step up of property, plant and equipment. See pro forma adjustment (A5). Acquired property, plant and equipment ($76,100) has an estimated useful life ranging from three to thirty nine years.
Additional depreciation expense related to step up in fair value --------------------------------------- Six months ended Year ended March 31, 2003 September 30, 2002 ---------------- ------------------- Building and improvements $ 36 $ 71 Machinery and equipment 182 364 Leasehold improvements 13 25 Furniture and fixtures 128 256 ---- ---- Total $359 $716 ==== ====
11 NBTY, INC. and SUBSIDIARIES & REXALL SUNDOWN, INC. and SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars and shares in thousands) (A15) Represents the elimination of impairment charges recorded by Rexall for the year ended December 31, 2002 for existing goodwill and intangible assets of $36,184 and $22,856, respectively. (A16) Other income (expense), net pro forma adjustments:
Six months ended Year ended March 31, 2003 September 30, 2002 ---------------- ------------------ Elimination of Rexall interest expense (a) $54,983 $109,965 NBTY interest expense (b) 414 3,449 Interest expense - New borrowings (c) (4,526) (9,201) Amortization of deferred financing costs (d) (648) (1,295) ------- -------- Total Net Adjustment $50,223 $102,918 ======= ========
a. Eliminate interest expense recorded by Rexall related to debt not assumed in the purchase transaction. b. Eliminate interest expense on NBTY's old debt that was replaced by the new debt in connection with the acquisition. c. Adjustment to increase interest expense to reflect interest on NBTY's new Credit and Guarantee Agreement ("CGA") entered into in connection with the acquisition assuming the new debt was entered into as of October 1, 2001. The new CGA is comprised of $375,000 Senior Secured Credit Facilities. The CGA consists of a $100,000 Revolving Credit Facility, a $50,000 Term Loan A and a $225,000 Term Loan B. The Company obtained a variable interest rate with the following terms: The revolving credit facility and term loans are scheduled to mature on the earlier of (i) fifth anniversary of the closing date for the Revolving Credit Facility and Term Loan A, and the sixth anniversary date for Term Loan B; or (ii) March 15, 2007 if the Company's 8-5/8% senior subordinated Notes due September 15, 2007 are still outstanding on such date. Interest rates charged on borrowings can vary depending on the interest rate option utilized. Options for the rate can either be the Alternate Base Rate or LIBOR plus applicable margin. The Company's average borrowing rate at March 31, 2003 was 3.6%. The effect of a 1/8 percentage point in the interest rate on pretax income is $323. d. Adjustment to increase interest expense to reflect amortization of deferred financing fees paid of $7,500 in connection with the new CGA. Deferred finance costs are amortized over the loan terms. (A17) Adjustment to interest income for $165 and $367 for the six months ended March 31, 2003 and the year ended September 30, 2002, respectively, to eliminate historical interest income that was earned on cash held by NBTY that was used to fund the acquisition. (A18) To record an income tax impact at NBTY's effective rate of 35.0%. 12 NBTY, INC. and SUBSIDIARIES & REXALL SUNDOWN, INC. and SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars and shares in thousands) The following non-recurring expenses are included in Rexall's loss from operations for the periods indicated. These expenses have not been reflected in any pro forma adjustments.
Six months ended Year ended March 31, 2003 September 30, 2002 ---------------- ------------------ Product mark up (a) $ 6,675 $17,102 Metab-O-LITE (b) 20,000 - Ephedra (c) 9,000 - Low Carb Bar litigation settlement (d) 7,819 - Management Stock Purchase Plan ("MSPP") (e) 6,156 6,016 Management service fees (f) 1,377 2,754 Cellasene litigation settlement (g) - 12,000 ------- ------- Total $51,027 $37,872 ======= =======
Included in cost of sales: a. Included in Rexall's cost of sales is a mark up on purchases from affiliated companies. Included in selling, general and administrative expense: b. Rexall recorded a $27,000 charge, which was offset by $7,000 recoverable from Rexall's insurance carrier, related to alleged trademark infringement and false advertising claim arising out of the labeling of its Metab-O-LITE product. This charge was recorded based upon the terms of a litigation settlement agreement. c. One-time charge associated with Rexall's discontinued sales of its ephedra products. d. One-time charge in connection with a litigation settlement on Rexall's low carbohydrate bar product. e. Rexall recorded compensation expense in connection with the MSPP. This expense was $2,129 and $6,016 for the six months ended March 31, 2003 and year ended September 30, 2002, respectively. In March 2003, Numico amended the MSPP, to provide a special cash bonus of $4,027 to be paid to participants on the sooner of July 5, 2005 or change in control, whether or not the participant remain in the employ of Numico. The amount of the cash bonus was dependent upon the market value of the participant's Numico shares and is designed to reimburse the participant for individual tax exposures. f. Management service fees based upon the terms of the agreement between Rexall and Numico as defined. These fees were allocated by Numico based upon estimated costs plus a margin of 5%. g. Rexall recorded a $12,000 charge in relation to a legal settlement on its Cellasene product. The litigation settlement and potential exposure relating to Cellasene has been retained by Numico. 13 NBTY, INC. and SUBSIDIARIES & REXALL SUNDOWN, INC. and SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars and shares in thousands) Forward Looking Statements This report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our financial condition, results of operations and business. All of these forward-looking statements, which can be identified by the use of terminology such as "subject to," "believe," "expects," "may," "will," "should," "can," or "anticipates," or the negative thereof, or variations thereon, or comparable terminology, or by discussions of strategy which, although believed to be reasonable, are inherently uncertain. Factors which may materially affect such forward-looking statements include: (i) slow or negative growth in the nutritional supplement industry; (ii) interruption of business or negative impact on sales and earnings due to acts of war, terrorism, bio-terrorism, civil unrest or disruption of mail service; (iii) adverse publicity regarding the consumption of nutritional supplements; (iv) inability to retain customers of companies (or mailing lists) recently acquired; (v) increased competition; (vi) increased costs; (vii) loss or retirement of key members of management; (viii) increases in the cost of borrowings and unavailability of additional debt or equity capital; (ix) unavailability of, or inability to consummate, advantageous acquisitions in the future, including those that may be subject to bankruptcy approval or the inability of the Company to integrate acquisitions into the mainstream of its business; (x) changes in general worldwide economic and political conditions in the markets in which the Company may compete from time to time; (xi) the inability of the Company to gain and/or hold market share of its wholesale and retail customers; (xii) loss or reduction in ephedra sales; (xiii) unavailability of electricity in certain geographical areas; (xiv) exposure to and expense of defending and resolving, product liability claims and other litigation; (xv) the ability of the Company to successfully implement its business strategy; (xvi) the inability of the Company to manage its retail, wholesale, manufacturing and other operations efficiently; (xvii) consumer acceptance of the Company's products; (xviii) the inability of the Company to renew leases on its retail locations; (xix) inability of the Company's retail stores to attain or maintain profitability; (xx) the absence of clinical trials for many of the Company's products; (xxi) sales and earnings volatility and/or trends; (xxii) the effect on Company sales of the rapidly changing nature of the Internet and on-line commerce; (xxiii) fluctuations in foreign currencies, and more particularly the British Pound; (xxiv) import-export controls on sales to foreign countries; (xxv) the inability of the Company to secure favorable new sites for, and delays in opening, new retail locations; (xxvi) introduction of new federal, state, local or foreign legislation or regulation or adverse determinations by regulators, and more particularly the Food Supplements Directive and the Traditional Herbal Medicinal Products Directive in Europe; (xxvii) the mix of the Company's products and the profit margins thereon; (xxviii) the availability and pricing of raw materials; (xxix) risk factors discussed in the Company's filings with the U.S. Securities and Exchange Commission; and (xxx) other factors beyond the Company's control. Readers are cautioned not to place undue reliance on forward-looking statements. The Company cannot guarantee future results, trends, events, levels of activity, performance or achievements. The Company does not undertake and specifically declines any obligation to update, republish or revise forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events. 14 NBTY, INC. and SUBSIDIARIES & REXALL SUNDOWN, INC. and SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NBTY, INC. (Registrant) Date: December 15, 2003 By: /s/ Scott Rudolph ----------------- ----------------- Scott Rudolph Chairman and Chief Executive Officer (Principal Executive Officer) Date: December 15, 2003 By: /s/ Harvey Kamil ----------------- ---------------- Harvey Kamil President and Chief Financial Officer (Principal Financial and Accounting Officer) 15 EX-99 3 nbtka991.txt EXHIBIT 99.1 Exhibit 99.1 Rexall Sundown, Inc. and Subsidiaries Consolidated Financial Statements December 31, 2002 and 2001 Report of Independent Certified Public Accountants To the Supervisory Board of Royal Numico N.V. and the Shareholder of Rexall Sundown, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholder's equity (deficit) and cash flows present fairly, in all material respects, the financial position of Rexall Sundown, Inc. and Subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for the years then ended and for the seven months ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 1 and Note 10 to the consolidated financial statements, these financial statements have been prepared on a carve-out basis; accordingly, the financial position, results of operations and cash flows may not be indicative of what would have been reported if Rexall Sundown, Inc. had been a stand-alone entity for the periods presented. The Company's ultimate parent, Royal Numico N.V., has provided a letter of support indicating its intention to fund the Company's operating needs, if required. As discussed in Note 5 to the consolidated financial statements, the Company changed its method of accounting for goodwill on January 1, 2002 as the result of the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." /s/ PricewaterhouseCoopers LLP West Palm Beach, Florida March 6, 2003 Rexall Sundown, Inc. and Subsidiaries Consolidated Balance Sheets December 31, 2002 and 2001 (Amounts in thousands, except share data) - ---------------------------------------------------------------------------
