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
-------- ------------
<s> <c> <c>
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
---- ----
<s> <c> <c>
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
------------- ------ ------- --------- ----------- -------------
<s> <c> <c> <c> <c> <c> <c>
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
---- ----
<s> <c> <c>
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
-------- ------------
<s> <c> <c>
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
-------- ------------
<s> <c> <c>
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
---- ----
<s> <c> <c>
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