Assets 2002 2001 ----------- ----------- Current assets: Cash and cash equivalents $ 9,039 $ 75,564 Trade accounts receivable, net of allowance for doubtful accounts of $3,176 and $616, respectively 47,665 55,953 Inventory, net 72,314 94,427 Deferred income taxes 35,417 36,144 Due from affiliates 65,430 80,963 Prepaid expenses and other current assets 8,473 5,815 ----------- ----------- Total current assets 238,338 348,866 Property, plant and equipment, net 70,855 76,568 Goodwill and intangibles assets, net 65,952 860,761 Other assets 9,026 2,940 ----------- ----------- Total assets $ 384,171 $ 1,289,135 =========== =========== Liabilities and Shareholder's Deficit Current liabilities: Accounts payable $ 9,808 $ 8,506 Accrued expenses and other current liabilities 54,749 70,101 Due to affiliates 122,332 59,959 Notes payable 1,334,357 1,363,250 ----------- ----------- Total current liabilities 1,521,246 1,501,816 ----------- ----------- Deferred tax liabilities 28,705 39,972 Other liabilities 5,193 10,000 ----------- ----------- Total liabilities 1,555,144 1,551,788 ----------- ----------- Commitments and contingencies Shareholder's deficit: Common stock: (authorized, issued and outstanding 1000 shares at December 31, 2002 and 2001; $0.01 par value) Paid in capital 433,894 433,894 Loans to employees (2,128) (8,144) Accumulated deficit (1,602,739) (688,403) ----------- ----------- Total shareholder's deficit (1,170,973) (262,653) ----------- ----------- Total liabilities and shareholder's deficit $ 384,171 $ 1,289,135 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 1 Rexall Sundown, Inc. and Subsidiaries Consolidated Statements of Operations For the Years Ended December 31, 2002 and 2001 and the Seven Months Ended December 31, 2000 (Amounts in thousands, except share data) - ---------------------------------------------------------------------------
2002 2001 2000 ------------ ------------ ------------ Net sales Third party $ 412,814 $ 518,199 $ 327,429 Affiliates 42,314 44,283 23,312 --------- --------- --------- Net sales 455,128 562,482 350,741 Cost of sales 319,376 397,676 207,807 --------- --------- --------- Gross profit 135,752 164,806 142,934 Operating expenses Selling, general and administrative 168,846 270,786 152,414 Impairment of goodwill and other intangibles 59,040 732,012 - --------- --------- --------- Operating loss (92,134) (837,992) (9,480) Other income (expense): Interest income 1,331 713 990 Interest expense (109,965) (110,571) (62,407) Other expense (339) (210) (277) --------- --------- --------- Loss before income tax benefit (201,107) (948,060) (71,174) Income tax benefit (18,752) (321,099) (9,732) --------- --------- --------- Net loss before the cumulative effect of accounting change (182,355) (626,961) (61,442) Cumulative effect of accounting change (731,981) - - --------- --------- --------- Net loss $(914,336) $(626,961) $ (61,442) ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 2 Rexall Sundown, Inc. and Subsidiaries Consolidated Statements of Shareholder's Equity / (Deficit) For the Years Ended December 31, 2002 and 2001 and the Seven Months Ended December 31, 2000 (Amounts in thousands, except share data) - ---------------------------------------------------------------------------
Number Shareholder's of shares Common Paid in Loans to Accumulated equity / issued stock capital employees deficit (deficit) --------- ------ ------- --------- ----------- ------------- Balance at June 1, 2000 1,000 $ - $391,883 $ - $ - $ 391,883 Net loss - - - (61,442) (61,442) Loans to employees - - (13,354) - (13,354) Capital contribution - 41,546 - - 41,546 Stock options - 465 - - 465 ----- ----- -------- -------- ----------- ----------- Balance at December 31, 2000 1,000 - 433,894 (13,354) (61,442) 359,098 Net loss - - - (626,961) (626,961) Loans to employees - - 5,210 - 5,210 ----- ----- -------- -------- ----------- ----------- Balance at December 31, 2001 1,000 - 433,894 (8,144) (688,403) (262,653) Net loss - - - (914,336) (914,336) Loans to employees - - 6,016 - 6,016 ----- ----- -------- -------- ----------- ----------- Balance at December 31, 2002 1,000 $ - $433,894 $ (2,128) $(1,602,739) $(1,170,973) ===== ===== ======== ======== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 3 Rexall Sundown, Inc. and Subsidiaries Consolidated Statements of Cash Flows For the Years Ended December 31, 2002 and 2001 and the Seven Months Ended December 31, 2000 (Amounts in thousands, except share data) - ---------------------------------------------------------------------------
2002 2001 2000 ------------ ------------ ------------ Cash flows used in operating activities: Net loss $(914,336) $(626,961) $(61,442) Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation 11,355 10,618 6,864 Amortization 3,788 97,291 56,875 Impairment of goodwill and other intangibles 791,021 732,012 - Employee loans 6,016 5,210 (13,354) Deferred income taxes (10,540) (376,110) 9,303 Changes in assets and liabilities: Trade accounts receivable 8,288 32,420 (26,562) Inventory 22,113 12,370 (20,791) Prepaid expenses and other current assets (2,658) 10,924 1,567 Other assets (6,086) (1,030) (159) Accounts payable 1,302 (51,541) 25,794 Accrued expenses and other current liabilities (15,352) 76,937 (28,514) Due from / to affiliates 77,906 (37,649) 13,430 Other liabilities (4,807) 6,858 3,142 --------- --------- -------- Net cash used in operating activities (31,990) (108,651) (33,847) --------- --------- -------- Cash flows (used in) provided by investing activities: Disposals of property, plant and equipment 1,808 304 - Acquisition of property, plant and equipment (7,450) (7,504) (8,961) Sale of trademarks - 201,000 - --------- --------- -------- Net cash (used in) provided by investing activities (5,642) 193,800 (8,961) --------- --------- -------- Cash flows (used in) provided by financing activities: Principal payments on notes payable (28,893) (12,250) - Capital contribution from Parent - - 41,546 --------- --------- -------- Net cash (used in) provided by financing activities (28,893) (12,250) 41,546 --------- --------- -------- Net (decrease) increase in cash and cash equivalents (66,525) 72,898 (1,262) Cash and cash equivalents, beginning of year 75,564 2,666 3,928 --------- --------- -------- Cash and cash equivalents, end of year $ 9,039 $ 75,564 $ 2,666 ========= ========= ======== Supplemental disclosures of cash flow information: Cash (paid) received during the year for Interest $(108,634) $(109,858) $(61,417) ========= ========= ======== Income taxes $ (18,746) $ 45,677 $ (6,700) ========= ========= ========
The accompanying notes are an integral part of these consolidated financial statements. 4 Rexall Sundown, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2002 and 2001 (Amounts in thousands, except share data) - --------------------------------------------------------------------------- 1. Description of Business and Basis of Presentation Rexall Sundown, Inc. ("Rexall" or the "Company") develops, manufactures, markets and sells vitamins, nutritional supplements and consumer health products. In June 2000, Rexall was acquired by Nutricia USA, Inc. ("Nutricia" now known Numico USA Inc.), an indirect wholly-owned subsidiary of Royal Numico N.V. ("Numico"), a Dutch public company. Rexall has not reported its results on a separate basis since acquisition. The consolidated financial statements of the Company for the periods presented have been prepared by management on a carve-out basis and reflect the consolidated financial position, results of operations and cash flows of Rexall in accordance with accounting principles generally accepted in the United States of America. Certain amounts in the financial statements have been estimated, allocated and pushed down from Nutricia or Numico in a consistent manner in order to depict the financial position, results of operations and cash flows of Rexall on a stand-alone basis. Additionally, Rexall conducts significant business with members of the Numico consolidated group. These transactions have been included as historically recorded or incurred and, therefore, may not necessarily be indicative of the revenues and expenses that the Company would have incurred had it operated as an independent, stand-alone entity. Accordingly, the financial position, results of operations and cash flows may not be indicative of what would have been reported if Rexall had been a stand-alone entity for the periods presented. See Note 14, for further discussion regarding the allocation of Nutricia or Numico parent company costs and the Company's transactions with affiliated entities. 2. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Inventory Inventories are stated at the lower of cost (first-in, first-out basis) or market. Property, Plant and Equipment Property, plant and equipment is stated at cost less accumulated depreciation. Depreciation is charged to expense over the estimated useful lives of the assets and is computed on a straight-line basis. Estimated useful lives are 25 to 33 years for buildings and improvements, five to ten years for machinery and equipment and three to five years for furniture and fixtures. Leasehold improvements are depreciated over the shorter of the estimated useful life or the term of the respective lease. Maintenance and repairs are charged to expense when incurred and betterments are capitalized. Upon retirement or sale, the cost and accumulated depreciation are eliminated from the accounts and the gain or loss, if any, is included in the determination of net income as a component of other income (expense). The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. 5 Rexall Sundown, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2002 and 2001 (Amounts in thousands, except share data) - --------------------------------------------------------------------------- 2. Summary of Significant Accounting Policies, continued Goodwill and Intangible Assets Goodwill represents the excess of purchase price over the fair value of identifiable net assets of companies acquired. The Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Intangible Assets" as of January 1, 2002. This statement requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. Prior to fiscal 2002, goodwill was amortized over 20 years. Other definite lived intangibles comprised of retailer relationships and trademarks and trade names are amortized on a straight-line basis over 20 years. The Company reviews definite lived intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with a maturity of three months or less at the date of purchase to be cash equivalents. See Note 14 for details of cash on deposit with related parties. Income Taxes The Company utilizes the liability method of accounting for deferred income taxes. This method requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are also established for the future tax benefits of loss and credit carryovers. The liability method of accounting for deferred income taxes requires a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Revenue Recognition The Company recognizes revenue upon shipment, and such revenue is recorded net of estimated sales returns, discounts and allowances. Prepaid Customer Allowances Incentives associated with acquiring sales agreements with certain customers and based upon the customer's completion of a specified cumulative level of sales transactions are amortized over a term relevant to the agreements. These costs, which include the cost of inventory provided at no charge and other allowances, are included in other assets (both current and non-current). The amortization of these costs is recorded as a reduction of sales. In the consolidated balance sheets current prepaid allowances of $4,655 and $2,058 are included in prepaid expenses and other current assets and non-current prepaid allowances of $5,577 and $2,297 are included in other assets as at December 31, 2002 and 2001, respectively. 6 Rexall Sundown, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2002 and 2001 (Amounts in thousands, except share data) - --------------------------------------------------------------------------- 2. Summary of Significant Accounting Policies, continued Advertising Expense Advertising costs which include the development and production of advertising materials and the use of this material in various forms of media, are expensed in the period in which the costs are incurred, which is typically the same period the advertising first takes place. Advertising expense is included in selling, general and administrative expenses in the consolidated statements of operations and was $34,381, $32,895 and $16,175 in the years ended December 31, 2002 and 2001 and the seven months ended December 31, 2000, respectively. 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. Significant estimates include management's forecast of future cash flows used as a basis to assess recoverability of long-lived assets, including intangible assets. In addition, the Company provides for inventory obsolescence and estimated bad debts on accounts receivable based on historical experience and periodic reviews of the related assets. The Company's policy is generally to give customers the right to return products. Based on historical returns and any changes in its catalog, management provides for estimated net returns at the time of sale. Management periodically reviews its significant accounting estimates and it is reasonably possible that the recorded amount may change based on actual results and other factors. Foreign Currency Transactions The majority of the Company's transactions are settled in United States dollars. Gains or losses resulting from transactions denominated in other currencies and remeasurements of other currencies are recognized in income currently. The Company is subject to exposure from fluctuations in foreign currencies as the result of transactions with affiliated entities denominated in currencies other than the United States dollar. To manage this exposure, Rexall, during 2002, entered into foreign exchange forward contracts in which Numico Financial Services S.A. was the counterparty. No contracts remained outstanding at December 31, 2002. The Company has not designated these instruments as hedges and, accordingly, records the fair value of these instruments as an asset or liability in its consolidated balance sheets and the mark-to-market effect as other income/expense in its consolidated statements of operations. For the year ended December 31, 2002, $153 related to these contracts is recorded as other income in the accompanying consolidated statements of operations. 7 Rexall Sundown, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2002 and 2001 (Amounts in thousands, except share data) - --------------------------------------------------------------------------- 2. Summary of Significant Accounting Policies, continued Fair Value of Financial Instruments The carrying value of the Company's financial instruments, including cash, accounts receivable, accounts payable, accrued expenses and other short and long-term obligations, approximate their fair value. Stock Compensation Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," is applicable to the separate financial statements of a consolidated subsidiary when an award based upon the parent company's stock is granted to an employee of the subsidiary. The Company accounts for stock-based compensation using the intrinsic value method prescribed by APB No. 25 and related Interpretations, and complies with the disclosure provisions of SFAS No. 123, Accounting for Stock-based Compensation. Accordingly, compensation cost for stock options granted to employees is measured as the excess, if any, of the quoted market price of the stock at the date of grant over the amount an employee must pay to acquire the stock. Compensation cost for stock appreciation rights is recorded based on the quoted market price of the stock at the end of the period. Research and Development The Company expenses research and development as incurred. Research and development expense in the consolidated statements of operations was $3,657, $6,317 and $3,320 for the years ended December 31, 2002 and 2001 and the seven months ended December 31, 2000, respectively. These amounts include charges from affiliates. See Note 14. Accounting Pronouncements In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies criteria that must be met in order for intangible assets acquired in a purchase method business combination to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives and also reviewed for impairment. SFAS Nos. 141 and 142 were fully adopted by the Company on January 1, 2002. See Note 5. On December 31, 2001, the Company adopted Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which requires the measurement and recognition of the impairment of (i) long-lived assets to be held and used and (ii) long-lived assets to be held for sale. See Note 5. 8 Rexall Sundown, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2002 and 2001 (Amounts in thousands, except share data) - --------------------------------------------------------------------------- 2. Summary of Significant Accounting Policies, continued In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The Company will adopt the accounting requirements of SFAS No. 146 in 2003 and does not anticipate the effects to the financial statements to be material. In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS 123," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The Statement amends the requirements of SFAS No. 123 requiring prominent disclosures in annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company continues to use the intrinsic value method and, as a result, the adoption of SFAS No. 148 did not have a material effect on the Company's results of operations or its financial position. On November 25, 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 clarifies the requirements of FASB Statement No. 5, "Accounting for Contingencies," relating to the guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. See Note 13. 3. Inventory The components of inventory are as follows:
December 31, --------------------- 2002 2001 -------- -------- Raw materials, bulk tablets and capsules $ 42,779 $ 55,163 Work in process 976 3,124 Finished products 51,583 66,671 Inventory provision (23,024) (30,531) -------- -------- Total inventory $ 72,314 $ 94,427 ======== ========
9 Rexall Sundown, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2002 and 2001 (Amounts in thousands, except share data) - --------------------------------------------------------------------------- 4. Property, Plant and Equipment Property, plant and equipment is comprised of the following:
December 31, --------------------- 2002 2001 -------- -------- Land $ 10,186 $ 10,186 Building and improvements 33,536 33,814 Machinery and equipment 49,793 44,438 Leasehold improvements 2,401 2,317 Furniture and fixtures 3,776 3,295 -------- -------- 99,692 94,050 Less accumulated depreciation and amortization (28,837) (17,482) -------- -------- Property, plant and equipment, net $ 70,855 $ 76,568 ======== ========
Depreciation expense was $11,355, $10,618 and $6,864 for the years ended December 31, 2002 and 2001 and the seven months ended December 31, 2000, respectively. 5. Goodwill and Intangible Assets Upon adoption of SFAS No. 142 on January 1, 2002, the Company ceased to amortize goodwill; goodwill amortization was $42,841 and $25,112 for the year ended December 31, 2001 and for the seven months ended December 31, 2000, respectively. Under SFAS No. 142, goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value as determined using a discounted cash flow methodology. This methodology differs from the Company's previous policy, in accordance with accounting standards existing at that time, of using undiscounted cash flows to determine recoverability. Upon adoption of SFAS No. 142 on January 1, 2002, the Company recorded a one-time, non-cash charge of approximately $731,981 to reduce the carrying value of the Company's goodwill. This charge is not related to the Company's operations and is reflected as a cumulative effect of a change in accounting principle in the accompanying consolidated statements of operations. At December 31, 2002, given continued declines in operating performance during 2002 and revised cash flow projections, the Company completed an additional impairment analysis and recognized an additional impairment loss of $36,184. 10 Rexall Sundown, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2002 and 2001 (Amounts in thousands, except share data) - --------------------------------------------------------------------------- 5. Goodwill and Intangible Assets, continued Intangible assets are comprised of the following:
December 31, --------------------- 2002 2001 -------- -------- Amortized intangible assets Retailer relationships $ 54,994 $ 77,850 Trademarks and trade names - - -------- -------- 54,994 77,850 Less accumulated amortization (11,864) (8,075) -------- -------- Intangible assets, net $ 43,130 $ 69,775 ======== ========
Amortization expense related to retailer relationships and trademark and trade names was $3,788, $54,450, and $31,763 for the years ended December 31, 2002 and 2001 and the seven months ended December 31, 2000, respectively. At December 31, 2001, as required by Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed of" and by SFAS No. 144, the Company reviewed its long-lived assets and its identifiable intangible assets for impairment. Based upon a lower than expected operating performance and revised projections based upon overall declines in the herb and supplement category, the Company recognized an impairment loss of $707,862 and $24,150 related to trademarks and trade names and retailer relationships, respectively. Immediately following its impairment analysis, the Company sold the trademarks and trade names to an affiliated entity at its book value of $201,000, which approximated fair value. See Note 14. At December 31, 2002 based on further declines in operating performance, and in accordance with SFAS No. 121 and SFAS No. 144, the Company recognized an additional impairment loss of $22,856 related to retailer relationships. 6. Retention and Severance At acquisition, to assist in ensuring executive continuity, Numico instituted a management retention program providing for payments over a two or three-year period. Amounts related to this program of $827, $2,789 and $9,170 for the years ended December 31, 2002 and 2001 and the seven months ended December 31, 2000, respectively, are included in selling, general and administrative costs in the consolidated statements of operations. At December 31, 2002 and 2001, the Company had current liabilities associated with this program of $263 and $744, respectively, and remaining 2003 payments of $450. 11 Rexall Sundown, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2002 and 2001 (Amounts in thousands, except share data) - --------------------------------------------------------------------------- 6. Retention and Severance, continued Subsequent to its June 2000 acquisition by Numico and primarily due to the contraction of its business, the Company reduced its workforce by 22 and 72 in 2002 and 2001, respectively. The Company recorded a liability for the amounts owed to the terminated employees under the relevant severance agreements at the time of the employees' termination. Severance related to these terminations of $1,852 and $1,885 is included in selling, general and administrative costs in the accompanying consolidated statements of operations for the years ended December 31, 2002 and 2001, respectively. At December 31, 2002 and 2001 the Company had current liabilities of $558 and $508, respectively, related to remaining severance payments. 7. Lease Obligations The Company leases certain equipment, automobiles and warehouse and distribution facilities under non-cancelable operating leases. The leases provide for monthly payments over terms of one to five years and certain of the leases provide for renewal options. Total rent expense on all operating leases amounted to approximately $3,783, $4,474 and $2,000 for the years ended December 31, 2002, 2001 and the seven months ended December 31, 2000, respectively. The future minimum lease payments under non-cancelable operating leases at December 31, 2002 are as follows:
Fiscal Year 2003 $2,476 2004 1,828 2005 1,031 2006 83 2007 - ------ $5,418 ======
8. Benefit Plans The Company offers a 401(k) employee benefit plan (the "Plan"), which provides for voluntary contributions by employees of up to 20% of their base compensation (as defined in the Plan), subject to a maximum annual contribution. The Company makes a discretionary matching contribution determined on an annual basis. The Company contributed approximately $917, $1,067 and $545 for the years ended December 31, 2002, 2001 and the seven month period ended December 31, 2000, respectively. 9. Sales to a Major Customer, Major Products and Concentration of Credit Risk The Company had sales to a national retailer that represented approximately 13%, 16% and 19% of net sales for the years ending December 31, 2002 and 2001 and the seven-month period ended December 31, 2000, respectively. Additionally, the Company had sales to an affiliate of such national retailer that represented approximately 14%, 13% and 11% of net sales for the years ended December 31, 2002 and 2001 and the seven months ended December 31, 2000, respectively. 12 Rexall Sundown, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2002 and 2001 (Amounts in thousands, except share data) - --------------------------------------------------------------------------- 9. Sales to a Major Customer, Major Products and Concentration of Credit Risk, continued The Company sells products to a large number of customers, which are primarily in the United States. The Company continuously evaluates the credit worthiness of each customer's financial condition and generally does not require collateral. For the years ended December 31, 2002 and 2001 and the seven months ended December 31, 2000, net sales of the Company's Osteo-Bi-Flex(R) brand of nutritional supplements were approximately 16%, 16% and 21% of the Company's net sales, respectively, which include sales to the national retailer referenced above. For the years ended December 31, 2002 and 2001 and the seven months ended December 31, 2000, net sales of the Company's Metab-O-Lite brand, a diet and energy supplement, were approximately 6%, 9% and 8% of the Company's net sales, respectively, which include sales to the national retailer referenced above. Financial instruments that potentially subject the Company to concentration of credit risk are cash and trade accounts receivable. 10. Notes Payable The composition of notes payable is as follows:
December 31, ------------------------ 2002 2001 ---------- ---------- Term notes $1,332,357 $1,361,250 Interest (8.0%) payable semi-annually in arrears on June 30 and December 31 each year. Principal payable in installments on December 31 of each year, maturing June 30, 2010. Other 2,000 2,000 ---------- ---------- $1,334,357 $1,363,250 ========== ==========
In connection with, and to fund the Company's acquisition by Numico, the Company's immediate parent, Nutricia USA, Inc., entered into a loan agreement with another affiliate, Nutricia International B.V. ("the lender"). The loan agreement provides that the lender make available to the borrower a term loan in a principal amount totaling $1,375,000. The Company is not party to the loan agreement, its assets do not act as collateral and it is not a guarantor. The Company has, however, made both principal and interest payments related to the debt and its immediate parent, Nutricia, is a holding company with no apparent sources of cash. Accordingly, the debt has been pushed down to the Company and is considered a current obligation, as the Company has no specific repayment schedule. 13 Rexall Sundown, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2002 and 2001 (Amounts in thousands, except share data) - --------------------------------------------------------------------------- 10. Notes Payable, continued The loan agreement contains both affirmative and negative covenants related to Nutricia as the borrower requiring, among other items, minimum net worth and a maximum leverage ratio. Nutricia has not been in compliance with these covenants. Additionally, Nutricia has failed to make a portion of the principal payments as scheduled thus creating an event of default under the terms of the agreement. The lender has provided waivers for all events of default, has not required any acceleration of payment obligations and has waived all covenant requirements for the remaining term of the loan agreement. Additionally, the Company's ultimate parent, Numico, has provided a letter of support indicating its intention to fund the Company's operating needs if required. 11. Income Taxes The Company is part of a consolidated tax filing group with Nutricia for purposes of its United States income tax return. For state income tax purposes, the Company files on both a consolidated and separate return basis in the states in which they do business. The following reflects the actual income tax provision (benefits) the Company incurred for the fiscal years ended December 31, 2002 and 2001 and the seven month period ended December 31, 2000:
2002 2001 2000 -------- --------- -------- Current: Federal $ (6,468) $ 22,423 $ 7,523 State (1,744) 4,799 (6) -------- --------- -------- $ (8,212) $ 27,222 $ 7,517 -------- --------- -------- Deferred: Federal $ (9,094) $(284,979) $(14,202) State (1,446) (63,332) (3,047) -------- --------- -------- $(10,540) $(348,311) $(17,249) -------- --------- -------- Total: $(18,752) $(321,089) $ (9,732) ======== ========= ========
14 Rexall Sundown, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2002 and 2001 (Amounts in thousands, except share data) - --------------------------------------------------------------------------- 11. Income Taxes, continued The following table summarizes the differences between the Company's effective tax rate for financial statement purposes and the Federal statutory rate as of December 31, 2002 and 2001:
2002 2001 2000 --------- --------- -------- Tax at statutory rates $(317,249) $(331,821) $(24,162) State taxes, net of federal income taxes (30,127) (34,403) (2,429) Other 1,990 1,011 7,656 Change in valuation allowance 42,350 28,139 - Goodwill 284,284 15,985 9,203 --------- --------- -------- Total provision $ (18,752) $(321,089) $ (9,732) ========= ========= ========
The valuation allowance relates to tax assets associated with the carryforward of interest on related party debt as the Company believes that future taxable income will not be sufficient to utilize those carryforwards. At December 31, 2002 and 2001, the valuation allowance was $70,489 and $28,139, respectively. 15 Rexall Sundown, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2002 and 2001 (Amounts in thousands, except share data) - --------------------------------------------------------------------------- 11. Income Taxes, continued Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. Significant components of the Company's net deferred income taxes at December 31, 2002 and 2001 are as follows:
December 31, --------------------- 2002 2001 -------- -------- Deferred tax assets: Current: Inventory $ 11,934 $ 16,495 Other accruals 8,040 10,215 Accrued litigation 7,531 1,008 Accrued returns and credit memos 3,962 7,932 Charitable contributions 2,695 - Accounts receivable reserves 1,255 494 -------- -------- Total current assets: 35,417 36,144 -------- -------- Non-current: Interest limitation 70,489 28,139 -------- -------- Total non-current assets: 70,489 28,139 -------- -------- Total deferred tax assets: 105,906 64,283 -------- -------- Deferred tax liabilities: Current: Other accruals (421) (1,620) -------- -------- Total current liabilities: (421) (1,620) -------- -------- Non-current: Property, plant, equipment and other intangibles (28,284) (38,352) -------- -------- Total deferred tax liabilities: (28,705) (39,972) -------- -------- Net deferred tax asset: 77,201 24,311 Less: valuation allowance (70,489) (28,139) -------- -------- Net deferred tax asset: $ 6,712 $ (3,828) ======== ========
16 Rexall Sundown, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2002 and 2001 (Amounts in thousands, except share data) - --------------------------------------------------------------------------- 12. Shareholder's (Deficit) Equity Common Stock In connection with its acquisition by Numico in June 2000, the Company issued 1,000 shares of new Common Stock (par value $0.01) to its immediate parent, Nutricia, all of which are outstanding at December 31, 2002. Stock Options On June 5, 2000, the Executive Board of Numico, under approval of the Supervisory Board, granted key employees of the Company options to purchase Numico stock under the Numico 2000 Share Option Plan. These options were granted at the average of the closing sales price of the Numico Depositary Receipts for the 15 trading days ending June 5, 2000 as reported on the Amsterdam Stock Exchange. The difference between the exercise price of the option and the fair market value of Numico's Depositary Receipts on the date of the option grant, is expensed ratably over the option vesting period. These amounts were insignificant for the years ended December 31, 2002 and 2001 and for the seven months ended December 31, 2000. Options expire not later than five years after the date of grant and become exercisable in full three years after the date of grant. Stock option activity and information about stock options outstanding are summarized as follows:
2002 2001 2000 ------------------- ------------------- ------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Amount Price Amount Price Amount Price ------ -------- ------ -------- ------ -------- Options outstanding at beginning of period 272,500 $43.48 365,500 $43.48 365,500 $43.48 Exercised - - - - - - Cancelled (84,500) (93,000) Granted - - - - - - ------- ------ ------- ------ ------- ------ Options outstanding, end of year 188,000 272,500 365,500 ======= ====== ======= ====== ======= ====== Options exercisable, end of year - - - ======= ====== ======= ====== ======= ======
17 Rexall Sundown, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2002 and 2001 (Amounts in thousands, except share data) - --------------------------------------------------------------------------- 12. Shareholder's Equity, continued The Company uses the intrinsic value method of accounting for stock- based compensation. Had the fair value based method been used to account for such compensation, compensation costs would have reduced net income by $1,148, $1,148 and $670, respectively. No options were granted during 2002 or 2001. The weighted-average fair value of options granted during 2000 was $5,742. Fair value information for stock options was estimated using the Black-Scholes option-pricing model based on the following weighted average assumptions:
2002 2001 2000 ------- ------- ------- Dividend yield 1.37% 2.01% 1.75% Expected stock volatility 42.06% 38.39% 33.25% Risk free interest rate 2.78% 4.38% 4.99% Expected option life 5 years 5 years 5 years
Stock Appreciation Rights Numico has granted stock appreciation rights to employees that provide for a payment in cash or stock equal to the excess of the fair value of a common share, when the right is exercised, over its grant price. The Company granted 232,500 and 333,000 stock appreciation rights to certain key employees under the 2001-2006 and the 2002-2007 Stock Appreciation Rights Agreements, respectively. Stock appreciation rights expire not later than five years after the date of grant and become exercisable in full three years after the date of grant. As the grant price of the stock appreciation rights was greater than the fair value at the date of grant and for each subsequent reporting period, no compensation expense has been recognized for the years ended December 31, 2002 and 2001 and for the seven months ended December 31, 2000. Management Stock Purchase Plan On June 5, 2000, to encourage key employees of the Company to own shares of Numico stock and in accordance with the 2000 Management Stock Purchase Plan ("MSPP"), options to purchase Numico shares in an amount up to 200% of the participant's base salary were granted. These options were exercisable until October 27, 2000; 180,560 options were exercised. Upon exercise, Numico extended a recourse loan to the participant, with an annual interest rate of 6.2%, to match on a two-for-one basis the participant's investment, resulting in the issuance of an additional 361,120 shares and participant loans of $13,800. Numico will forgive 50% of the loan balance if the participant remains in the Company's employ through June 5, 2003 or if the employee is terminated under certain conditions as specified by the MSPP, and will forgive 50% of the loan balance if certain performance goals are met. Compensation expense related to the MSPP of $6,016, $5,210 and $911 for the years ended December 31, 2002 and 2001 and the seven months ended December 31, 2000, respectively, has been included in the accompanying consolidated statements of operations. The loans to participants are included as a reduction of shareholder's equity in the accompanying consolidated balance sheets. 18 Rexall Sundown, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2002 and 2001 (Amounts in thousands, except share data) - --------------------------------------------------------------------------- 13. Commitments and Contingencies Cellasene Litigations In August of 2000, an action was commenced in the United States District Court for the Southern District of Florida (Case No. 00- 7016) by the Federal Trade Commission against the Company seeking injunctive relief and restitution for violations of the FTC Act, relating to the labeling and marketing claims made for the Company's Cellasene product. At or around the same time, several class action complaints were also filed against the Company for the same activity alleging violations of various state unfair business and deceptive trade practices acts. The state court actions have now been consolidated into two proceedings, one in the Circuit Court of Palm Beach County, Florida and one in the Superior Court of Los Angeles County, California. On August 9, 2002, the District Attorney for San Bernardino filed a civil action against the Company in the Superior Court of San Bernardino County, California, alleging similar violations of California Civil Code Section 17200 relating to the marketing of Cellasene. The parties have entered into a global settlement agreement, which requires approval from the Federal Trade Commission and the various state courts. It is anticipated that the settlement will be approved and culminate in the Summer of 2003. Based upon the terms of this settlement agreement, the Company recorded a $12,000 charge in 2002. Low Carb Bar Litigations In September 2001, a putative consumer fraud class action was commenced in the Circuit Court of Jefferson County, Alabama alleging misleading labeling on the Company's low carbohydrate bar products. Counsel have recently commenced three additional, and virtually identical, lawsuits in the Circuit Court of Palm Beach County, Florida, the District Court of Sequoyah County, Oklahoma, and the Circuit Court of Polaski County, Arkansas. Although the Company will vigorously defend against these actions, there can be no assurance that they will ultimately prevail in their defense. In January 2002, a putative class action was filed in the Superior Court of San Francisco County, California individually and on behalf of all California consumers who purchased low carbohydrate food bar products. The Complaint seeks restitution and injunctive relief for an alleged violation of California Civil Code Sections 17200 and 17500 for unfair business practices relative to the marketing and sale of such products. Although the Company will vigorously defend against this action, there can be no assurance that they will ultimately prevail in their defense. In August 2002, two private attorney general actions were filed in the Superior Court of San Francisco County on behalf of all California consumers who purchased the Company's low carbohydrate food bar products and other food bar products that contain Vitamin D3. The Complaints seek restitution and injunctive relief for an alleged violation of California Civil Code Sections 17200 and 17500 for unfair business practices relative to the marketing and sale of such products. Although the Company will vigorously defend against these actions, there can be no assurance that they will ultimately prevail in their defense. 19 Rexall Sundown, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2002 and 2001 (Amounts in thousands, except share data) - --------------------------------------------------------------------------- 13. Commitments and Contingencies, continued Calcium 900 and Calcium 1200 Litigations In November 1998, a putative nationwide class action was filed in the Superior Court of Camden County, New Jersey (Case No. 8625-98) to recover damages for an alleged violation of the New Jersey Consumer Fraud Act on the grounds that the labeling of Sundown Vitamins Calcium '900' and Calcium 1200 products were allegedly misleading. The trial court denied nationwide class certification, but certified a limited class of New Jersey residents. After trial by jury, a judgment in favor of the plaintiff (valued at approximately $1,000) was entered. The Company has appealed the judgment, which appeal is pending. Although the Company will vigorously prosecute its appeal and defend against this action, there can be no assurance that they will ultimately prevail in their defense. In connection with the judgment, the Company has recorded $1,000 charge in 2002 and has posted a bond guaranteeing payment to the plaintiffs if the appeals process is unsuccessful. In December 1998, a virtually identical putative nationwide class action was filed in Circuit Court of Palm Beach County, Florida. The complaint seeks to recover damages for an alleged violation of the Florida Deceptive and Unfair Trade Practices Act on the grounds that the labeling of Sundown Vitamins Calcium '900' and Calcium 1200 products were allegedly misleading. The trial court entered an order denying Plaintiff's motion for class certification, which order was affirmed on appeal by the Fourth District Court of Appeals. Although the Company will vigorously defend against this action, there can be no assurance that they will ultimately prevail in their defense. Metabolife Litigation In June of 2002, a complaint was filed in the United States District Court, Southern District of California, by Metabolife International, Inc. seeking damages for alleged trademark infringement and false advertising arising out of the labeling of the Company's Metab-O-LITE product. The Court denied the Company's motion for summary judgment and granted in part Plaintiff's cross-motion for summary judgment as to certain defenses. Discovery has not yet commenced and no trial date or pre-trial deadlines have been established. Although the Company will vigorously prosecute its appeal and defend against this action, there can be no assurance that they will ultimately prevail in their defense. Bariatrix Litigation In February 2003, a complaint was filed in the United States District Court, District of Vermont, by Bariatrix Products International, Inc. seeking damages for alleged patent infringement arising out of the sale and distribution of the Company's high-protein low carbohydrate food bars. A responsive pleading has not yet been filed by the Company. The Company intends to tender its defense of this action to its third-party contract bar manufacturers. Although the Company will vigorously prosecute its appeal and defend against this action, there can be no assurance that they will ultimately prevail in their defense. 20 Rexall Sundown, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2002 and 2001 (Amounts in thousands, except share data) - --------------------------------------------------------------------------- 13. Commitments and Contingencies, continued Other Litigation The Company is also involved in litigation relating to claims arising out of its operations in the normal course of business, none of which are expected, individually or in the aggregate, to have a material adverse affect on the Company. 14. Related Party Transactions The Company has entered into transactions in the normal of course business with entities which are under common voting control. These transactions, measured at the exchange amount which is the amount of consideration established and agreed to by the related parties are as described below; there can be no guarantee that unrelated parties would agree to the same terms and conditions. Income Statement Sales The Company recorded net sales of $42,314, $44,283 and $23,312 to affiliated companies for the years ended December 31, 2002, 2001 and the seven months ended December 31, 2000, respectively. The net selling price is generally based upon the prices and terms and conditions offered to customers which are unrelated to the Company. The most significant net sales are to General Nutrition Companies, Inc. ("GNC") which accounted for $35,175, $31,073 and $19,098 or approximately 8%, 6% and 5%, respectively, of consolidated net sales for the years ended December 31, 2002, 2001 and the seven months ended December 31, 2000. These sales include product intended for sale by third parties and contract manufacturing. Cost of Sales Included in cost of sales are purchases from affiliated companies of $185,154, $147,769 and $4,789 for the years ended December 31, 2002, 2001 and the seven months ended December 31, 2000, respectively. The most significant purchases are from Nutraco S.A. which accounted for $152,247, $121,556 and $3,686 or 48%, 31% and 2% of consolidated cost of sales for the years ended December 31, 2002, 2001 and the seven months ended December 31, 2000, respectively. Nutraco S.A. purchases from unrelated suppliers and sells to the Company at a profit. 21 Rexall Sundown, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2002 and 2001 (Amounts in thousands, except share data) - --------------------------------------------------------------------------- 14. Related Party Transactions, continued Management Service Fees Based upon the terms of a management service agreement effective beginning in 2001 between the Company and Numico, included in selling, general and administrative expenses are management service fees of $2,754 and $1,450 for the years ended December 31, 2002 and 2001, respectively. There were no management service fees included for the seven months ended December 31, 2000. These fees are allocated by the Company's ultimate parent, Numico, based upon estimated costs plus a margin of 5%. The services charged include strategic planning, certain information technology, product and material management, and group business process, human resources, legal, tax, regulatory and management reporting. The Company's share of total service fees charged by Numico is based on its proportion of net sales to other affiliates in the United States which benefit from the services. Property Costs The Company charged an affiliate, Unicity Network, Inc. ("Unicity"), property costs of $482, $604 and $395 for the years ended December 31, 2002 and 2001 and the seven months ended December 31, 2000, respectively. These costs are for a portion of utilities, repairs and maintenance, security, property taxes, depreciation and other property costs related to a portion of the Company's property occupied by the affiliate. The income for the costs charged is offset with related property costs in the determination of selling, general and administrative expenses. While the Company believes that Unicity will continue to occupy these facilities and assume these expenses, there can be no assurance of this. Transportation Costs Subsequent to its acquisition by Numico in June 2000, the Company entered into an arrangement with GNC, for use of the affiliate's transportation fleet to distribute the Company's products to customer selling locations. Included in selling, general and administrative costs are transport costs charged by an affiliate, GNC, of $2,373, $977 and $151 for the years ended December 31, 2002 and 2001 and the seven months ended December 31, 2000, respectively. Research and Development Included in selling, general and administrative costs are research and development costs charged by affiliates of $1,505, $1,699 and $964 for the years ended December 31, 2002 and 2001 and the seven months ended December 31, 2000, respectively. The costs arise as a result of the Company's use of the affiliates' research facilities in areas such as product development and testing. For the year ended December 31, 2002, the Company charged an affiliate, GNC, $89 for use of its scientific research group. The income for these costs is deducted from related research costs in the determination of selling, general and administrative costs. 22 Rexall Sundown, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2002 and 2001 (Amounts in thousands, except share data) - --------------------------------------------------------------------------- 14. Related Party Transactions, continued Trademarks On December 31, 2001, the Company sold its trademarks with carrying value of $201,000 to an affiliated company, Numico Financial Services S.A. The sale proceeds were $201,000 in cash. On January 1, 2002, the Company entered into a trademark and license service agreement with Numico Financial Services S.A. The term of the agreement is 10 years and unless earlier terminated will automatically renew for successive five-year terms. The agreement grants the Company the exclusive, non-transferable right to use the licensed marks in connection with certain licensed activities for a fee of 12.3% of sales, as defined, to third parties and affiliates. The trademark and license service agreement also grants the Company the right to reimbursement from Numico Financial Services S.A. for (i) certain actual marketing and advertising expenses in connection with goods bearing any of the licensed marks, and (ii) a license management fee for actual costs plus 5%, in performance of services set forth in the agreement such as maintaining registration, protection, enforcement and defense of the trademarks. The maximum amount for which the Company can claim reimbursement is restricted to 8% of the Company's sales to third parties and affiliates. For the year ended December 31, 2002, net trademark fees of $19,278 are included in cost of sales. Insurance Included in selling, general and administrative costs are insurance costs of $1,051, $425 and $351 for the years ended December 31, 2002 and 2001 and the seven months ended December 31, 2000, respectively. These are charged by the Company's ultimate parent, Numico, for insurance premiums incurred related to the Company. Employee Costs Included in selling, general and administrative costs are employee costs charged by a Dutch affiliate of $383 for the year ended December 31, 2002. These costs relate to a portion of salary, bonus, relocation and other benefits for certain expatriate employees of the Company which are paid by the Dutch affiliate and then charged to the Company. International Sales Group Selling, general and administrative costs were reduced $450 for the year ended December 31, 2002. There were no deductions for the year ended December 31, 2001 and the seven months ended December 31, 2000. This reduction is for amounts billed to affiliates for use of the Company's international sales group for services such as order fulfillment, support and customer relationship management. Prior to fiscal 2002 the Company sold direct to certain international customers. In April 2002, the Company began to sell to international affiliates which then sold to third party customers. As a result the Company began billing the international affiliates for services rendered. 23 Rexall Sundown, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2002 and 2001 (Amounts in thousands, except share data) - --------------------------------------------------------------------------- 14. Related Party Transactions, continued Shared Services Cost of sales was reduced by $800 for year ended December 31, 2002 for a share of operational costs billed to an affiliate, GNC. The costs primarily relate to six operational personnel whose services are shared between the Company and GNC. Selling general and administrative costs were reduced $787, $1,682 and $1,889 for the years ended December 31, 2002 and 2001 and the seven months ended December 31, 2000, respectively. These reductions are for services provided and billed to an affiliate, Unicity Network, Inc., for a portion of salaries and wages, payroll benefits and taxes and certain other general and administrative costs. The basis for the amounts billed include agreed percentages of departmental budgets, headcount and actual costs incurred. Interest Income Included in interest income are amounts from an affiliate, Numico Financial Services S.A., of $1,132 for the year ended December 31, 2002. No interest income was included for the year ended December 31, 2001 and the seven months ended December 31, 2000. Numico Financial Services S.A. acts as a clearing/settlement and cash concentration center for affiliates of the Company. The weighted average interest earned on cash amounts held by Numico Financial Services S.A. was 1.78% for fiscal 2002. Balance Sheet Cash and Cash Equivalents Included in cash and cash equivalents are amounts on deposit with Numico Financial Services S.A. of $5,821 and $74,251 at December 31, 2002 and 2001, respectively. Numico Financial Services S.A. acts as a clearing/settlement and cash concentration center for affiliates of the Company. As discussed above, these cash amounts are the unused proceeds from sale of the Company's trademarks to Numico Financial Services S.A. on December 31, 2001. During fiscal 2002 the cash was used for debt principal and interest payments. Due from Affiliates The Company's collection terms for accounts receivable from affiliates are similar to those for third parties. However, at December 31, 2001 there was a significant receivable for sales to an affiliate, GNC, of $18,054, which had accumulated since August 2001. This receivable was ultimately settled in November 2002 for its full carrying amount. During this same period, the Company had amounts due to GNC, which served to offset the outstanding balance. See accounts payable discussion below. 24 Rexall Sundown, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2002 and 2001 (Amounts in thousands, except share data) - --------------------------------------------------------------------------- 14. Related Party Transactions, continued Included in due from affiliates at December 31, 2001, is a short-term loan receivable of $42,340 from GNC. In December 2001, the Company paid certain GNC liabilities to affiliates for purchases and debt interest and principal. This loan to GNC was non-interest bearing and was extinguished during the period March to December 2002 as the result of GNC making certain payments on the Company's behalf and cash payments for the remaining outstanding balance. Due to Affiliates Included in due to affiliates at December 31, 2002 and 2001 are $61,724 and $31,234 due to the Company's major supplier Nutraco S.A., and $7,524 and $14,563 due to GNC for supplies and other operating costs. Services Provided/Received With no Consideration The Company provides free of charge certain management services for the benefit of all U.S. based subsidiaries of the Company's ultimate parent, Numico. The payroll and benefit cost associated with this service was $1,820 in 2002. There were no costs during 2001 or 2000. The Company receives certain tax and risk management services free of charge from a U.S. affiliate to which the Company also provides the management services described above free of charge. The Company believes that the effect of the services it provides offset the effect of the services it receives. 25 EX-99 4 nbtka992.txt EXHIBIT 99.2 Exhibit 99.2 Rexall Sundown, Inc. and Subsidiaries Condensed Consolidated Financial Statements (Unaudited) For the six months ended June 30, 2003 and 2002 REXALL SUNDOWN, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands)
Assets June 30, December 31, 2003 2002 -------- ------------ Current assets: Cash and cash equivalents $ 6,261 $ 9,039 Accounts receivable, less allowance for doubtful accounts of $2,292 at June 30, 2003 and $3,176 at December 31, 2002 43,989 47,665 Inventory, net 69,960 72,314 Deferred income taxes 60,138 35,417 Due from affiliates 90,078 65,430 Prepaid expenses and other current assets 12,164 8,473 ----------- ----------- Total current assets 282,590 238,338 Property, plant and equipment, net 67,797 70,855 Goodwill 22,822 22,822 Intangible assets, net 41,551 43,130 Other assets 6,200 9,026 ----------- ----------- Total assets $ 420,960 $ 384,171 =========== =========== Liabilities and Shareholder's Deficit Current liabilities: Accounts payable $ 13,753 $ 9,808 Accrued expenses and other current liabilities 91,713 54,749 Due to affiliates 204,752 122,332 Notes payable 1,334,357 1,334,357 ----------- ----------- Total current liabilities 1,644,575 1,521,246 Deferred income taxes 28,460 28,705 Other liabilities 9,915 5,193 ----------- ----------- Total liabilities 1,682,950 1,555,144 ----------- ----------- Commitments and contingencies Shareholder's deficit: Common stock: (authorized, issued and outstanding 1,000 shares at June 30, 2003 and December 31, 2002; $0.01 par value) Paid in capital 433,894 433,894 Loans to employees - (2,128) Accumulated deficit (1,695,884) (1,602,739) ----------- ----------- Total shareholder's deficit (1,261,990) (1,170,973) ----------- ----------- Total liabilities and shareholder's deficit $ 420,960 $ 384,171 =========== ===========
See notes to unaudited condensed consolidated financial statements. 1 REXALL SUNDOWN, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Dollars in thousands)
For the six months ended June 30, ---------------------- 2003 2002 ---- ---- Net sales Third party $ 178,544 $ 226,059 Affiliates 25,039 21,530 --------- --------- Net sales 203,583 247,589 Costs and expenses: Cost of sales 149,745 174,290 Selling, general and administrative 115,733 91,151 --------- --------- 265,478 265,441 --------- --------- Operating loss (61,895) (17,852) --------- --------- Other income (expense): Interest income 64 857 Interest expense (54,983) (54,983) Miscellaneous, net (220) 26 --------- --------- (55,139) (54,100) --------- --------- Loss before income tax benefit (117,034) (71,952) Income tax benefit (23,889) (6,533) --------- --------- Net loss before the cumulative effect of accounting change (93,145) (65,419) Cumulative effect of accounting change - (731,981) --------- --------- Net loss $ (93,145) $(797,400) ========= =========
See notes to unaudited condensed consolidated financial statements. 2 REXALL SUNDOWN, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDER'S (DEFICIT) FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (Unaudited) (Dollars in thousands)
Common Stock ----------------------- Paid Loans Total Number of in to Accumulated Shareholder's shares issued Amount capital employees deficit deficit ------------- ------ ------- --------- ----------- ------------- Balance, December 31, 2001 1,000 $ - $433,894 $(8,144) $ (688,403) $ (262,653) Net loss (914,336) (914,336) Loans to employees 6,016 6,016 -------------------------------------------------------------------------- Balance, December 31, 2002 1,000 - 433,894 (2,128) (1,602,739) (1,170,973) Net loss (93,145) (93,145) Loans to employees 2,128 2,128 -------------------------------------------------------------------------- Balance, June 30, 2003 1,000 $ - $433,894 $ - $(1,695,884) $(1,261,990) ==========================================================================
See notes to unaudited condensed consolidated financial statements. 3 REXALL SUNDOWN, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)
For the six months ended June 30, --------------------- 2003 2002 ---- ---- Cash flows from operating activities: Net cash used in operating activities $ (264) $(24,635) ------- -------- Cash flows from investing activities: Purchase of property, plant and equipment (2,525) (3,387) Disposals of property, plant and equipment 11 - ------- -------- Net cash used in investing activities (2,514) (3,387) ------- -------- Cash flows from financing activities: Net cash used in financing activities - - ------- -------- Net decrease in cash and cash equivalents $(2,778) $(28,022) Cash and cash equivalents at beginning of period 9,039 75,564 ------- -------- Cash and cash equivalents at end of period $ 6,261 $ 47,542 ======= ========
See notes to unaudited condensed consolidated financial statements. 4 REXALL SUNDOWN, INC. and SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) 1. Principles of consolidation and basis of presentation Rexall Sundown, Inc. and Subsidiaries ("Rexall" or the "Company") develops, manufactures, markets and sells vitamins, nutritional supplements and consumer health products. In June 2000, Rexall was acquired by Nutricia USA, Inc. ("Nutricia" now known as Numico USA Inc.), an indirect wholly-owned subsidiary of Royal Numico N.V. ("Numico"), a Dutch public company. The accompanying condensed consolidated financial statements as of June 30, 2003 and December 31, 2002 and for six months ended June 30, 2003 and June 30, 2002 have been prepared by the Company and have not been audited. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The condensed consolidated financial statements of the Company for the periods presented have been prepared by management on a carve-out basis and reflect the consolidated financial position, results of operations and cash flows of Rexall in accordance with accounting principles generally accepted in the United States of America for interim financial information. These statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Certain amounts in the financial statements have been estimated, allocated and pushed down from Nutricia or Numico in a consistent manner in order to depict the financial position, results of operations and cash flows of Rexall on a stand-alone basis. Additionally, Rexall conducts significant business with members of the Numico consolidated group. These transactions have been included as historically recorded or incurred and, therefore, may not necessarily be indicative of the revenues and expenses that the Company would have incurred had it operated as an independent, stand-alone entity. Accordingly, the financial position, results of operations and cash flows may not be indicative of what would have been reported if Rexall had been a stand-alone entity for the periods presented. The Company's year ends on December 31. All intercompany accounts and transactions have been eliminated. The results of operations for the six months ended June 30, 2003 are not necessarily indicative of the results to be expected for the full year ending December 31, 2003. As these are condensed consolidated financial statements, this report should be read in conjunction with the Company's audited consolidated financial statements included as an exhibit in this 8-K/A filing. 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. The most significant estimates include the valuation of inventories, the allowance for doubtful accounts receivable, valuation of deferred tax assets, and the recoverability of long-lived assets. Actual results could differ from those estimates. 5 REXALL SUNDOWN, INC. and SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) New accounting developments In November 2002, the FASB issued Emerging Issues Task Force (EITF) Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF 00-21 addresses certain aspects of the accounting by a company for arrangements under which it will perform multiple revenue- generating activities. EITF 00-21 addresses when and how an arrangement involving multiple deliverables should be divided into separate units of accounting. EITF 00-21 provides guidance with respect to the effect of certain customer rights due to company nonperformance on the recognition of revenue allocated to delivered units of accounting. EITF 00-21 also addresses the impact on the measurement and/or allocation of arrangement consideration of customer cancellation provisions and consideration that varies as a result of future actions of the customer or the company. Finally, EITF 00-21 provides guidance with respect to the recognition of the cost of certain deliverables that are excluded from the revenue accounting arrangement. The provisions of EITF 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company does not expect the adoption of EITF 00-21 to have a material impact on its consolidated financial position or results of operations. In January 2003, the FASB issued Interpretation No. 46, ("FIN") "Consolidation of Variable Interest Entities," an interpretation of Accounting Research Bulletin ("ARB") No. 51. FIN 46 addresses consolidation by business enterprises of variable interest entities. FIN 46 applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first year or interim period beginning after June 15, 2003 to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company does not expect that the provisions of FIN 46 will have a material impact on the Company's consolidated financial position or results of operations. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company does not expect the adoption of SFAS 149 to have a material impact on its consolidated financial position or results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatorily redeemable stock; certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and must be applied to the Company's existing financial instruments effective July 1, 2003, the beginning of the first fiscal period after June 15, 2003. The Company has not entered into any financial instruments within the scope of SFAS 150 since May 31, 2003, nor does it currently hold any significant financial instruments within its scope. 6 REXALL SUNDOWN, INC. and SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) Stock compensation The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and provides pro forma disclosures of net income and earnings per share as if the method prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation", had been applied in measuring compensation expense. In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company is required to follow the prescribed format and provide the additional disclosures required by SFAS No. 148 in its annual financial statements for the year ending December 31, 2003 and must also provide the disclosures in its quarterly reports containing condensed consolidated financial statements for interim periods. See note 4 for further discussion and adoption. 2. Inventories The components of inventories are as follows:
June 30, December 31, 2003 2002 -------- ------------ Raw materials $ 40,661 $ 42,779 Work-in-process 3,921 976 Finished goods 45,457 51,583 Inventory reserve (20,079) (23,024) -------- -------- Inventory, net $ 69,960 $ 72,314 ======== ========
3. Goodwill and Intangible Assets Upon adoption of SFAS No. 142 on January 1, 2002, the Company ceased to amortize goodwill. Under SFAS No. 142, goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value as determined using a discounted cash flow methodology. Upon adoption of SFAS No. 142 on January 1, 2002, the Company recorded a one-time, non-cash charge of approximately $731,981 to reduce the carrying value of the Company's goodwill. This charge is not related to the Company's operations and is reflected as a cumulative effect of a change in accounting principle in the accompanying consolidated statements of operations. SFAS No. 142 requires that goodwill and other intangible assets with indefinite useful lives not be amortized but, instead, tested for impairment at least annually. The carrying amount of acquired intangible assets as of June 30, 2003 and December 31, 2002 is as follows: 7 REXALL SUNDOWN, INC. and SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands)
June 30, December 31, 2003 2002 -------- ------------ Amortized intangible assets Retailer relationships $ 54,994 $ 54,994 Less accumulated amortization (13,443) (11,864) -------- -------- Intangible assets, net $ 41,551 $ 43,130 ======== ========
Aggregate amortization expense of definite lived intangible assets for the six months ended June 30, 2003 and June 30, 2002 was approximately $1,579 and $1,894, respectively. 4. Stock-based compensation On June 5, 2000, the Executive Board of Numico, under approval of the Supervisory Board, granted key employees of the Company options to purchase Numico stock under the Numico 2000 Share Option Plan. Options expire not later than five years after the date of grant and become exercisable in full three years after the date of grant. Had the fair value based method been used to account for such compensation, the Company's net loss would have been reduced to the following pro forma amounts indicated. There were no grants during the six month periods ended June 30, 2003 and 2002.
For the three months ended June 30, ----------------------- 2003 2002 ---- ---- Net loss as reported $(93,145) $(797,400) Compensation costs (574) (574) -------- --------- Pro forma net loss $(93,719) $(797,974) ======== =========
Under SFAS No. 123, fair value information for stock options was estimated using the Black Scholes option pricing model based on the following weighted average assumptions: (a) expected life of option of 5 years; (b) dividend yield of 1.37%; (c) expected volatility of 42.06%; and (d) risk-free interest rate of 2.78%. 5. Discontinued Product Charge Effective April 2003, the Company voluntarily discontinued sales of its products that contain ephedra and recorded a charge of approximately $9,000 associated with such discontinued sales. The Company's belief that its ephedra products were safe when used as directed has been supported by scientific evidence. However, in light of adverse publicity surrounding ephedra and the current environment in the U.S., the Company believed it was in its best interest to voluntarily cease selling ephedra products. Loss from operations during the six months ended June 30, 2003 includes a one-time charge of approximately $9,000 ($5,535, after tax) associated with such discontinued sales. Of this amount, $5,701 reduced net sales and $3,299 increased cost of sales. 8 REXALL SUNDOWN, INC. and SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) 6. Litigation Recovery of Raw Material Costs The Company was a plaintiff in a vitamin antitrust litigation matter brought in the United States District Court in the District of Columbia against F. Hoffmann-La Roche Ltd. and others for alleged price fixing. Settlements with certain defendants were made and the Company received $6,026 ($3,706, after tax) in settlement of price fixing litigation during the six months ended June 30, 2002. Such amount reduced selling, general and administrative expenses. 7. Commitments and Contingencies Low Carb Bar Litigations In September 2001, a putative consumer fraud class action was commenced in the Circuit Court of Jefferson County, Alabama alleging misleading labeling on the Company's low carbohydrate bar products. Counsel have recently commenced three additional, and virtually identical, lawsuits in the Circuit Court of Palm Beach County, Florida, the District Court of Sequoyah County, Oklahoma, and the Circuit Court of Polaski County, Arkansas. This case was settled in August 2003, see discussion below. In January 2002, a putative class action was filed in the Superior Court of San Francisco County, California individually and on behalf of all California consumers who purchased low carbohydrate food bar products. The Complaint seeks restitution and injunctive relief for an alleged violation of California Civil Code Sections 17200 and 17500 for unfair business practices relative to the marketing and sale of such products. This case was settled in August 2003, see discussion below. In August 2002, two private attorney general actions were filed in the Superior Court of San Francisco County on behalf of all California consumers who purchased the Company's low carbohydrate food bar products and other food bar products that contain Vitamin D3. The Complaints seek restitution and injunctive relief for an alleged violation of California Civil Code Sections 17200 and 17500 for unfair business practices relative to the marketing and sale of such products. This case was settled in August 2003, see discussion below. In August 2003, the parties noted above entered into a settlement agreement with the Company and the lawsuit was dismissed with prejudice. Based upon the terms of this settlement, the Company recorded a $7,819 charge in the six months ended June 30, 2003. Metabolife Litigation In June of 2002, a complaint was filed in the United States District Court, Southern District of California (Case No. CV 1275R AJB), by Metabolife International, Inc. seeking damages for alleged trademark infringement and false advertising claim arising out of the labeling of the Company's Metab-O-LITE product. The Court denied the Company's motion for summary judgment and granted in part Plaintiff's cross- motion for summary judgment as to certain defenses. In July 2003, the parties entered into a settlement agreement and the lawsuit was dismissed with prejudice. Based upon the terms of this settlement, the Company recorded a $27,000 charge in the six months ended June 30, 2003, which was offset by $7,000 recoverable from the Company's insurance policy. 9 REXALL SUNDOWN, INC. and SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) Bariatrix Litigation In February 2003, a complaint was filed in the United States District Court, District of Vermont, by Bariatrix Products International, Inc. seeking damages for alleged patent infringement arising out of the sale and distribution of the Company's high-protein low carbohydrate food bars. The Company has tendered its defense of this action to its third-party contract bar manufacturers, one of which has accepted the tender. Although the Company will vigorously prosecute its appeal and defend against this action, there can be no assurance that they will ultimately prevail in their defense. 8. Related Party Transactions The Company has entered into transactions in the normal of course business with entities which are under common voting control. These transactions, measured at the exchange amount which is the amount of consideration established and agreed to by the related parties are as described below; there can be no guarantee that unrelated parties would agree to the same terms and conditions. Income Statement Sales The Company recorded net sales of $25,039 and $21,530 to affiliated companies for the six months ended June 30, 2003 and 2002, respectively. The net selling price is generally based upon the prices and terms and conditions offered to customers which are unrelated to the Company. The most significant net sales are to General Nutrition Companies, Inc. ("GNC") which accounted for $22,674 and $19,908 or approximately 11% and 8% of consolidated net sales for the for the six months ended June 30, 2003 and 2002, respectively. Cost of Sales Included in cost of sales are purchases from affiliated companies of $68,922 and $88,459 for the six months ended June 30, 2003 and 2002, respectively. The most significant purchases are from Nutraco S.A. which accounted for $55,627 and $70,347 or 37% and 40% of consolidated cost of sales for the six months ended June 30, 2003 and 2002, respectively. Nutraco S.A. purchases from unrelated suppliers and sells to the Company at a profit. Management Service Fees Based upon the terms of a management service agreement effective beginning in 2001 between the Company and Numico, included in selling, general and administrative expenses are management service fees of $1,377 for both the six months ended June 30 2003 and 2002. These fees are allocated by the Company's ultimate parent, Numico, based upon estimated costs plus a margin of 5%. The services charged include strategic planning, certain information technology, product and material management, and group business process, human resources, legal, tax, regulatory and management reporting. The Company's share of total service fees charged by Numico is based on its proportion of net sales to other affiliates in the United States which benefit from the services. 10 REXALL SUNDOWN, INC. and SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) Trademarks On December 31, 2001, the Company sold its trademarks with its impaired carrying value of $201,000 to an affiliated company, Numico Financial Services S.A. The sale proceeds were $201,000 in cash. On January 1, 2002, the Company entered into a trademark and license service agreement with Numico Financial Services S.A. The term of the agreement is 10 years and unless earlier terminated will automatically renew for successive five-year terms. The agreement grants the Company the exclusive, non-transferable right to use the licensed marks in connection with certain licensed activities for a fee of 12.3% of sales, as defined, to third parties and affiliates. The trademark and license service agreement also grants the Company the right to reimbursement from Numico Financial Services S.A. for (i) certain actual marketing and advertising expenses in connection with goods bearing any of the licensed marks, and (ii) a license management fee for actual costs plus 5%, in performance of services set forth in the agreement such as maintaining registration, protection, enforcement and defense of the trademarks. The maximum amount for which the Company can claim reimbursement is restricted to 8% of the Company's sales to third parties and affiliates. For the six months ended June 30, 2003 and 2002, net trademark fees of $9,029 and $10,728, respectively, are included in cost of sales. 9. Subsequent Event On July 25, 2003, the Company was acquired by NBTY, Inc. for $250,000 in cash, which is subject to adjustment based upon finalization of working capital balances acquired at date of closing in accordance with the terms of the purchase agreement. 11 -----END PRIVACY-ENHANCED MESSAGE-----